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Accounting 4 Managers PDF
Accounting 4 Managers PDF
Assignment - A
Question 1a): What do you understand by the concept of conservatism? Why it is
also called the concept of prudence? Why it is not applied as strongly today as
it used to be in the Past?
Answer:
Concept of Conservatism implies using conservatism while preparing
financial statements i.e. income should not be accounted for unless it has
actually been earned but expenses, even if just anticipated should be
provided for. According to this concept, revenues should be recognized only
when they are realized, while expenses should be recognized as soon as
they are reasonably possible. For instance, suppose a firm sells 100units of a
product on credit for Rs.10, 000. Until the payment is received, it will not be
recorded in the accounting books. However, if the firm receives information
that the customer has lost his assets and is likely to default the payment,
the possible loss is immediately provided for in the firms books. The rule is
to recognize revenue when it is reasonably certain and recognize expenses
as soon as they are reasonably possible. The reasons for accounting in this
manner are so that financial statements do not overstate the companys
financial position.
in
recording
income
and
expenses/losses
in
the
financial
statements so that anticipated income are not recorded whereas likely losses
are provided for.
However, this concept is not applied as strongly today as it used to be in the
past for the reason that the modern world saw a considerable increase in
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corporate frauds e.g. Enron case in USA and Satyam in India.Also, there is a
decline in assuming corporate social responsibilities due to superfluous
issues of gaining publicity and brand building. These two major issues call
for increased transparency in financial statements and hence, the decline in
use of age old concept of conservatism.
Question 1 b): What is a Balance Sheet? How does a Funds Flow
Statement differ from a Balance Sheet? Enumerate the items which are
usually shown in a Balance Sheet and a Funds Flow Statement.
Funds Flow statement determines the sources of cash flowing into the firm
and the application of that cash by the firm. The various items of a Funds
Flow Statement can be grouped under two heads, viz: inflow of funds
(sources) or outflow of funds (applications).
While the Balance Sheet shows only the monetary value of each source and
application of funds at the end of the year, funds flow statement depicts the
extent of changes in each source and application of funds during the year.
If we take the Balance Sheet for two consecutive years and work out the
change for each item, we are able to arrive at the Funds Flow Statement
items.
Sundry Creditors
Outstanding expenses
Provision for tax
Inflow of funds:
A decrease in assets
An increase in liabilities
An increase in shareholders funds
Outflow of funds:
An increase in assets
A decrease in liabilities
A decrease in shareholders funds
Question 2a: Discuss the importance of ratio analysis for inter-firm
and intra-firm comparisons including circumstances responsible for its
limitations .If any
Answer: Ratio analysis implies the systematic use of ratios to interpret the
financial statements so that the strength and weaknesses of a firm as well as
its historical performance and current financial position can be determined.
With the help of ratio analysis conclusion can be drawn regarding several
aspects such as financial health, profitability and operational efficiency of the
undertaking.
Ratio analysis is very useful in making inter-firm comparison as it helps to
draw a comparison between the entities within the same industry or
otherwise following the same accounting procedure. It provides the relevant
financial information for the comparative firms with a view to improving their
productivity & profitability.
identified and if results are negative, the action may be initiated immediately
to bring them in line.
However, in spite of being such a useful tool, it is not free from its
limitations. A single ratio is of a limited use and it is essential to have a
comparative study. The base used for ratio analysis viz: financial statements
have their own limitations. Also, they consider only the quantitative aspects
of business transactions where as there are various other non-quantitative
aspects such as quality of work force which considerably affect profitability
and productivity. Also, ratio analysis as a tool is also limited by changes in
accounting procedures/policies.
Question 2b: 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.
Answer: Pay-out Ratio means the amount of earnings paid out in dividends
to shareholders. Investors can use the payout ratio to determine what
companies are doing with their earnings. It can be calculated as:
The pay-out ratio also indicates how well earnings support the dividend
payment. The lower the ratio, the more secure the dividend because smaller
dividends are easier to payout than larger dividends.
This is a welcome policy from the point of view of the investors. But, the
company should take into account various important factors such as its need
for future investment and growth, cash requirements and debt obligations.
