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RTU Managerial Economics & Financial Accounting Solutions (2024)

📄 RTU Managerial Economics & Financial Accounting Solved Paper 2024

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Rajasthan Technical University (RTU) Solutions

B.Tech. III-Semester (Jan/Feb 2024) | Managerial Economics and Financial Accounting (3E1200 / 3AG1-03)

PART - A (Short Answer Questions - 2 Marks Each)

Q1. Explain Gross Domestic Product (GDP).

Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within the geographic boundaries of a country during a specific period (usually one year).

Q2. Draw circular flow of economic activities.

The circular flow model demonstrates the continuous movement of money, goods, and services between Household and Business sectors:

+-------------------------------------------------------------+ | HOUSEHOLDS | | - Own factors of production (Land, Labor, Capital) | | - Spend income on Goods & Services | +-------------------------------------------------------------+ | (Factor Services) ^ (Expenditure) v | +-------------------------------------------------------------+ | BUSINESS FIRMS | | - Produce Goods & Services | | - Pay Rent, Wages, Interest & Profits | +-------------------------------------------------------------+

Q3. Draw graph to show: a) Perfectly Inelastic Demand b) Perfectly Elastic Demand.

Q4. What is Giffen Paradox?

Giffen Paradox is an exception to the Law of Demand where demand for an inferior essential commodity increases as its price increases (and vice versa) due to a strong negative income effect overpowering the substitution effect.

Q5. Give mathematical form of Cobb-Douglas production function.

The Cobb-Douglas Production Function is expressed as:

Q = A * L^a * K^b Where: Q = Total Output L = Labor input K = Capital input A = Total factor productivity (technology factor) a, b = Output elasticities of labor and capital

Q6. Define Explicit and Implicit costs with example.

Explicit Cost: Direct contractual out-of-pocket payments made to external suppliers (e.g., payment of salaries, raw material cost).
Implicit Cost: Imputed/opportunity cost of self-owned resources used in business without cash payout (e.g., rent on self-owned building).

Q7. Draw a chart to show different market structures.

MARKET STRUCTURES | +------------------+------------------+ | | Perfect Competition Imperfect Competition (Many sellers, Homogeneous) | +--------------------+--------------------+ | | | Monopoly Monopolistic Oligopoly (Single seller) (Product Diff.) (Few large sellers)

Q8. List four important features of Monopoly market.

Single seller and large number of buyers.
No close substitutes available for the commodity.
Strong entry barriers preventing new firms from entering.
Firm acts as a price maker.

Q9. What is golden rule of accounting for real accounts?

The Golden Rule for Real Accounts is: "Debit what comes in, Credit what goes out."

Q10. Define payback period.

Payback Period is the exact time duration required for an investment project to generate cash inflows sufficient to recover its initial capital outlay.

PART - B (Analytical & Problem Solving - 4 Marks Each)

Q1. Define National Income. Explain steps involved in the estimation of national income by income method.

National Income represents the sum total of factor earnings (wages, rent, interest, profit) accruing to normal residents of a country in an accounting year.

Steps in Income Method:

Identify and classify all producing enterprises into primary, secondary, and tertiary sectors.
Classify factor payments into Compensation of Employees, Operating Surplus (Rent + Interest + Profit), and Mixed Income.
Sum up factor payments to estimate Net Domestic Product at Factor Cost (NDP_fc).
Add Net Factor Income from Abroad (NFIA) to NDP_fc to arrive at National Income (NNP_fc).

Q2. Explain economies and diseconomies of scale with examples.

Economies of Scale: Cost advantages or reductions in per-unit cost achieved when production scale expands (e.g., bulk purchasing discounts on raw material).
Diseconomies of Scale: Increases in per-unit cost when production scale expands beyond optimum capacity (e.g., management coordination failures, labor conflicts).

Q3. How will you calculate cash flows from operating activities by direct and indirect method? Explain with example.

