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Published by: rsakthimba on Oct 27, 2010
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Characteristics of Current Assets

‡ Short Life Span I.e. cash balances may be held idle for a week or two , thus a/c may have a life span of 30-60 days etc. ‡ Swift Transformation into other Asset forms I.e.each CA is swiftly transformed into other asset forms like cash is used for acquiring raw materials , raw materials are transformed into finished goods and these sold on credit are convertible into A/R & finlly into cash.

Finished goods. stores and spares  Sundry Debtors(less provision for bad debts)  Cash and Bank Balances  Bills Receivables  Short term loans and advances  Temporary investment in surplus funds  Prepaid Expenses  Accrued Incomes . Work-in-progress.CONSTITUENTS OF WORKING CAPITAL ‡ CURRENT ASSETS  Inventory Raw materials.

‡ CURRENT LIABILITIES         Sundry creditors/ Accounts Payable Short term loans Provisions Bills Payable Accrued/ Outstanding Expenses Dividends Payable Bank Overdraft Provision for Taxation (if it does not amt to Appropriation of profits) .

Objectives of WC ‡ Investing in Current Assets reducing the level of Current Liabilities ‡ The company should always be in a position to meet its current obligations ‡ Business Firm should manage its current assets to the marginal return on investment not less than the cost of capital .

. after the conversion of resources into inventories.Operating cycle ‡ It is the time duration starting from the procurement of goods or raw material and ending with the realisation of sales ‡ It is the time duration required to convert into sales. into cash.

labour. power.etc. ‡ Manufacturing the product raw materials into work-in-progress ‡ Work-in-progress into finished goods ‡ Finished products into accounts receivables ‡ Accounts receivable into cash . fuel.Phases of Operating cycle ‡ Acquisition of resources such as raw materials.

Operating cycle of manufacturing Organisation Raw material Conversion Period (R) Working Capital Conversion Period (W) Finished goods conversion period (F) Debt collection period (D) Credit collection period (C) Duration of operating cycle (O) .

OPERATING CYCLE Duration of Operating Cycle (O) = (R) + (W) + (F) + (D) + (T) + (C) .

Raw material stock x365 Total raw material consumption ‡ (W) = Average work-in-progress x365 Total cost of Production ‡ (F) = Average finished goods x365 Total cost of goods sold .Formulas ‡ (R) = Avg.

‡ (D) = Average receivables x365 Total credit sales ‡ (C) = Average creditors x365 Total credit purchases ‡ Receivable conversion period = Annual credit sales Accounts receivable x 365 .

inventory x365 Cost of sales ‡ Cash conversion cycle = operating cycle payables deferral period. .‡ Payables deferral period = Accounts payable + Salaries. general and admn. etc ___________________________ x365 Cost of sales + selling. Expenses ‡ Inventory conversion period = Avg.


Kinds of WC Concept Time Permanent Gross Net Temporary Regular Reserve Seasonal Special .

PERMANENT/ FIXED WORKING CAPITAL ‡ There is always a minimum level of CA which is continously required by a firm to carry on its business operations. the minimum level of investment in current assets that is required to continue the business without interruption is referred as permanent working capital. . ‡ Thus .

.TEMPORARY/ VARIABLE WORKING CAPITAL ‡ This is the amount of investment required to take care of fluctuations in business activity or needed to meet fluctuations in demand consequent upon changes in production & sales as a result of seasonal changes.

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