MBA 2nd Semester (DDE) Examination

FINANCIAL MANAGEMENT

Ques.1 “The profit maximization objective does not provide us write an

Operationally useful criterion.” Explain.

Ans. Certain objections have been raised against the goal of profit maximization
which strengthen the case for wealth maximization as the goal of business
enterprise. The objections are :- (a) Profit cannot be ascertained well in
advance to express the probability of return as future is uncertain. It is not at
all possible to maximize what cannot be known. Moreover, the return profit
vague and has not been explained clearly what it means. It may be total profit
before tax and after tax of profitability tax. Profitability rate, again is
ambiguous as it may be in relation to capital employed, share capital, owner’s
fund or sales. This vagueness is not present in wealth maximisation goal as the
concept of wealth is very clear. It represents value of benefits minus the cost
of investment.

(b) The executive or the decision maker may not have enough confidence in
the estimates or future returns so that he does not attempt further to
maximize.It is argued that firm’s goal cannot be to maximize profits but to
attain a certain level or rate of profit holding certain share of the market or
certain level of sales. Firms should try to ‘satisfy’ rather than to ‘maximise’.

(c) There must be a balance between expected return and risk. The possibility of
higher expected yields are associated with greater risk to recognize such a
balance and wealth maximisation is brought in to the analysis. In such cases,
higher capitalization rate involves. Such combination of expected returns with
risk variations and related capitalization rate cannot be considered in the
concept of profit maximisation.

(d) The goal of maximisation of profits is considered to be a narrow outlook.

Evidently when profit maximisation becomes the basis of financial decision of
the concern , it ignores the interests of the community on the one hand and
that of the government, workers and other concerned persons in the enterprise
on the other hand.

(e) The criterion of profit maximisation ignores time value factor. It considers the
total benefits or profits in to account while considering a project where as the
length of time in earning that profit is not considered at all. Whereas the
wealth maximization concept fully endorses the time value factor in
evaluating cash flows. Keeping the above objection in view, most of the thinkers
on the subject have come to the conclusion that the aim of an enterprise should be
wealth maximisation and not the profit maximisation.
 To make a distinction between profits and profitability. Maximisation of profits
with a view to maximizing the wealth of share holders is clearly an unreal motive.
On the other hand, profitability maximisation with a view to using resources to
yield economic values higher than the joint values of inputs required is a useful
goal. Thus, the proper goal of financial management is wealth maximisation.

Ques. 2 Explain the mechanics of calculating the present value of cash flows.

Ans. PRESENT VALUE METHOD

It is one of the Discounted Cash Flow (DCF) or time adjusted methods. It is also
Known as ‘Discounted Benefit – cost ratio method’. This method takes into
account the time value of money and all cash flows are expressed in terms of their present
value. It also takes into account all the benefits and costs occurring throughout the useful
life time of a project. This method is used on the assumption that the value of present
investments cannot be equal to future amounts of cash inflows from this investment. This
problem can be solved by converting the future amounts of earnings to their present
values. The steps involved in computing the present values of investment outlays and
cash inflows are recapitulated as follows :

(a) Determination of the rate of discount, i.e., cut-off rate. This discount rate is
the cost of capital of the firm or the rate of return desired by the firm on its
investment.
(b) Determination of cash outlays, both initial and subsequent , and cash inflows
for different years.
(c) Computation of the present value of cash outlays of the project by discounting
future cash outlays at the pre – determined discount rate. In case, the capital
asset has any salvage value, it present value of the cash outlays. For
computing the present value of cash flows at different periods, present value
factor may be calculated by the following formula :

Present value factor (PVF) = 1/(1+r)n

Where, r = Rate of interest or desired Rate of Return

N = Number of years.

