1. Working capital is the capital that a company uses for its day to day operations. Working capital is computed using the formula: Working capital = current assets – current liabilities. 2. Determinants of working capital requirements are – nature of business, seasonality of operations, production policy, market conditions and conditions of supply. A service company will have a lower working capital requirement than a manufacturing company. Firms with seasonality in operations will have higher fluctuations with regards to their working capital requirements. Market conditions in the form of degree of competition will affect working capital requirements. Higher competitive pressure will increase working capital requirements. 3. Three major decisions that managers have to take while performing the finance function are: (i) Investment decision – Managers have to select those assets that the business will invest in. It is also known as capital budgeting decisions. (ii) Financing decision – These decisions pertain to determining how the total funds that are required for the business will be obtained – will it be through debt or equity or a mix of debt or equity. (iii) Dividend decision – This pertains to determining what quantum of earnings should be distributed to shareholders as dividends and what quantum should be retained for meeting future growth requirements of the company. 4. Financial management involves planning, directing, monitoring and controlling the monetary resources of a company in such a manner that the goals and objectives of the company are achieved in an efficient manner. It involves management of capital budgeting, capital structure, working capital management, etc. Financial management is important as it helps an organization to set clarity towards its financial goals and helps in efficient utilization of resources. 5. Cash flow is not a suitable judge of profitability as it merely shows the changes in cash position of a firm in a financial year from its operating activities, from its financing activities and from its investing activities. Cash flow statement does not help us to determine gross profit margins, operating profit margins and net profit margins. We can just gauge the reason for changes in cash position in a year. 6. Financial risk refers to all kinds of risk associated with a financial transaction and an investment transaction. It can be in the form of credit risk, asset backed risk, investment risk etc. These risks arise due to the fact that there is a probability of loss that is inherent in any financing and investment method and this probability of loss cannot be avoided. Solution 1. Working capital is the capital that a company uses for its day to day operations. Working capital is computed using the formula: Working capital = current assets – current liabilities. 2. Determinants of working capital requirements are – nature of business, seasonality of operations, production policy, market conditions and condi.

1. 1. Working capital is the capital that a company uses for its day to day operations. Working
capital is computed using the formula: Working capital = current assets – current liabilities.
2. Determinants of working capital requirements are – nature of business, seasonality of
operations, production policy, market conditions and conditions of supply. A service company
will have a lower working capital requirement than a manufacturing company. Firms with
seasonality in operations will have higher fluctuations with regards to their working capital
requirements. Market conditions in the form of degree of competition will affect working capital
requirements. Higher competitive pressure will increase working capital requirements.
3. Three major decisions that managers have to take while performing the finance function are:
(i) Investment decision – Managers have to select those assets that the business will invest in. It
is also known as capital budgeting decisions.
(ii) Financing decision – These decisions pertain to determining how the total funds that are
required for the business will be obtained – will it be through debt or equity or a mix of debt or
equity.
(iii) Dividend decision – This pertains to determining what quantum of earnings should be
distributed to shareholders as dividends and what quantum should be retained for meeting future
growth requirements of the company.
4. Financial management involves planning, directing, monitoring and controlling the monetary
resources of a company in such a manner that the goals and objectives of the company are
achieved in an efficient manner. It involves management of capital budgeting, capital structure,
working capital management, etc. Financial management is important as it helps an organization
to set clarity towards its financial goals and helps in efficient utilization of resources.
5. Cash flow is not a suitable judge of profitability as it merely shows the changes in cash
position of a firm in a financial year from its operating activities, from its financing activities and
from its investing activities. Cash flow statement does not help us to determine gross profit
margins, operating profit margins and net profit margins. We can just gauge the reason for
changes in cash position in a year.
6. Financial risk refers to all kinds of risk associated with a financial transaction and an
investment transaction. It can be in the form of credit risk, asset backed risk, investment risk etc.
These risks arise due to the fact that there is a probability of loss that is inherent in any financing
and investment method and this probability of loss cannot be avoided.
Solution
1. Working capital is the capital that a company uses for its day to day operations. Working

2. capital is computed using the formula: Working capital = current assets – current liabilities.
2. Determinants of working capital requirements are – nature of business, seasonality of
operations, production policy, market conditions and conditions of supply. A service company
will have a lower working capital requirement than a manufacturing company. Firms with
seasonality in operations will have higher fluctuations with regards to their working capital
requirements. Market conditions in the form of degree of competition will affect working capital
requirements. Higher competitive pressure will increase working capital requirements.
3. Three major decisions that managers have to take while performing the finance function are:
(i) Investment decision – Managers have to select those assets that the business will invest in. It
is also known as capital budgeting decisions.
(ii) Financing decision – These decisions pertain to determining how the total funds that are
required for the business will be obtained – will it be through debt or equity or a mix of debt or
equity.
(iii) Dividend decision – This pertains to determining what quantum of earnings should be
distributed to shareholders as dividends and what quantum should be retained for meeting future
growth requirements of the company.
4. Financial management involves planning, directing, monitoring and controlling the monetary
resources of a company in such a manner that the goals and objectives of the company are
achieved in an efficient manner. It involves management of capital budgeting, capital structure,
working capital management, etc. Financial management is important as it helps an organization
to set clarity towards its financial goals and helps in efficient utilization of resources.
5. Cash flow is not a suitable judge of profitability as it merely shows the changes in cash
position of a firm in a financial year from its operating activities, from its financing activities and
from its investing activities. Cash flow statement does not help us to determine gross profit
margins, operating profit margins and net profit margins. We can just gauge the reason for
changes in cash position in a year.
6. Financial risk refers to all kinds of risk associated with a financial transaction and an
investment transaction. It can be in the form of credit risk, asset backed risk, investment risk etc.
These risks arise due to the fact that there is a probability of loss that is inherent in any financing
and investment method and this probability of loss cannot be avoided.