Question

Why is working capital necessary?

• A. To buy land
• B. To buy building
• C. To make payment for routine expenses
• D. To buy machine

Hint:

Working capital is the money available to fund daily operational costs and should be distinct from long-term investments.

Answer 1

The Correct Option is C

Step 1: Understanding working capital.
Working capital is the capital used by a company for day-to-day operations. It is necessary to cover the short-term operational expenses, such as wages, raw materials, rent, and utilities. It is not typically used for long-term investments like purchasing land or buildings.
Step 2: Analyzing the options.
(A) To buy land: This is incorrect. Working capital is not typically used for land purchases, as it is a long-term asset.
(B) To buy building: This is incorrect. Working capital is meant for routine operational costs, not for acquiring fixed assets like buildings.
(C) To make payment for routine expenses: Correct. Working capital is required for daily operational costs, including payments for inventory, salaries, and other routine expenses.
(D) To buy machine: This is incorrect. Machines are usually bought with long-term financing, not working capital.
Step 3: Conclusion.
The correct answer is (C) To make payment for routine expenses, as working capital is essential for covering short-term operational costs.