Essential Working Capital and Cost Accounting Principles

Working Capital Fundamentals

• What is working capital? The difference between current assets and current liabilities.
• Which of the following is NOT a current asset? Equipment.
• Liquidity refers to a company’s ability to… Convert assets into cash quickly to meet short-term obligations.
• What does positive working capital indicate? The company can cover its short-term liabilities with its short-term assets.
• Which of the following is a cash outflow from financing activities? Paying dividends.

Working Capital True or False

• Efficient management of the working capital cycle ensures enough cash flow to meet obligations: True.
• Negative cash flow means more cash is coming into the business than going out: False.
• Accounts payable is an example of a current liability: True.
• Liquidity is only important for long-term financial health, not for short-term operations: False.
• Cash flow from investing activities includes cash received from customers: False.

Cost Accounting Concepts

• Which of the following is an example of a variable cost? Direct labor.
• What is the main cost component in service-sector companies? Labor costs.
• Which cost would typically be classified as a period cost? Marketing expenses.
• Which of the following costs is inventoriable in the manufacturing sector? Direct materials used in production.
• What does the term “cost driver” refer to? A factor that causes changes in the total cost.

Key Cost Definitions

• A cost that has already been incurred and cannot be changed is known as an Actual cost.
• The cost of materials that become part of the finished product and can be traced directly to it is called Direct.
• Costs that remain unchanged despite variations in the level of activity are known as Fixed costs.
• The Relevant Range is the range of activity within which cost behavior assumptions are valid.
• The wages of workers directly involved in the production process are classified as Direct Labor.

Cost Accounting True or False

• Fixed costs change in direct proportion to the level of production: False.
• The cost of factory utilities that vary with production levels is considered an indirect variable cost: True.
• In a merchandising company, the cost of unsold inventory is considered a period cost: False.
• A cost object can only be a product and not a customer or a department: False.
• Advances in technology can turn indirect costs into direct costs: True.