CIA Working Capital Management 2 — Questions and Answers
Question 1: A company's accounts receivable balance is $150,000 and annual credit sales are $900,000. What is the days sales outstanding (DSO)?
- 60.8 days (Correct answer)
- 6 days
- 166.7 days
- 45 days
Correct answer: 60.8 days
DSO = (Accounts Receivable / Annual Credit Sales) × 365 = ($150,000 / $900,000) × 365 ≈ 60.8 days.
Question 2: Which inventory management technique is designed to minimize holding costs by receiving goods only as they are needed?
- Just-in-time (JIT) (Correct answer)
- Economic order quantity (EOQ)
- Safety stock model
- ABC analysis
Correct answer: Just-in-time (JIT)
Just-in-time (JIT) inventory management aims to reduce holding costs by aligning deliveries with production demand, minimizing inventory on hand.
Question 3: The economic order quantity (EOQ) model minimizes the total of which two costs?
- Ordering costs and holding costs (Correct answer)
- Purchase price and shipping costs
- Storage costs and insurance costs
- Lead time costs and stockout costs
Correct answer: Ordering costs and holding costs
EOQ balances ordering costs (costs per order placed) and holding costs (costs of carrying inventory), finding the quantity that minimizes their total.
Question 4: A conservative working capital policy typically results in:
- Lower risk but higher financing costs (Correct answer)
- Higher risk but lower financing costs
- Maximum asset utilization
- Minimum current assets
Correct answer: Lower risk but higher financing costs
A conservative policy holds more current assets and uses long-term financing, reducing liquidity risk but increasing the cost of capital.
Question 5: When a company offers credit terms of '2/10, net 30', what does this mean?
- A 2% discount is available if paid within 10 days; full amount due in 30 days (Correct answer)
- Payment is due in 10 days with a 2% penalty after 30 days
- 2% interest accrues after 10 days up to 30 days
- Full payment required within 2 days or net due in 30 days
Correct answer: A 2% discount is available if paid within 10 days; full amount due in 30 days
'2/10, net 30' means the buyer may deduct 2% if payment is made within 10 days; otherwise, the full invoice amount is due within 30 days.
Question 6: Which of the following best describes a lockbox system used in cash management?
- A bank collects payments directly from customers on behalf of the company (Correct answer)
- A secure vault for storing physical cash and securities on-site
- A system that delays outgoing payments to preserve cash
- An electronic fund transfer system for payroll disbursements
Correct answer: A bank collects payments directly from customers on behalf of the company
A lockbox system directs customer payments to a post office box managed by the bank, accelerating collection and reducing float.
Question 7: What does the term 'float' refer to in cash management?
- The time between when a check is written and when funds are actually deducted from the account (Correct answer)
- Surplus cash held in low-risk money market instruments
- The difference between book value and market value of cash
- Short-term borrowings used to fund seasonal operations
Correct answer: The time between when a check is written and when funds are actually deducted from the account
Float represents the delay between when a payment is initiated and when the bank processes it, creating a timing difference in available balances.
CIA Working Capital Management 2
A company's accounts receivable balance is $150,000 and annual credit sales are $900,000.
What is the days sales outstanding (DSO)?