Working Capital Management: Strategies for Effective Business Operations

Question 1

Which of the following is a disadvantage of effective working capital management?

Accepted Answer

Unnecessarily high inventory levels

Answer

Improved cash flow

Answer

Enhanced profitability

Answer

Reduced risk of insolvency

Question 2

Which of the following is **NOT** a key benefit of effective working capital management?

Accepted Answer

Increased risk of bankruptcy

Answer

Improved cash flow

Answer

Increased profitability

Answer

Enhanced financial flexibility

Question 3

Which current asset subcomponent typically accounts for the **largest** portion of working capital?

Accepted Answer

Inventory

Answer

Cash

Answer

Accounts receivable

Question 4

Which of the following inventory management techniques aims to minimize the **total** cost of holding and ordering inventory?

Accepted Answer

Economic order quantity (EOQ)

Answer

Materials requirements planning (MRP)

Answer

Just-in-time (JIT) inventory

Answer

Safety stock

Question 5

Which of the following is a **disadvantage** of trade credit?

Accepted Answer

Cash discounts may be forfeited

Answer

Increased flexibility

Answer

Improved supplier relationships

Answer

Reduced transaction costs

Question 6

What is the formula for calculating the **Net Working Capital (NWC)**?

Accepted Answer

Current assets - Current liabilities

Answer

Current assets / Total assets

Answer

Long-term assets + Current liabilities

Question 7

Which of the following is a measure of a company's ability to meet its **short-term obligations**?

Accepted Answer

Current ratio

Answer

Return on equity

Answer

Debt-to-equity ratio

Answer

Gross profit margin

Question 8

What is the **primary goal** of working capital management in a growth company?

Accepted Answer

To ensure sufficient liquidity to support expansion

Answer

To minimize inventory levels

Answer

To reduce accounts payable

Question 9

Which of the following factors does **NOT** affect a company's working capital cycle?

Accepted Answer

Government regulations

Answer

Supplier payment terms

Answer

Customer payment patterns

Answer

Industry norms

Question 10

Which of the following is NOT a potential consequence of holding excessive inventory?

Accepted Answer

Enhanced production efficiency

Answer

Lost sales due to stockouts

Answer

Increased storage costs

Answer

Reduced customer satisfaction

Question 11

What is the primary goal of accounts receivable management?

Accepted Answer

To maximize cash inflows while minimizing bad debt losses

Answer

To extend credit terms to all customers

Answer

To minimize the average collection period

Question 12

Which of the following is a key performance indicator (KPI) used to evaluate accounts payable performance?

Accepted Answer

Days payable outstanding (DPO)

Answer

Current ratio

Answer

Inventory turnover ratio

Answer

Return on assets (ROA)

Question 13

The formula used to calculate Net Working Capital (NWC) is:

Accepted Answer

Current Assets minus Current Liabilities

Answer

Equity divided by Total Assets

Answer

Current Liabilities divided by Current Assets

Answer

Total Assets divided by Total Liabilities

Question 14

Which of the following is an effective strategy for optimizing working capital management?

Accepted Answer

Extending payment terms with suppliers

Answer

Increasing inventory levels without proper justification

Answer

Offering discounts for early payment without considering the potential impact on revenue

Answer

Investing in new equipment without considering its impact on cash flow

Question 15

What is the primary purpose of a cash budget?

Accepted Answer

To forecast future cash flows and identify potential cash shortages or surpluses

Answer

To analyze investment opportunities

Answer

To record and track past financial performance

Answer

To prepare for audits

Question 16

Which of the following is NOT a source of working capital financing?

Accepted Answer

Long-term debt financing

Answer

Factoring

Answer

Overdraft facilities

Answer

Short-term loans

Question 17

Holding excessive working capital can have a negative impact on a company's financial performance. Which of the following is NOT a potential consequence?

Accepted Answer

Increased profitability

Answer

Reduced return on assets

Answer

Increased financial risk

Answer

Missed investment opportunities

Question 18

What is the overarching goal of working capital management?

Accepted Answer

To ensure that a company has sufficient liquidity to meet its short-term obligations and maximize its long-term profitability

Answer

To minimize the amount of working capital held

Answer

To maximize the current ratio at all times

Question 19

Which of the following is NOT a benefit of effective working capital management?

Accepted Answer

Reduced production costs

Answer

Improved liquidity

Answer

Enhanced financial performance

Answer

Increased shareholder value

Question 20

A company has current assets of £500,000 and current liabilities of £300,000. What is its net working capital?

Accepted Answer

£200,000

Answer

£800,000

Answer

£300,000

Answer

£500,000

Question 21

Which of the following is a key technique used in accounts receivable management?

Accepted Answer

Credit scoring

Answer

Activity-based costing

Answer

Linear programming

Answer

Break-even analysis

Question 22

The Days Sales Outstanding (DSO) for a company is 60 days. This means that:

Accepted Answer

The company typically takes 60 days to collect its accounts receivable

Answer

The company has a working capital ratio of 60

Answer

The company has a cash conversion cycle of 60 days

Answer

The company has 60 days of inventory on hand

Question 23

What is the primary goal of working capital management?

Accepted Answer

To optimize the trade-off between liquidity and profitability

Answer

To maximize current liabilities

Answer

To minimize the amount of current assets

Question 24

A company's current ratio is 1.5. This means that:

Accepted Answer

The company has £1.50 of current assets for every £1 of current liabilities

Answer

The company has £1.50 of current liabilities for every £1 of current assets

Answer

The company has a working capital surplus of £0.50

Question 25

Which of the following factors has the greatest impact on a company's working capital needs?

Accepted Answer

Operating cycle

Answer

Interest rates

Answer

Customer payment terms

Answer

Economic conditions

Question 26

What are the potential costs of holding excess working capital?

Accepted Answer

Increased borrowing costs, reduced profitability, and lost investment opportunities

Answer

Reduced inventory levels and improved cash flow

Answer

Improved liquidity and increased shareholder value

Question 27

Which of the following is a central objective of effective working capital management?

Accepted Answer

Ensuring sufficient liquidity to meet short-term obligations and fund ongoing operations

Answer

Maximizing return on equity

Answer

Improving customer satisfaction

Question 28

Which of the following is not considered as a current asset in working capital?

Accepted Answer

Fixed assets (such as property, plant, and equipment)

Answer

Inventory (raw materials, work-in-progress, and finished goods)

Answer

Cash and cash equivalents (liquid assets)

Answer

Accounts receivable (money owed by customers)

Question 29

Which inventory management technique aims to minimize inventory holding costs by maintaining just enough stock to meet current demand?

Accepted Answer

Just-in-time (JIT) inventory

Answer

First-in, first-out (FIFO) (assumes that the oldest inventory is sold first)

Answer

Economic order quantity (EOQ) (determines the optimal order size to minimize total inventory costs)

Answer

Safety stock (additional inventory held as a buffer against unexpected demand)

Question 30

Which accounts receivable management strategy is designed to assess the creditworthiness of potential customers and reduce the risk of bad debts?

Accepted Answer

Credit scoring (using financial and non-financial data to evaluate credit risk)

Answer

Collection float (delaying the recording of cash receipts to improve cash flow)

Answer

Factoring (selling accounts receivable to a third party at a discount)

Answer

Invoice discounting (borrowing against the value of unpaid invoices)

Question 31

Which accounts payable management technique involves taking advantage of discounts offered by suppliers for early payment?

Accepted Answer

Early payment discounts (reductions in invoice amounts for prompt payment)

Answer

Float (delaying the payment of accounts payable)

Answer

Invoice leveling (smoothing out accounts payable payments over time)

Answer

Supplier credit (extended payment terms offered by suppliers)

Question 32

Which of the following is a potential consequence of excessive working capital?

Accepted Answer

Higher financing costs (due to holding excess cash or borrowing unnecessarily)

Answer

Improved employee morale

Answer

Enhanced shareholder value

Answer

Increased customer loyalty

Question 33

Which of the following funding sources is typically considered a short-term financing option for working capital management?

Accepted Answer

Bank overdraft (a line of credit that allows businesses to borrow up to a certain limit)

Answer

Private placement (sale of securities to a limited number of investors)

Answer

Equity financing (raising capital by issuing shares)

Answer

Long-term loan (financing with a maturity of more than one year)

Question 34

Which of the following is a fundamental consideration when making strategic decisions about working capital management?

Accepted Answer

Balancing liquidity (ability to meet short-term obligations) and profitability (generating sufficient returns)

Answer

Offering extended payment terms to customers

Answer

Minimizing accounts payable

Answer

Maintaining a high level of inventory

Question 35

A company with a high level of inventory relative to sales is likely to have:

Accepted Answer

High working capital

Answer

Negative working capital

Answer

Low working capital

Answer

None of the above

Question 36

Which of the following is a benefit of effective accounts receivable management?

