Test 1: Management of Working Capital: answer key

Question 1 · 2 marks · Management of Working Capital · medium

Scenario. Bharat Renewables Ltd manufactures inverter modules and sells to distributors on credit. Its finance team is reviewing liquidity before the monsoon procurement season. The following projected balances relate to 31 March 2027; all amounts are in ₹ lakh. Current Assets: Raw material, work-in-process and finished goods inventory: 78 Trade receivables: 32 Cash and bank: 9 Prepaid and other current assets: 6 Total Current Assets: 125 Current Liabilities: Trade payables: 34 Accrued wages and operating expenses: 8 Short-term bank borrowing: 13 Total Current Liabilities: 55 Management reports that operating current assets never fall below ₹48 lakh during a normal year. Before the seasonal build-up, the total operating current-asset investment is expected to reach ₹75 lakh. The operating-cycle study, based on a 360-day year, indicates raw-material storage of 28 days, work-in-process holding of 14 days, finished-goods storage of 24 days, debtor collection of 36 days and supplier credit of 22 days. A proposed collection drive is expected to reduce debtor days to 28, while procurement negotiations may extend supplier credit to 28 days; other stages are unchanged. For broader corporate context, the balance sheet includes equity share capital of ₹10 crore, retained earnings of ₹3 crore and a 10% term loan of ₹5 crore. Forecast EBIT is ₹4.80 crore, the corporate tax rate is 25%, equity beta is 1.10, the risk-free rate is 6% and the market risk premium is 7%. Forecast operating cash flow is ₹5.40 crore. These financing and valuation indicators are supplied as company context; the questions focus on working-capital measurement, seasonality and cycle length. Assume all stated periods are averages and use the given 360-day convention.

Based on the projected balance sheet of Bharat Renewables Ltd, determine its Gross Working Capital and Net Working Capital, respectively.

1. Gross Working Capital ₹1,25,00,000; Net Working Capital ₹70,00,000 (correct answer)
2. Gross Working Capital ₹70,00,000; Net Working Capital ₹1,25,00,000
3. Gross Working Capital ₹1,25,00,000; Net Working Capital ₹83,00,000
4. Gross Working Capital ₹1,19,00,000; Net Working Capital ₹64,00,000

Answer: A — Gross Working Capital ₹1,25,00,000; Net Working Capital ₹70,00,000

Explanation. Step 1: Gross Working Capital represents total investment in current assets. Therefore, it is ₹78 lakh + ₹32 lakh + ₹9 lakh + ₹6 lakh = ₹125 lakh. Step 2: Net Working Capital = Current Assets − Current Liabilities = ₹125 lakh − ₹55 lakh = ₹70 lakh. Option b reverses the two concepts, while option c incorrectly omits accrued expenses or misclassifies a current liability. Option d excludes prepaid current assets and incorrectly understates gross working capital.

Where it goes wrong. Confusing Gross Working Capital with Net Working Capital, or excluding prepaid expenses from current assets when computing gross working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 2 · 2 marks · Management of Working Capital · medium

The finance manager identifies ₹48 lakh as the minimum operating current-asset investment throughout the year and ₹75 lakh as the total requirement during the seasonal peak. Determine the temporary or fluctuating working capital requirement at the seasonal peak.

1. ₹48,00,000
2. ₹27,00,000 (correct answer)
3. ₹75,00,000
4. ₹1,23,00,000

Answer: B — ₹27,00,000

Explanation. Permanent working capital is the minimum investment in current assets continuously required for normal operations. Hence, permanent working capital is ₹48 lakh. Temporary working capital is the additional requirement above this base level. Temporary Working Capital = Peak Requirement − Permanent Requirement = ₹75 lakh − ₹48 lakh = ₹27 lakh. Option a incorrectly identifies permanent capital as temporary capital. Option c represents the total peak requirement, not its fluctuating component.

Where it goes wrong. Treating the entire peak working capital requirement as temporary working capital instead of isolating the amount exceeding the permanent base.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 3 · 2 marks · Management of Working Capital · hard

Calculate the Net Operating Cycle of Bharat Renewables Ltd using its existing operating-cycle information.

1. 102 days
2. 124 days
3. 80 days (correct answer)
4. 66 days

Answer: C — 80 days

Explanation. Net Operating Cycle = Raw Material Storage Period + WIP Period + Finished Goods Storage Period + Debtors Collection Period − Creditors Payment Period. Substituting the information: 28 + 14 + 24 + 36 − 22 = 80 days. The creditors' payment period is deducted because supplier credit finances part of the operating cycle. Option a incorrectly adds creditors' days. Option d incorrectly substitutes the proposed collection and supplier-credit periods rather than the existing operating data.

