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

1 (60 Marks) Note: Each Question carries 10 marks. Answer all the questions. Q1. The Balanced Score Card is a framework for integrating measures derived from strategy. Take an Indian company which has adopted balance score card successfully and explain how it had derived benefits out of this framework. A.1 The Balanced Score Card is a framework for integrating measures derived from strategy. While retaining financial measures of past performance, the Balanced Score Card introduces the drivers of future financial performance. (Figure 1) The drivers (customer, internal business process, learning & growth perspectives) are derived from the organizations strategy translated into objectives and measures. The Balanced Score Card is more than a measurement system it can be used as an organizing framework for their management processes. The real power of the Balanced Score Card is when it is transformed from a measurement system to a management system. It fills the void that exists in most management systems - the lack of a systematic process to implement and obtain feedback about strategy

BSC in Indian Company Tata Motors Commercial Vehicles Business Unit Consisting of three plants in India, and supported by a nationwide sales and service network, Tata Motors Commercial Vehicles Business Unit (CVBU) manufactures the full range of commercial vehicles, such as 60-seat buses and 6x4 off-road vehicles. With a workforce of over 26,000, CVBU serves over 60% of the Indian market and is one of the top 10 truck manufacturers in the world. The CVBU has a top financial objective of being among the worlds top five profitable commercial vehicle manufacturers, which is supported by growth and cost themes and objectives. Scorecard Commencement CVBU began its scorecard implementation in 2000, in support of efforts to reverse several years of poor financial performance. A new strategy, crafted by the leadership team headed by the then new Executive Director (essentially CEO) Ravi Kant focused first on turnaround to be followed by sustainable growth and profitability through being the lowest-cost producer.

The scorecard was chosen as the preferred strategy implementation tool following the attendance by several senior managers at a seminar delivered by Dr. Norton.

Benefits And thus far the benefits from deploying the scorecard have been impressive. For instance, between 2001 and 2003 revenues grew by 40% (to a least double that of its nearest competitor). Note that from April December 2002 total volume sales of commercial vehicles was 72,612 units, which rose to 104, 626 in the same timeframe in 2003 - an impressive increase of 44%. Such performance, coupled with an aggressive cost reduction programme, helped its parent, Tata Motors Corporation, turn a US$108.62 million loss into a US$65.17 million profit between 2001 and 2003. For fiscal year ended March 2005 CVBU reported a 25% increase in sales in its domestic market of 25% against industry growth of 22%. As recognition of its success in 2004 CVBU was inaugurated into the Balanced Scorecard Collaboratives prestigious Hall of Fame, one of the first two Asia-based organizations to be afforded this honour. The original Strategy Map and Balanced Scorecard was created by putting in place a high-level steering committee, comprising functional heads and some other key officers such as the regional managers in sales and marketing. The committee reported to Ravi Kant. The committee appointed a core project team of five people (from the Business Excellence Service Department and Executive Directors Office) to facilitate the scorecard creation and deployment process. Final validation and ownership would remain with Ravi Kant and the

Steering Committee. At the outset the core teams knowledge was essentially drawn from the performance management and measurement expertise from the Business Excellence Service Department (the head of which sat on the Steering Committee), which had longstanding expertise in performance management frameworks such as The Malcolm Baldrige model. Indeed it was a Baldrige assessment that highlighted the business units weakness in strategy deployment. Once the CVBU Strategy Map was agreed upon, a concerted programme was conducted to provide detailed explanations to all functions and departments of the benefits of the scorecard and its importance to CVBU. Devolution Despite widespread communication, in year one the key focus was on defining the strategic objectives and their supporting strategic initiatives, and so the scorecard remained a high-level tool. KC Girotra, who as Head of the Business Excellence Service Department leads the scorecard effort, says: It was then decided that it should be cascaded to the lowest working levels in the organization, such as the Area Offices (sales and Marketing) and Centres of Excellence/Departments (plant locations). The cascade process involved Business Excellence Service Team Members, who had been trained by external consultants, running strategy mapping workshops within plants and functions. Team members also collaborated with both the CVBU Steering Committee and managers at lower levels to put in place a review process for monitoring and analysing performance on local Balanced Scorecards. Evolution and review led, for example, in year two to a sharpening of strategic initiatives to be more in line with the strategic challenges and the introduction of comparative data as a basis for selecting targets.

More than 300 scorecards have been created within CVBU covering all functions, departments, manufacturing centres of excellence and area offices (deepest work units within the sales and marketing organization). The CVBU level Balanced Scorecard defines the overall objectives, targets and timeframes to be achieved by the organization. These goals are then cascaded into Balanced Scorecards at each lower level. Hence, each scorecard is linked to the higher level scorecard. Additionally, each division/function defines its own initiatives to help achieve their own strategic objectives. For example, the CVBU level strategic objective of being a dominant player in domestic markets in all segments was cascaded into Lines of Business (LOB) scorecards where there are specific market share targets. The performance plans prepared by individual employees and cross-functional teams align all employees and teams to the company goals. Maintaining Momentum To maintain momentum, CVBU pays close attention to the continuous communication to all employees of the scorecard approach and benefits. Each year Ravi Kant initiates the process of sharing the companys vision, mission, future directions and strategies at a town hall meeting with all employees. He repeats the communication session personally at all locations in the company to ensure that all employees have a strong, consistent, understanding of the business units longer-term and shorter-term goals. More, the scorecard core team conducts scorecard cascading workshops at each division/function, to communicate the CVBU Strategy Map, Balanced Scorecard and initiatives. Other communications systems include internal publications, intranet websites, presentations made by senior leaders, and so on. Critical Success Factors KC Girotra says that there are three critical success factors in implementing the Balanced Scorecard.

