978-0134083285 Chapter 17 Part 1

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Foundations of Finance, 9e (Keown/Martin/Petty)

Chapter 17 Cash, Receivables, and Inventory Management

Learning Objective 17.1

1) Near-cash assets consist of marketable securities and accounts receivable.

Keywords: Near-cash Assets

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

2) Marketable securities are purchased when excess cash is temporarily available and sold when cash is

needed.

Keywords: Marketable Securities

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

3) Transaction balances are used to meet the regular cash needs of the firm, not irregular outflows that

will be handled with speculative balances.

Keywords: Transactions Motive, Speculative Motive, Regular Cash Flows, Irregular Cash Flows

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

4) The more difficult it is to estimate a firm’s cash flow needs, the greater the need to carry higher

precautionary balances.

Keywords: Precautionary Motive, Cash Flow Predictability

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

5) Motives for holding stocks of cash include transaction, precautionary, and speculative.

Keywords: Transaction Motive, Precautionary Motive, Speculative Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

6) The funds needed to satisfy the precautionary motive are entirely held in cash.

Keywords: Precautionary Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

7) Generally, the least important motive for holding liquid assets for a typical company is the speculative

motive.

Keywords: Speculative Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

8) The industry in which a firm operates has relatively little effect on the relative amounts of transaction

cash held.

Keywords: Transaction Motive, Industry Effect

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

9) Speculative cash balances are held to take advantage of uncertain profit-making opportunities.

Keywords: Speculative Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

10) The most important reasons firms hold cash balances are the transaction and precautionary motives.

Keywords: Transactions Motive, Precautionary Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

11) The goal of cash management is to hold the minimum amount of cash necessary to meet the firm’s

obligations in a timely manner.

Keywords: Cash Management

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

12) Effective cash management involves the trade-off between the risk of insolvency (resulting in higher

near cash balances) and the desire to earn higher returns (resulting in lower near cash balances).

Keywords: Cash Management, Risk-Return Tradeoff

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

13) The risk-return trade-off leads to two objectives: (1) keep enough cash on hand to make necessary

payments, and (2) reduce investments in idle cash to a minimum.

Keywords: Risk-Return Trade-off

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

14) The initial step in any effective cash management program is cash flow forecasting.

Keywords: Cash Management, Cash Flow Forecasting

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

15) The objective of managing cash inflows is to decrease the float while the objective of managing cash

outflows is to increase the float.

Keywords: Float, Cash Inflows, Cash Outflows

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

16) Firms like to hold large stocks of cash since the risk of becoming insolvent is minimized.

Keywords: Insolvency Risk

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

17) Companies with the largest cash balances reduce their risk of insolvency and thus maximize the value

of the companies for their shareholders.

Keywords: Insolvency, Cash Balance

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

18) Lockbox arrangements may reduce mail float, processing float, and transit float.

Keywords: Lockbox, Mail Float, Processing Float, Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

19) In a lockbox system, customer payments are collected directly by the bank and deposited immediately

in the corporation’s account.

Keywords: Lockbox

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

20) The estimated value of reducing float by one day is one day’s interest on the freed-up sales.

Keywords: Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

21) A zero balance account permits divisions to disburse funds while maintaining centralized control of

several bank accounts.

Keywords: Zero Balance Accounts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

22) One advantage of zero balance accounts is an increase in disbursing float.

Keywords: Zero Balance Accounts, Disbursing Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

23) Zero balance accounts reduce disbursing float.

Keywords: Zero Balance Accounts, Disbursing Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

24) Payable-through drafts look like checks but are not drawn on a bank.

Keywords: Payable-Through Drafts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

25) The main purpose of using a payable-through draft system is to gain effective control over field

payments.

Keywords: Payable-Through Drafts, Field Payments

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

26) Lock-box arrangements yield benefits for all companies regardless of the size of sales or customer

remittance checks.

Keywords: Lock-Box Arrangement

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

27) The benefits derived from reduced mail and processing floats must be greater than the bank fees

associated with a lockbox system or else a firm would be better off without the lockbox.

Keywords: Lockbox System, Mail Float, Processing Float, Cost-Benefit Tradeoff

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

28) Zero balance accounts permit centralized control over cash outflows while maintaining divisional

disbursing authority.

Keywords: Zero Balance Accounts

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

29) If current interest rates are low, and therefore expected to increase in the future, a firm wanting to

reduce its interest rate risk would hold debt with longer maturities.

Keywords: Interest Rate Risk, Maturity

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

30) A negotiable certificate of deposit is a marketable receipt for funds deposited in a bank for a period of

one to 18 months.

Keywords: Negotiable Certificate of Deposit

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

31) Commercial paper is a short-term, unsecured, promissory note.

Keywords: Commercial Paper

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

32) One of the attractive features of commercial paper is an active secondary market.

