Tools of Financial Analysis & Planning

3
TOOLS
OF
FINANCIAL ANALYSIS & PLANNING
Question 1 The following information is available in respect of ABC Ltd.: (1) Materials are purchased and received one month before being used and payment is made to suppliers two months after receipt of materials. (2) Cash is received from customers three months after finished goods are sold and delivered to them. (3) No time lag applies to payments of wages and expenses. (4) The following figures apply to recent and future months: Month Materials received Rs. 20,000 22,000 24,000 26,000 28,000 30,000 32,000 34,000 Sales Rs. 30,000 33,000 36,000 39,000 42,000 45,000 48,000 51,000 Wages and Expenses Rs. 9,500 10,000 10,500 11,000 11,500 12,000 12,500 13,000
January February March April May June July August
(5) Cash balance at the beginning of April is Rs. 10,000. (6) All the products are sold immediately they have been made and that materials used and sums spent on wages and expenses during any particular month relate strictly to the sales made during that month. Prepare cash flow forecast month by month from April to July, profit
3.2
Financial Management
and loss forecast for four months (April-July) and a movement of funds statement for the four months period (April-July). (Final-Nov. 1997) (10 marks)
Tools of Financial Analysis & Planning
3.3
Answer Cash forecast from April to July Amount in Rs. July 2,500 39,000 41,500
Opening Balance Collections from debtors
April 10,000 30,000 40,000
May 7,000 33,00 0 40,00 0 11,50 0 24,00 0 35,50 0 4,500
June 4,500 36,00 0 40,50 0 12,00 0 26,00 0 38,00 0 2,500
Payments: Wages and Expenses Payment to suppliers
11,000 22,000 33,000
12,500 28,000 40,500 1,000 Rs. 1,74,00 0 32,00 0 2,06,00 0 24,000 1,16,000 47,000 1,87,00 0 19,00 0
Closing balance
7,000
Profit and Loss forecast for 4 months April-July Sales (April to July) Closing Stock (July Purchase)
Less: Opening stock- (March purchase) Purchases (April to July) Wages and Expenses (April to July)
Profit for the 4 months period Movement of Funds Statement Stock (Opening) Receivables (Opening) April April March purchase Credit allowed 3 months
24,000
3.4
January Sales February Sales March Sales
30,0 00 33,0 00 36,0 00 99,000
Creditors (Opening)
April
Credit received 2 months February Purchase March Purchase
22,0 00 24,0 00 46,0 00 32,0 00 1,35,0 00 62,0 00
Closing stock (end of July), July Purchase Receivable (end of July), May to July Sales Creditors (end of July), June and July Purchase Now movement of funds statement can be worked out as :
Sources: Profit earned during 4 months Add: Increase in creditors (62,000 - 46,000) Application: Less: Increase in receivables (1,35,000-99,000) Less: Increase in stock (32,000-24,000)
Rs. 19,000 16,000 35,000 36,000 8,000 44,000 (-)9,00 0 10,000 1,000
Opening Cash balance Hence closing cash balance
3.5
Question 2 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 Rs. Capital and Liabilities Share Capital General Reserves Capital Reserve (Profit on Sale of investment) Profit & Loss Account 15% Debentures Accrued Expenses Creditors Provision for Dividends Provision for Taxation Total Assets Fixed Assets Less: Accumulated depreciation Net Fixed Assets Long-term Investments (at cost) Stock (at cost) 11,25,0 00 2,25,00 0 9,00,00 0 2,02,50 0 2,25,00 13,50,0 00 2,81,25 0 10,68,7 50 2,02,50 0 3,03,75 6,75,00 0 2,25,00 0 1,12,50 0 3,37,50 0 11,250 1,80,00 0 33,750 78,750 16,53,7 50 7,87,50 0 2,81,25 0 11,250 2,25,00 0 2,25,00 0 13,500 2,81,25 0 38,250 85,500 19,48,5 00 2005 Rs.
3.6
0 Debtors (net of provision for doubtful debts of Rs. 45,000 and Rs. 56,250 respectively for 2004 and 2005 respectively) Bills receivables Prepaid Expenses Miscellaneous Expenditure 2,53,12 5
0 2,75,62 5
45,000 11,250 16,875 16,53,7 50
73,125 13,500 11,250 19,48,5 00
Additional Information: (i) During the year 2004-05, fixed assets with a net book value of Rs. 11,250 (accumulated depreciation, Rs. 33,750) was sold for Rs. 9,000. (ii) During the year 2004-05, Investments costing Rs. 90,000 were sold, and also Investments costing Rs. 90,000 were purchased. (iii) Debentures were retired at a Premium of 10%. (iv) Tax of Rs. 61,875 was paid for 2003-04. (v) During the year 2004-05, bad debts of Rs. 15,750 were written off against the provision for Doubtful Debt account. (vi) The proposed dividend for 2003-04 was paid in 2004-05. Required: Prepare a Funds Flow Statement (Statement of changes in Financial Position on working capital basis) for the year ended March 31, 2005. (PE-II-Nov.2005)(16 marks) Answer Computation of Funds from Operation Profit and loss balance on March 31, 2005 Add: Depreciation Loss on Sale of Asset Misc. Expenditure written off Transfer to Reserves Premium on Redemption of debentures Provision for Dividend Rs. 2,25,000 90,000 2,250 5,625 56,250 11,250 38,250
3.7
Provision for Taxation Less: P/L balance on March 31, 2004 Funds from operations Accumulated Depreciation A/c To Fixed Asset A/c To Bal. c/d 33,750 By Bal. b/d By P/L A/c 2,81,250 (Pro (Prov. for dep.) (Bal. Fig.) 3,15,000
68,625 4,97,250 1,12,500 3,84,750
2,25,000 90,000 3,15,000
Fixed Assets A/c To Bal. b/d 11,25,000 By Accumulated Depreciation A/c By Cash 2,70,000 By P/L (Loss on sale) By Bal. c/d 13,95,000 Provision for Tax A/c To Cash paid) To Bal. c/d (tax 61,875 By Bal. b/d By P/L (Prov.) 85,500 (Bal. fig.) 1,47,375 A/c 68,625 1,47,375 78,750 33,750 9,000 2,250
To Bank (Purchase of Fixed Asset) (Bal. fig.)
13,50,000 13,95,000
Statement of Changes in Working Capital March 31, 2004 Current Assets March 2005 31, Change in W/C + -
3.8
Stock Debtors Bills Receivables Prepaid Expenses
2,25,000 2,53,125 45,000 11,250 5,34,375
3,03,750 2,75,625 73,125 13,500 6,66,000
78,750 22,500 28,125 2,250 1,31,62 5 -
Less: Current liabilities Accrued Expenses Creditors 11,250 1,80,000 1,91,250 Working Capital Increase in Working Capital 1,31,62 5 3,43,125 13,500 2,81,250 2,94,750 3,71,250 1,31,62 5 2,250 1,01,2 50 1,03,5 00 28,12 5 1,31,6 25
Funds Flow Statement for the year ended March 31, 2005 Sources Working Capital from Operations Sale of Fixed Assets Sale of Investments Share Capital Issued Total Funds Provided (A) Uses Purchase of Fixed Assets Purchase of Investments Payment of Debentures (at a premium of 10%) Payment of Dividends Payment of Taxes Rs. 3,84,750 9,000 1,01,250 1,12,500 Rs. 6,07,500 Rs. 2,70,000 90,000 1,23,750 33,750 61,875
3.9
Total Funds Applied (B) Increase in Working Capital (A-B) Question 3 Following are the financial statements of Zed Ltd.: Balance Sheet as on March 31, 2007 Rs. Capital and Liabilities: Share capital, Rs. 10 par value Share premium Reserves and Surplus Debentures Long-term loans Creditors Bank Overdraft Accrued expenses Income-tax payable 1,67,500 3,35,000 1,74,300 2,40,000 40,000 28,800 7,500 4,350 48,250 10,45,700 March 31, 2007 Rs. Assets: Land Building, net of depreciation Machinery, net of depreciation Investment in A Ltd. Stock Prepaid expenses Debtors Trade Investments Cash 3,600 6,01,800 1,10,850 75,000 58,800 1,900 76,350 40,000 77,400 10,45,700
5,79,375 Rs. 28,125
March 31, 2006 Rs. 1,50,000 2,37,500 1,23,250
50,000 27,100 6,250 4,600 16,850 6,15,550

March 31, 2006 Rs. 3,600 1,78,400 1,07,050 46,150 2,300 77,150 1,05,000 95,900 6,15,550
3.10
