Skip to content

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

Kaveri Ltd plans annual sales of 36,000 units at Rs 50 per unit; cost per unit is Rs 40 (all cash costs). Average raw material stock is held for 1 month (raw material is Rs 20 of the unit cost, purchased evenly), finished goods are held for 1 month at cost, debtors are allowed 2 months credit on sales value, and creditors allow 1 month on raw material purchases. Ignoring WIP and cash balance and assuming even activity over 12 months, what is the working capital required?

Working capital is Rs 4,20,000: current assets of Rs 4,80,000 (raw material 60,000, finished goods 1,20,000, debtors 3,00,000) less creditors of Rs 60,000. Ignoring the creditor deduction would overstate the requirement.

  1. ARs 3,90,000Correct
  2. BRs 3,00,000
  3. CRs 4,50,000
  4. DRs 4,20,000

Explanation

Monthly units = 3,000. Raw material stock = 3,000 x 20 x 1 = 60,000. Finished goods = 3,000 x 40 = 1,20,000. Debtors = 2 x 3,000 x 50 = 3,00,000. Current assets = 4,80,000... less creditors 3,000 x 20 = 60,000 gives 4,20,000, but debtors at 2 months on sales value was specified, so current assets = 60,000 + 1,20,000 + 3,00,000 = 4,80,000; net = 4,20,000. Re-check: option 4 equals this result.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Working Capital Management shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Working Capital ManagementFree diagnostic mock

More Introduction to Working Capital Management questions