The Institute of Chartered Accountants of Nepal

Suggested Answers

CAP I
December 2016

P.T.O.
 (2)

Fundamentals of Accounting
 (3)

Roll No……………. Maximum Marks - 50

Total No. of Questions - 3 Total No. of Printed Pages -8
Time Allowed - 2 Hours
Marks
Attempt all questions. Working notes should form part of the answer.
1. Arun and Anand were partners sharing their profits in the ratio of 3:2. Their position
as on 31 March 2015 were as under-
Liabilities Amount (Rs.) Assets Amount (Rs.)
Arun’s Capital 12,000 Land and Building 8,000
Anand’s Capital 10,000 Plant and Machinery 10,000
General Reserve 12,000 Sundry Debtors 11,000
Workmen’s Compensation Stock 12,000
Reserve 4,000 Cash at Bank 9,000
Sundry Creditors 12,000
50,000 50,000

They decided to admit Ashok for a 20% profit on the following terms:
a) The liability on Workmen’s Compensation Fund is to be determined at Rs. 2,000.
b) Ashok to bring in Rs. 3,000 as premium out of his share of Rs. 3,600. The new
firm decided that goodwill should appear in the books at the fractional value of
Rs. 500.
c) Ashok was to bring in further cash of Rs. 20,000 towards his capital.
d) General Reserve is to be maintained at its original value, no accounting treatment
will be made.
e) Rs. 2,000 creditors were to be paid at 5% discount.
Prepare the Capital Accounts and Balance Sheet of the new firm. 15
Answer:
Partner’s Capital Accounts
Amount in Rs.
Particulars Arun Anand Ashok Particulars Arun Anand Ashok
Goodwill (w.n. 3) 500 Balance b/d 12,000 10,000 -
Arun’s Capital 1,440 Bank A/c 20,000
A/c (w.n. 2) Workmen’s 1,200 800 -
Ashok’s Capital 960 Compensation
A/c (w.n. 2) Fund A/c
Balance c/d 17,100 13,400 17,100 Goodwill (w.n. 3) 2,400 1,600
Ashok’s Capital 1,440 960
A/c (w.n. 2)
Sundry Creditors 60 40
17,100 134,00 20,000 17,100 13,400 20,000

Balance Sheet of Arun, Anand and Ashok

 (4)
As on 31 March 2015
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital Accounts Goodwill 500
Arun 17,100 Fixed Assets
Anand 13,400 Land and Building 8,000
Ashok 17,100 47,600 Plant and Machinery 10,000
General Reserve 12,000
Workmen’s Compensation 2,000 Current Assets
Fund Stock 12,000
Sundry Creditors 10,000 Debtors 11,000
Cash at Bank (w.n. 4) 30,100
71,600 71,600
Working Note No. 1
Old Sharing Ratio 3:2
New Sharing Ratio = 20% Ashok
Balance = 80%
Arun = 80× 3/5 = 48%

Anand = 80× 2/5 = 32%

Working Note No. 2
General Reserve Total
Distribution of General Reserve Arun Ananda Ashok
Old Sharing Ratio 7,200 4,800 - 12,000
Recreation of General Reserve
New Sharing Ratio 5,760 3,840 2,400
1,440 960 (2,400)
Working Note No. 3
Goodwill Arun Anand Ashok Total
Goodwill raise
Old Sharing Ratio 10,800 7,200 _ 18,000
Goodwill written off
New Sharing Ratio 8,400 5,600 3,500 17,500
(3,500)
Cash brought 3,000
Debit to Capital (500)
Credit to Capital A/c 2,400 1,600

Working Note No. 4

Bank Balance
Opening 9,000
Add: Bought by Ashok
Goodwill 3,000
Capital 20,000 23,000
Less Paid to Creditors 1,900
 (5)
30,100

2.
a) The following trial balance of M/s Yusuf and Co., a proprietorship firm of Mr.
Yusuf as at December 31, 2015 is given to you:

Particulars Dr. Balances (Rs.) Cr. Balances (Rs.)

Opening Stock 15,500
Land and Building 35,000
Machinery 50,000
Furniture and Fixtures 5,000
Purchases 103,900
Salaries 11,000
General Expenses 2,500
Rent 3,000
Postage, Courier etc 1,400
Stationery 1,300
Wages 26,000
Freight on Purchases 2,800
Carriage on Sales 4,000
Repairs 4,500
Sundry Debtors 30,000
Bad Debts 600
Cash in Hand 100
Cash at Bank 6,400
Capital 60,000
Loan from Mr. Yusuf @ 9% 30,000
Sundry Creditors 9,600
Miscellaneous Revenue 1,200
Sales 202,200
Total 303,000 303,000

The following further information is given:

(i) Wages for December 2015 amounting to Rs. 2,100 have not yet been paid.
(ii) A provision of Doubtful Debts @5% on debtors is necessary.
(iii) Depreciation is to be charged as follows on WDV method:
 Land and Buildings- 2%
 Machinery- 10%
 Furniture and Fixtures- 15%
(iv) The loan from Mr. Yusuf was taken on July 01, 2015. Interest has not been
paid yet.
(v) The value of stock on hand on December 31, 2015 was Rs. 14,900.
(vi) The Financial year is January to December.

You are required to prepare in the books of M/s Yusuf and Co., (6+4=10)
i) Trading and Profit and Loss Account for the Financial Year 2015;
 (6)
ii) Balance Sheet at December 31, 2015.

b) A of Kathmandu and B of Pokhara entered into a Joint Venture for the purpose of
buying and selling secondhand motor cars. A to make purchases and B to effect
sales. B remitted a sum of Rs. 150,000 to A towards the venture. A purchased 5
cars for Rs. 160,000 and paid Rs. 60,000 for their reconditioning and sent them to
Pokhara. He also incurred an expense of Rs. 5,000 in transporting the cars to
Pokhara. B sold 4 cars for Rs. 240,000 and retained the fifth car for himself at an
agreed value of Rs. 50,000. His expenses were Insurance Rs. 1,000; Garage Rent
Rs. 2,000; Brokerage Rs. 2,000; and Sundry Expense Rs. 400. Each party’s ledger
contains are record of his own transactions on joint venture.
Prepare a statement showing the result of the venture and joint venture accounts
in the books B as it finally appear, assuming that the matter was finally settled
between the parties. 10
Answer:
a) i)
Trading and Profit and Loss Account
of M/s Yusuf and Co.,
for the FY ending December 31, 2015

