Discuss the concept of working capital what shall be the repercussions if the firm has
- Shortage of working capital
- Excess of working capital
Every business concern should have adequate working capital to run its business operations.
It should have neither redundant or excess working capital nor inadequate or shortage of
working capital. Both excess as well as short working capital positions are bad for any business.
However, out of the two, it is the inadequacy of working capital which is more dangerous
from the point of view of the firm.
Shortage of working capital
Disadvantages or Dangers of Inadequate Working Capital
1. A concern which has inadequate working capital cannot pay its short-term liabilities
in time. Thus, it will lose its reputation and shall not be able to get good credit
facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favourable market conditions
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The Time Period Concept (Periodicity Concept)
The following is the Trial Balance of a trader as at 31st December, 2001:
Adjustments:
- Stock at the end was Rs. 78,600
- Included amongst the debtors is Rs. 3,000 due from Zeenat and included amongst the creditors is Rs. 1,000 due to her.
- The effect of advertising not yet expired, a quarter of the amount ‘Printing and Advertising’ is to be carried forward to the next year.
- Reserve 2 per cent for discount on Debtors and create a bad debts reserve at 5 percent.
- A depreciation of 10% p.a. is to be written off Furniture and fittings.
- Wages owing on 31st December, 2001 is Rs. 300, salaries owing Rs. 500 and carriage owing Rs. 100.
- Prepaid insurance is Rs. 80.
- Furniture which stood at Rs. 600 in books Ist January, 2001 was disposed of at Rs. 290 on June, in part exchange for new furniture costing Rs. 520. A net invoice at Rs. 230 was passed through the purchase-day book.
- Purchase Invoice amounting to Rs. 400 had been omitted from the books.
- A Neon-sign costing Rs. 100 is included in Advertising.
- Two dishonored cheques for Rs. 200 and Rs. 300 respectively has not been entered in the cast book. The first for Rs. 200 is known to be bad. In the case of a second cheque for Rs. 300, it is expected that 75% of it would be realized.
- Private purchase amounting to Rs. 600 had been included in the Purchase Day Book.
- Charge full year’s interest on Deposit with Pran at 7% p.a.
- Provide for interest on Bank loan for the amount due.
Prepare Final Accounts.
The following details relates to the two machines X and Y:
Annual income after tax and depreciation:
Overhauling charges at the end of third year Rs. 25,000 on machine X. Depreciation has been charged at straight line method. Discount rate is 10%? P.V.F. at 10% for five years are 0.909, 0.826, 0.751, 0.683 and 0.621. Suggest which project should be accepted.
Discuss the concept of working capital what shall be the repercussions if the firm has
- Shortage of working capital
- Excess of working capital
Concept of conservatism
: From the following Balance Sheets of Sriramco, prepare
(a) Statement of Changes in Working Capital, and (b) Funds Flow Statement: Balance Sheet of Sriramco as on 31st December…
The following additional information is also available
- A machine has been sold for Rs. 40,000 whose written down value was Rs. 36,000.
Depreciation of Rs. 15,000 has been charged on plant in 2001;
- A piece of land had been sold out in 2001 and the profit on the sale has been credited to
capital reserve;
- An interim dividend of Rs. 30,000 has been paid in 2001;
- Income tax paid during 2001 amounts to Rs. 45,000;
- Preference Shares were redeemed at 5% premium.
The capital structure of Bombay Refrigeration Company Ltd. Consists of an equity share capital of Rs. 3, 00,000 (share of Rs. 10 par value) and Rs. 3,00,000 10% debentures. Sales increased by 20% from 30,000 to 36,000 units, the selling price is Rs. 10 per unit. Variable cost Rs.6 Per unit and fixed costs amount to Rs. 50,000 The company’s tax rate is 50%.
You are required to compute the degree of operating leverage, degree of financial leverage and degree of combined leverage.