Managerial Accounting QuizWorking Capital Management quiz 11/05/2026 1 min read Working Capital Management 10 questions in 15 minutes Pass Score 70% 1 / 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 $50,000 $80,000 $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 2 / 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 Purchase of $50,000 of trading securities for cash Prepayment of $50,000 of next year’s rent Acquisition of land valued at $50,000 through the issuance of common stock Refinancing of $50,000 of short-term debt with long-term debt Net working capital is defined as the excess of current assets over currentliabilities. Refinancing short-term debt with long-term debt decreasescurrent liabilities with no effect on current assets, resulting in an increase inworking capital 3 / 10 During the year, Company’s current assets increased by $120,000, current liabilities decreased by $50,000, and net working capital Decreased by $170,000 Increased by $70,000 Increased by $170,000 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 ) 4 / 10 As a company becomes more conservative with respect to working capital policy, it would tend to have a(n) Decrease in the operating cycle 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 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 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) Decrease of $10,000 Increase of $240,000 Increase of $230,000 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. 6 / 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 long-term debt Fluctuating current assets with short-term debt Permanent current assets with long-term debt Permanent current assets with short-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. 7 / 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 Changing the capital structure and dividend policy for the firm 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 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 8 / 10 Determining the appropriate level of working capital for a firm requires : 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 Changing the capital structure and dividend policy of the firm 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 9 / 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 short-term debt Permanent current assets with long-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. 10 / 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. Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
