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Amity Business School

Amity Business School


ACCOUNTING & FINANCE FOR MANAGEMENT
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The Need for Accounting

Managers, investors, and other internal groups


want the answers to two important questions:

How well did the


organization perform?
Where does the
organization stand?
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The Need for Accounting

Accountants answer these questions


with two major financial statements:

Income Statement

Balance Sheet
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Confused?
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What is Accounting?
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
to help users make
Comparable better decisions.
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Accounting Activities
 Identifying  Recording
Business Business
Activities Activities
 Communicating
Business Activities
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ACCOUNTING
Accounting is a process of Identifying, Measuring,
Recording, Classifying, Summarizing, Analyzing,
Interpreting and Communication the economic
information of an organization to its users.

Accounting is also called the language of business


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Activities Under
Accounting

Identifying Measuring Recording Classifying Summarizing

Transactions

Events

Analyzing

Interpreting

Communication User
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User of Accounting Information

External Users Internal Users

•Lenders •Consumer Groups •Managers •Sales Staff


•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
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User of Accounting Information

External Users Internal Users

Financial accounting provides Managerial accounting provides


external users with financial information needs for internal decision
statements. makers.
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Usefulness of Accounting
 Facilitates to replace memory
 Facilitates to comply with legal requirement
 Facilitates to ascertain net result of operations
 Facilitates to ascertain financial position
 Facilitates the users to take decisions
 Facilitates a comparative study
 Assists the management
 Facilitates control over assets
 Facilitates the settlement of tax liability
 Facilitates the ascertainment of value of business
 Facilitates raising loans
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Accounting Limitations

 Ignores the qualitative elements


 Not free from bias
 Estimated position and not real position
 In some cases ignores the price level changes
 Window Dressing
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Generally Accepted Accounting Principles


Financial accounting practice is governed by concepts
and rules known as generally accepted accounting
principles (GAAP).

Relevant Information Affects the decision of its


users.

Reliable Is trusted by
Information users.

Comparable Is helpful in contrasting


Information organizations.
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Accounting is based
on a set of principles
on which there is
general agreement,
not on rules that
can be “proved.”
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Accounting Principles

Accounting Accounting
Concepts Conventions

Concept includes those basic assumptions or Conventions includes those customs or traditions
Conditions upon which the science of Which guide the accountant while preparing
Accounting is based Accounting statements
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Basic Accounting Concepts

Business Entity Concept

Money Measurement Concept


Going concern Concept

Accounting Period Concept


Historical Cost Concept

Matching Concept

Revenue Recognition Concept

Dual Aspect Concept


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Separate Entity Concept

The activities of the


entity are to be kept
separate and distinct
from the activities
of the owner and all
other economic entities.
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MONEY MEASUREMENT ASSUMPTION

Only transaction data that can be expressed in terms of


money be included in the accounting records.

Hiring Paying
an employee an employee
Do not record Record
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GOING CONCERN ASSUMPTION


The enterprise will continue in operation long
enough to carry out its existing objectives.

NOW FUTURE
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Accounting Period Assumption

The economic life of a business can be


divided into artificial time periods

2008 2009 2010


QTR 1 JAN FEB MAR
QTR 2 APR MAY JUN
QTR 3 JUL AUG SEPT
QTR 4 OCT NOV DEC
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COST ASSUMPTION
Requires assets to be recorded at cost.

COST COST
is reliable because it is:
is relevant because it represents:

OBJECTIVELY
PRICE PAID
MEASURABLE
or
and
ASSETS SACRIFICED
FACTUAL
or
and
COMMITMENT MADE
VERIFIABLE
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MATCHING CONCEPT

Expenses are matched with revenues


in the period in which efforts
are made to generate revenues.
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REVENUE RECOGNITION CONCEPT

Revenue should be recognized in the


accounting period in which it is earned.

When a sale is involved, revenue is


recognized at the point of sale.
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Dual Aspect Concept


This is one of the fundamental concept of Accounting. It may be stated as “for every
Debit there is a credit”. Every business transaction has a dual effect and the entry
Made for the transaction is recorded on the debit and as well as on the credit side

It may be expressed in the form of equation

Assets = Liabilities + Equity


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ACCOUNTING CONVENTIONS

CONSERVATISM

CONSISTENCY

FULL DISCLOSURE

MATERIALITY
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CONSERVATISM
According to this convention, the Accountants should
follow the Rule
“Anticipate no profits but provide for all probable losses”.
The convention requires
That PROFIT should neither be overstated nor anticipated

• When in doubt, choose


method least likely to
overstate assets and income
• Do not intentionally
understate!
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CONSISTENCY
CONSISTENT INFORMATION
• Companies should use the same accounting
principles from year to year.
• Changes in accounting principles must be
justifiable.
2000 2001 2002
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FULL DISCLOUSRE

It requires that the financial statements should reveal all the relevant and reliable
Information fully & fairly. This convention become more relevant in the companies
Form of organization where management & ownership are in separate hands

Section 211 of the companies Act 1956 requires that the Income statement &
Balance Sheet of a company must give true & fair value of statement of affairs of
the Company& also prescribe the forms in which these statements are to be
prepared
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Materiality
• Will it influence the
decision?
– MATERIAL

• No impact on
decision?
– IMMATERIAL

© PhotoDisc/Getty Images © PhotoDisc/Getty Images


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Branches of Accounting

Financial Accounting

Cost Accounting

Management Accounting
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Dual Aspect
This is one of the fundamental concept of Accounting. It may be stated as “for every
Debit there is a credit”. Every business transaction has a dual effect and the entry
Made for the transaction is recorded on the debit and as well as on the credit side

It may be expressed in the form of equation

Assets = Liabilities + Equity


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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The resources
owned by a
business
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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the


creditors, which
represent debts
of the business
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The Accounting Equation

Assets = Liabilities + Owner’s Equity

The rights of the


owners
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Accounting Equation

Assets = Liabilities + Owners’ Equity

Resources Sources of Funding

Resources Creditors’ Owners’


= claims
+ claims
to use to
generate against against
revenues resources resources
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ACCOUNTING CYCLE

Record relevant transactions


Analyze each transaction and
and events in a journal
event from source documents

Post journal
information
to ledger
Prepare and analyze accounts
the trial balance
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Accounting Cycle

Journalize Transaction

Post to Ledgers

Adjust Accounts

Prepare the TRIAL-BALANCE

Prepare
Financial Statements
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Journalizing Transactions
• Transactions are events that have an economic
impact on a business.

• Business documents are records that are


evidence of transactions.

• A journal is an accounting record in which


business transactions are entered in
chronological order. It is also called as “book
of original entry”
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What is a business transaction?

A transaction is any event that affects the


financial position of an organization
and requires recording.
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Journal Entry Process

Every journal entry involves a 3-step process:


1. Identify the accounts involved with an event
or transaction.
2. Determine whether each account increased or
decreased.
3. Determine the amount by which each
account was affected.
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DOUBLE ENTRY SYSTEM


The concept of double entry is based on the fact that every transaction
has two aspects i.e. receiving a benefit and giving a benefit
• The accounting system that records both the aspects of
transaction in the same books of accounts is called double
entry system.
• The account that receives the benefit is debited and the
account that provides the benefit is credited.
• ‘Debit’ and ‘Credit’ are denoted by ‘Dr’ and ‘Cr’
respectively.
• The ultimate result of the system is that for every Debit (Dr)
there is an equal Credit (Cr).
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ACCOUNT

An account is a section of the ledger in which all the transactions


relating to the same activity that has taken place during a given period are
summarized and accumulated

1.When an amount is entered on the left side of the account, it is known as debit
.
2.When an amount is entered on the right side of the account, it is known as credit
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DEBIT
It signifies the receiving of benefit. In simple words it
is the left hand side

CREDIT
• It signifies the providing of a benefit. In simple
words it is the right hand side
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Remember:
Debits are Credits are
simply simply
entries on entries on
the left. the right.
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CLASSIFICATION OF ACCOUNTS
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Personal accounts Impersonal Accounts

• It records transaction with Account which do not


relates with any person are
person and firm with whom
know as impersonal
we deal. It take in the form account.
of.

• Natural person. • Real or property account


• Artificial person. • Nominal account.
• Representative person.
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RULES FOR DEBIT & CREDIT

Debit .. The receiver


Personal Account :
Credit .. The giver

Debit .. What comes in


Real account :
Credit ..What goes out

Debit .. Expenses and losses


Nominal account :
Credit .. Revenue and gain
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Assets = Liabilities + Capital


Dr Cr Dr Cr Dr Cr
+ - - + - +
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Format of a Journal

Date Particulars L/F Debit Credit


Rs. Rs.
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• Record the results of the transactions in a


journal.
• Journalizing provides a chronological
record of all business activities.

General Journal Entry Format:


Date Debit Entry . . . . . . . . . . . . . . .xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
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POSTING IN LEDGER

Posting is the process of transferring amounts


from the journal to the general ledger

A ledger is a collection of accounts in which data


from transactions recorded in the journals are
posted, classified, and summarized

A chart of accounts lists all accounts used


by the company
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LEDGER POSTING

Dr Cr
Ledger

Date Particulars J/F Amount Date Particulars J/F Amount


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POSTING IN LEDGER

Posting is the process of transferring amounts


from the journal to the general ledger

A ledger is a collection of accounts in which data


from transactions recorded in the journals are
posted, classified, and summarized

A chart of accounts lists all accounts used


by the company
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LEDGER POSTING

Dr Ledger Cr

Date Particulars J/F Amount Date Particulars J/F Amount


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Posting of Journal Entries Practically


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 30,000
Capital 30,000
Investment by owner

Dec. 2 Supplies 2,500


Cash 2,500
Purchased
1 Identify store supplies
the debit account in ledger.
for cash

CASH ACCOUNT No. 101

Date Description PR Debit Credit Balance


2007

Dec. 3 Purchased equipment G1 20,000.00 ########


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 30,000
Capital 30,000
Investment by owner

Dec. 2 Supplies 2,500


2 Enter the date.
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance


2007
Dec. 1

Dec. 3 Purchased equipment G1 20,000.00 ########


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 30,000
Capital 30,000
Investment by owner

Dec. 2 Supplies 2,500


3 Enter theCash
amount and description. 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance


2007
Dec. 1 Investment by owner 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 30,000
Capital 30,000
Investment by owner

4 Enter
Dec. the journal reference.
2 Supplies 2,500
Cash 2,500
CASH Purchased store supplies ACCOUNT No. 101
for cash

Date Description PR Debit Credit Balance


2007
Dec. 1 Investment by owner G1 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 30,000
Capital 30,000
Investment by owner

Dec.
5 2 Supplies the balance.
Compute 2,500
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance


2007
Dec. 1 Investment by owner G1 30,000 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)


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GENERAL JOURNAL Page 1


Date Description PR Debit Credit
2007
Dec. 1 Cash 101 30,000
Capital 30,000
Investment by owner

Dec.
6 2 Enter
Supplies
the ledger reference. 2,500
Cash 2,500
Purchased store supplies
CASH for cash ACCOUNT No. 101

Date Description PR Debit Credit Balance


2007
Dec. 1 Investment by owner G1 30,000 30,000

Dec. 3 Purchased equipment G1 20,000 (20,000)


The Posting Process
GENERAL JOURNAL Page 1 Amity Business School
Date Account Titles and Explanation PR Debit Credit General journal
Jan. 1 Cash 101 10 000
Carol Finlay, Capital 301 10 000 information is
Investment by owner transferred to the
general ledger

1 3

2 5
GENERAL LEDGER
Cash 5 ACCOUNT NO. 101

DATE EXPLANATION PR DEBIT CREDIT BALANCE

Jan. 1 G1 10 0 0 0 10 0 0 0
4

Carol Finlay, Capital ACCOUNT NO. 301


Steps:
DATE EXPLANATION PR DEBIT CREDIT BALANCE

1. Identify the account.


Jan . 1 G1 10 0 0 0 10 0 0 0

2. Enter date
3. Enter amount
4. Calculate new account balance
5. Enter posting references
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ERRORS & RECTIFICATIONS


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Trial Balance
A trial balance is a list of the balance on all the accounts in the books,
prepared as a document ancillary to the ledger after all the transaction of
a period have been entered. Trial balance is not an account. It forms no
part of the double entry, nor does it appear in the actual books of
account. It is a statement drawn up to check the arithmetical accuracy of
the accounts. When 2 totals of a trial balance tally, it is said to be “in
balance” or “proved”.

DEBIT CREDIT
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Methods of preparation
• Gross Trial Method • Net Trial Method.

All the ledger accounts are In this case the ledger


extracted in the trial account
balance with their two totals are firstly balanced and
debit and credit, in two then trial balance is
respective money columns. prepared by extracting
When the book keeping is merely the balance of
correct, the total of the two ledger accounts instead of
column must be equal. their debit and credit
totals. The balances are
put in the respective
column.
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Objects of a Trial Balance

• To ensure that there are no arithmetical errors

• To obtain the summary of the ledger accounts

• To facilitate the preparation of final accounts and


balance sheet

• To provide it in a convenient form, useful


information to the management for the purpose of
analyzing the trend of the business.
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DIS-AGREEMENT IN TRIAL BALANCE


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Possible Causes of Disagreement

• ERRORS IN POSTING FROM


THE BOOKS OF ORIGINAL
ENTRY

• ERRORS IN ADDITION

• ERRORS IN THE BALANCING


OFF THE LEDGER ACCOUNT

• ERRORS IN EXTRACTING
THE TRIAL BALANCE.
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TYPES OF ERRORS

ERROR OF PRINCIPLES
CLERICAL ERRORS

Error of Omission Error of Commission Compensating Error

a. Writing the wrong amount


b. Posting in wrong account
c. Wrong casting of subsidiary
d. Posting wrong amount
e. Wrong Balancing of ledger
f. Posting an amount on the
wrong side
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SUSPENSE ACCOUNT

When a trial balance is extracted, but fails to


agree, it is clear that a mistake or several
mistakes have been made. In such a case, the
books should be carefully re-checked until the
mistakes have been discovered and rectified. It
may, however, be inconvenient to defer the
preparation of final accounts until this has been
done. In such a case a suspense account may be
open in the general ledger and debit or credit
with the amount necessary to bring the trial
balance equal
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Preparation of Final Accounts


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Final Accounts of a Company


 A company needs to prepare its final accounts to ascertain the profit earned or loss suffered
during the year and also the financial position of a business at the end of the year. For this
purpose the company is preparing ‘Final Accounts’ which is also known as ‘Financial
Statements’. These include the following:

1. Trading Account
2. Profit and loss Account
3. Balance Sheet

 Trading Account: Trading Account is prepared to know the gross profit or gross loss arising
or incurred as a result of the trading activities of a business. In other words, it is prepared to
show the result of buying and selling of goods.

“The Trading Account shows the results of buying and selling of goods. In preparing this
account, the general establishment charges are ignored and only the transactions in goods are
included
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 Need and Importance of Trading Account:


 It provides information about Gross Profit and Loss
 It provides information about the direct expenses
 Comparison of closing stock with those of previous year
 It provide safety against possible losses

 Preparation of Trading Account:

Items written on the Dr. Side of Trading Account:


 Opening Stock
 Purchases and Purchases Return
 Direct Expenses, which includes Wages, Carriage inwards, Manufacturing expenses,
Dock Charges, Import Duty, Excise Duty, Octroi, Royalty

Items written on the Cr. Side of Trading Account:


 Sales and Sales Return
 Closing Stock
Form of Trading Account
Trading A/c
(For the year ended…………………..) Amity Business School

Particulars Amount Particulars Amount

To Opening Stock By Sales


To Purchases Less: Sales Return
Less Purchase Return By Closing Stock
To wages By Gross Loss
To Wages & Salaries (Transferred to P&L A/c)
To Direct Expenses (Balancing Figure)
To Carriage
To Carriage inwards
To Gas, Fuel, and Power
To Freight, Octroi and Cartage
To Manufacturing Expenses
To Factory Expenses
To Dock Charges
To Import Duty
To Excise Duty
To Royalty
To Gross Profit
(Transferred to P&L A/c)
(Balancing Figure)
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Prepare a Trading Account for the year ended 31 Dec 1993 from the following Balances:

Opening Stock 40, 000


Purchases 2, 00, 000
Sales 5, 00, 000
Freight and Octroi 6, 500
Wages 30, 000
Factory Lighting 10, 800
Coal, Gas and Water 2, 200
Purchase Return 12, 000
Sales Return 20, 000
Carriage on Purchase 8, 000
Carriage on Sales 10, 000
Factory Rent 12, 000
Office Rent 7, 500
Import Duty 32, 000

Closing Stock is valued at Rs. 60, 000


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Profit and Loss Account:

Trading account only discloses the gross profit earned as a result of


buying and selling the goods. However, a businessman has to incur a
number of expenses which are not taken to trading account. Hence a
businessman is more interested in knowing the net profit earned or net
loss incurred during the year. As such, a profit or loss account is
prepared which contains all the items of losses and gains pertaining to
the accounting period.
Form of Profit and Loss Account
Profit and loss A/c
(For the year ended…………………..) Amity Business School
Particulars Amount Particulars Amount

To Gross Loss b/d By Gross Profit b/d


(Transferred from Trading A/c) (Transferred from Trading A/c)
Office Expenses: By Rent from Tenants
To Salaries By Discount Received
To Salaries and Wages By Commission Received
To Rent, Rates & Taxes By interest on Investment
To Printing and Stationery By Dividend Received
To Postage & Telegram By Bad-Debts Recovered
To Lighting By profit on sale of assets
To Insurance Premium By Net Loss (if any)
To Telephone Charges (Transfd to Capital A/c)
To Legal Charges, Audit Fees
To Traveling, Establishment Exp
Selling and Distribution Exp.
To Carriage Outwards
To Advertisement, commission
To Brokerage, Bad-Debts
TO Export Duty, Packing Charges
Miscellaneous Expenses:
To Discount, Sales tax
To Repairs, Depreciation, interest Exp
To Bank Charges, Entertainment Exp
To Conveyance Expenses
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Balance Sheet
The balance sheet (also called statement of
financial position or statement of financial
condition) is a snapshot of the financial status
of an organization at a point in time.
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Need and Importance of Balance Sheet:
 Ascertain the true financial position of a company
 Help in ascertaining the nature and cost of various assets of the business
 Help in determining the nature and amount of various liabilities of the business
 Gives information about amount of capital at year end and addition and deduction during the year
 Helps in finding whether the firm is solvent or insolvent
 Helps in preparing the opening entries at the beginning of the next year

Classification of Liabilities
Fixed or long-term liabilities
Current or short-term liabilities
Contingent Liabilities
Classification of Assets:
Fixed Assets
Current Assets
Liquid Assets
Fictitious or Nominal Assets
Wasting Assets
Tangible and Intangible Assets
Form of Balance Sheet
BALANCE SHEET Amity Business School
(as on or as at…………………..)
Liabilities Amount Assets Amount

Current Liabilities: Current Assets


Bank Overdraft Cash in Hand
Bills Payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding Expenses Short term investment
Unearned income Sundry Debtors
Closing Stock
Fixed Liabilities: Prepaid Expenses
Long Term loan Accrued Income
Reserves
Fixed Assets
Capital: Furniture
Add : Net Profit Loose Tools
Less : Drawings Motor Vehicle
Less : Income Tax Long Term investments
Less : Life insurance Premium Plant and Machinery
Land and Buildings
Patents
Goodwill
Depreciation Amity Business School

Depreciation means a fall in the value of an asset.


Every Fixed Asset is liable to lose its value ,once it
begin to be used for production purpose

Accounting Concept of Depreciation

Accounting concept of depreciation means to


distribute the cost of fixed asset over its estimated
life in a reasonable manner.
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Plant Natural Intangible


Assets Resources Assets

Depreciation Depletion Amortization


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Objective of Charging Depreciation

1. To Ascertain the Profit or Loss Properly


2. To show the Asset at its proper Value
3. To Retain out of Profit Funds for Replacement

Basic Factors Consider for calculating the Depreciation

1. Original cost of the Asset


2. Scrap Value at the End of its Life
3. Estimated effective or Commercial life or legal life which ever is shoter
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Methods of Depreciations

1. Straight Line Method or Fixed installment Method


2. Diminishing Balance or Straight Line Method
3. Annuity Method
4. Sinking Fund Method
5. Sum of the Digits Method
6. Insurance policy Method
7. Revaluation Method
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Financial statement Analysis


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Meaning

Financial Statement Analysis is a process of identifying the


Financial Strength & weaknesses of the firm by properly establishing
relationship between the items of the Balance Sheet & the
Profit & Loss Account.

Objective of FSA
The basic objectives of Financial Statement Analysis are as follows:
i. To Judge the Financial health of the Firm
ii. To evaluate the profitability of the enterprise
iii. To gauge the debt servicing capacity of the firm
iv. To understand the Long term & short term solvency of the firm
v. To know the return on capital employed or invested
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Types of Financial Statement Analysis


External Analysis

The External Analysis of financial statements done by the outside agencies like investors
Financial Analysts, Creditors, Government Agencies etc.

Internal Analysis
The internal Analysis is done by those who have access to detailed
financial records of the firm. Generally management is interested in the analysis of the
Financial Statements for measuring the Effectiveness of its own policies & decisions.

Horizontal Analysis
When evaluation is done for several years simultaneously at a time for making
conclusions, it is called Horizontal Analysis. This is based on the data from
Year to year, rather than one time available Information.
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Vertical Analysis
It is the study of quantitative relationship of one financial item to another based on
Financial Statements on a Particular date.

Tools of Analyzing Financial Statements

i. Comparative Financial Statement


ii. Common Size Statements
iii. Trend Ratios
iv. Ratio Analysis
v. Fund Flow Analysis
vi. Cash Flow Analysis
vii. Break Even & Cost – Volume Profit Analysis
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1. Liquidity – the ability of the firm to pay its way


2. Investment/shareholders – information to enable
decisions to be made on the extent of the risk and the
earning potential of a business investment
3. Gearing – information on the relationship between the
exposure of the business to loans as opposed to share
capital
4. Profitability – how effective the firm is at generating
profits given sales and or its capital assets
5. Financial – the rate at which the company sells its stock
and the efficiency with which it uses its assets
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Accounting ratios is an expression showing the relationship


between two figures of financial statement. Accounting
ratios may be expressed in terms of fractions like 1/2 ,1/3 or
rates like two times, three times or percentage like 10%, 20%,
etc. Many times absolute figures do not help to understand
the position of the concern & the final account & financial
statements prepared there from may not reveal enough
information which will help in decision making. Therefore
ratio analysis is employed as a tool to analyse financial
position & make logical inferences out of the same.
There are three types of ratio:-
Balance Sheet ratios.
Revenue Statement ratios.
Combined ratios.
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THE USE OF FINANCIAL RATIOS

Financial Ratio are used as a relative measure that


facilitates the evaluation of efficiency or condition of
a particular aspect of a firm's operations and status

Ratio Analysis involves methods of calculating and


interpreting financial ratios in order to assess a firm's
performance and status
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Test Of Liquidity Ratios.

1. Current Ratios
2. Acid Test Ratios
3. Absolute Liquid Ratios

Asset Management Ratios / Activity Ratios/ Efficiency Ratios

1. Stock Turnover Ratios


2. Debtor Turnover Ratios
3. Creditor Turnover Ratios
4. Working Capital Turnover Ratios
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I. Liquidity Ratios

Liquidity means ability of the firm to pay its short-term


debts in time. Liquidity ratios are calculated to measure
the short term financial position or short term solvency of
the firm.
To understand the liquidity position of the business,
following ratios can be used:

• Current Ratio
• Acid Test Ratio/ Quick ratio/ Liquid Ratio
• Absolute Liquid Ratio/ Cash Ratio
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a) Current Ratio

Current ratio may be defined as the relationship between current


assets and current liabilities. This ratio is also called Working Capital
Ratio.

Current Ratio = Current Assets


Current Liabilities
Current Assets
Current Liabilities

Interpretation : Thumb rule : 2:1


Factors affecting interpretation
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b) Liquid Ratio/ Acid Test/ Quick Ratio

Quick ratio may be defined as a relationship between


quick/ liquid assets and current liabilities. This ratio
measures the capacity of the firm to pay its current
liabilities immediately.
Liquidity Ratio = Liquid Assets*
Current Liabilities
Liquid Assets: Current Assets – Stock – Prepaid Expenses

Interpretation: Thumb rule: 1:1


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c) Absolute Liquid Ratio or Cash Ratio

Liquid Ratio = Absolute Liquid Assets*


Current Liabilities
Liquid Assets: Cash & Bank + Short term securities

Interpretation: Thumb rule: 0.5:1


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III. Turnover ratios

Turnover Ratios / Activity Ratios / Efficiency Ratios measure


the efficiency with which a firm manages its resources.

• Inventory Turnover ratio


• Debtors Turnover ratio
• Creditors turnover ratio
The ratio is expressed in times
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a) Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of goods sold


Average inventory

Inventory Conversion Period = 365


Inventory Turnover Ratio
(expressed in days)
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b) Debtors Turnover Ratio

Debtor Turnover Ratio = Net Credit Sales


Average Debtors (Debtors + B/R)
This ratio measures how rapidly receivables are collected.
A high ratio indicative of shorter time-lag between credit
sales and cash collection. A low ratio shows that debts are
not being collected rapidly.
Average Collection Period/ Debtor days= 365
DTR
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c) Creditors Turnover Ratio:

Creditor turnover Ratio = Net Credit Purchases


Average Creditors (creditors+B/P)
A low turnover ratio reflects liberal credit terms granted
by suppliers, while a high ratio shows that accounts are to
be settled rapidly.

Average payment period / Creditor Days = 365


Creditor Turnover Ratio
II. Profitability Ratios Amity Business School

Profitability
Ratios

Related to Related to
Sales Investments

103
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a) Profitability Ratios Related to Sales

(I) Gross Profit Ratio: Gross Profit * 100


Net Sales
Sales – Cost of Goods Sold *100
Net Sales

(II) Net Profit Ratio: Net Profit * 100


Net Sales
Amity Business School

(III) Operating Ratio: Operating Costs X 100


Net Sales
where operating costs = Cost of goods sold +
Operating expenses
Operating Expenses are : Administrative and office
expenses + Selling and distribution expenses

IV) Expenses ratio: Expenses X 100


Net sales
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Profitability Related to Investments

Return on Investment
X 100
Return on Investment= Profit after tax
Shareholder’s fund

Shareholder’s funds = Equity Share Capital +


Preference Share Capital + Reserves and Surplus –
fictitious Assets like preliminary expenses
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Return on Equity

Return on Equity = Net Profit after tax and Preference Div *100
Equity capital

Return on Equity Shareholder’s funds=Net Profit after tax & Preference Div
*100
Equity Shareholder’s funds

Shareholder’s funds = Equity share capital+ Reserves and Surplus- Accumulated


Losses
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Return on Capital Employed

Return on Capital Employed= Profit before interest, tax X 100


Capital Employed

Where Capital employed = Equity Share Capital +


Preference Share Capital + Reserves and Surplus + long
Loans + debentures – fictitious Assets like preliminary
expenses
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Earnings per share

Earnings per share = Net profit after tax and Preference Dividend
Number of Equity Shares
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LEVERAGE RATIO

Financial leverage refers to the use of debt finance.


