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Notes from Management Accounting

1. Financial Statement Analysis -Comparative Statements, Common Size statement and

trend analysis

2. Ratio Analysis –Liquidity, Profitability, turnover, capital structure and leverage.

3. Funds flow and Cash flow statements

4. Budgets and budgetary control – Production, Cash and Flexible Budgets.

5. Capital Expenditure Control – Capital Budgeting Techniques – Pay Back Period –

Accounting Rate of Return – Net Present Value Method.

1. Financial Statement Analysis

1. Comparative financial statements

i. Comparative Balance sheet

ii. Comparative Profit and Loss Account

2. Common Size financial Statements

i. Common Size Balance sheet

ii. Common Size Profit and Loss Account

3. Trend Analysis

Comparative Balance Sheet

A Comparative balance sheet is a balance sheet which is prepared to ascertain the increase or

decrease in proprietors’ funds, in assets and in liabilities during the course of two years. While comparing the

previous year should be considered as ‘Base’ for calculation of changes (increase or Decrease) in percentages.

This balance sheet is highly useful to study the progress of the business.

Comparative Profit and Loss Account

A comparative profit and loss account is a statement which is prepared to find out the increase or

decrease in various items of cost, expense and income over a number of years, at least two. While comparing

the previous year’s have to be taken as ‘Base’ for calculation of increase or decrease in percentages. It

indicates the trend in the business operations.

Common Size Balance sheet

For preparing common- size balance sheet, the following procedures are to be observed: Either

the total of the assets side or the total of the capital and liabilities side (as both are same) is to taken as

100; Each type of asset is, then, expressed as a percentage of total assets (or total of the capital and

liabilities); Each item on the “capital and Liabilities” side is also expressed as a percentage of total assets

(or total of the capital and liabilities).

Common Size Profit and Loss Account

An item in the profit and loss account should be taken as “Base”. The base, let us say is ‘Sales’;

The Sales, is assumed to equal 100; All other items in the profit and loss account debit side and credit side

are, then, expressed as ‘percentage of sales’; Instead of taking ‘Gross Sales’ as the base, it is better to

choose ‘Net Sales’ as the base because it represents the effective revenue generation point.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Format of Comparative Balance sheet:-

X Ltd., Comparative Balance Sheet as on 31st March XXXX and XXXX

Particulars

Base Year

Current Year

Absolute Increase or

Decrease

Percentage Increase or

Decrease

Assets:- Fixed Assets:- Land and Buildings Plant and Machinery Furniture and fixtures Other Fixed Assets Total Fixed Assets (A) Investments:- Short term Investments Long term Investments Subsidiaries Other Investments Total Investments (B) Current Assets:- Cash Sundry Debtors Stock Cash at Bank Bills Receivable Prepaid Expenses Other Current Assets

Rs.

xxxx xxxx xxxx xxxx

Rs.

xxxx xxxx xxxx xxxx

Rs.

xxxx xxxx xxxx xxxx

Rs.

xxx xxx xxx xxx

XXXXX XXXXX XXXXX XXX

xxxx xxxx xxxx xxxx

xxxx xxxx xxxx xxxx

xxxx xxxx xxxx xxxx

xxx xxx xxx xxx


xxxx xxxx xxxx xxxx xxxx xxxx xxxx



xxx xxx xxx xxx xxx xxx xxx

Total Current Assets (C) Total Assets (A+B+C) Liabilities:- Capital and Reserves:- Equity share capital Capital Reserve General Reserve Other Reserves Total Shareholders’ Funds (A) Loans & Advances:- Debentures Loans (Short Term & Long Term) Total Loans & Advances (B) Current Liabilities: Sundry Creditors Bills Payable Any Outstanding Expenses Total Current Liabilities (C) Total Liabilities (A+B+C)


XXXXX

xxxx xxxx xxxx xxxx

XXXXX

xxxx xxxx xxxx xxxx

XXXXX

xxxx xxxx xxxx xxxx

XXX

xxx xxx xxx xxx


xxxx xxxx

xxxx xxxx

xxxx xxxx

xxxx xxxx


xxxx xxxx xxxx

xxxx xxxx xxxx

xxxx xxxx xxxx

xxxx xxxx xxxx


XXXXX

XXXXX

XXXXX

XXX


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Format of Comparative Income Statement:-

X Ltd., Comparative Income Statement for the years ended 31st March XXXX & XXXX

Particulars

Base Year

Current Year

Absolute Increase or

Decrease

Percentage Increase or

Decrease

SALES Less: Cost of goods sold Gross Profit (A) Less: Administrative Expenses Selling Expenses Distribution Expenses Other all Indirect Expenses Total Expenses (B) Net Profit before Income Tax (A-B) Less: Income Tax at XX% Net Profit after Tax

xxxx xxxx

xxxx xxxx

xxxx xxxx

xx xx

XXXX XXXX XXXX XX

xxxx xxxx xxxx xxxx

xxxx xxxx xxxx xxxx

xxxx xxxx xxxx xxxx

xx xx xx xx

XXXXX XXXXX XXXXX XX

XXXX

XXXX

XXXX

XXXX

XXXX

XXXX

XX

XX

XXXX XXXX XXXX XX

Format of Common Size Income Statement:-

X Ltd., Common Size Income Statement for the years ended 31st March XXXX

Particulars Base Year % of Sales

NET SALES Less: Cost of goods sold Gross Profit (A) Less: Operating Expenses:- Administrative Expenses Selling Expenses Distribution Expenses Total Operating Expenses (B) Operating Profit (A-B) Add: Non- Operating income: Less Non- Operating expenses: Net Profit

xxxx xxxx

xx xx

XXXX XX

xxxx xxxx xxxx

xx xx xx

XXXXX XX

XXXX XXXX

XX XX

XXXX XXXX

XX XX

XXXX XX


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Format of Common Size Balance sheet:-

X Ltd., Common Size Balance Sheet as on 31st March XXXX

Particulars Amount % of Total Asset

Assets:- Fixed Assets:- Land and Buildings Plant and Machinery Furniture and fixtures Other Fixed Assets Total Fixed Assets Investments:- Short term Investments Long term Investments Subsidiaries Other Investments Total Fixed Asset & Investments Current Assets:- Cash Sundry Debtors Stock Cash at Bank Bills Receivable Prepaid Expenses Other Current Assets

Rs.

xxxx xxxx xxxx xxxx

Rs.

xx xx xx xx

XXXX XX

xxxx xxxx xxxx xxxx

xx xx xx xx

XXXX XX


xx xx xx xx xx xx xx

Total Assets XXXX XX

Particulars Amount % of Total Liabilities

Liabilities:- Capital and Reserves:- Equity share capital Capital Reserve General Reserve Other Reserves Total Shareholders’ Funds Loans & Advances:- Debentures Loans (Short Term & Long Term) Total Sh. Fund, Loans & Advances Current Liabilities: Sundry Creditors Bills Payable Any Outstanding Expenses Total Liabilities

xxxx xxxx xxxx xxxx

xx xx xx xx

XXXX XX

xxxx xxxx

xx xx

XXXX XX

xxxx xxxx xxxx

xx xx xx

XXXX XX


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Ratio Analysis –Liquidity, Profitability, turnover, capital structure and leverage.

