Investment Appraisal Very Short Answer Type Questions

Investment Appraisal Very Short Answer Type Questions

Question 1.
What is investment appraisal?
Answer:
Investment appraisal is an integral part of capital budgeting (see capital budget), and is applicable to areas even where the returns may not be easily quantifiable such as personnel, marketing, and training

Question 2.
What is inflation?
Answer:
Inflation is the rate at which the general level of prices for goods and services is rises and subsequently, purchasing power falls.

Question 3.
What are the different types of inflation?
Answer:
The different types of inflation are:

  • Demand pull inflation
  • Cost push inflation
  • Built-in inflation

Question 4.
What is risk analysis?
Answer:
Risk analysis is the process of defining and analyzing the dangers to individuals, businesses and government agencies posed by potential natural and human-caused adverse events.

Question 5.
What is risk? What are types of risk?
Answer:
The quantifiable likelihood of loss or less-than-expected returns. Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk.

Question 6.
What is systematic risk?
Answer:
Systematic risks are associated with external environment, these are non diversifiable and is associated with securities market as well as economic, sociological, political considerations of the prices of-a.ll securities in the market.

Question 7.
What is unsystematic risk?
Answer:
Unsystematic risk is also Called unique risk and it is unique to firm or industry. It is caused by factors like labour strike, irregular disorganised management policies and consumer preferences.

Question 8.
What is business risk?
Answer:
This relates to the variability of the business, sales, income, profits etc. which in turn depend on the market conditions for the product mix, input supplies, strength of competitors, etc. The Internal Business Risk leads to fair in revenues and in profit of the company, but can be corrected by certain changes in the company’s policies.

Question 9.
What is financial risk?
Answer:
Financial Risk: This relates to the method of financing, adopted by the company, high leverage leading to larger debt servicing problems or short-term liquidity problems due to bad debts, delayed receivables and fall in current assets or rise in current liabilities.

Question 10.
What is insolvency risk?
Answer:
Default or Insolvency Risk:
The borrower or issuer of securities may become insolvent or may default or delay the payments due, such as interest instalments or principal repayments. The borrower’s credit rating might have fallen suddenly and he became default prone and in its extreme form it may take to insolvency or bankruptcies. In such cases, the investor may get no return or negative returns.

Question 11.
Distinguish between risk and uncertainty.
Answer:
Risk and uncertainty go together. Risk suggests that the decision-maker knows that there is some possible consequence of an investment decision, but uncertainty involves a situation, where the outcome is not known to the decision-maker. But basically, whether the outcome is known or not, the investments involve both risk and uncertainty.

Question 12.
How is the risk measured or technique of measuring risk?
Answer:
The risk. associated with the capital budgeting decisions is measured through the following methods:

  • Risk adjusted rate of return
  • Certainty equivalent co-efficient
  • Probabilistic method
  • Sensitivity analysis
  • Co-efficient of variation method or Standard deviation
  • Decision tree analysis.

Question 13.
What is lease or buy?
Answer:
Lease or buy decision involves applying capital budgeting principles to determine if leasing as asset is a better option than buying it. Leasing in a contractual arrangement in which a company (the lessee) obtains an asset from another company (the lessor) against periodic payments of lease rentals.

Question 14.
What is replacement assets value?
Answer:
The monetary value that would be required to replace the production capability of the, present assets in the plant. Includes production or process equipment, as well as utilities, support and related assets. It should not be based on the insured value or depreciated value of the assets. It includes the replacement value of the buildings and the grounds if these assets are maintainted by the maintenance expenditures.

Question 15.
What is replacement decision?
Answer:
Decision regarding replacement of an existing asset with another is based on the net present value and internal rate of return of the incremental cash flows, i.e. the difference between periodic net cash flows if the existing asset is kept and the periodic net cash flows if the asset is replaced.

In capital budgeting and engineering economics, the existing asset is called the defender and the asset which is proposed to replace the defender is called the challenger. Estimation of incremental cash flows for such replacement analysis involves calculation of net cash flows of the defender, net cash flows of the challenger and then finding the difference in cash flows for both the assets.

Question 16.
What do you mean by capital rationing?
Answer:
Capital rationing is the act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on specific portions of a budget.

Working Capital Management Long Answer Type Questions

Working Capital Management Long Answer Type Questions

Question 1.
Explain the determinants of working capital.
Answer:
Many factors have to be considered while deciding on the working capital requirements. Following are some of the important factors influencing the working capital.
(1) Operational efficiency: If a firm is very efficient in the operations it will utilise the available resources to the maximum extent eliminating wastages this will inturn increase the profitability and help the firm to reduce its costs. The pressure on working capital will be less when the firm is efficient in its operation whereas the firms that are not efficient will consume more working capital.

(2) Growth and Expansion: If the firm is desirous to expand its operations and aims at growth accordingly, the requirement of working capital will also be more, hence the growth and expansion programmes of a firm is an important factor influencing the requirement of working capital.

(3) Profit Appropriation: The earnings available to the firm through its operations are not available for working capital purposes. Only a certain proportion of the earning is available for working capital requirements. Because the company has to apportion its earnings in the form of depreciation, taxes, dividend and retained earnings. Whatever the amount left out after apportionment is available for working capital purposes.

(4) Capital structure of the company: If the policy of the company is such that the shareholders provide some funds towards the working capital needs then it will be easy for the management because it need not arrange from outside sources whereas if no such policy is followed then, the company has to raise money from outside sources and with an additional obligation of interest payment.

(5) Policies of RBI: If RBI follows stringent credit policies it will affect the companies intending to raise funds from outside sources for working capital requirements it may have to pay more interest. But if RBI follows liberal credit policies raising money in the capital or money market will not be a problem.

(6) Changes in prices: If the firm experiences fluctuations in the prices it has to keep more amount of working capital to meet the changes in the prices but if the prices are stable the working capital to be arranged is considerably less than in the previous case. Therefore the changes in the prices are one of the important factors influencing the working capital requirements.

(7) Profitability: There are concerns earning more profit because of good quality products, customer’s preference brand loyalty, less competition, monopoly power etc. Therefore a portion of the profit can be used as working capital. Whereas the other concerns are earning less profit because of more competition, inferior quality of product, more substitute etc. profit may not be sufficient to meet the working capital purposes as a result of which they may. have to borrow from other sources.

(8) Nature and size of the firm: If the nature and size of the firm is small then the requirement of working capital is less when compared to that of the firms which are bigger in size and with larger operations.

(9) Sales volume: The sales volume and the size or requirement of working capital are directly related to each other. As the volume of sales increases, there is an increase in the investment of working capital.

(10) Business terms: A firm which allows liberal credits to its customers may enjoy higher sales but will need more working capital as compared to a firm following stringent credit terms.

Conclusion:
Finance manager has to consider all these factors at the time of deciding the amount of working capital. His/Her main aim should be to reduce the cost to the maximum possible extent and makes funds available as and when required.

Question 2.
Explain the different sources of finance for funding working capital or short term finance requirements.
Answer:
The main sources of finance for short term working capital are as follows:
1. Trade Credit: It refers to the credit extended by the suppliers of goods in the normal course of business. This is an important source of short term finance. The credit worthiness of a firm and the confidence of its suppliers are the main basis of securing trade credit. It is most granted on open account basis whereby supplier sends goods to the buyer for the payment to be received in future as per terms of the sales invoice. It may also take the form of bills payable whereby the buyer signs a bill of exchange payable on a specified future date.

Accrued Expenses and Deferred Income are other spontaneous sources for short term financing. Accrued expenses are the expenses which have been incurred but not yet due and hence not yet paid also. These simply represent a liability that a firm has to pay for the services already received by it. Wages, salaries, interest and taxes are the most important components of accrued expenses.

Deferred incomes are incomes received in advance before supplying goods or services. They represent funds received by a firm and constitute an important source of short term finance. However, firms having great demand for its products and services, and those having good reputation in the market can demand deferred incomes.

2. Bank Borrowing: Commercial banks are the most important source of short term capital. The major portion of working capital loans are provided by commercial banks. They provide a wide variety of loans tailored to meet the specific requirements of a concern. The different forms in which banks normally provide loans and advances are as follows:

(a) Loans: When a bank makes an advance in lump-sum against some security it is called a loan. The entire loan amount is paid to the borrower either in cash or by credit to his account. The borrower is required to pay interest on the entire amount of loan from the date of sanction.

(b) Cash Credit: It is an arrangement by which a bank allows his customer to borrow money upto a certain limit against some tangible security or guarantee. The customer can withdraw from his cash credit limit according to his needs and he can also deposit .any surplus amount with him. The interest is charged on daily balance.

(c) Overdrafts: It is an agreement with a bank by which a current account holder is allowed to withdraw more than the balance to his credit upto a certain limit. There are no restrictions for operation of overdraft limits. The interest is charged on daily overdrawn balances. However it is allowed for. a short period and to a temporary accommodation.

(d) Purchasing and Discounting of bills: This is the most important form in which a bank lends without any collateral security. The seller draws a bill of exchange on the buyer of goods on credit. Such a bill may either be a clean bill or a documentary bill which is accompanied by documents of title to goods such as a railway receipt. The bank purchases the bills payable on demand and credits the customers’ account with the amount of bill less discount. On maturity, bank presents the bill to its acceptor for payment.

In addition to the above, banks help their customers in obtaining credit from their suppliers through the arrangement of Letter of credit. This is an undertaking by a bank, to honour the obligations of its customers upto a specified amount.

Question 3.
Explain Cash Management.
Answer:
Cash Management is concerned with the managing of:
(i) Cash flows into and out of the firm
(ii) Cash flows within the firm and
(iii) Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control.’ Following are some of the facts of cash management.
(1) Cash Planning:
Cash Planning is a technique to plan and control the use of cash. A projected cash flow statement may be prepared based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash. Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. The cash inflows International Financial Management should be accelerated while as far as possible, the cash out lows should be decelerated. Cash budget should be prepared for this purpose.

(2) Cash Forecasts and Budgeting:
A Cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay. The short term forecasts can be made with the help of cash flow projections.

The finance manager will make estimates of likely receipts in the near future and the expected disbursements in that period. Though it is not possible to make exact forecasts even then estimates of cash flows will enable the planners to make arrangement for cash needs. The long term cash forecasts are also essential for proper cash planning. Long term forecasts indicate company’s future financial needs for working capital, capital projects etc.

(3) Investment of Surplus Funds:
The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short term investment opportunities such as bank deposits, marketable securities, or intercorporate lending. As the firm invests its temporary cash balance, its primary criteria in selecting a security or investment opportunity will be its quickest convertibility into cash, when the need for cash arises. Besides this, the firm would also be interested in the fact that when it selis the security or liquidates investment, it atleast gets the amount of cash equal to the investment outlay. Thus, in choosing among alternative investment, the firm should examine three basic features of security: safety, maturity and marketability.

Question 4.
Discuss various Cash Management Techniques.
Answer:
Cash Management is concerned with the managing of:
(i) Cash flows into and out of the firm
(ii) Cash flows within the firm and
(iii) Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. .Following are some of the facts of cash management.
(1) Cash Planning:
Cash Planning is a technique to plan and control the use of cash. A projected cash flow statement may be prepared based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash. Cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. The cash inflows should be accelerated while as far as possible, the cash outlows should be decelerated. Cash budget should be prepared for this purpose.

(2) Cash Forecasts and Budgeting:
A Cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay. The short term forecasts can be made with the help of cash flow projections.

The finance manager will make estimates of likely receipts in the near future and the expected disbursements in that period. Though it is not possible to make exact forecasts even then estimates of cash flows will enable the planners to make arrangement for cash needs. The long term cash forecasts are also essential for proper cash planning. Long term forecasts indicate company’s future financial needs for working capital, capital projects etc.

