Chapter 5 Flashcards
this involves the maintenance of the appropriate level of cash and investment in marketable securities to meet the firms cash requirements and to maximize income on idle funds
cash and marketable management
their objective should be invest in cash for a return while retaining sufficient liquidity to satisfy future needs
cash and marketable securities
these are crucial to a firms continuing success
cash and short-term investments
these are the primary concerns of the treasurer when dealing with highly liquid assets
liquidity and safety
these are held because of their ability to facilitate routine operations of the company
cash and short-term investments
these assets are not held for purposes of achieving investment returns
cash and short-term investments
the ff are the reasons why the company would need to hold cash
transaction purposes
compensating balance requirements
precautionary reserves
potential investment opportunities
speculation
cash balances needed to conduct the ordinary business transactions
transaction purposes
the amount left in the checking balance to be maintained at all times as part of a loan agreement
compensating balance requirements
these are used to handle unexpected problems and contingencies due to the uncertain pattern of cash inflows and outflows
precautionary reserves
used to build up in anticipation of a future investment opportunity such as a major capital expenditure project
potential investment opportunities
the practice of delaying purchases and store up cash for use later to take advantage of possible changes in prices of materials, equipment and securities as well as changes in currency exchange rates
speculation
the difference between the banks balance for a firms account and the balance that the firm shows on its own books
float
types of float
positive float (disbursement float)
negative float
occurs when the bank balance exceeds the book balance, such as when checks issued by the firm are already delivered to the supplier but the same have not yet been cleared by the bank
positive float
this type of float should be increased
positive float
occurs when the book balance exceeds the bank balance
negative float
it shows that there is more cash tied up in the collection cycle
negative float
this type of float should be decreased or if possible eliminated
negative float
negative float can be categorized as
mail float
processing float
clearing float
occurs when the payment has already been or mailed by a customer but not yet received by the company
mail float
occurs when customers payments have been received but not yet deposited
processing float
occurs when customers checks have been deposited but not yet clesred
clearing float
is one strategy for expediting the receipt of funds
lockbox system
ZBA
Zero balance accounts
are those with no minimum maintaining cash balance required
Zero balance accounts
similar with basic knowledge on break-even analysis
cash break-even chart
the chart would show the amount of sales in pesos or the number of units to be sold so that the total cash inflows would equal total cash outflows
cash break-even chart
an EOQ type model which can be used to determine the optimal cash balance where the costs of maintaining and obtaining cash are at the minimum
Baumol cash management model
two types of costs related to holding cash
Cost of securities
Opportunity cost
Are those short-term money market instruments that can be easily converted into cash
marketable securities
the company may hold marketable securities because
substitute for cash balances
temporary investment
meet known financial obligations
it is the opportunity cost of idle cash
return on marketable securities
this return is the denominator of the optimal balance formula provided in the baumol cash management model
return on marketable securities
Risks involved in marketable securities
default risk
interest rate risk
inflation risk
The risk that the issuer may not be able to pay the interest or principal on time or at all
Default risk
The risk that the price of the securities would fluctuate due to changes in the market interest rates
Interest rates
The risk that inflation will reduce the real value of the investment
Inflation risk
How quickly a security can be sold before maturity without a significant price concession
Marketability
This focuses on plans and policies related to sales on account and ensuring the maintenance of receivables at a predetermined level and their collectability as planned
Receivables management
The objective of which is to have the right amount of its outstanding receivable balances and bad debts
Receivables management
It is the primary determinant of accounts receivable
Credit policy
Is a key determinant of sales so sales & marketing executive or concerned with this policy
credit policy
The credit policy consists of four variables
Credit period
discounts
credit standards
collection policy
The length of time buyers is given to pay for their purchases
Credit period
Price reductions given for early payment
discounts
The increase in quantity may offset the reduction in price or revenue
Balance
The criteria that determine which customers will be granted credit and how much
Credit standards
Two types of credit standards
strict credit standards
liberal credit standards
May tend to eliminate the risk of non-payment but may also decrease the potential sales due to rejected customers
Strict credit standards
May lead to higher sales but also higher bad debt losses and collection cost
Liberal credit standards
Factors to consider in traded standard or the four c’s of credit
character
capacity
capital
conditions
The customers willingness to pay
character
The customers ability to generate cash
capacity
The customers financial sources such as collateral
capital
The current economic or business conditions
conditions
The procedures used to collect past due accounts including the toughness or laxity used in the process
Collection policy
It is defined as a statement of the firm’s credit period and discount policy
Credit terms
Factors in credit terms
Cash discounts
credit and collection cost
