CFO Treasury Management & Cash Flow 2 — Questions and Answers
Question 1: A revolving credit facility differs from a term loan primarily because it:
- Has a fixed repayment schedule with no flexibility
- Allows a borrower to draw, repay, and re-draw funds up to a committed limit during the facility period (Correct answer)
- Is secured exclusively by the company's real estate assets
- Cannot be used for working capital purposes
Correct answer: Allows a borrower to draw, repay, and re-draw funds up to a committed limit during the facility period
A revolving credit facility provides flexible access to capital — the borrower can draw down and repay repeatedly, making it ideal for managing working capital fluctuations.
Question 2: Which hedging instrument gives a company the right, but not the obligation, to buy or sell foreign currency at a predetermined rate?
- Forward contract
- Cross-currency swap
- Foreign currency option (Correct answer)
- Currency futures contract
Correct answer: Foreign currency option
A foreign currency option provides the right (not obligation) to transact at a set rate, offering downside protection while allowing participation in favorable rate movements.
Question 3: Days Sales Outstanding (DSO) is calculated as:
- (Accounts Receivable ÷ Total Revenue) × 365 (Correct answer)
- Total Revenue ÷ Accounts Receivable
- (Cost of Goods Sold ÷ Inventory) × 365
- Net Income ÷ Total Assets
Correct answer: (Accounts Receivable ÷ Total Revenue) × 365
DSO measures the average number of days to collect payment after a sale; lower DSO indicates faster collections and better cash flow.
Question 4: A letter of credit (LC) issued by a bank in international trade primarily serves to:
- Hedge currency risk on the transaction
- Guarantee payment to the seller upon presentation of compliant shipping documents (Correct answer)
- Provide the buyer with extended credit terms beyond 180 days
- Replace the need for a commercial invoice
Correct answer: Guarantee payment to the seller upon presentation of compliant shipping documents
An LC shifts payment risk from the buyer to the bank — the bank commits to pay the seller once the required trade documents are presented and verified.
Question 5: Which working capital strategy involves deliberately extending the time taken to pay suppliers while staying within agreed credit terms?
- Reducing Days Sales Outstanding
- Supply chain finance / dynamic discounting
- Stretching Days Payable Outstanding (DPO) (Correct answer)
- Accelerating inventory turnover
Correct answer: Stretching Days Payable Outstanding (DPO)
Stretching DPO means paying suppliers at the latest contractually allowable date, preserving cash inside the business for a longer period.
Question 6: A bank sweep account automatically:
- Converts foreign currency deposits into US dollars at market rates
- Moves excess cash above a target balance into a higher-yielding investment account daily (Correct answer)
- Issues commercial paper on behalf of the corporate treasurer
- Calculates and remits payroll taxes to the IRS
Correct answer: Moves excess cash above a target balance into a higher-yielding investment account daily
Sweep accounts move surplus operating cash into overnight or short-term investments each evening, ensuring idle cash earns a return without manual intervention.
Question 7: Which of the following best describes 'counterparty risk' in treasury operations?
- The risk that interest rates move adversely on a fixed-rate bond
- The risk that the other party to a financial contract will fail to fulfill its obligations (Correct answer)
- The risk of commodity price increases affecting raw material costs
- The risk that regulatory changes will invalidate existing contracts
Correct answer: The risk that the other party to a financial contract will fail to fulfill its obligations
Counterparty risk (credit risk) is the possibility that the other party in a transaction — such as a bank on a derivative — defaults before settlement.
CFO Treasury Management & Cash Flow 2
A revolving credit facility differs from a term loan primarily because it: