Deck 12: Management of Working Capital

Question 1

Which of the following practical problems are associated with economic order quantity (EOQ)?

A) It is often difficult to determine ordering costs with sufficient accuracy
B) It is often difficult to determine stockholding costs with sufficient accuracy
C) Annual demand may not be so predictable
D) All of the above

Answer 1

D

Question 2

From the following statement of financial position extract of RiffRaff plc,calculate the working capital:
$$\begin{array} { l c } & £ 000 \\\text { Non-current assets } & 210 \\\text { Non-current liabilities } & \\10 \% \text { debentures } & 100 \\\text { Equity } & \\\quad \text { Share capital } & 90 \\\text { Retained earnings } & 60\end{array}$$

A) £110,000
B) £(40,000)
C) £40,000
D) £60,000

Answer 2

£40,000

Question 3

The Dingle company uses 12,000 units of dingits each year,and pays 75p each for them.The administration costs associated with each order is £175 and the shareholder costs are estimated at 20% per annum.Calculate the economic order quantity (EOQ).

A) 3672
B) 2050
C) 5292
D) 1184

Answer 3

C

Question 4

Which of the following is not an approach to dealing with liquidity problems?

A) Pay suppliers by check
B) Pay suppliers by bank transfer
C) Sell off surplus assets
D) Sell off inventory at low price

Question 5

High levels of working capital are associated with insolvency

Question 6

If two companies had the same amount of fixed assets and the same profit,the company with the lower amount of working capital would have a higher return on capital employed (ROCE)

Question 7

A company can limit the amount of credit allowed to customers in which of the following ways?

A) Impose a time limit for payment
B) Limit the amount of credit available for each customer
C) Estimate the maximum total receivable figure the company can afford to finance
D) All of the above

Question 8

Which of the following statements is correct?

A) Economic order quantity is the quantity at which the annual inventory holding cost is equal to the annual ordering cost
B) Economic order quantity is the quantity at which annual inventory holding cost has been maximized
C) Economic order quantity is the quantity at which annual inventory ordering costs is minimized
D) Economic order quantity is the amount at which inventory costs are offset by sales

Question 9

Working capital may be defined as:

A) Current assets + current liabilities = working capital
B) Long-term funds + non-current assets = working capital
C) Current assets + non-current assets = working capital
D) Long-term funds - non-current assets = working capital

Question 10

Which of the following statements is false?

A) Trade payables, if managed appropriately, can be a cost-free source of finance
B) An excessive delay in paying creditors is a good way to extend a cost-free source of finance
C) Deferment in the payment of taxes is one way of addressing liquidity problems
D) None of the above statements are false

Question 11

Which of the following is a limitation of Economic Order Quantity?

A) It is weak in assessing the appropriate order quantity
B) It fails to consider inventory holding costs
C) It does not take quantity discounts into account
D) It fails to consider ordering costs

Question 12

Economic order quantity means:

A) Ordering small quantities at frequent intervals
B) Ordering large quantities less frequently
C) Outsourcing inventory management
D) To balance inventory ordering costs and holding costs

Question 13

The outsourcing of the management of receivables is known as:

A) Factoring
B) Economic order quantity
C) Credit rating
D) Receivership

Question 14

There is no relationship between a companies turnover and their working capital

Question 15

One way of addressing the solvency problems associated with overtrading is to try and pay creditors more quickly

Question 16

Which of the following is normally associated with an attempt to address "overtrading"?

A) Reduce overdraft
B) Extend trade receivables
C) Delay payments to creditors
D) Increase inventory

Question 17

One of the risks associated with holding large amounts of inventory is:

A) Obliquity
B) Obeisance
C) Obsolescence
D) Obscurement

Question 18

Which of the following is not an appropriate means of assessing the credit worthiness of a customer?

A) Rely on personal judgment
B) Look at the customers annual reports and accounts
C) Assume the customer will pay
D) Use a credit rating agency

Question 19

If trade receivables is reduced,the amount of capital employed is reduced and profitability is increased

Question 20

It always makes sense to hold as much inventory as possible,"just in case" the inventory is needed and it is cost free

Question 21

A company buys goods on 2 months credit.Raw materials are converted into finished goods in approximately 1.5 months,and then typically sold 1 month later.Sales are on credit and customers typically take 1 month to pay for the goods.
What is the Cash cycle for the company?

A) 4.5 months
B) 1.5 months
C) 2.5 months
D) 0.5 months

Question 22

The Trial Balance of a company shows:

The Working Capital of the company is:

A) 1,000
B) 2,500
C) 12,000
D) -1,000

Question 23

A company has steady annual demand of 4,000 units.Ordering costs £250 per order.The holding cost is £8 per unit per year.
Using the Economic Order Quantity,what is the optimum order quantity for the company,and how many orders should be placed per year?
Formula: $$E O Q = \sqrt { \frac { 2 C _ { O } D } { C _ { H } } }$$

A) Order 4,000 units at a time, with a total of 1 order per year
B) Order 16 units at a time, with a total of 250 orders per year
C) Order 500 units at a time, with a total of 8 orders in the year
D) Impossible to calculate, since we do not know cost per unit

Question 24

The definition of "Working Capital" is:

A) Non-Current Assets - Non-Current Liabilities
B) Bank + Cash
C) Non-Current Assets + Current Assets - Current Liabilities
D) Current Assets - Current Liabilities

Question 25

A company currently uses an overdraft at 10% per annum.
A new credit controller is brought in,at a cost of £5,000 salary more than the previous person doing the job.After one year she claims to have saved the company money because she has reduced receivables from £50,000 to £20,000.
How much has she saved the company?

A) She has saved the company £25,000
B) She has saved the company £30,000
C) She has cost the company £2,000
D) She has cost the company £35,000