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Dear Mr Moffat,
I came across the following question which answer sounds not right to me.
Could you please correct me if I my understanding is wrong.Gorwa Co working capital is most likely to increase in which of the following situations?
a. Payments to suppliers are delayed
b. The period of credit extended to customers is reduced
c. Non current assets are sold
d. Inventory levels are increased.BBP answer is C which is wrong for me.
As working capital is current asset -current liabilities Non current assets do not effect the increase or decrease of working capital
Payment supplier delayed (increase of Payable) decrease working capital therefore No correct
The Period of credit extended to customer is reduced (reduce the receivable as the customers pay earlier) therefore decrease the working capital, therefore wrong.
Inventory level increase: correct as increase the current asset,therefore increase in working capital
Thanks and Regards
Gabriella
The answer is correct.
When non-current assets are sold, cash (or receivables) increases and therefore working capital increases.
If more inventory is purchased, then cash decreases (or payables increase) and therefore working capital remains unchanged.
Dear Mr Moffat,
Now it makes sense to me.
Thanks a lot for your help.Gabriella
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