Solved Paper 2016-2017 - Financial Management

Solved Paper 2016-2017 | Financial Management
Table of Contents
Q.1. Explain the objectives and functions of financial management.
OR
How is the finance function organised? What are the functions that finance department performs in a
large organisation?
Functions that finance department performs in a large organisation:-

1. Bookkeeping and Payables/Receivables
2. Financial Reporting and Control
3. Tax and Compliance
4. Strategic Planning and Financial Planning & Analysis
5. Treasury & Working Capital Management
6. Capital Budgeting
7. Risk Management
8. Corporate Development & Corporate Strategy
Q.2. Define capital structure. Explain the principles, while forming the capital structure of the
organisation.
OR
Define working capital. What factors would you take into consideration in estimating the working
capital needs of a budget hotel?
Q.3. Explain ratio analysis types with the help of a chart and its importance.
OR
Write short notes on:
(i) Over capitalisation
(ii) Indifference point
(iii) Comparative and common size Income statements
Q.4. Write short notes on:
(i) Payback period
(ii)Cash flow statements
(iii)Average rate of return
(iv)Profit maximisation
Q.5. Balance Sheet of a company as on 31.12.2010 is as follows:
Q.6. A project cost Rs.25,000/-. The net profits before depreciation and tax, and tax rate 20% for the
five years. Following are the expected cash flows to be:
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Q.7. From the following information, prepare a comparative balance sheet and give your
interpretations:
Q.8. A company has to choose one of the following two mutually exclusive projects A&B. Project A
requires Rs.20,000/- and Project B requires Rs.15,000/- as initial investment. The firms cost of capital
is 10%. Suggest which project should be accepted under NPV method. Following are the net cash
flows:
Q.9. Tyre manufacturing company has drawn up the following profit and loss account for the year
ended:
Q.10. Fill in the blanks:
Q.1. Explain the objectives and functions of financial

management.
The financial management is generally concerned with procurement, allocation and control of
financial resources of a concern.
The objectives are :
To ensure regular and adequate supply of funds to the concern.

To ensure adequate returns to the shareholders this will depend upon the earning capacity, the
market price of the share, expectations of the shareholders.
To ensure optimum funds utilization. Once the funds are procured, they should be utilized in a
maximum possible way at least cost.
To ensure the safety of investment, i.e, funds should be invested in safe ventures so that adequate
rate of return can be achieved.
To plan a sound capital structure-There should be the sound and fair composition of capital so that
a balance is maintained between debt and equity capital.
Functions of Financial Management
1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected costs and profits
and future programmes and policies of a concern. Estimations have to be made in an adequate
manner which increases earning capacity of the enterprise.
2. Determination of capital composition: Once the estimation has been made, the capital
structure has to be decided. This involves short- term and long- term debt equity analysis. This will
depend upon the proportion of equity capital a company is possessing and additional funds which

have to be raised from outside parties.
3.Choice of sources of funds: For additional funds to be procured, a company has many
choices like-
Issue of shares and debentures

Loans to be taken from banks and financial institutions
Public deposits to be drawn like in form of bonds.
Choice of the factor will depend on relative merits and demerits of each source and period of
financing.
4. Investment of funds: The finance manager has to decide to allocate funds into profitable
ventures so that there is safety on investment and regular returns are possible.
5.Disposal of surplus: The net profits decision have to be made by the finance manager. This
can be done in two ways:
Dividend declaration – It includes identifying the rate of dividends and other benefits as a bonus.
Retained profits – The volume has to be decided which will depend upon expansion, innovation,
diversification plans of the company.
6.Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and salaries, payment of
electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough
stock, purchase of raw materials, etc..
7.Financial controls: The finance manager has not only to plan, procure and utilize the funds but
he also has to exercise control over finances. This can be done through many techniques like ratio
analysis, financial forecasting, cost and profit control, etc.
OR
How is the finance function organised? What are the functions

that finance department performs in a large organisation?

