Chapter 5 : Working capital management

2001 Dec. 1b: The sales forecast for January to May, 2002 and the actual sales for November and December,2001 for Plysales Co. are given under : Nov.01 Dec.01 Janu.02 Feb.02 Mar.02 Apr.02 May.02 Actual sales in Rs. 80,000 70,000 Forecast sales in Rs. 80,000 100,000 80,000 100,000 90,000 20% of sales is in cash and rest is on credit, payment of which is realised in the third month. The following information are also available: (i) Amount of purchase is budgeted at 60% of the Sales Turnover of a month and paid in the third month of purchase. (ii) Variable expenses is 5% of turnover-time lag for payment half month. (iii) Commission of credit sales @ 5% is payable in the third month. (iv) Rent and other expenses amounting Rs. 3,000 paid every month. (v) Payment for purchase of fixed assets Rs. 50,000 in March,02. (vi) Payment for taxes in April,02 Rs. 20,000. (vii) There will be opening balance of cash of Rs. 25,000. You are required to prepare a Cash budget for the months from January to May 2002. Tutorial Notes: 1. Variable expenses payable @ 5% of turn over. The time lag is half month,. It implies that half of variable expenses is paid in the same month while next half is paid in next month. Working Notes: All figures in Rs. Solution : Computation of Cash and credit sales and commission: Nov.01 Dec.01 Janu.02 Feb.02 Mar.02 Apr.02 May.02 Sales 80,000 70,000 80,000 100,000 80,000 100,000 90,000 Cash sales 16,000 14,000 16,000 20,000 16,000 20,000 18,000 Credit sales 64,000 56,000 64,000 80,000 64,000 80,000 72,000 Commission payable* 3,200 2,800 3,200 4,000 3,200 Payment received 64,000 56,000 64,000 80,000 64,000 Purchases 48,000 42,000 48,000 60,000 48,000 60,000 54,000 Payment for purchases 48,000 42,000 48,000 60,000 48,000 Variable expenses 2.5% of current month and 2.5% of previous month sales. *5% of respective credit sales. Commission for Nov. is obtained in Jan. Plysales Ltd. Cash Budget for the period from January 02 to May 02 Janu.02 Feb.02 Mar.02 Apr.02 May.02 Receipts: Rs. Rs. Rs. Rs. Rs. Opening Balance 25,000 47,050 70,750 42,050 50,550 Cash sales 16,000 20,000 16,000 20,000 18,000 Collection from debtors 64,000 56,000 64,000 80,000 64,000 Total receipts 105,000 123,050 150,750 142,050 132,550 Payments : Payment to creditors 48,000 42,000 48,000 60,000 48,000 Variable expenses 3,750 4,500 4,500 4,500 4,750 Commission 3,200 2,800 3,200 4,000 3,200 Rent 3,000 3,000 3,000 3,000 3,000 Fixed assets 50,000 Taxes 20,000 Total payments 57,950 52,300 108,700 91,500 58,950 Closing Balance 47,050 70,750 42,050 50,550 73,600

Failure is success if we learn from it. 2001 Dec.3b X Ltd. currently has an annual turnover of Rs. 20 lakhs and an average collection period of 4 weeks. The company propose to introduce a more liberal credit policy which they hope will generate additional sales, as shown below : Proposed credit policy Increase in Increase of default % Collection period by in sales Rs. 1 2 weeks 200,000 2% 2 4 weeks 250,000 3% 3 6 weeks 350,000 5% 4 8 weeks 500,000 8% The selling price of the product is Rs. 10 and the variable cost per unit is Rs. 7. The current bad debt loss is 1% and the desired rate of return on investment is 20%. For the purpose of calculation, a year is to be taken to comprise of 52 weeks. Indicate which of the above policies you would recommend the company to adopt. Solution : Comparative statement of various credit policies Particulars Current Policy 1 Policy 2 Policy 3 Policy 4 Sales Rs. Lac 20.0 22.0 22.5 23.5 25.0 Contribution @ 30% 6.0 6.6 6.8 7.1 7.5 Bad debts % 1% 2% 3% 5% 6% Amount of bad debts Rs. Lac 0.2 0.4 0.7 1.2 1.5 Average collection period in weeks 4.0 6.0 8.0 10.0 12.0 Average debtors Rs. Lacs 1.5 2.5 3.5 4.5 5.8 Cost of debtors @ 20% 0.3 0.5 0.7 0.9 1.2 Contribution - bad debts -cost of deb. 5.5 5.7 5.4 5.0 4.8 The net benefit is the highest with policy 1 with credit period of 6 weeks. It is recommended for adoption. 2002 June 1b: Estimate the requirement of total capital of the following project with an estimated production of 250 tonne per annum of chemical X, presently imported and which can be entirely sold at the rate of its landed cost of Rs. 8,500 per tonne. You are also required to find out: (i) % of yield on investment (ii) % of profit on sales (iii) rate of cash generation per annum before tax. Details of the proposed project for expected production of 250 tonne are as under : (i) Investment (Rs.) Land 100,000 Building 800,000 Plant & machinery 1,200,000 (ii) Cost of production per annum (Rs. ) Imported raw material 650,000 Indigenous raw material 626,000 Salaries and wages 135,000 Repairs and maintenance 5% of plant cost and 2% on building Depreciation 7% on plant and 2.5% on building Admn. and other expenses 50000 Steam requirement per tonne @ Rs. 16 per tonne Power 6000 Packing drums (500 gms capacity) Rs. 30 each (iii) Working capital requirement : Imported Raw materials stock 6 months Indigenous raw materials stock 3 months Stock of finished goods 1 month Credit to customers 1 month Credit from suppliers (indigenous materials) 1 month Cash expenses 1 month

Solution :

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2002June 2a CIKA Ltd. has an and of 350 days.

Solution :

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2002 Dec 11 The Chief Financial Officer of Agra Oil Company has produced the following summary forecast profit statement and balance sheet of the company for the next twelve months: Rs. lacs Rs. lacs Summary of profit forecast Sales income 200,000 tins of oil at Rs. 600 per tin 1,200 Less : Variable cost 900 Less : Fixed cost 150 1,050 Profit 150 Summary of Balance sheet : Investment in fixed assets 1,500 Investment in Working capital Debtors 200 Stock 80 Cash 304 24 Less : Current liabilities (60) Total Investment (fixed assets + working capital) 1,744 Profit as return on investment : 8.6%. The directors are worried over the forecast low return on investment specially as a lot of the in in fixed assets will remain under-utilised. A detailed study shows that selling price cannot be increased nor the costs be reduced. So there is a dire need to increase the sales volume. Currently all sales are on credit and the company operates a very strict credit control procedure which has virtually eliminated bad debts. Because of this a number of potential customers have had to be refused and some new customers have taken their business elsewhere. The suggestion has been made that a relaxation of the credit policy could increase sales volume substantially specially if, the company were the company were to introduce a scheme whereby a 2% discount (at present no discount is given) were given on accounts paid within ten days and if the company is willing to accept 'riskier' customers, the sales volume would increase by 40%. Probably 65% of the customers would avail themselves cash discount and the average collection period of the remainder would be half of what it is at present. Bad debts would be the order of 2% to 6% of sales. Comment on whether the credit policy should be relaxed as suggested. Ignore taxation. State your assumptions, if any. Solution : Tutorial Notes 1. Following assumptions are made : (i) The variable cost, debtors and creditors move proportional to sales volume. (ii) Fixed cost remains same despite increase in sales volume. 2. The question says that if discount of 2% would be given, the sales would increase by 40% (over current sales of Rs. 1,200 lacs) and 65% of the customers would avail the discount facility. What should be the total discount in Rs. ? 3. The total discount would be 2% of 65% of Rs. 1,680 lacs i.e. Rs. 21.84 say Rs. 22 lacs. Show this as working note. 4. With proposed credit policy, the collection period would be half of what is present. What is the present collection period? Read the question again and find out.

