Question Bank-Management of Working Capital

QUESTION BANK

LONG QUESTIONS

Q1. What is Financial Management? What are the dominant objectives of financial management? Explain the different functions of finance.

Q2. What is meant by Working Capital Management? What are the determinants of Working Capital Management needs of an enterprise?

Q3. “Inadequate working capital is disastrous; whereas redundant working capital is a criminal waste.” In light of this statement, analyze carefully the working capital situation in Indian Company.

Q4. Explain in brief the gross and net concept of working capital. Which of those concepts do you prefer and why? And also explain the operating cycle concept of working capital. Give suitable example.

Q5. “The financing of current assets is governed by the financing policy of the firm.” Briefly discuss the various financing policies.

Q6 Explain briefly cash management? What are the motives of holding cash?

Q7. What are the objectives of cash management? Explain the factors determining the level of cash in a firm.

Q8. What is Cash Budget? What are the main functions of Cash Budget? Explain the significance of Cash Budget? Explain the significance of Cash Budget and also describe the important methods of preparing cash management.

Q9. What are the basic strategies of efficient cash management? Illustrate with suitable examples the of these on the operating cash requirement of a firm.

Q10. Discuss the Boumol’s Mathematical Model and Miller Orr Model used for determining the cash balance.

Q11. What do you understand by Receivable Management? Explain its objectives.

Q12. What are the determinants of the size of investment in receivables? Explain the costs of maintaining receivables.

Q13. What are credit standards? What key variables should be considered in evaluating possible changes in credit standards?

Q14. What is meant by credit terms? What are the expected effects of (a) a decrease in the cash discount, and (b) a decrease in the credit period?

Q15. What are collection policies? How can they evaluate?

Q16. What is Inventory? Why do firms maintain inventory? What are the objectives of inventory management?

Q17. What purpose does safety stock serve? What are the benefits and costs associated with safety stock?

Q18. What is meant by the ABC inventory control system? On what key premise is this system based? What are its limitations?

Q19. Define economic order quantity (EOQ). How can it be computed? What are the limitations of the EOQ model?

Q20. What is inventory reorder point? How is it determined?


