Financial Management MCQ'S - Test 5

Working capital management is mainly concerned with

• Fixed assets management

• Current assets and current liabilities management

• Long-term financing only

• Auditing only

Answer explanation

Working capital management focuses on managing current assets and current liabilities to ensure a company can meet its short-term obligations. This is crucial for maintaining liquidity and operational efficiency.

The prime objective of working capital management is to

• Maximize fixed assets

• Ensure smooth operating cycle

• Increase share capital

• Reduce sales

Answer explanation

The prime objective of working capital management is to ensure a smooth operating cycle, which involves managing short-term assets and liabilities effectively to maintain liquidity and operational efficiency.

A secondary objective of working capital management is to

• Maximize cost of funds

• Optimize working capital level and minimize cost

• Stop inventory purchases

• Eliminate receivables

Answer explanation

The secondary objective of working capital management is to optimize the working capital level and minimize costs, ensuring efficient use of resources while maintaining liquidity.

Working capital is sometimes called

• Fixed capital

• Flowing/circulating capital

• Sunk capital

• Dead capital

Answer explanation

Working capital is often referred to as flowing or circulating capital because it represents the funds available for day-to-day operations, highlighting its role in the continuous flow of business activities.

Cash is called the lifeblood of business because

• It increases depreciation

• It ensures smooth operations and liquidity

• It reduces sales

• It replaces profit

Answer explanation

Cash is essential for business as it ensures smooth operations and liquidity, allowing companies to meet their obligations and invest in growth. Without sufficient cash, businesses may struggle to function effectively.

Cash flow projection helps to

• Prepare trial balance

• Anticipate cash surplus/shortfall

• Compute depreciation

• Decide product design

Answer explanation

Cash flow projection is essential for anticipating cash surplus or shortfall, allowing businesses to manage their finances effectively. The other options do not relate directly to cash flow management.

Optimal cash balance means

• Keeping maximum cash always

• Keeping enough cash for liquidity but avoiding excessive idle cash

• Keeping zero cash

• Keeping only bank loans

Answer explanation

Optimal cash balance refers to maintaining sufficient cash for liquidity needs while minimizing excess idle cash. This ensures that funds are available for operations without incurring opportunity costs from holding too much cash.

Efficient payables management includes

• Paying suppliers as early as possible always

• Negotiating favorable terms without harming relationships

• Never paying suppliers

• Ignoring due dates

Answer explanation

Efficient payables management involves negotiating favorable terms with suppliers to maintain good relationships while optimizing cash flow, rather than paying early, ignoring due dates, or not paying at all.

One cause of poor cash management is

• Understanding cash cycle well

• Confusing profit with cash flow

• Keeping records

• Forecasting cash

Answer explanation

Confusing profit with cash flow leads to poor cash management because profit does not always reflect available cash. Businesses may appear profitable but still face cash shortages, impacting their operations.

Inventory management affects cash because

• Inventory ties up funds

• Inventory has no cost

• Inventory increases interest income

• Inventory is always free

Answer explanation

Inventory ties up funds because the money spent on purchasing and storing inventory cannot be used for other investments or expenses, impacting cash flow.