Chapter 9: Example Test Questions True/False Questions:

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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 crisi
s.



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 reliabl
e 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, Me
dium, 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., "s
easonal") 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 run
ning 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 i
n 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 sma
ll 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 m
ost 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 lowe
r 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


8
0.

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 n
ew
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 act
ually 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 improvi
ng 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 mont
h 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, t
he 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 payme
nt 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.



Tr
ue, 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
t
heir 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 reduc
tion 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 pur
poses.



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 l
ittle 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 own
ers 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 t
o "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 f
it 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 31
8


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 fra
ud 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 mi
nimum into an interest
-
bearing account, enabling it to keep otherwise
idle cash invested until it is needed to cover checks.



False, Easy, Page 320