Working Capital Management

(i)‘‘Cash Flow Analysis is an important financial tool for management in decision making.’’ Explain this statement and discuss the advantages of cash flow analysis.

(iv)What are the safety stocks in terms of working capital management ?

Initial Working Capital :

(A)Is required at the time of the commencement of business

(B)Represents the amount utilized at the time of contingencies

(C)Supplies the funds necessary to meet the current working expenses

(D)Is used to raise the volume of production by improvement or extension of machinery

Opening and closing balance of creditors are ₹ 3,00,000 & ₹ 3,60,000 respectively. Raw material purchased on credit was ₹ 11,00,000. Creditor’s payment period for the purpose of working capital statement will be :

[1 year = 360 days]

(A)98 days

(B)100 days

(C)104 days

(D)108 days

Operating cost is ₹ 18,90,000

Current assets are ₹ 7,20,000

Current liabilities are ₹ 3,00,000

Operating cycle days = ?

(1 year = 360 days)

(A)19 days

(B)70 days

(C)80 days

(D)99 days

Current assets are twice the current liabilities. If the net working capital is ₹ 70,000, current assets would be :

(A)₹ 60,000

(B)₹ 1,00,000

(C)₹ 1,20,000

(D)₹ 1,40,000

Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in :

(A)Higher profits

(B)An increase in sales

(C)A decrease in bad debt losses

(D)An increase in the average collection period

A purchased goods for the list price of ₹ 60,000 with a trade discount @ 20% and cash discount @ 5%. A paid 40% on the date of purchase. The amount of cash discount will be :

(A)₹ 12,000

(B)₹ 3,000

(C)₹ 2,400

(D)₹ 960

............. refers to the difference between current assets and current liabilities.

(A)Operational working capital

(B)Differential working capital

(C)Net working capital

(D)Gross working capital

Current assets are those assets :

(A)Which cannot be sold by the companies for profit making

(B)Which are not liquid for the company

(C)Which can be converted to cash within a period of one year

(D)All of the above

An aggressive current assets policy indicate :

(A)Higher liquidity and poor-risk

(B)Higher risk and poor liquidity

(C)Higher risk and higher liquidity

(D)Lower risk with lower liquidity

Maximum permissible bank finance as per the first method of Tandon Committee norms was ₹ 57,75,000 while current liabilities are reported at ₹ 75,00,000. Current assets are equal to ₹ :

(A)1,45,99,000

(B)1,98,00,000

(C)1,25,00,000

(D)1,52,00,000

A Company’s Raw material storage period is 20 days; Finished goods storage period is 25 days; Receivables (Debtors) collection period is 40 days; Credit period allowed by suppliers (Creditors) is 50 days.

What is the length of operating cycle of the company ?

(A)85 days

(B)40 days

(C)35 days

(D)135 days

( i )‘‘The concept of negative working capital is a sign of strong bargaining power, ’ Comment and explain with an example.

Higher level management mostly involved in decision making by selecting best alternatives from among the available. Hence, reporting to higher level management should be with :

(A)More types of reports

(B)More frequent reports

(C)More detailed report

(D)All the above

The shareholder value maximisation model holds that the primary goal of the firm is to maximise :

(A)Accounting profit

(B)Liquidity

(C)Market value

(D)Working capital

Which of the following would be consistent with a more aggressive approach to financing working capital ?

(A)Financing short-term needs with shortterm funds.

(B)Financing permanent inventory buildup with long-term debt.

(C)Financing some long-term needs with short-term funds.

(D)Financing seasonal needs with shortterm funds.

Commercial paper is a ................. issued by .................. interest rate of which is linked to .................. .

(A)Debenture, Corporates, 1 Yr Gov. Securities Yield

(B)Promissory Note, Corporates, 1 Yr Gov. Securities Yield

(C)Promissory Note, Banks, 1 Yr Gov. Securities Yield

(D)Promissory Note, Banks, RBI Repo Rate

Following information is provided by the Lake Ltd. for the year ending 31 March 2023 :

Raw material storage period — 60 days

WIP conversion period — 22 days

Finished goods storage period — 29 days

Debt collection period — 40 days

Creditor’s payment period — 60 days

Annual operating cost including depreciation of ₹ 2,00,000 was ₹ 20,00,000.

