Chapter 7

Question 1

Float

Answer 1

time period between mailing of a check and the collection period

Question 2

Types of floats (2)

Answer 2

1. mail float: time it takes for mail to be delivered

2. clearing float: time it take a check to clear

Question 3

Lockbox system

Answer 3

procedure used to expedite cash inflows by which customers forward their checks to post offices in their region and a local bank collects and processes them. The funds are then wired to the corporate home office for their use

Question 4

Sweep accounts

Answer 4

allows company to maintain 0 balances

excess cash is swept into an interest earning account

Question 5

commercial paper

Answer 5

usually not back by collateral

• short term investment (non-govermental securities)
• no existing secondary market

Question 6

bankers acceptances

Answer 6

exporter who holds acceptance can sell it on a discount basis to any buyer and receive the money before the importer receives the goods

Question 7

Credit risk based on 5c’s

Answer 7

Character: moral quality of borrower
Capital: financial resources of buyer
Capacity: enough cash flow to pay debt
Conditions: economic conditions
Collateral: asset backing loan

Question 8

Inventory

Answer 8

least liquid so should provide highest yield

Question 9

level production

Answer 9

max. efficiency in manpower and machinery usage

- may result in high inventory buildup

Question 10

seasonal production

Answer 10

• eliminates inventory buildup problems

- overtime wages and inefficiencies in equipement use

Question 11

stock out

Answer 11

firm is out of a specific inventory item

Question 12

safety stock

Answer 12

reduces risk of losing sales, but increases costs

Question 13

advantages of JIT (4)

Answer 13

1. reduction in space
2. reduced construction and overhead expenses
3. reduction in costs from quality control
4. elimination of waste

Question 14

negatives of JIT (2)

Answer 14

1. integration costs

2. inventory shortages leading to lost sales