Finance

BSSS-Institute of Advanced Studies
Study/Reading Material
Course Name: Accounting for Managers
M-1
Course Code: CP:106 Batch :2022-24
CEOs :1. To impart knowledge about the basics of the accounting functions in an organization
2. To develop the ability to decipher accounting functions
3. To develop the ability to apply tools and techniques of financial transaction to solve
organizational issues and challenges
COs : 1. Recognize and enumerate the facts and basics concepts of accounting
2. Demonstrate the comprehension related to accounting function
3. Implement the concept of financial transaction in Business operations
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COURSE CONTENTS:
Unit – 1: Financial Accounting – Concept, Importance, Scope, Principles of Double Entry,
Ledger Accounting and Preparations of Trial Balance.
Teaching material (As per the syllabus)
Objectives:
After studying this unit student should be able to:
1. The need for accounting;
2. Definition of accounting and its objectives;
3. Identify the parties interested in accounting information;
4. Activities of a management accountant;
5. Identify the stages involved in accounting process;
6. Explain the accounting concepts to be
7. Observed at the recording and reporting stages;
8. Understand and appreciate the Generally Accepted Accounting Principles.
9. Describe the advantages and limitations of branches of accounting;
Generally Accepted Accounting Policies (GAAPs): GAAPs are the basic rules that define
the parameters constraints within which accounting operate. They have been formulated so
that the financial statements are drawn on uniform basis. ICAI has issued the accounting
standards to standardize the accounting practice .These principles are classified into two
categories-
1. Accounting Concepts
2. Accounting Conventions
 Accounting Concepts – The basic assumptions:

1. Business Entity Concept: Business is considered to be separate and distinct from
its owners and therefore the business transactions are recorded from the business
point of view in the books. A separate capital A/C is maintained to show all
transactions of the owner.
When the owner introduces capital cash is debited and capital is credited.
When owner withdraws cash – drawing is debited and cash is credited.
Amount in credit of capital a/c is liability of the enterprises towards the proprietor.
2. Money Measurement Concepts: Only those transactions and events can be
recorded in books which can be measured in monetary terms. Money is the common
denominator in recording and reporting all transaction .EG. 6 Tables, 4Fans and 2
Tub light are bought but in the books their values is recorded which is tubelight rs-
10000, fans –rs15000 and tables rs20000.
The two limitations of these concepts are –
a. Transactions and events which cannot be measured in monetary terms cannot be
recorded regardless of their importance E.g.: loss of major supplier of materials.
B.Money is having static values as the transactions are recorded on the transactions
date – Eg – Building purchased on 1 st jan 1990 valued rs100000 which has a value
of rs 10000000 on 1st jan 2011 and this difference cannot be recorded.
3. Going Concern Concept: Business is assumed to be continuing for an indefinite
period and there is no intentions to close the business and scale down the operations
significantly .On the basis of this concepts, fixed assets are recorded in balance
sheet and depreciated over period of years and not treated as expenses of one year
.For e.g. A machine is purchased, its cost is not treated as expense of 1 year but
spread over 8-10years in the forms of depreciation.
4. Accounting Period Concept: The life of enterprises is broken into smaller periods
so that performance can be measured at regular intervals. The period is usually of
one year and is called accounting period ,ti helps the governments to assess and
collects tax and the owner to periodically review performances.
5. Cost Concepts : All the assets should be recorded in the books at prices paid for
their purchase is systematically reduced by charging depreciation over time thus the
markets values of an asset may change but for accounting purpose it is shown at the
purchase price.
6. Dual Aspects Concepts: Every Transaction has two aspects – a debit and a credit
of equal amount .Thus the equation Assets = Liabilities + Capital will always
remain true. E.g. (a.)Increase in a assets and decrease in another (e.g. Furniture
purchased in cash) (b.)Increase in as assets and increase in a liability. (C.)Decrease
in assets and decrease in an assets and decrease in a liability.
7. Revenue Recognition Concepts : Revenue should be recognition only when the
transaction has actually occurred and the obligation to receive the amount has been
established E.g. a company receives advance in January rs 10000 for T.V. and the
T.V. is actually to be sold in June .Then the revenue should be recognized only in
June.
8. Matching concepts: According to this concepts, cost incurred should be
recognized as an expense in the period in which its related revenue is earned .Thus
the expense of an accounting period are matched against related revenue .E.g.
Advertising expense is incurred in 1st year, since its benefit will flow for 3-4 years,
the advertising expense must be spread over a period of 3-4 years.
9. Accrual Concepts: A transaction is recorded at the time when it takes places and
not when the settlement take place .The profit is regard as earned at E.g. electricity
bill is paid for 10 months and 2 months is due, it will be recorded in books for all
12 months on accrual concept.
10. Verifiable Objective Concepts : It holds that accounting should be free from
personal bias .Also all accounting transaction should be supported by business
documents E.g. An Employments spends rs.500 in filling petrol .It will be recorded
only when he produces a voucher that can be verified .
Accounting Conventions Outcomes of accounting practices over a period of

time –
1. Conventions of full disclosures – There should be complete and understandable
reporting on the financial statements of all significant information’s relating to the
economic affairs of the entity ,Apart from legal requirements ,goods accounting
practice requires all material and significant information’s to be disclosed thus
improving understandability of account for the users.
2. Convention Of Consistency - Accounting practice one adopted should be applied
consistently year after year It helps in making the information’s comparable over
the period of time, however it does not mean that practice one adopted cannot be
changed forever. The accounting policies can be changed if law or accounting
standards require it or if the change results into more meaningful presentation. E.g.
there are two methods of depreciation – written down values method straight line
methods. Once a method is selected the company must follow the same method.
3. Prudence Conventions – It says that do not anticipate a profit, but provide for all
possible losses, it takes into considerations all prospective losses but not the
prospective profits.E.g. A company’s debtor is known to declare bankruptcy
shortly. Company must make provision for it.
4. Materiality Convention – Materiality refers to the importance of an item, an item
is regarded as material if its knowledge will affect or influence the decision of an
information investor, its depends upon the nature of the item and its amount, Only
those items must be disclosed separately, That are materials.
Note: Remaining Portion will be covered through with PPT

1. Annexure:
Reference Links (Articles) : 1. Article: “Convergence of IAS with IFRS”, S.P.
Shrivastava& S.K. Patel. Objective: Understand the importance of accounting
standards
2. “A Case for Historical Cost”, Robert N. Anthony, Harvard Business Review,
November-December 1976, pp. 69-79. Objective: A review whether replacement cost
is actually better than historical cost
3. Evolution of management accounting. Source: Asish K Bhattacharya | New Delhi
July 13, 2009 Las
4. Indian Accounting Standards may pose challenge for new IL&FS management
Source: ET BUREAU | JUN 26, 2019, 06.53 AM IST
5.Demystifying Accounting Conservatism – By Dr. Meena Bhatia, ICAI E-Journal
(August 2017)
Web-Resources:
http://ncert.nic.in/textbook/textbook.htm
https://www.accountingformanagement.org/
https://www.investopedia.com/terms/a/accounting-equation.asp
https://www.investopedia.com/terms/t/trial_balance.asp
https://www.futureaccountant.com/accounting-process/#.W1v03NIzY2x
Reference Books :
R1: Financial Management, Khan M.Y. & Jain P.K., Tata McGrawhill,
R2: Financial Management, Sharma R.K. & Gupta Shashi K.,Kalayani
Other Books:
1.Anthony R N and Reece, J.S., ‘Accounting Principles’, 6th ed. Homewood , Illinois
Richard D, Irwin.
2.Bhattacharya S K and Dearden J, ‘Accounting for Management’, Text and Cases, New
Delhi.
3.Sharma & Gupta, ‘ Management Accounting’ Kalyani publication.
4.Pandey I.M.,’ Management Accounting’, Vikas Publication.
Case study Links : Mehta Automobiles (Source: Book – Accounting for management by
SK Bhattacharyya & John Dearden)
Sample Questions:
M-1
Q-1Aruna decided to start business of fashion garments under the name of M/s. Designer Wear
.She had a saving about ₹ 1000000. She invested ₹300000 out of her savings and borrowed equal
amount from State Bank of India. She purchased a commercial space of 500sq. feet for ₹ 500000.
The space so purchased was suitably renovated to make it fit for such trade. Balance of ₹ 100000
was used for decorating the space. Total amount of bank loan is to be repaid in 20 quarterly
installments beginning 30th June 2012. Annual rate of interest is 12%.
She started business on Ist april, 2012 .In view of further capital requirement she deposited ₹
200000 in the bank. She paid Security Deposit of ₹ 5000 for the electricity connection with BSES
Rajdhani Power Ltd. and ₹2000 to MTNL for telephone connection. Furniture for ₹ 10000 was
purchased.
All payments were to be made by cheque. All receipts were in cash to be deposited in the bank on
the same day.
At the end of the year, their results showed the following:
Total sales 2000000
Total Purchase 1700000
Electricity expenses 40000
Telephone Charges 50000
Cartage Outwards 60000
Travelling Expenses 45000
Entertainment Expenses 5000
Maintenance Expenses 25000
Miscellaneous Expenses 15000
Electricity Expenses payable 20000
She withdrew ₹ 5000 by cheque each month for their personal expenses. Bank loan installments
were paid regularly.
Journalise the above transactions. Post them into the Ledgers and prepare the Trail Balance.
Charge depreciation @5% on Building and 10% on furniture. Closing Stock at the end of the year
was ₹ 550000.
Prepare a Bar Diagram and / or Pie Charts showing the expenses.
Trial Balance
Q-2. The following trial balance was extracted from the books of Chetan, a small businessman.
Do you think it is correct? If not, rewrite it in the correct form.
Debit Amount Credit Amount
Stock 8250 Capital 10000
Purchases 12750 Sales 15900
Returns outwards 700 Returns inwards 1590
Discount received 800 Discount allowed 800
Wages and salaries 2500 Scooty 1750
Rent and rates 1850 Carriage charges 700
Sundry debtors 7600 Sundry creditors 7250
Bank Overdraft 2450 Bills payable 690
Q-3 Tally the Trial balance:
Particulars Amount Particulars Amount

