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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

A company's treasury invests surplus cash in instruments with a short maturity, high liquidity and low credit risk, such as Treasury Bills and commercial paper from top-rated issuers. Which cash management objective is chiefly served by this practice?

Investing surplus cash in Treasury Bills and top-rated commercial paper aims to earn a return on idle funds while keeping them liquid and safe. Short maturity and low credit risk mean the cash can be recovered quickly when required without risking principal.

  1. AEarning a return on idle cash without sacrificing liquidity and safetyCorrect
  2. BMaximising capital appreciation through equity speculation
  3. CIncreasing the firm's financial leverage
  4. DReducing the firm's tax liability to nil

Explanation

Short-term, liquid, low-risk instruments let the firm earn some return on temporarily surplus cash while keeping it available when needed and protecting principal. Equity speculation would compromise safety and liquidity, and the practice neither raises leverage nor eliminates tax.

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