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Short Answer Questions
1. Define accounting. Why is it called language of business?
Accounting is defined as ―an art of recording, classifying and summarizing
transactions and events in a significant manner and in terms of money. It is
called language of business because the financial performance and the
financial position of any company need to be conveyed to the stakeholders of
any business concern. This can be done by systematically preparing the
financial statements and presenting to the interested parties.
2. State the significance of prudence principle?
It is also termed as ‗Conservatism convention‘, according to which ―anticipate
no profit but provide for all possible losses‖, such as Provisions for Bad debts
and discount on debtors, so that the profits are not inflated.
Hence secret reserves are not permitted.
3. Distinguish ‘grouping’ and ‘marshaling’ of assets and liability.
Grouping means putting together items in Balance Sheet of similar nature
under a common heading.
Marshalling refers to order in which assets and liabilities are shown in B/S
either in order of liquidity or permanency.
4. What is meant by dual aspect of accounting system?
Dual aspect of Accounting describes that every transaction should have two
aspects. Two aspect of transaction are Debit and Credit. Every ‗debit‘ has a
corresponding credit so the total of all debits must be equal to total of all
credits.
5. What is journal and imprest system of petty cash book?
The advance paid in the beginning of the period and reimbursement of the
amount spent for petty expenses, so that the same amount will be
maintained for meeting the petty expenses, is referred as ―imprest‖ System.
In journal system, recording of transaction not only be inconvenient but also
consume a lot of valuable time of the cashier. At the end of month, Petty
cashier submits a statement of account of expenses incurred by him and gets
a fresh advance.
6. Define fixed cost and variable cost?
Fixed Costs are the costs that don‘t change with changes in the activity level
e.g. salaries & rent.
Variable costs are the costs that are sensitive to changes in level of activity
e.g. raw materials direct labour. .
7. Why a flexible budget is considered superior to fixed budget?
Flexible budget is superior to fixed budget for following reasons:
a. Fixed budget does not change with level of activity but flexible is meant
for any change in level of activity.
b. Fixed budget is an unrealistic yardstick in case of level of output does
not match with planned budgeting.
c. Flexible budget is more suitable in case of new Venture because of
uncertainties in demand.
8. Determine margin of safety from the information given below:
Total Fixed cost – Rs. 4500; Total variable cost – Rs.7500;
Total sales – Rs.15000 and units sold – 5000
Sales at BEP: Fixed Expenses/P/v Ratio 7500*3 = 4500 units 5 Contribution: Sales – Variable Exp. =15000-7500 =7500 P/v Ratio = C/S = 7500/4500 = 5/3 MOS = Actual Sales – Sales at BEP 5000-4500 = 500 units.
9. Write a short note on the terms ‘cost’ and ‘costing’.
Cost is the value of resources used up when carrying out the task or
particular activity. It consists of material, labour and resources. Costing are
the techniques or method applying for ascertaining costs. It covers many
aspects like labour overhead and marginal or absorption costs.
10. State the importance of budgeting.
a. Helps Enforce Planning.
b. Better Coordinate Activities.
c. Helps in Evaluating Performance.
d. Helps in Controlling.
e. Helps in Allocating Resources.
f. Helps in Motivating Managers & Employees.
11. What do you understand by ‘financial statement analysis?
Financial statements analysis is the process of identifying the financial
strength & weakness of the firm by properly establishing relationship between
items of the Balance Sheet and Profit & Loss A/C. It is to assess and interpret
the result of past performance and current financial position.
12. State the importance of EPS and ROI.
ROI reflects the total earnings produced by the total assets of the firm. It
represents the before tax and interest expenses return on invested capital.
ROI: PBDIT/Total Assets or Investments.
EPS represents the return per shares issued by the company. It is directly
connected to profitability.
EPS: Net Profit / No. of shares.
13. List any two advantage of trend analysis.
a. Understanding the changes in financial statements from year to year is
easier when Percentages changes are available.
b. Using previous year‘s data Percentage change can identify the future
pattern of movements in given data.
14. How does cash flow statement differ from fund flow statement?
a. Cash flow is concerned only with change in cash position while Fund flow
is concerned with change in working capital position.
b. Cash flow is more useful to the management as a tool of financial analysis
in short periods as compared to Fund flow.
c. Another distinction between them is techniques of their preparations.
15. Explain accounting cycle.
Accounting Cycle is described as follows:
a. Record the transaction in journal or Special journals with voucher.
b. To post the transaction from journal to Ledger for further analysis and
having balances of each account.
c. Prepare the trial balance with the ledger‘s balances.
d. To make adjustment and closing entries.
e. Prepare Final Accounts or Financial statements.
16. explain accrual concept
It states that Revenues are recognized when they simply become receivables.
Accrual Concept focuses on the economic impact of transactions. It makes a
distinction between the actual receipt of cash and the right to receive cash. In
this case firm maximizes Assets.
17. what are the two limitation of financial accounting
a. Accounting information is sometimes based on estimates.
b. Accounting information cannot be used as only test of managerial
performance on basis of more profit.
c. Fixed assets are recorded in the accounting records at the original cost.
18. explain kaizen costing
Kaizen is Japanese word which means Change for Better. It refers to continual
and gradual improvements made through innovation at large investments in
technology. It is the technique of cost reduction during the manufacturing
process.
19. what is the objective if financial accounting
a. It enables the management to find out the overall as well as department
wise efficiency of the firm.
b. To know the short term and long term solvency of firm.
c. It is used in inter firm comparison for further change in decision making
process.
20. how would you calculate return on investment
ROI tells about the overall profitability of the company in relation to total
investment in company. It is calculated as:
ROI = Operating Profit or PBDIT
___________________________
Total Assets / Total Investment
21. write a two limitation of historical Cost accounting
a. Market value or current value of fixed asset undergoes frequent changes
and financial statements will have to be changed every year.
b. Recording at market value is both costly and time consuming.
c. They are not affected by decision and irrelevant for decision making.
22. what is trend analysis
Trend Analysis is an important and useful technique of financial statement
analysis. It ascertains a relationship between of each year‘s data to the base
year‘s data. It involves figuring out the price index level or growth rate with
respect to previous year or year that has been a standard (Base Year).
23. what are indirect cost
Costs that are not identifiable with the end product are called indirect costs
and include the following: Lubricants, Scrap, Indirect Material, and
Depreciation. Indirect costs are called often overhead expenses .
24. Difference between marginal costing and absorption costing
a. Marginal cost values stock at variable cost basis while in Absorption stock
is valued at full cost.
b. In long run decision making based on marginal cost approach nay result in
contribution failing to cover fixed cost and losses being incurred but
absorption does not allow that.
c. Marginal costing aids profit planning whereas Absorption is useful to
identify inefficient utilization of production resources.
25. what are fixed budget
a. This is the budget which is designed to remain unchanged irrespective of
level of activity.
b. It is prepared for definite production and capacity level.
c. It is not adjusted according to activity level and not effective tools of cost
control.
26. What are decision packages?
Each separate activity of the organization is identified and called a decision
package. It comes under Zero Based Budgeting (ZBB) and identifying activity
is part of Activity Based Costing (ABC).It is a document that identifies and
describes a specific activity to evaluate it and decide whether to approve or
disapprove.
27. What is margin of safety?
Margin of safety has great importance in BEA. It is difference between actual
sales to sales at breakeven point.
MOS = Actual Sales – Sales at BEP
MOS= Profit/P/v Ratio.
28. Define a double entry system.
Double Entry accounting first introduced by Luca Fra Paccoli‖ an Italian
mathematician. Every ‗debit‘ has a corresponding credit so the total of all debits
must be equal to total of all credits.
29. What is business entity concept?
The business concern is artificially formed as a separate legal entity, taking
the form of a Proprietorship concern or a Partnership firm or a Private limited
Company or a Public Limited Company. Thus the Proprietor or Partners or
Promoters is/are considered distinct from his/their own business. Without
such a distinction the affairs of the firm will be mixed up with the private
affairs of the Proprietor or Partners or Promoters and the true picture of the
firm will not be available. Hence the business concern (entity) is to be
considered different from the owner/s also referred as Separate entity
concept.
30. Discourse accounting as a information system.
An accounting system consists of personnel, procedures, devices and record
used by an organization which helps in development and structure of
accounting information and communicating this information to decision
makers. Design and capabilities of these systems vary greatly from
organization to organization. In very small business, the accounting system
may consist of little more than a cashbook and a cheque book and may be an
annual interaction with the chartered accountant for filing tax return. In very
large business.
31. Explain the concept of target costing.
It is defined as "a cost management tool for reducing the overall cost of a
product over its entire life-cycle with the help of production, engineering,
research and design". A target cost is the maximum amount of cost that can
be incurred on a product and with it the firm can still earn the required profit
margin from that product at a particular selling price.
Target costing involves setting a target cost by subtracting a desired profit
margin from a competitive market price. To compete effectively, organizations
must continually redesign their products (or services) in order to shorten
product life cycles.
32. What is current purchasing power of accounting method.
Changes in price level should be reflected in the financial statement through
current purchasing power (CPP). For measuring changes in price level and
incorporating and true changes in financial statements, index numbers are
used. Price Index is used to convert the values of various items in Financial
statements.
33. What is meant by operating activities?
Operating Activities are those which are carried from getting input to convert
in output and getting revenues. This are directly related to earn profit and
related to part of production. They generally result from the transactions and
events that enter into determination of profit.
34. Mention the purpose of preparing cash flow statement.
a) It is very useful in understanding the cash position of a firm.
b) It helps management to understand the past behavior of the cash
cycle
and to control the usage of cash in future.
c) The repayment of loans.
d) The cash flow statement is helpful in making short-term financial
decision relating to liquidity, and the way and means position of firm.
35. How labor mixed variance calculated.
LMV is the different in labour cost due to change in composition of the labour
force. In order to calculate this variance, the total actual hours spent is
compared with the revised standard hours. The revised standard hour are
calculated as follows:
Actual hours (total).standard ratio
LMV = SR (RSH – AH)
36. What is meant by expense center?
An expense centre is responsibility centre in which inputs not output are
measured in monetary terms. Expense or Cost centre a department in
organization in which manager is held responsible only for cost incurred and
maintain systematic records.
