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Test Questions Working Capital

 

1. What is the concept of working capital ?

 

2. Define working capital.

 

3. List out the various kinds of working capital.

 

4. What is meant by Gross working capital ?

 

5. What is Net working capital ?

 

6. What is meant by core current assets ?

 

7. What is meant by variable working capital ?

8. Explain the concept of operating cycle.

 

9. What are the stages of operating cycle ?

 

10. Briefly explain the various advantages of working capital.

 

11. Explain the various disadvantages of working capital.

 

12. What are the disadvantages of excessive working capital ?

 

13. Describe the various determinants of working capital in a business concern.

 

14. What are the sources of short-term working capital ?

 

15. Discuss the new trends in financing of working capital by banks.

 

16. Discuss the various techniques of forecasting working capital of a concern.

 

17. Explain the procedure for computation of working capital.

 

PROBLEMS AND SOLUTIONS

 

Problem 1. From the following information, prepare a statement in column form showing · the working capital requirements. (i) In total and (ii) As regards each constituent part of working capital.

 

Budgeted sales ( $10 per unit) $2,60,000 p.a.

Analysis of Costs                                  $

Raw Materials                         3.00

Direct Labour                          4.00

Overheads                               2.00

Total Cost                               9.00

Profit                           1.00

Sales                            10.00

 

It is estimated that

(i)                 Raw materials are carried in stock for three weeks and finished goods for two weeks.

(ii)               Factory processing will take three weeks.

(iii)             Suppliers will give full five weeks credit.

(iv)             Customers will require eight weeks credit.

It may be assumed that production and overheads accrue evenly throughout the year.

 

 

 

Solution : Statement of Working Capital Requirement

 

Current Assets                                                                        $

 

Raw Materials 78,000 x 3/52      =                  4,500

Work in Progress (Note)              =                 9,000

Finished Goods 2,34,000 x 2/52  =                9,000

Debtors 2,60,000 x 8/52               =                40,000

 

Less : Current Liabilities                           =                62,000

Trade Creditors (5 weeks) 5/52 x 78,000 =    7,500

Working Capital Required                               55,000

 

Working Notes:

 

(i) Number of Units                                                    =    26,000

(ii) Finished Goods

Raw Materials 26,000 x 3                              =   78,000

Direct Labour 26,000 x 4                                =   1,04,000

Overheads 26,000 x 2                                     =   52,000

Finished Goods                                                           2,34,000

 

(iii) Work in Progress

Raw Material 78,000 x 3/52                           =    4,500

Labour 1,04,000 x 3/52 x 112                         =    3,000

Overhead 52,000 x 3/52 x 112                       = 1,500

Work in Progress                                                            9,000

 

(i)                 NOTE : (i) Normally finished goods and work in progress are taken as same value. Suppose wages and overheads accrue evenly throughout the year given in the problem, we have to find out the work in progress value separately. At that time of computing work in progress labour, overhead value is reduced to half.

 

(ii)               At the time of calculating working capital, debtor value will be taken as either including profit element or excluding profit element.

 

Problem 2. Prepare a working capital forecast from the following information :

 

Issued share capital                 4,00,000

12% Debentures                      1,50,000

 

The fixed assets are valued at $3. 00 lakhs. Production during the previous year is

1.00 lakh 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                                     50%

Direct Wages                                        10%

Overheads                                              25%

 

The raw materials ordinarily remain in stores for 2 months before production. Every unit of production remains in process for 2 months. Finished goods remain in the warehouse for 4 months. Credit allowed by creditors is 3 months from the date of delivery of raw materials and credit given to debtors is 3 months from the date of dispatch.

 

Selling price is $ 6 per unit. Both the production and sales are in a regular cycle.

 

   Solution:                              Working Capital Statement

$

Raw Materials                                                  50,000

Work in Progress                                             67,500

Finished Goods                                               1,70,000

Debtors                                                           1,27,500

4,15,000

Less : Creditors                                                  75,000

Working capital required                                3,40,000

 

Working Notes :

                      Number of units               =

Sales Value = 1,00,00      =

Material = 6,00,000 x 50/100   =

Labour= 6,00,000 x 10 /100 =

Overheads = 6,00,000 x 25 /100   =

 

(i) Finished Goods

Raw Materials        =

Direct Labour      =

Overheads =

i.e., 5,10,000 x 4/12   =

 

(ii) Work in Progress

Raw Materials    = 3,00,000 x 2/12  =

Direct Labour= 60,000 x2/12 x 1/2  =

Overheads = 1,50,000 x 2  / 12x 1/2 =

 

 

(iii)                    Debtors = 5,10,000 x 3/12 =

(iv)                  Creditors = 3,00,000 x 3/12 =

1,00,000

6,00,000

3,00,000

60,000

1,50,000

 

 

3,00,000

60,000

1,50,000

5,10,000

1,70,000

 

 

50,000

5,000

12,500

 

67,500

 

1,27,500

75,000

 

 

Problem 3. The management of G Ltd has called for a statement showing the working capital needed to finance a level of 3,00,000 units of output for the year. The cost structure for the company’s product, for the above mentioned activity level is detailed below.

