Indicate how each of the following six different transactions that Dynamic Mattress might make would affect (I) cash and (ii) net working capital:
1. Paying out a $2 million cash dividend.
2. A customer paying a $2,500 bill resulting from a previous sale.
3. Paying $5,000 previously owed to one of its suppliers.
4. Borrowing $1 million long-term and investing the proceeds in inventory.
5. Borrowing $1 million short-term and investing the proceeds in inventory.
6. Selling $5 million of marketable securities for cash.[/QUOTE]

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1. Paying out a $2 million cash dividend.
Both cash and net working capital is affected negatively, because,
working capital = current assets – current liabilities, and cash is included in the current assets, therefore any payment of cash decreases both the cash and net working capital balances.

2. A customer paying a $2,500 bill resulting from a previous sale.
Cash decreases with the cash amount, but net working capital does not change, because accounts payable will decrease and which is considered to be a current liability.

3. Paying $5,000 previously owed to one of its suppliers.
Cash decreases with 5,000, accounts payable decreases, working capital decrease as well.

4. Borrowing $1 million long-term and investing the proceeds in inventory.
Cash increases, notes payable increases, inventory increases, current assets increases, and current liabilities won't change because it is a long term debt, then, net working capital will change as well by the effect of current assets which has increased

5. Borrowing $1 million short-term and investing the proceeds in inventory.
In this case, the case is different from above, try doing it by yourself, if you understood the case above.

6. Selling $5 million of marketable securities for cash.
Cash increases, investments in securities increases, current assets increases, and current liabilities won't change, then the working capital will change with the effect of current assets only.

Hope that will help.

Need anymore help get back to me,

Moussa Hawas
Equity Research Analyst