Financial Management | Solved Paper 2015-2016 | 5th Sem B.Sc HHA

Q.1. From the following Balance Sheet of M/s. XYZ Co. Ltd. for the period 31st March 2013 and 31st March 2014, you are required to prepare:

(i)  Statement of changes in the working capital

(ii)  Funds flow statement

Liabilities	31.03.2013 Rs.	31.03.2014 Rs.	Assets	31.03.2013 Rs.	31.03.2014 Rs.
Share capital	4,00,000/-	5,00,000/-	Land & Building	1,50,000/-	1,60,000/-
Creditors	1,00,000/-	65,000/-	Furniture	40,000/-	45,000/-
Profit & Loss A/c	40,000/-	60,000/-	Stock	80,000/-	1,10,000/-
			Debtors	70,000/-	60,000/-
			Cash/Bank	2,00,000/-	2,50,000/-
Total	5,40,000/-	6,25,000/-	Total	5,40,000/-	6,25,000/-

 

Statement of changes in the working capital

PARTICULARS	31ST MARCH		CHANGE IN  WORKING CAPITAL
	2013 (₹)	2014 (₹)	INCREASE(₹)	DECREASE(₹)
Current Assets
Stock	80,000/-	1,10,000/-	30,000/-	——
Debtors	70,000/-	60,000/-	——	10,000/-
Cash/Bank	2,00,000/-	2,50,000/-	50,000/-	——
Total                      (A)	3,50,000/-	4,20,000/-
Current Liabilities
Creditors	1,00,000/-	65,000/-	35,000/-	——-
Total                     (B)	1,00,000/-	65,000/-
Net Working Capital    (A-B)	2,50,000/-	3,55,000/-
Net Increase in working capital	1,05,000/-			1,05,000/-
	3,50,000/-	3,55,000/-	1,15,000/-	1,15,000/-

 

Fund flow statement-

Statement of Sources and  Application of funds of  the year
Sources	(₹)	Applications	(₹)
Share Capital	1,00,000	Purchase of  Land & Building	10,000
Funds from Operation	20,000	Purchase of Furniture	5,000
		Increase in working capital	1,05,000
Total	1,20,000	Total	1,20,000

Working Notes:
1.Computation of the Cash Received and Cash Spent

Sources of Fund
	2014	2013	Cash Received  (₹)
Share Capital	5,00,000	4,00,000	1,00,000
Profit & Loss A/c	60,000	40,000	20,000
Application of funds
	2014	2013	Cash Spent  (₹)
Land & Building	1,60,000	1,50,000	10,000
Furniture	45,000	40,000	5,000

 

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Q.2. What are the different sources of raising finance for a large organisation?

Sources of finance mean the ways for mobilizing various terms of finance to the industrial concern. Sources of finance state that, how the companies are mobilizing finance for their requirements. The companies belong to the existing or the new which need sum amount of finance to meet the long-term and short-term requirements such as purchasing of fixed assets, construction of office building, purchase of raw materials and day-to-day expenses. Sources of finance may be classified under various categories according to the following important heads:

1. Based on the Period

Sources of Finance may be classified under various categories based on the period.
Long-term sources: Finance may be mobilized by long-term or short-term. When the finance mobilized with large amount and the repayable over the period will be more than five years, it may be considered as long-term sources. Share capital,
issue of a debenture, long-term loans from financial institutions and commercial banks come under this kind of source of finance. Long-term source of finance needs to meet the capital expenditure of the firms such as purchase of fixed assets, land and buildings, etc.
Long-term sources of finance include:
● Equity Shares
● Preference Shares
● Debenture
● Long-term Loans
● Fixed Deposits
Short-term sources: Apart from the long-term source of finance, firms can generate finance with the help of short-term sources like loans and advances from commercial banks, moneylenders, etc. Short-term source of finance needs to meet the operational expenditure of the business concern.
Short-term source of finance include:
● Bank Credit
● Customer Advances
● Trade Credit
● Factoring
● Public Deposits
● Money Market Instruments

2. Based on Ownership

Sources of Finance may be classified under various categories based on the period:
An ownership source of finance include
● Shares capital, earnings
● Retained earnings
● Surplus and Profits
Borrowed capital include
● Debenture
● Bonds
● Public deposits
● Loans from Bank and Financial Institutions.

