Foundations of Financial Management
Answers to Text Discussion Questions
7-1. Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits.
7-2. Liquidity is the quality of converting an asset to cash quickly and at fair market value.
7-3. The treasury manager is most concerned with daily cash flows of a corporation as it is the manager’s responsibility to invest temporary funds into money market instruments and to provide for temporarily excess funds into money market instruments and to provide for temporary cash needs through borrowing. Income based on accrual accounting methods will not capture daily cash surpluses and deficits.
7-4. Float represents the difference between a corporation's recorded cash balances and the amount credited to the corporation by the bank. It is the latter item that is of particular interest to us. To the extent a corporation can accelerate check collections to the bank account and slow down check payments from its bank account, the cash balance at the bank may exceed the recorded amount on the company books. The differential or float may be thought of as a short-term source of funds to the corporation.
7-5. Float exists because of the delay time in cheque processing. Electronic funds transfer, or the electronic movement of funds between computer terminals, would eliminate the need for cheques and thus eliminate float.
7-6. A firm could operate with a negative balance on the corporate books, as indicated in Table 7-2, knowing float will carry them through at the bank. Cheques written on the corporate books may not clear until many days later at the bank. For this reason, a negative account balance on the corporate books of $100,000 may still represent a positive balance at the bank.
7-7. Both lockbox systems and regional collection offices allow for the
7-1. Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits.
7-2. Liquidity is the quality of converting an asset to cash quickly and at fair market value.
7-3. The treasury manager is most concerned with daily cash flows of a corporation as it is the manager’s responsibility to invest temporary funds into money market instruments and to provide for temporarily excess funds into money market instruments and to provide for temporary cash needs through borrowing. Income based on accrual accounting methods will not capture daily cash surpluses and deficits.
7-4. Float represents the difference between a corporation's recorded cash balances and the amount credited to the corporation by the bank. It is the latter item that is of particular interest to us. To the extent a corporation can accelerate check collections to the bank account and slow down check payments from its bank account, the cash balance at the bank may exceed the recorded amount on the company books. The differential or float may be thought of as a short-term source of funds to the corporation.
7-5. Float exists because of the delay time in cheque processing. Electronic funds transfer, or the electronic movement of funds between computer terminals, would eliminate the need for cheques and thus eliminate float.
7-6. A firm could operate with a negative balance on the corporate books, as indicated in Table 7-2, knowing float will carry them through at the bank. Cheques written on the corporate books may not clear until many days later at the bank. For this reason, a negative account balance on the corporate books of $100,000 may still represent a positive balance at the bank.
7-7. Both lockbox systems and regional collection offices allow for the