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Short Answer Questions: Accounting Is Defined As An Art of Recording, Classifying and Summarizing
Short Answer Questions: Accounting Is Defined As An Art of Recording, Classifying and Summarizing
Short Answer Questions: Accounting Is Defined As An Art of Recording, Classifying and Summarizing
14.How does cash flow statement differ from fund flow statement?
a. Cash flow is concerned only with change in cash position while Fund flow
is concerned with change in working capital position.
b. Cash flow is more useful to the management as a tool of financial analysis
in short periods as compared to Fund flow.
c. Another distinction between them is techniques of their preparations.
15.Explain accounting cycle.
Accounting Cycle is described as follows:
a. Record the transaction in journal or Special journals with voucher.
b. To post the transaction from journal to Ledger for further analysis and
having balances of each account.
c. Prepare the trial balance with the ledger‘s balances.
d. To make adjustment and closing entries.
e. Prepare Final Accounts or Financial statements.
The Cost Principle: Assets and services acquired should be recorded at their
actual cost.
68.What is an Entity?
An accounting entity is an organization that stands apart from other
organizations and individuals as a separate economic unit.
Owner is distinct from entity
Separate legal Entity
Net Sales
Operating Profit Ratio express relationship between operating profits and net
sales. It is computed as:
Operating Profit Ratio = (Operating Profit / Net Sales) *100
75.A firm has opening and closing debtors of Rs.40,000 and Rs.
75,000 respectively and credit sales of Rs. 3,45,000. Calculate the
debtor’s turnover ratio.
Debtors turnover ratio = credit sales/average debtors
=3, 45,000 / 57,000
= 6 time per year.
76.A firm has opening and closing inventory of Rs. 56,000 and Rs.
44,000 respectively. The firm has sold goods for Rs. 5, 00,000 at
gross profit margin of 20% calculate the inventory turnover ratio.
Inventory turnover = cost of goods sold / average inventory
= 5, 00,000 – 1, 00,000 / ½ (56, 000+44, 000)
= 4, 00,000 / 50,000
= 8 times per year.
Methodology:
The following 10 steps are required to install a comprehensive target costing
approach with an organization.
1. Re-orient culture and attitudes. The first and most challenging step is re-
orient thinking toward market-driven pricing and prioritized customer needs
rather than just technical requirements as a basis for product development.
This is a fundamental change from the attitude in most organizations where
cost is the result of the design rather than the influencer of the design and
that pricing is derived from building up an estimate of the cost of
manufacturing a product.
2. Establish a market-driven target price. A target price needs to be
established based upon market factors such as the company position in the
market place (market share), business and market penetration strategy,
competition and competitive price response, targeted market niche or price
point, and elasticity of demand. If the company is responding to a request for
proposal/quotation, the target price is based on analysis of the price to win
considering customer affordability and competitive analysis.
3. Determine the target cost. Once the target price is established, a
worksheet (see example below) is used to calculate the target cost by
subtracting the standard profit margin, non-recurring development costs, and
any uncontrollable corporate allocations. The target cost is allocated down to
lower level assemblies of subsystems in a manner consistent with the
structure of teams or individual designer responsibilities.
4. Balance target cost with requirements. Before the target cost is finalized,
it must be considered in conjunction with product requirements. The greatest
opportunity to control a product's costs is through proper setting of
requirements or specifications. This requires a careful understanding of the
voice of the customer, use of conjoint analysis to understand the value that
customers place on particular product capabilities, and use of techniques such
as quality function deployment to help make these tradeoff's among various
product requirements including target cost.
5. Establish a target costing process and a team-based organization. A
well-defined process is required that integrates activities and tasks to support
target costing. This process needs to be based on early and proactive
consideration of target costs and incorporate tools and methodologies
described subsequently. Further, a team-based organization is required that
integrates essential disciplines such as marketing, engineering,
manufacturing, purchasing, and finance. Responsibilities to support target
costing need to be clearly defined.
6. Brainstorm and analyze alternatives. The second most significant
opportunity to achieve cost reduction is through consideration of multiple
concept and design alternatives for both the product and its manufacturing
and support processes at each stage of the development cycle. These
opportunities can be achieved when there is out-of-the-box or creative
consideration of alternatives coupled with structured analysis and decision-
making methods.
7. Establish product cost models to support decision-making. Product cost
models and cost tables provide the tools to evaluate the implications of
concept and design alternatives. A target cost worksheet can be used to
capture the various elements of product cost, compare alternatives, as well as
track changing estimates against target cost over the development cycle.