3. Based on Sources of Generation

Sources of Finance may be classified into various categories based on the period.
Internal source of finance includes
● Retained earnings
● Depreciation funds
● Surplus
External sources of finance may be include
● Share capital
● Debenture
● Public deposits
● Loans from Banks and Financial institutions

4. Based in Mode of Finance

Security finance may be include
● Shares capital
● Debenture
Retained earnings may include
● Retained earnings
● Depreciation funds
Loan finance may include
● Long-term loans from Financial Institutions
● Short-term loans from Commercial banks.
The above classifications are based on the nature and how the finance is mobilized
from various sources. But the above sources of finance can be divided into three major
classifications:
● Security Finance
● Internal Finance

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OR

What are the different financial statements which are usually prepared by the business organisation?

Financial Statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance and liquidity of a company. Financial Statements reflect the financial effects of business transactions and events on the entity.

Five Types of Financial Statements

The five main types of financial statements are:

Statement of Financial Position 

Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an entity at a given date. It is comprised of the following three elements:

• Assets:Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)
• Liabilities:Something a business owes to someone (e.g. creditors, bank loans, etc)
• Equity:What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.

Income Statement 

Income Statement, also known as the Profit and Loss Statement, reports the company’s financial performance in terms of net profit or loss over a specified period. Income Statement is composed of the following two elements:

• Income:What the business has earned over a period (e.g. sales revenue, dividend income, etc)
• Expense:The cost incurred by the business over a period (e.g. salaries and wages, depreciation, rental charges, etc)

Cash Flow Statement 

Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in cash flows is classified into the following segments:

• Operating Activities: Represents the cash flow from primary activities of a business.
• Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories (e.g. purchase of a factory plant)
• Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and debt together with the payments of interest and dividends.

Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the movement in owners’ equity over a period. The movement in owners’ equity is derived from the following components:

• Net Profit or loss during the period as reported in theincome statement
• Share capital issued or repaid during the period
• Dividend payments
• Gains or losses recognized directly in equity (e.g. revaluation surpluses)
• Effects of achange in accounting policy or correction of accounting error.

     Fund Flow Statement

The fund flow statement, also known as the Application of Funds and Statement of Sources, is a statement designed to analyse changes in the financial position of enterprises. This statement will include the following components to show the sources of funds received and their expenditures:

• Application of funds: how the funds have been utilised by the organisation
• Sources of funds: how the funds have been incurred by the organisation.

 

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Q.3.  What do you understand by capital budgeting? What is its practical utility for a large hotel?

Capital budgeting is the process of evaluating and selecting long-term investment opportunities that are in line with the company’s strategic goals and objectives. It involves identifying potential investment opportunities, estimating their cash flows, assessing their risk, and selecting the projects that provide the highest returns for the company.

The practical utility of capital budgeting for a large hotel is significant. A large hotel typically has a range of investment opportunities, including building new facilities, renovating existing ones, purchasing new equipment, and developing new services. The capital budgeting process enables the hotel to evaluate and prioritize these opportunities based on their potential return on investment.

Some of the practical applications of capital budgeting for a large hotel are:

1. Identifying investment opportunities: The capital budgeting process enables the hotel to identify potential investment opportunities that are aligned with its strategic objectives. For instance, a hotel may decide to invest in new facilities in order to attract more customers and increase revenue.
2. Estimating cash flows: The hotel can estimate the expected cash flows from each investment opportunity. This involves projecting the revenue and costs associated with each project.
3. Assessing risk: The hotel can assess the risk associated with each investment opportunity. This involves considering factors such as market conditions, competition, and economic trends.
4. Selecting projects: The hotel can select the investment opportunities that provide the highest return on investment. This involves comparing the expected cash flows and risk associated with each project.
5. Allocating resources: Capital budgeting enables the hotel to allocate its resources efficiently. By selecting the most profitable projects, the hotel can optimize its use of resources and maximize its returns.

In conclusion, capital budgeting is a crucial process for a large hotel as it enables the hotel to evaluate and select the most profitable investment opportunities. By using this process, the hotel can ensure that its resources are allocated efficiently and that it achieves its strategic objectives.

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OR

“Return on investments is considered to be the master ratio which reflects the overall performance of a company‟. Explain.

Return on investment (ROI) is a financial ratio that measures the efficiency and profitability of a company’s investment. It is considered to be the master ratio because it reflects the overall performance of a company. ROI measures how much profit or return an investment generates relative to its cost. In other words, it indicates how effectively a company is using its resources to generate profits.

ROI is calculated as the ratio of net income to investment cost. Net income is the income earned after deducting all expenses and taxes, while the investment cost is the amount of money invested in a particular project or venture. A high ROI indicates that the investment is profitable and generating significant returns, while a low ROI indicates that the investment is not generating sufficient returns.

ROI is an important metric for investors, shareholders, and management, as it provides insights into the profitability and effectiveness of a company’s operations. A high ROI indicates that the company is generating significant profits from its investments, while a low ROI indicates that the company is not using its resources effectively and efficiently.

ROI can also be used to compare the performance of different companies in the same industry or sector. For example, a company with a higher ROI than its competitors is considered to be more efficient and profitable. This can be an important factor for investors when making investment decisions.

In addition to measuring overall performance, ROI can also be used to evaluate specific investment projects. By comparing the expected ROI of different projects, a company can determine which projects are most profitable and which ones should be prioritized.

In the context of a large hotel, ROI can be used to evaluate various investments such as expansion projects, marketing campaigns, or the purchase of new equipment. For example, if a hotel is considering investing in a new marketing campaign, it can use ROI to determine the potential profitability of the campaign. By calculating the expected ROI of the campaign, the hotel can make an informed decision about whether to invest in the campaign or allocate resources elsewhere.

Overall, ROI is a powerful tool for evaluating the profitability and effectiveness of a company’s investments. It provides valuable insights into a company’s financial performance and can be used to guide investment decisions and prioritize resources.

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Q.4. Define financial management. What are the main objectives of financial management? Explain.

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Q.5. “Ratio analysis is a tool to examine the health of a business with a view to make financial results more intelligible”. Explain.

Ratio analysis is a powerful tool used by businesses to evaluate their financial performance. It involves the calculation and interpretation of financial ratios, which are mathematical relationships between two or more financial variables. Ratio analysis can help businesses to understand the strengths and weaknesses of their financial position, and to make more informed decisions about their operations.

Some of the key benefits of ratio analysis include:

1. Better understanding of financial performance: Ratio analysis can help businesses to better understand their financial performance by comparing financial data from different periods or against industry benchmarks.
2. Identification of strengths and weaknesses: By examining ratios, businesses can identify areas where they are performing well and areas where they may need to make improvements.
3. Facilitation of decision making: Ratio analysis can provide businesses with valuable information that can be used to make more informed decisions about operations, such as whether to expand, invest in new technology, or cut costs.
4. Improved communication: Ratios can be used to communicate financial information to stakeholders, including investors, creditors, and managers.

Some of the key ratios that businesses may use in ratio analysis include:

1. Liquidity ratios: These ratios measure a business’s ability to meet its short-term financial obligations. Examples include the current ratio and the quick ratio.
2. Profitability ratios: These ratios measure a business’s ability to generate profits from its operations. Examples include the net profit margin and return on equity.
3. Efficiency ratios: These ratios measure a business’s ability to manage its assets and liabilities effectively. Examples include inventory turnover and accounts receivable turnover.

In conclusion, ratio analysis is a valuable tool for businesses looking to improve their financial performance. It helps to identify areas where the business is doing well, and areas where improvements need to be made. By understanding the key ratios used in ratio analysis, businesses can make more informed decisions about their operations, and communicate their financial performance to stakeholders.

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OR Write short notes on any two:

1. Over-capitalisation

Over-capitalisation refers to a situation where a company raises more capital than it needs to finance its operations or expand its business. In other words, the company’s actual capital requirement is less than the amount of capital it has raised. This can lead to a number of problems such as lower profitability, low return on investment, and lower dividends. Over-capitalisation can be caused by factors such as excessive borrowing, overvaluation of assets, or high issuance of equity shares. To avoid over-capitalisation, companies should raise only the amount of capital they need and utilize it efficiently to generate maximum returns.

2. Net present value method

Net present value (NPV) is a method used in capital budgeting to determine the profitability of an investment. It compares the present value of cash inflows to the present value of cash outflows, considering the time value of money. The NPV method calculates the net present value of an investment by subtracting the initial investment cost from the present value of expected future cash flows. If the net present value is positive, it means that the investment is expected to generate a profit and should be considered, while a negative net present value indicates that the investment will likely result in a loss. The NPV method is widely used in business to evaluate investment opportunities, and is preferred over other methods such as the payback period and internal rate of return because it considers the time value of money.

3. Balance sheet

A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. A liquidity format balance sheet emphasizes a company’s liquidity or its ability to meet its short-term financial obligations. It presents assets and liabilities in order of liquidity, with the most liquid assets and current liabilities listed first. The liquidity format balance sheet helps analysts and investors assess a company’s short-term financial position and its ability to meet its obligations. It also provides insight into a company’s working capital management and cash flow. The liquidity format balance sheet is particularly useful for short-term creditors, such as suppliers and lenders, who want to evaluate a company’s ability to repay debts in the short-term.

4. Distinguish between funds flow and cash flow

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 an 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.

 

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Q.6. From the following data, calculate the “Net Present Value” of two projects viz. X&Y and suggest which of the two projects should be accepted assuming a discount rate of 10%:

Sl. No.	Particulars	Project X (Rs.)	Project Y (Rs.)
01	Initial Investment	50,000/-	60,000/-
2	Estimated Life	5 years	5 years
3	Scrap Value	1,000/-	2,000/-

The profits before depreciation and after taxes (cash flows) are as follows:

Present value at 10% of Re.1/- is as under

Project	Year 1	Year 2	Year 3	Year 4	Year 5
X	10,000/-	15,000/-	10,000/-	15,000/-	10,000/-
Y	10,000/-	15,000/-	15,000/-	20,000/-	15,000/-

Year	1	2	3	4	5
Present value at 10% Re.1/-	0.909	0.826	0.751	0.683	0.621

 

To calculate the net present value of projects X and Y, we need to first calculate the present value of the cash flows for each year for both projects, using the given discount rate of 10% and the table of present values:

Project X: Year 1: 10,000 x 0.909 = 9,090 Year 2: 15,000 x 0.826 = 12,390 Year 3: 10,000 x 0.751 = 7,510 Year 4: 15,000 x 0.683 = 10,245 Year 5: 10,000 + 1,000 x 0.621 = 6,810

Total present value of cash flows for Project X = 45,045

Project Y: Year 1: 10,000 x 0.909 = 9,090 Year 2: 15,000 x 0.826 = 12,390 Year 3: 15,000 x 0.751 = 11,265 Year 4: 20,000 x 0.683 = 13,660 Year 5: 15,000 + 2,000 x 0.621 = 11,842

Total present value of cash flows for Project Y = 58,247

To calculate the net present value, we need to subtract the initial investment from the total present value of cash flows:

For Project X: Net present value = 45,045 – 50,000 = -4,955

For Project Y: Net present value = 58,247 – 60,000 = -1,753

Since both projects have negative net present values, neither project should be accepted at the given discount rate of 10%.

 

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Q.7. From the Balance Sheets of M/s. XYZ Hotel, you are required to prepare cash flow statement:

Liabilities	As on 31.03.2014 Rs.	As on 31.03.2015 Rs.	Assets	As on 31.03.2014 Rs.	As on 31.03.2015 Rs.
Share capital	50,000/-	70,000/-	Cash	10,000/-	5,000/-
Debentures	30,000/-	20,000/-	Debtors	15,000/-	20,000/-
Sundry Creditors	15,000/-	20,000/-	Stock	50,000/-	40,000/-
Bills Payable	5,000/-	10,000/-	Building	20,000/-	35,000/-
Profit & Loss A/c	20,000/-	25,000/-	Furniture	15,000/-	35,000/-
			Goodwill	10,000/-	10,000/-
Total	1,20,000/-	1,45,000/-	Total	1,20,000/-	1,45,000/-

 

Cash Flow Statement for M/s. XYZ Hotel for the year ended March 31, 2015

Year ended 31.03.2014	Year ended 31.03.2015
Cash flows from operating activities
Net profit before tax	–	25,000
Adjustments for:
Depreciation	5,000	20,000
Increase in debtors	5,000	-5,000
Decrease in stock	-10,000	10,000
Increase in sundry creditors	5,000	5,000
Net cash from operating activities	5,000	55,000
Cash flows from investing activities
Purchase of building	–	-15,000
Purchase of furniture	–	-20,000
Net cash used in investing activities	–	-35,000
Cash flows from financing activities
Issue of share capital	20,000	20,000
Repayment of debentures	–	10,000
Increase in bills payable	5,000	5,000
Net cash from financing activities	25,000	35,000
Net increase in cash and cash equivalents	30,000	55,000
Cash and cash equivalents at the beginning of the year	10,000	40,000
Cash and cash equivalents at the end of the year	40,000	95,000

 

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OR
Write short notes (any two):

A. Explain any two financial statements.

Financial statements are documents that provide information about the financial performance and position of a company. Two important financial statements are:

1. Balance sheet: A balance sheet is a snapshot of a company’s financial position at a specific point in time. It shows the company’s assets, liabilities, and equity. Assets are things that the company owns, such as cash, inventory, and property. Liabilities are the company’s debts, such as loans and accounts payable. Equity is the difference between assets and liabilities, and represents the value of the company that belongs to its owners.
2. Income statement: An income statement shows a company’s revenues, expenses, and net income over a period of time, such as a quarter or a year. Revenues are the money the company earns from its operations, while expenses are the costs it incurs to generate those revenues. Net income is the company’s profit after all expenses have been deducted from revenues.

B. Explain objective of profit maximisation

The objective of profit maximization is to maximize the profits of a company. This means that the company aims to generate as much profit as possible from its operations. Profit is the difference between revenues and expenses, so a company can maximize its profits by increasing revenues or decreasing expenses. The idea behind profit maximization is that the more profit a company generates, the more value it creates for its shareholders.

However, profit maximization is not always the best objective for a company. For example, if a company focuses too much on maximizing its profits, it may neglect other important factors such as employee satisfaction, customer loyalty, and environmental responsibility. Therefore, companies often have multiple objectives, such as maximizing long-term shareholder value, while also taking into account the needs of other stakeholders.

C. Deferred Revenue Expenditure (with examples)

Deferred revenue expenditure refers to a cost that is incurred in the present but is expected to provide benefits over multiple accounting periods. Instead of recognizing the full cost as an expense in the current period, the cost is spread out over the periods during which the benefits are expected to be received. Examples of deferred revenue expenditure include:

1. Advertisement costs: A company may spend a large amount on advertising campaigns, but the benefits of the advertising may last for several years. The cost of the advertising can be spread out over the expected life of the campaign.
2. Research and development costs: A company may invest in research and development projects that will benefit the company for many years to come. The cost of these projects can be deferred and recognized over the expected life of the resulting products or processes.

By deferring the recognition of these costs, a company can match the expenses with the revenues they generate, which provides a more accurate picture of the company’s financial performance over time.

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Q.8. BALANCE SHEET OF M/S. XYZ CO. LTD. AS ON 31.03.2015

Liabilities	Amount (Rs)	Assets	Amount (Rs.)
Equity Share Capital	3,00,000/-	Goodwill	70,000/-
10% Debenture	2,00,000/-	Machinery	2,50,000/-
Reserves & Surplus	50,000/-	Stock	1,50,000/-
Bills Payable	20,000/-	Prepaid Expenses	25,000/-
Creditors	1,30,000/-	Marketable Securities	1,25,000/-
Outstanding Expenses	15,000/-	Debtors	30,000/-
Bank Overdraft	50,000/-	Bills Receivable	25,000/-
Provision for taxes	10,000/-	Cash in Hand	30,000/-
		Cash at Bank	70,000/-
TOTAL:	7,75,000/-		7,75,000/-

Calculate:
(a) Current ratio

(b) Acid test ratio

(c) Debt equity ratio

(d) fixed assets to net worth ratio

(a) Current ratio = Current Assets / Current Liabilities

Current Assets = Stock + Prepaid Expenses + Marketable Securities + Debtors + Bills Receivable + Cash in Hand + Cash at Bank = 1,50,000 + 25,000 + 1,25,000 + 30,000 + 25,000 + 30,000 + 70,000 = 4,25,000

Current Liabilities = Bills Payable + Creditors + Outstanding Expenses + Bank Overdraft = 20,000 + 1,30,000 + 15,000 + 50,000 = 2,15,000

Current ratio = 4,25,000 / 2,15,000 = 1.98

(b) Acid test ratio = (Current Assets – Stock – Prepaid Expenses) / Current Liabilities

Acid test ratio = (1,25,000 + 30,000 + 25,000 + 30,000 + 70,000 – 1,50,000 – 25,000) / 2,15,000 = 2,05,000 / 2,15,000 = 0.95

(c) Debt Equity Ratio = Total Debt / Total Equity

Total Debt = 10% Debenture + Bills Payable + Creditors + Outstanding Expenses + Bank Overdraft + Provision for Taxes = 2,00,000 + 20,000 + 1,30,000 + 15,000 + 50,000 + 10,000 = 4,25,000

Total Equity = Equity Share Capital + Reserves & Surplus = 3,00,000 + 50,000 = 3,50,000

Debt Equity Ratio = 4,25,000 / 3,50,000 = 1.21

(d) Fixed Assets to Net Worth Ratio = Fixed Assets / Total Equity

Fixed Assets = Machinery = 2,50,000

Total Equity = Equity Share Capital + Reserves & Surplus = 3,00,000 + 50,000 = 3,50,000

Fixed Assets to Net Worth Ratio = 2,50,000 / 3,50,000 = 0.71

 

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OR

Define working capital. What factors would you take into account in estimating the working capital needs of a large organisation?

Working capital refers to the amount of cash or other liquid assets that a company has available to fund its day-to-day operations. It is a measure of a company’s short-term liquidity, and it is calculated by subtracting current liabilities from current assets. In simpler terms, it is the difference between a company’s current assets and current liabilities.

Estimating the working capital needs of a large organization can be a complex process, as it involves taking into account various factors that can impact the company’s cash flow and liquidity. Some of the factors that should be considered when estimating the working capital needs of a large organization include:

1. Nature of the business: The type of business and the industry it operates in can significantly affect its working capital needs. For example, a manufacturing company may have higher working capital needs than a service-oriented business, as it may require more inventory, raw materials, and equipment.
2. Sales volume and seasonality: Companies with high sales volumes or seasonal fluctuations in demand may require more working capital to fund their operations during peak periods. They may also need to maintain higher levels of inventory to meet customer demand.
3. Accounts receivable and payable: The length of time it takes for a company to collect payments from its customers (accounts receivable) and pay its suppliers (accounts payable) can affect its working capital needs. If a company has a long cash conversion cycle, it may require more working capital to bridge the gap between cash inflows and outflows.
4. Capital expenditures: Capital expenditures, such as investments in property, plant, and equipment, can impact a company’s working capital needs. These investments can tie up cash that could otherwise be used for day-to-day operations.
5. Financing arrangements: The financing arrangements a company has in place can also impact its working capital needs. For example, if a company relies heavily on short-term debt to fund its operations, it may need to maintain higher levels of working capital to meet its debt obligations.
6. Economic conditions: Economic conditions, such as inflation, interest rates, and currency fluctuations, can impact a company’s working capital needs. For example, rising interest rates can increase the cost of borrowing, which can impact a company’s cash flow and liquidity.

In summary, estimating the working capital needs of a large organization requires careful consideration of various factors that can impact its cash flow and liquidity. By analyzing these factors, a company can ensure that it has the necessary resources to fund its day-to-day operations and meet its financial obligations.

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Q.9. The Income statement of a concern are given below for the year ending 31.03.2013 and 31.03.2014. You are required to prepare comparative income statement:

Particulars	31.03.2013 Amount in Rs.	31.03.2014 Amount in Rs.
Net Sales	1,50,000/-	2,50,000/-
Cost of goods sold	50,000/-	75,000/-
Operating Expenses:
General & Administrative expenses	20,000/-	30,000/-
Advertisement expenses	30,000/-	40,000/-
Non-operating expenses:
Interest paid	10,000/-	25,000/-
Income tax	20,000/-	40,000/-

 

Comparative Income Statement for the years ending 31.03.2013 and 31.03.2014:

Particulars	31.03.2013	31.03.2014	Increase/(Decrease)	% Change
Net Sales	1,50,000/-	2,50,000/-	1,00,000/-	66.67%
Cost of Goods Sold	50,000/-	75,000/-	25,000/-	50%
Gross Profit	1,00,000/-	1,75,000/-	75,000/-	75%
Operating Expenses:
General & Administrative Expenses	20,000/-	30,000/-	10,000/-	50%
Advertisement Expenses	30,000/-	40,000/-	10,000/-	33.33%
Total Operating Expenses	50,000/-	70,000/-	20,000/-	40%
Operating Profit	50,000/-	1,05,000/-	55,000/-	110%
Non-Operating Expenses:
Interest Paid	10,000/-	25,000/-	15,000/-	150%
Income Tax	20,000/-	40,000/-	20,000/-	100%
Total Non-Operating Expenses	30,000/-	65,000/-	35,000/-	116.67%
Net Profit	20,000/-	40,000/-	20,000/-	100%

 

Note: The above table shows the standardized comparative income statement for the years ending 31.03.2013 and 31.03.2014, with a comparison of the net sales, cost of goods sold, gross profit, operating expenses, operating profit, non-operating expenses, and net profit. The increase/(decrease) column shows the difference between the two years, and the % change column shows the percentage change between the two years.

 

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Q.10. State True or False:

(a)  Ratio analysis helps in the decision-making process. 

True: Ratio analysis helps in decision making process as it provides insights into a company’s financial health and performance. By comparing ratios over time or with industry averages, investors and managers can make informed decisions about the company’s operations, financial structure, and potential for growth.

(b)  Debt equity ratio is to measure outsiders funds to shareholders funds. 

False: The debt equity ratio is used to measure the proportion of a company’s funds that come from debt and equity. It is calculated by dividing total debt by total equity. This ratio is not specific to measuring outsider funds to shareholders funds.

(c)  Working capital = current assets minus current liabilities.

True: Working capital is calculated by subtracting current liabilities from current assets. It represents the amount of cash or liquid assets a company has available to fund its day-to-day operations.

(d)  Non-fund items are added back to profits & loss account in order to know funds from operation. 

False: Non-fund items are subtracted from profits & loss account to know funds from operation. These non-fund items include non-cash expenses like depreciation and amortization.

(e)  Net present value method recognizes the time value of money. 

True: Net present value (NPV) method recognizes the time value of money by taking into account the present value of future cash flows. This method helps investors and managers determine the potential profitability of a project or investment opportunity.

(f)  Payback method is not a simple method to calculate. 

False: Payback method is a simple method to calculate the time it takes for an investment to recoup its initial cost. It is a sample method that does not take into account the time value of money or future cash flows.

(g)  Depreciation is calculated on fixed assets as well as on current assets. 

False: Depreciation is calculated only on fixed assets as they lose their value over time. Current assets do not lose their value over time and hence, depreciation is not calculated on them.

(h)  Equity shareholders and preference shareholders share profit equally.

False: Equity shareholders and preference shareholders do not share profit equally. The profit sharing ratio depends on the terms of the preference shares and the dividend declared on equity shares.

(i)  Gross profit ratio = ( Gross profit x100) /Net profit 

True: Gross profit ratio is calculated by dividing gross profit by net sales and multiplying the result by 100.

(j) Current ratio is =  (Current liabilities x 100) /Current assets   

True: Current ratio is calculated by dividing current assets by current liabilities. It is expressed as a ratio or a percentage.

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