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Unit 6: Working Capital Management - Practice Quiz

FIN212 — Basic Financial Management 50 Questions
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1 Net Working Capital is best defined as:

A. Total Assets minus Total Liabilities
B. Total Current Assets
C. Shareholder's Equity plus Long-term Debt
D. Current Assets minus Current Liabilities

2 Which of the following represents Gross Working Capital?

A. Cash plus Marketable Securities
B. Inventory plus Accounts Receivable
C. Total Current Liabilities
D. Total Current Assets

3 Working capital that is required to maintain the minimum level of current assets required for business operations throughout the year is known as:

A. Permanent Working Capital
B. Gross Working Capital
C. Temporary Working Capital
D. Negative Working Capital

4 Which financing strategy involves financing all permanent working capital and a portion of temporary working capital with long-term financing?

A. Hedging Strategy
B. Conservative Strategy
C. Matching Strategy
D. Aggressive Strategy

5 If Current Assets are and Current Liabilities are , what is the Net Working Capital?

A.
B.
C.
D.

6 Which of the following is NOT a determinant of working capital requirements?

A. Length of the production cycle
B. Depreciation method of fixed assets
C. Rate of stock turnover
D. Nature of the business

7 A firm with a highly seasonal business usually requires:

A. Negative working capital
B. Fluctuating working capital requirements
C. Constant working capital throughout the year
D. Zero working capital

8 The time duration between the acquisition of raw materials and the realization of cash from sales is called:

A. The Financing Cycle
B. The Depreciation Cycle
C. The Operating Cycle
D. The Accounting Cycle

9 The formula for the Cash Conversion Cycle is:

A.
B.
C.
D.

10 If the Inventory Conversion Period is 60 days, the Receivables Conversion Period is 40 days, and the Payables Deferral Period is 30 days, what is the Operating Cycle (Gross)?

A. 10 days
B. 70 days
C. 100 days
D. 130 days

11 Using the data: Inventory Period = 60 days, Receivables Period = 40 days, Payables Period = 30 days. What is the Net Operating Cycle (Cash Conversion Cycle)?

A. 70 days
B. 10 days
C. 130 days
D. 100 days

12 Regarding the Liquidity-Profitability Trade-off, which statement is true?

A. Investing heavily in current assets maximizes profitability.
B. There is usually an inverse relationship between liquidity and profitability.
C. Minimizing working capital increases liquidity.
D. Higher liquidity always leads to higher profitability.

13 An aggressive working capital policy is characterized by:

A. High inventory levels
B. Zero short-term debt
C. High current assets relative to sales
D. Low current assets relative to sales

14 Which of the following is an objective of Inventory Management?

A. To minimize the total cost of inventory (ordering and carrying costs)
B. To maximize the amount of cash held in the bank
C. To increase the accounts payable period
D. To eliminate all inventory holdings completely

15 The costs associated with storing inventory, insurance, and obsolescence are collectively known as:

A. Ordering Costs
B. Stock-out Costs
C. Carrying (Holding) Costs
D. Transaction Costs

16 In the Economic Order Quantity (EOQ) model, what is the relationship between Ordering Costs and Carrying Costs at the optimal order point?

A. They are unrelated
B. Ordering Costs = Carrying Costs
C. Ordering Costs > Carrying Costs
D. Ordering Costs < Carrying Costs

17 The formula for Economic Order Quantity (EOQ) is represented as (where A=Annual Demand, O=Ordering Cost, C=Carrying Cost per unit):

A.
B.
C.
D.

18 Calculate EOQ if Annual Demand = 10,000 units, Ordering Cost per order = , and Carrying Cost per unit per year = .

A. 2500 units
B. 250 units
C. 1000 units
D. 500 units

19 Which inventory management technique classifies items into three categories based on their usage value?

A. EOQ Model
B. JIT System
C. ABC Analysis
D. VED Analysis

20 In ABC Analysis, 'A' items usually represent:

A. All obsolete items
B. Low percentage of items, high usage value
C. High percentage of items, low usage value
D. Moderate percentage of items and value

21 What is Safety Stock?

A. The quantity ordered in the EOQ model
B. Inventory held to protect against uncertainties in demand or supply
C. The maximum inventory level allowed
D. Inventory that is obsolete

22 The Reorder Point is calculated as:

A.
B.
C.
D.

23 The Just-In-Time (JIT) inventory system aims to:

A. Complicate the production process
B. Maximize safety stock
C. Reduce inventory levels to near zero
D. Increase ordering costs

