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Fall / August 2012 Master of Business Administration- MBA Semester 1 MB0041 Financial and Management Accounting Assignment Set- 1

Q1.Explain the process involved in accounting process ?

Accounting involves a lot of complexities, but understanding some basic principles can be very helpful. This article is designed to help you get a start in understanding the accounting process. The accounting process involves all the steps that take place between a single transaction and the completion of financial statements at the end of an accounting cycle. Included in this article are lots of useful links to pictures and websites that will help you to better understand the accounting process.

The Accounting Process


The first step in the accounting process is recording journal entries and naturally this requires a transaction. It is important to understand that not every transaction will involve cash. In today's business world, nearly every service or good that is transacted is done so on some form of credit. This means that you might walk out of a store with a forty dollar piece of equipment and at that exact moment you have not yet paid a single dollar. Instead you used a credit card and you will pay for that purchase at some later point. In accounting, it is important to record transactions when they happen, regardless of when the transaction will be paid for with cash. This is known as accrual accounting. Once the transaction occurs, a journal entry must be recorded. A journal entry should be put into a table with each entry taking up two rows. Each row will list an account affected by the transaction. In accounting, every transaction will affect two different accounts (and in cases more). If you buy supplies for your business on credit, the journal entry should record a debit to your supplies account, meaning that now you have more assets (in supplies) and a credit to your accounts payable account because you now owe money to businesses that sold you the supplies. In every journal entry one of the accounts will always be debited and one will always be credited. The image to the upper-left illustrates what a journal entry should look like. At the end of a month, quarter, or year, you will need to prepare financial statements. By that time you should have a nice long list of journal entries. The next step is to create T-accounts or ledger accounts by taking each account and listing all the debits and credits to that account. Simplified T-accounts will look like this. After the T-accounts are created, the information must be transferred to a trial balance. The trial balance is a simple table listing each account and the current balance of that account. Asset accounts (cash, accounts receivable, equipment, building, land, etc) almost always have a debit

balance while liability and equity accounts (accounts payable, notes payable, owner's equity, etc) have credit balances. When completed, a trial balance will look like this. In a trial balance, the debit and credit side will always balance out with equal totals. Often, a trial balance will need to be adjusted, which means things like depreciation, prepaid expenses, and accrued expenses are accounted for in the proper accounting period. Using the trial balance, financial statements are prepared. The first statement is the income statement. It will list the service revenue (money that is brought in from services provided or products sold) followed by all the expenses incurred during that financial period. Using the total from the income statement which is found by subtracting expenses from revenue, the owner's equity statement is prepared. Finally, the balance sheet is completed by listing all the assets, liabilities, and owner's equity. Assets will always equal the liabilities and equity, which is why this statement is called a balance sheet. These statements should be completed in the order mentioned above because information needed for the equity statement and balance sheet come from the previous statement. All of this may sound very complicated, but viewing samples of each of these should help you to understand what types of accounts are recorded in each statement.The accounting process is completed when all accounts are closed and "reset" for the new financial cycle. This involves working with a work sheet that condenses all the financial statements onto one table. All accounts must then be emptied out into the capital account, which is the only account which rolls-over from year to year.There is no doubt that accounting can be very difficult and complex. Hopefully this article has helped you to grow in your knowledge of the subject. Most likely, you will still have a few questions, but using the links and other external information you can continue to expand your knowledge. As with anything, know that accounting, especially at a business level, has both legal and ethical ramifications. Be sure to consult a certified public accountant if you have any concerns.

Q2.The salaries paid in for 2004 is Rs. 5,00,000;Salaries outstanding is Rs.20,000;Salaries paid in advance for 2004 for is Rs. 30,000. What is the actual salary expenditure for 2004 ? Which accounting principle is involved in this and explain that principle.

Salary paid (-)Salary outstanding (-)Salary paid in advance

5,00,000 20,000 30,000

Periodicity is the accounting principle used in above. This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2012, or the 5

weeks ended May 1, 2012. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2011, the amount is known; but for the income statement for the three months ended March 31, 2012, the amount was not known and an estimate had to be used.

