Question

Current liabilities are Rs.10,000 and current assets are Rs. 15,000. If debtors realized Rs.3,000 and Rs.6,000 worth preference shares got converted into equity, the impact on working capital (WC) would be _______________.

• A. Decrease of Rs.3,000 in WC
• B. Increase of Rs.3,000 in WC
• C. No change in WC
• D. Decrease in Rs.9,000 in WC
• E. Increase in Rs.9,000 in WC

Answer 1

The correct option is C No change in WC

Long term liabilities are not taken into account while computing WC. Hence the conversion of preference shares into equity will not have any of the above impact on working capital.
Both debtors and cash come under the category of current assets. So when an amount of Rs.3,000 is realize from debtors, then it will not effect current assets or working capital. So there will be no change in working capital.