CCM CCM Working Capital Management 2 — Questions and Answers
Question 1: Which action would DECREASE a company's Days Payable Outstanding (DPO)?
- Negotiating longer payment terms with vendors
- Paying invoices earlier than their due dates (Correct answer)
- Using a revolving credit line
- Increasing purchase order volume
Correct answer: Paying invoices earlier than their due dates
Paying invoices before their due dates reduces the average time taken to settle supplier obligations, thereby lowering DPO.
Question 2: In accounts receivable management, aging analysis helps a company:
- Determine inventory reorder points
- Identify overdue customer invoices and collection risks (Correct answer)
- Calculate depreciation on fixed assets
- Monitor supplier payment terms compliance
Correct answer: Identify overdue customer invoices and collection risks
Aging analysis categorizes accounts receivable by how long invoices have been outstanding to help identify collection risks and prioritize follow-up.
Question 3: Which inventory management approach minimizes holding costs by ordering frequently in small quantities?
- Economic Order Quantity (EOQ)
- Just-In-Time (JIT) (Correct answer)
- Safety stock model
- ABC analysis
Correct answer: Just-In-Time (JIT)
Just-In-Time inventory management reduces holding costs by receiving goods only as needed for production or sales, minimizing on-hand stock.
Question 4: A company's current ratio is 1.8 and its quick ratio is 0.9. What does this indicate?
- The company has no short-term debt
- The company relies heavily on inventory to meet short-term obligations (Correct answer)
- The company has excess cash reserves
- The company's receivables exceed its payables
Correct answer: The company relies heavily on inventory to meet short-term obligations
A large gap between the current and quick ratios indicates the company holds significant inventory; without it, liquid assets are insufficient to cover current liabilities.
Question 5: The operating cycle of a business measures the time from:
- Paying suppliers to receiving customer payments
- Purchasing inventory to collecting cash from customers (Correct answer)
- Issuing invoices to depositing checks
- Ordering raw materials to paying employees
Correct answer: Purchasing inventory to collecting cash from customers
The operating cycle spans from the purchase of inventory through production and sale to the collection of cash from customers.
Question 6: Dynamic discounting in accounts payable allows buyers to:
- Receive early payment discounts from customers
- Offer variable discounts to suppliers for early invoice payment (Correct answer)
- Negotiate fixed rebates based on annual purchase volume
- Extend payment terms without any financial penalty
Correct answer: Offer variable discounts to suppliers for early invoice payment
Dynamic discounting lets buyers offer suppliers early payment at a sliding discount rate — the earlier the payment, the greater the discount.
CCM CCM Working Capital Management 2
Which action would DECREASE a company's Days Payable Outstanding (DPO)?