CH13. Managing Cash Flow Flashcards by T Jo

Solid cash management enables a business owner to ________.
A) adequately meet the cash demands of the business
B) avoid retaining unnecessarily large cash balances
C) stretch the profit-generating power of each dollar the business owns
D) All of the above

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Which of the following statements concerning cash management is false?
A) Cash is the most important, yet least productive, asset a small business owns.
B) Young companies tend to be “cash sponges,” soaking up every available dollar of cash.
C) Fast-growing businesses are least likely to experience shortages.
D) Cash management involves forecasting, collecting, disbursing, investing, and planning for a company’s cash needs.

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The first step in managing cash more effectively is ________.
A) having an adequate cash reserve for emergency expenditures
B) rapid payment of accounts payable
C) speeding up payment of accounts receivable
D) understanding the company’s cash flow cycle

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A common cause of business failures is that owners neglect to forecast how much cash their companies will need until they reach the point of generating positive cash flow.

TRUE

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The objectives of cash management are to adequately meet the cash demands of the business, to avoid retaining unnecessarily large cash balances, and to stretch the profit-generating power of each dollar the business owns.

TRUE

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The goal of cash management is to maintain as much cash as possible on hand to meet any unexpected circumstances that might arise.

FALSE

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It is likely that young companies and rapidly growing companies will experience cash flow difficulties.

TRUE

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The shorter a company’s cash flow cycle, the more likely it is to encounter a cash crisis.

FALSE

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More companies fail for the lack of \_\_\_\_\_\_\_\_ than for the lack of \_\_\_\_\_\_\_\_.
A) cash; profit
B) profit; cash
C) net revenue; gross revenue
D) vision; profit

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Which of the following measures a company's liquidity and its ability to pay its bills and other financial obligations on time?
A) Cash budget
B) Cash flow
C) Cash management
D) All of the above

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\_\_\_\_\_\_\_\_ typically lead(s) sales; \_\_\_\_\_\_\_\_ typically lag(s) sales.
A) Production; receivables
B) Collections; purchases
C) Receipts; production
D) Purchases; collections

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A highly profitable company rarely experiences cash flow problems.

FALSE

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Developing a cash forecast is essential for new businesses because early profit levels usually do not generate sufficient cash to keep the company afloat.

TRUE

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A highly profitable business is a highly liquid business.

FALSE

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Profit is the difference between a company’s total revenue and its total expenses.

TRUE

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Compiling the total cash on hand, bank balance, summary of the day’s sales, summary of the day’s cash receipts, and a summary of accounts receivables collections into monthly summaries provides the basis for making reliable cash forecasts.

TRUE

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A small company’s cash balance is the difference between total revenue and total expenses.

FALSE

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A cash budget reveals important clues about how well a company ________.
A) balances its accounts receivable and accounts payable
B) controls inventory
C) finances its growth
D) All of the above

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A firm’s cash budget should ________.
A) be prepared on a monthly basis for at least one year in advance and cover all seasonal fluctuations
B) cover a longer planning horizon when a firm’s pattern is highly variable
C) show the amount and timing of cash receipts and cash disbursements on an annual basis
D) show the amount and timing of cash receipts and cash disbursements on a quarterly basis

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A cash budget ________.
A) is based on the cash method of accounting
B) is a “cash map,” showing the amount and the timing of cash flowing into and out of the business over a given period of time
C) will never be completely accurate since it is based on forecasts
D) All of the above

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Which of the following is not a step in creating a cash budget?
A) Determining an adequate minimum cash balance.
B) Forecasting profits.
C) Forecasting cash receipts.
D) Forecasting cash disbursements.

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A cash budget is based on the cash method of accounting, meaning that cash receipts and cash disbursements are recorded in the forecast only when \_\_\_\_\_\_\_\_ is expected to take place. 
A) the transaction is predicted
B) a credit sale 
C) the cash transaction
D) projections are

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On March 10th, a business owner receives an invoice from a supplier for $416.27 with "Net 30" credit terms marked on it. On April 7th, the owner writes the supplier a check for $416.27 and mails it. When would this cash disbursement show up on the company's cash budget?
A) March 10th
B) March 30th
C) April 7th
D) April 10th

