Which of the following statements about net working capital (NWC) is correct?
A) NWC is positive for all firms.
B) As NWC decreases, potential liquidity increases.
C) NWC excludes inventory, which is deemed illiquid.
D)Decreases in NWC can increase the firm's risk.

Question

Quizplus · Accepted Answer

Decreases in NWC can increase a firm's risk because it indicates that the firm has less current assets available to cover its short-term liabilities. This can make it difficult for the firm to meet its obligations as they come due, potentially leading to default or bankruptcy. A positive NWC is not always the case for all firms as it depends on the nature of the business. B is incorrect as a decrease in NWC may not necessarily lead to potential liquidity increases as it may indicate a lack of working capital to fund future growth. C is incorrect as inventory is included in the calculation of NWC as it represents a current asset that can be sold for cash in the short-term.

Which of the Following Statements About Net Working Capital (NWC)