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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

A firm has projected current assets of ₹80 lakh and current liabilities other than bank borrowings of ₹20 lakh. Under the second method of lending (Tandon Committee), the bank requires 25% of current assets to be financed from long-term sources. What is the maximum permissible bank finance (MPBF) and the resulting current ratio if the firm borrows exactly the MPBF?

MPBF is ₹40 lakh and the current ratio is 1.33. Under the second method, MPBF equals 75% of current assets (₹60 lakh) less other current liabilities (₹20 lakh). Total current liabilities then become ₹60 lakh, so the current ratio is 80/60 = 1.33.

  1. A₹40 lakh; current ratio 1.33Correct
  2. B₹45 lakh; current ratio 1.23
  3. C₹60 lakh; current ratio 1.00
  4. D₹20 lakh; current ratio 2.00

Explanation

Method II: MPBF = 75% of current assets − other current liabilities = 60 − 20 = ₹40 lakh. Total current liabilities = 20 + 40 = ₹60 lakh, so current ratio = 80/60 = 1.33. The ₹45 lakh option is the first method (75% of the ₹60 lakh working capital gap), giving 80/65 = 1.23. ₹60 lakh is the entire gap.

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