1.

The working capital requirement (WCR) is

a. working capital plus short-term debt plus cash
b. inventories plus receivables less payables plus prepayments less
accruals
c. inventories plus receivables less payables
d. working capital less short-term debt less cash
2. Working capital is
a. WCR less short-term debt less cash
b. WCR plus short-term debt plus cash
c. equity plus long-term debt less non-current assets
d. equity plus long-term debt plus non-current assets

3. Companies may adopt an aggressive or a conservative working capital policy. An

aggressive policy means that a company
a. holds high levels of cash and inventories
b. faces a low level of risk
c. has a low level of flexibility
d. expects a lower level of profitability
4. The following are extracts from the income statement for the year ended 31 December 2009 and
the balance sheet as at 31 December 2009.

Income statement for the year ended 31 December 2009

000

Sales revenue

20,000

Cost of sales

Balance sheet as at 31 December

Current assets

(17,000)

2008

2009

000

000

Inventories

4,000

5,000

Trade receivables

2,500

3,000

Investments

3,000

1,500

200

500

Bank overdraft

3,800

1,650

Trade payables

9,000

6,000

Taxation

800

1,000

Dividend (proposed)

100

200

Cash and bank

Current liabilities

Assume that sales and cost of sales for the year 2008 were 10% below 2009 levels.
Inventory turnover days for 2009 are higher or lower than 2008 by
a. - 12.5%
b. - 25.0%
c. + 12.5%
d. + 25.0%
5. The following are extracts from the income statement for the year ended 31 December 2009 and
the balance sheet as at 31 December 2009.

Income statement for the year ended 31 December 2009

000

Sales revenue

20,000

Cost of sales

Balance sheet as at 31 December

(17,000)

2008

2009

000

000

Current assets

Inventories

4,000

5,000

Trade receivables

2,500

3,000

Investments

3,000

1,500

200

500

Bank overdraft

3,800

1,650

Trade payables

9,000

6,000

800

1,000

Cash and bank

Current liabilities

Taxation

Dividend (proposed)

100

200

Assume that sales and cost of sales for the year 2008 were 10% below 2009 levels.
Average trade receivables collection days for 2009 are higher or lower than 2008 by
a. - 8.0%
b. + 10.6%
c. + 8.0%
d. - 10.6%
6. The following are extracts from the income statement for the year ended 31 December 2009 and
the balance sheet as at 31 December 2009.

Income statement for the year ended 31 December 2009

000

Sales revenue

20,000

Cost of sales

Balance sheet as at 31 December

(17,000)

2008

2009

000

000

Current assets

Inventories

4,000

5,000

Trade receivables

2,500

3,000

Investments

3,000

1,500

200

500

Cash and bank

Current liabilities

Bank overdraft

3,800

1,650

Trade payables

9,000

6,000

Taxation

800

1,000

Dividend (proposed)

100

200

Assume that sales and cost of sales for the year 2008 were 10% below 2009 levels.
Average trade payables days for 2009 are higher or lower than 2008 by
a. - 40.0%
b. + 40.0%
c. + 33.3%
d. - 33.3%
7. The following are extracts from the income statement for the year ended 31 December 2009 and
the balance sheet as at 31 December 2009.

Income statement for the year ended 31 December 2009

000

Sales revenue

20,000

Cost of sales

Balance sheet as at 31 December

(17,000)

2008

2009

000

000

Current assets

Inventories

4,000

5,000

Trade receivables

2,500

3,000

Investments

3,000

1,500

200

500

Bank overdraft

3,800

1,650

Trade payables

9,000

6,000

Taxation

800

1,000

Dividend (proposed)

100

200

Cash and bank

Current liabilities

Assume that sales and cost of sales for the year 2008 were 10% below 2009 levels.
The operating cycle for 2009 is
a. 33 days
b. 107 days
c. 129 days
d. 55 days
8. A management philosophy that incorporates a pull system of producing or purchasing components
and products in response to customer demand describes

a. optimised production technology (OPT)

b. kanban
c. materials requirement planning (MRP)
d. just in time (JIT)
9. Short-term cash flow improvement may not be achieved by
a. reducing trade payables
b. reducing inventories
c. increasing trade payables
d. reducing trade receivables
10. Long-term cash flow improvement may not be achieved by
a. increasing equity capital
b. reducing capital expenditure
c. reducing long-term debt
d. increasing long-term liabilities

