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Corporate Liquidity and Cash Management Flashcards

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Read the first 7 Corporate Liquidity and Cash Management flashcards as text

  1. A company's cash conversion cycle (CCC) is calculated as days sales outstanding plus days inventory outstanding minus days payable outstanding. If DSO=45, DIO=30, and DPO=20, what is the CCC?

    Answer: 55 days

    CCC = DSO + DIO - DPO = 45 + 30 - 20 = 55 days.

  2. Which liquidity ratio is considered the most conservative measure of a company's short-term liquidity?

    Answer: Cash ratio

    The cash ratio (cash + cash equivalents / current liabilities) is the most conservative because it excludes receivables and inventory.

  3. A treasury manager wants to reduce idle cash balances while maintaining daily liquidity. Which technique BEST achieves this?

    Answer: Zero balance accounts (ZBAs)

    ZBAs automatically sweep excess cash to a master account daily, minimizing idle balances while maintaining subsidiary account functionality.

  4. Under the Federal Reserve's Regulation CC, which type of check deposit typically has the longest hold period before funds are made available?

    Answer: Non-local checks

    Non-local checks (drawn on banks outside the Federal Reserve check processing region) historically had the longest availability holds under Reg CC.

  5. A corporation's net liquidity position is best defined as:

    Answer: Available credit lines plus cash minus near-term cash requirements

    Net liquidity = available borrowing capacity + cash and equivalents minus near-term cash needs, reflecting true financial flexibility.

  6. Which of the following best describes the purpose of a notional pooling arrangement?

    Answer: To offset credit and debit balances across accounts for interest calculation without moving funds

    Notional pooling calculates interest on the net position of grouped accounts without physically moving funds between them.

  7. When evaluating a company's liquidity risk, which scenario represents a LIQUIDITY TRAP?

    Answer: Excess cash is invested in long-term illiquid securities when short-term needs arise

    A liquidity trap occurs when funds are locked in illiquid investments, leaving a company unable to meet short-term obligations despite having assets.