37. What is objective of preparing common size financial statement.
Financial statements when presented in absolute figures, it is hard to
understand and interpret. So each item is converted into percentage of total
assets or capital.
We can find how much percentage of cost is incurred in generating so much
revenue.
38. Difference between standard cost and estimated cost.
Standard cost:
(1). It is a regular system of account based upon estimation and time
schedule.
(2). It is used for effective cost control and to take proper action to
maximize efficiency.
Estimate cost:
a) It used as statistically data which leads to lot of guess work.
b) It can be used where costing is in operation.
39. Mention two usage of management accounting.
a. Planning & Policy formulation.
b. Helps in interpretation process.
c. Helps in decision making and controlling.
d. Helps in reporting, motivating and organizing.
40. Explain cash budget.
This budget represents the amount of cash receipts and payments and a
balance during given period. It is prepared for getting useful information on
basis of monthly or weekly.
a. It ensures sufficient cash.
b. It reveals surplus amount and the effect of fluctuations on cash
position.
41. Write an accounting equation. What does it signify?
An accounting equation is a statement of equality between the resources
and the sources which finance the resources and is expressed as follows:
Sources of Funds = Uses of Funds
Or
Equities = Assets
Owner‘s equity + Outsiders liability = Assets
42. Write three principle of accounting.
The Going Concern Concept: The entity will continue to operate in the future.
The Cost Principle: Assets and services acquired should be recorded at their
actual cost.
Measurement Concept: The monetary unit is the principle means for
measuring assets and equities.
43. explain the convention of conservation .
Convention of Conservatism:-
―Anticipate no profits but provide for all possible losses‖
Policy of ‗caution‘ & ‗playing safe‘. It is also called Prudence Principle.
Accountant should record not only actual loss but also losses that likely to
occur. E.g. Provision for bad debts, redemption reserve.
44. What are cost driver.
Determination of Cost Drivers completes the last stage of the ABC model.
Cost Drivers trace, or link, the cost of performing certain Activities to Cost
Objects.
For example, taking orders for existing customers may be linked to specific
customers based on the number of orders taken, if each order takes
approximately the same amount of time. If order taking time varies based on
the customer, this cost may be linked based on another driver or multiple
drivers.
45. How are outstanding expenses treated in final account.
These are the expenses incurred within the accounting year but the payment
has not been made. O/S or unpaid expenses should be added to the
concerned expenses A/C in P&L a/c and will be shown as a current liability in B/S.
46. What is common size statement?
This technique of taking the highest figure as the base figure and converting
every other figure in that statement to a percentage of the same is known as
vertical analysis. This helps us in finding out what has been the relative
change as a percentage of the base figure so that we can look at any
performance lacunas and understands the reason for the same as also
compare with other companies. Involves expressing comparison in
percentages of the current period and past period.
47. Explain the term funds.
The term funds as cash and they concerned themselves with the movements
in the cash account. Funds may be defined in different ways depending upon
the purpose of analysis .however; the following are most commonly used
definitions:
a. Funds mean cash,
b. Funds mean net working capital, and
c. Funds mean all financial resources.
48. What is human resources accounting.
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested
parties‖. HRA, thus, not only involves measurement of all the costs/
investments associated with the recruitment, placement, training and
development of employees, but also the quantification of the economic value
of the people in an organization.
49. What is significance of P/E ratio?
PRICE EARNING RATIO: PE Ratio indicates the number of times the Earning
per Share is covered by its market price.
P/E RATIO = Market Price per Equity Share/Earning Per Share
This ratio tells us about how much the market discount they earnings.
Obviously, the higher the ratio the better.
50. Difference between social cost and social benefit.
Social Cost: It may include the effect on social community who might have to
live in the shadow of its premises and how it engages with its customers,
workplace, and impacts on environment.
Social Benefits: customers. Services, users or clients can be involved in the
social process. It can be used in strategic planning with great deal of flexibility
within the framework.
51. Explain the term cost object.
A cost object is tangible input for a product or service provided like labour
and material. Cost of employing labour can be directly fixed as for employing
labour as ―per man per hour‖ or ―per man per day‖. So the labour is cost
object as it is directly associate with it.
52. What is opportunity cost?
Opportunity costs are alternative costs or the returns from the next best
alternative use of the firms resources which the firm foregoes in order to avail
of the returns of the next best use of the same resources e.g.: suppose a
businessman can buy a lathe machine or a paper pressing machine with the
help of limited capital which can earn him rs 50,000 and rs 70,000. if he
chooses the latter he would have foregone the opportunity of earning rs
50,000,thus ,his opportunity cost is rs 50,000.
53. Difference between period cost and product cost.
Product cost is the cost of purchasing or manufacturing inventory. Until the
goods are sold, product cost represent inventory and they reported as asset
in B/S.
Costs which are associated with time periods rather than with the purchase or
manufacture like selling and general expenses. These are charged directly to
expense account on assumption that benefit is recognized when cost is
incurred.
54. Difference between direct cost and indirect cost.
Direct cost – expenses incurred directly in producing the goods or services.
It is incurred for and may be conveniently identified with a particular cost
center or cost unit. Material, labour and direct expenses.
Indirect costs - Not directly chargeable to production of goods. These costs
are those costs, which are incurred for the benefit of a number of cost centers
or cost unit and therefore, cannot be conveniently. Salary of manager, office
Rent and selling and distribution expenses.
55. What is meant by ‘margin of safety’ and ‘angle of incidence’?
MARGIN OF SAFTY: It is the difference between the total sales and break-
even sales. It may be expressed in monetary term or as a percentage.
MOS= (Actual sales- break- even sales)
ANGLE OF INCIDENCE: this is an angle formed between the cost line and
revenue line where they intersect each other.. It indicate rate of profit earned by the business.
56. Write a short note on profit center.
Profit Centre is that department where the manager is held responsible for
both costs (inputs) and revenues (outputs) and thus for profit. Despite the
name, a profit centre can exist in nonprofits organizations.
A centre, whose performance is measured in terms of both - the expense it
incurs and revenue it earns, is termed as a profit centre.
57. Name any four non operating items.
a. Depreciation.
b. Goodwill written off.
c. Loss on sale of Machinery.
d. Preliminary expenses written off.
e. Gain on Sale of Assets.
58. What is Human Resource Accounting?
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested
parties‖. HRA, thus, not only involves measurement of all the costs/
investments associated with the recruitment, placement, training and
development of employees, but also the quantification of the economic value
of the people in an organization.
59. What is Benchmarking?
Benchmarking is the continual search for the most effective method of
accomplishing a task by comparing existing methods and performance levels
with those of organization or with subunits within the same organization.
These practices are referred to best practices. Benchmarking is also called
Competitive Benchmarking.
60. What is Reengineering?
It is the contrast to the concept of Kaizen Costing, which involves small &
incremental steps toward gradual improvement but Reengineering involves a
giant leap. It is the complete redesign of a process with an emphasis on
finding creative new ways to accomplish an objective. It is starting from
scratch to redesign a business process.
61. Given the following details, Determine the ‘Margin of Safety’
sales.
Profit earned Rs. 24000, Selling price per unit Rs.10; Marginal cost
per unit Rs.7.
MOS = Profit/P/v Ratio
P/V Ratio = Contribution/Sales 10-7/10 = 3/10
MOS = 24000*10/3 = 80000 units.
62. What is Semi variable cost?
It is a cost that comprises both fixed and variable elements. For example a
telephone cost consists of a fixed rental charge and variable cost associated
with calls made.
63. Define Financial Audit.
It is the audit of financial statements and aims to know whether financial
statements are prepared according to Accounting Principles and Conventions.
Whether financial statements present a true & fair view of business results.
64. From the information given below, calculate Stock Turnover Ratio.
Opening stock – Rs.29000; Closing stock –Rs.31000, sales Rs.
300000; Gross profit 25% on cost
S.T.R. = Cost of goods sold / Average Stock.
Average Stock = (Opening stock + Closing Stock)/2
G.P. is 25 % on Cost = 20 % on Sales (Remember Note)
G.P. = 300000 * 20 % = 60000
Cost of Goods Sold = Sales – G.P. = 240000
S.T.R. = 240000/30000 = 8 times.
65. Define Cost Audit.
ICMA defines it as the verification of cost accounts and a check on the
adherence to cost accounting plan. Cost Audit is verifying correctness of cost
accounts, cost reports, cost data and costing methods.
66. Write short notes on :
a. Journal
b. Ledger
A journal is defined as a book containing a chronological record of
transactions. It is the book in which transactions are recorded first of all
under double entry system.
Ledger is book which contains various accounts. Ledger is set of accounts. It
contains all accounts whether Real, Nominal or personal. It is in Two forms.
a. Bound Ledger b. Loose Leaf Ledger
67. Define Management Audit.
It is detailed & critical review of all aspects of management including all facets
of operations, internal controls, policies & plans within an organization also
known as Operational Audit.
68. What is an Entity?
An accounting entity is an organization that stands apart from other
organizations and individuals as a separate economic unit.
Owner is distinct from entity
Separate legal Entity
69. What is an account? State the name of different types of account.
An account is standardized format used to maintain the separate recorded
and to accumulate date for each of the individual items in order to facilitate
the preparation of periodic financial statements and to provide a continuous
check on the accuracy of the recording transaction.
Types of Accounts
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts
70. How does an asset differ from Liabilities?
Assets:
It is something a company owns which has future economic value.
Land, Building, equipments, Goodwill are examples of assets.
Liabilities:
It is something a company owes.
Money
Service
Product
71. How does an expense differ from revenues?
Revenues:
They are amounts received or to be received from customers for sales of
products or services.
Sales, Performance of services, Rent, Interest
Expenses:
They are amounts that have been paid or will be paid later for costs that
have been incurred to earn revenue.
Salaries and wages, utilities, Supplies used, Advertising.
72. What do you mean by Owners Equity?
It is what‘s left of the assets after liabilities have been deducted.
