1 Working Capital

1-Working Capital

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Working Capital

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1-Working Capital

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Working Capital Management

Question 1

What do you understand by the Term “Working Capital’. How would you differentiate between Gross and Net Working Capital.

Answer

Meaning of Working Capital.

Working Capital is defined as the excess of Current assets over current liabilities. Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include:

1) Cash and Bank Balances

2) Receivables

3) Inventory a) Raw materials, stores and spares b) Work - in - Progress c) Finished goods

4) Prepaid expenses

5) Short term advances

6) Temporary investments

The value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold accounts receivable are created. The collection of accounts receivable brings cash into the firm. The cycle starts again Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year. These include:

1) Creditors for goods Purchased

2) Outstanding expenses Le., expenses due but not paid

3) Short term borrowings

4) Advances received against sales

5) Taxes and dividends payable

6) Other Liabilities maturing within a year.

Working Capital is also known as circulating capital. fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.

Gross and Net Working Capital.

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Generally the working capital has its significance in two perspectives - ‘Gross Working Capital’ and ‘Net Working Capital’.

Gross Working Capital:-

The gross working capital refers to investment in all the current assets. The total of investments in all current assets is known as gross working capital.

Net Working Capital. 1) It is the excess of current assets over current liabilities. This is as a matter of fact, the most

commonly accepted definition. Some people define it has only the difference between current assets and current liabilities.

2) It is that portion of a firm’s current assets which is financed by long - term funds.

Question 2

Whay is it important to have adequate working capital. Explain effects of insufficient working capital.

Answer

Importance of adequate Working Capital.

The need for adequate investment in working capital can be understood from the following points:

1) Working Capital is required to use fixed assets profitably. For example a machine cannot be used productively without raw materials etc.

2) Funds are required for day to day operations and transaction. These are provided by Cash and Cash equivalents, forming part of current assets.

3) Adequate working capital determines the short - term solvency of the firm. An adequate working capital means that the firm will be unable to meet its immediate payment commitments. This represents under capitalisation.

4) Increase in activity levels and sales should be backed up by suitable investment in working capital.

5) The aspects of liquidity and Profitability should be suitably analysed by the Finance Manager, Too much emphasis on profitability may adversely affect liquidity.

Hence working capital levels are said to be adequate when:

1) Current Assets are greater than Current Liabilities.

2) Current Ratio = Current Assets / Current Liabilities is about 2 : 1. This may differ from industry to industry.

3) Quick Ratio = Quick Assets / Quick Liabilities is at least 1 : 1. This may also differ from industry to industry.

Disadvantages of Insufficient Working Capital.

The disadvantages sufferd by a company with insufficient working capital are as follows:

1) The Company is unable to take advantage of new opportunities or adapt to changes.

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2) Trade discounts are lost. A Company with ample working capital is able to finance large stocks and can therefore place large orders.

3) Cash discount are lost. Some companies are try to persuade their debtors to pay early by offering them a cash discount off the price owed.

4) The advantages of being able to offer a credit line to customers are foregone.

5) Financial reputation is lost result in non - cooperation from trade creditors in times of difficulty.

6) There may be concerted action by creditors and will apply to court for winding up.

Question 3

What is the need for working capital. What factors influence levels of working capital. Also explain Permanent and Temporary Working Capital.

Answer

Need For Working Capital.

The basic objective of financial management is to maximise shareholders wealth. This is possible only when the company earns sufficient profit. The amount of such profit largely depends upon the magnitude of sales. However, sales do not convert into cash instantaneously. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order to sustain the sales activity. In case adequate working capital is not available for this period, the company will not be in a position to sustain the sales since it may not be in a position to sustain the sales since it may not be in a position to purchase to purchase raw materials, pay wages and other expenses required for manufacturing the goods to be sold. Thus we need working capital for following reasons

1) A firm invests a part of its permanent capital in fixed assets and keeps a part of it for working capital i.e. for meeting the day to day requirements.

2) We will hardly find a firm which does require any amount of working capital for its normal operations. The requirement of working capital varies from firm to firm depending upon the nature of business, Production policy, market conditions, seasonality of operations, conditions to supply etc.

3) Working capital to a company is like the blood to human body. It is the most vital ingredient of a business.

4) Working capital management if carried out effectively, efficiently and consistently, will assure the health of an organisation.

Factors influencing the levels of working capital needs of a firm:

Factors influencing the levels of working capital needs of a firm can be categorised into two groups, viz internal factors and external factors.

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Internal Factors.

1) Nature of business (trading vs. manufacturing concern)

2) Size of business

3) Firm’s Production policy (Seasonal vs. regular business)

4) Firm’s credit policy

5) Access of money market

6) Growth and expansion of business

7) Profit margin and dividend policy

8) Inventory policy of a company

9) Operating efficiency of firm

10) Length of Production Cycle

11) Demand of Industry

12) Cash Requirement

External factors.

1) Market conditions (degree of competition)

2) Technological development

3) Conditions of supply

4) Import Policy

5) Taxation Policy

6) Abnormal factors

Permanent and Temporary Working Capital:

Working capital can be dividend into two categories on the basis of time:

1) Permanent Working Capital:

2) Temporary of Variable Working Capital.

Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year.

Permanent Working Capital.

This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. In other words, it represents the current assets required on a continuing basis over the entire year. Tandon Committee has referred to this type of working capital as “ Hard core current assets”.

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The following are the characteristics of this type of working capital:

1) Amount of Permanent working capital remains in the business in one form or another. This is particularly important from the point of view of financing. The suppliers of such working capital should not expect its return during the lifetime of the firm.

2) It also grows with the size of the business. In other words, greater the size of the business, greater is the amount of such working capital and vice versa. Permanent working capital is permanently needed for the business and therefore it should preferable be financed out of long - term funds.

Temporary Working Capital.

It refers to that part of total working capital which is required by a business over and above permanent working capital. It is also called variable working capital. Since the volume of temporary working capital keeps on fluctuating from time to time. In other words, it represents additional current assets required at different times during the operating year. For example, extra inventory has to be maintained to support sales during peak sales period. Similarly, receivable also increase and must be financed during period of high sales. On the other hand investment in inventories, receivables etc. will decrease in periods of depression Temporary working capital is generally financed from short term sources of finance such as bank credit. The diagrams given below illustrate the difference between Permanent and temporary working capital is fixed over a period of time, while temporary working capital is fluctuating In fig. 5.2 the permanent working capital is increasing over a period of time with increase in the level of business activity. This happens in case of a growing company. Hence, the permanent working capital line is not horizontal with the base line as in diagram

Question 4

What do you understand by working Capital Management and explain various considerations in working capital Management.

Answer

Working Capital Management.

Working capital management is usually concerned with the administration of all the current assets and current liabilities it is basically concerned with:

a) Determining the need for working capital.

b) Determining the optimal levels of investment in various current assets, and

c) Examining the salient points regarding each element of working capital.

It is obvious that given a constant level of production, higher the amount of working capital, the lower will be the return on investment since capital turnover ratio will be less. On the other hand,

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lower the amount of working capital, the higher would be the amount of the risk since the company would not have adequate liquidity to meet its short term obligations. In working capital management, therefore we have to strike a balance between risk and Profitability. We have to find out that level of investment in working capital which gives us a reasonable amount of liquidity subject to a good working capital turnover ratio. In fact, working capital management policies have a great influence on a firm’s profitability liquidity and structural health.

Major considerations in Working Capital Management.

The three major considerations in working capital management are:

a) Profitability

b) Liquidity and

c) Structural Health.

1) If the amount of Working Capital is high, liquidity is high. But due to low capital Turnover ratio, the return on investment or profitability will also below.

2) Similarly, if the amount of working capital is less a high turnover indicates higher profitability. But liquidity may be seriously affected, causing loss of reputation in the short run.

3) Also the structural health of the firm on the long - term and short - term basis depends upon the optimum amount of working capital.

Hence, the finance manager has to strike a balance between liquidity and Profitability without affecting the structural health of the firm.

Question 5

Explain various approaches to working capital financing.

Answer

Financing Current Assets.

A firm can adopt different financing sources viz. long term short term and spontaneous. Long term sources can be shares, debentures long term loans etc. Short term sources like bank loans, commercial paper, factoring etc. Spontaneous source is short of self financing like trade credit which does not have any explicit cost. A firm should take maximum advantage of the spantaneous finance sources. The approach a firm uses in mixing these sources can be matching, conservative or aggressive.

1) Matching Approach.

When a firm uses long term sources to finance fixed assets and Permanent current assets and short term financing to finance temporary current assets as shown below

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2) Conservative Approach.

Under this Approach a firm finances its permanent assets and also a part of temporary current assets with long term finances. It relies heavily a long term financing and is less risky so far as solvency is concerned, however, the funds may be invested in such instruments which fetch small returns to build up liquidity thus deviously affecting profitability as shown below

3) Aggressive Approach.

The firm uses more short term financing than is justified in this approach. The firm finances a part of its Permanent current assets with short term financing. This is more risky but may add to the return on assets as shown below

Question 6

Write Short Notes on:-

a) Hard Core Working Capital

b) Impact of Double Shift on Working Capital.

Answer

Hard Core Working Capital.

Hard Core working capital or core current assets may be defined as that part of the current assets which represents the very minimum level of raw materials, Process stock, finished goods, stores accounts receivable and cash which are in circulation to ensure continuity of production. Thus the core current assets represent a fixed element just like the fixed Assets of the company. Such current assets are basically in the nature of circulating assets but are blocked for long term for example, funds invested in core inventories, Comprising process stock plus minimum raw materials, finished goods and stores are tied up a long term arising out of technological and business considerations, quite like the investment in fixed assets like machinery and building. In relation to inventory, the base stock would be treated as “ hard core”.

Determination the hardcore working capital in different industries would require a careful analysis of the items of inventory, receivables work in process and cash.

Impact of double Shift Working on Working Capital Requirements.

Working Double shifts leads to economics of sale due to greater use of fixed assets. As a firm increases the number of production hours, working capital requirements also increase. But the increase in the working capital may not be directly Proportional.

The impact of double shift working on various components of working capital is as under:

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1) Raw Materials.

Stock Requirements as regards units, may double since consumption per day will be twice as earlier. However, due to bulk Purchasing, the firm may avail of quantity discounts.

2) Work -in - Progress.

There will be no change in the quantity of Work - in - Progress since work commenced in first shift will be completed in the second and vice - versa. At the end of any day, the average quantity of Work - in - Progress remains the same.

3) Finished goods.

Due to greater production, finished goods stock may double in quantity. But cost of Production per unit may be reduced due to lower cost of raw materials, economies of fixed costs etc.

4) Debtors.

Increase in demand and Increased sales will lead to higher amount of Debtors, for the same credit period. But the increase may not be Proportional or it may not double in case of reduction in credit period. Also discounted selling price may be offered in order to sell the increased production.

5) Creditors.

Due to bulk Purchasing and better bargaining power the firm may avail extended credit period for payment. Unless otherwise specified, the amount of creditors may double.

6) Fixed and VAriable Overheads.

Fixed overheads will remain fixed whereas variable overheads will increase in Proportion to the increased Production, Semi - variable overheads will increase according to the variable element in them.

Question 7

What are the recommendations of various Committee on Financing of Working Capital Requirement.

Answer

Financing of Working Capital.

