Master of Business Administration

Semester I

MB0041 – Financial and Management Accounting

Assignment

Set- 1

Q1. Distinction between book keeping and accountancy.

Ans.

Distinction between Book-keeping and Accountancy:

Accountancy is the profession and the practitioners of accountancy are called accountants. Book keeping is the basic activity of recording. On recording the transactions and events in the books of accounts, accounting does the role of analysis and reporting. Accountancy is the profession of carrying the activities of book keeping and accounting. Accounting enjoys wider scope and includes not only book keeping but also analysis, interpretation and reporting of financial information. The later part of accounting is the core function of accounting. In the present day environment, sophisticated software packages are available, which facilitate entry of transactions and preparation of ledger accounts.

 

Book keeping Accountancy

It is a process of identifying, measuring, recording and analyzing the transactions in books of accounts.

It involves summarizing the classified transaction, interpreting the analyzed results and communicating the information to the users of financial statement.

Adopt principles of accounting for recording

Analyzing and interpreting requires skill, knowledge and experience

Book keeping is the first stage of accounting process

Accountancy follows book keeping. It is the secondary stage

The objective is to prepare final accounts and balance sheet in a systematic manner at the end of accounting period

The objective is to ascertain net results of financial operations and communicate the results to all stakeholders in a manner they understand

Accounts executives who perform this function may not require higher level of knowledge.

Accountants who perform this function need higher analytical skills to interpret the data and to take appropriate decisions

The nature of job is routine and clerical The nature of job is non routine but analytical.

Q2. Pass journal entries for the following transactions:

a) Madam commenced business with cash Rs. 70000

b) Purchased goods on credit 14000

c) Withdrew for private use 3000

d) Goods purchased for cash 12000

e) Paid wages 5000

Ans.

Accounting equations for the transactions

Transaction Assets = Liabilities + Owners Equity

Cash + Good + Debtors + Furniture + Creditors+ Madan's Capital

1 70,000 70,000

2 14,000 14,000

3 -3,000 -3,000

4 -12,000 12,000

5 -5,000 -5000

End Equation 50,000 26,000 0 0 14,000 62,000

76,000 76,000

Q3. Write short notes on:

a. Outstanding Expenses

b. Prepaid Expenses

Ans.

(a) Outstanding Expenses

 Expenses yet to be paid or outstanding expenses for the current period should be charged against the current period’s income. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses.

Salaries outstanding (March 20XX month salary paid in April 20XX) ·

Rent outstanding

Salaries A/c Dr.

To outstanding Salaries A/c.

Being salary for the month of march 20xx due but not yet paid accounted.

(b) Prepaid Expenses

Expenses paid in advance or prepaid expenses should be not be charged against the revenues relating to the current period but taken to the coming period. Prepaid expenses form an asset and therefore prepaid expenses account is debited.

Salaries paid in advance·

Insurance paid in advance·

Rent paid in advance

Example:

Insurance premium is paid from April, 2004 to March, 2005 and the amount isRs.3600. The accounting year of the firm ends on 31st December, 2004. Therefore the premium relating to Jan, Feb and Mar of amounting to Rs.900 is said to have been paid in advance. To record this internal adjustment, the entry is

Prepaid Expenses Account Dr. 900

To insurance account 900

Being insurance premium for Jan Feb and March 2005 paid in advance accounted.

Q4. Given variable cost Rs. 5,00,000. Fixed cost Rs. 3,00,000. Net profit Rs. 1,00,000. Sales Rs. 10,00,000.

Find :

(a) MCSR (b) BEP (c) Profit when sales amounted Rs.12,00,000 (d) sales required to earn a profit of Rs.2,00,000.

Hint: Your answers should match this

(a) 600000 ; (b) 600000; (c) 600000 ; (d) 1000000

Ans.

(a) MCSR = Contribution/Sales × 100

  Contribution = Sales - Variable Cost

= 10,00,000 - 5,00,000

  = 5,00,000

MCSR = 5,00,000/10,00,000 × 100

= 50%

(b) BEP = Fixed Cost/ MCSR 

= 3,00,000/0.5

= 6,00,000

(c) Profit when sales amounted Rs.12,00,000

Contribution 50%

Therefore total Contribution

12,00,000 × 50% = 6,00,000

Less: fixed cost Rs. 3,00,000

Profit= 3,00,000

(d) Sales required to earn a profit of Rs.2,00,000.

= Fixed Cost + Desired Profit/MCSR 

= 3,00,000 + 2,00,000/50%

= Rs. 10,00,000

Q5. Explain the meaning of Depreciation.

Mention the different types of depreciation with examples

Ans.

Depreciation

 Depreciation is reduction in the value of an asset due to constant use of the same, which is called wear and tear. Fixed assets like, buildings, plant, machinery, furniture etc., are subject to depreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss to the organization.

Depreciation account is debited and the concerned asset account is credited. The item of depreciation may appear in the trial balance, which means that already the concerned asset is reduced by the amount of depreciation. If depreciation is given as an additional adjustment, then the depreciation amount should be charged against profit and loss account on one hand and the concerned asset account is reduced on the other hand in the balance sheet.

There are two popular methods of depreciation: Fixed installment method (Straight line method)  Reducing balance method (Written down value method)

In fixed installment method, depreciation is calculated on cost of the asset. The depreciation charged remains same throughout the life of the asset. In case of reducing balance method (Diminishing balance method), the depreciation is charged on the reducing balance of the book value of the asset. The depreciation amount gets reduced year after year during the life of the asset. Reducing balance method is more popular and well recognized.

Example:

The book value of the building is Rs.400000. It is depreciated at 10% on fixed installment method. Show the journal entry and how does it appear in the balance sheet for the first and second year under both the methods.

Depreciation account Dr. 40,000

To building account 40,000

Being depreciation amount accounted for.

1. Depreciation charged for the first year under straight line and reducing balance method. 

2.

Balance Sheet as on

Liabilities AssetsBuilding 4,00,000Less 10% 3,60,000Depreciation 40,000

 During the first year the depreciation charged is similar under both the methods.

3. Depreciation for the second year under:

Straight line method Reducing balance method

BALANCE SHEET BALANCE SHEET

BUILDING 3,60,000 BUILDING 3,60,000

LESS 10% LESS 10%

SLM 40,000 DEPRECIATION 36,000

(10% OF 4,00,000) (10% OF 3,60,000)

3,20,000 3,24,000

Q6. Show the rectification entries for the following:

a. The Sales account is under cast by Rs.15,000

b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550.

c. Salary paid Rs.6,000 has been posted to Rent account

d. Cash received from Ram posted to Shyam account Rs.7,000

e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c

Ans.

DATE PARTICULARS L.F DR. CR.

a. Suspense A/c. Dr. To Sales A/c.(Being under casting of sales account rectifies)

15,000 15,000

b. Mr. X A/c. Dr.

Return Inward A/c. Dr.

To Suspense A/c.(Being wrong posting of return inward rectified)

900

90

990

c. Salary A/c. Dr.

To Rent A/c.(Being wrong posting of rent account rectified)

6000

6000

d. Suspense A/c. Dr.

To Ram A/c.(Being wrong posting of cash received rectified)

7000

7000

e. Jadu A/c. Dr.

To Madhu A/c.(Being wrong debit of madhu account rectified)

8640

8640

Set- 2

Q1. Distinguish between Management Accounting and Financial Accounting?

Ans.

Distinction between Financial Accounting and Management Accounting

Financial accounting is the preparation and communication of financial information to outsiders such as creditors, bankers, government, customers and so on. Another objective of financial accounting is to give complete picture of the enterprise to shareholders. Management accounting on the other hand aims at preparing and reporting the financial data to the management on regular basis. Management is entrusted with the responsibility of taking appropriate decisions, planning, performance evaluation, control, management of costs, cost determination etc., For both financial accounting and management accounting the financial data is the same and the reports prepared in financial accounting are also used in management accounting But the following are major differences between Financial accounting and Management accounting.

Financial accounting Management accounting

The primary users of financial accounting information are shareholders, creditors, government authorities, employees etc.

Top, middle and lower level managers use the information for planning and decision making

Accounting information is always expressed in terms of money

Management accounting may adopt any measurement unit like labour hours, machine hours or product units for the purpose of analysis

Financial data is presented for a definite period, say one year or a quarter

Reports are prepared on continuous basis, monthly or weekly or even daily

Financial accounting focuses on historical data Management accounting is oriented towards future

Financial accounting is a discipline by itself and has its own principles, policies and conventions

Management accounting makes use of other disciplines like economics, management, information system, operation research etc.,

Q2. Enter the following transactions in the single column cash book of Gopichand. March, 2003

1st Commenced business with cash 20000 2nd Bought goods for cash 5000 3rd Sold goods for cash 4000 4thGoods purchased from Ravi Kumar 10000 10thPaid to Ravi Kumar 7000 14thCash sales 8000 18thPurchased furniture for office 4000 22nd Paid wages 500 25thPaid rent 600 30thReceived Commission 4000 30th Withdrew for personal purpose 1000 31stPaid salary 900

Hint: Goods Purchased from Ravi Kumar is a credit purchase Balance c/f should be 17000

Ans.

Single column   cash book   of   Gopichand

Date Receipt Cash Date Payments Cash

MARCH2003

MARCH2003

1ST To Capital 20,000 2nd By Goods 5,000

3rd To Sales 4,000 10th By Ravi Kumar

7,000

14th To Sales 8,000 18th By Office Furniture

4,000

30th To Commission

4,000 22nd By Wages 500

25th By Rent 600

30th By Drawings 1,000

31st By Salary 900

31st By Bal. c/d. 17,000

36,000 36,000

Q3. What is cash flow statement and how is the cash flow statement subdivided?

Ans.

Cash flow statement, also known as Statement accounting for variations in cash, Where Got Where Gone Statement. It shows the movement of cash and their causes during the period under consideration. The statement is significant to the stakeholders of the company and is prepared to show the impact of financial policies and procedures on the cash position. It takes into account all the transactions that have a direct impact upon cash and cash equivalent.

According to Accounting Standard 3 (Revised) method cash flow statement is sub divided into three parts:

(i) cash flow from operating activities(ii) cash flow from investing activities(iii) cash flow from financing activities.

1. Cash flow from Operating Activities:

 Operating activities are the principal revenue producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments without recourse to external source of financing. Information about the specific components of future operating cash flows is useful in conjunction with other information in forecasting future operating cash flows.

Computation of Operating Profit before Working capital changes:

 The Net Profit shown in the Profit and Loss Account will have to be adjusted for non-cash items

For find out operating profit before working capital changes. Some if these items are as follows:

i. Depreciation:

Depreciation does not result in outflow of cash and, therefore, net profit will

Have to be increased by the amount of depreciation or development rebate charged, in order to find out the real cash generated from operations.

ii. Amortization of intangible assets:

Goodwill, preliminary expenses, etc., when written off should therefore, be added back to profits to find out the cash from operations.

iii. Loss on Sale of fixed assets:

It does not result in outflow of cash and, therefore, should be added back of profits.

iv. Gains from sale of fixed assets:

Since a sale of fixed assets is taken as a separate source of cash, it should be deducted from net profits.

v. Creation of reserves:

If profit for the year has been arrived at after charging transfers to reserves, such transfers should be added back to profits. If cash operations show a net loss, such net loss after making adjustments for non-cash items will be shown as an application of cash. Thus cash from operations is computed on the pattern of computation of Funds from operations.

Cash generated from Operations

 To find the cash from operations, adjustments will have to be made for µchanges in current assets and current liabilities arising on account of operations.

Any decrease in current assets or any increase in current liabilities between two periods should be added back to Operating profit before working capital changes.

Likewise any increase in current assets or any decrease in current liabilities should be deducted from Operating profit before working capital changes to arrive at cash generated from Operations.

Computation of Net Cash Flow from Operating Activities:

 From cash generated from operations Income tax paid, cash flow from extraordinary items (if any) should be adjusted (subtracted) to arrive at Net cash flow from operating activities.

2. Cash Flow from Investing Activities

 Transactions like purchase or sale of fixed assets proceeds from sale of equipments, Interest on Investment received, Dividends received are recorded.

3. Cash Flow from Financing Activities

 Transactions such as proceeds from issue of shares, debentures, proceeds from long term loans, repayment of long term loans, Interest paid on debentures, dividend payment to equity, preference share holders are shown to arrive at net cash used in financing activities. Purchase of plant and machinery on lease or hire purchase should be shown separately as deferred credit. However the cost of machinery purchased will be shown as application of cash.

Computation of Net Increase in Cash and Cash Equivalent

 The net cash flow from operating, investing and financing activities is added to arrive at net increase in cash and cash equivalent. To this cash and cash equivalent at the beginning of the period is added to get cash and cash equivalent at the end of the period.

Q4. A large retail stores makes 25% of its sales for cash and the balance on 30 days net. Due to faulty collection practice, there have been losses from bad debts to the extent of 1 % of credit sales on average in the past. The experience of the store tells that normally 60 % of credit sales are collected in the month following the sale, 25% in the second following month and 14 % in the third following month. Sales in the preceding three months have been January 2007 Rs.80,000, February Rs.1,00,000 and March Rs.1,40,000. Sales for the next three months are estimated as April Rs.1,50,000, May Rs.1,10,000 and June Rs.1,00,000. Prepare a schedule of projected cash collection.

Hint: Cash Receipts: April Rs. 1,27,650, May Rs. 1,31,750, June Rs. 1,17,325

Ans.

