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Questions and Answers
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?
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?
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?
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What are some examples of fixed capital?
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What is the purpose of working capital in a business?
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What is the primary source of fixed capital?
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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.
