How does paying $5,000 previously owed to a supplier affect cash and net working capital?
Paying $5,000 previously owed to a supplier would affect both cash and net working capital. Let's break it down:
1. Cash: Cash is the money a company has on hand or in its bank accounts. When you pay $5,000 to a supplier, it means you are reducing the cash balance. So, your cash position decreases by $5,000.
2. Net Working Capital: Net working capital is the difference between a company's current assets (such as cash, accounts receivable, inventory) and its current liabilities (such as accounts payable, short-term debt). It represents the company's ability to meet its short-term obligations.
When you owe $5,000 to a supplier, it is recorded as an accounts payable, which is a current liability. When you pay off this amount, the accounts payable decreases by $5,000. As a result, your net working capital increases by $5,000 because you are reducing a liability.
In summary, paying $5,000 previously owed to a supplier reduces your cash balance by $5,000 and increases your net working capital by $5,000.