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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

A manufacturer expects a large cash surplus for the next three months before it is needed for a planned equipment purchase. Which action is most consistent with good treasury practice?

The best action is placing the surplus in a short-term, low-risk, liquid deposit maturing when the equipment is needed. Treasury investment prioritises security and liquidity alongside return, so long-term equities or unsecured lending would expose the funds to unnecessary risk or unavailability.

  1. APlace the surplus in a short-term, low-risk, liquid deposit matching the date it is neededCorrect
  2. BInvest the surplus in long-term equities to maximise returns
  3. CLend the surplus to a supplier on an unsecured basis
  4. DUse the surplus to pay off all trade payables immediately, regardless of due dates

Explanation

Treasury investments should balance security, liquidity and return, and match the timing of the cash need. A three-month deposit meets this. Long-term equities risk capital loss and illiquidity, unsecured loans are risky, and paying payables early loses free credit and does not preserve funds for the purchase.

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