Working Capital Management: A Comprehensive Guide for MBA Students

Question 1

Which of the following is true regarding techniques for managing accounts receivable?

Accepted Answer

Both credit policies and collection strategies are effective techniques.

Answer

Credit policies are the sole effective technique.

Answer

Collection strategies are the sole effective technique.

Question 2

To minimize financial risks during an economic downturn, which working capital management strategy is most suitable?

Accepted Answer

Reduce accounts payable to preserve cash

Answer

Increase inventory to prevent stockouts

Answer

Extend credit terms to boost sales

Question 3

Examine the ethical considerations that arise when a company extends payment terms to its suppliers.

Accepted Answer

Companies should think about how their payment policies affect suppliers and work to set up fair and reasonable payment terms.

Answer

Companies have no ethical duty to think about how their payment policies affect suppliers.

Answer

To increase profitability, businesses should extend payment terms to suppliers as much as possible.

Answer

Only big businesses need to think about the ethical effects of payment policies.

Question 4

Which of the following is **not** a current asset included in working capital?

Accepted Answer

Accounts payable

Answer

Cash

Answer

Inventory

Answer

Accounts receivable

Question 5

A company with a negative working capital position has:

Accepted Answer

More current liabilities than current assets

Answer

More current assets than current liabilities

Answer

Equal current liabilities and current assets

Answer

Cannot be determined from the provided information

Question 6

Which of the following is **not** a factor to consider when setting credit terms?

Accepted Answer

Availability of external financing

Answer

Customer risk

Answer

Industry norms

Answer

Company's financial position

Question 7

Which of the following components is NOT typically considered in working capital management?

Accepted Answer

Capital investment decisions

Answer

Cash management

Answer

Inventory management

Answer

Accounts receivable management

Question 8

Which of the following is NOT a commonly used metric for evaluating working capital management?

Accepted Answer

Debt-to-equity ratio

Answer

Inventory turnover ratio

Answer

Days sales outstanding (DSO)

Answer

Cash conversion cycle

Question 9

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

Accepted Answer

Long-term debt

Answer

Cash

Answer

Inventory

Answer

Accounts receivable

Question 10

How does improved working capital management impact profitability?

Accepted Answer

It can increase profitability

Answer

It can decrease profitability

Answer

It has no impact on profitability

Answer

The impact is uncertain

Question 11

Which component is NOT included in working capital?

Accepted Answer

Long-term investments

Answer

Cash

Answer

Inventory

Answer

Prepaid expenses

Question 12

What is the primary objective of optimizing working capital?

Accepted Answer

Balance profitability and liquidity

Answer

Maximize stakeholder value

Answer

Reduce operational costs

Answer

Comply with regulatory requirements

Question 13

Which accounts receivable management strategy involves transferring the collection of receivables to an outside entity?

Accepted Answer

Factoring

Answer

Collection

Answer

Debt consolidation

Answer

Invoice discounting

Question 14

What does the Days Sales Outstanding (DSO) ratio measure?

Accepted Answer

Average number of days it takes to collect receivables

Answer

Percentage of sales made on credit

Answer

Customer's ability to pay

Answer

Efficiency of the credit approval process

Question 15

Which factor is generally NOT considered when evaluating a customer's creditworthiness?

Accepted Answer

Customer demand

Answer

Credit history

Answer

Financial performance

Answer

Industry outlook

Question 16

What is the primary goal of cash management?

Accepted Answer

Maintain an optimal cash balance

Answer

Maximize cash inflows

Answer

Minimize cash expenses

Answer

Comply with financial covenants

Question 17

What is a key advantage of utilizing a lockbox system?

Accepted Answer

Accelerates cash collection

Answer

Reduces processing costs

Answer

Provides enhanced customer service

Answer

Eliminates the risk of fraud

Question 18

How does excessive working capital generally impact a company's profitability?

Accepted Answer

Reduces profitability due to higher holding costs

Answer

Increases profitability due to higher efficiency

Answer

Has no impact on profitability

Answer

Improves profitability due to increased liquidity

Question 19

Which of the following is excluded from the scope of working capital management?

Accepted Answer

Financing long-term investments

Answer

Managing cash flow

Answer

Managing inventory levels

Answer

Managing accounts receivable

Question 20

The optimal level of working capital for a business typically depends on:

Accepted Answer

The company's specific circumstances

Answer

Maintaining zero working capital

Answer

Keeping it as high as possible

Answer

Minimizing it as much as possible

Question 21

In working capital management, how should ethical considerations be prioritized?

Accepted Answer

Considering the impact on all stakeholders, including suppliers, customers, and employees

Answer

Prioritizing profitability over ethical obligations

Answer

Delaying payments to creditors to improve cash flow

Answer

Reducing inventory levels without regard to customer needs

Question 22

How does effective working capital management enhance a firm's ability to handle unexpected events?

