On the basis of the following information, calculate the operating cycle of Verna Trading Limited: Inventory as on 1st April, 2023-₹ 6,00,000 and as on 31st March 2024-₹ 4,00,000. Book Debts as on 1st April, 2023-₹ 20,00

CS Professional · Corporate Funding & Listings in Stock Exchanges · PYQS · December 2024
On the basis of the following information, calculate the operating cycle of Verna Trading Limited: Inventory as on 1st April, 2023-₹ 6,00,000 and as on 31st March 2024-₹ 4,00,000. Book Debts as on 1st April, 2023-₹ 20,00,000 and as on 31st March, 2024-₹ 24,00,000. The sales and cost of goods sold for the year ended 31st March, 2024 are ₹ 2,00,00,000 and ₹ 1,50,00,000 respectively. Of the total sales as above, cash sales were for ₹ 24,00,000 (one year may be taken as 360 days for calculation).

Answer & Explanation:

Calculation of Operating Cycle of Verna Trading Limited Operating Cycle = Inventory period + Accounts receivable period. Average Inventory = (Opening Inventory + Closing Inventory)/2 (₹ 6,00,000 + ₹ 4,00,000)/2 = ₹ 5,00,000 Cost of Goods Sold = ₹ 1,50,00,000 (Given) Inventory Period (A) = (Average Inventory / Cost of Goods Sold) x 360 = (₹ 5,00,000 / ₹ 1,50,00,000) x 360 = 12 days Credit sales = Total Sales - Cash Sales = ₹ 2,00,00,000 - ₹ 24,00,000 = ₹ 1,76,00,000 Average Book Debts = (Opening Book Debts + Closing Book Debts)/2 = (₹ 20,00,000 + ₹ 24,00,000)/2 = ₹ 22,00,000 Account Receivable Period (B) = (Average Book Debts / Total Credit Sales) x 360 = (₹ 22,00,000 / ₹ 1,76,00,000) x 360 = 45 days Hence, working capital cycle (A+B) = 12 + 45 = 57 days

Topics: Financial Management

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