Cash Management quiz Managerial Accounting Quiz Share Cash Management 20 questions in 30 minutes Pass Score 70% 1 / 20 A major bank has agreed to provide a lockbox system to a company at a fixed fee of $50,000 peryear and a variable fee of $0.50 for each payment processed by the bank. On average, the companyreceives 50 payments per day, each averaging $20,000. With the lockbox system, the company’scollection float will decrease by 2 days. The annual interest rate on money market securities is 6%. Ifthe company makes use of the lockbox system, what would be the net benefit to the company? Use365 days per year. $120,000 $50,000 $60,875 $59,125 The annual benefit from using the lockbox system is the excess of interestearned on the early deposits over the cost of the service. If the plan isadopted, the firm’s average cash balance will increase by $2,000,000($20,000 average payment × 50 per day × 2 days). The annual variablecost will be $9,125 ($.50 per payment × 50 per day × 365 days). Benefit (loss) = Interest earned – Cost = ($2,000,000 × 6%) – ($50,000 + $9,125) = $120,000 – $59,125 = $60,875 2 / 20 The most direct way to prepare a cash budget for a manufacturing firm is to include : Projected net income, depreciation, and goodwill impairment Projected sales, credit terms, and net income Projected purchases, percentages of purchases paid, and net income Projected sales and purchases, percentages of collections, and terms of payments The most direct way of preparing a cash budget requires incorporation ofsales projections and credit terms, collection percentages, estimatedpurchases and payment terms, and other cash receipts and disbursements. In other words, preparation of the cash budget requires consideration ofboth inflows and outflows. 3 / 20 What is the benefit for a firm with daily cash receipts of $15,000 to be able to speed up collectionsby 2 days, assuming an 8% annual return on short-term investments and no cost to the company tospeed up collections? $2,400 annual benefit $2,400 daily benefit $30,000 annual benefit $15,000 annual benefit Speeding up collections by 2 days will raise the firm’s average cashbalance by $30,000. At 8% interest, the benefit will be $2,400 annually[($15,000 × 2 days) × .08]. 4 / 20 All of the following are reasons for holding cash except for the Motive to meet future needs Transactions motive Motive to make a profit Precautionary motive The three motives for holding cash are : (1) as a medium of exchange (thetransactions motive), (2) to provide a reserve for contingencies (theprecautionary motive), and (3) to take advantage of unexpectedopportunities (the speculative motive). 5 / 20 The following information applies to B Company: Purchases Sales January $160,000 $100,000 February 160,000 200,000 March 160,000 240,000 April 140,000 300,000 May 140,000 260,000 June 120,000 240,000 A cash payment equal to 40% of purchases is made at the time of purchase, and 30% is paid in each of thenext 2 months. Purchases for the previous November and December were $150,000 per month. Payroll is 10%of sales in the month it occurs, and operating expenses are 20% of the following month’s sales (July sales were $220,000). Interest payments were $20,000 paid quarterly in January and April. Cash disbursements forthe month of April were : $140,000 $200,000 $152,000 $254,000 Cash disbursements for the month of April are calculated as follows: April purchases: $140,000× 40% = $ 56,000 March purchases: $160,000× 30% = 48,000 February purchases: $160,000× 30% = 48,000 April payroll: $300,000× 10% = 30,000 April op. expenses: $260,000× 20% = 52,000 Interest = 20,000 Total April disbursements = $254,000 6 / 20 A company has extra cash at the end of the year and is analyzing the best way to invest the funds. The company should invest in a project only if the : Return on investments of comparable risk exceeds the expected return on the project Return on investments of comparable risk equals the expected return on the project Expected return on the project is equal to the return on investments of comparable risk Expected return on the project exceeds the return on investments of comparable risk Investment risk is analyzed in terms of the probability that the actual returnon an investment will be lower than the expected return. Comparing aproject’s expected return with the return on an asset of similar risk helpsdetermine whether the project is worth investing in. If the expected returnon a project exceeds the return on an asset of comparable risk, the projectshould be pursued. 7 / 20 A working capital technique that increases the payable float and therefore delays the outflowof cash is : Concentration banking A draft A lockbox system Electronic data interchange (EDI) A draft is a three-party instrument in which one person (the drawer) orders a secondperson (the drawee) to pay money to a third person (the payee). A check is the mostcommon form of draft. It is an instrument payable on demand in which the draweeis a bank. Consequently, a draft can be used to delay the outflow of cash. A draftcan be dated on the due date of an invoice and will not be processed by the draweeuntil that date, thereby eliminating the necessity of writing a check earlier than thedue date or using an EFT. Thus, the outflow is delayed until the check clears thedrawee bank. 8 / 20 Assume that each day a company writes and receives checks totaling $10,000. If it takes 5 days forthe checks to clear and be deducted from the company’s account, and only 4 days for the deposits toclear, what is the float? $50,000 $10,000 $0 $(10,000) The float period is the time between when a check is written and when itclears the payor’s checking account. Check float results in an interest-freeloan to the payor because of the delay between payment by check and itsdeduction from the bank account. If checks written require 1 more day toclear than checks received, the net float equals 1 day’s receipts. Thecompany will have free use of the money for 1 day. In this case, theamount is $10,000. 