Leverage ratios help in assessing the risk arising from the
use of debt capital.
two types of ratios:
a) Structural ratios – based on proportions of debt and
equity in financial statements
b) Coverage ratios – show the relationship between debt
service commitments and sources of meeting these
burdens
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Debt Equity Ratio

Debt Equity ratio = Debt


Equity
Debt : All external long term liabilities
Equity: Share Capital + Reserves and Surplus- Accumulated
Losses
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Capital Gearing Ratio

Fixed Interest bearing funds


Equity shareholder’s funds

Fixed Interest bearing funds : debentures + long term loans +


preference share capital

Equity shareholder’s funds : equity share capital + reserves


and surplus – accumulated losses
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Proprietory ratio

Shareholder’s Net Worth


Total Assets

Shareholder’s Net worth = equity share capital + preference


share capital +Reserves and Surplus – Intangible assets –
fictitious assets

Total Assets = Net Fixed assets +Current assets – fictitious


assets
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Interest Coverage Ratio

Interest Coverage ratio = Net profit (before interest and tax)


Interest
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Debt Service Coverage Ratio

DSCR = PAT + Depreciation + other non cash


expenses +Interest on term loan
Interest on Term loan + Term loan Installments
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VALUATION RATIOS

Price-Earning Ratio = Market Price of the share


Earnings Per Share

Dividend payout ratio = Dividend per share * 100


Earning per share
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Funds :
The term Fund means Working Capital i.e. the difference between current
assets and current liabilities.

Any increase or decrease in Working Capital means “Flow of Funds”.


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Fund Flow
Statement
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Funds flow statement

shows working capital flow rather than cash flow


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Examples of Current Assets


1. Cash in hand
2. Cash at Bank
3. Short term Investments (marketable securities)
4. Sundry debtors
5. Bills Receivable
6. Accrued income
7. Prepaid expenses
8. Stock-in-trade
9. Advance tax
10.Short term loans and advances
Amity Business School

Examples of Current Liabilities


1. Sundry Creditors
2. Bills Payable
3. Outstanding expenses
4. Income received in advance
5. Bank Overdraft
6. Cash credit
7. Short term loan
Schedule of Changes in Working
Capital Amity Business School

Amount Change in Working Capital


Increase Decrease
Particulars 2008 2009 (Debit) (Credit)

A. Current Assets
Cash in hand 5,000 7,000 2,000
Cash at bank 12,000 11,000 1,000
Marketable Securities 7,000 9,000 2,000
Bills Receivable 4,000 3,000 1,000
Debtors(Gross) 2,000 1,500 500
Stock 200 300 100
Prepaid Expenses 5,000 8,000 3,000
35,200 39,800
B. Current Liabilities
Creditors 8,000 6,000 2,000
Bills Payable 3,000 2,000 1,000
Income received in advance 4,000 3,000 1,000
Provision for bad and doubtful debts 500 700 200
Outstanding expenses 1,000 1,800 800
16,500 13,500

C. Working Capital ( A - B ) 18,700 26,300

D. Increase in Working Capital 7,600 7,600

26,300 26,300 11,100 11,100


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Funds from Operation


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The Net Profit disclosed by the P&L A/C may not generate an equal
amount of funds to the business .
A business making a substantial profit may not have adequate funds at the
end of the accounting period. On the contrary, a business may have
enough funds at its disposal though it has incurred a substantial loss.
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Reason -> P&L A/C records expenses that should have been paid and
records income that should have been received . It takes into account
all prepayments and accruals.
Moreover, the charging of depreciation or amortization of intangible
or fictitious items do not require any use of funds in the current
period.

In short, the P&L does not make any distinction between any funds
flow and non-funds flow items.
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Net Profit as per P&L A/C


Add: Expenses not resulting in application of funds
Depreciation
Discount written off
Goodwill written off
Preliminary Expenses written off
Transfers to Reserves

Add: Expenses being Non-business expenses


Loss on sale of fixed assets
Loss on redemption of debentures

Less Income being Non business incomes


Dividend received
Interest received
Profit on sale of fixed assets
Profit on redemption of debentures

Funds from Operations


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Alternate way of calculation of


Funds from Operation
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Dr. Adjusted P&L A/C Cr.


Particulars Amount Particulars Amount
To Net Loss By Net Profit
To Depreciation By Profit on sale of fixed assets
To Loss on sale of fixed assets By Dividend Received
To discount on issue of shares written off By Funds from operations (Bal fig)
To Goodwill written off
To Preliminary Exp. Written off
To Proposed Dividend
To General Reserve
To Funds used in Operation
(Bal. fig.)
Amity Business School

Funds Flow Statement

Sources of Funds Amount Application of Funds Amount

Decrease in Working Capital Increase in Working Capital


Funds from Operation Funds used in Operation
Issue of shares and debentures Redemption of Preference Shares and Debentures
Increase in Share Capital,Share Premium Decrease in Share Capital
Increase in Debentures, loans etc Decrease in Debentures , loans etc
Sale of Fixed asset Purchase of Fixed asset
Dividends Received Dividends paid
Interest Received Interest paid
Donation , gifts and compensation received Income Tax paid
Amity Business School

Why is “Increase in Working Capital” an “Application of Funds” ?

Working Capital = Current Assets – Current Liabilities

Working Capital = Current Assets – Current Liabilities


Amity Business School

Why is “Decrease in Working Capital” a “Source of Funds” ?

Working Capital = Current Assets – Current Liabilities

Working Capital = Current Assets – Current Liabilities


Amity Business School

From the following Balance sheet of --- prepare the statement of changes in WC

2004 2003
Assets
Goodwill 5000 10000
Cash 70000 25000
Debtors 90000 98000
Closing Stock 120000 87000
Long term investment 10000 15000
Land 27000 15000
Preliminary Expenses 3000 5000
Liabilities
Trade creditors 45000 50000
Bills payable 35000 20000
Short term loan 20000 -
Share capital 150000 125000
Profit & loss A/C 75000 60000
Amity Business School

Calculate Funds From operations from the following Information


Income Statement

To Rent 25000 By Gross Income 500000


To Salaries Paid 100000 By Profit on sale of vehicle 3000
To Provisions for Depreciation 50000 By refund of tax 2000
To commission Paid 5000 By Dividend Received 10000
To Provision for taxation 150000
To General Reserve 3000
To loss on sale of investment 10000
To cost of issue of shares 2000
To Provision for legal Damages 5000
To net Income 165000

515000 515000
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CASH FLOW STATEMENT


( AS-3)
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Cash Flow Statement is a statement which expresses the reasons of


change in cash balances of business between two dates.

•This statement attempts to analyze the transactions of the firm in terms of


cash.

•It provides a Summary of sources of cash and uses of cash in the


organization
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Definitions

Cash
Cash comprises cash in hand and demand deposits with banks.
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Cash Equivalents
These are -short term ,
-highly liquid investments
- that are readily convertible into known amounts of cash
- and which are subject to an insignificant risk of change in value.
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Cash Flows
These are inflows and outflows of Cash and Cash equivalents.
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AS-3 lays down a format for the cash flow statement which
identifies separately the main activities resulting in cash inflows
and outflows.

The standard requires that 3 separate categories of cash flow


should be shown in the cash flow statement-
-Operating Activities
-Investing Activities
-Financing Activities
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Operating Activities
Operating Activities are the principal revenue producing activities
of the enterprise and other activities that are not investing or
financing.
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Extra-ordinary items
Items which are gains or losses which arise from events and
transactions that are distinct from the ordinary activities of the
business and which are both material and NOT expected to
recur frequently or regularly.
Example
Profit/Loss on sale of assets / investments.
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Investing Activities
Investing activities are the acquisition and disposal of long
term assets not included in cash equivalents.
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Financing Activities
Financing activities are activities that result in changes in the size
and composition of the owners’ capital ( including preference
share capital in case of a company) and borrowings of the
enterprise.
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• Current Assets : are those assets which


are held for conversion into cash in the
normal course of trading.

• Current Liabilities: are those liabilities


which fall due for payment within one year.
Cash Flow Statement Amity Business School

A. Cash flow from Operating Activities


Net Profit before taxation and extraordinary items ****
Adjustments for:
Less : Non-operating income (e.g. Interest income, profit on sale of assets) (****)
Add non operating expense ****

__________
Operating Profit before working capital changes ****
Add: Decrease in Current Assets ****
Increase in Current Liabilities ****
Less: Increase in Current Assets
Decrease in Current Liabilities (****)
Cash generated from operations ****
Income Tax paid (****)
****

Net Cash from operating activities *****


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Working Capital Changes

Add: Decrease in Current Assets


Increase in Current Liabilities

Less: Increase in Current Assets


Decrease in Current Liabilities
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• A decrease in Stock or Debtors will increase the cash


inflow from operating activities.

• Whereas an increase in Stock or Debtors will


decrease the cash inflow from Operating Activities.

• Similarly, a decrease in creditors reduces Cash Balance


and increase in Creditors will effectively increase the
cash available to the enterprise.
Amity Business School

Cash Flow From Investing Activities

Sale of Fixed Assets xxx


Purchase of Fixed Asset (xxx)
Dividend Received xxx
Interest Received xxx
Cash flow from Investing Activities xxx
Cash Flow From Financing Activities
Issue of Share Capital xxx
Increase in Loan xxx
Redemption/Repayment of Deb (xxx)
Interest Paid (xxx)
Dividend Paid (xxx)
Cash Flow from Financing Activities xxx

Net Cash & Cash equivalent xxx


+ opening Balance of Cash xxx
Closing Balance of cash xxx
Amity Business School

According to AS-2 (Revised), “inventories are assets held for sale in the ordinary course of
Business; in the process of production for sales; or in the form of material or supplies to be
Consumed in production process or in the rendering of services.”

Inventory vary according to the nature of the business:

Trading Concerned: Inventories under this type encompass products purchased for resale
in the existing form.

