Financial and Management Accounting MB0025

8/8/2019 Financial and Management Accounting MB0025

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1. Explain any two accounting concepts withexample?

Concepts are the basic assumptions or conditions upon which the science of accounting is based. Thereare five basic concepts of accounting namely

Business entity concept,

Going concern concept,

Money measurement concept, Periodicity concept and

Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a

separate entity and different from the owner or theproprietor. This is true in the case all forms oforganization. If X starts business, he should not mixup his personnel properties with that of thebusiness. When he invests his funds into thebusiness, it is regarded as capital to the businessand capital is a liability from the business point of

view. If X withdraws any money fro the business, itis detectable form the capital and to that extent theliability of the business towards the owner isreduced. On the other hand, if the proprietorwithdraws money form the business for businesspurposes, then it is treated as expenditure to thebusiness. This legal separation between business

and ownership is kept in mind while recoding thetransactions in the books of business.

Financial and Management Accounting MB0025


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Going concern concept

The fundamental assumption is that the business

entity will continue fairly for a long time to come. There is no reason why an enterprise should bepromoted for a short period only to liquidate thebusiness in the foreseeable future. This assumptionis called Going concern concept. For this reasonaccountants value fixed assets on historical costmethod. Had the business been setup to last for

short period, fixed assets should have been valuedat a market price. Besides, going concern conceptprovides for amortization of the cost of fixed assetsover the lifetime of the assets. For example, anentrepreneur purchases a plant for Rs. one croreand it has a life of 10 years. During this period, hesets aside every year certain funds from the income

of the business so that it would help him forreplacement of the asset at the end of ten years.This process of amortization presupposes that theenterprise will continue to do business fairly for longtime.



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2. Prove that accounting equation is satisfiedin all the following transactions of Mr. X

i. Commenced business with cash Rs80,000ii. Purchased goods for cash Rs 40,000 andon credit Rs. 30,000iii. Sold goods for cash Rs. 40,000 costingRs. 25,000iv. Paid salary Rs. 2,000 and salaryoutstanding Rs. 1,000v. Brought scooter for personal use forcash at Rs. 20,000

The accounting equation is,

Equity [Working Capital] + Liabilities + Assets



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i. Commenced business with cash Rs80,000

In the first transaction, the business receives a

capital of Rs. 80,000 cash and so capital accountand cash accounts are affected.Capital is a liability and cash is an asset to thebusiness.

This is shown in the transaction number 1, in thetable.

ii. Purchased goods for cash Rs 40,000 andon credit Rs. 30,000

In this transaction, cash account, goods account andliabilities account gets affected.Cash account reduces by Rs. 40,000Goods account increases by Rs. 40,000

Liabilities account increases by Rs. 30,000This is shown in the transaction number 2, in thetable.

iii. Sold goods for cash Rs. 40,000 costing Rs.25,000

In this transaction, goods account, cash account andprofit account gets affected.Cash account increases by Rs. 40,000Goods account reduces by Rs. 25,000Profit account being owners account, it getscredited with Rs 15,000




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iv. Paid salary Rs. 2,000 and salaryoutstanding Rs. 1,000

In this transaction, cash and salary accounts areaffected.

Cash account reduces by Rs. 2,000 ans salaryaccount gets credited by Rs. 2,000Outstanding salary is Rs. 1,000 which is not paidyet, hence non of the accounts gets affected.


v. Brought scooter for personal use for cashat Rs. 20,000The scooter is for personal use, the liability of thebusiness on owners capital decreases.Cash account and capital account decreases by Rs.20,000

This is shown in the transaction number 5, in the

table.

Transaction

Numbe

r

Assets

Liabilities andowner'sequity

Cash

a/c

Goods

a/c

Salary

a/c

Liabili

ties

Mr.X'sCapita

l

180000

80000

2

-40000

70,000

30000

3

400

00

-25000

15000

4 - 200



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2000

0

5

-200

00

-20000

58000

45000

2000

30000 75000

105000 105000

Q3.Show the rectification of entries for thefollowing

a. the sales account is undercast by Rs.15,000

b. Goods returned by customer Mr. X ofRs.5650 has been posted in return inwardaccount as Rs.5560 and in Mr. Xs account asRs. 6550c. Salary paid Rs.6,000 has been posted torent account.d. Cash received from Ram posted to Shyam

account Rs. 7000e. Cash received from jadu Rs. 8640 has beenposted to the debit of Madhus account.

The below table shows the rectification of entries

ParticularsDebit

[Rs.]

Credit

[Rs.]



