Fixed Capital & Working Capital

1 Mark Questions

1. How does inflation affect the working capital requirements of a company?

State. (Delhi 2014)

Ans. With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher with higher rate of inflation.

1. State how growth prospects affect the working capital requirement of a company? (Delhi 2013)

Ans. If the growth potential of a concern is perceived to be higher, it will require large amount of working capital, so that it will be able to meet higher production and sales target whenever required.

1. Name any two essential ingredients of sound working capital management.(All India 2010)

Ans. (i) Inventory management (ii) Receivable management

1. Define fixed capital. (All India 2010; Delhi 2010, 2009, 2008)

Ans. The amount of capital investment in fixed assets is called fixed capital, e.g. plant and machinery, land and building, etc.

1. What is working capital? (Delhi 2010, 2009, 2008; All India 2008)

Ans. Working capital is that part of total capital which is required for holding current assets. It may also be defined as an excess of current assets over current liabilities.

1. Identify the decision taken in financial management which affects the liquidity

as well as the profitability of business. (Hots; All India 2008)

Ans. Short-term investment decision or working capital decision affects the liquidity as well as the profitability of the business.

1. State why does the working capital needs for a service industry different from

that of a manufacturing industry? (Hots; All India 2008)

Ans. Service industries require no inventory and manufacturing overheads, hence, require less working capital.

4/5 Mark Questions

1. Explain any four factors which affect the working capital requirements of a company. (All India 2013)

Ans. Working capital is that part of total capital which is required for holding current assets. It may also be defined as an excess of current assets over current liabilities. The four main factors affecting working capital requirements are as follows

1. Production cycle It is the time span between the receipt of raw materials and their

conversion into finished goods. Length of production cycle affects the working capital requirement. If the duration of production cycle is longer, the working capital requirements to meet day-to-day expenses would be higher and vice-versa.

1. Business cycle At times of boom period in the market, e.g. Diwali, Guru Parv, etc.

The production as well as sales are likely to be higher. Whereas, the working capital requirement would be lower in times of depression in the market.

1. Nature of business A trading business needs less amount of working capital

because there is no processing of goods. On the other hand, the working capital requirement would be more in case of manufacturing business where raw materials are converted into finished goods.

1. Scale of operations A large scale organisation requires large amount of working capital as compared to a small scale organisation because the quantum of inventory, debtors and cash required is generally high.
2. Explain any four factors which affect the 'fixed capital' requirements of a company. (All India 2013)

Ans. The amount of capital investment in fixed assets is called fixed capital, e.g. plant and machinery, land and building, etc.

1. Nature of business While deciding the fixed capital requirement of a business

enterprise, its nature should be considered, e.g. trading concern needs lower investment in fixed assets as compared with a manufacturing organisation; since it does not require to purchase plant and machinery, etc.

1. Scale of operations A large organisation operating at a higher scale needs higher investment in fixed assets as compared to the small organisation.
2. Choice of technique A capital intensive organisation requires higher investment in plant and machinery. So, requirement of fixed capital would be higher. On the other hand, labour intensive organisation requires less investment in fixed assets.
3. Technology upgradation These days upgradation with the latest technologies is