Master of Business Administration - MBA Semester 1 Subject Code MB0041 Subject Name Financial and Management Accounting 4 Credits

(Book ID: B1130) Assignment Set- 1

Q1. Assure you have just started a Mobile store. You sell mobile sets and
currencies of Airtel, Vodaphone, Reliance and BSNL. Take five transactions and prepare a position statement after every transaction. Did you firm earn profit or incurred loss at the end? Make a small comment on your financial position at the end. Ans:

Q2. (a) List the accounting standards issued by ICAI. (b) Write short notes of IFRS. Ans: A) ICAI Accounting Standards To bring uniformity in terminology, accounting concepts, conventions, and assumptions, the Institute of Chartered Accountants of India (ICAI) established Accounting Standards Board (ASB) in 1977. An Accounting Standard is a selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. There are altogether 32 accounting standards issued by ASB out of which, one standard (AS8) has been withdrawn pursuant to AS26 becoming mandatory. Annexure 2 given at the end of this unit provides you the details of 32 Accounting Standards (AS).

ACCOUNTING STANDARDS
AS No

Title

Recommendary or Mandatory Mandatory Mandatory Mandatory

AS-1 AS-2 AS-3

Disclosure of Accounting Policies Valuation of Inventories Cash Flow Statement

Mandatory from accounting period beginning on or after 1.4.1991 1.4.1999 1.4.2000

b)
International Financial Reporting System: IFRS are standards, interpretations and framework for the preparation and presentation of financial statements. IFRS was framed by International Accounting Standards Board (IASB). The objective of financial statement is to provide information about the financial position, performance and changes in the financial position of an entity. It should also provide the current financial status of the entity to all the users of financial information. IFRS follows accrual basis of accounting and the financial statements are prepared on the basis that an entity will continue for the foreseeable future. IFRS helps entities access global capital market with ease. Under IFRS, we need to submit a statement of financial position (Balance Sheet), Comprehensive income statement (Profit & Loss/ Income and Expenditure account), either a statement of changes in equity or statement of recognized income or expenses, cash flow statement and notes including summary of significant accounting policies. Scope and functions of Accounting Standard Board The Accounting standards board (ASB) was constituted by The Institute of chartered Accountants of India on 21st April, 1977. The aim of the board was to bring in uniformity among various accounting policies and practices that were practiced in India. To determine the broad areas in which accounting standards need to be formulated and hold a dialogue with various representatives of the government, industry and other organization to ascertain their views. On the basis of the discussions they hold, the board prepares and issues a draft proposal for comments by the members of the Institute and the public. After modification (if any) in the draft proposal a final draft is submitted to the council of the institute. The accounting standard will then be issued under the authority of the Council. At present there are 30 accounting standards issued by the Council.

Q3. Prepare a Three-column Cash Book of M/s Thuglak & Co. from

The following particulars:

Ans:

Q4. Choose an Indian Company of your choice that has adopted Balance Score Card and detail on it. Ans:

Q5. From the following data of Jagdish Company prepare (a) a statement of source and uses of working capital (funds) (b) a schedule of changes in working capital

Adjustments: 1) Machinery worth Rs.70000 was purchased and worth Rs.10000 was sold during the year [Accumulated depreciation on machinery is Rs.18000 after adjusting depreciation on machinery sold]. Proceeds from the sale of machinery were Rs.6000 2) Dividends paid during the year Rs.11600 Ans:

Q6. What is a cash budget? How it is useful in managerial decision making? Ans: Cash Budget A proper control over cash is very essential. Cash is an important component in any activity. The control becomes inescapable. If cash is not properly managed or if it is mismanaged, the ultimate result would be disastrous. In many times and in many business situations, business failures are noticed due to the lacunae found in the cash management. Hence cash budgeting occupies a pivotal place in the study of Financial Management. Cash budgeting is the process of forecasting the expected receipts known as cash inflows, and expected payments known as cash outflows to meet the future obligations. The written statement of receipts and payments is known as the cash budget. It is a crystal ball which enables one to observe the future movements in cash position. It is a mere forecast of cash position of an undertaking for a definite period of time. The period may be daily, weekly, monthly, quarterly, semi-annually, or annually. The major two components of cash budget would be forecast first the cash receipts and then second forecasting the cash disbursements.

A proper control over cash is very essential. Cash is an important component in any activity. The control becomes inescapable. If cash is not properly managed or if it is mismanaged, the ultimate result would be disastrous. In many times and in many business situations, business failures are noticed due to the lacunae found in the cash management. Hence cash budgeting occupies a pivotal place in the study of Financial Management. Cash budgeting is the process of forecasting the expected receipts known as cash inflows, and expected payments known as cash outflows to meet the future obligations. The written statement of receipts and payments is known as the cash budget. It is a crystal ball which enables one to observe the future movements in cash position. It is a mere forecast of cash position of an undertaking for a definite period of time. The period may be daily, weekly, monthly, quarterly, semi-annually, or annually. The major two components of cash budget would be forecast first the cash receipts and then second forecasting the cash disbursements Decision making is the process of evaluating two or more alternatives leading to a final choice known as alternative choice decisions. Decision making is closely associated with planning for the future and isdirected towards a specific objective or goal. Decision model contains the following decision-making steps or elements: 1. Identify and define the problem 2. Identify alternative as possible solutions to the problem. 3. Eliminate alternatives that are clearly not feasible 4. Collect relevant data (costs and benefits) associated with each feasible alternative 5. Identify cost and benefits as relevant or irrelevant and eliminate irrelevant costs and benefits from consideration. 6. Identify to the extent possible, non-financial advantage and disadvantage about each feasible alternative. 7. Total the relevant cost and benefits for each alternative 8. Select the alternative with the greatest overall benefits to make a decision 9. Implement or execute the decision 10. Evaluate the results of the decision made. Types of Costs A decision involves selecting among various choices. Non routine types of decisions are crucial and critical to the firm as it involves huge investments and involve much uncertainty. Short term decision making is based on relevant data obtained from accounting information. Relevant Cost are costs which would change as a result of the decision. Opportunity costs are monetary benefits foregone for not pursuing the alternative course. When a decision to follow one course of action is made, the opportunity to pursue some other course is foregone. Sunk costs are historical cost that cannot be recovered in a given situation. These costs are irrelevant indecision making. Avoidable costs are costs that can be avoided in future as a result of managerial choice. It is also known as discretionary costs. These costs are relevant in decision making Incremental / Differential costs are costs that include variable costs and additional fixed costs resulting from a particular decision. They are helpful in finding out the profitability of increased output and give a better measure than the average cost.

After determining the various sources, the quantum of receipt should be estimated. Past analysis will help to identify the problem areas for effecting collection of cash. Illustration 1: A large retail stores makes 25% of its sales for cash and the balance on 30 days net. Due to faulty collection practice, there have been losses from bad debts to the extent of 1 % of credit sales on average in the past. The experience of the store tells that normally 60 % of credit sales are collected in the month following the sale, 25% in the second following month and 14 % in the third following month. Sales in the preceding three months have been January 2007 Rs.80,000, February Rs.1,00,000 and March Rs.1,40,000. Sales for the next three months are estimated as April Rs.1,50,000, May Rs.1,10,000 and June Rs.1,00,000. Prepare a schedule of projected cash collection. Statement of expected Cash Receipts
Collection form April Cash sales 37,500 Collection from Debtors : January 8,400 18,750 February 63,000 March April May Total 1,27,650 May 27,500 10,500 26,250 67,500 1,31,750 June 25,000 14,700 28,125 49,500 1,17,325

Working Notes: Details of Cash and Credit Sales Month wise

Details re: Credit Sales Month wise realization:

Forecasts of cash payments: The items of expenditures differ from business to business. The normal items which come under the lists are: 1. Cash purchases 2. Payment to creditors or suppliers 3. Payments to Bills payable

4. Payment to employees in the nature of wages, salaries 5. Manufacturing, selling and distribution and administration expenses 6. Repayments of bank load and special obligations such as bonus, donations, advances 7. Interest and dividend payments 8. Capital expenditures for acquiring assets of enduring benefit 9. payment of tax liability 10. other expenses of periodic nature The quantum of amount likely to be spend on the above each item is generally determined with reference to functional budgets of the concerns. The policy of the management will also play a crucial role. It is the policy which determines the ratio of cash purchases and credit purchases. In many cases, the time lag affects the amount of expenditures to be incurred in a particular period. The formula adopted for the expenses payable in next month is : months amount x time lag.

