CFAI Practice: M04 — Working Capital and Liquidity
Source: CFAI Official Practice Problems 2026
Questions
1. Credit terms from 2/10 net 30 to 2/10 net 40 → liquidity impact:
- A. pull on liquidity
- B. drag on liquidity ✓
- C. no change
Extending net period → AR increases → CCC lengthens → drag.
2. Decrease cash conversion cycle by increasing days:
- A. sales outstanding
- B. inventory on hand
- C. payable outstanding ✓
↑DPO → ↓CCC (DPO is subtracted in the formula)
3. Most liquid issuer based on quick ratio:
| Issuer A | Issuer B | Issuer C | |
|---|---|---|---|
| Quick ratio | 420/440 = 0.955 | 430/520 = 0.827 | 270/300 = 0.900 |
- A. Issuer A ✓ (highest quick ratio = 0.955)
4. Negative cash conversion cycle:
- A. not feasible
- B. possible due to cash/securities on hand
- C. possible if inventory returned quickly and vendor financing used ✓
5. Eliminating prompt-payment discount to customers:
- A. increase liquidity
- B. decrease liquidity ✓
- C. no effect
No incentive for early payment → customers pay later → drag on liquidity.