Question
How does the purchase of a new machinery to expand
production capacity impact the working capital of ABC Limited?Solution
Working capital = Current Assets ā Current Liabilities. When a company purchases fixed assets like machinery, there are two possible scenarios: ā¢ Cash purchase ā Cash (a current asset) decreases, which reduces working capital. ā¢ Credit purchase ā 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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