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Huffaker Corporation paid for a new plant with cash
Huffaker Corporation paid for a new plant with cash. This transaction has what effect on working capital?
a. Working capital increases.
b. Working capital decreases.
c. Working capital does not change.
d. The effect cannot be determined.
Expert Solution
Answer: b. Working capital decreases.
Working capital is computed as current assets less current liabilities. A purchase of new plant with cash has an entry as follows:
| Account | Debit | Credit |
|---|---|---|
| Plant Asset | XXX | |
| Cash | XXX |
Plant is a non-current asset and a debit or increase with this account has no effect on working capital. Meanwhile, cash is a current asset, a credit or decrease with this account would result to a decrease in working capital.
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