1.
Define Management Accounting. Explain the role of management accounting in a
bank.
2.
Roles of management accounting in bank
3.
Management Accounting is beneficial for banking operation. Comments with
example
4.
Explain the role of Management Accounting in planning, control and decision
making in a bank.
5.
Management Account is helpful in decision making. Explain. Or, Why Management
Accounting Is Important in Decision-Making
6.
Compare and contrast between Management Accounting & Financial Accounting
7.
Distinguish between Management Accounting & Financial Accounting.
8.
Describe the uses of financial statements analysis. Or, Objectives of Financial
Statement Analysis
9.
Describe the limitations of financial statements analysis.
10.
Discuss the factors considered in lending by a bank. Or, Factors affecting
while assessing a loan proposal
11.
What is breakeven point?
12.
Describe three approaches to break-even-analysis.
13.
Discuss the usefulness and assumptions of break-even analysis.
14.
Limitation of Break even analysis
15.
Define margin of safety. Discuss its implications.
16.
What is cost sheet?
17.
Define Break-even analysis. Discuss importance of break-even analysis.
18.
Discuss the uses/ purposes/ advantage of Cost Sheet
19.
What is meant by cost behavior? How cost behavior helps in classifying costs in
banking?
20.
Mention the classification of costs on different bases.
21.
Define cost accounting. Discuss the concept of service costing.
22.
Discuss the importance of cost accounting to a banker.
23.
Define Working Capital. Explain the factors affecting working capital
requirement.
24.
Describe motives for holding cash in a bank.
25.
Explain different sources of financing working capital. Explain the objectives
of inventory management.
26.
Explain the difference between variable working capital and permanent working
capital.
27.
Explain the factors determining the need for working capital. Or, Describe in
brief the various factors, which are taken into account in determining the
working capital needs of a firm.
28.
Define lease finance.
29.
Define working capital. Discuss its significance for a firm.
30.
What are different kinds of leases? Discuss about three types of lease. Or,
Explain different forms of lease finance.
31.
Difference between lease finance and hire purchase finance.
32.
Explain the importance of lease finance.
33.
Explain the economies of lease.
34.
Discuss the characteristics of capital of lease.
35.
Discuss the relative merits of lease finance and hire purchase finance.
36.
Features of financial lease and operating lease.
37.
Advantages and disadvantages of financial (capital) lease and operating lease.
38.
Define hire purchase. Mention the characteristics of hire purchase.
39.
Discuss briefly the importance of budgetary control system with special
reference to Banking Organization 40. Define Capital Budgeting. Discuss the use
of the time-value of money in capital budgeting.
41.
Discuss the techniques of capital budgeting
42.
Discuss the utility of cash budget as a tool of the cash management. What are
the steps involved in construction of a cash budget?
43.
What is payback period? How payback period is used in capital budgeting
decision
44.
What is Cash flow Statement?
45.
What is purpose/ objectives of cash flow statement
46.
Difference between Cash Flow Statement and Fund Flow Statement
47.
Difference between Cash Flow Statement and Cash Budget
48. Objectives of
Cash Budget/Cash Flow Forecast
49.
Importance/ Usefulness of Cash Flow Statement
50. Common misconception of pricing.
51. Industrial sickness and its cause
1. Define Management Accounting. Explain the
role of management accounting in a bank.
Management Accounting analyzes and provides cost information to
the internal management for the purposes of planning, controlling and
decision-making. As per CIMA (Chartered Institute of Management Accountants),
"Management Accounting is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of
information that used by management to plan, evaluate, and control within an
entity and to assure appropriate use of an accountability for its
resources". This is the phase of accounting concerned with providing
information to managers for use in planning and controlling operations and in
decision making
2. Roles of management accounting in bank
The management accounting function of a bank in conjunction, need to apply
competitive bank management skills in order to remain competitive in their
industry and maximize profits that may enhance competitiveness to adapting to
analyzing bank performance and establishing profitability and risks; managing
interest rate risks; managing the cost of funds, bank capital and liquidity;
managing credit given to customers and managing the investment portfolio. Banks
uses the management accounting information to improve towards achieving the organizational
goal and objectives; and to control over its expenditure. It is effective in
minimizing cost, enhancing profitability, curtails overhead cost and recovers
non-performing loans, and beef-up shareholders fund.
3. Management Accounting is beneficial for
banking operation. Comments with example.
Management
Accounting: The management accounting function of a bank
in conjunction, need to apply competitive bank management skills in order to
remain competitive in their industry and maximize profits that may enhance
competitiveness to adapting to analyzing bank performance and establishing
profitability and risks; managing interest rate risks; managing the cost of
funds, bank capital and liquidity; managing credit given to customers and
managing the investment portfolio.
Banks are benefited by using the
management accounting information to improve towards achieving the
organizational goal and objectives; and to control over its expenditure. It is
effective in minimizing cost, enhancing profitability, curtails overhead cost
and recovers non-performing loans, and beef-up shareholders fund. Banks can
enjoy several advantages that usually coincide with the ability to improve
operations and overall profitability. Some are-
1. Reduce expenses: Management accounting can help lower the
operational expenses that conduct to analysis on cost of capital.
2. Managing cash flow: It can analyze and measures the effective liquidity requirement as well as careful analysis of necessary and unnecessary cash expenditures.
2. Managing cash flow: It can analyze and measures the effective liquidity requirement as well as careful analysis of necessary and unnecessary cash expenditures.
3. Management decisions: It usually provides a quantitative
analysis for various decision opportunities.
4. Increase financial returns: Management accounting increase
financial returns by analyzing financial forecasts on cost of capital and
pricing of their assets and liabilities.
