Working Capital Coursework Example | Topics and Well Written Essays - 2000 words

Working Capital - Coursework Example Inventory forms a major component of the working capital accounting process and hence is considered to be an asset for the company that will generate additional cash flow when cash flow is realized (Mulford & Comiskey, 2005). Working capital and inventory have somewhat of a symbiotic relationship where inventory is accounted within the current assets side of the working capital measurement formula (Schroeder, Clark & Cathay, 2011). Working capital is measured as current assets minus current liabilities. Organizations that have large amounts of sales are often left with huge inventory positions. This brings in a huge change in the working capital position of the company. Hence we understand how inventory can be used to manipulate liquidity position while calculating working capital (Narayanan & Nanda, 2004). It is argued that inventory should not be included while calculating for working capital to determine the liquidity positions of the company. A far better representation of company’s liquidity is the quick ratio where inventories are removed. The rationale behind such argument is as below. Inventory is generally considered on the asset side of the balance sheet under the current asset subhead. The logic behind being that inventories are finished goods or work in progress that shall get sold and liquidated soon and shall there by generate revenue causing a positive cash flow to the business. However, certain corporations also consider inventory as current liability. Their argument is that inventories can be used in exchange of bills payable and such other short term loans which becomes a liability for the business unless it is paid off. Also as per the ASB opinion 9, current liabilities are classified as obligations theta are expected to be liquidated within a period of one year or the normal operating cycle (US GAAP, n.d.). Hence inventory inclusion might also create