CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
Kaveri Pumps has annual credit sales of ₹36,00,000. Its total cost of sales is ₹30,00,000, which includes depreciation of ₹3,00,000. Customers are allowed 60 days of credit. Take a year as 360 days and value receivables at cash cost. What is the investment in receivables?
Investment in receivables is ₹4,50,000. Cash cost of sales is ₹27,00,000 after removing depreciation of ₹3,00,000, since depreciation is not a cash outflow. Multiplying by 60/360 gives ₹4,50,000. Valuing at sales or total cost would overstate the investment.
- A₹6,00,000
- B₹4,50,000Correct
- C₹5,00,000
- D₹4,00,000
Explanation
Cash cost = 30,00,000 - 3,00,000 = ₹27,00,000. Receivables = 27,00,000 × 60/360 = ₹4,50,000. Using sales value gives ₹6,00,000 and using total cost including depreciation gives ₹5,00,000, both of which are wrong for the cash cost basis.
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