Working Capital Management quiz Managerial Accounting Quiz On Apr 11, 2026 Share Working Capital Management 10 questions in 15 minutes Pass Score 70% 1 / 10 All of the following statements in regard to working capital are true except : The hedging approach to financing involves matching maturities of debt with specific financing needs Current liabilities are an important source of financing for many small firms Profitability varies inversely with liquidity Financing permanent inventory buildup with long-term debt is an example of an aggressive working capital policy Financing permanent inventory buildup, which is essentially a long-term investment, with long-term debt is a moderate or conservative working capital policy. 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 . 2 / 10 Determining the appropriate level of working capital for a firm requires : Changing the capital structure and dividend policy of the firm 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 Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency 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 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 short-term debt Fluctuating current assets with long-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 debt because the periodic liquidation of the assets provides funds to pay off the debt. However, financing permanent current assets with short-term debt is a risky strategy because the assets may not be liquidated in time to pay off the debt at maturity. 4 / 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 $ 530,000 under the proposal. 5 / 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 Did not change Increased by $70,000 Increased by $170,000 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 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. 7 / 10 Determining the appropriate level of working capital for a firm requires : 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 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 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 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 $50,000 $35,000 $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 9 / 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 decreases Increases and the current ratio increases Increases and the current ratio remains unchanged Net working capital is the excess of current assets over current liabilities. The current ratio equals current assets divided by current liabilities. Selling stock for cash increases current assets and stockholders’ equity, with no effect on current liabilities. The result is an increase in working capital and the current ratio. 10 / 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 ratio of short-term debt to total debt while L has a high ratio of short-term debt to total debt 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 A conservative working capital management financing policy uses permanent capital to finance permanent asset requirements and also some or all of the firm’s seasonal demands. Thus, L’s current ratio (current assets/current liabilities) will be high since its current liabilities will be relatively low. An aggressive policy entails financing some fixed assets and all the current assets with short-term capital. This policy results in a lower current ratio. Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback exam questions on working capital managementQuestion Bank. Working Capital Management.pdfWorking Capital Management
