Working Capital Management [THEORY]

Question 1

Working capital management involves investment and financing decisions
related to:

A .plant and equipment and current liabilities.
B. current assets and capital structure.
C. current assets and current liabilities.
D. sales and credit.

Answer 1

C. current assets and current liabilities.

Question 2

The goal of managing working capital, such as inventory, should be to
minimize the:

A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage

Answer 2

C. aggregate of carrying and shortage costs

Question 3

Zap Company follows an aggressive financing policy in its working capital
management while Zing Corporation follows a conservative financing
policy. Which one of the following statements is correct?

A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing
finances short-term assets with short-term debt.

Answer 3

B. Zap has a low current ratio while Zing has a high current ratio.

Question 4

Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

Answer 4

C. Increase the amount of short-term borrowing.

Question 5

As a company becomes more conservative with respect to working
capital policy, it would tend to have a(n)
A. Increase in the ratio of current liabilities to non current liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.

Answer 5

D. Increase in the ratio of current assets to current liabilities.

Question 6

short-term financing plans with high liquidity have:

A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

Answer 6

B. moderate return and moderate risk

Question 7

Temporary working capital supports

A. the cash needs of the company. C. acquisition of capital equipment.
B. payment of long term debt. D. seasonal peaks

Answer 7

D. seasonal peaks

Question 8

The transaction motive for holding cash is for:

A. a safety cushion C. compensating balance requirements
B. daily operating requirements D. none of the above

Answer 8

B. daily operating requirements

Question 9

The difference between the cash balance on the firm’s books and the balance shown on the bank statement is called:

A, the compensating balance C. a safety cushion
B. float D. none of the above

Answer 9

B. float

Question 10

The length of time between payment for inventory and the collection of cash is referred to as:

A. payables deferral period C. operating cycle
B. receivables conversion period D. cash conversion cycle

Answer 10

D. cash conversion cycle

Question 11

As a firm’s cash conversion cycle increases, the firm:

A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period
D. incurs more shortage costs

Answer 11

B. increases its investment in working capital

Question 12

The longer the firm’s accounts payable period, the:

A. longer the firm’s cash conversion cycle is.
B. shorter the firm’s inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.

Answer 12

D. less the firm must invest in working capital.

Question 13

The average length of time a peso is tied up in current asset is called the:

A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period.

Answer 13

D. cash conversion period.

Question 14

Which of the following statements is most correct? If a company lowers its DSO, but nochanges occur in sales or operating costs, then:

A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
D. the company’s total asset turnover ratio would probably decline

Answer 14

B. the company might well end up with a lower debt ratio.

Question 15

All but which of the following is considered in determining credit policy?

A. Credit standards C. Accounts payable deferral period
B. Credit limits D. Collection efforts

Answer 15

C. Accounts payable deferral period

Question 16

The use of safety stock by a firm will:

A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above

Answer 16

B. increase inventory costs

Question 17

When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item

A. decreases by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock

Answer 17

D. Increases by the number of units of the safety stock

Question 18

Which of the following statements is correct for a firm that currently has total costs of carryingand ordering inventory that are 50% higher than total carrying costs?

A. Current order size is greater than optimal
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used

Answer 18

A. Current order size is greater than optimal

Question 19

With credit terms of 3/8, n/30, what is the customer’s payment decision date?

A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.

Answer 19

B. The 8th day is the customer’s decision date.

Question 20

All of these factors are used in credit policy administration except:

A. credit standards C. peso amount of receivables
B. terms of trade D. collection policy

Answer 20

C. peso amount of receivables