Tag: Accounting and Financial Management

1. Which one is NOT a property of Cobb-Douglas Production Function?

A. Multiplicative power function can be written in log-linear form
B. Parameters a & b represent elasticity coefficients
C. Constants a & b represent share of inputs
D. Power functions are homogeneous because exponents sum to 1

Answer: D
Explanation: Only if exponents sum to 1 does homogeneity exist; otherwise not.

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2. Costs which do not take the form of cash outlays and do not appear in books are called:

A. Sunk Costs
B. Opportunity Costs
C. Accounting Costs
D. Direct Costs

Answer: B

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3. Funds From Operations exclude which item?

A. Depreciation
B. Loss on sale of building
C. Profit on sale of land
D. Amortisation of goodwill

Answer: C
Explanation: Non-operating profit deducted in FFO computation.

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4. EVA (Economic Value Added) is defined as:

A. Net Profit After Tax
B. Operating profit after tax minus cost of capital
C. Net profit before tax
D. Accounting profit minus expenses

Answer: B

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5. Which statement is FALSE regarding CAPM?

A. Required return = risk-free rate + risk premium
B. Relevant risk is contribution to portfolio risk
C. Relevant risk greater than stand-alone risk
D. Different securities have different degrees of relevant risk

Answer: C

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6. Beta (β) is a measure of:

A. Systematic risk
B. Unsystematic risk
C. Total risk
D. Business risk

Answer: A

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7. When required rate > coupon rate, the bond sells at:

A. Premium
B. Par
C. Discount
D. Book value

Answer: C

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8. Value of a bond equals face value when:

A. Required > coupon
B. Required < coupon
C. Required = coupon
D. Risk = zero

Answer: C

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9. Capital Budgeting is concerned with:

A. Arranging finances
B. Working capital management
C. Evaluating investment decisions
D. Repairs & renewals

Answer: C

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10. DuPont analysis decomposes ROE into:

A. Margin × Turnover × Leverage
B. Profit × Dividends × Risk
C. Revenue × Cost × Time
D. Assets ÷ Liabilities × Turnover

Answer: A

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11. Debt Service Coverage Ratio indicates:

A. Effective utilisation of assets
B. Times fixed assets cover borrowed funds
C. Excess of CA over CL
D. Times surplus covers interest + loan instalments

Answer: D

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12. Authorised capital ₹5 lakh, 40% paid-up, loss this year ₹50,000 and previous loss ₹2 lakh. Tangible net worth =

A. ₹2,00,000
B. ₹2,50,000
C. ₹–50,000
D. ₹7,50,000

Answer: C
Paid up = 40% × 5,00,000 = 2,00,000 – 2,50,000 loss total = -50,000

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13. Liquidity ratios include:

A. Current ratio, Acid Test, Defensive interval
B. Quick ratio, Total asset turnover
C. Asset turnover, Defensive interval
D. Current ratio, Asset turnover

Answer: A

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14. Break-Even Q: SP=20, VC=14, Fixed=540000+252000 = 792000

Contribution = 6
Break-even units = 792000 / 6 = 132,000
Units for ₹60000 profit = 792000 + 60000 = 852000 / 6 = 142000
Sales = 142000 × 20 = 28,40,000

Correct answer closest: (3) 26,40,000 & 1,42,000

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15. Capital structure M-M assumes:

A. Perfect capital market, equal risk class, nominal taxes
B. Perfect market only
C. Dividend payout 100%
D. High personal tax

Answer: A

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16. CAPM was developed by:

A. Sharpe & Lintner
B. Lintner & Treynor
C. Sharpe, Lintner & Treynor
D. Miller & Modigliani

Answer: C

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17. Controller function in finance includes:

A. Negotiating loans
B. Advertising public issue
C. Analysing variance standard vs actual cost
D. Estimating future cash flow

Answer: C

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18. Match – Cash & Working Capital

Concentration banking – Cash collection
Playing float – Cash disbursement
Optimum cash certainty – Baumol
Uncertainty – Miller Orr

Correct Code: b a d c

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19. Credit policy does NOT aim at:

A. Max sales
B. Minimise bad debts
C. Maximise shareholder wealth
D. Minimise adverse effect on sales

Answer: C

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20. Non-payment by solvent debtor till due date is:

A. Default cost
B. Delinquency cost
C. Capital cost
D. Extra collection cost

Answer: B

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21. Capital budgeting methods include:

A. Payback, PI, IRR
B. Payback, Utility theory
C. Utility theory, IRR
D. PI, Utility theory

Answer: A

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22. Acquisition is same as:

A. Merger & Amalgamation
B. Amalgamation & Absorption
C. Takeover & Absorption
D. Merger alone

Answer: C

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23. IRR decision:

A. IRR > cost of capital → Accept
B. IRR < cost of capital → Accept
C. IRR = NPV = zero
D. Both A & C

Answer: D

Accounting and Financial Management

1. Accounting Principles and Standards

Meaning of Accounting:

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions to provide useful information for decision-making.

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Basic Accounting Principles (GAAP):

1. Business Entity Concept: Business and owner are separate entities.

2. Going Concern Concept: Business will continue for the foreseeable future.

3. Money Measurement Concept: Only monetary transactions are recorded.

4. Accounting Period Concept: Results are reported for a fixed period (usually one year).

5. Cost Concept: Assets are recorded at their purchase price.

6. Dual Aspect Concept: Every transaction affects two accounts (Debit = Credit).

7. Accrual Concept: Record income and expenses when they occur, not when cash is received or paid.

8. Matching Concept: Match revenues with related expenses in the same period.

9. Conservatism: Recognize expected losses, not profits.

10. Materiality: Only significant information should be disclosed.

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Accounting Standards (AS) and IFRS

• Issued in India by Institute of Chartered Accountants of India (ICAI).

• Ensure uniformity, transparency, and comparability in financial reporting.

• International Standards: IFRS (International Financial Reporting Standards).

• Ind AS: Indian convergence with IFRS.

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🔹 2. Preparation of Financial Statements

Financial Statements show the financial performance and position of a business.

Major Statements:

1. Income Statement (Profit & Loss Account) – shows profitability.

2. Balance Sheet – shows financial position at a point in time.

3. Cash Flow Statement – shows movement of cash.

4. Statement of Changes in Equity (for companies).

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Format of Balance Sheet (Condensed):

Assets = Liabilities + Owner’s Equity

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🔹 3. Financial Statement Analysis

Used to evaluate financial health and assist managerial decision-making.

Techniques of Analysis:

1. Comparative Statement Analysis – compares financial data across years.

2. Common Size Analysis – expresses items as % of total.

3. Ratio Analysis – most common tool.

4. Cash Flow & Funds Flow Analysis.

5. Trend Analysis.

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A. Ratio Analysis

1️⃣ Liquidity Ratios

• Current Ratio = Current Assets / Current Liabilities
  → Ideal = 2:1

• Quick Ratio (Acid-Test) = (Current Assets − Inventory) / Current Liabilities
  → Ideal = 1:1

2️⃣ Solvency Ratios

• Debt-Equity Ratio = Total Debt / Shareholders’ Equity

• Interest Coverage Ratio = EBIT / Interest Expense

3️⃣ Profitability Ratios

• Gross Profit Ratio = (Gross Profit / Sales) × 100

• Net Profit Ratio = (Net Profit / Sales) × 100

• Return on Assets (ROA) = Net Profit / Total Assets

• Return on Equity (ROE) = Net Profit / Shareholders’ Equity

4️⃣ Activity Ratios

• Inventory Turnover = Cost of Goods Sold / Average Inventory

• Debtors Turnover = Credit Sales / Average Debtors

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B. Funds Flow Analysis

Shows changes in working capital between two balance sheets.

Key Terms:

• Fund: Working Capital (Current Assets − Current Liabilities)

• Sources of Fund: Issue of shares, long-term loans, sale of assets.

• Uses of Fund: Purchase of assets, repayment of debt, dividend payment.

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C. Cash Flow Analysis

Prepared as per AS-3, it shows inflows and outflows of cash.

Activities:

1. Operating Activities: Day-to-day operations.

2. Investing Activities: Purchase/sale of assets or investments.

3. Financing Activities: Issue/repayment of capital and loans.

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D. DuPont Analysis

DuPont model breaks Return on Equity (ROE) into three components:

$$\text{ROE}=\text{Net Profit Margin}\times \text{Asset Turnover}\times \text{Equity Multiplier}$$

Helps in understanding how profit, efficiency, and leverage affect ROE.

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🔹 4. Cost Accounting and Cost Sheet

Cost Accounting:
Identifies, measures, and controls costs for cost efficiency.

Cost Sheet:
A statement showing the total cost of production and selling a product.

Format:

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🔹 5. Marginal Costing and CVP Analysis

Marginal Costing:
Costs are divided into Fixed and Variable; fixed costs are not charged to individual products.

Contribution (C):

$$C=\text{Sales}-\text{Variable Cost}$$

Profit = Contribution − Fixed Cost

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Cost-Volume-Profit (CVP) Analysis

Used to study the relationship between cost, volume, and profit.

Key Equations:

• Break-Even Point (BEP):

  $$\text{BEP (units)}=\frac{\text{Fixed Cost}}{\text{Selling Price per Unit – Variable Cost per Unit}}$$

• BEP (Sales ₹):

  $$\text{BEP (₹)}=\frac{\text{Fixed Cost}}{\text{P/V Ratio}}$$

P/V Ratio (Profit-Volume Ratio):

$$\text{P/V Ratio}=\frac{\text{Contribution}}{\text{Sales}}\times 100$$

Margin of Safety (MOS):

$$\text{MOS}=\text{Actual Sales}-\text{BEP Sales}$$

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🔹 6. Standard Costing and Variance Analysis

Standard Costing:
Predetermined cost used as a benchmark for comparison.

Variance:
Difference between standard and actual performance.

Types:

1. Material Variance:

   • Material Cost Variance = (Standard Cost − Actual Cost)

   • Material Price Variance = (SP − AP) × AQ

   • Material Usage Variance = (SQ − AQ) × SP

2. Labour Variance:

   • Labour Cost Variance = (SR × SH) − (AR × AH)

   • Labour Efficiency Variance = (SH − AH) × SR

3. Overhead Variance:

   • Overhead Cost Variance = Standard OH − Actual OH

Purpose:
Control and performance evaluation.

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🔹 7. Financial Management – Concept and Functions

Definition:

Financial Management involves planning, organizing, and controlling financial resources to achieve organizational objectives.

Main Functions:

1. Investment Decision – Capital budgeting.

2. Financing Decision – Sources of funds and capital structure.

3. Dividend Decision – Distribution of profits.

4. Liquidity Decision – Managing working capital.

Objectives:

• Maximize shareholders’ wealth.

• Ensure profitability, liquidity, and solvency.

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🔹 8. Capital Structure and Cost of Capital

Capital Structure:

Combination of debt and equity used for financing business operations.

Capital Structure Theories:

1. Net Income (NI) Theory: More debt → higher firm value (due to low cost).

2. Net Operating Income (NOI) Theory: Value independent of capital structure.

3. Traditional Theory: Moderate debt optimizes value.

4. Modigliani–Miller (M–M) Theory: In perfect market, structure is irrelevant.

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Cost of Capital:

Minimum rate of return expected by investors.

$$\text{Overall Cost of Capital (WACC)}=\frac{E}{V}{K}_e+\frac{D}{V}{K}_d(1-T)$$

Where:
E = Equity, D = Debt, V = Total Capital, Ke = Cost of Equity, Kd = Cost of Debt, T = Tax rate.

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Sources of Finance:

• Long-term: Shares, debentures, loans, retained earnings.

• Short-term: Trade credit, bank loans, commercial paper.

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🔹 9. Budgeting and Budgetary Control

Meaning:

Budgeting = Preparing future financial plans.
Budgetary Control = Comparing actual with budgeted performance to take corrective action.

Types of Budgets:

1. Fixed Budget – For one level of activity.

2. Flexible Budget – For multiple activity levels.

3. Cash Budget – Forecast of cash inflow/outflow.

4. Capital Budget – Long-term investment planning.

5. Zero-Based Budgeting (ZBB):
   Every activity must be justified from zero base (no automatic carry-forward).

Budgetary Process:

1. Define objectives.

2. Prepare budgets.

3. Implement.

4. Compare actual vs. budget.

5. Take corrective actions.

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🔹 10. Leverages and EBIT–EPS Analysis

Leverage:

Leverage measures how changes in sales or EBIT affect profits.

A. Operating Leverage (OL):

$$\text{OL}=\frac{\text{Contribution}}{\text{EBIT}}$$

→ Measures effect of sales change on operating income.

B. Financial Leverage (FL):

$$\text{FL}=\frac{\text{EBIT}}{\text{EBT}}$$

→ Measures effect of EBIT change on EPS.

C. Combined Leverage (CL):

$$\text{CL}=\text{OL}\times \text{FL}$$

Financial Breakeven Point:

$$\text{BEP (financial)}=\text{Fixed Financial Charges (Interest, Preference Dividend)}$$

Indifference Point:
Level of EBIT where EPS remains same for two financial plans (debt vs. equity).

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✅ Quick Summary Keywords:

GAAP, Financial Statements, Ratio Analysis, Cash Flow, DuPont, Cost Sheet, Marginal Costing, Variance, Capital Structure, Budgeting, Leverage, EBIT–EPS, ZBB.