Question

The source of working capital is

• A. Debtors
• B. Bank overdraft
• C. Cash sales
• D. All of these

Hint:

Sources of working capital can be internal (like cash from sales, retained profits) or external (like bank overdraft, trade creditors, short-term loans). Remember that working capital is a cycle (cash → inventory → debtors → cash), and every part of the cycle can be a source of funds when it converts back to cash.

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
The question asks to identify the sources of working capital from the given options.
Step 2: Key Concept:
Working Capital is the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. Sources of working capital are the ways through which a company finances its current assets. These can be short-term or long-term.
Step 3: Detailed Explanation:
Let's analyze the options as sources of funds for working capital:
- (A) Debtors (or Accounts Receivable): Debtors are a component of current assets, not a source of funds. In fact, they represent an application or use of working capital (funds are locked up in receivables). However, if the question is interpreted loosely, managing debtors efficiently (i.e., quick collection) can release cash, thus acting as an internal source. But typically, it's a use of funds. Let's re-evaluate the question's intent. Often in this context, 'source' can mean anything that provides cash for operations.
- (B) Bank Overdraft: This is a short-term borrowing facility provided by a bank, allowing a company to withdraw more money than it has in its account. It is a major source of short-term working capital finance.
- (C) Cash Sales: Generating cash from sales is the primary and most important internal source of funds for meeting day-to-day operational expenses, i.e., working capital.
- Revisiting (A) Debtors: Some question framers might consider 'Bills discounted' or 'Factoring of debtors' as a source, which is essentially raising finance against debtors. In that sense, debtors can be a source.
Given that Bank Overdraft and Cash Sales are definite sources, and considering the likely intent of such a question in a multiple-choice format, 'All of these' becomes the most probable answer, assuming a broad interpretation of 'Debtors' as a potential source through financing against them. However, the most direct and clear sources are (B) and (C). A better framing would have used 'Creditors' instead of 'Debtors'. But let's assume the question includes any means to generate cash for operations. Cash sales provide cash. Bank overdraft provides cash. Liquidating debtors (getting paid) provides cash. In this sense, all three can be seen as sources of cash for working capital.
Step 4: Final Answer
Bank overdraft and cash sales are clear sources of working capital. Debtors represent funds that are yet to be collected but are a key part of the working capital cycle, and their collection is a source of cash. Therefore, in a broad sense, all the given options are related to providing funds for working capital. The most inclusive option is (D).