1 Question Bank Working Capital Management UNIT-1-Basic concepts and overview of working capital Q1. What is meant by Working Capital Management? What are the determinants of Working Capital Management needs of an enterprise? Q2 Describe the importance of working capital for a manufacturing concern. Q3. Inadequate working capital is disastrous; whereas redundant working capital is a criminal waste. In light of this statement, analyze carefully the working capital situation in Indian Company. Q4. Explain in brief the gross and net concept of working capital. Which of those concepts do you prefer and why? Q5 Explain the operating cycle concept of working capital. Give suitable example. Q6 Describe the important features of the Tondon Committee s recommendations regarding bank finance. Q7 Discuss the new trends in financing of working capital by banks. Q8 What are the various sources of working capital financing? Explain. Q9 Working Capital decisions deal with decisions ensuring an optimum mix and level of current assets and current liabilities.' Elucidate the statement. Q10 Discuss the importance of working capital management to shareholders and creditors?
2 Q11 How is working capital affected by (a) sales (b) Technology and production cycle Inflation.Explain with examples. (c) Q12 Define working capital management. Why is it important to study the management of working capital as a separate area in financial management? Q13 Explain the concept of working capital cycle? Why is it important in working capital management? Illustrate. Q14 Explain briefly the essentials of a sound working capital management. Q15 The most important challenge for a finance manager in working capital management is to find an optimum mix and level of currents and current liabilities. Elucidate the statement. UNIT-2-Computation of working capital Q1 A co. has the following selected assets and liabilities: Cash 45,000 Retained Earnings 1, 60,000 Equity Share Capital 1, 50,000 Debtors 60,000 Inventory 1, 11,000 Debentures 1, 00,000 Provision for taxation 57,000 Outstanding expenses 21,000 Land and building 3, 00,000 Goodwill 50,000 Furniture 25,000 Creditors 39,000 You are required to determine (i) Gross working capital and (ii) Net working capital Q2 Calculate the operating cycle of a company from the following information
3 Raw material consumption per annum Annual cost of production Annual cost of goods sold Annual sales Average value of current assets maintained: Raw material Work-in-progress Finished goods Debtors (RS) 84,200 1,42,500 1,53,000 1,95,000 12,400 7,200 12,200 26,000 The company gets 30days credit from their suppliers. All sales made by the firm are on credit only. You may take one year as equal to365 days. Q3 From the following information estimate the amount of working capital by Operating cycle method taking 360 days in a year Sales 50,000 per unit Material cost Rs.10 per unit Labour cost Rs.4 per unit Overheads Rs.3.5 per unit Customers are given 45 day s credit and 60 day s credit is taken from suppliers. Raw material for 36 days and finished goods for 15 days are kept in stock. Production cycle is 18 days. A cash balance equal to one-third of average of other working capital is kept for contingencies. Q4 The following information is available for Sagar ltd. Average stock of raw material and stores Average work in process inventory Average finished goods inventory Average accounts receivable Average account payable Average stock of raw material and stores purchased on credit and consumed per day Average work in process value of raw material committed per day Average cost of goods sold per day Average sales per day (Rs 000)
4 You are required to calculate (a) Duration of raw material stage (b) Duration of work-in-progress stage (c) Duration of finished good stage (d) duration of account receivables stage (e) Duration of accounts payable stage (f) Duration of the operating cycle. Q5 The following are the data of Z Ltd.taken from the accounting records: Average stock of raw material during the year 1, 80,000 Average stock of work in process during the year 1, 00,000 Average stock of finished goods during the year 54,000 Average balance of debtor 1, 50,000 Average balance of creditors 1, 20,000 Average daily sales 2,000 Average daily cost of finished goods sold 1,800 Average daily consumption of raw material 1,200 Average period of credit available from suppliers is 100 days Based on the above data, state: (a) Average period of raw material holding in stores (b) Credit period allowed to customers; (c) Average period for which finished goods stay in godowns (d) Average