Managerial Accounting QuizWorking Capital Management quiz 11/04/2026 1 min read Working Capital Management 10 questions in 15 minutes Pass Score 70% 1 / 10 A company is experiencing a sharp increase in sales activity and a steady increase in production, somanagement has adopted an aggressive working capital policy. Therefore, the company’s currentlevel 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 the same as in any other type of business condition as business cycles tend to balance out over time Would most likely be lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment When a firm has an aggressive working capital policy, management keepsthe investment in working capital at a minimum. Thus, a growing companywould want to invest its funds in capital goods and not in idle assets. Thispolicy maximizes return on investment at the price of the risk of minimalliquidity. 2 / 10 A corporation is considering a plant expansion that will increase its sales and net income. The following data represent management’s estimate of the impact the proposal will have on the company: Current Proposed Cash $ 120,000 $ 140,000 Accounts payable 360,000 450,000 Accounts receivable 400,000 550,000 Inventory 360,000 420,000 Marketable securities 180,000 180,000 Mortgage payable (current) 160,000 310,000 Fixed assets 2,300,000 3,200,000 Net income 400,000 550,000 The effect of the plant expansion on net working capital will be a(n) Increase of $230,000 Decrease of $10,000 Increase of $240,000 Increase of $10,000 Net working capital is defined as current assets minus current liabilities. Net working capital is calculated as follows: Current Proposed Cash $120,000 $140,000 Accounts receivable 400,000 550,000 Inventory 360,000 420,000 Marketable securities 180,000 180,000 Total current assets $1,060,000 $1,290,000 Accounts payable $360,000 $450,000 Mortgage payable -- current 160,000 310,000 Total current liabilities $ (520,000 ) $ (760,000 ) Working capital $ 540,000 $ 530,000 Net working capital decreases by $10,000 from the current $ 540,000 to $ 530,000under the proposal. 3 / 10 The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s maturing obligations is the policy that finances Fluctuating current assets with long-term debt Fluctuating current assets with short-term debt Permanent current assets with short-term debt Permanent current assets with long-term debt Fluctuating current assets can often be financed with short-term debtbecause the periodic liquidation of the assets provides funds to pay off thedebt. However, financing permanent current assets with short-term debt isa risky strategy because the assets may not be liquidated in time to pay offthe debt at maturity. 4 / 10 As a company becomes more conservative with respect to working capital policy, it would tend to have a(n) Increase in the ratio of current liabilities to noncurrent liabilities Increase in the ratio of current assets to noncurrent assets Decrease in the operating cycle Decrease in the quick ratio A conservative working capital policy results in an increase in workingcapital (current assets – current liabilities). It is typified by a reduction inliquidity risk. Increasing the current ratio, whether by decreasing currentliabilities or increasing current assets, minimizes the risk that the companywill not be able to meet its obligations as they fall due. Thus, an increasingratio of current to noncurrent assets means that a company is forgoing thepotentially higher returns on long-term assets in order to guard againstshort-term cash flow problems. 5 / 10 Determining the appropriate level of working capital for a firm requires : Offsetting the profitability of current assets and current liabilities against the probability of technical insolvency Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt Changing the capital structure and dividend policy for the firm Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets 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 6 / 10 Net working capital is the difference between : Fixed assets and fixed liabilities Total assets and total liabilities Shareholders’ investment and cash Current assets and current liabilities Net working capital is defined by accountants as the difference between current assets and current liabilities. Working capital is a measure of shortterm solvency. 7 / 10 C corporation follows an aggressive financing policy in its working capital management while L Corporation follows a conservative financing policy. Which one of the following statements is correct? C’s interest charges are lower than L’s interest charges C has a low ratio of short-term debt to total debt while L has a high ratio of short-term debt to total debt C has less liquidity risk while L has more liquidity risk C has a low current ratio while L has a high current ratio A conservative working capital management financing policy usespermanent capital to finance permanent asset requirements and also someor all of the firm’s seasonal demands. Thus, L’s current ratio (currentassets/current liabilities) will be high since its current liabilities will berelatively low. An aggressive policy entails financing some fixed assetsand all the current assets with short-term capital. This policy results in alower current ratio. 8 / 10 As a company becomes more conservative in its working capital policy, it would tend to have a(n) Decrease in its acid test ratio Increase in funds invested in common stock and a decrease in funds invested in marketable securities Increase in the ratio of current liabilities to noncurrent liabilities Increase in the ratio of current assets to units of output A conservative working capital policy minimizes liquidity risk byincreasing net working capital (current assets – current liabilities). Theresult is that the company forgoes the potentially higher returns availablefrom using the additional working capital to acquire long-term assets. Aconservative working capital policy is characterized by a higher currentratio (current assets ÷ current liabilities) and acid test ratio (quick assets ÷current liabilities). Thus, the company will increase current assets ordecrease current liabilities. A conservative policy finances assets usinglong-term or permanent funds rather than short-term sources . 9 / 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 Purchase of a new plant financed by a 20 year mortgage Cash payment of payroll taxes payable Cash collection of accounts receivable 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. 10 / 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 Permanent current assets with long-term debt Fluctuating current assets with short-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 currentassets minimizes the risk that the entity cannot pay its debts when theybecome due. It is based on the assumption that the firm can control whenthe assets are liquidated. Accordingly, the riskiest approach is to financepermanent assets with short-term debt. Moreover, short-term financingsubjects the firm to greater risks of interest rate increases and loan renewalproblems. 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