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Winter / November 2011 Master of Business Administration

Master of Business Administration-MBA Semester 1 MB0041 Financial and Management Accounting - 4 Credits (Book ID: B1130)

Assignment Set- 1 (60 Marks)

MB0041 Financial and management Accounting - 4 Credits (Book ID: B1130) Assignment
Set- 1 Q1. Distinction between book-keeping and accountancy Ans: Distinction between Book-keeping and Accountancy: Accountancy is the profession and the practitioners of accountancy are called accountants. Book keeping is the basic activity of recording. On recording the transactions and events in the books of accounts, accounting does the role of analysis and reporting. Accountancy is the profession of carrying the activities of book keeping and accounting. Accounting enjoys wider scope and includes not only book keeping but also analysis, interpretation and reporting of financial information. The later part of accounting is the core function of accounting. In the present day environment, sophisticated software packages are available, which facilitate entry of transactions and preparation of ledger accounts. Book keeping It is a process of identifying, measuring, recording and analyzing the transactions in books of accounts Adopt principles of accounting for recording Book keeping is the first stage of accounting process The objective is to prepare final accounts and balance sheet in a systematic manner at the end of accounting period Accounts executives who perform this function may not require higher level of knowledge. The nature of job is routine and clerical Accountancy It involves summarizing the classified transaction, interpreting the analyzed results and communicating the information to the users of financial statement. Analyzing and interpreting requires skill, knowledge and experience Accountancy follows book keeping. It is the secondary stage

The objective is to ascertain net results of financial operations and communicate the results to all stakeholders in a manner they understand.

Accountants who perform this function need higher analytical skills to interpret the data and to take appropriate decisions. The nature of job is non routine but analytical.

Q2. Pass journal entries for the following transactions

(a) Madan commenced business with cash Rs. 70000 (b) Purchased goods on credit 14000 (c) Withdrew for private use 3000 (d) Goods purchased for cash 12000 (e) Paid wages 5000 Ans: Transaction Accounts affected Account to be debited and account to be No in the books of the credited business 01 Capital account and Cash account being real account is debited cash account and Capital account being personal account is credited 02 Goods account and Goods account being real account is creditors account debited and creditors account being personal account is credited 03 Personal drawings Drawings account being personal account account and cash account 04 is debited and cash account being real account is credited

Goods account and Goods account being real account is cash account debited and cash account being real account is credited

05

Wages account and Wages account being nominal account is cash account debited and cash account being real account is credited

Accounting equations for the transactions Liabilities + Owners Equity Furniture + = Madan's Capital 70,000 14,000 -3,000 -12,000 -5,000 50,000 26,000 76,000 0 0 14,000 76,000 12,000 -5000 62,000 14,000 -3,000

Assets = Transaction Cash + Good + Debtors +

Creditors +

1 2 3 4 5 End Equation

70,000

Q3. Write short notes on : a. Outstanding Expenses b. Prepaid Expenses

Ans: (a) Outstanding Expenses Expenses yet to be paid or outstanding expenses for the current period should be charged against the current periods income. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses. Salaries outstanding (March 20XX month salary paid in April 20XX) Rent outstanding

(b) Prepaid Expenses Expenses paid in advance or prepaid expenses should be not be charged against the revenues relating to the current period but taken to the coming period. Prepaid expenses form an asset and therefore prepaid expenses account is debited. Salaries paid in advance Insurance paid in advance Rent paid in advance Example: insurance premium is paid from April, 2004 to March, 2005 and the amount is Rs.3600. The accounting year of the firm ends on 31stDecember, 2004. Therefore the premium relating to Jan, Feb and Mar of 2005 amounting to Rs.900 is said to have been paid in advance. To record this internal adjustment, the entry is

Q4. Given variable cost Rs.5,00,000. Fixed cost Rs.3,00,000. Net profit Rs.1,00,000. Sales Rs.10,00,000. Find (a) MCSR (b) BEP (c) Profit when sales amounted Rs.12,00,000 (d) sales required to earn a profit of Rs.2,00,000. Ans: (a) MCSR = Contribution/Sales 100 Contribution = Sales Variable Cost = 10,00,000 5,00,000

= 5,00,000 MCSR = 5,00,000/10,00,000 100 = 50% (b) BEP = Fixed Cost/ MCSR = 3,00,000/0.5 = 6,00,000 (c) Profit when sales amounted Rs.12,00,000 Contribution 50% Therefore total Contribution 12,00,000 50% = 6,00,000 Less: fixed cost Rs. 3,00,000 Profit = 3,00,000 (d) sales required to earn a profit of Rs.2,00,000. = Fixed Cost + Desired Profit/MCSR = 3,00,000 + 2,00,000/50% = Rs. 10,00,000

