Question :
1.DISCUSS THE SOURCESS AND WAYS FOR MEETING THE FUND REQUIREMENTS.
Answer:
Funds at the command of the management may be put to use as it is thought best in the interest of
the company. But there are loan facilities with specific purpose / projects, especially in care of law
extended for the purchase of capital assets, and cash credit facilities extended against materials.
Internally generated funds may be available and they could be employed expeditiously.
Alternatively funds have to be arranged from outside sources. As the need of fund is for different
lengths of period, the arrangements for funds are accordingly attempted. For making payments and
for purchase of fixed assets requiring substantial amount of funds, the following sources are
generally used.
1. SHARE CAPITAL: The shares issued may be equity share capital or Preference share capital.
Decisions as to equity or preference are to be taken keeping in view the expected
profitability in the forthcoming years.
2. DEBENTURES: Debentures may be issued non convertible or convertible into equity share
capital after a given period. The major consideration for issuing debentures is that interest
on it is revenue expenditure and as such reduces the taxable profit and tax liabilities. The
other connections should be the response expected of the investors and the stock exchange.
3. LOANS: This can be obtained from financial institution like IDBI, ICI and IFC etc. For foreign
currency loans, financial institutions have to be contacted who guide and arrange for such
loans depending on the type of arrangements.
4. FIXED DEPOSIT: This can be arranged from the share holders and general public.
5. LEASE OF ASSETS: An alternative to avoid arranging for finances, one may resort to taking
the plant and machinery on lease.
For meeting the needs of working capital funds, generally commercial banks provide fund based
and non fund based facilities. For generating funds internally and for balancing the cash flow a
number of measures may be taken depending upon the need of financial circumstances.
Question :
2.WHAT ARE THE DECISIVE FACTORS IN SELECTING THE SOURCES OF FINANCE.
Answer:
There is no single parameter to decide in favour of a single source of finance. There exists a
conglomerate of factors which need to be comprehensively and quickly analysed to take judicious
decisions. They can be briefly summed up as :
1. Proper sense of timing for approaching a particular source.
2. The source should be honourable as to the status of a company and dependable as to the
smooth flow of funds when required.
3. Gestation period between initiating for this finance need, negotiations and/ or other
formalities completion to the final approvals and the disbursement of finances.
4. Consideration of interest rates.
5. Securities asked for by the financial institutions and the banks.
6. Financial institutions insisting on any debt / equity ratio and / or margin money.
7. Incidence of taxation in having a particular type of finance as against another, say capital
vs. loans.
8. For generating funds internally by means of giving a fillip to the activities and boosting sales
by offering higher discount facilities, or liquidating the stocks or reducing raw materials /
stores / spares/ inventions, cost benefit analysis must be made before making a final
decision. Internal financiers against external finance savings.
Question :
ABC Company expects with some degree of certainty to generate the following net income and to
have the following capital expenditure during the next five years
Year 1 2 3 4 5_________ ___
Rs.( In Thousands ) Rs.( In Thousands ) Rs.( In Thousands )Rs.( In
Thousands )Rs.( In Thousands )
Net Income 5000 4000 2500 2000 1500
Capital Expenditure 2000 2500 3200 4000 5000
The company currently has 1000000 shares of equity and pays dividends Rs. 5 per share
(a) Determine dividends per share if dividend policy is treated as a residual decision.
(b) Determine the amounts of external financing that will be necessary if the present dividend per share i
maintained.
(c) Determine dividends per share and the amounts of external financing that will be necessary if
dividend pay out ratio of 50% is maintained.
Under which of the three dividend policies are aggregate dividends maximised? External Financing
Minimised ?
Answer:
Year Income available for Dividends Dividend Per Share External Financing
1 Rs.3000000.00 Rs.3.00 0.00
2. Rs.1500000.00 Rs.1.50 0.00
3. 0.00 0.00 Rs.7000000.0
4. 0.00 0.00 Rs.2000000.00
5. 0.00 0.00 Rs. 3500000.00
__________ ______________
Rs.4500000.00 Rs.12500000.00
(b )
Year Net Income Dividends Capital Expenditure External Financing
1. 5000000.00 5000000.00 2000000.00 2000000.00
2. 4000000.00 5000000.00 2500000.00 3500000.00
3. 2500000.00 5000000.00 3200000.00 5700000.00
4. 2000000.00 5000000.00 4000000.00 7000000.00
5. 1500000.00 5000000.00 5000000.00 8500000.00
__________ ______________
Rs 25000000.00 Rs. 26700000.00
(c )
Year Net Income Dividend Dividend per Share Capital Expenditure External Financing
(1) (2) ( 3) (4) ( 5) ( 3+5-1)
1 5000000.00 2500000.00 2.50 2000000.00 0.00
2 4000000.00 2000000.00 2.00 2500000.00 500000.00
3 2500000.00 1250000.00 1.25 3200000.00 1950000.00
4 2000000.00 1000000.00 1.00 4000000.00 3000000.00
5. 1500000.00 750000.00 0.75 5000000.00 4250000.00
___________ ___________
Rs 7500000.00 Rs. 9700000.00
_____________ _____________
Aggregate dividends are highest under alternative b, and external financing is minimised under alternative c,
and a is constant dividend payout policy.
Question : WHAT IS TRIAL BALANCE? WHICH ERRORS ARE NOT DISCLOSED BY TRIAL BALANCE, DISCUSS.
Answer:
A trial balance is a simply list of the names and balances of all the accounts in the ledger. if the total debit
balance tallies with total credit balances then it is assumed that no clerical mistake is done, But it is
not a conclusive proof of the absence of any error. Since there are some errors which will not cause a
dis agreement in the trial balance .
These errors are
a. ERRORS OF OMMISSION : If an entry completly omitted from the books of accounts, it will not