Direct Method: Lists major cash inflows (Cash from sales) and cash outflows (Payments to suppliers/employees).
Net Operating Cash Flow = Cash Collections - Operating Cash Outflows
Indirect Method: Starts with Net Profit before tax and adjusts for non-cash expenses (Depreciation) and working capital changes.
Net Operating Cash Flow = Net Profit + Non-Cash Expenses ± Working Capital Adjustments

Q4. Monopolistic Competition Analysis

a) Demand curve elasticity: Demand curve in monopolistic competition is more elastic than in monopoly because close substitutes are available in monopolistic competition, whereas monopoly has no close substitutes.

b) Freedom of entry and exit: Allows new firms to enter freely when supernormal profits exist and inefficient firms to leave when losses occur, resulting in normal profits in the long run.

Q5. Explain following with help of suitable graph: a) Zero income elasticity b) Negative Income elasticity c) Unit income elasticity d) Income elasticity greater than unity.

Income Elasticity of Demand (Ey) measures demand response to income changes:

a) Zero Income Elasticity (Ey = 0): Demand doesn't change with income (e.g., Salt). Vertical line.
b) Negative Income Elasticity (Ey < 0): Demand falls as income rises (Inferior goods). Downward sloping curve.
c) Unit Income Elasticity (Ey = 1): % change in demand equals % change in income. 45-degree upward line.
d) Greater than Unity (Ey > 1): Demand increases proportionally more than income (Luxury goods). Flatter upward curve.

Q6. Give brief answer of following Questions on Balance Sheet:

a) Accruals, notes payable, accounts payable category: Current Liabilities.
b) Inventories, cash and equivalents, accounts receivables category: Current Assets.
c) Unpaid products bought from suppliers recorded as: Accounts Payable / Sundry Creditors.
d) Total of common stock and retained earnings denoted as: Shareholders' Equity / Owner's Equity.

Q7. Explain Liquidity and Solvency ratios with formulas.

a) Liquidity Ratio: Measures ability to meet short-term obligations.
Current Ratio = Current Assets / Current Liabilities
b) Solvency Ratio: Measures long-term debt repayment ability and stability.
Debt-to-Equity Ratio = Total Long-Term Debt / Shareholders' Equity

PART - C (Detailed Solutions - 10 Marks Each)

Q1. a) Complete the Cost Table and b) Draw graph showing relationship between costs.

Completed Cost Table:

QTY (Units)	TFC (Rs.)	TVC (Rs.)	TC (Rs.)	AVC (Rs.)	ATC (Rs.)	MC (Rs.)
0	60	0	60	-	-	-
1	60	30	90	30	90	30
2	60	40	100	20	50	10
3	60	55	115	18.33	38.33	15
4	60	55	115	13.75	28.75	0
5	60	75	135	15	27	20

Formulae used: 1. TFC = 60 (Constant for all units) 2. TC = TFC + TVC 3. AVC = TVC / Q 4. ATC = TC / Q 5. MC = TC(n) - TC(n-1)

Q2. Calculate and comment on degree of elasticity:

a) Cross Elasticity of Demand (Tea & Coffee) Price of Tea: P1 = 4, P2 = 3 (Delta P = -1) Demand of Coffee: Q1 = 2, Q2 = 4 (Delta Q = +2) Cross Ed = (% Change in Q_coffee) / (% Change in P_tea) = (+100%) / (-25%) = -4 (Abs value = 4) Comment: Positive relationship in economic terms (High positive cross-price elasticity), showing strong substitute goods. b) Income Elasticity of Demand Income: Y1 = 10,000, Y2 = 15,000 (Delta Y = 5,000) Demand: Q1 = 500, Q2 = 800 (Delta Q = 300) Ey = (Delta Q / Q) / (Delta Y / Y) = (300 / 500) / (5,000 / 10,000) = 0.6 / 0.5 = 1.2 Comment: Income elasticity > 1, good A is a luxury/normal superior good. c) Price Elasticity of Demand Price: P1 = 8, P2 = 6 (Delta P = -2) Demand: Q1 = 200, Q2 = 250 (Delta Q = 50) Ed = (Delta Q / Q) / (Delta P / P) = (50 / 200) / (-2 / 8) = 0.25 / -0.25 = -1 Comment: Unitary elastic demand (|Ed| = 1). d) Elasticity of Supply Price: P1 = 20, P2 = 30 (Delta P = 10) Supply: Q1 = 200, Q2 = 800 (Delta Q = 600) Es = (Delta Q / Q) / (Delta P / P) = (600 / 200) / (10 / 20) = 3 / 0.5 = 6 Comment: Highly elastic supply (Es > 1).

