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MS-4 june-2007

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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 s,000 withdrawn by the proprietor for personal use, but no entry was passed.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

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