4. Explain the role of Management Accounting
in planning, control and decision making in a bank.
The main functions that management are involved with are planning,
decision making and control.
Planning
· Planning involves establishing the objectives of an organization and formulating relevant strategies that can be used to achieve those objectives
· Planning can be either short-term (tactical planning) or long-term (strategic planning).
Decision making Decision making involves considering information that has been provided and making an informed decision.
· In most situations, it involves making a choice between two or more alternatives.
· The first part of the decision-making process is planning, the second part is control.
Planning
· Planning involves establishing the objectives of an organization and formulating relevant strategies that can be used to achieve those objectives
· Planning can be either short-term (tactical planning) or long-term (strategic planning).
Decision making Decision making involves considering information that has been provided and making an informed decision.
· In most situations, it involves making a choice between two or more alternatives.
· The first part of the decision-making process is planning, the second part is control.
Control
Information relating to the actual results of an organization is reported to
managers.
· Managers use the information relating to actual results to take control measures and to re-assess and amend their original budgets or plans.
· Internally- sourced information, produced largely for control purposes, is called feedback.
· Managers use the information relating to actual results to take control measures and to re-assess and amend their original budgets or plans.
· Internally- sourced information, produced largely for control purposes, is called feedback.
Illustration
- The managerial processes of planning, decision making and control
Here, management prepares the plan, which is put into action by
the managers with control over the input resources (labor, money, materials,
equipment and so on). Output from operations is measured and reported ('fed
back') to management, and actual results are compared against the plan in
control reports. In order to make plans, it helps to know what has happened in
the past so that decisions about what is achievable in the future can be made.
5. Management Account is helpful in decision
making. Explain. Or, Why Management Accounting Is Important in Decision-Making
Managerial accounting information provides data-driven input,
which can improve decision-making over the long term that helps to make their
business more successful in business decision contexts.
1. Relevant Cost Analysis: Managerial accounting information is
used by company management to determine what should be sold and how to sell it.
2. Activity-based Costing Techniques: By using activity-based
costing techniques, management can determine the activities required to produce
and service a product line.
3. Make or Buy Analysis: By completing a make or buy analysis,
management can determine which choice is more profitable. While this technique
is certainly useful, the decision makers should only use these analyses as a
factor in the decision.
4. Utilizing the Data: It provides a data-driven look at how to
grow. By focusing on this data, decision makers can make decisions that aim for
continuous improvement and are justifiable based on intelligent analysis.
6. Compare and contrast between Management
Accounting & Financial Accounting
7. Distinguish between Management Accounting
& Financial Accounting.
8. Describe the uses of financial statements
analysis. Or, Objectives Of Financial Statement Analysis
The uses/ objectives of financial statement analysis are as
follows
1. Assessment of Past Performance: Financial statement analysis
judging management's past performance and opportunities of future performance
like operating expenses, net income, cash flows, return on investment, etc.
2. Assessment of current position: Financial statement analysis
shows the current position of the assets liabilities.
3. Prediction of profitability and growth prospects: It helps in
assessing and predicting the earning prospects and growth rates of earning and
judging earning potential of business enterprise.
4. Prediction of bankruptcy and failure: It is an important tool
in assessing and predicting bankruptcy and probability of business failure.
5. Assessment of the operational efficiency: It helps to assess
the operational efficiency and deviation between standards and actual
performance.
9. Describe the limitations of financial
statements analysis.
1. The use of estimates in allocating costs to each period. The ratios will be as accurate as the estimates.
2. The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or inflation/deflation.
3. Companies have a choice of accounting methods i.e. inventory LIFO vs. FIFO and depreciation methods. These differences impact ratios and make it difficult to compare companies using different methods.
4. Companies may have different fiscal year ends making comparison difficult if the industry is cyclical.
5. Diversified companies are difficult to classify for comparison purposes.
6. It does not provide answers to all the users' questions. In fact, it usually generates more questions!
1. The use of estimates in allocating costs to each period. The ratios will be as accurate as the estimates.
2. The cost principle is used to prepare financial statements. Financial data is not adjusted for price changes or inflation/deflation.
3. Companies have a choice of accounting methods i.e. inventory LIFO vs. FIFO and depreciation methods. These differences impact ratios and make it difficult to compare companies using different methods.
4. Companies may have different fiscal year ends making comparison difficult if the industry is cyclical.
5. Diversified companies are difficult to classify for comparison purposes.
6. It does not provide answers to all the users' questions. In fact, it usually generates more questions!
10. Discuss the factors considered in lending
by a bank. Or, Factors affecting while assessing a loan proposal
The major factors that interact to loan pricing are mentioned below:
1. Credit Profile: It will obtain a credit report that shows the amount of debt have outstanding and how have historically paid the debt and obligations. The credit report will also contain a "credit score" that ranks the credit history.
2. Property: The type of property are mortgaging also impacts loan pricing. The value of the property as compared to the amount customer wish to borrow also impacts to loan price.
3. Income/Debt: The amount of mortgage payments and total debt payments as compared to the income, ("debt-to-income ratios") may also impact to loan cost.
4. Other Factors: Other factors may also affect the risk, and interest rate of customer and origination charge. These factors include, but are not limited to: previous bankruptcies, foreclosures or unpaid judgments; and the type of loan product applied for.
The major factors that interact to loan pricing are mentioned below:
1. Credit Profile: It will obtain a credit report that shows the amount of debt have outstanding and how have historically paid the debt and obligations. The credit report will also contain a "credit score" that ranks the credit history.
2. Property: The type of property are mortgaging also impacts loan pricing. The value of the property as compared to the amount customer wish to borrow also impacts to loan price.
