Assingment: Financial Information of Vijay Merchant Company

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Q-1 Selected financial information about Vijay merchant company is given below: Particulars| 2010 (Rs.)| 2009 (Rs.)|
Sales| 69,000| 43,000|
Cost of Goods Sold| 57,000| 32,500|
Debtors| 7,200| 3,000|
Inventories| 11,400| 5,500|
Cash| 1,500| 800|
Other Current Assets| 4,000| 2,700|
Current Liabilities| 16,000| 11,000|

Compute the current ratio, quick ratio, and average debt collection period and inventory turnover for 2009 and 2010- State whether there is a favorable or unfavorable change in liquidity from 2009 to 2010. At the beginning of 2009, the company had debtors of Rs.2500 and inventory of Rs.3000.

Answer: For 2009

a. Current Ratio = Current Assets/Current Liabilities

Total Current Assets = Debtor + lnventory + Cash + Other Current Assets Current Ratio = C.A. /C.L.= (3000 + 5500 + 800 + 2700)/ 11000 = 1.09:1

b. Quick Ratio = (Current Assets - lnventory - Prepaid Expenses)/Current Liabilities

Quick Ratio = (3000 + 800 + 2700) / 11000 = 0.59:1

c. Average Collection Period = Number of Days in a year / Debtors turnover Ratio

Debtors Turnover Ratio = Net Credit Sales / Average Debtors
Average Debtors = (Opening Debtors + Closing Debtors) / 2
Average Debtors = (2500 + 3000) / 2 = 2750
Debtors Turnover Ratio = 43OO0 / 27 50 = 15.64
Average Collection Period = 365 / 15.64 = 23 Days

d. lnventory Turn Over Ratio = Cost of Goods Sold / Average lnventory

Average lnventory = (Opening lnventory + Closing lnventory) / 2 Average lnventory = (3000 + 5500) / 2 = 4250
lnventory Turn Over Ratio = 32500 / 4250 = 7.6 times.
For 2010
a. Current Ratio = current Assets/current Liabilities

Total Current Assets = Debtor + lnventory + Cash + Other Current Assets Current Ratio = C.A. /C.L. = (7200 + 11400 + 1500 + 4000) / 16000 = 1.51:1

b. Quick Ratio = (Current Assets = Inventory = Prepaid Expenses)/Current Liabilities

Quick Ratio = (7200 + 1500 + 4000)/ 16000 = 0.79:1

c. Average Collection Period = Number of Days in a year / Debtors Turnover Ratio

Debtors Turnover Ratio = Net credit Sales / Average Debtors
Average Debtors = (Opening Debtors + Closing Debtors) / 2
Average Debtors = 3000 +7200/ 2 = 5700
Debtors Turnover Ratio = 69000 / 5100 = 13.52
Average Collection Period = 365 / L3.52 = 27 Days

d. lnventory Turn Over Ratio = Cost of Goods Sold / Average lnventory Average lnventory = (Opening lnventory + Closing lnventory) / 2 Average lnventory = 5500 + 11400/ 2 = 8450
lnventory Turn Over Ratio = 57000 / 8450 = 5.75 times.

As the liquid ratio of the year 2010 is more than year 2009, there is a favorable change in the firm's liquidity in 2010 than 2009.

Q.-2 Explain different methods of costing. Your answer should be studded with examples (preferably firm name and product) for each method of costing.

Answer: Costing refers to the techniques and processes of determining costs of a product manufactured or a service rendered. The method of costing depends on the nature of product, production method and specific business conditions. For example, in cement or steel industry, raw materials passes through different stages (processes) and production is done on continuous bases while in case of construction of a house or contract to build a metro rail / flyover / underpass the job is for a specific purpose and each job is different from the other.

In service industry like hospitality industry, software development, back office processing work etc process costing technique is used.

A. Job Costing: It is used in those business concerns where production is carried out as per specific order and customer's specification.

* Batch Costing: This method is used to determine the cost of a group of identical products. the batch consist of similar products is a unit and not a single item within the batch.

Example: Production of tablets, capsules, nuts & bolts, components/ spare parts

*...
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