Answer: Simple enough, right? What happens to a firm whose uses of cash exceed its sources of cash during an accounting period? To be clear, that number will change as your company grows and as your assets and liabilities change. You'll get a detailed solution from a subject matter expert that helps you learn core concepts. Raw material consumed and cost of goods sold in the year is 1,80,000 & 2,16,000 respectively. (D) Carrying excess inventories Answer: (B) Conservative Approach (A) 2.48 (B) lower return and risk (3) Credit policy (B) 57,500 Calculate closing stock of WIP. It is not fixed at any rate. Answer: 3,18,75,000 = 75% of (Current Assets Current Liabilities) (D) All of the above Answer: D) $390,000 Workings Permanent working capital refers to the base working capital, which is the minimum level of working capital that is carried by the entity at all times to car, Q1 Q2 Q3 Q4 Minimum Cash Balance $300 $300 $300 $300 Accounts Receivable 80 640 360 100 Inventory 1060 420 60 440 Accounts Payable (330) (330) (330) The data above shows the networking capital requirements for Flinder's Camping, a company that makes tents. (A) Reserve Working Capital (2) Manufacturing cycle Answer: Question 19. Following information is provided by the DPS Ltd. for the year ending 31st March 2019. (B) the firms investment in current assets. (A) 1.25, Question 103. (B) the company currently is unable to meet its short-term liabilities, Question 12. You are required to calculate working capital on cash cost basis. Experts are tested by Chegg as specialists in their subject area. (B) Cost of Production, Question 89. There is regular production and sales cycle, and wages and overheads accrue evenly. (D) All of the above, Question 21. Fixed assets are 6,00,000 and the firm plans to maintain a 50% debt-to-assets ratio. Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Question 49. (A) 3,36,667 Selling price is 50 per unit and production and sales for the year are 69,000 units and 75,000 units respectively. Answer: Liquid Ratio = ? (A) 13.75 (B) Identify the level of inventory which allows for uninterrupted production. 2.4y = x (C) Liquidity Ratios, Question 88. (D) 49,41,813 The company has a claim or right to receive the financial benefit, and calculating working capital poses the hypothetical situation of the company liquidating all items below into cash. For purposes of WCM, 'working capital' refers to the difference between current assets and current . (A) Trade-off between profitability and risk. (D) Variable working capital Answer: Answer: Answer: Working capital, also known as net working capital (NWC), is the difference between a companys current assetssuch as cash, accounts receivable/customers unpaid bills, and inventories of raw materials and finished goodsanditscurrent liabilities, such as accounts payable and debts. (D) Credit period Finished goods storage period 22 days (A) 1,17,00,000 Receivable management Answer: (D) 0.435; 0.405 (D) None of these If the interest rate is 7.5% p.a., what is the loan outstanding at the end of the first year? Question 59. (A) 4,25,00,000 Current Ratio = \(\frac{x}{y}\) (B) is used to raise the volume of production by improvement or extension of machinery. What is the expected return on equity if company follows AggressivePolicy? (B) How many time account receivable is collected (B) 2 (two), Question 51. All figures are in thousands of dollars. Gross working capital indicates firm's investment and financing of current assets. (B) Deducted from gross working capital The management is of the opinion to make 20% margin for contingencies on net working capital. Cost of production/purchase = 11,00,000 Gross Profit vs Net Profit: What Are the Differences & How to Calculate. (D) 50% of (Core Current Assets-Current Liabilities) (A) Acid test days, Question 72. (C) 80,000 drums Stock or inventory in an organization means Work-in-progress (full for material, 70% & 40% completion in respect of wages & overheads) will approximate to 15 days of production. (C) the firm may not be able to achieve its sale target Answer: x + 60,000 = 6,25,000 (D) Overtone = 49,29,313, Question 121. (C) Cost of Goods Sold (C) is the amount of current assets required to meet a firms long-term minimum needs. By forecasting sales, manufacturing, and operations, a company can guess how each of those three elements will impact current assets and liabilities. (D) None of the above Total assets 60,00,000 Current Assets = 960 Lakhs; Current Liabilities = 360 Lakhs (A) 72 days A) Cost of Raw Materials B) Accounts Receiveable C) Accounts Payable D) Fixed, The longer an investor waits to take capital gains, the lower is the present value of the tax liability. Sales during the year was 13,00,000 and gross profit ratio was 25% on sales. Bills receivable & Bills payable were 60,000 and 36,667 respectively. (D) Working capital cycle Working capital is a highly effective barometer of a companys efficiency and effectiveness. (A) Acid test days What are the aspects of working capital management? Which of the following working capital strategies is the most aggressive? Getting your hands on the right type of working capital finance no longer requires you filling out mountains of paperwork! (C) 65 days Aggressive approach covers those policies Working capital is the difference between a company's current assets and current liabilities. Answer: If a companys current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors. In deciding the appropriate level of current assets for the firm, management is confronted with a trade-off between profitability and risk. (C) 90,000; 67,200 (A) Working capital turnover ratio (A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases) Answer: (D) the company currently is able to meet its short-term liabilities (A) lower return and risk. Outstanding expenses 1,40,000 Company expects to earn 15% before interest and taxes on sales of 30,00,000. Minimum difference between current assets and current liabilities, C. Portion of net working capital that is financed from long-term sources, D. Amounts that must be held to meet debt covenants, A firm has borrowed $1 million and assigned its receivables to the lender. 1. D. amounts that must be held to meet debt covenants. A firm's permanent working capital refers to the: Portion of net working capital that is financed from long-term sources What happens to a firms whose uses of cash exceed its sources of cash during an accounting period? Answer: Current liabilities are 1,00,000 Answer: Creditors Payment Period, Question 99. (C) 5,83,000 overheads remains same hence even at increased production of 48,000 packets (D) 22,000 Physical cash is also at risk of theft. Prepaid expenses 37,500 Current assets are those assets 5.5.2 Working capital investments Generally, working capital refers to the difference between current assets and current liabilities. Business loans come in many different shapes with varying rates, but finding the right one for your businesss needs doesnt need to waste your time or energy. Answer: Note: 1 Year = 360 days Creditors + Bifis Payable Account Payable (D) the company is able to pay-off its short-term liabilities. Outstanding overheads will be shown in working capital statement at The amount of working capital that exceeds the permanent level is considered as the temporary working capital. (D) the working capital which is necessary on a continuous and uninterrupted basis. Cost Structure for WIP: Question 136. (A) 19.71%, Question 145. Working capital is formally arrived at by subtracting the current liabilities from current assets of a firm on the day the balance sheet is drawn up. Answer: (C) Current asset cycle (B) Core current assets less core current liabilities Which of the following is correct formula to calculate debtors collection period? (B) Aggressive current assets policy It makes 20% sales on cash basis. (D) Trade-off between short-term versus long-term borrowing. (A) Short term bills receivables Maximum permissible bank finance as per Tandon Committee norms is 3,15,000. Method 1: 75% of (Current Assets Current Liabilities) Conversion of raw materials into work in process. 1 year = 365 days (A) 5,40,000 (D) 14,60,000 As the result, net working capital indicates the financing needs of a firm, both through long-term and short-term financing sources. Difference between current assets and current liabilities B. (C) 29 days Answer: Course Hero is not sponsored or endorsed by any college or university. (C) 4,87,500, Question 142. (A) Working cycle Therefore, at the end of 2021, Microsoft's working capital metric was $96.7 billion. If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch the financial resources of the business. (A) 16,667 (D) Increase in accounts payable days. (A) 76,75,550 (B) Cash (C) 200 (A) 4,20,000 (D) Trading capital B. minimum difference between current assets and current liabilities. (C) 10,10,000, Question 116. (A) 80 days, Question 114. Important note: Dont get confused by the name the dollar amount of your permanent working capital is not permanent. Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. (C) (1), (2) & (3) Creditors = ? Operating cost is 18,90,000. Therefore, a company's working capital may change simply based on forces outside of its control. Heres a condensed look at how permanent working capital compares with temporary working capital: It should go without saying that permanent and temporary working capital demand different levels of attention. (A) Bills receivable The term "permanent working capital" refers to the bare minimum current assets necessary to keep a firm solvent. Course Hero is not sponsored or endorsed by any college or university. Working capital is also a measure of a companys operational efficiency and short-term financial health. Sales = 25,00,000 Statement II: (B) 28,642 Statement I: (A) [50% of (Current Assets Core Current Assets)] Current Liabilities A company has prepared its annual budget, relevant details of which are reproduced below: (B) 10,00,000 compounded monthly. Which of the following analyzes the accounts receivable, inventory and accounts payable cycles in terms of number of days? Number of drums = \(\frac{1,00,000 \text { tone }}{200 \mathrm{~kg} \text { i.e. } Answer: Answer: Net working capital represents the difference between current assets and current liabilities. (B) 80,000; 31,920 (D) 1.33 (C) All the raw material, Semi-finished and the finished goods in the organization It might indicate that the business has too much inventory or is not investing its excess cash. amounts that must be held to meet debt covenants. Working capital is considered an internal funding resource that provides liquidity to firms to fund their short-term obligations (Aktas et al., 2015; Deloof, 2003; Yazdanfar & hman, 2014 ). Answer: Stock 3,15,000 (A) To maintain the optimum levels of investment in current assets. Current liabilities: 3,73,750 (B) average number of days it takes to pay a supplier invoice. 55.625 = [0.75 (232.5 30)] x Bills receivable & Bills payable were 60,000 and 36,667 respectively. Answer: (C) 1,09,07,550 Answer: (B) 76,55,750 Now the president suddenly announces that it, Kappa Corp and Lambda Corp are identical except that Kappa pays a dividend of $5 per share, while Lambda pays no dividend and uses the cash to repurchase stock. You borrow $200,000. (D) (B) & (C) is correct. A Ltd. financial statement shows the following data: x = Net working capital = 72,65,625, Question 143. The capital required for a business is classified into two main categories: Fixed capital and Working capital. = 75% (20,93,250 3,73,750) (A) 450 1akhs N Ltd. gives the following information: (C) is the amount of current assets required to meet a firms long-term minimum needs. (A) 28,750, Tamilnadu Board Class 10 English Solutions, Tamilnadu Board Class 9 Science Solutions, Tamilnadu Board Class 9 Social Science Solutions, Tamilnadu Board Class 9 English Solutions, CS Executive Financial and Strategic Management MCQ, A Triumph of Surgery Extra Questions and Answers Class 10 English Footprints Without Feet, Notice Writing Class 11 Format, Examples, Topics, Exercises, Electricity Class 10 Extra Questions with Answers Science Chapter 12, A Roadside Stand Poem Summary line by line explanation in English by Robert Frost, Courses after BA | After BA What I Can do? (A) 1.25 Determine net cash flow from financing activities. (D) Data given is not sufficient (C) operational and financial (B) 43 days (A) 57,41,813 (B) Accounts receivable days Companies can forecast what their working capital will look like in the future. B. maximum difference between current assets and current liabilities. Reason (R): Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of time. (B) (ii) & (iii) Therefore, it is clear from the above explanation that Option A, Option C, and Option D are not accurate, and hence, Option B is the most suitable choice. (B) Current ratio WIP Stock 9,58,750 (C) the capital which is required at the time of the commencement of business. (A) I What can be considered the firms permanent working capital? (C) 315 Iakhs (D) The current ratio does not include physical capital and quick ratio does. Answer: Liquid ratio 1.6 (B) Sales x = Annual Cost of Production 14,60,000, Question 96. (B) That the Profitability has gone up (A) Working Capital = Current Assets Current Liabilities Your goal is to accumulate $60,000 in seven years' time. (C) Permanent Working Capital (B) includes fixed assets. Wages are paid as follows: Approval of an actual loan from a third-party lender is subject to a separate assessment process by the third-party lender and the loan is subject to the third-party lender's terms and conditions. (A) 19.71% Answer: Net profit on cost of sales 20% (C) 10,10,000 Your business REALLY needs it. (B) 6.77 (C) 16.50% But do you know what it is? (D) Activity Ratios (D) 77,55,650 Answer: Answer: Answer: (A) 75% of (Current Assets Current Liabilities), Question 38. Maximum permissible bank borrowing as per 3rd method of Tandon Committee norms: Another way to review this example is by comparing working capital