Question

National Bark Company reported a current ratio of 2:1 last quarter and this quarter it has reported a ratio of 1:1. This means that over the last quarter a. The change in its working capital dropped by 50 percent. b. The change in its working capital increased by 50 percent. c. The company went from reporting working capital to reporting zero working capital. d. The company increased its net working capital

Answer 1

Answer: c. The company went from reporting working capital to reporting zero working capital.

Explanation:

The Current Ratio is a financial metric measure that compares the Current Assets of a company to it's Current Liabilities as follows, Current Assets/ Current Liabilities.

A ratio of 2:1 means that Current Assets are double the Current Liabilities and 1:1 means that they are the same.

Moving on, another measure is the Working Capital. The Working Capital is a measure of how much the company has to enable it to engage in day to day transactions.

It is calculated by subtracting Current Liabilities from current assets.

Seeing as now, the current ratio tells us that both Current Liabilities and Assets are the same, subtracting the former from the latter will give us a ZERO balance.

This means that Working Capital is now Zero so C is correct.

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