CHPTER 4 & 5

M/s E Traders is a firm of two partners Mr. S & Mr. N dividing profits & losses in the ratio of 3:2. The
following are the balances in their ledgers on 31st March, 2005

Capital:- Mr. S 40,000

Mr. N 26,000
Drawings: - Mr. S 16,000
Mr. N 14,000
Sundry Creditors 32,151
Goodwill 15,000
Cash in Hand 100
Cash at Bank 7,065
Sundry Debtors (less provision for B/D for Rs. 2,130) 58,170
Bad Debts 1,575
Stock (as on 01-04-2004) 14,517
Plant & Machinery (as on 01-04-2004) 21,000
Building (as on 01-04-2004) 30,000
Purchases (less Returns of Rs. 4,038) 153,336
Sales (less Returns of Rs.23, 463) 325,275
Carriage outward 7,010
Wages 46,455
Land 6,000
6% Loan on Mortgage 28,500
Interest on Mortgage Loan 1,185
Salaries 18,291
Carriage Inward 2,787
Rents & Rates 6,000
Gas, Water &Electricity 2,160
Insurance (For the period 01-01-2005 to 31-12-05) 513
Advertisement 9,792
Cash discount received 3,300
Cash discount paid 1,680
Investments 15,000
General Expenses 11,780
Bills Payable 8,840
Bills Receivable 5,400
Dividend Received 750

You are required to prepare Trading and Profit & Loss Account for the year ending 31st March, XXXX
and the Balance Sheet on that date after making the following adjustments:-

(1) (i) Depreciation is to be provided for on Plant & Machinery at 10% p.a. and on Builing at
6% P.A.
(ii) Provide for rent payable for February and March XXXX at Rs. 500 p.m.
(iii) Provision for Bad Debts must be maintained at 5% of Debtors.
(iv) Provide interest on capital at 10%. No interest on drawings.
(2) Purchases included Plant & Machinery costing Rs. 3,000 purchased on 01-04-2004.
(3) The Manager is entitled to a commission of 10% of Net Profits after charging his
commission but before interest on capital accounts of Partners.
(4) The closing Stock was Rs. 16,800.

Trading Account of E Traders Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount

Stock Opening 14,517 SALES: 3,25,275
Less Sales Return
Purchases 1,53,336 1,50,336 Closing stock 16,800
Less Purchases of Plant & Machinery 3,000
Carries Inwards 2,787
Wages :Factory staff 46,455
Gross Profit c/d 1,27,980
TOTAL 3,42,075 TOTAL 3,42,075
 Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXX
Particulars Amount Particulars Amount
Sundry Expenses 11,780 Gross Profit b/d 1,27,980
Carriage & Packing of Sales 7,010 Discount Received 3,300
Gas, Water, Electricity, etc. 2.160
Salaries :Clerical Staff 18,291
Discounts allowed 1,680
Rent & Rate 6000
+ outstanding + 600 6,600
Interest Payables on Mortgage 1185
+ outstanding +525 1,710
Insurance 523 -
- paid in advance 386 127
Provisions for Bad & Doubtful Debts 3,015
- 2,130 885
Depreciation on
Building 1,800
Plant & Machinery 2,400 4,200
Net Operating Profits c/d 67,045
TOTAL 1,31,280 TOTAL 1,31,280

Profit & Loss (Adjustment) Accounts of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount

Manager’s A/c 6,705 Net Operating Profits b/d 67,045
Interest on Capital of N 4,000 Dividend Received 750
Interest on Capital of S 2,600 6,600
Capital A/c of N 32,694
Capital A/c of S 21,796 54,490
TOTAL 67,795 TOTAL 67,795

Balance Sheet of XYZ Ltd. as on 31st March, .XXXX

LIABILITIES Amount ASSETS Amount
Current Liabilities Cash in Hand 100
Trade Creditors 32,151 Cash at Bank 7,045
Bills Payable 8,840 Inventories / Stock Closing 16,800
*Rents & Rates outstanding 600 *Bills Receivables 5,400
LONG TERM LIABILITIES *Debtors 60,300
6% Loans on Mortgage. 28,500 Less Bad Debts/provisions for Bad Debts 3,015 57,285
Interest on 6% Loans on
Mortgage o/s 525 *Investments 15,000
Capital A/c – S 40,000 *Plants & Machinery 21,000
+ interest 4,000 + Purchases 3000
+ P& L A/c 32,694 24,000
76,,694 Less Depreciation 2,400 21,600
- Drawings 16,000 60,694
Capital A/c – N 26,000 Building (at Cost) 30,000
+ interest 2,600 Less Depreciation 1,800 28,200
+ P& L A/c 21,796 Land 6,000
50,396 Prepaid Insurance 385
- Drawings 14,000 36,396
Goodwill(*in balancing figure) 10,495
TOTAL 1,68,330 TOTAL 1,68,330
From the following balances as on 31st March, 2005, you are required to prepare Trading and Profit &
Loss Account for the year ending 31st March, 2005 and the Balance Sheet on that date after making the
necessary adjustments:-

Capital:- Mr. Gupta 40,000

Drawings: 15,000
Sales 4,34,400
Purchases 3,64,650
Carriage Inward 27,900
Rents & Rates & Taxes 8,550
Sales Returns 12,900
Purchases Returns 8,700
Salaries 13,950
Sundry Creditors 22,200
Sundry Debtors 36,000
6% Bank Loan (01-04-2004) 30,000
Interest paid on Bank Loan 1,350
Printing & Advertisements 21,900
Interest received from A.N. Sen 400
Cash in Hand 570
Cash at Bank 12,000
Discount received 6,300
Discount paid 11,310
Investments 7,500
Furniture & Fittings 2,700
General Expenses 6,000
Audit Fee 1,050
Insurance 900
Postage & Telegrams 4,070
9% Deposits with Mr. A. N. Sen 45,000

(a) The closing Stock was Rs. 1,20,800.

(b) Sundry Debtors included a sum of Rs. 3,000 & Sundry Creditors included a sum of Rs.
4,000 due to Mr Gupta.
(c) Purchases costing Rs. 1,800 had been omitted to be entered in the Purchases A/c..
(d) Personal Purchases costing Rs. 1,000 made by Mr. Gupta had been included in the
Purchases.
(e) Furniture Purchases costing Rs. 1,000 purchased on 01-04-2004 had been debited to
Purchases A/c.
(f) 25% of Printing & Advertisements is to be carried forward to the next year.
(g) Provide 5% for Bad Debts & 2% on the balance for discount for prompt payment.
(h) Write off Depreciation on Furniture & Fittings at 10%.
(i) Insurance paid in advance as on 31-03-2005 was Rs. 120.
(j) Provide interest on Bank Loan and 9% Deposits with Mr. A. N. Sen.
(k) As on 31-03-2005 Salaries and Carriage Inwards that remained unpaid were Rs. 1,200 &
Rs. 150 respectively.