Capital 60000 Carriage Outward 700
Stock at commencement 5000 Wages and Salary 25000
Discount Allowed 500 Bills Receivable 7000
Commission Received 700 Debtors 9000
Fixed Assets 60000 Bills payable 7000
Sales 85000 Rent 3000
Purchases 45000 Interest Paid 2000
Return Outward 1000 Cash 800
Return Inward 2000 Creditors 6900
Carriage Inward 600 Stock at End 7000

M-2
4. Determine and justify the tools and techniques of management accounting.
4. Appraise and evaluate organizational decisions using financial tools
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COURSE CONTENTS:
Unit – 2: Preparation of Profit and Loss account and Balance Sheet, Depreciation Accounting
Objectives:
1. Know the differences between capital and revenue;
2.Know the preparation of non-corporate financial statements as well as corporate financial
statement
3.Prepare the profit and loss account and the balance sheet of a company as per the
requirements of the Companies Act
Financial Statement:
Financial statements are prepared by business organisations to determine the operating results
of the business and to know the financial health on a particular date. Before preparing
financial statements, there should be clarity about the nature of certain items and their
treatment in the final accounts. It is obligatory to prepare financial statements by the end of
each accounting year.
As regards preparation of Balance Sheet of a company, the nature of details shown with
respect to the liabilities and assets and the order of arrangement of the items are prescribed in
Schedule VI, Part I of the Companies Act. There are two alternate proformas given in
Schedule VI for the preparation of Company Balance Sheets: (i) horizonal and (ii) vertical.
Any of these forms may be adopted for the Balance Sheet of a Company. Both the prescribed
forms may require that the figures of the previous year should be shown in a separate column
alongside the figures of the current year.
Depreciation:
The depreciation should be applied constantly from period to period. A change from one
method of providing depreciation to another should be made only if the implementation of
the new method is required by act or for agreement with an accounting standard or if it is
considered that the change would result in a more appropriate preparation of the financial
statements of the enterprise. When such a change in the method of depreciation is made,
depreciation should be recalculated in agreement with the new method from the date of the
asset coming into use. The deficiency or surplus arising from retrospective re computation of
depreciation in accordance with the new method should be adjusted in the accounts in the
year in which the method of depreciation is changed. In case the change in the method results
in deficiency in depreciation in respect of past years, the deficiency should be charged in the
statement of profit and loss. In case the change in the method results in surplus, the surplus
should be credited to the statement of profit and loss. Such a change should be treated as a
change in accounting policy.
The useful life of a depreciable asset should be estimated after considering the following
factors:
(i) expected physical wear and tear;
(ii) Out of fashion
(iii) Scrap
(iv) Old technology

1. Annexure:
Reference Links (Articles): 1. Sebi introduces new norms for debt funds: Here’s how it will
enhance safety level, an article by Renu Yadav, published on Business Today on June 30, 2019
2. Budget 2019: Golden jubilee year for banks; budget should bring this revolutionary change,
an article by Charan Singh, published in Financial Express on June 28, 2019.
3. Reading the RBI balance sheet: Why transferring central bank’s economic capital may
increase embedded risk, an article by Saugata Bhattacharya, published in Financial Express
on June 28, 2019.
4. How different sectors will fare in Q4 of FY19, an article by Niti Kiran, published in the
Financial Times on April 12, 2019
Web-Resources:
1. http://ncert.nic.in/textbook/textbook.htm
1. https://cleartax.in/s/profit-loss-statement#Format
2. https://cleartax.in/s/balance-sheet
3. https://sol.du.ac.in/mod/book/view.php?id=1240&chapterid=900
4. https://financeaccountingsimplified.com/trading-profit-and-loss-account-and-balance-
sheet
5. https://www.incometaxindia.gov.in/charts%20%20tables/depreciation%20rates.htm
6. https://financeaccountingsimplified.com/depreciation/
Reference Books :
Other Books:
Richard D, Irwin.
2.Bhattacharya S K and Dearden J, ‘Accounting for Management’, Text and Cases, New Delhi.
3.Sharma & Gupta, ‘Management Accounting’ Kalyani publication.
Case study Links : Premier Engineering Company Ltd. (Source: Book – Accounting for
Management by SK Bhattacharyya & John Dearden)
Sample Questions:
M-2
Final accounts
Q. 1. The following Trial Balance is prepared on 31st March, 2008 from a trader’s books:
Particulars Dr. (Rs.) Cr. (Rs.)

Cash in Hand 8,000
Cash in Bank 12,000
Wages 20,000
Sales 5,00,000
Machinery 2,12,000
Bills Receivable 40,000
Opening Stock 84,000
Creditors 40,000
Purchases 3,30,000
Sales Return 6,000
Salaries 32,000
Debtors 86,000
Taxes and Insurance 22,000
Bad Debts 6,000
Freight on Purchases 4,800
Capital 3,20,000
Commission 28,00
8,62,800 8,62,800
Taking into consideration Closing Stock was Rs. 90,000 prepare the Trading and profit and
loss accounts for the year ending 31st March, 2008 and a balance sheet on that date.
Q.2. The following is the Trial Balance of Mrs. S.S. on 31 st December, 2005.
Particulars Dr. (Rs.) Cr. (Rs.)
Cash in Hand 1,080
Cash in Bank 5,260
Purchases 81,350
Return Outwards 1,000
Sales A/c 1,97,560
Return Inwards 1,360
Wages 20,960
Fuel and Power 9,460,
Carriage on Sales 6,400
Carriage on Purchases 4,080
Stock (1.1.2005) 11,520
Buildings 60,000
Freehold Land 20,000
Machinery 40,000
Salaries 30,000
Patents 15,000
General Expenses 6,000
Insurance 1,200
Capital 1,42,000
Drawings 10,490
Sundry Debtors 29,000
Sundry Creditors 12,600
3,53,160 3,53,160
Taking into account the following adjustments, pass the necessary Journal entries and prepare
the Trading and Profit and Loss Accounts and the Balance Sheet:
1. Stock at hand on 31st December, 2005 is Rs. 13,600.
2. Machinery is to be depreciated at the rate of 10% and patents at the rate of 20%.
3. Salaries for the month of December, 2005 amounting to Rs. 3,000 were unpaid.
4. Insurance included a premium of Rs. 170 for next year.
5. Wages include a sum of Rs. 4,000 Spent on the erection of a cycle shed for employees and
customers.
6. A provision for Doubtful Debts is to be created to the extent of 5% on Sundry Debtors.
Depreciation
Q. 3. Ram Bros. acquired a machine on 1st July, 2014 at a cost of Rs. 1,40,000 and spent Rs.
10,000 on its installation. The firm writes off depreciation at 10% of the original cost every
year. The books are closed on 31st December every year. Show the machinery Account and
depreciation account for three years.
Q. 4. A company puchased machinary for Rs. 20,000 on 1 st January 2006, The macinary is
depreciated at 10% P.A. on the original cost. On 1st July 2018, The machinary was sold for Rs.
12,000.
Give the machinary account, assuming the books are closed on 31st December each year.
Q. 5. A firm purchases an old truck for a sum of Rs. 2,00,000 on 1 st January 2007. It charges
20% depreciation per annum according to the written down value method. The truck was
sold on 1st July, 2008 for a sum of Rs. 1,60,000. You are required to prepare the Truck Account
for 2007 and 2008.
Q. 6. A Company purchaed a machinary for Rs. 80,000 on 1st April, 2005 and decided to write
off at 10% annually on the diminishing balance method. On 1 st July 2007 a part of the
machinery valued in the books of the firm at Rs. 16,000 on 1 st April 2005 was sold for Rs.
10,000.
Show the Machinery Account in the books of the Company for the years 2005, 2006 and 2007.
Accounts are closed each year on 31st December.

