Test Questions Working Capital
- Explain the Concept of Working Capital.
- What do you understand by Working Capital?
- Make a list of various Types of Working Capital.
- Define Gross Working Capital.
- Explain Net Working Capital.
- What is Variable Working Capital?
- What do you understand by Core Current Assets?
- What is the Concept of Operating Cycle?
- Write down different stages of Operating Cycle.
- Explain in brief the advantages of Working Capital.
- List out the disadvantages of Working Capital.
- Write down the disadvantages of Excessive Working Capital.
- Explain the sources of short-term Working Capital.
- Which are the determinants of Working Capital in businessorganization? Explain.
- “Techniques of Forecasting Working Capital of a firm.” Explain it.
- Describe the new trends in the financing process of Working Capital by banks.
- Write down the procedure for computation of Working Capital.
Some Problems and its Solutions
Problem No. 1
From the given information, prepare a table to show the working capital requirements of a firm. A) In total, B) As each constituent part of Working Capital
Budgeted Sales ($10 per unit) $2,60,000 per annum
Analysis of Costs
Raw Materials 3.00
Direct Labour 4.00
Overheads 2.00
Total Cost 9.00
Profit 1.00
Sales 10.00
Assume the production and overheads go evenly throughout the year and,
- Raw materials will be in stock for three weeks whereas the finished goods for not more than two weeks.
- Factors processing takes three weeks
- Suppliers will give five weeks credit
- Customers require eight weeks credit
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:
- Number of units = 26,000
- Finished Goods
Raw Material (26,000 x 3) 78,000
Direct Labour(26,000 x 4) 1,04,000
Overhead (26,000 x 2) 52,000
Finished Goods 2,34,000
- 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
Note:
- In general, the work in progress and finished goods have similar values. In this given problem, suppose overheads and wages are evenly throughout the year. In this case, we have to calculate work in progress separately. Thus, the overhead value will be reduced to half during
- For calculating working capital, the debtor value either includes profit elements or excludes profit elements.
Problem No. 2
Find out the Working Capital Forecast from the given information:
Issued Share Capital 4,00,000
12% Debentures 1,50,000
The production of the firm is predicted to be 1.00 lakh units for its fixed assets value of $3.00 lakhs. This same level of activity is expected to be maintained for the current year.
The expected ratio of cost to selling price is,
Raw Materials 50%
Direct Wages 10%
Overheads 25%
Assume selling price is $6 per unit. Raw materials remain in stores for at least 2 months where every production remains for 2 months in the process. The finished goods will remain in warehouse for 4 months. The credit given to the debtors is 3 months whereas credit allowed by creditors is for 3 months. And, the production along with sale of the products will be on a regular cycle.
Solution:
Working Capital Statement
Raw Materials 50,000
Work in Progress 67,500
Finished Goods 1,70,000
Debtors 1,27,500
4,15,000
Less: Creditors 75,000
Working Capital Required 3,40,000
Working Notes:
- Number of units = 1,00,000
Sales value = 1,00,00 = 6,00,000
Material = 6,00,000 x 50/ 100 = 3,00,000
Labour = 6,00,000 x 10/ 100 = 60,000
Overheads = 6,00,000 x 25/ 100 = 1,50,000
- Finished Goods
Raw Material 3,00,000
Direct Labour 60,000
Overhead 1,50,000
5,10,000
Finished Goods (5,10,000 x 4/ 12) = 1,70,000
- Work in Progress
Raw Material (3,00,000 x 2/ 12) 50,000
Direct Labour (60,000 x 2/ 12 x 1/ 2) 5,000
Overhead (1,50,000 x 2/ 12 x 1/ 2) 12,500
- Debtors = 5,10,000 x 3/ 12 = 67,500
- Creditors = 3,00,000 x 3/ 12 = 1,27,500
= 75,000
Problem No. 3
G Ltd has ordered a statement for the Working Capital of their firm to meet the finance of 3,00,000 units output estimated for the year. The Cost of Capital Structure is shown below:
Cost Element Cost per unit ($)
Raw Material 20
Direct Labour 2
Overheads 15
Total Cost 40
Profit 10
Selling Price 50
Consider the following statements:
- Past statistics show that raw materials are in stock for two months on an average.