5.How can you compute the investments required in debtors in proposed policy? Try to calculate before you see the solution. 6. Try to compute the total investment required in proposed policy. The investment will consist of fixed assets (given as Rs. 1,500 lacs) and current assets viz. Stock, Debtors and Cash. 7. If you take collection period in days, you may take year as 365 days. Present Proposed Sales in Rs. lacs (40% above 1,200) 1,200 1,680 Less Variable cost @ 75% of sales 900 1,260 (assumed to be proportional to sales) Contribution 300 420 Less : Fixed cost 150 150 (assumed to be constant) Profit 150 270 Less : discount 0 22 (2% of 65% of 1,680) Profit after discount 150 248 The bad debts are from 2% to 6%, the range of profit for proposed sales would be Bad debts to customers 2% 6% Profit before bad debts 248 248 Bad debts on sales (Rs. 1,680 lacs) 34 101 Profit after discount 214 147 Thus for bad debts range of 2% to 6%, the corresponding profit range will be Rs. 214 lacs to Rs. 147 lacs. Computation of Investment required : 1. The investment in debtors would be in two types of debtors (i) those who avail the options i.e. 65% of credit sales (in this question, all sales are credit sales) and (ii) those who receive cash discount of 2% and pay within 10 days. 65% avail discount and pay within 10 days, the investment required would be : 65% of Rs. 1,680 lacs x (10 / 365) = Rs. 30 lacs For remaining debtors i.e. 35%, the collection period would be half of what is at present. The present collection period is indirectly given. Total sales at present is Rs. 1,200 lacs per annum or Rs. 100 lacs per month and total debtors are Rs. 200 lacs. Thus present collection period would be two months. The collection period with proposed credit policy would be one month. 35% of debtors take one month to pay. The investment in them would be : 35% of Rs. 1,680 lacs x 30 / 365 Or 35% of Rs. 1,680 lacs x 1/12, both are correct. Investment in debtors : 35% x Rs. 1,680 lacs x 1/12 = Rs. 49 lacs Comparative statement of present and proposed policy Present Proposed (figures in Rs. lacs) Sales 1,200 1,680 Investment in fixed assets 1,500 1,500 Investment in current assets Stock Stock 80 112 (proportional to sales) Debtors 200 79 (as computed above) Cash 24 34 (proportional to sales) Less : Current liabilities (60) (84) (proportional to sales) Total Investment 1,744 1,641 Return with profit of Rs. 214 lacs (with bad debts of 2%) 13% (214 / 1,641) Return with profit of Rs. 147 lacs (with bad debts of 6%) 9% (147 / 1,641) Recommendation : Current return on investment is 8.6% (150 / 1,744). The return with 2% bad debts is 13% and that with 6% is 9%. In view of more return, the proposed credit policy is recommended to be adopted. 2004 Dec 8 (b)

Hindustan Products Ltd. is considering the revision of its credit policy with a view to increasing its sales and profits. Currently all its sales are on credit and the customers are given one month's time to settle dues. It has a contribution of 40% on sales and it can raise additional funds at a cost of 20% per annum. The marketing director of the company has given the following options with draft estimates for consideration : Particulars Current Option-1 Option-2 Option-3 Sales Rs. Lac 200 210 220 250 Credit period months 1 1.5 2 3 Bad Debts as % of sales 2 2.5 3 5 Cost of administration Rs. Lac 1.2 1.3 1.5 3 Advise the company to take the right decision. Solution : fig. in Rs. Lacs Particulars Current Option-1 Option-2 Option-3 Sales Rs. Lac 200 210 220 250 Credit period months 1.0 1.5 2.0 3.0 Debtors (sales for credit period) 16.7 26.3 36.7 62.5 Cost of debtors @ 20% 3.3 5.3 7.3 12.5 Credit administration cost 1.2 1.3 1.5 3.0 Bad Debts as % of sales 2.0 2.5 3.0 5.0 Bad Debts 4.0 5.3 6.6 12.5 Total cost (debtors + admin.+bad debts) 8.5 11.8 15.4 28.0 Contribution as 40% of sales 80.0 84.0 88.0 100.0 Net Gain 71.5 72.2 72.6 72.0 Option 2 provides highest gain. It is recommended for adoption. 2005 Dec 4a: The Marketing manager. Provision for bad debt?

