Free CPA Canada Finance Practice Questions: Treasury Management

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These are original Finance Prep practice questions aligned to this topic area. They are not official CPA Canada Finance Elective questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Treasury Management

Prairie Metalworks Ltd. is a Canadian manufacturer that expects to breach its operating line by about $500,000 in two months unless working capital improves. The bank will not increase the line until management shows that cash timing is improving without damaging key relationships or production reliability.

Relevant facts:

• Customers: Standard terms are net 45. Days sales outstanding is 64 days. About 35% of invoices are issued more than a week after shipment because shipping documentation is batched weekly. Major customers generally pay on time once invoices are accurate, but two large accounts have said they would re-tender the work if terms are changed to cash on delivery.
• Suppliers: The key steel supplier offers terms of 2/10, net 30 and has warned that further late payments will remove Prairie from priority allocation.
• Operations: A critical imported component has a six-week lead time. Current safety stock is five weeks. Stockouts would stop production, and expedited freight is not available during winter.
• Financing cost: A 1% early-payment discount to creditworthy customers would cost less than the line-of-credit interest saved if collection occurs about 35 days earlier.

Which working-capital policy should the CPA recommend as the best way to improve cash timing rather than merely shift risk to customers, suppliers, or operations?

• A. Keep customer terms unchanged but pay the key steel supplier after 60 days to match actual customer collections.
• B. Implement same-day electronic invoicing, faster dispute follow-up, and a 1%/10, net 45 discount for approved creditworthy customers.
• C. Reduce the critical component safety stock to one week until the operating-line breach has passed.
• D. Change all customer terms to cash on delivery and stop shipments to any customer with balances more than 15 days old.

Best answer: B

What this tests: Treasury Management

Explanation: A sound working-capital policy improves the timing or reliability of cash flows without creating a larger commercial or operating risk. Prairie’s main receivables issue is not that all customers are poor credit risks; invoices are being issued late, and customers pay once invoices are accurate. Same-day invoicing and faster dispute resolution directly reduce avoidable collection delays. A targeted early-payment discount is also supportable because the discount cost is lower than the financing cost saved when cash is collected earlier. By contrast, forcing customers to prepay, stretching suppliers beyond agreed terms, or cutting safety stock below operational needs may appear to improve cash temporarily, but each transfers the problem to another stakeholder or process and could damage value.

• Cash-on-delivery terms may accelerate receipts, but the facts show key customers may re-tender, so the policy shifts liquidity risk to customers and creates revenue risk.
• Paying the steel supplier after 60 days conserves cash temporarily, but it breaches the supplier relationship and risks loss of priority allocation.
• Cutting safety stock below the six-week lead time reduces inventory cash tied up, but it shifts the risk to operations by increasing the chance of production stoppages.

This improves the billing and collection cycle while using an economically justified incentive instead of forcing customers, suppliers, or operations to absorb the cash shortfall.

Question 2

Topic: Treasury Management

Kootenay Components Ltd., a private Canadian manufacturer, is preparing a financing package for two banks. Management wants the package submitted this month for credit approval and draft covenant terms. The requested financing is a $4.0 million five-year equipment term loan and an increase in the operating line from $1.5 million to $2.6 million.

A bank contact provided preliminary screens:

• Total debt to EBITDA should not exceed 3.25x.
• Debt service coverage ratio should be at least 1.25x, using sustainable cash flow after taxes and maintenance capital expenditures.
• The operating line must be supported by eligible receivables and inventory.
• Covenants should leave reasonable headroom under downside cases.

Management’s financing plan includes the following:

The plan shows pro forma debt to EBITDA of 3.0x and DSCR of 1.42x using forecast EBITDA after taxes, maintenance capex, and planned distributions. No monthly cash-flow forecast, borrowing-base support, customer evidence, or downside sensitivity has been prepared.

What is the best interpretation of the financing plan’s readiness?

