MANAGEMENT ADVISORY SERVICES Working
WORKING CAPITAL MANAGEMENT C. Purchase of 50,000 of financial assets held fo
D. Acquisition of land valued at 50,000 throu
Theories: common shares
Working Capital Policy 6. Which one of the following transactions doe
1. Net working capital is the difference between current ratio and does not change the total curr
A. Current assets and current liabilities C. Shareholders A. A cash dividend is declared.
investment and cash B. A fully depreciated asset is sold for cash.
B. Fixed asset and current liabilities D. Total assets and total C. A cash advance is made to a divisional office
liabilities CMA 0692 D. Short-term notes payables are retired with c
2. Working capital is important for all the following reasons except 7. Tiger, Inc. has current ratio of 0.95 is to 1.
that it: following would raise the company’s current rat
A. affects a firm’s liquidity and profitability. A. Declaration of cash dividend.
B. consists of a large portion of a firm’s total assets. B. Payment of accounts payable.
C. consists of those assets that are most manageable. C. Collection of accounts receivable
D. consumes a small portion of the financial manager’s time. D. Purchase merchandise in a 2/10, net 30 open
Cabrera
8. Which one of the following transactions would i
3. Which of the following statements is correct? ratio and decrease net profit?
A. Working capital is a measure of long-term solvency A. A stock dividend is declared.
B. The stockholder’s equity is a major component of working B. Vacant land is sold for less than the net book
capital Roque 2013 C. An income tax payment due from the prev
C. Net working capital is the difference between quick assets and
current liabilities. D. Uncollectible accounts receivable are writ
D. Net working capital is the difference between current assets allowance account.
and current liabilities.
9. If a firm increases its cash balance by issuing
4. The longer the firm’s accounts payable period, the: common stock, working capital
A. Shorter the firm’s inventory period. A. increases and the current ratio increases.
B. Longer the firm’s cash conversion period. B. increases and the current ratio decreases.
C. Less the firm must invest in working capital C. increases and the current ratio remain uncha
D. More the delay in the accounts receivable period. Bobadilla D. remains unchanged and the current ratio r
5. Starrs has current assets of 300,000 and current liabilities of
200,000. Starrs could increase it's working capital by the 10. Working capital management involves investm
A. Prepayment of 50,000 of next year's rent decisions related to:
B. Refinancing of 50,000 of short-term debt with long -term debt A. sales and credit.
,MANAGEMENT ADVISORY SERVICES Working
B. current assets and capital structure.
C. current assets and current liabilities. 15. Which of the following statement is false?
D. plant and equipment and current liabilities. Bobadilla A. Net working capital equals working ca
liabilities.
11. The primary objective of working capital management is to: B. A firm with a current ratio greater than on
A. achieve a balance between risk and return. working capital.
B. maximize the company’s total current assets. C. Working capital management concerns deci
C. minimize the company’s total current liabilities. firm’s assets.
D. balance the amount of current assets and current liabilities. D. Net working capital is that portion of a fi
Roque 2013 financed with long-term funds.
12. Which of the following assumptions does not underlie risk-return 16. The optimal level of working capital depends on
tradeoffs in managing working capital? factors except the:
A. Fixed assets remain constant. A. Kind of firm. C. Stability of
B. The yield curve is downward sloping. B. Length of the cash cycle. D. Variablity o
C. Current assets are less profitable than fixed assets.
D. Short-term financing is less expensive than long-term financing. 17. Determining the appropriate level of working
Cabrera requires
A. Changing the capital structure and dividend
13. Which of the following is incorrect B. Offsetting the profitability of current a
A. Profitability varies directly with liquidity. liabilities against the probability of technical
B. The greater the risk, the greater is the potential for larger C. Evaluating the risk associated with various le
return. and the types of debt used to finance those
C. More current assets lead to greater liquidity, but yield lower D. Maintaining a high proportion of liquid asset
returns. in order to maximize the return on total inve
D. Long-term financing has less liquidity risk than short-term
financing, but has a higher explicit cost, hence lower return. 18. A firm following an aggressive working capital s
Roque 2011 A. hold substantial amounts of liquid assets.
B. minimize the amount of short-term financing
14. Which of the following statements is false? C. finance fluctuating assets with long-term fina
A. Liquidity is the ability to convert an asset into cash without D. minimize the amount of funds held in liquid a
significant loss.
