Chapter 7 Discussion Questions 7-1 In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit? Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available primary concern han the maximum profits 7-2. Briefly explain how a corporation may use float to its ad vantage Float represents the difference between a corporation's recorded cash balances and the amount cred ited to the corporation by the bank. It is the latter item that is of particular interest to us. To the extent a corporation can accelerate check account, the cash balance at the bank may exceed the payments from its bank collections to the bank account and slow down check recorded amount on the company books. The differential or float may be thought of as a short-term source of funds to the corporation 7-3 Why does float exist and what effect do electronic funds transfer systems have on float? Float exists because of the delay time in check processing. Electronic funds transfer, or the electronic movement of funds between computer terminals would eliminate the need for checks and thus eliminate float 7-4 How can a firm operate with a negative cash balance on its corporate books? A firm could operate with a negative balance on the corporate books, as indicated in Table 7-2, knowing float will carry them through at the bank Checks written on the corporate books may not clear until many days later at the bank. For this reason, a negative account balance on the corporate books of $100,000 may still represent a positive balance at the bank CopyrightC2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-241 Chapter 7 Discussion Questions 7-1. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit? Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits. 7-2. Briefly explain how a corporation may use float to its advantage. Float represents the difference between a corporation's recorded cash balances and the amount credited to the corporation by the bank. It is the latter item that is of particular interest to us. To the extent a corporation can accelerate check collections to the bank account and slow down check payments from its bank account, the cash balance at the bank may exceed the recorded amount on the company books. The differential or float may be thought of as a short-term source of funds to the corporation. 7-3. Why does float exist and what effect do electronic funds transfer systems have on float? Float exists because of the delay time in check processing. Electronic funds transfer, or the electronic movement of funds between computer terminals, would eliminate the need for checks and thus eliminate float. 7-4. How can a firm operate with a negative cash balance on its corporate books? A firm could operate with a negative balance on the corporate books, as indicated in Table 7-2, knowing float will carry them through at the bank. Checks written on the corporate books may not clear until many days later at the bank. For this reason, a negative account balance on the corporate books of $100,000 may still represent a positive balance at the bank