Management Accounting

1. Define Management Accounting. Explain the role of management accounting

in a bank.
2. Roles of management accounting in bank
3. Management Accounting is beneficial for banking operation. Comments with
example.
4. Explain the role of Management Accounting in planning, control and decision
making in a bank.
5. Management Account is helpful in decision making. Explain.
Or, Why Management Accounting Is Important in Decision-Making
6. Compare and contrast between Management Accounting & Financial
Accounting
7. Distinguish between Management Accounting & Financial Accounting.
8. Describe the uses of financial statements analysis.
Or, Objectives of Financial Statement Analysis
9. Describe the limitations of financial statements analysis.
10. Discuss the factors considered in lending by a bank.
Or, Factors affecting while assessing a loan proposal
11. What is break even point?
12. Describe three approaches to break-even-analysis. 8
13. Discuss the usefulness and assumptions of break-even analysis. 8
14. Limitation of Break even analysis
15. Define margin of safety. Discuss its implications. 5
16. Define Break-even analysis. Discuss importance of break-even analysis.
17. What is cost sheet?
18. Discuss the uses/ purposes/ advantage of Cost Sheet
19. What is meant by cost behavior? How cost behavior helps in classifying costs
in banking?
20. Mention the classification of costs on different bases. 6
21. Define cost accounting. Discuss the concept of service costing. 8
22. Discuss the importance of cost accounting to a banker. 6
23. Define Working Capital. Explain the factors affecting working capital
requirement. 8
24. Describe motives for holding cash in a bank. 5
25. Explain different sources of financing working capital. Explain the objectives
of inventory management. 7
26. Explain the difference between variable working capital and permanent
working capital. 5
27. Explain the factors determining the need for working capital.
Or, Describe in brief the various factors, which are taken into account in
determining the working capital needs of a firm.
28. Define working capital. Discuss its significance for a firm. 4
29. Define lease finance. 3
30. What are different kinds of leases? Discuss about three types of lease.
Or, Explain different forms of lease finance. 5

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31. Difference between lease finance and hire purchase finance. 6/8
32. Explain the importance of lease finance. 6
33. Explain the economies of lease. 6
34. Discuss the characteristics of capital of lease. 5
35. Discuss the relative merits of lease finance and hire purchase finance.
36. Features of financial lease and operating lease. 4
37. Advantages and disadvantages of financial (capital) lease and operating
lease. 6
38. Define hire purchase. Mention the characteristics of hire purchase. 5
39. Discuss briefly the importance of budgetary control system with special
reference to Banking Organization
40. Define Capital Budgeting. Discuss the use of the time-value of money in
capital budgeting.
41. Discuss the techniques of capital budgeting
42. Discuss the utility of cash budget as a tool of the cash management. What
are the steps involved in construction of a cash budget?
43. What is payback period? How payback period is used in capital budgeting
decision
44. What is Cash flow Statement?
45. What is purpose/ objectives of cash flow statement
46. Difference between Cash Flow Statement and Fund Flow Statement
47. Difference between Cash Flow Statement and Cash Budget
48. Importance/ Usefulness of Cash Flow Statement
49. Objectives of Cash Budget/Cash Flow Forecast

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1. Define Management Accounting. Explain the role of management
accounting in a bank.
Management Accounting analyzes and provides cost information to the internal
management for the purposes of planning, controlling and decision-making.
As per CIMA (Chartered Institute of Management Accountants), "Management
Accounting is the process of identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of information that used by
management to plan, evaluate, and control within an entity and to assure
appropriate use of an accountability for its resources". This is the phase of
accounting concerned with providing information to managers for use in
planning and controlling operations and in decision making.

2. Roles of management accounting in bank

The management accounting function of a bank in conjunction, need to apply
competitive bank management skills in order to remain competitive in their
industry and maximize profits that may enhance competitiveness to adapting to
analyzing bank performance and establishing profitability and risks; managing
interest rate risks; managing the cost of funds, bank capital and liquidity;
managing credit given to customers and managing the investment portfolio.

Banks uses the management accounting information to improve towards

achieving the organizational goal and objectives; and to control over its
expenditure. It is effective in minimizing cost, enhancing profitability, curtails
overhead cost and recovers non-performing loans, and beef-up shareholders
fund.

3. Management Accounting is beneficial for banking operation.

Comments with example.
The management accounting function of a bank in conjunction, need to apply
competitive bank management skills in order to remain competitive in their
industry and maximize profits that may enhance competitiveness to adapting to
analyzing bank performance and establishing profitability and risks; managing
interest rate risks; managing the cost of funds, bank capital and liquidity;
managing credit given to customers and managing the investment portfolio.

