Determining working capital requirements, Cost Accounting

Assignment Help:

 Understanding the existing capital requirements and how these are financed will assist us in understanding the process of financing of business and the flow of funds inside the business. The first question we should answer is how much working capital is required to start the operation. We could find out the amount of capital required and compare the similar with existing capital to notice whether it is sufficient and whether there is any excess obtainable for future use. Please note which we are not applying precise techniques of cash management or liquidity planning as that is beyond the scope of this section.

We know by Ramsons that operating needs of the business requires one month's cash expenses but payment for creditors to be remained in cash. Such is a minimum of Rs. 30,000 cash on hand is required through Ramsons comprising Rs. 4,000 his withdrawal.

Ramsons have to remain three months sales in inventory. It means that throughout the first month he starts along with three months' sales in the form of inventory. We identify that the sales per month is Rs. 1,50,000 sold at a markup of 25 percent upon sales. Thus, inventory needed to be maintained is three times of 75 % of sales.

It is: 1,50,000 x .75 x 3 = Rs. 3,37,500

Likewise, we know from the information obtainable that every month one-third of the sales are made on cash and 2/3 on credit to be collected in four installments. It means, cash collection throughout the month will be cash sales plus one-fourth of credit sales of the period and one-fourth of three previous months' credit sales. Likewise in the first month we will be actually making one half of the sales for cash and another half of on credit.  So example is:

Total Sales

Cash Sales

Rs. 1,50,000

 

 

Rs. 50,000

Credit Sales

First Instalment in Cash

Rs. 1,00,000

 

 

Rs.25,000

 

Total Cash Collection

 

 

Rs. 75,000

Credit period of the sales will be given as:

First month sales upon credit less first instalment is Rs. 75,000. It means:

Rs. 75,000 credit for one month

Rs. 50,000 credit for one month

Rs. 25 000 credit for one month

It is equivalent to Rs. 75,000 sales made for credit of two months. In terms of working capital need, we need one month's financing of the cost of sales regarding to Rs. 1,50,000 sales. It is Rs. 1,12,500 is required for financing this amount.

Hence, we could summaries Ramson's need for funds for financing current asset to begin operations, given as:

3 months' inventory

3,37,500

 

One month's expenses as cash

 

30,000

 

3,67,500

Throughout the first month Ramsons will sell one-third of the inventory generating Rs. 75,000 in cash and another half of Rs. 75,000 to be collected into three instalments. Hence we require some additional funds to finance our granting credit for the customers.

Likewise,  we  would  require  to  replenish  the  inventory  and  make  payments  for expenses. We shall examine such along with the assist of the balance sheet and profit and loss account of Ramsons for the starting four months.


Related Discussions:- Determining working capital requirements

Tracking direct materials, Tracking Direct Materials Jack keeps full re...

Tracking Direct Materials Jack keeps full records of the material released to each job. When Donnie gathered up light bulbs, tape, breakers, wire, and wire nuts on the morning

Compute the days'' sale, Year Ending April 2009, 2009 April 30, 2008 Net Sa...

Year Ending April 2009, 2009 April 30, 2008 Net Sales $10,148,082 $10,070,778 Accs Receivable 1,171,797 1,161,481 Assume that the accounts receivable (in thousands) were $996,852 a

Difference between cost accounting and financial accounting, The difference...

The difference among "cost accounting" and "financial accounting are terms demote to the accounting techniques used internally by a company's management to explain the costs of run

Irrelevant cost., what is irrelevant cost and give example

what is irrelevant cost and give example

Attainable standards and current standards, Attainable Standards and Curren...

Attainable Standards and Current Standards Although the standard must be set high sufficient that achievable and it has to be worked for. Attainable standards must provide a c

Accounting treatment of spoilage costs, Accounting Treatment of Spoilage Co...

Accounting Treatment of Spoilage Costs 1) Normal Spoilage Costs: These costs are assigned to the good output utilizing two approaches as: (i) Omission Approach:  Under th

Material handling, Material Handling The objective is to ensure about ...

Material Handling The objective is to ensure about the goods are delivered to the right places at the right instance and in aright manner to ignore delays, unnecessary and con

Concepts of balanced scorecard and performance measurement, A college curre...

A college currently measures its performance by comparing the actual costs against its budgeted costs for the year.Now that the college is facing increased competition from Various

Prepare the draft sfp for the fiscal year, Prime Essentials Limited is a sm...

Prime Essentials Limited is a small private corporation. The owner plans to approach the bank for an additional loan or a line of credit to facilitate expansion. The company bookke

Changes in recreational use value - water quality, You perform a travel cos...

You perform a travel cost study that looks at the relationship between the cost of visiting a lake (including costs of travel, value of time spent not working & any entry fees), it

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd