You are on page 1of 16

Page-1

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-0-10" src="pdf-obj-0-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page- 1 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-0-16" src="pdf-obj-0-16.jpg">
Page- 1 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-0-18" src="pdf-obj-0-18.jpg">
Page- 1 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-0-21" src="pdf-obj-0-21.jpg">

Page-2

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-1-10" src="pdf-obj-1-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page- 2 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-1-16" src="pdf-obj-1-16.jpg">
Page- 2 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-1-18" src="pdf-obj-1-18.jpg">
Page- 2 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-1-21" src="pdf-obj-1-21.jpg">

Page-3

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-2-10" src="pdf-obj-2-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page- 3 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Q.1. A.1. Definition: One needs money to make money. Finance is the life-blood of business and there must be a continuous flow of funds in and out of a business enterprise. Money makes the wheels of business run smoothly. Sound plans, efficient production system and excellent marketing network are all hampered in the absence of an adequate and timely supply of funds. Sound financial management is as important in business as production and marketing. A business firm requires finance to commence its operations, to continue operations and for expansion or growth. Finance is, therefore, an important operative function of business. / IGNOU ASSIGNMENT GURU " id="pdf-obj-2-16" src="pdf-obj-2-16.jpg">

Q.1.

A.1.

Definition:

One needs money to make money. Finance is the life-blood of business and there must be a continuous flow of funds in and out of a business enterprise. Money makes the wheels of business run smoothly. Sound plans, efficient production system and excellent marketing network are all hampered in the absence of an adequate and timely supply of funds.

Sound financial management is as important in business as production and marketing. A business firm requires finance to commence its operations, to continue operations and for expansion or growth. Finance is, therefore, an important operative function of business.

Page- 3 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Q.1. A.1. Definition: One needs money to make money. Finance is the life-blood of business and there must be a continuous flow of funds in and out of a business enterprise. Money makes the wheels of business run smoothly. Sound plans, efficient production system and excellent marketing network are all hampered in the absence of an adequate and timely supply of funds. Sound financial management is as important in business as production and marketing. A business firm requires finance to commence its operations, to continue operations and for expansion or growth. Finance is, therefore, an important operative function of business. / IGNOU ASSIGNMENT GURU " id="pdf-obj-2-29" src="pdf-obj-2-29.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-4

IGNOU ASSIGNMENT GURU

Meaning of Financial Management:

Financial management may be defined as planning, organising, directing and controlling the financial activities of an organisation. According to Guthman and Dougal, financial

management means, “the activity concerned with the planning, raising, controlling and

administering of funds used in the business.” It is concerned with the procurement and utilisation of funds in the proper manner.

Objectives of Financial Management:

Financial management is one of the functional areas of business. Therefore, its objectives must be consistent with the overall objectives of business. The overall objective of financial management is to provide maximum return to the owners on their investment in the long- term.

This is known as wealth maximisation. Maximisation of owners’ wealth is possible when the capital invested initially increases over a period of time. Wealth maximisation means maximising the market value of investment in shares of the company.

Wealth of shareholders = Number of shares held ×Market price per share.

In order to maximise wealth, financial management must achieve the following specific objectives:

(a) To ensure availability of sufficient funds at reasonable cost (liquidity).

  • (b) To ensure effective utilisation of funds (financial control).

  • (c) To ensure safety of funds by creating reserves, re-investing profits, etc. (minimisation of

risk).

  • (d) To ensure adequate return on investment (profitability).

  • (e) To generate and build-up surplus for expansion and growth (growth).

  • (f) To minimise cost of capital by developing a sound and economical combination of corporate

securities (economy).

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 4 IGNOU ASSIGNMENT GURU Meaning of Financial Management: Financial management may be defined as planning, organising, directing and controlling the financial activities of an organisation. According to Guthman and Dougal, financial management means, “the activity concerned with the planning, raising, controlling and administering of funds used in the business.” It is concerned with the procurement and utilisation of funds in the proper manner. Objectives of Financial Management: Financial management is one of the functional areas of business. Therefore, its objectives must be consistent with the overall objectives of business. The overall objective of financial management is to provide maximum return to the owners on their investment in the long- term. This is known as wealth maximisation. Maximisation of owners’ wealth is possible wh en the capital invested initially increases over a period of time. Wealth maximisation means maximising the market value of investment in shares of the company. Wealth of shareholders = Number of shares held ×Market price per share. In order to maximise wealth, financial management must achieve the following specific objectives: (a) To ensure availability of sufficient funds at reasonable cost (liquidity). (b) To ensure effective utilisation of funds (financial control). (c) To ensure safety of funds by creating reserves, re-investing profits, etc. (minimisation of risk). (d) To ensure adequate return on investment (profitability). (e) To generate and build-up surplus for expansion and growth (growth). (f) To minimise cost of capital by developing a sound and economical combination of corporate securities (economy). / IGNOU ASSIGNMENT GURU " id="pdf-obj-3-57" src="pdf-obj-3-57.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-5

IGNOU ASSIGNMENT GURU

(g) To coordinate the activities of the finance department with the activities of other departments

of the firm (cooperation).

