finals Flashcards
1
Q
There are implications of different methods of transferring cash to or from a company that a treasurer should understand, since there are significant differences in the costs and cash flow speed of each one. The level of manual processing
and related controls is significantly different for each kind of transfer, which has a major impact on the long - term efficiency of the finance and accounting functions
A
Cash transfer method
2
Q
- Inbound cash payments tend to be for very small transactions, though possibly in very high volume, especially in retail situations. However, business - to - business cash payments are not common.
- Cash is bulky, requires significant controls to maintain on -site, and does not earn interest income until deposited. Given the extra cost of counting it at the bank, it is also expensive to deposit. Consequently, companies have a strong incentive to avoid both paying with or accepting cash.
A
Cash payments
3
Q
- A ___ is a negotiable instrument drawn against deposited funds, to pay the recipient a specific amount of funds on demand.
- A check has traditionally been physically routed from the payer to the payee, then to the payee’s bank, which issues funds to the payee, and then by the payee’s bank to the payer’s bank.
- The vast majority of checks are issued directly by companies.
- However, they may also be issued directly by a bank, which is called a bank check or bank draft. The bank check is a payment on behalf of the payer, which is guaranteed by the bank (and therefore of value to the payee).
A
Check payments
4
Q
THE CHECK PAYMENT PROCESS:
- A drawer writes a check from their bank account.
A
Check creation
5
Q
THE CHECK PAYMENT PROCESS:
- The person who receives the check becomes the holder.
- Payee accepts the check.
A
Holder acceptance
6
Q
THE CHECK PAYMENT PROCESS:
- Individuals, businesses, and banks can accept checks without liability if they are holders in due course.
A
Holder’s liability
7
Q
THE CHECK PAYMENT PROCESS:
- Payee endorses the check as either blank, special, or restrictive.
A
Endorsement
8
Q
THE CHECK PAYMENT PROCESS:
- The bank is required to honor properly payable checks.
- Failure to do so could make the bank liable for wrongful dishonor.
A
Bank’s obligation
8
Q
THE CHECK PAYMENT PROCESS:
- Drawee receives checks for in-clearing capture.
- Full MICR line is captured in preparation.
A
Drawee’s Action
9
Q
THE CHECK PAYMENT PROCESS:
- Checks sorted daily into bundles by statement cycle and filed.
A
Sorting and filing
9
Q
THE CHECK PAYMENT PROCESS:
- Check is proofed, encoded, captured, and sorted (on-us, local, nonlocal).
- Batched and presented to the drawee through clearing arrangements (direct presentment, correspondent bank, clearing house, Federal Reserve bank).
A
Processing for collection
9
Q
THE CHECK PAYMENT PROCESS:
- Endorsed check is ___ a ___, which also endorses it.
A
Acceptance by depositary bank
10
Q
THE CHECK PAYMENT PROCESS:
- Data from capture runs stored and posted to accounts at the close of business.
- Exception items (rejected checks) require special handling
A
Data storage and posting
11
Q
THE CHECK PAYMENT PROCESS:
- Customers receive monthly account statements with either paper checks or check images.
A
Customer statements
12
Q
- This type of endorsement involves simply signing the back of the check. It turns the check into a bearer instrument, meaning it can be redeemed by whoever holds it. ___ are the most flexible but also the riskiest, as anyone who possesses the check can cash it.
A
Black endorsement
13
Q
- Also known as an “endorsement in full,” a ____ endorsement specifies the person to whom the check is payable. It involves signing the back of the check and writing “Pay to the order of [Name]” above the signature. This restricts the check’s negotiation to the specified person or entity.
A
Special endorsement
14
Q
- This type of endorsement limits how the check can be used. Common restrictions include “For Deposit Only” or “For [specific purpose] only.” For example, if a check is endorsed with “For Deposit Only,” it can only be deposited into the payee’s bank account and cannot be cashed. It provides an additional layer of security by preventing unauthorized parties from cashing or negotiating the check.
A
Restrictive endorsement
15
Q
- If a company has significant cash holdings, then it may be worthwhile to spend time investing in float-related funds.
- However, maintaining an abnormally small cash balance requires active float monitoring on a daily basis. If there is a gap of even a single day in float monitoring, then the company will very likely not have sufficient funds for all presented checks and will incur expensive account overage fees.
A
Investing float - related funds
16
Q
- In banking, value dates refer to the date when account holders can use funds from deposited checks that already passed through the bank’s clearing cycle
- When an individual (payee) first deposits a check at their bank, the bank will credit the payee’s account with the amount indicated on the check.
- However, the money’s not actually been received by the bank since they still need to collect the funds from the bank of the other party (assuming that the parties involved use two separate financial institutions). The bank faces a risk of incurring a negative cash flow if the payee immediately uses the cash from the check.
A
Value dating
17
Q
____ is a service provided by banks to companies for the receipt of payment from customers. Under the service, the payments made by customers are directed to a special post office box instead of going to the company.
A
Lockbox banking
18
Q
- _____ is a technology-based method that lets banks accept checks or deposit using electronic images instead of the original, physical, paper versions. It let banking customers use their computers, tablets, or smartphones to conveniently deposit checks.
- _____ is not only more convenient for bank customers; it also benefits the banks themselves.
A
Remote deposit capture
19
Q
- ___ involves the use of check payments that are drawn on remote bank locations, thereby lengthening the duration of the disbursement float. At its most sophisticated level of usage, a company can have multiple remote bank locations set up around the country and pay suppliers using bank accounts located the furthest from them.
A
Remote disbursement
20
Q
- ___, which are also known as wire payments, allow money to be moved quickly and securely without the need to exchange cash. They allow two parties to transfer funds even if they’re in different (geographic) locations safely. A transfer is usually initiated from one bank or financial institution to another. Rather than cash, the participating institutions share information about the recipient, the bank receiving account number, and the amount transferred.
A
Wire transfers
21
Q
ACH (Automated Clearing House) ____ is a network used for electronically moving money between bank accounts across the United States. It’s run by an organization called Nacha.
A
ACH payments
22
Q
A ____ is a type of company charge card used for smaller purchases to achieve greater cost efficiency, control and convenience. ____ are also known as purchasing cards, P-Cards or PCards.
____ can be tied to either a credit card or a bank account. The bank that manages a procurement card will issue payments to payees within days, while providing monthly invoicing to the client company.
A
Procurement cards
22
Q
- In an ACH ___ transaction, one party agrees to pay another. To make that happen, the party receiving payment sends a message to the ACH network asking it to
collect said payment and move the funds into their account.
A
ACH debit
23
Q
The ___ is usually called upon to either manage a company’ s existing debt or procure new debt. In either case, this calls for a knowledge of the broad variety of debt instruments available, as well as dealing with credit rating agencies. It may also be necessary to have a working knowledge of the accounting, controls, policies, and procedures used to manage debt.
A
Treasurer
24
Q
- _____ – is a financial transaction in which a company sells its accounts receivable to a finance company that specializes in buying receivables at a discount (called a factor). Accounts receivable factoring is also known as invoice factoring or accounts receivable financing.
A
Factoring
25
Q
- _____ – unsecured debt that is issued by a company and has a fixed maturity ranging from 1 to 270 days. A company uses commercial paper to meet its short- term working capital obligations. It is
commonly sold at a discount from face value, with the discount (and therefore the interest rate) being higher if the term is longer. A company can sell its commercial paper directly to investors, such as money market funds, or through a dealer in exchange for a small commission.
A
Commercial paper
26
Q
- _____ – uses a company’s inventory as collateral for a loan. The inventory to be used as collateral is segregated from the rest of the inventory by a fence, and all inventory movements into and out of this area are tightly controlled. Alternatively, the inventory may be stored in a public warehouse. State lien laws typically require that signs around the segregated area clearly state that there is a lien on the inventory stored inside. It is highly transaction intensive and recommended only for those companies that have exhausted all other less expensive forms of financing.
