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Sources of Working Capital

It is not necessary to analyze every transaction that occurred during the accounting period to determine the source of working capital. Simply stated the transitions which provide-working capital are classified in terms of their effect on non-current items. Some of the more common sources of working capital are:

1.    Current operations (Profits earnings) : Funds in the form of cash, debtors and bills receivables are received by the business enterprise while cost of goods sold and other expenses result in the outflow of funds. Thus, the working capital is increased form the trading operations if the receipts from sales exceed the cost of the goods sold and other expenses. (For details see Working Capital from Operations).

2.    Income from long term investments: Interest and dividends from the long term investments constitute a source of working capital form the non-trading or non-operating activities of the business enterprise.

3.    Issuance of share capital (or Sale of capital stock): The issuance of share capital for cash or in exchange for current assets, e.g., inventories, increases current assets and hence working capital. Likewise an additional investment by a proprietor or partners in cash is also a source of working capital. When the share capital is issued at a premium or discount the some would also be taken into consideration for determining the funds provided by this source.

4.    Borrowing  on debentures or bonds (i.e., Long term debts) : The issuance of debentures or bonds or any other long term debts for cash or stock increases reworking capital. When the debentures or bonds are issued at a price above or below the nominal price, it would be necessary to consider the premium or discount in order to determine the amount of funds provided by the transition.

5.    Sale of long-term assets: The sale of long-term investments, plant and machinery, buildings, land and other non-current assets for cash or receivables, is a source of funds. However, the funds provided by the sale of a non-current assets is not necessarily the same as the amount in its account.

6.    Any unusual source, e.g., damages recovered through legal action.

Working Capital Flow

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