After determining the level of working capital, there comes the question of financing. Two other short term sources of working capital finances are.

1) Trade Credit

2) Short term bank credit for working capital: a) Cash Credit b) Letter of Credit c) Bills finance d) Working capital demand loan e) Overdraft facility

3) Factoring of receivables

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4) Commercial paper

5) Long term sources comprising equity capital and long term borrowings

Maximum Permissible Bank Finance - Tandon Committee.

The Reserve Bank of India set up in 1974 a study group under the chairmanship of Mr. P.L. Tandon Popularly referred to as The Tandon Committee.

Terms of Reference.

1) To suggest guidelines for commercial banks to follow up and supervise credit from the point of view of ensuring proper and use of funds.

2) To make recommendations for obtaining Periodical forecasts from borrowers of business / Production plans and credit needs.

3) To make suggestions for Prescribing inventory norms for different industries both in the private and public sectors and indicate the broad criteria for deviating from those norms.

4) To make criteria regarding satisfactory capital structure and sound financial basis in relation to borrowing.

5) To make recommendations as to whether the existing the pattern of financing working capital requirements by cash credit overdraft system etc. requires to be modified. If so, to suggest suitable modifications.

6) To make recommendations on any other related matter as it may consider germane to the subject of enquiry or any other matter which may be specifically refer to it by the Reserve Bank of India.

Findings of the Committee.

1) Borrowers who decide how much they would borrow. The bank cannot do any credit planning since it doesnot decide how much it would lend.

2) Bank credit instead of being taken as a supplementary to other source of finance is treated as first source of finance.

3) Bank credit is extended on the amount of security available and not according to the level of operations of the borrower.

4) There is a wrong notion that security by itself ensures the safety of bank funds. As a matter of fact safety essentially lies in efficient follow up of the industrial operations of the borrowers.

Recommendations of the Committee.

1) A Proper fund discipline has to be observed by the borrowers. They should supply to the banker information regarding his operational plans well in advance. The banker must carry out a realistic appraisal of such plans.

2) The main function of the banker as a lender into supplement the borrower’s resources to carry on acceptable level of current assets. This has two implications (a) current assets must be reasonable and based on norms and (b) a part of funds requirement for carrying out current asset must be financed from long term funds.

3) The bank should know the end use of bank credit so that it is used only for purposes for which it was made available.

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4) The bank should follow inventory and receivable norms and also lending norms. It has suggested inventory and receivable norms for fifteen major industries. It has also suggested three lending norms which are as follows:

Lending Norms.

1) The borrower has to contribute a minimum of 25% of working capital gap from long term funds.

MPBF = 75% of [Current Assets and Current Liabilities] i.e 75% of Net Working Capital.

2) The borrower has to contribute a minimum of 25% of the total current assets from long term funds.

MPBF = [75% of Current Assets] Less Current Liabilities.

3) The borrower has to contribute the entire hard core current assets and a minimum of 25% of the balance of the current assets from long term funds.

MPBF = [75% of Soft Core Current Assets] Less Current Liabilities.

Main recommendations of Chore Committee:

1) Enhancement of borrowers contribution.

The Committee recommended that the borrower’s over - dependence on bank credit should be reduced by increasing their contribution to working capital. For this purpose in assessing the permissible bank credit, the borrowers should adopt the second method of lending recommended by the Tandon Committee requiring the borrowers to contribute at least 25% of the total current assets from their own funds. This would give a minimum current ratio of 1.33: 1. The excess borrowing should be segregated and treated as working capital term loan payable in half - yearly instalments within five years.

2) Compulsory Periodic review of cash credit limits and submission of quarterly Statement.

Credit limit of all borrowers having a limit of over Rs. 10 lakhs should be reviewed at least once a year compulsorily and all borrowers having a limit of Rs. 50 lakhs and above should submit quarterly statement compulsorily as Prescribed by the committee.

3) No bifurcation of cash credit into demand loan for core portion and fluctuating Cash credit component.

This was recommended to avoid the differential in interest rate. In cases where cash credit accounts have already been bifurcated, steps should be taken to abolish the differential interest with immediate effect.

4) Separate limits for peak level and normal non - peak levels periods.

Bankers should fix separate credit limits whereever feasible for the normal non - peak level as also for the peak level credit requirements indicating the duration of these periods. These levels apply to agriculture based industries as well as consumer industries.

5) Drawl of funds to be regulated through quarterly statements.

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The borrower should dictate before the commencement of each quarter the requirements of the funds i.e. operating limits during the quarter. Drawings less than or in excess of the operative limit so fixed (wiith a tolerable limit of 10% either way) but not exceeding the sanctioned limit should be deemed to be an irregularity and appropriate corrective steps should be taken.

6) Penalty for default in submission of quarterly statements.

A penal interest of 1% p.a. on the total outstanding in the period of default may be levied for default in submission of quarterly statements. At the same time notice should be given to the borrower that if default persists, the bait may freeze the operation of his account. Where a borrower has accounts with more than one bank the decision will be conveyed to the other banks by the bank freezing the account.

7) Adhoc temporary limits.

In case of unforeseen circumstances and contingencies, the ban may consider granting adhoc or temporary limits by charging additional interest of 1% p.a. on these accommodations.

Current Trends in MPBF

Kannan Committee Report.

In view of the ongoing liberalization in the financial sector, the Indian Banks Association (IBA) constituted a committee headed by shri K. kannan chairman and Managing Director of Bank of Baroda to examine all the aspects of working capital finance including assessment of maximum Permissible bank finance (MPBF). The committee submitted its report on 25th february 1997. It recommended that the airthmetical rigidities imposed by Tandon Committee (and reinforced by chore committee) in the form of MPBF Computation so far been in practice should be scrapped. The committee further recommended that freedom to each bank be given in regard to evolving its own system of working capital finance for a faster credit delivery so as to serve various borrowers more effectively. It also suggested that line of credit system (LCS) as prevalent in many advanced countries should replace the existing system of assessment / fixation of sublimits within total working capital requirements. The Committee proposed to shift emphasis from the Liquidity level Lending (Security based lending) to the cash Deficit lending called Desirable Bank finance (DBF). Some of the recommendations of the committee have already been accepted by the Reserve bank of India with suitable modifications. The important measures adopted by RBI in this respect are given below:-

1) Assessment of working capital finance based on the concept of MPBF, as recommended by the Tandon Committee has been withdrawn. The banks have been given full freedom to evolve an appropriate system for assessing working capital needs of the borrowers within the guidelines and norms already prescribed by Reserve Bank of India.

2) The turnover method may continue to be used as a tool to assess the requirements of small borrowers. For small scale and tiny industries this method of assessment has been extended upto total credit limits of Rs. 2 crore as against existing limit of 1 crore.

3) Banks may now adopt Cash Budgeting System for assessing the working capital finance in respect of large borrowers.

4) The banks have also been allowed to retain the present method of MPBF with necessary modification or any other system as they deem fit.

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5) Banks should lay down transparent policy and guidelines for credit despensation in respect of each broad category of economic category of economic activity.

6) The RBI’s instructions relating to directed credit quantitative limits on lending and prohibitions of credit shall continue to be in force. The present reporting system to RBI under the Credit Monitoring Arrangement (CMA) shall also continue in force.

Format

Calculation of Working Capital Requirement

-

-

d) Prepaid Expenses (Expense * Pre-payment Period)

Total Current Assets (A)

Adjusted Working Capital

Working Capital Estimation

b) Wages o/s (expense x credit period)

c) Overheads o/s (expense x credit period)

Total Current Liabilities (B)Working Capital (A-B)

Margin

Current Assetsa) Cash at Bank

b) Stock in Hand

Raw Material (RMC * Holding Period)

Work In Progress (Cost * DOC * Holding Period)

Material Labour Overheads

Finished Stock (COGS*Holding Period)

c) Debtors (COS*Credit Period)

Current Liabilitiesa) Creditors (Purchase x credit period)

Notes & Assumptions

1) Debtors have been valued at Total Cost and not at selling price.

2) Production and sales have been assumed to have accrued evenly during the year.

Tondon Committee - Determination of Maximum Permissible Bank

Finance (MPBF)

There are three methods for this purpose. These are as under Three Methods for Calculating MPBF

Mehod 1-> 75%*(CA-CL)

Method 2-> 75%*CA - CL

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Method 3- > 75%*(CA-CCA) - CL

Note:-

For MPBF Current Assets are estimated at Balance-sheet value i.e. as per Total Approach.

Current Ratio

There are two methods for the calculation of current ratio considering the Maximum Permissible Bank Finance. These are

a) If the Maximum Permissible Bank finance(MPBF) is to be used for acquiring Assets other than Current Assets, then it is calculated as under

Current Assets

-------------------------------

CL + MPBF

b) If the Maximum Permissible Bank finance(MPBF) is to be used for acquiring or investing Current Assets, then it is calculated as under

Current Assets + MPBF

------------------------------------------------

CL + MPBF

Numerical Problems

Question No. 1

Following details have been provide to you, you are required to find out the estimated working capital. Add 10% to your estimate figure to cover contingencies.

Projected P & L A/c. is as under Sales 21,00,000

Cost of goods sold

Material 8,00,000

Wages & M.Exp. 6,55,000

Dep. 2,45,000

----------

17,00,000

Less. Stock (finished stock) 1,70,000 15,30,000

---------------

Gross Profit 5,70,000

Administrative Exp. 1,30,000

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Selling Exp. 1,40,000 2,70,000

----------------

Profit Before Tax 3,00,000

Tax 1,20,000

---------------

Profit after tax 1,80,000

---------------

Apart from above finished stock , goods equal to 15 per cent of year's production (in terms of physical units) are in progress which on an average requires full material and only 40% of other expenses. The company believes in keeping two months' consumption of material in stock.

Sale are 25% cash and rest at two months credit. All expenses are paid in next month. Supply of material extend to one and a half month credit . State any assumptions that you have made.

Do the question when

1. It is an existing Organisation

2. New Organisation

Answer

Question 1 it is an existing organisation

Cash Total

1,33,333.33 1,33,333.33

1,20,000.00 1,20,000.00 39,300.00 39,300.00

- 14,700.00 1,45,500.00 1,70,000.00

1,97,437.50 2,62,500.00

6,35,570.83 7,39,833.33

1,00,000.00 1,00,000.00

54,583.33 54,583.33

22,500.00 22,500.00

1,77,083.33 1,77,083.33

4,58,487.50 5,62,750.00

45,848.75 56,275.00

5,04,336.25 6,19,025.00

Assumption:- OpWIP = cl WIP, Op RM=Cl RM, OP Fin st=0

d) Prepaid Expenses


c) Debtors (90%of (800000+655000)+270000)x75%x2/12

b) Wages o/s (655000x1/12

c) Overheads o/s 270000x1/12


Margin

Total Current Assets (A)Current Liabilitiesa) Creditors (800000) x1.5/12


Current Assets

Labour & Exp (655000)x15%x40% DepFinished Stock (800000+655000)*10%

b) Stock in Hand

Raw Material (800000) x 2/12

Work In Progress

Material (800000)x15%x100%

a) Cash at Bank

Notes & Assumptions



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3) It is assumed that it is an established concern therefore opening stock & closing stock of raw material and WIP is taken to be same. Howerver opening stock of finished goods is taken to be zero as only closing stock of finished goods is given.

