FIN3702
EXAM PACK
,FIN3702
WORKING CAPITAL MANAGEMENT- MAY/JUNE
EXAM ANSWERS
SECTION A: MULTIPLE-CHOICE QUESTIONS [30 MARKS]
Question 1
Answer: 3 — paying accounts payable as soon as possible.
Paying suppliers early uses cash sooner. To minimise operating cash requirements, a
firm should normally delay payment as long as possible without damaging its credit
standing.
Question 2
Answer: 5 — a, b and e.
Efficient cash management involves:
taking advantage of cash discounts;
maximising cash turnover; and
delaying cash payments without damaging creditworthiness.
Increasing inventory levels is not an objective of efficient cash management, and the
wording "any technique" for collecting receivables is too broad.
Question 3
Answer: 3 — 8.00%.
Alternative 1 is a discount loan with a compensating balance, making its effective cost
higher than the stated 7%.
,Alternative 2:
Effective rate=8%\text{Effective rate}=8\%
Therefore, the cheaper alternative is Alternative 2, giving an effective annual rate of
8.00%.
Question 4
Answer: 3 — a, c and e.
a is correct: Net working capital = Current Assets − Current Liabilities.
c is correct: lower liquidity makes it more difficult to meet current obligations.
e is correct: net working capital helps assess technical solvency.
Statement b is incorrect because net working capital represents the excess of current
assets over current liabilities, not current assets financed by short-term funds.
Question 5
Answer: 3 — b and c.
The conservative approach has:
lower risk;
lower return; and
higher financing cost.
Therefore, statements b and c are the incorrect statements as required by the question.
Question 6
Answer: 4 — None of the above.
The cash conversion cycle is:
, CCC=DIO+DSO−DPOCCC=DIO+DSO-DPO
Maintaining receivables while sales decrease increases the collection period.
Buying more raw materials increases inventory.
Offering customers longer payment periods increases receivables.
Therefore, none of the listed changes reduces the CCC.
Question 7
Answer: 5 — None of the above.
Long-term solvency is normally assessed using ratios such as the debt ratio, debt-to-
equity ratio or times-interest-earned ratio. None of the four listed ratios directly
measures long-term solvency.
Question 8
Answer: 5 — a and b.
Depreciation is a non-cash expense and is treated as a source of funds in funds-
flow analysis.
Depreciation reduces accounting profit and therefore reduces taxable income.
Depreciation itself does not constitute a cash payment, although its tax effect can
affect cash flow.
EBIT does not exclude depreciation; depreciation is deducted in arriving at EBIT.
Question 9
Answer: 3 — Net income after taxes and non-cash charges.
Operating cash flow is calculated by starting with after-tax income and adding back non-
cash expenses such as depreciation.
Question 10
EXAM PACK
,FIN3702
WORKING CAPITAL MANAGEMENT- MAY/JUNE
EXAM ANSWERS
SECTION A: MULTIPLE-CHOICE QUESTIONS [30 MARKS]
Question 1
Answer: 3 — paying accounts payable as soon as possible.
Paying suppliers early uses cash sooner. To minimise operating cash requirements, a
firm should normally delay payment as long as possible without damaging its credit
standing.
Question 2
Answer: 5 — a, b and e.
Efficient cash management involves:
taking advantage of cash discounts;
maximising cash turnover; and
delaying cash payments without damaging creditworthiness.
Increasing inventory levels is not an objective of efficient cash management, and the
wording "any technique" for collecting receivables is too broad.
Question 3
Answer: 3 — 8.00%.
Alternative 1 is a discount loan with a compensating balance, making its effective cost
higher than the stated 7%.
,Alternative 2:
Effective rate=8%\text{Effective rate}=8\%
Therefore, the cheaper alternative is Alternative 2, giving an effective annual rate of
8.00%.
Question 4
Answer: 3 — a, c and e.
a is correct: Net working capital = Current Assets − Current Liabilities.
c is correct: lower liquidity makes it more difficult to meet current obligations.
e is correct: net working capital helps assess technical solvency.
Statement b is incorrect because net working capital represents the excess of current
assets over current liabilities, not current assets financed by short-term funds.
Question 5
Answer: 3 — b and c.
The conservative approach has:
lower risk;
lower return; and
higher financing cost.
Therefore, statements b and c are the incorrect statements as required by the question.
Question 6
Answer: 4 — None of the above.
The cash conversion cycle is:
, CCC=DIO+DSO−DPOCCC=DIO+DSO-DPO
Maintaining receivables while sales decrease increases the collection period.
Buying more raw materials increases inventory.
Offering customers longer payment periods increases receivables.
Therefore, none of the listed changes reduces the CCC.
Question 7
Answer: 5 — None of the above.
Long-term solvency is normally assessed using ratios such as the debt ratio, debt-to-
equity ratio or times-interest-earned ratio. None of the four listed ratios directly
measures long-term solvency.
Question 8
Answer: 5 — a and b.
Depreciation is a non-cash expense and is treated as a source of funds in funds-
flow analysis.
Depreciation reduces accounting profit and therefore reduces taxable income.
Depreciation itself does not constitute a cash payment, although its tax effect can
affect cash flow.
EBIT does not exclude depreciation; depreciation is deducted in arriving at EBIT.
Question 9
Answer: 3 — Net income after taxes and non-cash charges.
Operating cash flow is calculated by starting with after-tax income and adding back non-
cash expenses such as depreciation.
Question 10
