CFC Working Capital Management 2 — Questions and Answers
Question 1: If a company's DIO is 45 days, DSO is 30 days, and DPO is 25 days, what is the Cash Conversion Cycle?
- 40 days
- 50 days (Correct answer)
- 75 days
- 100 days
Correct answer: 50 days
CCC = DIO + DSO - DPO = 45 + 30 - 25 = 50 days, representing the net days to convert operations into cash inflows.
Question 2: Which inventory management approach aims to minimize holding costs by receiving goods only as they are needed for production or sale?
- Economic Order Quantity (EOQ)
- Just-In-Time (JIT) (Correct answer)
- ABC Analysis
- Safety Stock Method
Correct answer: Just-In-Time (JIT)
Just-In-Time (JIT) minimizes inventory holding and storage costs by scheduling deliveries to arrive precisely when needed, reducing excess stock.
Question 3: A company has $90,000 in accounts receivable and annual credit sales of $1,095,000. What is the DSO (use 365 days)?
- 25 days
- 30 days (Correct answer)
- 35 days
- 45 days
Correct answer: 30 days
DSO = (Accounts Receivable / Annual Credit Sales) × 365 = ($90,000 / $1,095,000) × 365 = 30 days.
Question 4: Which technique allows a company to sell its accounts receivable to a third party at a discount to obtain immediate cash?
- Pledging receivables
- Securitization
- Factoring (Correct answer)
- Discounting notes payable
Correct answer: Factoring
Factoring involves selling accounts receivable to a financial institution (factor) at a discount, immediately improving cash flow without waiting for customers to pay.
Question 5: What is the Economic Order Quantity (EOQ) model designed to minimize?
- Total revenue from inventory sales
- Total inventory ordering and holding costs combined (Correct answer)
- Days inventory outstanding
- Accounts payable balance
Correct answer: Total inventory ordering and holding costs combined
EOQ minimizes total inventory costs by finding the optimal order size that balances ordering costs (per order placed) against holding costs (per unit stored per period).
Question 6: Which working capital financing approach matches the maturity of financing to the life of the asset being financed?
- Conservative approach
- Aggressive approach
- Hedging (matching) approach (Correct answer)
- Flexible approach
Correct answer: Hedging (matching) approach
The hedging or matching approach pairs short-term financing with short-term assets and long-term financing with long-term assets, reducing refinancing risk.
Question 7: A company extends its credit terms from net 30 to net 45 days. What is the most likely immediate effect on the company's working capital?
- Decrease in accounts receivable
- Increase in accounts payable
- Increase in accounts receivable (Correct answer)
- Decrease in inventory levels
Correct answer: Increase in accounts receivable
Extending customer credit terms allows customers more time to pay, increasing the balance of outstanding accounts receivable on the company's books.
CFC Working Capital Management 2
If a company's DIO is 45 days, DSO is 30 days, and DPO is 25 days, what is the Cash Conversion Cycle?