Functions that finance department performs in a large

organisation:-
1. Bookkeeping and Payables/Receivables

Bookkeeping is the most basic financial activity in a company. Before a business owner ever
considers hiring a CFO, they bring in a bookkeeper, who tracks all of the transactions in the
organization, covering both sales and expenses. As the organization grows, they might hire more
specialized payables and receivables clerks, to take over functions such as corresponding with
vendors and suppliers, above and beyond recording transactions.
2. Financial Reporting and Control

Financial Reporting and Control is the function that takes raw accounting entries and transforms
them into usable and comparable financial statements. Requiring far more judgment than the
bookkeeper’s role, this function involves everything from ruling on how to implement accounting
principles to designing financial processes of the organization, selecting accounting systems,
liaising with external auditors, and ensuring that there are no gaps or oversights in existing
processes.
3. Tax and Compliance

Running a business involves paying tax, and paying tax means doing a lot of calculations and
filling out a lot of forms. Often using the financial statements as a basis, along with various other
configurations of the information produced by Bookkeeping and Payables/Receivables, the Tax and
Compliance function will make sure all of the government forms and filings are sent complete and
on-time to the taxman. A strong Tax and Compliance function will go one step beyond simple
compliance, and will find ways to minimize tax, so as to maximize the company’s net income.
4. Strategic Planning and Financial Planning & Analysis

This function, “FP&A” for short, is the true bridge between the Past and the Future. FP&A regularly
creates strategic and financial plans that forecast what financial results (sales and expenses) will

look like in future periods. Then, they compare actual results—prepared with the assistance of the
Financial Reporting and Control function—to determine areas where the business can improve.
With this “variance analysis” complete, they can then prepare more accurate forecasts for the
future. A strong FP&A function will not only generate annual forecasts but will be able to update
them even over the course of a day or two, and to run many scenarios that examine the effects of,
say, losing a big customer or an economic contraction.
5. Treasury & Working Capital Management

The key role of Treasury is to make sure that the company doesn’t run out of cash. This means,
among other things, forecasting the upcoming working capital (receivables, payables and
inventory) needs of the company, investing surplus cash in short-term instruments to generate
modest interest income, and managing currency risk.
6. Capital Budgeting
Capital Budgeting is the function responsible for selecting between the various uses of capital, or
capital projects. After all, most organizations will have money available to invest in the business,
with the hopes of either growing sales or reducing expenses. But the opportunities for spending
typically exceed the amount available to spend, so Capital Budgeting develops business cases to
evaluate and identify the most effective projects. A strong Capital Budgeting function will not only
forecast project benefits, but will also track these benefits over time to determine whether the use
of capital was as effective as originally anticipated.
7. Risk Management
Risk Management is a function that is rapidly developing after the financial scandals of the early
2000s (Enron, WorldCom, the Great Recession and Lehman/Bear Stearns collapse, etc.). In the
financial services industry, the function is particularly central as most institutions run with a high
amount of debt (leverage), though leaders in other industries are also bulking up this function.
Risk Management takes a hard look at some of the key risks faced by the company—currency,
interest rate, market, operational, legal, etc.—and tries to quantify the possible impacts so that
they can be mitigated as much as possible. If FP&A looks at the base case scenario for the
company’s financial results, Risk Management takes a wrecking ball to it.

8. Corporate Development & Corporate Strategy

Corporate Development and Corporate Strategy can be widely defined, but it is the area of
Finance most heavily populated by former investment bankers and management consultants. As
such, common tasks that fall to this function include sourcing and analyzing mergers &
acquisitions deals, raising debt and equity financing, making capital structure decisions and
providing insight into high level strategic decisions such as entering a new market.
Q.2. Define capital structure. Explain the principles, while

forming the capital structure of the organisation.
Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-
term finance.
Capital structure is the mix of the long-term sources of funds used by a firm. It is made up of debt
and equity securities and refers to permanent financing of a firm. It is composed of long-term debt,
preference share capital and shareholders’ funds. “Capital structure is essentially concerned with
how the firm decides to divide its cash flows into two broad components, a fixed component that is
earmarked to meet the obligations toward debt capital and a residual component that belongs to
equity shareholders”
Factors Determining Capital Structure
1. Trading on Equity- The word “equity” denotes the ownership of the company. Trading on
equity means taking advantage of equity share capital to borrowed funds on a reasonable basis. It
refers to additional profits that equity shareholders earn because of issuance of debentures and
preference shares. It is based on the thought that if the rate of dividend on preference capital and
the rate of interest on borrowed capital is lower than the general rate of company’s earnings,
equity shareholders are at an advantage which means a company should go for a judicious blend
of preference shares, equity shares as well as debentures. Trading on equity becomes more
important when expectations of shareholders are high.
2.The degree of control- In a company, it is the directors who are so-called elected
representatives of equity shareholders. These members have got maximum voting rights in a
concern as compared to the preference shareholders and debenture holders. Preference

