Table 14.6
A breakdown of Teffan, Inc.’s outstanding accounts receivable dated June 30, 2019 on the basis
of the month in which the credit sale was initially made follows. The firm extends 30-day credit
terms.
71) Accounts receivable over 90 days total ________. (See Table 14.6)
A) $200,000
B) $470,000
C) $300,000
D) $100,000
72) An evaluation of the firm’s collection efforts based on the aging schedule would suggest
________. (See Table 14.6)
A) poor credit management
B) satisfactory credit management
C) superior credit management
D) overzealous collection efforts
73) An increase in collection efforts by a firm will result in ________ in sales volume, ________
in the investment in accounts receivable, ________ in bad debt expenses, and ________ in
collection expenditures.
A) an increase; a decrease; an increase; a decrease
B) an increase; a decrease; a decrease; an increase
C) an increase; a decrease; an increase; an increase
D) a decrease; a decrease; a decrease; an increase
74) A decrease in collection efforts by a firm will result in ________ in sales volume, ________
in the investment in accounts receivable, ________ in bad debt expenses, and ________ in
collection expenditures.
A) an increase; an increase; an increase; a decrease
B) an increase; a decrease; an increase; an increase
C) an increase; a decrease; an increase; a decrease
D) a decrease; a decrease; a decrease; an increase
75) An increase in accounts receivable turnover for a firm due to an increase in collection efforts
will ________.
A) decrease the firm’s marginal investments in accounts receivable
B) increase the firm’s marginal investments in accounts receivable
C) decrease the firm’s collection expense
D) increase the firm’s bad debt expense
Table 14.7
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is
considering a 3 percent cash discount for payment within 10 days. The firm’s current average
collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film,
variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that
the change in credit terms will result in a minor increase in sales of 10 films per year, that 75
percent of the sales will take the discount, and the average collection period will drop to 30 days.
The firm’s bad debt expense is expected to become negligible under the proposed plan. The bad
debt expense is currently 0.5 percent of sales. The firm’s required return on equal-risk
investments is 20 percent. (Assume a 360-day year.)
76) What is the firm’s marginal profit contribution from sales under the proposed plan of
initiating the cash discount? (See Table 14.7)
A) $22,500
B) $40,000
C) $62,500
D) $100,000
77) What is the marginal investment in accounts receivable under the proposed plan? (See Table
14.7)
A) $1,234,375
B) $1,382,500
C) $1,567,300
D) $1,841,570
78) What is the cost of marginal investment in accounts receivable under the proposed plan?
(See Table 14.7)
A) $313,460
B) $276,500
C) $246,875
D) $368,314
79) What are the savings of marginal bad debts under the proposed plan? (See Table 14.7)
A) $500,000
B) $50,000
C) $10,000
D) $5,000
80) What is the cost of the marginal cash discount? (See Table 14.7)
A) $768,750
B) $300,000
C) $307,500
D) $230,625
81) What is the net result of increasing the cash discount? (See Table 14.7)
A) +$33,750
B) -$33,750
C) +$128,750
D) -$58,750
82) Ashley’s Ad Agency’s accounts receivable totaled $451,000 on January 30, 2019. An aging
summary of receivables at this date follows:
The firm extends 30-day credit terms to all its credit customers.
(a) Prepare an aging schedule for Ashley’s Ad Agency.
(b) Evaluate the firm’s collection performance.
86
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14.5 Management of receipts and disbursements
1) Receipts and disbursements management techniques are aimed at minimizing a firm’s
financing requirements by taking advantage of certain imperfections in the collection and
payment system.
2) The entire process resulting from a check issue and mail by a payer company to a payee
company (i.e., mail float, processing float, and clearing float) is disbursement float to the payer
company and is collection float to the payee company.
3) Processing float is the delay between the receipt of a check by a payee and its deposit in firm’s
account.
4) Mail float is the delay between the deposit of a check by a payee and the actual availability of
the funds.
5) Assuming that a firm has done all it can to stimulate customers to pay promptly and to select
vendors offering the most attractive and flexible credit terms, it can further speed collections and
slow disbursements by taking advantage of the “float” existing in the collection and payment
systems.
6) Float exists when a payee has received funds in a spendable form but these funds have not
been withdrawn from the account of the payer.
7) Collection float is experienced by a payer and is a delay in the receipt of funds.
8) Disbursement float is experienced by a payee and is a delay in the actual withdrawal of funds.
9) Collection float results from the lapse between the time that a firm deducts a payment from its
checking account ledger and the time that funds are actually withdrawn from its accounts.
10) Disbursement float results from the delay between the time that a payer or customer deducts
a payment from its checking account ledger (disburses it) and the time that a payee or vendor
actually receives these funds in a spendable form.
11) A lockbox system is used to reduce collection float by shortening all three basic float
components (i.e., mail, processing, and clearing).
12) Controlled disbursing involves the strategic use of mailing points and bank accounts to
lengthen mail float and clearing float, respectively.
13) Controlled disbursing is a method of consciously anticipating the mail, processing, and
clearing time involved with the payment process.
14) Playing the float involves the strategic use of mailing points and bank accounts to lengthen
mail float and clearing float, respectively.
15) With the ACH (automated clearing house) credits, disbursement float is sacrificed because
ACH transactions immediately draw down a company’s payroll account on pay day.
16) The ACH (automated clearing house) debits are preauthorized electronic withdrawals from a
payer’s account.
17) Zero-balance accounts are checking accounts in which a zero balance is maintained and the
bank automatically covers all checks presented against the accounts.
18) Federal agency issues are low-risk securities issued by government agencies but not
guaranteed by the U.S. Treasury.
19) Eurodollar deposits are deposits of currency that are not native to the country in which the
bank is located.
20) To be truly marketable, a security must have three basic characteristics: a ready market, risk-
free, and safety of principal.
21) Marketable securities are short-term, interest-earning, money market instruments that can
easily be converted into cash.
22) The yields on Treasury bills are generally higher than those on any other marketable
securities due to their virtually risk-free nature.
23) Federal agency issues are obligations of the U.S. Treasury and are readily accepted as low-
risk securities.
24) Commercial paper is a short-term loan issued by commercial banks that have variable yields
based on size, maturity, and prevailing money market conditions.
25) A major decision confronting a business firm when purchasing marketable securities
involves a trade-off between the opportunity to earn a return on idle funds during the holding
period and the brokerage costs associated with the purchase and sale of marketable securities.
26) Treasury notes generate lower returns than U.S. Treasury bills.
27) Most federal agency issues have short maturities and offer slightly higher yields than U.S.
Treasury issues having similar maturities.
28) The yields on negotiable certificates of deposit are typically above those on U.S. Treasury
issues and comparable to the yields on commercial paper with similar maturities.
29) In exchange for the tailor-made maturity date provided by the repurchase agreement, a bank
or security dealer provides a return slightly below than obtainable through outright purchase of
similar marketable securities.
30) The higher yields on Eurodollar deposits compared with nearly all other marketable
securities, governmental or nongovernmental, with similar maturities are attributable to (1) the
fact that the depository banks are generally less closely regulated than U.S. banks and are
therefore more risky, and (2) some foreign exchange risk may be present.
31) When managing accounts payable, a good strategy would be to ________.
A) pay as early as possible creating better credit rating for a firm
B) pay as slowly as possible without damaging a firm’s credit rating
C) pay big customers early to maintain good relations and small customers on a later date
D) pay only when a firm has adequate funds to meet its liabilities
32) Delaying the payment of accounts payable in order to improve cash management is known as
________.
A) ACH transfers
B) stretching payables
C) credit scoring
D) lockbox system
33) ________ refers to funds that have been dispatched by a payer but are not in a form that can
be spent by the payee.
A) Banker’s acceptance
B) Float
C) A direct send
D) Lockbox
34) ________ float is the delay between the receipt of a check and the actual deposit of it into a
firm’s account.
A) Disbursement
B) Deposit
C) Processing
D) Clearing
35) Float is important in the cash conversion cycle of a firm because ________.
A) its presence reduces a firm’s average collection period
B) its presence reduces a firm’s average payment period
C) its presence lengthens both a firm’s average collection period and its average payment period
D) its presence reduces the investment that a firm must make in its cash conversion cycle