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WORKING
CAPITAL
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ACKNOWLEDGEMENT
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DECLARATION
PRESENTED BY
NAME OF STUDENTS ROLL NO.
PRIYANKA GAIKWAD 07
RUBY KHOT 13
SABINA MUSA 15
AFSHA RATANSI 19
SHAHISTA SHAIKH 23
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INDEX
SR. NO. TOPICS PG NO.
1 WHAT DOES COST ACCOUNTING 5
MEAN?
2 EMERGENCE OF COST ACCOUNTING 6
3 EXPANDING USES 7
4 BASICS OF COSTING METHODS 8
5 ESTIMATING TOTAL COST 10
6 WORKING CAPITAL DEFINATION 11
7 INTRODUCTION TO WORKING 12
CAPITAL
8 IMPORTANCE AND ASPECTS OF 14
WORKING CAPITAL
9 WORKING CAPITAL POLICY 17
10 IMPORTANCE OF WORKING CAPITAL 20
RATIOS
11 WHERE IS WORKING CAPITAL 24
ANALYSIS MOST CRITICAL
12 WORKING CAPITAL CYCLE 25
13 SOURCES AND OTHER REQUIRMENTS 27
OF WORKING CAPITAL
13 OVERVIEW OF CURRENT METHODS 28
15 ACCOUNT ANALYSIS 30
16 FUTURE OF COST ACCOUNTING 33
17 BALANCE SHEET ANALYSIS 36
18 INCOME STATEMENT RATIO 39
ANALYSIS
19 CONCLUSION 42
20 BIBLOGRAPHY 43
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Cost accounting was first used by the Louisville & Nashville Railroad in
the late 1860s. This enabled the company to determine such measures as
comparative cost per ton-mile among its branches, and it was by these
measures, rather than earnings or net income, that the company evaluated
the performance of its managers.
EXPANDING USES.
The largest U.S. manufacturing firms in the 1870s were textile
producers. Because these years were a period of hardship for the industry,
textile producers began to devote more attention to the determination and
control of costs. By 1886, Lyman Mills, one of the country's largest textile
producers, began to determine unit costs for its various products, though it
did not use this information to make pricing or investment decisions. The
Standard Oil Trust, formed in 1882, also began to determine the comparative
costs of their different refineries in the 1880s and on this basis opted to
concentrate production in their largest units. However, the enterprise did not
accurately account for overhead or capital depreciation in its determination
of costs.
The firm with the most detailed and sophisticated costing methods in the
1880s was the Carnegie Company, a steel producer. In this case, the
connection between costing methods in the railroad and manufacturing
industries was direct, as Andrew Carnegie patterned the organization of his
firm after the Pennsylvania Railroad, where he had been an executive.
Carnegie's costing method was referred to as the voucher system of
accounting. In this system, each of the company's departments kept track of
the quantity and price of materials and labor for each order. These data were
aggregated into cost sheets that the company's accountants were able to
produce on a daily basis. Though the Carnegie Company made extensive use
of its cost sheets to determine prices, it focused on prime rather than
overhead and depreciation costs.
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FIXED COSTS.
VARIABLE COSTS.
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levels, fixed costs are declining, and variable costs constant. Manufacturers
are vitally interested in unit costs with respect to changes in output levels,
since this determines profit per unit of output at any given price level. The
characteristics of fixed and variable costs indicates that as output increases,
unit costs will decline, since there is constant variable cost and lesser fixed
cost embodied in each unit. These costing methods thus suggest that it is in
manufacturers' interest to run, within the limits of plant design, at high
capacity levels.
DIRECT COSTS.
INDIRECT COSTS.
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WORKING CAPITAL
DEFINITION
Current asset minus current liabilities, Working
capital measures how much in liquid assets a company has available to build
its business. The number can be positive or negative, depending on how
much debt the company is carrying. In general, companies that have a lot of
working capital will be more successful since they can expand and improve
their operations. Companies with negative working capital may lack
the funds necessary for growth. also called net current assets or current
capital.
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Introduction
Working capital may be regarded as the life blood of business. Working
capital is of major importance to internal and external analysis because of its
close relationship with the current day-to-day operations of a business. Every
business needs funds for two purposes.
* Short term funds are required for the purchase of raw materials, payment
of wages, and other day-to-day expenses. . It is other wise known as
revolving or circulating capital
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Working Capital is more a measure of cash flow than a ratio. The result
of this calculation must be a positive number. It is calculated as shown
below:
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* Here risk refers to the inability of a firm to meet its obligation, when they
become due for payment.
* There is a definite inverse relationship between the degree of risk &
profitability.
* A management prefers to minimize risk by maintaining a higher level of
current assets or working capital.
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* Generally, higher the risk lower is the cost & lowers the risk, higher is the
cost.
* A sound working capital management should always try to achieve a
proper balance b/w these two.
