Financial Management | Solved Paper 2014-2015 | 5th Sem B.Sc HHA

Q.1. A Balance Sheet of a company is given below:

Liabilities	Amount in ₹	Assets	Amount in ₹
Equity Capital	5,00,000/-	Cash in hand	50,000/-
Reserve & Surplus	50,000/-	Fixed Assets	3,00,000/-
Loan	1,00,000/-	Stock	65,000/-
Creditors	40,000/-	Debtors	50,000/-
P & L Account	50,000/-	Goodwill	50,000/-
Provision for Taxation	25,000/-	Investment	2,50,000/-
TOTAL	7,65,000/-	TOTAL	7,65,000/-

Note: Sales for the year was₹2,50,000/-

Calculate:
(a) Current ratio

(b) Fixed assets to current assets ratio

(c) Debt equity ratio

(d) Liquidity ratio

(e) Fixed assets turnover ratio

(a) Current ratio:

Current Ratio = Current Assets / Current Liabilities Current Assets = Stock + Debtors + Cash in hand = 65,000 + 50,000 + 50,000 = 1,65,000/- Current Liabilities = Creditors + Provision for Taxation = 40,000 + 25,000 = 65,000/- Current Ratio = 1,65,000 / 65,000 = 2.53

(b) Fixed assets to current assets ratio:

Fixed Assets to Current Assets Ratio = Fixed Assets / Current Assets Fixed Assets = 3,00,000/- Current Assets = 1,65,000/- Fixed Assets to Current Assets Ratio = 3,00,000 / 1,65,000 = 1.82

(c) Debt equity ratio:

Debt Equity Ratio = Total Debt / Equity Total Debt = Loan + Creditors + Provision for Taxation = 1,00,000 + 40,000 + 25,000 = 1,65,000/- Equity = Equity Capital + Reserves & Surplus + P & L Account = 5,00,000 + 50,000 + 50,000 = 6,00,000/- Debt Equity Ratio = 1,65,000 / 6,00,000 = 0.28

(d) Liquidity ratio:

Liquidity Ratio = (Current Assets – Stock) / Current Liabilities Current Assets = 1,65,000/- Stock = 65,000/- Current Liabilities = `65,000/- Liquidity Ratio = (1,65,000 – 65,000) / 65,000 = 1

(e) Fixed assets turnover ratio:

Fixed Assets Turnover Ratio = Sales / Fixed Assets Sales = 2,50,000/- Fixed Assets = 3,00,000/- Fixed Assets Turnover Ratio = 2,50,000 / 3,00,000 = 0.83

 

 

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Q.2. What is Working Capital? Discuss the factors which determine working capital needs of a firm.Discuss the features of Financial Management.

Working capital refers to the funds that are used by a company to meet its day-to-day operational expenses. In simple terms, working capital is the difference between current assets and current liabilities of a company. It is an important measure of a company’s financial health, as it indicates the company’s ability to meet its short-term obligations.

Factors that determine working capital needs of a firm:

1. Nature of Business: The type of business and the operating cycle of the company greatly influence its working capital needs. Businesses that require high levels of inventory, such as manufacturing companies, will have higher working capital needs.
2. Sales Volume: The amount of sales a company generates determines its working capital requirements. A company with high sales volume will require more working capital to meet its operating expenses.
3. Credit Policy: The credit policy of a company also affects its working capital needs. A company that offers extended credit to its customers will require more working capital to cover the costs of goods sold until payment is received.
4. Seasonal Variations: Companies that experience seasonal fluctuations in sales will require additional working capital to cover the increase in expenses during peak seasons.
5. Economic Environment: The overall economic environment also affects the working capital needs of a company. In a recessionary environment, companies may face difficulty in obtaining credit, which can lead to a decrease in working capital.
6. Production Cycle: The length of the production cycle also affects working capital needs. Longer production cycles require more working capital to cover the costs of raw materials, labor, and overhead until the final product is sold.
7. Supplier Credit: The credit terms offered by suppliers also affect working capital needs. A company that is able to obtain favorable credit terms from its suppliers will require less working capital to cover its expenses.

