Master of Business Administration-

MB0041 – Financial and Management Accounting

Q.1 Explain the Various accounting Concepts and Principles?

Concepts: Concepts take the form of assumptions or conditions, which guide the accountants while preparing accounting statements.

Types of Accounting Concepts

As said earlier, concepts are the basic assumptions or conditions upon which the science of accounting is based. There are five basic concepts of accounting, namely – business entity concept, which is also termed as separate entity concept, going concern concept, money measurement concept, periodicity concept and accrual concept. Each concept is discussed below.

Business Separate Entity Concept: The essence of this concept is that business is a separate entity and it is different from the owner or the proprietor. It is an economic unit which owns its assets and has its own obligations. This enables the business to segregate the transactions of the company from the private transactions of the proprietor(s).

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 be promoted for a short period only to liquidate the business in the foreseeable future. This assumption is called “going concern concept”.

This concept forms the basis for the distinction between expenditure that will yield benefit over a long period of time (Fixed Assets) and expenditure whose benefit will be exhausted in the short term (Current Asset). Similarly liabilities are classified as short term liabilities and long term liabilities.

Money Measurement Concept: All transactions of a business are recorded in terms of money. An event or a transaction that cannot be expressed in money terms, cannot be accounted in the books of accounts.

Periodicity Concept: The time interval for which accounts are prepared is an important factor even though we assume long life for a business. The accounting period could be half year or even a quarter. The financial statements should be prepared at the end of each accounting period so that income statement shows profit or loss for that accounting period. So also a balance sheet is prepared to depict the financial position of the business.

Accrual Concept: Profit earned or loss suffered for an accounting period is the result of both cash and credit transactions. It is possible that certain incomes are earned but not received and similarly certain expenses incurred but not yet paid during an accounting period. But it is relevant to consider them while computing the financial results just because they are related to the specific accounting period.

Accounting Principles: Accounting Principles are the rules basing on which accounting takes place and these rules are universally accepted.

Principle of Income Recognition: According to this concept, revenue is considered as being earned on the date on which it is realized, i.e., the date on which goods and services are transferred to customers for cash or for promise. It should further be noted that it is the amount which the customers are expected to pay which shall be recorded. In effect, only revenue which is actually realized should be taken to profit and loss account. Unrealized revenue should not be taken into consideration for determining the profit.

Principle of Expense: Expenses are different from payments. A payment becomes expenditure or an expense only when such payment is revenue in nature and made for consideration.

Principle of Matching Cost and Revenue: Revenue earned during a period is compared with the expenditure incurred to earn that income, whether the expenditure is paid during that period or not. This is matching cost and revenue principle, which is important to find out the profit earned for that period. Here costs are reported as expenses in the accounting period in which the revenue associated with those costs is reported.

Principle of Historical Costs: This is called ‘cost’ principle. All assets are recorded at the cost of acquisition and this cost is the basis for all subsequent accounting for the assets. The expenses and the goods purchased are shown at the value at which they are incurred. The value of the assets is constantly reduced by charging depreciation against their cost to present their book value in the balance sheet.

Principle of Full Disclosure: The business enterprise should disclose relevant information to all the parties concerned with the organization. It means that any information of substance or of interest to the average investors will have to be disclosed in the financial statements.

Double Aspect Principle: This concept is the most fundamental one for accounting. A business entity is an independent unit and it receives benefits from some and gives benefits to some other. Benefit received and benefit given should always match and balance.

Modifying Principle: The modifying principle states that the cost of applying a principle should not be more than the benefit derived from. If the cost is more than the benefit, then that principle should be modified. This is called cost-benefit principle. There should be flexibility in adopting a principle and the advantage out of the principle should over weigh the cost of implementing the principle.

Principle of Materiality: While important details of financial status must be informed to all relevant parties, insignificant facts which do not influence any decisions of the investors or any interested group, need not be communicated. Such less significant facts are not regarded as material facts. What is material and what is not material depends upon the nature of information and the party to whom the information is provided. While income has to be shown for income tax purposes, the amount can be rounded off to the nearest ten and fraction does not matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount outstanding during a particular period. The information on debtors furnished to Registrar of Companies need not be in detail.

Principle of Consistency: Consistency is required to help comparison of financial data from one period to another. Once a method of accounting is adopted, it should not be changed. For instance if stock is valued under FIFO method in first year it should be valued under the same method in the subsequent years also. Likewise if the firm chooses to depreciate assets under diminishing balance method, it should continue to do so year after year, unless the management takes a policy decision to change the depreciation method. Any change in the accounting methods should be informed to the concerned authorities with justification.

Principle of Conservatism or Prudence: Accountants follow the rule “anticipate no profits but provide for all anticipated losses “. Whenever risk is anticipated sufficient provision should be made. The value of investments is normally taken at cost, even if the market value is higher than the cost. If the market value expected is lower than the cost, then provision should be made by charging profit and creating investment fluctuation fund. This is the principle of conservatism and it does not mean that the income or the value of assets should be intentionally under stated.

Q.2 Pass journal entries for the following transactions

1. Madan commenced business with cash Rs. 70000

2. Purchased goods on credit 14000

3. Withdrew for private use 3000

4. Goods purchased for cash 12000

5. Paid wages 5000

Answer:

Solution:

Transaction

No

Accounts affected

in the books of the

business

Account to be debited and account to be

credited

01 Capital account and

cash account

Cash account being real account is debited

and Capital account being personal

account is credited

02 Goods account and

creditors account

Goods account being real account is

debited and creditor’s account being

personal account is credited

03 Personal drawings

account and cash

account

Drawings account being personal account

is debited and cash account being real

account is credited

04 Goods account and

cash account

Goods account being real account is

debited and cash account being real

account is credited

05 Wages account and

cash account

Wages account being nominal account is

debited and cash account being real

account is credited

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

Q.3 Explain the various types of errors disclosed by Trial Balance?

Errors affecting Trial Balance or Errors Disclosed by Trial Balance:

If the Trial Balance does not tally, it will indicate that certain errors have been committed

which have affected the agreement of the Trial Balance. The accountant will then proceed

to find out the errors and ultimately the errors will be located. Such errors are called

‘Errors Disclosed by Trial Balance or Errors which affect the agreement of Trial Balance.

Until such errors are rectified, the Trial Balance will not agree. Some of these types of

errors are as follows:

Wrong Casting: If the total of the Cash Book or some other Subsidiary Book is wrong,

the Trial Balance will not tally. For example, the total of the Purchase book has been

added Rs. 2000 in excess. When this total will be posted to the debit side of the purchase

account, it will also show an excess debit of Rs. 2000 and hence, the Trial Balance will

not tally.

Posting to the Wrong Side: If instead of posting an amount on the debit side of an

account, it is posted on the credit side, or vice versa, the Trial balance will not tally. For

example, goods for Rs. 2000 from Gopal. If instead of posting the amount on the credit

side of Gopal’s account it is posted to his debit, the debit side of the Trial Balance will

exceed the credit by Rs. 4,000.

Posting of Wrong Amount: The Trial Balance will not tally if the posting in an account

is made with an incorrect amount. For example, goods for Rs. 600 have been purchased

from Mahendra. If, it has been correctly entered in the Purchase Book or purchase

account, but while posting to Mehendra’s account, in credit side (correct side) the amount

posted is Rs. 60 instead of Rs. 600, the Trial Balance will not tally.

Omission of Posting of One Side of an Entry: For example if Rs. 500 have been

received from Ram and correctly entered in the Cash Book or Cash Account but if it is

mmitted to be posted on the credit side of Ram’s Account, the Trial Balance will not

tally.

Double Posting in a Single Account: For example if Rs. 500 have been received from

Shyam Lal and correctly entered in the Cash Account, but if it is posted twice on the

credit side of Shyam Lal’s account, the Trial Balance will not tally.

Errors of Totalling and Balancing of Accounts in the Ledger: Errors may occur in the

totaling of debit or credit sides of accounts in the Ledger or in the balancing of accounts

in the Ledger. Because the balances of accounts are transferred to the Trial Balance, Then

the Trial balance will not tally.