Where it goes wrong. Adding creditors' payment days instead of deducting them, or mixing existing operating-cycle data with proposed policy improvements.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 4 · 2 marks · Management of Working Capital · hard

Assuming the proposed collection drive reduces debtor collection from 36 days to 28 days and supplier negotiations extend the credit period from 22 days to 28 days, calculate the revised Cash Conversion Cycle. Assume all inventory holding periods remain unchanged.

1. 72 days
2. 80 days
3. 74 days
4. 66 days (correct answer)

Answer: D — 66 days

Explanation. The revised Cash Conversion Cycle is calculated using the revised debtor and creditor periods. Revised CCC = 28 + 14 + 24 + 28 − 28 = 66 days. Alternatively, the original cycle of 80 days reduces by 8 days due to faster debtor collection and another 6 days due to extended supplier credit. Therefore, the total reduction is 14 days and the revised cycle is 66 days. Option b ignores the policy changes; option c incorrectly applies only part of the improvement.

Where it goes wrong. Recognising the debtor collection improvement but forgetting that an increase in supplier credit also reduces the cash conversion cycle.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 5 · 2 marks · Management of Working Capital · medium

Scenario. Zenith Power Systems Ltd manufactures industrial power-control units. The production controller and finance manager jointly review inventory dwell time and cash tied up before approving the next capacity run. The following annual operating data relate to the coming year, which is assumed to have 360 days. Raw-material consumption: ₹8.64 crore Average raw-material inventory: ₹72 lakh Annual cost of production: ₹10.80 crore Average work-in-process inventory: ₹90 lakh Annual cost of goods sold: ₹18 crore Average finished-goods inventory: ₹1.20 crore Average collection period from trade debtors: 42 days Average credit period allowed by suppliers: 36 days Net daily cash operating requirement during the operating cycle: ₹4 lakh. The controller estimates that the net daily cash operating requirement is measured after routine supplier-credit financing has been reflected in the cycle calculation. The company is considering a barcode-based stores system and revised production scheduling. No change in sales volume, credit terms or supplier terms is assumed for the base case. The finance department also records the following corporate indicators: equity share capital ₹12 crore, retained earnings ₹4 crore, 10.5% long-term debentures ₹6 crore, EBIT ₹5.40 crore, corporate tax rate 25%, equity beta 0.95, risk-free rate 6.5%, market risk premium 7% and forecast annual operating cash flow ₹6.20 crore. These figures provide a realistic corporate setting; the questions below use the stated inventory, cost and collection data rather than requiring a CAPM or leverage computation. Assume inventories are valued at the relevant annual cost measure and no abnormal idle time exists.

Determine the raw-material storage period of Zenith Power Systems Ltd from the annual consumption and average inventory information.

1. 30 days (correct answer)
2. 24 days
3. 36 days
4. 45 days

Answer: A — 30 days

Explanation. Raw Material Storage Period = Average Raw Material Inventory ÷ Average Daily Raw Material Consumption. Average daily consumption = ₹8,64,00,000 ÷ 360 = ₹2,40,000. Therefore, storage period = ₹72,00,000 ÷ ₹2,40,000 = 30 days. Option b may arise from using an incorrect annual-day divisor. Option c may result from using monthly rather than daily consumption without proper conversion.

Where it goes wrong. Using annual raw-material consumption directly without converting it into daily consumption, or using an incorrect number of operating days.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 6 · 2 marks · Management of Working Capital · medium

Calculate the Work-in-Process holding period of Zenith Power Systems Ltd using average WIP inventory and annual cost of production.

1. 20 days
2. 30 days (correct answer)
3. 36 days
4. 45 days

Answer: B — 30 days

Explanation. WIP Holding Period = Average WIP Inventory ÷ Average Daily Cost of Production. Daily production cost = ₹10,80,00,000 ÷ 360 = ₹3,00,000. Average WIP inventory is ₹90,00,000. Therefore, WIP holding period = ₹90,00,000 ÷ ₹3,00,000 = 30 days. Option a understates the period by using an inflated daily production cost, while options c and d incorrectly use unrelated holding or collection periods.

Where it goes wrong. Using raw-material consumption or cost of goods sold instead of annual cost of production as the denominator for WIP holding period.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 7 · 2 marks · Management of Working Capital · hard

Determine Zenith Power Systems Ltd's Net Operating Cycle by calculating the Finished Goods Storage Period first and then incorporating the remaining operating-cycle components.

