Financial Management – what do you understand by Accounting Standards


1. (A) what do you understand by Accounting Standards? How do they differ from Accounting Concepts? Why should the accounting practices be standardized?

(b) Why are the fixed assets shown at their book value rather than their market value, even if the latter has appreciated significantly? Give reasons.

2. (a) How would Explain the you compute the cost of goods sold? Two methods of inventory valuation.

(b) What is depreciation and what is the rationale behind making a provision for depreciation in the process of matching income and expenses?

3. What do you understand by Zero Base Budgeting? How does a Zero Base Budget differ from a Flexible Budget? Discuss the steps involved in Zero Base Budgeting.

4. Distinguish between: (a) Accounting Rate of Return and Internal Rate of Return

(b) Profitability Index and Profitability Ratios

(c) Bonus Shares and Rights Shares

(d) Earnings yield and Dividend yield

5. A manufacturing company produces and sells products P; Q and R. It has an available machine hour capacity of one lakh hours, interchangeable among the three products. Presently the company produces and sells 20,000 units of P and 15,000 units each of Q and R. The unit Selling Price of the three products P, Q and R is Rs. 25, Rs. 32 and Rs. 42 respectively. With this price structure and the aforesaid sales-mix, the company is incurring loss. The total expenditure exclusive of fixed charges (presently Rs. 5 per unit) is Rs. 13.75 lakhs. The’ unit cost ratio amongst the three products P, Q and R is 4: 6: 7.

Since the company desires to improve its profitability without changing its cost and price structures, it has been considering-the following three mixes so as to be within its total available capacity:

Products Mix I Mix II Mix III
P 25,000 20,000 30,000
Q 15,000 12,000 5,000
R 10,000 18,000 15,000

You are required to compute the quantum of loss now incurred and advise the most profitable mix which could be considered by the company.

6. ‘The conventional break-even analysis is based on a number of assumptions.’ Explain and illustrate the concept of break-even analysis and justify the above statement.

7. he following information is available for XYZ Ltd. for three years.

Year 1 Year 2 Year 3
Gross Profit Ratio 36% 33 1/2% 30%
Stock turnover 20 times 25 times 14 times
Average Stock Rs. 38,400 Rs. 36,000 Rs. 70,000
Average debtors Rs.87,500 Rs.7,68,750 Rs.2,00,000
Income tax rate 50% 50% 50%
Net Profit ratio 6% 7% 12%
Maximum credit
period allowed
to customers
60 days 60 days 30 days

Prepare a statement of profits in comparative form for all the three years, and evaluate the position of the company regarding profitability and liquidity.

8. What do you understand by Budgetary Control? Discuss its objectives and explain the steps that are taken for installing an effective system of budgetary control in an organization.

9. Distinguish between:

(a) Gross Margin and Return on Investment

(b) Financial Risk and Business Risk

(c) Profit Maximization and Wealth Maximization Criteria

(d) Internal Rate of Return method and Net Present Value method


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