Q.4 From the following balances extracted from Trial balance, prepare

Trading Account.

The closing stock at the end of the period is Rs. 56000

Particulars Amount in Rs.Stock on 1-1-2004 70700Returns inwards 3000Returns outwards 3000Purchases 102000Debtors 56000Creditors 45000Carriage inwards 5000Carriage outwards 4000Import duty on materials received from abroad 6000Clearing charges 7000Rent of business shop 12000Royalty paid to extract materials 10000Fire insurance on stock 2000Wages paid to workers 8000Office salaries 10000Cash discount 1000Gas, electricity and water 4000Sales 250000

Q.5 Differentiate Financial Accounting and Management accounting?

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.,

Q.6 Following is the Balance Sheet of M/s Srinivas Ltd. You are required to prepare a Fund Flow Statement.

Particulars 2006 2007 Particulars 2006 2007Equity Share capital

50,000 65,000 Cash balances 10,000 13,000

Profit & Loss 14,750 17,000 Debtors 25,000 27,000Trade Creditors 29,000 31,000 Investment 5,000 nilMortgage 10,000 15,000 Fixed Assets 50,000 80,000Short term loans 15,000 16,500 Less:

Depreciation(5,250) (7000)

Accrued expenses 8,000 7,500 Goodwill 5,000 nil      Stock 37,000 39,000Total 1, 26,750 1, 52,000 Total 1, 26,750 1, 52,000

Additional Information:

1. Depreciation provided is Rs.1750.

2. Write off goodwill.

3. Dividend paid Rs.3500.

Master of Business Administration-

MB0041 – Financial and Management Accounting

Q.1 Explain the tools of Management accounting?

Tools of Management Accounting:

Management Accounting uses the following tools or techniques to fulfill its

responsibilities and duties towards management.

• Financial Statement Analysis

• Funds Flow Analysis

• Cash Flow Analysis

• Costing Techniques that includes marginal costing, differential costing, standard

costing, and responsibility costing

• Budgetary control

• Management Reporting.

Financial Statements are indicators of two significant factors that include profitability and

financial soundness. Analysis and interpretation of financial statements enables full

diagnosis of the profitability and financial soundness of the firm. Analysis means

methodical classification of the data given in the financial statements. Methodical

classification enables comparison of the various inter-connected figures with each other.

Interpretation explains the meaning and significance of the data.

Funds Flow Analysis is an important tool for management accountant. It reveals the

changes in working capital position, the sources from which the working capital was

obtained and the purpose for which it was used. It also reveals the changes that have

taken place behind the Balance Sheet.

Cash Flow Statement identifies the sources and application of cash. It is prepared on the

basis of actual or estimated data. It depicts the changes in the cash position from one

period to another. A projected cash flow or a cash budget will help the management in

ascertaining how much cash will be available to meet obligations to trade creditors, to

pay bank loans and to pay dividends to the shareholders.

Standard Costing is the preparation and use of standard costs, their comparison with

actual costs and the analysis of variance. It discloses the cost of deviations from

standards. It aims at assessing the cost of a product, process or operation under standard

operating conditions.

Budgetary Control has become an essential tool of management for controlling costs and

to maximize profit. It helps to compare the current performance with pre-planned

performance thereby correcting the deviations if any.

Management Reporting System is an organized method of providing each manager with

all the data and only those data which he needs for his decisions, when he needs them and

in a form which aids his understanding and stimulates his action.

Q.2 Find the contribution and profit earned if the selling price per unit

is Rs.25, variable cost per unit Rs.20 and fixed cost Rs.3,05,000 for the

output of 80,000 units.

ANSWER-contribution = sale - variable csot

= 25 - 20 = 5 Rs

contribution for 80000 units = 5 x 80000 = 400000 Rs.

Profit = contribution - fixed cost

= 400000-305000Profit = 95000 Rs.

Q.3 Explain the essential features of budgetary control?

Essential Features Of Budgetary Control An effective budgeting system should have essential features to get best results. In this direction, the following may be considered as essential features of an effective budgeting.

Business Policies defined: The top management of an organization strives to have an action plan for every activity and for each department. Every budget should reflect the business policies formulated from time to time. The policies should be precise and the same must be clearly defined. No ambiguity should enter the document. Clear knowledge should be provided to all the personnel concerned who are going to execute the policies. Periodic suggestions should be called for.

Forecasting: Business forecasts are the foundation of budgets. Time and again discussions should be arranged to derive the most profitable combinations of forecasts. Better results can be anticipated based on the sound forecasts. As far as possible, quantitative techniques should be made use of while forecasting

Formation of Budget Committee: A budget committee is a group of representatives of various important departments in an organization. The functions of committee should be specified clearly. The committee plays a vital role in the preparation and execution of budget estimated. It brings coordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair.

Accounting System: To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time to time

Organizational efficiency: To make the budget preparation and its subsequent implementation a success, an efficient, adequate and best organization is necessary a budgeting system should always be supported by a sound organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must also be a delegation of authority from top to bottom line. .

Management Philosophy: Every management should set a healthy philosophy while opting for the budget. Management must wholehear4tedly support the activities which developing a budget. Encouragement should flow from top management. All the

members must be involved to make it a workable preposition and a dream-driven document.

Reporting system: Proper feed back system should be established. Provision should be made for corrective measures whenever comparative measures are proposed.

Availability of statistical information: Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should be made available to each department.

Motivation: Since budget acts as a mirror, the entire organization should become smart in its approach. Every employees both executive and non-executives should be made part of the overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organization.

Q.4 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 e

xtent 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.

ANSWER-Statement of expected Cash Receipts

Collection form   April May JuneCash sales 37,500 27,500 25,000Collection from Debtors - January 8,400 - -  February 18,750 10,500 -  March 63,000 36,350 14,700  April - 67,500 28,125  May - - 49,500Total   127,650 141,850 117,325

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

Cash sales : 37,500 27,500 25,000

DebtorsMarch 105000 - -April - 112500 -May - - 82,500

Total 142,500 140,000 107,500

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 spend 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

Q.5 A factory works on standard costing system. The standard

estimates of material for the manufacture of 1000 units of a commodity

are 400 kg at Rs. 2.50 per kg. When 2000 units of a commodity are

manufactured, it is found that 820 kgs of material is consumed at Rs.

2.60 per kg. Calculate the material variance

First calculate the standard quantity and standard cost.Standard quantity : For manufacture of 1000 units, the standard estimates = 400 kgs. Therefore, for actual manufactured quantity, the standard is 2000 x 400 / 1000 or 800 kgs.

Standard cost = Standard quantity x Standard rate => 800 x Rs.25

=> Rs.2,000 Actual Cost = 820 x Rs. 2.60 => Rs. 2,132 Material cost variance = Standard cost – Actual cost= > 2000 – 21312 => 132 ADV. Material price variance = (SR – AR ) AQ=> 2.5-0 – 2.60 x 820=> Rs.82 ADV Material usage variance = 800 – 820 x 2.50=> Rs.50 ADV

Q.6 The Anchor Company Ltd produces most of its electrical parts in its own plant.

The company is at present considering the feasibility of buying a part from an

outside supplier for Rs. 4.5 per part. If this were done, monthly costs would increase

by Rs. 1,000.

The part under consideration is manufactured in Department 1 along with

numerous other parts. On account of discontinuing the production of this part,

Department 1 would have somewhat reduced operations. The average monthly

usage production of this part is 20,000 units. The costs of producing this part on per

unit basis are as follows.

Material Rs. 1.80

Labour (half-hour) 2.40

Fixed overheads 0.80

Total costs 5.00

ANSWER-

PARTICULARS Make Cost Buy Cost

      TotalPer unit Total

Per unit

Relevant Costs:        Materials (20000Units)   36000 1.8 - -

Labour     48000 2.4 - -Purchasing Cost (20000Units) - - 90000 4.5Additional Cost of Purchasing from outside - - 1000 0.05  84000 4.2 91000 4.55

  Differential Costs7000 Per Month  

 Favoring Making Of the part 0.35  

             

The company should be continue the practice of producing the part in Department- 1