Working Capital Management: A Comprehensive Guide for Financial Economics Students

Question 1

Which of the following is NOT considered a current asset in the context of working capital management?

Accepted Answer

Long-term debt

Answer

Inventory

Answer

Prepaid expenses

Answer

Accounts receivable

Question 2

The primary objective of working capital management is to:

Accepted Answer

Optimize liquidity

Answer

Maximize profits

Answer

Minimize risk

Answer

Reduce costs

Question 3

How does an increase in inventory levels generally affect the current ratio?

Accepted Answer

Increases it

Answer

Decreases it

Answer

Has no effect on it

Answer

Cannot be determined

Question 4

How does trade credit typically affect a company's working capital?

Accepted Answer

It depends on the terms of the trade credit

Answer

It increases working capital

Answer

It decreases working capital

Answer

It has no impact on working capital

Question 5

Which of the following is NOT a commonly used key performance indicator for working capital management?

Accepted Answer

Return on assets

Answer

Inventory turnover ratio

Answer

Days sales in inventory

Answer

Current ratio

Question 6

Holding excessive levels of current assets can have certain drawbacks. Which of the following is NOT a potential downside?

Accepted Answer

Enhanced financial performance

Answer

Increased storage and insurance costs

Answer

Reduced flexibility in responding to changes in demand

Answer

Lost opportunity cost from investing the funds in other profitable ventures

Question 7

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

Accepted Answer

Increased stock price

Answer

Improved profitability through reduced costs

Answer

Enhanced liquidity through better cash flow management

Answer

Reduced risk of bankruptcy through better financial management

Question 8

Which of the following is a crucial goal of working capital management?

Accepted Answer

Ensuring adequate liquidity to cover day-to-day business operations

Answer

Minimizing long-term debt

Answer

Maximizing profit margins

Question 9

Among the current assets, which one is generally regarded as having the highest liquidity?

Accepted Answer

Cash and cash equivalents

Answer

Accounts receivable

Answer

Prepaid expenses

Answer

Inventory

Question 10

Which strategy is commonly employed to increase a company's working capital?

Accepted Answer

Extending credit periods granted by suppliers

Answer

Reducing inventory levels

Answer

Issuing new shares

Answer

Paying dividends to shareholders

Question 11

What is the potential consequence of holding excessive inventory levels for a company?

Accepted Answer

Reduced profitability and increased risk of obsolete stock

Answer

Increased sales and improved customer satisfaction

Answer

Enhanced liquidity and reduced risk

Question 12

What is the primary purpose of establishing a trade credit policy?

Accepted Answer

To outline the terms and conditions for payments between businesses

Answer

To safeguard consumers from fraudulent transactions

Answer

To provide incentives for early payments

Answer

To control prices within an industry

Question 13

Which financial ratio is commonly used to measure a company's working capital efficiency?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Earnings per share

Answer

Return on assets

Question 14

What are the potential risks associated with implementing an overly aggressive working capital management strategy?

Accepted Answer

Increased financial instability and potential liquidity shortages

Answer

Improved customer relationships and reduced operating costs

Answer

Enhanced profitability and increased market share

Question 15

Which of the following is classified as a current liability?

Accepted Answer

Accounts payable

Answer

Share capital

Answer

Long-term bank loan

Answer

Retained earnings

Question 16

Which of the following is explicitly excluded from working capital?

Accepted Answer

Long-term debt

Answer

Accounts receivable

Answer

Inventory

Answer

Accounts payable

Question 17

The primary benefit of maintaining a cash buffer is:

Accepted Answer

Increased liquidity

Answer

Reduced risk of bankruptcy

Answer

Improved profitability

Question 18

The optimal level of working capital should balance:

Accepted Answer

Liquidity with profitability

Answer

Long-term assets with long-term liabilities

Answer

Current assets with current liabilities

Answer

Assets with liabilities

Question 19

Which of the following is a key benefit of effective inventory management?

Accepted Answer

Reduced carrying costs

Answer

Improved customer service

Answer

Increased sales

Answer

Enhanced brand reputation

Question 20

A company's credit period refers to:

Accepted Answer

The number of days customers have to pay their invoices

Answer

The number of days a company has to pay its suppliers

Answer

The length of time a company retains its inventory

Question 21

The primary purpose of trade credit is to:

Accepted Answer

Facilitate business transactions

Answer

Enhance customer loyalty

Answer

Generate additional revenue

Answer

Reduce inventory carrying costs

Question 22

Which of the following is a potential downside to offering trade credit?

Accepted Answer

Bad debts

Answer

Reduced sales volume

Answer

Higher credit card fees

Answer

Increased storage costs

Question 23

The fundamental difference between factoring and invoice discounting lies in:

Accepted Answer

The timing of the transfer of accounts receivable

Answer

The amount of financing provided

Answer

The cost of financing

Answer

The type of collateral required

Question 24

Which of the following is a component of working capital?

Accepted Answer

Accounts receivable

Answer

Long-term debt

Answer

Accumulated depreciation

Question 25

Which of the following is a potential advantage of a company holding a high level of working capital?

Accepted Answer

Enhanced liquidity and financial stability

Answer

Reduced borrowing costs

Answer

Increased shareholder value

Answer

Improved profitability

Question 26

Which of the following is a strategy to optimize a company's working capital?

