Chapter 16: Working Capital Management Test

(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)

Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.

Multiple Choice: True/False

(16 Intro) Net working capital F S Answer: b EASY
1. Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

a. True
b. False

(16 Intro) Net working capital F S Answer: b EASY
2. Net working capital is defined as current assets divided by current liabilities.

a. True
b. False

(16 Intro) Days of working capital F S Answer: a EASY
3. Days of working capital is the amount of net operating working capital required per dollar of daily sales.

a. True
b. False

(16.2) Working capital management F S Answer: a EASY
4. Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

a. True
b. False

(16.2) Working capital financing F S Answer: b EASY
5. An increase in any current asset must be accompanied by an equal increase in some current liability.

a. True
b. False

(16.2) Permanent curr. oper. assets F S Answer: a EASY
6. The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

a. True
b. False

(16.2) Conservative fin. approach F S Answer: a EASY
7. A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

a. True
b. False

(16.2) Aggressive fin. approach F S Answer: a EASY
8. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an