Refer to section 19.3
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Cash concentration
23. Which one of the following statements is correct?
A. Funds received via automated clearinghouse transfers are available that day.
B. A depository transfer check is the most costly means of transferring funds into a cash concentration account.
C. The means selected to transfer funds into a concentration account depends primarily upon the size of the transfers.
D. Concentration accounts are used to transfer funds to lockbox locations as needed.
E. The most expedient means of transferring funds into a concentration account is a wire transfer.
Refer to section 19.3
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Cash concentration
24. A cash concentration account:
A. is frequently used as a source of funds for short-term investments.
B. cannot be used to cover a compensating balance requirement.
C. cannot be used to transfer funds into zero-balance accounts.
D. is generally the only bank account a firm needs to efficiently manage its cash.
E. is another name for a controlled disbursement account.
Refer to section 19.3
AACSB: N/A
Bloom's: Comprehension
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Cash concentration
25. The main purpose of a cash concentration account is to:
A. decrease collection float.
B. decrease disbursement float.
C. consolidate funds.
D. replace a lockbox system.
E. cover compensating balance requirements.
Refer to section 19.3
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Cash concentration
26. Which one of the following statements is correct concerning a cash management system that employs both lockboxes and a concentration bank account?
A. All customer payments must be submitted to a lockbox.
B. The party which collects the checks from the lockbox is responsible for recording the payment on the customer's account.
C. Payments received in a lockbox are transferred immediately to the concentration account.
D. The firm's cash manager determines how the funds in the concentration account are disbursed.
E. The concentration account must be zeroed out on a daily basis.
Refer to section 19.3
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Cash concentration
27. A zero-balance account:
A. is used to cover the compensating balance requirement of a line of credit agreement.
B. is only used to deposit funds received at local lockboxes.
C. is funded on an as-needed basis only.
D. is limited to handling payroll disbursements.
E. requires a compensating balance.
Refer to section 19.4
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-2
Section: 19.4
Topic: Zero-balance accounts
28. Which one of the following statements is correct concerning zero-balance accounts?
A. Each zero-balance account is offset by a compensating balance account.
B. Zero-balance accounts are used for depositing incoming funds.
C. A master account must be used in conjunction with a zero-balance account.
D. Zero-balance accounts are used solely in conjunction with a lockbox system.
E. Zero-balance accounts are still required to maintain a minimal balance.
Refer to section 19.4
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-2
Section: 19.4
Topic: Zero-balance accounts
29. Which one of the following statements is correct?
A. The money market refers to securities that mature in two years or less.
B. Banks are prohibited from investing cash surpluses on behalf of their customers on a short- term basis.
C. Short-term securities tend to have a high degree of interest rate risk.
D. A cyclical firm may purchase marketable securities as part of its short-term financing plan.
E. Corporations are not permitted to invest in money market mutual funds but can invest in bank money market accounts.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Management of cash surplus
