Can You Explain the Working Capital Statement?

The movement of current assets and current liabilities over the accounting period is what goes into the working capital statement.

Changes in current assets and current liabilities will affect working capital throughout this time period.

The Statement’s Reason for Existence

If you want to see how much your current assets and current liabilities have grown or shrunk, you can use a statement of changes in working capital.

Working capital and its change during the accounting period are also displayed.

The following table presents the dynamics of working capital in an easily digestible style.

Structure of a Working Capital Statement

Working capital rises as current assets rise and current liabilities fall.

Working capital is reduced when current assets fall and current liabilities rise.

What You Need to Do to Get Your Statement of Working Capital Changes Ready

Create a pro forma first. The next step is to catalog all liquid assets under the “current assets” title. Then, divide the current assets by two years, one being the base year and the other being the current year.

Find out how much money has changed hands between the two time periods. If the change is a decrease, enter it in the corresponding column.

The next step is to record any outstanding debts under the “current liabilities” heading. Then, in the corresponding cells, please provide the total amount of current liabilities for both the base year and the current year.

The last step is to calculate the change in current liabilities between the two time periods. If the change is a decrease, enter it in the corresponding column.

Compute the difference between the current year’s assets and current year’s liabilities. Both A and B represent the sum of the company’s current assets and current liabilities.

Working capital is determined by deducting current liabilities (B) from current assets (A) for both the current period and the base period.

The next stage is to evaluate the change in working capital between the current and base years.

If this year’s working capital is more than last year’s, then you should enter the difference between the two amounts.

Write the increase in working capital in the appropriate column.

To account for a decrease in working capital from one year to the next, enter the difference between the current year and the prior year.

Write the working capital decrease down against the check amount in the appropriate column.

Total the two columns representing the two years, past and present.

Things to Keep in Mind When Preparing a Working Capital Statement

1. Financial Assets

Marketable securities refer to investments that are intended to be kept for a period of time of less than a year.

These are the company’s current assets, and any changes to them are shown in the statement of changes in working capital.

Therefore, a statement of changes in working capital need not provide a distinct treatment for marketable securities.

Long-term trades, on the other hand, are treated differently since they involve fixed assets (i.e., investments that are kept for more than a year with the expectation of receiving regular income in the form of interest or dividends).

Since certain investments are purchased as income-yielding securities for the long-term, the difference between the opening and closing balances represents the application of funds.

Since this is not a current asset, it does not get updated in the statement of changes in working capital.

2. Income Tax Prepayment Agreement

Businesses are obligated to pay income tax. During the assessment year, income tax is due on earnings from the prior year.

On the concept of pay as you earn, income tax agencies urge that tax be paid on future anticipated earnings in the prior year itself.

Third, tax planning considerations

Taxes on income are deducted from a company’s earnings. The company sets aside money to cover its self-assessed tax liability.

(a) Include the tax provision in the statement of changes in working capital as a current liability.

Since tax payments affect two current accounts (cash and provision for taxation), they will not be reflected as an application of funds in the fund flow statement.

The profit and loss adjustment account and the statement of cash flows need not be revised as a result.

(a) Exclude the tax provision from the statement of changes in working capital because it is a noncurrent liability.

In this situation, the application of money to pay taxes owed during the current fiscal year should be included in the statement of cash flows.

Funds from operations can be calculated by debiting the profit and loss adjustment account the amount by which the opening credit balance on the credit side differs from the closing credit balance and the tax paid on the debit side.

Using the worksheet, we can see that there is a discrepancy.

Finances Used as an Illustration

Determine from the details below:

The sum that should be recorded as “application” in the statement of cash flows.

Amount should be deducted from profit-and-loss account to reflect “provision for income tax” in order to calculate “funds from operations.”

The following table provides further details.

The total income tax for 2017-18 that will be paid in 2018-2019 is $45,000. It is considered a deferred obligation.