I. Short term Solvency Ratio: Solvency ratios assess the long term financial condition of the firm.

Bankers and creditors are most interested in liquidity. But shareholders, debenture holders, and financial

institutions are concerned with the long term financial prospects.

1. Current Ratio : 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

A current ratio of 2:1 considered ideal. If the current ratio is less than two, it may be difficult for a firm to

pay current liabilities.

CURRENT ASSETS: Cash in hand, Cash at bank, Debtors, Stock, Prepaid Expenses, Bills receivable, Short term liabilities CURRENT LIABILITIES: Creditors, Bank overdraft, Bills payable, Provisions for Doubtful debts, Provisions for income tax

2. Quick ratio = 𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠

𝑄𝑢𝑖𝑐𝑘 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Quick ratio is also called Acid test ratio because the acid test of a concern’s financial soundness. It

is the relationship between quick assets and quick liabilities.

Quick Assets = Current assets – [stock +prepaid Expenses] Quick Liabilities = current liabilities – bank over draft

3. Absolute liquidity Ratio: 𝐶𝑎𝑠 𝑕+𝑏𝑎𝑛𝑘 +𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

II. Longer term Solvency Ratio

4. Debt Equity ratio: 𝐷𝑒𝑏𝑡

𝐸𝑞𝑢𝑖𝑡𝑦

Debt:Long term debt, short term debt, debentures, creditors, bills payable

Equity: Equity share capital, preference share capital, reserves and profit and loss account.

5. Proprietary Ratio: 𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑎𝑟𝑦 𝐹𝑢𝑛𝑑

𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝐴𝑠𝑠𝑒𝑡𝑠

Proprietors Funds: Equity share capital, Preference share capital, Share Premium, Reserves,

Profit and loss [Cr] ( Minus Profit and loss a/c [Dr] balance.)

Total Tangible assets: All assets [ Excluding goodwill and preliminary expenses]

6. Fixed assets ratio: 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡

𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝑓𝑢𝑛𝑑𝑠

The ratio shows the relationship between fixed assets and proprietors fund. The purpose of this

ratio is to find out the percentage of the owners fund invested in fixed assets.

Long Term Funds:- Share Capital+ Reserve & Surplus + Long term Loans-Fictitious assets

7. Capital gearing Ratio: 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠𝑕𝑎𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 +𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐹𝑢𝑛𝑑𝑠 +𝐷𝑒𝑏𝑒𝑛𝑡𝑢𝑟𝑒𝑠

𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑕𝑎𝑟𝑒 𝐻𝑜𝑙𝑑𝑒𝑟 𝐹𝑢𝑛𝑑

It is the ratio between equity share capital and fixed interest bearing securities. This ratio is

mainly used to analyze the capital structure of a company.



III. TURNOVER OR ACTIVITY RATIO:

8. Stock turn over ratio: [Inventory turnover ratio}

This ratio indicates whether investments in inventory are efficiently used or not. It explain

whether investment in inventories in within proper limits or not. It also measures the effectiveness of the

firms sales efforts. The ratio is calculated as follows

= 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘

Cost of goods sold: Sales – Gross profit (or) (Opening stock + Purchase +Direct Expenses) – Closing stock

Average stock =𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 +𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘

2

9. Debtors turnover ratio [Or] Debtors velocity:

The purpose of this ratio is to discuss the credit collections power and policy of the firm. This

ratio is established between accounts receivable and net credit sales of the period.

Debtors’ turnover ratio: =𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Account Receivable = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 & 𝐵𝑖𝑙𝑙𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 +𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 & 𝐵𝑖𝑙𝑙𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

2

Average debt collection periods [In days] = 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 +𝐵𝑖𝑙𝑙𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠× 365

Average debt collections period [In month]= 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 +𝐵𝑖𝑙𝑙𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠× 12

10. Creditors turnover ratio Or creditors velocity:

Creditors’ turnover ratio: =𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐 𝑕𝑎𝑠𝑒

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

Account Payable = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 & 𝐵𝑖𝑙𝑙𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 +𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝐶𝑟𝑒𝑑𝑖 𝑡𝑜𝑟𝑠 & 𝐵𝑖𝑙𝑙𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

2

Average Creditors collection periods [In days] = 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 +𝐵𝑖𝑙𝑙𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐 𝑕𝑎𝑠𝑒× 365

Average Creditors collections period [In month]= 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 +𝐵𝑖𝑙𝑙𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒

𝑁𝑒𝑡 𝑐𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐 𝑕𝑎𝑠𝑒× 12

11. Fixed assets turnover ratio: 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠

12. Working capital turnover ratio: 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

13. Capital turnover ratio: 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Capital Employed = Total Assets- Current Liabilities or Shareholders funds + Long Term loans


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 III. PROFITABILITY RATIOS:

A business firm is basically a profit earning organization.

15. Gross profit ratio: 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠× 100

16. Net profit ratio: 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡


17. Operating ratio: 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 +𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠


18. Operating profit ratio: 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡


18. Expenses ratio: 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠


20. Earning per share [EPS]: 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆𝑕𝑎𝑟𝑒

𝑁𝑜 𝑜𝑓 𝑆𝑕𝑎𝑟𝑒𝑠

21. Price earning Ratio: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒

𝐸𝑃𝑆

22. Pay Out Ratio: 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒

𝐸𝑃𝑆× 100 (or)

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 & 𝑃𝑟𝑒𝑓 .𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑× 100

23. Dividend Yield Ratio: 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑆𝑕𝑎𝑟𝑒

𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑕𝑎𝑟𝑒× 100

24. Retained Earning Ratio: 𝑅𝑒𝑡𝑎𝑖𝑛 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 & 𝑃𝑟𝑒𝑓 .𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑× 100

Funds flow and Cash flow statements

Preparation of funds flow statements

1. Schedule of changes in working capital

2. Funds flow statements

1. Schedule of changes in working capital

It is prepared in order to measure the increase or decrease in working capital over a period of

time. This schedule is prepared with the help of only current assets and current liabilities.

Working capital = Current assets – Current liabilities.

=> Increase in current assets increase in working capital

=> Decrease in current assets decrease in working capital

=> Increase in current liabilities decrease in working capital

=> Decrease in current liabilities increase in working capital



Schedule of changes in working capital Particular

Previous

Year Current

Year

Changes in Working Capital

Increase Decrease

Current Assets: Cash in hand Cash at bank Sundry debtors Bills receivable Stocks Prepaid expenses (A)Total Current Assets Current Liabilities: Sundry creditors Bank over draft Bills payable Out standing expenses (B)Total Current Liabilities Working capital [A-B] Net increase/Decrease In working capital

Total

Funds Flow Statements Sources Rs. Applications Rs.

Funds from operation xxx Redemptions of Preference share xxx Issue of debentures xxx Redemptions of Debentures xxx Long term borrowings xxx Repayment of loans xxx Sale of fixed assets xxx Purchase of Fixed assets xxx Issues of shares xxx Payment of tax xxx Sale of investments xxx Payment of dividend xxx Decrease in working capital xxx Purchase of investment xxx Funds from lost xxx Net increase in working capital xxx XXXXX XXXXX

Adjusted Profit and Loss A/c Particulars Rs. Particulars Rs.

