Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2

Paper – 8: Cost Accounting & Financial Management

Full Marks: 100 Time Allowed: 3 Hours

This paper contains 3 questions. All questions are compulsory, subject to instruction provided
against each question. All workings must form part of your answer.
Assumptions, if any, must be clearly indicated.

1. Answer all questions: [2×10=20]

(a) Define Cost Apportionment.

Answer:
When items of cost cannot directly charge to or accurately identifiable with any cost
centres, they are prorated or distributed amongst the cost centres on some predetermined
basis. This method is known as cost apportionment. Thus we see that items of indirect costs
residual to the process of cost allocation are covered by cost apportionment.

(b) List the two objective of CAS-4.

Answer:
Objectives of CAS-4: Cost Accounting Standard on Cost of Production for Captive
Consumption is:
 The purpose of this standard is to bring uniformity in the principles and methods used for
determining the cost of production of excisable goods used for captive consumption.
 The cost statement prepared based on standard will be used for determination of
assessable value of excisable goods used for captive consumption.

(c) In a workshop the normal working hours is 8 hours for which `450 is paid as wages. However,
calculation of wages payable is made on piece rate basis that 30 pieces will be produced
per hour. When a worker produces below standard, 90% of the piece rate is paid but when
he produces above standard, 110% of piece rate is paid. On a particular day, a worker
produces 260 pieces in the allotted time of 8 hours. What will be his earning?
Answer:
Normal price rate = 450/240 = 1.875.
Standard Production= 8hrs x 30 pieces = 240 pieces
260 pieces in 8 hours is above standard of 240 pieces.
Hence, wages = 110 % x 1.875 x 260 = 536.25 or 536.

(d) State the treatment of Bad Debts in Cost record.

Answer:
We know bad debt refer to customers who do not pay money after having purchased the
product. This situation arises after the sale is done. Many experts say that bad debt is not
an item of expense but it’s a financial loss and thus should be excluded for the purpose of
costing. However normal bad debts may be considered as selling expense and included in
the cost. An exceptional case like bankruptcy of a big institution may be excluded from
the cost.

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(e) A concern producing a single product estimates the following expenses for a production
period.
Particulars `
Direct Material 25,000
Direct Labour 25,000
Direct Expenses 2,500
Overhead Expenses 1,05,000
What will be the overhead recovery rate based on prime cost?
Answer:
Prime cost = Direct Material + Direct Labour + Direct Expenses = `52,500
Overhead Expenses =` 2,10,000

Overhead recovery rate based on prime cost = `1,05,000/`52,500 = 2 times or 200 % of prime
cost.

(f) State the cost units applicable to the following industries:

Cement, Goods Transport, Education, BPO
Answer:
Cost units for the following industries
Industry Cost unit
Cement Tonnes Any unit of weight is acceptable (like quintals,
kg, etc)
Goods Tonnes- Any unit that is a product of weight and
Transport Kilometer length(distance) (like ton-miles, quintal-miles,
etc)
Education Student year Any unit that is a product of no. of students and
the duration -days/months or years
BPO Accounts Any unit in terms of number of transactions, or a
handled product of number and value of transactions

(g) Calculate the future value of `1,000 invested in State Bank Cash Certificate scheme for 2
years @5.5% p.a., compounded semi-annually.
Answer:
mn
 c
= FVn  PV1 
m 

22
 0.055
 1,0001 
 2 
=1,000(1.0275)4
= 1,114.62

(h) The capital of PQR Limited is as follows :

9% preference shares of `10 each `3,00,000
Equity shares of `10 each `8,00,000
Following further information is available:
Profit after Tax `2,70,000
Equity Dividend paid 20%

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The market price of equity shares `40 each

Then the EPS and PE ratio are:
Answer:
PAT - Preference dividend
EPS 
No. of Equity share

