A newly formed company has applied for a short-term loan to a commercial bank for financing its working capital requirements. Projected statement of profit and loss is as follows: ₹ Sales (20% cash) 21,00,000 Less: Cost

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
A newly formed company has applied for a short-term loan to a commercial bank for financing its working capital requirements. Projected statement of profit and loss is as follows: ₹ Sales (20% cash) 21,00,000 Less: Cost of goods sold 15,30,000 Gross profit 5,70,000 Less: Administrative expenses 1,40,000 Selling expenses 1,30,000 Profit before tax (PBT) 3,00,000 Less: Tax 1,00,000 Profit after tax (PAT) 2,00,000 Cost of goods sold has been derived as follows: Material 8,40,000 Wages and money expenses (one month arrear) 6,25,000 Depreciation 2,35,000 17,00,000 Less: Stock (10% of finished goods) 1,70,000 15,30,000 The figures given above relate only to the goods that have been finished and not to work-in-progress; goods equal to 15% of year's production (in terms of physical units) are in progress on an average requiring full materials and only 40% of other expenses. The company believes in keeping two months consumption of material in stock. Credit allowed to customers is 2 months. Selling expenses and administrative expenses are one month in arrears. Credit allowed by supplier is 1½ months. You are requested by the bank to prepare an estimate of requirements of working capital for the company. Add 10% to your estimated figure to cover contingencies.

Answer & Explanation:

Statement showing estimates of working capital Amount (₹) Current Assets Raw material (W.N. 2) 1,61,000 Work in progress (W.N. 1) 1,63,500 Finished Goods (W.N. 3) 1,46,500 Debtors (W.N 4) 2,11,800 Total Current Assets (A) 6,82,800 Current Liabilities Creditors (W.N. 5) 140,875 Outstanding wages (W.N 5) 55,208 Outstanding administrative & Selling Expenses (W.N. 7) 22,500 Total current liabilities (B) 2,18,583 Working capital (A-B) 4,64,217 Add: 10% for contingencies 46,422 Estimated working capital 5,10,639 Working Notes: 1. Work in Progress Raw material (₹8,40,000 * 0.15) = ₹1,26,000 Wages etc. (₹6,25,000 * 0.15 * 0.40) = ₹37,500 Total Work in Progress = ₹1,63,500 2. Raw material Total consumption of raw material = consumed in finished goods + consumed in work-in-progress = ₹8,40,000 + ₹1,26,000 = ₹9,66,000 Stock of raw material = ₹9,66,000 * 2/12 = ₹1,61,000 3. Finished goods stock = ₹14,65,000 * 0.10 = ₹1,46,500 4. Debtors Material consumed ₹8,40,000 Wages etc. ₹6,25,000 ₹14,65,000 * 0.90 = 13,18,500 Add: Administrative & Selling expenses = 2,70,000 Total Cost of Sales = 15,88,500 ₹15,88,500 * 0.80 * 2/12 = ₹2,11,800 Alternatively, Debtors may be arrived as follows: Credit sales = ₹21,00,000 * 80% = ₹16,80,000 Debtors = ₹16,80,000 * 2/12 = ₹2,80,000 (Note: the answer will change accordingly) 5. Creditors Raw material consumed = Opening stock + purchases - closing stock ₹9,66,000 = Nil + Purchases - ₹1,61,000 Purchases = ₹9,66,000 + ₹1,61,000 = ₹11,27,000 ₹11,27,000 * 1.5/12 = ₹1,40,875 6. Outstanding wages Wages paid = ₹6,25,000 + ₹37,500 = ₹6,62,500 Outstanding = ₹6,62,500 * 1/12 = ₹55,208 7. Outstanding Administrative & Selling Expenses ₹2,70,000 * 1/12 = ₹22,500

Topics: Working Capital Management

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