If an investment in a new asset results in a change in current assets that exceeds the change in current liabilities, this change in net working capital represents an initial cash outflow.

Question

Quizplus · Accepted Answer

An increase in current assets (such as inventory or accounts receivable) represents a cash outflow because it requires cash to be invested in these assets. Meanwhile, an increase in current liabilities (such as accounts payable) represents a cash inflow because it means the company has more time to pay its bills, freeing up cash in the short term. Therefore, if the change in current assets is greater than the change in current liabilities, it represents an initial cash outflow.

If an Investment in a New Asset Results in a Change