Multiple Choice
A budget is a plan for spending money based on income, expenses, and which of the following?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following correctly expresses the formula for net working capital (NWC) using the fundamental accounting equation?
A
Current Assets minus Current Liabilities equals NWC.
B
Current Assets plus Current Liabilities equals NWC.
C
Current Assets multiplied by Current Liabilities equals NWC.
D
Current Liabilities minus Current Assets equals NWC.
Verified step by step guidance1
Understand the concept of Net Working Capital (NWC): NWC is a measure of a company's short-term liquidity and operational efficiency. It represents the difference between current assets and current liabilities.
Recall the fundamental accounting equation: Assets = Liabilities + Equity. This equation helps us understand the relationship between a company's resources and claims against those resources.
Identify the components of NWC: Current Assets include items like cash, accounts receivable, and inventory, while Current Liabilities include obligations such as accounts payable and short-term debt.
Formulate the correct expression for NWC: Net Working Capital is calculated as Current Assets minus Current Liabilities. This formula reflects the excess of short-term resources over short-term obligations.
Verify the options provided: Compare each option to the correct formula (Current Assets - Current Liabilities = NWC) and eliminate incorrect choices based on the definition and calculation of NWC.
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