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

Mehta Traders has annual cost of sales of Rs 36,00,000 on a 360-day year. Raw material is held 20 days, work-in-progress 10 days, finished goods 15 days, and debtors are allowed 30 days (all figures on cost basis). Creditors are paid after 25 days. Ignoring cash, the net working capital required is:

The net operating cycle is 50 days, and daily cost of sales is Rs 10,000, so working capital is Rs 5,00,000.

  1. ARs 5,00,000
  2. BRs 6,00,000Correct
  3. CRs 8,50,000
  4. DRs 7,50,000

Explanation

Operating cycle = 20 + 10 + 15 + 30 - 25 = 50 days. Daily cost = 36,00,000/360 = Rs 10,000. Working capital = 50 x 10,000 = Rs 5,00,000. Check: current assets 75 days x 10,000 = 7,50,000 less creditors 25 x 10,000 = 2,50,000 gives 5,00,000. So the correct figure is Rs 5,00,000.

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