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81) Exchanging goods and services for other goods and services, or ________, is an effective
way for a small business to conserve cash.
A) leasing
B) bartering
C) arbitrating
D) credit sales
82) Difficulty in collecting accounts receivable is the primary cause of cash flow problems,
according to small business owners.
83) The longer an accounts receivable is outstanding, the lower its probability of collection.
84) For cash planning purposes, it is better to underestimate cash disbursements than to
overestimate them.
85) Seasonal sales patterns cause cash balances to fluctuate dramatically, creating the need for
cash forecasts.
86) To manage cash efficiently, business owners should strive to accelerate their accounts
payable and stretch out their accounts receivable.
87) Forty percent of industrial and wholesale sales are on credit and 90 percent of retail sales are
on account.
88) Most small businesses conduct a thorough credit investigation before selling to a new
customer.
89) The first line of defense against bad debt losses is to have a financial institution extend loans
to credit-seeking customers.
90) One effective technique for improving cash management is to establish a firm credit policy
in writing and let customers know in advance what it is.
91) Some businesses use cycle billing, in which a company bills a portion of its credit customers
each day of the month to smooth out uneven cash receipts.
92) As soon as an account receivable becomes past due, a business owner should turn it over to a
collection agency.
93) If an account receivable becomes past due, the best strategy is simply to wait; statistics show
that customers eventually pay their bills if business owners do not bother them with repeated
collection attempts.
94) Small business owners should not press customers for payment of their past due accounts for
fear of losing them as customers altogether.
95) A small business owner should concentrate collection efforts on the top 20 percent of the
company's customers since they typically account for 80 percent of all accounts receivable.
96) A security agreement is a contract in which a business selling an asset on credit gets a
security interest in that asset, protecting its legal rights in case the buyer fails to pay.
97) Communication in a timely and professional manner is key to effective collection activities.
98) Proper cash management techniques call for a small business owner to pay invoices as soon
as the invoices arrive.
99) Efficient cash managers set up a payment calendar each month, which allows them to pay
their bills on time and to take advantage of cash discounts for early payment.
100) A basic principle of cash management is verifying all invoices before paying them.
101) A cash discount offers a price reduction if the owner pays an invoice on time.
102) Small business owners generally should not take advantage of cash discounts vendors offer,
choosing instead to maintain control of their cash for as long as possible.
103) It is considered unethical for small business owners to regulate payments to their company's
advantage.
104) Because inventory is not a liquid asset, cash invested there is tied up and cannot be used for
other purposes.
105) Only about 20 percent of a typical business' inventory turns over quickly.
106) Roughly 80 percent of the typical business' inventory turns over quickly.
107) It is much wiser to carry too little inventory rather than too much because there are no costs
associated with carrying too little inventory.
108) Cash and quantity discounts allow business owners to receive a price break in the goods
they purchase.
109) Identify the "big three" of cash management. As a small business consultant, what would
you recommend your clients do to control the "big three" more effectively?
Mini-Case 13-1: The Golden Company
This is a summary of the monthly cash budget for the next quarter (October through December)
for the Golden Company.
October November December
Sales $750,000 $800,000 $900,000
Manufacturing Costs 450,000 480,000 540,000
Operating Expenses 225,000 240,000 270,000
Capital Expenditures - 0 - 60,000 - 0 –
110) From the information provided, prepare a monthly cash budget for the next quarter
(October-December) for the Golden Company.
