Treasury Management Quiz Questions

In evaluating alternative capital investments, a company should consider qualitative factors such as:

corporate strategy

Which of the following is a ratio that is often used by commercial banks to measure a company s leverage and does not include the effect of assets that are difficult to value or are NOT easily converted to cash? - long-term debt to capital - debt to tangible net worth - total liabilities to total assets - cash flow to total debt

debt to tangible net worth

Breaking the buck refers to

Not permitting MMF (money market fund) to go below $1 NAV in most circumstance

When utilizing a Factor (financial intermediary that purchases receivables from a company)to sell your receivables, all could be true except: - you will sell receivables at a discount off of the face amount - they must be sold without recourse back to the selling company - factors can have recourse back to the selling company if customers do not pay - factoring can assist in raising cash for a company

they must be sold without recourse back to the selling company

How do treasury's plan assessments affect projected cash flow streams in budgeting?

In determining impact on debt covenants and credit ratings

Company R has an AR collection pattern of 8% in the current month, 47% in the first month, 30% in the second month, 10% in the third month, and 5% in the fourth month. If AR for July is $598,000, what amount of cash do they expect to collect in October?

$598,000 * 10% = $59,800

Using the above information, what is the cash turnover for the company?

365/ cash conversion cycle = 365/69= 5.3 times

What is a company's CCC and cash turnover given the following? •Days' inventory = 45 •Days' receivables = 35 •Days' payables = 30

50 days; 7.3 times 45+35-30= 50 days 365/50 = 7.3times

Which agencies are required to regulate OTC derivatives to reduce excessive risk taking?

CFTC and SEC

Which is sometimes used if a subsidiary's currency is expected to appreciate relative to the parent company's currency?

Lagging

Upon entering into an interest rate swap with a notional principal of $10,000,000, what is the initial amount of money the counterparties must exchange at the beginning of the swap?

$0

All of the following are advantages of using traditional financial ratios for analysis EXCEPT: - they can easily be computed from the information found in publicly available financial reports - they usually reflect accounting rather than economic values - they can be used to view historical trends and availability over time - they allow comparisons to be made between like companies

they usually reflect accounting rather than economic values

An international company would establish a re-invoicing center for which of the following reasons?

to manage the foreign exchange exposure of its foreign subsidaries

When it comes to Audit Opinions, firms would like

unqualified

Describe two situations when a buyer should forgo an offered cash discount.

•When buyer has to borrow funds at interest rate that exceeds effective cost of discount •When buyer has enough cash to pay A/P by discount date but can earn a rate that exceeds effective cost of discount.

Which is true of credit unions?

Credit unions operate in over 100 countries.

Monetary Control Act of 1980 assisted in loosening the economy by

Reducing float in the payment system

The type of underwriting that is most risky to the company putting out the public offering

Best Efforts Underwriting

Which of the following trade payment methods virtually eliminates the seller s credit risk?

Cash before delivery

Which is true?

FinCEN enforces counter-money laundering legislation and provides intelligence for investigations and prevention strategies.

What is characteristic of a relaxed current asset investment strategy?

Company has less risk due to higher cash holdings

In case of bankruptcy, what is the order of payment?

1. Senior Debt 2. Bankruptcy Trustee 3. Taxes Owed 4. Subordinated bondholders 5. Common Shareholders

Complete the percentage-of-sales pro forma statement forecasting steps: 1.Forecast ___________. 2.Calculate projected ending cash balance by projecting [step 1] cash impact. 3.Compare projected ending and target __________ and adjust pro forma statement to show fund source for shortfall or investment of surplus.

1. income statement and balance sheet; 3. cash balance

Amalgamated Binding Consolidators takes 20 days to convert its raw materials to finished goods, 5 days to sell it, and 15 days to collect its credit sales. What is the company s days receivable period?

15 days

Why do service industry ratios differ from manufacturing industry ratios?

Balance sheets have higher current assets, especially A/R.

What is a ramification of overly strict credit?

Company may decline trade credit to customers who are an acceptable credit risk.

Which is a possible reason why the vast majority of participants in US capital markets do not support adopting IFRS over US GAAP?

IFRS might result in different interpretations of specific situations.

Company Q has average daily credit sales of $15,875.00. The daily cash sales are $8,750.00. The AR ending balance for June 30 is $387,500.00. What is the average days sales outstanding for Company Q?

AR ending balance/ daily credit sales (387500/15875)= 24.4

How are liabilities and debt different?

Accounts payable is a liability but not a debt. - Liability refers to an amount that is owed, regardless of the form. -Notes payable is both a liability and a debt - Debt refers only to obligations that require interest payments and is considered a subset of debts

The Red Flags Rule applies to FIs and creditors with what types of consumer accounts?

Accounts that permit multiple payments or transactions

What is a benefit of using in-house banks in international treasury management?

Aggregates many small transactions into fewer larger ones

The Glass Steagall Act was basically repealed through which act of Congress?

Allowing Financial Holding Companies

In addition to verifying incoming payments and authorizing payments, vouchering has a three-way match of an invoice against what?