B. Lengthening the cash cycle increases a firm’s required level of 19. Conservative working capital management stra
working capital. A. high risk, high return. C. low risk, low
C. Working capital management uses only a small portion of the B. low risk, high return. D. moderate
financial manager’s time. return. Cabrera
D. The goal of working capital management is to maintain the
optimal level of net working capital. Cabrera 20. Compared to other firms in the industry, a com
,MANAGEMENT ADVISORY SERVICES Working
a conservative working capital policy will tend to have a A. the maximization of shareowners' wealth
A. Higher total asset turnover B. the goal of minimizing the cost of debt finan
B. Greater percentage of short-term financing C. the objective of matching the maturities of a
C. Higher ratio of current assets to fixed assets D. the expectation that long-term interest rate
D. Greater risk of needing to sell current assets to repay debt coming year
RPCPA 0595
26. An advantage of the use of long-term debt as
21. As a company becomes more conservative in working capital term debt to finance current assets is
policy, it would tend to have a(an) A. It is easy to repay
A. Decrease in its acid-test ratio. B. It decreases the risk of the firm
B. Increase in the ratio of current assets to units of output. C. It generally is less costly than short-term deb
C. Increase in the ratio of current liabilities to non-current D. It generally places fewer restrictions on the fi
liabilities.
D. Increase in funds invested in common stock and a decrease in 27. Financing inventory build-up with long-term deb
funds invested in marketable securities. CMA 1296 A. Matching policy.
B. Hedging policy.
22. Temporary working capital supports C. An aggressive working capital policy
A. acquisition of capital equipment. C. seasonal peaks. D. A conservative working capital policy.
Bobadilla
B. payment of long term debt. D. the cash needs of the 28. In a conservative or relaxed working capital fina
company. A. Operations are operated with too much work
B. Operations are conducted on a minimum
23. According to the hedging approach, working capital should be capital.
financed with: C. The company is exposed to risk of illiquid
A. long-term financing. C. short-term and long-term working capital position.
financing. D. Short term liabilities are used to finance
B. short-term financing. D. spontaneously generated current assets, but also part or all of the
funds. Cabrera asset requirements.
24. The hedging approach to financing involves 29. As a company becomes more conservative with
A. The use of long-term debt to finance current assets. capital policy, it would tend to have a(n)
B. Matching maturities of debt with specific financing needs. A. Increase in the operating cycle.
C. The use of short-term debt to finance non-current assets. B. Decrease in the operating cycle.
D. Issuance of common stocks to raise funds for working capital C. Increase in the ratio of current assets to curr
requirements. Roque 2011 D. Increase in the ratio of current liabilities to n
25. The financing of the basic level of current assets by issuing
commercial paper is inconsistent with 30. Which of the following statements is true?
, MANAGEMENT ADVISORY SERVICES Working
A. Short-term debt is usually more expensive than long-term debt. financing would _____, and the risk of te
B. A conservative working capital policy is characterized by higher would____, respectively
current ratio and acid-test ratio. A. decrease, decrease, increase C. increase, d
C. Determining the appropriate level of working capital for a firm B. decrease, increase, decrease D. increase, in
requires changing the firm’s capital structure and dividend
policy. 36. Zap Company follows an aggressive financing p
D. Liquid assets do not ordinarily earn higher returns relative to capital management while Zing Corporation fol
long-term assets, so holding the former will maximize the return financing policy. Which one of the following sta
on total assets. Roque 2011
A. Zap has less liquidity risk while Zing has mo
31. Short-term financing plans with high liquidity have: B. Zap has a low current ratio while Zing has a
A. high return and high risk C. moderate return and C. Zap has low ratio of short-term debt to total
moderate risk a high ratio of short-term debt to total debt.
B. low profit and low risk D. none of the given choices D. Zap finances short-term assets with long-te
Bobadilla finances short-term assets with short-term d
32. Which of the following would increase risk? 37. Which of the following statements is false?
A. Using short-term debt to finance permane
A. Raise the level of working capital. the risk of insolvency.
B. Increase the amount of equity financing. B. Financing fluctuating current assets with lon
C. Increase the amount of short-term borrowing. a conservative strategy.
D. Decrease the amount of inventory by formulating an effective C. The term permanent assets refers only to fi
inventory policy. Bobadilla machinery, buildings, and equipment.
D. Maintaining a high level of current asse
33. When a firm finances long-term assets with short-term sources of marketable securities reduces the proba
funding, it insolvency.
A. Improves the leverage ratio
B. Will have higher interest expense 38. Which of the following statements is true?
C. Reduces the risk of cash shortage A. A higher level of working capital inc
D. Is ignoring the principle of matched maturities Bobadilla profitability.
B. Long-term financing is used to finance curre
34. The probability of technical insolvency is reduced by: hedging approach.
A. maintaining a high level of liquid assets. C. Technical solvency is the inability of a firm to
B. financing fluctuating assets with long-term debt. as they come due.
C. financing permanent assets with short-term debt. D. The hedging approach is an example of an
D. both A and B. Cabrera capital management strategy.
35. If the firm was to shift P2,000 of current liabilities to long term 39. All of the following statements in regard to
fund, the firm's net working capital would____ , the annual cost of correct except
WORKING CAPITAL MANAGEMENT C. Purchase of 50,000 of financial assets held fo
D. Acquisition of land valued at 50,000 throu
Theories: common shares
Working Capital Policy 6. Which one of the following transactions doe
1. Net working capital is the difference between current ratio and does not change the total curr
A. Current assets and current liabilities C. Shareholders A. A cash dividend is declared.
investment and cash B. A fully depreciated asset is sold for cash.
