Working Capital Management

Chapter 10
Working Capital Management

1 ICAI Mat
A firm has the following data for the year ending 31st March, 2017:
(`)
Sales (1,00,000 @ ` 20) 20,00,000
Earnings before Interest and Taxes 2,00,000
Fixed Assets 5,00,000
The three possible current assets holdings of the firm are ` 5,00,000, ` 4,00,000 and ` 3,00,000.
It is assumed that fixed assets level is constant and profits do not vary with current assets levels.

ANALYSE the effect of the three alternative current assets policies.

T E
Analysing Current Asset Policy
I T U
S T
C I N
Answer SJ
Effect of Alternative Working Capital Policies
Working Capital Policy Conservative (`) Moderate (`) Aggressive(`)
Sales 20,00,000 20,00,000 20,00,000
Earnings before Interest and Taxes (EBIT) 2,00,000 2,00,000 2,00,000
Current Assets 5,00,000 4,00,000 3,00,000
Fixed Assets 5,00,000 5,00,000 5,00,000
Total Assets 10,00,000 9,00,000 8,00,000
Return on Total Assets (EBIT ÷ Total Assets) 20% 22.22% 25%
Current Assets/ Fixed Assets 1.00 0.80 0.60
The aforesaid calculation shows that the conservative policy provides greater liquidity
(solvency) to the firm, but lower return on total assets. On the other hand, the aggressive policy
gives higher return, but low liquidity and thus is very risky. The moderate policy generates
return higher than Conservative policy but lower than aggressive policy. This is less risky than
aggressive policy but riskier than conservative policy.
In determining the optimum level of current assets, the firm should balance the profitability –
solvency tangle by minimizing total costs – Cost of liquidity and cost of illiquidity.

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 Working Capital Management

2 ICAI Mat
From the following information of XYZ Ltd., you are required to CALCULATE:
(a) Net operating cycle period.
(b) Number of operating cycles in a year.
(`)
(i) Raw material inventory consumed during the year 6,00,000
(ii) Average stock of raw material 50,000
(iii) Work-in-progress inventory 5,00,000
(iv) Average work-in-progress inventory 30,000
(v) Finished goods inventory 8,00,000
(vi) Average finished goods stock held 40,000
(vii) Average collection period from debtors 45 days
(viii) Average credit period availed 30 days
(ix) No. of days in a year 360 days

T E
Operating Cycle
I T U
S T
C I N
Answer SJ
(a) Calculation of Net Operating Cycle period of XYZ Ltd.
Average stock of raw material
Raw Material storage period (R) =
Average Cost of Raw Material Consumption per day

` 50,000 ` 50,000
= = = 30 days
` 6,00,000 ÷ 360 days 1,667

Work-in-progress holding period (W) = Average Work-in-progress inventory

Average Cost of Production per day
` 30,000 ` 30,000
= = = 22 days
` 5,00,000 ÷ 360 days 1,389

Average stock of finished goods

Finished Goods storage period (F) =
Average Cost of Goods Sold per day

` 40,000 ` 40,000
= = = 18 days
` 8,00,000 ÷ 360 days 2,222

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 Working Capital Management

Receivables (Debtors) collection period (D) = 45 days

Credit Period allowed by creditors (C) = 30 days
Net Operating Cycle = R + W + F+ D – C= 30 + 22 + 18 + 45 – 30 = 85 days
No. of days in a year
(b) Number of Operating Cycles in a year =
Operating Cycle period
360 days
= = 4.23 times
85 days

3 ICAI Mat
On 1st January, the Managing Director of Naureen Ltd. wishes to know the amount of working
capital that will be required during the year. From the following information PREPARE the
working capital requirements forecast.
Production during the previous year was 60,000 units. It is planned that this level of activity
would be maintained during the present year.
The expected ratios of the cost to selling prices are Raw materials 60%, Direct wages 10% and
Overheads 20%.

T E
Raw materials are expected to remain in store for an average of 2 months before issue to
production.
I T U
S T
Each unit is expected to be in process for one month, the raw materials being fed into the
I N
pipeline immediately and the labour and overhead costs accruing evenly during the month.
C
SJ
Finished goods will stay in the warehouse awaiting dispatch to customers for approximately 3
months.
Credit allowed by creditors is 2 months from the date of delivery of raw material.
Credit allowed to debtors is 3 months from the date of dispatch.
Selling price is ` 5 per unit.
There is a regular production and sales cycle.
Wages and overheads are paid on the 1st of each month for the previous month.
The company normally keeps cash in hand to the extent of ` 20,000.

Forecasting Working Capital requirement

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Answer
Working Notes:
1. Raw material inventory: The cost of materials for the whole year is 60% of the Sales value.
60
Hence it is 60,000 units × ` 5 × = ` 1,80,000
100
The monthly consumption of raw material would be ` 15,000. Raw material requirements
would be for two months; hence raw materials in stock would be ` 30,000.
2. Work-in-process: (Students may give special attention to this point). It is stated that each
unit of production is expected to be in process for one month).

(`)
(a) Raw materials in work-in-process (being one month’s raw material 15,000
requirements)
(b) Labour costs in work-in-process 1,250
(It is stated that it accrues evenly during the month. Thus, on the first
day of each month it would be zero and on the last day of month
the work-in-process would include one month’s labour costs. On
E
an average therefore, it would be equivalent to ½ of the month’s
T
labour costs)
I T U
⎛ 10% of (60,000 × `5)
⎜
⎞
× 0.5 month⎟
S T
⎝ 12 months

C I N ⎠

SJ
(c) Overheads (For ½ month as explained above) 2,500
⎛ 20% of (60,000 × `5) ⎞
⎜ × 0.5 month⎟
⎝ 12 months ⎠
Total work-in-process 18,750

3. Finished goods inventory: (3 month’s cost of production)

60% of (60,000 ×` 5) 45,000

Raw materials ⎛⎜ ⎞
× 3 month⎟
⎝ 12 months ⎠
7,500
Labour ⎛⎜ 10% of (60,000 × `5) × 3 month⎞⎟
⎝ 12 months ⎠

⎛ 20% of (60,000 × `5) ⎞ 15,000

Overheads ⎜ × 3 month⎟
⎝ 12 months ⎠
67,500
4. Debtors: The total cost of sales = 2,70,000.
Therefore, debtors = ` 2,70,000 × 3 = ` 67,500
12

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 Working Capital Management

Total Cost of Sales = Raw Materials + Wages + Overheads + Opening Finished goods
inventory – Closing finished goods inventory.
= ` 1,80,000 + ` 30,000 + ` 60,000 + ` 67,500 – ` 67,500 = ` 2,70,000.
5. Creditors: Suppliers allow a two months’ credit period. Hence, the average amount of
creditors would be two months consumption of raw materials i.e.
⎛ 60% of (60,000 × ` 5) ⎞
⎜ × 2 months⎟ = ` 30,000
⎝ 12 months ⎠
⎛ 10% of (60,000 × ` 5) ⎞
6. Direct Wages payable: ⎜ ×1 months⎟ = ` 2,500
⎝ 12 months ⎠
⎛ 20% of (60,000 × ` 5) ⎞
7. Overheads Payable: ⎜ × 1 month ⎟ = ` 5,000
⎝ 12 months ⎠
Here it has been assumed that inventory level is uniform throughout the year, therefore
opening inventory equals closing inventory.
Statement of Working Capital Required:
(`) (`)
Current Assets:
Raw materials inventory (Refer to working note 1)
U TE 30,000
Working–in-process (Refer to working note 2)
I T 18,750

ST
Finished goods inventory (Refer to working note 3) 67,500
Debtors (Refer to working note 4)
Cash
C I N 67,500
20,000 2,03,750
Current Liabilities:
SJ
Creditors (Refer to working note 5) 30,000
Direct wages payable (Refer to working note 6) 2,500
Overheads payable (Refer to working note 7) 5,000 (37,500)
Estimated working capital requirements 1,66,250

4 ICAI Mat
The following annual figures relate to XYZ Co.,
(`)
Sales (at two months’ credit) 36,00,000
Materials consumed (suppliers extend two months’ credit) 9,00,000
Wages paid (1 month lag in payment) 7,20,000
Cash manufacturing expenses (expenses are paid one month in arrear) 9,60,000
Administrative expenses (1 month lag in payment) 2,40,000
Sales promotion expenses (paid quarterly in advance) 1,20,000

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 Working Capital Management

The company sells its products on gross profit of 25%. Depreciation is considered as a part of
the cost of production. It keeps one month’s stock each of raw materials and finished goods,
and a cash balance of ` 1,00,000.
Assuming a 20% safety margin, COMPUTE the working capital requirements of the company
on cash cost basis. Ignore work-in-process.

Working Capital Estimation based on Cash

Cost

Answer
Statement of Working Capital requirements (cash cost basis)
(`) (`)
A. Current Asset
Inventory:
T E
⎛ ` 9,00,000
Raw materials ⎜
⎞
× 1 month ⎟
I T U 75,000

⎝ 12 months ⎠
S T
⎛ ` 25,80,000
C I N
⎞
× 1 month ⎟
2,15,000

SJ
Finished Goods ⎜
⎝ 12 months ⎠
⎛ ` 29, 40,000 ⎞ 4,90,000
Receivables (Debtors) ⎜ × 1 month ⎟
⎝ 12 months ⎠
Sales Promotion expenses paid in advance 30,000
⎛ ` 1,20,000 ⎞
⎜ × 3 months ⎟
⎝ 12 months ⎠
Cash balance 1,00,000
Gross Working Capital 9,10,000
B. Current Liabilities:
Payables:
1,50,000
Creditors for materials ⎛⎜ ` 9,00,000 × 2 month ⎞⎟
⎝ 12 months ⎠

60,000
⎛ ` 7,20,000 ⎞
Wages outstanding ⎜ × 1 month ⎟
⎝ 12 months ⎠

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 Working Capital Management

Manufacturing expenses outstanding 80,000

" ` 9 , 60 , 000 %
$ ! 1 month '
# 12 months &
Administrative expenses outstanding 20,000 3,10,000

" ` 2, 40 , 000 %
$ ! 1 month '
# 12 months &
Net working capital (A – B) 6,00,000
Add: Safety margin @ 20% 1,20,000
Total Working Capital requirements 7,20,000
Working Notes:
(i) Computation of Annual Cash Cost of Production
(`)
Material consumed 9,00,000
Wages 7,20,000
Manufacturing expenses 9,60,000
Total cash cost of production
T E 25,80,000

I T U
(ii) Computation of Annual Cash Cost of Sales:
S T
C I N (`)

SJ
Cash cost of production as in (i) above 25,80,000
Administrative Expenses 2,40,000
Sales promotion expenses 1,20,000
Total cash cost of sales 29,40,000
Since, the cash manufacturing expenses is already given in the question hence, the amount
of depreciation need not to be computed. However, if it were required to be then it could be
computed as follows:
(`)
Sales 36,00,000
Less: Gross profit (25% of `36,00,000) (9,00,000)
Cost of Production (including depreciation) 27,00,000
Less: Cash Cost of Production (as calculated above) (25,80,000)
Depreciation (Balancing figure) 1,20,000

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 Working Capital Management

5 ICAI Mat; RTP May’21

Samreen Enterprises has been operating its manufacturing facilities till 31.3.2017 on a single
shift working with the following cost structure:
Per unit (`)
Cost of Materials 6.00
Wages (out of which 40% fixed) 5.00
Overheads (out of which 80% fixed) 5.00
Profit 2.00
Selling Price 18.00
Sales during 2016-17 – ` 4,32,000.

