You are on page 1of 14

Course Code Course Title

: :

MCS-035 Accountancy and Financial Management

Question 1: From the following balances taken from the books of M/s X & Co., prepare trading and profit and loss account for the year ending December 31, 2008 and balance sheet as on that date. Particulars Stock (1-1-2008) Debtors and Creditors Returns Drawing and Capital Fire Insurance Premium Life Insurance Premium Income Tax Paid Bill Receivable and Bills Payable Sales Tax Payable Wages and Salaries Telephone Expenses Sales Promotion Expenses Case and Bank Overdraft Audit Fees Discount Investments Interest on Investments Interest on Bank Overdraft Rent Paid Bad Debts Recovered Amount Amount Rs.(Dr.) Rs.(Dr.) 17,000 --25,000 22,000 89,000 1,15,00 0 17,000 12,000 8,000 1,25,00 0 2,000 --5,000 10,000 14,000 --18,000 3,000 21,000 5,000 8,000 4,000 60,000 --6,000 12,000 --1

----16,000 12,000 ------14,000 --1,000 --5,000 ----2,000

17000 25000 89000 17000 8000 2000 5000 14000 12000 18000 3000 5000 21000 4000 60000 5000 6000 24000 3.000 3.01.000 particulars Stock (01.Total 3.00 0 Closing stock on 31st December.000 Trading and P/L account 2 .24.35.24. 2008 amounted to Rs. 22000 115000 12000 125000 16000 10000 14000 1000 8000 12000 3.25.2008) Debtors and Creditors Purchase and Sales Drawing and Capital Fire Insurance premium Life insurance premium Income tax paid Bill receivable and Bill payable Sales tax payable Wages and salaries Telephone expances Sales promotion expances Cash and Bank overdraft Audit fees Discount Investment Interest on investment Interest on bank overdraft Rent paid Bad debt recovered Suspense Amount Cr.35.000/Ans : Trial Balance (Rectified) as on Dec 31. 2008 Amount Dr.

000 3 .2008 particulars To opening stock To purchase To Wages and salaries To gross profit transferred to P/L A/C Fire Insurance premium Life insurance premium Income tax paid Telephone expances Sales promotion expances Audit fees Discount Interest on overdraft Rent paid Net profit Amount particulars 17000 By Sales 89000 By closing stock 12000 22000 Amount 115000 25000 1.40.68.40.Of M/s X & Co. 31.000 22000 125000 1000 8000 12000 1.000 8000 By Gross profit from trading A/C 2000 By fire insurance premium 5000 By Discount 18000 By Interest on investment 3000 By Bad debt recovered 21000 4000 5000 6000 96000 1.68. As on Dec.000 1.

53.56.000 Question 2: The Board of Directors of Ruby Ltd requests you to prepare a statement showing the working capital requirements forecast for a level of activity of 1.000 Less:Drawing (17000) Creditors Bill payable Sales tax payable Overdraft Amount Assets 91000 Investment Amount 60000 22000 16000 10000 14000 1.08. The following information is available for your calculation: (Rs.000 Closing stock Debtors Bill recievable Cash Suspanse 25000 25000 14000 5000 24000 1.Balance Sheet of M/s X & Co. 31.2008 Liabilities Capital 12000 Add: profit 96000 1. per unit) ____________________________________________________________________ _________________ Raw materials 90 Direct labour 40 Overheads 75 205 Profit 60 Selling price per unit 265 (a) Raw materials are in stock on average one month. on average 2 weeks. As on Dec. (b)Materials are in process. (c) Finished goods are in stock.000 units of production. on average on month (d)Credit allowed by supplier – one months (e) Time lag in payment from debtors – 2 months 4 .53.

Raw meterials (156000*90) Direct labour (156000*40) Overheads (156000*75) Cost of goods sold Profit (156000*60) Sales 20% of output is sold against cash So.000 9360000 41340000 Working capital requirement Assets Raw materials (14040000*1/2) 1170000 5 .80. 20% of the output is sold against cash. Cash in hand and at bank is expected to be Rs.000.19. Wages and overhead accrue similarly and a time period of 4 weeks is equivalent to a month. It is to be assumed that production is carried on evenly throughout the year. Ans : Projected Income Statement Ruby Ltd. credit sales = 41340000*80% = 33072000 14040000 6240000 11700000 3.(f) Lag in payment of wages .1½ weeks (g) Lag in payment of overheads – one month.60.

00.3.20.Working progress Raw material (14040000*1/2*1/12) = 585000 Labour overhead 50 % of (6240000+11700000)*1/2*1/12 = 373750 Finished goods (31980000*1/12) Debtors (33072000*1/12) Cash balance Total (A) 958750 2665000 5512000 60000 10365750 Current Liabilities Creditors (14040000*1/12) Wages (6240000*3/8) Overhead (11700000*1/12) Total (B) Working capital (A-B) 1170000 195000 975000 2340000 8025750 Question 3: A machine costs Rs.000 only. A sinking fund is created for replacing the machine at the end of its effective life time when its scrap realised a sum of Rs. Calculate to the nearest 6 .000 and its effective life is estimated to be 6 years.

the amount which should be provided. Rate of interest = 8% per annum Let assume annual instalment of sinking fund = x And instalment will be deposited at the beginning of the year.9114 = 35391 i.a. For the year ended 31st March 2008 are as under: 7 .469x 3rd = x(1. for the sinking if it accumulates at 8% p.3604x 4th = x(1.08)5 = 1.586 x 2nd = x(1.9114x = 300000-20000 Or. compounded annually.08)2 = 1.08)3 = 1. every year. Ans : Cost of machine = 300000 Residual value = 20000 at the end of 6th years.9114x 7. 1st instalment = x(1+r/100)n Installment : 1st = x(1.66x 6th = x(1.hundreds of rupees.e 35400 Question 4: Summarised Income statement and Balance sheet of Gem cables ltd.08)4 = 1.08x 7. x = 280000/7.08)1 = 1.08)6 = 1.25x 5th = x(1.

000 80.000 80.00.000 Debtors 5.000 Marketable 2.00.000 9.000 4.00.) Sales Less: Cost of goods sold Gross Profit margin Less Depreciation 1.00.000 earnings Inventory 9. 2008 (Rs.00. capital Fixed assets 63.60.00.000 64.000 Selling and administration expenses 2.50.50. Ans : 8 .000 securities You are required to calculate: (a) Gross profit margin.000 3.00.000 Debentures 8.000 12.00.40.00.000 Less: Interest Profit before tax Less: Tax @40% Net Profit Liabilities Rs.000 Retained 18.000 Balance Sheet as at 31st March.000 Bills 1.00. (c) Cash profit ratio.000 payable Cash 90.10.00.000 Creditors 2.Income statement for the year ended 31st March. (b) Net profit margin. 2008 Assets Rs.000 16. (d) Return on total assets.20.00.00.00. Share 50.000 5. and (e) Return on Shareholders Networth.000 3.80.00.000 Profit before interest and tax 80.

94% Question 5: Discuss the effects of liberal vs.(a) Gross profit margin = gross profit Sales = 1600000*100 8000000 = 20 % * 100 (b) Net profit margin = Net profit *100 Sales = 540000 * 100 8000000 = 6.75% (c) Return on total assets =profit after tax *100 Total Assets = 540000 * 100 8000000 = 6. 9 .75% (e) Return on share holder Net worth = Return Share holder networth = 540000 *100 6800000 = 7. stiff credit standards.

At one end of the spectrum. liberal credit standards tend to push sales up by attracting more customers. Receivables. finished goods get converted (from the point of view of the selling firm) into receivables (book debts). and it is particularly appealing to customers who cannot borrow from other sources or find it very expensive or cumbersome to do so. generate cash. when realized. decrease the investment in receivables and lower the collection cost.Ans : Business firms often sell goods on credit to facilitate sales. Question 6: How do cash flow problem arise? What steps are suggested to overcome the problem? 10 . In general. cash discount and collection effort. and collection expenses. a larger investment in receivables and a higher cost of collection. reduce the incidence of bad debt loss. It is valuable to customers as it augments their resources. however. The important dimensions of a firms credit policy are credit standards. accompanied by a higher incidence of bad debt loss. These variables are related and have a bearing on the level of sales. At the other end. A pivotal question in the credit policy of a firm is: What standard should be applied in accepting or rejecting an account for credit granting? A firm has a wide range of choice in this respect. however strong his credit rating may be. When goods are sold on credit. bad debt loss. discounts taken by customers. credit period. Firms generally offer cash discounts to induce customers to make prompt payments. The credit period extended by business firms usually ranges from 15 days to 45 days. This is. Stiff credit standards have opposite effects. it may decide not to extend credit to any customer. The percentage discount and the period during which it is available are reflected in the credit terms. it may decide to grant credit to all customers irrespective of their credit rating. They tend to depress sales.

or it m11y11i11dicate a more serious long-term problem. The sooner you can diagnose the problem the better. However. Note that a cash flow problem is not necessarily the same as experiencing a negative cash flow. Obligations become increasingly difficult to meet in the short and medium term. when cash flow is consistently negative and the business uses up its cash balances. Three Step Analysis Of Cash Flow There is a simple three step approach to diagnose a cash flow problem. Long-term problems require significant business adjustments to correct and.Identify the primary cause of the cash flow problem Once these steps are completed you can determine what options are available. A business often experiences a net cash outflow. 11 . The distinction between the two is important.Determine if the current cash flow shortage is short or long term Step 2 . The main causes of cash flow problems are summarised below While every business owner hopes their business will never have financial problems. then the problems become serious. in reality most experience financial pressure at some point in their existence. for example when making a large payment for fixed assets or where there is a seasonal drop in demand. This Factsheet is designed to help you diagnose a cash flow shortage and take some steps toward correcting it. This may indicate a temporary short-term problem (such as a poor growing season) that will correct itself in time.Cash Flow Most farm businesses become aware of potential financial problems when cash flow becomes tight. Step 1 . if left uncorrected. The first step is to determine if the problem is short or long-term. Early Warning Signs . have the potential to result in business failure.Calculate business equity Step 3 .Ans : A cash flow problem arises when a business struggles to pay its debts as they become due. Early diagnosis gives you more time to make decisions and more options concerning your farm business.

A cash flow shortage that persists ultimately reduces the owner's equity. . Debt Servicing Capacity Projected Year + Farm Cash Revenue .000 $20. Step 2 .000 $42.Depreciation or Reserve for Asset Acquisition Debt Servicing Capacity $380.000 ($15. a shortage of $15.Table 1.000 $18. In this example.000 $8. owners withdrawals and operating debt can be divided by the projected production to determine the breakeven price needed.Farm Cash Expenses = Net Cash from Operation + Interest Payments + Owner's Contributions . Businesses with low equity are unable to tolerate cash flow shortages and therefore are at much greater risk.000 exists.000 31.Calculate business equity Knowing your equity position enables you to judge the businesses' ability to survive the cash shortage. Knowing your equity position also allows you to pre-determine the minimum level of equity that you wish to maintain in the business.000 $5. Back of the envelope analysis . This is important because the equity in the farm 12 .000) This example shows that there is cash available to cover the interest and principle payments but not enough to cover depreciation.Owner's Withdrawals (including taxes) = Cash Available for Principal and Int.000 $36. The total of principal and interest payments.000 $328. High equity businesses have the ability to withstand a longer and more serious cash flow shortage because they can re-borrow against their equity. Depreciation or a reserve for asset acquisition is used to replace assets as they wear out.000 $52.the information summarized in the debt servicing capacity worksheet can also be used to project breakeven prices for crops or livestock.Principal and Interest Payments Cash Available After P & I Payments .

000) x 100 .Identify the primary cause of the cash flow problem The most important and the most difficult step in the process is identifying the cause of the cash flow shortage. Equity can be determined by subtracting your total liabilities from your total assets.000 ÷ 650. 13 . For the purpose of evaluating your business equity you should use conservative fair market values.g. To determine the equity as a percentage divide your equity by your total assets and multiply by 100. which is the sale value of the asset. This can be done by examining the following three areas: 1.64% Step 3 . scale of the business 3. If you know your current equity position and the projected cash shortfall you can calculate if you are at risk of falling below that amount. Sometimes this is because of depressed commodity prices. efficiency 2. However it is important to determine if the cash flow problem will continue even after prices increase. Often they have worked very hard at becoming more efficient only to see returns diminish. debt structure Efficiency Some producers might immediately feel defensive when the word efficiency is used. (420. decide that you will not let your equity percentage fall below a certain amount. but it can vary widely depending on how the assets are valued. Statements prepared for accounting purposes use cost less depreciation to value assets. Statements prepared for lenders use fair market value. You may. It is important to protect that investment.000. The equity of the business is always stated on the balance sheet.business represents the retirement savings for many farmers. If the efficiency of the business is only slightly below average even good prices may not generate the profits needed to maintain a positive cash flow. for example. say $250. Percent Equity = (Equity ÷ Total Assets) x 100 E. which is the purchase cost of the asset minus the depreciation taken for tax purposes.

Because there is no one measurement of efficiency you must look at a combination of physical and economic measurements such as yield per acre or variable costs per unit of output. 14 .Efficiency is measured by the physical and economic output of the business.