Working capital will affect incremental cash flows if:
A)Current liabilities change more than current assets
B)Current assets change more than current liabilities
C)Inventory changes from previous levels
D)Net working capital changes from previous levels

Question

Quizplus · Accepted Answer

Net working capital is the difference between current assets and current liabilities. Any change in net working capital has an impact on incremental cash flows as it affects the company's ability to finance its day-to-day operations. A decrease in net working capital indicates a higher level of liquidity and hence a positive effect on incremental cash flows. Conversely, an increase in net working capital indicates lower liquidity and hence a negative effect on incremental cash flows. Changes in current assets or liabilities alone may have an impact but are not as significant as changes in net working capital. Therefore, option D is the best choice.

Working Capital Will Affect Incremental Cash Flows If