University of Moratuwa

Faculty of Business

Department of Management of Technology

Master of Business Administration in Management of Technology

Post Graduate Diploma in Business Administration Specialized in Management of
Technology
Master of Business Administration in Entrepreneurship
Post Graduate Diploma in Business Administration Specialized in Entrepreneurship

Semester 3 - Examination

MN 5207 – Accounting and Financial Management

Time allowed: 3 Hours July 2021

INSTRUCTIONS TO CANDIDATES:

This paper contains Six (06) questions on ten (10) pages.

Answer Five (05) questions.

This examination accounts for 50% of the module assessment.

The maximum marks attainable are indicated in square brackets.

This is an open book examination.

Use separate answer booklets for Section A and Section B.

Assume reasonable values for any data not given in or with the examination paper. Clearly
state such assumptions made on the script.
If you have any doubt as to the interpretation of the wording of a question, make your own
decision, but clearly state it on the script.
Electronic/communication devices are not permitted. Only equipment allowed is a calculator
approved and labeled by the Faculty of Business.
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Section A

Question 1

(a) What are the basic decisions taken in the financial management? Explain them briefly using
examples
(4 Marks)
(b) Do you think that managing financial resources of a company is challenging today? Explain
your answer using examples.
(6 Marks)
(c) What is meant by financial system? Explain how the COVID-19 pandemic affected the Sri
Lankan financial system.
(4 Marks)
(d) Write brief short notes on the followings

I. Financial assets
II. Credit rating
III. Financial derivatives
(6 Marks)

(Total 20 Marks)

Question 02

(a) Define the terms “Risk” and “Return”

(3 Marks)

(b) Explain the following concepts

I. Unsystematic risk and portfolio

II. Systematic risk and Beta coefficient

(4 Marks)

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(c) Answer the following questions using “X” and “Y” equity shares given in the table.
Year X (Rs) Y (Rs)

Divided Opening Closing Divided Opening Closing

Cash flow Price Value Cash flow Price Value
(DPS) (DPS)

2019 2.00 20.40 25.50 1.00 18.30 18.50

2020 1.50 25.50 32.50 1.50 18.50 22.30

DPS = Dividends per share

I. Calculate the returns of both shares for 2019 and 2020

II. Calculate the average return of both shares and comment on these average
returns.
(5 Marks)
(d) You are given the following information related security “A” and “B”.

Economic Probability Security “A” Security “B”

condition (EC) of EC returns (%) returns (%)
Growth 0.10 70 80
Normal 0.50 50 30
Decline 0.40 -10 -20

As a risk-takin investor, you want to construct an investment portfolio by investing 60%

of your money in the higher risk security and remaining in the lower risk security.
Calculate the expected return and standard deviation of your portfolio assuming
correlation coefficient between security “A” returns and “B” returns is
-0.75.

(8 Marks)
(Total 20 Marks)

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Question 03
a) Why do investors pay more attention to the time preference for money, when making
their financial decisions?
(2 Marks)
b) What is meant by the term structure of interest rates?
(3 Marks)
c) You have decided to buy a new car and you have three financing alternatives. First,
you can pay Rs.2000,000 in cash for the car. Second, you can buy the car on an
instalment plan by paying a Rs.500,000 down payment and promising to pay
Rs.500,000 per year at the end of each of the next four years. The third alternative, a
low-cost lease plan, involves an annual payment of Rs.400,000 payable at the
beginning of each of the next five years. In addition to the lease payments, you are
forecasting that you will have to make another Rs.500,000 payment at the end of the
fifth year in order to meet the dealer’s residual value requirement. You have
determined that you can invest your money at a 10% effective annual rate of return,
and have decided to use that rate in comparing the three financing alternatives. Which
financing alternative would you prefer?
(5 Marks)
d) Namal Ltd. has issued a 10% bond that is to mature in 8 years. The bond has a Rs.
1,000 par value and interest is due to be paid semi-annually. If your required rate of
return is 8% per annum which continues for the foreseeable future, what price would
you be willing to pay for this bond after three years from the issued date?
(5 Marks)

e) The present capital structure of Nimal company consists of 60% equity and 40% debt.
The company equity shares have greater volatility than the market that represented by
the Beta coefficient (ß) which is 1.24. The average market return and treasury bill
yield rate are 18% and 7% respectively. Cost of debt of the company is 10% and
corporate tax rate is 30%. Assume that the capital structure of the company has
remained unchanged in foreseen future. Calculate overall cost of capital for the
existing capital structure of the company.
(5 Marks)

(Total 20 Marks)

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Section B
Question 04

i. Nethuli Enterprises is an electronic equipment manufacturing company which produces water

sensors and it has three production departments and two service departments. Production
departments are machine shop, assembling, and packing. Service departments are storing and
maintenance. Overhead expenses which directly allocated and cannot be traced directly to the
relevant departments are shown in table 1.

