Contents Part One COST ACCOUNTING : PRIME COST AND OVERHEADS Chapter 1 OVERVIEW OF COST ACCOUNTING 1. 1 Need for Cost Management 3 1. 2 Introduction to Cost Accounting 3 1. 3 Cost 4 1. 4 Costing 4 1. 5 Cost Accounting 4 1. 6 Cost Accountancy 4 1. 7 Art, Science and Practice 5 1. 8 Scope of Cost Accounting 5 1. 9 Objectives of Cost Accounting 5 1. 10 Cost Accounting System 5 1. 11 Necessity for Cost Accounting System 6 1. 12 Essentials of Good Cost Accounting System 6 1. 13 Essential Factors for Good Cost Accounting System 7 1. 14 Reports Provided by Cost Accounting Department 7 1. 15 Practical Difficulties in Installation 8 1. 16 Suggestions to Overcome Practical Difficulties 8 1. 17 Cost Accounting and Financial Accounting : Distinction 9 1. 18 Cost Accounting and Management Accounting : Distinction 10 1. 19 Limitations of Cost Accounting 10 1. 20 Important Features of a Performance Measurement Costing 11 1. 21 Cost Unit 11 1. 22 Examples of Cost Units 11 1. 23 Composite Cost Unit 12 1. 24 Cost Object 12 1. 25 Cost Centre 13 1. 26 Benefits of Establishment of Cost Centre 13 1. 27 Types of Cost Centres 13 1. 28 Profit Centre 13 1. 29 Investment Centre 14 1. 30 Methods of Costing 14 1. 31 Specific Order Costing 15 1. 32 Continuous Operation Costing 15 1. 33 Specific Order Costing and Continuous Order Costing: Distinction 15 1. 34 Types of Costing Systems 15 1. 35 Levels of Variability of Costs 16 1. 36 Strategic Cost Management (SCM) 17 Theoretical Examination Questions 17 True or False Statements 17 Choose Correct Answer 18 Chapter 2 CLASSIFICATION OF COST 2. 1 Classification of Costs 21 2. 2 Cost Classification by Nature 22 2. 3 Cost Classification in Relation to Cost Centre 22 2. 4 Cost Classification by Time 23 2. 5 Cost Classification for Decision Making 24 2. 6 Cost Classification by Nature of Production Process 26 2. 7 Classification of Costs based on Behaviour 27 2. 8 Importance of Behaviourwise Cost Classification 28 2. 9 Segregation of Semi-variable Costs 29 2. 10 Industrial Engineering Method 29 2. 11 Account Inspection Method 29 2. 12 Scatter Graph Method 29 2. 13 High and Low Method 30 2. 14 Regression Analysis 31 2. 15 Assumptions in Regression Analysis 33 2. 16 Meaning of Cost Codification 33 2. 17 Objectives of Codification 33 2. 18 Requirements of Efficient Coding System 33 2. 19 Methods of Codification of Costs 34 Theoretical Examination Questions 35 True or False Statements 35 Choose Correct Answer 36 Practical Examination Problems 40 Chapter 3 MATERIAL PROCUREMENT PROCEDURES 3. 1 Components in Direct Material Cost 43 3. 2 Bill of Materials 43 3. 3 Advantages of Bill of Materials 44 3. 4 Purchase Requisition 44 3. 5 Purchase Order 45 3. 6 Material Inspection Note 45 3. 7 Goods Received Note (GRN) 46 C-11
C-12 Cost Accounting and Financial Management 3. 8 Stores Requisition Note 46 3. 9 Material Transfer Note 47 3. 10 Material Return Note 47 3. 11 Bin Card 48 3. 12 Stores Ledger 48 3. 13 Methods of Pricing Material Issues 49 3. 14 First-In First-Out (FIFO) Method 49 3. 15 Last-In First-Out (LIFO) Method 50 3. 16 Weighted Average Cost Method 50 3. 17 Standard Cost Method 51 3. 18 Replacement Cost Method 51 3. 19 Factors Effecting Selection of Pricing Method 51 3. 20 Suitability of Pricing Method in Rising Prices 52 3. 21 Reasons for Stock Discrepancies 54 3. 22 Steps to Avoid Stock Discrepancies 54 3. 23 Accounting Procedure for Material Shortages 55 3. 24 Material Control System 58 3. 25 Perpetual Inventory System 58 3. 26 Advantages of Perpetual Inventory System 58 3. 27 Continuous Stock Taking System 59 3. 28 Advantages of Continuous Stock Taking System 59 Theoretical Examination Questions 59 True or False Statements 60 Choose Correct Answer 60 Practical Examination Problems 63 Chapter 4 INVENTORY MANAGEMENT 4. 1 Definition and Meaning of Inventory 72 4. 2 Features of Ideal Inventory Policy 72 4. 3 Requirements of Stock Control 72 4. 4 Impact of Inflation on Inventory Holding 73 4. 5 Input-Output Ratio 73 4. 6 Stock Turnover Ratio 74 4. 7 Basic Concept of Economic Order Quantity (EOQ) 74 4. 8 Categories of Inventory Costs 75 4. 9 Assumptions of EOQ 76 4. 10 Graphical Determination of EOQ 76 4. 11 EOQ with Discounts 77 4. 12 Pull System in Inventory Control 78 4. 