Question 1

Float refers to the difference between the firm's available or collected balance at its bank and the firm's book, or ledger, balance.

Accepted Answer

Float is the difference between the available or collected balance at a bank and the firm's book balance.

Question 2

Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services.

Accepted Answer

Firms need cash to pay for goods and services, to meet payroll obligations, and to maintain financial stability in case of unexpected events. Additionally, banks often require a certain amount of cash to be held in deposit as collateral for loans or to pay for banking services.

Question 3

If a firm has a large percentage of accounts over 30 days old, this is solid proof that its receivables manager is not doing a good job.

Accepted Answer

A large percentage of accounts over 30 days old could be due to various factors such as industry norms, economic conditions, or company credit policies, not solely the performance of the receivables manager.

Question 4

In addition to being a substitute for cash balances, marketable securities are used as a temporary investment.

Accepted Answer

Marketable securities can be easily bought and sold in the market, making them a good option for short-term investments while waiting for more profitable opportunities or while determining the best long-term investments.

Question 5

You receive some goods on April 1 with the following terms: 3/20, net 30, June 1 dating. This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

Accepted Answer

The terms "3/20, net 30, June 1 dating" mean you receive a 3% discount if you pay within 20 days of June 1, and the full amount is due 30 days after June 1, not 30 days after receipt of the goods.

Question 6

An increase in a current asset must be accompanied by a corresponding increase in a current liability.

Accepted Answer

This statement is false. An increase in a current asset does not necessarily have to be accompanied by a corresponding increase in a current liability. It could simply mean that the company has received more cash, for example, from sales or loans, which would increase the current asset cash without necessarily increasing a current liability.

Question 7

For a typical nonfinancial company, a small portion of its assets is held in the form of cash, defined as demand deposits and currency.

Accepted Answer

Cash typically makes up a small portion of a nonfinancial company's assets, with the majority of its assets being in the form of property, equipment, inventory, and other tangible or intangible assets related to the company's operations.

Question 8

When deciding whether to offer a discount for cash payment, a firm must balance the profits from additional sales with the lost revenues from the discount.

Accepted Answer

This statement is true. A firm must consider the potential increase in sales from offering a cash discount and compare it to the revenue that would be lost from giving the discount. The decision ultimately depends on whether the increased sales and resulting profits outweigh the lost revenue.

Question 9

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Accepted Answer

The receivables-to-sales ratio measures how quickly a company collects its accounts receivable, while the payables-to-sales ratio measures how quickly the company pays its accounts payable. These two ratios are not directly related, so a high receivables-to-sales ratio does not necessarily mean that the company will have a high payables-to-sales ratio.

Question 10

The aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

The aging schedule is a popular tool used in accounting to keep an eye on a company's accounts receivable. It separates outstanding receivables into categories based on the length of time they have been delinquent. This helps businesses better understand the risk associated with their receivables and informs efforts to collect overdue payments.

Question 11

Net operating working capital, defined as current assets minus current liabilities, is also equal to the current ratio.

Accepted Answer

Net operating working capital is not equal to the current ratio. Net operating working capital is calculated as current assets minus current liabilities, whereas the current ratio is calculated as current assets divided by current liabilities.

Question 12

Cash is often referred to as a nonearning asset. Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business.

Accepted Answer

This statement is true. Cash is considered a nonearning asset because it does not generate any return or income for the company. Therefore, cash management aims to reduce the amount of cash required for business operations to maximize the use of funds elsewhere.

Question 13

Working capital management deals with the management of current assets and current liabilities such as accounts receivable and accruals, etc.

Accepted Answer

The answer of Working capital management deals with the management...

Question 14

Credit standards refer to the financial importance of a potential customer to the firm in order to qualify for credit.

Accepted Answer

Credit standards refer to the criteria a firm uses to determine the creditworthiness of a potential customer, including their ability to pay back the credit, not just their financial importance to the firm.

Question 15

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Accepted Answer

The average accounts receivables balance is calculated by multiplying the days sales outstanding by the average daily credit sales.

Question 16

The credit period is the amount of time it takes to do a credit search on a potential customer.

Accepted Answer

The credit period refers to the amount of time a creditor allows a customer to pay for a product or service before interest or fees are applied. It is not related to the time it takes to conduct a credit search on a customer.

Question 17

The four major elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

These are indeed the four major elements in a firm's credit policy.

Question 18

Providing much higher yields than operating assets, marketable securities are often held in sizable amounts.

Accepted Answer

Marketable securities are typically held for liquidity purposes and not primarily for high yields; operating assets, depending on the business, can often generate higher returns through the core operations of a company.

Question 19

Lockbox arrangements are one way for a firm to speed up collection of payments from customers.

Accepted Answer

Lockbox arrangements involve having customers send their payments to a designated post office box that is controlled by the firm's bank. The bank then collects the payments and deposits them directly into the firm's account, speeding up the payment collection process.

Question 20

The collection process is a fairly inexpensive component of doing business, although sometimes difficult to implement.

Accepted Answer

The collection process can be costly and time-consuming, especially if it requires legal action or hiring a third-party collection agency. It also requires resources to establish and maintain effective communication with customers and track outstanding balances.

Quiz 18: Current Asset Management