1. 102 days
2. 96 days
3. 90 days (correct answer)
4. 126 days

Answer: C — 90 days

Explanation. Finished Goods Storage Period = Average Finished Goods Inventory ÷ Average Daily Cost of Goods Sold = ₹1,20,00,000 ÷ (₹18,00,00,000 ÷ 360) = ₹1,20,00,000 ÷ ₹5,00,000 = 24 days. Net Operating Cycle = 30 + 30 + 24 + 42 − 36 = 90 days. Option a may result from incorrect inventory calculations, while option d incorrectly adds the creditor period instead of deducting it.

Where it goes wrong. Using annual sales instead of cost of goods sold for finished-goods holding, and incorrectly treating supplier credit as an additional inventory period.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 8 · 2 marks · Management of Working Capital · hard

Zenith Power Systems Ltd has determined a Net Operating Cycle of 90 days. If its average net cash operating requirement during each day of the cycle is ₹4,00,000, estimate the funds required to finance this cycle.

1. ₹2,40,00,000
2. ₹4,00,00,000
3. ₹3,00,00,000
4. ₹3,60,00,000 (correct answer)

Answer: D — ₹3,60,00,000

Explanation. Working Capital Funding Requirement = Daily Net Cash Operating Requirement × Net Operating Cycle. Substituting the figures, ₹4,00,000 × 90 days = ₹3,60,00,000. This calculation assumes the daily cash requirement remains constant and is already expressed net of the supplier-credit financing incorporated in the cycle. Option a uses 60 days instead of 90, while option c incorrectly uses 75 days.

Where it goes wrong. Multiplying daily cash requirement by gross inventory and collection days instead of the net operating cycle after deducting supplier credit.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 9 · 2 marks · Management of Working Capital · medium

Scenario. Aditya Automotive Ltd manufactures precision components for original-equipment manufacturers. Demand is stable at its base level but rises sharply in two quarters when customers complete annual model launches. The finance director has separated the working-capital requirement into a permanent base and a seasonal increment. The permanent requirement is ₹4.80 crore throughout the year. Temporary requirements by quarter are ₹0.80 crore, ₹2.00 crore, ₹3.20 crore and ₹1.20 crore, respectively. The average temporary requirement is to be determined using all four quarters. For its financing comparison, the company is considering three policies. Under the conservative policy, long-term funds finance the entire permanent requirement and 50% of the average temporary requirement; the balance of average temporary need is short-term funded. Under the matching (hedging) policy, long-term funds finance the permanent requirement and short-term funds finance the entire temporary requirement. Under the aggressive policy, long-term funds finance 75% of permanent working capital, while the remaining permanent requirement and all average temporary need are short-term funded. The annual rates are 9% on long-term funds and 12% on short-term funds; assume balances remain constant at their stated averages for the annual cost comparison. Other corporate data are: fixed assets ₹12 crore; EBIT ₹3.12 crore; equity share capital ₹8 crore; retained earnings ₹2 crore; term debt ₹6 crore at a 9% coupon; bank working-capital finance at 12%; tax rate 25%; equity beta 1.15; risk-free rate 6.5%; market risk premium 6%; and forecast operating cash flow ₹4.60 crore. The latest operating cycle comprises raw-material storage of 32 days, WIP of 16 days, finished-goods storage of 20 days, debtor collection of 40 days and supplier credit of 30 days. Separately, management is assessing current-asset investment alternatives of ₹6.00 crore, ₹4.80 crore and ₹3.60 crore against the same fixed-asset base and EBIT. The questions distinguish financing policy from current-asset investment policy.

Under the matching or hedging financing approach adopted by Aditya Automotive Ltd, what amount of short-term finance is required to cover the average temporary working capital requirement?

1. ₹1.80 crore (correct answer)
2. ₹4.80 crore
3. ₹3.20 crore
4. ₹7.20 crore

Answer: A — ₹1.80 crore

Explanation. Average Temporary Working Capital = (₹0.80 crore + ₹2.00 crore + ₹3.20 crore + ₹1.20 crore) ÷ 4 = ₹7.20 crore ÷ 4 = ₹1.80 crore. Under the matching approach, permanent working capital is financed through long-term sources, while temporary working capital is financed through short-term sources. Consequently, the average short-term financing requirement is ₹1.80 crore. Option b incorrectly represents permanent working capital.

Where it goes wrong. Using peak seasonal temporary working capital of ₹3.20 crore rather than the average temporary requirement specified in the question.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 10 · 2 marks · Management of Working Capital · hard

Calculate the annual financing cost under the matching approach adopted by Aditya Automotive Ltd, using the given average balances and financing rates.

