QUESTION BANK B 604 F : WORKING CAPITAL MANAGEMENT UNIT-1-Basic Working Capital & Computation of Working Capital 1. What is meant by Working Capital Management? 2. Explain in brief the gross and net concept of working capital. Which of those concepts do you prefer and why? 3. Explain the operating cycle concept of working capital. Give suitable example. 4. Explain the components of working capital. 5. Discuss about the current assets and current liabilities 6. The most important challenge for a finance manager in working capital management is to find an optimum mix and level of currents and current liabilities. Elucidate the statement. 7. A co. has the following selected assets and liabilities: Cash 45,000 Retained Earnings 1, 60,000 Equity Share Capital 1, 50,000 Debtors 60,000 Inventory 1, 11,000 Debentures 1, 00,000 Provision for taxation 57,000 Outstanding expenses 21,000 Land and building 3, 00,000 Goodwill 50,000 Furniture 25,000 Creditors 39,000 You are required to determine (i) Gross working capital and (ii) Net working capital 8. Calculate the operating cycle of a company from the following information (RS) Raw material consumption per annum 84,200 Annual cost of production 1,42,500 Annual cost of goods sold 1,53,000 Annual sales 1,95,000 Average value of current assets maintained: Raw material 12,400 Work-in-progress 7,200 Finished goods 12,200 Debtors 26,000
The company gets 30days credit from their suppliers. All sales made by the firm are on credit only. You may take one year as equal to365 days. 9. From the following information estimate the amount of working capital by Operating cycle method taking 360 days in a year Sales Material cost Labour cost Overheads Customers are given 45 day s credit and 60 day s cr edit is taken from suppliers. Raw material for 36 days and finished goods for 15 days are kept in stock. Production cycle is 18 days. A cash balance equal to one-third of average of other working capital is kept for contingencies. 10. The following information is available for Sagar ltd. 50,000 units@rs.20 per unit Rs.10 per unit Rs.4 per unit Rs.3.5 per unit (Rs 000) Average stock of raw material and stores 400 Average work in process inventory 600 Average finished goods inventory 360 Average accounts receivable 600 Average account payable 360 Average stock of raw material and stores purchased on credit and 20 consumed per day Average work in process value of raw material committed per day 25 Average cost of goods sold per day 36 Average sales per day 40
You are required to calculate (a) Duration of raw material stage (b) Duration of work-inprogress stage (c) Duration of finished good stage (d) duration of account receivables stage (e) Duration of accounts payable stage (f) Duration of the operating cycle. 11. The following are the data of Z Ltd. taken from the accounting records: Average stock of raw material during the year 1, 80,000 Average stock of work in process during the year 1, 00,000 Average stock of finished goods during the year 54,000 Average balance of debtor 1, 50,000 Average balance of creditors 1, 20,000 Average daily sales 2,000 Average daily cost of finished goods sold 1,800 Average daily consumption of raw material 1,200 Average period of credit available from suppliers is 100 days Based on the above data, state: (a) Average period of raw material holding in stores (b) Credit period allowed to customers; (c) Average period for which finished goods stay in godowns (d) Average period of conversion of raw material into finished goods (e) Working capital cycle (in days) 12. M\s Rajiv Bros who are willing to purchase a business have consulted you and one point, on which you are asked to advise them, is the average amount of working capital which would need to be employed in the first year s trading. You are given the following estimates and are requested to add 15% to your computed figures to allow for contingencies: Per annum (1) Average amount of stocks: Finished goods 30,000 Raw material 60,000 (2) Average credit given: Inland sales 4 weeks 2,60,000 Export sales 2 weeks 6,50,000 (3) Lag in payment of expenses: Wages 11\2 weeks 2,60,000 Material and overheads 4 weeks 3,90,000 13. The management of Vishal Ltd has called for a statement showing the working capital needed to finance a level of the activity 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:
