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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

While estimating the working capital requirement of a manufacturing firm using the operating cycle approach, which of the following items is normally excluded from the computation of cash cost of current assets?

Depreciation is excluded because it is a non-cash charge. Working capital estimates are based on cash costs, so only expenses that need actual cash outflow, such as materials, wages and power, are used when valuing stock, work-in-progress and debtors.

  1. ADepreciation on plant and machineryCorrect
  2. BWages paid to direct workers
  3. CCost of raw materials consumed
  4. DFactory power charges

Explanation

Depreciation is a non-cash expense and does not require cash funding, so it is left out when computing the working capital blocked in stocks and debtors at cash cost. Wages, materials and power all need cash outlay and are included.

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