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.
II. Increasing accounts payable
III. Selling marketable securities and using the proceeds to pay dividends
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 |
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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. |