FIN3702 - MCQ Test Bank

FIN3702 - MCQ Test Bank (2021)

Principles of Managerial Finance, 12e (Gitman)
Chapter 14 Working Capital and Current Assets Management
Learning Goal 1: Understand short-term financial management, net working
capital, and the related tradeoff between profitability and
risk.
1) A firm that is unable to pay its bills as they come due is technically
insolvent. Answer: TRUE
Topic: Basics of Short-Term Financial
Management Question Status: Previous
Edition

2) Short-term financial management is concerned with management of the firm's
current assets and current liabilities.
Answer: TRUE
Topic: Basics of Short-Term Financial
Management Question Status: Previous
Edition

3) The goal of short-term financial management is to manage each of the firm's
current assets and current liabilities in order to achieve a balance between
profitability and risk that contributes to the firm's value.
Answer: TRUE
Topic: Basics of Short-Term Financial
Management Question Status: Previous
Edition

4) Working capital represents refers to a firm's long
term capital. Answer: FALSE
Topic: Working Capital
Management Question Status:
Previous Edition

5) In general, the greater a firm's current assets relative to its short-term
obligations, the better able it will be to pay its bills as they come due.
Answer: TRUE
Topic: Working Capital
Management Question Status:
Previous Edition

6) The more predictable a firm's cash inflows, the more net working capital
it will need. Answer: FALSE
Topic: Working Capital
Management Question Status:
Previous Edition

7) As the ratio of current assets to total assets increases, the firm's
risk increases. Answer: FALSE
Topic: Working Capital
Management Question Status:
Previous Edition

8) Because firms are unable to match cash inflows to outflows with certainty,
most of them need current liabilities that more than cover outflows for

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,current assets.
Answer: FALSE
Topic: Working Capital
Management Question Status:
Previous Edition




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, 9) Too much investment in current assets reduces firm profitability, whereas too
little investment in current assets increases the risk of not being able to pay
debts as they come due.
Answer: TRUE
Topic: Trade-off Between Profitability
and Risk Question Status: Previous
Edition

10)Business risk is the risk of being unable to make the scheduled fixed financing
payments on debt and preferred stock.
Answer: FALSE
Topic: Business Risk
Question Status: Previous Edition

11)Net working capital can be defined as the portion of the firm's current assets
financed with long-term funds.
Answer: TRUE
Topic: Net Working
Capital Question Status:
Previous Edition

12)A firm is said to be technically insolvent when its total assets is less than its
total liabilities and stockholders' equity.
Answer: FALSE
Topic: Technical
Insolvency Question
Status: Previous Edition

13)An increase in current assets increases net working capital, thereby
reducing the risk of technical insolvency.
Answer: TRUE
Topic: Technical
Insolvency Question
Status: Previous Edition

14)The effect of a decrease in the ratio of current assets to total assets and the
effect of an increase in the ratio of current liabilities to total assets are
increases in the firm's profits and, correspondingly, its risk.
Answer: TRUE
Topic: Trade-off Between Profitability
and Risk Question Status: Previous
Edition

15)Net working capital is defined as
A) a ratio measure of liquidity best used in cross-sectional analysis.
B) the portion of the firm's assets financed with short-term funds.
C) current liabilities minus current assets.
D) current assets minus current
liabilities. Answer: D
Topic: Net Working
Capital Question Status:
Previous Edition




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, 16)The portion of a firm's current assets financed with long-term funds may be called
A) working capital.
B) accounts receivable.
C) net working capital.
D) inventor
y. Answer: C
Topic: Net Working
Capital Question Status:
Previous Edition

17)In working capital management, risk is measured by the probability that a firm will
become
A) liquid.
B) technically insolvent.
C) unable to meet long-term obligations.
D) less
profitable.
Answer: B
Topic: Working Capital
Management Question Status:
Previous Edition

18)The conversion of current assets from inventory to receivables to cash provides the

of cash used to pay the current liabilities, which represents a(n) of cash.
A) outflow; inflow
B) use; source
C) source; use
D) inflow;
outflow Answer: C
Topic: Working Capital
Management Question Status:
Previous Edition

19)The goal of working capital management is to
A) balance current assets against current liabilities.
B) pay off short-term debts.
C) achieve a balance between risk and return in order to maximize the firm's
value.
D) achieve a balance between short-term and long-term assets so that
they add to the achievement of the firm's overall goals.
Answer: C
Topic: Working Capital
Management Question Status:
Previous Edition

20)Current liabilities can be viewed as
A) debts that mature in one year or less.
B) debts that mature in more than one year.
C) sources of cash inflows.
D) none of the
above Answer: A
Topic: Working Capital
Management Question Status:
Previous Edition




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