Working Capital Management: Master Current Assets and Liabilities

Question 1

Which metric measures the average time it takes a company to convert its inventory into sales?

Accepted Answer

Days Inventory Outstanding (DIO)

Answer

Days Sales Outstanding (DSO)

Answer

Inventory Turnover Ratio

Answer

Cash Conversion Cycle (CCC)

Question 2

Which of the following is NOT an advantage of implementing a strict credit policy?

Accepted Answer

Increased sales volume

Answer

Reduced bad debt losses

Answer

Lower interest expenses

Answer

Improved cash flow

Question 3

What is the formula for calculating the Accounts Receivable Turnover Ratio?

Accepted Answer

Net sales / Average accounts receivable

Answer

Average accounts receivable / Net sales

Answer

Cost of goods sold / Average accounts receivable

Answer

Net income / Average accounts receivable

Question 4

What is the ideal level of working capital that a business should maintain?

Accepted Answer

Sufficient to meet its short-term obligations

Answer

As high as possible

Answer

As low as possible

Answer

Equal to its total current assets

Question 5

What is the primary objective of effective working capital management?

Accepted Answer

Maximize liquidity and solvency

Answer

Minimize inventory levels

Answer

Increase sales revenue

Answer

Facilitate long-term investments

Question 6

Which of the following is a potential disadvantage of inventory management?

Accepted Answer

Increased carrying costs

Answer

Improved customer satisfaction

Answer

Reduced risk of obsolescence

Answer

Enhanced cash flow

Question 7

What is the primary goal of accounts receivable management?

Accepted Answer

Minimizing the risk of uncollectible debts

Answer

Maximizing sales revenue

Answer

Reducing expenses related to collecting payments

Answer

Extending credit to as many customers as possible

Question 8

Which strategy can help optimize the cash conversion cycle?

Accepted Answer

Reducing inventory holding period

Answer

Delaying payments to suppliers

Answer

Extending payment terms for customers

Answer

Increasing production lead time

Question 9

What is the primary reason for maintaining a cash reserve?

Accepted Answer

To cover unforeseen expenses

Answer

To seize investment opportunities

Answer

To maintain a positive credit rating

Answer

To distribute dividends to shareholders

Question 10

Which factor is NOT relevant in determining credit limits?

Accepted Answer

Personal opinion of the credit manager

Answer

Customer's payment history

Answer

Customer's industry

Answer

Company's financial stability

Question 11

What is the primary advantage of using a factor for accounts receivable financing?

Accepted Answer

Immediate access to cash

Answer

Reduced risk of bad debts

Answer

Elimination of collection costs

Answer

Improved customer relationships

Question 12

The central focus of working capital management is:

Accepted Answer

Optimizing the utilization of current assets and liabilities

Answer

Maximizing returns for shareholders

Answer

Minimizing operational costs

Answer

Increasing revenue from sales

Question 13

Which of the following is NOT classified as a current asset?

Accepted Answer

Machinery

Answer

Inventory

Answer

Accounts receivable

Answer

Prepaid expenses

Question 14

The main objective of credit policy is to:

Accepted Answer

Minimize bad debts

Answer

Maximize sales

Answer

Control inventory

Answer

Increase cash flow

Question 15

Which of the following is NOT a common tool used in cash flow forecasting?

Accepted Answer

Variance analysis

Answer

Budgeting

Answer

Scenario planning

Answer

Trend analysis

Question 16

The inventory conversion period measures the average time it takes for a company to:

Accepted Answer

Sell its finished goods

Answer

Convert raw materials into finished goods

Answer

Pay for its inventory

Answer

Receive payment from customers

Question 17

Working capital comprises which of the following?

Accepted Answer

Current assets and current liabilities

Answer

Long-term debt and current assets

Answer

Intangible assets and current assets

Answer

Fixed assets and current liabilities

Question 18

The primary objective of effective working capital management is to:

Accepted Answer

Optimize the balance between liquidity and profitability

Answer

Minimize the need for long-term financing

Answer

Reduce the risk of financial distress

Answer

Maximize the company's market share

Question 19

Which method of inventory management aims to minimize inventory holding costs by ordering items only as they are needed?

Accepted Answer

Just-in-time inventory management

Answer

Last-in, first-out (LIFO)

Answer

Economic order quantity (EOQ)

Answer

First-in, first-out (FIFO)

Question 20

The primary purpose of a credit policy is to:

Accepted Answer

Establish guidelines for extending credit to customers

Answer

Calculate the net present value of a project

Answer

Determine the cost of goods sold

Answer

Assess the creditworthiness of potential customers

Question 21

Which of the following is NOT a factor considered when setting credit terms?

Accepted Answer

Supplier's credit policy

Answer

Company's financial position

Answer

Industry norms

Answer

Customer's credit history

Question 22

The average collection period is calculated as:

Accepted Answer

Accounts receivable / (Sales / 365)

Answer

Accounts receivable / Sales

Answer

Accounts payable / (Purchases / 365)

Answer

Inventory / Cost of goods sold

Question 23

One of the primary benefits of effective working capital management is:

Accepted Answer

Improved cash flow

Answer

Reduced employee turnover

Answer

Lower insurance costs

Answer

Increased market share

Question 24

Ineffective working capital management can lead to:

Accepted Answer

Financial distress

Answer

Improved customer satisfaction

Answer

Higher sales growth

Answer

Increased employee morale

Question 25

Which of the following is NOT a working capital ratio?

Accepted Answer

Return on equity

Answer

Cash conversion cycle

Answer

Current ratio

Answer

Quick ratio