CFC Treasury Management & Cash Flow 3 — Questions and Answers
Question 1: A financial controller uses a notional pooling arrangement across five European subsidiaries. Which statement best describes how interest is calculated?
- Each subsidiary earns or pays interest based solely on its own balance
- Interest is calculated on the net combined position without physically moving funds (Correct answer)
- Funds are physically transferred to a master account each night
- Only subsidiaries with positive balances participate in the pool
Correct answer: Interest is calculated on the net combined position without physically moving funds
Notional pooling offsets positive and negative balances mathematically; interest is based on the net position without actual fund transfers.
Question 2: Which ratio directly measures a company's ability to cover current liabilities using only cash and cash equivalents?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Operating cash flow ratio
Correct answer: Cash ratio
The cash ratio (Cash / Current Liabilities) is the most conservative liquidity measure, excluding receivables and inventory.
Question 3: A treasurer wants to lock in the rate on a 3-month SOFR-based loan starting in 6 months. Which derivative is most appropriate?
- Forward rate agreement (FRA) (Correct answer)
- Currency swap
- Equity put option
- Credit default swap
Correct answer: Forward rate agreement (FRA)
An FRA allows a borrower to lock in a specific interest rate for a future loan period, hedging against rate movements.
Question 4: Under ASC 230, which activity classification applies to cash paid for interest on long-term debt?
- Investing activity
- Financing activity
- Operating activity (permitted under US GAAP) (Correct answer)
- Non-cash supplemental disclosure only
Correct answer: Operating activity (permitted under US GAAP)
US GAAP (ASC 230) classifies interest paid as an operating activity, unlike IFRS which permits financing classification.
Question 5: A company's monthly cash burn rate is $2.5M and it holds $12M in unrestricted cash. What is its cash runway?
- 3.0 months
- 4.8 months (Correct answer)
- 6.0 months
- 12.0 months
Correct answer: 4.8 months
Cash runway = $12M ÷ $2.5M/month = 4.8 months before the company exhausts its cash.
Question 6: Which payment mechanism offers same-day irrevocable settlement and is most appropriate for large, time-sensitive corporate payments in the US?
- ACH debit
- Wire transfer (Fedwire) (Correct answer)
- Corporate check
- Virtual card
Correct answer: Wire transfer (Fedwire)
Fedwire transfers provide real-time gross settlement (RTGS), making them irrevocable and ideal for large, urgent payments.
Question 7: What is the purpose of a standby letter of credit (SBLC) in treasury operations?
- To finance the purchase of inventory on open account terms
- To guarantee payment if the applicant defaults on an obligation (Correct answer)
- To convert short-term debt to long-term debt automatically
- To hedge commodity price exposure
Correct answer: To guarantee payment if the applicant defaults on an obligation
An SBLC is a bank guarantee that pays the beneficiary if the applicant fails to perform a contractual obligation.
CFC Treasury Management & Cash Flow 3
A financial controller uses a notional pooling arrangement across five European subsidiaries.
Which statement best describes how interest is calculated?