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Diagnostic Tests - Questions and Answers ACCA Paper F9: Financial Management
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ACCA Paper F9: FINANCIAL MANAGEMENTDiagnostic Tests - Questions and Answers
SAMPLE TOPIC COVERED: Cash Management
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+AddVance Study Material
Data Map
Copyright StatementEnvironmental NoticeContentsFor the ladies onlyElectronic links Icons within this E-bookTest your knowledge now!
Syllabus Study guideThe structure of the syllabus A. Financial management functionIntellectual levels B. Financial management environmentLearning hours C. Working capital managementGuide to exam structure D. Investment appraisalGuide to examination assessment E. Business financeAim F. Cost of capitalMain capabilities G. Business valuationsRelational diagram of main capabilities H. Risk management
RationalDetailed syllabusApproach to examining the syllabus
ToolsPV tableAnnuity tableFormulae sheetSymbols and notations
Diagnostic Test Topics1. Financial management function2. Financial analysis3. Financial management environment4. Working capital Management5. Cash management6. Capital investment appraisal7. Nature and role of financial markets and institutions8. Business finance9. Cost of capital
10. Business and asset valuation11. Risk management
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ACCA Paper F9Financial Management (FM)
Diagnostic Test Practice Questions & Answers
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Contents
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Tony Surridge +AddVance Study Materials
ACCA F9 Diagnostic Tests Practice Questions and Answers
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ACCA Paper F9
Financial Management
Diagnostic Test:
Cash managementQuestions
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Question 1What are the FOUR main responsibilities of the finance manager?
(4 marks)
Question 2
Strategic financial management in a company is concerned withTHREE key decisions. What are they? (3 marks)
Question 3List FIVE responsibilities of a 'Cash manager' working in a largecompany. (5 marks)
Question 4Write a formula which describes liquidity? (1 mark)
Question 5List FOUR categories of revenue expenses. (4 marks)
Question 6List the FOUR main business motives for holding cash. (4 marks)
Question 7One model used for forecasting cash is the 'Receipts and Payments Forecast'. List the SIX stagesinvolved in this model. (6 marks)
Question 8
Give THREE possible reasons for surplus cash. (3 marks)
Question 9When the cash forecast shows surplus funds, plans are needed for putting them to use. List EIGHTfactors to be considered before investing these funds. (8 marks)
Question 10Different investments bring different yields. ListTHREE main factors that influence the level ofyield. (3 marks)
Question 11List FIVE short-term investments that a companymight make with temporary cash surpluses. (5 marks)
Question 12In addition to deciding how much cash to hold in total and where spare cash should be invested, acompany must decide upon the proportion held as liquidcash. List FOUR factors which influence thisdecision. (4 marks)
Question 13One model for determining the optimal cash balance is the 'economic quantity' model ('Baumol'model). State the equation which makes up this model. (2 marks)
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Brush up your knowledge byworking through smallquestions. Large questionsare made up of small parts
Question 14XYZ Company has a high investment of some $12m in short-term securities, which currently earn anaverage return of 5.4% per annum, or 0.45 percent for a one-month period (i). The company's finance
director estimates a cash need of $2,000,000 (P) over a one-
month period where the cash is expected to be dispersed at aconstant rate. The transaction fee (T) each time money iswithdrawn from the short-term securities is $200.
Calculate, by using the Baumol model:
(a) the optimal transaction size (withdrawal lot size) (Q);(2 marks)
(b) the average cash balance; and (1 mark)
(c) the number of transactions which the company shouldmake during the month. (1 mark)
Question 15D Company expects to have a steady demand for cash for the next year amounting to $800,000. Thetransaction cost associated with selling marketable securities or borrowing each time the firm needs toreplenish its cash balances is $100. The company's opportunity interest rate is 8 percent per year.
