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| Working Capital MCQs |
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Effective management of working capital is crucial for a company's financial health and operational efficiency. It ensures that a company has enough liquidity to meet its short-term obligations, avoid disruptions in its operations, and take advantage of business opportunities. Here are some key aspects of working capital management:
Cash flow management: Cash is
the most essential component of working capital. Proper management of cash flow
involves monitoring and optimizing cash inflows and outflows to ensure that a
company has enough cash on hand to meet its operational needs. This includes
efficient cash collection from customers, prudent payment of bills, and
managing cash reserves effectively to avoid unnecessary costs associated with
overstocking or stockouts.
Inventory management: Inventory
refers to the goods or products that a company holds for sale. Efficient
inventory management involves optimizing inventory levels to strike a balance
between avoiding stockouts and minimizing carrying costs. It includes proper
inventory valuation, forecasting demand accurately, implementing just-in-time
(JIT) inventory systems, and periodically reviewing and managing slow-moving or
obsolete inventory.
Accounts receivable management:
Accounts receivable are the amounts owed to a company by its customers for
goods or services provided on credit. Managing accounts receivable effectively
involves establishing and enforcing credit policies, monitoring and collecting
receivables promptly, and managing bad debts.
Accounts payable management:
Accounts payable are the amounts owed by a company to its suppliers for goods
or services received on credit. Managing accounts payable involves optimizing
payment terms to take advantage of early payment discounts, negotiating
favorable credit terms with suppliers, and managing payment schedules to avoid
late payment penalties.
Short-term financing: Working
capital may require short-term financing to cover temporary shortfalls in cash
flow or unexpected increases in operational needs. Managing short-term
financing options such as bank overdrafts, lines of credit, trade credit, and
commercial paper involves evaluating the costs and risks associated with each
option and selecting the most appropriate source of short-term funds.
Monitoring and analysis: Effective working capital management requires regular monitoring and analysis of key performance indicators (KPIs) such as cash conversion cycle, current ratio, and days sales outstanding (DSO). These KPIs provide insights into the company's liquidity position, operational efficiency, and effectiveness of working capital management practices.
MCQs on Working Capital
1. Which of the following is not a component of working capital
management?
a) Inventory management
b) Cash management
c) Accounts receivable management
d) Long-term investment management
Answer: d) Long-term investment management
2. Which of the following is the primary objective of working
capital management?
a) Maximizing shareholder wealth
b) Maximizing short-term profits
c) Maximizing long-term profits
d) Maintaining liquidity and solvency
Answer: d) Maintaining liquidity and solvency
3. Which of the following is not a source of short-term
financing for working capital?
a) Trade credit
b) Bank loans
c) Issuance of bonds
d) Commercial paper
Answer: c) Issuance of bonds
4. Which of the following ratios measures a company's ability
to meet its short-term obligations?
a) Debt-to-equity ratio
b) Current ratio
c) Return on investment ratio
d) Price-earnings ratio
Answer: b) Current ratio
5. Which of the following ratios measures a company's ability
to collect its accounts receivables?
a) Inventory turnover ratio
b) Debt-to-equity ratio
c) Accounts receivable turnover ratio
d) Gross profit margin ratio
Answer: c) Accounts receivable turnover ratio
6. Which of the following is not a technique for managing
accounts receivable?
a) Offering cash discounts for early payment
b) Tightening credit policies
c) Factoring
d) Increasing inventory levels
Answer: d) Increasing inventory levels
7. Which of the following is not a technique for managing
inventory?
a) Economic order quantity (EOQ) model
b) Just-in-time (JIT) inventory management
c) Safety stock management
d) Delayed payment to suppliers
Answer: d) Delayed payment to suppliers
8. Which of the following is a disadvantage of maintaining high
levels of inventory?
