Question

Which one of the following will decrease the value of a firm's net working capital?

1) Increase in accounts payable
2) Decrease in accounts receivable
3) Increase in inventory
4) Increase in short-term debt

Answer 1

An increase in accounts payable will decrease the value of a firm's net working capital.

Step-by-step explanation:

The value of a firm's net working capital is determined by the difference between its current assets and current liabilities. To decrease the value of net working capital, we need to reduce either current assets or current liabilities.

Among the options given, the one that will decrease the value of net working capital is an increase in accounts payable. When a firm increases its accounts payable (money owed to suppliers), it is effectively delaying payment, which reduces its current liabilities, thus decreasing its net working capital.

The other options, such as a decrease in accounts receivable or an increase in inventory, actually increase the value of net working capital because they either decrease current assets or increase current liabilities.

An increase in short-term debt would also increase the value of net working capital, as it increases current liabilities.