How would the following transactions affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.
Answer
To determine how the transactions affect cash and net working capital, we need to analyze the specific nature of each transaction. Let's break it down:
a. Paying out a $2 million cash dividend:
(i) This transaction decreases cash by $2 million, as the company is distributing cash to its shareholders.
(ii) This transaction does not impact net working capital, as it only affects the company's cash position and does not involve any current assets or liabilities.
b. A customer paying a $2,500 bill resulting from a previous sale:
(i) This transaction increases cash by $2,500 since the customer is making a payment.
(ii) This transaction increases net working capital by $2,500, as it reduces accounts receivable (a current asset) and increases cash (also a current asset).
c. Paying $5,000 previously owed to one of its suppliers:
(i) This transaction decreases cash by $5,000, as the company is making a payment to the supplier.
(ii) This transaction does not impact net working capital, as it only affects the company's cash position and does not involve any current assets or liabilities.
d. Borrowing $1 million long-term and investing the proceeds in inventory:
(i) This transaction increases cash by $1 million since the company receives the loan proceeds.
(ii) This transaction increases net working capital by $1 million, as it increases cash (a current asset) and inventory (also a current asset).
e. Borrowing $1 million short-term and investing the proceeds in inventory:
(i) This transaction increases cash by $1 million since the company receives the loan proceeds.
(ii) This transaction increases net working capital by $1 million, as it increases cash (a current asset) and inventory (also a current asset).
f. Selling $5 million of marketable securities for cash:
(i) This transaction increases cash by $5 million, as the company receives proceeds from selling marketable securities.
(ii) This transaction does not impact net working capital, as it only affects the company's cash position and does not involve any current assets or liabilities.
In summary, transactions (a), (c), and (f) only impact cash and do not affect net working capital. Transactions (b), (d), and (e) both increase cash and net working capital due to changes in current assets.