Raw material 20 Direct labour 5 Overheads 15 Total 40 Profit 10 Selling price 50 (a) Past experience indicates the raw materials are held in stock.on an average for two months. (b) Work in progress(100% complete in regards to material and 50% for labour and overheads)will approximately be to half a month s production (c) Finished goods remain in warehouse, on an average for a month, (d) Supplier of material extend a month s credit, (e) 2 month s credit is allowed to debtors, calculation of debtors may be made at selling price. (f) A minimum cash balance of Rs.25000 is expected to be maintained. (g) The production pattern is assumed to be even during the year. Prepare the statement of working capital requirement. 14. The board of director of Nanak Engineering company private Ltd requests you to prepare a statement showing the working capital requirement for a level of 1,56,000 units of production. The following information is available for your calculations: Raw material 90 Direct labour 40 Overheads 75 Profit 60 Selling Price per unit 265 (1) Raw materials are in stock. on average one month. (2) Material are in process, on average 2 weeks (3) Finished goods are in Stock, on average one month (4) credit is allowed by suppliers, one month (5) Time lag in payment from debtors,2 months (6) Lag in payment of wages. 1 1\2 weeks. (7) Lag in payment of overhead is one month. 20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs.60, 000. It is to be assumed that production is carried on evenly throughout the year and overhead accrue similarly and a time period of 4 weeks is equivalent to a month. 15. Raju brother s Pvt Ltd sells goods on a gross profit of 25%.depriciation is taken into
account as a part of cost of production.the following are the annual figures given to you: Sales(2 month credit) 18,00,000 Material consumed(1 month credit) 4,50,000 Wages(1 month lag in payment) 3,60,000 Cash manufacturing expense(1 month lag in payment) 4,80,000 Administrative expense(1 month lag in payment) 1,20,000 Sales promotion ( paid quarterly in advance) 60,000 Income tax payable in 4 installment of which one lies in next year 1,50,000 The company keeps one month stock each of raw material and finished goods. It also keeps Rs.1, 00,000 in cash. You are required to estimate the working capital requirement of the company on cash cost basis assuming 15% margin.ignore work in progress. 16. You are required to prepare a statement showing the working capital needed to finance a level of annual activity of 52,000 units of output. The following information are available: (Rs. per Element of cost unit) Raw material 8 Direct labour 2 Overheads 6 Total 16 Profit 4 Selling price 20 Raw materials are in stock, on an average for 4 weeks. Materials are in process, on an average, for 2.Finihed goods are in stock, on an average, for 6 weeks. Credit allowed to customer is for 8 weeks. Credit allowed by suppliers of raw material is for 4 weeks.lag in payment of wages 1 1\2 weeks. It is necessary to hold cash in hand and at bank amounting to Rs 75000.It may be noted that production is carried on evenly during the year and wages and overheads accrued. 17. XYZ Ltd sells its product on a gross profit of 20% of sales. The following information is extracted from it s annul accounts for the year ending 31 dec., 2010: Sales(at 3 months credit) 40.00.000 Raw material 12.00.000 Wages(15 days in arrears) 9,60,000 Manufacturing and general expenses(one month in arrear) 12,00,000 Admn.expenses(one month in arrear) 4,80,000
Sales promotion expenses 2,00,000 (Payable half yearly in advance) The company enjoys one month s credit from the suppliers of raw material and maintains two months stock of raw material and one and half month of finished goods. Cash balance is maintained at Rs.1, 00,000 as a precautionary balance. Assuming 10% margin find out the working capital requirement of XYZ Ltd. 18. From the record of a firm the following data has been collected Particular Amount (Rs) in thousands Sales (at two month credit) 4800 Raw material (supplier s extended two month credit) 1200 Wages (monthly in arrear) 840 Manufacturing expenses outstanding at the end of year (one month in arrear)80 Admn.expenses (one month in arrear) 240 Sales promotion expenses 150 (Payable quarterly in advance) Company sells its product on gross profit of 20% on selling price. It s keep one month tock of each raw material and finished goods, and cash balance of Rs.1, 25,000 Assume a safety margin of 20% and o working progress. Determine the working capital requirement of the company.ignore work in progress. UNIT: 2 Cash Management 1. Explain briefly cash management? What are the motives of holding cash? 2. What are the objectives of cash management? Explain the factors determining the level of cash in a firm. 3. Write the names of various sources of cash and their applications. 4. What is optimum cash balance and how can it be arrived at? 5. Write note on: (a) Baumol Model (b) Miller Orr 6. Prepare a cash budget of ABC Ltd.. for April, May, June 2010:
Months Sales Purchase Wages Expense Jan. (Actual) 80000 45000 20000 5000 Feb. (Actual) 80000 40000 18000 6000 March (Actual) 75000 42000 22000 6000 April (Budgeted) 90000 50000 24000 7000 May (Budgeted) 85000 45000 20000 6000 June (Budgeted) 80000 35000 18000 5000 Additional Information: (1) 10% of the purchase and 20% of the sale for cash (2) The average collection period of the company is half month and the credit purchase are paid off regularly after one month. (3) Wages are paid half monthly and the rent of Rs.500/-included in expense is paid monthly. (4) Cash Balance as on April 1, may be taken at Rs.15000/- 7. Prepare a cash budget of KLM Ltd. for April, May, June 2010: Months Sales Purchase Wages Expense Jan. (Actual) 160000 90000 40000 10000 Feb. (Actual) 160000 80000 36000 12000 March (Actual) 150000 84000 44000 12000 April (Budgeted) 180000 100000 44000 14000 May (Budgeted) 170000 90000 40000 12000 June (Budgeted) 160000 70000 36000 10000 Additional Information: (1) 10% of the purchase and 20% of the sale for cash (2) The average collection period of the company is half month and the credit purchase are paid off regularly after one month. (3) Wages are paid half monthly and the rent of Rs.1500/-included in expense is paid monthly. (4) Cash Balance as on April 1, may be taken at Rs.30000/- (a) A cash budget by quarters for the year; and (b) State the amount of loan outstanding at the end of the years. 8..The Budget officer of a company is preparing a cash forecast for three months ending 31 st December,2010 and has collected the following data in respect of sales: Months Estimated Sales October 540000 November 300000 December 200000 Cash discount of 2% is allowed to debtors. All sales are on credit. Debtor s balances (before providing for bad and doubtful debts) at the end of each month are estimated to be equal sales of that month plus 50% of sales of previous month. Sales for the month of September were Rs.440000/- and debtor as on 30 th September were Rs.560000/-subject to provision for
doubtful debts of Rs.48200/-.Estimate the collection from debtors. UNIT-3 Inventory Management 1. Explain the various approach to inventory management. 2. What is the reorder point of inventory? How is it determined? 3. What is ordering cost? How is it different from varying cost? Explain the relationship between the two. 4. What is meant by inventory? Discuss as to why Inventory management is important explaining the items of stock kept by a manufacturing company. 5. What do you mean by ABC analysis? Describe its advantages? 6. Explain the Pareto Analysis. 7. A manufacture of refrigerator purchases 3200 units of certain component from a supplier. His annual usages is 3200 units. The cost of placing the order is Rs.100 and the cost of carrying one unit for a year is Rs.16 Calculate EOQ. 8. Stock Number Annual Rs. Volume J24 12,500 R26 9,000 L02 3,200 M12 1,550 P33 620 T72 65 S67 53 Q47 32 V20 30 What are the appropriate ABC groups of inventory items?
9. Assume you have a product with the following parameters: Annual Demand = 360 units Holding cost per year = Rs. 1.00 per unit Order cost = Rs. 100 per order What is the EOQ for this product? What is the expected time between orders? 10. Assume that our firm produces Type C fire extinguishers. We make 30,000 of these fire extinguishers per year. Each extinguisher requires one handle (assume a 300 day work year for daily usage rate purposes). Assume an annual carrying cost of Rs. 1.50 per handle, production setup cost of Rs. 150, and a daily production rate of 300. What is the optimal production order quantity? 11. Litely Corp sells 1,350 of its special decorator light switch per year and places orders for 300 of these switches at a time. Assuming no safety stocks, litely estimates a 50% chance of no shortages in each cycle and the probability of shortages of 5, 10, and 15 units as 0.2, 0.15, and 0.15 respectively. The carrying cost per unit per year is calculated as Rs. 5 and the stock out cost is estimated at Rs. 6 (Rs. 3 lost profit per switch and another Rs. 3 loss of goodwill or future sales). What level of safety stock should litely use for this product? (Consider safety stock of 0, 5, 10, and 15 units.) 12. The Delta company uses a periodic inventory system. The beginning balance of inventory and the purchases made by Delta during the month of July are given below: Date Description Units Unit cost Total cost July 01 Beginning inventory 500 Rs. 20 Rs. 10,000 July 18 Inventory purchased 800 Rs. 24 Rs. 19,200 July 25 Inventory purchased 700 Rs. 26 Rs. 18,200 Total - 2,000 Rs. 47,400 - The Delta Company sold 1,400 units during the month of July. Required: Compute inventory on 31st July and cost of goods sold for the month of July using following inventory costing methods: a. First in, first out (FIFO) method b. Last in, first out (LIFO) method c. Average cost method 13. ABC Ltd. purchased a product X during January and sold 6 Units, details of which are as follows: January 1 Purchased 5 units @ Rs. 50 Each January 5 Sold @ units January 10 Sold 1 unit January 15 purchased 5 units @ Rs. 70 Each January 25 sold 3 units