Accepted Answer

Strengthens resilience and adaptability

Answer

Improves liquidity only

Answer

Has no effect

Question 23

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

Accepted Answer

Fixed asset management

Answer

Cash management

Answer

Inventory management

Answer

Accounts receivable management

Question 24

A company's accounts receivable turnover ratio is calculated by:

Accepted Answer

Dividing net sales on credit by average accounts receivable

Answer

Dividing average accounts receivable by net sales on credit

Answer

Multiplying net sales on credit by average accounts receivable

Answer

Subtracting net sales on credit from average accounts receivable

Question 25

Which of the following is a recommended working capital management strategy?

Accepted Answer

Negotiating early payment discounts with suppliers

Answer

Extending payment terms to customers

Answer

Maintaining excessive inventory levels

Answer

Limiting cash holdings

Question 26

The purpose of a company's current ratio is to assess:

Accepted Answer

Its short-term debt-paying ability

Answer

Its long-term financial stability

Answer

Its profitability

Answer

Its market value

Question 27

Inventory shrinkage refers to:

Accepted Answer

Losses due to theft, damage, or obsolescence

Answer

Inventory that is always accounted for in valuation

Answer

Inventory that has no impact on financial statements

Answer

Inventory applicable only to manufacturing companies

Question 28

Compare the optimal working capital management strategies for a manufacturing company and a service-based company. Explain how industry-specific factors influence their approaches.

Accepted Answer

Manufacturing companies typically require higher working capital due to inventory and production cycles.

Accepted Answer

Service-based companies typically have higher accounts receivable due to revenue recognition.

Answer

Both manufacturing and service-based companies should minimize working capital to reduce costs.

Answer

Industry-specific factors do not impact working capital management strategies.

Question 29

The cash conversion cycle (CCC) measures the time it takes for a firm to:

Accepted Answer

Convert accounts receivable into cash

Answer

Convert cash into inventory

Answer

Convert inventory into accounts receivable

Answer

Convert accounts payable into cash

Question 30

Which of the following is NOT a technique for managing accounts payable?

Accepted Answer

Slowing down payments to suppliers

Answer

Factoring

Answer

Early payment discounts

Answer

Negotiating extended payment terms

Question 31

What is the primary goal of working capital management?

Accepted Answer

Optimizing the firm's use of short-term assets and liabilities

Answer

Maximizing short-term profitability

Answer

Minimizing long-term risk

Answer

Increasing shareholder wealth

Question 32

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

Accepted Answer

Long-term debt management

Answer

Cash management

Answer

Inventory management

Answer

Accounts receivable management

Question 33

How does increasing inventory levels affect the firm's cash conversion cycle?

Accepted Answer

Increases the cash conversion cycle

Answer

Decreases the cash conversion cycle

Answer

Has no impact on the cash conversion cycle

Answer

Varies depending on the firm's industry and business model

Question 34

Which of the following is not a common technique for forecasting cash flows?

Accepted Answer

Activity-based costing

Answer

Discounted cash flow analysis

Answer

Linear regression

Answer

Monte Carlo simulation

Question 35

Which of the following is NOT a primary goal of working capital management?

Accepted Answer

Increasing shareholder return

Answer

Maximizing profitability

Answer

Maintaining adequate liquidity

Answer

Minimizing risk

Question 36

What is the formula for calculating the current ratio?

Accepted Answer

Current Assets / Current Liabilities

Answer

Quick Assets / Current Liabilities

Answer

Inventory / Accounts Receivable

Answer

Net Working Capital / Current Assets

Question 37

What is the impact of working capital management on a company's profitability?

Accepted Answer

Improved working capital management can increase profitability by releasing cash for investment.

Answer

Improved working capital management can reduce profitability due to increased borrowing costs.

Answer

Working capital management has no impact on profitability.

Answer

The impact of working capital management on profitability is not clear.

Question 38

What is the role of technology in modern working capital management?

Accepted Answer

It can automate tasks, improve data analysis, and enhance supply chain visibility.

Answer

It has no significant role in modern working capital management.

Answer

It has made working capital management more complex.

Answer

It has eliminated the need for human involvement in working capital management.

Question 39

What is the primary purpose of working capital management in financial management?

Accepted Answer

Optimizing cash flow and profitability

Answer

Maximizing current assets

Answer

Minimizing inventory levels

Answer

Increasing return on equity

Question 40

Which of the following is NOT a component of the cash conversion cycle?

Accepted Answer

Fixed asset turnover

Answer

Inventory days

Answer

Days sales outstanding

Answer

Days payable outstanding

Question 41

What is the primary objective of effective inventory management?

Accepted Answer

Matching demand with supply to enhance inventory turnover

Answer

Minimizing inventory holding costs

Answer

Maximizing inventory on hand

Answer

Outsource inventory management to reduce overhead costs

Question 42

Which of the following is a type of trade credit financing?

Accepted Answer

Factoring

Answer

Leasing

Answer

Equity financing

Answer

Bank loan

Question 43

What is the primary impact of a seasonal increase in sales on a firm's working capital requirements?

Accepted Answer

Increase in accounts receivable and inventory

Answer

Decrease in accounts payable and cash on hand

Answer

Increase in accounts payable and decrease in inventory

Answer

Decrease in accounts receivable and increase in cash on hand

Question 44

Which of the following is a potential risk associated with holding excessive inventory?

