Series 7 Exam Question 115: Answer and Explanation

Question: 115

Use the following exhibit to answer this question:

Assets	Liabilities
Cash: $10	Accts Payable: $10
Securities: $10	Bonds Due This Year: $10
Accts Receivable: $20	Bonds Due in 10 Years: $30
Inventory: $20
Machinery: $10
Land: $10

All numbers in the chart above are in millions

What is the working capital?

• A. $10,000,000
• B. $20,000,000
• C. $30,000,000
• D. $40,000,000

Correct Answer: D

Explanation:

D. Remember that the working capital looks at what a company owes in a one-year period subtracted from the cash a company has that can be converted into cash in a one-year period. Looking on the asset side of the exhibit, cash, securities, accounts receivable, and inventory are all current assets. This means that the current assets are

Current assets = $10,000,000 + $10,000,000 + $20,000,000 + $20,000,000 = $60,000,000

The current liabilities are accounts payable and bonds due this year:

Current liabilities = $10,000,000 + $10,000,000 = $20,000,000

This means that the working capital is

Woking capital = current assets - current liabilities

Woking capital = $60,000,000 - $20,000,000 = $40,000,000