The same as net assets
The owner‘s claim on the entity‘s assets
73. Differentiate Operating Ratio & Operating Profit Ratio.
Operating Ratio establishes the relationship between the cost of goods sold
plus other operating expenses to net sales.
Operating ratio = Cost of Goods Sold + Operating Expenses * 100
Net Sales
Operating Profit Ratio express relationship between operating profits and net
sales. It is computed as:
Operating Profit Ratio = (Operating Profit / Net Sales) *100
74. What are the sources of Funds?
a. Issue of Share Capital
b. Issue of Debentures for cash or any other asset.
c. Sale of long term investment.
d. Receipts of dividend income, rent income, interest.
75. A firm has opening and closing debtors of Rs.40,000 and Rs.
75,000 respectively and credit sales of Rs. 3,45,000. Calculate the
debtor’s turnover ratio.
Debtors turnover ratio = credit sales/average debtors
=3, 45,000 / 57,000
= 6 time per year.
76. A firm has opening and closing inventory of Rs. 56,000 and Rs.
44,000 respectively. The firm has sold goods for Rs. 5, 00,000 at
gross profit margin of 20% calculate the inventory turnover ratio.
Inventory turnover = cost of goods sold / average inventory
= 5, 00,000 – 1, 00,000 / ½ (56, 000+44, 000)
= 4, 00,000 / 50,000
= 8 times per year.
77. What do you mean by GAAP (Generally Accepted Accounting
Principles)?
Generally accepted accounting principles (GAAP) - a term that applies to the
broad concepts or guidelines and detailed practices in accounting, including all
the conventions, rules, and procedures that make up accepted accounting
practice at a given time.
78. What are the steps involved in Accounting Cycle?
1. Analyze the transaction
2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the trial balance
5. Prepare financial statements
79. Define type of Activities in Activity Based Costing.
• Unit level: Performed each time a unit is produced
• Batch level: Performed each time a batch is produced
• Product level: Performed to support production of different type of product
• Customer Level: Performed to support servicing customers
• Facility level: Residuary head
80. What is Balanced Score Card Approach.
A balanced scorecard is a performance measurement and reporting system
that strikes a balance between financial and operating measures, links
performance to rewards, and gives explicit recognition to the diversity of
organizational goals
This enhances the learning process because managers learn the results of
their actions and how these actions are linked to the organizational goals
Long Answer Questions 1. Explain three most significant accounting conventions.
The Matching Convention:
When an event affects the revenues and expenses, the affect on each should be
recognized in the same accounting period.
The sale of the products has two aspects:
1. Revenue aspect
2. Expense aspect.
Revenues earned because the sale is going to fetch you some money and
expenses incurred for producing that product or providing that services. Correct
measurement of the net effect of the sale and expenses in any accounting period
can only be made when you match the relevant expenses to its related sales.
Otherwise it will allow a lot of freedom for not showing the true profitability of the
business.
The Consistency convention:
The accounting policies and methods followed by the company should be the
same every year.
The consistency concept states that once an entity has decided on one method, it
should use the same method for all the same character unless it has a sound
reason to change the method. This is done because frequent changes in the
manner of handling same type of events, would make it very difficult for the
external users to compare financial statements over different periods. The term
consistency as used here refers to consistency over a period of time and not the
logical consistency.
The Materiality Convention:
Insignificant events would not be recorded if the benefit of recording them does
not justify the cost.
In law, there is something called ‗de minims non curat lex‘ , which means that
the court will not consider trivial matters. Similarly the accounting does not
attempt to record events so insignificant that the work of recording them is not
justified by the usefulness of the results.
But there are no definite rules that separate material information from immaterial
information. So the materiality concept may be taken to mean that although
insignificant events may be disregarded but there must be full disclosure of all
important information.
2. What is target costing? Discuss its methodology.
Target costing is a pricing tool used by the firms. It is designed as a ―cost
management tool for reducing the overall cost of a product over its entire life
with the help of production, engineering, research and design. ―A Target cost is
the maximum amount of cost that can be incurred on a product and with it the
firm can still earn the required profit margin from that product at a particular
selling price‖.
Methodology:
The following 10 steps are required to install a comprehensive target costing
approach with an organization.
1. Re-orient culture and attitudes. The first and most challenging step is re-
orient thinking toward market-driven pricing and prioritized customer needs
rather than just technical requirements as a basis for product development.
This is a fundamental change from the attitude in most organizations where
cost is the result of the design rather than the influencer of the design and
that pricing is derived from building up an estimate of the cost of
manufacturing a product.
2. Establish a market-driven target price. A target price needs to be
established based upon market factors such as the company position in the
market place (market share), business and market penetration strategy,
competition and competitive price response, targeted market niche or price
point, and elasticity of demand. If the company is responding to a request for
proposal/quotation, the target price is based on analysis of the price to win
considering customer affordability and competitive analysis.
3. Determine the target cost. Once the target price is established, a
worksheet (see example below) is used to calculate the target cost by
subtracting the standard profit margin, non-recurring development costs, and
any uncontrollable corporate allocations. The target cost is allocated down to
lower level assemblies of subsystems in a manner consistent with the structure of teams or individual designer responsibilities.
Target Cost calculation work sheet
Manufacturers suggested retail price - 495
- Standard dealer margin (30%) - (148.50)
- shipping & distribution costs - (15)
- profit margin (20%) - (66.30)
- allocated non-recurring development cost - (35)
= Business unit target cost - 230.20
- overhead (45%) - (103.59)
= Direct target Cost (labour & material) - 126.61
4. Balance target cost with requirements. Before the target cost is finalized,
it must be considered in conjunction with product requirements. The greatest
opportunity to control a product's costs is through proper setting of
requirements or specifications. This requires a careful understanding of the
voice of the customer, use of conjoint analysis to understand the value that
customers place on particular product capabilities, and use of techniques such
as quality function deployment to help make these tradeoff's among various
product requirements including target cost.
5. Establish a target costing process and a team-based organization. A
well-defined process is required that integrates activities and tasks to support
target costing. This process needs to be based on early and proactive
consideration of target costs and incorporate tools and methodologies
described subsequently. Further, a team-based organization is required that
integrates essential disciplines such as marketing, engineering,
manufacturing, purchasing, and finance. Responsibilities to support target
costing need to be clearly defined.
6. Brainstorm and analyze alternatives. The second most significant
opportunity to achieve cost reduction is through consideration of multiple
concept and design alternatives for both the product and its manufacturing
and support processes at each stage of the development cycle. These
opportunities can be achieved when there is out-of-the-box or creative
consideration of alternatives coupled with structured analysis and decision-
making methods.
7. Establish product cost models to support decision-making. Product cost
models and cost tables provide the tools to evaluate the implications of
concept and design alternatives. A target cost worksheet can be used to
capture the various elements of product cost, compare alternatives, as well as
track changing estimates against target cost over the development cycle.
8. Use tools to reduce costs. Use of tools and methodologies related to design
for manufacturability and assembly, design for inspection and test, modularity
and part standardization, and value analysis or function analysis. These
methodologies will consist of guidelines, databases, training, procedures, and
supporting analytic tools.
9. Reduce indirect cost application. Since a significant portion of a product's
costs (typically 30-50%) are indirect, these costs must also be addressed.
The enterprise must examine these costs, re-engineer indirect business
processes, and minimize non-value-added costs. But in addition to these
steps, development personnel generally lack an understanding of the
relationship of these costs to the product and process design decisions that
they make. Use of activity-based costing and an understanding of the
organization's cost drivers can provide a basis for understanding how design
decisions impact indirect costs and, as a result, allow their avoidance.
10. Measure results and maintain management focus. Current estimated
costs need to be tracked against target cost throughout development and the
rate of closure monitored. Management needs to focus attention of target cost
achievement during design reviews and phase-gate reviews to communicate the importance of target costing to the organization.
3. What ratios would you calculate to assess the liquidity position and
solvency position of a firm?
Working capital: Current assets-Current liabilities.
Current ratio: current assets/current liabilities
Acid Test ratio or Quick ratio: Quick assets/Current liabilities
=Current assets-Inventory-Prepaid
Expenses/Current Liabilities
Cash Ratio: Cash+ Marketable securities+ Net receivable and debtors/ Current
Liabilities.
Receivable Turnover or Debtors Turnover ratio:
Net credit sales [total sales-cash sales-sales return]/ Average Debtors or average
accounts receivable (times)
Debt Collection Period: 12months/Debtor Turnover
Inventory Turnover Ratio:
Cost of Goods Sold/Average Inventory (times)
Cost of Goods Sold= Sales- Gross profit or
Cost of Goods Sold=Opening Stock+ Purchase+ Direct expenses-Closing stock.
4. What is the objective of preparing Fund Flow Statement? In what way it
is different from a Balance Sheet?
Objectives: Fund Flow Statement is an essential tool in Financial Management
decision making. The basic purpose of this statement is to indicate where funds
come from and where it was used during a certain period. Following are the basic
objectives of preparing this statement:
1. It determines the financial consequences of business orientation.
2. It acts as a central device when comparing with budgeted figures.
3. It points out the weak financial position of the company.
4. It points out the causes for changes in working capital.
5. it enables the banker, financial institution or creditor in on seeing the degree of
risk.
6. The management can rearrange the finance more effectively on the basis of this
statement.
7. Various uses of fund can be known after comparing them with the uses of
previous years. Improvement or downfall in the firm can be assessed.
Distinction between Fund Flow Statement and Balance Sheet:
FUND FLOW STATEMENT
1. It is dynamic in nature.
2. It incorporates items causing changes
in working capital.
3. It is a management tool for financial
analysis and helps in decision making.
4. The preparation of this statement is a
post Balance Sheet exercise.
BALANCE SHEET
1. It is static in nature. It is prepared at
the end of the accounting period and
portrays the financial position of the firm
on a particular date.
2. It includes the balance of real and
personal account and shows the total
resource.
3. It reveals the financial position of a
firm and one can examine the soundness
of the firm.
4. I t is the end product of all accounting
operation for a particular period of time.
5. What problems do adoption of Price Level Accounting or Inflation
Accounting serves?