shareholders have reasonably less voting rights while debenture holders have no voting rights. If
the company’s management policies are such that they want to retain their voting rights in their
hands, the capital structure consists of debenture holders and loans rather than equity shares.
3.The flexibility of financial plan- In an enterprise, the capital structure should be such that
there is both contractions as well as relaxation in plans. Debentures and loans can be refunded
back as the time requires. While equity capital cannot be refunded at any point which provides
rigidity to plans. Therefore, in order to make the capital structure possible, the company should go
for the issue of debentures and other loans.
4. Choice of investors- The company’s policy generally is to have different categories of

investors for securities. Therefore, a capital structure should give enough choice to all kind of
investors to invest. Bold and adventurous investors generally go for equity shares and loans and
debentures are generally raised keeping in mind conscious investors.
5. Capital market condition- In the lifetime of the company, the market price of the shares has
got an important influence. During the depression period, the company’s capital structure
generally consists of debentures and loans. While in the period of boons and inflation, the
company’s capital should consist of share capital generally equity shares.
6. Period of financing- When the company wants to raise finance for short period, it goes for
loans from banks and other institutions; while for long period it goes for an issue of shares and
debentures.
7. Cost of financing- In a capital structure, the company has to look at the factor of cost when
securities are raised. It is seen that debentures at the time of profit earning of company prove to
be a cheaper source of finance as compared to equity shares where equity shareholders demand
an extra share in profits.
8. Stability of sales- An established business which has a growing market and high sales
turnover, the company is in position to meet fixed commitments. Interest on debentures has to be
paid regardless of profit. Therefore, when sales are high, thereby the profits are high and the
company is in the better position to meet such fixed commitments like interest on debentures and
dividends on preference shares. If a company is having unstable sales, then the company is not in
a position to meet fixed obligations. So, equity capital proves to be safe in such cases.
9. Sizes of a company- Small size business firms capital structure generally consists of loans

from banks and retained profits. While on the other hand, big companies having goodwill, stability
and an established profit can easily go for the issuance of shares and debentures as well as loans
and borrowings from financial institutions. The bigger the size, the wider is total capitalization.
OR
Define working capital. What factors would you take into

consideration in estimating the working capital needs of a
budget hotel?
Working Capital is the capital which is needed for meeting day to day requirement of the business
concern. For example, payment to creditors, salary paid to workers, purchase of raw materials
etc., normally it consists of recurring in nature. It can be easily converted into cash. Hence, it is
also known as short-term capital.
Main factors affecting the working capital are as follows:
(1) Nature of Business:
The requirement of working capital depends on the nature of the business. The nature of the
business is usually of two types: Manufacturing Business and Trading Business.
In the case of the manufacturing business, it takes a lot of time in converting raw material into
finished goods. Therefore, capital remains invested for a long time in a raw material, semi-finished
goods and the stocking of the finished goods.
(2) The scale of Operations:
There is a direct link between the working capital and the scale of operations. In other words, more
working capital is required in case of big organisations while less working capital is needed in case
of small organisations.
(3) Business Cycle:
The need for the working capital is affected by various stages of the business cycle. During the
boom period, the demand for product increases and sales also increase. Therefore, more working

