1.
Which approach to financing working capital involves matching the maturity of assets
and liabilities?
o i. Conservative Approach
o ii. Aggressive Approach
o iii. Matching Approach
o iv. None of the above
o A. i and ii
o B. ii and iii
o C. i and iii
o D. iii and iv
o Answer: D
2. Which approach to financing working capital relies heavily on long-term financing?
o i. Conservative Approach
o ii. Aggressive Approach
o iii. Matching Approach
o iv. Moderate Approach
o A. i and ii
o B. ii and iii
o C. i and iv
o D. i and iii
o Answer: C
3. In an aggressive approach to financing working capital, the firm uses:
o i. More long-term financing
o ii. More short-term financing
o iii. Equal mix of short-term and long-term financing
o iv. No financing at all
o A. i and iii
o B. ii and iii
o C. ii and iv
o D. iii and iv
o Answer: B
4. A conservative approach to financing working capital:
o i. Reduces risk
o ii. Increases profitability
o iii. Involves higher liquidity
o iv. Relies more on short-term funds
o A. i and iii
o B. ii and iv
o C. i and iv
o D. iii and iv
o Answer: A
Costs and Risks of Financing Working Capital
5. Which of the following are risks associated with short-term financing?
o i. Interest rate risk
o ii. Refinancing risk
o iii. Default risk
o iv. Liquidity risk
o A. i and ii
o B. ii and iii
o C. i and iv
o D. iii and iv
o Answer: A
6. Costs of long-term financing include:
o i. Higher interest rates
o ii. Lower liquidity
o iii. Fixed interest payments
o iv. Lower risk
o A. i and ii
o B. i and iii
o C. ii and iv
o D. i and iv
o Answer: B
7. Which of the following can increase the cost of short-term financing?
o i. Rising interest rates
o ii. Reduced creditworthiness
o iii. Improved credit rating
o iv. Decreasing interest rates
o A. i and ii
o B. iii and iv
o C. i and iv
o D. ii and iii
o Answer: A
Sources of Working Capital Finance
8. Which of the following are sources of working capital finance?
o i. Accruals
o ii. Trade Credit
o iii. Long-term bonds
o iv. Short-term bank finance
o A. i and ii
o B. iii and iv
o C. i and iv
o D. i, ii, and iv
o Answer: D
9. Trade credit is:
o i. A short-term financing source
o ii. An interest-free loan from suppliers
o iii. An equity financing source
o iv. A long-term financing source
o A. i and ii
o B. ii and iii
o C. i and iii
o D. iii and iv
o Answer: A
10. Sources of short-term bank finance include:
o i. Overdrafts
o ii. Term loans
o iii. Revolving credit
o iv. Commercial paper
o A. i and ii
o B. ii and iv
o C. i and iii
o D. iii and iv
o Answer: C
Public Deposits, Commercial Paper, and Factoring
11. Public deposits as a source of working capital finance:
o i. Are short-term borrowings
o ii. Require collateral
o iii. Are obtained from the public
o iv. Involve interest payments
o A. i and iii
o B. ii and iv
o C. i, iii, and iv
o D. iii and iv
o Answer: C
12. Commercial paper is:
o i. A short-term unsecured promissory note
o ii. Issued by large, creditworthy companies
o iii. A long-term financing option
o iv. Used to finance accounts receivable
o A. i and ii
o B. ii and iii
o C. iii and iv
o D. i, ii, and iv
o Answer: D
13. Factoring involves:
o i. Selling accounts receivable to a third party
o ii. Long-term financing
o iii. Immediate cash for receivables
o iv. Recourse or non-recourse agreements
o A. i and ii
o B. ii and iii
o C. i, iii, and iv
o D. iii and iv
o Answer: C
Working Capital Analysis and Funds Flow Statement
14. The funds flow statement is used to analyze:
o i. Sources of funds
o ii. Uses of funds
o iii. Financial position at a specific point in time
o iv. Profitability of the business
o A. i and ii
o B. ii and iii
o C. iii and iv
o D. i and iv
o Answer: A
15. Components of working capital analysis include:
o i. Inventory turnover ratio
o ii. Receivables turnover ratio
o iii. Debt-to-equity ratio
o iv. Current ratio
o A. i and iii
o B. ii and iv
o C. i, ii, and iv
o D. iii and iv
o Answer: C
16. Which of the following ratios help in analyzing working capital efficiency?
o i. Current ratio
o ii. Quick ratio
o iii. Debt service coverage ratio
o iv. Inventory turnover ratio
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
Additional Questions
17. Accruals as a source of finance:
o i. Are spontaneous sources of finance
o ii. Do not involve explicit interest costs
o iii. Are obtained from external investors
o iv. Are non-spontaneous sources of finance
o A. i and ii
o B. ii and iii
o C. i and iii
o D. iii and iv
o Answer: A
18. Provisions are considered a source of finance because:
o i. They represent retained earnings
o ii. They delay outflows of cash
o iii. They are an external source of finance
o iv. They are considered equity financing
o A. i and ii
o B. ii and iv
o C. ii and iii
o D. i and iii
o Answer: A
19. Short-term financing is preferred over long-term financing because:
o i. It is usually less expensive
o ii. It provides greater flexibility
o iii. It reduces financial risk
o iv. It improves liquidity
o A. i and ii
o B. ii and iii
o C. iii and iv
o D. i and iv
o Answer: A
20. Working capital management involves managing:
o i. Inventory
o ii. Accounts receivable