To Depreciation xxx By Balance b/d xxx To Loss on sale of Assets xxx By Profit on sale of Assets xxx To Goodwill Written off xxx By Income from Investment xxx To Provision of Tax xxx By Income Tax Refund xxx To Proposed Dividend To Balance c/d

xxx xxx

By Funds from Operation (Bal Fig.) xxx

XXXXX XXXXX



PREPARATION OF CASH FLOW STATEMENTS Particulars Rs. Rs.

I. Cash Flows from Operating activities:- Cash receipts from customers Less: Cash paid to Suppliers & Employees Cash From Operations Less: Income taxes paid Cash flows before Extraordinary Activities Less: Increase or Decrease in Working Capital items Net Cash flows from Operating Activities II. Cash flows from Investing activities:- Sale of Fixed Assets Interest Received Dividend Received Purchase of Fixed Assets Net Cash from Investing Activities III. Cash Flows From Financing Activities:- Issue of Share Capital Long Term Loan Received Repayment of Loan Interest and Dividend Paid Net Cash from Investing Activities Net Increase / Decrease in Cash and Cash Equivalents Add: Cash at the Beginning of the Period Cash at the End of the Period

xxx

(xxx)

xxx (xxx)

xxx xxx

xxx xxx xxx

(xxx)

XXXX

XXXX

XXXX

xxx xxx

(xxx) (xxx)

XXXX XXXX

XXXX

Working Notes for Calculate Net profit before tax and Extraordinary items

Particulars Rs.

Closing Profit and Loss A/c Balance XXX Less: Opening Balance of Profit and Loss A/c XXX Add: Transfer to General Reserve

XXX XXX

Add: Proposed Dividend XXX Add: Interim dividend XXX Add: Provision for Tax Net Profit Before Tax

XXX

XXXX

Fixed Asset A/c Particulars Rs. Particulars Rs.

To Balance b/d xxx By Bank (Sales) xxx To Bank (purchase) xxx By Depreciation xxx To Profit and Loss A/c (Profit) xxx By Profit and Loss a/c (Loss) xxx By Balance c/d xxx XXXXX XXXXX

Provision for Tax A/c

Particulars Rs. Particulars Rs. To Bank (Tax Paid) xxx By Balance b/d xxx To balance c/d xxx By Profit and Loss a/c (Made) xxx XXXXX XXXXX



Budgets and budgetary control

Cash Budget Format:-

Month--------- Month --------- Month------------ Opening balance of cash Add Receipts: Cash sales Receipts from Debtors Loans Sales of assets Other receipts

Total Receipts (A) Payments: Cash purchase Payment to creditors Loan repayment Wages and salaries Capital expenditure Taxes Dividends

Total Payments (B) Closing Balance of cash(A-B)

Production budget Formats:-

Month Units required for sale

Add closing stock of finished goods

Total units required

Less opening stock of finished goods

Units to be produced

Flexible budget Formats:-

Particulars

Capacity Level Level 1 Level 2 Level 3

Per Unit Rs.

Total Rs.

Per Unit Rs.

Total Rs.

Per Unit Rs.

Total Rs.

Material Lobour Variable Expenses

Prime Cost Administration Expenses:

Fixed Variable

Cost of Production Selling and Distribution Exp:

Fixed Variable

Total Cost

xxx xxx xxx

XXX XXX XXX

xxx xxx xxx

XXX XXX XXX

xxx xxx xxx

XXX XXX XXX

xxx XXX xxx XXX xxx XXX

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

XXX XXX


xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx




Capital Expenditure Control

1. Pay Back Period

=Initial Investment

Annual Cash Inflow

Calculation of Net Cash Inflow Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Annual Profit before Dep. & Tax Less: Depreciation Annual Profit after Dep. and before Tax Less: Tax Annual Profit after Dep. and Tax Add: Depreciation Annual Cash inflows

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

xxx xxx

XXX XXX XXX XXX XXX Note: - Annual Cash inflows is Net income form asset after Tax, but before Depreciation

Statement Showing Cumulative Cash inflows

Year

Project X Project Y Project Z

Cash Inflows

Rs.

Cumulative Cash Inflows

Rs.

Cash Inflows

Rs.


Rs.

Cash Inflows

Rs.


Rs. 1 2 3 4 5

Initial Investment

Pay Back Period

xxx xxx xxx xxx xxx

XXXX XXXX XXXX XXXX XXXX

xxx xxx xxx xxx xxx


xxx xxx xxx xxx xxx


XXXXX XXXXX XXXXX

Initial Investment

Annual Cash Inflow

Initial Investment

Annual Cash Inflow

Initial Investment

Annual Cash Inflow

Conclusion: Lower pay-back period is Preferable, However, when two or more projects have the same

pay-back period, the project with higher initial cash inflows should be preferred.

Statement Showing Profitability of Machine

Particulars Machines

Machine A Machine B Rs. Rs. Rs. Rs.

Cost of Machine Estimate Life in years Savings Through Machines:- Savings in Scrap Savings in Wages Etc., Total Savings Less: Additional Cost Maintenance & Supervision Indirect Materials Etc., Income before Depreciation & Tax

xxx X

xxx X

xxx xxx

xxx xxx

xxx xxx

XXX

XXX

xxx xxx

XXX

XXX

XXXX XXXX



2. Average Rate of Return (ARR)

Computation of ARR

I. Annual return on original investment method

=𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑓𝑙𝑜𝑤𝑠

𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 −𝑆𝑐𝑟𝑎𝑝 𝑣𝑎𝑙𝑢𝑒× 100

II. Annual return on Average Investment method

=𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑓𝑙𝑜𝑤𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡× 100

Average Investment =𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 −𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒

2+ 𝐴𝑑𝑑𝑛𝑙. 𝑁𝑒𝑡 𝑊. 𝐶 + 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒

Average Inflows is the average of net profits after depreciation and tax of all the

years in the life of the investment.

3. Net Present Value (NPV)

NPV = Present Value of Cash inflow – Initial Investment

Present Value of Cash inflow = Cash inflow × Present value of Annuity

Statement showing Net Present Value of Investment Particulars Year Cash Inflow

Rs. P.V factor

(i.e 10% p.a) Present Value

Rs.

Present Value of Cash inflow

Less: - Initial Investment (Or)Cash Outflows

Net Present Value

1 2 3 4 5

XXX XXX XXX XXX XXX

.909

.826

.751

.683

.621

XXX XXX XXX XXX XXX

XXXX

XXXX

XXXXX



Theories:-

Unit 1:-

2 Mark Questions:-

1. Meaning of management Accounting:

Management accounting is a system of accounting concerned with the internal reporting or

information to management. Management accounting involves collecting, classifying, analyzing,

interpreting and presenting all accounting information which are useful to management.

The management accounting is designed as a good guide to the management in formulating

policies and controlling current business operations.

2. Definition of Management accounting.

Rober N.Anthony:

“management accounting is concerned with accounting information that is useful to

management”

3. Meaning of financial statement:

it is prepared for the purpose of presenting a periodical review or report of the progress made by

the concerns and deals with state of the investments, in the business and result s achieved during the

accounting period.

