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FM C Working capital management

Written by Mahnoor Sheikh (ACCA)

ACCA · Financial Management · 8 questions

Name: ____________________   Date: ____________

  1. Inventory is held for 60 days, receivables are collected in 45 days and payables are paid in 40 days. What is the cash operating cycle?

    • A 25 days
    • B 145 days
    • C 65 days
    • D 85 days

  2. Which of these is a sign of overtrading?

    • A Very high liquidity ratios
    • B A fall in payables
    • C Falling revenue and high cash
    • D Rapid growth in revenue with falling liquidity and a rising overdraft

  3. A business takes a conservative approach to financing working capital. What does it do?

    • A Uses mainly short-term finance
    • B Pays no interest
    • C Uses more long-term finance, which is safer but costlier
    • D Uses no finance

  4. Annual cash needs are $1,000,000, the cost of each transfer is $50 and the interest rate is 5 percent. What is the Baumol transfer amount, to the nearest dollar?

    • A $10,000
    • B $44,721
    • C $100,000
    • D $20,000

  5. Which model sets upper and lower limits for cash balances when cash flows vary?

    • A The CAPM
    • B The Miller-Orr model
    • C The economic order quantity model
    • D The Baumol model

  6. Which of these is a way of speeding up the collection of receivables?

    • A Not following up overdue accounts
    • B Giving longer credit terms
    • C Offering an early settlement discount
    • D Removing credit checks

  7. A discount of 2 percent is offered for paying 30 days earlier. Which formula gives the annual cost of not taking it?

    • A 2/100 x 30
    • B (1 + 2/98) to the power of 365/30, less 1
    • C (1 + 2/100) to the power of 30/365
    • D 2 x 365/30

  8. Factoring is:

    • A Buying inventory
    • B Selling receivables to a finance company or handing it the collection of debts
    • C Paying suppliers early
    • D Issuing shares

Answer key

1. C, 2. D, 3. C, 4. B, 5. B, 6. C, 7. B, 8. B

  1. 60 + 45 - 40 = 65.

  2. The business is growing faster than its working capital can support.

  3. An aggressive policy uses more short-term finance.

  4. Square root of (2 x 50 x 1,000,000 / 0.05) = 44,721.

  5. Baumol assumes steady cash use.

  6. Discounts have a cost, which should be compared with the benefit.

  7. The discount is 2/98 of the amount paid, compounded over the number of periods in a year.

  8. It can speed up cash and reduce collection costs.