CPFM Working Capital Management 2

Question 1

A company has current assets of $480,000 and current liabilities of $300,000. What is its current ratio?

Accepted Answer

1.6

Answer

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?

Accepted Answer

Maturity-matching (hedging) approach

Answer

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?

Accepted Answer

Days payable outstanding

Answer

CCC = DIO + DSO − DPO, subtracting the time taken to pay suppliers.

Question 4

A negative cash conversion cycle generally indicates that a company:

Accepted Answer

Collects from customers before paying suppliers

Answer

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:

Accepted Answer

Higher levels of current assets and more long-term financing

Answer

A conservative policy keeps larger liquidity buffers and relies more on long-term financing, lowering risk but also returns.

CPFM Practice Test