Banks are benefited by using the management accounting information to

improve towards achieving the organizational goal and objectives; and to control
over its expenditure. It is effective in minimizing cost, enhancing profitability,
curtails overhead cost and recovers non-performing loans, and beef-up
shareholders fund.

Banks can enjoy several advantages that usually coincide with the ability to
improve operations and overall profitability. Some are-
1. Reduce expenses: Management accounting can help lower the operational
expenses that conduct to analysis on cost of capital.

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2. Managing cash flow: It can analyze and measures the effective liquidity
requirement as well as careful analysis of necessary and unnecessary cash
expenditures.
3. Management decisions: It usually provides a quantitative analysis for various
decision opportunities.
4. Increase financial returns: Management accounting increase financial returns
by analyzing financial forecasts on cost of capital and pricing of their assets
and liabilities.

4. Explain the role of Management Accounting in planning, control and

decision making in a bank.
The main functions that management are involved with are planning, decision
making and control.
Planning
 Planning involves establishing the objectives of an organization and
formulating relevant strategies that can be used to achieve those objectives
 Planning can be either short-term (tactical planning) or long-term (strategic
planning).
Decision making
Decision making involves considering information that has been provided and
making an informed decision.
 In most situations, it involves making a choice between two or more
alternatives.
 The first part of the decision-making process is planning, the second part is
control.

Control
Information relating to the actual results of an organization is reported to
managers.

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  Managers use the information relating to actual results to take control
measures and to re-assess and amend their original budgets or plans.
 Internally- sourced information, produced largely for control purposes, is
called feedback.

Illustration - The managerial processes of planning, decision making and control

Here, management prepares the plan, which is put into action by the managers
with control over the input resources (labor, money, materials, equipment and
so on). Output from operations is measured and reported ('fed back') to
management, and actual results are compared against the plan in control
reports.
In order to make plans, it helps to know what has happened in the past so that
decisions about what is achievable in the future can be made.

5. Management Account is helpful in decision making. Explain.

Or, Why Management Accounting Is Important in Decision-Making
Managerial accounting information provides data-driven input, which can
improve decision-making over the long term that helps to make their business
more successful in business decision contexts.
1. Relevant Cost Analysis: Managerial accounting information is used by
company management to determine what should be sold and how to sell it.
2. Activity-based Costing Techniques: By using activity-based costing
techniques, management can determine the activities required to produce
and service a product line.
3. Make or Buy Analysis: By completing a make or buy analysis, management
can determine which choice is more profitable. While this technique is
certainly useful, the decision makers should only use these analyses as a
factor in the decision.
4. Utilizing the Data: It provides a data-driven look at how to grow. By focusing
on this data, decision makers can make decisions that aim for continuous
improvement and are justifiable based on intelligent analysis.

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6. Compare and contrast between Management Accounting & Financial
Accounting

7. Distinguish between Management Accounting & Financial

Accounting.

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8. Describe the uses of financial statements analysis.
Or, Objectives Of Financial Statement Analysis
The uses/ objectives of financial statement analysis are as follows
1. Assessment of Past Performance: Financial statement analysis judging
management's past performance and opportunities of future performance like
operating expenses, net income, cash flows, return on investment, etc.
2. Assessment of current position: Financial statement analysis shows the
current position of the assets liabilities.
3. Prediction of profitability and growth prospects: It helps in assessing and
predicting the earning prospects and growth rates of earning and judging
earning potential of business enterprise.
4. Prediction of bankruptcy and failure: It is an important tool in assessing and
predicting bankruptcy and probability of business failure.
5. Assessment of the operational efficiency: It helps to assess the operational
efficiency and deviation between standards and actual performance.

9. Describe the limitations of financial statements analysis.

Limitations of financial statements analysis
1. The use of estimates in allocating costs to each period. The ratios will be as
accurate as the estimates.
2. The cost principle is used to prepare financial statements. Financial data is
not adjusted for price changes or inflation/deflation.
3. Companies have a choice of accounting methods i.e. inventory LIFO vs. FIFO
and depreciation methods. These differences impact ratios and make it
difficult to compare companies using different methods.
4. Companies may have different fiscal year ends making comparison difficult if
the industry is cyclical.
5. Diversified companies are difficult to classify for comparison purposes.
6. It does not provide answers to all the users' questions. In fact, it usually
generates more questions!