1. ₹62,10,000
2. ₹64,80,000 (correct answer)
3. ₹68,40,000
4. ₹72,00,000

Answer: B — ₹64,80,000

Explanation. Under matching, ₹4.80 crore permanent working capital is financed long-term at 9%, while ₹1.80 crore average temporary working capital is financed short-term at 12%. Long-term cost = ₹4.80 crore × 9% = ₹43.20 lakh. Short-term cost = ₹1.80 crore × 12% = ₹21.60 lakh. Total annual financing cost = ₹43.20 lakh + ₹21.60 lakh = ₹64.80 lakh. Option a represents the conservative-policy cost, not the matching-policy cost.

Where it goes wrong. Applying the long-term financing rate to temporary working capital or using peak temporary requirement instead of the average balance.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 11 · 2 marks · Management of Working Capital · hard

Aditya Automotive Ltd is assessing its aggressive current-asset investment policy under which current assets are maintained at ₹3.60 crore. Given fixed assets of ₹12 crore and EBIT of ₹3.12 crore, calculate the Current Assets/Fixed Assets Ratio and Return on Total Assets, respectively.

1. 0.40 times and 17.33%
2. 0.30 times and 17.33%
3. 0.30 times and 20.00% (correct answer)
4. 0.40 times and 20.00%

Answer: C — 0.30 times and 20.00%

Explanation. Current Assets/Fixed Assets Ratio = ₹3.60 crore ÷ ₹12 crore = 0.30 times. Total Assets = ₹3.60 crore + ₹12 crore = ₹15.60 crore. Return on Total Assets = EBIT ÷ Total Assets × 100 = ₹3.12 crore ÷ ₹15.60 crore × 100 = 20%. Option d incorrectly calculates the asset ratio, while option b understates the return by using an inappropriate asset base or profit figure.

Where it goes wrong. Confusing the Current Assets/Fixed Assets Ratio with the Current Assets/Total Assets Ratio, or using current assets alone as the denominator for ROA.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 12 · 2 marks · Management of Working Capital · hard

Determine the annual financing cost under the conservative working-capital financing policy of Aditya Automotive Ltd.

1. ₹58,50,000
2. ₹64,80,000
3. ₹68,40,000
4. ₹62,10,000 (correct answer)

Answer: D — ₹62,10,000

Explanation. Average temporary working capital is ₹1.80 crore. Under the conservative policy, long-term finance covers permanent capital of ₹4.80 crore plus 50% of temporary capital, i.e. ₹0.90 crore. Thus, long-term funding = ₹5.70 crore and short-term funding = ₹0.90 crore. Cost = (₹5.70 crore × 9%) + (₹0.90 crore × 12%) = ₹51.30 lakh + ₹10.80 lakh = ₹62.10 lakh. Option b incorrectly applies the matching policy.

Where it goes wrong. Financing all temporary working capital through short-term sources instead of allocating half of average temporary working capital to long-term finance under the specified conservative policy.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 13 · 2 marks · Management of Working Capital · medium

Scenario. A manufacturing enterprise reports inventory of ₹54 lakh, trade receivables of ₹38 lakh, cash and cash equivalents of ₹8 lakh and prepaid expenses of ₹2 lakh. Current liabilities comprise trade payables of ₹31 lakh, accrued expenses of ₹7 lakh and short-term bank borrowing of ₹14 lakh. Calculate its Gross and Net Working Capital, respectively.

A manufacturing enterprise reports inventory of ₹54 lakh, trade receivables of ₹38 lakh, cash and cash equivalents of ₹8 lakh and prepaid expenses of ₹2 lakh. Current liabilities comprise trade payables of ₹31 lakh, accrued expenses of ₹7 lakh and short-term bank borrowing of ₹14 lakh. Calculate its Gross and Net Working Capital, respectively.

1. ₹1,02,00,000 and ₹50,00,000 (correct answer)
2. ₹52,00,000 and ₹1,02,00,000
3. ₹1,02,00,000 and ₹57,00,000
4. ₹95,00,000 and ₹43,00,000

Answer: A — ₹1,02,00,000 and ₹50,00,000

Explanation. Gross Working Capital = Inventory + Receivables + Cash + Prepaid Expenses = ₹54 lakh + ₹38 lakh + ₹8 lakh + ₹2 lakh = ₹102 lakh. Current Liabilities = ₹31 lakh + ₹7 lakh + ₹14 lakh = ₹52 lakh. Net Working Capital = ₹102 lakh − ₹52 lakh = ₹50 lakh. Option c understates current liabilities by omitting a liability or incorrectly classifies one item. Option d excludes prepaid expenses from gross working capital.

