[Solved] Which of the following do not constitute working capital man (2024)

FAQs

[Solved] Which of the following do not constitute working capital man? ›

Detailed Solution

Equipment is a fixed asset, and fixed assets are not part of working capital.

Fixed assets are non-current assets meaning they are held for the long-term to generate income. They are not considered when computing the working capital of a business.

Working capital includes only current assets, which have a high degree of liquidity — they can be converted into cash relatively quickly. Fixed assets are not included in working capital because they are illiquid; that is, they cannot be easily converted to cash.

"It's basically the cash you need to operate, or your current assets minus your current liabilities. Without enough working capital, you could lose your flexibility and credibility with financial institutions, suppliers and customers," says Marie-Claude Provost, BDC's Vice President, Solutions and Initiatives.

To explain this, we can consider a company that starts trading on Day One, wholly in cash and without holding any stock. After its first year of trading, all profits will be in the form of cash, so its balance sheet will be 100% cash, and there will be no working capital – i.e., no stock, debtors, or creditors.

Payable accounts is not part of working capital.

The correct answer is Unsecured term loans. Key Points​The Unsecured term loans is not a source of working capital. What is working capital? It is the excess of current assets over current liabilities.

Any stocks in trade, consumable stores, or raw materials held for the purpose of business or profession have been excluded from the definition of capital assets. Any movable property (excluding jewellery made out of gold, silver, precious stones, and drawing, paintings, sculptures, archeological collections, etc.)

However, the more practical metric is net working capital (NWC), which excludes any non-operating current assets and non-operating current liabilities. Non-Operating Current Assets → Cash and cash equivalents, such as marketable securities, must be excluded in the net working capital (NWC) calculation.

What is lack of enough capital? ›

Lack of capital can result in not having enough to cover overhead expenses, funding expansion opportunities, or launching a new product to market. Here's a quick look at how a lack of capital could impact your business-growth prospects.

In most cases, low working capital means that the business is just scraping by and barely has enough capital to cover its short-term expenses. Sometimes, however, a business with a solid operating model that knows exactly how much money it needs to run smoothly still may have low working capital.

Current Ratio = Current Assets / Current Liabilities

A current ratio between 1.5 and 2.0 typically shows that you have enough working capital available while using your assets efficiently.

The ideal position is to have more current assets than current liabilities and thus have a positive net working capital balance. NWC is most commonly calculated by excluding cash and debt (current portion only). Image: CFI's Financial Analysis Fundamentals Course.

Working capital is known as the capital that a company uses or requires to finance its day-to-day operations. It is made up of the company's current assets (such as cash, inventory, and accounts receivable) and current liabilities (such as accounts payable, short-term loans, and accrued expenses).

Operating Working Capital (OWC) measures the current assets and current liabilities used as part of a company's core, day-to-day operations. Cash and cash equivalents are excluded from the calculation of operating working capital (NWC), as well as debt and any interest-bearing securities with debt-like features.

Non-cash working capital is a form of working capital that may convert to money shortly, such as accounts receivables. This financial measure helps a company gauge its financial health and evaluate its turnover speed—the time it takes the company to convert its non-cash current assets into cash.