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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Which statement about the effect of business growth and price-level changes on working capital is correct?

Growth in sales generally needs more investment in inventory and receivables, so working capital requirement rises. Inflation increases rupee needs, and faster stock turnover reduces them, so those statements are wrong.

  1. AInflation lowers the rupee amount of working capital needed
  2. BGrowth in sales generally requires additional investment in current assetsCorrect
  3. CHigher profit retention always reduces the need for working capital
  4. DA firm with a faster stock turnover needs more working capital for the same sales

Explanation

As sales expand, more inventory and receivables are needed, so working capital rises. Inflation raises rupee requirements, and faster turnover reduces them. Retained profit provides funds but does not reduce the need itself.

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