In conclusion, working capital is an important aspect of a company’s financial management. Understanding the factors that determine working capital needs can help companies optimize their financial resources and ensure their ability to meet short-term obligations.

OR
Discuss the features of Financial Management.

Financial management is the process of managing the financial resources of an organization to achieve its goals and objectives. It involves planning, organizing, controlling, and monitoring the financial activities of the organization. Here are some of the key features of financial management:

1. Financial Planning: Financial management involves the process of financial planning, which includes forecasting, budgeting, and determining the financial objectives of the organization.
2. Financial Control: Financial management involves the process of financial control, which includes monitoring and evaluating the financial performance of the organization, and taking corrective actions if necessary.
3. Risk Management: Financial management involves the process of risk management, which includes identifying, assessing, and managing financial risks that may arise in the organization.
4. Capital Management: Financial management involves the process of capital management, which includes managing the organization’s capital structure, including debt and equity financing.
5. Investment Management: Financial management involves the process of investment management, which includes managing the organization’s investment portfolio to maximize returns while minimizing risk.
6. Financial Reporting: Financial management involves the process of financial reporting, which includes preparing and presenting financial statements and reports to stakeholders, including investors, creditors, and regulatory authorities.
7. Tax Planning: Financial management involves tax planning, which involves managing the organization’s tax liabilities and taking advantage of tax incentives and deductions.
8. Cost Management: Financial management involves cost management, which includes managing the organization’s costs to maximize profits and minimize expenses.

 

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Q.3. What do you understand by Financial Analysis and what are its objectives?

Financial analysis is the process of examining an organization’s financial statements and data to assess its financial health and performance. Financial analysis involves the use of various financial tools and techniques to analyze the financial data of the organization.

Objectives of financial analysis:

1. Assessing financial performance: One of the primary objectives of financial analysis is to assess the financial performance of an organization. It helps in analyzing the company’s profitability, liquidity, solvency, and stability over a period.
2. Identifying trends and patterns: Financial analysis helps in identifying the trends and patterns in the company’s financial statements over a period. This can help the company to identify areas of strength and weakness in its operations.
3. Evaluating investment opportunities: Financial analysis helps investors to evaluate the potential of investing in the company. It helps in assessing the company’s financial health and performance, which can help investors to make informed investment decisions.
4. Assessing the creditworthiness of the organization: Financial analysis helps in assessing the creditworthiness of the organization. It helps creditors to assess the ability of the company to repay the loans and interest on time.
5. Making strategic decisions: Financial analysis helps in making strategic decisions such as mergers and acquisitions, expansion plans, and divestitures. It provides insights into the company’s financial health, which can help in making informed decisions.

Features of Financial Analysis:

1. Quantitative analysis: Financial analysis involves the use of quantitative techniques to analyze financial data. This helps in assessing the financial performance of the organization.
2. Comparability: Financial analysis involves comparing the company’s financial statements over a period or with other companies. This helps in assessing the company’s financial performance and identifying areas of improvement.
3. Timeframe: Financial analysis involves analyzing financial data over a period. This helps in identifying trends and patterns in the company’s financial performance.
4. Historical perspective: Financial analysis involves analyzing historical financial data. This helps in assessing the company’s financial health and performance over a period.
5. Industry-specific: Financial analysis is specific to the industry in which the organization operates. This helps in identifying industry-specific factors that can impact the company’s financial health and performance.
6. Use of ratios: Financial analysis involves the use of financial ratios to assess the company’s financial performance. This helps in comparing the company’s financial performance with industry benchmarks and identifying areas of improvement.

 

OR Write the difference 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 out flow 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.

 

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Q.4. Define the following terms in not  more than five lines each (any five):

a. Net Profit Ratio

(a) Net Profit Ratio: Net Profit Ratio is a profitability ratio that shows the percentage of net profit earned on sales. It is calculated by dividing net profit by sales and multiplying by 100. For example, if a company has a net profit of Rs. 1,00,000 and sales of Rs. 10,00,000, then the net profit ratio would be 10%.

b. Trend Analysis

Trend Analysis: Trend analysis is a method of analyzing financial data over a period of time to identify any trends or patterns. It helps in understanding the performance of a company by comparing financial data from different periods. Trend analysis is used to identify changes in sales, expenses, profit, and other financial indicators over time.

c. Pay-back period method

The payback period method is a capital budgeting technique used to calculate the time required to recover the initial investment in a project. It is calculated by dividing the initial investment by the expected annual cash inflows. The payback period method is a simple and easy-to-use technique, but it does not consider the time value of money.

d. Cash Budget

Cash Budget: A cash budget is a financial statement that shows a company’s expected cash inflows and outflows for a specific period of time. It helps a company to plan and manage its cash flow effectively. A cash budget includes cash receipts, cash payments, opening balance, closing balance, and the expected cash balance at the end of the period.

e. Stock Turnover

Stock Turnover Ratio= Cost of Sales / Average Inventory

Stock Turnover: Stock turnover is a measure of how quickly a company sells its inventory. It is calculated by dividing the cost of goods sold by the average inventory during a specific period. A high stock turnover ratio indicates that a company is selling its inventory quickly, while a low ratio indicates that inventory is not selling quickly enough.

f. Working Capital

Working capital is the amount of funds that a company has available for its day-to-day operations. It is calculated by subtracting current liabilities from current assets. Working capital is important for a company’s liquidity and is used to fund operations, pay suppliers, and manage inventory. For example, if a company has current assets of Rs. 50,00,000 and current liabilities of Rs. 20,00,000, then the working capital would be Rs. 30,00,000.

Working Capital = Current Assets – Current Liabilities

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Q.5. Prepare a Funds Flow Statement for the year 2013 from the following Balance Sheets:

Liabilities	2012	2013	Assets	2012	2013
Sundry Creditors	12,000/-	14,000/-	Fixed Assets	5,50,000/-	6,50,000/-
Share Capital	5,50,000/-	6,50,000/-	Investment	12,000/-	20,000/-
Bills Payable	10,000/-	10,000/-	Cash in Hand	17,000/-	16,000/-
Provision for Tax	12,000/-	19,000/-	Sundry Debtors	15,000/-	14,000/-
Outstanding Expenses	10,000/-	7,000/-
TOTAL	5,94,000/-	7,00,000/-	TOTAL	5,94,000/-	7,00,000/-

Balance Sheets as on 31st March 2013

PARTICULARS	31ST MARCH		CHANGE IN  WORKING CAPITAL
	2012 (₹)	2013 (₹)	INCREASE(₹)	DECREASE(₹)
Current Assets
Investment	12,000/-	20,000/-	8,000/-	——
Sundry Debtors	15,000/-	14,000/-	——	1,000/-
Cash in hand	17,000/-	16,000/-	——	1,000/-
Total                      (A)	44,000/-	50,000/-
Current Liabilities
Sundry Creditors	12,000/-	14,000/-	——	2,000
Bills Payable	10,000/-	10,000/-	——	——
Outstanding Expenses	10,000/-	7,000/-	3,000	——
*Provision for Tax	12,000/-	19,000/-	——	7,000
Total                     (B)	44,000/-	50,000/-
Net Working Capital    (A-B)	—-	—-
	—	—	11,000	11,000

* Provision for Tax may or may not be treated as current liability.

Funds flow statement

Statement of Sources and  Application of funds of  the year
Sources	(₹)	Applications	(₹)
Share Capital	1,00,000	Fixed Assets	1,00,000
Total	1,00,000	Total	1,00,000

Working Notes:

1.  Computation of the Cash Received and Cash Spent

Sources of Fund
	2013	2012	Cash Received            (₹)
Share Capital	6,50,000	5,50,000	1,00,000
Application of funds
	2013	2012	Cash Spent           (₹)
Fixed Assets	6,50,000	5,50,000	1,00,000

 

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Q.6.  Write short notes on any two:

(a)DU Pont Control Chart

The Du Pont Control Chart is a financial analysis tool that shows the overall return on investment (ROI) and identifies which factors are contributing to that return. It is also known as the Du Pont model or the Du Pont identity. It was developed by the Du Pont Corporation in the early 20th century. The Du Pont Control Chart breaks down the ROI into three components: net profit margin, total asset turnover, and financial leverage. By analyzing these components, a company can identify which areas of its operations need improvement.

Example: Let’s say a company has a net profit margin of 10%, a total asset turnover of 2, and a financial leverage of 1.5. The Du Pont Control Chart would calculate the company’s ROI as follows: ROI = 10% x 2 x 1.5 = 30%. This means that for every INR 1 invested in the company, it generates INR 0.30 in profit.

(b)Common size income statement

A common size income statement is a financial statement that shows the percentages of each item’s revenue or expense in relation to the total revenue or expense of a company. It is a useful tool for financial analysis because it enables the comparison of a company’s performance with industry standards or with its own past performance.

Example: Let’s say a company has a total revenue of INR 10,00,000 and the cost of goods sold is INR 4,00,000. The common size income statement would show the cost of goods sold as a percentage of total revenue, which is 40%.

(c)Financial Planning

Financial planning is the process of setting and achieving financial goals for an individual or a company. It involves creating a budget, managing debt, investing, and managing risks. Financial planning is crucial for long-term financial stability and growth.

Example: Let’s say an individual wants to save for their child’s college education. Financial planning would involve creating a budget to identify how much they can save each month, determining the best way to invest that money, and managing any debt that may impact their ability to save. They may also need to manage risks, such as potential job loss or unexpected expenses that could impact their ability to save for their child’s education.

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Q.7.  Differentiate between the following (any two):

(a)Over Trading and Under Trading

Points of Difference	Over Trading	Under Trading
Meaning	It refers to a situation where a business engages in excessive buying and selling activities, leading to increased operating costs and decreased profits.	It refers to a situation where a business fails to utilize its available resources to their full capacity, resulting in reduced profits.
Cause	Excessive expansion, insufficient working capital, or inability to manage increased business operations.	Inadequate demand, insufficient production, overcapitalization, or poor management.
Consequence	Increased operating costs, decreased profits, inability to meet obligations, and financial distress.	Reduced profits, wastage of resources, inability to meet fixed expenses, and financial distress.
Solution	Reduce unnecessary expenses, improve management, and increase working capital.	Increase demand, optimize production, reduce idle capacity, and improve management.
Example	A retail store that purchases more inventory than it can sell, leading to higher storage and operating costs.	A manufacturing firm that operates at only 50% of its production capacity, leading to lower revenues and higher per-unit costs.

(b)Under Capitalisation and Over Capitalisation.

Points of Difference	Under Capitalization	Over Capitalization
Meaning	It refers to a situation where a business does not have adequate capital to meet its operating and expansion requirements.	It refers to a situation where a business has more capital than it needs to operate and expand efficiently.
Cause	Insufficient initial capital, poor financial planning, inability to attract investors or loans.	Over-optimistic forecasting, excessive borrowing, or oversubscription of shares during the initial public offering.
Consequence	Limited growth opportunities, inability to take advantage of profitable opportunities, and financial distress.	Inefficient use of funds, low return on investment, reduced shareholder value, and financial distress.
Solution	Increase capital through equity, debt, or retained earnings, improve financial planning and management, and optimize resource utilization.	Reduce capital through dividend payments, share buybacks, or asset sales, improve financial planning and management, and invest in profitable opportunities.
Example	A start-up that fails to raise sufficient capital and is unable to launch its product or service.	A company that uses its excess funds to acquire non-core assets, leading to decreased profitability and liquidity.

(c)Profit Maximisation and Wealth Maximisation

Points of Difference	Profit Maximization	Wealth Maximization
Meaning	It is the objective of maximizing profits or earnings in the short term, regardless of the impact on the long-term financial health of the business.	It is the objective of maximizing shareholder wealth by increasing the value of the business over the long term.
Focus	Short-term gains, maximizing profits, and reducing costs.	Long-term gains, increasing shareholder value, and managing risk.
Consideration	Only considers financial factors such as revenue, expenses, and profits.	Considers both financial and non-financial factors such as market share, customer satisfaction, and social responsibility.
Consequence	May lead to sacrificing long-term growth opportunities, stakeholder dissatisfaction, and damage to the business’s reputation.	Encourages long-term growth, stakeholder satisfaction, and positive reputation, but may require short-term sacrifices.
Example	A company that cuts research and development expenses to increase profits in the current year.	A company that invests in sustainable technologies to reduce its carbon footprint and increase its long-term profitability.

 

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Q.8. Prepare a Statement of changes in Working Capital from the following Balance Sheets of ABC Ltd.

Liabilities	2010	2011	Assets	2010	2011
Equity Capital	5,00,000/-	5,00,000/-	Fixed Assets	6,00,000/-	7,00,000/-
Debentures	3,70,000/-	4,50,000/-	Investments	2,00,000/-	1,00,000/-
Tax Payable	77,000/-	43,000/-	Work in progress	80,000/-	90,000/-
Accounts Payable	96,000/-	1,92,000/-	Stock	1,50,000/-	2,25,000/-
Interest Payable	37,000/-	45,000/-	Bills Receivable	70,000/-	1,40,000/-
Dividends Payable	50,000/-	35,000/-	Cash	30,000/-	10,000/-
TOTAL	11,30,000/-	12,65,000/-	TOTAL	11,30,000/-	12,65,000/-

 

Statement of changes in Working Capital

Particulars	2010	2011	Change
Current Assets
Cash	30,000	10,000	-20,000
Bills Receivable	70,000	1,40,000	+70,000
Stock	1,50,000	2,25,000	+75,000
Work in progress	80,000	90,000	+10,000
Total Current Assets	3,30,000	4,65,000	+1,35,000
Current Liabilities
Accounts Payable	96,000	1,92,000	+96,000
Tax Payable	77,000	43,000	-34,000
Interest Payable	37,000	45,000	+8,000
Dividends Payable	50,000	35,000	-15,000
Total Current Liabilities	2,60,000	3,15,000	+55,000
Working Capital	70,000	1,50,000	+80,000

 

The table above shows the statement of changes in working capital for ABC Ltd. based on the given balance sheets of 2010 and 2011. The changes in the current assets and current liabilities are calculated to determine the change in working capital.

In 2010, the total current assets of the company were Rs. 3,30,000 and the total current liabilities were Rs. 2,60,000, resulting in a working capital of Rs. 70,000. In 2011, the total current assets increased to Rs. 4,65,000 and the total current liabilities increased to Rs. 3,15,000, resulting in a working capital of Rs. 1,50,000. Therefore, the change in working capital is Rs. 80,000 (1,50,000 – 70,000), indicating an increase in the working capital of the company from 2010 to 2011.

 

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Q.9. XYZ Ltd. is considering to purchase a machine. Two machines are available A

and B costing ₹2,50,000/-.

YEAR	A machine cash inflow	B machine cash inflow	Discount factor 8%
1	30,000	60,000	0.926
2	50,000	1,00,000	0.857
3	60,000	65,000	0.794
4	65,000	45,000	0.735
5	40,000	–	0.651
6	30,000	–	0.630
7	16,000	–	0.683

Evaluate the two alternatives according to Net Present Value method (Cost of Capital @ 10%).
State the importance of financial statement analysis. Explain any one technique of financial statement analysis.

To evaluate the two alternatives according to the Net Present Value method, we need to calculate the present value of cash inflows for each machine and then subtract the initial cost. The machine with a higher net present value would be the better investment.

Using the given data and the formula:

Present value = Cash inflow x Discount factor

The present value of cash inflows for machine A and machine B are as follows:

Machine A:

PV1 = 30,000 x 0.893 = 26,790

PV2 = 50,000 x 0.797 = 39,850

PV3 = 60,000 x 0.712 = 42,720

PV4 = 65,000 x 0.636 = 41,340

PV5 = 40,000 x 0.567 = 22,680

PV6 = 30,000 x 0.507 = 15,210

PV7 = 16,000 x 0.452 = 7,232

NPV (A) = (26,790 + 39,850 + 42,720 + 41,340 + 22,680 + 15,210 + 7,232) – 2,50,000 = -75,178

Machine B: PV1 = 60,000 x 0.893 = 53,580 PV2 = 1,00,000 x 0.797 = 79,700 PV3 = 65,000 x 0.712 = 46,180 PV4 = 45,000 x 0.636 = 28,620

NPV (B) = (53,580 + 79,700 + 46,180 + 28,620) – 2,50,000 = -42,920

Therefore, based on the calculations, neither machine A nor machine B would be a good investment as both have negative net present values.

