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

Verma Traders expects annual credit sales of Rs 36,00,000 at a selling price that includes 20% profit on cost. Debtors are allowed 2 months credit. Debtors are to be valued at cost of sales. What is the amount of debtors to be funded?

Debtors to be funded are Rs 5,00,000. Since profit is 20% on cost, cost of sales is Rs 36,00,000 divided by 1.2, or Rs 30,00,000. Two months of this cost equals Rs 5,00,000, because debtors are valued at cost rather than selling price.

  1. ARs 6,00,000
  2. BRs 5,00,000Correct
  3. CRs 3,00,000
  4. DRs 7,20,000

Explanation

Cost of sales = 36,00,000 / 1.20 = Rs 30,00,000. Two months of cost = 30,00,000 x 2/12 = Rs 5,00,000. Rs 6,00,000 values debtors at sales price, and Rs 7,20,000 wrongly deducts 20% of sales from sales.

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