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Xaviers Institute of Business Management Studies
COURSE :MBA
FINANCIAL MANAGEMENT
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 authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements. The objective of such standards is to provide financial information to investors, lenders, creditors, contributors and others that is useful in making decisions about providing resources to the entity.
Question. 1(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: In business, you must know each asset’s book value and market value. Although both values are important in business, knowing the difference between book value and market value is necessary for decision making and recordkeeping.
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), also referred to as the cost of sales or cost of services, is how much it costs to produce your products or services. COGS include direct material and direct labor expenses that go into the production of each good or service that is sold.
When calculating the cost of goods sold, do not include the cost of creating goods or services that you don’t sell.
Question. 2(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 an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset’s value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits.
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 based budgeting in management accounting involves preparing the budget from the scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.
Let us take an example of a manufacturing department of a company ABC that spent INR 10 million last year. The problem is to budget the expenditure for the current year. There are multiple ways of doing so:
Question. 4. Distinguish between:
(a) Accounting Rate of Return and Internal Rate of Return
Answer : Internal Rate of Return
IRR is the discount rate that pushes the difference between the present value of cash inflows and present value of cash outflows to zero. It represents the rate of return an investment project is capable of generating over a
(b) Profitability Index and Profitability Ratios
Answer : The Profitability Index (PI) measures the ratio between the present value of future cash flows and the initial investment. The index is a useful tool for ranking investment projects and showing the value created per unit of investment.
The Profitability Index is also known as the Profit Investment Ratio (PIR) or the Value Investment Ratio (VIR).
Profitability Index Formula
(d) Earnings yield and Dividend yield
Answer : The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of how much a company earned per share. This yield is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem underpriced or overpriced.
Earnings yield is 12-month earnings divided by the share price. Earnings yield is the inverse of the P/E ratio.
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:
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 period allowed to customers | 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.
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.
Answer : Meaning:
Budgetary control is the process of determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances, if any. First of all, budgets are prepared and then actual results are recorded.
The comparison of budgeted and
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
Dear students, Get assignments and Case studies
Do send your query at :
or call us at :08263069601