A firm possessing a current ratio of 1 will exhibit __________ net working capital.
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Answer: C. zero
Explanation
Net working capital is calculated precisely by subtracting current liabilities from total current assets. When a firm holds a current ratio of exactly one, current assets equal current liabilities. Subtracting equal values from one another mathematically yields a net working capital of exactly zero. Working capital management evaluates a company's short-term financial health and operational efficiency. Current assets typically include cash, accounts receivable, and inventory held for business operations. Current liabilities encompass obligations due within a standard operating cycle of twelve months.
Maintaining adequate working capital ensures a company can cover daily operational expenses smoothly. A zero net working capital implies very tight liquidity management with no buffer for shocks. Financial analysts monitor this metric closely to assess short-term solvency and credit risk. Positive net working capital occurs when current assets exceed current liabilities significantly. Negative net working capital arises if current liabilities surpass total current assets. Option four is simply a placeholder and does not represent a valid mathematical outcome.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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