Multiple Choice
Which of the following best measures how much cash a firm is generating through its operating activities?
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4. Merchandising Operations
Net Sales
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Given the following balance sheet for XYZ Company:\[\begin{array}{ll}\text{Cash} & \$10,000 \\\text{Accounts Receivable} & \$15,000 \\\text{Inventory} & \$25,000 \\\text{Accounts Payable} & \$12,000 \\\text{Short-term Notes Payable} & \$8,000 \\\end{array}\]What is the net working capital for the company?
A
$20,000
B
$30,000
C
$10,000
D
$40,000
Verified step by step guidance1
Step 1: Understand the concept of Net Working Capital (NWC). Net Working Capital is calculated as Current Assets minus Current Liabilities. It measures a company's short-term liquidity and operational efficiency.
Step 2: Identify the Current Assets from the balance sheet. Current Assets typically include Cash, Accounts Receivable, and Inventory. Add these values together: Cash (
), Accounts Receivable (
), and Inventory (
).
Step 3: Identify the Current Liabilities from the balance sheet. Current Liabilities typically include Accounts Payable and Short-term Notes Payable. Add these values together: Accounts Payable (
) and Short-term Notes Payable (
).
Step 4: Subtract the total Current Liabilities from the total Current Assets to calculate Net Working Capital. Use the formula:
.
Step 5: Interpret the result. A positive Net Working Capital indicates that the company has more short-term assets than liabilities, which is generally a sign of good liquidity and financial health.
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