If demand for a firm's products suddenly slows down so that inventory increases while sales decrease, how will the firm's needs for net working capital react?
A) Net working capital would increase.
B) Net working capital would decrease.
C) There would be no change in net working capital.
D) Net working capital would first decrease, then increase slowly over time.

Question

Quizplus · Accepted Answer

When demand for a firm's products decreases, leading to increased inventory and decreased sales, the firm's net working capital increases. This is because net working capital is calculated as current assets minus current liabilities, and a rise in inventory (a current asset) without a corresponding increase in current liabilities would result in higher net working capital.

If Demand for a Firm's Products Suddenly Slows Down So