SNJB’s Late Sau. K.B. Jain College Of Engineering, Chandwad

[5669]-584

TE Computer Engineering

Information System & Engineering Economics ( Nov-2019 Solution)

Q1) a) Define the following terms [6]

i) Information goods

ii) Experience goods

iii) Lock-in

Ans- 1. Information Goods- Information good in economics and law is a type commodity whose

market value is derived from information it contains. Examples include CDs containing pieces of

music, DVDs containing movie content, and books containing short stories. Information goods are in

contrast to material goods such as clothes, food, and cars. These can exist in either digitized

formor analog format.[1]

In information goods, the valuable part is a pattern in which the material is arranged including the

arrangement of ink on paper or a series of information on a compact disc. Those patterns might be

either directly consumed through reading, viewing, or may be used to operate other devices such as

a cassette player or a computer. The device, in turn, may produce some consumable pattern of

information (such as visual, sound, or text).

2) Experience goods- it is product or service that difficult to evaluate in advance areas such as

price and quality. If you sell reputation of good, customer royalty, word of mouth extremely valuable

of these are the primary things that customer can use to make purchasing decision.

3) Lock –in- This is the period for specified period in which we can not withdraw money from

specific account eg. PPF Account lock tenure is 15 yrs

b) How is information system (IS) different from information Technology (IT)? [4]

Ans-Information systems is an umbrella term for the systems, people and processes designed to create,

store, manipulate, distribute and disseminate information. The field of information systems bridges business

and computer science.

One of the reasons people may not distinguish between IS and IT is that they assume all information

systems are computer-based systems. An information system, however, can be as simple as a pencil

and a piece of paper. Separate, the objects are just tools. Used together, they create a system for

recording information.

Although information systems are heavily reliant on computers and other technology-based tools,

the term predates computers and can include non-technological systems. One example

is management information systems, which use information such as a database to improve

performance, create reports and make decisions.

Information technology falls under the IS umbrella but deals with the technology involved in the

systems themselves. Information technology can be defined as the study, design, implementation,

support or management of computer-based information systems.

IT typically includes hardware, software, databases and networks. Information technology often

governs the acquisition, processing, storage and dissemination of digitized information, or data,

generated through the disciplines of computing and telecommunications. Information technology

focuses on managing technology and improving its utilization to advance the overall business goals.

Q2) a) Why is vendor management important? What are the key issues to consider for

managing vendors carefully? [6]

Ans- Vendor management is the process that empowers an organization to take appropriate measures for

controlling cost, reducing potential risks related to vendors, ensuring excellent service deliverability and

deriving value from vendors in the long-run.This includes researching about the best suitable vendors,

sourcing and obtaining pricing information, gauging the quality of work, managing relationships in case of

multiple vendors, evaluating performance by setting organizational standards, and ensuring that the

payments are always made on time.

So, that’s where the vendor management system or VMS comes in place.

A vendor management system is an online web-based tool that acts as a single node to manage all

vendor related activities in any organization or business while ensuring improved efficiency and

long-term growth in a cost-effective manner.

Benefits of Vendor Management

By having proper vendor management in place, an organization can experience the following

benefits:

(1) Better Selection-

By implementing appropriate vendor management in place, your organization can benefit from a

larger selection of vendors, resulting in more choices and ultimately better costs.

Your organization can benefit from a bidding war between vendors while ensuring that you get your

money’s worth.

(2) Better Contract Management

In a multi-vendor scenario, lack of vendor management system elevates the issue of managing

contracts, documentation and other vital information in your organization.

By implementing a proper VMS in place, your organization can benefit from a centralized view of

the current status of all contracts and other useful information which will enable your organization

to achieve better decision-making capabilities and save valuable time.

(3) Better Performance Management

An integrated view of the performance of all the vendors can be achieved through the

implementation of a vendor management system.

This can give your organization a clear understanding of what is working and what is not! This

ultimately leads to improved efficiency, which in turns improves the overall performance of the

organization.

(4) Better Vendor Relationship

It is never easy to manage multiple vendors at the same time. While some vendors may prove really

fruitful, others may not. But managing relationship among the vendors is the key to successful

project completion.

By getting all vendor related information in a single place, you benefit from getting all required

information at once and it can influence your decision-making process, thereby simplifying it!

(5) Better Value

Ultimately the goal of a vendor management system is to get the most value for your buck. So,

implementation of a vendor management system, when done properly can result in long-term

savings as well as improved earnings over a period of time.

Although there are many benefits, some challenges need to be overcome to ensure the smooth

functioning of the organization.

b) Define the following terms [4]

i) De-skilling

ii) Alienation

Ans- Deskilling is the process by which skilled labor within an industry or economy is eliminated

by the introduction of technologies operated by semiskilled or unskilled workers. This results in

cost savings due to lower investment in human capital, and reduces barriers to entry, weakening the

bargaining power of the human capital. Deskilling is the decline in working positions through the

machinery introduced to separate workers from the production process.

Alienation : the process whereby the worker is made to feel foreign to the products of his/her own

labor. The creation of commodities need not lead to alienation and can, indeed, be highly satisfying:

one pours one's subjectivity into an object and one can even gain enjoyment from the fact that

another in turn gains enjoyment from our craft. In capitalism, the worker is exploited insofar as he

does not work to create a product that he then sells to a real person; instead, the proletariat works

in order to live, in order to obtain the very means of life, which he can only achieve by selling his

labor to a capitalist for a wage (as if his labor were itself a property that can be bought and sold).

Q3) a) What is meant by e-governance? What are the main stages of e-governance

evolution? [6]

Ans- e-Governance is the application of ICT for delivering Government Services, exchange of

information, communication transactions, integration various stand-alone systems and services

between Government and Citizens (G2C), Government and Business (G2B) as well as back office

processes and interactions within the entire Government frame work. Common interactions in e-

Governance have already been introduced in section 1.3. Through eGovernance, government

services will be made available to the citizens in a convenient, efficient and transparent manner. The

Government being the service provider, it is important to motivate the employees for delivering the

services through ICT. To achieve this, the Government employees are being trained on technology

and started realizing the advantage of ICT.

The aim is to make them thorough with e-Governance applications and responsive to the

technology driven administration. Defined broadly, e-Governance is the use of ICT to promote more

efficient and effective government, facilitate more accessible government services, allow greater

public access to information, and make government more accountable to citizens. e-Governance has

emerged beyond electronic service delivery and is part of the ongoing reform and transformation of

government enabling participatory governance and partnerships to improve efficiency and

effectiveness

Different stages of e-governance are identified on certain set of criteria. These stages are:

Simple information dissemination (one-way communication)- is considered as the most basic form, as it is used for merely disseminating information;

Two-way communication (request and response)- is characterised with e-mail system and information and data-transfer technologies in the form of website;

Service and financial transactions- is online services and financial transactions leading to web based self-services:

Integration (both vertical and horizontal)- in this stage the government would attempt inter and intra-governmental integration; and

Political participation- this stage means online voting, online public forums and opinion surveys for more direct and wider interaction with the government.

Another classification of e-governance has six stages of which the first two are similar to that of the above classification. The remaining four are:

Third stage- refers to multi-purpose portals, which allow customers to use a single point of entry to send and receive information and to process transactions across multiple departments;

Fourth stage- consists of portal personalisation, wherein customers are allowed to customise portals with their desired features;

Fifth stage- is when government departments cluster services along common lines to accelerate the delivery of shared services and clustering of common services; and

Sixth and final stage- technology is integrated further to bridge the gap between the front and back office.

b) What is the meaning of outsourcing and how is it different from offshoring? [4]

Ans- Outsourcing refers to an organization contracting work out to a 3rd party,

whileoffshoring refers to getting work done in a different country, usually to leverage cost

advantages. It's possible to outsource work but not offshore it; for example, hiring an outside law

firm to review contracts instead of maintaining an in-house staff of lawyers. It is also possible to

offshore work but not outsource it; for example, a Dell customer service center in India to serve

American clients.

Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower

costs and take advantage of the vendor's expertise, economies of scale, and large and scalable labor

pool.

Outsourcing Benefits

Why do companies outsource? There are several reasons why a company might outsource. While

this can be a politically sensitive topic, management experts generally agree that outsourcing - when

done right - increases competitive advantage with a natural division of labor that evolves in any

society. Reasons for outsourcing include:

Cost advantage: Costs are arguably the chief motivation behind outsourcing. Often companies find

that contracting work out to a 3rd party is cheaper.

Focus on core competency: There are a lot of business functions in a company. For example,

human resources, information technology, manufacturing, sales, marketing, payroll, accounting,

finance, security, transportation and logistics among others. Most of these are not "core" to the

company. A "core" activity is one which offers the company competitive advantage over its

competitors. It is an activity that the company does better than the competition, which is the main

reason its customers do business with the company. Having to handle non-core functions is a

distraction, so many companies outsource them.

Quality and Capability: Often companies don't have in-house expertise for certain activities. In

these cases, it is more efficient to outsource, and resulting products and services tend to be of higher

quality when provided by outsourcing vendors.

