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Inventory, Prepaids, and Deferrals in Working Capital

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Create an argument for including inventory, prepaids, and deferrals in working capital. Provide support for your answer.

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Working Capital is defined as that funding which is required for daily operational purposes, that is for the operational cycle of the business. A typical operational cycle is one year (may be a calendar year or a fiscal year).

The assets associated with the operational cycle include:

* cash
* accounts receivable
* inventory
* short term investments
* prepaids
* supplies (until used)

The liabilities associated with the operational cycle include:

* accounts payable
* accrued expenses
* unearned income
* short term loans

From this listing, we can recognize that inventory and prepaids are current (or short term) assets which are used in the daily conduct of the business. Inventory is what the business sells in order to create revenue for its core operation --- it leads directly to ...

Solution Summary

This discussion represents the concept of working capital and its components. In addition, it presents the format for analyzing the current ratio or cash flow position of the firm.

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See Also This Related BrainMass Solution

12 Short Answer Questions on Accounts: Chart of accounts, trial balance, adjusting entries, differences between prepaids and accruals, different journal entries associated with booking prepaid insurance and unrecorded insurance

1) What are the components of the chart of accounts?

2) What is the purpose of the numbering structure on a chart of accounts?

3) Why is the structure of the chart of accounts important?

4) Is the chart of accounts the same for every organization? Explain your answer.

5) When is the trial balance prepared?

6) What is the purpose of preparing a trial balance?

7) What does the trial balance tell you?

8) What does the trial balance not tell you?

9) What accounting assumptions necessitate the use of adjusting entries?

10) What are the differences between prepaids and accruals?

11) What are the different journal entries associated with booking prepaid insurance and unrecorded insurance?

12) What accounts are subject to adjusting journal entries?

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