ory vechniques are methods used by businesses to mar — avert re aresix common inventory techniques nage and control their invent ay. He ary categorizes inventory items into three groups based on their importan ortance and value: iS apc analys Be items that contribute the most to revenue), B (moderate-value items), and C(I at pusinesses to prioritize resources and attention on managing hi aa eran wet) optimizing inventory control. igh-value items more of ABC Analysis t Resource Allocation: ABC Analysis helps in prioritizing resources and attention by a) categorizing items into A (high-value), B (moderate-value), and C (low-value) classes. ») ‘optimized Inventory Management: ABC Analysis aids in optimizing inventory management py highlighting theiters that contribute the most to revenue or are critical for production. ve Risk Management: By identifying high-value items, ABC Analysis helps in assessing 2 ‘andmanaging risks associated with stockouts or disruptions in the supply chain. in-Making: The analysis provides a clear classification of items, aiding d) Enhanced Decisio decision-makers insetting appropriate inventory control policies for each class. Demerits of ABC Analysis a) Simplicity Assumption: ABC solely based on their value, management. b) Static Nature: The classification remains static, market dynamics may notbe promptly reflected. 9 Overemphasis on Value: The analysis tends to focus primaril other factors like the frequency of orders or the importance of ‘Process. 4) May Lead to Neglect of Class C Items: The attention given to Class Citems may beinsufficient, potentially leading to oversights in their management. 7 : fe: tatoo where inventory is kept to a minimum, an\ iNinusbies forimmediate use. It aims to reduce holding costs and increas levels, with efficient and reliable supply chains, helping businesses Analysis assumes that the classification of items into A, B, orCis which may oversimplify the complex nature of inventory and changes in the business environment or ly on monetary value, neglecting certain items in the production (low-value items) d items are ordered or produced.only se efficiency. Often applied maintain lower inventoryuc EE CET ae duced storage requi Merits of Just-In-Time (JIT) oii ng costs due to 2) Cast Reduction: Lower inventory holding © carrying costs ia dpa rectuces ile on processes and reduces non-valy b) Efficiency Improvement: JIT promotes efficient production PI us added activities. ized lead times ©) Reduced Lead Times: Shorter production cycles and minim! : - of overproduction, excess inventory, ang d) Waste Reduction: Focus on waste elimination In oy; unnecessary processing. e) Increased Flexibility: Greate’ demand. Demerits of Just-In-Time (JIT) ble and efficient supply @) Dependency on Suppliers: Relies heavily on a stal disruptions in the supply chain can. havea significantimpact. IIT can involve significant initial b) High Initial Implementation Costs: Implementing J ‘especially in terms of reorganizing production processes and training employees. ©) Risk of Stockouts: Operating with minimal inventory levels increases the risk of stockouts if there are unexpected changes in demand or supply disruptions. 4) Skill and Training Requirements: a skilled and well- I-trained workforce to manage the intricacies of JIT production and inventory control. e) Difficulty in Handling Variability: IT may face challenges in handli processes or demand patterns. 3. Safety’ Safety stock is a buffer of extra inventory that uncertainties in demand or supply. Especially useful for| patterns or suppliers with variable lead times. adaptability to changes in customer preferences and mai ing variability in production is kept to mitigate the risk of stockouts due to businesses dealing with unpredictable demand Merits of Safety Stock Management Risk Mitigation: Safety stock acts as a buffer against uncertainties in, demand payee chain a) disruptions. b) Customer Service Improvement: Ensures a consistent supply of products to meet customer demand. ©) Production Stability: Provides stability in production processes by preventing interruptions due to stockouts or unexpected changes in demand. d) Optimized Order Cycles: Facilitates smoother and optimized order cycles, especially dealing with variable lead times. Demerits of Safety Stock Management 2) Increased Holding Costs: Maintaining safety stock increases holding expenses and the risk of obsolescence. come, ining4 capital rmpact: Require pork ” Mock ttocking: Without a for overstor 1 pla 0 amsro overstockiNO may pr underuciization: If not managed property isk 0 ironed Peri? ic Order Quantity (EOQ) af ‘oqisa calculation that determines the optimal order quantity te end ordering costs. Aims to find the balance between holue, ze total inventory holding ons ‘and ordering too frequently (Increasing orde as ventory (inereasinc costs) 9 ordering costs) ing ‘of Economic Order Quantity (EOQ) cost optimization: EOQ helps businesses find the optimal order au . ts associated with inventory, including ordering and holding co me that minimizes the total improved cash Flow: By minimizing holding costs, EOQ reduces inventory. in Stockouts and Overstocking: E0Q ens E ures that 9) Mijucing the risk of stockouts or overstocking. st invernory levee aes r the amount of capitaltied upin Efficient Production Planning: EOQ helps in planning producti efficiently aligning with optimal order quantities. 2 ecco standardization of Orders: encourages standardization of order making ordering process more consistent and manageable. Te nag @ e) Demerits of Economic Order Quantity (EOQ) a) Assumptions and Simplifications: E0Q is based on certain assumptions, such as constant demand and holding costs, which may not always align with real-world variability. b) Sensitivity to Assumptions: changes in input parameters (e.g., holding costs, demand) can significantly impact the OQ calculation. ‘ Limited Applicability: may be less applicable for businesses with dynamic demand patterns, ___ variable ordering costs, or other factors that deviate from its assumptions, External Factors: EOQ focuses on internal costs and may neglect external factors: such as supplier reliability, lead times, and economic changes {. FIFO (First-in, First-Out) This technique assumes that the first items added tothe "words, the oldest inventory is used or sold first. Suitable for critical factor, such as perishable goods. Merits of FIFO a) Fairness: The first item that enters the system is the sense of fairness in resource allocation. inventory are the first to be sold. In other r industries where product shelf life is a first to be processed or used, creating &b) 9 @) e) Demerits of FIFO a) b) go a) CCK aaa im Simplicity: FIFO is a straightforward and easy-to-understand method. Implementat., generally simple, making it a practical choice In various scenarios, especially IIE, § systems a ost reflection, Cost Reflection: In inventory management, FIFO can be beneficial for & Low Holding Costs: In inventory systems, using FIFO can help minimize holding costs because older, potentially more expensive. Automatic Prioritization: FIFO automatically prioritizes items based on their entry time, in certain situations, using the oldest items first may, May not reflect real-world usag' represent the actual usage pattern. Potential For bbeelets Inventory/\Uang FIFO might lead e'olorr = In obs before newer, potentially better, inventory is used. challenges in adapting to changes Difficulty in adapting to changes: FIFO might fac demand or production. Complexity in implementation: systems, especially those with complex dep' additional effort and considerations. While FIFO is generally simple, implementing it in certay yendencies or dynamic requirements, might require 2. LIFO (Last-In, First-Out) sms added to the inventory are the first to be sold. It reflects the cog of the most recently acquired or produced goods. Commonly LIFO assumes that the last iter sy used in industries where prices are rising asit may result in lower taxable income. Merits of LIFO better represent the real-world scenario in certain. 2) Reflects Real-World Usage: LIFO may and often higher, situations. b) Tax Advantages: By using LIFO, a company can match the most recent, with revenue, potentially reducing taxable income and resulting in lower tax liabilities. © Potential for Lower Holding Costs: LIFO can help reduce holding costs in scenarios wherett most recently acquired items are also the most desirable or cost-effective. d) Flexibility in Cost Management: LIFO provides flexibility in managing costs, allowing businesses to adapt to changes in the market or production costs more dynamically comparedt FIFO. f Demerits of LIFO 2 a) Complex Accounting: LIFO accounting can be more complex than FIFO, especially when comes to record-keeping and financial reporting. Z b) Distorted Financial Statements: It may result in lower reported profits and higher costs goods sold (COGS) compared to FIFO, affecting key financial metrics. ©) Potential for Obsolescence: In industries where technology or product features rapidly, using LIFO may increase the risk of obsolescence.oo yy valuation Issues: LIFO can pose challenges in invent oH Aa Srreginania With Companies using dierent a Valuation, especially when i) Apa" . 