1. A firm develops an annual cash budget in order to
a. Support the preparation of its cash flow statement for the annual report.
b. Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be deferred.
c. Determine the opportunity costs of alternative sales and production strategies.
d. Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.
2. According to John Maynard Keynes, the three major motives for holding cash are for
a. Transactional, psychological, and social purposes.
b. Speculative, fiduciary, and transactional purposes.
c. Speculative, social, and precautionary purposes.
d. Transactional, precautionary, and speculative purposes.
3. Which of the following actions would not be consistent with good management?
a. Increased synchronization of cash flows.
b. Minimize the use of float.
c. Maintaining an average cash balance equal to that required as a compensating balance or that which minimizes total cost.
d. Use of checks and drafts in disbursing funds.
4. Which of the following investments is not likely to be a proper investment for temporary idle cash?
a. Initial public offering of an established profitable conglomerate.
b. Commercial paper.
c. Treasury bills.
d. Treasury bonds due within one year.
5. A precautionary motive for holding excess cash is
a. To enable a company to meet the cash demands from the normal flow of business activity.
b. To enable a company to avail itself of a special inventory purchase before prices rise to higher levels.
c. To enable a company to have cash to meet emergencies that may arise periodically.
d. To avoid having to use the various types of lending arrangements available to cover projected cash deficits.
6. The following practices will impact the cash flow of the company:
1. Sales personnel are unequivocally responsible for collecting their credit sales.
2. Sales commission are based on collected invoices.
3. Statement of accounts receivable are reconciled with customers and regularly sent for confirmation.
4. Automatic transfer of funds is arranged with banks regarding deposits of branches.
Answer (2)
In summary, the correct answer for the annual cash budget question is option d, which emphasizes minimizing the opportunity costs of excess cash. Keynes identified the three motives for holding cash as transactional, precautionary, and speculative. Moreover, effective cash management practices can significantly impact a company's cash flow.
;
Let's break down each of the multiple-choice questions to provide a detailed explanation:
A firm develops an annual cash budget in order to:
D. Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.
A cash budget helps a firm manage its cash flow efficiently by ensuring that they are making the most use of available cash. By avoiding excess noninvested cash, a firm can minimize lost opportunities where that cash could have been used elsewhere, such as in investments. Furthermore, having a clear estimate of cash flows can prevent unnecessary short-term borrowing, thus minimizing interim financing costs.
According to John Maynard Keynes, the three major motives for holding cash are for:
D. Transactional, precautionary, and speculative purposes.
Keynes identified three key reasons why firms hold cash:
Transactional: To handle ordinary business operations such as paying salaries, bills, and other regular expenses.
Precautionary: To have cash available for unexpected expenses or emergencies.
Speculative: To take advantage of potential investment opportunities that may arise unexpectedly.
Which of the following actions would not be consistent with good management?
D. Use of checks and drafts in disbursing funds.
While checks and drafts are traditional modes of payment, good cash management practices typically involve more instantaneous and secure methods, such as electronic transfers, which help in synchronizing cash flows more efficiently and reducing float time.
Which of the following investments is not likely to be a proper investment for temporary idle cash?
A. Initial public offering of an established profitable conglomerate.
Investments for idle cash should be low-risk and highly liquid. Treasury bills, commercial paper, and treasury bonds due within a year are all suitable as they are stable and can be readily converted to cash. An initial public offering (IPO), despite being of an established company, still carries higher risk and is not as liquid, making it less suitable for temporary idle cash.
A precautionary motive for holding excess cash is:
C. To enable a company to have cash to meet emergencies that may arise periodically.
The precautionary motive is about having additional cash on hand to cover unexpected financial obligations or emergencies that might occur, ensuring liquidity is maintained without resorting to emergency borrowing.
The following practices will impact the cash flow of the company:
These practices are designed to positively impact a company's cash flow by tightening and streamlining collection practices and cash management. This includes holding sales personnel accountable for collections (1), aligning sales commissions with actual collections (2), reconciling accounts receivable regularly (3), and optimizing cash transfers with automatic bank arrangements (4). All are efforts to ensure cash is collected as efficiently as possible, minimizing outstanding receivables and maximizing cash availability.