capital is needed. On the contrary, during the period of depression, the demand declines and it
affects both the production and sales of goods. Therefore, in such a situation less working capital
is required.
(4) Seasonal Factors:
Some goods are demanded throughout the year while others have seasonal demand. Goods which
have uniform demand the whole year their production and sale are continuous. Consequently,
such enterprises need little working capital.
On the other hand, some goods have seasonal demand but the same are produced almost the
whole year so that their supply is available readily when demanded.
Such enterprises have to maintain large stocks of raw material and finished products and so they
need a large amount of working capital for this purpose. Woolen mills are a good example of it.
(5) Production Cycle:
Production cycle means the time involved in converting raw material into finished product. The
longer this period, the more will be the time for which the capital remains blocked in raw material
and semi-manufactured products.
Thus, more working capital will be needed. On the contrary, where the period of production cycle
is little, less working capital will be needed.
(6) Credit Allowed:
Those enterprises which sell goods on cash payment basis need little working capital but those
who provide credit facilities to the customers need more working capital.
(7) Credit Availed:
If the raw material and other inputs are easily available on credit, less working capital is needed.
On the contrary, if these things are not available on credit then to make a cash payment quickly
large amount of working capital will be needed.
(8) Operating Efficiency:
Operating efficiency means efficiently completing the various business operations. Operating

efficiency of every organisation happens to be different.
Some such examples are: (i) converting raw material into finished goods at the earliest, (ii) selling
the finished goods quickly, and (iii) quickly getting payments from the debtors. A company which
has a better operating efficiency has to invest less in stock and the debtors.
Therefore, it requires less working capital, while the case is different in respect of companies with
less operating efficiency.
(9) Availability of Raw Material:
Availability of raw material also influences the amount of working capital. If the enterprise makes
use of such raw material which is available easily throughout the year, then less working capital
will be required, because there will be no need to stock it in large quantity.
On the contrary, if the enterprise makes use of such raw material which is available only in some
particular months of the year whereas for continuous production it is needed all the year round,
then a large quantity of it will be stocked. Under the circumstances, more working capital will be
required.
(10) Growth Prospects:
Growth means the development of the scale of business operations (production, sales, etc.). The
organisations which have sufficient possibilities for growth require more working capital, while the
case is different in respect of companies with fewer growth prospects.
(11) Level of Competition:
High level of competition increases the need for more working capital. In order to face
competition, more stock is required for quick delivery and credit facility for a long period has to be
made available.
(12) Inflation:
Inflation means a rise in prices. In such a situation more capital is required than before in order to
maintain the previous scale of production and sales. Therefore, with the increasing rate of
inflation, there is a corresponding increase in the working capital.

Q.3. Explain ratio analysis types with the help of a chart and
its importance.
Ratio analysis is a commonly used tool for financial statement analysis. A ratio is a mathematical
relationship between one number to another number. The ratio is used as an index for evaluating
the financial performance of the business concern. An accounting ratio shows the mathematical
relationship between two figures, which have a meaningful relationship with each other.
A ratio can be classified into various types. Classification from the point of view of financial
management is as follows:
● Liquidity Ratio
● Activity Ratio
● Solvency Ratio
● Profitability Ratio
Liquidity Ratio
It is also called as the short-term ratio. This ratio helps to understand the liquidity in a business
which is the potential ability to meet current obligations. This ratio expresses the relationship
between current assets and current assets of the business concern during a particular
period. The following are the major liquidity ratio:
S. No. Ratio Formula Significant Ratio

1. Current Ratio = Current Assets/CurrentLiability 2:1
= Quick Assets /Current Liability
2. Quick Ratio 1:1
Quick Asset= Current Asset- Inventory
Activity Ratio
It is also called as the turnover ratio. This ratio measures the efficiency of the current assets
and liabilities in the business concern during a particular period. This ratio is helpful to
understand the performance of the business concern. Some of the activity ratios are given
below:
S. No. Ratio Formula

1. Stock Turnover Ratio Costof Sales/Average Inventory
2. Debtors Turnover Ratio Credit Sales/AverageDebtors

3. Creditors Turnover Ratio Credit Purchase/Average credit

4. Working Capital Turnover RatioSales/Net working capital
Solvency Ratio
It is also called as the leverage ratio, which measures the long-term obligation of the business
concern. This ratio helps to understand, how the long-term funds are used in the business
concern. Some of the solvency ratios are given below:
S. No Ratio Formula
1. Debt-Equity Ratio External Equity/Internal Equity
2. Proprietary Ratio Shareholder Equity / Total Assets
3. Interest Coverage Ratio EBIT/Fixed Interest Charges
Profitability Ratio
Profitability ratio helps to measure the profitability position of the business concern. Some
of the major profitability ratios are given below.
S. No Ratio Formula
1. Gross Profit Ratio Gross Profit / Net Sales
2. Net Profit Ratio Net Profit after tax / Net Sales
3. Operating Profit Ratio
Operating Net Profit / Sales
4. Return in Investment Net Profit after tax / Shareholder Fund
OR
Write short notes on:
(i) Over capitalisation