One of the key factor in selling product under competitive market condition is
product pricing. The significance of pricing goes much beyond the simple question of
determining product profitability. Adoption of price level accounting serves some
major problems. They are:
1. The system is not acceptable to Income tax authorities.
2. Too much calculation makes complications.
3. Changes in prices are never ending process.
4. The amount of depreciation will be lower in time of deflation.
5. The profit calculated on the system of price level accounting may not be a realistic
profit.
6. What is the scope of Cost Accounting? Discuss briefly different types of
cost.
Scope of Cost Accounting:
1. It enables the management to ascertain the cost of product, jobs, service or units
of production so as to develop cost standards.
2. Cost data are useful in the determination of selling price or quotation.
3. The object is to minimize the cost of manufacturing. Comparison of actual cost
with standard reveals the interdependencies variance.
4. The central theme is to provide information, largely in the areas of cost, which will
be useful in controlling the operation of a business in a broad sense.
Different Types of Cost:
Fixed cost - cost which does not vary and remains constant within a given period of
time and range of activity in spite of fluctuations in production.eg. rent, supervisor
salary, interest on loan.
Variable cost – varies directly in proportion to every increase or decrease in the
volume or output of production. eg. raw material, direct labour.
Semi-Variable costs – contains a fixed and variable element eg. utilities.
Step costs – remain constant over a range of activity. eg. production supervisor if
second shift is added.
Product cost – cost which become part of the cost of the product rather than an
expense of the period. eg. Cost of raw materials
Period costs – costs which are not associated with production eg. Salesmen
salaries, commission etc.
Direct cost – expenses incurred directly in producing the goods or services
Indirect costs - Not directly chargeable to production of goods
Committed costs – unavoidable fixed costs like depreciation, rent, salaries etc.,
Discretionary costs – costs set at a fixed amount for a specific time period eg.,
advertisement budget, research 7 development expenditure etc.
Relevant costs – costs which could be changed by managerial decisions ( closing
down of non-profitable retail shop)
Irrelevant costs- costs not affected by the managerial decisions (prepaid rent for
the shop, unrecovered costs which will be scrapped)
Shut down costs – certain fixed costs continue to be paid at times of less or no
production
Sunk costs –historical or past costs already incurred for future indefinite period of
time (investment on fixed assets)
Imputed costs (or hypothetical costs) – are ‗notional‘ costs which do not involve
in any cash outlay (rent of own property, salary to proprietor/ partner, interest on
capital)
Differential cost- difference in total costs between two alternatives
Incremental costs – choice of an alternative results in increase in total costs, such
increase is incremental cost
Decremental costs- such decrease in costs
Opportunity costs – cost sacrificed by selecting the alternate choice
Production, selling & distribution costs
7. Define Budget and Budgetary control. Discuss the advantages of
budgetary control in an organisation.
Budget:
―Budget is an estimate of future needs arranged according to an orderly basis,
covering some or all of the activities of an enterprise for definite period of time in
future to attain the objective.‖-George R. Terry.
Budgetary control:
―Budgetary control means the establishment of budgets relating to the
responsibilities of the executives of the requirements of the policy and continuous
comparison of actual with budgeted results either to secure by individual action the
objective of that policy or to provide basis for its revision‖
Advantages:
The advantages or benefits of budgetary control are as follows:
1. Budgets fix the goals and targets without which operations lack directions.
2. Reduction in cost and elimination of efficiency is achieved automatically.
3. The budgets facilitate to maintain order efforts and brings about efficiency in
results.
4. An effective system of budgetary control results in coordinate effort of all persons
involved.
5. It enables the management to decentralize responsibility without losing control of
the business since it pin-point efficiency.
6. Budgetary control and standard costing goes hand by hand. It promotes mutual
cooperation and team sprits among the persons involved.
7. It ensures that the capital employed at a particular level is kept at a minimum
level.
8. It facilitates an intelligent and planned forecast for future.
9. It is a good guide to management for making future plans.
10.It aims to maximization of profit through cost control and proper utilization of
recourses.
11. It brings to light the inefficiency and weaknesses on comparing actual
performance with budget. Thus management can take remedial measures.
12. It is a guide to management in the field of research and development in future.
13. It evaluates the performance.
14. Since budget provides advance information, financial crisis can be avoided.
15. It acts as a safety signal for the management. It prevents wastages of all types.
8. Explain the role of an accountant.
The role of an accountant is as follows:
1. To establish, coordinate, administer as an integral part of management, an
adequate plan for the control of operation.
2. To compare performance with operating plan and standards and to report and
interpret the results of operation to all level of management.
3. To consult with all segment of management responsible for policy or action
concerning any phase of the operation of the business as it relates to the attainment
of objectives.
4. To administer tax policies and procedures.
5. To supervise and coordinate preparation of reports of government agencies.
6. To assure fiscal protection for the assets of the business through adequate
internal control and proper insurance coverage.
7. To continuously appraise economic and social forces and government influences
and interpretation their effect upon business.
8. Providing help in the design of an information system.
9. Helps in budget preparation.
10.Coordinating budget making and report preparation activities.
11.Preparing the performance report, control report, special managerial report and
division making.
12 Interpretating accounting data based on the particular requirements of the
managers in a gives situations.
9. What is meant by Fund Flow Statement? How it is prepared?
Fund Flow Statement is a financial statement which reveals the methods by which
the business has been financed and how it has use its funds between opening and
closing balance sheet dates. Thus a fund flow statement is a report on movement
funds explaining where from works capital originated and where into the same goes
during an accounting period.
Preparation of Fund Flow Statement:
The fund flow statement requires preparation of two statements:
1. Statement changes in working capital
2. Funds from Operation
3. Fund Flow Statement
Schedule of changes in working capital:
Many business enterprises prefer to prepare schedule of changes in working capital,
while preparing a funds flow statement, on a working capital basis. This schedule in
changes in working capital provides information concerning the changes in each
individual current assets and current liabilities accounts. This schedule is a part of
fund flow statement and increase in working capital indicated by schedule changes in
working capital will be equal to the amount of changes in working capital as found by
fund flow statement. The format of schedule of changes in Working capital is as
follows:
Schedule of changes in Working Capital
IItteemmss AAss oonn ccuurrrreenntt
yyeeaarr AAss oonn
pprreevviioouuss yyeeaarr IInnccrreeaassee DDeeccrreeaassee
AA.. CCuurrrreenntt AAsssseettss::
CCaasshh
BBaannkk
ddeebbttoorrss
SSttoocckk
PPrreeppaaiidd
eexxppeennsseess
TToottaall CCAA
BB.. CCuurrrreenntt lliiaabbiilliittiieess::
BBaannkk oovveerrddrraafftt
CCrreeddiittoorrss
OOuuttssttaannddiinngg eexxpp..
TToottaall CCLL
NNeett iinnccrreeaassee//
DDeeccrreeaassee iinn WWCC
Funds from Operation
By preparing adjusted profit and loss accuont
Dr.
Cr.
Particulars RRss
Particulars RRss..
TToo ggooooddwwiillll wwrriitttteenn ooffff
TToo ttrraannssffeerr ttoo GGeenneerraall
rreesseerrvvee
TToo ddeepprreecciiaattiioonn
TToo pprroovviissiioonn ffoorr ttaaxx
TToo pprrooppoosseedd ddiivviiddeennddss
TToo lloossss oonn ssaallee ooff aasssseettss
TToo PPrreelliimmiinnaarryy eexxpp..
TToo bbaallaannccee cc//dd
BByy bbaallaannccee bb//dd
BByy ggaaiinn oonn ssaallee ooff aasssseettss
BByy FFuunnddss FFrroomm ooppeerraattiioonnss
Fund Flow Statement
Sources of fund RRss AApppplliiccaattiioonn ooff ffuunnddss RRss
FFuunnddss FFrroomm OOppeerraattiioonnss SSaallee ooff FFiixxeedd AAsssseettss IIssssuuee ooff SShhaarreess ((EEqquuiittyy && PPrreeffeerreennccee)) IIssssuuee ooff DDeebbeennttuurreess LLoonngg--TTeerrmm bboorrrroowwiinnggss DDeeccrreeaassee iinn WWoorrkkiinngg CCaappiittaall
FFuunnddss LLoosstt iinn ooppeerraattiioonnss PPaayymmeennttss ooff DDiivviiddeenndd PPaayymmeenntt ooff TTaaxx PPuurrcchhaassee ooff FFiixxeedd AAsssseettss PPaayymmeenntt ooff lloonngg--tteerrmm llooaannss RReeddeemmppttiioonn ooff ddeebbeennttuurreess RReeddeemmppttiioonn ooff PPrreeff..ccaappiittaall IInnccrreeaassee iinn WWoorrkkiinngg ccaappiittaall
11. Define Budgeting. State the objectives of budgeting.
Budgeting:
Budgeting is defined as ―The entire process of preparing the budget is known as
budgeting‖ –Batty.
Objectives:
1. To obtain more economic use of capital
2. To prevent waste and reduce expenses.
3. To facilitate various departments to operate efficiently and economically.
4. To plan and control the income and expenditure of the firm
5. To create a good business practice by planning future.
6. To fix responsibilities on different departments or heads. 7. To coordinate the
various activities of various departments.
8. To ensure the availability of working capital.
9. To smooth out seasonal variations buy developing new products.
10.To ensure matching of sales with productions.
11. What is meant by CVP (Cost Volume Profit) analysis? What are the
assumptions used in it? Limitations of Cost Volume Profit analysis.
Cost profit volume analysis is a systematic method of examining the relationships
between selling price, total sales revenue, volume of production expenses and
profits. This analysis simplifies the real world conditions that a business enterprise
likely to face.
Assumptions used in CVP analysis:
1. CVP analysis focuses on prices, revenues, volume, cost, profits and sales mix and
on the interrelationship between them during the short run.
2. In CVP analysis, all expenses classified into fixed and variable. Semi-variable
expenses have to be divided into their fixed and variable elements.
3. CVP analysis may be used in setting selling prices, selecting the product mix to
sell, choosing among alternatives marketing strategies and analysis the effects of
cost increase or decrease on the profitability of the business enterprise.
Limitations:
There are certain limitations faced by CVP analysis. These are:
1. The function of profit projection is virtually important to financial analyst, but it is
not without it shortcomings. Clear assignment of costs to either a fixed or variable
category is not always possible. The interpretations of several analysts probably
differ.
2. Direct labour is usually classified as a variable cost. Any change in production
volume will have a direct effect on labour in the same direction. If management
decides on a temporary shutdown of operations, the effect on the variability of
labour cost may not correspond directly. If for example the company wishes to retain
it highly experienced and skilled personnel during the shutdown period so as not to
lose them, the fluctuating nature of direct labour changed.
3. Another major weakness of cost volume profit analysis as a planning or controlling
device occurs in a manufacturing business. The assumption by the analyst the sales
and production volumes will always be the same may be valid in theory but not in
fact.
4. Analysis covering an extended period o time required a common denominator for
all component periods so that data examined will be equivalent. Where costs and
prices have changed drastically, adjustments based on current costs and prices
produce a more uniform result.
12. What is meant by Balance Sheet? Gives it specimen.
Balance Sheet:
A Balance Sheet, also commonly referred as statement of financial position, is a
statement of assets and liabilities of business enterprises at a particular date. The
Balance Sheet summarizes and reveals the financial position of an enterprise on a
particular date, by showing what It own and what it owes. Because the balance sheet
is a snapshot of an instant in time, it is a status report rather than flow report.
Specimen of Balance Sheet:
Balance Sheet
As at………………….
Liabilities Amt(Rs) Assets Amt(Rs)
Current liabilities
Bank overdraft
Outstanding expenses
Bills payable
Sundry creditors
Income received in
advance
Fixed non-current
liabilities
Loan
Capital
Opening balance
Add: Net profit
(Less loss)
Less: Drawings
------
------
------
------
------
-------
-------
-------
-------
-------
Current Assets
Cash in hand
Cash at bank
Prepaid expenses
Sundry debtors
Accrued income
Bills receivable
Stock(closing)
Non-current
Assets[Fixed
Assets]
Investments
Furniture, Fittings,
Loose tools
Plant and Machinery
Building
Land
Goodwill
-------
-------
-------
-------
-------
-------
-------
-------
-------
-------
-------
-------
-------
13. Explain the various steps involved in Activity Based Budgeting.
Various steps involved in Activity Based Costing are:
1. Identify resources: Resources represents the expenditures of an organisation.
Eg. Include production labour, sales and marketing labour, occupancy and utilities,
equipments and supplies. Activity Based Costing links these cost to products,
customers or services.
2. Identify activities: Activities represents the work performed in an organisation.
ABC activities for sales department in a typical organisation might include:
a. Making sales call to existing customers.
b. Making sales calls to potential customers.
c. Making customer service calls.
d. Training product representation.
e. Distributing samples.
f. Attending trade shows and other events.
g. Evaluating products and improving product knowledge
ABC accounts for these costs based on what activities caused them to occur. By
determining the actual activities that occurs in various departments, it is then
possible to more accurately relate these costs to customers, products and services.
3. Identify cost objects: ABC provides profitability by one or more cost objects,
usually represented by products, customers and/or services. Cost Object profitability
is utilized to identify money losing customers, to validate separate divisions or
business units, or to measure the performance of individual projects, jobs, or
contracts. Defining the outputs to be viewed is an important step in a successful ABC
implementation.
4. Determine resources drivers: Resources drivers provide the link between the
expenditure of an organisation and the activities performed within the organisation.
For example, the total salary of a customer service representative would likely be
allocated to the Activities performed based on the amount of time spent performing
the Activity. If 50% of her time is spent performing the activity, taking orders for
existing customers, 50% of her salary (including all costs such as benefits, taxes,
and insurance) would be allocated to this Activity.
5. Determine cost drivers: Determine cost drivers completes the last stage of the
model. Cost drivers trace or link, the cost of performing certain activities or cost
objects.
For example, taking orders for existing customers may be linked to specific
customers based on the number of orders taken, if each order takes approximately
the same amount of time. If order taking time varies based on the customer, this
cost may be linked based on another driver or multiple drivers.
14. What is meant by Financial Analysis? Discuss its tools in brief.
Financial Analysis:
According to Lev, ―Financial Statement Analysis is an information processing system
designed to provide data for decision making models, such as the portfolio selection
model, bank lending decision model and corporate management models―.
Tools:
A financial analyst can adopt the following tools for analysis the financial statement.
These are also termed as methods of financial statement-
1.Comparative Financial Statements:
The percentage analysis increases and decreases in corresponding items in
comparative financial statement is called horizontal analysis
2. Common Size Statement:
It involves expressing comparison in percentages. Common size statement may be
prepared in order to compare percentage of a current period with past period to
compare individuals business, or to compare one business with industry percentages
published by trade associations.
3. Trend ratios or Trend Analysis:
Using the previous years data of a business enterprise, trend analysis can be done to
observe percentages changes over time in selected data. In this, percentage changes
are calculated for several successive years instead of between two years.
4. Statement showing changes in Working capital:
Many business enterprises prefer to prepare schedule of changes in working capital,
while preparing a funds flow statement, on a working capital basis. This schedule in
changes in working capital provides information concerning the changes in each
individual current assets and current liabilities accounts. This schedule is a part of
fund flow statement and increase in working capital indicated by schedule changes in
working capital will be equal to the amount of changes in working capital as found by
fund flow statement.
5. Fund Flow and Cash Flow Analysis:
Fund Flow Statement is a financial statement which reveals the methods by which
the business has been financed and how it has use its funds between opening and
closing balance sheet dates. Thus a fund flow statement is a report on movement
funds explaining where from works capital originated and where into the same goes
during an accounting period.
Cash Flow Statement concentrate to transactions that have a direct impact on cash.
It deals with the inflow and outflow cash between balance Sheet dates.
6. Ratio Analysis:
Financial ratios provide the analyst with a means for making meaningful comparison
of a firm‘s financial data over tine and with other firms. Thus, financial ratios
represent an attempt to standardized financial information in order or facilitate
meaningful comparisons.
15. What do you mean by Social Accounting? What are the key principles of
Social Accounting? Explain the process involved in this.
Social Accounting:
Social accounting is a method by which a business seeks to place a value on the
impact on society of its operations. This might include the following impacts on the
environment: waste; the effect on society of the packaging it produces; and how
much fuel it uses in its company cars. It can also include the effect on the local
community who might have to live in the shadow of its premises, and how it engages with the community, its customers and workforce.
Key principles:
1. Multi-perspective: encompassing the views of people and groups that are
important to the organisation.
2. Comprehensive: inclusive of all activities of an organisation.
3. Comparative: able to be viewed in the light of other organizations and
addressing the same issues within same organisation over time.
4. Regular: done on an ongoing basis at regular intervals.
5. Verified: checked by people external to the organisation. 6. Disclosed: readily available to others inside and outside of the organisation.
Process involved in Social accounting:
Step 1 Planning: In the first stage of social accounting, the organisation clarifies its
mission, objectives and activities as well as its underpinning values. It also analyses
its stakeholders through completing a ‗stakeholder map‘. These exercises help the
organisation to make explicit what it does, why and how it does it, and who it works with and whom it seeks to benefit.
Step 2 Accounting: In this phase, an organisation decides the ‗scope‘ or focus of
the social accounts, especially if it will build a comprehensive picture over time. The
organisation then sets up ways of collecting relevant information over a period of
time to report on performance and impact against its values and its objectives,
encompassing both quantitative and qualitative. The information is then brought together and analyzed.
Step 3 Reporting and audit: The information that was collected, collated and
analyzed in Step 2 is brought together in a single document, which serves as a draft
of the social accounts. People from outside the organisation (a Social Audit Panel)
then review this document to check that the report is based on information that has
been properly gathered and interpreted. When the Panel is satisfied with the report
and its findings, the organisation can make its report available to the stakeholders
and wider public in full or as a shorter summary. Social Accounting and Audit is
really about examining the ‗social, environmental and economic‘ performance and
impact of an organisation. There are a variety of key terms which are included in the
glossary as part of the new, revised manual.
16. What do you mean by Human Resource Accounting? State its purposes. What is the usefulness of Human Resource Accounting?
Human Resource Accounting:
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested parties‖.
HRA, thus, not only involves measurement of all the costs/ investments associated
with the recruitment, placement, training and development of employees, but also
the quantification of the economic value of the people in an organization.
HRA Needs
Knowledge / Information /Skills
Intellectual capacity
Employees Attitudes
Experience
Employee Turnover
Purposes of this accounting:
HRA serves the following purposes in an organisation:
1. It furnishes cost/value information for making management decisions about
acquiring, allocating, developing, and maintaining human resources in order to attain
cost-effectiveness;
2. It allows management personnel to monitor effectively the use of human
resources;
3. It provides a sound and effective basis of human asset control, that is, whether
the asset is appreciated, depleted or conserved;
4. It helps in the development of management principles by classifying the financial
consequences of various practices.
Usefulness:
HRA is a management tool which is designed to assist senior management in
understanding the long term cost and benefit implications of their HR decisions so
that better business decisions can be taken. If such accounting is not done, then the
management runs the risk of taking decisions that may improve profits in the short
run but may also have severe repercussions in future.
HRA also provides the HR professionals and management with information for
managing the human resources efficiently and effectively. Such information is
essential for performing the critical HR functions of acquiring, developing, allocating,
conserving, utilizing, evaluating and rewarding in a proper way. These functions are
the key transformational processes that convert human resources from ‗raw‘ inputs
(in the form of individuals, groups and the total human organization) to outputs in
the form of goods and services. HRA indicates whether these processes are adding
value or enhancing unnecessary costs.
Human capital also provides expert services such as consulting, financial planning
and assurance services, which are valuable, and very much in demand. Basically
HRA can be tracked through two methods—cost-based analysis and value-based
analysis. The cost-based approach focuses on the cost parameters, which may relate
to historical cost, replacement cost, or opportunity cost. The value-based approach
suggests that the value of human resources depends upon their capacity to generate
revenue.
