WORKING CAPITAL

Question 1

Is the amount of current assets (financial management view) or current assets net of current liabilities (accounting view) used to finance the firm’s short-term operation

Answer 1

Working Capital

Question 2

Is the lifeblood of business organization. It is needed to sustain the normal operations of the business. Success in managing the current assets in the short run is critical for the company’s long-run survival

Answer 2

Working Capital

Question 3

Working capital becomes the most _________ function by financial manager

Answer 3

Time-consuming

Question 4

those convertible to cash within 1 year or a normal operating cycle, whichever is longer, to support operations like payment of short-term obligations. It includes cash, marketable securities, receivables, inventories, and prepayments

Answer 4

Current Assets

Question 5

current assets required to support fluctuations in the firm’s level of activity

Answer 5

Temporary Current Assets

Question 6

current assets required to maintain normal operations

Answer 6

Permanent Current Assets

Question 7

obligations to be paid within 1 year, through current assets or incurrences of another liability. It includes trade payables, accrued expenses, short-term debts, and the current portion of long-term debts.

Answer 7

Current Liabilities

Question 8

Refers to the efficient and effective utilization of working capital to attain organizational objectives related to:

Profitability of operations

Liquidity of financial resources

Minimization of risks of company costs

Answer 8

Working Capital Management

Question 9

involves managing the company’s liquidity which in turn involves managing

the company’s investment in current assets

the company’s use of current liabilities

Answer 9

Working Capital Management

Question 10

WCM covers both setting the ________ and _______ in daily operations.

Answer 10

Working Capital Policy & Carrying it out

Question 11

refers to the basic decisions regarding

target levels of each category of current assets

how current assets will be financed

Answer 11

Working Capital Policy

Question 12

carries a relatively large amount of current assets. Sales are stimulated by liberal credit policy resulting in a high level of receivables. The firm carries a large amount of inventory.

Answer 12

Relaxed Current Investment Policy

Question 13

current assets are minimized. The firm implements a tight credit policy through means running the risk of losing sales, holds minimal safety stock of cash and inventory, and works out the highest current asset turnover;

Answer 13

Restricted Current Investment Policy

Question 14

policy between relaxed and restricted

Answer 14

Moderate Current Investment Policy

Question 15

Liquidity and Profitability of CASH

Answer 15

Most Liquid Asset; Idle (None income generating)

Question 16

Liquidity and Profitability of SHORT-TERM INVESTMENT

Answer 16

Very Liquid; Low Income

Question 17

Liquidity and Profitability of RECEIVABLES

Answer 17

Liquids; Funds are tied up in receivables (opportunity cost of capital)

Question 18

Liquidity and Profitability of INVENTORY

Answer 18

Less Liquid; Funds are tied up in inventory (opportunity cost of capital)

Question 19

almost all investment assets are financed by long-term debts, resulting in lesser amounts of short-term debts. It reduces liquidity risk but also reduces profit due to greater financing costs.

Answer 19

Conservative Policy

Question 20

uses short-term debts to finance, not only temporary but also part of the permanent current asset requirements. Thus, leading to greater amounts of short-term debts and lesser amounts of long-term debts. - It increases profits due to lesser financing costs of short-term debts but also exposes the firm to liquidity risks due to low working capital position

Answer 20

Aggressive Policy

Question 21

(Hedging Principle / Self-Liquidating debt Principle) It matches the maturities of obligations to the income (cash flow) generating characteristics of the assets financed. Long term debts are used to finance long-term assets (permanent working capital) requirements while short-term debts are to finance short-term assets

Answer 21

Maturity Matching Policy

Question 22

balances the trade-off between risk and profitability in a manner consistent with its attitude toward bearing risk

Answer 22

Balanced Policy

Question 23

refers to property, plant, and equipment (fixed assets) and permanent current assets that must always be with the company throughout the year.

Answer 23

Permanent

Question 24

additional requirements arising from fluctuation in the volume of activity (production and sales) arising from seasonal changes in demand level for products during the year.

Answer 24

Seasonal (Temporary)

Question 25

appropriate mix of current and noncurrent assets

Answer 25

Assets Mixed Decision

Question 26

appropriate mix of short-term and long-term debts to finance current assets.

Answer 26

Financing mixed decision