Question

Can you explain the charts of adjustments for changes in current assets and current liabilities? How can we apply to the problem?

Answer 1

Working capital = current asses minus current liabilities

There are various items in current assets like inventory, accounts receivables,cash and bank balances etc...

Similarly in current liabilities we have accounts payables, short term loans and advances, etc.

Changes in the working capital results in knowing the cash generated from operational activities of business.

1. Chart of adjustments will be increase in current assets or vice-versa. similarly in current liablities there will be increase or decrease from year to year.
2. If from previous year current assets are increased when compared in this current year, this tells that cash outflow is reduced. This difference amount should be decreased from net profit in cash flow from operational activity in cash flow statement( if they are following indirect method). If the current assets are decreased the process is vice versa I.e., add increased amount to net profit.
3. Similarly as above the changes in current assests ,the difference amount should be add/ subtract to/ from net profit if any noticed. That is if current liabilities are increased then add back the difference to net profit from profit and loss account of current year.if current liabilities are decreased then vice versa.