Statement of changes in Working Capital

In the preparation of funds flow statement, the first step is to find out the net amount of increase or decrease of working capital, as increase in net working capital is a use of funds and decrease in net working capital is a source. Since net working capital is excess of current assets over current liabilities, the increase or decrease in the net working capital can be found out by comparing the current assets and current liabilities contained in the balance sheets of two following dates. For this purpose, a statement is prepared which is called statement or schedule of changes in net working capital. This statement helps to identify the change in position of the working capital. While preparing the statement of changes in working capital, the following points are considered.

* Increase in current assets , increase in net working capital
* Decrease in current assets , decrease in net working capital
* Increase in current liabilities , decrease in net working capital
* Decrease in current liabilities, increase in net working capital

The statement or schedule of changes in net working capital can be prepared by using one of the following forms.

1. Using only current account

The statement or schedule of changes in net working capital can be prepared by using only current account, viz. account of current assets and current liabilities. While preparing the statement, the current assets and current liabilities of the previous year are compared with those of the current year and changes (increase or decrease) therein are determined. If the total of increase is more than that of decrease, there is an increase in net working capital, or vice versa.

2. Using both current and non-current accounts

The statement or schedule of changes in net working capital can also be prepared by using both current as well as non-current accounts. Current account is the account of current assets and current liabilities and non-current account of non-current assets and non-current liabilities and owner’s equity. Increase in an item of current assets or decrease in an item of current liabilities from previous year to this year is debited, while increase in an item of current liabilities or decrease in an item of current assets is credited to current account. On other hand, increase in an item of non-current assets or decrease in an item of non-current liabilities from the previous year to this year is debited, while increase in an item of non-current liabilities and owner’s equity and decrease in an item of non-current assets is credited to non-current account.

The preparation of statement of changes in networking capital under this method is advantageous as compared to the previous method as it is easy to prepare funds flow statement there from.

Changes in Net Working Capital = Working Capital (Current Year) – Working Capital (Previous Year)

Or

Change in a Net Working Capital = Change in Current Assets – Change in Current Liabilities

• Step 1: Find the Current Assets for the current year and previous year

From the point of the current asset of view, we consider the below:

• • • Inventory
    • Accounts Receivable
    • Prepaid Expenses
• Step 2: Find the Current Liability for the Current Year and Previous Year

From the current liabilities, we consider the below:

• • • Accounts Payable & Accrued Expenses
    • Interest Payable
    • Deferred Revenue
• Step 3: Find Working Capital for the Current Year and Previous Year

• • • Working Capital (Current Year) = Current Assets (current year) – Current Liabilities (current year)
    • Working Capital (Current Year) = Current Assets (current year) – Current Liabilities (current year)
• Step 4: Calculate Changes in Net Working Capital using the formula below –

• • • Changes in Net Working Capital Formula = Working Capital (Current Year) – Working Capital (Previous Year).