Keywords: Commercial Paper, Secondary Market

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

33) Yields on various financial instruments tend to be positively correlated with maturity.

Keywords: Yield Curve, Maturity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

34) The interest earned on U.S. Treasury bills is subject to state and local income taxes.

Keywords: U.S. Treasury Bills, Income Taxes

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

35) The minimum denomination of U.S. Treasury bills is $100,000.

Keywords: U.S. Treasury Bills

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

36) Marketable securities are near-cash assets because they can be converted into cash quickly.

Keywords: Marketable Securities, Near-Cash Assets

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

37) A Treasury bill is a near-cash asset.

Keywords: U.S. Treasury Bills

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

38) A security is considered liquid if it can be sold, regardless of the time it takes to make the sale.

Keywords: Liquidity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

39) An extremely liquid asset is one that can be sold for cash quickly without a reduction in price below

its current market value.

Keywords: Liquidity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

40) Marketable securities are only those security investments the firm can convert into cash balances

within one year.

Keywords: Marketable Securities

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

41) Available yields on financial securities depend on their financial risk, interest rate risk, liquidity, and

taxability.

Keywords: Financial Risk, Interest Rate Risk, Liquidity, Taxability

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

42) A company concerned about the liquidity of its near–cash securities should invest in U.S. Treasury

bills because the secondary market for U.S. Treasury bills is excellent.

Keywords: Liquidity, U.S. Treasury Bills, Secondary Market

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

43) U.S. Treasury bills are exempt from federal, state, and local income taxes.

Keywords: U.S. Treasury Bills, Taxability

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

44) Money-market mutual funds are diversified portfolios of short-term, high-grade debt instruments.

Keywords: Money-Market Mutual Funds

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

45) U.S. Treasury bills are extremely liquid due to excellent secondary markets.

Keywords: U.S. Treasury Bills, Liquidity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

46) Commercial paper is much more liquid than money-market mutual funds because commercial paper

is available to only the most creditworthy corporations.

Keywords: Commercial Paper, Money-Market Mutual Fund, Liquidity

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

47) U.S. Treasury bills, bankers’ acceptances and commercial paper are all sold on a discount basis.

Keywords: U.S. Treasury Bills, Bankers’ Acceptances, Commercial Paper, Discount Basis

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

48) The speed of the collections process is determined by three types of float: mail float, processing float,

and transit float.

Keywords: Collections, Mail Float, Processing Float, Transit Float

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

49) Cash inflows come from

A) purchase of marketable securities.

B) purchase of fixed assets.

C) credit sales.

D) cash sales.

Keywords: Cash Inflows

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

50) John Maynard Keynes segmented a firm’s demand for cash into the following motives:

A) risk, investment, and liquidity.

B) transaction, speculative and precautionary.

C) transaction, liquidity, and speculative.

D) transaction, speculative, and risky.

Keywords: Transactions Motive, Speculative Motive, Precautionary Motive, Liquidity

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

51) A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an

example of the ________ motive for holding cash.

A) transaction

B) speculative

C) hedging

D) precautionary

Keywords: Speculative Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

52) Which of the following affects the precautionary motive for holding cash?

A) the cash flow predictability

B) the firm’s access to external funds

C) both A and B

D) none of the above

Keywords: Precautionary Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

53) A company that has an unpredictable cash flow, and is holding cash because of things that might

happen due to this uncertainty, is holding a larger minimum cash balance due to which type of motive?

A) transaction

B) precautionary

C) speculative

D) common sense

Keywords: Precautionary Motive

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking

54) Which of the following would be an example of the “transactions motive” for a firm holding cash

balances?

A) investing “excess cash balances”

B) anticipating a downturn in the economy

C) purchase of inventory

D) take advantage of an anticipated decline in the price of raw materials

Keywords: Transactions Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

55) Which of the following would be an example of the “precautionary motive“ for a firm holding cash

balances?

A) purchase of inventory

B) anticipating a strike

C) purchase fixed assets

D) make dividend payments

Keywords: Precautionary Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

56) Which of the following would be an example of the “speculative motive“ for a firm holding cash

balances?

A) make dividend payments

B) anticipating a strike

C) purchase of inventory

D) take advantage of an anticipated decline in the price of raw materials

Keywords: Speculative Motive

Learning Obj.: L.O. 17.1

AACSB: Reflective Thinking

57) All of the following elements of a cash management program will likely contribute to an increase in

the value of the firm EXCEPT

A) collect cash more quickly.

B) slow down cash disbursements.

C) prepare more accurate cash flow forecasts.

D) increase cash balances for precautionary reasons.

Keywords: Cash Management Program, Precautionary Motive, Cash Flow Forecasting

Learning Obj.: L.O. 17.1

AACSB: Analytical Thinking