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Working Capital Management V1
ASSIGNMENT A
Q1. Find out working capital by operating cycle method, taking 360 days in a yea
r:Sales 8000 units Rs. 120 per unit
Material cost Rs. 40 per unit
Labour cost Rs. 20 per unit
Overheads Rs. 30 per unit
Customers are given 45 days credit and 50 days credit is taken from suppliers. R
aw materials for 30 days and finished goods for 25 days are kept in stock. Produ
ction cycle is of 20 days.

Q2. A company has an expected usage of 50000 units of a commodity during the com
ing year. The cost of placing an order is Rs. 100 and carrying cost per unit is
Rs. 2.50, Lead time of an order is 5 days and company will keep a reserve of two
days usage. You are required to calculate:a). Economic Order Quantity
b). Re-order Level
Assume 250 working days in a year.
Q3. After inviting tenders, two quotations are received as follows:(a) Rs. 1.20 per unit;
(b) Rs. 1.10 per unit plus Rs. 3000 fixed charges to be added irrespective units
ordered.
Advice with your argument, to whom order should be placed and for what quantity?
Q4. From the information given below, calculate the working capital requirements
:Budgeted sales Rs. 650000
Percentage of net profit on cost of sales 25%
Average credit allowed to customers 10 weeks
Average credit allowed by suppliers 4 weeks
Average stock (for sales requirements) 8 weeks
Add 10% to computed figure for contingencies.
Ans:- Working capital required = Rs. 154000.
Q5:- Calculate the estimate of working capital required by an organization:Expected annual production 2600 tons
Stock of raw materials 3 weeks
Processing period 2 weeks
Stock of finished goods 5 weeks
Credit period to customers 8 weeks
Credit allowed by the suppliers 5 weeks
Price of raw material 80% of sales
Wages and overheads 25% of sales
Selling price Rs. 200 per ton
Cash balance needed Rs. 30000
ASSIGNMENT B
CASE STUDY)

Q1. From the following figures calculate the period of operating cycle and estim
ate the amount of working capital required:Rs. Rs.
1-4-04 31-3-05
Stock of raw material 35000 55000
Stock of work in progress 10000 30000
Stock of finished goods 30000 10000
Sundry debtors 50000 50000
Purchase of materials
200000
Wages and manufacturing expenses 80000
Administrative & selling expenses
40000
Sales 500000
The company obtains credit of 60 days from its creditors. All the sales is on cr
edit. Assume 360 days in a year.
Q2:- B Limited gives the following information about its liquidity.
Interest on securities 14.4% per annum
Fixed cash on sale of securities Rs. 900.
Standard deviation of change of daily cash balance Rs. 4000.
Management wants to maintain a minimum cash balance of Rs. 10000.
Calculate Return Point and Upper control level according to Miller -Orr-Model. A
ssume 360 days in a year.
Q3. Annual sales of Modern company is 16000 units @ Rs. 50 per unit. Its variabl
e cost is Rs. 30 per unit and fixed cost Rs. 160000 per year. The company is con
sidering to relax its credit policy. This will increase its sales by 20% and ave
rage collection period will increase from 30 days to 45 days. Bad debts are expe
cted at 3% on increase in sales and collection charges will increase by Rs. 2000
0. If required rate of return on investments is 15% after tax and rate of tax is
40%. Will it be fair to relax the credit policy?

CASE STUDY
Ques. A company wants to fix its credit policy. It is considering on three alter
natives as under:1. sale on 15 days credit at 5% cash discount, or
2. sale on 1 month credit without cash discount, or
3. sale on 2 months credit without cash discount
In (1) above additional sales would be Rs. 100000; in (2) Rs. 300000 and in (3)
Rs. 700000.
Collection charges will be in (1) 2%, (2) 5% and (3) 10% of sales. Bad debts are
expected at 2%, 4%, and 10% respectively. Assuming interest on investment @ 12%
per annum, state which policy should be adopted.

ASSIGNMENT C
1. The results of overtrading may be
a. Overcapitalization
b. Illiquidity
c. Technical insolvency
d. Both b and c above
2. Which of the following is/are true?
a. A company following an aggressive working capital policy will finance its cur
rent assets more from long term sources.

b. A company following of conservative working capital policy will finance its c

urrent assets more from long term sources.
c. A company having a conservative working capital policy will have a higher cur
rent ratio than one following an aggressive working capital policy.
d. Both b and c above
3. Which of the following is/are true in respect of working capital?
a. Gross working capital is the sum of the total current assets.
b. Net working capital represents the margin on working capital supported by lon
g-term funds.
c. Net working capital can be negative.
d. all of a, b, and c above
4.
a.
b.
c.
d.

Under trading means

Having low amount of working capital
High turnover of working capital
Sales are less compared to assets employed
Assets are less compared to sales generated

5.
a.
b.
c.
d.

Working capital gap is

Equal to current assets
Equal to current assets
Equal to current assets
Equal to current assets

plus
less
less
plus

current
current
current
current

liabilities
liabilities
liabilities
liabilities

including bank borrowings

including bank borrowings
excluding bank borrowings
other than bank borrowings

6. Working capital margin is

a. The difference between current assets and current liabilities
b. The increase in working capital requirement as a result of increased producti
on
c. The portion of working capital requirement that will be finance through banks
loans
d. The portion of working capital which will be financed through long term sourc
es.
7.
a.
of
b.
c.
d.
8.
a.
b.
c.
d.

Overtrading implies
A disproportionately high investment in current assets compared to the value
sales.
Greater sales generated by smaller investment in current assets
A high turnover of current assets in proportion to sales
High turnover of working capital
The average collection period is determined by
Daily credit sales divided by average balance in receivable account
Balance in receivable account by average daily credit sales
Total credit sales divided by average balance in receivable account
None of the above

9.
ng
a.
b.
c.
d.