period of conversion of raw material into finished goods (e) Working capital cycle (in days) Q6 M\s Rajiv Bros who are willing to purchase a business have consulted you and one point, on which you are asked to advise them, is the average amount of working capital which would need to be employed in the first year s trading. You are given the following estimates and are requested to add 15% to your computed figures to allow for contingencies: Per annum (1) Average amount of stocks: Finished goods Raw material (2) Average credit given: Inland sales 4 weeks Export sales 2 weeks (3) Lag in payment of expenses: Wages 11\2 weeks Material and overheads 4 weeks 30,000 60,000 2,60,000 6,50,000 2,60,000 3,90,000
5 Q7 The management of Vishal Ltd has called for a statement showing the working capital needed to finance a level of the activity of 3,00,000 units of output for the year. The cost structure for the company s product, for the above mentioned activity level, is detailed below: Raw material Direct labour Overheads Total Profit Selling price (a) Past experience indicates the raw materials are held in stock.on an average for two months. (b) Work in progress(100% complete in regards to material and 50% for labour and overheads)will approximately be to half a month s production (c) Finished goods remain in warehouse, on an average for a month, (d) Supplier of material extend a month s credit, (e) 2 month s credit is allowed to debtors, calculation of debtors may be made at selling price. (f) A minimum cash balance of Rs is expected to be maintained. (g) The production pattern is assumed to be even during the year. Prepare the statement of working capital requirement Q8 The board of director of Nanak Engineering company private Ltd requests you to prepare a statement showing the working capital requirement for a level of 1,56,000 units of production. The following information is available for your calculations: Raw material 90 Direct labour 40 Overheads 75 Profit 60 Selling Price per unit 265 (1) Raw materials are in stock. on average one month. (2) Material are in process, on average 2 weeks (3) Finished goods are in Stock, on average one month (4) credit is allowed by suppliers,one month (5) Time lag in payment from debtors,2 months (6) Lag in payment of wages. 1 1\2 weeks. (7) Lag in payment of overhead is one month.
6 20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs.60, 000. It is to be assumed that production is carried on evenly throughout the year and overhead accrue similarly and a time period of 4 weeks is equivalent to a month. Q9 Raju brother s Pvt Ltd sells goods on a gross profit of 25%.depriciation is taken into account as apart of cost of production.the following are the annual figures given to you: Sales(2 month credit) Material consumed(1 month credit) Wages(1 month lag in payment) Cash manufacturing expense(1 month lag in payment) Administrative expense(1 month lag in payment) Sales promotion ( paid quarterly in advance) Income tax payable in 4 installment of which one lies in next year 18,00,000 4,50,000 3,60,000 4,80,000 1,20,000 60,000 1,50,000 The company keeps one month stock each of raw material and finished goods. It also keeps Rs.1, 00,000 in cash. You are required to estimate the working capital requirement of the company on cash cost basis assuming 15% margin.ignore work in progress. Q10 You are required to prepare a statement showing the working capital needed to finance a level of annual activity of 52,000 units of output. The following informations are available: Element of cost (Rs.per unit) Raw material 8 Direct labour 2 Overheads 6 Total 16 Profit 4 Selling price 20 Raw materials are in stock, on an average for 4 weeks. Materials are in process, on an average, for 2.Finihed goods are in stock, on an average, for 6 weeks. Credit allowed to customer is for 8 weeks. Credit allowed by suppliers of raw material is for 4 weeks.lag in payment of wages 1 1\2 weeks. It is necessary to hold cash in hand and at bank amounting to Rs It may be noted that production is carried on evenly during the year and wages and overheads accrued. Q11 XYZ Ltd sells its product on a gross profit of 20% of sales. The following information is extracted from it s annul accounts for the year ending 31 dec., 2010:
7 Sales(at 3 months credit) Raw material Wages(15 days in arrears) Manufacturing and general expenses(one month in arrear) Admn.expenses(one month in arrear) Sales promotion expenses (Payable half yearly in advance) ,60,000 12,00,000 4,80,000 2,00,000 The company enjoys one month s credit from the suppliers of raw material and maintains two months stock of raw material and one and half month of finished goods. Cash balance is maintained at Rs.1, 00,000 as a precautionary balance. Assuming 10% margin.find out the working capital requirement of XYZ Ltd. Q12 Mr. has recently joined Peacock glass pvt Ltd one of the task given to him is to arrange necessary fund for the working capital requirement of the company. For this purpose he has collected following annual data from the various books of accounts: Particular Amount (Rs) in lakhs Sales (at 90 days credit) Raw material (supplier s extended two month credit) 15.0 Wages (on last day of month) 12.5 Manufacturing expenses outstanding at the end of year (one month in arrear) 2.5 Admn.expenses (one month in arrear) 4.0 Sales promotion expenses 1.0 (Payable quaterly in advance) Company sells its product on gross profit of 20% on selling price. Its keep one month tock of each raw material and finished goods, and cash balance to the extend of 50% of current liabilities. Assume a safety margin of 10% and o working progress. Determine the working capital requirement of the company.ignore tax. Q13 The details of XYZ Company's product, costs, stock and plans, liabilities are as follows: :Activity Level: Produce 10,000 units of Product 'X' in a period of four weeks. There is no opening stock for the product. Cost Structure of Product Raw material = Rs. 75 per unit Labour costs = Rs. 60 per unit
8 Variable Overheads= Rs. 25 per unit Fixed Overheads= Rs. 16, 00,000 per 4 weekly period Selling price = Rs. 500 per unit Levels of Stock Planned (i) Raw materials: 2 weeks consumption (ii) Work-in-Process: 4 weeks (iii) Finished Goods: 2 weeks supply (iv) Debtors settle the bills six weeks after supply Current Liabilities Structure (i) Raw materials paid for at the end of the month in which delivery is made. (ii) Expense creditors allow an average of six weeks credit. You are required to estimate the level of working capital needed for the year. You may assume 48 weeks in a year and 4 weeks in a month for computation purposes. Q14 From the record of a firm the following data has been collected Particular Amount (Rs) in thousands Sales (at two month credit) 4800 Raw material (supplier s extended two month credit) 1200 Wages (monthly in arrear) 840 Manufacturing expenses outstanding at the end of year (one month in arrear) 80 Admn.expenses (one month in arrear) 240 Sales promotion expenses 150 (Payable quaterly in advance) Company sells its product on gross profit of 20% on selling price. It s keep one month tock of each raw material and finished goods, and cash balance of Rs.1, 25,000 Assume a safety margin of 20% and o working progress. Determine the working capital requirement of the company.ignore work in progress. Q15 Using operating cycle method, calculate working capital requirement by sumeet Ltd from the following information given below: (1) Estimated sales 20,000 units per unit
9 (2) Production and sales quantities coincide and will be carried through out the year. (3) Production cost is estimated as under: MaterialRs.2.50 per unit, Labour Rs.2.00 per unit. Overhead Rs.17, 500 (4) Customers are given 60 days credit and 50 days credit availed from suppliers. (5) 40 days supply of raw material and 15 days supply of finished goods are kept in store (6) Production cycle is 20 days and all material are issued at the commencement of each production cycle. (7) 1\3 of average other working capital is kept as cash balance for contingencies. UNIT: 3 Cash Management Q1. Efficient cash management will aim at maximizing the cash inflows and showing cash outflows Discuss. Q2. Explain briefly cash management? What are the motives of holding cash? Q3. What are the objectives of cash management? Explain the factors determining the level of cash in a firm. Q-4 Write the names of various sources of cash and their applications. Q-5 What is optimum cash balance and how can it be arrived at? Q-6 Write note on: (a) Baumol Model (b) Cash Budget (c) Collection float Q7.The Budget officer of a company is preparing a cash forecast for three months ending 31 st December,2010 and has collected the following data in respect of sales: Months Estimated Sales October November December Cash discount of 2% is allowed to debtors. All sales are on credit. Debtor s balances (before providing for bad and doubtful debts) at the end of each month are estimated to be equal sales of that month plus 50% of sales of previous month. Sales for the month of September were Rs /- and debtor as on 30 th September were Rs /-subject to provision for doubtful debts of Rs.24100/-.Estimate the collection from debtors.