10. Discuss the factors considered in lending by a bank.

Or, Factors affecting while assessing a loan proposal
(2 Answers)
The major factors that interact to loan pricing are mentioned below:
1. Credit Profile: It will obtain a credit report that shows the amount of debt
have outstanding and how have historically paid the debt and obligations. The
credit report will also contain a "credit score" that ranks the credit history.
2. Property: The type of property are mortgaging also impacts loan pricing.
The value of the property as compared to the amount customer wish to borrow
also impacts to loan price.
3. Income/Debt: The amount of mortgage payments and total debt payments
as compared to the income, ("debt-to-income ratios") may also impact to loan
cost.

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4. Other Factors: Other factors may also affect the risk, and interest rate of
customer and origination charge. These factors include, but are not limited to:
previous bankruptcies, foreclosures or unpaid judgments; and the type of loan
product applied for.

[The following is a list of factors that institutions should consider in loan pricing.
1. Cost of funds: The cost of funds is applicable for each loan product prior to
its effective date, allowing sufficient time for loan-pricing decisions and
appropriate notification of borrowers.
2. Cost of operations: The salaries & benefits, training, travel, and all other
operating expenses. In addition, insurance expense, financial assistance
expenses are imposed to loan pricing.
3. Credit risk requirements: The provisions for loan losses can have a
material impact on loan pricing, particularly in times of loan growth or an
increasing credit risk environment.
4. Customer options and other IRR: The customer options like right to
prepay the loan, interest rate caps, which may expose institutions to IRR.
These risks must be priced into loans.
5. Interest payment and amortization methodology: How interest is
credited to a given loan (interest first or principal first) and amortization
considerations can have a impact on profitability.
6. Loanable funds: It is the amount of capital an institution has invested in
loans, which determines the amount an institution must borrow to fund the
loan portfolio and operations.
7. Patronage Refunds & Dividends: Some banks pay it to their
borrowers/shareholders in lieu of lower interest rates. This approach is
preferable to lowering interest rates.
8. Capital and Earnings Requirements/Goals: Banks must first determine
its capital requirements and goals in order to determine its earnings needs.]

11. What is break even point ?

12. Describe three approaches to break-even-analysis. 8

Three approaches to break-even analysis are (a) the graphical method, (b) the
equation method, and (c) the contribution margin method.
1. In the graphical method, total cost and total revenue data are plotted on a
graph. The intersection of the total cost and the total revenue lines indicates
the break-even point. The graph shows the break-even point in both units
and dollars of sales.

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2. The equation method uses some variation of the equation Sales = Variable
expenses + Fixed expenses + Profits, where profits are zero at the break-
even point. The equation is solved to determine the break-even point in units
or dollar sales.
3. In the contribution margin method, total fixed cost is divided by the
contribution margin per unit to obtain the break-even point in units.
Alternatively, total fixed cost can be divided by the contribution margin ratio
to obtain the break-even point in sales dollars.

13. Discuss the usefulness and assumptions of break-even analysis. 8

Usefulness of break-even analysis

The break-even point is helpful to in making important decisions in business. It
is a simple tool defining the lowest quantity of sales which will include both
variable and fixed costs. Moreover, such analysis facilitates the managers with a
quantity which can be used to evaluate the future demand. If, in case, the
break-even point lies above the estimated demand, reflecting a loss on the
product, the manager can use this info for taking various decisions. It is also
helpful in recognizing the relevance of fixed and variable cost. The fixed cost is
less with a more flexible personnel and equipment thereby resulting in a lower
break-even point.

Assumptions of break-even analysis

1. Costs can be reasonably subdivided into fixed and variable components.
o Fixed costs (depreciation, salaries, rent, etc.) and variable costs (direct
labor and materials) can be easily identified in most cases.
o Semi variable expenses can be problematic, but can nonetheless be
separated into fixed and variable components for analysis purposes.
2. All cost-volume-profit relationships are linear.
o Assumption holds so long as analysis is confined to reasonable range of
operations.
o If levels of operations are doubled, relationship may be different.
3. Sales prices will not change with changes in volume.
o Economic theory states that one would normally expect price increase to
be accompanied by decrease in sales volume and vice versa.
o Assumption holds so long as analysis is confined to reasonable range of
prices.

14. Limitation of Break even analysis

Break even analysis suffers the following limitations:

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15. Define margin of safety. Discuss its implications. 5
The margin of safety is the excess of budgeted (or actual) sales over the break-
even volume of sales. It states the amount by which sales can drop before
losses begin to be incurred. Thus we have the following two formulas to
calculate margin of safety:
MOS = Budgeted Sales − Break-even Sales
MOS = Budgeted Sales − Break-even Sales / Budgeted Sales

Implication:
In investing parlance, margin of safety is the difference between the expected
(or actual) sales level and the breakeven sales level. It can be expressed in the
equation form as follows:
Margin of Safety = Expected (or) Actual Sales Level (quantity or dollar amount) -
Breakeven sales Level (quantity or dollar amount)
The measure is especially useful in situations where large portions of a
company's sales are at risk, such as when they are tied up in a single customer
contract that may be canceled.

16. Define Break-even analysis. Discuss importance of break even

analysis.
Break even analysis is a technique of profit planning that is essentially a
device for integrating costs, revenues, and output of the firm in order to
illustrate the probable effects of alternatives courses of action upon net profits.
Is has been defined a chart which shoes the profitability of otherwise of and
undertaking at various levels of activity and as a result indicates the point at
which neither profit nor loss is made. The beak even chart depicts the following
at various level of activity:
1. Variable costs, fixed costs and total costs
2. Sales value
3. Profit or lass
4. The point at which total costs just equal or break even with sales

Importance of Break-even analysis

Break even analysis provides useful information to management in most lucid
and precise manner. It is an effective and efficient reporting tool of management
accounting. The importance of break even analysis can be enumerated as under.
1. Fair knowledge about break even analysis can be help the banking to
examine loan proposal of a firm.
2. It helps the bankers in assessing working capital requirement of a unit
3. This analysis helps in revealing clear projections of profit planning of an
enterprise at different production vis-a-vis the financial needs
4. It helps the banker in studying the projection cost of production and
profitability statement of a unit prepared to show net position at a given of
output.
5. It is a useful diagnostic tool

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17. What is cost sheet?
Cost sheet is a statement that reflects the cost of the items and services
required by a particular project or department for the performance of its
business purposes. For example, a departmental cost sheet might include the
material costs, labor costs and overhead costs incurred over a given time frame
by a department and it therefore provides a record of costs that are chargeable
to that department.

18. Discuss the uses/ purposes/ advantage of Cost Sheet

The uses/ purposes/ advantages of cost sheet are:
1. Discloses the total cost and the cost per unit of the units produced during the
given period.
2. To enables a manufacture to keep a close watch and control over the cost of
production
3. To guide to the manufacturer and helps in formulating a definite useful
production policy.
4. To fixing up the selling price more accurately.
5. To minimize the cost of production
6. To submit quotations with reasonable degree of accuracy

19. What is meant by cost behavior? How cost behavior helps in

classifying costs in banking? 8
Cost behavior is the change in total costs in response to the change in some
activity. These are referred to as variable costs. Some other costs will not
change in total with a reasonable increase in miles driven. These costs are
referred to as fixed costs. Other costs might be part variable and part fixed.
These are referred to as mixed costs and an example might be depreciation.

20. Mention the classification of costs on different bases. 6

1. Basis of Identity:
– Materials (raw material components, and spare parts, consumable stores,
packing material etc),
– Labor and
– Expenses
2. Basis of Function:
– Production or Manufacturing Cost (raw material, cost of labor, other direct
cost and factory indirect cost)
– Office and Administration Cost
– Selling and Distribution Cost
3. Basis of Variability:
– Fixed Cost / Period Cost
– Variable Cost / Product Cost
– Semi-Variable Cost / Semi-Fixed cost
4. Basis of controllability:
– Controllable Cost
– Uncontrollable Cost

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5. Basis of normality:
– Normal cost
– Abnormal cost
6. Basis of Time:
– Historical Cost
– Pre-determined Cost

21. Define cost accounting. Discuss the concept of service costing. 8

Cost accounting is a process of collecting, analyzing, summarizing and
evaluating various alternative courses of action. Its goal is to advise the
management on the most appropriate course of action based on the cost
efficiency and capability. Cost accounting provides the detailed cost information
that management needs to control current operations and plan for the future.
Service Costing: Services or activities, having public utilities, need to
determine cost of the services or activities offered. A public utility undertaking,
offering services to a community rather than manufacturing a tangible product,
uses service costing.
The service or function, having public utilities, covers water supply service,
electricity supply service, transport service, hospital service, library service,
canteen service, park service, hostel service etc. Each service is unique and
needs a different accounting treatment. An intelligent selection of unit cost is
required to obtain a meaningful cost comparison. A correct choice of unit cost
provides correct cost analysis for decision making destined for effective cost
control and reduction.

22. Discuss the importance of cost accounting to a banker. 6

The aim of cost accounting in a bank is to provide uniform account allocation
within the financial accounting system, which, in turn, affords comprehensive
and transparent cost allocation to cost centers, provides detailed costing
information and complements existing controlling components within the value
area. This is an important principle on the way to creating a comprehensive P&L,
profit centre and business unit accounting process.
The bank are emphasized to applying the cost accounting are-
– Uniform booking and allocation of costs (account allocation guidelines)
– Definition and consideration of imputed costs
– Cost monitoring (target-actual analysis)
– Transparency in terms of cost reduction potential, increased operational
efficiency
– Enhanced information base providing efficient bank controlling

23. Define Working Capital. Explain the factors affecting working

capital requirement. 8
Working capital signifies money required for day-to-day operations of an
organization. No business can run without the provision of adequate working
capital. It is two types: (1) Gross working capital- also referred to as working

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capital, means the total current assets, and (2) Net working capital- the
differences between current assets and current liabilities.
The amount of working capital is determined by a wide variety of factors.
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10. Rate of turnover
11. State of business activity
12. Business policy

24. Describe motives for holding cash in a bank. 5

The amount of cash in bank needs to keep will differ according to its financial
situation, but it should keep some of their investments in cash and cash
equivalents.
1. Safety: Keeping money in savings accounts, money market accounts and
certificates of deposit provides an important level of safety.
2. Current Needs: Everyone needs to keep cash on hand for current needs
that have some cash set aside in money market accounts, savings accounts,
certificates of deposit, etc.
3. Investment Opportunities: it gives chance to jump on a promising
investment opportunity such as when the stock market is riding high.
4. Emergency Fund: Setting money aside in an emergency fund gives the
ability to pay liabilities or an investment.

25. Explain different sources of financing working capital. Explain the

objectives of inventory management. 7
The sources of finance of financing working capital may be four categories are-
1. Trade Credit: It is the primary sources that trade credit constitutes the
important source accounting for approximately two-fifths of the total
working capital.
2. Bank Credit: The banks determine the maximum credit based on the margin
requirements of the security. The forms of bank credit are- Loan and
overdraft arrangement, cash credit, bills purchase and bills discounted.
3. Non-bank Short Term Borrowing: These types of loan are found from
relatives, friends, head office or project office etc.
4. Long –term Sources: It comprises equity capital and long-term borrowings.

The objectives of inventory management can be explained in detail as under:-

1. To ensure that the supply of raw material & finished goods.
2. To minimize carrying cost of inventory.

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 3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence & wastage etc.
5. To make arrangement for sale of slow moving items.
6. To minimize inventory ordering costs.

26. Explain the difference between variable working capital and

permanent working capital. 5
Permanent Working Capital:
To carry on business a certain minimum level of working capital is necessary on
a continuous and uninterrupted basis. For all practical purposes, this
requirement will have to be met permanently as with other fixed assets. This
requirement is referred to as permanent working capital.
Temporary Working Capital:
Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. This portion of the required
working capital is needed to meet fluctuations in demand consequent upon
changes in production and sales as result of seasonal changes.

27. Explain the factors determining the need for working capital.
Or, Describe in brief the various factors which are taken into account
in determining the working capital needs of a firm.
A firm should have neither low nor high working capital. Low working capital
involves more risk and more returns, high working capital involves less risk and
less returns. The factors determining the needs for of working capital are as
below:
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10. Rate of turnover
11. State of business activity
12. Business policy

28. Define working capital. Discuss its significance for a firm. 4

Working capital signifies money required for day-to-day operations of an
organization. No business can run without the provision of adequate working
capital. It is two types: (1) Gross working capital- also referred to as working
capital, means the total current assets, and (2) Net working capital- the
differences between current assets and current liabilities.

Significant of working capital for a firm

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1. Importance to Management: Cost accounting provides invaluable help to
management. These are:
a) Helps in ascertainment of cost
b) Aids in Price fixation
c) Helps in Cost reduction
d) Elimination of wastage
e) Helps in identifying unprofitable activities
f) Helps in checking the accuracy of financial account
g) Helps in fixing selling Prices
2. Importance to Employees: Worker and employees have an interest in which
they are employed. An efficient costing system benefits employees through
incentives plan in their enterprise, etc. As a result both the productivity and
earning capacity increases.
3. Cost accounting and creditors: Suppliers, investor’s financial institution and
other moneylenders have a stake in the success of the business concern and
therefore are benefited by installation of an efficient costing system. They
can base their judgement about the profitability and prospects of the
enterprise upon the studies and reports submitted by the cost accountant.
4. Importance to National Economy: An efficient costing system benefits
national economy by stepping up the government revenue by achieving
higher production. The overall economic developments of a country take
place due to efficiency of production.
5. Data Base for operating policy: Cost Accounting offers a thoroughly analysed
cost data which forms the basis of formulating policy regarding day to day
business.

29. Define lease finance. 3

A lease is a commercial arrangement whereby an equipment owner conveys to
right to use the equipment in return for a rental. In other words, lease is a
contract between the owner of an asset (the lessor) and its user (the lessee) for
the right to use the asset during a specified period in return for a mutually
agreed periodic payment (the lease rentals). The important feature of a lease
contract is separation of the ownership of the asset from its usage.

30. What are different kinds of leases? Discuss about three types of
lease.
Or, Explain different forms of lease finance. 5
1. Operating Lease: The lessee acquires the use of an asset on long-term
basis at one point of time lessee prefers the system of hiring an asset for
each period.
2. Financial Lease: It involves a relatively longer-term commitment on the
part of the lessee. Commonly used for leasing land, buildings and large
pieces of fixed-equipments.
3. Sale and Lease Back: The firm sells an asset, already owned by itsparty
and hires it back from the buyer.

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4. Direct Lease: The lessee does not already own the equipment that acquires
from the manufacturing company directly.
5. Leveraged Lease: Involves as a third party lender that the lessor borrows
funds from the lender and himself acts as an equity participant.
6. Primary and Secondary Lease: The primary lease provides for the
recovery of the cost of the asset and profit through lease rentals followed by
the secondary/perpetual lease at nominal lease rents.

31. Difference between lease finance and hire purchase finance. 6/8
Particulars Lease Hire Purchase
Ownership lies with the Hirer becomes the owner
1. Ownership of
lessor. Lessee has the subject to full installment is
Asset
right to use only. paid.
It is claimed as an
It is allowed to the hirer in case
2. Depreciation expense in the books of
of hire purchase transaction.
lessor.
Installment is inclusive of the
Rentals cover the cost of principal amount and the
3. Rental Payments
using an asset. interest for the time period the
asset.
It is done for longer It is done mostly for shorter
4. Duration
duration. duration
Total lease rentals are Hirer claims the depreciation of
5. Tax Impact
shown as expenditure. asset as an expense.
6. Repairs &
Lessor is responsible in
Maintenance Hirer is responsible.
case of operating lease.
responsibility

32. Explain the importance of lease finance. 6

Leasing industry plays an important role in the economic development of a
country by providing money incentives to lessee. It is more flexible so lessees
can structure the leasing contracts according to their needs for finance. Today,
most of us are familiar with leases of houses, apartments, offices, etc
1. Lease finance is easy to get than getting loan for buying all fixed assets.
2. Monthly rent payment for lease finance will be operating expenses. It will be
allowed to deduct total income. So, company can get tax benefits in lease
financing.
3. It can show as invisible debt of company out of its balance sheet.
4. It is more flexible way of finance.

33. Explain the economies of lease. 6

There are several qualitative considerations which make leasing an attractive
proposition. Some of the commonly cited advantages of leasing are:
1. Shifting the Risk of Technological Obsolescence
2. Easy Source of Finance

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3. Conversion of Borrowing Capacity through off-the Balance-sheet Financing
4. Improved Performance
5. Convenience and Flexibility
6. Maintenance and Specialized Services
7. Lower Administrative Cost

34. Discuss the characteristics of capital of lease. 5

A capital lease would be considered a purchased asset for accounting purposes.
The choice of lease classification will have important results on a firm's financial
statements. To be considered a capital lease, a lease must meet be
characterized by one or more followings:
1. the lease term is greater than 75% of the property's estimated economic
life;
2. the lease contains an option to purchase the property for less than fair
market value;
3. ownership of the property is transferred to the lessee at the end of the lease
term;
4. the present value of the lease payments exceeds 90% of the fair market
value of the property

35. Discuss the relative merits of lease finance and hire purchase
finance.
As we discussed in our introduction to asset finance, the use of hire purchase or
leasing is a popular method of funding the acquisition of capital assets.
However, these methods are not necessarily suitable for every business or for
every asset purchase. There are a number of considerations to be made, as
described below:
1. Certainty: One important advantage is that a hire purchase or leasing
agreement is a medium term funding facility, which cannot be withdrawn,
provided the business makes the payments as they fall due.
The uncertainty that may be associated with alternative funding facilities
such as overdrafts, which are repayable on demand, is removed.
However, it should be borne in mind that both hire purchase and leasing
agreements are long term commitments. It may not be possible, or could
prove costly, to terminate them early.
2. Budgeting: The regular nature of the hire purchase or lease payments
(which are also usually of fixed amounts as well) helps a business to forecast
cash flow. The business is able to compare the payments with the expected
revenue and profits generated by the use of the asset.
3. Fixed Rate Finance: In most cases the payments are fixed throughout the
hire purchase or lease agreement, so a business will know at the beginning
of the agreement what their repayments will be. This can be beneficial in
times of low, stable or rising interest rates but may appear expensive if
interest rates are falling.
On some agreements, such as those for a longer term, the finance company
may offer the option of variable rate agreements. In such cases, rentals or

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 installments will vary with current interest rates; hence it may be more
difficult to budget for the level of payment.
4. The Effect of Security: Under both hire purchase and leasing, the finance
company retains legal ownership of the equipment, at least until the end of
the agreement. This normally gives the finance company better security than
lenders of other types of loan or overdraft facilities. The finance company
may therefore be able to offer better terms.
The decision to provide finance to a small or medium sized business depends
on that business' credit standing and potential. Because the finance
company has security in the equipment, it could tip the balance in favour of
a positive credit decision.
5. Maximum Finance: Hire purchase and leasing could provide finance for
the entire cost of the equipment. There may however, be a need to put
down a deposit for hire purchase or to make one or more payments in
advance under a lease. It may be possible for the business to 'trade-in' other
assets which they own, as a means of raising the deposit.
6. Tax Advantages: Hire purchase and leasing give the business the choice of
how to take advantage of capital allowances.
If the business is profitable, it can claim its own capital allowances through
hire purchase or outright purchase.
If it is not in a tax paying position or pays corporation tax at the small
companies rate, then a lease could be more beneficial to the business. The
leasing company will claim the capital allowances and pass the benefits on to
the business by way of reduced rentals.

36. Features of financial lease and operating lease. 4

Main features of a financial lease:
 the assets has selected by lessee and purchased by the lessor
 the lessee uses that asset during the lease
 the lessee pays a series of installments or rentals
 the lessee has the option of acquiring ownership of the asset

Main features of a financial lease:

 short term arrangement for the use of asset
 Various costs related to that asset like are paid by the owner
 It is shorter than the economic life of the asset.
 lessee can cancel the operating lease prior to the end date.
 The rent is lower than the cost of asset.

37. Advantages and disadvantages of financial (captal) lease and

operating lease. 6
Advantages & disadvantages of financial or capital lease:
Advantages: A capital lease is usually used to finance equipment for the major
part of its useful life, and there is a reasonable assurance that the lessee will
obtain ownership of the equipment by the end of the lease term.

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Disadvantages: Capital leases are used for long-term leases and for items that
not become technologically obsolete, such as many kinds of machinery. Also,
Capital leases give the lessee the benefits and drawbacks of ownership, so they
are considered as assets, and they may be depreciated and these leases are
considered as debts.

Advantages & disadvantages of operating lease:

Advantages: An operating lease usually finances equipment for less than its
useful life, and at the end of the lease term the lessee can return the equipment
to the lessor without further obligation.
Disadvantages: Operating leases, sometimes called service leases are used for
shot-term leasing and often for assets that are high-tech or in which the
technology changes often, like computer and office equipment. The lessee uses
the property but does not take on the benefits or drawbacks of ownership,
which are retained by the lessor and The rental cost of an operating lease is
considered an operating expense.

38. Define hire purchase. Mention the characteristics of hire purchase.

Hire purchase is a type of installment credit under which the hire purchaser,
agrees to take the goods on hire at a stated rental, which is inclusive of the
repayment of principal as well as interest. The hire purchaser acquires the
property (goods) immediately on signing the hire purchase agreement but the
ownership or title of the same is transferred only when the last installment is
paid.

Characteristics of Hire-Purchase System

Hire-purchase is a credit purchase.
 The price under is paid in installments
 The goods are delivered in the possession of the purchaser
 Hire vendor continues to be the owner of the goods
 The purchaser has a right to use the goods as a bailer
 The purchaser has a right to terminate the agreement at any time
 The purchaser becomes the owner of the goods after the payment of all
installments

39. Discuss briefly the importance of budgetary control system with

special reference to Banking Organization
Budgeting is a powerful management tool that is used to accomplish four major
objectives: planning, coordination, motivation and control. The budget is a
planning tool that represents the expected results of operations, thus it is a way
of formulating and expressing in monetary terms the objectives of an
organization and the operational plans for achieving those objectives. A budget
is therefore a control tool. An important part of budget preparation is
consideration of the importance of goal definition, individual aspirations and
goals. The purpose of a budget in budgetary control is to specify the standard of
acceptable performance in the banks. When a bank sets standards of acceptable

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performance, it has to be done with good judgment or else motivation may be
misplaced. If a budgetary control system is not accepted by the people who
have to operate it, they may hamper and obstruct the information flow so that
realistic planning and control decisions will be difficult to take. Therefore, for the
budgetary process to be successful, it requires top-management support, co-
operative and motivated middle management staff and well-organized reporting
systems.

