CHAPTER-IV

1.What is the concept of working capital?

2.Name the various kinds of working capital.
3.What do you mean by gross working capital?
4.What is net working capital?
5.What do you understanding by operating cycle concept of working capital?
6.Give any five factors determining working capital requirements.
7.Write a short note on the importance of working capital.
8.What are the kinds of working capital?
9.What is the need for working capital?

10.From the following information extracted from the books of a

manufacturing concern, compute the operating cycle in days:

Period covered 365 days

Average period of credit allowed by suppliers 16 days
(Rs ‘000)
Average total of debtors outstanding 480
Raw material consumption 440
Total production cost 10,000
Total cost of goods sold for the year 10,500
Sales for the year 16,000
Value of average stock maintained:
Raw materials 320
Work-in-progress 350
Finished goods 260

11.From the following data, compute the duration of operating cycle for each
of the two companies:
 X Ltd Y Ltd

Stock:
Raw materials 40,000 60,000
Work-in-process 30,000 45,000
Finished goods 25,000 38,000
Purchase/consumption of raw material 1,60,000 2,70,000
Cost of goods produced/sold 3,00,000 3,80,000
Sale (all credit)3,60,0000 4,32,000 Nil
Debtors 72,000 1,08,000
Creditors 20,000 27,000
Assume 360 days per year for computational purposes.

12. From the following information as contained in the Trading and Profit and
Loss Account and Balance Sheet of Ankur and Company Limited, you are
required to compute the operating cycle period.

Trading and Profit and Loss Account

(for the year ended 31.3.2011)
Rs Rs
To Opening stocks: By Sales 3,20,00
0
Raw materials 14,000 By Closing stocks:
Work-in-process 30,000 Raw materials 16,000
Finished goods 20,000 Work-in-process 40,000
To Purchases 2,40,000 Finished goods 30,000
To Wages 25,000
To Manufacturing expenses 15,000
To Gross profit c/d 62,000
4,06,000 4,06,00
 0
To office & administrative By Gross profit b/d 62,000
expenses 16,000
To Selling expenses 8,000
To Net profit 38,000
62,000 62,000

Balance Sheet

Liabilities Rs Assets Rs
Share Capital 3,00,000 Land and Buildings 1,50,000
Loans 1,60,000 Plant and Machinery 2,40,000
Profit and Loss A/c 38,000 Stocks:
Creditors 42,000 Raw materials 16,000
Work-in-process 40,000
Finished goods 30,000
Debtors 52,000
Cash 12,000
5,40,000 5,40,000
Additional Information:

(i) Closing balance of debtors is 4,000 more than the opening balance of
debtors.

(ii) Opening balance of creditors was 12,000.

(iii) Purchases and sales are made on credit basis only.

13.The following information has been provided by a company for the year
ended 31.3.2017:

Liabilities Rs Assets Rs
 Equity share capital 2,00,00 Fixed asset less depreciation 3,00,00
0 0
8% Debentures 1,00,00 Inventories 1,00,00
0 0
Reserves and surplus 50,000 Sundry debtors 70,000
Long term loans 50,000 Cash and bank 10,000
Sundry creditors 80,000
4,80,00 4,80,00
0 0
Sales for the year ended 31.3.2017 amounted to ₹ 10,00,000 and it is
estimated that the same will amount to 12,00,000 for the year 2017-18.

You are required to estimate the working capital requirements for the year
2017-18 assuming a linear relationship between sales and working capital

14. The following are the extracts from the balance sheet of a company as on
31.3.2017. Compute the additional working capital required by the company
for the year ending 31.3.2018.

₹
Fixed Assets:
Land and buildings 12,50,000
Plant and machinery 7,50,000
20,00,000
Current Assets:
Stock 20,00,000
Debtors 7,50,000
Cash and bank 5,00,000
 32,50,000
Less: Current Liabilities:
Creditors 8,50,000
Taxation 2,00,000
Bank overdraft 3,50,000
Bills payable 4,00,000
18,00,000
Working Capital 14,50,000
34,50,000
Additional information:

(i) It is estimated that sales will increase by 25% next year.

(ii) Maximum amount of overdraft that can be availed will be only 4,00,000.

(iii) There will be no increase in the liability for tax due to increase in sales.

(iv) Period of credit allowed to customers and stock turnover will remain
unchanged.

(v) Period of credit allowed by creditors and that for bills payable will remain
the same.

(vi) There will be no increase in the amount of cash and bank balance.
15.The sales and working capital figures of Suvidha Ltd. For a period of 5years
are given as follows:

Year Sales Working Capital

2013-14 60 12
2014-15 80 15
2015-16 120 2
2016-17 130 21
2017-18 160 23
You are required to forecast the working capital requirements of the company
for the year 2018-19 taking the estimated sales of Rs.200 lakhs.

