Question

Thomas is concerned about his company's ability to pay off its short-term debts. If he wants to know more about his company's liquidity, what should he do

Answer 1

Answer: d. Calculate his net working capital

Explanation:

A company's liquidity is shown by the current assets that it has. These assets are to be used to pay off current liabilities as well so in checking for liquidity, it is best to remove current liabilities from current assets as this shows how liquid the company is in that period.

This is what the Net Working Capital is. It is a result of deducting the Current liabilities from the current assets. When Thomas calculates this, he will be able to see how liquid his company is and if he is able to pay off short-term debt and still have enough for other transactions.