1) Financial managers frequently broaden their definition of cash to include:
A) currency, bank checking accounts, as well as stock and bond investments.
B) currency, bank checking accounts, and bond investments.
C) cash, bond investments, bank checking accounts, and short-term marketable securities.
D) currency, bank checking accounts, and short-term marketable securities.
E) cash and bank accounts only.
Answer: D
2) Determining the appropriate cash balance involves assessing the trade-off between:
A) income and diversification.
B) the benefits and costs of liquidity.
C) balance sheet strength and transaction needs.
D) short-term and long-term investment returns.
E) cash needs and cash preferences.
Answer: B
3) An appropriate cash balance is reached when the:
A) interest on any marketable security is maximized.
B) interest foregone from not investing in Treasury bills is minimized.
C) value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
D) liquidity value is greater than the interest foregone on an equivalent amount of Treasury bills.
E) balance is maintained at a zero level.
Answer: C
4) Firms would need to hold zero cash for transaction purposes if all outgoing cash transactions
could be:
A) greater than total cash inflows.
B) less than total cash inflows.
C) separated from all incoming transactions.
D) perfectly synchronized with cash inflows.
E) performed electronically.
5) Firms hold cash to satisfy the transaction motive. This means that cash is held to:
A) meet disbursements for normal operations.
B) balance the flow between cash inflows and outflows.
C) meet unexpected emergency cash needs.
D) meet disbursements for normal operations and to balance the flow between cash inflows and
outflows.
E) offset fees that would otherwise be charged by the firm's bank.
6) Firms hold cash, in part, to satisfy compensating balance requirements. Compensating
balances are cash balances held at:
A) the firm in excess of its transactions needs.
B) the firm that are below that of its transactions needs.
C) the firm in excess of its cash inflows.
D) commercial banks to pay implicitly for bank services.
E) commercial banks as emergency funds.
7) The cost of holding cash:
A) is the opportunity cost of the lost investment income.
B) is zero because it is the most liquid asset a firm can hold.
C) decreases as cash holdings increase.
D) increases as market rates decline.
E) is irrelevant in today's electronic world.
Answer: A
8) Most large firms hold a larger cash balance than most models imply because:
A) it is too difficult to estimate the costs of security transactions.
B) banks are compensated by account balances for payment of services.
C) corporations have few bank accounts and it is difficult to manage their cash.
D) cash is costless and need not be managed closely.
E) the costs of holding cash for these firms is negligible.
9) The difference between available cash and book cash is called:
A) float.
B) disbursement float.
C) surplus.
D) collection float.
E) the net deficit.
10) All the following can create disbursement float except the:
A) payment of wages.
B) payment for raw materials.
C) disbursement of funds to a supplier.
D) distribution of cash dividends.
E) sale of an asset.
Answer: E
11) Checks written by a firm are said to generate ________ float.
A) collection
B) ledger
C) disbursement
D) book
E) accounting
12) When a firm writes a check, there is an immediate decrease in the ________ balance, but no
immediate change in the ________ balance.
A) bank; collected
B) ledger; book
C) bank; ledger
D) book; bank
E) available; book
13) Collection float increases:
A) disbursement float.
B) the bank balance.
C) the book balance.
D) the collected balance.
E) both book and bank balances.
14) Net collection float means the:
A) book balance is greater than the ledger balance.
B) the available balance is less than the book balance.
C) disbursement float equals the book cash.
D) disbursement float exceeds the collection float.
E) collection float equals the disbursement float.
15) Which one of the following related to float management is true?
A) Float management is the practice of speeding up the disbursement of cash.
B) An objective of float management is the elimination of disbursement float.
C) An objective of float management is to reduce float by reducing sales.
D) Firms prefer net disbursement float over net collection float.
E) Float management is no longer needed.
16) Average daily float can be calculated as:
A) Average daily receipts/Weighted average delay.
B) Annual sales/365.
C) Total receipts/Total days.
D) Total float × Total days.
E) Average daily receipts × Weighted average delay.
17) Collection float includes:
A) availability delay and processing delay only.
B) billing time, mailing time, processing delay, and availability delay.
C) mailing time, processing delay, and availability delay.
D) availability delay only.
E) mailing time and processing delay only.
18) Which one of these probably has reduced collection time the most?