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Jane is arguing with Joan about how much cash their small retail outlet needs as they prepare their cash budget. Jane feels that with the Christmas season coming, their busiest time, they need more cash available while Joan feels they do not because their sales volume will be up significantly. Jane and Joan are discussing which step of the cash budgeting process? A) Determining an adequate minimum cash balance B) Forecasting sales C) Forecasting cash receipts D) Forecasting cash disbursements

``` A cash budget is only as accurate as the ________ forecast from which it is derived. A) profit B) receivables C) income D) sales ```

``` What factors can drastically affect a company's cash flow? A) Increased competition B) Economic swings C) Normal seasonal variations D) All of the above ```

Which of the following would be a potential source of information for preparing a sales forecast? A) Past records B) Trade associations and the Chamber of Commerce C) Similar firms D) All of the above

When a firm sells goods or services on credit, the owner needs to remember that for cash budgeting purposes ________. A) the sale may be immediately posted as if it has been collected B) the sale should be recorded in the month it was made C) she/he must account for a delay between the sale and the actual collection of the proceeds D) such a transaction counts as a cash disbursement

``` It is recommended that new business owners estimate cash disbursements as best they can and then add on another ________ percent. A) 3-4 B) 5-10 C) 10-25 D) 25-35 ```

When estimating the firm's end-of-month cash balance, the owner should first ________. A) determine the cash balance at the beginning of the month B) add up total cash receipts and subtract cash on hand C) review the accounts receivable D) make a daily list of cash disbursements

The fact that the cash budget illustrates the flow of cash in a business helps the owner to ________. A) accelerate accounts payable payments B) get a seasonal line of credit rather than an annual line of credit C) slow accounts receivable payments D) track the effects of depreciation and bad debts

39) A cash budget allows a small business owner to anticipate cash shortages and cash surpluses and gives her/him time to handle, or even avoid, approaching problems.

TRUE

40) Typically, small business owners should prepare a projected weekly cash budget for at least six months and quarterly estimates for the remainder of the year, being careful to cover all seasonal sales fluctuations.

FALSE

41) A small business whose sales are highly variable, such as a seasonal business, should use a short cash planning horizon.

TRUE

42) The primary problem with cash management tools is that they are too complex and time-consuming for small business owners to use practically.

FALSE

43) In a cash budget, credit sales to customers are recorded at the time the sale is made.

FALSE

44) Depreciation and debt expenses are often left off the cash budget but need to be included to accurately forecast cash requirements for running the business.

FALSE

45) The cash budget is nothing more than a forecast of the firm's cash inflows and outflows for a specific time period, and it will never be completely accurate.

TRUE

46) The first step in preparing a cash budget is to forecast sales.

FALSE

47) The most reliable method of determining an adequate minimum cash balance is using estimates of similar businesses from trade literature.

FALSE

48) A small firm's minimum cash balance should be two times its average weekly sales.

FALSE

49) A small company's ideal minimum cash balance is one month's sales.

FALSE

50) Because the heart of the cash budget is the sales forecast, the cash budget is only as accurate as the sales forecast on which it is based.

TRUE

51) Since even the best sales forecast will be wrong, the small business owner should prepare three forecasts — optimistic, pessimistic, and most likely.

TRUE

52) A sale to a customer is not really a sale until the business owner actually collects the money from it.

TRUE

53) To project cash receipts, an entrepreneur must analyze accounts receivable to determine the company's collection pattern.

TRUE

54) The key factor in forecasting cash disbursements for a cash budget is to record them in the month when they are incurred, not when they are paid.

FALSE

55) Some financial analysts recommend that new owners estimate cash disbursements as best they can and then add another 25 to 50 percent of the total.

TRUE

58) By planning cash needs ahead of time, a small business is able to achieve all but which of the following? A) Make the most efficient use of available cash. B) Provide the opportunity to forgo quantity and cash discounts. C) Finance seasonal business needs. D) Provide funds for expansion.

59) The "big three" of cash management include ________. A) accounts receivable, overhead, and inventory B) accounts payable, accounts receivable, and taxes C) accounts receivable, accounts payable, and inventory D) accounts receivable, prices, and expenses

``` 60) Experts estimate that ________ percent of industrial and wholesale sales are on credit, while ________ percent of retail sales are on credit. A) 20; 40 B) 40; 20 C) 60; 30 D) 90; 40 ```

61) Small businesses selling on credit find that ________. A) it is relatively inexpensive and it is simple B) it is expensive, requires a great deal of effort, and it is risky C) it is essentially borrowing money from the customer D) many can get by without selling on credit because their business customers do not expect to use credit

``` 62) The cost to check a potential customer's credit at a reporting service starts at $________. A) 5 B) 40 C) 119 D) 499 ```

``` 63) ________ small businesses take the time to conduct a credit check. A) All B) Most C) Few D) None of the above ```

64) An important source of credit information that collects information on small businesses that other reporting services ignore is ________. A) National Association of Credit Management B) TRW C) Dun & Bradstreet D) National Association of Small Business Owners

``` 65) According to the American Collectors Association, if a business is writing off more than ________ percent of its sales as bad debts, it needs to tighten its credit and collection policies. A) 3 B) 5 C) 10 D) 25 ```

``` 66) A collection agency typically takes ________ percent of the amounts they collect on past due accounts. A) 5 to 10 B) 10 to 20 C) 25 to 30 D) 30 to 50 ```

67) To encourage credit customers to pay invoices promptly, a business owner should ________. A) ensure that all invoices are clear, accurate, and timely B) state clearly a description of the goods or services purchased and an account number C) include a telephone number and a contact person in case the customer has a question or a dispute D) All of the above

68) Once a small business has established a firm written credit policy and has clearly communicated it, the next step in building an effective credit policy is to ________. A) send invoices promptly B) determine what percentage of sales are being written off as bad debt C) create a simple credit application D) create a "tracking file" of events

69) Once a credit account becomes past due, a small business owner should ________. A) wait patiently; the customer will most likely pay the bill eventually B) turn the account over to a collection agency the day it becomes past due C) send a "second notice" letter requesting immediate payment D) call the "deadbeat" in the middle of the night and make harassing and threatening remarks until he pays

``` 70) According to the American Collector's Association, only ________ percent of accounts more than 90 days delinquent will be paid voluntarily. A) 5 B) 20 C) 45 D) 65 ```

71) The Fair Debt Collection Practices Act prohibits business owners from ________. A) harassing people who are past due B) sending invoices the same day product is shipped C) hiring debt collection attorneys D) referring past due bills to collection agencies

72) An effective approach to successful collections includes ________. A) an abrupt, in-your-face style of communication once a payment is late B) waiting to invoice and communicate with the customer once a payment problem clearly exists C) setting up an automated collection system to generate "Past Due" notices that does not require personal intervention D) timely, well-communicated payment expectations with well-documented records

``` 73) A contract in which a business selling an asset on credit gets a security interest in that asset (the collateral), protecting its legal rights in case the buyer fails to pay, is a ________. A) lockbox B) classic collection blunder C) way to protect the buyer D) security agreement ```

74) An entrepreneur can potentially improve collections by ________. A) contacting the customer once the bill becomes past due to verify they have received the bill and that it is accurate B) negotiate payment if the customer is unable to pay the full amount on time C) developing a rapport with the customer that will lead to prompt payment D) All the above

75) Patel Industries recently filled an order from one of its customers, Oxmoor Gardens, a small garden supply store. Oxmoor's owner recently received an invoice from Patel for $1,278.64 with selling terms of "2/10, Net 30." Therefore, ________. A) the selling terms indicate that Oxmoor must pay 2 percent of the invoice by the 10th day of the month with the balance due in 30 days B) the selling terms are offering Oxmoor a 2 percent discount if the bill is paid within 10 days; otherwise the full amount of the invoice is due in 30 days C) the selling terms indicate that the full amount of the invoice is due within 30 days and Oxmoor will be subject to a 2 percent finance charge for every 10 days that the bill is past due D) the selling terms indicate that Oxmoor has not yet qualified for a quantity discount and must pay the full amount of the invoice within 30 days

76) Efficient cash managers ________. A) disregard trade discounts because of their hidden costs B) avoid the use of credit cards to stretch their firm's cash balances C) set up a payment calendar to both pay on time and take advantage of cash discounts for early payment D) use expressions like "the check is in the mail" to mollify creditors when short on cash

``` 77) For product-based businesses, ________ often represents their largest capital investment. A) account receivables B) inventory C) plant and equipment D) real estate ```

78) Which of the following is true about inventory management for the small business owner? A) Most small business owners have turned to technology and computer spreadsheets to achieve maximum efficiency in managing it. B) Inventory is the largest capital investment for most businesses, but few owners use any formal means for managing it. C) Inventory is generally highly liquid and can be easily mortgaged to a bank for immediate cash if needed. D) Inventory yields a return of about 25 percent for manufacturing firms but nothing for service companies.

