CFA Practice Question

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CFA Practice Question

Which statement(s) is (are) true?

I. The debt ratio is a measure of working capital.
II. The purchase of merchandise for cash or on credit ordinarily has no effect on the amount of working capital.
Correct Answer: II

User Contributed Comments 10

User Comment
kalps II is true because the debit is to stock and credit is to Case or Account payable, however it does depend on the ratio at the time of the purchase
Gina does it? if you purchase merchandize by cash, the amount of current assets doesn't change. if you purchase on credit, your liabilities increase by the amount of the change in assets. since working capital is current assets minus current liabilities, the sum doesn't change, and it should not depend on the A:L ratio at time of purchase.
Gina CA-CL=Working Capital
debit to merchandise, credit to cash
debit to merchandise, credit to A/P
Gina Debt Ratio=Total L/Total A
mtcfa II is true: the $ amount of working capital will be the same, but the ratio will likely change.
ehc0791 Assume the merchandise is for inventory, CA will be the same, because both cash and inventory belong to CA. But if the merchandise is a long term asset, then II will not be true.
prachirp merchandise is inventory and not long term asset
viannie CA - CL = working capital.
if merchandise = $100 => $100 debit in inventory but credit $100 in cash. Both inventory and cash are CA. That will cancel out.
However, if $100 on account, i.e. CL increase by $100. Cash (CA not affected) but inventory (CA) increase also by $100. Again cancel out.

Therefore, either way, working capital is NOT affected.
bfeitosa Thanks Viannie!
birdperson @viannie -- nicely done!
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