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DAIBB_MANAGEMENT ACCOUNTING

SECTION-A
01. Define Management Accounting
02. Define Financial Accounting
03. Compare between Management Accounting and Financial Accounting.
04. Explain the role of Management Accounting in a bank.
OR Management Accounting is beneficial for banking operation - comments with the example.
05. Management Accounting is helpful in decision making-discuss the statement.
06. Explain the role of Management Accounting in planning, control and decision making in a bank.
07. Describe the necessity of Financial Statement Analysis
08. Describe the uses/ Objectives of financial statements analysis.
09. Describe the limitations of financial statements analysis
10. Limitations of Management Accounting
11. Components of Managerial Accounting
12. Scope of Management Accounting
13. Planning in organizations
14. Objectives of Management Accounting
15. Describe the shortcomings that the present reporting system in a bank suffers from.
16. How management accountants contribute to banking success
17. When designing effective management reports, consideration may be given to:
18. Variance analysis helps management to understand the present costs and then to control future costs.

SECTION-B
01. Break-Even Point
02. What is Break-even Analysis? Discuss the assumptions & uses of BEP.
03. Assumptions of Break-even point:
04. Uses of BEP Analysis
05. Limitations of Break-even analysis:
06. Usefulness/ Importance of Break-even analysis:
07. Application/Necessities of Break-even analysis:
08. Describe three approaches to break-even-analysis.
09. What is meant by sales mix? What assumptions are casually made concerning sales mix in cost-volume
profits (CVP) analysis?
10. Cost Volume Profit Analysis
11. Contribution Margin (CM):
12. Cost sheet, Discuss the uses/ purposes/ advantage of Cost Sheet
13. Types of Costing
14. What is meant by cost behavior? How cost behavior helps in classifying costs in banking?
15. Define cost accounting. Discuss the concept of service costing.
16. Discuss the importance of cost accounting to a banker.
17. What Are the Three Types of Costs Used in Manufacturing Products?
18. Definition of Pricing, Objectives of Pricing
19. Discuss the factors considered in lending by a bank.
Or, Factors affecting while assessing a loan proposal
20. Causes of sickness in small scale industry
21. Describe the motives for holding cash in bank.
22. Explain operating, investing and financing activities with appropriate examples.

Ganesh Kirtunia, SO, BDBL, Kanchpur Branch

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SECTION-C

1. Discuss the use of ‘time value of money’ in capital budgeting:

2. What is Payback Period? How Payback Period is used in Capital Budgeting Decision?
3. What are the major constraints of this method (Payback period):
4. Discuss the importance of capital budgeting for taking investment decision:
5. Evaluation Techniques of Capital Budgeting
6. Budget. What are the objectives of budgeting?
7. What is the importance of budget?
08. The Process / steps of Preparation of Budgets:
09. What is Master Budget & Uses?
10. Budgeting and Budgetary Control
11. Essentials of a Budget
12. Importance of Cash Management
13. Budgeting and its Role in Decision Making
14. Components of the Master Budget
15. Performance Budget
16. How does zero base budgeting is differed from capital budgeting?
17. What is a budgetary control system? And what are the benefits?
19. Discuss briefly the importance of budgetary control system with special reference to Banking
Organization
20. Objectives of Budgetary Control. Advantages of Budgetary Control
21. Limitations of Budgetary Control
22. Advantages of budgeting and budgetary control
23. Cash Budget
24. Discuss the utility of cash budget as a tool of the cash management. What are the steps involved in
construction of a cash budget? The utility of cash budget as a tool of the cash management:
25. Cash Budget is Important Tool in Cash Management
26. The purpose of cash budgets

SECTION-D

01. Define working capital and its significance/ importance for a firm.
02. Explain the factors affecting working capital requirements. Or Determinants of Working Capital.
03. Factors that determine the Level of Investment in Working capital
04. Management of Working Capital:
05. Explain the difference between variable working capital and permanent working capital.
06. Explain different sources of financing working capital.
07. Explain the objectives of inventory management.
08. Importance or Advantages of Adequate Working Capital
09. Disadvantages of Redundant or Excessive Working Capital

SECTION-E
01. Lease. Types of Lease. Importance of Lease Finance. Importance of Leasing for developing country.
Illustrate the basic characteristics of Lease: Explain the economics of lease.
02. State the advantage and disadvantage of lease. Risks associated with leasing.
03. Finance Lease. Key Features of a Finance Lease.
04. Operating Lease. Features/Advantages of Operating Lease. Features of Operating lease.
05. Explain different forms of lease finance.
06. Discuss the characteristics of capital of lease
07. Discuss the relative merits of lease finance and hire purchase finance.
08. Features of financial lease and operating lease. Advantages and disadvantages of financial lease and
operating lease.
09. Hire purchase. Characteristics of Hire-Purchase System. Features of Hire Purchases. Advantages of Hire
Purchase System.
Ganesh Kirtunia, SO, BDBL, Kanchpur Branch
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SECTION-A
01. Define Management Accounting
Management accounting refers to accounting information developed for managers within an organization. It is
concerned with the provisions and use of accounting information to managers within organizations, to provide
them with the basis to make informed business decisions that will allow them to be better equipped in their
management and control functions.
Unlike financial accounting, which produces annual reports mainly for external stakeholders, management
accounting generates monthly or weekly reports for an organization's internal audiences such as department
managers and the chief executive officer. These reports typically show the amount of available cash, sales
revenue generated, amount of orders in hand, state of accounts payable and accounts receivable, outstanding
debts, raw material and inventory, and may also include trend charts, variance analysis, and other statistics.

02. Define Financial Accounting

Financial Accounting is the field of accountancy concerned with the preparation of financial statements for
decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other
stakeholders.
Managerial accounting is used primarily by those within a company or organization. Reports can be generated
for any period of time such as daily, weekly or monthly. Reports are considered to be "future looking" and have
forecasting value to those within the company.

03. Compare between Management Accounting and Financial Accounting.

Financial Accounting Management Accounting

A financial accounting system produces A management accounting system produces information
information that is used by parties external to the that is used within an organization, by managers and
organization, such as shareholders, bank and employees.
creditors.
Financial accounting focuses on history. Management accounting focuses on future & Present.
Financial accounting helps in making investment Management Accounting helps management to record,
decision, in credit rating. plan and control activities to aid decision-making
process.
Focus on quantitative information Focus on both qualitative and quantitative information
Financial accounts are supposed to be in No specific format is designed for management
accordance with a specific format by IAS so that accounting systems.
financial accounts of different organizations can be
easily compared.
Well-defined - annually, semi-annually, quarterly As needed - daily, weekly, monthly.
Preparing financial accounting reports are There are no legal requirements to prepare reports on
mandatory especially for limited companies. management accounting.
Drafted according to GAAP - General Accepted Drafted according to management suitability.
Accounting Procedure.

04. Explain the role of Management Accounting in a bank.

OR Management Accounting is beneficial for banking operation - comments with the example.
1. Collection, Classification, Analysis and Presentation of Financial data
2. Systematic and reliable planning
3. Ascertainment, Reduction and Control of cost
4. Product Pricing
5. Measurement of work performance
6. Preparation of statement of cost and other necessary statement
7. Preparation of Master Plan of Development of Industry
8. Role of Financial Management in Industry
9. Forward looking
10. Efficiency Analysis
11. Helping in decision making.
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05. Management Accounting is helpful in decision making- discuss the statement.

Managerial accounting information provides data-driven input to these decisions, which can improve decision
making over the long term. Small business managers can leverage this powerful tool to help make their business
more successful by understanding how management accounting benefits common business decision contexts.
Relevant Cost Analysis
Managerial accounting information is used by company management to determine what should be sold and how
to sell it. For example, a small business owner may be unsure where he should focus his marketing efforts.
Activity-based Costing Techniques
Once the company has determined what products to sell, the business needs to determine to whom they should
sell the products. By using activity-based costing techniques, small business management can determine the
activities required to produce and service a product line.
Make or Buy Analysis
A primary use of managerial accounting information is to provide information used in manufacturing. By
completing a make or buy analysis, she can determine which choice is more profitable.
Utilizing the Data
Managerial accounting information provides a data-driven look at how to grow a small business. Budgeting,
financial statement projections and balanced scorecards are just a few examples of how managerial accounting
information is used to provide information to help management guide the future of a company.

06. Explain the role of Management Accounting in planning, control and decision making in a bank.
The main functions that management are involved with are planning, decision making and control.
Planning
Planning involves establishing the objectives of an organization and formulating relevant strategies that can
be used to achieve those objectives
Planning can be either short-term (tactical planning) or long-term (strategic planning).
Decision making
Decision making involves considering information that has been provided and making an informed decision.
In most situations, it involves making a choice between two or more alternatives.
The first part of the decision-making process is planning; the second part is control.
Control
Information relating to the actual results of an organization is reported to managers.
Managers use the information relating to actual results to take control measures and to re-assess and amend
their original budgets or plans.
Internally- sourced information, produced largely for control purposes, is called feedback.
Here, management prepares the plan, which is put into action by the managers with control over the input
resources (labor, money, materials, equipment and so on). Output from operations is measured and reported ('fed
back') to management, and actual results are compared against the plan in control reports.
In order to make plans, it helps to know what has happened in the past so that decisions about what is achievable
in the future can be made.

07. Describe the necessity of Financial Statement Analysis

1. Holding of Share: Shareholders are the owners of the company. The financial statement analysis is important
as it provides meaningful information to the shareholders in taking decisions.
2. Decisions and Plans: The management of the company is responsible for taking decisions and formulating
plans and policies for the future. They, therefore, always need to evaluate its performance and effectiveness of
their action to realize the company's goal in the past. For that purpose, financial statement analysis is important
to the company's management.
3. Extension of Credit: The creditors are the providers of loan capital to the company. Therefore, they may have
to take decisions as to whether they must extend their loans to the company and demand for higher interest rates.
The financial statement analysis provides important information to them for their purpose.
4. Investment Decision: The prospective investors are those who have surplus capital to invest in some profitable
opportunities. Therefore, they often have to decide whether to invest their capital in the company's share. The
financial statement analysis is important to them because they can obtain useful information for their investment
decision making purpose.

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08. Describe the uses/ Objectives of financial statements analysis.

The uses/ objectives of financial statement analysis are as follows
1. Assessment of Past Performance: Financial statement analysis judging management's past performance and
opportunities of future performance like operating expenses, net income, cash flows, return on investment, etc.
2. Assessment of current position: Financial statement analysis shows the current position of the assets liabilities.
3. Prediction of profitability and growth prospects: It helps in assessing and predicting the earning prospects and
growth rates of earning and judging earning potential of business enterprise.
4. Prediction of bankruptcy and failure: It is an important tool in assessing and predicting bankruptcy and
probability of business failure.
5. Assessment of the operational efficiency: It helps to assess the operational efficiency and deviation between
standards and actual performance.
09. Describe the limitations of financial statements analysis
Although financial statement analysis is highly useful tools, it has limitations also.
1. The use of estimates in allocating costs to each period. The ratios will be as accurate as the estimates.
2. The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or
inflation/deflation.
3. Companies have a choice of accounting methods i.e. inventory LIFO vs. FIFO and depreciation methods.
These differences impact ratios and make it difficult to compare companies using different methods.
4. Companies may have different fiscal year ends making comparison difficult if the industry is cyclical.
5. Diversified companies are difficult to classify for comparison purposes.
6. It does not provide answers to all the users' questions. In fact, it usually generates more questions!

10. Limitations of Management Accounting

Though management accounting is helpful tool to the management as it provides information for planning,
controlling and decision making, still its effectiveness is limited by a number of reasons. Some of the limitations
of management accounting are as follows:
1. Based On Accounting Information
Management accounting is based on data and information provided by financial accounting and cost accounting.
As such the correctness and effectiveness of managerial decisions will depend upon the quality of data provided
by cost and financial accounts. So, effectiveness of management account is limited to the reliability of sources of
information.
2. Lack of Knowledge
The use of management accounting requires the knowledge of number of related subjects. Deficiency in
knowledge in related subjects like accounting principles, statistics, economics, principle of management etc. will
limit the use of management accounting.
3. Intensive Decisions
Decision taking based on management accounting that provide scientific analysis of various situations will be
time consuming one. As such management may avoid systematic procedures for taking decision and arrive at
decision using intuitive. And intuitive limit the usefulness of management accounting.
4. Management Accounting Is Only a Tool
The tools and techniques of management accounting provide only information and not decisions. Decisions are
to be taken by the management and implementation of decisions is also done by management.
5. Evolutionary Stage
Management accounting is still in a development stage and has not yet reached a final stage. The techniques and
tools used by this system give varying and differing results. It is still named as internal accounting and/ or
operational accounting.
6. Personal Prejudices and Bias
The interpretation of financial information may differ from person to person depending upon the capability of
the interpreter. Analysis and interpretation of data and information may be influenced by personal basis. As such,
the objectivity of decision may be affected by personal prejudices and bias.
7. Psychological Resistance
Changes in traditional accounting practices and organizational set up are required to install the management
accounting system. It calls for a rearrangement of the personnel and their activities and framing of new rules and
regulations which generally may not be liked by the people involved.
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11. Components of Managerial Accounting

1. Experimentation and innovation are encouraged in the types of management information provided.
2. Information generated for planning and programming purposes to establish a better balance with the control
function of accounting.
3. Cost consciousness is increased among operating units through the identification of cost and responsibility
centers and the use of performance standards.
4. Cost analyses facilitate the linkages among management control, program budgeting, and performance
auditing.
5. Emphasis on cost estimation for planning or control purposes, rather than on financial reporting.
6. Costs are monitored to determine if they are reasonable for the activities performed.
7. Performance standards (workload and unit cost data) added to traditional accounting control mechanisms by
which legal compliance and fiscal accountability are evaluated.
8. Crosswalks of financial data are accommodating various external and internal reporting needs.

12. Scope of Management Accounting

The scope or field of management accounting is very wide and broad based and it includes a variety of aspects
of business operations. The main aim of management accounting is to help management in its functions of
planning, directing, controlling and areas of specialization included within the admit of management accounting.
The scope of management accounting can be studied as follows:
1. Financial Accounting: Financial accounting forms the basis for analysis and interpretation for furnishing
meaningful data to the management. The control aspect is based on financial data and performance evaluation,
on recorded facts and figures. So, management accounting is closely related to financial accounting in many
respects.
2. Cost Accounting: Cost accounting is the process and techniques of ascertaining cost. Planning, decision
making and control are the basic managerial functions. The cost accounting system provides the necessary tool
for carrying out such functions efficiently. The tools include standard costing, inventory management, variable
costing etc.
3. Budgeting and Forecasting: Budgeting means expressing the plans, policies and goals of the firm for a
definite period in future. Forecasting on the other hand, is a prediction of what will happen as a result of a given
set of circumstances. Forecasting is a judgment whereas the budgeting is an organizational object. These are
useful for management accounting in planning.
4. Inventory Control: Inventory is necessary to control from the time it is acquire till its final disposal as it
involves large sum. For controlling inventory, management should determine different level of stock. The
inventory control technique will be helpful for taking managerial decisions.
5. Statistical Method: Statistical tools not only make the information more impressive, comprehensive and
intelligible but also are highly useful for planning and forecasting.
6. Interpretation of Data: Analysis and interpretation of financial statements are important part of management
accounting. After analyzing the financial statements, the interpretation is made and the reports drawn from this
analysis are presented to the management. Interpreting the accounting data to the authorities in the management
is the principal task of management accounting.
7. Reporting to Management: The interpreted information must be communicated to those who are interested
in it. The report may cover Profit and Loss Account, Cash Flow and Funds Flow statements etc.
8. Internal Audit and Tax Accounting: Management accounting studies all the tax matters to assist the
management in investment decisions vis-a-vis tax planning as a resource to enjoy tax relief.
Internal audit system is necessary to judge the performance of every department. Management is able to know
deviations in performance through internal audit. It also helps management in fixing responsibility of different
individuals.
9. Methods of Procedures: This includes maintenance of proper data processing and other office management
services. It may have to deal with filing, copying, duplicating, communicating and management information
system and also may have to report about the utility of different office machines.

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13. Planning in organizations

In organizations, planning is a management process, concerned with defining goals for company's future direction
and determining on the missions and resources to achieve those targets. To meet the goals, managers may develop
plans such as a business plan or a marketing plan. Planning always has a purpose. The purpose may be
achievement of certain goals or targets.
Main characteristics of planning in organizations are:
Planning increases the efficiency of an organization.
It reduces the risks involved in modern business activities.
It facilitates proper coordination within an organization.
It aids in organizing all available resources.
It gives right direction to the organization.
It is important to maintain a good control.
It helps to achieve objectives of the organization.
It motivates the personnel of an organization.
It encourages managers' creativity and innovation.
It also helps in decision making.
The planning helps to achieve these goals or target by using the available time and resources. The concept of
planning is to identify what the organization wants to do by using the four questions which are "where are we
today in terms of our business or strategy planning? Where are we going? Where do we want to go? How are we
going to get there?

14. Objectives of Management Accounting

The base objectives of management accounting are to assist the management in carrying out its duties efficiently.
The main objectives of management accounting are as follows:
Planning and policy formulation: Planning involves forecasting on the basis of available information, setting
goals; framing polices determining the alternative courses of action and deciding on the program of activities.
Management accounting can help greatly in this direction. It facilitates the preparation of statements in the light
of past results and gives estimation for the future.
Interpretation process: Management accounting is to present financial information to the management.
Financial information is technical in nature. Therefore, it must be presented in such a way that it is easily
understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs,
etc.
Assists in Decision-making process: With the help of various modern techniques management accounting
makes decision-making process more scientific. Data relating to cost, price, profit and savings for each of the
available alternatives are collected and analyzed and provides a base for taking sound decisions.
Controlling: Management accounting is a useful for managerial control. Management accounting tools like
standard costing and budgetary control are helpful in controlling performance. Cost control is affected through
the use of standard costing and departmental control is made possible through the use of budgets. Performance
of each and every individual is controlled with the help of management accounting.
Reporting: Management accounting keeps the management fully informed about the latest position of the
concern through reporting. It helps management to take proper and quick decisions. The performance of various
departments is regularly reported to the top management.
Facilitates Organizing: “Return on Capital Employed” is one of the tools of management accounting. Since
management accounting stresses more on Responsibility Centers with a view to control costs and responsibilities,
it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficiently
organization framework.
Facilitates Coordination of Operations: Management accounting provides tools for overall control and
coordination of business operations. Budgets are important means of coordination.

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15. Describe the shortcomings that the present reporting system in a bank suffers from.
Accountancy assists users of financial statements to make better financial decisions. It is important however to
realize the limitations of accounting and financial reporting when forming those decisions. Following are the
main limitations of accounting and financial reporting:
1. Different accounting policies and frameworks
Accounting frameworks allow the preparers of financial statements to use accounting policies that most
appropriately reflect the circumstances of their entities. The use of different accounting frameworks (e.g. IFRS,
US GAAP) by entities operating in different geographic areas also presents similar problems when comparing
their financial statements. The problem is being overcome by the growing use of IFRS and the convergence
process between leading accounting bodies to arrive at a single set of global standards.
2. Accounting estimates
Accounting requires the use of estimates in the preparation of financial statements where precise amounts cannot
be established. Estimates are inherently subjective and therefore lack precision as they involve the use of
management's foresight in determining values included in the financial statements. Where estimates are not based
on objective and verifiable information, they can reduce the reliability of accounting information.
3. Professional judgment
The use of professional judgment by the preparers of financial statements is important in applying accounting
policies in a manner that is consistent with the economic reality of an entity's transactions. However, differences
in the interpretation of the requirements of accounting standards and their application to practical scenarios will
always be inevitable. The greater the use of judgment involved, the more subjective financial statements would
tend to be.
4. Verifiability
Audit is the main mechanism that enables users to place trust on financial statements. However, audit only
provides 'reasonable' and not absolute assurance on the truth and fairness of the financial statements which means
that despite carrying audit according to acceptable standards, certain material misstatements in financial
statements may yet remain undetected due to the inherent limitations of the audit.
5. Use of historical cost
Historical cost is the most widely used basis of measurement of assets. Use of historical cost presents various
problems for the users of financial statements as it fails to account for the change in price levels of assets over a
period. This not only reduces the relevance of accounting information by presenting assets at amounts that may
be far less than their realizable value but also fails to account for the opportunity cost of utilizing those assets.
6. Measurability
Accounting only considers transactions that are capable of being measured in monetary terms. Therefore,
financial statements do not account for those resources and transactions whose value cannot be reasonably
assigned such as the competence of workforce or goodwill.
7. Limited predictive value
Financial statements present an account of the past performance of an entity. They offer limited insight into the
prospects of an enterprise and therefore lack predictive value which is essential from the point of view of
investors.
8. Fraud and error
Financial statements are susceptible to fraud and errors, which can undermine the overall credibility and
reliability of information contained in them. Deliberate manipulation of financial statements that is geared
towards achieving predetermined results (also known as 'window dressing') has been a unfortunate reality in the
recent past as has been popularized by major accounting disasters such as the Enron Scandal.
9. Cost benefit compromise
Reliability of accounting information is relative to the cost of its production. At times, the cost of producing
reliable information outweighs the benefit expected to be gained which explains why, in some instances, quality
of accounting information might be compromised.

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16. How management accountants contribute to banking success

The core challenge for banks, as for all organizations, is to create long-term sustainable success. Banks need to
understand their business models and have the confidence that these will deliver sustainable value – with
appropriate risk mitigations as necessary. They also need to understand the role of performance indicators and
executive incentives in driving the right, or wrong, behaviors – as well as how good governance can make a
difference. The financial crisis showed that some banks did not grasp these issues adequately.

This is where the management accountant can play a key role. By providing high quality management
Information, the management accountant supports business success by enabling evidence-based decision making
as well as effective allocation of resources and robust risk management. For example, the tools and techniques
used by management accountants, such as activity based costing help banks to achieve cost leadership. They can
also provide information to enhance understanding of customer, product, and delivery channel profitability – key
issues for retail banks. Management accountants can be compared to navigators - planning the route and providing
the information and key performance indicators - to influence the desired outcomes.

Management accountants also have the skills that enable them to progress in all areas of banking, for example,
they might work in lending functions where their skills can be applied to credit assessment. Or they might work
as business advisors to ensure the long-term success of their customers. This is especially true for the small
business sector, which is usually a key engine of growth in many economies – but where financial and business
management skills can be patchy. They might also be found in regulatory or risk management functions,
undertaking detailed financial analysis.

17. When designing effective management reports, consideration may be given to:
presenting reports in form and content that satisfy users’ needs
recognizing specific reporting preferences for users, for example, in the presentation of financial data, some
management members may better understand the data when presented graphically, rather than in numeric table
form
Ensuring reports are free from bias, errors or material misstatement
Ensuring that reports are checked for accuracy prior to release

18. Variance analysis helps management to understand the present costs and then to control future
costs.
Variance analysis is an analytical tool that managers can use to compare actual operations to budgeted estimates.
In other words, after a period is over, managers look at the actual cost and sales figures and compare them to
what was budgeted. Some budgets will be met and some will not.
There are several important standard cost variances that are included in a typical variance analysis: cost variances,
material variances, labor variances, and overhead variances. All of these variances look at the difference between
what expenses were actually incurred for the period and what management set at the standard or budgeted
expenses at the beginning of the period.
Managers also tend to look at price variances and quantity variances. Price variance measures the difference
between actual and budgeted revenue based on the difference between actual and budgeted sales price per unit.
Quantity variances deal with production levels comparing the actual number of units produced and the budgeted
units produced during the period.

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SECTION-B

01. Break-Even Point

The break-even point (BEP) is the point at which cost or expenses and revenue are equal. Break-even point is a
point at which total costs just equal or break even with sales. This is the activity point at which neither profit is
made nor loss is incurred. Break-even point of an enterprise/firm is a point where total revenue/sale proceeds/sale
or output equals total cost.
02. What is Break-even Analysis? Discuss the assumptions & uses of BEP.
Break-Even Analysis
Breakeven analysis is the study of the relationship between selling prices, sales volumes, fixed costs, variable
costs and profits at various levels of activity. It is also known as cost-volume-profit analysis. Breakeven analysis
is simply a technique for determining whether what you sell will make any money or not. It is often requested in
business plans. Its form is quite simple.
If you assume that you can price your product at P, the fixed costs are FC, and the variable costs to produce the
product is VC, then you can calculate the quantity of the product you need to sell just to breakeven (that means
you just cover your costs and don't make any more money) as:
Breakeven number of units = FC/ (P-VC)
So, if the price of the product is $5, the variable costs to produce it is $3 and the fixed costs are $1000, then the
breakeven number of units is = 1000/(5-3)=500 units.
03. Assumptions of Break-even point:
1. Fixed costs will tend to remain constant. In other words, there will not be any change in cost factor, such as,
change in property tax rate, insurance rate, salaries of staffs etc.
2. Price of variable cost factors, i.e., wage rates, price of materials, supplies, services etc.
3. Product specifications and methods of manufacturing and selling will not undergo a change;
4. Operating efficiency will not increase/decrease.
5. There will not be any change in pricing due to change in volume, competition etc.
04. Uses of BEP Analysis
01. Breakeven analysis can be used to determine a company’s breakeven point (BEP).
02.Breakeven point is a level of activity at which the total revenue is equal to the total costs. At this level, the
company makes no profit. With reference to the breakeven point, the managers can set their sales goals and
target profits.
05. Limitations of Break-even analysis:
1. It may be difficult to segregate to segregate cost into fixed and variable components;
2. It is not correct to assumption that total fixed cost into fixed and variable components;
3. The assumption of constant unit variable cost is not valid;
4. Selling price may not remain unchanged over a period of time;
5. Break-even analysis is a short run concept and has a limited use in long range planning.
06. Usefulness/ Importance of Break-even analysis:
Break even analysis provides useful information to management in most lucid and precise manner. It is an
effective and efficient reporting tool of management accounting. The importance of breakeven analysis can be
enumerated as under.
1. Fair knowledge about break even analysis can be help the banking to examine loan proposal of a firm.
2. It helps the bankers in assessing working capital requirement of a unit
3. This analysis helps in revealing clear projections of profit planning of an enterprise at different production vis-
a-vis the financial needs
4. It helps the banker in studying the projection cost of production and profitability statement of a unit prepared
to show net position at a given of output.
5. It is a useful diagnostic tool.

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07. Application/Necessities of Break-even analysis:

1. It helps to provide a dynamic view of the relationships between sales, costs and profits.
2. A better understanding of break even, for example, is expressing break even sales as a percentage of actual
sales can give managers a chance to understand when to expect to break even.
3. The break-even point is a special case of Target Income Sales.

08. Describe three approaches to break-even-analysis.

Three approaches to break-even analysis are (a) the graphical method, (b) the equation method, and (c) the
contribution margin method.
1. In the graphical method, total cost and total revenue data are plotted on a graph. The intersection of the total
cost and the total revenue lines indicates the break-even point. The graph shows the break-even point in both
units and dollars of sales.
2. The equation method uses some variation of the equation Sales = Variable expenses + Fixed expenses + Profits,
where profits are zero at the breakeven point. The equation is solved to determine the break-even point in units
or dollar sales.
3. In the contribution margin method, total fixed cost is divided by the contribution margin per unit to obtain the
break-even point in units.
Alternatively, total fixed cost can be divided by the contribution margin ratio to obtain the break-even point in
sales dollars.

09. What is meant by sales mix? What assumptions are casually made concerning sales mix in cost-
volume profits (CVP) analysis?
Sales mix is the components of Cost volume profit analysis. CVP analysis expands the use of information
provided by breakeven analysis.
Assumptions:
1. The behavior of both costs and revenue is linear throughout the relevant range of activity.
2. Costs can be classified accurately as either fixed or variable.
3. Changes in activity are the only factors those affects costs. 4. All units produced are sold.
5. When a company sells more than one type of product, the sales mix will remain constant.
Applications:
CVP simplifies the computation of breakeven in break-even analysis and more generally allows simple
computation of target income sales. It simplifies analysis of short run trade-offs in operation decisions.
Limitations:
CVP is a short run marginal analysis, it assumes that unit variable costs and unit revenues are constant which is
appropriate for small deviation from current production and sales and assumes a neat division between fixed
costs and variable costs through in the long run all costs are variable. For longer term analysis that considers the
entire life-cycle of a product one therefore often prefers activity-based costing.

10. Cost Volume Profit Analysis

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned with the effect of
sales volume and product costs on operating profit of a business. It deals with how operating profit is affected by
changes in variable costs, fixed costs, selling price per unit and the sales mix of two or more different products.
A method of cost accounting used in managerial economics. Cost-volume profit analysis is based upon
determining the breakeven point of cost and volume of goods. It can be useful for managers making short-term
economic decisions, and also for general educational purposes.
It involves three elements:
Cost - the cost of making the product or providing a service
Volume - the number of units of products produced or hours/units of service delivered
Profit - Selling Price of product/service - Cost to make product/provide service = Operating Profit
CVP analysis has following assumptions:
1. All cost can be categorized as variable or fixed.
2. Sales price per unit, variable cost per unit and total fixed cost are constant.
3. All units produced are sold.
Where the problem involves mixed costs, they must be split into their fixed and variable component by High-
Low Method, Scatter Plot Method or Regression Method.
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11. Contribution Margin (CM):

The unit Contribution Margin (CM) is the quantity of unit sales price (P) minus the quantity of unit variable cost
(V) is of interest in its own right, it is the marginal profit per unit, or alternatively the portion of each sale that
contributes to Fixed Costs. The break-even point can be more simply computed as the point where Total
Contribution=Total Fixed Cost.
Contribution Margin (CM) Ratio:
The margin contribution can also be expressed as a percentage. The contribution margin ratio, which is sometimes
called the profit-volume ratio, indicates the percentage of each sales dollar available to cover fixed costs and to
provide operating revenue. The contribution margin ratio is Contribution Margin (CM) Ratio = Sales – Variable
Costs/Sales.
12. Cost sheet, Discuss the uses/ purposes/ advantage of Cost Sheet
Cost sheet is a statement that reflects the cost of the items and services required by a particular project or
department for the performance of its business purposes. For example, a departmental cost sheet might include
the material costs, labor costs and overhead costs incurred over a given time frame by a department and it
therefore provides a record of costs that are chargeable to that department.
Discuss the uses/ purposes/ advantage of Cost Sheet
1. Discloses the total cost and the cost per unit of the units produced during the given period.
2. To enables a manufacture to keep a close watch and control over the cost of production
3. To guide to the manufacturer and helps in formulating a definite useful production policy.
4. To fixing up the selling price more accurately.
5. To minimize the cost of production
6. To submit quotations with reasonable degree of accuracy
13. Types of Costing
There are different types or techniques of costing are used in cost accounting. Different types of costing are used
in different industries to analyze and presenting costs for the purposes of control and managerial decisions. The
generally used types of costing are as follows:
1.Marginal Costing: In Marginal Costing, it allocates only variable costs i.e. direct materials, direct labor and
other direct expenses and variable overheads to the production. It does not take into account the fixed cost of
production. This type of costing emphasizes the distinction between fixed and variable costs.
2. Absorption Costing: The technique of absorbing fixed and variable costs to production is called absorption
costing. Under absorption costing full costs, i.e. fixed and variable costs are absorbed to the production.
3. Standard Costing: When costs are determined in advance on certain predetermined standards under a given
set of operating conditions, it is called standard costing. Standard costing is to be compared with the actual costs
periodically to analyze the changes in the cost to revise the standards to avoid any loss due to outdated costing.
4. Historical costing: When costs are determined in terms of actual costs and not in terms of predetermined
standards cost is called Historical costing. In this system of cost accounting, costs are determined only after they
have been incurred. Almost all organizations use historical costing system of accounting for costs.
14. What is meant by cost behavior? How cost behavior helps in classifying costs in banking?
Cost behavior is the change in total costs in response to the change in some activity. These are referred to as variable costs.
Some other costs will not change in total with a reasonable increase in miles driven. These costs are referred to as fixed
costs. Other costs might be part variable and part fixed.
These are referred to as mixed costs and an example might be depreciation.
Mention the classification of costs on different bases.
1. Basis of Identity:
– Materials (raw material components, and spare parts, consumable stores, packing material etc),
– Labor and – Expenses
2. Basis of Function:
– Production or Manufacturing Cost (raw material, cost of labor, other direct cost and factory indirect cost)
– Office and Administration Cost – Selling and Distribution Cost
3. Basis of Variability:
– Fixed Cost / Period Cost – Variable Cost / Product Cost – Semi-Variable Cost / Semi-Fixed cost
4. Basis of controllability:
– Controllable Cost– Uncontrollable Cost-Abnormal cost
6. Basis of Time:
– Historical Cost– Pre-determined Cost
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15. Define cost accounting. Discuss the concept of service costing.

Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses
of action. Its goal is to advise the management on the most appropriate course of action based on the cost
efficiency and capability. Cost accounting provides the detailed cost information that management needs to
control current operations and plan for the future.
Service Costing: Services or activities, having public utilities, need to determine cost of the services or activities
offered. A public utility undertaking, offering services to a community rather than manufacturing a tangible
product, uses service costing.
The service or function, having public utilities, covers water supply service, electricity supply service, transport
service, hospital service, library service, canteen service, park service, hostel service etc. Each service is unique
and needs a different accounting treatment. An intelligent selection of unit cost is required to obtain a meaningful
cost comparison. A correct choice of unit cost provides correct cost analysis for decision making destined for
effective cost control and reduction.
16. Discuss the importance of cost accounting to a banker.
The aim of cost accounting in a bank is to provide uniform account allocation within the financial accounting
system, which, in turn, affords comprehensive and transparent cost allocation to cost centers, provides detailed
costing information and complements existing controlling components within the value area. This is an important
principle on the way to creating a comprehensive P&L, profit centre and business unit accounting process.
The bank is emphasized to applying the cost accounting are-
– Uniform booking and allocation of costs (account allocation guidelines)
– Definition and consideration of imputed costs
– Cost monitoring (target-actual analysis)
– Transparency in terms of cost reduction potential, increased operational efficiency
– Enhanced information base providing efficient bank controlling
17. What Are the Three Types of Costs Used in Manufacturing Products?
A business requires funding to operate, whether it is for basic business operations or to manufacture products for
consumers. Like operational costs, manufacturing costs are divided into several types so the accounting
department can track all manufacturing expenses to get accurate annual reports. These manufacturing costs
change if the production expands or if the business decides to replace existing products as part of a product line.
Labor Costs: Labor costs, also known as direct labor costs, refer to any funding given to workers who produce
and build the products in question. Examples of labor include assembly line workers, machine operators and
installation clerks. Indirect labor refers to individuals who are working for the company but have indirect roles
in the manufacturing process. Indirect workers include janitors, supervisors and security guards.
Material Costs: Material costs refer to the raw materials that create the product in question. Raw materials cover
anything from the finished product itself to any bolts, nuts and wood that went into building the original product.
The final product is considered “raw” since it may be used as raw materials for another product for another
business. Material costs also include direct materials that play a role in the manufacturing process, such as tiny
motors, buttons and light bulbs.
Overhead Costs: Overhead costs are those associated with the manufacturing process, excluding the raw
materials and labor funding. The machinery and equipment used to build the products must undergo frequent
maintenance and funding must be available to complete repairs. Overhead costs also cover any maintenance or
rebuilding of the manufacturing facilities, such as expanding the production line or adding new lighting in the
factory. Any expense or cost that does not fit into direct material costs and labor costs may fall into the
manufacturing overhead category.

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18. Definition of Pricing, Objectives of Pricing

Pricing is the process of determining what a company will receive in exchange for its products. Pricing factors
are manufacturing cost, market place, competition, market condition, and quality of product. It is also a key
variable in microeconomics price allocation theory. Again it is a fundamental aspect of financial modeling and
is one of the four Ps of the marketing mix. The other three aspects are product, promotion, and place. Price is the
only revenue generating element amongst the four Ps, the rest being cost centers.
Objectives of Pricing
Objectives of Pricing or goals give direction to the whole pricing process. Determining what your objectives are
is the first step in pricing. When deciding on pricing objectives you must consider:
1) The overall financial, marketing, and strategic objectives of the company; 2) The objectives of your product
or brand; 3) Consumer price elasticity and price points; and 4) The resources you have available.
Some of the more common objectives of pricing are:
maximize long-run profit, maximize short-run profit, increase sales volume (quantity), increase monetary sales,
increase market share, obtain a target rate of return on investment (ROI), obtain a target rate of return on sales,
Stabilize market or stabilize market price, company growth, maintain price leadership, desensitize customers to
price, discourage new entrants into the industry, match competitors prices, encourage the exit of marginal firms
from the industry, survival, avoid government investigation or intervention, obtain or maintain the loyalty and
enthusiasm of distributors and other sales personnel, enhance the image of the firm, brand, or product, be
perceived as “fair” by customers and potential customers, create interest and excitement about a product,
discourage competitors from cutting prices, use price to make the product “visible", help prepare for the sale of
the business (harvesting), Social, ethical, or ideological objectives.

19. Discuss the factors considered in lending by a bank.

Or, Factors affecting while assessing a loan proposal
The major factors that interact to loan pricing are mentioned below:
1. Credit Profile: It will obtain a credit report that shows the amount of debt have outstanding and how have
historically paid the debt and obligations. The credit report will also contain a "credit score" that ranks the credit
history.
2. Property: The type of property are mortgaging also impacts loan pricing. The value of the property as
compared to the amount customer wish to borrow also impacts to loan price.
3. Income/Debt: The amount of mortgage payments and total debt payments as compared to the income, may
also impact to loan cost.
4. Other Factors: Other factors may also affect the risk, and interest rate of customer and origination charge.
These factors include, but are not limited to: previous bankruptcies, foreclosures or unpaid judgments; and the
type of loan product applied for.

[The following is a list of factors that institutions should consider in loan pricing.
1. Cost of funds: The cost of funds is applicable for each loan product prior to its effective date, allowing
sufficient time for loan-pricing decisions and appropriate notification of borrowers.
2. Cost of operations: The salaries & benefits, training, travel, and all other operating expenses. In addition,
insurance expense, financial assistance expenses are imposed to loan pricing.
3. Credit risk requirements: The provisions for loan losses can have a material impact on loan pricing,
particularly in times of loan growth or an increasing credit risk environment.
4. Customer options and other IRR: The customer options like right to prepay the loan, interest rate caps,
which may expose institutions to IRR. These risks must be priced into loans.
5. Interest payment and amortization methodology: How interest is credited to a given loan (interest first or
principal first) and amortization considerations can have a impact on profitability.
6. Loanable funds: It is the amount of capital an institution has invested in loans, which determines the amount
an institution must borrow to fund the loan portfolio and operations.
7. Patronage Refunds & Dividends: Some banks pay it to their borrowers/shareholders in lieu of lower interest
rates. This approach is preferable to lowering interest rates.
8. Capital and Earnings Requirements/Goals: Banks must first determine its capital requirements and goals
in order to determine its earnings needs.

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20. Causes of sickness in small scale industry

The different types of industrial sickness in Small Scale Industry (SSI) fall under two important categories. They
are as follows:
Internal causes for sickness
We can say pertaining to the factors which are within the control of management. This sickness arises due to
internal disorder in the areas justified as following:
a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital
management, absence of costing & pricing, absence of planning and budgeting and inappropriate utilization or
diversion of funds.
b) Bad Production Policies: The another very important reason for sickness is wrong selection of site which is
related to production, inappropriate plant & machinery, bad maintenance of Plant & Machinery, lack of quality
control, lack of standard research & development and so on.
c) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI.
This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning,
wrong market research methods, and bad sales promotions.
d) Inappropriate Personnel Management: Another internal reason for the sickness of SSIs is inappropriate
personnel management policies which includes bad wages and salary administration, bad labor relations, lack of
behavioral approach causes dissatisfaction among the employees and workers.
e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate
management which includes improper corporate planning, lack of integrity in top management, lack of
coordination and control etc.
External causes for sickness
a) Personnel Constraint: The first for most important reason for the sickness of small scale industries are non-
availability of skilled labor or manpower wages disparity in similar industry and general labour invested in the
area.
b) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due
to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario,
excessive tax policies by govt. and market recession.
c) Production Constraints: This is another reason for the sickness which comes under external cause of sickness.
This arises due to shortage of raw material, shortage of power, fuel and high prices, import-export restrictions.
d) Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to
credit restrains policy, delay in disbursement of loan by govt., unfavorable investments, fear of nationalization.
e) Credit squeeze initiated by the government policies.
21. Describe the motives for holding cash in bank.
1. Transaction Motive: Transaction motive refers to the holding of cash to meet anticipated obligations whose
timing is not perfectly synchronized with cash receipts.
2. Precautionary Motive: Precautionary motive implies the need to hold the cash to meet unpredictable
obligations.
3. Speculative Motive: It refers to the desire of a firm to take advantage of opportunities which present
themselves at unexpected moments and which are typically outside the normal course of business.
4. Compensation Motive: Customers of a bank are usually required to maintain a minimum cash balance at that
bank for providing services to them. Since this balance cannot be utilized by the firms for transaction purposes,
the bank themselves can use the amount to earn a return.
22. Explain operating, investing and financing activities with appropriate examples.
Operating Activities: Addition or deduction of current activities or current liabilities with Net Income from
Income statement for knowing cash flow is referred to as operating activities. For example-
Cash flow from operating activities: Net income (+) Depreciation (+) Decrease inventory (+) Increase A/c
payable (-) Decrease A/c receivable---------------Net cash flow from O A
Investing Activities: Adjustment in cash flow statement due to increase & reduction of fixed asset (Land,
building, equipment etc.) is considered as investing activities. For example---
Cash flow statement from investing activities: Sale on Fixed Asset Purchase equipment (.Net CF from I A)
Financing Activities: Transactions of increasing and decreasing of long term liabilities for preparing CF
statement is considered as Financing Activities. For example --
Cash flow from Financing Activities Divided Paid Long term loan paid New Bank Loan
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SECTION-C
01. Capital Budgeting:
Capital budgeting is the planning process used to determine whether an organization's long term investments
such as new machinery, replacement machinery, new plants, new products, and research development projects
are worth the funding of cash through the firm's capitalization structure. It is the process of allocating resources
for major capital, or investment, expenditures. One of the primary goals of capital budgeting investments is to
increase the value of the firm to the shareholders.
02. Discuss the use of ‘time value of money’ in capital budgeting:
The time value of money is important in capital budgeting decisions because it allows small-business owners to
adjust cash flows for the passage of time. This process, known as discounting to present value, allows for the
preference of dollars received today over dollars received tomorrow. Understanding some common capital
budgeting techniques that use the time value of money can help you understand why this concept is so important
in capital budgeting decisions.
03. What is Payback Period? How Payback Period is used in Capital Budgeting Decision?
Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most
individuals, regardless of academic training or field of endeavor. When used carefully or to compare similar
investments, it can be quite useful. As a stand-alone tool to compare an investment to "doing nothing," payback
period has no explicit criteria for decision-making. The formula or equation for the calculation of payback period
is as follows: Payback period = Investment required / Net annual cash inflow
Payback period is the length of time until the accumulated cash flows equal or exceed the original investment.
Payback period rule-investment is acceptable if its calculated payback is less than some pre-specified number of
years.
How Payback period is used in capital budgeting decision:
Payback period is used in capital budgeting decision are as payback period in capital budgeting refers to the
period of time required for the return on an investment to ‘repay’ the sum of the original investment. This time
value of money is not taken into account. Payback period intuitively measures how long something takes to ‘Pay
for itself’. The term is also widely used in other types of investment areas, often with respect to energy efficiency
technologies, maintenance, upgrades, or other changes.
04. What are the major constraints of this method (Payback period):
There are some major constraints/ problems with the payback period method:
1. Payback period ignores any benefits that occur after the payback period and therefore, does not measure
profitability. 2. It ignores the time value of money. 3. Additional complexity arises when the cash flow changes
sign several times, i.e., it contains outflows in the midst or at the end of the project lifetime.
05. Discuss the importance of capital budgeting for taking investment decision:
The importance of capital budgeting for taking investment decision:
1. Capital budgeting is an important task when large sum of money is involved to initiate a project which
influences the profitability of the firm. 2. Long term investment once made cannot be reversed without
significance loss of invested capital. If the investment becomes sunk and mistakes, it influences the whole
conduct of the business for the years to come. 3. Investment decision are the base on which the profit will be
earned and probably measured through the return on the capital. 4. A proper mix of capital investment is quite
important to ensure adequate rate of return on investment calling for the need of capital budgeting. 5. The
implication of long term investment decisions are more extensive than those of short run decisions because of
time factor involved, capital budgeting decisions are subject to the higher degree of risk and uncertainty than
short run decision.
06. Evaluation Techniques of Capital Budgeting
Capital budgeting is making long-run planning decisions for investment in project. Evaluation techniques of
capital budgeting can be classified into two categories.
1. Traditional Methods 2. Discounted Cash Flow Methods
1. Traditional Method
Traditional method does not consider the time value of money. It assumes that present value is equal to future
value. There are two methods of evaluation:
i) Pay Back Period (PBP) ii) Accounting Rate Of Return (ARR).
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2. Discounted Cash Flow Method

Discounted cash flow method is based on the concept of the time value of money. It is more practicable concept
of decision making. The discounted cash flow method assumes that present value of any amount is not equal to
future value. The present value is much more worth than future value. The following methods are used under
discounted cash flow method:
i) Net Present Value (NPV) ii) Profitability Index (PI) iii) Internal Rate of Return (IRR)
Concept and Meaning of Pay Back Period (PBP)
The payback period is the traditional method of evaluating investment proposals under capital budgeting. It is
the simplest and perhaps the most widely employed quantitative method for appraising capital expenditure
decisions. It is also called payout or pay off period. It calculates the period of return of investment. Payback
period is the time required to recover the investment made in a project. Thus, PBP measures the number of years
to pay back the original outlay from cash inflows generated by an investment proposal.
There are two ways of calculating PBP:
Advantages of Pay Back Period (PBP)
1. Payback period is simple and easy to understand and compute.
2. Payback period is universally used and easy to understand.
3. Payback period gives more importance on liquidity for making decision about the investment proposals.
4. Payback period deals with risk. The project with a shortest PBP has less risk than with the project with longest
PBP. 5. The short-term approach of payback period is an added advantage of calculation of capital expenditure.
Disadvantages of Pay Back Period (PBP)
1. In the calculation of payback period, time value of money is not recognized.
2. Payback period gives high emphasis on liquidity and ignores profitability.
3. Only cash flow before the payback period is considered. Cash flow occurred after the PBP is not considered.
Concept of Internal Rate Of Return(IRR)
Internal rate of return (IRR) is the discount rate at which the net present value of an investment becomes zero. In
other words, IRR is the discount rate which equates the present value of the future cash flows of an investment
with the initial investment. It is one of the several measures used for investment appraisal.
The IRR is described as that rate which equates the present value of the future cash flows with the cost of the
investment which produce them. IRR method is also called yield on investments, marginal efficiency of capital,
time adjusted rate of return, rate of return and so on.
Advantages Of IRR
1. IRR method considers the time value of money.
2. IRR method discloses the maximum rate of return the project can give.
3. IRR method considers and analysis all cash flows of entire project.
4. IRR method ascertains the exact rate of return the project earns.
Disadvantages Of IRR
1. IRR method is difficult to understand, complications due to trial and error method.
2. The important drawback of IRR is that it recognizes the cash inflows generated by project is reinvested to
internal rate of project, but NPV recognizes such cash inflows are reinvested to cost of capital of the organization.
3. Single discount rate ignores the varying future interpret rate.

Concept OF Net Present Value

Net present value is the present value of net cash inflows generated by a project including salvage value, if any,
less the initial investment on the project. It is one of the most reliable measures used in capital budgeting
because it accounts for time value of money by using discounted cash inflows. Before calculating NPV, a target
rate of return is set which is used to discount the net cash inflows from a project. Net cash inflow equals total
cash inflow during a period less the expenses directly incurred on generating the cash inflow.
Advantages of Net Present Value (NPV)
1. NPV gives important to the time value of money. 2.In the calculation of NPV, both after cash flow and before
cash flow over the life span of the project are considered. 3. Profitability and risk of the projects are given high
priority. 4. NPV helps in maximizing the firm's value.

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Disadvantages of Net Present Value (NPV) 01.NPV is difficult to use. 2. NPV cannot give accurate decision if
the amount of investment of mutually exclusive projects are not equal. 3. It is difficult to calculate the appropriate
discount rate. 4. NPV may not give correct decision when the projects are of unequal life.
Concept and Meaning of Accounting Rate of Return (ARR)
Accounting rate of return (ARR) is also known as average rate of return. ARR is based upon accounting
information rather than on cash flow. In other words, Accounting rate of return (ARR) refers to the rate of earning
or rate of net profit after tax on investment. ARR consider profitability rather than liquidity. Under ARR
technique, the average annual expected book income is divided by the average book investment in the project.
Advantages of Accounting Rate of Return (ARR)
1. ARR is based on accounting information, therefore, other special reports are not required for determining
ARR. 2. ARR method is easy to calculate and simple to understand. 3.ARR method is based on accounting profit
hence measures the profitability of investment.
Disadvantages Of Accounting Rate OF Return (ARR)
1. ARR ignores the time value of money. 2. ARR method ignores the cash flow from investment 3. ARR method
does not consider terminal value of the project.
Concept and Meaning of Profitability Index (PI)
The profitability index is known as benefit cost ratio. PI is similar to the NPV approach. The profitability index
approach measures the present value of return per dollar invested, while the NPV is based on the difference
between the present value of the future cash inflow and present value of cash outlay. PI is calculated by dividing
the present value of future cash inflow by present value of cash outlay.
Profitability Index (PI) = Total present value/Net cash outlay
Advantages and Disadvantages of Profitability Index (PI)
Advantages Of Profitability Index (PI)
1. PI considers the time value of money.2. PI considers analysis all cash flows of entire life.3. PI makes the right
in the case of different amount of cash outlay of different project. 4. PI ascertains the exact rate of return of the
project.
Disadvantages Of Profitability Index(PI)
1. It is difficult to understand interest rate or discount rate. 2. It is difficult to calculate profitability index if two
projects having different useful life.
07. Budget. What are the objectives of budgeting?
A budget is a detailed summary of income and probable expenses for a given time, usually monthly. Put simply,
a budget helps keep you from running out of money before the end of the month. Budgeting is a tool to assist you
in prioritizing both the spending and managing of your money, which, in the long run, will ensure your financial
success.
Many companies go through the budgeting process every year simply because they did it the year before, but
they do not know why they continue to create new budgets.
The main objectives of budgeting are:
Provide structure: A budget is especially useful for giving a company guidance regarding the direction in which
it is supposed to be going. Thus, it forms the basis for planning what to do next. A budget only provides a
significant amount of structure when management refers to it constantly, and judges’ employee performance
based on the expectations outlined within it.
Predict cash flows: A budget is extremely useful in companies that are growing rapidly, that have seasonal sales,
or which have irregular sales patterns. A budget is useful for predicting cash flows, but yields increasingly
unreliable results further into the future.
Allocate resources: Some companies use the budgeting process as a tool for deciding where to allocate funds to
various activities, such as fixed asset purchases. Though a valid objective, it should be combined with capacity
constraint analysis to determine where resources should really be allocated.
Model scenarios: If a company is faced with several possible paths down which it can travel, then you can create
a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction.
Measure performance: A common objective in creating a budget is to use it as the basis for judging employee
performance, using variances from the budget. This is a treacherous objective, since employees attempt to modify
the budget to make their personal objectives easier to achieve (known as budgetary slack).

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08. What is the importance of budget?

A budget is much more meaningful when it is checked periodically. Once our budget at Burroughs Farm is
approved, it is spread over each month of the budgeted period. In other words, how much of each budgeted item
will be spent month by month.
Now, let us review the importance of budgeting.
1. First of all, the budget necessitates the establishment of a program and regulates and emphasizes performance
within that program. You cannot prepare a budget without first establishing a complete program, after which
changes in your program will reflect as variances in your budget.
2. Budgeting encourages participation and promotes understanding by financial organizations officers and other
financial organizations employees such as the financial organizations manager and the professional.
3. Budgeting requires that all expenditures be specifically labeled, whereby they immediately gain identity. In
other words, expenses must be listed under a particular budgeted item.
4. The budget identifies immediate needs for the coming year. Budget variances point out areas of concern, such
as too much labor being used in one area, possibly suggesting the purchase of a new piece of maintenance
equipment.
5. Large budget variances reflect unusual and unexpected problems, many times these have occurred when the
golf course was under a stress condition. Severe drought is an example.
6. Budgeting provides for continuity of operations, especially helpful when superintendents and/or financial
organizations officers change.
7. Budgeting provides the superintendent with a vehicle to evaluate his maintenance program.
8. A good budget builds the superintendents credit with his members. That is, an excellently conditioned course
achieved within the limits of an approved budget, is a feather in the superintendents hat.
9. Budgets regulate inventories. It restricts the purchase and storing of unneeded supplies. These are some of the
things a good Budgeting does for a financial organizations and its superintendent.
09. The Process / steps of Preparation of Budgets:
The process of preparing a budget should be highly regimented and follow a set schedule, so that the completed
budget is ready for use by the beginning of the next fiscal year. Here are the basic steps to follow:
Update budget assumptions: Review the assumptions about the company's business environment that were used
as the basis for the last budget, and update as necessary.
Review bottlenecks: Determine the capacity level of the primary bottleneck that is constraining the company
from generating further sales, and define how this will impact any additional company revenue growth.
Available funding: Determine the most likely amount of funding that will be available during the budget period,
which may limit growth plans.
Step costing points: Determine whether any step costs will be incurred during the likely range of business
activity in the upcoming budget period, and define the amount of these costs and at what activity levels they will
be incurred.
Create budget package: Copy forward the basic budgeting instructions from the instruction packet used in the preceding
year. Update it by including the year-to-date actual expenses incurred in the current year, and also annualize this information
for the full current year.
Issue budget package: Issue the budget package personally, where possible, and answer any questions from recipients.
Also state the due date for the first draft of the budget package.
Obtain revenue forecast: Obtain the revenue forecast from the sales manager, validate it with the CEO, and then distribute
it to the other department managers. They use the revenue information as the basis for developing their own budgets.
Obtain department budgets: Obtain the budgets from all departments, check for errors, and compare to the bottleneck,
funding, and step costing constraints. Adjust the budgets as necessary.
Obtain capital budget requests: Validate all capital budget requests and forward them to the senior management team
with comments and recommendations.
Update the budget model: Input all budget information into the master budget model.
Review the budget: Meet with the senior management team to review the budget. Highlight possible constraint issues, and
any limitations caused by funding limitations.
Process budget iterations: Track outstanding budget change requests, and update the budget model with new iterations as
they arrive.
Issue the budget: Create a bound version of the budget and distribute it to all authorized recipients.
The process of preparing a budget should be highly regimented and follow a set schedule, so that the completed
budget is ready for use by the beginning of the next fiscal year.

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10. What is Master Budget & Uses?

The master budget is the comprehensive set of all budgetary schedules and the pro forma financial statements of
an organization. It includes both the operating and financial budgets.
Use of Master Budgeting System:
1. The preparation of budgets forces management to plan ahead and to establish goals and objectives that
can be quantified.
2. Budgeting compels departmental managers to make plans that are in congruence with the plans of other
departments as well as the objectives of the entire firm.
3. The budgeting process promotes internal communication and coordination of subunit activities.
4. Budgets provide directions for day-to-day operations, clarify duties to be performed, and assign
responsibility for these duties.
5. Budgets provide a framework for measuring financial performance.
6. A properly implemented budgeting system can motivate employees and managers to higher levels of
performance, particularly if goals and outputs are linked through appropriate incentives.
7. Budgets allow managers to anticipate problem areas (e.g., cash short-falls) and opportunities (e.g., short-
term investment of excess cash).
11. Budgeting and Budgetary Control
Budgeting has come to be accepted as an efficient method of short-term planning and control. It is employed, no
doubt, in large business houses, but even the small businesses are using it at least in some informal manner.
Through the budgets, a business wants to know clearly as to what it proposes to do during an accounting period
or a part thereof. The technique of budgeting is an important application of Management Accounting. Probably,
the greatest aid to good management that has ever been devised is the use of budgets and budgetary control.
12. Essentials of a Budget
An analysis of the above said definitions reveal the following essentials of a budget:
(1) It is prepared for a definite future period.
(2) It is a statement prepared prior to a defined period of time.
(3) The Budget is monetary and I or quantitative statement of policy.
(4) The Budget is a predetermined statement and its purpose is to attain a given objective.
13. Importance of Cash Management
Cash management consists of taking the necessary actions to maintain adequate levels of cash to meet operational
and capital requirements and to obtain the maximum yield on short-term investments of pooled, idle cash. A
good cash management program is a very significant component of the overall financial management of a
municipality. Such a program benefits the city or town by increasing non-tax revenues, improving the control
and superintendence of cash, increasing contacts with members of the financial community and lowering
borrowing costs, while at the same time maintaining the safety of the municipality’s funds.
14. Budgeting and its Role in Decision Making
Budgeting is crucial for decision-making. It gives a business a sense of direction. A budget is an anticipated
computation of revenues and the ways in which those revenues will be spent in achieving the business’ goals.
Budgeting involves planning for the future. The ideal is to plan in advance for the next five years through the
development and implementation of a strategic plan. Control is an important part of the budgeting process
because it assesses what actually happens against what an organization has planned.
If ABC, Ltd plans to enter the market with a new product, the budget process anticipates the number of units that
should be available for sale to fulfill the market needs for that specific product after taking into consideration
other factors such as competition share and marketing strategies to promote and position that new product. It
should also consider the direct labor, direct material, indirect costs, and overhead related to the production of
such product. The sales budget becomes the plan action needed for ABC, Ltd to achieve the expected 5% of the
market share.
Organizations that keep a sound budgeting system prepare a master budget, which is the comprehensive financial
plan for the organization as a whole. According to the company’s needs it should to be broken down into quarterly
or monthly budgets. The reason is that management can monitor the budget performance by evaluating actual
against budgeted amounts and taken corrective measures when discrepancies are noted.

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15. Components of the Master Budget

Two major components are: operating and financial budgets. While the operating budget provides, the income
generating of an organization, the financial budget anticipates the inflows and outflows of cash and the overall
financial position.
A budgeted income statement includes schedules as follows:
1. Sales budget
2. Production budget
3. Direct material purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling and administrative expenses budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget.

16. Performance Budget

A budget that reflects the input of resources and the output of services for each unit of an organization. This type
of budget is commonly used by the government to show the link between the funds provided to the public and
the outcome of these services. A performance budget is a financial summary in which an organization targets
specific levels for various expense and revenue items. It provides a snapshot of where top leadership intends to
take the firm, as well as strategic moves department heads must make to implement a successful strategy. Senior
executives unveil an annual performance budget after discussing details with segment chiefs, who, in turn, canvas
rank-and-file personnel for feedback about the blueprint.

17. How does zero base budgeting is differed from capital budgeting?
1) The Traditional Budgeting refers to a list of all planned expenses and revenues. While in Zero Based Budgeting
it is always assumes that the expenditures are always based on zero.
2) It focuses on what the managers tend to spend rather on what resources they need. ZBB aims to achieve an
optimal allocation of resources that incremental and other budgeting systems cannot achieve. Zero Based
Budgeting provides an efficient allocation of resources, as it based on the needs and benefits.
3) It fails to identify wastes, incoming workloads and cost drivers. ZBB identifies and eliminates wastage and
obsolete operations.
4) it does not support continuous improvement and appears to have general lack of ownership and buy - in. ZBB
increases staff motivation as well as the communication and coordination within the organization, detects inflated
subjects and drives managers to find out cost effective ways to improve operations.
5) Critics also found out that it is very time consuming for the benefits to be achieved. Within short time result
is found.

18. What is a budgetary control system? And what are the benefits?
Budgetary Control is the process of establishment of budgets relating to various activities and comparing the
budgeted figures with the actual performance for arriving at deviations, if any. Accordingly, there cannot be
budgetary control without budgets. Budgetary Control is a system, which uses budgets as a means of planning
and controlling.
A budgetary control system is a method of monitoring and controlling income, and expenditure and for managing
the demands for cash, minimizing borrowings. It can be applied in a business context or by an individual in
relation to his or her personal finances.
In a business environment it is most valuable as a tool to control the flow of cash because a good system would
monitor cash inflow and flag-up any projected shortfalls so that corrective action could be taken, for example if
some customers were habitually not paying promptly or there was a sudden and unusual need for spending.
Additionally, such a system would also ensure that cash was always available for essential business purposes like
buying raw materials.
A system of management control in which actual income and spending are compared with planned income and
spending, so that you can see if plans are being followed and if those plans need to be changed in order to make
a profit.

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19. Discuss briefly the importance of budgetary control system with special reference to Banking
Organization
Budgeting is a powerful management tool that is used to accomplish four major objectives: planning,
coordination, motivation and control. The budget is a planning tool that represents the expected results of
operations, thus it is a way of formulating and expressing in monetary terms the objectives of an organization
and the operational plans for achieving those objectives. A budget is therefore a control tool. An important part
of budget preparation is consideration of the importance of goal definition, individual aspirations and goals. The
purpose of a budget in budgetary control is to specify the standard of acceptable performance in the banks. When
a bank sets standards of acceptable performance, it has to be done with good judgment or else motivation may
be misplaced. If a budgetary control system is not accepted by the people who have to operate it, they may hamper
and obstruct the information flow so that realistic planning and control decisions will be difficult to take.
Therefore, for the budgetary process to be successful, it requires top-management support, cooperative and
motivated middle management staff and well-organized reporting systems.
20. Objectives of Budgetary Control
Budgetary Control is planned to assist the management for policy formulation, planning, controlling and co-
coordinating the general objectives of budgetary control and can be stated in the following ways:
(1) Planning: A budget is a plan of action. Budgeting ensures a detailed plan of action for a business over a
period.
(2) Co-ordination: Budgetary control co-ordinates the various activities of the entity or organization and secure
co-operation of all concerned towards the common goal.
(3) Control: Control is necessary to ensure that plans and objectives are being achieved. Control follows planning
and co-ordination. No control performance is possible without predetermined standards. Thus, budgetary control
makes control possible by continuous measures against predetermined targets. If there is any variation between
the budgeted performance and the actual performance, the same is subject to analysis and corrective action.
21. Advantages of Budgetary Control
The advantages of budgetary control may be summarized as follows:
(1) It facilitates reduction of cost.
(2) Budgetary control guides the management in planning and formulation of policies.
(3) Budgetary control facilitates effective co-ordination of activities of the various departments and
functions by setting their limits and goals.
(4) It ensures maximization of profits through cost control and optimum utilization of resources.
(5) It evaluates for the continuous review of performance of different budget centers.
(6) It helps to the management efficient and economic production control.
(7) It facilitates corrective actions, whenever there is inefficiencies and weaknesses comparing actual
performance with budget. (8) It guides management in research and development.
(9) It ensures economy in working. (10) It helps to adopt the principles of standard costing.

22. Limitations of Budgetary Control

Budgetary Control is an effective tool for management control. However, it has certain important limitations
which are identified below:
(1) The budget plan is based on estimates and forecasting. Forecasting cannot be an exact science. If the budget
plans are made based on inaccurate forecasts then the budget program may not be accurate and ineffective.
(2) For reasons of uncertainty about future, and changing circumstances which may develop later, budget may
prove short or excess of actual requirements.
(3) Effective implementation of budgetary control depends upon willingness, co-operation and understanding
among people reasonable for execution. Lack of co-operation leads to inefficient performance.
(4) The system does not substitute for management. It is mere like a management tool.
(5) Budgeting may be cumbersome and time consuming process.
23. Advantages of budgeting and budgetary control
There are a number of advantages to budgeting and budgetary control:
Compels management to think about the future, which is probably the most important feature of a budgetary
planning and control system. Forces management to look ahead, to set out detailed plans for achieving the targets

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for each department, operation and (ideally) each manager, to anticipate and give the organization purpose and
direction.
Promotes coordination and communication.
Clearly defines areas of responsibility. Requires managers of budget centers to be made responsible for the
achievement of budget targets for the operations under their personal control.
Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick against which
actual performance is measured and assessed. Control is provided by comparisons of actual results against budget
plan. Departures from budget can then be investigated and the reasons for the differences can be divided into
controllable and non-controllable factors.
Enables remedial action to be taken as variances emerge.
Motivates employees by participating in the setting of budgets.
Improves the allocation of scarce resources.
Economizes management time by using the management by exception principle.

24. Cash Budget

An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash
budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether
too much cash is being left in unproductive capacities.
A cash budget is extremely important, especially for small businesses, because it allows a company to determine
how much credit it can extend to customers before it begins to have liquidity problems.
For individuals, creating a cash budget is a good method for determining where their cash is regularly being
spent. This awareness can be beneficial because knowing the value of certain expenditures can yield opportunities
for additional savings by cutting unnecessary costs.

25. Discuss the utility of cash budget as a tool of the cash management. What are the steps involved
in construction of a cash budget? The utility of cash budget as a tool of the cash management:
A cash budget shows the expected flow of cash. Cash flow is crucial to any entity and therefore the cash budget
is very important to any business entity as it involves planning, control, coordination, etc. A cash budget allows
a company to establish the amount of credit that it can extend to customers without having problems with
liquidity. The cash flow budget helps the business determine when income will be sufficient to cover expenses
and when the company will need to seek outside financing.
The Steps involved in developing a cash budget:
Step #1. Determine and adequate minimum cash balance.
Step #2. Forecasting Sales
Step #3. Forecasting Cash Receipts
Step #4. Forecasting Cash Disbursements
Step #5. Estimating the end of the month cash balance.
Cash Budget is Important Tool in Cash Management
As we know that a firm is well advised to hold adequate cash balance but should avoid excessive balances. The
firm has, therefore, to assess its need for cash properly. The cash budget is probably the most important tool in
cash management. It is a device to help a firm to plan and control the use of cash. It is a statement showing the
estimated cash income (cash inflow) and cash expenditure (cash outflow) over the firm’s planning horizon. In
other words, the net cash position (surplus or deficiency) of a firm as it moves from one budgeting sub period to
another is highlighted by the cash budget.
26. The purpose of cash budgets
To co-ordinate the timings of cash needs. It identifies the periods when there might either be a shortage of cash
or an abnormally large cash requirement.
It pinpoints the period when there is likely to be excess cash.
It enables a firm which has sufficient cash to take advantage of cash discounts on its accounts payable, to pay
obligations when due.
It helps to arrange needed funds on the most favorable terms and prevents the accumulation of excess funds.
With adequate time to study his firm’s needs, the manager can select the best alternative. In contrast, a firm which
does not budget its cash requirements may suddenly find itself short of funds. With pressing needs and little time
to explore alternative avenues of financing, the management is force to accept the best terms offered in a difficult
situation.
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SECTION-D
01. Define working capital and its significance/ importance for a firm.
Working capital is a financial metric which represents operating liquidity available to a business, organization
or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working
capital is considered a part of operating capital. Gross working capital equals to current assets. Net working
capital is calculated as current assets minus current liabilities. Positive working capital is required to ensure that
a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt
and upcoming operational expenses. The working capital is calculated as:
Working Capital = Current Assets – Current Liabilities

To operate the functions of a firm working capital is very important. A firm is a unit of an industry to produce
the finished goods for earning profit.
The importance of working capital for a firm is as below:
01. For smooth Production: for the smooth production of a firm healthy working capital is very important.
02. Sufficient stock: To stock sufficient raw materials working capital is very important for a firm.
03. Smooth sales: To sell produced goods working capital of a firm is required.
04. Bearing regular expenses: Various types of expenses not even related to production bears by a firm
important to have healthy working capital.
05. Establish as a solvent firm: To establish as a solvent firm working capital is an important parameter to have.
06. Earning profit: For the optimum level of production and sales promotion working capital of a firm is very
necessary.
07. Creation of goodwill: Goodwill of a firm is the asset of it. To create goodwill of the firm working capital
plays an important role.
08. Wealth maximization: For the accelerate production goods and services a firm can earn profit increase day
by day to enhance its wealth.
09. Protection of fixed capital: For the well protection of the fixed capital of a firm consistence of working
capital is highly required.
10. Increase credit rating: Credit from a bank of financial institutions credit rating is very important. Healthy
working capital of a firm increases the credit rating.
The aforesaid explanations denote that working capital is very important for a firm.

02. Explain the factors affecting working capital requirements. Or Determinants of Working Capital.
Requirements Of working capital depend upon various factors such as nature of business, size of business, the
flow of business activities. However, small organization relatively needs lesser working capital than the big
business organization. Following are the factors which affect the working capital of a firm:
The main factors affecting working capital are as below:
01. Nature of Business: The requirement of working capital depends on the nature of business. The nature
of business is usually of two types: Manufacturing Business and Trading Business. In the case of
manufacturing business, it takes a lot of time in converting raw material into finished goods. Therefore,
capital remains invested for a long time in raw material, semi-finished goods and the stocking of the
finished goods.
02. 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 organizations while less working capital is
needed in case of small organizations.
03. Business Cycle: The need for the working capital is affected by various stages of the business cycle.
During the boom period, the demand of a 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.
04. 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.
05. Production Cycle: Production cycle means the time involved in converting raw material into finished
product. Thus, more working capital will be needed. On the contrary, where period of production cycle
is little, less working capital will be needed.
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06. 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.
07. Credit Avails: If 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 cash payment quickly
large amount of working capital will be needed.
08. Operating Efficiency: Operating efficiency means efficiently completing the various business
operations. Operating efficiency of every organization happens to be different.
09. Availability of Raw Materials: 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.
Reversely happened when the raw materials are not available anytime and anywhere.
10. Growth Prospects: Growth means the development of the scale of business operations (production, sales,
etc.). The organizations which have sufficient possibilities of growth require more working capital, while
the case is different in respect of companies with less 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 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.

03. Factors that determine the Level of Investment in Working capital

1) Industry/ Peers - Industry Average - Peer Company Holdings
2) Working Capital Policy - Conservative Policy - Aggressive Policy - Moderate Policy

04. Management of Working Capital:

Management will use a combination of policies and techniques for the management of working capital. The
policies aim at managing the current assets and the short term financing those cash flows and returns are
acceptable:
1. Cash management: Identify the cash balance which allows for the business to meet day to day
expenses but reduces cash holding costs.
2. Inventory management: Identify the level of inventory which allows for uninterrupted production.
3. Debtors management: Identify the appropriate credit policy, i.e. credit terms which will attract
customers.
4. Short term financing: Identify the appropriate source of financing, given the cash conversion cycle.

05. Explain the difference between variable working capital and permanent working capital.
Working capital is a part of capital investment is used for running the business such like money which is used to
buy stock, pay expenses and finance credit.
Considering time as the basic of classification there are two types of working capital:
1) Permanent working capital;
2) Variable working capital;
The difference between variable working capital and permanent working capital is as follows:
1) Permanent working capital is referred to finance to stock of finished goods, debtors balance etc.
Variable working capital is used to carry out day to day operations.
2) Permanent working capital consists of stock of raw materials, stock of work-in-process, stock of
finished goods, debtors balance, etc. Variable working capital consists of cash, marketable securities,
account receivable, stock etc.
3) Permanent working capital includes long term financial decisions. Variable working capital includes
short term financing decisions.
4) Permanent working is mainly required for operational activities. Variable working capital is required
for trading activities.

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6. Explain different sources of financing working capital.

Common Sources of Working Capital Finance:
Loans from Commercial Banks: Small scale industries can raise loans from the commercial banks with or
without security. This method of financing does not require any legal formality except that of creating a mortgage
on the assets.
Public Deposits: Often companies find it easy and convenient to raise, short-term funds by inviting shareholders,
employees and the public to deposit their savings with the company.
Trade Credit: Just as the companies sell goods on credit, they also buy raw materials, components and other
goods on credit from their suppliers.
Factoring: Factoring is a financial service designed to help firms in managing their book debts and receivables
in a better manner.
Discounting Bills of Exchange: When goods are sold on credit, bills of exchange are generally drawn for
acceptance by the buyers of goods. The bills are generally drawn for a period of 3 to 6 months. In practice, the
writer of the bill, instead of holding the bill till the date of maturity, prefers to discount them with commercial
banks on payment of a charge known as discount.
Bank Overdraft and Cash Credit: Overdraft is a facility extended by the banks to their current account holders
for a short-period generally a week.
Advances from Customers: One way of raising funds for short-term requirement is to demand for advance from
one’s own customers.
Accrual Accounts: Generally, there is a certain amount of time gap between a income is earned and is actually
received or expenditure becomes due and is actually paid. Salaries, wages and taxes.

7. Explain the objectives of inventory management.

The main objectives of inventory management are to maintain inventory at appropriate level to avoid excessive
or shortage of inventory because both the cases are undesirable for business. Thus, management is faced with the
following conflicting objectives:
(1) To keep inventory at sufficiently high level to perform production and sales activities smoothly.
(2) To minimize investment in inventory at minimum level to maximize profitability.
(3) To ensure that the supply of raw material & finished goods will remain continuous so that production
process is not halted and demands of customers are duly met.
(4) To minimize carrying cost of inventory. (5) To keep investment in inventory at optimum level.
(6) To reduce the losses of theft, obsolescence & wastage etc.
(7) To make arrangement for sale of slow moving items.
(8) To minimize inventory ordering costs.
8. Importance or Advantages of Adequate Working Capital
Working capital is the life blood and nerve center of a business. Just as circulation of blood is essential in the
human body for maintaining life, working capital is very essential to maintain the smooth running of a business.
No business can run successfully without an adequate amount of working capital. The main advantages of
maintaining adequate amount of working capital are as follows:
1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by
providing uninterrupted flow of production.
2. Goodwill: Sufficient working capital enables a business concern to make prompt payments and hence helps
in creating and maintaining goodwill.
3. Easy loans: A concern having adequate working capital, high solvency and good credit standing can arrange
loans from banks and other on easy and favorable terms.
4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases
and hence it reduces costs.
5. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials and
continuous production.
6. Regular payment of salaries, wages and other day-to-day commitments: A company which has ample
working capital can make regular payment of salaries, wages and other day-to-day commitments which raises
the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and
profits.

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7. Exploitation of favorable market conditions: Only concerns with adequate working capital can exploit
favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding
its inventories for higher prices.
8. Ability to face Crisis: Adequate working capital enables a concern to face business crisis in emergencies such
as depression because during such periods, generally, there is much pressure on working capital.
9. Quick and Regular return on Investments: Every Investor wants a quick and regular return on his
investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors
as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates
a favorable market to raise additional funds i.e., the future.
10. High morale: Adequacy of working capital creates an environment of security, confidence, high morale and
creates overall efficiency in a business.

09. Disadvantages of Redundant or Excessive Working Capital

1. Excessive Working Capital means ideal funds which earn no profits for the business and hence the business
cannot earn a proper rate of return on its investments.
2. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of
inventories causing more chances of theft, waste and losses.
3. Excessive working capital implies excessive debtors and defective credit policy which may cause higher
incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks and other financial institutions may not be
maintained.
6. Due to low rate of return on investments, the value of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.

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SECTION-E
01. Lease. Types of Lease. Importance of Lease Finance. Importance of Leasing for developing
country. Illustrate the basic characteristics of Lease: Explain the economics of lease.
Lease
A contract under which one party, the Lessor (owner) of an asset agrees to grant the use of that asset to another,
The Lessee (user), in exchange for periodic rental payment. It is a contractual agreement between the two parties
whereby one acquires the right to use the property and the other who allows the former the right to use his owned
property.
Types of Lease:
Essentially there are two types of leasing: (a) Equipment Leasing; (b) Real Estate Financing;
Equipment Leasing are two types: (a) Financial Lease (also called lease financing); (b) Operating Lease (also
called Service or Non-pay-out lease)
Financial Lease is two types: (a) Primary Lease; (b) Secondary Lease;
Operating Lease is two types: (a) Simple operating lease; (b) specialized Service Operating Lease;
Importance of Lease Finance
Leasing industry plays an important role in the economic development of a country by providing money
incentives to lessee. It is more flexible so lessees can structure the leasing contracts according to their needs for
finance.
1. Lease finance is easy to get than getting loan for buying all fixed assets.
2. Monthly rent payment for lease finance will be operating expenses. It will be allowed to deduct total income.
So, company can get tax benefits in lease financing.
3. It can show as invisible debt of company out of its balance sheet. You can show lease finance in the footnote
of balance sheet, if you did contract directly with the owner of asset.
4. One of major important point is that it is more flexible way of finance. You can fix your need of asset and get
it one lease through lease financing.
5. A study from IFC has revealed that 30% of total share of lease financing as investment of fixed asset is of
emerging and developed economies and now 15% of developing countries.
Importance of Leasing for developing country
In the case of a developing country, lease from is beneficial for importing equipment like Ships, aircrafts etc.
instead of borrowing. This will protect a better image of a nation than a borrower with no pressing service charges
for unpaid loans. Government should make favorable laws so as encourage availability of lease finance for
importing plant, machinery and equipment by the private sector companies to accelerate the pace of
industrialization and self-reliance in production of capital goods.
Illustrate the basic characteristics of Lease:
1) A contract of commercial nature between the lessor (owner) and the lessee (user);
2) The contract should provide for periodical payment of rentals for using the asset for a fixed term by the lessee;
3) On the expiry of the lease term the lease should return the asset to the owner or dispose it in the manner desired
by the owner. 4) Generally, two parties are involved in a lease agreement, they are- a) Lessor; b) Lessee;
Explain the economies of lease
There are several qualitative considerations which make leasing an attractive proposition. Some of the commonly
cited advantages of leasing are:
1. Shifting the Risk of Technological Obsolescence 2. Easy Source of Finance 3. Conversion of Borrowing
Capacity through off-the Balance-sheet Financing 4. Improved Performance 5. Convenience and Flexibility
6. Maintenance and Specialized Services 7. Lower Administrative Cost

02. State the advantage and disadvantage of lease. Risks associated with leasing.
Favorable aspects of lease financing:
Lessee’s perspective: (1) Full extent financing of the cost of capital goods; (2) Flexibility in payment of lease
rentals; (3) Favorable duration of lease period; (4) Medium term finance; (5) Piecemeal financing device. (6)
Keeping working capital free (7) Lease as a revenue expenses (8) Procedural convenience.

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Lessor’s perspective: 1. Better security; 2. Tax planning; 3. More profitable; 4. High return on equity; 5. No
entry barriers. 6. Facility in accession public deposits
Unfavorable aspect of lease financing or Disadvantages of Lessee/Lessor: 1. Deprivation of equipment 2.
Consequences of default 3. Inadequate protection against loss 4. Loss of terminal value 5. High interest cost 6.
Loss of residual value 7. Lack of freedom to make changes
Risks associated with leasing: The following risks are associated with lease: (1) Default risk. (2) Credit risk (3)
Risk changing taxation law (4) Risk of bankruptcy (5) Acceleration of rents and other due amounts (6) Risk of
residual value (7) Risk of war, physical damage of asset etc.
03. Finance Lease. Key Features of a Finance Lease.
Finance Lease
A finance lease also referred to as a lease or business lease, it Amy suit those businesses who wish to have an off
-Balance Sheet style of funding. Lessee (user) are not the owner of the goods so the value of the goods will not
be entered on his/her balance sheet so neither the contingent liability.
Key Features of a Finance Lease:
1. Flexible Terms: Lease can choose from terms of 1-5 years.
2. Fixed Residual: A residual may be compulsory; this residual is set by the lease provider.
3. Repayment Options: Lessee can choose to structure a repayment schedule that suits. This could be monthly,
quarterly or Yearly.
04. Operating Lease. Features/Advantages of Operating Lease. Features of Operating lease.
Operating Lease:
An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment
being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.
Features/Advantages of Operating Lease:
1. No incidence of the rents on the balance sheet; they are operating expenses deductible from profits.
2. Improvement of cash-flow. 3. Economy of corporate taxes.
Features of Operating lease:
a) Lease period: The lease period is less than the useful life of the asset. The lessor relies on subsequent leasing
or eventual sale of the asset to cover his capital outlay and show a profit.
b) Lessor’s business: The lessor may very well carry on a trade in this type of asset.
c) Risks and rewards: The lessor is normally responsible for repairs and maintenance.
d) Cancellation: The lease can sometimes be cancelled at short notice.
e) Substance: The substance of the transaction is the short-term rental of an asset.
05. Explain different forms of lease finance.
1. Operating Lease: The lessee acquires the use of an asset on long-term basis at one point of time lessee prefers
the system of hiring an asset for each period.
2. Financial Lease: It involves a relatively longer-term commitment on the part of the lessee. Commonly used
for leasing land, buildings and large pieces of fixed-equipment’s.
3. Sale and Lease Back: The firm sells an asset, already owned by its party and hires it back from the buyer.
4. Direct Lease: The lessee does not already own the equipment that acquires from the manufacturing company,
directly.
5. Leveraged Lease: Involves as a third-party lender that the lessor borrows funds from the lender and himself
acts as an equity participant.
6. Primary and Secondary Lease: The primary lease provides for the recovery of the cost of the asset and profit
through lease rentals followed by the secondary/perpetual lease at nominal lease rents.
06. Discuss the characteristics of capital of lease
A capital lease would be considered a purchased asset for accounting purposes. The choice of lease classification
will have important results on a firm's financial statements. To be considered a capital lease, a lease must meet
be characterized by one or more followings:
1. The lease term is greater than 75% of the property's estimated economic life;
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2. The lease contains an option to purchase the property for less than fair market value;
3. Ownership of the property is transferred to the lessee at the end of the lease term;
4. The present value of the lease payments exceeds 90% of the fair market value of the property
07. Discuss the relative merits of lease finance and hire purchase finance.
As we discussed in our introduction to asset finance, the use of hire purchase or leasing is a popular method of
funding the acquisition of capital assets.
However, these methods are not necessarily suitable for every business or for every asset purchase. There are a
number of considerations to be made, as described below:
1. Certainty: One important advantage is that a hire purchase or leasing agreement is a medium-term funding
facility, which cannot be withdrawn, provided the business makes the payments as they fall due. The uncertainty
that may be associated with alternative funding facilities such as overdrafts, which are repayable on demand, is
removed.
2. Budgeting: The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts
as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected
revenue and profits generated by the use of the asset.
3. Fixed Rate Finance: In most cases the payments are fixed throughout the hire purchase or lease agreement,
so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial
in times of low, stable or rising interest rates but may appear expensive if interest rates are falling. On some
agreements, such as those for a longer term, the finance company may offer the option of variable rate
agreements.
4. The Effect of Security: Under both hire purchase and leasing, the finance company retains legal ownership
of the equipment, at least until the end of the agreement. The decision to provide finance to a small or medium
sized business depends on that business' credit standing and potential. Because the finance company has security
in the equipment, it could tip the balance in favor of a positive credit decision.
5. Maximum Finance: Hire purchase and leasing could provide finance for the entire cost of the equipment.
There may however, be a need to put down a deposit for hire purchase or to make one or more payments in
advance under a lease. It may be possible for the business to 'trade-in' other assets which they own, as a means
of raising the deposit.
6. Tax Advantages: Hire purchase and leasing give the business the choice of how to take advantage of capital
allowances. If the business is profitable, it can claim its own capital allowances through hire purchase or outright
purchase.
8. Features of financial lease and operating lease. Advantages and disadvantages of financial lease and
operating lease.
Main features of a financial lease:
the assets has selected by lessee and purchased by the lessor
the lessee uses that asset during the lease
the lessee pays a series of installments or rentals
the lessee has the option of acquiring ownership of the asset
Main features of an operating lease:
short term arrangement for the use of asset
Various costs related to that asset like are paid by the owner
It is shorter than the economic life of the asset.
lessee can cancel the operating lease prior to the end date.
The rent is lower than the cost of asset.
Advantages and disadvantages of financial (capital) lease and operating lease.
Advantages & disadvantages of financial or capital lease:
Advantages: A capital lease is usually used to finance equipment for the major part of its useful life, and there is
a reasonable assurance that the lessee will obtain ownership of the equipment by the end of the lease term.
Disadvantages: Capital leases are used for long-term leases and for items that not become technologically
obsolete, such as many kinds of machinery. Also, Capital leases give the lessee the benefits and drawbacks of
ownership, so they are considered as assets, and they may be depreciated and these leases are considered as debts.
Advantages & disadvantages of operating lease:
Advantages: An operating lease usually finances equipment for less than its useful life, and at the end of the lease
term the lessee can return the equipment to the lesser without further obligation.
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Disadvantages: Operating leases, sometimes called service leases are used for short-term leasing and often for
assets that are high-tech or in which the technology changes often, like computer and office equipment. The
lessee uses the property but does not take on the benefits or drawbacks of ownership, which are retained by the
lessor and the rental cost of an operating lease is considered an operating expense.
9. Hire purchase. Characteristics of Hire-Purchase System. Features of Hire Purchases. Advantages
of Hire Purchase System.
Hire purchase
Hire purchase is a type of installment credit under which the hire purchaser agrees to take the goods on hire at a
stated rental, which is inclusive of the repayment of principal as well as interest. The hire purchaser acquires the
property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is
transferred only when the last installment is paid.

Characteristics of Hire-Purchase System

Hire-purchase is a credit purchase.
The price under is paid in installments
The goods are delivered in the possession of the purchaser
Hire vendor continues to be the owner of the goods
The purchaser has a right to use the goods as a bailer
The purchaser has a right to terminate the agreement at any time
The purchaser becomes the owner of the goods after the payment of all installments

Features of Hire Purchases

Hire purchase can be defined as a contract in which the buyer acquires the possession of the goods immediately
and agrees to pay the total cost in installment where each installment is treated as hire charges. The ownership of
goods is transferred to the buyer from seller only when the last Installment is paid. Here is the list of features of
hire purchases -
1. Under hire purchase agreement the hire seller transfers possession of goods immediately to the purchaser.
2. The Buyer agrees to make payment in Installment over a period of time.
3. The Ownership of the goods will remain with the seller until the payment of the last Installment.
4. The hire purchaser generally makes a down payment on signing the agreement.
5. If the purchaser of the goods default even the last Installment, the hire seller has the right to takes the goods
back without making any compensation to the buyer of goods.

Advantages of Hire Purchase System

Facility of buying
People with small income can buy expensive articles such as car, house, furniture, etc. They can make payment
in easy installments and thereby improve their standard of living. The buyer can return the goods if he is not
satisfied with their quality or is unable to pay further installments.
Thrift and savings
Hire purchase system encourages people to reduce expenses and save money to pay installments at regular
intervals.
Higher sales
Hire purchase system helps to widen market for costly goods. People who cannot buy such goods otherwise are
tempted to purchase them on installments. The seller can take back the goods if buyer makes default in payment.

Ganesh Kirtunia, SO, BDBL, Kanchpur Branch