A firm with assets that will convert to cash within the next 12 months, in excess of its obligations to pay cash in this same interval, has
A)positive working capital and a current ratio that is less than one.
B)positive working capital and a current ratio that exceeds one.
C)negative working capital and a current ratio that exceeds one.
D)negative working capital and a current ratio that is less than one.
E)a serious liquidity problem.

Question

Quizplus · Accepted Answer

A firm with assets that will convert to cash within the next 12 months, in excess of its obligations to pay cash in this same interval, has a positive working capital. Current ratio measures a firm's ability to pay its short-term liabilities using its short-term assets. Since the firm has excess assets to pay off its upcoming obligations, its current ratio will exceed one. Therefore, the correct answer is B - positive working capital and a current ratio that exceeds one.

A Firm with Assets That Will Convert to Cash Within