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DRIVE SPRING 2014 PROGRAM BBA SEMESTER V

SUBJECT CODE & NAME BBA 502

FINANCIAL MANAGEMENT

BK ID B1850

CREDIT 4 MARKS60

Q:1 Assume you are promoted to Finance Manager of a company. Describe the three important

components of the master budget in detail with an example

Master budget: The master budget is a one-year budget planning document for the firm encompassing

all other budgets. It coincides with the fiscal year of the firm and may be broken down into quarters and,

further, into months. If the firm plans for the master budget to be an ongoing document, rolling from

year to year, then normally a month is added to the end of the budget to facilitate planning. This is

called continuous budgeting.

The three components of master budget is as follow:

Operating budget

Financial budgetCapital budget

Operating budget:

Operating budgets relate to the planning of the activities or operations of the enterprise, such as

production, sales and purchases. Operating budget is composed of two partsa programme or activity

budget and a responsibility budget. These represent two different ways of looking at the operations of

the enterprise; but arriving at the same results.

Programme or activity budget specifies

Responsibility budget

There are two ways in which the operating budget may be prepared;(a) Periodic budgeting

(b) Continuous budgeting.

Periodic budgeting: involves the preparation of the budget for the forthcoming year without providing

for a comprehensive revision as the budget period passes. The budget period is generally divided into

months; that is, the annual budget consists of the monthly estimates.

Continuous budgeting: provides for a system of revising the budget for the changing conditions

continuously. Continuous budgeting would, however, be desirable in case of those firms which operate

under uncertainties of consumer demands and are exposed to a greater degree of cyclical fluctuations.

(ii) Financial Budgets

Financial budgets are concerned with the financial implications of the operating budgetsThe

important components of financial budgets are: cash budget, pro forma balance sheet and income

statement and statements of changes in financial position.

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Cash budget: The major objective of the cash budget, therefore, is to plan cash in such a way that the

company always maintains sufficient cash balance to meet its needs and uses the idle cash in the most

profitable manner.

Pro forma financial statements: pro forma financial statements give information as to the future assets,

liabilities and income-statement items. The pro forma statements are prepared to identify the

anticipated results of the budgeted operations.

(iii) Capital Budgets

Capital budget involves the planning to acquire worthwhile projects, together with the timings of the

estimated cost and cash flows of each project Capital budgets are difficult to prepare because estimates

of the cash flows over a long period have to be made which involve a great degree of uncertainty. Such

projects require large sum of funds and have long-term implications for the firm.

Q: 2 explain the concept of time value of money. Suppose Narsimham pays Rs 10,000 at the end of

each year for 5 years into a public provident fund. The interest rate being 12% per year. What is thepresent value of the series of Rs 10,000 paid each year for 5 years?

Some standard calculations based on the time value of money are:

Present value:The current worth of a future sum of money or stream ofcash flows,given a specifiedrate of

return.Future cash flows are "discounted" at thediscount rate;the higher the discount rate, the lower the

present value of the future cash flows. Determining the appropriate discount rate is the key to valuing future

cash flows properly, whether they be earnings or obligations

Present value of anannuity:An annuity is a series of equal payments or receipts that occur at evenly spaced

intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each

period for an ordinary annuity while they occur at the beginning of each period for an annuity due

Resent value of aperpetuityis an infinite and constant stream of identical cash flows.

Future value:The value of an asset or cash at a specified date in the future, based on the value of that asset

in the present.

Future value of an annuity (FVA):The future value of a stream of payments (annuity), assuming the

payments are invested at a given rate of interest.

http://en.wikipedia.org/wiki/Present_valuehttp://en.wikipedia.org/wiki/Present_valuehttp://en.wikipedia.org/wiki/Cash_flowshttp://en.wikipedia.org/wiki/Rate_of_returnhttp://en.wikipedia.org/wiki/Rate_of_returnhttp://en.wikipedia.org/wiki/Annuity_(finance_theory)http://en.wikipedia.org/wiki/Annuity_(finance_theory)http://en.wikipedia.org/wiki/Perpetuityhttp://en.wikipedia.org/wiki/Perpetuityhttp://en.wikipedia.org/wiki/Future_valuehttp://en.wikipedia.org/wiki/Future_valuehttp://en.wikipedia.org/wiki/Future_valuehttp://en.wikipedia.org/wiki/Perpetuityhttp://en.wikipedia.org/wiki/Annuity_(finance_theory)http://en.wikipedia.org/wiki/Rate_of_returnhttp://en.wikipedia.org/wiki/Rate_of_returnhttp://en.wikipedia.org/wiki/Cash_flowshttp://en.wikipedia.org/wiki/Present_value