AFP Liquidity Management

Question 1

Which of the following best defines liquidity in the context of corporate treasury management?

Accepted Answer

The ability to meet short-term financial obligations as they come due

Answer

Liquidity refers to a company's ability to meet short-term financial obligations on time using available cash or assets that can be quickly converted to cash.

Question 2

The current ratio is calculated as:

Accepted Answer

Current assets divided by current liabilities

Answer

The current ratio equals current assets divided by current liabilities, measuring a company's ability to cover short-term obligations with short-term assets.

Question 3

A quick ratio (acid-test ratio) differs from the current ratio in that it:

Accepted Answer

Excludes inventory and prepaid expenses from current assets

Answer

The quick ratio excludes inventory and prepaid expenses from current assets because these items are less liquid and cannot be quickly converted to cash.

Question 4

Which liquidity management strategy involves concentrating subsidiary cash balances into a single master account?

Accepted Answer

Cash pooling

Answer

Cash pooling consolidates cash balances from multiple subsidiary or regional accounts into a single master account, optimizing interest income and reducing borrowing costs.

Question 5

The cash conversion cycle (CCC) measures:

Accepted Answer

The time from raw material purchase to collection of cash from customers

Answer

The CCC measures the time elapsed from paying for raw materials to receiving cash from customers, encompassing DIO + DSO – DPO.

AFP - Association for Financial Professionals Practice Test

AFP - Association for Financial Professionals Practice Test

AFP Liquidity Management