Question 1 it is an New organisation HW-Q30

Cash Total

1,53,333 1,53,333

1,20,000 1,20,000 39,300 39,300

14,700 1,45,500 1,70,000

1,97,438 2,62,500

6,55,571 7,59,833

1,34,167 1,34,167

80,358 80,358

2,14,525 2,14,525

4,41,046 5,45,308

44,105 54,531

4,85,150 5,99,839

Current AssetsWorking Capital Estimation

b) Stock in Hand

Raw Material (800000+120000) x 2/12

Work In Progress

Material (800000)x15%x100% Labour (655000)x15%x40% Overheads Finished Stock (800000+655000)*10%

c) Debtors (90%of (800000+655000)+270000)x75%x2/12

d) Prepaid Expenses

a) Cash at Bank


Working Capital (A-B)

Margin


Current Liabilitiesa) Creditors (800000+120000+153333) x1.5/12

b) Wages o/s (655000+39300+270000)x1/12


Total Current Liabilities (B)

Question No. 2

Reliance furnishes following figures are for one year. a) Sales - home at one month credit 12,00,000

- Export at three months credit 5,40,000

b) Materials used (suppliers allows 2 months credit) 4,20,000

c) Wages ?

d) Depreciation 50,000

e) Other Manufacturing Exp 4,50,000

f) Administrative Expenses 1,50,000

g) Sales promotion Exp 75,000

h) Income tax 1,50,000 Other details.

1) Suppliers allow 2 months credit

2) Wages are paid after 2 weeks

3) manufacturing and administration expenses are paid in next month.

4) Sales promotion expenses are paid in advance for three months.

5) Income tax is paid quarterly.

6) Selling price of exports is 10% less than the domestic price and company earns 25% on domestic prices.

7) The company keeps one month's stock of each of raw material and finished goods.

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8) Assume 15% safety Margin. Ignore WIP.

From the above calculate working capital requirement of the company.

Answer

Step 1

Prepare Trading and P&L to determine wages as balancing figure

Step 2

Prepare Statement of working capital Estimation.

To mat 4,20,000 By sales

To Wages 2,05,000 Dome 12,00,000

To Dep 50,000 Export 5,40,000

To other Manu Exp 4,50,000

To Adm Exp 1,50,000

To sales Prom Exp 75,000

To Inc Tax-Assumed -

To NP-Ass bef Tax 3,90,000

17,40,000 17,40,000

Trading & PL a/c

Cash Tot

- -

35,000 35,000

- -

89,583 93,750

1,80,556

2,35,000

18,750 18,750

3,23,889 3,82,500

70,000 70,000

7,885 7,885

50,000 50,000

37,500

1,27,885 1,65,385

1,96,004 2,17,115

29,401 32,567

2,25,405 2,49,683


1200000*1/12 + 540000*3/12

a) Creditors (Purchase x credit period) 4.20L*2/12



d) Inc Tax

Work In Progress

Finished Stock at Factory Cost (Cost *1/12)

c) Debtors -13L*2/3*1/12 + 13L*1/3*3/12

d) Prepaid Expenses

Total Current Assets (A)Current Liabilities


b) Stock in Hand

Raw Material 420,000 * 1/12



Margin

Working Notes Rate on Domestic Pr Domestic Export

Sales 100 12,00,000 5,40,000

Profit 25 3,00,000 90,000

Cost 75 9,00,000 4,50,000

Sales at domestic price 12,00,000 6,00,000

Ratio of sales 2 :1

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Notes & Assumptions



Question. 3

1997 [Q.No.4 (b)]

Prepare an estimate of net working capital requirements of zero company from the data given below: Estimated Cost Per Amount Per Unit Unit of production Rs. Raw materials 100 Direct Labour 40 Overheads 80 -------- 220 =====

The following is the additional information Selling Price Per unit Rs. 240

Level of activity 1,04,000 units Per annum

Raw materials in stock average 4 Weeks

Work in Progress [Assume 100 Per cent stage

of completion of material and 50 Per cent

for labour and overheads] Average 2 weeks

Finished goods in stock Average 4 weeks

Credit allowed by suppliers Average 4 weeks

Credit allowed to debtors Average 8 weeks

Lag in payment of wages Average 1 1/2 weeks.

Cash at bank is expected to be Rs. 25,000. Assume production is sustained during 52 weeks of the year.

Answer


1-Working Capital


Cash Total

25,000 25,000

8,00,000 8,00,000

4,00,000 4,00,000 80,000 80,000

1,60,000 1,60,000 17,60,000 17,60,000

35,20,000 38,40,000

-

67,45,000 70,65,000

8,00,000 8,00,000

1,20,000 1,20,000

9,20,000 9,20,000

58,25,000 61,45,000

- -

58,25,000 61,45,000


b) Stock in Hand(UnitsxRMCxHP)

Margin


a) Creditors 104000x100x4/52

b) Wages o/s 104000x40x1.5/52



Finished Stock 104000x220x4/52

c) Debtors 104000x220 or 240 x 8/52

d) Prepaid Expenses

Total Current Assets (A)Current Liabilities

Raw Material 104000x100x4/52

Work In Progress (UnitsxCostxDOCxHP)

Material 104000x100x100%x2/52 Labour 104000x40x50%x2/52 Overheads 104000x80x50%x2/52


Notes & Assumptions 1) Debtors have been valued at Total Cost and not at selling price.

Question. 4

2001 [Q.No.5 (b)]

AB Ltd. Provides the following particulars relating to its working: Amount in Rs. (Per Unit) 1) Cost/Profit Per unit: Raw Material Cost 84 Direct Labour Cost 36 Overheads (All Variable) 36 ------------- Total Sales 156 Profit 44 ------------ Selling Price 200 2) Average Amount of Backup Stock raw material 1 Month Work - in Progress (50% complete) 1/2 Month Finished goods 1 Month 3) Credit allowed by Suppliers - 1 Month 4) Credit allowed to customers - 2 Months 5) Average time lag in the payment of wages 1/2 Month Overhead Expenses 1 1/2 Months 6) Required Cash in hand and at bank Rs. 3,00,000. 7) 25% of the output is sold for cash.

1-Working Capital


For an expected sale of 1,00,000 units of AB Ltd., work out the working capital requirements assuming that production is carried on evenly throughout the year and wages and overheads accrue similarly.

Answer Question 4

Cash Total

3,00,000 3,00,000

7,00,000 7,00,000

1,75,000 1,75,000 75,000 75,000 75,000 75,000

13,00,000 13,00,000

19,50,000 25,00,000

45,75,000 51,25,000

7,00,000 7,00,000

1,50,000 1,50,000

4,50,000 4,50,000

13,00,000 13,00,000

32,75,000 38,25,000

- -

32,75,000 38,25,000



Margin

Finished Stock 156*100000*1/12

c) Debtors 156 or 200 * 100000*2/12*75%

d) Prepaid Expenses


Total Current Assets (A)Current Liabilitiesa) Creditors 100,000*84*1/12

b) Wages o/s 100,000*36*0.5/12




Raw Material 100,000*84*1/12


Material 100,000*84*50%*0.5/12 Labour 100,000*36*50%*0.5/12 Overheads 36*100000*50%*0.5/12


Question. 5

2003 [Q.No.3 (b)]

Estimate the net working capital of firm ‘X’ on the basis of the given data:

Item Cost per unit Rs. Raw material 400 Direct Labour 150 Overheads (including Depreciation Rs.50) 300 ------------- Total 850 ======

Additional Information:

Selling Prices Rs.1,000 Per unit Output 52,000 units per annum Raw material in stock Average 4 weeks

Work in progress (Wages and overheads are 50% completion

Stage with full material consumption) Average 2 weeks Finished goods in stock Average 4 weeks Credit allowed by suppliers Average 4 weeks

1-Working Capital


Credit allowed to debtors Average 8 weeks Cash at bank is expected to be Rs.50,000

(All sales are on credit basis and production takes place evenly during the 52 weeks of a year)

Answer

Question 5

Cash Total

50,000 50,000

16,00,000 16,00,000

8,00,000 8,00,000 1,50,000 1,50,000 2,50,000 3,00,000

32,00,000 34,00,000

64,00,000 80,00,000

124,50,000 143,00,000

16,00,000 16,00,000

- -

- -

16,00,000 16,00,000

108,50,000 127,00,000

- -

108,50,000 127,00,000

d) Prepaid Expenses




Raw Material


Material Labour Overheads Finished Stock

c) Debtors


Current Liabilitiesa) Creditors

b) Wages o/s



Margin


1) Depreciation has been excluded in calculating Working Capital i.e. Working capital has been calculated on

Cash Cost Basis.

2) Debtors have been valued at Total Cost excluding depreciation and not at selling price.


Question. 6

2005 May 6 [Q.No.13 (a)]

XYZ Co. Ltd is a pipe manufacturing company. Its Production cycle indicates that materials, are introduced in the beginning of the production cycle; wages and overhead accrue evenly through out the Period of the cycle. Wages are paid in the next month following the month of accrual. Work in Process includes full units of raw materials used in the beginning of the production Process and 50% of wages and overheads are supposed to be conversion costs. Details of Production Process and the components of working capital are as follows:

Production of Pipes 12,00,000 units Duration of the Production cycle One month Raw materials inventory held One month consumption Finished goods inventory held for Two months Credit allowed by creditors One months Credit given to debtors Two month Cost Price of raw materials Rs. 60 Per unit Direct Wages Rs. 10 Per unit Overheads Rs. 20 Per unit

1-Working Capital


Selling Price of finished pipes Rs. 100 Per unit

Required to Calculate: 1) The amount of working capital required for the company.

2) Its maximum Permissible bank finance under all the three methods of lending norms as suggested by the

Tondon Committee, assuming the value of core current assets: Rs. 1,00,00,000.

Answer Question 6

Cash Total

- -

60,00,000 60,00,000

60,00,000 60,00,000 5,00,000 5,00,000

10,00,000 10,00,000 180,00,000 180,00,000

180,00,000 200,00,000

495,00,000 515,00,000

60,00,000 60,00,000

10,00,000 10,00,000

- -

70,00,000 70,00,000

425,00,000 445,00,000

- -

425,00,000 445,00,000


Current Assets

a) Cash at Bank

b) Stock in Hand

Raw Material 12,00,000*60*1/12

Work In Progress

Material 12,00,000*60*100%*1/12 Labour 12,00,000*10*50%*1/12 Overheads 12,00,000*20*50%*1/12Finished Stock 12,00,000*90*2/12

c) Debtors 12,00,000*90(or 100)*2/12

d) Prepaid Expenses

Total Current Assets (A)Current Liabilitiesa) Creditors (12,00,000*60*1/12

b) Wages o/s (12,00,000*10*1/12



Margin




Tondon Committee-Determination of Maximum Permissible Bank

Finance (MPBF)

There are three methods for this purpose. These are as under

Question. 7

2004 May 6 [Q.No.12 (a)]

The following annual figures relate to MNP Ltd.

