Managerial Accounting QuizWorking Capital Management quiz 12/06/2026 1 min read Working Capital Management 10 questions in 15 minutes Pass Score 70% 1 / 10 If a firm increases its cash balance by issuing additional shares of common stock, net working capital Remains unchanged and the current ratio remains unchanged Increases and the current ratio increases Increases and the current ratio remains unchanged Increases and the current ratio decreases Net working capital is the excess of current assets over current liabilities.The current ratio equals current assets divided by current liabilities. Sellingstock for cash increases current assets and stockholders’ equity, with noeffect on current liabilities. The result is an increase in working capital andthe current ratio. 2 / 10 Net working capital is the difference between : Current assets and current liabilities Total assets and total 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. 3 / 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 lower than under other business conditions in order that the company can maximize profits while minimizing working capital investment 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 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. 4 / 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 Permanent current assets with long-term debt Fluctuating current assets with long-term debt Permanent current assets with short-term debt Fluctuating current assets with short-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. 5 / 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 has a low current ratio while L has a high current ratio C has less liquidity risk while L has more liquidity risk 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 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. 6 / 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? $45,000 $35,000 $50,000 $80,000 Working capital equals current assets minus current liabilities. Assuming theaccruals 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 7 / 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 $10,000 Increase of $240,000 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. 8 / 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 short-term debt Permanent current assets with long-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. 9 / 10 All of the following statements in regard to working capital are true except : Profitability varies inversely with liquidity Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy Current liabilities are an important source of financing for many small firms The hedging approach to financing involves matching maturities of debt with specific financing needs Financing permanent inventory buildup, which is essentially a long-terminvestment, with long-term debt is a moderate or conservative working capitalpolicy. An aggressive policy involves using short-term, relatively low-cost debt to finance the inventory buildup. It focuses on high profitability potential, despite high risk and low liquidity. An aggressive policy involves reducing liquidity and accepting a higher risk of short-term lack of liquidity. Financing inventory with long-term debt increases the current ratio and accepts higher borrowing costs in exchange for greater liquidity and lower risk . 10 / 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 3is to decrease current assets by $140 and increase current liabilities by $20. Option 4 is todecrease current assets by $100 and decrease current liabilities by $75. Which option should board of directorschoose to maximize net working capital? Option 4 Option 2 Option 1 Option 3 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). Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
