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Xaviers Institute
of Business Management Studies
FINANCIAL MANAGEMENT
Max. Marks: 80
SECTION – A
Note: Attempt any five questions. All
questions carry equal marks.
Question. 1. (A) what do you understand by
Accounting Standards? How do they differ from Accounting Concepts? Why should
the accounting practices be standardized?
Answer: Accounting Standards are the guidelines and
principles that are established to standardize accounting policies and
practices. They provide a common framework for the preparation and presentation
of financial statements to ensure consistency, transparency, and comparability
across different organizations and industries.
Question. (b) Why are the fixed assets shown
at their book value rather than their market value, even if the latter has
appreciated significantly? Give reasons.
Answer: Fixed assets are shown at their book value rather than
their market value because the primary objective of financial reporting is to
provide relevant and reliable information to the users of financial statements.
The book value of a fixed asset is the cost of the asset less accumulated
depreciation. It is the value of the asset as recorded in the accounting
records.
The book value of a fixed asset is considered to be more
reliable than its market value because the latter can be volatile and
Question. 2. (a) How would Explain the you
compute the cost of goods sold? Two methods of inventory valuation.
Answer: The cost
of goods sold (COGS) is the cost of the goods that a business has sold during a
specific period. It is an important expense that is subtracted from the revenue
to determine the gross profit of the business. The COGS can be computed using
different methods of inventory valuation. Two commonly used methods are:
Question. (b) What is depreciation and what
is the rationale behind making a provision for depreciation in the process of
matching income and expenses?
Answer: Depreciation is a non-cash expense that reflects
the reduction in the value of a fixed asset over time due to wear and tear,
obsolescence, or other factors. It is an accounting method that allocates the
cost of a fixed asset over its useful life.
The rationale behind making a provision
Question. 3. What do you understand by Zero
Base Budgeting? How does a Zero Base Budget differ from a Flexible Budget?
Discuss the steps involved in Zero Base Budgeting.
Answer : Zero Base
Budgeting (ZBB) is a budgeting process that starts from scratch every
budget cycle, instead of using the previous budget cycle as a baseline. This
approach requires every budget item to be justified based on its need and
priority, regardless of whether it was included in the previous budget or not.
In other words, all expenses are evaluated as if the budget for each
Question. 4. Distinguish between:
(a) Accounting Rate of Return and Internal
Rate of Return
(b) Profitability Index and Profitability
Ratios
(c) Bonus Shares and Rights Shares
(d) Earnings yield and Dividend yield
Question. 5. A manufacturing company produces
and sells products P; Q and R. It has an available machine hour capacity of one
lakh hours, interchangeable among the three products. Presently the company
produces and sells 20,000 units of P and 15,000 units each of Q and R. The unit
Selling Price of the three products P, Q and R is Rs. 25, Rs. 32 and Rs. 42
respectively. With this price structure and the aforesaid sales-mix, the
company is incurring loss. The total expenditure exclusive of fixed charges
(presently Rs. 5 per unit) is Rs. 13.75 lakhs. The’ unit cost ratio amongst the
three products P, Q and R is 4: 6: 7.
Since the company desires to improve its
profitability without changing its cost and price structures, it has been
considering-the following three mixes so as to be within its total available
capacity:
|
Products |
Mix I |
Mix II |
Mix III |
|
P |
25,000 |
20,000 |
30,000 |
|
Q |
15,000 |
12,000 |
5,000 |
|
R |
10,000 |
18,000 |
15,000 |
You are required to compute the quantum of
loss now incurred and advise the most profitable mix which could be considered
by the company.
Question. 6. 'The conventional break-even
analysis is based on a number of assumptions.' Explain and illustrate the
concept of break-even analysis and justify the above statement.
Answer : Break-even
analysis is a financial tool used to determine the point at which a
company's revenue from sales is equal to its total costs, resulting in zero
profit or loss. The concept of break-even analysis is to determine the minimum
level of sales volume required to cover all of the company's costs, including
fixed and variable costs.
The conventional break-even analysis is based
Question. 7. The following information is
available for XYZ Ltd. for three years.
|
|
Year 1 |
Year 2 |
Year 3 |
|
Gross Profit Ratio |
36% |
33 1/2% |
30% |
|
Stock turnover |
20 times |
25 times |
14 times |
|
Average Stock |
Rs. 38,400 |
Rs. 36,000 |
Rs. 70,000 |
|
Average debtors |
Rs.87,500 |
Rs.7,68,750 |
Rs.2,00,000 |
|
Income tax rate |
50% |
50% |
50% |
|
Net Profit ratio |
6% |
7% |
12% |
|
Maximum credit |
60 days |
60 days |
30 days |
Prepare a statement of profits in comparative form for
all the three years, and evaluate the position of the company regarding
profitability and liquidity.
Answer: o prepare a statement of profits in comparative
form, we need to gather the relevant information from the given data:
Year 1:
Gross Profit = 36% of Sales
Stock Turnover = 20 times
Average Stock = Rs. 38,400
Average Debtors = Rs. 87,500
Income
Question. 8. What do you understand by
Budgetary Control? Discuss its objectives and explain the steps that are taken
for installing an effective system of budgetary control in an organization.
Question. 9. Distinguish between:
(a) Gross Margin and Return on Investment
(b) Financial Risk and Business Risk
(c) Profit Maximization and Wealth
Maximization Criteria
(d) Internal Rate of Return method and Net
Present Value method
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