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IGNOU MCA MCS-035 Free Solved Assignments 2010

Course Code : MCS-035


Course Title : Accountancy and Financial Management
Assignment Number : MCA(3)/035/Assign/2010
Maximum Marks : 100
Weightage : 25%
Last Dates for Submission : 15th April, 2010 (For January Session)
15th October, 2010 (For July Session)

This assignment has six questions. Answer all questions. 20 marks are for viva voce. You
may use illustrations and diagrams to enhance the explanations. Please go through the
guidelines regarding assignments given in the Programme Guide for the format of
presentation.

Question 1:From the following balances taken from the books of M/s X & Co.,
prepare trading and profit and loss account for the year ending December 31,
2008 and balance sheet as on that date.

Particulars Amount Amount


Rs.(Dr.) Rs.(Dr.)
Stock (1-1-2008) 17,000 ---
Debtors and Creditors 25,000 22,000
Returns 89,000 1,15,00
0
Drawing and Capital 17,000 12,000
Fire Insurance Premium 8,000 1,25,00
0
Life Insurance Premium 2,000 ---
Income Tax Paid 5,000 ---
Bill Receivable and 10,000 ---
Bills Payable
Sales Tax Payable 14,000 16,000
Wages and Salaries --- 12,000
Telephone Expenses 18,000 ---
Sales Promotion 3,000 ---
Expenses
Case and Bank 21,000 ---
Overdraft
Audit Fees 5,000 14,000

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Discount 8,000 ---


Investments 4,000 1,000
Interest on Investments 60,000 ---
Interest on Bank --- 5,000
Overdraft
Rent Paid 6,000 ---
Bad Debts Recovered 12,000 ---
--- 2,000
Total 3,24,000 3,24,00
0

Closing stock on 31st December, 2008 amounted to Rs.25,000/-

Ans :
Trial Balance (Rectified)
as on Dec 31, 2008
particulars Amount Amount
Dr. Cr.
Stock (01.01.2008) 17000 -
Debtors and Creditors 25000 22000
Purchase and Sales 89000 115000
Drawing and Capital 17000 12000
Fire Insurance premium 8000 125000
Life insurance premium 2000 -
Income tax paid 5000 -
Bill receivable and Bill 14000 16000
payable
Sales tax payable - 10000
Wages and salaries 12000 -
Telephone expances 18000 -
Sales promotion expances 3000 -
Cash and Bank overdraft 5000 14000
Audit fees 21000 -
Discount 4000 1000
Investment 60000 -
Interest on investment - 8000
Interest on bank overdraft 5000 -
Rent paid 6000 -
Bad debt recovered - 12000
Suspense 24000 -
3,35,000 3,35,000

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Trading and P/L account


Of M/s X & Co. As on Dec. 31,2008

particulars Amount particulars Amount

To opening stock 17000 By Sales 115000


To purchase 89000 By closing stock 25000
To Wages and salaries 12000
To gross profit 22000
transferred to P/L A/C
1,40,000 1,40,000
Fire Insurance 8000 By Gross profit from 22000
premium trading A/C
Life insurance 2000 By fire insurance 125000
premium premium
Income tax paid 5000 By Discount 1000
Telephone expances 18000 By Interest on 8000
investment
Sales promotion 3000 By Bad debt 12000
expances recovered
Audit fees 21000
Discount 4000
Interest on overdraft 5000
Rent paid 6000
Net profit 96000
1,68,000 1,68,000

Balance Sheet of M/s X & Co. As on Dec. 31,2008

Liabilities Amount Assets Amount


Capital 12000 91000 Investment 60000
Add: profit 96000
1,08,000
Less:Drawing (17000)
Creditors 22000 Closing stock 25000
Bill payable 16000 Debtors 25000
Sales tax payable 10000 Bill recievable 14000
Overdraft 14000 Cash 5000
Suspanse 24000
1,53,000 1,53,000

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Question 2:The Board of Directors of Ruby Ltd requests you to prepare a


statement showing the working capital requirements forecast for a level of
activity of 1,56,000 units of production. The following information is available
for your calculation:

(Rs. per unit)


__________________________________________________________________
___________________
Raw materials 90
Direct labour 40
Overheads 75
205
Profit 60
Selling price per unit 265

Raw materials are in stock on average one month.


Materials are in process, on average 2 weeks.
Finished goods are in stock, on average on month
Credit allowed by supplier – one months
Time lag in payment from debtors – 2 months
Lag in payment of wages - 1½ weeks
Lag in payment of overheads – one month.

20% of the output is sold against cash. Cash in hand and at bank is expected to be
Rs.60,000. It is to be assumed that production is carried on evenly throughout the
year. Wages and overhead accrue similarly and a time period of 4 weeks is
equivalent to a month.

Ans :Projected Income Statement Ruby Ltd.