(d) Determination of the present value of the cash inflows expected to be

generated by the investment outlays. In determining the cash inflows after
tax(CFAT), all direct and indirect costs including operational and maintenance
costs are deducted from the total cash receipts. Depreciation is disregarded
as a cost under this method. With the help of the pre-determined discount rate,
present values of cash inflows after tax at different periods may be computed
 either by calculating the present factor as mentioned above or by taking the
present value factor (PVF) from the annuity tables.
(e) The present values of all cash inflows and outflows for different periods are
determined as under :

PV = Actual cash flow X PVF

Present values of all cash inflows and cash outflows for different periods are
added together respectively which serve as an accept – reject criterion. In case
the present value of cash outflows, the project will be accepted otherwise
rejected.

PV > C accepted the proposal

PV > C reject the proposal

Where PV is the present value cash inflows and C is the present value of cash
outflows or outlays.

Ques.3 Explain the merits and Demerits of the time. adjusted methods of
evaluating the investment projects.

Ans. MERITS OF TIME ADJUSTED METHOD

1. This method takes into account the entire economic life of an investment and
income therefrom . It gives the true rate of return effected by a new project.
2. It gives due weight to time factor of financing. In the words of Charles Horn
green : “ Because the discounted returns on method explicitly and routinely
weights the time value of money, it is the best method to use for long-range
decisions.”
3. It permits direct comparison of the projected returns on investment with the cost
of borrowing money which is not possible in other methods.
4. It makes allowance for difference in the time at which investment generate their
income.
5. This approach by recognizing the time factor makes sufficient provision for
uncertainty and risk. It offers a good measure or relative profitability of capital
expenditure by reducing the earnings to the present value.

DEMERITS

1. It involves a good amount of calculations. Hence it is difficult and complicated

one . But this criticism has no force.
2. It is very difficult to forecast the economic life of any investment exactly.
3. The selection or cash – inflow is based on sales forecasts which is in itself an
interminable element.
4. The selection of an appropriate rate of interest is also difficult.
 But despite these defects, this approach afford an opportunity for making valid
comparisons between several long term competing capital projects.
Ques. 5 Does financial leverage always increase the earnings per share ? Support
your ans. With suitable example.

Ans. Earnings per share (EPS) is simply a measure of profits reported available for
equity shareholders during a period divided by the total number of equity shares
outstanding at the end of that period.

Financial leverage indicates the effects of debt component in capital structure on

earnings of equity shareholders under various conditions. It can be measured, by the ratio
of
I. The rate of growth in earnings available to the shareholders ot
II. The rate of growth of EBIT. This can be illustrated by the following formula :

EBIT or EBT

EBIT – Interest

The financial leverage in our hypothetical company can be analyzed, by using the
following formula :

EBIT 150 1.5

EBIT – Interest 150 – 50

This formula requires modification to consider implications of financial leverage caused

by preference shares where an adjustment for tax factor is also essential.

Table 1

Original After an increase of 10% in sales

Sales 1500 1650

Variable cost 900 990
450 450
EBIT 150 210
Interest (assumed) 50 50
PBT 100 160
Taxes @ 55% 55 88

PAT 45 72
 Percentage increase in EBIT1

Operating leverage =

Percentage increase in sales

40
= = 4
10

EBIT
Financial leverage =
EBIT – Interest
150
= = 1.5
100

Combined effect of operating and financial leverage : 4 * 1.5 = 6 times

Thus, an increase in sales @ 10% will cause an increase in EBIT of 6 times or 60%. By
combining, the operating leverage and financial leverage, we get 4 * 1.5 = 6. It means
that an increase in sales of 10% brings an increase in EBIT of 40% and an increase in
profits of 60%. Similarly a decrease of 10% in sales will mean a full in EBIT of 20% and
a decline in PBT of 60%.

FAVOURABLE AND UNFAVOURABLE LEVERAGE

From the shareholders point of view, the value of leverage depends upon whether
it is helping or hurting them. So long as shareholders find rising sales and EBIT levels,
leverage is advantages or favorable to them, because it tends to maximize the related
increase in EPS, DPS and possible market price. On the other hand , when sales and
EBIT levels are falling leverage tends to be disadvantageous since it maximizes the
related decline in EPS1.

Thus, leverage is a double edged sword. It has got tremendous acceleration of

deceleration effect on EBIT as well as on EPS. It may prove a blessing for companies
which are suitable place for making an optimum use of financial resources in terms of
growing earnings. However, it may prove a blessing for cause for companies with high
debt financing but loan and uncertain cash inflows to meet the debt obligations.
Ques.6 Write notes on the following.

Ans. NET OPERATING INCOME APPROACH

According to the net operating income (NOI) approach the market value of the
firm is not affected by the capital structure changes. The market value of the firm is
found out by capitalizing the net operating income at the over all or the weighted average
cost of capital, which is constant.

The overall capitalization rate depends on the business risk of the firm. It is
independent of financial mix. If NOI and average cost of capital are independent of
financial mix, market value of firm will be a constant and independent of capital structure
changes. The critical assumptions of the NOI approach are :

a) The market capitalizes the value of the firm as a whole. Thus the split between
debt and equity is not important.
b) The market uses an overall capitalization rate, to capitalize the net operating
income. Overall cost of capital depends on the business risk. If the business risk is
assumed to remain unchanged, overall cost of capital is a constant.
c) The use of less costly debt funds increases the risk to shareholders. This causes
the equity capitalization rate to increase. Thus, the advantage of debt is offset
exactly by the increase in the equity – capitalisation rate.
(d) The debt capitalisation rate is constant.
(e) The corporate income taxes do not exist.

Thus, we find that the weighted cost of capital is constant and the cost of equity increase
as debt is substituted for equity capital.

Ques.7Explain the concept of working capital. Discuss the working capital need of a
manufacturing firm.

Ans. Money required by the company to meet out day – today expenses to finance
production and stocks to pay wages and other production etc. is called the working
capital of the company. Working capital is used in operating the business. It is mostly
dept is circulation by releasing it back after selling the products and reinvesting it in
further production. It is because of this regular cycle that the working capital
requirements are usually for short periods. Though, both fixed and working capitals shall
be recovered from the business, the differences lies in the rate of their recovery. Working
capital shall be recovered much more quickly as compared to fixed capitals which would
last for several years. As the process of production become more round about and
complicated the production to fixed working capital increase correspondingly.

Therefore, working capital management refers to the management of current assets and
current liabilities. Working capital, however, represents investment in current assets, such
as cash, marketable securities, inventories and bills receivables. Current liabilities mainly
include bills payable, notes payable and miscellaneous accruals. Net working capital is
the excess of current assets over current liabilities here. Current assets are those assets
which are normally converted into cash within an accounting year; and current liabilities
are usually paid within an accounting year.

What for is working capital required by firm very much depends on the nature of the
business which the firm is conducting. If the firm has business which deals with public
utility services, obviously the requirement will be low. It is primarily because the amount
becomes available as soon as services are sold and also the services arranged by the firm
and immediately sold, without much difficulty and complication. On the other hand
trading concerns need heavy amounts because these require funds for carrying goods
traded. Similarly many industrial units will also need heavy amounts for carrying on their
business. Many manufacturing concerns will also need sufficiently heavy amounts, that
of course depends on the nature of commodities which are being manufactured.

MANUFACTURING FIRM

We now come to manufacturing firm. If it is complex and complicate, it will be another

determinant. In this complex process obviously more capital will be needed and goods
will be produced after considerable delays. Longer it takes to produce a good , more will
be its cost and more working capital will become unavoidable. When the companies are
engaged in the production of heavy machinery and equipment, a way out is found out by
demanding some advance money from the party or parties which plea orders or which
usually take away the goods.

Ques.8Define EOQ. How is it computed ? Give an example.

Ans. Economic order quantity refers to the size of the order which gives maximum
economy is purchasing any item of raw materials or finished product. It is fixed mainly
after talking into account the following costs :

I. INVENTORY CARRYING COST

It is the cost of keeping items in stock. It includes interest on investment.

Obsolescence losses, store – keeping cost, insurance premium, etc. The larger the
volume of inventory, the higher will be the inventory carrying cost and vice versa.

II ORDERING COST

It is the cost of placing an order and securing the supplies. It various from time to
time depending upon the number of orders placed and the number of times
ordered. The more frequently the orders are placed and fewer the quantities
purchased an each order, the greater will be the ordering cost and vice versa.
 The economic ordering quantity can be determined by any of the following two
methods :

1) FORMULA METHOD

In this case the EOQ can be determined as per the following for formula :
Where :

E = Economic ordering quantity

U = Quantity purchased in a year
P = Cost of placing an order
S = Annual cost of storage of one unit

A refrigeration manufacture, purchases 1600 units of a certain component from

13. His annual usage is 1600 units. The order placing cost is Rs. 100 and the cost
of carrying one unit for a year is Rs. 8.

Calculate the economic ordering qty by formula method :

E = Sqrt. (2u * p)/s

= Sqrt. (2*1.600*100)/8
= Sqrt. (40,000) = 200 units

EOQ model is based on the following assumptions :

I. The firm knows with certainly the annual usage or demand of the particular item
of inventories.
II. The rate at which the firm uses the inventories or makes sales is constant through
out a year.
III. The order the replenishment of inventory are placed exactly when inventories
reach the zero level.
The above assumption may also be called as limitation of EOQ modes. There is every
likelihood of a discrepancy between actual and estimated demand for a particular items of
inventory. Similarly, the assumptions as to constant usage or sale of inventories and
instantaneous replenishment of inventories are also of doubtful validity. On account of
these reasons, EOQ model may sometimes give wrong estimate about economic order
quantity.

2 .TABULAR METHOD

This method is to be used in those circumstances where the inventory carrying

cost per units is not constant. This will be clear with the following :

Calculating the Economic Ordering Quantity using Tabular Method on the basis of data
given.
Annual Orders Units per Order Avg. Carrying Total
Requirement per year order placing stock in costs amount
costs units cost
(50% of
order
placed)
1600 1 1600 100 800 6400 6500
2 800 200 400 3200 3400
3 533 300 267 2136 2436
4 400 400 200 1600 2000
5 320 500 160 1280 1780
6 267 600 134 1072 1672
7 229 700 115 920 1620
8 200 800 100 800 1600
9 178 900 89 712 1612
10 160 1000 80 640 1640

The above table shows that total cost is the minimum when each is of 200 units.
Therefore, economics ordering quantity is 200 units only.

A graphic presentation of the economic ordering quantity on the basis of figures given in
the above table will be as follows :

Total cost on inventory management

Inventory carrying costs.

Ordering cost [ EOQ = 2000 units]

Cost in thousand (Rs.)

0 1 2 3 4 5 6 7 8 9 10
ACCOUNTING FOR MANAGERS
Ques.8 “Standard costs are bases for a proper managerial control of manufacturing
operation,” Explain.

Ans. Standard costs are bases for a proper managerial control of manufacturing
operation. Management can control costs on information being provided to it
immediately for comparison of results. The advantages of standard costing can be listed
as follows :

a) FORMULATION OF PRICE AND PRODUCTION POLICIES

Standard costing acts as a valuable guide to management in the formulation of

price and production policies. It assists management in the field of inventory
pricing, product pricing, profit – planning and also further reporting to higher
levels.

b) COMPARISON AND ANALYSIS OF DATA

Standard costing provides a stable and sound basis for comparison of actual costs
with standard costs according to different elements separately. It beings out
clearly the impact of external factors and internal courses on the cost and
performance of the concern. Thus, it indicates places where remedial action is
necessary and how for improvement is possible in the long run.

c) COST CONSCIOUSNESS

An atmosphere of cost consciousness is related among the staff, managerial as

well as workmen of the business. Standard costing also provides incentive
personal for efficient work.

d) BETTER CAPACITY TO ANTICIPATE

A tighter, more accurate and effective budget can be formulated for the coming
years by once knowing the deviations of actual costs from standard costs. Data are
available at an early stage and the capacity to anticipate about changing
conditions is developed.
e) DELEGATION OF AUTHORITY AND FIXATION OF RESPONSIBILITY

The net profit is analyzed and responsibility can be placed on the person incharge
for any variations form the standards. The sphere of operations of adverse
variations is disclosed and particular production department or centre can be held
accountable for it. Thus, delegation of authority and fixation of responsibility can
be done by management to control the affairs in different departments.

f) MANAGEMENT BY ‘EXCEPTION’
 The principle ‘management by exception’ can be made applicable on cases in the
business. This helps the management in concentrating its attention on cases which
are off – standard i.e below or above the standard set in. The trend of costs is
portrayed and therefore, a pattern is provided for the elimination of undesirable
factors causing damage to the business.

g) BETTER ECONOMY, EFICIENCY AND PRODUCTIVITY

Management review of costs is more effective as the operations are scrutinized

carefully and inefficiencies are disclosed. Men, machines and material are more
effectively utilized and thus economies can be effected in business together with
increased productivity. Beside it, a lot of clerical labour is also saved and
economy is attained in calculations and computations.

Ques.1 Explain concepts and conventions. Give examples of different transactions which
may influence assets, liabilities and owners funds.

Ans.1 ACCOUNTING CONCEPTS

1. BUSINESS ENTITY CONCEPT

In accounting, business is treated as a separate entity from its owners. Accounts

are prepared to give information about the business and not those who own it. A
distinction is made between business transactions and personal transactions and
also between business property and personal property of the owners.

2. GOING CONCERN CONCEPTS

It is presumed that the business concern will continue to exist indefinitely or at

least in the near future. The present resources of the concern are utilized to attain
the long term objectives of the business. This concept is very important in relation
to the recording of transactions and preparation of financial statements. For eg, it
is only this assumption that while preparing final accounts of the concern, fixed
assets are shown in the balance sheet at diminishing balance method, i.e, going
concern value.

3. THE COST CONCEPT

The accounting records are based on cost concept. This concept is closely related
to the going concern concept. The assets and liabilities of a business are shown at
a cost which has been paid or agreed upon between the parties. The figures are
recorded on objectivity basis.

4. DUAL ASPECT CONCEPT

 This concept lies at the heart of whole accounting system. Modern accounting
system is based on dual aspect concept. It is based on the principle that for every
debit transaction, there is a corresponding credit transaction. There must be a
given of benefit and also a taker of it. Suppose a purchases building for Rs.
20,000, he will get the building and will part with the cash for similar amount. So
one account will be debited and another account will be credited. The debits will
be equal to credits.

5. MONEY MEASUREMENT CONCEPT

According to this concept only those transactions are recorded in accounting

which can be expressed in terms of money. Money provides a mechanism by
which real resources can be transferred among different individuals. Money is
accepted as a medium of exchange for goods and services. One is prepared to sell
one’s property in exchange for money.

6. ACCOUNTING PERIOD / ACCRUAL CONCEPT

Financial position and profitability of a concern are assessed at a regular interval

called accounting period. While preparing profit and loss account of a concern all
revenue items relating to that period are taken into consideration irrespective of
the fact that whether these items are paid or payable. Similarly, a balance sheet is
prepared to reveal the financial position of the concern on a particular date.

ACCOUNTING CONVENTIONS

1. CONVENTION OF DISCLOSURE

The disclosure of all significant information is one of the important accounting

conventions. It implies that accounts should be prepared in such a way that an
material information is clearly disclosed to the reader. This information should
not only include figures given in the final accounts but also information which
occurs after the preparation of balance sheet but before the presentation of
financial statements.

2. CONVENTION OF CONSISTENCY

The conventions of consistency means that same accounting principles should be

used for preparing financial statement for different periods. It enables the
management to draw important conclusions regarding the working of the concern
over a longer period. If different accounting procedures and processes are used for
preparing financial statements of different years then the results will not be
comparable because these will be based on different postulates.

3. CONVENTION OF CONSERVATISM
 The convention of conservatism means a cautions approach or policy of ‘Play
safe’. This convention ensures that uncertainties and risks inherent in business
transactions should be given a proper consideration. If there is a possibility of
loss, it should be taken into account at the earliest. On the other hand, a prospect
of profit should be ignored upto the time it does not materialize.

4. CONVENTION OF MATERIALITY

According to this convention only those events should be recorded which have
significant bearing and insignificant things should be ignored. The avoidance of
insignificant things will not materially affects the records of the business. It
should be seen that the efforts involved in recording the events should be worth
the labour involved in it.

Ques.3 What is the key question in assessing liquidity ? What ratios are used in this
regard?

Ans. ANALYSIS OF SHORT-TERM FINANCIAL POSITION OR TEST OF

LIQUIDITY

The short term creditors of a company like supplies of good of credit and
Commercial banks providing short-term loans, are primarily interested in
knowing the companies ability to meet its current or short term obligations of a firm can
be met only when there are sufficient liquid assets. Therefore, a firm must ensure that it
does not suffer from lack of liquidity or the capacity to pay its current obligations due to
lack of good liquidity position, its goodwill in the market is likely to be effected beyond
repair.

Two types of ratios can be calculated for measuring short term financial position
or short term solvency of a firm.

A. LIQUIDITY RATIOS

Liquidity refers to the ability of a concern to meet its current obligations as and
when there become due. The short-term obligations are met by realizing amounts
from current, floating or circulating assets. The current assets should either be
liquid or near liquidity . These should be convertible into cash for paying
obligations of short-term nature. The sufficiently or insufficiency of current
assets should be assessed by comparing them with short term liabilities. If current
assets can pay off current liabilities, then liquidity position will be satisfactory.
On the other hand if current liabilities may not be easily met out of current assets
then liquidity position will be bad. The bakers, suppliers of goods and other
short-term creditors are interested in the liquidity of the concern. They will
extend credit only if they are sure that current assets are enough to pay out the
 obligations. To measure the liquidity of a firm, the following ratios can be
calculated :

I. Current Ratio.
II. Quick or Acid Test or liquid ratio.
III. Absolute liquid ratio or cash position ratio.

I CURRENT RATIO

Current ration may be defined as the relationship between current assets and
current liabilities. This ratio, also known as working capital ratio, is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial position
or liquidity of a firm. It is calculated by dividing the total of current assets by total of the
current liabilities. Thus,

Current assets
Current Ratio =
Current liabilities

Or

Current assets : Current liabilities

COMPONENTS OF CURRENT RATIO

Current Assets Current liabilities

1. Cash in hand 1. Outstanding expenses/Accrued
2. Cash at bank expenses
3. Marketable securities 2. Bills payable
4. Short-term investments 3. Sundry creditors
5. Bills receivable 4. Short-term advances
6. Sundry debtors 5. Income tax payable
7. Investments 6. Dividends payable
8. Work-in-progress 7. Bank overdraft
9. Prepaid expenses

II QUICK OR ACID TEST OR LIQUID RATIO

Quick ratio, also known as acid test or liquid ratio, is a more rigorous test of liquidity
than the current ratio. The term liquidity refers to the ability of a firm to pay its short term
obligations as and when they become due. The two determinants of current ratio, as a
measure of liquidity, are current assets and current liabilities. Current assets include
inventories and prepaid expenses which are not easily convertible into cash within as
short period. Quick ratio may be defined as the relationship between quick / liquid assets
and current or liquid liabilities. An asset is said to be liquid if it can be converted into
cash within a short period without loss of value. In that sense, cash in hand and cash at
bank are the most liquid assets.

Quick or liquid assets

Quick/liquid or acid test ratio =
Current liabilities

COMPONENTS OF QUICK/LIQUID RATIO

Quick/Liquid Assets Current Liabilities

Cash in hand Outstanding expenses
Cash at bank Bills payable
Bills receivable Sundry creditors
Sundry debtors Short-term advances
Marketable securities Income tax payable
Temporary investments Dividends payable
Bank overdraft

Ques.5 “ A management accountant is both an information provider and a part of

management”. Explain.

