ACC 235 Chapter 7

Automated clearing house

bankers' acceptance

Dun & Bradstreet

certificates of deposit

lock-box

Eurodollars

compensating balance

Treasury notes

Treasury bills

commercial paper

float

cost-benefit analysis

credit terms

electronic funds transfer

conomic ordering quantity

average collection period

aging of accounts receivable

money market deposit account

safety stock

carrying cost

passbook savings account

Just In Time (JIT)

commercial paper

5 C's of credit

13. money market fund

14. cash flow cycle

62. 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

63. One of the first considerations in cash management is A. to have as much cash as possible on hand. B. synchronization of cash inflows and cash outflows. C. profitability. D. to put any excess cash into accounts receivable.

64. Which of the following is not a valid reason for holding cash? A. To meet transaction requirements B. To earn the highest return possible C. To satisfy emergency needs for funds D. To provide a compensating balance for a bank

65. Cash flow does not rely on which of the following? A. The payment patterns of customers B. The monetary policy of the Federal Reserve C. The speed at which suppliers and creditors process checks D. The efficiency of the banking system

66. The difference between the amount of cash on the firm's books and the amount credited to it by the bank is A. an overdraft. B. interest revenue. C. extended disbursement. D. float.

67. "Float" takes place because A. a firm is early in paying its bills. B. the level of cash on the firm's books is equal to the level of cash in the bank. C. a lag exists between writing a check and clearing it through the banking system. D. a customer writes "hot" checks.

68. Which of the following is not a method of speeding up collections? A. Lock-box system. B. Regional collection centers. C. Extended disbursement float. D. All of these are methods for speeding up collections.

69. The system whereby funds are moved between computer terminals without use of checks is A. electronic funds transfer. B. float. C. a lock-box system. D. magnetic character recognition.

70. How would electronic funds transfer affect the use of "float"? A. Increase its use somewhat B. Decrease its use somewhat C. Virtually eliminate its use D. Have no effect on its use

71. One of the most popular uses of automated clearing houses is the A. direct deposit of checks. B. transfer of funds between U.S. banks and foreign banks. C. transfer of funds between government agencies. D. collection of accounts receivable from customers.

72. Automated clearinghouses are commonly used by consumers to make direct payments for A. insurance premiums. B. mortgage payments. C. utility bills. D. all of these.

73. One of the major cost savings for consumers using automated clearing houses is A. saving more than $1 billion in postage. B. saving time paying bills through check writing. C. security of having the payments and deposits directly deposited or deducted from your account. D. All of these are true.

74. Which of the following is not a true statement about automated clearinghouses (ACHs)? A. Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks. B. Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989. C. Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions. D. The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses.

75. Some of the services provided around the clock by SWIFT are A. international payments between banks. B. foreign exchange. C. trade finance transactions. D. all of these.

76. International cash management is more complex than domestic based cash management because of A. difficult liquidity management. B. different banking systems. C. currency risk fluctuations. D. all of these.

77. SWIFT's implementation of the "smart card" is expected to A. decrease the likelihood of electronic fraud. B. remove the need for secret information to be sent through mail. C. guarantee the identity of the sender. D. all of these.

78. International cash management systems are more complex than domestic cash management systems because A. many developing countries still use a cash payments system. B. some countries rely on electronic funds transfer more than the U.S. C. liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations. D. none of these.

79. International cash management systems are more complex than domestic cash management systems because of A. the risk involved in currency fluctuations. B. the changing interest rates across countries. C. varying time zones across countries. D. all of these.

80. The corporate sweep account is an account A. that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest earning account. B. that allows companies to write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest bearing account to the appropriate payment account. C. that allows companies to move their lock box collections into an interest bearing checking account. D. a and b are correct.

81. A multinational company may prefer to hold sizeable cash balances in one currency rather than another because A. of high interest rates existing in one country. B. one country's currency may be strong relative to the dollar. C. both a and b D. None of these

82. The problem in stretching out the maturity of marketable securities is that A. you are legally locked in until the maturity date. B. longer term securities are often not available. C. there is greater possibility of loss. D. interest rates are generally lower.

83. Which of the following is not a factor influencing the selection of a marketable security? A. Yield B. Maturity C. Float D. Safety

84. Probably the safest and most marketable instrument for short-term investment is A. commercial paper. B. large denomination certificates. C. Treasury notes. D. Treasury bills.

85. Which of the following securities trades on a discount basis? A. Treasury notes B. Treasury bills C. Commercial paper D. Certificates of deposit

86. A firm that wishes to minimize risk when investing idle cash would be least likely to buy A. commercial paper. B. long-term corporate bonds. C. negotiable certificates of deposit. D. Treasury bills of the U.S. government.

87. A banker's acceptance A. is a draft drawn on a bank and paid by that bank when presented to it. B. may be accepted by the bank for future payment. C. is traded in a relatively liquid market until maturity. D. all of these.

88. Eurodollar certificate of deposits A. are not marketable investments. B. are used by banks to loan out funds to anyone seeking dollars. C. pay interest rates usually lower than the rates on U.S. treasury bills. D. are European currencies deposited into international U.S. branch banks.

89. In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies like the Federal Land Bank A. are significantly riskier than Treasury securities. B. are much less liquid than Treasury securities. C. yield slightly more than Treasury securities. D. usually require the payment of higher commissions when purchased than Treasury securities.

90. Treasury Inflation Protected Securities (TIPS) A. pay interest semiannually that equals a real rate of return specified by the U.S. Treasury, plus principal at maturity that is adjusted annually to reflect inflation's impact on purchasing power. B. are a useful short-term investment if interest rates should rise quickly because of rapid increases in inflation. C. increase the coupon rate of the security to adjust for changes in inflation. D. a and b are true

91. Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of deposit B. Savings accounts C. Commercial paper D. Money market fund

92. Eurodollars A. can only be redeemed at U.S. banks or their branches in European countries. B. are U.S. dollars which have been converted into several European currencies. C. may be borrowed by anyone who wishes to hold dollars. D. can only be redeemed at U.S. banks or their branches in any foreign country.

93. Money market funds are A. accounts that allow small investors to participate in buying large-denomination securities. B. extremely risky but high-yielding accounts used by large corporations to finance operations. C. accounts that allow small investors to buy shares in companies that then buy shares of common stock. D. pools of bonds held by large utility companies.

94. Characteristics of a money market mutual fund include A. the purchase of shares by investors, the proceeds of which are reinvested into liquid short-term securities. B. a required minimum balance of $2,500. C. the ability to be readily marketable. D. none of these.

95. Characteristics of a money market deposit account include A. a lower risk than money market funds. B. insured by federal agencies. C. generally a limit of three deposits or withdrawals per month. D. all of these.

96. Which of the following are characteristics of money market investments? A. Money market funds are offered by banks. B. Money market funds are insured up to $100,000 by federal agencies. C. The minimum balance for money market deposit accounts is $5,000. D. None of these

97. Money market funds A. are modeled after money market deposit accounts. B. are insured up to $100,000. C. have a minimum balance of $2,500. D. earn competitive market rates of return.

98. The three primary policy variables to consider when extending credit include all of the following except A. credit standards. B. the level of inflation. C. the terms of trade. D. collection policy.

99. The most subjective and also significant segment of the 5 C's of credit for giving final approval is A. capacity. B. collateral. C. character. D. conditions.

100. Dun & Bradstreet is known for providing A. interest rate information to cash managers. B. credit scoring reports that rank a company's payment habits relative to its peer group. C. cash management systems to corporate treasurers. D. consumer credit reports to credit card companies.

101. When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine? A. The age of the management team, the dollar amount of sales, net profits, and long-term debt. B. The age of the company, the number of employees, the level of current assets. C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies). D. The company's cash balances, return on equity, and its average tax rates.

102. Which of the following is not a valid quantitative measure for accounts receivable collection policies? A. Average collection period B. Aging of accounts receivables C. Ratio of debt to equity D. Ratio of bad debts to credit sale.

103. Variables important to credit scoring models include A. age of company in years. B. negative public records. C. facility ownership. D. all of these.

104. Inventory is usually divided into three basic categories except A. projected sales. B. work in progress. C. finished goods. D. raw materials.

105. Companies that are mostly influenced by seasonal sales have to make a choice between A. level production and inventory buildup. B. seasonal production and an uneven workforce. C. a stable workforce and a fluctuating workforce. D. All of these.

106. The costs of carrying inventory do not include A. the interest on funds tied up in inventory. B. the cost of warehouse space. C. ordering costs. D. insurance and handling costs.

107. For a given firm, holding other factors constant, ordering costs per unit generally A. decline as average inventory increases. B. increase in proportion to increases in inventory. C. are considered fixed costs. D. are negotiated.

108. The economic order quantity A. determines the reorder point. B. provides the lowest inventory costs. C. determines the safety stock. D. all of these.

109. The economic order quantity A. assumes that inventory usage is seasonal. B. assumes that delivery times of each order are consistent. C. considers stock-outs D. all of these.

110. When using the economic order quantity model A. ordering costs increase as the level of inventory increases. B. carrying costs decrease as the level of inventory increases. C. costs are minimized when total carrying costs and total ordering costs are equal. D. none of these

111. Hedging A. is a way to protect your accounts receivable position. B. increases risk. C. is a legal agreement to buy or sell a financial futures contract. D. can be carried out with a futures contract.

112. The amount of safety stock that a firm carries depends upon A. the predictability of inventory usage. B. the time period necessary to fill inventory orders. C. the riskiness of the storage facility. D. a and b are correct

113. A Just-In-Time (JIT) inventory management program has all but which of the following requirements? A. Quality production B. Large safety stocks C. Close ties between suppliers, manufacturers, and customers D. Minimizing inventory levels

114. Cost savings from JIT inventory management include(s) A. reduced overhead expenses. B. lower inventory financing costs. C. greater productivity. D. all of these.

115. All of the following are benefits of just-in-time inventory ordering systems except A. reduces warehouse space. B. saves utility and manpower costs. C. reduces inventory costs. D. prevents stock outs.

116. If average daily remittances are $6 million, and "extended disbursement float" adds 2 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 7% on excess funds. A. $500,000 B. $1,500,000 C. $0 D. $840,000

117. Price Corp. is considering selling to a group of new customers and creating new annual sales of $90,000. 5% will be uncollectible. The collection cost on these accounts is 3% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 30% tax bracket. What is the profit on new sales? A. $7,560 B. $9,660 C. $7,245 D. none of these.

118. Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is the return on investment? A. 3% B. 25% C. 5% D. none of these

119. Modos Company has deposited $3,500 in checks received from customers. It has written $1,400 in checks to its suppliers. The initial bank and book balance was $600. If $1,600 of its customer's checks have cleared but only $600 of its own, calculate its float. A. $1,200 B. $1,100 C. $300 D. $700

120. Massa Machine Tool expects total sales of $60,000. The price per unit is $10. The firm estimates an ordering cost of $25 per order, with an inventory cost of $0.70 per unit. What is the optimum order size? A. 327 units B. 655 units C. 447 units D. 207 units

121. Assuming that we can earn a 10% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. An increase in bank loans that would cost us 8%. B. A decrease in inventories which are earning a 16% return. C. A reduction in marketable securities which are earning a return of 14%. D. An increase in accounts payable that would cost our firm 15%.

122. If a company can implement cash management systems and save 3 days by reducing remittance time and 1 day by increasing disbursement time based on $2,000,000 in average daily remittances and $2,500,000 in average daily disbursements and their return on freed up funds is 10%, what is the max they should spend on the system? A. $2,000,000 B. $650,000 C. $850,000 D. $1,000,000

123. All of the following are methods of controlling receivables except: A. offer a cash discount B. reduce net terms C. use DBIS D. reduce cash sales

124. Level production offers all of the following benefits except: A. lower overtime usage B. maximum efficiency C. greater storage space D. higher use of capacity

125. We expect that we can receive annual incremental income after taxes of $25,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm's minimum required after-tax return is 8%? A. $36,000 B. $312,500 C. $168,000 D. $180,000

126. All of the following are examples of carrying costs except: A. interest expense B. warehouse space C. shipping costs D. insurance premiums

127. The inventory decision model provides which type of information A. optimal total inventory B. optimal safety stock C. optimal order size D. optimal carrying cost per unit

128. Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit and desires to keep 100 units in safety stock. Assuming level production, what is their average inventory? A. 200-300 B. 301-400 C. 401-500 D. 501-600