Asked by Sarah Gittins on Jul 18, 2024
Verified
Which of the following is the best definition of target cash balance?
A) The costs associated with holding too little cash.
B) An automated teller machine card used at the point of purchase to avoid the use of cash. As this is not a credit card, money must be available in the user's bank account.
C) A chequing account in which a zero balance is maintained by transfers of funds from a master account in an amount only large enough to cover cheques presented.
D) The need to hold cash to satisfy normal disbursement and collection activities associated with a firm's ongoing operations
E) A firm's desired cash level as determined by the trade-off between carrying costs and shortage costs.
Target Cash Balance
The optimal amount of cash that a company aims to maintain to minimize costs while still meeting its financial obligations and avoiding liquidity issues.
Carrying Costs
The total costs associated with holding inventory, including warehousing, insurance, and loss from obsolescence.
Shortage Costs
Expenses incurred when demand exceeds supply, often leading to lost sales or higher production costs.
- Define key terms related to cash management such as target cash balance, zero-balance account, and transaction motive.
Verified Answer
BF
Brandon Family Christian GardenJul 18, 2024
Final Answer :
E
Explanation :
E) A firm's desired cash level as determined by the trade-off between carrying costs and shortage costs is the best definition of target cash balance. It reflects the balance a firm aims to maintain to minimize both the costs of holding too much cash (carrying costs) and the costs of having too little cash (shortage costs).
Learning Objectives
- Define key terms related to cash management such as target cash balance, zero-balance account, and transaction motive.