When constructing a pro forma statement, net working capital generally:
A) remains fixed.
B) varies only if the firm is currently producing at full capacity.
C) varies only if the firm maintains a fixed debt-equity ratio.
D) varies only if the firm is producing at less than full capacity.
E) varies proportionally with sales.

Question

Quizplus · Accepted Answer

Net working capital is a measure of a company's liquidity and reflects the difference between its current assets and current liabilities. As a company's sales increase, its current assets and current liabilities will also increase, causing the net working capital to vary proportionally with sales. Therefore, E is the best choice.

When Constructing a Pro Forma Statement, Net Working Capital Generally