A business that wants to increase its working capital can take which of the following actions?

• A. Pay off long-term debt using cash
• B. Increase dividends paid to shareholders
• C. Increase net sales by offering discounts to customers who pay early
• D. Purchase additional inventory on credit

Answer: (C)

Verified step by step guidance

1. Understand the concept of working capital: Working capital is calculated as Current Assets minus Current Liabilities. It represents the liquidity available to a business for day-to-day operations.
2. Analyze the impact of paying off long-term debt using cash: Paying off long-term debt reduces cash (a current asset), which decreases working capital. This action does not help increase working capital.
3. Evaluate the effect of increasing dividends paid to shareholders: Dividends are paid out of retained earnings and cash. Increasing dividends reduces cash (a current asset), which decreases working capital. This action does not help increase working capital.
4. Consider the impact of increasing net sales by offering discounts to customers who pay early: Offering discounts encourages customers to pay sooner, which increases cash inflow and reduces accounts receivable (a current asset). This action improves liquidity and increases working capital.
5. Assess the effect of purchasing additional inventory on credit: Purchasing inventory on credit increases inventory (a current asset) and accounts payable (a current liability). Since both current assets and current liabilities increase, the net effect on working capital depends on the relative amounts. This action may not necessarily increase working capital.