Which of these is used in calculating working capital?
Answer Details
Working capital is a financial metric that represents the difference between a company's current assets and current liabilities. It is used to assess a company's short-term liquidity and operational efficiency. In calculating working capital, we focus on the **current assets**, which are assets that are expected to be converted into cash or used up within one year.
Among the options provided:
Furniture and fittings: These are considered **fixed assets** or **non-current assets** because they are used over a long period and are not expected to be converted into cash within a year.
Stock of raw material: This is a **current asset** because it is expected to be used or sold in the production process within a short period, typically less than a year. Thus, it is part of the calculation of working capital.
Machinery: Similar to furniture and fittings, machinery is a **fixed asset** as it is used over many years and not sold or consumed within the short term.
Office equipment: Like furniture and fittings, office equipment is also considered a **fixed asset** for similar reasons.
Therefore, the **stock of raw material** is used in calculating working capital because it is a **current asset**. Working capital is calculated using the formula:
Working Capital = Current Assets - Current Liabilities
In this formula, **current assets** would include items such as stocks of raw material, cash, accounts receivable, etc. As a result, stock of raw material is relevant for determining a company's ability to meet its short-term obligations and manage day-to-day operations.