Labor flexibility: Outsourcing allows a company to ramping up and down quickly as needed. For

example, a company may need a large number software programming experts for 6-8 months to

develop an application. It would be infeasible to hire people for only 6 months. Outsourcing,

however, can provide flexibility so the company does not have to worry about hiring and firing.

Benefits of offshoring

Offshoring provides many of the same benefits as outsourcing, including:

Cost savings: Companies usually offshore manufacturing or services to developing countries where

wages are low, thus resulting in cost savings. These savings are passed on to the customers,

shareholders and managers of these companies.

Skills: The competitive advantage of nations often means that some countries or regions develop a

much better ecosystem for certain types of industries. This means there is better availability of

skilled human resources in that region for specific types of tasks. For example, India and the

Phillipines have a large pool of English-speaking, college educated youth; as well as a mature

training infrastructure; that makes it ideal for business process outsourcing. Therefore, many

companies choose to offshore certain business functions (e.g. call centers for customer support) to

these locations. These can either be captive or outsourced.

Q4) a) What is a business process? Explain it in brief. [6]

Ans- A business process is a collection of linked tasks which find their end in the delivery of a service

or product to a client.   A business process has also been defined as a set of activities and tasks that,

once completed, will accomplish an organizational goal.  The process must involve clearly defined

inputs and a single output. These inputs are made up of all of the factors which contribute (either

directly or indirectly) to the added value of a service or product. These factors can be categorized

into management processes, operational processes and supporting business processes.

Management processes govern the operation of a particular organization’s system of operation.

Operational processes constitute the core business. Supporting processes such as human resources

and accounting are put in place to support the core business processes.

The three types of business processes are:

Management Processes: The processes that govern the operation of a system.

Operational Processes: The processes that constitute the core business of the organization

and create the primary value stream.

Supporting Processes: The processes that support the core processes. Examples include

accounting and technical support.

Examples of business processes include:

Invoicing

Shipping products

Receiving orders

Updating personnel data

Determining marketing and other budgets

Ten Core Business Processes

Customer Strategy & Relationships (Marketing)

Employee Development & Satisfaction (Human Resources)

Quality, Process Improvement & Change Management.

Financial Analysis, Reporting, & Capital Management.

Management Responsibility.

Customer Acquisition (Sales)

Product Development.

Product/Service Delivery.

b) What is middleware? Why is it important? [4] Ans-

Ans-

Imagine hosting a party where you invited many people. All of them speak different languages, and

none understand the others’. You are the only one that can understand and speak all of the

languages. To have a successful party, and to be a good host, you’d have to fill the role of translators

so everyone can communicate with one another.

Middleware is exactly like that - it enables multiple systems to communicate with each other across

different platforms. Some leverages it at Enterprise level involving larger number of applications,

while some is on a smaller scale. Middleware is important because it makes synergy and integration

across those applications possible.

Middleware is basically used to transform data. For ex A system(source) wants to know the balance

of the customer so it will call B system( target) to fetch the balance, middleware comes into picture

to convert this data from A to B system's readable format so that B system can respond and send the

data in System B format which is again transformed to System A readable format before sending to

system A.

Advantages- Middleware as the name suggests positioned between various applications within and

outside of the enterprise. It enables a seamless communication between disparate applications.

1. It enables applications to communicate synchronously (immediate reply) or asynchronously

(delayed response).

2. It is also possible that it can collect information from various sources, package it and send

that to the destination.

3. It can provide encryption, decryption of the information flowing across, thus securing the

information.

4. with middle-ware, one can provide complete or partial or enriched data to all the destination

applications simultaneously.

5. The information can be routed to appropriate destination application.

6. Middleware is a series of classes that are used to intercept input, output, or both, between a

request and a response.

7. Middleware is very useful, because it doesn’t really interrupt the flow of the

request/response, and is a great way to kick off other processes based on the request.

8. Knowing that a class modifies input data as soon as it receives it, middleware allows you to

capture and log the data before the class has touched it, without modifying the class.

9. The thing to remember about middleware is that it is part of a chain of events, and must not

break the chain, no matter what. To do this, your middleware accepts a parameter called

“next” which is the next middleware class to call in the chain.

10. When creating APIs, or micro-services, middleware really shines.

Q5) a) What are the different types of engineering economics decisions? Explain in brief [8]

Ans- The term "engineering economic decision" refers to all investment decisions relating to

engineering projects. The most interesting facet of an economic decision, from an engineer’s point of

view, is the evaluation of costs and benefits associated with making a capital investment.

The five main types of engineering economic decisions are

(1) service or quality improvement

(2) new products or product expansion

(3) equipment and process selection

(4) cost reduction

(5) equipment replacement.

Some examples of engineering economic problems range from value analysis to economic studies.

Each of these is relevant in different situations, and most often used by engineers or project

managers. For example, engineering economic analysis helps a company not only determine the

difference between fixed and incremental costs of certain operations, but also calculates that cost,

depending upon a number of variables. Further uses of engineering economics include:

Value analysis

Linear programming

Critical path economy

Interest and money - time relationships

Depreciation and valuation

Capital budgeting

Risk, uncertainty, and sensitivity analysis

Fixed, incremental, and sunk costs

Replacement studies

Minimum cost formulas

Various economic studies in relation to both public and private ventures

Engineers play a vital role in capital investment decisions based upon their ability and experience 

to design, analyze, and synthesize. The factors upon which a decision is based are commonly a  

combination of economic and noneconomic elements. Engineering economy deals with the

economic factors.

Engineering economy involves formulating, estimating, and evaluating the expected economic 

outcomes of alternatives designed to accomplish a defi ned purpose. Mathematical techniques 

simplify the economic evaluation of alternatives.  

Because the formulas and techniques used in engineering economics are applicable to all  types of

money matters, they are equally useful in business and government, as well as for  individuals.  

Therefore, besides applications to projects in your future jobs, what you learn  from this book and in

this course may well offer you an economic analysis tool for making  personal decisions such as car

purchases, house purchases, major purchases on credit, e.g.,  furniture, appliances, and electronics. 

Other terms that mean the same as engineering economy  are   engineering economic analysis, 

capital allocation study, economic analysis, and similar descriptors. 

People make decisions; computers, mathematics, concepts, and guidelines assist people in  their

decision-making process. Since most decisions affect what will be done, the time frame of  

engineering economy is primarily the   future . Therefore, the numbers used in engineering econ-

omy are   best estimates of what is expected to occur . The estimates and the decision usually  

involve four essential elements: 

Cash flows  

Times of occurrence of cash flows  Interest rates for time value of money  Measure of economic

worth for selecting an alternative Since the estimates of cash fl ow amounts and timing are about

the future, they will be some-what different than what is actually observed, due to changing

circumstances and unplanned  events. In short, the variation between an amount or time estimated

now and that observed  in the future is caused by the stochastic (random) nature of all economic

events.   Sensitivity  analysis  is utilized to determine how a decision might change according to

varying esti- mates, especially those expected to vary widely.

b) What is meant by discounting process? Shayam have just purchased 100 shares of General

Electric stock at Rs 30 per share. He will sell the stock when its market price doubles. If he

expect the stock price to increase 12% per year, how long do Shayam expect to wait before

selling the stock.

Ans-

Q6) a) Explain with suitable example nominal interest rate and effective annual interest rate.

[8]

Ans- Nominal interest rate is also defined as a stated interest rate. This interest works according to

the simple interest and does not take into account the compounding periods.

Effective interest rate is the one which caters the compounding periods during a payment plan. It is

used to compare the annual interest between loans with different compounding periods like week,

month, year etc.

In general stated or nominal interest rate is less than the effective one. And the later depicts the true

picture of financial payments. The nominal interest rate is the periodic interest rate times the

number of periods per year. For example, a nominal annual interest rate of 12% based on monthly

compounding means a 1% interest rate per month (compounded).

A nominal interest rate for compounding periods less than a year is always lower than the

equivalent rate with annual compounding (this immediately follows from elementary algebraic

manipulations of the formula for compound interest).

Note that a nominal rate without the compounding frequency is not fully defined: for any interest

rate, the effective interest rate cannot be specified without knowing the compounding frequency

and the rate. Although some conventions are used where the compounding frequency is understood,

consumers in particular may fail to understand the importance of knowing the effective rate.

Nominal interest rates are not comparable unless their compounding periods are the same; effective

interest rates correct for this by "converting" nominal rates into annual compound interest. In many

cases, depending on local regulations, interest rates as quoted by lenders and in advertisements are

based on nominal, not effective interest rates, and hence may understate the interest rate compared

to the equivalent effective annual rate.

The term should not be confused with simple interest (as opposed to compound interest) which is

not compounded. The effective interest rate is always calculated as if compounded annually. The

effective rate is calculated in the following way, where ie is the effective rate, r the nominal rate (as a

decimal, e.g. 12% = 0.12), and “m” the number of compounding periods per year (for example, 12

for monthly compounding):

ie = (1 + r/m)m - 1

When banks are charging interest, they advertise the nominal rate, which is lower and does not

reflect how much interest the consumer would owe on the balance after a full year of compounding.

On the other hand, with deposit accounts where banks are paying interest, they generally advertise

the effective rate because it is higher than the nominal rate.

Therefore, if you were to borrow money at 8 percent APR and immediately deposit it in an account

at 8 percent APY, the deposit account will have less money at the end of the year than you owe on

the debt.

Applications The differences between nominal, real and effective rates are important when it

comes to loans. For example, a loan with frequent compounding periods will be more expensive

than one that compounds annually, which is a vital consideration when shopping for mortgages.

Furthermore, a bond that pays just a 1% real interest rate may not adequately grow an investor’s

assets over time. Simply put: interest rates effectively reveal the true return that will be posted by a

fixed-income investment and the true cost of borrowing for individuals or businesses.

Investors who seek protection from inflation in the fixed-income arena may elect to

consider Treasury Inflation Protected Securities (TIPS), which pay interest rate that are indexed to

inflation. Mutual funds investing in bonds, mortgages and senior secured loans that pay floating

interest rates, also periodically adjust with current rates.

b) What is meant by sinking fund? Ram wants to set up a college savings plan for his

daughter. She is currently 10 years old and will go to college at age 18. Assume that when she

starts college, she will need at least Rs 100000 in the bank. How much money do Ram need to

save each year in order to have necessary funds if the current rate of interest is 7%. Assume

that end-of-year payments are made. [8]

Ans-

Q7) a) Differentiate between [8]

i) General inflation rate and specific inflation rate

ii) Consumer price index and producer price index

Ans- The inflation rate is the percentage increase or decrease in prices during a specified period,

usually a month or a year. The percentage tells you how quickly prices rose during the period. For

example, if the inflation rate for a gallon of gas is 2% per year, then gas prices will be 2% higher next

year.

There are two causes of inflation. The most common is demand-pull inflation. That's when demand

outpaces supply for goods or services. Buyers want the product so much that they're willing to pay

higher prices. 

Cost-push inflation is the second, less common, cause. That's when supply is restricted but demand

is not. That happened after Hurricane Katrina damaged gas supply lines. Demand for gasoline didn't

change, but supply constraints raised prices to $5 a gallon.

Some sources say that an increase in the money supply also causes inflation. That's a

misinterpretation of the theory of monetarism. It says the primary cause of inflation is the printing

out of too much money by the government. As a result, too much capital chases too few goods. It

creates inflation by triggering either demand-pull or cost-push inflation.

Specific Inflation Rate - Normally, we want to know how much prices have increased since last

year, or since we bought our house, or perhaps how much prices will increase by the time we retire

or our kids go to college.

Fortunately, The method of calculating Inflation is the same, no matter what time period we desire.

We just substitute a different value for the first one. So if we want to know how much prices have

increased over the last 12 months (the commonly published inflation rate number) we would

subtract last year’s index from the current index and divide by last year’s number and multiply the

result by 100 and add a % sign.

The formula for calculating the Inflation Rate looks like this:

((B – A)/A)*100

So if exactly one year ago the Consumer Price Index was 178 and today the CPI is

185, then the calculations would look like this:

((185-178)/178)*100

or

(7/178)*100

or

0.0393*100

which equals 3.93% inflation over the sample year (Not Actual Inflation Rates). 

Consumer price index - The Consumer Price Index (CPI) is a measure that examines the weighted

averageof prices of a basket of consumer goods and services, such as transportation, food, and

medical care. It is calculated by taking price changes for each item in the predetermined  basket of

goods and averaging them. Changes in the CPI are used to assess price changes associated with

the cost of living; the CPI is one of the most frequently used statistics for identifying periods of

inflation or deflation.

Calculating CPI 

The BLS records about 80,000 items each month by calling or visiting retail stores, service

establishments (such as cable providers, airlines, car and truck rental agencies), rental units and

doctors’ offices across the country in order to get the best outlook for the CPI. 

The formula used to calculate the Consumer Price Index for a single item is as follows:

The base year is determined by the BLS. CPI data for the years 2017 and 2018 were based on

surveys collected in 2014 and 2015. 

Producer price index- The producer price index, or PPI, is a group of indexes that calculates and

represents the average movement in selling prices from domestic production over time. PPI is a

product of the Bureau of Labor Statistics (BLS). The PPI measures price movements from the seller's

point of view. Conversely, theconsumer price index (CPI), measures cost changes from the

viewpoint of the consumer. In other words, this index tracks change to the cost of production.

There are three areas of PPI classification that use the same pool of data from the Bureau of Labor

Statistics. These three areas are industry classification, commodity classification, and the

commodity-based final and intermediate demand (FD-ID).

b) ABC company is considering the acquisition of a new metal-cutting machine. The required

initial investment of Rs 75000 and the projected cash benefits over a three year project life

are as follows : [8]

End of Year Net Cash Flow

0 - Rs 75000

1 Rs 24400

2 Rs 27340

3 Rs 55760

The MARR is known to be 15%.

i) Draw the cash flow diagram.

ii) Find the net present worth of the project.

iii) Shall the Company purchase the new metal-cutting machine?