13 Fixation of Inventory Levels 78 4. 14 VED Analysis 79 4. 15 FNSD Analysis 79 4. 16 ABC Analysis 80 4. 17 Just in Time Inventory Management 81 Theoretical Examination Questions 81 Choose Correct Answer 82 Practical Examination Problems 85 Chapter 5 EMPLOYEE REMUNERATION METHODS 5. 1 Time and Motion Study 90 5. 2 Method Study 90 5. 3 Work Study 90 5. 4 Activity Sampling 91 5. 5 Work Simplification 91 5. 6 Job Evaluation 91 5. 7 Advantages of Job Evaluation 91 5. 8 Job Evaluation Methods 92 5. 9 Merit Rating 92 5. 10 Labour Remuneration Plans 92 5. 11 Suitability of Time Rate Remuneration Plans 93 5. 12 Advantages and Disadvantages of Time Rate Remuneration Plans 93 5. 13 Flat Time Rate Plan 93 5. 14 High Day Rate Plan 93 5. 15 Plan with Different Time Rates 94 5. 16 Halsey Premium Bonus Plan 94 5. 17 Rowan Premium Bonus Plan 94 5. 18 Comparison of Halsey and Rowan Plans 96 5. 19 Halsey-Wair Plan 97 5. 20 Accelerated Premium Bonus Plan 97 5. 21 Emerson s Efficiency Bonus Plan 98 5. 22 Barth Variable Bonus Plan 99 5. 23 Bedaux Points Plan 100 5. 24 Gnatt s Task Bonus Plan 100 5. 25 Piece Rate Remuneration Plans 101 5. 26 Straight Piece Rate Plan 101 5. 27 Piece Rate with Guaranteed Time Rate Plan 102 5. 28 Differential Piece Rate Plan 102 5. 29 Taylor s Differential Piece Rate Plan 103 5. 30 Merrick s Differential Piece Rate Plan 104 5. 31 Group Bonus Plans 104 5. 32 Applicability of Group Bonus Plans 105 5. 33 Advantages and Disadvantages 105 5. 34 Profit Sharing Plan 105 5. 35 Co-partnership Plan 106 5. 36 Requisites of Good Wage Incentive Plan 106 Theoretical Examination Questions 107 True or False Statements 108 Choose Correct Answer 108 Practical Examination Problems 111 True or False Statements 82
Contents C-13 Chapter 6 EMPLOYEE COST ACCOUNTING 6. 1 Labour Cost Records 125 6. 2 Payroll Accounting 125 6. 3 Labour Cost Accounting 125 6. 4 Time Keeping 126 6. 5 Time Booking 126 6. 6 Labour Turnover 128 6. 7 Causes of Labour Turnover 128 6. 8 Measures to Reduce Labour Turnover 129 6. 9 Measurement of Labour Turnover 130 6. 10 Costs of Labour Turnover 131 6. 11 Total Cost of Labour Turnover 132 6. 12 Treatment of Cost of Labour Turnover 132 6. 13 Idle Time 133 6. 14 Causes of Idle Time 133 6. 15 Accounting Treatment of Idle Time 134 6. 16 Overtime Premium 134 6. 17 Accounting Treatment of Overtime Premium 134 6. 18 Measures to Control Overtime Premium 134 6. 19 Disadvantages of Overtime Working 135 6. 20 Treatment of Special Labour Costs 135 6. 21 Incentive Schemes 135 6. 22 Incentive to Indirect Workers and Indirect Incentive to Direct Workers : Distinction 136 6. 23 Casual Worker and Out Worker 136 Theoretical Examination Questions 136 True or False Statements 137 Choose Correct Answer 137 Practical Examination Problems 140 Chapter 7 OVERHEADS : CLASSIFICATION AND ACCOUNTING 7. 1 Definition and Meaning of Direct Expense 148 7. 2 Definition and Meaning of Overheads 148 7. 3 High Overhead Costs and Test of Efficiency 149 7. 4 Standing Order Number vs. Cost Account Number 149 7. 5 Steps in Accounting of Overheads 149 7. 6 Classification and Codification of Overheads 149 7. 7 Collection of Overheads 149 7. 8 Cost Allocation 150 7. 9 Departmentalization of Overheads 150 7. 10 Allocation of Overheads 151 7. 11 Apportionment of Overheads 151 7. 12 Distinction between Allocation and Apportionment 151 7. 13 Production Overhead 151 7. 14 Examples of Production Overhead 152 7. 15 Types of Production Overhead and Basis of Apportionment 152 7. 16 Re-apportionment of Service Centre Costs 153 7. 17 Rationale for Allocating Service Departments Costs to Production Departments 153 7. 18 Methods in re-allocation of Service Department Overheads 153 7. 19 Direct Method 153 7. 20 Step down Method 154 7. 21 Repeated Distribution Method 155 7. 22 Simultaneous Linear Equation (Matrix) Method 158 7. 23 Meaning and Definition of Administrative Overhead 160 7. 24 Examples of Administration Overhead 160 7. 25 Types of Administration Overhead and Basis of Apportionment 161 7. 26 Treatment of Administrative Overheads in Cost Accounting 161 7. 27 Meaning and Classes of Selling and Distribution Overheads 161 7. 28 Basis of Apportionment of Selling and Distribution Overheads 162 7. 