Deck 7: Current Asset Management

Question 1

In the management of cash and marketable securities, the primary concern is profitability.

Answer 1

False

Question 2

Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.

Answer 2

False

Question 3

A lock-box system is a method of extending disbursements.

Answer 3

False

Question 4

Cost-benefit is not a consideration in development of a cash management system; only safety and liquidity.

Question 5

Electronic funds transfer will likely increase the use of float.

Question 6

A lock-box is used to safeguard the corporation's marketable securities.

Question 7

For modern corporations, the more cash they have, the better off they are.

Question 8

"Extended disbursement float" has to do with the length of time a corporation takes to collect bills.

Question 9

Checks can be cleared only through the Federal Reserve System.

Question 10

Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances.

Question 11

Sales, receivables, and inventory form the basis of cash flow.

Question 12

A lock-box is used by the selling corporation to speed up the check collection and check-clearing process.

Question 13

The cash generating process for a firm is continuous, even though cash flow can be sporadic.

Question 14

It is possible for companies to operate with negative cash balances on their books.

Question 15

A goal of cash management is to insure that the inflows and outflows of cash are synchronized.

Question 16

For most firms, the primary motive for holding cash is the transaction motive.

Question 17

"Float" is the name given for a short-term loan between suppliers and buyers.

Question 18

Minimizing cash balances can improve overall corporate profitability.

Question 19

Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies.

Question 20

Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank.

Question 21

Stretching out the maturity of marketable securities can rarely result in a loss.

Question 22

The 5 C's of credit include character, capital, capacity, conditions, and collateral.

Question 23

Bankers' acceptances are short-term securities that arise from foreign trade.

Question 24

One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.

Question 25

The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States.

Question 26

The investment of excess short-term funds is usually diversified between short- and long-term marketable securities.

Question 27

Small-denomination certificates of deposit are usually more liquid than large-denomination CDs.

Question 28

Banker's acceptances rank behind treasury bills and commercial paper as a vehicle for short-term investments.

Question 29

Multinational firms find it difficult to shift funds from one country to another.

Question 30

Certificates of deposits purchased in small denominations of $1,000 at the savings and loan are readily marketable.

Question 31

It is less expensive to clear a check through the Federal Reserve System than to process an automatic fund transfer through an automated clearinghouse.

Question 32

In general, cash management at the international level employs the same techniques as domestic cash management.

Question 33

Treasury bills are unique in that they trade on a premium basis.

Question 34

Eurodollars are U.S. dollars held on deposit by foreign banks.

Question 35

SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail.

Question 36

Because they generally run a surplus budget, government agencies are able to issue securities with slightly lower yields than direct Treasury issues.

Question 37

The use of automated clearinghouses (ACHs) saves money for consumers, corporations and financial institutions by reducing transactions costs.

Question 38

Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes.

Question 39

Cash management becomes more important as the level of short-term interest rates rise.

Question 40

The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.

Question 41

Just-in-time inventory systems can leave manufacturers empty handed if suppliers can't keep up with product growth rates.

Question 42

The economic order quantity helps a firm determine the most efficient order size to place.

Question 43

A reduction in carrying costs would increase the economic order quantity.

Question 44

If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.
Avg. A/R = Daily credit sales x credit terms
$120,000 = $2,000 x 60 days

Question 45

When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer.

Question 46

When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.

Question 47

The two basic costs associated with inventory are production cost and ordering cost.

Question 48

If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size.

Question 49

Return on investment is the major decision criteria in credit decisions.

Question 50

If a company would like to reduce their average collection period, they can either reduce offer a cash discount or increase their net terms.

Question 51

Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and probability of bankruptcy 12 months in the future.

Question 52

Seasonal production allows for maximum efficiency in machinery and manpower use.

Question 53

Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet's D-U-N-S (Data Universal Numbers System) that tracks relationships and ownership of businesses within Dun & Bradstreet's information base.

Question 54

Maintaining a safety stock will guard against an EOQ from occurring.

Question 55

The use of "float" has dramatically increased since the Check Clearing for the 21^st Century Act was passed.

