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Questions and Answers
What is the primary purpose of fixed capital in a business?
What is the primary purpose of fixed capital in a business?
To generate income over an extended period through long-term investments
What are the typical sources of working capital?
What are the typical sources of working capital?
Short-term loans, trade credit, and the company's cash reserves
What is the main difference between the nature of fixed capital and working capital?
What is the main difference between the nature of fixed capital and working capital?
Fixed capital is invested in long-term assets, while working capital is used for short-term operational needs
What is the definition of working capital?
What is the definition of working capital?
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What are some examples of fixed capital?
What are some examples of fixed capital?
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What is the purpose of working capital in a business?
What is the purpose of working capital in a business?
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What is the primary source of fixed capital?
What is the primary source of fixed capital?
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What is the definition of fixed capital?
What is the definition of fixed capital?
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Study Notes
Fixed Capital and Working Capital
Fixed Capital
- Refers to the capital invested in long-term assets essential for business operations and not meant for resale
- Represents funds invested in acquiring fixed assets like land, buildings, machinery, etc.
- Utilized for long-term investments to generate income over an extended period
- Typically obtained through long-term loans, equity investments, or retained earnings
- Examples: Purchase of machinery, construction of a factory, acquisition of land, etc.
Working Capital
- Represents the capital required for day-to-day operations of a business, covering short-term expenses and liabilities
- Refers to the funds needed for managing current assets and liabilities to ensure smooth business operations
- Used to finance daily operational activities like purchasing raw materials, paying salaries, utility bills, etc.
- Typically sourced from short-term loans, trade credit, and the company's cash reserves
- Examples: Inventory, accounts receivable, accounts payable, cash, etc.
Key Differences
- Fixed capital is invested in long-term assets, while working capital is used for short-term operational needs
- Fixed capital is for acquiring permanent assets, whereas working capital is for managing day-to-day expenses
- Fixed capital is obtained through long-term sources, while working capital is financed through short-term sources
- Fixed capital investments include machinery and buildings, while working capital includes inventory and accounts receivable
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Description
Understand the differences between fixed capital and working capital, two essential components of a company's financial structure. Learn about their definitions, natures, and purposes.