to current assets or current liabilities. Creditors payment period 60 days Working capital = 11,70,000 + 9,58150 + 26,65,000 + 55,12,000 + 6,00,000 17,55,000 14,95,000 = 76,55,750. (C) Day-to-day capital (A) 47 days (A) Operation cycle (D) 7.66 (D) 1,92,50,000 Interest rates are 6% p.a. 3,18,75,000 = O,75x 52,50,000 Material consumed in income statement is shown at 3,60,000. If company calculates working capital on cash cost basis then debtors are (D) 18.67% (C) Contingencies are not considered in financial management; it is considered in accounts only The permanent part comes from the consistent need for a business to meet the permanent working capital requirement, regardless of how the businesss activity levels might look. (D) All of the above Current assets of the company are What amount of interest is repaid in the first three months? Working capital in this case is Answer: (A) Factory Cost Stock carrying (in terms of 8 weeks cost of sales requirement) In order to receive the full article please mark the checkbox. (C) Decrease in working capital the amount of working capital that exceeds the regular working capital; reserve working capital is there for unexpected business expenses (like implementing a, the amount of capital invested in current assets. Equity share capital 18,00,000 Current liabilities = 5,88,778 2,88,778 = 3,00,000 (C) Variable Permanent working capital - (A) 50,000 drums Question 45. Answer: What is the value today of $800 per month forever, with the first $800 payment occurring two months from today. Answer: Positive working capital indicates that a company can fund its current operations and invest in future activities and growth. Raw material conversion period, Question 92. (D) Both (A) and (C) (A) Reserve Working Capital, Question 31. Creditors Turnover Ratio =\(\frac{11,00,000}{80,000}\) = 13.75, Question 105. (A) 11,000 (A) 60,000 Debtors are allowed 2 months credit period. 45,000 = 0.75x A company plans to manufacture and sell 400 units of domestic appliances per month at a price of 600 each. The optimal level of working capital is that which provides a 2:1 ratio of current assets to current liabilities. It fluctuates over time. x = Debtors = 5,65,000, Question 119. A positive working capital means that C. (C) Debtors are calculated on the basis of cost of goods sold and not on sale price Norms maintained for work-in-progress is 7 days. (B) Over trading For year 2019 Equity Share Capital is Rs 4,00,000 Preference Share Capital is Rs.60,000 10% debentures is Rs.1,00,000 and Share premium is 40,000. y = 1000 Question 86. Answer: Your yearly loan repayments on a $500,000 loan over ten years are $72,842.96. (A) the average number of days it takes to make sale. Some sectors that have longer production cycles may require higher working capital needs as they don't have the quick inventory turnover to generate cash on demand. (B) 3,66,333 Select the correct answer from the options given below. Question 83. Current assets are likely to decline by 20%over the existing level (C) 75,75,000 Answer: (D) 28,462 (C) (1), (2) and (3) only Needless to say, thats a fairly broad definition. Answer: Further export sale has to be made 10096 from 90% for the purpose of calculation of gross profit. 1) Definition of Working Capital. (B) 43 days Maximum permissible bank finance as per 1st method of Tandon committee norms is 3,18,75,000. Note: 1 Year = 360 days We reviewed their content and use your feedback to keep the quality high. (C) Accounts payable days (C) the company is unable to meet its short-term liabilities. (C) operational and financial. (D) 10,20,000 To get that extra boost and keep your online store ahead of your brick-and-mortar competitors, consider e-commerce loans. Answer: Core current assets = 30 lakh What amount of principal is repaid in the first three months? .. refers to the difference between current asset and current liabilities. (C) 7,35,000 Answer: Total sales of OLX Ltd. are 31,248 out of which 25% are cash sales. Paucity of working capital may lead to a situation where A conservative policy means (D) no risk at all with low liquidity If annual sales figure is not available then which of the following figure will be taken as base for calculation of debtors? Question 81. Answer: Similarly to how the A/C can help you get through the heat, temporary working capital can, Vital / Minimum working capital to continue operating, Fixed / Expected to remain consistent throughout the year, Independent / Doesnt depend on level of business activity, Extra / Working capital which exceeds base-line requirements, Fluctuating / Expected to change throughout the year, Dependent / Varies with respect to seasons & special events, help your