FINANCIAL MANAGEMENT EXAM ANSWER PROVIDED

  FINANCIAL MANAGEMENT EXAM ANSWER PROVIDED

Xaviers Institute of Business Management Studies

Marks 100

FINANCIAL MANAGEMENT

Note: Attempt any five questions. All questions carry equal marks. 

1. (A) Explain the Business Entity concept, Accrual concept and Consistency concept of Accounting.

(b) What do you understand by capitalization of earnings? How is the value of a firm ascertained with the help of its earnings? Explain with an example.

2. The following is the Trial Balance of Mr. Keshav Kant on 31st March 2006.

  Rs. Rs.

  Dr. Cr.

Capital - 8,00,000

Drawings 60,000 -

Opening Stock 75,000 -

Purchases 15,95,000 -

Freight on Purchases 25,000 -

Wages (11 months upto 28-2-2006) 66,000 -

Sales - 23,10,000

Salaries 1,40,000 -

Postage & Telephones 12,000 -

Printing and Stationery 18,000 -

Miscellaneous expenses 30,000 -

Creditors - 3,00,000

Investments 1,00,000 -

Discount received - 15,000

Debtors 2,50,000 -

Bad Debts 15,000 -

Provision for Bad Debts - 8,000

Building 3,00,000 -

Machinery 5,00,000 -

Furniture 40,000 -

Commission on Sales 45,000 -

Interest on Investments - 12,000

Insurance (year upto 31 .7 .2006) 24,000 -

Bank Balance 1,50,000 -

  34,45,000 34,45,000

Adjustments:

(i) Closing Stock Rs. 2, 25,000.

(ii) Machinery worth Rs. 45,000 purchased on 1.10.2005 was shown as purchases. Freight paid on the machinery was Rs. 5,000 which is included in the Freight on Purchases.

(iii) Commission is payable at 2% on Sales.

(iv) Investments were sold at 10% profit but the entire sale proceeds have been taken as Sales.

(v) Write off Bad Debts Rs. 10,000 and create .a Provision for Doubtful Debts at 5% of Debtors.

(vi) Depreciate Building by 2% p.a. and Machinery and Furniture @ 10% p.a

Prepare Trading and Profit and Loss A/c for the Year ending 31st March 2006 and a Balance Sheet as on that date

3. Distinguish between Operating Leverage and Financial Leverage. What will be the effect of small change in Sales on Net Income, Return on Equity and Earnings Per Share if both these leverages are considerable? Explain.

4. (a) What is Production Budget ? What factors are taken into consideration while preparing a Production Budget? Why are separate budgets prepared For each of the elements of production costs? Explain.

(b) What is a Rolling Budget? Why is it prepared? Explain the procedure of its preparation.

5. An Engineering Company has received an export order for its sole product that would require the use of half of the factory's total capacity, which is estimated at 4 lakh units per annum. The condition of the export order is that it has to be accepted in full: acceptance of a part is not allowed

The factory is currently operating at 60% level to meet the demand of its domestic customers. As against the current price of Rs. 6 per unit, the export offer is Rs. 4.70 per unit, which is less than the total cost of current production. The cost break-down is given below:

Direct material: Rs. 2.50 per unit

Direct labour: 1.00 per unit

Variable expenses: 0.50 per unit

Fixed overhead: 1.00 per unit

Total: 5.00 per unit

The company has the following options:

(a) Accept the export order and cut back domestic sales as necessary

(b) Remove the capacity constraint by installing balancing equipment and also by working overtime to meet both domestic and export demand. This will increase fixed overheads by Rs. 15,000 annually and additional cost for overtime work will amount to Rs. 40,000 for the year.

(c) Appoint a sub-contractor to manufacture the additional requirement and meet the domestic and export requirements in full by supplying raw materials, paying a conversion charge @ Rs. 2 per unit and appointing a supervisor at a salary of Rs. 3,000 per month for checking the quality of the product and controlling operations at the manufacturing unit

(d) Refuse the order.

You are required to prepare a statement of costs and profits under each of the options and give your recommendation to the company giving the reasons for the same.

6. Aditya Company's equity shares are being traded in the market at Rs. 54 per share with a price-earning ratio of 9. The company's payout is 72%. It has 1,00,000 equity shares of Rs. 10 each and no preference shares. Book value per share is Rs. 42.

You are required to calculate:

(i) Earnings per Share

(ii) Net Income

(iii) Dividend Yield, and

(iv) Return on Equity

7. Comment on the following statements:

(a) The greater the variability of cash flows, the higher should be the minimum cash balance.

(b) As there is no explicit cost of retained earnings, these funds are free of cost.

(c) Dividend, Investment and Financing decisions are inter-dependent.

(d) Profitability Index is more relevant in the evaluation and ranking of projects than Internal Rate of Return.

8. Write short notes on the following:

(a) Performance Budget

(b) Amortization of Intangible Assets

(c) Accounting Standards

(d) Funds from Business Operations