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MBA Semester 1

MB0041 – Financial Management & Accounting


Assignment Set - 1

Q.No.1: What is accounting cycle? List the sequential steps involved in Accounting cycle?
Answer: Accounting is termed as language of business which records all even ts and transactions
that are of monetary value and facilitates communication among individuals in a society.
Accountancy refers to a systematic knowledge of accounting. It explains ‘why to do’ and ‘how to
do’ of various aspects of accounting. It tells us why and how to prepare the books of accounts and
how to summarize the accounting information and communicate it to the interested parties.

Steps involved in Accounting cycle.


Accounting is the process of identifying the transactions and events, measuring the transactions and
events in terms of money, recording them in a systematic manner in the books of accounts,
classifying or grouping them and finally summarizing the transactions in a manner useful to the users
of accounting information.

1. Identifying the transactions and events: This is the first step of accounting process. It identifies the
transaction of financial character that is required to be recorded in the books of accounts.
Transaction is transfer of money or goods or services from one person o r account to another
person or account. Events happen as a result of internal policies or external needs. Events of non
financial character cannot be recorded even though such events may have an impact on the
operational results of the firm.

2. Measuring: This denotes expressing the value of business transactions and events in terms of
money (in terms of rupees in India).

3. Recording: It deals with recording of identifiable and measurable transactions and events in a
systematic manner in the books of original entry that are in accordance with the principles of
accountancy.

4. Classifying: It deals with periodic grouping of transactions of similar nature that appear in the
books of original entry into appropriate heads by posting or transfer entries. For Eg: All purchases
of goods made for cash or on credit on different dates are brought to purchase account.

5. Summarizing: It deals with summarizing or condensing transactions in a manner useful to the


users. This function involves the preparation of financial state ments such as income statement,
balance sheet, statement of changes in financial position and cash flow statement.

6. Analyzing: It deals with the establishment of relationship between the various items or group of
items taken from income statement or balanc e sheet or both. Its purpose is to identify the
financial strengths and weaknesses of the enterprise. The above six process in the present day
scenario are generally performed using software packages.

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7. Interpreting: It deals with explaining the significanc e of those data in a manner that the end
users of the financial statement can make a meaningful judgment about the profitability and
financial position of the business. The accountants should interpret the statement in a manner
useful to the users, so as t o enable the user to make reasoned decision out of the alternative
course of action. They should explain various factors on what has happened, why it happened,
and what is likely to happen under specific conditions.

8. Communicating: It deals with communi cating the analyzed and interpreted data in the form of
financial reports/ statements to the users of financial information eg Profit and loss account, Balance
Sheet, Cash flow and Funds Flow statement, Auditors report etc.

Q.No.2A). Bring out the differ ence between Indian GAAP and US GAAP norms?
Answer: Some of the major differences between US GAAP and Indian GAAP are highlighted
hereunder:

1. Underlying assumptions : Under Indian GAAP, Financial statements are prepared in accordance
with the principle of conservatism, which basically means “Anticipate no profits and provide for
all possible losses”. Under US GAAP conservatism is not considered, if it leads to deliberate and
consistent understatements.

2. Prudence vs. rules: The Institute of Chartered Accoun tants of India (ICAI) has been structuring
Accounting Standards based on the International Accounting Standards ( IAS) , which employ
concepts and `prudence' as the principle in contrast to the US GAAP, which are "rule oriented",
detailed and complex. It i s quite easy for the US accountants to handle issues that fall within the
rules, while the International Accounting Standards provide a general framework of accounting
standards, which emphasise "substance over form" for accounting. These rules are less
descriptive and their application is based on prudence. US GAAP has thus issued several Industry
specific GAAP , like SFAS 51 ( Cable TV)

3. Format/ Presentation of financial statements : Under Indian GAAP, financial statements are
prepared in accordance with t he presentation requirements of Schedule VI to the Companies
Act, 1956. On the other hand , financial statements prepared as per US GAAP are not required to
be prepared under any specific format as long as they comply with the disclosure requirements
of US GAAP. Financial statements to be filed with SEC include

