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

Meenakshi Foods Ltd. has annual sales of ₹48,00,000 (360 days) and cost of sales of ₹36,00,000. Annual raw material purchases are ₹18,00,000. It plans: debtors 30 days (valued at sales value), finished goods stock 30 days (valued at cost of sales), creditors 45 days on purchases, and a minimum cash balance of ₹50,000. It wants a 10% safety margin on the net working capital. The working capital to be provided is:

The working capital to be provided is ₹5,77,500. Current assets are debtors ₹4,00,000, stock ₹3,00,000 and cash ₹50,000, totalling ₹7,50,000. Less creditors of ₹2,25,000 gives ₹5,25,000, and a 10% safety margin raises it to ₹5,77,500.

  1. A₹5,77,500Correct
  2. B₹5,25,000
  3. C₹4,67,500
  4. D₹5,22,500

Explanation

Debtors = 48,00,000 × 30/360 = ₹4,00,000. Finished goods = 36,00,000 × 30/360 = ₹3,00,000. Cash = ₹50,000. Current assets = ₹7,50,000. Creditors = 18,00,000 × 45/360 = ₹2,25,000. Net = ₹5,25,000; adding 10% gives ₹5,77,500. ₹5,25,000 omits the safety margin, and ₹4,67,500 values debtors at cost instead of sales as given.

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