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.
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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