Do you know what is "Working Capital" and how to calculate it?
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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.
| Know more about Working Capital |
Working Capital Formula
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
- Identify current assets
- Identify current liabilities
- Calculate the difference between them
Waoowww BONUS!!!
Keys of practice exercise
- $600
- $30,000
- $4,500
- -$4,265
- $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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Hira Aziz
Did you receive it from a friend? Subscribe here for free. Accounting Drive Hi Reader, I hope you are good and doing great. You may be wondering why I have not sent you the Accounting Guide last week? Well, I have been very busy with my kid because of his examination. That is why I could not write the newsletter for you. But today, you got good news. Ta da, you are going to learn a new topic. You have learnt about the working capital; what it is, how to calculate, analyze and manage it. In...
Did you receive it from a friend? Subscribe here for free. Accounting Drive Hello Reader How are you doing? Hopefully, you will be fine and doing well. Last week you learnt about the management of working capital. You are aware of the best working capital management strategies. While managing working capital if you or your manager face shortage of funds for working capital. How would you solve this issue? Can you suggest any helpful source of getting WC funds to your manager? Do you know how...
Did you receive it from a friend? Subscribe here for free. Accounting Drive Hi Reader The last week was very busy for me because of my sister-in-law’s wedding. That is why I am writing a short Accounting Guide for this week (does not includes practice questions and solutions). You know what is working capital, how to calculate and analyze it. But do you know everything about working capital that an accountant needs to know? The duties of an accountant are evolving day by day. Today, an...