CIA Working Capital Management 3

Question 1

Which of the following is an example of spontaneous financing?

Accepted Answer

Accounts payable arising from credit purchases

Answer

A revolving line of credit from a bank

Answer

Long-term bonds issued to fund expansion

Answer

Common stock issued to new investors

Question 2

A company's current ratio is 2.5 and its quick ratio is 1.2. This indicates that:

Accepted Answer

A significant portion of current assets is tied up in inventory

Answer

The company is highly liquid with minimal inventory

Answer

The company has excessive cash holdings

Answer

Current liabilities exceed current assets

Question 3

Which method of inventory valuation results in higher cost of goods sold during periods of rising prices?

Accepted Answer

LIFO (Last-In, First-Out)

Answer

FIFO (First-In, First-Out)

Answer

Weighted average cost

Answer

Specific identification

Question 4

A revolving credit facility is best described as:

Accepted Answer

A flexible credit line allowing repeated borrowing up to a set limit

Answer

A one-time term loan repaid in fixed installments

Answer

A long-term bond with a fixed maturity date

Answer

A factoring arrangement for selling receivables

Question 5

Factoring accounts receivable involves:

Accepted Answer

Selling receivables to a third party at a discount in exchange for immediate cash

Answer

Using receivables as collateral for a secured loan

Answer

Writing off uncollectible receivables against bad debt expense

Answer

Extending payment terms to improve customer relationships

Question 6

In the context of working capital management, the operating cycle is defined as:

Accepted Answer

The time from raw material purchase to cash collection from customers

Answer

The time between placing a purchase order and receiving delivery

Answer

The number of days it takes to pay suppliers

Answer

The period between annual financial statement dates

Question 7

Which of the following is the most appropriate benchmark for evaluating a company's working capital management efficiency?

Accepted Answer

Industry average ratios and prior-period trends

Answer

Only the absolute level of net working capital

Answer

The risk-free rate of return

Answer

Total long-term debt outstanding