Which of the Following Is Most Likely to Occur If

question 10

Multiple Choice

Which of the following is most likely to occur if a firm over-invests in net working capital?

• A) The current ratio will be lower than it should be.
• B) The quick ratio will be lower than it should be.
• C) The return on investment will be lower than it should be.
• D) The times interest earned ratio will be lower than it should be.

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Definitions:

Net Investment

The total amount spent by a company for purchasing new assets, after accounting for depreciation.

Gross Investment

The total amount spent on purchases of new capital and on replacing depreciated capital within an economy.

Net Investment

The sum of money used to purchase new capital assets, subtracting the depreciation from current capital assets.

Depreciation

The reduction in the value of an asset over time, due in particular to wear and tear.