working capital

Examples of working capital in the following topics:

• Working Capital Management Analysis

  • Along with fixed assets, such as property, plant, and equipment, working capital is considered a part of operating capital.
  • Net working capital is calculated as current assets minus current liabilities.
  • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
  • Decisions relating to working capital and short term financing are referred to as working capital management.
  • Identify working capital and discuss how a company would use it

• Key Considerations for the Statement of Cash Flows

  • The statement shows historical changes in cash and cash equivalents rather than working capital.
  • Financing activities - activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise.
  • Transactions include cash received by the company issuing its own capital stock and bonds, as well as any other short- or long-term borrowing it may do.

• Outputs of Accounting

  • Financial institutions (banks and other lending companies) use statements to decide whether to grant a company fresh working capital or extend debt securities (such as a long-term bank loan or debentures).

• Categories of Goods Included in Inventory

  • The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers.
  • Work in process or work in progress (WIP) - Materials and components that have began their transformation to finished goods.
  • Optimal production management aims to minimize work in process.
  • Work in process requires storage space, represents bound capital not available for investment, and carries an inherent risk of earlier expiration of the shelf life of the products.
  • The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers.

• Reporting R&D Cost

  • Expense R&D, unless items have alternative future uses, then allocate as consumed, or capitalize and depreciate as used.
  • A cost which cannot be deducted in the year in which it is paid or incurred must be capitalized.
  • The capital expenditure costs are then amortized or depreciated over the life of the asset.
  • In this case, the contract usually specifies that all direct costs, certain specific indirect costs, plus a profit element, should be reimbursed to the enterprise performing the R&D work.
  • It is the company for whom the work has been performed that reports these costs as R&D and expenses them as incurred.

• Analyzing Intangible Assets

  • Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses.
  • For example, an amount paid to obtain a trademark must be capitalized.
  • Certain amounts paid to facilitate these transactions are also capitalized.
  • The regulations contain many provisions intended to make it easier to determine when capitalization is required.
  • R&D activities frequently result in the development of something that is patented or copyrighted (such as a new product, process, idea, formula, composition, or literary work).

• Cost of Improvements

  • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • Asset or capital improvements are undertaken to enhance or improve a business asset that is in use.
  • If the capital improvement is financed, the interest cost associated with the improvement should not be capitalized as an addition to the asset's historical cost.
  • Interest costs are not capitalized for assets that are not under construction.
  • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.

• Basic Components of Asset Valuation

  • They would credit assets received as gifts to a stockholders' equity account titled Paid-in Capital—Donations.
  • Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
  • Appraisals are used often to value works of art, rare books, antiques, and real estate.
  • They would credit assets received as gifts to a stockholders' equity account titled Paid-in Capital—Donations.

• Accounting Perspectives on Long-Lived Assets

  • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
  • Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.
  • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

• Overview of Lease Accounting

  • There are two types of leases capital leases and operating leases.
  • Capital equipment is financed either with debt or equity.
  • A capital lease is a form of debt-equity financing in which the lease acts like loan.
  • To that end, a capital lease must be recorded as liability on the company's balance sheet, it is important to note that the IRS treats capital leases as a liability.
  • Under a capital lease, the lessee does not record rent as an expense.