Overcapitalization is a situation in which actual profits of a company are not sufficient enough to
pay interest on debentures, on loans and pay dividends on shares over a period of time. This
situation arises when the company raises more capital than required. A part of capital always
remains idle. With a result, the rate of return shows a declining trend.
The causes can be-

High promotion cost- When a company goes for high promotional expenditure, i.e., making
contracts, canvassing, underwriting commission, drafting of documents, etc. and the actual
returns are not adequate in proportion to high expenses, the company is over-capitalized in such
cases.
Purchase of assets at higher prices- When a company purchases assets at an inflated rate,
the result is that the book value of assets is more than the actual returns. This situation gives rise
to over-capitalization of the company.
A company’s floatation n boom period- At times company has to secure it’s solvency and
thereby float in boom periods. That is the time when the rate of returns is less as compared to
capital employed. This results in actual earnings lowering down and earnings per share declining.
Inadequate provision for depreciation- If the finance manager is unable to provide an
adequate rate of depreciation, the result is that inadequate funds are available when the assets
have to be replaced or when they become obsolete. New assets have to be purchased at high
prices which prove to be expensive.
Liberal dividend policy- When the directors of a company liberally divide the dividends into the
shareholders, the result is inadequate retained profits which are essential for high earnings of the
company. The result is deficiency in company. To fill up the deficiency, fresh capital is raised which
proves to be a costlier affair and leaves the company to be overcapitalized.
Over-estimation of earnings- When the promoters of the company overestimate the earnings
due to inadequate financial planning, the result is that company goes for borrowings which cannot
be easily met and capital is not profitably invested. This results in consequent decrease in
earnings per share.
Effects of Overcapitalization
On Shareholders- The over-capitalized companies have following disadvantages to shareholders:

Since the profitability decreases, the rate of earning of shareholders also decreases.
The market price of shares goes down because of low profitability.
The profitability going down has an effect on the shareholders. Their earnings become uncertain.
With the decline in goodwill of the company, share prices decline. As a result, shares cannot be
marketed in the capital market.
On Company-
Because of low profitability, the reputation of a company is lowered.
The company’s shares cannot be easily marketed.
With the decline of earnings of the company, goodwill of the company declines and the result is

fresh borrowings are difficult to be made because of loss of credibility.

In order to retain the company’s image, the company indulges in malpractices like manipulation of
accounts to show high earnings.
The company cuts down it’s expenditure on maintenance, replacement of assets, adequate
depreciation, etc.
On Public- An overcapitalized company has got many adverse effects on the public:
In order to cover up their earning capacity, the management indulges in tactics like an increase in
prices or decrease in quality.
Return on capital employed is low. This gives an impression to the public that their financial
resources are not utilized properly.
Low earnings of the company affect the credibility of the company as the company is not able to
pay it’s creditors on time.
It also has an effect on working conditions and payment of wages and salaries also lessen.
(ii) Indifference point

An important tool that managers use to help them choose between alternative cost structures is
the indifference point. The indifference point is the level of volume at which total costs, and hence
profits, are the same under both cost structures. If the company operated at that level of volume,
the alternative used would not matter because income would be the same either way. At the cost
indifference point, total costs (fixed cost and variable cost) associated with the two alternatives
are equal.
There may be two methods or two alternatives to doing a thing, say two methods of production. It
is also possible at a particular level of activity; one production method is superior to another, and
vice versa. There is a need to know at which level of production, it will be desirable to shift from
one production method to another production method. This level or point is known as cost
indifference point and at this point total cost of two production methods is same.
(iii) Comparative and common size Income statements

A comparative Income statement is a document that compares an income statement with prior
period statements or with the income statement generated by another company.
Analysts like comparative statements because the reports show the effect of business decisions on

a company’s bottom line. Analysts can identify trends and evaluate the performance of managers,
new lines of business and new products on one report, instead of having to flip through
individual financial statements. When comparing different companies, a comparative statement
shows how a business reacts to market conditions affecting an entire industry.
Common size income statement is an income statement in which each account is expressed as a
percentage of the value of sales. This type of financial statement can be used to allow for easy
analysis between companies or between time periods of a company. Common size income
statement analysis allows an analyst to determine how the various components of the income
statement affect a company’s profit.
Q.4. Write short notes on:
(i) Payback period
Pay-back period is the time required to recover the initial investment in a project.
(It is one of the non-discounted cash flow methods of capital budgeting).

Pay-back period = Initial investment/Annual cash inflows
Merits of Pay-back method

The following are the important merits of the pay-back method:
1. It is easy to calculate and simple to understand.
2. Pay-back method provides further improvement over the accounting rate return.
3. Pay-back method reduces the possibility of loss on account of obsolescence.
Demerits
1. It ignores the time value of money.
2. It ignores all cash inflows after the pay-back period.
3. It is one of the misleading evaluations of capital budgeting
The payback period is the length of time required to recover the cost of an investment. The
payback period of a given investment or project is an important determinant of whether to

undertake the position or project, as longer payback periods are typically not desirable for
investment positions.
The payback period ignores the time value of money, unlike other methods of capital budgeting,
such as net present value, internal rate of return or discounted cash flow.
(ii)Cash flow statements

Cash flow statement is a statement which discloses the changes in cash position between the two
periods.Along with changes in the cash position, the cash flow statement also outlines the reasons
for such inflows or outflows of cash which in turn helps to analyse the functioning of a
business.Cash flow statement is a statement which shows the sources of cash inflow and uses of
cash outflow of the business concern during a particular period of time.
It is the statement, which involves the only short-term financial position of the business concern.
Cash flow
statement provides a summary of operating, investment and financing cash flows and
reconciles them with changes in its cash and cash equivalents such as marketable securities.
(iii)Average rate of return

The average rate of return means the average rate of return or profit taken for considering
the project evaluation. This method is one of the traditional methods for evaluating
the project proposals:
Merits
1. It is easy to calculate and simple to understand.
2. It is based on the accounting information rather than cash inflow.
3. It is not based on the time value of money.
4. It considers the total benefits associated with the project.
Demerits
1. It ignores the time value of money.
2. It ignores the reinvestment potential of a project.
3. Different methods are used for accounting profit. So, it leads to some difficulties
in the calculation of the project.

(iv)Profit maximisation
Profit maximization is a traditional and narrow approach, which aims at, maximizes the profit of
the concern. The main aim of any kind of economic activity is earning a profit. A business concern
is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques to
understand the business efficiency of the concernProfit maximization consists of the following
important features.
1. Profit maximization is also called as cashing per share maximization. It leads to maximize the
business operation for profit maximization.
2. The ultimate aim of the business concern is earning the profit, hence, it considers all the
possible ways to increase the profitability of the concern.
3. Profit is the parameter of measuring the efficiency of the business concern. So it shows the
entire position of the business concern.
4. Profit maximization objectives help to reduce the risk of the business.
Q.5. Balance Sheet of a company as on 31.12.2010 is as

follows:
Liabilities 2009 2010 Assets 2009 2010
Share capital 2,00,000/-2,50,000/-Fixed assets 3,50,000/-4,75,000/-
Retained earnings 1,60,000/-3,00,000/-Stock 1,00,000/-95,000/-
Premium on shares – 5,000/- Bills receivable 43,000/- 50,000/-
Accumulated depreciation80,000/- 60,000/- Pre-paid expenses 4,000/- 5,000/-
Debentures 60,000/- – Cash balance 15,800/- 10,200/-
Accounts payable 37,800/- 40,200/- Commission on shares25,000/- 20,000/-
TOTAL: 5,37,000/-6,55,200/- 5,37,000/-6,55,200/-
Additional information:
(i) Net income for the year Rs.1,40,000/-
(ii) Fixed assets purchases were made during the year at a cost of
Rs.1,65,000/- and fully depreciated machinery costing Rs.40,000/-
(iii) Depreciation for the year Rs.20,000/-
(iv) Income tax paid was Rs.40,000/-
You are required to prepare:

(a) A statement of schedule of changes in working capital
(b) Sources and application of funds
Preparing the schedule/statement of changes in working capital requires us to present the

information relating to the current area of the balance sheets pertaining to the two periods in the
format given below and deriving and presenting the changes within them.
Schedule/Statement of Changes in Working Capital for the period from 31/12/2009 to

31/12/2010
Balance as on 31 Dec st
Working Capital Change
Particulars/Account
2009 2010 Increase Decrease
a) CURRENT ASSETS . . . .
1) Cash Balance 15,800/- 10,200/- 7,000/- 5,600/-
2) Bills Receivable 43,000/- 50,000/- 1,000/- 5,000/-
3) Stocks/Inventories 100,000/- 95,000/- 5,000/-
4) Prepaid Expenses 4,000/- 5,000/-
5) Commision on Share 25,000/- 20,000/-
TOTAL 187,800/- 180,200/- 8,000/- 15,600/-
b) CURRENT LIABILITIES . . .
1) Accounts Payable 37,800/– 40,200/- 2,400/-
2) Premium on Share ———– 5,000/- 5,000/-
TOTAL 37,800/- 45,200/- 7,400/-
Working Capital [(a) – (b)] 150,000/- 135,000/-
TOTAL 8,000/- 30,400/-
Net Change in Working Capital 22,400/-
Q.6. A project cost Rs.25,000/-. The net profits before

depreciation and tax, and tax rate 20% for the five years.
Following are the expected cash flows to be:
Year 1 2 3 4 5
Project5,000/-6,000/-7,000/-8,000/-10,000
You are required to calculate payback period.
Q.7. From the following information, prepare a comparative

balance sheet and give your interpretations:
Yr 2000 Yr 2001 Yr 2000 Yr 2001
Liabilities Assets
Amount in Rs. Amount in Rs. Amount in Rs. Amount in Rs.
Share Capital 5,00,000/- 8,00,000/- Land & Building 4,30,000/- 3,70,000/-
Reserves and
4,30,000/- 2,22,000/- Plant 3,70,000/- 5,00,000/-
surplus
Debentures 1,00,000/- 2,00,000/- Furniture 25,000/- 30,000/-
Other fixed
Loan 2,50,000/- 3,00,000/- 20,000/- 25,000/-
assets
Bills payable 80,000/- 45,000/- Cash and Bank 25,000/- 90,000/-
Sundry creditors 1,00,000/- 1,10,000/- Bills receivable 1,45,000/- 80,000/-
Current
6,000/- 20,000/- Sundry debtors 2,50,000/- 3,50,000/-
liabilities
Stock 2,00,000/- 2,50,000/-
Pre-paid
1,000/- 2,000/-
expenses
TOTAL: 14,66,000/- 16,97,000/- TOTAL: 14,66,000/- 16,97,000/-
Q.8. A company has to choose one of the following two

mutually exclusive projects A&B. Project A requires Rs.20,000/-

and Project B requires Rs.15,000/- as initial investment. The
firms cost of capital is 10%. Suggest which project should be
accepted under NPV method. Following are the net cash flows:
Year 1 2 3 4 5
Project A4200480070008000 4000
Project B4200450040005000 4000
Year 1Year 2Year 3Year 4Year 5

0.909 0.826 0.751 0.683 0.621
Calculate: net present value
Present value Rs.1/- @ 10% (discount factor) using present value tables
For Project A
Initial Investment = Rs 20,000/-
YearDiscount FactorReturnNet Present Value

1 0.909 4,200 3817.8
2 0.826 4,800 3964.8
3 0.751 7,000 5257
4 0.683 8,000 5464
5 0.621 4,000 2484
Total 28,000 20987.6
Present Value of Return= 20,987.6/-
Return on Investment = (20,987.6 – 20,000) / 20,000
= 0.04938
= 4%
For Project B
Initial Investment = Rs. 15,000/-
YearDiscount FactorReturnNet Present Value

1 0.909 4,200 3817.8

2 0.826 4,500 3717
3 0.751 4,000 3004
4 0.683 5,000 3415
5 0.621 4,000 2484
Total 21,700 16437.8
Present Value of Return = 16,437.8/-
Return on Investment = (16,437.8 – 15,000) / 15,000
= 0.0958
= 9.58%
So, project should be accepted under NPV method will be
1st – Project B (As its giving 9.58% ROI)
Q.9. Tyre manufacturing company has drawn up the following

profit and loss account for the year ended:
Calculate:
(a) Gross Profit Ratio
(b) Net Profit Ratio
(c) Operating Ratio
(d)Operating Profit Ratio
Operating Ratio Operating Profit Ratio
Particulars Rs. Particulars Rs.

To opening stock 26,000/- By Sales 1,60,000/-
To purchases 80,000/- By Closing Stock 38,000/-
To wages 24,000/-
To manufacturing expenses 16,000/-
To gross profit c/d 52,000/-
1,98,000/- 1,98,000/-
To selling & distribution expenses4,000/- By gross profit b/d 52,000/-

To administrative expenses 22,800/- By commission received4,800/-

To value of furniture lost by fire 800/-
To general expenses 1,200/-
To net profit c/d 28,000/-
56,800/- 56,800/-
From the Question, we have
Net Profit = 28,000/-
Gross Profit = 52,000/-
Net Sales = 160,000/-
Operating Expense = 4,000 + 22,800 + 800 + 1,200 = 28,800/-
Operating Profit aka EBIT = Gross Profit – Operating Expense = 52,000 – 28,800 = 23,200/-
Now,
Gross Profit Ratio = Gross Profit / Net Sales
= 52,000 / 160,000 = 13:80 = 0.1625 = 16.25%
Net Profit Ratio = Net Profit after tax / Net Sale
= 28,000 / 160,000 = 0.175 = 17.5%
Operating Ratio = Operating Expenses / Net Sales
= 28,800 / 160,000 = 0.18 = 18%
Operating Profit Ratio = Operating Profit / Net Sale
= 23,200 / 160,000 = 0.145 = 14.5%
Q.10. Fill in the blanks:

(a) Expenditure incurred on research is an example of Deferred revenue expenditure.
(Deferred revenue expenditure/partly capital expenditure).
(b) Capital structure means the pattern of capital employed in the firm (capital

employed/dividend).
(c) Capital budgeting is related to capital expenditure (sales/capital expenditure).
(d) Quick assets = current assets (minus) stock. (debtors/stock).
(e) Depreciation means a reduction in the value of fixed assets due to usage and efflux
of time (current assets/fixed assets).

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Solved Paper 2016-2017 | Financial Management

Functions that ﬁnance department performs in a large organisation:-

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Q.1. Explain the objectives and functions of ﬁnancial

The objectives are :

To ensure regular and adequate supply of funds to the concern.

1. Estimation of capital requirements: A ﬁnance manager has to make estimation with

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have to be raised from outside parties.

Issue of shares and debentures

How is the ﬁnance function organised? What are the functions

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Functions that ﬁnance department performs in a large

1. Bookkeeping and Payables/Receivables

2. Financial Reporting and Control

3. Tax and Compliance

4. Strategic Planning and Financial Planning & Analysis

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5. Treasury & Working Capital Management

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8. Corporate Development & Corporate Strategy

Q.2. Deﬁne capital structure. Explain the principles, while

Factors Determining Capital Structure

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4. Choice of investors- The company’s policy generally is to have diﬀerent categories of

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Deﬁne working capital. What factors would you take into

Main factors aﬀecting the working capital are as follows:

(1) Nature of Business:

(2) The scale of Operations:

(3) Business Cycle:

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(4) Seasonal Factors:

(5) Production Cycle:

(6) Credit Allowed:

(7) Credit Availed:

(8) Operating Eﬃciency:

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eﬃciency of every organisation happens to be diﬀerent.

(9) Availability of Raw Material:

(10) Growth Prospects:

(11) Level of Competition:

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S. No. Ratio Formula Signiﬁcant Ratio

S. No. Ratio Formula

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3. Creditors Turnover Ratio Credit Purchase/Average credit

Write short notes on:

(i) Over capitalisation

The causes can be-

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On Shareholders- The over-capitalized companies have following disadvantages to shareholders:

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fresh borrowings are diﬃcult to be made because of loss of credibility.

(ii) Indiﬀerence point

(iii) Comparative and common size Income statements

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Q.4. Write short notes on: