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UNIT - I
MANAGEMENT ACCOUNTING - INTRODUCTION
SECTION – A (2 MARKS)
1. What is Management Accounting?
It is the study of managerial aspects of Accounting. It is a tool to exercise decision
making. It provides information to the management to use it as a base for decision
making.
2. Define Management Accounting.
Management Accounting is the presentation of accounting information in such a
way as to assist management in the creation of policy and in the day today
operations of an undertaking – I.C.M.A
3. What are the duties of Management Accountant?
Collection of Information
Evaluation of Information
Interpretation of Information
Reporting of Information
4. What are the Functions of Management Accountant?
Planning for Control
Reporting
Evaluation of Various Policies and Programmes
Administration of Tax
Protection of Assets
SECTION – B (5 MARKS)
1. What are the Characteristics of Management Accounting?
Providing Financial information
Use of Special techniques and Concepts
Cause and Effect Analysis
Decision Making
Achievement of Objectives
Improving Efficiency
Forecasting
2. What are the tools and Techniques of Management Accounting?
Financial policy and Accounting
Analysis of Financial Statements
Historical Cost Accounting
Budgetary Control
Standard Costing
Marginal Costing
Management Information System.
3. What are the Merits of Management Accounting?
Increase in Efficiency
Effective Planning
Performance Evaluation
Profit Maximisation
Reliability
Elimination of Wastages
Effective Communication
Employee Morale
Control and Co-ordination
4. What are the limitations of Management Accounting?
Dependence for basic records
Personal Bias
Only a Tool
Provided only Data
Resistance to Change
Costly to Install
5. What are the steps involved in Installation of Management Accounting System?
Organisation Manual
Preparation of Various forms and Reports
Requisite Staffing
Classification of Accounts
Setting up Cost Centres
Introducing Accounting techniques
Providing the usage of OR Techniques
SECTION – C (10 MARKS)
1. Explain the Scope of Management Accounting
Financial Accounting
Cost Accounting
Budgeting and Forecasting
Inventory Control
Statistical Analysis
Analysis of Data
Internal Audit
Tax Accounting
2. Explain the Objectives and Functions of Management Accounting.
Presentation of Data
Aid of Planning and Forecasting
Help in organizing
Decision Making
Effective Control
Communication of Management Policies
Effective Control
Incorporation of Non – Financial information
Co-ordination
Motivating Employees
3. Distinction between Financial Accounting and Management Accounting.
Financial Accounting Management Accounting
Concerned with External Reporting Concerned with Internal Reporting
Records the Past and Present Concerned with future plans and Operations
Historical and Objective Management Accounting is Subjective
Analyses the data of the business as a whole Evaluates Performance of different
Departments, Divisions
Financial Accounts are prepared as per the
guidelines laid down by Companies Act and
IT Act
The Management Accountant has flexibility
in following different standards set by the
management.
Reports are prepared periodically Reports are prepared as and when required
Records the Transactions as per established
Conventions and Principles
Management Accounting does not have any
set of rigid principles
4. Distinction between Cost Accounting and Management Accounting.
Cost Accounting Management Accounting
Purpose is to ascertain and control Cost of
Product and Services
Purpose is to provide information to
Management for performing the functions of
planning, directing and controlling.
Accounting is based on Historical and Present
data.
Deals with future projections on the basis of
historical and present cost data
Established procedures and practices are
followed
No such practices and Procedures
Uses Quantitative Information Uses both Qualitative and Quantitative
Information
It is mainly concerned with Cost
Ascertainment and Control
Includes Financial Accounting, Cost
Accounting, Budgeting, Tax Planning and
Reporting to Management
UNIT - II
ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS
SECTION – A (2 MARKS)
1. What are Financial Statements?
Financial Statements refer to formal and original statements prepared by a
business concern to disclose its financial information. Financial Statements are
prepared for the purpose of presenting a periodical review or report on the
progress by the management and deal with:
i. Status of Investments in the business
ii. Results achieved during the period under review.
2. What are the types of Analysis of Financial Statements?
Types of Analysis
On the basis of Information used
External Analysis
Internal Analysis
On the basis of modus operandi used
Horizontal Analysis
Vertical Analysis
3. What are the Techniques and Tools of Financial Statement Analysis?
Ratio Analysis
Cash Flow Analysis
Funds Flow Analysis
Comparative Financial Statements
Common Size Financial Statements
Net Working Capital Analysis
Trend Analysis.
4. How do you show the following items in a Comparative Income Statement?
Particulars 31 – 03 – 2009 31 – 03 – 2010
Sales 1000000 1200000
Cost of Sales 800000 1050000
Solution
COMPARATIVE INCOME STATEMENT
Particulars 31 – 03 – 09 31 – 03 – 10 Increase (+) / Decrease (-)
Rs. %
Sales 1000000 1200000 + 200000 +20
Less: Cost of Sales 800000 1050000 +250000 +31.25
Gross Profit 200000 150000 -50000 -25
5. How do you show the following items in a Common Size Income Statement?
Particulars 31 – 03 – 2009 31 – 03 – 2010
Sales 1000000 1600000
Less: Cost of Sales 800000 1200000
Gross Profit 200000 400000
Solution
COMMON SIZE INCOME STATEMENT
Particulars 31 – 03 – 2009 31 – 03 – 2010
Rs. % Rs. %
Sales 1000000 100 1600000 100
Less : Cost of Sales 800000 80 1200000 75
Gross Profit 200000 20 400000 25
6. How do you show the following items in a Common Size Balance Sheet?
Particulars 31 – 03 – 2009 31 – 03 – 2010
Total of Balance Sheet 2000000 2400000
Fixed Assets 800000 1200000
Inventories 400000 600000
Solution
COMMON SIZE BALANCE SHEET
Particulars 31 – 03 – 2009 31 – 03 – 2010
Rs. % Rs. %
Total of Balance Sheet 2000000 100 2400000 100
Fixed Assets 800000 40 1200000 50
Inventories 400000 20 600000 25
7. How do you deal with the following items in a Comparative Balance Sheet?
Particulars 31 – 03 – 2009 31 – 03 – 2010
Fixed Assets 4000000 5000000
Current Assets 1000000 900000
Share Capital 500000 600000
Solution
COMPARATIVE BALANCE SHEET
Particulars 31 – 03 – 09 31 – 03 – 10 Increase (+) / Decrease (-)
Rs. %
Fixed Assets 4000000 5000000 +1000000 +25
Current Assets 1000000 900000 -100000 -10
Share Capital 500000 600000 +100000 +20
8. Calculate Trend Percentages for the following taking the year 2004 as Base Year:
Particulars 2004 2005 2006 2007 2008
Sales 500000 600000 650000 700000 800000
Cost of Sales 400000 440000 500000 520000 560000
Solution
Trend Percentages (2004 as Base Year)
Rs. % ( Base Year 2004)
Particulars 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008
Sales 500000 600000 650000 700000 800000 100 120 130 200 160
Cost of Sales 400000 440000 500000 520000 560000 100 110 125 130 140
9. Explain the Nature of Financial Statements.
Based on recorded facts
Accounting Conventions and Principles
Postulates
Personal Judgements
10. What are the functions / Importance of Financial Statements?
For the Management: To take effective decisions
To fulfill the functions of operation and control
For the Financiers: Customer’s Financial Position, Solvency
Customer’s Credit Standing and Profitability
For the Creditors Extension of Trade Credit
For the Investors Earning Capacity
Growth Potential
Efficiency of Management
SECTION – B (5 MARKS)
1. Following is the Profit & Loss A/c of Shekar Fibres Limited for the year ended
31.03.2009 & 31.03.2010. You are required to prepare a Common Size Income
Statement:
Profit & Loss Account
Particulars 31.03.2009 31.03.2010 Particulars 31.03.2009 31.03.2010
To Cost of Goods Sold 300 375 By Net Sales 400 500
To Operating Expenses
Administrative 10 10
Selling 15 20
To Profit 75 95
400 500 400 500
Solution:
COMMON SIZE INCOME STATEMENT
Particulars 31 – 03 – 2009 31 – 03 – 2010
Rs. % Rs. %
Sales 400 100 500 100
Less : Cost of Sales 300 75 375 75
Gross Profit 100 25 125 25
Less : Operating Expenses
Administration 10 2.5 10 2
Selling 15 3.75 20 4
Total 25 6.25 30 6
Operating Profit 75 18.75 95 19
Add: Non – Operating Income - - - -
75 18.75 95 19
Less : Non Operating Expenses - - - -
Net Profit 75 18.75 95 19
2. From the following information, show the results of operations of a
manufacturing concern using Trend Percentages with 1987 as Base Year:
Amount in Thousands (Rs.)
Particulars 1990 1989 1988 1987
Sales 1300 1200 950 1000
Cost of Goods Sold 728 696 589 600
Gross Profit 572 504 361 400
Selling Expenses 120 110 97 100
Net operating Profit 452 394 264 300
Solution
TREND PERCENTAGES FOR INCOME STATEMENT (1987 AS BASE YEAR)
Amount in Thousands (Rs.) Trend Percentage ( Base Year 1987)
Particulars 1990 1989 1988 1987 1987 1988 1989 1990
Sales 1300 1200 950 1000 100 95 120 130
Cost of Goods Sold 728 696 589 600 100 98 116 121
Gross Profit 572 504 361 400 100 90 126 143
Selling Expenses 120 110 97 100 100 97 110 120
Net operating Profit 452 394 264 300 100 88 131 151
3. From the following details below, prepare a Common Size Income Statement of
Lively Limited:
Particulars Year Ending 31.03.2009 Year Ending 31.03.2010
Sales 200000 500000
Cost of Sales 100000 220000
Operating Expenses 20000 30000
Non – Operating Expenses 30000 35000
Solution
Common Size Income Statement of Lively Limited:
Particulars 31 – 03 – 2009 31 – 03 – 2010
Rs. % Rs. %
Sales 200000 100 500000 100
Less : Cost of Sales 100000 50 220000 44
Gross Profit 100000 50 280000 56
Less : Operating Expenses 20000 10 30000 6
Operating Profit 80000 40 250000 50
Add: Non – Operating Income - - - -
80000 40 250000 50
Less : Non Operating Expenses 30000 15 35000 7
Net Profit 50000 25 215000 43
4. From the following data, you are required to calculate Trend Percentages taking
2007 as Base Year:
Rs. in Thousands
Particulars 2007 2008 2009 2010
Cash 100 120 80 140
Debtors 200 250 325 400
Stock 300 400 350 500
Other Current Assets 50 75 125 150
Land 400 500 500 500
Buildings 800 1000 1200 1500
Plant 1000 1000 1200 1500
Total 2850 3345 3780 4690
Solution:
TREND PERCENTAGES (BASE YEAR 2007)
Particulars Rs. in Thousands Trend Percentage ( Base Year 2007)
2007 2008 2009 2010 2007 2008 2009 2010
Cash 100 120 80 140 100 120 80 140
Debtors 200 250 325 400 100 125 162.5 200
Stock 300 400 350 500 100 133 117 167
Other Current Assets 50 75 125 150 100 150 250 300
Total (A) 650 845 880 1190 100 130 136 183
Land 400 500 500 500 100 125 125 125
Buildings 800 1000 1200 1500 100 125 150 187.5
Plant 1000 1000 1200 1500 100 100 120 150
Total (B) 2200 2500 2900 3500 100 114 132 159
Total 2850 3345 3780 4690 100 117 133 165
5. What are the Limitations of Financial Statements?
Information shown in Financial Statements is not precise since it is based
on conventions and rules developed there from
Financial Statements are influenced by personal opinions, Judgements and
subjective views and whims of accountants.
Financial Statements are dumb because they cannot speak themselves.
Balance Sheet of a Concern is a static document as it discloses the
financial position of a concern on a particular date.
Financial Statements of one period may not be comparable with that of
statements of other periods due to differences in conditions and changes in
economic situation.
6. What are the Objectives of Analysis and Interpretation of Financial Statements?
i. To interpret the profitability and efficiency of various business
activities.
ii. To measure the managerial efficiency of the firm.
iii. To measure short term and long term solvency of the business.
iv. To ascertain earning capacity in future period.
v. To determine future potential of the concern.
vi. To measure utilisation of various Assets
vii. To compare operational efficiency of similar concerns engaged in
the same industry.
7. What are the Limitations of Financial Statement Analysis?
i. Nature of Financial Statements is historical.
ii. Results of Analysis cannot be considered as Judgements or
Conclusion.
iii. If Financial Statements are manipulated by Window Dressing,
analysis based on those figures will be mis leading or meaning
less.
iv. Results of Analysis may be interpreted differently by different
users.
v. Frequent changes in Accounting Policies and Methods makes the
statements incomparable.
vi. Rising Inflation erodes the value of money in the present day
economic situation, which reduces the validity of Analysis.
SECTION – C (10 MARKS)
1. Explain are the Techniques and Tools of Financial Statement Analysis?
Ratio Analysis
An Analysis of Financial statements based on ratios is known as Ratio Analysis
A Ratio is a mathematical relationship between two or more items taken from
financial statements. Ratio Analysis is the process of computing, determining and
presenting the relationship of items. It is helpful to management and outsiders to
diagnose the financial health of a business concern. It helps in measuring the
Profitability, Solvency and Activity of a firm.
Cash Flow Analysis
Cash Flow Analysis depicts the Inflow and Outflow of Cash. Cash Flow
Statement is the devise for such Analysis. It highlights causes which bring
changes in Cash position between two Balance Sheet dates.
Funds Flow Analysis
Funds Flow Statement signifies Sources and Applications of Funds. The term
Funds refers to Working Capital. Funds Flow Analysis shows Internal and
External sources of Working Capital and the way funds have been used. Funds
Flow Analysis is helpful in judging credit worthiness, financial planning and
budget preparation.
Comparative Financial Statements
These Statements summarise and present related data for a number of years.
These Statements normally comprise Comparative Profit & Loss Account and
Comparative Balance Sheet, Comparative statements of change in Total capital as
well as Working capital. These statements helps in making inter – period and inter
– firm comparison and also highlight the trends in performance efficiency and
financial position.
Common Size Statements:
Common Size Statements indicate the relationship of various items with some
common items (expressed as a percentage of Common item). In the income
statements, sales figure is taken as basis and all other figures are expressed as a
percentage of sales. Similarly in the Balance Sheet, total assets and liabilities is
taken as base and all other figures are expressed as percentage of this total.
Net Working Capital Analysis
Schedule of Changes in Working Capital is prepared to disclose net changes in
working capitals on two specific dates (Generally Two Balance Sheet Dates). It is
prepared from Current Assets and Current Liabilities on the specified dates to
show net increase or decrease in working capital.
Trend Analysis:
Trend signifies a tendency and as such the review and appraisal of tendency in
accounting variables are nothing but trend analysis. Trend Analysis is carried out
by calculating Trend Ratios and / or by plotting the accounting data on graph
paper or chart. Trend Analysis is significant for forecasting and budgeting.
2. From the following Balance Sheets of X Limited , You are required to prepare
a Common Size Balance Sheet
BALANCE SHEET AS ON 31 ST DECEMBER
Liabilities 2009 2010 Assets 2009 2010
Equity Capital 300000 1200000 Land & Buildings 100000 450000
Liability for Expenses 9000 17000 Plant & Machinery 300000 750000
Retained Earnings 50000 33000 Stock 60000 217000
Sundry Creditors 91000 100000 Debtors 115000 160000
Debentures 150000 250000 Cash 10000 5000
Bills Receivable 10000 15000
Prepaid Expenses 5000 3000
Total 600000 1600000 Total 600000 1600000
SolutionCOMMON SIZE BALANCE SHEET OF X LIMITED FOR THE YEARS 2009 AND 2010
Assets 2009 2010
Rs. % Rs. %
FIXED ASSETS
Land & Buildings 100000 16.67 450000 28.13
Plant & Machinery 300000 50.00 750000 46.87
TOTAL (A) 400000 66.67 1200000 75.00
CURRENT ASSETS
Stock 60000 10.00 217000 13.56
Debtors 115000 19.17 160000 10.00
Cash 10000 1.67 5000 0.31
Bills Receivable 10000 1.67 15000 0.94
Prepaid Expenses 5000 0.83 3000 0.19
TOTAL(B) 200000 33.33 400000 25.00
TOTAL (A + B) 600000 100.00 1600000 100.00
LIABILITIES AND CAPITAL
Current Liabilities
Liability for Expenses 9000 1.50 17000 1.06
Sundry Creditors 91000 15.17 100000 6.25
TOTAL (A) 100000 16.67 117000 7.31
Long Term Liabilities
Debentures 150000 25 250000 15.63
TOTAL (B) 150000 25 250000 15.63
TOTAL LIABILITIES (A + B = C) 250000 41.67 367000 22.94
CAPITAL AND RESERVES
Equity Capital 300000 50 1200000 75
Retained Earnings 50000 8.33 33000 2.06
TOTAL (D) 350000 58.33 1233000 77.06
TOTAL LIABILITIES AND CAPITAL 600000 100.00 1600000 100.00
3. Prepare a Comparative Income Statement of Vinayaka Travels Limited for the
Years ending 31st March 2006 and 31st March 2007 from the following:
Particulars 31 – 03 – 2006 31 – 03 – 2007
Purchases less Returns 80000 150000
Other Direct Expenses 20000 50000
Sales 180000 260000
Office Expenses 20000 25000
Selling Expenses 10000 15000
Finance Expenses 10000 8000
Profit 40000 12000
Solution
COMPARATIVE INCOME STATEMENT
Particulars 31 – 03 – 06 31 – 03 – 07 Increase (+) / Decrease (-)
Rs. %
Sales (A) 180000 260000 +80000 +44.44
Less: Cost of Sales
Purchases less returns 80000 150000 +70000 +87.5
Other Direct Expenses 20000 50000 +30000 +150
Total (B) 100000 200000 +100000 +100
Gross Profit (C) = (A) – (B) 80000 60000 -20000 -25
Administration Expenses
Office Expenses 20000 25000 +5000 +25
Selling Expenses 10000 15000 +5000 +50
Total (D) 30000 40000 +10000 +33.33
Operating Profit (E) = (C) – (D) 50000 20000 -30000 -60
Less : Non Operating Expenses
Finance Expenses 10000 8000 -2000 -20
Total (F) 10000 8000 -2000 -20
Net Profit (E) – (F) 40000 12000 28000 -70
4. From the following Balance Sheets of X Limited , You are required to prepare
a Comparative Balance Sheet
BALANCE SHEET AS ON 31 ST DECEMBER
Liabilities 2009 2010 Assets 2009 2010
Equity Capital 400 400 Land & Buildings 400 370
6% Preference Capital 300 300 Plant & Machinery 400 410
Reserves 200 245 Stock 200 300
8% debentures 100 150 Debtors 200 300
Bills Payable 50 75 Cash 100 140
Sundry Creditors 250 350
Total 1300 1520 Total 1300 1520
Solution
COMPARATIVE BALANCE SHEET OF X LIMITED
Particulars 2009 2010 Increase (+) / Decrease (-)
ASSETS Rs. %
FIXED ASSETS
Land & Buildings 400 370 -30 -7.5
Plant & Machinery 400 410 +10 +2.5
TOTAL (A) 800 780 -20 -2.5
CURRENT ASSETS
Stock 200 300 +100 +50
Debtors 200 300 +100 +50
Cash 100 140 +40 +40
TOTAL(B) 500 740 +240 +48
TOTAL (A + B) 1300 1520 +220 +16.92
LIABILITIES AND CAPITAL
Current Liabilities
Bills Payable 50 75 +25 +50
Sundry Creditors 250 350 +100 +40
TOTAL (A) 300 425 125 +41.67
Long Term Liabilities
8% Debentures 100 150 +50 +50
TOTAL (B) 100 150 +50 +50
TOTAL LIABILITIES (A + B = C) 400 575 +175 +43.75
CAPITAL AND RESERVES
Equity Capital 400 400 - -
6% Preference Share Capital 300 300 - -
Reserves 200 245 +45 +22.5
TOTAL (D) 900 945 +45 +5
TOTAL LIABILITIES AND CAPITAL 1300 1520 +220 16.92
UNIT - III
RATIO ANALYSIS
SECTION – A (2 MARKS)
1. What is Ratio Analysis?
A ratio is mathematical relationship between two items expressed in
Quantitative form. It is the process of determining and presenting the
relationship of items and groups of items in the Financial Statements.
Ratios may be expressed in Proportion, Times or Percentages.
2. What are the advantages of Ratio Analysis?
Forecasting
Managerial Control
Facilitates Communication
Measuring Efficiency
Facilitating Investment Decisions
Useful in Measuring Financial Solvency
Inter firm Comparisons
3. What are the Limitations of Ratio Analysis?
Ratios are means and not an end.
Practical Knowledge required for Analyst.
Non – Availability of Standards or Norms
Extent of Accuracy of Financial Information
Consistency in preparation of Financial Statements
Time Lag and Change in Price Level.
4. How do you Classify Ratios by Function?
Profitability Ratios Turnover Ratios Solvency Ratios
Gross Profit Ratio Stock Turnover Proprietary Ratio
Net Profit Ratio Debtors Turnover Debt – Equity Ratio
Operating Ratio Creditors Turnover Fixed Assets Ratio
Operating Profit Ratio Working Capital Turnover Capital Gearing Ratio
Current Ratio
Liquid Ratio
Cash Position Ratio
SECTION – B (5 MARKS)
1. Compute (a) Pay out ratio and (b) Retained Earnings ratio from the following
data.
Rs.
Net Profit 10000
Provision for Tax 5000
Preference Dividend 2000
No. of Equity Shares 3000
Dividend per Equity Share Re. 0.40
Solution:
Net Profit 10000
Less: Provision for Tax 5000
-------
Net profit after Tax 5000
Preference Dividend 2000
-------
Net profit after Tax and Dividend 3000
-------
Earnings per Share = Net Profit after Tax & Dividend
---------------------------------------
No. of Equity Shares
= 3000 / 3000 = Re.1.00
Pay Out ratio = Dividend per Equity Share / Earnings per Share x 100
= 0.40 / 1 x 100
= 40%
Retained Earnings Ratio = 1 – Pay Out Ratio
= 1 – 40%
= 60%
2. Calculate Stock Turnover Ratio from the following Trading Account:
Trading Account
Particulars Rs. Particulars Rs.
To Opening Stock 40000 By Sales 200000
To Purchases 100000 By Closing Stock 20000
To Freight 10000
To Gross Profit 70000
220000 220000
Solution:
Cost of Goods Sold = Sales – Gross Profit
= 200000 – 70000
= 130000
Average Stock = (Opening stock + Closing Stock)
---------------------------------------
2
= (40000 + 20000) / 2
= 30000
Stock Turnover Ratio = Cost of Goods sold
-----------------------
Average Stock
= 130000 / 30000
= 4.33 Times
3. Kuberan & Co. makes both cash and credit sales. From the following information,
Calculate Average Collection Period:
Particulars Rs.
