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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

A firm's estimated annual cost of goods sold is Rs 18,00,000 (360 days). Average raw material, WIP and finished goods holding periods total 40 days at cost, debtors are held 30 days at cost, and creditors are paid in 20 days on purchases that equal Rs 9,00,000 a year. Ignoring cash, the net working capital required is:

Net working capital required is Rs 3,00,000. Inventory of Rs 2,00,000 plus debtors of Rs 1,50,000 gives Rs 3,50,000, and deducting creditors of Rs 50,000, computed on purchases of Rs 9,00,000 for 20 days, leaves Rs 3,00,000.

  1. ARs 2,50,000Correct
  2. BRs 3,00,000
  3. CRs 2,00,000
  4. DRs 3,50,000

Explanation

Inventory = 18,00,000 x 40/360 = 2,00,000. Debtors = 18,00,000 x 30/360 = 1,50,000. Creditors = 9,00,000 x 20/360 = 50,000. Net = 2,00,000 + 1,50,000 - 50,000 = Rs 3,00,000. This equals option B, so the key should be Rs 3,00,000; Rs 2,50,000 would result from wrongly deducting creditors on cost of goods sold.

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