Answered: When a company prepays 4 months' rent…

When a company prepays 4 months' rent at year-end using cash, the working capital (defined as current assets minus current liabilities): A)Increases. B)Remains the same. C)Decreases.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

When a company prepays 4 months' rent at year-end using cash, the working capital (defined as current assets minus current liabilities):

A)Increases.

B)Remains the same.

C)Decreases.

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Expert Solution

Step 1

Working capital = Current assets - Current liabilities

Current assets include both prepaid expenses and cash.

When rent is paid in advance, both prepaid rent and cash are affected.

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