- Work in progress will be for half of the month
- Finished goods will be stored maximum of one month
- Suppliers can extend only a month credit
- Debtors are allowed to have two months credit
- A minimum cash balance is expected to be maintained is of $25,000
Prepare a Working Capital Statement assuming the production is even during the year.
Solution
Working Capital Statement or, The Statement of Working Capital Requirement
Current Assets
Raw Materials (60,00,000 x 2/ 12) 10,00,000
Work in Progress 3,75,000
Finished Goods (1,20,00,000 x 1/ 12) 10,00,000
Debtors (1,50,00,000 x 2/ 12) 25,00,000
48,75,000
Less: Current Liabilities
Sundry Creditors (60,00,000 x 1/ 2) 5,00,000
43,75,000
Add: Minimum Cash Balance 25,000
Working Capital 44,00,000
Workings:
- Finished goods
Raw Materials (3,00,000 x 20) 60,00,000
Direct Labour (3,00,000 x 5) 15,00,000
Overheads (3,00,000 x 15) 45,00,000
Finished Goods 1,20,00,000
Solution:
Statement of Working Capital Requirement
$
Current Asset 5,000
Finished products and work in progress 8,000
Stores, Material, etc. 13,000
Account Receivable
Local Sales (78,00 x 2/ 52) 3,000
Outside the state (3,12,000 x 6/ 52) 36,000
Total Current Assets 52,000
Less: Current Liabilities
Account Payable (96,000 x 4/ 52) 7,385
Outstanding wages (2,60,000 x 2/ 52) 10,000
Total Current Liabilities 17,385
Working Capital 34,615
Add: 10% Contingencies (34,615 x 10/ 100) 3,462
Working Capital Required 38,077
Assignment Problems
Problem No. 6
Ram Ltd. has decided to work on a new project. You are asked to give advice on the average amount of Working Capital that will be required for the first year production.
Following estimations are given to figure out the Working Capital and it is instructed to add 10% to the computed figures to allow for contingencies.
- Average amount locked up for stocks
Stock of finished products 5,000
Stock of stores materials, etc. 8,000
- Average credit given
Inland sales 6 weeks credit 3,12,000
Export sales 1 ½ h weeks credit 78,000
- Lag in payment of wages and other outgoings
Wages (1 ½ h weeks) 2,60,000
Stores, Materials etc. (1 ½ h months) 48,000
Rent Royalties etc. (for 6 months) 10,000
The Clerical Staff (1 ½ months) 62,400
Manager (½ month) 4,800
Miscellaneous Expenses(1h month) 48,000
- Payment in Advance
The Sundry Expenses (Paid Quarterly in advance) 8,000
- Undrawn profits throughout the year (on an average) = 11,000
Set up the calculations for an average amount of Working Capital requirement.
Problem No. 7
Prepare a forecast of Working Capital requirement for Sethal Ltd by using the data given below.
- Expected level of production is 15,600 units for the year
- Cost per unit of raw materials, direct labour and overheads are $90, $40 and $75 respectively.
- Selling price is $265 per unit
- Raw materials will be in stock for 1 month at an average
- Materials will be processed for 2 weeks at an average
- Finished goods will be in stock for 1 month at an average
- Credit allowed will be one month
- Time lag from the debtors is for 2 months
- Lag in payment is 11/ 2 weeks (wages)
- Lag in payment is for one month (overheads). All the sales are on credit
- Cash in hand plus bank is estimated to $60,000
Assume that production will be evenly throughout the year. The wages and overheads are evenly for 4 weeks period i.e. equivalent to one month.
