CPFM - Certified Professional in Financial Management Working Capital Management Questions and Answers 1

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

The Cash Conversion Cycle (CCC) is calculated as: Inventory Period + Receivables Period - Payables Period. To reduce the CCC, a company must either decrease the inventory or receivables period, or increase the payables period. Offering an early payment discount incentivizes customers to pay sooner, directly reducing the receivables collection period and thus shortening the CCC.

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

An aggressive working capital financing policy involves financing a portion of permanent current assets with short-term, lower-cost debt. This approach is risky because it requires the company to continuously refinance this short-term debt, and it faces interest rate fluctuations and potential difficulties in obtaining new financing during economic downturns. The other options represent more conservative or moderate (maturity matching) approaches.

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

The primary objective of working capital management is to maintain a balance between profitability and liquidity. A company must have sufficient cash flow to meet its short-term obligations (liquidity) while also efficiently using its assets to generate profits (profitability). Focusing solely on maximizing returns could jeopardize liquidity, while being overly liquid might harm profitability.

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

The Quick Ratio, or Acid-Test Ratio, is calculated as (Current Assets - Inventory) / Current Liabilities. In this case, it is ($500,000 - $100,000) / $250,000 = $400,000 / $250,000 = 1.6. This ratio measures a company's ability to meet its short-term obligations with its most liquid assets.

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

A primary benefit of a Just-in-Time (JIT) inventory system is the reduction of costs associated with holding inventory, such as storage, insurance, and the risk of inventory becoming obsolete. By receiving goods only as they are needed in the production process, companies can significantly lower their investment in inventory.

CPFM Practice Test

CPFM Practice Test

CPFM - Certified Professional in Financial Management Working Capital Management Questions and Answers 1