The active and visible support of senior management A strong review process A knowledgeable team to drive and support scorecard deployment

As a final note, Ravi Kant is now Managing Director of the Tata Motors group. As much as anything this is an unambiguous endorsement of how successfully he led the implementation of CVBUs strategy. This is an extract from a case study that appears in the book Mastering Business in Asia: Succeeding with the Balanced Scorecard by James Creelman and Naresh Makhijani, John Wiley & Sons, 2005. Q2. What is DuPont analysis? Explain all the ratios involved in this analysis. Your answer should be supported with the chart. A.2 DU PONT ANALYSIS

A method of performance measurement that was started by the DUPONT corporation in the 1920s.

With this method, assets are measured at their gross book value rather thin at net book value in order to produce a higher return on equity (ROE). It is also known as DU PONT identy.

The Du Pont analysis can be depicted via the following chart: DU PONT CHART

The apex of the Du pont chart is the teturtn on total assets (ROTA) defined as the product of the net profits margin (NPM) and total assets turnover ratio (TATR).
Net Profit Net Profit Net Sales Total Asset Net Sales Total Assets

Such decomposition helps in understanding how the return on total assets is influenced by the net profit margin and the total assets turnover ratio. A manager has basically three ways of improving operating performace in terms of ROA and ROE. These are : Increase capital asset turnover Increase operating profit margins Change financial leverage

Each of these primary drivers is impacted by the specific decisions on cost control, efficiency, productivity, marketing choices etc.

Q3. Accounting Principles are the rules based on which accounting takes place and these rules are universally accepted. Explain the principles of materiality and principles of full disclosure. Explain why these two principles are contradicting each other. Your answer should be substantiated with relevant examples. A.3 Principles of Materiality: - While important details of financial status must be informed to all relevant parties, insignificant facts, which do not influence any decisions of the investors or any interested group, need not to b e communicated. Such less significant facts are not regarded as material facts. What is material and what is not material depends upon the nature of information and the party to whom the information is provided. While income has to be shown for income tax purposes, the amount can be rounded off to the nearest ten and fraction does not matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount outstanding during a particular period.

Principles of Full disclosure: - The business enterprise should disclose relevant information to all the parties concerned with the organization. It means that any information of substance or of interest to the average investors will have to be disclosed in the financial statements.

The company Act 1956 requires that income statement and balance sheet of a company must give a fair and true view of the state of affairs of the company. Full discloser of all relevant facts in accounts is the necessity in order to make accounting record useful. It is not a new thing , but is based on convention. Even in older times people used to speak truth and in full was incorporated in accounts too. Thus, full discloser is a very important convention.

For examples: - a hotel should report the building of a new wing, or the future acquisition of another property. A restaurant facing a lawsuit from a customer who was injured by tripping over a frayed carpet edge should disclose the contingency of the lawsuit. Similarly, is accounting practices of the current financial statements were changed and differ from those previously

reported, the changes should be disclosed. Changes from one period to the next that affect current and future business operations should be reported if possible. Changes of this nature include changes made to the method used to determine depreciation expenses or to the method of inventory valuation, such changes would increase or decrease the value of ending inventory, cost of sale, gross margin and net income or loss. All changes disclosed should indicate the dollar effects such disclosures have on financial statements.

Q4. Explain any two types of errors that are disclosed by trial balance with examples and rectification entry. Note - Avoid giving examples given in the self- learning material. A.4 Types of Errors that are disclosed by trial balance: - Accountants prepare trial balance to checks this correctness of accounts. If total of debits balances does not agree with the total of credit balances, it is a clear cut indication that certain errors have been committed while recording the transactions the books of original entry or subsidiary books. All errors of accounting procedure can be classified as errors of principle: When a transaction is recorded again the fundamental principles of accounting, it is an error of principle. For Example if revenue expenditure is treated as capital expenditure or vice versa. 1. Posting a wrong amount: This mistake may occur while posting an entry from subsidiary book to ledger. Example: Cash received from Krupa Rs. 1250 is posted to Krupas ledger account Rs. 1520, while its correct posted in cash a/c

Rectification entry: Krupa account To Suspense a/c Dr. Rs. 270 Rs. 270

Being excess credit given to Krupa a/c rectified.

2. Omitting to post an entry from subsidiary book to ledger: If an entry made in the subsidiary book does not get posted to ledger, the trial balance does not tally. Example: Stationery bill paid Rs.2000 recorded in cash account but is not posted to Stationery account at all. Rectification entry: Stationery account To Suspense a/c Dr. Rs. 2000 Rs. 2000

Being excess credit given to Krupa a/c rectified.

Q5. Distinguish between financial accounting and management accounting A.5 Distinction between Financial Accounting and Management Accounting Financial 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 shareholders, information are Management accounting Top, middle and lower level managers use the information for planning and decision making

creditors,

government employees etc.,

authorities,

Accounting

information

is

Management

accounting

may

adopt

any

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

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,

discipline by itself and has its own principles, policies and

information system, operation research etc.,

conventions

Q6. XYZ Ltd provides the following information January 1 Sundry debtors Cash in hand Cash at bank Bills Recieveable Inventory Bills Payables Outstanding expenses Sundry creditors Bank overdraft Short term loans 65,000 13,000 15,000 16,000 90,000 12,000 6,000 30,000 30,000 32,000 December 31 1,05,000 20,000 20,000 30,000 84,000 8,000 5,000 58,000 42,000 36,000

Prepare a schedule of changes in working capital Hint: Net Working capital: Jan 1st 89000 and Dec31st 110000 A.6 Schedule of changes in Working Capital