Answer 1) Financial statements are a main source of financial information for an organization.

. Users analyse these statements to evaluate the ability of an organization to use its resources efficiently and effectively and form expectations about risks and returns by studying the changes in assets, liabilities, earnings and cash flows over time. A balance sheet shows the assets, liabilities and owners' equity at a point in time, for example a balance sheet prepared on March 31st, 2011 provides a snapshot of the assets, liabilities and owners' equity for that entity at that point in time. The income statement and statement of cash flows help explain the changes in balance sheet accounts during a period of time. Balance sheets for the beginning and ending of a fiscal period reveal changes in an entity's resources and finances. Examining an entity's income statement and statement of cash flows will reveal major events that caused these changes. The relationship between financial statements can be attributed to the manner in which the numbers on one statement explain numbers on other statements. Even though financial statements provide a wealth of information, their usefulness is limited because of certain constraints in the reporting process. These constraints exist mainly due to costs associated with reporting financial information. Information is a resource, and it is costly to provide. For information to be valuable, its cost must be less than the benefits it provides to its users. Therefore, the amount and type of reported information are constrained by costs and benefits. Users should keep these limitations in mind when interpreting financial statement information. Some of these limitations are briefly explained below. Financial statements are many times based on numbers derived from estimates and allocations. For example, when calculating depreciation, one has to estimate the cost of an asset that was used up during a fiscal period and allocate that amount to the depreciation expense for that period. These are estimates and not exact numbers since it is difficult to exactly determine how much of an asset is consumed during a particular fiscal period. Also frequently management has to use their judgment when determining how certain expenses and revenues are recorded. These decisions and estimates mean that accounting numbers are not as precise as they might appear. Financial statements primarily report the purchase or exchange price of an asset or liability at the time it is acquired or incurred. The recorded values are not adjusted for inflation or for changes in the appreciation or depreciation of the assets or liabilities. Therefore the true value of an asset is ambiguous. Even though the financial statements include the primary transactions that occur as part of an entity's business activities, there are no guarantees that all important transactions are fully recorded in the financial statements. Accountants and managers sometimes disagree about when certain activities should be recognized. Also, they may disagree about the amount that should be reported in the financial statements for these activities.

Certain types of resources and costs are not reported in financial statements. The value of employees is not an asset listed on most balance sheets even though an organizations human capital may be its most important asset. Without their skilled human capital, the physical resources of an organization often would have little value. Financial statements do not report this human capital as their value is difficult and costly to determine. In the scientific and technological industry, research and development activities are responsible for majority of the revenues but the costs of these efforts are expensed when they are incurred each fiscal period even though they may have a major effect on the future earnings of a company. Such costs are expensed because of difficulty in identifying the timing and amount of future benefits a company will receive from these efforts. The economic value of a company differs from the amount reported on its financial statements because of these measurement limitations. Information provided by the statements is not always timely. Annual financial statements may sometimes report information that is pertinent a year ago and monthly statements may have data that is from a few weeks ago. Such delays may be critical for certain types of decisions. Some users, particularly managers, may need information on an on-going basis to make effective decisions. Traditional financial statements are only one type of accounting information. Some ways of providing more timely information is to provide quarterly reports to stockholders and to use information technology to help reduce reporting costs. Though a variety of problems impair their usefulness, financial statements continue to be a primary source of information for managers and external users about a company's activities. But these problems mean that considerable care is needed to understand accounting information and to use it correctly in making decisions.

Answer 5) Financial statements do not give the complete financial information. These statements give the information of funds on a particular date. The purpose of preparation of fund flow statements is to know about from where funds are coming and where being invested. The funds flow statements is generally prepared from the data identifiable and profit and loss account and balance sheets. Fund flow statement is also called as sources and application of funds. It shows the detail of funds business received from sources and the amount of funds the business used for different purposes in the year. Acc. To FOURLKE, A statement of sources and application of funds, is a technical advice designed to highlight the changes in financial position of business enterprise between two dates. It discloses the funds at the end of one period of time to the end of another period of time. It provides the useful additional information, not covered by financial statements. The funds flow statement is prepared from data generally identifiable and profit and loss account, balance sheet and related notes. The another important need of fund flow statement is that income statement and balance sheet does not provide full and needed information. Income statement is restricted to the limited transactions regarding goods and services to customers. The balance sheet also gives the detail of assets and liabilities of the business. There are few other reasons to prepare fund flow statement: It explains the financial consequences of business operations: Fund flow statement gives answer to following conflicting situations. How the business could have good liquid position in spite of business making loses or acquisition of fixed assets? Where have the profits gone? How a business can earn more and more profits. It answers intricate queries: How much fund is generated from normal business operations? What are the sources of repayment of loans? How to utilize the funds up to optimum level? It acts as an instrument for allocation of resources. It is a test of effectiveness in use of working capital. How and when to prepare fund flow statements? There are different transactions, which can make change in flow of funds and vice versa. Firstly those transactions which can make a change in flow of funds. Transactions that effect current and fixed assets. A transaction, which changes the balance of current assets and fixed asset, will make a flow of funds. Transactions effecting current assets and non-current liabilities. When a transaction effects a change in current asset and non-current liability, it will result in flow of funds. Transactions effecting current liability and non-current assets. All those transactions, which involve current liabilities and non-current assets, will result in flow of funds. Transactions effecting current liability and non-current liability: when there will be change in current liability and non-current liability will result in flow of funds. Transaction not effecting funds. If transaction effect accounts of current category only: All those transaction which effect the current assets or current liabilities only will never result into flow of funds. If transaction effect non current accounts only.

There will be no change in flow of funds, if a transaction affects accounts of non-current category only. Schedule of changes in working capital: When there will be a change in current assets and current liabilities of the firm then that change is covered under schedule of changes in working capital. This is the first step of fund flow statement. So this particulars statement records only change in current assets and current liabilities of the business. By current assets we mean cash and other assets, which are easily converted into cash by normal course of business. By current liabilities we mean which are paid out in short span of time for e.g. creditors, bills payable, bank overdraft etc. The schedule of changes in working capital is prepared by recording current assets and liabilities at the beginning and at the end of the period. If a current asset is more in current year in comparison to previous year then difference is recorded in the increase column and vice versa. If a current liability is more in current year than the previous year the difference is recorded in decrease side. Performa of Schedule of changes in working capital: Particulars 2005 2006 Increase Decrease Current assetsStockDebtorsCash and bankCurrent liabilitiesBills payableCreditorsBank overdraftTotal liabilitiesWorking capitalIncrease/Decrease in working capital Preparation of funds flow statement: In order to prepare fund flow statement, it is necessary to find out the sources and application of funds. Sources of funds: a) Internal sources: funds flow from operations is the only internal source of funds. The following adjustments will be required in net profit for calculating true funds from operations. Add. Depreciation on fixed assets Preliminary expenses or goodwill written off. Transfer to general reserve Provision for taxation and proposed dividend. Loss on sale of fixed assets. Less. Profit on sale of fixed assets Profit on revaluation of fixed assets. Dividend received or accrued dividend. b) External sources Funds from long term loan Sale of fixed assets Funds from increase in share capital. Applications of funds. Purchase of fixed assets Payment of dividend Payment of fixed liabilities Payment of tax liability. Performa of funds flow statement Sources o funds Amount Application of funds Amount Issue of sharesIssue of debenturesLong-term borrowingsSale of fixed assetsOperating profit*Decrease in working capital*Redemption of redeemable preference sharesRedemption of debenturesPayment of long-term loansPurchase of fixed assetsOperating loss*Increase in working capital* * Only one figure will be there.

Answer 4) Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. According to Myers, " Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements." Advantages and Uses of Ratio Analysis There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to workout a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner: 1. To workout the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way profitability ratios show the actual performance of the business. 2. To workout the solvency: With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. In case external liabilities are more than that of the assets of the company, it shows the unsound position of the business. In this case the business has to make it possible to repay its loans. 3. Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc. 4. Helpful in comparative analysis of the performance: With the help of ratio analysis a company may have comparative study of its performance to the previous years. In this way company comes to know about its weak point and be able to improve them. 5. To simplify the accounting information: Accounting ratios are very useful as they briefly summarise the result of detailed and complicated computations. 6. To workout the operating efficiency: Ratio analysis helps to workout the operating efficiency of the company with the help of various turnover ratios. All turnover ratios are worked out to evaluate the performance of the business in utilising the resources. 7. To workout short-term financial position: Ratio analysis helps to workout the short-term financial position of the company with the help of liquidity ratios. In case short-term financial position is not healthy efforts are made to improve it. 8. Helpful for forecasting purposes: Accounting ratios indicate the trend of the business. The trend is useful for estimating future. With the help of previous years ratios, estimates for future can be made. In this way these ratios provide the basis for preparing budgets and also determine future line of action.

Limitations of Ratio Analysis In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of accounting ratios: 1. Limited Comparability: Different firms apply different accounting policies. Therefore the ratio of one firm can not always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc. 2. False Results: Accounting ratios are based on data drawn from accounting records. In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct. 3. Effect of Price Level Changes: Price level changes often make the comparison of figures difficult over a period of time. Changes in price affects the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison. 4. Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis. 5. Effect of window-dressing: In order to cover up their bad financial position some companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way. 6. Costly Technique: Ratio analysis is a costly technique and can be used by big business houses. Small business units are not able to afford it. 7. Misleading Results: In the absence of absolute data, the result may be misleading. For example, the gross profit of two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs. 20,000 and profit earned by the other one is Rs. 10,00,000 and sales are Rs. 40,00,000. Even the profitability of the two firms is same but the magnitude of their business is quite different. 8. Absence of standard university accepted terminology: There are no standard ratios, which are universally accepted for comparison purposes. As such, the significance of ratio analysis technique is reduced.

Answer 6) Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes. During the review process, no reference is made to the previous level of expenditure. Zerobased budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent on whether the total budget or specific line items are increasing or decreasing. The term "zero-based budgeting" is sometimes used in personal finance to describe "zerosum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing.

Advantages
1. 2. 3. 4. 5. 6. 7. 8. 9. Efficient allocation of resources, as it is based on needs and benefits rather than history. Drives managers to find cost effective ways to improve operations. Detects inflated budgets. Increases staff motivation by providing greater initiative and responsibility in decisionmaking. Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centers to identify their mission and their relationship to overall goals. It helps in identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting alternative courses of action.

Disadvantages
1. 2. 3. 4. More time-consuming than incremental budgeting. Justifying every line item can be problematic for departments with intangible outputs. Requires specific training, due to increased complexity vs. incremental budgeting. In a large organization, the amount of information backing up the budgeting process may be overwhelming.

Use in the public sector

Zero Base Budgeting (ZBB) in the public sector and the private sector are very different processes, and this must be understood when implementing a ZBB process in the public sector. The use of ZBB in the private sector has been limited primarily to administrative overhead activities (i.e. administrative expenses needed to maintain the organization). [2] For example, Peter Phyrr used ZBB successfully at Texas Instruments in the 1960s and authored an influential 1970 article in Harvard Business Review.

In 1973, President Jimmy Carter, while governor of Georgia, contracted with Phyrr to implement a ZBB system for the State of Georgia executive budget process. President Carter later required the adoption of ZBB by the federal government during the late 1970s. Zero-Base Budgeting (ZBB) was an executive branch budget formulation process introduced into the federal government in 1977. Its main focus was on optimizing accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to set priorities based on the program results that could be achieved at alternative spending levels, one of which was to be below current funding. According to Peter Sarant, the former director of management analysis training for the US Civil Service Commission during the Carter ZBB implementation effort, ZBB means different things to different people. Some definitions are implying that zero-base budgeting is the act of starting budgets from scratch or requiring each program or activity to be justified from the ground up. This is not true; the acronym ZBB, is a misnomer. ZBB is a misnomer because in many large agencies a complete zero-base review of all program elements during one budget period is not feasible; it would result in excessive paperwork and be an almost impossible task if implemented. In many respects the common misunderstanding of ZBB noted above resemble a sunset review process more than a traditional public sector ZBB process.
Definition

According to Sarant, ZBB is a technique which complements and links to existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited resources It is a flexible management approach which provides a credible rationale for reallocating resources by focusing on a systematic review and justification of the funding and performance levels of current programs. A method of budgeting in which all expenses must be justified for each new period. Zerobased budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.
Components of a public sector ZBB analysis

In general there are three components that make up public sector ZBB:
1. Identify three alternate funding levels for each decision unit (Traditionally, this has been a zero-base level, a current funding level and an enhanced service level.); 2. Determine the impact of these funding levels on program (decision unit) operations using program performance metrics; and 3. Rank the program decision packages for the three funding levels.

The process was also specifically intended to involve both program staff and budget staff in the process. In many cases, program staffers were asked to look for alternative service delivery models that could deliver services more efficiently at lower funding level. The US General Accounting Office (GAO) reviewed past performance budgeting initiatives in 1997 and found that ZBBs main focus was on optimizing accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to: Set priorities based on the program results that could be achieved at alternative spending levels, one of which was to be below current funding.
1. In developing budget proposals, these alternatives were to be ranked against each other sequentially from the lowest level organizations up through the department and without reference to a past budgetary base. 2. In concept, ZBB sought a clear and precise link between budgetary resources and program results.

Further, ZBB illustrated the usefulness of:

1. Defining and presenting alternative funding levels; and 2. Expanded participation of program managers in the budget process.

The federal ZBB budgeting system had the following components: Budget requests for each decision unit were to be prepared by their managers, who would (1) identify alternative approaches to achieving the units objectives, (2) identify several alternative funding levels, including a minimum level normally below current funding, (3) prepare decision packages according to a prescribed format for each unit, including budget and performance information, and (4) rank the decision packages against each other. ZBB was officially eliminated in federal budgeting on August 7, 1981. Some participants in the budget process as well as other observers attributed certain program efficiencies, arising from the consideration of alternatives, to ZBB. Interestingly, ZBB established within federal budgeting a requirement to:
1. Present alternative levels of funding; and 2. Link (them) to alternative results.

This element of the ZBB budgeting process remained in effect through the Regan, Bush and early Clinton administrations before being eliminated in 1994.
Defining the government program zero-base

As noted earlier, there is often considerable confusion over the meaning of zero-base budgeting. There is no evidence that public sector ZBB has ever included building budgets from the bottom up and reviewing every invoice as part of the analysis. In discussions of ZBB, there is often confusion between a ZBB process and a sunset review process. In a sunset review the entire function is eliminated unless evidence is provided of program effectiveness. This confusion ultimately leads to the question: what is a zero-base?

Sarants definition of the zero-base based on the federal training experience is: A minimum level is actually the grass roots funding level necessary to keep a program alive. Therefore, the minimal level is the program or funding level below which it is not feasible to continue a program because no constructive contribution can be made toward fulfilling its objective. Identifying this level of program funding has been subjective and problematic. Consequently, some states have selected arbitrary percentages to insure that an amount smaller than last years request in considered. They do this by stipulating that one alternative must be 50 or 80 or 90 percent of last years request. This equates to analyzing the impact on program operations of a 10, 20 or 50 percent reduction in funding as the zero base funding level. Importance of performance measures Performance measures are a key component of the ZBB process. At the core, ZBB requires quality measures that can be used to analyze the impact of alternative funding scenarios on program operations and outcomes. Without quality measures ZBB simply will not work because decision packages cannot be ranked. To perform a ZBB analysis alternative decision packages are prepared and ranked, thus allowing marginal utility and comparative analysis. Traditionally, a ZBB analysis focused on three types of measures. They (federal agency program staff) were to identify the key indicators to be used in measuring performance and results. These should be measures of:
1. effectiveness, 2. efficiency, and 3. Workload for each decision unit.

Indirect or proxy indicators could be used if these systems did not exist or were under development.