30. Which two of the following are the primary reasons why firms temporarily accumulate large cash surpluses?
I. cyclical activities
II. desire to invest funds
III. daily operations
IV. fixed asset purchases
A. I and III only
B. II and IV only
C. I and II only
D. III and IV only
E. I and IV only
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Management of cash surplus
31. Which one of the following statements is correct?
A. Money market accounts are low-risk, high-return investments.
B. The rate of return earned on short-term securities tends to exceed that earned on long-term securities.
C. U.S. Treasury bills are well suited for short-term investments.
D. The income earned on U.S. Treasury bills is exempt from all taxation.
E. Short-term investments tend to have high levels of default risk.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
32. Municipal bonds:
A. are less liquid than U.S. Treasury bills.
B. produce income that is subject to federal income taxation.
C. generally pay a higher coupon than corporate bonds.
D. are also referred to as commercial paper.
E. are issued by the federal government.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
33. Money market securities have which of the following characteristics?
I. long maturities
II. low default risk
III. high degree of liquidity
IV. low rates of return
A. I and III only
B. II and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
34. A jumbo CD:
A. is issued by the federal government.
B. generally matures between 2 and 5 years.
C. is a loan of $100,000 or more to a municipality.
D. is a loan of $1 million or more on a short-term basis.
E. is a short-term loan of $100,000 or more to a commercial bank.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
35. Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller will buy it back tomorrow at a slightly higher price. This investment is known as a:
A. commercial paper transaction.
B. repurchase agreement.
C. private certificate of deposit.
D. revenue anticipation note.
E. bill anticipation note.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
36. A repurchase agreement generally has a maximum life of:
A. 1 day.
B. a few days.
C. one month.
D. one to three months.
E. three to six months.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
37. A money market preferred stock:
A. has a floating dividend.
B. is sold only under a repurchase agreement.
C. is a special form of commercial paper.
D. has more price volatility than an ordinary preferred.
E. has its interest rate reset daily.
Refer to section 19.5
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.5
Topic: Short-term securities
38. Which of the following costs related to holding cash are minimized when the level of cash a firm holds is optimized?
A. opportunity costs
B. trading costs
C. total costs
D. both trading and opportunity costs
E. trading costs, opportunity costs, and total costs
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: Cash balance
39. Which of the following statements related to the BAT model is correct?
I. The BAT model is used to determine the target cash balance for a firm.
II. The BAT model is rarely used in business due to its complex nature.
III. The BAT model is a model that helps eliminate a firm's collection float.
IV. One disadvantage of the BAT model is the fact that it assumes all cash outflows are known with certainty.
A. I and II only
B. III and IV only
C. II and III only
D. I and III only
E. I and IV only
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: BAT model
40. Which of the following variables are included in the BAT model?
I. upper cash limit
II. interest rate on marketable securities
III. opportunity cost of holding cash
IV. fixed cost of each securities trade
A. II only
B. I and III only
C. II and IV only
D. II, III, and IV only
E. I, III, and IV only
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: BAT model
41. The BAT model is used to:
A. maximize the benefits of leverage.
B. determine the optimal cash position of a firm.
C. eliminate all daily cash surpluses.
D. analyze the cash balance given fluctuating cash inflows and outflows.
E. maximize the opportunity costs of holding cash.
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: BAT model
42. The Miller-Orr model assumes that:
A. the cash balance is depleted at regular intervals.
B. all cash flows are known with certainty.
C. the average change in the daily cash flows is positive.
D. management will set both the lower and the upper desired levels of cash.
E. the cash balance fluctuates in a random manner.
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: Miller-Orr model
43. The Miller-Orr model:
A. recommends selling securities in an amount equal to (U* - C) when the cash balance reaches L.
B. requires that marketable securities be sold whenever the cash balance falls below the target level.
C. bases the optimal level of cash solely on the opportunity costs of holding cash.
D. supports the argument that the target cash balance declines as order costs increase.
E. advocates investing an amount described as (U* - C) in marketable securities when the cash balance reaches U*.
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: Miller-Orr model
44. Which of the following statements is correct?
A. A firm has a greater likelihood of needing an unexpected loan when its cash flows are relatively constant over time.
B. The cost of borrowing affects the target cash balance of a firm.
C. Management's desire to maintain a low cash balance has no effect on the borrowing needs of a firm.
D. The target cash balance increases as the interest rate rises.
E. The target cash balance decreases as the order costs increase.
Refer to section 19.A
AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.A
Topic: Target cash balance
45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has $1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the disbursement float on this account?
A. $0
B. $217
C. $846
D. $909
E. $1,063
Disbursement float = $846
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Disbursement float
46. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587. These checks clear the bank in an average of 2 days. What is the average amount of the disbursement float?
A. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962
Disbursement float = 42 ´ $587 ´ 2 = $49,308
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Disbursement float
47. On average, your firm receives 62 checks a day from customers. These checks, on average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses 38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days. What is the average amount of the collection float?
A. $2,473.80
B. $3,401.00
C. $3,710.70
D. $5,101.50
E. $6,802.00
Collection float = 62 ´ $39.90 ´ 1.5 = $3,710.70
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Collection float
48. When Chris balanced her business checkbook, she had an adjusted bank balance of $11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a total value of $3,648. What is the amount of the collection float on this account?
A. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012
Collection float = $879 ´ 2 = $1,758
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Collection float
49. Your company has an available balance of $7,911. A deposit of $2,480 that was made this morning is not yet included in the bank's balance. There are also 4 checks outstanding with a value of $325 each. What is the net float?
A. net collection float of $1,180
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480
Net collection float = $2,480 - (4 ´ $325) = $1,180
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Net float
50. A firm has $16,718 in outstanding checks that have not cleared the bank. The firm also has $13,450 in deposits that have been recorded by the firm but not by the bank. The current available balance is $11,407. What is the status of the net float?
A. net collection float of $8,138
B. net collection float of $2,043
C. net collection float of $13,450
D. net disbursement float of $3,268
E. net disbursement float of $5,311
Net disbursement float = $16,718 - $13,450 = $3,268
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Net float
51. Your firm generally receives 4 checks a month. The check amounts and the collection delay for each check is shown below. Given this information what is the amount of the average daily float? Assume a 30 day month.
A. $1,070
B. $2,333
C. $2,640
D. $2,900
E. $3,416
Average daily float = [($1,200 ´ 2) + ($3,900 ´ 1) + ($5,800 ´ 3) + ($4,200 ´ 2)/30 = $1,070
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily float
52. Hoyes Lumber generally receives 3 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume each month has 30 days.
A. $1,386.67
B. $1,407.19
C. $4,750.00
D. $6,833.33
E. $6,933.33
Average daily float = [($6,100 ´ 3) + ($5,500 ´ 1) + ($8,900 ´ 2)]/30 = $1,386.67
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily float
53. The Blue Star generally receives only 3 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume every month has 30 days.
A. $971.43
B. $1,456.67
C. $3,351.33
D. $5,666.67
E. $6,800.00
Average daily float = [($9,100 ´ 2) + ($2,900 ´ 3) + ($8,400 ´ 2]/30 = $1,456.67
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 19-3
Section: 19.2
Topic: Average daily float
54. The Food Wholesaler generally receives 4 checks a month. The check amounts and the collection delay for each check are shown below. Given this information, what is the amount of the average daily float? Assume every month has 30 days.
A. $3,963.89
B. $21,750.00
C. $22,236.67
D. $28,133.33
E. $35,675.00
Average daily float = [($67,200 ´ 3) + ($91,600 ´ 1) + ($54,200 ´ 2) + ($88,500 ´ 3)]/30 = $22,236.67
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily float
55. Hot Tub Builders sells to three retail outlets. Each retailer pays once a month in the amounts shown below. The collection delay associated with each payment is also given below. What is the amount of the average daily receipts if you assume each month has 30 days?
A. $2,389.70
B. $8,190.00
C. $14,608.13
D. $23,896.97
E. $81,900.00
($38,700 + $149,800 + $57,200)/30 = $8,190
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily receipts
56. Atlas Builders deals strictly with five customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume every month has 30 days.
A. $1,143.33
B. $2,546.67
C. $2,983.33
D. $6,166.67
E. $6,860.00
Average daily receipts = ($6,800 + $8,500 + $2,000 + $9,500 + $7,500)/30 = $1,143.33
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily receipts
57. National Exporters deals strictly with two customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the amount of the average daily receipts? Assume that every month has 30 days.
A. $2,653.33
B. $3,006.33
C. $5,306.67
D. $7,811.67
E. $8,600.00
Average daily receipts = ($86,400 + $72,800)/30 = $5,306.67
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Average daily receipts
58. Cross Country Trucking provides transportation services exclusively for four customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the weighted average delay? Assume each month has 30 days.
A. 2.11 days
B. 2.27 days
C. 2.46 days
D. 2.50 days
E. 2.78 days
Total monthly collections = $64,000 + $88,200 + $96,500 + $47,900 = $296,600
Weighted average delay = [($64,000/$296,600) ´ 2] + [($88,200/$296,600) ´ 3] + [($96,500/$296,600) ´ 2] + [($47,900/$296,600) ´ 3] = 2.46 days
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Weighted average delay
59. High Brow Express deals strictly with two customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the weighted average delay? Assume that every month has 30 days.
A. 1.79 days
B. 1.84 days
C. 2.00 days
D. 2.07 days
E. 2.16 days
Total monthly collections = $419,000 + $575,000 = $994,000
Weighted average delay = [($419,000/$994,000) ´ 1] + [($575,000/$994,000) ´ 3] = 2.16 days
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Weighted average delay
60. The Metallurgical Specialty Co. deals strictly with four customers. The average amount each customer pays per month along with the collection delay associated with each payment is shown below. Given this information, what is the weighted average delay? Assume each month has 30 days.
A. 1.98 days
B. 2.04 days
C. 2.09 days
D. 2.16 days
E. 2.23 days
Total monthly collections = $287,000 + $416,000 + $139,000 + $233,000 = $1,075,000
Weighted average delay = [($287,000/$1,075,000) ´ 4] + [($416,000/$1,075,000) ´ 1] + [($139,000/$1,075,000) ´ 1] + [($233,000/$1,075,000) ´ 3] = 2.23 days
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Weighted average delay
61. On an average day, Goose Down Feathers receives $2,400 in checks from customers. These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.04 percent. What is the present value of the float? Assume each month has 30 days.
A. $115.20
B. $618.40
C. $2,400.00
D. $4,080.00
E. $4,256.50
Present value of the float = $2,400 ´ 1.7 = $4,080
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Cost of float
62. On an average day, Town Center Hardware receives $2,420 in checks from customers. These checks clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.025 percent. What is the maximum amount this store should pay to completely eliminate its collection float? Assume each month has 30 days.
A. $1,152.38
B. $1,288.15
C. $2,109.16
D. $4,637.33
E. $5,082.00
Maximum cost = Present value of the float = $2,420 ´ 2.1 = $5,082.00
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Cost of float
63. On an average day, your firm receives $11,800 in checks from customers. These checks clear the bank in an average of 2.1 days. The applicable daily interest rate is 0.015 percent. What is the highest daily fee your firm should pay to completely eliminate the collection float? Assume each month has 30 days.
A. $3.42
B. $3.72
C. $17.78
D. $34.18
E. $37.20
Maximum daily fee = $11,800 ´ 2.1 ´ 0.00015 = $3.72
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Maximum daily fee
64. On an average day, Wilson & Wilson receives $7,800 in checks from customers. These checks clear the bank in an average of 1.7 days. The applicable daily interest rate is 0.022 percent. What is the highest daily fee this firm should pay to completely eliminate its collection float? Assume each month has 30 days.
A. $1.72
B. $2.92
C. $17.20
D. $24.30
E. $29.17
Maximum daily fee = $7,800 ´ 1.7 ´ 0.00022 = $2.92
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-1
Section: 19.2
Topic: Maximum daily fee
65. Your average customer is located 4.3 mailing days away from your firm. You have determined that, on average, it is taking your staff 1.5 days to process payments received from customers. In addition, it takes an average of 2.2 days for your funds to be available for use once you have made your bank deposit. What is your firm's collection time?
A. 2.2 days
B. 3.7 days
C. 4.3 days
D. 5.8 days
E. 8.0 days
Collection time = 4.3 + 1.5 + 2.2 = 8 days
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Collection time
66. It takes your firm 4.5 days to prepare and mail out all the monthly statements to your customers. On average, the mail time between your firm and your customers is 2.6 days. Customer checks take an average of 1.8 days to clear the bank. You have determined that your total average collection time is 6.1 days. How long, on average, does it take your firm to process the payments from customers?
A. 1.7 days
B. 2.6 days
C. 4.4 days
D. 4.8 days
E. 6.2 days
Processing time = 6.1 - 2.6 - 1.8 = 1.7 days
AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 19-2
Section: 19.3
Topic: Collection time
67. Currently, your firm requires 2 days to process the checks which customers mail in to pay for their credit purchases. The average mail time associated with these payments is 2.3 days and the check clearing time is 2.1 days. If your firm adopts a lockbox system, the mail time will be cut in half. In addition, if employees are reassigned, checks could be processed the same day they are received. How long will your collection time be if both the lockbox system and the job reassignments are implemented?
A. 3.85 days
B. 4.10 days
C. 4.25 days
D. 4.40 days
E. 4.55 days
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