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2. To provide other needed information about charges in such economic resources and
obligation.
4. To provide financial information that assets in estimating the learning potential of the
business.
Though financial statements are relevant and useful for a concern, still they do not present
a final picture a final picture of a concern. The utility of these statements is dependent
upon a number of factors. The analysis and interpretation of these statements must be
done carefully otherwise misleading conclusion may be drawn.
1. Financial statements do not given a final picture of the concern. The data given in these
statements is only approximate. The actual value can only be determined when the
business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally
one year, during the life of a concern. The costs and incomes are apportioned to different
periods with a view to determine profits etc. The allocation of expenses and income
depends upon the personal judgment of the accountant. The existence of contingent
assets and liabilities also make the statements imprecise. So financial statement are at
the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final
and accurate position. The value of fixed assets in the balance sheet neither represent
the value for which fixed assets can be sold nor the amount which will be required to
replace these assets. The balance sheet is prepared on the presumption of a going
concern. The concern is expected to continue in future. So fixed assets are shown at cost
less accumulated deprecation. Moreover, there are certain assets in the balance sheet
which will realize nothing at the time of liquidation but they are shown in the balance
sheets.
4. The financial statements are prepared on the basis of historical costs Or original costs.
The value of assets decreases with the passage of time current price changes are not
taken into account. The statement are not prepared with the keeping in view the economic
conditions. the balance sheet loses the significance of being an index of current
economics realities. Similarly, the profitability shown by the income statements may be
represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and operating
result of the business but they do not become a part of these statements because they
cannot be measured in monetary terms. The basic limitation of the traditional financial
statements comprising the balance sheet, profit & loss A/c is that they do not give all the
information regarding the financial operation of the firm. Nevertheless, they provide some
extremely useful information to the extent the balance sheet mirrors the financial position
on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss
A/c shows the result of operation during a certain period in terms revenue obtained and
cost incurred during the year. Thus, the financial position and operation of the firm.
business. Management of working capital is not a least important part of it. It is being increasingly
realized that inadequacy or mismanagement of working capital is the leading cause of business failures.
It is the investment needed for carrying our day-to-day operations of the business smoothly. Lets have
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
Every business needs funds for two purposes for its establishment and to carry out its
day- to-day operations. Long terms funds are required to create production facilities
through purchase of fixed assets such as p&m, land, building, furniture, etc. Investments
in these assets represent that part of firms capital which is blocked on permanent or fixed
basis and is called fixed capital. Funds are also needed for short-term purposes for the
purchase of raw material, payment of wages and other day to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers
to that part of the firms capital which is required for financing short- term or current assets
such as cash, marketable securities, debtors & inventories. Funds, thus, invested in
current assts keep revolving fast and are being constantly converted in to cash and this
cash flows out again in exchange for other current assets. Hence, it is also known as
revolving or circulating capital or short term capital.
The gross working capital is the capital invested in the total current assets of the
enterprises current assets are those
Assets which can convert in to cash within a short period normally one accounting
year.
2) Bills receivables
3) Sundry debtors
a. Raw material
b. Work in process
d. Finished goods
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities.
In a narrow sense, the term working capital refers to the net working. Net working
capital is the excess of current assets over current liability, or, say:
Net working capital can be positive or negative. When the current assets exceeds
the current liabilities are more than the current assets. Current liabilities are those
liabilities, which are intended to be paid in the ordinary course of business within
a short period of normally one accounting year out of the current assts or the
income business.
3. Dividends payable.
4. Bank overdraft.
7. Sundry creditors.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. Both the concepts have their
own merits.
The gross concept is sometimes preferred to the concept of working capital for the
following reasons:
3. It take into consideration of the fact every increase in the funds of the
enterprise would increase its working capital.
On the basis of concept working capital can be classified as gross working capital
and net working capital. On the basis of time, working capital may be classified
as:
Temporary or variable working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable working capital
can further be classified as seasonal working capital and special working capital. The
capital required to meet the seasonal need of the enterprise is called seasonal working
capital. Special working capital is that part of working capital which is required to meet
special exigencies such as launching of extensive marketing for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense that is
required for short periods and cannot be permanently employed gainfully in the business.
Easy loans: Adequate working capital leads to high solvency and credit
standing can arrange loans from banks and other on easy and favorable terms.
Ability To Face Crises: A concern can face the situation during the
depression.
Every business concern should have adequate amount of working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortages of working capital. Both excess as well as short working
capital positions are bad for any business. However, it is the inadequate working
capital which is more dangerous from the point of view of the firm.
Every business needs some amounts of working capital. The need for working capital
arises due to the time gap between production and realization of cash from sales. There
is an operating cycle involved in sales and realization of cash. There are time gaps in
purchase of raw material and production; production and sales; and realization of cash.
For studying the need of working capital in a business, one has to study the business
under varying circumstances such as a new concern requires a lot of funds to meet
its initial requirements such as promotion and formation etc. These expenses are
called preliminary expenses and are capitalized. The amount needed for working
capital depends upon the size of the company and ambitions of its promoters. Greater
the size of the business unit, generally larger will be the requirements of the working
capital.
The requirement of the working capital goes on increasing with the growth and
expensing of the business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.
There are others factors also influence the need of working capital in a business.
DEBTORS
12. PRICE LEVEL CHANGES: Changes in the price level also affect the
working capital requirements. Generally rise in prices leads to increase in
working capital.
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Reference :
www.google.com
INVESTOPEDIA.com
www.Moneycontrol.com
www.cmaindia.org
www.acclimited.com