Distinguish between of the Fixed and Working Capital.
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Solution
Fixed Capital | Working Capital |
(1)
Meaning Fixed capital refers to any kind of physical capital. i.e. fixed assets. |
Working capital refers to current assets minus current liabilities. |
(2)
Nature It stays in business almost permanently i.e. for more than one accounting year. |
Working capital is circulating capital. |
(3)
Purpose It is not used up in production of product but invested in fixed assets such as land, building, equipments, etc. |
Working capital is invested in short term assets such as cash, account receivable, inventory, etc. |
(4)
Sources Fixed capital fund can come from selling shares, debentures, long term loans, bonds, etc. |
Working capital can be funded with short term loans, deposits, trade credit, etc. |
(5)
Objective of investment Investor invests money in fixed capital hoping to make future profit. |
Investor invests money in working capital for getting immediate return. |
(6)
Risk Involved Investment in fixed capital implies a risk. |
Investment in working capital is less risky. |
Concept: Concept of Fixed and Working Capital
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