The concept of float is best defined as:
a. cheques written by the corporation that are still outstanding
b. cheques written to the corporation that are still outstanding
c. the difference between the firm's recorded cash balance and the amount credited to the firm's account by the bank
d. what a boat does in water
c. the difference between the firm's recorded cash balance and the amount credited to the firm's account by the bank
A collection center:
a. involves using geographically disbursed centers to collect from non-paying customers
b. utilizes local banks to clear local payments made to the collection center
c. is lower in cost to the firm than a lockbox system
d. results in checks being forwarded to a P.O. box and clearing through local bank branches
b. utilizes local banks to clear local payments made to the collection center
Using a lockbox system to improve collections:
a. is more expensive than the use of collection centers
b. utilizes local banks to clear local payments made to the collection center
c. provides more float than collection centers
d. results in checks being forward to a P.O. box and clearing through local banks
d. results in checks being forward to a P.O. box and clearing through local banks
If a firm has an average daily, remittance of $4,000,000 and 1.5 days in the collection process may be saved through a lockbox system, has the firm freed up any real funds for other investment?
a. No, these funds are theoretical in nature only
b. Yes, approximately $2,666,667 has been freed up
c. Yes, approximately $6,000,000 has been freed up
d. Cannot be determined from information provided
c. Yes, approximately $6,000,000 has been freed up
Before establishing a collection center or lockbox system, the firm must:
a. obtain regulatory approval
b. establish that the benefits outweigh the substantial costs
c. survey its customers to determine if they are agreeable
d. set up an electronic funds transfer (EFT) system
b. establish that the benefits outweigh the substantial costs
Internationally, a company may primarily prefer to hold cash balances in one currency over another for which of the following reasons:
a. higher interest rates and a stronger currency relative to others
b. the firm is headquartered in a particular country
c. twenty-four hour a day access may be available
d. there is no real reason to favor one currency over another
a. higher interest rates and a stronger currency relative to others
All of the following are factors influencing the choice of marketable securities except:
a. yield
b. maturity
c. marketability
d. maximum investment allowed
d. maximum investment allowed
Under normal conditions, the longer the maturity of the security:
a. the higher the yield
b. the lower the yield
c. the greater the possibility of the yield curve changing
d. the lower the level of interest rate risk
a. the higher the yield
Treasury bills are:
a. government obligations with a maturity of 3-5 years
b. sold at a discount to face value
c. the only government security that pays cash dividends
d. extremely illiquid, although extremely safe
b. sold at a discount to face value
The primary focus of the Bank of Canada's short-term money policy is now
a. the overnight rate
b. the treasury bill rate
c. the prime rate
d. the bank rate
a. the overnight rate
The level of accounts receivable for the firm:
a. should be judged based on historical standards of industry norms
b. should be judged as to whether the return earned on A/R equals or exceeds the potential gain from other investments
c. is irrelevant as long as sales are increasing
d. is not the concern of the financial manager
b. should be judged as to whether the return earned on A/R equals or exceeds the potential gain from other investments
In establishing credit standards, the firm must consider the nature of the credit risk based on all of the following, except:
a. prior record of payment
b. terms of credit
c. financial stability
d. current net worth
b. terms of credit
The conditions of the terms of credit will have the greatest impact in which area:
a. the balance sheet
b. financing costs
c. accounts receivable
d. profit margin
c. accounts receivable
In monitoring collection policy, the firm should look at all of the following, except:
a. average collection period
b. ratio of bad debts to credit sales
c. aging of accounts receivable
d. terms of credit
d. terms of credit
As the least liquid of the current assets, inventory:
a. could technically be classified as a capital asset and amortized
b. should be managed using level production
c. should be managed using seasonal production
d. should provide the highest yield to justify investment
d. should provide the highest yield to justify investment
aging of accounts receivable:
Analyzing accounts by the amount of time they have been on the books.
average collection period:
The average amount of time accounts receivable have been on the books. It may be computed by dividing accounts receivable by average daily credit sales.
bank rate:
The rate of interest the Bank of Canada charges on loans to the chartered banks. It is a monetary tool used for management of the money supply.
