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MS-4 Question Bank

MS-4 Question Bank (10)

MS-4 Question Bank

MS-4 -   june-2007


1. (a) Explain the Continuity concept and the Periodicity concept and discuss their significance.

(b) Explain the nature of accounting function and describe the role played by the Accountant in a business organisation.

2. The following items appear on the Trial Balance prepared from the books of Mr. Kamal Saxena as on 31st March 2006 after making necessary adjustments for depreciation on fixed assets, outstanding and accrued items and placing the difference under Suspense Account.

Machinery: 1,70,000

Furniture: 49,500

Sundry Debtors: 38,000

Drawings: 28,000

Travelling Expenses: 6,500

Insurance: 1,500

Audit Fees: 1,000

Salaries: 49,000

Rent: 5,000

Cash in hand: 7,800

Cash at Bank: 18,500

Stock in trade (1-4-2005): 80,000

Prepaid Insurance: 250

Miscellaneous expenses: 21,200

Suspense A/c (Dr.): 39,400

Sundry Creditors: 82,000

Capital Account: 2,45,750

Outstanding Expenses :

Salaries: 1,500

Printing: 600

Audit Fees: 1,000

Bank Interest (Cr.): 1,200

Discounts (Cr.): 1,800

Sales less Refurns): 6,80,00

Discount allowed: 1,200

Printing and Stationery: 1,500

Purchases (less Returns): 4,60,00

Depreciation :

Machinery: 30,000

Furniture: 5,500

On a subsequent scrutiny the following mistakes were noticed

(i) A new machinery was purchased for Rs. 50,000 but the amount was wrongly posted to Furniture Account as Rs. 5,000.

(ii) Cash received from Debtors Rs. 5,600 was omitted to be posted in the ledger.

(iii) Goods worth Rs. s,000 withdrawn by the proprietor for personal use, but no entry was passed.

You are further told that :

(a) Closing Stock amounted to Rs. 47,500.

(b) Depreciation on Machinery and Furniture has been provided @ 15% and 10% respectively On declining balance system. Full year's depreciation is provided on addition.

You are required to prepare a Trading and Profit and Loss Account for the year ended on 31st March 2006 and a Balance Sheet as on that date.

3. (a) Explain the concept of cost of capital as a device for establishing a cut-off point for capital investment proposals.

(b) Discuss the limiting factors in the reliability of capital budgeting techniques including the discounted cash flow techniques.

4. (a) What is optimum cash balance ? How can it be determined ? Explain.

(b) Distinguish between Cash Flow Statement and Funds Flow Statement." What purposes do they serve? How do you calculate Funds from Business Operations while preparing a Funds Flow Statement? Explain.

5. (a) Explain the three important control ratios that are used to compare the actual performance with the budgeted performance.

(b) Distinguish between Fixed Budget and Flexible Budget. When is a Flexible Budget considered desirable ? Explain.

6. A company produces a single product which is sold by it presently in the domestic market at Rs. 75 per unit. The present production and sales is 40,000 units per month representing 50% of the available capacity. The cost data of the product are as under:

Variable cost per unit Rs. 50.

Fixed cost per month Rs. 10 lakh.

To improve profitability, the management has 3 proposals on hand as under :

(a) To accept an export supply order For 30,000 units per Month at a reduced price of Rs. 60 per unit, incurring additional variable costs of Rs. 5 per unit towards export packing, duties etc.

(b) To increase the domestic market sales by selling to a domestic chain store 30,000 units at Rs. 55 per unit, retaining the existing sales at the existing price.

(c) To reduce the selling price for the increased domestic sales as advised by the sales department as under :

Reduce Selling price
per unit by Rs.

Increase in Sales
expected (in units)







Prepare a table to present the results of the above proposals and give your comments and advice on the proposals.

7. Comment on the following statements :

(a) Operating cycle plays a decisive role in influencing the working capital needs.

(b) "Debt is a double-edged knife."

(c) Break -even analysis is not without limitations.

(d) Higher profit margin need not necessarily lead to higher rate of return on investment.

(e) A company's profitability is better judged by PBIT rather than by PAT.

8. Write short notes on the following :

(a) Absorption Costing

(b) Zero based Budgeting

(c) Direct Labour Variances

(d) Sunk Costs and Imputed Costs

MS-4 -   june-2008


l. (a) What do you understand by the concept of conservatism ? Why is it also called the concept of prudence ? Why is it not applied as strongly today as it used to be in the Past ?

(b) What is a Balance Sheet ? How does a Funds Flow Statement differ from a Balance Sheet ? Enumerate the items which are usually shown in a Balance Sheet and a Funds Flow Statement'

2. (a) Why does depreciation need to be provided on fixed assets and what are the usual methods of providing depreciation

(b) Discuss the role of the Board of Directors in dividend decision

3. What do you understand by Discounted Cash Flow Techniques of Capital Budgeting ? Briefly explain the Net Present Value Method and Internal Rate of Return Method. which of the two would you rank better and why ?