17. Define Responsibility accounting. Discuss the advantages of responsibly
accounting. What is Balanced Score Card Approach.
Responsibility Accounting:
Eric Kohier defines Responsibility Accounting as ―a method of accounting in which
costs are identified with persons assumed to be capable of controlling them, rather
than with products or functions. It differs from activity accounting, in that it does not
in itself require an organizational grouping by activities and sub-activities or provides
a systematic criterion of system design.‖
Purpose
Social responsibility includes;
1. Financial (Profits)
2. Social (people)
3. Environmental ( Planet)
Advantages:
1. It introduces sound system of control - a system of closer control.
2. Each and every individual in the organization is assigned some responsibility and
they are accountable for their work.
3. Everybody knows what is expected of him. Nobody can shift responsibility to
anybody else if something goes wrong.
4. It is effective tool of cost control and cost reduction applied with budgetary control
and standard costing.
5. It facilitates the management to set realistic plans and budgets.
6. It is not only a control device but also facilitates decentralization of decision-
making.
7. It measures the performance of individuals in an objective manner.
8. It fosters a sense of cost-consciousness among managers and their subordinates.
9. It helps the management to make an effective delegation of authority and
required responsibility as well.
10. Under the system of Responsibility Accounting, detailed information is collected
about costs and revenues, on a continuous basis and the data is helpful in planning
for future costs and revenues.
11. Timely corrective action can be taken and better control over costs can be
achieved.
Balanced Score Card:
A balanced scorecard is a performance measurement and reporting system that
strikes a balance between financial and operating measures, links performance to
rewards, and gives explicit recognition to the diversity of organizational goals. One
advantage of the balanced scorecard approach is that line managers can see the
relationship between non-financial measures, which they often can relate more easily
to their own actions, and the financial measures that relate to organizational goals.
Another advantage of the balanced scorecard is its focus on performance measures
from each of the following four components of the successful organization.
1. Financial Strength
2. Customer Satisfaction
3. Business Process Improvement
4. Organizational Learning
This enhances the learning process because managers learn the results of their
actions and how these actions are linked to the organizational goals.
18. What is the study of Variance Analysis? How it helps in cost control.
Variance analysis is the process of analyzing variances by sub-dividing the total
variance in such a way that management can assign responsibility for of standard
performance.
Variance Analysis are important tools of cost control and cost reduction and they
generate an atmosphere of cost consciousness in the organisation. In short, the uses
of variances are:
1. Comparison of actual with standard cost which reveals the efficiency or
inefficiency of performance.
2. it its a tool of cost control and cost reduction.
3. It helps the management to apply the principle of management by exception.
4. It helps the management to maximize the profits by analyzing the variances into
controllable and uncontrollable; the controllable variances are further analyzed so as
to bring a cost reduction, indirectly more profit.
5. Future planning and programs are based costing and variance analysis need a
complete study of organisation. Thus, the factors of profits can be known and future
plan made.
6. Within an organisation, a cost consciousness is created along with the team spirit.
The variance analysis and fact finding further boost the profits of the organisation.
19. What is meant by Inflation Accounting? Give its uses.
Inflation Accounting:
Inflation or price level accounting is a method of measuring the impact of changes in
general purchasing power of the dollar. Inflation is measured and reported in the
financial statement. Purchasing power gains and losses on monetary item are
reflected in this.
Uses of Inflation Accounting:
1. Since assets are shown in current value, Balance Sheet exhibits a fair view of the
financial position of a firm.
2. Depreciation is calculated on the value of assets to the business and not on their
historical cost- a correct method. It facilitates easy replacements.
3. Profit and loss account will not overstate business income.
4. Inflation accounting shows current profits based on current prices.
5. Financial ratios based on figures, adjusted to current value are more meaningful.
6. Profit or loss is determined by matching cost and the revenue at current values
which are comparable – a realistic assessment of performance.
7. Inflation accounting gives correct information, based on current price to the
workers and shareholders.
20. Discuss the advantages and disadvantages of Zero Based budgeting.
Advantages of Zero Based Budgeting:
1. It represents a move towards allocation of resources by need and benefit and thus
results in more efficient allocation of resources.
2. It identifies and eliminates the wastages and obsolete operations.
3. It ensures that the best possible methods of performing jobs are and that new
ideas emerge.
4. It creates a questioning attitude rather than one which accepts that current
practices represents the value for money.
5. It increased the staff involvement which may lead to improve motivation and
greater involvement in the job.
6. It increases the communication within the organisation.
7. Managers become more aware of the costs of inputs which help them to identify
priorities.
8. The documentation of decision packages provides management with a deep,
coordinated knowledge of all organizational activities.
9. It is useful especially for service departments where it can be difficult to identify
output.
Disadvantages of Zero Based Budgeting:
1. The costs involved in preparing a vast number of decision packages in a large firm
are very high.
2. It is very time-consuming and large amount of additional paper work are involved.
3. Managers develop fear and feel threatened by ZBB and therefore may oppose new
ideas and change.
4. The ranking of decision packages and allocation of resources is subjective to a
certain degree, which can result in departmental conflict.
5. Administration and communication of ZBB process may become critical problems;
because more managers become involved in this process than in most budgeting and
planning procedures and these problems are further compounded in large
organization.
21. Describe the importance and uses of Break Even Analysis.
Importance:
A break even analysis is performed to identify the level of operation at which the
entity had covered all costs but has not yet earned any profit. The break-even point
identifies the volume of activity at which total revenues equal total cost. This is an
important point to the management because it represents a minimum acceptable
level of operations and it indicates that profitable operations can only results when
the level of activity exceeds the break-even point.
Uses:
The break-even point is helpful to management for forecasting, evaluating
managerial efficiency and decision making.
As a forecasting tool, the break-even point can aid in determining the following:
1. The requirement of the sales department that justify a proposed investment in
plant expansion.
2. The effect of increases and in decreases in sales volume.
3. The probable cost per unit of manufactured goods at various production levels.
4. The evaluation of changes in production methods.
5. The planning of profit objectives.
Managerial efficiency may be evaluated by comparing actual break-even results with
predetermined levels. If properly considered by management, the level of break-
even point can be important tools when used in conjunction with the analysis of sales
mix and the conversion of variable costs to fixed costs.
22. Is accounting an information system? Differentiate between Financial
Accounting and Management accounting.
An accounting system consists of personnel, procedures, devices and records used
by an organisation which helps in developing and structure of accounting information
and communication this information to decision makers. Design and capabilities of
these systems are varying greatly from organisation to organisation. In very small
businesses, the accounting systems may consists of little more than a cashbook and
cheque book and may be an annual interaction with the chartered accountant for
filling tax returns. In very large business, accounting system would include
computers, expensive ERP software like SAP, highly trained employees and
accounting reports that provides the backbone for controlling the daily operation of
every department. Still the basic purpose of the accounting system remains the
same, to meet the organizations need for accounting information as efficiently as
possible.
Accounting should be viewed as an information system for simple reason that it
would help focus attention on the information provided by it. Accounting helps users
in taking better decision by providing relevant, timely and cost-effective information
on the financial and operational parameters.
Difference between Financial and Management accounting:
Financial Accounting Management Accounting
Purpose
Types of
Reports
Standards for
Presentations
Reporting
Entity
Time period
covered
Users of
information
To provide investors, creditors
and other external parties with
useful information about the
financial performance and cash
flow prospects of an enterprise.
Primarily financial statements-
statements of financial position
or balance sheet, profit and loss
accounts, cash flow statements
and related notes and
supplemental disclosure that
provide investors, creditors and
other users information to
support external decision
making prices.
Generally accepted accounting
principles, including those
formally established in the
authoritative accounting
literature and standards
industry practice
Usually the company is viewed
as whole.
Usually a year, quarter or
month. Most reports focus on
completed periods. Emphasis is
placed on the current period,
with prior periods often shown
for comparison.
Outsiders as well as managers.
For financial statements, these
outsiders include stockholders,
creditors, prospective investors,
regulatory authorities and the
general public.
To provide managers with
information useful for planning,
evaluating and rewarding
performance and sharing with
other outsider parties. To
apportion decision making
authority over firms resources.
Many different types of
reports, depending on the
nature of the business and the
specific information needs of
management.
Rules are set within each
organisation to produce
information most relevant to
the needs of management.
A component of company‘s
value chain such as a business
segment supplier, customers,
product line, department or
product.
Any period year, quarter.
Month, week, days even a
work shift. Some reports are
historical in nature; others
focus on estimates of results
expected in future periods.
Management, customers,
auditors, suppliers and others
involved in an organization
value chain.
23. Discuss the three most important concepts of accounting.
1. Business Entity Concept:
The business concern is artificially formed as a separate legal entity, taking the form
of a Proprietorship concern or a Partnership firm or a Private limited Company or a
Public Limited Company. Thus the Proprietor or Partners or Promoters is/are
considered distinct from his/their own business. Without such a distinction the affairs
of the firm will be mixed up with the private affairs of the Proprietor or Partners or
Promoters and the true picture of the firm will not be available. Hence the business
concern (entity) is to be considered different from the owner/s also referred as
Separate entity concept.
2. Money measurement concept:
The transactions to be recorded in the books of accounts have to be expressed in
monetary terms only for the purpose of measuring and assessing the actual income
earned or loss incurred in a business. For example: the efficiency of a manager
which resulted in improvement in business cannot be recorded in the books because
it cannot be quantitatively measured. Hence only those events having money value
can be entered in the books of accounts.
3. Going Concern concept:
This assumes that the business will continue to exist forever. Any business is not
started with an intention of closing it down in the near future. This concept affirms
that it will be continuing its business without the intention or necessity of winding up
of its business and to permanently continue its business keeping in view earning
returns on the investment made. 24. In a certain period the company sold 8000 units at Rs.15 per unit and
incurred a loss of Rs.5 per unit. In another period the company sold 20000
units and incurred a profit of Rs. 4 per unit. What would be the Break Even
Point in terms of Rupees and Units.
