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Chapter 5: 14Q (page 237)

What is working capital? How does working capital relate to the operating cycle?

Short Answer

Expert verified

The capital employed by the business entity in the daily functions of the business entity is known as working capital.

Working capital determines the ability of the company to fulfill the funding requirement of the operating cycle.

Step by step solution

01

Definition of Prepaid Expenses

The expenses that the business entity has not received as services yet, but the payment has been made are prepaid expenses. These are considered current assets and services from these expenses expected to be obtained in one year or operating cycle.

02

Working Capital

The excess of current assets that will be available with the company after fulfilling the obligations relating to the current commitments or liabilities is considered working capital. It is calculated as:

Workingcapital=Currentassets-Currentliabilities

03

Relation of Working Capital with Operating Cycle

During the operating cycle of the business entity, the essential functions require a steady flow of funds for efficient working, and this constant flow of funds is fulfilled by the working capital of the business entity.

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Most popular questions from this chapter

1. Which of the following statements about IFRS and GAAP accounting and reporting requirements for the balance sheet is not correct?

(a) Both IFRS and GAAP distinguish between current and non-current assets and liabilities.

(b) The presentation formats required by IFRS and GAAP for the balance sheet are similar.

(c) Both IFRS and GAAP require that comparative information be reported.

(d) One difference between the reporting requirements under IFRS and those of the GAAP balance sheet is that an IFRS balance sheet may list long-term assets first.

Question: P5-1 (L03) (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order.

Accounts Receivable Inventory鈥擡nding

Accumulated Depreciation鈥擝uildings Land

Accumulated Depreciation鈥擡quipment Land for Future Plant Site

Accumulated Other Comprehensive Income Loss from Flood

Advances to Employees Noncontrolling Interest

Advertising Expense Notes Payable (due next year)

Allowance for Doubtful Accounts Paid-in Capital in Excess of Par鈥� preferred stock

Bond Sinking Fund Patents

Bonds Payable Payroll Taxes Payable

Buildings Pension Liability

Cash (in bank) Petty Cash

Cash (on hand) Preferred Stock

Cash Surrender Value of Life Insurance Premium on Bonds Payable

Commission Expense Prepaid Rent

Common Stock Purchase Returns and Allowances

Copyrights Purchases

Debt Investments (trading) Retained Earnings

Dividends Payable Salaries and Wages Expense (sales)

Equipment Salaries and Wages Payable

Freight-In Sales Discounts

Gain on Disposal of Equipment Sales Revenue

Interest Receivable Treasury Stock (at cost)

Inventory鈥擝eginning Unearned Subscriptions Revenue

Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)

11. Should available-for-sale securities always be reported as a current asset? Explain.

(Critique of Balance Sheet Format and Content) The following is the balance sheet of Sameed Brothers Corporation (000s omitted).

SAMEED BROTHERS CORPORATION

BALANCE SHEET

DECEMBER 31, 2017

Assets

Current assets

Cash

\(26,000

Marketable securities

18,000

Accounts receivables

25,000

Inventory

20,000

Supplies

4,000

Stock investment in subsidiary company

20,000

\)113,000

Investment

Treasury stock

25,000

Property, Plant and Equipment

Building and land

91,000

Less: Reserve for depreciation

(31,000)

60,000

Other assets

Cash Surrender value of life insurance

19,000

Total assets

\(217,000

Liabilities and Stockholder鈥檚 equity

Accounts payable

\)22,000

Reserve for income taxes

15,000

Customer鈥檚 account with credit balance

1

\(37,001

Deferred credit

Unamortized premium on bonds payable

2,000

Long term liabilities

Bonds payable

60,000

Total liabilities

99,001

Common stock

Common stock at par \)5

85,000

Earned surplus

24,999

Cash Dividend declared

8,000

117,999

Total liabilities and Stockholder鈥檚 equity

$217,000

Instructions

Evaluate the balance sheet presented. State briefly the proper treatment of any item criticized

(L03) Harding Corporation has the following accounts included in its December 31, 2017, trial balance: Accounts Receivable \(110,000, Inventory \)290,000, Allowance for Doubtful Accounts \(8,000, Patents \)72,000, Prepaid Insurance \(9,500, Accounts Payable \)77,000, and Cash $30,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
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