A corporation is considering expanding operations to meet growing demand. With t

Question

A corporation is considering expanding operations to meet growing demand. 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 invento- ries by $60,000. At the same time accounts payable will increase by $50,000, ac- cruals by $10,000, and long-term debt by $100,000. The change in net working capital is a. a decrease of $40,000. b. a decrease of $120,000. c. an increase of $120,000. d. an increase of $60,000.

Explanation / Answer

Networking capital = current assets - current liabilities

Current assets = cash + accounts receivebiles + inventory= 20,000 +40,000 +60,000 = 1,20,000

Current liabilities = accounts payable + accruals + long term debt= 50,000 +10,000 + 100,000 =1,60,000

Answer 1,20,00 -1,60,000,,

A.decrease of 40,000

Note.long term debt is includedin current liabilities as portion is paid in current year, some analysts do not consider long term debt in current liabilites.

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