Essential Features of Budgetary Control

An effective budgeting system should have essential features to get best results. In this direction, the following may be considered as essential features of an effective budgeting. Business Policies defined: The top management of an organization strives to have an action plan for every activity and for each department. Every budget should reflect the business policies formulated from time to time. The policies should be precise and the same must be clearly defined. No ambiguity should enter the document. Clear knowledge should be provided to all the personnel concerned who are going to execute the policies. Periodic suggestions should be called for. Forecasting: Business forecasts are the foundation of budgets. Time and again discussions should be arranged to derive the most profitable combinations of forecasts. Better results can be anticipated based on the sound forecasts. As far as possible, quantitative techniques should be made use of while forecasting Formation of Budget Committee: A budget committee is a group of representatives of various important departments in an organization. The functions of committee should be specified clearly. The committee plays a vital role in the preparation and execution of budget estimated. It brings coordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair. Accounting System: To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time to time Organizational efficiency: To make the budget preparation and its subsequent implementation a success, an efficient, adequate and best organization is necessary a budgeting system should always be supported by a sound organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must also be a delegation of authority from top to bottom line. Management Philosophy: Every management should set a healthy philosophy while opting for the budget. Management must wholeheartedly support the activities which developing a budget. Encouragement should flow from top management. All the members must be involved to make it a workable preposition and a dream-driven document. Reporting system: Proper feedback system should be established. Provision should be made for corrective measures whenever comparative measures are proposed.

Availability of statistical information: Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data should be made available to each department. Motivation: Since budget acts as a mirror, the entire organization should become smart in its approach. Every employees both executive and non-executives should be made part of the overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organization.

Master of Business Administration - MBA Semester 1 Subject Code MB0041 Subject Name Financial and Management Accounting 4 Credits
(Book ID: B1130) Assignment Set- 2

Q1. Selected financial information about Vijay merchant company is given below:

Ans: Gross profit ratio = gross profit/net saleas*100 = 200000/1200000*100 =16.67 % Net profit ratio = net profit ratio after tax/net saleas*100 =80000/1200000*100 =6.67% =SALEAS- GROSS PROFIT =1200000-200000 =1000000 =cogs+operating expenses/net saleas *100 =1000000+100000+80000/1200000*100 =98.33%

COGS

Operatin ratio

Operating profit ratio =100-98.33% =1.67% Expenses ratio =operatingexpenses/netsaleas*100 =180000/1200000*100 =15.00%

Q2. Explain different methods of costing. Your answer should be studded with examples (preferably firm name and product) for each method of costing. Ans: cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company's costs and improve profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically. Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the supply chain(the series of events in the production process that, in concert, result in a product) into financial values. Classification of costs Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are: By nature or element: materials, labor, expenses By functions: production, selling, distribution, administration, R&D, development. By traceability: direct and indirect By variability: fixed, variable, semi-variable By controllability: controllable, uncontrollable By normality: normal, abnormal Standard cost accounting In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company's fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP(Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. For example: if the railway coach company normally produced 40coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000 / 40).Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach. The development of throughput accounting As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came under question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that "every production process has a limiting factor" somewhere in the chain of production. As business management learned to identify the constraints, they increasingly adopted throughput accounting to manage them and" maximize the throughput dollars" (or other currency) from each unit of constrained resource. For example: The railway coach company was offered a contract to make 15 open-topped streetcars each month, using a design that included ornate brass foundry work, but very little of the metalwork needed to produce a covered rail coach. The buyer offered to pay$280 per streetcar. The company had a firm order for 40 rail coaches each month for $350 per unit. The

company accountant determined that the cost of operating the foundry vs. the metalwork shop each month was as follows:

Marginal costing This method is used particularly for short-term decision-making. Its principal tenets are: Revenue (per product) variable costs (per product) =contribution (per product) Total contribution total fixed costs = (total profit or total loss)Thus, it does not attempt to allocate fixed costs in an arbitrary manner to different products. The short-term objective is to maximize contribution per unit. If constraints exist on resources, then Managerial Accounting dictates that marginal cost analysis be employed to maximize contribution per unit of the constrained resource Lean accounting Lean accounting has developed in recent years to provide the accounting, control and measurement methods supporting manufacturing and other applications of lean thinking such as healthcare, construction, insurance, banking, education, government, and other industries. There are two main thrusts for Lean Accounting. The first is the application of lean methods to the company's accounting, control, and measurement processes. This is not different from applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors & defects, and make the process clear and understandable. The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they motivate lean change & improvement, provide information that is suitable for control and decisionmaking, provide an understanding of customer value, correctly assess the financial impact of lean improvement ,and are themselves simple, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activitybased costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports. These are replaced by: lean- focused performance measurements simple summary direct costing of the value streams decision-making and reporting using a box score financial reports that are timely and presented in "plain English" that everyone can understand radical simplification and elimination of transactional control systems by eliminating the need for them driving lean changes from a deep understanding of the value created for the customers eliminating traditional budgeting through monthly sales, operations, and financial planning processes (SOFP) value-based pricing correct understanding of the financial impact of lean change

Q3. State the importance of differentiating between the fixed costs and variable costs in managerial decision. Ans: Fixed Cost: It is a cost which does not change in total for a given time period despite wide fluctuation in output or volume of activity. These costs are also known as standby costs, capacity costs or period costs. Eg. Rent, property taxes, supervising salaries, depreciation of office facilities, advertising and insurance. Example: The production volume and Fixed costs

Fixed costs will not change over a wide range of volume. They will fluctuate before and beyond that range.

Classification of Fixed Cost: Committed cost: Such costs are primarily incurred to maintain the companys facilities and physical existence and over which management has little or no discretion. Depreciation on P&M, taxes, insurance rent etc are the examples. Managed cost: They relate to the current operations which must continue to be paid to ensure the continued operating existence of the company. eg Staff and management salaries. Discretionary cost: They are also known as programmed cost which is incurred due to special policy decision, mgt program, new research or new system development. Step Cost: This cost is constant for a given amount of output and then increases in a fixed amount at a higher output level. One supervisor is required at a salary of Rs.10000 pm for every 50 workers. The cost of supervisor salary increases to Rs.20000 on employing 51st worker.

Variable Cost:
Variable costs are costs that vary directly and proportionately with the output. There is a constant ratio between the change in the cost and the change in the level of output. Eg. Direct material and Direct labour and Variable overheads (factory supplies, indirect materials, sales commission, office supplies)If the factory is shut down, variable costs are eliminated.

Significance & Objective of Costing It aims to serve the information needs of management for planning, control and decision making. It helps to determine product cost. They are important in inventory valuation, decision regarding pricing of the product. It facilitates planning and control of regular business activities. Different alternative plans are evaluated in terms of respective cost and
associated benefits. In control process the data generated can be compared with budgets and estimates. It supplies information for short term and long term decisions. These decisions involve whether to develop new products, when to enter which market etc.

Q4. Following are the extracts from the trial balance of a firm as at 31st March 2009 Name of the Dr Cr account Sundry debtors 2,05,000 Bad debts 3,000 Additional Information 1) After preparing the trial balance, it is learnt that Mr.X a debtor has become insolvent and nothing could be recovered from him and, therefore the entire amount of Rs.5,000 due from him was irrecoverable. 2) Create 10% provision for doubtful debt. Required: Pass the necessary journal entries and show the sundry debtors account, bad debts account, provision for doubtful debts account, P&L a/c and Balance sheet as at 31st March 2009. Ans:

Q5. A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in investment in accounts receivable. Based upon this information, the companys (select the best one and give reason) 1) Average collection period has decreased 2) Percentage discount offered has decreased 3) Accounts receivable turnover has decreased

4) Working Capital has increased. Ans: The effects of change in the credit policy are:

An increase in sales An increase in discount taken A decrease in bad debts A decrease in account receivables.

Now we have to find out the appropriate cause: First no.4 Working capital has increased. An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities. It means the firm, has increased its investment in account receivables or debtors. But it is not satisfying the no.4 effect which is a decrease in account receivables. Then no.3 Account receivable turnover has decreased. Account receivable turnover is also known as debtor turnover ratio. A higher debtor turnover ratio indicates more efficient management of debtors/ sales or more liquid debtors. Similarly lower debtor turnover ratio indicates inefficient management of debtors/ sales and less liquid debtors. If debtor turnover ratio has been decreased and debtors are less liquid then bad debt will increase. But it is not satisfying no. 3 effect which is a decrease in bad debt. Then no.2 Percentage discount offered has decreased. Firms offer cash discounts to induce their customers to make prompt payments. Cash discounts have implications on sales volume, average collection period, investment in receivables, incidence of bad debts and profits. Providing a small cash discount would be beneficial for the seller as it would allow him to have access to the cash sooner. The sooner a seller receives the cash, the earlier he can put the money back into the business to buy more supplies and/or grow the company further. Here the firm is providing lower discounts to the customers. By doing this the firm can recover the cash sooner, thereby reducing the chances of bad debts. By providing cash discounts it can induce the buyers. Hence thereby it increases sales volume. Cash discount induces the buyer for prompt payment, so there is less chance of credit sales and decrease in account receivables. Also the cash discount enables the customer to buy at a lesser price. So they pay immediately to avail discounted price. Thus it increases the amount of discount taken. So this reason is appropriate for all the outcomes of the change in the credit policy. Then no.1 Average collection period has decreased. The average collection period represents the number of days for which a firm has to wait before its receivables are converted in to cash. It measures the quality of debtors. Generally, the shorter the average collection period the better is the quality of the debtors as a short collection period implies quick payments by debtors. Similarly, a higher collection period implies as inefficient collection performance which in turn adversely affect the liquidity or short term paying capacity of the firm out of its current liabilities. As noted above shorter collection period results in more liquid debtors who make quick payments, thereby reducing the chances of bad debts. If the firm is providing more discounts then more consumers will be attracted, thereby increasing the sales. If the debtors are more liquid, then there will be an obvious reduction in the account receivables. However, this reason is more appropriate than the previous one, for all the outcomes of the change in the credit policy.

