CH 7 study cards

Question 1

What is Current Asset Management?

Answer 1

Definition: Managing a firm’s current assets, including cash, marketable securities, accounts receivable, and inventory.
Objective: Ensure effective allocation to maintain liquidity and meet short-term obligations.

Question 2

Why is Current Asset Management important?

Answer 2

Impacts liquidity and ability to meet short-term obligations, influencing business succes

Question 3

What are the main types of current assets?

Answer 3

Cash, Marketable Securities, Accounts Receivable, and Inventory.

Question 4

What is Cost-Benefit Analysis?

Answer 4

A method to evaluate the costs and benefits of decisions to ensure value-adding choices.

Question 5

What are explicit costs in cost-benefit analysis?

Answer 5

Direct, measurable costs such as materials and labor.

Question 6

What are implicit costs?

Answer 6

Indirect or hidden costs, such as opportunity costs.

Question 7

What is opportunity cost?

Answer 7

The benefit that is forgone by choosing one option over another.

Question 8

What is the primary goal of cash management?

Answer 8

Maintain an optimum level of cash to ensure smooth operations.`

Question 9

What is float in cash management?

Answer 9

The difference between the recorded cash balance and the available cash in the bank

Question 10

What are two main reasons for holding cash?

Answer 10

Transaction Needs and Precautionary Needs.

Question 11

What is the goal of cash flow management?

Answer 11

Speed up inflows, slow down outflows, and manage float.

Question 12

What factors influence cash balance decisions?

Answer 12

Transaction Needs, Cash Flow Predictability, Borrowing Arrangements, and Interest Rates.

Question 13

What are low-risk, liquid investments for excess cash?

Answer 13

savings accounts, Money market funds, Term deposits, Treasury bills.

Question 14

What is the purpose of a lockbox system in cash management?

Answer 14

To speed up collections by having payments mailed to a local post office box.

Question 15

What is Electronic Funds Transfer (EFT)?

Answer 15

Electronic exchange of payments between companies to reduce errors and speed up transactions.

Question 16

What is Electronic Data Interchange (EDI)?

Answer 16

Automates the exchange of financial and business information between companies.

Question 17

What are preauthorized cheques?

Answer 17

Payments automatically deducted from a bank account, ensuring timely payments.

Question 18

What is the importance of cost-benefit analysis in cash management?

Answer 18

Helps evaluate whether implementing new cash management systems will provide more benefits than costs.

Question 19

What are marketable securities?

Answer 19

Short-term investments that are easily bought or sold, providing liquidity.

Question 20

What are key factors to consider when choosing marketable securities?

Answer 20

Yield, Maturity, Minimum Investment, Safety, and Marketability.

Question 21

What is yield in marketable securities?

Answer 21

The return on an investment, typically expressed as a percentage.

Question 22

What is maturity in marketable securities?

Answer 22

the time until the security matures and the principal is returned.

Question 23

What is safety in marketable securities

Answer 23

The likelihood that the issuer of the security will default on the investment.

Question 24

What does marketability refer to in securities?

Answer 24

How easily the security can be bought or sold in the market without affecting its price

Question 25

What is accounts receivable (A/R)?

Answer 25

Money owed by customers for goods or services provided on credit.

Question 26

What is trade credit?

Answer 26

Financing that allows customers to buy goods or services on credit and pay later.

Question 27

How is accounts receivable considered an investment?

Answer 27

It represents future cash inflows, but carries the risk of non-payment.

Question 28

What is the return on accounts receivable?

Answer 28

The financial return from accounts receivable, compared with the cost of borrowing or opportunity cost of other assets.

Question 29

What are the three primary policy variables in credit policy administration?

Answer 29

Credit Standards, Terms of Credit, and Collection Policy.

Question 30

. What is credit risk analysis

Answer 30

Evaluating the Four Cs of Credit: Character, Capacity, Capital, and Conditions to assess customer ability to pay

Question 31

What is the role of credit standards?

Answer 31

Establish criteria for evaluating customer creditworthiness.

Question 32

What are the terms of credit?

Answer 32

The length of time a customer is allowed to pay for goods or services on credit, and any discounts for early payment

Question 33

What is the average collection period?

Answer 33

The average time it takes for a company to collect its accounts receivable.

Question 34

What is the bad debts ratio?

Answer 34

The ratio of bad debts to credit sales, showing the risk in credit management.

Question 35

What is aging of accounts receivable?

Answer 35

Categorizing accounts receivable by how long they have been outstanding

Question 36

What is the goal of inventory management?

Answer 36

Maintain an optimum level of inventory to meet customer demand while minimizing costs

Question 37

What are carrying costs in inventory management?

Answer 37

Costs for holding and storing inventory, including storage, insurance, and financing.

Question 38

What are ordering costs in inventory management?

Answer 38

Costs associated with placing, receiving, and inspecting inventory orders.

Question 39

What is the difference between level and seasonal production?

Answer 39

Level Production: Producing a constant amount each month. Seasonal Production: Varying production based on seasonal demand.