9 / 20 The owner of a newly established janitorial firm is deciding what type of checking account to open.The firm is planning to keep a $500 minimum balance in the account for emergencies and plans towrite roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check chargefor a standard business checking account with no minimum balance. The firm also has the option ofa premium business checking account that requires a $2,500 minimum balance but has no monthlyfees or per check charges. If the firm’s cost of funds is 10%, which account should the firm choose? Standard account, because the savings is $34 per year Premium account, because the savings is $34 per year Premium account, because the savings is $16 per year Standard account, because the savings is $16 per year The firm can compare the costs of the two alternatives as follows: Standard account= Variable cost + Fixed cost = [(80 checks × $.10) + $10] × 12 months = $18 × 12 months = $216 per year Premium account = Variable cost + Fixed cost = [$0 + ($2,500 reqd. – $500 projected)] × 10% = $2,000 × 10% = $200 per year Thus, the premium account should be selected because it is cheaper by$16 per year. 10 / 20 An entity is considering implementing a lockbox collection system at a cost of $80,000 per year.Annual sales are $90 million, and the lockbox system will reduce collection time by 3 days. If theentity can invest funds at 8%, should it use the lockbox system? Assume a 360-day year. Yes, producing savings of $140,000 per year No, producing a loss of $20,000 per year No, producing a loss of $60,000 per year Yes, producing savings of $60,000 per year The annual benefit (loss) from using the lockbox system is the excess(deficit) of interest earned on the early deposits over (under) the cost of theservice. If the plan is adopted, average cash balance will increase by$750,000 [$90,000,000 × (3 days ÷ 360 days)]. Benefit (loss) = Interest earned – Cost = ($750,000 × 8%) – $80,000 = $60,000 – $80,000 = $(20,000) 11 / 20 A typical firm doing business nationally cannot expect to accelerate its cash inflow by : Establishing multiple collection centers throughout the country Employing a lockbox arrangement Maintaining compensating balances rather than paying cash for bank services Initiating controls to accelerate the deposit and collection of large checks Compensating balances are either (1) an absolute minimum balance or (2) aminimum average balance that bank customers must keep at the bank. These are generally required by the bank to compensate for the cost of services rendered.Maintaining compensating balances will not accelerate a company’s cash inflows because less cash will be available even though the amount of cash coming inremains unchanged. 12 / 20 Shown below is a forecast of sales for the first 4 months of the year (all amounts are in thousands of dollars). January February March April Cash sales $ 15 $ 24 $18 $14 Sales on credit 100 120 90 70 On average, 50% of credit sales are paid for in the month of sale, 30% in the month following the sale, and the remainder is paid 2 months after the month of sale. Assuming there are no bad debts, the expected cash inflow for March is : $122,000 $119,000 $138,000 $108,000 Cash inflows for March would consist of 50% of March credit sales ($90 × 50% =$45), plus 30% of February credit sales ($120 × 30% = $36), plus 20% of January credit sales ($100 × 20% = $20), plus cash sales for March of $18. Consequently,total collections equal $119,000. 13 / 20 All of the following are valid reasons for a business to hold cash and marketable securities except to : Satisfy compensating balance requirements Maintain adequate cash needed for transactions Earn maximum returns on investment assets Meet future needs A company will hold cash and marketable securities to facilitate businesstransactions; cash is a medium of exchange. Cash and near-cash items are also heldto meet future needs, to satisfy compensating balance requirements imposed bylenders, and to provide a precautionary balance for security purposes. Cash isusually not held in an attempt to earn maximum returns on investment because cashand marketable securities are not usually the highest paying investments. 14 / 20 A compensating balance : Is a level of inventory held to compensate for variations in usage rate and lead time Is the amount of prepaid interest on a loan Compensates a financial institution for services rendered by providing it with deposits of funds Is used to compensate for possible losses on a marketable securities portfolio A compensating balance is a minimum amount that the bank requires thefirm to keep in its demand account. Compensating balances arenoninterest-bearing and are meant to compensate the bank for variousservices rendered, such as unlimited check writing. These funds areobviously unavailable for short-term investment and thus incur anopportunity cost. 15 / 20 An automated clearinghouse (ACH) electronic transfer is a(n) : Check that must be immediately cleared by the Federal Reserve Bank Electronic payment to a company’s account at a concentration bank Computer-generated deposit ticket verifying deposit of funds Check-like instrument drawn against the payor and not against the bank An ACH electronic funds transfer (EFT is an electronic payment to a company’saccount at a concentration bank. A concentration bank is a large bank to which a company transfers funds from local depository banks. These local banks operate thecompany’s lockboxes and thus serve as collection points. The transfer of funds tothe concentration bank allows the company to take advantage of economies of scalein cash management. The use of ACHs facilitates concentration banking. ACHs areelectronic networks operated by the Federal Reserve (except for the New Yorkregional ACH association) that guarantee 1-day clearing. 