Question

CHAPTER 9: NET WORKING CAPITAL A small business has the following changes in their end-of-the-month balances:...

CHAPTER 9: NET WORKING CAPITAL

A small business has the following changes in their end-of-the-month balances:

Nov 1 Dec 1

Cash $ 1,000 $ 2,000

Inventory $27,000 $20,500

Accounts Payable $27,500 $21,500  

What is the monthly net working capital change from November 1 to December 1, and does it represent a cash inflow or cash outflow?

a.

The monthly net working capital change from November 1 to December 1 is +$1,000, and represents a cash inflow.
b.

The monthly net working capital change from November 1 to December 1 is -$500, and represents a cash outflow.
c.

The monthly net working capital change from November 1 to December 1 is +$500, and represents a cash outflow.
d.

The monthly net working capital change from November 1 to December 1 is -$1,000, and represents a cash inflow.
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Answer #1

Net Working capital change = Net Working capital in Dec 1 - Net working capital in Nov 1

Net Working capital in Nov 1 = Current Assets - Current liabilities = Cash + Inventory - Account payable = 1000 + 27000 - 27500 = $ 500

Net working capital in Dec 1 = 2000 + 20500 - 21500 = $ 1000

Monthly net working capital change = 1000 - 500 = $ 500

Answer is

c.

The monthly net working capital change from November 1 to December 1 is +$500, and represents a cash outflow.
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