Professional Documents
Culture Documents
Accounting For Managers
Accounting For Managers
Assignment - A
1.
(Sale, Purchase, Inventory, etc.) that has a short term (<1 Year)
impact
Investing: Anything that has a long term (> 1 year) implication
(Plant, Machinery, Capital Expenditures, etc.)
Financing: Changes in sources of funds (New Debt, Equity, etc.)
Category
Operating
Investing
Financing
Items
Net Income and Changes in working capital {-(CACL)2011 - (CA-CL)2010 }
Property and Equipment, net, Intangible Assets, net,
Goodwill
Differences of all Long-Term Liabilities and Share Holders
Equities
2.
(a) Discuss the importance of ratio analysis for inter-firm and intra-firm
comparisons including circumstances responsible for its limitations .If any
(b) Why do you understand by the term pay-out ratio? What factors are
taken into consideration while determining pay-out ratio? Should a company
follow a fixed pay-out ratio policy? Discuss fully.
3 From the ratios and other data given below for Bharat Auto Accessories Ltd.
. indicate your interpretation of the companys financial position, operating efficiency
and profitability.
Year I
Current Ratio
265%
278%
302%
115%
110%
99%
2.75
3.00
3.25
Receivables Turnover
9.83
8.41
7.20
37
43
50
95%
100%
110%
6.11
6.01
5.41
5.10
4.05
2.50
11.07% 8.5%
7.0%
22%
23%
25%
10%
16%
23%
70%
71%
73%
Rs. 3
Rs. 3
Rs. 3
16.4%
18%
22.7%
7.03%
5.09%
2.0%
4
. Bose has supplied the following information about his business to Summary of Cash
book
Sundry debtors
Stock
Machinery
Furniture
Sundry creditors
Receipts
To Opening balance
To Cash sales
To Receipt from debtors
To Misc. receipts
To Loan from Dass @ 9%
per annum (taken on
1.10.2003)
On 1st April
2003
(Rs.)
1,81,000
1,50,000
2,50,000
40,000
1,10,000
Rs.
5,000
61,000
7,53,000
2,000
Payments
By Payments to creditors
By wages
By Salaries
By Drawings
By Sunday office expenses
1,00,000 By Machinery purchased (on
1.10.2003)
By Closing balance
9,21,000
Rs.
3,50,000
1,60,000
1,50,000
40,000
1,10,000
95,000
16,000
9,21,000
Discount allowed totaled Rs.7,000 and discount received was Rs.4,000. Bad debts
written off were Rs.8,000. Depreciation was written off on furniture @5% per annum and
machinery @10% per annum under the straight line method of depreciation. The office
expenses included Rs.5,000 paid as insurance premium for the year ending 30th June, 2004.
What procedure would you adopt to study the liquidity of a business firm?
Who are all the parties interested in knowing this accounting information?
What ratio or other financial statement analysis technique will you adopt for
this.
The procedure you would adopt to study the liquidity of a business firm is
to compare the liquidity rations of the business. You do this by comparing
the businesses most liquid assets with its short-term liabilities.
1. Shareholders
Shareholders are interested in financial statement analysis to know the
profitability of the organization. Profitability shows the growth potentiality
of an organization and safety of investment of shareholders.
3. Creditors
Creditors are interested in analyzing the financial statements in order to
know the short term liquidity position of an organization. Creditors
analyse the financial statement to know either the organization is enable
4. Management
Management is interested to analyze the financial statement for
measuring the effectivenessof its policies and decisions.It analyze the
financial statements to know short term and long term solvency
position,profitability,liquidity position and return on investment from the
business.
5. Government
Government is interested to analyze the financial position in determining
the amount of tax liability. It also helps for formulating effective plans and
policies for economic growth.
Financial Ratio Analysis is the calculation and comparison of main indicators ratios which are derived from the information given in a company's financial
statements (which must be from similar points in time and preferably audited financial
statements and developed in the same manner). It involves methods of calculating
and interpreting financial ratios in order to assess a firm's performance and status.
This Analysis is primarily designed to meet informational needs of investors, creditors
and management. The objective of ratio analysis is the comparative measurement
of financial data to facilitate wise investment, credit and managerial decisions. Some
examples of analysis, according to the needs to be satisfied, are:
a firm's ratios,
Vertical Analysis - the comparison of Balance Sheet accounts either using
ratios or not, to get useful information and draw useful conclusions, and
Cross-sectional Analysis - ratios are used and compared between several
firms of the same industry in order to draw conclusions about an entity's
profitability and financial performance. Inter-firm Analysis can be categorized
under Cross-sectional, as the analysis is done by using some basic ratios of the
Industry in which the firm under analysis belongs to (and specifically,
the average of all the firms of the industry) as benchmarks or the basis for our
firm's overall performance evaluation.
6.
From the following particulars, determine the bank balance as per pass book
5,40,000
Direct materials
96,000
Direct labour
1,20,000
Direct expenses
19,000
Fixed overheads :
Factory
2,00,000
Administration
21,000
25,000
Direct materials
16.00
Direct labour
15.00
Direct expenses
1.50
2.00
1.50
It is expected that 2,000 units of the new product can be sold at a price of
Rs. 60 per unit. The fixed factory overheads are expected to increase by 10%,
while fixed selling and distribution expenses will go up by Rs. 12,500 annually.
Administrative overheads remain unchanged.
However, there will be an increase of working capital to the extent of Rs. 75,000,
which would take the total cost of the project to Rs. 8.75 lakh.
The company considers that 20o/o pre-tax and interest return on investment
You are required to
(a) Decide whether the new product be introduced.
(b) Make any further observation/recommendations about profitability of the
company on the basis of the above data , after making assumption that the present
investment is Rs. 8 lakh.
8.
The master budget is the aggregation of all lowerlevel budgetsproduced by a company's various functional areas, and also
includes budgeted financial statements, a cash forecast, and a financing
plan.
Cash Budget
Cash budget is a financial budget prepared to calculate the budgeted cash inflows and
outflows during a period and the budgeted cash balance at the end of the period.
Cash budget helps the managers to determine any excessive idle cash or cash
shortage that is expected during the period. Such information helps the managers
to plan accordingly. For example if any cash shortage in expected in future, the
managers plan to change the credit policy or to borrow money and if excessive idle
cash is expected, they plan to invest it or to use it for the repayment of loan.
All businesses need to maintain a safe level of cash to enable them to carry on business
activities. The managers of a business need to determine that safe level. The cash
budget is then prepared by taking into consideration, that safe level of cash. Thus, if a
cash shortage is expected during a period, a plan is made to borrow cash.
Cash budget is a component of master budget and it is based on the following
components of master budget:
Schedule of expected cash collections
Schedule of expected cash payments
Selling and administrative expense budget
There are three basis approaches to valuing inventory that are allowed by Generally accepted
accounting principles (GAAP) (a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material
bought earliest in the period, while the cost of inventory is based upon the cost of material bought later
in the year. This results in inventory being valued close to current replacement cost. During periods of
inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three
approaches, and the highest net income.
(b) Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material
bought towards the end of the period, resulting in costs that closely approximate current costs. The
inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During
periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the
three approaches, and the lowest net income.
(c) Weighted Average: Under the weighted average approach, both inventory and the cost of goods
sold are based upon the average cost of all units bought during the period. When inventory turns over
rapidly this approach will more closely resemble FIFO than LIFO.
Without inflation all three inventory valuation methods would produce the same
results. However, prices do tend to rise over the years, and the company's
method costing method affects the valuation ratios.
The FIFO method assumes that the first unit in inventory is the first until sold. FIFO
gives a more accurate value for ending inventory on the balance sheet. On the other
hand, FIFO increases net income and increased net income can increase taxes owed.
The LIFO method assumes the last item entering inventory is the first sold. During
periods of inflation LIFO shows ending inventory on the balance sheet much lower than
what the inventory is truly worth at current prices, this means lower net income due to a
higher cost of goods sold.
The average cost method takes a weighted average of all units available for sale
during the accounting period and then uses that average cost to determine the value
of COGS and ending inventory.
Provisions of Accounting Standard 2 (AS-2) with regards to inventory valuation are as
follows:Inventory
As per the definition of inventory or closing stock it includes following things;
Items which are held for sale in the normal course of business that is finished stock of goods.
Work-in-progress (WIP) for such sale. Goods which are not yet finished or ready to sale.
Raw material which is not even issued for production while valuation of closing stock or
inventory. It also includes consumable stores item.
Applicability
AS-2 is not applicable to following cases.
Work in process in the construction contract business including, directly related to service contract.
Any financial instruments held as stock in trade which includes shares, debentures, bonds etc.
Other inventories like livestock, agricultural product and forest product, natural gases and mineral
oils etc.
Work in progress in the business of banking, consulting and service business. That means it
includes incomplete consulting service, merchant banking service and medical service in process.
All of above are not cover under the definition of inventory/ closing stock that's why this
accounting standard if not become applicable to above cases or in the course of business.
Cost of inventory
Valuation of inventory is made at cost or market/ net realisable value whichever
is lower. So that for the purpose of valuation cost of inventory is required to
obtain. There can be three types of cost are included in the inventory which are
as follow.
Purchase cost
3. Freight inward
2. Trade discount
3. Rebate
4. Duty drawback
Cost of conversion
After purchasing the raw material or goods during the production time whatever
cost is paid or payable will be considered as conversion cost. It includes direct
labour, material and other direct expense plus allocation of fixed and variable
production overhead incurred for conversion or raw material in to finished goods.
Following things should be considered for conversion cost of the inventory.
