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This answer could result from considering only the current portion of the mortgage payable as equivalent to working capital. The current portion of the mortgage payable is a current liability and so it is a component of working capital. However, working capital consists of all current assets minus all current liabilities, so there are more components to be included in calculating the change in working capital. If you have calculated this incorrect answer in another way, please let us know how you did it so we can add that to this answer explanation. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
This answer results from not including the current portion of the mortgage payable as a current liability. Current maturities of long-term debt are current liabilities, so the increase in the current portion of the mortgage payable decreases net working capital.
In the current situation, the company has working capital of $555,000 ($1,080,000 ? $525,000). Under the proposed plan it would be $525,000 ($1,280,000 ? $755,000). This is a decrease of $30,000. Alternatively, this question could be answered by selecting the items that are either current assets or current liabilities and calculating the amount of change in each and its effect on net working capital. An increase in a current asset increases net working capital while a decrease in a current asset decreases net working capital. An increase in a current liability decreases net working capital while a decrease in a current liability increases net working capital. Thus, the changes in the current assets and current liabilities will affect net working capital as follows: Effect on Net Working Capital Cash +20,000 Accounts payable ?80,000 Accounts receivable +100,000 Inventory +80,000 Current maturities long-term debt ?150,000 Change in net working capital ?30,000
This answer could result from omitting cash and accounts payable from the calculation of the difference in working capital. Working capital consists of all current assets minus all current liabilities. Cash is a current asset and accounts payable is a current liability, so they should both be included. If you have calculated this incorrect answer in another way, please let us know how you did it so we can add that to this answer explanation. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.