Prepare an estimation of working capital, Managerial Accounting

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Prepare an estimation of working capital needs from the subsequent information of a trading relates with:

(a)

Projected Annual Sales

1,00,000

(b)

Selling Price

Rs.8 per unit

(c)

Profit Margin on Sales

25%

(d)

Average Credit Period Allowed to Customers

8 weeks

(e)

Average Credit Period Allowed by Suppliers

4 weeks

(f)

Average Stock Holding in terms of Sales Requirement

12 weeks

(g)

Allow 10% for Contingencies

 

Solution:

 Statement demonstrating working Capital Requirements

(a)

Current Assets

Stock (12 Weeks)

Rs.

1,38,462

 

(Rs.6,00,000 × 12/52)

92,308

 

Debtors (8 weeks)

2,30,770

 

Rs. 6,00,000 × 8/52)

 

Less:

Current Liabilities

46,154

 

Creditors (4 weeks)

 

 

(6,00,000 × 4/52)

 

 

Net Working Capital (A-B)

1,84,616

Add:

10% for Contingencies

18,462

 

Total Working Capital Required

 

Working Notes

(i) Cost of Goods Sold

Sales = Rs. 1,00,000 . 8 = Rs. 8,00,000

Profits = Rs. 8,00,000 . 25%  = Rs. 2,00,000

Cost of Sales = Rs. 8,00,000-2,00,000= Rs. 6,00,000

(ii)  As, it is a trading concern; hence cost of sales is treated as purchases.

(iii) Profits have been ignored since profits may or may not be utilized as source of working capital.


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