Monetary Working Capital Adjustment (MWCA)
Monetary Working Capital Adjustment: Definition
Working capital is the part of a company’s capital that is needed to meet the day-to-day expenses of the business, as well as to hold the current assets required for normal operations. It is referred to as the excess of current assets over current liabilities.
Changes in price levels disturb the working capital position of a concern. The current cost accounting (CCA) method requires financial adjustments to be made to reflect the effects of changing prices on net monetary items.
This leads to a loss from holding net monetary assets or to gain from holding net monetary liabilities when prices are rising, and vice-versa, in order to maintain the monetary working capital of the enterprise.
The adjustment reflects the amount of additional finance needed to maintain the same working capital due to the changes to price levels.
The method of calculating the so-called monetary working capital adjustment (MWCA) is the same as that of the current cost of sales adjustment (COSA).
Formula to Calculate Monetary Working Capital Adjustment
The following formula yields a value for monetary working capital adjustment (MWCA):
where C = Closing monetary working capital; O = Opening monetary working capital; Ia = Average index for closing MCWA; Ic = Appropriate index for opening MCWA; and Io = Appropriate index for opening MCWA.
An application of the MWCA formula is given in the next section.
Calculate the MCWA from the following data:
|1 January 2019||31 December 2019|
|Sundry Debtors ($)||70,000||100,000|
|Sundry Creditors ($)||30,000||40,000|
To calculate the MCWA, the following formula is applied:
For C, O, and the index values, we have:
Closing Monetary Working Capital (C) = 1,00,000 – 40,000 = 60,000
Opening Monetary Working Capital (O) = 70,000 – 30,000 = 40,000
Average Index (Ia) = 110
Closing Index (Ic) = 120
Opening Index (Io) = 110
Putting these values into formula, it follows that:
MCWA = (60,000 – 40,000 – 110) (60,000 / 120 – 40,000 / 100)
= 20,000 – 110 (500 – 400)
= 20,000 – 11,000