Question 1

Cash management primarily involves:

Accepted Answer

A

Question 2

GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the credit markets froze and no funds were available for borrowing. Fortunately, the firm had some cash reserves saved that it was able to use to fund its operations until additional credit was available. The need to retain cash for situations such as this is referred to as which one of the following motives for holding cash?

Accepted Answer

The situation described in the scenario is an example of the precautionary motive for holding cash, which refers to the need for a company to hold cash reserves to mitigate the risk of unexpected events that may negatively impact its ability to fund its operations. The other motives for holding cash are not relevant to this scenario.

Question 3

Adjustment costs is another name for which one of the following?

Accepted Answer

Adjustment costs refer to the expenses associated with managing shortages in inventory or cash, hence "shortage costs" is the correct term.

Question 4

An account into which a firm transfers funds, usually from a master account, in an amount sufficient to cover the checks presented for payment that day is called a _____ account.

Accepted Answer

A controlled disbursement account is designed to help firms manage their cash flow by providing them with detailed information about the checks that will clear against their accounts on a given day. This allows them to better plan their cash resources and make decisions about how to allocate funds across different accounts or investments. These accounts are typically used by larger firms with significant cash flows that require careful monitoring and management to ensure that they are being used effectively. Other options listed, such as a lockbox, compensating balance, or revolving account, are not directly related to the management of check payments and do not provide the same level of detail and control over cash flow.

Question 5

Why do firms need liquidity?
I. to meet compensating balance requirements
II. to take advantage of an opportunity that suddenly arises
III. to conduct daily business activities
IV. to be prepared for a financial emergency

Accepted Answer

Firms need liquidity for several reasons: to meet compensating balance requirements with banks, to seize sudden opportunities, to conduct daily operations, and to be prepared for financial emergencies. All these aspects are crucial for the smooth functioning and financial health of a company.

Question 6

Which one of the following statements is correct?

Accepted Answer

The answer of Which one of the following statements is...

Question 7

Which of the following should help reduce the total collection time for a firm?
I. opening a post office box so mail can be received earlier in the morning
II. assigning additional staff in the morning to process incoming payments
III. providing a discount for customers who pay electronically
IV. establishing preauthorized payments from customers

Accepted Answer

All four options are strategies aimed at reducing the total collection time for a firm. Opening a post office box allows for earlier receipt of payments, assigning additional staff can speed up processing, offering discounts for electronic payments encourages faster payment methods, and establishing preauthorized payments ensures timely collection directly from customers' accounts.

Question 8

The Presque Isle Center has branch operations in three states. Each branch deals with a local bank. However, all excess funds in these branch bank accounts are transferred on a daily basis to the firm's primary bank located near the firm's home office. This routine of transferring cash to the primary bank on a regular basis is referred to as:

Accepted Answer

The routine of transferring cash to the primary bank on a regular basis is called cash concentration, which involves consolidating funds from different accounts into a single account to gain greater control over cash balances and reduce risk. This helps the firm to optimize its use of available cash resources while minimizing the amount of idle cash held in subsidiary accounts. Strategic cash disbursement is a technique used to manage payment flows, transfer flotation refers to leveraging the time gap between the initiation and completion of a transaction to earn interest or invest funds, payables management deals with optimizing the payment terms and timing of accounts payable, and float management is a broad term that covers the techniques and strategies used to manage the timing and availability of cash.

Question 9

Collection float:

Accepted Answer

The answer of Collection float:
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Question 10

The Snow Hut has analyzed the carrying and shortage costs associated with its cash holdings and determined that the firm should ideally maintain a cash balance of $3,600. This $3,600 represents which one of the following to the firm?

Accepted Answer

The $3,600 represents the target cash balance, which is the ideal amount of cash that the firm should maintain in order to balance the carrying and shortage costs associated with its cash holdings.

Question 11

Which of the following will reduce collection time?
I. billing customers electronically rather than by mail
II. accepting debit cards but not checks as payment for a sale
III. offering cash discounts for early payment
IV. reducing the processing delay by one day

Accepted Answer

All the options listed contribute to reducing collection time. I. Billing customers electronically speeds up the invoice delivery process. II. Accepting debit cards ensures immediate payment, unlike checks which can take days to clear. III. Offering cash discounts for early payment incentivizes customers to pay sooner. IV. Reducing processing delays directly decreases the time between sale and payment collection.

Question 12

An account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is called a _____ account.

Accepted Answer

A zero-balance account (ZBA) is a cash management technique that involves maintaining a checking account with a balance of zero. The account is automatically funded with only enough money to cover the checks presented for payment that day. This helps to optimize the use of funds and eliminate excess balances.

Question 13

The cash found in a cash drawer that a check-out clerk uses to make change is an example of which of the following motives for holding cash?

Accepted Answer

The cash found in a cash drawer that a check-out clerk uses to make change is an example of transaction motive for holding cash, which is to meet the cash needs of the day-to-day transactions.

Question 14

Check kiting is:

Accepted Answer

The answer of Check kiting is:
...

Question 15

A lockbox is a:

Accepted Answer

The answer of A lockbox is a:
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Question 16

Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor. DLK is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being offered to RB Enterprises at a bargain basement price. While RB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up. This illustrates which of the following needs to hold cash?

Accepted Answer

This situation illustrates a speculative need to hold cash, as RB Enterprises decided to purchase the assets of DLK due to an unexpected opportunity that was too good to pass up, indicating a speculative motive for holding cash to take advantage of unforeseen opportunities.

Question 17

A lockbox system:

Accepted Answer

The answer of A lockbox system:
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Question 18

Disbursements float:

Accepted Answer

The answer of Disbursements float:
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Question 19

Float is defined as the:

Accepted Answer

Float is defined as the difference between book cash and bank cash. It occurs when there is a time lag between when a company records a transaction in its books and when the bank processes it. This can result in discrepancies between the company’s cash balance according to its records (book cash) and the cash balance according to the bank’s records (bank cash).

Question 20

Which one of the following collection times is correctly described?

Accepted Answer

The answer of Which one of the following collection times...

Quiz 19: Cash and Liquidity Management