Manufacturing Concerned: Inventories under this type consist of raw materials, work in
Progress and finished goods.
Amity Business School

Q1. The expenses for production of 5000 units in a factory are given as follows
per unit Rs
Material 50
Labour 20
Variable Overheads (Factory) 15
Fixed Factory Overheads (Rs.50000) 10
Administrative expenses (5% Variables) 10
Selling expenses (20% fixed) 6
Distribution expenses (10% fixed) 5
Total Cost of sales per unit 116

You are required to prepare a budget for the production of 7000 units.
Amity Business School

Q2. With the following date for 60% activity level, prepare a budget for production at
80% and 100% activity level.

Production 600 units


Material Rs 100 per unit
Labour Rs.40 per unit
Direct Expenses Rs.10 per unit
Factory overheads Rs 40000 (40% fixed)
Administration expenses Rs.30000 (60% fixed)
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Q3. The expenses budgeted for production of 10000 units in a factory are furnished below.

per unit
Material 70
Labour 25
Variable Factory expenses 20
Fixed factory overheads (Rs.100000) 10
Direct variable expenses 05
Administration expenses (fixed Rs.50000) 05
Selling expenses (10% fixed) 13
Distribution expenses (20% fixed) 7
Total cost of sales per unit 155

You are required to prepare a budget for the production of 6000 units & 8000 units
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Cash Budget

Q4. A company is to have Rs.32000 cash in hand on 1.April 2011 and it requests you to
Prepare a cash budget for three month April, May & June 2011. The following information
Is supplied to you for the purpose.

Month Sales (Rs) Purchase (Rs) Wages (Rs) Expenses (Rs)


February 70000 44000 6000 5000
March 80000 56000 9000 6000
April 96000 60000 9000 7000
May 100000 68000 11000 9000
June 120000 62000 14000 9000

Other information
a. Period of credit allowed by supplier is 2 months
b. 25% of sales is for cash and the period of credit allowed to customer for credit sale is 1 month
c. Delay in payment of wages and expenses 1 month
d. Income tax Rs.28000 is to be paid in the month of June.
Amity Business School

Q5. Azad Ltd wishes to arrange overdraft facilities with bank during the period April to June
Of a particular year, when it will be manufacturing stock. Prepare a cash budget for the above
Period from the following data , indicating the extend of the bank facilities, the company will
Require at the end of each month.
Month Sales Purchases Wages
February 180000 124800 12000
March 192000 144000 14000
April 108000 243000 11000
May 174000 246000 10000
June 126000 268000 15000
Further information
50% of the credit sales are realized in the month following the sales and remaining sales in
Second month following.

Creditors are paid in the following month of purchase.


Cash at bank on 1st April is Rs.25000
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Inventory Record System

Periodic Inventory System Perpetual Inventory System


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Periodic inventory system is a method of ascertaining inventory by taking the actual


Physical count ( measure or weight) of all the inventory items on hand at a particular
Date at the end of an Accounting period. It is also known as the physical inventory
System because of the actual physical count.
Cost of Goods sold = opening stock + purchases – Closing stock

Perpetual Inventory System is a system of records that reveals the physical movement of
Stocks and there current balances. It is a method of recording inventory balances after
Each purchase and sale takes place.
Closing inventory is calculated as follows:
Closing inventory = Opening inventory + purchases – cost of goods sold
Amity Business School

According to the provision of AS-2 (Revised) only the following method of inventory
Valuation are permitted:

i. Specific Identification (of cost) method


ii. FIFO
iii. Weightage Average Cost Method
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Specific identification of Cost

Specific identification of costs means that specific costs are attributed to identified items
Of inventory. For items which are segregated for a specific project (purchased or produced),
Appropriate treatment for such items will be of much important.
The process of assigning costs involves the following two procedure:

i. one has to keep track of the purchase price of each specific unit
ii. To know which specific units were sold.

The most important feature of the method is that business enterprise must keep a track
Of the cost of each individual items purchased and sold
This method is suitable where the purchases are not frequent.
Amity Business School

FIFO

This method is based on the assumption that flow is in the order in which expenditure
were made

To explain the units that are received first will be sold first.

The flow of cost is presumed to be the same as flow of goods


.
The closing (ending) inventory consists of the latest lots and is valued at the price paid
for such lot
Amity Business School

From the following information calculate the value of ending inventory and cost of
Goods sold.

Date Transactions units price per


unit(Rs)
Jan 2 opening balance b/f 100 10
Jan 9 purchases 400 15
Jan 14 sold 300 -
Jan 25 purchases 500 20
Jan 29 sold 400 -
Amity Business School

Stock Ledger under FIFO Method


Date Receipts (purchases) Issues (sales) Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 2nd - - - - - - 100 10 1000


Jan 9th 400 15 6000 - - - 100 10 1000
400 15 6000

Jan 14th 100 10 1000


200 15 3000 200 15 3000

Jan 25th 500 20 10,000 - - - 200 15 3000


500 20 10000

Jan 29th - - - 200 15 3000


200 20 4000 300 20 6000
Amity Business School

Calculation of value of ending inventory Statement showing value of inventory & CGS
Rs ( Periodic system) Rs
Opening inventory 1000 Opening inventory 1000
Add purchases Add Purchases
(6000 + 10,000) 16000 (6000+10000) 16000

Less cost of goods sold Less closing stock 6000


(1000+ 3000+ 3000+ 4000) 11000 (300 x 20)

Value of closing inventory 6000 Cost of goods sold 11000


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Merits of FIFO

i. This method is suitable for perishable goods


ii. FIFO is easy to operate
iii. Assignment of cost against revenue is matched.
iv. Closing inventory valuation reflects the true financial position due to recent purchases.

Demerits of FIFO

i. In the period of rising prices, higher income will be reported resulting higher tax
liabilities
ii. In the period when prices are fluctuating, the cost of purchase do not represent
current market price.
iii. In case where production cycle is lengthy, true profit cannot be shown in income
statement.
Amity Business School

LIFO

Though this method is not recognized by AS-2 (Revised), this method is required for the
Academic interest.

Under this method, goods which are purchased last are sold first.
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Stock Ledger under LIFO Method


Date Receipts (purchases) Issues (sales) Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 2nd - - - - - - 100 10 1000


Jan 9th 400 15 6000 - - - 100 10 1000
400 15 6000

Jan 14th 300 15 4500 100 10 1000


100 15 1500

Jan 25th 500 20 10,000 - - - 100 10 1000


100 15 1500
500 20 10000

Jan 29th - - - 400 20 8000 100 10 1000


100 15 1500
100 20 2000
Amity Business School

Calculation of Ending Inventory Calculation of valuation of inventory & CGS


Perpetual system Periodic System

Opening inventory 1000 Opening inventory 1000


Add Purchases Add purchases
(6000 + 10,000) 16000 (10000 + 6000) 16000

17000 17000

Less Cost of goods sold Less closing inventory


(4500 + 8000) 12500 (1000+1500+2000) 4500

Closing inventory 4500 Cost of goods sold 12500


Amity Business School

Weighted Average Method

The weighted Average Method is based on the assumption that:


i. Each sale of goods consists of a due proportion of the earlier lots
ii. Such sale is valued at the weighted average price

Total cost of goods in stock


Weighted Average Price =
Total quantity of goods in stock

( whereas Total Cost = Quantity x cost per unit)


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Stock Ledger under WAC Method


Date Receipts (purchases) Issues (sales) Balance
Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 2nd - - - - - - 100 10 1000


Jan 9th 400 15 6000 - - - 500 14 7000

Jan 14th 300 14 4200 200 14 2800

Jan 25th 500 20 10,000 - - - 700 18.29 12800

Jan 29th - - - 400 18.29 7316 300 18.29 5484


Amity Business School

Calculation of Ending Inventory Calculation of valuation of inventory & CGS


Perpetual system Periodic System

Opening inventory 1000 Opening inventory 1000


Add Purchases Add purchases
(6000 + 10,000) 16000 (10000 + 6000) 16000

17000 17000

Less Cost of goods sold Less closing inventory


(4200 +7316) 11516 (300 x 17) 5100

Closing inventory 5484 Cost of goods sold 11900


Statement showing the weighted Average Cost per unit under WAC( applying Periodic inventory system

Date Qty Rate Amount WAC = 17000


1000
Jan 2nd 100 10 1000 = Rs 17 per unit
Jan 9th 400 15 6000
Jan 29th 500 20 10000
17000
Amity Business School

Merits of weighted Average cost

i. This method is realistic, objective & consistent


ii. Manipulation may not be possible
iii. It average out the effects of price fluctuations

Demerits of Weighted Average Cost

i. This method needs more calculation work at each and every stage
ii. The ending inventory differs from the conventional method of valuation of closing
date.
Amity Business School

Economic order quantity


Economic order Quantity is that size of the order which gives maximum economy
In purchasing any item of material.

In order to determine the economic or optimum order quantity, an analysis of the various
Cost associated with the ordering quantity is made.
This cost may be divided into two parts:

i. Material Acquisition costs &


ii. Material Carrying cost

Material acquisition cost arises on account of having to process an order


Material carrying cost include interest charges on investment in material, insurance costs,
Storage cost etc
Amity Business School

The material acquisition costs are related to the number of orders placed during a
Given period
On the other hands, carrying cost, which are variable or semi variable in nature, tend to
Change nearly in directly proportion to the level of stock carried in the manufacturing
Concerned.

