CIA Working Capital Management 1 — Questions and Answers
Question 1: A company has current assets of $500,000 and current liabilities of $320,000. What is its net working capital?
- $180,000 (Correct answer)
- $820,000
- $320,000
- $500,000
Correct answer: $180,000
Net working capital is calculated as current assets minus current liabilities: $500,000 - $320,000 = $180,000.
Question 2: Which of the following is NOT a component of the cash conversion cycle?
- Depreciation period (Correct answer)
- Days inventory outstanding
- Days sales outstanding
- Days payable outstanding
Correct answer: Depreciation period
The cash conversion cycle consists of days inventory outstanding, days sales outstanding, and days payable outstanding; depreciation is not a component.
Question 3: An aggressive working capital strategy is characterized by:
- Financing long-term assets with short-term debt (Correct answer)
- Holding large safety stocks of inventory
- Maintaining high levels of cash reserves
- Using long-term debt for all financing needs
Correct answer: Financing long-term assets with short-term debt
An aggressive strategy relies heavily on short-term financing, even for long-term assets, to reduce costs at the expense of higher liquidity risk.
Question 4: Which ratio measures a company's ability to meet short-term obligations using only its most liquid assets?
- Quick ratio (Correct answer)
- Current ratio
- Working capital ratio
- Cash ratio
Correct answer: Quick ratio
The quick ratio (acid-test ratio) excludes inventory and prepaid expenses, measuring liquidity with only cash, marketable securities, and receivables.
Question 5: A firm has average inventory of $400,000 and cost of goods sold of $2,000,000. What is the days inventory outstanding (DIO)?
- 73 days (Correct answer)
- 50 days
- 200 days
- 20 days
Correct answer: 73 days
DIO = (Average Inventory / COGS) × 365 = ($400,000 / $2,000,000) × 365 = 73 days.
Question 6: The primary goal of working capital management in an industrial firm is to:
- Ensure sufficient liquidity while maximizing profitability (Correct answer)
- Maximize current assets at all times
- Minimize all short-term liabilities
- Eliminate accounts payable
Correct answer: Ensure sufficient liquidity while maximizing profitability
Working capital management balances liquidity needs against the opportunity cost of tying up excess resources, aiming to maintain operations while maximizing profitability.
Question 7: Which of the following actions would DECREASE the cash conversion cycle?
- Negotiating longer payment terms with suppliers (Correct answer)
- Extending credit terms to customers
- Increasing safety stock levels
- Reducing accounts payable turnover
Correct answer: Negotiating longer payment terms with suppliers
Negotiating longer payment terms with suppliers increases days payable outstanding, which reduces the cash conversion cycle (CCC = DIO + DSO - DPO).
CIA Working Capital Management 1
A company has current assets of $500,000 and current liabilities of $320,000.
What is its net working capital?