Question 1

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.

Accepted Answer

The difference between the amount of cash on the firm's books and the amount credited to it by the bank is called float. This typically occurs when there is a time delay between when a check is deposited and when it is cleared by the bank, resulting in a temporary disparity between the company's recorded cash balance and its actual available funds.

Question 2

Characteristics of a money market mutual fund include:
A) the purchase of shares by investors,the proceeds of which are reinvested into liquid short-term securities.
B) a required minimum balance of $2,500.
C) these funds cannot be easily marketable.
D) secured by a promissory note.

Accepted Answer

Money market mutual funds are investment vehicles that pool together funds from multiple investors and invest the proceeds in short-term, low-risk securities like Treasury bills, certificates of deposit, and commercial paper. The primary objective is capital preservation and liquidity. Investors purchase shares, and the proceeds are then reinvested by the fund managers. The other options (B, C, D) are not accurate characteristics of money market mutual funds.

Question 3

The system whereby funds are moved between computer terminals without use of cheques is:
A) electronic funds transfer.
B) float.
C) a lock-box system.
D) magnetic character recognition.

Accepted Answer

Electronic funds transfer (EFT) is the system whereby funds are moved between computer terminals without the use of cheques. This includes direct deposit of payroll, automatic bill payments, and online banking transfers. Float is the time between when a payment is made and when the funds are actually received in the bank account. A lock-box system is a system where a company's incoming payments are directed to a designated post office box, which is emptied regularly by the bank for processing. Magnetic character recognition (MCR) is a technology used to digitize and read characters from printed or written materials, such as cheques.

Question 4

The problem in stretching out the maturity of marketable securities is that:
A) you are legally locked in until the maturity date.
B) longer term securities are often not available.
C) there is greater possibility of loss.
D) interest rates are generally lower.

Accepted Answer

The answer of The problem in stretching out the maturity...

Question 5

Which of the following securities represents an unsecured promissory note issued by a corporation?
A) Certificates of deposit
B) Savings accounts
C) Commercial paper
D) Money market fund

Accepted Answer

Commercial paper is an unsecured promissory note issued by a corporation, typically with a maturity of 1-9 months. Certificates of deposit, savings accounts, and money market funds are not considered promissory notes.

Question 6

Deposited cheques may be cleared through:
A) Stock exchange.
B) trusted employees.
C) a local dealer network.
D) chartered banks.

Accepted Answer

Deposited cheques are cleared through chartered banks, which have the infrastructure and regulatory oversight to process cheque transactions securely and efficiently. The other options (stock exchange, trusted employees, local dealer network) are not involved in the clearance of cheques.

Question 7

The economic order quantity:
A) determines the reorder point.
B) is the lowest cost amount to order considering all costs.
C) determines the safety stock.
D) requires the number of days to maturity.

Accepted Answer

The economic order quantity (EOQ) is the quantity of goods or materials that should be ordered at one time in order to minimize the total cost of ordering and holding or carrying them. EOQ considers all costs, including ordering costs, holding costs, and the cost of the goods themselves, and calculates the quantity that will result in the lowest total cost. It does not determine the reorder point, safety stock, or require the number of days to maturity.

Question 8

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

Accepted Answer

Electronic funds transfer allows for immediate transfer of funds, leaving no time for "float" to occur. Therefore, it would virtually eliminate its use.

Question 9

"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 cheque and it being debited to the bank account.
D) a customer writes "hot" cheques.

Accepted Answer

"Float" occurs because there is a time delay between writing a check and it being debited from the bank account. This time delay creates a window of opportunity for funds to appear as available in both the company's checking account and the recipient's account.

Question 10

For a given firm,holding other factors constant,ordering costs per unit generally:
A) decline as average inventory increases.
B) increase in proportion to increases in inventory.
C) are considered fixed costs.
D) are negotiated.

Accepted Answer

Ordering costs per unit generally decline as average inventory increases because ordering fewer, larger quantities of inventory results in fewer orders needing to be placed and processed, thus reducing the ordering costs per unit.

Question 11

The costs of carrying inventory do not include:
A) the interest on funds tied up in inventory.
B) the cost of warehouse space.
C) ordering costs.
D) insurance and handling costs.

Accepted Answer

The costs of carrying inventory include the interest on funds tied up in inventory, the cost of warehouse space, insurance and handling costs, and other costs such as obsolescence and spoilage. Ordering costs, on the other hand, are not considered a cost of carrying inventory but rather a cost of ordering and replenishing inventory.

