CTP Working Capital Management 2 — Questions and Answers
Question 1: A company has a Days Sales Outstanding (DSO) of 45 days and an industry average of 30 days. What does this most likely indicate?
- The company collects receivables faster than peers
- The company has a collection problem or lenient credit terms (Correct answer)
- The company has too little inventory
- The company's payables are being paid too slowly
Correct answer: The company has a collection problem or lenient credit terms
A DSO higher than the industry average suggests the company is slower at collecting receivables, indicating potential collection issues or overly lenient credit terms.
Question 2: Which of the following best describes the purpose of a lockbox system in receivables management?
- To delay outgoing payments as long as possible
- To accelerate the collection and processing of customer payments (Correct answer)
- To store physical cash in a secure facility
- To consolidate all bank accounts into one master account
Correct answer: To accelerate the collection and processing of customer payments
A lockbox system routes customer payments directly to a bank's processing center, reducing mail float and accelerating funds availability.
Question 3: Under the cash conversion cycle (CCC) formula, which change would DECREASE the CCC?
- Increasing days inventory outstanding (DIO)
- Increasing days sales outstanding (DSO)
- Increasing days payable outstanding (DPO) (Correct answer)
- Decreasing supplier credit terms
Correct answer: Increasing days payable outstanding (DPO)
CCC = DIO + DSO – DPO; increasing DPO (paying suppliers later) reduces the CCC by extending the time the company holds supplier financing.
Question 4: A company offers terms of 2/10 net 30. What is the approximate annualized cost of NOT taking the discount?
- 2.0%
- 18.4%
- 36.7% (Correct answer)
- 24.0%
Correct answer: 36.7%
Annualized cost = (Discount% / (1 – Discount%)) × (365 / (Net days – Discount days)) = (0.02/0.98) × (365/20) ≈ 36.7%.
Question 5: Which inventory management approach aims to minimize inventory holding costs by receiving goods only when needed for production?
- Economic Order Quantity (EOQ)
- Just-in-Time (JIT) (Correct answer)
- ABC analysis
- Safety stock model
Correct answer: Just-in-Time (JIT)
Just-in-Time (JIT) inventory management synchronizes supply deliveries with production schedules to minimize inventory carrying costs.
Question 6: In evaluating a customer's creditworthiness, the 'capacity' component of the 5 C's of credit refers to:
- The collateral available to secure the debt
- The borrower's ability to repay from operating cash flows (Correct answer)
- The economic environment affecting repayment
- The legal authority to enter into a credit agreement
Correct answer: The borrower's ability to repay from operating cash flows
Capacity in the 5 C's framework assesses whether the borrower generates sufficient cash flow to service the debt obligation.
Question 7: A treasury professional wants to reduce payment float on outgoing disbursements. Which action is MOST appropriate?
- Use controlled disbursement accounts
- Issue checks from a remote branch bank
- Delay check printing to month-end
- Convert paper checks to ACH payments (Correct answer)
Correct answer: Convert paper checks to ACH payments
Converting checks to ACH payments eliminates mail float and reduces disbursement float since ACH settles electronically on a predictable schedule.
CTP Working Capital Management 2
A company has a Days Sales Outstanding (DSO) of 45 days and an industry average of 30 days.
What does this most likely indicate?