Saturday, October 31, 2015

What is working capital?

Working capital is required to operate the day to day activities of the organization.Working capital is the amount of a company's current assets minus the amount of its current liabilities.
The working capital is calculated as:
There are two concepts of working capital such as:
1. Gross working capital
2. Net working capital
-Gross working capital: Gross working capital is the total of current assets.
-Net Working Capital: Net Working Capital is the different between current assets and the current liabilities.
Some important points:
1. Finished goods is calculated on cost of production.
2. Debtors/accounts receivable is calculated on cost of sales/ sales price.
3.If completion period /stage is not given it is assumed that material will be used at the beginning of the production and labor and overhead will be at 50% completion stage.
4. profit will not be considered in the working capital completion mainly because of it is not a source of financing working capital.
5. Production will be carried out through the year and labor and overhead will be used similarly.