Deck 19: The Management of Working Capital

Question 1

Which of the following statements is incorrect? Factoring:

A)Can improve working capital management by speeding up the collection of cash
B)Requires payment of a handling charge to the factor
C)Is a service to business provided by the government
D)Is useful to those businesses that supply goods on credit

Answer 1

Is a service to business provided by the government

Question 2

The management accountant of XP Supplies plc has worked out that the demand for the period for inventory item ZZ776 is 800 units.The holding cost per unit is £1.80 and the order cost is £10 per order.What is the Economic Order Quantity (to the nearest whole unit)?

A)67 units
B)17 units
C)94 units
D)9 units

Answer 2

94 units

Question 3

Which of the following is an example of a holding cost?

A)Inventory storage cost
B)Cost of ordering new inventory
C)Cost of returning inventory that is surplus to requirements
D)Office rental cost

Answer 3

Inventory storage cost

Question 4

Which of the following statements is correct? Factoring can assist businesses in the management of their

A)Trade receivables
B)Inventory
C)Trade payables
D)Long-term borrowings

Question 5

Which of the following is a possible consequence of a business having too high a level of inventory?

A)Trade payables are likely to be too low
B)Too much cash is released into the working capital cycle
C)Customers may go elsewhere
D)If inventory is perishable, it may reach the end of its shelf life before it can be sold.

Question 6

Which of the following statements is correct? Just-in-Time inventory management:

A)Aims to keep inventory levels high so that it can be supplied very quickly to the production process
B)Results in high levels of holding costs
C)Results in high levels of top quality finished goods
D)Aims to completely eliminate waste in production

Question 7

Which of the following describes working capital? Working capital is:

A)The start-up capital raised by a sole trader before he gives up his full-time employment to start in business.
B)The financing required for day-to-day running of a business.
C)The start-up capital provided in the form of loans and gifts from friends and relatives.
D)The financing invested in the long-term future of the business.

Question 8

Last year Spiller Beamish plc incurred total costs of £250 in placing 10 orders for a product.This year the management accountant would like to use the EOQ model to see if the product should be ordered more, or less, frequently.Holding costs for the product are £3 per unit, and demand for the product for the period is estimated at 7000 units.What is the Economic Order Quantity (to the nearest whole unit), assuming that the cost of placing one order is unchanged from the previous year?

A)342 units
B)1080 units
C)242 units
D)512 units

Question 9

Which of the following is a significant drawback of the Economic Order Quantity model?

A)It may not be realistic to assume that all holding costs are constant
B)It increases the length of the working capital cycle
C)It tends to result in an inventory level that is unrealistically high
D)It results in too many orders being placed

Question 10

Azee Products Limited offers 30-day credit terms to its customers.An age analysis of the company's receivables at 31 May 20X6 shows the following (with comparative figures for 31 May 20X5) along with the percentage of receivables in each category): Two statements have been made by the company's sales director about this age analysis:
A Credit control has generally improved over the year since May 20X5
B The position in respect of balances outstanding for between 31 and 60 days has improved since May 20X5
Which of these statements are correct?

A)Neither
B)Both
C)A only
D)B only

Question 11

The management accountant of Xyleron Phospher plc has worked out that the demand for the period for inventory item X2427 is 1400 units.The holding cost per unit is £6.50 and the order cost is £16 per order.What is the Economic Order Quantity (to the nearest whole unit)?

A)42 units
B)59 units
C)270 units
D)83 units

Question 12

Renbo Illuminati Ltd uses the EOQ to determine the optimal size of inventory orders.The following information has been established in respect of inventory line AB22:
A.Demand for the item in the period: 600 units
B. Cost per order: £6
C. Time required to fulfil orders on average: 5 days
D. Holding cost per unit: £4
Which of the above items of information are required in order to calculate the Economic Order Quantity (EOQ)?

A)ABD
B)BCD
C)ABC
D)ACD

Question 13

Which of the following is not an element of working capital?

