COMPUTATION OF WORKING CAPITAL
The two components of working capital (WC) are current assets (CA) and current liabilities. They have a bearing on the cash operating cycle. In order to calculate the working capital what is required is the holding period of various types of inventories, the credit collection period the credit payment period. Working capital also depends on the budgeted level of activity in terms production sales. The calculation of WC is based on the assumption that the production sales carried on evenly throughout the year and all costs accrue similarly. As the working capital are related to the cost excluding depreciation and not to the sale price, WC is computed reference to cash cost. The cash cost approach is comprehensive and superior to the operating approach based on holding period of debtors and inventories and payment period of creditors problems have been solved, however, using the operating cycle approach also.
The steps involved in estimating the different items of CA and CL are as follows
Estimation of Current Assets