3. Income/Debt: The amount of mortgage payments and total debt payments as compared to the income, ("debt-to-income ratios") may also impact to loan cost.
4. Other Factors: Other factors may also affect the risk, and interest rate of customer and origination charge. These factors include, but are not limited to: previous bankruptcies, foreclosures or unpaid judgments; and the type of loan product applied for.
**** [The
following is a list of factors that institutions should consider in loan
pricing.
1. Cost of funds: The cost of funds is applicable for each
loan product prior to its effective date, allowing sufficient time for
loan-pricing decisions and appropriate notification of borrowers.
2. Cost of operations: The salaries & benefits,
training, travel, and all other operating expenses. In addition, insurance
expense, financial assistance expenses are imposed to loan pricing.
3. Credit risk requirements: The provisions for loan losses
can have a material impact on loan pricing, particularly in times of loan
growth or an increasing credit risk environment.
4. Customer options and other IRR: The customer options
like right to prepay the loan, interest rate caps, which may expose
institutions to IRR. These risks must be priced into loans.
5. Interest payment and amortization methodology: How
interest is credited to a given loan (interest first or principal first) and
amortization considerations can have a impact on profitability.
6. Loanable funds: It is the amount of capital an
institution has invested in loans, which determines the amount an institution
must borrow to fund the loan portfolio and operations.
7. Patronage Refunds & Dividends: Some banks pay it to
their borrowers/shareholders in lieu of lower interest rates. This approach is
preferable to lowering interest rates.
8. Capital and Earnings Requirements/Goals: Banks must
first determine its capital requirements and goals in order to determine its
earnings needs.]
12. Describe three approaches to
break-even-analysis.
Three approaches to break-even analysis are (a) the graphical
method, (b) the equation method, and (c) the contribution margin method.
1. In the graphical method, total cost and total revenue data are
plotted on a graph. The intersection of the total cost and the total revenue
lines indicates the break-even point. The graph shows the break-even point in
both units and dollars of sales.
2. The equation method uses some variation of the equation Sales = Variable expenses + Fixed expenses + Profits, where profits are zero at the breakeven point. The equation is solved to determine the break-even point in units or dollar sales.
2. The equation method uses some variation of the equation Sales = Variable expenses + Fixed expenses + Profits, where profits are zero at the breakeven point. The equation is solved to determine the break-even point in units or dollar sales.
3. In the contribution margin method, total fixed cost is divided
by the contribution margin per unit to obtain the break-even point in units.
Alternatively, total fixed cost can be divided by the contribution margin ratio
to obtain the break-even point in sales dollars.
11. What is breakeven
point?
Break even point of an enterprise firm is a point where total revenue/sale proceeds/sale or output equals total cost. It indicates that level of output/sales/sale proceeds/revenue at which the firm recovers all its costs and neither neither earns a profit nor incurs any loss. in other words this is a point of zero profitability. Once the firm/enterprise cross its breakeven point, it starts earning profit.
Break even point of an enterprise firm is a point where total revenue/sale proceeds/sale or output equals total cost. It indicates that level of output/sales/sale proceeds/revenue at which the firm recovers all its costs and neither neither earns a profit nor incurs any loss. in other words this is a point of zero profitability. Once the firm/enterprise cross its breakeven point, it starts earning profit.
13. Discuss the usefulness and assumptions of
break-even analysis.
Usefulness of break-even analysis The break-even point is helpful to in making important decisions in business. It is a simple tool defining the lowest quantity of sales which will include both variable and fixed costs. Moreover, such analysis facilitates the managers with a quantity which can be used to evaluate the future demand. If, in case, the break-even point lies above the estimated demand, reflecting a loss on the product, the manager can use this info for taking various decisions. It is also helpful in recognizing the relevance of fixed and variable cost. The fixed cost is less with a more flexible personnel and equipment thereby resulting in a lower break-even point.
Assumptions of break-even analysis
Usefulness of break-even analysis The break-even point is helpful to in making important decisions in business. It is a simple tool defining the lowest quantity of sales which will include both variable and fixed costs. Moreover, such analysis facilitates the managers with a quantity which can be used to evaluate the future demand. If, in case, the break-even point lies above the estimated demand, reflecting a loss on the product, the manager can use this info for taking various decisions. It is also helpful in recognizing the relevance of fixed and variable cost. The fixed cost is less with a more flexible personnel and equipment thereby resulting in a lower break-even point.
Assumptions of break-even analysis
1. Costs can be reasonably subdivided into fixed and variable
components.
-
Fixed costs (depreciation, salaries, rent, etc.) and variable costs (direct
labor and materials) can be easily identified in most cases.
-
Semi variable expenses can be problematic, but can nonetheless be separated
into fixed and variable components for analysis purposes.
2. All cost-volume-profit relationships are linear.
-Assumption
holds so long as analysis is confined to reasonable range of operations.
-If
levels of operations are doubled, relationship may be different.
3. Sales prices will not change with changes in volume.
-Economic
theory states that one would normally expect price increase to be accompanied
by decrease in sales volume and vice versa.
-
Assumption holds so long as analysis is confined to reasonable range of prices.
14. Limitation of Break even analysis
Breakeven analysis has the following limitations:-
1)
It may be difficult to segregate cost
into fixed and variable components
2)
It is not correct to assumption that
total fixed cost into fixed and variable components
3)
The assumption of constant unit
variable cost is not valid
4)
Selling price may not remain unchanged
over a period of time
5)
Breakeven analysis is a short run
concept and has a limited use in long range planning
15. Define margin of safety. Discuss its
implications.