(3) Investment of Surplus Funds:
The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short term investment opportunities such as bank deposits, marketable securities, or intercorporate lending. As the firm invests its temporary cash balance, its primary criteria in selecting a security or investment opportunity will be its quickest convertibility into cash, when the need for cash arises. Besides this, the firm would also be interested in the fact that when it sells the security or liquidates investment, it atleast gets the amount of cash equal to the investment outlay. Thus, in choosing among alternative investment, the firm should examine three basic features of security: safety, maturity and marketability.

Question 5.
Explain the Management of Accounts Receivable.
Answer:
Accounts Receivables Management is the process of making decisions relating to investment in trade debtors. The objective is to take a sound decision as regards investment in debtors as this involves cost consideration and a risk of bad debts too.

Dimensions of Accounts Receivables Management: Accounts Receivables Management involves the careful consideration of the following aspects:
(1) Forming of Credit Policy: A credit policy is related to decisions such as credit standards, credit, terms and collection efforts. Credit standards are criteria to decide the types of customers to whom goods could be sold on credit. If a firm has more slow paying customers, its investment in accounts receivable will increase. The firm will also be exposed to higher risk of default.

Credit terms specify duration of credit and terms of payment by customers. Investment in accounts receivable will be high if customers are allowed extended time period for making payments. Collection efforts determine the actual collection period. The lower the collection period, the lower the investment in accounts receivable and vice versa.

(2) Credit Evaluation of Individual Accounts: The firm need not follow the policy for treating all customers equal for the purpose of extending credit. Each case may be fully examined before granting any credit terms. Similarly, collection procedure will differ from customer to customer.The credit evaluation procedure of the individual accounts should involve the following steps:
(i) Credit Information:
The first step will be to gather credit information about the customers. This information should be adequate enough so that proper evaluation about the financial position of the customers is possible. This type of investigation can be undertaken only upto a certain limit because it will involve cost. The cost incurred and the benefit from reduced bad debt losses will be compared. The cost of collecting information should, therefore, be less than the potential -profitability. The information may be available from financial statements credit rating agencies, reports from banks, firms records etc.

(ii) Credit Investigation:
After having obtained the credit information, the firm will get an idea regarding matters which should be further investigated. The factors that affect the extent and nature of credit investigation of an individual customer are:

  • The type of customer, whether new of existing
  • The Customer’s business line background and the related trade risks
  • The nature of the product perishable or seasonal
  • Size of customer’s order and expected further volumes of business with him
  • Company’s credit policies and practices.

(iii) Credit Limit: A credit limit is a maximum amount of credit which the firm will extend at any point of time. The finance manager will match the creditworthiness of the customers with the credit standards of the company. The decision on the magnitude of credit will depend upon the amount of contemplated sale and the customer’s financial strength. The credit limit must be reviewed periodically.

(iv) Collection Procedure: The concern should follow a well laid down collection policy and procedure to collect dues from its customers. The concern should devise procedures to be followed when accounts become due after the expiry of credit period. The collection policy be termed as strict and lenient. A strict policy of collection will involve more efforts on collection. Such a policy will enable early collection of dues and will reduce bad debt losses. A rigorous collection policy will involve increased collection costs. A linient policy may increase the debt collection period and more bad debt losses.

(3) Control of Receivables: A firm needs to continuously monitor and control its receivable to ensure the success of collection efforts. Two traditional methods of evaluating the management of receivable are:

  • Average collection period
  • Aging schedule.

The average collection Period = The average collection period so calculated is compared with the firm’s stated credit period to judge the collection efficiency. The aging schedule breaks down receivables according to the length of time for which they have been outstanding. The aging schedule provides more information about the collection experience.

Question 6.
Discuss the preparation of Ageing Schedule and Debtors Turnover Ratio.
Answer:
Ageing Schedule:
Ageing schedule is a table that classifies accounts receivable and payables according to their dates. It helps in managing cash and analyzing payments. An aging schedule is a way of finding out if customers are paying their bills within the credit period prescribed in the company’s credit terms.

The typical accounts receivable aging schedule consists of 6 columns:

  • Column 1 lists the name of each customer with an accounts receivable balance.
  • Column 2 lists the total amount due from the customers listed in Column 1.
  • Column 3 is the “current column.” Listed in this column are the amounts due from customers for sales made during the current month.
  • Column 4 shows the unpaid amount due from customers for sales made in the previous month. These are the customers with accounts 1 to 30 days past due.
  • Column 5 lists the amounts due from customers for sales made two months prior. These are customers with accounts 31 to 60 days past due.
  • Column 6 lists the amount due from customers with accounts over 60 days past due.

Debtors Turnover Ratio:
A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy.
Debtors/Receivables Turnover = \(\frac{\text { Net Credit Annual Sales }}{\text { Average Trade Debtors }}\)
= No. of times
Trade Debtors = Sundry debtors + Bills Receivables
Debtors should always be taken to gross value. No provision for bad and doubtful debts be deducted from them. Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors.

Practical Problems

Question 1.
From the following information, calculate the operating cycle in days and the amount of working capital required.
Period covered – 365 days
Total cost of production – ₹ 22,000
Total cost of sales – ₹ 24,000
Raw materials consumption – ₹ 9,200
Average debtors outstanding – ₹ 1,000
Credit sales for the year – ₹ 30,000
Value of average stock maintained:
Raw materials – ₹ 680
“Work in progress – ₹ 760
Finished goods – ₹ 560
Note: Amount given represent lakhs.

Question 2.
Prepare an estimate of working capital requirement from the following date of a trading concern.
(a) Projected annual sales – 80,000 units
(b) Selling price – ₹ 8 per unit
(c) Percentage of profit – 20%
(d) Average credit period allowed to debtors – 10 weeks
(e) Average credit period allowed by suppliers – 8 weeks
(f) Average stock holding in terms of sales requirement – 10 weeks
(g) Allow 20% for contingencies.

Question 3.
Calculate the working capital requirement from the following information.

Question 4.
A proforma a cost sheet of a company provides the following particulars.
Elements of cost – Amount per Unit
Materials – 50%
Direct labour – 15%
Overheads – 15%
The following further particulars are available
(a) It is proposed to maintain a level of activity of 6,00,000 units.
(b) Selling price is 20 per unit
(c) Raw materials are expected to be in stores for an average of 2 months
(d) Materials will be in process, an average of one month
(e) Finished goods are required to be in stock for an average of 2 months
(f) Credit allowed to debtors is three months
(g) Credit allowed to supplier is two months.

Question 5.
A cost sheet of a company provides you the following information.
Elements of cost – Amount per Unit
Materials – 80
Direct labour – 30
Overheads – 60
Total cost – 170
Profit – 30
Selling price – 200
The following further particulars are available.
(a) Raw materials are in stock for one month (avg)
(b) Raw materials are in process on an average for half a month.
(c) Finished goods are in stock on an average for one month
(d) Credit allowed by supplier one month.
(e) Lag in payment of overheads is one month
(f) Lag in payment of wages is 1 1/2 weeks.
(g) 1/4th output is sold against cash.
(h) Cash in hand and at bank is expected to be ₹ 1,25,000.
(i) Credit allowed to customers 2 months.
You are required to prepare a statement showing the working capital needed to finance level of activity of 2,08,000 units of production.

Question 6.
What are the different methods of calculating EOQ?

Question 7.
Find out the EOQ from the following.

Question 8.
Give the meaning of EOQ and claculate EOQ from the following:
Monthly consumption 1,500 units
Ordering cost ₹ 50 per order
Inventory carrying cost per month per units ₹ 0.60.

Question 9.
Find out E.O.Q. from the following Annual usage 4000 units, cost of material per units ₹ 2, cost of placing and receiving one order ₹ 5 Annual carrying cost of one unit : 8% inventory value.

Working Capital Management Short Answer Type Questions

Working Capital Management Short Answer Type Questions

Question 1.
Explain the different principles of Working Capital.
Answer:
The different principles of working capital are:
(i) Principle of Risk Variation: Risk refers to the inability of a firm to maintain sufficient current assets to pay for its obligations. There is a definite relationship between the degree of risk and the rate of return. As a firm assumes more risk, the opportunity for gain or loss increases.

As the level of working capital relative to sales decreases, the degree of risk increases. When the degree of risk increases, the opportunity for gain and loss also increases. Thus, if the level of working capital goes up, the amount of risk goes down, the opportunity for gain or loss is likewise adversely affected. Depending upon their attitudes, the managements change the size of their working capital.

(ii) Principle of Cost of Capital: This principle emphasises the different sources of finance, for each source has a different cost of capital. It should be remembered that the cost of capital moves inversely with risk. Thus, additional risk capital results in the decline in the cost of capital.

(iii) Principle of Equity Position: According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position. Every rupee invested in the working capital should contribute to the new worth of the firm.

(iv) Principle of Maturity of Payment: A company should make every effort to relate maturities of payment to its flow of internally generated funds. There should be the least disparity between the maturities of a firm’s short-term debt instruments and its flow of internally generated funds because a greater risk is generated with greater disparity. A margin of safety should, however, be provided for short-term debt payments.

Question 2.
Explain the characteristics of working capital.
Answer:
The features of working capital are:
1) Short term Needs: Working capital is used to acquire current assets which get converted into cash in a short period. In this respect it differs from fixed capital which represents funds locked in long term assets. The duration of the working capital depends on the length of production process, the time that elapses in the sale and the waiting period of the cash receipt.

2) Circular Movement: Working capital is constantly converted into cash which again turns into working capital. This process of conversion goes on continuously. The cash is used to purchase current assets and when the goods are produced and sold out; those current assets are transformed into cash. Thus it moves in a circular away. That is why working capital is also described as circulating capital.

3) An Element of Permanency: Though working capital is a short term capital it is necessary to continue the productive activity of the enterprise. Hence so long as production continues, the enterprise will constantly remain in need of working capital. The working capital that is required permanently is called permanent or regular working capital.

4) An Element of Fluctuation: Though the requirement of working capital is felt permanently, its requirement fluctuates more widely than that of fixed capital. The requirement of working capital varies directly with the level of production. It varies with, the variation of the purchase and sale policy; price level and the level of demand also. The portion of working capital that changes with production, sale, price etc. is called variable working capital.

5) Liquidity: Working capital is more liquid than fixed capital. If need arises, working capital can be converted into cash within a short period and without much loss. A company in need of cash can get it through the conversion of its working capital by insisting on quick recovery of its bills receivable and by expediting sales of its product. It is due to this trait of working capital that the companies with a larger amount of working capital feel more secure.

6) Less Risky: Funds invested in fixed assets get locked up for a long period of time and cannot be recovered easily. There is also a danger of fixed assets like machinery getting obsolete due to technological innovations. Hence investment in fixed capital is comparatively more risky. As against this, investment in current assets is less risky as it is a short term investment. Working capital involves more of physical risk only, and that too is limited. Working capital involves financial or economic risk to a much less extent because the variations of product , prices are less severe generally.

7) Special Accounting System not needed: Since fixed capital is invested in long term assets, it becomes necessary to adopt various systems of estimating depreciation. On the other hand working capital is invested in short term assets which last for one year only. Hence it is not necessary to adopt special accounting system for them.

Question 3.
Explain various types of working capital.
Answer:
The various types of working capital are as follows:
1. Permanent working capital: It is the minimum amount of current assets which is needed to conduct a business even during the off season of the year. It is maintained to carry out operations at any time. It varies from year to year and organisation to organisation, depending upon the growth of fund required to produce the goods, necessary to satisfy demand at a particular point.

2. Temporary working capital: It represents the additional assets which is required from time to time during a year as per market fluctuations. It is also called as variable or seasonal working capital. It is required during the more active business seasons of the year.

3. Gross working capital: It refers to the amount of funds invest in current assets. It provides the correct amount of working capital at right time.

4. Net working capital: The net working capital is the difference between current liabilities. It enables the firm to determine how much amount is left for operational requirements.

