Anish AbrahamRegistration No: 541111322
MBA Semester 1
MB0041- Financial and Management Accounting
4 Credits
(Book ID: B1130)
Assignment Set- 2 (60 Marks)
Q.1 Selected financial information about Vijay merchant company is given below:
2010 2009
Sales 69,000 43,000
Cost of Goods Sold 57,000 32,500
Debtors 7,200 3,000
Inventories 11,400 5,500
Cash 1,500 800
Other current assets 4,000 2,700
Current liabilities 16,000 11,000
Compute the current ratio, quick ratio, average debt collection period and inventory
turnover for 2009 and 2010. State whether there is a favorable or unfavorable
change in liquidity from 2009 to 2010. At the beginning of 2009, the company had
debtors of Rs..2500 and inventory of Rs.3000. [10 Marks]
Answer
Current ratioCurrent ratio = Current assets / Current liabilitiesCurrent ratio (2010) = 7200+11400+1500+4000
16000Current ratio (2010) = 1.5 :1
Current ratio (2009) = 3000+5500+800+270011000
Current ratio (2009) = 1.09 :1
Quick ratioQuick ratio = Current assets(less inventory + other current assets)
Current liabilitiesQuick ratio (2010) = 7200+1500
16000Quick ratio (2010) = 0.54 :1
Quick ratio (2009) = 3000+80011000
Quick ratio (2009) = 0.35 : 1
Average debt collection periodDebtors turnover ratio = Net credit sales / Average debtorsDebt collection period = Months or Days in year / Debtors turnover ratio
Debtors turnover ratio (2010) = 69000/ (7200+3000) 2
Debtors turnover ratio (2010) = 13.52
Debt collection period (2010) = 365 / 13.52Debt collection period (2010) = 27 days
Debtors turnover ratio (2009) = 43000/ (3000+2500) 2
Debtors turnover ratio (2009) = 15.64
Debt collection period (2009) = 365 / 15.64Debt collection period (2009) = 24 days
Inventories turnover ratioInventories turnover ratio = Cost of goods sold / Average inventoryInventory holding period = 12 months / Inventory turnover ratio
Inventories turnover ratio (2010) = 57000 / (11400+5500)2
Inventories turnover ratio (2010) = 6.75
Inventory holding period (2010) = 365 / 6.75Inventory holding period (2010) = 54 days
Inventories turnover ratio (2009) = 32500 / (5500+3000)2
Inventories turnover ratio (2009) = 7.647Inventory holding period (2009) = 365 / 7.647Inventory holding period (2009) = 48 days
There is a favourable change in liquidity from 2009 to 2010 as indicated by the improvement in Current ration and Quick ratio.
Q.2 Explain different methods of costing. Your answer should be studded with
examples (preferably firm name and product) for each method of costing.
[10 Marks]
Answer
The following are the methods of costing
1. Job Costing: This type of costing is used in those businesses where production is carried out as per specific order and customer specification.
a) Batch Costing: This method is used to determine the cost of a group of identical products. The batch consists of similar products is a unit and not a single item within the branch.
Example: Ranbaxy - Production of tablet / Mattel Inc – Production of toys (Hot-wheels)
b) Contract Costing: This method is based on the principle of job costing used by house builders and civil contractor. The contract becomes the cost unit for which relevant costs are determined.Example: GMR – Construction of Airport
Gammon India Ltd – Transportation projects
c) Composite Costing: In this method costs are accumulated for different components of the product and then combined because the nature of the product is complex.Example: Airbus – Manufacture of Aero planes
Sirosky – Helicopter manufacturer
2. Process Costing: This method is used in those industries wheremanufacture is done continuously thereby it is difficult to trace costs to specific units. The total cost is averaged for the number of unitsmanufactured.
a) Unit Costing: This method is used when a single item is produced and the final product is composed of homogeneous units. The cost per unit is obtained by dividing the total cost by the total number of units manufactured.Example: India cement - cement
Nestle – chocolates
b) Operating Costing: This method is used by service industries. The unit cost differs among these services depending upon the nature of services being rendered.Example: Southern travels – Transport buses
Star Cruises - Holiday cruise packages
c) Operation Costing: This product costing is used when conversion activities are very similar across products lines but the direct materials differ significantly.Example: Phillips – Manufacturers of LCD / LED TVs
IBM - Manufacturers of Desktop / Lap-top computers
Q.3 State the importance of differentiating between the fixed costs and variable
costs in managerial decision. [10 Marks]
Answer
It is very important to distinguish between fixed and variable costs in managerial
decisions as the management has the discretionary power to make some costs
either fixed, variable of partly fixed and partly variable which will have a direct impact
on the performance of the organization. For example the remuneration of sales
persons can be treated as fixed cost wherein it will become a salary fixed per month
which may not induce additional motivation on the part of the sales team to sell
more. Whereas if the management decides to treat this compensation to sales
persons as variable cost by rewarding them with commission linked to their sales
this may result in motivating the sales team to surpass targets and sell more. A
similar scenario can be applied to the workers in a production line where they are
paid a fixed salary or a piece-rate remuneration or a salary combined with piece-rate
beyond a certain targeted level of output. Differentiating the fixed and variable cost
will also enable the management to take measures to control them by identifying
alternatives that will be most suited to the organizational goals. Cost of storage
space in an administrative environment is likely to be higher than in a warehousing
environment and the management can control this cost as per the requirement of
the business. Variable costs can also be controlled in similar ways by identifying
appropriate cost effective alternatives for example appropriate lighting source and
it’s usage in production line and administrative areas.
Q.4 Following are the extracts from the trial balance of a firm as at 31st March 2009
Name of the account Dr Cr
Sundry debtors 2,05,000
Bad debts 3,000
Additional Information
1) After preparing the trial balance, it is learnt that Mr.X a debtor has become
insolvent and nothing could be recoverd from him and, therefore the entire
amount of Rs.5,000 due from him was irrecoverable.
2) Create 10% provision for doubtful debt.
Required: Pass the necessary journal entries and show the sundry debtors
account, bad debts account, provision for doubtful debts account, P&L a/c and
Balance sheet as at 31st March 2009. [10 Marks]
Answer
Journal Entry
Particulars Dr Cr
Profit & Loss A/c Dr
To Bad Debts A/c
(Being bad debt transferred to P&L a/c)
3000
3000
Bad Debts A/c Dr
To Sundry Debtors A/c
(Being Mr. X balance transferred to Bad Debts from debtors)
5000
5000
Profit & Loss A/c Dr
To Bad Debts A/c
(Being additional Bad Debts written off)
5000
5000
Profit & Loss A/c Dr
To Provision for Doubtful debts account A/c
(Being 10% provision provided)
20000
20000
Ledger Posting
Sundry Debtors A/c
Dr CrTo Bal b/d 205,000 By Bad debts A/c 5,000 By Bal c/d 200,000
205,000 205,000
Bad debts A/cDr CrTo Bal c/d 3,000 To Sundry Debtors 5,000 By Profit & Loss A/c 3,000 By Profit & Loss A/c 5,000 0
8,000 8,000
Provision for doubtful debts A/c
Dr Cr By Profit & Loss A/c 20,000 To Bal c/d 20,000 0
20,000 20,000
Profit & Loss A/c for year ended 31st March 2009
Dr CrBad debts Amt Amt Amt AmtTo Bad debts A/c (Old) 3,000 To Bad debts A/c (New) 5,000 8,000 To Provision for doubtful debts 20,000 By Bal c/d 28,000
28,000 28,000
Balance Sheet as at 31st March 2009Dr crLiabilities Amt Amt Asset Amt Amt Sundry debtors 205,000 Less: Bad debt new 5,000 200,000
Provision for doubtful debts 20,000
0 220,000
Q.5 A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in investment in accounts receivable. Based upon this information, the company’s (select the best one and give reason)
1) Average collection period has decreased2) Percentage discount offered has decreased3) Accounts receivable turnover has decreased4) Working Capital has increased.
[10 Marks]
Answer
As the result of increase in sales, decrease in bad-debts and decrease in investment in accounts receivable the working capital has been favourably affected as increase in sales and decrease in investment in AR indicates realization of debtors in shorter period which improves the liquidity of the company by converting AR in cash/bank balances.
Q.6 Identify the users of accounting information. [10 Marks]
Answer
a. Investors: Investors may be broadly classified as retail investors, high net worth individuals, Institutional investors both domestic and foreign. As chief provider of risk capital, investors are keen to know both the return from their investments and the associated risk. Potential investors need information to judge prospects for their investments.
b. Lenders: Banks, Financial Institutions and debenture holders are the main lenders and they need information about the financial stability of the borrower enterprise. They are interested in information that would enable them to determine whether their borrower has the capability to repay the loans along with the interest due on it.
c. Regulators Rating Agencies and Security Analyst: Investors and creditors seek the assistance of information specialist in assessing prospective returns. Equity analyst, bond analyst and credit rating agencies offer a wide range of information in the form of answering queries on television shows, providing trends in business newspapers on a particular stock, offer valuable information in seminars, discussion groups, meetings and interviews. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials, visit their premises and make constant enquiry using e-mails, teleconference and video conference. Firms build a good rapport with such type of information seekers to gain visibility in the market.
d. Management: Management needs information to review the firms short term solvency and long term solvency. It has to ensure effective utilization of its resources, profitability in terms of turnover and investment. It has to decide upon the course of action to be taken in future and also may be interested in acquiring other business which is undervalued.
e. Employees, Trade Union and Tax authorities: Employees are keen to know about the general health of the organization in terms of stability and profitability. Current employees have a natural interest in the financial condition of the firm as their compensation will depend on the financial performance of the firm. Trade unions use financial reports for negotiating wage package, declaration of bonus and other benefits. Tax authorities need information to assess the tax liability of the firm.
f. Customers: Customers have an interest in the accounting information about the continuation of company especially when they have established a long term involvement with or are dependent on the company.
g. Government and regulatory agencies: Government and the regulatory agencies require information to obtain timely and correct information, to regulate the activities of the enterprise if any. They seek information when tax laws need to be amended, to provide institutional support to the lagging industries. The regulatory agencies use financial reports to take action against the firm when appropriate returns are not filed in time or when the returns fails to provide true and fair position of the business or to take appropriate action against the firm when complaints / misappropriation are being lodged. Stock exchange has a legitimate interest in financial reports of publicly held enterprise to ensure efficient operation of capital market.
h. The Public: Every firm has a social responsibility. Firms depend on local economy to meet their varied needs. They may get patronage from local government in the form of capital subsidy, cheap land or tax sops in the form of tax holidays for certain period of time. Prosperity of the enterprise may lead to prosperity of the economy both directly and indirectly.
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