Certified Treasury Professional Corporate Liquidity and Cash Management Questions and Answers — Questions and Answers
Question 1: A treasury manager at a multinational corporation is tasked with investing a significant, temporary cash surplus. The primary objective is capital preservation, followed by liquidity, with yield being a secondary concern. Which of the following short-term investment vehicles is MOST appropriate?
- Commercial Paper
- U.S. Treasury Bills (Correct answer)
- Actively Managed Corporate Bond Fund
- Auction Rate Securities
Correct answer: U.S. Treasury Bills
U.S. Treasury Bills (T-Bills) are short-term debt securities backed by the full faith and credit of the U.S. government, making them one of the safest investments available. They are highly liquid and align perfectly with the primary objective of capital preservation. Commercial paper carries credit risk, an actively managed fund has market risk, and auction rate securities have liquidity risk.
Question 2: A company is experiencing a lengthening of its cash conversion cycle. Which of the following is the most likely cause?
- A decrease in the days inventory outstanding (DIO).
- An increase in the days payables outstanding (DPO).
- An increase in the days sales outstanding (DSO). (Correct answer)
- Negotiating early payment discounts with suppliers.
Correct answer: An increase in the days sales outstanding (DSO).
The cash conversion cycle (CCC) is calculated as DIO + DSO - DPO. An increase in the days sales outstanding (DSO) means it is taking longer to collect cash from customers, which directly lengthens the CCC. A decrease in DIO or an increase in DPO would shorten the CCC.
Question 3: Which of the following cash flow forecasting methods is best suited for short-term (e.g., daily or weekly) liquidity planning and relies on projecting specific cash receipts and disbursements?
- The receipts and disbursements method (Correct answer)
- The pro forma balance sheet method
- The statistical (stochastic) method
- The indirect method based on net income
Correct answer: The receipts and disbursements method
The receipts and disbursements method, also known as the direct method, is a detailed, bottom-up approach that forecasts specific cash inflows (like customer payments) and outflows (like payroll and supplier payments). This level of detail makes it ideal for managing short-term liquidity. The other methods are generally used for medium- to long-term forecasting.
Question 4: A treasury department is implementing a cash management system to concentrate funds from multiple domestic bank accounts into a single master account. This practice is primarily aimed at achieving which of the following objectives?
- Increasing the credit rating of the company.
- Simplifying the supplier payment process.
- Minimizing idle cash balances and optimizing investment returns. (Correct answer)
- Reducing foreign exchange exposure.
Correct answer: Minimizing idle cash balances and optimizing investment returns.
Cash concentration systems pool funds from various accounts into one central account. This allows a company to have a better view of its overall cash position, minimize idle (non-earning) cash left in disparate accounts, and more effectively invest larger sums to achieve better returns or pay down debt.
Question 5: In the context of working capital management, which of the following is defined as current assets minus current liabilities?
- Operating cash flow
- Gross working capital
- Net working capital (Correct answer)
- Quick ratio
Correct answer: Net working capital
Net working capital is the measure of a company's liquidity and operational efficiency. It is calculated as current assets less current liabilities. A positive net working capital indicates a company can meet its short-term obligations. Gross working capital refers only to the total current assets.
Question 6: A company's treasurer is evaluating strategies to improve liquidity. Which of the following actions would most directly and quickly increase the company's available cash?
- Repurchasing company stock.
- Extending more lenient credit terms to customers.
- Factoring accounts receivable. (Correct answer)
- Increasing raw material inventory levels.
Correct answer: Factoring accounts receivable.
Factoring involves selling accounts receivable to a third party (a factor) at a discount. This action converts a non-cash asset (receivables) directly into cash, providing an immediate liquidity boost. Extending lenient credit terms would slow down cash collections, while repurchasing stock and increasing inventory are uses of cash, not sources.
Certified Treasury Professional Corporate Liquidity and Cash Management Questions and Answers
A treasury manager at a multinational corporation is tasked with investing a significant, temporary cash surplus.
The primary objective is capital preservation, followed by liquidity, with yield being a secondary concern.
Which of the following short-term investment vehicles is MOST appropriate?