Accounting For Managerial Decisions (BMS : SEM-I1}, “10. Disolosure of Other Long-term Liabilties in Company Balance Sheet [Ans.: Para 2.5-6-D) “44, Disclosure of Long-term Provisions in Company Balance Sheet Para 2.5-6-E) | 12.Disclosure of Short-term Borrowings in Company Balance Sheet [Ans.: Para 2.5-6-F "48. Disclosure of Other Current Liabilities in Company Balance Sheet _—[Ans.: Para 2.5-6.G) 14, Diaclosure of Short-term Provisions in Company Balance Sheet [Ans.: Para 2.5-6-H) 15. Disclosure of Tangible Assets in Company Balance Sheet 16. Disclosure of Intangible Assets in Company Balance Sheet [Ans.: Para 2.5-6-J) 1 17, Disclosure of Non-current Investments in Company Balance Sheet [Ans.: Para 2.5-6-k] 18. Disclosure of Long-term Loans and Advances in Company Balance Sheet[Ans.: Para 2.5-6-L) \ 19. Disclosure of Other Non-current Assets in Company Balance Sheet {Ans.: Pata 2.5-6-M) 20. Disclosure of Current Investments in Company Balance Sheet [Ans.: Para 2.5-6-N) \ 21 Disclosure of Inventories in Company Balance Sheet [Ans.: Para 2.5-6-0) 22. Disclosure of Trade Receivables in Company Balance Sheet [Ans.; Para 2.5-6-P} 23, Disclosure of Cash and Cash Equivalents in Company Balance Sheet [Ans.: Para 2.5-6-Q) 24. Disclosure of Other Short-term Loans and Advances in Company Balance Sheet [Ans.: Para 2.5-6-R} 28. Disclosure of Contingencies and Commitments in Company Financial Statements [Ans.: Para 2.5-6-7] | 26. Disclosure of Revenue from Operations in Statement of Profit and Loss of a company {| (Ans.: Para 2.7-2) | 27.Disclosure of Finance Costs in Statement of Profit and Loss of a company [Ans.: Para 2.7.3) 28, Disclosure of Other Income in Statement of Profit and Loss of acompany [Ans.: Para 2.7-4) 29,Unamortized Expenditure Para 2.8-A-22) 30. Currant tax ‘31. Classification between current and non-current items. 32. Accounting Standard 1 CRS oer sey | | 1. hh of flovng ttomons et 7 | (a) Payment to Auditors must be shown as a separate item on the Cr. of the profit & loss a/c ofa | company (b) Payment to Auditors can be clubbed with other expenses and shown under Misc. Expense: iit is loss than 1% ofthe total revenue \Ucf Payment to Auditors as advisor in Tax, Company Law must be shown as a separa Item on the Dr, ofthe profit & loss alc of a company (@) Payment to Auditors as audtors must not be shown asa separate tem on the Dr. ofthe proft 4& loss alc of a company in order to maintain confidentiality, 2. Claims not acknowiedged as debts (a) is shown under Trade Recelvables in the balanco sheet of a company : (b)is shown under Trade Payables in the balance sheet of a company * (c) is shown under Provisions in the balance sheet of a company . ~{€) is shown by way of a noto tothe balance sheet of a company under Contingent Liabilities |. Uncalled amount on party paid shares (a) is shown under Investments in the balance sheet of a company {(b) is shown under Share Capital in the balance sheet of a company (6) is shown undor Provisions in the balance sheet of a company {df is shown by way of a note to the balance sheet of a company under Contingent Labites 4. Amount of Arrears of cumulative dividends {a) is dobited to the profit and loss a/c of a company as Provision for Proposed Dividends ()is deductod from Pref. Share Capital In the balance sheet of a company _ (C) is added to Prof. Share Capital in the balance sheet of a company \(¢) 1s shown by way of a note to the balance sheet of a company under Contingent Lin4 rate Financial Statements 3 executed contracts on capital account 3 (a) is shown 2s Capital Work-in-progress under Fixed assets in the balance sheet of a company - is shown under Share Capita in the balance sheet of a company “ (¢) is shown under Loans and Advances on the Assets side inthe balance sheet of a company " _jayis shown by way of a note to the balance sheet of a company under Contingent Liabilities - gn the Notes on Fixed Assets of a company {@) Gross Block Closing = Opening WDV + Purchases - Sales - {p) Gross Block Closing = Opening Gross Block + Purchases - Sales - Depreciation | (¢) Gross Block Closing = Opening WDV + Purchases - Sales - Depreciation gy Gross Block Closing = Opening Gross Block + Purchases - Sales 1» imine Notes on Fited Assets of a company (a) Depreciation Closing = Opening Depreciation - Depreciation for Curent Year + Depreciation _ "on Assets sold a) Depreciation Closing = Opening WDV + Depreciation for Current Year - Depreciation on Assets sold ~(¢) Depreciation Closing = Opening Depreciation + Depreciation on Assets Purchased during Year + Depreciation on Closing WOV “soy Depreciaon Closing = Opering Depreciation + Depreciation for Gurent Year- Depreciation ‘on Assets sold ', Inthe Notes on Fixed Assets of a company {a) Not Block Opening = Closing Net Block - Opening Depreciation | *(p) Net Block Opening = Opening Gross Block - Closing Depreciation {c) Not Block Opening = Opening Gross Block - Current Depreciation {ay Net Block Opening = Opening Gross Block - Opening Depreciation 9, Inthe Notes on Fixed Assets of a company, Closing WOV + Depreciation for the year Is equal to (a) Opening Gross Block “(Ff Opening WDV (¢) Closing WDV (d) Closing Gross Block 40.\n tho Notes on Fixed Assets of a company (a) Closing WDV = (Closing Gross Block + Assets Purchased - Assets Sold) - (Closing Depreciation + Depreciation during current Year - Depreciation on assets sold) {b) Closing WOV = (Opening Gross Block + Assets Purchased - Assets Sold) - (Opening "Depreciation - Depreciation during current Year + Depreciation on assets sold) “er losing WDV = (Opening Gross Block + Assets Purchased - Assets Sold) - (Opening ee Depreciation + Depreciation during current Year - Depreciation on assets sold) (d) Closing WOV = (Opening WDV + Assets Purchased - Assets Sold) - (Opening Depreciation | + Depreciation during current Year - Depreciation on assets sold) “41, Short Term loans, for the purpose of disclosure in the balance sheet of a company (a) have been defined as ose which are dv for not less than 1 year as a he date of he Balance Sheet yYhave been defined as those which are due for not more than 1 year as at the date of the Balance Sheet es (c) have been defined as those which are due for not more than 6 months as at the date of the Balance Sheet - (d) have been defined as those which are due for not less than 6 months as at the date of the Balance Sheet | 12.When demand for tax raised by the income-tax department is disputed by the company by fling an appeal Ad} the amount is shown as a contingent liability in the notes to accounts ~~ (b)no entry is passed {c) the amount is debited to Profit & Loss Account and credited to Provision for Tax A/C (d) the amount is debited to Tax Paid Account and credited to Provision for Tax A/c 3, When demand for additional tax raised by the income-tax department is accepted by the company {a) the amount is shown as a contingent liability in the notes to accounts. (b) no entry is passed UC) the amount is debited to Profit & Loss Account and credited to Provision for Tax A/c (d) the amount is debited to Tax Paid Account and credited to Provision for Tax AlcTinarchal Searomenes ” (1). V1 2) BVI) Curent Asante (4) Curent Asrets (5) Loans ant Aebwarems (8) Current Liabites (7) Contingent Laabitties (8) more (9) Contingant \iatities (10) ¥: 1.00.00 (11) rot (12) 7 years (13} non-currant (14) current (15) current , True: 7.8.10, 11 Fase :1.2.3.4.5,6.9, 12.19, 14.18 {G.1 (Disclosure of Share Capital in Balance Sheet): A Lit has an authored cage of P50 00 000 § into Equity Shares of € 10 each, The company invited applications ter (0 O00 snares, The | fague was fuly subscnbed. All cats wore made and wero duly tecorvad sxcact tw ‘nat cab of € 2 7 er snare on 1,000 shares. $00 of the sharas on which na! call mis not recerved ware efoto Shon how Share Capstal wil appear in tho Balance Sheet of the company as per Rens Sects ito the Companies Act 1956 7 ¥ [Ans.: 3,90,000 + 4,000 + 4.000 » * 3,98,000} | q.2(oisciosure of Share Capitan): ALtd has authored captal of 90,00.000 sedate 9 95.360 | Equity Shares of € 10 each. A Ltd, allotted 10,000 Equity shares of 10 each a Sty ous 1D ; tones to tho Memorandum of Assocuttion and 8,000 Equity shares of ® 10 9ach a3 828y paw ‘vendors against the purchase of buikling and offored 5,00,000 Equity shaves af f 10 ener io ihe ay (78 called up). The issue was fully subscribed. Al money ware dy wecewed wih he "oilowing exceptions ‘Asano holds 4,000 sharos has not paid anything ater Application meney (2 ger snare) (Director of A Lic) who holds 600 shares, has paid only & 6 per share. Cirho holds 400 sharon, haa paid only & 6 per share 4,000 shares held by Mr, A wore lorteited, “Required : Show how the Share Capital will appear in the Balance Sheet of A Let (Ans.: 1,50,000 + 39,60,000 + 8,000 + &.000 « 41.24.00} ~ @3:0n 1-4-2012, V Ltd. was formed with an authonsed capaa! of € 10.00,000, eweded inte 7.00.000 shares of ® 10 each, The company Issued prospectus wwitng applicators for 30.200 Equity hares Tho company received applications for 85,000 Equity shares. Dunng ine Wat your, 9 Ger ‘aare called. Fi holding 1,000 shares and 8 hokting 2,000 aharea ct not cay "he Neat cil of Fz por snaro. S's sharns wore lreted ater th fst cal and ater on 1300 ot ne ete sharon ued at & 6 per share, ® 8 called up. th following Share Captal in the Balance Sheet of the company as per Revises Schedvie-V Part? cf the Companies Act. 1956. ‘Asso prepare ‘Holes to Accounts’ for thw same, [Ana.; 6,786,000 - 2,000 + 3,000 = € 6,77,000) : From me following information, prepare Protit and Loss Statement af ABC Ltt for he year ist March, 2015 ; Pavers Revenue trom Operations 2608 Employee Benatits Expense 850 5. Dapreciaton and Amonisation Expense 150 | &, Cost of Materials Consumed 1,000, |. Other Income ad os Finance Costs 2| M Accounting For Managerial Decisions (BMS: SEM 1 14. When assessed tan is less than the provision for tax mace by fa) the amourt is debted to Tax Pad Account and created to Prof {B) Mo entry ss passed é&) me amount ss Gedted to Prott & Loss Account and creited to Provision for Tax Ale «Ue ihe amount ts cebtied to Provson for Tax Account and credited to Proft & Loss Ate 45. Which of mne following statements is talse 7 2) Dicend is noenally caiculated with reference 10 paid-up capital {b) No Guasend is paid on amounts pad by sharenolders as cals in advance {c) # me company’s artes of association so provide, dvdend may rot be paid on the share, | cn which calls are S38 outstanding | Jet nem snares are issued during the year, Gvidend is paid a ful rato Imespectve ofthe pares | of noiding | +. Every Balance Sheet must comply with thé requirements of Pan | of S | _VI_ of ne Companies Act, 1956 as far as possitie. 2. Every Prott and Loss Account must comply witn the requrements of Part Wot: __Si__ of ne Companies Act 1956 as far as possible. Scher | 4. paerest accrued on mwestmerts required tobe shown under_C FF (Fixed Assets/ Assets) the balance sheet of a company. Cone 4. Loose tools are required to be shown unt balance sheet of 2 company. Lea 5. Bis Recerable ae requred to be shown under {Loans and Advances / Cures: | Assets} in the balance sheet of a company. Curent | ce (Fued Assets / Current Assets) inte | 6. interest accrued but not due on 2 Secured Loanis required to be shown under_< (Cures | Liabésies / Secured loans) in the balance sheet of a company. ek | 7. Uncaied amount of panty paid shares is required to be shown under —— (Contingent | | | | | ables / Share Capital) in the balance sheet of a company. &. Shost Term Loans have been defined vide Schedule VI as those which are due for not 110° | less / more) than 1 year as at the date of the Balance Sheet. 9. Arrears of Fuxed Cumulative Preference Dividends are required to be shown under Vertical analysis involves {a) finding out the relationship between an item in respect of two concerns in different years {b) finding out the relationship between two items in respect of two concems over two yeady of Financial Statements 123 lo} finding out the relationship between two items in respect of the same concern and in the ~ " same year, (4) finding out the relationship between two tems in respect of the same concem over two years. Following are examples of Vertical Analysis (a) Ratio Analysis (b) Cash Flow Statements {c) Trend Percentages Ld) (a) and (0) Owner's Funds (a) Capital - Reserves and Surplus - P & L Alc Dr. Balance - Misc. Expenditure not written off (b) Capital + Reserves and Surplus + P & L A/c Dr. Balance - Misc. Expenditure not written off Llc) Capital + Reserves and Surplus - P & LA/e Dr. Balance - Misc. Expenditure not written off (4) Capital + Reserves and Surplus - P & L Alc Dr. Balance + Misc. Expenditure not writen off 7. Own Funds + Loan Funds equal to (a) Total Funds Available (b) Capital Employed only (c) Fixed Assets + Investments + Working Capital only 40) Each of the above . Total Assets are equal to (a) Fixed Assets + Investments + Current Assets (b) Fixed Assets + Investments + Working Capital (c) Own Funds + Loan Funds - Current Liabilities (Gd) Fixed Assets + Investments + Current Liabilities |. Capital Employed is equal to (a) Fixed Assets + Investments + Current Assets \ (0) Fixed Assets + Investments + Working Capital (c) Fixed Assets + Investments + Current Liabiities (a) None of the above 10. Owners’ Funds are equal to (a) Capital Employed (0) Fixed Assets + Investments + Working Capital \-(C} Total Assets - Current Liabilties - Loan Funds (d) None of the above I. In a Vertical Financial Statement, accumulated losses (a) ate added to the total of (a) Capital and (b) Reserves & Surplus (0) are deducted from the total of Capital and Reserves & Surplus (c) are shown under ‘Application of Funds’ 2. Following is nota Quick asset {a) Loose tools \lof Advance tax (c) Bills Receivable (d) Interest Accrued 13. Following is not a Quick liability {@) Unclaimed Dividends (0) Public Deposits (o} Bank Overdraft (@) Advances Received 4. In year 1 Is taken as the base year and the figures of all the years (year 2, year 3) are compared with those of the base year (a) Cash Flow Statements (b) Common Size Statements ¥, Mo) Trend Analysis (@) None of the above ‘ 15. Inter-firm and inter-period comparisons are made with the help of 8 (a) Comparative Statements (b) Common Size Statements “ (6) Trend Analysis (d) Cash Flow Statements 18. Ina Common Size Income Statement, {a) Sales of year 1 is taken as the base figure and the sales of allthe years (year 2. year 3) are compared with that of the base year (b) sales is taken as the base and treated as equal to 100Accounting For Managerial Decisions (BMS : SEM-Iit) {c) sales figures of various firms in the same industry are compared (d) None of the above Common size Statements are used _{a) only for Horizontal Analysis, (0) only for Vertical Analysis {e)-for both Horizontal Analysis and Vertical Analysis (4) neither for Horizontal Analysis nor for Vertical Analysis The term financial statement refers to (2) only income statement (0) only batance sheet (6) only cash flow statement ld) all of the above In figures of two or more periods are placed side by sie to faciltate easy and meaningful comparisons. | {oYcomparative statement analysis (b) common-size statement analysis | (c) trend percentage analysis (d) none of these | 20. What is shown by a comparative balance sheet ? j {a) two years balance sheet figures only y only increase or decrease in figures. (©) only percentage of increase or decrease sy’ allot the above 21. The comparative income statement shows the increase or decrease of previous year over the {a) only sales (b) only profit (c) only expense «(dll of the above 22, The technique of converting figures into percentages to some common base is called. {a} common-size statement analysis {b) trend percentages {(c) ratio analysis (d) none of these jis a assumed to be hundred and al 23. In.common-size income statement analysis th other figures are expressed as a percentage of \(a) sales, sales (b) sales, profit (c) sales, net profit (d) none of these 24. In common-size balance sheet analysis, the _______are taken as cent percent. {a) fixed assets, (0) total capital (0) total assets () none of these 25, The technique of taking first year figures as base and comparing with subsequent year s illed See \(a) trend analysis, (b) ratio analysis (c) common-size statement (d) none of these PPM a an kn 1. Horizontal Analysis involves analysis of two items in the financial statement of the same concem and in the same year. 2. Foran oll company, stock of oil is a liquid asset. 3. Ina vertical balance sheet, fictitious assels are included under Fixed Assets. 4. Owed Funds is an intemal source of Finance. 5. Goodwill is shown under ‘Application of Funds’ in the vertical Balance Sheet. 6. Advances to suppliers for goods are classified as Quick Assets in vertical statements, 7. Advances to contractors for construction of building are classified as Loans & Advances under Current Assets in vertical financial statements. 8. Unclaimed dividends are classified as Current Liabilities in vertical financial statements. 8. Penalty for late payment of sales tax on sale of trading goods is an operating expenditure, 10. Common-size statements are used for both horizontal and vertical analysis. 11. While comparative statement shows the size of change, trend statement shows the. directonol change. 12. Common-size analysis is used for comparing performance of a company in one year with that of another year. 13. In common-size analysis, the industry average is compared with the performance of a companytudy of Financial Statements Bs In common-size analysis, all the items in the financial statements are expressed as a percentage ‘of the concemed totals. 45.Common-size analysis expresses items in the balance sheet as an index relative to the base year, 16.A financial statement for one company that shows two or more years in a side-by-side format is ‘called a comparative financial statement, (@ | 25. @) @) co) 24. ©) 0.2 True : 5, 8, 10, 11, 13, 16 Fal |, 2, 3, 4,6, 7,9, 12, 14, 15 False; Horizontal analysis involves comparison of two concems or two years in respect of the samo item, False; Stock, which cannot be quickly converted in cash is not an liquid asset. False; Fictitious assets are deducted from the Proprietor's Funds. False; Owed (Borrowed) Funds is an extemal source of the Finance. False; classified as Non-Quick Current Assets (being pre-payments).. 7. False; classified as capital work-in-progress under Fixed Assets. . False; a non-operating expenditure. 12. False; Comparative 5. False; Trend Analysis. Land and Buildings F ¥\ 8,00,000 4 Stock (iS 2,75,000 { Prepaid Expenses © f) 60,000 Debtors ¢ 5,00,000 Debentures {= 4 3,00,000 Bank overdratt _U. Equity Share Capital ©¢ 10,00,000 ofit & Loss A/c (Credit) (2S Proposed Dividend we 90,000 ong Term investments <;_ Advance Tax@C 1,00,000 BE Provision tor Tax eu Bills Payable CL 45,000 a Unclaimed Dividend cL 25,000 reliminary Expenses not yet Wiof- St ou are required to arrange the above items in the form of a vertical (columnar) Balance-sheet for financial analysis and determine (a) Current Assets (b) Fixed Assets (c) Current Liabilities ) Proprietary Funds (e) Quick Assets (f) Quick Liabilities. (T.¥.8.Com., Oct. 2005, adapted) [Ans.: CE % 16,00,000)No. Topic 11. Theory Questions 11.1 Descriptive Questions 11.2 Short Notes Objective Questions 12.1. Multiple Choice Questions: 122. State Whether True or False 42.3. Check Your Answers Practical Problems 13.1 Compute Balance Sheet Ratios 132 Compute P & L Ratios 13.3 Compute Various Ratios SER senate 1. Explain: Uses of Ratio Analysis (March 06, 07) ‘State the different ratios according to Conventional & Functional Classification, [Ans.: Para 8) [Ans.: Para 3} ‘3. State the significance of the following ratios : (a) Retum on Capital employed (including long term borrowings) (0) Creditors Tumover Ratio . Explain in brief Debtors Tumnover Ratio. Brefiy state the different types and names of ratios. . Explain in brief Limitations of Ratio Analysis. (April 01, Oct. 2005, 07) 7. Explain in brief Debtor Tumover Ratio and Creditor Tumover Ratio. (April 2005) [Ans.: Para 6.7, 6.) 8. Explain in brief Trading on Equity. (April, Oct. 2005, 07) [Ans.;Pare7) 9. Distinguish between Over-trading and Under-trading. (Oct. 2003) [Ans.: Para 7.2 & 74) 10. Explain in brief - Window Dressing of Current Ratio. (Mar. 2004, 2006, Oct. 2004) [Ans.: Para 4.) 11, Explain in brief - Capital Gearing Ratio. (Mar. 08) [Ans.: Para 46) aos) Write a Short Note on - 1. Different forms of ratios 2. Conventional classification of ratios 3. Functional classification of ratios 4, Ratios useful for Creditors 5. Ratios useful for Shareholders 6. Ratios useful for Management 7. Patios useful for Lenders, 8. Current Ratio 9. Liquid RatioRatio Analysis and Interpretation 10. Stock to Working Capital Ratio 11. Propristory Ratio ¥2.Debt Equity Ratlo 19,Capital Gearing Ratio 14.Gross Profit Ratio 15. Operating Ratio 16.Expensos Ratio. 17. Operating Profit Ratio 18.nlet Profit Ratio 19. Stock Tumover Ratio 20.Retum on Capital Employed 21.Retum on Proprietors’ Funds 22, Return on Equity Captal _ 23.Dividend Payout Ratio | 24.Eaming Per Share __25.Price Eaming Ratio 26. Debtors Tumover - 27.Creditors Tumover 28.Overrading _ 29.Over-capitalisation 4 __30.Ratos for Inter-company comparisons | 31.Ratios for Inter-period comparions __32.Limitations of Ratio Analysis — Ee _ A_Concepts | 1 Current Ratio 4a) Balance Sheet Ratio (b) Revenue Statement Ratio ce (c) Composite Ratio (8) None of the above _ 2. Balance Sheet Ratios may indicate E> (a) relationship between the profits and the investments of the concem ™(6) relationship between the assets and the liabiliies of the concem (c) relationship between the profitabiliy and the sales of the concem (4) relationship between the profits and the assets of the concem Gross Profit Ratio (a) Balance Sheet Ratio \{6) Revenue Statement Ratio (¢) Composite Ratio (d) None of the above _ 4. Liquid Ratio Bi \(a} Balance Sheet Ratio (b) Revenue Statement Ratio (c) Composite Ratio (6) None of the above 5. Revenue Statement Ratios may study {a) relationship between the profits and the investments of the concem (b) relationship between the revenue and the assets of the concem (cJ relationship between the profitability and the sales of the concem ____(d) relationship between the profits and the assets of the concam Propristory Ratio (a) Balance Sheet Ratio (b) Revenue Statement Ratio {c) Composite Ratio (@) None of the above‘Composite Ratios show 8. Capital Gearing Ratio SayBalance Sheet Ratio. (c) Composite Ratio 9. Operating Ratio (a) Balance Sheet Ratio {c) Composite Ratio 10. Debt-Equity Ratio lay Balance Sheet Ratio (c) Composite Ratio 11. Net Operating Profit Ratio (a) Balance Sheet Ratio (c) Composite Ratio 42. Stock-Working Capital Ratio Balance Sheet Ratio (c) Composite Ratio 13. Stock Tumover Ratio (a) Balance Sheet Ratio (c) Composite Ratio 14, Expenses Ratio (a) Balance Sheet Ratio (c) Composite Ratio 15. Net Profit Ratio (a) Balance Sheet Ratio (c) Composite Ratio 16. Retum on Capital Employed (a) Balance Sheet Ratio ‘Uc Composite Ratio 17, Retum on Proprietors’ Funds (a) Balance Sheet Ratio fof Composite Ratio 18. Return on Equity Capital Ratio {a) Balance Sheet Ratio fo) Composite Ratio 19, Debtors Tumover Ratio (a) Balance Sheet Ratio x(c) Composite Ratio 20. Creditors Tumover Ratio (a) Balance Sheet Ratio ‘Ule) Composite Ratio 21. Dividend Payout Ratio (a) Balance Sheet Ratlo {9} Composite Ratio 22. Liquidity ratios (a) Capital gearing ratio, Debt-Equity ratio and Proprietory ratio Accounting For Managerial Decisions (BMS + Spy, hy __{@) relationship botween the assets and the liabilities of the concern ____LUteFFelationship between the profits and the funds employed of the concern ~~ (C) relationship between the profitability and the sales of the concem | (d) relationship between the sales and the investments of the concem (b) Revenue Statement Ratio (@) None of the above ‘Ulb} Revenue Statement Ratio (d) None of the above (b) Revenue Statement Ratio (@) None of the above ‘«Uof Revenue Statement Ratio (a) None of the above (b) Revenue Statement Ratio (@) None of the above ‘40 Revenue Statement Ratio (d) None of the above {ef Revenue Statement Ratio (@) None of the above * (0) Revenue Statement Ratio (4) None of the above {b) Revenue Statement Ratio. (d) None of the above (b) Revenue Statement Ratio (6) None of the above : (b) Revenue Statement Ratio (d) None of the above (b) Revenue Statement Ratio (@) None of the above 7 (b) Revenue Statement Ratio (d) None of the above (b) Revenue Statement Ratio (d) None of the above x (DMLiquid ratio and Current ratio we (c) Stock turnover ratio; Debtors tumover ratio {d) Retum on investments, Return on equity capital 4——e— es, putin Analysis and Interpretation a gp. Leverage ratios Capital gearing ratio, Debt-€ a Liquid rato and Current ato.” "%° 84 Proprietary ratio (@) Stock mover Fatio: Debtors tumover ratio (d) Rloturn on investments, Return on 2A Ona) ialcs G ow Septal a) Capttal gearing ratio, Debt-Equity rati a Liquid ratio and Current ato" abbas dad (6) Stock turnover ratio; Debtors tumover ratio (d) Return on investments, Return on equity capital 5. Coverage ratios (2) Capital gearing ratio, Debt-Equty ratio and Proprietory ratio. (b) Liquid ratio and Current ratio \ley Dividend Payout, Debt Service (d) Return on investments, Return on equity capital 26. Profitability ratios (a) Capital gearing ratio, Debt-Equity ratio and Proprietory ratio (b) Liquid ratio and Current ratio (c) Stock turnover ratio; Debtors tumover ratio \id) Fleturn on investments, Return on equity capital 27. Following Profitability Ratios are useful for Share Holders (a) Liquid Ratio and Stock-working Capital (o)-Retum on Proprietors Funds, Retum on Equity Capital (c) Operating Ratio, Expense Ratios 28. Following Ratios are useful for Short Term Creditors (a) Current Ratio, Liquid Ratio and Stock-working Capital (b) Retum on Proprietors Funds, Return on Equity Capital (c) Operating Ratio, Expense Ratios 29. Following Ratio is useful for Long Term Creditors {a) Current Ratio (b) Return on Equity Capital (c) Expense Ratios (0)Debt Equity Ratio 90, Standard Current Ratio May 21 (by 4:1 (6) 65% (a) 1.33 31. Standard Liquid Ratio (a) 2:4 Oya (c) 65%. (d) 1.33 82. Standard Proprietory Ratio (a) 2:1 (b) 4:1 ey 65% (d) 1.33 48. “Standard Debt Service Coverage Ratio (a) 2st (ott (0) 65% 94.33 4. Standard Debt-Eqully Ratio Ma) 21 (byt (c) 65% (9) 1.33 24 Ma) Standard Current Ratio {b) Standard Liquid Ratio (©) Standard Proprietary Ratlo (a) Standard Debt Service Coverage Ratio " (@) Standard Current Ratio of Standard Liquid Ratio (©) Standard Pioprietory Ratio (d) Standard Debt Service Coverage Ratioi ; 22 Accounting For Monagerial Decisions (RMS: SEMI), 7, NS a) Stardars Cosrent Fatio (©) Standant Liquid Ratio Ap) Standard Prooetory Bato (@) Stondars Debt Service Coverage Ratio BIS {a} Stedard Carrere Rate (@) Stansard Liquid Rato [e) Standard Prsosetory Rano: le? Standard Debt Sence Coverage Ratio 21 > ta? Standard Dedt-Equity Ratio. (b) Standard Liquid Rabo (©) Stancat Propnetory Ratio 1, Ligut rato indicates the company’s abiity to meet ts long term Eabiities. 2. Quen Assets = Current Assets - (Stock - Prepaid Expenses) 3. Bark Overat = Curent Lanilties - Quick Lisbites 4. Bark Overt 5 High Propnetary Ratio mdicates low nsk for the creditors. High Stock Turnover Rate indeates high cost cf goods sold 7. Al other tings remanng the same. issue of new shares wil improve the current ratio. &. The cference between Die curert and quick ratio is that inventory is reduced fom eure fabites when computing iquic rato. 1B. Ligedtty means the frm's abity to pay #5 debts in the long run 10. Lower inventory Tumover ato indicates higher effciency in inventory management. 11. Whe comping Debt Equty Rate, Pref. Snare Captal is to be ignored. ‘12. Whe computing Proptetory Rado, Pret. Share Capital is taken as part of the Proprietors’ Funds. Propnetor’s Funds 13. Pronaetoy Fate = CaszalEmeioyes ~ Curentabines *'° Propnetor’s Funds «100 14 Propeetory Pato = Fea Assets ~ Invesrnents + Working captal : Proprietors Funds 5 00 135 Procestory Fiato= 7257 Assets sige of Horzontal Balance sheet Less Ficitious Aseate 16.4 Legis rete higher Pian 111 shows undersnvestment 17.4 Current rato lower than 2:1 shows under-trading. 38 2 Capa! Gearng Pato, Pret. Share Ceptal forms part of the Denominator. 18. Operating Rato = Operating Expenses / Profit 20.Net Prot Pato = Net Prof ater tax / Sales x 100 21. Retum on Capital Employed = NPAT / Captal Employed x 100 ‘22 Retum on Captal Employed = Net Prota Rabo x Capital Tumover Ratio 23 Retum on Propnetors’ Funds = NPAT / Capital Employed x 100 26. Retum on Equty Captal = Net Profit betore Tax / Equity Shareholders Funds x 100 25. Retum on Equty Captal = Prott avaiable to Equty Shareholders / Paid-up Equity Share C22 121 SBSRBRsono Analysis and Interpretation 203 422 True 3.5, 7, 12, 13,15, 16,22 False: 1, 2, 4,6,8,9, 10, 11, 14, 17, 18, 19.20, 21.23. 24,25 1. False: indicates abilty to moet immedate tabates. 2. False. QA = CA- Stock - Prepaid Seta) 01: “Cosmos india Lid.” Balance Sheet as on 31st March 2016 Cental Reserve Gereval Reserve 21,000 Provson for Tax 9.875 Commission received in Adv. 420.000 45°. Debentures 3.00425 12% Bank Loan Prepad insurance 15375 Pret. Share Capital Land & Buikting 53,00,000 Eguty Snare Captal Fixtures 25.000 Bils Payable Furniture 73.000 Prott and Loss Ac Prelimmary Expenses 13,825 Bark Overdratt Goodwit 1.90,000 Share Premium Investments (Long Term) 1.73.00 Sundry Creditors You are required to rearrange above Balance Sheet in vertical form and compute the foowing rates {a) Current Ratio (b) Proprietory Ratio (c) Capital Gearing Fiato. (Mac. 2004, adpated) [Ans.: B/S (v) Total & 16,41,800; (a) 1.796 : 1; (b) 73.87%: (c) 0.32 > 1] 02 (Comparative B/S + Ratios) : Following are Balance Sheets of Sharat Lid tor tie year ended 2101 March 2013 and 2014, Equty Capaal Fixed Assets (Cost) 8% Pret. Share Capital ‘Stock 28,000 Reserves Debtors 62.500 Prott 2 Loss Ale Bits Recewable 30.000 10% Debentures Prepaid Expenses &.0c0 Bank Overdrat ” Cash at Bank 13,000 Creanors Cash in Hand 15,000 Provesion for Taxation Calis in Amears 2.000: Proposed Dividend Share Issue Expenses. 10,500 | Depreciation Provision ? Prepare a comparative Balance Sheet in verdcal orm and interpret the samo afer calculating following fatos (1) Capital Gearing (2) Stock Working Capita) Rato (3) Liqud Rato (4) Debt Equity Ratio. (Oct 2002, adapted) [Ans.; B/S (v) Totat : 2013 - 1,$8,500, 2014 - 2.51,500 (1) 0.46, 1.26; (i) 51.95%, 32.68%; (i) 2.03, 2.41; (lv) 0.32, 0.90 oF 0.46, 0.42] 0.3 From Detalls) : From the information given below prepare a Balance Sheet in a vertcal form tunable for analysis and calcutate the tollowing ratio: (l) Capital Geanng Rato (8) Propristory Ratio (8) Current Ratio (tv) Liquid RatioAccounting For Managerial Decisions (BMS : SEM-IIl) “No. Topic | 8. Theory Questions ae 8.1 Descriptive Questions 82 Short Notes 9. Objective Questions 9.1 Multiple Choice Questions 92 State Whether True or False 9.3 Check Your Answers 10. Case Studies 211, Practical Problems: 11.1. Corporates 261 11.2. Direct Method 267 12. Check Your Answers Step-By-Step 270 124 CFS- Indirect sph 2270 122 CFS -Direct BESESTREE ERM Y=Senalea sue 1. Explain - Cash Flow Statement summarises the changes in the amount of cash for a particulat period, [Ans 2, Explain in brief the main provisions of AS 3. [Ans.: 3. Describe the two main aspects of (a) cash and (b) flow in a Cash Flow Statement. [Ans.. 4. Describe the classification of cash flows. [Ans.: Para 3] 5. Explain the importance of Cash Flow Statement [Ans.: Para 6] PEM) Write a Short Note on - 1. Cash flow from operating activities 2, Cash flow from investing activities 8. Cash flow from financing activities 4. Cash flow in foreign currency 5. Cash flow from interest and dividends 6 7. 8 5. Non-cash transactions and Cash Flow Statement . Non-cash items and cash flow from operations [Ans.: Para 4.1.1] Non-operating cash flows and cash flow from operations [Ans.: Para 4.1.2] 9. Excluding accruals while computing cash flow from operations [Ans.: Para 4.1.3] 10. Direct Method Cash Flow Statement [Ans.: Para 4.2) 11. Indirect Method Cash Flow Statement [Ans.: Para 4.3] 12. Utility of Cash Flow Statement {Ans.: Para 6)Cavh Flow Statement es Csi kone en) 1. For the purpose of Cash Flow Statement, ‘Cash’ (a) includes only cash (b) includes cash and savings account with Bank (c) includes cash and current account with Bank ~(d) includes cash and savings account balance as well as current account with Bank 2, For the purpose of Cash Flow Statement, ‘Cash Equivalents’ include (a) bank fixed deposit for 30 days (b) money market instruments (c) treasury bills MAFAll the above 3, The principal revenue-producing activities of the enterprise {a) Investing Activity 4b) Operating Activity (c) Financing Activity 44, The acquisition and disposal of long term assets and investments (a) Investing Activity (b) Operating Activity (c) Financing Activity 5. Acquiring and selling of a subsidiary (a) Investing Activity (b) Operating Activity (c) Financing Activity , 6. Refund of income-tax } (a) Cash inflow from Investing Activity (b) Cash inflow from Financing Activity \(e}Cash inflow from Operating Activity —__(d) Cash outflow from Operating Activity 7. The activities resulting in changes in the size and composition of the owner's capital and borrowings of the enterprise (a) Investing Activity (b) Operating Activity Ue) Financing Activity 8, Purchase of a business concer by means of issue of shares {a) should be shown as cash inflow from investing activity (b) should be shown cash inflow from investing activity and cash outflow from financing activity \(e) should be ignored while preparing the cash flow statement (2) should be shown as cash outflow from financing activity 9. Conversion of debt into equity ‘ (a) should be shown as cash inflow as well as cash outflow from financing activity (0) should be shown cash inflow from investing activity and cash outflow for financing activity \(¢)'should be ignored while preparing the cash flow statement (8) should be shown as cash outiow from financing activity 10. Changes in bank overdraft (a) should be shown as cash flow from investing activity (b) should be shown as cash flow from financing activity, (c) should be ignored while preparing the cash flow statement Xd) should be shown as changes in cash balances 11. Depreciation (@) is deducted from book profits to determine the cash from operations \(0) is added back to book profits to determine the cash from operations, (c) is treated as cash outflow for investing activities (d) is treated as cash inflow from financing activities, 12, Amount of preliminary expenses written off (2) is deducted from book profits to determine the cash from operations (0) is added back to book profits to determine the cash from operations (©) is ignored (d)is treated as cash inflow from financing activitiesAccounting For Managerial Decisions (BMS: E44) _{8) is deducted trom book profits to determine the cash from operations _ \{BJis added back to book profits to determine the cash from operations (6) treated as cash outflow for investing activities — {8)is ignored - 14,Decroase in Receivables (@) is deducted from book profits to determine the cash from operations \P}is added back to book profits to determine the cash from operations (6) is ignored (4) should be shown as changes in cash balances 415. Increase in Payables (a) is deducted from book profits to determine the cash from operations “Ulb) is added back to book profits to determine the cash from operations (6) is ignored (@) should be shown as changes in cash balances 16. Increase in Stock \layis deducted from book profits to determine the cash from operations: (0) is added back to book profits to determine the cash from operations (0) is treated as cash outiow for investing activities (@) should be shown as changes in cash balances 17.Increase in Bank Balance {a);s deducted from book profits to determine the cash from operations (b)is added back to book profs to determine the cash from operations (6) is ignored \{@y should be shown as changes in cash balances 18.Increase in O/S Expenses {a)is deducted from book profits to determine the cash from operations Ut) is added back to book profs to determine the cash from operations (©) is ignored (4) should be shown as changes in cash balances 19.Cash sales of goods-in-trade will be shown in the Cash Flow Statement as fe) operating cash flow (b) investing cash flow (c) financing cash flow (d) cash or cash equivalents 20.Cash paid to suppliers of raw materials will be shown in the Cash Flow Statement as eI operating cash flow (b) investing cash flow (c) financing cash flow (d) cash or cash equivalents 21.Cash payments of salaries and wages to employees will be shown in the Cash Flow Statement as \aYoperating cash flow (b) investing cash flow (c) financing cash flow (d) cash or cash equivalents 22.Cash paymentto acquire a fixed asset, ‘Say, machinery will be shown in the Cash Flow Statement as (a) operating cash flow \(F investing cash flow (c) financing cash flow (d) cash or cash equivalents 23.Cash proceeds from issuing shares at a Premium will be shown in the Cash Flow Statement as | {a) operating cash flow (©) investing cash flow (c}financing cash flow (4) cash or cash equivalents 24. Payment of dividends will be shown in the Cash Flow Statement as (2) operating cash flow (b) investing cash flow er tinancing cash flow (d) cash or cash equivalents 25. Interest received on investments will be shown in the Cash Flow Statement as (@) operating cash flow (b) investing cash flow (chfinancing cash flow (3) cash or cash equivalents 26. Interest paid on debentures will be shown in the Cash Flow Statement as. (a) operating cash flow (b) investing cash flow \{6) financing cash flow (@) cash or cash equivalents oes ee ayrr Cash Flow Statement eo 27. Dividends recelved on shares of other companies hald as investmonts will be shown in the Cash Flow Statement as (a) operating cash flow UbFinvesting cash flow (c) financing cash flow (d) cash or cash equivalents 28. Cash payment of a long-term loan will be shown in the Cash Flow Statoment as (a) operating cash flow (b) investing activites “(o)-financing cash flow (4) cash or cash equivalents 29, Payment of income-tax will be shown in the Cash Flow Statement as {ay operating cash flow (0) investing cash flow (c) financing cash flow (d) cash or cash equivalents 30.Which of the following is a feature of preference shares? (a) Preference-dividend is tax deductible (p) Preference shareholders shall invariably participate in the surplus (c) Preference shareholders have voting rights. \(d) Preference shares are always redeemable 31.Which of the following is not a source of long-term finance? (a) Equity capital (b) Preference capital (c) Debentures \(@) Bank Overdraft 2. STATE WHETHER TRUE OR FALSE . For the purpose of Cash Flow Statement, Deposits kept with Banks for 30 days will be classified as Investing Activity. interest paid on loans reduces the Cash Flow for operating activity. Income-tax on profit on sale of share investment reduces the Operating Cash Flow. Tax-Refund is a non-operating Cash Flow. . Loans given to others is a financing activity. Change in Bank Over draft is adjusted in cash flows from financing. While inflow of cash results in inflow of funds; inflow of funds may not always rest 8. Increase in current assets will always result in inflow of cash. 9, Increase in outstanding expenses is added to Net profitto arrive at Cash from operations. 10.Cash equivalents are defined as demand deposits in bank. 11. Transaction of conversion of debt Into equity should be disclosed by way of a footnote to the Cash Flow Statement. 12.Cash from Operations = Net Profits in P & L A/c + Increase in Creditors. 13.Cash from Operations = Net Profits in P & L Alc + Increase in Bills Receivables. 14. The statement of cash flows shows not only the amount of cash used during a particular time, but also how the cash was used. 15. The statement of cash flows reflects cash flows during a period of time. 16. The statement of cash flows does not report why cash increased or decreased during the period. 17.Investors and management use the statement of cash flows to evaluate a firm's proftabitty. 18.For purposes of the statement of cash flows, “cash” includes cash on hand, cash in the bank and cash equivalents. 19.Cash equivalents include investments that cannot be readily converted into cash. 20. Operating activities on the statement of cash flows include activities that affect net income, Current liabilities and current assets. Seer ee i) 91 inflow of cash,Morking Capital - No. Topic 9. Theory Questions 10. Objective Questions 10.1 Multiple Choice Questions 10.2 State Whether True or False 10.3. Check Your Answers Practical Problems 11.1. Basic/Margin of Satety 11.2 Different Types of Purchases/Sales/Materials 11.3 Miscellaneous 12. Check Your Answers Step-By-Step 1. Write short note on Working Capital Cycle. [Ans.: Para 6] 2. State different types of working capital with its components and source of net working capital with components. [Ans.: Para 6.1, 2.1) 3. Write a short not as Gross Working Capital and Net working Capital. [Ans.:Para 2] 4. Write a short note on Factors determining Working Capital. [Ans.: Para 7] 3. Wnite a short note on Seasonal Working Capital. [Ans.: Para 2.2] 8, Write a short note on - Consequences of Inadequate Working Capital [Ans.: Para 4] 10, CBSE EERE oat ae eR EEE) 10.1_ MULTIPLE CHOICE QUESTIONS 1. The total Current Assets without deducting the Current Liabilities. \(ayGross Working Capital (b) Net Working Capital (c) Permanent Working Capital (a) Temporary Working Capital 2, Current Assets - Current Liabilities (a) Gross Working Capital wey Net Working Capital (c) Permanent Working Capital (a) Temporary Working Capital 3. When Cash is received against overdraft from bank (a) There is an increase in Net Working Capital iO} There is an increase in Gross Working Capital (c) There is an increase in both the Gross and the Net Working Capital (d) There is no effect on both the Gross and the Net Working Capital 4. The minimum amount of Working Capital required to enable the concem to operate at the lowest level of activity (a) Gross Working Capital (b) Net Working Capital ey Permanent Working Capital {d) Temporary Working Capital 5, Permanent Working Capital Is also known as (a) Gross Working Capital (b) Net Working Capital lg) Core Working Capital (4) Fixed Capital316 Accounting For Managerial Decistons (BMS: SEM-111) ‘6. When activity is at higher level, the concern noeds more working capital, which is known ag (2) Gross Working Capital {b) Not Working Capital {c) Permanent Working Capital (6) Temporary Working Capital 7. Cash Working Capital includes {a) Fixed assets less depreciation (b) Debto‘s at sales value 0} Debtors at sales less profit margin (6) Creditors at purchase cost less profit margin 8. Cash Working Capital includes © (a) Fixod assets less depreciation Uo} Cost of inventory excluding depreciation {c} Cost of inventory including depreciation (4) None of the above 9. Which of the following statements is false 7 {a) ina trading concern, the operating cycle does not involve tems of raw materials and workin. ross () tnemeraposi ‘concem selling only on cash basis, the operating cycle does not invotve the iter of debtors. | «(oth amanufactunng concem, the operaing cycle does notinvolve tems of opening and closing | stock (4) Negative Working Capita indicates lack of quidty and adverse solvency position ofa concem, 40, The amount of funds invested in current assets is called Ua gross working capital (b) net working capital (c) surplus capital (d) none of these 11. Under the gross working capital concept the working capital is equal to (2) total curent Fabilties (b) surplus current assets \Uprrotal curent assets (d) none of these 42.The term net working capital refers to ‘6h the excess of the current assets over current liabilities (b) the liquid assets {c) the total current assets less provisions (d) none of these 13. will ensure high return on investment. ‘Ga adequate working capital (b) surplus working capital qf (c) shortage of working capital (d) none of these 14. refers to idle funds which eams no return. t {a) shortage of working capital bf excess working capital [ {(c) variable working capital (d) fixed working capital 15. Shortage of working capital may resul La¥poor credit standing (b) more cash discount (c) more trade discount (d) none of the above 16.Net Operating cycle can be delayed by lef increase in WIP period (b) Decrease in raw materials storage period (c) Increase in credit payment period (6) Both (a) and (c) above 17.1 the conversion period is arrived at as 10, it means tfal It takes 10 days to convert the raw materials to finished goods (b) 20 days cost of production is held on an average as WIP (c) Raw materials which can be consumed in 10 days are held in WIP (a) None of the above 18. Which of the following is nota factor that affects the composition of the working capital ? (a) Nature of business (6) Nature of raw materials used lo) Tax structure of the company (d) Process technology used 19.1f the net working capital is negative then it indicates that (2) Long-term funds have been used for financing short-term assets (b) Long-term funds have been used for financing long-term assets \ley'Shor-term funds have been used for financing long-term assets (4) Short-term funds have been used for financing short-term assetsWorking Capital wy 4 Not operating cycle pertod is (a) The period from raw material procurement to sala of finished goods (b) The length of time taken for a rupee invested in currant agsets to Come back with profit to the | company {c) The time taken to convart raw matonials into finished goods {a} The time between payment of raw materi purchases and the collaction of cash for sales 24 The duration of the net operating cycle can be reduced by ‘aj Increasing the time available for payments to credtors (») Decreasing the raw material storage period {c) Decreasing the work-in-progress period (a) None of the above 22. Gross working capital means (a) Total assets ‘bf Total current assets (c) Total current liablities (d) Fixed assets minus current assets (e) Current assets minus current fiablives 23, Net working capital is equal to (ay Current assets ~ Current fabilties —_(b) Fixed assets ~ Current assets (c) Current Assets ~ Cash (4) Long term loans ~ Short term loans, (e) Current Liabilities ~ Provisions 24. Which of the following is not an item of current liabilities 7 (a) Sundry creditors (b) Advances from customers (c) Hire purchase dues (6) Unclaimed dividends {ey Debentures 25. Which of the following equations describes the net operating cash cycle 7 (a) Average stock tumover period + Average creditor payment period ~ Average debt collection period (b) Average stock tumover period + Average debt collection period ~ Average creditor payment period (c) Average cash balance + Average debt collection period ~ Average creditor payment penod (d) Average cash balance — Average debt collection period + Average creditor payment penod 26. Which of the following will increase the duration of the net operating cycle ? (af Increase in the raw material storage period (b) Decrease in the average collection period (c) Increase in the average payment period (d) Decrease in the conversion period (e) Both (a) and (c) above 27. Which of the following will cause a decrease in the net operating cycle of a firm ? (a) Increase in the average collection period (6) Increase In the average payment period (c) Increase in the finished goods storage period (d) Increase in the raw materials storage period (€) Increase in the work-in-progress period 22. Which of the following statements is / are not true ? |. Shorter the duration of net operating cycle period, slower will be the transformation of current assets into cash. II. The net operating cycle approach is useful forboth controlling and forecasting working capa Ill. Gross operating cycle period less average collection period is the net operating cycle period. (a) Only (I) above (0) Only (Il) above (c) Only (Ill) above (d) Both (I) and (11) above ley Both (I) and (II) above 29.S Ltd. buys raw materials from suppliers on six weeks’ credit, which are delivered immediately. The raw materials are held in stock for four weeks before being issued to production. The production process take three weeks and the finished goods are in held in stock for two Weeks before being sold on credit. Customers are allowed eight weeks’ credit and pay promptly at the end of the period. What is the length of the cash conversion cycle of the business 73b Accounting For Managerial Decisions (BMS : SEM-111 (a) 19 weeks MOTT weeks (©) 17 weeks (d) 23 weeks 30.0 Engineering Co. buys raw matorias from suppliers on four weeks’ credit and they are delivered immediately. When the raw materials are received, they are held in the warehouse fr five weeks before being used in production. The production process takes one week and the completed {goods are held for two weeks before finaly being sold to credit customers. These customers are allowed a maximum credit period of sixweeks, Whatis the cash conversion cycle of the business? (a) 7 weeks ‘OT 10 weeks (©) 11 weeks (4) 12 weeks 31.P Co. buys materials from its suppliers on eight weeks’ credit. The materials are delivered immediately and held for two weeks before being issued to production. The production process takes five weeks and the finished goods are held forfour weeks before being sold. Allcustomers are allowed four weeks’ credit but take seven weeks to pay. How long is the cash conversion cycle of the business ? . (2)7 weeks \(b7 10 weeks (6) 18 weeks (4) 25 weeks PPM ne ee 1. In public tity concem tke Railways, Electricity Boards, where most transactions are in cash, ‘working capital requirements are low. 2. Working capital requirement is high, when the supply of raw materials is iregular. ‘3. The amount of funds invested in current assets is called the net working capital 4, Under the gross working capital concept, the working capital is equal to the surplus current asset 5. The term net working capital refers tothe liquid assets, 6. If the debtors take longer to pay, the operating cycle too becomes longer. 7. Itwe pay creditors ate, we require more working capital 8. I we get more advances from customers, we need less working capital. 9. Higher Bank Overdraft means higher working capital. 40. The permanent working capital will remain in the business until the business is closed down. 114. The fixed working capital is financed by bank overdratt. 42.Tamporary or variable working capita is meant to take care of seasonal demands. 19. Temporary working capital is financed by long term bank loans. 414.Net operating cycle is the sum of inventory cycle, debtors realisation cycle and the creditors payment cycle. 15.Net operating cycle is the sum of inventory cycle and debtors credit cycle, 16. Net operating cycle is the sum of inventory cycle plus debtors credit cycle less creditors payment cycle. 17, Permanent’ Working Capital is the same as Fixed Capital, 18. Gross Working Capital is the sum of the Total Current Assets. 19. Net Working Capital can never be negative. 20. Working capital refers to a firm's long term capital 21.In general, the greater a firm's current assets relative to its short-term obligations, the better able it will be to pay its bills as they come due. 22. increase in current assets increases net working capita, thereby increasing liquidity. 23. The cash conversion cycle Is the amount of te from the point when the firm inputs materials ‘and labour into the production process to the point when cash is collected from the sale ofthe resulting finished product. 24. The firm's operating cycle is simply the sum of the average age of inventory and the average payment period. 25.The cash conversion cycle is the total number of days in the gross operating cycle less the average payment period for inputs to production, 26. Anegative cash conversion cycle means the average payment period exceeds the gross operating cycle. 27. The gross operating cycle is the conversion of a firm's working capital from cash to inventories and inventories to receivables and back to cash,Working Capital 39 28. The gross operating cycle is the amount of time the firm's cash is tied up between payment for production inputs and receipt of payment from the sale of the resulting finished product. 29 The cash conversion cycle is the difference between the number of days resources are tied up in the gross operating cycle and the average number of days the firm can delay making payment on the raw materials purchased on credit. 30. positive cash conversion cycle means that the firm must obtain financing to support the cash conversion cycle. 31. Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle. 32 Working capital estimation involves the estimation of all of a firm's assets and liabities. 33. The cash conversion cycle is the net period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service. 34, The cash conversion cycle is made up of the production cycle minus the collection cycle plus the payment cycle. 35. To determine the average cash conversion cycle, we must first compute the average production cycle, the average collection cycle, and the average payment cycle. 36. Gross operating cycle has two components: the production cycle and the collection cycle. Mon eea ea) 10.1 1 @ fe @ [1 © [6 @ | 2. @ | 26 @ | at. wo 2 (ob) | 7 @) | 12 (a) | 17 (a) | 22. (be) | 27. (by 3. (b) | 8. () | 13. @ | 18. ( | 23 (@) | 2. ©) 4 © 13. @ | 14 &) [1% © | 24 () | 29 (bo) 5. (0) | 10. (a) | 15. (a) | 20. (@ | 25. (be) | 90. (b) Hints to MCQs : 27. Increase in the average collection period, increase in the finished goods storage period, increase in the raw materials storage period and increase in the work-in-process period all result in increasing the operating cycle ofthe firm. Only increase in the average payment period decreases the net operating cycle of the firm. Hence option (b) is correct. 29.8+2+3+4-6= 11 weeks 30.5+14+2+6—4= 10 weeks 31.7+245+4-8= 10 weeks 10.2 True: 1, 2,6, 8, 10, 12, 16, 18, 21, 22, 25, 26, 27, 29, 30, 33, 35, 36 False : 3, 4, 5, 7, 9, 11, 13, 14, 15, 17, 19, 20, 23, 24, 28, 31, 32, 34 3. False; called Gross Working Capital 4, False; equal to Total Current Assets | 5. False; refers to All CA - All CL 7. False; require less Working Capital | 9. False; Lower Wo Capital 11.1 BASIC / MARGIN OF SAFETY ‘0.1; From the following information you are required to prepare: (1) A Statement of Working Capital required, and (2) A Statement showing each Current Asset and Current Liability constituting the Working Capital, | z v | Budgeted Sales 7,20,000 | Less: | Cost of Raw Materials 2,16,000 | Direct Labour 2,88,000 | Overheads 1,44,000 _6,48,000 | Net Profit 72,000 j 2 er aeeS Receivables Management Optimum Size of Accounts Receivables Aspects of Credit Policy Credit Standards 5c Credit Evaluation Policy 9. Credit Rating 10.Credit Score 11, Risk Classification Scheme 12. Credit Terms 19. Credit Period 14.Cash Discount 15. Agoing Schedule 16. Collection Policy 17. Optimum Collection policy Para 3.2) [Ans.: Para 3.2] Para 3.3] Para 3.3] Para 3.3] Para 3.3] Para 3.5] [Ans.: Para 3.5] [Ans.: Para 4] {Ans.: Para 3.6] [Ans.: Para 3.6] CRM ea" koran) (A)__ Concept 1. 5 C's of the credit does not include (a) Collateral (c) Conditions 2. Which of the following is not an element of credit policy? (a) Credit Terms (c) Cash Discount Terms (b) Character \Ud] None of the above (0) Collection Policy (9) Sales Price 3. Ageing schedule incorporates the relationship between (a) Creditors and Days Outstanding {¢) Average Age of Directors ‘Uj Debtors and Days Outstanding (@) Average Age of All Employees, 4. Which of the following is not a technique ot receivables Management? \(a)Funds Flow Analysis (c) Days sales outstanding (b) Ageing Schedule (d) Collection Matrix 5. Which of the following is not a part of credit policy? (a) Collection Etfor. (c) Credit Standard (b) Cash Discount \A6T Paying Practices of debtors 6. Credit Policy of a firm should involve a trade-off between increased (a) Sales and Increased Profit (c) Sales and Cost of goods sold \UbY Profit and Increased Costs of Receivables (4) None of the above 7. the closing balance of receivables is less than the opening balance for a month then which one is true out of (a) Collections > Current Purchases (©) Collections < Current Purchases ‘(DF Collections > Current Sales (d) Collections < Current Sales 8. If the average balance of debtors has increased, which of the following might not show a change in general? (a) Total Sales (c) Current Ratio \Ub) Average Payables. (6) Bad Debt loss 9. 80% of sales of & 10,00,000 of a firm are on credit. t has a Receivable Turnover of 8. Whatis the Average collection penod (360 days a year) and Average Debtors of the firm? “ah'45 days and ® 1,00,000 (c) 45 days and & 8,00.000 (b) 360 days and ® 1,00,000 (d) 360 days and @ 1,25,000 10.In response to market expectations, the credit period has been increased from 45 days to 60 days. This would result in (a) Decrease in Sales (C) Increase in Bad Debts (b) Decrease in Debtors {G} Increase in Average Collection Perloda Accounting For Managerial Decisions (BMS : SEM-II1) 44..Cash Discount term 3/15, net 40 means pr 9% Discount if payment in 15 days, otherwise full payment in 40 days {b) 15% Discount if payment in 3 days, otherwise full payment 40 days “4 (@) 3% Interest if payment made in 40 days and 15% interest thereatter ~~ {d) None of the above - ¥2u1f the sales of the firm are ® 60,00,000 and the average debtors are € 15,00,000 then the “) sécelvables turnover is, “war times (b) 25% {c) 400% (2) 0.25 times 49.16 cash discount is offered to customers, then which of the following would increase? fay Sales (b) Debtors (¢) Debt collection period (@) Allof the above 14, Receivables Management deals with {a) Receipts of raw materials of Debtors collection {¢) Creditors Management (d) Inventory Management 15. Which of the following is related to Receivables Management? (2).Cash Budget (b) Economic Order Quantity ‘Ageing schedule (8) Allof the above 16. The one item sted below that is not considered in credit and collection policy decisions is the (a) Quality of accounts accepted “~Abf Quantity discount given (c) Cash discount given (6) Level of collection expenditures +17. Wihen a company analyses credit applicants and increases the quality of he accounts rejected, the company is attempting to (a) Maximize sales (b) increase bad-debt losses {¢) Increase the average collection period Y}Maximize profits 48.4 change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that (a) Net prof has increased (bY The average collection period has decreased {¢) Gross prott has dectined (G) The size ofthe discount offered has decreased 19.An aging of accounts receivable measures the (a) Abiity of the fir to meet short-term obligations (0) Average length of time that receivables have been outstanding (c) Percentage of sales that have been collected after a given time period {af Amount of receivables that have been outstanding for given lengths of time 20.The average collection period fora firm measures the number of days \aY Alter a typical credit sale is made until the firm receives the payment (0) For a typical check to “clear” through the banking system {(c) Beyond the end of the credit period belore a typical customer payment is received (6) Belore a typical account becomes delinquent 21. Which of the following is not the logical consequence of iberalizing credit standards? (a) Sales tend to increase {b) Investment in receivables tend to increase (c) Bad debt losses tend to increase {6} Requirement of finance for working capital tends to decrease {e) Collection costs tend to increase 22. Which of the following statements is not tue? (a) f credit standards are fiberalized, tnen sales wil increase (b) Strict credit standards will tend to reduce the incidence of bad debt loss {c) Increase in credit period wil tend to increase the investment in receivables eV Lideratizing cash discount policy will tend to increase the average collection period {e) A igorous coltection effort tends to increase the collection expense 23. Which of the following does not resuit from liberalizing credit standards? (2) leads to higher bad debt loss (0) causes an increase in salesReceivables Management 355 \(eF Tt reduces the cost of collection (d) It increases the investment in receivables (e) Requirement for financing working capital tends to increase 24, Which of the following is/are not technique(s) for monitoring collection of receivables? (i) Ageing schedule (i) Lockbox arrangements (i) Days sales outstanding = (i) Funds flow anatysis (a) Only () above (b) Only (iv) above (c) Both (i) and (ji) above (eS Both (il) and (iv) above 25, The average collection period measures the (a) Number of days it takes a typical cheque to “clear” through the banking system (0) Number of days between the day a customer places an order with the firm and the day the firm sends the goods to the customers (c) Number of days beyond the end of the credit period and befors a typical customer payment is received {dumber of days between the day when a typical credit sale is made and the day when the firm receives the payment 26.Which of the following statements is true about the terms of trade credit 2/10, net 307 (a) 10% cash discount is offered for payment before 30 days (b) 2% cash discount is awarded for payment on the 30th day after purchase (c) 10% cash discount can be taken if paid by the second day after invoicing \{g)fi0 cash discount is offered from the eleventh day onwards after the date of purchase 27. Which of the following costs is not a cost of maintaining receivables? (a) Administrative costs (b) Collection costs ley Ordering costs (4) Defautting costs (e) Financing costs 28.An ageing schedule gives particulars about (a) Profit and present value (b) Accounts receivable and proportion of sales (c) Employees and age of their service _{@"Age-wise distribution of accounts receivable 29. Which of the following is/are not true? () credit standards are made more stringent, sales are likely to decrease and less amount of money wil be locked up in receivables. (i) If credit period is lengthened, sales are likely to increase but bad debt losses are likely to decrease. (iif cash discount is increased, discount paid is likely to increase and amount of receivable is likely to reduce. ‘\ey Only (il) above (b) Only (ii) above (c) Both (i) and (i) above (a) Both (i) and (ii) above (e) Both (i) and (i) above 30. Which of the following statements is tue about the terms of trade credit 4/10, net 307 (a) A 10% cash discount is offered for payment before 30 days (b) A 4% cash discount can be taken for payment before the 10th of the following month after invoicing (c) A 10% cash discount can be taken if paid by the fourth day after invoicing (Ud) No cash discount is offered from the eleventh day onwards after the date of purchase (€) 4% cash discount is awarded for payment on the 30th day after purchase '31.Which of the following measures is not adopted to monitor the payment of receivables ? (a) Days sales outstanding (b) Ageing Schedule of Receivables lorNumerical Credit Scoring (a) Average Collection Period 32, Which of the following is a logical consequences of liberalizing credit standards 7 (a) Collection costs tend to decrease fb Bad debt losses tend to increase (c) Sales tend to decrease (d) Cost of funds locked in receivables tend to decrease {e) Requirement for financing working capital tends to decrease 33. Other things remaining the same, which of the following will generally result as a consequence ‘of making the credit standards more stringent (strict / tight)?Accounting Kor Managerial Decisions (BM {a) More bad debt losses {b) Incroase in the number of customers ~(€) Higher sales tumover "LAdl} Reduction of the outstanding dabtors in the balance sheot (8) Incremental cost of collection of the recewables: 34, Which of the following Isa technique for monitoring the status of the receivables ? layAgeing Schedule (b) Outstanding creditors (¢) Selection Matrix (a) Funds Flow Anatysis: {e) Credit Evaluation "35: Which of the following is not part of collection program 7 (a) Despatch of frtrs to customars whose due date is approaching © (Qoy'Monitoring te state of payables © (@) Telegraphic and telephonic advice to customers around the due date © {d) Threat of legal actions to overdue accounts {e) Legal action against overdue accounts (B)__ Numerical MCQ/ Answer in Brief (Internal Tests) {8)_Numerical MCQ/ Answer eorre— ), net 30, the annual interest cost, based on a 360- '36.When 2 company offers credit terms of day year. is (a)24.0% (0) 35.3% (€) 36.0% MOY36.7% 37. The following information regarding a change in credit policy is given by the WW Company. The ‘company has a required rate of return of 10% and a variable cost ratio of 60%. Old Credit Policy New Credit Policy Sales _ — %36,00,000 % 39,60,000 ‘Average collection period 30 days 36 days i “The pretax cost of carrying the additional investment in receivables, using a 360-day year, would i be j far? 5.760 (0) 9,600 (©) © 8,160 (d) 7960 38. LW Company has the opportunity to increase annual sales ® 1,00,000 by selling to a new, riskier group of customers. Based on sales, the bad debt is expected to be 15%, and collection costs «willbe 5°. The company's manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If LW accepts this opportunity, the company’s after-tax profit will increase by (a) @ 4,000 UdT® 6,000 (c) 2 10,000 (d) 7 9,000 ‘39.11 a firm’s credit terms require payment within 45 days but allow a discount of 2% if paid within 15. ‘days (using a 360-day year), the approximate cost or benefit of the trade credit terms is (a) 2% (0) 16% (c) 48% Md} 24% 40.PP Ltd, is considering a change in its credit terms from 1/30 to 2/10, 1/30. The company’s budgeted sales for the coming year are € 2,40,00,000, of which 90% are expected to be made ‘on cred. If the new credit terms are adopted, PP Ltd. estimates that discounts will be taken on 50% of the credit sales, however, bad debts will be unchanged. The new credit terms will result in expected discounts taken in the coming year of MeF® 2,16,000 (b) & 4,32,000 (c) % 2,40,000 (0) & 4,80,000 41.Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there will be no change in bad debts. The company's: budgeted credit sales for the coming year are € 2,70,00,000, and short-term interest tates are ‘expected fo average 8%. To make the changes in collection procedures cost benelicial, the minimum savings in collection costs (using a 360-day year) for the coming year would have tO be (a) ® 30,000 (b) ¥ 9,60,000 (c) 7 1,80,000 fey? 36,000 42. Company's budgeted sales for the coming year are @ 4,05,00,000, of which 80% are expected to be credit sales at terms of 1/30. D Company estimates that a proposed relaxation of credit_ as — lg | Receivables Management 357 standards will Increase credit sales by 20% and increase the average collection period trom 30 days to 40 days. Based on a 360-day year, the proposed relaxation of cradit standards wil resu® in an expected increase in the average accounts recasvable balance of {a) & 5.40,000 (0) € 27.00.00 (©) £9,00,000 “4dr? 16.20,000 43.A firm averages € 4,000 in sales per day and is paid, on an average, within 30 days of the sale. Alter they receive their invorce, 55%. of the customers pay by cheque, whe the remaining 45% pay by credit card. Approximately how much would the company show in accounts recewable ‘nits balance sheet on any given date? (a) 4,000 Wor? 1.20,000 (©) © 48,000 (8)% 54.000 44. Acompany plans to tighten its credit policy. The new policy will decrease the average number of ‘days in collection from 75 to 50 days and wit reduce the rato cf cradit sales to total evanue trom 70% to 60%. The company estimates that projected sales will be 5% less ¢ the proposed new credit policy is implemented. If projected sales for the coming year are 8 50 mon. calculate the impact on accounts recelvable ofthis proposed change in credit policy. Assume a 360-cay yaar (a) 38,17,445 decrease (0) 65,00,000 decrease oy 33.33,334 decrease (0) & 1.87,49.778 increase 45.JD sells to retail stores on credit terms of 2/10, net 20. Daily sales average 150 unts at a price ‘of $300 each, Assuming that al sales are on credit and 60%> of customers take the discount and pay on day 10 while the rest of the customers pay on day 30. the amount of JD's accounts receivable is (a) 13,50,000 . (©) 9,90,000 (©) € 9,00,000 {a1 8,10,000 46.CD grants credit terms of 1/15, net 30 and projects gross sales for next year ct & 20,00,000. The credit manager estimates that 40% of their customers pay on the discount date, 40% on ine net due date, and 20% pay 15 days after the net due date. Assuming undorm sales and 2 360-day year, what is the projected days’ sales outstanding (rounded to the nearest whcle day}? (a)20 days (0) 24 days \(oy27 days (4) 30 days 47.11 the terms of credit are 1/10 net 40, what willbe the implicit cost of trade cred? (Assume 360 days in a year) {a) 11.11 percent MOF 12.12 percent (6) 19.13 percent (2) 14.14 percent (e) 15.15 percent 48. What is the annual benefit for a firm with daily sales of 8 30,000 that speeds up catlectons by 3 days, assuming 4.6% p.a. of cost of funds? (a) 90,000 (0) 87,200 soy 5,400 (@) 8 1,800 (e215, 49. What can be the annual cost fora firm, for maintaining accounts receivables its daivy saies are % 40,000, average collection period is 4 days, and cost of funds is 8% p.a Mayr 12.800 (b) & 10,000 (c) 7,500 (0) 8 5,500 50. Vishal Brick Company sells on terms of 2/10, nat 30. Gross sales for the year are & 12.00.00 and the collections dopartment estimates that 30% of tha customers pay on the tenth day and take discounts; 40 percent pay on the thirteth day; and the remaining 30% pay. on average, 40 days after the purchase. The average collection penod is (assuming 360 days per year sfey27 days (0) 35 days (©) 43 days (a) 54 days (e) 66 days 51.P Ltd.'s present sales is % 20,00,000 and has extended credit period to ‘net 45 days’. The company ! is expecting to increase its sales by & 5,00,000 and the contribution to sales ratio is 20%. What is the additional prolit arising out of new sales 7 La) 2°1,00,000 (©) €2.00,000 (c) 8 3,00,000 (8) 400,000 (e) & 5,00,000358 Accounting For Managerial Decisions (BMS : SEM-IN) ‘52, Whatis the annual benefit for a firm with daily sales of ¥ 30,000 speeds up collections by 3 days, assuming a 6% p.a. of cost of funds ? (@) 90,000 (0) 7,200 ey? 5,400 (4) 1,800 (e)215 8.2 STATE WHETHER TRUE OR FALSE 4. Receivables management deals only with the collection of cash from the debtors. 2: Receivables management involves a trade of between costs and benefits of receivable. ‘3, The objective of a credit policy Is to curtail the credit period allowed to customers. '4. Credit period allowed to customers must be equal to credit period allowed by the supplier to the fir. 5. Delinquency cost refers to bad debt losses to the firm. 66. Liberalizing the discount rate means increasing the discount rate for the same period. 7. Credit evaluation of a customer is'@ cost process henée it need not be undertaken by a seling firm. {8 In order to minimize the level of receivables, a firm should follow a strict and aggressive should follow a strict and aggressive collection procedures. 9, Ageing schedule of receivables is one way or monitoring the receivables. 40. Services of a factor are always beneficial PRMMscecouu ons 84 1 @)2 @ ]% @ [s @ | 2 @ | 10 @ | 18 0) | 26 3b) |] i. @ [1% @ | 27. © j 4. (a) | 12 (@) | 20. (@) | 26 @ | 5. (d) | 13. (a) | 21. (d) | 2% (a) 6. (b) 14. (b) 22, (4) 30. (a) | 7 ) 115. © | 23. © | 31. © | 8. (b) 16. (b) 24. (d) 32. (b) Hints : ‘36. (20 / 980 x 100) x (360/20) 37.10% x 60% x (3,96,000 - 3,00,000) ‘38.60% x [(30% x 1,00,000) - 15,000 - 5,000} 39.2%x12 40.2% x 90% x 50% x 2,40,00,000 41.2,70,00,000 / 360 x 6 x 8% 42. (120% x 90,000 x 40) - (4,05,00000 x 80% / 43.4,000 x 30 mee 44.(70% x 5,00,00,000 14.8) - (95% x 5,00,00,00 x 60% / 7.2) 45. (150 x 300 x 30 x 4¢ 1%) + (150 x 300 x 30 x 60% x 13) 46. (40% x 15) + (40% x 30) + (20% x 45) 0.01 360 0.01 360 “Fao 30-10 ~ Dag * ag = 22 48.30,000 x 3 x 0.06 49.8% x 40,000 x 4 50. ACK . 51.5,00,000 x 20% =? 1,00,000 52. Annual Profit = 30,000 x 3 x 0, , 06 = 82 True:2,6,9 CS