Treasury Management & Cash Flow Flashcards

A financial controller uses a notional pooling arrangement across five European subsidiaries. Which statement best describes how interest is calculated?

Answer: Interest is calculated on the net combined position without physically moving funds

Notional pooling offsets positive and negative balances mathematically; interest is based on the net position without actual fund transfers.

Which ratio directly measures a company's ability to cover current liabilities using only cash and cash equivalents?

Answer: Cash ratio

The cash ratio (Cash / Current Liabilities) is the most conservative liquidity measure, excluding receivables and inventory.

A treasurer wants to lock in the rate on a 3-month SOFR-based loan starting in 6 months. Which derivative is most appropriate?

Answer: Forward rate agreement (FRA)

An FRA allows a borrower to lock in a specific interest rate for a future loan period, hedging against rate movements.

Under ASC 230, which activity classification applies to cash paid for interest on long-term debt?

Answer: Operating activity (permitted under US GAAP)

US GAAP (ASC 230) classifies interest paid as an operating activity, unlike IFRS which permits financing classification.

A company's monthly cash burn rate is $2.5M and it holds $12M in unrestricted cash. What is its cash runway?

Answer: 4.8 months

Cash runway = $12M ÷ $2.5M/month = 4.8 months before the company exhausts its cash.

Which payment mechanism offers same-day irrevocable settlement and is most appropriate for large, time-sensitive corporate payments in the US?

Answer: Wire transfer (Fedwire)

Fedwire transfers provide real-time gross settlement (RTGS), making them irrevocable and ideal for large, urgent payments.

What is the purpose of a standby letter of credit (SBLC) in treasury operations?

Answer: To guarantee payment if the applicant defaults on an obligation

An SBLC is a bank guarantee that pays the beneficiary if the applicant fails to perform a contractual obligation.