Total Assets Are 1000 Fixed Assets Are 700 Long Term Debt Is ✓ Solved
total assets are 1000 fixed assets are 700 long Termdebt is 25
Calculate the net working capital for the company given the following financial data:
- Total assets: $1000
- Fixed assets: $700
- Long-term debt: $250
- Short-term debt: $300
Determine the net working capital, knowing that net working capital = current assets - current liabilities, and considering that current assets include total assets minus fixed assets, and current liabilities are represented by short-term debt.
Sample Paper For Above instruction
Introduction
Net working capital (NWC) is an essential measure of a company's short-term liquidity and operational efficiency. It indicates whether a firm has enough short-term assets to cover its short-term liabilities. Calculating NWC accurately helps managers and investors assess financial health and operational flexibility. This paper demonstrates how to compute net working capital accurately using given financial data, clarifying the relationship between total assets, fixed assets, current assets, and current liabilities.
Understanding the Financial Data
The provided data includes total assets, fixed assets, long-term debt, and short-term debt:
- Total assets = $1000
- Fixed assets = $700
- Long-term debt = $250
- Short-term debt = $300
Total assets encompass both fixed and current assets. Fixed assets are long-term assets like property and equipment, while current assets consist of assets expected to be converted into cash within a year, such as accounts receivable, inventory, and cash.
Given that, current assets can be calculated as:
Current assets = Total assets - Fixed assets = $1000 - $700 = $300.
Current liabilities include short-term debt and other short-term obligations. Provided data specifies short-term debt as $300.
The question asks for net working capital, which is:
NWC = Current assets - Current liabilities.
Assuming that the only current liabilities are the short-term debt, the calculation simplifies to:
NWC = $300 - $300 = $0.
Thus, the net working capital for the company is $0, indicating that current assets exactly match current liabilities, and the company neither has excess short-term assets nor shortages.
Implications and Significance
A net working capital of zero suggests that the firm can meet its short-term obligations with its current assets but has no surplus for unforeseen expenses or investment opportunities. While this level of liquidity might be sufficient to operate smoothly, it leaves little room for financial flexibility or buffer against unexpected cash flow issues.
This balance is often viewed as a neutral financial position, but companies typically prefer a positive NWC to ensure liquidity and operational resilience. A zero net working capital could signal tight liquidity management or reliance on rapid cash conversions to meet obligations.
Conclusion
In conclusion, using the given financial data, the net working capital for the firm is calculated as $0, demonstrating a balanced current asset and current liability position. This calculation underscores the importance of analyzing component parts of the balance sheet to assess liquidity accurately.
References
- Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
- Ross, S. A., Westerfield, R. W., & Jaffe, J. (2018). Corporate Finance. McGraw-Hill Education.
- Pinto, J. E., & Miglionico, L. (2020). Financial Management. Pearson.
- Damodaran, A. (2015). Damodaran on Valuation: Security Analysis for Investment and Capital Markets. Wiley.
- Ross, S., Westerfield, R., & Jordan, B. (2019). Essentials of Corporate Finance. McGraw-Hill Education.