Management Accounting I

July-October 2021
BMJ Term 1
Tuesday
(6 - 7pm)
debarati@xlri.ac.in
 Cash Conversion Cycle
Cash

Sales Purchases
(Receivables) (Payables)

Inventories
• Carrying costs vs Shortage costs
• Purchase discounts vs Sales discounts
• Credit period
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 Example
87 + 5 + 45 = 137 days
Cash 30 days
137 – 30 = 107 days 45 days

Sales Purchases
(Receivables) (Payables)

5 days 87 days
Inventories

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 Need Cash Now!
• Pledging

 Using receivables as security for loan

• Assignment

 Formal transfer of receivables to lender

• Factoring

 Transfer of receivables without recourse

Basu, XLRI
 Problems Discussion
• 7.6

• 7.11

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Long-term Assets
 Fixed Assets
• Purpose: Held for business and not for sale

 Dell and Dell computers

 Mahindra & Mahindra, Blazo X and Thar

• Also called Non-Current, Long-term or Long-lived Assets

 Property, Plant and Equipment (PPE)

 Intangible Assets (eg: Patents, Licenses, Brands, Franchises)
 Natural Resources (eg: Oil, Minerals, Forests)

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 Property, Plant and Equipment
• Cost of Acquisition

 Net Purchase Price (including taxes* and discounts)

 Directly attributable costs

• Freight, installation, stamp duty, testing, fees, transit insurance

• Repair cost of parts damaged during shipping?

• Capital vs Revenue Expense

 Avoidable / abnormal costs not capitalized

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 6.2

• Special Cases: Basket purchases, Self-constructed and donated assets, Components

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 Depreciation
• Estimates:

 Residual value

• Amount realisable at disposal – costs of disposal

 Useful life (years or units)

• Useful life vs physical life

• Depreciable value = cost – residual value

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 Depreciation Methods
• Straight line (SLM)
Cost – Residual Value
• Accelerated Useful Life

 Written-Down-Value (WDV)
1 – n Residual Value
Cost
 Sum-of-the-years’-digits
(Cost – Residual Value) x Remaining Useful Life
• Production units 1 + 2 + 3….+ Useful Life
Units Used
Useful Life in Units
• Which one do we use?

 Pros and Cons

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 Test!
• Machinery purchased for 1,00,000 on 1st October 2013

• Residual value 10,000; Useful life 4 years

• Depreciation on 31st March 2014 if using SLM?

• On 1st April 2016, major repairs of 25,000 undertaken

• Residual value now 8,750; Earlier useful life extended by another 2.5 years

• Depreciation & Accumulated Depreciation on 31st March 2017 if using SLM?

Basu, XLRI
 Asset Disposal
• On 1st April 2019,

 Option 1: Machinery discarded / abandoned

 Option 2: Machine held for sale

• Carrying amount vs Net Realisable Value (20,000)

 Option 3: Machinery sold; residual value realised

 Option 4: Machinery sold for 32,000
 Option 5: Machinery exchanged; 50,000 paid for a different one valued at 80,000
similar
Basu, XLRI
Questions for Next Class
6.24

Basu, XLRI
6.22

Basu, XLRI