Finance for Non-Finance Managers Working Capital Management 1 — Questions and Answers
Question 1: What is working capital defined as?
- Current assets minus current liabilities (Correct answer)
- Total assets minus total liabilities
- Fixed assets minus long-term debt
- Revenue minus operating expenses
Correct answer: Current assets minus current liabilities
Working capital is current assets minus current liabilities, measuring short-term liquidity.
Question 2: Which of the following is an example of a current asset?
- Land
- Accounts receivable (Correct answer)
- Equipment
- Long-term investments
Correct answer: Accounts receivable
Accounts receivable is a current asset because it is expected to be collected within one year.
Question 3: A company has $500,000 in current assets and $200,000 in current liabilities. What is its working capital?
- $200,000
- $500,000
- $300,000 (Correct answer)
- $700,000
Correct answer: $300,000
Working capital = $500,000 − $200,000 = $300,000.
Question 4: What does a negative working capital typically indicate?
- The company is highly profitable
- The company may struggle to meet short-term obligations (Correct answer)
- The company has no long-term debt
- The company has excess cash
Correct answer: The company may struggle to meet short-term obligations
Negative working capital means current liabilities exceed current assets, signaling potential liquidity problems.
Question 5: Which of the following strategies helps improve working capital?
- Extending payment terms to suppliers
- Speeding up collection of accounts receivable (Correct answer)
- Increasing inventory levels
- Taking on more long-term debt
Correct answer: Speeding up collection of accounts receivable
Collecting receivables faster converts credit sales to cash more quickly, boosting working capital.
Question 6: The cash conversion cycle measures:
- How long it takes to convert investments into fixed assets
- The time between paying for inventory and collecting cash from sales (Correct answer)
- The interest rate on a company's debt
- How quickly a company depreciates assets
Correct answer: The time between paying for inventory and collecting cash from sales
The cash conversion cycle is the number of days from paying for inventory to receiving cash from customers.
Finance for Non-Finance Managers Working Capital Management 1
What is working capital defined as?