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Course Code : MCS-035

Course Title : Accountancy and Financial Management


Assignment Number : MCA(3)/035/Assign/09
Maximum Marks : 100
Weightage : 25%
Last Dates for Submission : 30th April, 2009 (For January Session)
31st October, 2009 (For July Session)
This assignment has nine 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 Trial Balance of K. Kundu as on 31.03.2008, prepare Trading Account and Profit and
Loss Account for the year ended 31.3.2008 and a Balance Sheet as on that date after making necessary
adjustments: (15 Marks)

Trial Balance
Rs. Rs.
K.Kundu’s Drawings 12,000 K. Kundu’s Capital 60,000
Furniture & Fixtures 4,000 Returns Outward 2,000
Plant & Machinery 30,000 Sales 1,30,000
Opening Stock 20,000 Creditors 12,000
Purchases 80,000 Loan at 6% p.a. taken from 10,000
M. Mehta on 1.10.2007
Salaries and Wages 22,400 Discount 600
Debtors 20,400
Returns Inward 5,000
Postage & Telegrams 1,500
Rent, Rates & Taxes 3,600
Bad Debts written-off 400
Trade Expenses 200
Interest on loan from M. Mehta 150
Insurance 800
Travelling Expenses 500
Sundry Expenses 3,050
Cash in Hand 10,300
Total 2,14,600 2,14,600

Adjustment:

(1) Closing stock: Cost Price Rs. 21,000, Market Price Rs. 25,000.
(2) Of the debtors Rs. 400 are bad and should be written-off. Create a reserve for bad debts at 5% on
Sundry Debtors and a reserve for discount Debtors at 2½%.
(3) Salaries Rs. 800 for March 2008 were not paid.
(4) Interest on Capital is to be calculated at 6% p.a. and on drawings Rs. 330.
(5) Prepaid Insurance amounted to Rs. 100.
(6) Depreciate Furniture & Fixture by 5% and Plant and Machinery by 10%.
(7) Make a reserve for discount on creditors @ 2%.
Question 2:

A company is considering which of two mutually exclusive projects it should undertake. The Finance
Director thinks that the project with the higher NPV should be chosen whereas the Managing Director
thinks that the one with the higher IRR should be undertaken especially as both projects have the same
initial outlay and length of life. The company anticipates a cost of capital of 10% and the net after-tax cash
flows of the projects are as follows: (10 Marks)

(Rs. ‘000)
Year 0 1 2 3 4 5
Cash flows:
Project X (200) 35 80 90 75 20
Project Y (200) 218 10 10 4 3

Required:

(a) Calculate the NPV and IRR of each project.


(b) State, with reasons, which project you would recommend.
(c) Explain the inconsistency in the ranking of the two projects.

The discount factors are as follows:


Year 0 1 2 3 4 5

Discount (10%) 1 0.91 0.83 0.75 0.68 0.62


Factors: (20%) 1 0.83 0.69 0.58 0.48 0.41

Question 3:

P Ltd. uses three types of materials A, B and C for production of X, the final product. The relevant monthly
data for the components are as given below: (10 Marks)

(Units)
Materials A B C
Normal usage 200 150 180
Minimum usage 100 100 90
Maximum usage 300 250 270
Reorder quantity 750 900 720
Reorder period (months) 2 to 3 3 to 4 2 to 3

Calculate for each component: (i) Reorder level, (ii) Maximum level, (iii) Minimum level, and (iv) Average
stock level.

Question 4:

What is ‘Economic order quantity? How does it help in maintaining optimum level of inventory?
(5 Marks)

Question 5:

Sakthi Traders has a contribution/sales ratio of 20% and average book debts of Rs. 10 lakhs which it
collects in an average collection period 24 days. The company eorganized its ‘Credit Administration’
deptt, recently and introduced a cash incentive of 5% to speed up collection of outstandings. The incentive
is payable to customers making payment within 10 days. When the company reviewed the position after a
few months it was found that the average collection period had actually fallen to 20 days only and the
average book debts had increased to Rs. 10.50 lakhs mainly as a result of some increase in sales. It was also
noticed that only about half the total sales availed of the cash discount. The company’s cost of raising
additional funds is 20%. Do you recommend continuance of the cash incentive scheme? Show workings.
Assume one year = 360 days. (10 Marks)

Question 6:

A company sells 40,000 units of its product per year @ Rs. 35 per unit. The average cost per unit is Rs. 31
out of which variable cost per unit is Rs. 28. The average collection period is 60 days. Bad debts losses are
3% on sales and the collection charges amount to Rs. 15,000.

The company is considering the proposal to follow stricter collection policy which would bring down the
losses on account of bad debts to 1% of sales and average collection period to 45 days. It would, however,
reduce the sales volume by 1000 units and increase collection expenses to Rs. 25,000.

The company requires a rate of return of 20%. Would you recommend the adoption of the new credit
policy? (Assume 360 days in a year for the purpose of your calculation.)
(10 Marks)

Question 7:

What is Treasury Management? Explain the various tools of treasury management. How is it different from
financial management? (5 Marks)

Question 8:

What is the concept of ‘operating cycle? Why is it important in working Capital management? Give a
suitable example to illustrate the operating cycle concept.
(5 Marks)

Question 9:

JB Ltd. has the following Profit and Loss Account for the year ended 31st March, 2007 and the Balance
Sheet as on that date: (10 Marks)

Profit and Loss Account for the year ended 31st March, 2007

Particulars Rs. lakhs Particulars Rs. lakhs


Opening stock 1.75 Sales: Credit 12.00
Add: Manufacturing cost 10.75 Cash 3.00
12.50
Less: Closing stock 1.50
Cost of goods sold 11.00
Gross Profit 4.00
15.00 15.00
Administrative expenses 0.35 Gross profit 4.00
Selling expenses 0.25 Other income 0.09
Depreciation 0.50
Interest 0.47
Income-tax 1.26
Net profit 1.26
Total 4.09 4.09

Balance Sheet as on 31st March, 2007

Liabilities Rs. lakhs Assets Rs. lakhs


Equity shares of Rs. 10 each 3.50 Plant and machinery 10.00
10% Preference shares 2.00 Less: Depreciation 2.50
Reserves and surplus 2.00 Net plant and machinery 7.50
Long-term loan (12%) 1.00 Goodwill 1.40
Debentures (14%) 2.50 Stock 1.50
Creditors 0.60 Debtors 1.00
Bills Payable 0.20 Pre-paid expenses 0.25
Accrued expenses 0.20 Marketable securities 0.75
Provision for tax 0.65 Cash 0.25
Total 12.65 12.65

The market price of the share of JB Ltd. on 31st March, 2007 is Rs. 45 (Rs. laksh)
Reserves at the beginning 1.465
Net profit during the year 1.265
2.725
Preference dividends 0.200
Equity dividends 0.525
Reserves at the close of year 2.000

Calculate the following ratios – (1) Current ratio (2) Quick ratio (3) Debt-equity ratio (4) Interest coverage
(5) Debtors turnover (6) Average collection period (7) Gross profit margin (8) Net profit margin (9)
Earning per share (10) Return on shareholder’s equity (11) P/E ratio and (12) Earning yield.