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Assignment No. - 1
Attempt the following Questions:
How is working capital affected by inflation?
Impact of Inflation on Working Capital Requirement
When the inflation rate is high, it will have a direct impact on
the requirement of working
capital as explained below:
Inflation will cause the slow turnover figure at higher level
even if there is no increase in
the quantity of sale. The higher the sale means the higher level
of balance in receivables.Inflation will result in the increase of
raw material price and hike in the payment for
expenses and as a result increase in balance of trade creditors
and creditors for expense.
Increase in the valuation of closing stock will result in
showing higher profits but without
its realization into cash cause the firm to pay higher tax
dividend and bonus. This willlead the firm in serious problem in
fund shortage and the firm may enable to meet its
short term and long-term obligation.
Increase in investment in current asset means the increase in
the requirement of workingcapital without corresponding increase in
sale or profitability of a firm.
In order to control working capital needs in periods of
inflation, the following measures
may be applied.
The possibility of using substitute raw materials without
affecting quality must beexplored in all seriousness. Research
activities in this regard may be undertaken, with
financial assistance provided by the Government and the
corporate sector, if any.
Attempts must be made to increase the productivity of the work
force by propermotivational strategies. Before going in for any
incentive scheme, the cost involved must
be weighed against the benefit to be derived. Though wages in
accounting are considered
a variable cost, they have tended to become partly fixed in
nature due to the influence ofvarious legislative measures adopted
by the Central or State Governments. Increased
productivity results in an increase in value added and this has
the effect of reducing labor
cost per unit.
What is cost of capital? Differentiate between explicit and
implicit cost.
The cost ofcapital is a term used in the field of financial
investment to refer to the cost of
a company's funds (both debt and equity), or, from an investor's
point of view "the
shareholder's required return on a portfolio company's existing
securities". It is used to
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evaluate new projects of a company as it is the minimum return
that investors expect for
providing capital to the company, thus setting a benchmark that
a new project has to meet
expenditures of a potential action or business activity, and to
determine the actual profits
of a company.
Meanwhile, explicit costs also have alternative labels like:
economic costs, notational
costs, and implied costs.
reflect a business payment for a transaction. On the other hand,
implicit costs are not
often recorded and they do not occur directly. This type of cost
reflects a potential
opportunity, benefits, or advantages that might have occurred in
a given situation. In
addition, explicit costs can be emergency costs in an unforeseen
situation.
fit and performance. In contrast, explicit
costs can determine the total costs of the business as well as
the businesss economic
profits.
Enumerate SEBI's guidelines on "Bonus Issues"
Securities and Exchange Board of India (SEBI) guidelines are to
be followed for issue of
bonus shares:-
No company shall, issue the shares by the way of bonus unless
the benefits are extended
to the shareholders.
1. The bonus issue is made out of free reserves built out of the
profits or share premium
collected in cash only.
