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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Aarav Textiles has annual cash cost of sales of ₹21,60,000 and annual purchases of raw material (all on credit) of ₹12,00,000. It holds raw material stock for 45 days of purchases, allows debtors 45 days (valued at cost) and receives 30 days of credit from suppliers. Taking a 360-day year and ignoring cash and other items, the net working capital required is:

Net working capital required is ₹3,20,000. Debtors at cost are ₹2,70,000 and raw material stock is ₹1,50,000, giving current assets of ₹4,20,000. Deducting creditors of ₹1,00,000 leaves ₹3,20,000. Ignoring creditors would overstate the requirement.

  1. A₹3,20,000Correct
  2. B₹4,20,000
  3. C₹5,20,000
  4. D₹50,000

Explanation

Debtors = 21,60,000 × 45/360 = ₹2,70,000. Raw material stock = 12,00,000 × 45/360 = ₹1,50,000. Creditors = 12,00,000 × 30/360 = ₹1,00,000. Net working capital = 2,70,000 + 1,50,000 - 1,00,000 = ₹3,20,000. Omitting creditors gives ₹4,20,000, which is wrong because supplier credit reduces the funding need.

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