Working Capital:
Overview
A business can be profitable on paper and still collapse, because profit is not the same as cash. What keeps a firm alive day to day is working capital, the money available to pay wages, suppliers and bills right now. It is often called the lifeblood of a business.
In this lesson you will learn what working capital is, how it is calculated, and why having enough of it matters so much. You will see how too little working capital causes a cash crisis even in a profitable firm, and how a business can manage it.
Objectives
- The concept and importance of working capital
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Lesson Evaluation
Congratulations on completing the lesson on Working Capital:. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Working capital is calculated as: A. current assets + current liabilities B. current assets - current liabilities C. total assets - total liabilities D. revenue - costs Answer: B
- Current assets of $80,000 and current liabilities of $30,000 give working capital of: A. $30,000 B. $50,000 C. $80,000 D. $110,000 Answer: B
- Which is a current asset? A. a factory building B. inventories (stock) C. a long-term loan D. machinery Answer: B
- A profitable business may still fail if it: A. has too much cash B. runs out of working capital to pay short-term debts C. lowers its prices D. trains its staff Answer: B
- Too much working capital is a problem because: A. debts cannot be paid B. idle cash and stock could earn more if invested C. profit falls to zero D. it breaks the law Answer: B
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