a) Increased risk of stockouts
b) Reduced carrying costs
c) Increased efficiency
d) Improved cash flow
Answer: a) Increased risk of stockouts
9. Which of the following is not a cash management technique?
a) Delaying payments to suppliers
b) Establishing a lockbox system
c) Investing in long-term securities
d) Concentration banking
Answer: c) Investing in long-term securities
10. Which of the following is a cash budget used for?
a) To forecast sales
b) To estimate long-term capital requirements
c) To manage cash inflows and outflows
d) To analyze profitability
Answer: c) To manage cash inflows and outflows
11. Which of the following is a disadvantage of factoring as a means
of managing accounts receivable?
a) Increased cash flow
b) High cost of factoring
c) Increased risk of bad debts
d) Increased risk of stockouts
Answer: b) High cost of factoring
12. Which of the following is not a benefit of just-in-time
(JIT) inventory management?
a) Reduced inventory holding costs
b) Improved quality control
c) Increased flexibility in production
d) Increased safety stock levels
Answer: d) Increased safety stock levels
13. Which of the following is not a tool for managing accounts
payable?
a) Negotiating payment terms with suppliers
b) Delaying payments to suppliers
c) Offering cash discounts for early payment
d) Factoring
Answer: d) Factoring
14. Which of the following is a disadvantage of relying solely
on short-term financing for working capital?
a) Reduced risk of default
b) Increased interest expenses
c) Increased financial flexibility
d) Improved liquidity
Answer: b) Increased
Working Capital Management MCQs
1. Which of the following is not a component of working
capital?
a) Cash and cash equivalents
b) Accounts payable
c) Inventory
d) Long-term loans
Answer: d) Long-term loans
2. The primary objective of working capital management is to:
a) Maximize short-term profitability
b) Minimize liquidity risk
c) Maintain a positive net working capital
d) Minimize the cost of capital
Answer: c) Maintain a positive net working capital
3. The cash conversion cycle is calculated as:
a) Accounts receivable period + inventory turnover period
b) Accounts payable period + inventory turnover period
c) Accounts payable period + accounts receivable period
d) Inventory turnover period - accounts receivable period
Answer: a) Accounts receivable period + inventory turnover period
4. Which of the following is not a cash inflow in the cash
budget?
a) Sales revenue
b) Collections from accounts receivable
c) Payment of accounts payable
d) Sale of fixed assets
Answer: c) Payment of accounts payable
5. A company with a high level of inventory turnover is likely
to have:
a) A lower level of liquidity risk
b) A higher level of liquidity risk
c) A higher level of profitability
d) A lower level of profitability
Answer: a) A lower level of liquidity risk
6. The optimal level of working capital is determined by
balancing:
a) The need for liquidity and the cost of financing
b) The need for liquidity and the level of profitability
c) The level of profitability and the cost of financing
d) The level of accounts receivable and the level of
accounts payable
Answer: a) The need for liquidity and the cost of financing
7. The receivables turnover ratio measures:
a) The number of days it takes to collect accounts
receivable
b) The number of times accounts receivable turn over in a
year
c) The percentage of sales that are on credit
d) The number of credit sales outstanding
Answer: b) The number of times accounts receivable turn over in a year
8. A company with a high level of accounts payable is likely to
have:
a) A lower level of liquidity risk
b) A higher level of liquidity risk
c) A higher level of profitability
d) A lower level of profitability
Answer: a) A lower level of liquidity risk
9. The cash budget is used to:
a) Determine the optimal level of working capital
b) Identify potential cash shortfalls or surpluses
c) Calculate the cost of capital
d) Evaluate the efficiency of inventory management
Answer: b) Identify potential cash shortfalls or surpluses
10. A company with a longer cash conversion cycle than its
competitors is likely to:
a) Have a higher level of profitability
b) Have a lower level of profitability
c) Have a lower level of liquidity risk
d) Have a higher level of liquidity risk
Answer: d) Have a higher level of liquidity risk
11. The inventory turnover ratio measures:
a) The number of days it takes to sell inventory
b) The number of times inventory is sold and replaced in a
year
c) The percentage of inventory that is obsolete
d) The amount of inventory that is held in stock
Answer: b) The number of times inventory is sold and replaced in a year
12. Which of the following is not a current liability?
a) Accounts payable
b) Long-term loans
c) Accrued expenses
d) Taxes payable
Answer: b) Long-term loans