CMA Training Video | Working Capital Analysis | By Varun Jain
Miles Education - CPA, CMA, CFA
Working Capital: Working capital is calculated by subtracting the current liabilities from current
assets.Formula: Working Capital = Current Assets - Current LiabilitiesCurrent Ratio: It is the
ratio of current assets to current liabilities. If the current ratio is 2, then the current assets are
twice the current liabilities.Formula: Current Ratio = Current Assets / Current LiabilitiesQuick
Ratio: The quick ratio or acid test ratio measures the company's ability to pay off its current
liabilities only using its current assets that are more liquid.Solvency Ratios: These ratios help to
determine whether the business has enough cash to pay its debts as they become due.Activity
Ratios: These ratios help us understand how active the business is by analyzing its
operations.Examples of Activity Ratios:Average InventoryAverage ReceivablesAverage
PayablesBondurant resold that went what they metrics all the energy they did it twelve times
during the year.Net Credit Sales: It is calculated by subtracting discounts and returns from
sales.Formula: Net Credit Sales = Sales - Discounts - ReturnsNote: Credit sales are considered
instead of cash sales because we don't have receivables in cash sales.
Cogs, or cost of goods sold, is a measure of a business's inventory cost. It is calculated by
subtracting the ending inventory from the beginning inventory and adding the purchases
made.A business starts by purchasing goods from its vendors or suppliers, who may offer trade
terms that require cash payment upon delivery. Once the business has received the inventory, it
sells the goods, often on credit, and records the transaction in an inventory account.If using the
perpetual method of inventory, the business records journal entries for every sale and passing
the cost of goods sold to the inventory account.The receivable collection or conversion period
can be calculated by dividing 360 by 6 to get 60 days. Similarly, the payable turnover can be
calculated by dividing 360 by 24 to get 15 days, which is the amount of time it takes for the
business to pay its suppliers.
Halleck Working Capital is calculated as current assets minus current liabilities. The current
ratio is calculated by dividing current assets by current liabilities. However, I prefer the first
formula as it allows you to easily calculate your turnover ratio and period. This is particularly
useful for inventory and receivables conversion analysis. When analyzing ratios, it's important to
assess their sensitivity. For turnover ratios, the numerator is typically net credit sales and the
denominator is receivables. The ratio for average net receivables is calculated by subtracting
any allowance for uncollectibles. Next, let's look at the inventory turnover ratio, which has the
cost of goods sold as the denominator and average inventory as the numerator. The cash
conversion cycle is another important ratio to consider. Changes in the numerator or
denominator can have an adverse effect on the ratio and therefore, impact the inferences that
can be drawn. It's important to note that the degree of impact on a particular ratio will depend on
the value of the ratio. If the ratio is greater than one, an equal increase in the numerator and
Miles Education - CPA, CMA, CFA
Working Capital: Working capital is calculated by subtracting the current liabilities from current
assets.Formula: Working Capital = Current Assets - Current LiabilitiesCurrent Ratio: It is the
ratio of current assets to current liabilities. If the current ratio is 2, then the current assets are
twice the current liabilities.Formula: Current Ratio = Current Assets / Current LiabilitiesQuick
Ratio: The quick ratio or acid test ratio measures the company's ability to pay off its current
liabilities only using its current assets that are more liquid.Solvency Ratios: These ratios help to
determine whether the business has enough cash to pay its debts as they become due.Activity
Ratios: These ratios help us understand how active the business is by analyzing its
operations.Examples of Activity Ratios:Average InventoryAverage ReceivablesAverage
PayablesBondurant resold that went what they metrics all the energy they did it twelve times
during the year.Net Credit Sales: It is calculated by subtracting discounts and returns from
sales.Formula: Net Credit Sales = Sales - Discounts - ReturnsNote: Credit sales are considered
instead of cash sales because we don't have receivables in cash sales.
Cogs, or cost of goods sold, is a measure of a business's inventory cost. It is calculated by
subtracting the ending inventory from the beginning inventory and adding the purchases
made.A business starts by purchasing goods from its vendors or suppliers, who may offer trade
terms that require cash payment upon delivery. Once the business has received the inventory, it
sells the goods, often on credit, and records the transaction in an inventory account.If using the
perpetual method of inventory, the business records journal entries for every sale and passing
the cost of goods sold to the inventory account.The receivable collection or conversion period
can be calculated by dividing 360 by 6 to get 60 days. Similarly, the payable turnover can be
calculated by dividing 360 by 24 to get 15 days, which is the amount of time it takes for the
business to pay its suppliers.
Halleck Working Capital is calculated as current assets minus current liabilities. The current
ratio is calculated by dividing current assets by current liabilities. However, I prefer the first
formula as it allows you to easily calculate your turnover ratio and period. This is particularly
useful for inventory and receivables conversion analysis. When analyzing ratios, it's important to
assess their sensitivity. For turnover ratios, the numerator is typically net credit sales and the
denominator is receivables. The ratio for average net receivables is calculated by subtracting
any allowance for uncollectibles. Next, let's look at the inventory turnover ratio, which has the
cost of goods sold as the denominator and average inventory as the numerator. The cash
conversion cycle is another important ratio to consider. Changes in the numerator or
denominator can have an adverse effect on the ratio and therefore, impact the inferences that
can be drawn. It's important to note that the degree of impact on a particular ratio will depend on
the value of the ratio. If the ratio is greater than one, an equal increase in the numerator and