It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these financial statements with "December 31" is not good enoughthe reader needs to know if the statement covers the one week ended December 31, 2011 the month ended December 31, 2011 the three months ended December 31, 2011 or the year ended December 31, 2011

Q3.Find the value of the following :


a. If the total assets are Rs. 87,000 and the liablilites are Rs. 47,000 find out the amount of capital. b. If the capital of proprietor is Rs. 4,00,000 and the total assets are 6,00,000.what is the amount of liabilities to outsiders? c. If creditors are Rs. 56,000 bank overdraft is Rs. 1,00,000 and outstanding expenses are Rs. 8,000. What is the total assests? d. Fixed assets are Rs. 70,000 and current assets are Rs. 1,00,000 and the creditors are Rs.30,000.what is capital ?

The 'basic accounting equation' is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.

Transanction Number a b c e

Assets = 87,000 6,00,000 1,64,000 1,70,000

Liablitites 47,000 2,00,000 64,000 30,000

Capital 40,000 4,00,000 1,00,000 1,40,000

4.Enter the following transactions in the single column cash book of gopicahnd.March 2003 1st. Commenced business with cash 2nd Bought goods for cash 3rd Sold goods for cash 4th Goods purchased from Ravi Kumar 10thPaid to Ravi Kumar 14th Cash Sales 18th Purchased Furniture for office 22nd Paid Wages 25th Paid Rent 30th Received commission 30th Withdrew for personal purpose 20,000 5,000 4,000 10,000 7,000 8000 4000 500 600 4000 1000

Cash Balance

1,70,000

Hint goods purchased from Ravi Kumar is credit purchase

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

Q5.Find Out the missing figures. Office stationery Opening stock 5000 Purchased during the 25000 year Closing stock 3000 Consumed for the year ? Consumables 8000 ? 6000 24000

Solution Opening stock (+)Purchased during the year (-)Consumed for the year = Closing stock

Office stationary 5000 25000 27000 3000

Consumables 8000 22000 6000 6000

Q6.Explain the tools of management accounting. Tools of Management Accounting Management Accounting uses the following tools or techniques to fulfill its responsibilities and duties towards management. Financial Statement Analysis Funds Flow Analysis Cash Flow Analysis Costing Techniques that includes marginal costing, differential costing, standard costing, and responsibility costing Budgetary control Management Reporting. Financial Statements are indicators of two significant factors that include profitability and financial soundness. Analysis and interpretation of financial statements enables full diagnosis of the profitability and financial soundness of the firm. Analysis means methodical classification of the data given in the financial statements. Methodical classification enables comparison of the various inter-connected figures with each other. Interpretation explains the meaning and significance of the data. Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital position, the sources from which the working capital was obtained and the purpose for which it was used. It also reveals the changes that have taken place behind the Balance Sheet. Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated data. It depicts the changes in the cash position from one period to

another. A projected cash flow or a cash budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans and to pay dividends to the shareholders. Standard Costing is the preparation and use of standard costs, their comparison with actual costs and the analysis of variance. It discloses the cost of deviations from standards. It aims at assessing the cost of a product, process or operation under standard operating conditions. Budgetary Control has become an essential tool of management for controlling costs and to maximize profit. It helps to compare the current performance with pre-planned performance thereby correcting the deviations if any. Management Reporting System is an organized method of providing each manager with all the data and only those data which he needs for his decisions, when he needs them and in a form which aids his understanding and stimulates his action. Tools of Management Accounting Management Accounting uses the following tools or techniques to fulfill its responsibilities and duties towards management. Financial Statement Analysis Funds Flow Analysis Cash Flow Analysis Costing Techniques that includes marginal costing, differential costing, standard costing, and responsibility costing Budgetary control Management Reporting. Financial Statements are indicators of two significant factors that include profitability and financial soundness. Analysis and interpretation of financial statements enables full diagnosis of the profitability and financial soundness of the firm. Analysis means methodical classification of the data given in the financial statements. Methodical classification enables comparison of the various inter-connected figures with each other. Interpretation explains the meaning and significance of the data. Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital position, the sources from which the working capital was obtained and the purpose for which it was used. It also reveals the changes that have taken place behind the Balance Sheet. Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated data. It depicts the changes in the cash position from one period to another. A projected cash flow or a cash budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans and to pay dividends to the shareholders. Standard Costing is the preparation and use of standard costs, their comparison with actual costs and the analysis of variance. It discloses the cost of deviations from standards. It aims at assessing the cost of a product, process or operation under standard operating conditions. Budgetary Control has become an essential tool of management for controlling costs and to maximize profit. It helps to compare the current performance with pre-planned performance thereby correcting the deviations if any.

Management Reporting System is an organized method of providing each manager with all the data and only those data which he needs for his decisions, when he needs them and in a form which aids his understanding and stimulates his action. Tools of Management Accounting Management Accounting uses the following tools or techniques to fulfill its responsibilities and duties towards management. Financial Statement Analysis Funds Flow Analysis Cash Flow Analysis Costing Techniques that includes marginal costing, differential costing, standard costing, and responsibility costing Budgetary control Management Reporting. Financial Statements are indicators of two significant factors that include profitability and financial soundness. Analysis and interpretation of financial statements enables full diagnosis of the profitability and financial soundness of the firm. Analysis means methodical classification of the data given in the financial statements. Methodical classification enables comparison of the various inter-connected figures with each other. Interpretation explains the meaning and significance of the data. Funds Flow Analysis is an important tool for management accountant. It reveals the changes in working capital position, the sources from which the working capital was obtained and the purpose for which it was used. It also reveals the changes that have taken place behind the Balance Sheet. Cash Flow Statement identifies the sources and application of cash. It is prepared on the basis of actual or estimated data. It depicts the changes in the cash position from one period to another. A projected cash flow or a cash budget will help the management in ascertaining how much cash will be available to meet obligations to trade creditors, to pay bank loans and to pay dividends to the shareholders. Standard Costing is the preparation and use of standard costs, their comparison with actual costs and the analysis of variance. It discloses the cost of deviations from standards. It aims at assessing the cost of a product, process or operation under standard operating conditions. Budgetary Control has become an essential tool of management for controlling costs and to maximize profit. It helps to compare the current performance with pre-planned performance thereby correcting the deviations if any. Management Reporting System is an organized method of providing each manager with all the data and only those data which he needs for his decisions, when he needs them and in a form which aids his understanding and stimulates his action.

Fall / August 2012 Master of Business Administration- MBA Semester 1 MB0041 Financial and Management Accounting Assignment Set- 1

Q1.Compute trend Ratios and comment on the financial performance of Infosys Technlogies Ltd. From the following extract of its income statements of five years ?

Particulars Revenue Operating Profit (PBIDT) PAT from ordinary activities

2010-11 27,501 8,968

2009-10 22,742 7,861

2008-09 21,693 7,195

2007-08 16,692 5,238

2006-07 13,893 4,391

6,835

6,218

5,988

4,659

3,856

Solution

Particulars Export revenue (%) Total revenue (%) Operating profit before depreciation (%) Net profit before exceptional item (%) EPS before exceptional item (%)

2010-11 18.78 20.08 14.32 11.95 11.85

2009-10 4.33 4.32 6.57 (1.10) (1.26)

2008-09 29.65 29.50 39.15 30.18 29.92

2007-08 19.28 19.01 17.47 18.35 15.36

Turning thirty is a good time to reminisce. And reflect. And look ahead. Thirty is one of those rare junctures when you have both youth and experience on your side. Thus, as Infosys completes thirty, we talk about the pleasures and pains of starting small; the genesis of a valuebased organization culture; personal goals turning into company milestones; sharing wealth and caring for society; learning and educating; building infrastructure for one and all; agreeing to disclose and refusing to compromise on quality; and above all, believing in a vision and leading by example to see it become reality.

