Working Capital Management: A Comprehensive Guide for Year 13 Business Studies Students

Question 1

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

Accepted Answer

Increased risk of insolvency and bankruptcy

Answer

Improved liquidity and cash flow

Answer

Reduced financing costs and interest expenses

Answer

Increased profitability and return on assets

Question 2

What element is NOT a part of working capital?

Accepted Answer

Property, Plant, and Equipment

Answer

Inventory

Answer

Accounts receivable

Answer

Cash and cash equivalents

Question 3

The foremost objective of working capital management is to:

Accepted Answer

Ensure ample liquidity to fulfill short-term obligations

Answer

Increase revenue

Answer

Minimize assets invested in current assets

Answer

Maximize shareholder equity

Question 4

Which of the following approaches is used to expedite cash inflows?

Accepted Answer

Factoring

Answer

Inventory management

Answer

Trade credit

Answer

Cash flow planning

Question 5

The optimal level of working capital is:

Accepted Answer

Sufficient to cover current obligations

Answer

Zero

Answer

As low as possible to minimize holding costs

Answer

A specific percentage of sales revenue

Question 6

Which financial ratio is utilized to assess a company's ability to repay short-term debts?

Accepted Answer

Current ratio

Answer

Return on equity

Answer

Debt-to-asset ratio

Answer

Gross profit margin

Question 7

Which of the following is NOT an advantage of optimizing working capital?

Accepted Answer

Higher return on assets

Answer

Enhanced liquidity

Answer

Reduced financing costs

Answer

Increased profitability

Question 8

Which item is excluded from the primary components of working capital?

Accepted Answer

Investments in affiliate companies

Answer

Inventory

Answer

Accounts payable

Answer

Accounts receivable

Question 9

What is the primary goal of effective working capital management?

Accepted Answer

To ensure sufficient liquidity to meet short-term obligations

Answer

To maximize revenue generation

Answer

To minimize investment in long-term assets

Answer

To increase long-term profitability

Question 10

Which technique involves extending the payment period for accounts payable?

Accepted Answer

Trade credit

Answer

Factoring

Answer

Cash conversion cycle

Answer

Inventory optimization

Question 11

What is the fundamental distinction between current assets and current liabilities?

Accepted Answer

Current assets are projected to be converted into cash within a year, whereas current liabilities are due in more than a year.

Answer

Current liabilities are projected to be converted into cash within a year, whereas current assets are due in more than a year.

Answer

Current assets comprise cash and marketable securities, whereas current liabilities do not.

Answer

Current liabilities include accounts payable and overdrafts, whereas current assets do not.

Question 12

What is the main advantage of optimizing inventory?

Accepted Answer

Improved cash flow

Answer

Lower storage costs

Answer

Increased sales revenue

Answer

Lower production costs

Question 13

Which financial ratio evaluates the effectiveness of accounts receivable management?

Accepted Answer

Days Sales Outstanding (DSO)

Answer

Inventory Turnover Ratio

Answer

Debt-to-Equity Ratio

Answer

Current Ratio

Question 14

What is the purpose of calculating the cash conversion cycle?

Accepted Answer

To assess the time it takes for a business to convert its inventory into cash.

Answer

To determine the amount of cash needed to fund working capital requirements.

Answer

To evaluate the efficiency of accounts payable and receivable management.

Answer

To predict future cash flows.

Question 15

Which of the following is NOT a factor that determines working capital requirement?

Accepted Answer

Government stability

Answer

Industry type

Answer

Sales volume

Answer

Profit margin

Question 16

How does an increase in sales affect working capital?

Accepted Answer

Increased working capital requirement

Answer

Reduced working capital requirement

Answer

No impact on working capital requirement

Answer

Depends on the type of sales

Question 17

Which of the following is excluded from the calculation of working capital?

Accepted Answer

Long-term debt

Answer

Inventory

Answer

Accounts receivable

Answer

Accounts payable

Question 18

Which of the following is NOT a method for a business to finance its working capital?

Accepted Answer

Reducing inventory levels

Answer

Issuing short-term debt

Answer

Extending the payment period with suppliers

Question 19

Which element is **not** considered a part of a company's working capital?

Accepted Answer

Fixed assets

Answer

Inventory

Answer

Accounts payable

Answer

Cash

Question 20

Which method should be used to calculate a company's working capital?

Accepted Answer

Current assets minus current liabilities

Answer

Current liabilities minus current assets

Answer

Non-current assets minus non-current liabilities

Answer

Total assets minus total liabilities

Question 21

Which of the following is **not** considered a component of working capital?

Accepted Answer

Fixed assets

Answer

Inventory

Answer

Accounts payable

Answer

Cash equivalents

Question 22

Which of the following is NOT a core component of working capital?

Accepted Answer

Long-term debt

Answer

Current assets

Answer

Current liabilities

Answer

Inventory

Question 23

What is the formula to calculate the current ratio?

Accepted Answer

Current assets ÷ Current liabilities

Answer

Current liabilities ÷ Current assets

Answer

Inventory ÷ Current liabilities

Answer

Long-term debt ÷ Current assets

Question 24

Which of the following is NOT a potential consequence of ineffective working capital management?

Accepted Answer

Improved shareholder value

Answer

Cash flow problems

Answer

Reduced profitability

Answer

Increased risk of insolvency

Question 25

What is the primary purpose of a cash flow forecast?

Accepted Answer

To predict future cash inflows and outflows

Answer

To evaluate the financial health of a business

Answer

To determine the optimal level of working capital

Answer

To plan capital expenditures

Question 26

Which of the following is NOT a key performance indicator (KPI) used in working capital management?

Accepted Answer

Return on assets (ROA)

Answer

Current ratio

Answer

Days sales outstanding (DSO)

Answer

Inventory turnover ratio

Question 27

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

Accepted Answer

Increased revenue

Answer

Improved cash flow

Answer

Reduced financing costs

Answer

Reduced exposure to bad debts

Question 28

What is the formula for calculating the current ratio?

Accepted Answer

Current assets / Current liabilities

Answer

Current liabilities / Current assets

Answer

Net working capital / Total assets

Answer

Quick assets / Current assets

Question 29

Which inventory management technique aims to minimize inventory levels while ensuring adequate stock levels to meet customer demand?

Accepted Answer

Just-in-time (JIT) inventory

Answer

First-in, first-out (FIFO)

Answer

Last-in, first-out (LIFO)

Answer

Economic Order Quantity (EOQ)

Question 30

The formula for calculating the current ratio is:

Accepted Answer

Current Assets / Current Liabilities

Answer

Current Liabilities / Current Assets

Answer

Total Assets / Current Liabilities

Answer

Total Liabilities / Current Assets

Question 31

Which inventory management technique aims to minimize inventory levels and reduce holding costs?

Accepted Answer

Just-In-Time (JIT)

Answer

Economic Order Quantity (EOQ)

Answer

First-In, First-Out (FIFO)

Answer

Last-In, First-Out (LIFO)

Question 32

The optimal level of working capital is the balance that:

Accepted Answer

Minimizes risk and maximizes return

Answer

Maximizes risk and minimizes return

Answer

Maximizes both risk and return

Answer

Minimizes both risk and return

Question 33

The net working capital of a business represents:

Accepted Answer

Current Assets minus Current Liabilities

Answer

Current Liabilities minus Current Assets

Answer

Total Assets minus Total Liabilities

Answer

Total Liabilities minus Total Assets

Question 34

The payback period is a measure that indicates:

Accepted Answer

The time it takes to recover the initial investment

Answer

The profitability of an investment

Answer

The risk associated with an investment

Answer

The return on an investment

Question 35

How does a recessionary economic cycle typically affect a company's working capital management?

Accepted Answer

Lower demand resulting in reduced accounts receivable and inventory levels

Accepted Answer

Increased financing costs making it more expensive to finance working capital

Answer

Higher demand leading to increased inventory levels and accounts payable

Answer

No significant impact on working capital management

Question 36

How have technological advancements impacted working capital management in modern businesses?

Accepted Answer

Automated inventory systems have reduced inventory levels, cutting stockholding costs.

Accepted Answer

E-commerce platforms have sped up cash collection, enhancing accounts receivable management.

Answer

Technological advancements have had minimal impact on working capital management practices.

Question 37

Which of the following is NOT an advantage of effective working capital management?

Accepted Answer

Increased sales revenue

Answer

Enhanced liquidity

Answer

Reduced risk of bankruptcy

Answer

Improved profitability

Question 38

A company with a low inventory turnover ratio is likely to:

Accepted Answer

Have excessive inventory levels

Answer

Have efficient inventory management practices

Answer

Have high sales volume

Answer

Have strong financial performance

Question 39

Which of the following is a strategy to reduce the level of accounts receivable?

