Working Capital Management: A Comprehensive Guide for Business and Finance Students

Question 1

What is a primary benefit of reducing accounts receivable turnover?

Accepted Answer

Improved cash flow

Answer

Increased inventory levels

Answer

Reduced risk of bad debts

Answer

Lower operating expenses

Question 2

What's the main goal of working capital management?

Accepted Answer

Making sure the company has enough money to pay its short-term bills

Answer

Boosting the company's profits in the long run

Answer

Lowering the company's chances of going bankrupt

Question 3

What is the main goal of working capital management?

Accepted Answer

Balance short-term assets and liabilities

Answer

Maximize return on equity

Answer

Minimize capital costs

Answer

Increase profitability

Question 4

The primary goal of working capital management is to:

Accepted Answer

Ensure the company's short-term liquidity and solvency

Answer

Maximize shareholder wealth

Answer

Minimize income tax payments

Question 5

Which of the following is **NOT** considered a current asset?

Accepted Answer

Long-term investments

Answer

Cash

Answer

Accounts receivable

Answer

Inventory

Question 6

The primary goal of inventory management is to:

Accepted Answer

Optimize inventory levels to meet demand while minimizing costs

Answer

Reduce inventory holding costs only

Answer

Maximize inventory turnover ratio

Question 7

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

Accepted Answer

Reduced risk of bad debts

Answer

Increased inventory turnover

Answer

Improved sales revenue

Answer

Lower cost of goods sold

Question 8

The formula for calculating the accounts payable turnover ratio is:

Accepted Answer

Cost of goods sold / Average accounts payable

Answer

Sales revenue / Average accounts payable

Answer

Accounts payable / Current liabilities

Answer

Average accounts payable / Cost of goods sold

Question 9

Which of the following is a strategy for optimizing working capital?

Accepted Answer

Reducing inventory levels

Answer

Increasing dividend payments

Answer

Increasing long-term debt

Answer

Slowing down accounts payable payments

Question 10

What is the main purpose of a cash conversion cycle?

Accepted Answer

To measure the time it takes for a company to convert cash into sales and back into cash

Answer

To calculate the company's profit margin

Answer

To assess the company's liquidity position

Question 11

What is a key advantage of using a net working capital target?

Accepted Answer

It provides a benchmark to monitor working capital performance

Answer

It eliminates the need for cash flow analysis

Answer

It guarantees a positive cash flow

Question 12

A company's cash conversion cycle (CCC) measures the time it takes for the business to:

Accepted Answer

Convert inventory into cash

Answer

Convert accounts receivable into cash

Answer

Convert accounts payable into cash

Question 13

Which inventory management technique minimizes holding costs while ensuring adequate stock levels?

Accepted Answer

Just-in-time (JIT) inventory

Answer

Last-in, first-out (LIFO) inventory

Answer

Economic order quantity (EOQ) model

Answer

First-in, first-out (FIFO) inventory

Question 14

A company's accounts receivable turnover ratio is calculated by dividing:

Accepted Answer

Net credit sales by average accounts receivable

Answer

Net income by accounts receivable

Answer

Accounts payable by accounts receivable

Answer

Average accounts receivable by net credit sales

Question 15

When determining an appropriate working capital policy, a company should consider factors such as:

Accepted Answer

Industry practices, business risk tolerance, and access to financing

Answer

Size of the company only

Answer

Profitability of the company only

Question 16

A key objective of effective working capital management is:

Accepted Answer

Balancing liquidity and profitability

Answer

Maximizing current assets

Answer

Minimizing current liabilities

Question 17

A company's working capital position can be assessed using:

Accepted Answer

Financial ratios and cash flow statements

Answer

Income statement only

Answer

Statement of changes in equity only

Answer

Balance sheet only

Question 18

Which of the following is not a strategy for managing seasonal fluctuations in working capital?

Accepted Answer

Investing in long-term assets

Answer

Using overdrafts or lines of credit

Answer

Adjusting inventory levels

Answer

Negotiating flexible payment terms

Question 19

A company's net working capital is calculated by:

Accepted Answer

Subtracting current liabilities from current assets

Answer

Multiplying current liabilities by current assets

Answer

Adding current liabilities to current assets

Question 20

A company has a high inventory turnover ratio. What does this generally suggest?

Accepted Answer

The company is efficiently managing its inventory.

Answer

The company has a low cost of goods sold.

