Question 1

Which of the following accounts are part of working capital and which are a part of capitalization.
A.____ Accounts payable
B. ____ Line of credit
C. ____ Laundry washers and dryers
D. ____ Inventory
E. ____ Cash
F. ____ Paid-in capital
1. Capitalization
2. Working capital

Accepted Answer

Identification of accounts that belong to the category of 'Working Capital' or 'Capitalization' of the company.
Classification of accounts:
a. Accounts Payable: Working Capital Current Liability
b. Line of Credit: Capitalization Long-term liability
c. Laundry washers and dryers: Working Capital Current Liability
d. Inventory: Working Capital Current Liability
e. Cash: Working Capital Current Liability
f. Paid-in-Capital: Capitalization Long-term liability
Working Capital:
Working Capital is the total amount of money or capital utilized in the daily operations of a business. It is the different between the current assets and the current liabilities of an organization. It also keeps into consideration the total cash that is used in producing a product or a service. Working capital depicts the procedure through which the company is capitalized with long term debt and owner's equity or taking both into consideration.
Current assets include cash, accounts receivable, inventory etc. Current liabilities would include accounts payable, taxes payable, wages payable etc. the difference between current assets and current liabilities is the working capital of the company used for fulfilling the day-to-day operational activities of the business.

The Balance Sheet accounts used for determining working capital are current assets and current liabilities.
Current Assets:
Current Assets are assets , which the organization owes from its debtors , and other stakeholders in various forms and which have to be accumulated or incurred within a span of one year or less. For example:
Cash - Both in hand and at bank, that can be used for daily operations of the business.
Inventory - is the supply or the material purchased by firm but not yet used.
Accounts Receivable - is the uncollected dollar amount that the firm owes from others.
Current Liabilities:
Current Liabilities are liabilities, which the organization owes towards its creditors and other stakeholders and which have to be repaid within a span of one year or less. For example, accounts payable, wages payable etc. are a part of current liabilities.
• Accounts Payable :
Accounts Payable are the products and services received by the company but not yet paid for.
• Wages Payable:
Wages Payable is the wages due to a company but not yet paid to the employees who have provided the goods and services to customers.
• Taxes Payable:
Taxes Payable are the taxes collected but not yet remitted to the tax agency.
Capitalization:
Capitalization on the other hand, is the source and the method through which the money for the organization is raised to invest in and start a business. Managers are expected to use the assets of the business optimally in order to maximize profitability. Sources to raise capital for the firm can be in form of Paid in capital, common stock, retained earnings etc., which are used for funding long-term operations, distributing profits to shareholders etc.
The Balance Sheet accounts used for capitalization purpose are:
• Paid-in-Capital :
Paid-in-Capital the initial amount invested in a company by the owners from their individual financial resources.
• Common Stock :
Common Stock is the amount invested by other individuals or institutions in form of stock purchase.
• Retained Earnings :
Retained Earnings is part or portion of the annual operating profits of the company that can be reinvested if required.

Question 2

Explain the financial information contained in a Balance Sheet and how it is used.

Accepted Answer

Revealing the financial statement contained in a Balance Sheet and the way it is used.
Balance Sheet:
Balance Sheet is a financial statement that is used to measure the status or net worth of a business at a particular period of time or at a given date. It is also referred to as the Assets and Liability Statement prepared at the end of each month or year. It contains the balance of each account at a particular time period and identifies what the organization owes from others (assets) and owes to others (liabilities).
Balance Sheet: Assets = Liabilities + Owner's Equity
A Balance Sheet consists of the following information:
Assets:
Assets is total value or worth a company owes from others. Assets can be divided into current assets and long-term assets.
• Current Assets:
Current Assets are assets , which the organization owes from its debtors, and other stakeholders in various forms and which have to be accumulated or incurred within a span of one year or less.
For example:
Cash - both in hand and at bank that can be used for daily operations of the business.
Inventory - is the supply or the material purchased by firm but not yet used.
Accounts Receivable - is the uncollected dollar amount that the firm owes from others.
• Long-Term Assets:
Long-Term Assets are those assets , which are acquired by the company from a long-term perspective, and heavy investment is made in acquiring such assets which when dissolved, remit return to the company. For instance, property, plant, equipment etc.
Liabilities:
Liabilities are the total value or worth a company owes to others. Liabilities can be divided into current liabilities and long-term liabilities.
Current Liabilities:
Current Liabilities are liabilities, which the organization owes towards its creditors and other stakeholders and which have to be repaid within a span of one year or less. For example, accounts payable, wages payable etc. are a part of current liabilities.
• Accounts Payable - are the products and services received by the company but not yet paid for.
• Wages Payable - are the wages due to a company but not yet paid to the employees who have provided the goods and services to customers.
• Taxes Payable - are the taxes collected but not yet remitted to the tax agency.
• Long term liability: are those liabilities which are to be repaid by the company from a long term perspective and heavy borrowings are made through such liabilities which when at the time of dissolution of the company need to be remitted back by the company. Example, long-term bank loans etc.
Owner's Equity:
Owner's Equity is the total worth or net value of the company. It is the amount that reveals the net worth or the valuation of the company. It can be in form of:
• Paid-in-Capital :
The initial amount invested in a company by the owners from their individual financial resources.
• Common Stock :
Common Stock is the amount invested by other individuals or institutions in form of stock purchase.
• Retained Earnings :
Retained Earnings is part or portion of the annual operating profits of the company that can be reinvested if required.

Question 3

Following is the Balance Sheet in $ for the GTO Hotel:

Answer the following:
____What is the working capital amount?
____What is the total capitalization amount?
____What is the liabilities capitalization percent?
____What is the Owner Equity capitalization percent?

Accepted Answer

Working capital: &#10;&#8226; It is based on two elements current assets and the current liabilities. Working capital is the excess amount of current assets over the current liabilities.&#10;&#8226; It is a gap between the current assets and current liabilities.&#10;   Compute the working capital amount: &#10;       The current assets of the company are sufficient enough to meet its current liabilities.&#10;Therefore, the total working capital amount is $210,000.&#10;Capitalization amount: &#10;&#8226; Capitalization identifies the way that a business obtains and uses the money to start or expand a business by purchasing long-term assets.&#10;&#8226; Capital is money or property that is used to create more money or property.&#10;&#8226; It involves the use of long-term debt or owner equity as a way of obtaining the necessary funds.&#10;Compute the capitalization amount: &#10;   Therefore, the total capitalization amount is $2,660,000.&#10;Compute the liabilities capitalization percent. &#10;Liabilities capitalization amount = $900,000&#10;   Liabilities represent a share of 39.82% of the total capitalization funds of the company.&#10;4. Computation of Owner's Equity capitalization percent. &#10;Owner's Equity capitalization amount = $1,760,000&#10;Owner's Equity capitalization percent = &#10;   Owner's Equity represents a share of 77.18% of the total capitalization funds of the company.