Required:
(i) Calculate D Company's optimum transaction size (in $s). (2 marks)
(ii) Calculate the approximate number of transactions made each year, and their total cost.(1 mark)
(iii) Suppose the company's opportunity interest rate increases from 8 percent to 10 percent. Calculatethe revised optimum transaction size, and the total cost of transactions over the next year.
(2 marks)
(iv) Now suppose transaction costs increase from $100 to $150 but the interest rate remains 8 percent.Calculate the revised optimum transaction size, and the total cost of transactions over the year.
(2 marks)
The following formula should be used:
)securitiesmarketableonforegonereturnof(ratecashholdingofcostyopportuniti
borrowingorsecuritiessellingofactionper transcostsfixedT
periodspecifiedover thectionsfor transaneededcashnewnetofamounttotalP
accountcashsfirm'thetotransfertofundsofamountoptimalQ:
i
TxPx2
=
=
=
=
=
Where
Q
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Question 16
The last 50 day period had been analysed to determine the cash balance positions for XYZ Company.The analysis showed the following pattern of cash balances (to the nearest $2,000):
Days $5 12,000
10 14,00020 18,0008 22,0007 24,000
50
You are requiredto calculate:
(a) the probability distribution for the cash position over the 50-day period; (2 marks)
(b) the 'expected' (arithmetic mean) cash balance for any day; (2 marks)
(c) the daily variance of cash flows. (2 marks)
(d) the standard deviation of cash per day. (1 mark)
For parts (c) and (d) you are to use the following formula:
Calculations are to be to the nearest $1.
Question 17Describe how the Miller-Orr model attempts to provide an approach to cash management
(2 marks)
Question 18The Miller-Orr model is based on a 'return point'. State the formula by which the return point iscalculated. (1 mark)
Question 19
State the formula for the 'spread' of daily cash (used in the Miller-Orr model). (2 marks)
FOR YOUR INTEREST ONLY: NOT EXAMINABLE. This question will help you understand the dailyvariance that is used in the Miller-Orr model.
( )
balancecashdailymeancarithmetrix
balancecashactualx
balancecashactualtheofyprobabilitp
rootsquare
balancecashdailytheofdeviationstandard:Where
2x-xp
=
=
=
=
=
=
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Question 20Using the logic of Miller-Orr state the formula for the upper limit of daily cash. (1 mark)
Question 21
Data is provided for XYZ Company which use the Miller-Orr cash model for treasury purposes.
- The company's policy is to operate with a minimum cash balance of $8,000.- The fixed transaction cost for buying and selling securities is $12.- The opportunity interest rate on short-term securities is 0.028 per cent per day.- The companys daily cash variance is $14,393,600, equivalent to a standard deviation of $3,794.
You are required to calculate:
(a) the company's upper limit of daily cash balance; (3 marks)(b) the cash 'return point; (1 mark)
which can then be used as a decision rule by the company's treasury management.
Question 22Briefly describe the steps necessary to use the Miller-Orr model. (3 marks)
Question 23A companys cash forecast shows a serious cash deficit, even though the company has a good profitforecast. List FIVE ways that plans may be implemented to improve the future cash flow.
(5 marks)
Question 24Antro Company is thinking of purchasing new plant and machinery. With this new plant andmachinery, the company expects sales to increase from $16,000,000 to $20,000,000.
Management know that the company's assets, debtors and accrued expenses vary directly with sales. Thecompany's after-tax profit margin on sales is 8 percent, and management plans to pay 40 percent of its after-tax earnings in dividends. The company's currentbalance sheet is given below.
Balance Sheet$'000
Current assets 6,000Non-current assets 24,000Total assets 30,000
Accounts payable 8,000Accrued expenses 2,000Long-term debt 6,000Ordinary share capital 4,000Retained earnings 10,000Total liabilities and net worth 30,000
You are required toprepare an estimated balance sheet for the year after acquiring the new plant
and machinery and to determine the additional funds needed by the company by the end of that year.(4 marks)
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Question 25The following sales budget is given for Saspong Company for the second quarter of 2009.
