11.

23

GRADED ILL UST RAT ION S / EXAMINATI

ON QUESTIONS

Calculate the oper ating cycle of a com pany whic

h give s the following details relating. to its

.. . . ..•? • , - , • .
·:·. .. . . • • •' Particulars
'.•.. .. .
RaW materials consumption per annum
Annual cost of production 8,42,000
Annual cost of sales 14,25,000
15,30,000
Annual sales
Average value of current assets held: 19,50,000
Raw materials
1,24,000
Work-in-progress
72,000
Finished goods
1,22,000
Debtors
2,60,000
•'lhecompany gets 30 days cred it from it suppliers.
All sales mad e by the firm are on credit only. You may
••y ear as equal to 365 days .
•
s,ldin:
1 °""P"t41tion of Operating Cycle:
(c) Raw material hold ing peri od (R)

= Average raw mate rial stock held = 1,24,000 x

Annual raw material cons ump tion /365 365 = 54days
8,42,000
(I,) Work-in-progress peri od 0/v)

= Average wor k in prog ress held = 72,000 x 365

Annual cost of prod uctio n of good s/36 5 14,2 = 18da ys
5,000
(c) rmished goods hold ing peri od (F)

=Average finished good s stock held _ 1,22,000 x365

= 29da ys
Annual cost of good s sold / 365 - 15,30,000
(cl) Debtors collection peri od (D)
=-Average debtors held = 2,60,000 x 365 = 49da ys
Annual credit sale s/ 365 19, 50,000

Cross operating cycle (R + W + F + D) = tSOdays

(t) l"-..1 • , = 30da ys
' - & ~ t o r s paym ent peri
od (C) (given)
Net operating cycle (R + W + F + D - C) = t20d ays

•
 Illutrat ion 2.
From the following data comput e the duratio n of the operati ng cycle for each of the two,-.,
.
and comme nt on the increase / decrease:
<r ·ooo,
/
• Part/cu/era Year1 Year2 ·
~

Averag e Stock
Raw material 20 27
Work-In -progres s 14 18
Finished goods 21 24
Purchas e 96 135
Cost of goods sold 140 180
Sales 160 200
Debtors 32 50
Creditors 16 18

Assume 360 days per year for comput ational purpose s. [CA Final adopted; B.Com(H), Delhi Unii,, 2014]
Solution: Compu tation of Operat ing Cycle
Particulars Year 1 Year2
' • .''.·~f~
.:.
(a) Raw material holding period (R)
• Average raw material stock held
= 20 27
Annual raw material consum ption/36 0 - >< 360 = 75 days - >< 360 =72 days
96 135
(b) Work-in-progress period (W)
Average work In progres s held 14
= - >< 360 = 36 days -
18
>< 360 =36 days
Annual cost of producti on of goods/3 60 140 180
(c) Finished goods holding period (F)
= Average finished goods stock held 21 24
Annual cost of goods sold/360 - >< 360 = 54 days ->C360 =48day s
140 180
(d) Debtors collection period (D)
= Average debtors held 32
- >< 360 = 72 days 50
Annual credit sales/360 - >< 360 =90 days
160 200
(e) Gron operating cycle (R + W + F + D)
(I) 237 days 246 days
Less Creditors payment period (C)
Average creditors
= 16
- >< 360 = 60 days 18
Annual credit purchases/360 - >< 360 =48 days
96 135
Net operating cycle (R + W + F + D) - C
177 days 198 days
Operati ng cycle has increased. from 177 days in first year to 198 days in second year.
This increase in
operati ng cycle will result in an increased require ment of workin g capital.

Illustration 3. The following information for a particu lar year has been extract ed from
manufa cturing company. the books of 8
Balance Sheet Data

Opening {'
Raw material
2,00,000 3,00.000
Work-in1)l'09ress
1,00,000 2,00,000
Finished goods
3,00,000 4,00,000
Debtors
Creditors • 3,00,000 4,00,000
2,00,000 3,00,000
 Profit and Lo11 Account Data
r
purchases
consumption of raw material 18,00,000
Total production cost 15,00,000
Total cost of goods sold 25,00,000
Total cost of sales 28,00,000
Sales 30,00,000
::::::~~::~~::==::;-~::;:=:-=-:-------~38~,oo~,OOO~-
unili';360 days in a year, you are required to calculate:
ASS ating cycle in days
• ~ cycle in days
1
! Working capital required for the year
[B.Com(H), Dtlhi Univ. 2017)

Sol" ti0 Jt'• tation of Operating Cycle:

t co;:w material holding period (R)
(a Average raw material stock held 2,50,000
= Annual raw material consumpti on/360 = 15,00,000 x 360 60days
(b) Work-in-progress period (W)
Average work in progress held 1,50,000
=Annual =----x
cost of production of goods/ 360 25,00,000360 21.6days
(c) Finished goods holding period (F)
Average finished goods stock held 3,50,000
=-___: ~------= =:...--- ---=---- x360 4Sdays
Annual cost of goods sold/360 28,00,000
(d) Debtors collection period (D)
_ Average debtors held 3,50,000
- - - - = - - - - - - = - - - - x 360 3Sdays
Annual credit sales/ 360 36,00,000
Operating cycle (R + W + F + D) 161.6days

1 Cash Cycle:
Operating cycle (R + W + F + D) 161.6days
Ltss Creditors Payments Period (C) 56.2Sdays
== Average creditors 2,50,000
Annual trade purchases /360 = 16,00,000 x 360
Cash Cycle (R + W + F + D) - C 105.3Sdays
Note·• Ent·zre sales and purchases have been assumed on "-,--"',t
--"· bas.as.
3
• ~lculatiun °/ Working Capital Required: ,
,a) Oper tin
a g cycle / cash cycle approach
- - - - - - - ~ ~ -~ ~
N
o.ofoperatin cl . - : - - - - - : : - ; =--•3.4 2
g cy es m a year - Duration of one operating cycle period tOS.35
Alnount of working capital requireme nt
No
• Total operating cost
(cost of sales)= 30,00, 000 • Rs. 8,77,193 (Approx)
•of operating cycle in a year 3.42
 JI .1 <>

(b) Alternatively, requirement of working capital can also be assessed on the basis of estimation of various
component of working capital.
Compuution of Working Capital

Particulars f
(8) Value of average stock R.M. maintained 2,50,000
(b) Value of average stock WIP maintained 1,50,000
(c) Value of average stock F.G. maintained 3,50,000
(d) Value of average debtors maintained 3,50,000
Total average current assets Investment 11,00,000
Less Average creditors outstanding 2,50,000
Working capital 8,50,000
It can be observed that value of the working capital requirement calculated by the above two methods are
almost the same.
Illustration 4. The following information is provided by MNP Ltd. for the year ending 31st March, 2020:

Raw Material Storage period 45days

Work-in-Progress conversion period 20days
Finished Goods storage period 25days
Debt Collection period 30days
Creditors payment period 60days
Annual Operating Cost f 25,00,000
(Including Depreciation off 2,50,000)
Assume 360 days in a year. You are required to calculate:
(i) Opera ting 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 on a
market survey it is planning to discontinue sales on credit and deliver products based 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.
(CA, lnter,Jan, 2021, Similar question in CA,IPCC, May, 20151
Solution: (i) Calculatio n of Operating Cycle Period
Operating Cycle Period= R + W + F + D-C ⇒ 45 +20 + 25 +30-60 =60 days
360days 360
(il) Number of Operating Cycles in a Year= Ope tin' C p . =
ra g ye1e en00 60 = 6
Operating Cycle Cost 25,00,000-2,50,CXX> !II ,000
(iii) Amount of Working Capital Required= Number of Operating Cycles = =' 3,75
6
(iv) Reduction in Working Capital
New Operating Cycle Period = R + W + F - C ⇒ 45 + 20 + 25 - 60 = 30 days
 • C I • y 360
f R vised Ope ra ting ye es 1n a ear = - 30 = 12
~ro e
N
0,(XX) ,
f Revised Wor king Cap ital Req uire d:= 25,00,00J-2,5
12 = 1,87,500
~ounto
=f 3,75,000 -f 1,87,500= f 187,500
. ·n Working Cap ital
. . ,
Rfductton •
•On 5 AB Ltd. prov ides the follo wing part
icula rs relating to I•ts working:
01.str1J ti • .
;\ Cost I Profit•per umt: PtrUnit
(t, 1cost
Raw matena 84
Direct labour cost 36
Overheads (all variable) 36
Total cost 156
Profit 44
Selling price 200
(iz) Average amount of back up stock:
Raw material 1 month
Work-in-progress (50% com plete ) 1/2 month
Finished good s 1 month
(iii) Credit allowed by supp liers 1 month
(iv) Credit allowed to cust ome rs 2 month
(v) Average time lag in the payment of
Wages l/2m onth
Overhead expe nses l½m onth s
,3,00,000
(v,) Required cash in hand and at bank
(viii) 25% of the outp ut is sold for cash
, wor k out the working capital requirements assuming that
For an expected sale of 1 00 000 unit s of AB Ltd. ds similarl:Y·
• carried on even' ly' thro ugh out the year and wag es and overhea accrue .
Production 15

