Fall Drive 2011

Q.1 Assure you have just started a Mobile store. You sell mobile sets and currencies of Airtel, Vodaphone, Reliance and BSNL. Take five transactions and prepare a position statement after every transaction. Did you firm earn profit or incurred loss at the end? Make a small comment on your financial position at the end.

ANS: We shall consider five transactions and show how they are accounted for
in the books of the business. 1. Mr. Rajesh brings Rs.100000 cash as capital into his business. 2. He purchases Mobile Set to his shop Rs.10000 3. He buys currencies for cash Rs.50000 4. He sells currencies worth Rs.30000 for Rs.40000 on credit to Arjun 5. He pays wages to servants Rs.1000 Transaction 1: The business receives capital in cash. Capital is a liability and cash is an asset to the business. Liability Asset Capital 100000 Cash 100000 Transaction 2: Mobile Set is purchased for cash. This transaction can be reflected as Under.
Q.2a. List the accounting standards issued by ICAI.

ANS: To bring uniformity in terminology, accounting concepts, conventions,

and assumptions, the Institute of Chartered Accountants of India (ICAI) established Accounting Standards Board (ASB) in 1977. An Accounting Standard is a selected set of accounting policies or broad guidelines. Example: While depreciating an asset the practice of adopting straight line method or diminishing balance method or any other method is a convention regarding the principles and methods to be chosen out of several alternatives. There are altogether 32 accounting standards issued by ASB out of which, one standard (AS8) has been withdrawn pursuant to AS26 becoming mandatory.
2b. Write short notes of IFRS.

ANS: 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 financial 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 continue for the foreseeable future. IFRS helps entities access global capital market with ease.
Q.3 Prepare a Three-column Cash Book of M/s Thuglak & Co. from

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The following particulars: [10 Marks] 20X1 Jan 1. Cash in hand Rs. 50,000, Bank Overdraft Rs. 20,000 2. Paid into bank Rs. 10,000 3. Bought goods from Hari for Rs, 200 for each 4. Bought goods for Rs. 2,000 paid cheque for them, discount allowed 1% 5. Sold goods to Mohan for each Rs. 1.175 6. Received a cheque from Shyam to whom goods were sold for Rs. 800.Discount allowed 12.5% 7. Shyams cheque deposited into bank 8. Purchased an old typewriter for Rs. 200 , Spent Rs. 50 on its repairs 9. Bank notified that Shyams cheque has been returned dishonored and debited the account in respect of charges Rs. 10 10. Received a money order Rs. 25 from Hari 11. Shyam settled his account by means of a cheque for Rs. 820, Rs. 20 being for interest charged. 12. Withdrew from the bank Rs. 10,000 18. Discounted a B/E for Rs. 1,000 at 1% through bank 20. Honored our own acceptance by cheque Rs. 5,000 22. Withdrew fir personal use Rs. 1,000 24. Paid tread expenses Rs. 2,000 25. Withdrew from bank for private expenses Rs. 1,500 26. Purchased machinery from Rajiv for 5,000 and paid him by means of a bank draft purchased for Rs. 5,005 27. Issued cheque to Ram Saran for cash purchased of furniture Rs. 1,575 28. Received a cheque for commission Rs. 500 from R.& Co. and deposited into bank 29. Ramesh who owned us Rs. 500 became bankrupt and paid us 50 paise in the rupee 30. Received payment of a loan of Rs. 5,000 and deposited Rs. 3,000 out of into bank 31. Paid rent to landlord Mohan by cheque of Rs. 220 31. Interest allowed by bank Rs. 30 31. Half-yearly bank charges Rs. 50 Q.4 Choose an Indian Company of your choice that has adopted Balance Score Card and detail on it.

ANS: The Balanced Score Card is a framework for integrating measures derived from strategy. While retaining financial measures of past performance, the Balanced Score Card introduces the drivers of future financial performance. (Figure 1) The drivers (customer, internal business process, learning & growth perspectives) are derived from the organization's strategy translated into objectives and measures. The Balanced Score Card is more than a measurement system it can be used as an organizing framework for their management processes. The real power of the Balanced Score Card is when it is transformed from a

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measurement system to a management system. It fills the void that exists in most management systems - the lack of a systematic process to implement and obtain feedback about strategy

Q.5 From the following data of Jagdish Company prepare (a) a statement of source and uses of working capital (funds) (b) a schedule of changes in working capital Assets Cash Short-term investment 2008 1,26,000 42,400 2007 1,14,000 20,000

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Debtors Stock Long term Investment Machinery Building Land Total Liabilities and Equity Accumulated depreciation Creditors Bills Payable Secured loans Share capital Share premium Reserves and surplus Total

60,000 38,000 28,000 2,00,000 2,40,000 14,000 7,48,400 1,10,000 40,000 20,000 2,00,000 2,20,000 24,000 1,34,400 7,48,400 Income statement

50,000 28,000 44,000 1,40,000 80,000 14,000 4,90,000 60,000 30,000 10,000 1,00,000 1,60,000 Nil 1,30,000 4,90,000

Sales Cost of goods sold Gross Profit Less Operating expenses: Depreciation machinery Depreciation building Other expenses Net profit from operation

2,40,000 1,34,600 1,05,200 20,000 32,000 40,000

92,000 13,200 4,800 18,000 2,000 16,000

Gain on sale on long-term investment Total Loss on sale of machinery Net Profit

Adjustments: 1) Machinery worth Rs.70000 was purchased and worth Rs.10000 was sold during the year [Accumulated depreciation on machinery is Rs.18000 after adjusting depreciation on machinery sold]. Proceeds from the sale of machinery were Rs.6000 2) Dividends paid during the year Rs.11600 [ 10 Marks] Q.6 What is a cash budget? How it is useful in managerial decision making?