4. Definitions for financial statement: [2 Marks]

According to john N.Myer, “ the financial statements provide a summary of the accounts of a

business enterprise, the balance sheet reflecting the assets and liabilities and the income statement show

in the results of operations during a certain period”

5. Tools used in Management accounting?

1.Financial statement analysis.

2.Funds flow statement

3.Cash flow analysis.

4.Costing techniques

Marginal costing Differential costing Standard costing Opportunity costing

5.Budgetary control

6.Managment reporting

6. Feature of Management accounting:

It guides and assists the management in planning the activities of the concern. It evaluates the efficiency and effectiveness of management policies.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Comparison of different data is done expensively. Management is enable to take corrective actions. 7. What is meant by analysis and interpretation of financial statement?

Meaning:

The term analysis means methodical classification of the data given in the financial statements.

The figures given in the financial statements will not help one unless they are put in a simplified form.

The term interpretation means explaining the meaning an significance of the data so simplified.

8. Meaning of comparative financial statement:

Comparative statement can be prepared for both types of financial statements profit and loss

account and balance sheet. The comparative p&l a/c will present a review of operating activities of the

business. The comparative balance sheet the effect of operations on the assets and liabilities.

9. Meaning of common size statement:

Comparative statements that give only the vertical percentage of ratio for financial data without

giving rupee value are known as common size statements. They are also known as 100% statements.

10. Meaning of Trent analysis:

Under this technique of financial analysis the ratio of different items for various periods are

calculated and then a comparison is made. This method determines the directions upward or downwards

and involves the computation of percentage relationship that each statement it bears to the same item in

that year

5 Marks & 10 Marks

1. Objectiveof Management accounting:

1.Planning and policy formulation:

The object of management accounting is to supply necessary data to the management for

formulating plain. Planning is essentially related to taking decisions for future. Management account

prepares statement of past results and gives estimations for future.

2.Helpful in controlling performance:

Management accounting devices like standard costing and budgetary control are helpful in

controlling performance. The work is divided into different units and goals are set up for each unit. The

management accountant acts as a co-coordinating link between different departments andhe also

monitoring their performance to the top management.

3.Helpful in organizing:

Management accounting is connected with the establishment of cost centre, preparation of

budget. Preparation of cost control account and fixing of responsibility for different functions. All these

aspects are helpful in setting up an effective and efficient organizational frame work.

4.Motivation employees:


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Management accounting helps the management in selecting best alternative of doing the thing.

They feel motivated in achieving their targets and further incentives may be given for improving their

performance.

5.Helpful in making Decisions:

Management accounting prepares a report on the feasibility of various alternative and makes an

assessment of their financial implications. The information provided by the accountant helps

management in selecting a suitable alternative and taking correct decisions.

6.Reporting to management:

The management is kept informed through regular financial and other reports. The performance

of various department is also regularly communicated to the top management.

7.Helpfuld in coordination:

Management accounting provides tool which are helpful in coordination the actives of different

sections or department.

8.Helpful in tax administration:

Management accounting helps in assessing various tax liabilities and depositing correct amount

of taxes with the concerned authorities.

2. Nature/ Characteristics of management accounting

1.Providing accounting information:

Management accounting involves the presentation of information in a way it suits managerial

needs. Theaccounting data is used for reviewing various policy decisions. Management accounting is a

service function and it provides necessary information to different levels of management.

2.Cause and Effect analysis:

Financial accounting is limited to the preparation of profit and loss account and finding out the

ultimate result ie., profit or loss Management accounting goes a step further. The “cause and effect”

relationship.

3.Use of special techniques and concept:

The techniques usually used include financial planning and analysis, standard costing, budgetary

control, marginal costing, project appraisal, control accounting etc.,

4.Taking important decisions:

It supplies necessary information to the management which may base its decisions on it.

5.Achieving of objectives:

The recording of actual performance and comparing it with targeted figures will give an idea to

the management about the performance of various department.

6.No fixed norms followed:

No specific rules are followed in the Management accounting.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 7.Increase in efficiency:

The efficiency can be achieved by setting up goals for each department or section.

8.Supplies information and not decisions:

The Management accountant supplies information to the management. The decisions are to be

taken by the top management.

9.Concerned with forecasting:

The Management accounting is concerned with the future. It helps the management in planning

and forecasting. The information is supplied with the object to guide management for taking future

decisions.

3. Scope of Management accounting:

1.Financial accounting:

Management accounting is mainly concerned with the rearrangement of the information provide

by the financial accounting.

2.Cost accounting:

Standard costing, marginal costing, opportunity cost analysis, differential costing and other cost

techniques play a useful role in operation and control of the business undertaking.

3.Revaluation accounting:

This is concerned with ensuring that capital is maintained infact in real terms and profit is

calculated with this fact in mind.

4.Budgeatary control:

This includes framing of budget, comparison of actual performance with the budgeted

performance, computation of variances, finding of their causes etc.,

5.Inventory control:

It includes control over inventory from the time it is acquired till its final disposal.

6.Statistical control:

Graphs, charts, index numbers and other statistical methods make the information more

impressive and intelligible.

7.Interim reporting:

Preparation of monthly, quarterly, half yearly income statement and other related reports, cash

flow and funds flow statement scrap report etc.,

8.Taxation:

This includes computation of income in accordance with the tax laws. Filling of returns and

making tax payments.

9.Office services:


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Maintenance of proper data processing and other office management services, reporting on best

use of mechanical and electronic device.

10.Internal Audit:

Development of a suitable internal audit system for internal control.

4. Functions of Management accounting:

1.Planning:

Plan would include profit planning programmes of capital investment and financing sales

forecasts, expenses budges and cost standards.

2.Controlling:

He has to compare actual performance with operating plans and standards and to report and

interpret the result of operations to all levels of management and the owners of the business.

3.Coordinating;

Management accounting acts as coordinator among different financial department through

budgeting and financial reports.

4.Provides data:

Management accounting serves as a vital source of data for management planning. The

accounting and documents are a repository of a vast quantity of data about the past progress of the

enterprise which are a must for making forecasts for the future.

5.Modifies data:

The accounting data required for managerial decision is properly compiled and classified.

5. Advantage of management accounting:-

1.Helps Decision making:-

Management accounting helps in decision making such as pricing, make or buy, acceptance of

additional orders, select or suitable product mix etc., These important decisions are taken with the helps

to marginal costing techniques.

2.Helps in Planning:-

Planning includes profit planning preparation of budgets, programmes of capital investment and

financing, management accounting assist in planning through budgetary control, capital budgeting and

cost-volume profit analysis.

3.Helps in Organizing:-

Management accounting uses various tools and techniques like budgeting responsibility accounting

and standard costing. A sound organizational structure is developed to facilitate the use of these

techniques.

4.Facilitates Communication:-


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Management is provided with up to date information through periodical reports. These reports assist

the management in the evaluation of performance and control.

5.Helps in Coordinating:-

The functional budgets (purchase budget, sales budget, overhead etc.,) are integrated into one known

as master budget. This facilitates clear definition of departmental gods and co-ordination of their

activities.

