Question

1-A company’s profitability may suffer from holding too much working capital. This statement is

A. True

B. False

And fully explain your answer with at least 3 sentences.

2-A company that does not have enough assets to pay its liabilities is insolvent. This statement is

A. True

B. False

And fully explain the concept insolvent with at least 3 sentences.

3-The higher a company’s plant assets to long-term liabilities ratio, the greater its borrowing capacity. This statement is

A. True

B. False

Fully describe your answer with at least 3 sentences.

Answer 1

Answers :

1) True

The purpose of working capital is to meet Day to Day activities of business. For this purpose a company need to maintain required working capital, If company is maintaing too much working capital then there will be inactive capital which will not give any returns, so the profitabilty of company reduces.

2) True

A company should maintain required assets to meet the liabilities. If value of assets is less than the liabilities, then such company will be insolvent. The company assets are formed with the help of liabilities. if company investment decisions are accurate then value of assets will be increased other wise it will reduce. At the end of the day company should pay liabilities to liability holders, If assets value is less than the liabilities then such company is insolvent.

3) True

The Borrowing capacity of company is depend on the value of long term assets. if long term assets vaue is higher as compared to long term liabilities then lenders provide good amount of loans to the company. So company should make proper decisions with regard to investment in long term assets.