MB0041- MANAGERIAL ECONOMICSAns:-Illustration 4:The trial balance of Evergreen Co Ltd., as taken on 31st December, 2002 didnot tally and the difference was carried to suspense account. The followingerrors 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 toPurchases a/c.c) Discount received Rs.1250 and discount allowed Rs. 850 in September2002 have been posted to wrong sides of discount account.d) A cheque received from Mr. Longford for Rs. 1500 for goods sold to himon credit earlier, though entered correctly in the cash book has beenposted in his account as Rs. 1050.e) Stocks worth Rs. 255 taken for use by Mr Dayananda, the ManagingDirector, have been entered in sales day book.f) While carrying forward, the total in Returns Inwards Book has beentaken as Rs. 674 instead of Rs. 647.g) An amount paid to cashier, Mr. Ramachandra, Rs. 775 as salary for themonth of November has been debited to his personal account asRs. 757.Pass journal entries and draw up the suspense accountNote:In illustration 4 sub question (c): Discount received Rs.1250 is posted on thewrong side of discount account. Discount received (income) should becredited and discount allowed (expenses) should be debited. Instead ofcrediting the discount received account, it has been wrongly debited. Torectify this error, we need to credit discount received account to the extent ofRs.2500 (Rs.1250+ Rs.1250).In the same context, discount allowed (which is an expense) should bedebited, instead it is credited. To rectify the error, we need to debit discountallowed to the extent of Rs.1700 (850 +850). The difference betweendiscount received and discount allowed account is transferred to suspenseaccount.Ans:- Adjusted Trial BalanceThe adjustments may be directly incorporated into the final accounts asshown above. However, the adjustments may also be incorporated into thetrial balance so that the preparation of the final accounts becomes easy.Such a trial balance, which is prepared after incorporating all theadjustments, 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 10003. Taxes and Insurance prepaid 20004. Outstanding salaries 50005. Commission received in advance1000Ans:- Trend AnalysisThis technique involves computation of trend ratios (trend percentages) for aseries of years. Horizontal analysis gives a picture of only two years, thecurrent year in comparison with the previous year. This leaves the user withno idea about tracking the growth of the company. To overcome thislimitation, 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 trendpercentages are computed.The formula for computing trend percentage for a particular year is given by:Figure for the base yearTrend ratio Figure for that particular year 100Let us understand this with the help of an illustration.Illustration 2: Compute trend ratios and comment on the financialperformance of Infosys Technologies Ltd. from the following extract of itsincome statements of five years. Comment: The Revenue and Operating Profit (PBIDT) have almostdoubled in four years. The PAT from ordinary activities has increased by77.26% in the same period.Ratio AnalysisAbsolute 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 thesales 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 Bbecause Company A made a profit of 50% (10000/20000) whereasCompany B made a profit of only 25% (100000/400000).Therefore, ratios are very useful.8.6.1 Meaning of ratioA ratio represents a relationship between two numbers. An accounting ratiorepresents a relationship between two accounting numbers.A ratio can be expressed in the following three forms:1. Proportion2. Percentage

3. Turnover rate

Liquidity ratiosLiquidity is the ability of a firm to satisfy its short-term obligations as theybecome due for payment. It reflects the short-term solvency of the firm. Theratios which indicate the liquidity of the firm are:1. Net working capital2. Current ratios3. Acid test or quick ratio4. Super quick ratio1. Net working capital It is the excess of current assets over currentliabilities.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 currentliabilities. It indicates the rupees of current assets available for eachrupee of current liability payable.Ans:- Meaning of Cash Flow AnalysisCash flow analysis is an important tool of financial analysis. It is the processof understanding the change in position with respect to cash in the currentyear and the reasons responsible for such a change. Incidentally, theanalysis also helps us to understand whether the investing and financingdecision taken by the company during the year are appropriate are not.Cash flow analysis is presented in the form of a statement. Such astatement is called a cash flow statementObjectives of Cash Flow AnalysisCash flow analysis is done with the objective of understanding some of thefollowing important questions: What is the change in the cash position of the firm for the current yearas 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 StatementThe preparation of cash flow statement is similar to the preparation of fundflow statement. It requires the identification of the sources of cash and theuses of cash.A source of cash is a transaction which brings an inflow of cash. Anapplication 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 orapplication of cash.Sources of cash: Cash from operations Proceeds of issue ofo Equity shareso Preference shares Proceeds of issue ofo Debentureso Bonds Raising long-term debts from banks and financial institutions Raising mortgage loans (long-term) Sale of assetso 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 assetso 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 andapplications of cash decrease the cash balance.Ans:- Hydro Electric Ltd. furnishes the following information from its cost recordsfor the first quarter of the current year