(`)
Stock of raw materials (at cost) 36,000
Work-in-progress (valued at prime cost) 22,000
Finished goods (valued at total cost) 72,000
Sundry debtors 1,08,000

T E
In view of increased market demand, it is proposed to double production by working an extra

I T U
shift. It is expected that a 10% discount will be available from suppliers of raw materials in view
T
of increased volume of business. Selling price will remain the same. The credit period allowed
S
I N
to customers will remain unaltered. Credit availed of from suppliers will continue to remain at

C
the present level i.e., 2 months. Lag in payment of wages and expenses will continue to remain
half a month.
SJ
PREPARE the additional working capital requirements, if the policy to increase output is
implemented.

Effect of Double Shift Working on Working

Capital Requirement

Answer
This question can be solved using two approaches:
(i) To assess the impact of double shift for long term as a matter of production policy.
(ii) To assess the impact of double shift to mitigate the immediate demand for next year only.
The first approach is more appropriate and fulfilling the requirement of the question.

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 Working Capital Management

Workings:
(1) Statement of cost at single shift and double shift working
24,000 units 48,000 Units
Per unit (`) Total (`) Per unit (`) Total (`)
Raw materials 6.00 1,44,000 5.40 2,59,200
Wages - Variable 3.00 72,000 3.00 1,44,000
Fixed 2.00 48,000 1.00 48,000
Overheads - Variable 1.00 24,000 1.00 48,000
Fixed 4.00 96,000 2.00 96,000
Total cost 16.00 3,84,000 12.40 5,95,200
Profit 2.00 48,000 5.60 2,68,800
18.00 4,32,000 18.00 8,64,000

Sales ` 4,32,000
(2) Sales in units 2016-17 = = = 24,000 units
unit selling price ` 18
(3) Stock of Raw Materials in units on 31.3.2017
Value of stock ` 36,000
= = 6,000 unitsT E
=
Cost per unit 6
I T U
(4) Stock of work-in-progress in units on 31.3.2017
S T
=
C I N
Value of work-in-progress ` 22,000
Prime Cost per unit
=
` 6 + `5
= 2,000 units

SJ
(5) Stock of finished goods in units 2016-17
Value of stock ` 72,000
= = = 4,500 units
Total Cost per unit ` 16

(i) Assessment of impact of double shift for long term as a matter of production policy:
Comparative Statement of Working Capital Requirement
Single Shift Double Shift
Rate Amount Rate Amount
Unit Unit
(`) (`) (`) (`)
Current Assets
Inventories :
Raw Materials 6,000 6.00 36,000 12,000 5.40 64,800
Work-in-Progress 2,000 11.00 22,000 2,000 9.40 18,800
Finished Goods 4,500 16.00 72,000 9,000 12.40 1,11,600
Sundry Debtors 6,000 16.00 96,000 12,000 12.40 1,48,800
Total Current Assets: (A) 2,26,000 3,44,000

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 Working Capital Management

Current Liabilities
Creditors for Materials 4,000 6.00 24,000 8,000 5.40 43,200
Creditors for Wages 1,000 5.00 5,000 2,000 4.00 8,000
Creditors for Expenses 1,000 5.00 5,000 2,000 3.00 6,000
Total Current Liabilities: (B) 34,000 57,200
Working Capital: (A) – (B) 1,92,000 2,86,800

Additional Working Capital requirement = ` 2,86,800 – ` 1,92,000 = ` 94,800

(ii) Assessment of the impact of double shift to mitigate the immediate demand for
next year only.
Workings:
(6) Calculation of no. of units to be sold:
No. of units to be Produced 48,000
Add: Opening stock of finished goods 4,500
Less: Closing stock of finished goods (9,000)
No. of units to be Sold 43,500

E
(7) Calculation of Material to be consumed and materials to be purchased in units:
T
No. of units Produced
I T U 48,000
Add: Closing stock of WIP
S T 2,000
I N
Less: Opening stock of finished goods
C
(2,000)

SJ
Raw Materials to be consumed in units 48,000
Add: Closing stock of Raw material 12,000
Less: Opening stock of Raw material (6,000)
Raw Materials to be purchased (in units) 54,000
(8) Credit allowed by suppliers:
No. of units to purchased × Cost per unit 54,000 × ` 5.40
× 2 months = × 2 months = ` 48,600
12 months 12 months
Comparative Statement of Working Capital Requirement
Single Shift Double Shift
Rate Amount Rate Amount
Unit Unit
(`) (`) (`) (`)
Current Assets
Inventories:
Raw Materials 6,000 6.00 36,000 12,000 5.40 64,800
Work-in-Progress 2,000 11.00 22,000 2,000 9.40 18,800
Finished Goods 4,500 16.00 72,000 9,000 12.40 1,11,600

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 Working Capital Management

Sundry Debtors 6,000 16.00 96,000 12,000 12.40 1,48,800

Total Current Assets: (A) 2,26,000 3,44,000
Current Liabilities
Creditors for Materials 4,000 6.00 24,000 9,000 5.40 48,600
Creditors for Wages 1,000 5.00 5,000 2,000 4.00 8,000
Creditors for Expenses 1,000 5.00 5,000 2,000 3.00 6,000
Total Current Liabilities: (B) 34,000 62,600
Working Capital: (A) – (B) 1,92,000 2,81,400

Additional Working Capital requirement = ` 2,81,400 – ` 1,92,000 = ` 89,400

Notes:
(i) The quantity of material in process will not change due to double shift working since
work started in the first shift will be completed in the second shift.
(ii) It is given in the question that the WIP is valued at prime cost hence, it is assumed that
the WIP is 100% complete in respect of material and labour.
(iii) In absence of any information on proportion of credit sales to total sales, debtors
quantity has been doubled for double shift.
(iv) It is assumed that all purchases are on credit.
T E
I T U
(v) The valuation of work-in-progress based on prime cost as per the policy of the
company is as under.
S T
C I N Single shift Double shift

SJ
(`) (`)
Materials 6.00 5.40
Wages – Variable 3.00 3.00
Fixed 2.00 1.00
11.00 9.40

6 ICAI Mat
A company’s requirements for ten days are 6,300 units. The ordering cost per order is ` 10 and
the carrying cost per unit is ` 0.26.
You are required to calculate the economic order quantity.

Economic Order Quantity

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 Working Capital Management

Answer
The economic order quantity is:
2 × 6,300 × 10 1,26,000
EOQ = = units (approx).
= 700units (approx.)
0.26 0.26

7 ICAI Mat
Marvel Limited uses a large quantity of salt in its production process. Annual consumption is
60,000 tonnes over a 50-week working year. It costs ` 100 to initiate and process an order and
delivery follow two weeks later. Storage costs for the salt are estimated at ` 0.10 per tonne per
annum. The current practice is to order twice a year when the stock falls to 10,000 tonnes.
IDENTIFY an appropriate ordering policy for Marvel Limited, and contrast it with the cost of
the current policy.

Economic Order Quantity

T E
I T U
S T
Answer

C I N
SJ
The recommended policy should be based on the EOQ model.
F = ` 100 per order
S = 60,000 tonnes per year
H = ` 0.10 per tonne per year
2 × 100 × 60,000
Substituting : EOQ = = 10,954 tonnes per order
0.10
Number of orders per year = 60,000/10,954 = 5.5 orders
Re-order level = 2×60,000/50 = 2,400 tonnes
Total cost of optimum policy = holding costs + ordering costs
= (0.1×10954)/2 + (100×60,000)/10,954
= 547.70 + 547.74 = ` 1,095
To compare the optimum policy with the current policy, the average level of stock under the
current policy must be found. An order is placed when stock falls to 10,000 tonnes, but the lead
time is two weeks. The stock used in that time is (60,000×2)/50 = 2,400 tonnes. Before delivery,
inventory has fallen to (10,000 – 2,400) = 7,600 tonnes. Orders are made twice per year, and so
the order size = 60,000/2 = 30,000 tonnes. The order will increase stock level to 30,000 + 7,600

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 Working Capital Management

= 37,600 tonnes. Hence the average stock level = 7,600 + (30,000/2) = 22,600 tonnes. Total costs
of current policy = (0.1×22,600) + (100×2) = ` 2,460 per year.
Advise: The recommended policy should be adopted as the costs (` 1,365 per year) are less
than the current policy.

8 ICAI Mat
Pureair Company is a distributor of air filters to retail stores. It buys its filters from several manufac-
turers. Filters are ordered in lot sizes of 1,000 and each order costs ` 40 to place. Demand from
retail stores is 20,000 filters per month, and carrying cost is ` 0.10 a filter per month.
(a) COMPUTE the optimal order quantity with respect to so many lot sizes?
(b) CALCULATE the optimal order quantity if the carrying cost were ` 0.05 a filter per month?
(c) COMPUTE the optimal order quantity if ordering costs were ` 10?

Optimal Order Quantity based on various

condition
T E
I T U
S T
Answer
C I N
(a) EOQ* =
2(20)(40)
100 SJ
=4

Carrying costs = ` 0.10 × 1,000 = ` 100. The optimal order size would be 4,000 filters, which
represents five orders a month.
2(20)(40)
(b) EOQ* = = 5.66
50
Since the lot size is 1,000 filters, the company would order 6,000 filters each time. The lower
the carrying cost, the more important ordering costs become relatively, and the larger the
optimal order size.

2(20)(10)
(c) EOQ* = =2
100
The lower the order cost, the more important carrying costs become relatively and the
smaller the optimal order size.

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 Working Capital Management

9 RTP May 18
Following information is forecasted by the Puja Limited for the year ending 31st March, 20X8:
Balance as at 1st Balance as at 31st
April, 20X7 March, 20X8
(`) (`)
Raw Material 45,000 65,356
Work-in-progress 35,000 51,300
Finished goods 60,181 70,175
Debtors 1,12,123 1,35,000
Creditors 50,079 70,469
Annual purchases of raw material (all credit) - 4,00,000
Annual cost of production - 7,50,000
Annual cost of goods sold - 9,15,000
Annual operating cost - 9,50,000
Annual sales (all credit) - 11,00,000
You may take one year as equal to 365 days.
T E
CALCULATE
I T U
(i) Net operating cycle period.
S T
I N
(ii) Number of operating cycles in the year.
C
SJ
(iii) Amount of working capital requirement using operating cycles.

Operating Cycle

Answer
Working Notes:
1. Raw Material Storage Period (R)
Average Stock of Raw Material
= × 365
Annual Consumption of Raw Mate erial
` 45,000 + ` 65,356
2 × 365
=
` 3,79,644
= 53 days.

