Accounting for Managers

S. No.

Questions

1.

(a) What do you understand by the concept of conservatism ? Why is it also called the concept of prudence? Wh
to be in the Past ?

Ans:- The convention of conservatism, also known as the doctrine of prudence in accounting is a policy

future gains. This policy tends to understate rather than overstate net assets and net income, and therefore

In accounting, it states that when choosing between two solutions, the one that will be least likely to oversta

According to this concept "convention expected losses are losses but expected gains are not gains". On th
at cost price or market price, whichever is lower. Provision for bad and doubtful debts are maintained.

prudence concept

Definition

An accounting principle that requires recording expenses and liabilities as soon as possible, b
realized or assured. Also called conservatism principle.
According to accural concept, expenses incurred and revenue earned during the accounting period should
regardless of the actual receipt of payment of cash.

According to prudence concept revenue should be recognized only when it has been realized.Revenue is r
irrespective of the fact whether it is received or not during that period.

for example: when a product delivered to a customer the company records a revenue even though the cust

(b) What is a Balance Sheet ? How does a Funds Flow Statement differ from a Balance Sheet ? Enumerate the
Sheet and a Funds Flow Statement.

Ans:- DEFINITION of 'Balance Sheet'

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point

give investors an idea as to what the company owns and owes, as well as the amount invested by the sharehold
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
The main differences between balance sheet and fund flow statement are as below:
1. Meaning
Balance Sheet: Balance sheet is a statement of assets, liabilities and capital.

Funds Flow Statement: Funds flow statement is a statement if changes in assets, liabilities and capital accounts
2. Objective
Balance Sheet: Balance sheet is prepared to ascertain the financial position of a firm.
Funds Flow Statement: It is prepared to ascertain the sources and application of funds.
3. Preparation
Balance Sheet: It is prepared with the help of trial balance.
Funds Flow Statement: It is prepared with the help of balance sheets of two subsequent dates.
4. Information
Balance Sheet: It provides static view of financial affairs.
Funds Flow Statement: It provides the changes in assets, liabilities and capital accounts.
Balance Sheet vs. Fund FlowStatement
Balance sheet:
1.
Prepared to know the financialposition.
2.
Prepared on the basis of different accounts in ledger.
3.
Shows the assets andliabilities, its a staticstatement.
4.
Useful for all, i.e. Management,Shareholders, Creditors,Outsiders and Govt. agenciesetc.
5.
CA and CL are shown itemwise.
6.
Its preparation is a statutoryobligation and as per prescribed
format.

Fund Flow Statement:

1.
Prepared to know the totalsources and their uses in ayear.
2.
Prepared with the help of balance sheets of twoconsecutive years.
3.
It reveals the changes in thevalue of Fixed Assets and their effect on flow of funds.
4.
Useful for internal financialmanagement.
5.
CA and CL are used to find outincrease or decrease inworking capital.
6.
Its preparation is at thediscretion
of the management.

2.

(a) Discuss the importance of ratio analysis for inter-firm and intra-firm comparisons including circumstances res
understand by the term pay-out ratio? What factors are taken into consideration while determining pay-out ratio
policy? Discuss fully.

3.

From the ratios and other data given below for Bharat Auto Accessories Ltd. indicate your interpretation of the co
and profitability.

Year I

Year II Year III

Current Ratio

265%

278%

302%

Acid Test Ratio

115%

110%

99%

Working Capital Turnover (times)

2.75

3.00

3.25

Receivables Turnover

9.83

8.41

7.20

Average Collection Period (Days)

37

43

50

Inventory to Working Capital

95%

100%

110%

Inventory Turnover (times)

6.11

6.01

5.41

Income per Equity Share

5.10

4.05

2.50

Net Income to Net Worth

11.07% 8.5%

7.0%

Operating Expenses to Net Sales

22%

23%

25%

Sales increase during the year

10%

16%

23%

Cost of goods sold to Net Sales

70%

71%

73%

Dividend per share

Rs. 3

Rs. 3

Rs. 3

Fixed Assets to Net Worth

16.4%

18%

22.7%

Net Profit on Net Sales

7.03%

5.09%

2.0%

4.
Bose has supplied the following information about his business to Summary of Cash

Assets and Liabilities

On 1st April 2003

(Rs.)