Where it goes wrong. Omitting prepaid expenses from current assets or failing to deduct short-term bank borrowing when computing net working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 14 · 2 marks · Management of Working Capital · hard

Scenario. A company maintains permanent working capital of ₹2.40 crore throughout the year. Its total working-capital requirement during four quarters is ₹3.00 crore, ₹3.60 crore, ₹4.40 crore and ₹3.20 crore, respectively. Determine the maximum temporary working capital requirement.

A company maintains permanent working capital of ₹2.40 crore throughout the year. Its total working-capital requirement during four quarters is ₹3.00 crore, ₹3.60 crore, ₹4.40 crore and ₹3.20 crore, respectively. Determine the maximum temporary working capital requirement.

1. ₹2.40 crore
2. ₹2.00 crore (correct answer)
3. ₹4.40 crore
4. ₹6.40 crore

Answer: B — ₹2.00 crore

Explanation. Temporary Working Capital = Total Working Capital Requirement − Permanent Working Capital. The quarterly temporary requirements are ₹3.00 − ₹2.40 = ₹0.60 crore; ₹3.60 − ₹2.40 = ₹1.20 crore; ₹4.40 − ₹2.40 = ₹2.00 crore; and ₹3.20 − ₹2.40 = ₹0.80 crore. The maximum temporary requirement is therefore ₹2.00 crore during the third quarter. Option c represents the total requirement, not the temporary component.

Where it goes wrong. Identifying the highest total working-capital requirement as temporary working capital without deducting the permanent base.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 15 · 2 marks · Management of Working Capital · hard

Scenario. A company has an average raw-material storage period of 25 days, WIP holding period of 18 days, finished-goods storage period of 20 days, debtor collection period of 35 days and creditor payment period of 30 days. Assuming 360 operating days annually, determine its Net Operating Cycle and the approximate number of operating cycles per year.

A company has an average raw-material storage period of 25 days, WIP holding period of 18 days, finished-goods storage period of 20 days, debtor collection period of 35 days and creditor payment period of 30 days. Assuming 360 operating days annually, determine its Net Operating Cycle and the approximate number of operating cycles per year.

1. 98 days and 3.67 cycles
2. 73 days and 4.93 cycles
3. 68 days and 5.29 cycles (correct answer)
4. 68 days and 4.80 cycles

Answer: C — 68 days and 5.29 cycles

Explanation. Net Operating Cycle = 25 + 18 + 20 + 35 − 30 = 68 days. Number of Operating Cycles per Year = 360 ÷ 68 = 5.2941, approximately 5.29 times. Option a incorrectly adds creditors' days, producing an inflated cycle. Option b incorrectly deducts additional days, while option d calculates the number of cycles using an incorrect denominator. The shorter net operating cycle indicates quicker conversion of operating investment into cash.

Where it goes wrong. Using the gross operating period without deducting supplier credit, or calculating annual cycles using the gross rather than net operating cycle.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 16 · 2 marks · Management of Working Capital · medium

Scenario. An enterprise has fixed assets of ₹8 crore and EBIT of ₹2.40 crore. Under its aggressive current-asset investment alternative, current assets amount to ₹3.20 crore. Calculate the Current Assets/Fixed Assets Ratio and Return on Total Assets.

An enterprise has fixed assets of ₹8 crore and EBIT of ₹2.40 crore. Under its aggressive current-asset investment alternative, current assets amount to ₹3.20 crore. Calculate the Current Assets/Fixed Assets Ratio and Return on Total Assets.

1. 0.25 times and 30.00%
2. 0.40 times and 30.00%
3. 0.25 times and 21.43%
4. 0.40 times and 21.43% (correct answer)

Answer: D — 0.40 times and 21.43%

Explanation. Current Assets/Fixed Assets Ratio = ₹3.20 crore ÷ ₹8 crore = 0.40 times. Total Assets = ₹8 crore + ₹3.20 crore = ₹11.20 crore. Return on Total Assets = EBIT ÷ Total Assets × 100 = ₹2.40 crore ÷ ₹11.20 crore × 100 = 21.43%. Option b incorrectly divides EBIT by current assets alone, while option c uses an incorrect current-assets ratio. The calculation illustrates the relationship between asset investment and returns.

Where it goes wrong. Calculating ROA using current assets alone or confusing the Current Assets/Fixed Assets Ratio with another liquidity ratio.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 17 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturing concern consumes raw materials costing ₹6.48 crore annually. Its average raw-material inventory is ₹54 lakh. Assuming 360 operating days, calculate the average raw-material storage period.

