Question

Which of the following actions will cause an increase in net working capital? Response options group...

Which of the following actions will cause an increase in net working capital?

Response options group

The merchandise is sold for profit, but the sale is on credit

Cash is used to invest in temporary securities

Cash dividends are declared and paid

Long-term debt is settled with contributions from partners

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Answer #1

The Working Capital is computed by deducting Current liabilities from Current assets. So, to increase the Working capital, either Current asset should be increased or Current liability should decrease.

When the merchandise is sold, the inventory is reduced (Current asset). But, the Receivables shall increase as the sales are on credit. It is noted that the decrease in inventory is lesser than the sale value as it is on profit. So, it would increase the Working capital.

When cash is used to purchase temporary assets, the total current asset value does not change. It does not impact the working capital also.

When cash dividend are paid, it also does not have increasing effect on the working capital. Futhur, when the long term debt is paid using cash brought by partners also, the working capital is not increased.

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