Asked by Germanee Foster on Jun 22, 2024
Verified
A new project will cause accounts payable to increase by $35,000, accounts receivable to increase by $40,000 and inventory to decrease by $5,000 Which one of the following statements is true?
A) The project will not affect net working capital.
B) The change in accounts payable is a use of cash.
C) The change in inventory is a use of cash.
D) The project will decrease the amount of cash provided to customers.
E) Net working capital will decrease.
Net Working Capital
The difference between a company's current assets and current liabilities, indicating its short-term financial health and ability to meet short-term obligations.
Accounts Payable
Short-term liabilities or debts a company owes to its creditors for goods and services purchased on credit.
Inventory
The total stock of goods or materials a company holds for the purpose of resale or production.
- Assess changes in net working capital and its impact on project cash flows.
Verified Answer
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Savannah ClaypoolJun 28, 2024
Final Answer :
A
Explanation :
Net working capital is calculated as current assets minus current liabilities. The increase in accounts receivable ($40,000) and the decrease in inventory (-$5,000) sum to a $35,000 increase in current assets. The increase in accounts payable ($35,000) is an increase in current liabilities. The changes in current assets and current liabilities offset each other, so net working capital remains unchanged.
Learning Objectives
- Assess changes in net working capital and its impact on project cash flows.