Practice problem

Document Sample
Practice problem Powered By Docstoc
					                      Financial Accounting
                      Practice problems

Maximum Marks 40

1. India Chemical Ltd. has recently finalized its accounts for the year 2002. Given below
is its Profit and Loss Account for the year ended on 31.12.2002 . You are required to
analyze the performance of the company and its retention policy using comparatives
available for the previous year and industry average indicators.

 PROFIT & LOSS ACCOUNT for the year ended 31.12.2002
                                         2002                        2001
                                     Amount in Rs. 000
 Sales net of sales tax                  7000                        6000
 Other Income                                0                          0
 Change in stock                           600                        400
 Total Revenues                          7600                        6400
 Expenses                                5510                        4890
 Depreciation                              570                        450
 Profit Before Interest and Tax          1520                        1060
 Interest                                  140                        120
 Profit Before Tax                       1380                         940
 Tax Provision                             400                        300
 Profit After Tax                          980                        640
 Balance of Last Year                       20                         20
 Distributable Profit                    1000                         660
 Appropriations
 Transfer to General Reserve               392                         200
 Proposed Dividend                         400                         400
 Dividend tax                               40                          40
 Balance of Profit & Loss Account          168                          20
                                         1000                          660

Additional Information:
   (i)     Industry growth rate 20%.
   (ii)    Pay out ratio in the industry is 60%.
   (iii)   Overall profitability of the industry 8%.

[ Hints : Find out comparative ratios and comment on the performance of the company. It
is better that all ratios are computed with reference to sales. Retention policy of the
company is ascertained on the basis of the figures of profit retained in the business as
compared to distributable profit.]                          8 Marks




                                                                                       1
2. Modern Infotech Ltd. provides the following information which requires to be
properly arranged in the form of a company balance sheet . You are required to help the
company.

                                               Rs. in
 Balance Sheet Items                           Cr.
 Share capital                                      100
 General reserve                                    200
 Share premium                                        50
 Profit and Loss Account                               5
 Secured loans                                      100
 Unsecured loans                                      30
 Plant and Machinery                                300
 Furniture                                            30
 Land                                                 20
 Building                                             50
 Debtors                                              60
 Creditors                                            20
 Inventories                                          50
 Cash & Bank balances                                  3
 Advances to Group Companies                          30
 Accumulated Depreciation                             20
 Proposed Dividend                                    40
 Capital Work in Progress                             70
 Provision for Tax                                    20
 Provision for Retirement Benefits                    30
 Provision for warranty                               10
 Miscellaneous Expenditure                            12

[ Hints : Use a proper balance sheet format and classify the information.

 Balance Sheet as at 31 December 2002
                                                Rs. in     Rs. in
 Sources of Funds                               Cr.        Cr.
 SHARE CAPITAL
 RESERVES AND SURPLUS
 SHAREHOLDERS' FUNDS
 SECURED LOANS
 UNSECURED LOANS
 LOAN FUNDS
 Total
 Applications of Funds
 GROSS BLOCK
 Less Accumulated Depreciation
 NET BLOCK
 Capital Work In Progress



                                                                                     2
 INVESTMENTS
 CURRENT ASSETS , LOANS AND
 ADVANCES
 A. CURRENT ASSETS
 B. LOANS AND ADVANCES

 LESS CURRENT LIABILITIES AND
 PROVISIONS
 A. CURRENT LIABILITIES
 B.PROVISIONS

 Net
 Miscellaneous Expenditure

You may show workings. ]                             8 Marks

3. Minitech Computers Ltd. provides the balance sheet dated 31.12.2002. Mr. Anish is
10% shareholder of the company. He is disturbed on studying the balance sheet as it
seems that the company has poor current ratio and high leverage . You are required to
compute current ratio and debt-equity ratio of the company and guide Mr. Anish in
understanding liquidity and leverage of the company.

Given below is the Balance Sheet of the company:

 Balance Sheet as at 31 December 2002
                                   Rs. in      Rs. in
 Sources of Funds                  Cr.         Cr.
 SHARE CAPITAL                                      100
 RESERVES AND SURPLUS                                 80
 SHAREHOLDERS' FUNDS                                180
 SECURED LOANS                                      400
 UNSECURED LOANS                                      30
 LOAN FUNDS                                         430
 Total                                              610
 Applications of Funds
 GROSS BLOCK                             598
 Less Accumulated Depreciation           100
 NET BLOCK                                          498
 Capital Work In Progress                            70
 INVESTMENTS                                         80
 CURRENT ASSETS , LOANS AND
 ADVANCES
 A. CURRENT ASSETS                       200
 B. LOANS AND ADVANCES                   100
                                         300
 LESS CURRENT LIABILITIES AND
 PROVISIONS



                                                                                   3
 A. CURRENT LIABILITIES                 300
 B.PROVISIONS                            50
                                        350
 Net                                              -50
 Miscellaneous Expenditure                         12
                                                  610

The following additional information should also be considered while making analysis:
   (i)    50% of the provision to be paid shortly.
   (ii)   Advances to group companies cannot be collected within a short period.
   (iii)   Secured loans include Rs. 20 crore which is payable within a period of 3
          months.
   (iv)   Investments represent short run parking of cash.
   (v)    Current liabilities includes creditors for machinery amounting to Rs. 120 cr.
          against which a term loan has been arranged which will be received shortly.
   (vi)   The company expects to earn PAT Rs. 100 cr. next year and it pays dividend
          @ 40% on equity. Assume 10% distribution tax .
   (vii) The company writes off Miscellaneous expenditure @ Rs. 3 cr. p.a.
   (viii) Instalment of secured loans during the next year is also Rs. 40 cr.

The cash flow projection of the company shows that there will adequate cash to pay the
loan instalment and dividend as it will earn adequate cash profit.     8 Marks

4. Consider the following Profit and Loss Account and Balance Sheets of Arun Foods
Ltd.
 PROFIT & LOSS ACCOUNT for the year ended
 31.12.2XXX
                                          Amount in Rs. cr.
 Sales net of sales tax                               7000
 Other Income                                          100
 Change in stock                                       600
 Total Revenues                                       7700
 Expenses                                             5510
 Depreciation                                          570
 Profit Before Interest and Tax                       1620
 Interest                                              140
 Profit Before Tax                                    1480
 Tax Provision                                         400
 Profit After Tax                                     1080
 Balance of Last Year                                    20
 Distributable Profit                                 1100
 Appropriations
 Transfer to General Reserve                           450
 Proposed Dividend                                     400
 Dividend tax                                            40



                                                                                     4
 Balance of Profit & Loss Account                         210
                                                         1100


                                  As on 31.12.2002 31.12.2001
 Balance Sheet as at 31 December
 2XXX                             Rs. cr.          Rs. cr.
 Sources of Funds
 SHARE CAPITAL                         3000               2000
 RESERVES AND
 SURPLUS                               1140                500
 SHAREHOLDERS'
 FUNDS                                 4160               2500
 SECURED LOANS                         1220                800
 UNSECURED LOANS                         200              1000
 LOAN FUNDS                            1400               1800
 Total                                 5560               4300
 Applications of Funds
 GROSS BLOCK                           3800               3200
 Less Accumulated Depreciation           970               400
 NET BLOCK                             2830               2800
 INVESTMENTS                               0               100
 CURRENT ASSETS , LOANS AND
 ADVANCES
 A. CURRENT ASSETS           3900             3000
 B. LOANS AND
 ADVANCES                     400                0
                             4470             3000
 LESS CURRENT LIABILITIES AND
 PROVISIONS
 A. CURRENT
 LIABILITIES                  900              700
 B.PROVISIONS                 840              900
                             1740             1600
 Net Current Assets                    2730               1400
 Total                                 5560               4300

Mr. X , an important shareholder of the company wanted to know cash profit of the
company rather than PAT and distributable profit. He has doubt that the company is
paying dividend by raising loan as fresh trench of secured loan has been raised. You are
required to make a cash flow analysis and interpret the result for the benefit of Mr. X.

Additional Information :
   (1) Cash in hand : 31.3.2002 Rs. 25 cr. , 31.3.2001 Rs. 10 cr.
   (2) Advance tax paid Rs. 400 cr. during 2002.


                                                                                      5
   (3) Dividend for 2001 : Rs. 900 cr. paid during 2002
   (4) Investments were sold at par.
   (5) Break up of reserves and surplus ( Rs. cr.):
                              2002         2001
      General Reserve         930           480
      P&L A/C                 210            20
      Total                  1140           500
   (6) Loans and advances of 2002 represents advance tax.     8 Marks

   5. [CASE STUDY]

Given below are Profit and Loss Account of Bharat Aluminum Co. for the year ended on
30.9.2002 , and Balance Sheet as on 30.9.2002 .
                                                          ( Rs. In lacs)
   Profit and Loss Account                      30.9.2002             30.9.2001
   Sales                                        5000                  2500
   Other Income                                  100                   100
   Increase in Inventories                       600                   100
   Revenue                                      5700                  2700
   Expenses                                     2600                  1200
   Depreciation                                  400                   400
   Interest                                      500                   400
   Profit Before Tax                            2200                   700
   Tax provision                                 600                    250
   Profit After Tax                             1600                  450
   Balance at the beginning                      100
   Transfer to General Reserve                  1400
   Proposed Dividend including Distribution 220
   Tax
   Balance at the end                             80

  Balance Sheet as on 30.92002 ( Rs. in lacs)
                                        30.9.2002                  30.9.2001
  Sources
  Share Capital
  Equity shares                                1000                    1000
  Reserves & Surplus
  General Reserve                2000                       600
  Profit & Loss Account             80         2080         100         700
  Secured Loans
  12.5% Term Loans                             4000                    3200
  Total                                        7080                    4900
  Applications
  Fixed Assets
  Gross Block                  7000                         5000



                                                                                  6
   Less             Accumulated 2000                       1600
   depreciation
   Net Block                                     5000                  3400
   Investments                                   1000                   600
   Current Assets , Loans &
   Advances
   Inventories                   1000                       400
   Receivables                     500                      500
   Cash & Bank Balances            100                      200
   Loans to Group Companies        500                       -
   Advance Tax                     600                      250
   Total                         2700                      1350
   Current       Liabilities &
   Provisions
   Trade Creditors                800                        90
   Provision for tax              600                       250
   Proposed Dividend including 220                          110
   distribution tax
   Total                        1620                        400
   Net Current Assets                            1080                   900


Shareholders of the company raised three points in the annual general meeting:
   (1) Although the company earned huge profit , there is no money to pay dividend.
   (2) There had been increase in inventories which meant change in working capital
       policy of the company.
   (3) There had been increased dependence on trade creditors.

The management replies :

   (1) Increased inventory holding is compensated by the extended credit period from
       the suppliers.
   (2) Cash flow problem arises at the growth phase of any company.

However, the shareholders wanted a finance committee to be formed to look into the
financial policies of the company. The finance committee needed your help to address
these issues more closely.

A survey revealed the following :
Industry average current ratio :           1.1
Industry average debt equity ratio :      0.7
Industry average growth                   15%
Shareholders also wanted to look into the cash flow.

You are required to add points to the debate.                8 marks



                                                                                  7
8

				
DOCUMENT INFO