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Classification of Working Capital - Permanent Working Capital & Temporary Working Capital (in Hindi)
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Heena Malhotra
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Unacademy user
Ya it was very helpful...
Aman Amit
2 years ago
Thank you sir
Im not sir ..you are sir bro..i'm the student whose role model is you
mam pls Asia hi course statistics ke liye bhi le aayo
  1. Management of Working Capital By Heena Malhotra


  2. MEANING AND CONCEPT OF WORKING CAPITAL in acounting term working captalis the diference between the current assets and curent labilies f we break down the components of working capital we will fnd working capital as follows Working Capital Current Assets -Current Liabilities By Heena Malhotra


  3. Current Assets: An asset is classified as current when: () Itis expected to be realised or intends to be sold or consumed in normal operating cycle of the entity: (i) The asset is held primarily for the purpose of trading: () It is expected to be realised within twelve months after the reporting period; (iv) It is non- restricted cash or cash equivalent. Generally current assets of an entity, for the purpose of working capital management can be grouped into the following main heads: (a) Inventory (raw material, work in process and finished goods) (b) Receivables (trade receivables and bills receivables) (c) Cash or cash equivalents (short-term marketable securities) (d) Prepaid expenses By Heena Malhotra


  4. Current Liabilities: A liability is classified as current when: (0 It is expected to be settled in normal operating cycle of the entity. (i) The liability is held primarily for the purpose of trading (ii) It is expected to be settled within twelve months after the reporting period Generally current liabilities of an entity, for the purpose of working capital management can be grouped into the following main heads: (a) Payable (trade payables anbls eceivables) (b) Outstanding payments (wages & salary etc.) By Heena Malhotra


  5. Working Capital On the basis of Value On the basis of time Permanent Factuating Gross Net By Heena Malhotra


  6. (a) Value: From the value point of view, Working Capital can be defined as Gross Working Capital or Net Working Capital Gross working capital refers to the fim's investment in current assets. Net working capital refers to the difference between current assets and current abilities. Apositive working capital indicates the company's ability to pay its short-term liabilties. On the other hand a negative working capital shows inability of an entity to meet its short-term liabilties. By Heena Malhotra


  7. (b) Time: From the point of view of time, working capital can be divided into two categories viz, Permanent and Fluctuating (temporary). Permanent working capital refers to the base working capita, which is the minimum level of investment in the current assets that is carried by the entity at all tmes to carry its day to day activities Temporary working capital refers to that part of total working capital,which is required by an entity in addition to the permanent working capital. It is also called variable working capital which is used to finance the short term working capital requirements which arises due to fluctuation in sales volume. By Heena Malhotra


  8. The following diagrams shows Permanent and Temporary or Fluctuating or variable working capital: ry Tempora Temporary Permanent Perm Time Time By Heena Malhotra


  9. Working Capital On the basis of Value On the basis of time Permanent Factuating Gross Net By Heena Malhotra


  10. Importance of Adequate Working Capital Management of working capital is an essential task of the finance manager. He has to ensure that the amount of working capital available with his concern is neither too large nor too small for its requirements. A large amount of working capital would mean that the company has idle funds. Since funds have a cost, the company has to pay huge amount as interest on such funds. If the firm has inadequate working capital, such firm runs the risk of insolvency. Paucity of working capital may lead to a situation where the firm may not be able to meet its liabilities The various studies conducted by the Bureau of Public Enterprises have shown that one of the reasons for the poor performance of public sector undertakings in our country has been the large amount of funds locked up in working capital. This results in over capitalization. Over capitalization implies that a company has too large funds for its requirements, resulting in a low rate of return, a situation which implies a less than optimal use of resources. A firm, therefore, has to be very careful in estimating its working capital requirements.


  11. Optimum Working Capital O If a company's current assets do not exceed its current liabilities, then it may run into trouble with creditors that want their money quickly. o Current ratio (current assets/current liabilities) (along with acid test ratio to supplement it) has traditionally been considered the best indicator of the working capital situation. o It is understood that a current ratio of 2 (two) for a manufacturing firm implies that the firm has an optimum amount of working capital. This is supplemented by Acid Test Ratio (Quick assets/Current liabilities) which should be at least 1 (one). Thus it is considered that there is a comfortable liquidity position if liquid current assets are equal to current liabilities. By Heena Malhotra


  12. Optimum Working Capital O In nutshell, a firm should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous. By Heena Malhotra


  13. DETERMINANTS OF WORKING CAPITAL 8. Operating Efficiency - A company can reduce the working capital requirement by eliminating waste, improving coordination etc. By Heena Malhotra