Institute of Rural Management Anand

PGDM-RM42 – Term I – End Term Examination

Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

Ans:2

(A) Long Term Debt/Equity = Debentures/Share capital + General Reserves + Surplus

Long Term Debt/Equity= 87500/100000+45000+30000
Long Term Debt/Equity= 0.5 or 50%
This ratio measures the relationship of amount provided by the company’s creditors for
business to the amount provided by shareholders for the business. A Higher Long-term debt
to equity ratio means the company has taken more debt.
(B) Current ratio = Current Assets/ Current Liabilities

a. Sale of goods for Rs.11,000 (Cost Rs.10,000). Since the goods are sold at 11000 (Profit
of 1000) would decrease the inventory by 10000 increase the cash by 11000. Hence the
net effect would be increase of Rs. 1000 in the Current Asset. This would improve the
current ratio.

b. Sold inventory at a loss. Let the Cost of Inventory be Rs. 10000 and it is sold at Rs.
8000 therefore at a loss of Rs. 2000. This would decrease the inventory by 10000 and
cash will increase by 8000. The net effect on current asset will be decrease of 2000, so
this would reduce the current ratio.

c. Sold Stock at par. Here the Stock/Inventory will be decreased by the same amount by
which cash is increased. Hence the Current Asset will remain the same. This would have
no effect on Current Ratio.

d. Bonus Shares issued. This will have no effect on either current asset or current
liabilities. Therefore, no effect on Current Ratio will be there.

e. Payment of dividend. This will have no effect on either current asset or current
liabilities. Therefore, no effect on Current Ratio will be there.

Ans:3

(A) The amount of interest incurred during the construction will be included as a part of
acquisition of the cost of asset rather than including it as an expense in the P&L Account. This
is the interest that the company is incurring during the period of construction, hence it will be
included in the cost of asset. This is also called capitalization of interest.

(B) Here two costs,

Cost to train employees in operating the machine Rs.2,00,000 and
Cost to promote the new product Rs.10,00,000
will not be directly attributable to the acquisition of the machine because these costs are not
necessarily to be incurred during acquiring and installing the machine.
Rest all costa are directly attributable to acquiring and installing of the machine.

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 Institute of Rural Management Anand
PGDM-RM42 – Term I – End Term Examination
Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

C) The Purchase price for the machine would be Rs. 100000 be credited in Machinery account in
Balance Sheet. Cash account in Balance Sheet will be debited by Rs. 95000, and Trade discount
account due to penalty in Balance Sheet will be debited by Rs. 95000. All these changes will be
made in Balance Sheet.

Ans:4
COMMON SIZE STATEMENT

Particulars 2021 2020 Particulars 2021 2020

Sales 1,60,000 90,000 Sales 100.00 100.00

Cost of goods Cost of goods

1,02,000 48,000 63.75 53.33
sold sold

Gross profit 58,000 42,000 Gross profit 36.25 46.67

Selling and Selling and
administrative 20,000 16,000 administrative 12.50 17.78
expenses expenses
Operating
Operating
income or 38,000 26,000 23.75 28.89
income or EBIT
EBIT
Interest
8,000 6,000 Interest expense 5.00 6.67
expense
Income Income before
30,000 20,000 18.75 22.22
before taxes taxes
Income tax Income tax
9,000 6,000 5.63 6.67
expense expense

Net income 21,000 14,000 Net income 13.13 15.56

We can see from the common size statement we can say that the COGS (Cost of Goods Sold) are
increasing from 53.33% of the total sales to 63.75% of the total sales. Since Gross profit =Sales-
COGS. Higher COGS decreases the Gross Profit which we can see from the common-size
statement above.

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 Institute of Rural Management Anand
PGDM-RM42 – Term I – End Term Examination
Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

Ans: 5
(1)
Particulars 2015 2016 2017 2018 2019
Cash Flow from Operating
Activity 2107.8 2876.3 3332.2 3273 3633.7
Cash Flow from Investing
Activity -1636.8 -1081.7 -2589.6 -2146 -1529.1
Cash Flow from Financing
Activity -770.3 -792.5 -1478.8 -1209.5 -2035.9
A+B+C -299.3 1002.1 -736.2 -82.5 68.7
Opening Cash 999.6 700.3 1702.4 966.2 883.7
Closing Cash 700.3 1702.4 966.2 883.7 952.4

Here we can see that Cash flow from operating activities is very very high, Cash flow from
investing activities is negative, and Cash flow from financing activities is significantly negative.
We can also observe that cash flow from operating activities far exceed the cash needed for
Investing activities. Hence the company is in Cash Rich State.

(2) Since the firm incurred expenses of Rs. 50,00,000 for the period from April 1 2019 to
December 31 2019, and Rs. 80,00,000 in the year 2020 before the start of commercial
production. Hence these expenses were important for start of commercial production. Therefore,
these expenses should be capitalized and added to the asset account.
(3) Somalis Shipping Limited (SSL) will depreciate the cost of Overhaul and Inspection for the
period or interval of five years.

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 Institute of Rural Management Anand
PGDM-RM42 – Term I – End Term Examination
Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

Ans: 1

Cash Flow Statement is given below:

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Institute of Rural Management Anand
PGDM-RM42 – Term I – End Term Examination
Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

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Institute of Rural Management Anand
PGDM-RM42 – Term I – End Term Examination
Financial Accounting (FAC)
24-10-2021
Abhishek Malhotra, Roll Number: P42003

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