Question

Explain working capitol using an example.

Step 1

Working capital, as the name suggests, is the capital blocked in the day to day working of the company. It's the money stuck into day to day operations of the firm.

Step 2

Working capital is mathematically given by:

Working capital = Current assets - current liabilities

Step 3

Current Assets: Assets which are likely to be converted into cash or consumed or sold within 1 year OR 1 operating cycle whichever is longer. Elements of current assets are: Inventory (Raw Material, WIP, Finished Products), Account receivable, Prepaid expenses, short term investment...

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