Question

Cash working capital includes
O Creditors at purchase cost less
profit
O Fixed Assets less depreciation
O Debtors at sales
O Debtors at sales less profit​

Answer 1

Answer:

MCQ on Financial Management

1. "Shareholder wealth" in a firm is represented by:

a) the number of people employed in the firm.

b) the book value of the firm's assets less the book value of its liabilities

c) the amount of salary paid to its employees.

d) the market price per share of the firm's common stock.

2. The long-run objective of financial management is to:

a) maximize earnings per share.

b) maximize the value of the firm's common stock.

c) maximize return on investment.

d) maximize market share.

3. What are the earnings per share (EPS) for a company that earned Rs. 100,000 last year in

after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in retained

earning at the year end?

a) Rs. 100,000

b) Rs. 6.00

c) Rs. 0.50

d) Rs. 6.50

4. A(n) would be an example of a principal, while a(n) would be an example of

an agent.

a) shareholder; manager

b) manager; owner

c) accountant; bondholder

d) shareholder; bondholder

Explanation:

(c) short-term loans and advances and sundry debtors comprising amounts due to the factory on

account of sale of goods and services and advances towards tax payments”.

The term “working capital” is often referred to “circulating capital” which is frequently

used to denote those assets which are changed with relative speed from one form to another i.e.,

starting from cash, changing to raw materials, converting into work-in-progress and finished

products, sale of finished products and ending with realization of cash from debtors.

Working capital has been described as the “life blood of any business which is apt because

it constitutes a cyclically flowing stream through the business”.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital viz. quantitative and qualitative. Some people

also define the two concepts as gross concept and net concept. According to quantitative concept,

the amount of working capital refers to ‘total of current assets’. Current assets are considered to be

gross working capital in this concept.

The qualitative concept gives an idea regarding source of financing capital. According to

qualitative concept the amount of working capital refers to “excess of current assets over current

liabilities.”

L.J. Guthmann defined working capital as “the portion of a firm’s current assets which are

financed from long–term funds.”

The excess of current assets over current liabilities is termed as ‘Net working capital’. In

this concept “Net working capital” represents the amount of current assets which would remain if

all current liabilities were paid. Both the concepts of working capital have their own points of

importance. “If the objectives is to measure the size and extent to which current assets are being

used, ‘Gross concept’ is useful; whereas in evaluating the liquidity position of an undertaking ‘Net

concept’ becomes pertinent and preferable.

It is necessary to understand the meaning of current assets and current liabilities for

learning the meaning of working capital, which is explained below.

Current assets – It is rightly observed that “Current assets have a short life span. These types

of assets are engaged in current operation of a business and normally used for short– term

operations of the firm during an accounting period i.e. within twelve months. The two important

characteristics of such assets are,

(i) Short life span, and

(ii) Swift transformation into other form of assets.

Cash balance may be held idle for a week or two, account receivable may have a life span

of 30 to 60 days, and inventories may be held for 30 to 100 days.”

Fitzgerald defined current assets as, “cash and other assets which are expected to be

converted in to cash in the ordinary course of business within one year or within such longer period

as constitutes the normal operating cycle of a business.”

Current liabilities – The firm creates a Current Liability towards creditors (sellers) from

whom it has purchased raw materials on credit. This liability is also known as accounts payable and

shown in the balance sheet till the payment has been made to the creditors.