Question

What is the nature of working capital ?

• A. Stable
• B. Unstable
• C. Floating
• D. Neither (A) nor (B)

Hint:

Associate "working capital" with the "operating cycle." The continuous flow and conversion of assets within this cycle (Cash $\rightarrow$ Inventory $\rightarrow$ Receivables $\rightarrow$ Cash) perfectly illustrates its "floating" nature.

Answer 1

The Correct Option is C

Step 1: Understanding the Question:
The question asks to describe the fundamental nature of working capital. Working capital is the capital of a business used in its day-to-day trading operations, calculated as current assets minus current liabilities.
Step 2: Key Concept:
The concept of the Operating Cycle is crucial to understanding the nature of working capital. The operating cycle involves the conversion of cash into inventory, inventory into receivables (credit sales), and finally, receivables back into cash.
Step 3: Detailed Explanation:
Working capital is not 'stable' or 'fixed' because its components (cash, inventory, receivables, payables) are constantly changing. It continuously circulates or 'floats' throughout the business operations.
For example:

Cash is used to buy raw materials (inventory).

Inventory is converted into finished goods and sold, creating accounts receivable.

Accounts receivable are collected, converting them back into cash.

This continuous movement and conversion of one form of current asset into another is why working capital is often called 'circulating capital' or described as having a 'floating' nature. The term 'unstable' is too negative and doesn't capture the purposeful movement, while 'stable' is incorrect. 'Floating' accurately describes its dynamic and circulatory character.
Step 4: Final Answer:
The nature of working capital is best described as floating or circulating. Therefore, option (C) is the correct answer.