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Working Capital CalculationA company has two kinds of assets namely fixed assets, such as property and machinery, and current assets.
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Current Assets and LiabilitiesAssets of a company are of two types―long term assets and short term assets. Short term assets, also known as current assets, are those which will either be used or sold within one operating cycle, usually one year. Current assets are calculated as the sum total of the cash or cash equivalents, current inventory, accounts receivable, as well as marketable securities. Liabilities of a company are of two types―long term liabilities and short term liabilities. Short term liabilities, also known as current liabilities, are those debts, obligations, and liabilities of a business which have to be settled within one operating cycle, usually one year. Current liabilities are calculated as the sum total of the accrued expenses, accounts payable, part of the long term debt which is accounted as current and notes payable. YXM has cash worth $200,000, $20,000 in account receivable, $100,000 in securities, and $40,000 in inventory. The same company has $80,000 in accounts payable, $40,000 in current debt, and $30,000 in accrued expenses. How will its working capital be calculated?Current Assets of YXM Ltd. in the previous year was $200,000, then, for change in the working capital calculation, the working capital of the previous year is subtracted from that of the current year. A positive working capital is a good sign for the business, as investors base their investment decisions on the liquidity of a company, which is reflected when the current assets are more than current liabilities in a given period.