Statement of expected Cash Receipts

Collections from

Cash Sales

Collections From Debtors- January

February

March

April

May

Total

April

37,500

8,400

18,750

63,000

-

-

127,650

May

27,500

-

10,500

26,250

67,500

-

131,750

June

25,000

-

-

14,700

28,125

49,500

117,325

Assume that the credit policy is enforced strictly, what would be the cash receipts

Cash Sales:

Debtors

March

April

May

Total

37,500

105000

-

-

142,500

27,500

-

112500

-

140,000

25,000

-

-

82500

107,500

Forecasts of cash payments:

The items of expenditures differ from business to business. The normal items which come under the lists are:

1. Cash purchases

2. Payment to creditors or suppliers

3. Payments to Bills payable

4. Payment to employees in the nature of wages, salaries

5. Manufacturing, selling and distribution and administration expenses

6. Repayments of bank load and special obligations such as bonus, donations, advances

7. Interest and dividend payments

8. Capital expenditures for acquiring assets of enduring benefit

9. Payment of tax liability

10. Other expenses of periodic nature

The quantum of amount likely to be spending on the above each item is generally determined with reference to functional budgets of the concerns. The policy of the management will also play a crucial role. It is the policy which determines the ratio of cash purchases and credit purchases. In many cases, the time lag affects the amount of expenditures to be incurred in a particular period. The formula adopted for the expenses payable in next month is: month’s amount x time lag.

Q5. What are the guidelines that deal with reserve for discount on debtors? What are Bad debts also mention the accounting treatment of bad debts.

Ans.

Reserves for Discount on Debtors

 

There are two types of discounts allowed to customers in a business. One is trade discount and the other is cash discount. After anticipating the amount of cash discount allowable, a provision is made in the current year itself. In the subsequent years, the actual discount allowed is set off against the provision for discount on debtors. Every year, the amount of provision for discount on debtors is deducted from the profits.

The following guide lines may be kept in mind while dealing with the reserve for discount on debtors

1. If a reserve for discount on debtors do not exist and cash discount is allowed then transfer the discount to P&L account.

2. Any fresh reserve for discount on debtors is to be made, debit the P&L Account with the amount of reserve.

3. If provision for discount on debtors exists at the time of providing discount, then write off the discount from the provision already made for the purpose.

4. New provision should then be calculated and only as much as required to bring the existing provision to the new figure should be debited to P&L Account.

5. If the new provision required is lower than the provision already existing (old), then the difference shows profit and transfer the same to P&L Account.

Bad Debts

 Bad debts are those debts which are not recovered. Bad debts form loss to the business and reduce the amount of debtors .Since bad debts are losses, they are debited and the debtor’s account is credited. If bad debts are recovered, cash account is debited and bad debts recovered account is credited.

Accounting treatment of Bad debts:

A. If bad debts are identified and shown in trial balance: B. If bad debts are shown outside the trial balance:

 This denotes bad debts that they were identified after the preparation of Trial Balance. Two adjustments should be incorporated.

Example:

The sundry debtors for the year 2005 are Rs.50000. The bad debts amounted toRs.4000 as on 31-12-2005 already shown in the trail balance. Write off further bad debtsRs.5000. Show how the above internal adjustments appear in the Profit and loss account and Balance Sheet.

 Solution:

 Bad debts shown in the trial balance is Rs.4000 and not shown in the trial balance isRs.5000.To incorporate those bad debts not yet shown in the trial balance.

Q6. Prepare a Statement of changes in working capitals from the following information.

Particulars April 1 March 31

Share Capital 50,000 50,000 Retained earnings 14,000 48,000 Fixed Assets at cost 80,000 90,000 Provision for Depreciation on Fixed Assets 22,000 27,000 Investments in shares of subsidiaries 15,000 15,000 Government securities 6,0000 12,000 8% Debentures (redeemable in 5 equal annual installment of Rs.20,000 each, from the current year

20,000 -

Prepaid expense 21,000 4,000 Outstanding expenses 5,000 12,000 Creditors and Bills Payables 30,000 25,000 Debtors and Bills Receivables 18,000 20,000 Cash and Bank balances 5,000 13,000 Provision for Doubtful Debts 4,000 2,000

Prepare Statement of Changes in Working Capital

Note: If the investments are in the form of Government Securities, it is treated as current assets.

Hint: working capital: Balance as on April1st 11000 and 31st March 20000.

Ans.

Statement of changes in working capital during the year

DETAILS BALANCE AS ON EFFECT ON W.C

APRIL 1ST MARCH 31ST

INCREASE DECREASE

CURRENT ASSETS

CASH & BANK BALANCE 5000 13000 8000 ---------------

DEBTORS & B.R. 18000 20000 2000 ---------------

GOVT. SECURITIES 6000 12000 6000 ---------------

PREPAID EXPENSES 21000 14000 -------------- 7000

TOAL SAY A. 50000 59000 -------------- ---------------

CURRENT LIABILITIES

OUTSTANDING EXPENSES 5000 12000 --------------- 7000

CREDITORS & B.P. 30000 25000 5000 ----------------

PROVISION FOR DOUBTFUL DEBTS

4000 2000 2000 ----------------

TOTAL SAY B. 39000 39000 ---------------- ----------------

WORKING CAPITAL

A MINUS B 11000 20000 ---------------- ----------------

NET INCREASE IN WORKING CAPITAL

9000 --------------- ------------------ 9000

20000 20000 23000 23000

THANK YOU