MS-04 : ACCOUNTING AND FINANCE FOR MANAGERS

JUNE 2003

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

1 What do you understand by Accounting Standards? Why are such standards necessary? Discuss the accounting standards laid in India regarding valuation of inventories and depreciation. 

2 From the following closing balances as on 31st December 2001, prepare the Trading and Profit and Loss Account for the year ending on that date and the Balance Sheet as on that date, after making necessary adjustments:

Rs.

Mr. Mehta’s Capital Account 1,65,000

Stock on 1st January 2001 70,200

Sales 4,34,400

Purchases 3,64,650

Carriage Inwards 27,900

Rent and Taxes 8,550

Sales Returns 12,900

Salaries 13,950

Purchase Returns 8,700

Sundry Debtors 36,000

Sundry Creditors 22,200

6% Bank Loan (1-1-2000) 30,000

Interest paid on Bank Loan 1,350

Printing and Stationery 21,900

Drawings a/c 15,000

Interest received from A.N. Sen 400

Cash at Bank 12,000

Discount received 6,300

Investments 7,500

Furniture and Fittings 2,700

Discount paid 11,310

General Expenses 6,000

Audit Fees 1,050

Insurance 900

Travelling Expenses 3,500

Postage and Telegrams 4,070

Cash in hand 570

9% deposit with A.N. Sen (on 1.1.2001) 45,000

Adjustments:

(a) Stock as on December 31, 2001 was Rs. 1,20,000.

(b) 25% of the Printing and Advertising is to be carried forward to the next year.

(c) Provide 5% for bad debts and 2% on the balance for discount for prompt payment.

(d) Write off depreciation at 10% on Furniture and Fittings. Depreciation in respect items sold off during the year need not be provided.

(e) Salaries and Carriage Inwards that remained unpaid on 31-12-2001 was Rs 1,200 and Rs. 150 respectively.

(f) Insurance paid advance Rs. 120

(g) Furniture of the book value of Rs. 900 as on 1.1.2001 had been disposed off for Rs. 500 on 30.6.2001.

(h) Furniture purchased for Rs. 1,000 on 1.1.2001 had been debited to Purchases Account.

(i) Provide for interest on the deposit with Mr. A.N. Sen and Bank Loan.

3 The clients of an accounting firm wherein you are employed are concerned about the fall in dividends from a company whose shares they hold as investment. The abridged Profit and Loss account and Balance Sheet of the company for the last two year are given below:

Abridged Profit and Loss A/c (Year ended March 31)

(Rs. in lakhs)

2001 2000

Sales and Other Incomes 19,200 15,500

Operating and Other Expenses 15,600 11,900

Depreciation 700 650

Interest 1,850 1,750

Taxes 500 200

Proposed Dividend 200 400

Abridged Balance Sheet (as on March 31)

(Rs. in lakhs)

2001 2000

Share Capital (of Rs. 10 each) 4200 2600

Reserves and Surplus 7550 1200

Convertible portion of 12.5%

Debentures --- 500

Loan Funds :

Secured Loans 10,100 8,700

Unsecured Loans 1,000 3,300

22,850 16,300

Fixed Assets

Cost 14,800 11,200

Less: Depreciation 2,700 2,000

12,100 9,200

Advances on Capital a/c and

Capital work in progress 1,000 200

13,100 9,400

Inventories 8,600 7,100

Sunday Debtors 1,400 550

Cash and Bank Balances 850 680

Loans and Advances 3,000 1,600

Less: Current Liabilities 4,100 3,030

22,850 16,300

You are required to

(a) Compute the following:

Interest Cover, Return on Next Worth, Earnings Per Share, Dividend Cover.

(b) State whether the shares are to be disposed off or to be retained as investment. Indicate justification for your opinion.

4 A Japanese soft drink company is planning to establish a subsidiary company in India to produce mineral water.

Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produced the following for the India subsidiary:

The Indian production will be sold by manufacture’s representatives who will receive a commission of 8% of the sale price. No portion of the Japanese office expenses is to be allocated to the Indian subsidiary.

You are required to:

(a) Compute the sale price per bottle to enable the management to realise an estimated 10% profit on the sale proceeds in India.

(b) Calculate the break even point in rupees as also in number of bottles, assuming that the sale price is Rs. 14 per bottle.

5(a) What do you understand by ‘operating leverage’? How is the degree of operating leverage calculated? Explain its significance.

(b) Explain the Accounting Rate of Return method. Does it suffer from any serious drawback? Explain fully.

6(a) What do you understand by a Flexible Budget? How does it differ from a Fixed Budget? Explain the necessity and significance of a Flexible Budget.

(b) Discuss the factors which are taken into consideration while preparing the Sales Budget.

7 Explain the factors which affect the dividend decision of a company. What has been the effect of imposition of a tax on the distribution of dividends by companies in India? Discuss.

8 Comment on the following statements:

(a) Operating cycle plays a decisive role in influencing the working capital needs.

(b) Cash Budget takes into account operating cash flows only.

(c) Many reasons account for direct material variances.

(d) Funds Flow Statement shows Funds from Operations and not the Net Profit.