CFA Practice Question

There are 120 practice questions for this study session.

CFA Practice Question

Which of the following activities will decrease net working capital, all other factors remaining equal? Assume the current ratio is greater than one.

I. Selling inventory at book value for cash
II. Increasing accounts payable
III. Selling marketable securities and using the proceeds to pay dividends
A. I and II
B. I and III
C. II and III
Explanation: I: In this case, inventory declines and cash rises by an equal amount. Thus, there is no change in net working capital.

User Contributed Comments 8

User Comment
djop2002 any hints for the reason III will decrease net WC?
Kuki you are selling mktble securities for cash. No change in current assets as mktble securities reduce and cash increases by the same amount.
HOWEVER, you utilize the cash to pay dividends therefore current assets reduce and therefore working capital declines.
Profache Cash is used (dividends), assets go down, liabilities stays the same, the NWC goes down.
sonofman you are selling inventory at book value not at fair market value which means that cash from the sale of inventory will be less
gill15 Sonofman. Remember that our ratios that we are finding are based on BOOK VALUES

thats why it remains the same. Way to look into the question though...good job.
something Why increase in accounts payable decreases working capital? Accounts payable a liability, and an increase should increase capital inflow. And it also means inventory increases, wouldn't that increase the current asset.
markbucfa Something. 200/100=2, (200+10)/(100+10)=1.91
gomez1234 I believe that this is wrong. Increasing accounts payable should increase net working capital. Such an error is unacceptable.
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