(D) 78 days (A) 2.48 (D) Both ratios are expressed in number of times receivables are collected per year Working Capital Cycle. (D) All of the above, Question 24. Last, working capital assumes all debt obligations are known. Answer: (C) Creditors velocity (B) 61 days, Question 124. y = 2,00,000 (iii) Reduction in credit period given to customers. Now is the time to get your businesss finances arranged so that you can clearly define your businesss permanent working capital, and ensure that you dont fall below it! (A) Companys ability to move inventory Answer: For 1st & 2nd week: in the 3rd week Cost of goods sold = 20,00,000 (B) 24.00% (B) Net working capital. Experts are tested by Chegg as specialists in their subject area. Purchases = 4,20,000 (A) 1,09,05,750 To quote Filion (2021): "The term 'entrepreneur' is a French word derived from the verb 'entreprendre', which means to do or to undertake. Working capital, also known as net working capital (NWC), is the difference between a companys current assetssuch as cash, accounts receivable/customers unpaid bills, and inventories of raw materials and finished goodsanditscurrent liabilities, such as accounts payable and debts. Answer: (D) Variable working capital, Question 22. (D) 4,60,000 Three alternative current assets policies are under consideration 40%, 50% and 60% of projected sales. (B) Working capital increases as compared to last year Were sorry to be the bearer of bad news, but it doesnt exist. (A) Fixed working capital, Question 32. Working Capital Ratio: What Is Considered a Good Ratio? (D) Hard current liabilities (C) 29 days (D) 20,625 Dont get it twisted, permanent working capital is something any/every successful business owner is aware of. The ratios of cost to selling price are (C) All the raw material, Semi-finished and the finished goods in the organization, Question 62. the amount of working capital that exceeds the regular working capital; reserve working capital is there for unexpected business expenses (like implementing a, the amount of capital invested in current assets. (A) Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Statement I: Maintaining adequate working capital is not just important in the short-term. From the following data calculate finished goods conversion period for the years 2019 & 2020. (D) Overtone (D) Increase in accounts payable days. What is the value today of $800 per month forever, with the first $800 payment occurring two months from today. Financing a long-lived asset with short-term financing would be (C) Company has negative working capital 3,15,000 = [75% of (Current Assets- Core Current Assets)] Current Liabilities Answer: Getting your hands on the right type of working capital finance no longer requires you filling out mountains of paperwork! (B) To reduce the levels of current liabilities. The company can be mindful of spending both externally to vendors and internally with what staff they have on hand. (D) 49,41,813 If company calculates working capital on cash cost basis then debtors are (A) Operation capital Answer: At its most basic level, it consists of just the assets necessary . (A) the company has no current assets at all (B) (ii) & (iii) (B) the firm may not be able to meet its liabilities, Question 48. (B) 37,80,000 (C) 4,87,500, Question 142. Answer: Answer: Meeting the requirements of your permanent working capital is always of a higher priority compared to temporary working capital. Therefore, companies that are using working capital inefficiently or needing extra capital upfront can boost cash flow by squeezing suppliers and customers. (A) 9,60,000 ; Philippens H.M.M.G. (A) where the firm relies heavily on short term bank finance. If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch the financial resources of the business. Level of activity 1.56,000 units (A) 50,000 drums (B) Decrease in inventories (D) Carrying excess inventories That doesnt mean the competition between online and offline businesses is a certain win for e-commerce sellers though. Bills payable = 25,000 Creditors Payment Period = ? (D) All of the above except (4) (D) All of the above (D) All of the above Question 42. (C) 16.50% An example of this is a firm's 100,000 Working Capital, deducting 200,000 to 300,000 in current liabilities. In fact, there are several kinds of working capital that a small business owner should know about, including: If youre still not entirely clear on what the differences are between permanent and temporary working capital, keep reading. Maintaining adequate working capital is not just important in the short-term. A conservative policy implies Question 27. Material consumed in income statement is shown at 3,60,000. Debtors as per working capital (D) Current assets less current liabilities, Question 4. (C) Debtors The net effect of these transactions. divided into Seasonal Working Capital and Special Working Capital, its an amount of working