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 Working Capital Management

Annual Consumption of Raw Material = Opening Stock + Purchases – Closing Stock

= ` 45,000 + ` 4,00,000 – ` 65,356
= ` 3,79,644
2. Work-in-Progress (WIP) Conversion Period (W)
Average Stock of WIP
WIP Conversion Period = × 365
Annual Cost of Production
` 35,000 + ` 51,300
= 2 × 365
` 7,50,000
= 21 days
3. Finished Stock Storage Period (F)
Average Stock of Finished Goods
= × 365
Cost of Goods Sold

` 65,178
= × 365 = 26 days.
` 9,15,000

Average Stock =
` 60,181 + ` 70,175
T E
= ` 65,178
2

I T U
4. Debtors Collection Period (D)
S T
=
Average Debtors
× 365
C I N
=
Annual Credit Sales
` 1,23,561.50
` 11,00,000
SJ
= 41 days
` 1,12,123 + ` 1,35,000
Average debtors = = ` 1,23,561.50
2

5. Creditors Payment Period (C)

Average Creditors
× 365
Annual Net Credit Purchases
! ` 50,079 + ` 70,469 $
# &
" 2 %
= × 365
` 4,00,000
= 55 days
(i) Operating Cycle Period
= R + W + F+ D - C
= 53 + 21 + 26 + 41 - 55
= 86 days

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 Working Capital Management

(ii) Number of Operating Cycles in the Year

365
=
Operating Cycle Period
365
= = 4.244
86
(iii) Amount of Working Capital Required
Annual Operating Cost
=
Number of Operating Cycles
` 9,50,000
= = ` 2,23,845.42
4.244

10 MTP Mar 18; MTP Nov 18

A newly formed company has applied to the commercial bank for the first time for financing its
working capital requirements. The following information is available about the projections for
the current year:
Estimated level of activity: 1,04,000 completed units of production plus 4,000 units of
E
work-in-progress. Based on the above activity, estimated cost per unit is:
T
Raw material
I T U
` 80 per unit
Direct wages
S T
` 30 per unit
Overheads (exclusive of depreciation)
C I N ` 60 per unit

SJ
Total cost ` 170 per unit
Selling price ` 200 per unit
Raw materials in stock: Average 4 weeks consumption, work-in-progress (assume 50%
completion stage in respect of conversion cost) (materials issued at the start of the processing).
Finished goods in stock 8,000 units
Credit allowed by suppliers Average 4 weeks
Credit allowed to debtors/receivables Average 8 weeks
Lag in payment of wages 1
Average 1 weeks
2
Cash at banks (for smooth operation) is expected to be ` 25,000
Assume that production is carried on evenly throughout the year (52 weeks) and wages and
overheads accrue similarly. All sales are on credit basis only.

CALCULATE Net Working Capital. (10 Marks)

10.16 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Calculation of Working Capital

Answer
Estimate of the Requirement of Working Capital
(`) (`)
A. Current Assets:
Raw material stock 6,64,615
(Refer to Working note 3)
Work in progress stock 5,00,000
(Refer to Working note 2)
Finished goods stock 13,60,000
(Refer to Working note 4)
Receivables 25,10,769
(Refer to Working note 5)
T E
U
TIT
Cash and Bank balance 25,000 50,60,384
B. Current Liabilities:
Payables for raw materials
I N S 7,15,740
(Refer to Working note 6)
Payables for wages
SJ C 91,731 (8,07,471)
(Refer to Working note 7)
Net Working Capital (A – B) 42,52,913
Working Notes:
1. Annual cost of production
`
Raw material requirements (1,04,000 units x ` 80) 83,20,000
Direct wages (1,04,000 units x ` 30) 31,20,000
Overheads (exclusive of depreciation)(1,04,000 x ` 60) 62,40,000
1,76,80,000
2. Work in progress stock
`
Raw material requirements (4,000 units x ` 80) 3,20,000
Direct wages (50% x 4,000 units x ` 30) 60,000
Overheads (50% x 4,000 units x ` 60) 1,20,000
5,00,000

CA Inter FM
| 10.17
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

3. Raw material stock

It is given that raw material in stock is average 4 weeks’ consumption. Since, the company
is newly formed, the raw material requirement for production and work in progress will be
issued and consumed during the year.
Hence, the raw material consumption for the year (52 weeks) is as follows:
`
For Finished goods 83,20,000
For Work in progress 3,20,000
86,40,000
` 86,40,000
Raw material stock = × 4 weeks i.e. ` 6,64,615
52 weeks
4. Finished goods stock
8,000 units @ ` 170 per unit = `13,60,000
5. Receivables for sale
Credit allowed to debtors Average 8 weeks
Credit sales for year (52 weeks) i.e. (1,04,000 units - 8,000 units) 96,000 units
Cost per unit
T E ` 170
Credit sales for the year (96,000 units x `170)
I T U ` 1,63,20,000

Receivables =
` 1,63,20,000
× 8 weeks S T ` 25,10,769
52 weeks
C I N
6.
SJ
Payables for raw material:
Credit allowed by suppliers Average 4 weeks
Purchases during the year (52 weeks)
i.e. (` 83,20,000 + ` 3,20,000 + ` 6,64,615) ` 93,04,615
(Refer to Working notes 1,2 and 3 above)
` 93,04,615 ` 7,15,740
Payables for raw materials = × 4 weeks
52 weeks
7. Payables for wages
Lag in payment of wages 1
Average 1 weeks
2
Direct wages for the year (52 weeks) i.e.
(` 31,20,000 + ` 60,000) ` 31,80,000
(Refer to Working notes 1 and 2 above)
` 31, 80 , 000 1 ` 91,731
Payables for wages = × 1 weeks
52 weeks 2

10.18 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

11 May 18; RTP May 20

Day Ltd., a newly formed company has applied to the Private Bank for the first time for financing
it’s Working Capital Requirements. The following informations are available about the projections
for the current year:
Estimated Level of Activity Completed Units of Production 31,200 plus unit of
work in progress 12,000
Raw Material Cost ` 40 per unit
Direct Wages Cost ` 15 per unit
Overhead ` 40 per unit (inclusive of Depreciation ` 10 per unit)
Selling Price ` 130 per unit
Raw Material in Stock Average 30 days consumption
Work in Progress Stock Material 100% and Conversion Cost 50%
Finished Goods Stock 24,000 Units
Credit Allowed by the supplier 30 days
Credit Allowed to Purchasers 60 days
Direct Wages (Lag in payment) 15 days
Expected Cash Balance ` 2,00,000
T E
I T U
Assume that production is carried on evenly throughout the year (360 days) and wages and

S T
overheads accrue similarly. All sales are on the credit basis.

I N
You are required to calculate the Net Working Capital Requirement on Cash Cost Basis.
C
SJ (10 Marks)

Net Working Capital Requirement on Cash

Cost Basis.

Answer
Calculation of Net Working Capital requirement:
(`) (`)
A. Current Assets:
Inventories:
Stock of Raw material (Refer to Working note (iii)) 1,44,000
Stock of Work in progress (Refer to Working note (ii)) 7,50,000
Stock of Finished goods (Refer to Working note (iv)) 20,40,000
Debtors for Sales (Refer to Working note (v)) 1,02,000
Cash 2,00,000

CA Inter FM
| 10.19
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Gross Working Capital 32,36,000 32,36,000

B. Current Liabilities:
Creditors for Purchases (Refer to Working note (vi)) 1,56,000
Creditors for wages (Refer to Working note (vii)) 23,250
1,79,250 1,79,250
Net Working Capital (A - B) 30,56,750

Working Notes:
(i) Annual cost of production
(`)
Raw material requirements 17,28,000
{(31,200 × ` 40) + (12,000 × ` 40)}
Direct wages 5,58,000
{(31,200 × ` 15) +(12,000 × ` 15 x 0.5)}
Overheads (exclusive of depreciation) 11,16,000
{(31,200 × ` 30) + (12,000 × ` 30 × 0.5)}
Gross Factory Cost 34,02,000
Less: Closing W.I.P [12,000 (` 40 + ` 7.5 + `15)] T E (7,50,000)
Cost of Goods Produced
I T U 26,52,000
Less: Closing Stock of Finished Goods
S T (20,40,000)
I N
(` 26,52,000 × 24,000/31,200)
C
(ii) Work in progress stock
SJ
Total Cash Cost of Sales 6,12,000

(`)
Raw material requirements (12,000 units × `40) 4,80,000
Direct wages (50% × 12,000 units × ` 15) 90,000
Overheads (50% × 12,000 units × ` 30) 1,80,000
7,50,000

(iii) Raw material stock

It is given that raw material in stock is average 30 days consumption. Since, the company
is newly formed; the raw material requirement for production and work in progress will be
issued and consumed during the year. Hence, the raw material consumption for the year
(360 days) is as follows:
(`)
For Finished goods (31,200 × ` 40) 12,48,000
For Work in progress (12,000 × ` 40) 4,80,000
17,28,000

10.20 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

` 17,28,000
Raw material stock = × 30 days = `1,44,000
360 days
(iv) Finished goods stock:
24,000 units @ ` (40+15+30) per unit = ` 20,40,000
(v) Debtors for sale: ` 6,12,000 × 60 days = ` 1,02,000
360 days
(vi) Creditors for raw material Purchases [Working Note (iii)]:
Annual Material Consumed (` 12,48,000 + ` 4,80,000) ` 17,28,000
Add: Closing stock of raw material [(17,28,000 * 30 days)/ 360 days] ` 1,44,000
` 18,72,000
` 18,72,000
Credit allowed by suppliers = × 30 days = ` 1,56,000
360 days
(vii) Creditors for wages:

` 5,58,000
Outstanding wage payment = × 15 days = ` 23,250
360 days

T E
RTP Nov 18; RTP May 19
12
I T U
T
A company is considering its working capital investment and financial policies for the next
S
I N
year. Estimated fixed assets and current liabilities for the next year are ` 2.60 crores and ` 2.34
crores respectively. Estimated Sales and EBIT depend on current assets investment, particularly
C
SJ
inventories and book-debts. The financial controller of the company is examining the following
alternative Working Capital Policies:
(` Crores)
Working Capital Policy Investment in Current Assets Estimated Sales EBIT
Conservative 4.50 12.30 1.23
Moderate 3.90 11.50 1.15
Aggressive 2.60 10.00 1.00
After evaluating the working capital policy, the Financial Controller has advised the adoption
of the moderate working capital policy. The company is now examining the use of long-term
and short-term borrowings for financing its assets. The company will use ` 2.50 crores of the
equity funds. The corporate tax rate is 35%. The company is considering the following debt
alternatives.
(` Crores)
Financing Policy Short-term Debt Long-term Debt
Conservative 0.54 1.12
Moderate 1.00 0.66
Aggressive 1.50 0.16
Interest rate-Average 12% 16%

CA Inter FM
| 10.21
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

You are required to CALCULATE the following:

(i) Working Capital Investment for each policy:
(a) Net Working Capital position
(b) Rate of Return
(c) Current ratio
(ii) Financing for each policy:
(a) Net Working Capital position.
(b) Rate of Return on Shareholders’ equity.
(c) Current ratio.

Calculation of Working Capital

Investments and financing under different
Policies.

Answer
T E
(i) Statement showing Working Capital for each policy
I T U (` in crores)

S T
C I N Working Capital Policy
Conservative Moderate Aggressive
Current Assets: (i)
Fixed Assets: (ii)
SJ 4.50
2.60
3.90
2.60
2.60
2.60
Total Assets: (iii) 7.10 6.50 5.20
Current liabilities: (iv) 2.34 2.34 2.34
Net Worth: (v)=(iii)-(iv) 4.76 4.16 2.86
Total liabilities: (iv)+(v) 7.10 6.50 5.20
Estimated Sales: (vi) 12.30 11.50 10.00
EBIT: (vii) 1.23 1.15 1.00
(a) Net working capital position: (i)-(iv) 2.16 1.56 0.26
(b) Rate of return: (vii)/(iii) 17.3% 17.7% 19.2%
(c) Current ratio: (i)/(iv) 1.92 1.67 1.11

(ii) Statement Showing Effect of Alternative Financing Policy

(` in crores)
Financing Policy Conservative Moderate Aggressive
Current Assets: (i) 3.90 3.90 3.90
Fixed Assets: (ii) 2.60 2.60 2.60
Total Assets: (iii) 6.50 6.50 6.50

10.22 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Current Liabilities: (iv) 2.34 2.34 2.34

Short term Debt: (v) 0.54 1.00 1.50
Long term Debt: (vi) 1.12 0.66 0.16
Equity Capital (vii) 2.50 2.50 2.50
Total liabilities 6.50 6.50 6.50
Forecasted Sales 11.50 11.50 11.50
EBIT: (viii) 1.15 1.15 1.15
Less: Interest short-term debt: (ix) 0.06 0.12 0.18
(12% of ` 0.54) (12% of ` 1.00) (12% of ` 1.50)
Long term debt: (x) 0.18 0.11 0.03
(16% of ` 1.12) (16% of ` 0.66) (16% of ` 0.16)
Earning before tax: (xi) - (ix + x) 0.91 0.92 0.94
Tax @ 35% (0.32) (0.32) (0.33)
Earning after tax: (xii) 0.59 0.60 0.61
(a) Net Working Capital Position: 1.02 0.56 0.06
(a) (i) - [(iv)+(v)]
(b) Rate of return on Equity sharehold- 23.6% 24% 24.4%
ers’ capital : (xii)/(vii)
T E
U
TIT
(c) Current Ratio: 1.35 1.17 1.02
(a) [(i)/(iv)+(v)]

I N S
13
SJ C MTP May 18; MTP Aug 18
A newly formed company has applied to the commercial bank for the first time for financing its
working capital requirements. The following information is available about the projections for
the current year:
Estimated level of activity: 1,04,000 completed units of product ion plus 4,000 units of work-in
progress.
Based on the above activity, estimated cost per unit is:
Raw material ` 80 per unit
Direct wages ` 30 per unit
Overheads (exclusive of depreciation) ` 60 per unit
Total cost ` 170 per unit
Selling price ` 200 per unit
Raw materials in stock: Average 4 weeks consumption, work-in-progress (assume 50%
completion stage in respect of conversion cost) (materials issued at the start of the processing).
Finished goods in stock 8,000 units
Credit allowed by suppliers Average 4 weeks

CA Inter FM
| 10.23
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Credit allowed to debtors/receivables Average 8 weeks

Lag in payment of wages 1
Average 1 weeks
2
Cash at banks (for smooth operation) is expected to be ` 25,000
Assume that production is carried on evenly throughout the year (52 weeks) and wages and
overheads accrue similarly. All sales are on credit basis only.
CALCULATE
Net Working Capital required (10 Marks)

Net working Capital requirement and

Finance as per Tandon Comimittee

Answer
Estimate of the Requirement of Working Capital

U TE (`) (`)
A. Current Assets:
I T
Raw material stock

I N ST
Work in progress stock (Refer to Working note 3)
6,64,615
5,00,000

SJ C
Finished goods stock (Refer to Working note 2)
Debtors/ Receivables (Refer to Working note 4)
13,60,000
29,53,846
Cash and Bank balance (Refer to Working note 5) 25,000 55,03,461
B. Current Liabilities:
Creditors for raw materials 7,15,740
Creditors for wages (Refer to Working note 6) 91,731 (8,07,471)
Net Working Capital (A–B) (Refer to Working note 7) 46,95,990
Working Notes:
1. Annual cost of production
`
Raw material requirements (4,000 units x ` 80) 83,20,000
Direct wages (1,04,000 units x ` 30) 31,20,000
Overheads (exclusive of depreciation) (1,04,000 x ` 60) 62,40,000
1,76,80,000

10.24 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

2. Work in progress stock

`
Raw material requirements (4,000 units x ` 80) 3,20,000
Direct wages (50% x 4,000 units x ` 30) 60,000
Overheads (50% x 4,000 units x `60) 1,20,000
5,00,000
3. Raw material stock
It is given that raw material in stock is average 4 weeks consumption. Since, the company
is newly formed, the raw material requirement for production and work in progress will be
issued and consumed during the year.
Hence, the raw material consumption for the year (52 weeks) is as follows:
`
For Finished goods 83,20,000
For Work in progress 3,20,000
83,40,000
` 86 , 40 , 000 ` 6,64,615
Raw material stock
52 weeks
x 4 weeks
T E
4. Finished goods stock
I T U
S T
5. Debtors for sale
C N
8,000 units @ ` 170 per unit = ` 13,60,000
I
SJ
Credit allowed to debtors
Credit sales for year (52 weeks) i.e. (1,04,000 units – 8,000 units)
Average 8 weeks
96,000 units
Selling price per unit ` 200
Credit sales for the year (96,000 units x ` 200) ` 1,92,00,000
` 1,92,00,000 ` 1,92,00,000
Debtors x 8 weeks
52 weeks

(Debtor can also be calculated based on Cost of goods sold)

6. Creditors for raw material:
Credit allowed by suppliers Average 4 weeks
Purchases during the year (52 weeks) i.e.
(` 83,20,000 + ` 3,20,000 + ` 6,64,615) ` 93,04,615
(Refer to Working notes 1,2 and 3 above)
` 93,04,615 ` 7,15,740
Creditors x 4 weeks i.e. ` 7,15,740
52 weeks

CA Inter FM
| 10.25
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

7. Creditors for wages

Lag in payment of wages 1
Average 1 weeks
2
Direct wages for the year (52 weeks) i.e. (` 31,20,000 + ` 60,000) ` 31,80,000
(Refer to Working notes 1 and 2 above)
` 31,80,000 1 ` 91,731
Creditors x 1 weeks i.e. ` 91,731
52 weeks 2

14 RTP May 19
A proforma cost sheet of a company provides the following particulars:
Amount per unit (`)
Raw materials cost 100.00
Direct labour cost 37.50
Overheads cost 75.00
Total cost
T E 212.50
Profit
I T U 37.50
Selling Price
S T 250.00

I N
The Company keeps raw material in stock, on an average for one month; work-in-progress, on

C
an average for one week; and finished goods in stock, on an average for two weeks.

SJ
The credit allowed by suppliers is three weeks and company allows four weeks credit to its
debtors. The lag in payment of wages is one week and lag in payment of overhead expenses is
two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at bank
put together at `37,500.
Required:
PREPARE a statement showing estimate of Working Capital needed to finance an activity level
of 1,30,000 units of production. Assume that production is carried on evenly throughout the
year, and wages and overheads accrue similarly. Work-in-progress stock is 80% complete in
all respects.

Estimation of Working Capital

Requirement

10.26 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Answer
Statement showing Estimate of Working Capital Needs
(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
Raw material (1 month or 4 weeks) 10,00,000
# 1,30,000 units !"` 100 &
% ! 4 weeks (
$ 52 weeks '
WIP Inventory (1 week) 4,25,000
# 1,30,000 units !"` 212.50 &
% ! 1 weeks ( ! 0.8
$ 52 weeks '
Finished goods inventory (2 weeks) 10,62,500 24,87,500
# 1,30,000 units !"` 212.50 &
% ! 2 weeks (
$ 52 weeks '
(ii) Receivables (Debtors) (4 weeks) 17,00,000
# 1,30,000 units !"` 212.50 & 4
T E
%
$ 52 weeks
! 4 weeks ( ! th
' 5
I T U
(iii) Cash and bank balance
S T 37,500
Total Current Assets
C I N 42,25,000
B. Current Liabilities: SJ
(i) Payables (Creditors) for materials (3 weeks) 7,50,000
# 1,30,000 units !"` 100 &
% ! 3 weeks (
$ 52 weeks '
(ii) Outstanding wages (1 week) 93,750
# 1,30,000 units !"` 37.50 &
% ! 1 week (
$ 52 weeks '
(iii) Outstanding overheads (2 weeks) 3,75,000

# 1,30,000 units !"` 75 &

% ! 2 weeks (
$ 52 weeks '
Total Current Liabilities 12,18,750
Net Working Capital Needs (A – B) 30,06,250

CA Inter FM
| 10.27
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

15 May 19
Bita Limited manufactures used in the steel industry. The following information regarding the
company is given for your consideration:
(i) Expected level of production 9000 units per annum.
(ii) Raw materials are expected to remain in store for an average of two months before issue to
production.
(iii) Work-in-progress (50 percent complete as to conversion cost) will approximate to 1/2
month’s production.
(iv) Finished goods remain in warehouse on an average for one month.
(v) Credit allowed by suppliers is one month.·
(vi) Two month’s credit is normally allowed to debtors.
(vii) A minimum cash balance of ` 67,500 is expected to be maintained.
(viii) Cash sales are 75 percent less than the credit sales.
(ix) Safety margin of 20 percent to cover unforeseen contingencies.
(x) The production pattern is assumed to be even during the year.
T E
I T U
(xi) The cost structure for Bita Limited’s product is as follows:

S T `
Raw Materials
C I N 80 per unit
Direct Labour
SJ
Overheads (including depreciation ` 20)
20 per unit
80 per unit
Total Cost 180 per unit
Profit 20 per unit
Selling Price 200 per unit

You are required to estimate the working capital requirement of Bita limited. (10 Marks)

Working Capital Requirement

10.28 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Answer
Statement showing Estimate of Working Capital Requirement
(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
1,20,000
- Raw material inventory ⎛⎜ 9,000 units × `80 ×2 month⎞⎟
⎝ 12 months ⎠
Work in Progress:
⎛ 9,000 units × ` 80 ⎞ 30,000
Raw material ⎜ × 0.5 month ⎟
⎝ 12 months ⎠
9,000 units × `20 3,750
Wages ⎜⎛ ⎞
× 0.5 month⎟ × 50%
⎝ 12 months ⎠

⎛9,000 units × ` 60 ⎞ 11,250 45,000

Overheads ⎜ × 0.5 month ⎟ × 50%
⎝ 12 months ⎠
(Other than Depreciation)
Finished goods (inventory held for 1 months)
U TE 1,20,000
⎛ 9,000 units × `160 ⎞
I T
ST
⎜ × 1 month⎟
⎝ 12 months ⎠

(ii) Debtors (for 2 months)

C I N 1,92,000
 9,000 units ×`160

 12 months
SJ 
× 2 month  × 80% or

 11,52,000 
 × 2 month 
 12 months 

(iii) Cash balance expected 67,500

Total Current assets 5,44,500
B. Current Liabilities
(i) Creditors for Raw material (1 month) 60,000
 9,000 units ×` 80 
 × 1 month 
 12 months 
Total current liabilities 60,000
Net working capital (A – B) 4,84,500
Add: Safety margin of 20 percent 96,900
Working capital Requirement 5,81,400

CA Inter FM
| 10.29
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Working Notes:
1. If Credit sales is x then cash sales is x-75% of x i.e. x/4.
Or, x + 0.25x = ` 18,00,000
Or, x = ` 14,40,000
So, credit Sales is ` 14,40,000
⎛ ` 14,40,000 ⎞
Hence, Cash cost of credit sales ⎜ × 4 ⎟ = ` 11,52,000
⎝ 5 ⎠
2. It is assumed that safety margin of 20% is on net working capital.
3. No information is given regarding lag in payment of wages, hence ignored assuming it is
paid regularly.
4. Debtors/Receivables is calculated based on total cost.
[If Debtors/Receivables is calculated based on sales, then debtors will be
⎛ 9,000 units × `200 ⎞ 14, 40,000
⎜ × 2 month ⎟ × 80% Or, ⎛⎜ ⎞
× 2 month ⎟ = ` 2, 40,000
⎝ 12 months ⎠ ⎝ 12 months ⎠
Then Total Current assets will be ` 5,92,500 and accordingly Net working capital and

E
Working capital requirement will be ` 5,32,500 and ` 6,39,000 respectively.]
T
I T U
16
S T RTP Nov 19

C I N
Following are cost information of KG Ltd., which has commenced a new project for an annual

SJ
production of 24,000 units which is the full capacity:
Costs per unit
(`)
Materials 80.00
Direct labour and variable expenses 40.00
Fixed manufacturing expenses 12.00
Depreciation 20.00
Fixed administration expenses 8.00
160.00
The selling price per unit is expected to be ` 192 and the selling expenses ` 10 per unit, 80% of
which is variable.
In the first two years of operations, production and sales are expected to be as follows:
Year Production (No. of units) Sales (No. of units)
1 12,000 10,000
2 18,000 17,000
To assess the working capital requirements, the following additional information is available:

10.30 |CA Inter FM

Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

(a) Stock of materials 2 months’ average consumption

(b) Work-in-process Nil
(c) Debtors 2 month’s average sales.
(d) Cash balance ` 1,00,000
(e) Creditors for supply of materials 1 month’s average purchase during the year.
(f ) Creditors for expenses 1 month’s average of all expenses during the year

PREPARE, for the two years:

(i) A projected statement of Profit/Loss (Ignoring taxation); and
(ii) A projected statement of working capital requirements

Projected statement of P/L and Working

Capital Requirements.

Answer
T E
(i)
I T U
Projected Statement of Profit / Loss

S T
Production (Units)
C I N Year 1
12,000
Year 2
18,000
Sales (Units)
SJ 10,000 17,000

(`) (`)
Sales revenue (A) 19,20,000 32,64,000
(Sales unit x ` 192)
Cost of production:
Materials cost 9,60,000 14,40,000
(Units produced x ` 80)
Direct labour and variable expenses 4,80,000 7,20,000
(Units produced x ` 40)
Fixed manufacturing expenses 2,88,000 2,88,000
(Production Capacity: 24,000 units x ` 12)
Depreciation 4,80,000 4,80,000
(Production Capacity : 24,000 units x ` 20)
Fixed administration expenses 1,92,000 1,92,000
(Production Capacity : 24,000 units x ` 8)
Total Costs of Production 24,00,000 31,20,000

CA Inter FM
| 10.31
Divya Jadi Booti
Contact: 033-4059-3800 Website: sjc.co.in
 Working Capital Management

Add: Opening stock of finished goods --- 4,00,000

(Year 1 : Nil; Year 2 : 2,000 units)
Cost of Goods available for sale 24,00,000 35,20,000
(Year 1: 12,000 units; Year 2: 20,000 units)
Less: Closing stock of finished goods at average cost (4,00,000) (5,28,000)
(year 1: 2000 units, year 2 : 3000 units)
(Cost of Production * Closing stock/ units produced)
Cost of Goods Sold 20,00,000 29,92,000
Add: Selling expenses - Variable (Sales unit x ` 8) 80,000 1,36,000
Add: Selling expenses -Fixed (24,000 units x ` 2) 48,000 48,000
Cost of Sales : (B) 21,28,000 31,76,000
Profit (+) / Loss (-): (A - B) (-) 2,08,000 (+) 88,000
Working Notes:
1. Calculation of creditors for supply of materials:
Year 1 (`) Year 2 (`)
Materials consumed during the year 9,60,000 14,40,000
Add: Closing stock (2 month’s average
consumption) T E 1,60,000 2,40,000

I T U 11,20,000 16,80,000
Less: Opening Stock
S T --- 1,60,000
Purchases during the year
C I N 11,20,000 15,20,000

2. SJ
Average purchases per month (Creditors)
Creditors for expenses:
93,333 1,26,667

Year 1 (`) Year 2 (`)

Direct labour and variable expenses 4,80,000 7,20,000
Fixed manufacturing expenses 2,88,000 2,88,000
Fixed administration expenses 1,92,000 1,92,000
Selling expenses (variable + fixed) 1,28,000 1,84,000
Total 10,88,000 13,84,000
Average per month 90,667 1,15,333
(ii) Projected Statement of Working Capital requirements
Year 1 (`) Year 2 (`)
Current Assets:
Inventories:
- Stock of materials 1,60,000 2,40,000
(2 month’s average consumption)
- Finished goods 4,00,000 5,28,000

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 Working Capital Management

Debtors (2 month’s average sales) (including profit) 3,20,000 5,44,000

Cash 1,00,000 1,00,000
Total Current Assets / Gross working capital (A) 9,80,000 14,12,000
Current Liabilities:
Creditors for supply of materials 93,333 1,26,667
(Refer to working note 1)
Creditors for expenses 90,667 1,15,333
(Refer to working note 2)
Total Current Liabilities: (B) 1,84,000 2,42,000
Estimated Working Capital Requirements: (A-B) 7,96,000 11,70,000

17 MTP Mar 20
Cost sheet of A&R Ltd. provides the following particulars:
Amount per unit (`)
Raw materials cost 200.00
Direct labour cost
T E 75.00
Overheads cost
I T U 150.00
Total cost
S T 425.00
Profit
Selling Price
C I N 75.00
500.00

SJ
The Company keeps raw material in stock, on an average for four weeks; work-in-progress, on
an average for one week; and finished goods in stock, on an average for two weeks.
The credit allowed by suppliers is three weeks and company allows four weeks credit to its
debtors. The lag in payment of wages is one week and lag in payment of overhead expenses is
two weeks.
The Company sells one-fifth of the output against cash and maintains cash-in-hand and at bank
put together at ` 2,50,000.
Required:
PREPARE a statement showing estimate of Working Capital needed to finance an activity
level of 2,60,000 units of production. Assume that production is carried on evenly throughout
the year, and wages and overheads accrue similarly. Work-in-progress stock is 80% complete
in all respects.

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 Working Capital Management

Answer
Statement showing Estimate of Working Capital Needs
(Amount in `) (Amount in `)
A. Current Assets
(i) Inventories:
Raw material (4 weeks) 40,00,000
! 2,60,000 units x ` 200 $
# x 4 weeks &
" 52 weeks %
WIP Inventory (1 week) 17,00,000
! 2,60,000 units x ` 425 $
# x 1 week & x 0.8
" 52 weeks %
Finished goods inventory (2 weeks) 42,50,000 99,50,000
! 2,60,000 units x ` 425 $
# x 2 weeks &
" 52 weeks %
(ii) Receivables (Debtors) (4 weeks) 68,00,000
! 2,60,000 units x ` 425 $ 4
x 4 weeks & x th T E
#
" 52 weeks % 5
I T U
(iii) Cash and bank balance
S T 2,50,000
Total Current Assets
C I N 1,70,00,000

SJ
B. Current Liabilities:
(i) Payables (Creditors) for materials (3 weeks) 30,00,000
! 2,60,000 units x ` 200 $
# x 3 weeks &
" 52 weeks %
(ii) Outstanding wages (1 week) 3,75,000
! 2,60,000 units x ` 75 $
# x 1 week &
" 52 weeks %

(iii) Outstanding overheads (2 weeks) 15,00,000

! 2,60,000 units x ` 150 $
# x 2 weeks &
" 52 weeks %
Total Current Liabilities 48,75,000
Net Working Capital Needs (A – B) 1,21,25,000

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 Working Capital Management

18 MTP March 20
The following information is provided by the P Ltd. for the year ending 31st March, 2020.
Raw Material storage period 52 days
Work in progress conversion period 18 days
Finished Goods storage period 20 days
Debt Collection period 75 days
Creditors’ payment period 25 days
Annual Operating Cost 45 crore
(Including depreciation of ` 42,00,000)
(1 year = 360 days)

You are required to CALCULATE Operating Cycle period and Number of Operating Cycles in
a year.

Answer
Calculation of Operating Cycle Period and number of Operating Cycle in a Year

T E
Operating Cycle Period =R+W+F+D–C

I T U
T
= 52 + 18 + 20 + 75 – 25 = 140 days
S
I
Number of Operating Cycle in a Year =
C N 360
Operating Cycle Period

SJ = 360/140 = 2.57 times

19 RTP Nov 20
The following figures and ratios are related to a company:
(i) Sales for the year (all credit) ` 90,00,000
(ii) Gross Profit ratio 35 percent
(iii) Fixed assets turnover (based on cost of goods sold) 1.5
(iv) Stock turnover (based on cost of goods sold) 6
(v) Liquid ratio 1.5:1
(vi) Current ratio 2.5:1
(vii) Receivables (Debtors) collection period 1 month
(viii) Reserves and surplus to Share capital 1:1.5
(ix) Capital gearing ratio 0.7875
(x) Fixed assets to net worth 1.3 : 1

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 Working Capital Management

You are required to PREPARE:

(a) Balance Sheet of the company on the basis of above details.
(b) The statement showing working capital requirement, if the company wants to make a
provision for contingencies @ 15 percent of net working capital.

Answer
Working Notes:
(i) Cost of Goods Sold = Sales – Gross Profit (35% of Sales)
= ` 90,00,000 – ` 31,50,000
= ` 58,50,000
(ii) Closing Stock = Cost of Goods Sold / Stock Turnover
= ` 58,50,000/6 = ` 9,75,000
(iii) Fixed Assets = Cost of Goods Sold / Fixed Assets Turnover
= ` 58,50,000/1.5
= ` 39,00,000
(iv) Current Assets:
T E
Current Ratio = 2.5
I T U
Liquid Ratio = 1.5
S T
Inventories (Stock)
C I N
= 2.5 – 1.5 = 1
Current Assets
SJ = Amount of Inventories (Stock) × 2.5/1
= ` 9,75,000 × 2.5/1 = ` 24,37,500
(v) Liquid Assets (Receivables and Cash)
= Current Assets – Inventories (Stock)
= ` 24,37,500 – ` 9,75,000
= ` 14,62,500
(vi) Receivables (Debtors) = Sales × Debtors Collection period /12
= ` 90,00,000 × 1/12
= ` 7,50,000
(vii) Cash = Liquid Assets – Receivables (Debtors)
= ` 14,62,500 – ` 7,50,000 = ` 7,12,500
(viii) Net worth = Fixed Assets /1.3
= ` 39,00,000/1.3 = ` 30,00,000

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 Working Capital Management

(ix) Reserves and Surplus

Reserves and Share Capital = Net worth
Net worth = 1 + 1.5 = 2.5
Reserves and Surplus = ` 30,00,000 × 1/1.5
= ` 20,00,000
(x) Share Capital = Net worth – Reserves and Surplus
= ` 30,00,000 – ` 20,00,000
= ` 10,00,000
(xi) Current Liabilities = Current Assets/ Current Ratio
= ` 24,37,500/2.5 = ` 9,75,000
(xii) Long-term Debts
Capital Gearing Ratio = Long-term Debts / Equity Shareholders’ Fund
Long-term Debts = ` 30,00,000 × 0.7875 = ` 23,62,500
(a) Balance Sheet of the Company
Particulars
T E Figures as at 31-03-2020 (`)
I. EQUITY AND LIABILITIES
I T U
Shareholders’ funds
S T
(a) Share capital
(b) Reserves and surplus
C I N 10,00,000
20,00,000
Non-current liabilities
(a) Long-term borrowings
SJ 23,62,500
Current liabilities 9,75,000
TOTAL 63,37,500
II. ASSETS
Non-current assets
Fixed assets 39,00,000
Current assets
Inventories 9,75,000
Trade receivables 7,50,000
Cash and cash equivalents 7,12,500
TOTAL 63,37,500
(b) Statement Showing Working Capital Requirement
Particulars (`) (`)
A. Current Assets
(i) Inventories (Stocks) 9,75,000
(ii) Receivables (Debtors) 7,50,000
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 Working Capital Management

(iii) Cash in hand & at bank 7,12,500

Total Current Assets 24,37,500
B. Current Liabilities:
Total Current Liabilities 9,75,000
Net Working Capital (A – B) 14,62,500
Add: Provision for contingencies
(15% of Net Working Capital) 2,19,375
Working capital requirement 16,81,875

20 Nov 20
PK Ltd., a manufacturing company, provides the following information:
(`)
Sales 1,08,00,000
Raw Material Consumed 27,00,000
Labour Paid 21,60,000

T E
Manufacturing Overhead (Including Depreciation for the year ` 3,60,000) 32,40,000
Administrative & Selling Overhead
I T U 10,80,000
Additional Information:
S T
I N
(a) Receivables are allowed 3 months’ credit.
C
SJ
(b) Raw Material Supplier extends 3 months’ credit.
(c) Lag in payment of Labour is 1 month.
(d) Manufacturing Overhead are paid one month in arrear.
(e) Administrative & Selling Overhead is paid 1 month advance.
(f ) Inventory holding period of Raw Material & Finished Goods are of 3 months.
(g) Work-in-Progress is Nil.
(h) PK Ltd. sells goods at Cost plus 33 %.
(i) Cash Balance ` 3,00,000.
(j) Safety Margin 10%.
You are required to compute the Working Capital Requirements of PK Ltd. on Cash Cost basis.
(10 Marks)

Working Capital Requirement on Cash

Cost Basis

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 Working Capital Management

Answer
Statement showing the requirements of Working Capital (Cash Cost basis)
Particulars (`) (`)
A. Current Assets:
Inventory:
Stock of Raw material (` 27,00,000 × 3/12) 6,75,000
Stock of Finished goods (` 77,40,000 × 3/12) 19,35,000
Receivables (` 88,20,000 × 3/12) 22,05,000
Administrative and Selling Overhead (` 10,80,000 × 1/12) 90,000
Cash in Hand 3,00,000
Gross Working Capital 52,05,000 52,05,000
B. Current Liabilities:
Payables for Raw materials* (` 27,00,000 × 3/12) 6,75,000
Outstanding Expenses:
Wages Expenses (` 21,60,000 × 1/12) 1,80,000
Manufacturing Overhead (` 28,80,000 × 1/12) 2,40,000
Total Current Liabilities
T E 10,95,000 10,95,000
Net Working Capital (A-B)
I T U 41,10,000
Add: Safety margin @ 10%
S T 4,11,000

Working Notes:
C I N
Total Working Capital requirements 45,21,000

(i)
SJ (`)
(A) Computation of Annual Cash Cost of Production
Raw Material consumed 27,00,000
Wages (Labour paid) 21,60,000
Manufacturing overhead (` 32,40,000 - ` 3,60,000) 28,80,000
Total cash cost of production 77,40,000
(B) Computation of Annual Cash Cost of Sales
Cash cost of production as in (A) above 77,40,000
Administrative & Selling overhead 10,80,000
Total cash cost of sales 88,20,000
* Purchase of Raw material can also be calculated by adjusting Closing Stock and Opening
Stock (assumed nil). In that case Purchase will be Raw material consumed + Closing Stock
– Opening Stock i.e ` 27,00,000 + ` 6,75,000 – Nil = ` 33,75,000. Accordingly, Total Working
Capital requirements (` 43,35,375) can be calculated.

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 Working Capital Management

21 RTP May 21
While applying for financing of working capital requirements to a commercial bank, TN
Industries Ltd. projected the following information for the next year:
Cost Element Per unit (`) Per unit (`)
Raw materials
X 30
Y 7
Z 6 43
Direct Labour 25
Manufacturing and administration overheads (excluding depreciation) 20
Depreciation 10
Selling overheads 15
113
Additional Information:
(a) Raw Materials are purchased from different suppliers leading to different credit period
allowed as follows:
T E
X – 2 months; Y– 1 months; Z – ½ month
I T U
T
(b) Production cycle is of ½ month. Production process requires full unit of X and Y in the
S
I N
beginning of the production. Z is required only to the extent of half unit in the beginning

C
and the remaining half unit is needed at a uniform rate during the production process.

SJ
(c) X is required to be stored for 2 months and other materials for 1 month.
(d) Finished goods are held for 1 month.
(e) 25% of the total sales is on cash basis and remaining on credit basis. The credit allowed by
debtors is 2 months.
(f ) Average time lag in payment of all overheads is 1 months and ½ months for direct labour.
(g) Minimum cash balance of ` 8,00,000 is to be maintained.
CALCULATE the estimated working capital required by the company on cash cost basis if
the budgeted level of activity is 1,50,000 units for the next year. The company also intends to
increase the estimated working capital requirement by 10% to meet the contingencies. (You
may assume that production is carried on evenly throughout the year and direct labour and
other overheads accrue similarly.)

Working Capital Requirement on Cash

Cost basis

10.40 |CA Inter FM

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 Working Capital Management

Answer
Statement showing Working Capital Requirements of TN Industries Ltd. (on cash cost
basis)
Amount in Amount in
(`) (`)
A. Current Assets
(i) Inventories:
Raw material
" 1, 50 , 000 units ! ` 30 % 7,50,000
X$ ! 2 months '
# 12 months &

" 1, 50 , 000 units ! ` 7 % 87,500

Y$ ! 1 month '
# 12 months &

" 1, 50 , 000 units ! ` 6 % 75,000

Z$ ! 1 month '
# 12 months &

" 1, 50 , 000 units ! ` 64 % 4,00,000

WIP $
# 12 months
! 0.5 month '
&
T E
" 1, 50 , 000 units ! ` 88 I T U 11,00,000 24,12,500
Finished goods $
# 12 months S T %
! 1 month '
&
(ii) Receivables (Debtors)
C I N 19,31,250

$
# 12 months
SJ
" 1, 50 , 000 units ! ` 103 %
! 2 months ' ! 0.75
&
(iii) Cash and bank balance 8,00,000
Total Current Assets 51,43,750
B. Current Liabilities:
(i) Payables (Creditors) for Raw materials
" 1, 50 , 000 units ! ` 30 % 7,50,000
X$ ! 2 months '
# 12 months &

" 1, 50 , 000 units ! ` 7 % 87,500

Y$ ! 1 month '
# 12 months &

" 1, 50 , 000 units ! ` 6 % 37,500 8,75,000

Z$ ! 0.5 month '
# 12 months &

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 Working Capital Management

(ii) Outstanding Direct Labour 1,56,250

" 1, 50 , 000 units ! ` 25 %
$ ! 0.5 month '
# 12 months &
(iii) Outstanding Manufacturing and administration overheads 2,50,000
" 1, 50 , 000 units ! ` 20 %
$ ! 1 month '
# 12 months &
(iv) Outstanding Selling overheads 1,87,500
" 1, 50 , 000 units ! ` 15 %
$ ! 1 month '
# 12 months &
Total Current Liabilities 14,68,750
Net Working Capital Needs (A – B) 36,75,000
Add: Provision for contingencies @ 10% 3,67,500
Working capital requirement 40,42,500
Workings:
1. (i) Computation of Cash Cost of Production
Particulars
T E Per unit (`)
Raw Material consumed
I TU 43
Direct Labour
S T 25

I N
Manufacturing and administration overheads
C
20

SJ
Cash cost of production 88
(ii) Computation of Cash Cost of Sales
Particulars Per unit (`)
Cash cost of production as in (i) above 88
Selling overheads 15
Cash cost of sales 103
2. Calculation of cost of WIP
Particulars Per unit (`)
Raw material (added at the beginning):
X 30
Y 7
Z (` 6 x 50%) 3
Cost during the year:
Z {(` 6 x 50%) x 50%} 1.5
Direct Labour (` 25 x 50%) 12.5
Manufacturing and administration overheads (` 20 x 50%) 10
64

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 Working Capital Management

22 Jan 21
The following information is provided by MNP Ltd. for the year ending 31st March. 2020 :
Raw Material Storage period 45 days
Work-in-Progress conversion period 20 days
Finished Goods storage period 25 days
Debt Collection period 30 days
Creditors payment period 60 days
Annual Operating Cost (Including Depreciation of ` 2,50,000) ` 25,00,000
Assume 360 days in a year.
You are required to calculate : (5 Marks)
(i) Operating Cycle period
(ii) Number of Operating Cycle in a year.
(iii) Amount of working capital required for the company on a cost basis.
(iv) The company is a market leader in its product and it has no competitor in the market. Based

E
on a market survey it is planning to discontinue sales on credit and deliver products based
T
I T U
on pre-payments in order to reduce its working capital requirement substantially. You are
required to compute the reduction in working capital requirement in such a scenario.

S T
C I
Operating Cycle and Working Capital
N
required
SJ
Answer
(i) Calculation of Operating Cycle Period:
Operating Cycle Period =R+W+F+D–C
= 45 + 20 + 25 + 30 – 60 = 60 days
(ii) Number of Operating Cycle in a Year
360 360
= = =6
Opening cycle period 60

(iii) Amount of Working Capital Required

Annual operating cost ` 25, 00 , 000 " ` 2, 50 , 000
! !
Number of opening cycle 6

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 Working Capital Management

` 22, 50 , 000
= = ` 3, 75, 000
6
(iv) Reduction in Working Capital
Operating Cycle Period = R + W + F – C
= 45 + 20 + 25 – 60 = 30 days
` 22, 50 , 000
Amount of Working Capital Required = × 30 = ₹ 1,87,500
360
Reduction in Working Capital = ₹ 3,75,000 – ₹ 1,87,500 = ₹ 1,87,500
Note: If we use Total Cost basis, then amount of Working Capital required will be
₹ 4,16,666.67 (approx.) and Reduction in Working Capital will be ₹ 2,08,333.33 (approx.)

23 ICAI Mat
PQ Ltd., a company newly commencing business in 2020 has the following projected Profit and
Loss Account:
(₹) (₹)

T E
Sales
Cost of goods sold
I T U 2,10,000
1,53,000
Gross Profit
S T 57,000
Administrative Expenses
C I N 14,000
Selling Expenses
Profit before tax SJ 13,000 27,000
30,000
Provision for taxation 10,000
Profit after tax 20,000
The cost of goods sold has been arrived at as under:
Materials used 84,000
Wages and manufacturing Expenses 62,500
Depreciation 23,500
1,70,000
Less: Stock of Finished goods 17,000
(10% of goods produced not yet sold)
1,53,000
The figure given above relate only to finished goods and not to work-in- progress. Goods equal
to 15% of the year’s production (in terms of physical units) will be in process on the average
requiring full materials but only 40% of the other expenses. The company believes in keeping
materials equal to two months’ consumption in stock.

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 Working Capital Management

All expenses will be paid one month in advance. Suppliers of materials will extend 1-1/2 months
credit. Sales will be 20% for cash and the rest at two months’ credit. 70% of the Income tax will
be paid in advance in quarterly instalments. The company wishes to keep ₹ 8,000 in cash. 10%
has to be added to the estimated figure for unforeseen contingencies.
Required:
PREPARE an estimate of working capital.
Note: All workings should form part of the answer.

