Company XYZ has purchased a new machinery to expand its

production capacity. This purchase of Fixed Asset will _________

A Increase the working capital Correct Answer Incorrect Answer

B Decrease the working capital Correct Answer Incorrect Answer

C Not affect the working capital Correct Answer Incorrect Answer

D All of the above Correct Answer Incorrect Answer

Solution

Working capital is the difference between the capital assets and capital liabilities. The purchase of fixed assets can be done by 2 ways: • Cash payment – this would reduce cash and therefore the current assets, thereby reducing the working capital • Credit purchase – this would increase the creditors and therefore the current liabilities, thereby again reducing the working capital.

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EMRS Hostel Warden, JSA and Accountant

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