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Accounting for Management QuestAns

Accounting for Management QuestAns

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Published by: pappu_58 on Sep 26, 2011
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CASE 1.1
MEHTA AUTOMOBILES
 SUMMARY 
HISTORY OF MEHTA AUTOMOBILES
Mr Mehta is a mechanic. Due to his excellent work, professional ability, pleasingmanners and sense of responsibility, he was soon promoted to the post of a chief mechanic. Because of his abilities, his friends and relatives advised him to start his ownautomobile repairs shop. Therefore, after consulting with his family he accepted theoffers of his friends Mr Nitin and Mr Mohan Kapoor, who offered to give a rental officein a busy street of Ahmedabad and a loan of 1,00,000 respectively to start his business.
CURRENT POSITION
Mr Mehta’s business is well settled small-scale business. He has hired four moreassistants in addition to earlier two and also two mechanics and a part-time salesman. Hehas a small office with necessary furniture, and he stores his goods at his home, which heuses as his small godown. He has also started a small spare parts selling section. He isalso assisted by his son Mr Rajendra Mehta for the regular day-to-day activities.
NEW VENTURE
During his day-to-day activities, Mr Mehta came across an advertisement in a localnewspaper, which was about a company, who was in search of a well-known automobileservice shop owner, for a sole selling agency of their cars and spare parts in Gujarat. Mr Mehta found this proposal profitable and thus applied for the same.
CONDITIONS OF CONTRACT
The company specified two conditions which every applying firm in order to get thecontract had to fulfil. The conditions are as under:(
a
)Every firm had to obtain from its bank, a certificate to the effect that a minimum balance of 5,00,000 was maintained in business account.(
b
)Every firm had to submit a complete current financial position of the businessand the results of immediate past period.
THE PROBLEM
Mr Mehta found the problem, which was to comply with the above, two conditions. Thefollowing were the difficulties, which Mr Mehta had to face in order to get the problem.As Mr Mehta did not have any knowledge about how to prepare his financialaccounts, he had not prepared any regular accounts.His used to run his business in such a manner that each cash received was deposited in bank and was withdrawn at the time of payment, and as his business was not of a verylarge scale he was not able to maintain a minimum balance of Rs 5,00,000 in his businessaccount.Thus due to the above problems, he was not able to satisfy the two conditions laiddown by the company.
1
 
THE SOLUTION
In order to get the contract, Mr Mehta must fulfil the above two conditions so for that hehas to do the following things.(
a
)Learn the basic things of recording of day-to-day transactions.(
b
)Collect necessary data for the preparation of last year’s financial statements.(
c
)Maintain a daily book to record all the day-to-day transactions of the business.(
)Appoint an accountant, who will prepare all the accounts and financialstatements from this daily book.
QUESTIONS AND ITS ANSWERS1.
Mr Mehta mentioned that(
a
)He could not have systematic accounting records because he did not possessspecialized accounting skill; and(
b
)Keeping such records would increase in costs, which he could not afford. Howwould you respond to these comments?
Solution:
(
a
)Here, as Mr Mehta’s business is not very vast, recording of day-to-daytransactions does not require any specialised knowledge so he could just learnthe basic fundamentals of accounting and start recording the day-to-daytransactions in a daily book. This daily book can be recorded systematically byappointing an accountant (Mr Lal).(
b
)In short term, recording of proper accounts will cost a bit to Mr Mehta but it will be equalized by the long-term benefits by maintaining proper books of accounts.In addition, appointing an accountant (Mr Lal) for such limited size firm wouldnot cost very much as he will not have to be paid a very high amount for hisservices rendered.
2.
What information would Mr Lal require for preparing the financial statements?
Solution:
Mr Mehta would require three types of information for preparing the financialstatements, which are as under.(
a
)Information related to Trading Account(
i
)Purchases and sales of goods(
ii
)Direct expenses(
iii
)Closing stock of goods(
b
)Information related to Profit & Loss A/c.(
i
)Daily revenue expenses of the firm(
ii
)Daily revenue incomes of the firm(
c
)Information related to Balance Sheet(
i
)Information related to liabilities of firm1.Share capital2.Other liabilities which include:
Reserves & Surplus
Secured loan and unsecured loans
Current liability
Contingent liability(
ii
)Information related to Assets of the business:
2
 
1.Fixed assets2. Investments3.Current Assets4. Miscellaneous expenditure
3.
What items would you expect to find in the statements of financial position and profitand loss analysis relating to Mr Mehta?
Solution:
Following are the items which may appear in the profit and loss account of Mr Mehta:
Trading Account of Mr Mehta
 ParticularsAmountParticularsAmoun
To Opening StockxxxBy SalesxxxTo PurchasexxxBy Closing StockxxxTo WagesxxxTo Gross ProfitxxxBy Gross LossxxxTotalxxxxxTotalxxxxx
Profit and loss a/c of Mr Mehta
 ParticularsAmountParticularsAmoun
To Salary of AssistantsxxxBy sale of AssetsxxxTo Electricity ExpensesxxxBy Discount ReceivedxxxTo Telephone ExpensesxxxBy Interest on InvestmentxxxTo Sundry ExpensesxxxTo Discount PaidxxxTo Net ProfitxxxBy Net LossxxxTotalxxxxxTotalxxxxx
Balance Sheet of Mr Mehta
 LiabilitiesAmountAssetsAmoun
Share CapitalFixed Assets
Total ownership capitalxxxLand & Buildingxxx
Reserve & Surplus
FurniturexxxProfitxxxEquipmentsxxx
Secured LoanInvestments
Mortgage LoanxxxInvestmentsxxx
Unsecured LoanCurrent Assets
Friends LoanxxxCash Balancexxx
Current Liability
Bank BalancexxxBank OverdraftxxxDebtorsxxxCreditorsxxxStockxxxTotalxxxxxTotalxxxxx
4.
What records would Mr Mehta require to maintain, for controlling his businessactivities?
Solution.
Mr Mehta would be required to maintain the following records, for controllinghis business activities.
(1)Trading Account
(
a
)It tells us what are the net purchase and net sales of the company.(
b
)It also specifies the direct expenditure, incurred by the company.(
c
)Information regarding trading account is helpful during time of calculatingthe gross profit of the company.(
)Other benefits.
3

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