Working Capital Requirement

Answer
Statement showing the requirements of Working Capital
Particulars (₹) (₹)
A. Current Assets:
T E
Inventory:
I T U
Stock of Raw material (₹ 96,600 × 2/12)
S T 16,100

C I N
Stock of Work-in-progress (As per Working Note)
Stock of Finished goods (₹ 1,46,500 × 10/100)
16,350
14,650

Cash in Hand
SJ
Receivables (Debtors) (₹ 1,27,080 × 2/12) 21,180
8,000
Prepaid Expenses:
Wages & Mfg. Expenses (₹ 66,250 × 1/12) 5,521
Administrative expenses (₹ 14,000 × 1/12) 1,167
Selling & Distribution Expenses (₹ 13,000 × 1/12) 1,083
Advance taxes paid {(70% of ₹ 10,000)× 3/12} 1,750
Gross Working Capital 85,801 85,801
B. Current Liabilities:
Payables for Raw materials (₹ 1,12,700 × 1.5/12) 14,088
Provision for Taxation (Net of Advance Tax) (₹ 10,000 × 30/100) 3,000
Total Current Liabilities 17,088 17,088
C. Excess of CA over CL 68,713
Add: 10% for unforeseen contingencies 6,871
Net Working Capital requirements 75,584

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 Working Capital Management

Working Notes:
(i) Calculation of Stock of Work-in-progress
Particulars (₹)
Raw Material (₹ 84,000 × 15%) 12,600
Wages & Mfg. Expenses (₹ 62,500 × 15% × 40%) 3,750
Total 16,350
(ii) Calculation of Stock of Finished Goods and Cost of Sales
Particulars (₹)
Direct material Cost [₹ 84,000 + ₹ 12,600] 96,600
Wages & Mfg. Expenses [₹ 62,500 + ₹ 3,750] 66,250
Depreciation 0
Gross Factory Cost 1,62,850
Less: Closing W.I.P (16,350)
Cost of goods produced 1,46,500
Add: Administrative Expenses 14,000
1,60,500
Less: Closing stock
T E (14,650)
Cost of Goods Sold
I T U 1,45,850
Add: Selling and Distribution Expenses
S T 13,000
Total Cash Cost of Sales
C I N 1,58,850

SJ
Debtors (80% of cash cost of sales) 1,27,080
(iii) Calculation of Credit Purchase
Particulars (₹)
Raw material consumed 96,600
Add: Closing Stock 16,100
Less: Opening Stock -
Purchases 1,12,700

24 RTP Nov’21
The management of Trux Company Ltd. is planning to expand its business and consults you
to prepare an estimated working capital statement. The records of the company reveals the
following annual information:
(₹)
Sales – Domestic at one month’s credit 18,00,000
Export at three month’s credit (sales price 10% below domestic price) 8,10,000

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 Working Capital Management

Materials used (suppliers extend two months credit) 6,75,000

Lag in payment of wages – ½ month 5,40,000
Lag in payment of manufacturing expenses (cash) – 1 month 7,65,000
Lag in payment of Administration Expenses – 1 month 1,80,000
Selling expenses payable quarterly in advance 1,12,500
Income tax payable in four installments, of which one falls in the next financial 1,68,000
year
Rate of gross profit is 20%. Ignore work-in-progress and depreciation.
The company keeps one month’s stock of raw materials and finished goods (each) and believes
in keeping ₹ 2,50,000 available to it including the overdraft limit of ₹ 75,000 not yet utilized by
the company.
The management is also of the opinion to make 10% margin for contingencies on computed
figure.
You are required to PREPARE the estimated working capital statement for the next year.

Estimated Working Capital Requirement

T E
I T U
S T
Answer
C I N
SJ
Preparation of Statement of Working Capital Requirement for Trux Company Ltd.
(₹) (₹)
A. Current Assets
(i) Inventories:
Material (1 month) 56,250
" ` 6 , 75, 000 %
$ ! 1month '
# 12 months &
Finished goods (1 month) 1,80,000 2,36,250
" ` 21, 60 , 000 %
$ ! 1month '
# 12 months &
(ii) Receivables (Debtors)
For Domestic Sales 1,26,466
" ` 15,17, 586 %
$ ! 1month '
# 12 months &

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 Working Capital Management

For Export Sales 1,88,729 3,15,195

" ` 7, 54 , 914 %
$ ! 3 months '
# 12 months &
(iii) Prepayment of Selling expenses 28,125
" ` 112
, , 500 %
$ ! 3 months '
# 12 months &
(iv) Cash in hand & at bank 1,75,000
Total Current Assets 7,54,570
B. Current Liabilities:
(i) Payables (Creditors) for materials (2 months) 1,12,500
" ` 6 , 75, 000 %
$ ! 2 months '
# 12 months &
(ii) Outstanding wages (0.5 months) 22,500
" ` 5, 40 , 000 %
! 0.5 month '
$
# 12 months &
T E
(iii) Outstanding manufacturing expenses
I T U 63,750
" ` 7, 65, 000 % S T
$
# 12 months
! 1month '
&
C I N
" ` 1, 80 , 000
SJ
(iv) Outstanding administrative expenses
%
15,000

$ ! 1month '
# 12 months &
(v) Income tax payable 42,000
Total Current Liabilities 2,55,750
Net Working Capital (A – B) 4,98,820
Add: 10% contingency margin 49,882
Total Working Capital required 5,48,702
Working Notes:
1. Calculation of Cost of Goods Sold and Cost of Sales
Domestic (₹) Export (₹) Total (₹)
Domestic Sales 18,00,000 8,10,000 26,10,000
Less: Gross profit @ 20% on domestic sales 3,60,000 90,000 4,50,000
and 11.11% on export sales (Working note-2)
Cost of Goods Sold 14,40,000 7,20,000 21,60,000

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 Working Capital Management

Add: Selling expenses (Working note-3) 77,586 34,914 1,12,500

Cash Cost of Sales 15,17,586 7,54,914 22,72,500
2. Calculation of gross profit on Export Sales
Let domestic selling price is ₹ 100. Gross profit is ₹ 20, and then cost per unit is ₹ 80
Export price is 10% less than the domestic price i.e. ₹ 100 – (1- 0.1) = ₹ 90
Now, gross profit will be = ₹ 90 - ₹ 80 = ₹ 10
` 10
So, Gross profit ratio at export price will be = ×100 = 11.11%
` 90
3. Apportionment of Selling expenses between Domestic and Exports sales:
Apportionment on the basis of sales value:
` 112
, , 500
Domestic Sales = × ₹ 18,00,000 = ₹ 77,586
` 26 ,10 , 000
` 112
, , 500
Exports Sales = × ₹ 8,10,000 = ₹ 34,914
` 26 ,10 , 000

4. Assumptions
T E
(i)
U
It is assumed that administrative expenses is related to production activities.
I T
S T
(ii) Value of opening and closing stocks are equal.

C I N
25
SJ ICAI Mat
A company is presently having credit sales of ₹ 12 lakh. The existing credit terms are 1/10, net
45 days and average collection period is 30 days. The current bad debts loss is 1.5%. In order to
accelerate the collection process further as also to increase sales, the company is contemplating
liberalization of its existing credit terms to 2/10, net 45 days. It is expected that sales are likely
to increase by 1/3 of existing sales, bad debts increase to 2% of sales and average collection
period to decline to 20 days. The contribution to sales ratio of the company is 22% and opportu-
nity cost of investment in receivables is 15 percent (pre-tax). 50 per cent and 80 percent of
customers in terms of sales revenue are expected to avail cash discount under existing and
liberalization scheme respectively. The tax rate is 30%.
ADVISE, should the company change its credit terms? (Assume 360 days in a year).

Evaluation of Credit Policy

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Answer
Working Notes:
(i) Calculation of Cash Discount
Cash Discount = Total credit sales × % of customers who take up discount × Rate
12, 00 , 000 × 50 × .01
Present Policy = = ₹ 6,000
100
Proposed Policy = 16,00,000 × 0.80 × 0.02 = ₹ 25,600
(ii) Opportunity Cost of Investment in Receivables
Present Policy = 9,36,000 × (30/360) × (70% of 15)/100 = 78,000 × 10.5/100 = ₹ 8,190
Proposed Policy = 12,48,000 × (20/360) × 10.50/100 = ₹ 7,280
Statement showing Evaluation of Credit Policies
Present Proposed
Particulars
Policy Policy
Credit Sales 12,00,000 16,00,000
Variable Cost @ 78%* of sales 9,36,000 12,48,000
Bad Debts @ 1.5% and 2%
T E 18,000 32,000
Cash Discount
I T U 6,000 25,600
Profit before tax
S T 2,40,000 2,94,400
Tax @ 30%

C I N 72,000 88,320

SJ
Profit after Tax 1,68,000 2,06,080
Opportunity Cost of Investment in Receivables 8,190 7,280
Net Profit 1,59,810 1,98,800
* Only relevant or variable costs are considered for calculating the opportunity costs on
the funds blocked in receivables. Since 22% is contribution, hence the relevant costs are
taken to be 78% of the respective sales.
Advise: Proposed policy should be adopted since the net benefit is increased by
(₹ 1,98,800 – 1,59,810) ₹ 38,990.

26 ICAI Mat
The following data relating to an auto component manufacturing company is available for the
year 2020-21:
Raw material held in storage 20 days
Receivables’ collection period 30 days
Conversion process period 10 days
(raw material – 100%, other costs – 50% complete)

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Finished goods storage period 45 days

Credit period from suppliers 60 days
Advance payment to suppliers 5 days
Total cash operating expenses per annum ₹ 800 lakhs
75% of the total cash operating expenses are for raw material. 360 days are assumed in a year.
You are required to CALCULATE:
(i) Each item of current assets and current liabilities,
(ii) The working capital requirement, if the company wants to maintain a cash balance of ₹ 10
lakhs at all times.

Working Capital Requirement

Answer

T E
Since WIP is 100% complete in terms of material and 50% complete in terms of other cost, the

I T U
same has been considered for number of days for WIP inventory i.e. 10 days for material and 5
days for other costs respectively.
S T
Particulars
C I N For Raw Material For Other Costs Total

Cash Operating expenses SJ 75

100
! 800 " 600
25
100
! 800 " 200 800.00

20
Raw Material Stock Holding ! 600 " 33.33 - 33.33
360
10 5
WIP Conversion ! 600 " 16.67 ! 200 " 2.78 19.45
360 360
45 45
Finished Goods Stock Holding ! 600 " 75 ! 200 " 25 100.00
360 360
30 30
Receivable Collection Period ! 600 " 50 ! 200 " 16.67 66.67
360 360
5
Advance to suppliers ! 600 " 8.33 - 8.33
360
60
Credit Period from suppliers ! 600 " 100 - 100.00
360

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 Working Capital Management

Computation of working capital

₹ in lakhs
Raw Material Stock 33.33
WIP 19.45
Finished Goods stock 100.00
Receivables 66.67
Advance to Suppliers 8.33
Cash 10.00
237.78
Less: Payables (Creditors) 100.00
Working capital 133.78

27 MTP Nov’21
On 01st April, 2020, the Board of Director of ABC Ltd. wish to know the amount of working
capital that will be required to meet the programme they have planned for the year. From the
following information, PREPARE a working capital requirement forecast and a forecast profit
and loss account and balance sheet:
T E
Issued share capital
I T U
₹ 6,00,000
10% Debentures S T ₹ 1,00,000
Fixed Assets
C I N ₹ 4,50,000

SJ
Production during the previous year was 1,20,000 units; it is planned that this level of activity
should be maintained during the present year.
The expected ratios of cost to selling price are: raw materials 60%, direct wages 10% overheads
20%
Raw materials are expected to remain in store for an average of two months before issue to
production. Each unit of production is expected to be in process for one month. The time lag in
wage payment is one month.
Finished goods will stay in the warehouse awaiting dispatch to customers for approximately
three months.
Credit allowed by creditors is two months from the date of delivery of raw materials. Credit
given to debtors is three months from the date of dispatch.
Selling price is ₹ 5 per unit.
There is a regular production and sales cycle and wages and overheads accrue evenly. [10]

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 Working Capital Management

Working Capital Requirement Forecasting Profit & Loss

Account and Balance Sheet

Answer
Forecast Profit and Loss Account for the period 01.04.2020 to 31.03.2021
Particulars ₹ Particulars ₹
Materials consumed (1,20,000 @ 3,60,000 By Sales (1,20,000 @ ₹ 5) 6,00,000
₹ 3)
Direct wages : (1,20,000 @ ₹ 0.50) 60,000
Overheads : (1,20,000 @ ₹ 1) 1,20,000
Gross profit c/d 60,000
6,00,000 6,00,000
Debenture interest (10% of 10,000 By gross profit b/d 60,000
1,00,000)
T E
Net profit c/d 50,000
60,000
I T U 60,000

S T
Working Capital Requirement Forecast for the year 01.04.2020 to 31.03.2021

C I N Current

SJ
Period
Particulars Total (₹) Current Assets (₹) Liabilities
(Months)
(₹)
Raw Work-in- Finished Debtors Creditors
materials progress goods
1. Material
In store 2 60,000
In work-in- 1 30,000
progress
In finished 3 90,000
goods
Credit to 3 90,000
debtors
9
Less : Credit 2 60,000
from creditors
Net block 7 2,10,000
period

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2. Wages:
In work-in- 1/2 2,500
progress
In finished 3 15,000
goods
Credit to 3 15,000
debtors
6½
Less : Time lag 1 5,000
in payment
Net block 5½ 27,500
period
3. Overheads:
In work-in- ½ 5,000
progress
In finished 3 30,000
goods
Credit to 3 30,000
debtors
T E
Net block 6½ 65,000
I T U
period
S T
4. Profit
C I N
SJ
Credit to 3 15,000
debtors
Net block 3 15,000
period
Total (₹) 3,17,500 60,000 37,500 1,35,000 1,50,000 65,000
Forecast Balance Sheet as on 31.03.2021
(₹) (₹)
Issued share capital 6,00,000 Fixed Assets 4,50,000
Profit and Loss A/c 50,000 Current Assets:
10% Debentures 1,00,000 Stock:
Sundry creditors 65,000 Raw materials 60,000
Bank overdraft- Work-in-progress 37,500
Balancing figure 17,500 Finished goods 1,35,000 2,32,500
Debtors 1,50,000
8,32,500 8,32,500

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The Total amount of working capital, thus, stands as follows:

₹
Requirement as per working capital 3,17,500
Less: Bank overdraft as per balance sheet 17,500
Net requirement 3,00,000
Notes:
1. Average monthly production: 1,20,000 ÷ 12 = 10,000 units
2. Average cost per month:
Raw Material 10,000 × (₹ 5 × 0.6) = ₹ 30,000
Direct wages 10,000 × (₹ 5 × 0.1) = ₹ 5,000
Overheads 10,000 × (₹ 5 × 0.2) = ₹ 10,000
3. Average profit per month: 10,000 × (₹ 5 × 0.1) = ₹ 5,000
4. Wages and overheads accrue evenly over the period and, hence, are assumed to be
completely introduced for half the processing time.

28 T E MTP May'22
I T U
T
The following annual figures relate to manufacturing entity:
S
A. Sales at one month credit

C I N 84,00,000

SJ
B. Material consumption 60% of sales value
C. Wages (paid in a lag of 15 days) 12,00,000
D. Cash Manufacturing Expenses 3,00,000
E. Administrative Expenses 2,40,000
F. Creditors extend 3 months credit for payment.
G. Cash manufacturing and administrative expenses are paid 1 months in arrear.
The company maintains stock of raw material equal to economic order quantity. The company
incurs ₹ 100 as per ordering cost per order and opportunity cost of capital is 15% p.a. The
optimum cash balance is determined using Baumol’s model. The bank charges ₹ 10 for each
cash withdrawal. Finished goods are held in stock for 1 month. The company maintains a bank
balance of ₹12,00,000 on an average. Creditors are paid through net banking and all other
expenses are incurred in cash which is withdrawn from bank.
Assuming a 20% safety margin, you are required to ESTIMATE the amount of working capital
that needs to be invested by the Company. [10]

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 Working Capital Management

Working Capital Safety Margin

Answer
Statement of working capital Requirement
Particular (₹) (₹)
A. Current Assets
Stock of Raw Material (W.N. 2) 81,975
" 1%
Stock of finished Goods $ 65, 40 , 000 ! ' 5,45,000
# 12 &

" 1%
Average Receivables (at Cost) $ 67, 80 , 000 ! ' 5,65,000
# 12 &

TE
Bank Balance 12,00,000
Cash Balance (W.N. 3)
Gross Working Capital
I T U 15,232
24,07,207
B. Current Liabilities
I N ST
SJ
"
C 3%
Average Creditor for materials $ 50 , 40 , 000 ! '
# 12 &
12,60,000

" 0.5 %
Outstanding Wages $ 12, 00 , 000 ! ' 50,000
# 12 &

" 1%
Outstanding Cash Manufacturing Expenses $ 3, 00 , 000 ! ' 25,000
# 12 &

" 1%
Outstanding administrative Expenses $ 2, 40 , 000 ! ' 20,000
# 12 &
13,55,000
Net Working Capital (A – B) 10,52,207
Add: Safety Margin @ 20% 2,10,441
Total Working Capital Requirement 12,62,648

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Working Notes:
1. Computation of annual cash Cost of Production & Sales
Material Consumed (84,00,000 × 60%) 50,40,000
Wages 12,00,000
Manufacturing expenses 3,00,000
Cash Cost of production 65,40,000
(+) Administrative Expenses 2,40,000
Cash Cost of Sales 67,80,000
2. Computation of stock of Raw Material
A = 50,40,000
B = 100
C = 0.15
2AB 2 × 50 , 40 , 000 × 100
∴ EOQ = = = ₹ 81,975
C 0.15
3. Calculation of Cash Balance
A = 12,00,000+3,00,000+2,40,000
T E
A = 17,40,000
I T U
S T
B = 10
C = 0.15
C I N
Optimal Cash Balance =
SJ
2AB
C
=
2 × 17, 40 , 000 × 10
0.15
= ₹ 15,232

29 RTP Nov'22
Trading and Profit and Loss Account of Beat Ltd. for the year ended 31st March, 2022 is given
below:
Amount Amount Amount Amount
Particulars Particulars
(₹) (₹) (₹) (₹)
To Opening Stock: By Sales (Credit) 1,60,00,000
- Raw Materials 14,40,000 By Closing Stock:
- Work-in- progress 4,80,000 - Raw Materials 16,00,000
- Finished Goods 20,80,000 40,00,000 - Work-in-progress 8,00,000
To Purchases (credit) 88,00,000 - Finished Goods 24,00,000 48,00,000
To Wages 24,00,000
To Production Exp. 16,00,000

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To Gross Profit c/d 40,00,000

2,08,00,000 2,08,00,000
To Administration Exp. 14,00,000 By Gross Profit b/d 40,00,000
To Selling Exp. 6,00,000
To Net Profit 20,00,000
40,00,000 40,00,000
The opening and closing payables for raw materials were ₹ 16,00,000 and ₹ 19,20,000 respective-
ly whereas the opening and closing balances of receivables were ₹ 12,00,000 and ₹ 16,00,000
respectively.
You are required to ASCERTAIN the working capital requirement by operating cycle method.

Woking Capital Requirement on the basis

of Operating Cycle

Answer
T E
Computation of Operating Cycle
I T U
(1) Raw Material Storage Period (R)
S T
Raw Material Storage Period (R)
C I N =
Average Stock of Raw Material

SJ
Daily Average Consumption of Raw material
"14 , 40, 000 ! 16, 00, 000 # / 2
= = 64.21 Days
86 , 40 , 000 / 365

Raw Material Consumed = Opening Stock + Purchases – Closing Stock

= ₹ 14,40,000 + ₹ 88,00,000 – ₹ 16,00,000 = ₹ 86,40,000
(2) Conversion/Work-in-Process Period (W)
AverageStock of WIP
Conversion/Processing Period =
Daily Average Production cost
" 4 , 80, 000 ! 8, 00, 000 # / 2
= = 18.96 days
1, 23, 20 , 000 / 365
Production Cost:
₹
Opening Stock of WIP 4,80,000
Add: Raw Material Consumed 86,40,000
Add: Wages 24,00,000

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 Working Capital Management

Add: Production Expenses 16,00,000

1,31,20,000
Less: Closing Stock of WIP 8,00,000
Production Cost 1,23,20,000
(3) Finished Goods Storage Period (F)
Average Stock of Finished Goods
Finished Goods Storage Period =
Daily Average Cost of Good Sold
" 20, 80, 000 ! 24 , 00, 000 # / 2
= = 68.13 Days
1, 20 , 00 , 000 / 365
Cost of Goods Sold
₹
Opening Stock of Finished Goods 20,80,000
Add : Production Cost 1,23,20,000
1,44,00,000
Less: Closing Stock of Finished Goods (24,00,000)
1,20,00,000
T E
(4) Receivables Collection Period (D)
I T U
Receivables Collection Period =
S T
Average Receivables

C I N Daily average credit sales

SJ
(12,00,000 + 16,00,000) / 2
= = 31.94 Days
1,60,00,000 / 365

(5) Payables Payment Period (C)

Average Payables
Payables Payment Period =
Daily average credit purchase

(16,00,000 + 19,20,000) / 2
= = 73 Days
88,00,000 / 365
(6) Duration of Operating Cycle (O)
O =R+W+F+D–C
= 64.21 + 18.96 + 68.13 + 31.94 – 73
= 110.24 days
Computation of Working Capital
(i) Number of Operating Cycles per Year
= 365/Duration Operating Cycle = 365/110.24 = 3.311

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 Working Capital Management

(ii) Total Operating Expenses

₹
Total Cost of Goods sold 1,20,00,000
Add: Administration Expenses 14,00,000
Add: Selling Expenses 6,00,000
1,40,00,000
(iii) Working Capital Required
Total Operating Expenses
Working Capital Required =
Number of Operating Cycles per yearr

1, 40 , 00 , 000
= = ₹ 42,28,329.81
3.311

30 May’22
Balance sheet of X Ltd for the year ended 31st March,2022 is given below:
(₹ in lakhs)
Liabilities Amount
T E
Assets Amount
Equity Shares ₹ 10 each 200
I T
Fixed AssetsU 500
Retained earnings 200
S TRaw materials 150
11% Debentures
C I N 300 W.I.P 100

SJ
Public deposits (Short-Term) 100 Finished goods 50
Trade Creditors 80 Debtors 125
Bills Payable 100 Cash/Bank 55
980 980
Calculate the amount of maximum permissible bank finance under three methods as per
Tandon Committee lending norms.
The total core current assets are assumed to be ₹ 30 lakhs. [5]

Maximum Permissable Bank Finance,

Tandon Committee

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Answer
Current Assets = 150 + 100 + 50 + 125 + 55 = ₹ 480 Lakhs
Current Liabilities = 100 + 80 + 100 = ₹ 280 Lakhs
Maximum Permissible Banks Finance under Tandon Committee Norms:
Method I
Maximum Permissible Bank Finance = 75% of (Current Assets – Current Liabilities)
= 75% of (480 - 280)
= ₹ 150 Lakhs
Method II
Maximum Permissible Bank Finance = 75% of Current Assets – Current Liabilities
= 75 % of 480 – 280
= ₹ 80 Lakhs
Method III
Maximum Permissible Bank Finance = 75% of (Current Assets – Core Current Assets) –
Current Liabilities

E
= 75 % of (480 – 30) – 280
T
T
= ₹ 57.5 Lakhs
I U
S T
C I N
SJ

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