WorksheetsWORKING CAPITAL POLICY AND MANAGEMENT (2)
Total questions: 60
Worksheet time: 36mins
An increase in ________ would increase net working capital.
A. plant and equipment
B. accounts payable
C. accounts receivable
D. Both B and C
If current ratio is 2. Current liabilities are RM200,000. The current assets equal ________ and net working capital is ________.
A. RM200,000 and RM400,000
B. RM200,000 and RM100,000
C. RM400,000 and RM200,000
D. RM400,000 and RM400,000
Current assets include
A. all assets that have not been fully depreciated.
B. accounts payable, accounts receivable and short-term notes.
C. cash, accounts receivable and leased equipment.
D. cash, accounts receivable and inventory.
Which of the following would be considered an issue that is related to the management of working capital?
A. How much inventory should the firm maintain?
B. How should a firm finance its current assets?
C. To whom should the firm grant trade credit?
D. All of the above
An increase in ________ would decrease a firm's current ratio and net working capital.
A. notes payable
B. inventories
C. cash
D. both B and C
A decrease in ________ would increase net working capital.
A. accounts payable
B. accounts receivable
C. cash
D. marketable securities
In general, the greater a firm's rely on current liabilities to finance its assets, the lower the _______
A. liquidity.
B. flexibility.
C. certainty of interest costs.
D. both A and C.
The risk of a firm not being able to pay its bills on time is called ______
A. illiquidity.
B. insolvency.
C. capital inadequacy.
D. float.
Which of the following will reduce the liquidity of a firm? An increase in _____
A. short-term notes payable.
B. accounts payable.
C. current assets.
D. both A and B.
Net working capital refers to which of the following?
A. Current assets
B. Current assets minus current liabilities
C. Current assets minus inventory
D. Current assets divided by current liabilities
Which of the following is most likely to occur if a firm over-invests in working capital?
A. The current ratio will be lower than it should be.
B. The quick ratio will be lower than it should be.
C. The return on investment will be lower than it should be.
D. The times interest earned ratio will be lower than it should be.
Which of the following is most likely to occur if a firm under-invests in net working capital?
A. The firm might not have sufficient cash to pay its bill when it comes due.
B. The firm might not have adequate raw material to produce finished goods.
C. The firm could be losing sales because lack of inventory.
D. All of the above.
Jajan Corporation has current assets of RM15 million and current liabilities of RM6 million. Jajan's current ratio is ________ and its net working capital is ________.
A. 1.5 times; RM10 million
B. 2.5 times; - RM9 million
C. 2.5 times; RM9 million
D. 0.4 times; - RM9 million
G-Tra Entrerprise has current assets of RM25.5 million and current liabilities of RM27 million. Which of the following is possible?
A. G-Tra makes efficient use of its current assets.
B. G-Tra may be at some risk of being unable to pay its bills.
C. G-Tra appears to be over investing in current assets.
D. All of the above.
Working capital refers to investment in current assets, while net working capital is the difference between current assets and current liabilities.
Net working capital provides a very useful summary measure of a firm's short-term financing decisions.
Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.
If the current ratio is too high, it may indicate problems in working capital management.
Accounts payable and accrual are considered a _____
A. spontaneous liability.
B. temporary financing source.
C. permanent financing source.
D. temporary assets
Which of the following is NOT considered a permanent source of financing?
A. Corporate bonds
B. Common stock
C. Preferred stock
D. Commercial paper
Which of the following is most likely to be a temporary source of financing?
A. Commercial paper
B. Preferred stock
C. Long-term debt
D. All of the above
What is the conventional method for financing permanent levels of accounts receivable and inventory?
A. Bonds and equity
B. Short-term loans
C. Accounts payable and accrued expenses
D. Equity only
A toy manufacturer following the self-liquidating financing policy. The company will generally finance its seasonal inventory build-up prior to the festive season with ____
A. common stock.
B. selling equipment.
C. trade credit.
D. preferred stock.
Which of the following is considered to be a spontaneous source of financing?
A. Operating leases
B. Accounts receivable
C. Inventory
D. Accounts payable
Current assets of North Uni Corporation at the end of each quarter were: 1st quarter RM1.5 million, 2nd quarter RM1.9 million, 3rd quarter RM1.7 million and 4th quarter RM2.4 million. The best estimate for North Uni's permanent current assets is
A. RM2.4 million.
B. RM1.875 million.
C. RM1.5 million.
D. RM0.9 million.
Disadvantages of using current liabilities as opposed to long-term debt include
A. greater risk of illiquidity.
B. uncertainty of interest costs.
C. higher cash flow exposure.
D. both A and B.
According to the self-liquidating financing principle, permanent assets should be financed with ________ liabilities.
A. permanent
B. spontaneous
C. current
D. permanent and current
Which of the following is most consistent with conservative financing principle in working capital management?
A. Fixed assets should be financed with short-term notes payable.
B. Inventory should be financed with preferred stock.
C. Accounts receivable should be financed with short-term lines of credit.
D. Borrow on a floating rate basis to finance investments in permanent assets.
The principle of aggressive financing policy suggests that ___
A. machinery with a 5 year economic life be financed with debt that will be paid off in 5 years or less.
B. seasonal peaks in inventory be financed with traded credit.
C. the minimum level of current assets required for the firm's year around operations be financed with temporary sources.
D. all of the above.
Spontaneous sources of financing include
A. marketable securities.
B. accruals.
C. bonds.
D. commercial paper.
Which of the following is NOT a spontaneous source of financing?
A. Accrued salaries payable
B. Loans secured by inventory
C. Accrued taxes payable
D. Accounts payable
A quite risky working capital management policy would have a high ratio of _____
A. short-term debt over bonds and equity.
B. short-term debt over total debt.
C. bonds over property, plant, and equipment.
D. short-term debt over equity.
Which of the following is a temporary source of financing?
A. Accrued wages
B. Preferred stock
C. Debentures
D. Unsecured bank loans
If management expects interest rates to rise and credit to tighten in the near future, it should consider ____
A. increasing its use of commercial paper and loans secured by current assets.
B. decreasing the use of spontaneous financing.
C. decreasing the level of permanent financing.
D. increasing the level of permanent financing.
Potential risks of using short-term bank loans for permanent assets include ____
A. higher costs.
B. a loss of flexibility.
C. unable to renew the loans due to liquidity problem.
D. falling interest rates.
The use of short-term debt provides flexibility in financing since the firm is only paying interest when it is actually using the borrowed funds.
The riskier financing approach is conservative policy.
With conservative approach, the firm will has surplus cash.
Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.
Accrued wages are considered a non-spontaneous source of financing.
A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable.
Increasing the use of short-term debt versus long-term debt financing will increase profit.
Spontaneous sources of financing may be either short-term or long-term debt.
With conservative financing policy, a firm will has higher profit and higher liquidity.
With aggressive financing policy, a firm will has higher profit and lower liquidity.
By following aggressive financing approach, all the temporary assets and partially of permanent current assets are financed by short term debt.
According to maturity matching approach, assets and liabilities will be matches to maturities.
Aggressive principles is a moderate financing policy.
This approach will lead to “higher risk, higher return”.
A, Conservative
B. Self-liquidating
C. Hedging
D. Aggressive
•Minimum level of current assets.
•Maintained throughout the year
•Do not consider changes caused by seasonal demand.
All the following features are applicable to ____
A, Non-current assets
B. Permanent current assets
C. Total permanent assets
D. Temporary current assets
The objectives of cash management are as follows except ___
A. holding enough cash to smooth daily firm operation.
B. reduce cash to minimum level.
C. speed up the cash disbursement.
D. manage the short term investment portfolio.
Motive for holding cash is firm can take advantage of potential profit-making situations such as Jumbo Sale.
The purposes of holding cash include
A. transition
B. precaution
C. provocation
D. all of the above
Marketable securities are held as long-term investment.
The higher the maturity period that the marketable securities have, the higher the risk.
Default risk faces by the investor is refer to the risk when interest rate changes.
Marketable securities comprise of
A. Government Treasury Bond
B. Commercial Papers
C. Debentures
D. All of the above.
Effective cash management should be able to accelerate insolvency risk.
In working capital management concept, a firm must reduce cash to minimum level because cash does not earn a return.
Commercial papers can be issued by any firm to finance its working capital requirement.
