“Management Accounting is concerned with accounting information that is useful to management.” -R.N. Anthony “Management Accounting is a system that collects, classifies, summarises, analyses and reports information that will assist managers in their decision making and control activities”. ~ Robert S. Kaplan “Management Accounting is the term used to describe accounting methods, systems and techniques which coupled with special knowledge and ability, assists management in its task of ‘maximising profits or minimising losses. Management Accountancy is the blending together into a coherent whole, Financial Accounting, cost accountancy and all aspects of financial management.” Batty “Management Accounting is a system of collection and presentation of relevant economic information relating to an enterprise for planning, controlling and decision-making.” -ICWA of India “Management Accounting is the provision of information required by management for such purposes as formulation of policies, planning and controlling the activities of the enterprise, decision-making on the alternative courses of action, disclosure to those extemal to the entity (shareholders and others), disclosure to employees and safeguarding of assets.” -CIMA London Management Accounting is “the application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards these objectives”, American Accounting Association ‘Scanned with CamScanner7 SCOPE OF MANAGEMENT ACCOUNTING ‘The scope of Management Accounting is very vast as Management Accountancy utilizes the principles and practices of Financial Accounting and Cost Accounting in addition to other ‘management techniques for efficient operations of « company. It widely uses different techniques from various branches of knowledge like Statisties, Mathematics, Economics, Laws and Psychology to assist the management in its task of maximizing profits oF minimizing losses. The ‘main thrust in Management Accountancy is towards determining policy and formulating plans to achieve the desired objectives of management. Management Accountancy makes corporate planning and strategy effective. 1) Financial Accounting nancial Accounting provides basic historical data which helps management to forecast and plan its financial activities for the future period. Thus for an effective and successful Management Accounting, there should be a proper and well designed Financial Accounting system. fi) Cost Accounting, Cost Accounting provides the most sophisticated techniques like marginal costing, budgetary control, standard costing ete., which enables Management Accounting to provide necessary information for effective decision making and control. ) Budgetary Control In order to plan business activities forthe Future, forecasting and budgeting play a very significant role, Forecasting helps in the preparation of budgets and budgeting helps management accountant in exercising budgetary contro. iv) Tax Planning ‘Tax planning is another important area which has a serious impact on the profitability of the concern, Without proper planning of tax, the profits of the enterprise are hijacked which affects adversely the business operations. Hence, i is an important activity of Management Accounting vy) Reporting to Management ‘There should be 2 system of prompt and intelligent reporting to management for effective and timely decisions. Both routine and special reports are prepared for submission to top management, ‘middle-order management and operating level management depending on their requirements. This isan essential part of Management Accounting. ‘Scanned with CamScanner,3.3, OBJECTIVES OF FINANCIAL STATEMENTS The basic objective of financial statements is to furnish information required for decision making. Financial statements provide necessary accounting information for decision-making and control. Financial statements are prepared to serve the following objectives: i) to provide necessary information to it strength of the business undertaking. ii) to present a true and fair view of the state of affairs of the undertaking. i) to provide reliable financial information about the economic resources and obligation of an enterprise, akcholders about the financial performance and iv) to provide information about changes in net resources of an enterprise that result from the activities. ‘Scanned with CamScanner,v) to provide financial information that assists in estimating the eaming potential of the enterprise. vi) to provide other relevant information about changes in the economic resources and obligations; and vii) to disclose, to the extent possible, other information related to the financial statements relevant to the users of statements. ‘Scanned with CamScanner,5.2 MEANING OF A RATIO In mathematics, a ratio is a relationship between two numbers of the same kind (i.¢., objects, persons, students, units of whatever identical dimension), usually expressed as “a to b” or a:b or a/b, sometimes expressed arithmetically as a dimensionless quotient of the two, which explicitly indicates how many times the first number contains the second. It is a relationship between two related variables expressed in proportion or percentage or quotient or times. In business analysis a relationship between two variables of balance sheet or income statement or ‘one variable from balance sheet and other variable from income statement and vice versa, for example the relationship between gross profit and sales. This is expressed as gross profit divided by sales. The meaningful inferences are drawn from the established relations. Ratios can be expressed in the following manner: Percentage: Let us say the net profit ratio is 10% of net sales. This is the result of dividing net profit (Rs.10,000) by net sales (Rs.1,00,000) and multiplying by 100. i s say quick ratio is 1:1. This is calculated by dividing quick assets (Rs. 1,00,000) by current liabilities (Rs.1,00,000). Let us express that the net profit is one-fifth of sales. This is calculated by dividing net profit (Rs.1,000) by sales (Rs.5,000). ‘Times: Let the inventory turnover ratio is 6 times. This is calculated by dividing cost of goods sold (Rs.3,00,000) by average inventory (Rs. 50,000). ‘Scanned with CamScanner,5.6 IMPORTANCE OF RATIO ANALYSIS Financial analysis is performed by both intemal management and external groups. Firms would perform such an analysis in order to evaluate their overall current performance, identify problem / opportunity areas, develop budgets and implement strategies for the future. The importance of ratio analysis ean be summarized for various groups vested with diversified interest as follows: For Short-term Creditors: The short-term creditors are those creditors who supply credit for a period of less than one year. They can determine the firm’s ability to meet its current obligations with the help of liquidity ratios such as current ratio, quick ratio and absolute liquidity ratio, For Long-term Creditors: The long-term creditors are those creditors who provide funds to the company for a period more than one year. Debenture or bondholders, financial institutions are part of long-term creditors. These creditors are interested in the solvency of the firm. Some of the important solvency ratios are debt-equity ratio, proprietary ratio and interest coverage ratio, For Management: Management includes the persons who manage the affairs of the business enterprise. The management can determine the operating efficiency with which the firm is utilizing its various assets in generating sales revenues with the help of activity ratios such as capital tumover ratio, stock tumover ratio, debtors’ turnover ratio, ete. The management uses ratio analysis to know company’s viability as an ongoing concern, adequacy of capital structure and effectiveness of financial policies. For Owners and Investors: Owners are those persons who provide funds to the business and share the business and financial risk. The investors can determine the magnitude and direction of change in firm’s earnings with the help of profitability ratios such as earnings per share, dividend per share, return on investment, return on equity, etc. According to these ratios, investors decide whether to hold or sell and prospective investors can decide whether to buy or not to buy the particular company shares. ‘Scanned with CamScanner,6.2 MEANING OF FUNDS The term ‘Funds’ is a little ambiguous. According to the dictionary meaning, the term ‘funds’ implies “an accumulation or deposit of resources from which supplies are or may be drawn a more or less permanent store or supply”. It is also defined as the “available pecuniary resources”. But these are broad in nature and fit the context of macro level planning and control. From the enterprise point of view, the term ‘funds’ may be used to mean any of the following: i) Total financial resources or assets ii) Total current assets iii) Net current assets or net working capital iv) Total quick assets v) Net quick assets vi) Cash Of these six concepts of funds, the common tendency is to define funds as being equal to working capital, cash and financial resources. The ‘Statement of Changes in Financial Position’ or the Funds Flow Statement is prepared on the basis of working capital concept. ‘Scanned with CamScanner,6.8 ADVANTAGES OF FUNDS FLOW STATEMENT ‘A funds flow statement is an essentiat tool for the financial analysis and is of primary importance to the financial management. Now-a-days, it is being widely used by the financial analysts, credit granting institutions and financial managers. The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied. The advantages of funds flow statement is presented as follows: i, Acts as. Future Guide: A projected funds flow statement also acts as a guide for future to the management. The management can come to know the various problems that it is going to face in near future for want of funds. The firm’s future needs for funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems. ‘Scanned with CamScanner,ii, Analysis of Financial Operations: The financial statements reveal the net effect of various transactions on the operational and financial position of a concern. The balance sheet gives a static view of the resources of a business and the uses to which these resources have been put ata certain point of time. But it does not disclose the causes for changes in the assets and liabilities between two different points of time. The funds flow statement explains causes for such changes and also the effect of these changes on the liquidity position of the company. iii, Changes in Working Capital Position: A Funds Flow Statement presents either the increase in Working Capital or Decrease in Working Capital with the help of ‘A Statement ‘of Changes in Working Capital’- which helps us to know from which sources the additional Capital has been procured, or the application of such funds. iv. Formulation of a Realistic Dividend Policy: Sometimes a firm has sufficient profit available for distribution as dividend but yet it may not be advisable to distribute dividend or eash resources. In such eases, a funds flow statement helps in the formulation of a realistic dividend policy. vy. Fund Generating Capacity: Funds Flow Statement helps to understand the fund ‘generating capacity of the firm which, ultimately, provides valuable information to the ‘management for taking future courses of action. vi. Overall Creditworthiness of a Firm: The financial institutions and banks such as State Financial Institutions, Industrial Development Corporations, Industrial Finance Corporation of India, Industrial Development Bank of India, etc, all ask for funds flow statement constructed for a number of years before granting loans to know the ereditwor thiness and paying eapacity of the firm. Hence, a firm secking financial assistance from these institutions has no alternative but to prepare funds flow statements. vii, Projected Funds Flow Statement: A firm can prepare its expected inflows and outflows of ceash for future with the help of a Projected Funds Flow Statement. viii, Proper Allocation of Resources: The resources of a concem are always limited and it ‘wants to make the best usc of these resources. A projected funds flow statement constructed forthe future helps in making managerial decisions. The firm ean plan the deployment of its resources and allocate them among various applications. ix. Throws Light on Many Confusing Questions: Such as (a) Why were the net current assets lesser in spite of higher profits and vice-versa? (b) Why more dividends could not be declared in spite of available profits? (c) How was it possible to distribute more dividends than the present eamings? (4) What happened to the net profit? Where did they go? (©) What happened to the proveeds of sale of fixed assets or issue of shares, debentures, ctc.? (f) What are the sources of the repayment of debt? (g) How was the increase in working capital financed and how will it be financed in future? ‘Scanned with CamScanner,Mlustration-17: Trading Profit & Loss Account of Harshitha Limited for the year ending 31 si December, 2019 Dr. cr. Particulars Rs. | Particulars Rs. [To Opening Stock 75,000 | By Sales Tess returns T0,00,000 To Purchases less returns 5,75,000_| By Closing Stock of To Wages 40,000 | Finished Goods 50,000 To Carriage Inward 10,000 To Gross Profit e/d. 4,00,000 Li 10,50,000 10,50,000 By Gross Profit bid, 4,00,000 ‘ToSelling Expenses By Intereston Investments 2,000 ToDiscount Allowed 154 choo To Bad Debis 34 To Interest Paid 25,000 ToNet Profit Before Tax 2,17,000 4,52,000 4,52,000 ‘aleulate gross profit ratio. ‘olution 3ross Profit Ratio= [Gross Profit] / [Net Sales] X 100 3iven: Gross Profit = Rs.4,00,000 and Net Sales = Rs. 10,00,000 ross Profit Ratio = [Rs.4,00,000 / Rs, 10,00,000]100 = 40% ‘Scanned with CamScanner,Mlustration-18 Trading and Profit & Loss Account of Avinash Limited for the year ending 31-12-2019 Dr. Cr. Particulars Rs. Particulars Rs. ‘To Opening Stock 2,00,000 | By Sales 32,00,000 To Purchases 16,00,000 | ByClosing Stock | 4,00,000 To Gross Profit e/d. 18,00,000 36,00,000 36,00,000 4,00,000 | By Gross Profit b/d. | 18,00,000 To Selling & Distribution Exp. 200,000 | By Profit on To Other Expenses 40,000 Sale of Land 0,000 To Loss on Sale of Investments 10,000 To Net Profit 12,00,000 18,50,000 18,50,000 Calculate Operating Profit Ratio. Sol Operating Profit = Operating Expenses ross Profit - Operating Expenses Office & Administrative Exp. + Selling & Dist. Exp. + Other Exp. = Rs.4,00,000 + Rs.2,00,000 + Rs.40,000 = Rs.6,40,000 ‘Scanned with CamScanner,Mustration-19 ‘Trading and Profit & Loss Account of Kalyan Limited for the year ending 31-12-2019 Dr. cr. Particulars Rs, Particulars Rs. To Opening Stock 50,000 | By Sales 8,00,000 To Purchases 4,00,000 | By Closing Stock 50,000 To Manufacturing Expenses 20,000 To Gross Profit c/d. 3,80,000 8,50,000, 8,50,000 To Office & Administrative Exp. 70,000 ByGross Profitb/d. | 3,80,000 To Selling & Distribution Exp. 65,000 | ByProfiton Sale To Finance Expenses 20,000 of Investments 10,000 To Loss on Sale of Building 12,000. | By Interest received To Tax 50,000 on Investments 10,000 To Net Profit afier Tax 183,000 4,00,000 4,00,000] Calculate net profit ratio. Solution Net profit after tax = Rs.1,83,000 and Net sales = Rs.8,00,000 ‘Net profit ratio = Net profit after tax / Net sales = [Rs-1,83,000 / Rs.8,00,000] 100 = 22.875% ‘Scanned with CamScannerLIMITATIONS OF FUNDS FLOW STATEMENT. ome of the notable limitations or disadvantages of funds flow statement can be hi ollows: ighted as i. Ignores the Non-fund Transactions: Funds flow statement ignores the non-fund t ransactions i.e, it does not take into consideration those transactions which do not affect the working capital. For example, funds flow statement does not record the purchase of fixed assets by the issue of shares or debentures. Secondary Information: Funds flow statement is based on secondary data. In other words, 1 funds flow statement is based on income statement and balance sheet. ii. Historical in Nature: Funds flow statement is historical in nature because it isprepared on the basis of historical financial statements i.c., balance sheet and income statement. v. Not Original: statement. So, funds flow statement is not original as 1. No Cash Position: Funds flow statement does not disclose the cash pos which cash flow statement should be prepared separately. tis only the rearrangement of financial data of balance sheet and income cannot be prepared alone. jon of the firm, for No Future Indication: It discloses past financial situation of the firm which may not be suitable for future purpose. ‘ii, Working Capital Changes: It shows only either increase in working capital or decreas working capital. But, the effect of transactions between current assets and current liabilities are not included in the funds flow statement. ‘Scanned with CamScanner