Q5. Explain the meaning of Depreciation. Mention the different types of depreciation with examples Ans: Depreciation Depreciation is reduction in the value of an asset due to constant use of the same, which is called wear and tear. Fixed assets like, buildings, plant, machinery, furniture etc., are subject to depreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss to the organization. Depreciation account is debited and the concerned asset account is credited. The item of depreciation may appear in the trial balance, which means that already the concerned asset is reduced by the amount of depreciation. If depreciation is given as an additional adjustment, then the depreciation amount should be charged against profit and loss account on one hand and the concerned asset account is reduced on the other hand in the balance sheet. There are two popular methods of depreciation:

Fixed installment method (Straight line method) Reducing balance method (Written down value method). In fixed installment method, depreciation is calculated on cost of the asset. The depreciation charged remains same throughout the life of the asset. In case of reducing balance method (Diminishing balance method), the depreciation is charged on the reducing balance of the book

value of the asset. The depreciation amount gets reduced year after year during the life of the asset. Reducing balance method is more popular and well recognized. Example: The book value of the building is Rs.400000. It is depreciated at 10% on fixed installment method. Show the journal entry and how does it appear in the balance sheet for the first and second year under both the methods.

1. Depreciation charged for the first year under straight line and reducing balance method. 2.

During the first year the depreciation charged is similar under both the methods. 3. Depreciation for the second year under:

Q6. Show the rectification entries for the following: a. The Sales account is undercast by Rs.15,000 b. Goods returned by the customer Mr.X of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr.X a/c as Rs.6,550. c. Salary paid Rs.6,000 has been posted to Rent account d. Cash received from Ram posted to Shyam account Rs.7,000 e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhus a/c

Solution:

Date a.

Particulars Suspense A/c Dr. To Sales A/c (Being Undercasting of sales account rectified) Mr. X A/c Dr. Return Inward A/c Dr. To Suspense A/c (Being wrong posting of return inward rectified) Salary A/c Dr. To Rent A/c (Being wrong posting of rent account rectified) Suspense A/c Dr. To Ram A/c (Being wrong posting of cash received rectified) Jadu A/c Dr. To Madhu A/c (Being wrong debit of madhu account rectified)

L.F

Dr 15,000

Cr 15,000

b.

900 90 990 6,000 6,000 7,000 7,000 8,640 8,640

c.

d.

e.

MB0041 Financial and management Accounting - 4 Credits (Book ID: B1130) Assignment
Set- 2 Q1. Disinguish Financial Accounting and Management accounting Ans: Distinction between Financial Accounting and Management AccountingFinancial 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 The primary users of financial accounting information are shareholders, creditors, government authorities, employees etc., Accounting information is always expressed in terms of money Financial data is presented for a definite period, say one year or a quarter Financial accounting focuses on historical data Financial accounting is a discipline by itself and has its own principles, policies and conventions Management accounting Top, middle and lower level managers use the information for planning and decision making

Management accounting may adopt any measurement unit like labour hours, machine hours or product units for the purpose of analysis Reports are prepared on continuous basis, monthly or weekly or even daily Management accounting is oriented towards future Management accounting makes use of other disciplines like economics, management, information system, operation research etc.,

Q2. Enter the following transactions in the single column cash book of Gopichand. March, 2003 1st Commenced business with cash 20000 2nd Bought goods for cash 5000 3rd Sold goods for cash 4000 4thGoods purchased from Ravi Kumar 10000 10thPaid to Ravi Kumar 7000 14thCash sales 8000 18thPurchased furniture for office 4000 22nd Paid wages 500 25thPaid rent 600 30thReceived Commission 4000 30th Withdrew for personal purpose 1000 31stPaid salary 900 Solution: single column cash book of Gopichand Date March 2003 1st 3rd 14th 30th Receipts Cash Date March 2003 2nd 10th 18th 22nd 25th 30th 31st 31st 36,000 Payments Cash

To Capital To Sales To Sales To Commission

20,000 4,000 8,000 4,000

By Goods By Ravi Kumar By Office Furniture By Wages By Rent By Drawings By Salary By Bal c/d

5,000 7,000 4,000 500 600 1,000 900 17,000 36,000

Q3. What is cash flow statement and how is the cash flow statement subdivided?
Cash flow statement, also known as Statement Accounting for variations in cash, Where Got Where Gone Statement. It shows the movement of cash and their causes during the period under consideration. The statement is significant to the stakeholders of the company and is prepared to show the impact of financial policies and procedures on the cash position. It takes into account all the transactions that have a direct impact upon cash and cash equivalent.

