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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Nirmal Traders has current assets of Rs 12,00,000 and current liabilities of Rs 8,00,000. It pays Rs 2,00,000 of creditors out of cash, and separately collects Rs 1,00,000 from debtors in cash. What are its net working capital and current ratio after both transactions?

Paying creditors reduces both current assets and current liabilities by Rs 2,00,000, giving 10,00,000 and 6,00,000. Collection from debtors does not change totals. Net working capital stays Rs 4,00,000 and the current ratio rises to 1.67.

  1. ANet working capital Rs 4,00,000; current ratio 2.0
  2. BNet working capital Rs 2,00,000; current ratio 1.5
  3. CNet working capital Rs 4,00,000; current ratio 1.67Correct
  4. DNet working capital Rs 6,00,000; current ratio 2.0

Explanation

Paying creditors reduces current assets and current liabilities by Rs 2,00,000: CA 10,00,000, CL 6,00,000. Collecting from debtors only swaps one current asset for another, so no change. NWC = 4,00,000; ratio = 10/6 = 1.67. Original ratio was 1.5, so payment improves it.

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