6.Evaluation and control of performance:-

Management accounting is a convenient tool for evaluation of performance with the help or ratios and

variance analysis, the efficiency of departments can be measured. Management accounting assists the

management in the location of weak sports and in taking corrective actions.

7.Interpreation of financial information:-

Management accounting presents information in a simple and purposeful manner. This facilities quick

decision making.

8.Economic Appraisal:-

Management accounting includes appraisal of social and economic forces and government policies.

This appraisal helps the management in assessing their impact on the business.

6. Limitations Management accounting:

1.Based on Accounting information:

Management accounting derives information from past financial accounting and cost accounting

records.

2.Wide Scope:

Management accounting has a very wide scope incorporating management disciplines. This

results in accuracy and other practical difficulties.

3.Costing:

The installation of Management accounting system requires a large organizations.

4.Evolutionary Stage:

Management accounting is still in its initial stage tools and techniques are not fully developed.

5.Oppoistion to change;

Introduction of Management accounting system requires a number of changes in the

organization structure rate and regulations.

6.Not an alternative to management:

Management accounting will not replace the management and administration.



7. Needs and importance of management accounting

1.Increase efficiency:

Management accounting increase efficiency of business operation. The targets of different

department are fixed in advance and the achievements of these goals is a tool for measuring their

efficiency.

2.Proper planning:

Management is able to plan various operations with the help of accounting information. The

techniques of budgeting is helpful in forecasting various activities.

3.Measurement of performance:

The performance will be good if actual costs does not exceed the standard cost. Budgetary

control system too helps in measuring efficiency of all employees.

4.Maximising Profitability:

The step of controlling costs are able to reduce cost of production. The profit of the enterprise are

maximized with the help of Management accounting system.

5.Improves services to customer:

The customers are supplied good quality of products becomes good because quality standard are

pre-determined. The customers are supplied good quality goods at reasonable prices.

6.Effective management control:

The tools and techniques of Management accounting are helpful to the management in planning,

coordinating and controlling activities of the concern.

8. Difference between management accounting and financial accounting.

1.Objective:

The main objectives of financial accounting is to supply information in the form of profit and loss

and balance sheet.

But Management accounting is to provide information for internal use of management

2.Performance analysis:

Financial accounting over all performance of the business.

But Management accounting is concerned with the department or divisions.

3.Data used:

Financial Accounting is mainly concerned with the recording of past events.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 But Management accounting is concerned with future plans and polices.

4.Accuracy:

Accuracy is an important factor in financial accounting;

But approximation are widely used in Management accounting.

5.Legal Compulsion:

Financial accounting is compulsory for all joint stock companies.

But Management accounting is only optional.

6.Monetary Transactions:

Financial accounting records only those transitions which can be expressed in terms of money.

But Management accounting records not only monetary transitions.

7.Control:

Financial accounting will not reveal whether plans are property implementations.

But Management accounting will reveal the deviations of actual performance from plans.

9. Difference between cost accounting and Management accounting.

1.Objective:

The cost accounting is the ascertainment and control of cost of products or services.

But Management accounting is to help the management in decisions making, planning, control

etc.,

2.Scope:

Cost accounting deals, primarily with cost data.

But Management accounting deals with both cost and revenue.

3.Data used:

The cost accounting only those transactions which can be expressed in figure are taken.

But Management accounting uses both quantitative and qualitative.

4.Nature:

Cost accounting uses both past and present figures.

But Management accounting is concerned with the prosecution of figures for future.



10. What are the steps required for installing Management accounting systems?

Installation of Management Accounting:

1.Organisational Manual:

Organizational manual should be prepared and adopted. This will clearly explain the duties and

responsibilities of various managerial levels in the organization.

2.Preparing forms and returns:

The second step in installing Management accounting will be the designing and preparing of

various forms and returns for collection and presentation of information for management need.

3.Reuisite staffing:

The staff should be given proper training so that the objectives and implementing techniques are

clear to everyone associated with this system.

4.Classifying accounts and integrating the system:

The accounts are classified to facilitate collection and analysis of data. The financial and cost

accounting systems should be integrated.

5.Introducing standard costing techniques:

Introduced for setting up standards and recording the performance so that reasons for variations

are ascertained and corrective measures and taken in time.

6.Setting up budgetary control system:

Budgetary control system should be introduced to plan the activities of various budgets into a

master budget will help in determining the organizational goals.

7.Setting up operational research techniques:

The business is operating under changing economic. Political and social environment

11. List down the objectives of Financial Statements

Objective of financial statements:

To estimate the earning capacity of the concern To judge the financial [both liquidity and solvency] position and financial performance of the

concern To determine the debt capacity of the concern To decide about the future prospects of the concern.

12. Explain the concept of Financial Statement

Financial statement at least refers to the two statement which are prepared by a business

concern at the end of the year.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Income statement or trading & profit and loss account which is prepared by a business concern

in order to know the profit earned and loss sustained during a specific period.\ Position statement or balance sheet which is prepared by a business concern on a particular date

in order to know is its financial position. To theses statements are added the statement of retained earning and some other statements (as

funds flow statement, cash flow statement etc.,) and schedule of fixes assets (as investment,

equipment) and debtors etc., to give a full view of the financial affairs.

All these statements are collectively called as package of financial statements. Financial

statement is also called financial reports.

13. Explain the nature of Financial statement.

1) Record Facts:

This refers to the data taken out from the accounting records. The original cost or historical cost

is the basis of recording various transactions. The financial statements do not disclose such facts as they

are not recorded in the accounting books whether or nor such facts are material.

2. Accounting convention:

While preparing financial statements certain accounting conventions are followed. The use of

accounting conventions makes financial statements comparable, simple and realistic.

3. Personal judgments:

Although concepts and conventions provide a good guideline to the accountant for taking at a

decisions as to how much should be charged to the profit and loss account of the concern. Year and how

much should be carried forward to the next year as unexpired costs.

4. Postulaters:

The accountant makes certain assumptions while making accounting records. One of these

assumption is that the enterprise is treated as a going concern.

14. Explain the limitations of financial statement.

Limitations of financial statement:

A balance sheet described as a statement of all assets and liabilities. Balances sheet does not disclose information relating to changes in management, loss of market

etc., The balance sheet are on a historical basis. Personal judgment play a great part in determining the figures for the balance sheet. The precision of financial statement data is not possible because the statement deal with matters

which cannot be precisely stated. Financial statement do not give a final picture of the concerns. The data given in these statement is only approximate.

15. The tools in analysis and interpretation of financial statement.

1. Comparative financial statement:

Comparative statements can be prepared for both types of financial statement profit and loss

account and balance sheet. The comparative profit and loss account will present review of operating


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 activities of the business. The comparative balance sheet shows the effect of operation on the assets and

liabilities.

2.Common size statement:

Comparative statements that give only the vertical percentage of ratio for financial data with out

giving rupee value are known a common size statement.

The common size statement may be prepared in the following way

1. The total of assets or liabilities are taken as 100

2. The individual assets are expressed as a percentage of total assets.

3.Trend analysis:

This method determines the direction upwards or downwards and involves the computation of

the percentage relationship that each statement items bears to the same item in that year.

4.Average analysis:

It is an important over trend analysis method. When trend ratio have been determined for the

concern. These figures are compared with industry average.

5.Statement of changes in working capital:

The main objective of this statement preparation is to derive a fairly accurate summary of the

events that affected the amount of working capital is determined by deducting the total of current

liabilities form the total of current assets.

6.Funds flow analysis:

It is very useful in planning immediate and long term financing. It is an important tool of working

capital analysis also.

7.Cash flow analysis:

It is important tool of cash planning and control. At the same time it serves as a valuable tool of

financial analysis also.

8.Ratio analysis:

Ratio is relationship expressed in mathematical terms between figures which are connected with

each other in some manner.



Unit 2 (RATIO ANALYSIS)

2 Marks

1. Definition of Ration:

According to accountant’s Hand book by wixon kell and Bedford a ratio “is an expression of the

quantitative relationship between two members”

2. Meaning of Ratio:

Ratios are relationship expressed in mathematical terms between figures which are connected

with each other in some manner.

3. Nature of Ratio Analysis:

Analysis of financial statements is a process of evaluating relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance.

Financial analysis is used as a device to analyze and interpret the financial health of enterprise. The absolute accounting figures reported in the financial statements do not provide a meaningful

understating of the performance and financial performance of a firm. An accounting figure conveys meaning when it is related to some other relevant information.

4. Steps in Ratio Analysis:

The financial is to select the information relevant to the decision under consideration from the statements and calculates appropriate ratios.

To compare the calculated ratios with the ratios of the same firm relating to past or with the industry ratios. This step facilitates in assessing success or failure of the firm.

It involves interpretation, drawing of inferences and report writing. Conclusions are drawn after comparison in the shape of report or recommended course of action.

5 Marks & 10 Marks

1. Advantages of Ratio:

1.Simplifies financial Statement:

Ratio analysis simplifies the comprehension of financial statements. It explains whole story of

changes in the financial condition of the firm.

2.Help measuring performance and position:

Through leverage and solvency ratios. Ratio analysis helps in assessing the financial position of a

firm.

3.Facilitates intra-firm comparison:

Comparison of ratios of the same firm over a period of years can be made. This with help to

know whether the financial performance is improving.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 4.Helps in forecasting and planning:

Profitability ratio indicate trends in costs sales, profit etc., the ascertainment of trends helps in

making forecast. Such financial forecasts are useful in planning.

5.Helps in coordination:

Ratio analysis communicates the financial strength or weakness of a firm in a more easy and

under stand able manner. Such a clear communication helps in better coordination in the enterprise.

6.Helps in control:

Comparison of actual ratio with the standards levels. The deviations and weaknesses. The helps

the management to take corrective action at the right time. Control of cost as well as performance are

ensured.

2. Limitations of ratio analysis:

1.Inadequacy of standard:

Ratios are useful only if they are compared with some standard. But adequate standards like

industry average are not easily available.

2.Limitation of financial statement:

Ratios are based only on the information recorded in the financial statements. Financial

statements suffer from a number of limitations.

3.Ratio alone are not adequate:

Ratios are only indicators. They cannot be taken as final regarding good or bad financial position

of the firm.

4.Difficulty in comparison:

It is difficult to have similar companies for comparison. Even if similar companies are available

their accounting periods may differ. This makes inter firm comparison difficult.

5.Problem price level changes:

Ratio analysis does not take in to account the effects of changes in price level.

6.Window dressing:

Financial statement can easily be window, dressed to present a better picture of the

financial and profitability positions. It is very difficult for an outsider to know about the window dressing

made by a company.

7.Personal bias:

Ratios are only a means of financial analysis. They have to be interpreted and different

people may interpret the same ratio in different ways.

8.No Fixed standards:

No fixed standards can be laid down. Ex: ideal current ratio is said to be 2:1


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 9.No indicators of future:

Ratios are generally calculated from past financial statements. Hence they are no indicators of the

future..

3. Classification of Accounting Ratio:

I.Classification according to statement:

1.Profit and loss account ratio:

Ratio calculated on the basis of the items of the profit and loss account only.

Ex: Gross profit ration and Net profit ratio.

2.Balance sheet ratio;

Ratios calculated on the basis of the figures of the balance sheet only.

Ex; Current Ratio, Quick Ratio, Proprietary Ratio etc.,

3.Composite Ratio:

Ratios based on figures of profit and loss account as well as the balance sheet.

Ex: Debtors and Creditors turnover Ratio, return on capital employed

II. Classification according to Functions:

1.Solvency Ratio:

Short term and long term solvency ratio.

Ex; Current Ratio, Quick Ratio, Dept equity Ratio etc.,

2.Profitability Ratio:

Ex: Gross profit ration and Net profit ratio, Operating profit ratio, return on capital employed.

3.Turnover or Activity ratio:

Stock turnover ratio, debtors turnover ratio, creditors turnover ratio.

4.Capital structure ratio:

Ex: Capital gearing ratio.

Unit 3 (FUND FLOW AND CASH FLOW STATEMENT)

1. Meaning of funds:

Funds means all financial resources used in the business, whether in the form of men, material,

machinery, money and others. It refers to the money values in whatever form it may exist.

2. Definition of Funds flow statement [FFS]:

According tofoulke, “ a statement of sources and application of fund is a technical device

designed to analyses the changes in the financial condition of a business enterprise between two dates”


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 3. Meaning funds flow statements:

The funds flow statement is a report on the movement of funds or working capital. It explains how

working capital is raised and used during an accounting period.

4. Concept of Flow of Funds:

The term ‘flow’ means change and therefore the term ‘flow of funds’ means ‘change in funds’ or ‘change

in working capita’. In other words ‘flow of funds’ means any increase or decrease in working capital. If

the transaction results in the increase of funds it is called a source of funds; if it results in the decrease of

funds it is know as an application of funds. If the transaction does not affect the working capital there is

no flow of funds.

5. What is meant by working capital?

Working capital refers to the capital required for the day-to-day operations of a business. It is the

excess of current assets over current liabilities. Adequate working capital is necessary for the successful

running of any organization. The management must forecast the working capital requirements in

advance and arrange for financing them

6. Meaning funds flow statements:

The funds flow statement is a report on the movement of funds or working capital. It explains how

working capital is raised and used during an accounting period.

7. Objectives or Managerial uses of Funds flow statement [FFS]:

Funds flow statement is a total of managing working capital. It gives us a picture about the changes in working capital It helps to fund out funds flow operation It reveals the sources of working capital. It also reveals the application of fund It helps the borrowing operations. Funds flow statement reveals the plus and minus points in the management of working capital.

8. Limitations of Funds flow statement [FFS]

It should be remembered that a Funds flow statement [FFS] is not a substitute of an income statement or a balance sheet. It provides only some additional information as regards changes in working capital.

It cannot reveal continuous changes It is not an original statement but simply are arrangement of data given in the financial

statements. It is essentially historic in nature and projected funds flow statement cannot be prepared with

much accuracy. Changes in cash are more important and relevant for financial management than the working

capital.

9. Meaning of non-current assets:

All assets other than current assets come within the category of non-current assets. It include all

fixes assets intangible assets and fictitious assets.