M-3
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COURSE CONTENTS:
Unit – 3: Comparative and Common Size Statement, Ratio Analyse, Cash Flow and Fund
Flow Analysis
Objectives:
1. Acquaint with the concepts of revenues and provisions, profit and capital;
2. Appreciate the uses and limitations of financial statements
3.Prepare the profit and loss account and the balance sheet of a company as per the
requirements of the Companies Act
4.Explain importance of cash flow statement for investors and other stockholders;
5. Compare the differences between cash flow statement with other financial statements;
6. Explain a few advanced financial analysis models with the help of ratio analysis
MEANING & CONCEPT OF FINANCIAL STATEMENT ANALYSIS
 Financial Analysis is also known as analysis and Interpretation of Financial
Statements- Is the process of determining financial strengths and weaknesses of the
firm by stabilizing relationships between the items of the Balance Sheet, Income
Statement and other Operative data.
 Analysis-means methodical classification of the data given in the financial statements
so that they are put in a simplified form.
 Interpretation- means explaining the meaning and significance of data so simplified.
Definition of Financial Analysis
Interpretation of accounts may be defined as the art and science of translating the figures
therein in such a way as to reveal the financial strength and weakness of a business and the
causes which have contributed thereto.
- Spicer and Peglar
Types Of Financial Statement Analysis
 On the basis of Material Used

 External Analysis
 Internal Analysis
 On the basis of Firms involved
 Intra-Firm Analysis
 Inter-Firm Analysis
 On the basis of Modus Operandi
 Horizontal Analysis
 Vertical Analysis
Comparative Statement
A comparative statement is a document that is utilized for the purpose of comparing one
particular financial statement with statements from earlier periods. Investors are able to identify
trends, track a company's progress, and compare it with other companies in its industry when
historical financials are presented side-by-side with the most recent figures in columns that are
next to each other.
Vertical Analysis- Common Size Analysis

Evaluates Financial Statement data by expressing each item in a financial Statement as a
percent of a base amount.
Horizontal Analysis or Trend Analysis
Evaluates series of financial data over a period of time
Procedure for calculating Trends
Following steps are taken for calculating trends:
o One year taken as base year . Generally, the first or the last year is taken as base
year.
o The figures of base year are taken as 100.
o Percentage are calculated in relation to the base year. For this each year’s figure is
divided by the base year’s figure.
o If the figure of any year is less than the figure in the base year, the trend percentage
will be less than 100 and vice versa.
Objectives of Financial Statement Analysis
 Measures the efficiency of the Business.
 Judges the Profit Earning Capacity of the Business.
 Helpful in knowing the Financial Strength of the Organization.
 Provides information about activities of the organization.
 Helpful in Comparison of Financial Results.
Drawbacks/ Limitations of Financial Analysis
 Historical Analysis
 Ignores Price Level Changes
 Qualitative or Non- Monetary aspects ignored
 Limitations of Accounting Data
 Variation in Accounting Practices
CASH FLOW STATEMENT
When it comes to managing an organization's finances and keeping track of its cash flow, a
cash flow statement is an important tool that is used. Along with the income statement and the
balance sheet, this statement is one of the three essential reports that contribute to the process
of evaluating how well a company is doing. It is typically helpful to make cash forecasts in
order to facilitate planning for the short term.
The cash flow statement reveals the sources of cash and assists you in keeping track of money
coming in and going out of the business. The activities of running the business, investing the
business' money, and managing the business' finances all bring in cash for the company.
Additionally, information regarding cash outflows, expenses paid for business activities, and
investments made at a specific point in time is provided by the statement. The management of
a company can make more educated decisions regarding the regulation of business operations
with the assistance of the information that is provided in the cash flow statement.
In general, it is the goal of businesses to have a positive cash flow for their operations; if this
is not the case, the company may have to resort to taking out loans in order to continue
operating.
The significance of preparing a cash flow statement
To ensure the continued viability of a company, there must always be adequate cash on hand.
This gives it the ability to repay bank loans, purchase commodities, or make investments in
order to generate profitable returns. If a company does not have sufficient cash on hand to pay
off its debts, it is considered to be in a state of bankruptcy. The following is a list of some of
the advantages of having a cash flow statement:
Gives details about spending: A comprehensive understanding of the primary payments that
the company makes to its creditors can be gained from examining the cash flow statement. In
addition to this, it displays transactions that were recorded in cash but are not reflected in any
of the other financial statements. Purchasing goods for inventory, providing customers with
credit, and investing in capital equipment are all examples of these types of expenditures.
Maintaining the optimal level of cash on hand is made easier with the help of a cash flow
statement, which also contributes to the overall success of this endeavor. It is essential for the
company to figure out whether a disproportionate amount of its cash is just sitting around doing
nothing, or whether there is a deficiency or surplus of funds. In the event that there is idle cash
lying around, the company may put it toward the purchase of shares or inventory if it so
chooses. If there is a shortfall in capital, the company has the option of looking into different
places from which it can borrow money in order to keep the business operating.
Profit plays an important role in the growth of a company because it generates cash, which
helps a business focus on generating cash. However, there are a variety of other options
available to generate income. For instance, a company is actually generating cash when it
discovers a way to pay less for equipment and implements this discovery. It is increasing its
cash position whenever it is able to collect receivables from its customers in a more expedient
manner than is typical.
A cash flow statement is an important tool for controlling cash flow, and it can be used for
short-term planning as well. A prosperous company must maintain an adequate level of liquid
assets at all times in order to meet its short-term obligations, such as forthcoming payments. A
financial manager has the ability to analyze the cash coming in and going out based on previous
transactions in order to make important decisions. The ability to foresee a cash deficit in order
to pay off debts or the establishment of a base from which to request credit from banks are both
examples of situations in which decisions need to be made based on the cash flow.
The structure of a statement of cash flows
An operating activities section, an investment activities section, and a financial activities

section make up a cash flow statement.
Operating activities are those cash flow activities that either generate revenue or record the
money that was spent on producing a product or service. Operating activities are also known
as cash flow activities. The purchase and sale of inventory, the payment of interest and taxes,
the payment of wages to employees, and the payment of rent are all examples of operational
business activities. This section does not cover any other types of cash flow, such as
investments, debts, or dividends. These types of cash flow are not included.
The cash flow statement's operations section begins with the recording of net earnings, which
are obtained from the net income field on the company's income statement. This field is located
on the cash flow statement's operations section. This provides an estimate of the profit that the
company made last year. Following this, it will list any non-cash items that are associated with
operational activities and then convert those items into cash items. The cash flow statement of
a company should demonstrate an adequate amount of positive cash flow for the operational
activities of the company. In the event that it does not, the company might find it difficult to
manage the day-to-day operations of the business.
Investment activities: The second section on the cash flow statement records the gains and
losses that were caused due to the company's investment in assets such as property, plant, or
equipment (PPE), thus reflecting the overall change in the cash position of the business. When
investors want to know how much money the company spends on PPE, they look for shifts in
the cash flow statement.
Another essential component of investment activities is known as capital expenditure,