2,70,000 - 27,000
  3.04
80,000
M arketprice
PE ratio 
EPS
` 40

3.04
=13.16

(i) Cactus Limited paid a dividend of `5 per share for 2013-14. The company follows a fixed
dividend payout ratio of 60%. The company earns a return of 20% on its investment. The cost
of capital to the company is 14%. What would be the expected market price of its share,
using the Walter Model?
Answer:
Dividend `5
EPS    8.33
payout ratio 0.6
r
D  (E - D) 
According to Walter Model = P  k
k
0.20
5 - (8.33- 5)
= 0.14
0.14
= 69.69

(j) X owns a stock portfolio equally invested in a risk free asset and two stocks. If one of the
stocks has a beta of 0.8 and the portfolio is as risky as the market what must be the beta of
the other stocks in the portfolio?
Answer:
Beta of market =βm = βp=1
Βp = 1/3(0.8) +1/3(x) + 1/3(0) =1
Solving, we get beta of other stock = 2.2

2. Answer any three questions from a, b, c and d. [3×16=48]

(a)
(i) The following details are available in respect of a Consignment of 1,250 kgs. of materials „X‟:
 Invoice price-`20 per kg.
 Excise duty-25% of invoice price.
 Sales Tax-8% on Invoice price including Excise Duty

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 Trade discount-10% on Invoice price

 Insurance-1% of aggregate net price
 Delivery charges-`250
 Cost of containers @`60 per container for 50 kg. of material. Rebate is allowed @ `40 per
container if returned within six weeks, which is a normal feature.
 One container load of material was rejected on inspection and not accepted.
 Cost of unloading and handling @ 0.25% of the cost of materials ultimately accepted.
On the basis of above you are required to find out the landed cost per kg. of material „X‟.
[8]
Answer:
Computation of landed cost of Material „X‟
Total cost for 1,250 kg in ` Cost per kg. in `
Invoice price 25,000.00 20.00
Add: Excise Duty (25,000×25%) 6,250.00 5.00
31,250.00 25.00
Add: Sales Tax (31,250×8%) 2,500.00 2.00
33,750.00 27.00
Less: Trade Discount @ 10% on invoice 2,500.00 2.00
price
31,250.00 25.00
Add: Insurance @ 1% on above 312.50 0.25
31,562.50 25.25
Add: Delivery Charges 250.00 0.20
Cost of container @ `60 for 50Kg. 1,500.00 1.20
33,312.50 26.65
Less: Cost of material returned* 1,332.50 --------
31,980.00 26.65#
Add: Cost of handling @0.25% 79.95 0.07#
32,059.95 26.72#
Less: Credit for container returnable @ 960.00 0.80#
Total landed cost 31,099.95 25.92#

*1Container of 50kg. rejected. (33,312÷1,250)×50 =`1,332.50

@Total consignment 1,250 kg. less 50 kg. (1 container returned) =1,200 kg.
Credit (`40÷50)×1,200kg =`960
#Per unit cost is determined by dividing 1,200kg. and not by 1,250 kg. as 1 container of
50kg. was returned.

(ii) The following details have been obtained from the cost records of Comet Paints Limited:
(`)
Stock of raw materials on 1 Sept. 2014
st 75,500
Stock of raw materials on 30th Sept. 2014 91,500
Direct Wages 52,500
Indirect wages 2,750
Sales 2,11,000
Work-in-progress on 1st Sept. 2014 28,000
Work-in-progress on 30th Sept. 2014 35,000
Purchase of raw materials 66,000
Factory rent rates and power 15,000
Depreciation of plant and machinery 3,500
Expenses on purchases 1,500

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Carriage outwards 2,500

Advertising 3,500
Office rent and taxes 2,500
Travelers wages and commission 6,500
Stock of finished goods on 1st Sept. 2014 54,000
Stock of finished goods on 30th Sept. 2014 31,000