Accepted Answer

Reduced bad debts

Answer

Higher accounts payable

Answer

Increased inventory levels

Question 37

The optimal level of working capital is:

Accepted Answer

The level that meets the company's operational and financial needs at the lowest possible cost

Answer

The lowest level possible

Answer

The highest level possible

Question 38

Working capital management is important for:

Accepted Answer

Improving operational efficiency and financial performance

Answer

Reducing long-term debt

Answer

Increasing sales revenue

Question 39

What is the primary goal of inventory management?

Accepted Answer

Balancing the need to meet customer demand with minimizing inventory holding costs.

Answer

Keeping inventory levels as high as possible to maximize sales opportunities.

Answer

Maximizing inventory levels to ensure there are no stockouts.

Answer

Minimizing inventory holding costs, regardless of customer demand.

Question 40

Which of the following is a common strategy used to encourage prompt payment from customers?

Accepted Answer

Offering early payment discounts.

Answer

Reducing the number of credit checks performed.

Answer

Extending payment terms to customers.

Answer

Increasing credit limits for customers.

Question 41

How is working capital calculated?

Accepted Answer

Current Assets - Current Liabilities

Answer

Total Assets - Current Liabilities

Answer

Total Assets - Total Liabilities

Answer

Current Assets + Current Liabilities

Question 42

Which of the following is a potential negative consequence of poor working capital management?

Accepted Answer

Cash flow shortages, making it difficult to meet financial obligations.

Answer

Increased profits due to lower operating costs.

Answer

Improved customer satisfaction through faster delivery times.

Answer

Enhanced brand reputation due to strong customer service.

Question 43

What is the main goal of working capital management?

Accepted Answer

To ensure the company has enough liquid assets to meet its short-term financial obligations while maximizing profitability.

Answer

Reducing cash flow to conserve resources.

Answer

Minimizing inventory levels, regardless of the impact on sales.

Answer

Maximizing current liabilities to increase financial flexibility.

Question 44

Which of the following is a key component of the working capital cycle?

Accepted Answer

Cash conversion cycle - the time it takes to convert raw materials into cash from sales.

Answer

Economic order quantity - the ideal order size to minimize inventory costs.

Answer

Return on investment - a measure of profitability.

Answer

Inventory turnover - the rate at which inventory is sold and replaced.

Question 45

Which of the following is a common technique used to improve accounts payable management?

Accepted Answer

Negotiating payment terms with suppliers to extend payment deadlines.

Answer

Offering early payment discounts to suppliers.

Answer

Reducing the number of suppliers to simplify operations.

Answer

Increasing credit limits for suppliers to encourage more purchases.

Question 46

Which of the following is NOT a benefit of effective working capital management?

Accepted Answer

Reduced need for external financing

Answer

Increased employee morale

Answer

Enhanced profitability

Answer

Improved liquidity

Question 47

Inventory management aims to:

Accepted Answer

Optimize stock levels to minimize carrying costs and avoid stockouts.

Answer

Reduce customer demand

Answer

Increase production capacity

Question 48

Which of the following is a technique used in accounts receivable management to encourage prompt payment?

Accepted Answer

Offering discounts for early payment

Answer

Increasing credit limits

Answer

Imposing penalties for late payment

Answer

Granting extended payment terms

Question 49

Negotiating extended payment terms with suppliers is primarily aimed at:

Accepted Answer

Reducing accounts payable turnover

Answer

Improving customer relationships

Answer

Increasing cash flow

Answer

Accelerating inventory turnover

Question 50

Which of the following is a key working capital ratio used to assess a company's ability to meet its short-term obligations?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Gross profit margin

Answer

Return on assets ratio

Question 51

Working capital management involves:

Accepted Answer

Balancing liquidity and profitability

Answer

Investing in fixed assets

Answer

Minimizing operating expenses

Answer

Increasing sales revenue

Question 52

Which of the following factors does NOT influence the optimal level of working capital?

Accepted Answer

Exchange rate fluctuations

Answer

Industry practices

Answer

Availability of financing

Answer

Operating cycle

Question 53

Just-in-time (JIT) inventory management is based on the principle of:

Accepted Answer

Minimizing inventory levels to reduce holding costs.

Answer

Storing inventory in multiple locations to ensure availability.

Answer

Maintaining high inventory levels to meet unexpected demand.

Question 54

Which of the following is a challenge in managing working capital?

Accepted Answer

Striking a balance between liquidity and profitability

Answer

Determining the precise amount of working capital required

Answer

Accurate forecasting of customer demand

Question 55

Effective working capital management can lead to:

Accepted Answer

Improved financial performance by optimizing resource allocation.

Answer

Increased market share due to enhanced customer satisfaction.

Answer

Reduced employee turnover as a result of higher job security.