Table of Contents
Q.1. Financial Planning is key to success. What are the basic fundamentals of financial planning? Explain the goals of financial management.
Financial planning is a process that helps individuals and families achieve their financial goals by identifying their current financial situation, determining their short and long-term financial objectives, and creating a plan to achieve those goals. In general, the basic fundamentals of financial planning include budgeting, saving, investing, managing debt, and protecting assets.
- Budgeting: Create a spending plan that matches your income and expenses to track your spending, avoid overspending, and ensure you are living within your means.
- Saving: Save at least 20% of your monthly income to achieve long-term financial goals such as retirement or buying a house. This can be achieved by creating a separate savings account, investing in a retirement plan, or investing in other investment vehicles such as mutual funds or stocks.
- Investing: Grow your wealth over time and achieve your long-term financial goals by understanding your risk tolerance and investment options before investing your money. Investing can be done in a variety of ways such as stocks, mutual funds, real estate, and other assets.
- Managing Debt: Create a plan to manage and pay off debt, such as credit card debt, student loans, and mortgages. This may involve consolidating debt, negotiating with creditors, or creating a repayment plan.
- Protecting Assets: Purchase insurance to protect your assets in case of unexpected events such as accidents, illnesses, or natural disasters. Insurance can provide financial security and peace of mind, especially during difficult times.
By following these basic fundamentals of financial planning, individuals can achieve their financial goals and live financially stable life.
OR
Explain the goals of financial management.
The goals of financial management include maximizing shareholder value, profit maximization, wealth maximization, risk management, cash flow management, capital allocation, cost reduction, liquidity management, and long-term sustainability. By achieving these goals, financial management can help companies to achieve financial success and sustainable growth over time.These goals are:
- Maximizing shareholder value: The primary goal of financial management is to maximize shareholder value, which means increasing the value of the company’s shares through profitable investments and operational efficiency.
- Profit Maximization: One of the primary goals of financial management is to maximize profits by managing revenues and expenses effectively.
- Wealth Maximization: Financial management aims to increase the wealth of shareholders by increasing the value of their investments over time.
- Risk Management: Financial management helps to manage risk by identifying and minimizing risks that may negatively impact the financial performance of the company.
- Cash Flow Management: Financial management focuses on managing the cash flow of the company to ensure that there is sufficient cash on hand to meet obligations and invest in growth opportunities.
- Capital Allocation: Financial management helps to allocate capital to the most productive investments to achieve maximum returns.
- Cost Reduction: Financial management focuses on reducing costs and increasing operational efficiency to increase profitability.
- Liquidity Management: Financial management ensures that the company has sufficient liquidity to meet short-term financial obligations.
- Long-term Sustainability: Financial management aims to ensure the long-term sustainability of the company by making sound financial decisions and investing in sustainable growth opportunities.
Q.2. Define working capital. What factors would you take into consideration in
estimating the working capital needs of a budget hotel?
Working capital refers to the amount of money that a company needs to finance its day-to-day operations. It is the difference between current assets and current liabilities and is a measure of the company’s short-term liquidity.
Factors to Consider in Estimating the Working Capital Needs of a Budget Hotel:
- Seasonal demand: Budget hotels may experience fluctuations in demand throughout the year, which can affect the amount of working capital needed to cover expenses during low-demand periods.
- Inventory management: Budget hotels need to manage inventory levels of items such as linens, toiletries, and food to avoid excess inventory costs, which can tie up working capital.
- Accounts receivable and payable: Budget hotels need to manage their accounts receivable and payable effectively to ensure that they have the sufficient cash flow to cover expenses.
- Operating expenses: Operating expenses such as payroll, utilities, and maintenance costs can be significant for budget hotels, and it is important to ensure that there is sufficient working capital to cover these expenses.
- Cash reserves: Budget hotels may need to maintain cash reserves to cover unexpected expenses such as repairs or maintenance, which can affect the amount of working capital needed.
- Payment terms: Budget hotels may negotiate payment terms with suppliers and vendors to manage their working capital needs effectively.
