What is the effect of increasing accounts payable on working capital?
Practice Questions
Q1
What is the effect of increasing accounts payable on working capital?
Increase working capital
Decrease working capital
No effect on working capital
Depends on current assets
Questions & Step-by-Step Solutions
What is the effect of increasing accounts payable on working capital?
Step 1: Understand what accounts payable is. Accounts payable is the money a company owes to its suppliers for goods or services received.
Step 2: Know what working capital is. Working capital is the difference between a company's current assets (like cash and inventory) and current liabilities (like accounts payable and short-term debt).
Step 3: Recognize that increasing accounts payable means the company is delaying payment to its suppliers.
Step 4: Realize that when accounts payable increases, current liabilities go up.
Step 5: Understand that working capital is calculated as current assets minus current liabilities.
Step 6: If current liabilities increase (due to higher accounts payable), but current assets remain the same, the overall working capital decreases.
Step 7: Conclude that increasing accounts payable does not increase working capital; it actually decreases it.
