Chapter 07 Test Bank – Static Key
1. For most modern corporations, the more cash they have, the better off they are.
2. In the management of cash and marketable securities, the primary concern is profitability.
3. Minimizing cash balances can improve overall corporate profitability.
4. “Float” has been largely reduced because of electronic payments and improvements in business–to–
business relationships.
5. For most firms, the primary motive for holding cash is the transaction motive.
6. Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.
7. A primary goal of cash management is to insure that the inflows and outflows of cash are synchronized.
8. Proper management of sales, receivables, payables, and inventory form the basis of cash flow.
9. The cash-generating process for a firm is continuous, even though cash flow can be sporadic.
10. Computerized cash management and electronic funds transfer allow firms to carry smaller cash
balances.
11. Float is the difference between the cash balance on the corporate books and the amount currently
credited to the corporation by the bank.
12. “Float” is the name given for a short-term loan between suppliers and buyers.
13. Checks can be cleared only through the Federal Reserve System.
14. Unfortunately, float is too complicated to be effectively managed through any combination of
disbursement and collection strategies.
15. It is possible for companies to operate with negative cash balances on their books.
16. A lock-box system is a method of extending disbursements.
17. A lock-box is used to safeguard the corporation’s marketable securities.
18. A lock-box is used by the selling corporation to speed up the check collection and check-clearing
process.
19. “Extended disbursement float” has to do with the length of time a corporation takes to collect bills.
20. Cost-benefit is not a consideration in development of a cash management system, only safety and
liquidity.
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21. Electronic funds transfer will likely increase the use of float.
22. The use of automated clearinghouses (ACHs) saves money for consumers, corporations, and financial
institutions by reducing transaction costs.
23. It is less expensive to clear a check through the Federal Reserve System than to process an automatic
fund transfer through an automated clearinghouse.
24. The “SWIFT” transfer system was developed to aid regional bank fund transfers within the United
States.
25. 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.
26. Every message routed through SWIFT is encrypted and every money transaction is authorized by
another code for security purposes.
27. Multinational firms find it difficult to shift funds from one country to another.
28. In general, cash management at the international level employs the same techniques as domestic cash
management.
29. Eurodollars are U.S. dollars held on deposit by foreign banks.
30. Stretching out the maturity of marketable securities can rarely result in a loss.
31. The investment of excess short-term funds is usually diversified between short- and long-term
marketable securities.
32. Cash management becomes more important as the level of short-term interest rates rises.
33. Treasury bills are unique in that they trade on a premium basis.
34. Because they generally run a surplus budget, government agencies are able to issue securities with
slightly lower yields than direct Treasury issues.
35. As of 2015, the Federal Reserve intends to maintain low interest rates on U. S. government securities
as long as inflation remains comparatively low and unemployment remains high.
36. Certificates of deposit purchased in small denominations of $1,000 at commercial banks or savings and
loan organizations are readily marketable.
37. When considering risk and popularity, banker’s acceptances are ranked behind Treasury bills and
commercial paper as a vehicle for short-term investments.
38. Small-denomination certificates of deposit are usually more liquid than large-denomination CDs.
39. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.
40. Bankers’ acceptances are short-term securities that arise from foreign trade.
41. The 5 Cs of credit include “character, capital, capacity, conditions, and collateral.”
42. 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.
43. Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to
devise models predicting payment problems and the probability of bankruptcy 12 months in the future.
44. Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet’s D-U-N-S
(Data Universal Number System) that tracks relationships and the ownership of businesses within Dun &
Bradstreet’s information base.
45. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable
balance will be $120,000.
46. If a firm’s average accounts receivable balance increases, this could be because the company
improved what customers it extended credit to.
47. If a firm’s average collection period increases, this could be because the company gave credit to
customers with a low credit report.
48. Return on investment is the major decision criteria in credit decisions.
49. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
50. Seasonal production allows for maximum efficiency in machinery and manpower use.
51. The “economic ordering quantity” helps a firm determine the most efficient order size to place.
52. The two basic costs associated with inventory are production cost and ordering cost.
53. A reduction in carrying costs would increase the economic order quantity.
54. Lower ordering costs would tend to increase a firm’s economic order quantity.
55. Assuming that inventory is used up at a constant rate and safety stock is zero, the average inventory
will be half the re-order size.
56. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product
requested.
57. A stock out saves the firm money because little inventory is held on hand, which saves on storage
costs.
58. Maintaining a safety stock will always guard against an “EOQ point” from occurring.
59. Just-in-time inventory systems can leave manufacturers empty–handed if suppliers can’t keep up with
product growth rates.
60. Just-in-time inventory management typically pushes the cost of holding inventory from the manufacturer
to the manufacturer’s suppliers.
61. The use of “float” has dramatically increased since the Check Clearing for the 21st Century Act was
passed.
62. When considering offering a cash discount, a firm must weigh the benefits of freed-up cash with the
cost of the cash discount.
63. A cash discount typically lowers the average collection period of a firm.
64. When considering a potential customer, the firm should overlook the customer’s credit history if the
customer is purchasing a huge order.
65. When selecting marketable securities, the company should always select securities with longer
maturities if they offer higher yields.
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66. If a company would like to reduce its average collection period, it can either offer a cash discount or
increase net terms.
67. Level production allows a company to reduce inventory and maximize efficiency as compared to
seasonal production.
68. Cash should have a higher required return than accounts receivable because it is more liquid.
69. Inventory should have a higher required return than cash because it is less liquid.
70. Liquidity of an asset has nothing to do with measuring the required rate of return on the asset.
71. In managing cash and marketable securities, what should be the manager’s primary concern?
72. One of the first considerations in cash management is
73. Which of the following is not a valid reason for holding cash?
74. Cash flow does not rely on which of the following?
75. The difference between the amount of cash on the firm’s books and the amount credited to it by its
bank is
76. “Float” takes place because
77. Which of the following is the most liquid asset?
78. Which of the following is not a method of speeding up collections of cash?
79. The system whereby funds are moved between computer terminals without use of checks is
80. How will widespread adoption of electronic funds transfer affect the use of “float”?
81. Automated clearinghouses are commonly used by consumers to make direct payments for
82. One of the major cost savings for consumers using automated clearinghouses is
83. Which of the following is not a true statement about automated clearinghouses (ACHs)?
84. Some of the services provided around the clock by SWIFT are
85. International cash management is more complex than domestic-based cash management because of
86. SWIFT’s implementation of the “smart card” is expected to
87. International cash management systems are more complex than domestic cash management systems
because