1. What is meant by depreciation? What are the different types of depreciation?

Differentiate straight line method and diminishing balance method

Depreciation is an accounting method of allocating the cost of a tangible or physical asset
over its useful life or life expectancy. Depreciation represents how much of an asset's value
has been used up.

What are the Causes of Depreciation?

Depreciation is a ratable reduction in the carrying amount of a fixed asset. Depreciation is
intended to roughly reflect the actual consumption of the underlying asset, so that the
carrying amount of the asset has been reduced to its salvage value by the time its useful life
is over. But why do we need depreciation at all? The causes of depreciation are:

Wear and tear. Any asset will gradually break down over a certain usage period, as parts
wear out and need to be replaced. Eventually, the asset can no longer be repaired, and must
be disposed of. This cause is most common for production equipment, which typically has a
manufacturer's recommended life span that is based on a certain number of units produced.
Other assets, such as buildings, can be repaired and upgraded for long periods of time.

Perishability. Some assets have an extremely short life span. This condition is most
applicable to inventory, rather than fixed assets.

Usage rights. A fixed asset may actually be a right to use something (such as software or a
database) for a certain period of time. If so, its life span terminates when the usage rights
expire, so depreciation must be completed by the end of the usage period.

Natural resource usage. If an asset is natural resources, such as an oil or gas reservoir, the
depletion of the resource causes depreciation (in this case, it is called depletion, rather than
depreciation). The pace of depletion may change if a company subsequently alters its
estimate of reserves remaining.

Inefficiency/obsolescence. Some equipment will be rendered obsolete by more efficient

equipment, which reduces the usability of the original equipment.

Straight Line Method Diminishing Balance Method

Equal amount of depreciation is charged The amount of depreciation goes on
every year
reducing year after year.

depreciation is calculated on the original Depreciation is calculated on the

cost of the assets reducing balance of asset.

The value of assets can be written down The value of assets cannot be written
to zero
Down to zero

The initial years of the life of the asset bear Every year bears almost the same charges.
lesser amount as depreciation and repairs but Depreciation goes on declining, whereas repairs
final years bear the same amount of and maintenance charges go on increasing.
depreciation but more repairs and maintenance
charges

This method is useful for assets of lesser The method is suitable for assets having
value such as patents, furniture and longer life and more value such as land
fixtures etc and building, plant and machinery etc.

Straight line method is not recognized by Income Written down value method is recognized
tax law by Income tax law

2. Define working capital? Explain the various factors affecting the working capital
requirements of a firm
Meaning of Working Capital:

Working capital means current assets or circulating capital. Experts define working
capital in both, narrow as well as broad sense. In the narrow sense, it is defined as
“the difference between current assets and current liabilities”.

According to Gerstenbergh, “working capital is the excess of current assets over

current

liabilities”. However, Gerstenbergh prefers to call working capital as circulating

capital.

In a broader sense, working capital has been defined as follows:

According to Western and Brigham, “working capital refers to a firm’s investment in

short term assets such as cash, short term securities, account receivable and
inventories”.

As per Mead, Baker and Mallot, “working capital means current assets”.
As per J. S. Mill, “the sum of current assets is working capital of a business”.

It takes into account all current resources of the company. It refers to ‘gross working
capital’.

Factors affecting Working Capital Requirement:

The factors affecting working capital requirement are as follows:

i. Business Cycle:

When there is boom in the economy, sales will increase, which will lead to an
increase in investment in stock.
Hence, additional working capital would be required. During recession period, sales
would decline and the need of working capital would also decrease.

ii. Requirement of Cash:

The requirement of working capital depends upon the cash required by the
organization for various purposes. If the requirement of cash is more, then company
requires more working capital and viceversa.

iii. Growth and Expansion Activities:

The working capital requirement increases with the growth of firm. It needs funds
continuously to support large scale operation.

iv. Seasonal Fluctuations:

The requirement of working capital depends upon the seasonal fluctuations. It states
that, if the demand for the product is seasonal, the working capital required in that
season will be more.

For e.g. The demand for sweaters is more in winter. Sweater manufacturing
companies need more working capital before winters to make the goods available in
the market before the season starts.

v. Production Cycle:

The process of converting raw material into finished goods is called ‘production
cycle’. A firm requires more working capital when the production cycle is longer and
vice versa.
vi. External Factors:

If the financial institutions and banks provide funds to the firm as and when
required, the need of working capital will be reduced.

vii. Credit Control:

Volume and terms of credit sales, collection policy etc. are the important factors of
credit control. Sound credit policy improves cash flow and hence the firms making
cash sales require less working capital. Liberal credit policy increases the risk of bad
debts and hence the firms selling on easy credit terms may require more working
capital.

viii. Terms of Purchase and Sales:

If the credit terms of purchases are favourable and terms of sales are less liberal
then the requirement of working capital will reduce as the requirement of cash will
be less. On the other hand, if the firm does not get proper credit for purchase and
adopts liberal credit policy for sales, it will require more working capital.

ix. Size of Business:

The size of business has a great impact on the requirement of working capital. Large
scale firms require large amount of working capital.

x. Volume of Sale:

The volume of sale is directly proportional to the size of working capital. If the
volume of sale increases, there is an increase in amount of working capital and vice
versa.

xi. Management Ability:

The requirement of working capital will reduce if there is proper co-ordination

between production and distribution of goods. Lack of co-ordination between
different departments may result in heavy stocking of finished and semi-finished
goods, which ultimately leads to an increase in the requirement of working capital.

xii. Nature of Business:

The nature of business highly influences the requirement of working capital.

Industrial and manufacturing enterprises, trading firms, big retail stores etc. need a
 large amount of working capital as they have to satisfy varied and continuous
demands of consumers.

3. Explain the objectives and functions of financial management

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.

Scope/Elements

1. Investment decisions includes investment in fixed assets (called as capital

budgeting). Investment in current assets are also a part of investment decisions
called as working capital decisions.
2. Financial decisions - They relate to the raising of finance from various resources
which will depend upon decision on type of source, period of financing, cost of
financing and the returns thereby.
3. Dividend decision - The finance manager has to take decision with regards to the net
profit distribution. Net profits are generally divided into two:
a. Dividend for shareholders- Dividend and the rate of it has to be decided.
b. Retained profits- Amount of retained profits has to be finalized which will
depend upon expansion and diversification plans of the enterprise.

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control
of financial resources of a concern. The objectives can be-

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning
capacity, market price of the share, expectations of the shareholders.
3. To ensure optimum funds utilization. Once the funds are procured, they should be
utilized in maximum possible way at least cost.
4. To ensure safety on investment, i.e, funds should be invested in safe ventures so
that adequate rate of return can be achieved.
5. To plan a sound capital structure-There should be sound and fair composition of
capital so that a balance is maintained between debt and equity capital.

Functions of Financial Management

1. Estimation of capital requirements: A finance manager has to make estimation with

regards to capital requirements of the company. This will depend upon expected
costs and profits and future programmes and policies of a concern. Estimations have
to be made in an adequate manner which increases earning capacity of enterprise.
2. Determination of capital composition: Once the estimation have been made, the
capital structure have to be decided. This involves short- term and long- term debt
 equity analysis. This will depend upon the proportion of equity capital a company is
possessing and additional funds which have to be raised from outside parties.
3. Choice of sources of funds: For additional funds to be procured, a company has
many choices like-
a. Issue of shares and debentures
b. Loans to be taken from banks and financial institutions
c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source and
period of financing.

4. Investment of funds: The finance manager has to decide to allocate funds into
profitable ventures so that there is safety on investment and regular returns is
possible.
5. Disposal of surplus: The net profits decision have to be made by the finance
manager. This can be done in two ways:
a. Dividend declaration - It includes identifying the rate of dividends and other
benefits like bonus.
b. Retained profits - The volume has to be decided which will depend upon
expansional, innovational, diversification plans of the company.
6. Management of cash: Finance manager has to make decisions with regards to cash
management. Cash is required for many purposes like payment of wages and
salaries, payment of electricity and water bills, payment to creditors, meeting
current liabilities, maintainance of enough stock, purchase of raw materials, etc.
7. Financial controls: The finance manager has not only to plan, procure and utilize the
funds but he also has to exercise control over finances. This can be done through
many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

4. Define break even point. Explain the various managerial application of break even
analysis?
Break Even Analysis in economics, business, and cost accounting refers to the point
in which total cost and total revenue are equal. A break even point analysis is used to
determine the number of units or dollars of revenue needed to cover total costs (fixed and
variable costs).
Break-even point represents that volume of production where total costs equal to total
sales revenue resulting into a no-profit no-loss situation.
If output of any product falls below that point there is loss; and if output exceeds that point
there is profit.
Uses of Break-Even Analysis:
(i) It helps in the determination of selling price which will give the desired profits.

(ii) It helps in the fixation of sales volume to cover a given return on capital employed.
(iii) It helps in forecasting costs and profit as a result of change in volume.

(iv) It gives suggestions for shift in sales mix.

(v) It helps in making inter-firm comparison of profitability.

(vi) It helps in determination of costs and revenue at various levels of output.

(vii) It is an aid in management decision-making (e.g., make or buy, introducing a product

etc.), forecasting, long-term planning and maintaining profitability.

5. Define marginal costing? Explain the difference between marginal costing and
absorption
Marginal Costing
Definition: Marginal Costing is a costing technique wherein the marginal cost, i.e.
variable cost is charged to units of cost, while the fixed cost for the period is
completely written off against the contribution.

The term marginal cost implies the additional cost involved in producing an extra
unit of output, which can be reckoned by total variable cost assigned to one unit. It
can be calculated as:

Marginal Cost = Direct Material + Direct Labor + Direct Expenses + Variable

Overheads
Characteristics of Marginal Costing
Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of
variability into fixed cost and variable costs. In the same way, semi variable cost is
separated.
Valuation of Stock: While valuing the finished goods and work in progress, only
variable cost are taken into account. However, the variable selling and distribution
overheads are not included in the valuation of inventory.
Determination of Price: The prices are determined on the basis of marginal cost and
marginal contribution.
Profitability: The ascertainment of departmental and product’s profitability is based
on the contribution margin.
In addition to the above characteristics, marginal costing system brings together the
techniques of cost recording and reporting.

Facts Concerning Marginal Costing

Cost Ascertainment: The basis for ascertaining cost in marginal costing is the nature
of cost, which gives an idea of the cost behavior, that has a great impact on the
profitability of the firm.
Special technique: It is not a unique method of costing, like contract costing, process
costing, batch costing. But, marginal costing is a different type of technique, used by
the managers for the purpose of decision making. It provides a basis for
understanding cost data so as to gauge the profitability of various products,
processes and cost centers.
Decision Making: It has a great role to play, in the field of decision making, as the
changes in the level of activity pose a serious problem to the management of the
undertaking.

Absorption costing refers to a method of costing to account for all the costs of
manufacturing. The management uses this method to absorb the costs incurred on a
product. The costs include direct costs and indirect costs. Direct costs include
materials, labour used in production.
 6. Explain the factors which affect the dividend policy of a firm. What are the
procedures for the payment of dividend?
A dividend policy is the policy a company uses to structure its dividend payout to
shareholders. Some researchers suggest the dividend policy is irrelevant, in theory, because
investors can sell a portion of their shares or portfolio if they need funds.
Factors Affecting Dividend Decision:
The finance manager analyses following factors before dividing the net earnings between
dividend and retained earnings:
1. Earning:
Dividends are paid out of current and previous year’s earnings. If there are more earnings then
company declares high rate of dividend whereas during low earning period the rate of dividend is
also low.
2. Stability of Earnings:
Companies having stable or smooth earnings prefer to give high rate of dividend whereas
companies with unstable earnings prefer to give low rate of earnings.
3. Cash Flow Position:
Paying dividend means outflow of cash. Companies declare high rate of dividend only when they
have surplus cash. In situation of shortage of cash companies declare no or very low dividend.

4. Growth Opportunities:
If a company has a number of investment plans then it should reinvest the earnings of the
company. As to invest in investment projects, company has two options: one to raise additional
capital or invest its retained earnings. The retained earnings are cheaper source as they do not
involve floatation cost and any legal formalities.

5. Stability of Dividend:
Some companies follow a stable dividend policy as it has better impact on shareholder and
improves the reputation of company in the share market. The stable dividend policy satisfies the
investor. Even big companies and financial institutions prefer to invest in a company with regular
and stable dividend policy.

Procedure of Declaration and Payment of Dividend

Companies are expected to report and pay dividends following a procedure:
1. Notification of the Meeting of Directors – The matter must be announced in a Board of
Directors meeting. The same must be conveyed to the managers concerned.

2. Hold required meetings – Dividend resolutions must be debated and accepted at board
meetings. Recommendations can include the acceptance of the annual loss and benefits
accounts, the specification of the final amount of the dividend, the date of the book closure
and acceptance of AGM’s notice as the same must be addressed and accepted in the
Company’s Annual General Meeting.
3. Dividend Declaration – The organization has to pay dividends following due review and
acceptance of resolutions.
4. Open a bank account – A separate bank account must be opened for payment of
dividends and the complete credit payable in five days after the declaration.
5. Dividend payment – The dividend has to be paid in cash to the shareholders within 30
days of notification.

6. Outstanding dividend collection – The corporation is responsible for adding to the

outstanding dividend account the balance remaining on the dividend account. After seven
years, the same amount will be transferred to the Investor Education and Security Fund if
not requested.

7. Explain the various tools and techniques used for inventory management

Inventory management is a systematic approach to sourcing, storing, and

selling inventory—both raw materials (components) and finished goods (products). In
business terms, inventory management means the right stock, at the right levels, in the
right place, at the right time, and at the right cost as well as price.

1. Economic order quantity.

Economic order quantity, or EOQ, is a formula for the ideal order quantity a company needs
to purchase for its inventory with a set of variables like total costs of production, demand
rate, and other factors.

The overall goal of EOQ is to minimize related costs. The formula is used to identify the
greatest number of product units to order to minimize buying. The formula also takes the
number of units in the delivery of and storing of inventory unit costs. This helps free up tied
cash in inventory for most companies.

2. Minimum order quantity.

On the supplier side, minimum order quantity (MOQ) is the smallest amount of set stock a
supplier is willing to sell. If retailers are unable to purchase the MOQ of a product, the
supplier won’t sell it to you

For example, inventory items that cost more to produce typically have a smaller MOQ as
opposed to cheaper items that are easier and more cost effective to make.
3. ABC analysis.

This inventory categorization technique splits subjects into three categories to identify items
that have a heavy impact on overall inventory cost.

Category A serves as your most valuable products that contribute the most to overall profit.

Category B is the products that fall somewhere in between the most and least valuable.

Category C is for the small transactions that are vital for overall profit but don’t matter
much individually to the company altogether.

4. Just-in-time inventory management.

Just-in-time (JIT) inventory management is a technique that arranges raw material orders
from suppliers in direct connection with production schedules.

JIT is a great way to reduce inventory costs. Companies receive inventory on an as-needed
basis instead of ordering too much and risking dead stock. Dead stock is inventory that was
never sold or used by customers before being removed from sale status.

5. Safety stock inventory.

Safety stock inventory management is extra inventory being ordered beyond expected
demand. This technique is used to prevent stockouts typically caused by incorrect
forecasting or unforeseen changes in customer demand.

7. FIFO and LIFO.

LIFO and FIFO are methods to determine the cost of inventory. FIFO, or First in, First out,
assumes the older inventory is sold first. FIFO is a great way to keep inventory fresh.

LIFO, or Last-in, First-out, assumes the newer inventory is typically sold first. LIFO helps
prevent inventory from going bad.

8. Reorder point formula.

The reorder point formula is an inventory management technique that’s based on a

business’s own purchase and sales cycles that varies on a per-product basis. A reorder point
is usually higher than a safety stock number to factor in lead time.
9. Batch tracking.

Batch tracking is a quality control inventory management technique wherein users can
group and monitor a set of stock with similar traits. This method helps to track the
expiration of inventory or trace defective items back to their original batch.

10. Consignment inventory.

If you’re thinking about your local consignment store here, you’re exactly right.
Consignment inventory is a business deal when a consigner (vendor or wholesaler) agrees to
give a consignee (retailer like your favorite consignment store) their goods without the
consignee paying for the inventory upfront. The consigner offering the inventory still owns
the goods and the consignee pays for them only when they sell.

11. Perpetual inventory management.

Perpetual inventory management is simply counting inventory as soon as it arrives. It’s the
most basic inventory management technique and can be recorded manually on pen and
paper or a spreadsheet.

12. Dropshipping.

Dropshipping is an inventory management fulfillment method in which a store doesn’t

actually keep the products it sells in stock. When a store makes a sale, instead of picking it
from their own inventory, they purchase the item from a third party and have it shipped to
the consumer. The seller never sees our touches the product itself.

13. Lean Manufacturing.

Lean is a broad set of management practices that can be applied to any business practice.
It’s goal is to improve efficiency by eliminating waste and any non value-adding activities
from daily business.

14. Six Sigma.

Six Sigma is a brand of teaching that gives companies tools to improve the performance of
their business (increase profits) and decrease the growth of excess inventory.

15. Lean Six Sigma.

Lean Six Sigma enhances the tools of Six Sigma, but instead focuses more on increasing
word standardization and the flow of business.

16. Demand forecasting.

Demand forecasting should become a familiar inventory management technique to

retailers. Demand forecasting is based on historical sales data to formulate an estimate of
the expected forecast of customer demand. Essentially, it’s an estimate of the goods and
services a company expects customers to purchase in the future.

17. Cross-docking.

Cross-docking is an inventory management technique whereby an incoming truck unloads

materials directly into outbound trucks to create a JIT shipping process. There is little or no
storage in between deliveries.

18. Bulk shipments.

Bulk shipments is a cost efficient method of shipping when you palletize inventory to ship
more at once.

8. Discuss the various methods used for risk factor in capital budgeting decision (refer
guide)
9. What is budgetary control? Examine the role of budgeting in financial control
Budgetary control is the process by which budgets are prepared for the future
period and are compared with the actual performance for finding out variances, if
any. The comparison of budgeted figures with actual figures will help the
management to find out variances and take corrective actions without any delay.

Objectives of Budgetary Control

The main objectives of budgetary control are given below:
1. Defining the objectives of the enterprise.

2. Providing plans for achieving the objectives so defined.

3. Coordinating the activities of various departments.

4. Operating various departments and cost centres economically and efficiently.

:5. Increasing the profitability by eliminating waste.

6. Centralizing the control system.

7. Correcting variances from set standards.

8. Fixing the responsibility of various individuals in the enterprise.

Advantages of Budgetary Control

Budgetary control has become an important tool of an organization to control costs and to
maximize profits. Some of the advantages of budgetary control are:
1. It defines the goals, plans and policies of the enterprise. If there is no definite aim then
the efforts will be wasted in achieving some other aims.

2. Budgetary control fixes targets. Each and every department is forced to work efficiently to
reach the target. Thus, it is an effective method of controlling the activities of various
departments of a business unit.

3. It secures better co-ordination among various departments.

4. In case the performance is below expectation, budgetary control helps the

management in finding up the responsibility.
5. It helps in reducing the cost of production by eliminating the wasteful expenditure.

6. By promoting cost consciousness among the employees, budgetary control brings in

efficiency and economy.
7. Budgetary control facilitates centralized control with decentralized activity.
8. As everything is planned and provided in advance, it helps in smooth running of business
enterprise.

9. It tells the management as to where action is required for solving problems without
delay.

Disadvantages or Limitations of Budgetary Control

The following are the limitations of budgetary control:

1. It is really difficult to prepare the budgets accurately under inflationary conditions.

2. Budget involves a heavy expenditure which small business concerns cannot afford.

3. Budgets are prepared for the future period which is always uncertain. In future,
conditions may change which will upset the budgets. Thus, future uncertainties minimize
the utility of budgetary control system.
4. Budgetary control is only a management tool. It cannot replace management in decision-
making because it is not a substitute for management.

5. The success of budgetary control depends upon the support of the top management. If
there is lack of support from top management, then this will fail.