For Midterm 2

Question 1

This involves the maintenance of the appropriate level of cash and investment in marketable securities to meet the firm’s cash requirements and to maximize income on idle funds.

Answer 1

Cash and Marketable Securities

Question 2

are subject to significant control risk

Answer 2

Liquid Assets

Question 3

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

Answer 3

Liquidity and Safety

Question 4

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

Answer 4

Cash and short-term Investments

Question 5

These assets are not held for purposes of achieving investment returns.

Answer 5

Cash and Short-term Investments

Question 6

The following are reasons why the Company would need to hold cash :

Answer 6

Transaction Purpose
Compensating Balance Requirements
Precautionary Reserves
Potential Investment Opportunities
Speculation

Question 7

cash balances needed to conduct the ordinary business transactions

Answer 7

Transaction Purpose

Question 8

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

Answer 8

Compensating Balance requirements

Question 9

This amount compensates the bank for services
rendered by providing it with deposits of funds.

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

to a practice of delaying purchases and store up cash for use later to take advantage of possible changes in prices of exchange rates.

Answer 12

Speculation-

Question 13

the difference between the bank’s balance for a firm’s account and the balance that the firm shows on its own books

Answer 13

Bank statement vs book balance

Question 14

two aspects of float

Answer 14

1.the time it takes a company to process its checks internally
2.The time consumed in clearing the check through banking system

Question 15

Types of float

Answer 15

1. Positive Float
2. Negative Float
3. Mail float
4. Processing Float
   Clearing Float

Question 16

occurs when the bank balance exceeds the book balance

Answer 16

Positive Float

Question 17

occurs when the book balance exceeds the bank balance. It shows that there is more cash tied up in the collection cycle

Answer 17

Negative Float

Question 18

occurs when the payment has already been mailed by a customer but not yet received by the Company.

Answer 18

Mail Float

Question 19

occurs when customers’ payments have been received but not yet deposited.

Answer 19

Processing Float

Question 20

occurs when customers’ checks have been deposited but not yet cleared.

Answer 20

Clearing Float

Question 21

Cash Management Strategies

Answer 21

1. Accelerate Cash collections
2. Control or slow down cash disbursement
   3.Reduce the need for precautionary cash balance

Question 22

o Bill customers promptly o Offer cash discounts for prompt payment
o Use of lockbox system
o Establish local collection office
o Ask customers to make direct payments to the firm’s depository bank
o Use of automatic fund transfer or electronic fund transfer

Answer 22

Accelerate cash collections

Question 23

● Stretch payables
● Maintain zero-balance accounts (ZBA)
● Play the float
● Less frequent payroll and schedule issuance of checks to suppliers.

Answer 23

Control or slow down Cash Disbursement

Question 24

● More accurate cash budgeting
● Have ready lines of credit
● Invest idle cash in highly liquid, short-term investments instead of holding idle precautionary cash balances.

Answer 24

Reduce the need for pre cautionary cash balance

Question 25

Similar with basic knowledge
on break even analysis

Answer 25

Cash Break even Chart

Question 26

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 26

Baumol Cash Management Model

Question 27

Two types of costs related to holding cash

Answer 27

cost of securities transaction
opportunity cost of holding cash

Question 28

are those short-term money market instrument instruments that can be easily converted into cash.

Answer 28

Marketable Securities

Question 29

Company may hold
securities because?

Answer 29

● It serves as a substitute for cash balances
● It serves as a temporary investment
●It is need to meet known financial obligations

Question 30

Risks Involved in marketable Securiteis

Answer 30

Default Risk
Interest Rate Risk
Inflation Risk

Question 31

issuer may not be able to pay the interest or principal on
time

Answer 31

Default Risk

Question 32

price of the securities would fluctuate due to changes in the market interest rates.

Answer 32

Interest rate risk-

Question 33

the risk that inflation will reduce the “real value” of investment

Answer 33

Inflation Risk-

Question 34

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

Answer 34

marketability

Question 35

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 35

Receivables Management

Question 36

to have the right amount of outstanding receivable balances and bad debts.

Answer 36

Receivables management

Question 37

is the primary determinant of account receivable

Answer 37

Credit Policy

Question 38

Four variables of credit policy

Answer 38

Credit Period
Discounts
Credit Standards
Credit Policy

Question 39

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

Answer 39

Credit Period

Question 40

price reductions given for early payment.

Answer 40

Discounts

Question 41

offering discounts mean lower prices and lower revenues.

Answer 41

Tradeoffs

Question 42

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

Answer 42

Credit Standards

Question 43

may tend to eliminate the risk of nonpayment but may also decrease the potential sales due to rejected customers.

Answer 43

Strict Credit Standards

Question 44

may lead to higher sales, but also higher bad debt losses and collection costs.

Answer 44

Liberal Credit Standards

Question 45

Factors to Consider: 4 C’s of Credit

Answer 45

Character
Capacity
Capital
Conditions

Question 46

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

Answer 46

Credit Policy

Question 47

a statement of the firm’s credit period and discount policy.

Answer 47

Credit Terms