Ans-

a) What is annual-equivalence analysis and benefits of this analysis? [8]

Ans-

Annual equivalent worth analysis, or AE, and present-worth analysis are the two main analysis

techniques, determined on the concept of equivalence. The equation for AE is

AE analysis yields the same decision result as PW analysis.

The capital-recovery cost factor, or CR(i), is one of the most important applications of AE analysis in

that it allows managers to calculate an annual equivalent cost of capital, for ease of itemization with

annual operating costs. The equation for CR(i) is

where I = initial cost and S = salvage value.

AE analysis is recommended over PW analysis in many key real-world situations for the following

reasons: 

1. In many financial reports, an annual-equivalence value is preferred over a presentworth value, for

ease of use and its relevance to annual results.

2. Calculation of unit costs is often required in order to determine reasonable pricing for sale items.

Calculation of cost per unit of use is required in order to reimburse employees for business use of

personal cars.

3. Make-or-buy decisions usually require the development of unit costs so that “make” costs can be

compared with prices for “buying.”

4. Comparisons of options with unequal service lives is facilitated by the AE method, assuming that the

future replacements of the project have the same initial and operating costs. However, this method

is not practical in general, as future replacement projects typically have quite different cost streams.

It is recommended that you consider various future replacement options by estimating the cash

flows associated with each of them.

Annual worth analysis Principle: Measure an investment worth on annual basis Benefit: By knowing

the annual equivalent worth, we can: – seek consistency of report formats – determine unit costs (or

unit profits) – facilitate unequal project life comparisons

When only costs are involved, t he AE method is called the annual equivalent cost. Revenues must

cover two kinds of costs: operating costs and capital costs.

Two transactions are associated with owning equipment: initial cost ( I) & salvage value ( S). Capital

costs: taking these items into consideration,

we calculate the capital recovery costs as: CR(i) = I(A/P,i,N) – S(A/F,i,N) = (I – S)(A/P,i,N) + iS

b) A Company is planning an investment to produce sensors and control systems that have

been requested by a fruit-drying company. The work would be completed in five years

through a contractor. The project is expected to generate the following cash flows in actual

dollars: [8]

Year(n) Net Cash Flow in Actual Dollars

0 -$75000

1 $32000

2 $35700

3 $32800

4 $29000

5 $58000

a) What are the equivalent year-zero dollars (constant dollars) if the general inflation rate is

5% per year?

b) Compute the present worth of these cash flows in constant dollars at inflation free interest

rate of 10% using deflation method.

Ans-

Q9) a) Explain in detail with suitable example the balance sheet statement of a Company. [10]

Ans-

A company's balance sheet, also known as a "statement of financial position," reveals the firm's

assets, liabilities and owners' equity (net worth). The balance sheet, together with the income

statement and cash flow statement, make up the cornerstone of any company's financial statements.

If you are a shareholder of a company or a potential investor, it is important that you understand

how the balance sheet is structured, how to analyze it and how to read it.

How the Balance Sheet Works

Cash & Equivalents are assets that are money in the bank, literally cold, hard cash or something

equivalent, typically complete liquid assets.

Investments come into play when a company has so much on hand that it can afford to tie some of

it up in bonds with durations of less than a year. This money cannot be immediately liquefied, but it

does earn higher returns to strengthen cash position of company.

Accounts Receivable is the money currently owed to a company by its customers. Looking at the

growth in accounts receivable relative to the growth in revenues is important. If receivables are up

more than revenues, you know that lot of sales for that period have not been paid yet.

Inventories are the components and finished products that a company has currently stockpiled to

sell to customers. Inventories should be viewed somewhat skeptically by investors as an asset. First,

because of real liquidation compared to accounting value, the value of inventories is often

overstated on the balance sheet. Second, money blocked in inventories cannot be used to sell it.

Companies that have inventories growing faster than revenues or that are unable to move their

inventories fast enough are sometimes disasters waiting to happen.

Prepaid Expenses are expenditure that the company has already or over paid to its suppliers.

Although this is not completely liquid, but having bills already paid is definite plus. It means less

amount has to be paid for that expense and more of the revenues will flow to the bottom line and

become liquid assets.

Current Liabilities

These are short-term debts that normally require that the company convert some of its current

assets into cash in order to pay them off. As well as simply being a bill that needs to be paid,

liabilities are also a source of assets. Any money that a company pulls out of its line of credit or gains

the use of because it pushes out its accounts payable is an asset that can be used to grow the

business. There are four main categories of current liabilities; Accounts Payable, Accrued Expenses,

Short-Term Notes Payable and Long-Term Debt Payable.

