Question

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is __________.
A) an increase of $120,000.
B) a decrease of $40,000.
C) a decrease of $120,000.
D) an increase of $60,000.

Answer 1

Answer:

B) a decrease of $40,000

Explanation:

As we Know Working capital is the the net or current assets and current liabilities.

Increase in Current Assets

Cash                              $20,000

Accounts receivable    $40,000

Inventories                   $60,000

Total Increase in CA   $120,000

Increase in Current Liabilities

Accounts payable       $50,000

Accruals                       $10,000

Long-term debt           $100,000

Total Increase in CA   $160,000

Increase in Working Capital =  Increase in Current Assets - Increase in Current Liabilities

Change in Working Capital = $120,000 - $160,000 = -$40,000

As current Liabilities increased more than the current assets, so the working capital will decrease by $40,000