Which of the following rules stands true while preparing a schedule of changes in working capital (A) An increase in current assets increases working capital (B) An increase in current assets decreases working capital (C) An increase in current liabilities decreases working capital (D) An increase in current liabilities increases working capital Choose the most appropriate answer from the options given below:?

Option 1 : A and C only

The correct answer is A and C only

 Working Capital:

The difference between a company's current assets, such as cash, accounts receivable (unpaid invoices from customers), and inventories of raw materials and completed goods, and its current liabilities, such as accounts payable, is known as working capital.

Formula: Working Capital = Current assets - Current Liabilities

 (A) An increase in current assets increases working capital

Let us consider an example:

Let Current assets = 1,00,000 and Current Liabilities = 40,000

Working Capital = 1,00,000 - 40,000 = 60,000

Current Assets increases to 1,20,000

Working Capital = 1,20,000 - 40,000 = 80,000

Hence, increase in current assets increases working capital
 

 (C) An increase in current liabilities decreases working capital

Let us consider an example:

Let Current assets = 1,00,000 and Current Liabilities = 40,000

Working Capital = 1,00,000 - 40,000 = 60,000

Current Liabilities increases to 60,000

Working Capital = 1,20,000 - 60,000 = 40,000

Hence, an increase in current liabilities decreases working capital