Name: Rajat Chowdhry Roll Number: 520810922 Learning Center: 2017 Subject Code: BC0044 Subject: Accounting and

Assignment No.: 2 Financial Management Course: Bachelor Of Computer Application (II Semester) Date of Submission at the Learning Center: 8th Dec, 2009

Ques. 1

What are the basic accounting concepts? Explain their implications.

Ans. A renowned accountant once observed that ‘Accounting was born without notice and reared in neglect’ Accounting was first practiced and then theorized. Certain ground rules were initially set for financial accounting: these rules arose out of conventions. Therefore, these are called accounting conventions or concepts. We shall discuss here only the basic accounting conventions or concepts that are very vital to understand the process of accounting Money Measurement Concept Each transaction and event must be expressible in monetary terms. If an event cannot be expressed in monetary terms, then cannot be considered for accounting purposes. For Example, if you successfully pass a distance-learning Programme of a university, it will give you a great deal of satisfaction. But that satisfaction cannot be expressed in monetary terms. Hence such an event is not fit for accounting .on the other hand, if you are robbed of Rs.1000 in a train journey, the loss suffered can definitely be expressed in monetary terms. This concept implies that the legal currency of a country should be used for such measurement. The Cost Concept Assets such as land, buildings, plant and machinery etc. and obligations, such as loans, public deposits, should be recorded at historical cost (i.e., cost as on acquisition). For example, the land purchased by a business entity two years back at a cost of Rs.10 lakh should be shown, as per the cost concept, at the same amount even today when the current price of the land may have increased five-fold. Thus, the greatest limitation of this concept is that it distorts the true worth of an asset by sticking to the original cost. The Going Concern Concept One common argument put forward by the proponents of cost concept is that the assents are shown at its original cost because these are meant for use for a long period of time and not for immediate resale. Therefore, the cost concept rests on the assumption that an entity would continue its operation for a long time. An entity is said to be a going concern if it has ‘neither the intention nor the necessity of the liquidation or of curtailing materially the scale of the operations’ this concept is considered as one of the fundamental accounting assumptions. The Valuation principle of assets and liabilities depend on this concept. If an entity is not a going concern, its assets and liabilities are to be valued in an altogether different manner. The Matching Concept The Internet concept involved in accrual accounting is called matching concept. Revenue earned in an accounting year is offset (matched) with all the expenses incurred during the same period to generate that revenue, thus providing a measure of the overall profitability of the economic activity. Thus, matching concept is very vital to measure of the financial results of a business. The timing of incurring expenses and earning revenues does not always match. For example, In case of a seasonal business majority of sales may take place only in four months of a year whereas fixed expenses like salaries, rent etc. are incurred throughout the year. Concept of prudence It says ‘Anticipate no profits but provide for all possible losses’. Prudence is the ‘Inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such that assets or income are not, overstated and liabilities or expenses are not understated’. Expected losses should be accounted for but not anticipated gains.

Ques. 2 Ans.

Explain various techniques of inventory management The various techniques of inventory management

ABC system Monitoring a large number and types of types of inventory becomes very difficult in a big company given the amount involved. In such cases, ABC analysis enables the management to monitor the stocks in a proper manner. It is neither required nor desirable for firms to keep the same degree of control on all the items of stock. Items of high value command maximum attention while low value items do not require much control. The firm therefore classifies inventories into three different categories– A group – items with high value come under this classification and they involve the largest investment and high attention. Rigorous, sophisticated and intensive control measures are used for such item monitoring. Items under the C group represent least value items needing simple control techniques and less attention although the number of items in this group is fairly large. The B group stands midway. They are neither too expensive nor very cheap. These items require reasonable attention. The ABC analysis concentrates on important items is therefore known as “Control by importance and exception”. It is also known as proportional value analysis as items are classified according to the importance of their value. Economic order quantity (EOQ) Economic order quantity refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage. Answers to questions such as: What should be the quantity ordered for each replenishment of stock, how many orders should be placed to get the raw materials or should the entire requirement be procured once or in installments and if installments, how many of them – these are sought to be explained by the EOQ model. The optimum level of inventory is referred to as the Economic Order Quantity. It is that level one unit beyond which is additional cost to the firm and one unit below may hamper production process. The model is based on the following assumption; nevertheless, it is the most widely used technique in inventory control.

Ques. 3 “Efficient cash management will aim at maximizing the availability of cash inflows by decentralizing collections and decelerating cash outflows by centralizing disbursements” Discuss. Ans. Cash is the most important current asset for a business operation. It is the force that drivers business activities and also the ultimate output expected by the owners. The firm should keep sufficient cash at all times. Excessive cash will not contribute to the firm ‘s profits and storage of cash will disrupt its manufacturing operations the term ‘cash’ can be used in two senses in a narrow sense it means the currency and other cash equivalents such as cheques, drafts and demand deposits in banks. In a broader sense it includes near cash assets like marketable securities and times deposits in banks. The distinguishing nature of this king of assets is that they can be converted into cash very quickly. Cash in its own form is an idle asset. Unless employed in some form or another, it does not earn any revenue. Cash management is concerned with (A) management of cash flow into and out of the firm, (B) cash management within the firm and (C) management of cash balances held by the firm – deficit financing or investing surplus cash. Cash management tries to accomplish at a minimum cost the various tasks of the various tasks of cash collection, payment of outstanding s and arranging for deficit funding or surplus investment. It is very difficult to predict cash flow s accurately. Generally, there is no correlation between inflows and outflows s at some points of times, cash inflows. At some points of some points of time, cash inflows because of the seasonal nature of product sale thus prompting the firm to resort to borrowing and sometimes outflows may be lesser than inflows resulting in surplus cash. There is always an element of uncertainty about the inflows and outflows. The firm should therefore evolve strategies to manage cash in the best possible way. These can be broadly summarized as:

• Cash planning: cash flows should be appropriately planned to avoid excessive or shortage of cash. Cash budgets can be prepared to aid this activity. • Managing cash flows: the flow of cash should be properly managed steps to speed up cash collection and inflows should be implemented while cash outflows should be slowed down. • Optimum cash level: the firm should decide on the appropriate level of cash balance. Balance should be stuck between excess cash and cash deficient stage. • Investing surplus cash: The surplus cash should be properly invested to earn profits. Many in very investment and avenues to invest surplus cash are available in the market such as bank short term deposits, T-bills, inter corporate lending etc. The ideal cash management system will depend on a number of issues like, firm’s product, competition, and collection program delay in payments availability of cash at low rates of interests and investment opportunities available. Objectives of cash management This can be studied under two heads: (A) meeting payments schedule and (B) minimize funds committed to cash balances Meeting payments schedule: in the normal cause of functioning, a firm will have to its employees, suppliers, infrastructure bills, etc. it will also receive cash through sale of its products and collection of receivables. Both these do not happen simultaneously. A basic objective of cash management is therefore to meet the payment schedule in time. Timely payment will help the firm to maintain its creditworthiness in the market and to foster good and cordial relationships with creditors and suppliers. Creditors give a cash discount if payments are made in time and the firm can avail the discount as well. Trade credit refers to the credit extended by the supplier of goods and services in the normal cause of business transactions. Generally, cash is not paid immediately for purchases but after an agreed period of time. There is deferral of payment and is a source of finance trade credit does not involve explicit interest charges, but there is an implicit cost involved. Minimize funds committed to cash balances Trying to achieve the second objective is very difficult. A high level of cash will help the firm to meet its first objective discussed above, but keeping excess reserves is also not desirable as funds in its original form is idle cash and a non-earning asset. It is not profitable for firms to keep huge balances. A low level of cash balances may mean failure to meet the payment schedule. The aim of cash management is therefore to have an optimal level of cash by bringing about a proper synchronization of inflows and outflows and check the spells of cash deficits and cash surpluses. Seasonal industries are classic examples of mismatches between inflows and outflows.

Ques.4

Enter the following transactions in a cashbook with cash, bank and discount columns. 2008 Jan.1 Jan.2 Jan.3 Jan.4 Jan.5 Jan.10 Jan.11 Jan.15 Jan.20 Jan.25 Jan.26 Jan.27 Jan.29 Jan.31 Commenced business with Rs.16,000 in cash Paid into bank Rs. 14,500 Bought goods for Rs. 3,850 and paid by cheque. Bought furniture for cash Rs. 680 Sold goods for cash Rs. 2,600 and deposited the same into bank. Bought goods for Rs. 4,850 and paid by cheque. Bought stationery for Rs. 185 Received cash from Hedge Rs.680 allowing him a discount of Rs. 20 Paid Raj his dues by cheque Rs. 240 receiving a discount of Rs.10 Paid Chandra by cheque Rs. 400 Sold goods for cash Rs. 585 and remitted the same into the bank. Our cheque to Chandra returned dishonored. Drew cheque for salary Rs. 2,365 Drew cheque for personal use Rs 100

Ans.

Ques.5

Adyta Mills Ltd. furnishes the following financial information for the current year: Balance Sheet as on 31-3-2008 Liabilities Amount Assets Equity Share Capital 1000000 Plant & Equipment Retained Earnings 368000 Land & Buildings Sundry Creditors 104000 Cash Bills Payable 200000 Sundry Debtors Other Current Liabilities 20000 Stock Prepaid Insurance 1692000 Income statement as on 31-3-2008 Sales 4000000 Less: Cost of Goods Sold 3080000 Gross Profit 920000 Less: Operating Expenses 680000 Operating Profit 240000 Less: Taxes (0.35) 84000 Net Profit after taxes 156000 Amount 640000 80000 160000 320000 480000 12000 1692000

Calculate: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Current ratio Acid-Test ratio Stock Turnover Ratio Debtors Turnover Ratio Creditors Turnover ratio Gross Profit Ratio Net Profit Ratio Return on equity capital

Ans.

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