Chapter 9: Example Test Questions
True/False Questions:
51.Cash is the most important yet least productive asset a small business owns.
True, Medium, Page 294
52.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, Easy, Page 294
53.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, Easy, Page 294
54.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, Easy, Page 294
55.It is likely that young companies and rapidly growing companies will experience cash flow difficulties.
True, Medium, Page 294
56.The shorter a company's cash flow cycle, the more likely it is to encounter a cash crisis.
False, Medium, Page 295
57.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, Medium, Page 296
58.A highly profitable business is a highly liquid business.
False, Medium, Page 297
59.A small company's cash balance is the difference between total revenue and total expenses.
False, Easy, Page 297
60.Profit is the difference between a company's total revenue and its total expenses.
True, Easy, Page 297
61.The goal of cash management is to maintain as much cash as possible on hand to meet any unexpected circumstances that might arise.
False, Medium, Page 298
62.A cash budget allows a small business owner to anticipate cash shortages and cash surpluses and gives him time to handle, or even avoid, approaching problems.
True, Easy, Page 298
63. 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, Medium, Page 298
64.A small business whose sales are highly variable (i.e., "seasonal") should use a short cash planning horizon.
True, Medium, Page 298
65.The primary problem with cash management tools is that they are too complex and time consuming for small business owners to use practically.
False, Medium, Page 298
66.In a cash budget, credit sales to customers are recorded at the time the sale is made.
False, Medium, Page 299
67.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, Medium, Page 299
68.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, Medium, Page 299
69.The first step in preparing a cash budget is to forecast sales.
False, Medium, Page 299
70.The most reliable method of determining an adequate minimum cash balance is using estimates of similar businesses from trade literature.
False, Medium, Page 299
71.A small firm's minimum cash balance should be two times its average weekly sales.
False, Medium, Page 299
72.A small company's ideal minimum cash balance is one month's sales.
False, Medium, Page 299
73.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, Medium, Page 300
74.Since even the best sales forecast will be wrong, the small business owner should prepare three forecasts—optimistic, pessimistic, and most likely.
True, Medium, Page 301
75.Difficulty in collecting accounts receivable is the primary cause of cash flow problems, according to small business owners.
True, Medium, Page 303
76.The longer an accounts receivable is outstanding, the lower its probability of collection.
True, Easy, Page 303
77.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, Medium, Page 303
78.For cash planning purposes, it is better to underestimate cash disbursements than to overestimate them.
False, Easy, Page 305
79.Seasonal sales patterns cause cash balances to fluctuate dramatically, creating the need for cash forecasts.
True, Medium, Page 306
80.To manage cash efficiently, business owners should strive to accelerate their accounts payable and stretch out their accounts receivable.
False, Medium, Page 307
81.Most small businesses conduct a thorough credit investigation before selling to a new customer.
False, Medium, Page 307
82.Forty percent of industrial and wholesale sales are on credit, and 90 percent of retail sales are on account.
False, Medium, Page 307
83.A sale to a customer is not really a sale until the business owner actually collects the money from it.
True, Easy, Page 307
84.The first line of defense against bad debt losses is to have a financial institution extend loans to credit-seeking customers.
False, Medium, Page 309
85.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, Easy, Page 309
86.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, Easy, Page 309
87.As soon as an account receivable becomes past due, a business owner should turn it over to a collection agency.
False, Easy, Page 309
88.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 don't bother them with repeated collection attempts.
False, Medium, Page 309
89.Small business owners should not press customers for payment of their past due accounts for fear of losing them as customers altogether.
False, Easy, Page 309
90.A small business owner should concentrate her collection efforts on the top 20 percent of her company's customers since they typically account for 80 percent of all accounts receivable.
True, Medium, Page 310
91.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, Easy, Page 312
92.Proper cash management techniques call for a small business owner to pay invoices as soon as he receives them.
False, Medium, Page 312
93.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, Easy, Page 313
94.A basic principle of cash management is verifying all invoices before paying them.
True, Easy, Page 313
95.A cash discount offers a price reduction if the owner pays an invoice on time.
False, Easy, Page 313
96.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, Medium, Page 313
97.It is considered unethical for small business owners to regulate payments to their companies’ advantage.
False, Medium, Page 313
98.Because inventory is not a liquid asset, cash invested there is tied up and cannot be used for other purposes.
True, Medium, Page 315
99.A typical manufacturing company pays 40-50 percent of the value of the inventory for the cost of borrowed money, warehouse space, materials handling, staff, lift-truck expenses, and fixed costs.
False, Difficult, Page 315
100.Only about 20 percent of a typical business's inventory turns over quickly.
True, Medium, Page 315
101.Roughly 80 percent of the typical business' inventory turns over quickly.
False, Medium, Page 315
102.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, Medium, Page 315
103.Bartering, exchanging goods and services for other goods and services, is an effective way for small business owners to conserve cash.
True, Easy, Page 316
104.Bartering is an opportunity to transform slow-moving inventory into much-needed products and services.
True, Easy, Page 316
105.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, Medium, Page 316
106.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, Medium, Page 317
107.Important advantages of leasing include the flexibility of the lease agreement and protection against obsolescence.
True, Medium, Page 317
108.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, Easy, Page 317
109.Many banks allow entrepreneurs to schedule their loan payments to fit their company's cash flow cycles.
True, Medium, Page 318
110.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, Medium, Page 318
111.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, Easy, Page 318
112.Companies lose billions of dollars each year due to employee theft.
True, Easy, Page 318
113.In order to deter employee theft, it is best to separate cash management duties between at least two different employees.
True, Easy, Page 318
114.When trying to prevent employee theft, business owners should create a “police state” environment and trust no one.
False, Easy, Page 318
115.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, Easy, Page 318
116.Revising business plans annually forces owners to focus on managing the business more effectively.
True, Easy, Page 319
117.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, Easy, Page 320
118.When investing surplus cash, the small business owner should seek the highest returns possible on the money.
False, Medium, Page 320
119.When investing surplus cash, an owner’s primary objective should be on the safety and liquidity of the investments.
True, Easy, Page 320
120.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, Easy, Page 320