Andjelkovic-Stewart Limited Company borrows $1 million short-term, $10,000 long-term and invests these proceeds in inventory. Which of the following statement is TRUE?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

To tackle this question, I’ll break down the cash and liability movements and then relate them to working capital.
Option a: Increase in working capital.
- When the company borrows 1,000,000 short-term, cash (a current asset) rises and current liabilities rise by 1,000,000.
- When it borrows 10,000 long-term, cash increases by 10,000 and long-term liabilities increase by 10,000. Since long-term debt is not a current liability, this does not affect current liabilities.
- The company then invests the borrowed cash into inventory, which converts cash (another current asset) into inventory (a current asset). As a result, total current assets go up by the amount invested in inventory (1,010,000) while current liabilities remain up by 1,000,000 from the short-term borrowing.
- Net effect on working capital (CA − CL) is an increase of 10,000 (1,010,000 CA increase vs 1,000,000 CL increase).
Therefore, there is an increase in working capital.

Option b: No change in working capital.
- This would require CA and CL to move in exactly the same amount. However, CA increases by 1,010,000 (cash raised plus the resulting inventory) while CL increases by 1,000,000 (short-term borrowing). The mismatch means WC changes.

Option c: Decrease in working capital.
- Since CA increases more than CL (by 1,010,000 vs 1,000,000), WC would not decrease; it increases. A decrease would require CL to rise more than CA or CA to fall, neither of which happens here.

Option d: No change in working capital and no change in cash.
- Cash does change temporarily: cash rises with borrowings and falls back when the inventory is purchased. While cash returns to its original level at the end, the net change in current assets (due to the inventory) creates a change in working capital (an increase of 10,000). So this statement is incorrect.

In summary, evaluating the cash inflows from both borrowings and the use of those funds to acquire inventory shows that working capital increases by 10,000, making option a the correct characterization of the transaction set. The other options fail because they assume either no net change in working capital or a decrease, or they incorrectly claim cash remains unchanged in all respects.

Andjelkovic-Stewart Limited Company borrows $1 million short-term, $10,000 long-term and invests these proceeds in inventory. Which of the following statement is TRUE?[Fill in the blank]

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