• A. It is not suitable for any lender contact until actual results confirm the forecast EBITDA growth.
• B. It supports covenant setting if the covenants are set at the bank’s preliminary screens of 3.25x total debt to EBITDA and 1.25x DSCR.
• C. It is ready for credit approval because the forecast debt to EBITDA and DSCR both meet the bank’s preliminary screens.
• D. It is suitable for preliminary lender discussions, but not for credit approval or covenant setting until cash-flow timing, borrowing-base support, forecast evidence, and downside covenant headroom are completed.

Best answer: D

What this tests: Treasury Management

Explanation: A financing plan can be adequate for an initial market discussion while still being insufficient for approval or covenant setting. Here, the forecast ratios appear to meet the bank’s screening thresholds, but the support is incomplete. The EBITDA forecast depends on unsigned customer volumes, so the lender cannot assess forecast reliability. The requested operating line also depends on seasonal working-capital needs, but there is no monthly cash-flow forecast or borrowing-base schedule to support the peak draw. Covenant setting requires more than meeting a screen; it should be based on sustainable cash flow, sensitivity analysis, and reasonable headroom so normal volatility does not create an immediate default risk. The right conclusion is to use the package cautiously for preliminary discussions and complete the lender-ready analysis before asking for approval or covenant terms.

• Meeting headline leverage and DSCR screens does not prove approval readiness when the forecast, working-capital support, and sensitivity analysis are missing.
• Setting covenants exactly at preliminary bank screens ignores covenant headroom and the risk that unsupported forecast EBITDA will not be achieved.
• Waiting for actual results may be unnecessarily restrictive; lenders can discuss structure before approval if the limitations are clearly identified.

The plan meets preliminary ratio screens on management’s forecast but lacks the support needed for approval, operating-line sizing, and covenant negotiation.

Question 3

Topic: Treasury Management

A CPA is reviewing a treasury proposal for Northline Components Ltd., a Canadian private manufacturer. Northline has $1.8 million of temporary surplus cash from a seasonal customer prepayment. The cash must be available in 8 months for an equipment deposit and tax instalments.

Northline’s board-approved treasury policy for operating reserves requires:

• capital preservation over return enhancement;
• readily available Canadian-dollar investments;
• maximum maturity of 12 months; and
• performance monitoring against 90-day Government of Canada Treasury bills.

A bank has proposed a 5-year principal-protected note issued by the bank. The note pays no fixed interest. At maturity, it repays principal plus 60% of any positive return on the S&P/TSX 60 Index, capped at 18% total return. The principal protection applies only if the note is held to maturity. Early sale is at the bank’s quoted market value less a 1% fee and may be unavailable in stressed markets.

Which issue is most relevant to the CPA’s assessment of the proposal?

• A. The note is not suitable for the operating reserve because its liquidity and maturity do not match the 8-month cash need, and principal protection applies only at maturity.
• B. The main risk is that Northline will lose principal at maturity if the S&P/TSX 60 Index declines.
• C. The note should be accepted if the expected S&P/TSX 60 return exceeds the 90-day Treasury bill benchmark.
• D. The note is suitable because bank-issued principal protection eliminates the investment risk for an operating reserve.

Best answer: A

What this tests: Treasury Management

Explanation: Temporary operating cash should be evaluated primarily on liquidity, maturity matching, capital preservation, and the entity’s approved benchmark. Northline needs the funds in 8 months and its policy limits operating-reserve investments to readily available instruments with maturities of 12 months or less, benchmarked to 90-day Government of Canada Treasury bills. The proposed structured note has an equity-linked payoff and a 5-year term. Although principal is protected if held to maturity, Northline may need to sell before maturity, when the price could be below principal and liquidity may be limited. The key suitability concern is not whether the equity upside is attractive, but whether the instrument fits the cash reserve’s purpose and policy constraints.

