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Accounting For Managers ADL-03-Ver3

Assignment - A
Question 1(a) What do you understand by the concept of conservatism ? Why is it also
called the concept of prudence? Why is it not applied as strongly today as it
used to be in the Past?

Answer: Concept of Conservatism implies using conservatism while preparing financial

statements i.e. income should not be accounted for unless it has actually been earned but
expenses, even if just anticipated should be provided for. According to this concept, revenues
should be recognized only when they are realized, while expenses should be recognized as
soon as they are reasonably possible.

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Question 1(b) What is a Balance Sheet? How does a Funds Flow Statement differ from a
Balance Sheet? Enumerate the items which are usually shown in a Balance
Sheet and a Funds Flow Statement.

Question 2(a) Discuss the importance of ratio analysis for inter-firm and intra-firm
comparisons including circumstances responsible for its limitations. If any

Question 2(b) Why do you understand by the term ‘pay-out ratio'? What factors are
taken into consideration while determining pay-out ratio? Should a company
follow a fixed pay-out ratio policy? Discuss fully.

Question 3. From the ratios and other data given below for Bharat Auto Accessories
Ltd. indicate your interpretation of the company's financial position, operating
efficiency and profitability.

Year I Year II Year III

Current Ratio 265% 278% 302%

Acid Test Ratio 115% 110% 99%
Working Capital Turnover 2.75 3.00 3.25
Receivables Turnover 9.83 8.41 7.20
Average Collection Period 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 22% 23% 25%
Sales increase during the 10% 16% 23%
Cost of goods sold to Net 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%

Question 4: Bose has supplied the following information about his business for the year
ended 31 st March, 2004 is as follows:

Assets and Liabilities On 1st April 2003 On 31st March, 2004

Rs. Rs.
Sundry debtors 1,81,000 1,93,000
Stock 1,50,000 1,40,000
Machinery 2,50,000 ?
Furniture 40,000 ?
Sundry creditors 1,10,000 1,25,000

Receipts Rs. Payments Rs.

To Opening 5,000By Payments to 3,50,000
balance creditors
To Cash sales 61,000By wages 1,60,000
To Receipt from 7,53,000By Salaries 1,50,000
To Misc. 2,000By Drawings 40,000
By Sunday office 1,10,000
To Loan from 1,00,000By Machinery
Dass @ 9% per purchased (on 95,000
annum (taken 1.10.2003)
on 1.10.2003)
By Closing 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.8,000. Depreciation was written off on
furniture @5% per annum and machinery @ 10% per annum under the
straight line method of depreciation. The office expenses included
Rs.5,000 paid as insurance premium for the year ending 30th June,
2004. Wages amounting to Rs.20,000 were still due on 31st March,
Prepare trading and profit and loss account for the year ended 31 si
March, 2004 and the balance sheet as on that date.

Question 5:

(a) What procedure would you adopt to study the liquidity of a business firm?

(b) Who are all the parties interested in knowing this accounting information?

(c) What ratio or other financial statement analysis technique will you adopt for this.

Assignment - B
Question 1: From the following particulars, determine the bank balance as per pass
book of Priya & Co. as on 28th February 2008.

a) Credit balance as per cash book on 28th February, 2008 was Rs. 15,000

b) Interest charged by the bank up to 28th February Rs. 500 was recorded in the pass book.

c) Bank charges made by the bank Rs. 125 were also recorded only in the pass book.

d) Out of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750 were cleared
and credited by the bankers.

e) Two cheques of Rs. 7,500 and Rs. 15,000 were issued but out of them only one cheque of
Rs. 7,500 was presented for payment upto 28th February.

f) Dividends on shares Rs. 4,500 were collected by the bankers directly, for which Priya &
Co. did not have any information.

Question 2: A company manufactures a single product in its factory utilizing 600% of

its capacity. The selling price and cost details are given below:

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 and sales. Administrative overheads are
wholly fixed. Since the existing product could not achieve budgeted level
for two consecutive years, the Company decides to introduce a new
product with marginal investment but largely using the existing plant and

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 2.00
Variable selling and 1.50
distribution overheads

It is expected that 2,000 units of the new product can be sold at a price of
Rs. 60 per unit. The fixed factory overheads are expected to increase by
10%, while fixed selling and distribution expenses will go up by Rs.
12,500 annually. Administrative overheads remain unchanged.

However, there will be an increase of working capital to the extent of Rs.

75,000, which would take the total cost of the project to Rs. 8.75 lakh.

The company considers that 20% pre-tax and interest return on

investment is the minimum acceptable to justify any new 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 data, after making
assumption that the present investment is Rs. 8 lakh.

Question 3 (a): What is Master Budget? How it is different from Cash Budget?

Question 3 (b) What are the various methods of inventory valuation? Explain the effect
of inventory valuation methods on profit during inflation. What are the
provisions of Accounting Standard 2 (AS-2) with regards to inventory

Case Study
Geeta & Company has experienced increased production costs. The primary area of concern
identified by management is direct labor. The company is considering adopting a standard
cost system to help control labor and other costs. Useful historical data are not available
because detailed production records have not been maintained. To establish labor standards,
Geeta & Company has retained an engineering consulting firm. After a complete study of the
work process, the consultants recommended a labor standard of one unit of production every
30 minutes, or 16 units per day for each worker. The consultants further advised that Geeta's
wage rates were below the prevailing rate of Rs per hour ‘Geeta's production vice-president
thought that this labor standard was too tight, and from experience with the labor force,
believed that a labor standard of 40 minutes per unit or 12 units per day for each worker
would be more reasonable, the president of Geeta & Company believed the standard should
be set at a high level to motivate the workers and to provide adequate information for control
and reasonable cost comparison. After much discussion, management decided to use a dual
standard. The labor standard of one unit every 30 minutes, recommended by the consulting
firm, would be employed in the plant as a motivation device, while a cost standard of 40
minutes per unit would be used in reporting. Management also concluded that the workers
would not be informed of the cost standard used for reporting purposes. The production vice
president conducted several sessions prior to implementation in the plant, informing the
workers of the new standard cool system and answering questions. The new standards were
not related to incentive pay but were introduced when wages were increased to Rs 7 per hour.
The standard cost system was implemented on January 1, 2007. At the end of six months of
operation, these statistics on labor performance were presented to executive management:

Jan Feb Mar Apr May June

Production (units) 5,100 5,000 4,700 4,500 4,300 4,400

Direct labor hours 3,000 2,900 2,900 3,000 3,000 3,100

Quantity Variances:

Variance based on labor Rs.3150 Rs2,800 Rs3,850 U RS5.250 RS.5.950 Rs6,300

standard (one unit each U U U
30 minutes) U* U

Variance based on cost Rs.2,800 F Rs.3,033 Rs.1,633 Rs.933 RS.1.167

standard (one unit each -0- U U
40 minutes) F F

*U = Unfavorable; F = Favorable

Materials quality, labor mix, and plant facilities and conditions have not
changed to a significant extent during the six month period.


1. Describe the impact of different types of standards on motivations,

and specifically, the likely effect on motivation of adopting the labor
standard recommended for Geeta & Company by the engineering firm.

Please advise the company in reviewing the standards.

Assignment - C
1. Which of the following statements is true concerning assets?
a) They are recorded at cost and adjusted for inflation.
b) They are recorded at market value for financial reporting because historical cost is
c) Accounting principles require that companies report assets on the income statement.
d) Assets are measured using the cost concept.

2. When the concept of conservation is applied to the Balance Sheet, it results in

a) Overstatement of Capital
b) Understatement of Capital
c) Overstatement of Assets
d) Understatement of Assets.

3. Which of the following is a correct expression of the accounting equation?

a) Assets - Liabilities + Owners’ Equity
b) Assets = Liabilities - Owners’ Equity
c) Assets + Owners’ Equity = Liabilities
d) Assets = Liabilities + Owners’ Equity

4. How is the balance sheet linked to the other financial statements?

a) The beginning retained earnings balance on the statement of retained earnings becomes
the amount of retained earnings reported on the balance sheet.
b) Retained earnings is added to total assets and reported on the balance sheet.
c) Net income increases retained earnings on the statement of retained earnings, which
ultimately increases retained earnings on the balance sheet.
d) There is no link between the balance sheet and the other statements.

5. The process of recording the economic effects of business transactions in a book of

original entry:
a) Double entry system
b) Debit
c) Credit
d) Journalizing

6. If the sum of the debits and credits in a trial balance is not equal, then
a) There is no concern because the two amounts are not meant to be equal.
b) The chart of accounts also does not balance.
c) It is safe to proceed with the preparation of financial statements.
d) Most likely an error was- made in posting journal entries to the general ledger or in
preparing the trial balance.

7. Z Ltd had Rs. 1800 of supplies on hand at January 1, 2006. During 2006, supplies with a
cost of Rs. 7,000 were purchased. At December 31, 2006, the actual supplies on hand
amounts to Rs. 2,300. After the adjustments are recorded and posted at December 31, 2006,
the balances in the Supplies and Supplies Expense accounts will be:
a) Supplies, Rs7, 000; Supplies Expense, Rs2, 300.
b) Supplies, Rs1, 800; Supplies Expense, Rs7, 000.
c) Supplies, Rs2, 300; Supplies Expense, Rs6, 500.
d) Supplies, Rs2, 300; Supplies Expense, Rs3, 900.

8. In the statement of changes in financial position, uses of resources are defined as:
a) Transaction debits
b) Fund increases
c) Transaction credits
d) Fund decreases

9. Most firms elected to define funds in the statement of changes in financial position as:
a) Cash
b) Working capital
c) Current assets
d) Owners’ Equity

10. The funds flow statement included:

a) All sources and uses of resources.
b) Only cash transactions.
c) Only transactions affecting current assets.
d) Only transactions affecting fund accounts.

11. Which of the following is not an example of a non-fund adjustment to income required in
preparing the statement of changes in financial position when funds were defined as working
a) Depreciation expense
b) Gain from asset disposal
c) Interest expense
d) Amortization of premium on debt

12. In the cash flow statement, cash is defined as:

a) Quick assets
b) Literal cash on hand or on demand deposit, plus cash equivalents.
c) Literal cash on hand or on demand deposit, plus marketable securities.
d) All of the above

13. Flexible budgets

a) Accommodate changes in the inflation rate.
b) Accommodate changes in activity levels.
c) Are used to evaluate capacity utilization.
d) Are static budgets that have been revised for changes in prices.

14. Which of the following statements regarding changing inventory methods is true?
a) A change in inventory methods can be justified if the change is made to better match
profits with revenue.
b) The effect of changing inventory method does not need to be disclosed.
c) Tax advantages are valid justification for changing inventory methods.
d) One place that the reader of an annual report would be able to identify that a company
changed inventory methods is the footnotes to the financial statements.

Use the information presented below to answer the questions that follow. Solid Co. received a
non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the
maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock
with a selling price of Rs6, 000. The note is due in 3 months.

15. The difference of Rs200 between the amount of the note (Rs. 6,200) and the sales price of
the merchandise (Rs. 6,000)
a) Is the interest explicitly included in the amount of the note.
b) Will be recorded in a contra account, Discount on Notes Receivable, by Co.
c) Will be recorded as interest revenue on October 1, 2006.
d) Is an error made in preparing the note.

16. Which of the following combination of financial statements would provide the most in-
depth information to help under stand a company's liquidity?
a) Income statement and statement of cash flows.
b) Balance sheet and statement of cash flows.
c) Balance sheet and income statement.
d) Statement of retained earnings and statement of cash flows.
17. Y Ltd sold equipment for Rs4, 000. This resulted in a Rs1, 500 loss. What is the impact
of this sale on the working capital?
a) Reduces working capital.
b) Increases working capital.
c) Has no affect on working capital at all.
d) The increase offsets the decrease.

18. If a company's asset turnover rate increased from 2005 to 2006, which of the following
cone usions can be made?
a) The company was less efficient during 2006 in using its assets to produce profits.
b) The company produced more sales in 2006 for each dollar invested in assets.
c) The company was more profitable in 2005.
d) The company is over-invested in assets in 2006.

19. X Ltd's master budget calls for the production of 6,000 units of product monthly; The
master budget includes indirect labor of Rs. 396,000 annually; X Ltd considers indirect labor
to be a variable cost. During the month of September, 5,600 units of product were produced,
and indirect labor costs of Rs. 30,970 were incurred. A performance report utilizing flexible
budgeting would report a flexible budget variance for indirect labor of:-
a) Rs. 170 unfavorable.
b) Rs. 170 favorable.
c) Rs. 2,030 unfavorable.
d) Rs. 2,030 favorable.

20. Which of the following is not an advantage for using standard costs for variance analysis?
a) Standards simplify product costing.
b) Standards are developed using past costs and are available at a relatively low cost.
c) Standards are usually expressed on a per unit basis.
d) Standards can take into account expected changes planned to occur in the budgeted

21. The main purpose of cost accounting is to-

a) Maximize profits,
b) Provide information to management for decision making
c) help in fixing selling price
d) To watch cash flows

22. Conversion cost is total of:

a) Direct material and direct wages
b) Direct material, direct wages, and production overheads
c) Direct wages and production overheads.
d) None of the above.

23. A cost, which does not involve cash outlay, is called:

a) Historical cost
b) Imputed cost
c) Out of pocket cost.
d) Explicit cost.
24. Committed fixed costs are those, which:
a) Arise from yearly budget appropriations
b) Are incurred because management can afford
c) Arise from additional capacity.
d) All of above

25. Cost of research undertaken at the request of the customer should be:
a) Charged to costing profit and loss account
b) Charged to selling overheads
c) Recovered from the customer.
d) All of above

26. Salaries due for the month of March will appear

a) On the Receipt side of the Cash Book
b) On the Payment side of the Cash Book
c) As a contra entry
d) Nowhere in the Cash Book.

27. Liabilities of business are Rs. 11,220 and owner's equity is Rs. 15,000. The assets of the
business will be.
a) Rs. 3,780.
b) Rs. 26,220.
c) Rs. 11,220.
d) Rs. 15,000.

28. An entry of Rs. 320 has been debited to Eknath's account at Rs. 230. If is an error of
a) Principle.
b) Omission.
c) Commission.
d) Compensatory.

29. Unearned revenues are:

a) Prepayments.
b) Liabilities.
c) Temporary accounts.
d) Both a and b above.

30. The revenue recognition principle requires that sales revenues be recognized:
a) When cash is received.
b) When the merchandise is ordered.
c) When the goods are transferred from the seller to the buyer.
d) None of the above.

31. All of the following are “other receivables” except:

a) Petty cash.
b) Interest receivable.
c) Income taxes refundable.
d) Advances to employees.
32. Depreciation is depsndent on a number of estimates. When a change in an estimate is
required, the change is ma
a) in the current year.
b) in the future year.
c) to prior periods.
d) both a and b above.

33. In order to pay a dividend:

a) the corporation must have adequate retained earnings.
b) the board of directors must declare a dividend.
c) the corporation must have adequate cash.

34. Cash flow activities that include the cash effects of transactions that create revenues and
expenses and thus enter into the determination of net income are referred to as:
a) Investing activities.
b) Financing activities.
c) Operating activities.
d) All of the above.

35. All of the following are used in preparing a statement of cash flows except:
a) A trial balance.
b) Comparative balance sheet.
c) Current income statement.
d) Additional information.

36. Depreciation is result of

a) Usage.
b) Time.
c) Obsolescence.
d) All of the above.

37. Outstanding Expenses are the examples of

a) Personal Accounts.
b) Real Accounts.
c) Nominal Accounts.
d) None of the above.

38. Liquid Assets are inclusive of all current assets except

a) Inventories.
b) Prepaid Expenses.
c) Cash.
d) Both (a) and (b) above.

39. Management Accounting is mainly related to

a) Presentation of Figures from Financial Accounting.
b) Presentation of Figures from Cost Accounting.
b) Principles
c) Both (a) and (b) above.
40. Variance Analysis is done with regards to actuals with-
a) Standards.
b) Budgeted Figures.
c) Benchmarks
d) All of the above.