Question

Pan American Airways is a financially distressed international airline that struggled to attract customers in 2019. To boost their revenues, Pan Am decided to offer long-term financing in 2020. The company generated an additional $1 billion in revenues that year through accounts receivable. The airline also spent $1 billion in cash to stock up on inventory (the company is decreasing the cash that it already had to buy the inventory). All else being equal, what is the change in net working capital in 2020?

Group of answer choices No change $2 billion -$1 billion -$2 billion $1 billion

Answer 1

Answer is $1 billion.

change in net working capital in 2020 = working capital in 2020 - working capital in 2019

working capital = current assets - current liabilities

current assets include cash, accounts receivable and inventory.

increase in current assets will be a positive change in net working capital and vice versa.

change in net working capital in 2020 = increase in inventory - decrease in cash + increase in accounts receivable = $1 billion - $1 billion + $1 billion = $1 billion