Rs. Amount Rs. Amount

Rs. Rs.
To Opening Stock 15,500
To Purchases 103,900 By sales 202,200
To Wages 26,000
Add: Wages Outstanding 2,100 28,100

To Freight on Purchases 2,800

To Gross Profit c/d 66,800 By Closing Stock 14,900
2,17,100 217,100
BY Gross Profit b/d 66,800
By Miscellaneous
Revenue 1,200
To Salaries 11,000
To General Expenses 2,500
To Rent 3,000
To Postage Courior etc 1,400
To Statinery Expenses 1,300
To Carriage on Sales 4,000
To Repairs 4,500
To Depreciation 6,450
Land and Building 700
Machinery 5,000
Furniture and Fixtures 750
To Provision for Doubtful
Debts 1,500
To Interest on Loan 1,350
To Bad Debts 600
 (7)
To Net Profit 30,400

68,000 68,000

ii)
Balance Sheet
of M/s Yusuf and Co.,
as on December 31, 2015
Amount Amount
Liabilities Assets
Rs. Rs.
Rs.
Rs.
Capital 60,000 Fixed Assets:
Net Profit 30,400 Land Building 35,000
Less. Depreciation @ 2% (700)
Loan from Mr. Yusuf 30,000 34,300
Machinery 50,000
Less. Depreciation @ 10% (5,000)
45,000
Furniture and Fixtures 5,000
Less. Depreciation @ 15% (750)
4,250
Current Assets:
Cash on Hand 100
Current Liabilities Cash at Bank 6,400
Sundry Creditors 9,600
Wages Payable 2,100 Sundry Debtors 30,000
Interest Payable on Less: Provision for Doubtful
Loan 1,350 Debts (1,500)
28,500
Stock 14,900

133,450 133,450

b)
Joint Venture Account with A in the books of B
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Bank A/c (Remittance to A) 150,000 By Bank A/c (Sales) 240,000
To Bank A/c (Insurance) 1,000 By Vehicle A/c (Car purchase) 50,000
To Bank A/c (Garage Rent) 2,000
To Bank A/c (Brokerage) 2,000
To Bank Account (Sundry
Expense) 400
To Profit and Loss A/c (Share of
Profit) 29,800
To Bank A/c (Balance remitted to
A) 104,800
 (8)

290,000 290,000

Memorandum Joint Venture Account

Dr. Cr.
Particulars Amount (Rs.) Particulars Amount (Rs.)
To A (Cost of car purchase) 160,000 By B (Sales) 240,000
To A (Reconditioning expense) 60,000 By B (Car taken) 50,000
To A (Transportation Expense) 5,000
To B (Insurance) 1,000
To B (Garage Rent) 2,000
To B (Brokerage) 2,000
To B Sundry Expense 400
To Profit transferred to
A
B 29,800
29,800
290,000 290,000

3.
a) Cost of inventory obtained from physical count on 30 June, 2016 Rs. 154,892.
This figure does not include any amounts for the two items below:
i) An inventory line which had cost Rs. 31,825 was found to be damaged.
Remedial work costing Rs. 2,300 is needed to enable the items to be sold for
Rs. 34,700. Selling expenses of Rs. 2,640 would also be incurred in selling
these items.
ii) Goods sent to customer on approval in May 2016 were not included in the
inventory. The sale price of the goods was Rs. 35,888 and the cost Rs. 35,066.
The customer notified his acceptance of the goods in July 2016.
Compute the adjusted closing inventory as on 30 June, 2016 from the above
information. Give detailed explanation for all your treatments. 5

b) Write short notes on: (2×5=10)

i) Components of financial statements.
ii) Bank reconciliation statement and its importance.

Answer:
 (9)
a) Statement of adjusted inventory as on 30 June, 2016
Particulars Amount (Rs)
Cost of inventory obtained from physical count on 30 June, 2016 154,892
Add- Net realizable value of damaged items 29,760
Add- Cost of goods sent on approval lying with customer. 35,066
Adjusted cost of Inventory 219,718

Working Note-1
A. Cost of Damaged goods =Rs.31,825
B. Computation of Net Realizable value of damaged goods
Selling price =Rs. 34,700
Less: Cost of remedial work needed to enable the items to be sold =Rs. 2,300
Less: Expenses to be incurred in selling these items = Rs. 2,640
NRV =Rs. 29,760
Damaged items should be taken at cost or NRV whichever is lower, hence it is taken at
NRV Rs. 29,760
Working Note-2
Goods were sent on approval basis on May 2016, but the customer notified his acceptance
of the goods only in July 2016 hence as on 30 June it should be counted as stock though
physically it is lying in the customer’s premises.

b)
i) Components of Financial Statements:
Nepal Accounting Standard on Presentation of Financial Statement (NAS – 01) states that
– a completed set of financial statements includes the following statements:
 Statement of Financial Position as at the end of the period;
 Statement of Profit or Loss and Other Comprehensive Income for the period;
 A statement of Cash Flow for the period;
 A statement of Changes in Equity for the period; and
 Notes to the Accounts comprising a summary of significant accounting policies and
other explanatory notes.

ii) Bank Reconciliation Statement and its importance:

It is a statement which compares the bank balances as per organization’s accounting
records with the balance stated in the bank statement. It is normal for a organization's
bank balance as per accounting records to differ from the balance as per bank statement
due to timing differences. Certain transactions are recorded by the entity that are updated
in the bank's system after a certain time interval. Similarly, some transactions are
accounted for in the bank's financial system before the organization incorporates them
into its own accounting system. Such timing differences appear as reconciling items in
the Bank Reconciliation Statement.
Importance of Bank Reconciliation Statements
 Preparation of bank reconciliation statement helps in identifying errors in the
accounting records of the organization or the bank.
 (10)
 Bank reconciliation statements provide the control mechanism to help to protect the
valuable resource through uncovering irregularities such as unauthorized bank
withdrawals. However, in order for the control process to work effectively, it is
necessary to segregate the duties of persons responsible for accounting and
authorizing of bank transactions and those responsible for preparing and monitoring
bank reconciliation statements.
 If the bank balance appearing in the accounting records can be confirmed to be
correct by comparing it with the bank statement balance, it provides added comfort
that the bank transactions have been recorded correctly in the organization records.
 Monthly preparation of bank reconciliation assists in the regular monitoring of cash
flows of a business.
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Mercantile Laws
Suggested
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Roll No……………. Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages -4

Time Allowed - 1 Hour

Marks

Attempt all questions.

1. Answer the following questions:

a) Describe the provisions relating to the penalties and appeal in brief as per the
Partnership Act, 2020". 5
b) State the various rights of partners in a partnership firm. 5

Answer
a)
Any of the following penalties may be imposed on the order of the concerned department in the
following matters:-
If the business of any partnership firm is operated without registration in contravention of Section 5 of
the Partnership Act,2020, each partner thereof is fixed with an amount not exceeding 50 rupees.
If an application filed under Section 6 (i.e particular to be mentioned etc.) is found to contain false
particulars, each partner of the firm registered in such way is fined with an amount not exceeding 100
rupees.
A firm which fails to give notice mentioned in Section 10 (i.e in case of alternation in particulars) is
fined with an amount not exceeding 100 rupees.
Each partner who acts in contravention of Section 11 (i.e operating business without renewal of the firm
etc) is fined with an amount not exceeding 50 rupees.
The dissatisfied party of concerned department's order under Partnership Act can file an appeal against
the decision to the appellate court within 35 days of receiving notice in this respect.
Likewise, any dissatisfied person over the penalties imposed on him by the department under Section 41
may file an appeal against such department to the Appellate Court within 35 days of the decision of
imposing penalties.
b)
Rights of Partners
a) Entitlement to have access to and to copy of the account and books of the firm: Every Partner shall
be entitled to have access to the account and books of the firm and if a partner intends to get a copy
of it the partner who holds such book and document shall prepare a copy of original document and
provide to such partner upon putting his/her signature.
b) Remuneration and interest: Section 19 of Partnership Act furnishes the provisions relating to the
remuneration and interest as every partner shall be entitled to receive remuneration as specified in
the agreement of managing the business of the firm and if the partner has invested additional capital
than he/she has agreed to subscribe, under the agreement he/she shall be entitled to receive an
interest not exceeding ten percent. If a partner, knowingly or negligently causes any loss or damage,
he/she shall be liable to pay back the values or amount of such loss or damage.
c) Profit derived by the partner to be the property of firm: Section 20 of the above Act provides if a
partner derives any profit for him/her from any transaction of the firm, or from the use of the
 (13)
property or business connected with the firm or in the name of the firm he/she shall account for that
profit and pay it to the firm.
d) The amount paid by the partners shall be mentioned in the account: The amount paid by the partners
pursuant to Sections 19 and 20 of the above Act, shall be clearly mentioned in the profit and loss
account of the fiscal year of the firm.
e) Share of profit and loss: Pursuant to section 22(1) of the above Act, that in the course of sharing the
profit and loss between/among partners it shall be shared in a manner as referred to in the agreement,
if any, and it shall be shared on the pro rata basis if such provision does not exist in the agreement.
Wherever there is an agreement between/among partners in respect of interest on the capital
subscribed by a partner in the course of promoting of the partnership, such an interest shall be paid
only out of the profit.
f) No entitlement to profit: If a partner fails to pay the capital to be subscribed by him/her to the firm,
he/she shall not be entitled to receive his/her profit until he/she pays the said capital.
2. Answer the following questions:
a) What are the rules regarding delivery of goods? 5
b) What do you understand by suit of Injunction? Explain it in the light of the
Contract Act, 2056. (1+4=5)
c) Identify charter party and its kinds. 5
Answer
a)
Some of the rules regarding delievery of goods are as follows:-
Examination of goods:- The buyer has a right to examine the goods to see whether they are in proper
quantity and condition or not. Until he is satisfied, the goods will not be transferred.
Modes of delivery:- A delievery of the goods may be either actual or symbolic or constructive. The sold
goods must be in possession of the buyer.
Application of delievery:- Unless otherwise agreed , the buyer must apply for delivery. The seller is not
bound to deliver goods without any application from the buyer.
Place of delivery:- Generally, a delivery is made in the stated place but if no place is mentioned in the
contract, delivery will be made in the following places - a) at the place of contract b) at the place where
the goods are sold c) at the place where the goods are produced in case of future goods.

Time of delivery:- If no time has been fixed in the contract, the delivery of goods will be made in
reasonable time, which is guided by the fact. When goods are received by the buyer before after the time
prescribed in the contract, deemed as valid deliver of goods.
Expenses of delivery:- Unless otherwise agreed, the expenses of putting goods into a deliverable state
shall be borne by the seller.
Installment delivery:- Unless otherwise agreed, the buyer is not bound to accept delivery of goods in
installments.
b)
Suit for injunction
Injunction refers to the order or decree of court. Sometimes court may issue an order to a person asking
him to abstain from doing a contemplated work or from continuing an ongoing act. Such order would be
a remedy to aggrieved party in some case.
A court may issue an order of injunction to restrain a party from committing a breach of contract. Such
injunctions may be "interlocutory" ones which are designed to regulate the position of the parties
pending a full hearing of a dispute permanent.
 (14)
Further, an injunction, whether interlocutory or permanent, may be "prohibitory" ordering a defendant
not to do something in breach of contract or "mandatory" requiring a defendant to reverse the effects of
an existing breach. An injunction will not, normally, be granted if the effect is to directly or indirectly
compel the defendant to do acts for which the plaintiff could not have obtained an order for specific
performance.
Section 87(1) of Nepalese Contract Act provides that if it becomes impossible to execute the contract
because any party about to take any action or behave in a manner contrary to the nature of contract, the
party, aggrieved by such action or conduct any file a complaint with the Appellate Court to stay such
action or conduct.
It further provides under section 87(2) of this Act, that the court may issue an appropriate order to any
party to stop immediately his/her specific action or conduct with a provision to settle the dispute
resulting from that contract according to the contract or prevailing law, notwithstanding, anything
contained in prevailing law.
Furthermore, under section 87(3) of this Act, in case order is issued, the aggrieved party may also realize
the additional loss or damage resulting from the failure of the other party to comply with the order
issued under Sub-section (2) above.
Hence, Nepalese Contract Act incorporates both the common law remedies as well as equitable
remedies developed by Common law and equity.
c)
Charter Party
A charter party may be defined as "an agreement in writing for hiring an entire ship or a major portion
thereof for the purpose of carrying goods through sea routes. So when the consignor has to dispatch a
considerable volume of goods or while carrying, he does not like to mix the goods with that of the
others, he likes to enter into a contract of charter party. The consignor, who charter the ship, is called the
charterer and the ship owner, who promises to carry goods to a certain port or harbor in consideration of
its freight is called the carrier.
A charter party may be of two types, viz., (a) Time Charter and (b) Voyage Charter
(a) Time Charter
If the ship is chartered for a definite period of time, it is called Time Charter. Under time charter, the
shipper can use the ship for a definite period of time to carry his goods or passengers - no matter, how
many times of voyage he makes within such time.
(b) Voyage Charter
If the ship is reserved for a particular voyage, say, from a particular port to another particular port, it is
called voyage charter. Under this charter, time of voyage is ignored. The ship is reserved till the
completion of voyage from one destination to another.
Both the types of charter party can be made either with demise or without demise.
(i) Charter with demise
Under this charter party, the charter hires the entire ship on lease or demise either for a particular period
of time or for a particular voyage. He pays the requisite carriage to the shipping company and takes the
ship in his own inchargeship and responsibility. Thus, under it, till the end of the chartered period the
charterer plays the role of owner of the ship, and he takes the services of the captain and the other
crewmembers as if they are his servants. The charterer himself becomes liable for the entire voyage.
(ii) Charter without demise
 (15)
If the ship is hired (wholly or partly), just for carrying goods without the terms of lease or demise it is
called Charter without demise. Under it, the ship is reserved to carry goods or passengers for a certain
time or voyage but the ship will be run by the shipping company under its own responsibility.
 (16)

Fundamentals of Economics
 (17)

Roll No……………. Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages -18
Time Allowed – 1 Hour
Marks
Attempt all questions.

1. Long Answer Questions: (2×5=10)

a) Evaluate the role of cottage and small scale industry in Nepal.
b) Define price elasticity of demand. Explain any four uses of price elasticity of demand
in business decision making.

Answer
a)
Cottage and small scale industries are the foundations of sustainable economic development and self
development economy. So the government has been giving emphasis on establishment, development,
and expansion of cottage and small scale industries that contribute to the economic development by
creating self-employment and employment through entrepreneurship and skill development at local
levels.
Role of cottage and small scale industries are as follows:
1. Increase employment opportunities
Country like Nepal having capital-scarce and labour surplus economy can generate more employment
opportunities by encouraging local people and private sectors to establish such industries. Establishment
of such industries can help to solve the problem of under employment, disguised unemployment and
seasonal employment.
2. Utilization of local resources
These industries are based on local raw materials. So, proper utilization of locally available raw
materials like bamboo, herbs, animal skins, stone, etc. can increase the level of production of essential
goods in the society.
3. Decrease in level of poverty
Establishment and expansion of such industries generate more employment opportunities among low
income group people. They also become the subsidiary source of income of such people. Thus, such
industries help to raise the economic status of poor people and support for decreasing level of poverty.
4. Source of foreign currency earning
Handmade carpet, handicrafts, Nepali paper products, woolen shawl (pashmina), metal products are
some of the examples of goods exported by Nepal in foreign market. By increasing efficiency of cottage
and small industries production of such products can be increased level of foreign currency earning can
be increased by exporting such goods.
5. Protect local art and culture
Products of cottage and small scale industries are based on local art, culture and skill. So, operation of
these industries and supply of products of these industries inside and outside the country helps to
preserve traditional art, skill and culture of a country.
 (18)
6. Basis of large scale industries
These industries are the basis of large scale industries. Development of such industries increases income
and purchasing power of people, enhances managerial skill and efficiency of entrepreneurs, increases
market demand of industrial products, etc. These are the symptoms of establishment and expansion of
large scale industries.
7. Balanced development
Cottage and small scale industries are mostly established to meet local demand and are dispersed all
over the country. Thus, they support to reduce regional disparity. Hence, these industries help to make
balance between rural and urban area.
Development of cottage and small scale industries is essential for the development of less developed
country like Nepal. So far, a total of 270,988 cottage and small scale industries are registered across the
country. But, due to various problems like lack of capital, lack of protection policy, lack of skilled
manpower, lack of rural infrastructures, traditional technology, limited market, intermediary
exploitation these industries are not found flourished all over the country. Those which are in existence
are in bad condition.
b)

1. Price elasticity of demand refers to the degree of responsiveness or sensitivity of quantity demanded
of a commodity towards price of the commodity. In other words, price elasticity of demand
measures the relative effect on quantity demanded of a commodity due to change in its price.
Mathematically, it can be expressed as,

Price elasticity of demand has enormous uses in business decision making, in fact: price
elasticity of demand is one of the main tool of business decision making. The main four uses of price
elasticity of demand in business decision making are as follows:
1. Determination of Price of the Product:
Price elasticity of demand helps in determination of price of the product. If the product is highly
elastic higher price will reduce demand of the product significantly. Hence, price of highly
product should be lower in the market and price of less elastic product will be higher since it will
not decrease demand significantly.
2. Demand Forecasting :
Price elasticity of demand is useful in forecasting the future demand of the product with the
expected price of the market in future. If the coefficient of elasticity of a product is known, we
can predict/forecast the future demand as per the expected price of future.
3. Analysis of Market :
Price elasticity can also be useful to analyze the market whether the market is highly
competitive, normal or monopolistic. If substitute goods are available, the market will be highly
elastic and competitive. Similarly, if there is no any substitute good, the market will be inelastic
and monopolistic.
4. Determination Business Strategies:
To determine any business successful strategy, the businessperson should have complete
knowledge about the market, rivalry, future demand etc. Price elasticity of demand helps the
businessmen to know about such things and make appropriate business strategy and business
planning.
In conclusion, Price elasticity of demand is the measurement of sensitivity of change in price of the
commodity to the quantity demanded of the product. It is one of the major tool to make the business
decisions like pricing, demand forecasting, market analysis, strategy formulation etc.
 (19)
2. Short Answer Questions (Any Five): (5×3=15)
a) Define micro and macroeconomics. Explain any four differences between them.
b) Explain the relationship between average productivity (AP) and marginal
Productivity (MP) with the help of schedule and diagram.
c) Explain the relationship between Average Revenue (AR) and Marginal Revenue
(MR) in perfect competition market with the help of schedule and diagram.
d) Define oligopoly. State any four distinct characteristics of oligopoly.
e) Describe the problems of foreign trade in Nepal.
f) Explain the types of demand function.

Answer
a)
Microeconomics is a branch of economics that studies the nature, relationship and behavior of individual
households and firms in making decisions on the allocation of limited resources. Whereas
Macroeconomics is a branch of economics that studies the nature, relationship and behavior of such
aggregate quantities and averages as national income, total consumption, savings, investment, total
employment, general price level and so on.
The main differences of Microeconomics and macroeconomics can be stated as following:
a) Difference in origin and development: Microeconomics was originated form Greek word
‘MIKROS’ which means small and initiated by Classical economists. Whereas macroeconomics was
originated form Greek word ‘MAKROS’ means large and Initiated by J.M.Keynes.
b) Difference in Objective of study: The objective of Microeconomics is optimum allocation of
resources, Whereas the objective of macroeconomics is full employment and growth of resources.
c) Difference in Methodology of study: Microeconomic study is based on partial equilibrium
analysis. Whereas Macroeconomic study is based on general equilibrium analysis.
d) Difference in scope of study: Microeconomics has limited scope and includes individual consumer,
producer, firm, industry etc. as its subject matter. Whereas Macroeconomics has broad scope and
includes National income, aggregate employment, Price level etc. as its subject matter.

Even though there are many differences between Microeconomics and macroeconomics but in fact they
are like two sides of a same street and interdependent with each other rather than different.

b) Average productivity (AP) refers to the production per unit of labour received by the producer by
employing certain number of labour in its production process.

Mathematically, where, TP = Total product, N = units of labour

Marginal Productivity (MP) refers to the additional output received by the producer by
employing one additional unit of labor in it’s production process. In other words, it is the ratio
between change in total product (∆TP) and the change in units of labour (∆N).
Mathematically, or,
Where, ∆TP = change in Total product, ∆N = change in units of labour
th
TPn = Total product of n unit of labour TPn-1 = Total product of (n-1)th unit of
labour
The relationship between AP and MP can be explained with the help of following schedule and
diagram.
Units of labor TP AP MP
 (20)
1 10 10 10
2 30 15 20
3 60 20 30
4 80 20 20
5 90 18 10
6 90 15 0
7 80 11.4 -10
AP, MP
50
40
30
20

AP
10

O 1 2 3 4 5 6 7 Units of labor
MP
-10

From the above diagram it is clear that at first unit of labour, AP and MP both will be equal.
After this both will increase but MP increases by higher rate than that of AP. Both reaches their
respective maximum points at 3 units and MP starts to fall but AP remains constant for a while.
MP intersects at the highest point of AP and diminishes sharply. AP will never be zero or
negative but MP can also be zero as well as negative.
Hence in conclusion, we can be say that initially AP and MP start from same point, rate of
increase in MP is higher than that of AP, both reaches to their respective maximum points and
MP starts to fall before AP. MP intersects AP at its highest point, after which MP will be less
than AP. MP can be zero as well as negative but AP will never be zero or negative.

c) Perfect competition is a type of market structure in which large number of buyers and sellers will
be dealing with homogeneous product and there is free entry and exit of firms in an industry.
There is large number of firms in an industry. All the firms are very small in size in comparison
to industry which can’t influence price as well as output of the whole industry. Hence, price of
the product will be determined by the industry with the help of market demand and market
supply and all the firms will follow that price. It means all the firms are price takers not the price
makers in perfect competition market and price of the product remains constant.
Total Revenue (TR) refers to the sum total of income received by the producer by selling
all the available units of his product in given period of time.
Mathematically, TR = P X Q where, P = price per unit, Q = total quantity sold.
Average Revenue (AR) refers to the income/revenue per unit of output. It is the ratio between
TR and total Quantity sold. It is always equal to price.
Mathematically,
 (21)
Marginal revenue (MR) refers to the addition made to total revenue with sale of one additional
unit of the product in the market. In other words, it is the difference between total revenue of last
unit sale and total revenue of second last unit of sale.
Mathematically,
The relationship between TR, AR and MR in perfect competition market can be explained with
the help of following schedule and diagram.
Price TR AR MR
Quantity
1 10 10 10 10
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
Revenue

TR
50
40
30
20
10

AR /MR

O 1 2 3 4 5 Quantity

From the above diagram it is clear that TR curve in perfect competition market is a straight line
starting from origin. It increases in same rate as quantity increases. AR and MR both curves will
coincide with each other and parallel to X-axis. In conclusion, TR had direct relationship with
quantity and AR and MR both are independent of quantity.

d) Oligopoly is a type of market structure under imperfect competition market. It falls between two
extreme market structures, perfect competition and monopoly. Oligopoly occurs when a few firms
dominate the market for a good or service. This implies that when there are a small number of
competing firms, their marketing decisions exhibit strong mutual interdependence. By mutual
interdependence we mean that a firm's action say of setting the price has a noticeable effect on its
rival firms and they are likely to react in the some way. Each firm considers the possible reaction of
 (22)
rivals to its price and product development decisions. The examples of Oligopoly market in Nepal
are soft drinks industries, Airlines companies, Universities etc.
There are some distinct features of oligopoly market structure in comparison to other type
of market structures which can be explained as following:
1. Interdependence in Decision Making: In oligopoly, all firms under an industry are
interdependent in decision making. Since, behavior of one firm will affect another; they observe
the behavior of their opponents and make decisions accordingly.
2. High Advertising and selling cost: Oligopolistic firms give higher importance to advertising
and selling costs. They want to increase the sales not by changing the price but by other means
such as advertising and selling costs and marketing techniques.
3. Group Behavior: We can observe the Mass behavior rather than individual behavior in
oligopoly market structure. Since, one firm don’t want to take risk with individual decision
making in the industry. They decide in group regarding the price, output, Quality etc.
4. Indeterminate Demand curve: Since oligopolistic firms are interdependent with each other,
they do not know their demand curve. They can anticipate their demand curve if they know the
expected behavior of other firms of the industry but when the behavior of other firms change
demand curve will also change. Hence, the demand curve of an oligopolistic firm is
indeterminate.

In conclusion, Oligopoly is a type of realistic market structure within imperfect market structure. It
has some distinct and realistic characteristics such as Interdependency, group behavior, High
advertising cost, unknown demand curve etc.

e) Foreign trade or international trade refers to the exchange of goods and services from domestic
economy to the rest of the world. In other words, it is the trade between two countries of the world.
Most of the countries of the world have been able to take advantage from the foreign trade. Foreign
trade is being one of the important base for economic development of a country but Nepal is not
being able to take advantage from foreign trade even in this age of globalization.
Analyzing the current situation of foreign trade, Nepal’s trade is mostly concentrated with India.
About 60% trade with India and only 40% with the rest of the world. With increase in volume of
international trade, trade deficit is also increasing rapidly. Due to high trade deficit, balance of
trade also being negative. The main problems of foreign trade in Nepal are as follows:
a. Odd geographical location: Being Nepal a landlocked country, trade with other countries than
India is very difficult. Even trade with neighbor country china is also very difficult due to
geographical location. It is one of the major causes of high trade dependency with India.
b. Low production of goods and services: To export goods and services, excess of supply over
domestic demand of goods and services is necessary.
c. Obsolete Technology of Production: Due to primitive production technique, cost of production
of Nepalese products is higher than other countries and Nepal can’t compete with other countries
in terms of price and quality as well.
d. One sided foreign trade: Nepal’s foreign trade is mostly concentrated with India. About 60% of
the total trade is with India and rest 40% with other countries. It is also one of the major
problems of Nepalese foreign trade.
e. Limited goods to export: Nepal is producing only limited products that can be exported to other
countries. In fact, those products are also produced by India as well. Therefore, potentiality of
exporting goods from Nepal is being limited.
 (23)
Due to above stated problems of Nepalese economy, Nepal is not being able to take advantages from
foreign trade and converted as dependent import based economy.

f) Demand function indicates the relationship between demand for a product as dependent variable
and its determinants as a independent variables.

Demand function is of two types.

Single variable or short run demand. dx = f(Px) and multivariable or Long run demand function dx =
f( Px,
py, Y, P, Ex …)
Linear Demand Function
A demand function is said to be linear when the slope of demand curve remains constant throughout
its length.
Mathematically, it is written as
Dx = a – b Px
Where,
Dx = demand for a commodity, a= autonomous demand, b = slope of demand curve,
Px = Price of a commodity

Geometrically, linear demand function is shown by straight line- demand curve, as below

Non-Linear Demand Function

A demand function is said to be non-linear or curvilinear when the slope of the demand curve
(∆P/∆D) changes all along the curve. Power function is one of the example of non- linear demend
function as

And Where, a, b and c are all greater than zero.

Geometrically, non- linear demand function is shown in following figure.

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 (25)

Fundamentals of Management
 (26)

Roll No……………. Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages - 4

Time Allowed –1 Hour

Marks
Attempt all questions.

3. Long Answer Questions: (2×5=10)

a) Describe techniques for improving communication.
b) List out the Fayol's fourteen principles of management and describe in brief.

Answer:
a) Communication is the essence of leading, motivating, coordinating and decision making in
organizations. So managers should improve communication. Organizational effectiveness
depends on effective communication. The techniques of improving communication can be
described on basis of some figured out elements as two-way communication to structural
redesign including effective listening and clear language.
1. Two-way communication: The sender and receiver should promote two-way communication.
Counseling, open door policy, employee meetings and participation can improve two-way
communication.
2. Effective listening: Effective listening requires active listening consisting of hearing exactly
what is being said, understanding the sender’s feeling for message content and sensitive to verbal
and nonverbal cues.
3. Clear language: Language should be simple to convey proper meaning. Jargons should be
avoided and symbols used for encoding and decoding should be clear to both sender and
receiver.
4. Avoid information overload: Providing timely, appropriate and up to date information should
regulate Information flow. Information overload should be avoided.
5. Structural redesign: The organizational structure should be redesigned to facilitate smooth flow
of information. Reengineering can be done through teams, task forces and committees.

If the target audience for communication is clearly specified and the goal of communication is clear
in mind of sender, communication is improved.

b) Henri Fayol (1814-1925) a contributor in administrative management has propounded following

fourteen principles of management:
1. Division of work: Work should be divided among individuals and groups to ensure that
effort and attention are focused on special portions of the task. Fayol presented work
specialization as the best way to use the human resources of the organization.
2. Authority: The concepts of Authority and responsibility are closely related. Authority
was defined by Fayol as the right to give orders and the power to exact obedience.
Responsibility involves being accountable, and is therefore naturally associated with
authority. Whoever assumes authority also assumes responsibility
3. Discipline: A successful organization requires the common effort of workers. Penalties
should be applied judiciously to encourage this common effort.
 (27)
4. Unity of Command: Workers should receive orders from only one manager.
5. Unity of Direction: The entire organization should be moving towards a common
objective in a common direction.
6. Subordination of individual interests to the general interests: The interests of one person
should not take priority over the interests of the organization as a whole.
7. Remuneration: Many variables, such as cost of living, supply of qualified personnel,
general business conditions, and success of the business, should be considered in
determining a worker’s rate of pay.
8. Centralization: Fayol defined centralization as lowering the importance of the subordinate
role. Decentralization is increasing the importance. The degree to which centralization or
decentralization should be adopted depends on the specific organization in which the
manager is working.
9. Scalar chain: Managers in hierarchies are part of a chain like authority scale. Each
manager, from the first line supervisor to the president, possess certain amounts of
authority. The president possesses the most authority; the first line supervisor the least.
Lower level managers should always keep upper level managers informed of their work
activities. The existence of a scalar chain and adherence to it are necessary if the
organization is to be successful.
10. Order: For the sake of efficiency and coordination, all materials and people related to a
specific kind of work should be arrange in proper sequence as possible.
11. Equity: All employees should be treated as equitably as possible.
12. Stability of tenure of personnel: Retaining productive employees should always be a high
priority of management. Recruitment and Selection Costs, as well as increased product-
reject rates are usually associated with frequency of hiring new workers.
13. Initiative: Management should take steps to encourage worker initiative, which is
defined as new or additional work activity undertaken through self-direction.
14. Espirit de corps: Management should encourage harmony and general good feelings
among employees.

4. Short Answer Questions (Any Five): (5×3=15)

a) Explain the problems of goal formulation.
b) Team and participative methods of planning
c) Scientific management theory
d) Explain psychological barriers to effective communication.
e) Approaches to organizing
f) Legal and ethical compliance of business
Answer:
a) Problems of Goal Formulation
Managers face a number of problems while formulating goals and at the implementation phase.
Some common problems are explained below.
1. Inappropriate Goals: if managers cannot integrate goals and resources properly, they fail to
quantify abstract goals or set conflicting goals, goals become inappropriate. Such goals tend to
failure in action.
2. Dynamic and Complex Environment: environment rapidly changes in various dimensions like
political, legal, socio-cultural, political and technological arena creating problem to adjust and
establish harmony of action plans to cope such changes. Pre-set goals may need frequent
changes, which is not so easy for all the managers, they feel problem.
 (28)
3. Absence of Participation: goals set without active involvement and participation of subordinates
who actually have to strive hard to achieve such goals tends to lose their cooperation at work.
They do not feel ownership to the programmes following the goals. The result is poor result of
the endeavor.
4. Defective Reward System: organization’s policy and system to reward and punish based on the
subordinates’ dedication, success, and contribution to goal achievement decides how well they
will work wholeheartedly. Poor reward policy and system will lead to jeopardize the goal
success.
5. Disintegration of Goals: Managers should strive to integrate the goals of the organization,
functional goals and individual goals with each another. If there appears disintegration between
these goals, all of the counterparts become harassed and humiliated finally leading to goal
failure.
6. Focus on Short-term Perspective: some managers lack long term vision and become contented
with short-term success. They want their tenure yield greater result at the cost of long-term
benefits. They fail in the long run to realize mission and strategies.
7. Resistance to Change: people tend to resist changes for many reasons. They compare their
present and potential status, skills gap, growth opportunities and income level together with job
security. If they are not well prepared and convinced, they oppose every change following the
goals.

b) Team and participative methods of planning

Among the methods of planning team and participative methods are taken as modern methods of
planning. Team methods of planning focuses on delegation of planning job to a work team
having multiple skills in planning. The team member can be line managers and staff experts. The
team functions as a unit. The team prepares draft plans which are forwarded to the top
management. The plans are reviewed and finalized by top management. And the participative
methods of planning is concerned with participation of superior and subordinates in planning job.
This method is blend of top-down and bottom-up methods of planning. In this methods top
management provides broad premises, parameters and guidelines to middle and lower level
management. The middle and lower level management formulates the plans and forwards them
to top management. Top management reviews and finalized the plan.

c) F.W. Taylor propounded scientific management theory. This theory states that productivity can
be improved endlessly and inefficiency should not be allowed. Scientific management theory is
based on specialization, worker education, management-labour harmony and one best method.
Worker should specialize in a particular type of job to achieve the highest level of efficiency.
There should be division of work for specialization. Productivity and efficiency are the goals of
scientific management and properly trained and developed workers produce the best. There
should be harmony in relation of management and labour to increase productivity. Time and
motion study should be used to find one best method of performing each element of the job. It
introduced rational method to solve management problems. It laid the foundation of modern
management theory.

d) Whether together with or next to the communicator, the receiver fails to catch with the meaning
or the sender s/himself cannot transfer meaning properly because of some psychological barriers
affected by selective attention or selective distortion or selective retention as mentioned below:
1. Filtering: it is a condition when the sender intentionally limits the receiver’s full access to
information necessary for complete transfer of meaning.
 (29)
2. Distrust: Under distrust, the receiver s/himself disbelieves on the sender’s access to
information s/he is transmitting to the receiver.
3. Viewpoint: People may hold certain point of view, value system, and attitudes. Such
predispositions lead them to form prejudice to the meaning of the message being received.
4. Defensiveness: The receiver may be biased or find the meaning opposite to personal interest/
threatening to one’s existence or status. In such case s/he may fail to respond properly but go
into defensive position.

e) Organizing is creating a structure. Important approaches to organizing can be classical,

behavioral and contingency. Organization is viewed as a machine and employees are regarded as
components of that machine by classical approach to organizing. It consists scientific
management, administrative management and bureaucratic management. Specialization and
standardization, universal principles of management, clearly defined procedures and
management by rules are elements of classical approach. Behavioral approach consists socio-
technical system and Rensis Likert’s system 4. This approach states that needs of the social
system should be effectively dealt for organizing and recognizes unique value of organizational
members. Contingency approach states that organizing is dependent on situational factors.
Technology, environment, organization size and organizational life cycle are the important
situational factors.
If student gives answer inrelation to other behavioural approach i.e maslow's and
Herzberg marks should be given.

f) Among the approaches to social responsibility of business legal and ethical compliance are two
important approaches. Legal compliance is the obligation of business to obey law. This approach
focuses that business organizations must comply with the legal provision made by the respective
country to operate its business activities. And ethical compliance is concerned with how the
business decision affect other people and business compliance with code of conduct to promote
social responsibility in terms of corruption, honesty in disclosure, misuse of assets, relationship,
rights and duties etc.
 (30)

Commercial Mathematics & Statistics

 (31)
Roll No........................ Maximum Marks - 25

Total No. of Questions - 2 Total No. of Printed Pages -5

Time Allowed - 1 Hour Marks

Attempt all questions.
1. (4×4=16)
a) A man is employed to count Rs. 10,710. He counts at the rate of Rs. 180 per minute for half
an hour. After this he counts at the rate of Rs. 3 less every minute than the preceding
minute. Find the time taken by him to count the entire amount.
b) Age and weight of newborn calf is taken at weekly intervals.

Age(week) 1 2 3 4 5 6 7 8 9 10
Weight(lbs) 50 51 53 55 57 58 62 70 75 108

Estimate the weight of 15 week calf.

c) Construct the cost of living index number for the year 2017 from the data given below:

Base year (2016)

Commodity Price in 2017
Price Quantity
A 25 16 35
B 36 7 48
C 12 4 16
D 6 3 10
E 28 4 28

What change in the cost of living figure in 2017 has taken place as compared to 2016?
d) From the following table, calculate the rank correlation coefficient:

X: 48 33 40 9 16 16 65 24 16 57
Y: 13 13 24 6 15 4 20 9 6 19
Answer
a)
Amount counted in half an hour = Rs 180 30 = Rs 5400
Balance to be counted = Rs 10710 – Rs 5400 = Rs 5310
In one minute just after half an hour, the amount counted is Rs 177.Then it becomes an
arithmetic
Series where a= 177 , Sn= 5310 d = -3 , n = ?
We know that
Sn = [2a + (n-1)d]
or, 5310 = [ 2 177 + (n- 1)(-3)]
or, 10620 = n(357-3n)
or, n2 -119n + 3540 = 0
or, (n- 59)(n – 60) = 0

Either n= 59 or n = 60.
Now, in 59 minutes after half an hour, the amount counted = [2 177 + (59- 1)(-3)]
= Rs 5310
and nothing is counted in the 60th minute.
 (32)
Required time = 30 + 59 = 89 minutes.
b)
Let Age of the Calf be X and weight be Y.

X Y XY X2
1 50 50 1
2 51 102 4
3 53 159 9
4 55 220 16
5 57 285 25
6 58 348 36
7 62 434 49
8 70 560 64
9 75 675 81
10 108 1080 100
∑ =55 ∑ =639 ∑ =3913 ∑ =385

∑
Here n= 10 , ̅ = = = 5.5
̅ =∑ = = 63.9
∑ ∑ ∑
Regression coefficient of Y on X is byx = ∑ ∑
=

= = 4.83
Regression equation of Y on X is
Y - ̅ = byx(X- ̅ )
or, Y – 63.9 = 4.83(X- 5.5)
or, Y = 45.885 +63.9
= 109.785
Or alternatively it can be solved through Time Sires Analysis
c)
Calculation Table
Commodity p0 q0 p1 p0q0 p1q0
A 25 16 35 400 560
B 36 7 48 252 336
C 12 4 16 48 64
D 6 3 10 18 30
E 28 4 28 112 112
∑ ∑
p0q0=830 p1q0=1102

∑
Cost of living index = ∑

Hence, the cost of living index number of 2017 has been increased by (132.77 – 100) = 32.77%

Or CLI = EWP
EW

d)
 (33)

X Y R1 R2 d D2
48 13 3 5.5 -2.5 6.25
33 13 5 5.5 -0.5 0.25
40 24 4 1 3 9.00
9 6 10 8.5 1.5 2.25
16 15 8 4 4 16
16 4 8 10 -2 4
65 20 1 2 -1 1
24 9 6 7 -1 1
16 69 8 8.5 -0.5 0.25
57 19 2 3 -1 1
d=41

 Solution: It is seen that in X series, 16 is repeated thrice and in Y series, 6 and 13 repeat
twice. So, here m1 = 3, m2 = 2 and m3 = 2
 m1  m12  1 m2  m2 2  1 m3  m32  1 
6  d  2
  
 12 12 12 
R  1 `
n(n  1)
2

6  41  2  0.5  0.5 264

 1  1  0.733
10(10  1)
2
990
2. (3×3=9)
a) A committee of 5 persons is to be chosen from 5 CAs, 3 Economists and 4 Lawyers. In how
many ways can this be done if in the committee there must be at least one member of each
group and at least 2 lawyers?
b) Divide Rs. 18,500 between Poonam and Suprina in such a way that Poonam’s share at the
end of 5 years be equal to Suprina’s share at the end of 8 years, C.I. being calculated at 4%
p.a.
c) An operator of a fleet of truck purchases 50 tyres of a company A and B at the same price.
Under similar driving conditions, he gets the following results:
Company A Company B
Mean 18,500 km 21,000 km
Standard Deviation 3,500 km 4,800 km
Which brand would you advise him to buy in future?

Answer
a)
Here
No. of CAs =5 ,
No. of Economists = 3
No. of Lawyers =4

To find: No. of ways of selecting 5 persons in a committee having at least one member
of each group and at least 2 lawyers.
Ways CAs(=5) Economists(=3) Lawyers(=4) No. of ways of selections
5
I 2 1 2 C2×3C1×4C2 =10×3×6=180
 (34)
5
II 1 2 2 C1×3C2×4C2 =5×3×6=90
5
III 1 1 3 C1×3C1×4C3 =5×3×4=60
Total =330 ways

b)
Let Poonam’s share be Rs x, then Suprina’s share be Rs (18500- x)
Case I (Poonam’s case)
p = Rs x
n = 5 yrs
r = 4 % p.a. and A1 = ?
We have, A1 = p(
= x (1.04)5
Case II( Suprina’s case)
P= Rs (18500-x)
n= 8 yrs
r= 4 % p.a. and A2 = ?
We have, A2 = p(
= (18500- x)(1.04)8
By question, A1 = A2
or, x (1.04)5 = (18500- x) (1.04)8
or, x = (18500- x) (1.04)3
or, x= (18500 –x) (1.124864)
or, x+1.124864x = 20809.984
or. 2.124864x = 20809.984
or, x =
x = Rs 9793.56
, the required Poonam’s share is Rs 9793.56
And Suprina’s share is Rs (18500 – 9793.56) = Rs 8706.44
c)
For company A
X  18,500, S.D.  3500

s 3500
C.V .  X 100  X 100  18.92
For companyXB 18500
Y  21,000, S.D.  4800
s 4800
C.V .  X 100  X 100  22.86
Y 21000
As CV of company A is less than CV of company B, tyres of company A is more consistent
and reliable. So operator should buy tyre of company A.