Accounts Payable are basic costs of doing business that a company, for whatever reason, has not

paid off yet. One company’s accounts payable is another company’s accounts receivable, which is

why both terms are similarly structured. A company has the power to push out some of its accounts

payable, which often produces a short-term increase in earnings and current assets.

Accrued Expenses are bills or services that the company has racked up but it has not yet paid.

These are normally contracted, utility expenses and taxes subject to withholding that are billed on

set schedule and have not yet come due. Although subject to withholding,

Short-Term Notes Payable is the amount that a company has drawn off from its line of credit from

a bank or other financial institution that needs to be repaid within next one year. The company also

might have a portion of its Long Term Debt come due with the year, which is why this gets counted

as a current liability even though it is called long-term debt.

Debt & Equity

The remainder of the balance sheet is taken up by assets that cannot be easily converted into cash

or liabilities that will not come due for more than a year. Specifically, these are main categories –

Fixed Assets, Long-Term Liabilities, Equity and Retained Earnings.

Fixed Assets are assets are not liquid, but that are kept on a company’s books for accounting

purposes. Much of this is actually subject to an accounting convention called depreciation for tax

purposes, meaning that the stated value of the total assets and the actual value or price paid might

be very different.

Long Term Liabilities are normally loans from banks or other financial institutions that are

secured by various assets on the balance sheet, such as inventories. Most companies will tell you in

a footnote to this item when this debt is due and what interest rate the company is paying.

Equity & Retained Earnings are more than a little bit confusing and does not always add all that

much value to the analysis. Equity can be capital introduced by owner plus par value of stock issued

that is recorded purely for accounting purposes and has no real relevance to the actual value of

company’s stock. Retained earnings simply measures the amount of earnings a company has

generated and decides that earnings should be retained. These have to account for on the balance

sheet under shareholder equity. This allows investors to see how much money has been generated

through business over the years.

Balance sheet – Checklist

Bank Reconciliation – review bank in books including a copy of the bank statement.

Petty Cash Reconciliation – ensure the amounts reimbursed balance with the nominal

balance to be held.

Debtor’s Accounts – include any amounts not contained in aged debtors report. This will also

include analysis of amounts outstanding greater than 30 days with reports on action taken.

Fixed Asset Reconciliation – examine fixed asset to ensure all items of capital are included.

Ensure there are no obsolete items being depreciated (e.g. obsolete computer hardware/

upgraded software applications).

Pre-paid Expenses – ensure pre-paid expenses relate to future periods are accounted e.g.

Rent paid in advance, Taxes & Insurance, Legal & Contractual expenses.

Income Accrual – ensure income, which is due but has not been invoiced or received, is

raised as accrued income e.g. interest income, accounts receivable, rent receivable.

Expense Accrual – ensure all accrued expenses i.e. interest payable, Taxes payable, Wages

payable, Goods/ Services received for which no supplier invoice has yet been received is

reflected in the accounting records.

Pre-paid Income – ensure pre-paid income is accounted for properly

Creditor’s Accounts – review the creditors report to ensure all expenses are current and

credit notes have been processed where applicable.

Accrued Expenses – ensure all expenses are included as accrued expenses if the amounts

have not been included in the accounts payable ledger. Examine accrued expenses to ensure

liability had arisen at balance date

Contingent Liabilities – ensure all contingent liabilities are raised including necessary

compliance requirements.

Payroll Liabilities – examine payroll reports to substantiate wages/deductions/

superannuation and taxation balances.

Balance sheet – Analysis

After knowing all the terms of balance sheet now you are ready to analyze and judge actual position

of company through balance sheet. With the help of below stated ratios you can easily get an idea

about company’s financial position.

Current Ratio is a measure to know how much liquidity a company has, the formula for calculating

a company’s current ratio is:

Current Ratio = (Current Assets/ Current Liabilities)

 As a general rule, a current ratio of 1.5 or greater is normally sufficient to meet near term operating

needs. A current ratio is too high can suggest that a company is hoarding assets instead of using

them to grow the business; not the worst thing in the world, but potentially something that could

impact long-term returns. But certain industries have their own norms as far as which current

ratios make sense e.g. in the auto industry a high current ratio makes a lot of sense if a company

does not want to go bankrupt during the next recession.

b) Consider the following accounting information for a computer system:

Cost basis of the asset (I) = $10000;

Useful life (N) = 5 years;

Estimated salvage value (S) = $2000.

