Working Capital Management Practice Quiz
Which of the following is NOT considered part of working capital?
A) Cash
B) Inventory
C) Long-term debt
D) Accounts receivable
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
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
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
A company’s current ratio is a measure of:
A) Profitability
B) Operational efficiency
C) Liquidity
D) Leverage
Which of the following would likely decrease working capital?
A) Increasing accounts payable
B) Increasing accounts receivable
C) Decreasing inventory
D) Selling fixed assets
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
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
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
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
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
Which of the following is an example of a current asset?
A) Equipment
B) Buildings
C) Accounts payable
D) Accounts receivable
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
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
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
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
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
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
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
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
Which of the following is an example of a current liability?
A) Long-term debt
B) Accounts payable
C) Equipment
D) Common stock
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
The cash conversion cycle is influenced by all of the following EXCEPT:
A) Inventory turnover
B) Receivables turnover
C) Payables turnover
D) Depreciation
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
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
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
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
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)
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
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
Which of the following is the most liquid current asset?
A) Accounts receivable
B) Inventory
C) Cash
D) Prepaid expenses
Which of the following is typically considered the primary source of short-term financing?
A) Long-term bonds
B) Bank loans
C) Issuance of equity
D) Deferred tax liabilities
A company’s working capital management is essential for:
A) Maximizing long-term investment returns
B) Ensuring liquidity for day-to-day operations
C) Enhancing profitability through long-term loans
D) Managing fixed asset investments
If a company’s inventory turnover ratio is too low, it may indicate:
A) The company is holding excess inventory
B) The company is selling products at a high markup
C) The company is experiencing strong sales
D) The company is over-leveraged
What does a negative cash conversion cycle indicate?
A) The company is making payments too quickly
B) The company is efficient in converting investments into cash
C) The company has insufficient liquidity to meet obligations
D) The company has excess working capital
Which of the following is a common reason for high levels of accounts receivable?
A) A company offers long payment terms to customers
B) A company maintains a high inventory turnover rate
C) A company sells mainly for cash
D) A company has a very low cost of goods sold
A company that is able to convert its inventory into sales quickly will typically have:
A) High working capital requirements
B) Low liquidity
C) A low cash conversion cycle
D) High profitability
The quick ratio differs from the current ratio because it excludes:
A) Accounts receivable
B) Inventory
C) Accounts payable
D) Prepaid expenses
Which of the following is true about managing working capital?
A) It involves minimizing short-term debt
B) It aims to balance liquidity with profitability
C) It eliminates the need for inventory management
D) It always involves increasing debt
Which of the following is an example of an operating asset?
A) Real estate
B) Equipment
C) Patents
D) Accounts payable
Which of the following is true regarding working capital turnover?
A) A higher turnover ratio suggests poor management of working capital
B) A lower turnover ratio suggests efficient management of working capital
C) A higher turnover ratio suggests efficient management of working capital
D) Working capital turnover is unrelated to business performance
Which of the following actions can a company take to improve its working capital?
A) Speed up accounts payable
B) Slow down accounts receivable collection
C) Increase inventory turnover
D) Increase long-term liabilities
Which of the following would most likely decrease a company’s current ratio?
A) Paying off short-term debt
B) Increasing cash balances
C) Selling off inventory for cash
D) Taking on additional short-term debt
A company’s accounts receivable days is a measure of:
A) How long it takes to collect payments from customers
B) The efficiency of inventory management
C) The number of days the company takes to pay its suppliers
D) How long it takes to pay off short-term debt
The main objective of optimizing inventory management is to:
A) Ensure high profitability
B) Minimize storage costs and improve cash flow
C) Increase the number of suppliers
D) Decrease production costs
A company’s quick ratio is greater than 1.5. This means:
A) The company can meet its short-term obligations using its most liquid assets
B) The company’s liquidity is extremely low
C) The company is facing liquidity problems
D) The company has high levels of long-term debt
Which of the following is a disadvantage of relying on short-term financing for working capital?
A) Short-term debt is typically less expensive than long-term debt
B) Short-term financing offers greater flexibility
C) Short-term debt may need to be refinanced often
D) Short-term financing improves liquidity
Which of the following would most likely increase working capital?
A) Extending the accounts payable period
B) Decreasing inventory levels
C) Reducing the accounts receivable collection period
D) Paying off long-term debt
The main benefit of reducing the inventory turnover period is:
A) Increasing sales without affecting cash flow
B) Reducing holding costs and freeing up cash
C) Increasing inventory levels
D) Increasing customer satisfaction
Which of the following is the least likely to affect a company’s working capital?
