Foundations of Financial Management, 17e (Block)
Chapter 7 Current Asset Management
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) Reasons for holding cash could be for transaction balances, compensating balances for banks,
and other precautionary needs.
7) Cash flows are independent of the payment pattern of customers, the speed at which suppliers
and creditors process checks, and the efficiency of the banking system.
8) Cash balances are usually determined by the amount of cash flowing through the firm on a
yearly basis.
9) A primary goal of cash management is to ensure that the inflows and outflows of cash are
synchronized.
10) Proper management of sales, receivables, payables, and inventory form the basis of cash
flow.
11) The cash-generating process for a firm is continuous, even though cash flow can be sporadic.
12) Computerized cash management and electronic funds transfer allow firms to carry smaller
cash balances.
13) Float is the difference between the cash balance on the corporate books and the amount
currently credited to the corporation by the bank.
14) “Float” is the name given for a short-term loan between suppliers and buyers.
15) There are two kinds of float: mail float and clearing float.
16) Checks can be cleared only through the Federal Reserve System.
17) Unfortunately, float is too complicated to be effectively managed through any combination
of disbursement and collection strategies.
18) It is possible for companies to operate with negative cash balances on their books.
19) A lock-box system is a method of extending disbursements.
20) A lock-box is used to safeguard the corporation’s marketable securities.
21) When utilizing a lockbox system, a customer typically sends a check to the bank, a bank
employee picks up the check and processes the check electronically and then sends record of
payment to the company’s finance center.
22) A lock-box is used by the selling corporation to speed up the check collection and check-
clearing process.
23) “Extended disbursement float” has to do with the length of time a corporation takes to collect
bills.
24) Cost-benefit is not a consideration in development of a cash management system, only safety
and liquidity.
25) Electronic funds transfer will likely increase the use of float.
26) The use of automated clearinghouses (ACHs) saves money for consumers, corporations, and
financial institutions by reducing transaction costs.
27) It is less expensive to clear a check through the Federal Reserve System than to process an
automatic fund transfer through an automated clearinghouse.
28) The “SWIFT” transfer system was developed to aid regional bank fund transfers within the
United States.
29) 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.
30) Every message routed through SWIFT is encrypted and every money transaction is
authorized by another code for security purposes.
31) Multinational firms find it difficult to shift funds from one country to another.
32) In general, cash management at the international level employs the same techniques as
domestic cash management.
33) Eurodollars are U.S. dollars held on deposit by foreign banks.
34) Stretching out the maturity of marketable securities can rarely result in a loss.
35) The investment of excess short-term funds is usually diversified between short- and long-
term marketable securities.
36) Cash management becomes more important as the level of short-term interest rates rises.
37) Treasury bills are unique in that they trade on a premium basis.
38) Because they generally run a surplus budget, government agencies are able to issue securities
with slightly lower yields than direct Treasury issues.
39) Certificates of deposit purchased in small denominations of $1,000 at commercial banks or
savings and loan organizations are readily marketable.
40) When considering risk and popularity, banker’s acceptances are ranked behind Treasury bills
and commercial paper as a vehicle for short-term investments.
41) Small-denomination certificates of deposit are usually more liquid than large-denomination
CDs.
42) The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of
deposit.
43) Bankers’ acceptances are short-term securities that arise from foreign trade.
44) The 5 Cs of credit include “character, capital, capacity, conditions, and collateral.”
45) 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.
46) 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.
47) 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.
48) If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts
receivable balance will be $120,000.
49) If a firm’s average accounts receivable balance increases, this could be because the company
improved what customers it extended credit to.
50) If a firm’s average collection period increases, this could be because the company gave credit
to customers with a low credit report.
51) Return on investment is the major decision criteria in credit decisions.
52) Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.
53) Seasonal production allows for maximum efficiency in machinery and manpower use.
54) The “economic ordering quantity” helps a firm determine the most efficient order size to
place.
55) The two basic costs associated with inventory are production cost and ordering cost.
56) A reduction in carrying costs would increase the economic order quantity.
57) Lower ordering costs would tend to increase a firm’s economic order quantity.
58) 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.
59) A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the
product requested.
60) A stock out saves the firm money because little inventory is held on hand, which saves on
storage costs.
61) Maintaining a safety stock will always guard against an “EOQ point” from occurring.
62) Just-in-time inventory systems can leave manufacturers empty-handed if suppliers can’t keep
up with product growth rates.
63) Just-in-time inventory management typically pushes the cost of holding inventory from the
manufacturer to the manufacturer’s suppliers.
64) The use of “float” has dramatically increased since the Check Clearing for the 21st Century
Act was passed.
65) When considering offering a cash discount, a firm must weigh the benefits of freed-up cash
with the cost of the cash discount.
66) A cash discount typically lowers the average collection period of a firm.
67) When considering a potential customer, the firm should overlook the customer’s credit
history if the customer is purchasing a huge order.
68) When selecting marketable securities, the company should always select securities with
longer maturities if they offer higher yields.
69) If a company would like to reduce its average collection period, it can either offer a cash
discount or increase net terms.
70) Level production allows a company to reduce inventory and maximize efficiency as
compared to seasonal production.
71) Cash should have a higher required return than accounts receivable because it is more liquid.
72) Inventory should have a higher required return than cash because it is less liquid.
73) Liquidity of an asset has nothing to do with measuring the required rate of return on the
asset.
74) In managing cash and marketable securities, what should be the manager’s primary concern?
A) Maximization of profit
B) Maximization of liquid assets
C) Acceptable return on investment
D) Liquidity and safety