Sundry debtors
Stock
Machinery
Furniture
Sundry creditors

Receipts

To Opening balance
To Cash sales
To Receipt from debtors
To Misc. receipts
To Loan from Dass @ 9%
per annum (taken on
1.10.2003)

book for the year ended

On 31st March
(Rs.)

1,81,000
1,50,000
2,50,000
40,000
1,10,000

Rs.

5,000
61,000
7,53,000
2,000

Payments

1,93,000
1,40,000
?
?
1,25,000

Rs.

By Payments to creditors
By wages
By Salaries
By Drawings
By Sunday office expenses
1,00,000 By Machinery purchased (on
1.10.2003)
By Closing balance

3,50,000
1,60,000
1,50,000
40,000
1,10,000
95,000
16,000

9,21,000

9,21,000

Discount allowed totaled Rs.7,000 and discount received was Rs.4,000. Bad debts written off were Rs.8,
@5% per annum and machinery @10% per annum under the straight line method of depreciation. The office ex
premium for the year ending 30th June, 2004. Wages amounting to Rs.20,000 were still due on 31st March, 200

Prepare trading and profit and loss account for the year ended 31sl March, 2004 and the balance sheet a
5.

What procedure would you adopt to study the liquidity of a business firm?
Ans:- The procedure you would adopt to study the liquidity of a business firm is to compare the liquidity ratio

comparing the businesses most liquid assets with its short-term liabilities.
Who are all the parties interested in knowing this accounting information?
Ans:- The Different Users or Parties interested in accounting are :

1: Customers.
2: General Public.
3: Government.
4: Tax Authorities.
5: Money Lenders, Bank or other money lending institutions.
6: Potential Investors.
7: Management.
8: Researchers.
9: Investors-Long term , Short term...
Each has a different interest in the books of accounts or accounting..
What ratio or other financial statement analysis technique will you adopt for this.
Ans:6.

7.

From the following particulars, determine the bank balance as per pass book of Priya & Co. as on 28th Februar
Credit balance as per cash book on 28th February, 2008 was Rs. 15,000
Interest charged by the bank up to 28th February Rs. 500 was recorded in the pass book.
Bank charges made by the bank Rs. 125 were also recorded only in the pass book.
Out of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750 were cleared and credited by the ba
Two cheques of Rs. 7,500 and Rs. 15,000 were issued but out of them only one cheque of Rs. 7,500 was prese
Dividends on shares Rs. 4,500 were collected by the bankers directly, for which Priya & Co. did not have any inf
A company manufactures a single product in its factory utilizing 600% of its capacity. The selling price and cost d

Rs.

Sales (6,000 units)

5,40,000

Direct materials

96,000

Direct labour

1,20,000

Direct expenses

19,000

Fixed overheads :

Factory

2,00,000

Administration

21,000

Selling and Distribution

25,000

12.5% of factory overheads and 20% of selling and distribution overheads are variable with production
fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company d
investment but largely using the existing plant and machinery.
The cost estimates of the new product are as follows:

Cost elements

Rs. per unit

Direct materials

16.00

Direct labour

15.00

Direct expenses

1.50

Variable factory overheads

2.00

Variable selling and distribution

overheads

1.50

It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed facto
10%, while fixed selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads re
However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost
The company considers that 20o/o pre-tax and interest return on investment
You are required to

(a) Decide whether the new product be introduced.

(b) Make any further observation/recommendations about profitability of the company on the basis of the above
investment is Rs. 8 lakh.
8.

(a) What is Master Budget? How it is different from Cash Budget?

(b) What are the various methods of inventory valuation? Explain the effect of inventory valuation methods on
with regards to inventory valuation?