A) Sales fluctuations
B) Payment terms with suppliers
C) Currency exchange rates
D) Cost of capital
A company that increases its payment period to suppliers may:
A) Improve working capital by delaying cash outflows
B) Decrease its liquidity
C) Increase its inventory turnover
D) Face a higher risk of supplier dissatisfaction
Which of the following is a component of the working capital management process?
A) Financing long-term investments
B) Managing current liabilities and current assets
C) Investing in equity securities
D) Managing fixed assets
The most common method of financing working capital needs is:
A) Equity financing
B) Long-term debt
C) Short-term loans or lines of credit
D) Issuing bonds
Which of the following would improve a company’s cash conversion cycle?
A) Lengthening the inventory holding period
B) Reducing accounts payable
C) Reducing accounts receivable
D) Increasing production time
The ability of a company to pay off short-term obligations using its liquid assets is measured by:
A) Quick ratio
B) Debt-to-equity ratio
C) Gross profit margin
D) Return on investment (ROI)
A company is highly successful in collecting its accounts receivable. This likely means:
A) It has a high accounts receivable turnover
B) Its working capital is insufficient
C) It has too much inventory
D) It has a high cash conversion cycle
Which of the following best defines net working capital?
A) Total assets minus total liabilities
B) Total current assets minus total current liabilities
C) Accounts receivable minus accounts payable
D) Cash plus short-term investments
Which of the following would increase a company’s working capital efficiency?
A) Decreasing inventory levels
B) Extending the accounts payable period
C) Speeding up accounts receivable collection
D) Increasing sales volume
A company’s working capital is defined as:
A) The amount of cash available for reinvestment
B) The difference between current assets and current liabilities
C) The company’s total debt
D) The company’s cash flow
Which of the following is a potential disadvantage of holding high levels of working capital?
A) High liquidity
B) Low return on assets
C) Reduced profitability
D) Lower financing costs
What is the primary objective of working capital management?
A) To increase long-term profitability
B) To maximize operational efficiency and liquidity
C) To reduce the company’s total assets
D) To increase equity financing
Which of the following would reduce a company’s working capital requirement?
A) Increasing inventory levels
B) Lengthening the accounts receivable period
C) Decreasing accounts payable
D) Speeding up the collection of accounts receivable
Which of the following would likely decrease a company’s cash conversion cycle?
A) Increasing accounts payable
B) Increasing inventory turnover
C) Lengthening the accounts receivable period
D) Lengthening the inventory holding period
Which of the following financial ratios is a key indicator of working capital efficiency?
A) Return on equity
B) Accounts receivable turnover
C) Debt-to-equity ratio
D) Net profit margin
A high current ratio is generally an indication that a company:
A) Has strong profitability
B) Has a large amount of short-term debt
C) Has a high amount of liquid assets relative to its short-term liabilities
D) Is at risk of liquidity problems
Which of the following would most likely be considered a current liability?
A) Long-term debt
B) Accounts payable
C) Common stock
D) Equipment
Which of the following is NOT a component of working capital management?
A) Managing accounts receivable
B) Managing cash flows
C) Managing equity investments
D) Managing accounts payable
What does the cash conversion cycle measure?
A) The time taken to convert inventory into cash
B) The efficiency of a company’s use of long-term capital
C) The time it takes to generate a return on assets
D) The time it takes to pay off long-term liabilities
A company’s accounts payable turnover ratio measures:
A) The rate at which the company pays its suppliers
B) The rate at which the company collects from customers
C) The efficiency of converting inventory into cash
D) The company’s ability to generate net income
Which of the following would increase a company’s current ratio?
A) Paying off accounts payable
B) Taking on additional short-term debt
C) Selling fixed assets for cash
D) Increasing accounts receivable
If a company reduces its accounts payable period, this would likely:
A) Decrease its working capital
B) Increase its liquidity
C) Increase its cash conversion cycle
D) Decrease its profitability
Which of the following is NOT typically considered part of a company’s working capital?
A) Inventory
B) Short-term debt
C) Equipment
D) Accounts receivable
A company’s working capital is positive. This generally suggests:
A) The company has more short-term liabilities than assets
B) The company can easily pay off its short-term obligations
C) The company’s long-term assets are insufficient
D) The company is at risk of insolvency
Which of the following could be an indication of inefficient working capital management?
A) High inventory turnover
B) A long accounts receivable collection period
C) A low accounts payable turnover
D) High cash balances
Which of the following best describes “net working capital”?
