Question

Which relates to NEGATIVE CHANGE in net working capital?

A. Increase in inventory level
B. Sale of net fixed assets
C. Purchase of net fixed assets
D. Increase in current assets and decrease in current liabilities for the period
E. Increase in current liabilities with no change in current assets for the period

Answer 1

An increase in current liabilities with no change in current assets directly leads to a negative change in net working capital, indicating that a company has more short-term financial obligations without an increase in its short-term resources.

Step-by-step explanation:

Negative change in net working capital is associated with scenarios where current assets decrease or current liabilities increase without a corresponding increase in current assets. The option which directly relates to a negative change in net working capital is:

E. Increase in current liabilities with no change in current assets for the period

This is because an increase in current liabilities (such as accounts payable or short-term debt) without an increase in current assets means that the company has more short-term obligations than resources, implying that its working capital has decreased.