Question 4.
Explain the Importance of adequate working capital. OR Describe the need of working capital in a firm.
Answer:
Adequate working capital is important for an organisation because of the following reasons:

  • To protect a business from the adverse effects of reduction in the value of current assets.
  • To permit a sufficient level of inventories for continuous production.
  • To enable the management to overcome depression period
  • To pay current liabilities on time promptly and avail discounts on payment.
  • Acts as a cushion in emergencies like strikes, flood etc.
  • Have favourable credit terms with customers.
  • Helpful in providing funds for expansion.
  • Working capital if possible can be invested in non-current assets.
  • Necessary funds can be accumulated for meeting future expenses.
  • It enables the company to operate its business more efficiently
  • To overcome excessive non operating losses.
  • To meet higher inventories and fixed assets requirements.

Question 5.
What are the disadvantages of excess working capital in the company.
Answer:
Excess working capital is a threat to a company. The following are disadvantages of excess working capital:

  • Leads to low profitability even though sufficient cash is available.
  • Outstanding and losses may be faced.
  • One of the root causes over overcapitalisation
  • It leads to greater production level but not having a matching demand in market.
  • High level of inventories and its maintenance and storage cost increases.
  • It may lead to carelessness about costs and therefore inefficiency of operations.
  • Creates an imbalance between liquidity and profitability
  • Unwise dividend policies.

Excessive working capital is not a good indicator for future growth and profitability for the organisation. The management should avoid such a condition and maintain a level of adequate working capital in the organisation.

Question 6.
What are the disadvantages of inadequate working capital in the company?
Answer:
Inadequate working capital is also not a favourable position for an organisation. There are several disadvantages of it.
These are as follows:

  • May not be able to take bulk orders.
  • It leads to adverse effects on solvency of the firm
  • Cash discount facilities cannot be availed properly or efficiently.
  • Leads to low liquidity which ultimately leads to decrease in profitability.
  • The organisation will not be able to pay dividends because of non availability of funds.
  • The credit worthiness of the company is adversely effected due to insufficient funds and untimely payment to creditors.
  • The upgradation of machines and even its repairs cannot be done properly due to lack of funds with the company.
  • Leads to borrowing at higher rates many times.
  • May not be able to take up profitable business opportunities.
  • Cash sales of the company mostly stagnate or even reduce and it may restrict its activities.

Question 7.
Explain the methods of estimating working capital requirements.
Answer:
There are two methods usually followed in determining working capital requirements:
(i) Conventional Method or Cash Cycle Method:
According to the conventional method, cash inflows and outflows are matched with each other. Greater emphasis is laid on liquidity and greater importance is attached to current ratio, liquidity ratio etc. which pertain to the liquidity of a business.

(ii) Operating Cycle Method:
The term operating cycle or cash cycle refers to the time duration required to convert the cash to raw materials, raw materials to work-in-progress, work in progress to finished goods, finished goods to debtors and debtors back to cash. We should know the operating cycle of an enterprise. There are four major components of the operating cycle of a manufacturing company.
(a) The cycle starts with free capital in the form of cash and credit, followed by investment in materials, manpower and the services

(b) Production phase

(c) Storage of the finished products terminating at the time-finished product is sold

(d) Cash or accounts receivable collection period, which results in, and ends at the point of dis-investment of the free capital originally committed. New free capital then becomes available for productive reinvestment. When new liquid capital becomes available for recommitment to productive activity, a new operating cycle begins.

Question 8.
What are the different motives of holding cash? OR What are the objectives of cash management?
Answer:
a. Transactionary motive:
A firm requires cash to meet the transactions in the ordinary course of the business like making payments towards dividends taxes, purchases wages etc. As there is no synchronisation between the cash inflows and the cash outflows the firms has to keep aside a certain portion of the amount to meet its day to day transactions.

b. Precautionary motive:
Cash under this motive is held as a precautionary measure. Firms are exposed to unforeseen events or contingencies like calamities, competition, strike, lockouts, consumer behaviour, changing government policies. As such so to meet these additional formalities firms have to set aside a certain portion of the amount to meet these unforeseen events.

c. Speculative motive:
The speculative motive relates to holding cash for investing in profitable investments as and when they arise. As such investments does not occur on a regular basis so the firm can keep a certain portion of the amount aside to reap the benefits of taking up the profitable investments as and when they occur. Ex. Prices of raw materials may fall temporarily so the firm may utilise the portion kept aside for speculative purpose and purchase the materials when they are available at lesser prices.

Question 9.
How to prepare Cash Budget? Explain.
Answer:
The cash budget is prepared after operating budgets and the capital expenditure budgets are prepared.
(i) The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available.

(ii) Cash outflows for the period are then subtracted to calculate the cash balance before financing.

(iii) If this balance is below the company’s required balance, the financing section shows the borrowings needed.

(iv) The financing section also includes debt repayments, including interest payments.

(v) The cash balance before financing is adjusted by the financing activity to calculate the ending cash balance.

(vi) The ending cash balance is the cash balance in the budgeted or pro forma balance sheet.

(vii) The format of this budget is:
Beginning cash balance
+ cash receipts
= cash available
? cash disbursements
= excess/deficiency of cash
+/- financing
= Ending cash balance

Question 10.
What are the factors influencing size of receivables?
Answer:
A number of factors influence the size of receivables, following are some of the factors:
1) Volume of credit sales: A firm has to be very competitive to ensure that it faces the competition in the market. It has to attract customers which is possible by offering credit sales to the customers. Hence, the volume of credit sales is one of the factor that influences the size of the receivables. More the credit sales more will be the accounts receivables.

2) New products: A firm to promote its new products will have to offer attractive terms like discounts, Sale on credit basis etc. If the firm is selling its new products on credit basis it will result in accounts receivables or debtors. Hence, promotion of the new product is one of the factor affecting the account receivable.

3) Location: If the firm is operating from a distant place from the market area, location becomes a demerit. So the firm to promote its product and attract the customers offers the products on credit basis which will in turn result in debtors.

4) Credit policy: If the firm is rigid on selling goods on credit basis the size of the accounts receivable is almost nil. But if the firm is liberal in offering its goods on credit basis then the size of the accounts receivable will be more.

5) Credit worthiness of the customers: The paying habits of the customers affects the size of the accounts receivables, if the customers delay the payments it will adversely affect the size of the accounts receivables.

6) Credit collection efforts: The firm should give due concern in collecting the credit given to the customers. The firm has to send periodical reminders reminding the customers to pay the money due to the firm. If the firm is liberal in collecting the credit, the customers also will delay their payments. This will effect the size of the accounts receivables.

Question 11.
Explain various Inventory Management Techniques.
Answer:
Inventory management refers to managing the stores to ensure that there is neither over stocking nor under stocking of materials. An efficient system of inventory management will determine what to purchase, from where to purchase, how much to purchase, and where to store. Following are, the tools of inventory management.
a. Fixation of levels: It is a tool through by which materials are maintained in the store houses by fixing different levels namely Maximum level, Re-order level, Minimum level and Danger level. Levels are fixed taking into consideration the factors like cost and nature of raw materials, lead time, storage spare etc.

b. ABC analysis: Materials are controlled giving importance to its value. Materials are graded as A, B & C wherein materials with ‘A’ grade are costlier in value but less in number where as materials with ‘C” grade are cheaper in value and more in number. Grade ‘B’ materials are moderate in value and moderate number of such items are maintained.

c. VED analysis: Materials are categorised as vital, essential and desirable components. Much importance is given to the materials categorised as vital than to the desirable components.

d. FSN analysis: Under this type, materials are grouped according to their movements. Fast moving items are stored in large quantities to meet the requirements. Slow moving items are moderately stored. Non moving items are rarely required therefore the quantity stored is very less.

e. Economic order quantity: Economic order quantity is the size of the lot to be purchased which is economically viable. EOQ is a point at which the ordering cost and the carrying cost are minimum.

f. Perpetual inventory system: A record is kept on a continuous basis as and when the materials are received and issued and hence, it is called perpetual inventory system.

Working Capital Management Very Short Answer Type Questions

Working Capital Management Very Short Answer Type Questions

Question 1.
What is Working Capital?
Answer:
Working capital is that part of the firms total capital which is required for financing short term assets or current assets.such as cash, debtors, inventories, marketable securities. It is also known as circulating capital.

Question 2.
Explain the concept of working capital.
Answer:
Working capital is the amount of funds necessary to cover the cost of Operating the enterprise. There are two concepts of working capital: (i) Gross working capital (ii) Net working capital Gross working capital is the capital invested in total current assets of the enterprise. Net working capital is the excess of current assets over current liabilities.

Question 3.
Mention the different types of working capital.
Answer:
The different types of working capital are:

  • Permanent working capital
  • Temporary working capital
  • Gross working capital
  • Net working capital

Question 4.
What do you mean by working capital management?
Answer:
Working capital management refers to the administration of all aspects of current assets namely cash, debtors, inventories and marketable securities and current liabilities. This basically determines the levels and compositions of current assets to ensure that right sources are tapped to finance current assets and current liabilities are paid in time.

Question 5.
Differentiate between Gross and Net Working Capital.
Answer:
Gross working capital is a broader concept which includes all the current assets of the company whereas net working capital is the difference between current assets and current liabilities.

Question 6.
What is conservative approach to working capital financing?
Answer:
Conservative approach to working capital financing depends on long-term funds for financing needs. The firm finances the permanent current assets and a part of the temporary current assets with long-term funds. If the temporary assets are not needed then the long-term funds are invested in the marketable securities. A firm following this approach will face less risk but along with Sow returns.

Question 7.
State any two determinants of working capital.
Answer:
The two determinants of working capital are:

  • Opersational efficiency
  • Growth and Expansion

Question 8.
What is operating cycle?
Answer:
The term operating cycle or cash cycle refers to the time duration required to convert the cash to raw materials, raw materials to work-in-progress, work in progress to finished goods, finished goods to debtors and debtors back to cash.

Question 9.
What is cash management?
Answer:
Cash management refers to the process of managing cash i.e. its inflow and outflow in an organisation for cash demanding activities and minimising funds committed to cash balances.

Question 10.
What is cash cycle?
Answer:
It is the net time interval between cash collections from sale of the product and cash payment for resources acquired by the firm. It also represents the time interval over which additional funds called working capital, should be obtained in order to carry out the firm’s operations.

Question 11.
Name the various floats which necessitates management of cash.
Answer:
Float refers to the amount of money tied up between the time a payment is initiated and cleared funds become available in the company’s bank account. The different types of float are:

Question 12.
Mention various Cash Management Techniques.
Answer:
The various cash management techniques include the following:

  • Budgeting
  • Investing
  • Credit
  • Generating income

Question 13.
Give the meaning of receivables.
Answer:
Receivables are also known as accounts receivables or Book debts. Receivables are the claims against its customers for the goods sold to the customers in the ordinary course of business on credit basis. The purpose of lending goods on credit basis is to attract more customers, meet competition and to increase sales and profits.

Question 14.
What is receivable management?
Answer:
Receivables management is a decision making process which takes into account the creation of debtors turnover and minimising the cost of borrowing of working capital due to lacking of funds in receivables.

Question 15.
What is Ageing Schedule?
Answer:
Ageing schedule is a table that classifies accounts receivable and payables according, to their dates. It helps in managing cash and analyzing payments.

Question 16.
What do you mean by Debtors Turnover Ratio?
Answer:
A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy.
Debtors/Receivables Turnover = \(\frac{\text { Net Credit Annual Sales }}{\text { Average Trade Debtors }}\)
= No. of times
Trade Debtors = Sundry debtors + Bills Receivables
Debtors should always be taken to gross value. No provision for bad and doubtful debts be deducted from them. Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors.

Question 17.
What is Inventory Management?
Answer:
Inventory Management refers to the purchase of raw materials from the right source at the right time and at the -right price and supplying the materials to the production department as and when required. The main objective of inventory management is to reduce the order placing, receiving and inventory carrying cost

Question 18.
State the objectives of inventory management.
Answer:
The basic objectives of inventory management are:

  • Availability of materials
  • Best services to consumers
  • Wastage minimisation
  • Optimum Investment

Question 19.
Give the meaning of EOQ.
Answer:
Economic Order Quantity is a point at which the carrying cost and the ordering cost are equal. Economic order Quantity is that size of the lot to be purchased which is economically viable. This is the quantity of material which can be purchased at minimum costs.

Question 20.
Mention two benefits of holding inventories.
Answer:
Various benefits of holding inventories are:

  • Avoiding Lost Sales
  • Gaining Quantity Discounts
  • Reducing Order Cost

Question 21.
Mention the techniques of inventory management.
Answer:
The techniques of inventory management are:

  • Fixation of levels
  • ABC Analysis
  • VED analysis
  • FSN analysis
  • Economic order quantity
  • Perpetual inventory system.

Question 22.
What is ABC analysis OR Pareto analysis?
Answer:
ABC analysis is a method of material control wherein the materials are divided into a number of categories. Materials are controlled giving importance to its value. Materials are graded as A, B & C where in materials with ‘A’ grade are costly in value but less in number where as materials with ‘C” grade are cheap in value and more in number. Grade ‘B’ materials are moderate in value and moderate number of such items are maintained.

Question 23.
What is Just-In-Time Management?
Answer:
Just-In-Time (JIT) is a broad philosophy of seeking excellence and eliminating waste in the manufacturing process. A major objective of JIT is to have items only at the right place at the right time i.e. to purchase and produce items only before they are needed so that work-in-process inventory is keet low. As a concept, JIT means that virtually no inventories are held at any stage of production and that exact number of units is brought to each successive stages of production at the right time.

Question 24.
What do you mean by safety stock?
Answer:
The receipt of inventory from the suppliers may be delayed beyond the expected lead time. The delay may be because of strikes, floods, transportation and communication barriers, and also because of seasonal nature of the raw materials. This inturn would disrupt the production schedule. To prevent this situation the firm maintains additional inventory which is known as “safety stock”.

The Finance Function Long Answer Type Questions

The Finance Function Long Answer Type Questions

Question 1.
Explain the scope of financial management.
Answer:
The primary objective of a finance Manager is to arrange sufficient finances in order to meet the short term long, term needs. The funds are procured at minimum costs so that the profitability of the business is maximised.

The finance manager should basically concentrate on the following areas:
(1) Financial Estimation: As stated earlier, the prime task of a finance executive is to estimate the short term and long term financial requirement of the business. The estimation of finance should be such that there should neither be inadequate nor excess funds with the concern because both the situations would be uangerous for the concern. If there is inadequacy of funds, the day-to-day functioning of the organisation gets affected whereas excess funds results in misuse of funds are unprofitable investment.

(2) Planning of the capital structure: The process of planning of the capital structure includes selection of right proportion of securities for raising funds. The process involves deciding about the quantum of funds and also the type of securities to raise the funds. The organisation should choose long term debts for financing fixed assets and overdrafts and cash credits should be selected for financing working capital requirements.

(3) Selecting right source of funds: In market, finance is available in different forms like shares, debentures, financial institutions, commercial banks public deposits etc. Selecting a right source at the right time at right cost is the challenge for the finance executive. Before making any commitment about the funds, the finance executor should decide and be clear about the period for which funds are required. It funds are needed for short period then he should choose banks, financial institutions etc. If funds are needed for long periods then equity or debentures should be selected.

(4) Investment of funds: After the mobilisation of funds, it is the responsibility of the finance manager to allocate or invest the funds towards capital expenditure and revenue expenditure. Before making a final decision the profitability of each project has to be evaluated by the finance manager. The proposal is selected based on the fair returns it promises.

(5) Analysing the financial performance: After the investment of funds in different investment proposals, the performance of each proposal has to be measured. In other words the profit generating capacity of each proposal has to be analyzed.

(6) Planning of profit: Profit earning capacity of an organisation speaks about the efficiency level Of the organisation. Profit earning capacity enables future expansion and diversification programs of the company. It is the prime responsibility of the finance manager to plan the profits before hand as he has to protect the interest of the stakeholders and shareholders.

(7) Ensuring liquidity: Another responsibility of a finance manager is to ensure the liquidity of the organisation as it is directly by related to the borrowing capacity of the company.

Question 2.
Give a brief note on sources of business finance.
Answer:
There are two major sources of finance for meeting the financial requirements of any business enterprises, which are as under

Owners Fund:
Owners fund is also called as Owners Capital or owned capital. It consists of the funds contributed by the owners of business as well as profits reinvested in business. A company cans raise owner’s funds in the following ways:

  • Issue of equity shares,
  • Ploughed back profits

Borrow Fund:
The second source of funding to a business is the borrowed fund. Borrowed fund consists of the amount raised by way of loans or credit. It is also known as borrowed capital.
The borrowed fund is procured from the following sources:

  • Debentures
  • Bank Loans
  • Loans from specialized financial institutions.
  • Other long term financial institutions

All businesses require an adequate finance. They need money for investment in fixed asset such as land, building, machinery etc. Once business is in operation, money is needed for Working Capital, such as purchase of raw material, payment of wages, utility bills etc. A going concern also requires extra capital to cover a temporary cash flow crisis, or purchase new improved machinery or simply to expand the business. The financial requirements of a business, on the basis of time duration, are usually classified under three heads which are as follow

1. Short Term Finance:
Short term Sources of finance is defined as money raises for investment in business for a period of less than one year, it is also named as working capital or circulating capital or revolving capital.

The purpose and amount of obtaining short term capital varies with the nature and size of the business. Generally the short term capital is required for meeting the day to day expenses of business such as payment of utility bills, wages to the workers, unforeseen expenses, seasonal upswings in business, increasing inventories raw material, work in progress and finished goods etc.

The various sources of short term finance are as under –

  • Trade creditor open book account
  • Advance from customers
  • Installment credit
  • Bank Overdraft
  • Gash credit
  • Discounting bills
  • Against bill of lading

2. Medium Term Finance:
Medium term sources of finance are required for investment in business for a medium period which normally ranges from one to five years. The medium term funds are required generally for the repair and modernization of machinery, renovation of the building, adoption of new methods of production, carrying advertisement campaign on large scale, in newspapers, television etc. The various sources of medium term finance are as under:

  • Commercial Banks
  • Debentures
  • Loans from Specialized Credit Institutions

3. Long Term Finance:
Long term sources of finance refer to the funds, which are required for investment in business for a period exceeding up’ to five years. It is also named as long term capital or fixed capital. Long term sources’of finance are mostly required for the purchased of fixed assets, such as land, building, machinery etc. modernization and expansion of business. The amount of long term finance varies with the nature of business, size of business, nature of the product manufactured, the number of goods produced, and the method of production etc. The various sources of long term finance are as under

  • Equity shares
  • Issue of right shares
  • Debentures
  • Loans from industrial and financial institutions –
  • Leasing
  • Ploughing back of profits

Question 3.
What are the aims/goals/objectives of financial management?
Answer:
Financial Management of any business firm has to set goals for and to interpret them in relation to the objectives of the firm. Broadly there are only two alternative goals/objectives of financial management.
1. Specific Objectives:
(a) Profit Maximisation: It is considered as an important goal in financial decision making in an organisation. Maximisation is the condition of achieving the maximum target profit with available resources .in an economic and efficient manner. Profit ensures maximum welfare to the share holders, employees and creditors and increases confidence of the management of the company.

(b) Wealth Maximisation: It refers to the maximisation of wealth through maximisation in the market value of shares of a company. The efficient management of an organisation maximises the present value not only for shareholders but for all including employees, customers, suppliers and community at large. It Is the ultimate objective of every organisation.

2. General Objectives:
(a) Balanced asset structure: A proper balance between the fixed and current assets is an important factor for efficient management of funds. This is one of the objectives of financial management that the size of current asset must permit the company, to exploit the investments on fixed assets.

(b) Liquidity: Liquidity refers to available cash and it is an indication of positive growth of a company. It is an important factor for meeting the short and long term obligations of a firm.

(c) Proper planning of funds: Proper planning of funds include acquisition and allocation of funds in the best possible manner i.e. minimum cost of acquisition of funds but maximum returns through wise decisions.

(d) Efficiency: Efficiency and effectiveness are very much necessary in controlling the flow of funds. The efficiency level should continuously increase for betterment of
the organisation.

(e) Financial discipline: There shouldn’t be any bulk handling of funds, mis-use etc. Proper discipline should be practiced in matters relating to finance, its flow and control. This can be done through various techniques like budgeting, fund flow statements etc.

Question 4.
Evaluate Wealth Maxmisation and Profit Maximisation as primary objectives of a concern?
Answer:
Profit maximisation: It is the primary motive of any business concern to earn profit. Profit is the means through which the efficiency level of an organisation can be measured. Profits reduce the risk of companies. The ultimate survival of the firm depends upon the profit generating capacity.

Wealth Maximisation: Wealth Maxmisation refers to creation of wealth of the concern. In other words, it refers to the increase in the market value of shares. By taking care of the interest of shareholders and stakeholders, the company in the long run can ensure the increase in the value of its shares.

Profit maximisation:
Advantages:

  • The efficiency level of an organisation can be ensured only through profits.
  • The interest of shareholders, creditors, employees, banks, financial institutions etc., can be protected and
  • their welfare can be ensured only through profits.
  • The profits enable a concern to take up expansion and diversification programs.
  • Profits increase the demand for the shares of the company.
  • Profits ensure the survival of the concern

Disadvantages:

  • Profit maximisation objective does not consider the element of risk.
  • Profit maximisation unnecessarily invites competition for the concern
  • There is unnecessary government intervention because of profit maximisation
  • Huge profits invite problems from workers.
  • Huge profits unnecessarily create doubts in the minds of customers that they are cheated

Wealth Maximisation:
Advantages:
1. Wealth maximisation is a clear term. The present values of cash flows are taken into consideration. The effect of investment and benefits can be measured clearly.

2. Wealth Maximisation includes the concept of time value of money. This concept includes the usage of present value of cash inflows and cash outflows which helps in achieving the overall objectives of the company.

3. Wealth Maximisation guides the management in framing consistent strong dividend policy to give maximum returns to the equity shareholders.

Disadvantages:
The objective of wealth maximisation is not descriptive. The wealth maximisation concept differs from one entity to another entity.

Question 5.
Write short note economic environment for business.
Answer:
Economic environment influences the business to a great extent. It refers to all those economic factors which affect the functioning of a business unit. Dependence of business on economic environment is total i.e. for input and also to sell the finished goods. Trained economists supplying the Macro economic forecast and. research are found in major companies in manufacturing, commerce and finance which prove the importance of economic environment in business.

The following factors constitute economic environment of business:

  • Economic system
  • Economic planning
  • Industry
  • Agriculture
  • Infrastructure
  • Financial & fiscal sectors
  • Removal of regional imbalances
  • Price and distribution controls
  • Economic reforms
  • Human resource and
  • Per capita income and national income

Question 6.
Explain various functions of financial markets.
Answer:
The various functions of financial markets are:
Functions of a financial market can be classified into two categories: Economic Functions, and Financial Functions. The various functions of financial markets are as follows:
(a) Economic Functions:

  • It facilitates the transfer of real economic resources from lenders to ultimate borrowers in financial system
  • Lenders earn interest/dividend on their surplus invisible funds, thereby increasing their earnings, and as a result, enhancing national income of the country.
  • Borrowers will have’ to use borrowed funds productively if invested in new assets, hence increasing their income, spending and standard of living.
  • By facilitating transfer of real resources, it serves the economy and finally the welfare of the general public in the country.
  • It provides a channel through which new savings flow into capital market which facilitates smooth capital formation in the economy.
  • Interaction of buyers and sellers in the financial market helps in price discovery of financial assets.
  • Financial markets provide a mechanism for an investor to sell a financial asset and liquidate the funds invested. In the absence of liquidity, the owner will be forced to hold a debt instrument till its maturity.
  • Financial market reduces the search and information costs of transacting financial instrument. Search costs include money spent to advertise the desire to sell purchase a financial asset.

(b) Financial Functions:

  • It provides the borrowers with funds which they will invest in some productive purpose.
  • It provides the lenders with productive assets so that they can invest it in productive usage without the necessity of direct ownership of assets.
  • It provides liquidity in the market through which the claims against money can be resold by investors at any time and there by assets can be converted in to cash.

Question 7.
Give the classification of financial markets. OR Discuss the types o of financial markets.
Answer:
Financial markets can be classified into:
a. Money market and capital market: Money market is a market for short term financial assets, which are near substitutes for money. Money market instruments are highly liquid in nature and can be easily converted into cash without major losses. The instruments of money market are for shortest duration usually for a period less than one year. The dealings of money market can. be conducted with the involvement of brokers and middlemen.

Money market consists of a number of sub markets such as treasury bills market, call money market, inter bank transactions market, commercial paper market and commercial bill market etc. Capital market is the market for developmental finance. This market deals with instruments such as shares, debentures etc. Capital market instruments are for long term duration. It is a market for long term finance.

b. Primary market and secondary market: Primary (or new issue) market basically consists of all people, institutions, services and practices involved in raising fresh capital for both new and existing companies. Primary markets is a market for new securities, which acquire capital for the first time.

Secondary market basically consists of securities which are already issued. Secondary market also known as stock market which deals with purchases and sales of securities issued by government, semi government or public sector undertakings and shares and debentures by Joint stock companies.

c. Organised, and Unorganised market: The operators of organised market are non-bank financial institutions such as LIC, and GIC, State Co-operative Banks etc. At the top, there are state co-operative banks, at the district level there are central co-operative banks and at local level, there are primary credit societies and urban co-operative banks. This is called as organised market because they are governed by RBI.

The Unorganised market structure comprises of Money lenders, indigenous bankers etc. It is said as unorganised market because the activities of these market are not governed by RBI or any other authority. The principal operators of unorganised market are money lenders, indigenous banks, nidhis and chit funds etc.

d. Foreign Exchange market: It is a market where foreign currency are bought and sold. The major operators of this market are central bank and its authorised dealers. The foreign exchange market plays the part of a clearing house through which purchases and sales of foreign exchange whether originating outside the market or within the market itself are offset against each other.

e. Broad, deep and shallow market: Broad market is a market that basically attracts funds from national and international investors in greater volume. Deep market is a market where there are good opportunities for swap dealings. Shallow market is an under developed financial market. This underdevelopment exists due to unnecessary regulations and control imposed by government.

Question 8.
What are functions of financial intermediaries?
Answer:
The various functions performed by these intermediaries are broadly classified into two:
(а) Traditional functions:

  • Underwriting of investments in shares/debentures etc
  • Dealing in secondary market activities
  • Participating in money market instruments
  • Involving in leasing, hire purchase, venture capital, seed capital etc.
  • Dealing in foreign exchange market activities
  • Managing the capital issues
  • Making arrangements for the placement of capital and debt instruments with investing institutions
  • Arrangement of funds from financial institutions for the clients project
  • Assisting in the process of getting all Government and other clearances.

b. Modern Functions:

  • Rendering project advisory services
  • Planning for mergers and acquisitions and assisting for their smooth carry out
  • Guiding corporate customers in capital restructuring
  • Acting as trustees’to the debenture holders .
  • Structuring the financial collaboration joint venture by identifying suitable partner and preparing joint venture agreement
  • Rehabilitating and reconstructing sick companies
  • Hedging of risks by using swaps and derivatives –
  • Managing portfolio of large public sector corporations .
  • Undertaking risk management services like insurance service, buy back options etc
  • Advising the clients on best source of funding overall
  • Guiding the clients in the minimisation of the cost of debt
  • Capital market .services such as clearing, registration and transfers, safe custody of securities, collection of income on securities
  • Promoting credit rating agencies.
  • Recommending suitable changes in the management structure and management style with a view of achieving better result.

Question 9.
Explain the different instruments traded in money market.
Answer:
The instruments traded in Money market are:

  • Treasury bills
  • Commercial bills
  • Certificates of deposits
  • Inter-bank participation certificates
  • Commercial papers
  • Money at call or call money

(a) Treasury bills: Treasury bills are purely finance bills, which are for short term not exceeding one year, issued by RBI on behalf of the government. The primary objectives behind the issue of treasury bills is to meeting temporary financial deficits of government.

(b) Commercial bills: There are situations of credit sale, the seller draws a bill on behalf of the buyer, the buyer accepts the bill by promising him to pay the bill amount later Usually bills are drawn for 3 months and 6 months.

(c) Certificates of deposits: These are short term instruments issued by banks, financial institutions to raise large sums of money. The Certificates of deposits are issued for period ranging from 3 months to one year. These are issued to individuals, corporation, companies, trust, funds, associations etc. r in the form of promissory notes payable on a particular fixed date without days of grace.

(d) Inter bank participation: With the permission of RBI, the banks are authorised to raise short term finance by issuing Inter bank participation certificate. This scheme of inter banks participation is restricted to scheduled commercial banks only and the participation is for a minimum period ranging from 91 days to 180 days. Participation is permitted in two types a. With risk participation b. Without risk participation.

(e) Commercial papers: These refers to promissory notes issued by i companies, basically approved by RBI. These are negotiable by endorsement and delivery. These are usually issued with a fixed maturity and at a discount usually determined by the company issuing it.

(f) Money at call: This is basically a market for short term loans say one day to fourteen days. These are payable on demand at the option of the lender or borrower.

Question 11.
Briefly explain the components of money market.
Answer:
The Indian Money Market is divided into two parts, namely, the unorganised sector and the organised sector. This has been depicted below:
The Finance Function Long Answer Type Questions 1
I. Unorganized Sector:
The unorganized sector is more predominant in small towns and villages where modern banking facilities are not available. Farmers, labourers, craftsman, artisans and other small scale producers and traders who do not have access to modern band, rely on the unorganized sector.

A. Unregulated Non banking financial intermediaries:
These include – i) Finance companies, ii) Chit fund, and iii) Nidhis Finance companies are found all over the country and generally give loans to retailers, wholesalers, traders, artisans and other self-employed persons. They charge high rates of interest from 36% to 48% Chit funds have no standardised form. It has regular members who make fixed periodic subscriptions to it.

The total fund collected from this periodic subscription is given to some member of the chit fund selected on the basis of previously agreed criterion. The RBI has absolutely no control over the lending activities of the chit funds. The nidhis are predominant in South India they are like some kind of mutual benefit funds as their dealings are restricted only to members. Since the nidhis operate in the unregulated credit market, there is hardly any information available about the amount of lending business done by them.

B. Indigenous bankers: are individuals or private firms which receive deposits and give loans and thereby operate as bands. Indigenous bankers do not constitute a homogenous groups. They can be classified under four subgroups. Namely equjarati shroffs, Muitane shroffs, Chettiars and Marwari kayas Amongst these four, the Gujarati indigenous bankers are the most important in terms of volume of business. Indigenous bankers are facing stiff competition from the commercial and co-operative banks.

C. Moneylenders : are of three types:

  • professional money enders whose main activity is money lending;
  • itinerant money lenders like pathans and Kabouli’s and
  • non professional money lenders whose main source of income is not money lendings, the activities of money lenders are generally lacalised.

II. Organized Sector:
Mumbai, Delhi, Chennai, Kolkatta, Ahmedabad and Bangalore are the principal centres of the organized money market in India, Mumbai being the most prominent, the organized sector of the Indian money market comprises the RBI, commercial banks, foreign banks, cooperative banks, finance corporations, Mutual Funds and Discount and Finance House of India limited (DFHI) the principal constituents of the Indian money market are:

  • The call money market
  • The treasury Billmarket
  • The Repo market
  • the commercial Bill market
  • The certificate of Deposits Market
  • The commercial paper market and
  • Money Market Mutual Funds.

A. The Call Money Market: The call money market refers to the market for extremely short period loans, say one day to fourteen days. These loans are repayable on demand at the option of either the lender or the borrower.

B. Treasury Bill Market: Treasury bills are short term promissory notes issued by RBI on behalf of Central Government for raising fund to meet revenue expenditure. These are issued at discount to face value.

C. The Repo Market: Repo is a money market instrument which helps in collateralised short term borrowing and lending through sale purchase operations in debt instruments.. Under a repo transaction, securities are sold by their holder to an investor with an agreement to repurchase them at a predetermined rate and date. Under reverse repo transactions, securities are purchased with a simultaneous commitment to resll as a predetermined rate and date.

D. The Commercial Bill Market: The Commercial Bill Market is the Submarket in which the trade bills or commercial bills are handled. The Commercial bill is a bill drawn by one merchant firm on the other. The legitimate purpose of a commercial bill is to reimburse the seller while the buyer delays payment. In India, the commercial bill market is highly undeveloped Commercial bills as instruments of credit are useful to both business firms and banks

E. The Certificate of Deposit Market: Certificate of deposits are short term deposit instruments issued by banks and financial institutions to raise large sums of money.

F. Commercial Paper: A Commercial Paper is an unsecured promissory note issued with a fixed maturity, short-term debt instrument issued by a corporation approved by RBI, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates. Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

G. Money Market Mutual funds: A Scheme of money market mutual funds was introduced by the RBI in April 1992. The objective of the scheme was to provide an additional short term avenue to the individual investors. As the initial guidelines were not attractive, the scheme did not receive a favourable response. The new guidelines allow banks, public financial institutions and also the institutions in the private sector to set up MMMFs. MMMFS have been brought under the purview of-the SEBI regulations since March 2000.

The Finance Function Short Answer Type Questions

The Finance Function Short Answer Type Questions

Question 1.
State the aims of finance functions.
Answer:
The aims of finances functions can be summarized as follows:
1. Acquiring Sufficient and Suitable Funds: The crucial aim of finance function is to assess the needs of the enterprise, properly and procure funds in time. Time is an important element in meeting the needs of the organization. It is necessary that the funds should be, reasonably, adequate to the demands of the firm.

2. Proper Utilization of Funds: Raising funds is important more than that is its proper utilization. If proper utilization of funds were not made, there would be no revenue generation. Benefits should always exceed cost of funds so that the organization can be profitable.

3. Increasing Profitability: Profitability is necessary for every organization, the planning and control functions of finance aim at increasing profitability of the. firm. To achieve profitability, the cost of funds should be low. Idle funds do not yield any return, but incur cost.

4. Maximizing Firm’s Value: The ultimate aim of finance function is maximizing the value of the firm, which is reflected in wealth maximization Of shareholders. The market value of the equity shares is an indicator of the wealth maximization.

Question 2.
Explain the functions of financial management system.
Answer:
The functions of financial management are as follow:

  • Estimation of financial requirements of a firm
  • Selection of right and appropriate source of funds for raising the funds.
  • After selecting the right source, raising the funds required by the firm.
  • After accumulating, proper allocation of funds to different profitable avenues becomes essential.
  • After the investment of funds, proper analysis and interpretation is required to ensure profitable investment in order to increase the yield.
  • Effective working capital management to ensure smooth running of business.
  • The financial management also ensure fulfilling social obligation of business.
  • Proper financial management protects the interest of creditors, shareholders and employees.

Question 3.
State the criticisms laid against ‘Profit Maximisation”.
Answer:
Profit maximisation Advantages:

  • The efficiency level of an organisation can be ensured only through profits.
  • The interest of shareholders creditors, employees, banks financial institutions etc., can be protected and their welfare can be ensured only through profits.
  • The profits enable a concern to take up expansion and diversification programs.
  • Profits increase the demand for the shares of the company.
  • Profits ensure the survival of the concern.

Disadvantages:

  • Profit maximisation objective does not consider the element of risk.
  • Profit maximisation unnecessarily invites competition for the concern.
  • There is unnecessary government intervention because of profit maximisation.
  • Huge profits invite problems from workers.
  • Huge profits unnecessarily create doubts in the minds of customers that, they are cheated.

Question 4.
State and explain in. brief the different goals of financial management? State the advantages of wealth maximisation?
Answer:
The goals can be divided into:
(a) Specific Goals:

  • Profit Maximisation
  • Wealth Maximisation

(b) Other Goals:

  • Maintaining balanced asset structure
  • Ensuring efficiency in business operations
  • Ensuring financial discipline
  • Planning judicious utilisation of funds
  • Maintaining liquidity of funds

The advantages of wealth maximisation are:

  • Wealth maximisation includes the concept of time value of money.
  • The concept of wealth maximisation is universally accepted as it takes into account the interest of financial institutions, owners, employees and society.
  • The concept of wealth maxmisation considers the impact of risk factor.
  • Wealth maximisation concept guides the management of the firm in framing effective dividend policy to give maximum returns to equity shareholders.

Question 5.
Difference between profit maximation and wealth maximisation.
Answer:
Difference between profit maximation and wealth maximisation are:

Profit Maximization Wealth Maximization
1. Emphasizes short-term returns Emphasizes long term returns.
2. Easy to determine the link between financial decisions and profits. Offers no clear relationship between between financial decisions and stock price.
3. Ignores risk or uncertainty. Recognizes risk or uncertainty.
4. Ignores the timing of returns. Recognizes the timing of returns.
5. Does not consider stockholders Considers stockholders return.
6. Objective to make profits Objective to maximise earnings per share

Question 6.
What are the decisions of financial management?
Answer:
The functions of finance involve three important decisions:
1. Investment decisions: This decision includes all activities involved in deciding the pattern of investment. This decision involves both short term and long term investments which in other words means both capital assets and current assets. This decision involves allocation of huge financial resources.

2. Financing Decisions: This decision involves selecting appropriate sources of funds for raising money. It is a major challenge for a financial executive, because the source selected should aim in maximising returns of the investors. The different alternative sources available for mobilising funds are a) Equity b) Equity and Debentures c) Equity, debenture and preference shares d) Equity, debentures, preference shares and long term loans.

3. Dividend Decision: The .primary objective of any organisation is to fulfill the desire of the investors by promising a good percentage of dividend on their investments. A finance manager should also keep in mind the objective of retained earnings at the time of promising dividends to the investors.

Question 7.
State the role of financial markets.
Answer:
Role played by financial market is as follows:

  • Growth in Income: Financial markets allow lenders earn interest/dividend on their surplus investable funds, thus contributing to the growth in their income.
  • Productive Usage: Financial markets allow for the productive use of the funds used in financial system thus enhancing the income and the gross national production.
  • Capital Formation: Financial markets provide a channel through which new savings flow to aid capital formation of a country.
  • Price Discovery: Financial markets allow for the determination of the price of the traded financial asset through the interaction of different set of participants..
  • Sale Mechanism: Financial markets provide a mechanism for selling of a financial .asset by an investor so as to offer the benefits of marketability and liquidity of such assets.
  • Information Availability: The information generated in financial market is useful to various parties taking part in financial market.

Question 8.
Discuss the features of primary market.
Answer:
Features Of Primary Market are:

  • New long term capital: This is the market for new long term capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called New Issue Market (NIM).
  • Issued by the company directly : In a primary issue, the securities are issued by the company directly to investors.
  • Issue new-security certificates : The company receives the money and issue new security certificates to the investors.
  • Setting up new business: Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
  • Facilitating capital formation: The primary market performs the crucial function of facilitating capital formation in the economy.
  • Converting private capital into public capital: The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as going public.

Question 9.
Explain functions of primary market.
Answer:
Functions of primary market are as follows:
1. Facilitate capital growth: The key function of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments.

2. Issue new stocks: It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations.

3. Raise funds from the public : It provides a channel for . the government to raise funds from the public to finance public sector projects.

4. Issuance of new securities by corporations: Unlike the secondary market, such as the stock market which trades listed shares between buyers and sellers, the primary market exists for the issuance of new securities by corporations and the government directly to investors.

5. Methods of issuing securities: Methods of issuing securities in the Primary Market

  • Initial Public Offer or IPO
  • Rights Issue (For existing Companies); and
  • Preferential Issue.

Question 10.
What are the functions of Capital Market?
Answer:
The functions of capital market are:

  • Allocation functions: Capital market helps the investors to invest their savings into various productive avenues. Capital market attracts new investors who are willing to make new funds available to business.
  • Liquidity functions: It helps to buyers and sellers can exchange securities at mutual satisfactory prices. This allows better liquidity for the securities that are trade.
  • Indicative function: It act as a barometer showing the progress of a company and also economy as a whole through share price movements.
  • Savings and investment functions: It helps quickly converting long-term investment into liquid funds. This creates confidence among investors.
  • Transfer function: It helps for transfer of existing assets among individual units or groups.
  • Merger function: It encourages for voluntary or coercive take over mechanism to put the management of inefficient companies to more competent hands.

Question 11.
Explain features of money market.
Answer:
The features of money market are:
(i) Short term financing: It helps for providing short term financino. Money market meets working capital requirements of industry, trade and commerce.

(ii) No fixed place: For conduct of their operations, there is no fixed place and even transactions can be conducted over the phone.

(iii) Liquidity adjustment: It serves as a medium of exchange between the holders of temporary cash surplus and temporary cash deficits. The short-term financial assets are converted into money with speed, without loss and with minimum transaction cost.

(iv) Existence of sub-markets: In a developed money market, the various sub-markets existed and functioned smoothly. That is the money market will have a developed sub-market, such as bill markets, call money market acceptance market, discount market, buillion market, central bank, co-opratives bank etc.

(v) Prevalence of healthy competition: In each sub-market, there should be a reasonable and healthy competition. That is a developed money market, there are a large numbers of borrowers, lenders and dealers.

(vi) Highly developed industrial system: The money market will function smoothly and can fulfil the basic purpose of its existance only when there is a highly developed industrial system.

(vii) International attraction: Well developed money markets attract funds from foreign countries also. The dealers, borrowers and lenders of foreign countries are eagerly coming forward to participants in the activities of developed money market.

(viii) Uniformity of interest rate: Prevalence of uniformity in interest rates in different parts of the country is the important characteristic feature of money market.

(ix) Highly organised banking system: As there are many dealers in short-term funds, the commercial banks are considered as the nervous system of the money market. Therefore a well-developed money market will have a highly organised and developed commercial banking system.

Question 12.
Distinguish between capital market and money market.
Answer:
The distinction between capital market and money market is shown below:

Capital Market Money Market
1. It is a market for long term funds 1. It is a market for short term funds
2. This market deals in instruments like shares, debentures, bond etc. 2. This market deals with bills of exchange, treasury bills, commercial papers, certificate of deposits etc.
3. Development banks and insurance companies are primary players in capital market. 3. Central Bank and commercial banks are the major players in money market.
4. The instruments of capital market generally have secondary market. 4. The instruments of money market do not have a secondary market
5. Authorised dealers are the mediators. 5. There are no brokers involved in who conduct the capital market transactions money market transactions.

Question 13.
Explain any three financial institution.
Answer:
Financial institutions are the firms that provide financial services and advice to their clients. The financial institutions are generally regulated by the financial laws of the government authority.
1. Commercial Banks Institutions:
A commercial bank can be defined as a type of financial institution which provides a wide range of services such as mortgage lending, giving business and auto loans and accepting deposits. The commercial bank also deals with basic investment products such as savings accounts and certificates of deposit.

The traditional commercial banks come with, all facilities such as safe deposit boxes, bank tellers, ATMs and vaults. However, there are some commercial banks that do not have any physical branches. Here the customer is required to undertake all transactions either through the Internet or by phone.

2. Credit Unions Institutions:
The Credit Union is known by various names across the world and is a member-owned, not-for-profit financial cooperative. Unlike other banks and financial institutions, the Credit Unions are. established and operated by the members. In the Credit Union, the profits are shared amongst the members. There is no set standard for the Credit Union. It can range from an organization – with just a few members to a large one where there are thousands of people.

In the Credit Union the members pool their money in the bank so that they can provide loan money to each other. Further, the profits that are achieved , are employed to fund projects and services for the overall benefit of the community. Some of the services offered by the Credit Unions are online banking, share accounts (savings accounts), share draft accounts (checking accounts), credit cards and share term certificates (certificates of deposit).

3. Stock Brokerage Firms institutions:
The stock brokerage firm is responsible for facilitating buying and selling of financial securities between a buyer and a seller. A brokerage firm serves a clientele of investors and employs a number of stockbrokers through whom they trade public stocks and other securities.

Once a transaction has been successfully completed the brokerage company receives compensation, which is by means of a commission. Full-service brokerages offer estate planning services, tax advice and consultations. A discount brokerage charges less money than the i traditional brokerage and here clients conduct trades via computerized trading systems. In online brokerages, the investor is offered a website to conduct his h or her transactions.

The Finance Function Very Short Answer Type Questions

The Finance Function Very Short Answer Type Questions

Question 1.
What do you mean by finance?
Answer:
The term “Finance” is understood as provision of funds as and when needed. It refers to the science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

Question 2.
What is business finance?
Answer:
Business- Finance refers to that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.

Question 3.
What do you mean by financial management?
OR
Define financial management.
Answer:
According to J.F. Bradley “Financial Management is the area of business management devoted to the judicious use of capital and a careful selection of sources of capital in order to enable a business firm to move in the direction of reaching its goals”.

Question 4.
State four functions of financial mangement.
OR
Outline the functional areas of financial mangement.
Answer:
The functions of financial management are as follows:

  • Estimation of financial requirements of a firm.
  • Selection of right and appropriate source of funds for raising the funds.
  • After selecting the right source, raising the funds required by the firm.
  • Lastly accumulating, proper allocation of funds to different profitable avenues becomes essential.

Question 5.
State the objectives of financial management.
Answer:
Financial management has three main objectives they are:

  • Maintaining of adequate Liquid Assets
  • Maximisation of profit
  • Maximisation of wealth.

Question 6.
What is profit maximisation?
Answer:
Profit Maximisation is a primary objective and a social obligation. Profit is a tool through which efficiency of the organisation can be measured. The growth and survival of a company depends upon its ability to earn profit. The profit earned can be preserved for meeting future deficiency.

Question 7.
What is wealth maximisation?
Answer:
Wealth Maxmisation refers to creation of wealth of the concern.- In other words, it refers to the increase in the market value of shares.

Question 8.
State the goals of financial management.
Answer:
The goals of financial management are:

  • Profit maximisation
  • Wealth maximisation
  • Maximising firm value
  • Acquiring sufficient fund

Question 9.
What is economic environment for business?
Answer:
Economic Environment refers to all those economic factors, which have a bearing on the functioning of a business. Business depends on the economic environment for all the needed inputs. It also depends on the economic environment to sell the finished goods.

The economic environment consists of external factors in a business market and the broader economy that can influence a business. Macroeconomic influences are broad economic factors that either directly or indirectly affect the entire economy and all of its participants, including the business.

Question 10.
What are Financial Markets?
Answer:
Financial markets represent an important segment of the financial system. It refers to an outlet where financial products, financial services and financial securities are traded.

Question 11.
Classify the Financial markets?
Answer:
Financial markets can be classified into:

  • Money market and capital market
  • Primary market and secondary market
  • Organised and unorganised market
  • Foreign exchange market
  • Broad, deep and shallow market.

Question 12.
Give the meaning of secondary market.
Answer:
Secondary market is a market for all those securities and stock which are already issued to the public. It deals with sale/purchase of already issued equity/debts by corporates and others. It is also known as stock market.

Question 13.
Name the intermediaries of secondary markets.
Answer:
The intermediaries of secondary markets are:

  • Market Intermediaries Registration and Supervision Department (MIRSD).
  • Market Regulation Department (MRD).

Question 14.
Give the meaning of capital market.
Answer:
Capital market is the market for long term finance. Capital market is the medium that channelises the small savings of the community and makes it available for industrial outlets.

Question 15.
What is Money Market?
Answer:
Money market basically deals with short term financial assets, which are close substitute of money. It is a place where short term surplus funds at the disposal of financial institutions and individuals are borrowed by individual institutions and also by government facing financial deficit.

Question 16.
What do you mean by Financial Dualism?
Answer:
The financial system of most developing countries are characterised by coexistence and cooperation between the formal and informal financial sectors. The coexistence of these two sectors is known as ‘financial dualism’.

Question 17.
What is financial system?
Answer:
A financial system is a system that allows the exchange of funds between lenders, investors and borrowers. Financial systems operate at national, global, and firm-specific levels. Money, credit, and finance are used as medium of exchange in financial systems.

Question 18.
What are financial institutions?
Answer:
Financial institutions render financial services of dealing in financial assets i.e. mobilise the savings against financial claims. Financial Institutions range from pawn shops and money lenders to banks, pension funds, insurance companies, brokerage houses, investment trusts and stock exchanges.

Question 19.
What are financial instruments?
Answer:
Financial instruments range from the common – coins, currency notes and cheques; mortgages, corporate bills, and stocks – to the more exotic – futures and swaps of high-finance.

B.Com 5th Sem Culture, Diversity and Society MCQ Questions and Answers

B.Com 5th Sem Culture, Diversity and Society MCQ Questions and Answers

B.Com 5th Sem Culture, Diversity and Society Syllabus

Unit 1: Understanding the Diversity of Indian Society (12-14 Hours)

  • Geographical diversity
  • Religious diversity
  • Cultural diversity
  • Unity in Diversity

Unit 2: Family, Caste, Village and Women in India (12-14 Hours)

  • Family as a basic institution of Indian Society: Indian family in transition.
  • Social stratification and disparities; the caste system and its evils; the predicament of the weaker sections.
  • Scheduled castes and Tribes; Backward classes and religious minorities.
  • Rural society and its problems; rural-urban migration.
  • Gender discrimination; violence against women; measures to improve the status of women.

Unit 3: Contemporary challenges before Indian Society (12-14 Hours)

  • Communalism and religious fundamentalism
  • Regionalism and ethnocentrism
  • Globalization and mono-culturalism; McDonaldization
  • Child labour; migrant labour; bonded labour; contract labour
  • Mass media and its impact on society

GST and Technology Long Answer Type Questions

GST and Technology Long Answer Type Questions

Question 1.
Write short note on GSP Framework.
Answer:
Tax payer’s convenience will be a key in success of GST regime. The tax payer should have a choice to use third party applications which can provide varied interfaces on desktops, laptops and mobiles and can connect with GST System. The GSP developed apps will connect with the GST system via secure GST system APIs. Majority of GST system functionalities related to taxpayer’s GST compliance requirements shall be available to the GSP through APIs. GSPs may use GST APIs and enrich and enhance the tax payer’s experience. (The APIs of GST System are RESTful, json-based and stateless). GST System will not be available over the Internet for security reasons.

The production API end points Can only be consumed via MPLS lines. All APIs will be accessed over HTTPS protocol. The benefits of API based integration are:

  • Consumption across technologies and platforms (mobile, tablets, desktops, etc.) based on the individual requirements
  • Automated upload and download of data
  • Ability to adapt to changing taxation and other business rules and end user usage models.
  • Integration with customer software (ERP, Accounting systems) that tax payers and others are already using for their day to day activities.

Question 2.
What will be the role of GST Suvidha Providers?
Answer:
The GSP developed Apps will connect with the GST system via secure GST system APIs. Some of the functions of GSP are:

  • Development of various apps / interfaces for taxpayer, TRPs of GST system
  • Providing other value added services to the taxpayers

The GST Suvidha Providers (GSPs) are envisaged to provide innovative and convenient methods to taxpayers and other stakeholders in interacting with the GST Systems from registration of entity to uploading of invoice details to filing of returns. Thus there will be two sets of interactions, one between the App user and the GSP and the second between the GSP and the GST System.

Question 3.
What will be the role of taxpayers w.r.t GST Common Portal being developed and maintained by GSTN?
Answer:
The functions which will be performed by taxpayers through GSTN are:

  • Application for registration as well as amendment in registration, cancellation of registration and profile management.
  • Payment of taxes, including penalties, fines, interest, etc. (in terms of creation of Challan as payment will take place at bank’s portal or inside a bank premises).
  • Change of status of a taxpayer from normal to Compounding and vice-versa.
  • Uploading of Invoice data & filing of various statutory returns/Annual statements.
  • Track status of return/tax ledger/cash ledger etc. using unique Application Reference Number (ARN) generated on GST Portal.
  • File application for refund etc.
  • Status review of return/tax ledger/cash ledger

Question 4.
Write short notes on Relationship of GSTN with Tax Administrations,
Answer:
The common GST Portal developed by GSTN will function as the front-end of the overall GST IT eco-system. The IT systems of CBEC and State Tax Department will function as back-ends that would handle tax administration functions such as registration approval, assessment, audit, adjudication etc. Nine States and CBEC are developing their backend systems themselves.

GSTN is doing the backend for 20 States and 5 UTs. GSTN has been interacting with CBEC and States for ensuring mutual interaction between the front-end that would be operated by GSTN and the back-ends of the tax administrations. Till September 2016, ten workshops have been conducted with the States/CBEC. GSTN will undertake training of tax officials in GST IT system from December 2016 onwards. During the operation phase as well GSTN will continue the interaction with CBEC and states and extend help wherever necessary.

Question 5.
Explain the historical background of GSP.
Answer:
The Goods and Services Tax constitutional amendment having been promulgated by the Govt of India, the rollout of the GST Bill will be a collective effort of the Central and State Governments, the tax payers and the IT platform provider i.e. GSTN, CBEC and State Tax Departments. Besides these main participants there are going to be other stakeholders e.g. Central and States tax authorities, RBI, the Banks, the tax professionals (tax return preparers, Chartered Accountants, Tax Advocates, STPs etc.), financial services providing companies like ERP companies and Tax Accounting Software Providers etc.

The GST System is going to have a G2B portal for taxpayers to access the GST Systems, however, that would not be the only w,ay for interacting with the GST system as the taxpayer via his choice of third party applications, which will provide all user interfaces and convenience via desktop, mobile, other interfaces, will be able to interact with the GST system. The third party applications will connect with GST system via secure GST System APIs.

All such applications are, expected to be developed by third party service providers who have been given a generic name, GST Suvidha Provider or GSP. The GSPs are envisaged to provide innovative and convenient methods to taxpayers and other stakeholders in interacting with the GST Systems from registration of entity to uploading of invoice details to filing of returns. Thus there will be two sets of interactions, one between the App user and the GSP and the second between the GSP and the GST System. It is envisaged that App provider and GSP could be the same entity.

In the evolving environment of the new GST regime it is envisioned that the GST Suvidha Providers (GSP) concept is going to play a very important and strategic role. It is the endeavour of GSTN to build the GSP eco system, ensure its success by putting in place an open, transparent and participative framework for capable and motivated enterprises and entrepreneurs.

Question 6.
Explain the GST Compliance Requirement by the Taxpayer.
Answer:
The taxpayer under GST Regime will have to provide following information at regular intervals:

  • Invoice data upload (B2B and large value B2C)
  • Upload GSTR-1 (return containing supply data) which will be created based on invoice data and some other data provided by the taxpayer.
  • Download data on inward supplies (receipts or purchase) in the form of Draft GSTR-2 from GST Portal created by the Portal based on GSTR-1 filed by corresponding suppliers.
  • Do matching of purchases made and that downloaded from GST portal. Finalize the same based on his own purchase (inward supply data) and upload GSTR-2
  • File GSTR-3 created by GST Portal based on GSTR-l and 2 and other info and tax paid.

Similarly there are’other returns for other categories of taxpayers like casual taxpayer or composition taxpayers.

Question 7.
Explain the Design and Implementation Framework of GSP.
Answer:
Tax payer’s convenience will be a key in success of GST regime. The tax payer should have a choice to use third party applications which can provide varied interfaces on desktops, laptops and mobiles and can connect with GST System. The GSP developed apps will connect with the GST system via secure GST system APIs. Majority of GST system functionalities related to taxpayer’s GST compliance requirements shall be available to the GSP through APIs. GSPs may use GST APIs and enrich and enhance the tax payer’s experience. (The APIs of GST System are RESTful, json-based and stateless). GST System will not be available over the Internet for security reasons.

The production API end points can only be consumed via MPLS lines. All APIs will be accessed over HTTPS protocol. The benefits of API based integration are:

  • Consumption across technologies. and platforms (mobile, tablets, desktops, etc.) based on the individual requirements.
  • Automated upload and download of data.
  • Ability to adapt to changing taxation and other business rules and end user usage models.
  • Integration with customer software (ERP, Accounting systems) that tax payers and others are already using for their day to day activities

Question 8.
Write short note on GSP Eco system.
Answer:
GST System is following a platform approach for providing services to Tax Payers.
(a) All GST System functionalities like registration of entities, uploading of invoices, filing of returns will all be available through APIs.

(b) GSTN believes in creating an ecosystem of Service Providers viz GST Suvidha Provider (GSR) providing innovative solutions (Portal, Mobile App, Enriched API) either themseh/es or through its third party partners for making tax filing more easy and convenient to tax payers.

(c) GSTN envisages a very important role of GSPs in making GST rollout easy and convenient for tax payers.

Question 9.
Briefly explain Framework and Guidelines to integrate GST System.
Answer:
Framework and Guidelines for GST/ISP integration integrate GST System are:
Mandatory guidelines and responsibilities: GSP/ISP: For integrating with GSt System project, GSPs shall opt for a robust, fault tolerant infrastructure with enterprise grade SLAs, GSPs shall procure MPLS connectivity from any of the designated ISPs providing integration connectivity to GSt system.
(i) GSTs/ISPs need to provide the CPE router, to terminate the MPLS connectivity at GSTs Data Centre locations. These guidelines and the architecture of connectivity are subject to change overtime, at discretion of GSTN. The GSP and the ISP will need to make the necessary technology changes as and when that happens at his own cost.

(ii) The access to GST system will controlled through GSTN firewalls.

(iii) Each on-boarded ISP shall bring and deploy their own infrastructure in GSTN datacenters in order to provide connectivity services to GSPs.

(iv) ISP’s must provide ISP Routers in HA mode at both DC1 (Delhi) and DC2(Bangalore) locations of GSTN.

(v) ISPs shall arrange for the required .rack space outside the GSTN cage area.

(vi) ISP routers has to be hosted in the ISP’s cage area or ISP’s Rack near to the GSTN DC1/DC2 cage area, in a highly secured manner.

(vii) MPLS connectivity order will be given directly by GSP’s to their respective ISP’s. The cost for all the MPLS link has to be borned by the ISP’s/ GSP’s.

(viii) ISPs shall provide back-haul links at both the GSTN DCs i.e. DC1 and DC2.

(ix) GSTN and/or its MSP will not provide any links or incur any cost for providing the MPLS connectivity to GSPs.

(x) ISPs along with GSPs must provision adequate bandwidth end to end for connecting to GST Systems.

(xi) The ISPs providing connectivity services to GSPs shall provide identical setup in GSTN DC1 and DC2.

(xii) GSPs has to route the GSTN related URLs IPs inside the respective ISPs/GSPs network and the IP details will be provided at the time of integration.

(xiii) The ISPs has to decide the appropriate WAN IPs and Routing Protocols for their respective PE/CE routers.

(xiv) The ISPs shall ensure appropriate P-2-P VPN tunnel till their respective router for securing the data in transit.

(xv) The ISPs shall configure their routers to enable policy based NATing based on the GSP wise traffic classification.

GST and Technology Short Answer Type Questions

GST and Technology Short Answer Type Questions

Question 1.
Discuss about the genesis of GSTN.
Answer:
The GST System Project is a unique and complex IT initiative. It is unique as it seeks, for the first time to establish a uniform interface for the tax payer and a common and shared IT infrastructure between the Centre and States. Currently, the Centre and State indirect tax administrations work under different laws, regulations, procedures and formats and consequently the IT systems work as independent sites.

