Working capital is that part of capital which is required to meet the day to day expenses and for holding current assets for the normal operations of the business. It is referred to as the excess of current assets over current liabilities. The changes in the price levels disturb the working capital position of a concern.
CCA method required a financing adjustment reflecting the effects of changing prices on net monetary items, leading to a loss from holding net monetary assets or to gain from holding net monetary liabilities when prices are rising, and vice-versa, in order to maintain the monetary working capital of the enterprise. The adjustment reflects the amount of additional finance needed to maintain the same working capital due to the changes to price levels. The method of calculating MWCA is the same as that of COSA.
Formula to calculate Monetary working capital adjustment
C = Closing monetary working capital
O = Opening monetary working capital
Ia = Average index for closing MCWA
Ic = Appropriate index for opening MCWA
Io = Appropriate index for opening MCWA
It has been explained in the following illustration.
Calculate the Monetary Woking Capital Adjustment (MCWA) from the following data:
|Sundry Debtors ($)||70,000||1,00,000|
|Sundry Creditors ($)||30,000||40,000|
Closing Monetary Working Capital (C) = 1,00,000 – 40,000 = 60,000
Opening Monetary Working Capital (O) = 70,000 – 30,000 = 40,000
Average Index (Ia) = 110
Closing Index (Ic) = 120
Opening Index (Io) = 110
Putting these values into formula we have:
MCWA = (60,000 – 40,000 – 110) (60,000 / 120 – 40,000 / 100)
= 20,000 – 110 (500 – 400)
= 20,000 – 11,000