Working Capital Management Flashcards
7 cards from real CFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Working Capital Management flashcards as text
What is the Operating Cycle?
Answer: DIO + DSO
The Operating Cycle = DIO + DSO, measuring the total time from purchasing inventory to collecting cash from sales before accounting for payables timing.
Which working capital strategy involves maintaining higher levels of current assets relative to current liabilities to maximize liquidity?
Answer: Conservative strategy
A conservative working capital strategy maintains large current asset buffers, providing strong liquidity at the cost of lower returns on invested capital.
Supply chain financing (reverse factoring) primarily benefits which party in the supply chain?
Answer: Suppliers, by enabling early payment at the buyer's lower financing rates
Reverse factoring enables suppliers to receive early payment at the buyer's typically lower borrowing rates, improving supplier cash flow while the buyer may extend its own payment terms.
What is the primary liquidity risk of an aggressive working capital strategy?
Answer: Insufficient liquidity to meet short-term obligations
An aggressive strategy minimizes current assets and maximizes use of short-term liabilities, increasing the risk of not having sufficient liquid resources to meet short-term obligations.
Which type of company is MOST likely to operate with a negative Cash Conversion Cycle?
Answer: A large retailer that collects cash immediately but pays suppliers on extended terms
Large retailers collect cash at the point of sale (near-zero DSO) while negotiating extended payment terms with suppliers (high DPO), producing a negative CCC.
A supplier offers trade credit terms of '2/10 net 30.' What does this mean?
Answer: A 2% discount is available if paid within 10 days; otherwise, the full amount is due in 30 days
The notation '2/10 net 30' means the buyer earns a 2% early payment discount if paid within 10 days; otherwise, the full invoice amount is due within 30 days.
Which metric best reflects a company's overall efficiency in managing its short-term operational funding cycle without external financing?
Answer: Cash conversion cycle
The cash conversion cycle integrates inventory management, receivables collection, and payables timing into a single metric that shows how efficiently a company self-funds its operations.