Question

Which one of the following will decrease the net working capital of a firm? Assume that the current ratio is greater than 1.0. collecting an accounts receivable paying an accounts payable selling a fixed asset for book value selling inventory at a profit paying a payment on a long-term debt

Answer 1

Paying an accounts payable will decrease the net working capital of a firm.

Net working capital is calculated by subtracting current liabilities from current assets. Current liabilities include accounts payable, which represent the amount of money a firm owes to its suppliers or creditors for goods or services received. When a firm pays its accounts payable, it reduces its current liabilities.

By reducing current liabilities, the firm's net working capital decreases because the denominator in the calculation (current liabilities) decreases. This means that the firm has less available capital to fund its daily operations and cover short-term obligations.

It is worth noting that while paying an accounts payable decreases net working capital, it is also a sign of good financial management. It indicates that the firm is fulfilling its obligations and maintaining healthy relationships with its suppliers.

Step-by-step explanation: