What may be the cause if the value of inventory is greater than the value of the net working capital?
What may be the cause if the value of inventory is greater than the value of the net working capital?
Net working capital is calculated as current assets minus current liabilities. Current assets include components like inventory, accounts receivable, and cash. If the value of inventory is greater than the value of net working capital, it suggests that inventory is disproportionately high compared to other current assets and liabilities. This imbalance indicates that inventory levels are excessively high, leading to a higher value of inventory compared to the overall net working capital.
The answer is (C), inventory is too high. Net working capital is calculated by subtracting current liabilities from current assets. Current assets include inventory, accounts receivable, and cash. Current liabilities include accounts payable and accrued expenses. If inventory is too high, it will increase the value of current assets, but it will not increase net working capital. This is because inventory is a current asset, but it is also a current liability. When inventory is sold, it is converted into accounts receivable, which is another current asset. However, when accounts receivable are collected, the cash is used to pay off accounts payable, which is a current liability. Therefore, if inventory is too high, it will not increase net working capital. In fact, it may actually decrease net working capital if the inventory is not selling quickly enough.