Answer

The company is holding too much inventory.

Answer

The company is experiencing very high demand for its products.

Question 21

Which of the following is NOT a common strategy for managing accounts receivable?

Accepted Answer

Increasing the credit limit offered to customers.

Answer

Using factoring services.

Answer

Offering early payment discounts.

Answer

Implementing strict credit policies.

Question 22

A company is considering extending its credit terms to customers. What is a potential negative consequence of this decision?

Accepted Answer

Increased risk of bad debts.

Answer

Higher profitability.

Answer

Reduced administrative costs.

Answer

Improved customer loyalty.

Question 23

Which of the following is a key factor in determining the optimal level of inventory to hold?

Accepted Answer

Demand for the product.

Answer

The weight of the product.

Answer

The size of the warehouse.

Answer

The color of the product.

Question 24

A company with a high accounts payable turnover ratio indicates:

Accepted Answer

The company is paying its suppliers quickly.

Answer

The company is holding too much cash.

Answer

The company is using its suppliers' funds for a long time.

Answer

The company is experiencing financial difficulties.

Question 25

Which of the following is NOT a common source of short-term financing?

Accepted Answer

Issuing bonds.

Answer

Trade credit.

Answer

Bank loans.

Answer

Factoring.

Question 26

A company's working capital is defined as:

Accepted Answer

Current assets minus current liabilities.

Answer

Current liabilities minus current assets.

Answer

Fixed assets plus current liabilities.

Answer

Total assets minus total liabilities.

Question 27

Which of the following is a potential risk associated with holding too much cash?

Accepted Answer

Opportunity cost of earning a return on investments.

Answer

Increased liquidity.

Answer

Reduced risk of bankruptcy.

Answer

Lower borrowing costs.

Question 28

A company with a high inventory turnover ratio indicates that it is:

Accepted Answer

Efficiently managing its inventory and selling goods quickly.

Answer

Holding excessive inventory, leading to potential storage costs.

Answer

Experiencing a high demand for its products, resulting in stockouts.

Question 29

Which of the following is NOT a common method for managing accounts receivable?

Accepted Answer

Increasing the credit limit for all customers.

Answer

Implementing a strict credit policy.

Answer

Offering early payment discounts.

Answer

Using factoring to sell receivables.

Question 30

A company's working capital is calculated as:

Accepted Answer

Current Assets - Current Liabilities.

Answer

Current Liabilities - Current Assets.

Answer

Fixed Assets - Current Liabilities.

Answer

Total Assets - Total Liabilities.

Question 31

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

Accepted Answer

Greater flexibility to seize business opportunities.

Answer

Lower risk of liquidity problems.

Answer

Reduced opportunity cost of holding cash.

Question 32

A company decides to implement a just-in-time (JIT) inventory system. This is an example of:

Accepted Answer

Improving inventory management efficiency.

Answer

Focusing on long-term investment strategies.

Answer

Reducing the cost of goods sold.

Answer

Increasing working capital requirements.

Question 33

A company has a high accounts payable turnover ratio. This suggests that the company:

Accepted Answer

Is paying its suppliers promptly.

Answer

Has a poor relationship with its suppliers.

Answer

Is experiencing financial difficulties.

Question 34

Which of the following is a common technique used to manage cash flow?

Accepted Answer

Cash forecasting.

Answer

Reducing the dividend payout ratio.

Answer

Increasing debt financing.

Answer

Investing in long-term assets.

Question 35

A company is considering offering a cash discount to customers who pay their invoices early. This is an example of:

Accepted Answer

Managing accounts receivable.

Answer

Increasing working capital requirements.

Answer

Improving inventory management.

Answer

Reducing the cost of goods sold.

Question 36

The optimal level of working capital for a company:

Accepted Answer

Depends on the specific industry and business operations.

Answer

Is always the highest possible level.

Answer

Is always the lowest possible level.

Question 37

A company uses a factoring service to sell its accounts receivable. This is a strategy to:

Accepted Answer

Improve cash flow.

Answer

Reduce accounts payable.

Answer

Increase profitability.

Answer

Increase inventory levels.

Question 38

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

Accepted Answer

Long-term debt

Answer

Accounts payable

Answer

Inventory

Answer

Accounts receivable

Question 39

What is the goal of working capital management?

Accepted Answer

To optimize a company's financial performance

Answer

To increase shareholder value

Answer

To maximize sales revenue

Answer

To minimize operating expenses

Question 40

Which of the following strategies is used to manage inventory?