10. Meaning of cash flow statement:

Cash flow analysis considers the changes in the cash position of a business enterprise.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 Cash flow statement is prepared to show the impact of various transactions on the cash position of the

firm. It takes into account only transactions immediately resulting in cash inflow and cash out flow.

11. What are the Non-Current liabilities?

share capital debentures profit and loss credit balance reserves

12. What are the Current liabilities?

sundry creditors bank over draft bills payable provisions for tax proposed divided out standing

13. What are the Non-Current Assets?

fixed assets investments long term investments

14. Explain the term of current assets.

Current assets are those assets which can be converted into cash within a year.

Current assets:

cash in hand cash at bank sundry debtors bills receivable working progress/ stock/inventories

5 Marks and 10 Marks

1. Items of sources and uses of funds.

Sources of funds:

1. Funds from operations or trading profit:

Trading profit or the profit from operations of the business are the most important and major

source of funds.

2. Issue of share capital:

If during the year there is any increase in the share capital, whether preference or equity it

means capital has been raised during year. Issue of share is a sources of funds as in constitutes inflow of

funds.

3. Issue of debentures and raising of loans etc:

Issue of debentures or raising of loans whether secured or unsecured results in the flow of funds

in to the business. Loans raised for consideration other than a current assets, such as for purchase of

building, will not constitute inflow.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 4. Sale of fixed [non-current] Assets and long term or trade investments:

Any fixed or non current assets like land building, plant and machinery, furniture long term

investments etc., are sold it generates funds and becomes a sources of fund.

5. Non trading receipts:

Any non- trading receipt like divided received, refund of tax, rent received, etc, also increase

funds and is treated as a sources of funds because such as income is not included in the funds from

operations.

6. Decrease in working capital:

If the working capital decrease during the current period as compared to the previous period it

means that there has been a release of funds from working capital and it constitutes a source of funds.

Uses or Applications of funds:

1. Funds lost in operations:

Such loss of funds in trading amounts to an outflow of funds and is treated as an application of

funds.

2. Redemption of preference share capital:\

If share are redeemed in exchanges of some other type of shares or debentures. It does not

constitute an outflow of funds as no current account is involved in that case.

3. Repayment of loans or redemption of debentures etc:

Redemption of debentures or repayment of loans also constitute an application of funds.

4. Purchase of any non current assets or fixed assets:

Any fixed or non current asset are purchased, fund outflow from the business.

5. Payment of dividends and tax:

Payments of dividends and tax are also applications of funds.

6. Any other non trading payments:

Any payment or expenses not related to the trading operations of the business amounts to

outflow of funds and is taken as applications of funds.

2. Significance and importance of Funds flow statement

1. It helps in the analysis of financial position:

The Funds flow statement [FFS] explains causes for such change and also the effect of these

changes on the liquidity position of the company.

2. It helps in the formation of the realistic divided policy:

A firm has sufficient profits available for distribution as divided but yet it may not be advisable to

distribute dividend for lack of liquid or cash resources.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 3. It helps in the proper allocation of resources:

The resources of a concern are always limited and it wants to make the best use of these

resources. A projected funds flow statement constructed for the future helps in making managerial

decisions.

4. It acts as a future guide:

The management can come to know the various problems it is going to face in ear future for want

of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these

needs.

5. It helps in apprising the use of working capital:

a funds flow statement helps in explaining how efficiently the management has used its working

capital and also suggest ways to improve working capital of the firm.

6. It helps knowing the overall credit worthiness of a firm:

The financial institutions as a banks such as sate financial institutions. IDC,IFCI,IDBI and etc., all

ask for Funds flow statement [FFS] constructed for a number of years before granting loans to know the

credit worthiness and paying capacity of the firm.

3. Explain the factors which influence working capital needs of a business

The requirements of working capital depend on the following factors.

1. Nature of the Business: In the case of public utility concerns like railways, electricity etc. most of the transaction are on

cash basis. Further they do not require large inventories. Hence their working capital requirements

are low. On the other hand, manufacturing the trading concerns require more working capital since

they have too invest heavily in inventories and debtors. (Example Cotton or Sugar Mill).

2. Size of the Business: Generally large business concerns are required to maintain huge inventories for the flow of

business. Hence, bigger the size, the larger will be he working capital requirement.

3. Time Consumed in Manufacture: To run a long production process more inventory is required. Hence the longer the period of

manufacture, the higher will be the requirements of working capital and vice verse.

4. Seasonal Fluctuations: A number of industries manufacture and sell goods only during certain seasons. For example,

the sugar industry produces practically all sugar between December and April. Their working capital

requirement will be higher during this season. It is reduces as the sales are made and cash is realised.

5. Fluctuations in Supply: If the supply of raw materials is irregular, companies are forced to maintain huge stocks to avoid

stoppage of production. In such a case, working capital requirement will he high.

6. Speed of Turnover: A concern (say a hotel) which effects sales quickly needs comparatively low working capital. This is

because of the quick conversion of stock into cash. But if the sales are slow, more working capital will

be required.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 7. Terms of Sales:

Liberal credit sales will result in locking up of funds in sundry debtors. Hence, a company which

allows liberal credit will need more working capital than a company which observes strict credit

norms.

8. Terms of Purchase: Working capital requirements are also affected by the credit facilities enjoyed by the company.

A company enjoying liberal credit facilities form its suppliers will need lower amount of working

capital (for example: book shop). But a company which has to purchase only for cash will need more

working capital

9. Labour Intensive Vs. Capital Intensive Industries: In labour intensive industries, larger working capital is required because of heavy wage bills and

more time taken for production. But the capital intensive industries require lesser amount of

working capital because of the heavy investment in fixed assets and shorter time taken for

production.

10. Growth and Expansion of Business: A growing concern needs more working capital to finance its increasing activities and expansion.

But working capital requirement are low in the case of static concerns.

4. Distinction of Cash from Funds:

Cash:

Cash plays a vital role in the economic activities of a business. In a day to day activities a firm needs cash to make payment for wages, salaries and other

expenses etc., It is very essential to maintain adequate balance of cash.

Funds:

Funds are the economic values that changes hands in business transactions or that exists in the business.

Funds mean just the cash on hand and cash at bank. Funds 1.sources and application of funds.2.Sources and uses of funds3.movements of working

capital 4. Movements of funds statement 5. Distinction between funs flow and cash flow statement

Funds flow statement Cash flow statement 1 It is based on wider concept of funds

ie working capital it is based on a narrows concepts ie cash

2 Overall changes in working capital is recorded

Only cash receipts and payments are recorded

3 It shows the causes of the changes in working capital

It shows the causes for changes in cash position

4 It is based on accrual basis of accounting

It is based on cash basis of accounting

5 It is appropriate for long range planning

It is appropriate for shot range planning

6 Schedule of changes in working capital is prepared

No such schedule is prepared

7 Inflow of funds may not necessarily Inflow of cash results in inflow of funds 8 The net difference represents net The difference of represents the closing


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 increase or decrease in working capital

balance of cash.

Unit 4 (BUDGET AND BUDGETARY CONTROL)

2 Marks

1. Meaning of budget:

A budget is a detailed plan of operations for some specific future period. A budget is written plan

covering projected activities of a firm for a particular duration. It is a monetary and or quantitative

expression of business plans and policies to be pursed in the future period of time.

