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

We start by restating the scenario and the options to ensure clarity.
Question: 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)
Answer options:
- a. Increase in working capital
- b. No change in working capital
- c. Decrease in working capital
- d. No change in working capital and no change in cash.

Now, let’s analyze how each component affects working capital and cash.
- Working capital = current assets − current liabilities. Any change that increases current assets while leaving current liabilities the same increases working capital; conversely, if both current assets and current liabilities rise by the same amount, working capital remains unchanged.
- In the transaction, the company borrows $1 million on a short-term basis. This creates current liabilities (short-term borrowings) and increases cash temporarily by $1 million.
- The company also borrows $10,000 long-term. This increases non-current liabilities and increases cash temporarily by $10,000.
- The proceeds are invested in inventory, which increases current assets (inventory) and reduces cash accordingly.

Option a: Increase in working capital
- If you look at the sequence, cash rises by $1,000,000 from the short-term loan and then falls by $1,000,000 when the inventory is purchased. The net change in cash due to the use of the short-term loan is zero. Inventory increases by $1,000,000, and current liabilities increase by $1,000,000 (from the short-term loan). Net working capital = (inventory) − (short-term liabilities) remains unchanged from the initial position. The long-term loan affects non-current liabilities and does not change current liabilities or current assets in the ongoing balance, aside from the temporary cash flow. Therefore, there is no net increase in working capital. Thus, option a is not true.

Option b: No change in working capital
- As explained, current assets rise by the amount invested in inventory, and current liabilities rise by the short-term borrowings by the same amount. Since both sides of the working capital equation move by the same magnitude, the net working capital remains the same. This makes option b a plausible true statement.

Option c: Decrease in working capital
- There is no scenario here where current assets fall or current liabilities rise without a corresponding asset increase. The actions described do not create a decrease in working capital; the movements offset each other. Therefore, option c is incorrect.

Option d: No change in working capital and no change in cash.
- We need to evaluate cash: cash is received from borrowing and then used to buy inventory. After the inventory purchase, cash returns to its prior level (the net cash change is zero). So there is no net change in cash across the whole transaction.
- Combined with the offsetting changes in current assets (inventory) and current liabilities (short-term borrowing), the net working capital remains unchanged as well. Therefore, this option correctly describes both no change in working capital and no net change in cash.

Summary of reasoning:
- The short-term borrowing increases current liabilities and provides cash that is used to fund higher inventory (a current asset). The long-term borrowings affect non-current liabilities and do not alter current assets or current liabilities in a way that changes working capital.
- The increases in current assets (inventory) and current liabilities (short-term borrowings) offset each other, resulting in no net change in working capital.
- The cash impact is temporary: cash increases when borrowing, then decreases by the amount spent on inventory, leaving no net cash change.
- Among the options, the scenario described fits the statement that there is no change in working capital and no change in cash, i.e., option d.

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]单项选择题

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