Q20. A corporation is considering expanding operations to meet growing dermand.

Question

Q20. A corporation is considering expanding operations to meet growing dermand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by 50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is a. An increase of $60,000 b. A decrease of $120,000 c. A decrease of $60,000 d. An increase of $120,000 Cr

Explanation / Answer

Change in net working capital = change in current assets - change in current liabities

Change in current assets = change in cash + change in inventory+ change in accounts receivable + change in other current assets

= 20000+40000+60000 = 120000

Similarly, change in current liabilities = 50000+10000

= 60000

Change in long term debt is not included in change in current liabilities because it is non current in nature as it is long term debt.

Therefore, change in net working capital = 120000-60000

= 60000

Therefore, change in net working capital is "an increase of 60000" as all the figures of changes are increase, we can directly add the current assets and deduct current liabilities.

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