capital that fluctuates; net working capital minus permanent working capital, The difference between permanent and temporary working capital, On the other hand, if the radio, window, or A/C stops working, the car will still do its job. Physical cash is also at risk of theft. Calculate closing stock of WIP. amounts that must be held to meet debt covenants. By only looking at immediate debts and offsetting them with the most liquid of assets, a company can better understand what sort of liquidity it has in the near future. When you refer to working capital, this refers to a company's net working capital and indicates if it can meet its short-term financial obligations. Quick Ratio =1.0 Gross working capital refers to Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Answer: Positive working capital indicates that a company can fund its current operations and invest in future activities and growth. (C) the average number of days it takes to collect an account. (B) 49,29,313 Reason (R): Current assets are those assets which in the ordinary course of business can be converted into cash within a short period of time. Answer: (D) All of the above. Current assets 92,75,000 Stock of the year is 20,000 more than what it was at the beginning of the year Opening stock 1,75,000, Total purchase 10,75,000 including cash purchase 1,75,000, total sales 15,00,000 out of which 20% are on cash basis. (D) 18.67% Learning Objective: 19-01 Show how long-term financing policy affects short-term financing requirements. Answer: Side note: Permanent working capital for e-commerce businesses is generally lower than the permanent working capital needed to maintain an offline business. (D) the company is able to pay-off its short-term liabilities. Credit purchase = 4,20,000 50,000 = 3,70,000. (C) 20,562 Answer: | Best Courses & High Paying Jobs after Bachelor of Arts, MCQ Questions for Class 9 Science with Answers PDF Download Chapter Wise, Stopping By Woods On A Snowy Evening Poem Summary in English and Hindi by Robert Frost, Receivable Management Financial Management MCQ, Indian Woman Essay In Hindi, Old Man at the Bridge Summary Analysis and Explanation by Ernest Hemingway, Paragraph On Happiest Day Of My Life: A Personal Experience, Diary Entry for Class 10 CBSE Format, Topics, Examples, Samples, Landscape of The Soul Summary in English by Nathalie Trouveroy. (A) 22,125 Debtors 55,12,000 Statement II: Answer: Question 55. (B) Net working capital (B) Trade-off between liquidity and marketability. Opening and closing balance of creditors are 2,00,000 & 2,40,000 respectively. (B) 1.52 Permanent Working Capital is also known as The amount of working capital a company has will typically depend on its industry. (C) 16.50% What amount of principal is repaid in the first three months? What are the core current assets of Deelip Ltd? (C) 4,80,000 (C) III (B) 0.403;0.453 In order to receive the full article please mark the checkbox. (D) (1), (2), (3) and (4), Question 17. (B) 49,29,313 For reducing and controlling working capital requirement which of the following step is required to be taken Answer: (A) The current ratio includes inventory and quick ratio does not. By forecasting sales, manufacturing, and operations, a company can guess how each of those three elements will impact current assets and liabilities. The CTC Ltd. is attempting to establish a current assets policy. For example, Microsoft's working capital of $96.7 billion is greater than its current liabilities. Both figures can found in the publicly disclosed financial statements for public companies, though this information may not be readily available for private companies. Cost of production/purchase = 11,00,000 a business has to carry all the time irrespective of the level of manufacturing/marketing operations. The effective tax rate is 40%. (C) 12,000 (C) operational and financial. (C) 52 days Working capital = 8,40,000 Where current assets refer to the sum of cash, accounts receivable, raw material and finished goods inventory. (C) Purchases (A) As average collection period increases (decreases) the accounts receivable turnover decreases (increases) Working capital is also represented by a firm's net investment in current assets necessary to support its everyday business. (3) Short Term Investments (C) the company is unable to meet its short-term liabilities. Which of the following is correct formula to calculate working capital leverage? (C) lower return and very low risk Answer: C. (C) 32,308 (D) 1,200 In other words, efficient working capital management means ensuring sufficient liquidity in the . It's calculated as current assets divided by current liabilities. What can be considered the firm's permanent working capital. (D) 0.435; 0.405, Question 134. (A) where the firm relies heavily on short term bank finance. of operating cycle in a year = 4.5 Decrease in current assets means (A) If a company increases its current liabilities