4. Consolidation of subsidiary companies : Under Indian GAAP (AS 21), Consolidation of Accounts
of subsidiary companies is not mandatory. AS 21 is mandatory if an enterprise presents
consolidated financial statements. In other words, the accounting standard does not mandate
an enterprise to present consolidated financial statements but, if the enterprise presents
consolidated financial statements for complying with the requirements of any statute or
otherwise, it should prepare and present consolidated financial statements in accordance with
AS 21.Thus, the financial income of any company taken in isolation neither reveals the quantum
of business between the group companies nor does it reveal the true pi cture of the Group .
Savvy promoters hive off their loss making divisions into separate subsidiaries, so that financial
statement of their Flagship Company looks attractive .Under US GAAP (SFAS 94),Consolidation of
results of Subsidiary Companies is mandat ory , hence eliminating material, inter company
transaction and giving a true picture of the operations and Profitability of the various majority
owned Business of the Group.

5. Cash flow statement : Under Indian GAAP (AS 3) , inclusion of Cash Flow statemen t in financial
statements is mandatory only for companies whose share are listed on recognized stock
exchanges and Certain enterprises whose turnover for the accounting period exceeds Rs. 50
crore. Thus , unlisted companies escape the burden of providing c ash flow statements as part of
their financial statements. On the other hand, US GAAP (SFAS 95) mandates furnishing of cash
flow statements for 3 years – current year and 2 immediate preceding years irrespective of
whether the company is listed or not.

6. Investments: Under Indian GAAP (AS 13), Investments are classified as Current and Long term.
These are to be further classified Government or Trust securities ,Shares, debentures or bonds

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Investment properties Others -specifying nature. Investments classified as current investments are
to be carried in the financial statements at the lower of cost and fair value determined either on
an individual investment basis or by category of investment, but not on an overall (or global)
basis. Investments classified as l ong term investments are carried in the financial statements at
cost. However, provision for diminution is to be made to recognise a decline, other than
temporary, in the value of the investments, such reduction being determined and made for
each investment individually. Under US GAAP ( SFAS 115) , Investments are required to be
segregated in 3 categories i.e. held to Maturity Security ( Primarily Debt Security) , Trading
Security and Available for sales Security and should be further segregated as Current or Non
current on Individual basis. Debt securities that the enterprise has the positive intent and ability to
hold to maturity are classified as held -to-maturity securities and reported at amortized cost. Debt
and equity securities that are bought and hel d principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value , with unrealised gains and
losses included in earnings. All Other securities are classified as available -for-sale securities and
reported at fair value, with unrealised gains and losses excluded from earnings and reported in a
separate component of shareholders' equity.

7. Depreciation: Under the Indian GAAP, depreciation is provided based on rates prescribed by the
Companies Act, 1956. Higher depreciation provision based on estimated useful life of the assets
is permitted, but must be disclosed in Notes to Accounts.( Guidance note no 49) . Depreciation
cannot be provided at a rate lower than prescribed in any circumstance. Similarly, there is no
compulsion to provide depreciation at a higher rate, even if the actual wear and tear of the
equipments is higher than the rates provided in Companies Act. Thus, an Indian Company can
get away with providing with lesser depreciation , if the sa me is in compliance to Companies Act
1956. Contrary to this, under the US GAAP, depreciation has to be provided over the estimated
useful life of the asset, thus making the Accounting more realistic and providing sufficient funds
for replacement when the a sset becomes obsolete and fully worn out.

8. Expenditure during Construction Period : As per the Indian GAAP (Guidance note on ‘Treatment
of expenditure during construction period' ) , all incidental expenditure on Construction of Assets
during Project stage are accumulated and allocated to the cost of asset on completion of the
project. Contrary to this, under the US GAAP (SFAS 7) , such expenditure are divided into two
heads – direct and indirect. While, Direct expenditure is accumulated and allocated to th e cost
of asset, indirect expenditure are charged to revenue.

9. Revaluation reserve : Under Indian GAAP, if an enterprise needs to revalue its asset due to
increase in cost of replacement and provide higher charge to provide for such increased cost of
replacement, then the Asset can be revalued upward and the unrealised gain on such
revaluation can be credited to Revaluation Reserve ( Guidance note no 57). The incremental
depreciation arising out of higher book value may be adjusted against the Revaluation R eserve
by transfer to P&L Account. However for window dressing some promoters misutilise this facility to
hoodwink the shareholders on many occasions. US GAAP does not allow revaluing upward
property, plant and equipment or investment.

10. Long term Debts: Under US GAAP , the current portion of long term debt is classified as current
liability, whereas under the Indian GAAP, there is no such requirement and hence the interest
accrued on such long term debt in not taken as current liability.