Functions of Financial Management

  • 1. Estimation of capital requirements: A finance manager has to make

estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

  • 2. Determination of capital composition: Once the estimation have been made,

the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

  • 3. Choice of sources of funds: For additional funds to be procured, a company

has many choices like-

  • a. Issue of shares and debentures

  • b. Loans to be taken from banks and financial institutions

  • c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and period of financing.

  • 4. Investment of funds: The finance manager has to decide to allocate funds into

profitable ventures so that there is safety on investment and regular returns is possible.

  • 5. Disposal of surplus: The net profits decision have to be made by the finance

manager. This can be done in two ways:

  • a. Dividend declaration - It includes identifying the rate of dividends and

other benefits like bonus.

  • b. Retained profits - The volume has to be decided which will depend upon

expansional, innovational, diversification plans of the company.

  • 6. Management of cash: Finance manager has to make decisions with regards to

cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.

  • 7. Financial controls: The finance manager has not only to plan, procure and

utilize the funds but he also has to exercise control over finances. This can be done

through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

Q.1.

A.1.(b)

There are 3 methods used in ranking investment proposals. The payback method, internalrate of return and net present value. The net present value method is the most acceptableand commonly used approach. Of the many methods for ranking investment proposals(1)The payback period methods, being the number of years (or time periods) required toreturn the original investment. The payback period is usually determined on anundiscounted basis, but discounted payback periods must also be established for aproject. The net present value (NPV) method: being the present value of future benefitsdiscounted at the appropriate cost of capital, minus the present value of the capital cost ofthe investment. The internal rate of return (IRR) method: being the discount rate whichequates the present value of benefits to the present value of the capital expenditure.5.The payback period shows the number of years required to recover the project’s cost orhow long it takes to get the entity’s money back.6.The payback method is

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 5 IGNOU ASSIGNMENT GURU (g) To coordinate the activities of the finance department with the activities of other departments of the firm (cooperation). Functions of Financial Management 1. Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise. 2. Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties. 3. Choice of sources of funds: For additional funds to be procured, a company has many choices like- a. Issue of shares and debentures b. Loans to be taken from banks and financial institutions c. Public deposits to be drawn like in form of bonds. Choice of factor will depend on relative merits and demerits of each source and period of financing. 4. Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible. 5. Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways: a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus. b. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company. 6. Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc. 7. Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc. Q.1. A.1.(b) There are 3 methods used in ranking investment proposals. The payback method, internalrate of return and net present value. The net present value method is the most acceptableand commonly used approach. Of the many methods for ranking investment proposals(1)The payback period methods, being the number of years (or time periods) required toreturn the original investment. The payback period is usually determined on anundiscounted basis, but discounted payback periods must also be established for aproject. The net present value (NPV) method: being the present value of future benefitsdiscounted at the appropriate cost of capital, minus the present value of the capital cost ofthe investment. The internal rate of return (IRR) method: being the discount rate whichequates the present value of benefits to the present value of the capital expenditure.5.The payback period shows the number of years required to recover the project’s cost orhow long it takes to get the entity’s money back.6.The payback method is / IGNOU ASSIGNMENT GURU " id="pdf-obj-4-101" src="pdf-obj-4-101.jpg">

Page-6

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-5-10" src="pdf-obj-5-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

easy to understand. The focus is on liquidity. If the initialinvestment cannot be recouped soon, it will not qualify. This method is preferred byindustries involved in technological developments. The downside of this method is that isfails to discern the most economic solution to the capital budgeting problem.7.

Let’s review a problem.Assume a $100,000 investment and the following cash flows fortwo alternatives. In year 1 Investment A has a $30,000 cash flow and Investment Bshows a $40,000 cash flow. In year 2 Investment A’s cash flow is $50,000 and B is$30,000. Year 3 shows $20,000 and $15,000 respectively, year 4 $60,000 and $15,000. Inyear 5 investment A does not show a cash flow but investment B shows a $50,000 cashflow. Which of the two alternatives would you select under the payback method?8.As shown in the solution Investment X will have a payback in 3 years versus the 4 yearpayback in Investment Y. Using the payback method, Investment X would be selected.9.The higher the discount rate the lower the net present value. NPV discounts back theinflows over the life of the investment to determine whether they equal or exceed therequired investment.Basic discount rate is usually the cost of the capital to the firm.Inflows must provide a return that at least equals the cost of financing those returns.

A.2.

Page- 6 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com easy to understand. The focus is on liquidity. If the initialinvestment cannot be recouped soon, it will not qualify. This method is preferred byindustries involved in technological developments. The downside of this method is that isfails to discern the most economic solution to the capital budgeting problem.7 . Let’s review a problem. Assume a $100,000 investment and the following cash flows fortwo alternatives. In year 1 Investment A has a $30,000 cash flow and Investment Bshows a $40,000 cash flow. In year 2 Investment A’s cash flow is $50,000 and B is$30,000. Year 3 shows $20,000 and $15,000 respectively, year 4 $60,000 and $15,000. Inyear 5 investment A does not show a cash flow but investment B shows a $50,000 cashflow. Which of the two alternatives would you select under the payback method?8.As shown in the solution Investment X will have a payback in 3 years versus the 4 yearpayback in Investment Y. Using the payback method, Investment X would be selected.9.The higher the discount rate the lower the net present value. NPV discounts back theinflows over the life of the investment to determine whether they equal or exceed therequired investment.Basic discount rate is usually the cost of the capital to the firm.Inflows must provide a return that at least equals the cost of financing those returns. A.2. / IGNOU ASSIGNMENT GURU " id="pdf-obj-5-27" src="pdf-obj-5-27.jpg">
Page- 6 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com easy to understand. The focus is on liquidity. If the initialinvestment cannot be recouped soon, it will not qualify. This method is preferred byindustries involved in technological developments. The downside of this method is that isfails to discern the most economic solution to the capital budgeting problem.7 . Let’s review a problem. Assume a $100,000 investment and the following cash flows fortwo alternatives. In year 1 Investment A has a $30,000 cash flow and Investment Bshows a $40,000 cash flow. In year 2 Investment A’s cash flow is $50,000 and B is$30,000. Year 3 shows $20,000 and $15,000 respectively, year 4 $60,000 and $15,000. Inyear 5 investment A does not show a cash flow but investment B shows a $50,000 cashflow. Which of the two alternatives would you select under the payback method?8.As shown in the solution Investment X will have a payback in 3 years versus the 4 yearpayback in Investment Y. Using the payback method, Investment X would be selected.9.The higher the discount rate the lower the net present value. NPV discounts back theinflows over the life of the investment to determine whether they equal or exceed therequired investment.Basic discount rate is usually the cost of the capital to the firm.Inflows must provide a return that at least equals the cost of financing those returns. A.2. / IGNOU ASSIGNMENT GURU " id="pdf-obj-5-30" src="pdf-obj-5-30.jpg">

Page-7

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-6-10" src="pdf-obj-6-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page- 7 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-6-16" src="pdf-obj-6-16.jpg">
Page- 7 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-6-18" src="pdf-obj-6-18.jpg">
Page- 7 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com / IGNOU ASSIGNMENT GURU " id="pdf-obj-6-21" src="pdf-obj-6-21.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-8

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 8 IGNOU ASSIGNMENT GURU A.3(i) Fixed assets are long-term, tangible assets such as land, equipment, buildings, furniture and vehicles. Fixed assets are parts of the company that help with production and are components that last over time in the company. They are physical assets that can be seen. They are not used for liquidation purposes to contain debt within a business or cashed out in any way to aid a business financially. Current assets are the general inventory of a company, including cash, accounts receivable, insurance claims, investments, and intangible or non-physical items. / IGNOU ASSIGNMENT GURU " id="pdf-obj-7-19" src="pdf-obj-7-19.jpg">

A.3(i)

Fixed assets are long-term, tangible assets such as land, equipment, buildings, furniture and vehicles. Fixed assets are parts of the company that help with production and are components that last over time in the company. They are physical assets that can be seen. They are not used for liquidation purposes to contain debt within a business or cashed out in any way to aid a business financially.

Current assets are the general inventory of a company, including cash, accounts receivable, insurance claims, investments, and intangible or non-physical items.

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 8 IGNOU ASSIGNMENT GURU A.3(i) Fixed assets are long-term, tangible assets such as land, equipment, buildings, furniture and vehicles. Fixed assets are parts of the company that help with production and are components that last over time in the company. They are physical assets that can be seen. They are not used for liquidation purposes to contain debt within a business or cashed out in any way to aid a business financially. Current assets are the general inventory of a company, including cash, accounts receivable, insurance claims, investments, and intangible or non-physical items. / IGNOU ASSIGNMENT GURU " id="pdf-obj-7-28" src="pdf-obj-7-28.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-9

IGNOU ASSIGNMENT GURU

Current assets account for the worth of a company, showing the earnings-to-debt ratio by the year's end. Each current asset has the ability to be cashed out to financially help the business or liquidated to save the company from debt or bankruptcy.

Fixed and current assets are recorded on a balance sheet, which is a statement showing the worth of a company at a certain point in time. The balance sheet shows the company's spending habits and inventory compared to its income. This helps the company determine where to cut back expenses and how to plan future budgets.

The three main categories to fill out on a balance sheet are assets, liabilities and owner's equity. The assets are the fixed and current assets. Liabilities are items causing debt to the company, and equity is the value of shares issued by a company. Each balance sheet is filled out annually so that potential investors or banks know if the company as a whole is a liability or investment opportunity.

A.3.(ii)

A spot exchange rate is the price to exchange one currency for another for immediate delivery. The spot rates represent the prices buyers pay in one currency to purchase a second currency. Although the spot exchange rate is for delivery on the earliest value date, the standard settlement date for most spot transactions is two business days after the transaction date.

The spot exchange rate is the price paid to sell one currency for another for delivery on the earliest possible value date.

Background

The foreign exchange market is the largest and most liquid market in the world, with over $5 billion changing hands daily. The most actively traded currencies are the U.S. dollar; the euro, which is used in many continental European countries including Germany, France, and Italy; the British pound; Japanese yen; and Canadian dollar.

Trading takes place electronically around the world between large, multinational banks. Other active market participants include corporations, mutual funds, hedge funds, insurance companies and government entities. Transactions are for a wide range of purposes, including import and export payments, short- and long-term investments, loans and speculation.

A.3.(iii)

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 9 IGNOU ASSIGNMENT GURU Current assets account for the worth of a company, showing the earnings-to-debt ratio by the year's end. Each current asset has the ability to be cashed out to financially help the business or liquidated to save the company from debt or bankruptcy. Fixed and current assets are recorded on a balance sheet, which is a statement showing the worth of a company at a certain point in time. The balance sheet shows the company's spending habits and inventory compared to its income. This helps the company determine where to cut back expenses and how to plan future budgets. The three main categories to fill out on a balance sheet are assets, liabilities and owner's equity. The assets are the fixed and current assets. Liabilities are items causing debt to the company, and equity is the value of shares issued by a company. Each balance sheet is filled out annually so that potential investors or banks know if the company as a whole is a liability or investment opportunity. A.3.(ii) A spot exchange rate is the price to exchange one currency for another for immediate delivery. The spot rates represent the prices buyers pay in one currency to purchase a second currency. Although the spot exchange rate is for delivery on the earliest value date, the standard settlement date for most spot transactions is two business days after the transaction date. The spot exchange rate is the price paid to sell one currency for another for delivery on the earliest possible value date. Background The foreign exchange market is the largest and most liquid market in the world, with over $5 billion changing hands daily. The most actively traded currencies are the U.S. dollar; the euro, which is used in many continental European countries including Germany, France, and Italy; the British pound; Japanese yen; and Canadian dollar. Trading takes place electronically around the world between large, multinational banks. Other active market participants include corporations, mutual funds, hedge funds, insurance companies and government entities. Transactions are for a wide range of purposes, including import and export payments, short- and long-term investments, loans and speculation. A.3.(iii) / IGNOU ASSIGNMENT GURU " id="pdf-obj-8-40" src="pdf-obj-8-40.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-10

IGNOU ASSIGNMENT GURU

Hurdal rate

In capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project. Hence the hurdle rate is also referred to as the company's required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate.

The hurdle rate is also used to discount a project's cash flows in the calculation of net present value.

The minimum hurdle rate is usually the company's cost of capital (a blend of the cost of debt and the cost of equity). However, the hurdle rate will be increased for projects with greater risk and when the company has an abundance of investment opportunities.

BREAKING DOWN 'Hurdle Rate'

In capital budgeting, projects are evaluated either by discounting futurecash flows to the present by the hurdle rate, so as to ascertain the net present value of the project, or by computing the internal rate of return (IRR) on the project and comparing this to the hurdle rate. If the IRR exceeds the hurdle rate, the project would most likely go ahead.

For example, a company with a hurdle rate of 10% for acceptable projects, would most likely accept a project if it has an internal rate of return of 14% and does not have a significantly higher degree of risk. Alternately, discounting the future cash flows of this project by the hurdle rate of 10% would lead to a large and positive net present value, which would also lead to the project's acceptance.

Discount Rate

The interest rate charged to commercial banks and other depository institutions for loans received

from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate

used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher

the discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities.

A.3.(iv) nternal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.

HOW IT WORKS (EXAMPLE):

The formula for IRR is:

0 = P 0 + P 1 /(1+IRR) + P 2 /(1+IRR) 2 + P 3 /(1+IRR) 3 +

. . .

+P n /(1+IRR) n

where P 0 , P 1 ,

P n equals the cash flows in periods 1, 2,

. . . IRR equals the project's internal rate of return.

. . .

n, respectively; and

Let's look at an example to illustrate how to use IRR.

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 10 IGNOU ASSIGNMENT GURU Hurdal rate In capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in a project. Hence the hurdle rate is also referred to as the company's required rate of return or target rate. In order for a project to be accepted, its internal rate of return must equal or exceed the hurdle rate. The hurdle rate is also used to discount a project's cash flows in the calculation of net present value. The minimum hurdle rate is usually the company's cost of capital (a blend of the cost of debt and the cost of equity). However, the hurdle rate will be increased for projects with greater risk and when the company has an abundance of investment opportunities. BREAKING DOWN 'Hurdle Rate' In capital budgeting, projects are evaluated either by discounting futurecash flows to the present by the hurdle rate, so as to ascertain the net present value of the project, or by computing the internal rate of return (IRR) on the project and comparing this to the hurdle rate. If the IRR exceeds the hurdle rate, the project would most likely go ahead. For example, a company with a hurdle rate of 10% for acceptable projects, would most likely accept a project if it has an internal rate of return of 14% and does not have a significantly higher degree of risk. Alternately, discounting the future cash flows of this project by the hurdle rate of 10% would lead to a large and positive net present value, which would also lead to the project's acceptance. Discount Rate The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window. The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money, but also the risk or uncertainty of future cash flows; the greater the uncertainty of future cash flows, the higher t he discount rate. A third meaning of the term “discount rate” is the rate used by pension plans and insurance companies for discounting their liabilities. A.3.(iv) nternal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that proje ct is desirable. If IRR falls below the required rate of return, the project should be rejected. HOW IT WORKS (EXAMPLE): The formula for IRR is: 0 = P + P /(1+IRR) + P /(1+IRR) + P /(1+IRR) + . . . +P /(1+IRR) where P , P , P equals the cash flows in periods 1, 2, . . . IRR equals the project's internal rate of return. . . . n, respectively; and Let's look at an example to illustrate how to use IRR. / IGNOU ASSIGNMENT GURU " id="pdf-obj-9-98" src="pdf-obj-9-98.jpg">

Page-11

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-10-10" src="pdf-obj-10-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Assume Company XYZ must decide whether to purchase a piece of factory equipment for $300,000. The equipment would only last three years, but it is expected to generate $150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%.

Here is how the IRR equation looks in this scenario:

  • 0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431) 2 + ($150,000)/(1+.2431) 3 + $10,000/(1+.2431) 4

The investment's IRR is 24.31%, which is the rate that makes the present value of the investment's cash flows equal to zero. From a purely financial standpoint, Company XYZ should purchase the equipment since this generates a 24.31% return for the Company -- much higher than the 10% return available from other investments.

Under payback method, an investment project is accepted or rejected on the basis of payback period. Payback period means the period of time that a project requires to recover the money invested in it. It is mostly expressed in years.

Unlike net present value and internal rate of return method, payback method does not take into account the time value of money.

According to payback method, the project that promises a quick recovery of initial investment is considered desirable. If the payback period of a project is shorter than or equal to the management’s maximum desired payback period, the project is accepted, otherwise rejected. For example, if a company wants to recoup the cost of a machine within

  • 5 years of purchase, the maximum desired payback period of the company would be 5

years. The purchase of machine would be desirable if it promises a payback period of 5

years or less.

Q.4.

A.4.(i)

What is 'Capital Budgeting'

Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature. These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the potential returns generated meet a sufficient target benchmark, also known as "investment appraisal."

Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital

Page- 11 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Assume Company XYZ must decide whether to purchase a piece of factory equipment for $300,000. The equipment would only last three years, but it is expected to generate $150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%. Here is how the IRR equation looks in this scenario: 0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431) + ($150,000)/(1+.2431) + $10,000/(1+.2431) The investment's IRR is 24.31%, which is the rate that makes the present value of the investment's cash flows equal to zero. From a purely financial standpoint, Company XYZ should purchase the equipment since this generates a 24.31% return for the Company -- much higher than the 10% return available from other investments. Under payback method , an investment project is accepted or rejected on the basis of payback period. Payback period means the period of time that a project requires to recover the money invested in it. It is mostly expressed in years. Unlike net present value and internal rate of return method, payback method does not take into account the time value of money. According to payback method, the project that promises a quick recovery of initial investment is considered desirable. If the payback period of a project is shorter than or equal to the management’s maximum desired payback period, the project is accepted, otherwise rejected. For example, if a company wants to recoup the cost of a machine within 5 years of purchase, the maximum desired payback period of the company would be 5 years. The purchase of machine would be desirable if it promises a payback period of 5 years or less. Q.4. A.4.(i) What is 'Capital Budgeting' Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are large in nature. These expenditures and investments include projects such as building a new plant or investing in a long-term venture. Often times, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the potential returns generated meet a sufficient target benchmark, also known as "investment appraisal." Ideally, businesses should pursue all projects and opportunities that enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital / IGNOU ASSIGNMENT GURU " id="pdf-obj-10-56" src="pdf-obj-10-56.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-12

IGNOU ASSIGNMENT GURU

budgeting techniques to determine which projects will yield the most return over an applicable period of time. Various methods of capital budgeting can include throughput analysis, net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.

There are three popular methods for deciding which projects should receive investment funds over other projects. These methods are throughput analysis, DCF analysis and payback period analysis.

A.4.(ii) Cash management has changed significantly over the past 2 decades for two reasons. First, from the early 1970s to the late 1980s, there was an upward trend in interest rate that increased the opportunity cost of holding cash. This encouraged financial manager to search for more efficient ways of managing cash. Second, technological developments, particularly computrised electronic funds transfer mechanism changed the way cash is managed.

Most cash management activities are performed jointly by the firm and its banks. Effective cah management
Most cash management activities are performed jointly by the firm and its banks. Effective
cah management encompasses proper management of cah inflow, and outflows, which
entails (1) improving forecasts of cash flows, (2) synchronizing cash inflows and outflows,
(3) usinig floats, (4) accelearing collections, (5) getting available funds to where they are
needed, and (6) controlling disbursement. Most businesses are conducted by large firms,
many sources and make payments from a number of different cities or even countries. For
example, companies such as IBM, General Motros, and Hewlett-Packard have
manufacturing plants all around the world, even more sales offices, but most of the
payments are made from the cities where manufacturing occurs, or else from the
headoffice. Thus a major corporation mightnhave hundreads of bank accounts, and since
there is no reason to think that inflows and outflows will balance in each account, a system
must be in place to transfer funds from where they come into where they are needed, to
arrange loans to cover net corporate shortfalls, and to invest net corporate surpluses
without delay.

A.4.(iii)

Net present value (NPV) is defined as an investment measure that tells an investor whether the investment is achieving a target yield at a given initial investment. NPV also

quantifies the adjustment to the initial investment needed to achieve the target yield assuming everything else remains the same. Formally, the net present value is simply the summation of cash flows (C) for each period (n) in the holding period (N), discounted at the

investor’s required rate of return (r):

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 12 IGNOU ASSIGNMENT GURU budgeting techniques to determine which projects will yield the most return over an applicable period of time. Various methods of capital budgeting can include throughput analysis, net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. There are three popular methods for deciding which projects should receive investment funds over other projects. These methods are throughput analysis, DCF analysis and payback period analysis. A.4.(ii) Cash management has changed significantly over the past 2 decades for two reasons. First, from the early 1970s to the late 1980s, there was an upward trend in interest rate that increased the opportunity cost of holding cash. This encouraged financial manager to search for more efficient ways of managing cash. Second, technological developments, particularly computrised electronic funds transfer mechanism changed the way cash is managed. Most cash management activities are performed jointly by the firm and its banks. Effective cah management encompasses proper management of cah inflow, and outflows, which entails (1) improving forecasts of cash flows, (2) synchronizing cash inflows and outflows, (3) usinig floats, (4) accelearing collections, (5) getting available funds to where they are needed, and (6) controlling disbursement. Most businesses are conducted by large firms, many sources and make payments from a number of different cities or even countries. For example, companies such as IBM, General Motros, and Hewlett-Packard have manufacturing plants all around the world, even more sales offices, but most of the payments are made from the cities where manufacturing occurs, or else from the headoffice. Thus a major corporation mightnhave hundreads of bank accounts, and since there is no reason to think that inflows and outflows will balance in each account, a system must be in place to transfer funds from where they come into where they are needed, to arrange loans to cover net corporate shortfalls, and to invest net corporate surpluses without delay. A.4.(iii) Net present value (NPV) is defined as an investment measure that tells an investor whether the investment is achieving a target yield at a given initial investment. NPV also quantifies the adjustment to the initial investment needed to achieve the target yield assuming everything else remains the same. Formally, the net present value is simply the summation of cash flows (C) for each period (n) in the holding period (N), discounted at the investor’s required rate of return (r): / IGNOU ASSIGNMENT GURU " id="pdf-obj-11-36" src="pdf-obj-11-36.jpg">
BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 12 IGNOU ASSIGNMENT GURU budgeting techniques to determine which projects will yield the most return over an applicable period of time. Various methods of capital budgeting can include throughput analysis, net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. There are three popular methods for deciding which projects should receive investment funds over other projects. These methods are throughput analysis, DCF analysis and payback period analysis. A.4.(ii) Cash management has changed significantly over the past 2 decades for two reasons. First, from the early 1970s to the late 1980s, there was an upward trend in interest rate that increased the opportunity cost of holding cash. This encouraged financial manager to search for more efficient ways of managing cash. Second, technological developments, particularly computrised electronic funds transfer mechanism changed the way cash is managed. Most cash management activities are performed jointly by the firm and its banks. Effective cah management encompasses proper management of cah inflow, and outflows, which entails (1) improving forecasts of cash flows, (2) synchronizing cash inflows and outflows, (3) usinig floats, (4) accelearing collections, (5) getting available funds to where they are needed, and (6) controlling disbursement. Most businesses are conducted by large firms, many sources and make payments from a number of different cities or even countries. For example, companies such as IBM, General Motros, and Hewlett-Packard have manufacturing plants all around the world, even more sales offices, but most of the payments are made from the cities where manufacturing occurs, or else from the headoffice. Thus a major corporation mightnhave hundreads of bank accounts, and since there is no reason to think that inflows and outflows will balance in each account, a system must be in place to transfer funds from where they come into where they are needed, to arrange loans to cover net corporate shortfalls, and to invest net corporate surpluses without delay. A.4.(iii) Net present value (NPV) is defined as an investment measure that tells an investor whether the investment is achieving a target yield at a given initial investment. NPV also quantifies the adjustment to the initial investment needed to achieve the target yield assuming everything else remains the same. Formally, the net present value is simply the summation of cash flows (C) for each period (n) in the holding period (N), discounted at the investor’s required rate of return (r): / IGNOU ASSIGNMENT GURU " id="pdf-obj-11-39" src="pdf-obj-11-39.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-13

IGNOU ASSIGNMENT GURU

If all of this math scares you don’t worry, we’ll walk through some detailed examples next

that will leave you with a solid intuition and understanding of NPV.

NPV Intuition

What’s the intuition behind NPV? Here’s a simple way to think about the net present value:

NPV = Present Value Cost

The net present value is simply the present value of all future cash flows, discounted back to the present time at the appropriate discount rate, less the cost to acquire those cash flows. In other words NPV is simply value minus cost.

A.4.(iv)
A.4.(iv)
Many real estate investors determine the value of an income property by using the capitalization rate,
Many real estate investors determine the value of an income property by using the
capitalization rate, aka cap rate. It is probably the one most misused concept in real estate
investing.
While brokers, sellers, and lenders are fond of quoting deals based on the cap rate, the
way it is typically used, they really shortcut the true use of a valuable tool. A broker prices a
property by taking the Net Operating Income (NOI), dividing it by the sales price, and voila!-
-there's the cap rate.
Example:
Say the property has an NOI of $125,000, and the price is $1,125,000.

$125,000/ $1,125,000 = 11.1% cap rate

But what does that number tell you? Does it tell you what your return will be
But what does that number tell you? Does it tell you what your return will be if you use
financing? No. Does it take into account the different finance terms available to different
investors? No. Then just what does it show?
What the cap rate above represents is merely the projected return for one year as if the
property were bought with all cash. Not many of us buy property for all cash, so we have to
break the deal down, usually by trial and error, to find the cash on cash return on our actual
investment using leverage (debt).
Then we calculate the debt service, subtract it from the NOI, and calculate our return. If the
debt terms, loan-to-value, or our return requirement change, then the whole calculation
must be performed again. That's not exactly an efficient use of time or knowledge.
BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 13 IGNOU ASSIGNMENT GURU If all of this math scares you don’t worry, we’ll walk through some detailed examples next that will leave you with a solid intuition and understanding of NPV. NPV Intuition What’s the intuition behind NPV? Here’s a simple way to think about the net present value: NPV = Present Value – Cost The net present value is simply the present value of all future cash flows, discounted back to the present time at the appropriate discount rate, less the cost to acquire those cash flows. In other words NPV is simply value minus cost . A.4.(iv) Many real estate investors determine the value of an income property by using the capitalization rate, aka cap rate. It is probably the one most misused concept in real estate investing. While brokers, sellers, and lenders are fond of quoting deals based on the cap rate, the way it is typically used, they really shortcut the true use of a valuable tool. A broker prices a property by taking the Net Operating Income (NOI), dividing it by the sales price, and voila!- -there's the cap rate. Example: Say the property has an NOI of $125,000, and the price is $1,125,000. $125,000/ $1,125,000 = 11.1% cap rate But what does that number tell you? Does it tell you what your return will be if you use financing? No. Does it take into account the different finance terms available to different investors? No. Then just what does it show? What the cap rate above represents is merely the projected return for one year as if the property were bought with all cash. Not many of us buy property for all cash, so we have to break the deal down, usually by trial and error, to find the cash on cash return on our actual investment using leverage (debt). Then we calculate the debt service, subtract it from the NOI, and calculate our return. If the debt terms, loan-to-value, or our return requirement change, then the whole calculation must be performed again. That's not exactly an efficient use of time or knowledge. / IGNOU ASSIGNMENT GURU " id="pdf-obj-12-45" src="pdf-obj-12-45.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

Page-14

IGNOU ASSIGNMENT GURU

Q.5.

A.5.(i) Outstanding Expenses

Outstanding expenses are those expenses which have been incurred and consumed during an accounting period and are due to be paid, but are not paid. Examples include outstanding salary, outstanding rent, etc. Outstanding expenses are recorded in the books at the end of an accounting period to show true numbers of a business.

Outstanding expense is a personal account and is shown on the liability side of a balance sheet.

Expenses are amounts paid for goods or services purchased. According to the accrual concept of accounting, transactions are recorded in the books of accounts at the time of their occurrence and not when the actual cash or a cash equivalent is received or paid. Therefore, payments are not necessarily made immediately, they may be late or in advance. Outstanding expenses and prepaid expenses are both a result of this.

A.5.(ii)

Master Budget Definition

The master budget is the aggregation of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan. The master budget is typically presented in either a monthly or quarterly format, and usually covers a company's entire fiscal year. An explanatory text may be included with the master budget, which explains the company's strategic direction, how the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the budget. There may also be a discussion of the headcount changes that are required to achieve the budget.

A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees.

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com Page- 14 IGNOU ASSIGNMENT GURU Q.5. A.5.(i) Outstanding Expenses Outstanding expenses are those expenses which have been incurred and consumed during an accounting period and are due to be paid, but are not paid . Examples include outstanding salary, outstanding rent, etc. Outstanding expenses are recorded in the books at the end of an accounting period to show true numbers of a business. Outstanding expense is a personal account and is shown on the liability side of a balance sheet. Expenses are amounts paid for goods or services purchased. According to the accrual concept of accounting, transactions are recorded in the books of accounts at the time of their occurrence and not when the actual cash or a cash equivalent is received or paid. Therefore, payments are not necessarily made immediately, they may be late or in advance. Outstanding expenses and prepaid expenses are both a result of this. A.5.(ii) Master Budget Definition The master budget is the aggregation of all lower-level budgets produced by a company's various functional areas, and also includes budgeted financial statements, a cash forecast, and a financing plan. The master budget is typically presented in either a monthly or quarterly format, and usually covers a company's entire fiscal year. An explanatory text may be included with the master budget, which explains the company's strategic direction, how the master budget will assist in accomplishing specific goals, and the management actions needed to achieve the budget. There may also be a discussion of the headcount changes that are required to achieve the budget. A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers. It is customary for the senior management team to review a number of iterations of the master budget and incorporate modifications until it arrives at a budget that allocates funds to achieve the desired results. Hopefully, a company uses participative budgeting to arrive at this final budget, but it may also be imposed on the organization by senior management, with little input from other employees. / IGNOU ASSIGNMENT GURU " id="pdf-obj-13-41" src="pdf-obj-13-41.jpg">

Page-15

IGNOU ASSIGNMENT GURU

BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com " id="pdf-obj-14-10" src="pdf-obj-14-10.jpg">

BCA MCA BA MA BDP B.COM M.COM B.SC

A.5.(iii)

Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned with a company's dividend policy since they can sell a portion of their portfolio of equities if they want cash. This evidence is called the "dividend irrelevance theory," and it essentially indicates that an issuance of dividends should have little to no impact on stock price. That being said, many companies do pay dividends, so let's look at how they do it.

There are three main approaches to dividends: residual, stability or a hybrid of the two.

Residual Dividend Policy

Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, deciding on dividends only if there is enough money left over after all operating and expansion expenses are met.

A.5.(iv)

   

Profit and

 

Trading Account

Loss

Account

     

It is the second

1

It is the first stage of final accounts.

  • 1 stage of the final accounts.

2

It shows the gross result (gross profit or gross loss) of the business.

 

It shows the net
2 results (net profit or net loss) of the business.

Page- 15 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com A.5.(iii) Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned with a company's dividend policy since they can sell a portion of their portfolio of equities if they want cash. This evidence is called the " dividend irrelevance theory, " and it essentially indicates that an issuance of dividends should have little to no impact on stock price. That being said, many companies do pay dividends, so let's look at how they do it. There are three main approaches to dividends: residual, stability or a hybrid of the two. Residual Dividend Policy Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, deciding on dividends only if there is enough money left over after all operating and expansion expenses are met. A.5.(iv) Profit and Trading Account Loss Account It is the second 1 It is the first stage of final accounts. 1 stage of the final accounts. 2 It shows the gross result (gross profit or gross loss) of the business. It shows the net 2 results (net profit or net loss) of the business. / IGNOU ASSIGNMENT GURU " id="pdf-obj-14-74" src="pdf-obj-14-74.jpg">

Page-16

IGNOU ASSIGNMENT GURU

 
BCA MCA BA MA BDP B.COM M.COM B.SC

BCA MCA BA MA BDP B.COM M.COM B.SC

 
 
     

All expenses

 

connected with

sales and

 

3

All direct expenses (expenses

connected with purchase or production

  • 3 administration (indirect

 

of goods) are considered in it.

expenses) of

business are

considered.

 

4

It does not start with the balance of any account.

 

It always starts with the balance
4 of a trading account (gross profit or gross loss).

     

Its balance (N.P or N.L) is

 

5

Its balance (G.P or G.L) is transferred to profit and loss account.

  • 5 transferred to capital account in balance sheet.

Page- 16 IGNOU ASSIGNMENT GURU BCA MCA BA MA BDP B.COM M.COM B.SC <a href=http://www.ignouassignmentguru.com All expenses connected with sales and 3 All direct expenses (expenses connected with purchase or production 3 administration (indirect of goods) are considered in it. expenses) of business are considered. 4 It does not start with the balance of any account. It always starts with the balance 4 of a trading account (gross profit or gross loss). Its balance (N.P or N.L) is 5 Its balance (G.P or G.L) is transferred to profit and loss account. 5 transferred to capital account in balance sheet. / IGNOU ASSIGNMENT GURU " id="pdf-obj-15-87" src="pdf-obj-15-87.jpg">