Certified Treasury Professional Working Capital Management Questions and Answers — Questions and Answers
Question 1: A company has a Days Inventory Outstanding (DIO) of 45 days, a Days Sales Outstanding (DSO) of 35 days, and a Days Payables Outstanding (DPO) of 40 days. What is the company's Cash Conversion Cycle (CCC)?
- 120 days
- 80 days
- 40 days (Correct answer)
- 50 days
Correct answer: 40 days
The Cash Conversion Cycle (CCC) is calculated using the formula: CCC = DIO + DSO - DPO. Using the provided values: CCC = 45 days + 35 days - 40 days = 40 days. This metric represents the number of days it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
Question 2: Which of the following describes an aggressive working capital financing policy?
- Financing all assets with long-term debt and equity.
- Using long-term sources to finance fixed assets and permanent current assets, and short-term sources for fluctuating current assets.
- Maintaining high levels of cash and marketable securities to ensure liquidity.
- Financing a portion of permanent current assets with short-term, lower-cost liabilities. (Correct answer)
Correct answer: Financing a portion of permanent current assets with short-term, lower-cost liabilities.
An aggressive working capital policy involves using a higher proportion of short-term, lower-cost, and riskier financing to fund assets, including a portion of permanent current assets. This approach aims to increase profitability by minimizing the cost of financing but increases liquidity risk.
Question 3: A treasury manager at a manufacturing firm is tasked with optimizing working capital. The company has been experiencing lengthening cash conversion cycles. Which of the following actions would be MOST effective in shortening the cash conversion cycle?
- Increasing the credit period offered to customers from 30 to 60 days.
- Negotiating with suppliers to extend payment terms from 45 to 60 days. (Correct answer)
- Increasing the level of raw material inventory to avoid production stockouts.
- Paying all supplier invoices immediately upon receipt to capture early payment discounts.
Correct answer: Negotiating with suppliers to extend payment terms from 45 to 60 days.
Extending payment terms with suppliers increases the Days Payables Outstanding (DPO). Since DPO is subtracted in the Cash Conversion Cycle formula (CCC = DIO + DSO - DPO), increasing DPO will decrease the CCC. The other options would lengthen the CCC: increasing customer credit periods increases DSO, increasing inventory increases DIO, and paying suppliers immediately decreases DPO.
Question 4: All of the following are primary objectives of accounts receivable management EXCEPT:
- Maximizing the days sales outstanding (DSO). (Correct answer)
- Converting receivables into cash as quickly as possible.
- Establishing and enforcing clear credit policies.
- Optimizing the company's cash flow and liquidity.
Correct answer: Maximizing the days sales outstanding (DSO).
A primary goal of accounts receivable management is to minimize, not maximize, the Days Sales Outstanding (DSO). A lower DSO indicates that a company is collecting its receivables more quickly, which improves cash flow and liquidity. The other options are all key objectives of effective AR management.
Question 5: A company is considering implementing a new inventory management system. Which system is designed to minimize inventory holding costs by receiving goods only as they are needed in the production process?
- Materials Requirements Planning (MRP)
- Economic Order Quantity (EOQ)
- Just-in-Time (JIT) (Correct answer)
- ABC Analysis
Correct answer: Just-in-Time (JIT)
The Just-in-Time (JIT) inventory system is a strategy focused on reducing in-process inventory and associated carrying costs. The goal is to have materials arrive from suppliers at the precise moment they are needed for production, thus minimizing the need to hold stock.
Question 6: Which of the following is a key strategy for optimizing a company's accounts payable process to improve working capital?
- Paying all invoices as soon as they are received to maintain good supplier relationships.
- Forgoing all early payment discounts to keep cash in the company longer.
- Automating the invoice processing and payment systems. (Correct answer)
- Using only paper checks for all supplier payments for better control.
Correct answer: Automating the invoice processing and payment systems.
Automating accounts payable processes can significantly improve efficiency, reduce errors, lower processing costs, and provide better visibility and control over cash outflows. This allows a company to strategically time payments, capture beneficial discounts, and manage its working capital more effectively. While maintaining good supplier relationships is important, paying invoices too early can negatively impact liquidity.
Certified Treasury Professional Working Capital Management Questions and Answers
A company has a Days Inventory Outstanding (DIO) of 45 days, a Days Sales Outstanding (DSO) of 35 days, and a Days Payables Outstanding (DPO) of 40 days.
What is the company's Cash Conversion Cycle (CCC)?