Raw meterials (156000*90) 14040000


Direct labour (156000*40) 6240000
Overheads (156000*75) 11700000
Cost of goods sold 3,19,80,000
Profit (156000*60) 9360000
41340000

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Sales

20% of output is sold against cash


So, credit sales = 41340000*80% = 33072000

Working capital requirement

Assets
Raw materials (14040000*1/2) 1170000
Working progress
Raw material (14040000*1/2*1/12) = 585000
Labour overhead
50 % of (6240000+11700000)*1/2*1/12 = 373750 958750
Finished goods (31980000*1/12) 2665000
Debtors (33072000*1/12) 5512000
Cash balance 60000

Total (A) 10365750

Current Liabilities
Creditors (14040000*1/12) 1170000
Wages (6240000*3/8) 195000
Overhead (11700000*1/12) 975000

Total (B) 2340000

Working capital (A-B) 8025750

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Question 3:A machine costs Rs.3,00,000 and its effective life is estimated to be
6 years. A sinking fund is created for replacing the machine at the end of its
effective life time when its scrap realised a sum of Rs.20,000 only. Calculate to
the nearest hundreds of rupees, the amount which should be provided, every
year, for the sinking if it accumulates at 8% p.a. compounded annually.

Ans : Cost of machine = 300000


Residual value = 20000 at the end of 6th years.
Rate of interest = 8% per annum

Let assume annual instalment of sinking fund = x


And instalment will be deposited at the beginning of the year.
1st instalment = x(1+r/100)n

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Installment :
1st = x(1.08)6 = 1.586 x
2nd = x(1.08)5 = 1.469x
3rd = x(1.08)4 = 1.3604x
4th = x(1.08)3 = 1.25x
5th = x(1.08)2 = 1.66x
6th = x(1.08)1 = 1.08x
7.9114x
7.9114x = 300000-20000
Or, x = 280000/7.9114
= 35391 i.e 35400

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Question 4:Summarised Income statement and Balance sheet of Gem cables


ltd. For the year ended 31st March 2008 are as under:

Income statement for the year ended 31st March, 2008


(Rs.)
Sales 80,00,000
Less: Cost of goods sold 64,00,000
Gross Profit margin 16,00,000
Less Depreciation
1,50,000
Selling and administration expenses 4,00,000
2,50,000
Profit before interest and tax 12,00,000

Less: Interest 3,00,000


Profit before tax 9,00,000
Less: Tax @40% 3,60,000
Net Profit 5,40,000

Balance Sheet as at 31st March, 2008


Liabilities Assets
Rs. Rs.
Share capital Fixed assets
50,00,000 63,00,000
Retained earnings Inventory

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18,00,000 9,00,000
Debentures Debtors
8,00,000 5,00,000
Creditors Marketable securities
2,80,000 2,10,000
Bills payable Cash
1,20,000 90,000

80,00,000 80,00,000

You are required to calculate: (a) Gross profit margin, (b) Net profit margin, (c)
Cash profit ratio, (d) Return on total assets, and (e) Return on Shareholders
Networth.

Ans (a) Gross profit margin = gross profit * 100


Sales

= 1600000*100
8000000
= 20 %

(b) Net profit margin = Net profit *100


Sales
= 540000 * 100
8000000

= 6.75%

(c) Return on total assets =profit after tax *100


Total Assets

= 540000 * 100
8000000

= 6.75%

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(e) Return on share holder Net worth


= Return
Share holder networth

= 540000 *100
6800000

= 7.94%

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Question 5: Discuss the effects of liberal vs. stiff credit standards.

Ans : Business firms often sell goods on credit to facilitate sales. It is valuable to customers as it
augments their resources, and it is particularly appealing to customers who cannot borrow from
other sources or find it very expensive or cumbersome to do so.
The credit period extended by business firms usually ranges from 15 days to 45 days. When
goods are sold on credit, finished goods get converted (from the point of view of the selling firm)
into receivables (book debts). Receivables, when realized, generate cash.
The important dimensions of a firms credit policy are credit standards, credit period, cash
discount and collection effort. These variables are related and have a bearing on the level of
sales, bad debt loss, discounts taken by customers, and collection expenses.
A pivotal question in the credit policy of a firm is: What standard should be applied in accepting
or rejecting an account for credit granting? A firm has a wide range of choice in this respect. At
one end of the spectrum, it may decide not to extend credit to any customer, however strong his
credit rating may be. At the other end, it may decide to grant credit to all customers irrespective
of their credit rating.
In general, liberal credit standards tend to push sales up by attracting more customers. This is,
however, accompanied by a higher incidence of bad debt loss, a larger investment in receivables
and a higher cost of collection. Stiff credit standards have opposite effects. They tend to depress
sales, reduce the incidence of bad debt loss, decrease the investment in receivables and lower the
collection cost. Firms generally offer cash discounts to induce customers to make prompt
payments. The percentage discount and the period during which it is available are reflected in the
credit terms.
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Question 6:How do cash flow problem arise? What steps are suggested to
overcome the problem?
Ans : A cash flow problem arises when a business struggles to pay its debts as they become due.
Note that a cash flow problem is not necessarily the same as experiencing a negative cash flow.

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A business often experiences a net cash outflow, for example when making a large payment for
fixed assets or where there is a seasonal drop in demand.
However, when cash flow is consistently negative and the business uses up its cash balances,
then the problems become serious.
The main causes of cash flow problems are summarised below
While every business owner hopes their business will never have financial problems, in reality
most experience financial pressure at some point in their existence. This Factsheet is designed to
help you diagnose a cash flow shortage and take some steps toward correcting it.
The sooner you can diagnose the problem the better. Early diagnosis gives you more time to
make decisions and more options concerning your farm business.
Early Warning Signs - Cash Flow
Most farm businesses become aware of potential financial problems when cash flow becomes
tight. Obligations become increasingly difficult to meet in the short and medium term. This may
indicate a temporary short-term problem (such as a poor growing season) that will correct itself
in time, or it m9y9i9dicate a more serious long-term problem.
The first step is to determine if the problem is short or long-term. The distinction between the
two is important. Long-term problems require significant business adjustments to correct and, if
left uncorrected, have the potential to result in business failure.
Three Step Analysis Of Cash Flow
There is a simple three step approach to diagnose a cash flow problem.
Step 1 - Determine if the current cash flow shortage is short or long term
Step 2 - Calculate business equity
Step 3 - Identify the primary cause of the cash flow problem
Once these steps are completed you can determine what options are available.

Table 1. Debt Servicing Capacity

Projected Year
+ Farm Cash Revenue $380,000
- Farm Cash Expenses $328,000
= Net Cash from Operation $52,000
+ Interest Payments $18,000
+ Owner's Contributions $8,000
- Owner's Withdrawals (including taxes) $42,000
= Cash Available for Principal and Int. $36,000
- Principal and Interest Payments 31,000
Cash Available After P & I Payments $5,000
- Depreciation or Reserve for Asset Acquisition $20,000
Debt Servicing Capacity ($15,000)

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This example shows that there is cash available to cover the interest and principle payments but
not enough to cover depreciation. Depreciation or a reserve for asset acquisition is used to
replace assets as they wear out. In this example, a shortage of $15,000 exists.
Back of the envelope analysis - the information summarized in the debt servicing capacity
worksheet can also be used to project breakeven prices for crops or livestock. The total of
principal and interest payments, owners withdrawals and operating debt can be divided by the
projected production to determine the breakeven price needed.
Step 2 - Calculate business equity
Knowing your equity position enables you to judge the businesses' ability to survive the cash
shortage. A cash flow shortage that persists ultimately reduces the owner's equity. High equity
businesses have the ability to withstand a longer and more serious cash flow shortage because
they can re-borrow against their equity. Businesses with low equity are unable to tolerate cash
flow shortages and therefore are at much greater risk.
Knowing your equity position also allows you to pre-determine the minimum level of equity that
you wish to maintain in the business. This is important because the equity in the farm business
represents the retirement savings for many farmers. It is important to protect that investment.
You may, for example, decide that you will not let your equity percentage fall below a certain
amount, say $250,000. If you know your current equity position and the projected cash shortfall
you can calculate if you are at risk of falling below that amount.
Equity can be determined by subtracting your total liabilities from your total assets. To
determine the equity as a percentage divide your equity by your total assets and multiply by 100.
The equity of the business is always stated on the balance sheet, but it can vary widely depending
on how the assets are valued. Statements prepared for accounting purposes use cost less
depreciation to value assets, which is the purchase cost of the asset minus the depreciation taken
for tax purposes. Statements prepared for lenders use fair market value, which is the sale value of
the asset. For the purpose of evaluating your business equity you should use conservative fair
market values.
Percent Equity = (Equity ÷ Total Assets) x 100
E.g. (420,000 ÷ 650,000) x 100 - 64%
Step 3 - Identify the primary cause of the cash flow problem
The most important and the most difficult step in the process is identifying the cause of the cash
flow shortage. This can be done by examining the following three areas:
efficiency
scale of the business
debt structure
Efficiency
Some producers might immediately feel defensive when the word efficiency is used. Often they
have worked very hard at becoming more efficient only to see returns diminish. Sometimes this
is because of depressed commodity prices. However it is important to determine if the cash flow
problem will continue even after prices increase. If the efficiency of the business is only slightly
below average even good prices may not generate the profits needed to maintain a positive cash
flow.
Efficiency is measured by the physical and economic output of the business. Because there is no
one measurement of efficiency you must look at a combination of physical and economic
measurements such as yield per acre or variable costs per unit of output.

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