Sample Questions and Answers
Which of the following is NOT considered part of working capital?
A) Cash
B) Inventory
C) Long-term debt
D) Accounts receivable
Answer: C
What does working capital represent?
A) The funds available for long-term investments
B) The difference between current assets and current liabilities
C) The company’s net income
D) The total value of assets
Answer: B
The primary goal of working capital management is to:
A) Minimize debt
B) Maximize the liquidity of assets
C) Optimize the return on equity
D) Ensure the company has enough capital for expansion
Answer: B
Which of the following strategies can be used to increase working capital?
A) Reducing accounts receivable
B) Delaying payment of accounts payable
C) Selling long-term assets
D) Increasing long-term debt
Answer: B
A company’s current ratio is a measure of:
A) Profitability
B) Operational efficiency
C) Liquidity
D) Leverage
Answer: C
Which of the following would likely decrease working capital?
A) Increasing accounts payable
B) Increasing accounts receivable
C) Decreasing inventory
D) Selling fixed assets
Answer: A
The cash conversion cycle measures:
A) The time taken to collect cash from customers
B) The time between outlaying cash and receiving cash from sales
C) The efficiency of cash flow management
D) The total working capital available
Answer: B
Which financial ratio is primarily used to assess a company’s working capital efficiency?
A) Return on Assets (ROA)
B) Quick ratio
C) Debt-to-equity ratio
D) Gross profit margin
Answer: B
A company’s inventory turnover ratio helps in assessing:
A) How quickly assets are turned into cash
B) The company’s ability to pay off short-term liabilities
C) How effectively inventory is managed
D) The company’s profitability
Answer: C
Which of the following is a major source of short-term financing for working capital?
A) Bonds
B) Line of credit
C) Long-term debt
D) Equity financing
Answer: B
Which of the following best describes an efficient working capital management strategy?
A) Maintaining excessive cash balances
B) Minimizing the amount of inventory held
C) Relying heavily on long-term debt
D) Rapidly increasing accounts receivable
Answer: B
Which of the following is an example of a current asset?
A) Equipment
B) Buildings
C) Accounts payable
D) Accounts receivable
Answer: D
The operating cycle of a company is the time it takes to:
A) Convert current liabilities into cash
B) Convert raw materials into finished goods and collect payment
C) Pay off all liabilities
D) Sell all fixed assets
Answer: B
Which of the following would most likely increase a company’s working capital?
A) Paying off a short-term loan
B) Increasing accounts receivable
C) Purchasing long-term assets
D) Declining sales
Answer: B
What does a quick ratio of less than 1 indicate?
A) The company is highly profitable
B) The company may struggle to meet its short-term obligations
C) The company is highly efficient in managing working capital
D) The company has no liabilities
Answer: B
In working capital management, the term “just-in-time inventory” refers to:
A) Maintaining high levels of stock
B) Minimizing the amount of inventory held
C) Increasing production efficiency
D) Reducing the cost of goods sold
Answer: B
A higher accounts receivable turnover indicates:
A) The company is effectively collecting its receivables
B) The company is selling goods on credit at a loss
C) The company is holding excess inventory
D) The company has high levels of debt
Answer: A
The cash conversion cycle is important because it:
A) Measures how long it takes a company to generate cash from sales
B) Assesses the profitability of operations
C) Measures the company’s overall debt capacity
D) Measures the effectiveness of the company’s marketing strategy
Answer: A
Which of the following strategies would most likely reduce working capital requirements?
A) Increasing inventory levels
B) Shortening the credit period for customers
C) Increasing accounts payable terms
D) All of the above
Answer: D
The current ratio is calculated by dividing:
A) Current liabilities by current assets
B) Current assets by current liabilities
C) Total assets by total liabilities
D) Net income by current liabilities
Answer: B
Which of the following is an example of a current liability?
A) Long-term debt
B) Accounts payable
C) Equipment
D) Common stock
Answer: B
What is the purpose of managing working capital?
A) To maximize long-term profitability
B) To ensure the business has sufficient liquidity to operate
C) To reduce the company’s operational costs
D) To increase equity financing
Answer: B
The cash conversion cycle is influenced by all of the following EXCEPT:
A) Inventory turnover
B) Receivables turnover
C) Payables turnover
D) Depreciation
Answer: D
Which of the following would be considered an efficient working capital management practice?
A) Extending the credit period to customers to improve sales
B) Increasing inventory to ensure no stockouts
C) Reducing accounts receivable turnover days
D) Financing short-term needs with long-term debt
Answer: C
The net working capital of a business is defined as:
A) The difference between total assets and total liabilities
B) The difference between current assets and current liabilities
C) The amount of money invested in long-term assets
D) The sum of cash and cash equivalents
Answer: B
What is a key disadvantage of having too much working capital?
A) It can lead to lower liquidity
B) It can indicate inefficiency in managing assets
C) It can lead to greater reliance on long-term debt
D) It can reduce the company’s profitability
Answer: B
A firm’s working capital cycle is:
A) The time it takes to generate profits
B) The time taken for the company to convert investments into cash
C) The period it takes to convert inventory into cash
D) The time taken to repay long-term debt
Answer: C
Which of the following financial ratios is most commonly used to evaluate short-term financial health?
A) Current ratio
B) Return on equity (ROE)
C) Debt-to-equity ratio
D) Earnings per share (EPS)
Answer: A
A negative working capital may indicate:
A) The company is inefficient in its operations
B) The company is highly liquid
C) The company has excessive debt
D) The company may face difficulties in paying short-term obligations
Answer: D
Which of the following actions would be most likely to increase a company’s working capital?
A) Increase in short-term loans
B) Delay in paying accounts payable
C) Decrease in accounts receivable
D) Issuance of common stock
Answer: D
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