Working Capital Management MCQ Quiz

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Working Capital Management MCQ Quiz - Quiz



How well do you understand working capital management? Here is an interesting 'working capital management' quiz. Take this quiz to see how strong your knowledge of the accounts subject you have. Working capital management is one of the very important components of financial management. This subject is concerned with the short-term finance of the business, which is a closely related trade between profitability and liquidity. If you are prepared to take this test, let's begin then. All the best for a perfect score!


Questions and Answers
  • 1. 

    Which of the following would not be financed from working capital?

    • A.

      Cash float.

    • B.

      Accounts receivable.

    • C.

      Credit sales.

    • D.

      A new personal computer for the office.

    Correct Answer
    D. A new personal computer for the office.
    Explanation
    Cash float and accounts receivable/credit sales use up working capital that will eventually be returned. A personal computer is a piece of physical equipment that will be wholly used up and have little or no value at the end of its life.

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  • 2. 

    Which of the following defines the difference between the current ratio and the quick ratio?

    • A.

      The current ratio involves inventories, and the quick ratio does not.

    • B.

      The current ratio does not involve inventories, and the quick ratio does.

    • C.

      The current ratio involves physical capital, and the quick ratio does not.

    • D.

      The current ratio does not involve physical capital, and the quick ratio does.

    Correct Answer
    A. The current ratio involves inventories, and the quick ratio does not.
    Explanation
    The current ratio is the ratio of current assets/current liabilities. The quick ratio (sometimes known as the acid test) is simply current assets minus inventories divided by current liabilities. Inventories may be excluded if it would be reasonable to expect that they would have to be deeply discounted to sell them quickly.

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  • 3. 

    Which of the following options is not true for the matching strategy?

    • A.

      All assets must be financed with permanent long-term capital.

    • B.

      Temporary current assets must be financed with temporary working capital.

    • C.

      Permanent current assets must be financed with permanent working capital.

    • D.

      Long-term assets must be financed from long-term capital.

    Correct Answer
    A. All assets must be financed with permanent long-term capital.
    Explanation
    The matching strategy is a financial management approach that aims to match the financing of assets with the appropriate type of capital. It recognizes that different types of assets require different types of financing. The statement "All assets must be financed with permanent long-term capital" is not true for the matching strategy. According to the strategy, temporary current assets should be financed with temporary working capital, while permanent current assets should be financed with permanent working capital. Long-term assets, on the other hand, should be financed from long-term capital. This approach ensures that the financing structure aligns with the nature and duration of the assets, optimizing the company's financial position.

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  • 4. 

    Which among the following working capital strategies is the most aggressive?

    • A.

      Making greater use of short-term finance and maximizing net short-term assets.

    • B.

      Making greater use of long-term finance and minimizing net short-term assets.

    • C.

      Making greater use of short-term finance and minimizing net short-term assets.

    • D.

      Making greater use of long-term finance and maximizing net short-term assets.

    Correct Answer
    C. Making greater use of short-term finance and minimizing net short-term assets.
    Explanation
    The most aggressive working capital strategy is making greater use of short-term finance and minimizing net short-term assets. This strategy involves relying heavily on short-term loans and credit to finance operations, while also minimizing the amount of cash tied up in short-term assets such as inventory and accounts receivable. By doing so, the company can maximize its liquidity and cash flow, but it also increases the risk of relying too heavily on short-term debt and potentially facing cash flow issues in the future.

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  • 5. 

    Which of these metrics is not used for measuring the length of the cash cycle?

    • A.

      Acid test days.

    • B.

      Accounts receivable days.

    • C.

      Accounts payable days.

    • D.

      Inventory days.

    Correct Answer
    A. Acid test days.
    Explanation
    Acid test days is not used for measuring the length of the cash cycle because it is a metric used to evaluate a company's liquidity and ability to pay off short-term liabilities using its most liquid assets. It measures the number of days it would take for a company to convert its current assets (excluding inventory) into cash to cover its current liabilities. On the other hand, metrics like accounts receivable days, accounts payable days, and inventory days are used to measure different components of the cash cycle, such as the time it takes to collect payments from customers, the time it takes to pay suppliers, and the time it takes to sell inventory.

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  • 6. 

    Which of these are considered components of working capital management?

    • A.

      Inventories

    • B.

      Current liabilities

    • C.

      Accounts receivable

    • D.

      Accounts payable

    • E.

      Cash

    Correct Answer(s)
    A. Inventories
    C. Accounts receivable
    D. Accounts payable
    E. Cash
    Explanation
    Working capital management involves managing the company's current assets and liabilities to ensure smooth operations and financial stability. Inventories, accounts receivable, accounts payable, and cash are all components of working capital management. Inventories represent the goods or materials a company holds for production or sale. Accounts receivable refers to the money owed to the company by its customers. Accounts payable represents the money the company owes to its suppliers or creditors. Cash is the amount of money available to the company for immediate use. These components are all crucial in managing the company's short-term financial health and liquidity.

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  • 7. 

    Which of these is the correct formula for calculating working capital?

    • A.

      Working capital = current assets – current liabilities.

    • B.

      Working capital = current assets + current liabilities.

    • C.

      Working capital = current assets - inventory - accounts payable. 

    • D.

      None of the above

    Correct Answer
    A. Working capital = current assets – current liabilities.
    Explanation
    The correct formula for calculating working capital is to subtract current liabilities from current assets. This formula takes into account all the current assets a company has, such as cash, accounts receivable, and inventory, and subtracts the current liabilities, such as accounts payable and short-term debt. This calculation helps determine the amount of capital available for day-to-day operations and is an important indicator of a company's financial health.

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  • 8. 

    The other name for working capital is _______________. 

    • A.

      Operating capital

    • B.

      Current assets capital

    • C.

      Capital relating to the main projects of the company

    • D.

      None of the above

    Correct Answer
    A. Operating capital
    Explanation
    Working capital refers to the funds that a company requires to carry out its day-to-day operations effectively. It is the capital that is used to cover the company's current liabilities and expenses. The term "operating capital" is another name for working capital because it emphasizes the capital needed for the ongoing operations and activities of the business. This includes managing inventory, paying suppliers, meeting short-term financial obligations, and maintaining cash flow. Therefore, operating capital is the correct alternative to describe working capital.

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  • 9. 

    Which of these methods is NOT used for calculating the working capital cycle? 

    • A.

      Percentage of sales method

    • B.

       Operating cycle approach

    • C.

      Trial and error method

    • D.

      None of the above

    Correct Answer
    C. Trial and error method
    Explanation
    The trial and error method is not used for calculating the working capital cycle. This method involves making repeated attempts or experiments until the desired result is achieved. However, when calculating the working capital cycle, specific formulas and approaches such as the percentage of sales method and the operating cycle approach are used to determine the length of time it takes for a company to convert its working capital into cash. The trial and error method is not a recognized or commonly used approach for this calculation.

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  • 10. 

    What are current assets? 

    • A.

      The assets that can be sold easily by the companies

    • B.

      The assets that are converted into cash within a period of one year

    • C.

      Assets that are held by the companies to pay off the current liabilities

    • D.

      All of the above

    Correct Answer
    B. The assets that are converted into cash within a period of one year
    Explanation
    Current assets are assets that are expected to be converted into cash within a period of one year. These assets include cash, cash equivalents, accounts receivable, inventory, and short-term investments. They are important for a company's liquidity and ability to meet its short-term obligations. By classifying assets as current, companies can assess their ability to generate cash in the near future and manage their working capital effectively.

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  • Current Version
  • Aug 25, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Apr 16, 2016
    Quiz Created by
    Mehtajimmit
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