Assume the following information from the financial statements of ReStateM Company:
Net income $10,000
Depreciation expense $2,000
Salaries expense $5,000
Deferred income taxes $1,000
Change in accounts receivable $2,000
Change in accounts payable -$3,000
Change in inventory -$4,000
Capital expenditures $5,000
The change in net working capital for ReStateM Company is:
A)Increase $7,000
B)Decrease $7,000
C)Increase $1,000
D)Decrease $1,000

Question

Quizplus · Accepted Answer

Net working capital change is calculated by changes in current assets (excluding cash) minus changes in current liabilities (excluding debt). Here, the change in accounts receivable (+$2,000) and inventory (-$4,000) are changes in current assets, and the change in accounts payable (-$3,000) is a change in current liabilities. Thus, the net change is $2,000 - $4,000 - $3,000 = -$5,000. However, the correct calculation should consider only the changes in accounts receivable and accounts payable, which are +$2,000 and -$3,000, respectively, leading to a net decrease of $1,000 in net working capital. The inclusion of inventory was an error in my explanation process, as it should indeed factor into the calculation, making the correct adjustment: $2,000 (accounts receivable increase) - $3,000 (accounts payable decrease) - $4,000 (inventory decrease) = -$5,000, not -$1,000 as previously stated. This mistake in my explanation led to the incorrect conclusion. The correct interpretation of changes should account for all mentioned components affecting net working capital, leading to a reevaluation of the correct answer based on the provided financial statement changes.

Assume the Following Information from the Financial Statements of ReStateM