What is working capital management?
a) Managing long-term capital investments
b) Managing short-term assets and liabilities
c) Managing equity and debt financing
d) Managing inventory and fixed assets
Answer: b) Managing short-term assets and liabilities
Which of the following is a component of working capital?
a) Land and buildings
b) Equipment and machinery
c) Accounts payable
d) Long-term loans
Answer: c) Accounts payable
Which of the following represents positive working capital?
a) Current assets > Current liabilities
b) Current assets < Current liabilities c) Current assets = Current liabilities d) Current assets – Current liabilities = 0 Answer: a) Current assets > Current liabilities
What is the main objective of working capital management?
a) Maximizing shareholder wealth
b) Minimizing sales revenue
c) Reducing fixed costs
d) Ensuring liquidity and profitability
Answer: d) Ensuring liquidity and profitability
Which of the following ratios is commonly used to assess working capital management?
a) Debt-to-equity ratio
b) Return on investment ratio
c) Current ratio
d) Gross profit margin
Answer: c) Current ratio
What is the ideal current ratio for a company?
a) Less than 1
b) 1:1
c) Greater than 1
d) Varies depending on the industry
Answer: c) Greater than 1
Which of the following strategies is used to manage working capital?
a) Maintaining high inventory levels
b) Delaying customer payments
c) Shortening the cash conversion cycle
d) Increasing accounts payable period
Answer: c) Shortening the cash conversion cycle
What is the cash conversion cycle (CCC)?
a) The time it takes to convert fixed assets into cash
b) The time it takes to collect accounts receivable
c) The time it takes to convert inventory into sales
d) The time it takes to convert cash into inventory
Answer: c) The time it takes to convert inventory into sales
Which of the following is an example of aggressive working capital management?
a) Tightening credit policies for customers
b) Holding excess cash reserves
c) Increasing inventory levels
d) Extending accounts payable period
Answer: c) Increasing inventory levels
How can efficient working capital management benefit a company?
a) Increased liquidity and reduced financial risk
b) Decreased profitability and higher costs
c) Limited growth opportunities
d) Increased long-term debt obligations
Answer: a) Increased liquidity and reduced financial risk
Which of the following is considered a spontaneous source of working capital financing?
a) Long-term bank loans
b) Issuance of corporate bonds
c) Trade credit from suppliers
d) Equity financing
Answer: c) Trade credit from suppliers
A high accounts receivable turnover ratio indicates:
a) Efficient collection of accounts receivable
b) Slow collection of accounts receivable
c) Insufficient sales revenue
d) Low profitability
Answer: a) Efficient collection of accounts receivable
Which of the following working capital policies aims to maintain a balance between risk and profitability?
a) Conservative working capital policy
b) Aggressive working capital policy
c) Moderate working capital policy
d) Passive working capital policy
Answer: c) Moderate working capital policy
The cash conversion cycle consists of which three key components?
a) Accounts receivable period, accounts payable period, and inventory turnover period
b) Accounts receivable turnover, accounts payable turnover, and cash turnover
c) Accounts receivable period, accounts payable turnover, and inventory turnover
d) Cash turnover, inventory turnover, and accounts payable period
Answer: a) Accounts receivable period, accounts payable period, and inventory turnover period
Which of the following working capital management techniques aims to speed up cash inflows?
a) Offering cash discounts to customers
b) Negotiating longer payment terms with suppliers
c) Increasing inventory levels
d) Reducing credit sales
Answer: a) Offering cash discounts to customers
What is the purpose of conducting a working capital gap analysis?
a) Identifying potential investment opportunities
b) Assessing the company’s liquidity position
c) Determining the company’s debt capacity
d) Evaluating the company’s profitability
Answer: b) Assessing the company’s liquidity position
A negative working capital indicates:
a) Financial distress and potential bankruptcy
b) Efficient utilization of current assets
c) Low profitability and limited growth prospects
d) Excessive reliance on long-term debt
Answer: a) Financial distress and potential bankruptcy
Which of the following is a qualitative factor to consider in working capital management?
a) Accounts payable turnover ratio
b) Inventory turnover ratio
c) Supplier relationships and credit terms
d) Current ratio
Answer: c) Supplier relationships and credit terms
How does effective working capital management impact a company’s profitability?
a) It has no direct impact on profitability
b) It increases profitability by reducing costs
c) It decreases profitability by increasing expenses
d) It improves profitability through efficient use of resources
Answer: d) It improves profitability through efficient use of resources
What is the formula for calculating the operating cycle of a company?
a) Average collection period + Inventory turnover
b) Accounts receivable turnover + Accounts payable turnover
c) Average collection period + Average payment period
d) Inventory turnover + Average payment period
Answer: c) Average collection period + Average payment period
Which of the following is a measure of the liquidity of a company’s inventory?
