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 As a company becomes more conservative in its working capital policy, it would tend to have a(n) Increase in funds invested in common stock and a decrease in funds invested in marketable securities Increase in the ratio of current assets to units of output Increase in the ratio of current liabilities to noncurrent liabilities Decrease in its acid test ratio 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 . 2 / 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 short-term debt Permanent current assets with long-term debt Permanent current assets with short-term debt Fluctuating 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. 3 / 10 Determining the appropriate level of working capital for a firm requires : Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets Maintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long-term debt 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 4 / 10 Determining the appropriate level of working capital for a firm requires : Changing the capital structure and dividend policy of the firm Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency Maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt Working capital finance concerns the determination of the optimal level, mix, and use of current assets and current liabilities. The objective is to minimize the cost of maintaining liquidity while guarding against the possibility of technical insolvency. Technical insolvency is defined as the inability to pay debts as they come due 5 / 10 During the year, Company’s current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital Increased by $170,000 Decreased by $170,000 Increased by $70,000 Did not change Net working capital is the excess of current assets over current liabilities. Anincrease 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 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? $50,000 $80,000 $45,000 $35,000 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 Increase of $10,000 Increase of $240,000 Decrease 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. 8 / 10 Net working capital is the difference between : Current assets and current liabilities Shareholders’ investment and cash Fixed assets and fixed liabilities Total assets and total 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. 9 / 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. 10 / 10 All of the following statements in regard to working capital are true except : 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 with long-term debt is an example of an aggressive working capital policy Profitability varies inversely with liquidity 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 . Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
