Question

quesuu 14 2 pts Managers must understand how transactions affect working capital because GAAP does not allow companies with weak working capital to obtain loans. because lenders often use this to assess a company's ability to meet current obligations so that management can avoid transactions that increase working capital. in anticipation of meeting creditors guidelines before issuing new stock D Question 15 2 pts The current ratio fails to accurately reflect the ability of a company to pay its current debts as they come due amounts that will come due within the next accounting period. amounts due within the next operating cycle as of the end of the accounting period. cash flows anticipated in future accounting periods.

Answer 1

Q.no 14

Ans: Option C

Reason: Working capital is that type of capital which is used for day to day operational activities of the company. It is the difference between Current Assets and Current Liabilities. It should not either high or low.

If it is high we will get oppurtunity cost loss if it is low, funds are not sufficient for day to day activities.

Increase in working capital also effects the current ratio which leads to raising doubt on paying ability of the company.

So from the above discussion we can conclude that manager must understand reflections of transaction to avoid the transactions that increase working capital.

Q.no 15

Ans : Option d

Reason: Current ratio speaks about the paying ability of current Liabilities using Its current assets.the ideal current ratio would be 2:1 that is current asset should be twice of it's current Liabilities.

However, current ratio doesn't speaks the cashflows for the future accounting period. Cash flow statement and funds flow statement speaks about it.

So Option d