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abottjen
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Disadvantages of having cash on hand?
It's not doing anything for you. It can't work for you, it just sits there.
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What are the three reasons for holding cash?
- 1. Speculative motive-- hold cash to take advantage of unexpected opportunities
- 2. Precautionary motive – hold cash in case of emergencies
- 3. Transaction motive – hold cash to pay the day-to-day bills
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Are trading costs increased or decreased when the firm must sell securities to establish a cash balance?
Increased.
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What happens to opportunity costs when there is a cash balance?
They increase because there is no return on cash.
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What is float?
difference between cash balance recorded in the cash account and the cash balance recorded at the bank
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Who likes float and why? The payee or the payer?
If you are a payee and you recieve money, float is a bad guy. Longer float is the longer it takes to get your money. Opposite for the payer.
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Disbursement float
- Generated when a firm writes checks
- Available balance at bank – book balance > 0
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Collection float
- Checks received increase book balance before the bank credits the account
- Available balance at bank – book balance < 0
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You have $3,000 in your checking account. You just deposited $2,000 and wrote a check for $2,500.
1. What is the disbursement float?
2. What is the collection float?
3. What is the net float?
4. What is your book balance?
5. What is your available balance?
- 1. 2,500
- 2. 2000
- 3. 2,500 - 2000= 500
- 4. 3000 + 2000 - 2500= 2,500
- 5. 3000
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Cash collection: COLLECTION. Is float the good or bad guy?
Float is the bad guy.
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Ways to reduce float
1. Lockboxes
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3 different types of float
1. mail float. 2. processing float. 3 availability float.
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What is a lockbox and why do companies use them?
a post office bond under the control of your bank. Customers send their checks into your lockboxes. The banks open it 1, 2, 3, times a day. It’s a means to expedite cash coming in. Optimizing the float as a receiver of funds.
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Why do companies use concentration accounts?
Because it gives them buying power for investments. Also has the ability to monitor debt.
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What ways can you have controlled disbursements?
- Zero-balance account
- Controlled disbursement account
- Direct deposit- deposit directly into the account, no paper checks. Reduces funds availability for payout but do not incur admin charge to make a check (13/check)
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