Calculation of EOQ
EOQ =
√ 2AS
I

‘A’ stands for annual consumption of material in terms of units


‘S’ stands for cost of placing one order including the cost of receiving it
‘I’ stands for interest payment per unit per annum ( or carrying cost per unit per annum)
Amity Business School

Calculate EOQ from the following information

Annual usage is 10,000 units


Cost of placing one order Rs 50
Cost of material per unit is Rs 25
Annual carrying Cost of one unit is 10% of inventory value

√ 2 x 10000 x 50
2.5

I = Rs.25 x 10 %
= Rs 2.50
Amity Business School

Cost Accounting deals with ascertainment, allocation, apportionment and


Accounting aspect of costs
In simple it is the art or process of recording, analysing and classifying of
Expenditure for the purpose of product costing or service costing, ascertainment
Of profitability, operational planning and cost control

Cost is a measurement, in monetary terms, of the amount of resources used


for the purpose of production of goods or rendering services.
Cost is the amount of actual or notional expenditure relating to a product, job,
service, process or activity.
Cost is often used as a generic term to describe various types of costs.
Costing is the technique and process of ascertaining costs.
Amity Business School

Objectives of Cost Accounting

• To ascertain cost
• To control cost
• To provide information for decision making
• To determine selling price
• To ascertain costing profit
Classification of cost Amity Business School
Classification Meaning Example
By Nature or Element
Which can be directly allocated to a Basic raw material,
Direct Material Cost
product, job or process primary packing material
Which cannot be directly allocated to a Stores, consumables,
Indirect Material Cost
product, job or process some low value items
Labour directly engaged for a specific
Direct Labour Cost Shop floor labour
job, contract or work order.
Labour not directly engaged for a
Indirect Labour Cost Staff departments
specific job, contract or work order.
Processing charges,
All direct costs other than materials
Direct Expenses machine hire charges,
and labour costs.
excise duty, etc
Rent, repairs, telephones,
All indirect costs other than indirect
Indirect Expenses electricity, utility costs,
materials and indirect labour costs.
insurance, depreciation
Sum of indirect material, indirect labour
Factory Overheads
and indirect expenses for the factory.
Administration Sum of indirect material, indirect labour
Overheads and indirect expenses for the office.
Sum of indirect material, indirect labour
Selling Overheads
and indirect expenses for selling.
Distribution Sum of indirect material, indirect labour
Overheads and indirect expenses for distribution.
Classification of cost Amity Business School
Classification Meaning Example
By Function
Sum of direct material, direct labour,
Production Cost
direct expenses and factory overheads.
Cost of the Admin Department for the
Administrative Cost
management of the organization.
Cost for seeking to create and
Selling Cost
stimulate demand and secure orders.
Costs for making the packed product
Distribution Cost ready for dispatch to recovery of
material for recycling, if any.
Costs for developing new or improved
Research Cost
product / application.
Pre-Production Cost Cost of trial run or production.
By Relation to Cost Center
Sum of direct material, direct labour
Direct Cost and direct expenses of the Cost
Center.
Sum of indirect material, indirect labour
This cost is apportioned
Indirect Cost and indirect expenses of the Cost
to the Cost Center.
Center. Also called as Overhead Cost.
Classification of cost Amity Business School
Classification Meaning Example
By Variability / Behaviour
Costs that do not vary with the volume
Fixed Cost Rent, insurance, salary
of production.
Costs that vary directly with the volume All direct costs, variable
Variable Cost
of production. overheads
Costs where one part remains fixed in
Semi-Variable / Semi-
a given range and the other part varies Telephones, electricity
Fixed Cost
with volume of production.
By Controllability
Costs that can be influenced by a
Controllable Cost Direct costs
decision maker at a particular level.
Costs that cannot be influenced by a All costs can ultimately be
Uncontrollable Cost
decision maker at that particular level. controlled at the top.
By Normality
Cost that is normally incurred at a level
Normal Cost Cost as per standard
of operation.
Cost that is not normal at the level of Abnormal loss, abnormal
Abnormal Cost
operation. idle time
Amity Business School
Classification Meaning Example
By Decision Making
Cost that is relevant for making the
Relevant Costs
underlying decision.
Cost that is not relevant for making the
Irrelevant Costs
underlying decision.
Historical or past cost already incurred
Sunk Costs
and cannot be changed.
Fixed costs to be incurred even when
Shut-Down Costs
the plant is shut down.
Out of Pocket Costs Costs that involve cash outlay.
The value of sacrifice made in
Opportunity Costs
accepting an alternate course of action.
Notional costs that do not have a cash Rent of own premises,
Imputed Costs
outlay, are similar to opportunity cost. interest on own capital
Increase or decrease in cost due to
Differential Costs change in activity level. Also called
incremental cost.
Total variable cost attributable to one
Marginal Cost unit of product. Incremental cost of
making one unit of product.
Replacement Cost Current cost of an identical asset.
Cost of converting raw material into a
Conversion Cost
finished product.
Costs that are committed and have to
Committed Costs
be incurred.
Discretionary Costs Costs that can be avoided.
Amity Business School

Element of Cost

Material Labour Other Expenses

Direct Indirect Direct Indirect


Direct Indirect

Overheads

Production or Administration Selling & Distribution


Work overhead overhead overheads
Amity Business School

By grouping the above elements of cost, the following divisions of cost are obtained

PRIME COST = Direct Material+ Direct Labour+ Direct Expenses

WORK or FACTORY COST = Prime Cost + Work or factory overheads

COST Of PRODUCTION = Work Cost + Administration Overheads

TOTAL COST or COST OF SALES = Cost of production + selling &


Distribution overheads
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Cost Sheet

Cost Sheet is a statement designed to show the output of a particular accounting


Period along with breakup of costs.

Note

Cost sheet is a memorandum statement. Therefore, it does not form part of double entry
Accounting records
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Specimen of Cost Sheet

Units :

Particulars Total Cost (Rs) Cost per unit(Rs)

Direct Material
Direct Labour
Prime Cost
Add Work overheads
work Cost
Add Administration Overheads
Cost of Production
Add Selling & Distribution overheads

Total cost or cost of sales


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Marginal costing
It is a costing system which treats only the variable
manufacturing costs as product costs. The fixed
manufacturing overheads are regarded as period cost
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Assumption of Marginal Costing

i. All elements of cost – production, administration & selling & distribution – can be segregate
into variable cost & fixed cost

ii. Variable cost remains constant per unit of output irrespective of the level of output and thus
fluctuate directly in proportion to change in the volume of output

iii. The selling price per unit remain unchanged or constant at all levels of activities.

iv. The fixed cost remain unchanged or constant for the entire volume of production

v. The volume of production or output is the only factor which influence the costs.
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Marginal Costing Equation

Sales – Variable Cost = Fixed Cost + profit

CONTRIBUTION

Contribution is the difference between sales and Variable cost or Marginal cost
Contribution being the excess of sales over variable cost is the amount that is
Contributed towards fixed expenses and profits
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Difference between Contribution & Profit

Contribution Profit
Includes fixed cost and profit Does not include fixed cost

Based on Marginal Cost Concept Based on common man concept

Contribution above Break even contribute Profit is expected only after


to profits covering variable & fixed cost

Contribution analysis required a knowledge Profit does not required any such concept
of Break even concept
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Advantages of Contribution

i. It helps the management in the fixation of selling price


ii. It assist in determining the break even point
iii. It helps management in the selection of a suitable product mix for profit maximisation
iv. It helps in choosing from among alternative methods of production, the method
which gives highest contribution per limiting factor is adopted
v. It helps the management in deciding whether to purchase or manufacture a product or a
component
vi. It helps in taking a decision as regards to adding a new product in the market
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Q1.Using marginal costing technique calculate the profit earned during the year

Fixed Cost Rs. 250,000


Variable Cost Rs 10 per unit
Selling Price Rs.15 per unit
Output level 75000 units

Q2. Determine the fixed expenses using marginal costing technique

Sales Rs. 2,40000


Direct Material Rs 80000
Direct Labour Rs. 50,000
Variable overheads Rs. 20000
Profit Rs 50,000
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Profit Volume Ratio

The Profit Volume Ratio expresses the relationship of contribution to sales

Contribution Sales – Variable cost


PV ratio = or
Sales Sales
Or

Change in Profit or Contribution


PV ratio =
Change in Sales
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The Profit/volume Ratio is one of the most important ratios for studying the profitability
Of operations of a business and establishes the relationship between contribution & sales
For example if PV ratio is 20% it means that for a sale of every Rs.100 will bring a profit
Of 20% after fixed expenses are met.

Comparison of P/V ratio for different products can be made to find out which product
Is more profitable.

Higher the P/V ratio more will be the profit.


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P/V ratio is very useful and is used for the calculation of:

i. Break even Point i.e. Fixed Cost / PV ratio

ii. Value of sale to earn a desire amount of Profits


Sale = Fixed Cost + Desire Profit
PV Ratio

iii. Profit = (sales x PV ratio) – Fixed Cost

iv. Fixed Cost = (sales x PV ratio) - Profits

v. Margin of Safety = Profit


PV Ratio
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Break Even Point

Breakeven analysis is also known as cost-volume


profit analysis
Breakeven analysis is the study of the
relationship between selling prices, sales
volumes, fixed costs, variable costs and profits
at various levels of activity
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Application

• Breakeven analysis can be used to determine a


company’s breakeven point (BEP)
• Breakeven point is a level of activity at which
the total revenue is equal to the total costs
• At this level, the company makes no profit
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Assumption of breakeven point analysis


• Relevant range
– The relevant range is the range of an activity over which
the fixed cost will remain fixed in total and the variable
cost per unit will remain constant
• Fixed cost
– Total fixed cost are assumed to be constant in total
• Variable cost
– Total variable cost will increase with increasing number
of units produced
• Sales revenue
– The total revenue will increase with the increasing
number of units produced
Amity Business School
Amity Business School

A business is said to be at break even when its total sales are equal to its costs.

