Chapter 9: Example Test Questions True/False Questions:


Nov 20, 2013 (4 years and 7 months ago)


Chapter 9: Example Test Questions

True/False Questions:


Cash is the most important yet least productive asset a small business owns.

True, Medium, Page 294


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


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


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

True, Easy, Page 294


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

True, Medium, Page 294


The shorter a company's cash flow cycle, the more likely it is to encounter a cash crisi

False, Medium, Page 295


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


A highly profitable business is a highly liquid business.

False, Medium, Page 297


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

False, Easy, Page 297


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

True, Easy, Page 297


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


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


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


A small business whose sales are highly variable (i.e., "s
easonal") should use a short cash
planning horizon.

True, Medium, Page 298


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


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

False, Medium, Page 299


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


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


The first step i
n preparing a cash budget is to forecast sales.

False, Medium, Page 299


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

False, Medium, Page 299


A sma
ll firm's minimum cash balance should be two times its average weekly sales.

False, Medium, Page 299


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

False, Medium, Page 299


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


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


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

True, Medium, Page 303


The longer an accounts receivable is outstanding, the lowe
r its probability of collection.

True, Easy, Page 303


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


For cash planning

purposes, it is better to underestimate cash disbursements than to
overestimate them.

False, Easy, Page 305


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

True, Medium, Page 306


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

False, Medium, Page 307


Most small businesses conduct a thorough credit investigation before selling to a n

False, Medium, Page 307


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

False, Medium, Page 307


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


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


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


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


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

False, Easy, Page 309


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


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


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

True, Medium, Page 310


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.

ue, Easy, Page 312


Proper cash management techniques call for a small business owner to pay invoices as soon
as he receives them.

False, Medium, Page 312


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

True, Easy, Page 313


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

True, Easy, Page 313


A cash discount offers a price reduc
tion if the owner pays an invoice on time.

False, Easy, Page 313


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


It is considered unethical for small business owners to regulate payments to their
companies’ advantage.

False, Medium, Page 313


Because inventory is not a liquid asset, cash invested there is tied up and cannot be used
for other pur

True, Medium, Page 315


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



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

True, Medium, Page 315


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

False, Medium, Page 315


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


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


Bartering is an opportunity to transform slow
moving inventory into much
products and services.

True, Easy, Page 316


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


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


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

True, Medium, Page 317


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


Many banks allow entrepreneurs to schedule their loan payments to f
it their company's
cash flow cycles.

True, Medium, Page 318


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


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

True, Easy, Page 318


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

True, Easy, Page 318


In order to deter employee theft, it is best to

separate cash management duties between at
least two different employees.

True, Easy, Page 318


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

False, Easy, Page 318


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


Revising business plans annually forces owners to focus on managing the business more

True, Easy, Page 319


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


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

False, Medium, Page 320


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

True, Easy, Page 320


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