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

A manufacturer has a large cash surplus after a seasonal sales peak and will need the money for a planned equipment purchase in four months. Which approach is most appropriate for the treasury department?

The treasury should place the surplus in a short-term, low-risk deposit maturing before the equipment purchase. The money is needed in four months, so safety and liquidity matter more than high return. Long-term equities or open-ended loans could not be relied on to be available on time.

  1. APlace the funds in a short-term, low-risk deposit that matures before the purchase dateCorrect
  2. BInvest in long-term equities to maximise returns
  3. CLend the funds to a supplier at a high interest rate with no fixed repayment date

Explanation

Surplus cash needed in four months should be kept safe and liquid, so a short-term low-risk deposit maturing in time is suitable. Long-term equities carry capital and liquidity risk, and an open-ended loan to a supplier gives no certainty of repayment when the cash is needed.

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