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CH 20] Calculating Business 20-3

Working Capital. Business requires working capital, which are funds, cash, not
encumbered by debt. Working capital are funds used in a firm’s day-to-day business
operations. Working capital is a measure of a company's liquidity, its operational efficiency
and its short-term financial health. If a company has substantial working capital, then it
should have the potential to invest and grow. Working capital is calculated as the current
assets minus the current liabilities.

Working Capital = Current Assets — Current Liabilities

From the Dunbar Company Balance sheet, Figure 20.1, the working capital is:

Working Capital = Current Assets – Current Liabilities
= $101,400 − $ 15,820
= $85,580 20

If a company's current assets do not exceed its current liabilities, then it may have trouble
growing or paying back creditors, and possibly go bankrupt.

Dunbar Company
Balance Sheet
December 31, 20xx

ASSETS
Current Assets:
Cash $18,000
Accounts Receivable, Net 32,400
Prepaid Expenses 3,000
Merchandise Inventory 48,000
Total Current Assets $ 101,400 22.7%

Working Assets:
Notes Receivable 3,600
Machinery 85,000
Equipment 35,000
Less: Accumulated Depreciation − 6,600
Total Working Assets 117,000 26.2%

Fixed Assets:
Plant & Real Estate 240,000
Less: Accumulated Depreciation − 12,600
Total Fixed Assets 227,400 51.0%
Total Assets $445,800 100.0%

LIABILITIES
Current Liabilities:
Accounts Payable $12,960
Accrued Interest Payable 2,860
Total Current Liabilities $ 15,820 3.5%
Working Liabilities
Notes Payable 27,000
Total Working Liabilities 27,000 6.1%
Fixed Liabilities:
Mortgage Payable 30,000 6.7%
Total Liabilities $ 72,820 16.3%

EQUITY
John Dunbar, Proprietorship 372,980 83.7%
Total Liabilities and Proprietorship $445,800 100.0%

Figure 20.1 Balance Sheet for Dunbar Company
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