Test: Business Arithmetic - 2 - CUET Commerce MCQ

Inventory control is not related to assets but to stock of items in which the business deals. For instance, the business is sale of computers; then the stock of computers must be maintained for inventory control. If an asset is purchased like land and building, a record must be maintained for that also, but that is not inventory control.

Inventory characteristics include how much inventory to order, the order cycle, which is how often to place orders for the product; as well as supplier information, product cost, product lead time, minimum and maximum order quantities, lot size availability, product unit of measure (pieces, each, tons, bags) and other product characteristics, such as country of origin and manufacturer's reference number. For inventory control, economic order quantity has minimum total cost per order, inventory carrying costs increases with quantity per order and ordering cost decreases with lot size.

In inventory control, holding costs do not affect the ROL. These costs are those associated with storing inventory that remains unsold. These costs are a component of total inventory costs, along with ordering and shortage costs. A firm's holding costs include the price of goods damaged or spoiled, as well as that of storage space, labour, and insurance.

Working capital refers to the capital mobilised for meeting day-to-day financial obligations of the company. The amount of available working capital is a measure of a firm's ability to meet its short-term obligations. Sources of working capital are net income, long-term loans, sale of capital assets, and injection of funds by stockholders. Ample working capital allows management to take advantage of unexpected opportunities, and to qualify for bank loans and favourable trade credit terms.

Balance in dividend equalisation fund is not a component of working capital. This is a buffer account to stabilise dividend and is maintained to compensate when profit is poor, so that a certain level of dividend can be continued. This account is not a part of working capital.

By the excessive working capital, the funds remain idle as the company has more funds than required. When funds remain idle, no profit is earned on idle funds. Hence, proper rate of return is not earned on the investment of the company.

Yield is defined as the income return on investment. It is calculated by dividing the profit earned on an investment by the cost of that investment. For instance, an investment with a profit of $100 and a cost of $100 would have an ROI of 1, or 100% when expressed as a percentage.

Net investment/Total equity or shareholders' fund is the return on investment which determines how efficiently a business is using the money invested by shareholders to generate profits. If a shareholder makes an interest-free loan to the company, this amount should be included in the total equity even though it is a liability. This ensures that the ROI is calculated on the total investment (at risk amount) of the shareholders.

The return on equity capital ratio is obtained by dividing net profit (after tax) less preference dividend by Equity capital.
his ratio establishes the relationship between net profit available to equity shareholders ad the amount of capital invested by them. It is used to compare the performance of company's equity capital with those of other companies, and thus help the investor in choosing a company with higher return on equity capital.

The reorder level of stock is the fixed stock level that lies between the maximum and minimum stock levels. At the reorder stock level, an order for the replenishment of stock should be placed. It is calculated as:
Re-order Level = Maximum Consumption x Maximum Re-ordering Period
Hence, option 1 is the answer.