Ans:

According to Accounting Standard 3 (Revised) method cash flow statement is sub divided into three parts (i) cash flow from operating activities (ii) cash flow from investing activities (iii) cash flow from financing activities. 1. Cash flow from Operating Activities: Operating activities are the principal revenue producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans and make new investments without recourse to external source of financing. Information about the specific components of future operating cash flows is useful in conjunction with other information in forecasting future operating cash flows. Computation of Operating Profit before Working capital changes: The Net Profit shown in the Profit and Loss Account will have to be adjusted for non-cash items for find out operating profit before working capital changes. Some if these items are as follows: i. Depreciation: Depreciation does not result in outflow of cash and, therefore, net profit will have to be increased by the amount of depreciation or development rebate charged, in order to find out the real cash generated from operations. ii. Amortization of intangible assets: Goodwill, preliminary expenses, etc., when written off should therefore, be added back to profits to find out the cash from operations. iii. Loss on Sale of fixed assets: It does not result in outflow of cash and, therefore, should be added back of profits. iv. Gains from sale of fixed assets: Since a sale of fixed assets is taken as a separate source of cash, it should be deducted from net profits. v. Creation of reserves: If profit for the year has been arrived at after charging transfers to reserves, such transfers should be added back to profits. If cash operations show a net loss, such net loss after making adjustments for non-cash items will be shown as an application of cash. Thus cash from operations is computed on the pattern of computation of Funds from operations. Cash generated from Operations To find the cash from operations, adjustments will have to be made for changes in current assets and current liabilities arising on account of operations.

Any decrease in current assets or any increase in current liabilities between two periods should be added back to Operating profit before working capital changes. Likewise any increase in current assets or any decrease in current liabilities should be deducted from Operating profit before working capital changes to arrive at cash generated from Operations. Computation of Net Cash Flow from Operating Activities: From cash generated from operations Income tax paid, cash flow from extraordinary items (if any) should be adjusted (subtracted) to arrive at Net cash flow from operating activities. 2. Cash Flow from Investing Activities Transactions like purchase or sale of fixed assets, proceeds from sale of equipments, Interest on Investment received, Dividends received are recorded. 3. Cash Flow from Financing Activities Transactions such as proceeds from issue of shares, debentures, proceeds from long term loans, repayment of long term loans, Interest paid on debentures, dividend payment to equity, preference share holders are shown to arrive at net cash used in financing activities. Purchase of plant and machinery on lease or hire purchase should be shown separately as deferred credit. However the cost of machinery purchased will be shown as application of cash. Computation of Net Increase in Cash and Cash Equivalent The net cash flow from operating, investing and financing activities are added to arrive at net increase in cash and cash equivalent. To this cash and cash equivalent at the beginning of the period is added to get cash and cash equivalent at the end of the period.

Q4. 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.

Solution: Statement of expected Cash Receipts Collection form Cash sales Collection from Debtors January February March April May Total April 37,500 8,400 18,750 63,000 May 27,500 10,500 26,250 67,500 June 25,000 14,700 28,125 49,500

127,650 131,750 117,325

Assume that the credit policy is enforced strictly ,what would be the cash receipts. Cash sales : Debtors March April May Total

37,500 105000 -

27,500 112500 -

25,000 82,500

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 : months amount x time lag

Q5. What are the guidelines that deal with reserve for discount on debtors? What is Bad debts also Mention the accounting treatment of bad debts. Ans: Reserves for Discount on Debtors

There are two types of discounts allowed to customers in a business. One is trade discount and the other is cash discount. After anticipating the amount of cash discount allowable, a provision is made in the current year itself. In the subsequent years, the actual discount allowed is set off against the provision for discount on debtors. Every year, the amount of provision for discount on debtors is deducted from the profits. The entry for making the provision is

The following guide lines may be kept in mind while dealing with the reserve for discount on debtors 1. If a reserve for discount on debtors do not exist and cash discount is allowed then transfer the discount to P&L account. 2. Any fresh reserve for discount on debtors is to be made, debit the P&L Account with the amount of reserve. 3. If provision for discount on debtors exists at the time of providing discount, then write off the discount from the provision already made for the purpose. 4. New provision should then be calculated and only as much as required to bring the existing provision to the new figure should be debited to P&L Account.

5. If the new provision required is lower than the provision already existing (old), then the difference shows profit and transfer the same to P&L Account. Bad Debts Bad debts are those debts which are not recovered. Bad debts form loss to the business and reduce the amount of debtors.

Since bad debts are losses, they are debited and the debtors account is credited. If bad debts are recovered, cash account is debited and bad debts recovered account is credited. Accounting treatment of Bad debts: A. If bad debts are identified and shown in trial balance:

B. If bad debts are shown outside the trial balance: This denotes bad debts that they were identified after the preparation of Trial Balance. Two adjustments should be incorporated. Example: The sundry debtors for the year 2005 are Rs.50000. The bad debts amounted to Rs.4000 as on 31-12-2005 already shown in the trail balance. Write off further bad debts Rs.5000. Show how the above internal adjustments appear in the Profit and loss account and Balance Sheet.

Solution: Bad debts shown in the trial balance is Rs.4000 and not shown in the trial balance is Rs.5000. To incorporate those bad debts not yet shown in the trial balance, the adjusting entry is

Q6. Prepare a statement of changes in working capital from the following information.

Solution: Statement of changes in working capital during the year

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