Working Capital Coursework Example | Topics and Well Written Essays - 2000 words

Working Capital - Coursework ExampleInventory forms a major component of the functional capital accounting process and hence is considered to be an asset for the company that will generate special cash flow when cash flow is realized (Mulford & Comiskey, 2005).Working capital and inventory have some of a symbiotic relationship where inventory is accounted within the current assets side of the working capital criterion formula (Schroeder, Clark & Cathay, 2011). Working capital is measured as current assets minus current liabilities. Organizations that have boastfully amounts of sales are often left with huge inventory positions. This brings in a huge lurch in the working capital position of the company. Hence we beneathstand how inventory can be utilise to manipulate liquidity position while calculating working capital (Narayanan & Nanda, 2004).It is argued that inventory should not be included while calculating for working capital to de frontierine the liquidity positions of t he company. A far break off representation of companys liquidity is the quick ratio where inventories are removed. The rationale behind such financial statement is as below.Inventory is generally considered on the asset side of the balance sheet under the current asset subhead. The logic behind being that inventories are finished goods or work in progress that shall get sold and liquidated soon and shall there by generate revenue causing a positive cash flow to the business. However, certain corporations also consider inventory as current liability. Their argument is that inventories can be used in exchange of bills payable and such other short term loans which becomes a liability for the business unless it is paid off. Also as per the ASB opinion 9, current liabilities are classified as obligations theta are expected to be liquidated within a period of one year or the normal operating cycle (US GAAP, n.d.). Hence inventory inclusion might also create