General Rules

Let us formulate some general rules to ascertain which transactions give rise to a source or a use of working capital and which do not. This exercise is useful for the preparation of the funds flow statement. Symbolically,

WC = CA – CL

From Equation 6.1 the following may be deduced:

1. Transactions affecting WC:
(a) An increase in CA (without affecting CL) causes an increase in WC.
(b) A decrease in CA (without affecting CL) causes a decrease in WC.
(c) An increase in CL (without affecting CA) causes a decrease in WC.
(d) A decrease in CL (without affecting CA) causes an increase in WC.

2. Transactions not affecting WC:
(e) A simultaneous increase in CA and CL does not affect WC.
(f) A simultaneous decrease in CA and CL does not affect WC.
(g) A simultaneous increase/decrease in non-current asset and non-current liability does not affect wC

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