11. Extraordinary items, prior period items and changes in accounting policies : Under Indian GAAP(
AS 5) , extraordinary items, prior period items and changes in accounting policies are disclosed
without netting off for tax effects . Under US GAAP (SFAS 16) adjustments for tax effects are
required to be made while reporting the Prior period Items.

12. Proposed dividend: Under Indian GAAP , dividends declared are accounted for in the year to
which they relate. For example, if dividend for the FY 1999 -2000 is declared in Sep 2000 , t hen the
corresponding charge is made in 2000 -2001 as below the line item . Contrary to this , under US
GAAP dividends are reduced from the reserves in the year they are declared by the Board.
Hence in this case under US GAAP , it will be charged Profit and loss account of 2000 -2001 above
the line.

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13. Loss on extinguishment of debt : Under Indian GAAP, debt extinguishment premiums are adjusted
against Securities Premium Account. Under US GAAP, premiums for early extinguishment of debt
are expensed as incurred.

Q.No.2B). What is Matching Principle? Why should a business concern follow this principle?
Answer: Matching Principle

Revenue earned during a period is compared with the expenditure incurred to earn that income,
whether the expenditure is paid during that period or not. This is matching cost and revenue
principle, which is important to find out the profit earned for that period. Here costs are reported as
expenses in the accounting period in which the revenue associated with those costs is reported.

While preparing the final accounts adjustments are made for outstanding expenses, prepaid
expenses, outstanding income and income received in advance.

Q.No.3: Prove that the accounting equation is satisfied in all the following transactions of Mr. X
(a) Commence business with cash Rs.50000
(b) Paid rent in advance Rs.1000
(c) Purchased goods for cash Rs.18000 and Credit Rs.20000
(d) Sold goods for cash Rs.25000 costing Rs.22000
(e) Paid salary Rs.5000 and salary outstanding is Rs.3000
(f) Bought moped for personal use Rs.20000
Answer: Accounting Equation = Capital + Liabilities

=Current Assets + Fixed Assets i.e. Liabilities = Assets

Capital & Liabilities Amount Assets Amount


Capital 50000 Cash 50000
Profit on sale of goods 3000 Less Advance Rent -1000
Less drawings -20000 Less Cash Purchase -18000
Add cash profit on sale 3000
Sundry Creditors 20000 Less Salary -5000
Add Salary O/S 3000 Less Drawings -20000
Advance Rent 1000
Total 56000 CWIP 46000
Total 56000

Profit and Loss Asccount


Dr Cr
Cash Purchase 18000 By B/S 46000
Credit Purchase 20000
Salary 5000
Salary 3000
46000

Q.No.4: Following are the extracts from the Trial Balance of a firm as on 31st March 2007

Dr Cr
Sundry Debtors 2,05,000

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Provision for Doubtful Debts 10,000
Provision for Discount on 1,800
Debtors
Bad Debts 3,000
Discount 1,000

Additional Information:
1) Additional Bad Debts required Rs.4,000
2) Additional Discount allowed to Debtors Rs.1,000
3) Maintain a provisio n for bad debts @ 10% on debtors
4) Maintain a provision for discount @ 2% on debtors

Required: Pass the necessary journal entries and show the relevant accounts including final
accounts.
Answer:
Particulars C/F Dr Amount Cr Amount
Bad debts Dr to Debtors acount 3000
3000
Provisiuon for bed debt A/C Dr to bad debts 7000
7000
P/L A/C Dr to provision for bad debt A/c 17500
17500
Discount A/C Dr to discount A/c 1000
1000
Provision for discount A/C Dr to discount A/C 2000
2000
P/L A/C, Dr to provision for discount A/C 1020
1020

Q.No.5A). Bring out the difference between trade discount and cash discount.
Answer:
Trade Discount
It is a reduction granted by a supplier from the list price of goods or services on busin ess
consideration (such as quantity bought, trade practices etc). For prompt payment cash discount is
allowed.

Cash Discount
It is the reduction granted by the supplier from the invoice price in consideration of immediate
payment or payment within a stipu lated period.

