1. The "Operating Cycle" of a manufacturing firm represents the time gap between:
Ordering raw material and Receiving raw material.
Sale of goods and Collection of cash.
Production start and Production end.
Acquisition of resources (raw material) and Realization of cash from sales.
Explanation:
Operating Cycle = Inventory Period + Accounts Receivable Period. It is the duration from buying raw materials to collecting cash from customers.
2. Under Method I of the Tandon Committee for assessing Maximum Permissible Bank Finance (MPBF), the borrower is required to contribute:
25% of Long Term Loans.
25% of Working Capital Gap.
25% of Total Current Assets.
10% of Total Current Assets.
Explanation:
In Method I, MPBF = 0.75 * (Total Current Assets - Current Liabilities). This implies the borrower finances 25% of the Working Capital Gap (CA-CL) from long-term sources.
3. "Net Working Capital" refers to:
Current Assets minus Current Liabilities.
Fixed Assets minus Long Term Liabilities.
Total Current Assets.
Total Current Liabilities.
Explanation:
Gross Working Capital is Total Current Assets. Net Working Capital is the difference between Current Assets and Current Liabilities, representing the liquidity cushion.
4. Which of the following is a "Spontaneous Source" of working capital financing?
Public Deposit.
Trade Credit (Creditors).
Debentures.
Bank Overdraft.
Explanation:
Spontaneous sources arise naturally from day-to-day business operations (like buying goods on credit creates accounts payable). They expand automatically as sales expand.
5. If Current Assets = ?200 Lakhs and Current Liabilities = ?200 Lakhs, then:
The firm is bankrupt.
Gross Working Capital is Zero.
Net Working Capital is Zero.
Net Working Capital is ?400 Lakhs.
Explanation:
Net Working Capital = CA - CL. If CA = CL, Net Working Capital is zero. This implies no long-term funds are used to finance current assets.
6. Commercial Paper (CP) is an unsecured money market instrument issued by corporates to raise:
Long-term capital.
Foreign Equity.
Short-term working capital.
Secured loans.
Explanation:
CPs are used by highly rated corporates to meet short-term working capital requirements at rates typically lower than bank interest rates.
7. Tandon Committee Method II for MPBF requires a minimum Current Ratio of:
Explanation:
Method II ensures that the borrower finances 25% of Total Current Assets from long-term sources, resulting in a Current Ratio of 1.33:1.
8. Calculate the Operating Cycle if: Inventory Holding Period = 60 days, Receivables Collection Period = 45 days, Creditors Payment Period = 30 days.
105 Days
75 Days
135 Days
15 Days
Explanation:
Gross Operating Cycle = Inventory Period + Receivables Period = 60 + 45 = 105 Days. (Note: Net Operating Cycle would be 105 - 30 = 75 days. Usually "Operating Cycle" implies Gross unless specified).
9. A "Cash Budget" helps management to:
Determine Tax Liability.
Calculate Depreciation.
Calculate Net Profit.
Anticipate cash shortages and surpluses to plan borrowing or investment.
Explanation:
It is a forecasting tool that estimates cash inflows and outflows, ensuring the firm has enough liquidity to meet obligations.
10. A very high Current Ratio may indicate:
Low liquidity.
Idle funds or excessive inventory (Stockpiling).
High efficiency.
Insolvency.
Explanation:
While a high ratio shows safety, too high means cash is not being invested or inventory is not being sold, indicating poor asset management.
11. Under the Chore Committee recommendations, MPBF is calculated as:
Similar to Tandon Method I.
Similar to Tandon Method II.
75% of Gross Working Capital.
Total Current Assets - Total Current Liabilities.
Explanation:
The Chore Committee reinforced the adoption of Tandon Method II: MPBF = (Total Current Assets * 0.75) - Current Liabilities (excluding bank borrowings). This ensures a higher current ratio.
12. Negative Net Working Capital occurs when:
Current Assets > Current Liabilities.
Current Liabilities > Current Assets.
Sales are declining.
Fixed Assets > Long Term Liabilities.
Explanation:
This indicates a liquidity crisis where short-term obligations exceed short-term assets. However, in some sectors like retail (supermarkets), this might be a strategy (using supplier credit to fund inventory).
13. Factoring converts Credit Sales into:
Immediate Cash.
Long-term Debt.
Bad Debts.
Inventory.
Explanation:
Factoring allows a firm to sell its accounts receivable (invoices) to a Factor for immediate cash (up to 80-90%), improving liquidity.
14. The "Baumol Model" of Cash Management is similar to which Inventory Management model?
FSN Analysis.
EOQ (Economic Order Quantity).
ABC Analysis.
JIT (Just In Time).
Explanation:
The Baumol Model balances the "Ordering Cost" (Transaction cost of selling securities) against the "Carrying Cost" (Opportunity cost of holding cash) to find the optimal cash balance, just like EOQ.
15. Which cost is associated with holding inventory?
Carrying Cost (Storage, Insurance, Obsolescence).
Stockout Cost.
Setup Cost.
Ordering Cost.
Explanation:
Carrying costs are the costs of holding inventory in the warehouse. Ordering costs are associated with placing orders. Stockout costs arise when inventory is exhausted.
16. The "Just-In-Time" (JIT) inventory system aims to:
Delay production.
Reduce inventory carrying costs to near zero by receiving goods only when needed.
Maximize inventory levels.
Increase warehouse size.
Explanation:
JIT is a lean manufacturing strategy. By eliminating idle stock, it minimizes storage, insurance, and obsolescence costs, though it increases the risk of stockouts.
17. The Nayak Committee recommended that for SSI units with working capital limits up to ?5 Crore, the bank should finance a minimum of:
80% of the gross working capital.
25% of the projected annual turnover.
20% of the projected annual turnover.
10% of the projected turnover.
Explanation:
Based on a working capital cycle of 3 months (25% of year), the requirement is 25% of turnover. The promoter brings 5%, and the bank provides 20% as a minimum limit.
18. How does opening a Letter of Credit (LC) for raw material purchase affect the borrower's Working Capital?
It reduces the Current Ratio immediately.
It increases the immediate cash outflow.
It is treated as a Term Loan.
It defers the cash outflow, effectively providing a source of working capital finance.
Explanation:
An LC (especially Usance LC) allows the buyer to receive goods now and pay later. This creates "Sundry Creditors," which is a source of spontaneous working capital financing.
19. The "Cash Conversion Cycle" (CCC) is calculated as:
Inventory Period - Receivables Period + Payables Period.
Sales - Cost of Goods Sold.
Inventory Period + Receivables Period + Payables Period.
Inventory Period + Receivables Period - Payables Period.
Explanation:
CCC measures the time between paying for raw materials and receiving cash from sales. A shorter cycle is better for liquidity.
20. Treasury Bills are instruments of the money market issued by:
Corporates.
Government of India.
Commercial Banks.
State Governments.
Explanation:
T-Bills are short-term sovereign debt instruments issued by the Central Government (via RBI) to meet short-term liquidity mismatches. They are risk-free.
21. A "Conservative" Working Capital Financing Policy involves:
Financing all fixed assets and ALL current assets (Permanent + Fluctuating) with Long-Term funds.
Financing all current assets with short-term debt.
Zero working capital.
Financing all fixed assets and a part of permanent current assets with long-term funds.
Explanation:
A conservative policy minimizes risk by using safe long-term funds for everything, even temporary needs. This increases safety (high liquidity) but reduces profitability (higher cost of long-term funds).