Question 1

What counts as a current asset or current liability?

Accepted Answer

Current assets are those expected to convert to cash within a year — cash, accounts receivable, and inventory. Current liabilities are obligations due within a year — accounts payable, short-term loans, and accrued expenses.

Question 2

What does a current ratio below 1 mean?

Accepted Answer

A current ratio below 1 means current liabilities exceed current assets — a potential warning sign that the business may struggle to meet short-term obligations without raising additional financing or liquidating assets.

Question 3

Is more working capital always better?

Accepted Answer

Not necessarily — while insufficient working capital signals liquidity risk, excessive working capital can indicate inefficient use of capital (too much cash or inventory sitting idle) that could otherwise be invested for growth.

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