Question 1

Which of the following accounts is (are) not part of a firm's working capital?
A) Plant and equipment
B) Marketable securities
C) Cash
D) a and c

Accepted Answer

Plant and equipment are fixed assets and not part of a firm's working capital. Working capital refers to the current assets that a company uses for its daily operations, such as cash, inventory, and accounts receivable. Marketable securities and cash, however, are current assets and part of a firm's working capital.

Question 2

Which of the following transactions will cause net working capital to decrease?
A) Inventory is purchased on credit.
B) The firm declares and pays a cash dividend.
C) An account payable is paid with cash.
D) Inventory is sold for cash.
E) None of the above would cause net working capital to decrease.

Accepted Answer

When a company declares and pays a cash dividend, it is reducing its cash and thereby reducing its net working capital.

Question 3

Net working capital is defined as:
A) current assets minus current liabilities.
B) working capital minus short-term debt.
C) current assets plus current liabilities.
D) All of the above

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. It represents the amount of capital a company has available for its daily operations. Choice B is incorrect because it subtracts short-term debt from working capital, which is not the definition of net working capital. Choice C is incorrect because it adds current assets and current liabilities, which also does not yield the net working capital. Therefore, only choice A is the correct definition of net working capital.

Question 4

Seasonal peaks in business are supported by:
A) permanent working capital.
B) long-term financing.
C) temporary working capital.
D) discretionary financing.

Accepted Answer

Seasonal peaks in business require additional funds for a short period of time, making temporary working capital the most suitable option. Permanent working capital is used for day-to-day operations, while long-term financing is for larger investments over a longer period of time. Discretionary financing refers to funds raised for a specific purpose, such as an acquisition, and is not relevant to seasonal peaks in business.

Question 5

An aggressive working capital policy:
A) uses more short-term financing than long-term.
B) uses short-term financing to support only the peaks of temporary working capital.
C) supports a portion of permanent working capital with short-term financing.
D) Both a & b
E) Both a & c

Accepted Answer

An aggressive working capital policy uses more short-term financing than long-term and supports a portion of permanent working capital with short-term financing.

Question 6

Temporary working capital is:
A) the seasonal borrowing capacity of a firm.
B) incremental working capital necessary to finance slower than expected collections of customer receivables.
C) incremental working capital necessary to support peak activity in seasonal businesses.
D) additional payroll cost and expenses incurred during seasonal peaks.

Accepted Answer

Temporary working capital refers to the additional working capital required to support peak activity in seasonal businesses. This can include financing for increased inventory, hiring of seasonal staff, and other expenses related to seasonal fluctuations in business activity. A is incorrect as it refers to borrowing capacity, which is a different concept. B and D may be components of temporary working capital, but they do not encompass the full meaning of the term.

Question 7

Which of the following is not considered working capital?
A) Old but salable inventory
B) A 90-day old receivable that should be paid within the next 60 days
C) A bank loan granted to support working capital that isn't due for three years
D) A payable owed to a customer that's bankrupt

Accepted Answer

A bank loan granted to support working capital that isn't due for three years is a long-term liability and not considered part of working capital. Working capital is the short-term assets and liabilities used to finance a company's day-to-day operations. Option A, B, and D all represent short-term assets or liabilities that are typically considered part of working capital.

Question 8

Working capital policy involves a tradeoff between easier operation and ____.
A) more working capital
B) spontaneous liabilities
C) temporary financing
D) the cost of carrying short-term assets

Accepted Answer

The tradeoff in working capital policy is between easier operation and the cost of carrying short-term assets. While more working capital may make operations run more smoothly, it can come at a cost, such as higher interest expenses on short-term financing or tied-up funds that could be invested elsewhere. Therefore, the best answer is D, the cost of carrying short-term assets.

Question 9

Which of the following factors does not directly affect the firm's investment in working capital?
A) The firm's inventory and credit policies
B) The age of the firm's plant and equipment
C) The firm's sales level
D) The length of the firm's operating cycle

Accepted Answer

The age of the firm's plant and equipment does not directly affect the firm's investment in working capital. Working capital represents the assets that a company requires to operate its business, such as inventory and account receivables. The age of the plant and equipment is a long-term investment and does not directly affect the day-to-day operations that require working capital.

Question 10

Which of the following is not part of net working capital?
A) Accounts payable
B) Marketable securities
C) Retained earnings
D) Inventory

Accepted Answer

Retained earnings are not part of net working capital, as they represent the accumulation of past profits and do not directly impact a company's ability to meet short-term obligations. The other options (accounts payable, marketable securities, and inventory) are all components of net working capital, as they represent the current assets and liabilities that are used to fund a company's ongoing operations.

Question 11

Which of the following best describes temporary working capital?
A) Incremental working capital to finance accounts receivable that are higher than expected.
B) Incremental working capital to finance high seasonal production levels.
C) Incremental working capital to finance an unplanned bargain purchase.
D) None of the above describes temporary working capital.
E) a., b., and c. above describe temporary working capital.

Accepted Answer

Temporary working capital refers to incremental working capital needed to finance short-term increases in production and inventory levels due to seasonal fluctuations in demand. Choice A refers to accounts receivable which is not temporary working capital, while Choice C refers to a specific unplanned purchase which is not indicative of temporary working capital needs.

Question 12

An aggressive working capital policy would include:
A) using short term financing to finance only the peak temporary working capital.
B) using short term financing to finance all temporary working capital.
C) using short term financing to finance all temporary and some permanent working capital.
D) both a. and b. above describe aggressive working capital policies.
E) All of the above describe aggressive working capital policies.

Accepted Answer

The answer of An aggressive working capital policy would include:
A)...

Question 13

Working capital increases when ____ decreases.
A) accounts receivable
B) inventory
C) accounts payable
D) cash

Accepted Answer

Accounts payable represents money owed to vendors or suppliers which increases the working capital when decreased.

Question 14

Which of the following will cause working capital to increase?
A) A decision to tighten credit and collections policies
B) A decision to carry higher levels of inventory
C) A decision to take increased advantage of suppliers trade credit
D) Both b. and c. above will increase permanent working capital.
E) All of the above will increase permanent working capital.

Accepted Answer

Carrying higher levels of inventory will increase the current assets and therefore increase working capital. Tightening credit and collections policies may reduce accounts receivable, but it will also reduce sales, and therefore may not increase working capital. Taking increased advantage of suppliers' trade credit may increase accounts payable, but it may also lead to a reduction in cash and working capital.

Question 15

Which of the following is an accepted financing wisdom?
A) The maturity of funds used to support a project should roughly match the project's duration.
B) Because firms can use their own equity as they choose, equity can be used to finance projects of any duration.
C) Any project can appropriately be supported by funding with a shorter maturity.
D) Any project can appropriately be supported by funding with a longer maturity.

Accepted Answer

The accepted financing wisdom is that the maturity of funds used to support a project should roughly match the project's duration. This is because using funds with a different maturity could lead to potential problems such as refinancing risks, interest rate risks, and cash flow mismatches. Therefore, it is best to match the maturity of funding with the project's duration to ensure smooth cash flows and minimize potential risks. Choices B, C, and D are incorrect because they go against this accepted wisdom.

Question 16

An effective program of working capital management requires that:
A) the firm run with the absolute minimum in each current asset account.
B) a series of cost/benefit tradeoffs be considered because running a business is easier with more working capital than with less, but holding working capital costs money.
C) large inventories be maintained to adequately service customers.
D) credit can be easily granted to customers to encourage higher sales.

Accepted Answer

Working capital management involves striking a balance between having enough current assets to run the business smoothly and minimizing the cost of holding these assets. A company can’t run on the absolute minimum of working capital, and large inventories may increase costs without necessarily improving service levels. Similarly, granting easy credit to customers may boost sales, but it can also increase the risk of bad debts and lead to cash flow problems. The key is to analyze the costs and benefits of each decision and find the optimal level of working capital that maximizes profitability and minimizes risk.

Question 17

The term "net working capital" means:
A) the firm's gross working capital minus spontaneous financing.
B) the firm's cash, accounts receivable, and inventory minus short-term payables and accruals.
C) the firm's current assets minus its current liabilities.
D) All of the above

Accepted Answer

All the options provided are different ways to describe or calculate net working capital, highlighting its essence as current assets minus current liabilities, while also considering aspects like spontaneous financing and specific components of current assets and liabilities.

Question 18

The cash conversion cycle measures the time:
A) between the creation of receivables and their collection.
B) it takes for inventory to be turned into product and sold.
C) between payment for inventory and collection of cash for its subsequent sale as product.
D) for a check to clear the banking system.

Accepted Answer

The cash conversion cycle measures the time it takes for a company to pay for inventory (cash outflow), convert it into finished goods (manufacturing process) and sell it to customers (generating receivables), and finally collect cash from customers (cash inflow). Choice A only measures the time between receivables creation and collection, while Choice B only measures the time for inventory turnover and sales. Choice D is irrelevant as it only relates to a single check clearing, not the overall cash cycle.

Question 19

Which of the following describes the cash conversion cycle?
A) From the purchase of inventory to the collection of cash from the sale of that inventory.
B) From the payment for inventory to the sale of that inventory.
C) From the payment for inventory to the collection of cash from the sale of that inventory.
D) From the purchase of inventory to the sale of that inventory.
E) None of the above describes the cash conversion cycle.

Accepted Answer

The cash conversion cycle measures the time it takes for a company to convert its investment in inventory into cash received from customers. It starts with the payment made to purchase inventory and ends with the collection of cash from the sale of that inventory. Therefore, option C, "From the payment for inventory to the collection of cash from the sale of that inventory," best describes the cash conversion cycle.

Question 20

Working capital represents assets that support day-to-day operating activities. Funding working capital requires:
A) a commitment of capital (money) for a short time, i.e. a time comparable to the period for which working capital assets are held.
B) a more or less permanent investment of funds to support ongoing daily operations.
C) a commitment to allocate funds annually from the firm's capital budget.
D) All of the above

Accepted Answer

Working capital is essentially the funds used to manage daily operations and is considered a part of the company's operating capital. Therefore, it requires a more or less permanent investment of funds to support ongoing daily operations, rather than a short-term commitment or an annual allocation from the capital budget.

Quiz 16: The Management of Working Capital Multiple Choice Questions

Which of the following accounts is (are) not part of a firm's working capital?

Which of the following transactions will cause net working capital to decrease?

Net working capital is defined as:

Seasonal peaks in business are supported by:

An aggressive working capital policy:

Temporary working capital is:

Which of the following is not considered working capital?

Working capital policy involves a tradeoff between easier operation and ____.

Which of the following factors does not directly affect the firm's investment in working capital?

Which of the following is not part of net working capital?

Which of the following best describes temporary working capital?

An aggressive working capital policy would include:

Working capital increases when ____ decreases.

Which of the following will cause working capital to increase?

Which of the following is an accepted financing wisdom?

An effective program of working capital management requires that:

The term "net working capital" means:

The cash conversion cycle measures the time:

Which of the following describes the cash conversion cycle?

Working capital represents assets that support day-to-day operating activities. Funding working capital requires: