Which of the following statements about nature of business as a factor affecting the working capital requirement is NOT correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → In a manufacturing business, sales can be effected immediately upon the receipt of materials.
Option (1) In a manufacturing business, sales can be effected immediately upon the receipt of materials. — False. In manufacturing, raw material must first be turned into finished goods before any sale is possible. Selling on receipt of goods happens in a trading business.
Option (2) A trading organisation usually needs a smaller amount of working capital than a manufacturing organisation. — True. A trading firm does no processing. So it holds less stock and needs less working capital than a manufacturer.
Option (3) In a trading organisation, there is usually no distinction between raw materials and finished goods. — True. A trader sells the same goods that it buys. So its raw materials and finished goods are one and the same.
Option (4) Service industries which usually do not have to maintain inventory require less working capital. — True. Service firms usually hold no inventory. So less money is tied up, and they need less working capital.
NCERT (2026-27 Edition): “1. Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, a trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.” |