Question
How does the purchase of a new machinery to expand
production capacity affect the working capital of a company ABC Limited?Solution
Working capital is the difference between the current assets and current 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. Apart from the impact on working capital, this purchase will also increase the Fixed Assets and therefore the total assets of the company.
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