It is point of no profit no loss

At this point, contribution is equal to fixed cost.

A concern which attain break even point at less number of units will definitely be better
from another concerned where break even point is achieved at more units of production
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Formula for calculation of Break Even Point

Total Fixed Expenses


Break Even Point (in Units) =
Contribution per unit

Break Even Point (in Rupee) = Fixed Cost

PV Ratio
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Question
From the following particulars calculate
i. Contribution
ii. PV Ratio
iii. Break even point in units & in Rupee
iv. What will be the selling price per unit if the BEP is brought down to 25000 units?

Fixed Expenses Rs 150,000


Variable Cost per Unit Rs 10
Selling Price Rs 15
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Margin of Safety
Margin of safety is the difference between the actual sales & the sales at the break even
point

Margin of safety = Profit

PV ratio

Margin of safety = Profit

Contribution per unit


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If the margin of safety is large it is an indicator strength of a business.

Efforts should be made by the management to increase (or improve) margin of


Safety so that more profit may be earned.

The margin can be increased by taking the following steps.

i. Increase the level of production (sales volume) provided the capacity is available
ii. Increasing the selling price
iii. Reduce the cost
iv. Substituting the existing products by more profitable product.
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Question2

A company has fixed expenses of Rs. 90,000 with sales at Rs 300000 and profit of
Rs. 60,000 during the first half year. If in the next half year, the company suffers a loss
Of Rs 30,000 calculate

a. PV ratio, BEP and margin of safety for first half


b. Expected sales volume of next half year assuming that selling price and fixed expenses
remain unchanged.
C. BEP & MES of the whole year.
Amity Business School

Question3

a. Given the following calculate P/V Ratio and profit when sales are Rs. 20,000;
Fixed cost Rs. 4000: Break even Point Rs 10000.

b. Given the following, find Margin of safety sales.


Profit earned Rs 24000
Selling Price per unit Rs.10
Marginal cost per unit is Rs. 7

c. From the following data, compute break- even sales and margin of safety.
Sales Rs. 1000000
Fixed Cost Rs.300000
Profit Rs.200000
Amity Business School

Question4.
The selling price of a product was Rs.200 per unit, as against its variable cost of
Rs.100 per unit. The total fixed costs were Rs.200000. Calculate the effect of a reduction in
Price by Rs.40 on the P/V ratio, Break even point and Margin of safety, if 4000 units were
Produced and sold.

Question5. (Decision making, Profit Planning )


Two business Red ltd and yellow ltd.. Sell, the same type of product in the same type of market
Their budgeted profit & loss account for the coming year are as follows;
Red Ltd Yellow Ltd
Sales 150000 150000
Variable cost 120000 100000
Fixed cost 15000 35000
Calculate the break even point of each business
Calculate the sales volume at which each of the business will earn Rs.5000 profit
State which business is likely to earn profit in following conditions
a. heavy demand for the product
b. low demand for the product
Give reason
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KEY FACTORS

Key factor is that factor which limits the volume of output or level of activities of
An undertaking at a particular point of time or over a period.

The extent of its influence must be first assessed so as to maximise the profits.
e.g. of key factors may be
i. Shortage of raw material
ii. Shortage of Labour hours
iii. Machine capacity available
iv. Sales capacity available

Basis of decision
The product mix decision should be taken on the basis of contribution per unit of key factor
i.e. contribution per unit
key factor per unit
Amity Business School

Q1.Using marginal costing technique calculate the profit earned during the year

Fixed Cost Rs. 250,000


Variable Cost Rs 10 per unit
Selling Price Rs.15 per unit
Output level 75000 units

Q2. Determine the fixed expenses using marginal costing technique

Sales Rs. 2,40000


Direct Material Rs 80000
Direct Labour Rs. 50,000
Variable overheads Rs. 20000
Profit Rs 50,000
Amity Business School

P/V ratio is very useful and is used for the calculation of:

i. Break even Point i.e. Fixed Cost / PV ratio

ii. Value of sale to earn a desire amount of Profits


Sale = Fixed Cost + Desire Profit
PV Ratio

iii. Profit = (sales x PV ratio) – Fixed Cost

iv. Fixed Cost = (sales x PV ratio) - Profits

v. Margin of Safety = Profit


PV Ratio
Amity Business School

Question
Calculate P/V ratio from the following information

i. Given; selling price Rs 10 per unit, variable Cost per unit Rs 6


ii. Give the profits and sales of two period as under

Sales Profits
Rs Rs
2000 1,50,000 20,000
2001 1,70,000 25,000
Amity Business School

Break Even Point

Breakeven analysis is also known as cost-volume


profit analysis
Breakeven analysis is the study of the
relationship between selling prices, sales
volumes, fixed costs, variable costs and profits
at various levels of activity
Amity Business School

Application

• Breakeven analysis can be used to determine a


company’s breakeven point (BEP)
• Breakeven point is a level of activity at which
the total revenue is equal to the total costs
• At this level, the company makes no profit
Amity Business School

Assumption of breakeven point analysis


• Relevant range
– The relevant range is the range of an activity over which
the fixed cost will remain fixed in total and the variable
cost per unit will remain constant
• Fixed cost
– Total fixed cost are assumed to be constant in total
• Variable cost
– Total variable cost will increase with increasing number
of units produced
• Sales revenue
– The total revenue will increase with the increasing
number of units produced
Amity Business School
Amity Business School

A business is said to be at break even when its total sales are equal to its costs.

It is point of no profit no loss

At this point, contribution is equal to fixed cost.

A concern which attain break even point at less number of units will definitely be better
from another concerned where break even point is achieved at more units of production
Amity Business School

Formula for calculation of Break Even Point

Total Fixed Expenses


Break Even Point (in Units) =
Contribution per unit

Break Even Point (in Rupee) = Fixed Cost

PV Ratio
Amity Business School

Question 1
From the following particulars calculate
i. Contribution
ii. PV Ratio
iii. Break even point in units & in Rupee
iv. What will be the selling price per unit if the BEP is brought down to 25000 units?

Fixed Expenses Rs 150,000


Variable Cost per Unit Rs 10
Selling Price Rs 15
Amity Business School

Margin of Safety
Margin of safety is the difference between the actual sales & the sales at the break even
point

Margin of safety = Profit

PV ratio

Margin of safety = Profit

Contribution per unit


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If the margin of safety is large it is an indicator strength of a business.

Efforts should be made by the management to increase (or improve) margin of


Safety so that more profit may be earned.

The margin can be increased by taking the following steps.

i. Increase the level of production (sales volume) provided the capacity is available
ii. Increasing the selling price
iii. Reduce the cost
iv. Substituting the existing products by more profitable product.
Amity Business School

Question2

A company has fixed expenses of Rs. 90,000 with sales at Rs 300000 and profit of
Rs. 60,000 during the first half year. If in the next half year, the company suffers a loss
Of Rs 30,000 calculate

a. PV ratio, BEP and margin of safety for first half


b. Expected sales volume of next half year assuming that selling price and fixed expenses
remain unchanged.
C. BEP & MES of the whole year.
Amity Business School

Question3

a. Given the following calculate P/V Ratio and profit when sales are Rs. 20,000;
Fixed cost Rs. 4000: Break even Point Rs 10000.

b. Given the following, find Margin of safety sales.


Profit earned Rs 24000
Selling Price per unit Rs.10
Marginal cost per unit is Rs. 7

c. From the following data, compute break- even sales and margin of safety.
Sales Rs. 1000000
Fixed Cost Rs.300000
Profit Rs.200000
Amity Business School

Question4.
The selling price of a product was Rs.200 per unit, as against its variable cost of
Rs.100 per unit. The total fixed costs were Rs.200000. Calculate the effect of a reduction in
Price by Rs.40 on the P/V ratio, Break even point and Margin of safety, if 4000 units were
Produced and sold.

Question5. (Decision making, Profit Planning )


Two business Red ltd and yellow ltd.. Sell, the same type of product in the same type of market
Their budgeted profit & loss account for the coming year are as follows;
Red Ltd Yellow Ltd
Sales 150000 150000
Variable cost 120000 100000
Fixed cost 15000 35000
Calculate the break even point of each business
Calculate the sales volume at which each of the business will earn Rs.5000 profit
State which business is likely to earn profit in following conditions
a. heavy demand for the product
b. low demand for the product
Give reason
Amity Business School

KEY FACTORS

Key factor is that factor which limits the volume of output or level of activities of
An undertaking at a particular point of time or over a period.

