CCA CCA Treasury & Cash Management 1 — Questions and Answers
Question 1: What is the primary objective of corporate cash management?
- To maximize the amount of cash held in checking accounts
- To optimize liquidity by ensuring sufficient cash to meet obligations while minimizing idle cash balances (Correct answer)
- To eliminate all short-term borrowing
- To maintain cash balances equal to one year of operating expenses
Correct answer: To optimize liquidity by ensuring sufficient cash to meet obligations while minimizing idle cash balances
Cash management balances having enough liquidity to meet obligations against the opportunity cost of holding excess idle cash that could be invested or used to reduce debt.
Question 2: What is a cash conversion cycle (CCC), and what does a shorter CCC indicate?
- The time to convert fixed assets to cash; shorter means faster asset turnover
- The time it takes to convert investments in inventory and receivables into cash; shorter means better liquidity management (Correct answer)
- The number of days to complete a bank reconciliation; shorter means more accurate books
- The duration of a company's operating cycle; shorter means lower revenues
Correct answer: The time it takes to convert investments in inventory and receivables into cash; shorter means better liquidity management
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding; a shorter CCC means the company converts its working capital into cash more quickly.
Question 3: Which of the following best describes a lockbox system?
- A secure vault for storing negotiable instruments
- A bank-operated collection system where customers mail payments directly to a bank PO box to accelerate deposit processing (Correct answer)
- A software tool for reconciling bank statements
- A method of securing online banking credentials
Correct answer: A bank-operated collection system where customers mail payments directly to a bank PO box to accelerate deposit processing
A lockbox system uses a bank-operated post office box to collect and process customer payments immediately, reducing float and accelerating the availability of funds.
Question 4: What is 'float' in the context of cash management?
- The interest rate earned on short-term investments
- The difference between the cash balance shown on the bank statement and the company's book balance due to processing delays (Correct answer)
- Excess cash held in money market accounts
- The premium paid for currency hedging instruments
Correct answer: The difference between the cash balance shown on the bank statement and the company's book balance due to processing delays
Float is the delay between when a payment is made and when it clears the banking system, creating a difference between book and bank cash balances.
Question 5: A company uses zero-balance accounts (ZBAs) in its cash management system. What is the primary benefit?
- Earning higher interest rates on operating account balances
- Centralizing excess funds in a master account while maintaining separate sub-accounts for disbursements that are funded automatically on demand (Correct answer)
- Eliminating the need for bank reconciliations
- Reducing the number of banking relationships required
Correct answer: Centralizing excess funds in a master account while maintaining separate sub-accounts for disbursements that are funded automatically on demand
ZBAs allow companies to centralize idle cash in a master concentration account while subsidiary accounts are automatically funded only as checks are presented, optimizing cash utilization.
Question 6: What type of short-term investment is most appropriate for a corporate treasurer seeking maximum liquidity and minimal credit risk?
- Corporate bonds with 2-year maturities
- US Treasury bills (T-bills) (Correct answer)
- Equity mutual funds
- Certificates of deposit with 5-year maturities
Correct answer: US Treasury bills (T-bills)
T-bills are backed by the US government (minimal credit risk), are actively traded (maximum liquidity), and have short maturities suitable for cash management.
CCA CCA Treasury & Cash Management 1
What is the primary objective of corporate cash management?