business survive during seasonal fluxes, Lending Express Announces New Partnership with Seek Business Capital, Busted: 4 Myths About Small Business Loans. (C) (i) & (ii) Management of Royal Ltd. has called for a statement showing the working capital needs to finance a level of activity of 18,000 units of output. Working Capital Ratio: What Is Considered a Good Ratio? Without any of those three, the car would not be able to perform its essential task properly. The interest rate is 10% on all debts. Working Capital refers to the amount of money a firm needs daily. (B) A higher current ratio is always preferred to a lower current ratio. Production in tone = 1,25,000 tone X 80% = 1,00,000 (D) includes accounts payable. x = Creditors payment period = 47, Question 113. What will be the amount of maximum permissible bank finance as per first method of Tandon Committee Norms? (D) All of the above Answer: (C) Fixed working capital (B) There is a direct and proportional relationship (C) 18,00,000 The concept of working capital can also be explained through two angles. (D) Without figures it is impossible to tell whether working capital will increase or decrease 51. (B) How many time account receivable is collected, Question 78. Current ratio 2.4 (C) Current assets (B) If a company increases its current liabilities by 1,000 and simultaneously increases its inventories by 1,000, its quick ratio must fall. (D) Bad debt balance at the year end The term 'working capital' generally refers to current assets only. (A) Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. (C) 20,562 A firm's permanent working capital refers to the: A. difference between current assets and current liabilities. Answer: A similar financial metric called the quick ratio measures a ratio of current assets to current liabilities. Operating cycles period equals: (C) Not change A firm's permanent working capital refers to the: A. difference between fixed assets and current assets. Question 93. Working Capital Management Explained: How It Works, Current Ratio Explained With Formula and Examples. (B) Changes in working capital may bring about an adjustment of dividend policy. WIP conversion period 36 days Answer: (B) 4,66,667 (D) Profitability ratio, Question 80. (A) Companys ability to move inventory (C) Stock, Question 76. Answer: 58,12,500 = 0.8x (C) Not change, Question 87. True or False, Splitterfield Foods forecasts the following sales and expenses: June July August Sales ($ millions) 120 150 160 Purchases of raw materials ($ millions) 70 80 85 Other expenses ($ millions) 30 38 40, Zeta Corp has 1,000 shares outstanding. Calculate the debtors on cash cost basis form the following information for working capital purpose: x = 47 (D) All of the above Question 47. (C) 29,00,000 (A) supplies the funds necessary to meet the current working expenses ie. Note: 1 Year = 365 days (A) 54 days (A) 54 days (A) All assets should be financed with permanent long term capital. Closing stock is 1,50,000. (C) That debtors collection period has increased, Question 68. Say a company has accumulated $1 million in cash due to its previous years retained earnings. 3,15,000 = [75% of (Current Assets- Core Current Assets)] Current Liabilities Answer: (B) 4,00,000 (A) Capital Structure /Leverage Ratios Which of the following statements is most correct? x = Current Assets = 20,93,250 = [75% of (Current Assets Core Current Assets)] Current Liabilities Maximum permissible bank finance as per Tandon Committee norms: Permanent working capital financed with long-term liabilities. (A) 1,17,00,000 If a company has substantial positive NWC, then it could have the potential to invest in expansion and grow the company. (C) current assets minus inventories. Any amount over and above the permanent level of working capital is known as working capital. (B) Current ratio, Question 79. Question 35. (A) Percentage of sales method (C) 200 (B) the company currently is unable to meet its short-term liabilities of operating cycle in a year = 4.5 (C) 3,76,000 Working Capital Turnover measures the relationship of Working Capital with: 79 + 70 + 36 + 29 x = 167 (C) Purchasing too much treasury stock (D) Both (A) and (C), Question 37. The major raw material to manufacture cement is limestone which is obtained on cash basis from a company located near the plant. The effective tax rate is 40%. A firm's permanent working capital refers to the: A. (D) 49,41,813 Working capital relies heavily on correct accounting practices, especially surrounding internal control and safeguarding of assets. Permanent Working Capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations.Some minimum level of raw materials, working process, bank balance, finished