Question

A company has the following balance sheet.
What is its net operating working capital?
Cash $ 10 Accounts payable $ 20
Short-term investments 20 Accruals 30
Accounts receivable 30 Notes payable 20
Inventory 40 Current liabilities 70
Current assets 100 Long-term debt 30
Net fixed assets 80 Common equity 10
Retained earnings 70
Total assets $180 Total liab. & equity $180

Answer 1

Solution:

Given:

Balance Sheet of a Company:

Assets	Amount in $	Liabilities	Amount in $
Cash	10	Accounts payable	20
Short-term investments	20	Accruals	30
Accounts receivable	30	Notes payable	20
Inventory	40	Current liabilities	70
Current assets	100	Long-term debt	30
Net fixed assets	80	Common equity	10
		Retained earnings	70
Total Assets	180	Total Liabilities & Equity	180

To Calculate:

Net Operating Working Capital

Formula:

Net Operating Working Capital = Current Operating Assets − Current Operating Liabilities

Process: Calculations

Current Operating Assets are:

1. Cash

2. Accounts Receivables

3. Inventories

Current Operating Liabilities are:

1. Accounts Payable

2. Accrued Expenses

So, our formula can also be written as:

Net Operating Working Capital = (Cash + Accounts Receivables + Inventories) − (Accounts Payable + Accrued Expenses)

Here:

Cash = $ 10, Accounts Receivables = $ 30, Inventories = $ 40

Accounts Payable = $ 20, Accrued Expenses or Accruals = $ 30

On putting these values in the formula, we get,

Net Operating Working Capital = ($ 10 + $ 30 + $ 40) – ($ 20 + $ 30)

Net Operating Working Capital = ($ 80) – ($ 50) = $ 30

Net Operating Working Capital = $ 30

Ans: The Net Operating Working Capital of the Company = $ 30