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ANSWER
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2. HOMEWORK
LIFO AND FIFO METHOD
First-In-First-Out [FIFO]: Under this method, materials received first are issued
first. When the first lot of materials purchased is exhausted the next lot is taken up
for issue. It works on the presumption that old stock should be used first, and when it
gets exhausted, new stock should be used. As a result, value of closing stock will be at
the latest purchase price.

Last- In-First-Out [LIFO]: This is quite opposite to FIFO method. Here, materials
received last are issued first. Under this method, materials issued to production
will be charged at the latest price. But closing stock will be valued at old price. Thus,
closing stock under this method will be understated.

1. From the following information open a stores ledger account under specific
pricing with FIFO:
2007, February 1 Opening balance 50 Kgs at Rs.10.
2 Issued 30 Kgs.
4 Purchased 60 Kgs at Rs.11.
5 Purchase 50 Kgs at Rs.12 for job Y to be issued on 15th February.
6 Issued 25 Kgs.
7 Purchased 50 Kgs at Rs.10.
16 Issued 60 Kgs.
25 Purchased 25 Kgs at Rs.12.
28 Issued 35 Kgs.

ANSWER:
First In First Out Method
Date Receipts Issues Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount
1.02.07 50 10 500
2.02.07 30 10 300 20 10 200
4.02.07 60 11 660 20 10 200
60 11 660

5.02.07 50 12 600 20 10 200

60 11 660
50[Y] 12 600
6.02.07 20 10 200 55 11 605
5 11 55 50[Y] 12 600

7.02.07 50 10 500 55 11 605

50[Y] 12 600
50 10 500

15.02.07 50 12 600 55 11 605

50 10 500

16.02.07 55 11 605 45 10 450

5 10 50
25.02.07 25 12 300 45 10 450
25 12 300

28.02.07 35 10 350 10 10 100

25 12 300

2. HOMEWORK

THEORY
1. Explain FIFO and LIFO methods of inventory valuation. Under what
circumstances, these are applicable?
Inventory management is a crucial function for any product-oriented business. First
in, first out (FIFO) and last in, first out (LIFO) are two standard methods of valuing a
business’s inventory. Your chosen system can profoundly affect your taxes, income,
logistics and profitability.

First-In-First-Out [FIFO]: Under this method, materials received first are issued
first. When the first lot of materials purchased is exhausted the next lot is taken up
for issue. It works on the presumption that old stock should be used first, and when it
gets exhausted, new stock should be used. As a result, value of closing stock will be at
the latest purchase price. FIFO can be a better indicator of the value for ending
inventory because the older items have been used up while the most recently acquired
items reflect current market prices. For most companies, FIFO is the most logical
choice since they typically use their oldest inventory first in the production of their
goods, which means the valuation of COGS reflects their production schedule.
For example, the seafood company, mentioned earlier, would use their oldest
inventory first (or first in) in selling and shipping their products. Since the seafood
company would never leave older inventory in stock to spoil, FIFO accurately reflects
the company's process of using the oldest inventory first in selling their goods.

Last- In-First-Out [LIFO]: This is quite opposite to FIFO method. Here, materials
received last are issued first. Under this method, materials issued to production
will be charged at the latest price. But closing stock will be valued at old price. Thus,
closing stock under this method will be understated. Since LIFO uses the most
recently acquired inventory to value COGS, the leftover inventory might be extremely
old or obsolete. As a result, LIFO doesn't provide an accurate or up-to-date value of
inventory because the valuation is much lower than inventory items at today's prices.
Also, LIFO is not realistic for many companies because they would not leave their
older inventory sitting idle in stock while using the most recently acquired inventory.
For example, a company that sells seafood products would not realistically use their
newly-acquired inventory first in selling and shipping their products. In other words,
the seafood company would never leave their oldest inventory sitting idle since the
food could spoil, leading to losses. As a result, LIFO isn't practical for many
companies that sell perishable goods and doesn't accurately reflect the logical
production process of using the oldest inventory first.

2. Explain accounting concepts and accounting conventions in detail with

suitable examples. (Add your own example to the answer)
OR
What is Financial Accounting? Explain the various concepts and conventions in
accounting.

Financial Accounting
Financial Accounting is concerned with recording all revenues and expenses, assets
and liabilities of a business concern and ends up with the preparation of Trading and
Profit and Loss Account [ to ascertain the profit/loss made ] and a Balance Sheet [to
find out what the business owns and owes to others].

Accounting Concepts
Following are the various Accounting concepts:-
1) Entity Concept: According to this concept, an organisation is treated as a
separate entity distinct from its owner. All transactions are recorded from business
point of view only.

2) Money Measurement Concept: This concept states that only those transactions
which can be expressed in terms of money alone will be recorded in the books of
accounts. Important matters which cannot be expressed in monetary units like, quality
of management, morale of employees, etc. cannot be recorded in the books of
accounts.

3) Going Concern Concept: This concept assumes that the business will continue to
operate in the foreseeable future. It constitutes the foundation for spreading the
depreciation over the useful life of the asset and treating outstanding expenses, pre-
paid expenses, income due and income received in advance in the books of accounts.

4) Dual Aspect Concept: According to this concept, every business transaction

will have two aspects-benefit giving aspect [called credit] and benefit receiving aspect
[called debit], ie. for each transaction there will be a debit and a corresponding equal
credit. This forms the basis for Double Entry System of book keeping, and “Accoun
ting Equation” developed by American accountants.

5) Accounting Period Concept: This concepts states that the business is a continuous
affair, the life of the business is divided into suitable accounting periods [say, a period
of one year], for ascertaining and reporting the results of business operations. It helps
in calculating the income generated during a specific period and the expenses incurred
in generating that income. It also forms the basis for segregating expenses into capital
and revenue nature. While revenue expenditure is charged to Profit and Loss Account,
capital expenditure is shown in Balance Sheet.

6) Cost Concept: According to this concept, assets purchased are recorded in the
books at the cost at which they were acquired. This cost will be the base for all
subsequent accounting periods. Depreciation charges will be made on the basis of the
cost at which the assets were procured.

7) Revenue Recognition Concept: This concept deals with the recognition of

revenue in the Income Statement. Revenue is said to have been made when the
organisation gets the legal right to receive it. Revenue is the gross inflow of cash or
near cash items arising in the ordinary course of business from sale of goods/ services
and from use of organisation‟s resources by others.
It excludes the amount collected on behalf of third parties, such as taxes.

8) Matching Concept: This concept states that revenue earned during a period
should be matched with the expenses incurred in earning that revenue. Hence, while
preparing Final Accounts, adjustments should be made for outstanding expenses,
outstanding incomes, expenses paid in advance and income received in advance.

9) Accrual Concept: This concept advocates that revenue and costs should be
recognized as and when they are earned or incurred and not when money is actually
received or paid. Mercantile system of accounting is based on this concept.

10) Objective Evidence Concept: It states that each and every transaction recorded
in the books of accounts should be supported by adequate physical evidence. This
ensures that the recorded accounting data is definite, verifiable and also free from the
personal bias of the accountant.

Accounting Conventions
1) Convention of Conservatism: This convention states that while preparing
accounts, accountants should take a conservative approach, in the sense that they
should provide for all anticipated losses, but should not take into account expected
profits. It provides the basis for valuing stock at „cost or market price whichever is
less‟.

2) Convention of Consistency: This convention insists that accounting practices

should remain unchanged over a period of time. This will facilitate meaningful
comparison of the organisation‟s performance between different accounting periods.
In case of any change in the accounting practice, its impact should be quantified and
clearly indicated in the financial statements.

3) Convention of Full Disclosure: According to this convention, financial statements

should provide all pertinent information expected of them. It has paved the way for
the practice of giving references and parenthesis in the statements.
4) Convention of materiality: Accountants, while preparing final accounts, should
give all material information and ignore insignificant details. What constitutes
material information depends upon the circumstances and is left to the discretion of
the accountants. An information is considered to be material, if its disclosure would
influence the judgment of any interested party.

3. “Management accounting information is concerned with accounting

information that is useful to management”. Critically examine this statement.
The part of accounting that helps managers in making decisions providing accounting
information is called management accounting. Management accounting is a special
branch of accounting. It is a modern and scientific innovation of accounting.
Management accounting is accounting for effective management.

Management accounting is a technique of selective nature. It does not use the whole
data provided by financial records. It selects and picks up only that information form
different financial records (such as profit and loss account or balance sheet), which
are relevant and useful to the management to arrive at important decisions on different
aspects of the business. Management accounting is concerned with the future. It
collects and analyses data to plan the future. The primary function of management is
to decide bout the future course of action. Management accounting, with the help of
different techniques, formats the future course of action.

Management Accounting makes available useful information which helps the

management in planning and decision-making. It can only provide information but
cannot proscribe. It is up to management to what extent it. It can make use of the
information depending upon its efficiency and wisdom. Management accounting
studies the relation between causes and effects. Financial accounting does and
analyses the causes responsible for profits or losses. Management accounting attempts
to study the cause-and-effect relationship by analyzing the different variables
affecting the profits and profitability of the business. Management accounting is no
bound by the rules of financial accounting. Financial accounting procedures are
designed based on GAAPs.

Definition of Management Accounting

The Chartered Institute of Management Accountants defines Management Accounting
as “the application of professional knowledge and skill in the preparation of
accounting information in such a way as to assist management in the formation of
policies and in the planning and control of the operations of the undertaking.

Objectives and Functions of Management Accounting

⮚ Helps management in effective decision making and policy formulation.

⮚ Aids in planning and forecasting.

⮚ Facilitates exercising effective control throughout the organisation.

⮚ Helps in organizing and coordinating the activities of various departments.

⮚ Consider financial and non-financial information for making sound decisions.

Tools and Techniques used by Management Accountant
⮚ Financial Accounting System. Analysis of financial statements.

⮚ Budgetary control.

⮚ Cost Accounting.

⮚ Marginal Costing.

⮚ Standard Costing.

⮚ Fund Flow and Cash Flow analysis.

⮚ Management Reporting.

Advantages of Management Accounting

⮚ Ensures effective planning Facilitates performance evaluation.

⮚ Exercises effective control over the entire organisation.

⮚ Helps in making sound decisions.

⮚ Contributes towards enhancing the efficiency of the organisation.

⮚ Minimizes wastages.

⮚ Makes efficient use of available resources.

Limitations of Management Accounting

⮚ It derives information from Financial and Cost Accounts. Such information
suffers from the limitation associated with Financial and Cost accounts.
⮚ It merely supplies information for decision making but does not replace the role
of management.
⮚ Installation of Management Accounting System is expensive.

⮚ Even though it uses quantitative and qualitative factors, it cannot replace the role
of intuition in managerial decision making.

Thus we can conclude that, Managerial accounting is mostly used in scenarios where
quick decisions need to be made to help managers optimise business operations.
Accounting information is used by managers to plan, evaluate the company
performance and manage risks. Budgeting is a great part of an organisation and
financial reporting can help a manager to set a realistic budget and identify the need
for funding. To measure the company’s performance certain ratios can be used such
as the liquidity ratio which measures the company’s ability to generate cash to meet
the short-term financial commitments, efficiency ratio that mostly relates to the
inventory turnover and the profitability ratio can be used to measure the return on
assets and net profit margins.