18 Questions
What is the trade-off that companies face when determining the appropriate level of working capital?
Between liquidity and profitability
What is the primary reason why companies invest in accounts receivable?
To offer credit to customers and increase sales
Which of the following is a component of working capital that managers and financial analysts usually focus on?
Accounts Payable
What is the term used to describe the amount of time it takes to sell inventory, collect accounts receivable, and pay accounts payable?
Cash Conversion Cycle
What is the primary purpose of accounts receivable?
To collect cash from customers
What is the concept that defines an asset as a right that has the potential to produce economic benefits?
Conceptual Framework
What is the primary characteristic of the FIFO cost method?
The first costs into inventory are the first costs assigned to cost of sales.
Under the LIFO cost method, which costs are assigned to cost of sales?
The latest costs into inventory.
What is the value of the ending inventory using the FIFO cost method?
$1,058.00
What is the total cost of sales using the FIFO cost method?
$6,763.00
What is the primary difference between the FIFO and LIFO cost methods?
The FIFO method values ending inventory based on the latest costs, while the LIFO method values ending inventory based on the oldest costs.
What is the purpose of the FIFO and LIFO cost methods?
To value inventory and calculate cost of sales.
In a period of rising prices, which inventory cost method would result in the highest Cost of Goods Sold (COGS)?
FIFO
What is the primary purpose of the current ratio in financial analysis?
To assess a company's short-term liquidity
In a period of falling prices, which inventory cost method would result in the lowest Ending Inventory (EI)?
FIFO
What is the main benefit of accounting information in decision making?
To provide information for decision making
What is the impact of a high current debt on a company's creditworthiness?
It increases the probability of default
Which of the following is NOT a benefit of using the current ratio in financial analysis?
It provides insight into a company's profitability
Test your understanding of working capital management, including the trade-off between liquidity and profitability, and the components of working capital such as accounts receivable, inventory, and accounts payable. Learn how companies invest in and finance working capital.
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