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Finance & Accounting
Pages 4 (1004 words)
Running Head: ABBREVIATED TITLE OF YOUR CHOICE (all caps) <Title> <Student Name> <Name and Section # of course> <Instructor Name> <Date> Finance Problem Solving Question 2 Working capital refers to the current assets – both temporary and permanent – of a company.
Therefore, Amber has a net working capital of $200 and a current ratio of 1.20. This indicates that the company will be able to pay any short term obligations that arise unexpectedly due to some investment in the working capital. On the other hand, Barbie has no current assets, but has $600 worth of current liabilities. Therefore, Amber has a net working capital of negative $600 and a weak current ratio. This indicates that the company will not be able to pay any short term obligations that arise unexpectedly due to no investments in the working capital. Amber Barbie Current Assets $1,200 $0 Current Liabilities $1,000 $600 Net Working Capital $200 ($600) Current Ratio 1.20 0.00 Therefore, it is important for a corporation to invest some of its funds in the financing of the working capital. A company must be able to pay its creditor when payment becomes dues, and possess ample inventory and cash to ensure the smooth functioning of the company. Question 4 A firm achieves optimal level of working capital only when the constituents of the working capital achieve optimal position. The company must have a favorable level of inventory determined by the economic order quantity. It must work upon optimal lead times that ensure no shortfall and no excess inventory at any point in time. This will ensure minimum costs association with the inventory handling. ...
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