10 Q-8 Prepare a cash budget of Rajiv & Co. for April,May,June 2010: Months Sales Purchase Wages Expense Jan. Feb. March April May June (Actual) (Actual) (Actual) (Budgeted) (Budgeted) (Budgeted) Additional Information: (1) 10% of the purchase and 20% of the sale for cash (2) The average collection period of the company is half month and the credit purchase are paid off regularly after one month. (3) Wages are paid half monthly and the rent of Rs.500/-included in expense is paid monthly. (4) Cash Balance as on April 1, may be taken at Rs.15000/- Q-9 Prepare a cash budget of DB Corp.for April,May,June 2010: Months Sales Purchase Wages Expense Jan. Feb. March April May June (Actual) (Actual) (Actual) (Budgeted) (Budgeted) (Budgeted) Additional Information: (1) 10% of the purchase and 20% of the sale for cash (2) The average collection period of the company is half month and the credit purchase are paid off regularly after one month. (3) Wages are paid half monthly and the rent of Rs.1500/-included in expense is paid monthly. (4) Cash Balance as on April 1, may be taken at Rs.30000/- Q-10 The following results are expected by XYZ. Ltd. By quarter next year in thousand of rupee: Particulars Sales Cash Payment Production cost Quarter
11 Selling& admin Pur.fix Assets The debtors at the end of a quarter are one-third of sales for the quarter. The opening balance of debtors is Rs /-. Cash on hand at the beginning of the year is Rs /- and the desired minimum balance is Rs /-.Borrowings are made at the beginning of the quarters in the need will occur in multiples of Rs.10000/- and are repaid at the end of quarters. Interest charges may be ignored. You are required to prepare: (a) A cash budget by quarters for the year; and (b) State the amount of loan outstanding at the end of the years. Q11.The Budget officer of a company is preparing a cash forecast for three months ending 31 st December,2010 and has collected the following data in respect of sales: Months Estimated Sales October November December Cash discount of 2% is allowed to debtors. All sales are on credit. Debtor s balances (before providing for bad and doubtful debts) at the end of each month are estimated to be equal sales of that month plus 50% of sales of previous month. Sales for the month of September were Rs /- and debtor as on 30 th September were Rs /-subject to provision for doubtful debts of Rs.48200/-.Estimate the collection from debtors. UNIT-4 Inventory Management Q-1 Explain the various approaches to inventory management. Q-2What is the reorder point of inventory? How is it determined? Q-3What is ordering cost? How is it different from varying cost? Explain the relationship between the two.
12 Q-4What is meant by inventory? Discuss as to why Inventory management is important explaining the items of stock kept by a manufacturing company. Q-5 What do you mean by ABC analysis? Describe its advantages? Q-6Writes note on: (a)ordering Cost (b)carrying Cost (c)safety Cost Q-7 Explain the Pareto Analysis. Q-8 A manufacture of refrigerator purchases 3200 units of certain component from a supplier. His annual usages is 3200 units. The cost of placing the order is Rs.100 and the cost of carrying one unit for a year is Rs.16 Calculate EOQ. Unit 5: Receivable Management 1) What do you mean by receivables? Enumerate the various costs of receivables. 2) Explain the different costs related to receivables. 3) Name various factors influencing the size of receivables. 4) Discuss the various aspects or dimensions of receivables management. 5) What is receivables management? How is it useful for business concerns? 6) What do you understand by receivables management? Discuss the factors which influence the size of receivables. 7) Receivables forecasting is important for the proper management of receivables. Discuss. 8) Explain the various problems associated with management of receivables in an organization. 9) What do you mean by the credit policy with respect to working capital of a firm? 10) Credit policy is of significant importance with respect to receivables management of a firm. Comment.