ANS: A proper control over cash is very essential. Cash is an important component in any activity. The control becomes inescapable. If cash is not properly managed or if it is mismanaged, the ultimate result would be disastrous. In many times and in many business situations, business failures are noticed due to the lacunae found in the cash management. Hence cash budgeting occupies a pivotal place in the study of Financial Management.

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Cash budgeting is the process of forecasting the expected receipts known as cash inflows, and expected payments known as cash outflows to meet the future obligations. The written statement of receipts and payments is known as the cash budget. It is a crystal ball which enables one to observe the future movements in cash position. It is a mere forecast of cash position of an undertaking for a definite period of time. The period may be daily, weekly, monthly, quarterly, semi-annually, or annually. The major two components of cash budget would be forecast first the cash receipts and then second forecasting the cash disbursements. The receipts of cash are formatted as follows: 1. Opening balance of cash in hand and cash at bank The Management Accounting Perspective of the Business Enterprise The management accounting view of business may be divided into two broad categories: (1) basic features and (2) basic assumptions.
Basic Features The business firm or enterprise is an organizational structure in which the basic activities are departmentalized as line and staff. There are three primary line functions: marketing, production, and finance. The organization is run or controlled by individuals collectively called management. The staff or advisory functions include accounting, personnel, and purchasing and receiving. The organization has a communication or reporting system (e.g. budgeting) to coordinate the interaction of the various staff and line departmental functions. The environment in which the organization operates includes investors, suppliers, governments (state and federal), bankers, accountants, lawyers, competitors, etc.) The organizational aspect of the business firm is illustrated in Figure 2.1. This descriptive model shows that there are different levels of management. A commonly used approach is to classify management into three levels: Top management, middle management, and lower level management. The significance of a hierarchy of management is that decision-making occurs at three levels. Basic Assumptions in Management Accounting The framework of management accounting is based on a number of implied assumptions. Although no single work has attempted to identify all of the assumptions, . Five categories of assumptions will be presented: 1. Basic goals 2. Role of management 3. Nature of Decision-making 4. Role of the accounting department 5. Nature of accounting information Basic Goal Assumptions - The basic goals or objectives the business enterprise may be multiple. For example, the goal may be to maximize net income. Other goals could be to maximize sales, ROI, or earnings per share. Management accounting does not require a specific of type of goal. However, whatever form the goal takes, management will at all times try to achieve a satisfactory level of profit. A less than satisfactory level of profit may portend a change in management. Role of Management Assumptions - The success of the business depends primarily upon the skill and abilities of managementwhich skills can vary widely among different managers. The business is not completely at the mercy of market forces. Management can through its actions (decisions) influence and control events

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within limits. In order to achieve desired results, management makes use of specific planning and control concepts and techniques. Planning and control techniques which management may use include business budgeting, cost-volume-profit analysis, incremental analysis, flexible budgeting, segmental contribution reporting, inventory models, and capital budgeting models. Management, in order to improve decision-making and operating results, will evaluate performance through the use of flexible budgets and variance analysis. Decision-making Assumptions - A critical managerial function is decisionmaking. Decisions which management must make may be classified as marketing, production, and financial. Decisions may also be classified as strategic and tactical and long-run and short-run. A primary objective of decision-making is to achieve optimum utilization of the businesss capital or resources. Effective decision-making requires relevant information and special analysis of data. Accounting Department Assumptions - The accounting department is a primary source of information necessary in making-decisions. The accounting department is expected to provide information to all levels of management. Management will consider the accounting department capable of providing data useful in making marketing, production, and financial decisions. Nature of Accounting Information - In order for the accounting department to make meaningful analysis of data, it is necessary to distinguish between fixed and variable costs and other types of costs that are not important in the recording of business transactions. Some but not all of the information needed by management can be provided from financial statements and historical accounting records. In addition to historical data, management will expect the management accountant to provide other types of data, such as estimates, forecasts, future data, and standards. Each specific 18 | CHAPTER TWO Management Accounting and Decision-Making managerial technique requires an identifiable type of information. The accounting department will be expected to provide the information required by a specific tool. In order for the accounting department to make many types of analysis, a separation of costs into fixed and variable will be required. The management accountant need not provide information beyond the relevant range of activity.

