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Fundamentals of Management Accounting · Class 12 Commerce

Ch 4Working Capital Management and Cash Flow Statements — Class 12 Fundamentals of Management Accounting, concept-first.

Every business needs two broad kinds of funds. It needs fixed capital to acquire long-term assets such as land, buildings, plant and machinery that will be used for many years, and it needs working capital to finance the day-to-day running of the business — buying stock, allowing credit to customers, and keeping enough…

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Key concepts

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Working Capital (Gross and Net)

Working capital is the fund a business keeps invested in its short-term operations — stock, receivables and cash — to finance day-to-day activity and bridge the gap between spending cash on inputs and collecting it from…

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Chapter contents

The NCERT structure, section by section. Open a section to see its questions, then read the concept-first solution.

1

Meaning and Concept of Working Capital

Every business needs two broad kinds of funds. It needs fixed capital to acquire long-term assets such as land, buildings, plant and machinery that will be used for many years, and it needs working ca…

2

Need and Importance of Working Capital

No business can run on fixed assets alone. A factory building and machinery cannot produce or sell anything unless the firm also has funds to buy raw material, pay wages while goods are being made, ho…

3

Classification of Working Capital

Working capital is classified in two different ways — on the basis of concept and on the basis of time. The concept-based classification (gross vs net working capital) was covered in Section 1.

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Determinants (Factors Affecting) Working Capital

The amount of working capital a firm needs is not the same for every business — it depends on a number of factors. Two firms in the same industry can have very different working capital requirements.

5

Sources of Working Capital

Once a firm knows how much working capital it needs, it must decide where to raise it from. The guiding principle is a matching one: permanent working capital should be financed from long-term sources…

6

Computation of Working Capital for a Trading Concern

For examination purposes, working capital is computed in two common situations: (a) finding net working capital from a given list of current assets and current liabilities, and (b) estimating the work…

7

Cash Flow Statement — Meaning and Objectives

A profit and loss account tells the owners how much profit a business made, and a balance sheet tells them the financial position on a particular date — but neither directly answers a very practical q…

8

Cash and Cash Equivalents; Transactions Affecting and Not Affecting Cash

Before a cash flow statement can be prepared, it must be clear what counts as 'cash' for the purpose of the statement, and which transactions actually change that cash.

9

Cash Flow Statement vs Funds Flow Statement

Students often confuse the cash flow statement with the older funds flow statement. Both are statements of financial flows prepared from two consecutive balance sheets, but they differ in what they me…

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Preparation of a Cash Flow Statement as per AS-3

AS-3 requires cash flows to be classified into three activities, and the cash flow statement is built by finding the net cash flow under each and reconciling to the change in cash.

Exercises

+Show 9 questions9 questions
  1. Q1What do you mean by working capital? Distinguish between gross working capital and net working capital.Free
  2. Q2Explain the need and importance of working capital for a business enterprise.Free
  3. Q3Distinguish between permanent working capital and temporary working capital.Free
  4. Q4Discuss the main factors (determinants) that affect the working capital requirement of a firm.Preview
  5. Q5Describe the various sources from which a firm can raise its working capital.Preview
  6. Q8What is a Cash Flow Statement? State its main objectives.Preview
  7. Q9Explain, with examples, transactions that affect cash and transactions that do not affect cash. What is meant by cash and cash equivalents?Preview
  8. Q10Distinguish between a Cash Flow Statement and a Funds Flow Statement.Preview
  9. Q11While preparing a Cash Flow Statement as per AS-3, 'Purchase of machinery for cash' is classified under: (a) Operating activities (b) Invest…Preview

More questions

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  1. Example 6From the following information, calculate the gross working capital and the net working capital of a firm. Current assets: Stock ₹40,000; De…Free
  2. Example 7A trading concern estimates the following for the coming year: annual credit purchases ₹7,20,000; annual credit sales ₹9,60,000. It plans to…Free
  3. Example 12From the following, calculate the cash flow from operating activities (before tax) using the indirect method: Net profit ₹50,000; Depreciati…Preview
  4. Example 13From the following comparative balance sheets of a company, prepare a Cash Flow Statement as per AS-3. Equity and liabilities — Equity share…Preview