Deck 21: Management of Working Capital

Question 1

Aziz Ltd made sales of £2 344000 in the 20X1 financial year, of which 42% were on credit. The average debtor's figure over that period was £1 455 630. What was the debtor's collection period in months (to one decimal place)?

A) 0.91 months
B) 1.78 months
C) 1.58 months
D) 0.42 months

Answer 1

B

Question 2

A decision to increase the credit given to customers is kely to increase the level of receivables and increase in the volume of sales.

Answer 2

True

Question 3

The following information is available for Katherine Ng Products for the 20X1 financial year: £ Average trade creditors 98 400 Purchases 723 675 Cost of sales 662 450 Turnover 847 220 Average stock 86 240 What is the creditors' turnover period in days (to one decimal place)?

A) 50.2 days
B) 34.2 days
C) 49.6 days
D) 45.7 days

Answer 3

C

Question 4

Working capital is the difference between current assets and current liabilities.

Question 5

The following extracts come from Ben's balance sheets at 31 May 20X1 and 20X2 are as follows: 20X2 20X1 £ £ Stock 24000 21000 Debtors 20 500 19 500 Cash at bank 1 500 3000 46000 43 500 Creditors: due within one year (26 250) (27 900) Net current assets 19 750 15 600 Three of the following six statements are correct: Between 20X1 and 20X2: 1. There has been a decrease in working capital. 2. There has been an increase in working capital. 3. There has been a cash outflow in respect of debtors. 4. There has been a cash inflow in respect of debtors. 5. There has been a cash inflow in respect of stock. 6. There has been a cash outflow in respect of stock. Which three statements are correct?

A) 2, 3 and 5
B) 2, 3 and 6
C) 1, 4 and 5
D) 1, 4 and 6

Question 6

In the context of working capital the opportunity cost is represented by the investment into current assets

Question 7

Which one of the following transactions increases a business's working capital?

A) Depreciation of £2000 is charged to profit and loss account
B) A fixed asset is sold for cash
C) A debtor pays an amount due of £6000
D) The owner draws £1000 for personal use

Question 8

Current assets represent assets held in the short term to finance current liabilities.

Question 9

The nature of working capital will vary depending upon the needs of the business.

Question 10

Overtrading is when the business is trading at a level that cannot sustain profitability.

Question 11

Grunweld Ltd extract of financial information for the 20X1 is as follows: £ Purchases 772 660 Expenses 115 500 Cost of sales 800000 Opening stock 75 600 Closing stock 85 440 What is the company's stock turnover ratio in days (to one decimal place)?

A) 36.7 days
B) 45.9 days
C) 34.6 days
D) 56.2 days

Question 12

A negative working capital means that current assets are fully financing current liabilities.

Question 13

The following is an extract from Colin's balance sheets at 30 June 20X1 and 20X2: 20X4 20X3 £ £ Stock 21 500 23 200 Debtors 26000 24 500 Cash at bank 8000 2 300 55 500 50000 Creditors: due within one year (17 200) (19 400) Net current assets 38 300 30 600 Which one of the following statements is correct? During the financial year ended 30 June 20X4

A) There were cash outflows in respect of debtors and creditors, and there was a cash inflow in respect of stock
B) There was a cash outflow in respect of debtors, and there were cash inflows in respect of creditors and stock
C) There was a cash inflow in respect of debtors, and there were cash outflows in respect of stock and creditors
D) There were cash inflows in respect of debtors and creditors, and a cash outflow in respect of stock

Question 14

The maintenance of a cash balance is an investment by the company.

Question 15

Barbara buys a fixed asset for £7000 for use in her business. She pays for it out of the business bank account. Which one of the following statements is correct?

A) Net current assets decreases by £7000
B) The business's capital employed increases by £7000
C) Working Capital increases by £7000
D) The business's capital employed decreases by £6850

Question 16

Ewan Ltd makes an operating profit of £37000 in its financial year ended 31 December 20X1, after charging £15 800 in depreciation for the year The business's net change in working capital (stock, debtors and creditors) was a cash outflow of £3500. What was the net cash inflow from operating activities for the year ended 31 December 20X1?

A) £39 300
B) £46 100
C) £34 400
D) £26 900

Question 17

The following is an extract from Ian's balance sheets at 31 December 20X1 and 20X2 shows the following information about net current assets: 20X2 20X1 £ £ Stock 18 860 15 200 Debtors 21 404 22 616 Cash at bank 6 620 7 940 46 884 45 756 Creditors: due within one year (19 977) (20 422) Net current assets 26 907 25 334 Which one of the following statements is correct?

A) There has been a cash inflow in respect of debtors
B) There has been a cash inflow in respect of creditors
C) Working capital has decreased
D) There has been a cash inflow in respect of stock

Question 18

The working capital cycle is the period of time from the investment into current assets to the inflow of cash derived from the investment.

Question 19

Which one of the following transactions decreases a business's working capital?

A) A fixed asset is sold for cash.
B) A creditor is paid an amount due of £3000.
C) The owner draws £1000 for personal use
D) A loss is made for the year

Question 20

Which of the following statements is correct? Stock turnover ratio in months is calculated as:

A) Average stock x 12 Cost of sales
B) Cost of sales x 12 Average stock
C) Sales x 12 Average stock
D) Operating profit x 12 Average stock