Working Capital Management Flashcards
7 cards from real CPFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Working Capital Management flashcards as text
A company has current assets of $480,000 and current liabilities of $300,000. What is its current ratio?
Answer: 1.6
Current ratio = current assets / current liabilities = 480,000 / 300,000 = 1.6.
Which working capital financing approach matches the maturity of financing to the life of the asset being financed?
Answer: Maturity-matching (hedging) approach
The maturity-matching or hedging approach finances assets with liabilities of similar maturity to reduce risk.
The cash conversion cycle is calculated as days inventory outstanding plus days sales outstanding minus what?
Answer: Days payable outstanding
CCC = DIO + DSO − DPO, subtracting the time taken to pay suppliers.
A negative cash conversion cycle generally indicates that a company:
Answer: Collects from customers before paying suppliers
A negative CCC means the firm receives cash from sales before it must pay suppliers, freeing up cash.
Under a conservative working capital policy, a company typically holds:
Answer: Higher levels of current assets and more long-term financing
A conservative policy keeps larger liquidity buffers and relies more on long-term financing, lowering risk but also returns.
Net working capital is defined as:
Answer: Current assets minus current liabilities
Net working capital equals current assets minus current liabilities.
Which of the following would increase a company's net working capital?
Answer: Issuing long-term debt and holding the proceeds as cash
Issuing long-term debt and holding cash raises current assets without raising current liabilities, increasing net working capital.