Question 56

When considering offering a cash discount, a firm must weigh the benefits of freed up cash with the cost of the cash discount.

Question 57

Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.

Question 58

Just-in-time inventory management pushes the cost of holding inventory from the manufacturer to the manufacturer's suppliers.

Question 59

Lower ordering costs would tend to increase a firm's economic order quantity.

Question 60

A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested.

Question 61

"Float" takes place because

A) a firm is early in paying its bills.
B) the level of cash on the firm's books is equal to the level of cash in the bank.
C) a lag exists between writing a check and clearing it through the banking system.
D) a customer writes "hot" checks.

Question 62

One of the most popular uses of automated clearing houses is the

A) direct deposit of checks.
B) transfer of funds between U.S. banks and foreign banks.
C) transfer of funds between government agencies.
D) collection of accounts receivable from customers.

Question 63

Level production allows a company to reduce inventory and maximize efficiency as compared to seasonal production.

Question 64

One of the first considerations in cash management is

A) to have as much cash as possible on hand.
B) synchronization of cash inflows and cash outflows.
C) profitability.
D) to put any excess cash into accounts receivable.

Question 65

Which of the following is not a method of speeding up collections?

A) Lock-box system.
B) Regional collection centers.
C) Extended disbursement float.
D) All of these are methods for speeding up collections.

Question 66

The system whereby funds are moved between computer terminals without use of checks is

A) electronic funds transfer.
B) float.
C) a lock-box system.
D) magnetic character recognition.

Question 67

One of the major cost savings for consumers using automated clearing houses is

A) saving more than $1 billion in postage.
B) saving time paying bills through check writing.
C) security of having the payments and deposits directly deposited or deducted from your account.
D) All of these are true.

Question 68

Automated clearinghouses are commonly used by consumers to make direct payments for

A) insurance premiums.
B) mortgage payments.
C) utility bills.
D) all of these.

Question 69

The difference between the amount of cash on the firm's books and the amount credited to it by the bank is

A) an overdraft.
B) interest revenue.
C) extended disbursement.
D) float.

Question 70

International cash management systems are more complex than domestic cash management systems because

A) many developing countries still use a cash payments system.
B) some countries rely on electronic funds transfer more than the U.S.
C) liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations.
D) none of these.

Question 71

In managing cash and marketable securities, what should be the manager's primary concern?

A) Maximization of profit
B) Maximization of liquid assets
C) Acceptable return on investment
D) Liquidity and safety

Question 72

How would electronic funds transfer affect the use of "float"?

A) Increase its use somewhat
B) Decrease its use somewhat
C) Virtually eliminate its use
D) Have no effect on its use

Question 73

Some of the services provided around the clock by SWIFT are

A) international payments between banks.
B) foreign exchange.
C) trade finance transactions.
D) all of these.

Question 74

International cash management is more complex than domestic based cash management because of

A) difficult liquidity management.
B) different banking systems.
C) currency risk fluctuations.
D) all of these.

Question 75

SWIFT's implementation of the "smart card" is expected to

A) decrease the likelihood of electronic fraud.
B) remove the need for secret information to be sent through mail.
C) guarantee the identity of the sender.
D) all of these.

Question 76

Which of the following is not a valid reason for holding cash?

A) To meet transaction requirements
B) To earn the highest return possible
C) To satisfy emergency needs for funds
D) To provide a compensating balance for a bank

Question 77

The corporate sweep account is an account

A) that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest earning account.
B) that allows companies to write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest bearing account to the appropriate payment account.
C) that allows companies to move their lock box collections into an interest bearing checking account.
D) a and b are correct.

Question 78

Which of the following is not a true statement about automated clearinghouses (ACHs)?

A) Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks.
B) Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989.
C) Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions.
D) The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses.

Question 79

Cash flow does not rely on which of the following?

A) The payment patterns of customers
B) The monetary policy of the Federal Reserve
C) The speed at which suppliers and creditors process checks
D) The efficiency of the banking system

Question 80

International cash management systems are more complex than domestic cash management systems because of

A) the risk involved in currency fluctuations.
B) the changing interest rates across countries.
C) varying time zones across countries.
D) all of these.