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Hi, Reader

This week’s “Accounting Guide” is about working capital

Concept description

What is working capital?

Working capital is the difference of current assets and current liabilities of a company. This difference amount depicts the liquidity position of a company. Liquidity position is the ability of a company to meet its day-to-day operational obligations.

Working capital could be positive, neutral or negative. Negative or positive working capital; which is better? depends on company’s assets and operational abilities.

Working Capital Formula

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Where,

Current assets include

• cash
• cash equivalents
• accounts receivable
• stock inventory
• marketable securities
• pre-paid liabilities
• other liquid assets

Current Liabilities include

• accounts payable
• short-term debt
• dividends
• notes payable
• income taxes owed

ReaderDo you know????

Accountants use more variations of this formula to find the exact working capital amount needed for company’s operational activities.

Formula-1

• Working Capital = (Current Assets – Cash) – (Current Liabilities – Short-term Debts)

Formula-2

• Working Capital = Account Receivable + Inventory – Account Payable

Practice exercise

Woohoo, here is your promised practice exercise for working capital.. Click the link below

Practice Exercise Solution Hints

Wonder! How to solve these questions????

Well, Reader No worries!

I am here to help you!!

Remember

• The amounts required for calculating working capital are present in the balance sheet.
• Current assets appear in the order of liquidity in a classified balance sheet.
• Current assets are those resources that can be utilized within a financial year of a company.
• Current liabilities are those obligations which are due within a financial year.
• Working capital is the difference between current assets and current liabilities.

Steps to calculate working capital

1. Identify current assets
2. Identify current liabilities
3. Calculate the difference between them

Waoowww BONUS!!!

Keys of practice exercise

1. $600
2. $30,000
3. $4,500
4. -$4,265
5. $2,450,000

Phew…. It’s too much hannn

Don’t worry dear Reader you have the whole week to work and practice working capital exercises. You can tally your answers with the keys of practice exercise.

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Hira from Accounting Drive

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