Prepare a Cost Sheet giving the maximum possible break up of costs and profits. [8]
Answer:
Cost Sheet
Particulars Amount (`)
Opening stock of Raw Material 75,500
Add: Purchase of Raw Materials 66,000
Add: Expenses on purchases 1,500
Less: Closing Stock of raw Material (91,500)
Raw Material Consumed 51,500
Add: Direct Wages 52,500
Prime Cost 1,04,000
Add: Factory Overheads
Indirect Wages 2,750
Factory rent, rates & power 15,000
Depreciation on Plant & Machinery 3,500
Gross Factory Cost 1,25,250
Add: Opening stock of work-in-progress 28,000
Less: Closing Stock of work-in-progress (35,000)
Net factory cost 1,18,250
Add: Office & Administration overheads
Office rent & taxes 2,500
Cost of Production 1,20,750
Add: Opening Stock of finished goods 54,000
Less: Closing stock of finished goods (31,000)
Cost of goods sold 1,43,750
Add: Selling & Distribution Overheads:
Carriage outwards 2,500
Advertising 3,500
Traveler’s wages & Commission 6,500
Cost of sales 1,56,250
Profit 54,750
Sales 2,11,000

(b)
(i) Distinguish between “Incentives to indirect workers” and “Indirect incentives to direct
workers”. [6]
Answer:
Incentive schemes for workers are made to motivate workers for increasing output and
quality production, saving time, reducing labour turnover and building sense of belonging.
Obviously, these schemes focus on performance of workers. While performance of direct
workers is easy to measure, that of auxiliary or indirect staff is not. Accordingly, incentive
schemes differ between direct workers and indirect workers.
Incentive schemes for indirect workers include:

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 Bonus to foremen and supervisors based on output, saving in time, quality improvement,
reduction in scrap, etc.
 Bonus to repairs and maintenance staff for routine and repetitive jobs, based on
reduction in number of complaints or breakdown.
 Bonus to stores staff, based on the value of materials handled or the number of
requisitions per period.
Indirect Incentives to direct workers include:
 Monetary schemes like profit sharing, co-partnership, co-ownership;
 Non-monetary schemes like education and training facilities, health and safety devices,
facilities for sports and housing, subsidized canteen and purchase coupon, pension,
creation of sick and benevolent funds, arrangement of tour programs etc.

(ii) The following is an extract of stores ledger of a particular item of stock with incomplete
information for September 2014. You are required to fill in the rate column of issues correct to two
decimal places. Also fill in the values under the 'Balance column' wherever indicated with a "?".
Identify the method of stock issue followed by the company. How would you treat the value of
the shortages on 30th September in Cost Accounts?

Date Receipts Issues Balance

September 2014 Quantity Rate Quantity Rate Quantity Value
(Kg) (`/Kg) (Kg) (`/Kg) (Kg) (`)
1 50,000 1,25,000
7 5,000 2.4
10 30,000 62,000
15 20,000
20 15,000 2.6
25 10,000 2.5
29 20,000
30 200 ?
shortage-abnormal loss

30 400 ?
shortage-abnormal loss

31 9,400 ?
[10]
Answer:
Statement showing the value of closing stock
Date Receipts Issues Balance
September 14 Quantity Rate Quantity Rate Quantity Value
(kg) (`/kg) (kg) (`/kg) (kg) `
1 50,000 1,25,000
7 5,000 2.4 55,000 1,37,000
10 30,000 2.50 25,000 62,000
15 20,000 2.50 5,000 12,000
20 15,000 2.6 20,000 51,000
25 10,000 2.5 30,000 76,000
29 20,000 2.55 10,000 25,000

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30 200 2.50 9,800 24,500

(Shortage-Normal
loss)
30 400 2.50 9,400 23,500
(shortage -abnormal
loss)

31 9,400 23,500
Working Note:
 The store ledger shows the value of the stock on 10.09.14 is `62,000 which show that the
store ledger is maintained in FIFO method.

 On 29.09.14 the issue price is :

Quantity Rate Value (`)

5,000 2.40 12,000
15,000 2.60 = 2.55 [1 mark]
Therefore, rate of the issue : 51,000/20,000 39,000
20,000 - 51,000
Therefore, rate of the issue: 51,000 / 20,000 = 2.55

 Normal Shortage is charged to production as a % of direct material consumed.

The value of normal loss to be included in material cost = 200 x 2.5 = `500

 Abnormal Loss is to be written off to costing P& L A/c

Value of Abnormal Loss = 400 x 2.5 = `1,000

(c)
(i) Distinguish between Financial Accounting and Cost Accounting. [8]
Answer:
The main differences between Financial and Cost Accounting are as follows:
Financial Accounting Cost Accounting
a. It provides the information about the It provides information to the
business in a general way. i.e Profit and management for proper planning,
Loss Account , Balance Sheet of the operation, control and decision
business to owners and other outside making.
partners.
b. It classifies records and analyses the It records the expenditure in an
transactions in a subjective manner, i.e objective manner, i.e according to the
according to the nature of expense. purpose for which the costs are
incurred.
c. It lays emphasis on recording aspect It provides a detailed system of control
without attaching any importance to for materials, labour and overhead
control. costs with the help of standard costing
and budgetary control.
d. It reports operating results and financial It gives information through cost reports
position usually at the end of the year. to management as and when desired.
e. Financial Accounts are accounts of the Cost Accounting is only a part of the
whole business. They are independent financial accounts and discloses profit
in nature. or loss of each product, job or service.
f. Financial Accounts records all the Cost Accounting relates to transactions
commercial transactions of the connected with Manufacturing of

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business and include all expenses i.e goods and services, means expenses
Manufacturing, Office, Selling etc. which enter into production.
g. Financial Accounts are concerned with Cost Accounts are concerned with
external transactions i.e transactions internal transactions, which do not
between business concern and third involve any cash payment or receipt.
party.
h. Only transactions which can be Non-Monetary information like No of of
measured in monetary terms are units/ hours etc are used.
recorded.

(ii) ABC Ltd. company having 25 different types of automatic machine, furnishes you the
following data for 2013-2014 in respect of machine B:
I. Cost of machine `50,000
Life-10 years Scrap value is nil
II. Overhead expenses are:
Factory rent `50,00 p.a
Heating & lighting `40,000
Supervision `1,50,000 p.a
Reserve equipment of machine B `6,000 p.a
Area of the factory 80,000 sq.ft.
Area occupied by machine B 3,000 sq.ft.
III. Wages of operator is `24 per day of 8 hours including all fringe benefits. He
attends to one machine when it is under set up and two machines while
under operation.
IV. Estimated production hours 3,600 p.a.
Estimated set up time 400 hrs. p.a.
Power 0.5 per hour
Prepare a schedule of comprehensive machine hour rate and find the cost of the following
jobs:
Job 1002 Job 1008
Set up time (hrs.) 80 40
Operation time (hrs.) 130 160
[6+2]
Answer:
Computation of machine hour rate when machine is in operation
Particulars Amount (`)
Standing charges:
Rent 50,000×3/80 =1,875
Heating & Lighting 40,000×3/80 =1,500
Supervision 1,50,000×1/25 =6,000
Reserve equipment =6,000
15,375
Cost per hour 15,375/4,000 3.84
Machine Expenses:
Depreciation [50,000÷(10×3,600)]=1.39
Wages [24/8×1/2]=1.50
Power =0.50 3.39
Machine hour rate 7.23

Computation of machine hour rate when machine is under set up

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Particulars Amount (`)

Standing charges:
Rent 50,000×3/80 =1,875
Heating & lighting 40,000×3/80 =1,500
Supervision 1,50,000×1/25 =6,000
Reserve equipment =6,000
15,375
Cost per hour 15,375/4,000 3.84
Machine expenses:
Depreciation [50,000 ÷ (10×3,600)] =1.39
Wages [24/8] =3.00
Power -------
Machine Hour Rate =8.23
Computation of cost of the jobs
Particulars Job 1002 Job 1008
Set up cost
Job 1002: 80×8.23 658.40
Job 1008: 40×8.23 329.2
Operation Cost
Job 1002: 130×7.23 939.9
Job 1008: 160×7.23 1,156.8
Total Cost of the Job 1,598.30 1,486.00

(d)
(i) The details of present output of a manufacturing department are given below:
Average output per week from 160 employees 48,000 units
Saleable value of output `6,00,000
Contribution made by output towards fixed expenses and profit `2,40,000
The Board of Directors plans to introduce more mechanization into the department at a
capital cost of `1,60,000. The effect of this will be to reduce the number of employees to 120,
and increasing the output per individual employees by 60%.
To provide the necessary incentive to achieve the increased output, the Board intends to
offer a 1% increase on the piece work rate of `1 per unit for every 2% increase in average
individual output achieved.
To sell the increased output, it will be necessary to decrease the selling price by 2%.
Calculate the extra weekly contribution resulting from the proposed change and evaluate
for the Board‟s information, the desirability of introducing the change. [10]
Answer:
48,000units
Average output per employee   300 units
160 employees
Planned output per employee = 300 units × 160% = 480 units
Total output per week as per plan = 480 units × 120 employee = 57,600 units
Existing piece work rate = `1 per unit
60%
New piece work rate = `1  `1 = `1.30
2
`6,00,000
Existing selling piece per unit =   `12.50
48,000units
New selling price per unit = `12.50 × 98% = `12.25

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Existing total variable cost = Sales –Contribution

= `6,00,000 - `2,40,000
= `3,60,000
Existing material cost = Total variable cost – Labour cost
= `3,60,000 – (`1 per unit × 48,000 units)
= `3,12,000
` 3,12,000
Existing, material cost per unit =   `6.50
48,000units
New variable cost per unit = Material cost per unit + New labour cost per unit
= `6.50 + `1.30 = `7.80
New total variable cost = `7.80 per unit × 57,600 units
= `4,49,280
New saleable value of the output = `12.25 per unit × 57,600 units
= `7,05,600
New contribution of the output = `7,05,600 - `4,49,280
= `2,56,320
Increase in contribution = `2,56,320 - `2,40,000
= `16,320

Comments: The proposal should be accepted since the contribution per week has
increased.
Note: Capital cost of mechanization has been ignored because the useful life and salvage
value of the machine have not been given.

(ii) How do you treat Idle Time in Cost Accounting? [6]

Answer:
Treatment of Idle Time
Treatments of different categories of Idle Time are as below:-
 Unavoidable idle time above would be for insignificant periods. In Cost Accounts, this is
allowed to remain merged in the Production Order or Standing Order Number on which
the worker was otherwise employed.
 Normal Idle Time is booked to factory or works overhead. For the pur-pose of effective
control, each type of idle time, i.e., idle time classi-fied according to the causes is
allocated to a separate Standing Order Number.
 Abnormal Idle Time would usually be heavy in amount involves longer periods and would
mostly be beyond the control of the management. Payment for such idle time is not
included in cost and is adjusted through the Costing Profit and Loss Account or included
in Profit and Loss Account, when the accounts are integrated.
 Tendency to conceal Idle Time should be discouraged. It is a non-effective time and the
resultant loss of profit due to reduced production activity but also increases the cost per
unit of production as the fixed costs continue to be incurred, irrespective of the reduced
quantum of production due to loss of labour time. Idle Time should, therefore, be
highlighted prominently so that action can be taken to remove the causes thereof.
Although for obvious reasons, it is not possible to record minor details, vigilance is
necessary for finding out long-term idleness among the workers.

3. Answer any two questions from a, b and c [2×16=32]

(a)
(i) Indicate the important accounting ratios that would be used by each of the following:

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I. A long–term creditor interested in determining whether his claim is adequately secured.

II. A bank that has been approached by a company for short-term loan / overdraft.
III. A Shareholder who is examining his portfolio and who is to decide whether he should
hold or sell his shares in a company. [3]
Answer:
I. Debt-Service Coverage Ratio and Interest Coverage Ratio.
II. Current Ratio and Quick Ratio.
III. Return on Equity, Earning per share, Dividend per share.

(ii) What do you understand by „Trading on Equity‟? State the limitations of Trading on Equity?
[1+4]
Answer:
The use of long-term fixed interest bearing debt and preference share capital along with
equity share capital is called Trading on Equity ‘or Financial Leverage.
Trading on Equity suffers from the following limitations:
 It is a double-edged weapon.
 It is beneficial only to companies having stability in earnings, such as an electricity
company;
 It increases risk and rate of interest;
 It is liable to restrictions from financial institutions.

(iii) A firm‟s sales, variable costs and fixed cost amount to `75,00,000, `42,00,000 and `6,00,000
respectively. It has borrowed `45,00,000 at 9 per cent and its equity capital totals `55,00,000.
I. What is the firm‟s ROI?
II. Does it have favourable financial leverage?
III. If the firm belongs to an industry whose asset turnover is 3, does it have high or low asset
leverage?
IV. What are the operating, financial and combined leverages of the firm?
V. If the sales drop to `50,00,000, and variable cost is `28,000, what will the new EBIT be?
VI. At what level will the EBT of the firm equal to zero? [1+1+1+3+1+1]
Answer:
I. ROI = EBIT / Investment
EBIT = Sales – VC – FC = `75 lakh - `42 lakh - `6 lakh = `27 lakh
ROI = `27 lakh / `100 lakh = 27%

II. Yes, the firm has favourable financial leverage as its ROI is higher than the interest on
debt.

III. Asset turnover = Sales / Total assets or Total investments

= `75 / `100 lakh = 0.75. It is lower than the industry average.

IV. Operating Leverage = (Sales – Variable Cost) / EBIT

= (`75 - `42) lakh / `27 lakh
= 1.22

Financial Leverage = EBIT / (EBIT – Interset)

= ` 27 lakh / (`27 lakh - `4.05 lakh)
= 1.18

Combined Leverage = (Sales – Variable Cost) / (EBIT – Interest)

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= `33 lakh / `22,95,000 = 1.44

Alternatively = OL × FL = 1.22 × 1.18

=1.44

V. EBIT at sales level of `50 lakh:

Sales revenue `50,00,000
Less: Variable Cost `28,00,000
Less: Fixed Costs `6,00,000
EBIT ` 16,00,000

VI. Zero EBIT implies break-even sales ratio (BESR)

Break-even sales ratio = C / PV ratio,
PV ratio= `33 lakh /`75 lakh = 44%
BESR = (`6 lakh + `4.05 lakh) / 0.44 =`22,84,091.

(b)
(i) AMRITAM Ltd. has a total saleof `3.2 crores and its average collection period is 90 days. The
past experience indicates that bad debts losses are 1.5% on sales. The expenditure incurred
by the firm in administering its receivable collection efforts is `5,00,000. A factor is prepared
to buy the firm‟s receivables by charging 2% commission. The factor will pay advance on
receivables to the firm at an Interest rate of 18% per annum after withholding 10% as reserve.
Assume 360 days in a year. Calculate the effective cost of factoring to the firm. [8]
Answer:
Average level of receivables = `3.2 crores × 90 /360 `80,00,000
Factoring Commission = `80 lakhs × 2 /100 `1,60,000
Factoring reserve = `80 lakhs × 10% `8,00,000
Amount available for the advance = `[ 80 – (1.6 + 8)] lakhs `70,40,000
Factor will deduct his interest @18% `67,23,200
(70.4 lakhs × 18 × 90) / 100 × 360 = 3,16,800
Therefore, Advance to be paid = `(70,40,000 – 3,16,800)
Annual cost of factoring to the firm: `6,40,000
Factoring commission = [1,60,000 × (360 / 90)]
Interest charges = [`3,16,800 × (360 /90)] `12,67,200
Total `19,07,200
Firm’s saving on taking factoring service: `5,00,000
Cost of credit administration saved
Cost of Bad debts =[ `3.20 Cr. × (1.5 /100)] 4,80,000
Total `9,80,000

Net cost to the firm = `(19,07,200 – 9,80,000) = `9,27,200

Effective rate of interest to the firm = Net Cost / Advance to pay = 9,27,200 / 67,23,200 ×100 =
13.79%

(ii) A company is considering, purchase of a new machinery which costs `8,00,000 and which
has an estimated life of 10 years. This machine will generate additional sales of `4,00,000 per
year, while increased cost of maintenance will be `1,00,000 per year. The cost of the
machine is depreciated on a straight line and has no salvage value at the end of its 10 year
life. The company has a cost of capital of 12 per cent and a corporate tax rate of 40 per
cent.

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You are required to calculate:

I. Annual Cash Flow
II. Net Present Value (NPV)
III. Payback period
IV. Internal Rate of Return. Should the Company purchase the new machine?
Note: The present value Factors are as follows:
At the end of 10 years
Present value of annuity of Re.1@ 12% 5.651
Present value of annuity of Re. 1 @ 23% 3.799
Present value of annuity of Re. 1 @ 24% 3.682
[8]
Answer:
Particulars `
I. Annual Cash Flow
Sales 4,00,000
(-) Cost of maintenance 1,00,000
EBDT 3,00,000
(-) Depreciation 80,000
(800000 ÷ 10)
EBT 2,20,000
(-) Taxes 88,000
EAT 1,32,000
(+) Depreciation 80,000
Annual cash flow 2,12,000
II. NPV:
PV of cash inflow (2,12,000 × 5.651) = 11,98,012
PV of cash outflow = 8,00,000
NPV = 3,98,012
III. Pay-back period
PBP = Original investment / annual cash flow
= 8,00,000 / 2,12,000= 3..77 years

IV. Internal rate of return (IRR)

Fake payable period = 3.77 (lies between 23% and 24%)
PV of cash inflow @23% = 2,12,000 × 3.799 = 8,05,388
PV of cash inflow @24% = 2,12,000 × 3.682 = 7,80,584
8,05,388 - 8,00,000
Therefore, IRR = 23  (24  23)
8,05,388 - 7,80,584
 5,388 
 23 
 24,804  1  23  0.22  23.22%

Since NPV is +ve, the co. should purchase the machine.

(c)
(i) Describe the features of Venture Capital. [6]
Answer:
The main features of venture can be summarized as follows:
 High Degree of risk: Venture capital financing is, invariably, an investment in a highly risky
project with the objective of earning a high rate of return.

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 Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2

 Equity Participation: Venture capital financing is, invariably, an actual or potential equity
participation wherein the object of venture capital is to make capital gain by selling the
share once the project become profitable.
 Long term Investment: Venture capital financing is a long term investment. It generally
takes a long period to encash the investment in securities made by the venture
capitalists.
 Participation in Management: In addition to provide capital, venture capital funds take
an active interest in the management of the form that of a traditional lender or banker.
 Achieve Social Objectives: It is different from the development capital provided by
several central and state level government bodies in that the profit objective is the
motive behind the financing. But venture capital profits generate employment, and
balanced regional growth indirectly due to setting up successful new business.
 Investment is Illiquid: A venture capital is not subject to repayment on demand as with an
overdraft or following a loan repayment schedule.

(ii) The Balance – Sheet of XYZ Ltd. for the year ended 31.03.2014 is given below:
Balance Sheet as at 31.03.2014
Liabilities ` Assets `
Equity Share Capital 5,00,000 Land & Building 1,00,000
Preference Share Capital 2,00,000 Machinery 4,00,000
General Reserve 1,00,000 Furniture 50,000
Secured Loans 3,00,000 Inventory 3,00,000
Sundry Creditors 1,00,000 Sundry Debtors 3,00,000
Cash/Bank Balances 50,000
Total 12,00,000 12,00,000

Calculate the following ratios from the given Balance Sheet

I. Current Ratio
II. Proprietory Ratio
III. Debt-Equity Ratio
IV. Capital Gearing Ratio [10]
Answer:
Current Assets 6,50,000
I. Current Ratio = =
Current Liabilities 1,00,000

= 6.5 : 1 or simply 6.5

Shareholders' funds 8,00,000

II. Propriety ratio = =
Total Tangible Assets 12,00,000

=2:3

TotalLong TermDebt 3,00,000

III. Debt Equity ratio = 
Shareholders' funds 8,00,000

=3:8

Or,

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 14
 Answer to MTP_Intermediate_Syllabus 2012_Dec2014_Set 2

TotalLong TermDebt 3,00,000

Debt Equity ratio = 
Debt  Equity 11,00,000
= 3 : 11
Long term Debt(incl.Pr ef.capital) 5,00,000
IV. Capital gearing ratio = 
Equity Shareholders' funds 6,00,000
=5:6

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 15