CCM CCM Working Capital Management 1 — Questions and Answers
Question 1: What is the primary goal of working capital management?
- Maximize long-term capital investment
- Ensure sufficient liquidity while minimizing idle cash (Correct answer)
- Reduce the company's tax liability
- Increase shareholder equity
Correct answer: Ensure sufficient liquidity while minimizing idle cash
Working capital management aims to balance liquidity needs with efficiency by minimizing idle cash while ensuring all short-term obligations can be met.
Question 2: The cash conversion cycle (CCC) is calculated as:
- DSO + DIO + DPO
- DSO - DIO - DPO
- DSO + DIO - DPO (Correct answer)
- DIO - DSO + DPO
Correct answer: DSO + DIO - DPO
The cash conversion cycle equals Days Sales Outstanding plus Days Inventory Outstanding minus Days Payable Outstanding, measuring how long cash is tied up in operations.
Question 3: Which metric measures how quickly a company collects payments from customers?
- Days Payable Outstanding (DPO)
- Days Inventory Outstanding (DIO)
- Days Sales Outstanding (DSO) (Correct answer)
- Current Ratio
Correct answer: Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) measures the average number of days a company takes to collect payment after making a sale.
Question 4: A company wants to improve its working capital position. Which action would be MOST effective?
- Extend payment terms to suppliers (Correct answer)
- Increase inventory safety stock
- Offer extended payment terms to customers
- Increase capital expenditures
Correct answer: Extend payment terms to suppliers
Extending supplier payment terms increases Days Payable Outstanding, which reduces the cash conversion cycle and frees up working capital.
Question 5: Which of the following is a common short-term working capital financing strategy?
- Issuing long-term bonds
- Revolving credit facility (Correct answer)
- Equity financing through IPO
- Capital lease agreements
Correct answer: Revolving credit facility
A revolving credit facility provides flexible short-term borrowing capacity that can be drawn and repaid repeatedly to fund temporary working capital needs.
Question 6: Net working capital is defined as:
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Fixed assets minus long-term debt
- Cash and equivalents minus short-term debt
Correct answer: Current assets minus current liabilities
Net working capital equals Current Assets minus Current Liabilities, representing the short-term liquidity buffer of a business.
CCM CCM Working Capital Management 1
What is the primary goal of working capital management?