A manufacturing concern consumes raw materials costing ₹6.48 crore annually. Its average raw-material inventory is ₹54 lakh. Assuming 360 operating days, calculate the average raw-material storage period.

1. 30 days (correct answer)
2. 27 days
3. 36 days
4. 40 days

Answer: A — 30 days

Explanation. Average Daily Raw Material Consumption = ₹6.48 crore ÷ 360 = ₹1.80 lakh. Raw Material Storage Period = Average Raw Material Inventory ÷ Average Daily Consumption = ₹54 lakh ÷ ₹1.80 lakh = 30 days. Option b may result from dividing annual consumption by 365 days and rounding inconsistently. Option c may arise from using monthly consumption without adjusting the inventory amount correctly. The specified 360-day convention must be consistently maintained.

Where it goes wrong. Using 365 days instead of the specified 360-day year or mixing monthly and daily inventory calculations.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 18 · 2 marks · Management of Working Capital · hard

Scenario. The average WIP inventory of a manufacturing company is ₹48 lakh. The annual cost of production is ₹7.20 crore. Assuming 360 days in a year, calculate the average WIP holding period.

The average WIP inventory of a manufacturing company is ₹48 lakh. The annual cost of production is ₹7.20 crore. Assuming 360 days in a year, calculate the average WIP holding period.

1. 18 days
2. 24 days (correct answer)
3. 30 days
4. 36 days

Answer: B — 24 days

Explanation. Average Daily Cost of Production = ₹7.20 crore ÷ 360 = ₹2 lakh per day. WIP Holding Period = Average WIP Inventory ÷ Average Daily Cost of Production = ₹48 lakh ÷ ₹2 lakh = 24 days. The correct denominator is cost of production because WIP represents goods undergoing manufacturing. Option a understates the period, while options c and d represent incorrect inventory-duration calculations arising from an inappropriate daily cost base.

Where it goes wrong. Using annual raw-material consumption or cost of goods sold instead of annual cost of production to determine WIP holding period.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 19 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturing company maintains average finished-goods inventory of ₹75 lakh. Its annual cost of goods sold is ₹9 crore. Using 360 days in a year, determine the finished-goods storage period.

A manufacturing company maintains average finished-goods inventory of ₹75 lakh. Its annual cost of goods sold is ₹9 crore. Using 360 days in a year, determine the finished-goods storage period.

1. 24 days
2. 27 days
3. 30 days (correct answer)
4. 36 days

Answer: C — 30 days

Explanation. Average Daily Cost of Goods Sold = ₹9 crore ÷ 360 = ₹2.50 lakh. Finished Goods Storage Period = Average Finished Goods Inventory ÷ Average Daily Cost of Goods Sold = ₹75 lakh ÷ ₹2.50 lakh = 30 days. This measures the period for which finished inventory remains held before sale. Option a understates the period by using an incorrect daily cost. Option d overstates it through an incorrect denominator or conversion.

Where it goes wrong. Using sales revenue instead of cost of goods sold to calculate finished-goods holding period.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 20 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturing company estimates the following average balances for the next financial year: raw-material inventory ₹60 lakh, work-in-process ₹45 lakh, finished-goods inventory ₹80 lakh, receivables ₹1.20 crore and minimum cash balance ₹25 lakh. Its current liabilities comprise trade payables ₹50 lakh, outstanding wages ₹15 lakh and accrued overheads ₹10 lakh. Calculate the estimated Net Working Capital requirement.

A manufacturing company estimates the following average balances for the next financial year: raw-material inventory ₹60 lakh, work-in-process ₹45 lakh, finished-goods inventory ₹80 lakh, receivables ₹1.20 crore and minimum cash balance ₹25 lakh. Its current liabilities comprise trade payables ₹50 lakh, outstanding wages ₹15 lakh and accrued overheads ₹10 lakh. Calculate the estimated Net Working Capital requirement.

1. ₹2.25 crore
2. ₹3.30 crore
3. ₹3.05 crore
4. ₹2.55 crore (correct answer)

Answer: D — ₹2.55 crore

Explanation. Gross Working Capital = ₹60 lakh + ₹45 lakh + ₹80 lakh + ₹120 lakh + ₹25 lakh = ₹330 lakh or ₹3.30 crore. Total Current Liabilities = ₹50 lakh + ₹15 lakh + ₹10 lakh = ₹75 lakh or ₹0.75 crore. Therefore, Net Working Capital = ₹3.30 crore − ₹0.75 crore = ₹2.55 crore. Option b incorrectly reports gross working capital, while option a omits or understates one of the current asset components.

