FIL 340 TEST 2
Three components of the payment system
Payment instrument (cash, card, electronic)
Clearing channel (where payment instrument is moved)
Settlement mechanism (means of transferring value from one party to another)

What is the fastest method to transfer money?
Wire transfer

What are 3 types of collection float?
Mail (1-5 days)
Processing (Efficient; 1 day or less)
Availability (0 to 2 days)

Why do financial executives believe that accelerating collections is the single most important short-term financial management action?
Delayed payments:
Deprive seller of use of money
Result in increased collection costs
Increase risk payment will never be collected

What is float?
Delay in value transfer from time check is written until it is debited from the payor’s account or credited to the payee’s account.

List 3 types of paper check clearing channels.
In-House/On-us checks
Clearing house
Federal Reserve bank
Correspondent bank
Direct send

List 3 methods of monitoring receivables.
DSO
Aging schedule
Uncollected balance %/Accounts Receivable Balance Pattern
Note: A/R turnover also used but does NOT provide more information than DSO Which method is considered by the author to be the best and why?
Uncollected balance percentage
Accurately show’s collection experience
NOT impacted by changes in sales What is a payment system?
A system that transfers value from one party to another. In the banking relationship, the transaction approach involves providing both credit and cash management to corporations. True or False List 4 conditions that indicate when funds from a check may become available for use by a depositor.
1 Drawee bank endpoint
2 Time of deposit relative to depository bank’s ledger cutoff time & deposit deadline
3 Day check is deposited
4 Bank’s availability schedule Describe the Clearing House Interbank Payments System (CHIPS).
Bank-owned, large-dollar funds transfer network
Real-time, intraday net settlement system that clears & settles transactions in U.S. dollars
NOT a true wire transfer system like Fedwire What is the purpose of a payment instrument?
Provide payment instructions.
Who gets paid, how much, where it’s coming from, etc. What are the 3 types of risk in a payment system?
Systemic – failure 1 bank cause others to fail ~ collapse entire payment system
Credit – risk party funding transaction will default
Fraud – risk someone might alter transaction or enter false item ~ loss for disbursing party What are the 5 C’s of Credit and briefly explain them?
1 Character – Integrity; willingness to pay
2 Capacity – CFs; sufficient to pay
3 Capital – Net worth
4 Collateral – Assets guaranteeing payment
5 Conditions – Borrower’s & Economy’s condition What is trade credit?
Credit that arises when goods are sold under delayed payment terms.
Buyer = Accounts payable
Seller = Accounts Receivable List 2 reasons given in class on why companies offer their customers trade credit?
1 Increase level of sales
2 Build goodwill
3 Greater stability because of repeat sales
4 Provide financing to customers What is factoring? What is the difference between recourse and no recourse?
Factoring – outright sale of A/R
Recourse: factor NOT responsible for bad accounts
No recourse: factor responsible for bad accounts

When evaluating a firm’s credit terms the best approach to use is
a) Financial Statement
b) NPV

A/R is
a) an asset for the firm selling its goods.
b) a liability for the firm buying the good.
c) a sales tool for the firm selling its goods.
d) All of the above

A/R management is linked to:
Credit, Billing, Collection

List 1 advantage to