Capital Management

Question 1

Describe a payment through draft.

Answer 1

Payment is made with a legal instrument, called a “draft”, that is drawn on an account of a bank and is guaranteed payment by the bank. Examples include bank drafts, cashier’s checks, certified checks and money orders.

Question 2

Describe the use of preauthorized checks.

Answer 2

Payment/collection of an amount due through the use of checks that are authorized in advance.

Question 3

Describe the operation of a lock-box system.

Answer 3

Customers remit payments to firm’s post office box where they are collected and then processed and deposited by firm’s bank; may reduce the float by several days.

Question 4

Identify the advantages of using a lock-box system.

Answer 4

1. Cash is available for use sooner than it would be if receipts were routed through the firm
2. Firm’s handling of collections is greatly reduced
3. Reduced likelihood of dishonored checks and earlier identification of those that are.

Question 5

Describe concentration banking.

Answer 5

Funds collected in multiple local banks are transferred regularly and (usually) automatically to firm’s primary bank; used to accelerate the flow of cash to a firm’s principal bank.

Question 6

Describe the uses of zero-balance accounts.

Answer 6

A bank account with no real balance. Two variations exist:

1. Checks written on account overdraw the account, but by agreement with the bank the overdrawn amount is paid automatically from another account.
2. Only the known amount of payments from an account is deposited into the account (e.g., payroll account).

Question 7

Define “float”.

Answer 7

The time between when a payment is initiated and when the related cash is available for use by the recipient.