Final answer:
Net working capital increases when a credit customer pays for his or her purchase, because this transaction increases current assets (cash) with no corresponding increase in current liabilities. The correct answer is D
Step-by-step explanation:
The question relates to net working capital and its increase due to various business transactions. Net working capital is the difference between a company's current assets and current liabilities. An increase in net working capital means that a firm’s liquidity is improving, indicating a greater capability to fund its day-to-day operations or pay off short-term obligations.
Now, let's analyze the options given:
a) Fixed assets are purchased for cash: This decreases cash (a current asset) without affecting current liabilities, so it does not increase net working capital.
b) Inventory is purchased on credit: This increases inventory (a current asset) and also increases accounts payable (a current liability), so the net effect is often neutral on the net working capital.
c) Inventory is sold at cost: If sold for cash, it would not affect net working capital because inventory is exchanged for cash. If sold on credit, accounts receivable (a current asset) would increase, but with no immediate effect on net working capital.
d) A credit customer pays for his or her purchase: This increases cash (a current asset) without increasing current liabilities, thus increasing net working capital.
e) Inventory is sold at a profit: If sold for cash, this would increase cash more than the value of the inventory sold, thus increasing net working capital. On credit, it would increase accounts receivable (current assets), potentially increasing net working capital.
The correct answer is d) a credit customer pays for his or her purchase, as this transaction increases current assets (cash) with no corresponding increase in current liabilities, thereby increasing net working capital.