# Working Capital Management

ASSIGNMENT A (FIVE ANALYTICAL QUESTIONS)
Q1. Find out working capital by operating cycle method, taking 360 days in a year:Sales 8000 units Rs. 120 per unit Material cost Rs. 40 per unit Labour cost Rs. 20 per unit Overheads Rs. 30 per unit Customers are given 45 days credit and 50 days credit is taken from suppliers. Raw materials for 30 days and finished goods for 25 days are kept in stock. Production cycle is of 20 days. Production cycle = 70 days; Total operation cost = Rs. 720000, Working capital required = Rs. 140000. Q2. A company has an expected usage of 50000 units of a commodity during the coming year. The cost of placing an order is Rs. 100 and carrying cost per unit is Rs. 2.50, Lead time of an order is 5 days and company will keep a reserve of two days usage. You are required to calculate:a). Economic Order Quantity b). Re-order Level Assume 250 working days in a year. EOQ = 2000 units, Re-order Level = 1400 units. Q3. After inviting tenders, two quotations are received as follows:(a) Rs. 1.20 per unit; (b) Rs. 1.10 per unit plus Rs. 3000 fixed charges to be added irrespective units ordered. Advice with your argument, to whom order should be placed and for what quantity?
Company A= Rs. 1.20 per unit Company B = Rs. 1.10 per unit + fixed Rs. 3000 When buying 30 000 units Company A= Rs. 1.20 × 30 000 = Rs. 36 000

From the information given below.10 of contingencies 41 248 Working Capital Required = 185 000 – 41 248 = 143 752 = 144 000 Working capital required = Rs. But if it orders more than 30 000 units it would be cost effective to order from company B but for units that are R36 000 and less it would be advisable to order from company A. 1. calculate the working capital requirements:Budgeted sales Rs. 36 000 The firm can buy from either A or B . Average stock required for sale 650 000 × 8/52 × 75/100 650 000 × 0. .75 93 600 × 1.Company B = Rs. 650000 Percentage of net profit on cost of sales 25% Average credit allowed to customers 10 weeks Average credit allowed by suppliers 4 weeks Average stock (for sales requirements) 8 weeks Add 10% to computed figure for contingencies.154 × 0.10 × 30 000= Rs.75 37 498 × 1.192 × 0.e. Q4. 3000 = Rs.10 of contingencies 82 500 Average credit allowed to customers ( i. 33 000 + Rs. 144000.10 of contingencies 103 000 Total current Assets 185 000 Less creditors 650 000 × 4/52 × 75/100 650 000 × 0.75 73 000 × 1.07692 × 0. sundry debtors) 650 000 × 10/52 × 75/100 650 000 × 0.

05 × 0.Calculate the estimate of working capital required by an organization:Expected annual production Stock of raw materials Processing period Stock of finished goods Credit period to customers Credit allowed by the suppliers Price of raw material Wages and overheads Selling price Cash balance needed Working Capital required Stock of raw material = ( 2 600 × 200 × 80/100 × 5/52) = 2 600 × 200 × 0.75 × 0.05769 = Rs 24 000 Stock of work in progress = (2 600 × 200 × 75/100 × 2/52) = 2 600 × 200 × 0.09615 =52 497.05 × 0. 30000 . 200 per ton Rs.8 × 0.Q5:.40 = 15 000 Stock of finished goods = ( 2 600 × 200 × 105/100 × 5/52) = 2 600 × 200 × 1.03846 = 14 999.90 =52 500 Sundry debtors = ( 2 600 × 200 × 105/100 × 8/52) = 2 600 × 200 × 1.15382 =84 000 Cash Balance = Rs 30 000 Total Current Assets = 205 500 2600 tons 3 weeks 2 weeks 5 weeks 8 weeks 5 weeks 80% of sales 25% of sales Rs.

Q2:. 300000. Working capital required = Rs. 900.4% per annum Fixed cash on sale of securities Rs. Operating cycle period = 120 days. .Less Creditors = ( 2 600 × 200 × 80/100 × 5/52) = 2 600 × 200 ×0. From the following figures calculate the period of operating cycle and estimate the amount of working capital required:Rs.THREE ANALYTICAL QUESTIONS + 1 CASE STUDY ) Q1. 35000 10000 30000 50000 --------Rs.09615 = 39 998. 31-3-05 55000 30000 10000 50000 200000 80000 40000 500000 The company obtains credit of 60 days from its creditors.4 Stock of raw material Stock of work in progress Stock of finished goods Sundry debtors Purchase of materials Wages and manufacturing expenses Administrative & selling expenses Sales Assume 360 days in a year. All the sales is on credit. Interest on securities 14.8 × 0.B Limited gives the following information about its liquidity. 100000.40 = 40 000 Required working capital = 205 500 – 40 000 = 165 500 ASSIGNMENT B . Cost of goods sold = Rs. 1.4.

If required rate of return on investments is 15% after tax and rate of tax is 40%. 40000. 10000. This will increase its sales by 20% and average collection period will increase from 30 days to 45 days. Its variable cost is Rs. 700000. Calculate Return Point and Upper control level according to Miller –Orr-Model. sale on 2 months credit without cash discount In (1) above additional sales would be Rs. A company wants to fix its credit policy. 5800. 100000. Annual sales of Modern company is 16000 units @ Rs. Assume 360 days in a year. It is considering on three alternatives as under:1. sale on 15 days credit at 5% cash discount. Bad debts are expected at 3% on increase in sales and collection charges will increase by Rs.Standard deviation of change of daily cash balance Rs. 100000. 4000. 160000 per year. Will it be fair to relax the credit policy Return required = Rs. or 2. Management wants to maintain a minimum cash balance of Rs. . the credit policy can be relaxed based on the current return CASE STUDY Ques. Q3. The company is considering to relax its credit policy. 50 per unit. Return Point = Rs. Upper control level = Rs. 20000. or 3. in (2) Rs. 300000 and in (3) Rs. sale on 1 month credit without cash discount. 30 per unit and fixed cost Rs.

Technical insolvency d. Illiquidity c. A company following of conservative working capital policy will finance its current assets more from long term sources. b. The results of overtrading may be a. Overcapitalization b. A company following an aggressive working capital policy will finance its current assets more from long term sources.Investment in additional sales 700 000 x 60/360 12% interest rate on investment Net additional profit Ratio of cross profit to contribution on additional sales = 390 133 / 700 000 = 55.7 % 116 667 53 200 390 133 Based on the above calculations. Which of the following is/are true? a. it will be advisable to adopt policy one because it has better returns ASSIGNMENT C (MULTIPLE CHOICE OBJECTIVE QUESTIONS) MULTIPLE CHOICE QUESTIONS 1.73 = 55. Both b and c above 2. .

Equal to current assets less current liabilities including bank borrowings c. Net working capital can be negative. Equal to current assets plus current liabilities other than bank borrowings 6. Sales are less compared to assets employed d. Which of the following is/are true in respect of working capital? a. Assets are less compared to sales generated 5. Having low amount of working capital b.c. Equal to current assets less current liabilities excluding bank borrowings d. c. A company having a conservative working capital policy will have a higher current ratio than one following an aggressive working capital policy. Working capital gap is a. High turnover of working capital c. and c above 4. The difference between current assets and current liabilities b. The increase in working capital requirement as a result of increased production . b. b. all of a. d. Net working capital represents the margin on working capital supported by longterm funds. Gross working capital is the sum of the total current assets. Both b and c above 3. Equal to current assets plus current liabilities including bank borrowings b. Working capital margin is a. d. Under trading means a.

Tax structure of the company d. A high turnover of current assets in proportion to sales d. The average collection period is determined by a. Greater sales generated by smaller investment in current assets c. High turnover of working capital 8. The portion of working capital which will be financed through long term sources. Which of the following is / are criterion /criteria for evaluation fo working capital management? . Nature of raw material in used c. A disproportionately high investment in current assets compared to the value of sales. 7. Balance in receivable account by average daily credit sales c. Total credit sales divided by average balance in receivable account d. b. Which of the following is not factor that affect the composition of the working capital? a. Nature of business b. None of the above 9. The portion of working capital requirement that will be finance through banks loans d. Overtrading implies a.c. Process technology used 10. Daily credit sales divided by average balance in receivable account b.

Cash . If the net working is negative then it indicates that a. Short life span b. Current assets are characterized by a.a. Long life span c. Sundry debtors b. Short term funds have been used for financing long term assets d. Long term funds have been used for financing short term assets b. Short term funds have been used for financing short term assets 14. Inventory turnover c. Both a and c above 12. Which of the following will not be considered as a current assets? a. Nature of business b. Nature of raw materials used c. Availability of cash d. Nature of finished goods d. All of the above 11. Which of the following factors does not influence the composition of working capital? a. Long term funds have been used for financing long term assets c. Financial leverage of the firm 13. Liquidity b. Quick transformation into other forms of assets d.