``` 79) Only about ________ percent of a typical business' inventory turns over quickly. A) 20 B) 40 C) 60 D) 80 ```

``` 81) Exchanging goods and services for other goods and services, or ________, is an effective way for a small business to conserve cash. A) leasing B) bartering C) arbitrating D) credit sales ```

82) Difficulty in collecting accounts receivable is the primary cause of cash flow problems, according to small business owners.

TRUE

83) The longer an accounts receivable is outstanding, the lower its probability of collection.

TRUE

84) For cash planning purposes, it is better to underestimate cash disbursements than to overestimate them.

FALSE

85) Seasonal sales patterns cause cash balances to fluctuate dramatically, creating the need for cash forecasts.

TRUE

86) To manage cash efficiently, business owners should strive to accelerate their accounts payable and stretch out their accounts receivable.

FALSE

87) Forty percent of industrial and wholesale sales are on credit and 90 percent of retail sales are on account.

FALSE

88) Most small businesses conduct a thorough credit investigation before selling to a new customer.

FALSE

89) The first line of defense against bad debt losses is to have a financial institution extend loans to credit-seeking customers.

FALSE

90) One effective technique for improving cash management is to establish a firm credit policy in writing and let customers know in advance what it is.

TRUE

91) Some businesses use cycle billing, in which a company bills a portion of its credit customers each day of the month to smooth out uneven cash receipts.

TRUE

92) As soon as an account receivable becomes past due, a business owner should turn it over to a collection agency.

FALSE

93) If an account receivable becomes past due, the best strategy is simply to wait; statistics show that customers eventually pay their bills if business owners do not bother them with repeated collection attempts.

FALSE

94) Small business owners should not press customers for payment of their past due accounts for fear of losing them as customers altogether.

FALSE

95) A small business owner should concentrate collection efforts on the top 20 percent of the company's customers since they typically account for 80 percent of all accounts receivable.

TRUE

96) A security agreement is a contract in which a business selling an asset on credit gets a security interest in that asset, protecting its legal rights in case the buyer fails to pay.

TRUE

97) Communication in a timely and professional manner is key to effective collection activities.

TRUE

98) Proper cash management techniques call for a small business owner to pay invoices as soon the invoices arrive.

FALSE

99) Efficient cash managers set up a payment calendar each month, which allows them to pay their bills on time and to take advantage of cash discounts for early payment.

TRUE

100) A basic principle of cash management is verifying all invoices before paying them.

TRUE

101) A cash discount offers a price reduction if the owner pays an invoice on time.

FALSE

102) Small business owners generally should not take advantage of cash discounts vendors offer, choosing instead to maintain control of their cash for as long as possible.

FALSE

103) It is considered unethical for small business owners to regulate payments to their company's advantage.

FALSE

104) Because inventory is not a liquid asset, cash invested there is tied up and cannot be used for other purposes.

TRUE

105) Only about 20 percent of a typical business' inventory turns over quickly.

TRUE

106) Roughly 80 percent of the typical business' inventory turns over quickly.

FALSE

107) It is much wiser to carry too little inventory rather than too much because there are no costs associated with carrying too little inventory.

FALSE

108) Cash and quantity discounts allow business owners to receive a price break in the goods they purchase.

TRUE

112) Which of the following inventory management techniques would help a business owner make the best use of his company's cash? A) Avoid overbuying inventory. B) Schedule inventory deliveries at the latest possible date. C) Purchase goods from the fastest suppliers who can meet quality standards to keep inventory levels low. D) All of the above

``` 113) It is estimated that approximately ________ thousand companies, most of them small, engage in barter exchanges every year. A) 50 B) 100 C) 400 D) 500 ```

114) The real benefit of barter for the entrepreneur is that ________. A) it is essentially without cost to the business owner B) it is considered a depreciable item for tax purposes rather than as income C) it saves the small business owner between $100,000 and $150,000 a year on the average D) it is "paid" for at the wholesale cost of doing business, yet it is credited at the retail price

115) Barter offers business owners the benefit of ________. A) buying materials, equipment, and supplies without spending valuable cash on them B) transforming slow-moving inventory into much-needed goods and services C) "paying" for goods and services at wholesale cost and getting credit for retail price D) All of the above

116) Which of the following is an effective way to trim overhead? A) When able, buy instead of leasing. B) Hire more full-time employees; reduce the number of part-timers. C) Eliminate zero-based budgeting. D) Negotiate fixed loan payments to coincide with company cash flow.