16.Texas Manufacturing Company Ltd. is to start production on 1st January,

2018. The prime cost of a unit is expected to be ₹40 out of which ₹16 is for
materials and₹ 24 for labour. In addition, variable expenses per unit are
expected to be ₹8 and fixed expenses per month₹ 30,000. Payment for
materials is to be made in the month following the purchases. One-third of
sales will be for cash and the rest on credit for settlement in the following
month. Expenses are payable in the month in which they are incurred. The
selling price is fixed at ₹80 per unit.

The number of units manufactured and sold are expected to be as under:

January 900
February 1,200
March 1,800
April 2,100
May 2,100
June 2,400
Draw up a statement showing requirements of working capital.
17.Details of X Ltd. For the year 2017-18, are given as under:

Cost of goods sold 48,00,000

Operating cycle 60 days
Minimum desired level of cash balance 75,000
You are required to calculate the expected working capital requirements by
assuming 360 days in a year.

18.Prepare an estimate of working capital requirements from the following

information of a trading concern:

(a) Project annual sales 1,00,000 units

(b) Selling price Rs. 8 per unit
(c) % age of net profit on sales 25%
(d) Average credit period allowed to customers 8 weeks
(e) Average credit period allowed by suppliers 4 weeks
(f) Average stock holding in terms of sales requirement 12 weeks
(g) Allow 10% for contingencies

19. From the following details you are required to make an assessment of the
average amount of working capital requirement of AB Ltd.

Items Average period Estimate for

of credit 1st year
Purchase of material 6 weeks 26,00,000
Wages 1.5 weeks 19,50,000
Overheads:
Rent, rates etc. 6 months 1,00,000
Salaries 1 months 8,00,000
Other Overheads 2 months 7,50,000
 Sales (cash) - 2,00,000
Sales (credit) 2 months 60,00,000
Average amt of stock and working progress - 4,00,000
Average amount of undrawn profit 3,00,000
It is assumed that all expenses and incomes were made at even
rate for the year.

20. ABC Ltd. Sells its products on a gross profit of 20 % on sales. The following
information is extracted from its annual accounts for the year ended 31st March
2017:

Sales (3 months credit) 40,00,000

Raw materials 12,00,000
Wages (15 days in arrears) 9,60,000
Manufacturing expenses (one month in arrears) 12,00,000
Administration expenses (one month in arrears) 4,80,000
Sales promotion expenses (payable half yearly in advance) 2,00,000
The company enjoys one month’s credit from suppliers of raw materials and
minimum 2 months stock of raw materials and one and a half months finished
goods. Cash balance is maintained at Rs.1,00,000 as a precautionary balance.
Assuming a 10 % margin, find out the working capital requirements of ABC Ltd.
Cost of sales for Computation of debtors and stock of finished goods may be
taken at sakes minus gross profit as per rate of gross profit given.

21. A problem cost sheet of a company provides the following particulars:

 ELEMENTS OF COST
Material 40%
Direct labour 20%
Overheads 20%
The following further particulars are available:

(a) It is proposed to maintain a level of activity of 2,00,000 units.

(b) Selling price is 12/- per unit.

(c) Raw materials are expected to remain in stores for an average period of one
month.

(d) Material will be in process, on averages half a month and is assumed to be

consisting 100% raw material, wages and overheads.

(e) Finished goods are required to be in stock for an average period of one
month.

(f) Credit allowed to debtors is two months.

(g) Credit allowed by suppliers is one month.

You may assume that sales and production follow a consistent pattern.

You are required to prepare pare a statement of working capital requirements,

a forecast Profit and Loss Account and Balance Sheet of the company assuming
that:

Share Capital 15,00,000

8% Debentures 2,00,000
Fixed assets 13,00,000
22. X & X & Co. is desirous to purchase a business and has consulted you and
one point on which you are asked to advise them is the average amount of
working capital which will be required in the first year's working.

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

Figures for the year

(i) Amount blocked up for stocks:
Stocks of finished product 5,000
Stocks of stores, materials, etc. 8,000
(ii) Average credit given:
Inland Sales-6 weeks credit 3,12,000
Export Sales 1.5 weeks credit 78,000
(iii) Lag in payment of wages and other outgoings:
Wages-1.5 Weeks 2,60,000
Stocks of materials, etc.- 1.5 months 48,000
Rent, Royalties, etc.-6 months 10,000
Clerical staff = 1/2 month 62,400
Manager 1/2 month 4,800
Miscellaneous Expenses-1.5 months 48,000
(iv) Payment in Advance:
Sundry Expenses (paid Quarterly in advance) 8,000
(v) Undrawn profit on the average throughout the year 11,000
Set up you calculations for the average amount of working capital required:

23.A porforma cost sheet of a company provides the following particulars:

 Elements of cost Amount per unit
Raw material 80
Direct labour 30
Overheads 60
Total cost 170
Profit 30
Selling Price 200
The following further particulars are available:

Raw materials are in stock on an average for one month. Work-in-process on

an average for half a month. Finished goods are in stock on an average for one

Month.

Credit allowed by suppliers is one month. Credit allowed to customers is two

months. Lag in payment of wages is 1.5 weeks. Lag in payment of overhead
expenses is one month.

One-fourth of the output is sold against cash. Cash in hand and at bank is
expected to be ₹25,000.