Q3. "Economics is an art." Elaborate this statement by explaining meaning, nature and scope of Economics.

Meaning: Economics is a social science concerned with allocating scarce resources among competing ends to maximize human satisfaction and welfare.

Economics as an Art: An 'Art' is the practical application of knowledge for achieving definite objectives. Economics provides practical solutions to real-world problems like inflation, poverty, unemployment, and resource allocation.

Nature & Scope:

Science & Art: It is a science because it uses systematic methods, and an art because it applies these principles to solve policy problems.
Micro & Macro Scope: Covers individual decision-making (Micro) and economy-wide aggregate phenomena (Macro).

Q4. "A competitive firm is not a price maker, but adjustor." Explain with reference to price determination.

In a Perfectly Competitive Market, individual firms are price takers, not price makers. Price is determined by industry supply and demand forces.

Short-run Equilibrium: Firms accept price P set by industry. They adjust output level where Marginal Cost (MC) = Marginal Revenue (MR). Depending on cost structure, a firm can earn supernormal profit, normal profit, or suffer losses in the short run.

Long-run Equilibrium: Due to free entry/exit, entry of new firms eliminates supernormal profits, and exit of firms eliminates losses. The firm adjusts output where Price = MR = MC = AC, earning only normal profit.

Q5. Prepare Schedule of Changes in Working Capital and Funds Flow Statement for 2021.

1. Schedule of Changes in Working Capital:

Particulars	2020 (Rs.)	2021 (Rs.)	Increase (Rs.)	Decrease (Rs.)
Current Assets:
Stock	1,00,000	75,000	-	25,000
Sundry Debtors	1,50,000	1,60,000	10,000	-
Cash at Bank	20,000	20,000	-	-
Total Current Assets (A)	2,70,000	2,55,000
Current Liabilities:
Sundry Creditors	1,53,000	1,90,000	-	37,000
Bills Payable	40,000	50,000	-	10,000
Expenses Outstanding	7,000	5,000	2,000	-
Total Current Liabilities (B)	2,00,000	2,45,000
Working Capital (A - B)	70,000	10,000
Net Decrease in Working Capital	-	-	60,000	-

2. Statement of Sources and Application of Funds:

Sources of Funds	Amount (Rs.)	Application of Funds	Amount (Rs.)
Issue of Share Capital	2,00,000	Purchase of Land & Building	40,000
Sale of Machinery	8,000	Purchase of Machinery	3,62,000
Funds from Operations (FFO)	1,34,000
Decrease in Working Capital	60,000
Total	4,02,000	Total	4,02,000

Working Notes: 1. Plant & Machinery Account: Opening Balance: Rs. 5,00,000 | Closing Balance: Rs. 8,00,000 Machinery Sold: Book Value = Rs. 5,000 (Cost 12,000 - Dep. 7,000), Sale Price = Rs. 8,000 -> Profit = Rs. 3,000 Machinery Purchases (Balancing Figure) = Rs. 3,62,000 2. Adjusted Profit & Loss Account: Closing P&L Balance (1,60,000) + General Reserve Transfer (20,000) + Depreciation (50,000) - Profit on Sale (3,000) - Opening P&L Balance (1,00,000) Funds From Operations (FFO) = Rs. 1,34,000