Test Questions Working Capital

  1. Explain the Concept of Working Capital.
  2. What do you understand by Working Capital?
  3. Make a list of various Types of Working Capital.
  4. Define Gross Working Capital.
  5. Explain Net Working Capital.
  6. What is Variable Working Capital?
  7. What do you understand by Core Current Assets?
  8. What is the Concept of Operating Cycle?
  9. Write down different stages of Operating Cycle.
  10. Explain in brief the advantages of Working Capital.
  11. List out the disadvantages of Working Capital.
  12. Write down the disadvantages of Excessive Working Capital.
  13. Explain the sources of short-term Working Capital.
  14. Which are the determinants of Working Capital in businessorganization? Explain.
  15. “Techniques of Forecasting Working Capital of a firm.” Explain it.
  16. Describe the new trends in the financing process of Working Capital by banks.
  17. 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,

  1. Raw materials will be in stock for three weeks whereas the finished goods for not more than two weeks.
  2. Factors processing takes three weeks
  3. Suppliers will give five weeks credit
  4. 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:

  1. Number of units =          26,000
  2. 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

 

  1. 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:

  1. 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
  2. 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:

  1. 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

  1. 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

  1. 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

  1. Debtors = 5,10,000 x 3/ 12 = 67,500
  2. 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:

  1. 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.

  1. Average amount locked up for stocks

Stock of finished products                                           5,000

Stock of stores materials, etc.                                                8,000

  1. Average credit given

Inland sales 6 weeks credit                                         3,12,000

Export sales 1 ½ h weeks credit                                 78,000

  1. 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

  1. Payment in Advance

The Sundry Expenses (Paid Quarterly in advance)     8,000

  1. 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.

  1. Expected level of production is 15,600 units for the year
  2. Cost per unit of raw materials, direct labour and overheads are $90, $40 and $75 respectively.
  3. Selling price is $265 per unit
  4. Raw materials will be in stock for 1 month at an average
  5. Materials will be processed for 2 weeks at an average
  6. Finished goods will be in stock for 1 month at an average
  7. Credit allowed will be one month
  8. Time lag from the debtors is for 2 months
  9. Lag in payment is 11/ 2 weeks (wages)
  10. Lag in payment is for one month (overheads). All the sales are on credit
  11. 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:

  1. The share capital of the firm is estimated to be $5,00,000 for its 15% Debentures of $2,00,000.
  2. The fixed assets of the firm is at $3,00,000
  3. The expected ratio of cost of selling price of its raw materials, direct labour and overheads are 60%, 10% and 20%
  4. Raw materials will be stored in stock for about 2 months on an average
  5. Finished goods will be stored for about 3 months on an average
  6. The expected production per year is limited to 1,20,000 units
  7. Each and every unit will remain in the process for about 1 month
  8. The credit given by the suppliers is of 2 months
  9. As the 20% of output sold against the cash, the time lag in payment is 3 months from the debtors
  10. 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

  1. 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

 

  1. 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

  1. 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:-

Links of Next Finance Topics:-

Submit Your Assignment




HOW IT WORKS

Customer Reviews

My Homework Help
Rated 5.0 out of 5 based on 510 customer reviews at
Rating View



Trusted Reviews from Google



Trusted Reviews from trustpilot