1.

Which approach to financing working capital involves matching the maturity of assets
and liabilities?
o i. Conservative Approach

o ii. Aggressive Approach

o iii. Matching Approach

o iv. None of the above

o A. i and ii

o B. ii and iii

o C. i and iii

o D. iii and iv

o Answer: D

2. Which approach to financing working capital relies heavily on long-term financing?

o i. Conservative Approach

o ii. Aggressive Approach

o iii. Matching Approach

o iv. Moderate Approach

o A. i and ii

o B. ii and iii

o C. i and iv

o D. i and iii

o Answer: C

3. In an aggressive approach to financing working capital, the firm uses:

o i. More long-term financing

o ii. More short-term financing

o iii. Equal mix of short-term and long-term financing

o iv. No financing at all

o A. i and iii

o B. ii and iii

o C. ii and iv

o D. iii and iv

o Answer: B

4. A conservative approach to financing working capital:

 o i. Reduces risk

o ii. Increases profitability

o iii. Involves higher liquidity

o iv. Relies more on short-term funds

o A. i and iii

o B. ii and iv

o C. i and iv

o D. iii and iv

o Answer: A

Costs and Risks of Financing Working Capital

5. Which of the following are risks associated with short-term financing?
o i. Interest rate risk

o ii. Refinancing risk

o iii. Default risk

o iv. Liquidity risk

o A. i and ii

o B. ii and iii

o C. i and iv

o D. iii and iv

o Answer: A

6. Costs of long-term financing include:

o i. Higher interest rates

o ii. Lower liquidity

o iii. Fixed interest payments

o iv. Lower risk

o A. i and ii

o B. i and iii

o C. ii and iv

o D. i and iv

o Answer: B

7. Which of the following can increase the cost of short-term financing?

o i. Rising interest rates
 o ii. Reduced creditworthiness

o iii. Improved credit rating

o iv. Decreasing interest rates

o A. i and ii

o B. iii and iv

o C. i and iv

o D. ii and iii

o Answer: A

Sources of Working Capital Finance

8. Which of the following are sources of working capital finance?
o i. Accruals

o ii. Trade Credit

o iii. Long-term bonds

o iv. Short-term bank finance

o A. i and ii

o B. iii and iv

o C. i and iv

o D. i, ii, and iv

o Answer: D

9. Trade credit is:

o i. A short-term financing source

o ii. An interest-free loan from suppliers

o iii. An equity financing source

o iv. A long-term financing source

o A. i and ii

o B. ii and iii

o C. i and iii

o D. iii and iv

o Answer: A

10. Sources of short-term bank finance include:

o i. Overdrafts

o ii. Term loans

 o iii. Revolving credit

o iv. Commercial paper

o A. i and ii

o B. ii and iv

o C. i and iii

o D. iii and iv

o Answer: C

Public Deposits, Commercial Paper, and Factoring

11. Public deposits as a source of working capital finance:
o i. Are short-term borrowings

o ii. Require collateral

o iii. Are obtained from the public

o iv. Involve interest payments

o A. i and iii

o B. ii and iv

o C. i, iii, and iv

o D. iii and iv

o Answer: C

12. Commercial paper is:

o i. A short-term unsecured promissory note

o ii. Issued by large, creditworthy companies

o iii. A long-term financing option

o iv. Used to finance accounts receivable

o A. i and ii

o B. ii and iii

o C. iii and iv

o D. i, ii, and iv

o Answer: D

13. Factoring involves:

o i. Selling accounts receivable to a third party

o ii. Long-term financing

o iii. Immediate cash for receivables

 o iv. Recourse or non-recourse agreements

o A. i and ii

o B. ii and iii

o C. i, iii, and iv

o D. iii and iv

o Answer: C

Working Capital Analysis and Funds Flow Statement

14. The funds flow statement is used to analyze:
o i. Sources of funds

o ii. Uses of funds

o iii. Financial position at a specific point in time

o iv. Profitability of the business

o A. i and ii

o B. ii and iii

o C. iii and iv

o D. i and iv

o Answer: A

15. Components of working capital analysis include:

o i. Inventory turnover ratio

o ii. Receivables turnover ratio

o iii. Debt-to-equity ratio

o iv. Current ratio

o A. i and iii

o B. ii and iv

o C. i, ii, and iv

o D. iii and iv

o Answer: C

16. Which of the following ratios help in analyzing working capital efficiency?
o i. Current ratio

o ii. Quick ratio

o iii. Debt service coverage ratio

o iv. Inventory turnover ratio

 o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

Additional Questions
17. Accruals as a source of finance:
o i. Are spontaneous sources of finance

o ii. Do not involve explicit interest costs

o iii. Are obtained from external investors

o iv. Are non-spontaneous sources of finance

o A. i and ii

o B. ii and iii

o C. i and iii

o D. iii and iv

o Answer: A

18. Provisions are considered a source of finance because:

o i. They represent retained earnings

o ii. They delay outflows of cash

o iii. They are an external source of finance

o iv. They are considered equity financing

o A. i and ii

o B. ii and iv

o C. ii and iii

o D. i and iii

o Answer: A

19. Short-term financing is preferred over long-term financing because:

o i. It is usually less expensive

o ii. It provides greater flexibility

o iii. It reduces financial risk

o iv. It improves liquidity

o A. i and ii
 o B. ii and iii

o C. iii and iv

o D. i and iv

o Answer: A

20. Working capital management involves managing:

o i. Inventory

o ii. Accounts receivable

o iii. Fixed assets

o iv. Accounts payable

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

21. The main objective of working capital management is to:

o i. Ensure liquidity

o ii. Minimize cost of capital

o iii. Maximize shareholder value

o iv. Optimize investment in current assets

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

22. A high current ratio indicates:

o i. Strong liquidity

o ii. Potential inefficiency in asset utilization

o iii. High profitability

o iv. Good short-term financial health

o A. i and ii

o B. ii and iii
 o C. i, ii, and iv

o D. iii and iv

o Answer: C

23. A low quick ratio suggests:

o i. Potential liquidity issues

o ii. Excessive reliance on inventory

o iii. Strong financial position

o iv. High inventory turnover

o A. i and ii

o B. ii and iii

o C. i and iii

o D. iii and iv

o Answer: A

24. The cash conversion cycle (CCC) is:

o i. The time taken to convert inventory into cash

o ii. The time taken to convert receivables into cash

o iii. The period between outlay of cash and cash recovery

o iv. The time taken to convert liabilities into cash

o A. i and ii

o B. ii and iii

o C. i, ii, and iii

o D. iii and iv

o Answer: C

25. Efficient management of receivables involves:

o i. Credit policy formulation

o ii. Collection policy

o iii. Inventory control

o iv. Payment terms management

o A. i and ii

o B. ii and iii

o C. i, ii, and iv
 o D. iii and iv

o Answer: C

26. Effective inventory management aims to:

o i. Reduce carrying costs

o ii. Avoid stockouts

o iii. Maximize order size

o iv. Improve cash flow

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

27. Trade credit terms such as "2/10, net 30" imply:

o i. A 2% discount if paid within 10 days

o ii. Full payment due in 30 days

o iii. A penalty if paid after 30 days

o iv. No discount available

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: A

28. Key considerations in managing payables include:

o i. Maintaining good supplier relationships

o ii. Maximizing cash discounts

o iii. Delaying payments as long as possible

o iv. Avoiding default

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv
 o Answer: C

29. Inventory turnover ratio measures:

o i. The efficiency of inventory management

o ii. The frequency of inventory replenishment

o iii. The profitability of inventory

o iv. The speed of sales

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

30. Receivables turnover ratio indicates:

o i. The effectiveness of credit policies

o ii. The speed of collections

o iii. The level of sales

o iv. The proportion of credit sales

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: A

31. An optimal level of working capital:

o i. Minimizes the cost of capital

o ii. Ensures smooth operations

o iii. Maximizes returns on investment

o iv. Balances risk and return

o A. i and ii

o B. ii and iv

o C. i, ii, and iv

o D. iii and iv

o Answer: C

32. Which factors influence working capital requirements?

 o i. Nature of business

o ii. Business cycle

o iii. Production policies

o iv. Market competition

o A. i and ii

o B. ii and iii

o C. i, ii, and iii

o D. iii and iv

o Answer: C

33. A positive cash flow from operations indicates:

o i. Strong operating performance

o ii. Efficient working capital management

o iii. Excessive inventory buildup

o iv. High profitability

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: A

34. Which of the following are spontaneous sources of finance?

o i. Trade credit

o ii. Bank loans

o iii. Accruals

o iv. Equity financing

o A. i and ii

o B. ii and iii

o C. i and iii

o D. iii and iv

o Answer: C

35. The main goal of cash management is to:

o i. Maximize liquidity
 o ii. Minimize idle cash

o iii. Optimize investment returns

o iv. Ensure timely payments

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. iii and iv

o Answer: C

36. A working capital cycle involves:

o i. Acquisition of raw materials

o ii. Conversion to finished goods

o iii. Sales and collections

o iv. Payment to suppliers

o A. i and ii

o B. ii and iii

o C. i, ii, and iv

o D. i, ii, iii, and iv

o Answer: D

37. Short-term financing is suitable for:

o i. Seasonal working capital needs

o ii. Permanent working capital needs

o iii. Long-term asset purchases

o iv. Immediate liquidity requirements

o A. i and ii

o B. ii and iii

o C. i and iv

o D. iii and iv

o Answer: C

38. Which of the following are advantages of using commercial paper?

o i. Lower interest costs

o ii. Flexibility in terms

 o iii. Availability for small businesses

o iv. Unsecured nature

o A. i and ii

o B. ii and iii

o C. i and iv

o D. iii and iv

o Answer: C

39. Working capital financing decisions involve:

o i. Determining the right mix of short-term and long-term funds

o ii. Assessing the cost of different financing options

o iii. Evaluating the risk profile of financing sources

o iv. Managing the timing of cash flows

o A. i and ii

o B. ii and iii

o C. i, ii, iii, and iv

o D. iii and iv

o Answer: C

40. A high inventory turnover ratio typically indicates:

o i. Efficient inventory management

o ii. High demand for products

o iii. Potential stockouts

o iv. Overinvestment in inventory

o A. i and ii

o B. ii and iii

o C. i, ii, and iii

o D. iii and iv

o Answer: A