The margin of safety is the excess of budgeted (or actual) sales
over the breakeven volume of sales. It states the amount by which sales can
drop before losses begin to be incurred. Thus we have the following two
formulas to calculate margin of safety:
MOS = Budgeted Sales − Break-even Sales
MOS = Budgeted Sales − Break-even Sales / Budgeted Sales
Implication: In investing parlance, margin of safety is the difference between the expected (or actual) sales level and the breakeven sales level. It can be expressed in the equation form as follows:
Implication: In investing parlance, margin of safety is the difference between the expected (or actual) sales level and the breakeven sales level. It can be expressed in the equation form as follows:
Margin of Safety = Expected (or) Actual Sales Level (quantity or
dollar amount) - Breakeven sales Level (quantity or dollar amount)
The measure is especially useful in situations where large
portions of a company's sales are at risk, such as when they are tied up in a
single customer contract that may be canceled.
16. What is cost sheet?
Cost sheet is a statement that reflects the cost of the items and
services required by a particular project or department for the performance of
its business purposes. For example, a departmental cost sheet might include the
material costs, labor costs and overhead costs incurred over a given time frame
by a department and it therefore provides a record of costs that are chargeable
to that department.
17. Define Break-even analysis. Discuss
importance of break even analysis.
Break even analysis is a technique of profit planning that is essentially a device for integrating costs, revenues, and output of the firm in order to illustrate the probable effects of alternatives courses of action upon net profits. Is has been defined a chart which shoes the profitability of otherwise of and undertaking at various levels of activity and as a result indicates the point at which neither profit nor loss is made. The beak even chart depicts the following at various level of activity:
Break even analysis is a technique of profit planning that is essentially a device for integrating costs, revenues, and output of the firm in order to illustrate the probable effects of alternatives courses of action upon net profits. Is has been defined a chart which shoes the profitability of otherwise of and undertaking at various levels of activity and as a result indicates the point at which neither profit nor loss is made. The beak even chart depicts the following at various level of activity:
1. Variable costs, fixed costs and total costs
2. Sales value
3. Profit or lass
4. The point at which total costs just equal or break even with
sales
Importance of Break-even analysis:
Importance of Break-even analysis:
Break even analysis provides useful information to management in
most lucid and precise manner. It is an effective and efficient reporting tool
of management accounting. The importance of break even analysis can be
enumerated as under.
1. Fair knowledge about break even analysis can be help the
banking to examine loan proposal of a firm.
2. It helps the bankers in assessing working capital requirement
of a unit
3. This analysis helps in revealing clear projections of profit
planning of an enterprise at different production vis-a-vis the financial needs
4. It helps the banker in studying the projection cost of
production and profitability statement of a unit prepared to show net position
at a given of output.
5. It is a useful diagnostic tool
18. Discuss the uses/ purposes/ advantage of Cost Sheet
18. Discuss the uses/ purposes/ advantage of Cost Sheet
The uses/ purposes/ advantages of cost sheet are:
1. Discloses the total cost and the cost per unit of the units
produced during the given period.
2. To enables a manufacture to keep a close watch and control over
the cost of production
3. To guide to the manufacturer and helps in formulating a
definite useful production policy.
4. To fixing up the selling price more accurately.
5. To minimize the cost of production
6. To submit quotations with reasonable degree of accuracy
19. What is meant by cost behavior? How cost
behavior helps in classifying costs in banking?
Cost behavior is the change in total costs in response to the
change in some activity. These are referred to as variable costs. Some other
costs will not change in total with a reasonable increase in miles driven.
These costs are referred to as fixed costs. Other costs might be part variable
and part fixed. These are referred to as mixed costs and an example might be
depreciation.
20. Mention the classification of costs on
different bases.
1. Basis of Identity:
–
Materials (raw material components, and spare parts, consumable stores, packing
material etc)
–
Labor and
–
Expenses
2. Basis of Function:
–
Production or Manufacturing Cost (raw material cost of labor, other direct cost
and factory indirect cost)
–
Office and Administration Cost
–
Selling and Distribution Cost
3. Basis of Variability:
–
Fixed Cost / Period Cost
–
Variable Cost / Product Cost
–
Semi-Variable Cost / Semi-Fixed cost
4. Basis of controllability:
–
Controllable Cost
–
Uncontrollable Cost
5. Basis of normality:
– Normal cost
– Abnormal cost
6. Basis of Time:
–
Historical Cost
–
Pre-determined Cost
21. Define cost accounting. Discuss the
concept of service costing.
Cost accounting: is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Service Costing: Services or activities, having public utilities, need to determine cost of the services or activities offered. A public utility undertaking, offering services to a community rather than manufacturing a tangible product, uses service costing. The service or function, having public utilities, covers water supply service, electricity supply service, transport service, hospital service, library service, canteen service, park service, hostel service etc. Each service is unique and needs a different accounting treatment. An intelligent selection of unit cost is required to obtain a meaningful cost comparison. A correct choice of unit cost provides correct cost analysis for decision making destined for effective cost control and reduction.
Cost accounting: is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Service Costing: Services or activities, having public utilities, need to determine cost of the services or activities offered. A public utility undertaking, offering services to a community rather than manufacturing a tangible product, uses service costing. The service or function, having public utilities, covers water supply service, electricity supply service, transport service, hospital service, library service, canteen service, park service, hostel service etc. Each service is unique and needs a different accounting treatment. An intelligent selection of unit cost is required to obtain a meaningful cost comparison. A correct choice of unit cost provides correct cost analysis for decision making destined for effective cost control and reduction.
22. Discuss the importance of cost accounting
to a banker.
