Monetary Working Capital Adjustment (MWCA)

Written by True Tamplin, BSc, CEPF®

Updated on July 22, 2022

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):

Definition of Monetary Working Capital Adjustment (MCWA) Formula 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.

Example

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
Index Number 100 120
Average Index 110

Solution

To calculate the MCWA, the following formula is applied:

Use of Monetary Working Capital Adjustment (MCWA) Formula 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 = $9,000

Monetary Working Capital Adjustment (MWCA) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.