4. Distinguish between :

(a) Financial Leverage and operating Leverage

(b) Cash Budget and Cash Flow Statement


(d) Preference shares and Rights shares

A company manufactures a single product in its factory utilising 60% of its capacity. The details are given below :


Sales (6,000 units)                                                              540000

Direct materials                                                                     96000

Direct labour                                                                         120000

Direct expenses                                                                      18000      

Fixed overheads :

Factory                                                                                 200000

Administration                                                                         21000

Selling and Distribution                                                         25000

12.5 % of factory overheads and 20% of selling and distribution overheads are variable with production and sales. Administrative overheads are wholly fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company decides to introduce a new product with marginal investment but largely using the existing plant and machinery.

The cost estimates of the   new product are as follows :

Cost elements                                                             Rs. per unit

Direct materials                                                               16

Direct labour                                                                      15

Direct expenses                                                                   1.5

Variable factory overheads                                               2.0

Variable selling and distribution overheads                    1.50

It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are expected to increase by t}o/o, while fixed

selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads remain unchanged.

However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost of the project to Rs. 8.75 lakh

The company considers that 20% pre-tax and interest return on investment is the minimum acceptable to justify any new investment.

You are required to

(a) Decide whether the new product be introduced.

(b) Make any further observations /recommendations

about profitability of the company on the basis of

the above data after making assumption that the present investment is Rs. 8 lakh.

6- Explain fully the following statements :

(a) "Lower the Break-even point, better it is

(b) "Greater the variability of cash flows, higher should be the minimum cash balance

(c) "Weighted average cost of capital would always be higher, if the market value weights are used. "

(d) "Capitalisation of reserves is different from capital resgrves. "

7 Why do you understand by the term 'pay-out ratio' ? What factors are taken into consideration while determining pay-out ratio ? should a company follow a fixed pay-out ratio policy ? Discuss fully.

MS-4 -   june-2009


1. 'Management Accounting is an extension of financial Accounting'. Explain how is Management effective tool of financial control ? Discuss.

2. Explain the cost concept and the concept of conservation. Why are assets shown at cost even when this market prices far exceeds the cost ? Give reason.

3.Why are Reserves created at the time of preparing the final accounts ? Distinguish

between General Reserve and Specific Reserve and give their examples.

4.Distinguish between capital expenditure and revenue expenditure. what will be the

effect on net profit, if the accountant treats a capital expenditure as revenue expenditure. Discuss.

5. Distinguish between :

(a) Gross Working Capital and Net Working Capital.

b)   Current Ratio and Quick Ratio.

c)   Direct Labour Rate Variance and Direct. Labour Efficiency Variance.

d)   Committed Fixed Costs and Disentionarv Fixed Costs.

6. In what way is financial leverage related to operating leverage ? Discuss with an example.

7. How would you appraise the technical feasibility and financial viabilrty of a project ? Explain.

8.What do you understand by Zero Base Budgeting ? Discuss the steps that are involved in the preparation of Zero Base Budget and describe its advantages over a traditional budget.

9. Explain fully the following statements :

a) very high current ratio is not desirable.

(b) "Cash Budget is a statement of all incomes and expenses during a given period."

(c) "Weighted average cost of capital would always be higher, if the market value weights are used."

(d) Companies with very high profits generally have a low pay out ratio.

10. Following details have been extracted from the annual budget of a manufacturing company for the year 2007 and 2008 :

Particulars                                                 Per Unit Rs.              Per Annual rs

Selling Price                                                     300

Direct Materials                                                64

Direct Labor                                                       48

Production overheads:

Variable                                                              32                           4000000

Fixed                                                                                                 3000000

Administrative overheads-fixed

Selling and Distribution overheads:

Variable                                                              36      

Fixed                                                                                                20,00,000

Currently the company is operating on a margin of safety of 25%. To improve its

profitability further, the company is considering the following options.

(a) Reduce selling price by 5%. Sales volume is expected to increase by 2A% also fixed production overheads will increase by Rs. 2lakh and fixed selling and distribution over heads by Rs 3 lakh.

b) Increase selling price by 5%. This will cause a drop in sales volume by 10%. To arrest further fall in sales, an increase of Rs 2 lakh will be required under fixed selling and distribution overheads.

c) Production can be increased by 15% by introducing an incentive scheme for labour.

This will be increase direct labour cost by 25%. An additional expenditure of Rs 3lakh would be required under fixed selling and distribution overhead to market the

increased production.

Required :

(a) Current level of production/sales and profit earned.

b) Assuming that (i), (ii) and (iii) above are mutually exclusive and other views remain unchanged, evaluate each of these options.

(c) If the company is able to reduce raw material cost by Rs 5 per unit by making

bulk purchases and reduce the fixed overhead costs by 2 lakh by suitable economy measures, at what selling price per unit should it sell its current production to earn a 10% increase in current profit ?

  1. The Balance Sheets       of ABC Manufacturing Company Ltd. as       on December 31,       2007 and 2008 are       as follows :


The following additional information is also available.

(a)A new machinery was purchased for Rs. 30,000 and old machinery costing Rs. 15,000 was sold for Rs. 5,000. Accumulated depreciation was Rs. 8,000.

(b) Rs 20,000 5% debentures were reduced by purchase from open market @ Rs 96.

c)   Rs 36,000 investments were sold at book value.

d)   12% dividend was paid in cash

e)   Rs.15,000 was debited to Contingency Reserve to settlement of previous tax liability.

You are required to prepare :

(a) a statement of changes in Working Capital, and

(b) a statement showing the sources and application of funds.

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