29 Accounting of Selling and Distribution Overheads 162 7. 30 Problems in Controlling Selling and Distribution Overheads 163 Theoretical Examination Questions 164 True or False Statements 165 Choose Correct Answer 165 Practical Examination Problems 167 Chapter 8 OVERHEADS : ABSORPTION AND CONTROL 8. 1 Definition and Meaning of Overhead Absorption 184 8. 2 Methods of Production Overhead Absorption 184 8. 3 Production Unit Method 184 8. 4 Percentage of Direct Material Cost Method 185 8. 5 Percentage of Direct Labour Cost Method 185 8. 6 Percentage of Prime Cost Method 186 8. 7 Direct Labour Hour Rate Method 186 8. 8 Machine Hour Rate Method 187 8. 9 Single Overhead Absorption Rate 190 8. 10 Departmental Overhead Absorption Rates 190 8. 11 Predetermined Overhead Absorption Rates 191 8. 12 Over and Under Absorption of Overheads 191 8. 13 Reasons for Over or Under Recovery 192 8. 14 Treatment of Under/Over Absorption of Overheads 192 Theoretical Examination Questions 193 True or False Statements 194 Choose Correct Answer 194 Practical Examination Problems 195 Chapter 9 OVERHEADS : TREATMENT OF SPECIAL ITEMS 9. 1 Idle Capacity Costs 210 9. 2 Treatment of Idle Capacity Costs in Cost Accounts 210
C-14 Cost Accounting and Financial Management 9. 3 Interest on Capital 210 9. 4 Arguments in Favour of Inclusion 211 9. 5 Arguments Against Inclusion 211 9. 6 Definition and Meaning of Depreciation 211 9. 7 Obsolescence 212 9. 8 Depreciation and Obsolescence : Distinction 212 9. 9 Importance of Sound Depreciation Policy 212 9. 10 Plant and Other Fixed Assets Registers 213 9. 11 Using of Asset After Fully Depreciated 213 9. 12 Material Handling Expenses 214 9. 13 Market Research Expenses 214 9. 14 Subscriptions and Donations 214 9. 15 After Sales Service Costs 214 9. 16 Royalties and Patent Fees 215 9. 17 Training Costs 215 9. 18 Taxation 215 9. 19 Financing Charges 215 9. 20 Major Repairs to Equipment 215 9. 21 Cost of Tools 216 9. 22 Bad Debts 216 9. 23 Notional Rent 216 9. 24 Packing Expenses 216 9. 25 Data Processing Cost 216 9. 26 Stores Overhead 217 9. 27 Erection and Dismantling of Plant and Machinery 217 9. 28 Transport Cost 217 9. 29 Insurance Cost 217 9. 30 Research and Development Costs 218 9. 31 Treatment of Research Cost 218 9. 32 Treatment of Development Cost 219 9. 33 Waste 219 9. 34 Scrap 219 9. 35 Spoilage 220 9. 36 Defectives 220 Theoretical Examination Questions 221 True or False Statements 222 Choose Correct Answer 222 Practical Examination Problems 223 Chapter 10 COST ACCOUNTING STANDARDS 10. 1 Cost Accounting Standards Board (CASB) and its Objectives 226 10. 2 Cost Accounting Standards (CAS) 226 10. 3 Generally Accepted Cost Accounting Principles (GACAP) 228 10. 4 Principles Applicable to all Elements of Cost as per GACAP 228 10. 5 Principles Applicable to Presentation and Disclosure as per GACAP 229 C A S 1 Classification of Cost 229 C A S 2 Capacity Determination 234 C A S 3 Overheads 235 C A S 4 Cost of Production for Captive Consumption 236 C A S 5 Determination of Average (equalized) Cost of Transportation 236 C A S 6 Materials 237 C A S 7 Employee Cost 239 C A S 8 Cost of Utilities 241 C A S 9 Packing Material Cost 242 C A S 10 Direct Expenses 243 C A S 11 Administrative Overheads 244 C A S 12 Repairs and Maintenance Cost 244 C A S 13 Cost of Service Centre Costs 245 C A S 14 Pollution Control Cost 246 C A S 15 Selling and Distribution Overheads 247 C A S 16 Depreciation and Amortization 248 C A S 17 Interest and Financing Charges 249 Part Two FINANCIAL MANAGEMENT Chapter 11 OVERVIEW OF FINANCIAL MANAGEMENT 11. 1 Traditional View of Financial Management 253 11. 2 Modern View of Financial Management 253 11. 3 Types of Decisions made by Finance Manager 253 11. 4 Investment Decisions 253 11. 5 Finance Decisions 254 11. 6 Classification of Capital Structure 255 11. 7 Dividend Decisions 255 11. 8 Tenets of Financial Management 256 11. 9 Interrelationship of Investment, Financing and Dividend Decisions 256 11. 10 Liquidity and Profitability 257 11. 11 Financial Management and Accounting : Distinction 257 11. 12 Financial Management-Science or Art 257 11. 13 Significance of Financial Management 258 11. 14 Functions of Financial Controller 258 11. 15 Finance Manager as a Facilitator 259 11. 16 Organization Chart of Finance Function 260 11. 17 Reasons for Centralizing Finance Function 260 11. 18 Financial Objectives of Business Firm 261 11. 19 Profit Maximization Objective 261 11. 20 Wealth Maximization Objective 262 11. 21 Value Maximization Objective 262 11. 22 Costing and Risk 263 11. 23 Risk-Return Trade off 264
Contents C-15 11. 24 Impact of Business Taxation on Financial Management 264 11. 25 Impact of Personal Taxation on Financial Management 265 11. 26 Finance Manager Role as Tax Planner 265 11. 27 Tax Shield 265 11. 28 Meaning of Tax Planning and Tax Avoidance 265 11. 29 Impact of Inflation on Financial Management 266 11. 30 Impact of Depreciation on Financial Management 267 11. 31 Objectives of Depreciation Policy 267 11. 32 Depreciation and Inflation 267 11. 33 Depreciation and Capital Budgeting 267 11. 34 Depreciation as a Source of Fund 268 11. 35 Depreciation and Tax Liability 268 11. 36 Depreciation and Dividend 268 11. 37 Techniques of Financial Management 268 True or False Statements 270 Choose Correct Answer 270 Chapter 12 CONCEPTS OF VALUE AND RETURN 12. 1 Time Value of Money 272 12. 2 Simple Interest 272 12. 3 Compound Interest 273 12. 4 Present Value 274 12. 5 Calculation of Discount Factors 275 12. 6 Compounding Rate and Capitalising Rate 276 12. 7 Annuity 276 12. 8 Future Value of Ordinary Annuity 276 12. 9 Present Value of Ordinary Annuity 277 12. 10 Present Value of Deferred Annuity 278 12. 11 Present Value of Perpetuity 278 12. 12 Amortisation 278 12. 13 Sinking Fund 279 12. 14 Interest Rates 280 12. 15 Nominal and Real Rates of Interest 280 12. 16 Interest Rates, Capital Gains and Losses 281 12. 17 Interest Rates and Share Prices 281 12. 18 Changes in Interest Rates and Financing Decisions 281 12. 19 Theories on Term Structure of Interest Rates 282 12. 20 Yield to Maturity 282 12. 21 Factors Determining Yields 284 12. 22 Yield of Stocks 284 Choose Correct Answer 285 Practical Examination Problems 285 Chapter 13 RATIO ANALYSIS 13. 1 Introduction to Ratio Analysis 287 13. 2 Categories of Ratios 287 13. 3 Liquidity Ratios 287 13. 4 Current Ratio 288 13. 5 Quick/ Liquid/Acid Test Ratio 288 13. 6 Absolute Liquid/Super Quick Ratio 288 13. 7 Defensive - Interval Ratio 289 13. 8 Leverage Ratios 289 13. 9 Debt-Equity Ratio 289 13. 10 Shareholders Equity Ratio 290 13. 11 Long-term Debt to Shareholders Net Worth Ratio 290 13. 12 Capital Gearing Ratio 290 13. 13 Fixed Assets to Long-Term Funds Ratio 290 13. 14 Proprietary Ratio 291 13. 15 Interest Coverage Ratio 291 13. 16 Debt Service Coverage Ratio (DSCR) 291 13. 17 Dividend Cover 292 13. 18 Asset Management Ratios 292 13. 19 Inventory Turnover Ratio 292 13. 20 Inventory Ratio 293 13. 21 Debtors Turnover Ratio 293 13. 22 Debtors Collection Period 293 13. 23 Bad Debts to Sales Ratio 293 13. 24 Creditors Turnover Ratio 294 13. 25 Creditors Payment Period 294 13. 26 Fixed Assets Turnover Ratio 294 13. 27 Total Assets Turnover Ratio 294 13. 28 Working Capital Turnover Ratio 294 13. 29 Sales to Capital Employed Ratio 295 13. 30 Profitability Ratios 295 13. 31 Gross Profit Margin 295 13. 32 Net Profit Margin 296 13. 33 Cash Profit Ratio 296 13. 34 Return on Total Assets 296 13. 35 Return on Shareholders Funds or Return on Net Worth 297 13. 36 Return on Capital Employed (ROCE) 297 13. 37 Operating Ratios 298 13. 38 Market Based Ratios 299 13. 39 Earnings Per Share (EPS) 299 13. 40 Cash Earnings Per Share 300 13. 41 Dividend Payout Ratio 300 13. 42 Dividend Yield 300 13. 43 Book Value 300 13. 44 Price Earnings Ratio (P/E Ratio) 301 13. 45 Market Price to Book Value Ratio (P/BV ratio) 301
C-16 Cost Accounting and Financial Management 13. 46 Du Pont Analysis 301 13. 47 Importance of Ratio Analysis 303 13. 48 Factors Affecting Efficacy of Ratios 303 13. 49 Non-financial Performance Measures 304 Theoretical Examination Questions 306 True or False Statements 306 Choose Correct Answer 306 Practical Examination Problems 310 Chapter 14 FUNDS FLOW ANALYSIS 14. 1 Meaning of Funds Flow Statement 335 14. 2 Classification of Balance Sheet Items 335 14. 3 Meaning of Fund and Flow 336 14. 4 Identification of Flow of Funds 336 14. 5 Computation of Sources and Application of Funds 337 14. 6 Calculation of Funds from Operations 337 14. 7 Sources of Funds 339 14. 8 Application of Funds 339 14. 9 Changes in Working Capital Position 339 14. 10 Computation of Net Increase or Decrease in Working Capital 340 14. 11 Funds Flow Statement and Balance Sheet : Distinction 340 14. 12 Funds Flow Statement and Income Statement : 341 14. 13 Benefits of Funds Flow Analysis 341 14. 14 Drawbacks of Funds Flow Analysis 342 Theoretical Examination Questions 344 Choose Correct Answer 344 Practical Examination Problems 345 Chapter 15 CASH FLOW ANALYSIS 15. 1 Introduction to Cash Flow Statement 363 15. 2 Scope of AS-3 Cash Flow Statements (Revised) 363 15. 3 Meaning of Certain Terms in Cash Flow Analysis 363 15. 4 Classification of Cash Flows 364 15. 5 Cash Flows from Operating Activities 364 15. 6 Cash Flows from Investing Activities 364 15. 7 Cash Flows from Financing Activities 365 15. 8 Foreign Currency Cash Flows 365 15. 9 Extraordinary Items 365 15. 10 Interest and Dividends 365 15. 11 Treatment of Certain Items 366 15. 12 Data Required In Preparation of a Cash Flow Statement 366 15. 13 Procedure In Preparation of Cash Flow Statement 366 15. 14 Reporting of Cash Flows from Operating Activities 367 15. 15 Direct Method 367 15. 16 Indirect Method 368 15. 17 Other Disclosure Requirements 369 15. 18 Uses of Cash Flow Statement 370 15. 19 Limitations of Cash Flow Statement 370 15. 20 Funds Flow Statement and Cash Flow Statement : Distinction 371 15. 21 Cash Flow Statement and Cash Budget : Distinction 371 Choose Correct Answer 372 Practical Examination Problems 373 Chapter 16 ANALYSIS OF OPERATING AND FINANCIAL LEVERAGES 16. 1 Meaning of Leverage 392 16. 2 Operating Leverage 392 16. 3 Financial Leverage 394 16. 4 Impact of Financial Leverage on ROE and ROA 397 16. 5 Combined Leverage 397 16. 6 Structural Leverage 398 16. 7 Interest Cover and Income Gearing 399 16. 8 Debt and Equity : Distinction 401 16. 9 Trading on Equity 402 16. 10 Gearing in Relation to Financial Risk 403 16. 11 Impact of Gearing on Cost of Capital 404 16. 12 Impact of Gearing on EPS 404 Theoretical Examination Questions 405 Choose Correct Answer 405 Practical Examination Problems 406 Chapter 17 TREASURY MANAGEMENT 17. 1 Meaning of Treasury Management 412 17. 2 Role of Treasurer 412 17. 3 Functions of Treasurer 413 17. 4 Advantages of Centralized Treasury Management 414 17. 5 Advantages of Decentralized Treasury Management 414 17. 6 Cash Management and Treasury Management : Distinction 414 17. 7 Meaning of Cash Assets and Cash Assets Management 414 17. 8 Classification of Cash Flows 415 17. 9 Motives for Holding Cash 415 17. 10 Cost-Benefit Analysis of Cash Management 415 17. 11 Management of Liquidity 416 17. 12 Reasons for Cash Surplus 416 17. 13 Reasons for Cash Flow Problems 416 17. 14 Effects of Cash Deficits 417 17. 15 Methods of Improving Liquidity 417 17. 16 Baumol s EOQ Model of Cash Management 418
Contents C-17 17. 17 Assumptions of Baumol s Model 419 17. 18 Limitations of Baumol s Model 419 17. 19 Miller-Orr Cash Management Model 420 17. 20 Assumptions of Miller-Orr Model 421 17. 21 Setting Cash Balance 422 17. 22 Cash Cycle 423 17. 23 Zero Balance Account 423 17. 24 Money Market Banking 423 17. 25 Petty Cash Imprest System 423 17. 26 Principles of Investment in Marketable Securities 424 17. 27 Meaning of Float 424 17. 28 Sources of Float 424 17. 29 Types of Float 425 17. 30 Collection Float 425 17. 31 Payment Float 426 17. 32 Net Float 426 17. 33 Management of Float 426 17. 34 Accelerating Cash Collections 426 17. 35 Lock Box System 427 17. 36 Concentration Banking 427 17. 37 Electronic Fund Transfer 427 17. 38 Delaying Payments 428 17. 39 Electronic Cash Management System 428 17. 40 Benefits of Electronic Cash Management System 428 17. 41 Virtual Banking 429 17. 42 Advantages of Virtual Banking Services 429 17. 43 Cash Budget 430 17. 44 Points to be Considered in Cash Budgeting 430 17. 45 Methods of Cash Budgeting 431 17. 46 Preparation of Cash Budget under Receipts and Payments Method 431 17. 47 Cash Flow Statement and Cash Budget : Distinction 432 17. 48 Cash Budget and Profit & Loss Account : Distinction 432 Choose Correct Answer 433 Practical Examination Problems 433 Chapter 18 RECEIVABLES MANAGEMENT 18. 1 Introduction to Receivables Management 439 18. 2 Trade Debt 439 18. 3 Types of Trade Credit 439 18. 4 Costs of Granting Credit 440 18. 5 Administration Costs of Debtors Balances 440 18. 6 Costs of Denying Credit 441 18. 7 Payment Terms 441 18. 8 Examples of Payment Terms 441 18. 9 Steps in Evaluation of Increase in Credit Term 442 18. 11 Steps in Evaluation of Increase in Cash Discount 443 18. 12 Monitoring of Accounts Receivables 444 18. 13 Ratio Analysis for Control of Receivables 444 18. 14 Ageing Schedule 444 18. 15 ABC Analysis of Receivables 445 18. 16 Discriminate Analysis and Credit Scoring 446 18. 17 Credit Utilization Report 446 18. 18 Cost-Benefit Analysis of Collection Expenditure 446 18. 19 Measuring Day s Sales in Terms of Debtors 447 18. 20 Credit Control Department 448 18. 21 Establish Credit Policy 448 Choose Correct Answer 449 Practical Examination Problems 449 Chapter 19 WORKING CAPITAL MANAGEMENT 19. 1 Need for Working Capital Management 454 19. 2 Meaning of Working Capital 454 19. 3 Components of Working Capital 455 19. 4 Gross and Net Working Capital 455 19. 5 Computation of Net Working Capital 456 19. 6 Permanent Working Capital 456 19. 7 Temporary Working Capital 457 19. 8 Positive and Negative Working Capital 457 19. 9 Disadvantages of Negative Working Capital 457 19. 10 Objectives of Working Capital Management 458 19. 11 Operating Cycle Concept 458 19. 12 Computation of Operating Cycle Period 459 19. 13 Reasons for Prolonged Operating Cycle 460 19. 14 How to Reduce Operating Cycle? 461 19. 15 Impact of Overtrading on Working Capital 461 19. 16 Impact of Under Capitalization on Working Capital 461 19. 17 Suggestions to Overcome situation of Under Capitalization 462 19. 18 Impact of Over Capitalization on Working Capital 462 19. 19 Poor Working Capital Management Symptoms 462 19. 20 Working Capital Management Strategies 463 19. 21 Conservative Approach 463 19. 22 Aggressive Approach 464 19. 23 Matching or Hedging Approach 464 19. 24 Zero Working Capital Approach 465 19. 25 Working Capital Policies 465 19. 26 Factors Determining Working Capital Requirement 467 19. 27 Working Capital Requirement in Seasonal Industries 468 19. 28 Working Capital Requirement During Periods of Inflation 469 19. 29 Working Capital Requirement in Industries with Shift Working 469 19. 30 Working Capital Leverage 470 18. 10 Economics of Cash Discount 442
C-18 Cost Accounting and Financial Management 19. 31 Methods of Working Capital Estimation 472 19. 32 Percentage of Sales Method 472 19. 33 Regression Analysis Method 473 19. 34 Operating Cycle Method 474 19. 35 Steps in Determination of Working Capital 477 19. 36 Approaches to Working Capital Estimation 479 19. 37 Total Approach and Cash Cost Approach : Distinction 479 19. 38 Sources of Working Capital Finance 480 19. 39 Trade Credit 480 19. 40 Terms in Trade Credit 481 19. 41 Cost of Taking Credit 481 19. 42 Management of Trade Credit 481 19. 43 Financial Ratios in Management of Trade Credit 482 19. 44 Bills Discounting 482 19. 45 Meaning of Factoring 483 19. 46 Factoring Mechanism 483 19. 47 Functions of a Factor 484 19. 48 Benefits of Factoring 484 19. 49 Cost-Benefit Analysis of Factoring 484 19. 50 Impact of Factoring on Financial Statements 485 19. 51 Factoring and Bills Discounting : Distinction 488 19. 52 Factoring and Securitization : Distinction 488 19. 53 Working Capital Finance from Banks 489 19. 54 Forms of Bank Credit 489 19. 55 Maximum Permissible Bank Finance 489 19. 56 Approaches to Bank Financing 490 19. 57 Bank Guarantees 492 19. 58 Features of Bank Guarantees 492 19. 59 Other Sources of Working Capital Finance 492 19. 60 Pledge of Accounts Receivables 493 19. 61 Charge on Inventory 494 Theoretical Examination Questions 494 Choose Correct Answer 494 Practical Examination Problems 496 Chapter 20 CAPITAL BUDGETING 20. 1 Introduction to Capital Budgeting 504 20. 2 Investment appraisal techniques 504 20. 3 Payback Period Method 504 20. 4 Merits of Payback Period Method 505 20. 5 Demerits of Payback Period Method 505 20. 6 Accounting Rate of Return Method 506 20. 7 Merits of Accounting Rate of Return Method 507 20. 8 Demerits of Accounting Rate of Return Method 507 20. 9 Net Present Value Method 508 20. 10 Merits of Net Present Value Method 508 20. 