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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Sundaram Textiles Ltd reports current assets of Rs 18,00,000 and current liabilities of Rs 11,00,000. Of the current assets, Rs 4,00,000 is a permanent minimum level of stock and debtors that the firm must always hold. What is the net working capital, and how much of it is permanent (core) working capital?

Net working capital is current assets minus current liabilities, which is Rs 7,00,000. The permanent working capital is the minimum level of current assets always required, stated as Rs 4,00,000. So the first option is correct.

  1. ANet working capital Rs 7,00,000; permanent working capital Rs 4,00,000Correct
  2. BNet working capital Rs 7,00,000; permanent working capital Rs 3,00,000
  3. CNet working capital Rs 14,00,000; permanent working capital Rs 4,00,000
  4. DNet working capital Rs 18,00,000; permanent working capital Rs 7,00,000

Explanation

Net working capital = current assets - current liabilities = 18,00,000 - 11,00,000 = Rs 7,00,000. Permanent working capital is the minimum level of current assets always needed, given as Rs 4,00,000. Option B wrongly subtracts the permanent portion from net working capital.

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