Consider the following statements about current assets and working ca…

Consider the following statements about current assets and working capital:

(A) Current assets usually contribute less to the profits than fixed assets.

(B) Net working capital is the excess of current liabilities over current assets.

(C) An asset is more liquid if it can be converted into cash quicker and without reduction in value.

(D) In the order of liquidity of current assets, raw materials come before debtors.

Which of the statements given above are correct?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (A) and (C) only

(A) Current assets usually contribute less to the profits than fixed assets. — Correct. Current assets are more liquid, but they give little or low return. So a balance is struck between liquidity and profitability.

(B) Net working capital is the excess of current liabilities over current assets. — Incorrect. It is the other way round. Net working capital = CA − CL, the excess of current assets over current liabilities. It is the part of current assets financed through long-term sources.

(C) An asset is more liquid if it can be converted into cash quicker and without reduction in value. — Correct. Liquidity has two parts: speed and no loss of value. Cash is the most liquid, so it comes first in the list of current assets.

(D) In the order of liquidity of current assets, raw materials come before debtors. — Incorrect. Debtors come fourth and raw materials seventh. Debtors only have to pay, while raw materials must first be made into goods and then sold.

NCERT (2026-27 Edition): “Working Capital Apart from the investment in fixed assets every business organisation needs to invest in current assets. This investment facilitates smooth day-to-day operations of the business. Current assets are usually more liquid but contribute less to the profits than fixed assets. Examples of current assets, in order of their liquidity, are as under.
1. Cash in hand/Cash at Bank
2. Marketable securities
3. Bills receivable
4. Debtors
5. Finished goods inventory
6. Work in progress
7. Raw materials
8. Prepaid expenses
These assets, as noted earlier, are expected to get converted into cash or cash equivalents within a period of one year. These provide liquidity to the business. An asset is more liquid if it can be converted into cash quicker and without reduction in value. Insufficient investment in current assets may make it more difficult for an organisation to meet its payment obligations. However, these assets provide little or low return. Hence, a balance needs to be struck between liquidity and profitability. …”

“Working Capital … Some part of current assets is usually financed through short-term sources, i.e., current liabilities. The rest is financed through long-term sources and is called net working capital. Thus, NWC = CA – CL (i.e. Current Assets - Current Liabilities.) Thus, net working capital may be defined as the excess of current assets over current liabilities.”