CFO Treasury Management & Cash Flow 1 — Questions and Answers
Question 1: What is the primary objective of treasury management for a CFO?
- Maximizing long-term capital investment returns
- Ensuring liquidity, managing financial risk, and optimizing cash utilization (Correct answer)
- Increasing the company's credit rating above competitors
- Minimizing the total tax liability across all jurisdictions
Correct answer: Ensuring liquidity, managing financial risk, and optimizing cash utilization
Treasury management focuses on maintaining sufficient liquidity, hedging financial risks, and deploying cash efficiently to support operations and strategic goals.
Question 2: Which metric measures a company's ability to meet short-term obligations using only cash and cash equivalents?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
Correct answer: Cash ratio
The cash ratio (cash and equivalents ÷ current liabilities) is the most conservative liquidity measure, excluding receivables and inventory.
Question 3: The Cash Conversion Cycle (CCC) measures which of the following?
- The time it takes to convert fixed assets into revenue
- The number of days between paying for inventory and collecting cash from customers (Correct answer)
- The average collection period for accounts receivable only
- The time required to complete an annual audit cycle
Correct answer: The number of days between paying for inventory and collecting cash from customers
CCC = DSO + DIO − DPO, representing the net days a company's cash is tied up in the operating cycle from inventory purchase to customer collection.
Question 4: Which short-term instrument is most commonly used by CFOs to invest excess cash while maintaining liquidity?
- 10-year Treasury bonds
- Money market funds (Correct answer)
- Common equity shares
- Real estate investment trusts
Correct answer: Money market funds
Money market funds invest in high-quality, short-duration instruments and offer same-day liquidity with minimal credit risk, making them ideal for corporate cash management.
Question 5: What does liquidity risk represent in the context of treasury management?
- The risk that interest rates will rise unexpectedly
- The risk that a company cannot meet its financial obligations as they come due (Correct answer)
- The risk of currency fluctuations reducing asset values
- The risk that counterparties will default on derivative contracts
Correct answer: The risk that a company cannot meet its financial obligations as they come due
Liquidity risk is the danger that a firm lacks sufficient liquid assets or access to funding to honor its payment obligations when they fall due.
Question 6: Cash pooling allows multinational corporations to:
- Invest subsidiary cash in long-term equity markets
- Consolidate cash balances from multiple entities to minimize idle cash and reduce borrowing costs (Correct answer)
- Eliminate the need for intercompany transfer pricing
- Automatically hedge all foreign currency exposures
Correct answer: Consolidate cash balances from multiple entities to minimize idle cash and reduce borrowing costs
Cash pooling (physical or notional) aggregates subsidiary balances so that surpluses in one entity offset deficits in another, reducing net external borrowing needs.
Question 7: A rolling 13-week cash flow forecast is primarily used by a CFO to:
- Determine the annual capital budget allocation
- Anticipate short-term cash surpluses and deficits to manage liquidity proactively (Correct answer)
- Calculate the weighted average cost of capital
- Prepare the statutory income tax return
Correct answer: Anticipate short-term cash surpluses and deficits to manage liquidity proactively
A 13-week cash forecast provides near-term visibility into inflows and outflows, enabling proactive management of borrowing, investing, and payment timing.
CFO Treasury Management & Cash Flow 1
What is the primary objective of treasury management for a CFO?