A) The total assets minus total liabilities
B) Current assets minus current liabilities
C) Cash plus short-term investments
D) Total liabilities minus equity
A high accounts receivable days figure typically suggests:
A) Efficient management of accounts receivable
B) The company is facing difficulty in collecting payments
C) The company is over-leveraged
D) High inventory turnover
What is the primary risk associated with holding excessive amounts of inventory?
A) Increased liquidity risk
B) Higher interest costs on short-term debt
C) Increased storage and obsolescence costs
D) Reduced profitability due to excessive sales
Which of the following strategies can help improve working capital management?
A) Reducing the accounts payable period
B) Speeding up the collection of accounts receivable
C) Reducing cash balances
D) Increasing the number of credit sales
If a company’s current ratio is below 1, it indicates that the company:
A) Has too much working capital
B) May have difficulty paying its short-term liabilities
C) Is highly profitable
D) Has strong liquidity
A company’s liquidity is primarily affected by:
A) Long-term financing decisions
B) Short-term asset and liability management
C) Depreciation policies
D) Changes in stock prices
Which of the following can improve the liquidity of a company?
A) Reducing the inventory turnover ratio
B) Increasing the accounts receivable collection period
C) Reducing short-term debt
D) Increasing long-term capital investment
Which of the following would decrease a company’s quick ratio?
A) Increase in accounts payable
B) Decrease in accounts receivable
C) Increase in inventory
D) Decrease in short-term debt
The current ratio is considered more conservative than the quick ratio because it includes:
A) Only cash and cash equivalents
B) Only accounts receivable
C) Inventory as a current asset
D) Long-term investments
Which of the following would most likely increase a company’s working capital?
A) Reducing the accounts payable period
B) Decreasing inventory turnover
C) Paying off long-term debt with cash
D) Increasing accounts receivable
Which of the following actions would reduce the working capital requirement?
A) Extending the payment period to suppliers
B) Speeding up the collection of accounts receivable
C) Reducing the cash conversion cycle
D) Increasing production costs
What would most likely increase a company’s liquidity position?
A) Increasing accounts receivable days
B) Reducing inventory levels
C) Increasing accounts payable days
D) Reducing the cash conversion cycle
What does the term “working capital efficiency” refer to?
A) The company’s ability to manage inventory and accounts receivable
B) The company’s ability to secure long-term debt
C) The company’s profitability
D) The company’s debt-to-equity ratio
Which of the following could be a result of inefficient working capital management?
A) High inventory turnover
B) Low levels of short-term debt
C) Cash flow problems due to slow collections
D) High accounts payable turnover
If a company’s inventory turnover ratio is low, it means that:
A) The company is selling products quickly
B) The company may be overstocking its inventory
C) The company is operating efficiently
D) The company has low inventory costs
Which of the following would reduce a company’s cash conversion cycle?
A) Reducing accounts payable turnover
B) Increasing inventory turnover
C) Extending the accounts receivable period
D) Increasing production lead time
Which of the following best describes the relationship between working capital and liquidity?
A) Working capital is a measure of long-term profitability, while liquidity is related to short-term solvency
B) Both working capital and liquidity are indicators of short-term solvency
C) Working capital measures the company’s ability to generate long-term income
D) Liquidity only considers short-term liabilities, while working capital includes both short-term and long-term assets
What is the main purpose of the quick ratio?
A) To assess the company’s long-term profitability
B) To measure the company’s ability to pay off its current liabilities without selling inventory
C) To determine the level of profitability generated by operations
D) To measure the efficiency of asset usage in generating revenue
Which of the following actions would most likely increase a company’s working capital?
A) Issuing new long-term debt
B) Paying off accounts payable
C) Purchasing additional equipment
D) Reducing accounts receivable turnover
Which of the following is a disadvantage of a company holding excessive working capital?
A) Increased interest payments on short-term debt
B) Decreased profitability due to excess inventory or idle cash
C) Difficulty in paying long-term liabilities
D) Lower return on assets
A company’s current liabilities exceed its current assets. This situation typically indicates:
A) A strong liquidity position
B) A potential liquidity problem
C) High profitability
D) A large amount of long-term debt
The inventory turnover ratio indicates:
A) How quickly the company collects payments from customers
B) The number of times inventory is sold and replaced over a period
C) The ability of the company to pay off short-term liabilities
D) The effectiveness of a company’s pricing strategy
Which of the following best defines the concept of “working capital optimization”?
A) Maximizing the company’s profitability through long-term investments
B) Ensuring that the company has the right amount of short-term assets to cover short-term liabilities
C) Increasing inventory to meet demand
D) Shortening the company’s operating cycle
What is the main advantage of using a just-in-time (JIT) inventory management system?