Total Sales 200000
Cash Sales 40000
Sales Returns 14000
Debtors (31-12-2010) 18000
Creditors ( 31-12-2010) 20000
Provision for bad debts (31-12-2010) 2000
Bills Receivable ( 31-12-2010) 4000
Net Credit Sales = Total Sales – Cash Sales – Sales Returns
= 200000 – 40000 – 14000
= 146000
Accounts Receivable = Bills receivable + Debtors
= 18000 + 4000
= 22000
Debtors Turnover = Net Credit Sales / Accounts Receivable
= 146000 / 22000
= 6.636 Times
Average Collection Period = No of Days in a Year / Debtors Turnover
= 365 / 6.636
= 55 days
4. From the following figures calculate the Creditors turnover ratio and the average
age of Accounts Payable:
Particulars Rs.
Credit Purchases during 2010 100000
Creditors on 1-1-2010 20000
Creditors on 31-12-2010 10000
Bills payable on 1-1-2010 4000
Bills payable on 31-12-2010 6000
Solution:
Average Creditors = (Opening Creditors + Closing Creditors) / 2
= (20000 + 10000) / 2
= 15000
Average Bills Payable = (4000 + 6000) / 2
= 5000
Average Accounts Payable = Average Creditors + Average Bills Payable
= 15000 + 5000
Creditors Turnover Ratio = Credit Purchases / Average Accounts Payable
= 100000 / 20000
= 5 Times
Average Age of Accounts Payable = No of days in a Year / Creditors Turnover
= 365 / 5
= 73 Days
SECTION – C (10 MARKS)
1. From the Following Balance Sheet, Calculate
(a) Current Ratio.
(b) Liquid Ratio.
(c) Debt Equity Ratio.
(d) Proprietary Ratio.
Balance Sheet
Rs. Rs.
Share Capital 500000 Fixed Assets 1400000
Reserves 300000 Stock 500000
6% Debentures 1100000 Debtors 200000
Bank Overdraft 100000 Cash 100000
Creditors 200000
2200000 2200000
Solution:
(a) Current Ratio = Current Assets
-------------------
Current Liabilities
Current Assets =Stock + Debtors + Cash
= 500000+200000+100000
= 800000
Current Liabilities =Bank Overdraft + Creditors
= 100000 + 200000
= 300000
Current Ratio = 800000/300000
= 2.67: 1
(b) Liquid Ratio = Liquid Assets
---------------
Current Liabilities
Liquid Assets = Current Assets – Stock
= 800000 – 500000
= 300000
Liquid Ratio = 300000/300000
= 1:1
(c) Debt Equity Ratio = Total long-term debt
----------------------------
Shareholders funds
Shareholders funds = Share Capital + Reserves + Profit
= 500000+ 300000
= 800000
Total long-term debt = Debentures
= 1100000
Shareholders funds = 1100000
---------------
800000
= 1.375: 1
(d) Proprietary Ratio = Share holder’s funds
------------------
Tangible assets
= 800000
-------------
2200000
= 0.36: 1
2. Calculate Profitability Ratios:
Rs.
Sales 1000000
Gross Profit 300000
Administration expenses 10000
Selling expenses 20000
Loss on sale of plant 2000
Dividend received 4000
Depreciation 6000
Net Profit 266000
Solution:
Gross Profit Ratio = Gross Profit / Sales x 100
= 300000 / 1000000 x 100
= 30%
Net Profit Ratio = Net Profit / Sales x 100
= 266000 / 1000000 x 100
= 26.60%
Operating Ratio = (Cost of Goods Sold + Operating Expenses) / Sales x 100
= (700000 + 36000) / 1000000 x 100
= 736000 / 1000000 x 100
= 73.60 %
Operating Profit Ratio= Operating Profit / Sales x 100
= 264000 / 1000000 x 100
= 26.40 %
Working Notes
Cost of Goods Sold =Sales – Gross Profit
Operating Expenses = Administration Exp.+ Selling Exp. + Depreciation
Operating Profit = Gross Profit – Operating Expenses
3. Following are the details relating to the trading activities of A Ltd.
Stock Velocity - 8 months
Debtor’s Velocity - 3 months
Creditor’s Velocity - 2 months
Gross Profit Ratio - 25%
Gross profit for the year Rs.400000; Bills receivable Rs.25000 and Bills payable
Rs.10000. Closing Stock of the year is Rs.10000 more than the opening stock. Find out.
(a) Sales (b) Debtors (c) Closing Stock and (d) Creditors
Solution:
Gross Profit Ratio = Gross Profit
--------------- x 100
. Sales
25 = 400000
---------- x 100
Sales
Sales = 400000 x 100
-----------------
25
Sales = 1600000
Cost of Goods Sold = Sales – Gross Profit
= 1600000 – 400000
= 1200000
Stock Turnover Ratio = Cost of Goods Sold
------------------------
Average Stock
1200000
----------------- = 1.5 times
Average Stock
Average Stock = 1200000
------------
1.5
= 800000
Let Opening Stock = Rs. X
Closing Stock = Rs. X + 10000
Average Stock = Opening Stock + Closing Stock
----------------------------------------
2
= X + X + 10000
----------------------
2
800000 = 2X + 10000
------------------
2
1600000 = 2X + 10000
2X = 1590000
X = 1590000
-----------
2
X = 795000
Opening Stock (x) = 795000
Closing Stock = X + 10000
= 795000 + 10000
Closing Stock = Rs.805000
Debtors Turnover Ratio = Net Credit Sales
-------------------
Accounts Receivable
4 times (12/3) = 1600000
-----------------------------
Accounts Receivable
Accounts Receivable = 1600000
-----------
4
= 400000
Accounts Receivable = Bills Receivable + Debtors
400000 = 25000 + Debtors
Debtors = 400000 – 25000
Debtors = 375000
Creditors Turnover = Net Credit Purchase
-------------------------
Accounts Payable
Net Credit Purchases = Cost of Goods sold + Closing Stock–Opening Stock
= 1200000 + 805000 – 795000
= 1210000
6 Times (12/2) = 1210000
-------------------
Accounts Payable
Accounts Payable = 1210000 / 6
= 201667.
Accounts Payable = Bills Payable + Creditors
201667 = 10000 + Creditors
Creditors = 201667 – 10000
Creditors = 191667.
4. From the following details prepare statement of proprietary funds with as many
details as possible.
(i) Stock Velocity = 6
(ii) Capital Turnover Ratio = 2
(iii) Fixed Assets Turnover Ratio = 4
(iv) Gross Profit Turnover Ratio = 20 per cent
(v) Debtors Velocity = 2 months
(vi) Creditors Velocity = 73 days
The Gross Profit was Rs.60,000. Reserves and surplus amount to Rs.20,000. Closing
Stock was Rs.5,000 in excess of opening stock.
Solution:
Gross Profit Ratio = 20%
Gross Profit
--------------- x 100 = 20
Sales
60000 x 100 =20
----------
Sales
Sales = 60000 x 100
---------------
20
Sales = 300000
Cost of Goods Sold = Sales – Gross Profit
= 300000 – 60000
= 240000
Stock Turnover Ratio = Cost of Goods Sold
------------------------
Average Stock
6 = 240000
-----------
Average Stock
Average Stock = 240000 / 6
Average Stock = 40000
Let opening Stock = X
Closing Stock = X + 5000
Average Stock = X+X+5000
--------------
2
40000 = 2X+5000
------------
2
2X + 5000 = 80000
2X = 75000
X = 75000 / 2
X = 37500
Opening Stock = 37500
Closing Stock = X + 5000
= 37500 + 5000
= 42,500
Fixed Assets Turnover Ratio = Net Sales
--------------
Fixed Assets
4 = 300000
-----------
Fixed Assets
Fixed Assets = 300000
-----------
4
Fixed Assets = 75000
Debtors Turnover Ratio = 2 Months
Debtors Turnover = 12 / 2
= 6 times
6 = Net Credit Sales
----------------------
Accounts Receivable
6 = 300000
-----------
Accounts Receivable
Accounts Receivable = 300000 / 6
= 50000
Debtors = 50000
(Assume Bills Receivable = NIL)
Creditors Turnover = 73 days
= 365 / 73
= 5 times
5 = Net Credit Purchase
-------------------------
Accounts Payable
Net Credit Purchases = Cost of Goods Sold +Closing Stock–Opening Stock
= 240000 + 42500 – 37500
= 245000
5 = 245000
--------------
Accounts Payable
Accounts Payable = 245000 / 5
= 49000
Creditors = 49000
(Assume Bills Payable = NIL)
Capital Turnover Ratio = 2 Times
Net Sales
------------------ ---- = 2
Capital Employed
240000
---------------- = 2
Capital Employed
Capital Employed = 240000 / 2
= 120000
Capital Employed = Share Capital + Reserves
120000 = Share Capital + 20000
Share Capital = 120000 - 20000
Share Capital = 100000
STATEMENT OF PROPRIETOR’S FUNDS
Particulars Rs. Rs. Rs.
Proprietor’s funds
Share Capital 100000
Reserves and Surplus 20000 120000
Proprietor’s funds
represented by
Fixed Asset: (A) 75000
Current Assets:
Stock 42500
Debtors 50000
Other Current Assets
(Balancing Figure)
1500 94000
Less: Current Liabilities
Creditors 49000 49000 45000
Working Capital (B)
Capital Employed (A)+
(B)
120000
5. From the following details, find out
(a) Current assets
(b) Current Liabilities
(c) Liquid assets
(d) Stock
Current Ratio 2.5; Liquid Ratio: 1.5; Working Capital Rs.90000.
Solution:
Current Ratio = 2.5
Current Assets 2.5
------------------ = -----
Current Liabilities 1
Let Current Liabilities= X
Current Assets = 2.5 X
Working Capital = Current Assets – Current Liabilities
90000 = 2.5 X – X = 1.5 X
X = 90000
---------
1.5
X = 60000
Current Liabilities = 60000
Current Assets = 60000 x 2.5
Current Assets = 150000
Liquid Ratio = 1.5
Liquid Assets
------------------ = 1.5
Current Liabilities
Liquid Assets
------------------ = 1.5
60000
Liquid Assets = 60000 X 1.5
= 90000
Stock = Current Assets – Liquid Assets
= 150000 – 90000
= 60000.
UNIT IVFUNDS FLOW STATEMENT, CASH FLOW STATEMENT AND
BUDGETARY CONTROL
SECTION A (2 MARKS)
1. What is “Fund Flow Statement”?
‘Flow’ means change. ‘Funds’ is interpreted as ‘working capital’ in the context of
funds flow statement. Thus, ‘Funds flow’ is ‘change in working capital’. Flow of
funds implies any changes in working capital. These changes are a continuous
process, day after day, as and when transactions take place. So, the changes in
working capital may be called ‘Flow’. It can be ‘Inflow’ or ‘Outflow’ of working
capital.
2. What is Working Capital?
Gross Working Capital = Total of Current Assets.
Net Working Capital = Excess of Current Assets over Current Liabilities.
3. Give some examples of Current Assets?
Cash in hand and Cash at Bank.
Accounts Receivable.
Inventories.
Advances recoverable in Cash.
Prepaid expenses.
4. What are the ‘Principles’ for preparation of Working Capital Statement?
Increase in Current Asset - Increases Working Capital
Decrease in Current Asset - Decreases Working Capital
Increase in Current Liability - Decrease Working Capital
Decrease in Current Liability - Increases Working Capital
5. Give some examples of Current Liabilities?
Accounts Payable.
Borrowings on Short term basis.
Outstanding expenses.
Incomes received in advance.
Tax Payable and Dividend Payable.
6. What is mean by Cash Flow Statement?
‘Cash Flow’ includes cash inflows and out flows – cash receipts and cash
payments – during a period. Movements of cash are vital importance to the
management. The short term liquidity and short term solvency positions of a firm
are dependent on its cash flow.
7. What are the advantages of Cash Flow Statement?
Historical analysis as guide to forecasting.
Effective cash management.
Formulation of financial policies.
Preparations of cash budget.
Short term financial decisions.
Liquidity position.
Revelations.
8. What are the Limitations of Cash Flow Statement?
It discloses inflows and outflows of cash alone.
Cash balance of the Cash flow statement will be altered by postponing
payment for purchases to delaying collection of receivables, etc.
Non cash items of expenses and incomes are excluded in Cash Flow
Statement. So it cannot provide a comprehensive picture of a firm’s
financial position.
9. Calculate the Net cash flow from financing activities from the following details:
Rs.
Issue of Debentures for Cash 2000000
Long term loan from Bank 500000
Redemption of Pref. shares 600000
Purchase of Land 900000
Solution:
Computation of Net cash flow from Financing Activities
Issue of Debentures for Cash 2000000
Long term loan from Bank 500000
Redemption of Pref. shares (600000)
-------------
Net cash flow from Financing Activities 19,00,000
---------------
10. Calculate the Amount of depreciation for 2010:
Provision for Depreciation on 1-1-2010 Rs.200000
Provision for Depreciation on 31-12-2010 Rs.250000
Depreciation on Fixed assets sold during the year Rs. 20000
Solution:
Rs.
Provision for Depreciation on 1-1-2010 200000
Depreciation on Fixed assets sold during the year (20000)
-----------
180000
Depreciation for the Year 70000
-----------
Provision for Depreciation on 31-12-2010 250000
----------
11. Ascertain the Amount of Profit or Loss on sale of Machinery
Rs.
Cost of Machinery 100000
Accumulated depreciation on Machinery 30000
Sale value of Machinery 85000
Solution:
Cost of Machinery 100000
Accumulated depreciation on Machinery (30000)
----------
Book value of Machinery 70000
Sale value of Machinery 85000
----------
Profit on Sale of Machinery 15000
----------
12. Compute the amount of dividend paid during 2010:
Rs.
Proposed dividend on 1-1-2010 50000
Proposed dividend on 31-12-2010 40000
Dividend debited to P&L Appropriation a/c 60,000
Solution
Proposed dividend on 1-1-2010 50000
Proposed dividend on 31-12-2010 40000
Dividend debited to P&L Appropriation a/c 60,000
Dr. Cr
PROPOSED DIVIDEND A/C
To Cash
(Balancing Figure)
70000 By Balance b/d 50000
To Balance c/d 40000 By P/L Appropriation A/c 60000
110000 110000
13. Compute the Cash Flow from Operating Activities:
Rs.
P&L a/c balance on 31-3-2010 400000
P&L a/c balance on 31-3-2009 250000
Transfer to General Reserve 50000
Depreciation on Fixed Assets 10000
Solution
Rs.
P&L a/c as on 31-3-2010 400000
P&L a/c as on 31-3-2009 (250000)
Transfer to General Reserve 50000
Depreciation on Fixed Assets 10000
------------
Cash Flow from Operating Activities 210000
------------
14. Define Budget.
I.C.M.A. defines a budget as “A financial and quantitative statement, prepared
prior to a defined period of time, of the policy to be pursued during that period for
the purpose of attaining a given objective.”
15. What is Budget?
A budget is the monetary and quantitative expression of business plans and
policies to be pursued in the future period of time. A Budget is an account of
probable future Income and Expenditure. A Budget is an estimate relating to
future period.
16. Define Budgeting.
“The entire process of preparing the budgets is known as budgeting” – J.BATTY
In the words of Rowland and Harr:
“Budgeting may be said to be the act of building budgets”.
Thus budgeting is a process of making the budget plans.
17. What are the Essential Features of a Budget?
A budget is a financial statement but it can be a statement of quantities also with
or without monetary data.
Budget is prepared for a particular period and it is prepared in advance.
Budget is a detailed plan of the policy to be pursued during the period for which
the budget is prepared. The function of the budget is to attain a specific objective.
18. Define ‘Budgetary Control’.
I.C.M.A defines “Budgetary Control” as “the establishment of budgets, relating
the responsibilities of executives to the requirements of a policy, and the
continuous comparison of actual with budgeted results either to secure by
individual action the objectives of that policy or to provide a basis for its
revision”.
SECTION – B (5 MARKS)
1. What are the Benefits of Fund Flow Statement?
It shows how the funds were obtained and used during a period.
The sources are useful in computation of cost of capital of the
business.
A detailed analysis of sources of funds in the past acts as a guide
for obtaining funds for future requirements.
It gives indication of any weakness or strength in the general
financial position of a firm.
It throws light on the financial consequences of business
operations.
It can be compared with relevant budgets to assess the usage of
funds as per plans.
2. What are the Limitations of Fund Flow Statement?
1. It is historical in nature.
2. It is nothing but ‘secondary data’.
3. It is a summarised presentation of figures and cannot provide
information about changes on a continuous basis.
4. The effect of transactions between current assets and liabilities is
not shown in the Statement.
5. It also ignores transactions between long term assets and liabilities.
6. It is not generally considered as a sophisticated technique of
financial analysis.
3. Distinction between Funds Flow Statement and Balance sheet
Funds Flow Statement Balance Sheet
It shows changes in working capital
between two Balance Sheet dates.
It shows the position of assets and liabilities .
It shows only those items which cause
changes in working capital.
It shows the real and personal accounts of a
business, reflected in the assets and liabilities.
It aims at presenting flow of funds over a
period.
It aims at depicting the financial position of a
business.
It is a tool for financial analysis which is
useful to the management.
It is the culmination of the accounting process
of a period which is useful to stakeholders.
It is based on the data forming part of the
income statement and the Balance Sheet.
It is based on the Trial Balance and additional
information relating to a firm.
It is prepared after the financial accounts
are completed.
It is prepared after the income statement is
completed.
4. What are the Sources and Applications of funds?
SOURCES OF FUNDS APPLICATIONS OR USES OF FUNDS
I. Internal sources
(1) Funds from operations
II. External Sources
(1) Issue of Equity shares
(2) Issue of Preference shares
(3) Issue of Debentures
(4) Public deposits accepted
(5) Long-tern loans from banks
and other institutions
(6) Sale of fixed assets
(7) Sale of long term
investments
(1) Purchase of fixed assets
(2) Purchase of Long term Investments
(3) Redemption of preference shares
(4) Redemption of debentures.
(5) Repayment of long-term loans, bank
loans and public deposits
(6) Payment of dividend.
(7) Payment of tax liability
(8) Outflow of funds on account of
operations.
5. Calculation Funds from Operations from the following Profit & Loss A/c
Particulars Rs. Particulars Rs.
To Expenses Paid 100000 By Gross Profit 200000
To Depreciation 40000 By Gain on Sale of Machinery 20000
To Loss on Sale of Building 15500
To Discount 500
To Goodwill 12000
To Net profit 52000
220000 220000
Solution
Computation of Funds from Operations
Net Profit for the Year : 52000
Add:
Goodwill Written off : 12000
Depreciation on Machinery : 40000
Loss on Sale of Building : 15500 67500
--------
119500
Less:
Gain on Sale of Machinery : 20000
--------
Funds from Operations : 99500
-------
6. Following are the Balance Sheets of a Company as on 31st December 2009 and
31st December 2010. You are required to Calculate Funds form Operations:
Particulars 31 – 12 – 2009 31 – 12 – 2010
Profit & Loss Appropriation A/c 30000 40000
General Reserve 20000 25000
Goodwill 10000 5000
Preliminary Expenses 6000 4000
Provision for Depreciation on Machinery 10000 12000
Solution
Computation of Funds from Operations
Closing Balance of profit & Loss Appropriation A/c : 40000
Less: Opening Balance of profit & Loss Appropriation A/c : 30000
---------
Net Profit for the Year : 10000
Add:
Transfer to General Reserve : 5000
Goodwill Written off : 5000
Preliminary Expenses written off : 2000
Depreciation on Machinery : 2000 14000
--------
Funds from Operations 24000
--------
7. From the following information relating to Bright Limited, Calculate Funds lost in
Operations:
Net Loss for the Year : 90000
Dividend Received : 7000
Depreciation Charged : 10000
Profit on Sale of Assets : 5000
Refund of Tax : 2000
Solution
Computation of Funds Lost in Operations
Net Loss for the Year : (90000)
Add:
Depreciation Charged : 10000
--------
(80000)
Less:
Dividend Received : 7000
Profit on Sale of Assets : 5000
Refund of Tax : 2000 14000
--------
Funds Lost in Operations (94000)
--------
8. Calculation Funds from Operations from the following Profit & Loss A/c
Particulars Rs. Particulars Rs.
To Salaries 10000 By Gross Profit 200000
To Rent 3000 By Profit on Sale of Machines 5000
To Commission 2000 By Dividend Received 2000
To Discount Allowed 1000 By Refund of Tax 3000
To Provision for Depreciation 14000
To Transfer to General Reserve 20000
To Loss on Sale of Investments 5000
To Provision for Taxation 10000
To Discount on Issue of Debentures 2000
To Preliminary Expenses 3000
To Selling Expenses 20000
To Net Profit 120000
210000 210000
Solution
Computation of Funds from Operations
Net Profit for the Year : 120000
Add:
Provision for Depreciation : 14000
Transfer to General Reserve : 20000
Loss on Sale of Investments : 5000
Provision for Taxation : 10000
Discount on Issue of Debentures : 2000
Preliminary Expenses : 3000 54000
-------
174000
Less:
Profit on Sale of Machinery : 5000
Dividend Received : 2000
Refund of Tax : 3000 10000
--------
Funds from Operations : 164000
---------
9. Distinguish between Fund Flow Analysis and Cash Flow Analysis.
FUND FLOW ANALYSIS CASH FLOW ANALYSIS
Prepared by based on the working capital
concept of ‘funds’
Prepared by based on the cash concept of
‘funds’
Accounting is based on ‘Accrual concept’
or accrual basis of accounting
Accounting is based on ‘cash concept’ or
cash basis of accounting
It differentiate between two period of It shows the cash position over the same
balance sheet dates accounting period
Fund flow is more useful for Long term
decision making.
Cash flow is more useful in short term
financial decisions.
10. From the following balances you are required to calculate Cash from Operating
Activities.
Particulars 31-12-2009
Rs.
31-12-2010
Rs.
Debtors 50000 47000
Bills Receivable 10000 12500
Creditors 20000 25000
Bills Payable 8000 6000
Outstanding Expenses 1000 1200
Prepaid Expenses 800 700
Accrued Income 600 750
Income received in advance 300 250
Profit made during the year - 130000
Solution:
Computation of Cash from Operating Activities
Net Profit for the Year: 130000
Decrease in Debtors 3000
Decrease in Prepaid expenses 100
Increase in Creditors 5000
Increase in Outstanding expenses 200
Increase in Bills Receivable (2500)
Increase in Accrued Income (150)
Decrease in Bills Payable (2000)
Decrease in Income received in Advance (50)
---------
Cash from Operating Activities 133600
---------
11. What are the Objectives of Budgetary Control?
Planning
Coordination
Efficiency and Economy
Increase in Profitability
Anticipation of future capital expenditure
Control
Deviations
12. What are the Advantages of Budgetary Control?
o Maximisation of Profits
o Effective Coordination
o Evaluation of Executive Performance
o Clear-Cut Goals and Targets
o Economy in Operations
o Revelation of Ineffectiveness
o Correction of Performance Continuously
o Introduction of Incentive Schemes of Remuneration
o Shutting Down of unprofitable products and activities.
13. What are the Limitations of Budgetary Control?
o Prediction of uncertain future
o Changes of Conditions
o Complacence
o Difficulty in Coordination
o Conflict among Different Departments
14. What are the Essentials of Budgetary Control?
o Top Management Support
o Clearly defined Organisational structure
o Efficient Accounting System
o Reporting of Deviation
o Motivation
o Realistic Targets
o Participation of all Department Concerned
o Flexibility
15. What are the Preliminary steps for Installation of Budgetary Control System in
Organisation?
o Organisation for Budgeting
o Budget Controller
o Budget Committee
o Budget Centres
o Budget Manual
o Budget Period
o Determination of Key factor
16. What are the Steps for Installation of Budgetary Control System in Organisation?
o Determination of Key factor
o Making Forecasts
o Evaluation of Alternative Combination of Factors
o Preparation of Various Functional Budgets
o Preparation of Master Budget
17. How are Budgets Classified?
A. According to Time
1. Long-Term Budgets
2. Short-Term Budgets
3. Current Budgets
B. Based on Functions
1. Functional or Subsidiary budgets
Purchase Budget
Cash Budget
Production Budget
Sales Budget
Materials Budget
2. Master Budget
C. Basis of Flexibility
1. Fixed Budget
2. Flexible Budget
18. What are the types of Budgets?
Sales Budget
Production Budget
Materials Budget
Labour Budget
Overhead budget
Research and development budget
Capital Expenditure Budget
Cash Budget
19. The following figures relating to product ‘Duper’ for the quarter ending 31-3-
2010 are available:
Budgeted sales: January 3,00,000 Units
February 2,40,000 Units
March 3,60,000 Units
Stock position: 1-1-2010 – 50% of January’s Budgeted sales.
31-3-2010 – 80,000 units
31-1-2010 – 40% of February’s Budgeted sales.
28-2-2010 – 60% of March’s Budgeted sales.
You are required to prepare a production budget for the quarter ending 31-3-2010.
Solution
Production Budget for the Quarter Ending 31 – 03 - 2010Particulars January February March
Budgeted Sales 300000 240000 360000
Add: Desired Closing Stock 96000 216000 80000
396000 456000 440000
Less: Estimated Opening Stock 150000 96000 216000
Budgeted Production (Units) 246000 360000 224000
20. From the following figures, Prepare Raw Materials Purchase Budget.
Particulars Materials in Units
A B C D
Estimated Opening stock 16,000 6,000 24,000 2,000
Estimated Closing stock 20,000 8,000 28,000 4,000
Estimated Consumption 1,20,000 44,000 1,32,000 36,000
Standard Price per Unit(Rs.) 0.25 0.05 0.15 0.10
Solution
Particulars A B C D
Estimated Consumption 120000 44000 132000 36000
Add: Desired Closing Stock 20000 8000 28000 4000
140000 52000 160000 40000
Less: Estimated Opening Stock 16000 6000 24000 2000
Budgeted Production (Units) 124000 46000 136000 38000Purchase Price per Unit 0.25 0.05 0.15 0.10
Purchase Cost 31000 2300 20400 3800
21. A manufacturing unit plans to sell 1,10,000 units in the first week, 1,20,000 units
in the second week, 1,30,000 units in the third week and 1,40,000 units in the 4th
week. At the beginning of the 1st week there are 14,000 units in stock. At the end
of each week the company plans to have an inventory equal to one fifth of the
sales of the next week. How many units must be manufactured in each week?
Solution
Particulars Week I Week II Week III
Estimated Sales 110000 120000 130000
Add: Closing Stock 24000 26000 28000
134000 146000 158000
Less: Opening Stock 14000 24000 26000
Budgeted Production (Units) 120000 122000 132000
Production for 4th Week cannot be computed because Week V closing stock cannot be
found.
22. Prepare a Production Budget from the following information
Product Estimated Stock
On 1-1-10
(units)
Estimated sales during
Jan to Mar 2010
(units)
Desired Stock
On 31-3-10
(units)
R 2,000 10,000 3,000
S 3,000 15,000 5,000
U 4,000 13,000 3,000
P 3,000 12,000 2,000
Solution:
Production Budget for Products R, S, U and P for Quarter Ending March 2010
Particulars R S U P
Estimated Sales 10000 15000 13000 12000
Add: Desired Closing Stock 3000 5000 3000 2000
13000 20000 16000 14000
Less: Estimated Opening Stock 2000 3000 4000 3000
Budgeted Production (Units) 11000 17000 12000 11000
23. The sales director of Future Problem & Co. reports that next year he expects to
sell 1,00,000 units of a particular product. The Production Manager consults the
store keeper and casts his figures as follows:
Two kinds of raw materials ‘P’ and ‘Q’ are required for manufacturing the
product. Each unit of the product requires 2 units of P and 3 units of Q. The
estimated opening balances at the commencement of next year are
Finished product - 20,000 units
Raw material ‘P’ - 24,000 units
Raw material ‘Q’ - 30,000 units
The desirable closing balances at the end of next year are:
Finished product - 28,000 units
Raw material ‘P’ - 26,000 units
Raw material ‘Q’ - 32,000 units
Prepare production budget and materials purchase budget for the next
year.
Solution:
Estimated Production : Estimated Sales + Desired Closing Stock
– Estimated Opening Stock
: 100000 + 28000 – 20000
: 108000 Units
MATERIALS PURCHASE BUDGET
Particulars Raw Material – P
(In Units)
Raw Material – Q
(In Units)
Estimated Consumption 216000
(108000 x 2)
324000
(108000 x 3)
Add: Desired Closing Stock 26000 32000
242000 356000
Less: Estimated Opening Stock 24000 30000
Budgeted Purchases (Units) 218000 326000
24. What are the important elements of Performance Budgeting?
Laying down of Objectives
Classification of Activities
Fixation of Standards
Accounting System
Decentralised Responsibility Structure and Delegation
Performance Reporting
SECTION – C (10 MARKS)
1. The financial position of Jayanth on 31st Dec. of 2009 and 2010 was as follows:
31-12-2009 31-12-2010
Assets Rs. Rs.
Land 25,000 25,000
Buildings 45,000 56,000
Machinery 90,000 95,000
Debtors 32,000 26,000
Stock 18,000 13,000
Cash 4,000 2,000
2,14,000 2,17,000
Liabilities
Creditors 42,000 25,500
Long-term Loan 25,000 20,000
Capital 1,47,000 1,71,500
2,14,000 2,17,000
During the year 2010, Jayanth has withdrawn Rs.8,500 for personal use. Depreciation
provision on machinery was Rs.28,000 on 31-12-2009 and Rs.35,000 on 31-12-2010.
You are required to prepare a Funds Flow Statement.
Solution
SCHEDULE OF CHANGES IN WORKING CAPITAL
01.01.2010 31.12.2010 WORKING CAPITAL (Rs.)Current Assets INCREASE DECREASE Debtors 32,000 26,000 6000
Stock 18,000 13,000 5000
Cash 4,000 2,000 2000
Current LiabilitiesCreditors 42000 25500 16500
TOTAL 16500 13000NET INCREASE IN WORKING CAPITAL 3500
20000 20000
Computation of Funds from Operations
Net Profit for the Year : 33000Add:Depreciation on Machinery : 7000
---------Funds from Operations 40000
---------
FUNDS FLOW STATEMENT
SOURCES:
Funds from Operations : 40000---------
TOTAL 40000---------
APPLICATIONS
Purchase of Buildings : 11000Purchase of Machinery : 12000Repayment of Long Term Loan : 5000Drawings made during the year : 8500Increase in Working Capital : 3500
---------TOTAL 40000
---------
2. From the following Balance Sheets, Prepare Funds Flow Statement
Liabilities 1-1-10
Rs.
31-12-10
Rs.
Assets 1-1-10
Rs.
31-12-10
Rs.
Creditors 40000 44000 Cash 10000 7000
Mrs. Somu’s Loan 25000 - Debtors 30000 50000
Loan from Canara Bank 40000 50000 Stock 35000 25000
Capital 125000 153000 Machinery 80000 55000
Land 40000 50000
Buildings 35000 60000
230000 247000 230000 247000
During the year a machine costing Rs.10,000(accumulated depreciation Rs.3,000) was
sold for Rs.5,000.The Provision for depreciation against machinery as on 1-1-2010 was
Rs.25,000 and on 31-12-2010 was Rs.40,000. Net profit for the year 2010 amounted to
Rs.45,000. Prepare the Funds Flow Statement.
SolutionSCHEDULE OF CHANGES IN WORKING CAPITAL
01.01.2010 31.12.2010 WORKING CAPITAL (Rs.)Current Assets INCREASE DECREASECash 10000 7000 3000
Debtors 30000 50000 20000
Stock 35000 25000 10000
Current LiabilitiesCreditors 4000
TOTAL 20000 17000NET INCREASE IN WORKING CAPITAL 3000
20000 20000
Computation of Funds from Operations
Net Profit for the Year : 45000Add:Depreciation on Machinery : 18000Loss on sale of Machinery : 2000 20000
---------Funds from Operations 65000
---------
FUNDS FLOW STATEMENTSOURCES:
Funds from Operations : 65000Sale of Machinery : 5000Loan from Canara Bank : 10000
---------TOTAL 80000
---------APPLICATIONS
Purchase of Buildings : 25000Purchase of Land : 10000Repayment of Mrs.Somu’s Loan : 25000Drawings made during the year : 17000Increase in Working Capital : 3000
---------TOTAL 80000
---------
3. From the following Balance Sheets, Prepare Funds flow Statement:
Liabilities 2009 2010 Assets 2009 2010
Equity Share Capital 300000 400000 Goodwill 115000 90000
Preference Share Capital 150000 100000 Buildings 200000 170000
General Reserve 40000 70000 Plant 80000 200000
Profit & Loss A/c 30000 48000 Debtors 160000 200000
Proposed Dividend 42000 50000 Stock 77000 109000
Creditors 55000 83000 Bills Receivable 20000 30000
Bills Payable 20000 16000 Cash in Hand 15000 10000
Provision for Taxation 40000 50000 Cash at Bank 10000 8000
677000 817000 677000 817000
Additional Information:
1. Depreciation on Plant Rs.10000 and on Buildings Rs.20000 charged in 2010
2. An Interim Dividend of Rs.20000 was paid in 2010.
3. Income Tax of Rs.35000 was paid during 2010.
Solution
SCHEDULE OF CHANGES IN WORKING CAPITAL
Current Assets 2009 2010 WORKING CAPITAL (Rs.)
INCREASE DECREASE
Debtors 160000 200000 40000
Stock 77000 109000 32000
Bills Receivable 20000 30000 10000
Cash in Hand 15000 10000 5000
Cash at Bank 10000 8000 2000
Current Liabilities
Creditors 55000 83000 28000
Bills Payable 20000 16000 4000
TOTAL 86000 35000
NET INCREASE IN WORKING CAPITAL 51000
86000 86000
Computation of Funds from Operations
Closing Balance of Profit & Loss Appropriation A/c : 48000
Less: Opening Balance of Profit & Loss Appropriation A/c : 30000
---------
Net Profit for the Year : 18000
Add:
Transfer to General Reserve : 30000
Provision for Taxation : 45000
Goodwill written off : 25000
Interim Dividend paid : 20000
Proposed Dividend : 50000
Depreciation on Plant : 10000
Depreciation on Buildings : 20000 200000
---------
Funds from Operations 218000
---------
FUNDS FLOW STATEMENT
SOURCES:
Issue of Equity Share Capital : 100000
Funds from Operations : 218000
Sale of Buildings : 10000
---------
328000
---------
APPLICATIONS
Redemption of Preference Shares : 50000
Purchase of Plant : 130000
Income Tax paid : 35000
Interim Dividend paid : 20000
Proposed Dividend : 42000
Increase in Working Capital : 51000
---------
328000
---------
4. Senthil Velavan Corporation made a profit of Rs.3,70,250 after considering the
following:
Particulars Rs.
Depreciation on Fixed Assets 7500
Provision for Tax 50000
Loss on Sale of Machine 600
Transfer to General Reserve 20000
Provision for Doubtful Debts 1200
Profit on sale of Fixed Assets 2500
Amortisation of Development Cost 5000
The following additional information is given to you:
Particulars 31-12-2009
Rs.
31-12-2010
Rs.
Creditors 20000 25000
Bills payable 15000 13000
Outstanding expenses 7000 6000
Debtors 36000 39000
Bills receivable 12000 10500
Prepaid expenses 1600 1700
You are required to determine Cash from Operating Activities.
Solution
CASH FROM OPERATING ACTIVITIES
Net Profit for the Year 370250
Transfer to reserve 20000
Provision for Taxation 50000
--------
Net profit before Tax and Extra Ordinary Items 440250
Depreciation on Fixed Assets 7500
Loss on sale of Machinery 600
Provision for doubtful debts 1200
Amortisation of Development Cost 5000
Profit on Sale of Fixed Assets (2500)
-----------
Operating profit before Working Capital changes 452050
Increase in Creditors 5000
Decrease in Bills Payable (2000)
Decrease in Outstanding Expenses (1000)
Increase in Debtors (3000)
Decrease in Bills Receivable 1500
Increase in Prepaid Expenses (100)
----------
452450
Income Tax paid 50000
---------
Cash from Operating Activities 402450
---------
Note: Entire Provision for Tax is assumed to be paid off as Tax.
Provision for Doubtful debts is not reduced from Debtors
5. The Comparative Balance Sheets of Mr. Wheldon for the two years were as
follows:
Liabilities 2009
Rs.
2010
Rs.
Assets 2009
Rs.
2010
Rs.
Capital 150000 175000 Land & Buildings 110000 150000
Loan from Bank 160000 100000 Machinery 200000 140000
Creditors 90000 100000 Stock 50000 45000
Bills payable 50000 40000 Debtors 70000 80000
Loan from IFC 25000 Cash 20000 25000
450000 440000 450000 440000
During the year a machine costing Rs.25,000(accumulated depreciation Rs.10,000) was
sold for Rs.13,000.The Provision for depreciation against machinery as on 31-12-2009
was Rs.50,000 and on 31-12-2010 was Rs.85,000. Net profit for the year 2010 amounted
to Rs.60,000. Prepare a Cash Flow Statement.
CASH FLOW STATEMENT (AS – 3)
Operating Activities
Net Profit for the Year 60000
Depreciation 45000
Loss on Sale of Machinery 2000
---------
Operating Profit before Working Capital Changes 107000
Decrease in Stock 5000
Increase in Debtors (10000)
Increase in Creditors 10000
Decrease in Bills Payable (10000)
----------
Cash from Operating Activities 102000
Investing Activities
Purchase of Land & Buildings (40000)
Sale of Machinery 13000 (27000)
--------
75000
Financing Activities
Loan from IFC 25000
Repayment of Bank Loan (60000)
Drawings (35000) (70000)
---------
5000
Cash and Cash Equivalents at the beginning of the Year 20000
---------
Cash and Cash Equivalents at the end of the Year 25000
---------
6. From the following Balance Sheets, Prepare Cash flow Statement:
Liabilities 2009 2010 Assets 2009 2010
Equity Share Capital 300000 400000 Goodwill 115000 90000
Preference Share Capital 150000 100000 Buildings 200000 170000
General Reserve 40000 70000 Plant 80000 200000
Profit & Loss A/c 30000 48000 Debtors 160000 200000
Proposed Dividend 42000 50000 Stock 77000 109000
Creditors 55000 83000 Bills Receivable 20000 30000
Bills Payable 20000 16000 Cash in Hand 15000 10000
Provision for Taxation 40000 50000 Cash at Bank 10000 8000
677000 817000 677000 817000
Additional Information:
Depreciation on Plant Rs.10000 and on Buildings Rs.20000 charged in 2010
An Interim Dividend of Rs.20000 was paid in 2010.
Income Tax of Rs.35000 was paid during 2010.
Solution
Net Profit for the Year 18000
Transfer to reserve 30000
Provision for Taxation 45000
Interim Dividend 20000
Proposed Dividend 50000
--------
Net profit before Tax and Extra Ordinary Items 163000
Depreciation on Fixed Assets 30000
Goodwill Written off 25000
-----------
Operating profit before Working Capital changes 218000
Increase in Debtors (40000)
Increase in Bills Receivable (10000 )
Increase in Stock (32000 )
Increase in Creditors 28000
Decrease in Bills Payable (4000)
----------
160000
Income Tax paid 35000
---------
Cash from Operating Activities 125000
Investing Activities
Sale of Buildings 10000
Purchase of Plant (130000) (120000)
-----------
5000
Financing Activities
Issue of Equity Share Capital 100000
Redemption of Preference Share Capital (50000)
Interim Dividend (20000)
Proposed Dividend (42000) (12000)
--------
(7000)
Cash and Cash Equivalents at the beginning of the Year 25000
(Cash + Bank = 15000 + 10000)
--------
Cash and Cash Equivalents at the end of the Year 18000
(Cash + Bank = 10000 + 8000) --------
7. On the basis of the following particulars, draw up a flexible budget for overhead
expenses and determine the overhead rates at 70% 80% and 90% plant capacity.
Particulars 70%
Rs.
80%
Rs.
90%
Rs.
Variable Overheads:
Indirect Labour
Indirect Materials
-
-
12,000
4,000
-
-
Semi-Variable Overheads:
Power(30% Fixed)
Repairs(40% Fixed)
-
-
20,000
2,000
-
-
Fixed Overheads:
Depreciation
Insurance
Salaries
-
-
-
11,000
3,000
10,000
-
-
-
Total Overhead Expenses - 62,000 -
Estimated Direct Labour Hours - 1,24,000 -
Solution FLEXIBLE BUDGET FOR OVERHEAD EXPENSES AT 70%, 80% AND 90% CAPACITY LEVELS
Particulars 70%
Rs.
80%
Rs.
90%
Rs.
Variable Overheads
Indirect Labour 10500 12000 13500
Indirect Materials 3500 4000 4500
TOTAL (A) 14000 16000 18000
Semi-Variable Overheads:
Power
Variable 12250 14000 15750
Fixed 6000 6000 6000
Repair
Variable 1050 1200 1350
Fixed 800 800 800
TOTAL (B) 20100 22000 23900
Fixed Overheads
Depreciation 11000 11000 11000
Insurance 3000 3000 3000
Salaries 10000 10000 10000
TOTAL (C) 24000 24000 24000
Total Overheads (A + B + C) 58100 62000 65900
Estimated Direct Labour hours 108500 124000 139500
Overhead Rate per Hour 0.535 0.500 0.472
8. The expenses budgeted for production of 10,000 units in a factory are furnished
below:
Particulars Per Unit
Rs.
Materials 70
Labour 25
Variable Overheads 20
Fixed Overheads (Rs.1,00,000) 10
Variable Expenses (Direct) 5
Selling Expenses (10% Fixed) 13
Distribution Expenses (20% Fixed) 7
Administration Expenses (50,000)
(Fixed for all levels)
5
Total Cost per Unit (to make and sell) 155
Prepare a Flexible Budget for 6000 Units and 8000 Units
Solution
FLEXIBLE BUDGET FOR THE PRODUCTION OF 10000, 8000 AND 6000 UNITS
Particulars 10000 units 8000 units 6000 units
Per Unit
Rs.
Total
Rs.
Per Unit
Rs.
Total
Rs.
Per Unit
Rs.
Total
Rs.
Materials 70 700000 70 560000 70 420000
Labour 25 250000 25 200000 25 150000
Variable Overheads 20 200000 20 160000 20 120000
Fixed Overheads 10 100000 12.5 100000 16.67 100000
Variable Expenses 5 50000 5 40000 5 30000
Selling Expenses
Variable 11.7 117000 11.70 93600 11.7 70200
Fixed 1.3 13000 1.625 13000 2.17 13000
Distribution Expenses
Variable 5.6 56000 5.60 44800 5.6 33600
Fixed 1.4 14000 1.75 14000 2.33 14000
Administration Expenses
(Fixed)
5.0 50000 6.25 50000 8.33 50000
Total 155.00 1550000 159.425 1275400 166.80 1000800
9. With the following data for 60% activity, prepare a budget at 80% activity.
Production at 60% Capacity - 600 units
Materials - Rs.100 per unit
Labour - Rs.40 per unit
Direct Expenses - Rs.10 per nit
Factory Expenses - Rs.40,000 (40% fixed)
Administration Expenses - Rs.30,000 (60% fixed)
Solution
FLEXIBLE BUDGET FOR THE PRODUCTION OF 600 AND 800 UNITS
Particulars 60% capacity - 600 units 80% capacity - 800 units
Per Unit
Rs.
Total Per Unit
Rs.
Total
Materials 100 60000 100 80000
Labour 40 24000 40 32000
Direct Expenses 10 6000 10 8000
Factory Expenses
Variable 40 24000 40 32000
Fixed 26.67 16000 20 16000
Administration Expenses
Variable 20 12000 20 16000
Fixed 30 18000 22.5 18000
TOTAL 266.67 160000 252.5 202000
10. A firms expects to have Rs.25,000 in Bank on 1st May 2009 and requires you to
prepare an estimate of cash position during the 3 months. May-July 2009. The
following information is made available:
Months Sales
Rs.
Purchase
Rs.
Wages
Rs.
Factory
Expenses
Rs.
Office
Expenses
Rs.
Selling
Expenses
Rs.
March 50,000 30,000 6,000 5,000 4,000 3,000
April 56,000 32,000 6,500 5,500 4,000 3,000
May 60,000 35,000 7,000 6,000 4,000 3,500
June 80,000 40,000 9,000 7,500 4,000 4,500
July 90,000 40,000 9,500 8,000 4,000 4,500
Other Information:
i. 20% of Sales is for Cash, remaining amount is collected in the
month following that of sale.
ii. Suppliers supply goods at 2 months credit.
iii. All expenses are paid in the month following the one in which they
are incurred.
iv. The company pays Dividends to Shareholders and Bonus to
Workers of Rs.10,000 and Rs.15,000 respectively in the month of
May.
v. Plant has been ordered and is expected to be received in June. It
will cost Rs.80,000
vi. Income Tax Rs.25,000 is payable in July.
Solution
CASH BUDGET FOR THREE MONTHS ENDING 31ST JULY 2009
Particulars May June July
Opening Cash Balance 25000 7300 (63200)
Add: Estimated Cash Receipts
Cash Sales 12000 16000 18000
Cash Receivable from Debtors 44800 48000 64000
TOTAL RECEIPTS 56800 64000 82000
Total Cash Available (I) 81800 71300 18800
Less: Estimated Cash Payments
Cash payable to Suppliers 30000 32000 35000
Wages 7000 9000 9500
Factory Expenses 5500 6000 7500
Office Expenses 4000 4000 4000
Selling Expenses 3000 3500 4500
Dividends to Shareholders 10000 - -
Bonus to Workers 15000 - -
Payment for Plant - 80000 -
Income Tax - - 25000
TOTAL PAYMENTS (II) 74500 134500 85500
Closing Cash Balance 7300 (63200)
Overdraft
(66700)
Overdraft
Note: Since nothing is mentioned about lag in payment of Wages, they are
assumed to be paid in respective months
11. Prepare Cash Budget for Months of April, May and June from the following data.
MONTHS SALES PURCHASES WAGES
February 1,80,000 1,24,800 12,000
March 1,92,000 1,44,000 14,000
April 1,08,000 2,43,000 11,000
May 1,74,000 2,46,000 10,000
June 1,26,000 2,68,000 15,000
1. 50% of credit sales is realised in the month following the sale and
the other 50% in the second month following.