Q6. Identify the users of accounting information. Ans: Users of Accounting Information Accounting reports are designed to meet the common information needs of most decision makers. These decisions include when to buy, hold or sell the enterprise shares. It assesses the ability of the enterprise to pay its employees, determine distributable profits and regulate the activities of the enterprise. Investors and lenders are the most obvious users of accounting information. a) Investors: Investors may be broadly classified as retail investors, high net worth individuals, Institutional investors both domestic and foreign. As chief provider of risk capital, investors are keen to know both the return from their investments and the associated risk. Potential investors need information to judge prospects for their investments. b) Lenders: Banks, Financial Institutions and debenture holders are the main lenders and they need information about the financial stability of the borrower enterprise. They are interested in information that would enable them to determine whether their borrower has the capability to repay the loans along with the interest due on it. They also use the information for monitoring the financial condition of the borrowers. They may stipulate certain restrictions (known as covenants) such as upper limit on the total debt borrowed from all sources or ask for additional security etc. Short term lenders (trade creditors) who provide short term financial support need information to determine whether the amount owing to them will be paid when due and whether they should extend, maintain or restrict the flow of credit. c) Regulators, Rating Agencies and Security Analyst: Investors and creditors seek the assistance of information specialist in assessing prospective returns. Equity analyst, bond analyst and credit rating agencies offer a wide range of information in the form of answering queries on television shows, providing trends in business newspapers on a particular stock, offer valuable information in seminars, discussion groups, meetings and interviews. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials, visit their premises and make constant enquiry using e-mails, teleconference and video conference. Firms build a good rapport with such type of information seekers to gain visibility in the market. d) Management: Management needs information to review the firms short term solvency and long term solvency. It has to ensure effective utilization of its resources, profitability in terms of turnover and investment. It has to decide upon the course of action to be taken in future. Management may also be interested in acquiring other business which is undervalued. When managers receive a commission or bonus related to profit or other accounting measures, they have a natural interest in understanding how those numbers are computed. Further when faced with a hostile takeover attempt, they communicate additional financial information with a view to boosting the firms stock price. e) Employees, Trade Union and Tax authorities: Employees are keen to know about the general health of the organization in terms of stability and profitability. Current employees have a natural interest in the financial condition of the firm as their compensation will depend on the financial performance of the firm. Potential employees may use financial information to find out the future prospects of the firm. Trade unions use financial reports for negotiating wage package, declaration of bonus and other benefits. Tax authorities need information to assess the tax liability of the firm.

f) Customers: Customers have an interest in the accounting information about the continuation of company especially when they have established a long term involvement with or are dependent on the company. For Eg. Car owners, buyers of white goods, electronic gadgets, depend on the manufacturer for warranty service support, continued supply of spare parts. The sales of Matiz car was badly affected due to the abrupt closure of Daewoo Motors. g) Government and regulatory agencies: Government and the regulatory agencies require information to obtain timely and correct information, to regulate the activities of the enterprise if any. They seek information when tax laws need to be amended, to provide institutional support to the lagging industries. The regulatory agencies use financial reports to take action against the firm when appropriate returns are not filed in time or when the returns fails to provide true and fair position of the business or to take appropriate action against the firm when complaints / misappropriation are being lodged. Stock exchange has a legitimate interest in financial reports of publicly held enterprise to ensure efficient operation of capital market. h) The Public: Every firm has a social responsibility. Firms depend on local economy to meet their varied needs. They may get patronage from local government in the form of capital subsidy, cheap land or tax sops in the form of tax holidays for certain period of time. Prosperity of the enterprise may lead to prosperity of the economy both directly and indirectly. Growth in software industry in Bangalore, Karnataka State, led to boom in housing sector, education sector, entertainment sector, travel sector and tourism sector in and around Bangalore. Published financial statement assist public by providing information about the trends and recent developments of the firm.