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 number of its current liabilities.
The working capital is calculated as:
There are two concepts of working capital such as:
1. Gross working capital
2. Networking capital
Gross working capital: Gross working capital is the total of current assets.
Net Working Capital: Net Working Capital is the difference between current assets and the current liabilities.
Some important points:
1. Finished goods are calculated on the cost of production.
2. Debtors/accounts receivable is calculated on the cost of sales/ sales price.
3. If the 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 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.
Preveius Address: What is Working Capital?