Which of the following factors have bearing on working capital management? a. Increasing the debt equity ratio b. The ratios of current assets to sales and short term financing to long term financing d.c. The profit criterion for working capital a. Marketable securities d. Manufacturing cycle c. The level of current ratio and quick ratio 18. Is relevant in analyzing working capital decisions b. Two important issues in formulating working capital policy are a. Import duties on capital goods b. Hastening the collection process d. Nature of business and operating cycle b. Continuity in the supply of raw materials d. Trade credit and permissible bank finance c. Which of the following measures should be taken to overcome under trading? a. May be substituted with the Net Present Value criterion in analyzing working capital decisions . Is compulsory for analyzing working capital decisions c. Both b and c above 17. Goodwill 15. Decreasing the debt equity ratio c. Slowing down the collection process 16.

it signifies a. Financing of working capital using long term sources c. The current ratio is less than I b. The period from raw material procurement to sale of finished goods. A current ratio less than one implies a. Net operating cycle period is a. Investment in current assets is reversible c. Equal to the accounting period of the company b. All of the above 20. The criterion of profit per period is equivalent to the criterion of net present value in the case a.d. The time between payment of raw material purchases and the collection of cash for sales . May be substituted with PVIFA concept of analyzing working capital decisions 19. Part of current assets are financed from long term sources 22. A low debt service coverage ratio 21. Adoption of conservative working capital policy d. Current assets form a small fraction of total assets b. The length of time taken for a rupee invested in current assets to come back with profit to the company d. c. Long term uses are met out of short term sources c. Negative net working capital b. If the net working capital negative. The value of current assets is higher than the value of current liabilities d. The liquidity position is not comfortable d.

It is the difference between current assets and spontaneous current liabilities.23. It is necessarily financed by short term funds c. 25. Uncertainty in cash flows 26. Duration of credit availed c. Which of the following factors influences the choice of liquidity mixed to be maintained by a company? a. Operating cycle can be shortened by increasing a. Which of the following is true with respect to net working capital? a. d. Extent of leverage c. Credit period to the customers d. All of the above . It is the total of current assets b. Which of the following factors influences the composition of working capital? a. Stock held in stores 24. seasonality of operations c. Negative net working capital implies long term funds utilized for short term purposes. Manufacturing time b. Marginal cost of capital d. Nature of business b. Nature of control with the managers b. marketability of finished goods d.

collection float b. payment float c. Cheques that have been deposited may not be immediately available for use due to a. Net float d. Speculative motive d. both a and b 31. Deposit float 30. Which of the following is not used for credit evaluation:a. Bank references . An instrument expedite cash inflows c. Which of the following is not a motive for holding cash:a.27. Float denotes the a. Extending loans to group companies d. Ratio analysis b. Precautionary motive c. Capital investments 29. Transaction purposes b. Precaution against unexpected expenses c. speculation purposes 28. Transaction motive b. difference between cash inflows and outflows d. Difference between bank balance and the balance shown in the firm’s books b. Which of the following is not the motive for the companies to hold cash? a.

Past experiences with the customers d. Collection costs c. over draft limit b. Which of the following is not the C’s for judgeing credit worthiness of a customer a. Credibility d. Collection matrix b. Days sales outstanding d. Character 34. Which of the following is not a cost of marinating receivables:a. Defaulting costs d. Collateral b. Ageing scheduled 35. None of the above 32. ABC system c. Collection program .c. Administrative costs b. Capacity c. Marketing costs 33. Which of the following is not a measure for monitoring receivable – a. Which of the following is not a credit policy variable or a non financial company? a. Credit standard c.

Avoidance of lost sales b. Standard price method b. Reduction of carrying costs 38. Reorder point sub system d. FIFO method b. Replacement method c. All of the above 39. Which of the following is not a benefit of storing inventories:a. LIFO method . If the material is priced at the value that is realizable at the time of issue such pricing method is referred to as a. EOQ sub system b. LIFO methods d. Availing of quantity discounts c. Stock level sub system c.d. Cash discount 36. Weighted average cost methods 37. Which of the following is not a method of pricing inventories? a. Which of the following are sub-systems of inventory management system? a. Reduction of order costs d.

C group items under ABC analysis are a. Shadow price method 40. Standard price method d. High value items b. High quantity items c.c. Both b and c . Low value items d.