The value of 4 units held as invent Required: Compute inventory on 31st January and cost of goods sold for the month of July using following inventory costing methods: a. First in, first out (FIFO) method b. Last in, first out (LIFO) method c. Average cost method Unit 4: Receivable Management 1. What do you mean by receivables? Enumerate the various costs of receivables. 2. Explain the different costs related to receivables. 3. Name various factors influencing the size of receivables. 4. Discuss the various aspects or dimensions of receivables management. 5. What is receivables management? How is it useful for business concerns? 6. What do you mean by the credit policy with respect to working capital of a firm? 7. Credit policy is of significant importance with respect to receivables management of a firm. Comment. 8. Explain the various decisions related to forming the credit policy in an organization. 9. The following information is available for a company: Monthly credit sales Rs.10,00,000 Average maturity period 40 days Factor s fees/commission 1% Interest rate charged by factor 15% Collection department s cost (if there is no factoring) Rs.4,500 per month Factor s average remittance period 10 days The company s cost of raising funds (other than factor) 24% Calculate the effective interest rate charged by the factor and advise the company ignoring all Other factors including risk of default. 10. Bharat ltd. decides to liberalize credit to increase its sales. The liberalized credit policy will bring additional sales of Rs.3, 00,000. The variable costs will be 60% of sales and there will be 10% risk for non-payment and 5% collection costs. Will the company benefit from the new credit policy? 11. The following are the details regarding the operation of a firm during a period of 12 months:
Sales Rs.12,00,000 Selling price per unit 10 Variable cost per unit 7 Total cost per unit 9 Credit period allowed to customers one month The firm is considering a proposal for a more liberal credit by increasing the average collection period from one month to two months. This relaxation is expected to increase sales by 25%. You are required to advise the firm regarding adopting the new credit policy, presuming that the firm s required return on investment is 25%. 12. A trader whose current sales are Rs.15, 00,000 per annum and average collection period is 30 days wants to pursue a more liberal credit policy to improve sales. A study made by a consultant firm reveals the following information: Credit policy Increase in collection period Increase in sales A 15 days Rs. 60,000 B 30 days Rs.90,000 C 45 days Rs.1,50,000 D 60 days Rs.1,80,000 E 90 days Rs.2,00,000 The selling price per unit is Rs.5. Average cost per unit is Rs.4 and variable cost per unit is Rs.2.75. The required rate of return on additional investment is 20%. Assume 360 days in a year and also assume that there are no bad debts. Which of the above policies would you recommend for adoption? 13. Suppose a firm is contemplating an increase in the credit period from 30 to 60 days. The average collection period which is at present 45 days is expected to increase to 75 days. It is also likely that the bad debts expenses will increase from the current level of 1 percent to 3 percent of sales. Total credit sales are expected to increase from the level of 30,000 units to 34,500 units. The present average cost per unit is Rs.8, the variable cost and sales per unit are Rs.6 and Rs.10 per unit respectively. Assume the firm expects a rate of return of 15%. Should the firm extend the credit period? Unit 5: Working Capital Financing
1. Describe the approaches of financing current assets of an enterprise. 2. Explain the importance of trade credit as source of working capital. What is the cost of these sources? 3. Discuss the main forms of working capital advance by banks. What is the kind of security required by them? 4. Write short notes on: a. Commercial Paper b. Certificate of deposit c. Letter of Credit 5. Discuss the important features of Commercial Paper. 6. Explain the following terms with respect to working capital financing: a. Hypothecation b. Pledge c. Mortgage d. Charge 7. Write advantages and disadvantages of trade credit as a source of short-term finance. 8. What is a letter of credit? Explain the different types of letter of credit issued by banks. 9. Differentiate between hypothecation and pledge. 10. What are the different functions of a factor? Explain the mechanism of factoring with the help of a diagram. 11. Discuss in detail the various types of factoring. ************************