FA Treasury and Cash Management 1 — Questions and Answers
Question 1: What is the primary objective of treasury management within an organization?
- Maximizing net income reported on financial statements
- Ensuring optimal liquidity while managing financial risks (Correct answer)
- Minimizing the company's overall tax liabilities
- Increasing the company's market share
Correct answer: Ensuring optimal liquidity while managing financial risks
Treasury management focuses on maintaining sufficient liquidity to meet obligations while identifying and managing financial risks such as interest rate and currency exposures.
Question 2: Which of the following is a key metric used to evaluate how efficiently a company collects its receivables in the cash conversion cycle?
- Return on equity (ROE)
- Days Sales Outstanding (DSO) (Correct answer)
- Earnings per share (EPS)
- Price-to-earnings (P/E) ratio
Correct answer: Days Sales Outstanding (DSO)
DSO measures the average number of days it takes to collect payment after a sale, directly affecting the cash conversion cycle.
Question 3: A company has $400,000 in average daily cash outflows and maintains a 6-day liquidity buffer. What is the minimum target cash balance?
- $400,000
- $1,200,000
- $2,400,000 (Correct answer)
- $3,200,000
Correct answer: $2,400,000
Minimum target cash = daily outflows × buffer days = $400,000 × 6 = $2,400,000.
Question 4: In treasury management, 'float' refers to:
- The variable interest component on adjustable-rate loans
- The difference between bank balance and book balance due to checks in transit (Correct answer)
- The premium paid on foreign currency options
- The spread between bid and ask prices on money market instruments
Correct answer: The difference between bank balance and book balance due to checks in transit
Float is the difference between a company's book balance and its bank balance caused by checks written but not yet cleared or deposits not yet processed.
Question 5: Which short-term instrument is most commonly used by corporate treasurers to invest excess cash due to its high liquidity and safety?
- High-yield corporate bonds
- Treasury bills (T-bills) (Correct answer)
- Common equity shares
- Real estate investment trusts (REITs)
Correct answer: Treasury bills (T-bills)
T-bills are short-term, highly liquid U.S. government obligations with minimal credit risk, making them ideal for short-term cash investment.
Question 6: What is the primary purpose of a bank lockbox system in treasury management?
- Physically securing petty cash at retail locations
- Accelerating collection of receivables by reducing mail and processing float (Correct answer)
- Delaying payments to suppliers to maximize available cash
- Encrypting banking credentials during electronic transfers
Correct answer: Accelerating collection of receivables by reducing mail and processing float
A lockbox directs customer payments to a bank processing center, reducing the time between mailing and depositing, thereby accelerating cash availability.
Question 7: Which liquidity ratio provides the strictest measure of a company's ability to meet immediate obligations using only cash and equivalents?
- Current ratio
- Quick ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
Correct answer: Cash ratio
The cash ratio (cash and cash equivalents ÷ current liabilities) is the most conservative liquidity measure as it excludes receivables and inventory.
FA Treasury and Cash Management 1
What is the primary objective of treasury management within an organization?