MS- 04: Accounting and Finance for Managers

ASSIGNMENT
Course Code
Course Title
Managers
Assignment Code
Coverage

:
:

MS-04
Accounting and Finance for

:
:

01/TMA/SEM-II/2010
All Blocks

Attempt All the Questions.

Remaining numericals solutions will be updated soon. We are matching our
solutions to other classmates to check its accuracy. So guys, please wait or if
you have also the solutions then kindly mail at
pinkkimanohar@rediffmail.com to check it. Thanks
Ques.1 Explain the following accounting concept
1. Concept of conservatism
2. Cost Concept
3. Periodicity Concept
4. Money Measurement Concept
Solutions :
1. The Conservatism (Prudence) Concept
As the term suggests its traditional approach of playing safe or being cautious in
recognising all the possible losses but ignoring all probable profits. This is also known as
prudence concept implying the common and accepted behaviour of accounting or
providing for future losses. Though this approach leads to creation of secret reserves and
understatement of income; it also of safeguards the interest of outsiders by preventing the
management from recognising unrealised, profits and providing for all future losses.
There are few instances, which illustrate the acceptance and adherence of this concept.
1. Inventories are valued at lower of cost or market price.
2. Providing for doubtful debts and discount allowed to debtors but ignoring the
probable discount received from creditor till the time final payments are made.
3. All the fixed assets are valued on historical costs irrespective of their market price
except in the case of revaluation of business.
4. Preference of written down value method over straight-line method of
depreciation, since the earlier one, provides for more depreciation in the initial years of
use.
5. Valuing Joint Life Insurance Policy at its surrender value irrespective of amount
of instalments paid.

2. Cost Concept
According to this concept, all transactions and events are recorded in the book" of
account at the actual price involved. This price is called cost. All assets are carried in the
books of accounts from year to year at their acquisition cost (also called historical cost)
irrespective of any change in their market value. Acquisition cost is considered highly
objective, reliable, definite and free from bias. Thus when a machine is purchased for Rs.
5 lakhs, transportation expenses are Rs. 20,000, installation expenses are Rs. 10,000, the
machine is valued at Rs. 5,30,000. This is the historical cost of machine.
However, the cost concept creates difficulties in its application in the following
situations:
(a) When due to price rise, the prices of all commodities go up substantially, the financial
position of a firm depicted on cost concept basis does not reflect true picture.
(b) Financial statements of two or more firms set up at different points of time prepared
on historical cost basis are not comparable due to changes in prices.
(c) Depreciation is computed on historical cost. This understates depreciation when
current value of an asset is very high. So it becomes necessary to revalue the assets.
(d) This concept implies recording of all assets for which costs have been incurred but the
assets like managerial competence, reputation or goodwill of the firm acquired over a
period of time are not recorded.
(e) The exception to this concept of valuing assets at cost irrespective of its market value
is the valuation of inventories. According to AS-2, inventories should be valued at cost or
market price whichever is lower.
In spite of the limitations, cost concept is still considered highly objective and free from
bias.
3. The Time Period Concept (Periodicity Concept)
This concept indicates that the profitability of a business is to be measured periodically.
The period for which income is measured is called the accounting period. For the purpose
of external reporting, the accounting period is generally one year. Thus, accounting profit
is the result of completed transactions during the accounting period. For income tax
purposes, a business has compulsorily to adopt financial year beginning on 1st April in
any calendar year and ending on 31st March in the next calendar year as its accounting
year. However, for internal reporting the profitability report can be prepared monthly,
quarterly or half yearly depending on the nature of project to facilitate better control and
evaluation of performance.
4.Money Measurement Concept
In accounting, a record is made only of those facts or transactions that can be expressed
in monetary terms. It provides a common yardstick, i.e., money for measuring, recording
and summarizing the transaction. Events, which cannot be expressed in money terms, do
not find a place in account books. For example, salary paid to manager is recorded in
account books but his competence, which cannot be expressed in monetary terms, is not
recorded in the books. The application of money measurement concept makes
accountingdata and information relevant, simple, understandable, homogeneous and
comparable.

The main advantage of money measurement concept is that even a layman is able to
understand and appreciate the things stated in terms of money. However, the concept
suffers from the following flaws:
a. Money does not have a constant value. The value of money changes because of
inflation or deflation in the country.
b. All business assets cannot be measured in money terms. It is very difficult to
calculate the value of goodwill or measure the competency or morale of employees.

(Solution for Q. 2 is contributed by Sunny Verma.)

Ques.2: The following is the Trial Balance of a trader as at 31st December, 2001:
Debit Balances
Stock (1-1-2001)
Sales returns
Purchases
Freight and carriage
Rate, Rent etc.
Salaries and wages
Sundry debtors
Bank Interest
Printing and
advertisement
Cash at Bank
Investments
Furniture and fittings
Discounts
General expense
Audit Fees
Insurance
Travelling expenses
Postage and telegrams
Cash in hand
Deposit with Pran
Drawing Account

Rs.
46,800
8,600
2,43,100
18,600
5,700
9,300
24,000
900
14,600
8,000
5,000
1,800
7,540
3,910
700
600
2,330
870
380
30,000
10,000
4,42,730

Credit Balances
Neerus capital account
Sales
Purchases returns
Sundry creditors
Bank loan at 6%
Income from investments
Discounts

Rs.
1,08,090
2,89,600
5,800
14,800
20,000
250
4,190

4,42,730

Adjustments:
(i)
Stock at the end was Rs. 78,600
(ii)
Included amongst the debtors is Rs. 3,000 due from Zeenat and included
amongst the creditors is Rs. 1,000 due to her.
(iii)
The effect of advertising not yet expired, a quarter of the amount Printing and
Advertising is to be carried forward to the next year.
(iv)
Reserve 2 per cent for discount on Debtors and create a bad debts reserve at 5
percent.
(v)
A depreciation of 10% p.a. is to be written off Furniture and fittings.

(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)

Wages owing on 31st December, 2001 is Rs. 300, salaries owing Rs. 500 and
carriage owing Rs. 100.
Prepaid insurance is Rs. 80.
Furniture which stood at Rs. 600 in books Ist January, 2001 was disposed of at
Rs. 290 on June, in part exchange for new furniture costing Rs. 520. A net
invoice at Rs. 230 was passed through the purchase-day book.
Purchase Invoice amounting to Rs. 400 had been omitted from the books.
A Neon-sign costing Rs. 100 is included in Advertising.
Two dishonored cheques for Rs. 200 and Rs. 300 respectively has not been
entered in the cast book. The first for Rs. 200 is known to be bad. In the case
of a second cheque for Rs. 300, it is expected that 75% of it would be realized.
Private purchase amounting to Rs. 600 had been included in the Purchase Day
Book.
Charge full years interest on Deposit with Pran at 7% p.a.
Provide for interest on Bank loan for the amount due.
Prepare Final Accounts.

Solution :
Trading account for the year ended 31st December, 2001.
Dr
Particulars
Rs.
Particulars
To opening stock
46,800
By Sales 2,89,600
To purchases
Less: Sales
2,43,100
Returns
8,600
Less:
-------Purchase
Returns (-) 5,800
Less:
Capatilised (-) 230
Less:
Drawings (-) 600
Add:
Omitted
Purchases (+) 400
2,36,870
By Closing Stock
-----To Freight &
18,700
Carriage
To Gross Profit
57,230
Total
3,59,600
Total

Cr.
Rs.
2,81,000

78,600

3,59,600

Profit & Loss Account for the year ended 31st December, 2001
Dr.
Particulars
To rates & rents
To Salaries &
Wages
9,300
+ O/S Wages 300
+O/S Salaries 500
------

Rs.
5,700

Particulars
By Gross Profit

Cr.
Rs.
57,230

By income from
Investments

250

10,100

By Discount

4,190

To bank interest
To print &
Advt.
14,500
Less: C/f To next
year (-) 3625
--------------------10,875
(-) Neon
Sign board 100
--------------------

900

By interest on
Deposit with
Pran

2,100

To interest on loan
To discount allowed
To general expenses
To audit fees
To insurance 600
Less : Prepaid 80

1,200
7,540
3,910
700

Total

63,770

10,775

520
To traveling exp.
To postages &
telegrams
To bad debt reserve
To discount on
Debtors reserve
To depreciation on
furniture
To loss on sale of
furniture
To net profit

2330

Total

63,770

870
1,200
456
172
310
17,087

Balance sheet as on 31st Dec, 2001

Liabilities &
Capital
Capital :
Opening 1,08,090
Drawing (-) 10,000
Private (-)
600
Purchasing
+Net profit 17,087

Assets

Rs.

