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Question
Answer the question.
Briefly explain any four types of working capital required by a business concern.
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Solution
Working capital means the capital invested in working assets or current assets such as cash, stock of goods, debtors and short term investments, etc.
The various types of working capital are:
Permanent Working Capital: It refers to the minimum amount of working capital required permanently to operate the minimum level of business activity. It determines the financing requirement in the case of fixed assets is simply the cost of the asset. It is of two types: Initial and Regular working capital.
Variable Working Capital: It is the difference between networking capital and permanent working capital. The amount of temporary’ working capital depends upon the extent of extra demand in season. It is of two types: seasonal and special working capital.
Gross Working Capital: Gross working capital refers to the total amount of funds invested in the current assets.
Gross Working Capital = Book value of current assets Working Capital: Networking capital means the excess of current assets over current liabilities. Current assets include cash at bank, sundry’ debtors, cash in hand, bills receivable, etc. Current liabilities include bills payable, sundry creditors, short term loans, etc.
Net Working Capital = Current assets – Current liabilities
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RELATED QUESTIONS
Match the pairs
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Group A |
Group B |
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a. Fixed Capital |
1. Owned Capital |
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b, Overdraft facility |
2. Bearer document |
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c. Share certificate |
3. Investment in fixed assets |
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d. Debentures |
4. Current Account |
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e. Return on shares |
5. Application Money |
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6. Dividend |
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7. Investment in current assets |
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8. Borrowed capital |
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9. Savings Account |
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10. Registered Document |
Answer the following question:
The Return on Investment (ROI) of a company ranges between 10 - 12% for the past three years. To finance its future fixed capital needs, it has the following options for borrowing debt:
Option ‘A’: Rate of interest 9%
Option ‘B’: Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reasons in support of your answer. Also, state the concept being used in taking the decision.
Explain the following as factors affecting the requirements of working capital:
Nature of business
Explain the following as factors affecting the requirements of working capital:
Scale of operations
Write a word or a term or a phrase which can substitute the following statement :
The difference between current assets and current liabilities.
Companies with a higher growth potential are likely to
Current assets are those assets which get converted into cash
Higher dividend per share is associated with
______ refers to the decisions regarding where to invest so as to earn the highest possible returns on investment.
