Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Net Sales

Financial Accounting

4. Merchandising Operations

Net Sales

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Multiple Choice

Net working capital increases when:

both current assets and current liabilities decrease by the same amount

current assets increase while current liabilities remain unchanged

current assets decrease and current liabilities increase

current liabilities increase while current assets remain unchanged

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Verified step by step guidance

Understand the concept of net working capital (NWC): Net working capital is calculated as the difference between current assets and current liabilities. The formula is:

NWC = Current Assets - Current Liabilities

. It represents the liquidity available to a company for day-to-day operations.

Analyze the impact of changes in current assets and current liabilities on NWC: If current assets increase while current liabilities remain unchanged, the difference between the two (NWC) will increase. Conversely, if current liabilities increase while current assets remain unchanged, NWC will decrease.

Evaluate the first scenario: If both current assets and current liabilities decrease by the same amount, the difference between them (NWC) remains unchanged because the reduction is proportional.

Evaluate the second scenario: If current assets increase while current liabilities remain unchanged, the difference between them (NWC) increases. This aligns with the correct answer provided in the problem.

Evaluate the remaining scenarios: If current assets decrease and current liabilities increase, NWC decreases. Similarly, if current liabilities increase while current assets remain unchanged, NWC decreases. These scenarios do not result in an increase in NWC.