- Creditworthiness: The creditworthiness of a budget hotel can affect its ability to secure financing, which can impact its working capital needs.
- Growth plans: If a budget hotel is planning to expand or renovate, it may need to increase its working capital to cover the associated costs.
In conclusion, working capital is a critical aspect of a budget hotel’s financial management. Factors that should be considered in estimating working capital needs include seasonal demand, inventory management, accounts receivable and payable, operating expenses, cash reserves, payment terms, creditworthiness, and growth plans. By managing these factors effectively, budget hotels can ensure that they have sufficient working capital to finance their day-to-day operations and achieve long-term financial success.
OR
What do you understand by the term “over capitalization”? State the factors
responsible for such a state of affairs.
Over capitalization refers to a situation where a company has more capital or assets than it needs to operate efficiently. In other words, the company has raised too much capital or has invested too much money in fixed assets, leading to a decrease in return on investment.
Factors Responsible for Over Capitalization:
- Overestimation of Capital Needs: Companies may overestimate their capital needs during the initial stages of planning, resulting in excess capital being raised.
- Over-Optimistic Projections: Companies may project high levels of growth, leading to overinvestment in fixed assets and overcapitalization.
- Over-Valuation of Assets: Companies may overvalue their assets, leading to a higher capital base than necessary.
- Inefficient Use of Funds: If a company does not use its funds efficiently, it may result in overcapitalization.
- Decline in Demand: If there is a decline in demand for the company’s products or services, it may result in excess capacity and overcapitalization.
- Economic Factors: Economic factors such as inflation, high interest rates, and recession can result in overcapitalization.
- Acquisition of Unproductive Assets: Companies may acquire unproductive assets that do not generate sufficient returns, leading to overcapitalization.
- Insufficient Dividend Payments: If a company does not pay sufficient dividends to its shareholders, it may result in a higher capital base than necessary.
- Tax Incentives: In some cases, companies may take advantage of tax incentives or subsidies, resulting in overcapitalization.
In conclusion, overcapitalization can occur due to various factors such as overestimation of capital needs, overoptimistic projections, overvaluation of assets, inefficient use of funds, decline in demand, economic factors, acquisition of unproductive assets, insufficient dividend payments, and tax incentives. Companies should carefully manage their capital needs and ensure that they invest in productive assets that generate sufficient returns to avoid overcapitalization.
Q.3. Write short notes on:
(a)Debt-equity Ratio
The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of shareholders‘ equity and debt used to finance a company’s assets. Closely related to leveraging, the ratio is also known as risk, gearing or leverage.
Debt to Equity Ratio = Total Liabilities/Total Stockholders’ Equity
It measures how much of total assets is financed by the debt.
(b)Over-Trading
Over-trading arises only when the capital employed is inadequate in comparison with the volume of business.
In other words, it is an expansion of sales without adequate support from the capital. That is to say, the company with limited resources tries to increase the volume of business which, ultimately, suffers from acute shortage of liquid funds.
This results in a Low Proprietary Ratio, Low Current Ratio and Liquid Ratio with inadequate working capital. Under this condition, the company does not maintain the adequate level of inventories and, as a result, it has to depend on regular supplies. On the other hand, payments of expenses (Wages, Salaries etc..) and Creditors including taxes cannot be made in the time since there is a serious shortage of cash.
Whether or not the company is over-trading can easily be known after analysing certain ratios, viz., Current Ratio, Liquid Ratio, Debtor’s Turnover Ratio, and
Inventory Turnover Ratio etc.. In the case of over-trading, however, the Current Ratio and Liquid Ratio will be lower than their standard of normal ratios but the turnover ratios will be higher than their standard of normal ratios.
(c) Any two financial statements
An income statement is also called for profit and loss account, which reflects the operational position of the firm during a particular period. Normally it consists of one accounting year. It determines the entire operational performance of the concern like total revenue generated and expenses incurred for earning that revenue.
Income statement helps to ascertain the gross profit and net profit of the concern. Gross profit is determined by preparation of trading or manufacturing a/c and net profit is determined by preparation of profit and loss account.