Which of the following is not factor that affect the composition of the worki
capital?
Nature of business
Nature of raw material in used
Tax structure of the company
Process technology used

10. Which of the following is / are criterion /criteria for evaluation fo workin
g capital management?
a. Liquidity
b. Inventory turnover
c. Availability of cash
d. All of the above

11. Current assets are characterized by

a. Short life span
b. Long life span
c. Quick transformation into other forms of assets
d. Both a and c above
12. Which of
capital?
a. Nature of
b. Nature of
c. Nature of
d. Financial

the following factors does not influence the composition of working

business
raw materials used
finished goods
leverage of the firm

13. If the net working is negative then it indicates that

a. Long term funds have been used for financing short term assets
b. Long term funds have been used for financing long term assets
c. Short term funds have been used for financing long term assets
d. Short term funds have been used for financing short term assets
14. Which of the following will not be considered as a current assets?
a. Sundry debtors
b. Cash
c. Marketable securities
d. Goodwill
15. Which of the following measures should be taken to overcome under trading?
a. Increasing the debt equity ratio
b. Decreasing the debt equity ratio
c. Hastening the collection process
d. Slowing down the collection process
16. Which of the following factors have bearing on working capital management?
a. Import duties on capital goods
b. Manufacturing cycle
c. Continuity in the supply of raw materials
d. Both b and c above
17. Two important issues in formulating working capital policy are
a. Nature of business and operating cycle
b. Trade credit and permissible bank finance
c. The ratios of current assets to sales and short term financing to long term f
inancing
d. The level of current ratio and quick ratio
18. The profit criterion for working capital
a. Is relevant in analyzing working capital decisions
b. Is compulsory for analyzing working capital decisions
c. May be substituted with the Net Present Value criterion in analyzing working
capital decisions
d. May be substituted with PVIFA concept of analyzing working capital decisions
19. If the net working capital negative, it signifies
a. The current ratio is less than I
b. Long term uses are met out of short term sources
c. The liquidity position is not comfortable
d. All of the above
20. A current ratio less than one implies
a. Negative net working capital
b. Financing of working capital using long term sources
c. Adoption of conservative working capital policy

d. A low debt service coverage ratio

21. The criterion of profit per period is equivalent to the criterion of net pre
sent value in the case
a. Current assets form a small fraction of total assets
b. Investment in current assets is reversible
c. The value of current assets is higher than the value of current liabilities
d. Part of current assets are financed from long term sources
22. Net operating cycle period is
a. Equal to the accounting period of the company
b. The period from raw material procurement to sale of finished goods.
c. The length of time taken for a rupee invested in current assets to come back
with profit to the company
d. The time between payment of raw material purchases and the collection of cash
for sales
23. Operating cycle can be shortened by increasing
a. Manufacturing time
b. Duration of credit availed
c. Credit period to the customers
d. Stock held in stores
24. Which of the following is true with respect to net working capital?
a. It is the total of current assets
b. It is necessarily financed by short term funds
c. It is the difference between current assets and spontaneous current liabiliti
es.
d. Negative net working capital implies long term funds utilized for short term
purposes.
25. Which of the following factors influences the choice of liquidity mixed to b
e maintained by a company?
a. Nature of control with the managers
b. Extent of leverage
c. Marginal cost of capital
d. Uncertainty in cash flows
26. Which of the following factors influences the composition of working capital
?
a. Nature of business
b. seasonality of operations
c. marketability of finished goods
d. All of the above
27. Which of the following is not a motive for holding cash:a. Transaction purposes
b. Precaution against unexpected expenses
c. Extending loans to group companies
d. speculation purposes
28. Which of the following is not the motive for the companies to hold cash?
a. Transaction motive
b. Precautionary motive
c. Speculative motive
d. Capital investments
29. Cheques that have been deposited may not be immediately available for use du
e to
a. collection float
b. payment float

c. Net float
d. Deposit float
30. Float denotes the
a. Difference between bank balance and the balance shown in the firm s books
b. An instrument expedite cash inflows
c. difference between cash inflows and outflows
d. both a and b
31. Which of the following is not used for credit evaluation:a. Ratio analysis
b. Bank references
c. Past experiences with the customers
d. None of the above
32. Which of the following is not a cost of marinating receivables:a. Administrative costs
b. Collection costs
c. Defaulting costs
d. Marketing costs
33. Which of the following is not the C s for judgeing credit worthiness of a cust
omer
a. Collateral
b. Capacity
c. Credibility
d. Character
34. Which of the following is not a measure for monitoring receivable
a. Collection matrix
b. ABC system
c. Days sales outstanding
d. Ageing scheduled
35. Which of the following is not a credit policy variable or a non financial co
mpany?
a. over draft limit
b. Credit standard
c. Collection program
d. Cash discount
36. If the material is priced at the value that is realizable at the time of iss
ue such pricing method is referred to as
a. Standard price method
b. Replacement method
c. LIFO methods
d. Weighted average cost methods
37. Which of the following is not a benefit of storing inventories:a. Avoidance of lost sales
b. Availing of quantity discounts
c. Reduction of order costs
d. Reduction of carrying costs
38. Which of the following are sub-systems of inventory management system?
a. EOQ sub system
b. Stock level sub system
c. Reorder point sub system
d. All of the above

39. Which of the following is not a method of pricing inventories?

a. FIFO method
b. LIFO method
c. Standard price method
d. Shadow price method
40. C group items under ABC analysis are
a. High value items
b. High quantity items
c. Low value items
d. Both b and c
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