abbreviated as "CapEx." The term "capital expenditure" refers to the money that a company
spends to invest in fixed assets such as buildings, vehicles, or land. An increase in the
company's capital expenditures indicates that it is investing in its future operations.
Nonetheless, it demonstrates that there is a decrease in the cash flow available to the company.
It is possible for a company to have negative cash flow as a result of heavy investment
expenditures; however, this is not always an indication of poor performance because the heavy
investment expenditures may be leading to high capital growth.
Financing Activities: The third section of the cash flow statement details the cash flow that
occurs between the company and its owners as well as its creditors. Transactions involving
debt, equity, and dividends all fall under the category of financial activities. When these
transactions take place, incoming cash is recorded whenever capital is raised (whether from
investors or banks, for example), and when dividends are paid, outgoing cash is recorded.
Conclusion
A company's cash flow statement is an important document because it reveals whether or not
the company has sufficient available cash to meet its obligations and make investments in its
assets. Simply looking at a company's cash flow statement is not sufficient to provide a
meaningful interpretation of the company's performance. After looking at the company's
income statement and balance sheet, you may find that in order to get a better idea of how the
business is doing overall, you need to perform an analysis of longer-term trends.
Fund Flow Statement
A statement known as a fund flow statement is one that is compiled for the purpose of analyzing
the factors that led to shifts in a company's financial position between two balance sheets. It
depicts the incoming and outgoing flows of funds, also known as the sources of funds and the
applications of funds, for a specific time period.
It is also correct to assert that a statement of cash flows is compiled in order to provide an
explanation of the variations in the working capital position of a company.
Objectives of Fund Flow Statement
When we consider that we already prepare a statement of profit and loss as well as a balance
sheet, the question of why we should prepare a statement of fund flow arises. The necessity
arises as a result of the fact that the profit and loss statement as well as the balance sheet will
not explain the reasons for a change in the financial position.
The profit and loss account as well as the balance sheet will give figures for two years, namely
the current year as well as the year before. However, this will not explain why the movement
has taken place, for example, the extent to which long-term funds have been used to meet long-
term needs and short-term funds have been used to meet both long-term and short-term needs.
The following is the rationale behind the preparation of a fund flow statement:
In general, a statement of the flow of funds will provide us with the following two pieces of
information:
Where the funds originally came from and how they were put to use are referred to as the
sources and applications of funds, respectively.
Constituent parts of a statement of cash flows
The following items make up a fund flow statement:
Where the money comes from: It discusses the total amount of funds obtained from
shareholders and other investors.
How the funds were utilized: It discusses the ways in which the funds have been put to use.
The expenditure of funds on immovable assets
The expenditure of funds on current assets
The advantages of developing a fund flow plan Statement
Even though the company is making profits, as shown on the profit and loss statement, it is still
in a precarious position with regard to its liquidity, and this helps the managers of the funds
better understand why this is the case.
Increase in working capital
When there is a shortage of uses or applications for long-term sources, which can result in a
gap, possibilities may become available. In the statement of cash flows, this is referred to as a
"increase in working capital." Because it is an unrestricted and adaptable source of funding that
the company can now make use of to satisfy its working capital requirements. If there are any
outstanding short-term loans, they could potentially be paid from the long-term sources slot, or
dividends could be distributed, etc.,
Decrease in working capital
There is a chance that the company has additional applications for the funds, but the company
has very few sources available for the long term. When that time comes, the company will
begin searching for funds that are readily available in the form of working capital.
As a direct consequence of this decision, the organization will allocate a smaller portion of the
funds currently available for working capital toward long-term initiatives. Therefore, we can
acquire funds that are available for long term uses, which are a component of the source of
funds, if we reduce the amount of working capital that we have available.
By compiling a statement of changes in working capital, one can determine whether the amount
of available working capital has increased or decreased. This statement analyzes the difference
in value between current assets and current liabilities over the course of two years and indicates
whether or not there has been an increase or decrease in working capital.
On the other hand, it aides the managers in comprehending how a company can remain
financially stable despite incurring losses in its operational front due to the fact that it operates.
We can determine whether or not any short-term funds are being used for long-term purposes
by analyzing a statement of the flow of funds. The ambiguous region that can only be clarified
through the preparation of a fund flow statement.
Users of the Funds Flow Statement
Lenders of capital are the users of fund flow statements who take the greatest interest in the
data. They focus more on the statements of the company's cash flow rather than the income and
expense statement and the balance sheet.
For instance, bankers who lend the company money in exchange for interest, either in the form
of an overdraft or a cash credit. When preparing fund flow statements, the bankers make use
of the information provided by the company in its profit and loss statement and balance sheet.
This enables them to make decisions regarding whether or not to provide their clients with
overdraft or cash credit facilities.
Annexure:
Reference Links (Articles) :
1. What Is A Cash Flow Statement? by Reem Heakal, published by Forbes, 27th May
2010.
2. Annual report can reveal the secrets a company wants to hide: Here's how to uncover by
Narendra Nathan published in The Economic Times, 19th June 2017.
3. Between the Numbers, Business Today, By Rahul Oberoi, September 2014
4. Fund Flow in Prosperous – The Hindu Business Line May 2003.
5. What the PE ratio tells about market direction by Ritesh Jain published in The
Economic Times, 7th April 20166. Companies may be asked to disclose fund flow statement
by Press Trust of India published by Business Standard, 21st Jan. 2013.
Web-Resources:
1. http://ncert.nic.in/textbook/textbook.htm
2. https://www.investopedia.com/terms/f/financial-statement-analysis.asp
3. https://cleartax.in/s/as-3-cash-flow-statements
4. https://cleartax.in/s/accounting-ratio
5. https://financeaccountingsimplified.com/financial-ratios/
6. https://www.caclubindia.com/articles/financial-ratios-an-important-analysis-tool-
16453.asp
7. http://download.nos.org/srsec320newE/320EL27.pdf
http://www.accountingnotes.net/financial-management/financial-analysis/tools-of-financial-
analysis-company/13472
Reference Books :
Other Books:
Richard D, Irwin.
Sample Questions:
M-3
Comparative Analysis
Q.1 The following is the Balance Sheets of MS Gupta for the years 2016 and 2017. Prepare
the comparative Balance Sheet and study the financial position of the concern
Balance Sheet as on 31st December
Liabilities 2016 2017 Assets 2016 2017
Rs. Rs. Rs. Rs.
Equity Share 500000 700000 Land and Building 270000 170000
Capital 330000 222000 Plant and Machinery 400000 600000
Reserve and 200000 300000 Furniture 20000 25000
Surplus 100000 150000 Other Fixed Assets 25000 30000
Debentures 50000 45000 Cash in Hand 20000 40000
Long term Loan 100000 120000 Bills Receivable 100000 80000
Bills Payable 5000 10000 Sundry Debtors 200000 250000
Sundry Creditors Stock 250000 350000
Other Current Prepaid Expenses - 2000
Liabilities
1285000 1547000 1285000 15470000
COMMON SIZE ANALYSIS

Q,2 From the above information, prepare a statement of sources and application of funds for
the year 2003.
The balance sheet of Mr Axis Private (Ltd) and Maxis Private Limited are given below:
Balance Sheet as on 31st December, 2017
Liabilities Axis Maxis Assets Axis Maxis
Pvt. Ltd. Pvt. Ltd. Pvt. Ltd. Pvt.
Rs. Rs. Rs. Ltd.
Rs.
Preference share 120000 150000 Land and Building 80000 123000
capital 140000 410000 Plant and Machinery 334000 600000
Equity share capital 24000 28000 Temporary 5000 40000
Reserves and 110000 120000 Investments 6000 20000
surpluses 7000 1000 Investments 4000 13000
Long-term loans 12000 3000 Sundry Debtors 1000 2000
Bill Payables 15000 6000 Prepaid Expenses 8000 10000
Sundry creditors 10000 90000 Cash and Bank
Outstanding balances
Expenses
Proposed Dividend
438000 808000 438000 808000

Compare the financial position of two companies with the help of common size balance
sheet.
Ratio Analysis
Q.3 From the following particulars extracted from the books of Ashok & Co. Ltd. compute
the following ratios and comment:
(a) Current ratio, (b) Acid Test Ratio, (c) Stock‐Turnover Ratio, (d) Debtors Turnover Ratio,
(e) Creditors' Turnover Ratio, and Average Debt Collection period.
1‐1‐2002 31‐12‐2002
Rs. Rs.
Bills Receivable 30,000 60,000
Bills Payable 60,000 30,000
Sundry Debtors 120,000 1,50,000
Sundry Creditors 75,000 1,05,000
Stock‐in‐trade 96,000 1,44,000
Additional information:
(a) On 31‐12‐2002, there were assets: Building Rs. 2,00,000, Cash Rs. 1,20,000 and Cash at
Bank Rs. 96,000.
(b) Cash purchases Rs. 1,38,000 and Purchases Returns were Rs. 18,000.
(c) Cash sales Rs. 1,50,000 and Sales returns were Rs. 6,000.
Rate of gross profit 25% on sales and actual gross profit was Rs. 1,50,000
.4 From the following statements find Out:
(A) Sales based profitability ratio- assessing efficiency of operating level management:
1. Gross Profit Ratio 2. Operating Profit Ratio 3.Net Profit Ratio 4.Operting Ratio
(B) Investment based profitability ratios- measuring overall performance in relation to
investment:
1. Return on Investment (ROI) 2. Return on Capital Employed (ROCE)
3. Return on Shareholders Fund 4. Return on Equity Shareholders Fund
5. Return on Total Assets 6. Return on Gross Capital Employed
Income Statement
For the year ending 31st march 2014
Particulars Details Amount
(Rs.)
Sales 10,00,000
Less: Cost of Goods Sold (COGS)
Raw Material Consumed :-
Opening Stock of Raw Material 50,000
(+) Purchase of Raw Material 5,00,000
(-) Closing Stock of Raw Material (1,00,000)
4,50,000
Raw Material Consumed 2,00,000
Direct Wages 1,00,000
Manufacturing Expenses 7,50,000
Add: Opening Stock of Finished Goods 1,00,000
Less : Closing Stock of Finished Goods (1,50,000)
7,00,000 (7,00,000)
Gross Profit 3,00,000
Less : Operating Expenses
30,000
Administrative Expenses (70,000)
40,000
Selling and Distribution Expenses
2,30,000
Cash Operating Profit ( EBDIT)
Less: Depreciation 20,000
10,000 (30,000)
Preliminary expenses written off
2,00,000
Operating Profit
Add: Non Operating Income ( Profit on sale of Shares) 50,000
(55,000) (5,000)
Less: Non Operating Expenses/ Losses ( Loss on sale of
plant)
1,95,000
(10,000)
Earnings Before Interest and Taxes({EBIT)
1,85,000
Less: Interest
50,000
Earnings Before Tax (EBT)
Less: Tax 1,35,000
Earnings After Tax (EAT)
Position Statement
(As on 31st March 2014)
Particulars Details Amount
(Rs.)
Equities and Liabilities:
Shareholders Fund-
Equity Share Capital 2,00,000
10% Preference Share Capital 1,00,000
Total Share Capital 3,00,000
General Reserve 80,000
Securities Premium 10,000
P&L Account 10,000
Less: Intangible and Fictitious Assets-
Goodwill (30,000)
Preliminary Expenses (70,000)
Total Shareholders Fund 3,00,000
Non Current Liabilities:
Long term Borrowings 2,00,000
Net Capital Employed 5,00,000
Current Liabilities:
Sundry Creditors 1,00,000
Tax Payable 50,000 1,50,000
Total Capital and Current Liabilities 6,50,000

