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Dear Tutor,
Could you please help me with the following question:
Gorwa Co’s working capital is most likely to increase in which of the following situations?1. Payments to suppliers are delayed
2. The period of credit extended to customers is reduced
3. Non-current assets are sold
4. Inventory levels are increased
The correct answer is 3. Non current assets are sold.Could you please help me why this answer is right and not e.g. Inventory levels are increased?
Working capital is current assets less current liabilities.
So if non-current assets are sold, then non-current assets reduce but receivables – and therefore working capital – increases.
(If they buy more inventory (so inventories increase), then payables also increase and so the net effect on working capital is zero).
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