Working Capital Management Flashcards
7 cards from real CTP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Working Capital Management flashcards as text
Which of the following is the BEST measure of a company's short-term liquidity?
Answer: Quick ratio
The quick ratio (cash + marketable securities + receivables divided by current liabilities) measures ability to meet short-term obligations without relying on inventory liquidation.
A company maintains excess cash in a money market fund rather than paying down its revolving credit facility. This decision is MOST justified when:
Answer: Prepayment penalties on the revolver outweigh the interest savings
If prepayment penalties on the revolving credit facility exceed the net interest cost of carrying idle cash, it may be cheaper to retain cash in a money market fund.
What is the PRIMARY benefit of implementing a payment factory in a multinational company's treasury operations?
Answer: It centralizes payment processing to reduce bank fees and improve control
A payment factory centralizes outgoing payments across subsidiaries, achieving economies of scale, reducing banking fees, and strengthening payment controls.
Under the Economic Order Quantity (EOQ) model, ordering costs and carrying costs are EQUAL at the:
Answer: Optimal order quantity
The EOQ is the quantity at which total ordering costs equal total carrying costs, minimizing total inventory costs.
A firm factors its receivables on a recourse basis. Which risk does the firm RETAIN?
Answer: Credit default risk of the customer
With recourse factoring, the seller retains the credit risk; if the buyer defaults, the seller must repurchase the receivable from the factor.
Which working capital financing strategy is MOST aggressive in terms of liquidity risk?
Answer: Financing all current assets with short-term debt
Financing all current assets, including permanent working capital, with short-term debt is the most aggressive strategy and creates significant rollover and liquidity risk.
The primary purpose of a daily cash position report is to:
Answer: Identify surplus or deficit cash to guide same-day investment or borrowing decisions
A daily cash position report aggregates bank balances, expected receipts, and disbursements so treasury can take timely action to invest surplus or cover shortfalls.