Solution:
Period Sales Profit and loss Contribution Fixed cost
I 120000 -40000
II 300000 80000
P/v ratio = Change in profit / Change in sales*100
= 80000-(-40000) / 300000-120000 *100
=120000 / 180000*100
= 67%
Contribution (1) = 120000*67% =80400
And (2) = 300000*67%=20100
Fixed cost:-
Contribution = FC+ Profit and loss
So FC = Contribution-profit
FC (1) = 80400-(-40000) =120400
FC (2) = 201000-80000 =121000
BEP = FC / P/v ratio
= 121000/67*100
= 180597
BEP (Unit)
= 180597/15=12039 Units.
25. Discuss accounting as an information system.
Accounting is often referred to as the language of business. The primary aim of
language to serve as a means of communication. Accounting is used to
communicate financial and other information to people, organization,
government etc about various aspects of business and non business activities.
An Accounting system consists of personnel , procedures, devices and records
used by an organization which helps in development and structure of accounting
information and communicating this information to decision makers. Design and
capabilities of these systems vary from organizations to organizations.
Input Process Output
Business Transaction
and events
(collection of Data)
26 . The Trial balance shows the following details ;
Bad debts 3000 Reserve for Bad
Assets
4500
Debtors 75000
Adjustments:
(i) Further Bad Debts Rs. 1000
(ii) Maintain reserve for doubtful debts @ 5%
(iii) Maintain reserve for discount on debtors @ 2%
Show the Profit & loss account and Balance sheet after the above
adjustments made, relating to bad debts ; discount on debtors and
net debtors.
Solution: Trading & Profit & Loss Account
Dr. Cr.
Profit & Loss A/C
Balance Sheet
Cash / Fund Flow
statements
Accounting
Concepts and
Convention
Particulars Detail Amount Particulars Amount
Balance Sheet
Liabilities Amount(Rs.) Assets Details Amount (Rs)
Debtors
Less: Further
Bad Debts
New Provision
of Debts.
Provision of
Discount on
Debtors.
75000
1000
3700
1406
65894
27. Define the Limitation of Financial Ratios.
Limitation of financial ratios:
Financial statement analysis through ratios is useful because they highlight
relationship between items in the financial statements. However, they have a
number of limitations which should be kept in mind while preparing or using
them.
(1) Ratios are based on accounting figures given in the financial statements.
However, accounting figures are themselves subject to deficiencies, approximations, diversity in practice or even manipulation to some extent.
(2) Ratio have inherent problem of comparability. companies otherwise similar
may employ different accounting methods, which can cause problems in
comparing certain key relationship.
(3) Inflation may limit the utility of accounting ratios. Due to inflation, historical
cost-based financial and accounting figures do not reflect current value figures,
especially in the case of assets purchased at different dates by the different
enterprises.
To Bad Debts
Add: Further bad debts.
Provision for doubtful debts
5 % on (75000-1000) =
3700
Reserve for discount on
debtors
2 % on 70300 (75000-
4700)
Less: Old provision
3000
1000
3700
1406
9106
4500
4606
(4) Accounting ratios are not totally dependable and they must be used after
giving due weightage to general economic conditions, industry situation, position
of firms within the industry, mode of operations, size of firm, diversity of product
which can make the business enterprises completely dissimilar and thus affect the computation of accounting ratios.
(5) The different methods of computations also influence the utility of accounting
ratio. The different concept used for determining numerator and denominator in
a particular accounting ratio will not help in drawing reliable conclusions even in identical situations.
28. Who are the users of accounting Information?
Accounting is of primary importance to the managers. However, other persons
such as creditors, prospective investors, employees, etc. are also interested in
the accounting information.
1. Proprietors.
A business is done with the objective of making profit. Its profitability and
financial soundness are, therefore, matters of prime importance to the
proprietors who have invested their money in the business.
2. Managers.
In a sole proprietary business, usually the proprietor is the manager. In case of
a partnership business either some or all the partners participate in the
management of the business. They, therefore, act both as managers as well as
owners.
3. Creditors.
Creditors are the persons who have extended credit to the company. They are
also interested in the financial statements because they will help them in
ascertaining the enterprise will be in a position to meet its commitment towards
them both regording payments and principals.
4. Prospective investors.
A person who is contemplating an investment in a business will like to knopwn
about its profitability and financial position.
5. Employees.The employees are interested in the financial statement on
accounts of taxation, labour and corporate laws.
6.Citizen
An ordinary citizen may be interested in the accounting records of the
institutions with which he comes I contact in his daily life e.g. bank, temple,
public utilities such as gas, transport, electricity companies. In a broader sense,
he is also interested in the account of a Government Company, a public utility
concern etc. as a voter and a tax payer.
29. Differentiate between Book-keeping and accounting.
Book-keeping Accounting
1. Is a part of accounting
2. Concerned with record Keeping &
1. Actual process of preparing &
presenting the accounts
maintenance Of accounting records.
3. Routine & clerical in nature
4. Involves identifying, measuring
Involves summarizing
5. Is primary stage
6. Is to maintain primary records
2. Requires higher level of knowledge
3. Analytical in nature
4. Recording & classifying analyzing &
interpreting transactions
5. Is secondary stage
6. Is to ascertain net results of operations
and financial position.
30. from the following information regarding a standard product, compute
(1) Price (2) usage and (3) mix variance:
Standard Actual
Quantity
(kilos)
Unit
Price
Rs.
Total
Rs.
Quantity
(kilos)
Unit
Price
Rs.
Total
Rs.
Material A
Material B
Material C
Total
4
2
2
8
1.00
2.00
4.00
2.00
4.00
4.00
8.00
16.00
2
1
3
6
3.50
2.00
3.00
3.00
7.00
2.00
9.00
18.00
Solution
1. Price variance= Actual quantity * (Standard price – Actual Price)
Material A =2 * (Re.1- Rs. 3.50)= Rs. 5 (Adverse)
Material B =1 * (Rs.1 – Rs. 2) = Rs. –
Material C = 3* (Rs. 4 – Rs.3) =Rs. 3 (Favorable)
=Rs. 2 ( Adverse)
2. Usage Variance= Standard price * (Standard quantity – actual quantity)
Material A =Re.1 * (4-2) =Rs.2 (Favorable)
Material B =Rs.2 * (2-1) =Rs.2 (Favorable)
Material C =Rs.4 * (2-3) =Rs.4 (Adverse)
=Nil
31. Discuss ratios are the shortcut in Financial Statement Analysis
Or
Discuss the importance of ratios.
By using the ratio we can know the following information of a firm:
A. Liquidity of the firm:
The liquidity of a business defined as its ability to meet maturing debt obligations.
That is, does or will the firm have the resources to pay the creditors when the debt
comes due?
There are two ways to approach the liquidity question.
1. We can look at the firm‘s assets that are relatively liquid in nature and compare
them to the amount of the debt coming due in the near term
2. We can look at how quickly the firm‘s liquid assets are being converted into cash.
B. Financing of assets:
Two primary ratios used to answer this question are the debt ratio and times interest
earned.
C. Management generating adequate operating profits on the firm’s assets:
We have several choices as to how we measure profits, operating profits, or net
profits. As net profit includes the unwanted effects of the firms financing policies, this
leaves operating profits as our best choice in measuring the firm‘s operating
profitability.
D. If the owners (shareholders) receiving an adequate return on their
investment
We want to know if the earnings available to the firm‘s owners or common equity
investors are attractive when compared to the returns of owners of similar
companies in the same industry.
Don‘t jump to conclusions that the ratios are the ultimate tools of financial analysis
and would give you straight answers regarding the financial health of the company.
They would not. Almost any ratio analyzed by itself can give you misleading
indications.
Financial ratios can be divided into five basic categories. These categories consist of
liquidity ratios, efficiency ratios, and leverage ratios. Profitability ratios and market
value ratios.
32. Discuss the advantages and limitations of Standard Costing
Advantages:
Advantages of Standard costing all as under:
a. Standards are the building blocks used to compile budgets.
b. Actual costs can be compared with standard costs in order to measure
performance.
c. The setting of standards should results in the best resources and methods being
used, which will increase efficiency.
d. It highlights areas of strength and weakness.
e. Standard costs can be used to value stock and as a basis for setting wage
incentives schemes.
f. It operates through the management by exception principals, where only those
variances, that are outside certain tolerance limits, are investigated thereby
economizing on managerial time.
g. Standard costing simplifies bookkeeping, as information is recorded at standard,
instead of a number of historic figures.
h. Control action is immediate, for, as soon as material is issued from store in order
to make a product it can be compared with the standard material which should have
been for the actual productions.
i. Managers are made responsible for standards.
Limitations:
a. heavy load of input data is required which is expensive.
b. Standard costing is only applicable in organizations where processes or jobs are of
a repetitive nature.
c. Unless standards are set which are accurate respect to labour efficiency, quality,
and price of material, any comparison with actual will be meaningless.
d. because of uncertainty , especially that related to inflation, standards needs to be
continually updated and revised.
33. What is posting? State relationship between Journal and Ledger.
Posting:-
Posting is the process of transferring debits and credits from the journal and other
books of original entry to their respective account in the ledger. The aim of posting is
to make a classified and summarized record of business transactions in appropriate
accounts.
Rules regarding posting:
1. Separate accounts should be opened in the ledger for the posting the different
transaction recorded in the book of original entity.
2. All the transaction pertaining to one account should be posted in the same
account.
3. Two aspect of the business transaction namely- debit aspect and credit aspect-
should be posted on the debit side and credit side of the account respectively.
Relationship between Journal and ledger:
Journal and ledger are the most important books maintained in an enterprise. They
are closely interrelated. Business transactions are recoded first in Journal and other
books of original entry and then from these books they are transferred to ledger.
Journal records transactions in a chronological order while the ledger records the
transactions in a classified from. Journal, being the book of original entry or more
reliable as compared to ledger.
A journal is not useful in answering a question such as, what is the balance of cash
at a certain date. This question is answered by referring to the ledger, which
summarizes the cumulative effect of recorded transactions in separate account
accounts. This is accomplished by transferring or posting information from the
journal into appropriate accounts in the ledger.
