Exam CLTD topic 1 question 99 discussion

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.