[1 Year = 360 days]

You are required to calculate working capital on cash cost basis, assuming no cost classification is available.

(A)4,66,667

(B)4,55,000

(C)5,05,555

(D)10,55,000

Which of the following is a factor that affects the optimal level of working capital?

(A)Sales revenue

(B)Competitive position of firm

(C)Fixed assets

(D)Management style

Which of the following indicates aggressive working capital policy ?

(A)Higher liquidity and poor risk

(B)Higher risk and higher liquidity

(C)Higher risk and poor liquidity

(D)Lower risk with lower liquidity

Which of the following is a technique used to manage working capital ?

(A)Factoring

(B)IPO

(C)Mergers and Acquisitions

(D)Divestment

Which of the following is the most important determinants of a firm’s cash reserve requirements ?

(A)Size of the firm

(B)Industry type

(C)Sales and profitability

(D)Seasonal fluctuations in sales

(a)Prepare an estimate of working capital required by the company for the ensuing year. Add 10% of your calculated figure for contingencies.

From the following, calculate the Debt- Equity Ratio : ₹ 10,000 Equity Shares @ 10 each 1,00,000 General Reserves 50,000 Debentures 75,000 Sundry Trade Creditors 37,500

(A)0.25 : 1

(B)0.375 : 1

(C)0.50 : 1

(D)0.75 : 1

The aggressive working capital investment approach covers those policies, which :

(A)Invest high capital in current assets, keep inventory at higher level

(B)Follow liberal credit policies and higher cash balances

(C)Hold lower level of inventory and follow strict credit policies

(D)None of the above

Sales collection policy of a company is ‘‘20% sales are on cash, 50% of the credit sales are collected next month and the balance in the foll owing month’’, The Collection for the month of March will be :

(A)20% of Jan sales + 40% of February sales + 40% of March sales

(B)20% of February sales + 50% of January sales + 50% of March sales

(C)20% of March sales + 40% of January sales + 40% of February sales

(D)20% of March sales + 50% of January sales + 50% of February sales

Apollo Ltd. sells its products allowing a credit period of l5 days only. The average variable cost is 60% of sales value and current sales amount to ₹ 100 lakh. Dat a for the year is as follows :

Debtors are calculated on cost price. Expected rate of return is 16%. Which one of the following is correct ?

(A)Incremental profit ₹ 3.50 lakh

(B)Incremental loss ₹ 3.50 lakh

(C)Incremental profit ₹ 4.20 lakh

(D)Incremental loss ₹ 4.20 lakh

Which of the following statements is/are true ?

(A)When a firm relaxes the credit terms and offers cash discount for extended term, the profitability is sure to increase

(B)When a firm relaxes the credit terms and offers cash discount for extended term, the profitability is sure to increase if the sales increases

(C)When a firrn relaxes the credit terms and offers cash discount for extended term, the profitability is sure to increase if cash sales increases

(D)None of the above

Which statement is true about terms of trade credit of 2/10, net 30 ?

(A)A 10% cash discount is offered for payment before 30 days

(B)A 2% cash discount can be taken for payment before the l0th of the following month

(C)A l0% cash discount can be taken if paid by the second day after invoicing

(D)No cash discount is offered from the eleventh day of sales

You are given with the following information :

The net change in working capital is :

(A)Net increase ₹ 47,000

(B)Net decrease ₹ 47,000

(C)Net decrease ₹ 52,000

(D)Net increase ₹ 52,000

Which of the following is not a dimension of liquidity management of firms ?

(A)Management of Cash and Marketable Securities

(B)Credit Policy Decision

(C)Management and Control of Inventories

(D)Investment in Fixed Assets

The amount of working capital that is utilized at the time of contingencies is termed as :

(A)Reserve Margin Working Capital

(B)Irregular Working Capital

(C)Temporary Working Capital

(D)None of the above

Which of the following statements is false in respect of Working Capital Leverage?

