Question no. 1 Soln.
a) Estimation of Inventory, Receivables and Payables Period:
*Assuming 360 days in a year
1. Inventory Period
RM Inventory 800
a. RM Inventory Period = = =60 days
RM Consumption per day 4800/360
b. WIP Inventory Period =
WIP Inventory 200
= =10 days
Cost of WIP per day (4800+ 0.5 x 1200+0.5 x 3600) /360
*Assuming uniform production cycle and 100% input at the beginning of the process, cost of
WIP = RM cost + 50% of Wages & Allocable Overheads
c. FG Inventory Period =
FG Inventory 1000
= =37.5 days
Cost of Goods Sold per day (4800+1200+ 3600) /360
*Assuming all overheads are direct, & hence included in COGS, also ignoring change in WIP &
FG stocks
Total Inventory Period = 107.5 days
2. Receivables Period
Receivables 1000
Receivables Period ¿ = =30 days
Credit Sales per day 12000 /360
*Assuming all sales are credit sales
3. Payables Period
Payables 400
Payables Period¿ = =30 days
Credit Purchases per day 4800 /360
*Assuming credit purchases include only raw materials, raw materials purchases are equal to raw
material consumption (i.e., ignoring changes in RM stocks for which information is also not
available) and that all raw material purchases are on credit.
Operating Cycle = Inventory Period + Receivables Period = 107.5 days + 30 days = 137.5 days
Cash Cycle = Operating Cycle – Payables Period = 137.5 – 30 = 107.5 days
b) Forecast of working capital requirement
i. Forecasted Income Statement
* Assuming that sales realisation per unit, & RM, wage & overhead costs per unit remain the same as
in 2022-2023. Ignoring impact of inventory changes on costs (as done in a.)
Rs in ‘000 2022-23 2023-24F
Sales Volume (‘000 240 360
units)
Sales 12,000 12000/240 x 360
=18,000
Raw materials 4,800 4800/240 x 360 =
7200
Wages 1,200 1200/240 x 360 =
1800
Overheads 3,600 3600/240 x 360 =
5400
Profits 2,400 3,600
ii. Working capital requirement
Rs in ‘000 Days Days 2023-24F
2022-23 2023-24
RM Inventory 60 7200*60/360=1200 @30 30 x 7200/360 = 600
WIP Inventory 10 10 x 10 10 x (7200+0.5x7200)/360
(7200+0.5x7200)/360 = = 300
300
FG Inventory 37.5 37.5 x 37.5# 37.5 x
(7200+1800+5400)/360 (7200+1800+5400)/360 =
= 1500 1500
Receivables 30 30 x 18000/360 = 1500 @15 15 x 18000/360 = 750
(Sundry
Debtors)
Cash 3 3x 3 3 x (7200+1800+5400)/360
(7200+1800+5400)/360 = 120
= 120
Current Assets 3,270
Payables 30 30 x 7200/360 = 600 30 30 x 7200/360 = 600
(Sundry
Creditors)
Current 600
Liabilities
Working CA-CL 2,670
Capital
@ Since the company’s raw material inventory days and receivable days are higher than the industry
norm, it will try to improve its efficiency in line with competitors (lower of the two rule).
# Since the company’s finished goods inventory days are lower than the industry norm, the estimate
is based on company’s numbers.
Working capital required by company in 2023-24 = Rs 32,70,000 – 600,000 = Rs 26,70,000
(Note that working capital required in 2022-23 was CA-CL = [(800+200+1000+1000+200) – 400] x
1000 = Rs 28,00,000
Despite a 50% increase in turnover, working capital requirement is projected to decline in 2023-24
due to higher efficiency (lower raw material inventory and receivable days).