Part I: - True/False

1. Net working capital is defined as current assets divided by current liabilities.

2. One goal of cash management is to minimize the amount of cash necessary to conduct business.
3. Firms hold cash balances in order to complete transactions that are necessary in business operations.
4. The central goal of inventory management is to provide sufficient incentives to ensure that the firm never
suffers a stock-out (i.e., runs out of an inventory item).
5. The principal goal of inventory management systems is to balance the costs of ordering, shipping, and
receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy.

Part II- Multiple Choice:-FOR ALL QUESTIONS, YOU ARE REQUIRED TO PUT THE LETTER
OF YOUR CHOICE ON THE SPACE PROVIDED

1. Gross working capital refers to

A. Total assets minus fixed assets.
B. Current assets minus current liabilities.
C. current assets minus inventories
D. current assets minus cash
2. One of the following is not a task or concept underlying working capital management
A. Speeding up receipt of cash by the firm
B. Delaying the payment of cash within allowable limits
C. Investing any idle cash in productive assets
D. None of the above
3. Financial statement analysis is/are:
A. A process of synthesis of summarization of financial statements and operative data.
B. It is a technique of investigating the financial positions and progress of the unit.
C. Establishing some relationship between balance sheet and income statement
D. None of the above
4. ____________are prepared to provide time perspective to the consideration of various elements of operations
and financial position of the business embodied in the statement.
A. Comparative statements C. Trend Analysis
B. Common size statements D. Ratio Analysis
5. lead time is: -
A. Time lag between placing an order and receiving it
B. Total time during which the economic order quantity is consumed
C. The time during which the company uses the safety stock
D. Time between orders
E. None of the above
6. Which of the following is not a component of ordering cost?
A. The cost of typing and dispatching an order.
B. Follow- up costs
C. cost involved in inspection, checking, and handling to stores,
D. Transportation cost under FOB destination agreement.
E. None of the above
7. At economic order quantity,
A. annual carrying cost will be greater than annual ordering cost
B. Annual carrying cost will be less than the annual ordering cost

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 C. Annual carrying cost will be equal to the annual ordering cost
D. The information is not sufficient to say something about inventory costs
E. None of the above
8. Short-Term Solvency (Liquidity)
A. Current Ratio
B. Quick Ratio (Acid-Test Ratio)
C. Cash Ratio
D. Net Working Capital to Total Assets Ratio
E. Interval Measure
9. The two models used for management and planning of cash and inventory with the same context are
A. Baumol model – Miller-Orr model
B. Baumol model – EOQ model
C. Miller-Orr model – EOQ model
D. ABC model – Baumol model
E. None
10. A Company’s account receivable balance may not be a function of:
A. Cash sales
B. Discount period
C. Average collection period
D. Credit sale
E. All
11. A firm holds some amount of its idle cash in its custody just to take advantage of unexpected opportunities that
may arise. This is best described as:
A. Safety balance
B. Speculative balance
C. Transaction balance
D. Compensating balance
E. none of the above
12. A ratio that shows the relative contributions of the creditors and the owners of the business is
A. Debt to asset ratio
B. Debt to equity ratio
C. Sales to asset ratio
D. Sales to fixed asset ratio.
E. None of the above
13. A ratio that measures the number of times asset is turned to sale is
A. Asset to sales ratio
B. Fixed asset to sale ratio
C. Sales to asset ratio
D. Sales to fixed asset ratio.
E. None of the above
14. A ratio that measures the number of times Fixed asset is turned to sale is
A. Asset to sales ratio
B. Fixed asset to sale ratio
C. Sales to asset ratio
D. Sales to fixed asset ratio.
E. None of the above
15. A ratio determined by dividing Current asset other than inventory by current liability is known as

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 A. Current Ratio D. Acid test ratio
B. Cash ratio E. None of the above
C. Inventory turnover ratio

Part III -Matching Questions, Match items in column “A” with its corresponding
items in column “B”

Column A Column B
1. Ratio used to Measures Efficiency of asset I. Marketability ratio
2. Ratio used to Measures ability of firm to pay current obligations J. Trend analysis
3. Ratio Used to evaluate marketability of firms share. N. Profitability ratio
4. Ratio used to measure operating performance O. Index Analysis
5. Ratio used to measure proportion of asset from debt T. Current ratio
U. Asset Management ratio
X. Comparative Analysis
Y. Debt management ratio

Part IV: Workout questions (Answer Ex.1, Ex2 and Ex3 or Ex4), Work on the
following question, showing all steps of your calculations on the separate
paper (20 pt.)

Ex1) A firm sets its minimum cash balance as $ 5,000 and estimates the following:
Transaction cost per sale/purchase = $ 15
Standard deviation = $ 1,200 per day
Interest rate = 7.3 percent p.a. or 0.02 per day
Required: - Calculate the spread using Miller-Orr model?

Ex2) A manufacturer has expected annual usage of product “Z” of 10,000 units. The cost of processing an order of
purchases is $ 4, and carrying cost per unit for a year is 10 cents. Lead-time on an order is 1 days and it is a practice to
keep stock usage in reserve for 2 days. Required: - (a) Economic order quantity (b) Reorder point.

Ex3) A firm has an investment in the credit sales as $ 10,000 and the average collection period allowed to the
customers as 40 days. Find the amount of investment gained and lost when the return on investment in the business is
at 9 percent and borrowings demand an interest at the rate of 12 percent per annum. The firm has a proposal to
increase its sales by increasing the credit days from 40 days to 60 days. Does the proposal worth accepting when
decrease in sales is expected as 5 percent? Ignore all other expenses as constant.

Ex4:-The assets and liabilities of a firm as on the 31 st of Dec., 2000 were as under. Calculate the current ratio, cash
ratio, acid test ratio and its net working capital.
Assets Birr Liabilities & Capital Birr
Plant 4, 000, 000 Share Capital 3, 000, 000
Buildings 2, 000, 000 Reserves & Surplus 800, 000
Stock (inventory) 1, 500, 000 Debentures 3, 000, 000
Receivables 1, 000, 000 Creditors 600, 000
Prepaid Asset 250, 000 Bills Payable 200, 000
Marketable Securities 750, 000 Accrued Expenses 200, 000
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Cash 2, 500 Provision for Taxation 650, 000
Long Term Loan 1, 300, 000

Unity University, Adama Campus,

Department of Accounting and Finance,

Working Capital management and financial analysis,

Final Exam Answer Sheet

Name _____________________________________ ID.No _____________________

Part III:
Part I True/False Part II: Multiple Choice Matching:
1. 1. 6. 11. 1.

2. 2. 7. 12. 2.

3. 3. 8. 13. 3.

4. 4. 9. 14. 4.

5. 5. 10. 15. 5.

Part IV: - Work out