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MENTORING - Fundamentals - Company fundamentals - Balance Sheet risk -…
MENTORING - Fundamentals - Company fundamentals - Balance Sheet risk
A company has two types of expenditures. One is revenue expenditure and the other one is capital expenditure.
Revenue expenditure is the expenses we incur for generating revenue.
Capital expenditure is the expenses we incur for buying and maintaining assets.
A company should generate revenue in the short term and build assets for the long term, which in turn generate revenue.
A balance sheet is pictorially (as per presentation globally) classified in terms of usage over timeframe.
Assets are divided into: (a) current assets; (b) non-current assets.
Current means now, that is for this financial year. Non-current means later, that is for beyond this financial year.
Liabilities are divided into: (a) current liabilities, (b) non-current liabilities.
Current assets and liabilities are called short-term assets and liabilities.
Non-current assets and liabilities are called long-term assets and liabilities.
Current assets/liabilities are used within a financial year, while non-current assets and liabilities are used beyond the current financial year.
A company generates capital (monetary) through equity and debt over short term and long term. Generally equity is used for long term assets or purposes.
With the capital generated, the company has two places to invest this. (a) short term operations, called working capital; (b) long term operations, called capital expenditure.
The equity that is added every year because of profits is called internal accrual. This is used for various short term and long term purposes.
The total capital employed by a company in a financial year is the sum of working capital (short term capital) and capital expenditure (long term capital).
Working capital = Current assets - Current liabilities.
Net working capital = Net current assets (current assets - investments - cash) - Net current liabilities (no adjustments)
Capital expenditure = Fixed assets + Work in progress.
Total capital employed = Net working capital + Capital expenditure.