CFA Practice Question

There are 120 practice questions for this study session.

CFA Practice Question

True or False? Peterson Products uses a zero-balance account for cash management purposes. McLeod Enterprises does not. If the firms are otherwise identical, one would expect McLeod to maintain a larger total cash safety stock than Peterson.
Correct Answer: True

Since Peterson uses a zero-balance account, it doesn't need to have a safety stock of cash in each of its accounts (as McLeod does). Peterson carries a safety stock only in its master account.

User Contributed Comments 3

User Comment
yu0825 What is safety stock off case? I think this case is true just because if a company has zero-balance account, the company will have higher risk. Please someone explain?
zeiad yes please some one explain
IvanTG Zero-balance account does not carry any balance, hence the name. Any checks written against this account will clear by an instant transfer from the master account. Company uses less cash by doing so...(assuming the fees associated with this type of account aren't much higher)
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