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

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Investment in net working capital arises when:

A company records depreciation expense on fixed assets.

A company increases its current assets more than its current liabilities.

A company issues new shares of common stock.

A company pays off all of its long-term debt.

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Verified step by step guidance

Understand the concept of net working capital: Net working capital is calculated as Current Assets minus Current Liabilities. It represents the liquidity available to a company for day-to-day operations.

Analyze the scenario where current assets increase more than current liabilities: If a company increases its current assets (e.g., inventory, accounts receivable, cash) more than its current liabilities (e.g., accounts payable, short-term debt), the net working capital will increase.

Relate this to the investment in net working capital: An increase in net working capital indicates that the company is investing more in its short-term assets relative to its short-term liabilities, which is referred to as an investment in net working capital.

Evaluate the other options provided: Depreciation expense on fixed assets does not directly affect net working capital because it is a non-cash expense. Issuing new shares of common stock affects equity, not net working capital. Paying off long-term debt affects long-term liabilities, not current liabilities.

Conclude that the correct answer is: A company increases its current assets more than its current liabilities, as this directly results in an investment in net working capital.