Lilly's Corporation has working capital of $620,000,and Harmon Corporation has working capital of $840,000.Which of the following statements is incorrect?
A) Since working capital is an absolute amount,other factors such as size of the company and materiality will help to determine liquidity of these two companies.
B) Since Harmon's working capital exceeds Lilly's working capital,it is safe to conclude that Harmon is more liquid than Lilly.
C) If Lilly Corporation is smaller than Harmon or has lower current liabilities;Lilly could be more liquid than Harmon.
D) None of these answers is correct.

Question

Quizplus · Accepted Answer

Working capital is current assets minus current liabilities.Current assets include assets most likely to be converted into cash in the current operating period.Current liabilities represent debts that must be satisfied in the current period.Working capital therefore measures the excess funds the company will have available for operations,excluding any new funds it generates during the year.Think of working capital as the cushion against short-term debt-paying problems.Harmon's working capital exceeds Lilly's working capital.However,it is not necessarily safe to assume that Harmon is more liquid than Lilly.Whether Harmon's working capital is sufficient or not depends on such factors as the industry in which it operates,its size,and the maturity dates of its current obligations.
So why is B incorrect? I agree it is but perhaps explain why.
Added wording.JMF
So why is B incorrect? I agree it is but perhaps explain why.
Added wording.JMF

Lilly's Corporation Has Working Capital of $620,000,and Harmon Corporation Has