CBS Cash Flow Management 3 — Questions and Answers
Question 1: Which of the following best describes a zero-balance account (ZBA) in cash management?
- A subsidiary account automatically funded from a master account as checks clear (Correct answer)
- An account that earns zero interest to minimize bank fees
- A sweep account that invests all idle cash in overnight securities
- An account maintained at exactly the minimum required balance
Correct answer: A subsidiary account automatically funded from a master account as checks clear
A ZBA is a disbursement account that maintains a zero balance until checks clear, at which point funds are transferred automatically from a master account.
Question 2: Lockbox services improve cash flow primarily by:
- Reducing mail and processing float (Correct answer)
- Lowering accounts payable balances
- Increasing credit sales
- Eliminating the need for a cash budget
Correct answer: Reducing mail and processing float
Lockboxes intercept customer payments at a bank's regional post office boxes, reducing the time between mailing and deposit.
Question 3: A company has days payable outstanding (DPO) of 30 days. Extending DPO to 45 days would:
- Lengthen the cash conversion cycle by 15 days
- Shorten the cash conversion cycle by 15 days (Correct answer)
- Increase accounts receivable turnover
- Decrease inventory holding costs
Correct answer: Shorten the cash conversion cycle by 15 days
CCC = DIO + DSO − DPO; increasing DPO by 15 days reduces the CCC by 15 days, freeing cash.
Question 4: In a cash budget, beginning cash plus cash receipts minus cash disbursements equals:
- Ending cash before financing (Correct answer)
- Net income
- Free cash flow
- Operating cash flow
Correct answer: Ending cash before financing
This calculation yields the ending cash balance before any short-term borrowing or repayment decisions are made.
Question 5: Which short-term investment is most appropriate for temporarily excess cash that may be needed within 30 days?
- Treasury bills (Correct answer)
- 10-year Treasury bonds
- Corporate bonds rated BBB
- Common stock index funds
Correct answer: Treasury bills
Treasury bills are highly liquid, low-risk, short-duration instruments suitable for parking cash needed in the near term.
Question 6: Which of the following is NOT a component of float in cash management?
- Discount float (Correct answer)
- Mail float
- Processing float
- Availability float
Correct answer: Discount float
Float components are mail float, processing float, and availability (clearing) float; discount float is not a recognized float category.
Question 7: A company's monthly cash budget shows a $50,000 deficit in March. The best first response is to:
- Arrange a short-term line of credit before March (Correct answer)
- Delay paying all vendors indefinitely
- Issue new equity shares immediately
- Increase capital expenditures to generate activity
Correct answer: Arrange a short-term line of credit before March
Proactive planning by securing a credit line before the deficit occurs is a sound cash management response to a forecasted shortfall.
CBS Cash Flow Management 3
Which of the following best describes a zero-balance account (ZBA) in cash management?