1 Can anyone explain with example in detail why decrease in working capital is a source of Fund and Increase in working capital is an Application of Fund ?
Thanks in Advance
Prashant Deo Pandey
(MBA-Finance)
(372 Points)
Replied 27 October 2010
Decrease in working capital occurs in two situations
When CA decreases n CL remains constant-Suppose as on 31st Mar 2009 n 31st Mar 2010 Debtors account shows a balance of Rs10000 n Rs 8000 respectively .It means that company have received Rs 2000 from debtors. So, it can be said that decrease in WC is a source of fund
When CL increases n CA remains constant-Suppose as on 31st Mar 2009 n 31st Mar 2010 Creditors account shows a balance of Rs 9000 and Rs 10000 respectively. It means that creditors have increased by Rs 1000 bcoz of non-payment to them which is also a source of fund for co.
Vice-versa will happen in case of increase in working capital
VUELVE
(CA- Student)
(351 Points)
Replied 27 October 2010
Shivam Rastogi
(Articled Assistant)
(34 Points)
Replied 27 October 2010
N0 Doubt Mr. Prashant has clearly explained.....
CA Sandeep Kumar
(Audit Assistant)
(804 Points)
Replied 27 October 2010
Here is my observation.
After calculating all requirements to prepare funds flow statement, just fill the items in the sources and application column of statement. If there is difference, say, Application is more than sources, then the interpretation is that, working capital has been used for long term investment purposes, i.e along with the other souces of funds, even working capital is utilised. On the contrary, if the sources are more than application, then, interpretation would be that the firm has used only long term funds for long term investment purposes, and working capital would just added as a balancing figure, i.e sources of funds which is in excess will lie in bank/cash, so we say just say applied for balancing purposes.
Comments are welcome. Thank you.
Santhosh Poojary
(SIEMPRE AHÍ PARA TI)
(15607 Points)
Replied 27 October 2010
Very Well Explained By Prashant...
Totally Agree
Kalpesh Chauhan,
(Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com))
(8310 Points)
Replied 28 October 2010
100% agree with Prashant
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