Chapter 07 – Current Asset Management
1. In the management of cash and marketable securities, the primary concern is profitability.
2. For modern corporations, the more cash they have, the better off they are.
Chapter 07 – Current Asset Management
3. Minimizing cash balances can improve overall corporate profitability.
4. For most firms, the primary motive for holding cash is the transaction motive.
5. Cash balances are usually determined by the amount of cash flowing through the firm on a
yearly basis.
6. A goal of cash management is to insure that the inflows and outflows of cash are
synchronized.
Chapter 07 – Current Asset Management
7. Sales, receivables, and inventory form the basis of cash flow.
8. The cash generating process for a firm is continuous, even though cash flow can be
sporadic.
9. Computerized cash management and electronic funds transfer allow firms to carry smaller
cash balances.
10. Float is the difference between the cash balance on the corporate books and the amount
credited to the corporation by the bank.
Chapter 07 – Current Asset Management
11. “Float” is the name given for a short-term loan between suppliers and buyers.
12. Checks can be cleared only through the Federal Reserve System.
13. Unfortunately, float is too complicated to be effectively managed through any
combination of disbursement and collection strategies.
14. It is possible for companies to operate with negative cash balances on their books.
Chapter 07 – Current Asset Management
15. A lock-box system is a method of extending disbursements.
16. A lock-box is used to safeguard the corporation’s marketable securities.
17. A lock-box is used by the selling corporation to speed up the check collection and check-
clearing process.
18. “Extended disbursement float” has to do with the length of time a corporation takes to
collect bills.
Chapter 07 – Current Asset Management
19. Cost-benefit is not a consideration in development of a cash management system; only
safety and liquidity.
20. Electronic funds transfer will likely increase the use of float.
21. The use of automated clearinghouses (ACHs) saves money for consumers, corporations
and financial institutions by reducing transactions costs.
22. It is less expensive to clear a check through the Federal Reserve System than to process an
automatic fund transfer through an automated clearinghouse.
Chapter 07 – Current Asset Management
23. The “SWIFT” transfer system was developed to aid regional bank fund transfers within
the United States.
24. 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.
25. Every message routed through SWIFT is encrypted and every money transaction is
authorized by another code for security purposes.
26. Multinational firms find it difficult to shift funds from one country to another.
Chapter 07 – Current Asset Management
27. In general, cash management at the international level employs the same techniques as
domestic cash management.
28. Eurodollars are U.S. dollars held on deposit by foreign banks.
29. Stretching out the maturity of marketable securities can rarely result in a loss.
30. The investment of excess short-term funds is usually diversified between short- and long-
term marketable securities.
Chapter 07 – Current Asset Management
31. Cash management becomes more important as the level of short-term interest rates rise.
32. Treasury bills are unique in that they trade on a premium basis.
33. Because they generally run a surplus budget, government agencies are able to issue
securities with slightly lower yields than direct Treasury issues.
34. Certificates of deposits purchased in small denominations of $1,000 at the savings and
loan are readily marketable.
Chapter 07 – Current Asset Management
35. Banker’s acceptances rank behind treasury bills and commercial paper as a vehicle for
short-term investments.
36. Small-denomination certificates of deposit are usually more liquid than large-
denomination CDs.
37. The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of
deposit.
38. Bankers’ acceptances are short-term securities that arise from foreign trade.
Chapter 07 – Current Asset Management
39. The 5 C’s of credit include character, capital, capacity, conditions, and collateral.
40. 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.
41. Because of changing economic conditions, it is difficult for companies such as Dun &
Bradstreet to devise models predicting payment problems and probability of bankruptcy 12
months in the future.
42. Finding out who is ultimately responsible for a bad debt can be helped by Dun &
Bradstreet’s D-U-N-S (Data Universal Numbers System) that tracks relationships and
ownership of businesses within Dun & Bradstreet’s information base.
Chapter 07 – Current Asset Management
43. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average
accounts receivable balance will be $120,000.
44. Return on investment is the major decision criteria in credit decisions.
45. Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
46. Seasonal production allows for maximum efficiency in machinery and manpower use.
Chapter 07 – Current Asset Management
47. The economic order quantity helps a firm determine the most efficient order size to place.
48. The two basic costs associated with inventory are production cost and ordering cost.
49. A reduction in carrying costs would increase the economic order quantity.
50. Lower ordering costs would tend to increase a firm’s economic order quantity.
51. 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.
Chapter 07 – Current Asset Management
52. A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the
product requested.
53. Maintaining a safety stock will guard against an EOQ from occurring.
54. Just-in-time inventory systems can leave manufacturers empty handed if suppliers can’t
keep up with product growth rates.
55. Just-in-time inventory management pushes the cost of holding inventory from the
manufacturer to the manufacturer’s suppliers.
Chapter 07 – Current Asset Management
56. The use of “float” has dramatically increased since the Check Clearing for the 21st
Century Act was passed.
57. When considering offering a cash discount, a firm must weigh the benefits of freed up
cash with the cost of the cash discount.
58. When a potential customer has a mediocre credit history, a firm should not consider
allowing them to become a customer.
59. When selecting marketable securities, the company should always select securities with
longer maturities if they offer higher yields.
Chapter 07 – Current Asset Management
60. If a company would like to reduce their average collection period, they can either reduce
offer a cash discount or increase their net terms.
61. Level production allows a company to reduce inventory and maximize efficiency as
compared to seasonal production.
62. In managing cash and marketable securities, what should be the manager’s primary
concern?
Chapter 07 – Current Asset Management
63. One of the first considerations in cash management is
64. Which of the following is not a valid reason for holding cash?
65. Cash flow does not rely on which of the following?
Chapter 07 – Current Asset Management
66. The difference between the amount of cash on the firm’s books and the amount credited to
it by the bank is
67. “Float” takes place because
68. Which of the following is not a method of speeding up collections?
Chapter 07 – Current Asset Management
69. The system whereby funds are moved between computer terminals without use of checks
is
70. How would electronic funds transfer affect the use of “float”?
71. One of the most popular uses of automated clearing houses is the
Chapter 07 – Current Asset Management
72. Automated clearinghouses are commonly used by consumers to make direct payments for
73. One of the major cost savings for consumers using automated clearing houses is
74. Which of the following is not a true statement about automated clearinghouses (ACHs)?