[April94]

Can someone please explain why inventory is considered a current asset, in the question below? In all of the other problems I’ve done, I was told inventory is NOT a current asset, so I don’t understand why they’re including it in the working capital.

In year 1, a company’s cash is 15% of sales, accounts receivable is 10% of sales, inventory is 20% of sales, accounts payable is 30% of sales, and long-term debt is 5% of sales. The company is preparing its forecasts and anticipates that sales will increase from $50,000 in year 1 to $55,000 in year 2. The company uses the percentage-of-sales method. What amount would be the required net working capital in year 2?

Explanation: Net working capital is equal to current assets minus current liabilities. The company requires net working capital of 15% of sales, because current assets minus current liabilities, expressed as percentages of sales, equals 15% (cash) + 10% (accounts receivable) + 20% (inventory) – 30% accounts payable, or 15%. At 15% of anticipated Year 2 sales of $55,000, required net working capital would be 15% x $55,000, or $8,250.