Approved PO and receiving or shipping information

Which of the following is true for full service banks that offer both underwriting/distribution and investment advisory or management functions?

Buy- and sell-side transactions should be separated by a "wall" to prevent each party from getting and acting on MNPI

The Quantitative Easing done by the Federal Reserve during the great recession used which monetary policy tool?

Buying bonds by the Federal Open Market Operations of the Fed

All of these are attributes of Jumbo CDs except: - CDs must be held to maturity - They are negotiable instruments with a secondary market - "The minimum denomination is $100,000" - The funds invested are exposed to bankruptcy risk over the FDIC amount

CDs must be held to maturity

What is another of these regulators/standard setters?

Central Banks

An airline wants to lock in the price of the jet fuel it needs to purchase to satisfy the peak in-season demand for travel. The airline wants to manage its exposure to fluctuations in fuel prices. What type of exposure is this?

Commodity

Which two accounts vary spontaneously as sales levels change, and why do they change?

Current assets (credit sales) and current liabilities (fewer assets or more liabilities)

What can a treasury professional discover by monitoring individual accounts receivable?

Customers that delay payment intentionally until follow-up is initiated

Using the info below what is the Days Receivables (DR)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00

Days Receivable → accounts receivables / revenues * 365 $19,300/$158,000*365= $44.59

The company currently calculates its Days Receivables at 42 days, its Days Payables at 31 days, and its Days Inventory at 58 days. What is the cash conversion cycle for the company?

Days Receivables + Days Inventory - Days Payable = 42+58-31 = 69 days

Using the info below what is the Days Inventory (DI)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00

Days inventory → inventory/COGS * 365 $23,600/$92,400* 365= $93.23

Using the info below what is the Days Payables (DP)? Annual Revenue $158,000.00 Annual Cost of Goods Sold $92,400.00 Cash Flow from Operations $850.00 Ending Inventory $23,600.00 Ending Accounts Receivable $19,300.00 Ending Accounts Payable $16,950.00

Days payable → accounts payable / COGS * 365 $16,950/$92,400*365

Which is a step in arriving at the projected closing cash position?

Deduct projected disbursement totals.

Which should be considered relevant cash flows for a proposed capital investment?

Deductible expenses and taxes that affect future cash flows Depreciation that can be claimed with one alternative but not the other

Which approach to monitoring and managing banking system safety and soundness has a moral hazard?

Deposit insurance Depositors may not investigate a bank's creditworthiness; banks may undertake more risk.

The items listed below are some of the best practice in cash forecasting. What is another of these best practices? •Use appropriate detail. •Use appropriate platform. •Invest the appropriate amount of resources. •Validate the forecast. •Cooperate and communicate. •Ensure the forecast is usable.

Disclose assumptions

A manufacturing company is working to improve its cash conversion cycle. Factory production has increased over the last year to increase inventory levels. They have an inventory turnover of 3.1 and asset turnover of 5.0. The company has a days payable of 30 and a days receivable of 60. It has started enforcing its net 30 terms and placed customers with balances outstanding more than 45 days on credit hold. As a result, the company collected receivables quicker but it suffered a 10% loss in sales. What can the company do to reduce its cash conversion cycle?

Extend payables deferral period

What is the difference between operating leverage and financial leverage?

Financial leverage results from fixed financing costs (interest).

The treasury manager of a chain of clothing stores wants to develop a medium-term forecast. Management plans to open two new stores, and anticipates same-store sales to increase by 15%. Which of the following items can be predicted with the highest degree of certainty?

Fixed bond interest payments

What type of brokerage would be appropriate for a firm that wants the broker to manage its investment portfolios and generally needs to transact in large blocks of securities?

Full-service institutional broker

Which of the following are important uses of variance analysis in comparing actual cash flows with projected cash flows? I. Identifying unanticipated changes in inventory II. Enhancing short-term investment income III. Validating a capital budget IV. Identifying delays in accounts receivable collections

I and IV only

Examples of traditional factors used in making a credit decision include which of the following? I. Capacity II. Capital III. Compliance IV. Character

I,II,IV only

ABC Company offers a discount of 2/10, net 30 to its customers. ABC factored its accounts receivables with an outside vendor, under a with recourse arrangement. What impact might this have on the company?

Improve cash conversion cycle

A company is interested in lowering its overall banking costs, managing netting, pooling, re-invoicing, and centralizing FX exposure at headquarters. Which of the following options will accomplish this

In-house banking

MCA, Inc. upgraded the treasury workstation that had been in place for two years and used data from that 24-month period to develop a new short-term forecast. A trend factor was applied to controlled disbursements of 97% on a month-by-month basis and the variance to actual disbursements is less than 1%. Which of the following model validation techniques was utilized?

In-sample validation

Identify whether changes in each of the balance sheet accounts is a source or use of funds on the statement of cash flows.

