Q.4 (i) Fixed Capital and Working Capital
Best answer
Answer:
| Points | Fixed Capital | Working Capital |
|---|---|---|
| Meaning | Capital invested in fixed (long-term) assets such as land, building, plant and machinery. | Capital invested in current assets such as cash, stock, debtors and bills receivable for day-to-day operations. |
| Purpose | To acquire assets which are used to produce goods; they are not meant for resale. | To meet the day-to-day expenses of the business such as raw materials, wages and rent. |
| Period | Invested for a long period. | Invested for a short period; it keeps circulating. |
| Nature | It is permanent in nature. | It is circulating (revolving) in nature. |
| Sources | Raised from long-term sources: shares, debentures, long-term loans, retained earnings. | Raised from short-term sources: trade credit, bank overdraft, cash credit, public deposits. |
| Liquidity | Fixed assets cannot be converted into cash easily. | Current assets can be easily converted into cash. |
| Risk and return | Higher risk; affects long-term profitability. | Lower risk; affects liquidity of the business. |
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