A
Field warehouse financing
27
Q
- _____ – is a method of financing inventory purchases, where a lender pays for assets that have been ordered by a distributor or retailer and is paid back from the proceeds from the sale of these items.
The arrangement is most commonly used when large assets, such as automobiles or household appliances, are involved. The entity at risk in this arrangement is the lender, which is relying upon the sale of the underlying assets in order to be repaid. Accordingly, the lender may demand the
following: - That all assets acquired under the ____ arrangement be sold at a price that is no lower than its original purchase price.
- That the inventory of assets in stock is regularly counted and matched against the records of the lender.
- That the inventory of assets in stock is regularly counted and matched against the records of the lender.
- That the loan be paid back no later than a certain date, thereby avoiding the risk of product obsolescence.
A
Floor planning
28
Q
- ____ – is a lease in which the lessor only finances the lease, and all other rights of ownership transfer to the lessee, resulting in
the recording of the underlying asset as the lessee’s property in its general ledger. The lessee can only record the interest portion of a
capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of a normal lease.
A
Capital lease
29
Q
- ____ – covers the purchase of a specific asset, which is paid for by the lease provider on the company’s behalf. In exchange, the company pays a fixed rate, which includes interest and principal, to the leasing company. It may also be charged for personal property taxes on the asset purchased.
A
Lease
30
Q
- ____ – under the terms of which the lessor carries the asset on its books and records a depreciation expense, while the lessee records the lease payments as an expense on its books. This type of lease typically does not cover the full life of the asset, nor does the buyer have a small - dollar buyout option at the end of the lease.
A
Operating lease
31
Q
- ____ – a commitment from a lender to pay a company whenever it needs cash, up to a preset maximum level. It is generally secured by company assets, and for that reason bears an interest rate not far above the prime rate. It is a flexible loan from a bank or financial institution and a defined amount of money that you can access as needed and then repay immediately or over a prespecified period of time. It will charge interest as soon as money is borrowed, and borrowers must be approved by the bank.
A
Line of credit
32
Q
- Loans
- ____ – is a loan that uses fixed assets or inventory as its collateral is a common form of
financing by banks. Loans may also be issued that are based on other forms of collateral, such as the cash surrender value of life insurance, securities, or real estate.
A
Asset-based loans
33
Q
- ____ – is a fixed-income instrument since bonds traditionally paid a fixed interest rate (coupon) to debtholders. Variable or floating interest rates are also now quite common. It is also referred to as a certificate of indebtedness.
A
Bonds
34
Q
- ____ – a bond that uses as collateral a company’s security investments.
A
Collateral trust bond
35
Q
- ____ – a bond that provides for either reduced or no interest in the beginning years of the bond term and compensates for it with increased interest later in the bond term. Since this type of bond is associated with firms having short – term cash flow problems, the full-term interest rate can be high.
A
Deferred interest bond
35
Q
- ____ – a bond that can be converted to stock using a predetermined conversion ratio. The presence of conversion rights typically reduces the interest cost of these bonds, since investors assign some value to the conversion privilege.
A
Convertible bond
36
Q
- ____ – a bond issued with no collateral. A subordinated debenture is one that specifies debt that is senior to it.
A
Debenture
36
Q
- ____– a bond whose payments are guaranteed by another party. Corporate parents will sometimes issue this guarantee for bonds issued by subsidiaries in order to obtain a lower effective interest rate.
A
Guaranteed bond
36
Q
- ____– a bond whose terms allow purchasers to convert them to common stock, as well as any accrued interest. The reason for its “death spiral” nickname is that bondholders can convert some shares and sell them on the open market, thereby supposedly driving down the price and allowing them to buy more shares, and so on.
A
Floorless bond
