Long Type Questions - Business Arithmetic, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. What is working capital ? What is the need of working capital ? (TBQ) (6 marks)
Ans. Working capital is the money needed to fund the normal day-to-day operations of a business. Need for working capital are as follows :
(i) For procuring or investing in long term assets : land, building, machinery, equipment, etc. These are typically known as fixed assets. Money invested on these items does not result in direct cash inflow for the business.
(ii) For buying raw materials, packing materials, paying salaries, rent and for many other services and/or materials used in the production or service. In other words, it is needed for day-to-day operations of a business.

Q2. Illustrate with an example how the working capital is calculated. (6 marks)
Ans. Working capital or circulating capital is the sum of all those expenditures which are repetitive in nature. It can be estimated by using following steps :
(i) Estimate the number of units to be produced in a specified period.
(ii) Estimate the cost of variable inputs i.e., labour cost, raw material cost, etc.
(iii) Estimate the period after which the revenue can be received from the sale.
(iv) Calculate the working capital by multiplying the cost of variable inputs with one unit more of the period of time needed for obtaining the revenue.
Suppose in a week 200 soaps are to be produced. The cost of variable inputs is ` 9,500. Also the revenue is to be obtained back after two week. Then :
Working capital = ` 9,500 × (2+1) = ` 28,500

Q3. What do you mean by an operating cycle ? What does it indicate ? (6 marks)
Ans. Adequate working capital is required for the smooth running of any business. It is required by a business for meeting day-to-day business expenses to complete business cycle or the operating cycle.
The working capital of a business keeps on circulating or changing since the money circulates in various forms of assets in a continued manner.
In a business concern operating cycle begins with outflow of cash towards the :
(i) Purchase of raw material.
(ii) Payment of labour, power, fuel and other expenses.
(iii) Converting the raw materials into work-in-progress and converting them into finished goods.
(iv) Sale of finished goods for cash or credit. If on credit then conversion of account receivable into cash.
(v) This operating cycle indicates that funds once tide up in the form of raw material are later converted into the form of finished goods.
(vi) In a manufacturing concern there is a time gap between the first step of purchasing of raw -materials to last step of selling goods and realising cash. This time duration is called operating cycle. It is also called the “changing” or “circulating capital” because money circulates in various forms of assets in a continued manner.

Q4. Explain the factors determining the working capital requirements. (6 marks)
Ans. Following factors determine the working capital requirements :
(i) Turnover : Higher is the sales turnover, lower is the requirement of working capital. On the other hand, lower is the sale turnover, higher is the requirement of working capital.
(ii) Tax Liability : Increase in tax liability increases the requirement of working capital and decrease in tax liability of the enterprise decreases the need of working capital.
(iii) Size of Enterprise : Larger in the size of enterprise, larger is the requirement of working capital.
(iv) Nature of the Enterprise : Requirement of working capital is dependent on the type of enterprise. Enterprise producing heavy machines needs more working capital, as their operating cycle is longer.
(v) Operating Cycle : Longer is the length of operating cycle longer is the requirement of working capital. This is due to the fact that more money is needed for making stocks, purchasing raw materials, etc.
(vi) Stock of Inventory : If the enterprises perfer to make a larger stock of finished, semi-finished goods and raw materials, then more working capital is required.