Income Statement for the year ended March 31, 2007 Rs. Net Sales Less: Cost of goods sold and operating expenses (including depreciation on buildings of Rs. 6,600 and depreciation on machinery of Rs. 11,400) Net operating profit Gain on sale of trade investments Gain on sale of machinery Profits before tax Income-tax Profits after tax Additional information: (i) Machinery with a net book value of Rs. 9,150 was sold during the year. (ii) The shares of A Ltd. were acquired by issue of debentures. Required: Prepare a Funds Flow Statement (Statement of changes in Financial position on Working capital basis) for the year ended March 31, 2007. (PE-II-Nov.2007) (12 marks) Answer Schedule of Changes in Working Capital March 31, 2007 March 31, 2006 Impact on Working Capital Increas e Current Assets Stock Prepaid expenses Debtors Trade 58,800 1,900 76,350 40,000 46,150 2,300 77,150 1,05,000 12,650 400 800 65,000 Decrea se 13,50,00 0 12,58,95 0 91,050 6,400 1,850 99,300 48,250 51,050
3.11
Investments Cash Current Liabilities Creditors Bank overdraft Accrued expenses Income payable tax 28,800 7,500 4,350 48,250 88,900 Net Working Capital Decrease in working capital net 1,06,150 2,71,700 2,71,700 1,06,1 50 1,19,0 50 1,19,0 50 1,65,550 27,100 6,250 4,600 16,850 54,800 2,71,700 250 250 12,900 1,700 1,250 31,400 34,350 1,19,0 50 77,400 2,54,450 95,900 3,26,500 12,650 18,500 84,700
Machinery Account Balance b/d Purchase of machinery (plug) Rs. 1,07,05 Sale of machinery 0 (given) 24,350 Depreciation (given) _______ Balance c/d _ 1,31,40 0 Rs. Balance b/d 1,05,00 Cash (sale of trade 0 investments) _______ Balance c/d 1,05,00 Rs. 9,150 11,400 1,10,8 50 1,31,4 00 Rs. 65,00 0 40,0 00 1,05,0
Trade Investments Account
3.12
0 Estimation of Funds flow from Operations
00
Rs. Profits after tax Add: Depreciation on Buildings Depreciation on Machinery 6,60 0 11,40 0 18,000 69,050 Less: Gain on sale of machinery 1,850 Funds from Operations 67,200 Gain on sale of trade investments has been considered as an operating income. Trade investments have been considered as part of current assets. Statement of Changes in Financial Position (Working Capital basis) for the year ended March 31, 2007 Rs. Sources: Funds from operations Sale of machinery on gain (9,150 + 1,850) Debentures issued (Rs. 2,40,000 75,000) Investment in A Ltd. financial transaction and hence not affecting working capital Issue of share capital (including share premium) Financial Resources Provided Uses: Purchase of building (6,01,800 + 6,600 1,78,400) Purchase of machinery 4,30,0 00 24,35 0 1,15,0 00 3,58,2 00 67,20 0 11,00 0 1,65,0 00 51,050
3.13
Payment of long-term loan Financial Resources Applied Net Decrease in Working Capital Question 4
10,0 00 4,64,3 50 1,06,1 50
Balance Sheet of OP Ltd. as on 31st March, 2007 and 2008 are as follows:
Liabilities Amount 31.3.200 7 Rs. Share capital General Reserve Profit and A/c Loss 20,00,00 0 4,00,000 2,50,000 10,00,00 0 5,00,000 4,00,00 0 20,000 3,00,000 for 1,00,00 0 49,70,00 0 Amount 31.3.200 8 Rs. 20,00,00 0 4,50,000 3,60,000 8,00,000 6,00,000 5,80,00 0 25,000 3,60,000 1,20,00 0 52,95,00 0 49,70,00 0 52,95,00 0 Land and Building Plant and Machinery Investment Stock Debtors Prepaid Expenses Cash and Bank Assets Amount 31.3.200 7 Rs. 15,00,00 0 18,00,00 0 4,00,000 4,80,000 6,00,000 50,000 1,40,000 Amount 31.3.200 8 Rs. 14,00,00 0 17,50,00 0 3,72,000 8,50,000 7,98,000 40,000 85,000
10% Debentures Bank Loan (longterm) Creditors Outstanding Expenses Proposed Dividend Provision taxation
Additional informations: (i) New machinery for Rs. 3,00,000 was purchased but an old machinery costing Rs. 1,45,000 was sold for Rs. 50,000 and accumulated depreciation thereon was Rs. 75,000.
3.14
(ii) 10% debentures were redeemed at 20% premium. (iii) Investment were sold for Rs. 45,000, and its profit was transferred to general reserve. (iv) Income-tax paid during the year 2007-08 was Rs. 80,000. (v) An interim dividend of Rs. 1,20,000 has been paid during the year 2007-08. (vi) Assume the provision for taxation as current liability and proposed dividend as non-current liability. (vii) Investment are non-trade investment. You are required to prepare: (i) Schedule of changes in working capital. (ii) Funds flow statement. (PE-II-Nov.2008) (12 marks)
3.15
Answer (i) Schedule of Changes in Working Capital

Particulars 31st March 2007 Rs. A. Current Assets: Stock Debtors Prepaid Expenses Cash and Bank Total (A) 4,80,00 0 6,00,00 0 50,000 1,40,0 00 12,70,0 00 8,50,00 0 7,98,00 0 40,000 85,0 00 17,73,0 00 3,70,00 0 1,98,00 0 10,000 55,000 2008 Rs. Working Capital Increas e Rs. Decreas e Rs.
B.
Current Liabilities: Creditors Outstanding Expenses Provision Taxation Total (B) Working Capital (A B) Increase in Working Capital Total for 4,00,00 0 20,000 1,00,0 00 5,20,00 0 7,50,0 00 5,80,00 0 25,000 1,20,0 00 7,25,00 0 10,48,0 00 ________ 5,68,00 0 _______ 5,68,00 0 1,80,00 0 5,000 20,00 0 _______ 2,70,00 0 2,98,00 0 5,68,00 0
(ii)
Funds Flow Statement for the year ending 31st March, 2008 Sources of Amoun Application of Amount
3.16
Funds
t Rs.
Funds Rs. 2,40,000 3,00,000 3,00,000 1,20,000 2,98,00 0 12,58,00 0
Funds from operations Bank loan taken Sale of Machinery Sale of Investment
10,63,0 Redemption of 00 debentures 1,00,00 Purchase of 0 machinery 50,000 Dividend paid 45,000 Interim Dividend paid Increase in working capital 12,58,0 00
Workings: 1. Funds from operations: Adjusted Profit and Loss A/c

Rs. To To General Reserve Depreciation Rs. 33,000 B Balance b/d y B Funds from y operations and 1,00,00 0 & 2,80,00 0 of on of 3,80,0 00 20,000 (Balancing figure) Rs. 2,50,0 00 10,63, 000
On Land Building On Plant Machinery To To Loss on Machine Sale
Premium Redemption Debentures
40,000 3,60,0 00
To
Proposed Dividend
3.17
To To
Interim Dividend Balance c/d
1,20,0 00 3,60,0 00 13,13, 000 13,13, 000
2. Depreciation on Land and Building = Rs. 15,00,000 Rs. 14,00,000 = Rs. 1,00,000. 3. Loss on Sale of Old Machine 75,000 (Cum-Dep.) value) = Rs. 20,000 = Cost Rs. 1,45,000 Rs. Rs. 50,000 (Sales
4. Depreciation on Plant and Machinery: Plant and Machinery A/c Dr. Rs. T Balance b/d o T Bank o (Purchases) A/c 18,00, 000 3,00,0 00 By Bank (Sold) A/c Cr. Rs. 50,000 20,000
By Profit and Loss A/c (Loss Sales) on
By Depreciation (Balancing figure) _______ _ 21,00, 000 5. Premium on Redemption of Debentures: By Balance c/d
2,80,00 0
17,50,0 00 21,00,0 00
Amount of Debenture Redeemed = Rs. 10,00,000 Rs. 8,00,000 = Rs. 2,00,000 Premium = Rs. 2,00,000 20/100
3.18
= Rs. 40,000 6. Profit on sale of investment: Investment A/c Dr. Rs. T Balance b/d o T General o Reserve (Profit Sales) 4,00,0 00 17,00 0 on 4,17,0 00 4,17,000 By Bank (Sales) A/c Cr. Rs. 45,000 3,72,000
By Balance c/d
7. Amount transferred to General Reserve from Profit and Loss A/c: General Reserve A/c Dr. Rs. T o Balance c/d 4,50,0 B 00 y B y ______ B _ y 4,50,0 00 Question 5 Alcobex Metal Company (AMC) does business in three products P1, P2 and P3. Products P1 and P2 are manufactured in the company, while product P3 is procured from outside and resold as a combination with either product P1 or P2. The sales volume budgeted for the three products for the year 2000-2001 (April-March) are as under: Products P1 P2 P3 Rs. in lakhs 1,200 500 400 Balance b/d Investment A/c Profit and Loss A/c Cr. Rs. 4,00,00 0 17,000 33,00 0 4,50,00 0
[Dec. 1999 to March, 2000 Rs. 20.00
3.19
lakhs P.M. April, 2000 to July, 2000 Rs. 25.00 lakhs P.M. Aug. 2000 to Nov. 2000 Rs. 30.00 lakhs P.M. Dec. 2000 to March, 2001 Rs. 45.00 lakhs P.M.] Based on the budgeted sales value, the cash flow forecast for the company is prepared based on the following assumptions: (1) Sales realisation is considered at: 50% Current month 25% Second month 25% Third month (2) Production Programme for each month is based on the sales value of the next month. (3) Raw material consumption of the company is kept at 59% of the months production. (4) 81% of the raw materials consumed are components. (5) Raw material and components to the extent, at 25% are procured through import. (6) The Purchases budget is as follows: (i) Indigenous raw materials are purchased two months before the actual consumption. (ii) Components are procured in the month of consumption. (iii) Imported raw materials and components are brought three months prior to the month of consumption. (7) The company avails of the following credit terms from suppliers: (i) Raw materials are paid for in the month of purchases; (ii) Company gets one months credit for its components; (iii) For imported raw material and components payments are made one month prior to the dates of purchases. (8) Currently the company has a cash credit facility of Rs. 140.88 lakhs (9) Expenses are given below and are expected to be constant throughout the year: Wages and Salaries Rs. 312 lakhs
3.20
Administrative Expenses (10)
Rs. 322 lakhs
Selling and Distribution Expenses Rs. 53 lakhs Dividend of Rs. 58.03 lakhs is to be paid in October. (11) Tax of Rs. 23.92 lakhs will be paid in equal installments in four-quarters: i.e., January, April, July and October. (12) The term-loan of Rs. 237.32 lakhs is repayable in two equal installments half-yearly. i.e June/December. (13) Capital expenditure of Rs. 292.44 lakhs for the year is expected to be spread equally during the 12 months period. You are required to prepare a Cash Flow Statement (Cash Budget) for the period of June-November, 2000. (Final-May 2001) (20 marks) Answer Alcobex Metal Company Cash Flow statement (cash budget) for the period of June November, 2000 (Rs. in lakhs) June July Augu Septem Octob Novem Total st ber er ber cash flow Opening (140. (273. (294. (310.35 (326. (405.0 (140. Balance 88) 98) 40) ) 31) 3) 88) (Refer to Assumptio n) Collection 166.6 166.6 169.1 170.42 171.6 171.67 1,016. from 7 7 7 7 27 customers (Refer to working note 1) Total 25.79 (107. (125. (139.93 (154. (233.3 875.3 31) 23) ) 64) 6) 9 Payment 99.49 101.7 103.5 104.76 104.7 104.76 618.9 to supplier 0 6 7 (Refer to working note 4) Wages 26 26 26 26 26 26 56.00
3.21
and Salaries Administr ative expenses Selling and Distributio n Dividend Tax Capital Expenditu re Repaymen t of term loan Total
26.83
26.83
26.83
26.83
26.83
26.83
160.9 8 26.52
4.42
4.42
4.42
4.42
4.42
4.42
24.37
5.98 24.37
24.37
5.98 24.37
58.03 24.37
24.37
58.03 11.96 146.2 2
118.6 6 186.38 (326.31 ) 250.3 9 (405. 03) 186.3 8 (419.7 4)
118.6 6 1,297 .34 (421. 95)
299.7 189.3 185.1 7 0 2 Closing (273. (294. (310. balance 98) 40) 35) Assumptions:
1. Since the opening cash balance as on June, 2000 is not given, it is assumed that the credit facility enjoyed by the company of Rs. 140.88 lakhs is its opening balance. 2. Since the question does not provide relevant information regarding purchase price and payment terms to the suppliers in respect of Product P3 which is procured from outside and sold as a combination with either Product P1 or P2. It is assumed that the Product P3 is manufactured within the company and its production programme and production costs are same as to the manufacturing of Products P1 or P2. 3. In the working notes some of the calculations are taken from December for the sake of completeness otherwise they are not required. Working Notes: 1. Collection from debtors:
Sal es Prod uct P2 Prod uct P3 Total Sales Curre nt month 2nd month collect 3rd month collect Total collection
3.22
Financial Management collect ion (iii) 80.83 80.83 80.83 80.83 83.33 83.33 83.33 83.33 85.83 85.83 85.83 85.83 93.33 93.33 93.33 93.33 ion (iv) 0 40.42 40.42 40.42 40.42 41.67 41.67 41.67 41.67 42.92 42.92 42.92 42.92 46.67 46.67 46.67 ion (v) 0 0 40.42 40.42 40.42 40.42 41.67 41.67 41.67 41.67 42.92 42.92 42.92 42.92 46.67 46.67 (vi)=(ii)+ (iii)+(iv) 80.83 121.25 161.67 161.67 164.17 165.42 166.67 166.67 169.17 170.42 171.67 171.67 179.17 182.92 186.67 186.67
(i) Decem ber January Februar y March April May June July August Septem ber October Novem ber Decem ber January Februar y March 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 41.67 20 20 20 20 25 25 25 25 30 30 30 30 45 45 45 45
(ii) 161.6 7 161.6 7 161.6 7 161.6 7 166.6 7 166.6 7 166.6 7 166.6 7 171.6 7 171.6 7 171.6 7 171.6 7 186.6 7 186.6 7 186.6 7 186.6 7 2746 .67
Total
160 0
666. 67
480
1373. 33
640.0 0
593.3 3
2606.67
2. Production Programme
Months Sales Value (Refer to workin Total raw material consump tion Compon ents Other raw materi al Imported raw material & compone Indigeno us raw material & compon Indigen ous raw materia l Indigeno us compon ents
3.23
g note (i) colum n (ii)) (i) (ii)=59% of (i) 95.38 95.38 95.38 98.38 98.33 98.33 98.33 101.2 8 101.2 8 101.2 8 101.2 8 110.1 3 110.1 3 110.1 3 110.1 3 1525.15 (iii)=81 % of (ii) 77.26 77.26 77.26 79.65 79.65 79.65 79.65 82.04 82.04 82.04 82.04 89.21 89.21 89.21 89.21 (iv)=(i i)-(iii) 18.12 18.12 18.12 18.68 18.68 18.68 18.68 19.24 19.24 19.24 19.24 20.93 20.93 20.93 20.93
nts
ents
(v)=25%o f (ii) 23.85 23.85 23.85 24.58 24.58 24.58 24.58 25.32 25.32 25.32 25.32 27.53 27.53 27.53 27.53
(vi)=(ii)(v) 71.54 71.54 71.54 73.75 73.75 73.75 73.75 75.96 75.96 75.96 75.96 82.60 82.60 82.60 82.60
(vii)=75 % of (iv) 13.59 13.59 13.59 14.01 14.01 14.01 14.01 14.43 14.43 14.43 14.43 15.69 15.69 15.69 15.69
(viii)=75 % of (iii) 57.95 57.95 57.95 59.74 59.74 59.74 59.74 61.53 61.53 61.53 61.53 66.91 66.91 66.91 66.91
Decem ber January Februar y March April May June July August Septem ber October Novem ber Decem ber January Februar y Total
161.67 161.67 161.67 166.67 166.67 166.67 166.67 171.67 171.67 171.67 171.67 186.67 186.67 186.67 186.67
2585. 05
1235.38
289.7 6
381.27
1143.8 6
217.29
926.57
3. Purchase Programme Months Indigenous others (Refer to working note 2 above) (column vii) (i) December January 13.59 14.01 Indigenous Components (Refer to working note 2 above) (column viii) (ii) 57.95 57.95 Imported others
(iii) 24.58 24.58
3.24
February March April May June July August September October November December January February
14.01 14.01 14.01 14.43 14.43 14.43 14.43 15.69 15.69 15.69 15.69 0.00 0.00
57.95 59.74 59.74 59.74 59.74 61.53 61.53 61.53 61.53 66.91 66.91 66.91 66.91
24.58 24.58 25.32 25.32 25.32 25.32 27.53 27.53 27.53 27.53 -
4. Payment to Suppliers (Rs. in lakhs) Months Indigenous Indigenous Imported others others and Component components s (Next month (Previous purchase month paid advance now) payment) December 13.59 0 24.58 January 14.01 57.95 24.58 February 14.01 57.95 24.58 March 14.01 57.95 25.32 April 14.01 59.74 25.32 May 14.43 59.74 25.32 June 14.43 59.74 25.32 July 14.43 59.74 27.53 August 14.43 61.53 27.53 September 15.69 61.53 27.53 October 15.69 61.53 27.53 November 15.69 61.53 0.00 December 15.69 66.91 0.00 January 0.00 66.91 0.00 February 0.00 66.91 0.00
Total Payment
13.59 96.54 96.54 96.54 99.07 99.49 99.49 101.70 103.50 104.76 104.76 104.76 82.60 66.91 66.91
3.25
March Question 6
66.91 0.00
0.00 0.00
66.91
XYZ Ltd. Companys Comparative Balance Sheet for 2002 and the Companys Income Statement for the year are as follows: XYZ Ltd. Comparative Balance Sheet December 31, 2002 and 2001 (Rs. in crores) Sources of funds: Sharehol ders funds Share Capital Retained earnings Loan funds Bonus payable Applicati on of funds Fixed Assets Plant 430 and Equipme nt Less: (218) Accumul ated deprecia tion Investme
3.26
nts Current Assets 205 Inventor y 180 Accounts receivabl e Pre17 paid expense s Cash 26 Less : Current liabilities and provision s 230 Accounts payable Accrued 70 liabilities 15 Deferred incometax provision
XYZ Ltd. Income Statement For the year ended December 31, 2002 (Rs. in crores) Sales Less : Cost of goods sold Gross margin Rs.1,00 0 530 470
3.27
Less : Operating expenses Net operating income Non-operating items: Loss on sale of equipment Income before taxes Less : Income-taxes Net income Additional information: (i) Dividends of Rs.48 crores were paid in 2002.
352 118 (4) 114 48 66
(ii) The loss on sale of equipment of Rs.4 crore reflects a transaction in which equipment with an original cost of Rs.12 crore and accumulated depreciation of Rs.5 crore were sold for Rs.3 crore in cash. Required: Using the indirect method, determine the net cash provided by operating activities for 2002 and construct a statement of cash flows. (PE-II-May 2003) (9 marks) Answer Statement of net cash flows provided by operating activities by using indirect method for the year ended December 31, 2002 (Rs. in crores) Operating Activities Net Income Adjustment to convert net income to a cash basis Depreciation and amortization charges Decrease in accounts receivable Increase in inventory Decrease in pre-paid expenses Decrease in accounts payable Increase in accrued liabilities Increase in deferred income tax Loss on sale of equipment 29 90 (45) 3 (80) 10 7 4 66
3.28
Net cash provided by operating activities Cash Flow from Investing Activities Additions to property, building & equipment Decrease in long term investments Proceeds from sale of equipment Net cash used in investing activities Cash Flows from Financing Activities Increase in bonds payable Cash dividends paid Net cash used in financing activities Net increase in cash & cash equivalents Cash & cash equivalents at the beginning of year Cash & cash equivalents at the end of year Question 7
84 (133) 15 3 (115) 95 (48) 47 16 10 26
The following is the income statement XYZ Company for the year 2004: (Rs.) Sales Add.: Equity In ABC Companys earning 1,62,7 00 6,000 1,68,70 0 Expenses Cost of goods sold Salaries Depreciation Insurance Research and development Patent amortisation Interest Rs. 89,300 34,400 7,450 500 1,250 900 10,650
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Bad debts Income tax: Current Deferred Total expenses Net income Additional informations are: 6,600 1,550
2,050
8,150 1,54,65 0 14,050
(i) 70% of gross revenue from sales were on credit. (ii) Merchandise purchases amounting to Rs. 92,000 were on credit. (iii) Salaries payable totaled Rs. 1,600 at the end of the year. (iv) Amortisation of premium on bonds payable was Rs. 1,350. (v) No dividends were received from the other company. (vi) XYZ Company declared cash dividend of Rs. 4,000. (vii) Changes in Current Assets and Current Liabilities were as follows: Increase (Decrease) Rs. Cash Marketable securities Accounts receivable Allowance for bad debt Inventory Prepaid insurance Accounts payable (for merchandise) Salaries payable Dividends payable 500 1,600 (7,150) (1,900) 2,700 700 5,650 (2,050) (3,000)
Prepare a statement showing the amount of cash flow from operations. (PE-II-May 2005) (7 marks)
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Answer Statement showing cash flow from Operations Rs Cash flow from operations Cash sales (30% 1,62,700) Collection from debtors Total cash from operations Uses of cash from operations Payment to suppliers Salaries expense Payment for insurance Research and development Interest payment Income tax payment Total operating cash payment Net cash flow from operations Notes (1) Rs 1,13,890 150 1,13,740 Add : decrease in accounts receivables 7,150 Collection from debtors on credit sales 1,20,890 (2) Dividends earned Rs 6,000 on equity of ABC Company has not been considered as it has not been received in cash. (3) Payment to suppliers Cost of goods sold Add: Increase in inventory Purchases Less: increase in accounts payable Payment to suppliers (4) Calculation of salaries payment Salary expense Add : decrease in salary payable Payment of salaries (5) Insurance payments Rs 34,400 2,050 Rs 36,450 Rs 89,300 2,700 9,200 5,650 86,350 Collection from debtors Credit sales (70% 1,62,700) Less : Bad debts (2,050 less 1,900) 48,810 1,20,890 1,69,700 86,350 36,450 1,200 1,250 12,000 6,600 1,43,850 25,850 Rs
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Insurance Add : increase in prepaid insurance Payment for insurance (6) Interest payment Interest expenses Add : Amortisation of bond premium Interest payments (7) Income tax payments Income tax expense Less: deferred tax Changes in current tax payable Income tax payments Question 8
Rs 500 700 Rs 1,200 Rs 10,650 1,350 Rs 12,000 Rs 8,150 1,550 Rs 6,600 Nil Rs 6,600
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 Less: Cash Cost of Sales Depreciation Salaries and Wages Operating Expenses Provision for Taxation (B) Net Operating Profit (A B) Non-recurring Income Profits on sale of equipment 1,98,00,00 0 6,00,000 24,00,000 8,00,000 8,80,00 0 2,44,80,00 0 7,20,000 1,20,00 0 8,40,000 (A) 2,52,00,00 0
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Retained earnings and profits brought forward Dividends declared and paid during the year Profit and Loss Account balance as on March 31, 2006 Assets Balance Sheet as on March 31, 2005 (Rs.) Fixed Assets: Land Buildings and Equipment Current Assets: Cash Debtors Stock Advances 6,00,000 16,80,000 26,40,000 78,000 90,78,000 Balance Sheet as on Liabilities and Equity March 31, 2005 (Rs.) Share Capital Surplus in Profit and Loss Account Sundry Creditors Outstanding Expenses Income-tax payable Accumulated Depreciation on Buildings Equipment and 12,00,000 36,00,000 15,18,000 24,00,000 2,40,000 1,20,000 4,80,000 36,00,000
15,18,00 0 23,58,000 7,20,00 0 16,38,000
March 31, 2006 (Rs.) 9,60,000 57,60,000 7,20,000 18,60,00 0 9,60,000 90,000 1,03,50,000 March 31, 2006 (Rs.) 44,40,000 16,38,000 23,40,000 4,80,000 1,32,000 13,20,000
90,78,000 1,03,50,000 The original cost of equipment sold during the year 2005-06 was
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Rs. 7,20,000. (PE-II-Nov. 2006) (10 marks)
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 Add: Depreciation Operating Profits before Working Capital Changes Increase in Debtors Decrease in Stock Increase in Advances Decrease in Sundry Creditors Increase in Outstanding Expenses Cash Generated from Operations Income tax Paid Net Cash from Operations Cash flows from Investment Activities Rs. Purchase of Land Purchase of Buildings and Equipment Sale of Equipment Net Cash used in Investment Activities Cash flows from Financing Activities Rs. Issue of Share Capital Dividends Paid Net Cash from Financing Activities 8,40,000 (7,20,000) 1,20,000 (4,80,000) (28,80,000) 3,60,000 (30,00,000) 16,00,000 6,00,000 22,00,000 (1,80,000) 16,80,000 (12,000) (60,000) 2,40,000 38,68,000 8,68,000 30,00,000
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Net increase in Cash and Cash Equivalents Cash and Cash Equivalents at the beginning Cash and Cash Equivalents at the end Buildings and Equipment Account Rs. Balance b/d Cash/Bank (purchase) (Balancing figure) 36,00,00 Sale of Asset 0 Balance c/d 28,80,00 0 64,80,00 0 Accumulated Depreciation on Buildings and Equipment Account Rs. Sale of Asset (Accumulated depreciation) Balance c/d Balance b/d 4,80,00 Profit and Loss 0 (Provisional) 13,20,0 00 18,00,0 00 Sale of Asset Account
1,20,000 6,00,000 7,20,000
Rs. 7,20,000 57,60,000 ________ 64,80,000
Rs. 12,00,000 6,00,000 ________ 18,00,000
Rs. Original Cost Less: Accumulated Depreciation Net Cost Profit on Sale of Asset Sale Proceeds from Asset Sales Question 9 X Ltd. has the following balances as on 1st April 2007: Rs. 7,20,000 4,80,000 2,40,000 1,20,000 3,60,000
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Fixed Assets Less; Depreciation Stocks and Debtors Bank Balance Creditors Bills payable Capital (Shares of Rs. 100 each)
11,40,000 3,99,000 7,41,000 4,75,000 66,500 1,14,000 76,000 5,70,000
The Company made the following estimates for financial year 200708: (i) The company will pay a free of tax dividend of 10% the rate of tax being 25%. (ii) The company will acquire fixed assets costing Rs.1,90,000 after selling one machine for Rs. 38,000 costing Rs. 95,000 and on which depreciation provided amounted to Rs. 66,500. (iii) Stocks and Debtors, Creditors and Bills payables at the end of financial year are expected to be Rs. 5,60,500, Rs. 1,48,200 and Rs. 98,800 respectively. (iv) The profit would be Rs. 1,04,500 after depreciation of Rs. 1,14,000. Prepare the projected cash flow statement and ascertain the bank balance of X Ltd. at the end of Financial year 2007-08. (PE-II-May 2008) (8 marks) Answer Working: (i) Cash Flow from operations Rs. Profit for the year Add: Depreciation (non cash item) Less: Profit on sale of machine Add increase in: 1,04,500 1,14,000 2,18,500 9,500 2,09,000
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Creditors (Rs. 1,48,200 Rs. 1,14,000) = Rs. 34,200 Bills payable (Rs. 98,800 Rs. 76,000) = Rs. 22,800 Less: Increase in stocks & debtors (Rs. 5,60,500 Rs. 4,75,000) Cash from operations (ii) Payment of Dividend 10% on capital Rs. 5,70,000 = Rs. 57,000 Gross up Amount= Total Dividend Tax 25%
Rs.57,000 100 = Rs.76,000 75
57,000 2,66,000 85,500 1,80,500
Rs. 76,000 Rs. 19,000
Payment of Dividend Rs. 57,000 Note: Income Tax on Companys Profit Ignored Projected Cash Flow Statement for the Year ending on 31st March, 2008 Rs. Bank Balance as on 1st April, 2007 Add: Inflow of Cash Sale of Machine Cash From operation Less: Outflow of Cash Purchase of Fixed Assets Payment of Dividend Tax Paid Bank Balance on 31st March, 2008 Rs. 1,90,000 Rs. 57,000 Rs. 19,000 2,66,000 19,000 Rs. 38,000 Rs. 1,80,500 2,18,500 2,85,000 66,500
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Question 10 A newly established company manufacturing two products furnishes the Cost Sheets as under: Products Rs./unit Direct Materials Direct Labour Variable Overheads Selling Price L 40 30 14 100 B 20 15 7 50
Fixed overheads excluding bank interest amount to Rs. 6,00,000 per annum spread out evenly throughout the year. Sales forecast is as under: Product July August L (Units) 4,200 4,600 B (Units) 2,100 2,300 Sept. 3,600 1,800 Oct. 4,000 2,000 Nov. 98 4,500 1,900
Production: 75% of each months sales will be produced in the month of sale and 25% in the previous month. Sales Pattern: L : One-third of sales will be on cash basis on which a cash discount of 2% is allowed. One-third will be on documents against payment basis. The documents will be discounted by the bank in the month of sales itself. Balance of one-third will be on documents against acceptance basis. The payment under this scheme will be received in the third month. For e.g. for sales made in September, payment will be received in November. B.: 80% of the sales will be against cash to be received in the month of sales and the balance 20% will be received next following month.