• Comparing expected equity-linked returns to Treasury bills misses the purpose of the reserve: liquidity and capital preservation matter more than upside.
• A decline in the S&P/TSX 60 does not necessarily cause a principal loss at maturity because the note includes maturity-based principal protection.
• Bank issuance does not eliminate early-sale market risk, liquidity risk, or the mismatch with Northline’s 8-month funding requirement.

The proposal conflicts with Northline’s cash timing and treasury policy because early exit could expose the company to market value loss and liquidity risk.

Question 4

Topic: Treasury Management

NorthTrail Components uses a monthly rolling cash forecast to monitor whether it can meet payroll, supplier commitments, scheduled debt service, and its minimum cash buffer. Management assumes all net cash surpluses after maintaining minimum cash are used immediately to repay the operating line, and all deficits are funded first by drawing the operating line. Forecast interest is already included in the net cash figures.

• Opening cash: $120,000
• Required minimum cash balance: $75,000 at each month-end
• Operating line: $600,000 limit, with $410,000 currently drawn
• Bank has not approved any temporary overadvance

Which interpretation best reflects whether operating and financing needs will be met?

• A. The entity can meet all commitments by allowing cash to fall to $10,000 in March because the operating line remains within its approved limit.
• B. There is a March liquidity gap of $65,000; the April inflow does not prevent a temporary cash shortfall or overadvance risk unless timing relief or financing is arranged.
• C. The forecasted needs will be met because the four-month cumulative cash outflow is only $40,000 and the operating line has $190,000 available at the start.
• D. The March funding gap is $140,000 because the full March net outflow must be financed with new borrowing outside the operating line.

Best answer: B

What this tests: Treasury Management

Explanation: Cash-flow monitoring must consider timing, not just the total result over the forecast period. The opening cash balance has only $45,000 above the required minimum, and the operating line has $190,000 available. January’s $60,000 surplus increases available liquidity, giving total capacity of $295,000 before the February and March deficits. February and March require $360,000 in combined funding, creating a $65,000 shortfall by March. The large April inflow may allow repayment later, but it does not solve the earlier liquidity breach. Management should arrange temporary financing, accelerate receipts, defer non-critical outflows, or negotiate timing relief before March.

• Relying on the four-month cumulative result ignores the month-by-month timing of cash needs.
• Treating the full March outflow as the gap ignores the remaining operating-line availability after February.
• Letting cash fall to $10,000 may pay scheduled items, but it fails the required minimum cash balance and leaves no approved liquidity cushion.

Available opening liquidity plus the January surplus is insufficient to cover the February and March deficits while maintaining the $75,000 cash buffer and staying within the line limit.

Question 5

Topic: Treasury Management

Prairie Gear Ltd. sells on credit to small Canadian retailers. Current annual credit sales are $4,800,000, and expected bad debts are 4.0% of credit sales. Management wants to reduce collection risk, measured by expected bad debts, but the sales director will only accept a policy that keeps expected annual credit sales at or above 95% of the current level. Ignore administration costs.

Which policy should Prairie Gear implement?

• A. Require COD from all new customers for the first six months
• B. Offer a 2% early-payment discount with no credit-limit changes
• C. Keep net 45 terms, but require credit checks and lower credit limits for higher-risk accounts
• D. Shorten all standard terms from net 45 to net 30

Best answer: C

What this tests: Treasury Management

Explanation: The sales constraint is 95% of $4,800,000, or $4,560,000. The COD policy has the lowest expected bad-debt dollars ($4,490,000 × 2.6% = $116,740), but it fails the sales objective because expected sales fall below $4,560,000. Among the remaining policies, the risk-based credit checks and lower credit limits produce expected bad debts of $132,820 ($4,580,000 × 2.9%), compared with $167,400 for shorter terms and $180,880 for the early-payment discount. It therefore most directly reduces collection risk while still respecting the sales objective.

• Shorter standard terms meet the sales target, but expected bad debts remain higher than under the risk-based credit-limit policy.
• COD for all new customers gives the largest bad-debt reduction, but it fails the minimum sales requirement.
• The early-payment discount preserves sales but mainly improves timing; it does not reduce expected bad debts as much as targeted credit controls.

This policy meets the $4,560,000 minimum sales target and gives the largest expected bad-debt reduction among acceptable policies.

Question 6

Topic: Treasury Management

Northland Foods Inc., a private Canadian processor, sold a surplus warehouse and invested $6.0 million of proceeds. The CFO asks for a recommendation for the audit committee that is consistent with the board’s investment policy and cash needs.

• $3.0 million must be available in 7 months for a packaging-line deposit.
• $1.0 million must remain available within 10 business days to protect operating line-of-credit covenants during seasonal receivables peaks.
• The remaining $2.0 million is a reserve that may be invested for at least 3 years.
• Funds required within 12 months must prioritize principal preservation and liquidity; permitted investments are high-interest savings, Government of Canada T-bills, cashable GICs, or investment-grade bonds maturing before the cash need; benchmark is the 180-day Government of Canada T-bill.
• The 3-year reserve is benchmarked to 60% FTSE Canada Universe Bond / 40% broad equity index; equity is capped at 40%; below-investment-grade debt is prohibited.

Current portfolio summary:

Total six-month return was 7.7%, compared with a blended policy benchmark of 5.4%. Which recommendation is most supportable?

• A. Move the full $6.0 million to T-bills until the packaging-line payment is made because principal preservation is the highest priority.
• B. Keep the current portfolio because it outperformed the blended benchmark and the ETFs can be sold daily.
• C. Increase the global equity ETF and dividend equity ETF to 40% of the total portfolio because the reserve policy allows 40% equity.
• D. Rebalance by holding $4.0 million in permitted short-term instruments matched to the seven-month and 10-day needs, sell the high-yield ETF, and invest only the $2.0 million reserve within the 60/40 benchmark.

Best answer: D

What this tests: Treasury Management

Explanation: A supportable investment recommendation should separate the portfolio by purpose and time horizon before comparing returns to benchmarks. Northland needs $4.0 million within 12 months or on short notice, but only $0.9 million is currently in instruments that clearly meet the short-term policy. Daily liquidity of ETFs does not eliminate market-value risk, and the long-duration bond ETF does not mature before the seven-month cash need. The high-yield bond ETF is also below investment grade and is prohibited. Only the $2.0 million reserve can be invested under the longer-term 60/40 benchmark. The strong six-month return is not enough to justify a portfolio that fails the liquidity, preservation, and quality constraints.

• Relying on outperformance and daily ETF liquidity ignores principal preservation and the required timing of cash needs.
• Applying the 40% equity cap to the full $6.0 million ignores that only $2.0 million is available for the 3-year reserve strategy.
• Moving all funds to T-bills protects liquidity but fails to follow the approved longer-term benchmark for the $2.0 million reserve.

This matches the portfolio to liquidity needs, policy constraints, and the appropriate benchmark for each pool of funds.

Question 7

Topic: Treasury Management

Alpine Gear Inc. maintains a $4.0 million investment portfolio for seasonal working-capital needs. The CFO asks whether the portfolio still fits the treasury policy, noting that its expected yield is higher than cash.

Policy constraints:

• Preserve capital and maintain a low-risk operating reserve.
• Keep at least $2.0 million and at least 60% of the portfolio in cash, T-bills, or redeemable GICs available within 30 days.
• Limit any one issuer or fund to 25% of the portfolio.
• Do not use private placements or equities for the operating reserve.

Which interpretation is most supportable?

• A. The portfolio remains aligned because the higher expected yield compensates for the reduced liquidity.
• B. The portfolio is overconcentrated, liquidity deficient, and misaligned with the operating-reserve objective.
• C. The only material issue is equity price volatility because no holding exceeds a 30% concentration level.
• D. The portfolio is liquid enough because the bond has a market quote and the fund permits quarterly redemptions.