Assets:
Non Fixed/Block Assets-
Plant 1,00,000
Building 80,000
1,80,000 1,80,000
70,000
Investments
Current Assets:
Liquid Asset-
Sundry Debtors 80,000
Bank Balance 40,000
Marketable Securities 20,000
Non Liquid Assets-
Stock of Raw Material 1,00,000
Stock of Finished Goods 1,50,000
Pre-paid expenses 10,000 4,00,000
6,50,000
Total Non-Current & Current Assets
Q.5Preparing Balance Sheet through Ratio Analysis

From the following information, prepare the Balance Sheet of ABB Ltd. Showing the details
of workig:
Paid up capital Rs. 50,000
Plant and Machinery Rs. 1,25,000
Total Sales (p.a.) Rs. 5,00,000
Gross Profit 25%
Annual Credit Sales 80% of net sales
Current Ratio 2
Inventory Turnover 4
Fixed Assets Turnover 2
Sales Returns 20% of sales
Average collection period 73 days
Bank Credit to trade credit 2
Cash to Inventory 1 : 15
Total debt to current Liabilities 3
Fund Flow and Cash Flow Analysis
Q.6The following are the summaries of the balance sheets of the Bharat Vijay Ltd. as on 31‐
12‐02 and 31‐12‐03.
Liabilities 2002 (Rs.) 2003 (Rs,) Assets 2002 (Rs.) 2003 (Rs,)
Share Capital 300000 4,00,000 Building 120000 250000
Debentures 200000 250000 Machinery 300000 260000
Profit & Loss 40000 60000 Stock 9000 80000
Creditors 70000 80000 Debtors 140000 240000
Bank Overdraft 25000 25000 Prepaid Expenses 15000 25000
Provision for Taxation 30000 40000
665000 855000 665000 855000
The following additional information is obtained:

1. The net profit for the year was Rs. 40,000 after charging depreciation.
2. During the year depreciation charged was Rs. 30,000 on building and Rs. 40,000 on
machinery.
3. The company purchased during the year buildings worth Rs. 1, 60,000.
4. Dividend paid during the year amounted to Rs. 20,000.
From the above information, prepare a statement of sources and application of funds for the
year 2003.

M-4
3. To develop the ability to apply tools and techniques of costing transaction to solve
4. Determine and justify the tools and techniques of Cost accounting.
----------------------------------------------------------------------------------------------------------------
COURSE CONTENTS:
Unit – 4: Management Accounting – Concept, Needs, Importance. Costing – Records and
Processes, Inventory Valuation, Reconciliation between Financial and Cost Accounts
Objectives:
1. Know the differences between financial accounting and cost accounting;
2.Know the preparation of cost sheet as well as corporate financial statement
3.Prepare the reconciliation statement on the basis of cost accounting and financial
accounting .
Management Accounting
Another name for managerial accounting is management accounting. Managerial accounting

is a type of accounting that generates statements, reports, and documentation that assist
management in making better decisions relating to the success of their firm. The most common
application of managerial accounting is for management purposes within an organization.
The significance of accounting for management
The primary purpose of managerial accounting is to offer assistance to a company's

management in effectively carrying out the functions of planning, organizing, directing, and
regulating the operations of the business. The following are some of the ways in which
management accounting is of assistance with these functions:
1. It is a source of data: This makes it an essential source of data for planning purposes. The
management accounting process records historical data, which demonstrates how the company
has grown over time. This information is helpful for making predictions about the future of the
company.
2. Performs data analysis: The accounting data is analyzed by calculating ratios and
projecting trends in order to present it in a relevant manner. Following this, the material is
analyzed so that planning and decision-making may occur. For instance, you can classify
purchases of various goods according to the time period, the suppliers involved, or the regions
involved.
3. Facilitates meaningful conversations by providing a medium for disseminating

information about a proposed course of action throughout the business Management
accounting can serve this purpose. At the beginning of the planning process, it provides a visual
representation of the practicability and coherence of the various components of the plan. In
later sections, it discusses the development of the plans and the roles that different parties will
play in carrying them out.
4. Contributes to the accomplishment of goals: It assists in the transformation of

organizational strategy and objectives into attainable business goals. These objectives can be
accomplished through the implementation of budget control and standard costing, both of
which are essential components of management accounting.
5. Makes use of qualitative data: When it comes to making decisions, management
accounting does not limit itself to using only quantitative data. It takes into consideration
qualitative information that can't be assessed in terms of money, thus it's a good indicator of
value. The cycles of an industry and the quality of its research and development are two
examples of the types of qualitative information that a company can acquire with the use of
specialized surveys.
SCOPE OF MANAGERIAL ACCOUNTING
The primary purpose of managerial accounting is to increase one's profits while lowering one's
expenses as much as possible. It is focused with the presentation of data to foresee irregularities
in finances in order to assist managers in making key decisions. This can be helpful. It has a
very broad scope and encompasses a number of different commercial operations. The sections
that follow explain the various ways in which management accounting can help an organization
run more efficiently.
1. Managerial accounting is a reorganization of the information found in financial accounts,