Cost Element                                                  Cost per unit ($)

Raw Materials                                                         20

Direct Labour                                                           5

Overheads                                                                15

Total Cost                                                              40

Profit                                                                      10

Selling Price                                                            50

 

Past trends indicate that raw materials are held in stock on an average for two months.

Work in progress will approximate to half a month’s production.

Finished goods remain in warehouse on an average for a month.

Suppliers of materials extend a month’s credit.

Two months’ credit is normally allowed to debtors.

A minimum. cash balance of  $  25,000 is expected to be maintained.

The production pattern is assumed to be even during the year. Prepare the statement of working capital determination.

 

Solution :                    Working Capital Statement (or)

Statement of Working Capital Requirement

 

Current Assets

Raw Materials60,00,000  x  2/12            =

Work in Progress                                       =

Finished goods  1,20,00,000 x 1/12        =

Debtors          1,50,00,000 x 2/12            =

 

Less : Current Liabilities

Sundry Creditors 60,00,000 x 1/ 2

 

Add : Minimum Cash Balance

Working Capital

 

Workings :

(i) Finished Goods

Raw Materials     3,00,000 x 20

Direct Labour      3,00,000 x 5

Overheads           3,00,000 x 15

Finished Goods

 

 

10,00,000

3,75,000

10,00,000

25,00,000

48,75,000

 

5,00,000

43,75,000

25,000

44,00,000

 

 

 

60,00,000

15,00,000

45,00,000

1,20,00,000

 

Solution:                           Statement of Working Capital  requirement

 

Current Assets

Finished products and work in progress  =

Stores, Material etc.                               =

 

Account Receivable

Local Sales 78,000 X 2/  52

Outside the state  3,12,000 X 6  / 52 = 36,000          =

Total Current Assets

Less : Current Liabilities

 

Account Payable 96,000 x  4/52                                    =

Outstanding wages 2,60,000 x 2 /52                              =

Total Current Liabilities

Working Capital

Add : 10% Contingencies (34,615 x 10/100)

Working Capital required

 

 

$.

5,000

8,000

13,000

 

 

3,000

36,000

52,000

 

 

7,385

10,000

17,385

34,615

3,462

38,077

 

Assignment Problem

 

Problem 6. Ram Ltd decided to purchase a business and has consulted you and one point on which you are asked to advice them is the average amount of working capital which will be required in the first year workings.

 

You are given the following estimates and are instructed to add 10% to your computed figure to allow for contingencies.

 

(i) Average amount locked up for the stocks

Stock of finished products

Stock of stores materials etc.

 

(ii) Average credit given

Inland sales-6 weeks credit

Export sales-11/2 h weeks credit

 

(iii) Lag in payment of wages and other outgoing

Wages-11 /2 h weeks

Stores, Materials etc. 11/2h months

Rent Royalties etc. 6 months

Clerical Staff-l 1/2 month

Manager-1/2 month

Miscellaneous Expenses-1h month

 

(iv) Payment in advance

Sundry Expenses (Paid Quarterly in advance)

 

(v) Undrawn profits on the average throughout the year

  $

5,000

8,000

 

 

3,12,000

78,000

 

2,60,000

48,000

10,000

62,400

4,800

48,000

 

 

 

8,000

 

11,000

 

Set up your calculations for the average amount of working capital required.

 

Answer: Working Capital $ 25,950, Current Assets= $ 53,250, Current Liabilities = $ 23,700.

 

 

Problem 7. From the following estimates of Sethal Ltd you are required to prepare a forecast of working capital requirements.

 

(i) Expected level of production for the year 15,600 units

(ii) Cost per unit : Raw Materials $ 90, Direct labour $  40, overheads $ 75.

(iii) Selling Price per unit $ 265

(iv) Raw Materials in stock on an average for 1 month

(v) Materials are in process on an average for 2 weeks.

(vi) Finished goods in stock on an average for 1 month.

(vii) Credit allowed by suppliers is one month.

(viii) Time lag in payment from debtors is 2 months.

(ix) Lag in payment of wages 11/2 weeks.

