Principles of Managerial Finance, Brief Ed., 8e (Zutter/Smart)
Chapter 14 Working Capital and Current Assets Management
14.1 Net working capital fundamentals
1) Short-term financial management is concerned with management of a firm's current assets and
current liabilities to achieve a balance between profitability and risk.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
2) Firms are able to reduce financing costs or increase the funds available for expansion by
maximizing the amount of funds tied up in working capital.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
3) A long-term trend in U.S. companies is that ________.
A) firms are increasing their investments in current assets relative to total assets, and most of this
increase has occurred as firms increase their cash holdings
B) firms are increasing their investments in current assets relative to total assets, and most of this
increase has occurred as firms increase their inventory balances
C) firms are decreasing their investments in current assets relative to total assets, and most of this
decrease has occurred as firms decrease their cash holdings
D) firms are decreasing their investments in current assets relative to total assets, and most of
this decrease has occurred as firms decrease their inventory balances.
Answer: D
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Reflective Thinking
4) On average in recent years, U.S. firms have been increasing their cash balances relative to
total assets.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Reflective Thinking
1
Copyright © 2019 Pearson Education, Inc.
,5) Working capital refers to a firm's long-term capital.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
6) The more predictable a firm's cash inflows, the more net working capital it will need.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
7) As firms are unable to match cash inflows to outflows with certainty, most of them need
current liabilities.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
8) When current assets exceed current liabilities, a firm has negative net working capital.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
9) Net working capital can be defined as the portion of a firm's current assets financed with long-
term funds.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
2
Copyright © 2019 Pearson Education, Inc.
,10) A firm that is unable to pay its bills as they come due is said to be insolvent.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
11) In general, the greater a firm's current assets relative to its short-term obligations, the better
able it will be to pay its bills as they come due.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
12) As the ratio of current assets to total assets increases, a firm's risk increases.
Answer: FALSE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
13) Too much investment in current assets reduces firm's profitability, whereas too little
investment in current assets increases the risk of not being able to pay debts as they come due.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
14) A firm is said to be insolvent when its total assets is less than its total liabilities and
stockholders' equity.
Answer: FALSE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
3
Copyright © 2019 Pearson Education, Inc.
, 15) An increase in current assets increases net working capital, thereby reducing the risk of
insolvency.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
16) Assuming that the level of total assets remains unchanged, the effect of a decrease in the
ratio of current assets to total assets is an increase in a firm's risk of insolvency.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
17) The goal of working capital management is to ________.
A) achieve a balance between short-term and long-term liabilities so that they add to the
achievement of a firm's overall goals
B) achieve a balance between a firm's non-current assets and non-current liabilities
C) achieve a balance between profitability and risk that contributes positively to a firm's value
D) achieve a balance between short-term and long-term assets so that they add to the
achievement of a firm's overall goals
Answer: C
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
18) The purpose of managing current assets and current liabilities is to ________.
A) achieve a balance between short-term and long-term financing of a firm
B) achieve as low a level of current liabilities as possible
C) achieve a balance between profitability and risk that contributes to a firm's value
D) achieve as high a level of current liabilities as possible
Answer: C
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
4
Copyright © 2019 Pearson Education, Inc.
Chapter 14 Working Capital and Current Assets Management
14.1 Net working capital fundamentals
1) Short-term financial management is concerned with management of a firm's current assets and
current liabilities to achieve a balance between profitability and risk.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
2) Firms are able to reduce financing costs or increase the funds available for expansion by
maximizing the amount of funds tied up in working capital.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
3) A long-term trend in U.S. companies is that ________.
A) firms are increasing their investments in current assets relative to total assets, and most of this
increase has occurred as firms increase their cash holdings
B) firms are increasing their investments in current assets relative to total assets, and most of this
increase has occurred as firms increase their inventory balances
C) firms are decreasing their investments in current assets relative to total assets, and most of this
decrease has occurred as firms decrease their cash holdings
D) firms are decreasing their investments in current assets relative to total assets, and most of
this decrease has occurred as firms decrease their inventory balances.
Answer: D
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Reflective Thinking
4) On average in recent years, U.S. firms have been increasing their cash balances relative to
total assets.
Answer: TRUE
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Reflective Thinking
1
Copyright © 2019 Pearson Education, Inc.
,5) Working capital refers to a firm's long-term capital.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
6) The more predictable a firm's cash inflows, the more net working capital it will need.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
7) As firms are unable to match cash inflows to outflows with certainty, most of them need
current liabilities.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
8) When current assets exceed current liabilities, a firm has negative net working capital.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
9) Net working capital can be defined as the portion of a firm's current assets financed with long-
term funds.
Answer: FALSE
Diff: 1
Topic: Net Working Capital
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
2
Copyright © 2019 Pearson Education, Inc.
,10) A firm that is unable to pay its bills as they come due is said to be insolvent.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
11) In general, the greater a firm's current assets relative to its short-term obligations, the better
able it will be to pay its bills as they come due.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
12) As the ratio of current assets to total assets increases, a firm's risk increases.
Answer: FALSE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
13) Too much investment in current assets reduces firm's profitability, whereas too little
investment in current assets increases the risk of not being able to pay debts as they come due.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
14) A firm is said to be insolvent when its total assets is less than its total liabilities and
stockholders' equity.
Answer: FALSE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
3
Copyright © 2019 Pearson Education, Inc.
, 15) An increase in current assets increases net working capital, thereby reducing the risk of
insolvency.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
16) Assuming that the level of total assets remains unchanged, the effect of a decrease in the
ratio of current assets to total assets is an increase in a firm's risk of insolvency.
Answer: TRUE
Diff: 1
Topic: Trade-Off between Profitability and Risk
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
17) The goal of working capital management is to ________.
A) achieve a balance between short-term and long-term liabilities so that they add to the
achievement of a firm's overall goals
B) achieve a balance between a firm's non-current assets and non-current liabilities
C) achieve a balance between profitability and risk that contributes positively to a firm's value
D) achieve a balance between short-term and long-term assets so that they add to the
achievement of a firm's overall goals
Answer: C
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
18) The purpose of managing current assets and current liabilities is to ________.
A) achieve a balance between short-term and long-term financing of a firm
B) achieve as low a level of current liabilities as possible
C) achieve a balance between profitability and risk that contributes to a firm's value
D) achieve as high a level of current liabilities as possible
Answer: C
Diff: 1
Topic: Working Capital Management
Learning Obj.: LG 1
Learning Outcome: F-24
AACSB: Analytical Thinking
4
Copyright © 2019 Pearson Education, Inc.
