FA Treasury and Cash Management 2 — Questions and Answers
Question 1: What is the primary function of a short-term cash flow forecast in treasury management?
- Setting the company's long-term capital structure targets
- Identifying future cash surpluses or deficits to plan investments or financing (Correct answer)
- Determining the optimal dividend payout ratio for shareholders
- Calculating the market value of the company's outstanding equity
Correct answer: Identifying future cash surpluses or deficits to plan investments or financing
Cash flow forecasts allow the treasurer to anticipate surpluses available for investment or deficits that require borrowing, enabling proactive financial management.
Question 2: Which of the following best describes a revolving credit facility?
- A fixed-term loan with a single lump-sum repayment at maturity
- A flexible borrowing arrangement allowing repeated drawdowns up to a set credit limit (Correct answer)
- A long-term mortgage secured by specific company assets
- A government-guaranteed loan program for small business capital expenditures
Correct answer: A flexible borrowing arrangement allowing repeated drawdowns up to a set credit limit
A revolving credit facility lets a company borrow, repay, and reborrow up to a predetermined limit, providing flexible short-term liquidity as needs change.
Question 3: The Baumol model for cash management is analogous to which inventory concept?
- FIFO inventory valuation
- Economic Order Quantity (EOQ) (Correct answer)
- ABC inventory classification
- Just-in-Time (JIT) inventory management
Correct answer: Economic Order Quantity (EOQ)
The Baumol model applies EOQ logic to cash, balancing the fixed cost of converting securities to cash against the opportunity cost of holding excess cash.
Question 4: Concentration banking helps a company by:
- Focusing all investments in a single high-performing asset class
- Consolidating dispersed funds from multiple accounts into a central master account (Correct answer)
- Limiting banking relationships to a single primary financial institution
- Concentrating sales efforts in the highest-revenue geographic markets
Correct answer: Consolidating dispersed funds from multiple accounts into a central master account
Concentration banking pools cash from regional or subsidiary accounts into one central account, improving control and enabling more effective deployment of idle funds.
Question 5: A company with Days Sales Outstanding (DSO) of 35 days, Days Inventory Outstanding (DIO) of 50 days, and Days Payable Outstanding (DPO) of 40 days has a cash conversion cycle of:
- 25 days
- 45 days (Correct answer)
- 85 days
- 125 days
Correct answer: 45 days
CCC = DSO + DIO − DPO = 35 + 50 − 40 = 45 days.
Question 6: What is working capital as used in treasury and liquidity management?
- Total assets minus total long-term liabilities
- Current assets minus current liabilities (Correct answer)
- Cash and equivalents minus all outstanding debt
- Operating income minus capital expenditures
Correct answer: Current assets minus current liabilities
Working capital (current assets − current liabilities) measures the net short-term financial resources available to fund day-to-day operations.
Question 7: Remote disbursement as a treasury strategy involves:
- Collecting receivables via lockboxes located near customers
- Issuing checks drawn on banks in distant locations to extend disbursement float (Correct answer)
- Wiring payments internationally to reduce processing fees
- Using electronic ACH transfers to speed up supplier payments
Correct answer: Issuing checks drawn on banks in distant locations to extend disbursement float
Remote disbursement uses checks drawn on geographically distant banks to exploit mail and clearing times, keeping cash in the company's account longer.
FA Treasury and Cash Management 2
What is the primary function of a short-term cash flow forecast in treasury management?