(A)It refers to the impact of level of working capital on company’s profitability

(B)It reflects the sensitivity of the return on capital employed in reference to the changes in level of current assets

(C)It expresses the relation of efficiency of working capital management with profitability of the firm

(D)All the above are correct

The current assets of a firm include Inventory of ₹ 124 Lakh, Receivables (including bills with bankers) of ₹ 80 Lakhs and Cash and Bank Balance of ₹ 4 Lakhs. Its total current liabilities are ₹ 140 Lakhs including bank borrowings of ₹ 60 Lakhs. What is the additional amount that the firm can borrow from bank for working capital in the light of method II of Tandon Committee ?

(A)₹ 21.60 Lakh

(B)₹ 32 Lakh

(C)₹ 38.40 Lakh

(D)None of the above

A firm is currently selling its goods on 30 days credit. It is selling 4 Lakh units @ ₹ 12.5 each. Variable cost is ₹ 10 per unit and average cost is ₹ 11.5 per unit. The firm is planning to double the credit period. It will increase the sales by 20% and bad debts by ₹ 20,000. If the pre-tax required rate of return of the company is 20%, what will be the impact on company’s profit if the policy is changed ? Assume a 365 days’ year.

(A)Profit will increase by ₹ 98,000 approx.

(B)Profit will increase by ₹ 78,000 approx.

(C)Profit will increase by ₹ 70,000 approx.

(D)Profit will decrease by ₹ 70,000 approx.

X invested ₹ 21,000 in shares of a company five years back. During this tenure, he received dividend of ₹ 2,100 and ₹ 1,800 during 1st and 4th year. The current market value of his investment is ₹ 40,100. The total investment return of X is :

(A)18.57%

(B)3.71%

(C)109.52%

(D)90.95%

The Budgeted Sales for the next 4 months are – ₹ 96,000; ₹ 1,44,000; ₹ 1,44,000 and ₹ 1,68,000 respectively. It is estimated that sales will be paid for as follows : 75% of the sales will be paid in the month in which sales were made. Of the balance, 50% will be paid in the month after the sales was made. The remaining 50% will be paid in the month after this. The amount of cash received in the 3rd month will be :

(A)₹ 1,38,000

(B)₹ 72,000

(C)₹ 1,62,000

(D)₹ 1,20,000

The existing net working capital of a firm was ₹ 12,04,000. It repaid its creditors worth ₹ 1,40,000 by issuing them 3 year bonds and acquired a 5 year loan of ₹ 3 Lakh. Further, it redeemed its 8% debentures worth ₹ 2 Lakh by issuing 9% preference shares of equal amount. Which of the following is correct in the light of this information ?

(A)Net Working capital will increase by ₹ 1,40,000

(B)Net Working capital will decrease by ₹ 1,40,000

(C)There will be no change in Net Working Capital

(D)None of the above

Which of the following is indicative of Aggressive Approach of Working Capital Management ?

(A)Holding low level of inventory

(B)Following Liberal Credit Policy

(C)Maintaining high cash balance

(D)All of the above

Which of the following methods is/are used to determine the working capital needed?

(A)Current Asset Holding Period

(B)Ratio to Sales

(C)Both (A) and (B)

(D)None of the above

A invested ₹ 2 lakh in equity shares of a limited company in the beginning of 2020. So far, he has received ₹ 1 Lakh as dividend income. The current market price of his holdings is ₹ 3 Lakh. His total return is :

(A)50%

(B)100%

(C)33.33%

(D)None of the above

DEF Ltd., a manufacturer of ball-point pens, is interested in knowing the Economic Order Quantity. It furnishes you the following information :

Annual Requirement : 40000 units

Cost per unit : ₹ 16

Carrying Cost 15% p.a.

Ordering Cost per order : ₹ 480

What will be its EOQ ?

(A)6000 units

(B)5000 units

(C)4000 units

(D)3000 units

Which of the following factors determine the credit policy of a firm ?

(A)Effect of credit period on volume of sales

(B)Credit Terms

(C)Cash Discount

(D)All of the above

Purchase goods of the list price of ₹ 25,000 from Mohan less 20% trade discount and 2% cash discount. The amount of cash discount is .................... .

(A)₹ 160

(B)₹ 240

(C)₹ 400

(D)₹ 500

If the Company’s Issued Capital is more than the Authorized Capital, and approval of increase in Authorized Capital is pending, the amount of Share Application Money received over and above the Authorized Capital should be shown under the head :

(A)Other Current Liabilities

(B)Other Long-Term Liabilities

(C)Reserve and Surplus

(D)Short-Term Provision

A company would like to have liquid resources for trasaction purposes, as a precautionary measure and for .................

(A)Fiance opportunities

(B)Resource utilization

(C)Speculative opportunities

(D)Accumulation of future reserves

Long term finance is required to finance :

(A)Fixed assets, variable part of working capital and expansion of business

(B)Fixed assets, permanent part of working capital and expansion of business

(C)Fixed assets and working capital

(D)Only fixed assets

A company has sales of ₹ 20 crore and 40% of the sales is on credit. Expenses on credit collection is 1.50%. The company targets to reduce collection expenses by 40%. Calculate the expected saving target of the company.

(A)₹ 4.80 lakh

(B)₹ 7.20 lakh

(C)₹ 4.50 lakh

(D)₹ 7.80 lakh

The monthly requirement of raw material of A Ltd. is 1200 units, ordering cost is ₹ 400 per order and carrying cost is 13% of unit value of ₹ 150. EOQ units are :

(A)767 Units

(B)769 Units

(C)762 Units

(D)765 Units

Negative working capital implies that :

(A)Current Assets > Current Liabilities

(B)Current Assets = Current Liabilities

(C)Current Assets < Current Liabilities

(D)Current Assets > Fixed Assets

Find out the average size of receivables if the goods are sold for ₹ 10,00,000 on a net 60 credit term with an assumption that 25% of the customers do not pay within the prescribed time.

(A)₹ 2,50,000

(B)₹ 2,00,000

(C)₹ 2,08,333

(D)₹ 2,18,333

Which of the following statements is not true?

(A)Management of working capital is an essential task of the finance manager

(B)Fluctuating working capital is needed to meet the seasonal requirements of the business

(C)A conservative current asset financing policy relies more on short term bank financing and less on long term sources.

(D)An aggressive current asset financing policy relies heavily on short term bank finance.

The Budget sales for the next 4 quarter are – ₹ 1,92,000, ₹ 2,88,000, ₹ 2,88,000 and ₹ 3,36,000 respectively. It is estimated that sales will be paid for as follows: 75% of the sales will be paid in the quarter in which sales were made. Of the balance 50% will be paid in the quarter after the sales was made. The remaining 50% will be paid in the quarter after this. The amount of cash received in quarter 3rd will be .............

(A)2,76,000

(B)1,44,000

(C)3,24,000

(D)2,40,000

Credit term ‘4/20 net 90’ means :

(A)0.40% discount will be granted if the customer pays within 90 days

(B)20% discount will be granted if the customer pays within 4 days, and if he does not avail the offer he must make payment within 90 days

(C)Net 90% discount will be granted if the customer pays 4 times the amount due within 20 days

(D)4% discount will be granted if the customer pays within 20 days, otherwise he must make payment within 90 days

According to William J. Baumol’s economic order quantity model with respect to cash management, optimum cash level is that level of cash where :

(A)Carrying costs are maximum and transactions costs are minimum

(B)Carrying costs and transactions costs are minimum

(C)Carrying costs and transactions costs are maximum

(D)Carrying costs are minimum and transactions costs are maximum

Net working capital is equal to :

(A)Fixed Assets–Current Assets

(B)Current Assets–Current Liabilities

(C)Current Assets–Cash

(D)Long Term Loans–Short Term Loans

Current Assets are those assets :

(A)Which can be converted into cash within 12 months

(B)Which can be converted into cash within a period normally not exceeding 12 months

(C)Which can be converted into cash within an operating cycle which normally does not exceed 12 months.

(D)Which are held for their conversion into cash within an operating cycle or a period of 12 months

What will be the operating cycle period if raw materials are in store for 2 months, processing time 2½ months finished goods remain in store for 15 days, debtors are allowed 60 days’ credit and credit received from suppliers of raw material is 1 month :

(A)7 months

(B)6 months

(C)6½ months

(D)5 months

Current assets are twice the current liabilities. If the net working capital is ₹ 60,000, current assets would be :

(A)₹ 60,000

(B)₹ 1,00,000

(C)₹ 1,20,000

(D)₹ 1,10,000

Efficiency of a credit control system does not get influenced by :

(A)Timely billing

(B)Accurate billing

(C)Compliance with the specified credit policy

(D)Cash discount availed by the customers

H Ltd. is a holding company of S Ltd. During the year 2018-19, Bills Receivable amounted to ₹ 4,00,000, out of total bills receivable of ₹ 5,00,000 received from S Ltd., were discounted by H Ltd. and S Ltd. had endorsed to its creditors all the bills received from H Ltd. amounting to ₹ 3,00,000. At the end of the year the amount of mutual debtors will be :

(A)₹ 8,00,000

(B)₹ 3,00,000

(C)₹ 2,00,000

(D)₹ 1,00,000

Mithu Ltd. had the investment as on 31-3-18 and 31-3-19 were ₹ 10,95,000 and ₹ 10,82,000 respectively. During the year interest on investment received ₹ 77,000 which was used in writing down the book value of investments. If there were some purchases of investment, then the cash flow from investment and from interest would be :

(A)Cash inflow ₹ 1,300 only

(B)Cash inflow ₹ 9,000 only

(C)Cash inflow ₹ 77,000 and Cash outflow ₹ 64,000

(D)Cash inflow ₹ 9,000 and Cash outflow ₹ 77,000

N Ltd. has Net working capital of ₹ 119 Lakh, Total Liabilities ₹ 225 Lakh and Non-current liabilities are ₹ 140 Lakh. The Current Ratio will be :

(A)2.4 : 1

(B)1.85 : 1

(C)2.46 : 1

(D)1.15 : 1

The Net Working Capital (NWC) of a firm is ₹ 14 Lakhs. It purchased ₹ 30 Lakhs worth of raw materials on credit, issued 7% debentures for ₹ 20 Lakhs, and purchased a machine for ₹ 18 Lakhs for cash. The new NWC of the firm will be:

(A)₹ 12 Lakhs

(B)₹ 16 Lakhs

(C)₹ 15 Lakhs

(D)₹ 10 Lakhs

Determination of “safety stock” requires a trade-off between :

(A)Carrying costs and stock-out cost

(B)Ordering cost and carrying cost

(C)Ordering cost and stock-out cost

(D)Lead time and order point

Monthly demand for a raw material is 150 units. Ordering cost per order is ₹ 8 and annual carrying cost per unit is ₹ 2. Economic Order Quantity (EOQ) under the above circumstances will be :

(A)90

(B)120

(C)150

(D)180

The EOQ for a firm is 7200 units. The minimum order size stipulated by the supplier is 9000 units for utilizing a cash discount on the purchase price. The annual usage of the material in units is 80,000 and the cost per order is ₹ 100. If the company decides to utilize cash discount, savings in the total ordering cost will be :

(A)₹ 400

(B)₹ 500

(C)₹ 600

(D)₹ 700

(d)The present credit term of X Ltd. are 1/10 net 30. Its annual sales are ₹ 40,00,000, its average collection period is 20 days. Its variable cost and average total costs to sales are 0.85 and 0.95 respectively and its cost of capital is 10%. The proportion of sales on which customers currently takes discount is 0.50.

X Ltd. is considering relaxing the discount terms to 2/10 net 30. Such relaxation is expected to increase sales by ₹ 5,00,000, reduce the average collection period to 14 days and increase the proportion of discount sales to 0.80. What will be the effect of relaxing the discount policy on company’s profit ? Take year as 360 days.

(a)X Ltd. plans to manufacture and sell 400 units of electronic appliances per month at a price of ₹ 600 each. The ratios of cost to selling price are as follows:

Other details are :

(a)Credit sales represent 80% of total sales and dealers enjoy 30 days credit.

(b)Creditors allow 21 working days credit for payment.

(c)Lag in payment of overhead and expenses are 15 working days.

(d)Cash requirement to be 10% of total current assets (excluding cash balance).

(e)Working days in year are taken as 300 days.

(f)Degree of completion is 100% for Raw Material and 50% of other expenses.

Calculate the net working capital required and the maximum permissible bank finance under second method of financing as per Tondon Committee norms.

For a product- ‘A’, following information is available :

Maximum consumption per week : 300 units

Normal consumption per week : 200 units

Reorder period : 2 to 5 weeks

The reorder level will be :

(A)400 units

(B)1200 units

(C)600 units

(D)1500 units

Economic Order Quantity (EOQ) determines :

(A)The order size that minimize the total inventory cost

(B)The order size which will earn discounts on purchase

(C)The order size where ordering cost is the lowest

(D)The order size where the carrying cost is minimum

Following information is given for Component ‘X’ :

Normal usage 100 units per week, maximum usage 125 units per week, reorder period 4 to 6 weeks. The minimum level of stock will be :

(A)200 units

(B)150 units

(C)450 units

(D)250 units

(d)Calculate Economic Order Quantity from the following details and also state the number of orders to be placed in a year :

A firm has inventory turnover of 4 and cost of goods sold is ₹ 7,50,000. With better inventory management, the inventory turnover is increased to 6. This would result in :

(A)Increase in average inventory

(B)Decrease in average inventory

(C)Decrease in cost of goods sold

(D)Increase in cost of goods sold

(c)Two components A and B are used as follows :

Calculate :

(i)Re-order Level

(ii)Maximum Level

(iii)Minimum Leval

(iv)Average Inventory.

Quarterly consumption of materials : 2,000 kg; Cost of placing an order : ₹ 50; Cost per unit : ₹ 40; Storage and other carrying costs : 8% of average inventory cost. Economic order quantity and number of orders to be placed per quarter of the year will be :

(A)400 kg and 5 orders

(B)400 kg and 20 orders

(C)500 kg and 4 orders

(D)500 kg and 16 orders

Which of the following techniques of material control analyses items of material based on their criticality to production ?

(A)Inventory Issue System

(B)Material Turnover Ratios

(C)ABC Analysis

(D)VED Analysis

Economic Order Quantity of a product is 3000 units. Its cost per unit is ₹ 1.50 and ordering cost is ₹ 18 per order. If the carrying cost per annum is 20% per annum for average inventory value, annual consumption in units is :

(A)50000 units

(B)60000 units

(C)75000 units

(D)90000 units

The per unit total cost of a company’s product is ₹ 60 including Raw Materials ₹ 30, Direct Labour ₹ 7.5 and Overheads of ₹ 22.5. The company is planning to produce 4,00,000 units in the ensuing year. If the inventory policy of the company envisages that raw materials stock averages two months consumption, work-inprocess investment averages half a month’s production and finished goods inventory averages one month consumption, the average investment in inventory of the firm for the ensuing year will be :

(A)₹ 30,00,000

(B)₹ 25,00,000

(C)₹ 45,00,000

(D)₹ 50,00,000

Following financials pertain to ABC Ltd. for the year ended 31/03/2021:

(i)Raw Meterial Inventory-Average outstanding amount : ₹ 40,000

(ii)W-I-P Inventory-Average outstanding amount : ₹ 1,08,000

(iii)Finished Goods Inventory-Average outstanding amount : ₹ 1,80,000

(iv)Sundry Debtors-Average outstanding amount : ₹ 2,00,000

(v)Sundry Creditors-Average outstanding amount : ₹ 1,20,000

(vi)Purchase of Raw Metarial-Average amount/day : ₹ 2,400

(vii)Cost of Sales-Average amount/day : ₹ 3,000

(viii)Sales-Average amount/day : ₹ 5,000

Operating Cycle of ABC Ltd. is :

(A)190 days

(B)185 days

(C)186 days

(D)195 days

Which one of the following will not help in lowering the cost of inventory ?

(A)Entering into short-term arrangements for supply of materials at market driven prices

(B)Arranging for direct supply of Raw Materials at manufacturing locations

(C)Promoting ex-factory sales of finished goods

(D)Availing quantity discounts and spot payment discounts if carrying costs and financing costs are less than discounts

Which of the following is not an assumption of EOQ Model ?

(A)Total usage of the commodity for the given period is known with certainty and the usage is spreaded evenly throughout the period

(B)There is sufficient gap between placing the order and receiving the supply

(C)The cost per order of commodity is constant irrespective of the number of total orders

(D)Carrying cost of the inventory is given as a percentage of the value of inventory and is fixed

Determine the economic order quantity from the following figures :

(i)Annual requirement of inventory 1,00,000 units

(ii)Cost per unit (other than carrying and ordering cost) ₹ 20

(iii)Carrying cost are likely to be 10% per year

(iv)Cost of placing order ₹ 1,000 per order

(A)10,000 Units

(B)1,000 Units

(C)2,000 Units

(D)5,000 Units

The following details are available in respect of a firm : Annual requirement of inventory 20,000 units, Cost per unit (other than carrying and ordering cost) is ₹ 10, Carrying cost are likely to be 10% per year, Cost of placing an order is ₹ 500 per order. The economic ordering quantity is :

(A)4472 Units

(B)4274 Units

(C)5270 Units

(D)4760 Units

Reorder level + Reorder Quantity – (Minimum Consumption × Minimum delivery period) determines which stock level :

(A)Reorder level

(B)Maximum level

(C)Minimum level

(D)Average level

ABC analysis is useful for :

(A)analyzing inventory based on their usage and movement

(B)reduction of total investment in material

(C)determining the optimal level of safety stock

(D)analyzing inventory based on their availability

Which of the following is not a valid assumption of EOQ model ?

(A)Demand forecast is available

(B)Inventory can be replenished immediately

(C)Cost per order is variable

(D)Carrying cost is a fixed percentage

Economic Order Quantity (EOQ) determines :

(A)The order size that minimize the total inventory cost.

(B)The order size where ordering cost is the lowest.

(C)The order size where the carrying cost is minimum.

(D)The order size which will earn discounts on purchase.

(c)A product requires 40 types of material every day for its manufacturing. A fixed cost of ₹ 50 per order is incurred for placing an order. The inventory carrying cost for each material is ₹ 0.02 per day. The lead period is 50 days. Assume 365 days in a year. Calculate the following :

(i)Economic Order Quantity (EOQ)

(ii)Re-order Level (ROL).

(b)Calculate Reorder level, Minimum level and Average stock level from the following information of X Ltd. :

Re-order period 4 to 6 weeks

Cash collected from debtors is.............

(A)Credit sales (+) Decrease in Account Receivable or ( – ) Increase in Account Receivable

(B)Credit sales ( – ) Decrease in Account Receivable or (+) Increase in Account Receivable

(C)Cash sales (+) Decrease in Account Receivable or ( – ) Increase in Account Receivable

(D)Cash sales ( – ) Decrease in Account Receivable or (+) Increase in Account Receivable

Liquidity of Receivables is assessed through which of the following :

(A)Average Collection Period

(B)Receivables Turnover Ratio

(C)Both (A) and (B)

(D)None of the above

What do you understand by the term ‘factoring’ with respect to management of accounts receivable ?

(A)Use of accounts receivables as prime collateral for a secured loan

(B)Pledging of accounts receivables to a lender

(C)Outright sale of accounts receivables to a financial agency

(D)Encashing accounts receivable before closure of accounts

A balance sheet has two parts to it, i.e.

I.Equity and Liabilities and

II. ........................................

(A)Shareholder’s fund

(B)Trade receivables

(C)Inventories

(D)Assets

Consider the following data and compute the total sales amount :

(i)Closing balance of receivables : ₹ 30 lakhs

(ii)Opening balance of receivables : ₹ 20 lakhs

(iii)Average collection period : 25 days

(iv)Credit sales are 73% of sales (assume 365 days in a year)

(A)₹ 365 lakhs

(B)₹ 500 lakhs

(C)₹ 550 lakhs

(D)₹ 730 lakhs

(d)You have applied for the position of Assistant Company Secretary in Sashvati Ltd. As part of the pre-interview scanning, the following information has been provided to you :

Cash sales are 1/4th of credit sales

As part of scanning exercise, you are required to calculate and inform to the interviewer, following values :

(1)Non-current debt (as per the Companies Act, 2013),

(2)Receivables,

(3)Current assets, and

(4)Cost of goods sold.

Maximum permissible bank finance as per the first method of Tandon Committee norms was ₹ 57,41,813 while current liabilities are reported at ₹ 32,50,000. Current assets = ?

(A)10905750

(B)9905720

(C)10907550

(D)10509750

Tandon Committee recommendations aims that the dependence of industry on bank finance should gradually :

(A)Decrease

(B)Remain Stable

(C)Increase

(D)None of the above

Which of the following is not a principle on which bank lending must necessarily be based ?