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Suspense accountDr

To Sales

account

15,000

15,000

Suspense accountDr

To Returnaccount

Mr. Xs accountDr

To Suspenseaccount

90

900

90

900

Salary accountDr

To rentaccount

6000

6000

Shyam accountDr

To Ram

account

7000

7000

Jadu accountDr

To Madhuaccount

8640

8640

Q4. The following balances are extracted fromthe books of Kiran Trading Co on 31st March2000. You are required to prepare trading and



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profit and loss account and a balance sheet ason that date:

Opening

Stock

5,

000

Commission

received

2,0

00B/R 22,

500

Return

Outward

2,5

00Purchases 1,95,

000

Trade

Expenses

1,0

00Wages 14,

000

Office

furniture

5,0

00Insurance 5,

500

Cash in hand 2,5

00Sundry

Debtors

1,50,

000

Cash at bank 23,7

50Carriage

Inwards

4,

000

Rent and

Taxes

5,5

00Commission

Paid

4,

000

Carriage

Outward

7,2

50

Interest onCapital

3,500

Sales 2,50,000

Stationery 2,

250

Bills Payable 15,

000Return

Inwards

6,

500

Creditors 98,

250

Capital 89,



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500

The closing stock was valued at Rs.1,25,000

Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

Opening stock 5,000Sales - Return

Inward

243,5

00Purchases - ReturnOutward

192,500

Closing Stock125,0

00Carriage Inwards 4,000

Wages14,00

0

Gross Profit153,0

00

368,500

368,500



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Profit and Loss Account of M/s Kiran TradingCo

Profit and Loss AccountDr CrRent and

Taxes5,500

by Trading a/c GrossProfit

153,000

Insurance 5,500 Commission Received 2,000

TradeExpenses

1,000

CommissionPaid

4,000

Interest onCapital

3,500

Stationary 2,250

CarriageOutward

7,250

Net Profit 126,000

155,000

155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet

Capital and Liabilities Assets

Bills Payable 15,000

SundryDebtors

150,000



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Capital89,50

0OfficeFurniture

5,000

Creditors98,25

0Cash inHand

2,500

Net Profit from P & LAccount

126,000

Cash inBank

23,750

B/R22,50

0

ClosingStock

125,000

328,7

50

328,7

50

5. Write a note on:a. outstanding expensesb. prepaid expenses

a. Out standing expenses:

Expenses due but not paid are known a outstandingexpenses. Wages, salaries, rent, commission etcpayable in the current month are paid in the

following month. If the final accounts are preparedfor the year ending 31st December, then theexpenses payable for December will be paid in

January of next year. The extent to which theamount belongs to the current year but payable inthe next year is called outstanding expenses. Torecord that aspect, the journal entry drawn in the

journal proper is:



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Concerned Expenses account Dr

To outstanding expenses account.

Outstanding expenses account indicates liability forthe current year and it will appear in the balancesheet.

b. Prepaid expenses:

Expenses paid in advance are regarded as prepaid

expenses. Prepaid expenses form an asset andtherefore prepaid expenses account is debited. Forexample, insurance premium is paid from April,2004 to March, 2005; and the amount is Rs. 3600.

The financial year ends by 31st December, 2004. Therefore the premium relating to Jan, Feb. andMarch of 2005 Rs. 900 is said to have been paid in

advance. To record this internal adjustment, theentry is:

Prepaid Expenses account Dr 900

To insurance account 900Note that outstanding or prepaid expenses accountsare regarded as personal accounts.



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Q1 Budgetary Control is a technique ofmanagerial control through budgets.Elaborate?

Solution: Modern business world is full ofcompetition, uncertainty and exposed to differenttypes of risks. The complexity of managerialproblems has led to development of variousmanagerial tools, techniques and procedures usefulfor the management in managing the business

successfully. In this direction, planning and controlplays an important role. Budgeting is the mostcommon and powerful standard device of pallingand control.

Budgetary control is a technique ofmanagerial control through budgets. A budget

is a quantitative expression of plan of action. . It is apre-determined detailed plan of action developed as



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a guide for future operation. According to WeldonBudgetary control is the planning in advance of thevarious functions of business so that the business asa whole can be controlled. Budgetary controls deals

with planning, coordination, recording appraisal andfollow-up of actions.

The procedure for preparing plan in respect of futurefinancial and physical requirements is generallycalled Budgeting. It is a forward planning exercise.It involves the preparation in advance of the

quantitative as well as the financial statements toindicate the intention of the management in respectof the various aspects of the business.

Budgetary control is applied to a system ofmanagement accounting control by which alloperations and output are forecasted far ahead as

possible and actual results when known arecompared with the budget estimates.

