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The MCQs below are drawn from the Accountancy & Auditing subject category.
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1581
Which financial metric is calculated by subtracting current liabilities from current assets?
Working capital represents the difference between a company's current assets and its current liabilities. It is a key indicator of a business's short-term financial health and its ability to cover its immediate operational obligations.
1582
Calculate the working capital if current assets are $250,000 and current liabilities are $135,500.
Working capital is a measure of a company's operational efficiency and short-term financial health. It is calculated by subtracting current liabilities from current assets. In this scenario, $250,000 minus $135,500 equals $114,500. A positive working capital indicates that the company has sufficient short-term assets to cover its short-term debts and continue its daily operations effectively.
1583
A business reports a working capital of $6,000 as of January 31. On February 2, trade receivables pay $1,150 to settle debts of $1,200, and damaged inventory costing $200 is written off. Calculate the working capital at the close of business on February 2.
Working capital is Current Assets minus Current Liabilities. The receipt of $1,150 cash increases cash (current asset) but decreases trade receivables (current asset) by the same amount, resulting in no net change. The $50 discount allowed reduces current assets. The $200 inventory write-off reduces current assets. Thus, $6,000 - $50 - $200 = $5,750.
1584
The sum of working capital and current liabilities is equivalent to which financial metric?
Working capital is defined as the difference between current assets and current liabilities (Working Capital = Current Assets - Current Liabilities). By rearranging this fundamental accounting equation, it follows that Current Assets = Working Capital + Current Liabilities. This calculation is vital for assessing a company's short-term liquidity and its ability to cover immediate financial obligations using its liquid resources.
1585
In principle, what is the primary source of financing for current assets?
While current assets are often financed by current liabilities in practice, the question asks for the principle of financing. Long-term capital (equity or long-term debt) is theoretically the stable source for financing the permanent portion of working capital (current assets) to ensure financial stability and liquidity for the business entity.
1586
What is the accounting term for the difference between current assets and current liabilities?
Net working capital is a financial metric that represents the difference between a company's current assets, such as cash and inventory, and its current liabilities, such as accounts payable. It indicates the short-term liquidity of a business.
1587
In accounting, how is the term 'working capital' or 'fund' typically defined in relation to financial categories?
In accounting, the term 'fund' in the context of working capital refers to the net difference between current assets and current liabilities. Current assets represent liquid resources expected to be converted to cash within a year, while current liabilities represent obligations due within the same period. This metric is essential for assessing a company's short-term liquidity and its ability to meet immediate financial commitments.
1588
Under what circumstances does a company maintain a positive working capital position?
Positive working capital exists when a company's current assets exceed its current liabilities. This indicates that the company has sufficient liquid assets to cover its short-term obligations as they fall due, which is a key indicator of short-term financial health and operational efficiency.
1589
How is working capital defined in financial accounting?
Working capital is a fundamental financial metric that measures a company's operational efficiency and short-term financial health. It is calculated as the difference between a company's current assets (such as cash, accounts receivable, and inventory) and its current liabilities (such as accounts payable and short-term debt). A positive working capital indicates that the company has sufficient liquid assets to cover its short-term obligations and continue its daily operations.
1590
How is the working capital of a business entity calculated?
Working capital is a financial metric representing the operating liquidity available to a business. It is calculated by subtracting current liabilities from current assets. A positive result indicates that the company can cover its short-term obligations with its short-term assets.
