Practice question · Multiple choice
A supermarket chain runs with negative working capital year after year and is perfectly healthy. How?
Hints
- Ask when a supermarket gets paid, and when it pays its suppliers.
- Negative working capital means suppliers are financing something. What?
Show the answer
B. It collects instantly and pays suppliers on 60-day terms
Why
Cash arrives before the supplier invoice falls due, so the suppliers finance the inventory and the ratio reads as a strength inverted. It is why liquidity ratios must be read against the business model, the same number that would alarm you at a shipbuilder is normal at a grocer.
Practise The Balance Sheet
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on The Balance Sheet
- A firm with negative net working capital is always insolvent.
- Current or non-current? Classify each item.
- Match each balance-sheet ratio to what it measures.
- A company has current assets 80 and current liabilities 110. What does this tell us?
- Which items belong in the equity section of the balance sheet?
- Order balance-sheet items from most liquid to least liquid.