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Working capital is an indicator of the short-term financial position that measures the
overall efficiency of an organization. It is calculated by subtracting current liabilities
from current assets and listed directly in its balance sheet.
Current assets mean the money kept in a bank and assets that can be converted into
cash in case if any situation arises. Current liabilities represent debt that an
individual will pay within the prescribed year. Finally, working capital is the money left
after subtracting liabilities from an individual's money in the bank.
Current assets consist of cash, accounts receivable, and inventory. Current liabilities
include wages, taxes, interest owed.
In broader terms, working capital is also used to measure the company’s financial
health. If there is a larger difference between what a company owns and what an
individual owns for the short-term, the business will be healthier.
If the company owes more than they own, they will have negative working capital,
and their business might get closed.
A study group under the chairmanship of Shri P.L. Tandon was constituted in 1974 by the
RBI in order to frame guidelines for bank credit. The terms of reference of the committee
were as follows.
Terms of reference
1. To suggest guidelines for commercial banks to follow up and supervise credit from the
point of view of ensuring proper end-use of funds and keeping a watch on the safety of
advances.
4. To suggest criteria regarding satisfactory capital structure and sound financial basis in relation to
borrowings.
5. To suggest whether the existing patterns of financing working capital requirements by cash credit /
overdraft system, etc. are required to be modified, if so, to suggest modifications.
.
Aneja Limited, a newly formed company, has applied to a commercial bank for the first
time for financing its working capital requirements. The following information is
available about the projections for the current year: Estimated level of activity: 1,05
,000 completed units of production. Based on the above activity, estimated cost per unit
is:
Raw material = 25 per unit
Direct wages = 10 per unit
Overheads (exclusive of depreciation) = 5 per unit
Total cost = 40 per unit
Selling price = 50 per unit
Raw materials in stock: Average 2months consumption,
Work-in-progress: average 1months consumption.
Finished goods in store: 3months consumption.
Credit allowed by suppliers = average 2weeks
Credit allowed to debtors/receivables= average 3 weeks
Time lag in payment of wages and overhead are = 1months.
Cash at banks (for smooth operation) is expected to be * 25,000.
There is a regular production and sales is a regular production and sales cycle ans
wages and overhead accrue evenly . wages are paid in the next month of accrual and
overhead are paid in the same month. Material are introduced in the beginning of
production cycle. Debtors are valued at sales.
Calculate MPBF as per Tandon Committee, core current assets is 100000/-.
CALCULATE the net working capital required.
PARTICULAR PERIOD QTY RATE AMOUNT
A) CURRENT ASSET
1. STOCKS
a. RAW MATERIAL 2 875 25 43750
b. WORKING IN
PROGRESS 1 875 32.5 28438
C. FINISHED GOODS 3 875 40 105000
B) CURRENT
LIABILITIES
1. CREDITOR 2 875 25 43750
2. OLS WAGES 1 875 5 4375
3. OLS OVERHEAD 1 875 2.5 2188
TOTAL C.L (B) 50313
PARTICULAR CPU
RAW MATERIAL 25
WAGES 10
OVERHEAD 5
TOTAL COST 40
(+) PROFIT 10
SALES 50
iii) VALUATION OF WIP.