11. In finance, "working capital" means the same thing as

a. total assets
b. fixed assets
c. current assets
d. current assets minus current liabilities
12. Which of the following would be consistent with a more aggressive approach to
financing working capital?
a. Financing short-term needs with short-term funds
b. Financing permanent inventory buildup with long-term debt
c. Financing seasonal needs with short-term funds
d. Financing some long-term needs with short-term funds
13. Which asset-liability combination would most likely result in the firm's having
the greatest risk of technical insolvency?
a. Increasing current assets while lowering current liabilities
b. Increasing current assets while incurring more current liabilities

c. Reducing current assets, increasing current liabilities, and

reducing long-term debt

d. Replacing short-term debt with equity

14. Which of the following illustrates the use of a hedging (or matching) approach to
financing?
a. Short-term assets financed with long-term liabilities
b. Permanent working capital financed with long-term liabilities
c. Short-term assets financed with equity
d. All assets financed with a 50 percent equity, 50 percent long-term debt
mixture
15. In deciding the appropriate level of current assets for the firm, management is
confronted with
a. a trade-off between profitability and risk
b. a trade-off between liquidity and marketability
c. a trade-off between equity and debt
d. a trade-off between short-term versus long-term borrowing

16. ______________ varies inversely with profitability.

a. Liquidity
b. Risk
c. Blue
d. False
17. Spontaneous financing includes
a. accounts receivable
b. accounts payable
c. short-term loans
d. a line of credit

18. Permanent working capital

a. varies with seasonal needs
b. includes fixed assets
c. is the amount of current assets required to meet a firm's longterm minimum needs

d. includes accounts payable

19. Financing a long-lived asset with short-term financing would be

a. an example of "moderate risk -- moderate (potential) profitability" asset
financing
b. an example of "low risk -- low (potential) profitability" asset financing
c. an example of "high risk -- high (potential) profitability" asset
financing
d. an example of the "hedging approach" to financing.
20. Net working capital refers to
a. total assets minus fixed assets
b. current assets minus current liabilities
c. current assets minus inventories
d. current assets
21. Working capital management is mainly concerned with:
a. the placement of the firm's debt and equity issues
b. the financing and management of the firm's current assets
c. inventory management
d. management of the firm's capital assets
22. The key to current asset planning is:
a. ensuring that the firm remains current on its obligation
b. maintaining an inventory surplus to ensure liquidity
c. forecasting sales accurately and matching production with the
forecast
d. maintaining the proper rate of asset growth
23. In most firms:
a. capital assets grow at a constant rate
b. the rate of growth for fixed and current assets remains constant
c. there is no relationship between the growth rates for fixed and current
assets
d. capital assets grow slowly, while current assets fluctuate

24. Level production methods tend to:

a. use manpower and equipment efficiently at a lower cost
b. be more difficult to manage than those matching sales and productions
c. result in a more stable value for current assets
d. eliminate seasonal bulges or reductions in current assets
25. Most retail stores are mainly concerned with:
a. their buyers' forecasts for the coming season
b. matching sales and inventory levels
c. decreasing inventory turnover
d. their investment in capital assets
26. The cash conversion cycle equals:
a. inventory period + collection period - payables period
b. payables period - inventory period - collection period
c. payables period + inventory period - collection period
d. inventory period - collection period + payables period
27. Which of the following would not be important in examining the firm's build-up
of accounts receivable/cash/current assets:
a. sales forecast
b. cash receipts and cash payments schedules
c. income statement
d. a brief cash budget
28. The belief that current assets should always be financed by current liabilities:
a. is sound financial practice and should always be followed
b. doesn't necessarily hold true
c. is grounded in the belief that a permanent building of current assets occurs
d. will often result in bankruptcy for the firm
29. A major advantage of using short term funds is:
a. there is no advantage
b. there are always more easily obtained
c. there are no governmental procedures with which to comply

d. interest rates are normally lower

30. The term structure of interest rates:
a. shows the interest rate pattern for securities of different risks but equal
maturities
b. shows the interest rate patterns for securities of equal risk with
different maturities
c. is normally based on corporate securities
d. remains constant over time
31 . The liquidity premium theory suggests that long-term interest rates are higher
than short-term interest rates because:
a. investors generally prefer to invest short periods of time
b. government policy maintains this relationship
c. there is greater risk in long-term bonds
32. Under normal conditions:
a. long term rates are lower than short term rates
b. the yield curve is downward sloping, or inverted
c. intermediate rates are higher than long or short term rates
d. short term rates are lower than long term rates
33. An inverted yield curve often foreshadows:
a. an inflationary period
b. a recessionary period
c. a large government bond issue
d. nothing at all
34. In designing working capital policy, the financial manager is concerned with
yield curve and:
a. dividend policy
b. balance of trade figures
c. the relative volatility of short and long term rates
d. the term structure of interest rates
35. A firm with heavy risk exposure due to short term borrowing should:
a. carry a large amount of fixed assets

b. carry more highly liquid assets

c. increase production to avoid inventory
d. prosper in the event of a credit crunch