MB0041- MANAGERIAL ECONOMICS

Ans:-

Illustration 4:

The trial balance of Evergreen Co Ltd., as taken on 31st December, 2002 did
not tally and the difference was carried to suspense account. The following
errors were detected subsequently.
a) Sales book total for November was under cast by Rs. 1200.
b) Purchase of new equipment costing Rs. 9475 has been posted to
Purchases a/c.
c) Discount received Rs.1250 and discount allowed Rs. 850 in September
2002 have been posted to wrong sides of discount account.
d) A cheque received from Mr. Longford for Rs. 1500 for goods sold to him
on credit earlier, though entered correctly in the cash book has been
posted in his account as Rs. 1050.
e) Stocks worth Rs. 255 taken for use by Mr Dayananda, the Managing
Director, have been entered in sales day book.
f) While carrying forward, the total in Returns Inwards Book has been
taken as Rs. 674 instead of Rs. 647.
g) An amount paid to cashier, Mr. Ramachandra, Rs. 775 as salary for the
month of November has been debited to his personal account as
Rs. 757.
Pass journal entries and draw up the suspense account

Note:
In illustration 4 sub question (c): Discount received Rs.1250 is posted on the
wrong side of discount account. Discount received (income) should be
credited and discount allowed (expenses) should be debited. Instead of
crediting the discount received account, it has been wrongly debited. To
rectify this error, we need to credit discount received account to the extent of
Rs.2500 (Rs.1250+ Rs.1250).
In the same context, discount allowed (which is an expense) should be
debited, instead it is credited. To rectify the error, we need to debit discount
allowed to the extent of Rs.1700 (850 +850). The difference between
discount received and discount allowed account is transferred to suspense

account.

Ans:- Adjusted Trial Balance

The adjustments may be directly incorporated into the final accounts as
shown above. However, the adjustments may also be incorporated into the
trial balance so that the preparation of the final accounts becomes easy.
Such a trial balance, which is prepared after incorporating all the
adjustments, is called adjusted trial balance.
Such adjustments are done through the concerned ledger accounts.
We may understand this with the help of an illustration.

Adjustments:
1. Charge depreciation at 10% on Buildings and Furniture and fittings.
2. Write off further bad debts 1000
3. Taxes and Insurance prepaid 2000
4. Outstanding salaries 5000

5. Commission received in advance1000

Ans:- Trend Analysis

This technique involves computation of trend ratios (trend percentages) for a
series of years. Horizontal analysis gives a picture of only two years, the
current year in comparison with the previous year. This leaves the user with
no idea about tracking the growth of the company. To overcome this
limitation, trend analysis may be used.
Under this technique, the data to be analysed is taken for a series of years.
The base year data is taken as 100. For the subsequent years, the trend
percentages are computed.
The formula for computing trend percentage for a particular year is given by:
Figure for the base year
Trend ratio Figure for that particular year 100
Let us understand this with the help of an illustration.
Illustration 2: Compute trend ratios and comment on the financial
performance of Infosys Technologies Ltd. from the following extract of its

income statements of five years.

Comment: The Revenue and Operating Profit (PBIDT) have almost

doubled in four years. The PAT from ordinary activities has increased by
77.26% in the same period.
Ratio Analysis
Absolute numbers notify very little. Assume that two companies A and B,
operating within the same industry vertical, submit the following information:

One would say that

Company B made more profits. But if it is given that the
sales of Company A is Rs.20000 and sales of Company B is Rs.400000,
then we understand the Company A is more efficient than Company B
because Company A made a profit of 50% (10000/20000) whereas
Company B made a profit of only 25% (100000/400000).
Therefore, ratios are very useful.
8.6.1 Meaning of ratio
A ratio represents a relationship between two numbers. An accounting ratio
represents a relationship between two accounting numbers.
A ratio can be expressed in the following three forms:
1. Proportion
2. Percentage
3. Turnover rate

Li
quidity ratios
Liquidity is the ability of a firm to satisfy its short-term obligations as they
become due for payment. It reflects the short-term solvency of the firm. The
ratios which indicate the liquidity of the firm are:
1. Net working capital
2. Current ratios
3. Acid test or quick ratio
4. Super quick ratio
1. Net working capital It is the excess of current assets over current
liabilities.
Net WorkingCapitl(NWC) urent Aset(CA) CurentLiablties(CL)
If CA is more than CL, it is called positive NWC and vice versa. 2. Current ratio It is
the ratio of total current assets to total current
liabilities. It indicates the rupees of current assets available for each
rupee of current liability payable.

Ans:- Meaning of Cash Flow Analysis

Cash flow analysis is an important tool of financial analysis. It is the process
of understanding the change in position with respect to cash in the current
year and the reasons responsible for such a change. Incidentally, the
analysis also helps us to understand whether the investing and financing
decision taken by the company during the year are appropriate are not.
Cash flow analysis is presented in the form of a statement. Such a
statement is called a cash flow statement
Objectives of Cash Flow Analysis
Cash flow analysis is done with the objective of understanding some of the
following important questions:
What is the change in the cash position of the firm for the current year
as compared to the previous year?
How good was the liquidity position of the firm?
What were the sources of cash during the current year?
How much cash was generated from operations?
What were the applications of cash during the current year?
How much cash was spent on investment activities, such as purchase of
new plant and machinery, purchase of land?
Preparation of Cash Flow Statement
The preparation of cash flow statement is similar to the preparation of fund
flow statement. It requires the identification of the sources of cash and the
uses of cash.
A source of cash is a transaction which brings an inflow of cash. An

application of cash is a transaction which leads to an outflow of cash. Following is the

list of transactions that results in a source of cash or
application of cash.
Sources of cash:
Cash from operations
Proceeds of issue of
o Equity shares
o Preference shares
Proceeds of issue of
o Debentures
o Bonds
Raising long-term debts from banks and financial institutions
Raising mortgage loans (long-term)
Sale of assets
o Tangible assets like land, buildings, equipments, machinery,
vehicles, etc.
o Intangible assets like patent rights, copyrights, brand names,
goodwill, licences, etc.
Sale of investments like shares, bonds, debentures, etc.
Applications or uses of cash:
Cash lost in operations (adjusted net loss)
Buy back of equity shares
Redemption of redeemable preference shares
Redemption of redeemable bonds or debentures
Repaying of long-term debts from banks and financial institutions
Repaying of mortgage loans (long-term)
Purchasing of assets
o Tangible assets like land, buildings, equipments, machinery,
vehicles, etc.
o Intangible assets like patent rights, copyrights, brand names,
goodwill, licences, etc.
Purchasing of investments like shares, bonds, debentures, etc.
It may be noted that the sources of cash increase the cash balance and
applications of cash decrease the cash balance.

Ans:-

Hydro Electric Ltd. furnishes the following information from its cost records

for the first quarter of the current year