Sales (at three months credit) Rs. 90,00,000 Materials consumed (suppliers extend

one and half month’s credit Rs. 22,50,000

1-Working Capital


Wages Paid (one month in arrear) Rs. 18,00,000 Manufacturing expenses outstanding at the end of

the year (Cash expenses are paid one month in arrear) Rs. 2,00,000 Total administrative expenses for the year (Cash

expenses are paid one month in arrear) Rs. 6,00,000 Sales Promotion expenses for the year

(Paid quarterly in advance) Rs. 12,00,000

The company sells its Products on gross-profit of 25% assuming depreciation as a Part of cost of Production. It keeps two month’s stock of finished goods and one month’s stock of raw materials as inventory. It keeps cash balance of Rs. 3,00,000.

Assume a 5% safety margin, work out the working capital requirements of the company on cash cost basis. Ignore work-in-progress.

Answer

To Material 22,50,000 Bys ales 90,00,000

To Wages 18,00,000

To Manu Exp 24,00,000

To Dep 3,00,000

To GP 22,50,000

90,00,000 90,00,000

To Adm Exp 6,00,000 By GP 22,50,000

To Sales Promo 12,00,000

To NP 4,50,000

202,50,000 202,50,000

Trading & PL a/c

Cash Total

3,00,000

1,87,500

10,75,000

20,62,500

3,00,000

39,25,000 -

2,81,250

1,50,000

2,50,000

6,81,250 -

32,43,750

Margin





Material Labour

b) Stock in Hand

Raw Material

Work In Progress

Overheads

Finished Stock (22.50L+18.00L+24L)*2/12

c) Debtors (22.50L+18.00L+24.00L+6.00L+12.00L)*3/12

d) Prepaid Expenses 12.00L*1/4

Total Current Assets (A)Current Liabilitiesa) Creditors (22,50,000*1.50/12)

b) Wages o/s (18.00L*1/12)

c) Overheads o/s (24.00L+6.00L)*1/12

Notes & Assumptions 1) Debtors have been valued at Total Cost excluding Depreciation and not at selling price.


1-Working Capital


Question. 8

2002 Nov 9 [Q.No.11 (b)]

The following information has been extracted from the records of a Company:

Product cost sheet Rs./unit Raw materials 45 Direct labour 20 Overheads 40 ----------- Total 105 Profit 15 ----------- Selling Price 120 =====

a) Raw materials are in stock on an average of two months.

b) The materials are in process on an average for 4 weeks. The degree of completion is 50%.

c) Finished goods stock on an average is for one month.

d) Time log in Payment of wages and overheads is 11/2 weeks.

e) Time log in receipt of Proceeds from debtors is 2 months.

f) Credit allowed by suppliers is one month.

g) 20% of the output is sold against cash.

h) The company expects to keep a cash balance of Rs. 1,00,000.

i) Take 52 weeks Per annum.

j) The company is Poised for a manufacture of 1,44,000 units in the year.

You are required to Prepare a Statement showing the working capital requirements of the Company.

Answer


1-Working Capital


Question 8

Cash Total

1,00,000 1,00,000

10,80,000 10,80,000

2,49,231 2,49,231 1,10,769 1,10,769 2,21,538 2,21,538

12,60,000 12,60,000

20,16,000 23,04,000

50,37,538 53,25,538

5,40,000 5,40,000

83,077 83,077

1,66,154 1,66,154

7,89,231 7,89,231

42,48,308 45,36,308

- -

42,48,308 45,36,308





Overheads Finished Stock

c) Debtors

d) Prepaid Expenses


b) Stock in Hand

Raw Material




Margin


Labour

Work In Progress

Material



Theory questions

Question. 10

2005 [Q.No.3 (a)]

Explain the factors affecting investment in working capital.

Answer

Factors affecting Working Capital of a firm.

There can be no standard or set rules to determine or estimate the Working Capital Requirements of a business firm. An indepth analysis of several factors has to be made to arrive at the working capital requirements of a firm. Such factors can be outlined as under:

1) Nature and Size of the Business.

Working Capital needs of a business are greatly influenced by the nature of the business. Trading and financial firms have a very small investment in fixed assets. But these concerns require huge amounts to be invested in Working Capital. Similarly, some seasonal business (cigarette manufacturing) and construction company require large amounts to be invested in Working Capital, especially as inventories. But businesses engaged in providing services (rather than products) need large investments in fixed assets and very nominal investments in Working Capital.

1-Working Capital


2) Manufacturing or Operating Cycle.

Generally, the longer the manufacturing period, the higher is the need of Working Capital. A long manufacturing time period demands more investment in working capital needs. Shorter the manufacturing or operating cycle, smaller are the needs of working capital.

3) Frequency of Turnover of Sales and Debtors.

Generally, a firm having a high rate of turnover needs small amount of inventories. Similarly, a firm enjoying a higher Debtors’ Turnover ratio also needs smaller amounts to be invested in its debtors. So an efficient debt collection results in reduction of the amount invested in working capital.

4) Demand and Supply Conditions.

Firms may be faced with seasonal fluctuations in the demand for their products or availability of raw material or finished inventories from the suppliers. In such cases, no doubt the investment in inventories tends to rise. Such fluctuations (seasonal) not only affect working capital requirements but these also affect the manufacturing process thereby indirectly affecting the working capital requirements.

5) Overall Operating Efficiency.

Which ultimately means the optimum utilisation of all the variable resources incurring minimum costs. This is the area where a good and efficient Finance Manager uses his abilities.

Question 11

2004 [Q.No.4 (a)]

Working capital management deals with decisions regarding the appropriate mix and level of current assets and current liabilities.” Elucidate the statement.

Answer

Working Capital Management (WCM).

Capital requirements of any business are divided into two categories:

a) Fixed Capital requirement, and

b) Working Capital requirement.

Like the management of long term assets, even the management of WC (Working Capital) also involves analysis of the effects on its returns and risks. But in the management of fixed assets, the time value of money assumes an important role . Hence, there arises the need of using discounting and compounding techniques. This is usually not so in WCM. Larger investments in WC, especially Cash or Bank Balances adversely affect firm’s profitability though it enhances firm’s liquidity and ultimately improves its goodwill. Further, in the short run it is only through adjustments in the levels of WC that the firm can make adjustments in the capital investments since investments once made in long term or fixed assets are all irreversible.

1-Working Capital


WC is defined in two different ways:

a) Gross WC:-

It means the firm’s investment in total Current Assets (C.A). Current Assets are those assets which are converted into cash without any special efforts within a short period of time i.e., either the year or the operating cycle whatever period it consists of.

b) Net WC:-

It means the difference between the total Current Assets (CA) and Current Liabilities (CL.). CL are those liabilities which have to be paid off or cleared or adjusted within a short period of time during the normal operating cycle of the business. Thus, the net WC means that portion of Current Assets which is financed through long term funds of the enterprise.

Excessive or inadequate investment in CA are both regarded as danger points, which ought to be always avoided. An excessive investment CA leads to adverse effect on the profitability, whereas inadequate investment similarly leads to insolvency as the firm may not be in a position to meet its financial obligations in time as and when the need arises. A good financial manager should have knowledge of both - (i) The sources of WC and (ii) avenues where surplus CA, if any, can be invested. As such WCM refers to the management of the CA CL and the proper relationship between these two. The main Purpose of WCM is to maintain a proper level of WC i.e., it has to be neither inadequate nor excessive. For this, even the different components of the WC are to be properly balanced. For example, the proportion of the inventory should not be very high in the total CA. If its is so, it means unnecessary accumulation of obsolete or slow moving inventory. Similarly, a very high proportion of accounts receivable also indicates a long credit period or a weak Debtors’ Turn - over ratio. All this ultimately affects the firm’s profitability as well as its liquidity.

Following are very important aspects of a good WCM:

a) Estimating a Proper amount of WC

b) Finding out sources from which these funds have to be obtained

c) Finding out avenues where surplus CA, if any, can be invested temporarily.

Question. 12

2002 [Q.No.3 (a)]

What are the two important characteristics of current assets? State their implications for working capital management.

Answer

The working capital management refers to the management of working capital current assets of a company. A company’s working capital consists of its investment in current assets such as Cash Bank Balance, Inventories, Receivables and Marketable securities.

Two important characteristics of current assets are:

1) Those which are convertible into cash or equivalent within a period of one year, and

2) Those which are required to meet day to day operations.

1-Working Capital


The need for working capital arises from two considerations:

1) Fixed assets be utilised at an optimum level if supported by sufficient working capital.

2) The working capital involves investment of funds of the company. If the working capital level is not properly maintained and managed, it may result in unnecessary blocking of scare resources of the company, Insufficient working capital can become a hindrance in smooth working of the organisation. The working capital management includes the management of the level of individual current assets as well as the management of total working capital. Each individual current asset has unique characteristics which should be kept in mind while deciding how much money should be invested in a current asset.

Question. 13

2001 [Q.No.1]

Explain briefly the following :

a) Temporary working capital;

Answer

Temporary Working Capital.

The amount of such capital keep fluctuating from time to time depending upon business activities. Temporary Working Capital is represented by additional current assets required at different times during the operating year. It also includes the additional working capital needed to meet the requirements due to fluctuations in sales volume.

Permanent Working Capital is fixed over a period of time while Temporary Working Capital fluctuates according to the requirements of the operational activities. Permanent Working Capital is increasing over a period of time with corresponding increase in the level of business activity while temporary Working Capital is fluctuating in increasing order.

Question. 14

1998 [Q.No.4 (b)]

State briefly the repercussions if a firm has paucity of working capital and excessive working capital.

Answer

Adequacy of Working Capital (WC). From the point of view of good financial management, it is always desired that a firm should have just adequate capital, especially working capital since it is the WC requirements which keep on changing from time to time. It happens only in case of the short terms WC requirements of a firm and not so much as regards the long term WC requirement. Both the excessive or even insufficient WC (over-capitalisation as well as under - capitalisation) situations are equally dangerous for the firm.

The Possible dangers of over - capitalisation can be as under: 1) Results in unnecessary accumulation of the inventories giving rise to more losses of such nature.

2) Results in a defective credit policy thus showing a poor collection effort from debtors and more bad debts.

3) Effective profits decline or rather speculative profits tend to rise which adversely affect the dividend policy.

1-Working Capital


Similarly, Possible dangers of under - capitalisation are: 1) Due to non - availability of sufficient inventories, firm may find it difficult to undertake profitable projects in

time.

2) Operating plans may seem to be difficult to be implemented.

3) Even firm’s fixed assets may remain idle sometimes due to paucity of WC funds.

4) Firm’s goodwill may also be affected because of its inability to honour its short term obligations.

1-Working Capital


Operating Cycle

(Working Capital Cycles) Working capital cycle is the total time required in realising all our cash. In other words it is the time-gap between payment for input and realisation of cash on account of sales. Following may be said to be the formula for operating cycle. O = R + W + F + D - C

Particulars Period

R = Raw material storage period

{ 12(or 52 or 365) x Raw material in hand /Raw material Consumed}

W = Work-in-progress period

{ 12(or 52 or 365) x WIP in hand /Total Production Cost}

F = Finished stock Holding period.

{ 12(or 52 or 365) x Finished Stock in hand / Cost of Sales}

D = Debtors realisation period

{ 12(or 52 or 365) x Debtors /Sales}

--------------- Total Less:-

C = Average payment period allowed by creditors.

