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MB0041

MB0041

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Master of Business Administration- MBA Semester 1Reg No.: 511011932
MB0041 – Financial Management & Accounting - 4 CreditsAssignment Set- 1 (60 Marks)Note: Each question carries 10 Marks. Answer all the questions.1. What is accounting cycle? List the sequential steps involved in Accounting cycle?
The Accounting Cycle is a series of steps which are repeated every reporting period. Theprocess starts with making accounting entries for each transaction and goes through closingthe books. Use this tutorial for an overview of the accounting cycle, covering activitiesrequired both during and at the end of the accounting period.Accounting Cycle – Steps During the Accounting PeriodThese accounting cycle steps occur during the accounting period, as each transactionoccurs:Identify the transaction through an original source document (such as an invoice, receipt ,cancelled check, time card, deposit slip, purchase order) which provides:dateamountdescription (account or business purpose)name and address of other party (if practical)Analyze the transaction determine which accounts are affected, how (increase or decrease), and how muchMake Journal entries – record the transaction in the journal as both a debit and a credit journals are kept in chronological order  journals may include sales journal, purchases journal, cash receipts journal, cash payments journal, and the general journalPost to ledger – transfer the journal entries to ledger accountsledger is kept by accountledger accounts may be T-account form or include balances(Learn more about the Chart of Accounts.)Accounting Cycle: Steps at the end of the accounting periodThese accounting cycle steps occur at the end of the accounting period:Trial Balance – this is a calculation to verify the sum of the debits equals the sum of thecredits. If they don’t balance, you have to fix the unbalanced trial balance before you go onto the rest of the accounting cycle. (If they do balance you could still have a problem, but at
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Master of Business Administration- MBA Semester 1Reg No.: 511011932
least it balances!)Adjusting entries – prepare and post accrued and deferred items to journals and ledger T-accountsAdjusted trial balance – make sure the debits still equal the credits after making the periodend adjustmentsFinancial Statements – prepare income statement, balance sheet, statement of retainedearnings, and statement of cash flows (this can occur at other points in time with appropriateadjustments)Closing entries – prepare and post closing entries to transfer the balances from temporaryaccounts (such as the revenue and expenses from the income statement to owner’s equityon the balance sheet).After-Closing trial balance – final trial balance after the closing entries to make sure debitsstill equal credits.
2. A. Bring out the difference between Indian GAAP and US GAAP norms?
Some of these major differences between US GAAP and Indian GAAP which give rise todifferences in profit are highlighted hereunder:1. Underlying assumptions: Under Indian GAAP, Financial statements are prepared inaccordance with the principle of conservatism which basically means “Anticipate no profitsand provide for all possible losses”. Under US GAAP conservatism is not considered, if itleads to deliberate and consistent understatements.2. Prudence vs. rules : The Institute of Chartered Accountants of India (ICAI) has beenstructuring Accounting Standards based on the International Accounting Standards ( IAS) ,which employ concepts and `prudence' as the principle in contrast to the US GAAP, whichare "rule oriented", detailed and complex. It is quite easy for the US accountants to handleissues that fall within the rules, while the International Accounting Standards provide ageneral framework of accounting standards, which emphasise "substance over form" for accounting. These rules are less descriptive and their application is based on prudence. USGAAP has thus issued several Industry specific GAAP , like SFAS 51 ( Cable TV), SFAS 50(Record and Music Industry) , SFAS 53 ( Motion Picture Industry) etc.3. Format/ Presentation of financial statements: Under Indian GAAP, financial statementsare prepared in accordance with the presentation requirements of Schedule VI to theCompanies Act, 1956. On the other hand , financial statements prepared as per US GAAPare not required to be prepared under any specific format as long as they comply with thedisclosure requirements of US GAAP. Financial statements to be filed with SEC include4. Consolidation of subsidiary companies: Under Indian GAAP (AS 21), Consolidation of 
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Master of Business Administration- MBA Semester 1Reg No.: 511011932
Accounts of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprisepresents consolidated financial statements. In other words, the accounting standard doesnot mandate an enterprise to present consolidated financial statements but, if the enterprisepresents consolidated financial statements for complying with the requirements of anystatute or otherwise, it should prepare and present consolidated financial statements inaccordance with AS 21.Thus, the financial income of any company taken in isolationneither reveals the quantum of business between the group companies nor does it revealthe true picture of the Group . Savvy promoters hive off their loss making divisions intoseparate subsidiaries, so that financial statement of their Flagship Company looksattractive .Under US GAAP (SFAS 94),Consolidation of results of Subsidiary Companies ismandatory , hence eliminating material, inter company transaction and giving a true pictureof the operations and Profitability of the various majority owned Business of the Group.5. Cash flow statement: Under Indian GAAP (AS 3) , inclusion of Cash Flow statement infinancial statements is mandatory only for companies whose share are listed on recognizedstock exchanges and Certain enterprises whose turnover for the accounting period exceedsRs. 50 crore. Thus , unlisted companies escape the burden of providing cash flowstatements as part of their financial statements. On the other hand, US GAAP (SFAS 95)mandates furnishing of cash flow statements for 3 years – current year and 2 immediatepreceding years irrespective of whether the company is listed or not .6. Investments: Under Indian GAAP (AS 13), Investments are classified as Current andLong term. These are to be further classified Government or Trust securities ,Shares,debentures or bonds Investment properties Others-specifying nature. Investments classifiedas current investments are to be carried in the financial statements at the lower of cost andfair value determined either on an individual investment basis or by category of investment,but not on an overall (or global) basis. Investments classified as long term investments arecarried in the financial statements at cost. However, provision for diminution is to be madeto recognise a decline, other than temporary, in the value of the investments, such reductionbeing determined and made for each investment individually. Under US GAAP ( SFAS 115), Investments are required to be segregated in 3 categories i.e. held to Maturity Security( Primarily Debt Security) , Trading Security and Available for sales Security and should befurther segregated as Current or Non current on Individual basis. Debt securities that theenterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are boughtand held principally for the purpose of selling them in the near term are classified as tradingsecurities and reported at fair value, with unrealised gains and losses included in earnings.All Other securities are classified as available-for-sale securities and reported at fair value,
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