Description
MANAGEMENT ACCOUNT WORKING CAPITAL, CALCULATION OF WORKING CAPITAL
1
ASSIGNMENT
ON
MANAGEMENT ACCOUNTING
(SEMESTER VI)
SUBMITED BY:
NAME : SIDDHESH N. KHILARE
CLASS : T.Y. B.COM
2
WORKING CAPITAL
Meaning of 'Working Capital':-
A measure of both a company's efficiency and its short-term financial health.
The working capital is calculated as:
Every organisation commercial as well as non commercial requires some amount of fied
capital for procurement of fied assets vi!. "and # $uilding% &lant # 'achinery% (ehicle
Etc. )n addition to fied capital an organisation requires additional capital for financing
day to day activities. *uch capital which is required for financing day to day activities is
called as +,orking -apital.. ,orking capital is required for smooth conduct of business
activities. )t is the working capital which decides success or failure of an organisation. )t
is the "ife blood of an organisation.
3
,orking capitlal is the warm blood passing through the arteries and veins of the
business.
"iquidity and &rofitability are the two aspects of paramount importancein a business.
"iquidity depends upon profitability of business and profitability is hard to achieve
without sufficient liquid resources. $oth these aspects are closely inter-related.
-ontrol of working capital and forecasting working capital is a continuous process and
therefore% part and parcel of the overall management of business.
The working capital ratio /-urrent Assets0-urrent "iabilities1 indicates whether a
company has enough short term assets to cover its short term debt. Anything below 2
indicates negative ,0- /working capital1. ,hile anything over 3 means that the company
is not investing ecess assets. 'ost believe that a ratio between 2.3 and 3.4 is sufficient.
,orking capital is the money you need to cover business epenses% meet short-term
obligations% and to grow your business. *tart-up capital is the money you need to start a
business until it generates enough revenue to pay for itself. *tart-up and working capital
can come from loans% grants% investors and partners% but many business women use
their personal financial resources to fund their businesses.
DEFINITION OF “WORKING CAPITAL”:-
4
The Accounting &rinciples of $ard of the American )nstitute of -ertified &ublic
Accountants defines working capital as under:-
+,orking -apital is represented by the ecess of current assets over current
liabilities and identifies the relatively liquid portion of the total enterprise capital
which constitutes a margin or buffer for maturing obligations within the ordinary
operating cycle of the business..
5oagland defines working capital as follows:-
+,orking capital is descriptive of that capital which is not fied. $ut% the more
common use of working capital is to consider it as the difference between the
book value of the current assets and the current liabilities..
WORKING CYCLE:-
MEANING:-
Current Assets and Current Liabilities are assets and liabilities which arise in the
course of normal operations of an enterprise. These assets change form and are
used to pay of current liabilities. This changing of assets due to and in course of
operations is nown as !oring Cycle or "perating Cycle.
The assets and liabilities thus# arising can be said to be Current Asset and
Current Liabilities and the diference between the two as !oring Capital.
BALANCE SHEET
")A$)")T)E*
*hare -apital
6eserve # *urplus
A**ET*
7ied Assets
)nvestments
$
"oans
----------------------------------
-urrent "iabilities -urrent Assets
,orking -apital 8 -urrent Assets 9 -urrent "iabilities
Alternati%ely nown as "perating Cycle Concept& of woring capital. This concept
is based on the continuity of 'ow of funds through business operations. This 'ow
of %alue is caused by diferent operational acti%ities of an organisation may
comprise(
a) *urchase of raw materials
b) Con%ersion of raw materials into +nished products
c) ,ale of +nished products and
d1 -ealisation of accounts recei%able.
The woring capital cycle measures the time between paying for goods supplied
to you and the +nal receipt of cash to you from their sale. .t is desirable to eep
the cycle as short as possible as it increases the efecti%eness of woring capital.
The working !"i#!$ %$e i& '!(e )" o* *o)r ore
o'"onen#&(
Cash (funds available)
/
Creditors (accounts payable)
Inventory (stock on hand)
Debtors (accounts payable)
M!n!ge'en# o* working !"i#!$:-
0uided by the abo%e criteria# management will use a combination of
policies and techni1ues for the management of woring capital. The
policies aim at managing the current assets 2generally cash and cash
e1ui%alents# in%entories and debtors) and the short term +nancing# such
that cash 'ows and returns are acceptable.
• C!&h '!n!ge'en#. .dentify the cash balance which allows for the
business to meet day to day e3penses# but reduces cash holding costs.
• In+en#or% '!n!ge'en#. .dentify the le%el of in%entory which
allows for uninterrupted production but reduces the in%estment in raw
materials4and minimi5es reordering costs4and hence increases cash
'ow. 6esides this# the lead times in production should be lowered to
reduce !or in *rocess 2!.*) and similarly# the 7inished 0oods should
be ept on as low le%el as possible to a%oid o%er production4
see ,upply chain management8 9ust .n Time 29.T)8 :conomic order
1uantity2:"
.
<
• De,#or& '!n!ge'en#. .dentify the appropriate credit policy# i.e.
credit terms which will attract customers# such that any impact on cash
'ows and the cash con%ersion cycle will be ofset by increased re%enue
and hence -eturn on Capital 2or vice versa)8 see =iscounts and
allowances.
• -hor# #er' .n!ning. .dentify the appropriate source of +nancing#
gi%en the cash con%ersion cycle( the in%entory is ideally +nanced by
credit granted by the supplier8 howe%er# it may be necessary to utili5e
a ban loan 2or o%erdraft)# or to >con%ert debtors to cash> through
>factoring>.
!hen not managed carefully# businesses can grow themsel%es out of cash
by needing more woring capital to ful+ll e3pansion plans than they can
generate in their current state. This usually occurs when a company has
used cash to pay for e%erything# rather than seeing +nancing that would
smooth out the payments and mae cash a%ailable for other uses. As a
result# woring capital shortages cause many businesses to fail e%en
though they may actually turn a pro+t. The most e?cient companies
in%est wisely to a%oid these situations.
/)ik r!#io
In finance, the Acid-test or !ic" #$ti% or &i!id #$ti% measures the ability of a company to use its near cash or
quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current
assets that presumably can be quickly converted to cash at close to their book values. A company with a Quick
Ratio of less than cannot currently fully pay back its current liabilities.
!ote that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the "urrent Ratio.
Ratios are tests of viability for business entities but do not give a complete picture of the business# health. If a
business has large amounts in Accounts Receivable which are due for payment after a long period $say %&
days', and essential business expenses and Accounts (ayable due for immediate payment, the Quick Ratio may
look healthy when the business is actually about to run out of cash. In contrast, if the business has negotiated
fast payment or cash from customers, and long terms from suppliers, it may have a very low Quick Ratio and
yet be very healthy.
)enerally, the acid test ratio should be * or higher+ however this varies widely by industry. In general, the
higher the ratio, the greater the company#s liquidity $i.e., the better able to meet current obligations using liquid
assets'.
@
Calculating Working Capital
To#!$ C)rren# A&&e#&:-
• This includes cash and assets that are liquid or easily converted into cash
within 1 year, such as accounts receivable, prepaid expenses, inventory, and securities (e.g.
stocks, bonds).
• The value of your current assets is your gross working capital. After deducting
current liabilities from your current assets, you get the amount of your net working capital.
Statement showing Requirement of Working Capital
Sr. No. Particulars Amt. Amt.
I] Current Assets :
1 Raw Materials XX
(No of Units x Price x Period)
2 Work in Progress
Raw Material (No of Units x Price x Period) X
Labour (No of Units x Price x Period x 1/2) X
Over Heads (No of Units x Price x Period x 1/2) X XX
3 Finished Goods XX
(No of Units x Price x Period)
4 Credit sales Debtors
(No of Units x Price x Period) XX
5 Cash & Cash Equivalents
XX
TOTAL CURRENT ASSETS (A)
XXX
II] Current Liabilities :
1 Credit Purchase- Raw Material XX
(No of Units x Price x Period)
2 Out Standing Expenses XX
TOTAL CURRENT LIABILITIES (B) XXX
WORKING CAPITAL REQUIRES (A-B) XXX
A
-O0RCE- OF WORKING CAPITAL:-
1) NET INCOME=
The total revenue in an accounting period minus all epenses during the same period.
)f income taes and interest are not deducted% it is called operating profit /or "oss% as the case
may be1. Also called earnings% net earnings% or net profit.
2) LONG TERM LOAN=
:enerally% a time frame for investing in which an asset is held for at least seven to ten years.
The measure of a ;long term; time frame can vary depending on the asset held or
the investment ob
MANAGEMENT ACCOUNT WORKING CAPITAL, CALCULATION OF WORKING CAPITAL
1
ASSIGNMENT
ON
MANAGEMENT ACCOUNTING
(SEMESTER VI)
SUBMITED BY:
NAME : SIDDHESH N. KHILARE
CLASS : T.Y. B.COM
2
WORKING CAPITAL
Meaning of 'Working Capital':-
A measure of both a company's efficiency and its short-term financial health.
The working capital is calculated as:
Every organisation commercial as well as non commercial requires some amount of fied
capital for procurement of fied assets vi!. "and # $uilding% &lant # 'achinery% (ehicle
Etc. )n addition to fied capital an organisation requires additional capital for financing
day to day activities. *uch capital which is required for financing day to day activities is
called as +,orking -apital.. ,orking capital is required for smooth conduct of business
activities. )t is the working capital which decides success or failure of an organisation. )t
is the "ife blood of an organisation.
3
,orking capitlal is the warm blood passing through the arteries and veins of the
business.
"iquidity and &rofitability are the two aspects of paramount importancein a business.
"iquidity depends upon profitability of business and profitability is hard to achieve
without sufficient liquid resources. $oth these aspects are closely inter-related.
-ontrol of working capital and forecasting working capital is a continuous process and
therefore% part and parcel of the overall management of business.
The working capital ratio /-urrent Assets0-urrent "iabilities1 indicates whether a
company has enough short term assets to cover its short term debt. Anything below 2
indicates negative ,0- /working capital1. ,hile anything over 3 means that the company
is not investing ecess assets. 'ost believe that a ratio between 2.3 and 3.4 is sufficient.
,orking capital is the money you need to cover business epenses% meet short-term
obligations% and to grow your business. *tart-up capital is the money you need to start a
business until it generates enough revenue to pay for itself. *tart-up and working capital
can come from loans% grants% investors and partners% but many business women use
their personal financial resources to fund their businesses.
DEFINITION OF “WORKING CAPITAL”:-
4
The Accounting &rinciples of $ard of the American )nstitute of -ertified &ublic
Accountants defines working capital as under:-
+,orking -apital is represented by the ecess of current assets over current
liabilities and identifies the relatively liquid portion of the total enterprise capital
which constitutes a margin or buffer for maturing obligations within the ordinary
operating cycle of the business..
5oagland defines working capital as follows:-
+,orking capital is descriptive of that capital which is not fied. $ut% the more
common use of working capital is to consider it as the difference between the
book value of the current assets and the current liabilities..
WORKING CYCLE:-
MEANING:-
Current Assets and Current Liabilities are assets and liabilities which arise in the
course of normal operations of an enterprise. These assets change form and are
used to pay of current liabilities. This changing of assets due to and in course of
operations is nown as !oring Cycle or "perating Cycle.
The assets and liabilities thus# arising can be said to be Current Asset and
Current Liabilities and the diference between the two as !oring Capital.
BALANCE SHEET
")A$)")T)E*
*hare -apital
6eserve # *urplus
A**ET*
7ied Assets
)nvestments
$
"oans
----------------------------------
-urrent "iabilities -urrent Assets
,orking -apital 8 -urrent Assets 9 -urrent "iabilities
Alternati%ely nown as "perating Cycle Concept& of woring capital. This concept
is based on the continuity of 'ow of funds through business operations. This 'ow
of %alue is caused by diferent operational acti%ities of an organisation may
comprise(
a) *urchase of raw materials
b) Con%ersion of raw materials into +nished products
c) ,ale of +nished products and
d1 -ealisation of accounts recei%able.
The woring capital cycle measures the time between paying for goods supplied
to you and the +nal receipt of cash to you from their sale. .t is desirable to eep
the cycle as short as possible as it increases the efecti%eness of woring capital.
The working !"i#!$ %$e i& '!(e )" o* *o)r ore
o'"onen#&(
Cash (funds available)
/
Creditors (accounts payable)
Inventory (stock on hand)
Debtors (accounts payable)
M!n!ge'en# o* working !"i#!$:-
0uided by the abo%e criteria# management will use a combination of
policies and techni1ues for the management of woring capital. The
policies aim at managing the current assets 2generally cash and cash
e1ui%alents# in%entories and debtors) and the short term +nancing# such
that cash 'ows and returns are acceptable.
• C!&h '!n!ge'en#. .dentify the cash balance which allows for the
business to meet day to day e3penses# but reduces cash holding costs.
• In+en#or% '!n!ge'en#. .dentify the le%el of in%entory which
allows for uninterrupted production but reduces the in%estment in raw
materials4and minimi5es reordering costs4and hence increases cash
'ow. 6esides this# the lead times in production should be lowered to
reduce !or in *rocess 2!.*) and similarly# the 7inished 0oods should
be ept on as low le%el as possible to a%oid o%er production4
see ,upply chain management8 9ust .n Time 29.T)8 :conomic order
1uantity2:"
.<
• De,#or& '!n!ge'en#. .dentify the appropriate credit policy# i.e.
credit terms which will attract customers# such that any impact on cash
'ows and the cash con%ersion cycle will be ofset by increased re%enue
and hence -eturn on Capital 2or vice versa)8 see =iscounts and
allowances.
• -hor# #er' .n!ning. .dentify the appropriate source of +nancing#
gi%en the cash con%ersion cycle( the in%entory is ideally +nanced by
credit granted by the supplier8 howe%er# it may be necessary to utili5e
a ban loan 2or o%erdraft)# or to >con%ert debtors to cash> through
>factoring>.
!hen not managed carefully# businesses can grow themsel%es out of cash
by needing more woring capital to ful+ll e3pansion plans than they can
generate in their current state. This usually occurs when a company has
used cash to pay for e%erything# rather than seeing +nancing that would
smooth out the payments and mae cash a%ailable for other uses. As a
result# woring capital shortages cause many businesses to fail e%en
though they may actually turn a pro+t. The most e?cient companies
in%est wisely to a%oid these situations.
/)ik r!#io
In finance, the Acid-test or !ic" #$ti% or &i!id #$ti% measures the ability of a company to use its near cash or
quick assets to extinguish or retire its current liabilities immediately. Quick assets include those current
assets that presumably can be quickly converted to cash at close to their book values. A company with a Quick
Ratio of less than cannot currently fully pay back its current liabilities.
!ote that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the "urrent Ratio.
Ratios are tests of viability for business entities but do not give a complete picture of the business# health. If a
business has large amounts in Accounts Receivable which are due for payment after a long period $say %&
days', and essential business expenses and Accounts (ayable due for immediate payment, the Quick Ratio may
look healthy when the business is actually about to run out of cash. In contrast, if the business has negotiated
fast payment or cash from customers, and long terms from suppliers, it may have a very low Quick Ratio and
yet be very healthy.
)enerally, the acid test ratio should be * or higher+ however this varies widely by industry. In general, the
higher the ratio, the greater the company#s liquidity $i.e., the better able to meet current obligations using liquid
assets'.
@
Calculating Working Capital
To#!$ C)rren# A&&e#&:-
• This includes cash and assets that are liquid or easily converted into cash
within 1 year, such as accounts receivable, prepaid expenses, inventory, and securities (e.g.
stocks, bonds).
• The value of your current assets is your gross working capital. After deducting
current liabilities from your current assets, you get the amount of your net working capital.
Statement showing Requirement of Working Capital
Sr. No. Particulars Amt. Amt.
I] Current Assets :
1 Raw Materials XX
(No of Units x Price x Period)
2 Work in Progress
Raw Material (No of Units x Price x Period) X
Labour (No of Units x Price x Period x 1/2) X
Over Heads (No of Units x Price x Period x 1/2) X XX
3 Finished Goods XX
(No of Units x Price x Period)
4 Credit sales Debtors
(No of Units x Price x Period) XX
5 Cash & Cash Equivalents
XX
TOTAL CURRENT ASSETS (A)
XXX
II] Current Liabilities :
1 Credit Purchase- Raw Material XX
(No of Units x Price x Period)
2 Out Standing Expenses XX
TOTAL CURRENT LIABILITIES (B) XXX
WORKING CAPITAL REQUIRES (A-B) XXX
A
-O0RCE- OF WORKING CAPITAL:-
1) NET INCOME=
The total revenue in an accounting period minus all epenses during the same period.
)f income taes and interest are not deducted% it is called operating profit /or "oss% as the case
may be1. Also called earnings% net earnings% or net profit.
2) LONG TERM LOAN=
:enerally% a time frame for investing in which an asset is held for at least seven to ten years.
The measure of a ;long term; time frame can vary depending on the asset held or
the investment ob