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Working Capital
Working Capital MCQs
?
Net working capital is the difference between
Current assets and current liabilities.
Fixed assets and fixed liabilities.
Total assets and total liabilities.
Shareholders’ investment and cash.
?
Determining the appropriate level of working capital for a firm requires
Changing the capital structure and dividend policy of the firm.
Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt.
Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments.
?
Determining the appropriate level of working capital for a firm requires
Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
Changing the capital structure and dividend policy for the firm.
Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt.
Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency.
?
All of the following statements in regard to working capital are true except
Current liabilities are an important source of financing for many small firms.
Profitability varies inversely with liquidity.
The hedging approach to financing involves matching maturities of debt with specific financing needs.
Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy.
?
During the year, Mason Company’s current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital
Increased by $70,000.
Did not change.
Decreased by $170,000.
Increased by $170,000.
?
Mason Company’s board of directors has determined 4 options to increase working capital next year. Option 1 is to increase current assets by $120 an...
Option 1.
Option 2.
Option 3.
Option 4.
?
Which one of the following would increase the net working capital of a firm?
Cash payment of payroll taxes payable.
Purchase of a new plant financed by a 20-year mortgage.
Cash collection of accounts receivable.
Refinancing a short-term note payable with a 2-year note payable.
?
Since Marsh, Inc., is experiencing a sharp increase in sales activity and a steady increase in production, the management of Marsh has adopted an aggr...
Would most likely be the same as in any other type of business condition as business cycles tend to balance out over time.
Would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment.
Would most likely be higher than under other business conditions so that there will be sufficient funds to replenish assets.
Would most likely be higher than under other business conditions as the company’s profits are increasing.
?
As a company becomes more conservative in its working capital policy, it would tend to have a(n)
Decrease in its acid test ratio.
Increase in the ratio of current liabilities to noncurrent liabilities.
Increase in the ratio of current assets to units of output.
Increase in funds invested in common stock and a decrease in funds invested in marketable securities.
?
As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
Increase in the ratio of current liabilities to noncurrent liabilities.
Decrease in the operating cycle.
Decrease in the quick ratio.
Increase in the ratio of current assets to noncurrent assets.
?
If a firm increases its cash balance by issuing additional shares of common stock, net working capital
Remains unchanged and the current ratio remains unchanged.
Increases and the current ratio remains unchanged.
Increases and the current ratio decreases.
Increases and the current ratio increases.
?
Starrs Company has current assets of $400,000 and current liabilities of $300,000. Starrs could increase its net working capital by the
Prepayment of $50,000 of next year’s rent.
Refinancing of $50,000 of short-term debt with long-term debt.
Acquisition of land valued at $50,000 through the issuance of common stock.
Purchase of $50,000 of trading securities for cash.
?
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s maturing obligations is the...
Fluctuating current assets with long-term debt.
Permanent current assets with long-term debt.
Permanent current assets with short-term debt.
Fluctuating current assets with short-term debt.
?
Clay Corporation follows an aggressive financing policy in its working capital management while Lott Corporation follows a conservative financing poli...
Clay has a low ratio of short-term debt to total debt while Lott has a high ratio of short-term debt to total debt.
Clay has a low current ratio while Lott has a high current ratio.
Clay has less liquidity risk while Lott has more liquidity risk.
Clay’s interest charges are lower than Lott’s interest charges.
?
Which of the following is not a function of financial management?
Financing.
Risk-management.
Internal control.
Capital budgeting.
?
All of the following statements in regard to working capital are correct except:
Current liabilities are an important source of financing for many small firms.
Profitability varies inversely with liquidity.
The hedging approach to financing involves matching maturities of debt with specific financing needs.
Financing permanent inventory buildup with longterm debt is an example of an aggressive working capital policy.
?
Determining the appropriate level of working capital for a firm requires
Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets.
Changing the capital structure and dividend policy of the firm.
Maintaining short-term debt at the lowest possible level because it is generally more expensive than longterm debt.
Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
?
Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?
Adopting a new inventory system that reduces the inventory conversion period.
Adopting a new inventory system that increases the inventory conversion period.
Increasing the average days sales outstanding on its accounts receivable.
Reducing the amount of time the firm takes to pay its suppliers.
?
Eagle Sporting Goods has $2.5 million in inventory and $2 million in accounts receivable. Its average daily sales are $100,000. The firm’s payable...
100 days.
60 days.
50 days.
40 days.
?
Jones Company has $5,000,000 of average inventory and cost of sales of $30,000,000. Using a 365-day year, calculate the firm’s inventory conversio...
30.25 days.
60.83 days.
45.00 days.
72.44 days.
?
The length of time between the acquisition of inventory and payment for it is called the
Operating cycle.
Inventory conversion period.
Accounts receivable period.
Accounts payable deferral period.
?
If everything else remains constant and a firm increases its cash conversion cycle, its profitability will likely
Increase.
Increase if earnings are positive.
Decrease.
Not be affected.
?
An organization offers its customers credit terms of 5/10 net 20. One-third of the customers take the cash discount and the remaining customers pay o...
13 days.
15 days
17 days.
20 days.
