Finance Question Paper

INSTITUTE OF MANAGEMENT TECHNOLOGY
CENTRE FOR DISTANCE LEARNING

GHAZIABAD
End-Term Examinations – June 2009
Subject Code : IMT-07 Time Allowed : 3 Hours
Subject Name: Working Capital Management Max. Marks : 50
Notes: (a) Answer any FOUR questions from SECTION-A and CASE STUDY as given in SECTION-B.
Each Question (SECTION-A) carries 9 MARKS and (SECTION-B) Case Study carries 14 MARKS.
(b) No doubts/clarifications shall be entertained. In case of doubts/clarifications, make reasonable assumptions and proceed.
(c) For students enrolled in January 2008, July 2008 and January 2009 batches, the Question Paper would be treated for
70 marks instead of 50 marks.
SECTION-A MARKS : 36
Q.1 ‘Efficient cash management will aim at maximizing the availability of cash inflows by decentralizing collections and
decelerating cash outflows by centralizing disbursements’. Discuss
Q.2 Discuss any three of the following:
a) Conservative approach of working capital finance
b) Impact of inflation of working capital management
c) JIT as a tool of inventory management
d) Commercial papers
Q.3 A firm has several items of inventory. The average number of each of these as well as their unit cost is listed below:
Item Avg. No. of units in Avg. Cost per unit Item No. Avg. No. of units in Avg. Cost per unit
No. inventory inventory
1 4000 1.96 11 1800 25.00
2 200 10.00 12 130 2.70
3 440 2.40 13 4400 9.50
4 2000 16.80 14 3200 2.60
5 20 165.00 15 1920 2.00
6 800 6.00 16 800 1.20
7 160 76.00 17 3400 2.20
8 3000 3.00 18 2400 10.00
9 1200 1.90 19 120 21.00
10 6000 0.50 20 320 4.00
The firm wishes to adopt ABC inventory system. How should the item be classified into A, B and C categories?
Q.4 Differentiate between:

a) Payment float and receivable float
b) Budgeting and forecasting
c) Buffer stock level and danger level
Q.5 A small firm has a total credit sales of Rs 80 lakhs and its average collection period is 80 days. The past experience
indicates that bad debt losses are around 1 percent of credit sales. The firm spends about Rs 120000 per annum on
administering its credit sales , this cost includes salaries of one officer and two clerks who handle credit checking &
collection . A factor is prepared to buy the firms receivables by charging 2 percent commission and interest at the rate of 18
percent after withholding 10 percent as reserve . What should the firm do ?
Q.6 What is credit control? What is the role of the credit control department?
Q.7 A Performa cost sheet provides the following particulars:
Particulars Amount per unit(Rs)
Elements of cost
Raw material 80
Direct Labour 30
Overhead 60
Total Cost 170
Profit 30
Selling Price 200
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The following further particulars are available:
Raw Material in stock, on average, one month; Material in process ( completion stage 50%), on average, half a month;
Finished goods in stock, on average , one month.
Credit allowed by suppliers is one month; credit allowed to debtors is two months; average time lag in payment of wages is
1.5 weeks and one month in overhead expenses; one fourth of the output is sold against cash; cash in hand & cash at bank
to be maintained at Rs 3,65,000.
You are required to prepare a statement showing the working capital needed to finance a level of activity of 1,04,000 units
of production. You may assume that production is carried on evenly through out the year , and wages and overheads
accrue similarly. For calculation purpose , 4 weeks may be taken as equivalent to a month.
SECTION-B (Case Study) MARKS : 14
Bose Engineering has had a very poor bad debt record and, for this reason it has devised the method of credit control based on
analyses of its debt experience and of the personal characteristics of its customers. It is ascertained its good and bad debt
experiences from a sample of actual orders executed. It ranked its customers using a points system from 0 to 100 , where 0
denoted a class of customers with the highest percentage of bad debts and 100 denoted a class with the highest percentage of
good debts. These analysis led to the preparation of following tables:
Point Ratings Cumulative total no. of Cumulative no. of orders received Cumulative no. of orders received
orders received which turn out to be good debts which turn out to be bad debts
0-10 1150 200 950
0-20 2100 450 1650
0-30 2850 750 2100
0-40 3950 1500 2450
0-50 6600 4000 2600
0-60 8150 5400 2750
0-70 9100 6250 2850
0-80 9500 6600 2900
0-90 9750 6800 2950
0-100 10000 7000 3000
The table shows, cumulatively , an analysis of the customers by class and an analysis of good & bad debts within each class per
10,000 orders received.
During 2005, the company rejected all orders from customers with a credit rating of 50 and below with the result that a sample
profit and loss account, based on the table of 10,000 orders received, appeared as follows:
Sales ( 3400 orders @ Rs 14/- per order) 47600

Variable Costs:
Purchases 3400 @ Rs 3/- 10200
Distribution 3400 @ Rs 2/- 6800 17000
30600
Overheads:
Administration & Selling Expenses 18200
Bad Debts @ Rs14/- 5600 23800
6800
Assume that administration and selling expenses remaining constant
a) Apply the 2005 prices and costs to the statistical table to show cumulatively for the first five classes of customers the effect
on profits of declining to accept orders in each class. Present your answer in columnar form in terms of contributions to
overheads and profit lost, costs saved and the total gain or loss.
b) Prepare a sample profit and loss account , similar to that shown and based on 10000 orders received, assuming that all
orders from customers with a credit rating of 20 and below are rejected.
25-6-2009 (E) Page 2 of 2 IMT-07

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INSTITUTE OF MANAGEMENT TECHNOLOGY

CENTRE FOR DISTANCE LEARNING

Q.4 Differentiate between:

25-6-2009 (E) Page 1 of 2 IMT-07

SECTION-B (Case Study) MARKS : 14

Sales ( 3400 orders @ Rs 14/- per order) 47600

Assume that administration and selling expenses remaining constant

25-6-2009 (E) Page 2 of 2 IMT-07

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