Indicate how each of the following six different transactions a company would make would 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 $5000 previuosly 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.
To determine how each of the transactions would affect cash and net working capital, we need to understand the nature of these transactions and their impact on a company's financial position. Here's how each transaction would affect cash and net working capital:
a) Paying out a $2 million cash dividend:
(i) Cash: Cash decreases by $2 million as the dividend is paid out to shareholders.
(ii) Net working capital: Net working capital remains unchanged as this transaction does not directly impact the company's current assets or liabilities.
b) A customer paying a $2,500 bill resulting from a previous sale:
(i) Cash: Cash increases by $2,500 as the customer pays the outstanding bill.
(ii) Net working capital: Net working capital increases by $2,500 as the accounts receivable (current asset) decreases.
c) Paying $5,000 previously owed to one of its suppliers:
(i) Cash: Cash decreases by $5,000 as the payment is made to the supplier.
(ii) Net working capital: Net working capital remains unchanged as this transaction only involves a transfer of current liabilities (accounts payable).
d) Borrowing $1 million long-term and investing the proceeds in inventory:
(i) Cash: Cash increases by $1 million as the loan proceeds are received.
(ii) Net working capital: Net working capital increases by $1 million as the inventory (current asset) increases and the long-term liability increases by the same amount.
e) Borrowing $1 million short-term and investing the proceeds in inventory:
(i) Cash: Cash increases by $1 million as the loan proceeds are received.
(ii) Net working capital: Net working capital increases by $1 million as the inventory (current asset) increases and the short-term liability increases by the same amount.
f) Selling $5 million of marketable securities for cash:
(i) Cash: Cash increases by $5 million as the marketable securities are sold.
(ii) Net working capital: Net working capital remains unaffected as marketable securities are typically classified as investments and not included in the calculation of net working capital.
Please note that net working capital is calculated as current assets minus current liabilities. The impact of these transactions on net working capital may vary depending on the specific circumstances and composition of a company's current assets and liabilities.