Master of Business Administration- MBA Semester 1 MB0041 Financial Management & Accounting - 4 Credits Assignment Set- 2 (60 Marks)

) Note: Each question carries 10 Marks. Answer all the questions.

1. Uncertainties inevitably surround many transactions. This should be recognized by exercising prudence in preparing financial statement. Explain this concept with the help of an example. The last concept is about prudence or otherwise known as conservatism. It is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty. Its purpose is to avoid the instances of overstatement of assets or income and understatement of liabilities or expenses. Although the said practice does not allow the creation of hidden reserves or the exercise of provisions, the deliberate understatement of assets or income, nor the deliberate overstatement of liabilities or expenses. Otherwise, it lacks the quality of reliability due to the lack of neutrality of the financial statements. The preparers of financial statements need to assume the presence of inevitable uncertainties that surround many events and circumstances. Examples of which are the collectivity of doubtful receivables, the probable useful life of plant and equipment, as well as the number of warranty claims that may occur. Such uncertainties are recognized by the disclosure of their nature and extent, as well as through the exercise of prudence in the preparation of financial statements. The four different non-management stakeholder groups interested in the financial statements of an enterprise are the institutional shareholders (investors or owners), the debt holders (also known as bondholders), the government, and the employees. The shareholders/debt holders are among the major recipients of the financial statements of corporations. They range from individuals with relatively limited resources to large, well-endowed institutions such as insurance companies and mutual funds. The decision made by these parties includes shares to buy, retain, or sell, and the timing of the purchase or sale of those shares. Typically, their decisions have a focus either on investment or on stewardship, although in some cases, it is both. If the emphasis is on the choice of a portfolio of securities that is consistent with the preferences of the investor for risk, return, dividend yield, liquidity and so on, it is said to be investment focus. Otherwise, it is stewardship focus. The required information for this choice varies significantly.

Consider approaches that intend to detect the improper pricing of securities by a fundamental analysis approach compared to a technical analysis approach. The former approach examines firm, industry and economy related information, where financial statements play a major role. An important aspect is the prediction of the timing, amounts, and uncertainties of the firms future cash flows. In contrast, it is through the examination of the movement in security prices, security trading volume, and other related variables that the technical analysis is able to detect the improper pricing of securities. Typically, financial statement information is not examined in this approach. When predicting the timing, amounts, and uncertainties of the firms future cash flows, the past record of management in relation to the resources under its control can be an important variable. The analysis undertaken for decisions by shareholders and investors can be done by those parties themselves or by intermediaries such as security analysts and investment advisors. Employees, on the other hand, are motivated by numerous factors. They might have a vested interest in the continued profitability of their firms operations. Therefore, financial statements for them serve as an important source of information regarding the possible profitability and solvency of their company at present, as well as in the future. They may also need them in monitoring the viability of their pension plans. The demand of the government or regulatory agencies can arise in a diverse set of areas. These include revenue raising (for income tax, sales tax, or value-added tax collection), government contracting (for reimbursing suppliers paid on a cost-plus basis or for monitoring whether the companies engaged in government business are earning excess profits), rate determination (deciding the allowable rate of return that an electric utility can earn), and regulatory intervention (determining whether to provide a governmentbacked loan agreement to a financially distressed firm. However, due to the diverse interest of the said individuals to the information contained in the financial statements, conflicts may arise. For the shareholders/debt holders, the interest of these parties lies in the fact that the money invested in the firm is their own money. They would like to ensure that they are getting a good return on their investment. This is measured by looking at how much profit the firm is making and whether their investment is increasing in value. For shareholders in companies, this means they will get good dividends and the market value of their shares will increase. They can also make capital gains, in case these shares will be sold. For the employees, they are part of the organization. As a part of the organization, they also feel that their efforts contributed to the profitability of the firm. They would therefore be delighted if they will be given incentives to their participation to the companys achievement. They might prefer to be given bonuses, salary increases, and other form of monetary benefits. They might also prefer given stock options or promotions, depending on the discretion of both parties. However, for the firms part, it

means increases in the expenses of the firm. For the government, various ministries and departments have different interest in the firms ability to pay taxes. They also see and review the enactment of laws for the industry and the provision of social services to the public. The government may also want to ensure that the firm complies with laws on, for example, wage payments and employee benefits. These are for their benefit, as well as the benefit of the society as a whole.

2. A. When is the change in accounting policy recommended and what are the disclosure requirements regarding the change in accounting policy? Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item shall be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making the judgement management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. To ensure proper understanding of financial statements, it is necessary that all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements. It would be helpful to the reader of financial statements if they are all disclosed as such in one place instead of

being scattered over several statements, schedules and notes. Examples of matters in respect of which disclosure of accounting policies adopted will be required are contained in paragraph 14. This list of examples is not, however, intended to be exhaustive. Any change in an accounting policy which has amaterial effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted. Disclosure of accounting policies or of changes therein cannot remedy a wrong or inappropriate treatment of the item in the accounts. B. Explain IFRS. International Financial Reporting Standards (IFRS) are Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS. IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. International Financial Reporting Standards comprise: International Financial Reporting Standards (IFRS) - standards issued after 2001 International Accounting Standards (IAS) - standards issued before 2001 Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001 Standing Interpretations Committee (SIC) - issued before 2001 Framework for the Preparation and Presentation of Financial Statements IAS 8 Par. 11 "In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in Standards and Interpretations dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework."

3. Journalise the following transactions: 01.01.09 02.01.09 03.01.09 04.01.09 05.01.09 06.01.09 07.01.09 Bought goods for Rs.10,000 Purchased goods from X Rs.20,000 Bought goods from Y for Rs.30,000 against a current dated cheque Purchased goods from Z [price list price is Rs.30,000 and trade discount is 10%] Bought goods of the list price of Rs.1,25,000 from M less 20% trade discount and 2% cash discount. Paid 40% of the amount by cheque Returned 10% of the goods supplied by X Returned 10% of the goods supplied by Y

Solution 01.01.09 02.01.09 03.01.09 04.01.09

Purchases A/c. Dr 10,000.00 Cash / Bank A/c. Cr Purchases A/c. Dr 20,000.00 Xs A/c. Cr Purchases A/c. Dr 30,000.00 Bank A/c. Cr Purchases A/c. Dr Rs 30,000 Zs A/c. Cr Trade Discount A/c. Cr

10,000.00 20,000.00 30,000.00 27000.00 3000.00

05.01.09

06.01.09 07.01.09

Purchases Dr 1,25,000 Ms A/c. 58,800 Bank A/c. 39,200 Trade Disc 25,000 Cash Disc 2,000 Xs A/c. Dr 2,000 Purchase Returns A/c. Dr 2,000 Ys A/c. Dr 3,000 Purchase Returns A/c. Dr 3,000

4. Bring out the difference between Funds Flow Statement and Cash Flow Statement. Mention up to what point in time they are similar and from where the differences begin.

Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period. Methods of cash flow: 1.Direct Method : presenting information in Statement of A. operating Activities B. Investment Activities C.Financial Activities 2.Indirect Method :uses net income as base & make adjustments to that income(cash & non-cash)transactions. Funds Flow Statement :Statement showing the source & application of funds during the period. Major Difference: The Cash Flow Statement allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. Fund Flow Statement is showing the fund for the future activites of the Company. The main differences are as follows:
1. A cash flow statement is concerned only with the change in cash position while a

fund flow analysis/statement is concerned the change in working capital position improvement in funds position but the reverse is not true.

2. Cash is part of working capital and an improvement in cash position results in

3. A cash flow statement is merely a record of cash receipts and disbursements. It does not reveal any important changes involving the utilization/disposition of resources.

5. A. Determine the sales of a firm with the following financial data Current Ratio 1.5 Acid test ratio 1.2 Current Liabilities 8,00,000 Inventory Turnover ratio 5 times Sol.

current Ratio =

Current Assets Current Liabilities

= 1.5 =

Current Assets 800, 000

= 1.5 x 800,000 = C.A Current Assets = 1,200,000

Current Assets Stock Current Liablities 1, 200, 000 Stock = 1.2 = 800, 000
= Acid Test Ratio =

= 1.2 x 800,000 = 1200, 000 Stock Stock = 240,000 Average Stock = 1,20,000 = Stock Turnover Ratio =

Cost of Goods Sold Average Stock

= 5=

Sales - Gross Profit 1, 20, 000

Sales = 600,000

B. What is Du-Pont chart? DuPont Chart calculates the key components of any business for easy evaluation of performance. Income Statement Sales

Other Income

Gross Profit

COGS

Earnings before interest & taxes (EBIT)

EBIT

EBIT on Assets

G&A

Operating Expenses

Net Profit

Total Assets

Interest Paid

Sales

Depreciation

Profit Margin

Taxes

Other Expense

Return on Equity

Assets

Cash

Receivables

Sales Fixed Assets

Assets Turnover

Inventory

Total Assets

Other Assets

Current Assets

Working Capital

Current Liabilities

Liabilities & Equity Payables

Current Liabilities

Notes Payables

Total Liabilities

Other Liability

NonCurrent Liabilities

Total

Leverage

Capital

Ending Net Worth

Beginning Net Worth

Retained Earnings

6. From the following data calculate the: 1. Break-even point expressed in terms of sale amount/revenue 2. Number of units that must be sold to earn a profit of Rs.60,000 per year

Sales Price - Variable Cost Contribution

Sales price (per unit) Variable manufacturing cost per unit Variable selling cost per unit Fixed factory overheads (per year) Fixed selling cost (per year) = 20 = 14 =6

Rs.20 Rs.11 Rs.3 5,40,000 2,52,000

Contribution Sales 6 100 = 30% = P /V = 20 P /V = Break Even Point = 79,2000 30% Fixed Cost P / V Ratio

BEP = 2,640,000

Sales in Unit at Desired Profit = 79,2000 + 60,000 30% 2,84,0000 = 20 =

= 1,42,000 Units

Fixed Cost + Desired Profit P / V Ratio