You are required to prepare a statement showing the working capital needed
to finance a level of activity of 1,04,000 units of production.

You may assume that production is carried on evenly throughout the year,
wages and overheads accrue similarly and a time period of 4 weeks
is equivalent to a month.

24. Mr. Krishan wishes to commence a new trading business and gives the
following information:

(1) The total estimated sales in a year will be 12,00,000.

(2) His expenses are estimated as fixed expenses of 2,000 per month plus
variable expenses equal to five per cent of his turnover.

(3) He expects to fix a sales price for each product which will be 25 per cent in
excess of his cost of purchase.

(4) He expects to turnover his stock four times in a year.

(5) The sales and purchases will be evenly spread throughout the year. All sales
will be for cash but he expects one month's credit for purchases.
Calculate:
(a) His estimated profit for the year.
(b) His average working capital requirements.

25. From the information given below you are required to prepare a projected
Balance Sheet, Profit and Loss Account and then an estimate of working
capital requirements:

Rs
(a) Issued share capital 3,00,000
6% debentures 2,00,000
Fixed assets at cost 2,00,000
(b) The expected ratios to selling price are:
Raw materials 50%
Labour 20%
Overheads 20%
Profit 10%
(c) Raw materials are kept in store for an average of two
months.
(d) Finished goods remain in stock for an average period of
three months.
 (e) Production during the previous year was 1,80,000 units and
it is planned to maintain the same in the current year also.
(f) Each unit of production is expected to be in process for half a
month.
(h) Selling price is Rs.4 per unit.
(g) Credit allowed to customers is three months and given by
suppliers is two months.
(i) There is a regular production and sales cycle.
(j) Calculation of debtors may be made at selling price.

26.From the following information you are required to estimate the net
working capital:

Cost per
unit
Raw materials 400
Direct labour 150
Overheads (excluding depreciation) 300
Total cost 850
Additional information:
Selling price Rs.1,000 per unit
Output 52,000 units P.A.
Raw materials in stock Average 4 weeks
Work in process:
(assume 50% completion stage with full
material consumption) average 2 weeks
Finished goods in stock average 4 weeks
 Credit allowed by suppliers average 4 weeks
Credit allowed to debtors average 8 weeks
Cash at bank is expected to be * Rs.50,000
Assume that production is sustained at an even pace during the 52 weeks of
the year. All sales are on credit basis. State any assumption that you might have
made while computing.

27.A proforma cost sheet of a company provides the following particulars:

Amount per unit

Raw materials cost 100.00
Director labour cost 37.50
Overheads cost 75.00
Total cost 212.50
Profit 37.50
Selling price 250.00
The company keeps raw material in stock, on average for one month; 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 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, wages and overheads accrue similarly and a
time period of 4 weeks is equivalent to a month. Work-in-progress stock is 80%
complete in all respects.

28.A proforma cost sheet of a manufacturing company provides the following

particulars:

Elements of cost Amount per unit

Raw material 8
Direct labour 3
Overheads (exclusive of depreciation) 6
17
The following further particulars are available:
Selling price Rs. 20 per unit
Level of activity 1,04,000 units of output P.A.
(52 weeks)
Raw material in stock on an average 4 weeks
Processing time on an average 2 weeks
Finished goods in store on an average 4 weeks
Credit period:
(a) Customers on an average 8 weeks
(b) Suppliers of materials on an average 4 weeks
Lag in payments:
(a) Wages on an average 1.5 weeks
(b) Overhead expenses on an average 2 weeks
75% of the output is sold on credit basis. Cash on hand and at bank is expected
to be ₹ 5,000.

You are required to prepare a statement in columnar form showing the working
capital requirements (a) in total, and (b) as regards each constituent part of the
same to finance a level of activity of 1,04,000 units of production per annum.
You may assume that all wages and overheads accrue evenly and are
completely introduced for half the processing time, i.e., 1 week.

29.Your company is operating at 60% capacity, producing 24,000 units per

annum, at the following cost-price structure:

Rs
Raw Material 5 per unit
Wages 3 per unit
Variable Overheads 2 per unit
Fixed Overheads 1 per unit
Profit 2 per unit
Selling price 13 per unit
On 31st mar,2016, the current assets and liabilities were follow: Rs.
Raw material 4,000 units, at cost 20,000
Work in Process 1,000 units, at cost 8,000
Finished Goods 3,000 units, at cost 33,000
Sundry Debtors 78,000
Creditors for goods 30,000
Liability for wages 3,000
Liability for expenses 6,000
In view of increased demand for the product, it has been decided that from 1st
April 2017, the unit should operate at 90% capacity. You are required to
ascertain the additional working capital as would be necessary in view of
additional production. The prices of materials, rates of wages and expenses
and the selling price per unit will not be changed. The period of credit allowed
to customers, credit allowed by suppliers and also time lag in payment of
wages and expenses shall remain the same as before.
Work in process may be assumed to be 100% complete as regards materials
and 50% as regards wages and overheads. Calculation of debtors may be made
at selling price.