A)Trade receivables
B)Trade payables
C)Equity capital
D)Inventory

Question 14

Sara's business lends £10 000 to one of its customers at an annual interest rate of 6%. Which two of the following statements are correct?
A. The annual receipt of interest increases cash.
B. The loan of £10 000 decreases cash in the business.
C. The loan of £10 000 has no effect on the working capital of the business.
D. Capital is decreased by £10 000 when the loan is made.

A)B and C.
B)C and D.
C)A and D.
D)A and B.

Question 15

Which of the following is an element of working capital?

A)Long-term borrowings
B)Trade payables
C)Share capital
D)Preference share capital

Question 16

Which of the following is an element of working capital?

A)Equity capital
B)Non-current assets
C)Inventory
D)Expenses

Question 17

Which of the following statements is correct? The operating cycle is calculated as:

A)The average inventory turnover period - the average trade payables period - the average trade receivables period
B)The average inventory turnover period + the average trade receivables period - the average trade payables period
C)The average trade receivables period + the average trade payables period - the average inventory period
D)The average trade receivables period + the average trade receivables period + the average trade payables period

Question 18

The management accountant of Prince & Porter plc has worked out that the demand for the period for inventory item BB774 is 900 units.The holding cost per unit is £3.75 and the order cost is £10 per order.What is the Economic Order Quantity (to the nearest whole unit)?

A)26 units
B)35 units
C)69 units
D)49 units

Question 19

Which of the following statements is correct? The length of a business's operating cycle is the time that elapses between:

A)Investment in inventory and the recording of sales on credit
B)Acquisition of non-current assets and the first receipts of cash generated from the use of the non-current assets in the business
C)Acquisition of inventory and the receipt of cash for its eventual sale
D)Initial investment in the business and the first receipts of cash from trading

Question 20

Suki buys a non-current asset for £6850 for use in her business.She pays for it out of the business bank account.Which one of the following statements is correct?

A)The business's capital increases by £6850.
B)Working capital decreases by £6850.
C)Working capital increases by £6850.
D)The business's capital decreases by £6850.

Question 21

The financial controller of Beauville Designs plc has calculated the following ratios for the company's financial year ended 31 March 20X4: Average inventory turnover period: 82.4 days
Average trade receivables turnover period: 54.3 days
Average trade payables turnover period: 73.7 days
What is the length of the company's operating cycle?

A)210.4 days
B)45.6 days
C)101.8 days
D)63.0 days

Question 22

The financial controller of James & Stratton Limited has calculated the following ratios for the company's financial year ended 31 December 20X9: Average inventory turnover period: 36.4 days
Average trade receivables turnover period: 42.7 days
Average trade payables turnover period: 56.4 days
What is the length of the company's operating cycle?

A)22.7 days
B)135.5 days
C)62.7 days
D)50.1 days

Question 23

The operating cycle for Fiennes Welbart plc for the year ended 31 May 20X7 was 117.3 days.The average inventory turnover period for the year was 92.7 days and the average trades receivables turnover period for the year was 57.6 days.What was the average trade payables turnover period for the year?

A)82.2 days
B)Insufficient information available
C)33 days
D)152.4 days

Question 24

Which of the following statements is correct? The operating cycle is calculated as:

A)The average trade receivables period + the average trade receivables period + the average trade payables period
B)The average trade receivables period + the average trade payables period - the average inventory period
C)The average inventory turnover period - the average trade payables period - the average trade receivables period
D)The average inventory turnover period + the average trade receivables period - the average trade payables period

Question 25

The operating cycle for Desert Filings Ltd was 107.6 days in the year ended 31 December 20X4, compared with 102.7 days in the previous year.Which of the following statements are correct? A The operating cycle has improved in the year ended 31 December 20X4 compared with the previous year
B A longer operating cycle indicates that inventory is being held, on average, for a longer period.

A)Both of them
B)A only
C)B only
D)Neither of them