Question 1

Holding cash for precautionary demand refers to:
A) keeping cash on hand to pay for emergency needs.
B) holding cash to compensate banks for the services they perform.
C) keeping money in the bank to pay bills for the goods and services they use.
D) keeping cash to take advantage of unexpected opportunities.

Accepted Answer

Precautionary demand for cash refers to holding cash to cover unexpected expenses or emergencies such as medical bills, car repairs, or job loss. This helps individuals or businesses avoid having to sell assets or borrow money in times of need.

Question 2

Which of the following is not a method of accelerating cash receipts?
A) Lock box systems
B) Wire transfers
C) Float management
D) Concentration banking

Accepted Answer

The answer of Which of the following is not a...

Question 3

____ are liquid investments that can be held instead of cash and earn a modest return.
A) Fixed asset investments
B) Marketable securities
C) Real estate securities
D) Treasury bonds

Accepted Answer

Marketable securities are liquid investments that can be easily bought and sold, allowing investors to hold them instead of cash and earn a modest return. Fixed asset investments, real estate securities, and Treasury bonds may also offer a return, but they are not as liquid and may be more difficult to convert to cash quickly.

Question 4

____ refers to the economic reason for holding cash in the bank to pay bills for the goods and services used.
A) Compensating balance
B) Transactions demand
C) Precautionary demand
D) Speculative demand

Accepted Answer

Transactions demand refers to the need to hold cash to conduct day-to-day transactions, such as paying bills for goods and services used. Compensating balance refers to the minimum balance required to be maintained in a bank account to offset the cost of banking services. Precautionary demand refers to the need to hold cash for unexpected events or emergencies. Speculative demand refers to the desire to hold cash to take advantage of potential investment opportunities.

Question 5

Which of the following credit and collections decisions would typically not increase the accounts receivable balance?
A) Extending credit to less creditworthy customers
B) Increasing the discount offered for prompt payment
C) Extending the time allowed for payment of a customer's bill
D) Delaying dunning letters from the credit department
E) All of the above would typically increase the accounts receivable balance.

Accepted Answer

Increasing the discount offered for prompt payment encourages customers to pay their bills earlier, which would decrease, rather than increase, the accounts receivable balance.

Question 6

Which of the following is an administrative (non-economic) reason for holding cash?
A) To pay bills for the goods and services used
B) To meet short-term obligations
C) To compensate banks for services
D) To have cash available to take advantage of unexpected opportunities

Accepted Answer

Compensating banks for providing services such as handling transactions, maintaining accounts, and offering lines of credit is an administrative reason for holding cash, not directly related to economic transactions or opportunities.

Question 7

Which of the following is not a consequence of too high a level of accounts receivable?
A) Higher financing cost on money needed to support the higher level of current assets
B) Larger bad debt losses
C) Poorer relations with customers
D) A reputation of having a poor collection policy
E) c and d

Accepted Answer

C) Poorer relations with customers and D) A reputation of having a poor collection policy are not direct consequences of too high a level of accounts receivable. Instead, high accounts receivable can lead to higher financing costs and larger bad debt losses, but not necessarily to poorer customer relations or a reputation for poor collection policies. These outcomes are more related to how the collections are managed, rather than the level of accounts receivable itself.

Question 8

Methods used by lenders who advance funds with the borrower's inventory as collateral involve varying amounts of administration, attention, and cost. They do not include:
A) trust receipts or chattel mortgage agreements whereby the inventory is specifically identified by serial number and cannot be sold without the lender's permission.
B) warehousing the collateralized inventory at the lender's facility.
C) a blanket lien granting the lender a collateral position in all of the borrower's inventory, which is physically maintained at the borrower's facility.
D) using public or field warehousing facilities.

Accepted Answer

Warehousing the collateralized inventory at the lender's facility is not a method used by lenders because typically, the inventory remains either at the borrower's premises or in third-party warehouses (public or field warehousing facilities), not at the lender's facility.

Question 9

Which of the following is not a reason that firms typically hold cash?
A) To make routine transactions
B) To satisfy compensating balance requirements
C) To earn interest
D) To be able to respond to emergencies and opportunities

Accepted Answer

Firms typically hold cash to make routine transactions, satisfy compensating balance requirements, and be able to respond to emergencies and opportunities. However, earning interest is not typically a primary reason for holding cash since the interest earned on cash balances is usually quite low.

Question 10

Which of the following is NOT used to accelerate cash receipts?
A) Lock Box Systems
B) Wire Transfers
C) Concentration Banks
D) Remote Disbursing

Accepted Answer

Remote disbursing is a method used to accelerate cash disbursements, not cash receipts. The other three options, lock box systems, wire transfers, and concentration banks, are all methods used to accelerate cash receipts.

Question 11

When a firm factors its accounts receivable as opposed to pledging them, the firm will:
A) offer the lender the accounts receivable as collateral to the loan.
B) sell the accounts receivable at a discount to the lender.
C) in all cases, remain liable for any uncollected accounts sold to the lender.
D) None of the above

Accepted Answer

When a firm factors its accounts receivable, it sells the accounts receivable to the lender at a discount, rather than offering them as collateral for a loan. The factor then assumes the responsibility for collecting payment from the customers whose accounts have been sold to them. The firm may or may not remain liable for any uncollected accounts, depending on the specific terms of the agreement with the factor.

Question 12

Which of the following reasons for holding cash is not under the control of management as a matter of policy?
A) Transaction demand
B) Precautionary demand
C) Speculative demand
D) Compensating balances
E) All of these reasons are under the complete control of management.

Accepted Answer

Compensating balances are typically required by lenders or suppliers and are not under the complete control of management as a matter of policy. The other reasons for holding cash, transaction demand, precautionary demand, and speculative demand, are all typically within the control of management as a matter of policy.

Question 13

The services provided by an accounts receivable factor to the borrower may include:
A) performing credit checks on potential customers.
B) collecting cash from customers.
C) assuming the bad debt risk when customers of factored accounts do not pay.
D) All of the above

Accepted Answer

An accounts receivable factor typically performs credit checks on potential customers to assess the risk of non-payment, collects cash from customers on behalf of the borrower, and assumes the bad debt risk when customers of factored accounts do not pay. Therefore, all of the above options are services provided by an accounts receivable factor to the borrower.

Question 14

Holding cash for speculative demand refers to:
A) keeping cash on hand to pay for emergency needs.
B) holding cash to compensate banks for the services they perform.
C) keeping money in the bank to pay bills for the goods and services they use.
D) keeping cash to take advantage of unexpected opportunities.

Accepted Answer

Holding cash for speculative demand means keeping cash on hand to take advantage of unexpected opportunities, such as a sudden stock market crash or a business deal that presents itself. This type of cash holding is often done by investors or businesses seeking to capitalize on potential lucrative opportunities.

Question 15

Holding cash for which of the following reasons is an example of transactions demand?
A) Purchase of inputs in response to an abrupt price drop
B) Acquisition of raw material for an emergency demand
C) Immediately producing a new batch of product to replace goods damaged by a flood
D) Payments to tax authorities

Accepted Answer

Transactions demand refers to the need for cash to facilitate day-to-day transactions such as paying bills or taxes, making purchases, etc. Thus, payments to tax authorities fall under the category of transactions demand as it involves the need for cash for official payments. Options A, B, and C refer to precautionary or speculative demand for cash.

Question 16

Traditional reasons for holding cash DO NOT include:
A) to make transactions.
B) to pay dividends.
C) for speculative opportunities.
D) to maintain compensating balances.

Accepted Answer

Holding cash for paying dividends is not a traditional reason as dividends are usually paid through electronic transfers or stock issuance, not physical cash. The other options - making transactions, speculative opportunities, and maintaining compensating balances - are traditional reasons for holding cash.

Question 17

The objectives of cash management include to:
A) earn a return.
B) hold cash to a minimum consistent with efficient operation.
C) ensure adequate liquidity.
D) Both b & c.
E) All of the above

Accepted Answer

The objectives of cash management are to hold cash to a minimum consistent with efficient operation while ensuring adequate liquidity, and to earn a return. Option D includes both of these objectives, making it the correct answer. Option E includes all the objectives, but it is not the best choice because earning a return is not always a primary objective for cash management.

Question 18

Zero balance accounts eliminate:
A) concentration banking.
B) wire transfers.
C) preauthorized checks.
D) excess funds at the banks of remote divisions.

Accepted Answer

Zero balance accounts (ZBAs) eliminate excess funds at the banks of remote divisions by automatically transferring funds from a master account to subsidiary accounts to cover checks and other withdrawals. ZBAs do not directly affect concentration banking, wire transfers, or preauthorized checks.

Question 19

Which of the following types of float can be virtually eliminated through the use of a lock box?
A) Mail float
B) Processing float
C) Transit float
D) Both a. and b. can be eliminated.
E) All of the above can be eliminated.

Accepted Answer

The answer of Which of the following types of float...

Question 20

Holding cash for which of the following reasons is an example of speculative demand?
A) Purchase of an input when there is an abrupt drop in the price
B) Quick acquisition of new raw materials for an emergency demand
C) A new shipment that has to be produced immediately because of product damage
D) Payments made to tax authorities

Accepted Answer

Holding cash for the purpose of taking advantage of an abrupt drop in the price of a necessary input is an example of speculative demand. Speculative demand for money is when people hold cash to take advantage of future financial opportunities, such as a drop in prices, rather than for transactions.

Quiz 16: The Management of Working Capital Multiple Choice Questions

Holding cash for precautionary demand refers to:

Which of the following is not a method of accelerating cash receipts?

____ are liquid investments that can be held instead of cash and earn a modest return.

____ refers to the economic reason for holding cash in the bank to pay bills for the goods and services used.

Which of the following credit and collections decisions would typically not increase the accounts receivable balance?

Which of the following is an administrative (non-economic) reason for holding cash?

Which of the following is not a consequence of too high a level of accounts receivable?

Methods used by lenders who advance funds with the borrower's inventory as collateral involve varying amounts of administration, attention, and cost. They do not include:

Which of the following is not a reason that firms typically hold cash?

Which of the following is NOT used to accelerate cash receipts?

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

Which of the following reasons for holding cash is not under the control of management as a matter of policy?

The services provided by an accounts receivable factor to the borrower may include:

Holding cash for speculative demand refers to:

Holding cash for which of the following reasons is an example of transactions demand?

Traditional reasons for holding cash DO NOT include:

The objectives of cash management include to:

Zero balance accounts eliminate:

Which of the following types of float can be virtually eliminated through the use of a lock box?

Holding cash for which of the following reasons is an example of speculative demand?