SHORT QUESTIONS

1. Working capital means:
(a) Total of current assets
(b) Excess of current assets over current liabilities
(c) That portion of assets which changes in business operations
(d) All the above
2. According to operating cycle concept, working capital is:
(a) That liquid part of net working capital which is required during operating cycle period.
(b) New working capital.
(c) Operating capital (d) Gross capital
3. Fixed working capital is:
(a) Minimum stock of raw materials (b) Minimum balance of bank
(c) Salaries of workers (d) All the above
4. Nature of seasonal working capital is:
(a) Short term (b) Long term
(c) Medium term (d) Variable
5. Working capital is:
(a) The capital invested in the business to meet its day to day capital requirements
(b) Circulating in nature
(c) The difference between current assets and current liabilities
(d) All the above
6. In the trading concern, the circulating nature of current assets is represented by:
(a) Cash → stock → cash → debtors (b) Cash → stock → debtors → cash
(c) Cash → debtors → stock → cash (d) Debtors → cash → stock → debtors
7. Operating cycle concept of working capital is:
(a) Superior to other traditional concepts
(b) Meant to support all the operational activities of the firm and cost thereof
(c) The cash interpretation of working capital for on going operations
(d) All the above
8. Net working capital is the excess of current assets over:
(a) Current liabilities (b) Liquid assets
(c) Long term liabilities (d) Non of these
9. Working capital is also known as:
(a) Circulating capital (b) Revolving capital
(c) Operating capital (d) Both (a) and (b)
10. Gross working capital is a:
(a) Business entity concept (b) Dual aspect concept
(c) Going concern concept (d) Money measurement concept
11. Temporary working capital is otherwise called as:
(a) Fluctuating working capital (b) Revolving working capital
(c) Variable working capital (d) Both (a) and (c)
12. Permanent working capital is also termed as:
(a) Regular working capital (b) Core working capital
(c) Fixed working capital (d) All the above
13. Operating cycle method is also known as:
(a) Cash working capital method (b) Percentage of sales method
(c) Estimation of component of working capital method (d) None of these
14. Gross working capital refers to capital invested in total of:
(a) Current assets (b) Fixed assets
(c) Circulating assets (d) Both (a) and (c)
15. Adequacy of working capital is required:
(a) For prompt (b) For increase in credit
(c) For convenience in raising loan (d) All these
16. Excess working capital is evidence of:
(a) Advance credit (b) Demand of the product
(c) Idle funds (d) None of these
17. “All current assets decisions are inter-related.” This statement is:
(a) Incorrect (b) Correct
(c) Partly correct (d) None of these
18. Which of the following is taken as reversible in nature?
(a) Current assets (b) Current liabilities
(c) Both (a) and (b) (d) None of these
19. Change in working capital is equal to:
(a) CA-CL (b) ∆CA-∆CL
(c) Both (a) and (b) (d) Cannot say
20. Current ratio measures:
(a) The efficiency in use of WC (b) The liquidity of WC elements
(c) The structural health of WC (d) All the above
21. Ratio of current assets to total assets is used to analyze the
(a) Efficiency (b) Liquidity
(c) Structural health (d) profitability
22. Which of the following reflects the efficiency of overall working capital:
(a) Receivable turnover (b) Working capital turnover
(c) Current assets turnover (d) Both (b) and (d)
23. Danger of excessive working capital is:
(a) Fixed assets may not be efficiently used
(b) May motivate a tendency to accumulate inventories for making speculative profit
(c) Company may not be in a position to honor its short term obligations
(d) All the above
24. Inefficient working capital management may cause:
(a) Inadequate working capital (b) Excessive working capital
(c) Both (a) and (b) (d) None of these
25. Current assets and current liabilities are the elements of :
(a) Liquid ratio (b) Current ratio
(c) Working capital Turnover (d) Super quick ratio
26. Liquidity ratio is also termed as:
(a) Turnover ratio (b) Liquidity ratio
(c) Quick ratio (d) None of these
27. International standard for current ratio is:
(a) 3:1 (b) 1:1
(c) 1.5:1 (d) None of these
28. Ideal standard for liquid ratio is:
(a) 0.5:1 (b) 1:1
(c) 1.5:1 (d) None of these
29. Which of the following will be useful Indicating liquidity crisis?
(a) Gross ratio (b) Net profit ratio
(c) Current ratio (d) None of these
30. Liquid assets are equal to:
(a) Current assets minus inventory minus prepaid expenses
(b) Cash, book balance, debtors, B/R, marketable securities
(c) All current assets (d) Both (a) and (b)
31. Net current assets method of estimating working capital is based on:
(a) Cash cost (b) Credit policy
(c) Credit sales (d) Borrowing + rate of interest
32. Cash forecast method of finding working capital is based on:
(a) Cash budget (b) Cash flow
(c) Fund flow (d) None of these
33. Factors determining the working capital needs of a firm include the following except:
(a) Nature of business (b) Location of business
(c) Manufacturing cycle (d) Taxation & retention policy
34. If raw materials are in store for 2 months, processing time 2 ½ months, finished goods remain in store for 15 days, debtors are allowed 60 days’ credit and credit available from suppliers of raw materials is one month. The operating cycle period is:
(a) 7 months (b) 6 months
(c) 6 ½ months (d) 5 months

