Working capital, Cost Accounting

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We have earlier explained working capital by total current assets less current liabilities. It, in other words, implies that all the assets held through the business along with the objective of conversion in cash as including cash during an operating cycle of the business. Of these assets, a part is financed through short-term credits that are to be met during the operating cycle representing current liabilities. Hence current assets less current liabilities or else working capital demonstrates amount of resources spent in current assets from sources of finance but the current liabilities also. Such net amount is also the amount obtainable for use in the business in the appearance of fund. Consider the subsequent illustration.

Ramsons are a retail outlet dealing in domestic appliances and entertainment electronics equipment, owned through Ram. The investment into the showroom, display counters,' furniture, cash register, fixtures and so on is Rs. 6, 00,000. Ram decides to utilize straight line depreciation at the rate of 10 percent per-annum.

Ramson's evaluated sales is Rs. 1,50,000 per month: 50,000 cash sales and Rs. 1,00,000 on credit to be collected in four equivalent monthly installments. All sales are made at 25 percent margin on selling price.

Sales and supply constraints would warrant carrying three months sales needs in the form of inventory. Likewise, month's cash expense requirements have to be conduct in cash balance.

Initial inventory is to be bought for cash and replenishment purchases will obtain a month's credit from suppliers.

Average monthly cash need for meeting operating expenses but payment for purchases amount to Rs. 26,000. Ram requires withdrawing Rs. 4,000 per month for his personal requirements.

1.  How much working capital will Ramsons need to start operations?

2. Will he need additional working capital throughout the first four months? Otherwise will he have surplus working capital throughout the first four months?

You can instinctively answer such questions through saying that Ramsons requires working capital to pay for inventory or for expenses and for keeping safe cash balance. You can put also a statement that Ramsons will obtain funds from operations to meet several of these needs. To be more exact, how much money does he need? This could be done through working out a schedule of cash payments and cash receipts on a monthly basis. This is also possible for us to prepare proforma monthly balance sheet and profit and loss account. You can also see that we have chosen the first four months consciously as it completes one operating cycle of the business.

RAMSONS: Schedule of Cash Payments

Month

January

Explanation

Operating Expenses

            Amount Rs.

26,000

            Total Rs.

 

 

Withdrawals

4,000

30,000

 

February

January Purchases

1,12,500

 

 

 

Operating expenses

26,000

 

 

 

Withdrawals

4,000

1,42,500

 

March

February Purchase

1,12,500

 

 

 

Operating expenses

26,000

 

 

 

Withdrawals

4,000

1,42,500

 

April

March purchases

1,12,500

 

 

 

Operating expenses

26,000

 

 

 

Withdrawals

4,000

1,42,500

 

RAMSONS: Schedule of Cash Receipts

991_WORKING CAPITAL1.png

Opening balance sheet of Ramsons will be as given below:

         RAMSONS: Balance Sheet as of January 1,2003

Assets

Rs.

Liabilities and

Rs.

 

 

 

Capital

 

Fixed Assets

 

6,00,000    Capital

 

9,67,500

Inventory

 

3,37,500

 

 

Cash

 

30,000

 

 

 

 

9,67,500

 

9,67,500

We have assumed here the whole asset needs are financed by owner's capital. Working capital of Ramsons on the January 1, 2003 year is as given:

Current Assets: Inventory

3,37,500

 

Cash

30,000

 

Total Current Assets

Less: Current Liabilities

 

3,67,500

Nil

 

Working Capital

 

3,67,500

 

 

 

                                                         RAMSONS: Schedule of Cash Balances                                

   January        February       March           April

Opening Balance

30,000

75,000

32,500

15,000

Cash Receipts

75,000

1,00,000

1,25,000

1,50,000

Total Cash available

1,05,000

1,75,000

1,57,500

1,65,000

Less: Cash Payments

30,000

1,42,500

1,42,500

1,42,500

 

Cash Balance

 

75,000

 

32,500

 

15,000

 

22,500

 

RAMSONS: Profit and Loss Account for the Month ending

31st January               28th February                31st March                      30th April

Sales

Less: Cost

 

 

 1,12,500

1,50,000

 

 

 

1,12,500

1,50,000

 

 

 

1,12,500

 

1,50,000

 

 

 

1,12,500

1,50,000

of Sales

 

 

 

 

 

 

 

 

 

 

 

 

Other

Expenses

 26,000

 

 

26,000

 

 

26,000

 

 

 

26,000

 

Depreciation

 5,000

1,43,500

 

5,000

1,43,500

 

5,000

 

1,43,500

 

5,000

1,43,500

Net Profit:                         6,500                          6,500                          6,500                          6,500

 

RAMSONS: Balance Sheet as at the end of

 

Assets

31st January

2003

28th February

2003

31st March

2003

 

30th April

2003

Fixed Assets

6,00,000

6,00,000

6,00,000

 

6,00,000

Less: Depreciation

5,000

10,000

15,000

 

20,000

 

Net Fixed Assets

 

5,95,000

 

5,90,000

 

5,85,000

 

 

5,80,000

 

Inventory

 

3,37500

 

3,37,500

 

3,37,500

 

 

3,37,500

Receivables

75,000

1,25,000

1,50,00

 

1,50,000

Cash

75,000

32,500

15,000

 

22,500

 

Total Current

Assets

 

4,87,500

 

4,95,000

 

5,02,500

 

 

5,10,000

Total Assets

10,82,500

10,85,000

10,87,500

 

10,90,000

Liabilities and

Capital

 

 

 

 

 

Capital

9,67,500

9,67,500

9,75,000

 

9,77,500

Add: Retained

Earnings

2,500

5,000

1,12,500

 

1,12,500

Owner's Equity

9,70,000

9,72,500

9,75,000

 

9,77,500

Accounts Payable

1,12,500

1,12,500

1,12,500

 

1,12,500

 

 

 

10,82,500

 

10,85,000

 

10,87,500

 

 

10,90,000

 

 

 

 

 

 

 

 

RAMSONS: Schedule of Working Capital

369_WORKING CAPITAL.png

Funds from Operations

Net Profit

     6,500

 6,500

 6,500

6,500

Add: Depreciation

    5,000

5,000

 5,000

5,000

Total funds generated from operations

                                             11,500                 11,500                 11,500                 11,500


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