CPFM - Certified Professional in Financial Management Working Capital Management Questions and Answers

Question 1

A company is analyzing its cash conversion cycle (CCC) which is currently 75 days.
The breakdown is as follows: Inventory Conversion Period = 45 days, Receivables Collection Period = 40 days, and Payables Deferral Period = 10 days.
Which of the following strategies would be most effective in reducing the CCC?

Accepted Answer

Offering a 2% discount for payments received within 10 days to its customers.

Answer

Increasing the safety stock of its most popular inventory items.

Answer

Negotiating payment terms with its suppliers from net 30 to net 15.

Answer

Switching from a just-in-time (JIT) inventory system to a materials requirement planning (MRP) system.

Question 2

A financial manager is evaluating the company's working capital financing policy. The company has a high degree of seasonal fluctuation in its sales. Which financing approach would be considered the most aggressive and carry the highest risk?

Accepted Answer

Financing a portion of permanent current assets with short-term debt.

Answer

Financing all fixed assets and the peak level of current assets with long-term debt and equity.

Answer

Financing permanent current assets with long-term debt and temporary current assets with short-term debt.

Answer

Financing all assets, both fixed and current, with long-term debt and equity.

Question 3

Which of the following best describes the primary objective of working capital management?

Accepted Answer

Balancing profitability and liquidity to ensure the smooth operation of the business.

Answer

Maximizing the returns on all corporate assets.

Answer

Minimizing the total cost of capital for the firm.

Answer

Maximizing the price of the company's common stock.

Question 4

A company has current assets of $500,000, including $100,000 in inventory. Its current liabilities are $250,000. What is the company's Quick Ratio (or Acid-Test Ratio)?

Accepted Answer

1.6

Answer

2.0

Answer

0.8

Answer

0.6

Question 5

Which of the following is a key advantage of implementing a Just-in-Time (JIT) inventory management system?

Accepted Answer

Reduced inventory holding costs and obsolescence risk.

Answer

Increased ability to meet unexpected surges in customer demand.

Answer

Lower risk of stockouts due to supply chain disruptions.

Answer

Simplified supplier relationships and logistics.

Question 6

A company decides to relax its credit standards for customers. Which of the following outcomes is most likely to occur?

Accepted Answer

An increase in bad debt expense.

Answer

A decrease in sales volume.

Answer

A decrease in the average collection period.

Answer

An increase in the cash conversion cycle.