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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

A firm has current assets of Rs 18,00,000 and current liabilities of Rs 12,00,000. Which of the following correctly gives its net working capital and the nature of that measure?

Net working capital is Rs 6,00,000, being current assets of Rs 18,00,000 less current liabilities of Rs 12,00,000. It measures the portion of current assets financed by long-term funds, whereas gross working capital is simply total current assets.

  1. ARs 6,00,000; net working capital is the excess of current assets over current liabilitiesCorrect
  2. BRs 30,00,000; net working capital is the sum of current assets and current liabilities
  3. CRs 6,00,000; net working capital is the excess of fixed assets over current assets
  4. DRs 18,00,000; net working capital equals gross current assets

Explanation

Net working capital = current assets - current liabilities = 18,00,000 - 12,00,000 = Rs 6,00,000. Option B adds the two figures instead of subtracting them. Option D gives gross working capital, not net.

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