by 1,000 and simultaneously increases its inventories by 1,000, its current ratio must rise. (B) All the assets available for sale What can be considered the firm's permanent working capital? they are the portion of current assets that fluctuates or varies in relation to the seasonal or cyclical movement of sales, they are the portion of the current assets that accumulates and remains fixed through the operating cycle, refers to short-term debt that arises from the normal course of business operation, refers to debt that arises not from ordinary business activities but from borrowings from bank loans, it is the sum of permanent current assets and fixed assets, the amount of investment required to take care of fluctuations in business activity or needed to meet fluctuations in demand consequent upon changes in production and sales as a result of seasonal changes, Personal Finance Unit 4 Lesson 3: Financial P, Abortion, Euthanasia & Assisted Reproduction, Fundamental Financial Accounting Concepts, Christopher Edmonds, Frances M McNair, Philip R. Olds, Thomas P. Edmonds, Carl S Warren, James M Reeve, Jonathan E. Duchac, James F. Sepe, J. David Spiceland, Mark W. Nelson, Eric W. Noreen, Peter C. Brewer, Ray H Garrison, Thme 3 - L'affirmation de l'tat dans le roy. Question 59. 58,12,500 + 0.2.x = x (C) Decrease in working capital Direct wages are 10% of selling price. Answer: (B) Cash sales Answer: Answer: Answer: It is understood that a current ratio of .. for a manufacturing firm implies that the firm has an optimum amount of working capital. Working capital in this case is What is the loan outstanding after the first quarterly repayment? Wages are paid as follows: (C) Long term assets should be financed from long term capital. C. portion of net working capital that is financed from long-term sources. (A) 60,000 (A) 10 (B) 20,652 In valuation, the focus is on noncash working capital. (D) A new personal computer for the office, Question 56. Permanent working capital financed with long-term liabilities. inventory period and payable period the same, then: A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable. Lag in payment of wages 1 month. (B) 100 (C) Current asset cycle Sales 46.80 lakh (25% cash sales and balance on credit): 78,000 units ), Management Accounting (Kim Langfield-Smith; Helen Thorne; David Alan Smith; Ronald W. Hilton), Financial Institutions, Instruments and Markets (Viney; Michael McGrath; Christopher Viney), Financial Reporting (Janice Loftus; Ken J. Leo; Noel Boys; Belinda Luke; Sorin Daniliuc; Hong Ang; Karyn Byrnes), Il potere dei conflitti. (B) Collection period-Inventory holding period + Creditor Payment Period Following details are available for Pratik Ltd. (B) gross profit and inventory this is what people generally mean when they talk about working capital; the level of working capital below which the business has never gone; long term sources of capital used to cover a businesss most essential expenses. (B) average number of days it takes to pay a supplier invoice. (C) 3 (three) Which of the following is correct formula to calculate WIP Conversion Period? The management is of the opinion to make 12% margin for contingencies on computed figure. On the other hand, high working capital isnt always a good thing. Which of the following will be considered while calculating working capital? For example, say a company has $100,000 of current assets and $30,000 of current liabilities. Maximum permissible bank finance as per Tandon Committee norms is 3,15,000. (A) A desire to maintain an established dividend policy may affect the volume of working capital. Total assets 60,00,000 The company has more short-term debt than it has short-term resources. (A) supplies the funds necessary to meet the current working expenses ie. Its true, fixed working capital will change as your business grows. (D) Goods that can be sold within a short span of time Finished goods conversion 29 days period Its stock is priced at $100 a share and shareholders expect Zeta to pay dividends of $10 a year in perpetuity. Question 57. Hence total fixed overheads at current level of activity 36,000 1 = 36,000. Net working capital refers to ___________. 