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Working Capital Management Flashcards

7 cards from real CTP 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

  1. A company has a Days Sales Outstanding (DSO) of 45 days and an industry average of 30 days. What does this most likely indicate?

    Answer: The company has a collection problem or lenient credit terms

    A DSO higher than the industry average suggests the company is slower at collecting receivables, indicating potential collection issues or overly lenient credit terms.

  2. Which of the following best describes the purpose of a lockbox system in receivables management?

    Answer: To accelerate the collection and processing of customer payments

    A lockbox system routes customer payments directly to a bank's processing center, reducing mail float and accelerating funds availability.

  3. Under the cash conversion cycle (CCC) formula, which change would DECREASE the CCC?

    Answer: Increasing days payable outstanding (DPO)

    CCC = DIO + DSO – DPO; increasing DPO (paying suppliers later) reduces the CCC by extending the time the company holds supplier financing.

  4. A company offers terms of 2/10 net 30. What is the approximate annualized cost of NOT taking the discount?

    Answer: 36.7%

    Annualized cost = (Discount% / (1 – Discount%)) × (365 / (Net days – Discount days)) = (0.02/0.98) × (365/20) ≈ 36.7%.

  5. Which inventory management approach aims to minimize inventory holding costs by receiving goods only when needed for production?

    Answer: Just-in-Time (JIT)

    Just-in-Time (JIT) inventory management synchronizes supply deliveries with production schedules to minimize inventory carrying costs.

  6. In evaluating a customer's creditworthiness, the 'capacity' component of the 5 C's of credit refers to:

    Answer: The borrower's ability to repay from operating cash flows

    Capacity in the 5 C's framework assesses whether the borrower generates sufficient cash flow to service the debt obligation.

  7. A treasury professional wants to reduce payment float on outgoing disbursements. Which action is MOST appropriate?

    Answer: Convert paper checks to ACH payments

    Converting checks to ACH payments eliminates mail float and reduces disbursement float since ACH settles electronically on a predictable schedule.