Question 3a:
From the ratios and other data given below for Bharat
Year III
Current Ratio
265% 278%
302%
115% 110%
99%
3.00
3.25
8.41
7.20
43
50
Inventory to Working
Capital
Inventory Turnover
(times)
Income per Equity Share
95%
100%
110%
6.11
6.01
5.41
5.10
4.05
2.50
11.07 8.5%
%
22%
23%
7.0%
10%
16%
23%
70%
71%
73%
Rs. 3
Rs.3
Rs.3
Operating Expenses to
Net Sales
Sales increase during the
year
Cost of goods sold to Net
25%
Sales
Dividend per share
22.7%
2.0%
7.03% 5.09%
In the given case of Bharat Auto Accessories Ltd, the current ratio has gone
up from 265% to 302% over a period of three years. It is a measure of the
degree to which current assets cover current liabilities (Current Assets /
Current Liabilities). A high ratio indicates a good probability the enterprise
can retire current debts. However, the acid test ratio has gone down from
115% to 99%, which is not a very good sign. It is a measure of the amount
of liquid assets available to offset current debt (Cash + Accounts Receivable
/ Current Liabilities). A healthy enterprise will always keep this ratio at 1.0
or higher. Also, the fixed asset to net worth ratio is 16.4% for Yr. I and has
gone up to 22.7% for Yr. III. This ratio is a measure of the extent of an
enterprise's investment in non-liquid and often over valued fixed assets
The operating expense to net sales has increased from 22% to 25% which
indicates that the organization has lowered its ability to generate profits in
case of declining revenues.
The indicators of profitability are income per equity share, net income to net
worth, and net profit on net sales. All these ratios have declined
considerably over the three year period. This indicates declining profitability
over the years.
Thus, on a review of the various ratios, we conclude that Bharat Auto
Accessories Ltd does not have a strong financial position, is not very efficient
in its operations and is undergoing a period of declining profitability.
Question 4:
Answer)
Trading and Profit and Loss Account for the yr ended 31st Mar 2004
Trading and Profit and Loss Account for the yr ended 31st Mar 2004
Dr.
Cr.
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PARTICULARS
To opening stock
To purchases
To wages
To salaries
To Sunday office expenses
To Gross Profit c/d
AMOUNT
1,50,000
3,69,000
1,80,000
1,50,000
1,08,750
23,250
PARTICULARS
By Cash Sales
By Credit Sales
AMOUNT
61,000
7,80,000
By closing stock
1,40,000
TOTAL
9,81,000
TOTAL
9,81,000
To Discount allowed
To Bad debts w/o
To Depreciation
7,000
8,000
Furniture @5%
23,250
4,000
2,000
26,750
TOTAL
58,500
2,000
-
36,500
Machinery @10%
34,500
4,500
TOTAL
58,500
AMOUNT
OWNERS CAPITAL
Op balance 5,16,000
Less drawings 40,000
Less loss
26,750
4,49,250
UNSECURED LOAN
Dass @9%
1,00,000
1,25,000
20,000
4,500
TOTAL
6,98750
ASSETS
FIXED ASSETS
Machinery 3,45,000
Less dep
34,500
Net block
3,10,500
Furniture
40,000
Less dep
2,000
Net block
38,000
INVESTMENTS
CURRENT ASSETS,LOANS &
ADVANCES
Stock
Sundry Debtors
Bank
Unexpired insurance
TOTAL
AMOUNT
3,48,500
1,40,000
1,93,000
16,000
1,250
6,98,750
WORKING NOTES:
1)
Question (5a)
Answer: Liquidity is the ability of the firm to convert assets into cash. It is
also called marketability or short-term solvency. In other words, it is the
ability of the firm to meet its day-to-day obligations.
In order to study the liquidity of the firm, we need to thoroughly examine its
asset structure, mainly the current assets. The current assets, viz: stock,
debtors, bank balance and other current assets need to be seen to
determine at what rate a firm can convert these into cash. A business that
collects its accounts receivable in an average of 20 days generally has more
cash on hand than a business that requires 45 days. Similarly, a business
that turns over its inventory 15 times a year has more cash on hand than a
company that turns its inventory only 10 times a year. A business which
keeps surplus cash or an idle bank balance may be readily able to meet its
short-term or daily obligations but it is not effectively utilizing its cash flow.
Another factor to determine the liquidity is to see the profitability of the firm.
The more profitable the firm is, the more cash resources it shall have.
Last, but not the least, we use make use of certain financial ratios like
current ratio, quick or acid-test ratio, net working capital to determine the
liquidity of the firm.
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Bankers and investors look at a company's ratios when they are trying to
decide if they want to lend you money or invest in your company.
Creditors are interested in the companys short-term and long-term ability to
pay its debts.
due within one year. In general, businesses prefer to have at least one dollar
of current assets for every dollar of current liabilities. However, the normal
current ratio fluctuates from industry to industry. A current ratio significantly
higher than the industry average could indicate the existence of redundant
assets. Conversely, a current ratio significantly lower than the industry
average could indicate a lack of liquidity.
Formula
Current Assets
Current Liabilities
Formula
Cash Equivalents + Marketable Securities
Current Liabilities
Working Capital
Working capital compares current assets to current liabilities, and serves as
the liquid reserve available to satisfy contingencies and uncertainties. A high
working capital balance is mandated if the entity is unable to borrow on
short notice. The ratio indicates the short-term solvency of a business and in
determining if a firm can pay its current liabilities when due.
Formula
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Assignment - B
Answer 1:
1)
Bank balance as per pass book of Priya & Co. as on 28th Feb.2008 :
(Rs.)
(Rs.)
