CFC Working Capital Management 3

Question 1

What is the Operating Cycle?

Accepted Answer

DIO + DSO

Answer

The Operating Cycle = DIO + DSO, measuring the total time from purchasing inventory to collecting cash from sales before accounting for payables timing.

Question 2

Which working capital strategy involves maintaining higher levels of current assets relative to current liabilities to maximize liquidity?

Accepted Answer

Conservative strategy

Answer

A conservative working capital strategy maintains large current asset buffers, providing strong liquidity at the cost of lower returns on invested capital.

Question 3

Supply chain financing (reverse factoring) primarily benefits which party in the supply chain?

Accepted Answer

Suppliers, by enabling early payment at the buyer's lower financing rates

Answer

Reverse factoring enables suppliers to receive early payment at the buyer's typically lower borrowing rates, improving supplier cash flow while the buyer may extend its own payment terms.

Question 4

What is the primary liquidity risk of an aggressive working capital strategy?

Accepted Answer

Insufficient liquidity to meet short-term obligations

Answer

An aggressive strategy minimizes current assets and maximizes use of short-term liabilities, increasing the risk of not having sufficient liquid resources to meet short-term obligations.

Question 5

Which type of company is MOST likely to operate with a negative Cash Conversion Cycle?

Accepted Answer

A large retailer that collects cash immediately but pays suppliers on extended terms

Answer

Large retailers collect cash at the point of sale (near-zero DSO) while negotiating extended payment terms with suppliers (high DPO), producing a negative CCC.

(CFC) Certified Financial Controller Practice Test

(CFC) Certified Financial Controller Practice Test

CFC Working Capital Management 3