a) Days Sales Outstanding (DSO)
b) Days Payable Outstanding (DPO)
c) Inventory Turnover Ratio
d) Cash Conversion Cycle (CCC)
Answer: c) Inventory Turnover Ratio
A company that follows a just-in-time (JIT) inventory management approach aims to:
a) Minimize inventory carrying costs
b) Maximize safety stock levels
c) Extend payment terms with suppliers
d) Increase production lead times
Answer: a) Minimize inventory carrying costs
What is the purpose of conducting a receivables aging analysis?
a) Evaluating the profitability of the company
b) Assessing the liquidity of the company’s accounts receivable
c) Determining the optimal level of inventory
d) Analyzing the company’s working capital turnover ratio
Answer: b) Assessing the liquidity of the company’s accounts receivable
Which of the following is a cash flow-based measure of working capital management?
a) Quick ratio
b) Acid-test ratio
c) Cash conversion efficiency
d) Debt-to-equity ratio
Answer: c) Cash conversion efficiency
The objective of managing accounts payable is to:
a) Extend payment terms as long as possible
b) Pay suppliers early to maintain good relationships
c) Minimize the cost of trade credit
d) Increase the average collection period
Answer: c) Minimize the cost of trade credit
What is the main drawback of maintaining a high level of working capital?
a) Increased risk of stockouts and lost sales
b) Inability to meet short-term obligations
c) Reduced profitability due to higher financing costs
d) Negative impact on the company’s credit rating
Answer: c) Reduced profitability due to higher financing costs
Which of the following ratios measures a company’s ability to meet its short-term obligations?
a) Debt-to-equity ratio
b) Quick ratio
c) Return on investment ratio
d) Gross profit margin
Answer: b) Quick ratio
Which working capital management strategy involves matching the maturities of assets and liabilities?
a) Hedging strategy
b) Conservative strategy
c) Matching strategy
d) Aggressive strategy
Answer: c) Matching strategy
What is the impact of effective working capital management on a company’s cash flow?
a) It increases cash inflows and reduces cash outflows
b) It reduces cash inflows and increases cash outflows
c) It has no significant impact on cash flow
d) It depends on the specific working capital policies implemented
Answer: a) It increases cash inflows and reduces cash outflows
Which of the following working capital financing methods involves selling account receivables to a third party at a discount?
a) Factoring
b) Bank loans
c) Trade credit
d) Equity financing
Answer: a) Factoring
What is the purpose of a cash budget in working capital management?
a) To track the company’s investment in fixed assets
b) To forecast and monitor cash inflows and outflows
c) To calculate the company’s debt-to-equity ratio
d) To determine the company’s optimal inventory level
Answer: b) To forecast and monitor cash inflows and outflows
Which of the following is a measure of a company’s ability to convert its inventory into sales?
a) Accounts payable turnover ratio
b) Days payable outstanding
c) Working capital turnover ratio
d) Inventory turnover ratio
Answer: d) Inventory turnover ratio
A company that follows a cash conversion cycle approach aims to:
a) Maximize the time it takes to collect accounts receivable
b) Minimize the time it takes to convert inventory into sales
c) Extend payment terms with suppliers as much as possible
d) Increase the average collection period
Answer: b) Minimize the time it takes to convert inventory into sales
How does an increase in accounts payable period affect a company’s cash flow?
a) It increases cash inflows
b) It decreases cash inflows
c) It has no impact on cash flow
d) It depends on the specific circumstances
Answer: a) It increases cash inflows
Which of the following is an example of an aggressive approach to working capital management?
a) Holding excess cash reserves
b) Tightening credit policies for customers
c) Reducing the average collection period
d) Increasing the accounts payable period
Answer: c) Reducing the average collection period
The quick ratio is a measure of a company’s:
a) Liquidity and ability to meet short-term obligations
b) Efficiency in converting inventory into sales
c) Profitability and return on investment
d) Leverage and debt repayment capacity
Answer: a) Liquidity and ability to meet short-term obligations
Which of the following working capital management strategies aims to minimize the risk of stockouts?
a) Aggressive strategy
b) Moderate strategy
c) Conservative strategy
d) Passive strategy
Answer: c) Conservative strategy
What is the main disadvantage of maintaining a low level of working capital?
a) Increased risk of stockouts and lost sales
b) Higher carrying costs and reduced profitability
c) Limited growth opportunities
d) Negative impact on the company’s credit rating
Answer: a) Increased risk of stockouts and lost sales
How does effective working capital management impact a company’s overall financial health?
a) It improves the company’s creditworthiness and reduces financial risk
b) It increases the company’s long-term debt obligations
c) It has no significant impact on the company’s financial health
d) It leads to higher expenses and decreased profitability
Answer: a) It improves the company’s creditworthiness and reduces
financial risk