35. Conversion period (in days) is calculated by:
(a) Average stock of semi- finished goods
Average daily factory cost (c) Both (a) and (b)
(b) Average stock of semi-finished goods x 365
Total factory cost per annum (d) None of these
36. Number of operating cycle is calculated:
(a) By dividing duration of operating cycle by 365 days
(b) By dividing 365 days of the year by duration of operating cycles
(c) By dividing duration of operating cycles by finished goods storage period
(d) None of these
37. The average amount of stock of raw materials for smooth production depends upon:
(a) Quantity of raw material required for production (b) Average time taken in obtaining fresh delivery
(c) Delay in supply (d) All the above
38. For estimating the working capital requirements, debtors may be determined at:
(a) Sales value (b) Cost
(c) Cost plus profit (d) All these
39. Which of the following factors does not affect the working capital requirement of a firm:
(a) Operating efficiency (b) Business cycles
(c) Labour relations (d) Production policy
40. Conservative current assets policy indicates:
(a) Greater liquidity (b) Higher risk
(c) Poor liquidity (d) Moderate risk
41. Poor liquidity and higher risk represent:
(a) Conservative current assets policy (b) Aggressive current assets policy
(c) Moderate current assets policy (d) None of these
42. In the hedging policy of financing current assets:
(a) Short term sources finance both hard core and variable current assets
(b) long term sources finance both hard core and temporary current assets
(c) long term sources finance temporary current assets and short term sources finance hard current assets
(d) long term sources finance hard core current assets and short term sources finance variable current assets
43. Conservative policy or financing current assets is followed:
(a) When long term source is used in financing core current assets and variable current assets
(b) When long term source is used in financing core current assets and a part of variable current assets leaving the rest portion of variable current assets to be financed by short term sources
(c) When short term sources finance the entire core and variable current assets
(d) None of these
44. Aggressive policy of financing current assets is adopted when:
(a) Only a part of core current assets is financed by long term sources leaving the remaining portion along with variable current assets to be financed by short term sources
(b) Entire portion of current assets being financed by short term sources
(c) Entire portion of current assets being financed by long term sources
(d) None of these
45. Motives for holding the cash in a business are:
(a) Transactionary (b) Precautionary
(c) Compensative (d) All of these
46. Level of cash in business in affected by:
(a) Term of purchase and sale (b) Political situations
(c) Wishes of financial manager (d) None of these
47. Deposit float consists of :
(a) Postal float (b) Processing float
(c) Bank float (d) All of these
48. Concentration banking is a method of:
(a) Decentralized collection (b) Centralized collection
(c) Direct collection (d) None of these
49. Optimum working cash balance is one where:
(a) Transaction cost is lowest (b) Opportunity cost is highest
(c) Total cost is minimum (d) None of these
50. Motives fir holding cash do not include:
(a) Investment motive (b) Transaction motive
(c) Precautionary motive (d) Speculative motive
51. Synchronizing cash inflows and cash outflows to optimize the cash balance include:
(a) Deferring disbursements (b) Speeding up collections
(c) Both (a) and (b) (d) Stopping payment of current liabilities
52. William J. Boumol’s model of cash management determines optimum cash level where the carrying cost and transaction cost are:
(a) Maximum (b) Minimum
(c) Medium (d) None of these
53. In Miller Orr model of cash management:
(a) The lower limit, upper limit and return point of cash balance are set out
(b) Only upper limit and return point are decided
(c) Only lower limit and return point are decided
(d) None of these
54. The term ‘float’ is used in:
(a) Inventory management (b) Receivable management
(c) Cash management (d) None of these
55. Collection from credit sales (debtors + B/R) depends to a great extent upon:
(a) Nature of business (b) Credit policy of the business
(c) Suppliers’ attitude (d) Both (a) and (b)
56. Which of the following methods of cash forecasting estimates the cash position of a particular moment of time?
(a) Profit cash forecast method (b) Budgeted balance sheet method
(c) Both (a) and (b) (d) None of these
57. The make up of each generation by business operations is highlighted by:
(a) Balance sheet method (b) Profit cash forecast method
(c) Receipts and payments method (d) None of these
58. Cash budget is needed for:
(a) Effective control over cash position
(b) Knowing the situation of excess or shortage of cash
(c) Knowing the amount of idle cash
(d) All the above