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2005 Dec 4b: ABC company currently sells on terms 'net 45'. The company has sales of Rs. 3.75 million a year with 80% being the credit sales. At present, the average collection period is 60 days. The company is now considering offering term ' 2/10 net 45'. It is expected that the new credit terms will increase current credit sales by 1/3 rd. The company now expects that 60% of the credit sales will be on discount and average collection period will be reduced to 30 days. The average selling price of the company's product is Rs. 100 unit, and variable cost per unit works out to be Rs. 85. The company is subject to tax rate of 40% and its before tax borrowing for working capital is 18%, Should the company change its credit terms to '2/10 net 45 days'? Support your answer by calculating the expected change in net profit. (Assume 360 days in a year). Solution : Tutorial notes : Discounts are generally given to speed up the payment of debts. Suppose a firm has an annual sales of Rs. 300 lacs. The monthly sales would be Rs. 25 lacs and if the collection period is say 2 months, the investment in debtors would be Rs. 50 lacs. Suppose 3% discount is proposed to be given for cash discount who pay cash immediately. Suppose further that 50% of debtors decides to avail the discount offer, this means that Rs. 25.0 lacs (50% of total debtors) would be released on account of discount offer in every two months. The discount paid to debtors for this release would be 3% of Rs. 25 lacs i.e. Rs. 75,000 every two months or say Rs. 4.5 lacs per annum. If the cost of Rs.25 lacs for one year is greater than Rs. 4.5 lacs, the discount should be given.

Suppose further that ROI of the firm is 20%, it is obvious that the firm will gain Rs. 25 lacs for the whole year and the return would be 20% of Rs. 25 lacs i.e. Rs. 5 lacs. As the discount to be given is Rs. 4.5 lacs, the saving of Rs. 50,000 (5.0 lac less 4.5 lac) justifies the new policy. The credit terms may be expressed as ''2/15 net 45''. This means that a 2% discount will be granted if the customer pays within 15 days, if he does not avail the offer he must make payment within 45 days. Debtors can be calculated on sales or on cost of sales. If cost of sales is given as in the present case, it is better to calculate debtors on cost of sales rather than on sales. Illustration : A company has annual sales amounting to Rs. 10.0 lacs for which it grants a credit of 60 days. At present no discount is offered to customers. The company is considering a plan to offer a discount '3/15 net 60'. The offer of discount is expected to bring the total credit period from 60 days to 45 days and 50% of the customers (in value) are likely to avail the discount facility. The selling price of product is Rs.15 and its variable cost is Rs. 12. Please advise the company which to resort to discount facility if the rate of return is 20% and a month is equal to 30 days. Annual credit sales Rs. 10.0 lacs Present investment in receivables : Collection period is 60 days and cost of sales is 80% (12/15) of sales. The investment is considered in cost of sales and not in sales. Present investment would be cost of sales for 60 days collection period and expected investment would be cost of sales for 45 days period. Present investment in receivables : 10.0 x (60/360) x 80% Rs. 1.34 lacs Expected investment in receivables : 10.0 x (45/360) x 80% Rs. 1.00 ;acs Saving in investment Rs. 0.34 lacs Return on saved investment @ 20% per annum (0.34 x 0.2) Rs. 6,800 Cash discount to be given : 3% x 50% x Rs. 10.0 lacs Rs. 15,000 The company gives Rs. 15,000 as discount and gains Rs. 6,800 on account of saving, the policy is not recommended. In the present case there will be two gains (i) increased contribution from increase in sales and (ii) Return on savings in investment. Total gains will be compared with the discount proposed to be given.