2. Creditors are paid in the month following the month of purchase.
3. Wages are paid at the end of the respective month.
4. Cash at bank – 1st April – Rs.25,000.
Solution
CASH BUDGET FOR THREE MONTHS ENDING 30th JUNE
Particulars April May June
Opening Cash Balance 25000 56000 (47000)
Add: Estimated Cash Receipts
Cash Receivable from Debtors
February 90000 - -
March 96000 96000 -
April - 54000 54000
May - - 87000
TOTAL RECEIPTS 186000 150000 141000
Total Cash Available (I) 211000 206000 94000
Less: Estimated Cash Payments
Cash payable to Suppliers 144000 243000 246000
Wages 11000 10000 15000
TOTAL PAYMENTS (II) 155000 253000 261000
Closing Cash Balance 56000 (47000)
Overdraft
(167000)
Overdraft
12. Prepare a Selling Overheads Budget from the Estimates given below:
Rs.
Advertisement 1,000
Salaries to the department 1,000
Expenses of the sales department (fixed) 750
Salaries and Dearness allowance 3,000
Commission at 1% on sales effected (other than those of agents)
Carriage Outwards estimated at 5% on sales.
Agent’s Commission – 6 1/2 % on sales.
The Sales during the period were estimated as follows:.
Rs.80,000 including Agent’s sales Rs.8,000
Rs.90,000 including Agent’s sales Rs.10,000
Rs.1,00,000 including Agent’s sales Rs.10,500
Solution
SELLING OVERHEADS BUDGET
Particulars
Estimated Sales
Rs.80000 Rs.90000 Rs.100000
Fixed Selling Overheads
Advertisement 1000 1000 1000
Salaries 1000 1000 1000
Expenses 750 750 750
Salaries and Dearness Allowance 3000 3000 3000
Total Fixed Overheads (A) 5750 5750 5750
Variable Selling Overheads
Commission (Other than those of Agents) 720 800 895
Carriage Outwards 4000 4500 5000
Commission to Agents 520 650 682.5
Total Variable Overheads (B) 5240 5950 6577.50
Total Selling Overheads 10990 11700 12327.50
UNIT – V
CAPITAL BUDGETING
SECTION – A (2 MARKS)
1. What is Capital Budgeting?
Capital Budgeting refers to Long Term Planning for:
a. Investment in Projects and Fixed Assets
b. Methods of Financing the approved Projects
2. Define Capital Budgeting.
“Capital Budgeting is the firm’s formal process for the acquisition and investment
of Capital” – Hampton John.J
“Capital Budgeting is Long Term planning for making and Financing proposed
capital outlays” – Charles T.HornGren
3. What are the important aspects of Capital Budgeting Decisions?
i. Cash outflow needed for a proposal
ii. Required return on Investments
iii. Measurement of Returns from Investment Proposals
iv. Ranking of Investment Proposals
v. Assessment of Risk or Uncertainty involved in projects.
4. What are the methods of Capital Budgeting
Traditional Methods:
i. Pay Back Method
ii. Accounting Rate of Return Method
Discounted Cash Flow Methods:
Net present Value Method
Profitability Index Method
iii. Internal Rate of Return Method
5. Compute Pay Back period for the following
Original Investment : Rs.30000
Annual Cash Flow : Rs.15000
Solution
Pay Back Period = Original Investment / Annual Cash Flow
= 30000 / 15000
= 2 Years
6. A project costs Rs.500000 and yields annually a profit of Rs.80000 after
Depreciation at 12% per annum but before tax at 50%. Calculate Pay Back
Period.
Solution
Profit after Depreciation before Tax : Rs.80000
Less: Tax at 50% of Profits : Rs.40000
------------‘
Rs.40000
Add; Depreciation @12% on Rs.500000 : Rs.60000
------------
Annual Cash Inflows : Rs.100000
-------------
Pay Back Period = Cost of the Project /Annual Cash Flow
= 500000 / 100000
= 5 Years
7. Calculate present values at 10% per annum for a period of 5 Years.
Solution
Year Present Value of Re.1
At 10% Discounting Factor
1 1.000 x 100 / 110 = 0.909
2 0.909 x 100 / 110 = 0.826
3 0.826 x 100 / 110 = 0.751
4 0.751 x 100 / 110 = 0.683
0.683 x 100 / 110 = 0.621
8. An Investment proposal is expected to result in an average annual Income of
Rs.6,00,000 after depreciation and tax. If the Investment needed is Rs.30,00,000
initially, compute ARR on original Investment.
Solution
Accounting Rate of Return on Original Investment
= Annual Income after Depreciation and Tax
---------------------------------------------------- X 100
Original Investment
= 600000
--------- X 100 = 20%
3000000
9. A Project requires an Investment of Rs.400000 and it is estimated to result in cash
inflows of Rs.480000 after discounting at Cost of Capital rate of 10%. Compute
the Net Present Value and Profitability Index. Should the Project be accepted?
Net Present Value = Present Value of Cash Inflows – Cost of the Project
= 480000 – 400000
= Rs.80000
Conclusion: Project is to be accepted because of positive N.P.V
Profitability Index = Present Value of Cash Inflows / Cost of the Project
= 480000 / 400000
= 1.20
Conclusion: Project is to be accepted because Profitability Index is more than 1.
10. A Company has an Investment Opportunity costing Rs.40000 with the following
expected net cash flow (after tax and before depreciation)
Year Net Cash Inflows
1 7000
2 7000
3 8000
4 9000
5 8000
6 9000
7 10000
Determine the Pay Back Period
Solution:
Year Cash Inflow Cumulative Cash Inflow
1 7000 7000
2 7000 14000
3 8000 22000
4 9000 31000
5 8000 39000
40000
6 9000 48000
7 10000 58000
Initial Investment : Rs.40000
Pay Back Period : 5 Years + 1000 / 9000
: 5.11 Years
SECTION – B (5 MARKS)
11. What are the features of Capital Budgeting?
It involves investment of Funds in the present for achieving future benefits
Future benefits are usually spread over several years
Investment of Funds is in Long Term activities which are usually Non –
Flexible
The Project in which the Investment is to be made will determine the
financial future of the organisation.
Each project involves huge amount of Funds
Capital Expenditure Decisions are Irreversible.
12. What are the factors influencing Capital Budgeting Decisions?
Availability of Funds
Future Earnings
Legal Compulsions
Degree of Uncertainty of Risk
Urgency
Research and Development Projects
Obsolescence
Competitor’s Activities
Intangible factors
13. Explain the Importance of Capital Budgeting?
Huge Amount of Investments
Permanent and Irreversible commitment of Funds
Long term Impact on Profitability
Growth and Expansion
Cost Over Runs
Alternatives
Multiplicity of Variables
Top Management Activity
SECTION – C (10 MARKS)
1. Explain the methods of Capital Budgeting.
TRADITIONAL METHODS:
Pay Back Method
It is also called Pay out Method. It is the time span in which a project ‘pays for
itself’ through surplus cash flows. It is the period within which investment in
Fixed Assets can be recovered.
Merits:
Simple to Understand
Easy to Calculate
Loss through obsolescence is minimised as short term projects are
preferred.
Demerits:
It ignores post payback period returns
It completely ignores time value of money.
It does not measure profitability.
It does not make use of Cost of Capital.
Accounting Rate of Return Method
This method takes into account the total earnings expected from an Investment
proposal over its full time. The method is called Accounting Rate of Return
Method because it uses the accounting concept of Profit.
Merits:
Easy to Understand and Operate
Measures Profitability
Method is based on net Earnings
Demerits:
It ignores time value of money.
Reliability of A.R.R method is affected due to various concepts of
Investment
DISCOUNTED CASH FLOW METHODS:
Net present Value Method
It recognizes the time value of money. Cash flows arising at different periods of
time are not comparable unless their equivalent present values are found. The net
present values of all inflows and outflows of cash occurring during the entire life
of a project is determined by discounting these flows by the firm’s cost of capital
or some other pre-determined rate.
Merits:
It recognizes the time value of Money
It considers earnings over the entire life of the Project which makes true
assessment of profitability possible.
Demerits
It is complicated to understand and operate.
Comparing different projects with different Investments becomes difficult.
Profitability Index Method
It is also called Benefits Cost Ratio. It is only a refinement of Net Present Value
Method. It shows the relationship between present value of cash inflows and
present value of Cash outflows. This method is also known as Excess Present
value Index Method.
Merits
It is useful in ranking two or most projects
It recognizes the time value of Money
It considers earnings over the entire life of the Project which makes true
assessment of profitability possible.
More suitable for comparative assessment of Projects
Demerits
It is complicated to understand and operate.
Comparing different projects with different Investments becomes difficult.
Internal Rate of Return Method
Internal Rate of Return is that rate of return at which the present values of Cash
Inflows and Cash Outflows are equal. I.R.R discounts the total cash flows to the
level of Zero.
Merits
It takes into account Time Value of Money
It considers the profitability of a project over its entire economic life.
Cost of Capital is not a pre-requisite for applying I.R.R method
It provides for ranking of various proposals because it is a percentage
return
Demerits
Discounting rate is unknown factor
The assumption of I.R.R that the earnings are re-invested at I.R.R for the
remaining life of the project is not a justifiable assumption.
2. Vijay & Co. is considering investing in a project requiring a capital outlay of
Rs.200000. Forecast for annual income after depreciation but before tax is as
follows:
Year Rs.
1 100000
2 100000
3 80000
4 80000
5 40000
Depreciation may be taken as 20% on original Cost and taxation at 50% of net
income.
You are required to evaluate the project according to each of the following
methods:
1. Pay Back Method
2. Rate of Return on Original Investment
3. Rate of Return on Average Investment
4. Discounted Cash Flow Method (Cost of Capital 10%)
5. Excess Present Value Index.
Solution:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Annual Income after Depreciation Before Tax 100000 100000 80000 80000 40000
Less: Taxation @50% 50000 50000 40000 40000 20000
Annual Income after Depreciation and after Tax 50000 50000 40000 40000 20000
Add: Depreciation @20% of the Cost of the Project 40000 40000 40000 40000 40000
Annual Cash Inflows 90000 90000 80000 80000 60000
1. Pay Back Period:
Year Cash Inflow Cumulative Cash Inflow
1 90000 90000
2 90000 180000
200000
3 80000 260000
4 80000 340000
5 60000 400000
Initial Investment : Rs.200000
Pay Back Period : 2 Years + 20000 / 80000
: 2.25 Years
2. Rate of Return on Original Investment
Accounting Rate of Return on Original Investment
= Average Annual Income (After Depreciation and Tax)
---------------------------------------------------------------
X 100
Original Investment
= 40000 / 200000 x 100
= 20%
Note: Average Annual Income = (50000 + 50000 + 40000 + 40000 + 20000) / 5
= 40000
3. Rate of Return on Average Investment
Accounting Rate of Return on Original Investment
= Average Annual Income (After Depreciation and Tax)
---------------------------------------------------------------
X 100
Average Investment
= 40000 / 100000 x 100
= 40%
Note: Average Annual Income = (50000 + 50000 + 40000 + 40000 + 20000) / 5
= 40000
Average Investment = Original Investment / 2
= 200000 / 2 = Rs.100000
4. Discounted Cash Flow Method (Cost of Capital 10%)
Year Annual Cash Inflows
Rs.
P.V of Re.1
at 10% (D.C.F)
Present Value of Cash Inflows
Rs.
1 90000 0.909 81810
2 90000 0.826 74340
3 80000 0.751 60080
4 80000 0.683 54640
5 60000 0.621 37260
308130
Present Value of the Project : Rs.308130
(-)Cost of the Project : Rs.200000
Net Present Value : Rs.108130
5. Excess Present Value Index
Excess Present Value Index = Present Value of Cash Inflows / Cost of the Project
= 308130 / 200000
= 1.541
Decision: The Project is acceptable on the basis of all the methods
3. A choice is to be made between two competing proposals which require an equal
investment of Rs.50000 and are expected to generate net cash flows as under:
End of Year Project I
Rs.
