Cash Management quiz Managerial Accounting Quiz Share Cash Management 20 questions in 30 minutes Pass Score 70% 1 / 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? Premium account, because the savings is $16 per year Standard account, because the savings is $16 per year Premium account, because the savings is $34 per year Standard account, because the savings is $34 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. 2 / 20 A retail mail order firm is currently using a central collection system that requires all checks to besent to its headquarters. An average of 5 days is required for mailed checks to be received, 4 days forthe firm to process them, and 1.5 days for the checks to clear through the bank. A proposedlockbox system would reduce the mail and process time to 3 days and the check clearing time to 1day. The firm has an average daily collection of $100,000. If the firm should adopt the lockbox system, its average cash balance would increase by : $650,000 $250,000 $800,000 $400,000 Checks are currently tied up for 10.5 days (5 for mailing, 4 forprocessing, and 1.5 for clearing). If that were reduced to 4 days, thefirm’s cash balance would increase by $650,000 ($100,000 per day × 6.5days). 3 / 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 D B C 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. 4 / 20 A firm has daily cash receipts of $200,000. A commercial bank has offered to reduce the collectiontime by 3 days. The bank requires a monthly fee of $4,000 for providing this service. If moneymarket rates will average 12% during the year, the additional annual income (loss) of having theservice is : $66,240 $(24,000) $24,000 $68,000 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 ($200,000 × 3 days). Benefit (loss) = Interest earned – Cost = ($600,000 × 12%) – ($4,000 × 12 months) = $72,000 – $48,000 = $24,000 5 / 20 All of the following can be utilized by a firm in managing its cash outflows except : Lockbox system Zero-balance accounts Controlled disbursement accounts Centralization of payables A lockbox system is a means of managing cash inflows, not outflows. 6 / 20 The most direct way to prepare a cash budget for a manufacturing firm is to include : Projected sales, credit terms, and net income Projected sales and purchases, percentages of collections, and terms of payments Projected net income, depreciation, and goodwill impairment Projected purchases, percentages of purchases paid, and net income 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. 7 / 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. $60,875 $50,000 $59,125 $120,000 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 8 / 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. No, producing a loss of $20,000 per year Yes, producing savings of $60,000 per year No, producing a loss of $60,000 per year Yes, producing savings of $140,000 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) 9 / 20 Average daily cash outflows are $3 million for firm . A new cash management systemcan add 2 days to the disbursement schedule. Assuming the firm earns 10% on excess funds,how much should the firm be willing to pay per year for this cash management system? $600,000 $1,500,000 $3,000,000 $6,000,000 If cash outflows are $3 million per day, holding cash 2 extra days means thataverage balances should increase by $6 million. At a 10% interest rate, theadditional $6 million would generate interest revenue of $600,000 per year. Thus, ifthe system can be acquired for $600,000 or less, it would be beneficial to do so. 10 / 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? $(10,000) $50,000 $10,000 $0 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. 11 / 20 According to John Maynard Keynes, the three major motives for holding cash are for : Transactional, precautionary, and speculative purposes Transactional, psychological, and social purposes Speculative, fiduciary, and transactional purposes Speculative, social, and precautionary purposes John Maynard Keynes, founder of Keynesian economics, concluded that there werethree major motives for holding cash: for transactional purposes as a medium ofexchange, precautionary purposes, and speculative purposes (but only duringdeflationary periods) . 12 / 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 $(30,000) $63,000 $66,000 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 13 / 20 A compensating balance : Is a level of inventory held to compensate for variations in usage rate and lead time 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 Is the amount of prepaid interest on a loan 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. 14 / 20 A retail mail order firm currently uses a central collection system that requires all checks to be sentto its headquarters. An average of 6 days is required for mailed checks to be received, 3 days toprocess them, and 2 days for the checks to clear through its bank. A proposed lockbox system wouldreduce the mailing and processing time to 2 days and the check clearing time to 1 day. The firm hasan average daily collection of $150,000. If the firm adopts the lockbox system, its average cashbalance will increase by : $750,000 $600,000 $1,200,000 $450,000 Checks are currently tied up for 11 days (6 for mailing, 3 for processing,and 2 for clearing). If that period were reduced to 3 days,the firm’s cashbalance would increase by $1,200,000 ($150,000 per day × 8 days). 15 / 20 A firm has daily cash receipts of $300,000. A bank has offered to provide a lockbox service that will reducethe collection time by 3 days. The bank requires a monthly fee of $2,000 for providing this service. If moneymarket rates are expected to average 6% during the year, the additional annual income (loss) of using the lockbox service is : $12,000 $54,000 $(24,000) $30,000 The additional annual income (loss) from using the lockbox service 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 average cash balance will increase by$900,000 ($300,000 × 3 days). Benefit (loss)= Interest earned – Cost = ($900,000 × 6%) – ($2,000 × 12 months) = $54,000 – $24,000 = $30,000 16 / 20 A firm has daily cash receipts of $100,000 and collection time of 2 days. A bank has offered toreduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500. If moneymarket rates are expected to average 6% during the year, the net annual benefit (loss) from havingthis service is : $0 $3,000 $12,000 $6,000 The annual benefit (loss) from using the bank’s proposed service is theexcess (deficit) of interest earned on the early deposits over (under) thecost of the service. If the plan is adopted, the firm’s average cash balancewill increase by $200,000 ($100,000 × 2 days). Benefit (loss) = Interest earned – Cost = ($200,000 × 6%) – ($500 × 12 months) = $12,000 – $6,000 = $6,000 17 / 20 A working capital technique that delays the outflow of cash is : Electronic funds transfer A draft Factoring A lockbox system 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. 18 / 20 A working capital technique that increases the payable float and therefore delays the outflowof cash is : A draft Electronic data interchange (EDI) A lockbox system Concentration banking 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. 19 / 20 All of the following are reasons for holding cash except for the Motive to make a profit Precautionary motive Transactions motive Motive to meet future needs 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). 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: $140,000 $235,000 $130,000 $210,000 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