Accepted Answer

Offering discounts for early payment

Answer

Increasing credit limits

Answer

Extending payment terms

Answer

Accepting partial payments only

Question 40

In a globalized economy, what are the key challenges faced by businesses in managing their working capital?

Accepted Answer

Fluctuating exchange rates and varying currency valuations

Accepted Answer

Managing inventory levels across different geographical locations

Accepted Answer

Coordinating cash flow with suppliers and customers in different time zones

Answer

Minimal impact on working capital management

Question 41

Which financial metric measures the difference between current assets and current liabilities?

Accepted Answer

Working Capital

Answer

Current Ratio

Answer

Inventory Turnover Ratio

Answer

Quick Ratio

Question 42

A company with a negative working capital position may encounter:

Accepted Answer

Short-term liquidity issues

Answer

Improved cash flow

Answer

Long-term solvency problems

Answer

Increased profitability

Question 43

Which inventory management technique aims to hold only the necessary inventory to meet customer demand?

Accepted Answer

Just-in-Time (JIT) Inventory

Answer

First-In, First-Out (FIFO)

Answer

Periodic Inventory

Answer

Last-In, First-Out (LIFO)

Question 44

A company that grants extended payment terms to its customers is likely to:

Accepted Answer

Increase its accounts receivable balance

Answer

Lower its financing costs

Answer

Reduce its inventory levels

Answer

Improve its cash flow

Question 45

Which of the following is NOT a component of a company's current assets?

Accepted Answer

Long-term investments

Answer

Accounts receivable

Answer

Cash and cash equivalents

Answer

Inventory

Question 46

The working capital cycle describes the period between:

Accepted Answer

The acquisition of raw materials and the collection of cash from customers

Answer

The sale of inventory and the payment of suppliers

Answer

The production of goods and the payment of wages

Question 47

Which financial ratio assesses a company's ability to meet its current obligations?

Accepted Answer

Current Ratio

Answer

Debt-to-Equity Ratio

Answer

Return on Equity

Answer

Gross Profit Margin

Question 48

A company with a high inventory turnover ratio generally indicates:

Accepted Answer

Efficient inventory management

Answer

Excessive inventory levels

Answer

High financing costs

Answer

Poor sales performance

Question 49

Which of the following is NOT a component of working capital?

Accepted Answer

Long-term debt

Answer

Trade receivables

Answer

Inventory

Answer

Cash and cash equivalents

Question 50

The formula for calculating the current ratio, a key financial ratio used in working capital management, is:

Accepted Answer

Current assets / Current liabilities

Answer

Total liabilities / Current assets

Answer

Total assets / Current liabilities

Answer

Current liabilities / Current assets

Question 51

Which of the following inventory management strategies aims to reduce the time inventory is held, thereby improving working capital efficiency?

Accepted Answer

Just-in-time inventory management

Answer

Economic order quantity

Answer

Safety stock holding

Question 52

What is the primary purpose of trade credit, commonly used in working capital management?

Accepted Answer

To extend payment terms to customers, thereby improving cash flow

Answer

To improve liquidity

Answer

To reduce the cost of borrowing

Answer

To increase sales revenue

Question 53

What is the purpose of a cash budget in working capital management?

Accepted Answer

To forecast future cash flows and plan for potential shortfalls, ensuring the company has sufficient liquidity to meet its obligations

Answer

To calculate working capital requirements, determining the optimal level of working capital for the business

Answer

To track actual cash inflows and outflows, providing a historical record of cash flow

Question 54

How does efficient working capital management impact a company's profitability?

Accepted Answer

It can increase the company's return on investment by optimizing the use of its working capital, leading to improved financial performance

Answer

It can increase the company's net income but not its return on investment, as it improves cash flow but not overall efficiency

Answer

It can decrease the company's profit margin by reducing the availability of funds for investment

Answer

It has no impact on profitability, as working capital management is solely focused on liquidity

Question 55

What is the relationship between working capital and liquidity?

Accepted Answer

Working capital is a measure of a company's short-term liquidity, indicating its ability to meet its current obligations and maintain financial stability

Answer

Working capital is not related to liquidity, as it focuses on the management of current assets and liabilities

Answer

Liquidity is a measure of a company's long-term solvency, assessing its ability to meet long-term debt obligations