Question 12

Average daily remittances are $5 million,and "extended disbursement float" adds 3 days to the disbursement schedule,how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds.
A) $500,000
B) $1,500,000
C) $1,000,000
D) $0

Accepted Answer

First, we need to calculate the amount of excess funds that the firm has due to the extended disbursement float:

3 days of float x $5 million in daily remittances = $15 million in excess funds

Next, we need to calculate the annual earnings on these excess funds:

$15 million x 10% = $1.5 million

Therefore, the firm should be willing to pay up to $1.5 million for a cash management system that can eliminate the extended disbursement float and maximize its earnings on excess funds. Choice B is the only option that matches this amount.

Question 13

A multinational company may prefer to hold sizeable cash balances in one currency rather than another because:
A) of low interest rates existing in one country.
B) one country's currency may be weaker relative to the dollar.
C) of interest rate differentials on short term investments.
D) both currencies are at parity.

Accepted Answer

Interest rate differentials on short term investments can make it more profitable for a company to hold cash balances in one currency over another. This allows the company to earn more interest on its holdings, increasing its overall profitability. A and B may also be factors, but they are not as strong as C in determining which currency to hold cash balances in. D is not a relevant factor as the question implies a choice between two different currencies, not parity.

Question 14

A firm that wishes to minimize risk when investing idle cash would be least likely to buy:
A) commercial paper.
B) long-term corporate bonds.
C) negotiable certificates of deposit.
D) Treasury bills of the Canadian government.

Accepted Answer

Long-term corporate bonds typically carry a higher level of risk than other short-term investments, such as commercial paper, negotiable certificates of deposit, and Treasury bills. Therefore, a firm looking to minimize risk when investing idle cash would be least likely to buy long-term corporate bonds.

Question 15

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.

Accepted Answer

Synchronization of cash inflows and cash outflows is the primary consideration in cash management to ensure that the company has enough cash available to meet its obligations and avoid cash shortages. Having as much cash as possible on hand or putting excess cash into accounts receivable may not necessarily optimize cash management, and profitability is a separate consideration that should be balanced with the need for adequate cash reserves.

Question 16

Which of the following securities regularly trades on a discount basis?
A) Government bonds
B) Treasury bills
C) Swap deposits
D) Certificates of deposit

Accepted Answer

Treasury bills are known to trade on a discount basis, meaning they are sold for less than their face value and the investor earns the difference between the purchase price and face value at maturity. Government bonds, swap deposits, and certificates of deposit do not typically trade on a discount basis.

Question 17

Which of the following is not a method of speeding up collections?
A) Lock-box system
B) Use of local bank branches to deposit funds
C) Extended disbursement float
D) Electronic fund transfer

Accepted Answer

Extended disbursement float is not a method of speeding up collections. In fact, it can delay collections by prolonging the amount of time it takes for funds to become available. The other options listed (lock-box system, use of local bank branches, and electronic fund transfer) are all methods that can help to speed up collections.

Question 18

Probably the safest and most marketable instrument for short-term investment is:
A) Commercial paper.
B) Large denomination certificates.
C) Bankers' acceptances.
D) Treasury bills.

Accepted Answer

Treasury bills are considered the safest short-term investment because they are issued and backed by the government, meaning there is very little risk of default. They also have a very low minimum investment requirement and can be easily bought and sold on the secondary market, making them a highly liquid and marketable investment.

Question 19

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

Accepted Answer

The primary concern in managing cash and marketable securities should be liquidity and safety. This means that the manager should ensure that there is always enough cash on hand to meet operational needs and unexpected expenses, while also investing any excess cash in highly liquid and safe securities to earn a reasonable return. Maximization of profit and acceptable return on investment may be secondary concerns, but should not come at the expense of liquidity and safety.

Question 20

A bankers' acceptance:
A) is a draft drawn on a corporation.
B) may be accepted by the corporation for future payment.
C) is a long term investment accepted by the bank.
D) is traded in a relatively liquid market until maturity.

Accepted Answer

The answer of A bankers' acceptance:
A) is a draft drawn...

Quiz 7: Current Asset Management

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

Characteristics of a money market mutual fund include:

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

The problem in stretching out the maturity of marketable securities is that:

Which of the following securities represents an unsecured promissory note issued by a corporation?

Deposited cheques may be cleared through:

The economic order quantity:

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

"Float" takes place because:

For a given firm,holding other factors constant,ordering costs per unit generally:

The costs of carrying inventory do not include:

Average daily remittances are $5 million,and "extended disbursement float" adds 3 days to the disbursement schedule,how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds.

A multinational company may prefer to hold sizeable cash balances in one currency rather than another because:

A firm that wishes to minimize risk when investing idle cash would be least likely to buy:

One of the first considerations in cash management is:

Which of the following securities regularly trades on a discount basis?

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

Probably the safest and most marketable instrument for short-term investment is:

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

A bankers' acceptance: