Chapter 5

Question 1

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

Answer 1

cash and marketable management

Question 2

their objective should be invest in cash for a return while retaining sufficient liquidity to satisfy future needs

Answer 2

cash and marketable securities

Question 3

these are crucial to a firms continuing success

Answer 3

cash and short-term investments

Question 4

these are the primary concerns of the treasurer when dealing with highly liquid assets

Answer 4

liquidity and safety

Question 5

these are held because of their ability to facilitate routine operations of the company

Answer 5

cash and short-term investments

Question 6

these assets are not held for purposes of achieving investment returns

Answer 6

cash and short-term investments

Question 7

the ff are the reasons why the company would need to hold cash

Answer 7

transaction purposes
compensating balance requirements
precautionary reserves
potential investment opportunities
speculation

Question 8

cash balances needed to conduct the ordinary business transactions

Answer 8

transaction purposes

Question 9

the amount left in the checking balance to be maintained at all times as part of a loan agreement

Answer 9

compensating balance requirements

Question 10

these are used to handle unexpected problems and contingencies due to the uncertain pattern of cash inflows and outflows

Answer 10

precautionary reserves

Question 11

used to build up in anticipation of a future investment opportunity such as a major capital expenditure project

Answer 11

potential investment opportunities

Question 12

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

Answer 12

speculation

Question 13

the difference between the banks balance for a firms account and the balance that the firm shows on its own books

Answer 13

float

Question 14

types of float

Answer 14

positive float (disbursement float)
negative float

Question 15

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

Answer 15

positive float

Question 16

this type of float should be increased

Answer 16

positive float

Question 17

occurs when the book balance exceeds the bank balance

Answer 17

negative float

Question 18

it shows that there is more cash tied up in the collection cycle

Answer 18

negative float

Question 19

this type of float should be decreased or if possible eliminated

Answer 19

negative float

Question 20

negative float can be categorized as

Answer 20

mail float
processing float
clearing float

Question 21

occurs when the payment has already been or mailed by a customer but not yet received by the company

Answer 21

mail float

Question 22

occurs when customers payments have been received but not yet deposited

Answer 22

processing float

Question 23

occurs when customers checks have been deposited but not yet clesred

Answer 23

clearing float

Question 24

is one strategy for expediting the receipt of funds

Answer 24

lockbox system

Question 25

ZBA

Answer 25

Zero balance accounts

Question 26

are those with no minimum maintaining cash balance required

Answer 26

Zero balance accounts

Question 27

similar with basic knowledge on break-even analysis

Answer 27

cash break-even chart

Question 28

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

Answer 28

cash break-even chart

Question 29

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

Answer 29

Baumol cash management model

Question 30

two types of costs related to holding cash

Answer 30

Cost of securities Opportunity cost

Question 31

Are those short-term money market instruments that can be easily converted into cash

Answer 31

marketable securities

Question 32

the company may hold marketable securities because

Answer 32

substitute for cash balances temporary investment meet known financial obligations

Question 33

it is the opportunity cost of idle cash

Answer 33

return on marketable securities

Question 34

this return is the denominator of the optimal balance formula provided in the baumol cash management model

Answer 34

return on marketable securities

Question 35

Risks involved in marketable securities

Answer 35

default risk interest rate risk inflation risk

Question 36

The risk that the issuer may not be able to pay the interest or principal on time or at all

Answer 36

Default risk

Question 37

The risk that the price of the securities would fluctuate due to changes in the market interest rates

Answer 37

Interest rates

Question 38

The risk that inflation will reduce the real value of the investment

Answer 38

Inflation risk

Question 39

How quickly a security can be sold before maturity without a significant price concession

Answer 39

Marketability

Question 40

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

Answer 40

Receivables management

Question 41

The objective of which is to have the right amount of its outstanding receivable balances and bad debts

Answer 41

Receivables management

Question 42

It is the primary determinant of accounts receivable

Answer 42

Credit policy

Question 43

Is a key determinant of sales so sales & marketing executive or concerned with this policy

Answer 43

credit policy

Question 44

The credit policy consists of four variables

Answer 44

Credit period discounts credit standards collection policy

Question 45

The length of time buyers is given to pay for their purchases

Answer 45

Credit period

Question 46

Price reductions given for early payment

Answer 46

discounts

Question 47

The increase in quantity may offset the reduction in price or revenue

Answer 47

Balance

Question 48

The criteria that determine which customers will be granted credit and how much

Answer 48

Credit standards

Question 49

Two types of credit standards

Answer 49

strict credit standards liberal credit standards

Question 50

May tend to eliminate the risk of non-payment but may also decrease the potential sales due to rejected customers

Answer 50

Strict credit standards

Question 51

May lead to higher sales but also higher bad debt losses and collection cost

Answer 51

Liberal credit standards

Question 52

Factors to consider in traded standard or the four c's of credit

Answer 52

character capacity capital conditions

Question 53

The customers willingness to pay

Answer 53

character

Question 54

The customers ability to generate cash

Answer 54

capacity

Question 55

The customers financial sources such as collateral

Answer 55

capital

Question 56

The current economic or business conditions

Answer 56

conditions

Question 57

The procedures used to collect past due accounts including the toughness or laxity used in the process

Answer 57

Collection policy

Question 58

It is defined as a statement of the firm's credit period and discount policy

Answer 58

Credit terms

Question 59

Factors in credit terms

Answer 59

Cash discounts credit and collection cost