and it is dependent on this information for decision-making. Therefore, the management cannot
put the managerial decisions into effect without referring to a certain financial accounting
system.
2. The inferences that can be drawn from financial accounting are restricted to numerical
figures such as profit and loss, whereas in management accounting, it is possible to explore the
cause and effect linkages that led to those results.
3. Managerial accounting makes use of approaches that are simple to comprehend, such as
standard costing and marginal costing, as well as project evaluation and control accounting.
4. The management looks at the most recent information while referring to past data as a point
of reference in order to evaluate the effects of various company decisions.
5. The management team can use this method of accounting to set goals, devise strategies to
achieve those goals, and evaluate how well certain departments are doing in relation to one
another.
6. Predictions can be made with the help of managerial accounting. It focuses on providing
knowledge that would relieve the effect of a problem rather than coming up with a permanent
solution to the issue at hand.
Techniques in Managerial Accounting
Accounting for management makes use of a variety of strategies in order to accomplish the
objectives set for the firm.
Marginal analysis: The marginal analysis evaluates earnings in comparison to the many
different forms of costs. It focuses mostly on the advantages that come with higher levels of
output. It requires understanding the contribution margin on the company's sales mix in order
to calculate the break-even point, which is part of the calculation involved. In this context,
"sales mix" refers to the proportion of a certain product that a company has sold in comparison
to the overall sales of that company. This is done to identify the unit volume for which the
company's gross sales and total expenditures are equivalent for that particular volume. The
pricing points for a variety of products can be determined by managerial accountants with the
assistance of this value.
Constraint analysis: Managerial accounting is responsible for monitoring the limits that a
product places on a company's ability to make profits and generate cash flow. It does an
analysis of the primary bottlenecks and the difficulties that they cause, as well as a calculation
of the impact that these bottlenecks have on revenue, profit, and cash flow.
Capital budgeting: The analysis of information that is used in the process of capital budgeting
is done so that choices pertaining to capital expenditures can be made. In this study, the
management accountants calculate the net present value and the internal rate of return in order
to assist managers with making capital budgeting decisions such as determining the payback
period or calculating the accounting rate of return.
Inventory valuation and product costing: The process of calculating the actual cost of
products and services, which includes the valuation of inventories and the pricing of products,
is referred to as product costing. Calculating the overhead charges and making an estimate of
the direct costs connected with the cost of products sold are normally required steps in the
process.
Trend analysis and forecasting: Analysis of trends and projections of their future outcomes
generally focus on predicting how product prices will change. The data that was gathered as a
result is useful for locating uncommon patterns and locating effective approaches to locate and
resolve the difficulties that lie beneath the surface.
Limitations of managerial accounting
However, despite the fact that managerial accounting can define the rate and method by which
an organization develops, it is not without its share of flaws. It should go without saying at this
point that the knowledge necessary to make managerial decisions is based on financial
statements. Because of this, the quality of the most fundamental records is the primary factor
that determines whether or not the decisions made in accounting are sound or flawed. In the
meantime, one and the same piece of information may be interpreted in a variety of ways by
various managers, depending on the managers' capabilities and levels of experience in the
sector. In this manner, there is the potential for bias in the decision-making process.
Larger businesses that are in the midst of rapid expansion are ideal candidates for adopting a
managerial accounting system. This is conceivable since the business is in a position to pay the
costs associated with putting in place a system and even pay experts to make the most of it so
as to protect the company from experiencing further breakdowns in the future.
Conclusion
Accounting for management facilitates the analysis and recording of financial information,
both of which can be put to use by an organization to improve its levels of production and
efficiency. It does this by the utilization of straightforward methods such as standard costing,
marginal costing, project evaluation, and control accounting to provide the monetary data at
predetermined intervals at regular intervals. On the other hand, the knowledge that is required
in order to make managerial decisions is entirely dependent on financial accounts. Because of
this, it is essential to keep records that are free of errors. In spite of the fact that it has a number
of drawbacks, it is a helpful tool for improving the way businesses are managed.
COST ACCOUNTING
Cost Accounting is a standard business practice that entails recording, analyzing, summarizing,
and researching the costs that an organization incurs for any activity, be it a procedure, a
service, a product, or anything else. This assists the organization in cost control, as well as
strategic planning and decision-making regarding the enhancement of cost efficiency. These
types of financial statements and ledgers provide the management team with visibility into the
information regarding their costs. The management is given an idea of the areas in which the
costs need to be controlled and the areas in which they need to increase more, which assists in
the creation of a vision and a future plan. There are several distinct approaches to accounting
for costs, including activity-based costing, marginal costing, standard cost accounting, and lean
accounting, among others. In this article, we will talk about additional goals and advantages,
as well as the costing process and the meaning of costs.
Origin and History of Cost Accounting
During the time of the industrial revolution, the first wave of particularly large businesses and
organizations emerged. Therefore, these organizations were more intricate and ever-changing.
This is what ultimately led to the development of what is now the standard procedure for cost
accounting in use today.
Therefore, the origin of cost accounting as well as its development can be traced back to the
beginning of the industrial revolution. The purpose of this was to provide assistance to the
businessmen in recording and maintaining a record of their costs and expenses.
During this time period, before the golden age of industrialization, the majority of these
companies' outgoing cash flow was comprised of what we now refer to as variable costs. the
costs associated with labor and materials, in addition to any comparable variable costs.
However, as a result of the rise of industrialization, these businesses incurred greater "fixed
costs." These are costs that are not immediately connected to the manufacturing of a product
or provision of a service. Rent, depreciation, storage costs, and other similar expenses are all
examples of fixed costs.
Understanding fixed costs became increasingly important as large industries such as railroads,
the steel industry, and other similar businesses developed. The process of allocating them
became significant for managers and owners in terms of the decisions they made, the prices
they set, and the products they developed. The modern method of accounting for costs began
with this development.
The classification, recording, and allocation of current costs as well as prospective costs are
the primary focuses of cost accounting, which is a sub-specialty within the larger field of
accounting known as cost accounting. It is one of the most essential methods or procedures for
a company to have in the contemporary environment of global commerce. Both the
management of an organization and the workers within that organization stand to gain a great
deal from it.
Importance of Cost Accounting
1] The Different Types of Cost
Because "cost" is such a broad term, it needs to be categorized before it can be of any further
use. Recording and categorizing different types of costs is an essential part of cost accounting.
The prime cost, the direct cost, the factory cost, the selling cost, and so on are all examples of
costs. A classification of this kind gives management the ability to keep costs under control
and determine whether or not particular processes and activities are profitable. In addition to
that, it is helpful when calculating efficiency.
2] Managing Expenditures
An effective company places a primary emphasis on cost management, particularly in regard

to inventory, labor, and a variety of other overhead costs. They are able to do this thanks to
cost accounting.
For instance, in order to achieve the highest possible level of effectiveness in their inventory
management, they might choose to implement the EOQ technique, which is a costing method.
In a similar vein, their productivity can be improved by analyzing the costs of labor and the
capacities of the machines they use. In order to achieve greater control over costs, cost
accounting categorizes overhead expenses as either fixed, variable, or controllable and
uncontrollable.
3] The Process of Determining Prices
The fundamental distinction between fixed costs and variable costs is one that is made in cost
accounting. After doing so, management will use this information to determine the prices of
products in accordance with the costs of those products.
This enables management to determine the most appropriate price for the product or service,
one that is neither excessively high nor inadequately low. Consider the situation where there is
a depression in the economy as an illustration.
In order for the businessman to thrive under these conditions, he will need to lower the prices
of his products. Therefore, he can start by attempting to gain control of his variable costs, which
will enable him to set his prices.
4] The Establishment of Standards
Standards are utilized by organizations in the process of developing future estimates and
budgets. They use these as a foundation to measure the actual efficiency of the process or
department they are evaluating.
Standard costing, which is an entire subfield within cost accounting, is dedicated to the process
that you just described.
Importance of Cost Accounting to Others
The Significance of Cost Accounting to Workers in Other Departments: Accounting for

costs enables us to calculate efficiency, which is one of the most important uses of this
discipline. Because of this, the company will be better able to devise an incentive program for
workers who demonstrate efficiency in their work, and as a result, those workers will be
awarded appropriately. It also serves as an incentive for workers who are already performing
at a lower efficiency to perform even better.
Government: When it comes to assessing for things like income tax or other similar
government liabilities, costing is helpful to the government. Additionally, it helps set industry
standards and contributes to the establishment of price fixing, tariff plans, cost control, and
other related topics.
Customers: Controlling expenses and increasing productivity are two of the primary goals of
cost accounting. The company stands to gain a lot from either of these two things. And in the
end, this advantage is passed on to the end users of the products or services in question.
Reconciliation of Cost and Financial Accounts
A non-integral system highlights the fact that the different objectives of financial accounting
and cost accounting call for a different approach to recording the transactions. This is because
the two types of accounting seek to measure different things. Financial accounting is concerned
with the ascertainment of profit or loss for the entire operations of the organization, for a
relatively long duration, usually a year, without being too much concerned with cost
computations, whereas cost accounting aims at ascertaining the profit or loss made by different
manufacturing or product divisions for the purpose of achieving efficiency in the organization
by cost comparison and for cost control.
When there is a non-integral accounting system in place, two different accounting systems will
handle the same fundamental transactions in a different manner (for example, the purchase of
materials, the consumption of materials, the payment of wages and other expenses, etc.), and
the transactions that occur within those accounting systems will be recorded using a different
method. When compared to the profit figure disclosed by the P&L A/c in the financial set of
books, the figure of profit in the cost accounts can be very different from the profit figure
disclosed by the P&L A/c. This is because of the differences in purpose and approach. Because
of this, there is a need for a reconciliation between the amount of profit reported by cost
accounting and the amount reported by financial accounting.
On the other hand, when an organization uses an integrated system of cost bookkeeping, the
transactions of both financial accounting and cost accounting are presented and recorded in the
same set of books. This is the case in an integrated system of cost bookkeeping. There is only
one profit and loss account (P&L A/C) and one total profit figure. Therefore, there is no need
for reconciliation when the situation is like this.
Need and usefulness of Reconciliation
In the event that there is a non-integrated system in place, it is essential that the various figures
of profits (according to the two different sets of books) be periodically reconciled with each
other in order to prevent the figures from losing their credibility. If the necessity of reconciling
the profits shown on the cost accounts and the financial accounts is taken into consideration
and cared for, the organization will reap the benefits listed below. (1) To determine the factors
that contribute to the disparity in profits and losses that are reflected in cost accounts and
financial accounts. (3) To facilitate coordination and promote better cooperation between the
activities of the financial and cost sections of the accounting departments. (2) To guarantee the
mathematical accuracy and reliability of cost accounts (to have appropriate cost ascertainment
and cost-control). (4) To put management in a better position to familiarize themselves with
the reasons for variations in profits, as well as to pave the way for more effective internal
control and for the standardization of policies regarding the valuation of stock and the recovery
of overhead costs, etc.
The underlying reasons for the disparity
The various factors that can be attributed to differences in the reported profit figures of two
different sets of books can be grouped into three broad categories in a general sense. i.e. I Items
that only appear in the financial accounts (ii) Items that only appear in the cost accounts (iii)
Items that are recorded only in the cost accounts I Items that are treated differently in the cost
accounts and the financial accounts
Reference Links (Articles) :