15,000
6,875
8,125
7,500
4,500
12,000
Bank balance as per pass book of Priya & Co as on 28th Feb 2008
20,125
Answer 2a:
Decision whether new product should be introduced
Sale price of new product 2000@Rs.60 = Rs.1,20,000
Less: Direct costs Direct material 2000@16
=Rs.32,000
Direct labour 2000@15
=Rs.30,000
Direct expenses 2000@1.5
=Rs. 3,000 Rs.65,000
Indirect costs-Variable factory overheads
2000@2.00
=Rs. 4,000
Variable selling & distribution overheads
2000@1.50
=Rs. 3,000
Rs. 7,000
Rs.72,000
CONTRIBUTION from new product
=
Rs.48,000
Answer 2b)
Profitability
Profits from present production
Sales
Direct material 96,000
Direct labour 1,20,000
Direct expenses 19,000
Variable factory ohds 25,000
5,40,000
2,35,000
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30,000
2,75,000
2,14,000
Rs.61,000
Answer 3 a)
The master budget is a summary of company's plans that sets specific
targets for sales, production, distribution and financing activities. It generally
culminates in cash budget,a budgeted income statement a budgeted balance
sheet. In short, this budget represents a comprehensive expression of
management's plans for future and how these plans are to be accomplished.
It usually consists of a number of separate but interdependent budgets. One
budget may be necessary before the other can be initiated. More one budget
estimate effects other budget estimates because the figures of one budget is
usually used in the preparation of other budget. This is the reason why these
budgets are called interdependent budgets.
The master budget is a comprehensive planning document that incorporates
several other individual budgets. A master budget is usually classified into
two individual budgets: the Operational budget and the Financial budget.
The operation budget consists of eight individual budgets: Sales Budget,
Production Budget, Direct Material Budget, Direct Labour Budget, Factory
overhead Budget, Ending inventory budget, Selling and administrative
expenses budget, Budgeted income statement.
The second part of the master budget will include the financial budget. The
financial budget consists of two individual budgets Cash Budget and
Budgeted Balance Sheet.
Thus, cash budget is a part of Master budget. The Cash budget will show the
effects of all the budgeted activities on cash. By preparing a cash budget
15
your business management will be able to ensure that they have sufficient
cash on hand to carry out activities. It will also allow them enough time to
plan for any additional financing they might need during the budget period,
and plan for investments of excess cash. A cash budget should include all
items that affect the business cash flow and should also include three major
sections; cash available, cash disbursements, and financing.
Answer 3 b)
The various methods of inventory valuation are:
i) FIFO(first-in-first-out) method
ii) LIFO(last-in-first-out)method
iii) Weighted average method
iv) Moving average method
v) Lower of cost or market value(LCM)
vi) Dollar value-LIFO
vii) Gross Profit method
viii)
Retail method
During times of inflation, different methods have different effect on inflation.
FIFO gives the highest amount of gross profit because the lower unit costs of the first
units purchased are matched against revenues, especially in times of inflation. LIFO
gives the lowest amount of net income during inflationary times.
Average costs approach tends to give profit which lies in between that given by FIFO
and LIFO method.
AS per Accounting Standard of ICAI (AS-2), inventory cost should comprise of all
cost of purchases, cost of conversion and other costs incurred in bringing the
inventories to the present location and condition. Cost of purchases should be
exclusive of duties which are recoverable from the taxing authorities. (e.g. Cenvat).
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Inventory should be valued at lower of cost or net realisable value. Inventory should
be valued on FIFO (First in First Out) method or weighted average method. [LIFO is
not permitted]. According to AS-2, inventory of raw materials should be valued at
cost, without considering excise duty, as manufacturer has availed credit of the same.
However, this reduces value of stock and hence profits are lower.
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CASE STUDY
Question 1:
Question 2:
standards.
Please
advise
the
18
company
in
reviewing
the
19
Assignment - C
1 d) Assets are measured using the cost concept.
2 a) Overstatement of Capital
d)
Understatement of Assets
earnings,
5 d) Journalizing
6 d) Most likely an error was- made in posting journal entries to the general ledger or in
preparing the trial balance
7 c) Supplies, Rs2, 300; Supplies Expense, Rs6, 500.
8 d) Fund decreases
9 a)Cash
10 a) All sources and uses of resources
11 c) Interest expense
12 d) All of the above
13 b) Accommodate changes in activity levels
14 d) One place that the reader of an annual report would be able to identify that a company
changed inventory methods is the footnotes to the financial statements.
15 b) Will be recorded in a contra account, Discount on Notes Receivable, by Co
16 b)Balance sheet and statement of cash flows.
17 c) Has no affect on working capital at all.
18 b) The company produced more sales in 2006 for each dollar invested in assets.
19 a) Rs. 170 unfavorable
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20 b) Standards are developed using past costs and are available at a relatively low cost.
21 c) help in fixing selling price.
21