MB0025: Financial &

Management Accounting
[Assignment SET1 & SET2]

Name : P. Srinath
SMDUE ID : 520923307
Center : Mehbub College Campus, Secunderabad
Subject Code : MB0025
Subject : Financial & Management Accounting
 ASSIGNMENT MBA SEM I Subject Code:
MB0025 SET 1

1. Explain any two accounting concepts with example?

Concepts are the basic assumptions or conditions up on which the
science of accounting is based. There are five basic concepts of
accounting namely

Business entity concept,

Going concern concept,
Money measurement concept,
Periodicity concept and
Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and
different from the owner or the proprietor. This is true in the case all
forms of organization. If X starts business, he should not mix up his
personnel properties with that of the business. When he invests his funds
into the business, it is regarded as capital to the business and capital is a
liability from the business point of view. If X withdraws any money fro the
business, it is detectable form the capital and to that extent the liability of
the business towards the owner is reduced. On the other hand, if the
proprietor withdraws money form the business for business purposes,
then it is treated as expenditure to the business. This legal separation
between business and ownership is kept in mind while recoding the
transactions in the books of business.

Going concern concept

The fundamental assumption is that the business entity will continue
fairly for a long time to come. There is no reason why an enterprise
should be promoted for a short period only to liquidate the business in the
foreseeable future. This assumption is called Going concern concept.
For this reason accountants value fixed assets on historical cost method.
Had the business been setup to last for short period, fixed assets should
have been valued at a market price. Besides, going concern concept
provides for amortization of the cost of fixed assets over the lifetime of
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 the assets. For example, an entrepreneur purchases a plant for Rs. one
crore and it has a life of 10 years. During this period, he sets aside every
year certain funds from the income of the business so that it would help
him for replacement of the asset at the end of ten years. This process of
amortization presupposes that the enterprise will continue to do business
fairly for long time.
2. Prove that accounting equation is satisfied in all the following
transactions of Mr. X
i. Commenced business with cash Rs 80,000
ii. Purchased goods for cash Rs 40,000 and on credit Rs.
30,000
iii.Sold goods for cash Rs. 40,000 costing Rs. 25,000
iv. Paid salary Rs. 2,000 and salary outstanding Rs. 1,000
v. Brought scooter for personal use for cash at Rs. 20,000

The accounting equation is,

Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000

cash and so capital account and cash accounts are affected.
Capital is a liability and cash is an asset to the business.
This is shown in the transaction number 1, in the table.

ii. Purchased goods for cash Rs 40,000 and on credit Rs. 30,000

In this transaction, cash account, goods account and liabilities account

gets affected.
Cash account reduces by Rs. 40,000
Goods account increases by Rs. 40,000
Liabilities account increases by Rs. 30,000
This is shown in the transaction number 2, in the table.

iii. Sold goods for cash Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account

gets affected.
Cash account increases by Rs. 40,000

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 Goods account reduces by Rs. 25,000
Profit account being owners account, it gets credited with Rs 15,000
This is shown in the transaction number 3, in the table.

iv. Paid salary Rs. 2,000 and salary outstanding Rs. 1,000
In this transaction, cash and salary accounts are affected.
Cash account reduces by Rs. 2,000 ans salary account gets credited by
Rs. 2,000
Outstanding salary is Rs. 1,000 which is not paid yet, hence none of
the accounts gets affected.
This is shown in the transaction number 4, in the table.

v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owners
capital decreases.
Cash account and capital account decreases by Rs. 20,000
This is shown in the transaction number 5, in the table.

Liabilities and owner's

Assets equity

Transaction Cash Goods Salary Mr.X's

Number a/c a/c a/c Liabilities Capital

1 80000 80000

2 -40000 70,000 30000

3 40000 -25000 15000

4 -2000 2000

5 -20000 -20000

58000 45000 2000 30000 75000

105000 105000

3. Show the rectification of entries for the following

a. the sales account is undercast by Rs.15,000

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 b. Goods returned by customer Mr. X of Rs.5650 has been
posted in return inward account as Rs.5560 and in Mr. Xs
account as Rs. 6550
c. Salary paid Rs.6,000 has been posted to rent account.
d. Cash received from Ram posted to Shyam account Rs. 7000
e. Cash received from jadu Rs. 8640 has been posted to the
debit of Madhus account.

The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr 15,000

To Sales account 15,000

Suspense account Dr 90

To Return account 90

Mr. Xs account Dr 900

To Suspense account 900

Salary account Dr 6000

To rent account 6000

Shyam account Dr 7000

To Ram account 7000

Jadu account Dr 8640

To Madhu account 8640

4. The following balances are extracted from the books of Kiran

Trading Co on 31st March 2000. You are required to prepare
trading and profit and loss account and a balance sheet as on
that date:
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 Opening Stock 5,00 Commission received 2,000
0

B/R 22,50 Return Outward 2,500

0

Purchases 1,95,00 Trade Expenses 1,000

0

Wages 14,00 Office furniture 5,000

0

Insurance 5,500 Cash in hand 2,500

Sundry Debtors 1,50,00 Cash at bank 23,750

0

Carriage Inwards 4,00 Rent and Taxes 5,500

0

Commission Paid 4,00 Carriage Outward 7,250

0

Interest on Capital 3,50 Sales 2,50,00

0 0

Stationery 2,250 Bills Payable 15,000

Return Inwards 6,500 Creditors 98,250

Capital 89,50
0

The closing stock was valued at Rs.1,25,000

Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

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 243,50
Opening stock 5,000 Sales - Return Inward
0

125,00
Purchases - Return Outward 192,500 Closing Stock
0

Carriage Inwards 4,000

Wages 14,000

153,00
Gross Profit
0

368,50
368,500
0

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

Dr Cr

Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000

Insurance 5,500 Comission Received 2,000

Trade Expenses 1,000

Commission Paid 4,000

Interest on Capital 3,500

Staionary 2,250

Carriage Outward 7,250

Net Profit 126,000

155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

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 Balance Sheet

Capital and Liabilities Assets

Bills Payable 15,000 Sundry Debtors 150,000

Capital 89,500 Office Furniture 5,000

Creditors 98,250 Cash in Hand 2,500

Net Profit from P & L Account 126,000 Cash in Bank 23,750

B/R 22,500

Closing Stock 125,000

328,75
328,750
0

5. Write a note on:

a. outstanding expenses
b. prepaid expenses
a. Out standing expenses:

Expenses due but not paid are known a outstanding expenses. Wages,
salaries, rent, commission etc payable in the current month are paid in
the following month. If the final accounts are prepared for the year
ending 31st December, then the expenses payable for December will be
paid in January of next year. The extent to which the amount belongs to
the current year but payable in the next year is called outstanding
expenses. To record that aspect, the journal entry drawn in the journal
proper is:

Concerned Expenses account Dr

To outstanding expenses account.

Outstanding expenses account indicates liability for the current year and
it will appear in the balance sheet.

b. Prepaid expenses:

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 Expenses paid in advance are regarded as prepaid expenses. Prepaid
expenses form an asset and therefore prepaid expenses account is
debited. For example, insurance premium is paid from April, 2004 to
March, 2005; and the amount is Rs. 3600. The financial year ends by 31st
December, 2004. Therefore the premium relating to Jan, Feb. and March
of 2005 Rs. 900 is said to have been paid in advance. To record this
internal adjustment, the entry is:

Prepaid Expenses account Dr 900

To insurance account 900

Note that outstanding or prepaid expenses accounts are regarded as
personal accounts.

ASSIGNMENT MBA SEM I Subject Code:

MB0025 SET 2

1. Budgetary Control is a technique of managerial control

through budgets. Elaborate.

Modern business world is full of competition, uncertainty and exposed to

different types of risks. The complexity of managerial problems has led to
development of various managerial tools, techniques and procedures
useful for the management in managing the business successfully. In this
direction, planning and control plays an important role. Budgeting is the
most common and powerful standard device of palling and control.

Budgetary control is a technique of managerial control through

budgets. A budget is a quantitative expression of plan of action. . It is a
pre-determined detailed plan of action developed as a guide for future
operation. According to Wheldon Budgetary control is the planning in
advance of the various functions of business so that the business as a
whole can be controlled. Budgetary controls deals with planning,
coordination, recording appraisal and follow-up of actions.

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 The procedure for preparing plan in respect of future financial and
physical requirements is generally called Budgeting. It is a forward
planning exercise. It involves the preparation in advance of the
quantitative as well as the financial statements to indicate the intention of
the management in respect of the various aspects of the business.

Budgetary control is applied to a system of management accounting

control by which all operations and output are forecasted far ahead as
possible and actual results when known are compared with the budget
estimates.

Budgeting is a forward planning. It basically serves as a tool for management

control. The objectives of budgeting may be taken as:

To forecast and plan for future to avoid losses and to maximize profits.

To help the concern in planning the activities both physical and financial.

To bring about coordination between different functions of the enterprise.