1. Cost Sheet: Meaning, Advantages and Preparation, By Sanya R, Accounting Notes
2. AS 2 – Valuation of Inventories, cleartax.in, May 22, 2018
3. 59 mega infra projects report cost overrun of Rs 1.36 lakh crore, Economic Times, Jul
25, 2018, 04.19 PM IST
4. Evaluation of Inventory management; J Nugra, Wiyarta, Y Kurniawan - ICIEB '18
Proceedings of the 2018 International Conference on Internet and e-Business
5. Periodic Inventory System Vs. Perpetual Inventory System; Irfanullah Jan, xplaind.com,
Mar 13,2019
Web-Resources:
1.https://cleartax.in/s/cost-accounting
2.https://www.investopedia.com/ask/answers/041415/what-are-different-types-costs-
cost-accounting.asp
3.https://www.kullabs.com/classes/subjects/units/lessons/notes/note-detail/5680
4.https://www.profitbooks.net/fifo-vs-lifo-best-inventory-valuation-method/
5.http://icmai.in/upload/Students/Syllabus2016/Inter/Paper-8-New.pdf
6.http://download.nos.org/srsec320newE/320EL27a.pdf
Reference Books :
Other Books:
Richard D, Irwin.
Sample Questions:
MODULE 4
Cost Sheet
Q.1 Compute Prime cost from the data given below:
Rs.
Direct Material 1,80,000
Expenses on purchases 20,000
Rent of special machine taken on hire for production 40,000
Productive wages 65,000
Q. 2 From the following information., prepare cost sheet.

Rs.
Direct material 1,60,000
Direct Labour 45,000
Direct Expenses 15,000
Factory overheads 35,000
Office and administration overheads 20% of works cost
Selling and distribution overheads 45,000
Opening stock of finished goods 25,000
Closing stock of finished goods 10,000
Profit on Sales 10%
Reconciliation:
Q.1 From the following figures prepare a reconciliation statement: Rs.

 Profit as per costing records 10,000
 Factory overheads under-recovered in costing 6,000
 Selling and administration overheads over-recovered in costing 4,000
 Bank interest credited in financial books 1000
 Preliminary expenses written off in financial books 13000
 Opening stock value: in cost books 10000
 Opening stock in financial books 8000
 Closing stock value: in cost books 24000
 Closing stock in financial books 20,000
Q.2A manufacturing company disclosed a net loss of Rs. 3,47,000 as per their cost accounts
for the year ended March 31, 2018. The financial accounts however disclosed a net loss of
Rs. 5,10,000 for the same period. The following information was discovered as a result of
inspection of the figures of both the sets of accounts:
Rs.
Factory overheads under-absorbed 40,000
Administration overheads over-absorbed 60,000
Depreciation charged in Financial Accounts 3,25,000
Depreciation recovered in Cost Accounts 2,75,000
Interest on investments not included in Cost Accounts 96,000
Income-tax provided 54,000
Interest on loan funds in Financial Accounts 2,45,000
Transfer fee (credit in financial books) 24,000
Stores adjustment (credit in financial books) 14,000
Dividend received 32,000
Prepare a statement showing reconciliation between the figure of net loss as per cost accounts
and the figure of net loss shown in the financial books.
Inventory Valuation
Q.1 Prepare Store Ledger Card (SLC) from the following information for July.
1 Beginning Inventory ………50 Pieces @ Rs. 20 ……………………Rs. 1,000
2 Purchases …………………100 Pieces @ Rs. 25 …………………….Rs. 2,500
9 Purchases …………………50 Pieces @ Rs. 28 …………………… Rs. 1,400
18 Sales ………………………125 Pieces @ Rs. 30 ………………………Rs. 3,725
20 Purchases …………………85 Pieces @ Rs. 32 ……………………Rs. 2,720
22 Purchase ……………………100 Pieces @ Rs. 34 ……………………Rs. 3,400
27 Sales …………………………150 Pieces @ Rs. 29 ……………………Rs. 4,350
Required: Determine the Cost of Sales, Cost of Closing Stock, Sales and Gross profit / loss
under LIFO, FIFO & Weighted Average Methods.
Q.2 Prepare Store Leger Card (FIFO, LIFO and Average) from the following data.
July 01 Balance b/d @ 10 Each
July 05 Purchases @ 12 Each
July 09 Purchases @ 9 Each
July 13 @ 18 Each
July 23 Purchases @8 Each
July 26 Purchases @16 Each
July 30 Sales @ 19 Each
Q.3 From the following information calculate (a) EOQ=2400 unit (b) No. of orders per year
=20 orders (c) Frequency of orders =18.25 days (d) Total ordering cost=3600 rs ( e) Total
carrying cost.= 3600 rs
Annual consumption of input = 48000 units
Annual carrying cost = 12%
Purchase price of input unit = Rs. 25
Ordering cost per order = Rs. 180
Q4. Purchase price per unit is Rs. 200, Cost per order is Rs. 100, Annual carrying cost per
unit is 10%, Annual consumption is 4000 units. Calculate EOQ and advise whether an offer
made by the supplier of 2% discount on purchase price on purchasing 2000 units per order is
acceptable or not? What would be your advise if the discount offered is increased to 5% on a
single order?
M-5
----------------------------------------------------------------------------------------------------------------
COURSE CONTENTS:
Unit – 5: Costing for Decision Making, Marginal Costing, Absorption Costing
Objectives:
1. Distinguish between the different types of costs;
2.Distinguish between the nature of costs;
3.Present different alternatives before the decision making
4.Selection out of different alternatives.
Marginal Costing
The term "marginal costing" refers to a method of costing in which the marginal cost, also
known as the variable cost, is charged to units of cost while the fixed cost for the period is
entirely written off against the contribution.
The change in the overall cost that occurs when the quantity produced increases by one is
referred to as the marginal cost. That is to say, it is the expense incurred in the production of
one additional unit of a good.
Marginal costing's defining traits and characteristics
Costs can be broken down into two categories: fixed and variable. On the basis of how much
they change, costs are divided into two categories: fixed costs and variable costs. In a similar
fashion, semi-variable costs are broken out separately.
The Stock Market's Valuation: When determining the value of finished goods as well as work
that is still in progress, only variable costs are considered. The valuation of inventory does not
take into account the variable overhead costs associated with selling and distribution, however.
Characteristics of the Marginal Costing Method
The following is a list of characteristics of marginal costing: Marginal costing is used to

determine the impact that variable costs have on the volume of production or output. Marginal
costing is used to determine how much money is being made. The break-even analysis is an
essential component of marginal costing and is an integral part of the process. The contribution
made by each product or department is the basis for determining the profitability of each
product or department.
The final selling price can be calculated by adding the contribution to the variable costs and
then subtracting the profit. The marginal costing method is used as the foundation for the
valuation of both finished goods and work that is still in progress.
The contribution is used to recoup the fixed costs, while the production bears the responsibility
of paying for the variable costs. Only fixed costs and variable costs are taken into consideration
when classifying costs. Additionally, semi-fixed prices are converted into either fixed costs or
variable costs depending on the situation.
Concept of Marginal Costing
Cost Ascertainment: The nature of the cost serves as the foundation for ascertaining the cost
in marginal costing. The nature of the cost provides an idea of the behavior of the cost, which
has a significant bearing on the profitability of the company.
Special technique: It is not a one-of-a-kind method of pricing, like contract costing, process
costing, or batch costing. Rather, it is a combination of these three. However, marginal costing
is a different kind of technique that managers use for the purpose of decision making. This
technique is used by managers. It offers a foundation for understanding cost data, which is
necessary in order to evaluate the relative profitability of a variety of products, processes, and
cost centers.
The Art of Making Decisions: It has a significant part to play in the area of decision making,
which is extremely important given the fact that shifts in activity level present a significant
challenge to the management of the undertaking.
The use of marginal costing provides managerial assistance in a wide variety of business
decision-making activities, including the replacement of machines, the discontinuation of a
product or service, and many others. It also helps management determine the appropriate level
of activity through break even analysis, which reflects the impact that increasing or decreasing
production level has on the overall profit of the company. This is another benefit of the analysis.
Marginal costing has a number of benefits.
The following is a list of advantages to using marginal costing:
 Simple to use and straightforward in its explanation.

