37 Practice+Questions+ (Working+Capital+Management)

Practice questions
Question 1
Which of the following is an example of a primary source of liquidity?
A. Negotiating debt agreements

B. Generating cash from short-term investments
C. Liquidating short-term assets
Question 2
Corporation Alpha is most likely faced with a drag on liquidity if its:
A. Largest vendor changes its payment terms form “2/10 net 30” to “2/10 net 50”
B. Weighted average collection period increases from 35 days to 45 days
C. Inventory turnover was below the industry standard during the last period and is well above
during the current period
Question 3
Imagine that Company X has a quick ratio of 2.5 times and a current ratio of 3.5 times. The current
liabilities of the company are 200 million. The amount of the inventory is closest to:
A. $100,000,000
B. $200,000,000
C. $300,000,000
Question 4
Take a look at Company Y’s financial information. The operating cycle of the company is closest to:
Company Y financial information (in $ millions)

Credit Sales $33
Cost of goods sold $20
Average accounts receivable $4
Inventory at t=0 $2
Inventory at t=1 $3
Average trades payable $4
A. 88 days
B. 89 days
C. 90 days
Question 5
Using the following financial information for Company Z, the number of days of payables for the current
year is closest to:
Current year Previous year

Credit sales $14,000 $12,000
Cost of goods sold $8,500 $6,900
Inventory $2,200 $2,000
Accounts payable $800 $800
A. 32.56 days
B. 33.56 days
C. 34.56 days
Question 6
Company X has the following financial information available. The cash conversion cycle of the company
is closest to:
Company X financial information (in $ millions)

Credit Sales $55
Cost of goods sold $30
Average accounts receivable $14
Inventory at t=0 $8
Inventory at t=1 $9
Average trades payable $6
A. 126 days
B. 136 days
C. 146 days
Question 7
A U.S. Treasury bill sells for $990 with 90 days remaining to maturity. Its face value is equal to $1,000.
Which of the following methods most likely results in the highest yield?
A. Bond equivalent yield

B. Discount-basis yield
C. Monet market yield
Question 8
Which of the following combinations would result in an increase in the operating cycle and a decrease in
the cash conversion cycle?
Operating cycle ↑ Cash conversion cycle ↓

A. Increase in receivables turnover ratio A decrease in payables turnover
B. A decrease in the inventory turnover ratio Increase in payables turnover
C. A decrease in the inventory turnover ratio A decrease in payables turnover
Question 9
Which of the following statements about the aging schedule is least likely accurate?
A. It requires more information compared to calculating the average days of receivables

B. It categorizes accounts by the number of days since they have been paid
C. Analysis of the historical trends provides a clearer picture of what drives changes in the accounts
receivable
Question 10
Which of the following statements about inventory management is most likely accurate?
A. An increase in the average days of inventory can indicate that the inventory is too large
B. A large inventory is beneficial for any company because it means there’s enough stock to
compensate for a potential demand increase
C. The average days of inventory of a company in the manufacturing industry should be similar to
that of a firm in the grocery business
Question 11
Imagine that company X uses trade credit with terms 3/10 net 60. What would be the effective
borrowing cost when a given invoice is paid on the 60th day?
A. 24.6%
B. 26.8%
C. 24.9%
Question 12
Corporation Sigma is considering three different sources of short-term financing: Suppose the firm
needs $1,000,000 for a year. Which form of financing would result in the lowest cost of credit?
• Obtaining a committed line of credit at a 7%-rate and 0.5% commission fee

• A banker’s acceptance at a 6.8% rate, stated on an “all inclusive” basis
• A commercial paper at a rate of 6.65% which has a dealer’s commission of 0.15% and a credit
enhancement fee of 0.25%
A. Line of credit
B. Banker’s acceptance
C. Commercial paper

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Practice questions

Which of the following is an example of a primary source of liquidity?

A. Negotiating debt agreements

Corporation Alpha is most likely faced with a drag on liquidity if its:

Company Y financial information (in $ millions)

Current year Previous year

Company X financial information (in $ millions)

A. Bond equivalent yield

Operating cycle ↑ Cash conversion cycle ↓

A. It requires more information compared to calculating the average days of receivables

• Obtaining a committed line of credit at a 7%-rate and 0.5% commission fee

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