Chapter 27: Working Capital Management (JAIIB – Paper 3)
1. What is the primary objective of working capital management?
A. Maximizing long-term investments
B. Minimizing shareholder equity
C. Ensuring liquidity while optimizing profitability
D. Avoiding short-term borrowings completely
Working capital management aims to maintain a balance between liquidity and profitability to ensure smooth business operations.
2. A company has a working capital cycle of 60 days. If it takes 20 days to convert raw materials to finished goods and 30 days to sell them, how many days are the receivables outstanding?
A. 10 days
B. 10 days
C. 20 days
D. 30 days
Working Capital Cycle = Inventory Period + Receivable Period - Payable Period. Here, Receivable Period = 60 - 20 - 30 = 10 days.
3. Which of the following is considered a highly liquid marketable security?
A. Land
B. Machinery
C. Accounts Receivable
D. Treasury Bills
Treasury bills are highly liquid and can be quickly converted into cash, unlike fixed assets or receivables.
4. Accruals in working capital management represent:
A. Expenses incurred but not yet paid
B. Cash on hand
C. Outstanding trade receivables
D. Inventory purchased on credit
Accruals are liabilities for expenses that have been incurred but not yet paid, such as salaries or utilities.
5. A supplier allows a company a credit period of 45 days. The company can utilize this trade credit to:
A. Increase long-term borrowing
B. Delay cash outflows and optimize liquidity
C. Reduce inventory levels permanently
D. Pay off all current liabilities immediately
Trade credit allows the company to defer payment to suppliers, helping maintain liquidity without borrowing.
6. Which of the following best describes the working capital cycle?
A. The process of acquiring long-term funds
B. The cycle of debt repayment to banks
C. The time taken to convert current assets into cash
D. The period of fixed asset depreciation
The working capital cycle measures how efficiently a company converts its current assets into cash.
7. Which of the following actions will **reduce the working capital requirement** of a company?
A. Increasing inventory levels
B. Extending credit to customers
C. Reducing supplier credit period
D. Faster collection of receivables
Faster collection of receivables improves cash flow and reduces the need for working capital.
8. Cash management in working capital involves:
A. Maintaining optimum cash balance for operations
B. Investing all cash in long-term assets
C. Avoiding short-term borrowings entirely
D. Ignoring liquidity requirements
Cash management ensures sufficient liquidity to meet day-to-day operational needs while minimizing idle cash.
9. What is the primary objective of providing working capital advances by commercial banks?
A. Financing long-term investments
B. Supporting short-term operational needs of borrowers
C. Providing equity capital
D. Funding only import transactions
Working capital advances are meant to help borrowers meet day-to-day operational expenses like raw materials, salaries, and other short-term needs.
10. In the Cash Budget Method of lending, bank finance is determined based on:
A. Past year's profit only
B. Fixed asset value
C. Borrower’s equity contribution only
D. Expected cash inflows and outflows of the borrower
In the Cash Budget Method, banks assess the borrower's projected receipts and payments to determine the working capital requirement.
11. Which of the following is a key regulatory guideline for bank finance for working capital?
A. Basel III liquidity ratio only
B. Foreign exchange limits
C. RBI’s prudential norms on working capital advances
D. Income Tax limits on cash credit
RBI prescribes prudential norms for working capital advances including maximum permissible limits, security, and monitoring procedures.
12. A company projects monthly receipts of ₹12 lakh and payments of ₹8 lakh. If it has ₹1 lakh cash in hand, what is the bank finance required under the Cash Budget Method?
A. ₹3 lakh
B. ₹4 lakh
C. ₹5 lakh
D. ₹2 lakh
Bank finance = Payments - Receipts - Cash in hand = 8 - 12 - 1 = 3 lakh (adjusted for negative net cash, finance required is ₹3 lakh).
13. Which of the following methods is commonly used by banks to regulate and monitor working capital finance?
A. Equity participation
B. Maximum Permissible Bank Finance (MPBF) method
C. Long-term lending
D. Issue of debentures
The MPBF method helps banks determine the maximum amount they can lend for working capital based on current assets and liabilities of the borrower.
14. Which of the following is a **primary security** commonly taken by banks for working capital advances?
A. Personal guarantee of the promoter
B. Hypothecation of land
C. Bank guarantee from another bank
D. Hypothecation of current assets (stocks, receivables)
Banks usually take hypothecation of current assets like stock and receivables as primary security for working capital loans.
15. Which of the following statements about regulation of bank finance is correct?
A. Banks must ensure advances are within prudential limits and adequately secured
B. Banks can give unlimited finance if the borrower is a large company
C. No monitoring is required after sanctioning working capital
D. Banks are not concerned with the borrower’s cash flow
Regulation of bank finance requires banks to lend within prescribed limits, ensure proper security, and continuously monitor working capital utilization.
