Edrona Exams | Complete examination management system

FM Eco

FM & Eco

 

Question 1

What are the main responsibilities of a Chief Financial Officer of an organisation?

Answer

Responsibilities of Chief Financial Officer (CFO): The chief financial officer of an organisation plays an important role in the company’s goals, policies, and financial success. His main responsibilities include:

  1. Financial analysis and planning: Determining the proper amount of funds to be employed in the firm.
  2. Investment decisions: Efficient allocation of funds to specific assets.
  3. Financial and capital structure decisions: Raisingof funds on favourable terms as possible, i.e., determining the composition of liabilities.
  4. Management of financial resources (such as working capital).
  5. Risk Management: Protecting assets.

 

Question 2

“The profit maximization is not an operationally feasible criterion.” Comment on it.

Answer

“The profit maximisation is not an operationally feasible criterion.” This statement is true because Profit maximisation can be a short-term objective for any organisation and cannot be its sole objective. Profit maximization fails to serve as an operational criterion for maximizing the owner's economic welfare. It fails to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency. It suffers from the following limitations:

  1. Vague term: The definition of the term profit is ambiguous. Does it mean short term orlong term profit? Does it refer to profit before or after tax? Total profit or profit per share?
  2. Timing of Return: The profit maximization objective does not make distinction between returns received in different time periods. It gives no consideration to the time value of money, and values benefits received today and benefits received after a period as the same.
  3. It ignores the risk factor.
  4. The term maximization is also vague.

 

Question 3

Discuss emerging issues affecting the future role of Chief Financial Officer (CFO).

Answer

Emerging Issues/Priorities Affecting the Future Role of Chief Financial Officer (CFO)

  1. Regulation: Regulation requirements are increasing and CFOs have an increasingly personal stake in regulatory adherence.
  2. Globalisation: The challenges of globalisation are creating a need for finance leaders to develop a finance function that works effectively on the global stage and that embraces diversity.
  3. Technology: Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through ‘big data’ and analytics.
  4. Risk: The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate ethos.
  5. Transformation: There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero cost impact.
  6. Stakeholder Management: Stakeholder management and relationships will become important as increasingly CFOs become the face of the corporate brand.
  7. Strategy: There will be a greater role to play in strategy validation and execution, because the environment is more complex and quick changing, calling on the analytical skills CFOscan bring.
  8. Reporting: Reporting requirements will broaden and continue to be burdensome for CFOs.
  9. Talent and Capability: A brighter spotlight will shine on talent, capability and behaviours in the top finance role.

 

Question 4

A company offers a Fixed deposit scheme whereby Rs10,000 matures to Rs12,625 after 2 years, on a half-yearly compounding basis. If the company wishes to amend the scheme by compounding interest every quarter, what will be the revised maturity value?

Answer

Computation of Rate of Interest and Revised Maturity Value

Principal = Rs 10,000

Amount = Rs 12,625

 

Question 5

X is invested Rs2,40,000 at annual rate of interest of 10 percent. What is the amount after 3 years if the compounding is done?

  1. Annually
  2. Semi-annually.

Answer

Computation of Future Value

Principal (P) = Rs 2,40,000
Rate of Interest (ĭ) = 10% p.a.

Time period (n)= 3 years

Amount if compounding is done:

 

Question 6

Why money in the future is worth less than similar money today? Give the reasons andexplain.

Answer

Money in the Future is worth less than the Similar Money Today due to several reasons:

Risk  :  There is uncertainty about the receipt of money in future.

Preference For Present Consumption : Most of the persons and companies in general, prefer current consumption over future consumption.

Inflation : In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence.

Investment Opportunities : Most of the persons and companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow.

 

Question 7

Discuss the financial ratios for evaluating company performance on operating efficiency and liquidity position aspects.

Answer

Financial ratios for evaluating performance on operational efficiency and liquidity position aspects are discussed as:

Operating Efficiency: Ratio analysis throws light on the degree of efficiency in the management and utilization of its assets. The various activity ratios (such as turnover ratios) measure this kind of operational efficiency. These ratios are employed to evaluate the efficiencywith which the firm manages and utilises its assets. These ratios usually indicate the frequency ofsales with respect to its assets. These assets may be capital assets or working capital or averageinventory. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by use of its assets – total as well as its components.

Liquidity Position: With the help of ratio analysis, one can draw conclusions regarding liquidity position of a firm. The liquidity position of a firm would be satisfactory, if it is able to meet its current obligations when they become due. Inability to pay-off short-term liabilitiesaffects its credibility as well as its credit rating. Continuous default on the part of the businessleads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to itssickness and dissolution. Liquidity ratios are current ratio, liquid ratio and cash to current liability ratio. These ratios are particularly useful in credit analysis by banks and other suppliers of short-term loans.

 

Question 8

Diagrammatically present the DU PONT CHART to calculate return on equity.

Answer

Du Pont Chart

There are three components in the calculation of return on equity using the traditional DuPont model- the net profit margin, asset turnover, and the equity multiplier. By examining each input individually, the sources of a company's return on equity can be discovered and compared to its competitors.

Return on Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier)

 

Question 9

Discuss the composition of Return on Equity (ROE) using the DuPont model.

Answer

Composition of Return on Equity using the DuPont Model

There are three components in the calculation of return on equity using the traditional DuPont model- the net profit margin, asset turnover, and the equity multiplier. By examining each input individually, the sources of a company's return on equity can be discovered and compared to its competitors.

a) Net Profit Margin: The net profit margin is simply the after-tax profit a company generates for each rupee of revenue.

Net profit margin = Net Income ÷ Revenue

Net profit margin is a safety cushion; the lower the margin, lesser the room for error.

b) Asset Turnover: The asset turnover ratio is a measure of how effectively a company converts its assets into sales. It is calculated as follows:

Asset Turnover = Revenue ÷ Assets

The asset turnover ratio tends to be inversely related to the net profit margin; i.e., the higher the net profit margin, the lower the asset turnover.

c) Equity Multiplier: It is possible for a company with terrible sales and margins to take on excessive debt and artificially increase its return on equity. The equity multiplier, a measure of financial leverage, allows the investor to see what portion of the return on equity is the result of debt. The equity multiplier is calculated as follows:

Equity Multiplier = Assets ÷ Shareholders’ Equity.

 

Calculation of Return on Equity

To calculate the return on equity using the DuPont model, simply multiply the three components (net profit margin, asset turnover, and equity multiplier.) Return on Equity = Net profit margin× Asset turnover × Equity multiplier

 

Question 10

Explain briefly the limitations of Financial ratios.

Answer

Limitations of Financial Ratios

The limitations of financial ratios are listed below:

  1. Diversified product lines: Many businesses operate a large number of divisions in quite different industries. In such cases, ratios calculated on the basis of aggregate data cannot be used for inter-firm comparisons.
  2. Financial data are badly distorted by inflation: Historical cost values may be substantially different from true values. Such distortions of financial data are also carried in the financial ratios.
  3. Seasonal factors may also influence financial data.
  4. To give a good shape to the popularly used financial ratios (like current ratio, debt- equity ratios, etc.): The business may make some year-end adjustments. Such window dressingcan change the character of financial ratios which would be different had there been nosuch change.
  5. Differences in accounting policies and accounting period: It can make the accounting data of two firms non-comparable as also the accounting ratios.
  6. There is no standard set of ratios against which a firm’s ratios can be compared:

Sometimes a firm’s ratios are compared with the industry average. But if a firm desires to be above the average, then industry average becomes a low standard. On the other hand, for a below average firm, industry averages become too high a standard to achieve.

 

Question 11

Explain the important ratios that would be used in each of the following situations:

  1. A bank is approached by a company for a loan of Rs50 lakhs for working capital purposes.
  2. A long term creditor interested in determining whether his claim is adequately secured.
  3. A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his holding in the company.
  4. A finance manager interested to know the effectiveness with which a firm uses its available resources.

Answer

Important Ratios used in different situations

  1. Liquidity Ratios- Here Liquidity or short-term solvency ratios would be used by the bank to check the ability of the company to pay its short-term liabilities. A bank may use Current ratio and Quick ratio to judge short terms solvency of the firm.
  2. Capital Structure/Leverage Ratios- Here the long-term creditor would use the capital structure/leverage ratios to ensure the long term stability and structure of the firm. A long term creditors interested in the determining whether his claim is adequately secured may use Debt-service coverage and interest coverage ratio.
  3. Profitability Ratios- The shareholder would use the profitability ratios to measure the profitability or the operational efficiency of the firm to see the final results of business operations. A shareholder may use return on equity, earning per share and dividend per share.
  4. Activity Ratios- The finance manager would use these ratios to evaluate the efficiency with which the firm manages and utilises its assets. Some important ratios are

(a) Capital turnover ratio

(b) Current and fixed assets turnover ratio

(c) Stock, Debtors and Creditors turnover ratio.

 

Question 14

Using the following data, complete the Balance Sheet given below:

 Gross Profits

 Rs54,000

 Shareholders’ Funds

 Rs6,00,000

 Gross Profit margin

 20%

 Credit sales to Total sales

 80%

 Total Assets turnover

 0.3 times

 Inventory turnover

 4 times

 Average collection period (a 360 daysyear)

 20 days

 Current ratio

1.8

Long-term Debt to Equity

40%

 

Balance Sheet

Liabilities Amount

(Rs)

Assets Amount

(Rs)

Creditors

………………

Cash

……………

Long-term debt

………………

Debtors

……………

Shareholders’ funds

………………

Inventory Fixed assets

……………

……………

Answer

 

Gross Profits Rs 54,000

Gross Profit Margin 20%

 

Sales = Gross Profits / Gross Profit Margin = Rs 54,000 / 0.20 = Rs 2,70,000

Question 15

JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:

 

The Income Statement of the JKL Ltd. for the year ended is as follows:

Required:

i) Calculate for the year 2005-06:

a)Inventory turnover ratio

b)Financial Leverage

c) Return on Investment (ROI)

d) Return on Equity (ROE)

e) Average Collection period.

ii) Give a brief comment on the Financial Position of JKL Limited.

Answer

Ratios for the year 2005-2006

i) (a) Inventory turnover ratio

 

(ii)Brief Comment on the financial position of JKL Ltd.

The profitability of operations of the company are showing sharp decline due to increase in operating expenses. The financial and operating leverages are becoming adverse. The liquidity of the company is under great stress.

 

Question 16

ABC Limited has an average cost of debt at 10 per cent and tax rate is 40 per cent. The Financial leverage ratio for the company is 0.60. Calculate Return on Equity (ROE) if its Return on Investment (ROI) is 20 per cent.

Answer

ROE = [ROI + {(ROI – r)  ×  D/E}] (1 – t)

= [0.20 + {(0.20 – 0.10)   ×  60}] (1 – 0.40)

=[ 0.20 + 0.06]  × 0.60 = 0.1560

ROE = 15.60%

 

Question 17

The following information relates to Beta Ltd. for the year ended 31st March 2013: Net Working Capital Rs12,00,000

Fixed Assets to Proprietor’s Fund Ratio 0.75 Working Capital Turnover Ratio 5 Times Return on Equity (ROE) 15%

There is no debt capital.

You are required to calculate:

i)Proprietor’s Fund

ii) Fixed Assets

iii) Net Profit Ratio.

Answer

(i) Calculation of Proprietor’s Fund

Since Ratio of Fixed Assets to Proprietor’s Fund                = 0.75

Therefore, Fixed Assets                                                       = 0.75 Proprietor’s Fund

Net Working Capital                                                             = 0.25 Proprietor’s Fund

12,00,000                                                                             = 0.25 Proprietor’s Fund

[Note: Fixed Assets may be computed alternatively by (Net Working Capital × Fixed Assets to Proprietor’s Fund Ratio) and Proprietor’s Fund by (Fixed Assets + Net Working Capital)].

 

Question 18

NOOR Limited provides the following information for the year ending 31st March, 2014:

Equity Share Capital

Rs25,00,000

Closing Stock

Rs6,00,000

Stock Turnover Ratio

5 times

Gross Profit Ratio

25%

Net Profit / Sale

20%

Net Profit / Capital

¼

You are required to prepare:

Trading and Profit & Loss Account for the year ending 31st March, 2014.

Answer

Working Notes:

 

 

Question 19

Distinguish between Funds Flow Statement and Cash Flow Statement.

Answer

Differentiation between Funds Flow Statement and Cash Flow Statement

  1. Funds flow statement is based on the accrual accounting system. In case of preparation of cash flow statement all transactions affecting the cash equivalents only are taken intoconsideration.
  2. Funds flow statement analyses the sources and applications of funds which are longtermin nature and the net increase in long-term funds will be reflected on the working capital of the firm. The Cash flow statement will only consider the increase or decrease in current assets and current liabilities in calculating the cash flow of funds from operations.
  3. Funds flow analysis is more useful for long-range financial planning. Cash flow analysis is more useful for identifying and correcting the current liquidity problems of the firm.
  4. Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement tallies difference between opening balance of cash and closing balance of cash by proceeding through sources and uses.

 

Question 20

From the information contained in Income Statement and Balance Sheet of ‘A’ Ltd., prepare Cash Flow Statement:

Income Statement for the year ended March 31, 2006

 

 

Rs.

 Net Sales

 (A)

 2,52,00,000

 Less:

 

 

 Cash Cost of Sales

 

 1,98,00,000

 Depreciation

 

 6,00,000

 Salaries and Wages

 

 24,00,000

 Operating Expenses

 

 8,00,000

 Provision for Taxation

 

 8,80,000

 

 (B)

 2,44,80,000

 Net Operating Profit (A – B)

 

 7,20,000

 Non-recurring Income – Profits on sale of equipment

 

 1,20,000

 

 

8,40,000

Retained earnings and profits brought forward

 

15,18,000

 

 

23,58,000

Dividends declared and paid during the year

 

7,20,000

Profit and Loss Account balance as on March 31, 2006

 

16,38,000

 

Balance Sheet ason

Assets

March 31, 2005

March 31, 2006

 

(Rs.)

(Rs.)

Fixed Assets:

 

 

 Land

 4,80,000

 9,60,000

 Buildings and Equipment

 36,00,000

 57,60,000

Current Assets:

 

 

 Cash

 6,00,000

 7,20,000

 Debtors

 16,80,000

 18,60,000

 Stock

 26,40,000

 9,60,000

Advances

   78,000

  90,000

 

 90,78,000

 1,03,50,000

 

Balance Sheet ason

Liabilities and Equity

March 31, 2005

March                        31,

2006

 

(Rs)

(Rs)

Share Capital

36,00,000

44,40,000

Surplus in Profit and Loss Account

15,18,000

16,38,000

Sundry Creditors

24,00,000

23,40,000

Outstanding Expenses

2,40,000

4,80,000

Income-tax payable

1,20,000

1,32,000

 Accumulated Depreciation on Buildings and Equipment  12,00,000   13,20,000
   90,78,000  1,03,50,000

The original cost of equipment sold during the year 2005-06 was Rs7,20,000.

Answer

Cash Flow Statement of Company A Ltd. for the year ending March 31, 2006 Cash flows from Operating Activities

 

Rs.

 Net Profits before Tax and Extra-ordinary Item

 16,00,000

 Add: Depreciation

  6,00,000

 Operating Profits before Working Capital Changes

 22,00,000

 Increase in Debtors

 (1,80,000)

 Decrease in Stock

 16,80,000

 Increase in Advances

 (12,000)

 Decrease in Sundry Creditors

 (60,000)

Increase in Outstanding Expenses

  2,40,000

 Cash Generated from Operations

 38,68,000

 Income tax Paid

  8,68,000

 Net Cash from Operations

 30,00,000

 

Cash flows from Investment Activities

   Rs.
 Purchase of Land  (4,80,000)

Purchase of Buildings and Equipment

(28,80,000)

Sale of Equipment

     3,60,000

Net Cash used in Investment Activities

(30,00,000)

 

Cash flows from Financing Activities

 

 

 

Rs.

Issue of Share Capital

8,40,000

 

Dividends Paid

(7,20,000)

  _______

Net Cash from Financing Activities

 

1,20,000

 Net increase in Cash and Cash Equivalents

 

 1,20,000

 Cash and Cash Equivalents at the beginning

 

 6,00,000

 Cash and Cash Equivalents at the end

 

 7,20,000

 

Buildings and EquipmentAccount

 

 Rs

 

 Rs

Balance b/d

36,00,000

Sale of Asset

7,20,000

Cash/Bank

(purchase) (Balancingfigure)

 

28,80,000

Balance c/d

 

 

57,60,000

  _____

    _

 

64,80,000

 

64,80,000

 

Accumulated Depreciation  on Buildings and EquipmentAccount

 

Rs

 

Rs

Sale of Asset

 

Balance b/d

 

12,00,000

(Accumulated depreciation)

4,80,000

Profit and (Provisional)

Loss

6,00,000

 Balance c/d  13,20,000      _________
   18,00,000      18,00,000

 

Sale of Asset Account

 

Rs

 Original Cost

 7,20,000

Less: Accumulated Depreciation

  4,80,000

 Net Cost

 2,40,000

 Profit on Sale of Asset

 1,20,000

 Sale Proceeds from Asset Sales

 3,60,000

 

Income Tax Payable Account

 

Rs

 

Rs

Bank A/c (b/f)

Balance c/d

 

8,68,000

1,32,000

Balance  b/d

Provision for Tax A/c

 

1,20,000

8,80,000

10,00,000

10,00,000

 

Question 21

The Balance Sheet of JK Limited as on 31st March, 2005 and 31st March, 2006 are given below:

 

Balance Sheetason                                                                  (Rs’000)

 

Liabilities

31.03.05

31.03.06

Assets

31.03.05

31.03.0

6

Share Capital

1,440

1,920

Fixed Assets

3,840

4,560

Capital Reserve

 

48

Less: Depreciation

1,104

1,392

General

816

960

 

2,736

3,168

 Liabilities  31/03/05  31/03/06  Assets

 31/03/05

 31/03/06
 Share Capital  1,440  1,920  Fixed Assets  3,840  4,560
 Capital Reserve    48  Less: Depreciation  1,104  1,392

 General Reserve

 816

 960

 

 2,736

 3,168

 Profit and Loss

 288

 360

 Investment

 480

 384

Account

 

 

 

 

 

9% Debenture

960

672

Cash

210

312

Current Liabilities

576

624

Other Current Assets

 

 

Proposed

Dividend

144

174

(including Stock)

1,134

1,272

Provision for Tax

432

408

Preliminary

Expenses

96

48

Unpaid Dividend

         -

       18

 

    _     

    _     

 

4,656

5,184

 

4,656

5,184

Additional Information:

  1. During the year 2005-2006, Fixed Assets with a book value of Rs2,40,000 (accumulated depreciation Rs84,000) was sold forRs1,20,000.
  2. Provided Rs4,20,000asdepreciation.
  3. Some investments are sold at a profit of Rs48,000and Profit was credited to Capital Reserve.
  4. It decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 per cent. The stock was Rs2,59,200as on 31.03.05.The stock as on31.03.06 was correctly valued atRs3,60,000.
  5. It decided to write off Fixed Assets costing Rs60,000on which depreciation amountingtoRs48,000 has been provided.
  6. Debentures are redeemed at Rs105. Required: Prepare a CashFlowStatement.

Answer

Cash flow Statement (31stMarch, 2006)

(A)Cashflows from OperatingActivities

Profit and Loss A/c

 

 

(3,60,000 – (2,88,000 + 28,800)

 

43,200

Adjustments:

 

 

Increase in General Reserve

1,44,000

 

Depreciation

4,20,000

 

Provision for Tax

4,08,000

 

Loss on Sale of Machine

36,000

 

Premium on Redemption of Debenture

14,400

 

Proposed Dividend

1,74,000

 

Preliminary Exp. w/o

48,000

 

Fixed Assets w/o

   12,000

 12,56,400

Funds from Operation

 

12,99,600

Increase in Sundry Current Liabilities

 

48,000

Increase in Current Assets

 

 

12,72,000 – (11,34,000 + 28,800)

 

(1,09,200)

Cash before Tax

 

12,38,400

Tax paid

 

   4,32,000

Cash from Operating Activities

 

  8,06,400

 

(b) Cash from Investing Activities

Purchases of fixed assets

(10,20,000)

 

Sale of Investment

 1,44,000

 

 Sale of Fixed Assets   1,20,000  (7,56,000)

 

(c) Cash from FinancingActivities

 Issue of Share Capital

 

 4,80,000

 

 Redemption of Debenture

 (3,02,400)

 

 Dividend paid

 (1,26,000)

      51,600

 Net increase in Cash and Cash equivalents

 

 1,02,000

 Opening Cash and Cash equivalents

 

 2,10,000

 Closing Cash

 

 3,12,000

 

d) Fixed AssetsAccount

 

Particulars

Rs.

 

Particulars

Rs.

 To

 Balance b/d

 27,36,000

 By

Cash

1,20,000

To

Purchases (Balance)

10,20,000

 By

 Loss on sales

 36,000

 

 

 

 By

 Depreciation

 4,20,000

 

 

 

 By

 Assets w/o

 12,000

 

 

 ________

 By

 Balance

 31,68,000

 

 

37,56,000

 

 

37,56,000

 

(e)DepreciationAccount

 

Particulars

Rs.

 

Particulars

Rs.

To

Fixed Assets (on sales)

84,000

By

Balance b/d

11,04,000

To

Fixed Assets w/o

48,000

By

Profit and Loss a/c

4,20,000

 To  Balance  13,92,000        _______
     15,24,000      15,24,000

 

Question 22

The following are the Balance Sheets of Gama Limited for the year ending March 31, 2004 and March 31,2005:

Balance Sheet as on March, 31

 

 

2004

2005

 

 

Rs

Rs

Capital and Liabilities

 

 

 

 Share Capital

 6,75,000

 7,87,500

 General Reserves

 2,25,000

 2,81,250

 Capital Reserve (Profit on Sale of investment)

-

11,250

 Profit & Loss Account

 1,12,500

 2,25,000

15% Debentures

 

 3,37,500

 2,25,000

 Accrued Expenses

 

 11,250

 13,500

 Creditors

 

 1,80,000

 2,81,250

 Provision for Dividends

 

 33,750

 38,250

 Provision for Taxation

 

 78,750

 85,500

 

 Total

 16,53,750

 19,48,500

 Assets

 

 

 

 Fixed Assets

 

 11,25,000

 13,50,000

 Less: Accumulated depreciation

 

 2,25,000

 2,81,250

 Net Fixed Assets

 

 9,00,000

 10,68,750

 Long-term Investments (at cost)

 

 2,02,500

 2,02,500

  Stock (at cost)

 

 2,25,000

 3,03,750

 Debtors (net of provision for doubtful debts of 

 Rs45,000 and Rs56,250 respectively for 2004

 and 2005 respectively)

 

2,53,125

2,75,625

 Bills receivables

 

 45,000

 73,125

 Prepaid Expenses

 

 11,250

 13,500

 Miscellaneous Expenditure

 

 16,875

 11,250

 

 

 16,53,750

 19,48,500

Additional Information:

  1. During the year 2004-05, fixed assets with a net book value of Rs11,250 (accumulated depreciation, Rs33,750) was sold forRs9,000.
  2. During the year 2004-05, Investments costing Rs90,000were  sold, and also Investments costing Rs90,000 werepurchased.
  3. Debentures were retired at a Premium of10%.
  4. Tax of Rs61,875was paid for2003-04.
  5. During the year 2004-05, bad debts of Rs15,750 were written off against the provision for Doubtful Debtaccount.
  6. The proposed dividend for 2003-04 was paid in2004-05.

Required:

Prepare a Funds Flow Statement (Statement of changes in Financial Position on workingcapital basis) for the year ended March31,2005.

Answer

Computation of Funds from Operation

 Profit and loss balance on March 31, 2005

 Rs2,25,000

 Add: Depreciation

 90,000

 Loss on Sale of Asset

 2,250

 Misc. Expenditure written off

 5,625

 Transfer to Reserves

 56,250

 Premium on Redemption of debentures

 11,250

 Provision for Dividend

 38,250

 Provision for Taxation

 68,625

 

 4,97,250

 Less: P/L balance on March 31, 2004

 1,12,500

 Funds from operations

 3,84,750

 

Accumulated Depreciation A/c

 To Fixed Asset A/c

 33,750

 By Bal. b/d

 2,25,000

To Bal. c/d

2,81,250

By P/L A/c

(Pro (Prov. for dep.) (Bal. Fig.)

 90,000

 

 3,15,000

 

 3,15,000

 

Fixed Assets A/c

 To Bal. b/d  11,25,000  By Accumulated Depreciation A/c  33,750
     By Cash  9,000

 To  Bank   (Purchase of Fixed Asset) (Bal. fig.)

 2,70,000

 By P/L (Loss on sale)

 2,250

 

 

 By Bal. c/d

13,50,000

 

13,95,000

 

13,95,000

 

Provision for Tax A/c

 To Cash (tax paid)

 61,875

 By Bal. b/d

 78,750

 

 

 By P/L A/c (Prov.)

 

 To Bal. c/d

 85,500

 (Bal. fig.)

 68,625

 

 1,47,375

 

 1,47,375

 

Statement of Changes in Working Capital

 

March                     31, 2004

March                     31,2005

Change                       in W/C

 

 Current Assets

 

 

 

 

 Stock

 2,25,000

 3,03,750

 78,750

 

 Debtors

 2,53,125

 2,75,625

 22,500

 

 Bills Receivables

 45,000

 73,125

 28,125

 

 Prepaid Expenses

 11,250

 13,500

 2,250

 

 

 5,34,375

 6,66,000

 1,31,625

-

 Less: Current liabilities

 

 

 

 

 Accrued Expenses

 11,250

 13,500

 -

 2,250

Creditors

 1,80,000

 2,81,250

 -

 1,01,250

 

 1,91,250

 2,94,750

 1,31,625

 1,03,500

 Working Capital

 3,43,125

 3,71,250

 -

 -

 Increase in  Working Capital  28,125   ____________   ____________  28,125

 Increase in  Working Capital

 3,71,250

 3,71,250

 1,31,625

 1,31,625

 

Funds Flow Statement for the year ended March 31, 2005

 Sources

 

 Rs

 

 Working Capital from Operations

 3,84,750

 Sale of Fixed Assets

 9,000

 Sale of Investments

 1,01,250

 Share Capital Issued

 1,12,500

 Total Funds Provided (A)

