Question

State two causes for the difference between fixed capital and working capital.

Hint:

Fixed capital = Long-term assets; Working capital = Short-term operating funds.

Answer 1

Step 1: Understanding the concept.
Fixed capital is the capital required for acquiring long-term assets such as machinery, buildings, and equipment. Working capital refers to funds used for daily operations like purchasing raw materials and paying wages.
Step 2: Causes for the difference.
1. Nature of Business: Manufacturing industries require more fixed capital, while trading firms need more working capital.
2. Production Cycle: A longer production cycle increases working capital requirements, while shorter cycles reduce it.
Step 3: Conclusion.
Thus, differences in the nature of operations and production duration create variations in fixed and working capital needs.