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Why inventory increase doesnt affect working capital

Forums › ACCA Forums › ACCA FM Financial Management Forums › Why inventory increase doesnt affect working capital

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by quangtuan.
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  • March 12, 2018 at 1:28 am #442254
    nhatanh2197
    Member
    • Topics: 10
    • Replies: 5
    • ☆

    This is the question i came across in BPP revision book:

    Gorwa Co’s 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

    The answer is C and the explaination is ” other situations have limit or no effect on working capital”.

    My question is why the increase of inventory level doesnt affect working capital? Because clearly based on the formula ” Working capital= Receivables + Cash + Inventory – Payables” inventory increase will result in higher working capital.

    Thank you in advance for giving me a help.

    March 12, 2018 at 1:41 am #442255
    quangtuan
    Participant
    • Topics: 5
    • Replies: 5
    • ☆

    Working capital= Receivables + Cash + Inventory – Payables

    Inventory increasing means cash decreases or payables increases, that’s why Working Capital does not change.

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