1. Fixed production overhead it includes indirect cost for production
which remains constant without relating to numbers of units produced.
For example depreciation and maintenance of factory building.
Other cost
It includes any other expenditure incurred to bring inventory or stock in the
present location and condition.
All three are the major part of the cost which required to be considered for
valuation of the inventory. But it should not include abnormal wastage relating to
material and labour, storage cost, administrative expenses & selling and
distribution expenses.
Weighted average
Assignment B
Case Study
Labor standards
Geeta & Company has experienced increased production costs. The primary area of
concern identified by management is direct labor. The company is considering adopting a
standard cost system to help control labor and other costs. Useful historical data are not
available because detailed production records have not been maintained.
To establish labor standards, Geeta & Company has retained an engineering
consulting firm. After a complete study of the work process, the consultants recommended
a labor standard of one unit of production every 30 minutes, or 16 units per day for each
worker. The consultants further advised that Geeta's wage rates were below the prevailing
rate of Rs per hour.
`Geeta's production vice-president thought that this labor standard was too tight,
and from experience with the labor force, believed that a labor standard of 40 minutes per
unit or 12 units per day for each worker would be more reasonable. he president of Geeta &
Company believed the standard should be set at a high level to motivate the workers and to
provide adequate information for control and reasonable cost comparison. After much
discussion, management decided to use a dual standard. The labor standard of one unit
every 30 minutes, recommended by the consulting firm, would be employed in the plant as
a motivation device, while a cost standard of 40 minutes per unit would be used in
reporting. Management also concluded that the workers would not be informed of the cost
standard used for reporting purposes. The production vice-president conducted several
sessions prior to implementation in the plant, informing the workers of the new standard
cost system and answering questions. The new standards were not related to incentive pay
but were introduced when wages were increased to Rs7 per hour.
The standard cost system was implemented on January 1, 19--. At the end of six
months of operation, these statistics on labor performance were presented to executive
management:
January February March
April
May
June
Production (units)
5,100
5,000
4,700
4,500
4,300
4,400
3,000
2,900
2,900
3,000
3,000
3,100
Quantity Variances:
Variance based on labor
standard
(one unit each 30 minutes)
Variance based on cost
standard
(one unit each 40 minutes)
Rs5,950
U Rs6,300
Rs933
U Rs1,167
-0-
*U = Unfavorable; F = Favorable
Materials quality, labor mix, and plant facilities and conditions have not changed to a
significant extent during the six month period.
for the first three months; thereby implying that the actual production was more than the
standard producton. In the fourthmonth, there was no variance in production and in the fifth
and sixth month, there was anunfavourable variance, thereby implying that the actual
production was less than standard production.Thus, we see that the
standard recommended by the engineering firm had a negativeimpact on motivation as it
was less than the standard production. But, in the case of internally setstandards, there was a
positive impact on motivation for first three months; neutral in the fourthmonth; and
negative impact in fifth and sixth month
Question 2: Please advise the company in reviewing the standards.
Answer:
The labour standard recommended by the consulting firm should not be used as
amotivational device as it is having a negative impact, The cost standard used for reporting
had
a positive or neutral impact for greater part of the period and a negative impact for two mont
hs.Therefore, the company should try and adopt labour standards similar to those ones.
Assignment C
1. Which of the following statements is true concerning assets?
Options
Overstatement of Capital
Understatement of Capital
Overstatement of Assets
Understatement of Assets.
The beginning retained earnings balance on the statement of retained earnings becomes the
amount of retained earnings reported on the balance sheet.
Retained earnings is added to total assets and reported on the balance sheet.
Net income increases retained earnings on the statement of retained earnings, which ultimately
increases retained earnings on the balance sheet.
There is no link between the balance sheet and the other statements.
Journalizing
6. If the sum of the debits and credits in a trial balance is not equal, then
Options
There is no concern because the two amounts are not meant to be equal.
The chart of accounts also does not balance.
It is safe to proceed with the preparation of financial statements.
Most likely an error was made in posting journal entries to the general ledger or in preparing the trial
balance.
7. Z Ltd had Rs1800 of supplies on hand at January 1, 2006. During 2006, supplies with
a cost of Rs7, 000 were purchased. At December 31, 2006, the actual supplies on
hand amounts to Rs2, 300. After the adjustments are recorded and posted at
December 31, 2006, the balances in the Supplies and Supplies Expense accounts
will be:
Options
8. In the statement of changes in financial position, uses of resources are defined as:
Options
Transaction debits
Fund increases
Transaction credits
Fund decreases
9. Most firms elected to define funds in the statement of changes in financial position
as:
Options
Cash
Working capital
Current assets
Owners Equity
Depreciation expense
Gain from asset disposal
Interest expense
Amortization of premium on debt
Quick assets
Literal cash on hand or on demand deposit, plus cash equivalents.
Literal cash on hand or on demand deposit, plus marketable securities.
All of the above