CPFM Treasury Management and Cash Flow Forecasting 2 — Questions and Answers
Question 1: Which technique eliminates the need for a company to convert one currency to another when settling intercompany transactions?
- Hedging
- Factoring
- Netting (Correct answer)
- Discounting
Correct answer: Netting
Netting consolidates intercompany payables and receivables so only the net difference is settled, reducing currency conversion costs.
Question 2: A treasury department uses a notional pooling arrangement primarily to:
- Increase credit risk
- Reduce net interest expense by offsetting balances (Correct answer)
- Eliminate all accounts payable
- Accelerate depreciation
Correct answer: Reduce net interest expense by offsetting balances
Notional pooling offsets credit and debit balances across accounts to reduce net borrowing costs without physically moving funds.
Question 3: Which risk arises from the possibility that a counterparty in a financial transaction will fail to meet its obligations?
- Liquidity risk
- Market risk
- Counterparty credit risk (Correct answer)
- Operational risk
Correct answer: Counterparty credit risk
Counterparty credit risk is the risk that the other party in a transaction defaults before the final settlement.
Question 4: In cash forecasting, the direct method differs from the indirect method primarily because it:
- Starts with net income
- Lists actual cash receipts and disbursements (Correct answer)
- Relies solely on the balance sheet
- Excludes operating activities
Correct answer: Lists actual cash receipts and disbursements
The direct method itemizes actual cash receipts and disbursements, providing a more granular view of cash movements.
Question 5: A company enters into a revolving credit facility primarily to:
- Issue new equity
- Provide flexible short-term borrowing access (Correct answer)
- Permanently retire long-term debt
- Fund pension obligations
Correct answer: Provide flexible short-term borrowing access
A revolving credit facility provides flexible, short-term borrowing capacity that can be drawn, repaid, and redrawn as needed.
Question 6: Which ratio is MOST directly relevant to assessing a company's ability to meet immediate cash obligations?
- Debt-to-equity ratio
- Cash ratio (Correct answer)
- Return on assets
- Inventory turnover
Correct answer: Cash ratio
The cash ratio measures the amount of cash and cash equivalents relative to current liabilities, reflecting immediate liquidity.
CPFM Treasury Management and Cash Flow Forecasting 2
Which technique eliminates the need for a company to convert one currency to another when settling intercompany transactions?