A firm is taking up a project that would increase its accounts payable by $3 5000, accounts receivable by $20 000 and inventory by $30 000

Finance Aug 08, 2020

A firm is taking up a project that would increase its accounts payable by $3 5000, accounts receivable by $20 000 and inventory by $30 000. Identify the correct statement Select one:

a. Net working capital has decreased

b. Net working capital has increased

c. Net working capital remains the same but value of assets has increased

d. Creditors turnover has decreased

Expert Solution

Answer:- Option (b):- Net working capital has increased

Explanation:- Net Working Capital = Current assets - Current liabilities

So, Increase in accounts payable by $35000 will reduce Net Working Capital by $35,000

and increase in accounts receivable by $20,000 and inventory by $30,000 will increase Net Working Capital by $50,000 ($30,000 + $20,000)

So, overall Net working capital has increased by $15,000 ( $50,000 - $35,000)

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