35. What are the objectives of Human Resource Accounting? Discuss its
utility.
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested parties‖.
HRA, thus, not only involves measurement of all the costs/ investments associated
with the recruitment, placement, training and development of employees, but also
the quantification of the economic value of the people in an organization.
Objectives:
HRA serves the following purposes in an organization:
1. It furnishes cost/value information for making management decisions about
acquiring, allocating, developing, and maintaining human resources in order to attain
cost-effectiveness;
2. It allows management personnel to monitor effectively the use of human
resources;
3. It provides a sound and effective basis of human asset control, that is, whether
the asset is appreciated, depleted or conserved;
4. It helps in the development of management principles by classifying the financial
consequences of various practices.
Utility of Human Resource Accounting:
1. It through lights on the strength and weakness of the existing workforce in an
organization. This is in turn, helps the management in recruitment planning where to
hire people or not.
2. It provides valuable feedback to managers regarding the effectiveness of the
Human Resource policies and practices.
3. It helps potential investors judge a company better on the strength of the human
assets utilized therein. If two companies offer the same rate of return on capital
employed, information on human resources can help investors decide which
company to be picked up as an investment.
4. It helps management in taking appropriate decisions regarding the use of human
assets in an organization that is whether to hire new recruits or promote people
internally.
36. A factory is currently working at 50% capacity and the product cost per
unit is given below:
Material - Rs. 100; Labour – Rs. 30; factory overheads (40%
fixed) – Rs. 30 ; Administrative overheads (50% fixed) – Rs.20.
The product is sold at Rs.240 per unit and the factory produces
10000 units at 50% capacity level. Estimate the profit and total
cost if the factory works at 60% by preparing a flexible budget. At
60% working, raw material cost increases by 20% and selling price
falls by 10%.
Solution: Flexible Budget
50% (10000 units) 60% (12000 units)
Particulars Cost per unit Total Cost Cost per unit Total Cost
Material 100 1000000 120 1440000
Labour 30 300000 30 360000
Factory Overhead (30 Rs.)
Fixed 40% 12 120000 12 144000
Variable 60% 18 180000 18 180000
Adminstrative Overhead (20 Rs.)
Fixed 50% 10 100000 10 120000
Variable 50% 10 100000 10 100000
Total Cost 180 1800000 200 2344000
Profit 60 600000 16 192000
Selling Price 240 2400000 216 2592000
37. A company budgets for a production of 150000 units. The variable cost per unit
is Rs.14 and fixed cost Rs. 2 per unit. The company fixes its selling price to
fetch a profit of 15% on cost.
a) Find the break-Even Point
b) Determine the P/V ratio
c) If it reduces the selling price by 5%, what is the new BEP and P/v ratio.
d) What would be the sales, at the reduced price if the desired profit is
Rs.3,96,000
Solution:
Total Cost = 14 + 2 = 16 Rs. Profit = 15 % of 16 = 2.40 Rs.
Selling Price = Cost + Profit 16 + 2.40 = 18.40 Rs.
Contribution: Sales – Variable Cost & 18.40 – 14 = 4.40
a. P/V Ratio = Contribution/Sales 4.40/18.40 = 24% (23.9%)
b. BEP: Fixed Cost / P/v Ratio fixed Cost = 300000 (150000*2)
= (300000 * 18.40)/ 4.40 = 1254545 Rs.
BEP in units. 68181 units (1254545/18.40)
c. New Selling Price = 18.40- (18.4*5%) = 17.48 Rs.
New P/V ratio = 3.48/17.48 = 20 % (19.9%)
New BEP = (300000*17.48)/3.48 = 1506896 Rs. Or 86206 units.
d. Estimated Sales = Fixed Cost + Desired Profit
P/V Ratio
Estimated Sales = (300000 + 396000)/19.9% = 3497487 Rs. (New P/V
Ratio)
38. Compute (i) Material Cost variance (ii) Material Price variance and (iii)
Material Usage variance from the following information:
Standard Actual
Particulars Quantity (Kg) Rate per kg Quantity (Kg) Rate per
kg
Material A 800 6.00 750 7.00
Material B 400 4.00 500 5.00
Solution: Material Cost Variance = (SQ * SP) – (AQ*AP)
= 6400-7750 = 1350 (A)
Material Price Variance = (SP-AP) * AQ
A = (6-7)*750 = 750 (A)
B = (4-5)*500 = 500 (A)
1250(A)
Material Usage Variance = (SQ-AQ)*SP
A = (800-750)*6 = 300 (F)
B = (400-500)*4 =400 (A)
100 (A)
39. Prepare Fund Flow Statement.
Liabilities 2006 2007 Assets 2006 2007
Share Capital 70000 74000 Cash 9000 7800
Debentures 12000 6000 Debtors 14900 17700
Creditors 10360 11840 Stock 49200 42700
Profit & Loss A/C 10740 11360 Goodwill 10000 5000
Land 20000 30000
105106 105207 105106 105207
Additional Information:
a. Dividends Paid for 4000 Rs.
b. Land Purchased for 15000 Rs.
c. Decrease in Working Capital is 6380 Rs. (calculated)
Solution: Funds From Operation
Net Profit as Per B/S 620
Add Non operating Expenses
Goodwill Written off 5000
Dividend Paid 4000
Depreciation on Land 5000 14000
Funds From Operations 14620
Fund Flow Statement
Sources Amount Applications Amount
Issue of Shares 4000 Purchase of Land 15000
Funds From Operation 14620 Redemption of Debentures 6000
Decrease in Working Capital 6380 Dividends Paid 4000
25000 25000
40. Preparing a cash budget for the months of may, June and July, 1998 on
the basis of the following information:
(1) Income and expenditure forces:
Months Credit
sales
Credit
purchases
Wages Manufacturing
Expenses
Office
expenses
Selling
expenses
March
April
May
June
July
August
60,000
62,000
65,000
58,000
56,000
60,000
36,000
38,000
33,000
35,000
39,000
34,000
9,000
8,000
10,000
8,500
9,500
8,000
4,000
3,000
4,500
3,500
4,000
3,000
2,000
1,500
2,500
2,000
1,000
1,500
4,000
5,000
4,500
3,500
4,500
4,500
(2) Cash balance on 1st may, 1998 Rs 8,000
(3) Plant costing Rs. 16,000 is due for delivery in July, payable 10% on
delivery and the balance after 3 months.
(4) Advance tax of Rs.8, 000 each is payable in march and June.
(5) Period of credit allowed (1) by suppliers – two months, and (2) to
customers-one month.
(6) Lag in payment of manufacturing expenses – ½ month.
(7) Lag in payment of office and selling expenses – one month.
Solution:
Cash Budget
Particular May 1998 Rs June 1998 Rs July 1998 Rs
Opening balance
Estimated cash receipts
Debtors (credit sales)
Estimated cash payment
Creditors (credit purchases)
Wages
Manufacturing expenses
Office expenses
Selling expenses
Plant- payment on delivery
Advance tax
8,000
62,000
70,000
36,000
10,000
3,750
1,500
5,000
-
-
-----------
56,250
13,750
64,000
77,750
38,000
8,500
4,000
2,500
4,500
-
8,000
-------------
65,500
12,250
58,000
70,250
33,000
9,500
3,750
2,000
3,500
1600
-
-------------
53,350
13,750 12,250 16,900
Working Notes: (1) Opening for June has been written finding closing balance for
May, and for July after finding the closing balance for June.
(2) Since the period of credit allowed to customers is one month, the payments for-
credit purchases in March shall be made in May and so on.
(3) Since the period of credit allowed by suppliers is two months, the payment: for
credit purchases in March shall be made in May and so on.
(4) One-half of the manufacturing expenses of April and one –half of those of May
shall be paid in May, (1/2 of Rs. 3,000) + (1/2 of Rs 4,500) Rs. 3750 and so on.
(5) Office and selling expenses of April shall be paid in May and so on.
41. The balance sheet of Y Ltd. stood as follows as on:
You are given the following information for the year 1994-95
Liabilities 31.3.95 31.3.94 Assets 31.3.95 31.3.94
Capital
Reserves
Loans
Creditors and
other current
Liabilities
250
116
100
129
250
100
120
25
Fixed assets
Less:
Depreciation
Investment
Stock
Debtors
Cash /bank
Other current
Assets
Misc.
Expenditure
400
140
260
40
120
70
20
25
60
300
100
200
30
100
50
20
25
70
595 495 595 495
Sales 600
PBIT 150
Interest 24
Provision for tax 60
All the figures given above are rupees in lakhs.
From the above particular calculate for the year 1994-95:
(a) Return on capital employed Ratio.
(b) Stock turnover ratio
(c) Return on net worth
(d) Current ratio
(e) Proprietary Ratio
Solution:
(a) Return on capital employed Ratio.
PBIT / Average capital employed *100
= 150 / 403 *100
= 37.22%
(b) Stock turnover ratio
Sales / average stock
600 / 110
= 5.45 times
(c) Return on net worth
PAT / Average *100
= 235 / 129
=22.53%
(d) Current Ratio
Current Assets / current liabilities
= 235 / 129
=1.82 times
(e) Proprietary Ratio
Proprietary funds / total assets –Misc. expenses
= 306 / 595-60
=0.57
Working notes:
(1) Average capital employed (Rs in lakhs )
31.3.1995
31.3.1994
Total assets (excluding Misce. Exp.) 535
425
Less: creditors and other current liability 129
25
406 400
Average 466 + 470 +/2 = Rs 468 lakhs
(2) Average net worth
Capital 250
250
Reserve 116
100
366
350
Less: Misc. expenses 60
70
Average: 306 + 280 / 2 = Rs 293 Lakhs
Proprietary funds as on 31.3.95 mean net worth as on that Rs 306 Lakhs.
(3) Profit after tax (PAT) (Rs in lakhs)
PBIT 150
Less: Interest 24
--------
126
Less: Tax 60
---------
66
(4) Current Assets as on 31.3.95 (Rs in lakhs)
Stock 120
Debtors 70
Cash /Bank 20
Other current Assets 25
-------
--
235
306 280