CHAPTER 16: WORKING CAPITAL MANAGEMENT
1. The length of the operating cycle is equal to the length of the
I. Inventory conversion period.
II. Receivables conversion period.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements I and II are correct.
d. Neither statement I nor II is correct.
2. The length of the operating cycle for a firm is equal to the length of the
I. payables deferral period.
II. cash conversion cycle.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements I and II are correct.
d. Neither statements I nor II is correct.
3. The shows the time interval over which additional non-spontaneous sources of working capital financing
must be obtained to carry out the firm’s activities.
a. inventory conversion period
b. cash conversion cycle
c. payables deferral period
d. receivables conversion period
4. Of the accounts listed, the account(s) that is (are) NOT part of a firm’s working capital is:
a. plant and equipment
b. marketable securities
c. cash
d. accounts receivable
5. Which of the following factors does not directly affect the firm’s level of investment in working capital?
a. the firm’s inventory and credit policies
b. the age of the firm’s plant and equipment
c. the firm’s sales level
d. the length of the firm’s operating cycle
Chapter 16: Working Capital Management
6. Under a conservative approach to working capital management, a firm tends to hold a relatively proportion
of its total assets in the form of current assets.
a. small
b. constant
c. stable
d. large
7. The rate of return on fixed assets is normally assumed to be the rate of return on current assets (especially
cash and marketable securities).
a. less than
b. greater than
c. equal to
d. none of these answers is correct.
8. All other things being equal, a policy of holding a relatively proportion of the firm’s total assets in the form
of current assets will tend to result in a expected profitability or rate of return on the total assets of the
firm.
a. large, higher
b. small, higher
c. constant, higher
d. constant, lower
9. All other things being equal, a policy of holding a relatively proportion of the firm’s total assets in the form
of current assets will tend to result in a risk of the firm encountering financial difficulties.
a. large, higher
b. small, higher
c. constant, higher
d. constant, lower
10. The relationship between the maturity of debt and its associated cost (interest rate) is referred to as:
a. term structure of interest rates
b. investment opportunity curve
c. risk-return tradeoff function
d. both the term structure of interest rates and the investment opportunity curve.
Chapter 16: Working Capital Management
11. Historically, the yield curve has generally been , which indicates that long-term interest rates usually have
been short-term interest rates.
a. upward sloping, lower than
b. downward sloping, higher than
c. upward sloping, higher than
d. level, about equal to
12. Lenders normally feel that the relative risk associated with short-term debt is the risk associated with
long- term debt.
a. lower than
b. equal to
c. higher than
d. none of these
13. Borrowers (e.g., business firms) feel that there is more risk associated with short-term debt (as compared with
long- term debt) because of the
a. uncertainty arising from interest rate fluctuations
b. risk of being unable to refund the debt
c. relatively high cost of short-term debt
d. a and b
14. All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt
will tend to result in expected after-tax earnings for the firm.
a. large, lower
b. constant, higher
c. constant, lower
d. large, higher
15. All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt
will tend to the variability (or risk) of the after-tax earnings of the firm.
a. large, decrease
b. small, increase
c. constant, lower
d. large, increase
Chapter 16: Working Capital Management
16. Which of the following working capital financing policies subjects the firm to the greatest risk?
a. financing fluctuating current assets with long-term debt
b. financing permanent current assets with long-term debt
c. financing permanent current assets with short-term debt
d. financing fluctuating current assets with short-term debt
17. With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are
financed with
I. equity funds
II. long term debt
a. long-term debt only
b. equity funds only
c. both long-term debt and equity funds
d. neither long-term debt nor equity funds
18. When the level of working capital is increased, all of the following are expected to occur except
a. expected profitability decreases
b. expected profitability increases
c. risk decreases
d. none of these
19. Which of the following factors affect the firm’s level of investment in working capital?
a. the length of the firm’s operating cycle
b. the firm’s sales level
c. the firm’s inventory and credit policies
d. all of these
20. The relationship between the maturity of debt and its associated cost (interest rate) is referred to as
I. term structure of interest rates.
II. seniority structure of interest rates.
III. seniority structure of interest rates.
a. term structure of interest rates
b. risk-return tradeoff function
c. seniority structure of interest rates
d. Both statements I and II are correct.
Chapter 16: Working Capital Management
21. The optimal level of working capital investment is the level that is expected to
a. maximize return on total assets
b. maximize earnings per share
c. maximize shareholder wealth
d. minimize interest expenses
22. The aggressive approach to the financing of a firm’s current assets uses a proportion of short-term debt
and a proportion of long-term debt.
a. low, high
b. relatively high, relatively low
c. high interest, low interest
d. none of these
23. If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using
the approach to asset financing.
