Test Bank for MGMT 12, Principles of Management 12th Edition By Chuck Williams

Principlesmofm ManagerialmFinance,m 12em (Gitman)
Chapterm 14m WorkingmCapitalmandm CurrentmAssetsmManagement

Learningm Goalm 1:m Understandm short-
termm financialm management,m netm workingm capital,mandmthemrelatedmtra
deoffmbetweenmprofitabilitym andmrisk.
1) Am firmm thatm ism unablem tom paym itsm billsm asm theym comem duem ism technicallym ins
olvent.mAnswer:m TRUE
Topic:mBasicsmofmShort-
TermmFinancialm ManagementmQuestionmStatus:m P
reviousmEdition

2) Short-
termm financialm managementm ism concernedm withm managementm ofm them firm'sm currentm assetsm
andmcurrentmliabilities.
Answer:m TRUE
Topic:mBasicsmofmShort-
TermmFinancialm ManagementmQuestionmStatus:m P
reviousmEdition

3) Them goalm ofm short-
termm financialm managementm ism tom managem eachm ofm them firm'sm currentm assetsmandm current
m liabilitiesm inm orderm tom achievem am balancem betweenm profitabilitym andm riskm thatmcontribute

smtomthemfirm'smvalue.
Answer:m TRUE
Topic:mBasicsmofmShort-
TermmFinancialm ManagementmQuestionmStatus:m P
reviousmEdition

4) Workingm capitalm representsm refersm tom am firm'sm longm termm ca
pital.mAnswer:m FALSE
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

5) Inm general,m them greaterm am firm'sm currentm assetsm relativem tom itsm short-
termm obligations,m them bettermablemitmwillm bemtompaymitsmbillsmasmtheymcomemdue.
Answer:m TRUE
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

6) Them morem predictablem am firm'sm cashm inflows,m them morem netm workingm capitalm itm will
m need.mAnswer:m FALSE

Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

7) Asm them ratiom ofm currentm assetsm tom totalm assetsm increases,m them firm'sm riskm inc
reases.mAnswer:m FALSE
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

8) Becausem firmsm arem unablem tom matchm cashm inflowsm tom outflowsm withm certainty,m mostm of
1

,mthemmneedmcurrentm liabilitiesmthatm morem thanmcovermoutflowsmform currentmassets.
Answer:m FALSE
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition




2

, 9) Toom muchm investmentm inm currentm assetsm reducesmfirmm profitability,m whereasm toom littlemi
nvestmentm inm currentm assetsm increasesm them riskm ofm notmbeingm ablem tom paym debtsm asm the
ym comemdue.
Answer:m TRUE
Topic:m Trade-
offmBetweenmProfitabilitymandmRiskmQuestionmStatu
s:m PreviousmEdition

10) Businessm riskm ism them riskm ofm beingm unablem tom makem them scheduledm fixedm financingm payme
ntsm onmdebtmandmpreferredmstock.
Answer:m FALSE
Topic:m BusinessmRisk
QuestionmStatus:m PreviousmEdition

11) Netm workingm capitalm canm bem definedm asm them portionm ofm them firm'sm currentm assetsm finance
dm withmlong-termm funds.
Answer:m TRUE
Topic:m NetmWorkingmCapitalmQu
estionmStatus:m PreviousmEdition

12) Am firmm ism saidm tom bem technicallym insolventm whenm itsm totalm assetsm ism lessm thanm itsm totalm li
abilitiesmandmstockholders'mequity.
Answer:m FALSE
Topic:mTechnicalmInsolvencymQue
stionmStatus:m PreviousmEdition

13) Anm increasem inm currentm assetsm increasesm netm workingm capital,m therebym reducingm them r
iskm ofmtechnicalminsolvency.
Answer:m TRUE
Topic:mTechnicalmInsolvencymQue
stionmStatus:m PreviousmEdition

14) Them effectm ofmam decreasem inmthem ratiom ofm currentmassetsm tom totalmassetsmandmthem effectmofm a
nmincreasem inm them ratiom ofm currentm liabilitiesm tom totalm assetsm arem increasesm inm them firm'sm pr
ofitsm and,mcorrespondingly,mitsmrisk.
Answer:m TRUE
Topic:m Trade-
offmBetweenmProfitabilitymandmRiskmQuestionmStatu
s:m PreviousmEdition

15) Netm workingm capitalm ism definedm as
A) am ratiom measurem ofm liquiditym bestm usedm inm cross-sectionalm analysis.
B) them portionm ofm them firm'sm assetsm financedm withm short-termm funds.
C) currentm liabilitiesm minusm currentm assets.
D) currentm assetsm minusm currentm liabiliti
es.mAnswer:m D
Topic:m NetmWorkingmCapitalmQu
estionmStatus:m PreviousmEdition




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, 16) Them portionm ofm am firm'sm currentm assetsm financedm withm long-termm fundsm maym bem called
A) workingm capital.
B) accountsm receivable.
C) netm workingm capital.
D) inventory.
mAnswer:m C

Topic:m NetmWorkingmCapitalmQu
estionmStatus:m PreviousmEdition

17) Inm workingm capitalm management,m riskm ism measuredm bym them probabilitym thatm am firmm willm becom
e
A) liquid.
B) technicallym insolvent.
C) unablem tom meetm long-termm obligations.
D) lessm profitable
.mAnswer:m B
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

18) Them conversionm ofm currentm assetsm fromm inventorym tom receivablesm tom cashm providesm themm
ofm cashm usedm tom paym them currentm liabilities,m whichm representsm a(n) ofm cash.
A) outflow;m inflow
B) use;m source
C) source;m use
D) inflow;m outflo
wmAnswer:m C
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

19) Them goalm ofm workingm capitalm managementm ism to
A) balancem currentm assetsm againstm currentm liabilities.
B) paym offm short-termm debts.
C) achievem am balancem betweenm riskm andm returnm inm orderm tom maximizem them firm'sm value.
D) achievem am balancem betweenm short-termm andm long-
termm assetsm som thatm theym addm tom themachievementmofm them firm'smoverallm goals.
Answer:m C
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition

20) Currentm liabilitiesm canm bem viewedm as
A) debtsm thatm maturem inm onem yearm orm less.
B) debtsm thatm maturem inm morem thanm onem year.
C) sourcesm ofm cashm inflows.
D) nonem ofm them abo
vemAnswer:m A
Topic:mWorkingmCapitalmManagementm
QuestionmStatus:m PreviousmEdition




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