Difference between Trade Discount and Cash Discount:

1. Trade discount is a reduction granted by a supplier from the list price on goods or services on
business considerations such as quantity bought, trade practices etc while cash discount is a
reduction granted from the invoice price in consideration of immediate payment or payment
within a stipulated period.
2. Trade discount is allowed to promote the sales while cash discount is allowed to encourage early
or prompt payment
3. Trade discount is shown by the way of deduction in the invoice itself. Hence no further entry is
required in the books of accounts. Cash discount is shown as an expense in profit and loss
account.
4. Trade discount may vary with the quantity purchased while cash discount varies with the period.

Q.No.5B). Explain the term (1) asset (2) liability with the help of examples.
Answer: 1) Asset

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An asset is a resources legally owned by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise. Eg: Land and buildings, plant and
machinery, furniture and fixtures, cash in hand and at bank, debtors and stock etc., are regarded as
assets, Assets may be fixed, current, liquid or fictitious.

Types of Assets:

1. Fixed assets are those which are held for use in the production or supply of goods and
services. Ex: plant and machinery, which is used fairly for long period.

2. Current assets are those which are held or receivable within a year or within the operating
cycle of the business. They are intended to be converted into cash within a short period of
time. Ex: Stock in trade, debtors, bills receivable, cash at bank etc.,

3. Liquid assets are those which can be easily converted into cash and for instance, cash in
hand, cash at bank, marketable investments etc.,

4. Fictitious assets are in the form of such expenses which could not be written Asset:off during
the period of their incidence. For example, promotional expenses of a company which could
not be treated as expenditure in the yea r of incidence are shown as fictitious asset.

2) Liability

Liability: It is a financial obligation of an enterprise arising from past event the settlement of which is
expected to result in an outflow of resources embodying economic benefit. Eg. Loans pa yable,
salaries payable, term loans.

Current liability is that obligation which has to be satisfied within a year. For example, payment to be
made sundry creditors for the goods supplied by them on credit; bills payable accepted by the
businessman; overdraft raised by the businessman in a bank etc.

Q.No.6: A fresh MBA student joined as trainee was asked to prepare Trial balance. He was unable to
submit a correct trial balance. You, as a senior accountant find out the errors and rectify them. After
redrafting the trial balance prepare trading and Profit and loss account.

Particulars Debit Credit


Capital 7,670
Cash in Hand 30
Purchases 8,990
Sales 11,060
Cash at bank 885
Fixtures and Fittings 225
Freehold premises 1.500
Lighting and Heating 65
Bills Receivable 825
Return Inwards 30
Salaries 1.075
Creditors 1890
Debtors 5,700
Stock at 1st April 2007 3,000
Printing 225
Bills Payable 1,875
Rates, taxes and insurance 190
Discount received 445
Discount allowed 200
21,175 21,705

Adjustments:
1) Stock on hand on 31st March 2008 was valued at Rs.1800

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2) Depreciate fixtures and fittings by Rs.25
3) Rs.35 was due and unpaid in respect of salaries
4) Rates and insurance had been paid in advance to the extent of Rs.40

Answer:
Particulars Debit Credit
Capital 7670
Cash in Hand 30
Purchases 8,990
Sales 11060
Cash at bank 885
Fixtures and Fittings 225
Freehold premises 1500
Lighting and Heating 65
Bills Receivable 825
Return Inwards 30
Salaries 1.075
Creditors 1890
Debtors 5,700
Stock at 1st April 2007 3,000
Printing 225
Bills Payable 1875
Rates, taxes and insurance 190
Discount received 445
Discount allowed 200
21,866

P & L Account

Particulars Amount Dr Particulars Amount Cr


To opening 3000 By Sales 11060
To Purchase 8990 By returns 30
To Lighting & Heating 65 11030
To gross profit 775 By closing stock 1800
12830 12830
To salaries 1075
Due 35 By gross profit 775
1110 By Discount received 445
Printing 225
To rate taxes 190 By Net loss 490
Less Advance 40 150
To depriciation 25
To discount 200
1710 1710

Balance sheet as on 31/03/2008

Liabilities Rs Assets Rs
Capital 7670 Furniture & Fixture 225
Less Net Loss 490 Less Depreciate 25 200
7180 Freehold premises 1500
Creditors 1890 Cash in hand 30
Bills payable 1875 Rental Advance 40
Unpaid salary 35 Cash of book 885
10980 Bills receivables 825
Debtors 5700

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Closing stock 1800
10980

MBA Semester 1
MB0041 – Financial Management & Accounting
Assignment Set - 2

Q.No.1: Uncertainties inevitably surround many transactions. This should be recognized by exercising
prudence in preparing financial statement. Explain this concept with the help of an example.
Answer: Accountants follow the rule “anticipate no profits but provide for all anticipated losses “.
Whenever risk is anticipated sufficient provision should be mad e. The value of investments is normally
taken at cost, even if the market value is higher than the cost. If the market value expected is lower
than the cost, then provision should be made by charging profit and creating investment fluctuation
fund. This is the principle of conservatism and it does not mean that the income or the value of
assets should be intentionally under stated.

The prudence concept in accounting governs the recording and reporting of financial transactions,
"such that the assets or in come are not overstated and liabilities or expenses understated”.
Prudence in accounting is about exercising due caution in preparing financial statements to reflect
the least favorable position, particularly as accounting depends on estimates -even for simpler
transactions. It is, therefore, one of the fundamental principles of financial accounting and is
considered very important by the IAS 1 (International Accounting Standard).
Often, in accounting, there are a body of methods that can be used for valuati on. The different
methods of estimating depreciation are a prime example. The principle of prudence holds that,
where there are alternative methods or valuations, you should apply the one with the most
conservative result. In deciding the value of stock fo r example, it would be prudent to use the cost
price of the stock as opposed to the selling price. This is because the sale of that stock is merely
anticipated. The derived principle from this is that where revenue is anticipated, the valuation should
be conservative or cautious.

On the other hand, there are anticipated expenses and liabilities. Anticipated expenses and
liabilities are treated differently under the prudence concept. They are immediately recorded or
taken into account, even if the loss has not yet been experienced. An example of this concept in an
everyday situation is if you foresee that you have to make your mortgage payment at the end of the
month. When you budget at the start of the month, you should anticipate that expense before it is
due. When the expense is due, you would likely be in a position to cover it. Businesses ought to
address devalued stock and debt servicing in the same way.
The principle of prudence also governs the handling of profit. Even though a business can expect
profit, it must not be recorded before it is realized. One reason for this is that any number of factors
can affect the business' profits positively or negatively. Ideally, profit should be in cash form, because
of the ease of determining the value of cash. I n addition, the cash value of profit from assets must
be certain-within reason. An example of this is if you sell an asset and use the proceeds to buy a
higher-value asset. You can only declare a profit once you purchase the higher -value asset and
once it maintains a determinable value by the end of the financial period.
The prudence concept creates a proper platform for accounting standards and reinforces the
fundamentals of financial reporting -such as the principle of Fair Presentation, which dictates tha t
financial reports should fairly reflect the financial position and cash flows of an organisation. In
addition, the prudence concept is not meant to justify withholding revenue or creating covert
reserves, since this is not in keeping with the principle o f Fair Presentation.

For example, suppose a manufacturing company's Warranty Repair Department has documented a
three-percent return rate for product X during the past two years, but the company's Engineering
Department insists this return rate is just a statistical anomaly and less than one percent of product X
will require service during the coming year. Unless the Engineering Department provides compelling
evidence to support its estimate, the company's accountant must follow the principle of
conservatism and plan for a three-percent return rate. Losses and costs —such as warranty repairs —
are recorded when they are probable and reasonably estimated. Gains are recorded when

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realized.

Hence, if the prudence concept is followed, the potential investor will not be shown accounts,
which are overly rosy or misleading.

Q.No.2A). When is the change in accounting policy recommended and what are the disclosure
requirements regarding the change in accounting policy?
Answer: Accounting Policies
It refers to specific accounting principles and methods of accounting adopted by the enterprise
while preparing and presenting the financial statements. The management of each enterprise has
to select appropriate accounting policies based on the nature and circumstances of the business
they are in. Some of the areas in which different accounting policies may be adopted are:
· Methods of depreciation, amortization,
· Treatment of expenditure during construction,
· Conversion or translation of foreign currency items,
· Valuation of inventories,
· Treatment of goodwill,
· Valuation of investments,
· Treatment of retirement benefits,
· Recognition of profit on long -term contract,
· Valuation of fixed assets and
· Treatment of contingent liabilities.

The major consider ations governing the selection and application of accounting policies are:

a. Prudence: Uncertainties are a fact and it is inevitable. This should be recognized by exercising
prudence in preparing financial statements.
b. Substance Over form: Transactions and events should be accounted for and presented in
accordance with their substance and financial reality and not merely with their legal form.
c. Materiality: Financial statement should disclose all material items which might influence the
decision of the users of the financial statement.

Change in Accounting Policies:

The change in accounting policy is recommended only in the following circumstances:


a. If it is required by statute for compliance with an accounting standard
b. If is considered that the change would result in a more appropriate presentation of the financial
statements of an enterprise.

Disclosure in case of change in Accounting Policy:

· If change has a material effect in current period and the effect of change is ascertainable the
amount of change should be disclosed.
· If the change has a material effect in current period and the effect of change is not
ascertainable wholly or in part, the fact should be disclosed.
· If change has no material effect in current period but which is re asonably accepted to have a
material effect in later periods, the fact of such change should be appropriately disclosed.

Q.No.2B). Explain IFRS.


Answer: International Financial Reporting System:
IFRS are standards, interpretations and framework for the preparation and presentation of financial
statements. IFRS was framed by International Accounting Standards Board (IASB).
The objective of financial statement is to provide information about the financial position,
performance and changes in the financ ial position of an entity. It should also provide the current
financial status of the entity to all the users of financial information. IFRS follows accrual basis of
accounting and the financial statements are prepared on the basis that an entity will cont inue for
the foreseeable future. IFRS helps entities access global capital market with ease.

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Under IFRS, we need to submit a statement of financial position (Balance Sheet), Comprehensive
income statement (Profit & Loss/ Income and Expenditure account), ei ther a statement of changes
in equity or statement of recognized income or expenses, cash flow statement and notes including
summary of significant accounting policies.

Q.No.3: Journalise the following transactions:

01.01.09 Bought goods for Rs.10,000


02.01.09 Purchased goods from X Rs.20,000
03.01.09 Bought goods from Y for Rs.30,000
against a current dated cheque
04.01.09 Purchased goods from Z [price list price
is Rs.30,000 and trade discount is 10%]
05.01.09 Bought goods of the list prc e of
Rs.1,25,000 from M less 20% trade
discount and 2% cash discount. Paid
40% of the amount by cheque
06.01.09 Returned 10% of the goods supplied by
X
07.01.09 Returned 10% of the goods supplied by
Y

Answer:
Date Particulars C/F Dr Amount Cr Amount
01.01.09 Purchase A/C Dr to bought A/C 10000
10000
02.01.09 Purchase A/C Dr to goods bought fro X 20000
20000
03.01.09 Purchase A/C goods bought from Y 30000
30000
03.01.09 Y acount Dr to bank A/C 30000
30000
04.01.09 Purchase A/C Dr to Z acount 27000
27000
05.01.09 Purchase A/C dr to M A/C (20% trade discount and 2% 100000
cash discount)
97500
2500
05.01.09 M, A/c Dr to bank A/C (40% of the amount by cheque) 39200
39200
06.01.09 X, A/C Dr to purchase return 2000
2000
07.01.09 Y, A/C Dr to purchase return 3000
3000
261200 261200

Q.No.4: Bring out the difference between Funds Flow Statement and Cash Flow Statement. Mention
up to what point in time they are similar and from whe re the differences begin.
Answer: Funds Flow Statement
This forms the final step in funds flow analysis. It consists of two components – the source of funds and
the application of funds. This statement reveals the overall creditworthiness of the enterpr ise. A Funds
Flow Statement differs from an Income Statement in the following aspects:
1. Funds flow statement reveals how the funds were obtained and how they were utilized whereas
the income statement discloses the results of the business activity.
2. A funds flow statement matches the ‘funds raised’ with ‘funds utilized’

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3. Income statement which discloses the results of operations cannot accurately furnish funds from
operations because non -fund items such as depreciation, writing off fictitious assets e tc are
included in it.

Cash Flow Statement


Cash flow statement, also known as “Statement Accounting for variations in cash”, ‘Where Got
Where Gone Statement’. It shows the movement of cash and their causes during the period under
consideration. The statem ent is significant to the stakeholders of the company and is prepared to
show the impact of financial policies and procedures on the cash position. It takes into account all
the transactions that have a direct impact upon cash and cash equivalent.

Cash flow from Operating Activities


Net Profit before taxation and extraordinary items:
Adjustments for
· Depreciation
· Foreign Exchange loss
· Interest Income
· Dividend Income
· Interest expenses
Operating Profit before Working Capital changes
(+)Decrease/(-)Increase in Sundry Debtors
(+)Decrease/(-)Increase in Inventories
(-)Decrease /(+) Increase in Sundry Creditors
Cash generated from operations
Income Tax Paid
Cash flow from extraordinary items
Proceeds from earthquake disaster settlement
Net Cash flow from Operating activities (i)
Cash Flow from Investing Activities
Purchase of Fixed Assets
Proceeds from sale of equipment
Interest received
Dividends received
Net cash flow from investing activities (ii)
Cash flow from Financing Activities
Proceeds from issua nce of share capital
Proceeds from long term borrowings
Repayment of long term loans
Interest Paid
Dividends Paid
Net cash used in financing activities (iii)
Net increase in cash & cash equivalent (i)+(ii)+(iii)
(+) Cash and cash equivalents at the beginni ng of the period
= Cash and cash equivalents at the end of the period

Difference between Cash Flow Statement and Funds Flow Statement

Following are the points of difference between Cash Flow Analysis and a Funds Flow:

Cash Flow Analysis Fund Flow Analysis


1. It is concerned only with the change in 1. Is concerned with change in working capital
cash position position between; two balance sheet dates.
2. It merely a record of cash receipts and 2. In Fund Flow statement net effect of receip ts and
disbursements disbursements are recorded.
3. It is more useful to the management as a 3. It is concerned with the total provision of funds.
tool of financial analysis in short period.
4. Cash is part of working capital and 4. An improvement in funds positions need not
therefore, an improvement in cash posi tion resulting improvement in cash position
results in improvement in the funds position

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5. An increase in a current liability of decrease 5. An increase in a current liability or decrease in a
in a current asset will result in increase in cash current asset results decrease in working capital
position
6. It is based on cash basis 6. It is based on accrual basis
7. It is not based on ledger mode 7. It is based on ledger principles

Q.No.5A). Determine the s ales of a firm with the following financial data.
Current Ratio 1.5
Acid test ratio 1.2
Current Liabilities 8,00,000
Inventory 5 times
Turnover ratio
Answer: Current Ratio = 1.5= Current Assets/Current Liabilities

=C.A//800000

Current Assets = 1.5*800000 = 1200000

Acid test Ratio =1.2 = Quick Assets/Current Liabilities

Quick Assets = 1.2 * Current liabilities

= 1.2 * 800000 = 960000

Current Assets- Current liabilities = Inventory

Inventory = 1200000 -960000 = 240000

Inventory turnover R atio = Sales/Inventory = 5 times

Sales = Inventory * 5 times = 240000*5=Rs 12,00,000/ -

Q.No.5B). What is Du-Pont chart?


Answer: Return on Investments represents the earning power of the company. It depends on Net
profit ratio and capital turnover rati o. A change in any of these ratios will change the firm’s earning
capacity. This chart shows how the return on capital employed is affected by various factors such as
cost of goods sold, change in working capital, change in selling and administrative expen ses etc.
This chart helps the management in detecting the core issues that confront the management and it
helps in effective use of capital.

MBA-1 | Subject Code: MB0041 - Financial Management & Accounting Page 12 of 13


Q.No.6: From the following data calculate the:
1. Break-even point expressed in terms of sale amount/revenue
2. Number of units that must be sold to earn a profit of Rs.60,000 per year
Sales price (per unit) Rs.20
Variable Rs.11
manufacturing cost
per unit
Variable selling cost Rs.3
per unit
Fixed factory 5,40,000
overheads (per year)
Fixed selling cost (per 2,52,000
year)
Answer: 1). Sales price per unit = Rs 20

Total variable cost per unit =Rs 14

Fixed factory overheads (per year) = Rs 540000


Fixed selling cost (per year) = Rs 252000

Total = Rs 792000

BEP in Rs = Fixed Cost/ (1-v.c/s.p)

= 792000 / ( 1-14/20) = 792000 / ( 6/20) = 792000*20 / 6 = 2640000

2. Contribution = S-V = 20-14 = 6

No of units for a desired profit = FC+DP / Contribution per unit

= 792000 + 60000 / 6 = 852000 / 6 = 142000 units

MBA-1 | Subject Code: MB0041 - Financial Management & Accounting Page 13 of 13