In: Finance
Which one of the following will increase net working capital?
Multiple Choice
A decrease in cash.
An increase in accounts payable.
An increase in depreciation.
A profitable sale of inventory.
The write-off of a bad debt.
Correct answer is D profitable sale of inventory will increase net WC
Working capital = Current assets - Current liabilities
Change in Working capital = Change in Current assets - Change in Current liabilities
An increase in current asset/decrease in current liability will lead to an increase in working capital
On the other hand, An increase in current liability/ decrease in the current asset will lead to decrease in working capital
1. A decrease in cash = Decrease in CA = decrease in WC
2. An increase in accounts payable = Increase in CL = decrease in WC
3. An increase in depreciation. effects fixed asset which does not have an effect over working capital
4. A profitable sale of inventory will increase cash by more than decrease in inventory, leading to net increase in current asset = Increase in net working capital
5. Write off of debtors will reduce debtors balance = Decrease in Current asset = Decrease in Working capital