Best answer: B

What this tests: Treasury Management

Explanation: An operating-reserve portfolio should be assessed against its purpose, not only by expected yield. The policy requires preservation of capital and reliable short-term liquidity. The HISA and redeemable GIC provide $1.2 million of policy-eligible 30-day liquidity, which is only 30% of the $4.0 million portfolio and below both the $2.0 million minimum and the 60% requirement. Boreal REIT is 30% of the portfolio and Prairie Mortgage Fund is 27.5%, so both exceed the 25% single issuer or fund limit. The Prairie fund is illiquid because redemptions are gated, and the equity ETF is not permitted for the operating reserve even though it settles quickly. Higher yield does not override liquidity, concentration, and strategic-fit constraints.

• Counting the equity ETF as reserve liquidity ignores the policy restriction and its price-risk exposure.
• A thinly traded bond and a gated fund do not provide reliable 30-day liquidity.
• Using a 30% threshold ignores the stated 25% concentration limit and misses other policy breaches.

Only $1.2 million is policy-eligible 30-day liquidity, two holdings exceed the 25% limit, and the private fund and equity ETF conflict with the reserve mandate.

Question 8

Topic: Treasury Management

Northside Recreation Inc. (NRI), a private Canadian supplier of outdoor equipment, maintains a $6.0 million investment portfolio as a treasury reserve. The reserve is intended to fund $3.0 million of plant repairs due in 10 months and support a bank covenant requiring at least $2.0 million of available liquidity. NRI’s operating cash flow is cyclical and tends to weaken when consumer confidence falls.

Management’s policy benchmark for this reserve is 80% treasury bills and 20% short-term investment-grade bonds. A recent review shows the following:

The actual portfolio includes Canadian dividend equities, high-yield bond ETFs, and a long-term bond fund. The bank’s downside scenario assumes the same consumer downturn would reduce NRI’s EBITDA by $1.1 million and trigger the actual portfolio stress loss.

Which interpretation best connects the portfolio to NRI’s overall risk and return profile?

• A. The portfolio mainly reduces NRI’s financing risk because the long-term bond fund offsets the bank covenant exposure.
• B. The portfolio improves NRI’s overall profile because the expected return exceeds the benchmark and the securities are diversified outside the operating business.
• C. The portfolio increases expected return, but it also increases enterprise downside risk because investment losses are likely when operating cash flow and liquidity are already under stress.
• D. The portfolio is too conservative because its expected return is below the yield available on high-yield bond ETFs.

Best answer: C

What this tests: Treasury Management

Explanation: A treasury reserve should be evaluated against its purpose, not only against its expected return. NRI needs near-term liquidity for plant repairs and covenant support, so preservation of capital and cash availability are important. The actual portfolio earns a higher expected return than the benchmark, but it has much higher volatility, a much larger stress loss, and only $1.2 million available within 12 months without market sales. The downside scenario also links investment losses with weaker EBITDA, meaning the portfolio does not cushion operating risk; it amplifies it. A better risk-return profile for this reserve would align investment risk, liquidity, and timing with NRI’s cash obligations and business-cycle exposure.

• Treating return above benchmark as automatically favourable ignores the reserve’s liquidity and capital-preservation purpose.
• Diversification across traded securities does not prevent losses from occurring at the same time as an operating downturn.
• Comparing the portfolio to the yield on one higher-risk holding uses the wrong benchmark for a treasury reserve.

The higher return is tied to market and credit exposures that are poorly matched to NRI’s near-term liquidity purpose and cyclical operating risk.

Question 9

Topic: Treasury Management

Maple Ridge Plastics Inc., a private Canadian manufacturer, has asked for a recommendation on whether to distribute $2.0 million of accumulated profits this quarter. Management’s draft memo recommends a special cash dividend because the company has excess cash.