Direct materials: 50% of the direct materials required for each months production will be purchased in the previous month and the balance in the month of production itself. The payment will be made in the month next following the purchase. Direct Wages: 80% of the direct wages will be paid in the month of use
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of direct labour for production and the balance in the next following month. Variable overheads: 50% to be paid in the month of incurrence and the balance in the next following month. Fixed overheads: 40% will be paid in the month of incurrence and the other 40% in the next following month. The balance of 20% represents depreciation. The bill discounting charges payable to the bank in the month in which the bills are discounted amount to 50 paise per Rs. 100 of bills discounted. A cash balance of Rs. 1,00,000 will be maintained on 1st July, 1998. Prepare a cash budget monthwise for July, August and September, 1998 (Final-May 1998) (20 marks) Answer Cash Budget for July, August and September, 1998 Particulars July Aug 98 Sept 98 98 Rs. Rs. Rs. (A) Receipts Sales 3,61,2 4,16,60 4,72,00 00 0 0 (Refer to working note 1) (B) Payments Direct Materials 1,33,7 2,16,25 2,01,25 50 0 0 (Refer to working note 2) Direct Wages 1,36,8 1,62,75 1,43,62 75 0 5 (Refer to working note 3) Variable overheads 46,81 75,688 70,438 3 (Refer to working note 4) Fixed overheads 40,00 40,000 40,000 0 (Refer to working note 5) Bill Discounting charges 700 767 600 (Refer to working note 6) ______ _______ _______ _
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(C) (D) (E)
Surplus/Deficit of Cash (A-B) Add: Opening Balance Closing Balance (C+D)
3,58,1 38 3,062 1,00,0 00 1,03,0 62
4,95,45 5 (78,855 ) 1,03,06 2 24,207
4,55,91 3 16,687 24,207 40,894
Working Notes: Particular June July 98 s 98 Rs. Rs. 1. Sales L 4,20,000 B 1,05,000 5,25,000 Cash inflow from sales: L : 1/3 Cash less 1,37,200 discounts (1/3 of Rs. 4,20,000 x 98%) 1/3 D/P discounts 1,40,000 (1/3 of Rs. 4,20,000)
August 98 Rs. 4,60,000 1,15,000 5,75,000 1,50,267 (1/3 of Rs. 4,60,000 x 98%) 1,53,333 (1/3 of Rs. 4,60,000 ) 92,000 (80% of Rs. 1,15,000 ) 21,000 (20% of 1,05,000 ) 4,16,600
Sept. 98 Rs.
Oct. 98 Rs.
3,60,000 90,000 4,50,000 1,17,600 (1/3 of Rs. 3,60,000 x 98%) 1,20,000 (1/3 of Rs. 3,60,000 ) 1,40,000 72,000 (80% of Rs. 90,000) 23,000 (20% of 1,15,000 ) 4,72,600
1/3 DA collection B : 80% cash
84,000 (80% of Rs. 1,05,000) -
20% collect ion
Total 2. Production (Qty)
3,61,200
3.40
L. 75%
25%
1,050 (25% of 4,200 units) 1,050 -
B 75%
25%
525 (25% of 2,100u nits) 525
3,150 (75% of 4,200 units) 1,150 (25% of 4,600 units) 4,300 1,575 (75% of 2,100 units) 575 (25% of 2,300 units) 2,150
3,450 (75% of 4,600 units) 900 (25% of 3,600 units) 4,350 1,725 (75% of 2,300 units) 450 (25% of 1,800 units) 2,175
2,700 (75% of 3,600 units) 1,000 (25% of 4,000 units) 3,700 1,350 (75% of 1,800uni ts) 500 (25% of 2,000 units) 1,850
3,000 (75% of 4,000 units) 1,125 (25% of 4,500 units) 4,125 1,500 (75% of 2,000u nits) 475 (25% of 1,900u nits) 1,975
Direct material requirements: (Rs.) L 42,000 1,72,000 1,74,000 (1,050 (4,300 (4,350 units x units units Rs. 40) x Rs. 40) x Rs. 40)
1,48, 000 (3,700 units x Rs. 40) 37,000 (1,850 units x Rs. 20) 1,85,000
10,500 (525 units x Rs. 20) 52,500
43,000 (2,150 units x Rs. 20) 2,15,000
43,500 (2,175 units x Rs. 20) 2,17,500
1,65,00 0 (4,125 units x Rs. 40) 39,500 (1,975 units x Rs. 20) 2,04,50 0
Purchases: (Rs.) 26,250 (50% of Rs. 52,500)
1,07,500 (50% of Rs. 2,15,000)
1,08,750 (50% of Rs. 2,17,500 )
92,500 (50% of Rs. 1,85,000 )
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1,07,50 0 (50% of Rs. 2,15,00 0) 1,33,75 0 Payment (Rs.) 3. Direct wages L 31,500 (1,050 x Rs. 30) B 7,875 (525 x Rs. 15) 39,375 Payment: 20% L
1,08,750 (50% of Rs. 2,17,500)
92,500 (50% of Rs. 1,85,000 ) 2,01,250 2,16,250 1,30,500 (4,350 x Rs. 30) 32,625 (2,175 x Rs. 15) 1,63,125 32,250 (20% of Rs. 1,61,250 ) 1,30,500 (80% of Rs.1,63, 125) 1,62,750 60,900 (4,350 x Rs. 14) 15,225 (2,175 x Rs. 7) 76,125 38,063 (50% of
1,02,250 (50% of Rs. 2,04,500 ) 1,94,750 2,01,250 1,11,000 (3,700 x Rs. 30) 27,750 (1,850 x Rs. 15) 1,38,750 32,625 (20% of Rs. 1,63,125 ) 1,11,000 (80% of Rs.1,38, 750) 1,43,625 51,800 (3,700 x Rs. 14) 12,950 (1,850 x Rs. 7) 64,750 32,375 (50% of
2,16,250 1,33,750 1,29,000 (4,300 x Rs. 30) 32,250 (2,150 x Rs. 15) 1,61,250 7,875 (20% of Rs. 39,375) 1,29,000 (80% of Rs. 1,61,250) 1,36,875 60,200 (4,300 x Rs. 14) 15,050 (2,150 x Rs. 7) 75,250
80% B
4. Variable overheads L 14,700 (1,050 x Rs. 14) B 3,675 (525 x Rs. 7) 18,375
Variable overheads payment (Rs.) 50% 37,625 (50% of
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50%
5. Fixed overhe ads payme nt 6. Bill discounting charges Bill discounted 1,40,000 1,53,333 (Refer to working note 1 above) Charges @ 50 700 767 paise per Rs. 100 Question 11
Rs. 72,250) 9,188 (50% of Rs. 18,375) 46,813 40,000
Rs. 76,125) 37,625 (50% of Rs. 75,250) 75,688 40,000
Rs. 64,750) 38063 (50% of Rs. 76,125) 70,438 40,000
1,20,000
600
A new manufacturing company is to be incorporated from January 1, 2000. Its authorised capital will be Rs. 2 crores divided into 20 lakh equity shares of Rs. 10 each. It intends to raise capital by issuing equity shares of Rs. 1 crore (fully paid) on 1 st January. Besides, a loan of Rs. 13 lakhs @ 12% per annum will be obtained from a financial institution on 1st January and further borrowings will be made at same rate of interest on the first day of the month in which borrowing is required. All borrowings will be repaid alongwith interest on the expiry of one year. The company will make payment for the following assets in January. Rs. (in lakhs) Plant and Machinery 20 Land and Building 40 Furniture 10 Motor Vehicles 10 Stock of Raw Materials 10 The following further details are available:
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(1) Projected Sales (January-June): (Rs. in lakhs) January 30 February 35 March 35 (2) Gross profit margin will be 25% on April May June sales. (Rs. in lakhs) 40 40 45
(3) The company will make credit sales only and these will be collected in the second month following sales. (4) Creditors will be paid in the first month following credit purchases. There will be credit purchases only. (5) The company will keep minimum stock of raw materials of Rs. 10 lakhs. (6) Depreciation will be charged @ 10% per annum on cost on all fixed assets. (7) Payment of preliminary expenses of Rs. 1 lakh will be made in January. (8) Wages and salaries will be Rs. 2 lakhs each month and will be paid on the first day of the next month. (9) Administrative expenses of Rs.1 lakh per month will be paid in the month of their incurrence. Assume no minimum required cash balance. You are required to prepare the monthly cash budget (January-June), the projected Income Statement for the 6 months period and the projected Balance Sheet as on 30th June, 2000 . (Final-May 2000) (20 marks) Answer Monthly Cash Budget (January-June) (Rs. in lakhs) Jan. Feb Mar Apri Ma Jun Tota . ch l y e l Opening cash balance A. Cash inflows Equity shares Loans 100. 00 13 2.5 0 100. 00 15.5 0 21. 00 2.7 5 10. 50 14. 50 -