Q2. What is fund flow analysis? What are the objectives of analysing flow of fund? Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vise- versa. First of all, we make fund flow statement and then study its cause and effect deeply and try to find many important facts and information which can be used in business. It can also solve following problems.

Fund may be interpreted in various ways as (a) Cash, (b) Total current assets. Net working capital, (d) Net current assets. For the purpose fund flow statement the term fund means net working capital. The flow fund will occur in a business, when a transaction results in a change i increase or decrease in the amount of fund. According to Robert Anthony, the Fund Flow Statement describes t sources from which additional funds were derived and the uses to which these funds were put. Different Names of Fund-flow Statement * A Funds Statement * A statement of sources and uses of fund * A statement of sources and application of fund * Where got and where gone statement * Inflow and outflow of fund statement Objectives of Fund Flow Statement The main purposes of Fund Flow Statement are: 1. To help to understand the changes in assets and asset sources which are not readily evident in the income statement or financial statement. 2. To inform as to how the cans to the business have been used. 3. To point out the financial strengths and weaknesses of the business . Format of Fund Flow Statement

Sources Applications Fund from operation - Fund lost in operations Non-trading incomes - Non-operating expenses Issue of shares - Redemption of redeemable preference share Issue of debentures- Redemption of debentures Borrowing of loans Repayment of loans Acceptance of deposits Repayment of deposits Sale of fixed assets Purchase of fixed asset Sale of Investments Purchase of long term Instruments (Long Term) Decrease in working capital Increase in working capital

Q3.Calculate the cost of raw materials purchased from the following data : Opening stock of raw materials Rs.10,000 Closing stock of raw materials Rs.15,000 Expenses on purchases Rs.5,000 Direct wages Rs.50, 000 Prime costs Rs.1, 00,000

Solution Opening Stock Puchases Expenses 20% of Prime Costs Closing Stock 10,000 50,000 5,000 20,000 15,000

Q4. Distinguish between absorption costing and marginal costing?

The system of computing the cost of production is known as costing. The main purpose of any costing system is to identify the cost incurred for the production of a unit output. In a manufacturing company, identifying the cost associated with a unit product is very important to price the product such that the company could make a profit and survive to exist in the future. Both absorption costing and marginal costing are traditional system of costing. Both methods have their own pros and cons. In modern management accounting, there are some sophisticated costing methods such as activity based costing (ABC) that are very popular. Those methods are built up just by adding and amending some principles of the principles of traditional costing system.

The difference between marginal costing & absorption costing is as below: 1. Under marginal costing: for product costing & inventory valuation, only variable cost is considered whereas, under absorption costing; for product costing & inventory valuation, both fixed cost & variable cost are considered. 2. Under marginal costing, there is a different treatment of fixed overhead. Fixed cost is considered as period cost & by Profit/Volume ratio (P/V ratio), profitability of different products is judged. On the other hand, under absorption costing system, the fixed cost is charged to cost of production. A reasonable share of fixed cost is to be borne by each product & thereby subjective apportionment of fixed overheads influences the profitability of product. 3. Under marginal costing, the presentation of data is so oriented that total contribution & contribution from each product gets highlighted. Under absorption costing, the presentation of cost data is on conventional pattern. After deducting fixed overhead, the net profit of each product is determined. 4. Under marginal costing, the unit cost of production does not get affected by the difference in the magnitude of opening stock & closing stock. Whereas, under absorption costing, due to the impact of the related fixed overheads, the unit cost of production get affected by the difference in the magnitude of opening stock & closing stock. Effects of opening & closing stock on profit: When income statements under absorption costing & marginal costing are compared, the under mentioned points should be considered:

1. The results under both the methods will be same in situations where sales & production coincide i.e., there is neither opening stock nor closing stock. 2. Profit under absorption costing will be more than the profit under marginal costing, when closing stock is more than the opening stock. The reason behind this is that, under absorption costing, a portion of fixed overhead, instead of being charged to the current period, is charged to the closing stock & carried over to the next period. 3. Profit shown under absorption costing will be lower than the profit shown under marginal costing, when closing stock is less than the opening stock. The reason behind this is that, under absorption costing, to the current period, a portion of fixed cost related to previous year is charged. Reconciliation of results of absorption costing & marginal costing: When comparison of the results of absorption costing & marginal costing is undertaken, the adjustments for under- absorbed & / or over absorbed overheads becomes necessary. Under absorption costing, on the basis of normal level of activity, the fixed overhead rate is predetermined. A situation of under-absorption &/or overabsorption arises when there is a difference between actual level of activity & normal level of activity. (i) Under-absorbed fixed overhead = Excess of normal level of activity over actual level of activity * Fixed overhead rate per unit. If there is under-absorption, the profit under absorption costing, before comparison with profit as per marginal costing, should be reduced with under-absorbed fixed overheads. Alternatively, by adding the under-absorbed fixed overhead to the cost of production, the same objective can be achieved. (ii) Over absorbed Fixed overhead = Excess of actual level of activity over normal level of activity * Fixed overhead rate per unit. If there is over absorption, then before the comparison of profit as per absorption costing with the profit as per marginal costing, with over-absorbed fixed overheads, the profit under absorption costing should be increased. Alternatively, by reducing the overabsorbed fixed overhead from the cost of production, the same objective can be achieved.

Q5. The Anchor Company Ltd. produces most of its electrical parts in its own plant. The company is at present considering the feasibility of buying a part from an outside supplier for Rs.4.50 per part. If this is done, monthly costs would increase by Rs.1,000. The part under consideration is manufactured in department 1 along with numerous other parts. On account of discontinuing the production of this part, department 1 would have somewhat reduced operations. The average monthly usage production of this part is 20,000 units. The costs of producing this part on per unit basis are as follows Material Labour (half-hour) Fixed overheads Total costs Rs. 1.80 2.40 0.80 5.00

Solution Particulars Make cost Total per unit Buy cost Total per unit

Relevant Costs : Materials (20000Units) Labour Purchasing Cost (20000 units) Additional Cost of Purchasing from outside

3600 0 4800 0
-

1.8 2.4 -

9000 0 1000 9100 0

4.5 0.05

8400 0

4.2 7000 per month

4.55

Differential Costs Favouring Making Of the part

0.35

The company should be continue the practice of producing the part in Department I

Q6. Explain the essential features of budgetary control.

An effective budgeting system should have essential features to get best results. In this direction, the following may be considered as essential features of an effective budgeting. Business Policies defined: The top management of an organization strives to have an action plan for every activity and for each department. Every budget should reflect the business policies formulated from time to time. The policies should be precise and the same must be clearly defined. No ambiguity should enter the document. Clear knowledge should be provided to all the personnel concerned who are going to execute the policies. Periodic suggestions should also be taken. Forecasting: Business forecasts are the foundation of budgets. Time and again discussions should be arranged to derive the most profitable combinations of forecasts. Better results can be anticipated based on the sound forecasts. As far as possible, quantitative techniques should be made use of while forecasting

Formation of Budget Committee: A budget committee is a group of representatives of various important departments in an organization. The functions of committee should be specified clearly. The committee plays a vital role in the preparation and execution of budget estimated. It brings coordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair. Accounting System: To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time to time Organizational efficiency: To make the budget preparation and its subsequent implementation a success, an efficient, adequate and best organization is necessary a budgeting system should always be supported by a sound organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must also be a delegation of authority from top to bottom line. Management Philosophy: Every management should set a healthy philosophy while opting for the budget. Management must wholeheartedly support the activities which developing a budget. Encouragement should flow from top management. All the members must be involved to make it a workable preposition and a dream-driven document. Reporting system: Proper feedback system should be established. Provision should be made for corrective measures whenever comparative measures are proposed. Availability of statistical information: Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should be made available to each department. Motivation: Since budget acts as a mirror, the entire organization should become smart in its approach. Every employees both executive and non-executives should be made part of the overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organization.