Accepted Answer

Just-in-time inventory (JIT)

Answer

Weighted average cost

Answer

Last-in, first-out (LIFO)

Answer

First-in, first-out (FIFO)

Question 41

What is the purpose of accounts receivable factoring?

Accepted Answer

To sell accounts receivable to a third party

Answer

To collect accounts receivable from customers

Answer

To evaluate the creditworthiness of customers

Answer

To record accounts receivable in the financial statements

Question 42

Which of the following is a benefit of early payment discounts?

Accepted Answer

Reduced cost of goods sold

Answer

Improved customer relationships

Answer

Increased sales revenue

Question 43

What is the formula for calculating the current ratio?

Accepted Answer

Current assets / Current liabilities

Answer

Current assets - Current liabilities

Answer

Current liabilities / Current assets

Answer

(Current assets + Current liabilities) / 2

Question 44

Which of the following ratios indicates the number of days it takes a company to collect its accounts receivable?

Accepted Answer

Average collection period

Answer

Quick ratio

Answer

Inventory turnover ratio

Question 45

What is the impact of increasing inventory levels on the inventory turnover ratio?

Accepted Answer

It decreases

Answer

It increases

Answer

It becomes negative

Answer

It remains the same

Question 46

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

Accepted Answer

Cash flow problems

Answer

Improved customer satisfaction

Answer

Increased profitability

Answer

Enhanced shareholder value

Question 47

What is the primary focus of working capital management?

Accepted Answer

Short-term financial performance

Answer

Risk management

Answer

Capital budgeting

Answer

Long-term investment decisions

Question 48

A company has a high inventory turnover ratio. This indicates that the company is:

Accepted Answer

Efficiently managing its inventory and converting it into sales.

Answer

Experiencing high levels of inventory shrinkage or obsolescence.

Answer

Holding excessive inventory levels, leading to high storage costs.

Question 49

Which of the following is NOT a common technique for managing accounts receivable?

Accepted Answer

Increasing the credit period offered to customers.

Answer

Using factoring services to accelerate cash collection.

Answer

Offering discounts for early payment.

Answer

Implementing a strict credit policy with thorough credit checks.

Question 50

A company is considering offering a cash discount to its customers. What is the primary objective of this strategy?

Accepted Answer

To incentivize early payment and improve cash flow.

Answer

To increase sales volume by lowering the perceived price.

Answer

To reduce the cost of goods sold by offering a discount.

Question 51

Which of the following is a key consideration when determining the optimal level of working capital for a company?

Accepted Answer

The company's operating cycle and cash conversion cycle.

Answer

The current market interest rates for short-term loans.

Answer

The company's long-term debt-to-equity ratio.

Question 52

A company is facing a shortage of cash due to delayed customer payments. Which of the following is a short-term financing option they could consider?

Accepted Answer

Obtaining a line of credit from a bank.

Answer

Increasing the company's dividend payout ratio.

Answer

Selling a portion of the company's fixed assets.

Answer

Issuing long-term bonds to raise capital.

Question 53

Which of the following is an example of a current asset?

Accepted Answer

Inventory of raw materials

Answer

Long-term investments in other companies

Answer

Land and buildings owned by the company

Answer

Deferred tax liabilities

Question 54

A company uses the Just-In-Time (JIT) inventory management system. What is the primary benefit of this approach?

Accepted Answer

Minimizing inventory holding costs and reducing waste.

Answer

Allowing for greater flexibility in production planning.

Answer

Providing a buffer against potential supply chain disruptions.

Question 55

A company's working capital cycle is calculated as:

Accepted Answer

Number of days of inventory + Number of days of receivables - Number of days of payables.

Answer

Number of days of receivables - Number of days of inventory + Number of days of payables.

Answer

Number of days of sales + Number of days of payables - Number of days of inventory.

Question 56

A company is considering extending its credit terms to customers. Which of the following is a potential drawback of this decision?

Accepted Answer

It could lead to an increase in bad debt expense.

Answer

It could increase the company's sales revenue.

Answer

It could improve customer satisfaction.

Answer

It could reduce the company's need for working capital.

Question 57

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

Accepted Answer

To ensure that the company has sufficient liquidity to meet its short-term obligations.

Answer

To maximize the company's return on equity.

Answer

To minimize the company's tax liability.