o iii. Fixed assets
o iv. Accounts payable
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
21. The main objective of working capital management is to:
o i. Ensure liquidity
o ii. Minimize cost of capital
o iii. Maximize shareholder value
o iv. Optimize investment in current assets
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
22. A high current ratio indicates:
o i. Strong liquidity
o ii. Potential inefficiency in asset utilization
o iii. High profitability
o iv. Good short-term financial health
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
23. A low quick ratio suggests:
o i. Potential liquidity issues
o ii. Excessive reliance on inventory
o iii. Strong financial position
o iv. High inventory turnover
o A. i and ii
o B. ii and iii
o C. i and iii
o D. iii and iv
o Answer: A
24. The cash conversion cycle (CCC) is:
o i. The time taken to convert inventory into cash
o ii. The time taken to convert receivables into cash
o iii. The period between outlay of cash and cash recovery
o iv. The time taken to convert liabilities into cash
o A. i and ii
o B. ii and iii
o C. i, ii, and iii
o D. iii and iv
o Answer: C
25. Efficient management of receivables involves:
o i. Credit policy formulation
o ii. Collection policy
o iii. Inventory control
o iv. Payment terms management
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
26. Effective inventory management aims to:
o i. Reduce carrying costs
o ii. Avoid stockouts
o iii. Maximize order size
o iv. Improve cash flow
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
27. Trade credit terms such as "2/10, net 30" imply:
o i. A 2% discount if paid within 10 days
o ii. Full payment due in 30 days
o iii. A penalty if paid after 30 days
o iv. No discount available
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: A
28. Key considerations in managing payables include:
o i. Maintaining good supplier relationships
o ii. Maximizing cash discounts
o iii. Delaying payments as long as possible
o iv. Avoiding default
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
29. Inventory turnover ratio measures:
o i. The efficiency of inventory management
o ii. The frequency of inventory replenishment
o iii. The profitability of inventory
o iv. The speed of sales
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
30. Receivables turnover ratio indicates:
o i. The effectiveness of credit policies
o ii. The speed of collections
o iii. The level of sales
o iv. The proportion of credit sales
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: A
31. An optimal level of working capital:
o i. Minimizes the cost of capital
o ii. Ensures smooth operations
o iii. Maximizes returns on investment
o iv. Balances risk and return
o A. i and ii
o B. ii and iv
o C. i, ii, and iv
o D. iii and iv
o Answer: C
32. Which factors influence working capital requirements?
o i. Nature of business
o ii. Business cycle
o iii. Production policies
o iv. Market competition
o A. i and ii
o B. ii and iii
o C. i, ii, and iii
o D. iii and iv
o Answer: C
33. A positive cash flow from operations indicates:
o i. Strong operating performance
o ii. Efficient working capital management
o iii. Excessive inventory buildup
o iv. High profitability
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: A
34. Which of the following are spontaneous sources of finance?
o i. Trade credit
o ii. Bank loans
o iii. Accruals
o iv. Equity financing
o A. i and ii
o B. ii and iii
o C. i and iii
o D. iii and iv
o Answer: C
35. The main goal of cash management is to:
o i. Maximize liquidity
o ii. Minimize idle cash
o iii. Optimize investment returns
o iv. Ensure timely payments
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. iii and iv
o Answer: C
36. A working capital cycle involves:
o i. Acquisition of raw materials
o ii. Conversion to finished goods
o iii. Sales and collections
o iv. Payment to suppliers
o A. i and ii
o B. ii and iii
o C. i, ii, and iv
o D. i, ii, iii, and iv
o Answer: D
37. Short-term financing is suitable for:
o i. Seasonal working capital needs
o ii. Permanent working capital needs
o iii. Long-term asset purchases
o iv. Immediate liquidity requirements
o A. i and ii
o B. ii and iii
o C. i and iv
o D. iii and iv
o Answer: C
38. Which of the following are advantages of using commercial paper?
o i. Lower interest costs
o ii. Flexibility in terms
o iii. Availability for small businesses
o iv. Unsecured nature
o A. i and ii
o B. ii and iii
o C. i and iv
o D. iii and iv
o Answer: C
39. Working capital financing decisions involve:
o i. Determining the right mix of short-term and long-term funds
o ii. Assessing the cost of different financing options
o iii. Evaluating the risk profile of financing sources
o iv. Managing the timing of cash flows
o A. i and ii
o B. ii and iii
o C. i, ii, iii, and iv
o D. iii and iv
o Answer: C
40. A high inventory turnover ratio typically indicates:
o i. Efficient inventory management
o ii. High demand for products
o iii. Potential stockouts
o iv. Overinvestment in inventory
o A. i and ii
o B. ii and iii
o C. i, ii, and iii
o D. iii and iv
o Answer: A
