Chapter 15: Managing Working Capital
Multiple Choice
1. What is the function of the operating cycle?
a. It measures the distance between divisions in an organization.
b. It measures the time between receiving raw materials and collecting cash from receivables.
c. It measures the time between a firm’s paying its suppliers for inventory and collecting cash
from customers.
d. It measures a firm’s operating and cash conversion cycles using information from a firm’s
income statement and balance sheet.
Answer: b
Level: difficult
Section: Operating Cycle
2. Which of the following measures the time that it takes from the firm paying its suppliers for
inventory and collecting the cash from customers on the sale of a finished product?
a. operating cycle
b. inventory period
c. cash conversion cycle
d. accounts receivable period
Answer: c
Level: medium
Section: Operating cycle
3. A manager can estimate the length of a firm’s operating and cash conversion cycles using
information from the firm’s ___________________ and ___________________.
a. income statement; receivable period
b. inventory controls; bank statements
c. account payable; accounts receivable
d. income statement; balance sheet
Answer: d
Level: medium
Section: Operating Cycle
4. A ________________ details the periodic cash inflows and cash outflows of firm over some
time frame.
a. cash outflow
b. cash budget
c. cash buffer
d. cash inflow
Answer: b
Level: easy
Section: Cash Budgets
5. An increase in sales generally leads to increases in the amount of all of these accounts except
for
a. depreciation
b. inventory
c. accounts receivable
d. accounts payable
Answer: a
Level: difficult
Section: Cash Conversion Cycle
6. A manager can estimate cash inflows by which two factors?
a. sales forecast; customer payments patterns
b. income statement; sales forecast
c. sales forecast; future cash flows
d. investment risk; customer payment patterns
Answer: a
Level: medium
Section: Cash Budgets
7. A manager can estimate the monthly net cash flow after they list all of the expected
_________ and ____________________.
a. forecasted data; cash outflows
b. cash inflows; cash outflows
c. forecasted data; cash inflows
d. cash inflows; determinant data
Answer: b
Level: easy
Section: Constructing the Cash Budget
8. The management of current assets involves all of the following except
a. the administration of cash and marketable securities
b. accounts receivable
c. inventories
d. past due accounts
Answer: d
Level: easy
Section: Management of Current Assets
9. A typical firm attempts to _________________ their cash holdings because under current law,
a business does not earn interest on their funds in a checking account.
a. deplete
b. maximize
c. minimize
d. eliminate
Answer: c
Level: medium
Section: Management of Current Assets
10. An effective manager manages their receivables by focusing on all of the following except
a. conducting a credit analysis
b. setting credit terms
c. carrying out the collection efforts
d. accounts payable
Answer: d
Level: easy
Section: Accounts Receivable Management
11. A manager that implements a credit analysis is not only involved with the appraising the
creditworthiness of quality of a potential customer but also emphasizes _________________.
a. the five P’s of product implementation.
b. the five C’s of credit analysis.
c. the five E’s of effective management practices.
d. the five G’s of good and ethical behavior.
Answer: b
Level: easy
Section: Accounts Receivable Management
12. What is the purpose of a credit bureau?
a. a bureau that allows potential business owners to establish a new business
b. a bureau that allows an entrepreneur to purchase a business license
c. not to provide a service to a nonprofit business entity
d. to obtain credit information about business firms and individuals
Answer: d
Level: medium
Section: Accounts Receivable Management
13. Which of the following is true about trade credit?
a. The credit is extended on purchases to a firm’s customers.
b. It is the credit that a trade business can obtain to operate its business.
c. The purchaser sets the terms of the credit.
d. The credit appears as accounts receivable on the balance sheet of the seller.
Answer: a
Level: difficult
Section: Credit Terms and Collection Efforts
14. Good inventory management involves keeping inventor down to minimize costs while also
trying to have enough inventory on hand to prevent
a. merchandise becoming obsolete.
b. stock outs and lost sales.
c. too many shipments or reorders.
d. competition from buying up all the supply.
Answer: b
Level: difficult
Section: Inventory Management
15. Which of the following is not a benefit of the B2B portal?
a. It lowers procurement costs.
b. It lowers supply-chain costs.
c. It lowers the communication between business entities.
d. It provides a way for firms to sell excess inventory costs.
Answer: c
Level: easy
Section: Technology and Working Capital Management