MULTIPLE CHOICE Consider a firm Theta that spends $60 to produce goods in year 1. In...
MULTIPLE CHOICE
Consider a firm Theta that spends $60 to produce goods in year 1. In year 2 it sells these goods for $100, but its customers pay their bills with a delay, therefore the payment is not received until year 3. What's the amount of net working capital for each year?
1. year 1: -$60; year 2: $100; year 3: $0
2. year 1: $60; year 2: $40; year 3: $0
3. year 1: -$60; year 2: $0; year 3: $100
4. year 1: $60; year 2: $100; year 3: $0
Homework Answers
Answer: 1. Year 1: - $ 60; Year 2: $ 100; Year 3: $ 0
Assuming that the amount spent in Year 1 is on credit, Current liabilities = $ 60
Since there are no receivables in Year 1, Net Working Capital = Current Assets - Current Liabilities = $ 0 - $ 60 = - $ 60
In year 2, there is receivable of $ 100. Assuming that the current liabilities have been paid off in Year 2, Net Working Capital = $ 100 - $ 0 = $ 100
In year 3, the receivable is collected, and assuming that the amount received is immediately spent on expenses, no current assets are left. Therefore net working capital is $ 0.
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MULTIPLE CHOICE
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