Discount to be given 2% of 60% of Rs. 40.0 lacs Computation of return due to saving in investment : Present investment is for a period of 60 days 30 x (60/360) x 85% Proposed investment is for a period of 30 days 40 x (30/360) x 85% Saving in investment Return due to saving in investment (@18%) 18% of Rs. 125,000 Computation of increased sales Contribution from present sales (15% of Rs. 30 lacs) Contribution from increased sales (15% of Rs. 40 lacs) Extra contribution due to discount policy Evaluation of Discount policy : Extra contribution Return on saving Total gain Less : Discount to be given Overall gain 2005 Dec 5b:

48,000 Rs. 425,000 300,000 125,000 22,500 450,000 600,000 150,000 150,000 22,500 172,500 48,000 124,500

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2006 Dec 6c: The annual turnover of VIBGYOR Limited is Rs. 12 million of which 80% is on credit. Debtors are allowed one month to clear off the dues. AllBank Factors Ltd. (a factor company) is willing to advance 90% of the bill raise on credit for a fee of 2% a month plus a commission of 3% on the total amount of debts. Vibgyor ltd. as a result of this arrangement, is likely to save Rs. 43,200 annually in management costs and avoid bad debts at 1% on the credit sales. A scheduled bank has come forward to make an advance equal to 90% of the debts at an interest rate of 12% per annum. However, the processing fee will be 2% on the debt. Should the company avail of the factoring service or offer of the bank? Give reasons. Solution ; Tutorial Notes

Factoring
The factors are organizations which assist the company in credit collection and management. A factor provides three basic services to clients : (i) Maintaining the credit sales ledgers (ii) credit collection and protection against bad debts (iii) Providing financial assistance to the company by providing advance payments against receivables/debtors. There are two types of costs involved in factoring (i) commission or service fee (ii) interest on advance granted by the factors to the firm. To properly understand the concept of factoring let us take Illustration from (CWA Final June 00) A small firm has a total credit sales of Rs. 80 lakhs and its average collection period is 80 days and bad debt losses are 1%. The variable and avoidable cost of credit administration is Rs. 120,000. A factor is ready to buy the firm's receivables at 2% commission and will pay advance against the receivables to the firm at an interest rate of 18% after withholding 10% as reserve. What should the firm do ? Rs. lacs Average debtors or receivables (80 / 360) x 80 days 17.78 The advance which the factor will pay will be average debtors less factoring commission, reserves and interest on advance. Factoring commission will be 2% on the total receivables. The factor will also withhold 10% as reserve. The Advance given by factor : Total receivables 17.78 Less : Factoring commission @ 2% 0.36 Less : Reserve as 10% 1.78 2.13 Advance to paid by the factor 15.65 At the time of giving advance, the factor will deduct the interest to be paid to him at 18%. Advance to be paid 15.85 Less : Interest @ 18% for 80 days on Rs. 15.85 lacs 0.63 Net advance to be paid to the firm 15.22 Let us calculate effective cost of factoring to the firm : The firm saves the following costs : Cost of credit administrative set up 1.20 Cost of bad debt losses 0.80 Total saving per annum 2.00 The firm incurs the following costs : Factoring commission 2% of total debts 1.60 Interest charges (0.63 x 360) / 80 2.84 Total cost incurred per annum 4.44 Net cost of factoring : 4.44 2.00 = Rs. 2.44 lacs per annum. This means that the firm has to pay Rs. 2.44 lacs against a deposit of Rs. 15.22 lacs received from the factor. The effective cost of factoring is ( 2.44 / 15.22) The solution to present problem goes as follows: 16.0%

The solution goes as follows:

1. Compute the cost of factoring and compare it with the cost of bank advances. Lesser of the two should be recommended. 2. Cost of factoring per month Cost of fee at 2% of monthly sales Commission at 3% on monthly sales Saving due to factoring 1% saving of bad debts on monthly sales Net cost of factoring per month You should try to fill the above and determine the cost of factoring. 3. Question is silent about the processing fee of bank advance. In general processing fee is taken one time when the loan formalities are processed. The cost is calculated on per month basis. Hence processing will be added on monthly basis. Cost of bank advances : Interest per month on 90% of 80% of Rs. 120 lacs Add: Processing fee at 2% of monthly sales of Rs. 8.0 lacs Add: Bad debts which cannot be avoided (1% of Rs. 8.0 lacs) Note : Processing fee will be applicable on first year only. In computation for subsequent years, the processing fee will not figure. Add : Less: Less: Please try to solve this on the above lines and compare your solution with the one given below. Total sales : Rs. 120 lacs; Credit sales : 80% of 120 i.e. Rs. 96 lacs. Monthly credit sales : Rs. 8.0 lacs. 2. Cost of factoring per month Cost of fee at 2% of monthly sales 2% of 90% of Rs. 8.0 lacs 14,400 Add : Commission at 3% on monthly sales 3% of Rs. 8.0 lacs 24,000 38,400 Less: Saving due to factoring (43,200 / 12) (3,600) Less: 1% saving of bad debts on monthly sales (8,000) (11,600) Net cost of factoring per month 26,800 Cost of bank advances : Interest per month on 90% of 80% of Rs. 120 lacs 7,200 Add: Processing fee at 2% of monthly sales of Rs. 8.0 lacs 16,000 Add: Bad debts which cannot be avoided (1% of Rs. 8.0 lacs) 8,000 31,200 Comment : Cost of factoring is Rs. 26,800 per month while cost of bank advances is Rs. 31,200. The company should avail of factoring service. Note : Processing fee will be applicable on first year only. In computation for subsequent years, the processing fee will not figure. For subsequent years, cost of factoring would be Rs. 26,800 and cost of bank advances would be Rs. 15,200. If the arrangement is going to last for longer duration, the bank advances would be beneficial for the company. 2007 June [7b] VIBGYOR Ltd. has sales of Rs. 250 million a year with 80% being credit sales. The present credit terms of the company are '2/15 net 45'. At present the average collection period is 30 days. The proportion of sales on which customers currently take discount is 0.50. Vibgyor Ltd. is considering relaxing its discount terms to '3/15 net 45'. Such a relaxation is expected to increase current credit sales by Rs. 10 million and reduce the average collection period to 27 days and increase the proportion of discount sales to 0.60. The average selling price of product is Rs. 1,000 per unit and variable cost per unit is Rs. 800. The company is subjected to a tax rate of 40% and its before tax, rate of borrowing for working capital is 12%. Should the company change its credit terms to '3/15 net 45'? Support your answer by calculating the expected change in net profit. (assume 360 days in a year). Solution : Tutorial Notes

