Finance Numericals

Example 1: Find out the working capital cycle or cash conversion cycle and operating cycle with the help of following information: Cost of goods sold at Rs. 2, 60,000 and opening stock of raw material is Rs. 10, 000. Company XYZ sale 40% goods on credit and the total sales is Rs. 6, 70,000. The opening and closing balance of finished goods are Rs. 40, 000 and Rs. 20, 000 respectively. Company takes 6 days to convert work in progress into finished goods. The average debtors is Rs. 45, 000 and the closing balance of accounts payable is Rs. 38, 000. The credit purchase is Rs. 2, 90,000. Solution: average raw material = (10, 000+0)/2  = Rs. 5, 000  Raw material holding period = 365/cost of goods sold/average raw material = 365/2, 60,000/5, 000 = 365/ 52 = 7 days Average finished goods = opening finished goods +closing finished goods)/2 =(40, 000+20, 000)/2  = 30, 000 Finished goods holding period = 365/2, 60,000/30, 000 365/8.66 = 42 days Credit sales = 0.40*6

Working Capital Management: It is a management of inventory, cash and account receivable in a company. By managing working capital company is able to pay its day to day operating expenses. Formula: Net Working Capital = Current Assets – Current Liabilities Net Operating Working Capital = Operating Current Assets – Operating Current Liabilities Working capital Cycle: It is a process of conversion starts from purchasing a raw material and ends with receiving cash from debtors. It is also known as operating cycle. There are 5 stages in operating cycle: ·          Storage of raw material: It is a period in which raw materials are kept in store if there is a time for conversion of raw material into processing level. Raw material storage period = Average stock of raw material / Average daily consumption of raw material Average stock of raw material = (Opening stock + Closing stock) / 2 Average daily consumpti

Cash ratio: It tells about company’s ability to pay its current liabilities with the help of cash and cash equivalent and marketable securities. Higher the ratio better for the company. Cash ratio = (Cash + cash equivalent + marketable securities) / Current liabilities Example: Company A wants to start a new company and for that it borrowed a loan of Rs. 60, 000. The bank will grant a loan after considering the cash ratio with the help of following information: Short term investment Rs. 35, 000 Cash Rs. 10, 000 Accounts payable ---- creditors Rs.36, 000 Long term loan Rs. 1, 25,000 Solution: Cash ratio = (10, 000 + 35, 000) / 36, 000 = 45, 000 / 36, 000 = 1.25 It shows that the cash ratio of company A is not so good so, the chance of getting approval on loan is very low. Cash Conversion cycle: It shows how much time required by company to convert its inventory into cash sales. Higher the

Profitability ratio: This ratio helps to know the profit earned in relation to capital employed in a company. Gross Profit ratio: This ratio shows how much profit earn on sales. Higher the ratio better for the company. Gross profit %= (Cost of goods sold / Net sales) * 100 Operating ratio: It shows how much cost of goods sold and operating expenses are absorbed by sales. Lower the ratio better for the company. Operating profit % = (Cost of goods sold + operating expenses / net sales ) * 100 Net Profit ratio: It shows the overall profit earned by company through sales. Higher the ratio in comparison to previous year better for the company. Net Profit % = (Net Profit / Net Sales) * 100 Operating profit ratio: It ignored non-operating income and expenses. The total of operating profit and operating ratio are 100. Operating Profit % = (Operating Profit / Net Sales) * 100 Operating Profit = Gross profit – operating expenses Net profit = gross pro