59. Cash inflow from cash sales may be forecasted if:
(a) Sales budget is in operation
(b) The ratio of cash sales and credit sales is known
(c) Change in consumer behaviour is known
(d) Both (a) and (b)
60. Receivables are maintained for:
(a) Increasing the sales (b) Meeting the competition
(c) Increasing the profit (d) All these
61. Delinquency costs arise when:
(a) Customer’s financial position is bed (c) Both (a) and (b)
(b) Customer’s financial position is doubtful (d) None of these
62. Which of the following not affect the size of investments in receivables?
(a) Level of credit sales (b) Salesman’s commission
(c) Terms of sales (d) None of these
63. Which pair of C’s is not relevant while assessing credit worthiness of a customer?
(a) Character and capacity (b) Capital and condition
(c) Competition and closeness (d) None of these
64. Liberal credit standard may result into:
(a) Increase in bad debts (b) Increase in average collection period
(c) Decrease in collection costs (d) Only (a) and (b)
65. Extension in credit period result into:
(a) Increase in sales volume (b) Increase in loss on bad debts
(c) Increase in average collection period (d) All these
66. Which of the following costs is not associated with receivables?
(a) Carrying costs (b) Delinquency costs
(c) Default costs (d) None of these
67. What are included in the term ‘receivables’?
(a) Debtors only (b) Bill receivables only
(c) Both (a) and (b) (d) None of these
68. Cash discount to customers is allowed to:
(a) Speed up sales (b) Speed up collection
(c) Minimize the level of average debtors (d) Minimize bad debts
69. When a firm advises its customers to mail their payments to special post office collection centers, the system is known as:
(a) Concentration banking (b) Lock box system
(c) playing the float (d) None of these
70. QC/2 is the formula for computing:
(a) Total ordering costs (b) Opportunity costs
(c) Total carrying costs (d) All these
71. Which of the following is not the purpose of holding inventory?
(a) Reduction in ordering costs (b) Benefits of quantity discount
(c) Benefits in cash discount (d) All these
72. Scientific inventory management technique do not include:
(a) ABC analysis (b) EOQ
(c) Cash flow analysis (d) Application and monitoring of inventory levels
73. Cost of carrying inventory does not include:
(a) Handling and transportation costs (b) Foregone quantity discounts
(c) Interest on capital (d) Risk of obsolescence
74. The assumption of EOQ model include the following except:
(a) Variable inventory cost per unit and ordering cost per order remain constant throughout the year
(b) Orders will be received on the expiry of lead time
(c) Cost of materials or finished goods may change during the year
(d) Production/sales can be forecast and would be evenly distributed
75. When the items of inventory are classified according to value of usage, the technique is known as:
(a) XYZ analysis (b) ABC analysis
(c) DEF analysis (d) None of these
76. Trade credit is a source of :
(a) Long term finance (b) Medium term finance
(c) Spontaneous finance (d) None of these
77. “Factoring is a method of financing whereby a firm sells its trade debts at a discount to a financial institution.” This statement is:
(a) Correct (b) Incorrect
(c) Partly correct (d) Cannot say
78. Trade credit is:
(a) Hybrid source of finance (b) Negotiated source of finance
(c) Long term source of finance (d) None of these
79. A factoring arrangement can be
(a) With recourse (b) Without recourse
(c) Both (a) and (b) (d) None of these
80. Bank financing of working capital will generally be:
(a) In the form of cash credit and overdraft (b) Bill acceptance, bills discounting
(c) line of credit, letter of credit and book guarantee (d) All the above
81. Commercial paper can be issued by a company, whose:
(a) Tangible net worth is not less than Rs. 5 crore
(b) Current ratio as per the latest audited balance sheet is at least 1.33:1
(c) Shares are not listed on any stock exchange
(d) Both (a) and (b)
82. Which of the following is not an example of shot term sources of financing:
(a) Convertible debentures (b) Public deposits
(c) Retained earnings (d) All the above
83. A committee under the chairmanship of V.T. Dahejia was set up by national credit council of India in:
(a) 1969 (b) 1968
(c) 1975 (d) 1972
84. Maximum permissible bank finance as suggested by Tondon Committee by the formula 0.75(CA-CL) will result into:
(a) Current ratio of 1.33:1 (minimum) (b) Current ratio of 1.17:1 (minimum)
(c) Both (a) and (b) (d) Cannot say
85. As per method II of Tondon Committee’s recommendation, the effect of financing working capital gap by bank loan would be to ensure a minimum current ratio of:
(a) 1:1 (b) 1.25:1
(c) 1.33:1 (d) 2:1
86. Which of the following method of Tondon Committee’s recommendations for fimancing working capital gap by bank loan was also recommended by chore committee:
(a) Method I (b) Method I & II
(c) Method II (d) Method II & III