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(Refer to working note 1) Receipt from debtors Total (A) B. Cash Outflows Plant and Machinery Land and Building Furniture Motor Vehicles Stock of raw materials (minimum stock) Preliminary expenses Payment to creditors for credit purchases (Refer to working note 2) Wages and salaries Admn. expenses Total :(B) Closing balance (A)-(B) 1.00 92.0 0 21.0 0 2.0 0 1.0 0 23. 50 2.00 1.00 27.2 5 2.75 2.0 0 1.0 0 27. 25 10. 50 2.0 0 1.0 0 31. 00 14. 50 2.0 0 1.0 0 31. 00 23. 50 10.0 0 6.00 232. 00 23.5 0 1.00 20. 50 24.2 5 24. 25 28. 00 28. 00 1.00 125. 00 20.0 0 40.0 0 10.0 0 10.0 0 10.0 0 20.0 0 40.0 0 10.0 0 10.0 0 10.0 0 113. 00 23. 50 30.0 0 30.0 0 35. 00 37. 75 35. 00 45. 50 40. 00 54. 50 140. 00 255. 50
Budgeted Income Statement for the six-month period ending 30th June Particulars To Purchases To Wages and Salaries Rs. Particulars (Rs. In lakhs) Rs. 225.00 10.00
166.7 By Sales 5 12.00 By Closing stock
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To Gross profit c/d
56.25 235.0 0
_____ 235.00 56.25
To Admn. expenses To Depreciation (10% on Rs. 80 lakhs for six months) To Accrued interest on loan (Refer to working note 3) To Net profit c/d
6.00 By Gross profit b/d 4.00 0.905 45.34 5 56.25
56.25
Projected Balance Sheet as on 30th June, 2000 Liabilities Amo unt (Rs.) Assets (Rs. in lakhs) Amo unt (Rs.) 40. 00 2. 00 20. 00 1. 00 10. 00 0. 50 10. 00 19. 00
Share Capital: Authorised capital 20,00,000 equity shares of Rs. 10 each Issued, subscribed and paid up capital 10,00,000 equity shares of Rs. 10 each Reserve and Surplus Profit and Loss Long-term loans
Fixed Assets: Land and Building Less: 200. Depreciation 00 Plant and Machinery Less: 100. Depreciation 00 Furniture 45.3 Less: 45 Depreciation 15.5 Motor Vehicles 0
38. 00
9.5 0
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Current liabilities and provisions: Sundry creditors Accrued interest Outstanding expenses
31. 75 0.9 05 2.0 0
Less: Depreciation Current Assets: Stock 34.6 Sundry debtors 55 Cash Miscellaneous expenditure to the extent not written off: _____ Preliminary expenses 195. 50
0. 50
9.5 0
76.0 0
10. 00 85. 00 23. 50
118. 50
1. 00 195. 50
Working Notes: 1. Subsequent Borrowings Needed (Rs. in lakhs) A. Cash Inflow Equity shares Loans Receipt from debtors Total (A) B. Cash Outflow Purchase of fixed assets Stock Preliminary expenses Payment to creditors Wages and salaries Administrative expenses 80.0 0 10.0 0 1.00 1.0 20. 50 2.0 0 1.0 24. 25 2.0 0 1.0 24. 25 2.0 0 1.0 28. 00 2.0 0 1.0 28. 00 2.0 0 1.0 113. 00 100. 00 13.0 0 30. 00 30. 00 35. 00 35. 00 35. 00 35. 00 40. 00 35. 00
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0 Total Surplus/ (Deficit) Cumulative balance 92.0 0 21.0 0
0 23. 50 23. 50
0 27. 25 2.7 5
0 27. 25 7.7 5
0 31. 00 4.0 0
0 31. 00 9.0 0
21.0 (2.5 0.2 8.0 12. 21. 0 0) 5 0 00 00 There is shortage of cash in February of Rs. 25 lakhs which will be met by borrowings on February 1. 2. Payment to Creditors Purchases = Cost of goods sold-Wages and salaries Purchases for January= (75% of 30 lakhs) - Rs. 2 = Rs. 20.50 lakhs. (Note: Since gross margin is 25% of sales, cost of manufacture i.e. materials plus wages and salaries should be 75% of sales) Hence, Purchases = Cost of manufacture minus wages and salaries of Rs. 2 lakhs) The creditors are paid in the first month following purchases. Therefore, payment in February is Rs. 20.50 lakhs The same procedure will be followed for other months. Total purchases = Rs. 125 lakhs (for Jan-May) + Rs. 31.75 lakhs (for June) + Rs. 10 lakhs (stock) = Rs. 166.75 lakhs 3. Accrued Interest on Loan 12% interest on Rs. 13 lakhs for 6 months Add: 12% interest on Rs. 2.5 lakhs for 5 months 0.905 lakhs Question 12 From the following information, prepare a summarised Balance Sheet as at 31st March, 2002: Working Capital Bank overdraft Fixed Assets to Proprietary ratio Rs.2,40,000 Rs.40,000 0.75 0.78 lakhs 0.125 lakhs
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Reserves and Surplus Current ratio Liquid ratio
Rs.1,60,000 2.5 1.5 (PE-II-Nov.2002) (6 marks)
Answer Working notes: 1. Current assets and Current liabilities computation: 2.5 assets Current liabilitie= k (say) s or Current = 1 2.5 1 Or Current assets = 2.5 k and Current liabilities = k = Or Working capital = ( Current assets Current liabilities) Or Rs.2,40,000 Or k = k (2.5 1) = 1.5 k = Rs. 1,60,000 = Rs. 1,60,000 Current assets Current liabilitie s
Current liabilities
Current assets = Rs.1,60,000 2.5 = Rs.4,00,000 2. Computation of stock Liquid ratio Or Or Or 1.5 = = Liquid assets Current liabilitie s Current assets Stock Rs.1,60,00 0
1.5 Rs.1,60,000 = Rs.4,00,000 Stock Stock = Rs.1,60,000 fund; Fixed assets; Capital
3. Computation of Proprietary and Sundry creditors Proprietary ratio and Fixed assets = =
Fixed assets = 0.75 Proprietar y fund 0.75 Proprietary fund = 0.25 Proprietary fund Proprietary fund Rs.9,60,000 = 0.75 proprietary fund
Net working capital =
Or Rs.2,40,000/0.25 = Or Proprietary fund and Fixed assets
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= = Capital = = = Sundry creditors = =
0.75 Rs.9,60,000 Rs.7,20,000 Proprietary fund Reserves & Surplus Rs.9,60,000 Rs.1,60,000 Rs.8,00,000 = (Current liabilities Bank overdraft)
(Rs.1,60,000 Rs.40,000) Rs.1,20,000
Construction of Balance sheet (Refer to working notes 1 to 3) Balance Sheet Rs. Capital Reserves & Surplus Bank overdraft Sundry creditors 8,00,00 Fixed assets 0 1,60,00 Stock 0 40,000 Current assets 1,20,00 0 11,20,0 00 11,20,0 00 Rs. 7,20,00 0 1,60,00 0 2,40,00 0
Question 13 With the help of the following information complete the Balance Sheet of MNOP Ltd.: Equity share capital Current debt to total debt Total debt to owners equity Fixed assets to owners equity Total assets turnover Inventory turnover Rs. 1,00,000 .40 .60 .60 2 Times 8 Times The relevant ratios of the company are as follows:
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(PE-II-May 2005) (7 marks) Answer MNOP Ltd Balance Sheet Liabilities Owner equity Current debt Long term debt Rs 24,000 Cash 36,000 Inventory 1,60,000 Working Notes 1. Total debt = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000 Current debt to total debt = 0.40 , hence current debt = 0.40 60,000 = 24,000 2. Fixed assets = 0.60 Owners equity = 0.60 Rs 1,00,000 = Rs 60,000 3. Total equity = Total debt + Owners equity = Rs 60,000 + Rs 1,00,000 = Rs 1,60,000 4. Total assets consisting of fixed assets and current assets must be equal to Rs 1,60,000 (Assets = Liabilities + Owners equity). Since Fixed assets are Rs 60,000 , hence, current assets should be Rs 1,00,000 5. Total assets to turnover = 2 Times : Inventory turnover = 8 Times Hence , Inventory /Total assets = 2/8=1/4, Total assets = 1,60,000 Therefore Inventory = 1,60,000/4 = 40,000 Balance on Asset side Cash = 1,00,000 40,000 = 60,000 Question 14 Using the following data, complete the Balance Sheet given below: Gross Profits Rs. 54,000 Assets Rs 60,000 60,000 40,000 1,60,000 1,00,000 Fixed assets
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Shareholders Funds Gross Profit margin Credit sales to Total sales Total Assets turnover Inventory turnover Average collection period (a 360 days year) Current ratio Long-term Debt to Equity Balance Sheet Creditors Long-term debt Shareholders funds .. .. ..