April May June TotalSales budget $90,000 $100,000 $120,000 $310,000
Credit sales are collected as follows: 70 percent in month of sale, 20 percent in month following sale, 8percent in second month following sale, and 2 percent bad debts. The accounts receivable balance at thebeginning of the second quarter is $36,000, of which $7,200 represents uncollected February sales, and$28,800 represents uncollected March sales.
You are required to:
(a) calculate the total sales for February and March. (3 marks)
(b) calculate the budgeted cash receipts from sales for April, May and June. Without prejudice to
your answer at (a), assume February sales equal $80,000 and March sales equal $100,000.(4 marks)
Question 26
The treasurer of Ernhar Company plans for the company to have a cash balance of $182,000 on1st June. Sales during June are estimated at $1,800,000. May sales amounted to $1,200,000 and Aprilsales amounted to $1,000,000. Cash payments for June have been budgeted at $1,160,000. Cashcollections have been estimated as follows: 60 percent of the sales for the month to be collected during themonth, 30 percent of the sales for the preceding month to be collected during the month, and 8 percent ofthe sales for the second preceding month to be collected during the month.
The treasurer plans to accelerate collections by allowing a 2 percent discount for prompt payment. Withthe discount policy, she expects to collect 70 percent of the current sales and will permit the discountreduction on these collections. Sales of the preceding month will be collected to the extent of 15 percentwith no discount allowed, and 10 percent of the sales of the second month will be collected with no discountallowed. This pattern of collection can be expected in subsequent months. During the transitional monthof June, collections may run somewhat higher. However, the treasurer prefers to estimate collections onthe basis of the new patterns so that estimates will be somewhat conservative.
You are required to:
(a) estimate cash collections (receipts) for June and the cash balance at 30th June under the present policy;(3 marks)
(b) estimate cash collections for June and the cash balance at 30th June according to the new policyallowing discounts; and (3 marks)
(c) Advise the company whether the discount policy is economically worthwhile. (1 mark)
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Question 27
Elizabeth Stores wants to estimate cash payments (disbursements) for cash budgeting purposes for the first3 months of 2011 from the data given below.
(i) Cost of merchandise sold, estimated
2010: December $450,0002011: January $500,000
February $560,000March $420,000
The cost of merchandise is to be paid for as follows: 35 percent in the month of sale and 65 percent inthe following month.
(ii) Wages for each month are estimated as follows:
2010: December $46,0002011: January $52,000
February $62,000March $50,000
All wages are paid as incurred.
(iii) Other expenses are to be paid every other month at the amount of $640 per month. The first paymentis to be made in February.
(iv) Six months' rent and insurance amounting to a total of $19,400 is to be paid in January.
(v) Corporation tax of $25,000 is to be paid in March.
(vi) Depreciation on equipment has been estimated at $15,000 for the year.
(vii) New equipment costing $100,000 is to be acquired in February, with a down payment of $8,000required at the date of purchase. The balance is to be paid in April using a 6%, 2-year loannegotiated with the bank. Repayment is by monthly payments of capital plus interest.
(viii) Other operating expenses have been estimated at $4,500 per month, which are to be paid each
month.
You are required toprepare a cash payments budget for each of the first 3 months of 2011. (7 marks)
Question 28Companies experience cash flow problems (deficit cash) for various reasons. List FIVE reasons.
(5 marks)
Question 29Define the term 'float' (as it relates to cash management practice). (1 mark)
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Question 30Describe THREE reasons why there may be a lengthy float. (3 marks)
Question 31Describe SIX ways the float could be reduced. (6 marks)
- END -
End of the Diagnostic Testbased on Cash management
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ACCA Paper F9
Financial Management
Diagnostic Test:
Cash managementAnswer Guides
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Answer to Question 1The work of financial management includes the following.