B. Fixed asset and current liabilities D. Total assets and total C. A cash advance is made to a divisional office
liabilities CMA 0692 D. Short-term notes payables are retired with c
2. Working capital is important for all the following reasons except 7. Tiger, Inc. has current ratio of 0.95 is to 1.
that it: following would raise the company’s current rat
A. affects a firm’s liquidity and profitability. A. Declaration of cash dividend.
B. consists of a large portion of a firm’s total assets. B. Payment of accounts payable.
C. consists of those assets that are most manageable. C. Collection of accounts receivable
D. consumes a small portion of the financial manager’s time. D. Purchase merchandise in a 2/10, net 30 open
Cabrera
8. Which one of the following transactions would i
3. Which of the following statements is correct? ratio and decrease net profit?
A. Working capital is a measure of long-term solvency A. A stock dividend is declared.
B. The stockholder’s equity is a major component of working B. Vacant land is sold for less than the net book
capital Roque 2013 C. An income tax payment due from the prev
C. Net working capital is the difference between quick assets and
current liabilities. D. Uncollectible accounts receivable are writ
D. Net working capital is the difference between current assets allowance account.
and current liabilities.
9. If a firm increases its cash balance by issuing
4. The longer the firm’s accounts payable period, the: common stock, working capital
A. Shorter the firm’s inventory period. A. increases and the current ratio increases.
B. Longer the firm’s cash conversion period. B. increases and the current ratio decreases.
C. Less the firm must invest in working capital C. increases and the current ratio remain uncha
D. More the delay in the accounts receivable period. Bobadilla D. remains unchanged and the current ratio r
5. Starrs has current assets of 300,000 and current liabilities of
200,000. Starrs could increase it's working capital by the 10. Working capital management involves investm
A. Prepayment of 50,000 of next year's rent decisions related to:
B. Refinancing of 50,000 of short-term debt with long -term debt A. sales and credit.
,MANAGEMENT ADVISORY SERVICES Working
B. current assets and capital structure.
C. current assets and current liabilities. 15. Which of the following statement is false?
D. plant and equipment and current liabilities. Bobadilla A. Net working capital equals working ca
liabilities.
11. The primary objective of working capital management is to: B. A firm with a current ratio greater than on
A. achieve a balance between risk and return. working capital.
B. maximize the company’s total current assets. C. Working capital management concerns deci
C. minimize the company’s total current liabilities. firm’s assets.
D. balance the amount of current assets and current liabilities. D. Net working capital is that portion of a fi
Roque 2013 financed with long-term funds.
12. Which of the following assumptions does not underlie risk-return 16. The optimal level of working capital depends on
tradeoffs in managing working capital? factors except the:
A. Fixed assets remain constant. A. Kind of firm. C. Stability of
B. The yield curve is downward sloping. B. Length of the cash cycle. D. Variablity o
C. Current assets are less profitable than fixed assets.
D. Short-term financing is less expensive than long-term financing. 17. Determining the appropriate level of working
Cabrera requires
A. Changing the capital structure and dividend
13. Which of the following is incorrect B. Offsetting the profitability of current a
A. Profitability varies directly with liquidity. liabilities against the probability of technical
B. The greater the risk, the greater is the potential for larger C. Evaluating the risk associated with various le
return. and the types of debt used to finance those
C. More current assets lead to greater liquidity, but yield lower D. Maintaining a high proportion of liquid asset
returns. in order to maximize the return on total inve
D. Long-term financing has less liquidity risk than short-term
financing, but has a higher explicit cost, hence lower return. 18. A firm following an aggressive working capital s
Roque 2011 A. hold substantial amounts of liquid assets.
B. minimize the amount of short-term financing
14. Which of the following statements is false? C. finance fluctuating assets with long-term fina
A. Liquidity is the ability to convert an asset into cash without D. minimize the amount of funds held in liquid a
significant loss.
