Association for Financial Professionals (AFP) Practice Exam

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In the context of cash flow exposure, when does a U.S. company experience implicit risk?

When a sale is expected until it occurs
From the start of the transaction until cash settlement
Only before setting product prices
After receiving the payment

The correct answer is: When a sale is expected until it occurs

The correct choice highlights the period during which a U.S. company remains exposed to implicit risk due to the uncertainty surrounding a sale that has been anticipated but not yet finalized. Implicit risk in this context refers to the potential for fluctuations in cash flow related to a transaction that is expected to occur but hasn’t been completed. When a company predicts a sale, it may prepare for that cash flow in its financial planning, yet until the sale officially takes place and the payment is received, there is no guarantee. This means that the company may face risks due to changes in market conditions, buyer behavior, or other unforeseen events that could impact the likelihood of that sale being successfully completed. Thus, the period of expectation for the sale until it becomes reality is crucial for assessing implicit risk. During this time, the company has taken on the risk associated with the anticipation of cash flow that may not ultimately materialize as planned. This contrasts with other choices, which refer to situations or periods that do not adequately capture the full essence of implicit risk as it relates to future sales expectations.