To control; actual actions by ensuring that actual are in tune with targets

Budgetary control: When one relates control function to budget, we find

a system what is generally termed as budgetary control. Control signifies
such systematic efforts which help the management to know whether
actual performance is in line with predetermined goal, policy and plans. It
is basically a measurement tool. Yardsticks should be laid down.
Standards must be set up.

Therefore, the objectives can be summarized as follows:

To conform to good business practice by planning for the future.

To coordinate the various divisions of a business.

To establish divisional and departmental responsibilities.

To forecast operating activities and financial position.

To operate most efficiently the divisions, departments and cost center.

To avoid waste, to reduce expenses and to obtain the income desired.

To obtain more economical use of capital available for the efficient

operation.
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 To provide more definite assurance of earning the proper return on capital
employed.

To centralize management control.

To show the management where action is needed to remedy a situation.

To help in controlling cash.

To help in obtaining better inventory control and turnover.

Steps In Budgetary Control

The procedure to be followed in the preparation and control of budget
may differ from business to business. But, a general pattern of outline of
budget preparation and control may go a long way to achieve the end
results.
The steps are as follows:
Formulation of policies: The business policies are the foundation stone
of budget construction. Function policies should be formulated in
advance. Long-range policies with short term projections should be made
for the functional areas such as sales, production, inventory, cash
management, capital expenditure.
Preparation of forecasts:
Based on the formulated policies, forecast should be made in respect
of each function. Activity based concepts should be introduced at the
micro level for each function Forecasts should not be considered as a
mere estimates. Scientific methods should be adopted for forecasting.
Analysis of various factors based on past, and present, future forecast
should be made.
Preparation of budgets:
Forecasts are converted into written codified document. Such written
documents can be used for coordination purposes. Function budgets will
act as guidelines for implementation.
Forecast combinations:
While developing the budgets, through a Master Budget various
permutations and combination processes are considered and developed.
Based on this, establishment of the most preferred one which will yield
optimum benefits should be considered. All the factor components should
be identified which are likely to cause disturbances while implementing
the budgets
2. a. Given: Current ratio = 2.6
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 Liquid ratio = 1.4

Working Capital = Rs.1,10,000

Calculate (1) Current assets (2) current liabilities

(3) Liquid Asset (4) Stock

Given data is working capital, hence:

Working capital = Current assets - current liabilities ----- [1]
Current Ratio = CA / CL = 2.6
In the absence of any value, the current liability is always taken as 1 unit
2.6 = CA / 1 and cross multiplying , CA is 2.6
Substituting CA in [1],
Working capital = 2.6 - 1 = 1.6
For 1.6 WCR = Working capital value is Rs1,10,000
For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750
For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 = Rs.68,750
Liquid Ratio =Liquid asset / current liabilities
1.4 = Liquid asset / 2,86,000
Liquid asset = 1.4 X 68,750
= 96,250
Liquid asset = Current asset Stock
Therefore,
Stock = Current Asset Liquid Asset
= 1,78,750 96250
= Rs. 82,500

b. Calculate Gross Profit Ratio from the following figures:

Sales Rs.5,00,000

Sales return Rs.50,000

Closing stock Rs.35,000

Opening stock Rs.70,000

Purchases Rs.3,50,000

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales
expressed as a percentage. It expresses the relationship between gross
profit and sales.
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 [Gross Profit Ratio = (Gross profit / Net sales) 100]
Cost Of Goods Sold [COGS] = Opening stock + Purchases closing
stock
= 70000 + 350000-35000
COGS = 385000 Rs.

Gross Profit = (Sales Sales returns) - COGS

= (500000 50000) 385000
= 450000 385000
Gross Profit = 65000 Rs.

Net Sales = Sales Sales returns

= 500000 50000
= 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales) 100]

= (65000/450000) X 100
= 14.4%

3. From the following Balance Sheet of William & Co Ltd., you are
required to prepare a Schedule of Changes in Working capital &
Statement of Sources and Application of funds.

Balance Sheet
Liabilities 2002 2003 Assets 2002 2003
Rs. Rs. Rs. Rs.
Capital 80,000 85,00 Cash in Hand 4,000 9,000
0
P&L a/c 14,500 24,50 Sundry Debtors 16,50 19,500
0 0
Sundry Creditors 9,00 5,00 Stock 9,00 7,000
0 0 0
Long-term Loans - 5,00 Machinery 24,00 34,000
0 0
Building 50,00 50,000
0
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 Total 1,03,5 1,19,5 Total 1,03,5 1,19,5
00 00 00 00

Schedule of changes in working capital

Effect on Working
Details Balance as on Capital

2002 2003 Increase Decrease

Liabilities

Sundry Creditors 9,000 5,000 - 4,000

Long term loans 0 5,000 5000

P&La/c 14500 24500 10000

Total liabilities [B] 23,500 34,500 10,000 9,000

Assets

Cash in Hand 4000 9000 5000

Sundry Debtors 16500 19500 3000

Stock 9000 7000 2000

Machinery 24000 34000 10000

Total Assets (A) 53500 69500 10000 2000

Working Capital A-B 30,000 35,000

Net increase in Working

capital 5000 9000

35,000 35,000 20,000 20,000

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 4. Bring out the difference between cash flow and funds flow
statement.

Difference between Cash Flow and Funds Flow Statement

The major differences between the two are:
1. FFS is related with accrual basis whereas CFS is on cash basis. For this
the, it is necessary to convert the accrual to cash basis.
2. In FFS, a Schedule of changes in working capital de-linking the current
assets and current liabilities are made. But in CFS, no schedule is
prepared.
3. FFS shows the causes of the changes in net working capital. CFS shows
the causes for the change in cash
4. In FFS, no opening or closing balances are recorded. But in CFS both
are incorporated
5. FFS is not based on the Ledger mode. But CFS is prepared on the basis
of Ledger principles.
6. In FFS, To and By are indicated. In CFS, these are not indicated.
7. In FFS, net effect of receipts and disbursements are recorded. In CFS
only cash receipts and payments are recorded.
8. FFS is concerned with the total provision of funds. CFS is concerned
with only cash.
9. FFS is flexible but CFS is rigid
10. FFS is more relevant for long range financial strategy. CFS
concentrates on short term aspects mostly affecting the liquidity of the
business.

5a. DELL computers sell 100 PCs at Rs.42,000. The variable

expenses amount to Rs.28,000 per PC. The total fixed
expenses is Rs.14,00,000. Prepare an income statement.

Income Statement

No. Of computers produced 100

No. Of computers sold 100

Unit selling price per computer 42000

unit variable cost per computer 28000

Sales revenue =No. Of computers 4200000

sold X unit selling price

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 Less variable cost (100 X 28000) -2800000

Less Fixed expenses -1400000

Profit or loss 0

b. Calculate BEP and MOS

Sales at present are 55,000 units per annum. Selling price is

Rs.6 per unit. Prime cost Rs.3 per unit. Variable overheads is
Re.1 per unit. Fixed cost Rs.80,000 per annum.

Sales at present 50,000 units per annum.

Selling price Rs.6 per unit, Prime cost Rs.3 per unit.

Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum.

Solution:
BEP = Fixed cost / (SP VC) per unit
= 80,000 / (6 4)
= 80,000 / 2
BEP = 40,000 units.
BEP in rupees = BEP in units x selling price per unit
= 40,000 x Rs.6
= Rs.2, 40,000
MOS = Actual Sales BEP Sales
= (55,000 x 6) 2,40,000
MOS = Rs.90,000

6. What is cost variable analysis?

A variable cost changes in total in direct proportion to a change in the

level of activity or cost driver. If activity increases, say by 20%, total
variable cost also increases by 20 %. The total variable cost increases
proportionately with activity. Variable cost fixed per unit but varies in
total.

Cost Variable Analysis:

Break Even Chart is used in Cost variable analysis.

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 It is a graphic or visual presentation of the relationship between costs,
volume and profit. It indicates the point of production at which there is
neither profit nor loss. It also indicates the estimated profit or loss at
different levels of production. While constructing the chart, the following
assumption is normally considered.
a) Costs are classified into fixed and variable costs
b) Fixed costs shall remain fixed during the relevant volume range of
graph.
c) Variable cost per unit will remain constant during the relevant volume
range of graph
d) Selling price per unit will remain constant
e) Sales mix remains constant.
f) Production and sales volume are equal
g) There exists a linear relationship between costs and revenue.
h) Linear relationship is indicated by way of straight line.

Break Even Analysis

It is an extension of or even part of marginal costing. It is a technique of
studying cost volume profit relationship. Basically, the break even
analysis is aimed at measuring the variations of cost with
volume. It is a simple method of presenting the effect of changes in
volume on profits. It is also known as CVP analysis. The various
assumptions are:
a) All costs can be classified into fixed and variable
b) Sales mix will remain constant.
c) There will be no change in general price level
d) The state of technology, Methods of production and efficiency remain
unchanged.
e) Costs and revenues are influenced only by volume
f) Cost and revenues are linear.
g) Stocks are valued at marginal cost
h) Unit produced and sold are same.

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