28
CASH BUDGET - THE GOLDEN COMPANY
August September October November December
Sales $750,000 $800,000 $900,000
Credit Sales $150,000 $450,000 562,500 600,000 675,000
Cash Receipts
Collections
1st Month - 70 percent $315,000 $393,750 $420,000
2nd Month - 25 percent 37,500 112,500 140,625
Cash Sales 187,500 200,000 225,000
Dividends Received - 0 - 1,000 - 0 -
Other - 0 - - 0 - - 0 -
Total Cash Receipts $540,000 $707,250 $785,625
Cash Disbursements
Manufacturing Costs - ½ $212,500 $227,500 $257,500
Manufacturing Costs - ½ 200,000 212,500 227,500
Operating Costs - ½ 120,000 115,000 130,000
Operating Costs - ½ 100,000 120,000 115,000
Note Payable 60,900 - 0 - - 0 -
Capital Expenditure - 0 - 60,000 - 0 -
Tax Payment - 0 - 50,000 - 0 -
Other - 0 - - 0 - - 0 -
Total Cash Disbursements $693,400 $785,000 $730,000
EOM Balance
Beginning Cash $70,000 $20,000 $20,000
Cash Receipts 540,000 707,250 785,625
Cash Disbursements 693,400 785,000 730,000
EOM Balance ($83,400) ($57,750) ($75,625)
Repay - 0 - 104,262 183,528
Borrow 103,400 182,012 127,903
Final EOM Balance $20,000 $20,000 $20,000
Calculations
October 18th notes payable:
$60,000 principal + $60,000 × .09 × ¼ of a year = $61,350
29
Manufacturing Costs
Because depreciation (a noncash expense) is a component of manufacturing costs and because
insurance and property taxes (cash expenses, which are included on a cash budget) are paid only
in February, June, and September, we must subtract out $25,000 of monthly manufacturing costs
as follows:
October 475,000 - 25,000 = $450,000
November 520,000 - 25,000 = $495,000
December 575,000 - 25,000 = $550,000
Now we can show the actual cash outflow of these expenses, which is 50 percent in the current
month and 50 percent in the following month.
October 450,000 / 2 = 225,000
PLUS the half from September: 200,000 accounts payable.
So cash outflow for manufacturing in October are:
225,000 + 200,000 = 425,000
November 495,000 / 2 = 247,500
PLUS the half from October; 225,000.
So cash outflow for manufacturing expenses for November are:
247,500 + 225,000 = 472,500
And this same monthly progression continues in the future.
Diff: 3
Learning Obj: 13-4 Describe fundamental principles involved in managing the "big three" of
cash management: accounts receivable, accounts payable, and inventory.
AACSB: Reflective Thinking
30
Mini-Case 13-2: The Laurens Corporation
In past years, Sue Salgado, owner of the Laurens Corporation, has been plagued by unexpected
cash flow problems. Her banker, worried about her lack of cash flow management, has suggested
that Sue create a cash budget for the upcoming quarter. Sue does this, using the following
information:
October November December
Sales $800,000 $900,000 $950,000
Manufacturing Costs 475,000 520,000 575,000
Operating Expenses 250,000 270,000 290,000
Capital Expenditures 20,000 70,000 - 0 -
Laurens Corporation expects 35 percent of its sales to be in cash, 70 percent of the accounts
receivable will be collected within the next month, and 25 percent in the second month after sale.
Depreciation, insurance, and property taxes comprise $25,000 of monthly manufacturing costs
and $12,000 of operating expenses. Insurance and property taxes are paid in February, June and
September. One-half of the remaining manufacturing costs and operating expenses will be paid
in the month in which incurred, and the rest in the following month. As of October 1st, the
following facts are relevant:
∙ Current assets consist of $50,000 in cash, $50,000 in securities
∙ Credit sales for August and September were $500,000 and $450,000, respectively
∙ The firm has a line of credit with a local bank at 18 percent APR, and loan is due the
following month
∙ Accounts payable of $200,000 for September manufacturing expenses
∙ Accrued liabilities of $100,000 for September operating expenses
∙ Dividends of $1,000 should be received in November
∙ An income tax payment of $20,000 will be made in November
∙ The firm's minimum cash balance is $10,000
111) From the information given, prepare a monthly cash budget for the next quarter (October
through December) for the Laurens Corporation.
112) Which of the following inventory management techniques would help a business owner
make the best use of his company's cash?
A) Avoid overbuying inventory.
B) Schedule inventory deliveries at the latest possible date.
C) Purchase goods from the fastest suppliers who can meet quality standards to keep inventory
levels low.
D) All of the above
113) It is estimated that approximately ________ thousand companies, most of them small,
engage in barter exchanges every year.
A) 50
B) 100
C) 400
D) 500
114) The real benefit of barter for the entrepreneur is that ________.
A) it is essentially without cost to the business owner
B) it is considered a depreciable item for tax purposes rather than as income
C) it saves the small business owner between $100,000 and $150,000 a year on the average
D) it is "paid" for at the wholesale cost of doing business, yet it is credited at the retail price
115) Barter offers business owners the benefit of ________.