bankers' acceptance:
Short-term securities that frequently arise from foreign trade. The acceptance is a draft drawn on a bank for approval for future payment and is subsequently presented to the payer.
bearer deposit notes:
Short-term notes that are negotiable and issued by chartered banks.
carrying costs:
The cost to hold an asset, usually inventory. For inventory, carrying costs include such items as interest, warehousing costs, insurance, and material-handling expenses.
certificate of deposit:
A certificate offered by a bank, trust company, or other financial institutions for the deposit of funds at a given interest rate over a specified time period.
commercial paper:
An unsecured promissory note that large corporations issue to investors. The minimum amount is usually $25,000.
cost-benefit analysis:
A study of the incremental costs and benefits that can be derived from a given course of action.
credit terms:
The repayment provisions that are part of a credit arrangement. An example would be a 2/10, net 30 arrangement in which the customer may deduct 2 percent from the invoice price if payment occurs in the first 10 days. Otherwise, the full amount is due.
Data Universal Number System (D-U-N-S):
A unique, nine-digit code assigned by Dun & Bradstreet to each business in its information base.
Dun & Bradstreet:
A credit-rating agency that publishes information on over 30 million business establishments through its Reference Book.
economic ordering quantity (EOQ):
The most efficient ordering quantity for the firm. The EOQ allows the firm to minimize the total ordering and carrying costs associated with inventory.
electronic funds transfer:
A system in which funds are moved between computer terminals without the use of written cheques.
Eurocurrency deposit:
A unit of currency held on deposit in a bank outside of the country issuing the currency.
float:
The difference between the corporation's recorded cash balance on its books and the amount credited to the corporation by the bank.
futures contract:
A contract to buy or sell a commodity at some specified price in the future.
hedging:
To engage in a transaction that partially or fully reduces a prior risk exposure by taking a position that is the opposite of your initial position. As an example, you buy some copper now but also engage in a contract to sell copper in the future at a set price.
just-in-time (JIT) inventory management:
The production process credited to the Japanese whereby parts required on the assembly line arrive at the appropriate station at the exact moment they are required. This cuts down on inventories and requires high quality control.
LIBOR:
See London Interbank Offered Rate: An interbank rate applicable for large deposits in the London market. It is a benchmark rate, just like the prime interest rate in Canada. Interest rates on Eurodollar loans are determined by adding premiums to this basic rate. Most often, LIBOR is lower than the Canadian prime rate.
lockbox system:
A procedure used to expedite cash inflows to a business. Customers are requested to forward their cheques to a post-office box in their geographic region, and a local bank picks up the cheques and processes them for rapid collection. Funds are then wired to the corporate home office for immediate use.
money market funds:
A fund in which investors may purchase shares for as little as $500 or $1,000. The fund then reinvests the proceeds in high-yielding $100,000 bank CDs, $25,000-$100,000 commercial paper, and other large-denomination, high-yielding securities. Investors receive their pro rata portion of the interest proceeds daily as a credit to their shares.
money markets:
Competitive markets for securities with maturities of one year or less. The best examples of money market instruments would be Treasury bills, commercial paper, and bankers' acceptances.
overnight (call) money:
The interest rate at which financial institutions lend money to each other for a short period is called the overnight rate.
ratio of bad debts to credit sales:
Bad debts as a percentage of credit sales. An indication of an aggressive or restrictive credit policy.
safety stock:
Inventory that is held in addition to regular needs to protect against being out of an item.
swapped deposit:
A short-term security offered by chartered banks that involves a foreign currency spot transaction, a foreign currency time deposit, and a forward contract. In effect, the purchaser lends money to the financial institution for investment in a foreign jurisdiction for a specified period. At maturity of the investment, the exchange rate is guaranteed.
term deposit:
The lending of money to a financial institution for a specified time period and at a specified rate of interest.
trade credit:
Credit provided by sellers or suppliers in the normal course of business.
Treasury bills:
Short-term obligations of the federal government with maturities of up to one year.
A product warranty is an example of a definite liability.
True / False
False
