AICPA Exam CPA-Business Topic 3 Question 57 Discussion

Choice 'd' is correct. Refinancing a short-term note payable with a two-year note payable would increase the working capital of a firm.

Choice 'a' is incorrect. The purchase of a new plant (fixed asset) financed by a 20-year mortgage (longterm debt with a one-year current portion) would reduce working capital because current liabilities would be increased.

Choice 'b' is incorrect. The cash collection of accounts receivable has no effect on working capital-cash increases by the amount that A/R decreases.

Choice 'c' is incorrect. The payment of a 20-year mortgage payable (long-term debt) would reduce cash and have no effect on current liabilities, thereby reducing working capital.