16 / 20 A company has daily cash receipts of $150,000. The treasurer of the company has investigated alockbox service whereby the bank that offers this service will reduce the company’s collection timeby four days at a monthly fee of $2,500. If money market rates average 4% during the year, theadditional annual income (loss) from using the lockbox service would be : $(12,000) $6,000 $(6,000) $12,000 The additional annual income (loss) from using the lockbox service is the excess(deficit) of interest earned on the accelerated deposits over (under) the cost of theservice. If the plan is adopted, the company’s average cash balance will increaseby $600,000 ($150,000 × 4 days). Benefit (loss)= Interest earned – Cost = ($600,000 × 4%) – ($2,500 × 12 months) = $24,000 – $30,000 = $(6,000) 17 / 20 A consultant recommends that a company hold funds for the following two reasons: Reason #1: Cash needs can fluctuate substantially throughout the year. Reason #2: Opportunities for buying at a discount may appear during the year. The cash balances used to address the reasons given above are correctly classified as : Reason #1 Reason #2 A Speculative balances Speculative balances B Speculative balances Precautionary balances C Precautionary balances Speculative balances D Precautionary balances Precautionary balances A B C D The three motives for holding cash are as a medium of exchange, as a precautionarymeasure, and for speculation. Reason #1 can be classified as a precautionary measure, and Reason #2 can be classified as holding cash for speculation. 18 / 20 An entertainment ticketing service is considering the following means of speeding cash flow for thecorporation: •Lock Box System. This would cost $25 per month for each of its 170 banks and would resultin interest savings of $5,240 per month. •Drafts. Drafts would be used to pay for ticket refunds based on 4,000 refunds per month at acost of $2.00 per draft, which would result in interest savings of $6,500 per month. •Bank Float. Bank float would be used for the $1,000,000 in checks written each month. Thebank would charge a 2% fee for this service, but the corporation will earn $22,000 in intereston the float. •Electronic Transfer. Items over $25,000 would be electronically transferred; it is estimatedthat 700 items of this type would be made each month at a cost of $18 each, which wouldresult in increased interest earnings of $14,000 per month. Which of these methods of speeding cash flow should be adopted? Lock box, drafts, and electronic transfer only Lock box and electronic transfer only Lock box, bank float, and electronic transfer only Bank float and electronic transfer only The total cost of each of the four methods being considered can becalculated as follows: Lockbox: $25 per-bank fee × 170 banks = $ 4,250 Drafts: $2 per-draft fee × 4,000 drafts = $ 8,000 Bank Float: $1,000,000 in checks written × 2% fee = $20,000 Electronic Transfer: $18 per-transfer fee × 700 items = $12,600 These costs are subtracted from the interest that could be earned under eachmethod to arrive at the relevant gain or loss: Lockbox: $5,240 – $4,250 = $ 990 Drafts: $6,500 – $8,000 = $(1,500) Bank Float: $22,000 – $20,000 = $ 2,000 Electronic Transfer: $14,000 – $12,600 = $ 1,400 The lockbox system, the bank float, and the electronic transfer are costeffective. 19 / 20 A firm has daily cash receipts of $300,000. A commercial bank has offered to reduce the collectiontime by 2 days. The bank requires a monthly fee of $3,000 for providing this service. If the moneymarket rates will average 11% during the year, the annual pretax income (loss) from using theservice is : $(30,000) $66,000 $30,000 $63,000 The additional annual income (loss) from using the bank’s proposedservice is the excess (deficit) of interest earned on the early deposits over(under) the cost of the service. If the plan is adopted, the firm’s averagecash balance will increase by $600,000 ($300,000 × 2 days). Benefit (loss) = Interest earned – Cost = ($600,000 × 11%) – ($3,000 × 12 months) = $66,000 – $36,000 = $30,000 20 / 20 Purchases Sales January $150,000 $100,000 February 150,000 200,000 March 150,000 250,000 April 130,000 250,000 May 130,000 300,000 June 100,000 230,000 A cash payment equal to 50% of purchases is made at the time of purchase, and 25% is paid in eachof the next 2 months. Purchases for the previous November and December were $140,000 permonth. Payroll for a month is 10% of that month’s sales, and other operating expenses are 15% of the following month’s sales (July sales were $210,000). Interest payments were $25,000 paidquarterly in January and April. Cash disbursements for the month of April were: $130,000 $210,000 $235,000 $140,000 Cash disbursements for the month of April are calculated as follows: April purchases: $130,000 × 50% = $ 65,000 March purchases: 150,000 × 25% = 37,500 February purchases: 150,000 × 25% = 37,500 April payroll: 250,000 × 10% = 25,000 April op. expenses: 300,000 × 15% = 45,000 Interest = 25,000 Total April disbursements = $235,000 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Answers to Cash Management Sample Testbest cash management accountbusiness cash management
