FM & Eco

 

Question 1

What are the main responsibilities of a Chief Financial Officer of an organisation?

Answer

Responsibilities of Chief Financial Officer (CFO): The chief financial officer of an organisation plays an important role in the company’s goals, policies, and financial success. His main responsibilities include:

1. Financial analysis and planning: Determining the proper amount of funds to be employed in the firm.
2. Investment decisions: Efficient allocation of funds to specific assets.
3. Financial and capital structure decisions: Raisingof funds on favourable terms as possible, i.e., determining the composition of liabilities.
4. Management of financial resources (such as working capital).
5. Risk Management: Protecting assets.

 

Question 2

“The profit maximization is not an operationally feasible criterion.” Comment on it.

Answer

“The profit maximisation is not an operationally feasible criterion.” This statement is true because Profit maximisation can be a short-term objective for any organisation and cannot be its sole objective. Profit maximization fails to serve as an operational criterion for maximizing the owner's economic welfare. It fails to provide an operationally feasible measure for ranking alternative courses of action in terms of their economic efficiency. It suffers from the following limitations:

1. Vague term: The definition of the term profit is ambiguous. Does it mean short term orlong term profit? Does it refer to profit before or after tax? Total profit or profit per share?
2. Timing of Return: The profit maximization objective does not make distinction between returns received in different time periods. It gives no consideration to the time value of money, and values benefits received today and benefits received after a period as the same.
3. It ignores the risk factor.
4. The term maximization is also vague.

 

Question 3

Discuss emerging issues affecting the future role of Chief Financial Officer (CFO).

Answer

Emerging Issues/Priorities Affecting the Future Role of Chief Financial Officer (CFO)

1. Regulation: Regulation requirements are increasing and CFOs have an increasingly personal stake in regulatory adherence.
2. Globalisation: The challenges of globalisation are creating a need for finance leaders to develop a finance function that works effectively on the global stage and that embraces diversity.
3. Technology: Technology is evolving very quickly, providing the potential for CFOs to reconfigure finance processes and drive business insight through ‘big data’ and analytics.
4. Risk: The nature of the risks that organisations face is changing, requiring more effective risk management approaches and increasingly CFOs have a role to play in ensuring an appropriate corporate ethos.
5. Transformation: There will be more pressure on CFOs to transform their finance functions to drive a better service to the business at zero cost impact.
6. Stakeholder Management: Stakeholder management and relationships will become important as increasingly CFOs become the face of the corporate brand.
7. Strategy: There will be a greater role to play in strategy validation and execution, because the environment is more complex and quick changing, calling on the analytical skills CFOscan bring.
8. Reporting: Reporting requirements will broaden and continue to be burdensome for CFOs.
9. Talent and Capability: A brighter spotlight will shine on talent, capability and behaviours in the top finance role.

 

Question 4

A company offers a Fixed deposit scheme whereby Rs10,000 matures to Rs12,625 after 2 years, on a half-yearly compounding basis. If the company wishes to amend the scheme by compounding interest every quarter, what will be the revised maturity value?

Answer

Computation of Rate of Interest and Revised Maturity Value

Principal = Rs 10,000

Amount = Rs 12,625

 

Question 5

X is invested Rs2,40,000 at annual rate of interest of 10 percent. What is the amount after 3 years if the compounding is done?

1. Annually
2. Semi-annually.

Answer

Computation of Future Value

Principal (P) = Rs 2,40,000
Rate of Interest (ĭ) = 10% p.a.

Time period (n)= 3 years

Amount if compounding is done:

 

Question 6

Why money in the future is worth less than similar money today? Give the reasons andexplain.

Answer

Money in the Future is worth less than the Similar Money Today due to several reasons:

Risk  :  There is uncertainty about the receipt of money in future.

Preference For Present Consumption : Most of the persons and companies in general, prefer current consumption over future consumption.

Inflation : In an inflationary period a rupee today represents a greater real purchasing power than a rupee a year hence.

Investment Opportunities : Most of the persons and companies have a preference for present money because of availabilities of opportunities of investment for earning additional cash flow.

 

Question 7

Discuss the financial ratios for evaluating company performance on operating efficiency and liquidity position aspects.

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 efficiencywith which the firm manages and utilises its assets. These ratios usually indicate the frequency ofsales with respect to its assets. These assets may be capital assets or working capital or averageinventory. 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.

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 short-term liabilitiesaffects its credibility as well as its credit rating. Continuous default on the part of the businessleads to commercial bankruptcy. Eventually such commercial bankruptcy may lead to itssickness 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.

 

Question 8

Diagrammatically present the DU PONT CHART to calculate return on equity.

Answer

Du Pont Chart

There are three components in the calculation of return on equity using the traditional DuPont model- the net profit margin, asset turnover, and the equity multiplier. By examining each input individually, the sources of a company's return on equity can be discovered and compared to its competitors.

Return on Equity = (Net Profit Margin) (Asset Turnover) (Equity Multiplier)

 

Question 9

Discuss the composition of Return on Equity (ROE) using the DuPont model.

Answer

Composition of Return on Equity using the DuPont Model

There are three components in the calculation of return on equity using the traditional DuPont model- the net profit margin, asset turnover, and the equity multiplier. By examining each input individually, the sources of a company's return on equity can be discovered and compared to its competitors.

a) Net Profit Margin: The net profit margin is simply the after-tax profit a company generates for each rupee of revenue.

Net profit margin = Net Income ÷ Revenue

Net profit margin is a safety cushion; the lower the margin, lesser the room for error.

b) Asset Turnover: The asset turnover ratio is a measure of how effectively a company converts its assets into sales. It is calculated as follows:

Asset Turnover = Revenue ÷ Assets

The asset turnover ratio tends to be inversely related to the net profit margin; i.e., the higher the net profit margin, the lower the asset turnover.

c) Equity Multiplier: It is possible for a company with terrible sales and margins to take on excessive debt and artificially increase its return on equity. The equity multiplier, a measure of financial leverage, allows the investor to see what portion of the return on equity is the result of debt. The equity multiplier is calculated as follows:

Equity Multiplier = Assets ÷ Shareholders’ Equity.

 

Calculation of Return on Equity

To calculate the return on equity using the DuPont model, simply multiply the three components (net profit margin, asset turnover, and equity multiplier.) Return on Equity = Net profit margin× Asset turnover × Equity multiplier

 

Question 10

Explain briefly the limitations of Financial ratios.

Answer

Limitations of Financial Ratios

The limitations of financial ratios are listed below:

1. Diversified product lines: Many businesses operate a large number of divisions in quite different industries. In such cases, ratios calculated on the basis of aggregate data cannot be used for inter-firm comparisons.
2. Financial data are badly distorted by inflation: Historical cost values may be substantially different from true values. Such distortions of financial data are also carried in the financial ratios.
3. Seasonal factors may also influence financial data.
4. To give a good shape to the popularly used financial ratios (like current ratio, debt- equity ratios, etc.): The business may make some year-end adjustments. Such window dressingcan change the character of financial ratios which would be different had there been nosuch change.
5. Differences in accounting policies and accounting period: It can make the accounting data of two firms non-comparable as also the accounting ratios.
6. There is no standard set of ratios against which a firm’s ratios can be compared:

Sometimes a firm’s ratios are compared with the industry average. But if a firm desires to be above the average, then industry average becomes a low standard. On the other hand, for a below average firm, industry averages become too high a standard to achieve.

 

Question 11

Explain the important ratios that would be used in each of the following situations:

1. A bank is approached by a company for a loan of Rs50 lakhs for working capital purposes.
2. A long term creditor interested in determining whether his claim is adequately secured.
3. A shareholder who is examining his portfolio and who is to decide whether he should hold or sell his holding in the company.
4. A finance manager interested to know the effectiveness with which a firm uses its available resources.

Answer

Important Ratios used in different situations

1. Liquidity Ratios- Here Liquidity or short-term solvency ratios would be used by the bank to check the ability of the company to pay its short-term liabilities. A bank may use Current ratio and Quick ratio to judge short terms solvency of the firm.
2. Capital Structure/Leverage Ratios- Here the long-term creditor would use the capital structure/leverage ratios to ensure the long term stability and structure of the firm. A long term creditors interested in the determining whether his claim is adequately secured may use Debt-service coverage and interest coverage ratio.
3. Profitability Ratios- The shareholder would use the profitability ratios to measure the profitability or the operational efficiency of the firm to see the final results of business operations. A shareholder may use return on equity, earning per share and dividend per share.
4. Activity Ratios- The finance manager would use these ratios to evaluate the efficiency with which the firm manages and utilises its assets. Some important ratios are

(a) Capital turnover ratio

(b) Current and fixed assets turnover ratio

(c) Stock, Debtors and Creditors turnover ratio.

 

Question 14

Using the following data, complete the Balance Sheet given below:

Gross Profits	Rs54,000
Shareholders’ Funds	Rs6,00,000
Gross Profit margin	20%
Credit sales to Total sales	80%
Total Assets turnover	0.3 times
Inventory turnover	4 times
Average collection period (a 360 daysyear)	20 days
Current ratio	1.8
Long-term Debt to Equity	40%

 

Balance Sheet

Liabilities Amount	(Rs)	Assets Amount	(Rs)
Creditors	………………	Cash	……………
Long-term debt	………………	Debtors	……………
Shareholders’ funds	………………	Inventory Fixed assets	…………… ……………
Answer
Gross Profits Rs 54,000
Gross Profit Margin 20%

 

Sales = Gross Profits / Gross Profit Margin = Rs 54,000 / 0.20 = Rs 2,70,000

Question 15

JKL Limited has the following Balance Sheets as on March 31, 2006 and March 31, 2005:

 

The Income Statement of the JKL Ltd. for the year ended is as follows:

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.

Answer

Ratios for the year 2005-2006

i) (a) Inventory turnover ratio

 

(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

ABC Limited has an average cost of debt at 10 per cent and tax rate is 40 per cent. The Financial leverage ratio for the company is 0.60. Calculate Return on Equity (ROE) if its Return on Investment (ROI) is 20 per cent.

Answer

ROE = [ROI + {(ROI – r)  ×  D/E}] (1 – t)

= [0.20 + {(0.20 – 0.10)   ×  60}] (1 – 0.40)

=[ 0.20 + 0.06]  × 0.60 = 0.1560

ROE = 15.60%

 

Question 17

The following information relates to Beta Ltd. for the year ended 31st March 2013: Net Working Capital Rs12,00,000

Fixed Assets to Proprietor’s Fund Ratio 0.75 Working Capital Turnover Ratio 5 Times Return on Equity (ROE) 15%

There is no debt capital.

You are required to calculate:

i)Proprietor’s Fund

ii) Fixed Assets

iii) Net Profit Ratio.

Answer

(i) Calculation of Proprietor’s Fund

Since Ratio of Fixed Assets to Proprietor’s Fund                = 0.75

Therefore, Fixed Assets                                                       = 0.75 Proprietor’s Fund

Net Working Capital                                                             = 0.25 Proprietor’s Fund

12,00,000                                                                             = 0.25 Proprietor’s Fund

[Note: Fixed Assets may be computed alternatively by (Net Working Capital × Fixed Assets to Proprietor’s Fund Ratio) and Proprietor’s Fund by (Fixed Assets + Net Working Capital)].

 

Question 18

NOOR Limited provides the following information for the year ending 31st March, 2014:

Equity Share Capital	Rs25,00,000
Closing Stock	Rs6,00,000
Stock Turnover Ratio	5 times
Gross Profit Ratio	25%
Net Profit / Sale	20%
Net Profit / Capital	¼

You are required to prepare:

Trading and Profit & Loss Account for the year ending 31st March, 2014.

Answer

Working Notes:

 

 

Question 19

Distinguish between Funds Flow Statement and Cash Flow Statement.

Answer

Differentiation between Funds Flow Statement and Cash Flow Statement

1. Funds flow statement is based on the accrual accounting system. In case of preparation of cash flow statement all transactions affecting the cash equivalents only are taken intoconsideration.
2. Funds flow statement analyses the sources and applications of funds which are longtermin nature and the net increase in long-term funds will be reflected on the working capital of the firm. The Cash flow statement will only consider the increase or decrease in current assets and current liabilities in calculating the cash flow of funds from operations.
3. Funds flow analysis is more useful for long-range financial planning. Cash flow analysis is more useful for identifying and correcting the current liquidity problems of the firm.
4. Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement tallies difference between opening balance of cash and closing balance of cash by proceeding through sources and uses.

 

Question 20

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	(A)	2,52,00,000
Less:
Cash Cost of Sales		1,98,00,000
Depreciation		6,00,000
Salaries and Wages		24,00,000
Operating Expenses		8,00,000
Provision for Taxation		8,80,000
	(B)	2,44,80,000
Net Operating Profit (A – B)		7,20,000
Non-recurring Income – Profits on sale of equipment		1,20,000

		8,40,000
Retained earnings and profits brought forward		15,18,000
		23,58,000
Dividends declared and paid during the year		7,20,000
Profit and Loss Account balance as on March 31, 2006		16,38,000

 

Balance Sheet ason

Assets	March 31, 2005	March 31, 2006
	(Rs.)	(Rs.)
Fixed Assets:
Land	4,80,000	9,60,000
Buildings and Equipment	36,00,000	57,60,000
Current Assets:
Cash	6,00,000	7,20,000
Debtors	16,80,000	18,60,000
Stock	26,40,000	9,60,000
Advances	78,000	90,000
	90,78,000	1,03,50,000

 

Balance Sheet ason

Liabilities and Equity	March 31, 2005	March                        31, 2006
	(Rs)	(Rs)
Share Capital	36,00,000	44,40,000
Surplus in Profit and Loss Account	15,18,000	16,38,000
Sundry Creditors	24,00,000	23,40,000
Outstanding Expenses	2,40,000	4,80,000
Income-tax payable	1,20,000	1,32,000
Accumulated Depreciation on Buildings and Equipment	12,00,000	13,20,000
	90,78,000	1,03,50,000

The original cost of equipment sold during the year 2005-06 was Rs7,20,000.

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	16,00,000
Add: Depreciation	6,00,000
Operating Profits before Working Capital Changes	22,00,000
Increase in Debtors	(1,80,000)
Decrease in Stock	16,80,000
Increase in Advances	(12,000)
Decrease in Sundry Creditors	(60,000)
Increase in Outstanding Expenses	2,40,000
Cash Generated from Operations	38,68,000
Income tax Paid	8,68,000
Net Cash from Operations	30,00,000

 

Cash flows from Investment Activities

	Rs.
Purchase of Land	(4,80,000)
Purchase of Buildings and Equipment	(28,80,000)
Sale of Equipment	3,60,000
Net Cash used in Investment Activities	(30,00,000)

 

Cash flows from Financing Activities

 

		Rs.
Issue of Share Capital	8,40,000
Dividends Paid	(7,20,000)	_______
Net Cash from Financing Activities		1,20,000
Net increase in Cash and Cash Equivalents		1,20,000
Cash and Cash Equivalents at the beginning		6,00,000
Cash and Cash Equivalents at the end		7,20,000

 

Buildings and EquipmentAccount

	Rs		Rs
Balance b/d	36,00,000	Sale of Asset	7,20,000
Cash/Bank (purchase) (Balancingfigure)	28,80,000	Balance c/d	57,60,000   _____     _
	64,80,000		64,80,000

 

Accumulated Depreciation  on Buildings and EquipmentAccount

	Rs			Rs
Sale of Asset		Balance b/d		12,00,000
(Accumulated depreciation)	4,80,000	Profit and (Provisional)	Loss	6,00,000
Balance c/d	13,20,000			_________
	18,00,000			18,00,000

 

Sale of Asset Account

	Rs
Original Cost	7,20,000
Less: Accumulated Depreciation	4,80,000
Net Cost	2,40,000
Profit on Sale of Asset	1,20,000
Sale Proceeds from Asset Sales	3,60,000

 

Income Tax Payable Account

	Rs		Rs
Bank A/c (b/f) Balance c/d	8,68,000 1,32,000	Balance  b/d Provision for Tax A/c	1,20,000 8,80,000
	10,00,000		10,00,000

 

Question 21

The Balance Sheet of JK Limited as on 31st March, 2005 and 31st March, 2006 are given below:

 

Balance Sheetason                                                                  (Rs’000)

 

Liabilities	31.03.05	31.03.06	Assets	31.03.05	31.03.0 6
Share Capital	1,440	1,920	Fixed Assets	3,840	4,560
Capital Reserve		48	Less: Depreciation	1,104	1,392
General	816	960		2,736	3,168

Liabilities	31/03/05	31/03/06	Assets	31/03/05	31/03/06
Share Capital	1,440	1,920	Fixed Assets	3,840	4,560
Capital Reserve		48	Less: Depreciation	1,104	1,392
General Reserve	816	960		2,736	3,168
Profit and Loss	288	360	Investment	480	384
Account
9% Debenture	960	672	Cash	210	312
Current Liabilities	576	624	Other Current Assets
Proposed Dividend	144	174	(including Stock)	1,134	1,272
Provision for Tax	432	408	Preliminary Expenses	96	48
Unpaid Dividend	-	18		_	_
	4,656	5,184		4,656	5,184

Additional Information:

1. During the year 2005-2006, Fixed Assets with a book value of Rs2,40,000 (accumulated depreciation Rs84,000) was sold forRs1,20,000.
2. Provided Rs4,20,000asdepreciation.
3. Some investments are sold at a profit of Rs48,000and Profit was credited to Capital Reserve.
4. It decided that stocks be valued at cost, whereas previously the practice was to value stock at cost less 10 per cent. The stock was Rs2,59,200as on 31.03.05.The stock as on31.03.06 was correctly valued atRs3,60,000.
5. It decided to write off Fixed Assets costing Rs60,000on which depreciation amountingtoRs48,000 has been provided.
6. Debentures are redeemed at Rs105. Required: Prepare a CashFlowStatement.

Answer

Cash flow Statement (31stMarch, 2006)

(A)Cashflows from OperatingActivities

Profit and Loss A/c
(3,60,000 – (2,88,000 + 28,800)		43,200
Adjustments:
Increase in General Reserve	1,44,000
Depreciation	4,20,000
Provision for Tax	4,08,000
Loss on Sale of Machine	36,000
Premium on Redemption of Debenture	14,400
Proposed Dividend	1,74,000
Preliminary Exp. w/o	48,000
Fixed Assets w/o	12,000	12,56,400
Funds from Operation		12,99,600
Increase in Sundry Current Liabilities		48,000
Increase in Current Assets
12,72,000 – (11,34,000 + 28,800)		(1,09,200)
Cash before Tax		12,38,400
Tax paid		4,32,000
Cash from Operating Activities		8,06,400

 

(b) Cash from Investing Activities

Purchases of fixed assets	(10,20,000)
Sale of Investment	1,44,000
Sale of Fixed Assets	1,20,000	(7,56,000)

 

(c) Cash from FinancingActivities

Issue of Share Capital		4,80,000
Redemption of Debenture		(3,02,400)
Dividend paid		(1,26,000)	51,600
Net increase in Cash and Cash equivalents			1,02,000
Opening Cash and Cash equivalents			2,10,000
Closing Cash			3,12,000

 

d) Fixed AssetsAccount

	Particulars	Rs.			Particulars	Rs.
To	Balance b/d	27,36,000		By	Cash	1,20,000
To	Purchases (Balance)	10,20,000		By	Loss on sales	36,000
				By	Depreciation	4,20,000
				By	Assets w/o	12,000
		________		By	Balance
						31,68,000
		37,56,000				37,56,000

 

(e)DepreciationAccount

	Particulars	Rs.		Particulars	Rs.
To	Fixed Assets (on sales)	84,000	By	Balance b/d	11,04,000
To	Fixed Assets w/o	48,000	By	Profit and Loss a/c	4,20,000
To	Balance	13,92,000			_______
		15,24,000			15,24,000

 

Question 22

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	2005
		Rs	Rs
Capital and Liabilities
Share Capital		6,75,000	7,87,500
General Reserves		2,25,000	2,81,250
Capital Reserve (Profit on Sale of investment)		-	11,250
Profit & Loss Account		1,12,500	2,25,000
15% Debentures		3,37,500	2,25,000
Accrued Expenses		11,250	13,500
Creditors		1,80,000	2,81,250
Provision for Dividends		33,750	38,250
Provision for Taxation		78,750	85,500
	Total	16,53,750	19,48,500
Assets
Fixed Assets		11,25,000	13,50,000
Less: Accumulated depreciation		2,25,000	2,81,250
Net Fixed Assets		9,00,000	10,68,750
Long-term Investments (at cost)		2,02,500	2,02,500

Stock (at cost)		2,25,000	3,03,750
Debtors (net of provision for doubtful debts of   Rs45,000 and Rs56,250 respectively for 2004  and 2005 respectively)		2,53,125	2,75,625
Bills receivables		45,000	73,125
Prepaid Expenses		11,250	13,500
Miscellaneous Expenditure		16,875	11,250
		16,53,750	19,48,500

Additional Information:

1. During the year 2004-05, fixed assets with a net book value of Rs11,250 (accumulated depreciation, Rs33,750) was sold forRs9,000.
2. During the year 2004-05, Investments costing Rs90,000were  sold, and also Investments costing Rs90,000 werepurchased.
3. Debentures were retired at a Premium of10%.
4. Tax of Rs61,875was paid for2003-04.
5. During the year 2004-05, bad debts of Rs15,750 were written off against the provision for Doubtful Debtaccount.
6. The proposed dividend for 2003-04 was paid in2004-05.

Required:

Prepare a Funds Flow Statement (Statement of changes in Financial Position on workingcapital basis) for the year ended March31,2005.

Answer

Computation of Funds from Operation

Profit and loss balance on March 31, 2005	Rs2,25,000
Add: Depreciation	90,000
Loss on Sale of Asset	2,250
Misc. Expenditure written off	5,625
Transfer to Reserves	56,250
Premium on Redemption of debentures	11,250
Provision for Dividend	38,250
Provision for Taxation	68,625
	4,97,250
Less: P/L balance on March 31, 2004	1,12,500
Funds from operations	3,84,750

 

Accumulated Depreciation A/c

To Fixed Asset A/c	33,750	By Bal. b/d	2,25,000
To Bal. c/d	2,81,250	By P/L A/c (Pro (Prov. for dep.) (Bal. Fig.)	90,000
	3,15,000		3,15,000

 

Fixed Assets A/c

To Bal. b/d	11,25,000	By Accumulated Depreciation A/c	33,750
		By Cash	9,000
To  Bank   (Purchase of Fixed Asset) (Bal. fig.)	2,70,000	By P/L (Loss on sale)	2,250
		By Bal. c/d	13,50,000
	13,95,000		13,95,000

 

Provision for Tax A/c

To Cash (tax paid)	61,875	By Bal. b/d	78,750
		By P/L A/c (Prov.)
To Bal. c/d	85,500	(Bal. fig.)	68,625
	1,47,375		1,47,375

 

Statement of Changes in Working Capital

	March                     31, 2004	March                     31,2005	Change                       in W/C
Current Assets
Stock	2,25,000	3,03,750	78,750
Debtors	2,53,125	2,75,625	22,500
Bills Receivables	45,000	73,125	28,125
Prepaid Expenses	11,250	13,500	2,250
	5,34,375	6,66,000	1,31,625		-
Less: Current liabilities
Accrued Expenses	11,250	13,500	-		2,250
Creditors	1,80,000	2,81,250	-		1,01,250
	1,91,250	2,94,750	1,31,625		1,03,500
Working Capital	3,43,125	3,71,250	-		-
Increase in  Working Capital	28,125	____________	____________		28,125
Increase in  Working Capital	3,71,250	3,71,250	1,31,625		1,31,625

 

Funds Flow Statement for the year ended March 31, 2005

Sources		Rs
	Working Capital from Operations	3,84,750
	Sale of Fixed Assets	9,000
	Sale of Investments	1,01,250
	Share Capital Issued	1,12,500
	Total Funds Provided (A)	Rs6,07,500
Uses		Rs
	Purchase of Fixed Assets	2,70,000
	Purchase of Investments	90,000
	Payment of Debentures (at a premium of 10%)	1,23,750
	Payment of Dividends	33,750
	Payment of Taxes	61,875
	Total Funds Applied (B)	5,79,375
	Increase in Working Capital (A-B)	Rs28,125

 

Question 23

Balance Sheets of RST Limited as on March 31, 2008 and March 31, 2009 are as under:

Liabilities	31.3.2008 Rs	31.3.2009 Rs	Assets	31.3.2008 Rs	31.3.2009 Rs
Equity Share Capital			Land & Building
(Rs10 face value per share)	10,00,000	12,00,000		6,00,000	7,00,000
General Reserve	3,50,000	2,00,000	Plant & Machinery	9,00,000	11,00,000

9% Preference Share Capital	3,00,000	5,00,000	Investments (Long- term)	2,50,000		2,50,000
Share Premium A/c	25,000	4,000	Stock	3,60,000		3,50,000
Profit & Loss A/c	2,00,000	3,00,000	Debtors	3,00,000		3,90,000
8% Debentures	3,00,000	1,00,000	Cash & Bank	1,00,000		95,000
Creditors	2,05,000	3,00,000	Prepaid Expenses	15,000		20,000
Bills Payable	45,000	81,000	Advance Tax Payment	80,000		1,05,000
Provision for Tax	70,000	1,00,000	Preliminary Expenses	40,000		35,000
Proposed Dividend	1,50,000	2,60,000		________
						_______
	26,45,000	30,45,000		26,45,000		30,45,000

1. Depreciationchargedonbuildingandplantandmachineryduringtheyear2008- 09 were Rs50,000 and Rs1,20,000 respectively.
2. During the year an old machine costing Rs1,50,000was sold for Rs32,000. Its written down value was Rs40,000on date ofsale.
3. Duringtheyear,incometaxfortheyear2007-08wasassessedatRs76,000.Achequeof Rs4,000 was received along with the assessment order towards refund of income tax paid in excess, by way of advance tax in earlier years.
4. Proposed dividend for 2007-08 was paid during the year2008-09.
5. 9% Preference shares of Rs3,00,000, which were due for redemption, were redeemed during the year 2008-09 at a premium of 5%, out of the proceeds of fresh issue of 9% Preferenceshares.
6. Bonus shares were issued to the existing equity shareholders at the rate of one share for every five shares held on 31.3.2008 out of generalreserves.
7. Debentures werere deemed at the beginning of the year at a premium of 3%.
8. Interim dividend paid during the year 2008-09 wasRs50,000.

Required:

(a)   Schedule of Changes in Working Capital;and Fund Flow Statement for the year ended March31,2009.

Answer

1. Schedule of Changes in WorkingCapital

 

Particulars	31.3.08		31.3.09		Effect on Working Capital
					Increase		Decrease
	Rs		Rs		Rs		Rs
Current Assets:
Stock	3,60,000		3,50,000		-		10,000
Debtors	3,00,000		3,90,000		90,000		-
Cash and Bank	1,00,000		95,000		-		5,000
Prepaid Expenses	15,000		20,000		5,000		-
Total (A)	7,75,000		8,55,000
Current Liabilities:
Creditors