1. The maintenance and production of statutory accounts.2. The provision of management accounting and management accounting information services.
3. Treasury management and strategic financial decisions.4. Internal audit (probably reporting to the 'Audit Committee')
Answer to Question 21. How funds should be invested.2. How to obtain such funds.
3. Dividend policy.
Answer to Question 31. Cash budgeting; daily, weekly, monthly, quarterly, annually and possibly longer term.2. Cashier's duties of making transactions payments to suppliers and paying wages, etc.3. Banking receipts.4. The management of short-term marketable securities (e.g. investing short-term surplus funds).5. Advising senior management of forecast cash deficit balances and advising on ways to deal
with this problem.
Answer to Question 4
Liquidity = Cash + Current account + Sight deposits + Short-term securities(cheque account)
Answer to Question 51. Material inputs2. Labour wages3. Direct expenses4. Overhead expenses
Bouncing cheque!
Click and bounceback to the question
screen
When the going gets tough, the tough get going.
Kennedy family motto
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Answer to Question 61. Transactions motive.2. Finance motive - repay loans, finance acquisition of assets.3. Precautionary motive - a cushion to meet unplanned spending.4. Speculation motive - to take advantage of short-term investment opportunities.
Answer to Question 71. Decide the budget period.2. Forecast sales for the budget period (usually month by month).3. Estimate ALL cash receipts (time lag to convert receivables to cash, and other cash receipts).4. Estimate ALL cash payments (supplies of raw materials, and other purchases and payments).5. Compute net cash flow per period within the budget period (often monthly).6. Develop a cash summary.
Answer to Question 81. Over funding.2. A reduction in operating assets (the sale of assets).3. A surplus of retained earnings over the increase in net assets employed.
Answer to Question 9Factors to consider are:1. the amount of funds available;2. the period for which funds are available;3. alternative yields that can be obtained;4. expectation of future interest rates;5. risk that unexpected liquidity will be required;6. tax considerations (different investment have different tax implications);7. risk and return from the investment; and8. does the company have outstanding borrowings that could be repaid early
(from the cash available).
Answer to Question 101. Risk.2. Term.3. Marketability (or realisability)Note:The lower the risk, the lower the yield (and vice versa).The longer the term, the higher the yield (and vice versa).Investments which cannot be realised (sold) quickly offer higher yields than those which can.
Answer to Question 111. Reduce its bank overdraft.2. Invest in deposit account(s) (retail bank or investment [merchant] bank).3. Invest in term deposit(s), probably linked to 'Certificate of Deposit'.4. Buy government or local authority loans/securities, such as Treasury bills (TBs).5. Invest in other money-market instruments, such as Certificates of deposit (CDs).
Every path has its puddle.
English proverb
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Answer to Question 12Four factors which influence the decision are:
1. the rate of interest earned from short-term investments (a higher rate will mean a greater cost ofkeeping money in a current account);
2. the cost of transferring money between the short-term investments and the current account (a highercost will mean that more money should be kept in the current account so that less frequent transfersare required);
3. the uncertainty of cash requirement (if there is a great volatility in daily cash flows then more moneywill be needed in the current account);
4. the consequence of running out of liquid resources (if these are serious then more liquidcash should be held).
