What is working capital, balance sheet, depreciation and types?

Question

Accepted Answer

Working capital is the difference between current assets and current liabilities on a balance sheet. Depreciation is the allocation of the cost of an asset over its useful life.

Working capital is calculated as current assets minus current liabilities.
Balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a specific point in time.
Depreciation is the reduction in value of an asset over time, typically recorded as an expense on the income statement.
Types of depreciation include straight-line, double declining balance, and units of production.

Accepted Answer

Working Capital:
Working capital, also known as net working capital (NWC), represents the difference between a company’s current assets and current liabilities.
Current assets include items like cash, accounts receivable (unpaid bills from customers), and inventories of raw materials and finished goods.
Current liabilities encompass obligations such as accounts payable and debts.
Working capital measures a company’s liquidity and short-term financial health. It indicates the ability to fund day-to-day operations and respond to financial stress or opportunities.
Negative working capital occurs when current liabilities exceed current assets, suggesting potential liquidity issues.
Positive working capital shows that a company can support ongoing operations and invest in future growth.
However, excessively high working capital might indicate that the business has too much inventory, isn’t investing excess cash, or isn’t taking advantage of low-cost debt opportunities1.
Balance Sheet:
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time.
It consists of three main sections: assets, liabilities, and equity.
Assets include both current assets (like cash, accounts receivable, and inventory) and long-term assets (such as property, plant, and equipment).
Liabilities encompass both current liabilities (like accounts payable and short-term debt) and long-term liabilities (such as bonds and mortgages).
Equity represents the residual interest in the company after deducting liabilities from assets.
The balance sheet follows the fundamental accounting equation: Assets = Liabilities + Equity.
It helps investors, creditors, and analysts assess a company’s financial health and solvency2.
Depreciation:
Depreciation is an accounting practice used to allocate the cost of a tangible or physical asset over its useful life.
Companies use depreciation for both tax and accounting purposes.
Different methods of depreciation include:
Straight-line depreciation: Allocates an equal amount of depreciation expense each year.
Declining balance depreciation: Front-loads depreciation, resulting in higher expenses initially.
Units of production depreciation: Ties depreciation to the actual usage or production of the asset.
Sum-of-the-years-digits depreciation: Accelerates depreciation based on a fraction of the asset’s useful life.
Depreciation allows businesses to match asset costs with related revenues over time, moving the costs from the balance sheet to the income statement.
It’s important to note that depreciation is considered a non-cash charge, as it doesn’t represent an actual cash outflow

What is working capital, balance sheet, depreciation and types?

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