Learn how to understand Financial Statement of a company (with examples)

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AAHAcademy
Finance Management Course
AllAssignmentHelp Academy
  • 12 lessons
  • 6 quizzes
  • 1 week duration

2.3 Liquidity and Working Capital

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It has been a convention that all the items in the assets and liabilities category are listed in their order of their liquidity.

Liquidity means how quickly an asset can be converted to cash to pay the liabilities or obligations of the company.

The top item is most liquid and the bottom item is least liquid.

Asset is divided into current assets and long term assets. Current assets are written above long term assets. Current assets are cash at hand, inventory, and accounts receivables from the customers. These are liquid items.

Liabilities are also divided into current liabilities and long term liabilities. Current liabilities can be employees’ salaries, amount to be paid to suppliers, taxes, and others. Long term liabilities can be bank loans, and others.

Working Capital is the difference between Current Assets and Current Liabilities.

Net Working Capital = Current Assets – Current Liabilities

A positive net working capital is considered as good as it shows the ability of the company to pay its current liability. However, it depends on the industry and company’s reputation. Companies in telecom and retail can be found with the negative working capital.