LECTURE 4: Working Capital

What is working capital?

• • a) The total assets of a company

• • b) The difference between current assets and current liabilities

• • c) The equity of a company

• • d) The long-term debt of a company

Which of the following is a component of working capital?

• • a) Fixed assets

• • b) Long-term liabilities

• • c) Inventory

• • d) Depreciation

What does positive working capital indicate?

• • a) The company is financially unhealthy

• • b) The company may face a liquidity crisis

• • c) The company has potential to invest and grow

• • d) The company has high long-term debt

Which of the following is NOT a component of working capital?

• • a) Cash Management

• • b) Receivables Management

• • c) Inventory Management

• • d) Equity Management

What is the main goal of cash management?

• • a) Increase long-term liabilities

• • b) Ensure an adequate cash balance for operations

• • c) Reduce short-term assets

• • d) Maximize investment in fixed assets

Which of the following best describes the objective of minimizing the rate of interest/cost of capital in working capital management?

• • a) Increase the company's overall debt

• • b) Achieve higher profitability by reducing financing costs

• • c) Maximize the company’s investments in current assets

• • d) Ensure all assets are financed by short-term sources

Why is managing inventory crucial for a business?

• • a) To maximize investment in fixed assets

• • b) To ensure liquidity issues are avoided

• • c) To balance the level of inventory with operational needs and capital investment

• • d) To minimize the credit extended to customers

Which of the following is an internal source of working capital?

• • a) Debentures

• • b) Public deposits

• • c) Retained earnings

• • d) Bank loans

Which source of short-term financing involves selling accounts receivable to a third party?

• • a) Trade credit

• • b) Factoring

• • c) Overdraft

• • d) Public deposits

Why is proper liquidity management important for a company?

• • a) It increases long-term liabilities

• • b) It ensures there is enough cash for business needs and enhances creditworthiness

• • c) It allows the company to delay payments to creditors

• • d) It minimizes the need for short-term financing