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Working Capital Management

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

e. Q4. 650000 Percentage of net profit on cost of sales 25% Average credit allowed to customers 10 weeks Average credit allowed by suppliers 4 weeks Average stock (for sales requirements) 8 weeks Add 10% to computed figure for contingencies. calculate the working capital requirements:Budgeted sales Rs. But if it orders more than 30 000 units it would be cost effective to order from company B but for units that are R36 000 and less it would be advisable to order from company A.10 of contingencies 41 248 Working Capital Required = 185 000 – 41 248 = 143 752 = 144 000 Working capital required = Rs.75 37 498 × 1.10 × 30 000= Rs.Company B = Rs. From the information given below. Average stock required for sale 650 000 × 8/52 × 75/100 650 000 × 0. . 3000 = Rs. 36 000 The firm can buy from either A or B . 1.192 × 0.154 × 0.75 93 600 × 1.75 73 000 × 1. 33 000 + Rs.10 of contingencies 103 000 Total current Assets 185 000 Less creditors 650 000 × 4/52 × 75/100 650 000 × 0. 144000.07692 × 0. sundry debtors) 650 000 × 10/52 × 75/100 650 000 × 0.10 of contingencies 82 500 Average credit allowed to customers ( i.

15382 =84 000 Cash Balance = Rs 30 000 Total Current Assets = 205 500 2600 tons 3 weeks 2 weeks 5 weeks 8 weeks 5 weeks 80% of sales 25% of sales Rs.03846 = 14 999.40 = 15 000 Stock of finished goods = ( 2 600 × 200 × 105/100 × 5/52) = 2 600 × 200 × 1.05769 = Rs 24 000 Stock of work in progress = (2 600 × 200 × 75/100 × 2/52) = 2 600 × 200 × 0.Calculate the estimate of working capital required by an organization:Expected annual production Stock of raw materials Processing period Stock of finished goods Credit period to customers Credit allowed by the suppliers Price of raw material Wages and overheads Selling price Cash balance needed Working Capital required Stock of raw material = ( 2 600 × 200 × 80/100 × 5/52) = 2 600 × 200 × 0.8 × 0. 30000 .09615 =52 497.05 × 0.75 × 0.90 =52 500 Sundry debtors = ( 2 600 × 200 × 105/100 × 8/52) = 2 600 × 200 × 1.Q5:. 200 per ton Rs.05 × 0.

All the sales is on credit. Interest on securities 14. Q2:. Working capital required = Rs. 900. From the following figures calculate the period of operating cycle and estimate the amount of working capital required:Rs.4 Stock of raw material Stock of work in progress Stock of finished goods Sundry debtors Purchase of materials Wages and manufacturing expenses Administrative & selling expenses Sales Assume 360 days in a year.Less Creditors = ( 2 600 × 200 × 80/100 × 5/52) = 2 600 × 200 ×0.B Limited gives the following information about its liquidity. .40 = 40 000 Required working capital = 205 500 – 40 000 = 165 500 ASSIGNMENT B . 100000.4% per annum Fixed cash on sale of securities Rs.THREE ANALYTICAL QUESTIONS + 1 CASE STUDY ) Q1.8 × 0. 1.4. 35000 10000 30000 50000 --------Rs.09615 = 39 998. 300000. Operating cycle period = 120 days. 31-3-05 55000 30000 10000 50000 200000 80000 40000 500000 The company obtains credit of 60 days from its creditors. Cost of goods sold = Rs.

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

Collection charges will be in (1) 2%. a) Credit policy number 1 Contribution on additional sales Less bad debt @ 2 % of 100 000 Less collection charges @ 2% of 100 000 Investments in additional sales 100 000 × 15/360 × 5/100 Rs 100 000 2 000 2 000 208 Additional profit Rs 96 792 12% interest rate of investment(12% of 15792) RS 11 495 Net profit Rs 84 297 Percentage contribution on additional sales 84 297/100 000 =84. and 10% respectively.75% c) Credit policy number 3 Contribution on additional sales Less bad debts @ 10% of 700 000 Less collection charges @ 10% of 700 000 Rs 700 000 70 000 70 000 .29% b) Credit policy number 2 Contribution on additional sales Less bad debt @ 4% of 300 000 Less collection charges@ 5% 300 000 Investment in additional sales= 300 000×30/360 Additional profit 12% interest rate on investment Net additional profit Rs 300 000 Rs 12 000 Rs 15 000 25 000 218 000 29 760 218 240 Percentage contribution on additional sales = 218 240/ 300 000 = 72. (2) 5% and (3) 10% of sales. Bad debts are expected at 2%. 4%. state which policy should be adopted. Assuming interest on investment @ 12% per annum. Below is an analysis of the policies.

73 = 55. A company following of conservative working capital policy will finance its current assets more from long term sources. Illiquidity c.Investment in additional sales 700 000 x 60/360 12% interest rate on investment Net additional profit Ratio of cross profit to contribution on additional sales = 390 133 / 700 000 = 55.7 % 116 667 53 200 390 133 Based on the above calculations. A company following an aggressive working capital policy will finance its current assets more from long term sources. Technical insolvency d. The results of overtrading may be a. b. Both b and c above 2. Overcapitalization b. Which of the following is/are true? a. . it will be advisable to adopt policy one because it has better returns ASSIGNMENT C (MULTIPLE CHOICE OBJECTIVE QUESTIONS) MULTIPLE CHOICE QUESTIONS 1.

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

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

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

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

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

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

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

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

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

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