Anish Abraham Registration No: 541111322

MBA Semester 1 MB0041- Financial and Management Accounting 4 Credits (Book ID: B1130) Assignment Set- 2 (60 Marks)

Q.1

Selected financial information about Vijay merchant company is given below: 2010 2009 69,000 57,000 7,200 11,400 1,500 4,000 16,000 43,000 32,500 3,000 5,500 800 2,700 11,000

Sales Cost of Goods Sold Debtors Inventories Cash Other current assets Current liabilities

Compute the current ratio, quick ratio, average debt collection period and inventory turnover for 2009 and 2010. State whether there is a favorable or unfavorable change in liquidity from 2009 to 2010. At the beginning of 2009, the company had debtors of Rs..2500 and inventory of Rs.3000. Answer Current ratio Current ratio = Current assets / Current liabilities Current ratio (2010) = 7200+11400+1500+4000 16000 Current ratio (2010) = 1.5 :1 Current ratio (2009) = Current ratio (2009) = Quick ratio Quick ratio = 3000+5500+800+2700 11000 1.09 :1 [10 Marks]

Quick ratio (2010) Quick ratio (2010) Quick ratio (2009) Quick ratio (2009)

Current assets(less inventory + other current assets) Current liabilities = 7200+1500 16000 = 0.54 :1 = 3000+800 11000 = 0.35 : 1

Average debt collection period Debtors turnover ratio = Debt collection period =

Net credit sales / Average debtors Months or Days in year / Debtors turnover

ratio Debtors turnover ratio (2010) Debtors turnover ratio (2010) = Debt collection period (2010) Debt collection period (2010) Debtors turnover ratio (2009) Debtors turnover ratio (2009) Debt collection period (2009) Debt collection period (2009) = 13.52 = = = 2 = = = 15.64 365 / 15.64 24 days 365 / 13.52 27 days 43000/ (3000+2500) 69000/ (7200+3000) 2

Inventories turnover ratio Inventories turnover ratio = Inventory holding period = Inventories turnover ratio (2010) Inventories turnover ratio (2010) Inventory holding period (2010) Inventory holding period (2010) Inventories turnover ratio (2009) Inventories turnover ratio (2009) Inventory holding period (2009) Inventory holding period (2009)

Cost of goods sold / Average inventory 12 months / Inventory turnover ratio = = = = = = = = 57000 / (11400+5500) 2 6.75 365 / 6.75 54 days 32500 / (5500+3000) 2 7.647 365 / 7.647 48 days

There is a favourable change in liquidity from 2009 to 2010 as indicated by the improvement in Current ration and Quick ratio. Explain different methods of costing. Your answer should be studded with

Q.2

examples (preferably firm name and product) for each method of costing. [10 Marks] Answer The following are the methods of costing
1.

Job Costing: This type of costing is used in those businesses where production is carried out as per specific order and customer specification.
a) Batch Costing: This method is used to determine the cost of a group of

identical products. The batch consists of similar products is a unit and not

a single item within the branch. Example: Ranbaxy - Production of tablet / Mattel Inc Production of toys (Hot-wheels)
b) Contract Costing: This method is based on the principle of job costing

used by house builders and civil contractor. The contract becomes the cost unit for which relevant costs are determined. Example: GMR Construction of Airport Gammon India Ltd Transportation projects
c) Composite Costing: In this method costs are accumulated for different

components of the product and then combined because the nature of the product is complex. Example: Airbus Manufacture of Aero planes Sirosky Helicopter manufacturer
2.