Working Cap1'tal
Solution•• Statement Sho win g Determination of Net
(A) C r
urrent Assets: 3,00,000
(a) Desired cash in hand and at Ban k 7,00,000
(b) Raw material (1,00,000 unit s x 84 xl/1 2)
3,25,000
(c) Work-in-progress (1,00,000 x 156 xl/2 4) ><
~
13,00,000
(d) Finished good s (1,00, 000 x 156 x 1/12)

(t) Debtors [1,0 0,00 0 x 156 x

75 x
100 12
.!] 19,50,000

T
(8) CotaJ CUrrent assets (A)
"P?rnt Liabilities:
1
:: Creditors (1,00,000 units X 84 X 1/12 )
) Wages (1,00, 000 x 36 x 1 /24)
~ Overheads (1.00, ooo x 36 x 15/12)
(C) NiOQJ CUrrent liabilities (B)
rt '°orlcing Capital CA - B)
 . . rs:
n 6. A pro t h of a com pan y pro vid e you the followmg particula
Illus tratio on na cos t s eet
.
Estimated cost per unit:
.. Amount per Unit (f) ..
Cost Be me nts
100
Raw material 40
Direct Iabour 60
Overheads
200

:
) • Additional information f 250 per unit
pe r annum
(i) Selling price: 1,04,000 un its of production
(i1) Level of activity: Average 4 weeks
(ii,) Raw materials in sto
ck: Average 2 weeks
(iv) Work-in-progress Average 4 weeks
(v) Finished goods in stock: Average 4 weeks
pliers: Average 8 weeks
(v,) Credit allowed by sup
tors Average 2 weeks
(vii) Cr ed it allowed to deb
(vii,) Lag in pa ym en t of
wages
capital.
at ba nk is expected to be 10% of gross working
(ix) Ca sh eads accrue
ou gh ou t the ye ar (52 we eks) an d wa ge s an d overh
enly thr rking capital
Production is carried on ev is. Yo u are req uir ed to pre pa re a sta tem en t of wo
on cash bas
similarly. 25% of sales are
requirement. (B.Com(H) Delhi Univ.,2015}

Solution:
Re qu ire me nt
tio n of W ork ing Ca pit al r
Sta tem en t of De ter mi na r
(A ) Current Assets:
(1) Invesbnent in inventories:

• (a) Raw material (1 04 ,00

0 x ~ x 100
5
J 8,00,000

(b) Working in progress

(1,04,000 x :ix 100 + 1,04,000 x 5~ X1 : x

(40 + 60)J 6,00,000

(c) Finished go od s (104,000 x 5: x 200 J 16,00,000 30,00,000

(i1) Investment in de bto rs

(1, 04, 000 x ~x 200 x
100
75 ) 24,00,000
52
gross wo rking capital) 6,00,000
(ii,) Desired cash balance (10% of
( (30, 00,000 + 24,00, 000) x ~ )
ross Working Capital) 60,00,000
Total au re nt assets (A) (G
 ,rent Liabilities:
(I) C"
(,) Credit allowed by suppli ers ( 1,04,0 00 X 100 Xi) 8,00,000
2
(iJ) Wages ( 1,04,0 00 x 40 x 5 i) 1,60,000

Total current liabilities (B) 9,60,000

50,40,000
(l') Net Working Capital Requirement (A - B)
g capital requirements:
Ill,strotion 7. From the following information prepar e an estimate of workin
(ij Projected annua l sale f 52000 units
(iQ Selling price f 60 per unit
(iiQ Raw material cost 40% of selling price
(iv) Direct labour cost 30% of selling price
(v) Overheads 20% of selling price
production process for
Raw materials remain in stock on an average for 3 weeks. Goods remain in
3 weeks credit from suppliers.
4weeks on an average. 5 weeks are allowed to debtors to pay while firm gets
and overhead expenses is two
Finished goods remain in stock for one month. Lag in payment of wages
100% complete with respect to
weeks. 50% sales are on cash basis. Assume that goods in process are Univ. 2006, 2017)
[B.Com (H) Delhi
materials but only 50% in conversion costs.
/52 = 1,000 units
Solution: Working Notes: 1. WN1 ➔ Weekly production and sales= 52,000
l Breakup of cost and profit per unit • f
Selling price (SP) 60 •
24
Raw material cost (40% of SP)
18
Direct labour cost (30% of SP)
12
Overheads (20% SP)
Total cost 54

