LADEED AHAMED C.

A
ROLL NO – 2114504233
MBA
SEM-1
DMBA104 - FINANCIAL & MANAGEMENT
ACCOUNTING
 SET 1

1. Discuss 5 accounting concepts with suitable example of each concept.

Ans.

1. Business separate entity concept

This concept states that business may be a separate entity and it's different from the
proprietor or the owner. during this concept an organization can own assets and
incur liabilities in its own name. This separation not only has important legal
implication but also has an accounting implication. this allows the business to
segregate the transactions of the corporate from the private transactions of the
proprietor(s). It distinguishes between the non-public assets and liabilities of the
owners therewith of the business.

Example: Personal checking account of the proprietor, cash withdrawal from

business for personal purpose should be accounted separately.

2. Going concern concept

In this concept the business entity will continue fairly for a protracted time to come
back. It assumes that there's neither the need nor the intention to shut down either
the complete business or substantial operations of the business.
3. Money measurement concept

All transactions of a business are recorded in terms of cash. this idea is essentially
concerned with the matter of measuring the worth of transactions. Certain
transactions are either already expressed in terms of cash or easily measured in
terms of cash. as an example, cost of inputs, prices of assets, etc. Other assets or
transactions that are difficult to live and express in terms of cash are ignored. for
instance, value of the brand, intelligence of individuals, etc.

4. Periodicity (accounting period) concept

As per the going concern concept, the lifetime of business is indefinite. This makes
it difficult to attend indefinitely to prevent and appearance back at how the
corporate performed and also makes it too late to require corrective actions if any.
Hence, the indefinite lifetime of business is split into regular intervals of your time.
Such regular time intervals are called accounting periods.

5. Accrual concept

The following are the features of this concept:

• Expenses incurred for an accounting period must be recorded therein accounting

period irrespective of whether it's actually paid therein accounting period or not.

• Income earned for an accounting period must be recorded therein accounting

period no matter whether it's actually received in this accounting period or not

Example: On 31st December, 2006, interest receivable on fixed deposit was Rs.
12000. The interest amount was credited to a checking account in February 2007
(two months later). per accrual concept, the income from interest is Rs.12000
though it's received after 31stDecember, 2006.

2. Prepare trading account of XYZ for the year ending 31 March 2019 from
the following information:
 Purchases 13,00,000

Sales 15,00,000

Stock (April 1, 2018) 40,000

Wages 30,000

Carriage inwards 14,000

Returns outwards 3,000

Returns inwards 2,500

Freight 15,000

Additional information: Stock on 31 March 2019 was Rs. 1,70,000

Answer:

Trading Account

Particulars Rs Particulars Rs

To Opening Stock 40,000 By Sales 14,97,500

15,00,000
To Purchases 12,97,000
13,00,000 Returns (2500)

Returns
30,000 1,70,000
(3000)
By closing stock
14,000
To Wages
15,000
To Carriage Inwards

To Freight
 2,71,500

To Gross profit 16,67,500 16,67,500

3. Distinguish between management accounting and financial accounting.

Answer. Financial accounting is the preparation and communication of financial

information to outsiders such as creditors, bankers, government, customers, etc.
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 are the same. The reports prepared in financial
accounting are also used in management accounting.

But there are a few major differences between financial accounting and
management accounting

Dimension Financial accounting Management

accounting
Users The primary users of The primary users of
financial management accounting
accounting information are
are internal users like top,
external users like middle,
shareholders, and lower level managers
creditors, government
authorities,
employees, etc.
Purpose Reporting financial To help the management
performance in
and financial position to planning, decision
enable making,
 the users to take financial monitoring, and
decisions. controlling.
It is a statutory It is optional. What to
Need requirement. What report,
to report, how to report, how to report, how much
how much to
to report, when to report, report, when to report, in
in which which
form to report, etc. are form to report, etc. are
stipulated decided
by Law or Standards. by the management as
per the
needs of the company or
management.
Expression of Accounting information Management accounting
information is always may
expressed in terms of adopt any measurement
money. unit
like labour hours,
machine
hours, or product units
for the
purpose of analysis
Reporting timing and Financial data is Reports are prepared on a
frequency presented for a continuous basis,
definite period, say one monthly,
year or a weekly, or even daily
quarter.
Time perspective Financial accounting Management accounting
focuses on is
historical data. oriented towards the
future.

Sources of principles Financial accounting is a Management accounting

discipline by itself and makes use of other
has its own disciplines
principles, policies and like economics,
conventions (GAAP). management,
information system,
operation
 research, etc.
Reporting entity Overall organisation Responsibility centres
within
the organisation
Form of reports Income statement (Profit MIS reports
and Loss Performance reports
a/c) Control reports
Balance sheet Cost statements
Cash flow statement Variance statements
Budgets
Estimate statements
Flowcharts

SET 2

4. The Balance Sheet of Punjab Auto Limited as on 31‐12‐2020 was as follows:

Particulars Rs. Particular Rs.

Equity Share 40,000 Plant and 24,000
Capital Machinery
Capital 8,000 Land and 40,000
Reserve Buildings
8% Loan on 32,000 Furniture & 16,000
Mortgage Fixtures
Creditors 16,000 Stock 12,000
Bank 4,000 Debtors 12,000
overdraft
Investments 4,000
Taxation: (Short‐term)
Current 4,000
Future 4,000
Profit and 12,000 Cash in hand 12,000
Loss A/c

120000 120000
From the above, compute (a) Debt‐Equity Ratio and (b) Proprietary Ratio.

Answer:
Debt Equity Ratio

The debt-to-equity (D/E) ratio is employed to gauge a company's financial leverage

and is calculated by dividing a company’s total liabilities by its shareholder equity.
The D/E ratio is a very important metric employed in finance. More specifically, it
reflects the flexibility of shareholder equity to hide all outstanding debts within the
event of a business downturn. The debt-to-equity ratio may be a particular sort of
gearing ratio.

These record categories may contain individual accounts that will not normally be
considered “debt” or “equity” within the traditional sense of a loan or the value of
an asset. Because the ratio may be distorted by retained earnings/losses, intangible
assets, and retirement program adjustments, further research is typically needed to
grasp a company’s true leverage
32000
Debt Equity Ratio = Debt/Equity = 40000+8000 = .67

Propriety Ratio

The proprietary ratio (also referred to as the equity ratio) is that the proportion
of shareholders' equity to total assets, and intrinsically provides a rough
estimate of the quantity of capitalization currently want to support a business.
If the ratio is high, this means that an organization incorporates a sufficient
amount of equity to support the functions of the business, and doubtless has
room in its financial structure to require on additional debt, if necessary.
Conversely, a coffee ratio indicates that a business is also making use of an
excessive amount of debt or trade payables, instead of equity, to support
operations (which may place the corporate in danger of bankruptcy).

Thus, the equity ratio could be a general indicator of economic stability. It

should be utilized in conjunction with the online profit ratio and an examination
of the statement of money flows to achieve a far better overview of the
financial circumstances of a business. These additional measures reveal the
flexibility of a business to earn a profit and generate cash flows, respectively
40000+8000
Propriety Ratio = Shareholders funds/ Total Assets = 120000
= .4
5. State the purpose or objective of preparing a cash flow statement. Also give
any two examples of cash flows from operating activities, investing activities
and financing activities.

Answer:

Meaning of Cash Flow Analysis

Cash flow analysis is a crucial tool of monetary analysis. it's the method of
understanding the change in position with reference to benefit the present year and
also the reasons liable for such a change. Incidentally, the analysis also helps us to
know whether the investing and financing decision taken by the corporate during
the year are appropriate don't seem to be.
Cash flow analysis is presented within the type of an statement. Such a press
release is termed a income statement.

Objectives of Cash Flow Analysis

• What is the change in the cash position of the firm for the current year as
compared to the previous year?
• How good was the liquidity position of the firm?
• What were the sources of cash during the current year?
• How much cash was generated from operations?
• What were the applications of cash during the current year?
The preparation of cash flow statement is similar to the preparation of fund flow
statement. It requires the identification of the sources of cash and the uses of cash.
An application of cash is a transaction which leads to an outflow of cash.
Following is the list of transactions that results in a source of cash or application of
cash.
Sources of cash:
 Cash from operations
 Proceeds of issue of
 Equity shares
 Preference shares
 Proceeds of issue of
 Debentures
 Bonds
 Raising mortgage loans (long-term)
 Sale of assets
 Intangible assets like patent rights, copyrights, brand names, goodwill,
licences, etc.
 Sale of investments like shares, bonds, debentures, etc.
Applications or uses of cash:
 Cash lost in operations (adjusted net loss)
 Buy back of equity shares
 Redemption of redeemable preference shares
 Redemption of redeemable bonds or debentures
 Repaying of long-term debts from banks and financial institutions
 Repaying of mortgage loans (long-term)
 Purchasing of assets
 Purchasing of investments like shares, bonds, debentures, etc.
 It may be noted that the sources of cash increase the cash balance and
applications of cash decrease the cash balance.
Examples of cash flows from Operating activities are:
a) cash receipts from the sale of goods and the rendering of services;
b) cash receipts from royalties, fees, commissions and other revenue;
c) cash payments to suppliers for goods and services;
d) cash payments to and on behalf of employees;
e) cash receipts and cash payments of an insurance enterprise for premiums and
claims, annuities and other policy benefits;
f) cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities; and g) cash receipts and
payments relating to futures contracts, forward contracts, option contracts and
swap contracts when the contracts are held for dealing or trading purposes.

Examples of cash flows arising from Investing activities are:

a) cash payments to acquire fixed assets : These payments include those relating to
capitalised research and development costs and self-constructed fixed assets;
b) cash receipts from disposal of fixed assets (including intangibles);
c) cash payments to acquire shares, warrants or debt instruments of other
enterprises and interests in joint ventures (other than payments for those
instruments considered to be cash equivalents and those held for dealing or trading
purposes);
d) cash receipts from disposal of shares, warrants or debt instruments of other
enterprises and interests in joint ventures (other than receipts from those
instruments considered to be cash equivalents and those held for dealing or trading
purposes);
e) cash advances and loans made to third parties (other than advances and loans
made by a financial enterprise);
f) cash receipts from the repayment of advances and loans made to third parties
(other than advances and loans of a financial enterprise);
6. Discuss the steps involved in standard costing. Also state the Differences
between Standard Costing and Budgetary Control.

Answer. Following are the steps involved in standard costing...

1. Establishment of standards

It is the primary step within the standard costing process. Standards need to be set
separately for every item of cost. It must be done very meticulously.

2. Comparison of actual costs with the predetermined standards.

It is the subsequent step in standard costing. It has to be ensured that an accurate

comparison is formed. the particular costs must be compared with the quality cost
for actual output.

3. Analyzing the variances (deviations) of actual costs from the quality costs.

The difference between the quality cost and also the actual cost is named the
variance. The variances are to be analyzed for every item of cost separately.

4. Reporting

The variance is also favorable or unfavorable. In either case, it should be reported

to the management for taking corrective actions wherever necessary.

Differences between Standard Costing and Budgetary Control

1. The scope of budgetary control is wider. It is an integrated plan of action and a

coordinated plan with respect to all functions of an enterprise. On the other hand,
the scope of standard costing is limited to the operating level.

2. Budgetary control targets are based on past actual data adjusted to future trends.
In standard costing, standards are based on technical assessment.
3. Budgeted targets work as the maximum limit of expenses which should not
exceed the actual expenditure. Standards are attainable level of performance.
4. Budgetary control emphasises the forecasting aspect of future operations.
Standard costing scope and utility is limited to only operating level of the concern.
5. Variance analysis is not compulsory in budgetary control though companies
normally do it. Even when it is done, no accounting entry is passed in the books for
the variance. But variance analysis is an essential part of standard costing.
Variances are analysed and journal entries are passed and posted to the ledger
accounts in the costing books.
6. Budgetary control can be operated in parts. That is, as per the needs of the
management, only functional budgets may be prepared. A standard costing system
cannot be operated in parts. All items of expenditure included in the cost units are
to be accounted for.