Question

# debtors increase by \$15,000 and creditors increase by \$11,000. The effect on cash flow of the...

debtors increase by \$15,000 and creditors increase by \$11,000. The effect on cash flow of the change in working capital is an:

a. decrease of 26,000

b. decrease of 4,000

c. increase of 4,000

d. increase of 26,000

Ans. Option  b. decrease of 4,000

Explanation and calculation:

Debtors are the current assets and creditors are the current liabilities. Increase in current assets will increase working capital and increase in current liabilities will decrease working capital.

Change in working capital = Increase in debtors - Increase in creditors

= \$15,000 - \$11,000

= \$4,000 (increase)

*Increase in working capital will decrease the net cash flow by the same amount, because in the calculation of net cash flow, increase in current assets are deducted and increase in current liabilities are added.

*So the calculation for change in net cash flow is as follows-

Change in net cash flow = Increase in liabilities - Increase in assets

= \$11,000 - \$15,000

= -\$4,000 (decrease)