Working Capital Management MCQ Quiz

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.