4. Working Capital

Question 1

What is working capital?

Answer 1

Working capital = Current Assets - Current Liabilities

Question 2

What is credit loss/bad debt?

Answer 2

The amount of money owed from customers that a company’s management expects to NOT receive due to some customers’ inability to pay back debt (estimated value of credit losses/uncrecoverable amount).

Question 3

What happens when credit loss (some customers unable to pay debt) happens?

Answer 3

In SoPL, an “impairment charge” is recognised as an expense.
In SoFP, the recoverable amount is recognised as a “net trade receivable” asset.
Adjust until finalised (e.g., increase impairment charge if more credit loss occurs).

Question 4

In an invoiced credit sale, how are the financial statements of the supplier and customer adjusted?

Answer 4

Supplier:
- Trade receivables (current asset) goes up in SoFP. Inventory goes down on SoFP.
- Revenue and C.O.S. go up in SoPL.

Customer:
- Trade payable (current liability) goes up in SoFP. Inventory goes up on SoFP.

Question 5

In an un-invoiced credit sale, how are the financial statements of the supplier and customer adjusted?

Answer 5

Supplier:
- Accrued income (current asset) goes up in SoFP. Inventory goes down on SoFP.
- Revenue goes up in SoPL.

Customer:
- Accrued expense (current liability) goes up in SoFP. Inventory goes up on SoFP.
- Expense on SoPL.

Question 6

When payment is made in advance, how are the financial statements of the supplier and customer adjusted?

Answer 6

Supplier:
- Unearned income (current liability) and cash (current asset) go up in SoFP.

Customer:
- Prepaid expense (current asset) goes up in SoFP. Cash (current asset) goes down in SoFP.