Ans. MANAGEMENT ACCOUNTANT AS AN INFORMATION PROVIDER

A. COLLECTION OF INFORMATION

The information used in management accounting is collected from a number of

sources both inside and outside the business. Inside the business, the information
may have to be collected from financial accountant, production department,
purchase, sale, costing department etc. The outside sources may be competitors,
financial statements, market, surveys etc.

B. EVALUATION OF INFORMATION

The next duty of the management accountant after the collection of information is
to evaluate it. The whole information may not be needed at present.

C. INTERPRETATION OF INFORMATION

The interpretation of information is another task assigned to management

accountant. If the information is supplied without interpretation then its utility
will be much less. Management accountant gives facts and figures about various
policies and evaluates them in monetary terms.
D. REPORTING OF INFORMATION :

Another duty of management accountant is to supply information to the

management. He meets informational needs of the management. The information
is supplied whenever needed.

ACCOUNTANT A PART OF MANAGEMENT

a) To establish, co-ordinate and maintain through authorized management an

integrated plan for the control of operations. Such a plan would provide to the
extent required in the business cost standards, expense budgets, sales forecasts,
profit planning and programme for capital investment and financing together with
the necessary procedures to different the plan.
b) TO measure performance against approved operating plans and standards and to
report and interpret the results of operations to all levels of management.
c) To measure and report on the validity of the objectives of the business and on the
effectiveness of its policies, organization structure and procedure in attaining
those.
d) To report to government agencies as required and to supervise all matters relating
to taxes.
e) To interpret and report on the effect of internal influenced on the attainment of the
objectives of the business. This function includes the continuous appraisal of
economic and social forces and of governmental influence as they affect the
operations of the business.
f) To provide protection for the assets of the business. This function includes
establishing and maintaining adequate internal control and auditing and assuring
proper insurance coverage.
Ans.4
Schedule of changes in working capital
Particulars 2001 2002 Increase Decrease
Current Assets
Stock 30000 23400 6600
B/R 2000 3200 1200
Debtors 18000 19000 1000
Cash at Bank 6600 15200 8600

Current liabilities
S. Creditors 8000 5400 2600
Bills payable 1200 800 400
Provision for
doubtful debts 400 600 200

13800 6800
7000
Increase in 13800 13800
working capital

Funds From Operations

Particulars Details Total

Net Loss (3000)
Add:
Transfer to general reserve 4000
Depreciation on plant 4000
Depreciation on building 4000
Interim dividend 8000
Provision for tax 19000 39000

F.F.O 36000
 Funds Flow Statement
Sources Amount Uses Amount
Purchase of investment 1000
purchase of
Funds from operation 36000 Purchase of plant 3000
Interim dividend 8000
Provision for tax 17000
Incharge in working 7000
capital

36000 36000

Building A/C
Particular Amount Particular Amount
To balance b/d 40000 By depreciation a/c 4000
By balance c/d 36000

40000 40000

Plant A/C
Particulars Amount Particulars Amount
To balance b/d 37000 By depreciation a/c 4000
To cash purchases 3000 By balance b/d 36000

40000 40000

Provision for tax

Particular Amount Particulars Amount

To bank a/c(PAID) 17000 By balance b/d 16000
To balance b/d 18000 By p&l a/c (MADE) 19000

35000 35000
Ans.7
7000 units
Flexible Budget
Particulars Per unit Total
Marginal cost :

Direct Material 60 420000

Direct Labour 30 210000
Variable expenses 5 35000
Variable overheads :
Production 20 140000
Selling 13.5 94500
Distribution 4 28000

132.5 927500

Fixed Cost :

Fixed production overhead 21.43 150000

Fixed administration overhead 5.71 40000
Fixed selling overheads 2.14 15000
Fixed distribution overhead 1.43 10000

30.71 215000

Total Cost 162.5 1142500

(Marginal plus fixed cosst)