ECON1010 Lecture Notes - Financial Statement, Working Capital, Bank Reconciliation
Lecture 6 - Working Capital
Friday, 30 March 2018
12:00 PM
<<L06 Lecture Working Capital (2).pptx>>
• A business' working capital is the excess of its current assets over its current liabilities
• Current assets are those that the business expects to turn into cash, sell or use up within one
year (e.g. cash, accounts receivable, inventories)
• Current liabilities are liabilities the business expects to pay within one year (e.g. bank
overdraft, accounts payable)
• Working capital refers to the net resources managers have to work with in the business' day-
to-day operations
• Management of working capital is important because it finances the day-to-day operations of
the business
• Need to find an appropriate balance:
o Too little working capital and the business risks insuffiient liquidity an’t pay its ills
o Too much and the business is not making the most of its resources (low returns on
excess cash)
• Example in recording and slide show about sufficiency of working capital
• Managers develop an internal control structure to ensure the operating activities are
performed in accordance with objectives
• Internal controls are the policies and procedures that direct how employees should perform a
business' activities
Internal controls for the most common working capital items:
• Cash
o This is money on hand, bank deposits in cheque and savings accounts, cheques, and
credit/debit card invoices receipts received from customers but not yet deposited
o A cheque is a written order directing a bank to pay out money to a designated payee
o The bank will take the money from a payers account and spend some days clearing the
cheque, if there are not sufficient funds the cheque is dishonoured
o Online banking
o Cash receipts must be properly recorded and protected from theft or loss
o All cash payments should require authorisation and be supported by appropriate source
documents
o All payments should be recorded and there should be 'cancelling' so payments are not
made twice
o A business' bank independently keep track of the cash balance and reports these in a
bank statement
o A business records cash transactions in its accounting system to keep track of its own
cash balance
o A bank reconciliation is comparing bank records with business records and identifying
any differences
o RECONCILIATION EXAMPLE IN RECORDING
o Cheques can be used for most transactions but can be inconvenient for small items
o A petty cash fund is a specified amount of money under the control of one employee
that is used for making small cash payments for the business
• Accounts receivable
o Potential credit customers complete a credit application and are subject to a credit
check
o Individual credit customer balances owed are monitored and followed up
o Total accounts receivable balance should be monitored in case adjustments are needed
• Inventory
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