Accepted Answer

Negotiating shorter payment terms with suppliers

Answer

Delaying payment of taxes

Answer

Increasing inventory levels

Answer

Offering longer payment terms to customers

Question 27

A company's gross profit margin is 45% and its inventory turnover is 2.5. What is the company's inventory holding period?

Accepted Answer

72 days

Answer

144 days

Answer

360 days

Answer

45 days

Question 28

Which of the following can be a potential consequence of poor working capital management?

Accepted Answer

Reduced profitability and liquidity

Answer

Improved customer satisfaction

Answer

Increased shareholder value

Answer

Enhanced brand reputation

Question 29

Which of the following is NOT a primary objective of working capital management?

Accepted Answer

To maximize shareholder value

Answer

To optimize the use of current assets

Answer

To maintain sufficient liquidity and solvency

Question 30

Which of the following is a current asset?

Accepted Answer

Inventory

Answer

Retained earnings

Answer

Long-term debt

Answer

Property, Plant, and Equipment

Question 31

What is a primary advantage of holding higher inventory levels?

Accepted Answer

Reduced risk of stockouts

Answer

Improved cash flow

Answer

Increased customer satisfaction

Answer

Lower storage costs

Question 32

Which of the following is a common measure of inventory efficiency?

Accepted Answer

Inventory turnover ratio

Answer

Debt-to-equity ratio

Answer

Quick ratio

Answer

Current ratio

Question 33

What is the purpose of trade credit?

Accepted Answer

To extend the payment period for purchases

Answer

To improve customer relationships

Answer

To reduce the cost of financing

Answer

To increase sales revenue

Question 34

Which of the following is a technique for accelerating cash inflows?

Accepted Answer

Factoring

Answer

Issuing bonds

Answer

Reducing inventory

Question 35

What is the impact of paying creditors early on the cash conversion cycle?

Accepted Answer

Shortens it

Answer

Does not affect it

Answer

Lengthens it

Question 36

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

Accepted Answer

Bankruptcy

Answer

Improved credit rating

Answer

Enhanced liquidity

Answer

Increased profitability

Question 37

How can working capital affect profitability?

Accepted Answer

Working capital can impact profitability through its influence on sales, expenses, and asset turnover.

Answer

Profitability always increases with higher working capital.

Answer

Working capital has no impact on profitability.

Question 38

Define the central element of working capital management?

Accepted Answer

Optimizing the relationship between current assets and current liabilities

Answer

Implementing long-term investment strategies

Answer

Forecasting future financial performance

Question 39

Which working capital policy aims to maintain a higher level of current assets relative to current liabilities?

Accepted Answer

Conservative

Answer

Moderate

Answer

Neutral

Answer

Aggressive

Question 40

What constitutes the optimal level of working capital for a company?

Accepted Answer

The level that minimizes the combined cost of holding current assets and financing them

Answer

The highest possible level

Answer

The lowest possible level

Question 41

Identify the primary benefit of effective working capital management.

Accepted Answer

Enhanced profitability

Answer

Reduced risk of insolvency

Answer

Increased tax liability

Answer

Lower employee morale

Question 42

What is the overarching goal of cash conversion cycle management?

Accepted Answer

Minimizing the time taken to convert inputs into cash

Answer

Maximizing inventory turnover

Answer

Increasing cash on hand

Question 43

Which financial ratio measures a company's ability to meet its short-term obligations?

Accepted Answer

Current ratio

Answer

Return on equity

Answer

Debt-to-equity ratio

Question 44

What is the purpose of a revolving credit facility?

Accepted Answer

Providing a flexible line of credit that can be repeatedly utilized and repaid

Answer

Solely funding long-term capital expenditures

Answer

Exclusively financing working capital needs

Question 45

Which of the following is considered a current asset within working capital?

Accepted Answer

Accounts receivable

Answer

Share capital

Answer

Building owned by the company

Answer

Long-term bonds

Question 46

What is the primary objective of effective working capital management?

Accepted Answer

Balancing liquidity and profitability to maximize financial performance

Answer

Reducing operating costs to improve efficiency

Answer

Maximizing shareholder value through stock appreciation

Question 47

Calculate the net working capital for a company with current assets of £225,000 and current liabilities of £150,000.

Accepted Answer

£75,000

Answer

£225,000

Answer

£150,000

Answer

£375,000

Question 48

Which of the following is an advantage of maintaining higher levels of working capital?

Accepted Answer

Enhanced liquidity, reducing the risk of financial distress

Answer

Reduced need for external financing

Answer

Potentially higher returns on investments

Answer

Improved operational efficiency

Question 49

What is the primary risk associated with holding excessively low levels of working capital?

Accepted Answer

Increased likelihood of insolvency due to cash shortages

Answer

Decreased profitability due to lost sales opportunities

Answer

Higher financing costs

Question 50

Which working capital policy involves maintaining a higher proportion of current assets compared to current liabilities?

Accepted Answer

Conservative policy

Answer

Flexible policy

Answer

Aggressive policy

Answer

Balanced policy

Question 51

What is the primary purpose of tracking the cash conversion cycle in working capital management?

Accepted Answer

Measuring the efficiency of a company's operating cycle, particularly inventory management

Answer

Assessing the company's overall financial performance

Answer

Determining the optimal level of working capital

Question 52

Which of the following strategies can effectively reduce the cash conversion cycle?

Accepted Answer

Optimizing inventory management practices to minimize inventory holding periods

Answer

Reducing operating expenses to improve efficiency

Answer

Seeking external financing to increase liquidity

Answer

Expanding into new markets to increase sales volume