Negative Working Capital

C

Working capital = Current assets - Current liabilities. If working capital is negative, then current liabilities exceed current assets, implying a current ratio of less than 1.

A negative working capital indicates that a firm's current liabilities exceed its current assets. This situation typically occurs when a firm has more short-term obligations (e.g., accounts payable, short-term debt) than short-term assets (e.g., cash, accounts receivable). Now, let's go through each answer choice and determine its accuracy:

A. The firm is close to bankruptcy: This statement cannot be concluded solely based on the fact that the firm has a negative working capital. While negative working capital may be an indicator of financial distress, it does not necessarily mean that the firm is on the brink of bankruptcy. Other factors, such as cash flow, profitability, and debt levels, need to be considered to assess the firm's financial health accurately.

B. The firm's accounting profits are low: The information about the firm's accounting profits cannot be determined solely from the fact that it has a negative working capital. Working capital relates to a firm's short-term liquidity and the relationship between its current assets and current liabilities. Accounting profits, on the other hand, reflect the firm's financial performance over a period of time. These two concepts are not directly linked, so we cannot conclude that the firm's accounting profits are low based solely on negative working capital.

C. The firm's current ratio is less than 1: The current ratio is calculated by dividing a firm's current assets by its current liabilities. A current ratio less than 1 would indicate that the firm's current liabilities exceed its current assets. Since the firm already has a negative working capital, which implies more current liabilities than current assets, it is reasonable to conclude that the firm's current ratio is less than 1. Therefore, option C is true.

D. The firm has a high debt-to-asset ratio: The information about the firm's debt-to-asset ratio cannot be determined solely from the fact that it has a negative working capital. The debt-to-asset ratio compares a firm's total debt to its total assets and provides insights into the firm's leverage. It does not directly relate to the working capital position of a company. Therefore, we cannot conclude that the firm has a high debt-to-asset ratio based solely on negative working capital.

In summary, the only true statement among the given options is C. The firm's current ratio is less than 1.