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The amount of working capital is most likely to increase when:
A. Work-in-progress falls
B. Selling prices increase
C. The credit period allowed to customers is reduced
D. The credit period taken from suppliers is increasedI don’t understand why C and D are not correct. My reasoning: if receivables fall (C), cash increases by the same amount; if payables rise (D), cash is higher. Since working capital = current assets – current liabilities, the total amount shouldn’t change — it just changes when cash is received or paid. Why are C and D treated as reducing working capital?
Thanks very much, sir!
C. The credit period allowed to customers is reduced
This would actually decrease working capital because it reduces receivables as customers pay their debts more quickly, leading to less cash tied up in accounts receivable.
D. The credit period taken from suppliers is increased
This would also decrease working capital because it increases payables, which are current liabilities. An increase in payables means that the company is delaying cash outflows, but it does not increase the net working capital.
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