Rs. 6,00,000 20% 80% 0.3 times 4 times 20 days 1.8 40%
Cash Debtors Inventor y Fixed assets
.. .. .. ..
(PE-II-Nov. 2005)(12 Marks) Answer Gross Profits Rs. 54,000 20% = Gross Profit Margin Sales
Gross Profits Gross Profit Margin
= Rs. 54,000 / 0.20 = Rs. 2,70,000 Credit Sales to Total Sales = 80% Credit Sales = Rs. 2,70,0000.80
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= Rs. 2,16,000 Total Assets Turnover Total Assets = = 0.3 times =
Sales TotalAssets Turnover
Rs. 270000 , , 0.3
= Rs. 9,00,000 Sales Gross Profits = COGS COGS = Rs. 2, 70,000 54,000 = Rs. 2, 16,000 Inventory turnover = 4 times Inventory =
COGS 2,16000 , = Inventory turnover 4
= Rs. 54,000 Average Collection Period = 20 days Debtors turnover =
360 Average Collection Period
= 360/20=18 Debtors =
Credit Sales Debtors turnover
Rs. 2,16,000 18
= 1.8
= Rs. 12,000 Current ratio 1.8 =
DebtorsInventory + + Cash Creditors

= (Rs. 12,000 + Rs. 54,000 + Cash) = Rs. 66,000 + Cash
1.8 Creditors 1.8 Creditors
Long-term Debt to Equity = 40% Shareholders Funds = Rs. 6, 00,000 Long-term Debt= Rs. 6, 00,00040%
3.53
= Rs. 2, 40,000 Creditors (Balance figure) = 9, 00,000 (6, 00,000 + 2, 40,000) = Rs. 60,000 Cash = (60,0001.8) 66,000 = Rs. 42,000 Balance Sheet (in Rs) Creditors (Bal. Fig) Long- term debt Shareholders funds 60,000 Cash Debtors 2,40,00 Inventory 0 6,00,00 Fixed 0 (Bal fig.) 9,00,00 0 Question 15 JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005: Balance Sheet Rs. in lakhs March 31, 2006 Sources of Funds: Shareholders Funds Loan Funds 2,377 3,570 5,947 Applications of Funds: Fixed Assets Cash and bank Debtors Stock Other Current Assets Less: Current Liabilities 3,466 489 1,495 2,867 1,567 (3,937) 2,900 470 1,168 2,407 1,404 (3,794) 1,472 3,083 4,555 March 31, 2005 Assets 42,000 12,000 54,000 7,92,00 0 9,00,00 0
3.54
5,947 4,555 The Income Statement of the JKL Ltd. for the year ended is as follows: Rs. in lakhs March 31, 2006 Sales Less: Cost of Goods sold Gross Profit Less: Selling, General Administrative expenses and 22,165 20,860 1,305 1,135 170 113 57 23 34 March 31, 2005 13,882 12,544 1,338 752 586 105 481 192 289
Earnings before Interest and Tax (EBIT) Interest Expense Profits before Tax Tax Profits after Tax (PAT) 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. (PE-II-May 2006)(12 marks) Answer Ratios for the year 2005-2006 (i) (a) = Inventory turnover ratio COGS Average Inventory
3.55
20,860 (2,8672,407) + 2
= 7.91 (b) Financial leverage = EBIT EBIT I 2005-06 = 170 57 2004-05 = 586 481
= 2.98 (c) ROI = = NOPAT Sales Sales Average Capital employed
= 1.22
57 (1 .4) 22,165 + 22,165 (5,9474,555) 2 34.2 22,165 22,165 5,251
= 0.65% (d) ROE = = PAT Average shareholde rs' funds
34 (2,3771,472) + 2 34 1,924.5 = 1.77%
(e) Average Collection Period* Average per = Sales day 22,165 = Rs.60.73 lakhs 365 Average Debtors Average per sales day
Average collection = period
3.56
(1,4951,168) + 2 = 6073 . = 1331 .5 60.73
= 22 days *Note: In the above solution, 1 year = 365 days has been assumed. Alternatively, some candidates may give the solution on the basis 1 year = 360 days. (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 The Financial statements of Excel AMP Graphics Limited are as under: Balance Sheet As at 31st December, 2001 2001 Sources of Funds: Shareholders funds Share Capital Reserves & Surplus Loan Funds: Secured Loans Finance lease obligations Unsecured loans 1,121 8,950 10,071 931 7,999 8,930 (Rs. in crores) 2000
74 171 245 10,316
259
115 374 9,304
Applications of Funds: Fixed Assets Gross Block Less: Depreciation 6,667 3,150 5,747 2,561
3.57
Net Block Capital Work-in-progress Investments Current Assets, Loans & Advances: Inventories Sundry debtors Cash & Bank Balances Loans & Advances Less: Current liabilities & Provisions Current liabilities Provisions Net Current Assets Net Deferred Tax Liabiliy
3,517 27 3,544 288 2,709 9,468 3,206 2,043 17,426 10,109 513 10,622 6,804 (320) 10,316
3,186 28 3,214 222 2,540 9,428 662 1,712 14,342 7,902 572 8,474 5,868
9,304
Profit and Loss Account For the year ended 31 December, 2001 2001 (Rs. in crores) Income: Sales & Services Other Income 23,43 6 32 0 23,75 6 15,179 2,543 3,546 419 7 412 383 6
2000
17,849 306 18,155
Expenditure: Cost of Materials Personnel Expenses Other Expenses Depreciation Less: Transfer from
10,996 2,293 2,815 377
3.58
revaluation reserve Interest 164 21,84 4 1,912 88 16,569
Profit Before Tax 1,586 Provision for Tax: Current Tax 450 371 Deferred Tax (6) Profit after Tax 1,468 1,215 Required: (a) Compute and analyse the return on capital employed (ROCE) in a Du-Pont control chart framework. (b) Compute and analyse the average inventory holding period and average collection period. (c) Compute and analyse the return on equity (ROE) by bringing out clearly the impact of financial leverage. (PE-II-Nov.2003) (16 marks) Answer (a) Working note: Computation of Cost of goods sold (COGS), Operating profit before depreciation, interest & tax (OPBDIT), Operating profit before interest and tax (OPBIT), Profit before interest and tax (PBIT), Profit before tax (PBT) and Profit after tax (PAT) (Rs. in crores) Year Cost of goods sold (COGS) (Material consumed + Personnel expenses + Other expenses) Operating profit before depreciation, interest and tax (OPBDIT) (Income from sales & service COGS) Operating profit before interest and tax (OPBIT) (OPBDIT depreciation) Profit before interest and tax (PBIT) (OPBIT + Other incomes) Profit before tax (PBT) 1,912 1,586 2,076 1,674 1,756 1,368 2,168 1,745 2001 21,268 2000 16,104
3.59
(PBIT Interest) Profit after tax (PAT) (PBT Tax) Return on capital employed (ROCE): (Before interest & tax) Operating before profits interest tax and Sales = Sales Capital employed Capital employed * Capital employed = (Balance sheet total Capital WIP Investments Loans & advances) Year 2001 2000 ROCE 22.07% 18.63% (Refer to working note) Rs.1,368 Rs.1,756 100 100 Rs.7,342 Rs.7,958 Operating profit margin 7.49% 7.66% (Refer to working note) Rs.1,756 Rs.1,368 100 100 Rs.23,436 Rs.17,849 Material consumed / Sales 64.77% 61.61% Personnel expenses /Sales 10.85% 12.85% Other expenses / Sales 15.13% 15.77% Depreciation / Sales 1.76% 2.11% (b) Computation and analysis of average inventory holding period and average collection period:
Year 1. Inventory turnover ratio: (Material consumed/ Closing inventory) 2. Average inventory turnover period: (360 days / Inventory turnover ratio) 3. Receivables turnover ratio: (Net credit sales/Closing Sundry debtors) 4. Average collection period: (360 days / Receivables 2001 5.6 (Rs.15,179/Rs.2, 709) 64 days (Rs. in crores) 2000 4.33 (Rs.10,996/Rs.2 ,540) 83 days
1,468
1,215
OPBIT
2.48 (Rs.23,436/Rs.9, 468) 145 days
1.89 (Rs.17,849/Rs.9 ,428) 190 days
3.60
turnover ratio)
(c) ROE = PAT / Shareholders funds 2001 2000 = = 1,468 Cr. 10,071 Cr. 1,215 Cr. 8,930 Cr.