Solution:
Working Capital Requirement
Current Assets
Raw Materials (1,08,000 x 1) 1,08,000
Finished Goods (2,46,000 x 1) 2,46,000
Debtors 2 months (2,46,000 x 2) 4,92,000
Work in Progress 88,500
Cash in hand and at the bank 60,000
9,94,500
Less: Current Liabilities
Creditors (1,08,000 x 1) 1,08,000
Lag in payment
of wages 11/ 2 weeks (48,000 x 3/ 2 x 1/ 4) 18,000
Lag in payment
of overheads (90,000 x 1) 90,000
2,16,000
Working Capital Required (9,94,500 – 2,16,000) = 7,78,500
Working:
Estimated Sales 16,600 units
A 4 weeks period i.e. equivalent to one month
Therefore,
Sales per month (15,600 x 52) 12,00 units
Estimated sales per month (265 x 1,200) 3,18,000
Raw materials per month (1,200 x 90) 1,08,000
Direct Labour per month (1,200 x 40) 48,000
Overheads per month (1,200 x 75) 90,000
Cost of sales/ Finished goods 2,46,000
Work in Progress 54,000
Raw materials 2 weeks (1,08,000 x 1/ 2) 12,000
Direct Labour 2 weeks (48,000 x 1/ 2) 22,500
Overheads 2 weeks (90,000 x 1/ 2 x 1/ 2) 88,500
Note:
As the labour and overheads accrue evenly during the year, both are reduced to one-half.
Problem No. 8
Prepare a Working Capital requirement of a projected business project for the year 31.12.2002 and its Project Balance Sheet.The following information is given:
- The share capital of the firm is estimated to be $5,00,000 for its 15% Debentures of $2,00,000.
- The fixed assets of the firm is at $3,00,000
- The expected ratio of cost of selling price of its raw materials, direct labour and overheads are 60%, 10% and 20%
- Raw materials will be stored in stock for about 2 months on an average
- Finished goods will be stored for about 3 months on an average
- The expected production per year is limited to 1,20,000 units
- Each and every unit will remain in the process for about 1 month
- The credit given by the suppliers is of 2 months
- As the 20% of output sold against the cash, the time lag in payment is 3 months from the debtors
- Selling price is of $5 per unit
Assume both the labour and overheads accrue remain evenly during the year.
Solution:
Working Capital Requirement
Current Assets
Raw Materials (2 months) 60,000
Work in Progress 37,500
Stock of finished goods (3 months) 1,35,000
Debtors (3 months) 1,08,000
Total Current Assets 3,40,500
Less: Current Liabilities
Creditors (2months) 60,000
Working Capital Required (3,40,500 – 60,000) = 2,80,500
Working:
Estimated production units (1,20,000/ 12) 10,000 units
Sales per month (10,000 units x $5) 50,000
- Finished goods:
Raw Materials (50,000 x 60/ 100) 30,000
Direct Labour (50,000 x 10/ 100) 5,000
Overheads (50,000 x 20/ 100) 10,000
Finished goods/ Cost of sales 45,000
- Work in Progress (1 month)
Raw Materials 30,000
Direct Labour (5,000 x 1/ 2) 2,500
Overheads (10,000 x 1/ 2) 5,000
Work in Progress 37,500
- Debtors (for 3 months) at cost equivalent
Cost of sales per month 45,000
Less: Cash sales (20%) 9,000
Cost of sales per month (credit) 36,000
Debtors (for 3 months) at cost equivalent (36,000 x 3) = 1,08,000
Now,
Projected Balance Sheet for 31.12.2002
Liabilities $
Share Capital 2,00,000 5,00,000
15% Debentures 30,000 2,30,000
Creditors 60,000
7,90,000
Assets $
Fixed assets at cost 3,00,000
Current Assets:
Raw Materials 60,000
Work in Progress 37,500
Stock of Finished Goods 1,35,000
Debtors 1,20,000
Profit & Loss A/c 30,000
Cash (BF) 1,07,000
7,90,000
Links of Previous Main Topic:-
- Introduction to responsibility accounting
- Introduction to financial management
- Introduction and types of dividend
- Concept of cost of capital
- Capitalization meaning
- Concepts of working capital
- Advantages or importance of working capital
Links of Next Finance Topics:-