Profit 6
Statement of Estimation of Working Capital Requirement

(A) Current Assets ' •

(,) Raw material stock 72,000

(1000 units x 24 x 3 weeks)
(ir) Work-in-progress 96,000
(a) Raw material (1000 x 24 x 4)
60,000
(b) Conversion costs [ 1000 x (18 + 12) x 4 x 1: ]

(ii,) Finished goods

52000 x 54 x 1 month)
(
12
(m) lnvesbnent in Debtors

(1ooo xMxS x 1 !o)

'-1 CIUNllt A•rll W
 (B) Curm at Liberalities
(1) Credi t from suppliers '2,000
(10()() X 24 X 3)
(ir) Wages outstanding 36,000
(10()(} X 18 X 2)
(iii) Overhead outstanding 24,000
(1000 x 12 x 2) 1,32,000
Total current liabilities (B) 4,65,000
(C) Net Work ing Capital (A - B)
to make an assessment of the average amount
Illustration 8. From the following details you are required
of working capital requirement of RS Ltd.
. ,- Average Period • .-:·· .' E,,,,.;,,
·_·• .; .. •. • of Credit •. · ·· · ; • : :. the
Particulars . . - •• - •·=:I-,, •. •.-•·: ~•t ~••
..
,.

6 weeks 26,00,000
Purchase of material 1½ weeks 19,50,000 • I

Wages
Overheads: 6months 1,00,000 . ;
Rent, rates etc. 1 month 8,00,000
Salaries 2 months 7,50,000
Other overheads cash 2,00,000 •
Sales 60,00,000
2 months
Credit sales 4,00,000
Average amount of stocks and work-in-progress 3,00,000
,. Average amount of undrawn profit
,
I

t It is assumed that all expenses and income were made at even

rate for the year.
'•I Sol•ti on: Statement of Working Capital Requi remen t • I o

(A) C•rm it Assets

4,00,000
I. Average amount of stock and work-in-progress ( given)
Debtors ( (,(),00,000 X}~) 10,00,000
Total current assets (A) 14,00,000
,,
(B) Curm ,t liabil itks

Creditors ( 26,00,000 X ~) 3,00,000

f 5
r
I Wages (19,50,000 x ¥) 56,250

Rent rates etc. ( 100,000 x ~ 50,000

L
Salaries ( 8,00,000x 1 ~J 66,61{/

Other overheads ( 7,50,000 xii J

Total current liabilities (B)
(C) Working Capital (A - B)
us, Average amount of undrawn profit
Working Capital required
 e cost sheet of PQR Ltd. provi des the following data:
fiotl 9• Th
,,,..,,, --~.--~.. -.-.~-·.:--.._"'.""'.-----:.Cos;:::t;-:p:e:-,::un:;,t-~-~-~_..:_~-.T _~-~- --,~.~~-
-_- . .,...s"__,,_,__:--:,-
.. -~.-·
•~
-- Raw material
• .• •
7
_.. -~ •• SC:_._ · • <' •· i,,.
1

Direct labour
overheads (including depreciation of t10 per unit) 20
40
Total costs
Profit
-110
20
Selling price
130
ge raw materials in stock is for one month . Average materials in work-
Aver~_Credit allowed by suppli ers: one month ; Credi t allowed to debtor in-progress is for half
s: one month. Average time lag in
~ent of wages is 10 days. Avera ge time lag in paym ent of overheads
is 30 days. 25% of sales are on cash
Csis.Cash at bank is expec ted to be' 1,00,000. Finished goods lie in
warehouse for one month. You are
required to prepare a statement showi ng working capital needed to finance a level of activity of 54,000 units of
output. Production is carried out evenly throughout the year and wages and
overheads acaue similarly. State
your ~ptio ns, if any, clearly. of the firm. [B.Com (H) Delhi Univ. 2016,similar question asked in 2013.)
Solution: Statement of Estim ation of Working Capital Requirement
Curmat Assets (A)