1. Compute the increase in contribution due to increased sales. This is first benefit of the new policy. 2. Due to new policy, the collection period would come down to 27 days from current period of 30 days. This will reduce the investment in debtors. The reduction will save @ 12% per annum. The saving will be taxed at 40%. This saving after tax is the second benefit. 3. Due to new policy, the discount of 2% will be increased to 3%. The increase in discount given, would be the loss of new policy Additional contribution due to new policy : 20% of Rs. 10 million i.e Rs. 2.0 million Current Proposed Sales 200.00 210.00 Collection period in days 30.00 27.00 Debtors 200/30 and 210/27) 16.67 15.75 0.917 Reduction in debtors due to change in discount rate = 16.67 15.75 = 0.92 This investment would result in saving at the rate of 12%. The saving will be subject to tax rate of 40%. Saving due to reduction in investment 12% of Rs. 0.92 million 0.1104 Rs. million Less : Tax on saving at the rate of 40% 0.0442 Rs. million Net saving after tax 0.0662 Rs. million Now let us compute the increase in discount cost and compare it with net saving due to reduction in investment. At present 50% customers (debtors) take advantage of 2% discount. Total sales is Rs. 250 million. 80% of total sales i.e. Rs. 200 millions is credit sales. Half of credit sales i.e. Rs. 100 million take advantage of discount policy. Thus discount given would be 2% of Rs.100 million i.e. Rs.2 million With the introduction of new discount policy, the credit sales would increase by Rs. 10 million. Thus the credit sales would be Rs. 200 million plus Rs. 10 million i.e Rs. 210 million. 60% of credits sales will avail the discount (3%) offer. The discount given as per new policy would be 3% of 60% of Rs.210 million i.e. Rs. 3.78 million You should present the above narration as given below Rs. million Current discount given 2% of 50% of 80% of Rs. 250 million 2.00 Discount proposed 3% of 60% of Rs. 210 million 3.78 Extra discount given due to new policy 1.78 Extra contribution due to discount policy 2.000 Add : Saving due to new policy (net) 0.066 2.066 Less : Additional discount to be given 1.780 Net benefit due to new policy 0.286 Comment : In view of the additional benefit of Rs. 0.286 million, the new policy is recommended.
2008 CWA Final Dec. The Hyundai Instrument Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (dso) on its cash flow cycle. The Hyundai corporation's sales last year (all on credit) were Rs. 150,000 and it earned a net profit of 6%. Its inventory turnover ratio was 5 and DSO was 36.5 days. The firm had fixed assets totaling Rs. 35,000 and its payable period is 40 days. Calculate : (i) Cash Conversion Cycle (ii) Total assets turnover and ROA, if it holds negligible amounts of cash and marketable securities and (iii) Cash conversion cycle, Total asset turnover and Return on Assets, if its Inventory Turnover can be raised to 7.3. Solution : Cash Conversion Cycle = Inventory Conversion period + Receivable collection period less Payable Deferral period. Cash Conversion Cycle = 365 / 5 + 36.5 - 40 = 69.5 days. Total Assets Turnover = Sales / Total Assets. Sales has been given as Rs. 150,000 but you have to compute the Total Assets. Think how can you calculate the Total Assets.

Total Assets will consist of Inventory, Receivables and Fixed assets. Inventory turnover is 5 which means sales are 5 times the inventory. The sales are Rs. 150,000 meaning that the inventory must be 150,000 / 5 = Rs. 30,000. Inventory can also be calculated on the basis of Cost of goods sold but the question is silent about it, hence it can be safely assumed that inventory turnover ratio is related to Sales and not to Cost of goods sold. You can write a note in this respect in your answer. Receivable are collected in every 36.5 days. The year is of 365 days and yearly sales are Rs. 150,000. The DSO is 36.5 days which means that at any point, sales of 36.5 days are outstanding which constitute the receivables. Thus receivables must be 150,000 / 365 x 36.5 = Rs. 15,000. The Fixed assets are given as Rs. 35,000. Thus total assets are Rs. 30,000 + Rs. 15,000 + Rs. 35,000 = Rs. 80,000. The sales are known. You can know the Total Assets Turnover. Total Assets = Inventory + Receivables + Fixed assets Total Assets = Rs. 150,000 /5 + (150,000/365) x 36.5 + Rs. 35,000 = Rs. 80,000 Total Assets = 150,000 / 80,000 = 1.875 ROA stands for Return on Asset. The return is net profit i.e. 6% of sales. The return works out to Rs. 9,000 and total assets as computed are Rs. 80,000. Return on assets must be 9,000 / 80,000 = 11.25%. (iii) The third part is just repetition of second part. Inventory turnover is 7.3 which means sales are 7.3 times the inventory. The inventory must be Rs. 150,000/7.3 = Rs. 20,548. Other assets viz. receivables and fixed assets are same. Total assets are Rs. 20,548 + Rs. 15,000 + Rs. 35,000 = Rs. 70,548. The ROA = 9,000 / 70,548 = 12.7%. Cash conversion cycle = 365/73 + 36.5 - 40 = 46.5 days. Total assets turnover = 150,000 / 70,548 = 2.12 and ROA = 9,000 / 70,548 = 12.7%.

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