13 11) Explain the various decisions related to forming the credit policy in an organization. 12) The following information is available for a company: Monthly credit sales Average maturity period Factor s fees/commission Interest rate charged by factor Collection department s cost (if there is no factoring) Factor s average remittance period The company s cost of raising funds (other than factor) Rs.10,00, days 1% 15% Rs.4,500 per month 10 days 24% Calculate the effective interest arte charged by the factor and advise the company ignoring all other factors including risk of default. 13) Bharat ltd. decides to liberalize credit to increase its sales. The liberalized credit policy will bring additional sales of Rs.3,00,000. The variable costs will be 60% of sales and there will be 10% risk for non-payment and 5% collection costs. Will the company benefit from the new credit policy? 14) The following are the details regarding the operation of a firm during a period of 12 months: Sales Rs.12,00,000 Selling price per unit 10 Variable cost per unit 7 Total cost per unit 9 Credit period allowed to customers one month The firm is considering a proposal for a more liberal credit by increasing the average collection period from one month to two months. This relaxation is expected to increase sales by 25%. You are required to advise the firm regarding adopting the new credit policy, presuming that the firm s required return on investment is 25%. 15) A trader whose current sales are Rs.15,00,000 per annum and average collection period is 30 days wants to pursue a more liberal credit policy to improve sales. A study made by a consultant firm reveals the following information: Credit policy Increase in collection period Increase in sales A B C D E 15 days 30 days 45 days 60 days 90 days Rs. 60,000 Rs.90,000 Rs.1,50,000 Rs.1,80,000 Rs.2,00,000
14 The selling price per unit is Rs.5. Average cost per unit is Rs.4 and variable cost per unit is Rs The required rate of return on additional investment is 20%. Assume 360 days in a year and also assume that there are no bad debts. Which of the above policies would you recommend for adoption? 16) Suppose a firm is contemplating an increase in the credit period from 30 to 60 days. The average collection period which is at present 45 days is expected to increase to 75 days. It is also likely that the bad debts expenses will increase from the current level of 1 percent to 3 percent of sales. Total credit sales are expected to increase from the level of 30,000 units to 34,500 units. The present average cost per unit is Rs.8, the variable cost and sales per unit are Rs.6 and Rs.10 per unit respectively. Assume the firm expects a rate of return of 15%. Should the firm extend the credit period? 17) H ltd. has at present annual sales level of Rs.10,000 units at Rs.300 per unit. The variable cost is Rs.200 per unit and fixed cost amount to Rs.3,00,000 per annum. The present credit period allowed by the company is one month. The company is considering a proposal to increase the credit period to two months and three months and has made the following estimates: Existing Proposed Credit period (month) Increase in sales (percent) Bad debts (percent) There will be increase in fixed cost by Rs.50,000 on account of increase in sales beyond 25% of present level. The company plans a pre-tax return of 20 percent on investment in receivables. You are required to calculate the most paying credit policy for the company. 18) The turnover of Rudraksha ltd. is Rs.60 lakhs of which 80% is on credit. Debtors are allowed one month to clear off the dues. A factor is willing to advance 90% of the bills raised on credit for a fee of 2% a month plus a commission of 4% on the total amount of debts. Rudraksha ltd. as a result of this arrangement is likely to save Rs.21,600 annually in management costs and avoid bad debts at 1% on the credit sales. A bank has come forward to make an advance equal to 90% of the debts at an annual interest rate of 18%. However, its processing fee will be at 2% on the debts. Suggest whether you would accept factoring or the offer from the bank?
15 Unit 6: Working Capital Financing 1) Discuss the concept of working capital. Distinguish between permanent and variable working capital. What is the significance of such distinction in financing working capital needs of an enterprise? 2) Describe the approaches of financing current assets of an enterprise. 3) Do you recommend that the firm should finance its current assets entirely with short-term financing? Explain your answer. 4) Discuss how a finance manager takes into account risk-return tradeoff considerations in each of the following financing strategies of working capital requirement of a firm: a. Hedging financing strategy b. Conservative financing strategy c. Aggressive financing strategy 5) If a firm has a constant requirement of working capital throughout the year, which of the three financing plans is preferable? Why? 6) Explain the importance of trade credit as source of working capital. What is the cost of these sources? 7) What do suppliers look for in granting trade credit? 8) Discuss the main forms of working capital advance by banks. What is the kind of security required by them? 9) Write short notes on: a. Commercial Paper b. Certificate of deposit c. Letter of Credit 10) Discuss the important features of Commercial Paper. 11) Explain the permanent sources of financing working capital. 12) What are the various sources of financing temporary or variable working capital? 13) Explain the following terms with respect to working capital financing: a. Hypothecation b. Pledge c. Mortgage
16 d. Charge 14) Explain the different approaches used for determining an appropriate working capital financing mix. 15) Write advantages and disadvantages of trade credit as a source of short-term finance. 16) What is a letter of credit? Explain the different types of letter of credit issued by banks. 17) Differentiate between hypothecation and pledge. 18) Whether working capital should be met from short-term or long-term capital? Explain in detail. 19) What are the different functions of a factor? Explain the mechanism of factoring with the help of a diagram. 20) Discuss in detail the various types of factoring. 21) What do you understand by financial evaluation of factoring? Explain the benefits associated with factoring. 22) Explain the different forms of bank finance available to organizations.