The aim of cost accounting in a bank is to provide uniform account
allocation within the financial accounting system, which, in turn, affords
comprehensive and transparent cost allocation to cost centers, provides
detailed costing information and complements existing controlling components
within the value area. This is an important principle on the way to creating a
comprehensive P&L, profit centre and business unit accounting process. The
bank are emphasized to applying the cost accounting are-
– Uniform booking and allocation of costs (account allocation guidelines)
– Definition and consideration of imputed costs
– Cost monitoring (target-actual analysis)
– Transparency in terms of cost reduction potential, increased operational efficiency
– Enhanced information base providing efficient bank controlling
– Uniform booking and allocation of costs (account allocation guidelines)
– Definition and consideration of imputed costs
– Cost monitoring (target-actual analysis)
– Transparency in terms of cost reduction potential, increased operational efficiency
– Enhanced information base providing efficient bank controlling
23. Define Working Capital. Explain the
factors affecting working capital requirement.
Working capital signifies money required for day-to-day operations
of an organization. No business can run without the provision of adequate
working capital. It is two types:
(1) Gross working capital- also referred to as working capital,
means the total current assets, and
(2) Net working capital- the differences between current assets
and current liabilities. The amount of working capital is determined by a wide
variety of factors.
1.
Nature of the business
2.
Size of the business
3.
Length of period of manufacture
4.
Methods of purchase and sale of commodities
5.
Converting working assets into cash 6. Seasonal variation in business
7.
Risk in business
8.
Size of labor force
9.
Price level changes
10.
Rate of turnover
11.
State of business activity
12.
Business policy
24. Describe motives for holding cash in a
bank.
The amount of cash in bank needs to keep will differ according to
its financial situation, but it should keep some of their investments in cash
and cash equivalents.
1. Safety: Keeping money in savings accounts, money market
accounts and certificates of deposit provides an important level of safety.
2. Current Needs: Everyone needs to keep cash on hand for current
needs that have some cash set aside in money market accounts, savings accounts,
certificates of deposit, etc.
3. Investment Opportunities: it gives chance to jump on a
promising investment opportunity such as when the stock market is riding high.
4. Emergency Fund: Setting money aside in an emergency fund gives
the ability to pay liabilities or an investment.
25. Explain different sources of financing
working capital. Explain the objectives of
inventory management. The sources of finance of financing working capital
may be four categories are-
1. Trade Credit: It is the primary sources that trade credit
constitutes the important source accounting for approximately two-fifths of the
total working capital.
2. Bank Credit: The banks determine the maximum credit based on
the margin requirements of the security. The forms of bank credit are- Loan and
overdraft arrangement, cash credit, bills purchase and bills discounted.
3. Non-bank Short Term Borrowing: These types of loan are found
from relatives, friends, head office or project office etc.
4. Long –term Sources: It comprises equity capital and long-term
borrowings.
The objectives of inventory management can be explained in detail
as under:-
1. To ensure that the supply of raw material & finished goods.
2. To minimize carrying cost of inventory.
3. To keep investment in inventory at optimum level.
3. To keep investment in inventory at optimum level.
4. To reduce the losses of theft, obsolescence & wastage etc.
5. To make arrangement for sale of slow moving items.
6. To minimize inventory ordering costs.
26. Explain the difference between variable
working capital and permanent working capital.
Permanent Working Capital: To carry on business a certain minimum
level of working capital is necessary on a continuous and uninterrupted basis.
For all practical purposes, this requirement will have to be met permanently as
with other fixed assets. This requirement is referred to as permanent working
capital. Temporary Working Capital: Any amount over and above the permanent
level of working capital is temporary, fluctuating or variable working capital.
This portion of the required working capital is needed to meet fluctuations in
demand consequent upon changes in production and sales as result of seasonal
changes.
27. Explain the factors determining the need
for working capital. Or, Describe in brief the various
factors which are taken into account in determining the working capital needs
of a firm.
A firm should have neither low nor high working capital. Low
working capital involves more risk and more returns, high working capital
involves less risk and less returns. The factors determining the needs for of
working capital are as below:
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10. Rate of turnover
11. State of business activity
12. Business policy
28. Define lease finance.
A lease is a commercial arrangement whereby an equipment owner
conveys to right to use the equipment in return for a rental. In other words,
lease is a contract between the owner of an asset (the lessor) and its user
(the lessee) for the right to use the asset during a specified period in return
for a mutually agreed periodic payment (the lease rentals). The important
feature of a lease contract is separation of the ownership of the asset from
its usage.
29. Define working capital. Discuss its
significance for a firm.
Working capital signifies money required for day-to-day operations
of an organization. No business can run without the provision of adequate
working capital. It is two types: (1) Gross working capital- also referred to
as working capital, means the total current assets, and (2) Net working
capital- the differences between current assets and current liabilities.
Significant of working capital for a firm
1. Importance to Management: Cost accounting provides invaluable help to management. These are: '
Significant of working capital for a firm
1. Importance to Management: Cost accounting provides invaluable help to management. These are: '
a)
Helps in ascertainment of cost
b)
Aids in Price fixation
c)
Helps in Cost reduction
d)
Elimination of wastage
e)
Helps in identifying unprofitable activities
f)
Helps in checking the accuracy of financial account
g)
Helps in fixing selling Prices
2. Importance to Employees: Worker and employees have an interest
in which they are employed. An efficient costing system benefits employees
through incentives plan in their enterprise, etc. As a result both the
productivity and earning capacity increases.
3. Cost accounting and creditors: Suppliers, investor’s financial
institution and other moneylenders have a stake in the success of the business
concern and therefore are benefited by installation of an efficient costing
system. They can base their judgement about the profitability and prospects of
the enterprise upon the studies and reports submitted by the cost accountant.
4. Importance to National Economy: An efficient costing system
benefits national economy by stepping up the government revenue by achieving
higher production. The overall economic developments of a country take place
due to efficiency of production.
5. Data Base for operating policy: Cost Accounting offers a
thoroughly analysed cost data which forms the basis of formulating policy
regarding day to day business.
30. What are different kinds of leases?
Discuss about three types of lease. Or, Explain different forms of lease
finance.
1. Operating Lease: The lessee acquires the use of an asset
on long-term basis at one point of time lessee prefers the system of hiring an
asset for each period.
2. Financial Lease: It involves a relatively longer-term
commitment on the part of the lessee. Commonly used for leasing land, buildings
and large pieces of fixed-equipments.
3. Sale and Lease Back: The firm sells an asset, already
owned by itsparty and hires it back from the buyer.
4. Direct Lease: The lessee does not already own the equipment that acquires from the manufacturing company directly.
4. Direct Lease: The lessee does not already own the equipment that acquires from the manufacturing company directly.
5. Leveraged Lease: Involves as a third party lender that
the lessor borrows funds from the lender and himself acts as an equity
participant.
6.
Primary and Secondary Lease: The primary lease provides for the recovery
of the cost of the asset and profit through lease rentals followed by the
secondary/perpetual lease at nominal lease rents.
31. Difference between lease finance and hire
purchase finance.
32. Explain the importance of lease finance.
Leasing industry plays an important role in the economic
development of a country by providing money incentives to lessee. It is more
flexible so lessees can structure the leasing contracts according to their
needs for finance. Today, most of us are familiar with leases of houses,
apartments, offices, etc
1. Lease finance is easy to get than getting loan for buying all
fixed assets.
2. Monthly rent payment for lease finance will be operating
expenses. It will be allowed to deduct total income. So, company can get tax
benefits in lease financing.
3. It can show as invisible debt of company out of its balance
sheet.
4. It is more flexible way of finance.
33. Explain the economies of lease.
There are several qualitative considerations which make leasing an
attractive proposition. Some of the commonly cited advantages of leasing are:
1. Shifting the Risk of Technological Obsolescence
2. Easy Source of Finance
3. Conversion of Borrowing Capacity through off-the Balance-sheet Financing
3. Conversion of Borrowing Capacity through off-the Balance-sheet Financing
4. Improved Performance
5. Convenience and Flexibility
6. Maintenance and Specialized Services
7. Lower Administrative Cost
34. Discuss the characteristics of capital of
lease.
A capital lease would be considered a purchased asset for
accounting purposes. The choice of lease classification will have important
results on a firm's financial statements. To be considered a capital lease, a
lease must meet be characterized by one or more followings:
1. the lease term is greater than 75% of the property's estimated
economic life;
2. the lease contains an option to purchase the property for less
than fair market value;
3. ownership of the property is transferred to the lessee at the
end of the lease term;
4. the present value of the lease payments exceeds 90% of the fair
market value of the property
35. Discuss the relative merits of lease finance and hire purchase finance.
35. Discuss the relative merits of lease finance and hire purchase finance.
There are a number of considerations to be made for lease finance
and purchase finance, as described below:
1. Certainty: One important advantage is that a hire purchase or leasing agreement is a medium term funding facility, which cannot be withdrawn, provided the business makes the payments as they fall due. However, it should be borne in mind that both hire purchase and leasing agreements are long term commitments. It may not be possible, or could prove costly, to terminate them early.
2. Budgeting: The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset.
3. Fixed Rate Finance: In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling.
4. The Effect of Security: Under both hire purchase and leasing, the finance company retains legal ownership of the equipment, at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms. The decision to provide finance to a small or medium sized business depends on that business' credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favour of a positive credit decision.
5. Maximum Finance: Hire purchase and leasing could provide finance for the entire cost of the equipment. There may however, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It may be possible for the business to 'trade-in' other assets which they own, as a means of raising the deposit.
6. Tax Advantages: Hire purchase and leasing give the business the choice of how to take advantage of capital allowances. If the business is profitable, it can claim its own capital allowances through hire purchase or outright purchase. If it is not in a tax paying position or pays corporation tax at the small companies rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals.
1. Certainty: One important advantage is that a hire purchase or leasing agreement is a medium term funding facility, which cannot be withdrawn, provided the business makes the payments as they fall due. However, it should be borne in mind that both hire purchase and leasing agreements are long term commitments. It may not be possible, or could prove costly, to terminate them early.
2. Budgeting: The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset.
3. Fixed Rate Finance: In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling.
4. The Effect of Security: Under both hire purchase and leasing, the finance company retains legal ownership of the equipment, at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms. The decision to provide finance to a small or medium sized business depends on that business' credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favour of a positive credit decision.
5. Maximum Finance: Hire purchase and leasing could provide finance for the entire cost of the equipment. There may however, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It may be possible for the business to 'trade-in' other assets which they own, as a means of raising the deposit.
6. Tax Advantages: Hire purchase and leasing give the business the choice of how to take advantage of capital allowances. If the business is profitable, it can claim its own capital allowances through hire purchase or outright purchase. If it is not in a tax paying position or pays corporation tax at the small companies rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals.
36. Features of financial lease and operating
lease.
Main features of
a financial lease:
· the assets has selected by lessee and purchased by the lessor
· the lessee uses that asset during the lease
· the lessee pays a series of installments or rentals
· the lessee has the option of acquiring ownership of the asset
· the assets has selected by lessee and purchased by the lessor
· the lessee uses that asset during the lease
· the lessee pays a series of installments or rentals
· the lessee has the option of acquiring ownership of the asset
Main features of
an operating lease:
· short term arrangement for the use of asset
· Various costs related to that asset like are paid by the owner
· It is shorter than the economic life of the asset.
· lessee can cancel the operating lease prior to the end date.
· The rent is lower than the cost of asset.
· short term arrangement for the use of asset
· Various costs related to that asset like are paid by the owner
· It is shorter than the economic life of the asset.
· lessee can cancel the operating lease prior to the end date.
· The rent is lower than the cost of asset.
37. Advantages and disadvantages of financial
(capital) lease and operating lease.
Advantages & disadvantages of financial or capital lease:
Advantages & disadvantages of financial or capital lease:
Advantages:
A capital lease is usually used to finance equipment for the major part of its
useful life, and there is a reasonable assurance that the lessee will obtain ownership
of the equipment by the end of the lease term.
Disadvantages: Capital leases are used for long-term leases and for items that not become technologically obsolete, such as many kinds of machinery. Also, Capital leases give the lessee the benefits and drawbacks of ownership, so they are considered as assets, and they may be depreciated and these leases are considered as debts.
Advantages & disadvantages of operating lease:
Disadvantages: Capital leases are used for long-term leases and for items that not become technologically obsolete, such as many kinds of machinery. Also, Capital leases give the lessee the benefits and drawbacks of ownership, so they are considered as assets, and they may be depreciated and these leases are considered as debts.
Advantages & disadvantages of operating lease:
Advantages:
An operating lease usually finances equipment for less than its useful life,
and at the end of the lease term the lessee can return the equipment to the
lessor without further obligation.
Disadvantages:
Operating leases, sometimes called service leases are used for shot-term
leasing and often for assets that are high-tech or in which the technology
changes often, like computer and office equipment. The lessee uses the property
but does not take on the benefits or drawbacks of ownership, which are retained
by the lessor and The rental cost of an operating lease is considered an
operating expense.
38. Define hire purchase. Mention the characteristics
of hire purchase. Hire purchase is a type of
installment credit under which the hire purchaser, agrees to take the goods on
hire at a stated rental, which is inclusive of the repayment of principal as
well as interest. The hire purchaser acquires the property (goods) immediately
on signing the hire purchase agreement but the ownership or title of the same
is transferred only when the last installment is paid.
Characteristics of Hire-Purchase System: Hire-purchase is a credit purchase.
· The price under is paid in installments
· The goods are delivered in the possession of the purchaser
· Hire vendor continues to be the owner of the goods
· The purchaser has a right to use the goods as a bailer
· The purchaser has a right to terminate the agreement at any time
· The purchaser becomes the owner of the goods after the payment of all installments
Characteristics of Hire-Purchase System: Hire-purchase is a credit purchase.
· The price under is paid in installments
· The goods are delivered in the possession of the purchaser
· Hire vendor continues to be the owner of the goods
· The purchaser has a right to use the goods as a bailer
· The purchaser has a right to terminate the agreement at any time
· The purchaser becomes the owner of the goods after the payment of all installments
39. Discuss briefly the importance of
budgetary control system with special reference to Banking Orgization
Budgeting is a powerful management tool that is used to accomplish
four major objectives: planning, coordination, motivation and control. The
budget is a planning tool that represents the expected results of operations,
thus it is a way of formulating and expressing in monetary terms the objectives
of an organization and the operational plans for achieving those objectives. A
budget is therefore a control tool. An important part of budget preparation is
consideration of the importance of goal definition, individual aspirations and
goals. The purpose of a budget in budgetary control is to specify the standard
of acceptable performance in the banks. When a bank sets standards of
acceptable performance, it has to be done with good judgment or else motivation
may be misplaced. If a budgetary control system is not accepted by the people
who have to operate it, they may hamper and obstruct the information flow so
that realistic planning and control decisions will be difficult to take.
Therefore, for the budgetary process to be successful, it requires top-management
support, cooperative and motivated middle management staff and well-organized
reporting systems.
41. Discuss the techniques of capital
budgeting There are a number of techniques of capital
budgeting. Some of the methods are based on the concept of incremental cash
flows from the projects or potential investments are as follows:
1. Payback
Period: The basic premise of this method is to
determine the amount of time that is required to recoup the funds spent on the
capital project or equipment expenditure.
2. Net Present
Value: It calculates whether the cash flow is in
excess or deficit and also gives the amount of excess or shortfall in terms of
the present value.
3. Internal Rate
of Return (IRR): It is a metric used by the capital
budgeting in order to determine whether the firm should make investments or
not.
40. Define Capital Budgeting. Discuss the use of the time-value of money in capital budgeting.
Capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure. It is the process of allocating resources for major capital, or investment, expenditures. One of the primary goals of capital budgeting investments is to increase the value of the firm to the shareholders.
Uses of time value of money: Time Value of Money (TVM) is can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is used for calculating the expected return on capital projects (investments). It is also used to calculate cash flows for bonds (debt) issued or purchased.
40. Define Capital Budgeting. Discuss the use of the time-value of money in capital budgeting.
Capital budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure. It is the process of allocating resources for major capital, or investment, expenditures. One of the primary goals of capital budgeting investments is to increase the value of the firm to the shareholders.
Uses of time value of money: Time Value of Money (TVM) is can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is used for calculating the expected return on capital projects (investments). It is also used to calculate cash flows for bonds (debt) issued or purchased.
A TVM calculation is often used in retirement planning. Basically,
one should determine the amount of money that must be saved each period to
reach some pre-determined level of savings in the future (point of retirement),
and then, based on some amount of cash outflow while in retirement, one has to
determine how long the savings will last.
42. Discuss the utility of cash budget as a
tool of the cash management. What are the steps
involved in construction of a cash budget?
The utility of cash budget as a tool of the cash management: A cash budget shows the expected flow of cash. Cash flow is crucial to any entity and therefore the cash budget is very important to any business entity as it involves planning, control, coordination, etc.
The utility of cash budget as a tool of the cash management: A cash budget shows the expected flow of cash. Cash flow is crucial to any entity and therefore the cash budget is very important to any business entity as it involves planning, control, coordination, etc.
A cash budget allows a company to establish the amount of credit
that it can extend to customers without having problems with liquidity. The
cash flow budget helps the business determine when income will be sufficient to
cover expenses and when the company will need to seek outside financing.
The Steps involved in developing a cash budget:
Step
#1. Determine and adequate minimum cash balance.
Step #2. Forecasting Sales
Step #3. Forecasting Cash Receipts
Step #4. Forecasting Cash Disbursements
Step #5. Estimating the end of the month cash balance.
Step #2. Forecasting Sales
Step #3. Forecasting Cash Receipts
Step #4. Forecasting Cash Disbursements
Step #5. Estimating the end of the month cash balance.
43. What is payback period? How payback period
is used in capital budgeting decision
Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods.
Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter payback periods are preferable to longer payback periods.
How payback period is used in capital
budgeting decision Payback period as a tool of analysis
is often used because it is easy to apply and easy to understand for most
individuals, regardless of academic training or field of endeavor. When used
carefully or to compare similar investments, it can be quite useful. As a
stand-alone tool to compare an investment to "doing nothing," payback
period has no explicit criteria for decision-making. The formula or equation
for the calculation of payback period is as follows:
Payback period = Investment required / Net
annual cash inflow
The calculation for discounted payback period is a bit different
than the calculation for regular payback period due to the fact that the cash
flows used in the calculation are discounted by the weighted average cost of
capital used as the interest rate and the year in which the cash flow is
received.
The payback method is not a true measure of the profitability of
an investment. Rather, it simply tells the manager how many years will be
required to recover the original investment. Unfortunately, a shorter payback
period does not always mean that one investment is more desirable than another.
50. Common misconception of
pricing.
Pricing
is an accounting practice of a once in a lifetime experience for most practice
owner. Because it is such a common event, sellers/buyers need to be aware of
the key misconceptions about the process. These are as:
1.
The seller/buyer needs to stay around for months or years to assist the product
in the transaction.
2.
The best offer of an accounting practice is another accounting firm.
3.
The average pricing for practices determines the value of a specific practice.
**** This passive approach is often driven by
a series of pricing strategy misconceptions.
Misconception #1: We’ll lose customers.
A common push-back from the salesforce when a price increase comes
into force is "but we'll lose customers to the competition".
Misconception #2: We’ll lose our competitive
edge.
Pricing is not a race to the bottom, and whilst being aware of the
market is a good thing, benchmarking your price against your competitors can be
a slippery slope to business failure, especially when it is clear that your
product delivers better value to your customers than your key competiton.
Misconception #3: We don’t have a
problem with our pricing.
"If it ain't broke, don't fix it" is a common
misconception. Often pricing reviews are implemented when your business is on
the decline, and you're fire fighting, but what if you could grow profitability
even when the going is good? Wouldn't that be nice?
Misconception #4: It’s too hard.
Pricing is a difficult discipline to master. Just by visiting a
Professional Pricing Society Conference alone, and you will see rafts of
individuals who devote their entire careers to its complexities.
More control. Increased
efficiency. Greater profits.
51. Industrial sickness and its cause
Industrial sickness: Industrial
sickness is defined as “an industrial company which has, at the end
of any financial year, accumulated losses equal to, or exceeding, its entire
net worth and has also suffered cash losses in such financial year and the
financial year immediately proceeding such financial year”.
Internal causes for sickness: 1) Lack of finance; 2) Bad production policies;
3) Marketing and Sickness; 4) Inappropriate personnel management; 5)
Ineffective Corporate management
External causes for sickness: 1) Personnel Constraint; 2) Marketing
Constraint; 3) Production Constraint; 4) Finance Constraint;
1. External Causes: The external or exogenous factors
which are beyond the control of a small- scale industry usually affect the
industry-group as a whole. In fact, there may be several external factors
causing a unit sick and which may vary from time to time and from industry to
industry and even from one point of time to another for the same industry. Nonetheless, the external factors causing small-scale industries
sick include but are not confined to the following only:
a.
Changes in the industrial policies of the government from time to time.
b.
Inadequate availability of necessary inputs like raw materials, power,
transport, and the skilled labour.
c.
Lack of demand for the product.
d.
Recessionary trends prevalent in the economy.
e.
Industrial strikes and unrest.
f.
Shortage of financial resources especially working capital.
g.
Natural calamities like drought, floods etc.
In view of the nature of all these factors,
these can also broadly be classified into three categories:
(i)
Government Policy,
(ii)
Environment, and
(iii)
Natural Calamities.
As a result of all these external factors, a
small-scale unit may have to face heavy constraints in its various functional
areas. We discuss below major constraints faced by some of functional areas, as
illustrative ones, in more detail.
2. Internal Causes: Internal or endogenous causes are
those which are within the control of the unit. These causes arise due to some
internal deficiencies in various functional areas like finance, production,
marketing and personnel.
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1.
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Lack
of Good Management
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2.
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Poor
Implementation
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3.
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Marketing
Problems
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4.
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Non-Availability
of Raw Materials
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5.
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Shortfall
of Working Capital
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6.
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Labour
Trouble
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7.
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Technical/Operational
Problems
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8.
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Other
Problems
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