OR
State the importance of financial statement analysis. Explain any one technique of financial statement analysis.

Financial statement analysis is a crucial tool for businesses, investors, and other stakeholders to evaluate the financial performance of a company. It helps in assessing the current financial position, identifying trends and patterns, and making informed decisions. Some of the key importance of financial statement analysis are:

1. Understanding the financial health of a company: Financial statement analysis helps in understanding the overall financial health of a company by evaluating its profitability, liquidity, solvency, and efficiency.
2. Making informed decisions: Investors, creditors, and other stakeholders can use financial statement analysis to make informed decisions about investing, lending, or partnering with a company.
3. Identifying trends and patterns: Financial statement analysis helps in identifying trends and patterns in the financial performance of a company over time, allowing stakeholders to understand the company’s strengths and weaknesses and plan accordingly.
4. Comparing performance: Financial statement analysis helps in comparing the financial performance of different companies in the same industry, enabling stakeholders to make informed decisions about investments or partnerships.

One of the techniques used in financial statement analysis is ratio analysis. Ratio analysis involves using financial ratios to evaluate the financial performance of a company. It provides a quantitative measure of a company’s financial health, profitability, liquidity, and efficiency. Some of the commonly used financial ratios are:

1. Liquidity ratios: Liquidity ratios measure a company’s ability to meet its short-term obligations. Examples include the current ratio, quick ratio, and cash ratio.
2. Profitability ratios: Profitability ratios measure a company’s ability to generate profits. Examples include the gross profit margin, net profit margin, return on assets, and return on equity.
3. Solvency ratios: Solvency ratios measure a company’s ability to meet its long-term obligations. Examples include the debt-to-equity ratio and the interest coverage ratio.
4. Efficiency ratios: Efficiency ratios measure a company’s ability to use its assets effectively to generate sales. Examples include inventory turnover ratio, asset turnover ratio, and account receivable turnover ratio.

Ratio analysis provides valuable insights into the financial performance of a company and can be used to identify areas of improvement or potential risks. It helps in evaluating the financial health of a company, making informed decisions, and comparing the performance of different companies.

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Q.10. What do you mean by Financial Planning? Explain the causes of Under- capitalisation.

Financial planning refers to the process of assessing an individual’s or a company’s financial goals and creating a roadmap to achieve them. It involves analyzing current financial status, identifying future goals, developing strategies to achieve those goals, and monitoring progress towards them. The main objective of financial planning is to ensure that resources are used efficiently and effectively to meet the desired financial goals.

Undercapitalization refers to a situation where a company has inadequate capital to support its operations or expansion plans. Some of the causes of undercapitalization are:

1. Inadequate Equity Capital: When a company is not able to generate enough funds through equity shares, it may lead to undercapitalization. This can be due to lack of investor interest or undervaluation of the company’s shares.
2. Overtrading: When a company engages in excessive buying and selling of goods without sufficient working capital, it can lead to undercapitalization. This happens when the company’s sales volume exceeds its financial capacity to handle it.
3. Inefficient Financial Management: Poor financial management practices such as mismanagement of funds, ineffective cost control measures, or over-reliance on short-term borrowings can lead to undercapitalization.
4. Economic Downturns: During periods of economic recession, companies may face declining sales, reduced profits, and cash flow problems, which can lead to undercapitalization.
5. Unrealistic Financial Projections: When companies set unrealistic financial targets or projections, they may face a shortfall of funds, leading to undercapitalization.

Undercapitalization can have several adverse effects on a company, such as reduced profitability, decreased competitiveness, inability to meet debt obligations, and stunted growth. It is, therefore, crucial for companies to maintain adequate capital to support their operations and expansion plans.