16. Public deposits accepted by companies are primarily used for:
A. Long-term fixed asset purchase only
B. Equity financing
C. Meeting short-term working capital requirements
D. Investment in government securities only
Public deposits are a source of short-term funds for companies, often used to finance working capital or other temporary needs.
17. Inter-Corporate Deposits (ICDs) are generally:
A. Provided by banks to companies
B. Short-term loans from one company to another
C. Long-term equity investments
D. Government-sponsored grants
ICDs are short-term unsecured loans given by one company to another to meet temporary fund requirements.
18. Which of the following is a key risk associated with accepting public deposits?
A. Increase in equity capital
B. Mandatory RBI refinance
C. Lower working capital utilization
D. Default risk and regulatory compliance
Public deposits carry the risk of default if companies fail to repay on time and require compliance with Companies Act and RBI guidelines.
19. Short-term loans from financial institutions are primarily used for:
A. Long-term capital expenditure
B. Financing working capital and temporary fund gaps
C. Issuing equity shares
D. Dividend distribution
Financial institutions provide short-term loans to companies to meet working capital needs or temporary cash flow shortages.
20. When a bank sanctions a working capital loan based on public deposits or ICDs, it primarily considers:
A. Long-term profit projections only
B. Equity shareholding structure
C. Liquidity, repayment capacity, and security
D. Market capitalization
Banks evaluate the borrower's liquidity, ability to repay, and available security before providing working capital finance.
21. Inter-Corporate Deposits are generally:
A. Unsecured short-term loans
B. Government-guaranteed loans
C. Equity investments
D. Bank advances
ICDs are usually unsecured, short-term loans between companies to meet temporary liquidity requirements.
22. Which of the following is a regulatory requirement for accepting public deposits?
A. Deposit must be over 10 years
B. No documentation is required
C. Only banks can accept public deposits
D. Compliance with Companies Act provisions and filing with RBI
Companies accepting public deposits must follow Companies Act rules and file returns with RBI, ensuring repayment capability and disclosure.
23. Which of the following is a common feature of short-term loans from financial institutions?
A. Repayment over 10-15 years
B. Short maturity period with focused purpose
C. Used exclusively for long-term investment
D. No interest is charged
Short-term loans from financial institutions are typically for 3–12 months and intended for specific working capital or temporary needs.
24. Rights debentures issued by a company for working capital are primarily used to:
A. Repay long-term bank loans only
B. Raise funds for short-term operational requirements
C. Finance capital expenditure exclusively
D. Invest in equity shares of other companies
Rights debentures are a debt instrument issued to raise short-term funds for working capital requirements of a company.
25. Which of the following is a key feature of Commercial Paper (CP)?
A. Long-term maturity over 5 years
B. Issued by individuals
C. Secured by fixed assets only
D. Unsecured short-term debt instrument issued by companies
Commercial Paper is an unsecured short-term instrument issued by corporates to raise funds for working capital or other short-term requirements.
26. Factoring services provided by banks or financial institutions involve:
A. Long-term lending against fixed assets
B. Issuing equity shares to suppliers
C. Purchasing accounts receivable and providing immediate cash
D. Guaranteeing inter-bank loans
Factoring involves a factor buying a company's receivables at a discount and providing immediate liquidity.
27. Forfaiting is different from factoring mainly because it:
A. Deals with medium and long-term receivables, usually in international trade
B. Is used for short-term domestic receivables only
C. Involves equity investment in the debtor
D. Provides guarantees for bank loans
Forfaiting is the purchase of medium- to long-term receivables in international trade, usually without recourse, unlike factoring which is short-term.
28. Which of the following is a risk mitigated through factoring?
A. Market risk in equity shares
B. Credit risk of customer receivables
C. Currency exchange rate risk
D. Risk in long-term debt instruments
Factoring transfers the credit risk of receivables from the seller to the factor, providing protection against customer default.
29. Which of the following is an advantage of Commercial Paper for a company?
A. Long-term funding without repayment
B. Secured by physical assets
C. Quick access to short-term funds at a lower cost
D. Issued by the government only
Commercial Paper allows companies to quickly raise short-term funds at a relatively lower interest rate compared to bank loans.
30. Which of the following correctly differentiates factoring from forfaiting?
A. Factoring is for long-term receivables, forfaiting is for short-term
B. Factoring is only for international trade, forfaiting is domestic
C. Factoring always involves recourse, forfaiting never involves cash advance
D. Factoring is short-term and usually domestic, forfaiting is medium/long-term and international
Factoring is typically short-term, domestic receivable financing, often with recourse. Forfaiting deals with medium- to long-term international receivables, usually without recourse.