{ 12(or 52) x Creditors /Purchases of Raw material Consumed}

========

1-Working Capital


Numericals

Question No. 15 From the following information, compute operating cycles for materials and for other elements of production cost in number of day ;- 1) Assume an year of 350 days. 2) Payments to creditors after 16 days. 3) Debtors Rs. 4,800. 4) Raw Material consumption Rs. 44,000. 5) Total production cost Rs. 1,00,000. 6) Total cost of sales : Rs. 1,05,000. 7) Sales for the year Rs. 1,60,000. 8) Raw Material stock Rs. 3,500.

Question no. 15 Mat Lab Exp

R 350 x 3500/44000 27.84 - -

W 350*2500/100000 8.75 8.75 8.75

F 350*3000/105000 10.00 10.00 10.00

D 350 x 4800/160000 10.50 10.50 10.50

(-) C (16.00) (16.00) (16.00)

41.09 13.25 13.25 Operating Cycle

Question No. 16 Part (a) From the following details calculate working capital requirement of the company. 1) Monthly production and sale is 12,000 units 2) Sales price is Rs. 250 3) Cost Material 80 Labour 30 Fixed overhead 20 Variable overhead 40 Profits balance 4) Raw materials are in stock for 1 month, 5) Production process (WIP) 1/2 month, 6) Finished stock holding period 1 month, 7) credit allowed to Debtors 2 months, 8) credit allowed by materials suppliers 1 month, 9) lag in payment of wages half months 10) lag in payment of overhead 3 weeks Determine 1) Working capital 2) operating cycle for material, labour and overheads. 3) Total operating cycle. part(b) Production manager has made a proposal of introducing two shifts of 8 hours each , instead of one shift of 9 hours, as earlier being in operation. Assuming that employees will receive same remuneration as before for one shift. Fixed overhead are likely to increase by 60%. In one month company works for 25 days. Determine 1) Working capital 2) operating cycle for material, labour and overheads. 3) Total operating cycle.

1-Working Capital


Material Labour O/H

R 1.00 - -

W 1/2 1/2 1/2

F 1.00 1.00 1.00

D 2.00 2.00 2.00

(-) C (1.00) - 1/2 - 3/4

Operating Cycle 3.50 3.00 2.75

Question No. 16(a)

Current Assets Cash

a) Cash at Bank

b) Stock in Hand

Raw Material 144000*80*1/12 9,60,000

Work In Progress

Material 144000*80*100%*0.5/12 4,80,000 Labour 90,000 Overheads 1,80,000 7,50,000 Finished Stock 20,40,000

c) Debtors 144000*170*2/12 40,80,000

d) Prepaid Expenses

Total Current Assets (A) 78,30,000

Current Liabilitiesa) Creditors (Purchase x credit period) 9,60,000

b) Wages o/s (expense x credit period) 1,80,000

c) Overheads o/s (expense x credit period)-Manu 5,40,000

Total Current Liabilities (B) 16,80,000

Working Capital (A-B) 61,50,000


Working Old New

Units-per month 12000/9 * 16 12,000.00 21,333

Material 80.00 80.00

Labour 30 * 9/8 30.00 33.75

Variable Ov 40.00 40.00

Fixed Ov 20*12000*160%/2133320.00 18.00

TC 170.00 171.75

Profit 80.00 78.25

SP 250.00 250.00

Question No. 16(b)

Material Labour O/H

R 1.00 - -

W 0.5 * 9/16 0.28125 0.28125 0.28125

F 1.00 1.00 1.00

D 2.00 2.00 2.00

(-) C (1.00) (0.50) (0.75)

Operating Cycle 3.28 2.78 2.53

Operating Cycle

1-Working Capital


Current Assets Total

a) Cash at Bank

b) Stock in Hand

Raw Material 256k*80*1/12 17,06,667

Work In Progress

Material 256k*80*9/32/12 4,80,000 Labour 1,01,250 Overheads 1,74,000 7,55,250 Finished Stock 256000*171.75*1/12 36,64,000

c) Debtors 256000*171.75*2/12 73,28,000

d) Prepaid Expenses


Current Liabilitiesa) Creditors (Purchase x credit period) 17,06,667

b) Wages o/s (expense x credit period) 3,60,000

c) Overheads o/s (expense x credit period)-o/h 9,28,000




Question. 17

1998 [Q.No.2 (b)]

From the following information taken from the books of a manufacturing concern, compute the operating cycle in days:

Period covered 365 days Average period of credit allowed by suppliers 16 days Rs. (‘000) Average of total debtors outstanding 480 Raw materials consumption 4,400 Total Production cost 10,000 Total Cost of Sales 10,500 Sales for the year 16,000

Value of average stock maintained: Raw materials 320 Work in Progress 350 Finished goods 260

Answer

Particulars Period

R = Raw material storage period { 12(or 52 or 365) x Raw material in hand /Raw material Consumed}

365 x 320/4400 26.55

W = Work-in-progress period

{ 12(or 52 or 365) x WIP in hand /Total Production Cost}

365 x 350/10,000 12.78

F = Finished stock Holding period.

{ 12(or 52 or 365) x Finished Stock in hand / Cost of Sales}

365 x 260/10,500 9.04

D = Debtors realisation period

{ 12(or 52 or 365) x Debtors / Sales}

1-Working Capital


365 x 480/16,000 10.95

---------------

Total 59.32

Less:- C = Average payment period allowed by creditors.

{ 12(or 52) x Creditors /Purchases of Raw material Consumed}

16.00

-----------------

43.32

========

43 days approximately

Question. 18

2002 [Q.No.2 (b)]

ABC Ltd. expects of its cost of goods sold for 2000 - 2001 to be Rs. 600 lakhs. The expected operating cycle is 90 days. It wants to keep a minimum cash balance of Rs.1 lakh. What is the expected working capital requirement? Assume a year consists of 360 days.

Answer Net Working Capital excluding cash = Cost of Goods Sold x Operating Cycle/ 52 or 365 or 12 = 6,00,00,000 x 90/360 = 1,50,00,000 Add Cash = 1,00,000 --------------- Total 1,51,00,000

Theory Questions

Question. 19

[Q.No.3. (a)]

Explain in brief the operating cycle of a manufacturing firm.

Answer

Operating Cycle (OC):-

A firm needs some investment in its working capital for running its day to day business smoothly. This investment in working capital may be long term or short term depending upon its needs. This investment in working capital depends on the “Operating Cycle” of the firm or business. Generally, the investment in the current assets (net) of the firm turns over several times in a year. Such an investment in current assets may be e.g. in its inventories, account receivables, cash etc. This investment gets realised during a period called “OC” which is usually much less than a year. Thus, OC is the duration or time during which most of the current assets of the business get converted in cash or cash equivalents. Usually, OC of a manufacturing firm consists of stages such as:

a) Purchases of Raw materials for cash or credit.

b) Converting of Raw materials into Work - in -progress (WIP)

1-Working Capital


c) Selling finished goods thus converting them into direct cash (in case of cash sales) or into account receivables (in case of credit sales)

d) Receiving money or bills receivable etc. from debtors

e) Realising bills receivable

f) Paying creditors

Thus the length of OC depends on Inventory conversion period and debt conversion period. The inventory conversion period means the time raw materials take to get converted into WIP plus time taken by WIP to get converted into finished goods and time the finished goods take to get sold. Further, debt conversion period means the time required to collect debts i.e., debt collection period. So OC means total of both of these times i.e., Inventory Conversion Period and Debt Conversion Period.

1-Working Capital


Self- Assessment on Working Capital

Management (Answers at End)

Question. 21

HI Tech. plans to sell 30,000 units next year. The expected cost of goods sold is as follows:

Rs. (Per unit) Raw materials 100 Manufacturing expenses 30 Selling, administration and financial expenses 20 Selling price 200

The duration at various stages of the operating cycle is expected to be as follows:

Raw materials stage 2 month Work in process stage 1 month Finished goods stage 1/2 month Debtors stage 1 month

Assuming the monthly sales level of 2,500 units:

1) Calculate the amount of various current assets; and

2) Estimate the gross working capital requirement if the desired cash balance is 5% of the gross working capital requirements.

Answer

1) Raw Material Rs. 5,00,000. Work in process Rs. 2,87,500, Finished goods - Rs. 1,62,500 Debtors Rs. 5,00,000;

2) Gross Working capital - Rs. 15,26,316.

Question. 22

While Preparing a project report on behalf of a client you have collected the following facts. Prepare an estimate of:

1) Working Capital

2) Cash cost of Working Capital

3) Maximum Bank Borrowings permissible under method I, II and III of Tandon committee norms and

4) Current Ratio under all three methods.

Amount Per unit Rs.

Estimated cost per unit of production Raw materials 100

1-Working Capital


Direct labour 40 Overheads (inclusive of depreciation) Rs. 20 Per unit 80 ------------ Total cost 220 ======

Additional Information: Selling Price Rs. 240 Per unit Level of activity 1,04,000 units of Production per annum Raw material in stock average 4 weeks Work - in - progress assume 100% completion Stage for material and 50% for labour & Overheads average 2 weeks Finished goods in stock average 4 weeks Credit allowed by suppliers average 4 weeks Credit allowed to debtors average 8 weeks Lag in payment of wages average 1-1/2 weeks

Cash at bank is expected to be Rs. 25,000.

Note:

Hard Core Current Assets are 30% of the total Current Assets.

Answer 1) Rs. 61,45,000

2) Rs. 53,05,000

3) I Norm - Rs. 46,08,750, II Rs. 43,78,750, III Rs. 27,89,125

4) Current Ratio 1.28 : 1,133 : 1,1,904 : 1

Answer

Assumption 1) Here Current Ratio has been calculated on the assumption that funds raised by MPBF will be invested in Fixed

Assets i.e CR has been calculated after MPBF has been invested in Fixed assets.

Question. 23

On 1st January, the Board of Directors of XYZ Ltd. wishes to know the amount of working capital that will be required to meet the programme of activity they have planned for the year. From the following available information, Prepare:

a) A working capital requirement and

b) An estimated profit and loss account and balance sheet at the end of the year:

1) Issued and paid up share capital Rs. 2,00,000.

2) 5% debentures (secured on assets) Rs. 50,000.

3) Fixed assets valued at Rs. 1,25,000 on 31.12.1193.

4) Production during previous year was 60,000 units. It is planned that this level of activity should be maintained during the present year.

5) The expected ratios of cost selling price are raw materials 60% direct wages 10% and overheads 20%.

1-Working Capital


6) Raw materials are expected to remain in stores for an average of two months before issued to production.

7) Each unit of production is expected to be in process for in process for one month (assume full unit of raw materials required in the beginning of manufacturing other conversion costs are 50%).

8) Finished goods will safely in warehouse for approximately three months.

9) Creditors allow credit for two months from the date of delivery of raw materials.

10) Selling Price per unit is Rs. 5.

11) Credit allowed to debtors in three months from the date of despatch.

12) There is regular production and sales cycle.

State your assumptions , if any.

Answer a) [Rs. 1,61,250] b) [Balance Sheet Rs. 3,16,250, Retained Earnings - Rs. 27,500]

Question. 24

X Ltd. sells goods at a gross profit of 20%. It includes depreciation as part of cost of production. The following figures for the 12 months period ending 31st December 1996 are given to enable you to ascertain the requirements of working capital of the company on a cash cost basis. In your workings, you are required to assume that:

1) A safety margin of 15% will be maintained.

