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com IMT 07 Working Capital Management M2

PART - A

Q1. Explain the concept of working capital and factors affecting the working cap ital requirements.

Q2. A firm is considering changing its credit policy from 20 to 2/10 net 30, its sales should increase from Rs 5,00,000 to Rs 7,00,000, its cost of goods sold w ill go from 55% to 50% of sales. Miscellaneous administrative cost will remain s teady at Rs 40,000, but collection cost will increase from Rs 20,000 to Rs 30,000 and bad debt losses will go up from 5% to 1 0% of its average accounts receivables, 40% of the customers are expected to take discount . The firm currently has debt of Rs 2,00,000 at 6%, which include the financing cost for fu nds currently tied up in receivables. If the balance in receivables increase or decreases with the new policy, the extra cost of funds tied up will be calculated at @ 10% estimated cost of th e firms new debt. a. What is the likely receivables balance under each policy? b. What will be the forecasted net income after taxes with each policy?

Q3. Current assets are financed through a mix of short term and long term funds. Discuss the statement and explain the various approaches in this context.

Q4. What is money market? Explain why there is a critical need for money market instruments.

Q5. What is factoring? What are the types of factoring? Explain how factoring is different from bill discounting.

PART

Q1 Discuss the following Impact of inflation on working capital requirement Commercial paper

Q2 Sadhan Nitro Company currently maintains a centralized billing system to hand le average daily collections of Rs 4,50,000. The total time for mailing , proces sing, and clearing has been estimated at 4 days. a) If the company s opportunity cost on short term funds is 15%, how much this tim e lag of 4 days costing the company? b) If management uld have reduced s52000 annually, ce that the firm has designed a system of lock boxes the float by 1.5 days & centralized what is the largest total amount of would be willing to accept with the with regional banks that wo billing system expense by R required compensating balan lock box management?

Q3 Discuss the following tools of inventory management: FNSD analysis VED analysis Pareto analysis GOLF analysis

Q4 Explain the procedure adopted for selecting a customer to whom the credit fac ilities are provided.

Q5 Write short notes on: Letter of credit Collection experience matrix

PART

Q1 Differentiate between

 Payment float and receivable float Budgeting and forecasting

Q2 Raina Paint Company uses 60,000 gallons of pigment per year. The cost of orde ring is Rs400 per order, and the cost of carrying the pigment in inventory is Rs 2 per gallon per year. The firm uses pigment at a constant rate every day throu ghout the year. Calculate the EOQ Calculate the total cost of the plan suggested by the EOQ Determine the total number of orders suggested by this plan. Assuming that it takes 20 days to receive an order once it has been placed, det ermine the reorder point in terms of gallons of pigment by using 360 day in a ye ar.

Q3 Explain the norms suggested by Tandon Committee for providing bank credits.

Q 4 From the following data compute the duration of operating cycle for two year s & comment on the increase/decrease:

Particulars Year 1 Year 2 RM Stock 20000 27000 WIP 14000 18000 FG Stock 21000 24000 Purchase of RM 96000

135000 COGS 140000 180000 Sale 160000 200000 Debtors 32000 50000 Creditors 16000 18000

You can assume 360 days in a year

Q5 What is meant by budgetary control system? What are the objectives & requisit es of successful budgetary control system?

CASE STUDY

A Performa cost sheet provides the following particulars:

Particulars Amount per unit (Rs) Elements of cost

Raw material 80 Direct Labour

30 Overhead 60 Total Cost 170 Profit 30 Selling Price 200

The following further particulars are available:

Raw Material in stock, on average, one month; Material in process ( completion s tage 50%), on average, half a month; Finished goods in stock, on average , one month.

Credit allowed by suppliers is one month; credit allowed to debtors is two month s; average time lag in payment of wages is 1.5 weeks and one month in overhead e xpenses; one fourth of the output is sold against cash ; cash in hand & cash at bank to be maintained at Rs 3,65,000.

You are required to prepare a statement showing the working capital needed to fi nance a level of activity of 1,04,000 units of production. You may assume that p roduction is carried on evenly through out the year , and wages and overheads ac crue similarly. For calculation purpose , 4 weeks may be taken as equivalent to a month.

CASE STUDY

II

Prepare the cash budget for April-October from the following information supplie d by Shah Agencies Ltd.

Balance Sheet as at 31st March 2010

Particulars Amount Particulars Amount Capital 100000 Cash 20500 Outstanding Liabilities 11000 Stock in Trade 50500

Sundry Debtors 20000

Furniture Less Dep.

25000 500 20000

111000

111000

Sales and expenditure on salaries are expected to be as under: Month Sales

Salaries April 30000 3000 May 52000 3500 June 50000 3500 July 75000 4000 August 90000 4000 September 35000 3000 October 25000 3000

The other expenses per month are : Rent 1000/-,Depreciation 1000/-,Miscellaneaou s expenses 500/- and commission 1 percent of sales. Out of the total sales , 80 percent is on credit and 20 percent of cash ; 70 percent of credit sales are col lected in the first month following sale and the balance in second month. There are no bad debt losses. Gross margin on sales on an average is 30 percent . Purc hases equal to the next month sale are made every month & they are paid during t he month in which they are made . The firm maintains a minimum cash balance of R s 10000/-. Cash deficiencies are made up by the bank loans whish are repaid at t he earliest opportunity available and cash in excess of Rs 15000/- in securities (ignore interest on bank loan & securities). Outstanding liabilities remain unc hanged. Debtors pertain to credit sales of March . Contact www.solvedhub.com for best and lowest cost solution or email solvedhub@g mail.com