Position statement is also called a balance sheet, which reflects the financial position of the firm at the end of the financial year.
Position statement helps to ascertain and understand the total assets, liabilities and capital of the firm. One can understand the strength and weakness of the concern with the help of the position statement.
OR
Evaluate the following as a form of financing:
(a)Equity shares
Equity Shares also are known as ordinary shares, which means, other than preference shares.
Equity shareholders are the real owners of the company. They have a control over the management of the company. Equity shareholders are eligible to get the dividend if the company earns a profit. Equity share capital cannot be redeemed during the lifetime of the company.
The liability of the equity shareholders is the value of the unpaid value of shares.
Features of Equity Shares
Equity shares consist of the following important features:
1. Maturity of the shares: Equity shares have permanent nature of capital, which has no maturity period. It cannot be redeemed during the lifetime of the company.
2. Residual claim on income: Equity shareholders have the right to get income left after paying fixed rate of dividend to preference shareholder. The earnings or the income available to the shareholders is equal to the profit after tax minus preference dividend.
3. Residual claims on assets: If the company wound up, the ordinary or equity shareholders have the right to get the claims on assets. These rights are only available to the equity shareholders.
4. Right to control: Equity shareholders are the real owners of the company. Hence, they have power to control the management of the company and they have power to take any decision regarding the business operation.
5. Voting rights: Equity shareholders have voting rights in the meeting of the company with the help of voting right power; they can change or remove any decision of the business concern. Equity shareholders only have voting rights in the company meeting and also they can nominate a proxy to participate and vote in the meeting instead of the shareholder.
6. Pre-emptive right: Equity shareholder pre-emptive rights. The pre-emptive right is the legal right of the existing shareholders. It is attested by the company in the first opportunity to purchase additional equity shares in proportion to their
current holding capacity.
7. Limited liability: Equity shareholders are having only limited liability to the value of shares they have purchased. If the shareholders are having fully paid up shares, they have no liability. For example: If the shareholder purchased 100 shares with the face value of Rs. 10 each. He paid only Rs. 900. His liability is only Rs. 100.
Total number of shares 100
Face value of shares Rs. 10
Total value of shares 100 × 10 = 1,000
Paid up value of shares 900
Unpaid value/liability 100
Liability of the shareholders is only unpaid value of the share (that is Rs. 100).
(b)Preference share
The parts of corporate securities are called as preference shares. It is the shares, which have preferential right to get a dividend and get back the initial investment at the time of winding up of the company. Preference shareholders are eligible to get fixed rate of dividend and they do not have voting rights.
Features of Preference Shares
The following are the important features of the preference shares:
1. Maturity period: Normally preference shares have no fixed maturity period except in the case of redeemable preference shares. Preference shares can be redeemable only at the time of the company liquidation.
2. Residual claims on income: Preferential shareholders have a residual claim on income. Fixed rate of dividend is payable to the preference shareholders.
3. Residual claims on assets: The first preference is given to the preference shareholders at the time of liquidation. If any extra Assets are available that should be distributed to equity shareholder.
4. Control of Management: Preference shareholder does not have any voting rights. Hence, they cannot have control over the management of the company.
(c)Debenture
A Debenture is a document issued by the company. It is a certificate issued by the company under its seal acknowledging a debt.
According to the Companies Act 1956, “debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge of the assets of the company or not.”
Features of Debentures
1. Maturity period: Debentures consist of the long-term fixed maturity period. Normally, debentures consist of 10–20 years maturity period and are repayable with the principal investment at the end of the maturity period.
2. Residual claims in income: Debenture holders are eligible to get a fixed rate of interest at every end of the accounting period. Debenture holders have priority of claim in income of the company over equity and preference shareholders.
3. Residual claims on asset: Debenture holders have priority of claims on Assets of the company over equity and preference shareholders. The Debenture holders may have either specific change on the Assets or floating change of the assets of the company. Specific change of Debenture holders are treated as secured creditors and floating change of Debenture holders are treated as unsecured creditors.
4. No voting rights: Debenture holders are considered as creditors of the company.
Hence they have no voting rights. Debenture holders cannot have the control over the performance of the business concern.
5. Fixed rate of interest: Debentures yield a fixed rate of interest till the maturity period. Hence the business will not affect the yield of the debenture.
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
Q.4. Write short notes on:
(a)Deferred Revenue Expenditure
Deferred revenue expenditure refers to an expense that is incurred in one accounting period but is not fully recognized as an expense until a later period. These expenses are usually capitalized and amortized over several accounting periods. Examples of deferred revenue expenditures include expenses incurred for research and development, advertising, and promotional activities.
Example
Example: A company spent INR 1,00,000 on advertising for a new product launch. Since the benefits of the advertising campaign will be spread over several years, the expenditure is capitalized and amortized over the next five years at a rate of INR 20,000 per year.
(b)Pay Back Period Method
Payback period method is a technique used to evaluate the time required to recover the initial investment in a project. It is calculated by dividing the initial investment by the expected annual cash flows from the project. The payback period is useful in determining the liquidity of a project, and shorter payback periods are generally preferred.
Example: A company invests INR 1,00,000 in a new project and expects to generate cash flows of INR 30,000 per year. The payback period is calculated as INR 1,00,000 ÷ INR 30,000 = 3.33 years, which means that it will take approximately 3 years and 4 months to recover the initial investment.
(c)Net Working Capital
Net working capital is the difference between a company’s current assets and current liabilities. It represents the amount of capital that a company has available to fund its day-to-day operations. Positive net working capital is generally seen as a sign of financial strength, while negative net working capital may indicate liquidity issues.
Example: A company has current assets of INR 5,00,000 and current liabilities of INR 3,00,000. The net working capital is calculated as INR 5,00,000 – INR 3,00,000 = INR 2,00,000, which means that the company has INR 2,00,000 available to fund its day-to-day operations.
(d)Net Present Value Method
The net present value method is a technique used to evaluate the profitability of a project by comparing the present value of the expected cash inflows to the present value of the expected cash outflows. If the net present value is positive, the project is expected to be profitable, while a negative net present value indicates that the project is not expected to be profitable. This method takes into account the time value of money and is widely used in investment analysis.
Example: A company is considering a new project that requires an initial investment of INR 2,00,000. The expected cash flows from the project are INR 50,000 per year for the next five years. The discount rate is 10%. The net present value is calculated as follows: Year 1: INR 45,455 Year 2: INR 41,323 Year 3: INR 37,567 Year 4: INR 34,153 Year 5: INR 31,049 Total: INR 1,89,547 Since the net present value is positive, the project is expected to be profitable.
Q.5. From the following Balance Sheets of Arora Co. Ltd. for the period 31st March 2009 and 31st March 2010, prepare a schedule of changes in Working Capital and Funds Flow Statement:
BALANCE SHEET AS ON 31ST MARCH
Liabilities |
2009 Amount in ₹ |
2010 Amount in ₹ |
Assets |
2009 Amount in ₹ |
2010 Amount in ₹ |
Share capital |
3,00,000/- |
4,00,000/- |
Plant |
95,000/- |
90,000/- |
Sundry Creditors |
60,000/- |
30,000/- |
Furniture |
20,000/- |
40,000/- |
Bills Payable |
40,000/- |
70,000/- |
Equipment |
– |
70,000/- |
Debtors |
1,60,000/- |
1,50,000/- |
|||
Stock |
1,25,000/- |
1,50,000/- |
|||
TOTAL |
4,00,000/- |
5,00,000/- |
TOTAL |
4,00,000/- |
5,00,000/- |
Schedule of Changes in Working Capital:
Particulars |
Amount in ` (2010) |
Amount in ` (2009) |
Change in ` |
|---|---|---|---|
Current Assets: |
|||
Debtors |
1,50,000/- |
1,60,000/- |
-10,000/- |
Stock |
1,50,000/- |
1,25,000/- |
25,000/- |
Total Current Assets |
3,00,000/- |
2,85,000/- |
15,000/- |
Current Liabilities: |
|||
Sundry Creditors |
30,000/- |
60,000/- |
30,000/- |
Bills Payable |
70,000/- |
40,000/- |
-30,000/- |
Total Current Liabilities |
1,00,000/- |
1,00,000/- |
0/- |
Net Change in Working Capital |
2,00,000/- |
1,85,000/- |
15,000/- |
Funds Flow Statement:
| Sources of Funds | Amount in ` |
|---|---|
| Share capital | 1,00,000/- |
| Increase in Long-Term Loans | 70,000/- |
| Total Sources of Funds | 1,70,000/- |
| Application of Funds | Amount in ` |
|---|---|
| Purchase of Plant | 5,000/- |
| Purchase of Furniture | 20,000/- |
| Purchase of Equipment | 70,000/- |
| Increase in Working Capital | 15,000/- |
| Total Application of Funds | 1,10,000/- |
Increase in Cash Balance: (60,000/-)
Explanation: The sources of funds amount to INR 1,70,000, which include an increase in share capital and long-term loans. The application of funds amount to INR 1,10,000, which include the purchase of plant, furniture, and equipment, as well as an increase in working capital. The increase in working capital is INR 15,000, as calculated in the schedule of changes in working capital. This results in a decrease in cash balance of INR 60,000.
Q.6. There are two projects A & B. Each project requires an investment of ₹2,00,000/-. Rank these projects according to the ‘Pay Back Period’ method on the basis of the following information:
PROFIT/ INFLOWS OF CASH
|
Years |
Project A in ₹ |
Project B in ₹ |
|
1 |
10,000 |
20,000 |
|
2 |
20,000 |
40,000 |
|
3 |
40,000 |
60,000 |
|
4 |
50,000 |
80,000 |
|
5 |
80,000 |
Years |
Project A (₹) |
Cumulative Cash in flow |
Project B (₹) |
Cumulative Cash inflow |
1 |
10,000 |
10,000 |
20,000 |
20,000 |
2 |
20,000 |
30,000 |
40,000 |
60,000 |
3 |
40,000 |
70,000 |
60,000 |
1,20,000 |
4 |
50,000 |
12,0000 |
80,000 |
2,00,000 |
5 |
80,000 |
2,00,000 |
——- |
——– |
Pay Back Period = Initial Investment/ Annual Cash Inflow
Project A= Initial Investment is ₹2,00,000 i.e, Paid back after 5 years.
Project B= Initial Investment is ₹2,00,000 i.e, Paid back after 4 years.
Therefore, Project B is considered 1st and Project A as 2nd.
Q.7. State True or False:
(a) Gross profit is sales minus cost of goods sold.
(a) True: Gross profit is calculated by subtracting the cost of goods sold from sales revenue. It represents the profit a company makes after deducting the cost of producing and selling its products or services.
(b) Working capital is the difference between current assets minus current liabilities.
(b) True: Working capital is the difference between current assets and current liabilities. It represents the amount of cash available to a business to fund its day-to-day operations.
(c) Average Stock is calculated: Opening Stock plus closing stock /2
(c) True: Average stock is calculated by adding the opening and closing stock levels and dividing the sum by two. This is useful in determining the average level of inventory held by a company during a given period.
(d) Equity share capital is also known as risk capital.
(d) True: Equity share capital represents the funds raised by a company by issuing equity shares to investors. Since equity shares do not come with a fixed rate of return, they are considered risk capital.
(e) Retaining of huge cash balances is a sound policy.
(e) False: Retaining huge cash balances may not be a sound policy for a company as it represents idle money that could be invested in more productive assets or used to pay off debt. Holding large cash balances can also reduce profitability by increasing the cost of capital. A company should aim to maintain an optimal cash balance that balances liquidity needs with the opportunity cost of holding cash.
Q.8. Following are the Balance Sheets of a concern for the years 2000 and 2001. Prepare a comparative balance sheet and study/report on the financial position of the concern:
Liabilities |
2000 Amount in ₹ |
2001 Amount in ₹ |
Assets |
2000 Amount in ₹ |
2001 Amount in ₹ |
Share capital |
6,00,000/- |
8,00,000/- |
Land & Building |
3,70,000/- |
2,70,000/- |
Reserves & Surplus |
3,30,000/- |
2,22,000/- |
Plant |
4,00,000/- |
6,00,000/- |
Debentures |
2,00,000/- |
3,00,000/- |
Furniture |
20,000/- |
25,000/- |
Loan |
1,50,000/- |
2,00,000/- |
Other fixed assets |
25,000/- |
30,000/- |
Bills Payable |
50,000/- |
45,000/- |
Cash & Bank |
20,000/- |
80,000/- |
Sundry Creditors |
1,00,000/- |
1,20,000/- |
Bills Receivable |
1,50,000/- |
90,000/- |
Current Liabilities |
6,000/- |
10,000/- |
Sundry Debtors |
2,00,000/- |
2,50,000/- |
Stock |
2,50,000/- |
3,50,000/- |
|||
Pre-paid expenses |
1,000/- |
2,000/- |
|||
TOTAL |
14,36,000/- |
16,97,000/- |
TOTAL |
14,36,000/- |
16,97,000/- |
Comparative Balance Sheet for the years 2000 and 2001:
Liabilities |
2000 (Amount in `) |
2001 (Amount in `) |
Change (+/-) |
|---|---|---|---|
Share capital |
6,00,000 |
8,00,000 |
+2,00,000 |
Reserves & Surplus |
3,30,000 |
2,22,000 |
-1,08,000 |
Debentures |
2,00,000 |
3,00,000 |
+1,00,000 |
Loan |
1,50,000 |
2,00,000 |
+50,000 |
Bills Payable |
50,000 |
45,000 |
-5,000 |
Sundry Creditors |
1,00,000 |
1,20,000 |
+20,000 |
Current Liabilities |
6,000 |
10,000 |
+4,000 |
Total Liabilities |
14,36,000 |
16,97,000 |
+2,61,000 |
Assets |
2000 (Amount in `) |
2001 (Amount in `) |
Change (+/-) |
|---|---|---|---|
Land & Building |
3,70,000 |
2,70,000 |
-1,00,000 |
Plant |
4,00,000 |
6,00,000 |
+2,00,000 |
Furniture |
20,000 |
25,000 |
+5,000 |
Other fixed assets |
25,000 |
30,000 |
+5,000 |
Cash & Bank |
20,000 |
80,000 |
+60,000 |
Bills Receivable |
1,50,000 |
90,000 |
-60,000 |
Sundry Debtors |
2,00,000 |
2,50,000 |
+50,000 |
Stock |
2,50,000 |
3,50,000 |
+1,00,000 |
Pre-paid expenses |
1,000 |
2,000 |
+1,000 |
Total Assets |
14,36,000 |
16,97,000 |
+2,61,000 |
OR
Rank the following projects in the order of their desirability according to the Net Present Value Method:
Project |
Year 1 – ₹ |
Year 2 – ₹ |
Year 3 – ₹ |
Year 4 – ₹ |
Year 5 – ₹ |
A |
5000 |
10000 |
10000 |
3000 |
2000 |
B |
20000 |
10000 |
5000 |
3000 |
2000 |
Year1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
0.909 |
0.826 |
0.751 |
0.683 |
0.621 |
Initial investment:
Project A – ₹20000
Project B – ₹30000
Discount rate 10%
Present value ₹1/- @10% (discount factor) using present value tables:
For Project A
Initial Investment = Rs 20,000/-
Year |
Discount Factor |
Return |
Net Present Value |
1 |
0.909 |
5,000 |
4545 |
2 |
0.826 |
10,000 |
8260 |
3 |
0.751 |
10,000 |
7510 |
4 |
0.683 |
3,000 |
2049 |
5 |
0.621 |
2,000 |
1242 |
Total |
30,000 |
23606 |
Present Value of Return= 23,606/-
Return on Investment = (23,606 – 20,000) / 20,000
= 3,606 / 20,000 = 0.18
= 18%
For Project B
Initial Investment = Rs. 30,000/-
Year |
Discount Factor |
Return |
Net Present Value |
1 |
0.909 |
20,000 |
18180 |
2 |
0.826 |
10,000 |
8260 |
3 |
0.751 |
5,000 |
3755 |
4 |
0.683 |
3,000 |
2049 |
5 |
0.621 |
2,000 |
1242 |
Total |
40,000 |
33486 |
Present Value of Return = 33,486/-
Return on Investment = (33,486 – 30,000) / 30,000
= 0.11
= 18%
In the order of their desirability
1st – Project B (As its giving 18% ROI)
2nd – Project A (As its giving 11% ROI)
Q.9. Distinguish between Fund Flow Statement and Cash Flow Statement.
|
Funds Flow Statement |
Cash Flow Statement |
|
1. Funds flow statement is the report on the movement of funds or working capital |
1. Cash flow statement is the report showing sources and uses of cash. |
|
2. Funds flow statement explains how working capital is raised and used during the particular |
2. Cash flow statement explains the inflow and outflow of cash during the particular period. |
|
3. The main objective of fund flow statement is to show the how the resources have been balanced mobilised and used. |
3. The main objective of the cash flow statement is to show the causes of changes in cash between two balance sheet dates. |
|
4. Funds flow statement indicates the results of current financial management. |
4. Cash flow statement indicates the factors contributing to the reduction of the cash balance in spite of the increase in profit and vice-versa. |
|
5. In a funds flow statement increase or decrease in working capital is recorded. |
5. In a cash flow statement, only cash receipt and payments are recorded. |
|
6. In funds flow statement there is no opening and closing balances. |
6. Cash flow statement starts with opening cash balance and ends with closing cash balance. |
Q.10. Following is the Profit & Loss Account of M/s. Arbaz Hotel Ltd. for the period ending 31.03.2010. Calculate:
(a) Gross profit ratio (b) Net profit ratio (c) Operating ratio (d) Administrative expenses ratio
|
Debit |
Amount in ₹ |
Credit |
Amount in ₹ |
|
To opening stock |
1,00,000/- |
By sales |
5,60,000/- |
|
To Purchases |
3,50,000/- |
By closing stock |
1,00,000/- |
|
To Wages |
9,000/- |
||
|
To gross profit |
2,01,000/- |
||
|
TOTAL |
6,60,000/- |
TOTAL |
6,60,000/- |
|
To Administrative expenses |
20,000/- |
By gross profit |
2,01,000/- |
|
To Selling & Marketing expenses |
89,000/- |
By interest (outside business) |
10,000/- |
|
To Non-operating expenses |
30,000/- |
By Profit on sale on investment |
8,000/- |
|
To Net Profit |
80,000/- |
||
|
TOTAL: |
2,19,000/- |
TOTAL: |
2,19,000/- |
From the given Profit and Loss account
Administrative Expenses= 20,000/-
Gross Profit= 201,000/-
Net Profit= 80,000/-
Operating Expenses= Administrative expenses + Sales & Marketing Expenses = 20,000 + 89,000 = 109,000/-
Operating Profit i.e EBIT = Gross Profit – Operating Expenses = 201,000 – 109,000 = 92,000/-
Total Sales= 5,60,000/-
Now As we know,
Gross Profit Ratio = Gross Profit / Net Sales = 201,000 / 5,60,000
= 201/560 = 0.358 = 35.8%
Net Profit Ratio = Net Profit / Total Sales = 80,000 / 5,60,000
= 8/56 = 1:7 = 0.14 = 14%
Operating Ratio = Operating Profit / Net Sale = 92,000 / 560,000
= 23:190 = 0.1642 = 16.42%
Administrative Expense Ratio = Administrative Expense / Net Sales = 20,000 / 560,000
= 1:28 = 0.03 = 3%