2) Cash is to be held to the extent of 50% of current liabilities.

3) There will be no Work - in - Progress

4) Tax is to be ignored.

Stocks of raw materials and finished goods are kept at one month’s requirements

All working notes are to form part of your answer.

Rs. Sales at 2 month’s credit 27,00,000 Materials consumed (Suppliers credit is for 2 months) 6,75,000 Wages (paid at the beginning of the next month) 5,40,000

Manufacturing expenses outstanding at the end of the year (Cash expenses are paid one month in arrear) 60,000 Administrative expenses (paid as above) 1,80,000 Sales promotion expenses - paid quarterly and in advance 90,000

Answer

[Cash cost of Working capital Requirement - Rs. 5,64,938]

Question. 25

1-Working Capital


Estalla Garment Co. Ltd. is a famous manufacturer and exporter of garments to the European countries. The finance manager of the company is preparing its working capital forecast for the next year. After carefully screeing all the documents, he collected the following information: Production during the previous year was 15,00,000 units. The same level of activity is intended to be maintained during the current year.

The expected ratios of cost to selling price are: Raw materials 40% Direct wages 20% Overheads 20%

The raw materials ordinarily remain in stores for 3 months before production. Every unit of production remains in the process for 2 months and is assumed to be consisting of 100% raw material, 50% wages and overheads. Finished goods remain in ware house for 3 months. Credit allowed by the creditors is 4 months from the date of the delivery of raw material and credit given to debtors is 3 months from the date of dispatch.

The estimated balance of cash to be held Rs. 2,00,000

Lag in payment of wages 1/2 month

Lag in payment of expenses 1/2 month.

Selling Price is Rs. 10 per unit. Both production and sales are in a regular cycle. You are required to make provision of 10% for contingency (except cash). Relevant assumptions may be made.

You have recently joined the company as an assistant finance manager. The job of preparing the forecast statement has been given to you. You are required to prepare the forecast the working capital needs of the company.

Answer

[Working Capital Requirement Rs. 84,50,000]

Question. 26

On 1st January, the Managing director of A Ltd. wishes to know the amount of working capital that will be required during the year. From the following information prepare the working capital requirements forecast. Production during the previous year was 60,000 units. It is planned that this level of activity would be maintained during the present year. The expected ratios of the cost to selling prices are raw materials 60%. Direct wages 10% and Overheads 20%. Raw materials are expected to remain in store for an average of 2 months before issue to production. Each unit is expected to be in process for one month, the raw materials being fed into the pipeline immediately and the labour and overhead costs accruing evenly during the month. Finished goods will stay in the warehouse awaiting despatch to customers for approximately 3 months. Credit allowed by creditors is 2 months from the date of delivery of raw materials. Credit allowed to debtors is 3 months from the date of despatch. Selling price is Rs. 5 per unit. There is a regular production and sales cycle. Wages and overheads are paid on the first of each month for the previous month. The company normally keeps cash in hand to the extent of Rs. 20,000.

Answer

1-Working Capital


[Working Capital Requirement - Rs. 1,73,750]

Question. 27

Following annual figures relate to XYZ Co. Rs. Sales (at two months credit) 36,00,000 Materials consumed (Suppliers extend two month’s credit) 9,00,000 Wages paid (monthly in arrear) 7,20,000 Manufacturing expenses outstanding at the end of the year 80,000

(Cash expenses are paid one month in arrear) Total administrative expenses, paid as above 2,40,000 Sales promotion expenses, paid quarterly in advance 1,20,000

The company sells its products on, gross profit of 25% counting depreciation as part of the cost of production. It keeps one months stock each of raw materials and finished goods, and a cash balance of Rs. 1,00,000.

Assuming a 20% safety margin, work out the working capital requirements of the company on cash cost basis. Ignore Work - in - progress.

Answer

[Working Capital Requirement - Rs. 7,20,000]

Question. 28

The following annual figures relate to MNP Ltd.:

Sales (at three months credit) Rs. 90,00,000 Materials consumed (Suppliers extend one and half month’s credit Rs. 22,50,000 Wages Paid (one month in arrear) Rs. 18,00,000 Manufacturing expenses outstanding at the end of the year Rs. 2,00,000

(Cash expenses are paid one month in arrear) Total administrative expenses for the year

(Cash expenses are paid one month in arrear) Rs. 6,00,000 Sales promotion expenses for the year (paid quarterly in advance) Rs. 12,00,000

The company sells its products on gross profit on 25% assuming depreciation as a part of cost of production. It keeps two month’s stock of finished goods and one month’s stock of raw materials as inventory. It keeps cash balance of Rs. 2,50,000. Assume a 5% safety margin, work out the working capital requirements of the company on cash cost basis. Ignore work - in - Progress.

Answer

[Cash Cost of Working Capital Requirement - Rs. 31,93,750]

1-Working Capital


Question. 29

Strong Cement Company Ltd. has an installed capacity of producing 1.25 lakhs tones of cement per annum; Its present capacity utilisation is 80%. The major raw material to manufacture cement is limestone which is obtained on cash basis from a company located near the plant. The company produces cement is 200 Kgs. drum. from the information given below, determine the cash cost of net working capital requirement of the company for the current year cost structure per drum of cement (estimated is as under):

Rs. Gypsum 25 Limestone 15 Coal 30 Packaging material 10 Direct labour 50 Factory overheads (including depreciation of Rs. 10) 30 Administrative overheads 20 Selling Overheads 25 ------------ Total Cost 205 Profit margin 45 ------------ Selling Price 250 Add: Sales tax (10% of selling price) 25 ------------ Invoice Price to consumer 275 ======

Additional Information:

1) Desired holding period of material: Gypsum 3 months coal : 2.5 months Limestone: 1 month Packing material: 1.5 months

2) The Product is in process for a period of 1/2 month (Assume full units of materials, namely:- gypsum, limestone, and coal are required in the beginning: other conversion costs are to be taken at 50%).

3) Finished goods are in stock for a period of 1 month before they are sold.

4) Debtors are extended credit for a period of 3 months.

5) Average time lag in payment of wages is approximately 1/2 month and of overheads : 1 month.

6) Avearge time lag in payment of sales tax is 11/2 months.

7) The credit period extended by various suppliers are Gypsum - 2 months: Coal - 1 month Packing material - 1/2 month

8) Minimum desired cash balance is Rs. 25 lakh. You may state your assumptions, if any.

1-Working Capital


9) Packing material is used for packing finished material at the time of sale.

Answer

[Working Capital Requirement - Rs. 3,666.667 (‘000)]

Hints:-

1) Packing material is to be taken as part of sales overhead

2) Value finished goods at Factory Cost

3) Value debtors at total cost plus sales tax.

4) Do not include cost of Packaging in Inventory valuation.

5) Include sales tax o/s in current liabilities.

Total production = 1.25 lacs x 1000 x 80% = 1000 lac kg

One Drum is of 200 kgs.

Therefore,

Total Production 10,00,00,000

No of Drums = ------------------------------------------- = ------------------------------- = 5,00,000

Weight of one Drum 200

Question. 30

PQ Ltd. a company newly commencing business in 1996 has the under mentioned Projected Profit and loss Account:

Sales 2,10,000 Cost of goods sold (1,53,000) ---------------- Gross Profit 57,000

Administrative expenses 14,000 Selling Expenses 13,000 (27,000) Profit before tax 30,000 Provision for taxation (10,000) --------------- Profit after tax 20,000

The cost of goods sold has been arrived at as under:-

Material used 84,000 Wages and manufacturing expenses 62,500 Depreciation 23,500 --------------- 1,70,000

Less: Stock of finished goods (10% of goods produced not yet sold) (17,000) ---------------- 1,53,000 ========

1-Working Capital


The figures given above relate only to finished goods not to Work - in - Progress. Goods equal to 15% of the year’s Production (in term of physical units) will be in process on the average requiring full materials but only 40% of the other expenses. The company believes in keeping materials equal to two months consumption in stock. All expenses will be paid one month in advance. Suppliers of materials will be extend 1 - 1/2 months credit. Sale will be 20% of cash and the rest at two month’s credit. 70% of the income tax will be paid in advance in quarterly installments. The company wished to keep Rs. 8,000 in cash.

Prepare an estimate of :

1) Working Capital, and 2) Cash Cost of working Capital.

Note: All working should form part of your answer.

Answer 1) [Rs. 77,543] 2) [Rs. 66,963]

Assumptions:-

1) Since it is a newly established organisation therefore its opening stock of Raw material, WIP and finished goods is zero. Therefore, a) Matereial Consumed = Material consumed given + consumed in Closing WIP b) Material purchased = Material Consumed + Closing stock of Raw material c) Expenses = Expenses given + share in Closing WIP

Question. 31

M.A. Ltd. is commencing a new project for manufacture for a plastic component. The following cost information has been ascertained for annual production for 12,000 units which is the full capacity.

Cost Per unit (Rs.) Materials 40 Direct labour and variable expenses 20 Fixed manufacturing expenses 6 Depreciation 10 Fixed administration expenses 4 ----------- 80 =====

The selling price per unit is expected to be Rs. 96 and the selling expenses Rs. 5 per unit 80% of which is variable. In the first two years of operations, production and sales are expected to be as follows:

Year Production Sales

(No. of units) (No. of units)

1 6,000 5,000

2 9,000 8,500

To assess the working capital requirements, the following additional information is available: a) Stock of materials 2.25 months average consumption

1-Working Capital


b) Work - in - Process NIL

c) Debtors 1 month’s average sales

d) Cash balance Rs. 10,000

e) Creditors for supply of materials 1 month’s average purchase during the year

f) Creditors for expenses 1 month’s average of all expenses during the year

Prepare, for the two years:

1) A Projected Statement of Profit / Loss (Ignoring taxation): and

2) A Projected statement of working capital requirements.

Answer 1) Profit Loss - (60,000) and 20,000

2) Rs. 1,40,583 and 2,06,792

Hint:- Calculate Working Capital by Total Approach

Question. 32

BS. Ltd. has been operating its manufacturing facilities till 31.3.1999 on a single shift working with the following cost structure:

Per unit Rs. Cost of Materials 6.00 Wages (40% fixed) 5.00 Overheads (80% fixed) 5.00 Profit 2.00 Selling Price 18.00 Sales during 1998 - 1999 - Rs. 4,32,000 As at 31.3.99 the company held: Rs. Stock of raw materials (at cost) 36,000 Work - in - Progress (valued at prime cost) 22,000 Finished goods (valued at total cost) 72,000 Sundry Debtors 1,08,000

In view of increased market demand, it is proposed to double production by working an extra shift. It is expected that a 10% discount will be available from suppliers of raw materials in view of increased volume of business. Selling price will remain the same. The credit period allowed to customers will remain unaltered. Credit availed of from suppliers will continue to remain at the present level i.e. 2 months. Lag in payment of wages and expenses will continue to remain half a month.

You are required to find

a) The additional working capital requirement, if the policy to increase output is implemented.

b) New and Old Operating Cycle.

Answer

[Net Additional Working Capital Requirement - Rs. 94,800]

1-Working Capital


Important note

Although the prime cost is always variable, but due to the nlanguage of the question even the fixed wages have been taken as part of prime cost.

