Working Capital Analysis

This text provides an example of a working capital analysis. It shows how to calculate the net increase in working capital, and how to use this information to create a statement of sources and applications of funds.

Questions

• What is working capital?
• How do you calculate the net increase in working capital?
• What is a statement of sources and applications of funds?

Answers

• Working capital is the difference between a company’s current assets and its current liabilities. It is a measure of a company’s liquidity, or its ability to meet its short-term financial obligations.
• The net increase in working capital is calculated by subtracting the current liabilities from the current assets at the end of the period from the current liabilities and current assets at the beginning of the period.
• A statement of sources and applications of funds is a financial statement that shows how a company’s funds have been used during a period of time. It shows the sources of funds (such as new equity issuance or debt financing) and the applications of funds (such as capital expenditures or dividends).