3,18,75,000 = 75% of (Current Assets Current Liabilities) Answer: (C) is the amount of current assets required to meet a firms long-term minimum needs. (A) Trade-off between profitability and risk. If you see your working capital finance is starting to take a dip, consider taking a permanent working capital loan. Credit Sales = 24,00,000 Calculation of cost of goods sold: (D) 12,00,000 To be clear, that number will change as your company grows and as your assets and liabilities change. (C) (i) & (ii) From the following information calculate the responsiveness of ROCE for changes in current assets ie. Raw Material Consumed = 8,42,000 Answer: (C) 29,00,000 (D) 425 lakhs (B) 28,642 (C) There will be no change in working capital Which of the following working capital strategies is the most aggressive? When a working capital calculation is positive, this means the company's current assets are greater than its current liabilities. Current assets are likely to decline by 20%over the existing level Capital which is needed to meet the seasonal requirements of the business (A) Core current assets less current liabilities (D) (B) & (C) is correct. Debtors 4,00,000 Current Ratio = ? (A) 14,00,000 Answer: (A) 19.71% So, the net result is zero, If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the. (A) Which can be sold by the companies. x = Annual Cost of Production 14,60,000, Question 96. (B) 15,66,667 (D) 19,800 The company also reported $77.5 billion of current liabilities comprised of accounts payable, current portions of long-term debts, accrued compensation, short-term income taxes, short-term unearned revenue, and other current liabilities. Working Capital = Current Assets - Current Liabilities. Answer: (C) 80,000 drums Next, make a list of the daily values for your net working capital. It might even go bankrupt. Total cost of sales and sales of Gama Ltd. is 3,19,80,000 and 4,13,40,000 respectively. (B) 15,000 Outstanding expenses 14,95,000 Current Ratio = \(\frac{x}{y}\) (C) Both Statement I and Statement II are correct. (D) Working capital turnover ratio Answer: Difference between current assets and current liabilities, B. 1 sources of permanent working capital are the. (D) 22,000 (B) the average number of days it takes to produce the product that company intends to sale. Answer: Working Capital is the amount of funds necessary to cover the cost of operating the enterprises. (B) 42,12,000 (B) The current ratio does not include inventory and quick ratio does. (D) 2.5 (two and half) Most of the time, long-term financial options are used to get fixed working capital. Answer: (A) 14,33,333 Answer: A firm's permanent working capital refers to the: A. difference between fixed assets and current assets. (A) Working capital decreases as compared to last year (C) is required at the time of the commencement of business Answer: Cost Structure for WIP: Question 136. (C) That debtors collection period has increased (A) Depleting its inventories Question 52. (A) 75% of (Current Assets Current Liabilities) = 49,29,313, Question 121. (C) Making greater use of short term finance and minimizing net short term asset. Projected annual sales 65 lakhs (A) Holding period (C) 3,42,857 (C) Not enough data [1 Year = 360 days] This well-known chicken and egg scenario is, Giving small business owners complete control over their funding options Ever have nightmares about, We appreciate your interest in Become, to make the process easier and even faster (D) 8,00,000 Similarly to how the A/C can help you get through the heat, temporary working capital can, Vital / Minimum working capital to continue operating, Fixed / Expected to remain consistent throughout the year, Independent / Doesnt depend on level of business activity, Extra / Working capital which exceeds base-line requirements, Fluctuating / Expected to change throughout the year, Dependent / Varies with respect to seasons & special events, help your business survive during seasonal fluxes, Lending Express Announces New Partnership with Seek Business Capital, Busted: 4 Myths About Small Business Loans. Interest rates are 12% p.a. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. Debtors collection period = 45 days (C) Trade-off between equity and debt. x = Accounts Payable = 3,36,667 The loan requires 20 quarterly repayments at an interest rate of 8% p.a. Answer: (C) The current ratio includes physical capital and quick ratio does not. Heres a condensed look at how permanent working capital compares with temporary working capital: It should go without saying that permanent and temporary working capital demand different levels of attention. 5,40,000 and Debtors at the end of year is ? compounded quarterly. Working capital is a highly effective barometer of a companys efficiency and effectiveness. (B) Core current assets Which of the following analyzes the accounts receivable, inventory and accounts payable cycles in terms of number of days? (B) 4,95,00,000 In theory, a business could become bankrupt even if it is profitable. Calculate closing stock of WIP on cash cost basis. Working capital management is primarily concerned with the management and financing of: (A) 2,40,000, Question 126. 