Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

Ananya Textiles Ltd keeps a large cash balance mainly so that it can buy raw cotton at a discount when a supplier unexpectedly offers a bulk clearance sale. Which motive for holding cash does this best illustrate?

The speculative motive. The firm holds cash to exploit unpredictable opportunities, like a discounted bulk cotton purchase, that can earn profit. It is not for routine payments (transactions), not for emergencies (precautionary), and not a bank-required balance (compensation).

  1. ATransactions motive
  2. BPrecautionary motive
  3. CSpeculative motiveCorrect
  4. DCompensation motive

Explanation

Holding cash to take advantage of uncertain bargain opportunities, such as a discounted bulk purchase, is the speculative motive. The transactions motive covers routine payments, and the precautionary motive covers unexpected emergencies, not profit opportunities. The compensation motive relates to balances kept with a bank in return for its services.

Did you get it right without looking?

One question tells you little. A timed set on Management of Cash and Cash Equivalents shows your real accuracy, how long you take and where you lose marks.

Practise Management of Cash and Cash EquivalentsFree diagnostic mock

More Management of Cash and Cash Equivalents questions