financial & mngmt acc

MB0041-FINANCIAL AND MANAGEMENT ACCOUNTING

Q.(1) Analyze the following transaction under traditional approach.

ANS.

1) 18.1.2011 Received a cheque from a customer, Sanjay at 5 p.m. Rs.20,000

2) 19.1.2011 Paid Ramu by cheque Rs.1,50,000

3) 20.1.2011 Paid salary Rs. 30,000

4) 20.1.2011 Paid rent by cheque Rs. 8,000

5) 21.1.2011 Goods withdrawn for personal use Rs. 5,000

6) 25.1.2011 Paid an advance to suppliers of goods Rs. 1,00,000

7) 26.1.2011 Received an advance from customers Rs. 3,00,000

8) 31.interest on loan Rs. 5,000

9) 31.1.2011 Paid installment of loan Rs. 25,000

10) 31.1.2011 Interest allowed by bank Rs. 8,000

ANS.

Q.(2) The trial

balance of Nilgiris Co Ltd., has taken on 31st December, 2002 did not tally and the difference was carried to suspense account. The following errors were detected subsequently.

a) Sales book total for November was under cast by Rs. 1200.

b) Purchase of new equipment costing Rs. 9475 has been posted to Purchases a/c.

c) Discount received Rs.1250 and discount allowed Rs. 850 in September 2002 have been posted to wrong sides of discount account.

d) A cheque received from Mr. Long ford for Rs. 1500 for goods sold to him on credit earlier, though entered correctly in the cash book has been posted in his account as Rs. 1050.

e) Stocks worth Rs. 255 taken for use by Mr. Dayananda, the Managing Director, have been entered in sales day book.

S.No. Accounts Involved Nature of Account

Affects Debit/Credit

1. Cash a/c

Sanjay a/c

Real

Personal

Cash (Cheque) is coming in Sanjay is the giver

Debit

Credit

2. Ramu a/c

Bank a/c

Personal

Personal

Ramu is the receiverBank is the giver

Debit

Credit

3. Salary a/c

Cash a/c

Nominal

Real

Salary is an expenseCash is going out

Debit

Credit4. Rent a/c

Bank a/c

Nominal

Personal

Rent is expense

Bank is the giver

Debit

Credit5. Drawings a/c

Purchase a/c

Personal

Nominal

Sanjay is the receiverDecrease is stock

Debit

Credit6. Adv. To Suppliers a/c

Cash a/cPersonal

Real

Suppliers are the receiverCash is going out

Debit

Credit7. Cash a/c

Advance from customers a/c

Real

Personal

Cash is coming inCustomers are givers

Debit

Credit

8. Interest on loans a/c

Cash a/c

Nominal

Real

Interest is expense

Cash is going out

Debit

Credit9. Loan a/c

Cash a/c

Personal

Real

Lender is the receiverCash is going out

Debit

Credit

10. Bank a/c

Bank interested a/c

Personal

Nominal

Bank is the receiverBank interest is an income

Debit

Credit

f) While carrying forward, the total in Returns Inwards Book has been taken as Rs. 674 instead of Rs. 647.

g) An amount paid to cashier, Mr. Ramachandra, Rs. 775 as salary for the month of November has been debited to his personal account as Rs. 757.

Pass journal entries and draw up the suspense account.

ANS.

Date Particulars LF Debit Rs.

Credit Rs.

31.12.2002 Suspense a/c Dr

To Sales a/c

(Being under casting of sales book rectified)

1200

1200

31.12.2002 New Equipment a/c Dr

To Purchase a/c

(Being wrong debit given to purchase account rectified)

9475

9475

31.12.2002 Discount allowed a/c Dr

Suspense a/c

To Discount received a/c

(Discount received and discount allowed posted to wrong sides of discount a/c rectified

1700

800

2500

31-12-2002 Suspense a/c Dr

To Langford’s a/c

(Being short credit given to Langford rectified)

450

450

31.12.2002 Sales a/c Dr

To Suspense a/c

(Being stock used for personal purpose wrongly credited to sales account rectified)

255

255

31.12.2002 Suspense a/c Dr

To Returns Inwards a/c

(Being excess debit given to returns inwards account to the extent of Rs27, now rectified)

27

27

31.12.2002 Salary a/c Dr

To Ramachandra‘s a/c

To Suspense a/c

(Being the wrong debit of salary to the personal account of Ramachandra now rectified)

775

757

18

Q.(3) From the given trial balance drafts an Adjusted Trial Balance.

Trial Balance as on 31.033.2011

Debit balances Rs. Credit balance Rs.