(A)Safety

(B)Liquidity

(C)Profitability

(D)Risk Neutralization

Lending policy and appraisal norms by banks are decided by the ....................

(A)Reserve Bank of India

(B)Government of India

(C)Financial Institutions

(D)Prime Minister of India

Calculate maximum permissible bank finance (MPBF) as per first method suggested by the Tandon Committee, from the information given below :

(A)₹ 150 Lakhs

(B)₹ 200 Lakhs

(C)₹ 350 Lakhs

(D)₹ 450 Lakhs

Concept of Maximum Permissible Bank financial was introduced by :

(A)Kannan Committee

(B)Chore Committee

(C)Nayak Committee

(D)Tandon Committee

An arrangement where a bank allows a borrower to overdraw up to a certain limit for working capital financing is known as :

(A)Bridge Loan

(B)Cash Credit

(C)Term Loan

(D)Leverage Buy Out

An asset is not classified as current when :

(A)The asset is held primarily for the purpose of trading activities

(B)It is not cash equivalent

(C)It is expected to be realized within twelve months after the reporting period

(D)It is expected to be realized or intends to be sold or consumed in normal operating cycle of the entity

A company has Raw material holding period- 27 days; Conversion period-25 days; Finished goods holding period-28 days; Period of accounts receivables- 20 days; Period of accounts payable - three fourth of accounts recievables; operating cycle period will be :

(A)65 days

(B)75 days

(C)80 days

(D)85 days

Net Operating Cycle (NOC) can be defined as sum of :

(A)Raw Material, W.I.P. and Finished Goods Conversion period

(B)Raw Material, W.I.P., Finished Goods and Receivables Conversion period

(C)Inventory Plus Receivables Conversion period minus Deferral period

(D)None of the above

Consider the following factors — Gross operating cycle – 80 days; Net operating cycle – 55 days; Raw material holding period – 40 days, Conversion period – 2 days; Finished goods holding period – 20 days; Average collection period will be:

(A)87 days

(B)37 days

(C)18 days

(D)62 days

Which of the following is not one of the key motives of holding cash be a firm ?

(A)Forecasting motive

(B)Transactional motive

(C)Speculative motive

(D)Contingency motive

Which of the following is not an example of transactional motive of holding cash?

(A)Purchase of Raw Materials and Components

(B)Payment of Salaries and Wages

(C)Purchase of Fixed Assets

(D)None of the above

The annual cash requirement of A Ltd. is ₹ 25 lakh. Cost of conversion of marketable securities per lot is ₹ 2,500. The company can earn 5% annual yield on its securities. What will be the economic lot size according to the Baumol Model ?

(A)₹ 1,00,000

(B)₹ 2,50,000

(C)₹ 5,00,000

(D)₹ 4,75,000

Cash Management Model has been propounded by :

(A)Lintner

(B)Walter

(C)Baumol

(D)Gordon

A Factoring firm has credit sales of ₹ 300 lakhs and its average collection period is 36 days. The financial controller estimates bad debt losses are around 2% of credit sales. The firm spends ₹ 1,50,000 annually on debtor’s administration. This cost comprises of telephonic and fax bills along with salaries of staff members. These are the avoidable costs. A Factoring firm has offered to buy the firm’s receivables. The factor will charge 1% commission and will pay an advance against receivables on an interest @ 12% p.a. after withholding 10% as reserve. What is the approx. Net annual benefit of factoring to the firm in rupees ? Ignore capital cost.

(A)(1,73,400)

(B)1,73,400

(C)(1,56,000)

(D)1,26,000

(ii)The total turnover of X Ltd. is ₹ 50 lakhs of which 72% is on credit. Debtors are allowed one month to clear off the dues. A factoring company is willing to advance 80% of the bill raised on credit for a fee of 2% a month plus a commission of 10% on the total amount of debts. X Ltd., as a result of this arrangement, is likely to save ₹ 48,000 annually in management cost and avoid bad debts @ 1% on the credit sales.

A bank has come forward to make an advance equal to 80% of the debts at an annual interest rate of 15%. However, its processing fees will be @ 2% on the debts. Would you accept factoring or the offer from the bank ?

(a)Forfaiting and Export Factoring