Answer to Question 13
Answer to Question 14
(a) Optimum transaction size
(b) Average cash balance$421,637/2 = $210,819
(c) Number of transactions$2,000,000/$421,637 = 5
)securitiesmarketableonforegonereturnof(ratecashholdingofcostyopportuniti
borrowingorsecuritiessellingofactionper transcostsfixedT
periodspecifiedover thectionsfor transaneededcashnewnetofamounttotalP
accountcashsfirm'thetotransfertofundsofamountoptimalQ:i
TxPx2
=
=
=
=
=
Where
Q
$421,637
0.00450.45/100
0.0045
$200x$2,000,000x2 **
=
===Q
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Answer to Question 15The following formula should be used:
(i) D Company's optimal transaction size
(ii) Number of transactions made each year
No of T = P/Q = $800,000/44,722 = approx. 18 transactionsTotal transaction cost = 18 x $100 = $1,800
(iii) Revised optimal cash balance: interest rate at 10%
(iv) Revised optimal cash balance: transaction cost at $150
)securitiesmarketableonforegonereturnof(ratecashholdingofcostyopportuniti
borrowingorsecuritiessellingofactionper transcostsfixedT
periodspecifiedover thectionsfor transaneededcashnewnetofamounttotalP
accountcashsfirm'thetotransfertofundsofamountoptimalQ:i
TxPx2
=
=
=
=
=
Where
Q
$44,722
0.08
$100x$800,000x2
=
=Q
$2,000
$100x$40,000
$800,000:onstransactiofCost
$40,000
0.1
$100x$800,000x2
=
=
=Q
$2,191
$150x$54,773
$800,000:onstransactiofCost
$54,773
0.08
$150x$800,000x2
=
=
=Q
To a certain extent, a little blindness is necessary when you undertake a risk.
Bill GatesMicrosoft founder
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Answer to Question 16
(a) The probability distribution is as follows:$ p
12,000 0.10* (i.e. 5/50)14,000 0.20 (i.e. 10/50)18,000 0.40 (i.e. 20/50)22,000 0.16 (i.e. 8/50)24,000 0.14 (i.e. 7/50)
1.00
Workings for (b), (c) and (d):
-12,000 0.10 1,200 (6,080) 36,966,400 3,696,64014,000 0.20 2,800 (4,080) 16,646,400 3,329,28018,000 0.40 7,200 ( 80) 6,400 2,56022,000 0.16 3,520 3,920 15,366,400 2,458,62424,000 0.14 3,360 5,920 35,046,400 4,906,496
1.00 18,080 Daily variance = 14,393,600
(b) The 'expected' cash balance for any day is $18,080.
(c) The daily variance of cash flows is $14,393,600.
(d) The standard deviation of cash per day is:
Note: The standard deviation () is not required in the Miller-Orr model, but it is worth remembering that thevariance is 2 (i.e. in this case $3,7942 = $14,393,600) if the examiner gets you to calculate it this way.
=x
( ) ( ) ( ) 22 xxpxxxxxppx
$3,794say8,$3,793.8890$14,393,60Variance ===
If you need helpunderstanding what a
variance is then click here.
Slow and steady wins the race.
Aesop, c. 620 560 B.C.The Hare and the Tortoise
HELP
* 5/50 = 0.1
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Answer to Question 22
The steps involves in using the Miller-Orr model are as follows.
1. The minimum level of cash is set, as a policy. This may be zero, or it may be set at some safetymargin above zero.
2. The variance of cash flows is estimated. This can be calculated by using sample observations for anumber of days past.
3. Estimate/determine both the opportunity interest rate and the fixed transaction cost for each sale orpurchase of securities.
4. Compute the 'spread' between the upper and minimum levels and use it to calculate the 'return point'and the upper level.
5. Implement the limits strategy. When the upper limit is reached invest enough funds in short-termsecurities to bring the cash level to the 'return point'. When the minimum level is reached drawsufficient funds from short-term securities to bring the cash balance to the 'return point'.
Answer to Question 23
1. Delay selected payments.2. Reduce or cancel selected discretionary purchase payments.3. Fund forecast capital purchases from other sources, such as leases where applicable.4. Liquidate short-term marketable securities or other short-term assets.