Where it goes wrong. Reporting gross working capital as net working capital or deducting only trade payables while ignoring accrued wages and overheads.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 21 · 2 marks · Management of Working Capital · medium

Scenario. A company requires permanent working capital of ₹3.20 crore and an additional temporary working capital requirement of ₹2.00 crore during the seasonal peak. Under the matching or hedging approach, identify the appropriate long-term and short-term financing arrangement at the peak.

A company requires permanent working capital of ₹3.20 crore and an additional temporary working capital requirement of ₹2.00 crore during the seasonal peak. Under the matching or hedging approach, identify the appropriate long-term and short-term financing arrangement at the peak.

1. Long-term finance ₹3.20 crore; short-term finance ₹2.00 crore (correct answer)
2. Long-term finance ₹5.20 crore; short-term finance Nil
3. Long-term finance ₹2.00 crore; short-term finance ₹3.20 crore
4. Long-term finance ₹4.00 crore; short-term finance ₹1.20 crore

Answer: A — Long-term finance ₹3.20 crore; short-term finance ₹2.00 crore

Explanation. The matching approach finances assets using sources having corresponding maturities. Permanent working capital of ₹3.20 crore is financed through long-term sources, while the seasonal temporary requirement of ₹2.00 crore is financed through short-term sources. Therefore, total peak funding of ₹5.20 crore is divided into ₹3.20 crore long-term and ₹2.00 crore short-term finance. Option b represents a fully conservative long-term funding arrangement, while option c reverses the maturity allocation.

Where it goes wrong. Reversing the maturity relationship by financing permanent working capital with short-term borrowings and seasonal temporary working capital with long-term funds.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 22 · 2 marks · Management of Working Capital · hard

Scenario. A company has permanent working capital of ₹6 crore and average temporary working capital of ₹2 crore. Long-term funds cost 10% annually and short-term funds cost 14% annually. Under Policy C, all permanent working capital and 50% of average temporary working capital are financed long-term. Under Policy A, 75% of permanent working capital is financed long-term and the balance of permanent and all temporary working capital is financed short-term. Calculate the additional annual financing cost under Policy A compared with Policy C.

A company has permanent working capital of ₹6 crore and average temporary working capital of ₹2 crore. Long-term funds cost 10% annually and short-term funds cost 14% annually. Under Policy C, all permanent working capital and 50% of average temporary working capital are financed long-term. Under Policy A, 75% of permanent working capital is financed long-term and the balance of permanent and all temporary working capital is financed short-term. Calculate the additional annual financing cost under Policy A compared with Policy C.

1. ₹6,00,000
2. ₹10,00,000 (correct answer)
3. ₹14,00,000
4. ₹18,00,000

Answer: B — ₹10,00,000

Explanation. Policy C: Long-term finance = ₹6 crore + ₹1 crore = ₹7 crore; short-term finance = ₹1 crore. Cost = ₹7 crore × 10% + ₹1 crore × 14% = ₹70 lakh + ₹14 lakh = ₹84 lakh. Policy A: Long-term finance = ₹4.50 crore; short-term finance = ₹1.50 crore + ₹2 crore = ₹3.50 crore. Cost = ₹45 lakh + ₹49 lakh = ₹94 lakh. Additional cost = ₹94 lakh − ₹84 lakh = ₹10 lakh. Option c overstates the difference by misallocating seasonal finance.

Where it goes wrong. Incorrectly applying the short-term interest rate to only seasonal temporary capital under the aggressive policy while ignoring the short-term financing of permanent working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 23 · 2 marks · Management of Working Capital · hard

Scenario. A supplier offers credit terms of 2/10, net 40. A company regularly pays on the 40th day instead of taking the cash discount available on the 10th day. Assuming a 360-day year, calculate the approximate annualised cost of foregoing the cash discount.

A supplier offers credit terms of 2/10, net 40. A company regularly pays on the 40th day instead of taking the cash discount available on the 10th day. Assuming a 360-day year, calculate the approximate annualised cost of foregoing the cash discount.

1. 20.00%
2. 22.45%
3. 24.49% (correct answer)
4. 26.67%

Answer: C — 24.49%

Explanation. The discount sacrificed is 2% of the invoice value. Assuming an invoice of ₹100, the payment after discount would be ₹98. The company effectively pays an additional ₹2 for using ₹98 over 30 days, being 40 − 10 days. Annualised cost = (2 ÷ 98) × (360 ÷ 30) × 100 = 24.4898%, approximately 24.49%. Option b incorrectly uses a different payment interval. Option d incorrectly uses the invoice amount as the funds retained.

Where it goes wrong. Calculating the discount cost over the entire net credit period of 40 days instead of the additional 30 days, or using 2% of invoice value without dividing by the net amount.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 24 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturer implements five operational improvements: raw-material storage decreases by 5 days, WIP holding increases by 2 days, finished-goods storage decreases by 3 days, debtor collection decreases by 4 days and supplier credit is extended by 5 days. If its average daily cash operating requirement is ₹2,40,000, determine the reduction in the Net Operating Cycle and the estimated funds released.

A manufacturer implements five operational improvements: raw-material storage decreases by 5 days, WIP holding increases by 2 days, finished-goods storage decreases by 3 days, debtor collection decreases by 4 days and supplier credit is extended by 5 days. If its average daily cash operating requirement is ₹2,40,000, determine the reduction in the Net Operating Cycle and the estimated funds released.

1. 9 days and ₹21,60,000
2. 12 days and ₹28,80,000
3. 15 days and ₹30,00,000
4. 15 days and ₹36,00,000 (correct answer)

Answer: D — 15 days and ₹36,00,000

Explanation. The change in operating cycle is −5 + 2 − 3 − 4 − 5 = −15 days. The final 5-day improvement arises because supplier credit increases and creditors' days are deducted in the operating-cycle formula. Thus, the cycle reduces by 15 days. Estimated funds released = 15 × ₹2,40,000 = ₹36,00,000. Option c correctly identifies the reduction in days but makes an arithmetic error in calculating the funds released.

Where it goes wrong. Treating the increase in supplier credit as an increase in the operating cycle rather than a reduction, or ignoring the impact of increased WIP holding.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital

Question 25 · 2 marks · Management of Working Capital · hard

Scenario. A manufacturer estimates the following annual figures using 360 days: raw-material consumption ₹6 crore, cost of production on cash basis ₹9 crore, cost of goods sold including depreciation ₹18 crore and cost of goods sold excluding depreciation ₹16.20 crore. It maintains raw-material inventory for 30 days, WIP for 20 days and finished goods for 30 days. Annual credit sales have a cash cost of sales excluding depreciation of ₹14.40 crore, with a collection period of 45 days. Minimum cash balance required is ₹40 lakh. Annual credit purchases are ₹6 crore with 45 days' supplier credit; annual wages of ₹2.40 crore remain outstanding for 15 days and annual cash overheads of ₹1.20 crore remain outstanding for 30 days. Calculate the Net Working Capital requirement.

A manufacturer estimates the following annual figures using 360 days: raw-material consumption ₹6 crore, cost of production on cash basis ₹9 crore, cost of goods sold including depreciation ₹18 crore and cost of goods sold excluding depreciation ₹16.20 crore. It maintains raw-material inventory for 30 days, WIP for 20 days and finished goods for 30 days. Annual credit sales have a cash cost of sales excluding depreciation of ₹14.40 crore, with a collection period of 45 days. Minimum cash balance required is ₹40 lakh. Annual credit purchases are ₹6 crore with 45 days' supplier credit; annual wages of ₹2.40 crore remain outstanding for 15 days and annual cash overheads of ₹1.20 crore remain outstanding for 30 days. Calculate the Net Working Capital requirement.

1. ₹3.60 crore (correct answer)
2. ₹4.55 crore
3. ₹3.95 crore
4. ₹2.65 crore

Answer: A — ₹3.60 crore

Explanation. Current Assets: Raw materials = ₹6 crore × 30/360 = ₹0.50 crore; WIP = ₹9 crore × 20/360 = ₹0.50 crore; finished goods = ₹16.20 crore × 30/360 = ₹1.35 crore; receivables = ₹14.40 crore × 45/360 = ₹1.80 crore; cash = ₹0.40 crore. Gross Working Capital = ₹4.55 crore. Current Liabilities: Creditors = ₹6 crore × 45/360 = ₹0.75 crore; wages = ₹2.40 crore × 15/360 = ₹0.10 crore; overheads = ₹1.20 crore × 30/360 = ₹0.10 crore. Total = ₹0.95 crore. Net Working Capital = ₹4.55 − ₹0.95 = ₹3.60 crore. Depreciation and profit must not be included in cash-cost funding calculations.

Where it goes wrong. Including depreciation or profit in receivables and finished-goods funding, or forgetting to deduct outstanding wages and overheads when calculating net working capital.

Authority. ICAI SM: Financial Management and Strategic Management, Management of Working Capital