Compute the annual depreciation allowances and the resulting book values,using the double-

declining-balance depreciation method. Illustrate the result using a diagram. [8]

Ans-

Q10 )a) Explain in detail the classification of costs for financial statements. [10]

Ans-

In managerial accounting, costs are classified into fixed costs, variable costs or mixed costs (based

on behavior); product costs or period costs (for external reporting); direct costs or indirect costs

(based on traceability); and sunk costs, opportunity costs or incremental costs (for decision-

making).

Classification of costs based on behavior helps in cost-volume-profit analysis. Classification based

on traceability is important for accurate costing of jobs and units produced. Classification for the

purpose of decision-making is important to help management identify costs which are relevant for a

decision.

Cost Classification Diagram

The following diagram summarizes the different categories into which costs are classified for

different purposes:

Product Costs vs Period Costs

Product costs (also called inventoriable costs) are costs assigned to the manufacture of products

and recognized for financial reporting when sold. They include direct materials, direct labor, factory

wages, factory depreciation, etc.

Period costs are on the other hand are all costs other than product costs. They include marketing

costs and administrative costs, etc.

Breakup of Product Costs

The product costs are further classified into direct materials, direct labor andmanufacuturing

overhead costs:

Direct materials: Represents the cost of the materials that can be identified directly with the

product at reasonable cost. For example, cost of paper in newspaper printing, etc.

Direct labor: Represents the cost of the labor time spent on that product, for example cost of

the time spent by a petroleum engineer on an oil rig, etc.

Manufacturing overhead costs: Represents all production costs except those for direct labor

and direct materials, for example the cost of an accountant's time in an organization,

depreciation on equipment, electricity, fuel, etc.

Direct Costs vs Indirect Costs

The product costs that can be specifically identified with each unit of a product are called direct

product costs. Whereas those which cannot be traced to a specific unit are indirect product costs.

Thus direct material cost and direct labor cost are direct product costs whereas manufacturing

overhead cost is indirect product cost.

Prime Costs vs Conversion Costs

Prime costs are the sum of all direct costs such as direct materials, direct labor and any other direct

costs.

Conversion costs are all costs incurred to convert the raw materials to finished products and they

equal the sum of direct labor, other direct costs (other than materials) and manufacturing

overheads.

Fixed Costs vs Variable Costs

Fixed costs are costs which remain constant within a certain level of output or sales. This certain

limit where fixed costs remain constant regardless of the level of activity is called relevant range.

For example, depreciation on fixed assets, etc.

Variable costs are costs which change with a change in the level of activity. Examples include direct

materials, direct labor, etc.

Mixed costs (also called semi-variable costs) are costs which have both a fixed and a variable

component.

Sunk Costs vs Opportunity Costs

The costs discussed so far are historical costs which means they have been incurred in past and

cannot be avoided by our current decisions. Relevant in this regard is another cost classification,

called sunk costs. Sunk costs are those costs that have been irreversibly incurred or committed; they

may also be termed unrecoverable costs.

b) Define the following terms [8]

i) Depreciation ii) Cost basis

iii) Debt ratio iv) Times- interest-earned ratio

Ans-

Depreciation

In accounting, depreciation is the assigning or allocating of the cost of a plant asset (other than land)

to expense in the accounting periods that are within the asset's useful life.

Example of Depreciation

Let's assume that a business purchases a delivery truck with a cost of $100,000 and it is expected to

be used for 5 years. If we also assume that the truck will have no salvage value, the company will

record depreciation expense of $100,000 over the five years. When the straight-line method of

depreciation is used the annual depreciation expense will be $20,000. (The amounts can vary

depending on the depreciation method and assumptions.)

Cost basis-

A cost-benefit analysis is a process businesses use to analyze decisions. The business or analyst

sums the benefits of a situation or action and then subtracts the costs associated with taking that

action. Some consultants or analysts also build models to assign a dollar value on intangible items,

such as the benefits and costs associated with living in a certain town.

Debt Ratio-

The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is

defined as the ratio of total debt to total assets, expressed as a decimal or percentage. It can be

interpreted as the proportion of a company’s assets that are financed by debt.

A ratio greater than 1 shows that a considerable portion of debt is funded by assets. In other words,

the company has more liabilities than assets. A high ratio also indicates that a company may be

putting itself at a risk of default on its loans if interest rates were to rise suddenly. A ratio below 1

translates to the fact that a greater portion of a company's assets is funded by equity.

The debt ratio is also referred to as the debt-to-assets ratio.

Times- interest-earned ratio

The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations

based on its current income. The formula for a company's TIE number is earnings before interest

and taxes (EBIT) divided by the total interest payable on bonds and other debt.

The result is a number that shows how many times a company could cover its interest charges with

its pretax earnings.

TIE is also referred to as the interest coverage ratio.

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