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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 тАУ Current Liabilities. When a company purchases fixed assets like machinery, there are two possible scenarios: тАв Cash purchase тЖТ Cash (a current asset) decreases, which reduces working capital. тАв Credit purchase тЖТ 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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