5. Reduce working capital investment (shorten the working capital cycle).
Answer to Question 24
Antro Company
Estimated Balance Sheet (at end of first year)
Present level % of sales Projected level(based on sales of $20m)
$m $m
Non-current assets 24 150.0 30.0Current assets: 6 37.5 7.5Current liabilities:
accounts payable (8) 50.0 (10.0)accrued expenses (2) 12.5 ( 2.5)
Net assets employed 20 25.0
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Answer to Question 24 (continued)
Antro CompanyEstimated Balance Sheet (at end of first year) (continued)
Present level % of sales Projected level(based on sales of $20m)
$m $mCapital represented by:Long term debt 6 n.a. 6.0Ordinary share capital:
issued capital 4 n.a. 4.0retained earnings 10 n.a. 10.96 (note 1)
Total funds provided 20 20.96Additional funds required 4.04Total funds required 25.00
Note 1Retained earnings
$mProfit for the period ($20m x 0.08) 1.60Lessdividends, this period ($1.6m x 0.4) 0.64To retained earnings 0.96Addbrought forward retained earnings 10.00Retained earnings balance 10.96
CONCLUSION: The additional funds required are $4,040,000.
Answer to Question 25(a)
(b) Cash collectionsApril May June
$ $ $February ($80,000 x 0.08) 6,400March ($100,000 x 0.2) 20,000
($100,000 x 0.08) 8,000April ($90,000 x 0.7) 63,000
($90,000 x 0.2) 18,000($90,000 x 0.08) 7,200
May ($100,000 x 0.7) 70,000($100,000 x 0.2) 20,000June ($120,000 x 0.7) 84,000
89,400 96,000 111,200
00096,$30%
$28,800salesMarch
$28,800sales)(of30%70%)-(100%salesMarch
AprilMarch
$72,00010%
$7,200salesFebruary
$7,200sales)(of10%20%)-70%-(100%salesFebruary
AprilMarchFebruary
==
==
==
==
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Answer to Question 26(a) and (b) (a) (b)
Cash collection Cash collectionunder the present policy under the discount policy
$ $Opening balance at 1st June 182,000 182,000Collections:
from June sales 1,080,000 ($1,800,000 x 0.6) 1,234,800 (note 1)from May sales 360,000 ($1,200,000 x 0.3) 180,000 ($1,200,000 x 0.15)from April sales 80,000 ($1,000,000 x 0.08) 100,000 ($1,000,000 x 0.10)
Total cash available 1,702,000 1,696,800Lesscash payments 1,160,000 1,160,000Balance at 30th June 542,000 536,800
Note 1$1,800,000 x 0.7 x 0.98 = $1,234,800
(c) No, the policy is not economically worthwhile, since, under the discount policy, the 30th June cashbalance will be smaller. It seems that the discount will not increase the level of sales and willcause an increase in bad debts from 2% to 5%.
Answer to Question 27
Elizabeth StoresCash Payments Budgetfor 3 months January - March 2011
January February March Total
$'000 $'000 $'000 $'000Payments for variable materials:35% current month 175.0 196.00 147.0 518.0065% preceding month 292.5 325.00 364.0 981.50
Total payments for variable materials 467.5 521.00 511.0 1,499.50Wages 52.0 62.00 50.0 164.00Other expenses 0.64 0.64Rent and insurance 19.4 19.40Corporation tax 25.0 25.00Equipment, down payment 8.00 8.00Other operating expenses 4.5 4.50 4.5 13.50Total payments 543.4 596.14 590.5 1,730.04
Notes: 1. Depreciation does not affect cash flow.2. The bank loan is not taken out until April 2011.
If you need help followingthe payment pattern forvariable materials then
click here.
HELP
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Answer to Question 28Companies experience cash flow problems for the following reasons.
1. The company is continually trading at a loss.2. Because the company is growingand needs to increase its working capital and acquire more fixed
assets.3. When a business has seasonalor cyclicalsales, and for example needs to build inventory for a period
before a sales period.4. In a period of inflationthe company will need ever-increasing amounts of cash to replace used-up and
worn-out assets.5. When the company needs to spend money on one-offitems of expenditure, such as the redemption of
a loan.