A) It helps reduce inventory levels, thereby decreasing working capital requirements
B) It improves the quality of the company’s products
C) It minimizes the need for long-term debt financing
D) It maximizes inventory turnover by increasing the holding period
Which of the following would most likely decrease a company’s liquidity?
A) Reducing inventory levels
B) Decreasing the accounts receivable turnover ratio
C) Speeding up the payment of accounts payable
D) Extending the accounts receivable collection period
What does the term “working capital cycle” refer to?
A) The time it takes to convert short-term debt into equity
B) The time it takes to turn the company’s assets into cash
C) The time it takes for a company to complete its production and sales process
D) The time between the outlay of cash and the receipt of cash from sales
Which of the following best describes the working capital management strategy known as “conservative financing”?
A) Using long-term debt for financing short-term assets
B) Financing both short-term and long-term assets with short-term debt
C) Maintaining a large amount of cash and short-term investments to cover working capital needs
D) Using only equity financing to cover working capital needs
The formula for calculating the current ratio is:
A) Current assets ÷ Total liabilities
B) Current liabilities ÷ Current assets
C) Current assets ÷ Current liabilities
D) Net income ÷ Current liabilities
Which of the following would increase the company’s cash conversion cycle?
A) Decreasing the inventory turnover
B) Increasing the accounts payable period
C) Decreasing the accounts receivable period
D) Increasing sales
The average collection period refers to:
A) The time it takes to pay suppliers
B) The time it takes for a company to convert inventory into cash
C) The average number of days it takes to collect payments from customers
D) The average period between the purchase of inventory and its sale
Which of the following would be considered a “liquid asset” in working capital management?
A) Equipment
B) Inventory
C) Cash
D) Goodwill
Which of the following financial statements is most closely related to the analysis of working capital?
A) Statement of cash flows
B) Income statement
C) Balance sheet
D) Statement of stockholders’ equity
Which of the following is the key factor in managing short-term liquidity?
A) Increasing long-term debt financing
B) Maintaining an appropriate balance of current assets and current liabilities
C) Reducing the company’s equity base
D) Increasing the company’s long-term investments
What does the operating cycle measure?
A) The number of days it takes for the company to sell its inventory and collect payment
B) The total number of days a company needs to pay its short-term liabilities
C) The amount of time it takes to acquire long-term assets
D) The number of days a company holds cash before reinvesting
Which of the following strategies is used to reduce a company’s working capital requirement?
A) Lengthening the accounts receivable period
B) Reducing inventory
C) Increasing accounts payable
D) Increasing cash holdings
What is the impact of increasing the accounts payable period on working capital?
A) It decreases working capital by increasing liabilities
B) It increases working capital by decreasing liabilities
C) It has no impact on working capital
D) It increases working capital by reducing assets
A low current ratio may suggest:
A) Strong liquidity
B) High levels of short-term debt
C) High inventory turnover
D) Efficient working capital management
What is a likely consequence of too much working capital?
A) Increased return on equity
B) Decreased profitability due to the opportunity cost of idle funds
C) High liquidity risk
D) Increased creditworthiness
In working capital management, which of the following is an example of an operational decision?
A) Determining the level of short-term debt
B) Managing the inventory turnover ratio
C) Deciding between equity or debt financing
D) Deciding on dividend payouts
A company with high levels of inventory might face which of the following challenges?
A) Difficulty in paying short-term liabilities
B) High costs related to storage and obsolescence
C) Low cash reserves
D) High liquidity
What is the main disadvantage of relying heavily on short-term debt to finance working capital?
A) Increased long-term asset purchases
B) Increased liquidity risk if the debt needs to be refinanced quickly
C) Higher cost of capital
D) Reduced operational flexibility
Which of the following best describes the purpose of the accounts receivable turnover ratio?
A) To measure how efficiently a company collects its receivables
B) To assess the amount of short-term debt financing used
C) To evaluate a company’s inventory management practices
D) To analyze the liquidity of a company’s assets
A company with a high debt-to-equity ratio is likely to face:
A) Higher liquidity risk
B) Lower financial leverage
C) Lower profitability
D) Higher operating efficiency
Which of the following would most likely result in an improvement in working capital?
A) Increasing the cash conversion cycle
B) Increasing the level of inventory
C) Reducing the accounts payable period
D) Lengthening the accounts receivable collection period
Which of the following is an indicator that a company may be experiencing liquidity problems?
A) High profitability and high cash flow
B) A low current ratio and frequent delays in paying bills
C) Strong sales growth and increasing net income
D) High levels of short-term investments
Which of the following is an example of a short-term liability?
A) Bonds payable
B) Accounts payable
C) Common stock
D) Retained earnings
Which of the following is typically considered a use of working capital?
A) Purchasing inventory
B) Issuing long-term debt
C) Raising equity capital
D) Selling long-term assets
How can a company reduce its working capital requirements?
A) Increasing accounts receivable days
B) Reducing inventory levels
C) Lengthening supplier payment terms
D) All of the above
What is the primary goal of working capital management?
A) Maximizing profitability in the long term
B) Maintaining a balance between liquidity and profitability
C) Minimizing equity financing
D) Maximizing debt financing
If a company’s accounts payable period increases, which of the following is most likely to happen?
A) The company will have more cash available for operations
B) The company will have more short-term debt
C) The company’s working capital will decrease
D) The company’s liquidity will decrease
What does a decrease in the inventory turnover ratio indicate?
A) The company is selling inventory more quickly
B) The company is holding inventory for a longer period
C) The company is reducing its inventory levels
D) The company is increasing production efficiency
The quick ratio excludes which of the following assets?
A) Accounts receivable
B) Inventory
C) Cash
D) Prepaid expenses
Which of the following would improve a company’s working capital position?
A) Increasing inventory turnover
B) Lengthening the accounts receivable collection period
C) Reducing the accounts payable period
D) All of the above
A decrease in accounts payable would likely result in:
A) An increase in working capital
B) A decrease in working capital
C) No change in working capital
D) An increase in cash flow
A company’s working capital cycle is measured by:
A) The time taken to convert short-term debt into equity
B) The time taken to convert current assets into cash
C) The time between the purchase of inventory and the collection of accounts receivable
D) The number of days it takes to produce inventory
What is the main advantage of using trade credit for financing working capital?
A) It provides long-term financing options
B) It allows a company to purchase goods without immediate cash outflows
C) It offers lower interest rates than bank loans
D) It has fewer regulatory requirements than short-term debt
Which of the following is NOT typically a short-term asset?
A) Accounts receivable
B) Inventory
C) Cash equivalents
D) Goodwill
Which of the following would likely reduce a company’s liquidity?
A) Increasing the accounts payable period
B) Reducing inventory levels
C) Extending the accounts receivable period
D) Increasing short-term debt
Which of the following best describes a company’s working capital needs during periods of rapid growth?
A) They typically decrease, as growth increases profitability
B) They typically increase, as more inventory and receivables are needed to support the expansion
C) They remain unchanged, as working capital requirements are fixed
D) They fluctuate unpredictably based on the company’s strategy
What is the impact of reducing accounts receivable on working capital?
A) It decreases working capital by increasing short-term liabilities
B) It increases working capital by converting receivables into cash
C) It has no impact on working capital
D) It decreases working capital by reducing current assets
Which of the following strategies is likely to improve cash flow and reduce working capital?
A) Increasing the length of the accounts receivable period
B) Reducing inventory holding levels
C) Increasing inventory purchases
D) Lengthening the accounts payable period
Which financial ratio is most directly related to the efficiency of working capital management?
A) Return on equity
B) Current ratio
C) Accounts receivable turnover
D) Debt-to-equity ratio
Which of the following is an example of a company using its working capital to improve operations?
A) Reducing the accounts receivable collection period
B) Increasing long-term debt to finance expansion
C) Issuing additional stock to increase equity
D) Selling long-term assets to fund capital expenditures
A company uses its working capital to fund the purchase of additional inventory. What is the likely result?
A) Increase in liquidity and cash flow
B) Decrease in short-term assets and liabilities
C) Reduction in working capital, as cash is used to purchase inventory
D) An increase in both working capital and profitability
Which of the following is most likely to indicate that a company is overstocked on inventory?
A) A high accounts receivable turnover ratio
B) A low inventory turnover ratio
C) A high quick ratio
D) A decrease in short-term liabilities
Which of the following statements about working capital financing is correct?
A) Working capital financing should always be obtained through long-term debt
B) Short-term financing is usually used for working capital needs due to its lower cost
C) Long-term debt is often used to finance working capital because it has a lower risk profile
D) Retained earnings are an inappropriate source of working capital financing
Which of the following would NOT increase a company’s cash flow?
A) Selling inventory for cash
B) Increasing the accounts payable period
C) Reducing accounts receivable collection period
D) Purchasing long-term assets
Which of the following actions would most likely reduce a company’s working capital cycle?
A) Increasing the accounts receivable period
B) Reducing the inventory period
C) Increasing the cash conversion cycle
D) Lengthening the accounts payable period
Which of the following is a key benefit of maintaining an optimal level of working capital?
A) The ability to fund long-term investments
B) Increased short-term debt obligations
C) A balanced liquidity position without sacrificing profitability
D) Maximized return on equity
What is the likely effect of increasing the accounts receivable days on a company’s working capital?
A) Decrease in working capital, as more cash is collected
B) Increase in working capital, as more inventory is needed
C) Increase in working capital, as the company holds more cash
D) No impact on working capital
What is the significance of managing the cash conversion cycle?
A) It helps measure the amount of time taken to convert cash into sales
B) It provides a measure of the company’s ability to manage debt
C) It measures the time taken to convert working capital into cash
D) It helps determine the company’s overall profitability
Which of the following could be considered a drawback of holding excessive cash in the business?
A) Increased risk of liquidity problems
B) Opportunity cost of not using cash for growth or investments
C) Increased financial leverage
D) Decreased inventory turnover
Which of the following would likely increase a company’s liquidity?
A) Increasing inventory turnover
B) Decreasing accounts receivable turnover
C) Lengthening the accounts payable period
D) Increasing short-term debt
Which of the following could potentially cause a company’s working capital to decrease?
A) Collecting accounts receivable more quickly
B) Purchasing additional inventory on credit
C) Paying off short-term liabilities
D) Extending the accounts receivable period
Which of the following best describes the term “cash flow from operations”?
A) The cash generated from the sale of long-term assets
B) The cash generated or used in the day-to-day business operations
C) The cash received from new equity investors
D) The cash spent on capital expenditures
What is the impact of increasing inventory purchases on a company’s working capital?
A) Decreases working capital by increasing current liabilities
B) Increases working capital by increasing current assets
C) Has no impact on working capital
D) Increases working capital by reducing long-term debt
Which of the following statements about working capital is correct?
A) Working capital is calculated by subtracting current liabilities from current assets.
B) Working capital only includes cash and cash equivalents.
C) Working capital is the same as net income.
D) A higher working capital indicates a higher risk of liquidity problems.
What is the most significant disadvantage of holding high levels of working capital?
A) It increases the risk of liquidity problems.
B) It ties up funds that could be used for other investments.
C) It makes it harder to obtain short-term financing.
D) It reduces cash flow from operations.
Which of the following is an example of a current liability?
A) Long-term debt
B) Accounts payable
C) Common stock
D) Land and buildings
Which of the following would reduce a company’s working capital?
A) Selling inventory for cash
B) Borrowing money for short-term financing
C) Paying off accounts payable
D) Increasing accounts receivable turnover
Which of the following measures would improve a company’s working capital position?
A) Decreasing accounts payable days
B) Reducing inventory turnover
C) Reducing accounts receivable collection period
D) Lengthening the accounts receivable period
What would be the effect of a company’s decision to extend its accounts payable period on working capital?
A) Increase in working capital due to reduced short-term liabilities
B) Decrease in working capital due to delayed payments to suppliers
C) No effect on working capital
D) Decrease in working capital due to increased current liabilities
Which of the following ratios is used to evaluate a company’s short-term liquidity?
A) Return on equity
B) Current ratio
C) Gross margin ratio
D) Price-to-earnings ratio
How does reducing inventory levels impact a company’s working capital?
A) Increases working capital by reducing current liabilities
B) Increases working capital by reducing current assets
C) Decreases working capital by freeing up cash
D) Decreases working capital by increasing short-term debt
What is the most common source of short-term financing for managing working capital?
A) Long-term bank loans
B) Equity financing
C) Trade credit from suppliers
D) Sale of assets
Which of the following would be the most likely cause of a reduction in working capital?
A) Increasing accounts receivable collection efficiency
B) Using cash to purchase long-term assets
C) Extending the accounts payable period
D) Increasing inventory turnover
What is the primary difference between working capital and the current ratio?
A) Working capital is a dollar amount, while the current ratio is a percentage.
B) Working capital includes long-term assets, while the current ratio excludes long-term assets.
C) The current ratio is the difference between assets and liabilities, while working capital is a measure of profitability.
D) Working capital is used for long-term financial analysis, while the current ratio is used for short-term analysis.
Which of the following is a key factor in determining a company’s working capital needs?
A) The amount of short-term debt
B) The company’s ability to collect accounts receivable quickly
C) The amount of long-term debt
D) The company’s tax rate
Which of the following would most likely increase a company’s working capital?
A) Taking on additional short-term debt
B) Lengthening the accounts payable period
C) Collecting receivables more quickly
D) Reducing inventory levels
Which of the following is true regarding the impact of increasing the accounts receivable turnover ratio?
A) It reduces working capital by improving cash flow.
B) It increases working capital by increasing short-term debt.
C) It has no effect on working capital.
D) It reduces working capital by delaying payments to suppliers.
Which of the following actions will most likely reduce a company’s current ratio?
A) Paying off short-term debt
B) Increasing accounts payable
C) Reducing inventory
D) Decreasing accounts receivable collection period
Which of the following is an advantage of financing working capital through short-term debt rather than long-term debt?
A) Short-term debt is usually more expensive than long-term debt.
B) Short-term debt provides greater flexibility in managing cash flow.
C) Short-term debt has longer repayment terms.
D) Short-term debt has lower interest rates than long-term debt.
Which of the following would most likely lead to a decrease in working capital?
A) Speeding up the accounts receivable collection process
B) Increasing accounts payable days
C) Reducing inventory levels
D) Extending the accounts receivable period
What is the primary function of working capital management in a business?
A) To generate long-term capital for expansion
B) To ensure there is sufficient cash flow to meet short-term obligations
C) To maximize the return on assets
D) To maximize profitability through cost-cutting
Which of the following would most likely improve a company’s cash flow and working capital?
A) Increasing accounts receivable turnover
B) Decreasing accounts payable turnover
C) Lengthening inventory turnover
D) Increasing long-term debt
What is the typical effect of decreasing the length of the cash conversion cycle?
A) Increased profitability due to faster inventory turnover
B) Increased working capital by collecting receivables more quickly
C) Decreased working capital due to faster inventory turnover
D) Increased need for short-term financing
Which of the following is the best indicator of a company’s short-term financial health?
A) Quick ratio
B) Earnings before interest and tax (EBIT)
C) Return on equity
D) Price-to-earnings ratio
A company’s management is trying to reduce its working capital. Which of the following actions would most likely achieve this?
A) Increasing the inventory turnover rate
B) Increasing the accounts receivable collection period
C) Extending the accounts payable period
D) All of the above
Which of the following is a direct result of decreasing the average payment period for accounts payable?
A) Decreased working capital
B) Increased working capital
C) Improved liquidity
D) Increased profitability
A company is considering increasing its inventory to meet demand. How would this affect working capital?
A) Decrease working capital as more cash is tied up in inventory
B) Increase working capital by reducing accounts payable
C) Increase working capital by reducing current liabilities
D) No effect on working capital
Which of the following is a characteristic of an efficient working capital management system?
A) High levels of current assets relative to current liabilities
B) High levels of short-term debt relative to long-term debt
C) Fast inventory turnover and quick receivables collection
D) A large amount of idle cash held in the business
Which of the following is most likely to be a source of working capital for a company?
A) Taking out a long-term loan
B) Selling fixed assets
C) Increasing accounts payable
D) Using retained earnings to purchase new equipment
Which of the following measures the efficiency with which a company manages its short-term liabilities?
A) Current ratio
B) Quick ratio
C) Cash conversion cycle
D) Debt-to-equity ratio
Which of the following is the most direct effect of reducing the accounts receivable days?
A) Increased profitability
B) Decreased working capital
C) Increased liquidity
D) Decreased short-term debt
What is a company’s working capital ratio?
A) Net income divided by total assets
B) Total current assets divided by total current liabilities
C) Operating income divided by total liabilities
D) Gross margin divided by total revenue
Which of the following is the primary concern for a company when managing working capital?
A) To maximize the use of debt financing
B) To balance liquidity and profitability
C) To minimize fixed costs
D) To avoid long-term investments
Which of the following is a key component of the cash conversion cycle?
A) Inventory turnover
B) Sales growth
C) Gross margin
D) Long-term debt ratio
Which of the following is an example of an internal factor affecting working capital management?
A) Interest rates
B) Inflation rates
C) Cash flow projections
D) Market competition
Which of the following is the most appropriate measure of liquidity for a company with low inventory levels?
A) Quick ratio
B) Inventory turnover ratio
C) Accounts payable turnover
D) Current ratio
Which of the following is an effective way to reduce a company’s cash conversion cycle?
A) Increase accounts payable turnover
B) Decrease inventory turnover
C) Increase the days sales outstanding (DSO)
D) Lengthen the accounts receivable collection period
Which of the following strategies is most likely to improve working capital?
A) Increasing the average payment period for suppliers
B) Increasing the average collection period for receivables
C) Reducing inventory turnover
D) Reducing the accounts payable days
Which of the following would result in an increase in a company’s working capital?
A) Paying off short-term debt
B) Reducing accounts receivable turnover
C) Selling long-term assets
D) Using short-term debt to finance operations
What is the primary objective of managing working capital?
A) To maximize long-term investments
B) To ensure sufficient cash for day-to-day operations
C) To reduce inventory levels
D) To minimize fixed costs
What does a decrease in the average collection period indicate about a company?
A) Improved liquidity
B) Reduced profitability
C) Increased short-term liabilities
D) Increased inventory turnover
What is the primary risk of relying too heavily on short-term financing for working capital?
A) Increased long-term debt
B) Reduced operating efficiency
C) Increased exposure to liquidity problems
D) Increased inventory costs
Which of the following is the primary function of accounts payable in working capital management?
A) To manage short-term debt payments
B) To manage inventory turnover
C) To manage liquidity by delaying cash outflows
D) To manage sales growth
Which of the following would be considered a long-term financing source for working capital?
A) A bank line of credit
B) A short-term loan
C) Retained earnings
D) Trade credit
A company’s working capital can be used to assess its ability to:
A) Meet short-term liabilities
B) Maximize profitability
C) Manage long-term investments
D) Minimize tax liabilities
Which of the following is a short-term financing strategy for managing working capital?
A) Issuing bonds
B) Selling fixed assets
C) Using a line of credit
D) Issuing common stock
How can a company improve its working capital if it has a low current ratio?
A) Increase short-term debt
B) Sell fixed assets to generate cash
C) Delay accounts payable payments
D) Decrease accounts receivable collection period
Which of the following is a characteristic of an efficient working capital management system?
A) Maintaining high levels of cash reserves
B) Maintaining an optimal level of current assets relative to current liabilities
C) Reducing the accounts payable turnover ratio
D) Reducing the cash conversion cycle by increasing the inventory turnover ratio
Which of the following would most likely lead to an improvement in working capital?
A) Delaying inventory purchases
B) Lengthening the accounts receivable period
C) Speeding up the collection of accounts receivable
D) Increasing credit sales to customers
A company’s accounts receivable days is increasing. This is likely to:
A) Improve working capital by increasing cash flow
B) Decrease working capital by tying up more cash in receivables
C) Improve profitability by reducing expenses
D) Have no effect on working capital
Which of the following would be the best measure of a company’s efficiency in managing its working capital?
A) Return on assets (ROA)
B) Cash conversion cycle
C) Gross margin
D) Debt-to-equity ratio
Which of the following actions will decrease a company’s working capital?
A) Speeding up the collection of accounts receivable
B) Reducing inventory levels
C) Extending the accounts payable period
D) Using cash to buy inventory
What is the relationship between a company’s working capital and its liquidity?
A) Higher working capital typically indicates better liquidity.
B) Lower working capital typically indicates better liquidity.
C) There is no relationship between working capital and liquidity.
D) Working capital only affects long-term liquidity.
Which of the following is considered a source of working capital?
A) Short-term loans
B) Long-term debt financing
C) Purchase of fixed assets
D) Sale of equity shares
Which of the following could result from increasing a company’s working capital?
A) Increased short-term liabilities
B) Reduced cash flow due to more cash tied up in operations
C) Decreased liquidity
D) Increased operational flexibility
What would be the primary consequence of shortening the inventory turnover period for a company?
A) Increased working capital
B) Decreased liquidity
C) Improved cash flow
D) Increased profitability
Which of the following is most likely to result in higher working capital?
A) A decrease in accounts receivable days
B) An increase in inventory turnover
C) A decrease in accounts payable turnover
D) An increase in sales volume
Which of the following would most likely decrease a company’s cash conversion cycle?
A) Lengthening the accounts payable period
B) Lengthening the accounts receivable period
C) Increasing inventory turnover
D) Increasing the average collection period
What effect would reducing a company’s accounts payable turnover have on its working capital?
A) Increase working capital by delaying payments to creditors
B) Decrease working capital by reducing short-term liabilities
C) Increase liquidity by reducing the cash conversion cycle
D) Have no impact on working capital
Which of the following actions would most likely increase a company’s working capital?
A) Decreasing inventory
B) Borrowing short-term funds
C) Increasing accounts payable
D) Increasing accounts receivable collection period
What is the effect of increasing accounts payable days on working capital?
A) Increase working capital by deferring cash outflows
B) Decrease working capital by increasing short-term liabilities
C) No effect on working capital
D) Decrease working capital by increasing current assets
Which of the following is an effect of poor working capital management?
A) Increased operational efficiency
B) Reduced liquidity
C) Reduced profitability
D) Both B and C
What would be the result of reducing the company’s cash conversion cycle?
A) Increased sales
B) Increased working capital
C) Improved liquidity and cash flow
D) Reduced need for short-term debt financing