4 ¥ fentory accounting methods. oA with Physical Flow: Materials may not align with iirc we method and the actual movement of invent ), leading to discrepancies of Inventory, HAY ea the nocounti" ! ted average Cost we verage cost method calculates th ) ignted ® lates the average cost of 2 i! the coat of older and newer items, Provides a Brphbd sot we ict ane yc aS ay be useful when w of Woightod Average Cost 2 Calculating the welghted average cost Is relatively simple. It involves dividing the by the total number of units, providing a cost per unit that can be used for ictuations: Welghted Average Cost smoothes out fluctuations in the costs: of ; thes Cost Flu goods, which can be particularly useful in Industries where costs vary significantly over time. Average Economic Conditions: ‘This method reflects the average economic conditions over the accounting period, providing a cost that Is representative of the overall cost structure during that time, reduces Impact of Extreme Costs: Impact of extreme costs (either high or low) on the valuation of Inventory, average cost of all units. ) hase of Comparison: Weighted Average Cost method Is generally easier because It p standardized and averaged cost per unit, Unlike LIFO or FIFO, Weighted Average Cost reduces the as it considers the rovides a Domorits of Weighted Average Cost |) May Not Reflect Current Market Conditions: The averaged cost may notaccurately reflect the current market conditions, especially if there are significant fluctuations In costs overtime, !) Smoothing Effect Can Mask Issues: While the smoothing effect can be an advantage. le averaged cost may pose challenges In Challenges in Decision-Making: The use of singl decision-making, especially If there Is a need to differentiate between the costs of newer and older Inventory for strategic or operational reasons, Complexity In Record-Keeping: Weighted Average Cost method requires ongoing tracking _ nd calculations, which may be challenging for companies with complex Inventory systems,PUT aust 2. COMPUTE THE SPECIFIC COST AND WEIGHTED AVERAGE OF CAPITAL OF AN ORGANIZATION, WITH IMAGINARY Fl is explicitly identified of Ina broader sense, " @ssociated with a particu could refer to any particular cost that lar aspect of a business operation. For instance: . : jon or process. 2) Specific Operating Cost: The cost incurred for a specific business operation oF PI : ny. 2) Specific Project Cost: The costs associated with a particular project within a compa! us bs cific product. ©) Specific Product Cost: The costs directly related to producing or launching a specific pr Weighted average cost of capital: The Weighted Average Cost of Capital a ede eins metric that represents the average cost a company incurs to finanee its operations an a ao Calculation of the average rate of return a company is expected to pay to all its stakehol equity and debt providers) to attract and maintain capital. Example Alpha Ltd. has the following capital structure as perits Balance Sheet as at 31.3.2021: : In lakhs. Equity share capital (fully paid share of 10 each) 4 18% Preference share capital (fully paid share of 100 each) q Reserves and surplus 2 12.5% debentures (fully paid debenture of 100 each) 9 12% term loans 8 40 Additional information: 8) The current market price of the company's share is = 64.25. The prevailing default risk free interest rate on 10 year GOI treasury bondsis 5.5%. The average market risk premium is 8%. The beta of the company is 1.1875. b) The preference shares of the company which are redeemabl le after 10 years are currently selling at 90 per preference share. ©) _ Thedebentures of the company which are redeemable after 5 years are Currently quoted at 90 pel debentures. sents: 4) The corporate tax rateis 30%, ‘ a Required: ‘ Calculate weighted average cost of capital using a) Book Value Weights, b) Market Value Weights(WACC using book value weights) rr as: eh, Amount of | Proposition | After tax cost | Product 4 Sources | of sources | of sources c D =CxD Equity sh; Bae sw espreal 0.20 0.1500 0.0300 eal TS Pres, nd Surplus 0.05 0.1500 0.0075 ions, ree shares 0.15 0.2000 0.0300 ee. ‘te 0.20 0.1000 0.0400 ferm loan 0.20 0.0840 0.0168 Weighted average cost of capital = 0.1243 or 12.43% (WACC using market value weights) Amount of Sources B Proposition of sources Cc After tax cost of sources D Equity share capital 0.09637 18% Pref. share capital 0.0135 12.5% Debenture i 0.0190 12% Term loan 0.0084 dividend +(Reedemable value ~ Net sale proced) /w (Redeemable value + Net sale proced)/2 18+ (100 - 90) /10 _ 18+1 _ Go0-+ 90) /2 90) /2 05 = 0.20 or 20% Interest (1 - Tax rate) termloan = “Wet sale proceeds” 96,000 (1 - 0.30) = 800,000 = 0.084ETC aunuee ease eran 3. PREPARE WITH IMAGINARY DATA RELATING TO DIVIDEND POLICigg PRACTICED BY ANY TWO COMPANIES idend policy used by a company can affect the value of the enterprise. Th id must align with the company’s goals and maximize its value for its shareholders. While the shareholders are the owners of the company, itis the board of directors who make the call on whethe, profits will be distributed or retained. The directors need to take a lot of factors into consideration when making this decision, such as, the growth prospects of the company and future projects. There are various dividend policies a company can follow such as: 1. Regular dividend policy Under the regular dividend policy, the company pays out dividends to its shareholders every year, If the company makes abnormal profits (very high profits), the excess profits will not be distributed to the shareholders but are withheld by the company as retained earnings. If the company makes a loss, the shareholders will still be paid a dividend under the policy. | The regular dividend policy is used by companies with a steady cash flow and stable earnings, Companies that pay out dividends this way are considered low-risk investments because while the dividend payments are regular, they may not be very high. 2. Stable dividend policy Under the stable dividend policy, the percentage of profits paid out as dividends is fixed. For example, if a company sets the payout rate at 6%, it is the percentage of profits that will be paid out regardless of the amount of profits earned for the financial year. | Whether a company makes $1 million or $100,000, a fixed dividend will be paid out. Investingina company that follows such a policy is risky for investors as the amount of dividends fluctuates with the level of profits. Shareholders face a Jot of uncertainty as they are not sure of the exact dividend they will receive. 3. Irregular dividend policy 3 Under the irregular dividend policy, the company is under no obligation to pay its shareholders and : the board of directors can decide what to do with the profits. If they a make an abnormal profit in a certain year, they can decide to distribute it to the shareholders or not pay out any dividends at all and instead keep the profits for business expansion and future projects. The irregular dividend policy is used by companies that do not enjoy a steady cash flow or lack liquidity. Investors who invest in a company that follows the policy face very high risks as there is a possibility of not receiving any dividends during the financial year. 4. No dividend policy Under the no dividend policy, the company doesn't distribute dividends to shareholders. It is because any profits earned is retained and reinvested into the business for future growth. Companies that don’t give out dividends are constantly growing and expanding, and shareholders invest in them because the value of the company stock appreciates. For the investor, the share price appreciation is more valuable than a dividend payout. Fepevelopment Activities oi Ss. has a capital of € 10 lakhs in equity shares of € 100 each. The shares are currently quoted a The company proposes declaration of a dividend of % 10 per share at the end of the current sal year: The capitalization rate forthe risk class to which the company belong is 12% what will be the market price of the share at the end of the year, if: adividendis not declared? dividend is declared? ‘Assuming that the company pays the dividend and has net profits of 7 5,00,000 and makes new ents of & 10 lakhs during the period, how many new shares must be issued and also calculate yalueofthe firm. Use the MM model. casel: Value of the firm when dividend is paid: Step 1: Price of the share at the end of the current financial year where, Po=*100 pi=%10 Ke= 12% 0r0.12 Pi =Po(1+Ke)-D1 P1=100(1+0.12)-10 - P1=100(1.12)-10 P1=112-10 P1= 7102 ‘Step 2: Number of shares to be issued Where, 1=10,00,000, E=5,00,000, n=10,000, D1 =%10 Pi=z102 1-€- M= PL 40,00,000— (5.00,000—10,000 x10) a. nDi) a= __19100:000 (5.00.00 1.00.00) 102 ai = 4.00000 162 eee ‘M = 5882.35 shares1+Ke (10,000 + 5.882.35)102— (4 Ba en a (45,882.35)102 — (5,00,000) nPo= > nPo= _tavyesr THOT AAD nPo = 9,99.999.73 Round off value = 10, 00,000 Case II: Value of the firm when dividend is not paid: Step 1: Price of the share at the end of the current financial year Where, Po=100 P1=Po(1+Ke)-D1 P1=100(1+0.12)-0 P1=100(1.12)-0 P1=112-0 P1=%112 Step 2: Number of shares to be issued Where, 1= 10, 00,000 E=5,00,000 n=10,000 D1=0 P1=€112__10,00.000— (5.00.000- 10,000 x0) li 412 . +40,00,000— (5,00,000—0) ME Tz 20,00,000—5,00,000 = 112 5,00,000 aS gap M-= 4464.29 shares step 3° Value of the firm epee CE i+Ke i (40,000 + 4,464.29)412— (40,00,000— 5,00,000) ae T+0d2 sen 29y112 = 6.00000) nine {12 46,20,000.-5.90.000 Sor. a2 __41,20.000 wer 1 i2 nPo. nPo ="10,00,000‘a company's outstanding el \d controlling al izing the collection of it optimi: \d strategies aimed a! i low. Effectively managing receivables is or services provided. Receivable management is the process of overs invoices or receivables. It involves a set of practices an Payments from customers and maintaining a healthy cash fl crucial for a business to ensure that it receives timely payments for goods From the following particulars extracted from the books of Century Company Limited, compute the following ratios: a) Current ratio b) Acid Test Ratio ¢) Stock Turnover ratio 4) Debtors Turnover ratio €) Creditors Turnover ratio and f) Average Collection period 1.4,2020 | 31.3.2021 z 30,000 60,000 1,20,000 75,000 96,000 Particulars Bills recievable Bills payable Sundry Debtors Sundry Creditors Stock-in-Trade Additional Information: 2) _ 0n31.3.2021 there were assets: Building ¥ 2,00,000, Cash in hand ¢ 1,20,000, Cash at Bank® 96,000 b) Cash purchase ¥ 1,38,000 and purchase returns were % 18,000 ©) Cash sales 1,50,000 and sales returns were % 6,000 d) _ Rate of gross profit 25% on sales and actual Gross profit was € 1,50,000. Solution: i Current assets 1, Current ratio — = Current liabilities 2,46,000 eee Oe ea for 2020 = 1,35,000 82:1 5,70,000 4.2221 for2021 = 135,000Pei 2020 30,000 | 1,20,000 96,000 | stot cesnin nand cash at bank 96,000 qoal 2,A6,000 | 5,70,000 current iailities: A 3 le sis paved 60,000 | 30,000 jitors sundry cred 75,000 | 1,05,000 1,35,000 | 1,35,000 ge Quick assets 2. Acidtestratio = Current liabilities 1,50,000 - , 4,, For 2020 = Fiasn00 ~ 11*1 (246,000 - 96,000) ? 4,26,000 _ F For 2021 = 55900 = 2155#1 (670,000 - 3,44,000) Quick assets = Current assets - stock _ COGS _ 4,50,000 _ 5. 754i 3, Stock tumover ratio = Average stock ~ 120,000 Gross Profit = 25% of sales Net sales = 2259-000 x 400. 6,00,000 COGS = 6,00,000 - 1,50,000 = 4,50,000 _ 96,000 + 1,44,000 a 2 ing stock iverage stock = ceening the ee = 1,20,000 Net credit sales _ 4,50,000 _ 3.33times Net credit sales_ 4, Debtor turnover ratio = Average Debtors ~ 1,35,000 Note: Net credit sales = Net sales - Cash sales = 6,00,000 - 1,50,000 = 4,50,000 btors + Closing debtors Rpemaeictiys = Opening del ;EA Nalace Mare Rees 2i20,000 + 80,008 1,35,000 Net credit purchase _ 3,60,000 =o = 4 times Average creditors ~ 90,000 5. Creditor turnover ratio = Note: Net credit purchase = Total net purchase ~ Cash purchase = 4,98,000 - 1,38,000 = 3,60,000 Total net purchase = (Net sales + Cl. Stock) - (Opn stock + GP) = (6,00,00 + 1,40,000) ~ (96,000 + 1,50,000) = 7,40,000 - 2,46,000 = 4,98,000 Average creditor is Opening creditor + Closing creditors a 75,000 408,000 = 90,000 360 days 6. Average collection period = Debtor tumover ratio 360 =333 7 108 daysprea ska ARE NET INCOM ies come Approach and Net Operating Income (NOI) Approach i APPROACH AND NET OPERATING INCOME ve Net I The tal budgeting and investment appraisal to evaluate the profitability of potent e Penta compare ties Be sberoscr " yet nore Approach son overall Profitability: The Net Income Approach considers the overall profitability of a 1) Foene by taking into account the net income generated, including both operating and non perating income and expenses. rporates Financing Costs: This approach includes interest expenses as part of the cost of |, considering the financing structure of the project. It subtracts interest expenses from the eat the netincome available to shareholders. D capita pet incometoarniv reflects Financial Structure: The Net Income Approach is more comprehensive in reflecting d the financial structure and its impact on the overall profitability of the project. jicability to Equity Investors: Itis particularly relevant for equity investors as it focuses on 4) APP xincome available to shareholders after accounting for interest expenses and taxes. 7. Net Operating Income (NOI) Approach ) Focus on Operating Profitability: The Net Operating Income (NOI) Approach, on the other hand, focuses solely on the operating profitability of a project. It excludes Non-operating income and expenses, aswell as financing costs. Ignores Financing Structure: NOI does not consider the financing structure or interest associated with a project. It is based on the assumption that the project is financed entirely by equity, and it evaluates the project's operational performance independently of its capital structure. ; Simple and Direct: The NOT ‘Approach is simpler and more straightforward than the Net Income ‘Approach. It looks at the revenue generated from operations and subtracts the operating expenses to determine the net operating income. 4) Applicability to Real Estate: The NOI Approach is commonly used in real estate investment. analysis, where it is crucial to assess the income generated by the property's operations without the influence of financing and non-operating factors. Comparison: 4) Scope of Analysis: The Net Income Approach provides a more comprehensive analysis by considering all income and expenses, including financing costs. In contrast, the NOI Approach focuses exclusively on operating income and expenses. ») Financing Considerations: The Net Income Approach explicitly considers financing costs ant reflects the impact of the capital structure on overall profitability. The NOI Approach assumes a) all-equity financing scenario and ignores financing costs. o) &Approach is suitable for assessing equity investors. The NOI Appr focus is on the operational Applicability: The Net Income performance from the perspective of like real estate, where the