The level of Current Asset may be measured with the help of two ratios
"Working capital is the life blood & controlling nerve centre of a business."
No business can be successfully run without an adequate amount of working
capital.
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But from the perspective of equity valuation and the company's growth
prospects, working capital is more critical to some businesses than to others.
At the risk of oversimplifying, we could say that the models of these
businesses are asset or capital intensive rather than service or people
intensive.
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capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working capital
will generate cash will help improve profits and reduce risks. Bear in mind
that the cost of providing credit to customers and holding stocks can
represent a substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash
- Inventory (stocks and work-in-progress) and Receivables (debtors owing
you money). The main sources of cash are Payables (your creditors)
and Equity and Loans.
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ACTIVITY-BASED COSTING.
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ACCOUNT ANALYSIS.
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ENGINEERING APPROACH.
HIGH-LOW APPROACH.
In the high-low approach, a firm must know its total costs for
previous high and low levels of output. Graphing total costs against output,
total costs over a range of output are estimated by fitting a straight line
through total cost points at high and low levels of output. If changes in total
costs can be accurately described as a linear function of output, then the
slope of the line indicates changes in variable costs.
The problem with the high-low approach is that the two data points
may not, for whatever reasons, accurately represent the underlying total
cost-output relationship. That is, if additional total cost-output points were
plotted, they might lay significantly wide of the line connecting the two initial
high-low points.
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LINEAR REGRESSION.
DIRECT MATERIALS.
DIRECT LABOR.
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OVERHEAD.
Overhead standards are the most difficult to estimate, and they are
typically accounted for in an approximate manner. The problem of
accounting for overhead costs per unit of output was noted above—it is often
difficult to trace indirect costs to a particular product. The problem is made
more complicated if these costs are highly centralized within a plant and if
multiple products are produced within a plant. Overhead standards are
typically estimated by taking total overhead costs and relating them to a
more readily-knowable measure, such as direct labor hours, direct labor
costs, or machine hours used. Direct labor hours was traditionally the most
widely-used measure for determining overhead standards, but the growth of
automated plants resulted in a shift to machine hours used.
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TARGET COSTING.
A related practice that has also enjoyed quite a bit of attention since
the mid-1990s is target costing, which is a method of engineering a product
and its manufacturing process from the start with a specific cost model in
mind. This approach, which is essentially an elaboration of the engineering
costing approach, attempts to create an optimally efficient process from the
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LIQUIDITY RATIOS
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These ratios indicate the ease of turning assets into cash. They include
the Current Ratio, Quick Ratio, and Working Capital.
CURRENT RATIOS
The Current Ratio is one of the best known measures of financial
strength. It is figured as shown below:
If you feel your business's current ratio is too low, you may be able to raise it
by:
QUICK RATIOS
The Quick Ratio is sometimes called the "acid-test" ratio and is one of
the best measures of liquidity. It is figured as shown below:
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The Quick Ratio is a much more exacting measure than the Current
Ratio. By excluding inventories, it concentrates on the really liquid assets,
with value that is fairly certain. It helps answer the question: "If all sales
revenues should disappear, could my business meet its current obligations
with the readily convertible `quick' funds on hand?"
LEVERAGE RATIO
Generally, the higher this ratio, the more risky a creditor will perceive
its exposure in your business, making it correspondingly harder to obtain
credit.
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This ratio is the percentage of sales dollars left after subtracting the
cost of goods sold from net sales. It measures the percentage of sales dollars
remaining (after obtaining or manufacturing the goods sold) available to pay
the overhead expenses of the company.
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Net Profit Margin Ratio = Net Profit Before Tax / Net Sales
MANAGEMENT RATIOS
Other important ratios, often referred to as Management Ratios, are also
derived from Balance Sheet and Statement of Income information.
This ratio indicates how well accounts receivable are being collected.
If receivables are not collected reasonably in accordance with their terms,
management should rethink its collection policy. If receivables are
excessively slow in being converted to cash, liquidity could be severely
impaired. Getting the Accounts Receivable Turnover Ratio is a two step
process and is is calculated as follows:
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Daily Credit Sales = Net Credit Sales Per Year / 365 (Days)
This measures how efficiently profits are being generated from the
assets employed in the business when compared with the ratios of firms in a
similar business. A low ratio in comparison with industry averages indicates
an inefficient use of business assets. The Return on Assets Ratio is calculated
as follows:
The ROI is perhaps the most important ratio of all. It is the percentage
of return on funds invested in the business by its owners. In short, this ratio
tells the owner whether or not all the effort put into the business has been
worthwhile. If the ROI is less than the rate of return on an alternative, risk-
free investment such as a bank savings account, the owner may be wiser to
sell the company, put the money in such a savings instrument, and avoid the
daily struggles of small business management. The ROI is calculated as
follows:
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sources. The owner may thus determine the business's relative strengths
and weaknesses.
CONCLUSION
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BIBLOGRAPHY
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