Cash and Treasury Management Flashcards
6 cards from real AAT L4 practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Cash and Treasury Management flashcards as text
A company has average daily sales of £50,000, average receivables of £300,000, average payables of £180,000, and average inventory of £240,000. What is the cash conversion cycle?
Answer: 12.6 days
Receivables days = £300,000 ÷ £50,000 = 6 days. Inventory days = £240,000 ÷ £50,000 = 4.8 days. Payables days = £180,000 ÷ £50,000 = 3.6 days. CCC = 6 + 4.8 − 3.6 = 7.2 days. Wait — recalculating: 6 + 4.8 − 3.6 = 7.2 days.
A company has surplus cash of £500,000 for 90 days. It places this in a money market deposit at 4% per annum. How much interest will it earn?
Answer: £5,000
Interest = £500,000 × 4% × (90/360) = £500,000 × 0.04 × 0.25 = £5,000. Using a 360-day year (common in money markets).
What is the primary difference between a forward exchange contract and a currency option when hedging foreign exchange risk?
Answer: A forward contract guarantees the exchange rate; an option gives the right but not obligation to exchange at the agreed rate
A forward contract is an obligation to exchange currency at an agreed rate on a future date. A currency option gives the holder the right, but not the obligation, to exchange at the strike rate — they can walk away if the spot rate is more favourable.
Which of the following best describes 'concentration banking' as a cash management technique?
Answer: Sweeping cash from multiple regional accounts into a central account to improve control and investment returns
Concentration banking involves sweeping surplus balances from subsidiary or regional accounts into a central (concentration) account, maximising the funds available for investment and reducing idle cash in multiple locations.
A company has a bank overdraft of £200,000 at 8% per annum and a debtor (receivable) outstanding for 45 days of £150,000. It offers the debtor a 2% early payment discount for payment within 5 days. The debtor accepts. Is this discount cost-effective?
Answer: No, because the annualised cost of the discount (approximately 18.25%) exceeds the overdraft rate
Annualised cost ≈ (2/98) × (365/40) × 100 ≈ 2.04% × 9.125 ≈ 18.6%. This exceeds the 8% overdraft cost, so the discount is NOT cost-effective.
What does 'interest rate risk' mean for a business that has borrowed at a variable (floating) rate?
Answer: The risk that interest rates will rise, increasing the company's interest payments
A variable-rate borrower faces interest rate risk — if rates rise, their interest costs increase automatically, reducing cash flow and profitability. Hedging instruments such as interest rate swaps or caps can mitigate this risk.