CTP Corporate Liquidity and Cash Management 2 — Questions and Answers
Question 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?
- 55 days (Correct answer)
- 95 days
- 65 days
- 75 days
Correct answer: 55 days
CCC = DSO + DIO - DPO = 45 + 30 - 20 = 55 days.
Question 2: Which liquidity ratio is considered the most conservative measure of a company's short-term liquidity?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Operating cash flow ratio
Correct answer: Cash ratio
The cash ratio (cash + cash equivalents / current liabilities) is the most conservative because it excludes receivables and inventory.
Question 3: A treasury manager wants to reduce idle cash balances while maintaining daily liquidity. Which technique BEST achieves this?
- Lockbox banking
- Zero balance accounts (ZBAs) (Correct answer)
- Controlled disbursement
- Positive pay
Correct answer: Zero balance accounts (ZBAs)
ZBAs automatically sweep excess cash to a master account daily, minimizing idle balances while maintaining subsidiary account functionality.
Question 4: Under the Federal Reserve's Regulation CC, which type of check deposit typically has the longest hold period before funds are made available?
- Government checks
- Cashier's checks
- Local checks
- Non-local checks (Correct answer)
Correct 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.
Question 5: A corporation's net liquidity position is best defined as:
- Total assets minus total liabilities
- Cash and equivalents minus short-term debt obligations
- Available credit lines plus cash minus near-term cash requirements (Correct answer)
- Working capital minus capital expenditure commitments
Correct 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.
Question 6: Which of the following best describes the purpose of a notional pooling arrangement?
- To physically transfer cash between subsidiaries daily
- To offset credit and debit balances across accounts for interest calculation without moving funds (Correct answer)
- To automatically invest surplus cash in money market instruments
- To establish a revolving credit facility across multiple currencies
Correct 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.
Question 7: When evaluating a company's liquidity risk, which scenario represents a LIQUIDITY TRAP?
- Excess cash is invested in long-term illiquid securities when short-term needs arise (Correct answer)
- A company draws on its revolving credit facility to fund operations
- A company converts accounts receivable to cash via factoring
- A company issues commercial paper to bridge a timing gap
Correct 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.
CTP Corporate Liquidity and Cash Management 2
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?