11 Demerits of Net Present Value Method 508 20. 12 Internal Rate of Return Method 509 20. 13 Merits of IRR Method 510 20. 14 Demerits of IRR Method 510 20. 15 Relative Ranking of Projects : IRR vs. NPV 512 20. 16 Profitability Index Method 513 20. 17 Discounted Payback Period Method 514 20. 18 Adjusted Net Present Value Method 514 20. 19 Assumptions in Use of DCF Techniques 515 20. 20 Capital Rationing 515 20. 21 Factors Leading to Capital Rationing 515 20. 22 Situations of Capital Rationing 516 20. 23 Use of Linear Programming Technique in Capital Rationing 518 20. 24 Impact of Inflation in Capital Budgeting 519 20. 25 Synchronized and Differential Inflation 519 20. 26 Money Cash Flows and Real Cash Flows 519 20. 27 Impact of Taxation in Capital Budgeting 520 20. 28 Impact of Investment Incentives in Capital Budgeting 521 20. 29 Replacement or Retirement of an Asset 522 20. 30 Appraisal of Replacement Decisions 522 20. 31 Non-financial Factors In Capital Investment Decisions 525 Theoretical Examination Questions 526 True or False Statements 526 Choose Correct Answer 526 Practical Examination Problems 528 Chapter 21 PROBABILITY AND EXPECTED VALUE 21. 1 Meaning of Probability Analysis 546 21. 2 Theory of Probability 546 21. 3 Advantages and Disadvantages of Probability Analysis 547 Practical Examination Problems 548 Chapter 22 COST OF CAPITAL 22. 1 Meaning of Cost of Capital 554 22. 2 Sources of Long-term Finance 554 22. 3 Cost of Equity Capital (K ) 554 e 22. 4 Dividend Yield Method 555 22. 5 Dividend Growth Method 556 22. 6 Price Earning Method 558 22. 7 Capital Asset Pricing Method 558 22. 8 Cost of Retained Earnings (K ) 559 r 22. 9 Opportunity Cost Approach 559 22. 10 Rights Offer Approach 560 22. 11 Cost of Preferred Capital (K ) 561 p
Contents C-19 22. 12 Cost of Irredeemable Preference Shares 561 22. 13 Cost of Redeemable Preference Shares 561 22. 14 Cost of Debt (K ) 562 d 22. 15 Nominal and Real Cost of Debt 563 22. 16 Cost of Perpetual Debt 563 22. 17 Cost of Redeemable Debt 563 22. 18 Cost of Deep Discount Bonds and Zero Coupon Bonds 564 22. 19 Cost of Convertible Debentures 565 22. 20 Cost of Floating Debt 565 22. 21 Weighted Average Cost of Capital 565 22. 22 Simple WACC 566 22. 23 Computation of WACC using Book Values and Market Values 567 22. 24 Computation of WACC after considering Tax Shields 567 22. 25 Opportunity Cost of Capital 568 True or False Statements 568 Choose Correct Answer 568 Practical Examination Problems 570 Chapter 23 CAPITAL STRUCTURE THEORIES 23. 1 Meaning and Definition of Capital Structure 575 23. 2 Categories of Capital 575 23. 3 Financial Structure and Capital Structure : Distinction 576 23. 4 Optimum Capital Structure 576 23. 5 Advantages of Debt 576 23. 6 Factors Determining Capital Structure 576 23. 7 Basic Assumptions on Optimum Capital Structure Theories 577 23. 8 Debt-Equity Ratio Analysis 578 23. 9 EBIT-EPS Analysis 579 23. 10 Net Income Approach 581 23. 11 Net Operating Income Approach 583 23. 12 Weighted Average Cost of Capital Approach (Traditional View) 586 23. 13 Modigliani and Miller Theory (Modern View) 587 23. 14 Assumptions of MM Theory 587 23. 15 MM Theory : No Taxation 588 23. 16 MM Theory : Proposition I 589 23. 17 MM Theory : Proposition II 589 23. 18 MM Theory : Proposition III 590 23. 19 MM Theory : Arbitrage 591 23. 20 Criticism of MM Theory 592 23. 21 MM Theory : Corporate Taxation 592 23. 22 MM Theory and Corporate Debt 594 Theoretical Examination Questions 594 True or False Statements 594 Choose Correct Answer 595 Practical Examination Problems 596 Chapter 24 DIVIDEND DECISIONS 24. 1 Meaning of Dividend 600 24. 2 Determinants of Dividend Policy 600 24. 3 Constant Dividend Payout Policy 602 24. 4 Constant Dividend Rate Policy 602 24. 5 Variants of Constant Dividend Rate Policy 603 24. 6 Optimum Dividend Policy 603 24. 7 Gordon Growth Valuation Model 604 24. 8 Assumptions of Gordon Growth Valuation Model 605 24. 9 Criticism of Gordon Growth Model 606 24. 10 Walter s Valuation Model 606 24. 11 Assumptions of Walter s Valuation Model 607 24. 12 Implications of Walter s Model 607 24. 13 Modigliani and Miller s Dividend Irrelevancy Theory 608 24. 14 Basic Tenets of MM Dividend Irrelevancy Theory 609 24. 15 Assumptions of MM Dividend Irrelevancy Theory 609 24. 16 Capital Asset Pricing Model 611 24. 17 Bonus Shares 611 24. 18 Purpose of Bonus Issue 612 24. 19 Advantages of Bonus Issue 612 24. 20 Disadvantages of Bonus Issue 613 24. 21 Impact of Bonus Issue Decision 613 True or False Statements 614 Choose Correct Answer 614 Practical Examination Problems 615 Chapter 25 SOURCES OF FINANCE 25. 1 Equity Shares 623 25. 2 Advantages of Equity Shares 623 25. 3 Disadvantages of Equity Shares 623 25. 4 Preference Shares 624 25. 5 Advantages of Preference Shares 624 25. 6 Sweat Equity Shares 624 25. 7 Non-voting Shares 625 25. 8 Advantages of Non-voting Shares 625 25. 9 Disadvantages of Non-voting Shares 625 25. 10 Tracking Stocks 625 25. 11 Debentures 626 25. 12 Advantages of Debentures 626 25. 13 Drawbacks of Debentures 626 25. 14 Debentures and Share Capital : Distinction 627 25. 15 Convertible Debentures 627 25. 16 Valuation of Convertibles 628 25. 17 Zero Interest Bond 629 25. 18 Equity Warrants with NCDs 629
C-20 Cost Accounting and Financial Management 25. 19 Secured Premium Notes 629 25. 20 Deep Discount Bond 630 25. 21 Zero Coupon Convertible Note 630 25. 22 Junk Bonds 631 25. 23 Treasury Bills 631 25. 24 Central Government Securities (Gilt-edged Securities) 632 25. 25 Commercial Paper 632 25. 26 Features of Commercial Paper 633 25. 27 Advantages and Disadvantages of Commercial Paper 633 25. 28 Certificate of Deposit 635 25. 29 Features of Certificate of Deposit 635 25. 30 Bills Rediscounting 636 25. 31 Call Money 637 25. 32 Repurchase Agreements 637 25. 33 Interbank Participation Certificate 637 25. 34 Selection of Securities 638 25. 35 Valuation of Warrants 638 25. 36 Factors Determining Value of Warrant 639 25. 37 Advantages of Warrants 640 25. 38 Valuation of Bonds 640 25. 39 Value of Bond with Finite Period Maturity 641 25. 40 Fund Raising through Rights Issues 642 25. 41 Reasons for a Rights Issue 643 25. 42 Advantages of Rights Issue 643 25. 43 Valuation of Rights 643 25. 44 Valuation of Share after Rights Issue 644 25. 45 Shares Buyback or Repurchase 645 25. 46 Reasons for Shares Buyback 645 25. 47 Financing Aspects of Shares Buyback 646 25. 48 Shares Repurchase Price 646 25. 49 Impact of Shares Buyback on Shareholding Pattern 647 25. 50 Benefits of Shares Buyback 648 25. 51 Drawbacks of Shares Buyback 649 25. 52 Meaning of Financial Engineering 649 25. 53 Features of Financial Engineering 650 Choose Correct Answer 650 Practical Examination Problems 652 Chapter 26 FINANCIAL SERVICES 26. 8 Credit Rating Agencies 664 26. 9 Types of Credit Rating 664 26. 10 Benefits of Credit Rating 664 26. 11 Credit Rating Methodology 665 26. 12 Merchant Banking 666 26. 13 Loan Syndication 667 26. 14 Portfolio Management and Investment Advisory Services 667 26. 15 Venture Capital 668 26. 16 Activities Eligible for Support 668 26. 17 Stages in Venture Capital Financing 669 26. 18 Forms of Financial Assistance from VC Funds 669 26. 19 Advantages of VC Finance 669 26. 20 Private Equity 670 26. 21 Criteria for Evaluation of Investment Proposal 670 26. 22 Why PE Investment not popular? 671 26. 23 Exit Routes from PE Investment 671 26. 24 Reasons for Growing Popularity of Private Equity 671 Chapter 27 CONTEMPORARY DEVELOPMENTS 27. 1 Concept of Corporate Governance 672 27. 2 Tests for Effective Corporate Governance 672 27. 3 Uruguay Round in Setting up of World Trade Organization (WTO) 673 27. 4 General Principles and Objectives of WTO 674 27. 5 Important Terms in WTO 675 27. 6 Market Access 675 27. 7 Market Access in India 675 27. 8 General Agreement on Trade in Services (GATS) 676 27. 9 Trade Related Investment Measures (TRIMs) 677 27. 10 Trade Related Intellectual Property Rights (TRIPs) 677 27. 11 Impact of WTO on Indian Economy 678 27. 12 Dispute Settlement Mechanism under WTO 679 27. 13 Sector Specific Agreements 680 27. 14 Regional Trade Agreements 680 27. 15 Opportunities and Threats under WTO Regime 680 Key to Short Answer Questions 682 Mathematical Tables 710 CMA Intermediate Syllabus 714 26. 1 Financial Intermediation 661 26. 2 Credit Cards 662 26. 3 Advantages to the Cardholder 662 26. 4 Advantages to Merchants 662 26. 5 Consumer Credit 663 26. 6 Consumer Hire Purchase Business 663 26. 7 Credit Rating 664