(x) Lag in payment of overheads is one month. All sales are on credit.

(xi) Cash in hand and at Bank is expected to be $ 60,000.

 

It is assumed that production is carried on evenly throughout the year. Wages and overheads accrued evenly and a period of 4 weeks is equivalent to a month.

 

Solution :                                Statement of working capital Requirement

 

Current Assets

Raw materials 1,08,000  x 1   =

Finished goods 2,46,000  x 1

Debtors 2 months 2,46,000 X 2

Work in progress

Cash in hand and at Bank

 

 

Less : Current Liabilities

Creditors 1,08,000 x 1

Lag in payment of wages 1112 weeks

48 000 X 3/2 x 1/4

Lag in payment of overheads (90,000 x 1)

 

Working capital required

[9,94,500 – 2,16,000]

 

Working notes :

 

 

1,08,000

2,46,000

4,92,000

88,500

60,000

9,94,500

 

1,08,000

 

 

18,000

90,000

2,16,000

7,78,500

Estimated sales                                         = 15,600 units

A period of 4 weeks is taken as equivalent to one month.

 

Therefore, sales per month = 15,600 x 52

Estimated sales per month = 265 x 1,200

Raw Materials p.m. 1,200 x 90

Direct Labour p.m. 1,200 x 40

Overheads p.m. 1,200 x 75

Cost of Sales/Finished Goods

 

Work in progress

Raw materials (2 weeks) 1,08,000 x 1/2

Labour (2 weeks)  48,000 x 1/2

Overhead (2 weeks) 90,000 x1/2 x 1/2

 

 

 

 

1200 units

= 3,18,000

= 1,08,000

= 48,000

= 90,000

= 2,46,000

 

= 54,000

= 12,000

= 22,500

88,500

 

NOTE : Labour and overheads are reduced to one half as they accrue evenly during the year.

 

Problem 8. Prepare an estimate of working capital and projected Balance Sheet for the year ended on 31.12.2002 from the following information.

 

(i) Share capital $ 5,00,000, 15% Debentures of $ 2,00,000, Fixed assets at cost of $ 3,00,000.

 

(ii) The expected ratios of cost to selling price are Raw materials 60%, Labour 10%,

Overheads 20%.

 

(iii) Raw materials are in stores for an average of 2 months.

 

(iv) Finished goods are kept in warehouse for 3 months.

 

(v) Expected level of production 1,20,000 units per year.

 

(vi) Each unit of production is expected to be in process for 1 month.

 

(vii) Credit given by suppliers is 2 months.

 

(viii) 20% of the output is sold against cash. Time lag in payment from debtors is 3 months.

 

(ix) Selling price is $ 5 per unit

 

(x) Labour and overheads will accrue evenly during the year.

 

Solution :                            Statement of Working Capital requirement

 

Current Assets

Raw Materials (2 months)

Work in progress

Stock of finished goods (3 months)

Debtors 3 months

Total Current Assets

 

Less : Current Liability

Creditors 2 months

Working Capital required [3,40,500 – 60,000]

Working Notes:

Estimated production units 1,20,000 / 12

Sales p.m. 10,000 units x $ 5

(i) Finished goods :

Raw Materials 60% = 50,000 x 60/100

Direct Labour 10% = 50,000 x 10/100

Overheads 20% = 50,000 x 20/100

Finished goods/Cost of sales

(ii) Work in progress (1 month)

Raw materials

Labour 5000 x  1/2

Overheads 10,000 x 1/2

W.I.P

(iii) Debtors (3months) at cost equivalent

Cost of sales pm

Less : Cash sales 20%

Cost of sales (credit) pm

Debtors (3 months) at cost equivalent

= 36,000 x  3

 

 Projected Balance Sheet as on 31.12.2002

 

60,000

37,500

1,35,000

1,08,000

3,40,500

 

 

60,000

2,80,500

 

= 10,000 units

= 50,000

 

= 30,000

= 5,000

= 10,000

= 45,000

 

=30,000

= 2,500

= 5,000

= 37,500

 

= 45,000

= 9,000

= 36,000

 

= 1,08,000

 

 

 

         Liabilities

Share Capital          2,00,000

15% Debentures    30,000

Creditors

 

      $

5,00,000

2,30,000

60,000

 

 

 

 

 

7,90,000

     Assets

Fixed Assets at cost

Current Assets :

Raw Materials

Work in progress

Stock of Finished Goods

Debtors

Profit & Loss A/c

Cash (BF)

    $

3,00,000

 

60,000

37,500

1,35,000

1,20,000

30,000

1,07,500

7,90,000