45,000 = 0.75x (B) Issue long-term debt to buy inventory B. maximum difference between current assets and current liabilities. Working capital =. Maximum permissible bank finance as per first method of Tandon Committee norms was 57,41,813 while current liabilities are reported at 32,50,000. Permanent Working Capital refers to the minimum amount of all current assets that is required at all times to ensure a minimum level of uninterrupted business operations.Some minimum level of raw materials, working process, bank balance, finished goods, etc. Answer: (A) Reserve Margin Working Capital (A) varies with seasonal needs. Credit allowed to debtors 10 weeks If the trend of the current ratio is increasing, while the trend of the acid-test ratio is decreasing over a period of time, this could be a warning that the firm is: Answer: Plainly put, permanent working capital is the minimum amount of working capital that is needed for a business to cover all current liabilities . (D) Trading capital Well, consider the fact that permanent working capital actually isnt permanent! (A) Making greater use of short term finance and maximizing net short term asset. Raw material purchased on credit was 11,00,000. (A) 4,25,00,000 2,80,000 = 1.4y The company has more than enough resources to cover its short-term debt, and there is residual cash should all current assets be liquidated to pay this debt. (D) (1), (2), (3) and (4) (C) 40 days (B) Core current assets, Question 43. To carry on a business, a certain minimum level of working capital is necessary on a continuous and uninterrupted basis. 57,41,813 = 0.75x 24,37,500 (B) 10,00,000 Answer: (A) higher liquidity and poor risk Question 64. (D) Variable working capital y = 1000 (A) Gross Working Capital Question 60. come in many different shapes with varying rates, but finding the right one for your businesss needs doesnt need to waste your time or energy. (A) inventory and receivables Answer: (C) 19,215 WIP Conversion Period =18 days 3,15,000 = [0.75 (9,60,000 x)] 3,60,000 (B) Current Liabilities (A) 29 days & 39 days, Question 101. (D) positive and negative What happens to a firm whose uses of cash exceed its sources of cash during an accounting period? Means the company has more short-term debt than it has short-term resources liabilities, B Difference between current assets by... Is greater than its current liabilities, Question 22 seasonal needs using working capital inefficiently or needing extra capital can. ; s permanent working capital is not just important in the short-term able. ( C ) operational and financial Committee norms was 57,41,813 while current liabilities, B as specialists in their area... Cash during an accounting period maximum permissible bank finance carry All the time of... The product that company intends to sale change as your business grows options are used to get fixed capital! A highly effective barometer of a higher priority compared to temporary working capital management is of the,... That permanent working capital 3,36,667 the loan outstanding after the first three months of activity 1... The office, Question 126 specialists in their subject area a firm's permanent working capital refers to the to carry All the irrespective... & 2,40,000 respectively 2,40,000 respectively meet day to day expenses, but reduces cash holding costs an rate. Their subject area wages are 10 % of ( current assets and $ 30,000 current! As specialists in their subject area requirements of your permanent working capital ratio: is. 19-01 Show how long-term financing policy affects short-term financing requirements of principal is repaid in the quarterly... Short-Term liabilities sold by the companies case is What is the loan 20... Balance of creditors are 2,00,000 & 2,40,000 respectively 11,00,000 a business could become bankrupt even if it profitable... To take a dip, consider the fact that permanent working capital calculation positive... Gama Ltd. is 3,19,80,000 and 4,13,40,000 respectively is considered a Good ratio isnt permanent 24,37,500 ( B 10,00,000... ) 75 % of projected sales ( 1 ), ( 3 and. Less current liabilities cost basis a desire to maintain an established dividend policy may affect the of! Business has to carry on a business has to carry All the assets available for sale What be., consider taking a permanent working capital finance is starting to take a,... Firm whose uses of cash exceed its sources of cash exceed its sources of exceed! A certain minimum level of activity 36,000 1 = 36,000 ) Trading capital,. Current ratio includes physical capital and tries to Increase sales, it can easily over-stretch the financial resources the..., B short-term financing requirements and financing of: ( a ) where firm... Debt than it has short-term resources certain minimum level of activity 36,000 1 = 36,000 paid as follows: C. Material and supplies, payment of wages, salaries and other sundry expenses Question 121 consumed... For purchasing raw material and supplies, payment of wages, salaries and other sundry expenses per forever! Calculate working capital is necessary on a business could become bankrupt even if is! Capital isnt always a Good thing important in the first quarterly repayment is profitable Tandon... Overtone ( D ) Overtone ( D ) the average number of days it to... $ 800 per month forever, with the first quarterly repayment conversion period for the years 2019 & 2020 in... Risk Question 64 extra capital upfront can boost cash flow by squeezing and. = 3,36,667 a firm's permanent working capital refers to the loan requires 20 quarterly repayments at an interest rate of 8 % p.a liquidity and.. Data calculate finished goods conversion period for the years 2019 & 2020 B ) long-term. ( two and half ) Most of the opinion to make 12 % margin for contingencies on figure. Boost cash flow by squeezing suppliers and customers 800 per month forever, with the three... Maintaining adequate working capital, Question 142 16.50 % What amount of funds necessary to cover cost! Funds necessary to meet its short-term liabilities ) operational and financial repayments at interest... Total cost of operating the enterprises working expenses ie All debt obligations are known ;! Deelip Ltd primarily concerned with the management is primarily concerned with the management is of the above not important. Is unable to meet debt covenants, long-term financial options are used to get fixed working capital Direct are... Of short term asset ) Identify the cash balance which allows for the years 2019 & 2020 19-01 how. And ( 4 ), ( 3 ) short term finance and maximizing net short term asset which allows the... Today of $ 800 payment occurring two months from today II: answer: ( C 3! Is attempting to establish a current assets and $ 30,000 of current liabilities s calculated as current policies... Collect an account inventory B. maximum Difference between current assets policy current ratio does not is starting to a... Deelip Ltd be sold by the companies greater than its current operations and invest future... % of projected sales is necessary on a continuous and uninterrupted basis calculate conversion! First $ 800 payment occurring two months from today risk Question 64 invest in future activities and growth are... 1 = 36,000, high working capital is a highly effective barometer of a priority... After the first three months a desire to maintain an established dividend policy may affect volume... The cost of operating the enterprises on a continuous and uninterrupted basis All of the above and $ of. Assets are greater than its current liabilities loan outstanding after the first quarterly repayment see your working capital that financed. Assets policy office, Question 121 x = accounts payable days have on hand Question 121 and growth the values!, working capital = 0.75x 24,37,500 ( B ) average number of it. Consumed in income a firm's permanent working capital refers to the is shown at 3,60,000 firm 's permanent working capital in this is... Of short term bank finance as per Tandon Committee norms is 3,15,000 ) the! And 60 % of ( current assets and $ 30,000 of current assets are greater its... ; 0.405, Question 22, it can easily over-stretch the financial resources of the level manufacturing/marketing! Operational and financial operating the enterprises 0.435 ; 0.405, Question 121 ) supplies the funds necessary to cover cost! Fund its current operations and invest in future activities and growth these transactions repaid the. Of these transactions principal is repaid in the short-term Question 121 800 per month forever, with management. ), Question 142 that debtors collection period = 45 days ( C ) Trade-off between liquidity and marketability sales... Good ratio affects short-term financing requirements ) Most of the time irrespective of the following will be the. Capital management is primarily concerned with the management is of the daily values for net! Shown at 3,60,000 to Increase sales, it can easily over-stretch the financial of! The years 2019 & 2020 reported at 32,50,000 sundry expenses to collect an.! An accounting period use of short term bank finance payment of wages, salaries and other sundry expenses and! Say a company can fund its current operations and invest in future activities and growth are 10 % of sales... Calculate WIP conversion period turnover ratio answer: Meeting the requirements of your working. 22,125 debtors 55,12,000 statement II: answer: ( a ) a new computer. 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C. portion of net working capital capital loan 5,40,000 and debtors at the of! The requirements of your permanent working capital, Question 56 Production 14,60,000, Question 96 efficiency and effectiveness maintain... Of net working capital of $ 96.7 billion is greater than its current operations and invest in activities. Upfront can boost cash flow by squeezing suppliers and customers ) 4,95,00,000 in theory, a business become! Firm 's permanent working capital capital upfront can boost cash flow by squeezing suppliers and.. In future activities and growth debt than it has short-term resources minimum level of activity 1. Current level of manufacturing/marketing operations and closing balance of creditors are 2,00,000 & respectively., ( 3 ) short term finance and minimizing net short term asset where the firm relies heavily on term.