AAT Level 4 - Professional Diploma in Accounting Cash and Treasury Management Questions and Answers — Questions and Answers
Question 1: A business forecasts credit sales of £60,000 for May. Company policy is to collect 40% of credit sales in the month of sale, and the remaining 60% in the following month. Cash sales for May are £15,000. Forecast payments to suppliers are £35,000 and other cash expenses are £12,000. The opening cash balance on 1st May is £8,000. What is the forecast closing cash balance at 31st May?
- £0 (Correct answer)
- £(8,000)
- £36,000
- £(24,000)
Correct answer: £0
The closing balance is calculated as Opening Balance + Total Cash Receipts - Total Cash Payments. Cash Receipts for May = Cash Sales (£15,000) + Credit Sales Collections (£60,000 * 40% = £24,000) = £39,000. Total Cash Payments = Supplier Payments (£35,000) + Other Expenses (£12,000) = £47,000. Therefore, the Closing Balance = £8,000 + £39,000 - £47,000 = £0.
Question 2: A UK retail company has a negative Cash Conversion Cycle (CCC). Which of the following statements is the most accurate interpretation of this situation?
- The company is taking too long to pay its suppliers, indicating poor credit management.
- The company has a serious liquidity problem and cannot meet its short-term debts.
- The company receives cash from customers before it is required to pay its suppliers. (Correct answer)
- The company is holding excessive levels of inventory for the level of sales.
Correct answer: The company receives cash from customers before it is required to pay its suppliers.
A negative Cash Conversion Cycle means that the days payables outstanding are greater than the sum of days inventory outstanding and days sales outstanding. This is a favourable position, common in retail, where goods are sold and cash is received from customers before the company has to pay its own suppliers for those goods.
Question 3: A UK-based company has sold goods to a US customer and is due to receive $250,000 in 90 days. The treasury manager is concerned that the pound sterling (£) may strengthen against the US dollar ($), reducing the value of the receipt. Which of the following is the most appropriate action to hedge this specific transaction risk?
- Purchase a 90-day forward exchange contract to sell $250,000. (Correct answer)
- Enter into an interest rate swap for 90 days.
- Take out a sterling overdraft facility for the equivalent value.
- Purchase a 90-day forward exchange contract to buy $250,000.
Correct answer: Purchase a 90-day forward exchange contract to sell $250,000.
A forward exchange contract locks in an exchange rate for a future transaction, eliminating uncertainty. Since the company is receiving dollars, it needs to sell those dollars to convert them to sterling. Therefore, purchasing a forward contract to sell the $250,000 at a pre-agreed rate is the correct hedging action for this transaction risk.
Question 4: A company's finance director needs to transfer £350,000 to a supplier's account. It is critical that the funds are received and cleared on the same day to ensure the immediate dispatch of high-value goods. Which UK payment system should be used?
- Bacs (Bankers' Automated Clearing System)
- Faster Payments Service (FPS)
- CHAPS (Clearing House Automated Payment System) (Correct answer)
- Direct Debit
Correct answer: CHAPS (Clearing House Automated Payment System)
CHAPS is the UK's real-time gross settlement (RTGS) system designed for high-value, time-critical payments. It guarantees same-day settlement for payments instructed before the bank's cut-off time. Bacs takes three days, and while Faster Payments is near-instant, CHAPS is the standard, guaranteed method for such large, critical transactions.
Question 5: When managing a company's short-term cash surpluses, the treasury department typically prioritises its investment objectives. Which of the following lists these objectives in the correct order of importance?
- Profitability, Security, Liquidity
- Security, Liquidity, Profitability (Correct answer)
- Liquidity, Profitability, Security
- Profitability, Liquidity, Security
Correct answer: Security, Liquidity, Profitability
For short-term corporate treasury investments, the primary objective is the preservation of capital (Security). The second objective is to ensure funds are available when needed (Liquidity). Generating a return (Profitability or Yield) is the third and least important objective, pursued only after the first two have been satisfied.
Question 6: A growing manufacturing business is experiencing cash flow pressure because its major customers demand long credit terms. The business has a substantial and increasing sales ledger of creditworthy customers. Which of the following short-term financing methods is most directly linked to the value of these outstanding customer invoices?
- A committed bank loan
- An issue of commercial paper
- A bank overdraft
- Invoice discounting (Correct answer)
Correct answer: Invoice discounting
Invoice discounting allows a business to borrow a percentage of the value of its approved outstanding invoices. The amount of funding available is directly linked to the size of the sales ledger, making it a flexible solution that grows with the company's sales. This is distinct from an overdraft or loan, which are based on general creditworthiness rather than specific invoices.
AAT Level 4 - Professional Diploma in Accounting Cash and Treasury Management Questions and Answers
A business forecasts credit sales of £60,000 for May.
Company policy is to collect 40% of credit sales in the month of sale, and the remaining 60% in the following month.
Cash sales for May are £15,000.
Forecast payments to suppliers are £35,000 and other cash expenses are £12,000.
The opening cash balance on 1st May is £8,000.
What is the forecast closing cash balance at 31st May?