Question

question 1

thomas is concerned about his companys ability to pay off its short-term debts.

if he wants to know more about his companys liquidity, what should he do?

calculate his total assets
calculate his net working capital
calculate his debt-to-equity ratio
calculate his total liabilities

Explanation:

Define liquidity and short-term debt

Liquidity refers to a company's ability to meet its short-term obligations using its short-term assets. Short-term debts are obligations due within one year.

Analyze the options

• Calculate his total assets: Total assets include long-term assets, which do not measure short-term debt-paying ability.
• Calculate his net working capital: Net working capital is current assets minus current liabilities, directly measuring short-term liquidity.
• Calculate his debt-to-equity ratio: This is a solvency ratio measuring long-term financial leverage, not short-term liquidity.
• Calculate his total liabilities: Total liabilities include long-term debt, which does not isolate short-term obligations.

Select the correct measure

Net working capital specifically evaluates short-term liquidity by comparing current assets to current liabilities.

Answer:

• Calculate his total assets
• Calculate his net working capital (Correct answer)
• Calculate his debt-to-equity ratio
• Calculate his total liabilities