CPFM Working Capital Management 2 — Questions and Answers
Question 1: A company has current assets of $480,000 and current liabilities of $300,000. What is its current ratio?
- 1.6 (Correct answer)
- 0.625
- 180,000
- 2.4
Correct answer: 1.6
Current ratio = current assets / current liabilities = 480,000 / 300,000 = 1.6.
Question 2: Which working capital financing approach matches the maturity of financing to the life of the asset being financed?
- Aggressive approach
- Conservative approach
- Maturity-matching (hedging) approach (Correct answer)
- Float management
Correct answer: Maturity-matching (hedging) approach
The maturity-matching or hedging approach finances assets with liabilities of similar maturity to reduce risk.
Question 3: The cash conversion cycle is calculated as days inventory outstanding plus days sales outstanding minus what?
- Days payable outstanding (Correct answer)
- Days cash on hand
- Operating cycle days
- Average collection period
Correct answer: Days payable outstanding
CCC = DIO + DSO − DPO, subtracting the time taken to pay suppliers.
Question 4: A negative cash conversion cycle generally indicates that a company:
- Is insolvent
- Collects from customers before paying suppliers (Correct answer)
- Has excessive inventory
- Cannot meet payroll
Correct 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.
Question 5: Under a conservative working capital policy, a company typically holds:
- Minimal cash and high short-term debt
- Higher levels of current assets and more long-term financing (Correct answer)
- Negative net working capital
- No inventory buffer
Correct 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.
Question 6: Net working capital is defined as:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Cash minus accounts payable
- Revenue minus operating expenses
Correct answer: Current assets minus current liabilities
Net working capital equals current assets minus current liabilities.
Question 7: Which of the following would increase a company's net working capital?
- Paying off accounts payable with cash
- Collecting an account receivable in cash
- Issuing long-term debt and holding the proceeds as cash (Correct answer)
- Buying inventory on credit
Correct 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.
CPFM Working Capital Management 2
A company has current assets of $480,000 and current liabilities of $300,000.
What is its current ratio?