Accepted Answer

Obsolescence and spoilage

Answer

Improved cash flow and customer satisfaction

Answer

Reduced insurance and storage costs

Answer

Increased inventory turnover and profitability

Question 45

What is the formula for calculating the cash conversion cycle (CCC)?

Accepted Answer

Average inventory days + Average accounts receivable days - Average accounts payable days

Answer

Average inventory days - Average collections period + Average payment period

Answer

Average accounts receivable days + Average inventory days + Average accounts payable days

Answer

Average accounts payable days - Average inventory days + Average collections period

Question 46

Which of the following is a primary benefit of implementing centralized cash management?

Accepted Answer

Improved cash visibility, control, and efficiency

Answer

Increased transaction costs and reduced investment opportunities

Answer

Longer cash conversion cycle and reduced profitability

Answer

Diminished ability to respond to market conditions

Question 47

What is a commonly used strategy to accelerate cash inflows?

Accepted Answer

Offering discounts for early customer payments

Answer

Extending credit terms to suppliers

Answer

Increasing inventory levels to boost sales

Answer

Delaying payments to creditors

Question 48

Which type of ratio indicates a company's ability to pay its short-term obligations?

Accepted Answer

Current ratio

Answer

Debt-to-equity ratio

Answer

Return on equity

Answer

Inventory turnover ratio

Question 49

Which component is **not** included in the cash conversion cycle?

Accepted Answer

Days of cash on hand

Answer

Days of inventory

Answer

Days of sales outstanding

Answer

Days of accounts payable

Question 50

Which working capital management technique involves managing the timing of cash inflows and outflows?

Accepted Answer

Cash budgeting

Answer

Net working capital forecasting

Answer

Inventory management

Answer

Accounts receivable management

Question 51

What is the primary goal of maximizing working capital financing efficiency?

Accepted Answer

Minimizing financing costs

Answer

Maximizing return on financing

Answer

Ensuring adequate liquidity

Answer

Minimizing financial risk

Question 52

In times of economic downturn, which working capital management strategy is most effective in enhancing a firm's resilience to financial distress?

Accepted Answer

Conservative working capital management

Answer

Aggressive working capital management

Answer

Matching working capital management

Answer

Speculative working capital management

Question 53

How can companies incorporate sustainability into their working capital strategies to align with their ESG goals?

Accepted Answer

Prioritize suppliers with strong ESG performance and reduce waste in inventory management.

Answer

Increase inventory levels to minimize stockout risk and invest heavily in renewable energy sources.

Answer

Extend payment terms to customers and reduce investment in research and development.

Question 54

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

Accepted Answer

Equipment acquisition

Answer

Cash management

Answer

Inventory management

Answer

Accounts receivable management

Question 55

What is the equation for calculating the cash conversion cycle (CCC)?

Accepted Answer

Days Inventory Outstanding (DIO) + Days Payable Outstanding (DPO) - Days Sales Outstanding (DSO)

Answer

DSO - DIO - DPO

Answer

DIO - DSO - DPO

Answer

DPO - DSO - DIO

Question 56

Which of the following is NOT a potential consequence of holding too much working capital?

Accepted Answer

Enhanced financial performance

Answer

Increased carrying costs

Answer

Reduced operational flexibility

Answer

Higher inventory obsolescence

Question 57

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

Accepted Answer

Long-term debt

Answer

Inventory

Answer

Accounts receivable

Answer

Cash

Question 58

The optimal level of working capital is one that:

Accepted Answer

Strikes a balance between risk and profitability

Answer

Is as low as possible

Answer

Is as high as possible

Answer

Equals a firm's total assets

Question 59

The Just-in-Time (JIT) inventory management system aims to:

Accepted Answer

Minimize inventory levels while satisfying customer demand

Answer

Use a periodic inventory accounting method

Answer

Maximize inventory levels to ensure product availability

Question 60

Which of the following is a consequence of having a high accounts receivable turnover ratio?

Accepted Answer

Reduced risk of bad debts

Answer

Lower inventory turnover

Answer

Increased working capital

Answer

Higher cost of goods sold

Question 61

The cash conversion cycle (CCC) measures:

Accepted Answer

The time it takes to convert cash invested in inventory into cash received from customers

Answer

The time it takes to produce inventory

Answer

The time it takes to pay suppliers

Question 62

Which of the following is a technique used to IMPROVE working capital management?

Accepted Answer

Factoring

Answer

Pricing below cost

Answer

Increasing inventory levels

Answer

Delaying payment to suppliers

Question 63

Which of the following factors does NOT affect the working capital cycle?

Accepted Answer

Interest rates

Answer

Payment terms

Answer

Sales volume

Answer

Inventory turnover

Question 64

The working capital ratio is calculated as:

Accepted Answer

Current assets divided by current liabilities

Answer

Current liabilities divided by current assets

Answer

Total assets divided by liabilities

Answer

Net income divided by total assets