TRADING ACCOUNTS AS ON 31-12-2004

Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)
70,200 Sales 4,34,400
Stock Opening - Sales Returns 12,500 4,21,500
Purchases 3,64,650 Stock closing 1,20,000
- Purchases Returns 8,700
3,55,950
- Gupta’s Capital A/c 700
3,55,250
- Furniture A/c 1,000
3,54,250
+Purchases A/c 1,800 3,56,050
Carriage A/c 27,900
+ Carriage outstanding 150 28,050
Balance c/f to P& L A/c 87,2,00
Total 5,41,500 Total 5,41,500
 P & L A/C
Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)
Rates & Taxes 8,550 Gross Profit 87,200
Salaries 13,950 Interest received 400
+ outstanding 1,200 15,150 Interest outstanding 3,650
Bad & Doubtful Debts 1,650 Discount Received 6,300
Printing & Stationery 21,900
- prepaid 5,475 16,425
Prompt Payment Discount 627
Insurance 900
- Prepaid 120 780
Discount Paid 11,310
Depreciation on Furniture 370
Interest paid on bank loan 1,350
+ outstanding 450 1,800
General Expenses 6,000
Audit Fee 1,050
Traveling Expenses 3,500
Postage & telegram 4,070
Balance c/f 2,6,268
Total 97,550 Total 97,550
Working Notes

Capital Account of Mr. Gupta

Drawings 15,000 Balance b/d 1,65,000
S Debtors 3,000 Creditors A/c 4,000
Purchases A/c 700 Purchases A/c 1,800
Balance b/d 1,52,100
TOTAL 1,70,800 TOTAL 1,70,800

BALANCE SHEET
LIABILITIES Amt. (Rs.) Amt. (Rs.) Assets Amt. (Rs.) Amt. (Rs.)
Sundry Creditors 22,200 Cash in hand 570
Less Mr. Gupta’s A/c 4,000 18,200 Cash at Bank 12,000
Carriage outstanding 150 Stock 1,20,000
Salaries outstanding 1,200 Prepaid Insurance 120
Prepaid Printing & Advertisement 5,475
Bank Loan 6% 30,000 Sundry Debtors
Interest outstanding on Bank Loan 6% 450 - Mr. Gupta’s A/c 36,000
3,000
Bad & Doubtful Debts 33,000
1,650
- Prompt payment 31,350
Discount 627 30,723
P&L A/c 26,268 Investment 7,500
9% Deposits with A.N. Sen 45,000
Interest Receivable on 9% Deposits
with A.N. Sen 3,650
Capital : (in Balancing figure) 1,52,100 Furniture at cost 2,700
+ Purchases 1,000
3,700
- Depreciation 370 3,330
Total 2,28,368 Total 2,28,368
The Trial Balance of XYZ Ltd. for the year ending 31st March, XXXX , as under:-
Trial Balance of XYZ Ltd. as on 31st March, .XXXX
PARTICULERS Rs.
Share Capital: 5,000 Equity Shares of Rs. 100 each 5,00,000 4L
6% Debenture secured on the mortgage of fixed assets 1,00,000 4L
Provisions for Taxation for the assessment year 2001-02, 2002-03 1,00,000 4L
Sundry Creditors 52,000 4L
Discount on issue of Debentures 4,000 4L
Profit & Loss A/c (Credit Balance) 10,000 4L
Gross Profit 5,00,000 2C
Dividend Received on Investment ( Gross Rs. 10,000) 7,000 2C
Director’s Fees 1,00,000 2D
Interest on Debentures 5,000 2D
Income Tax deducted on Interest on Debentures 1,500 2D
 Audit Fee (including Rs. 1,000 for Tax Representation) 5,000 2D
Miscellaneous Trade Expenses 1,10,000 2D
Advance against Construction of Buildings 50,000 4A
Building (Cost Rs. 4,00,000) 3,00,000 4A
Furniture (Cost Rs.1,00,000) 5,000 4A
Moter Vehicles 30,000 4A
Equity Share of other Companies (Market Value Rs. 2,20,000) 2,00,000 4A
5,000 10% Preference Shares of Rs. 10 each of other companies (Rs. 6 paid up) 30,000 4A
Stock in Trade (at cost) 2,00,000 4A
Sundry Debtors (Consider for Unsecured Goods) 1,40,000 4A
Cash at Bank 57,500 4A
Preliminary Expenses 30,000 4A
You are required to prepare a Profit & Loss Account for the year ending 31st March, XXXX and the Balance
Sheet on that date after taken into Account following adjustments:
1. The method of valuation of Closing Stock has been charged & this resulted in
reduction of the value of the closing stock to Rs. 1,90,000. This has not been adjusted. 4A, 2D
2. Closing Stock also includes goods worth Rs. 20,000, which cannot be marketed. 4A,
2D
3. Provide Depreciation at @10% on the original cost of all fixed assets. 4A, 2D
4. Moter Vehicles account represents two old vehicles standing in the books at Rs.
5,000 each (original cost Rs. 15,000 each) & a new vehicle purchased on 1st January, XXXX for Rs.
20,000. One of the old vehicles was sold for Rs. 4,000 & amount was credited to Sales Account. 4A,
2D
5. The Company has contracted for the construction of a building at Rs. 1,50,000
which is still incomplete. 4A
6. Provide Rs. 1,00,000 towards taxation liability for the current year. 4A, 2D
7. Sundry Creditors include Rs. 2,000, which had already been paid. 4L
8. Dividend is proposed for the year at 20%.4L, 2C
9. Debtors outstanding for more than six months: Rs. 40,000. . 4A, 2D
10. Cash Balance includes a Cheque for Rs. 10,000 returned by the banker for want of
balance in the account. . 4A, 2D

P& L A/c for the year ended as on 31-03-2003

Particulars Amt. (Rs.) Amt. (Rs.) Particulars Amt. (Rs.) Amt. (Rs.)
Salaries & Wages 1,00,000 Gross Profit 5,00,000
Directors Fees 4,000 - Loss on value of Vehicle 4,000 4,96,000
Interest on Debenture 5,000 Dividend Received on Investment 10,000 7,000
+ Tax Deducted at Source 1,500 6,500 - Tax Deducted at Source 3,000
Audit Fee 4,000 Profit on sale of Vehicle 500
Tax Representation Fee 1,000
Misc. Expenses 1,10,000
DEPRECIATION ON
Building 40,000
Furniture 1,000
Moter Vehicle 1 1,500
Moter Vehicle 2 1,500
Moter Vehicle 3 1,000
Moter Vehicle sold 1,500 47,500
Loss on Valuation of stock 20,000
Loss on Absolution of stock 10,000
Balance c/f to P& L Adj.A/c 2,00,500
Total 5,03,500 Total 5,03,500

P& L Adj.A/c
Particulars Amt. (Rs.) Particulars Amt. (Rs.)
Provisions for Taxation 1,00,000 Balance b/d 10,000
Provisions for 1,00,000 P& L A/c 2,00,500
Balance c/d 10,500
Total 2,10,500 Total 2,10,500
BALANCE SHEET
LIABILITIES Amt. (Rs.) Amt. (Rs.) Assets Amt. (Rs.) Amt. (Rs.)
Capital : 5,00,000 Fixed Assets Building at cost 4,00,000 2,60,000
- Depreciation 1,00,000
3,00,000
- Depreciation 40,000
Bank Loan 30,000 Furniture at cost 10,000
- Depreciation 5,000
5,000
- Depreciation 1,000 4,000
Unsecured Loan Moter vehicle (1& 2) at cost 30,000
Sundry Creditors 22,200 - Depreciation 20,000
Less Mr. Gupta’s A/c 4,000 18,200 10,000
- - Depreciation 3,000 7,000
(3) at cost 20,000
Depreciation 2,000 18,000
Reserve & Surplus P& L A/c 10,500 INVESTMENTS
Equity Shares (at Cost & Paid 2,00,000
up value)
Preference Shares (at Cost 3,00,000
PROVISIONS & Paid up value)
Provisions for 2000-01 & 01-02 1,00,000 Current Assets
+ provisions for current year 1,00,000 2,00,000 Stock in Trade (at Cost ) 2,00,000
Less Devaluation 10,000
1,90,000
Less Obsolance 20,000 1,70,000
Provisions for Proposed Dividend 1,00,000 DEBENTURES
Within Six Month 1,00,000
Over Six Month 40,000 1,40,000
Cash & Bank Balance 57,500
_ Cheque Returns 10,000 47,500
Misc. Assets
Building Advance 50,000
Preliminary Expenses 30,000
Discounts on issue of 4,000
debentures 84,000
Total 9,60,500 Total 9,60,500

From the following Trial Balances of Mr. Keshav Kant as on 31st March, 2006, you are required to
prepare Trading and Profit & Loss Account for the year ending 31st March, 2005 and the Balance
Sheet on that date after making the necessary adjustments:-

Capital:- 8,00,000 4L
Drawings: 60,000 4L
Sales 23,10,400
1C
Commission on Sales 45,000 2C c
Stock opening 75,000 1C
Purchases 15,95,000 1C
Carriage Inward 25,000 1C b
Wages (for 11 months upto 28-02-2006) 66,000 1C
Salaries 1,40,000 2C
Sundry Creditors 3,00,000 4L
Sundry Debtors 2,50,000 4A e
Bad Debts 15,000 2C e
Provisions for Bad Debts 8,000 2C
Discount received 15,000 2D
Printing, Stationary & Advertisements 18,000 2C
Misc. Expenses 30,000 2C
Postage Telephones & Telegrams 12,000 2C
Machinery 5,00,000 4A b&f
Building 4,00,000 4A f
Furniture, Fixture & Fittings 40,000 4A f
Insurance 24,000 2C
Investments 1,00,000 4A d
Interest received on Investments 12,000 2D
Cash at Bank 150,000 4A
ADJUSTMENTS:-
(a) The closing Stock was Rs. 2,25,000. (1C & 4A)
(b) Machinery Purchases costing Rs. 45,000 on 01-10-2005 was shown as Purchases A/c.
Freight paid on the machinery was Rs. 5,000 which is included in the Freight on Purchases. (4A
& 2D)
(c) Commission is payable @ 2% on Sales.(2D)
(d) Investments were sold at 10% profit but entire sale proceed have been taken as sales. (2C
& 4A)
(e) Write off Bad Debts Rs. 10,000 & create a provision for Doubtful Debts @ 5% of
Debtors. (2C & 4A)
(f) Write off Depreciation on Building @ 2% and on Machinery & Furniture Fixture &
Fittings at 10%. (2C & 4A)

Manufacturing & Trading) Account of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount
Stock Opening 75,000 SALES: 23,10,000
Less Sale of Investment 60,000 22,50,000
Purchases 15,95,000
Less Machinery A/c 45,000 15,50,000 Closing stock 2,25,000
Fright 25,000
Less Machinery A/c 5,000 20,000
Wages 66,000
Add o/s 6,000 72,000
Gross Profit c/d 7,58,000
TOTAL 24,75,000 TOTAL 980 24,75,000
working Notes:-
(1) Net Sales (Based on Commission paid = Commission on Sales X 100 = 45,000 X 100 = 22,50,000
2 2
(2) Investment Sold = Total Sales (Given) – Sales (Worked out above) = 23,10,000-22,50,000 = 60,000

Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount
Misc. Expenses 30,000 Gross Profit b/d 7,58,000
Salaries : 1,40,000 Interest on Investment 12,000
Insurance 24,000
Less Prepaid 8,000 16,000 Discount Received 15,000
Commission on Sales 45,000
Postage & Telephone 12,000
*Bad Debts provisions 15,000
Less Written Off 10,000
5000
Add Provision 7500 12,500
Depreciation on
Building 6,000
Fixture & Fitting 4,000
Machinery 55,000 65000
Net Operating Profits c/d 1,64,500
TOTAL 7,85,000 TOTAL 7,85,000
Balance Sheet of XYZ Ltd. as on 31st March, .XXXX
LIABILITIES Amount ASSETS Amount
Sundry Trade Creditors 3,00,000Cash at Bank 1,50,000
Inventories / Stock Closing 2,25,000
Wages Outstanding 6,000 Debtors 250000
Less Provisions for Bad & Doubtful Debts 12,500 2,37,500
Prepaid Insurance 8,000
*Accounts Receivables
*Investments 1,00,000
. Capital 8,00,000 Machinery 5,00,000
P & L Accounts 1,64,000 + Purchases 45,000
9,64,000 9,04,000 + Freight 5,000
Less Drawings 60,000 5,50,000
Less Depreciation 55,000 4,95,000
General Reserve(*in 3,35,000 Furniture & fixture 40,000
Balancing figure0 Less Depreciation 4,000 36,000
*Building 3,00,000
Less Depreciation 6,000 2,94,000
 TOTAL 15,45,000 TOTAL 15,45,000
st
From the following Trial Balances of Mr. Keshav Kant as on 31 March, 2006, you are required to
prepare Trading and Profit & Loss Account for the year ending 31st March, 2005 and the Balance Sheet
on that date after making the necessary adjustments:-

Capital:- 8,00,000 4L
Drawings: 60,000 4L
Sales 23,10,400 1C
Commission on Sales 45,000 2Cc
Stock opening 75,000 1C
Purchases 15,95,000 1C
Carriage Inward 25,000 1Cb
Wages (for 11 months upto 28-02-2006) 66,000 1C
Salaries 1,40,000 2C
Sundry Creditors 3,00,000 4L
Sundry Debtors 2,50,000 4Ae
Bad Debts 15,000 2Ce
Provisions for Bad Debts 8,000 2C
Discount received 15,000 2D
Printing, Stationary & Advertisements 18,000 2C
Misc. Expenses 30,000 2C
Postage Telephones & Telegrams 12,000 2C
Machinery 5,00,000 4Ab & f
Building 4,00,000 4A
f
Furniture, Fixture & Fittings 40,000 4Af
Insurance 24,000 2C
Investments 1,00,000 4A d
Interest received on Investments 12,000 2D
Cash at Bank 150,000 4A
ADJUSTMENTS:-
(g) The closing Stock was Rs. 2,25,000. (1C & 4A)
(h) Machinery Purchases costing Rs. 45,000 on 01-10-2005 was shown as Purchases A/c.
Freight paid on the machinery was Rs. 5,000 which is included in the Freight on Purchases. (4A
& 2D)
(i) Commission is payable @ 2% on Sales.(2D)
(j) Investments were sold at 10% profit but entire sale proceed have been taken as sales. (2C
& 4A)
(k) Write off Bad Debts Rs. 10,000 & create a provision for Doubtful Debts @ 5% of
Debtors. (2C & 4A)
(l) Write off Depreciation on Building @ 2% and on Machinery & Furniture Fixture &
Fittings at 10%. (2C & 4A)

Manufacturing & Trading) Account of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount
Stock Opening 75,000 23,10,00
SALES: 0
Less Sale of Investment 60,000 22,50,000
Purchases 15,95,000
Less Machinery A/c 45,000 15,50,000 Closing stock 2,25,000
Fright 25,000
Less Machinery A/c 5,000 20,000
Wages 66,000
Add o/s 6,000 72,000
Gross Profit c/d 7,58,000
TOTAL 24,75,000 TOTAL 980 24,75,000
working Notes:-
(1) Net Sales (Based on Commission paid = Commission on Sales X 100 = 45,000 X 100 = 22,50,000
2 2
(2) Investment Sold = Total Sales (Given) – Sales (Worked out above) = 23,10,000-22,50,000 = 60,000

Profit & Loss Accounts of XYZ Ltd. as on 31st March, .XXXX

Particulars Amount Particulars Amount
 Misc. Expenses 30,000 Gross Profit b/d 7,58,000
Salaries : 1,40,000 Interest on Investment 12,000
Insurance 24,000
Less Prepaid 8,000 16,000 Discount Received 15,000
Commission on Sales 45,000
Postage & Telephone 12,000
*Bad Debts provisions 15,000
Less Written Off 10,000
5000
Add Provision 7500 12,500
Depreciation on
Building 6,000
Fixture & Fitting 4,000
Machinery 55,000 65000
Net Operating Profits c/d 1,64,500
TOTAL 7,85,000 TOTAL 7,85,000
Balance Sheet of XYZ Ltd. as on 31st March, .XXXX
LIABILITIES Amount Amount ASSETS Amount Amount
Sundry Trade Creditors 3,00,000Cash at Bank 1,50,000
Inventories / Stock Closing 2,25,000
Wages Outstanding 6,000 Debtors 250000
Less Provisions for Bad & Doubtful 12,500
Debts 2,37,500
Prepaid Insurance 8,000
*Accounts Receivables
*Investments 1,00,000
. Capital 8,00,000 Machinery 5,00,000
P & L Accounts 1,64,000 + Purchases 45,000
9,64,000 9,04,000 + Freight 5,000
Less Drawings 60,000 5,50,000
General Reserve* Less Depreciation 55,000 4,95,000
3,35,000 Furniture & fixture 40,000
Less Depreciation 4,000 36,000
*Building 3,00,000
Less Depreciation 6,000 2,94,000
TOTAL 15,45,000 TOTAL 15,45,000
* Difference between Total Assets & Total Liabilities is taken as General Reserve in Balancing
Figures.
CHAPTER6
Prepare an estimate of Net Working Capital requirement for ABC Ltd. from the following
information:-

Estimated cost of production per unit Rs. 170 which includes;-

Raw Material Rs. 80
Direct Labour Cost Rs. 30
Overheads (exclusive of Depreciation) Rs. 60
Selling Price per unit Rs. 200

Level of activity per Annum 1,40,000 units

Raw Material in Stock: average 4 weeks
Work in Progress (assume 50% completion stage)
Finished Goods in Stock: average 4 weeks
Credit allowed by suppliers: average 4 weeks
Credit allowed to Debtors: average 4 weeks
Leg period in payment of wages average 1.5 weeks
Cash at Bank expected as Rs. 25,000.

You may assume the production is carried out evenly throughout the year (52 weeks) and wages
and accrue similarly.

All sales are on credit basis only.

Add 10% for contingencies.

You may state your assumptions, if any.

ASSUMPTIONS:-
(1) All Sales are made on credit.
(2) It has been assumed that the material has been introduced at the commencement of the
process.
(3) All Materials procured on credit basis only.
(4) Leg in payment of Wages is 1.5 weeks only, hence it can be ignored
(5) Leg in Payment of Overheads is Nil.
(6) There is no depreciation charge..
(7) No provision is made for Contingency in trade being all Debts are good

Computation of Net Working Capital

Nature of Assets and Liabilities Basis of Calculations Amount
(A) Current Assets
(i) Raw Material Stock Average of 4 Weeks 1,04,000X 80 X 4 = 6,40,000
52
(ii) Work in Progress
Average of 2 Weeks 1,04,000X 80 X 2 = 3,20,000
(a) Raw Material 52
(b) Direct Labour & Overhead Average of 2 Weeks 1,04,000X 45 X 2 = 1,80,000
(50% Completion Stage) 52
(iii) Finished Goods 1,04,000X 170 X 4 =13,60,000
52
(iv) Debtors Average of 8 Weeks 1,04,000X 200 X 8 = 32,00,000
(i.e. credit allowed to Buyers) 52
(v) Cash at Bank 25,000
Total 57,25,000
(B) Current Liabilities
Creditors (i.e. credit allowed by Average of 4 Weeks 1,04,000X 80 X 4 = 6,40,000
Suppliers / creditors) 52
NET WORKING CAPITAL (A-B) 50,85,000

From the following particulars relating to ABC Ltd., prepare a statement showing changes in Working
Capital alongwith Fund Flow Statement:-

Balance Sheet of ABC Ltd. as on 31st March, 2004 & 2005 is as under:-
2004 2005
ASSETS
 CURRENT ASSETS (Net) 1,35,000 1,27,000
Land & Building 9,000 9,000
Plant & Machinery 81,000 1,05,000
(Accumulated Depreciation) (24,000) (26,000)
Patents 16,200 12,600
TOTAL ASSETS 2,32,200 2,49,200

CURRENT LIABILITIES 24,600 34,800

12% Debentures 43,400 0
14% Debentures 0 39,000
Retained Earning 68,200 71,800
Equity Share Capital 90,000 1,00,000
Reserve for Future Loans on Investments 6,000 3,600
TOTAL LIABILITIES 2,32,200 2,49,200

Additional Information:-
(a) A Reconciliation of the balances in retained earning is as follow:-
Opening Balance 68,200
Net income for the Current Year 3,000
Award received from statement of patent infringement case 15,600
Dividend paid (15,000)
Closing Balance 71,800
(b) Net Income of the year 2005 includes a loss of Rs. 4,800 on the sale of a part of plant. The
plant value of Rs. 19,000 at the beginning of the year-accumulated depreciation being Rs. 6,000.
(c) Investments of Rs. 15,000 was sold during the year at a loss. The loss was charged to the
Reserve for future losses on investments & did not appear on the Income Statement.
(d) During the current year 12% Debentures were called for redemption. Most of them were
refunded through new 14% Debentures & the rest were purchased for cash.
(e) The Equity Shares were issued in exchange of machinery. The rest of Plant & Machinery were
purchased for cash
.
31-03-2005 31-03-2004
Current Assets
Cash & Bank Balance 47,500 49,800
S.. Debtors 1,67,800 1,18,300
Investments 50,000 1,00,000
Stock 90,500 3,55,800 55,600 3,23,700
Fixed Assets 5,20,000 4,80,000
Less Deprecation 1,40,000 3,80,000 1,08,000 3,72,000
Preliminary Expenses 0 0 7,200 7,200
TOTAL 7,35,800 7,02,900
Current Liabilities
S Creditors 1,95,300 1,33,650
Provisions
Proposed Dividend 15,000 28,800
Provisions for Taxation 32,000 47,000 50,000 78,800
Capital : Equity Shares of Rs. 100 each 4,00,000 3,60,000
issued for cash
Reserve 60,000 1,10,000
. Surplus 33,450 93,450 20,450 1,30,450
7,35,800 7,02,900

Change in Working Capital

Current Assets 3,55,800 3,23,700
LESS: Current Liabilities 2,42,350 2,12,450
WORKING CAPITAL 1,13,450 1,11,250
WORKING CAPITAL as on 31-03-2005 1,13,450
WORKING CAPITAL as on 31-03-2004 1,11,250
2,200
Summarized Balance Sheet
as on as on Change in Working Capital
31-03-2005 31-03-2004
Sources Usage
WORKING CAPITAL 1,13,450 1,11,250 0 2,200
Fixed Assets (at Cost) 5,20,000 4,80,000 0 40,000
Preliminary Expenses 0 7,200 7,200 0
6,33,450 5,98,450
Accumulated Depreciation 1,40,000 1,08,000 32,000 0
Capital 4,00,000 3,60,000 40,000 0
Reserve 60,000 1,10,000 0 50,000
. Surplus in P &L A/c 33,450 20,450 13,000 0
6,33,450 5,98,450 92,200 92,000

Fund Flow Statement

Sources of Funds
Net Profit 40,000
Preliminary Expenses 7,200
Issue of Shares 40,000
Sale of Fixed Assets (Machinery) 3,000
Depreciation Written Off 8,000
Depreciation on Machinery Sold 40,000
1,000 39,000
TOTAL 1,37,200
Payment of Taxes 56,000
Payment of Dividend 10,000
profit on sale of Machinery
Purchase of Fixed Assets 49,000
Decrease in Tax Provisions 18,000
Increase in Working Capital 2,200
TOTAL 1,37,200
CHAPTER 9
Vivek Manufacturing Company manufactures bags that are sold to retailers at Rs. 10 per bag. The Cost
particulars are as follow:-
Direct Material Cost (one piece @ Rs.1.50 ) 2.50
Direct Wages (3 Hours @ Rs.1.00 ) 1.50
Variable Manufacturing Overheads 1.00
Variable Selling Overheads 1.50
Variable Administrative Overheads 0.50
TOTAL 7.00

Fixed Costs are

Manufacturing Overheads 4,00,000
Selling Overheads 3,00,000
Administrative Overheads 2.00.000
TOTAL 9,00,000

This year sakes were 3,50,000 units. The company desired to earn a net income of Rs. 6,00,000 before taxes.
The firm is evaluating a marketing program designed to achieve the firm’s desired Net Income. The program
would increase fixed cost by Rs. 1,45,000 & variable cost by Rs.0.25 per unit.

You are required to:-

(1) Calculate the Break
Even Point in Units & Rs. Sales.
(2) Prepare a detailed
Cost-Volume-Profit Chart, carefully labeled, and based on current situation.
(3) Compute the
Margin of Safety Ratio for the current year.
(4) Ignoring the
marketing program, compute the sales level that will satisfy Vivek’s net Income Requirement.
(5) Compute the Break
Even Point with the new marketing program.
(6) If the marketing
Program is implemented & sales are precisely enough to achieve the firm’s minimum net income
requirement, what is the margin of safety ratio.

Units Sales 3,50,000 Present Proposed

:Per Units (Rs.) Amt. (Rs.) : Amt. (Rs.) Per Units (Rs.)
Sales 10-00 35,00,000 41,82,500 11-95
VC 7-00 24,50,000 25,37,500 7.25
Contribution 3-00 10,50,000 16,45,,000 4.70
FC 2-5714 9,00,000 10,45,000
Profit 1,50,000 6,00,000
Less Tax 57,750 2,31,000
Profit After Tax 92,250 3,69,000

Sales = Selling Price per Unit x Units Sold

Sales = Variable Cost + Fixed Cost + Profit
Variable Cost (or VC) = Marginal Cost
Contribution = Sales – VC
Contribution = Fixed Cost + Profit
Profit = Contribution – Fixed Cost (FC)
Fixed Cost = Contribution - Profit

Profit / Volume Ratio (or P / V Ratio) = CONTRIBUTION per unit or Total Contribution
Selling Price Per Unit Total Sales
In case P / V Ratio is to be expressed as % of Sales the figure can be derived from the formulae as
given above should be multiplied by 100. thus

BEP (of output) = Fixed Cost = Rs. 9,00,000 = 3,00,000 Units

CONTRIBUTION per unit Rs. 3

BEP (of output) = Fixed Cost X Selling Price per Unit = Rs. 9,00,000 x Rs. 3 = Rs. 30,00,000
CONTRIBUTION per unit Rs. 3
 or = Fixed Cost x Total Sales Rs. 9,00,000 x Rs. 35,00,000 = Rs. 30,00,000
Total Contribution Rs. 10,50,000

or Fixed Cost = Rs. 9,00,000= Rs. 9,00,000 = Rs. 30,00,000 (Here P / V Ratio = Contribution / Sales = 3/10)
1 – Variable cost per Unit =1 – 7 (or 0.3)
Selling Price per Unit 10-00
At BEP, the desired profit is zero, in case of volume of output of sales is to be computed for a desired
profit, the amount of desired profit should be added to the fixed cost in the formula given above, hence
Unit sales for desired profit = Fixed Cost + desired profit = Rs. 16,45,000 = 2,13,637 Units
Contribution per unit Rs. 7.7

or Fixed Cost + desired profit = or Fixed Cost + desired profit =Rs. 16,45,000 = Rs. 25,52,960
1 – Variable cost per Unit P / V Ratio (0.6443) (Here P / V Ratio = Contribution / Sales = 7.70/11.95=0.6443)
Selling Price per Unit
======================================================================
A MNC soft drink company is planning to establish a subsidiary in India to produce mineral
water. Based on the estimated annual sales of 40,000 bottles mineral water, cost studies shows the
following estimates for the Indian Subsidiary:-

%age of Total Annual Cost which is

Heads of Expenditure Total Annual Cost variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administrative Expenses 40,000 35%

The Indian production will be sold by the manufacturer’s representatives who will receive a
commission of 8% of the sale price.

You are required to:-

a. Compute the sale price per bottle to enable the management to realize an estimated
10% profit of the sale proceeds in India.
b. Calculate the Break Even Point in Rs. Sales as also in numbers of bottles for the Indian
subsidiary on the assumption that the sale price is Rs. 14 per Bottles.

FROM THE GIVEN DATA estimated cost sheet is as under

Total cost for 40,0000 units (Rs,) Per Unit cost (Rs,)
VARIABLE COST
Material 2,10,000 5.25
Labour 3,21,000 3.00
Factory Overheads 50,600 1.265
Administrative Expenses 14,000 0.35
TOTAL VARIABLE COST 3,94,600 9.865
FIXED COST
Labour 30,000 0.75
Factory Overheads 41,400 1.035
Administrative Expenses 26,000 0.65
TOTAL FIXED COST 97,400 2.435
TOTAL COST 4,92,000 12.300
Sales Rs. 6,00,000 Rs 15/- per Bottle
Contribution Rs. 6,00,000 - Rs. 4,92,000 = Rs 15/- Rs 12.30 =
Rs. 1,08,000 Rs 2.70

Or Sales = Rs.100 = I f 82% of Sales = Rs. 4,92,000

Less Commission = Rs. 8 =
Profit = Rs. 10
= therefore, Total COST = Rs. 82
= therefore, Sales for 40000 bottles = Rs. 4,92,000 X 100 = Rs. 6,00,000
82
= therefore, Selling price per bottle = Rs. 6,00,000 = Rs 15/- per Bottle.
 40000 bottles
Sales - VC - FC = Net Income
Unit Contribution Margin to Cover FC = FC
Contribution per Unit

Unit Contribution Margin to Cover FC + Desired Income = Sale Price – VC

Contribution per Unit
BEP Sales (Units) = FC = Rs. 4,92,000 = = 18222.22 or 18223 units
Contribution per Unit Rs. 2.70

BEP Sales with Desired Income (Units)

= FC + Desired Income = Rs. 4,92,000 + Rs.1,08,000 = Rs. 6,00,000 = 22222.22 or 22223
Contribution per Unit Rs. 2.70 Rs. 2.70 units

Units Sales 40,000 Proposed

Present
Amt. (Rs.) Per Units (Rs.) %age Per Units
(Rs.)
Sales 5,40,000 13-50 6,00,000 15-00 14-00
VC
Material 2,10,000 5.25 2,10,000 5.25
Labour 1,20,000 3.00 1,20,000 3.00
Factory Overhead 50,600 1.265 50,600 1.265
Administrative Expenses 14,000 0.35 14,000 0.35
Total Variable Cost 3,94,600 9.865 3,94,600 9.865 9.865
Contribution 1,45,400 3.635 2,05,400 5.135 4.135
FC
Labour 30,000 0.75 30,000 0.75
Factory Overhead 41,400 1.035 41,400 1.035
Administrative Expenses 26,000 0.65 26,000 0.65
Total Fixed Cost 97,400 2.435 97,400 2.435 2.435
Profit 48,400 1.20 2.70 1.70
Sales = Selling Price per Unit x Units Sold
Sales = Variable Cost + Fixed Cost + Profit
Variable Cost (or VC) = Marginal Cost
Contribution = Sales – VC
Contribution = Fixed Cost + Profit
Profit = Contribution – Fixed Cost (FC)
Fixed Cost = Contribution - Profit
Sales – (Variable Cost + Fixed Cost) = Profit or Sales = Variable Cost + Fixed Cost + Profit
Therefore unit Contribution Margin to cover FC + Desired Income = unit sale price – unit VC, Thus

From the cost worked out in Column No. 1 & 2 of the above table, if Sales = 100%
- Profit 10%
Commission = 8% 18%
Total Cost = 82%
If 82% of sales = Rs. 4,92,000 then Total Sales for 40,000 units = Rs. 4,92,000 X 100 / 82 = Rs. 6,00,000
then Selling Price per unit = Rs. 6,00,000 / 40,000 units = Rs. 15.00 (as worked out in Column No. 3 & 4)
& proposed Selling Price per unit = Rs. 15.00 – 1-00 = Rs. 14.00 (as worked out in Column No. 5)
-
Profit / Volume Ratio (or P / V Ratio) = CONTRIBUTION per unit or Total Contribution
Selling Price Per Unit Total Sales
In case P / V Ratio is to be expressed as % of Sales the figure can be derived from the formulae as
given above should be multiplied by 100. thus

BEP (of output) (as worked out in Column No. 3 & 4)

= Fixed Cost + Desired Profit = Rs. 4,92,000 + 1,08,000 = Rs 6,00,000 = 22,223 Units
CONTRIBUTION per unit Rs. 2.70 Rs. 2.70

BEP (of output) (as worked out in Column No. 5)

= Fixed Cost + Desired Profit = Rs. 4,92,000 + 1,08,000 = Rs 6,00,000 = 35,295 Units
CONTRIBUTION per unit Rs. 1.70 Rs. 1.70

At BEP, the desired profit is zero, in case of volume of output of sales is to be computed for a desired
profit, the amount of desired profit should be added to the fixed cost in the formula given above, hence
Unit sales for desired profit = Fixed Cost + desired profit = Rs. 16,45,000 = 2,13,637 Units

The following data are obtained from the records of a factory:-

Sales 4,000 units @ Rs. 25 each Rs. 1,00,000

Material consumed Rs. 40,000
Variable Overheads Rs. 10,000
Labour Charges Rs. 20,000
Fixed Overhead Rs. 18,000 Rs. 88,000
Net Profit Rs. 12,000

You are required to calculate:-

(a) The number of units the company should sell so that there is neither any loss nor any profit.
(b) The sales needed to earn a profit of 20% on sales.
(c) The extra units which should be sold to obtained the present profit if it is proposed to reduced
the selling price by 20% to 25%.
(d) The Selling Price to be fixed to bring down its break even point to 500 units under the
present conditions.
(e) Fixed Assets costing Rs. 400000, accumulated depreciation Rs. 300000 were sole for Rs.
150000.
(f) Actual Tax liability for the PY year was Rs. 500000.
(g) Loans represent Long Term Loans given to Group Companies.
(h) Interest on Loan Funds for the PY year was 14,21`,000 & dividend income were Rs. 402,000.

From the given data For 4,000 Unit Total Per Unit Proposed Decrease
20% of present SP 25% of present SP
Sales 1,00,000 25.00 80,000 75,000
Variable Cost Material 40,000 10.00
Labour 10,000 2.50
Variable OH 20,000 70,000 5.00 17.50 70,000 70,000
Contribution 30,000 7.50 10,000 5,000
Fixed Cost 18,000 4.50 18,000 18,000
Profit 12,000 3.00 -28,000 -23,000

(a) BEP (i) In terms of Sales (Revenue)

BEP = Fixed Cost X Sales = Rs.18,000 X 1,00,000 = Rs. 60,00,000
Contribution 30,000
(ii) In terms of Units
BEP = Fixed Cost = Rs. 18,000 X 1,00,000 = 2,400 units
Contribution per Unit Rs. 7.50
(b) if selling price per unit = Rs.25/- therefore 20% of this SP = Rs.5/-. But from given data it is Rs. 3/-
BEP = Fixed Cost = Rs. 18,000 = 7,200 units
Contribution per Unit Rs. 2.50

Given Total Per Unit Per Unit

As per above calculations Units Sold 4000 7,200
Profit 12,000 3.00 36,000 5.00
Variable Cost 70,000 17.50 1,26,000 17.50
82,000 20.50 1,62,000 22.50
Fixed Cost 18,000 4.50 18,000 2.50
Sales 1,00,000 25.00 1,80,000 25.00

(c ) (i) No. of Units sold = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = 12,000 units
Contribution per Unit Rs. 2.50
(ii) No. of Units sold = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = 24,000 units
Contribution per Unit Rs. 1.25

(d) Proposed Selling = Contribution = Fixed Cost + Desired Profit = Rs. 18,000 + 12,000 = Rs. 60.00
Proposed No. of Units Proposed No. of Units 500
CHAPTER 10
You are required to calculate overheads variances when:-
(a) Standard Overhead rate Per Hour is used
(b) Standard Overhead rate Per Unit is used
BUDGETED ACTUAL
Production in units 12,500 11,000
Man Hours 6,250 5,750
OVERHEAD COST:
Fixed 12,500 13,000
Variables 50,000 45,000
Overhead Cost Variance
!
VOH Cost Variance FOH Cost Variance
! ! !
!
VOH VOH FOH
FOH
Expenditure Variance Efficiency Variance Expenditure Variance Expenditure
Variance
!
!
FOH Exp
FOH Capacity Variance
Variance
Variable Total OHCV (When Standard Overhead Rate per Hour is used):-
Standard Fixed OH Rate per hour =
Budgeted FOH = Rs. 12,500 = Rs. 2 per Hour
Budgeted Hours 6,250 hours

Standard Variable OH Rate per hour =

Budgeted VOH = Rs. 50,000 = Rs. 8 per Hour
Budgeted Hours 6,250 hours

Total Standard OH Rate per hour =

Budgeted FOH = Rs. 62,500 = Rs. 10 per Hour
Budgeted Hours 6,250 hours

Variable Total OHCV (When Standard Overhead Rate per Unit is used):-
= VOHCV + FOHCV

Standard Fixed OH Rate per hour =

Budgeted FOH = Rs. 12,500 = Rs. 2 per Hour
Budgeted units 12,500 Units

Standard Variable OH Rate per hour =

Budgeted VOH = Rs. 50,000 = Rs. 4 per Units
Budgeted units 12,500 Units

Total Standard OH Rate per hour =

Budgeted FOH = Rs 62,500 = Rs. 5 per Units Hour
Budgeted units 12,500 Units

Total OHCV (When Standard Overhead Rate per Hour is used):-

= Recovered OH - Actual OH
= (Actual Units X Actual Rate) – Actual OH
= ( 11,000 X 5) - 58,000 = 55,000 - 58,000 = (- 3,000)

Variable OHCV = Recovered VOH - Actual VOH

= (Actual Units X Actual Rate) – Actual OH
= ( 11,000 X 4) - 45,000 = 44,000 - 45,000 = (- 1,000)

Fixed OHCV = Recovered FOH - Actual FOH

= (Actual Units X Actual Rate) – Actual OH
= ( 11,000 X 1) - 13,000 = 11,000 - 13,000 = (- 2,000)

Verification:- Total OHCV = Variable OHCV - Fixed OHCV = (- 3,000) = (- 1,000) + (- 2,000)

Total OHCV (When Standard Overhead Rate per Unit is used):-

= Recovered OH - Actual OH
= (Actual Units X Actual Rate) – Actual OH
= (5,750 X 10) - 58,000 = 57,500 - 58,000 = (- 500)
Variable OHCV = Recovered VOH - Actual VOH
= (Actual Units X Actual Rate) – Actual OH
= ( 5,750 X 8) - 45,000 = 46,000 - 45,000 = ( 1,000)

Fixed OHCV = Recovered FOH - Actual FOH

= (Actual Units X Actual Rate) – Actual OH
= (5,750 X 2) - 13,000 - = 11,500 - 13,000 = (-1,500)

Verification:- Total OHCV = Variable OHCV - Fixed OHCV = (- 500) = ( 1,000) + (- 1,500)
CHAPTER 13

XYZ Ltd. has a debt of Rs. 45,00,000 @9% & Equity of Rs. 55,00,000. This firm has sales of Rs. 75,00,000.
Variable Cost of Rs. 42,00,000 and Fixed Cost of Rs. 6,00.000.
What is the firm Return on Investment (ROI)?
(ii) Does it have favourable Financial Leverage?
(iii) If the firm belongs to an industry whose assets turnover ratio is 3, does it have a
high ore low assts leverage?
What are the Operating Financial & Combined Leverage of the firm?
If the sales drop to Rs. 50,00,000what will be the new EBIT?

LIABILITIES ASSETS
Equity Share Capital 55,00,000
Debt Capital (@ 9% Interest) 45,00,000
TOTAL 1,00,00,000 TOTAL 1,00,00,000

As per given data Statement of Cost & Profits and their distribution is as under:-
Sales Given If sales dropped to
RS. 50,00,000 RS. 50,00,000
Sales S 75,00,000 50,00,000
Less VC VC 42,00,000 28,00,000
Contribution Con. 33,00,000 22,00,000
Fixed Costs FC 6,00,000 6,00,000
Profit PBIT 27,00,000 16,00,000
Less Interest @ 9% I 2,43,000 2,43,000
Profit Before Tax PBT 24,57,00,000 13,57,00,000
Less Tax say @ 38.5% T 9,45,950 5,22,450
Profit after Tax PAT 15,11,650 8,34,450
Return on Equity = PAT/ Equity
Capital 61.50% 15.17%
FINANCIAL LEVERAGE & EQUITY RETURNS

CAPITAL DEBT Zero DEBT 45 Lakh DEBT 75Lakh

STRUCTURE Equity Rs. 1 crore Equity Rs. Equity Rs.25 Lakh
55 Lakh
Profit PBIT 27,00,000 27,00,000 27,00,000
Less Interest @ 9% I 0 2,43,000 6,75,000
Profit Before Tax PBT 27,00,000 24,57,000 21,25,,000
Less Tax say @ 38.5% T 10,39,500 9,45,950 8,18,125
Profit after Tax PAT 16,50,500 15,11,050
Return on Equity = PAT/ 21.607% 24.47% 23.761%
Equity Capital
Since under Debt Equity in 45:55 Ratio, Return on Equity is highest, we may continue with existing system
being favourable because in changed scenario to existing Debt Equity Ratio leads to reduction in Return on
Equity.

Based on Assets Turnover Ratio 3, the required sales should be Rs. 1 crore x 3 = Rs. 3 crore. Whereas it is
on Rs. 75 Lakh which will be only 25% of the industry’s average, hence is not acceptable being
unsatisfactory

FINANCIAL LEVERAGE = Operating Profit = EBIT = 27,00,000 = 1.0989

Profit before Tax EBT 24,57,000

OPERATING LEVERAGE= Contribution = C = 33,00,000 = 1.2222

Operating Profit = EBIT 27,00,000

COMBINED LEVERAGE= Operating Profit x Contribution = EBIT x C

Profit before Tax X Operating Profit EBT EBIT
= 27,00,000 X 33,00,000 = 33,00,000 = 1.34307 or1.3431
24,57,000 X 27,00,000 24,57,000
 CHAPTER 15
You are a Financial Analyst for Susan Electronics Company. The Director of Capital Budgeting has asked
you to analyze two proposed capital investments Projects P & Q. Each project has a cost of Rs. 10,000 &
cost of the capital for each project is 12%. The projects expected net cash flow are as under:-
Expected Net Cash Flow (Rs.)
Year Project P Project Q
0 10,000 10,000
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
(i) Calculate each project’s Pay Back Period, Net Present Value (NPV) Internal Rate of Return (IRR).
(ii) Which project or projects should be accepted if they are independent?
(iii) Which project or projects should be accepted if they are mutually exclusive?
(i) How might a change in cost of capitals produce a conflict between the NPV &
IRR rankings of these two projects? Would this conflict exist if k were 5% (HINT:- plot the NPV
Profits ).
PAY BACK PERIOD
Project P Project Q
Year Cash Flow Cumulative Cash Flow Cash Flow Cumulative Cash Flow
0 10,000 (-10,000) 10,000 (-10,000)
1 6,500 -3,500 3,500 -3,500
2 3,000 -500 3,500 -3,000
3 3,000* 2,500 3,500* 500
4 1,000 3,500 3,500 4,000
For balanced Recovery period in third year, for both the project worked out as under:-
*Project P = 500/ 3000 = 1/6 year & *Project Q = 3000 / 3500 = 6/7 year
Hence, from the above calculations, the Pay Back Period for Project P is = 2 years + 1/6 year or 2 + 0.167
year = 2.167 year whereas for Project Q it is = 2 years + 6/7 year or 2 + 0.86 year = 2.86 year
NET PRESENT VALUE (@ 10% Rate of Interest):-
Project P Project Q
Year Cash Present Value of Present Cash Present Value of Present
Flow Cash Flow Value Flow Cash Flow Value
0 -10,000 0 0 -10,000 0 0.0
1 6,500 0.909 5,908.5 3,500 0.909 3,181.5
2 3,000 0.826 2478.0 3,500 0.826 2,891.0
3 3,000 0.751 2,253.0 3,500 0.751 2,685.5
4 1,000 0.683 683.0 3,500 0.683 2,390.5
Total of Present Value 11322.5 11091.5
Initial Outlays 10000 10000
Net present Vlue 1322.5 1091.5
Hence, from the above calculations, the Net Present Value for Project P is higher hence Project P is proffered.

Project P Project Q
discount discount Present Present Present Present
Factor Factor Cash Value Value Cash Value Value
Year @15% @16% Flow @15% @16% Flow @15% @16%
0 -1 -1 -10,000 -10000 -10000 -10,000 -10000 -10000
1 0.870 0.909 6,500 5655 5908.5 3,500 3045 5655
2 0.756 0.826 3,000 2268 2478.0 3,500 2646 2268
3 0.658 0.751 3,000 1974 2253.0 3,500 2303 1974
4 0.572 0.683 1,000 572 683.0 3,500 2002 572
Total of Present Value= 10,469 11322.5 9996 11,092
Initial Outlays= -10000 -10000 -10000 -10000
Net present Value = 469 1322.5 -4 1,092
Hence, from the above calculations, the Net Present Value for Project P is higher hence Project P is proffered.

NPV (@ 5% Rate of Interest)

Project P Project Q
 Year Cash Present Value factor of Present Cash Present Value factor of Present
Flow Cash Flow @ 5% interest Value Flow Cash Flow@ 5% interest Value
0 -10,000 1.0000 -10000 -10,000 1.0000 -10000
1 6,500 0.952 6188 3,500 0.952 3332.0
2 3,000 0.907 2721 3,500 0.907 3174.5
3 3,000 0.864 2592 3,500 0.864 3024.0
4 1,000 0.823 823 3,500 0.823 2880.5
Total of Present Value 12324 12,4 11
Initial Outlays -10000 -10000
Net present Value 2324 2,411
Hence, from the above calculations, the Net Present Value for Project Q is higher hence Project Q is proffered.