 Rs6,07,500

 Uses

 

 Rs

 

 Purchase of Fixed Assets

 2,70,000

 Purchase of Investments

 90,000

 Payment of Debentures (at a premium of 10%)

 1,23,750

 Payment of Dividends

 33,750

 Payment of Taxes

 61,875

 Total Funds Applied (B)

 5,79,375

 Increase in Working Capital (A-B)

 Rs28,125

 

Question 23

Balance Sheets of RST Limited as on March 31, 2008 and March 31, 2009 are as under:

Liabilities

31.3.2008

Rs

31.3.2009

Rs

Assets

31.3.2008

Rs

31.3.2009

Rs

Equity Share Capital

 

 

Land & Building

 

 

(Rs10 face value per share)

10,00,000

 12,00,000

 

 6,00,000

 7,00,000

 General Reserve

 3,50,000

 2,00,000

 Plant & Machinery

 9,00,000

 11,00,000

9% Preference Share Capital

 3,00,000

 5,00,000

Investments (Long- term)

2,50,000

2,50,000

 Share Premium A/c

 25,000

 4,000

 Stock

 3,60,000

 3,50,000

 Profit & Loss A/c

 2,00,000

 3,00,000

 Debtors

 3,00,000

 3,90,000

 8% Debentures

 3,00,000

 1,00,000

 Cash & Bank

 1,00,000

 95,000

 Creditors

 2,05,000

 3,00,000

 Prepaid Expenses

 15,000

 20,000

 Bills Payable

 45,000

 81,000

 Advance Tax Payment

80,000

1,05,000

Provision for Tax

70,000

1,00,000

 Preliminary Expenses

40,000

35,000

Proposed Dividend

1,50,000

2,60,000

 

 ________

  _______

 

26,45,000

30,45,000

 

26,45,000

30,45,000

  1. Depreciationchargedonbuildingandplantandmachineryduringtheyear2008- 09 were Rs50,000 and Rs1,20,000 respectively.
  2. During the year an old machine costing Rs1,50,000was sold for Rs32,000. Its written down value was Rs40,000on date ofsale.
  3. Duringtheyear,incometaxfortheyear2007-08wasassessedatRs76,000.Achequeof Rs4,000 was received along with the assessment order towards refund of income tax paid in excess, by way of advance tax in earlier years.
  4. Proposed dividend for 2007-08 was paid during the year2008-09.
  5. 9% Preference shares of Rs3,00,000, which were due for redemption, were redeemed during the year 2008-09 at a premium of 5%, out of the proceeds of fresh issue of 9% Preferenceshares.
  6. Bonus shares were issued to the existing equity shareholders at the rate of one share for every five shares held on 31.3.2008 out of generalreserves.
  7. Debentures werere deemed at the beginning of the year at a premium of 3%.
  8. Interim dividend paid during the year 2008-09 wasRs50,000.

Required:

(a)   Schedule of Changes in Working Capital;and Fund Flow Statement for the year ended March31,2009.

Answer

  1. Schedule of Changes in WorkingCapital

 

Particulars

31.3.08

31.3.09

Effect on Working Capital

 Increase

 Decrease

 

 Rs

 Rs

 Rs

 Rs

 Current Assets:

 

 

 

 

 Stock

 3,60,000

 3,50,000

 -

 10,000

 Debtors

 3,00,000

 3,90,000

 90,000

-

 Cash and Bank

 1,00,000

 95,000

 -

 5,000

 Prepaid Expenses

  15,000

  20,000

 5,000

-

 Total (A)

 7,75,000

 8,55,000

 

 

 Current Liabilities:

 

 

 

 

 Creditors

 2,05,000

 3,00,000

 -

 95,000

 Bills Payable

   45,000

   81,000

-

 36,000

 Total (B)

 2,50,000

 3,81,000

 

 

 Net Working Capital (A-B)