10. on december 30, a company pays $9,000 for the next six months of insurance coverage. what will be the…

10. on december 30, a company pays $9,000 for the next six months of insurance coverage. what will be the immediate effect on the companys total amount of its working capital? total amount of working capital wil... total amount of working capital will decrease total amount of working capital will increase total amount of working capital will remain the same

10. on december 30, a company pays $9,000 for the next six months of insurance coverage. what will be the immediate effect on the companys total amount of its working capital? total amount of working capital wil... total amount of working capital will decrease total amount of working capital will increase total amount of working capital will remain the same

Answer

Explanation:

Step1: Recall working - capital formula

Working capital = Current assets - Current liabilities.

Step2: Analyze the transaction

The company pays $9,000 for future insurance coverage. Cash (a current asset) decreases by $9,000, and prepaid insurance (also a current asset) increases by $9,000. Current liabilities are not affected.

Step3: Determine the effect on working capital

Since the decrease in one current - asset (cash) is offset by an equal increase in another current - asset (prepaid insurance), the net effect on current assets is zero. As current liabilities remain unchanged, working capital remains the same.

Answer:

Total amount of working capital will remain the same