A) Traditional lockboxes
B) Concentration accounts
C) Financial EDI
D) Zero-balance accounts
E) Depository transfer checks
19) By getting closer to the source of payment, lockboxes can be used to reduce:
A) availability float.
B) mailing float.
C) in-house processing float.
D) disbursement float.
E) clearing float.
20) The fastest but most expensive way for a firm to transfer surplus funds from the local deposit
bank to the concentration bank is:
A) a depository transfer check.
B) a cashier's check.
C) a wire transfer.
D) the firm's in-house transfer system.
E) an automated clearinghouse transfer.
21) Who deposits the checks into the payee's account when those checks are mailed to a
traditional lockbox?
A) Any postal employee
B) A specially designated postal employee
C) A bank employee
D) The payee
E) The payers
22) One primary reason concentration bank accounts are established is to:
A) reduce default risk.
B) increase disbursement float.
C) control disbursements for a specific purpose.
D) pool funds.
E) replace traditional lockboxes.
23) Which one of these statements correctly applies to a lockbox system of cash collections?
A) Mailing time is reduced while the collection time remains constant.
B) Electronic lockboxes have totally replaced traditional lockbox systems.
C) Checks can be deposited prior to the payments being applied to the customers' accounts.
D) Mailing time is reduced but the processing delay is increased.
E) Checks are held by the bank until the payee firm approves them to start the check-clearing
process.
24) Which one of the following statements concerning zero-balance accounts is false?
A) Zero-balance accounts are set up to process disbursements only.
B) Each zero-balance account maintains a minimal level of safety stock.
C) Funds are automatically transferred into the zero-balance account as checks are presented for
payment.
D) Zero-balance accounts are frequently used for payroll disbursements.
E) The master and the zero balance accounts are frequently located within the same bank.
25) Which one of the following is the best means of managing disbursements from an ethical,
business, and economic point of view?
A) Purposely mailing checks without a signature as a means of delaying payment
B) Delaying paying suppliers until 30 days past the due date of each invoice
C) Purposely mailing payments to suppliers from locations that maximize mailing time
D) Taking early payment discounts while paying bills after their due dates
E) Funding your bank account with the minimum amount needed to pay bills in a timely manner
26) If a firm has seasonal sales, then it is highly likely the firm will:
A) hold extra excess cash throughout the year.
B) borrow short term for part of the year and invest in marketable securities the rest of the year.
C) never be able to invest any excess funds.
D) continually have short-term loans outstanding.
E) have less volatile cash flows than a comparable firm with constant sales.
27) Short-term marketable securities generally have:
A) high maturity risk.
B) little, if any, marketability.
C) significant default risk.
D) a high level of liquidity.
E) maturities between one and two years.
28) Money market securities are best defined as securities:
A) purchased through a bank.
B) that are risk-free.
C) with maturities of one year or less.
D) that are purchased with cash and held until maturity.
E) that are held for one week or less.
29) Which one of the following is a money-market security that has limited marketability?
A) Jumbo certificates of deposit (CD's)
B) Commercial paper
C) Common stock
D) U.S. Treasury bills
E) Ordinary preferred stock
30) Money market preferred stock offers competitive rates of return similar to traditional money-
market instruments but:
A) forfeits the tax benefits normally provided to corporate shareholders.
B) still provides the corporate investor with the tax exclusion on dividend income.
C) has a fixed rate of dividend income.
D) is only an overnight investment.
E) has highly volatile stock prices due to the fixed coupon.
31) Probably the most sensible cash management policy would be to maintain:
A) sufficient cash on hand to meet all ordinary business needs plus some excess cash to invest in
marketable securities as a precautionary measure.
B) about 90 percent of the firm's ordinary cash needs in cash and delay payment on the
remaining 10 percent.
C) enough cash on hand to meet any potential demand for cash.
D) a zero-cash balance and transfer funds semi-monthly to pay bills.
E) twice the amount of cash on hand that would be typically indicated based on the firm's normal
cash flows.
32) U.S. Treasury bills:
A) are subject to the same risks as short-term tax exempts.
B) all have initial maturities of 90 days or less.
C) are issued for time periods as short as one week.
D) must be held to maturity and not resold.
E) are sold at weekly auctions.
33) Which one of these money market securities generally has the shortest life?
A) Repurchase agreements
B) Jumbo certificates of deposit
C) Money market preferred stock
D) Commercial paper
E) U.S. Treasury bills
34) The 2017 Tax Cuts and Jobs Act set the dividend exclusion for dividend income received by
corporate shareholders at ________ percent (or more).
A) 50
B) 0
C) 25
D) 70
E) 33
35) Which one of the following is the most marketable and has the least default risk?
A) Money market preferred stock
C) Municipal bonds
D) Repurchase agreements
36) On an average day, DDL Enterprises writes checks totalling $1,500. These checks take an
average of 5 days to clear. On an average day, DDL receives checks totalling $1,700 which take
4 days to clear. The cost of debt is 7.5 percent. What is the firm's disbursement float?
A) −$700
B) −$6,800
C) $700
D) $7,500
E) $6,800
Explanation: Disbursement float = Firm's available balance − Firm's book balance
This can also be calculated as:
Disbursement float = Number of days (Daily amount of checks written but not cleared)
Disbursement float = 5($1,500)
Disbursement float = $7,500
37) This morning, Wilson's Meats had both a book and a bank balance of $1,500. Today, the
firm received 20 checks from customers that averaged $110 each. The funds from these checks
will be delayed by one day, which will cover both the processing and availability delays.
Wilson's also received $4,000 of payments from customers who are billed and pay electronically.
The electronic payments are available immediately. What is the firm's collection float as of the
end of this day?
A) −$6,200
B) −$2,200
C) −$1,200
D) −$1,800
E) −$3,700
Explanation: Collection float = Firm's available balance − Firm's book balance
Collection float = ($1,500 + 4,000) − [$1,500 + 20($110) + $4,000]
Collection float = −$2,200
38) UpTown Beverages has a checkbook balance of $132,462. However, when the financial
manager looks up the firm's account on the bank's website, the balance that appears is $147,918.
What is the net float? Is the net float a collection float or a disbursement float?
A) −$15,456; collection float
B) −$15,456; disbursement float
C) $15,456; collection float
D) $15,456; disbursement float
E) $0; neither collection nor disbursement float
Explanation: Net float = Firm's available balance − Firm's book balance|
Net float = $147,918 − 132,462
Net float = $15,456
Since the net float is positive, it is disbursement float.
39) Top Notch Tools has average daily receipts of $3,600. These receipts are available after 1.5
days on average. What is the NPV of eliminating the float if the cost to do so is $1,500?
A) $3,260
B) $3,900
C) $2,100
D) $5,400
E) $3,150
Explanation: NPV = 1.5($3,600) − 1,500
NPV = $3,900
Explanation: Total receipts = $1,500 + 2,500 + 1,000 + 3,000
Total receipts = $8,000
Weighted average delay = (1.5/8)(1.2) + (2.5/8)(2.4) + (1/8)(1.6) + (3/8)(2.5)
Weighted average delay = 2.11 days
41) KN Florals receives the same checks each month. Of these monthly checks, 48 are for
$82.60 each, 15 are for $71.50 each, and 9 are for $40.70 each. The delay for the $82.60 checks
is 1.8 days, for the $71.50 checks 1.1 days, and for the $40.70 checks 1.3 days. Calculate the
average daily float. Assume a 30-day month.
A) $293.09
B) $287.46
C) $309.10
D) $299.47
E) $358.02
Explanation: Total float = 48($82.60)(1.8) + 15($71.50)(1.1) + 9($40.70)(1.3)
Total float = $8,792.58
Average daily float = $8,792.58/30
Average daily float = $293.09
42) Metal Manufacturers receives three checks per month. The first check is for $194,000 and
takes two days to clear. The second check is for $318,000 and clears in one day. The third check
is for $38,000 and clears in 2.5 days. What is the weighted average delay, the average daily
receipts, and the average daily float? Assume a 30-day month.
A) 1.83 days; $16,667; $23,333
B) 1.46 days; $18,667; $27,333
C) 1.83 days; $18,447; $26,700
D) 1.46 days; $18,333; $26,700
E) 1.51 days; $18,447; $27,800
43) Rubber Tires receives three checks a month. The first check averages $842,000 and clears in
1.2 days. The second check averages $318,000 and clears in .7 days. The third check averages
$465,000 and clears in 2 days. What is the average daily float? Assume a 30-day month.
