From the following calculate Gross Working capital and Net Working capital, Creditors ₹10000, cash ₹20000, stock ₹5000/-.
Answer & explanation
Correct answer: option 3
The correct answer is option (3) - ₹25,000, ₹15,000
Gross working capital (also known as current capital or circulating capital) is the sum total of all current assets of the business.
Net Working Capital means Current assets- Current Liabilities
Current assets include cash, inventory (raw materials, work in process, finished goods, spares etc) and accounts receivable (or trade debtors). Current assets comprise items that would get converted in to cash in the short-run, say, within the normal operating cycle (or cash conversion cycle) of the business.
Current liabilities represent short-term source of funds and are expected to fall due or mature for payment in a short period, generally within a year. These typically consist of payables to vendors and service providers, employees, other short term borrowings and provisions.
In the present case,
Creditors: Rs 10,000 : Current Liabilities
Cash: Rs 20,000 : Current Assets
Stock: Rs 5,000 : Current Assets
Thus,
Current Assets= 20,000+5,000= Rs 25,000
Current liabilities = 10,000
Gross Working Capital= Total Current Assets = 25,000
Net Working Capital= Current assets- Current Liabilities
= Rs25,000 - 10,000
=15,000