Question

A decrease in accounts payable constitutes a/an _________ in net working capital and is considered a/an __________ to a project.

Select one:

a. increase; cash inflow

b. increase; cash outflow

c. decrease; cash inflow

d. decrease; cash outflow

e. increase; opportunity cost

Answer 1

The correct answer is d. Decrease; cash outflow

Net working capital = Current asset - Current liabilities

Decrease in accounts payable will result in decrease in net working capital. Cash is a part of current assets and accounts payables is a part of current liabilities. Cash will be used to pay the accounts payable and as a result of it the current assets will decrease. The decrease in current asset will eventually lead to decrease in the net working capital. As payments are made in cash it will be considered as a/an cash outflow when accounts payable decrease.