A) buying materials, equipment, and supplies without spending valuable cash on them
B) transforming slow-moving inventory into much-needed goods and services
C) "paying" for goods and services at wholesale cost and getting credit for retail price
D) All of the above
116) Which of the following is an effective way to trim overhead?
A) When able, buy instead of leasing.
B) Hire more full-time employees; reduce the number of part-timers.
C) Eliminate zero-based budgeting.
D) Negotiate fixed loan payments to coincide with company cash flow.
117) Which of the following statements concerning leasing is true?
A) Leasing is an "off-the-balance-sheet" method of financing assets.
B) Although total lease payments for an asset are greater than those on a conventional loan, most
leases do not require large capital outlays as down payments.
C) Leasing gives business owners access to equipment even when they cannot borrow the money
to buy it.
D) All of the above
118) Leasing allows business owners to forecast cash flows more ________ because lease
payments are ________ amounts paid over a particular time period.
A) often; fixed
B) accurately; variable
C) accurately; fixed
D) often; variable
119) "Stick to what you are good at and ________ everything else" is an approach to reduce
overhead costs.
A) make
B) sell
C) leverage
D) outsource
120) Rather than build the current year budget on increases from the previous year's budget,
________ evaluates the necessity of every item.
A) zero-based budgeting
B) zero-based accounting
C) ground-up budgeting
D) year-one budgeting
121) When investing surplus cash, the small business owner's key objectives should be on the
________ of the investment.
A) high yields
B) current income
C) liquidity and safety
D) long-term yield
122) A checking account that never has idle funds (because it draws funds from an interest-
bearing master account to cover checks written) is called a ________ account.
A) zero-balance
B) money market
C) deficit
D) sweep
123) A sweep account is a checking account that ________.
A) bears interest, allowing depositors to write checks without tying up money for a specific
period of time
B) never has funds as they are drawn from a master account
C) automatically moves all funds in a company's checking account above a predetermined
minimum into an interest-bearing account
D) need to be reviewed and updated on a regular basis
124) Bartering (exchanging goods and services for other goods and services) is an effective way
for small business owners to conserve cash.
125) Bartering is an opportunity to transform slow-moving inventory into much-needed products
and services.
126) The real benefit to a business owner engaging in barter is the ability to "pay" for goods and
services at her wholesale cost and to get credit for the retail price.
127) Most business owners should avoid leasing as a cash management strategy because it
requires large capital outlays as down payments, and total lease payments typically are greater
than those for conventional loans.
128) Important advantages of leasing include the flexibility of the lease agreement and protection
against obsolescence.
129) When a small business encounters a sales slowdown, the first thing the owner should do is
cut marketing and advertising expenditures to conserve cash.
130) Many banks allow entrepreneurs to schedule their loan payments to fit their company's cash
flow cycles.
131) Changing your firm's shipping terms from "F.O.B. buyer" to "F.O.B. seller" can improve
your cash flow, as it switches the cost of shipping from you to your buyer.
132) Companies lose billions of dollars each year due to employee theft.
133) Rather than build the current year's budget on increases from the previous year's budget,
zero-based budgeting starts from a budget of zero and evaluates the necessity of every item.
134) To deter employee theft, it is best to separate cash management duties between at least two
different employees.
135) When trying to prevent employee theft, business owners should create a "police state"
environment and trust no one.
136) Because small business owners often rely on informal procedures for managing cash, they
are most likely to become victims of embezzlement and fraud by their employees.
137) A sweep account is a checking account that automatically "sweeps" all funds in a
company's checking account above a predetermined minimum into an interest-bearing account.
138) Small business managers need not be concerned about investing surplus cash since small
amounts of cash sitting around for a few days or weeks are not worth investing.
139) When investing surplus cash, the small business owner should seek the highest returns
possible on the money.
140) When investing surplus cash, an owner's primary objective should be on the safety and
liquidity of the investments.
141) A sweep account automatically "sweeps" all funds in a company's checking account above
a predetermined minimum into an interest-bearing account, enabling it to keep otherwise idle
cash invested until it is needed to cover checks.
142) Revising business plans annually forces owners to focus on managing the business more
effectively.
143) What steps can a small business owner take to minimize bad debt losses?
144) What steps can a small business owner take to avoid the cash "crunch"?
