I understand that working capital (WC) is current assets - current liabilities. However, changes in WC are confusing me. I found a formula below:

*(Year 1 current assets - current liabilties) - (Year 2 current assets - current liabilities)

Firstly, is this formula correct? And secondly, which is year 1 and year 2? If I have been provided a 2006 and 2005 Balance sheet, which year is which?

I am hoping this formula is correct as I am confused by the increase and decreases in CA and CL in terms of using a negative sign or positive sign when calculating the change. For example, if A/R in 2006 is $80,000 and 2005 is $90,000, A/R has decreased $10000, and if A/P in 2006 is $50,000 and $41,000 in 2005, A/P has increased by $9000.
Do you just use the numbers and add them up, or are there instances where you may have to subtract (ie with brackets around the numbers?)

Hopefully my first formula is correct...

Thanks,

Parrot

There is such a thing as overthinking a problem.

The formula is correct and you take it exactly as it is. The years are taken chronologically irrespective of how the data is presented, the point being that a negative change in working capital has connotations depending upon the reason for it. So also does a positive change

Just to be clear paraclete (as my brain is working a million miles an hour), Year 1 would be 2005 and year 2 would be 2006?

And you are so right... my sister tells me I overthink things all the time... I guess I just want to make sure that I cover everything, even if it is stressful!

Many thanks for your time and patience,

Parrot