Understanding Working Capital Calculation

Working capital represents a company's short-term financial health. It is calculated as the difference between current assets and current liabilities.

The formula is:

$ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} $

Analyzing Rules for Schedule of Changes

The schedule of changes in working capital tracks how fluctuations in current assets and current liabilities impact the overall working capital.

Rule Analysis:

• Statement A: An increase in current assets increases working capital.
  If current assets increase while current liabilities remain constant, the difference (Working Capital) will increase. For example, if CA goes from $100 to $120 and CL stays at $50, WC increases from $50 to $70. This statement is TRUE.
• Statement B: An increase in current assets decreases working capital.
  This contradicts the definition. An increase in current assets, all else being equal, leads to higher working capital. This statement is FALSE.
• Statement C: An increase in current liabilities decreases working capital.
  If current liabilities increase while current assets remain constant, the difference (Working Capital) will decrease. For example, if CA stays at $100 and CL goes from $50 to $70, WC decreases from $50 to $30. This statement is TRUE.
• Statement D: An increase in current liabilities increases working capital.
  This contradicts the definition. An increase in current liabilities, all else being equal, leads to lower working capital. This statement is FALSE.

Conclusion on Rules

Based on the analysis, the statements that stand true for preparing a schedule of changes in working capital are:

• An increase in current assets increases working capital (Statement A).
• An increase in current liabilities decreases working capital (Statement C).

Therefore, the correct combination is A and C.