Budgeting is a forward planning. It basically servesas a tool for management control. The objectives ofbudgeting may be taken as:

To forecast and plan for future to avoid lossesand to maximize profits.

To help the concern in planning the activitiesboth physical and financial.

To bring about coordination between differentfunctions of the enterprise

To control; actual actions by ensuring thatactual are in tune with targets



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Budgetary control:

When one relates control function to budget, we find

a system what is generally termed as budgetarycontrol. Control signifies such systematic effortswhich help the management to know whether actualperformance is in line with predetermined goal,policy and plans. It is basically a measurement tool.

Yardsticks should be laid down. Standards must beset up.

Therefore, the objectives can be summarized asfollows:

To conform to good business practice by planningfor the future.. To coordinate the various divisions of a business. To establish divisional and departmental

responsibilities. To forecast operating activities and financialposition. To operate most efficiently the divisions,departments and cost center. To avoid waste, to reduce expenses and to obtainthe income desired.

To obtain more economical use of capital availablefor the efficient

operation. To provide more definite assurance of earning theproper return on capital

employed. To centralize management control.

To show the management where action is neededto remedy a situation.



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To help in controlling cash. To help in obtaining better inventory control andturnover.

Steps in Budgetary ControlThe procedure to be followed in the preparation andcontrol of budget may differ from business tobusiness. But, a general pattern of outline of budget

preparation and control may go a long way toachieve the end results. The steps are as follows:

Formulation of policies: The business policies are thefoundation stone of budget construction. Functionpolicies should be formulated in advance. Long-range policies with short term projections should be

made for the functional areas such as sales,production, inventory, cash management, capitalexpenditure.Preparation of forecasts:Based on the formulated policies, forecast should bemade in respect of each function. Activity basedconcepts should be introduced at the micro level foreach function Forecasts should not be considered asa mere estimates. Scientific methods should beadopted for forecasting. Analysis of various factorsbased on past, and present, future forecast shouldbe made.Preparation of budgets:Forecasts are converted into written codifieddocument. Such written documents can be used forcoordination purposes. Function budgets will act asguidelines for implementation.



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Forecast combinations:While developing the budgets, through a MasterBudget various permutations and combinationprocesses are considered and developed. Based on

this, establishment of the most preferred one whichwill yield optimum benefits should be considered. Allthe factor components should be identified whichare likely to cause disturbances while implementingthe budgets

Q.2 a. Given: Current ratio = 2.6 Liquid

ratio = 1.4 Working Capital = Rs.1,

10,000

Calculate (1) Current assets (2) current

liabilities

(3) Liquid Asset (4) Stock. Solution:

Given data is working capital, hence: Working

capital = Current assets - current liabilities ----- [1]

Current Ratio = CA / CL = 2.6 In the absence of any

value, the current liability is always taken as 1 unit

2.6 = CA / 1 and cross multiplying, CA is 2.6

Substituting CA in [1], Working capital = 2.6 - 1 =



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1.6 For 1.6 WCR = Working capital value is Rs1,

10,000 For 2.6 CAR, the current asset is Rs.1,

10,000 x 2.6 / 1.6 = Rs.1, 78,750 For 1 CLR, the

current liability is 1, 10,000 x 1 / 1.6 = Rs.68,750 Liquid Ratio =Liquid asset / current

liabilities

1.4 = Liquid asset / 2, 86,000 Liquid asset = 1.4 X

68,750

= 96,250 Liquid asset = Current asset Stock

Therefore, Stock = Current Asset Liquid Asset

= 1, 78,750 96250

= Rs. 82,500

b. Calculate Gross Profit Ratio from thefollowing figures:Sales Rs.5, 00,000Sales return Rs.50, 000Closing stock Rs.35, 000Opening stock Rs.70, 000Purchases Rs.3, 50,000

Solution: Gross profit ratio (GP ratio) is theratio ofgross profit to net salesexpressed as a percentage. It expresses therelationship between grossprofit and sales.[Gross Profit Ratio = (Gross profit / Net sales) 100]

Cost of Goods Sold [COGS] = Opening stock +Purchases closing stock= 70000 + 350000-35000Financial and Management Accounting MB0025


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COGS = 385000 Rs.Gross Profit = (Sales Sales returns) - COGS= (500000 50000) 385000= 450000 385000

Gross Profit = 65000 Rs.Net Sales = Sales Sales returns= 500000 50000Net Sales = 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales)

100]= (65000/450000) X 100

Gross Profit Ratio = 14.4%



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Q3. From the following Balance Sheet ofWilliam & Co Ltd., you are required to preparea Schedule of Changes in Working capital &

Statement of Sources and Application offunds?

Balance Sheet


Liabilities

2002Rs.

2003Rs.

Assets 2002Rs.

2003Rs.

Capital 80,000

85,000

Cash inHand

4,000

9,000

P&L a/c 14,500

24,500

SundryDebtors

16,500

19,500

SundryCreditor

s

9,000

5,000

Stock 9,000

7,000

Long-termLoans

5,000

Machinery

24,000

34,000

Building 50,000

50,000

Total 1,03,500

1,19,500

Total 1,03,500

1,19,500


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Solution : schedule of changes in working capital


2002 2003Increa

se

Decrea

seLiabilitiesSundry Creditors 9,000 5,000 - 4,000Long term loans 0 5,000 5000P&L/c 14500 24500 10000

Total liabilities [B]23,50

034,50

010,00

09,000

AssetsCash in Hand 4000 9000 5000Sundry Debtors 16500 19500 3000Stock 9000 7000 2000Machinery 24000 34000 10000Total Assets (A) 5350

06950

010000 2000

Working Capital A-B 30,000

35,000

Net increase inWorking capital

5000 9000

35,00 35,00 20,000 20,000

Details Balance as on Effect on Working Capital


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6. In FFS, To and By are indicated. In CFS, theseare not indicated.

7. In FFS, net effect of receipts and disbursements

are recorded. In CFSonly cash receipts and payments are recorded.

8. FFS is concerned with the total provision of funds.CFS is concerned with

only cash.

9. FFS is flexible but CFS is rigid10.FFS is more relevant for long range financialstrategy. CFS concentrates

on short term aspects mostly affecting theliquidity of the business.

5a. DELL computers sell 100 PCs at Rs.42, 000.

The variable expensesamount to Rs.28, 000 per PC. The total fixedexpenses are Rs.14,00,000. Prepare an income statement.

Solution:



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b. Calculate BEP and MOSSales at present are 55,000 units per annum.Selling price is Rs.6per unit. Prime cost Rs.3 per unit. A variable

overhead is Re.1 per

unit. Fixed cost Rs.80, 000 per annum.Sales at present 50,000 units per annum. Sellingprice Rs.6 per unit, Prime costRs.3 per unit. Variable overheads Re.1 per unit.Fixed cost Rs.75, 000 perannum.

Solution:

BEP = Fixed cost / (SP VC) per unit


Income Statement

No. Of computers produced 100No. Of computers sold 100Unit selling price per computer 42000unit variable cost per

computer

28000

Sales revenue =No. Ofcomputers sold X unit sellingprice

4200000

Less variable cost (100 X28000)

-2800000

Less Fixed expenses -1400000

Profit or loss 0


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= 80,000 / (6 4)= 80,000 / 2BEP = 40,000 units.BEP in rupees = BEP in units x selling price per

unit= 40,000 x Rs.6= Rs.2, 40,000MOS = Actual Sales BEP Sales= (55,000 x 6) 2, 40,000MOS = Rs.90, 000

Q.6 What is cost variable analysis?

A variable cost changes in total in direct proportionto a change in the level ofactivity or cost driver. If activity increases, say by20%, total variable cost alsoincreases by 20 %. The total variable cost increases

proportionately withactivity. Variable cost fixed per unit but varies intotal.

Cost Variable Analysis:

Break Even Chart is used in Cost variable analysis. Itis a graphic or visualpresentation of the relationship between costs,volume and profit. It indicatesthe point of production at which there is neitherprofit nor loss. It also indicates the estimated profitor loss at different levels of production. Whileconstructing the chart, the following assumption isnormally considered.a) Costs are classified into fixed and variable costs



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b) Fixed costs shall remain fixed during the relevantvolume range of graph.c) Variable cost per unit will remain constant duringthe relevant volume range

of graphd) Selling price per unit will remain constante) Sales mix remains constant.f) Production and sales volume are equalg) There exists a linear relationship between costsand revenue.h) Linear relationship is indicated by way of straight

line.

Break Even Analysis

It is an extension of or even part of marginalcosting. It is a technique ofstudying cost volume profit relationship. Basically,

the break even analysis isaimed at measuring the variations of cost withvolume. It is a simple methodof presenting theeffect of changes in volume on profits. It is alsoknown asCVP analysis. The various assumptions are:

a) All costs can be classified into fixed and variableb) Sales mix will remain constant.c) There will be no change in general price leveld) The state of technology, Methods of productionand efficiency remainunchanged.e) Costs and revenues are influenced only byvolumef) Cost and revenues are linear.g) Stocks are valued at marginal costh) Unit produced and sold are same.



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End.

Financial and Management Accounting MB0025

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