The extent of its influence must be first assessed so as to maximise the profits.
e.g. of key factors may be
i. Shortage of raw material
ii. Shortage of Labour hours
iii. Machine capacity available
iv. Sales capacity available

Basis of decision
The product mix decision should be taken on the basis of contribution per unit of key factor
i.e. contribution per unit
key factor per unit
Amity Business School

Case 1
X ltd produces two products using the same raw material and production facilities,
Following information is provided to you

Product A Product B
Rs Rs
Selling price per unit 100 80
Material @ Rs 2 per Kg 20 10
Labour @ Rs 3 Per hr 15 30
Variable overheads @ Rs 4 per machine hr 40 16
Total fixed overheads: Rs 6,00,000
Comment on the profitability of each product when
i. Sales quantity is limited
ii. Raw material is in short supply
iii. Labour hour are limited
iv. Production capacity ( in term of machine hour ) is limited
v. There is heavy demand conditions
vi. There are low demand conditions
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Statement showing the contribution per unit of key factor


Particulars product A product B
Selling price per unit 100 80
less variable cost 75 56
Contribution per unit 25 24
PV Ratio 25% 30%

Contribution per Kg of raw material 25/10 24/5


Rs 2.5 Rs. 4.8

Contribution per Labour hour 25/5 24/10


Rs 5 Rs. 2.4

Contribution per machine hr 25/10 24/4


Rs.2.5 Rs. 6

Break even point Rs 600000/25 600000/24


24000 25000
units units
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a. When sales is limited, product A is more profitable because its contribution is higher
b. When Raw material is in short supply product B is more profitable
c. When Labour hours are limited, product A is more profitable
d. When production capacity is limited in terms of machine per hr product B is more profitable
e. When heavy demand is there product B is profitable due to high PV ratio
f. When low demand is there product A is profitable due to low BEP
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Case 2. Pricing decision & desire level of profit decision

An enthusiastic marketing manager suggests to his managing director that only if he is


Permitted to reduce the selling price of a product by 20%, he would be able to achieve a
30% increase in sales volume. The managing director finding that the sales volume increase
Exceeds in percentage the extend of requested reduction in price. Further following inform-
at ion is given.

Present selling price is Rs. 7.50 per unit


Present volume of sales 200000 units
Total variable cost is Rs. 10,50,000
Total fixed cost is Rs. 3,60,000
Assume no changes in the costs pattern in the coming period:
i. Examine the consequences of the managing director accepting the advise of
marketing manager & 30% increased in sales is realized
ii. At what volume of sales can the present quantum of profits be sustained, after effecting the
price reduction.
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Case 3
Z ltd purchases 20,000 bells per annum from an outside supplier at Rs.5 each. The
management feels that these can be manufactured. A machine costing Rs.50,000 will be
required to manufacture the item within the factory. The machine has an annual capacity
of 30,000 units and a life of 5 yrs. Following additional information is available.
Material cost per bell Rs 2
Labour cost per bell Rs 1
Variable overheads 100% of Labour cost.

i. The company should continue to purchase the bells from outside supplier or should
manufacture it in the factory
ii. The company should accept an order to supply 5000 bells to market at a selling price of
Rs 4.50 per unit
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Case 4

A firm can purchase a separate part from an outside source @ $11 per unit. There is a proposal
That the spare part can be produced in the factory itself. For the purpose a machine costing
$ 100000 with annual capacity of 20,000 unit and a life of 10 yrs will be required.
A Forman with monthly salary of $500 will have to be engaged. And the company has to raise
Funds @10% p.a.
Material required will be $ 4 per unit & wage $2 per unit.
Variable overheads are 150% of direct Labour.
Advice the firm whether the proposal should be accepted or not.
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Standard cost is a predetermined cost. It is a determination in


Advance of production, of what should be the cost.

When standard costs are used for the purpose of cost control,
The technique is known as the standard costing

Standard costing is the preparation of standard costs and applying


Them to measure the variations from actual costs and analysing the
Causes of variations with a view to maintain maximum efficiency in
Production
It is a technique which uses standards for costs and revenues for the
Purpose of control through variance analysis
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Analysis of Variances
The deviation of the actual cost or profit or sales from the standard
cost or profit or sales is known as variance.

When actual cost is less than the standard cost or actual profit is
better than standard profit, it is known as favorable variance.

When the actual cost is more than standard cost or actual profit or
turnover is less than the standard profit or turnover, it is known
as unfavorable or adverse variance
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Analysis of Variance may be done in respect of each element of


Cost and sales

Direct Material variances


Direct Labour Variances
Overheads Variances
Sales Variances
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Material Variances

Following may be the variances in case of Direct Material

Material cost Variance

Material Price Variance Material usage Variance

Material Mix Material Yield


variances Variances
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Material cost Variance


It is the difference between the standard cost of materials allowed
( as per standard laid down) for the output
achieved and the actual cost of material used
Calculated as follows
Material cost Variance

= Standard cost of material for Actual output – Actual cost of material used
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Q1. The Standard material required to manufacture one unit of product X is 10 Kg and the
Standard price per Kg is $2.50. The cost accounts record however, reveal that 11500 Kg of
Material costing $27600 were used to manufacture 1000 units of product X
Calculate Material Variance

Q2.. From the following particulars calculate Material Cost Variance, Material Price
Variance & Material Usage Variance.

Standard Actual
Material Units Price Material Units Price
A 1010 $1 A 1080 $1.2
B 410 $1.5 B 380 $1.8
C 350 $2 C 380 $1.9
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Material price Variance

MPV = Actual Quantity ( Standard price – Actual Price)

Material usage Variance

MQV = Standard Price ( Standard Quantity – Actual Quantity

Material Mix Variance


MMV it is that portion of the material usage variance which is
due to the difference between standard and the actual composition
of a mixture. In simple words, this variance arises because the ratio
of material being changed from the standard ratio set.
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In material mix Variance two situation may arises;


i. Actual weight of mix and the standard weight of mix do not differ.
ii. When Weightage of actual mix differs from standard Mix Weightage
Situation 1.
When Actual weight of mix and standard weight of mix is same

e.g. Standard Actual


Raw Material Units Price Raw Material Units Price
A 55 20 A 40 15

B 45 10 B 60 25
100 30
100
100 40
Same
Then Material Mix Variance is equal to the Material usage
Variance
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Situation II
When weight of actual mix differs from weight of standard mix.
Then Material mix Variance is calculated as difference between
Standard cost of Revised Quantity with Standard cost of Actual Mix.
Standard Actual
Raw Material units Price Raw Material units Price

A 60 25 A 65 20
B 50 30
B 40 20

100 115
115 50
100 45

Different
weights
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Material Mixed Variance


MMV = Standard Cost of Revised Standard Mix – Standard Cost of
Actual mix

Calculation of Revised Standard

Revised Standard = Actual weight


X Standard Quantity
Standard weight
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Yield Variance

Yield means output.

If the Weightage of units are same for standard mix & actual mix then yield variance is
Calculated by using the following formula

Yield Variance = Standard cost per unit of yield [ Actual yield – Standard yield]

If the Weightage of units are not same for standard mix and actual mix then standard yield is to
Be calculated

Standard Yield = Actual Material Mix – actual material loss allowed.


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Q3. Calculate MCV, MPV,MMV with the following information:


Standard
Material A: 60 units @ $5 per unit
Material B: 40 units @ $10 per unit

Actual
Material A: 50 units @ $6 per unit
Material B: 50 units @ $8 per units

Q4. From the following information calculate the material variance.


Consumption for 100 units of product
Standard Actual
Material A: 40 units @ $50 per unit 50 units @ $50 per unit
Material B: 60 units @ $40 per unit 60 unit @ $45 per unit
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Q5. From the following information calculate Material Yield Variance.

Standard Mix Actual Mix


Material A 200 units @ $12 160 units @ $13
Material B 100 units @$10 140 units @ $10
Standard loss allowed is 10% of input. Actual output is 275 units

Q6. The standard cost of chemical Mixture is as follows:


A 8 tons @ Rs.40
B 12 tons @Rs.60

The Actual cost is as follows


A 10 tons @ Rs.30
B 20 tons @ Rs.68

Standard yield is 90 %
Actual Yield is 26.5 tons
Compute Material Cost, price, Quantity, Mix and yield Variance.
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Labour Variance

Labour Cost Variance


Labour Rate of Pay Variance
Labour Efficiency Variance
Labour Mix Variance

241
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Calculate Labour Variance
Standard labour force to produce product A
20 semi Skilled workers @ P .75 per hour for 50 hrs
10 skilled worker @ Rs.1.25 per hour for 50 hr

Actual Labour force employed to produce A is:


22 semi skilled worker @ p.80 per hour for 50 hrs
8 skilled worker @ Rs. 1.20 per hour for 50 hrs
Standard Actual
Worker hour Rate Total Worker Hour Rate Total
Semi skill 1000 P.75 750 Semi Skill 1100 P.80 880
Skill 500 Rs.1.25 625 Semi Skill 400 Rs.1.20 480
1500 1375 1500 1360
Labour Cost Variance = Standard cost of labour – Actual cost of labour
Rs. 1375 - Rs.1360 = Rs. 15(F)
Rate of Pay Variance
Actual Time ( Standard Rate – Actual Rate)
Semi Skill 1100 ( P.75 – P.80) = 55(A)
Skill 400 ( Rs. 1.25 – Rs. 1.20) = 20 F) 242
Rate of pay Variance = 35 (A)
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Labour Efficiency Variance

Standard Rate (Standard Time – Actual Time)

Semi Skill P.75(1000-1100) = 75(A)


Skilled Rs. 1.25(500 -400) 125 (F)
Efficiency Variance = 50 (F)

Labour Mix Variance


Standard Cost of Standard Mix – Standard cost of Actual Mix

Rs. 1375 – Rs. 1325 = 50(F)

243