Financial and Management Accounting MB0025

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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.
Financial and Management Accounting MB0025

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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 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.

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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

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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
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
Goods account reduces by Rs. 25,000
Profit account being owner’s account, it gets
credited with Rs 15,000
table.

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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 non of the accounts gets affected.
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 owner’s capital decreases.
Cash account and capital account decreases by Rs.
20,000
table.
Liabilities and
owner's
Transac Assets equity
tion Cas Goo Sal Mr.X's
Numbe h ds ary Liabili Capita
r a/c a/c a/c ties l
800
80000
1 00
-
70,0
400 30000
00
2 00
-
400
250 15000
00
3 00
4 - 200
6
200
0
0
-
200 -20000
5 00
580 450 200
30000 75000
00 00 0
105000 105000
Q3.Show the rectification of entries for the

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

b. Goods returned by customer Mr. X of
Rs.5650 has been posted in return inward
account as Rs.5560 and in Mr. X’s 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 Madhu’s account.
The below table shows the rectification of entries
Debit Credit
Particulars
[Rs.] [Rs.]

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Suspense account 15,000
Dr
15,000
To Sales
account
Suspense account 90
Dr
90
To Return
account 900
Mr. X’s account 900

Dr
To Suspense
account
Salary account 6000
Dr
6000
To rent
account
Shyam account 7000
Dr
7000
To Ram
account
Jadu account 8640
Dr
8640
To Madhu
account
Q4. The following balances are extracted from

the books of Kiran Trading Co on 31st March
2000. You are required to prepare trading and
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profit and loss account and a balance sheet as
on that date:
Opening 5, Commission 2,0

Stock 000 received 00
B/R 22, Return 2,5
500 Outward 00
Purchases 1,95, Trade 1,0
000 Expenses 00
Wages 14, Office 5,0
000 furniture 00
Insurance 5, Cash in hand 2,5
500 00
Sundry 1,50, Cash at bank 23,7
Debtors 000 50
Carriage 4, Rent and 5,5
Inwards 000 Taxes 00
Commission 4, Carriage 7,2
Paid 000 Outward 50
Interest on 3, Sales 2,50,
Capital 500 000
Stationery 2, Bills Payable 15,
250 000
Return 6, Creditors 98,
Inwards 500 250
Capital 89,

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500
The closing stock was valued at Rs.1,25,000
Trading account of M/s Kiran Trading Co
Trading Account
Dr Cr
Sales - Return 243,5
Opening stock 5,000
Inward 00
Purchases - Return 192,5 125,0
Closing Stock
Outward 00 00
Carriage Inwards 4,000
14,00
Wages
0
153,0
Gross Profit
00
368,5 368,5
00 00

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Profit and Loss Account of M/s Kiran Trading
Co
Profit and Loss Account

Dr Cr
Rent and by Trading a/c Gross 153,0
5,500
Taxes Profit 00
Insurance 5,500 Commission Received 2,000
Trade
1,000
Expenses
Commission
4,000
Paid
Interest on
3,500
Capital
Stationary 2,250
Carriage
7,250
Outward
126,0
Net Profit
00
155,00 155,0
0 00
Balance Sheet Account of M/s Kiran Trading Co
Balance Sheet
Capital and Liabilities Assets
15,00 Sundry 150,0
Bills Payable
0 Debtors 00
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89,50 Office
Capital 5,000
0 Furniture
98,25 Cash in
Creditors 2,500
0 Hand
Net Profit from P & L 126,0 Cash in 23,75
Account 00 Bank 0
22,50
B/R
0
Closing 125,0
Stock 00
328,7 328,7
50 50
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:

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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:
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.

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Q1 Budgetary Control is a technique of

managerial control through budgets.
Elaborate?
Solution: 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

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a guide for future operation. According to Weldon
“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.
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
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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.
· 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.
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· 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.
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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
Q.2 a. Given: Current ratio = 2.6 Liquid

ratio = 1.4 Working Capital = Rs.1,
10,000
Calculate (1) Current assets (2) current
liabilities
(3) Liquid Asset (4) Stock. Solution:
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 =

18
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
Solution: 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.
[Gross Profit Ratio = (Gross profit / Net sales)
× 100]
Cost of Goods Sold [COGS] = Opening stock +
Purchases – closing stock
= 70000 + 350000-35000
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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
Net Sales = 450000 Rs.
Gross Profit Ratio = (Gross profit / Net sales) ×
100]
= (65000/450000) X 100
Gross Profit Ratio = 14.4%

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Q3. 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?
Liabiliti 200 200 Assets 200 2003

es 2 3 2 Rs.
Rs. Rs. Rs.
Capital 80,0 85,0 Cash in 4,0 9,0
00 00 Hand 00 00
P&L a/c 14,5 24,5 Sundry 16,5 19,5
00 00 Debtors 00 00
Sundry 9,0 5,0 Stock 9,0 7,0
Creditor 00 00 00 00
s
Long- 5,00 Machine 24,0 34,0
term 0 ry 00 00
Loans
Building 50,0 50,0
00 00
Total 1,03 1,19 Total 1,03 1,19

,50 ,50 ,50 ,50
0 0 0 0
Balance Sheet

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Solution : schedule of changes in working capital
Details Balance as on Effect on Working Capital
Increa Decrea
2002 2003
se se
Liabilities
Sundry Creditors 9,000 5,000 - 4,000
Long term loans 0 5,000 5000
P&L/c 14500 24500 10000
23,50 34,50 10,00
Total liabilities [B] 9,000
0 0 0
Assets
Cash in Hand 4000 9000 5000
Sundry Debtors 16500 19500 3000
Stock 9000 7000 2000
Machinery 24000 34000 10000
Total Assets (A) 5350 6950 10000 2000
0 0
Working Capital A-B 30,00 35,00

0 0
Net increase in 5000 9000
Working capital
35,00 35,00 20,000 20,000

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Q.4 Bring out the difference between cash

flow and funds flow statement.?
Ans: 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.

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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 are Rs.14,
00,000. Prepare an income statement.
Solution:

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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. A variable
overhead is Re.1 per
Income Statement
No. Of computers produced 100
No. Of computers sold 100
Unit selling price per computer 42000
unit variable cost per 28000
computer
Sales revenue =No. Of
computers sold X unit selling 4200000
price
Less variable cost (100 X -2800000
28000)
Less Fixed expenses -1400000
Profit or loss 0
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

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= 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
Q.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. 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

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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 methodof presenting the
effect of changes in volume on profits. It is also
known asCVP 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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………End……….

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1

1. Explain any two accounting concepts with

Concepts are the basic assumptions or conditions up

• Business entity concept,

Business separate entity concept:

The essence of this concept is that business is a