A budget is a numerical statement expressing the plans, policies and goals for a definite future

period. A budget is a blue print of a plan expresses in quantitative terms. It forms the basis for the

budgetary control

2. Definition of budget:

According to Gordon “ a predetermined detailed plan of action developed and distributed as a

guide to current operations and as a partial basis for the subsequent evaluation of performance”

The charactered institute of management accountants, london Define a budget as “a financial and

or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during

the period for the purpose of attaining a given objective”

3. Features of Budget:

It is a statement is terms of money or quantity or both It is prepared for a definite future period It is prepared prior to a definite period It pertains to the policy to be followed in future Its purpose is to attain a given objective.

4. Budgeting meaning:

Budgeting means the process of preparing budgets. It is the technique of formulating

budgets or it is an art of planning.

5. Definition of Budgeting:

ICMA, England defines budget as, “ a financial and / or quantitative statement, prepared and

approved prior to a defined period of time, of the policy to be pursued during that period for attaining a

given objective”

6. Characteristics of Budgeting:

A good budgeting system should involve persons at different levels while preparing the budget Authority and responsibility should to properly fixed The target of the budgets should be realistic The system should get the whole hearted co-operation of the top management Employees should be imparted budget education A proper reporting system should be introduced and the actual results should be promptly

reported, so that performance appraisal is undertaken.



7. Meaning of Budgetary control:

The establishment of budgets relating to the responsibilities of executives to the requirement of a

policy, and a continuous comparison of actual with budgeted results either secure by individual action

the objectives of that policy or to provide basis for its revision.

8. Definition of Budgetary control:

J. Batty defines budgetary control as “a system which used budgets as a means of planning and

controlling all aspects of producing and or selling commodities and services”

5 Marks & 10 Marks

1. Advantages of Budgetary control:

Budgetary control system defines the policies and objectives of the undertaking as a whole. It co ordinates the activities of different department It develops the systematic organization by establishing responsibilities and authorities to

department and executives. It leads to planned allocation of scarce resources and production facilities It sets out plans of action and targets to be achieved by the department as well as individuals. Therefore everyone knows for what he is responsible and how much he should do for it for

which a team spirit will be developed. It promoters efficiency of and economy by creating cost consciousness among employees. It helps in measuring the efficiency of department and individuals in achieving the budget

targets. It facilitates centralized control with decentralize activity It facilitates introduction of standard costing It acts as an internal audit It reveals whether the things are moving in right direction or not by pinpointing deviation of

actual results from budgets.

2. Limitations Or Disadvantages of Budgetary control:

Budgets are prepared for the future period. Future maybe uncertain the situation which is presumed to prevail in future may change upsetting the entire budget.

Budgets are prepared on the assumption More efficient persons become less efficient because if target fixed in budget is low. It depends on the support of top management.

3. Essential of Budgetary control:

1. A clearly defined organization: There should be a sound plan of organization with well defined

responsibilities.

2. A well defined policy: The policy of the management should be well defined in clear and

unambiguous terms.

3. Budget education: Everyone in the organization should know the working of the budget

programme and its benefits. They should be educated about their role in the success of this

system.

4. Proper delegation of authority and Responsibility: Budget preparation and control is done at

every level of management.

5. Effective communication system:The flow of information regarding budgets should be quick so

that there are properly implemented.

6. Flexibility: Flexibility will make the budgets more appropriate and realistic.

7. Motivation: A proper system of motivation should be introduced for making it a success.


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 8. Logical sequence in budget preparation: It is essential that proper arrangements be made for

the preparation, submission, examination and review of budget figures in logical consequence.

9. Participation of All employees: Budgeting requires active participation and involvement of all

employees in the organization.

4. Explain the types of budget.

Types of budget:

1. Master budget:

This budget is also know as summary budget or the finalized budget plan. This budget gives the

overall budget plan for the guidance of the management.

Definition of Master budget: ‘a summary of the budget schedules in form made for the purpose of

presenting in one report, the highlights of the budget forecast”

Advantages:

It helps to check the accuracy of all the functional budget It gives the projected balance sheet of the organization. It gives an estimated profit position of the concern for the budget period. A summary of all functional budgets in capsule form is available in one report. 2. Fixed budgets:

This budget is drawn for one level of activity and some set of conditions, on the assumption that

the forecast for a business activity will prove correct.

Definition;

“a budget designed to remain unchanged irrespective of the level of activity actually attained”

3. Flexible budget:

Flexible budget is one which is prepared in such a manner as to facilitate determination of the

budgeted cost for any level of activity.

Definition:“a budget designed to change in accordance with the level of activity actually attained”

4. Sales budget:

A sales budget is an estimate of expected sales during a budget period. It is the most important

budget and is expressed either in monetary or in quantitative terms.

5. Selling and distribution budget:

This budget includes all expenses relating to selling, advertising and distribution of goods. It is

related to sales budget and is prepared by the sales manger with the help of the adverting manager and

etc with necessary information regarding the expected changes due to change in sales as per sales budget.

6. Purcahse budget:

This budget may be expressed in terms of money or of quantity, the expected purchases of raw

materials to be made during the budget period. This budget based on sales budget production cost

budget, minimum and maximum stock level EOQ etc.,


Follow Us on Twitter Visit www.twitter.com/dhinagaran111 7. Production budget:

It is prepared in relation to the sales budget. It determine the quantity of goods which should be

produced to meet the budgeted sales. The production budget is prepared for the number of units to be

produced and also for the cost to incurred on material, labor and factory overhead.

8. Production cost budget:

The production cost budget is the total amount to be spent on producing the units stipulated in

the production budget. The cost of production includes direct material and direct labor and direct

expenses. Including factory over head.

9. Raw material budget:

The budget is concerned with determining the quantity of raw material required for production.

To give an idea about the total requirements of raw materials. To provide information about the position of stock To determine the cost of different types of raw material To supply necessary data to the purchase department for their purchase programme.

10. Cash budget:

It is also known as financial budget. It is a plan of estimated receipts and payments of cash for

the budget period.

Cash budget is defined “ an analysis of flow of cash in a business over a future, short or long

period of time. It is a forecast of expected cash intake and outlay”

Advantages:

Expected total receipts and total payment of cash are available in one statement. The investment in capital expenditure may be planned on the basis of expected availability of

cash on future date. Funds from external source such as bank loan can be arranged, if shortage of funds is anticipated

in advance.

5. Distinction between fixed and flexile budget

Fixed budget Flexible budget 1 A fixed budget remains the same

irrespective of the level of output A flexible budget will vary in accordance with the level of output

2 A fixed budget assumes that conditions will remain constant

This budget is changed if level of activity varies

3 In fixed budget costs are not classified according to their nature

The costs are classified into fixed, variable and semi variable.

4 Under changed circumstances cost cannot be ascertained

Cost can be easily ascertained under different level of activities which help in fixing prices.

5 The level of activity changes, the budgeted and actual results cannot be compared because of change in basis

The budget are redrafted as per changed and comparison between budgeted and actual figures will be possible.

*********All the Best********* Thanks and Regards… By Dhinagaran, Jayarajan & Gnanaprakash

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