Which statement is true?

Which statement is true?

• A. Working capital is defined as current assets minus current liabilities.
• B. A net capital ratio greater than one indicates the business is solvent.
• C. Net farm income from operations includes gains or losses from disposal of farm capital items.
• D. Short term goals may require more than one year to achieve.

Answer: (A)

The key idea here is liquidity and how we measure a farm’s ability to cover short-term obligations. Working capital is defined as current assets minus current liabilities, which directly shows the funds available to pay bills due within the next year. Current assets are things expected to turn into cash within a year (cash, receivables, inventory), while current liabilities are obligations due within a year (short-term debts, accounts payable). A positive working capital means the business can meet near-term needs; a negative amount signals potential liquidity problems. The other statements mix up concepts or use definitions that don’t hold in typical farm finance. A net capital ratio greater than one isn’t a standard, feasible measure of solvency because the ratio of equity to assets cannot exceed one (solvency is about assets exceeding liabilities, not a ratio >1). Net farm income from operations does not include gains or losses from disposal of capital items, which are recorded separately as non-operating items. Short-term goals are defined as those attainable within a year, so claiming they may take more than a year contradicts the definition.

The key idea here is liquidity and how we measure a farm’s ability to cover short-term obligations. Working capital is defined as current assets minus current liabilities, which directly shows the funds available to pay bills due within the next year. Current assets are things expected to turn into cash within a year (cash, receivables, inventory), while current liabilities are obligations due within a year (short-term debts, accounts payable). A positive working capital means the business can meet near-term needs; a negative amount signals potential liquidity problems.

The other statements mix up concepts or use definitions that don’t hold in typical farm finance. A net capital ratio greater than one isn’t a standard, feasible measure of solvency because the ratio of equity to assets cannot exceed one (solvency is about assets exceeding liabilities, not a ratio >1). Net farm income from operations does not include gains or losses from disposal of capital items, which are recorded separately as non-operating items. Short-term goals are defined as those attainable within a year, so claiming they may take more than a year contradicts the definition.