Integrating them for GST implementation would be complex since it would involve integrating the entire indirect tax ecosystem so as to bring all the tax administrations (Centre, State and Union Territories) to the same level of IT maturity with uniform formats and interfaces for taxpayers and other external stakeholders.

Besides, GST being a destination based tax, the interstate trade of goods and services (IGST) would need a robust settlement mechanism amongst the States and the Centre. This is possible only when there is a strong IT Infrastructure and Service back bone which enables capture, processing and exchange of information amongst the stakeholders (including taxpayers, States and Central Government, Bank and RBI).

Question 2.
What is GSTN? Explain the Structure of GSTN.
Answer:
Goods and Services Tax Network (GSTN) is a Section 8 (under new companies Act, not for profit companies are governed under section 8), non-Government, private limited company. It was incorporated on March 28, 2013.

The Government of India holds 24.5% equity in GSTN and all States of the Indian Union, including NCT of Delhi and Puducherry, and the Empowered Committee of State Finance Ministers (EC), together hold another 24.5%. Balance 51% equity is with non-Government financial institutions. The Company has been set up primarily to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST). The Authorised Capital of the company is Rs. 10,00,00,000 (Rupees ten crore only).

Structure of GSTN:
1. The GST System Project is a unique and complex IT initiative. It is unique as it seeks, for the first time to establish a uniform interface for the tax payer and a common and shared IT infrastructure between the Centre and States. Currently, the Centre and State indirect tax administrations work under different laws, regulations, procedures and formats and consequently the IT systems work as independent sites.

Integrating them for GST implementation would be complex since it would involve integrating the entire indirect tax ecosystem so as to bring all- the tax administrations (Centre, State and Union Territories) to the same level of IT maturity with uniform formats and interfaces for taxpayers and other external stakeholders.

Besides, GST being a destination based tax, the inter- state trade of goods and services (IGST) would need a robust settlement mechanism amongst the States and the Centre. This is possible only when there is a strong IT Infrastructure and Service back bone which enables capture, processing and exchange of information amongst the stakeholders (including tax payers, States and Central Governments, Accounting Offices, Banks and RBI).

2. This aspect was discussed in the 4th meeting of 2010 of the Empowered Committee of State Finance Ministers (EC) held on 21/7/2010. In the said meeting the EC approved creation of an Empowered Group on IT Infrastructure for GST(EG) under the chairmanship of Dr Nandan Nilekani along with five state commissioners of Trade Taxes. Department of Revenue, Ministry of Finance, Government of India vide OM no. S.34011/19/201Q-SO(ST) dated 26th July 2010 notified the Empowered Group on IT Infrastructure for GST with following members:

  • Member (B&C), CBEC
  • Additional Secretary (Revenue), DoR
  • DG (Systems), CBEC as Member-Secretary
  • FA, Ministry of Finance
  • Member Secretary, Empowered Group of State Finance Ministers,
  • Member Technology Advisory Group for Unique Projects (TAGUP)
  • Commercial Tax Commissioners of Maharashtra, Assam, Karnataka, West Bengal and Gujarat.

3. The Group was mandated to suggest, inter alia, the modalities for setting up a National Information Utility (NIU/ SPV) for implementing the Common Portal to be called GST Network (GSTN) and recommend the structure and terms of reference for the NIU/ SPV, detailed implementation strategy and the road map for its creation in addition to. other items like training, outreach, etc.

4. Prior to this, the Union Ministry of Finance had set up the Technical Advisory Group for Unique Projects (TAGUP) in March 2010 to make recommendations on the roadmap to roll out five major financial projects including GST. TAGUP recommended setting up of National Information Utilities as private companies
with a public purpose for implementation of large and complex Government IT projects including GST.

Question 3.
What services will be rendered by GSTN?
Answer:
GSTN will render the following services through the Common GST Portal:

  • Registration (including existing taxpayer master migration and issue of PAN based registration number)
  • Payment management including payment gateways and integration with banking systems
  • Return filing and processing
  • Taxpayer management, including account management, notifications, information, and status tracking
  • Tax authority account and ledger Management
  • Computation of settlement (including IGST settlement) between the Centre and States; Clearing house for IGST
  • Processing and reconciliation of GST on import and integration with EDI systems of Customs
  • MIS including need based information and business intelligence
  • Maintenance of interfaces between the Common GST Portal and tax administration systems
  • Provide training to stakeholders
  • Provide Analytics and Business Intelligence to tax authorities
  • Carry out research, study best practices and provide training to the stakeholders

Question 4.
What is the interface system between GSTN and the states/CBEC?
Answer:
In GST regime, while taxpayer facing core services of applying for registration, uploading of invoices, filing of return, making tax payments shall be hosted by GST System, all the statutory functions (such as approval of registration, assessment of return, conducting investigation and audit etc.) shall be conducted by the tax authorities of States and Central governments.

Thus, the frontend shall be provided by GSTN and the backend modules shall be developed by states and Central Government themselves. However 24 states (termed as Model 2 states) have asked GSTN to develop their backend modules also. The CBEC and rest of the states (Model 1) have decided to develop and host the back-end modules themselves.

Question 5.
Explain the vision and mission of GSTN.
Answer:
Vision: To become a trusted National Information Utility (NIU) which provides reliable, efficient and robust IT Backbone for the smooth functioning of the Goods & Services Tax regimen enabling economic agents to leverage the entire nation as One Market with minimal Indirect Tax compliance cost.

Mission:

  • Provide common and shared IT infrastructure and services to the Central and State Governments, Tax Payers and other stakeholders for ‘implementation of the Goods & Services Tax (GST).
  • Provide common Registration, Return and Payment services to the Tax payers.
  • Partner with other agencies for creating an efficient and user-friendly GST Eco-system.
  • Encourage and collaborate with GST Suvidha Providers (GSPs) to roll out GST Applications for providing simplified services to the stakeholders.
  • Carry out research, study best practises and provide Training and Consultancy to the Tax authorities and other stakeholders.
  • Provide efficient Backend Services to the Tax Departments of the Central and State Governments on request.
  • Develop Tax Payer Profiling Utility (TPU) for Central and State Tax Administration.
  • Assist Tax authorities in improving Tax compliance and transparency of Tax Administration system.

Question 6.
What will be the role of GSTN in registration?
Answer:
The application for Registration will be made Online on GST Portal. Some of the key data like PAN, Business Constitution, Aadhaar, CIN/DIN etc. (as applicable) will be validated online against respective agency i.e. CBDT, UID, MCA etc, thereby ensuring minimum documentation. The application data, supporting scanned documents shall be sent by GSTN to states/ Centre which in turn shall send the query, if any, approval or rejection intimation and digitally signed registration to GSTN for eventual download by the taxpayer.

Question 7.
What are the basic features of GST common portal?
Answer:
The GST portal shall be accessible over Internet (by Taxpayers and their CAs/Tax Advocates etc.) and Intranet by Tax Officials etc. The portal shall be one single common portal for all GST related services example.

  • Tax payer registration (New, surrender, cancelation, etc.)
  • Invoices upload, auto-drafting of Purchase register of buyer Periodic GST Returns filing.
  • Tax payment including integration with agency banks.
  • ITC and Cash Ledger and Liability Register.
  • MIS reporting for tax payers, tax officials and other stakeholders.
  • BI/Analytics for Tax officials.

Question 8.
What is GSP (GST Suvidha Provider)?
Answer:
A. The GST System is being developed by Infosys, the Managed Service Provider (MSP). The work consists of development of GST Core System, provisioning Of required IT infrastructure to host the GST System and running and operating the system for five years.

The proposed GST envisages all filings by taxpayers electronically. To achieve this, the taxpayer will need tools for uploading invoice information, matching of input tax credit (ITC) claims, creation of party-wise ledgers, uploading of returns, payment of taxes, signing of such document with digital signature etc.

The GST System will have a G2B portal for taxpayers to access the GST Systems, however, that would not be the only way for interacting with the GST system as the taxpayer via his choice of third party applications, which will provide all user interfaces and convenience via desktop, mobile, other interfaces, will be able to interact with the GST system. The third party applications will connect with GST system via secure GST system APIs. All such applications are expected to be developed by third party service providers who have been given a generic name, GST Suvidha Provider or GSP.

Taxpayers will interface with GST System, via GST system portal or via GSP ecosystem provided by way of applications for activities such as Registration, Tax payments, Returns filing and other information exchange with GST core system. The GSPs will become the user agencies of the GST system APIs and build applications and web portals as alternate interface for the taxpayers.

GST and Technology Very Short Answer Type Questions

GST and Technology Very Short Answer Type Questions

Question 1.
Who are GST providers?
Answer:
To enable taxable persons to comply with the requirements of GST, 34 companies have been given permission to act as GST suvidha providers. These providers will enable a middle tier of entrepreneurs, who can develop innovative services and solutions for a variety of tax payers.

Question 2.
What is GSTN?
Answer:
Goods and Services Tax Network (GSTN) is a nonprofit non-government company, which will provide shared IT infrastructure and service to both central and state governments including tax payers and other stakeholders. The Frontend services of registration, Returns and payments to all taxpayers will be provided by GSTN. It will be the interface between the government and the taxpayers.

Question 3.
What is GST system?
Answer:
Under GST system a uniform sharing of IT infrastructure between the center and states has been established.

Question 4.
Who is a GSP?
Answer:
GSP stands for GST Suvidha Provider. A GSP is considered as an enabler for the taxpayer to comply with the provisions of the GST law through its web platform (essentially an online compliance platform such as ClearTax ).

Question 5.
What is GSP eco-system?
Answer:
Under GSP eco-system uploading invoice information, matching of input tax credit (ITC) claims, creation of party-wise ledgers, uploading of returns, payment of taxes, signing of documents with digital signature is done electronically.

Question 6.
State any two features of GST Portal.
Answer:
The two features of GST Portal are:
(i) The Official portal of GST has added two important functionalities including the Form GST-ARA 01, an electronic form for Advance Ruling and the Application for revocation of cancellation of registration.

(ii) The GST portal also enabled the functionality to revoke or cancel the GST registration.

Question 7.
Is it mandatory for e-commerce operator to obtain registration? Explain.
Answer:
Yes it it mandatory for e-commerce operator to obtain registration. Section 19 r/w Schedule-Ill of the MGL, provides that the threshold exemption is not available to e-commerce operators and they would be liable to be registered irrespective of the value of supply made by them.

Question 8.
Who is an aggregator?
Answer:
Section 43B(a) of the MGL defines aggregator to mean a person, who owns and manages an electronic platform, and by means of the application and communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator. For instance, Ola cabs would be an aggregator.

Question 9.
Is an aggregator required to be registered under GST?
Answer:
Yes an aggregator required to be registered under GST. Section 19 r/ w Schedule-III of the MGL, provides that the threshold exemption is not available to aggregators and they would be liable to be registered irrespective of the value of supply made by them.

Question 10.
What is Tax Collection at Source (TCS)?
Answer:
In terms of Section 43C(1) of the MGL, the e-commerce, operator is required to collect (i.e. deduct) an amount out of the consideration paid or payable to the actual supplier of goods or services in respect of supplies of goods and / or services made through such operator. The amount so deducted/collected is called as Tax Collection at Source (TCS).

Question 11.
At what time/intervals should the e-commerce operator make such deductions?
Answer:
The timings for such collection/deduction are earlier of the two events:

  • the time of credit of any amount to the account of the actual supplier of goods and / or services;
  • the time of payment of any amount in cash or by any other mode to such supplier.

Question 12.
What is the concept of GST Eco-system?
Answer:
A common GST system will provide linkage to all State/UT Commercial Tax departments, Central Tax authorities. Taxpayers, Banks and other stakeholders. The eco-system consists of all stakeholders starting from taxpayer to tax professional to tax officials to GST portal to Banks to accounting authorities.