CFC Working Capital Management 1 — Questions and Answers
Question 1: What does the Cash Conversion Cycle (CCC) measure?
- The time it takes to collect cash from customers only
- The number of days from purchasing inventory to collecting cash from sales, net of payables timing (Correct answer)
- The period between paying suppliers and receiving inventory
- The average collection period for accounts receivable
Correct answer: The number of days from purchasing inventory to collecting cash from sales, net of payables timing
The CCC measures the net number of days between paying for inventory and collecting cash from customers, calculated as DIO + DSO - DPO.
Question 2: Which metric measures how quickly a company collects payments from customers after a sale?
- Days Inventory Outstanding (DIO)
- Days Payable Outstanding (DPO)
- Days Sales Outstanding (DSO) (Correct answer)
- Current Ratio
Correct answer: Days Sales Outstanding (DSO)
DSO (Days Sales Outstanding) measures the average number of days it takes a company to collect payment from customers following a credit sale.
Question 3: A company has current assets of $500,000 and current liabilities of $250,000. What is the current ratio?
- 0.5
- 1.5
- 2.0 (Correct answer)
- 2.5
Correct answer: 2.0
Current Ratio = Current Assets / Current Liabilities = $500,000 / $250,000 = 2.0, indicating the company has $2 of current assets for every $1 of current liabilities.
Question 4: Which working capital component represents amounts owed to suppliers for goods or services already received?
- Accounts Receivable
- Inventory
- Accounts Payable (Correct answer)
- Short-term Notes Payable
Correct answer: Accounts Payable
Accounts payable represents amounts owed to suppliers for goods/services received but not yet paid, and is a key current liability in working capital management.
Question 5: What does a negative net working capital position indicate?
- The company is always financially distressed
- Current liabilities exceed current assets (Correct answer)
- The company carries excessive inventory
- The company has too many accounts receivable outstanding
Correct answer: Current liabilities exceed current assets
Negative working capital means current liabilities exceed current assets; while often a warning sign, some efficient business models (e.g., large retailers) deliberately operate with negative working capital.
Question 6: Which of the following is excluded from the quick ratio (acid-test ratio) calculation?
- Cash and cash equivalents
- Marketable securities
- Accounts receivable
- Inventory (Correct answer)
Correct answer: Inventory
The quick ratio excludes inventory because it cannot be quickly converted to cash without a potential loss in value, making the ratio a more conservative liquidity measure.
Question 7: What is the primary goal of working capital management?
- Maximize long-term capital expenditures
- Minimize all use of short-term debt financing
- Ensure adequate liquidity while optimizing operational efficiency (Correct answer)
- Increase the company's total equity base
Correct answer: Ensure adequate liquidity while optimizing operational efficiency
Working capital management balances maintaining sufficient liquidity to meet short-term obligations with minimizing excess capital tied up in operations to maximize efficiency.
CFC Working Capital Management 1
What does the Cash Conversion Cycle (CCC) measure?