A) $69,600
B) $72,100
C) $73,600
D) $74,500
E) $68,900
Explanation: Total float = 1.2($842,000) + .7($318,000) + 2($465,000)
Total float = $2,163,000
Average daily float = $2,163,000/30
Average daily float = $72,100
44) Baker's Confectionery just received a check from a customer for $1,289 that it has recorded
in its checkbook but has not yet deposited this check into the bank. After recording this check,
the firm has a bank balance of $16,218 and a book balance of $16,309. All the firm's other
deposits have cleared and those funds are currently available. What is the amount of the
disbursement float?
A) $91
B) $246
C) $1,198
D) $2,487
E) $1,807
45) Sports 'n More receives five checks per month. These checks average $811, $416, $6,420,
$22,900, and $8,700. The three larger sized check amounts are available after 1.5 days while the
two smaller check amounts are available after one day. What is the weighted average delay?
A) 1.48 days
B) 1.39 days
C) 1.46 days
D) 1.37 days
E) 1.00 day
46) Fly-By-Night Airlines currently has $2.4 million on deposit with its bank. It also has a book
balance of $2.4 million. What will be its bank and book balances as soon as it writes a check for
$1.1 million to pay its fuel bill?
A) $2.4 million; $1.3 million
B) $2.4 million; $2.4 million
C) $1.3 million; $2.4 million
D) $1.3 million; $1.3 million
E) $1.85 million; $1.85 million
47) During the month Leslie's receives four checks in the amounts of $100, $325, $200, and
$500. They are delayed for 1.6 days, 2.1 days, 2.6, and 1 day, respectively. What is the average
daily collection float? Assume a 30-day month.
A) $74.93
B) $63.80
C) $62.08
D) $59.47
E) $68.15
48) The Mesa Bank is offering your firm the free use of their lockbox services. They estimate
that you can reduce your average mail time by 2 days and they can save you a combined clearing
and processing time of 1.5 days by putting the checks into the clearing system sooner. Your firm
receives 320 checks a day with an average value of $2,500 each. The current T-Bill rate is .015
percent per day. Assume a 365-day year. What is the annual amount of income your firm can
earn if it installs this service?
A) $15,300
B) $14,800
C) $16,400
D) $153,300
E) $148,700
49) Prime Bank is offering your company the use of their lockbox services. They estimate that
you can reduce your average mail time by 1.5 days and they can save you a combined clearing
and processing time of 1 day by putting the checks into the clearing system sooner. Your firm
receives 198 checks a day with an average value of $2,300 each. The current T-Bill rate is .011
percent per day. Assume a 365-day year. Prime Bank will charge your firm an annual fee of
$27,500 plus $.20 per check. What is the annual net savings from installing this system?
A) $4,115.36
B) $3,480.00
C) $2,816.00
D) $3,756.78
E) $4,108.29
50) Solid Financial provides lockbox services. They estimate that your firm can reduce its
average collection mail time by 1.6 days and the clearing and processing time by 1.2 days by
implementing their system. Your firm receives 74 checks a day with an average value of $9,750
each. The current T-Bill rate is .014 percent per day. Assume a 365-day year. What is the net
amount of annual income your firm can earn if it installs this service at an annual cost of
$48,000?
A) $65,675.00
B) $62,640.00
C) $56,408.17
D) $55,232.22
E) $58,746.20
51) Uptown Bank provides lockbox services. They estimate that you can reduce your average
mail time by 2.2 days and your combined clearing and processing time by .75 days by
implementing their system. Your firm receives 65 checks a day with an average value of $298
each. The current T-Bill rate is .01 percent per day. Assume a 365-day year. The bank will
charge your firm $.15 per check. What is the annual net savings from installing this system?
A) $1,215.84
B) −$1,022.15
C) $548.32
D) −$1,473.09
E) $718.28
52) Downtown Bank provides lockbox services. They estimate that you can reduce your average
mail time by 1.6 days and your combined clearing and processing time by .5 days by
implementing their system. Your firm receives 654 checks a day with an average value of $975
each. The current T-Bill rate is .009 percent per day. Assume a 365-day year. The bank will
charge your firm $.17 per check. What is the net present value from installing this system?
A) $105,215.84
B) $100,022.15
C) $98,548.32
D) $103,731.67
E) $102,718.28
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