Inventory and Cash Article


Bachelors of Computer Application (BCA) – Session 3 BC0044 – Accounting and Monetary Management – 4 Credit

1 . What is over capitalization? How do we understand overcapitalization has occurred? Ans. Over-capitalization

Over-capitalization arises when the present capital of the business is not really effectively or properly used. There is excessive capital available in the company compared to the actual necessity. A firm is said to be over-capitalized when ever its profits are not enough to yield dividends to the investors. For example , in the event the company's charge of go back is 12% and it earns money of Rs. 100000 by using an investment of Rs. 1200000, we get the fair level of go back to be less than the profits earned. Fair level of returning is 1200000*12% which is Rs. 144000. The corporation is getting less than the fair come back in the industry. The business is said to be over-capitalized because the making of the firm is (100000/1200000)*100 which is almost 8. 33% and this is less than the fair level return of the industry. How do we know over-capitalization has happened?

• Actual capitalization in the company is greater than the increased warranted by activity levels. • Revenue are lower than the expected returns.

• There is a fall in the rate of dividends statement.

• There is also a fall in industry value or maybe the market price from the shares with the company. Reasons behind over-capitalization:

• If the company acquires assets at inflated rates than the publication values, over-capitalization occurs. • Acquiring unsuccessful assets, typically intangible in nature just like goodwill, patents, etc . • High preliminary costs via preliminary bills.

• A company staying set up in boom time will pay more in acquisition of assets. Once the rate of growth time decreases, it will locate the capital more than capitalized. • Raising more capital than the required quantity.

• Company borrows money by high mortgage rates than the moneys could be placed into profitable use. • A company postponing herb repairs and maintenance will find itself over-capitalized as the efficiency from the plant stands reduced. • Excessive taxation by authorities leaves hardly any money together with the company. The money may be not enough to meet the daily requirements and the business may use borrowings. Credit beyond a certain limit leads to over-capitalization Effects of over-capitalization

• Fall in revenue

• Along with dividend rates

• Decrease of investors' self-confidence

• Fall in market rates of stocks and shares.

2 . Describe permanent and temporary working capital.

Ans. Seed money management consists of managing the various components of current assets and current financial obligations. It is an efforts to try to keep a healthy marriage between both of these so that a satisfactory level of working capital is managed. It is very important for the firm to take care of a satisfactory amount of working capital, or else there are probability of the company becoming financially troubled and heading bankrupt. The interface between CA and CL is therefore very important and varieties the main subject matter under seed money management. Long term and Momentary Working Capital:

Long lasting working capital may be the minimum expenditure in the form of inventory of recycleables, work-in-progress, done goods, shops and publication debts to facilitate uninterrupted operations in a firm. This kind of minimum level is called the permanent or perhaps fixed seed money. It is long term like the business fixed resources are. More than this, the firm's seed money requirements fluctuate depending upon the cyclicality and seasonality of product requirements. This is known as the varying or rising and falling or temporary working capital. Those two aspects could be graphically proven as follows: В



3A. Exactly what are the assumptions of EOQ Model?

Ans. Economic Purchase Quantity (EOQ)

EOQ identifies the optimal order size which will result in the lowest ordering and carrying costs for a specific thing of products on hand based on it is expected use. Answers to questions just like:...