Rs.
Furniture &
Fittings
1,800

1,14,577

-sold (-)
600
+New Purchase 520
1,720
Less: Depriciation@
10% (-) 172

Bank load
@ 6% 20,000
Add: Interest
@ 6% 1,200

21,200

Sundry
Creditors 14,800
Add : Omitted 400

15,200

Outstanding wages

300

Outstanding salaries

500

Deposit with
Pran
31,000
Add interest
@7%
2,100

1,548

32,100
Sundry Debtors
Balance 24,000
Bad debt
reserve@ 5%
(-)
1,200
22,800
Discount on
debtors@2% 456
---------------------22,344
Cash at bank
Cash in hand
Closing stock
Prepaind Advt.
Prepaid Insurance
Neon sign board

Total

1,51,777

Total

8,000
380
78,600
3,625
80
100
1,51,777

(Solution for question no. 3 is contributed by Farida)

Q.3 : From the following Balance Sheets of Sriramco, prepare
(a) Statement of Changes in Working Capital, and (b) Funds Flow Statement: Balance
Sheet of Sriramco as on 31st December
2000.
2001
Assets
Rs.
Rs.
Goodwill
90,000
80,000
Land and Buildings
2,80,000
2,00,000
Plant
1,00,000
2,00,000
Investments
30,000
40,000
Book Debts
1,80,000
2,10,000
Stock
80,000
1,20,000
Cash in hand and at Bank
40,000
45,000
Preliminary Expenses
20,000
10,000
8,20,000
9,05,000

Liabilities
Share Capital
Equity Share Capital
10% Red. Pref. Share Capital
Capital Reserve
General Reserve
P. and L. Account
Proposed Dividend
Sundry Creditors
Provision for Taxation

4,00,000
2,00,000
60,000
30,000
60,000
30,000
40,000
8,20,000

5,00,000
1,00,000
30,000
80,000
45,000
60,000
45,000
45,000
9,05,000

The following additional information is also available

(a) A machine has been sold for Rs. 40,000 whose written down value was Rs. 36,000.
Depreciation of Rs. 15,000 has been charged on plant in 2001;
(b) A piece of land had been sold out in 2001 and the profit on the sale has been credited
to
capital reserve;
(c) An interim dividend of Rs. 30,000 has been paid in 2001;
(d) Income tax paid during 2001 amounts to Rs. 45,000;
(e) Preference Shares were redeemed at 5% premium.

Solution:
Statement of change in working capital:
Current Assests
Debtors
Stocks
Cash
Current
Liabilities
Creditors
Provision for
Tax
Increase in
working
capital

2001

2002

180000
80000
40000

210000
120000
45000

300000
40000
5000
75000

30000
40000

45000
45000

15000
5000
20000

Fund Flow Statement

A. Sources of Funds
1.
2.
3.

Funds from Operations

Issue of Equity Share
Sale of Machine

51000
10000
40000
101000

B. Uses of Funds:
1.
2.
3.

Payment of Tax
45000
Payment of Dividend
30000
Redemption of Preference 100500
share
175500

Decrease in Working Capital (B-A) = 74,500/Working Note:

Funds from Operation
Closing balance of P&L Account 2001

45000

Add
1. Depreciation
2. Provision of Tax
3. Amount written off Goodwill
4. Amount written off Preliminary Exp.

= 15000
=
5000
= 10000
= 10000
85000

Less
Profit on Sale of Machine = 4000
Profit on Sale of Land
= 30000
Funds from Operation = 510000/-

Ques. 4 : The capital structure of Bombay Refrigeration Company Ltd. Consists of an

equity share capital of Rs. 3, 00,000 (share of Rs. 10 par value) and Rs.
3,00,000 10% debentures. Sales increased by 20% from 30,000 to 36,000
units, the selling price is Rs. 10 per unit. Variable cost Rs.6 Per unit and fixed
costs amount to Rs. 50,000 The companys tax rate is 50%.
You are required to compute the degree of operating leverage, degree of financial
leverage and degree of combined leverage.
Contributed by Neha
Solution:
Particulars

Amt

Sale (36000*10)

360000

(-)Variable cost (36000*6)

216000
144000

(-) Fixed cost

50000

EBIT

94000

(-)Intrest
EBT
(-) 50% Tax

30000
64000
32000
32000

1. Operating Leverage :

contribution/EBIT
144000/94000=1.53

2. Financial Leverage :

EBIT/EBT
94000/64000=1.47

3. Combined Leverage :

Operating leverage* financial leverage

1.53*1.47=2.2491

Ques. 5: The following details relates to the two machines X and Y:

Machine X
Cost
Estimated Life
Estimated salvage value
Working Capital required in the beginning

Rs. 56,125
5 years
Rs. 3,000
Rs.10,000

Machine Y
Rs.56,125
5 years
Rs. 3,000
Rs. 20,000

Annual income after tax and depreciation:

Year
I
II
III
IV
V

Rs.
3,275
5,375
7,375
9,375
11,375

Rs.
11,375
9,375
7,375
5,375
3,375

Overhauling charges at the end of third year Rs. 25,000 on machine X. Depreciation has
been charged at straight line method. Discount rate is 10%? P.V.F. at 10% for five years
are 0.909, 0.826, 0.751, 0.683 and 0.621. Suggest which project should be accepted.
Solution : not solved yet
Ques. 6: Discuss the concept of working capital what shall be the repercussions if the
firm has
a) Shortage of working capital
b) Excess of working capital
Solutions :
Every business concern should have adequate working capital to run its business operations.
It should have neither redundant or excess working capital nor inadequate or shortage of
working capital. Both excess as well as short working capital positions are bad for any business.
However, out of the two, it is the inadequacy of working capital which is more dangerous
from the point of view of the firm.

a) Shortage of working capital

Disadvantages or Dangers of Inadequate Working Capital

1. A concern which has inadequate working capital cannot pay its short-term liabilities
in time. Thus, it will lose its reputation and shall not be able to get good credit
facilities.
2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favourable market conditions and
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations and its creates
inefficiencies, increases costs and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed assets due to non-availability
of liquid funds.
6. The rate of return on investments also falls with the shortage of working capital.
b)Excess or Inadequate Working Capital
Disadvantages of Redundant or Excessive Working Capital
1. Excessive Working Capital means ideal funds which earn no profits for the business and
hence the business cannot earn a proper rate of return on its investments.
2. When there is a redundant working capital, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances of theft, waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy which
may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.
6. Due to low rate of return on investments, the value of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.

Ques 7: What is dividend and why is dividend decision important?

Solution:
The word dividend is derived from 'dividendum' which means total divisible sum. The
expression dividend has two meanings. For an existing company, i.e., going concern, the
dividend is the distribution of divisible profits by a joint stock company to its
shareholders by way of return on their investments in the shares after complying with the
provisions of the Companies Act and Articles of Association of the company. In the case
of winding up, it means a division of the realised assets among the creditors and
contributors according to their respective rights. The legal provisions as to dividends for a
company as a going concern are summarised as under:
1. Dividends cannot be paid except out of profits. As such the payment of dividend
is ruled out when there is loss except where the Central or State' Government has
guaranteed the payment of dividends by the company (Section 205).
2. Dividend must be paid within 42 days of declaration (Section 207).
3. Dividend is payable only to a registered shareholder or on his order to his banker.
However where a company has issued share warrants in pursuance of Section 114,
dividend is to be paid to the bearer of such warrantor to his banker.
4. Articles normally provide (as Article 88 of. Table A) that dividends may be paid
up in proportion to the amount paid up on each share (Section 93). In the absence .of such
provision, dividends are payable on the nominal amount of each share and not on the
amount paid. [Oak Bank Oil Company Vs. Crum (1882) & App. Cas. 65 H.L.]
5. No dividend is paid on calls-in-advance; it would be unjust if the same sum paid
on shares carried interest and dividend at the same time.
6. Where calls are in arrears, the company can make provision in the articles
prohibiting the payment of dividends on shares on which full amount has not been paid.
Otherwise dividend is payable only on the amount actually paid up.
7. The amount of dividend payable to shareholders may be rounded off to the
nearest rupees. Thus where such amount contains a part of a rupee consisting of paisa,
then, if such part is fifty paisa or more, it shall be increased to one rupee and if such part
is less than fifty paisa, it shall be ignored. .
Sources of dividend:
There are three sources from which dividends may be declared,
namely: (i) current year's profits, (ii) past profits remaining undistributed and (iii) moneys
provided by Government.
The dividend decision is difficult decision because of conflicting objectives and also
because of lack of specific decision-making techniques. It is not easy to lay down an
optimum dividend policy which would maximize the long-run wealth of the shareholders.
The factors affecting dividend policy are grouped into two broad categories.

1. Ownership considerations
2. Firm-oriented considerations
Ownership considerations: Where ownership is concentrated in few people, there are no
problems in identifying ownership interests. However, if ownership is decentralized on a
wide spectrum, the identification of their interests becomes difficult.
Various groups of shareholders may have different desires and objectives. Investors
gravitate to those companies which combine the mix of growth and desired dividends.
Firm-oriented considerations: Ownership interests alone may not determine the
dividend policy. A firm's needs are also an important consideration, which include the
following:
Contractual and legal restrictions
Liquidity, credit-standing and working capital
Needs of funds for immediate or future expansion
Availability of external capital.
Risk of losing control of organization
Relative cost of external funds
Business cycles
Post dividend policies and stockholder relationships.

Contributed by Farida, Sunny Verma & Pinkki Manohar