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    Nikki4's Avatar
    Nikki4 Posts: 4, Reputation: 1
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    #1

    Mar 16, 2007, 08:06 AM
    Working Capital
    If a firm borrows money on a six-month bank loan, what would the working capital be immediately after obtaining the loan, relative to its working capital just prior to the loan?

    Would it be Higher, Lower, the same?
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Mar 16, 2007, 03:40 PM
    Before the loan, let's say we have 100 CA and 60 CL, therefore a total WC of 40

    The firm borrows the money (let's say 100) on a 6 month bank loan, so the JE would be:
    Dr. Cash 100
    Cr. Bank Loan Payable 100

    The question is, is the Bank Loan current or long term liability?

    The definition of a current liability is a liability payable within 1 year.

    Since it is payable in 6 months, it is a CL.

    Therefore,
    CA of 200 – CL of 160 = WC of 40

    Therefore, NO change in WC
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