Process Costing: This method is used in those industries where manufacture is done continuously thereby it is difficult to trace costs to specific units. The total cost is averaged for the number of units manufactured.
a) Unit Costing: This method is used when a single item is produced and

the final product is composed of homogeneous units. The cost per unit is obtained by dividing the total cost by the total number of units manufactured. Example: India cement - cement Nestle chocolates
b) Operating Costing: This method is used by service industries. The unit

cost differs among these services depending upon the nature of services being rendered. Example: Southern travels Transport buses Star Cruises - Holiday cruise packages
c) Operation Costing: This product costing is used when conversion

activities are very similar across products lines but the direct materials differ significantly. Example: Phillips Manufacturers of LCD / LED TVs IBM - Manufacturers of Desktop / Lap-top computers Q.3 State the importance of differentiating between the fixed costs and variable [10 Marks]

costs in managerial decision. Answer

It is very important to distinguish between fixed and variable costs in managerial decisions as the management has the discretionary power to make some costs either fixed, variable of partly fixed and partly variable which will have a direct impact on the performance of the organization. For example the remuneration of sales

persons can be treated as fixed cost wherein it will become a salary fixed per month which may not induce additional motivation on the part of the sales team to sell more. Whereas if the management decides to treat this compensation to sales persons as variable cost by rewarding them with commission linked to their sales this may result in motivating the sales team to surpass targets and sell more. A similar scenario can be applied to the workers in a production line where they are paid a fixed salary or a piece-rate remuneration or a salary combined with piece-rate beyond a certain targeted level of output. Differentiating the fixed and variable cost will also enable the management to take measures to control them by identifying alternatives that will be most suited to the organizational goals. Cost of storage space in an administrative environment is likely to be higher than in a warehousing environment and the management can control this cost as per the requirement of the business. Variable costs can also be controlled in similar ways by identifying appropriate cost effective alternatives for example appropriate lighting source and its usage in production line and administrative areas.

Q.4 2009

Following are the extracts from the trial balance of a firm as at 31st March

Name of the account Sundry debtors Bad debts

Dr 2,05,000 3,000

Cr

Additional Information 1) After preparing the trial balance, it is learnt that Mr.X a debtor has become insolvent and nothing could be recoverd 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. [10 Marks]

Answer Journal Entry Particulars Profit & Loss A/c Dr To Bad Debts A/c (Being bad debt transferred to P&L a/c) Bad Debts A/c Dr To Sundry Debtors A/c (Being Mr. X balance transferred to Bad Debts from debtors) Profit & Loss A/c Dr To Bad Debts A/c (Being additional Bad Debts written off) Profit & Loss A/c Dr To Provision for Doubtful debts account A/c (Being 10% provision provided) 20000 20000 5000 5000 5000 5000 Dr 3000 Cr 3000

Ledger Posting Sundry Debtors A/c Dr To Bal b/d Cr 205,000 By Bad debts A/c 5,000

By Bal c/d 205,000

200,000 205,000

Bad debts A/c Dr To Bal c/d To Sundry Debtors Cr 3,000 5,000 By Profit & Loss A/c By Profit & Loss A/c 3,000 5,000

8,000

0 8,000

Provision for doubtful debts A/c Dr By Profit & Loss A/c Cr 20,000

To Bal c/d

20,000 20,000

0 20,000

Profit & Loss A/c for year ended 31st March 2009 Dr Bad debts To Bad debts A/c (Old) To Bad debts A/c (New) To Provision for doubtful debts Amt Amt 3,000 5,000 8,000 20,000 Amt Cr Amt

By Bal c/d 28,000

28,000 28,000

Balance Sheet as at 31st March 2009 Dr Liabilities Amt Amt Asset Sundry debtors Less: Bad debt new Provision for doubtful debts Amt 205,000 5,000 cr Amt

200,000

20,000

220,000

Q.5 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. [10 Marks] Answer As the result of increase in sales, decrease in bad-debts and decrease in investment in accounts receivable the working capital has been favourably affected as increase in sales and decrease in investment in AR indicates realization of debtors in shorter period which improves the liquidity of the company by converting AR in cash/bank balances.

Q.6

Identify the users of accounting information.

[10 Marks]

Answer
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.
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 and also may be interested in acquiring other business which is undervalued.
e. Employees, Trade Union and Tax authorities: Employees are keen to

f.

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. 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. 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. 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.

g. Government and regulatory agencies: Government and the regulatory

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.