Question

If accounts receivable increase by​ $1,000,000, inventory decreases by​ $500,000, and accounts payable increase by​ $500,000, net working capital would​ ________. A. increase by​ $2,000,000 B. increase by​ $1,500,000 C. decrease by​ $500,000 D. experience no change

Answer 1

Answer:

D. experience no change

Explanation:

We know,

Net working capital = Current Assets - Current liabilities

Accounts receivable and inventory are current assets accounts while accounts payable is a current liabilities account.

We also know,

Increase in current assets will increase working capital.

Increase in current liabilities will decrease working capital.

Decrease in current assets will decrease working capital.

Decrease in current liabilities will increase working capital.

Therefore, increase in Accounts receivable will increase the working capital by $100,000.

Again, decrease in inventory will reduce the working capital by $50,000.

Finally, increase in Accounts payable will decrease the working capital by $50,000.

So, $100,000 - 50,000 - 50,000 = 0

Therefore, no change in the working capital. Option D is correct.