PREVIOUS YEAR SOLVED PAPERS - December 2018
67. Which of the following is not a method of preparation of cash budget?
- Option : B
- Explanation : CASH BUDGET
A Cash budget is a summary statement of the firm’s expected cash inflows and outflows over a period of time. This budget helps the management in
(i) Determining the future cash needs of the firm;
(ii) Planning for financing of those needs; and
(iii) Exercising control over cash and liquidity of the firm.
Objectives and Uses of Cash budget: The preparation of cash budget serves the following purposes:
∎ It provides a sound basis for cash control.
∎ It gives estimated cash position due to operating activities.
∎ Cash generation due to capital receipts can be known promptly.
∎ It facilitates the planning of cash disbursements on account of capital expenditures, debt redemption, capital redemption and dividend payments.
∎ Just by having a glance, we can know the opening and closing budgeted balance of cash for a particular period.
∎ Estimated surplus and deficiency of cash during each period is predetermined; this facilitates proper planning for managing cash deficits and profitable investment of surplus cash.
∎ It provides perfect synchronization of cash requirements in relation to working capital, sales, raising of debts and capital expenditures.
Methods of Preparing Cash Budgets
A cash budget can be prepared by any one of the following methods:
1. Receipts and Payments Method
2. Adjusted Profit and Loss Account Method and
3. The Balance Sheet Method.
1. Receipts and Payments Method: The budget is prepared on the basis of estimated cash receipts and disbursements during the budget period. The first part of the budget shows estimated cash receipts on account of cash sales, collection from debtors, receipt of interest and dividend on investments made outside the business, sale of old assets, issue of capital and debt, etc. The second part shows estimated disbursements of cash on account of cash purchases, payment to creditors, payment of bills on maturity, operating expenses, payment of interest and dividends to the holders of equity/preference capital and interest to debenture holders, payment of direct/indirect taxes, etc. The accumulation of cash receipts and payments is on periodic basis which may be monthly or quarterly. The Closing balance of cash for the current period is net result of the opening balance of cash for the current period plus estimated receipts and minus the estimated disbursements. Symbolically,
C = O + R – D
Some times closing balance for a particular period may be negative i.e., there is cash deficit. The closing balance of a period becomes the opening balance for the next period. The budgeted cash balance may be positive or negative but actual cash balance can never be negative.
Minimum cash balance is predetermined on the basis of working capital requirements. In case the budgeted cash is less than the requisite minimum, arrangements are to be made to meet cash deficits. If the cash balance is in surplus, plans should be made for its profitable deployment.
2. Adjusted Profit and Loss Account Method: It is prepared on the basis of opening CASH including Bank balance, Projected Profit and Loss account, and Balance sheet exclusive of cash balance. This method is usually applied for long term cash forecasting. Cash budget prepared using this method is known as Cash Flow Statement. This method of preparing cash budget requires the following information:
1. Cash and Bank balances at the start of the budget period.
2. All the operating and non-operating expenses.
3. Estimated sales revenues.
4. Estimated non-operating incomes.
5. Changes in Working capital Assets and liabilities.
6. Planned capital receipts on account of issue of capital and/ or debentures and sale of assets.
7. Planned capital outlays, and payments on account of redemption of preference capital, and debentures.
8. Payment of interest and dividends.
Net profit in most of the cases is not equal to net inflow of cash from operations and this requires adjustments. This is why this method is known as Adjusted Profit and Loss account. All the non-cash expenses such as depreciation, goodwill written off, and Preliminary expenses written off are added back to the given Net Profit figure. Increases in current liabilities and decreases in current assets are added to the net profit; increases in current assets and decreases in current liabilities are deducted from the net profit so as to arrive at cash from operating activities. Raising of cash through issue of capital and debt, sale of assets, etc. are added and utilisations of cash in the form of redemption of capital and debt, purchase of assets, payments of dividends and interest etc., are deducted to arrive at the budgeted cash balance at the end of the period.
3. Balance Sheet method: In this method, closing balances of all (budgeted) Balance Sheet items, except cash and bank balances, are found and put in a budgeted Balance Sheet. If the total of liabilitiesside items is more than the total of assetside items, the balancing figure will be cash/bank balance. On the contrary, if the total of assets-side items is more than the total of liabilities-side items, the balancing figure will be bank overdraft or shortage in cash. The budgeted figures of closing Balance Sheet items can be found after adjusting the opening Balance Sheet items with the transactions anticipated for the year.
The main defect of this method is that it does not take into account the items of income and expenditure. Another defect is that cash position is ascertained only at the end of the year when the Balance Sheet is prepared.
68. Corporations are controlled and directed by which one of the following?
- Option : B
- Explanation : Corporate governance is a set of processes, customs, policies, laws, and institutions that affect the way a corporation is directed, administered or controlled. Corporate governance mechanisms consist of internal and external systems and procedures used to ensure that the agent (the management of the corporation) runs the firm for the benefit of one or more principals (shareholders and other stakeholders). An important theme of corporate governance is to ensure the accountability of a corporation’s management through mechanisms designed to reduce the agency problem between managers and shareholders. In the Anglo-American model of corporate governance, shareholder wealth maximization generally holds primacy as the firm’s goal. Thus, governance devices attempt to align or ensure that managerial behaviour and actions pursue this goal. Governance control mechanisms work through a broad array of layered and overlapping actions such as monitoring by the boards of directors, compensation systems, ownership structure, takeovers, and government regulations.
- Option : A
- Explanation : A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate.
Forward transactions are classified by forward value date into:
∎ Short dates: maturity of one month or less.
∎ Round dates (fixed dates or straight dates): original terms to maturity of a whole number of months.
∎ Broken dates (odd dates): original maturities of less than round dates.
Forward transactions are of two types: Outright forward contracts and foreign exchange swaps (or spot-forward swaps). An outright forward contract involves the sale or purchase of a currency for delivery more than two business days into the future. Hence, the only difference between an outright forward transaction and a spot transaction is the value date. The word ‘outright’ indicates that no spot transaction is involved. On the other hand, a foreign exchange swap (which is different from a currency swap) involves a spot purchase against a matching outright forward sale (or vice versa). For example, a foreign exchange swap transaction is concluded when a trader agrees to sell a currency and simultaneously to repurchase it (thus reversing the operation) some time in the future at an exchange rate determined now. When the reversal is on adjacent days, the term rollover is used.