Relevant facts gathered so far:

• Cash on hand is $4.8 million; management’s minimum operating cash reserve is $1.5 million.
• The 12-month cash forecast shows positive free cash flow of $900,000 after maintenance capital expenditures.
• No approved expansion projects have a positive NPV at the company’s required return.
• After a $2.0 million distribution, the company would remain compliant with its bank covenants.
• The company has three unrelated shareholders with equal voting control.

Which missing fact most prevents a supportable recommendation on the profit distribution?

• A. The company’s gross margin compared with the industry benchmark
• B. The market value of the company’s production equipment
• C. The accounting entry that would be recorded for a special dividend
• D. The shareholders’ objectives and after-tax outcomes for a dividend compared with other distribution methods

Best answer: D

What this tests: Treasury Management

Explanation: A supportable profit-distribution recommendation requires more than confirming that the company can afford a payment. The known facts address cash availability, short-term cash flow, reinvestment alternatives, and covenant constraints. The key remaining gap is whether a special dividend is the best way to meet shareholder objectives after considering the tax context and alternatives, such as a share redemption or repurchase where appropriate. Equal voting control does not mean equal liquidity needs, time horizons, or tax consequences. Without understanding those shareholder-level factors, the memo can support that some distribution may be feasible, but not that the proposed method is the best recommendation.

• Gross margin may help assess operating performance, but the distribution capacity and reinvestment facts are already provided.
• The accounting entry does not determine whether the distribution is financially suitable.
• Production equipment value would matter for asset valuation or secured borrowing, not for choosing the best profit-distribution method under these facts.

A profit-distribution recommendation should consider not only cash capacity but also shareholder objectives and the tax context of available distribution methods.

Question 10

Topic: Treasury Management

Brightwater Components Inc. must maintain a minimum operating cash balance of $30,000. Its cash balance on June 1 is $20,000. The same cash-flow pattern is expected each month from June through August:

• Receipts by the 15th: $40,000
• Payroll and rent by the 15th: $110,000
• Major customer collection on the 25th: $120,000
• Supplier payment on the 28th: $50,000

The controller proposes moving each supplier payment from the 28th to the 5th of the following month. The supplier will allow this every month with no fee. No other cash flows are expected. Which assessment best evaluates whether the proposal addresses Brightwater’s cash need?

• A. No. It creates a $130,000 mid-month shortfall because the following-month supplier payment must be added to payroll and rent before collections.
• B. No. The recurring shortfall remains $80,000 by the 15th; avoiding the $50,000 payment on the 28th lifts month-end cash to $70,000, but the following 5th repayment resets the cycle.
• C. Yes. It reduces the mid-month shortfall from $80,000 to $30,000 because the $50,000 supplier payment is deferred every month.
• D. Yes. It solves the cash need because each month-end balance rises from $20,000 to $70,000, exceeding the $30,000 minimum by $40,000.

Best answer: B

What this tests: Treasury Management

Explanation: A cash-management action should match the timing, amount, and recurrence of the cash need. By the 15th, Brightwater’s balance is $20,000 + $40,000 - $110,000 = -$50,000. Since the required minimum balance is $30,000, the recurring cash need is $80,000. Deferring the supplier payment improves the balance after the 25th collection and avoids the 28th outflow, producing a $70,000 month-end balance. However, the deferred $50,000 is then paid on the 5th, bringing the next cycle back to the same starting point before the 15th cash drain. The proposal improves month-end cash presentation but does not provide enough cash when the recurring shortfall occurs.

• Focusing on month-end cash misses the actual liquidity pressure, which occurs by the 15th.
• Treating the $50,000 deferral as available before the 15th uses the wrong timing.
• Adding the following-month supplier payment without recognizing the prior month-end cash increase double-counts the effect.

The cash need occurs before the customer collection and before the avoided 28th payment helps, so the same $80,000 mid-month shortfall recurs.

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