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

Accounts payable is spontaneous financing because it automatically increases as the firm purchases more on credit, without requiring formal negotiation.

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 large gap between the current ratio (2.5) and quick ratio (1.2) suggests that inventory represents a large portion of 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

Under LIFO, the most recently purchased (higher-cost) inventory is expensed first, resulting in higher COGS when prices are rising.

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 revolving credit facility allows a business to borrow, repay, and reborrow up to a maximum limit, providing flexible short-term financing.

Question 5

Factoring accounts receivable involves:

Accepted Answer

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

Answer

Factoring transfers receivables to a factor (third party) who pays an advance (at a discount) and collects from the customers directly.

(CIA) Certified Industrial Accountant Practice Test

(CIA) Certified Industrial Accountant Practice Test

CIA Working Capital Management 3