Finance for Non-Finance Managers Working Capital Management 2 — Questions and Answers
Question 1: What does accounts payable represent on a balance sheet?
- Money owed to the company by customers
- Money the company owes to suppliers (Correct answer)
- Cash held in reserve
- Revenue earned but not yet billed
Correct answer: Money the company owes to suppliers
Accounts payable is the amount owed to suppliers for goods or services received but not yet paid for.
Question 2: Inventory turnover ratio measures:
- How many times inventory is sold and replaced in a period (Correct answer)
- The percentage of revenue tied up in inventory
- The cost of storing inventory per unit
- How long inventory sits before it is ordered
Correct answer: How many times inventory is sold and replaced in a period
Inventory turnover = Cost of Goods Sold ÷ Average Inventory, showing how efficiently stock is managed.
Question 3: Which term describes money owed by customers for goods or services already delivered?
- Accounts payable
- Notes payable
- Accounts receivable (Correct answer)
- Deferred revenue
Correct answer: Accounts receivable
Accounts receivable represents amounts customers owe the company for completed sales on credit.
Question 4: A high days sales outstanding (DSO) typically indicates:
- Customers are paying very quickly
- The company is collecting receivables slowly (Correct answer)
- Inventory is selling faster than expected
- Supplier payment terms have improved
Correct answer: The company is collecting receivables slowly
High DSO means it takes more days on average to collect payment after a sale, slowing cash flow.
Question 5: Which of the following is a current liability?
- Patent
- Mortgage payable (10-year)
- Accrued wages payable (Correct answer)
- Goodwill
Correct answer: Accrued wages payable
Accrued wages payable are employee wages earned but not yet paid, due within the current period.
Question 6: Just-in-time (JIT) inventory management primarily aims to:
- Maximize inventory on hand to avoid stockouts
- Reduce inventory levels to lower holding costs (Correct answer)
- Increase supplier payment terms
- Speed up depreciation of assets
Correct answer: Reduce inventory levels to lower holding costs
JIT minimizes inventory by receiving goods only when needed, reducing storage costs and working capital tied up in stock.
Finance for Non-Finance Managers Working Capital Management 2
What does accounts payable represent on a balance sheet?