117) Which of the following statements concerning leasing is true? A) Leasing is an "off-the-balance-sheet" method of financing assets. B) Although total lease payments for an asset are greater than those on a conventional loan, most leases do not require large capital outlays as down payments. C) Leasing gives business owners access to equipment even when they cannot borrow the money to buy it. D) All of the above

``` 118) Leasing allows business owners to forecast cash flows more ________ because lease payments are ________ amounts paid over a particular time period. A) often; fixed B) accurately; variable C) accurately; fixed D) often; variable ```

``` 119) "Stick to what you are good at and ________ everything else" is an approach to reduce overhead costs. A) make B) sell C) leverage D) outsource ```

``` 120) Rather than build the current year budget on increases from the previous year's budget, ________ evaluates the necessity of every item. A) zero-based budgeting B) zero-based accounting C) ground-up budgeting D) year-one budgeting ```

``` 121) When investing surplus cash, the small business owner's key objectives should be on the ________ of the investment. A) high yields B) current income C) liquidity and safety D) long-term yield ```

``` 122) A checking account that never has idle funds (because it draws funds from an interest-bearing master account to cover checks written) is called a ________ account. A) zero-balance B) money market C) deficit D) sweep ```

123) A sweep account is a checking account that ________. A) bears interest, allowing depositors to write checks without tying up money for a specific period of time B) never has funds as they are drawn from a master account C) automatically moves all funds in a company's checking account above a predetermined minimum into an interest-bearing account D) need to be reviewed and updated on a regular basis

124) Bartering (exchanging goods and services for other goods and services) is an effective way for small business owners to conserve cash.

TRUE

125) Bartering is an opportunity to transform slow-moving inventory into much-needed products and services.

TRUE

126) The real benefit to a business owner engaging in barter is the ability to "pay" for goods and services at her wholesale cost and to get credit for the retail price.

TRUE

127) Most business owners should avoid leasing as a cash management strategy because it requires large capital outlays as down payments, and total lease payments typically are greater than those for conventional loans.

FALSE

128) Important advantages of leasing include the flexibility of the lease agreement and protection against obsolescence.

TRUE

129) When a small business encounters a sales slowdown, the first thing the owner should do is cut marketing and advertising expenditures to conserve cash.

FALSE

130) Many banks allow entrepreneurs to schedule their loan payments to fit their company's cash flow cycles.

TRUE

131) Changing your firm's shipping terms from "F.O.B. buyer" to "F.O.B. seller" can improve your cash flow, as it switches the cost of shipping from you to your buyer.

TRUE

132) Companies lose billions of dollars each year due to employee theft.

TRUE

133) Rather than build the current year's budget on increases from the previous year's budget, zero-based budgeting starts from a budget of zero and evaluates the necessity of every item.

TRUE

134) To deter employee theft, it is best to separate cash management duties between at least two different employees.

TRUE

135) When trying to prevent employee theft, business owners should create a "police state" environment and trust no one.

FALSE

136) Because small business owners often rely on informal procedures for managing cash, they are most likely to become victims of embezzlement and fraud by their employees.

TRUE

137) A sweep account is a checking account that automatically "sweeps" all funds in a company's checking account above a predetermined minimum into an interest-bearing account.

TRUE

138) Small business managers need not be concerned about investing surplus cash since small amounts of cash sitting around for a few days or weeks are not worth investing.

FALSE

139) When investing surplus cash, the small business owner should seek the highest returns possible on the money.

FALSE

140) When investing surplus cash, an owner's primary objective should be on the safety and liquidity of the investments.

TRUE

141) A sweep account automatically "sweeps" all funds in a company's checking account above a predetermined minimum into an interest-bearing account, enabling it to keep otherwise idle cash invested until it is needed to cover checks.

FALSE

142) Revising business plans annually forces owners to focus on managing the business more effectively.

TRUE

CH13. Managing Cash Flow Flashcards

(130 cards)