Financing of Working Capital – CA Inter FM Question Bank

Financing of Working Capital – CA Inter FM Question Bank is designed strictly as per the latest syllabus and exam pattern.

Financing of Working Capital – CA Inter FM Question Bank

Question 1.
Answer the following:
Differentiate between Factoring and Bilis discounting. (Nov 2009, 2 marks), ( May 2015,

4 marks)
OR
Distinguish between factoring and bill-discounting. (May 2013, 4 marks)
OR
What is ‘Bill discounting’? How does it differ from ‘Factoring’? Explain. (Nov 2017, 4 marks)
Answer:
Difference between Factoring and Bill Discounting

Basis of Difference	Factoring	Bill Discounting
1. Meaning	Factoring is a continuous arrangement between a financial institution, (namely the factor) and a firm (namely the client which sells goods and services to trade customers on credit. As per this arrangement, the factor purchases the client’s trade debts including accounts receivables either with or without recourse to the client, and thus, exercises control over the credit extended to the customers and administers the sales ledger of his client.	Bill discounting refers to the bill given to the bank & bank then gives the finance of that bill. This is used where there is urgent need of funds.
2. Parties	Factors, clients, debtors	Drawer, drawee, and payee
3. Type of	Management of book debts	Borrowing from Commercial Bank
4. Also known as	invoice Factoring	Invoice Discounting
5. Applicable Act	No specific Act	Negotiable Instruments Act

Question 2.
List the various sources available for financing working capital requirements.
Answer:
1. Spontaneous sources of Finance

• Trade credit
• Bills Payable
• Accrued Expenses

2. Inter-corporate Loans and Deposit
3. Commercial Papers
4. Funds generated from operations
5. Public deposits
6. Bills discounting
7. Bill Re-discounting Scheme
8. Factoring

Question 3.
Answer the following:
Enumerate the various forms of bank credit in financing working capital of a business organisation. ( May 2010, 2 marks)
Answer:
Forms of Bank Credit: The various forms of bank credit in financing the working capital of a business organisation are:

1. Cash credit;
2. Bank overdraft;
3. Bills discounting
4. Bill acceptance;
5. Line of credit;
6. Letter of credit; and
7. Bank guarantees.

Question 4.
Answer the following:
What are the forms of bank credit? (Nov 2012, 4 marks)
Answer:
Forms of Bank Credit

1. Cash Credits	Cash Credit is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank. Interest is not charged on the full amount of the advance but on the amount actually availed of by him.
2. Bank Overdraft	Under this facility, customers are allowed to withdraw in excess of credit balance standing in their Current Account. A fixed limit is therefore granted to the borrower within which the borrower is allowed to overdraw his account.
3. Bills Purchased/ Discounted	These advances are allowed against the security of bills which may be clean or documentary. Usance bills maturing at a future date or sight are discounted by the banks for approved parties. The borrower is paid the present worth and the bank collects the full amount on maturity.
4. Advance against documents of title to goods	A document becomes a document of title to goods when its possession is recognized by law or business custom as possession of the goods like bill of lading, dock warehouse keepers certificate, railway receipt, etc. An advance against the pledge of such documents is an advance against the pledge of goods themselves.
5. Advance against supply of bills	Advances against bills for supply of goods to government or semi-government departments against firm orders after acceptance of tender fall under this category. It is this debt that is assigned to the bank by endorsement of supply bills and executing irrevocable power of attorney in favour of the banks for receiving the amount of supply bills from the Government departments.

Question 5.
Write Short note on Maximum Permissible Bank Finance
Answer:
Maximum Permissible Bank Finance:
(i) Under Tandon Committee Norms
Maximum Permissible Bank Finance shall be computed under any of the following methods:
(a) MPBF = 75% of (Current Assets – Current Liabilities)
The Borrower has to contribute a minimum of 25% of the working capital gap from long MPBF term funds.

(b) MPBF [75% of Current Assets] – Current Liabilities The Borrower has to contribute a minimum of 25% of total current assets from long-term funds.
(c) MPBF = [75% of softcore current Asset] – Current Liabilities The Borrower has to contribute the entire hardcore current assets and a minimum of 25% of the balance of the current assets from long-term funds.

(ii) New Credit Policy: The RBI vide its credit policy of 1997 scrapped the concept of MPBF.
The new credit policy is as under

Credit Requirement	Credit Policy/Scheme
upto ₹ 25 Lakhs	A credit limit will be computed after detailed discussions with the Borrower, without going into a detailed evaluation.
₹ 25 Lakhs, but up to ₹ 5 crores	Credit Limit can be offered up to 20% of the projected Gross Sales of the Borrower.
Large Borrowers not falling in the above categories	Cash Budget System may be used to identify the Working Capital needs.