QUESTION PAPER May 2013

TOPPER S INSTITUTE [Cost & FM] May 2013 18 IPCC COST & FM GROUPI QUESTION PAPER May 2013 Q.1 Answer the following questions: [4 5=20 Marks] (a) Following are the details of the product Phomex for the month of April: Standard quantity of material required per unit 5 kg Actual output 1000 units Actual cost of materials used 7,14,000 Material price variance 51,000 (Fav) Actual price per kg of material is found to be less than standard price per kg of material by 10. You are required to calculate: (i) Actual quantity and Actual price of materials used. (ii) Material Usage Variance (iii) Material Cost Variance (i) Actual quantity = 5,100 kgs [WN 1 ) Actual price = 140 per kg [WN 2 ] (ii) Materials Usage Variance = (SQ SP) (AQ SP) [WN 3 & 4 ] = 7,50,000 7,65,000 = 15,000 (Adv) (iii) Material Cost Variance = MUV + MPV = 15,000 (Adv) + 51,000 (Fav) = 36,000 (Fav) Working Note 1 Calculation of Actual quantity: MPV = (AQ SP) (AQ AP) = 51,000 F AQ (SP AP) = 51,000 F AQ 10 = 51,000 AQ = 5,100 kgs Working Note 2 Calculation of Actual price: ActualMaterialCost Actual price = Actualquantity 7,14,000 = 5,100 kgs = 140 per kg. Working Note 3 Calculation of (SQ SP): SQ = 1,000 units 5 kg = 5,000 kgs SP = AP + 10 = 140 + 10 = 150 per kg SQ SP = 5,000 150 = 7,50,000 Working Note 4 Calculation of (AQ SP): AQ SP = 5,100 150 = 7,65,000

TOPPER S INSTITUTE [Cost & FM] May 2013 19 (b) (i) (ii) MFN Limited started its operation in 2011 with the total production capacity of 2,00,000 units. The following data for two years is made available to you: 2011 2012 Sales units 80,000 1,20,000 Total cost () 34,40,000 45,60,000 There has been no change in the cost structure and selling price and it is expected to continue in 2013 as well. Selling price is 40 per unit. You are required to calculate: (i) BreakEven Point (in units) (ii) Profit at 75% of the total capacity in 2013. FixedCost Break Even Point (in units) = n Cont P.U. 12,00,000 = 12 = 1,00,000 units Profit at 75% of total capacity: Profit = (No. of units sold Cont n P.U.) F.C. = (2,00,000 75% 12) 12,00,000 = 6,00,000 Working Note 1 Calculation of Contribution per unit: Cont n P.U. = Selling price per unit Value Cost P.U. = 40 28 = 12 Variable Cost per unit = Increase in Cost Increase in units 45,60,000 34,40,000 = = 28 per unit 1,20,000 80,000 Working Note 2 Calculation of Fixed Cost: (by using values of 2011) Total Cost Variable Cost = Fixed Cost 34,40,000 (80,000 28) = Fixed Cost Fixed Cost = 12,00,000 (c) A company issued 40,000, 12% Redeemable Preference Shares of 100 each at a premium of 5 each, redeemable after 10 years at a Premium of 10 each. The floatation cost of each share is 2. You are required to calculate cost of preference share capital ignoring dividend tax. RV NP PD+ K = N p 100 RV + NP 2 Here, PD = Pref. Dividend RV = Redeemable Value NP = Net Proceeds

TOPPER S INSTITUTE [Cost & FM] May 2013 20 PD = 12% of 100 = 12 RV = Face Value + Prem. = 100 + 10 = 110 NP = Issue Price floatation cost = (100 + 5) 2 = 103 110103 12+ K 10 p = 100 [N = Life of Share] 110+ 103 2 12+ 0.70 = 100 = 11.925% 106.50 (d) The following information relates to Beta Ltd. for the year ended 31 st March 2013: Net Working Capital 12,00,000 Fixed Assets to Proprietor s Fund Ratio 0.75 Working Capital Turnover Ratio 5 Time Return on Equity (ROE) 15% There is not debt capital. You are required to calculate (i) Proprietor s Fund (ii) Fixed Assets (iii) Net Profit Ratio. (i) Proprietor s Fund = Net working Capital + Fixed Assets Prop Fund = 12,00,000 + 0.75 prop fund 0.25 Fund = 12,00,000 12,00,000 Pr oprietor ' sfund= 0.25 (ii) Fixed Assets: = 48,00,000 Fixed Assets = 0.75 Prop Fund = 0.75 of 48,00,000 = 36,00,000 PAT (iii) Net profit Ratio = 100 Sales Working Notes: = 7,20,000 60,00,000 = 12% 100 PAT = 15% of Equity Fund/Proprietor s Fund = 15% of 48,00,000 = 7,20,000 Sales = 5 times of working capital = 5 12,00,000 = 60,00,000

TOPPER S INSTITUTE [Cost & FM] May 2013 21 Q.2 (a) The summarized Balance Sheets of MPS Limited as on 3132012 and 3132013 are as under: Liabilities 3132012 Equity share capital 40.00 Securities Premium Account General Reserve 8.00 Profit & Loss Account 10.30 10% Debentures 5.00 Sundry Creditors 4.90 Provision for Tax 5.00 Proposed Dividend 4.80 Corporate Dividend Tax 0.82 3132013 50.00 1.00 11.00 12.70 3.00 6.20 7.00 6.00 Assets 3132012 Land & Building 27.00 Plant & Machinery 25.00 Investments (Long Term) 3.00 Stock 7.50 Debtors 9.25 Bills Receivable 1.77 Cash & Bank Balance 4.50 Preliminary Expenses 0.80 3132013 25.00 34.00 8.00 9.80 11.15 1.65 7.70 0.62 1.02 78.82 97.92 78.82 97.92 Additional Information: (i) On 1.4.2012, the company redeemed debentures of 2,00,000 at par. (ii) During 201213 the company has issued equity shares for cash at a premium of 10%. (iii) Provision for tax made during the year 201213 for 6,80,000. (iv) Dividend received on investment 50,000 in July 2012. (v) A machine costing 8,00,000 (WDV 1,20,000) was sold for 50,000 during the year 2012 13. (vi) Depreciation for 201213 charged on plant & machinery 3,30,000 and 2,00,000 on land & building. (vii) Proposed Dividend and Corporate Dividend Tax of 201112 paid during the year 2012 13. Prepare a Cash Flow Statement as per Accounting Standard. (AS)3. [10 Marks] Cash Flow Statement for the year ended 31/3/13 (A) Cash Flow from operating activity (B) Cash Flow from Investing activity (C) Cash Flow from Financing activity Cash and Bank balance on 31/3/12 Cash & Bank balance on 31/3/13 Working Note: MPS Limited Cash Flow Statement for the year ended 31.3.13 (A) Cash Flow from operating Activities: Diff. between closing & opening balance of P/L A/c Add: Transfer to Reserve Add: Proposed dividend for current year Add: Corporate dividend tax for current year Add: Provision for Tax made during the c.y. 17,62,000 17,50,000 3,08,000 3,20,333 4,50,000 7,70,000 2,40,000 3,00,000 6,00,000 1,02,000 6,80,000

TOPPER S INSTITUTE [Cost & FM] May 2013 22 Net Profit before tax and extraordinary items Adjustment for: Depreciation (3,30,000 + 2,00,000) Interest on Debenture Dividend Received Loss on sale of machine Preliminary expenses w/o Operating profit before working capital changed Adjustment for: Increase in creditors Increase in stock Increase in Debtors Decease in Bills Receivable Cash generated from operations Less: Income tax paid (5 + 6.80 7.00) Total (B) Cash Flow from Investing Activities: Dividend received Sale of machine Purchase of Plant & machinery Purchase of Investment Total (C) Cash Flow from financing Activities Issue of Equity share Redemption of Debenture Interest on Debenture Dividend paid Corporate Dividend Tax Total 19,22,000 5,30,000 30,000 (50,000) 70,000 18,000 25,20,000 1,30,000 (1,90,000) (2,30,000) 12,000 22,42,000 (4,80,000) 17,62,000 50,000 50,000 (13,50,000) (5,00,000) (17,50,000) 11,00,000 (2,00,000) (30,000) (4,80,000) (82,000) 3,08,000 Working Note: To Balance b/d To Bank (b.f.) Plant & Machinery A/c 25,00,000 By Depreciation 3,30,000 13,50,000 By Cash/Bank A/c 50,000 By Profit & Loss A/c 70,000 By Bal. c/d 34,00,000 38,50,000 38,50,000 Q.2 (b) A skilled worker is paid a guaranteed wage rate of 120 per hour. The standard time allowed for a job is 6 hours. He took 5 hours to complete the job. He is paid wages under Rowan Incentive Plan. Calculate his effective hourly rate of earnings under Rowan Incentive Plan. (i) (ii) Calculate his effective hourly rate of earnings under Rowan Incentive Plan. If the worker is placed under Halsey Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings, calculate the time in which he should complete the job. [6 Marks]

TOPPER S INSTITUTE [Cost & FM] May 2013 23 Total Earning (i) Effective Hourly Rate = Actual Hours * 700 = = 140/hrs 5hrs *Calculation of total earning under Rowan Incentive Plant: AH Earning = ( AH R) + ( SH AH) R SH 5 = ( 5hrs 120) + (6 5) 120 6 = 600 + 100 = 700 (ii) Actual hours to maintain same effective Rate under Halsey Incentive scheme (50%) Bonus per hour = 140 120 = 20/hour 50 %( SH AH) 120 Bonus per hour = AH 50%(6 AH) 120 20= AH 20 AH = 360 60AH 80 AH = 360 360 AH = = = 4.5hours 80 Q.3(a) ABX Company Ltd. provides the following information relating to ProcessB: (i) Opening Workinprogress NIL (ii) Units Introduced 45,000 units @ 10 per unit (iii) Expenses debited to the process: Direct material 65,500 Labour 90,800 Overhead 1,80,700 (iv) Normal loss in the process 2% of Input (v) Workinprogress 1,800 units Degree of completion Materials 100% Labour 50% Overhead 40% (vi) Finished output 42,000 units (vii) Degree of completion of abnormal loss: Materials 100% Labour 80% Overhead 60% (viii) Units scrapped as normal loss were sold at 5 per unit. (xi) All the units of abnormal loss were sold at 2 per unit. You are required to prepare: (a) Statement of equivalent production. (b) Statement showing the cost of finished goods, abnormal loss and dosing balance of workinprogress. (c) ProcessB account and abnormal loss account. [10 Marks]

TOPPER S INSTITUTE [Cost & FM] May 2013 24 (a) Normal Loss (45,000 2%) Finished output Units in WIP Abnormal loss Statement of Equivalent Production Particulars Units Materials Labour Overhead % E. units % E. units % E. units 900 42,000 1,800 300 (b.f.) 100 100 100 42,000 1,800 300 100 50 80 42,000 900 240 100 40 60 42,000 20 180 Total 45,000 44,100 43,140 42,900 (b) Statement Showing the Cost of finished Goods, Abnormal Loss & closing balance of WIP Particulars Equival. Units Cost per Equiv. unit 1. Finished Goods (Mat., Lab, OH) 42,000 11.5873+2.1048 +4.2121 2. Abnormal Loss: Material Labour Overhead 300 240 180 11.5873 2.1048 4.2121 7,51,976 3,476 505 758 4,740 +1 3. Closing WIP: Material Labour Overhead 1,800 900 720 11.5873 2.1048 4.2121 20,857 1,894 3,033 25,784 Working Notes: (c) To Units Introduced To Direct Mat. To Labour To Overheads Statement of Cost per Equiv. Unit Elements Equiv. Units Cost of Element Cost per unit Materials Labour Overhead 44,100 43,140 42,900 4,50,000 + 65,5004,500 = 5,11,000 90,800 1,80,700 11.5873 2.1048 4.2121 Process B A/c Particulars Units Particulars Units 45,000 4,50,000 By Norma loss @ 2% 900 @ 5/unit 65,500 By Finished output 42,000 90,800 By Abnormal loss 300 1,80,700 By WIP c/d 900 4,500 7,51,976 4,740 25,784 45,000 7,87,000 45,000 7,87,000

TOPPER S INSTITUTE [Cost & FM] May 2013 25 Abnormal Loss A/c Particulars Units Particulars Units To Process B A/c 300 4,740 By Cash @ 2 P.U. By P/L A/c 300 600 4,140 300 4,740 300 4,740 Q.3(b) The following information related to XL Company Ltd. for the year ended 31 st March, 2013 are available to you: Equity share capital of 10 each 25 lakh 11 % Bonds of 1000 each 18.5 lakh Sales 42 lakh Fixed cost (Excluding Interest) 3.48 lakh Financial leverage 1.39 ProfitVolume Ratio 25.55% Income Tax Rate Applicable 35% You are required to calculate: (i) Operating Leverage; (ii) Combined Leverage; and (iii) Earning Per Share. [6 Marks] Contribution (i) Operating Leverage = EBIT 10,73,100 = = 1.48 7,25,100 Working Note: (a) Contribution = Sales PV Ratio = 42 lacs 25.55% = 10,73,100 (b) EBIT = Cont n Op. Fixed Cost = 10,73,100 3,48,000 = 7,25,000 (ii) Combined Leverage: CL = OL FL = 1.48 1.39 = 10,73,100 3,48,000 = 7,25,000 (iv) Earning per share: ( EBIT I)(1 t) EPS= N (7,25,100 *2,03,500)(1 35) = = Rs.1.356 2,50,000( Rs.10each) * 18.50 lac 11% = 2,03,500 Q.4(a) A company manufactures one main product (M 1) and two byproducts B 1 and B 2. For the month of January 2013, following details are available: Total Cost upto Separation point 2,12,400 Cost after separation No. of units produced Selling price per unit Estimated net profit as parentage to sales value Estimated selling expenses as percentage to sales value M 1 B 1 B 2 35,000 1,800 40 20% 4,000 100 20% 15% 24,000 3,000 30 30% 15%

TOPPER S INSTITUTE [Cost & FM] May 2013 26 There are no beginning or closing inventories. Prepare statement showing: (i) Allocation of joint cost; and (ii) Product wise and overall profitability of the company for January 2013. (i) Statement of Allocation of Joint Cost [8 Marks] Particulars B 1 B 2 Sales @ 40/ 30 P.U. Less: Estimated profit @ 20%/30% Less: Estimated selling expenses @ 15% on sales Less: Further estimated cost (cost after separation) 72,000 14,400 10,800 35,000 90,000 27,000 13,500 24,000 Joint Cost 11,800 25,500 Total Joint Cost Less: Joint cost allocable to B 1 Less: Joint cost allocable to B 1 Joint Cost allocable to M 1 2,12,400 11,800 25,500 1,75,100 (ii) Product wise & overall profitability Statement Particulars M 1 B 1 B 2 Total 4,00,000 72,000 90,000 5,62,000 Sales Less: Est. selling extra @ 20%/15%/15% Less: Cost after separ. Less: Joint cost 80,000 Nil 1,75,100 10,800 35,000 11,800 13,500 24,000 25,500 1,04,300 59,000 2,12,400 Profit 1,44,900 14,400 27,000 1,86,300 Q.4(b) The following information is provided by the DPS Limited for the year ending 31 st March, 2013. Raw material storage period 55 days Workin progress conversion period 18 days Finished Goods storage period 22 days Debt collection period 45 days Creditors payment period 60 days Annual Operating cost 21,00,000 (including depreciation of 2,10,000) [1 year = 360 days] You are required to calculate: (i) Operating Cycle period. (ii) Number of Operating Cycle in a year. (iv) Amount of working capital required for the company on a cash cost basis. (iv) The company is a market leader in its product, there is virtually no competitor in the market. Based on a market research it is planning to discontinue sales on credit and deliver products based on prepayments. Thereby, it can reduce its working capital requirement substantially. What would be the reduction in working capital requirement due to such decision? [8 Marks] (i) Operating cycle period = 55 + 18 + 22 + 45 60 = 80 Days

TOPPER S INSTITUTE [Cost & FM] May 2013 27 (ii) No. of operating cycle = (iii) Working Note (Cash cost basis): (iv) 360 = 4.5times 80 Working Capital = Annual cash operating cost Op.cycle 360 80 = ( 21lacs 2.10lacs) = 4,20,000 360 In case of cash sales operating cycle period will reduce by 45 Days (Debt collection period). Revised operating cycle period = 55 + 18 + 22 60 Revised working capital (cash cost): = 35 Days 35 = 18,90,000 = 1,83,750 360 Reduction in W.C. = 4,20,000 1,83,750 = 2,36,250 Reduction in W.C. Or 45Days = 18,90,000 360 = 2,36,250 Q.5 [4 4= 16 Marks] (a) Cost of a product or service is required to be expressed in suitable cost unit. State the cost units for the following industries: (i) Steel (ii) Automobile (iii) Transport (iv) Power (i) Steel Per Ton (ii) Automobile Number (iii) Transport Per ton km./passenger kilometer (iv) Power Kilo watt hour (b) Distinguish between Cost allocation and cost absorption. Allocation: Allocation is the process by which cost items are charged directly to a cost unit or cost center. For example, electricity charges can be allocated to various departments if separate meters are installed, deprecation of machinery can be allocated to various departments as the machines can be identified, etc. Thus allocation is a direct process of identifying overheads to the cost units or cost center. Absorption of Overheads: The most important step in the overhead accounting is Absorption of overheads. Absorption means charging equitable share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the absorption rate which is calculated by dividing the overhead

TOPPER S INSTITUTE [Cost & FM] May 2013 28 expenses by the base selected. (c) (d) What is debt securitization? And also state its advantages. Debt securitization is a method of recycling of funds. It is thus a process of transforming the assets of a lending institution into negotiable instrument for generation of funds. Function of debt securitization: (a) The origination function: The credit worthiness of borrower is assessed. (b) The pooling function: The loans/credit of similar types are dubbed or pooled together. (c) The transferring function: The asset pool is than transferred to a SPV. (d) Securitisation function: The SPV then issues securities on the basis of asset pools. Advantage of debt securitization: (a) It converts the debt into securities. (b) It converts the illiquid asset into liquid ones. (c) It opens up new investment avenues. Distinguish between factoring and billdiscounting. Differentiation between Factoring and Bills Discounting The differences between Factoring and Bills discounting are: (a) Factoring is called as Invoice Factoring whereas in Bills discounting, is known as Invoice discounting. (b) In Factoring, the parties are known as the client, factor and debtor whereas in Bills discounting, they are known as drawer, drawee and payee. (c) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks. (d) For factoring there is no specific Act, whereas in the case of bills discounting, the Negotiable Instruments Act is applicable. Q.6(a) Pentax Limited has prepared its expense budget for 20,000 units in its factory for the year 2013 as detailed below: per unit Direct Materials 50 Direct Labour 20 Variable Overhead 15 Direct Expenses 6 Selling Expenses (20% fixed) 15 Factory Expenses (100% fixed) 7 Administration expenses (100% fixed) 4 Distribution expenses (85%variable) 12 Total 129 Prepare en expense budget for the production of 15,000 units and 18,000 units. [7 Marks] Expenses Budget Particulars 15,000 units 18,000 units Direct Materials @ 50 per unit Direct Labour @ 20 per unit Variable OH @ 15 per unit Direct exps @ 6 per unit (assumed variable) Selling Exps: Variable @ 12 per unit Fixed ( 3 20,000) Factory Expenses ( 7 20,000 units) 7,50,000 3,00,000 2,25,000 90,000 1,80,000 60,000 1,40,000 9,00,000 3,60,000 2,70,000 1,08,000 2,16,000 60,000 1,40,000

TOPPER S INSTITUTE [Cost & FM] May 2013 29 Administration Exps ( 4 20,000 units) Distribution Expenses: Variable @ 10.20 P.U. (85% of 12) Fixed ( 1.80 20,000 units) 80,000 1,53,000 36,000 80,000 1,83,600 36,000 Total Expenses 20,14,000 2,35,600 Q.6(b) PQR company. Ltd. is considering to select a machine out of two mutually exclusive machines. The company's cost of capital is 12 percent and corporate tax rate is 30 percent. Other information relating to both machines is as follows: Machine I Machine II Cost of Machine 15,00,000 20,00,000 Expected Life 5 Yrs. 5 Yrs. Annual Income (Before Tax and Depreciation) 6,25,000 8,75,000 Depreciation is to be charged on straight line basis: You are required to calculate: (i) Discounted Pay Back Period (ii) % Net Present Value (iii) Profitability Index The present value factors of 1 @ 12% are as follows: Year 01 02 03 04 05 PV factor @ 12% 0.893 0.797 0.712 0.636 0.567 (i) Working Note (a) Discounted Pay Back period: Discounted Pay Back period = LLY + 15,00,000 12,67,056 Machine 1 = 3 yrs + 3,35,490 = 3 +.694 = 3.694 yrs 20,00,00017,59,466 Machine 2 = 3 yrs + 4,65,870 = 3 +.516 = 3.516 yrs Deficiency Discounted CFAT of Calculation of cumulative Dis. CFAT Year Machine I Machine II Discounted CFAT Cum Dis. CFAT Discounted CFAT Cum Dis. CFAT 1 2 3 4 5,27,500.893 = 4,71,058 5,27,500.797 = 4,20,418 5,27,500.712 = 3,75,580 5,27,500.636 = 3,35,490 4,71,058 8,91,476 12,67,056 (LLY) 16,02,546(ULY) 7,32,500.893 = 6,54,123 7,32,500.797 = 5,83,803 7,32,500.712 = 5,21,540 7,32,500.636 = 4,65,870 6,54,123 12,37,926 17,59,466(LLY) 22,25,336 (ULY) ULY

TOPPER S INSTITUTE [Cost & FM] May 2013 30 Working Notes: (b) Calculation of CFAT: Profit (before tax & Dep) Less: Deprecation PBT Less: Tax @ 30% PAT Add: Deprecation CFAT Machine I 6,25,000 3,00,000 3,25,000 97,500 2,27,500 3,00,000 5,27,500 Machine II 8,75,000 4,00,000 4,75,000 1,42,500 3,32,500 4,00,000 7,32,500 (ii) (iii) Net present Value = PV of Inflows PV of Outflows Machine I = (5,27,500 3.605) 15,00,000 = 4,01,638/ Machine II = (7,32, 500 3.605) 20,00,000 = 6,40,663/ Profitability Index: PI = PV of Inflows PV of Outflows Machine I = 5,27,500 3.605 15,00,000 = 1.268 Machine II = 7,32,500 3.605 20,00,000 = 1.32 Q.7 Answer any four of the following (a) Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on continuous stock taking. Comment. Perpetual inventory system is the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value. Under this system, a continuous record of receipt and issue of materials is maintained by the Stores Department and the information about the stock of material is always available. In this method, stock records are maintained in such a way as to make an entry in the records, the physical movement of stock, on receipts and issues of materials and to indicate the balance of each item of material in the stores at any point of time. In this system, the entries are made in bin cards and stores ledger as and when the receipts and issues of materials take place and ascertaining the balance after every receipt or issue of materials. The stocks as per the dual records namely bin card and stores ledger are reconciled on a continuous basis. However, in Continuous stock taking is the process of counting and valuing selected items at different times on a rotating basis. Under this system, physical stock verification is made for each item of stock on continuous basis. It is a physical checking of the stock records with actual stocks on continuous basis. It is a method of verification of physical stock on a continuous basis instead of at the end of the accounting period. It is a verification conducted round the year, thus covering each item of store twice or thrice. Valuable items are checked more frequently than the stocks with lesser value. Thus we can say that efficacy of the system depends on continuous stock taking.

TOPPER S INSTITUTE [Cost & FM] May 2013 31 (b) (c) (d) Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system? Integrated Accounting is the name given to a system of accounting whereby cost and financial accounts are kept in the same set of books. Integrated Accounting provides or meets out fully the information requirement for Costing as well as for Financial Accounts. The question of reconciling profit and financial profit does not arise, as there is one figure of profit only. Operating risk is associated with cost structure, whereas financial risk is associated with capital structure of a business concern. Critically examine this statement. Business Risk, which is sometimes called operating risk, is the risk associated with the normal day to day operations of the firm. An entity carrying on a business may in order to carry its day to day operations burden itself with some operating fixed costs which will be incurred irrespective of the fact whether the entity makes any sales or not. Examples of such operating fixed costs are: Rentals, Salaries, Electricity and Telephone Expenses etc. Financial Risk is created by the use of fixedcost securities (that is, debt and preference shares). An entity may in order to finance its business burden itself with some financial fixed costs which will be incurred irrespective of the fact whether the entity makes any profits or not. Examples of such financial fixed costs are: interest on debt, preference dividends. Looking at the two categories in a sources and uses context, business risk represents the chance of loss and variability of return created by a firm's uses of funds. Financial risk is the chance of loss and the variability of the owners return created by a firm's sources of funds. What is venture capital financing? State the factors which are to be considered in financing any risky project. Venture capital refers to financial investment in a highly risky project with the objective of earning a high rate of return. Thus venture capital financing means financing of high risk projects promoted by new, inexperienced entrepreneurs who have excellent business ideas, but does not have a financial backing. Features of Venture Capital financing: (i) Equity participation by the venture capitalist. (ii) It is a long term financing for a period between 5 to 10 years. (iii) The venture capitalist not only invest but also participate in the management of the venture capital undertaking. Factors that a venture capitalist should consider before financing any risky project are as follows: 1. Level of expertise of company s management: Most of venture capitalist believes that the success of a new project is highly dependent on the quality of its management team. They expect that entrepreneur should have a skilled team of managers. Managements also be required to show a high level of commitments to the project. 2. Level of expertise in production: Venture capital should ensure that entrepreneur and his team should have necessary technical ability to be able to develop and produce new product / service. 3. Nature of new product / service: The venture capitalist should consider whether the Development and production of new product / service should be technically feasible. They should employ experts in their respective fields to examine idea proposed by the entrepreneur. 4. Future prospects: Since the degree of risk involved in investing in the company is quite fairly High, venture capitalists should seek to ensure that the prospects for future profits compensate for the risk. Therefore, they should see a detailed business plan setting out the future business strategy. 5. Competition: The venture capitalist should seek assurance that there is actually a

TOPPER S INSTITUTE [Cost & FM] May 2013 32 market for a new product. Further venture capitalists should see the research carried on by the entrepreneur. (e) State the advantages of Electronic Cash Management System. With the growth in use of computers, banks are now providing electronic fund transfer and electronic clearing transfer securities. Dividends payments by companies, refunds of subscription money in case of OPOs and refund of tax by Incometax Dept. are now being made through electronic clearing facility where in the funds are transferred from one account to another within a few moments across India. In such transfers, there is no float as such. Business houses are also using these faculties and payments and receipts are effected through electronic clearing system. If it is so, then the question of float management does not arise. Even where the cheques are being used for payment, float period is reducing because of greater efficiency on the part of the banking system.