Increase in an asset - use of funds Decrease in an asset - source of funds Increase in liability - use of funds Decrease in liability - source of funds

Financing decisions in a budget are used to construct all of the following pro forma financial statement components EXCEPT: - debt - interest expense - shareholders equity - inventory

Inventory

A retail brokerage firm is MOST like which one of the following types of financial institutions?

Investment Banks

How do common-size statements enable direct financial comparisons of different-size firms?

Liability categories as a percentage of total assets can be compared.

A daily short-term forecast and variance analysis for LMN, Inc. is updated with relevant trends and actual data every Monday. Upon review, the treasurer assessed that sales were higher than forecasted, inventory was up and yields being earned on excess cash were lower. The MOST important reason for this cash forecast process is:

Liquidity Management

What does a company with a restrictive current asset investment strategy typically have?

Low accounts receivable balances

Company ABC is a restaurant chain that has enjoyed a surge in customers dining with not much of a profitability increase in the last couple of years. Following a bad restaurant review, customer traffic deteriorated with not much change in profitability. Which of the following BEST describes the cost structure of the company?

Low operating leverage

A put option on a company s stock has an exercise price of $20. On the delivery date, the stock is trading at $24 per share. What should the investor who has paid $2 for the option do?

Not exercise the option and lose $2

Which validation method tests a forecast using data that were not used to develop it, i.e., using 30 months of data for the forecast and the last 6 months of a three-year period to test?

Out-of-sample validation

In what scenario could a negative EVA be fine?

Rapid expansion of capital base is required to fund growth.

An analyst for a landscaping company wants to adjust her cash-flow forecast to account for the seasonality of outflows. How can this be accomplished?

Regression Analysis

Which procure-to-pay step initiates the inventory period (shown below), and which order-to-cash step ends it?

Send and receive payment

Identify the following forecasting horizons.

Short Term: Used to establish and manage target balances for bank compensation Medium Term: - Used to determine the company's need for short-term credit or availability of funds for short-term investing - Used as a benchmark to compare actual to projected cash flows on the cash budget Long Term: Used by financial institutions and rating agencies for credit analysis

A company is based in the United States and has an operating subsidiary in Germany. With a stable U.S. dollar and a depreciating euro, the company s cash manager may elect to:

Start leading receivables from the German subsidary

In the US, which state is the recipient of unclaimed or abandoned rebates or gift cards?

State that is residence of customer being escheated

A company enters into a cash flow hedge to offset fluctuations in the value of foreign currency transactions occurring in two years. How should the company record the gains and/or losses on the cash flow hedge in the current year?

The hedged gains and losses are reported in comprehensive income

What is characteristic of a restrictive current asset investment strategy?

The just-in-time approach is commonly used

XYZ Company has a well established commercial paper (CP) program that they use to fund operations. The company is expanding by purchasing a new factory. The CFO is worried about the time and expense needed to issue long-term debt and decides to use the funds they raise in the CP market to pay for the purchase of the factory. This strategy will be successful if:

The yield curve remains upward sloping

An increasing number of multinational companies have adopted formal multilateral netting systems for which of the following reasons?

To facilitate management of foreign exchange transactions

Which four ratios help determine the extent to which a company was leveraged?

Total liabilities to total assets Long-term debt to capital Debt to equity Debt to tangible net worth

What is the service a commercial bank traditionally does NOT make money from?

Underwriting security issued to the public

The items listed below are some of the reasons to use caution if reducing A/R and inventory conversion or extending A/P deferral periods. What is another of these reasons? •Production stoppages from poor materials or parts •A/P stretched past due •Lost trade discounts •Higher vendor charges from small orders or slow payment

Won't sell to customers with good credit who are a bit slow in paying

Which is NOT a source of cash for a company? - depreciation expense - an increase in accounts receivable - a decrease in inventory - paying your bills later

an increase in accounts receivables

The delay between when a payment is initiated and __________ is __________

buyer's/payor's account is debited; disbursement float

Examples of fixed assets include which of the following - inventory - treasury bills - forklift - goodwill

forklift

Company XYZ is a manufacturer of industrial equipment and has enjoyed a large percentage increase in profits from a small increase in revenues. Sales recently plummeted resulting in steep decline in profitability. Which of the following BEST describes the cost structure of the company?

high operating leverage

The matching principle in regards to accrual accounting is

recognize the expenses incurred to generate earned revenues

A company is experiencing the following long-term trend on a month-over-month basis: Sales are increasing by $100,000, a 15% increase. Accounts receivable are increasing by $5,000, a 1% increase. Accounts payable are increasing by $20,000, a 4% increase. Labor expenses are increasing by $40,000, a 3% increase. With all other income, expenses, long-term assets and liabilities remaining stable, this trend would MOST LIKELY prompt what action by the company?

repaying short-term debt

All are multicurrency account stipulations EXCEPT -the base currency in which the account is denominated -the currencies not accepted. (All others are accepted.) -the spread over spot rate to use in exchanging each currency back to the base currency. -the value date to apply to debits and credits for each transaction type and currency.

the currencies not accepted. (All others are accepted.) currencies are accepted