Table 1 – Overhead expenses

Cost Item Value Production Departments Service Departments

Machine Assembling Packing Storing Maintenance

shop

Indirect material 45,000 10,000 20,000 15,000 - -

Indirect labour 63,000 14,000 13,000 19,000 8,000 9,000

Miscellaneous supplies 24,500 7,500 5,500 3,000 4,500 4,000

Supervision 22,800

Factory rent 38, 400

Power 15,000

Machine depreciation 48,000

Fire precaution cost 19,200

Fuel & heat 18,000

Electricity 32,500

Overhead apportionment and re-apportionment bases are given in the table 2.

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Table 2: Overhead apportionment and re-apportionment bases

Machine Assembling Packing Stores Maintenance

shop

Floor space (Sq.ft) 1,300 1,200 950 700 650

Machinery value (Rs) 440,000 240,000 200,000 20,000 100,000

Number of employees 25 18 15 8 10

Horsepower of machine 2,000 1,500 1000 150 350

Radiator section 75 55 45 20 30

Number of material 40 25 20 - 15
requisitions

Light points 20 10 10 4 6

Maintenance hours 40 30 20 10 -

Machine hours 210 200 150 - -

When a water sensor is manufactured, it passes through the three production departments,
machine shop, assembling, packing for four (4), Two (2), and Three (3) machine hours
respectively. Directly attributable material cost per sensor is Rs. 3,450 and directly attributable
labour cost per product sensor is Rs. 3,100. In addition, Nethuli Enterprises should pay Rs.
1,000 direct tax per sensor produced to the municipal council.

You are required to;

a) Prepare a statement of overhead apportionment.

(10 Marks)

b) Prepare a statement of overhead re-apportionment by using simultaneous equation

method.
(5 Marks)
c) Calculate the total cost per water sensor.
(2 Marks)

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ii. “First In First Out (FIFO) method is more appropriate than Weighted Average Cost (WAC) in
inflationary situation”. Comment.
(3 Marks)
Question 05

i. Multi IT consultants (Pvt) Limited is a software development company. Extracts of the

Statements of Profit and Loss and Other Comprehensive Income of Multi IT consultants (Pvt)
Limited for the years ended 31st March 2020, 31st March 2019 and 31st March 2018 and extracts
of the Statements of Financial Position as at 31st March 2020, 31st March 2019 and 31st March
2018 are as follows.

Table 3: Extracts of Statements of P&L and other comprehensive income (Rs.’000)

For the year ended 31st March 2020 31st March 2019 31st March 2018

Turnover 127,500 105,000 133,000

Cost of sales 88,500 71,200 93,100

Gross profit 39,000 33,800 39,900

Income tax 2,240 1,070 1,980

Profit after tax 8,020 8,130 12,020

Interest 500 1000 600

Table 4: Extracts of Statements of Financial Position (Rs.’000)

As at 31st March 2020 31st March 2019 31st March 2018

Current assets 20,470 26,260 38,000

Current liabilities 13,200 17,875 12,280

Trade receivables 15,460 14,220 18,900

Trade payables 6,400 6,100 8,440

Inventory 2,680 11,530 18,650

Shareholders' equity 39,540 31,520 23,390

Non- current liabilities 10,220 9,450 11,200

You may assume that the credit sale is 55% from the total turnover. Further, 90% of cost of
sales consists of purchases and out of that 70% is on credit terms.

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You are required to calculate and interpret the following ratios for the years ended / as at 31st
March 2020 and 31st March 2019:

a) Gross Profit Ratio.

b) Return On Capital Employed (ROCE)
c) Net Profit Ratio.
d) Quick Assets Ratio.
e) Debtors’ Collection Period
(15 Marks)

ii. “In terms of decision making, Net Profit ratio is better than “Return on capital Employed
(ROCE)”. Comment.
(3 Marks)
iii. State two limitations of ratio analysis.
(2 Marks)

Question 06

i. Identify the most appropriate element of financial statement for the descriptions in part
a, b, c and d.
a. Decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
(2 Marks)

b. The present obligations arising from the past events, the settlement of which is
expected to result in an outflow from entity resources embodying economic
benefit.
(2 Marks)

c. Increases in assets, or decreases in liabilities, that result in increases in equity,

other than those relating to contributions from holders of equity claims.
(2 Marks)
d. A present economic resource controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic
benefits.
(2 Marks)

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ii. Calculate the gross profit and net profit of Mihinadee Enterprises for the year ended
31st March 2021 on following information.
Rs.

Inventory: 31st March 2019 20,000

Returns inwards 5,000

Returns outwards 6,000

Purchases 290,000

Carriage inwards 15,000

Sales 560,000

Interest income 35,000

Administrative expense 25,000

Advertising expense 10,000

Interest expense 9,000

Additional information

Inventory as at 31st March 2021 was Rs. 7,000. Net realizable value of the closing inventory
was 6,000.

(10 Marks)

iii. List the users of financial statements, as per the conceptual framework for financial
reporting.
(2 Marks)

End of Paper

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