Question

A(n) ________ in current assets increases net working​ capital, thereby​ ________ the risk of insolvency. A....

A(n) ________ in current assets increases net working​ capital, thereby​ ________ the risk of insolvency.
A.
​increase; increasing
B.
​decrease; reducing
C.
​decrease; increasing
D.
​increase; reducing

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Answer #1

Net working capital measures the business ‘ability to pay off its current liabilities using current assets. It shows a firm’s short-term liquidity and is useful to vendors and creditors.

Current Assets are short-term assets that can be converted to cash within one year or less. Current Liabilities are short-term financial obligation which are payable in 1 year or less than 1 year.

Net working capital is calculated using the below formula:

Net Working Capital= Current Assets- Current Liabilities

An increase in current assets increases net working capital and an increase in current liabilities reduces net working capital.

Therefore, an increase in current assets increases net working capital, thereby reducing the risk of insolvency.

Hence, the answer is option d.

In case of any query, kindly comment on the solution.

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