Deck 7: Current Asset Management

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

The "SWIFT" transfer system was developed to aid bank fund transfers within Canada.

Question 5

Deposit receipts purchased in small denominations of $1,000 at the bank are readily marketable.

Question 6

Electronic funds transfer will likely increase the use of float.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.

Question 12

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

Question 13

Cheques can be cleared only through the Bank of Canada.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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

Question 25

The Reference Book, published by D&B, is a book listing all the companies supplying certain types of products.

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

A reduction in production and selling costs as a percentage of sales would usually lead to a more liberal credit policy.

Question 31

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

Question 32

Cash management at the international level employs the same techniques as domestic cash management.

Question 33

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

Question 34

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

Question 35

Eurodollars are Canadian dollars held on deposit by foreign banks.

Question 36

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

Question 37

The market for Eurodollar deposits and loans is primarily centred in London.

Question 38

Bankers' acceptances rank behind treasury bills as a vehicle for short-term investments.

Question 39

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 40

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

Question 41

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 42

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

Question 43

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

Question 44

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 45

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

Question 46

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 47

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

Question 48

Accounts receivable of industrial corporations has increased more than thirtyfold since 1962, indicating the willingness of firms to extend credit.

Question 49

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

Question 50

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

Question 51

Minimizing cash balances can improve overall corporate profitability.

Question 52

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

Question 53

SWIFT stands for the Society for Worldwide International Funds Transfer.

Question 54

The 4 C's of credit include character, capital, capacity, and conditions.

Question 55

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

Question 56

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 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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.

Question 62

"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.

Question 63

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

A) of high interest rates existing in one country.
B) one country's currency may be strong relative to the dollar.
C) two of the answers are correct.
D) none of the other answers are correct

Question 64

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

A) government bonds
B) Treasury bills
C) swap deposits
D) certificates of deposit

Question 65

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) all of the other answers are correct

Question 66

The economic order quantity

A) assumes that inventory usage is seasonal.
B) assumes that delivery times of each order are consistent.
C) considers stock-outs.
D) all of the other answers are correct

Question 67

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.

Question 68

Deposited cheques may be cleared through

A) chartered banks.
B) trust companies.
C) a local clearing house.
D) all of the other answers are correct

Question 69

Which of the following is not a valid quantitative measure of accounts receivable collection policies?

A) average collection period
B) aging of accounts receivables
C) ratio of debt to equity
D) ratio of bad debts to credit sales

Question 70

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 71

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) the ability to be readily marketable.
D) none of the other answers are correct

Question 72

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

A) lock-box system
B) regional collection centres
C) extended disbursement float
D) All of the answers are methods for speeding up collections.

Question 73

Characteristics of a money market deposit account include

A) a lower risk than money market funds.
B) insured by CDIC.
C) generally a limit of three deposits or withdrawals per month.
D) all of the other answers are correct

Question 74

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.

Question 75

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.

Question 76

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.

Question 77

A bankers' acceptance

A) is a draft drawn on a bank and paid by that bank when presented to it.
B) may be accepted by the bank for future payment.
C) is traded in a relatively liquid market until maturity.
D) all of the other answers are correct

Question 78

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.

Question 79

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

Question 80

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