a. aggressive
b. moderate
c. matching
d. conservative
24. Basically the overall working capital policy decision involves a of alternative policies.
a. profit-risk tradeoff
b. financial choice
c. risk decision
d. none of these
25. The is the optimal working capital investment and financing policy.
a. aggressive policy
b. moderate policy
c. conservative policy
d. none of these
Chapter 16: Working Capital Management
26. The operating cycle begins with the and ends with the .
a. purchase of resources, selling of the product on credit
b. payment for purchases, liquidation of receivables
c. purchases of resources, receipt of cash
d. payment for purchases, receipt of cash
27. Net working capital is defined as:
a. total current assets
b. current assets minus current liabilities
c. total assets minus total liabilities
d. current assets plus current liabilities
28. The size and nature of a firm’s investment in current assets is a function of a number of different factors
including all of the following except
a. how efficient the firm manages its fixed assets
b. the length of the operating cycle
c. the sales level
d. credit policies
29. The assets are those that are affected by the seasonal or cyclical nature of company sales.
a. current
b. permanent current
c. fluctuating current
d. none of these
30. Which of the following assets (if any) are not part of a firm’s working capital investment?
a. cash
b. accounts receivable
c. inventory
d. none of these
Chapter 16: Working Capital Management
31. The firm’s inventory conversion period (measured in days) is equal to its average inventory divided by its .
a. cost of sales
b. sales
c. cost of sales/365
d. none of these
32. A firm’s cash conversion cycle is equal to its operating cycle minus its .
a. inventory conversion period
b. receivables conversion period
c. payables deferral period
d. none of these
33. The firm’s receivables conversion period (measured in days) is equal to its accounts receivable divided by its .
a. annual credit sales/365
b. annual credit sales
c. annual sales/365
d. none of these
34. The size of a firm’s investment in current assets is a function of all of the following factors except
a. sales level
b. inventory policies
c. credit policies
d. stockholders equity
35. A firm’s net working capital position is a widely used measure of its .
a. leverage
b. profitability
c. risk
d. none of these
Chapter 16: Working Capital Management
36. Many contain provisions requiring firms to maintain a minimum net working capital provision.
I. loan agreements with commercial banks.
II. bond indentures.
a. loan agreements with commercial banks
b. bond indentures
c. Both statements I and II are correct
d. Neither statement I nor II is correct
37. A firm’s operating cycle is equal to its:
I. Inventory conversion period plus receivables conversion period.
II. Cash conversion cycle minus payables deferral period.
a. Only statement I is correct.
b. Only statement II is correct
c. Both statements I and II are correct.
d. Neither statement I nor II is correct.
38. An anticipated need for short-term borrowed funds is best shown in
a. an operating budget
b. a capital budget
c. a production budget
d. a cash budget
39. Computerized financial planning models may be classified as any of the following except:
a. deterministic
b. optimistic
c. probabilistic
d. none of these
40. If a firm shows a profit on the quarterly income statement, then
a. there will be no need for additional financing
b. the firm may need additional financing
c. the firm will increase its cash balance
d. all these may be correct
Chapter 16: Working Capital Management
41. Renfro Industries balance sheet for December 31, 20x3 is as follows:
Liabilities and Equity ($000)
$ 8,000
Accounts Payable
$ 36,000
4,000
Notes Payable
12,000
60,000
Other Current Liabilities
32,000
100,000
Long-term debt
80,000
220,000
Preferred Stock
48,000
64,000
Common Stock
20,000
156,000
Paid-in Surplus
40,000
Retained Earnings
60,000
$328,000
Total Claims
$328,000
What is Renfro’s net working capital at the end of 20×3?
a. –$8 million
b. $36 million
c. $92 million
d. $172 million
42. What is the inventory conversion period for O’Brian’s if it has sales of $320,000, an average inventory of
$5,333, and a cash conversion cycle of 20 days? Assume that the cost of sales is 55 percent of sales.
a. 6 days
b. 11 days
c. 13.5 days
d. 15 days
43. What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an inventory
conversion period of 35 days, and a payables deferral period of 25 days.
a. 0 days
b. 25 days
c. 10 days
d. none of these
Chapter 16: Working Capital Management
44. Tefft Industries has an average inventory of $170,000, sells on terms of 2/10, net 30, and its cost of sales is
$540,000. What is Tefft’s inventory conversion period?
a. 85 days
b. 115 days
c. 105 days
d. cannot be determined from the data given
45. If Swatch’s inventory conversion period is 45 days, its payables deferral period is 35 days, and its receivables
conversion period is 50 days, then its cash conversion cycle must be days.
a. 60
b. 90
c. 30
d. cannot be determined from information given
46. Runners Ink, Inc. had sales last year of $700,000 and 35 percent of its sales are for cash, with the remainder
buying on terms of net 30 days. If the receivables conversion period is actually 38 days, what is Runners Ink’s
accounts receivable?
a. $72,877
b. $25,507
c. $47,370
d. none of these
47. Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year. If Sherwood’s
inventory averaged $0.4 million last year, what was the length of the inventory conversion period?
a. 130.4 days
b. 70.2 days
c. 195.5 days
d. 45.6 days
Chapter 16: Working Capital Management
48. Last year Bizmart had credit sales of $32 million and a net profit margin of 8%. If Bizmart had accounts
receivable of $4.5 million, what was the length of the receivables conversion period?
a. 51.3 days
b. 56.3 days
c. 54.9 days
d. 47.2 days
49. Linear Technology had sales (all on credit) of $36 million and a gross profit margin of 30% last year. If Linear
Technology’s inventory averaged $3.9 million, and its accounts receivable were $5.0 million, what was the
length of its operating cycle?
a. 90.2 days
b. 128.9 days
c. 111.9 days
d. 107.2 days
50. Crystal Oil has $9 million in accounts payable, $1.8 in salaries and taxes payable, and $10.4 in other current
liabilities. If Crystal Oil had a cost of sales of $54 million and selling, general, and administrative expense of
$18 million, what is the length of its payables deferral period?
a. 107.47 days
b. 73.02 days
c. 54.75 days
d. 45.63 days
51. Laserscope has an inventory conversion period of 45 days, a receivables conversion period of 42 days, and a
payables deferral period of 51 days. What is the length of its cash conversion cycle?
a. 54 days
b. 36 days
c. 48 days
d. can determine with more information