Part B
(ANALYSIS OF FINANCIAL STATEMENTS)

Q) Give any three points of distinction between "Funds Flow Statement" and "Cash Flow Statement".
Ans) Difference between Funds Flow Statement and Cash Flow Statement :

Q ) The following is the position of the current assets and current liabilities of Z Ltd. :

The company incurred a loss of Rs. 45,000 during the year. Calculate cash from operations.
Ans ) 

Q) How does ratio analysis become less effective due to price level changes? (Marks 4)
Ans) Financial analysis for various years cannot be compared as the price level changes will make the comparison misleading.
For example the comparing the ratio of sales to fixed assets of a current year will be much higher as compared to that of a previous year. This is because the sales are recorded at the current year's price but fixed assets will be expressed in terms of cost incurred in the past. Thus, the previous years figures must be adjusted in the light of price level changes before comparing the ratios of these years.

Q) A company has a loan of Rs. 20,00,000 as part of its Capital employed. The interest payable on the loan is 15% and the ROI of the company is 25%. The rate of income tax is 40%. What is the gain to the share-holder due to loan raised by the company? (Marks 5)
Ans) Return on Investment = Profit before Interest, tax   x 100
                                                  Capital employed
Capital employed = 20,00000
 25 = Profit before Interest and Tax
100                  2000000
Thus Profit before Interest and Tax = 500000
Less: Interest on loan
                ( 15  x 2000000)           300000
                 100
Pft after Interest and before Tax        200000
Less: tax (200000 x 40)                  80000
                            100                            
Net Profit after tax                        120000
Thus, gain to the shareholder due to the loan = 120000.

Q) Following are the Balance Sheets of Radha Ltd. as on 31.12.1995 and 31.12.1996.

You are required to prepare a comparative Balance Sheet on the basis of the information given in the above Balance Sheets.
(Marks 5)

Ans)

RADHA LTD.
Comparative Balance Sheet as on 31.12.95 and 31.12.96

Q) "Analysis of Financial Statement is affected by window dressing and the personal ability of the analyst." Comment. (Marks 6)
Ans) i) Analysis of financial statements is affected by window dressing :
The term window dressing means manipulation of accounts to conceal vital facts and present the financial statements in such a way to show a better position than what its actually is. Thus, analysis of financial statement may not be a definite indicator of the quality of management.
ii) Personal ability and bias of the analyst :
The figures in the financial statement are to be analysed by human ability. Thus, the users generally have divergent opinion and meaning for the accounting figures. For example, for calculating return on capital, some may consider profit after tax while others may consider profit before tax. 
Thus, the analysis of financial statements is based on the personal ability of user and thus cannot be free from bias.

Q ) The following are the summarised profit and loss account of Hindustan Products for the year ended 31.12.1996 and the Balance Sheet of the Company as on that date:

PROFIT AND LOSS ACCOUNT

BALANCE SHEET

Calculate the following ratios :
(i) Quick Ratio (ii) Stock Turnover Ratio and (iii) Return on Shareholders Investments:

Ans) i) Quick Ratio = Liquid Assets
                                 Current Liabilities
Liquid Assets = Debtors + Cash
21000  +  30000  = 51000
Current Liabilities = Creditors + Outstanding Exp.
= 115000 + 15000 = 130000
Thus, Quick Ratio = 51000
                             130000
= 51 : 130
= 0.39
ii) Stock Turnover Ratio = Cost of Goods Sold/Average Stock
Cost of Goods sold = Sales - Gross Profit
=  800000 - 340000
= 4,60,000
Average stock = Opening stock + closing stock
                                              2
= 99000 + 199000
             2
= 298000 = 149000
       2
Thus, the ratio = 460000
                         149000
= 3.08 times
iii)
Return on shareholders' Investment = Net Profit after Interest and Tax x 100
                                                                   Shareholders' funds
Shareholders' funds = Equity Share Capital + Profit and loss A/c
                             = 290000 + 60000
                             = 350000
Thus,  60000 x 100
         350000
= 17 1/7%

Q ) From the following information prepare Cash Budget for the month of April, May and June, 1997.

Additional information :
(i) Expected cash balance as on 31.3.1997 Rs. 17,000.
(ii) Period of credit allowed to customers is one month and that allowed by suppliers is two months.
(iii) Lag in payment of wages is one month.
Ans)

Cash Budget for the period April - June, 1997

Q ) Prepare a Funds Flow Statement from the following Balance Sheets of Modern Garments Ltd.

Additional Information : Depreciation charged on Plant and Machinery during the year was Rs. 40,000 (Marks 12)
Ans) Working notes :

Schedule of charges in Working Capital

Prov. for taxation is treated as current liability

 Dr.............................Plant and Machinery..........................................Cr.

Neha Ltd.
Funds flow statement 
 Dr............... ........for the year ended 31st Dec.'96........................ Cr.