Working Capital Management quiz Financial Accounting Quiz On Mar 30, 2025 Share /10 12345678910 Working Capital Management 10 questions in 15 minutes Pass Score 70% 1 / 10 A company has current assets of $400,000 and current liabilities of $300,000. The company could increase its net working capital by the Acquisition of land valued at $50,000 through the issuance of common stock Purchase of $50,000 of trading securities for cash Prepayment of $50,000 of next year’s rent Refinancing of $50,000 of short-term debt with long-term debt Net working capital is defined as the excess of current assets over current liabilities. Refinancing short-term debt with long-term debt decreases current liabilities with no effect on current assets, resulting in an increase in working capital 2 / 10 As a company becomes more conservative with respect to working capital policy, it would tend to have a(n) Decrease in the quick ratio Increase in the ratio of current assets to noncurrent assets Increase in the ratio of current liabilities to noncurrent liabilities Decrease in the operating cycle A conservative working capital policy results in an increase in working capital (current assets – current liabilities). It is typified by a reduction in liquidity risk. Increasing the current ratio, whether by decreasing current liabilities or increasing current assets, minimizes the risk that the company will not be able to meet its obligations as they fall due. Thus, an increasing ratio of current to noncurrent assets means that a company is forgoing the potentially higher returns on long-term assets in order to guard against short-term cash flow problems. 3 / 10 Net working capital is the difference between : Total assets and total liabilities Current assets and current liabilities Fixed assets and fixed liabilities Shareholders’ investment and cash Net working capital is defined by accountants as the difference between current assets and current liabilities. Working capital is a measure of shortterm solvency. 4 / 10 board of directors has determined 4 options to increase working capital next year. Option 1 is to increase current assets by $120 and decrease current liabilities by $50. Option 2 is to increase current assets by $180 and increase current liabilities by $30. Option 3 is to decrease current assets by $140 and increase current liabilities by $20. Option 4 is to decrease current assets by $100 and decrease current liabilities by $75. Which option should board of directors choose to maximize net working capital? Option 3 Option 1 Option 4 Option 2 Option 1 is correct. Net working capital is the excess of current assets over current liabilities. An increase in current assets or a decrease in current liabilities will increase net working capital. Option 1 maximizes net working capital, increasing it by $170 ($120 + $50). 5 / 10 During the year, Company’s current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital Did not change Increased by $170,000 Decreased by $170,000 Increased by $70,000 Net working capital is the excess of current assets over current liabilities. An increase in current assets or a decrease in current liabilities increases working capital. Thus, net working capital increased by $170,000 ($120,000 + $50,000 ) 6 / 10 A company is experiencing a sharp increase in sales activity and a steady increase in production, so management has adopted an aggressive working capital policy. Therefore, the company’s current level of net working capital Would most likely be higher than under other business conditions so that there will be sufficient funds to replenish assets Would most likely be higher than under other business conditions as the company’s profits are increasing Would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment Would most likely be the same as in any other type of business condition as business cycles tend to balance out over time When a firm has an aggressive working capital policy, management keeps the investment in working capital at a minimum. Thus, a growing company would want to invest its funds in capital goods and not in idle assets. This policy maximizes return on investment at the price of the risk of minimal liquidity. 7 / 10 Of the following, the working capital financing policy that would subject a firm to the greatest level of risk is the one where the firm finances Fluctuating current assets with short-term debt Permanent current assets with long-term debt Permanent current assets with short-term debt Fluctuating current assets with long-term debt The maturity matching (self liquidating) approach to financing of current assets minimizes the risk that the entity cannot pay its debts when they become due. It is based on the assumption that the firm can control when the assets are liquidated. Accordingly, the riskiest approach is to finance permanent assets with short-term debt. Moreover, short-term financing subjects the firm to greater risks of interest rate increases and loan renewal problems. 8 / 10 Which one of the following would increase the net working capital of a firm? Refinancing a short-term note payable with a 2 year note payable Cash payment of payroll taxes payable Cash collection of accounts receivable Purchase of a new plant financed by a 20 year mortgage Net working capital equals current assets minus current liabilities. Refinancing a short-term note with a 2 year note payable decreases current liabilities, thus increasing working capital. 9 / 10 Determining the appropriate level of working capital for a firm requires : Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency Changing the capital structure and dividend policy for the firm A company must maintain a level of working capital sufficient to pay bills as they come due. Failure to do so is technical insolvency and can result in involuntary bankruptcy. Unfortunately, holding current assets for purposes of paying bills is not profitable for a company because they usually offer a low return compared with longer-term investments. Thus, the skillful management of working capital requires a balancing of a firm’s desire for profit with its need for adequate liquidity 10 / 10 Shown below are selected data from a company’s most recent financial statements: Marketable securities $10,000 Accounts receivable 60,000 Inventory 25,000 Supplies 5,000 Accounts payable 40,000 Short-term debt payable 10,000 Accruals 5,000 What is net working capital? $80,000 $35,000 $50,000 $45,000 Working capital equals current assets minus current liabilities. Assuming the accruals are for expenses, Fortune Company’s calculation is as follows: Marketable securities 10,000 Accounts receivable 60,000 Inventory 25,000 Supplies 5,000 Accounts payable (40,000) Short-term debt payable (10,000) Accruals (5,000) Working capital 45,000 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback exam questions on working capital managementQuestion Bank. Working Capital Management.pdfWorking Capital Management