Answer to Question 29Floatdescribes the amount of money tied up (usually in the form of cheques) between the time whena payment is initiated (for example when a debtor posts a cheque) and the time when the funds become
available for use in the recipient's bank account. It includes the amount of transactions (cheques, etc.) intransit between banks and not yet credited.
Answer to Question 30Reasons why there may be a lengthy float include:
1. The time taken by a bank to clear a cheque (clearance delay).2. Transmission delay (such as the period of time the money is held in the postal system, which is
longer for overseas post.)3. Delay in the recipient banking the payments received (lodgement delay).
Answer to Question 31There are several measures that could be taken to reduce the float.
1. The recipient could ensure that the lodgement delayis kept to a minimum. (For example bypresenting cheques to the bank on day of receipt.)
2. For regular payment, standing ordersor direct debitsmight be used.
3. In certain circumstances bank cardsor credit cardsmay be used to receive payments.
4. BACS (Bankers' Automated Clearing Services Company)is a banking service which provides for
the computerised transfer of funds between banks (e.g. the payer's bank and the recipient's bank).The payer (customer) is required to supply a disk to BACS, which contains details of payments, andpayment will then be made in two days.
5. CHAPS (Clearing House Automated Payments System)is a computerised service for banks to makesame-dayclearances between each other. Each member bank of CHAPS can allow its corporatecustomers to make immediate transfer of funds through CHAPS. However, there is a largeminimum size of payment using CHAPS.
6. The recipient might, in some cases, arrange to collect chequesfrom the payer's premises.This is only practicable if the payer is local.
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Score sheet:Diagnostic Test: Cash management
Questionnumber Marksavailable Score
1 4
2 3
3 5
4 1
5 4
6 4
7 6
8 3
9 8
10 3
11 5
12 4
13 2
14 4
15 7
16 7
17 2
18 1
19 2
20 1
Total score c/fwd
Questionnumber Marksavailable Score
Total score b/fwd
21 4
22 3
23 5
24 4
25 7
26 7
27 7
28 5
29 1
30 3
31 6
Total
score128
Percentage (%)
91 128 marks 65 90marks 0 64 marks
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Measure of dispersion: VARIANCE
The extent of dispersion of a given value is reflected in the extent of its deviation from the average (mean)value of all the items. Take the following two examples:
Example 1 Example 2Value Deviation Deviation2 Value Deviation Deviation2
from average from average4 - 1 1 11 +6 366 +1 1 3 - 2 45 0 0 1 - 4 16
15 2/2 = 1 15 56/2 = 28Variance = 1 Variance = 28
The average is 5 (15/3) The average is also 5 (15/3)
The averages are the same but the dispersions are different. By virtue of the definition of the mean the sum ofthe deviations will be zero (e.g. in Example 1, - 1 + +1), but if we square the deviations (as shown in the thirdcolumn of each example), because all the squared items will be positive, the sum will be non-zero. If this sum
is divided by one less than the number of items, i.e. 2 in both examples (the reason for this is not discussedhere) a representative measure of dispersion is obtained. This is known as the variance and its square root isknown as the standard deviation. Although not strictly the full picture, it does give us as idea of what avariance is. The calculations are slightly different when probabilities are involved, as in the case of XYZCompany. It is worth remembering that variances can have very high values.
Return
If two line on a graph cross, it must be important.
Ernest F.CookeUniversity of Baltimore
Remark to a student, February 1985
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Payments for variable materials.
Lets produce a matrix to see the pattern of payments:
Month that variable material(merchandise) is used Cost of materials Month of payment
January February March$000 $000 $000 $000
December 450 (x 0.65) 292.5January 500 (x 0.35) 175.0 (x 0.65) 325February 560 (x 0.35) 196 (x 0.65) 364March 420 (x 0.35) 147
467.5 521 511Return
How often have I said to you that when you have eliminated theimpossible, whatever remains, however improbable, must be the truth.
Sherlock Holmes
Arthur Conan Doyle, 1859 - 1930
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