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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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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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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 ...

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