1) When a company pays out more dividends to shareholders in any particular year: A) Shareholders'...
1) When a company pays out more dividends to shareholders in any particular year:
A) Shareholders' equity must decrease
B) Long term debts must increase
C) Long term assets must decrease
D) Short term debts must increase
2) Which one of the following will increase the net working capital of a firm?
A) Making a payment on a long-term debt
B) Obtaining a 3-year loan to purchase inventory
C) Collecting payment from a customer
Homework Answers
1. The answer is
A. Shareholders equity must decrease
Since dividends paid are deducted from retained earnings which are a part of shareholders equity
It will have no.impact on debts and long term assets
2. Net working capital = current assets - current liabilities
B will increase net working capital I.e. obtaining loan to purchase inventory as current assets will increase while current liabilities will remain the same
Making payment on debt will reduce cash and hence current assets
Collecting payments will reduce debtors and increase cash and hence, no impact on current assets
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