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

Which of the following items is excluded when estimating the net working capital requirement of a manufacturing firm using the operating cycle approach?

Depreciation is excluded because it is a non-cash charge that needs no cash funding. Stock of raw material and customer credit are current assets requiring finance, and wages payable is a liability that reduces the requirement, so only depreciation is left out of the working capital estimate.

  1. ARaw material stock held in the stores
  2. BCredit allowed to customers on credit sales
  3. CDepreciation charged on plant and machineryCorrect
  4. DWages payable to workers at the month end

Explanation

Depreciation is a non-cash expense and does not require cash funding, so it is left out of the cost base used for working capital estimation. Raw material stock and receivables are current assets that must be funded, while wages payable is a current liability that reduces the requirement.

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