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    Question

    How does the purchase of a new machinery to expand

    production capacity impact the working capital of ABC Limited?
    A Not affect the working capital Correct Answer Incorrect Answer
    B Increase the working capital Correct Answer Incorrect Answer
    C Decrease the working capital Correct Answer Incorrect Answer
    D Either A or B Correct Answer Incorrect Answer
    E Cannot be determined for sure Correct Answer Incorrect Answer

    Solution

    Working capital = Current Assets – Current Liabilities. When a company purchases fixed assets like machinery, there are two possible scenarios: • Cash purchase → Cash (a current asset) decreases, which reduces working capital. • Credit purchase → Creditors (a current liability) increase, which also reduces working capital. Thus, in either case, the purchase of new machinery results in a reduction of working capital, even though it simultaneously increases the fixed assets and total assets of the company.

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