 It is helpful to determine profitability at different levels of production and sale by using
marginal costing, which is useful in profit planning. Using marginal costing is helpful.
 It is helpful in making decisions regarding the setting of the selling price, the decision
to export, and the decision to either make or buy.
 The breakeven analysis and the price-to-value ratio are both valuable tools for marginal
costing.
 Utilizing marginal costing makes it possible to conduct an analysis of the various
departments.
 Control of variable costs is achieved as a result of this method's elimination of arbitrary
allocations of fixed costs.
 It is not difficult to achieve a fixed overhead recovery rate.
 In marginal costing, the cost of producing an additional unit of inventory is used to
determine its value. As a result, it is not possible to carry forward illogical fixed
overhead costs from one accounting period to the next accounting period.
 Because fixed costs can't be easily adjusted over a short period of time, it's important
to focus on maintaining tight control over variable expenses.
ABSORPTION COSTING
When determining a product's total cost, absorption pricing takes into account all
aspects of production that contribute directly to that cost. When calculating product
costs, absorption pricing takes into account both variable and fixed overhead expenses.
Wages for employees who are physically working on the product are one of the costs
associated with manufacturing a product. Other costs associated with manufacturing a
product include the cost of the raw materials used in production as well as all of the
overhead costs (such as the cost of utilities) used in production.
Comparison of Variable Costing and Absorption Costing

The way that fixed overhead costs are handled is what distinguishes absorption costing
from variable costing. Variable costing is more straightforward. When using absorption
pricing, fixed overhead costs are distributed proportionately among all of the units
produced during the period. On the other hand, variable costing groups all of the fixed
overhead costs together and reports the expense as a single line item that is distinct from
the cost of goods sold (COGS) or inventory that is still available for sale.
The difference between variable costing and absorption costing is that the latter
calculates the cost of fixed overheads on a per-unit basis. variable costing does not.
When calculating net income on the income statement, variable costing will result in
one expense line item for fixed overhead costs being displayed as a lump sum. When
you use absorption pricing, you'll end up with two distinct types of fixed overhead costs:
those that are associated with the cost of goods sold, and those that are associated with
inventory.
Both absorption costing and variable costing have their own unique approaches to the
treatment of fixed overhead costs. When using absorption pricing, fixed overhead costs
are distributed proportionately among all of the units produced during the period. On
the other hand, variable costing involves adding up all of the fixed overhead costs and
reporting the total amount as a single line item, which is kept separate from the cost of
the goods that were sold or are still available for sale. In other words, when calculating
net income, variable costing will result in one lump-sum expense line item for fixed
overhead costs, whereas absorption costing will result in two categories of fixed
overhead costs: those that are attributable to the cost of goods sold, and those that are
attributable to inventory.
Benefits of using the Absorption Costing Method

The fact that absorption costing is compliant with generally accepted accounting
principles (GAAP), which are mandated by the Internal Revenue Service, is the primary
benefit of using this method of accounting (IRS). Not only does it take into account the
direct costs of production, but it also takes into account all of the costs of production,
including the fixed costs, allowing for a more accurate tracking of profit throughout an
accounting period.
Drawbacks of the Absorption Costing Method
The primary drawback of absorption costing is that it has the potential to inflate a
company's profitability during a specific accounting period. This is because absorption
costing does not subtract fixed costs from revenues until all of the company's
manufactured products have been sold, which can lead to an artificially inflated profit
margin. In addition, it is not helpful for analysis that aims to improve the operational
and financial efficiency of a business, as well as analysis that compares different
product lines.

Annexure:
Reference Links(Articles):
1. Top 9 Cost Concepts used in Decision Making, Accounting Notes, By Sanskriti Singh
2. Bajaj Auto ready to sacrifice profitability for speedy volume, market share growth,
Moneycontrol.com, July 23, 2018
3. Acquisition is about synergies, cost cutting, The Hindu, By Piyush Pandey, July 27,
2018
4. Longer breakeven period may deter investments in Indian hospitality, Economic Times,
By Ashish Kulshrestha, Dec 25, 2017
5. Reliance Jio raises rates, set to break-even soon; is RIL at Rs 1,500 a good buy?,
Economic Times, By Amit Mudgill, Jul 12, 2017
Web-Resources:
1.https://www.investopedia.com/terms/c/cost-volume-profit-analysis.asp
2. https://www.business-case-analysis.com/break-even-analysis.html
3.https://www.investopedia.com/terms/a/absorptioncosting.asp
4.http://www.financialaccountancy.org/absorption-costing-approach-or-total-
costing/absorption-costing/
5.http://icmai.in/upload/Students/Syllabus2016/Inter/Paper-8-New.pdf
Reference Books :
Other Books:
Richard D, Irwin.
Case study Links: Hospital Supply Inc. Source: Book: Management Accounting by Khan &
Jain
https://www.slideshare.net/ironswordlady/case-16-1-hospital-supply-our-case-anlysis
Sample Questions:
Module 5
Marginal Costing
Q.1 Pepsi Company produces a single article. Following cost data is given about its product:‐
Selling price per unit Rs.40
Marginal cost per unit Rs.24
Fixed cost per annum Rs. 16000
Calculate:
(a)P/V ratio (b) break even sales (c) sales to earn a profit of Rs. 2,000 (d) Profit
at sales of Rs. 60,000 (e) New break even sales, if price is reduced by 10%.
Q.2 From the following information's find out:
a. P/V Ratio
b. Sales &
c. Margin of Safety
Fixed Cost = Rs.40, 000
Profit = Rs. 20,000
B.E.P. = Rs. 80,000
Q.3 Bansi company manufactures a single product having a marginal cost of Rs. 1.50 per
unit. Fixed cost is Rs. 30,000 per annum. The market is such that up to 40,000 units can be
sold at a price of Rs. 3.00 per unit, but any additional sale must be made at Rs.2.00 per unit.
Company has a planned profit of Rs. 50,000. How many units must be made and sold?
Q.4 A manufacturer produces 1500 units of products annually. The marginal cost of each
product is Rs. 960 and the product is sold for Rs. 1200. Fixed cost incurred by the company is
Rs. 48, 000 annually. Calculate P/V Ratio and what would be the break ‐ even point in terms
of output and in terms of sales value?
Q.5 From the information given below, calculate P/V Ration, Fixed expenses, Expected profit
if sales is budgeted at Rs. 90, 000.
Year sales Profit
2004 1, 80, 000 30, 000
2005 2, 60, 000 50, 000

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BSSS-Institute of Advanced Studies

Teaching material (As per the syllabus)

 Accounting Concepts – The basic assumptions:

Accounting Conventions Outcomes of accounting practices over a period of

Note: Remaining Portion will be covered through with PPT

Q-3 Tally the Trial balance:

Particulars Amount Particulars Amount

BSSS-Institute of Advanced Studies

Note: Remaining Portion will be covered through with PPT

Particulars Dr. (Rs.) Cr. (Rs.)

BSSS-Institute of Advanced Studies

Teaching material (As per the syllabus)

 On the basis of Material Used

Vertical Analysis- Common Size Analysis

CASH FLOW STATEMENT

The significance of preparing a cash flow statement

The structure of a statement of cash flows

An operating activities section, an investment activities section, and a financial activities

Another essential component of investment activities is known as capital expenditure,

Fund Flow Statement

Objectives of Fund Flow Statement

Constituent parts of a statement of cash flows

The following items make up a fund flow statement:

The expenditure of funds on immovable assets

The expenditure of funds on current assets

The advantages of developing a fund flow plan Statement

Increase in working capital

Decrease in working capital

Users of the Funds Flow Statement

Note: Remaining Portion will be covered through with PPT

1285000 1547000 1285000 15470000

COMMON SIZE ANALYSIS

438000 808000 438000 808000

Total Capital and Current Liabilities 6,50,000

Q.5Preparing Balance Sheet through Ratio Analysis

The following additional information is obtained:

BSSS-Institute of Advanced Studies

Teaching material (As per the syllabus)

Another name for managerial accounting is management accounting. Managerial accounting

The significance of accounting for management

The primary purpose of managerial accounting is to offer assistance to a company's

3. Facilitates meaningful conversations by providing a medium for disseminating

4. Contributes to the accomplishment of goals: It assists in the transformation of

SCOPE OF MANAGERIAL ACCOUNTING

1. Managerial accounting is a reorganization of the information found in financial accounts,

Techniques in Managerial Accounting

Limitations of managerial accounting

Origin and History of Cost Accounting

Importance of Cost Accounting

1] The Different Types of Cost

An effective company places a primary emphasis on cost management, particularly in regard

3] The Process of Determining Prices

4] The Establishment of Standards

Importance of Cost Accounting to Others

The Significance of Cost Accounting to Workers in Other Departments: Accounting for

Reconciliation of Cost and Financial Accounts

Need and usefulness of Reconciliation

The underlying reasons for the disparity

Reference Links (Articles) :

25, 2018, 04.19 PM IST

4. Evaluation of Inventory management; J Nugra, Wiyarta, Y Kurniawan - ICIEB &#39;18

Proceedings of the 2018 International Conference on Internet and e-Business

Q. 2 From the following information., prepare cost sheet.

Q.1 From the following figures prepare a reconciliation statement: Rs.

4. Evaluation of Inventory management; J Nugra, Wiyarta, Y Kurniawan - ICIEB '18