Furniture and Fittings

10000 Bank Over Draft 16000

Buildings 500000 Capital A/C 400000

Sales Return 1000 Purchase Returns 4000

Sundry Debtors 25000 Sundry Creditors 30000

Purchases 90000 Commission 5000

Advertising 20000 Sales 235000

Cash 10000

Taxes and Insurance 5000

General Expenses 7000

Salaries 20000

TOTAL 690000 690000

A

Adjustments:

1. Charge depreciation at 10% on Buildings and Furniture and fittings.

2. Write off further bad debts 1000

3. Taxes and Insurance prepaid 2000

4. Outstanding salaries 5000

5. Commission received in advance1000

ANS. Ledger accounts

Dr. Furniture and fittings a/c Cr.

Particulars Rs. Particulars Rs.

To bal b/d 10000 By Depreciation

By bal c/d

1000

9000

Total 10000 Total 10000

To bal b/d 9000

Dr. Buildings a/cCr.

Particulars Rs Particulars Rs.

To bal b/d 500000 By Depreciation

By bal c/d

50000

450000


To bal b/d 450000

Bad Debts a/c

Dr.Cr.


To bal b/d 25000 By Bad Debt.

By bal c/d

1000

24000


To bal b/d 24000

Sundry Debtors a/c Dr.Cr.

Taxes and Insurance a/c

Dr. Cr.


To bal b/d 5000 By Prepaid taxes and Insurance

By bal c/d

2000

3000



To bal b/d

To Sundry Debtors

2000

1000 By bal c/d 3000


By bal b/d 3000

To bal b/d 3000

Prepaid taxes and Insurance a/c

Dr.Cr.

Particulars Rs Particulars Rs

To Taxes and Insurance 2000 By bal c/d 2000


To bal b/d 2000

Salaries a/c

Dr.Cr.

Particulars Rs Particulars Rs

To bal b/d

To Outstanding Salaries

20000

5000

By bal c/d 25000


By bal b/d 25000

Outstanding Salaries a/c

Dr.Cr.


To bal c/d 5000 By Salaries 5000


By bal b/d 5000

Depreciation a/c

Dr.Cr.


To Furniture and fittings

To Buildings

1000

50000

By bal c/d 51000


By bal b/d 51000

Commission a/c

Dr.Cr.


To Commission received in advance

To bal c/d

1000

4000

By bal b/d 5000


By bal b/d 4000

Commission received in advance a/c

Dr.Cr.


To bal c/d 1000

By Commission 1000


By bal b/d 1000

Adjusted Trial Balance as on 31.03.2011

Debit balances Rs. Adjustments Adjustments Amount

Furniture and Fittings 10000 -1000 9000

Buildings 500000 -50000 450000

Sales Returns 1000 1000

Bad Debts 2000 +1000 3000

Sundry Debtors 25000 +1000 24000

Purchases 90000 90000

Advertising 20000 20000

Cash 10000 10000

Taxes and Insurance 5000 -2000 3000

General Expenses 7000 7000

Salaries 20000 5000 25000

Depreciation - 1000+50000 51000

Prepaid Taxes and Insurance - 2000 2000

TOTAL 690000 695000

Credit balances Rs.

Bank Over Draft 16000 16000

Capital Account 400000 400000

Purchase Returns 4000 4000

Sundry Creditors 30000 30000

Commission 5000 -1000 4000

Sales 235000 235000

Outstanding salaries - 5000 5000

Commission received in advance - 1000 1000

TOTAL 690000 695000

Q.(4) Compute trend ratios and comment on the financial performance of Infosys Technologies Ltd. from the following extract of its income statements of five years.

(In Rs. Crore)

Particulars 2010-11 2009-10 2008-09 2007-08 2006-07

Revenue 27,501 22,742 21,693 16,692 13,893

Operating Profit (PBIDT)

8,968 7,861 7,195 5,238 4,391

PAT from ordinary activities

6,835 6,218 5,988 4,659 3,856

(Source: Infosys Technologies Ltd. – Annual Report)

ANS.

Infosys Technologies Ltd.

Trend Analysis

Particulars 2010-11 2009-10 2008-09 2007-08 2006-07

Revenue 27,501 22,742 21,693 16,692 13,893

Operating Profit (PBIDT) 8,968 7,861 7,195 5,238 4,391


6,835 6,218 5,988 4,659 3,856

Trend ratios

Revenue 197.95 163.14 156.14 120.15 100

Operating Profit (PBIDT) 204.24 179.03 163.86 119.29 100


177.26 161.26 155.29 120.82 100

Conclusion: The Revenue and Operating Profit (PBIDT) have almost doubled in four years. The PAT from ordinary activities has increased by 77.26% in the same period.

Q.(5) Give the meaning of cash flow analysis and put down the objectives of cash flow analysis. Explain the preparation of cash flow statement.