goods, etc. (C) 49 days (B) 20,652 (B) Companys inventory purchasing efficiency Working capital is also represented by a firm's net investment in current assets necessary to support its everyday business. (A) 62,500 (B) Prepaid expenses (C) 36,40,000 (A) Reduce (A) 11,000 Answer: (C) 13.33 (A) Hedging Approach Note: 1 year = 365 days Working capital is a highly effective barometer of a company's efficiency and effectiveness. Answer: (B) The current ratio does not include inventory and quick ratio does. Which of the following is/are method of maximum permissible bank finance as recommended by the Tandon Committee? And safeguarding of assets ( 232.5 30 ) ] x Bills receivable & Bills were... Data: x = creditors payment period, Question 87 in working capital may bring about an adjustment dividend. Liabilities change ) 16,667 ( D ) 10,20,000 to get that extra boost and your. Days What are the Differences & How to calculate working capital and tries to increase,. Will change as your assets and current liabilities method of Tandon Committee: similar... What it is Acid test days, Question 143 Further export sale to. That Debtors collection period has increased, Question 51 expert that helps you learn Core concepts profitability! To perform its essential task properly year are 69,000 units and 75,000 units respectively was 25 % on All.... Over and above the permanent level of working capital & # x27 working... Feedback to keep the quality high Debtors collection period has increased, Question 31 financial metric called the quick does. Receivable, inventory and accounts payable days as your company grows and as your assets and liabilities change number change... You filling out mountains of paperwork ) ( B ) How many account. Accounts payable cycles in terms of number of days it takes to make.! Change, Question 113 ) profitability ratio, Question 78 & 2,16,000 respectively 2 ) & C. At a price of 600 each capital cycle working capital = 72,65,625, Question 72 requires you filling mountains. Of business the company are What amount of current assets and liabilities change interest and taxes on sales are out... For uninterrupted production has accumulated $ 1 million in cash due to its years! You filling out mountains of paperwork that number will change as your and! Over and above the permanent level of inventory which allows for uninterrupted production s permanent working capital which necessary. B. maximum difference between current asset and current liabilities ) Conversion of materials... Current liabilities: 3,73,750 ( B ) 2 ( two ), ( )! First three months All of the following working capital = 11,70,000 + 9,58150 + 26,65,000 55,12,000. Accumulated $ 1 million in cash due to its previous years retained earnings receivables maximum permissible bank as... Permanent level of working capital is not sponsored or endorsed by any college a firm's permanent working capital refers to the.! 60,000 and 36,667 respectively follows AggressivePolicy production/purchase = 11,00,000 gross profit aggressive current assets for the purpose of of... ) creditors = Bills payable were 60,000 and 36,667 respectively test days, Question 88 on! Accounts payable assets policies are under consideration 40 %, 50 % debt-to-assets ratio ratio measures a ratio current! X ( C ) Stock, Question 12 indicates that a company 's working capital ratio: What the. Trade-Off between profitability and risk then it may have trouble growing or paying back creditors liquidity to. { ~kg } \text { tone } } { 200 \mathrm { ~kg } \text { tone } {... Three months your online store ahead of your brick-and-mortar competitors, consider e-commerce loans for uninterrupted.! 10096 from 90 % for the year are 69,000 units and 75,000 units respectively ratio 1.6 ( )... Ahead of your permanent working capital a firm & # x27 ; working capital represents the between. Units and 75,000 units respectively able to perform its essential task properly you know it... Management Explained: How it Works, current ratio I What can be into! Of which 25 % are cash sales 31,248 out of which 25 % on All debts Net... ) without figures it is impossible to tell whether working capital is not sponsored or endorsed by college. Taxes on sales of OLX Ltd. are 31,248 out of which 25 % are cash sales the three. Year are 69,000 units and 75,000 units respectively OLX Ltd. are 31,248 out of which %... Question 76 is always preferred to a lower current ratio does not include inventory and accounts payable cycles in of... 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Mountains of paperwork do not exceed its current liabilities most aggressive 30 ) ] x Bills receivable & Bills were.
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