Q.1

Selected financial information about Vijay merchant company is given below: 2010 2009 69,000 57,000 7,200 11,400 43,000 32,500 3,000 5,500

Sales Cost of Goods Sold Debtors Inventories

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Cash Other current assets Current liabilities

1,500 4,000 16,000

800 2,700 11,000

Compute the current ratio, quick ratio, average debt collection period and inventory turnover for 2009 and 2010. State whether there is a favorable or unfavorable change in liquidity from 2009 to 2010. At the beginning of 2009, the company had debtors of Rs..2500 and inventory of Rs.3000. Q.2 [10 Marks]

Explain different methods of costing. Your answer should be studded with

examples (preferably firm name and product) for each method of costing. [10 Marks] Q.3 State the importance of differentiating between the fixed costs and variable

costs in managerial decision.

ANS: Fixed Costs: These are those costs which remain fixed up to certain range of
work capacity no matter how much product you produce within that capacity range. Like factory building rent. You pay the rent no matter that did you use that building for making the products or not. Variable Costs: These are those costs which change with the change in the number of product units you produce. Like Material , Labor etc Mixed Cost/Semi Variable Costs: These are those cost the part of which is remain fixed and some part of the cost is variable.
Fixed vs. variable costs

Understanding the process of managing costs first requires an understanding of two general types of costs: fixed and variable. Fixed costs, or sunk costs as they are sometimes called, are those that generally do not vary between payment intervals. Generally, these costs cannot be altered on a short-term basis because of contractual agreements or simply because it is impractical.

Table 1: Examples of fixed and variable costs

Fixed monthly costs

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Rent........................................................... Yellow pages ad...................................... Loan payment........................................... Office managers salary............................. Doctors salary............................................ Total fixed costs......................................... Variable costs per patient visit Supplies (forms, covers, etc.).................... Electricity to operate a roller table............... Collections costs (stamps, invoices, etc.).......

$1,100 $400 $500 $3,000 $5,000 $10,000 $3 $1 $1

ne way to determine your fixed costs is to consider the expenses you would continue to incur if you temporarily closed your practice and no patients were being treated. In this case, your rent, car leases, yellow page ad fees and loan payments would still be due. They generally do not change with increases or decreases in business activity. It is important to note that fixed costs are unvarying only within a certain range of business activity. For example: if the practice grows enough to require additional space or additional employees, the fixed costs associated with rent or salaries will change as well. Variable costs are those that change as the level of business activity changes. Examples of the variable costs within a chiropractic business would be supplies used for each patient visit, collection fees paid to external billing agencies and wages for hourly, part-time employees. These costs are driven primarily by the practices business activity, by number of patients that the practice treats. The closed practice test we used above to determine the fixed costs of a practice can also be used to determine the variable costs. The variable costs are those that would stop if the practice were closed for a month and no patients were treated at all. Once you understand the difference between fixed and variable costs, it is important to know how to distinguish one from the other. For instance, consider a practice that has fixed costs of $10,000 and variable costs of $5 per patient. (See Table 1 for an example of fixed and variable costs.) To cover its monthly expenses, the practice would have to earn $10,000 in fees plus $5 per patient treated. If the practice had only one patient visit per month, it would have to charge $10,005 for that one treatment in order to cover its fixed and variable costs! If the practice had 1,000 patient visits during the month, its total costs would be $15,000 ($10,000 in fixed costs plus 1,000 patient visits at $5 each). Therefore, this practice would only have to charge $15 per patient visit to cover its fixed and variable costs.

Q.4 2009

Following are the extracts from the trial balance of a firm as at 31st March

Name of the account Sundry debtors

Dr 2,05,000

Cr

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Bad debts Additional Information

3,000

1) After preparing the trial balance, it is learnt that Mr.X a debtor has become insolvent and nothing could be recoverd from him and, therefore the entire amount of Rs.5,000 due from him was irrecoverable. 2) Create 10% provision for doubtful debt. Required: Pass the necessary journal entries and show the sundry debtors account, bad debts account, provision for doubtful debts account, P&L a/c and Balance sheet as at 31st March 2009. [10 Marks]

Q.5 A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in investment in accounts receivable. Based upon this information, the companys (select the best one and give reason) 1) Average collection period has decreased 2) Percentage discount offered has decreased 3) Accounts receivable turnover has decreased 4) Working Capital has increased. [10 Marks] Q.6 Identify the users of accounting information.

ANS: There are two types of users( internal and external):- list of internal users:1. employees 2. management 3. shareholders/owners.

list of external users :those who have economic transactions like

suppliers creditors bankers financial institutions

others like
competitors government and regulatory agencies

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auditors researchers and academicians representatives of others interest like brokers ,underwriters etc potential shareholders

* Management - obtain financial information in a way that best suits its needs, (i.e. ways to cut costs, maximize profit, etc.). * Board of Directors - information to assist in determination of current executive positions External users: * IRS - requires the information be presented in a very specific manner. * Stockholders and potentional stockholders - information that will aid in decision continue to hold the stock, sell the stock, or purchase the stock. * Bondholders, bankers & other creditors - information that will aid in decision of whether or not to purchase the bond. Bank needs information that will help it determine the company's ability to repay the loan and interest. * Employee (can also be considered internal) - information that will aid in decision to continue working at the company or look for employment elsewhere. * Supplier - information to aid in decision to continue or start supplying to the company.