Project II
Rs.
1 25000 10000
2 15000 12000
3 10000 18000
4 Nil 25000
5 12000 8000
6 6000 4000
The Cost of Capital of the Company is 10%. Which Project should be chosen?
Why?
Evaluate the Project Proposals under:
Pay Back Method
Discounted Cash Flow Method
Solution:
1. Pay Back Period:
Year Project I Project II
Cash Inflow Cumulative Cash Inflow Cash Inflow Cumulative Cash Inflow
1 25000 25000 10000 10000
2 15000 40000 12000 22000
3 10000 50000
18000 40000
50000
4 Nil 50000 25000 65000
5 12000 62000 8000 73000
6 6000 68000 4000 77000
Project I
Initial Investment : Rs.50000
Pay Back Period : 3 Years
Project II
Initial Investment : Rs.50000
Pay Back Period : 3 Years + 10000 / 25000
: 3.4 Years
Decision : Project I is better because of Lower Pay Back Period.
2. Discounted Cash Flow Method (Cost of Capital 10%)
Project I
Year Annual Cash Inflows
Rs.
P.V of Re.1
at 10% (D.C.F)
Present Value of Cash Inflows
Rs.
1 25000 0.909 22725
2 15000 0.826 12390
3 10000 0.751 7510
4 Nil 0.683 0
5 12000 0.621 7452
6 6000 0.564 3384
TOTAL 53461
Present Value of the Project: Rs.53461
(-)Cost of the Project : Rs.50000
Net Present Value : Rs.3461
Excess Present Value Index
Excess Present Value Index = Present Value of Cash Inflows / Cost of the Project
= 53461 / 50000
= 1.069
Project II
Year Annual Cash Inflows
Rs.
P.V of Re.1
at 10% (D.C.F)
Present Value of Cash Inflows
Rs.
1 10000 0.909 9090
2 12000 0.826 9912
3 18000 0.751 13518
4 25000 0.683 17075
5 8000 0.621 4968
6 4000 0.564 2256
TOTAL 56819
Present Value of the Project: Rs.56819
(-)Cost of the Project : Rs.50000
Net Present Value : Rs.6819
Excess Present Value Index
Excess Present Value Index = Present Value of Cash Inflows / Cost of the Project
= 56819 / 50000
= 1.136
Decision: Project II is better because of higher NPV and Profitability Index
for the same Investment
4. K Limited considers purchasing any one of the following two alternative
machines. The details are as given below:
PARTICULARS MACHINE X MACHINE Y
Cost of Machine Rs.600000 Rs.1000000
Life Time (Years) 4 5
Savings in Scrap Rs.90000 Rs.100000
Savings in Labour Rs.280000 Rs.360000
Additional Cost per Annum
Supervision Rs.20000 Rs.30000
Maintenance Rs.12000 Rs.20000
Indirect Materials Rs.8000 Rs.10000
Tax Rate 50% 50%
Using Discounted Cash Flow Method, prepare a statement of Profitability and
recommend the profitable machine. (Discounting Factor 12%)
STATEMENT OF PROFITABILITY
PARTICULARS MACHINE X MACHINE Y
INCOME – A Rs. Rs.
Savings in Scrap 90000 100000
Savings in Labour 280000 360000
TOTAL (A) 370000 460000
Additional Cost – B
Supervision 20000 30000
Maintenance 12000 20000
Indirect Materials 8000 10000
TOTAL (B) 40000 60000
Income before Depreciation & Tax 330000 400000
Less: Depreciation
(Cost of Machine / Life Time)
150000 200000
Income after Depreciation before Tax 180000 200000
Less: Tax @50% 90000 100000
Net Income (after Depreciation & Tax) 90000 100000
Add : Depreciation 150000 200000
Net Annual Cash Inflows 240000 300000
MACHINE X
Year Annual Cash Inflows
Rs.
P.V of Re.1
at 12% (D.C.F)
Present Value of Cash Inflows
Rs.
1 240000 0.893 214320
2 240000 0.797 191280
3 240000 0.712 170880
4 240000 0.639 153360
TOTAL 729840
Present Value of the Project: Rs.729840
(-)Cost of the Project : Rs.600000
Net Present Value : Rs.129840
Excess Present Value Index
Excess Present Value Index = Present Value of Cash Inflows / Cost of the Project
= 729840 / 600000
= 1.2164
MACHINE X
Year Annual Cash Inflows
Rs.
P.V of Re.1
at 12% (D.C.F)
Present Value of Cash Inflows
Rs.
1 300000 0.893 267900
2 300000 0.797 239100
3 300000 0.712 213600
4 300000 0.639 191700
5 300000 0.567 170100
TOTAL 1082400
Present Value of the Project: Rs.1082400
(-)Cost of the Project : Rs.1000000
Net Present Value : Rs.82400
Excess Present Value Index
Excess Present Value Index = Present Value of Cash Inflows / Cost of the Project
= 1082400 / 1000000
= 1.0824
Decision:
Model X is better because of higher Net Present Value and Higher Present
Value Index.
MODEL QUESTION PAPER - 1
SECTION A (10 X 2 = 2O MARKS)
ANSWER ANY TEN QUESTIONS
ALL QUESTIONS CARRY EQUAL MARKS
1. Define Management Accounting
2. What are Funds from operations?
3. What is a Cash Flow Statement?
4. What are the types of Analysis of Financial Statements?
5. How do you show the following items in a Common Size Income Statement?
Particulars 31 – 03 – 2009 31 – 03 – 2010
Sales 200000 400000
Less: Cost of Sales 140000 240000
6. A Project requires an Investment of Rs.600000 and it is estimated to result in cash
inflows of Rs.675000 after discounting at Cost of Capital rate of 10%. Compute
the Net Present Value and Profitability Index. Should the Project be accepted?
7. Calculate Present Value of Re.1 at 12% Discounting factor for 5 Years
8. Define Budget.
9. What is Payback Period?
10. What is Net Present Value?
11. Calculate Stock Turnover ratio
Cost of Goods Sold : Rs.65000
Sales : Rs.100000
Average Stock : Rs.15000
12. From the following information Prepare Funds Flow Statement;
Issue of Shares : Rs.100000
Funds from Operations Rs.200000
Redemption of Debentures Rs.180000
Increase in Working Capital Rs.120000
SECTION B (5 X 5 = 25 MARKS)
ANSWER ANY FIVE QUESTIONS
ALL QUESTIONS CARRY EQUAL MARKS
13. Distinction between Financial Accounting and Management Accounting.
14. From the following details below, prepare a Common Size Income Statement of
Lively Limited:
Particulars Year Ending 31.03.2009 Year Ending 31.03.2010
Sales 350000 550000
Cost of Sales 200000 330000
Operating Expenses 60000 80000
Non – Operating Expenses 25000 45000
15. Compute (a) Pay out ratio and (b) Retained Earnings ratio from the following
data.
Rs.
Net Profit 10000
Provision for Tax 5000
Preference Dividend 2000
No. of Equity Shares 3000
Dividend per Equity Share Re. 0.40
16. Kuberan & Co. makes both cash and credit sales. From the following information,
Calculate Average Collection Period:
Particulars Rs.
Total Sales 200000
Cash Sales 40000
Sales Returns 14000
Debtors (31-12-2010) 18000
Creditors ( 31-12-2010) 20000
Provision for bad debts (31-12-2010) 2000
Bills Receivable ( 31-12-2010) 4000
17. Calculation Funds from Operations from the following Profit & Loss A/c
Particulars Rs. Particulars Rs.
To Expenses Paid 100000 By Gross Profit 200000
To Depreciation 40000 By Gain on Sale of Machinery 20000
To Loss on Sale of Building 15500
To Discount 500
To Goodwill 12000
To Net profit 52000
220000 220000
18. From the following balances you are required to calculate Cash from Operating
Activities.
Particulars 31-12-2009
Rs.
31-12-2010
Rs.
Debtors 50000 47000
Bills Receivable 10000 12500
Creditors 20000 25000
Bills Payable 8000 6000
Outstanding Expenses 1000 1200
Prepaid Expenses 800 700
Accrued Income 600 750
Income received in advance 300 250
Profit made during the year - 130000
19. The following figures relating to product ‘Duper’ for the quarter ending 31-3-
2010 are available:
Budgeted sales: January 3,00,000 Units
February 2,40,000 Units
March 3,60,000 Units
Stock position: 1-1-2010 – 50% of January’s Budgeted sales.
31-3-2010 – 80,000 units
31-1-2010 – 40% of February’s Budgeted sales.
28-2-2010 – 60% of March’s Budgeted sales.
You are required to prepare a production budget for the quarter ending 31-3-2010.
SECTION C (3 X 10 = 30 MARKS)
ANSWER ANY THREE QUESTIONS
ALL QUESTIONS CARRY EQUAL MARKS
20. From the following Balance Sheets of X Limited , You are required to prepare a
Common Size Balance Sheet
BALANCE SHEET AS ON 31 ST DECEMBER
Liabilities 2009 2010 Assets 2009 2010
Equity Capital 300000 1200000 Land & Buildings 100000 450000
Liability for Expenses 9000 17000 Plant & Machinery 300000 750000
Retained Earnings 50000 33000 Stock 60000 217000
Sundry Creditors 91000 100000 Debtors 115000 160000
Debentures 150000 250000 Cash 10000 5000
Bills Receivable 10000 15000
Prepaid Expenses 5000 3000
Total 600000 1600000 Total 600000 1600000
21. Following are the details relating to the trading activities of A Ltd.
Stock Velocity - 8 months
Debtor’s Velocity - 3 months
Creditor’s Velocity - 2 months
Gross Profit Ratio - 25%
Gross profit for the year Rs.400000; Bills receivable Rs.25000 and Bills payable
Rs.10000. Closing Stock of the year is Rs.10000 more than the opening stock. Find
out (a) Sales (b) Debtors (c) Closing Stock and (d) Creditors
22. From the following Balance Sheets, Prepare Funds Flow Statement
Liabilities 1-1-10
Rs.
31-12-10
Rs.
Assets 1-1-10
Rs.
31-12-10
Rs.
Creditors 40000 44000 Cash 10000 7000
Mrs. Somu’s Loan 25000 - Debtors 30000 50000
Loan from Canara Bank 40000 50000 Stock 35000 25000
Capital 125000 153000 Machinery 80000 55000
Land 40000 50000
Buildings 35000 60000
230000 247000 230000 247000
During the year a machine costing Rs.10,000(accumulated depreciation Rs.3,000) was
sold for Rs.5,000.The Provision for depreciation against machinery as on 1-1-2010 was
Rs.25,000 and on 31-12-2010 was Rs.40,000. Net profit for the year 2010 amounted to
Rs.45,000. Prepare the Funds Flow Statement.
23. The expenses budgeted for production of 10,000 units in a factory are furnished
below:
Particulars Per Unit
Rs.
Materials 70
Labour 25
Variable Overheads 20
Fixed Overheads (Rs.1,00,000) 10
Variable Expenses (Direct) 5
Selling Expenses (10% Fixed) 13
Distribution Expenses (20% Fixed) 7
Administration Expenses (50,000)
(Fixed for all levels)
5
Total Cost per Unit (to make and sell) 155
Prepare a Flexible Budget for 6000 Units and 8000 Units
24. Vijay & Co. is considering investing in a project requiring a capital outlay of
Rs.200000. Forecast for annual income after depreciation but before tax is as
follows:
Year Rs.
1 100000
2 100000
3 80000
4 80000
5 40000
Depreciation may be taken as 20% on original Cost and taxation at 50% of net
income.
You are required to evaluate the project according to each of the following
methods:
Pay Back Method
Rate of Return on Original Investment
Rate of Return on Average Investment
Discounted Cash Flow Method (Cost of Capital 10%)
Excess Present Value Index