Question 3 OR (i) part ii
Permanent and temporary working capital
5 marks
- Time to write
- About 10 minutes
From an older CBCS paper
Question
Question 3 OR (i) part ii · 5 marksWrite short notes on these:
- Permanent and Temporary working capital
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- short notesA note opens with the meaning, then two or three key points. No long introduction.
What the paper leaves open
One of the three notes in the printed Q3 OR; the second note (ABC system of inventory management) is outside the current syllabus.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Permanent working capital: meaning, regular and reserve 2 marks 3 min
- 2 Temporary working capital: meaning, seasonal and special 2 marks 3 min
- 3 Importance 1 mark 2 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Steps 1 and 2 opens with the meaning: a one-line definition, the quickest mark in each.
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.
Try it first. About 10 minutes for 5 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Classification by time. On the basis of time, working capital is classified as permanent (fixed) working capital and temporary (variable) working capital.
Permanent (fixed) working capital. It is the minimum amount of current assets needed all the time to use the fixed facilities effectively and to keep current assets circulating: from cash to inventories, from inventories to receivables and from receivables back to cash. This minimum level never falls to zero while the business runs, and it grows as the business grows. It is further divided into regular working capital (needed for that circulation) and reserve working capital (an amount over the regular need, kept for contingencies such as strikes, rising prices or depression).
Temporary (variable) working capital. It is the extra working capital needed over and above the permanent level to meet seasonal demands and special exigencies. It is divided into seasonal working capital (for seasonal needs) and special working capital (for special exigencies, such as an extensive marketing campaign or research). It rises and falls with the level of activity.
Importance. Working capital is the lifeblood of a business, and adequate working capital brings:
- Solvency, through an uninterrupted flow of production;
- Goodwill, because payments are made promptly;
- Easy loans from banks on favourable terms, given a good credit standing;
- Cash discounts on purchases, which reduce cost;
- Regular supply of raw materials and continuous production;
- Regular payment of salaries and wages, which raises employees' morale and efficiency.
Where the 5 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Permanent working capital: meaning, regular and reserve | 2 |
| 2 | Temporary working capital: meaning, seasonal and special | 2 |
| 3 | Importance | 1 |
| Total | 5 |
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