ANS. Cash Flow Analysis: Cash flow analysis is an important tool of financial analysis. It is the process of understanding the change in position with respect to cash in the current year and the reasons responsible for such a change. Incidentally, the analysis also helps us to understand whether the investing and financing decision taken by the company during the year are appropriate are not.

Cash flow analysis is presented in the form of a statement. Such a statement is called a cash flow statement.

Objectives of Cash Flow Analysis:

a. What is the change in the cash position of the firm for the current year as compared to the previous year?

b. How good was the liquidity position of the firm?

c. What were the sources of cash during the current year?

d. How much cash was generated from operations?

e. What were the applications of cash during the current year?

f. How much cash was spent on investment activities, such as purchase of new plant and machinery, purchase of land?

Preparation of cash flow analysis: The preparation of cash flow statement is similar to the preparation of fund flow statement. It requires the identification of the sources of cash and the uses of cash. A source of cash is a transaction which brings an inflow of cash. An application of cash is a transaction which leads to an outflow of cash.

Sources of cash:

a. Cash from operations

b. Proceeds of issue of

(i) Equity shares, (ii) Preference shares

c. Proceeds of issue of

(i) Debentures, (ii) Bonds

d. Raising long-term debts from banks and financial institutions

e. Raising mortgage loans (long-term)

f. Sale of assets

(i) Tangible assets like land, buildings, equipment’s, machinery, vehicles, etc.

(ii) Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.

g. Sale of investments like shares, bonds, debentures, etc.

Applications or uses of cash:

a. Cash lost in operations (adjusted net loss)

b. Buy back of equity shares

c. Redemption of redeemable preference shares

e. Redemption of redeemable bonds or debentures

f. Repaying of long-term debts from banks and financial institutions

g. Repaying of mortgage loans (long-term)

h. Purchasing of assets

(i) Tangible assets like land, buildings, equipment’s, machinery, vehicles, etc.

(ii) Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.

Q.(6) Write the assumptions of marginal costing. Differentiate between absorption costing and marginal costing.

ANS. Assumptions of Marginal Costing:

1. Segregation of cost into fixed and variable: The whole principle of marginal costing is based on the idea that some costs vary with production while some costs don’t. Therefore, it is assumed that a clear bifurcation between fixed and variable costs is possible. Even if some costs do not entirely qualify as fixed or as variable, it is still possible to separate such mixed cost with respect to the amount, which remains fixed and the amount which varies with production.

2. Volume is the only factor which influences the cost: It is assumed that other factors like the demands, tastes, and preferences of consumers, availability of substitute products, availability and price of inputs, etc. are constant. Hence, volume is the only factor which influences the cost.

3. Constant selling price: It is assumed that the selling price will be constant for any level of sales.

4. Constant total fixed cost: It is assumed that the total fixed cost will be constant for any level of production.

5. Constant variable cost per unit: It is assumed that the variable cost per unit will be constant for any level of production.

6. No closing stock: It is assumed that the firm will be able to sell all its production. All the units produced would be sold. Hence, there would be no opening and closing stocks.

7. Linear relationship between costs and revenues: It is assumed that the costs and revenues are linearly related to volume. The change in costs and revenues is proportionate to the change in volume (number of units sold).

Differences of marginal and absorption costing:

Absorption Costing Marginal Costing

It is known as full costing. Both fixed and variable are included to ascertain the cost.

Only variable costs are included. Fixed costs are recovered from contribution.

Different unit costs are obtained at different levels of output because of fixed expenses remaining the same.

Marginal cost per unit remains same at different levels of output because variable expenses vary in the same proportion in which output varies.

Difference between sales and total cost (marginal cost and fixed cost) is profit.

Difference between sales and marginal cost is contribution and difference between contribution and fixed cost is profit or loss.

A portion of fixed cost is carried forward to the next period because closing stock of work-in-progress and finished goods are valued at the cost of production, which is inclusive of fixed cost.

Stock of work-in-progress and finished goods are valued at marginal cost. Fixed cost of a particular period is charged to that very period and is not carried over to the next period.

The apportionment of fixed expenses on an arbitrary basis gives rise to over or under absorption of overheads.

Products are charged only with variable cost, hence marginal costing does not lead to over or under absorption of fixed overheads.

It affects managerial decisions in certain areas. E.g., whether to accept the export order or not, whether to buy or manufacture, etc.

It is very helpful in taking managerial decisions. It considers the additional cost involved, assuming fixed expenses to remain constant.

Costs are classified according to functional basis such as production cost, office and administrative cost, and selling and distribution costs.

Costs are classified according to the behaviour of costs – fixed costs and variable costs.

It fails to establish relationship of cost, volume, and profit.

CVP relationship is an integral part of marginal costing.

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