Calculation of units sold

Sales 432000

Units sold = ------------------ = ------------------- = 24000 units

SP 18

After Double Shift Production and Sales will get doubled and the old and new cost sheet will be as under

Calculation of Raw material holding period

Raw material Holding Period 36,000

= --------------------------------------------------------- x 12 = ------------------------------ x 12 = 3 months

Cost of Raw material consumed 6 x 24000

Calculation of WIP period

WIP Stock 22,0000

WIP Period = ---------------------------------- x 12 = ----------------------- x 12 = 1 month

Cost of Production 264000

Important note

If we assume that the incomplete work of one shift will be completed in the other shift then the new WIP period will be half of the old WIP period i.e. 1/2 month.

Calculation of Finished Stock holding period

1-Working Capital


Finished Stock 72,000

= ------------------------------------------- = ----------------------------- x 12 = 2.25 months

Cost of Production 3,84,000

Calculation of Average Collection Period

Debtors 1,08,000

= ------------------------ = ------------------------- x 12 = 3 months

Sales 4,32,000

Calculation of Average Payment Period

2 months - Given in the Question

Calculation of Wages and Expenses Payment Period

1/2 months - Given in the Question

Question.33

From the following data, compute the duration of the operating cycle for each of the two years and comment on the increase decrease:

(Rs. ‘000) Year 1 Year 2

Stocks: Raw Materials 20 27 Work - in - Progress 14 18 Finished Goods 21 24 Purchases 96 135 Cost of Goods sold 140 180 Sales 160 200 Debtors 32 50 Creditors 16 18

Assume 360 days per year for computational Purposes.

Answer

[Operating Cycle 177 days 198 days]

Raw material Consumed = Opening Stock + purchase - Closing stock

1-Working Capital


Year 1 = 0 + 96 - 20 = 76

Year 2 = 20 + 135 - 27 = 128

Question.34

The following information is available for Swagat Ltd. (Rs. Million) Average stock of raw materials and stores 200 Average Work - in - Progress 300 Average finished goods inventory 180 Average accounts receivable 300 Average accounts payable 180

Average raw materials and stores purchased on credit and consumed per day 10

Average Work - in - progress value of raw materials committed per day 12.5 Avearge cost of goods sold per day 18 Average sales per day 20

You are required to calculate:-

1) Duration of raw material stage.

2) Duration of Work - in - Progress stage.

3) Duration of finished goods stage.

4) Duration of accounts receivable stage.

5) Duration of accounts payable stage. and

6) Duration of the operating cycle.

Answer 1) 20 Days. 2) 24 Days. 3) 10 Days. 4) 15 Days. 5) 18 Days. 6) 51 Days.

Question.35

The following data are available for Optex Limited. (Rs. in lakhs) 19 x 6 19 x 5 19 x 4 1. Opening Balance of a) Raw Materials, stores etc. 85 80 78 b) Work - in - Progress 24 20 18 c) Finished goods 100 90 85 d) Book debts 150 140 135 e) Trade Creditors 105 80 75 2. Closing Balance of a) Raw Materials, stores etc. 88 85 80 b) Work - in - Progress 25 24 20

1-Working Capital


c) Finished goods 98 100 90 d) Book debts 152 150 140 e) Trade Creditors 110 105 80 3. Purchase of raw materials Stores etc. 320 300 250 4. Consumption of raw materials, Stores etc. 317 295 248 5. Manufacturing expenses 160 145 125 6. Depreciation 25 20 18 7. Excise Duty 65 60 45 8. Administration & Financial and selling costs 95 80 65 9. Sales 825 800 640

Required: Calculate the duration of:

a) Raw materials and stores storage period.

b) Work - in - Process Period.

c) Finished goods Storage period.

d) Debtors collection period.

e) Creditors payment period, and

f) Operating Cycle.

Answer a) [115, 101, 98 days.] b) [18, 17, 18 days] c) [73, 66, 63 days]

d) [77, 65, 66 days] e) [112, 111, 121 days] f) [171 days, 140 days, 124 days.]

Question.36

The following is the projected Balance Sheet of Excel Ltd. as on 31.3.2004.

Balance Sheet as on 31.3.2004 Liabilities Rs. Lakhs Assets Rs. Lakhs Share capital 100 Fixed Assets 800 Reserves & surplus 150 Current Assets 1,000 Secured Loans 450 Miscellaneous expenditure 150 Unsecured loans 1,050 Current Liabilites 200 -------------- ------------- 1,950 1,950 ======== =======

1-Working Capital


The following are the other information:

1) Secured loans inlude installments payable to financial institutions before 31-3-2004 Rs. 100 lakhs

2) Unsecured loans include fixed deposits from public amounting to Rs. 400 lakhs out of which Rs. 100 lakhs are due for repayment before 31.3.2004.

3) Unsecured loans include Rs. 600 lakhs of zero interest fully convertible debentures dues for conversion on 30 - 9- 2003.

4) Current assets include deferred receivables due for payment after 31-3-2004 Rs. 40 lakhs.

5) The company has introduced a voluntary retirement scheme for workers costing Rs. 40 lakhs payable on 31 - 3 - 2008 and this amount is included in current liability.

You are required to calculate from the above information the maximum permissible bank finance by all the three methods for working capital as per Tandon Committee norms. For your exercise, assumes that core current assets constitute 25% of the current assets.

Answer

[MPBF 1st Method = Rs. 450 lakhs, 2nd Mehod = Rs. 3,600 lakhs, 3rd Method = Rs. 180 lakhs]

Question.37

Following is the balance Sheet of XYZ Ltd. Calculate the amount of maximum permissible bank finance by all the three methods for working capital as per Tandon Committee norms. You are required to assume the level of core current assets to be Rs. 30 lakhs.

You are also required to calculate the current ratios under each method and compare the same with the current ratios as recommended by the commitee, assuming that the bank has granted MPBF.

Balance Sheet of XYZ Ltd. as on 31st March, 2000 Liabilities Assets

Equity Shares Rs. 10 each 200 Fixed Assets 500

Retained earnings 200 Current Assets

11% Debentures 300 Inventory:

Public deposits 100 Raw materials 100

Trade Creditors 80 W.I.P. 150

Bills Payable 100 Finished goods 75 225

Debtors 100

Cash / Bank 55 480

------------- ------------

980 980

======= ======

Answer

[MPBF: I Method = Rs. 225 lakhs, II Method = Rs. 180 lakhs, III Method = Rs. 157.5 lakhs; Current Ratios: 1st Method = 1.74 : I and II Method = 1.83 : 1, III Method = 1.89 : 1]

1-Working Capital


Answer

Assumption

1) Here Current Ratio has been calculated on the assumption that funds raised by MPBF will be held by organisation in the form of Current assets i.e CR has been calculated immediately after getting MPBF

1-Working Capital


Answers

Current Assets Working Total Working

a) Cash at Bank 76,316 .05x

b) Stock in Hand

Raw Material 30000*100*2/12 5,00,000 5,00,000

Work In Progress

Material 30000*100*100%*1/12 2,50,000 2,50,000

Manu Exp 30000*30*50%*1/12 37,500 37,500

Finished Stock 30000*130*0.5/12 1,62,500 1,62,500

c) Debtors 30000*200*1/12 5,00,000 5,00,000

d) Prepaid Expenses

Total Current Assets (A) 15,26,316 x

.05x +5L +2.50L +37,500 + 162,500 +500,000 = x

x = 1526316

Question 21


Current Assets Cash Cost Total

a) Cash at Bank 25,000 -

b) Stock in Hand

Raw Material 8,00,000 -

Work In Progress

Material 1.04L*100*100%*2/52 4,00,000 -

Labour 1.04L*40*50%*2/52 80,000 -

O/H 1.04L*60or80*50%*2/52 1,20,000 1,60,000 Finished Stock 1.04*200 or 220*4/52 16,00,000 17,60,000

c) Debtors 1.04L*200 or 240 * 8/52 32,00,000 38,40,000

d) Prepaid Expenses

Total Current Assets (A) 62,25,000 57,60,000

Current Liabilitiesa) Creditors 8,00,000 -

b) Wages o/s 1.04L*40*1.5/52 1,20,000 1,20,000

c) Overheads o/s

Total Current Liabilities (B) 9,20,000 1,20,000

Working Capital (A-B) - 53,05,000 56,40,000


Question 22

1-Working Capital


CA= 57,60,000

CL= 1,20,000

Hard Core CA= 17,28,000

Method 1 42,30,000

Method 2 42,00,000

Method 3 29,04,000

Current Assets Cash Approach Total app

a) Cash at Bank Units-60,000

b) Stock in Hand 30,000 SP- 5

Raw Material 60k*3*2/12 Mat- 60%- 3

Work In Progress Lab-10%- 0.5

Material 60k*3*100%*1/12 15,000 OH- 20%- 1

Labour 60k*0.5*50%*1/12 1,250 Profit 0.5

Overheads 60k*1*50%*1/12 2,500 Finished Stock 67,500

c) Debtors 75,000

d) Prepaid Expenses

Total Current Assets (A) - 1,91,250

Current Liabilitiesa) Creditors (Purchase x credit period) 30,000



Total Current Liabilities (B) - 30,000

Working Capital (A-B) - 1,61,250

Margin


Question 23

1-Working Capital


To op St By sales 3,00,000

RM 30,000 By Stock

WIP 18,750 RM 30,000

FS 67,500 WIP 18,750

To Purchases 1,80,000 FS 67,500

To Wages 30,000

To Manu Exp 60,000

To GP 30,000

4,16,250 4,16,250

By GP 30,000

TO Deb Int 2,500

To NP 27,500

30,000 30,000

Trading & PL a/c

SC 2,00,000 FA 1,25,000

Stock

Reserve including PL 36,250 RM 30,000

5% Deb 50,000 WIP 18,750

FS 67,500

Ceediotrs 30,000 Debtors 75,000

3,16,250 3,16,250

B/S

To op stock-FS 1,61,250

To Material consumed 6,75,000 By sales 27,00,000

To Wages 5,40,000 By Cl Stock

To Mauf Exp 7,20,000 Finished 1,61,250

To Dep 2,25,000

To GP 5,40,000

28,61,250 28,61,250

To Adm 1,80,000 By GP 5,40,000

To sales 90,000

To NP 2,70,000

5,40,000 5,40,000

Trading & PL A/c

1-Working Capital


Question 24

Cash

1,16,250

56,250

1,61,250

3,67,500

22,500

7,23,750

1,12,500

45,000

60,000

15,000

2,32,500

4,91,250

73,688

5,64,938

Raw Material

Work In Progress

Material


Finished Stock (6.75L+5.40+7.20L)*1/12

c) Debtors (6.75L+5.40L+7.20L+1.80L+0.90)*2/12

d) Prepaid Expenses

Total Current Assets (A)Current Liabilitiesa) Creditors (Purchase x credit period)


c) Overheads o/s (expense x credit period)-Manu

Adm exp


Margin



b) Stock in Hand

Labour Overheads


1-Working Capital


Current Assets Cash APP Total app

a) Cash at Bank 2,00,000 2,00,000

b) Stock in Hand

Raw Material =15L*4*3/12 15,00,000 15,00,000

Work In Progress

Material 1500000*4*100%*2/12 10,00,000 10,00,000 Labour 1500000*2*50%*2/12 2,50,000 2,50,000 Overheads 1500000*2*50%*2/12 2,50,000 2,50,000 Finished Stock= 15L*8*3/12 30,00,000 30,00,000

c) Debtors 30,00,000 37,50,000


Current Liabilitiesa) Creditors= 15L*4*4/12 20,00,000 20,00,000

b) Wages o/s (expense x credit period) 1,25,000 1,25,000

c) Overheads o/s (expense x credit period) 1,25,000 1,25,000

Total Current Liabilities (B) 22,50,000 22,50,000

Working Capital (A-B) 69,50,000 77,00,000

Margin-10% OF wc EXCL CASH (69.50-2L)*10% and (77L-2L)*10% 6,75,000 7,50,000

Adjusted Working Capital 76,25,000 84,50,000


Question 25

Current Assets Cash Total

a) Cash at Bank 20,000 20,000

b) Stock in Hand

Raw Material 30,000 30,000

Work In Progress

Material 60000*3.00*100%*1/12 15,000 15,000 Labour 60000*0.50*50%*1/12 1,250 1,250 Overheads 60000*1.00*50%*1/12 2,500 2,500 Finished Stock 67,500 67,500

c) Debtors 67,500 75,000


Current Liabilitiesa) Creditors (Purchase x credit period) 30,000 30,000

b) Wages o/s (expense x credit period) 2,500 2,500

c) Overheads o/s (expense x credit period) 5,000 5,000

Total Current Liabilities (B) 37,500 37,500

Working Capital (A-B) 1,66,250 1,73,750


Question 26

1-Working Capital


Current Assets Cash

a) Cash at Bank 1,00,000

b) Stock in Hand

Raw Material 900000*1/12 75,000

Work In Progress

Material Labour Overheads Finished Stock 2,15,000

c) Debtors 29,40,000 * 2/12 4,90,000

d) Prepaid Expenses 30,000


Current Liabilitiesa) Creditors (Purchase x credit period)900000 * 2/12 1,50,000

b) Wages o/s (expense x credit period) 60,000

c) Overheads o/s (expense x credit period)-Manu 80,000

Adm exp 20,000



Margin 1,20,000

Adjusted Working Capital 7,20,000

Question27


To op stock

To Material 9,00,000 By sales 36,00,000


To Mauf Exp 9,60,000 Finished

To Dep 1,20,000

To GP 9,00,000

36,00,000 36,00,000

To Adm 2,40,000 By GP 9,00,000

To sales 1,20,000

To NP 5,40,000

9,00,000 9,00,000

Trading & PL A/c

1-Working Capital


Current Assets Cash Total

a) Cash at Bank 2.50 2.50

b) Stock in Hand 1.88 1.88

Raw Material

Work In Progress

Material Labour Overheads Finished Stock 10.75 11.25

c) Debtors 20.63 22.50

d) Prepaid Expenses 3.00 3.00

Total Current Assets (A) 38.75000 41.13

Current Liabilitiesa) Creditors (Purchase x credit period) 2.81 2.81

b) Wages o/s (expense x credit period) 1.50 1.50

c) Overheads o/s (expense x credit period) 2.50 2.50

Total Current Liabilities (B) 6.81 6.81

Working Capital (A-B) 31.937500 34.31

Margin 1.60 1.72

Adjusted Working Capital 33.53 36.03

Question 28


To op stock

To Material 22,50,000 By sales 90,00,000


To Mauf Exp 24,00,000 Finished

To Dep 3,00,000

To GP 22,50,000

90,00,000 90,00,000

To Admin 6,00,000 By GP 22,50,000

To Sales 12,00,000

To NP 4,50,000

22,50,000 22,50,000

Trading & PL A/c

Production = ----------------------------------------------------------- = 500,000 drums

Question 29

200 kg

125,000 x 1000kg * 80%

1-Working Capital


Current Assets Cash

a) Cash at Bank 25,00,000

b) Stock in Hand

Gypsum 5.00L *25 * 3/12 31,25,000.00

Coal 5.00L * 30*2.5/12 31,25,000.00

Limestone 5.00L*15*1/12 6,25,000.00

Packing 5.00L*10*1.5/12 6,25,000.00

Work In Progress

Material 5L*(25+15+30)*100%*0.5/12 14,58,333.33 Labour 5L*50*50%*0.5/12 5,20,833.33 Overheads 5L*20*50%*0.5/12 2,08,333.33 Finished Stock 5L*(25+15+30+50+20)*1/12 58,33,333.33

c) Debtors 5L*(25+15+30+10+50+20+20+25+25)*3/12275,00,000.00

Total Current Assets (A) 455,20,833.33


Gypsum 5.00L*25*2/12 20,83,333.33

Coal 5.00L*30*1/12 12,50,000.00

Packing 5.00L*10*0.5/12 2,08,333.33

b) Wages o/s 5L*50*0.5/12 10,41,666.67

c) Overheads o/s 5L*(20+20+25)*1/12 27,08,333.33

d) O/s Sales Tax 5.00L*25*1.5/12 15,62,500.00

88,54,166.67

366,66,666.67

-

366,66,666.67



Margin


1-Working Capital


Question No. 30

Current Assets Working Cash Total

a) Cash at Bank 8,000 8,000

b) Stock in Hand

Raw Material (84000+12600)*2/12 16,100 16,100

Work In Progress

Material 84000*15%*100% 12,600 12,600 Labour & Exp 62500*15%*40% 3,750 3,750 Dep 23500*15%*40% - 1,410 Finished Stock (84000+62500)*10% or 1.70L*10% 14,650 17,000

c) Debtors (84000+62500)*90%+27000)*80%*2/12 21,180 28,000

d) Prepaid Manu Exp (62500+3750)*1/12 5,521 5,521

e) Prepaid Adm & Selling 27000*1/12 2,250 2,250

Total Current Assets (A) 84,051 94,631

Current Liabilitiesa) Creditors (84000+12600+16100)*1.5/12 14,088 14,088

b) Wages o/s - -

c) Income Tax 10000*30% - 3,000

Total Current Liabilities (B) 14,088 17,088

Working Capital (A-B) 69,963 77,543


1-Working Capital


Particulars units Amount units Amount

Raw Material

Op stock - 45,000

Purchase 2,85,000 3,82,500

(-) Cl St (45,000) (67,500)

Material Consumed 2,40,000 3,60,000

Direct Wages 1,20,000 1,80,000

PRIME COST 6,000 3,60,000 5,40,000

Factory O/h

Fixed 72,000 72,000

Dep 1,20,000 1,20,000

GFC/NFC/Cost of Production 6,000 5,52,000 9,000 7,32,000

+ of Fin st - - 1,000 92,000

(-) cl fins st (1,000) (92,000) (1,500) (1,22,000)

COGS 5,000 4,60,000 8,500 7,02,000

Adm O/h-Fixed 48,000 48,000

S&D-Varraible 20,000 34,000

S&D-Fixed 12,000 12,000

TC 5,40,000 7,96,000

Profit (60,000) 20,000

First Year Second Year

Question No. 31

Current Assets First Year Second Year

a) Cash at Bank 10,000

b) Stock in Hand

Raw Material 67,500

Work In Progress -

Material Labour Overheads Finished Stock 1,22,000

c) Debtors 68,000

d) Prepaid Expenses -


Current Liabilitiesa) Creditors (Purchase x credit period) 31,875

b) Wages o/s (expense x credit period) 15,000

c) Overheads o/s (expense x credit period) 13,833

Total Current Liabilities (B) 60,708



1-Working Capital


Sales 4,32,000

--------------------------------- = --------------- = 24000 = Units Sold

SP 18

Question No. 32

Particulars PU Total(24,000) PU Total(48k)

Material 6.00 1,44,000 5.40 2,59,200

Wages

Variable 3.00 72,000 3.00 1,44,000

Fixed 2.00 48,000 1.00 48,000

PRIME COST 11.00 2,64,000 9.40 4,51,200

O/h

Vairable 1.00 24,000 1.00 48,000

Fixed 4.00 96,000 2.00 96,000

TC 16.00 3,84,000 12.40 5,95,200

Profit 2.00 48,000 5.60 2,68,800

SP 18.00 4,32,000 18.00 8,64,000

Year 1 Year 2

R 94.74 75.94

W 31.30 35.41

F 54.00 48.00

D 72.00 90.00

(-) C (60.00) (48.00)

192.04 201.35

op stock - 20.00

+ Purchases 96.00 135.00

- clsosing stock (20.00) (27.00)

RM consumed 76.00 128.00

op Finished St - 21.00

+ Cost of prod 161.00 183.00

- Cl Fin st (21.00) (24.00)

Cost of Goods sold 140.00 180.00

Operating Cycle

Question no. 33

Old New

RM Stock 36,000

WIP 22,000

F G Stock 72,000

Drs 1,08,000

Holding Periods

R = RM Stock/RM Cons *12 3.00 3.00

W = WIP St/PC *12 1.00 0.50

F = FS/COP *12 2.25 2.25

D =Drs/Sales *12 3.00 3.00

Creditors =given 2.00 2.00

Wages = given 0.50 0.50

Exp = given 0.50 0.50

1-Working Capital


1,996 1,995 1,994

Op stock-RM 85.00 80 78

Cl Stock-RM 88.00 85 80

Purchase-RM 320.00 300 250

Consumed-RM 317.00 295.00 248.00

Av stock-RM 86.50 82.50 79.00

R 98.23 100.68 114.68

Question No. 35

Op Stock-WIP 24 20

Cl Stock-WIP 25 24

Cons RM 317 295

Manu Exp 160 145

Dep 25 20

Excise -

Cost of Prod 501 456

Av stock-WIP 24.50 22

W 17.60 17

OP St-FS 100

Cl St-FS 98

Cost of Prod 501

Excise-Assumed to be incl in FS 65

Cost of Goods Sold 568

Av Stock 99

F 62.75

Op Drs 150

Cl Drs 152

Sales 825

Av Drs 151

D 65.89

1-Working Capital


Current Assets 1,000

Defferred Receivable due after 1 year (40)

960

Current Liabilities 200

Loan installment payable in a year 100

FD repayable in a year 100

VRS payable after 1 year (40)

360

Core Current Assets 25% of CA 240

Mehod 1- 75%*(CA-CL) 450

Method 2- 75%*CA - CL 360

Method 3- 75%*(CA-CCA) - CL 180

CR Used For CA Used for FA

Mehod 1- 75%*(CA-CL) (960+450)/(360+450) or 960/(360+450)1.74 1.19

Method 2- 75%*CA - CL 1.83 1.33

Method 3- 75%*(CA-CCA) - CL 2.11 1.78

Question No. 36

Current Assets

St-RM 100.00

St-WIP 150.00

St-FG 75.00

Drs 100.00

Cash 55.00

Total 480.00

Current Liability

Trade Creditors 80.00

Bills Payable 100.00

Total 180.00

Hard Core CA 30.00

Mehod 1- 75%*(CA-CL) 225.00

Method 2- 75%*CA - CL 180.00

Method 3- 75%*(CA-CCA) - CL 157.50

(CA+MPBF)/(CL+MPBF) CA/(CL+MPBF)

Mehod 1- 75%*(CA-CL) 1.74 1.19

Method 2- 75%*CA - CL 1.83 1.33

Method 3- 75%*(CA-CCA) - CL 1.89 1.42

Question No. 37

1 Working Capital

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