A firm with assets that will convert to cash within the next 12 months, less than 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 less than its obligations within the next 12 months has negative working capital. Additionally, the current ratio, which measures a firm's ability to meet its short-term obligations, is calculated by dividing current assets by current liabilities. A current ratio of less than one indicates that a firm may have difficulty meeting its short-term liabilities. Therefore, the correct answer is D, negative working capital and a current ratio that is less than one.

A Firm with Assets That Will Convert to Cash Within