B. Lengthening the cash cycle increases a firm’s required level of 19. Conservative working capital management stra
working capital. A. high risk, high return. C. low risk, low
C. Working capital management uses only a small portion of the B. low risk, high return. D. moderate
financial manager’s time. return. Cabrera
D. The goal of working capital management is to maintain the
optimal level of net working capital. Cabrera 20. Compared to other firms in the industry, a com
,MANAGEMENT ADVISORY SERVICES Working
a conservative working capital policy will tend to have a A. the maximization of shareowners' wealth
A. Higher total asset turnover B. the goal of minimizing the cost of debt finan
B. Greater percentage of short-term financing C. the objective of matching the maturities of a
C. Higher ratio of current assets to fixed assets D. the expectation that long-term interest rate
D. Greater risk of needing to sell current assets to repay debt coming year
RPCPA 0595
26. An advantage of the use of long-term debt as
21. As a company becomes more conservative in working capital term debt to finance current assets is
policy, it would tend to have a(an) A. It is easy to repay
A. Decrease in its acid-test ratio. B. It decreases the risk of the firm
B. Increase in the ratio of current assets to units of output. C. It generally is less costly than short-term deb
C. Increase in the ratio of current liabilities to non-current D. It generally places fewer restrictions on the fi
liabilities.
D. Increase in funds invested in common stock and a decrease in 27. Financing inventory build-up with long-term deb
funds invested in marketable securities. CMA 1296 A. Matching policy.
B. Hedging policy.
22. Temporary working capital supports C. An aggressive working capital policy
A. acquisition of capital equipment. C. seasonal peaks. D. A conservative working capital policy.
Bobadilla
B. payment of long term debt. D. the cash needs of the 28. In a conservative or relaxed working capital fina
company. A. Operations are operated with too much work
B. Operations are conducted on a minimum
23. According to the hedging approach, working capital should be capital.
financed with: C. The company is exposed to risk of illiquid
A. long-term financing. C. short-term and long-term working capital position.
financing. D. Short term liabilities are used to finance
B. short-term financing. D. spontaneously generated current assets, but also part or all of the
funds. Cabrera asset requirements.
24. The hedging approach to financing involves 29. As a company becomes more conservative with
A. The use of long-term debt to finance current assets. capital policy, it would tend to have a(n)
B. Matching maturities of debt with specific financing needs. A. Increase in the operating cycle.
C. The use of short-term debt to finance non-current assets. B. Decrease in the operating cycle.
D. Issuance of common stocks to raise funds for working capital C. Increase in the ratio of current assets to curr
requirements. Roque 2011 D. Increase in the ratio of current liabilities to n
25. The financing of the basic level of current assets by issuing
commercial paper is inconsistent with 30. Which of the following statements is true?
, MANAGEMENT ADVISORY SERVICES Working
A. Short-term debt is usually more expensive than long-term debt. financing would _____, and the risk of te
B. A conservative working capital policy is characterized by higher would____, respectively
current ratio and acid-test ratio. A. decrease, decrease, increase C. increase, d
C. Determining the appropriate level of working capital for a firm B. decrease, increase, decrease D. increase, in
requires changing the firm’s capital structure and dividend
policy. 36. Zap Company follows an aggressive financing p
D. Liquid assets do not ordinarily earn higher returns relative to capital management while Zing Corporation fol
long-term assets, so holding the former will maximize the return financing policy. Which one of the following sta
on total assets. Roque 2011
A. Zap has less liquidity risk while Zing has mo
31. Short-term financing plans with high liquidity have: B. Zap has a low current ratio while Zing has a
A. high return and high risk C. moderate return and C. Zap has low ratio of short-term debt to total
moderate risk a high ratio of short-term debt to total debt.
B. low profit and low risk D. none of the given choices D. Zap finances short-term assets with long-te
Bobadilla finances short-term assets with short-term d
32. Which of the following would increase risk? 37. Which of the following statements is false?
A. Using short-term debt to finance permane
A. Raise the level of working capital. the risk of insolvency.
B. Increase the amount of equity financing. B. Financing fluctuating current assets with lon
C. Increase the amount of short-term borrowing. a conservative strategy.
D. Decrease the amount of inventory by formulating an effective C. The term permanent assets refers only to fi
inventory policy. Bobadilla machinery, buildings, and equipment.
D. Maintaining a high level of current asse
33. When a firm finances long-term assets with short-term sources of marketable securities reduces the proba
funding, it insolvency.
A. Improves the leverage ratio
B. Will have higher interest expense 38. Which of the following statements is true?
C. Reduces the risk of cash shortage A. A higher level of working capital inc
D. Is ignoring the principle of matched maturities Bobadilla profitability.
B. Long-term financing is used to finance curre
34. The probability of technical insolvency is reduced by: hedging approach.
A. maintaining a high level of liquid assets. C. Technical solvency is the inability of a firm to
B. financing fluctuating assets with long-term debt. as they come due.
C. financing permanent assets with short-term debt. D. The hedging approach is an example of an
D. both A and B. Cabrera capital management strategy.
35. If the firm was to shift P2,000 of current liabilities to long term 39. All of the following statements in regard to
fund, the firm's net working capital would____ , the annual cost of correct except