40. Define Capital Budgeting. Discuss the use of the time-value of

money in capital budgeting.
Capital budgeting is the planning process used to determine whether an
organization's long term investments such as new machinery, replacement
machinery, new plants, new products, and research development projects are
worth the funding of cash through the firm's capitalization structure. It is the
process of allocating resources for major capital, or investment, expenditures.
One of the primary goals of capital budgeting investments is to increase the
value of the firm to the shareholders.

Uses of time value of money:

Time Value of Money (TVM) is can be used to compare investment alternatives
and to solve problems involving loans, mortgages, leases, savings, and
annuities. TVM is used for calculating the expected return on capital projects
(investments). It is also used to calculate cash flows for bonds (debt) issued or
purchased.
A TVM calculation is often used in retirement planning. Basically, one should
determine the amount of money that must be saved each period to reach some
pre-determined level of savings in the future (point of retirement),and then,
based on some amount of cash outflow while in retirement, one has to
determine how long the savings will last.

41. Discuss the techniques of capital budgeting

There are a number of techniques of capital budgeting. Some of the methods
are based on the concept of incremental cash flows from the projects or
potential investments are as follows:
1. Payback Period: The basic premise of this method is to determine the amount
of time that is required to recoup the funds spent on the capital project or
equipment expenditure.
2. Net Present Value: It calculates whether the cash flow is in excess or deficit
and also gives the amount of excess or shortfall in terms of the present
value.
3. Internal Rate of Return (IRR): It is a metric used by the capital budgeting in
order to determine whether the firm should make investments or not.

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42. Discuss the utility of cash budget as a tool of the cash
management. What are the steps involved in construction of a cash
budget?
The utility of cash budget as a tool of the cash management:
A cash budget shows the expected flow of cash. Cash flow is crucial to any
entity and therefore the cash budget is very important to any business entity as
it involves planning, control, coordination, etc.
A cash budget allows a company to establish the amount of credit that it can
extend to customers without having problems with liquidity.
The cash flow budget helps the business determine when income will be
sufficient to cover expenses and when the company will need to seek outside
financing.

The Steps involved in developing a cash budget:

Step #1. Determine and adequate minimum cash balance.
Step #2. Forecasting Sales
Step #3. Forecasting Cash Receipts
Step #4. Forecasting Cash Disbursements
Step #5. Estimating the end of the month cash balance.

43. What is payback period? How payback period is used in capital

budgeting decision

Payback period in capital budgeting refers to the period of time required for
the return on an investment to "repay" the sum of the original investment.
Payback period intuitively measures how long something takes to "pay for itself."
All else being equal, shorter payback periods are preferable to longer payback
periods. Payback period is widely used because of its ease of use despite the
recognized limitations described below.

How payback period is used in capital budgeting decision

Payback period as a tool of analysis is often used because it is easy to apply and
easy to understand for most individuals, regardless of academic training or field
of endeavor. When used carefully or to compare similar investments, it can be
quite useful. As a stand-alone tool to compare an investment to "doing nothing,"
payback period has no explicit criteria for decision-making.

The formula or equation for the calculation of payback period is as follows:

Payback period = Investment required / Net annual cash inflow

The calculation for discounted payback period is a bit different than the
calculation for regular payback period due to the fact that the cash flows used in
the calculation are discounted by the weighted average cost of capital used as
the interest rate and the year in which the cash flow is received.

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The payback method is not a true measure of the profitability of an investment.
Rather, it simply tells the manager how many years will be required to recover
the original investment. Unfortunately, a shorter payback period does not always
mean that one investment is more desirable than another.

44. What is Cash flow Statement?

45. What is purpose/ objectives of cash flow statement

46. Difference between Cash Flow Statement and Fund Flow

Statement

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47. Difference between Cash Flow Statement and Cash Budget
The difference between Cash Flow Statement and Cash Budget are summarizes
below:

48. Importance/ Usefulness of Cash Flow Statement

Cash flow statement is very important/ useful to the management for short term
planning are described below:

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49. Objectives of Cash Budget/Cash Flow Forecast

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