MANAGEMENT PROGRAMME

Term-End Examination
June,2OO8
AND FINANGEFOR
MS-4 : AGGOUNTING
MANAGERS
Maximum Marks : 100

Time : 3 hours

(Weishtage70%)

te'
No
l.

(a)

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What do you understand by the concept of
conservatism? Why is it also called the concept of
prudence ? Why is it not applied as stronglytoday as
it used to be in the Past ?

2.

(b)

What is a Balance Sheet ? How does a Funds Flow

Statement differ from a BalanceSheet ? Enumerate
the items which are usually shown in a Balance
Sheet and a FundsFlow Statement'

(a)

Why does depreciationneed to be provided on fixed

of providins
methods
aretheusuar

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P.T.o,

(b)

3.

Discussthe role of the Board of Directorsin dividend

decision.

What do you understand by Discounted Cash Flow

Techniquesof Capital Budgeting? Briefly explain the Net
PresentValue Method and InternalRate of Return Method.
which of the two would you rank better and why ?

4.

Distinguishbetween :
(a)

Financial Leverageand operating Leverage

(b)

Cash Budget and Cash Flow Statement

(c)

'First

iD, First out' and 'Last in, First out' systems of

Inventory Valuation.

(d)

Preference shares and Rightsshares

5 . A company manufacturesa single product in its factory

utilising 600/oof its capacity. The selling price and cost
details are given below :
Rs.
Sales(6,000 units)
Direct materials
Direct labour
Direct expenses

5,40,000
96,000

r,20,000
19,000

Fixed overheads:
Factory

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2,00,000

Administration

2r,000

Selling and Distribution

25,000

L2.5o/o of factory overheads and 20e/o of selling and

distribution overheads are variable with production

and

sales. Administrative overheads are wholly fixed.

Since the existing product could not achieve budgeted level
for

two

decides to

consecutive years, the Company

introduce a new product with marginal investment but

largely using the existing plant and machinery.

The cost estimatesof the new product are as follows :

Cosf elemenfs

'

Rs. per unit

Direct materials

16.00

Direct labour

15.00

Direct expenses

1.50

Variable factory overheads

2.00

Variablesellingand distribution
overheads

1'50

It is expectedthat 2,000 units of the new product can be

sold at a price of Rs. 60 per unit. The fixed factory
overheads are expected to increaseby t}o/o, while fixed
sellingand distributionexpenseswill go up by Rs. 12,500
annually. Administrative overheads remain unchanged.
However, there will be an increaseof working capital to
the extent of Rs. 75,000, which would take the total cost
of the project to Rs. 8'75 lakh.

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P.T.O.

The company considers that 20o/o pre-tax and interest

return on investmentis the minimum acceptableto justify
any new investment.
You are requiredto

6-

7'

(a)

Decidewhether the new product be introduced.

(b)

Make any further observations

/recommendations
about oroftaubilityof the company on the basis of
the above data, af,termaking assumption that the
presentinvestmentis Rs. 8 lakh.

Explain fully the following statements:

(a)

"Lower the Break-evenpoint, better it is.,,

(b)

"Greater the variabilityof cash flows, higher should

be the minimumcashbalanc
e.,,

(c)

"Weighted average cost of capital would always be

higher, if the market valueweightsare used."

(d)

"Capitalisation of reservesis different from capital

"
resgrves.

Why do you understandby the term 'pay-out ratio' ? What

factors are taken into consideration while determining
pay-out ratio ? should a company follow a fixed pay-out
ratio policy ? Discussfully.

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8.

From the ratios and other data given below for Bharat
Auto Accessories Ltd. indicate your interpretation of the
company's financial position, operating efficiency and
profitability.

Current Ratio

Year 1 Year 2 Year 3

2650/o 278o/o 302o/o
99o/o

Acid Test Ratio

ILSo/o 11006

Working Capital Turnover

(times)

2.75

3.00

3'25

ReceivablesTurnover

9.83

8.41

7'20

37

43

50

Average Collection Period

(Days)
Inventory to Working
Capital

95o/o 100%

Inventory Turnover (times)

6.11

Income per Equity Share

Net Income to Net Worth

6.01

LLOo/o
5'4L

2'50
5.10 4.05
8' 5o/o 7 '0o/o
11' O7o/o.'

Operating Expensesto Net

Sales

22o/o

23o/o

25o/o

Sales increaseduring the

year

L}o/o

160/o

23o/o

Cost of goods sold to Net

Sales

70o/o

7 Lo/o

73o/o

Dividend per share

Rs. 3

Rs. 3

Rs. 3

Fixed Assets to Net Worth

L6'4o/o

Net Profit on Net Sales

7'A3o/o 5'O9o/o 2'0o/o

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L8o/o

22'7o/o

14,000