24 The cost resulting from not having enough inventory to meet demand is called:

A. Stock-out Cost
B. Carrying Cost
C. Float Cost
D. Ordering Cost

25 Which of the following is a motive for holding cash according to Keynes?

A. Precautionary Motive
B. Speculative Motive
C. Transaction Motive
D. All of the above

26 The difference between the cash balance shown in the firm's ledger and the balance shown in the bank's account is known as:

A. Accrual
B. Float
C. Overdraft
D. Shortage

27 Which type of float is created when a firm writes a check but it has not yet cleared the bank?

A. Availability Float
B. Collection Float
C. Net Float
D. Disbursement Float

28 A cash management technique where customers mail payments to a post office box emptied by the firm's bank is called:

A. Lock-box System
B. Playing the Float
C. Electronic Fund Transfer
D. Concentration Banking

29 The Baumol Model of cash management is theoretically similar to which inventory model?

A. VED Analysis
B. EOQ Model
C. ABC Analysis
D. JIT System

30 In the Baumol Model, the cost of holding cash is the:

A. Inflation rate
B. Transaction cost of converting securities
C. Administrative cost
D. Opportunity cost (forgone interest)

31 The Miller-Orr Model deals with cash management when:

A. Cash flows are constant and predictable
B. There are no transaction costs
C. Cash flows fluctuate randomly
D. Interest rates are zero

32 In the context of Receivables Management, 'Trade Credit' is:

A. A loan from a bank
B. Equity investment
C. Credit granted by one firm to another during sales
D. Long-term bond

33 The primary objective of Receivables Management is to:

A. Trade off the benefits of increased sales against the costs of carrying receivables
B. Maximize sales regardless of bad debts
C. Collect cash immediately for every sale
D. Eliminate the credit department

34 Credit terms expressed as "2/10, net 30" mean:

A. 2% discount if paid within 10 days, otherwise full payment in 30 days
B. 2% interest is charged if paid in 10 days
C. 10% discount if paid within 2 days
D. Full payment due in 2 to 10 days

35 Which of the following is NOT one of the '5 Cs of Credit' used to evaluate customers?

A. Collateral
B. Character
C. Consistency
D. Capacity

36 Credit Standards refer to:

A. The collection procedures
B. The discount percentage
C. The terms of payment offered
D. The minimum criteria a customer must meet to receive credit

37 Relaxing credit standards is likely to result in:

A. Higher sales and higher bad debts
B. Higher sales and lower bad debts
C. Lower sales and lower bad debts
D. Lower sales and higher bad debts

38 An Aging Schedule is used to:

A. Forecast inventory needs
B. Schedule employee shifts
C. Analyze the quality of accounts receivable by age
D. Determine the depreciation of fixed assets

39 The process of selling accounts receivable to a financial institution to raise immediate cash is known as:

A. Pledging
B. Mortgaging
C. Discounting
D. Factoring

40 In the credit term "net 30", the number 30 represents the:

A. Credit period
B. Inventory period
C. Float period
D. Cash discount period

41 Which cost is NOT associated with Accounts Receivable?

A. Capital cost (opportunity cost of funds)
B. Administrative cost
C. Ordering cost
D. Delinquency/Bad debt cost

42 If a firm increases its cash discount from 2% to 3%, it generally aims to:

A. Increase the average collection period
B. Reduce the average collection period
C. Discourage early payment
D. Increase bad debts

43 Concentration Banking is a technique used to:

A. Decentralize cash balances
B. Pool funds from regional accounts into a central account
C. Avoid paying taxes
D. Increase float

44 The Precautionary Motive for holding cash is most influenced by:

A. The predictability of cash flows
B. The interest rate on securities
C. The number of bank accounts
D. The firm's marketing strategy

45 Which of the following is a credit policy variable?

A. Credit Terms
B. All of the above
C. Collection Policy
D. Credit Standards

46 What happens to the Operating Cycle if the Accounts Payable Period increases?

A. The Operating Cycle decreases
B. The Operating Cycle increases
C. The Operating Cycle remains the same
D. The Gross Operating Cycle increases

47 Revisiting the previous logic: If the Cash Conversion Cycle is , increasing Payables will:

A. Have no effect
B. Increase Inventory
C. Shorten the Cash Conversion Cycle
D. Lengthen the Cash Conversion Cycle

48 In the Miller-Orr model, if the cash balance hits the Upper Control Limit, the firm should:

A. Sell securities to raise cash
B. Buy securities to reduce cash
C. Do nothing
D. Borrow from the bank

49 Which working capital financing approach is considered the most risky?

A. Zero Working Capital Approach
B. Matching (Hedging) Approach
C. Conservative Approach
D. Aggressive Approach

50 VED Analysis involves classifying inventory based on:

A. Lead Time
B. Value
C. Criticality (Vital, Essential, Desirable)
D. Volume
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