14.58 % 13.61% D ROE = ROA + { (ROA i ( 1 Tc)} E ROA (Post tax) {(ROCE (1 .35)} Tax / PBT Loan funds / Total funds Shareholders Funds / Total funds ROE is marginally better than ROA, as the company is minimal. Question 17
14.34% 23.22% 2.37% 97.63% debt ratio
12.11% 23.39% 4.02% 95.98% employed by
The following accounting information and financial ratios of PQR Ltd. relate to the year ended 31st December, 2006: 2006 I Accounting Information: Gross Profit Net profit Raw materials consumed Direct wages Stock of raw materials Stock of finished goods Debt collection period All sales are on credit II Financial Ratios: Fixed assets to sales Fixed assets to Current assets 1:3 13 : 11 15% of Sales 8% of sales 20% of works cost 10% of works cost 3 months usage 6% of works cost 60 days
3.61
Current ratio Long-term loans to Current liabilities
2:1 2:1
Capital to Reserves and Surplus 1:4 If value of fixed assets as on 31st December, 2005 amounted to Rs. 26 lakhs, prepare a summarised Profit and Loss Account of the company for the year ended 31st December, 2006 and also the Balance Sheet as on 31st December, 2006. (PE-II-May 2007) (12 marks) Answer (a) Working Notes: (i) Calculation of Sales Fixed Assets 1 = Sales 3
26,00,000 1 = Sales Rs.78,00,0 = 00 Sales 3
(ii) Calculation of Current Assets Fixed Assets 13 = Current sets 11 As 26,00,000 13 = Current sets Rs.22,00,000 As = Current sets 11 As Rs. Sales Less: Gross Profit Works Cost 78,00,000 11,70,000 66,30,000
(iii) Calculation of Raw Material Consumption and Direct Wages
Raw Material Consumption (20% of Works Cost) Rs. 13,26,000 Direct Wages (10% of Works Cost) 6,63,000 3 = Rs.3,31,500 12 Rs.
(iv) Calculation of Stock of Raw Materials (= 3 months usage) = 13,26,000
(v) Calculation of Stock of Finished Goods (= 6% of Works Cost)
3.62
= 66,30,000
6 = Rs.3,97,800 100
(vi) Calculation of Current Liabilities
Current sets As =2 Current Liabilitie s 22,00,000 = 2 Current Liabilitie Rs. s = 11,00,000 Current Liabilitie s
(vii) Calculation of Debtors
Average collection period =
Debtors 365 Credit Sales
Debtors 365 60 Debtors 12,82,191. Rs. = = Rs. 78 or 12,82,192 78,00,000

(viii) Calculation of Long term Loan Long Loan 2 term = Current Liabilitie 1 s Long loan 2 term = Long loan Rs.22,00,000. term = 11,00,000 1 (ix) Calculation of Cash Balance Rs. Current assets Less: Debtors Raw materials stock Finished goods stock Cash balance (x) Calculation of Net worth Fixed Assets Current Assets Total Assets Less: Long term Loan Net worth 22,00,000 33,00,000 15,00,000 Current Liabilities 11,00,000 12,82,192 3,31,500 3,97,800 20,11,492 1,88,508 26,00,000 22,00,000 48,00,000 22,00,000
Net worth = Share capital + Reserves = 15,00,000
3.63
Capital 1 1 = Share Capital15,00,000 = Rs.3,00,000 = Reserves Surplus 4 and 5
4 Reserves Surplus15,00,000 = Rs. and = 12,00,000 5

Profit and Loss Account of PQR Ltd. for the year ended 31st December, 2006 Particulars T o T o T o T o Direct Materials Direct Wages Works (Overhead) Balancing figure Gross Profit c/d (15% of Sales) Rs. 13,26, 000 6,63,0 00 46,41, 000 11,70, 000 78,00, 000 T o Selling and Distribution Expenses (Balancing figure) Net Profit Sales) (8% of 5,46,0 00 By Gross Profit b/d _______ _ 78,00,0 00 11,70,0 00 Particulars By Sales Rs. 78,00,0 00
T o
6,24,0 00 11,70, 000
_______ _ 11,70,0 00
Balance Sheet of PQR Ltd. as at 31st December, 2006 Liabilities Share Capital Reserves Surplus Long term loans and Rs. Assets Rs. 26,00, 000
3,00,0 Fixed Assets 00 12,00, Current Assets: 000 22,00, 000 Stock of Raw Material
3,31,5 00
3.64
Current liabilities
11,00, Stock 000 Finished
of Goods
3,97,8 00 12,82, 192 1,88, 508 48,00, 000
Debtors _______ _ 48,00, 000 Question 18 Cash
Using the following information, complete the Balance Sheet given below: (i) (ii ) (iii ) (iv ) (v ) (vi ) Total debt to net worth Total assets turnover Gross profit on sales Average collection period (Assume 360 days in a year) Inventory turnover ratio based on cost of goods sold and year-end inventory Acid test ratio Balance Sheet as on March 31, 2007 Liabilities Equity Shares Capital Reserves and Surplus Total Debt: Current Liabilities Rs. 4,00,00 0 6,00,00 0 Assets Plant and Machinery and other Fixed Assets Current Assets: Inventory Debtors Cash _______ Rs. : : 3 0.75 : : : : 1:2 2 30% 40 days
_______
3.65
(PE-II-Nov. 2007) (8 marks) Answer Networth = Capital + Reserves and surplus = 4,00,000 + 6,00,000 = Rs. 10,00,000 TotalDebt 1 = Networth 2 Total debt = Rs. 5,00,000 Total Liability side = 4,00,000 + 6,00,000 + 5,00,000 = Rs. 15,00,000 = Total Assets Total Assets Turnover = 2= Sales Total assets
Sales 15,00,000
Sales = Rs. 30,00,000 Gross Profit on Sales : 30% i.e. Rs. 9,00,000 COGS = Rs. 30,00,000 Rs. 9,00,000 = Rs. 21,00,000 Inventory turnover = 3= COGS Inventory
21,00,000 Inventory Average debtors Salesday /
Inventory = Rs. 7,00,000 Average collection period = 40 =
Debtors 30,00,000 /360
Debtors = Rs. 3,33,333. Acid test ratio = 0.75 = Current sets Stock As Current liabilitie s
Current sets 7,00,000 As 5,00,000
3.66
Current Assets = Rs. 10,75,000. = 15,00,000 10,75,000 = Rs. 4,25,000
Fixed Assets = Total Assets Current Assets Cash and Bank balance = Current Assets Inventory Debtors = 10,75,000 7,00,000 3,33,333 = Rs. 41,667. Balance Sheet as on March 31, 2007 Liabilities Equity Share Capital Reserves & Surplus Total Debt: Current liabilities 5,00,000 Rs. Assets Rs. 4,25,000 4,00,000 Plant and Machinery 6,00,000 and other Fixed Assets
Current Assets: Inventory Debtors ________ 15,00,00 0 Cash 7,00,000 3,33,333 41,66 7 15,00,00 0
Question 19 Distinguish between Cash Flow and Fund Flow statement.(PE-IINov.2002, May 2004) (3 marks) Answer The points of distinction between cash flow and funds flow statement are as below: Cash flow statement (i) Funds flow statement It ascertains the (i) It ascertains the changes in changes in balance of cash financial position between in hand and bank. two accounting periods. It analyses the reasons (ii) It analyses the reasons for for changes in balance of change in financial position cash in hand and bank between two balance sheets
(ii)
(iii) It shows the inflows and (iii) It reveals the sources and outflows of cash. application of finds.
3.67
(iv) It is an important tool for (iv) It helps to test whether short term analysis. working capital has been effectively used or not. (v) The two significant areas of analysis are cash generating efficiency and free cash flow. Question 20 Discuss any three ratios computed for investment analysis. Nov.2004) (3 marks) Answer Three ratios computed for investment analysis are as follows; Profit tax after (i) Earning per share = Numberequity of shares outstandin g (ii) Dividend yield ratio (iii) Return on capital employed Question 21 Discuss the financial ratios for evaluating company performance on operating efficiency and liquidity position aspects. (PE-II-Nov. 2006) (4 marks) 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 efficiency with which the firm manages and utilises its assets. These ratios usually indicate the frequency of sales with respect to its assets. These assets may be capital assets or working capital or average inventory. 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. = = Equity dividend share100 per Market per price share Net profit before interest tax 100 and Capital employed (PE-II--
3.68
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 shortterm liabilities affects its credibility as well as its credit rating. Continuous default on the part of the business leads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to its sickness 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.

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