(i) Raw materials (54,000 x 50 x _!__ )

12
'
2,25,000

(G) Work-in-progr.?ss [ 54, C:xJ x 50 x ;

4
+ 54,000 x (20 + 30) x : x "i4 ] 1,68,750

(iii) Debtors (54 000 x 100 x 75 3,37,500

x _!__ )
' 100 12
(ro) Finished goods[54,000 x (50 + 20 + 30) x 112 ] 4,50,000.
(v) Cash 1,00,000
Total current Assets (A) 12,81,250
C11rrtnt t·•a&·1· • (B)
: thes
(~ Credit allowed by suppliers(54,000 x 50 x 1 2,25,000
)
12
•
(ii) Wages(S4,000 x 20 x ~ ) 30,000
360
('~ t,35,000
II Chrerheads (54,000 x 30 x 30 )
lotai 360
~ k·CUrrent liabili ties (B)
3,90,000
, : •ng Capit,af (A - B) 8,91,250
11111
Ptions:
6) "--.
cu, -wee of completion of WIP is assumed to be tOOo/o for materials.and 50o/o for labour
~.....
and
N\llnbe ----' to be 30 days and hence m a year 360 -
b\a r of days in a month is ass ~ . n will be modified accordingly• ,-
Ciii) Yass\111\e 365 days in year and solutto .
~ t i be"
.
s o v ~ mg non-cas 1 h ·tem ha& been excluded while calcu1ating
 1 I. ).._

ated by SR Ltd. for the next year, calculate the- -~-·

Illus trati on 10. From the following information estim .
capit al requ ired on cash cost basis:
27,oo-,
Sales (at gross profi t of 20%)
6~" -
Raw material
~
~~ 60.-,
Manufacturing Expenses outstanding at the end of the year
1,so.-,
TotalAdministtativeExpenses
90.-,
. nses
Total Selling Expe
1,00,(Q)
Desired cash balance
1 mon th's requirement. The company gives·
Finished good s and raw material are kept in stock to meet
it of 2 mon ths from its supp liers . Wages are pa~
cred it of 2 mon ths to its custo mers and also gets a cred
with a time lag of 1 mon th. Ther e is no work in
with a time lag of 15 days . All othe r expe nses are paid
progress.
n. Finished good s are value d at manufacturing cost.
The company includes depreciation in its cost of productio
[D.U., BCH-2019; Similar question in BBS-2011)
A safety margin of 15% is to be maintained.
tal Requ irem ent (Cas h Cost Basis)
Solu tion: State ment of Com putat ion of Wor king Capi
t
(A) Curre nt Asse ts (CA)
56,250
Raw Material stock [ 6, 75,000 x 1~ ]
1,61,250
Finished good s stock [ 19,35,000 x 1~]

i Investment in Debtors [ 22, 05, 000 x 1~ ]

3,67,500 •

Des ~ cash balance (50% of curre nt liabilities) 1,00,000

'
·1
t
f'
-·
I•
Total current assets (A)
(B) C.1rrent Liabilities:
Trade Creditors [6,75,000 x 12 ~1
6,85,000

1,12,500
.
Outstanding Wages [ 5,40,000 x 2~] 22,500
r)
Outs tandi ng manufacturing expenses (one mon th in arrea 60,000
Outstanding admn. ern, -~ [1, 80,
"r-,n~
000 x 1 ] (one mon th m• arrea r) 15,000
12

12
J
Outs tandi ng selling expenses [ 90 ,000 x 1 (one mon th in arrea r) 7,500

Total current liabi lities (B)

(0 Working Capi tal {A- B) (6,8S,OOO _ 2,l?,SOO)
Add Safety marg in (15% of 4,67,500)
Working Ctipitl,l lu'l" imn at
 . Notes:
~g t' n 0 1 Cash Cost of Sales:
"'"''' ,o
1,

costo
'I
f material consu med '
6,75,000
5,40,000
wages
(ash Manufacturing expen ses (60,000 X 12) 7,20,000

Cash cost of produ ction 19,35,000

Add Admin, expen ses 1,80,000
Add Sales expenses 90,000
22,05,000
Cash cost of sales
2. c,Jculation of Depreciation:
27,00,000
Sales 5,40,000
Less Gross profit (20%)
Cost of production (Balan cing figure ) 21,60,000
Im Cash cost of produ ction 19,35,000

Depreciation
2,2.5,000 . .,
Hlmration 11. The follow ing inform ation is extrac ted from last
year's annual accounts of ABC Ltd.:
L

Raw material 100.00

Direct labour 37.50

Overheads 75.00

Total costs
212.50 ',

Profit 37.50 .
250.00
Selling price
_.
The cornpan keeps raw materials in stock on an average for four weeks , work- in-pro gress in stock en an
average f Y . The Credi t~,--"- ·-=-"'" .::
by suppt r 0 1:1e week and finish ed goods in stock on an avera ge for two wee_ks
debto rs. 1be liag:til
PiYnient :;s
is th~ee weeks and the comp any allow s four weeks credi! to its
&ells one-fi wag~s 1s one week and lag in paym ent of overh ead expen
ses 1S two weeks . The cm ••
att37 soo fth of its outpu t again st cash and maint ains cash in hand
and at bank balanc e put tot• •
"'t• I •
• • :'.) -e tt;t
tu are re · d to financ e an activit y leve lol~
Of Plod .~ed to prepa re an estima te of worki ng capita l neede
hout the year and oved •da~ ...,
lctruesbnuar Assume that production is carried out evenlyallthroug
1y. Work-in-progress stock is 80°/o completed in re&pects.
' Sta I8.0ml (H) Dtlhi Unir1. 2018, Simillu ,pustian __,I n~
~ telllent of Estim ation of Work ing Capita l Requirement:
t ~ s CA)

(~ Ra 10() )( _!_ )
\V 11\ateria)s (1,30,000 X
52

----~ -, ork-in-progre.a 1, 30
 (iii) Finished goods [ 1, 30, ooo >< c100 + 3'.7_50 + 75 >>< : 2 ]

(RI) Debtors [ 1, 30,000 >< (100 + 37.50 + 75) >< 5~ ] 17,00~

(v) Cash • 37,!;Q)

ToW current Assets (A)
Current Liabiliti es (B)
~
3
(a) Credit allowed by suppliers (1,30,000 x lOO x 5 2 ) 7,SO,ooo

1
(iz) Wages (1,30,000 x 37.50 x ) 93,750
52
2 3,75,000
(h) Overheads (1,30,000 x 75 x )
52
12,18,750
30,06..250
ToW current _liabilities (B)
Working Capital (A - B) .
d projected
Illustration 12. PQ Ltd, a company started commencing business in 2018 has the under mentione
Profit and Loss Account·. .
.-
,_
. ..
. .. .... . - ~,. , r -__ ,..· ·: -

~- . .. ,. .. -·.. :,, ......... . . . ...., .

~ •,,.,
.
r.- ..
'
,•
, ., ...•:
,•. ,.. . ''
. .,
~-
\ ~ , ,. • f": -
'
.• ' '
., - .• . '
.. .. . .
.,
~

. . • ' ·: ' :

Sales 2, 10,000
Cost of goods sold 1,53,000
Gross profit 57,000
Administrative expenses 14,000
Selling expenses 13,000 27,000
Profit before tax 30,000
Provision for taxation 10,000
Profit after tax 20,000
The cost of goods sold has been arrived at as under:
Material used 84,000
Wages and Manufacturing expenses 62,500
Oepr,ciation 23,500
-
1,70,000
Less: Stock of finished goods (10% of goods produced not yet sold) 17,000
-
1,53,000
-
The f i ~ giv~ a~ve relate only ~ finis~ed goods and not to work-in-progress. ~ equa1_:i.:
of lhe year s production ( m terms of physical uruls) will be in process on an average reqwnng full IIIC)lllh'•
but only 40% of the other expenses. The company believes in keeping materials equal to two
consumption. . . . oed"-
All expenses will be paid one month m advance. Suppliers of materials will extend 1~ ~onths __..
Sales will be 20% for cash and the rest at two months credit. 70% of the income tax will be paid tn ad
quarterl y instalments. The company wishes to keep , 8,000 in cash.
Prepare an estimate of(,) Working Capital and (i,) Cash cost of working capital.
Note: AU working should form part of your answer.
 (i) Statement of Estimation of Work.mg Capital
50111tion:
(A) Ci,rrent Assets r
(a) Ra,v 1naterial stock (WN 2)
16,100
(b) Work-in-progress stock (WN1)
11,760
(c) finished goods Stock (given)
17,000
0x-x-
(d) Debtor ( 2,10,00100 12
80 2) 28,000
(e) Prepaid expenses (5,521 +2,250) (WN3) -1,171
(/) Desired cash balance 8,(0)
Total current assets (A) 94,631
(B) Current Liabilities

(a) Creditors ( :1 x (96,600 + 16,100)) 14,088

(b) Tax payable (30% of f 10,000) 3,000

Total current liabilities (B) 17,()88
r
71/;43
(C) Working capital required (A - B)
Working Notes: WN 1 - Valuation of work-in-progress:
15
Raw material ( x 84 ooo)
100 '
15 40
Wages n1anufacturing ( x x62,500)
100 100
1,410
Depreciation (
15 40 x 23,
x
100 100
soo)
WN2- Value of raw material consumed:
Raw material in finished goods
Raw material in work-in-pr ogress
Raw material consumed 2
961600 ><12
Raw material stock = 2 months consumpti on=

Raw material purchased (96,600 + 16,tOO)

~ 3 .. Prepaid Expenses:
_!_ (62,500 + 3,750)
Wages&: manufactu ring expenses 12

Adnun. &t selling expenses _!_ x 27,000

'3'7Rft
,,au are the wages &
• tlonad
lnd.W:
 In wo rk-i n-p rog ress (Calculated in WN1)
2,820
90 x23 ,so o) ( Sale is 90% of pro duc tion )
In Deb tors 2S,OOO x(
2,10,000 100 6,580

4,000
30 X>)
Profit included in Debtors ( 2,10,, : x 28,IX

10,580
t of current assets
Depreciation and profit included in cos
(ii) Computation of Cash Cost of Workin
g Capital
'
77,543
Wo rkin g capital as per (i) •
10,580
ed in cur ren t ass ets (WN4)
Less Depreciation and pro fit inc lud
II.
66,963
ng cap ital requirement
hav e app roa che d the ir ban ker s for the ir wo rki '
Illustration 13. M/s. PQR & Co. sam e by reta inin g the ma rgin s as und er:
who have agreed to sanctio n the

Raw material 20%

Stock-in-process 30%
Finished goods 25%
Debtors 10%
:
t year, you are req uire d to wo rk out
From the following projections for nex
com pan y; and
(1) The wor kin g capital required by the
to be a app rov ed by ban ker s.
(u) The wor kin g capital limits likely
Estimates for next year:
Annual Sales 14,40,000
Cost of production 12,00,000
Raw material purchases 7,05,000
Monthly expenditure 25,000
erials
Anticipated opening stock of raw mat 1,40,000
ls
Antidpated closing stock of raw materia 1,25,000
Inventory norms:
Raw material
Work-in-progress
Finished goods
• 1
1J1em'lll enjoys a aed it of 15 days an ill J>Urd1aaes aallOWs one month, credit on•.a....
mmpany has received an ad .._ of ' 15, OOOandSt • tey0Ur IU,
. U8 Uln ptiona,
.
 l l .3 7
Statement of Working Capital Requirement
, c,,rt"t ,Assets
~ . r
tJ~w Matenal (1,40,000 + 705,000-1,25,000) x2-
"" 12 1,20,000
Wotk•in·progress ( 12,00,000x 2~)
50,000
Finished goods ( 12, 00, 000 x 1~)
1,00,000
1
sundry [)ebtors ( 14,40,000 X )
12 1,20,000
Expenses (cash needed)
25,000
Total current assets (A)
4,15,000
(B) current liabilities
Trade Creditors 7,05,000 x _!_
24 29,375
Advance on sale orders
15,000
Total current liabilities (B) 44,375
(0 Working capital (A - B) 3,70,625
(ii) Working Capital Limits Likely to be Approved by Bankers
• _· Particulars·• .. ·, • _f· :·. Working Capital Margin to be · . _: :·
Needed by - • be Retained • .:.,.
Company f. by Banker r •.••

80
Raw materials 1,20,000 20% 100 x1,20,ooo =96,000
Work-in-progress 50,000 30% 17! x5Q,OOO = 35,000
75
F"llished QOOds 1,00,000 25%
.. 100
x1,oo.ooo = 75,000
.
Debtors 90
1,20,000 10% 100 x1,20.ooo = 1,08,000
Elis>enses 25,000
~Ing capital limit to 3,14,000
ed by bankers