The cash impact of the change in working capital when current assets increased by $40 million and current liabilities increased by $25 million is which of the following?

• A. Decrease of $15 million
• B. Increase of $15 million
• C. No change
• D. Decrease of $25 million

Answer: (A)

When current assets go up, cash is tied up in assets; when current liabilities go up, cash is freed up because you can delay or reduce cash outflows to suppliers. The cash impact from changes in working capital is the net effect of these opposite forces: cash decreases if the increase in assets exceeds the increase in liabilities, and cash increases if liabilities rise more.

Here, current assets increase by 40, and current liabilities increase by 25. The net effect on working capital is an increase of 15, meaning more cash is tied up in the increased assets than is offset by the extra liability. Therefore, cash falls by 15 million.

In intuition terms, you spent cash to build up assets, and you gained some liquidity from the higher liabilities, but not enough to offset the asset buildup. So the cash outcome is a reduction of 15 million.