8. Use tools to reduce costs. Use of tools and methodologies related to design
for manufacturability and assembly, design for inspection and test, modularity
and part standardization, and value analysis or function analysis. These
methodologies will consist of guidelines, databases, training, procedures, and
supporting analytic tools.
9. Reduce indirect cost application. Since a significant portion of a product's
costs (typically 30-50%) are indirect, these costs must also be addressed.
The enterprise must examine these costs, re-engineer indirect business
processes, and minimize non-value-added costs. But in addition to these
steps, development personnel generally lack an understanding of the
relationship of these costs to the product and process design decisions that
they make. Use of activity-based costing and an understanding of the
organization's cost drivers can provide a basis for understanding how design
decisions impact indirect costs and, as a result, allow their avoidance.
10. Measure results and maintain management focus. Current estimated
costs need to be tracked against target cost throughout development and the
rate of closure monitored. Management needs to focus attention of target cost
achievement during design reviews and phase-gate reviews to communicate
the importance of target costing to the organization.
3. What ratios would you calculate to assess the liquidity position and
solvency position of a firm?
Working capital: Current assets-Current liabilities.
Current ratio: current assets/current liabilities
Acid Test ratio or Quick ratio: Quick assets/Current liabilities
=Current assets-Inventory-Prepaid
Expenses/Current Liabilities
Cash Ratio: Cash+ Marketable securities+ Net receivable and debtors/ Current
Liabilities.
Receivable Turnover or Debtors Turnover ratio:
Net credit sales [total sales-cash sales-sales return]/ Average Debtors or average
accounts receivable (times)
Debt Collection Period: 12months/Debtor Turnover
Inventory Turnover Ratio:
Cost of Goods Sold/Average Inventory (times)
Cost of Goods Sold= Sales- Gross profit or
Cost of Goods Sold=Opening Stock+ Purchase+ Direct expenses-Closing stock.
Budgeting:
Budgeting is defined as ―The entire process of preparing the budget is known as
budgeting‖ –Batty.
Objectives:
1. To obtain more economic use of capital
2. To prevent waste and reduce expenses.
3. To facilitate various departments to operate efficiently and economically.
4. To plan and control the income and expenditure of the firm
5. To create a good business practice by planning future.
6. To fix responsibilities on different departments or heads. 7. To coordinate the
various activities of various departments.
8. To ensure the availability of working capital.
9. To smooth out seasonal variations buy developing new products.
10.To ensure matching of sales with productions.
11. What is meant by CVP (Cost Volume Profit) analysis? What are the
assumptions used in it? Limitations of Cost Volume Profit analysis.
Cost profit volume analysis is a systematic method of examining the relationships
between selling price, total sales revenue, volume of production expenses and
profits. This analysis simplifies the real world conditions that a business enterprise
likely to face.
Assumptions used in CVP analysis:
1. CVP analysis focuses on prices, revenues, volume, cost, profits and sales mix and
on the interrelationship between them during the short run.
2. In CVP analysis, all expenses classified into fixed and variable. Semi-variable
expenses have to be divided into their fixed and variable elements.
3. CVP analysis may be used in setting selling prices, selecting the product mix to
sell, choosing among alternatives marketing strategies and analysis the effects of
cost increase or decrease on the profitability of the business enterprise.
Limitations:
There are certain limitations faced by CVP analysis. These are:
1. The function of profit projection is virtually important to financial analyst, but it is
not without it shortcomings. Clear assignment of costs to either a fixed or variable
category is not always possible. The interpretations of several analysts probably
differ.
2. Direct labour is usually classified as a variable cost. Any change in production
volume will have a direct effect on labour in the same direction. If management
decides on a temporary shutdown of operations, the effect on the variability of
labour cost may not correspond directly. If for example the company wishes to retain
it highly experienced and skilled personnel during the shutdown period so as not to
lose them, the fluctuating nature of direct labour changed.
3. Another major weakness of cost volume profit analysis as a planning or controlling
device occurs in a manufacturing business. The assumption by the analyst the sales
and production volumes will always be the same may be valid in theory but not in
fact.
4. Analysis covering an extended period o time required a common denominator for
all component periods so that data examined will be equivalent. Where costs and
prices have changed drastically, adjustments based on current costs and prices
produce a more uniform result.
Balance Sheet
As at………………….
Liabilities Amt(Rs) Assets Amt(Rs)
Current liabilities Current Assets
Bank overdraft ------ Cash in hand -------
Outstanding expenses ------ Cash at bank -------
Bills payable ------ Prepaid expenses -------
Sundry creditors ------ Sundry debtors -------
Income received in ------ Accrued income -------
advance Bills receivable -------
Fixed non-current ------- Stock(closing) -------
liabilities ------- Non-current
Loan ------- Assets[Fixed
Capital ------- Assets] -------
Opening balance Investments -------
Add: Net profit ------- Furniture, Fittings,
(Less loss) Loose tools -------
Less: Drawings Plant and Machinery -------
Building -------
Land -------
Goodwill
ABC accounts for these costs based on what activities caused them to occur. By
determining the actual activities that occurs in various departments, it is then
possible to more accurately relate these costs to customers, products and services.
3. Identify cost objects: ABC provides profitability by one or more cost objects,
usually represented by products, customers and/or services. Cost Object profitability
is utilized to identify money losing customers, to validate separate divisions or
business units, or to measure the performance of individual projects, jobs, or
contracts. Defining the outputs to be viewed is an important step in a successful ABC
implementation.
4. Determine resources drivers: Resources drivers provide the link between the
expenditure of an organisation and the activities performed within the organisation.
For example, the total salary of a customer service representative would likely be
allocated to the Activities performed based on the amount of time spent performing
the Activity. If 50% of her time is spent performing the activity, taking orders for
existing customers, 50% of her salary (including all costs such as benefits, taxes,
and insurance) would be allocated to this Activity.
5. Determine cost drivers: Determine cost drivers completes the last stage of the
model. Cost drivers trace or link, the cost of performing certain activities or cost
objects.
For example, taking orders for existing customers may be linked to specific
customers based on the number of orders taken, if each order takes approximately
the same amount of time. If order taking time varies based on the customer, this
cost may be linked based on another driver or multiple drivers.
Key principles:
Step 1 Planning: In the first stage of social accounting, the organisation clarifies its
mission, objectives and activities as well as its underpinning values. It also analyses
its stakeholders through completing a ‗stakeholder map‘. These exercises help the
organisation to make explicit what it does, why and how it does it, and who it works
with and whom it seeks to benefit.
Step 3 Reporting and audit: The information that was collected, collated and
analyzed in Step 2 is brought together in a single document, which serves as a draft
of the social accounts. People from outside the organisation (a Social Audit Panel)
then review this document to check that the report is based on information that has
been properly gathered and interpreted. When the Panel is satisfied with the report
and its findings, the organisation can make its report available to the stakeholders
and wider public in full or as a shorter summary. Social Accounting and Audit is
really about examining the ‗social, environmental and economic‘ performance and
impact of an organisation. There are a variety of key terms which are included in the
glossary as part of the new, revised manual.
16. What do you mean by Human Resource Accounting? State its purposes.
What is the usefulness of Human Resource Accounting?
Intellectual capacity
Employees Attitudes
Experience
Employee Turnover
HRA also provides the HR professionals and management with information for
managing the human resources efficiently and effectively. Such information is
essential for performing the critical HR functions of acquiring, developing, allocating,
conserving, utilizing, evaluating and rewarding in a proper way. These functions are
the key transformational processes that convert human resources from ‗raw‘ inputs
(in the form of individuals, groups and the total human organization) to outputs in
the form of goods and services. HRA indicates whether these processes are adding
value or enhancing unnecessary costs.
Human capital also provides expert services such as consulting, financial planning
and assurance services, which are valuable, and very much in demand. Basically
HRA can be tracked through two methods—cost-based analysis and value-based
analysis. The cost-based approach focuses on the cost parameters, which may relate
to historical cost, replacement cost, or opportunity cost. The value-based approach
suggests that the value of human resources depends upon their capacity to generate
revenue.
2. Social (people)
3. Environmental ( Planet)
Advantages:
1. It introduces sound system of control - a system of closer control.
2. Each and every individual in the organization is assigned some responsibility and
they are accountable for their work.
3. Everybody knows what is expected of him. Nobody can shift responsibility to
anybody else if something goes wrong.
4. It is effective tool of cost control and cost reduction applied with budgetary control
and standard costing.
5. It facilitates the management to set realistic plans and budgets.
6. It is not only a control device but also facilitates decentralization of decision-
making.
7. It measures the performance of individuals in an objective manner.
8. It fosters a sense of cost-consciousness among managers and their subordinates.
9. It helps the management to make an effective delegation of authority and
required responsibility as well.
10. Under the system of Responsibility Accounting, detailed information is collected
about costs and revenues, on a continuous basis and the data is helpful in planning
for future costs and revenues.
11. Timely corrective action can be taken and better control over costs can be
achieved.
18. What is the study of Variance Analysis? How it helps in cost control.
Variance analysis is the process of analyzing variances by sub-dividing the total
variance in such a way that management can assign responsibility for of standard
performance.
Variance Analysis are important tools of cost control and cost reduction and they
generate an atmosphere of cost consciousness in the organisation. In short, the uses
of variances are:
1. Comparison of actual with standard cost which reveals the efficiency or
inefficiency of performance.
2. it its a tool of cost control and cost reduction.
3. It helps the management to apply the principle of management by exception.
4. It helps the management to maximize the profits by analyzing the variances into
controllable and uncontrollable; the controllable variances are further analyzed so as
to bring a cost reduction, indirectly more profit.
5. Future planning and programs are based costing and variance analysis need a
complete study of organisation. Thus, the factors of profits can be known and future
plan made.
6. Within an organisation, a cost consciousness is created along with the team spirit.
The variance analysis and fact finding further boost the profits of the organisation.
II 300000 80000
Accounting
Concepts and Profit & Loss A/C
Convention Balance Sheet
Cash / Fund Flow
Business Transaction statements
and events
(collection of Data)
Adjustments:
(i) Further Bad Debts Rs. 1000
(ii) Maintain reserve for doubtful debts @ 5%
(iii) Maintain reserve for discount on debtors @ 2%
Show the Profit & loss account and Balance sheet after the above
adjustments made, relating to bad debts ; discount on debtors and
net debtors.
Solution: Trading & Profit & Loss Account
Dr. Cr.
Balance Sheet
Liabilities Amount(Rs.) Assets Details Amount (Rs)
Debtors 75000
Less: Further 1000
Bad Debts
New Provision 3700
of Debts.
Provision of 1406 65894
Discount on
Debtors.
(1) Ratios are based on accounting figures given in the financial statements.
However, accounting figures are themselves subject to deficiencies,
approximations, diversity in practice or even manipulation to some extent.
(3) Inflation may limit the utility of accounting ratios. Due to inflation, historical
cost-based financial and accounting figures do not reflect current value figures,
especially in the case of assets purchased at different dates by the different
enterprises.
(4) Accounting ratios are not totally dependable and they must be used after
giving due weightage to general economic conditions, industry situation, position
of firms within the industry, mode of operations, size of firm, diversity of product
which can make the business enterprises completely dissimilar and thus affect
the computation of accounting ratios.
(5) The different methods of computations also influence the utility of accounting
ratio. The different concept used for determining numerator and denominator in
a particular accounting ratio will not help in drawing reliable conclusions even in
identical situations.
3. Creditors.
Creditors are the persons who have extended credit to the company. They are
also interested in the financial statements because they will help them in
ascertaining the enterprise will be in a position to meet its commitment towards
them both regording payments and principals.
4. Prospective investors.
A person who is contemplating an investment in a business will like to knopwn
about its profitability and financial position.
5. Employees.The employees are interested in the financial statement on
accounts of taxation, labour and corporate laws.
6.Citizen
An ordinary citizen may be interested in the accounting records of the
institutions with which he comes I contact in his daily life e.g. bank, temple,
public utilities such as gas, transport, electricity companies. In a broader sense,
he is also interested in the account of a Government Company, a public utility
concern etc. as a voter and a tax payer.
Book-keeping Accounting
Solution
1. Price variance= Actual quantity * (Standard price – Actual Price)
Material A =2 * (Re.1- Rs. 3.50)= Rs. 5 (Adverse)
Material B =1 * (Rs.1 – Rs. 2) = Rs. –
Material C = 3* (Rs. 4 – Rs.3) =Rs. 3 (Favorable)
=Rs. 2 ( Adverse)
=Nil
Or
1. We can look at the firm‘s assets that are relatively liquid in nature and compare
them to the amount of the debt coming due in the near term
2. We can look at how quickly the firm‘s liquid assets are being converted into cash.
B. Financing of assets:
Two primary ratios used to answer this question are the debt ratio and times interest
earned.
We want to know if the earnings available to the firm‘s owners or common equity
investors are attractive when compared to the returns of owners of similar
companies in the same industry.
Don‘t jump to conclusions that the ratios are the ultimate tools of financial analysis
and would give you straight answers regarding the financial health of the company.
They would not. Almost any ratio analyzed by itself can give you misleading
indications.
Financial ratios can be divided into five basic categories. These categories consist of
liquidity ratios, efficiency ratios, and leverage ratios. Profitability ratios and market
value ratios.
Journal and ledger are the most important books maintained in an enterprise. They
are closely interrelated. Business transactions are recoded first in Journal and other
books of original entry and then from these books they are transferred to ledger.
Journal records transactions in a chronological order while the ledger records the
transactions in a classified from. Journal, being the book of original entry or more
reliable as compared to ledger.
A journal is not useful in answering a question such as, what is the balance of cash
at a certain date. This question is answered by referring to the ledger, which
summarizes the cumulative effect of recorded transactions in separate account
accounts. This is accomplished by transferring or posting information from the
journal into appropriate accounts in the ledger.
35. What are the objectives of Human Resource Accounting? Discuss its
utility.
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested parties‖.
HRA, thus, not only involves measurement of all the costs/ investments associated
with the recruitment, placement, training and development of employees, but also
the quantification of the economic value of the people in an organization.
Objectives:
HRA serves the following purposes in an organization:
1. It furnishes cost/value information for making management decisions about
acquiring, allocating, developing, and maintaining human resources in order to attain
cost-effectiveness;
2. It allows management personnel to monitor effectively the use of human
resources;
3. It provides a sound and effective basis of human asset control, that is, whether
the asset is appreciated, depleted or conserved;
4. It helps in the development of management principles by classifying the financial
consequences of various practices.
36. A factory is currently working at 50% capacity and the product cost per
unit is given below:
Material - Rs. 100; Labour – Rs. 30; factory overheads (40%
fixed) – Rs. 30 ; Administrative overheads (50% fixed) – Rs.20.
The product is sold at Rs.240 per unit and the factory produces
10000 units at 50% capacity level. Estimate the profit and total
cost if the factory works at 60% by preparing a flexible budget. At
60% working, raw material cost increases by 20% and selling price
falls by 10%.
Solution: Flexible Budget
37. A company budgets for a production of 150000 units. The variable cost per unit
is Rs.14 and fixed cost Rs. 2 per unit. The company fixes its selling price to
fetch a profit of 15% on cost.
a) Find the break-Even Point
c) If it reduces the selling price by 5%, what is the new BEP and P/v ratio.
d) What would be the sales, at the reduced price if the desired profit is
Rs.3,96,000
Solution:
Total Cost = 14 + 2 = 16 Rs. Profit = 15 % of 16 = 2.40 Rs.
Selling Price = Cost + Profit 16 + 2.40 = 18.40 Rs.
Contribution: Sales – Variable Cost & 18.40 – 14 = 4.40
a. P/V Ratio = Contribution/Sales 4.40/18.40 = 24% (23.9%)
P/V Ratio
Estimated Sales = (300000 + 396000)/19.9% = 3497487 Rs. (New P/V
Ratio)
38. Compute (i) Material Cost variance (ii) Material Price variance and (iii)
Material Usage variance from the following information:
Standard Actual
Particulars Quantity (Kg) Rate per kg Quantity (Kg) Rate per
kg
Material A 800 6.00 750 7.00
Material B 400 4.00 500 5.00
Additional Information:
a. Dividends Paid for 4000 Rs.
40. Preparing a cash budget for the months of may, June and July, 1998 on
the basis of the following information:
(1) Income and expenditure forces:
Months Credit Credit Wages Manufacturing Office Selling
sales purchases Expenses expenses expenses
March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 65,000 33,000 10,000 4,500 2,500 4,500
June 58,000 35,000 8,500 3,500 2,000 3,500
July 56,000 39,000 9,500 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500
Solution:
Cash Budget
Particular May 1998 Rs June 1998 Rs July 1998 Rs
Opening balance 8,000 13,750 12,250
Estimated cash receipts
Debtors (credit sales) 62,000 64,000 58,000
70,000 77,750 70,250
Working Notes: (1) Opening for June has been written finding closing balance for
May, and for July after finding the closing balance for June.
(2) Since the period of credit allowed to customers is one month, the payments for-
credit purchases in March shall be made in May and so on.
(3) Since the period of credit allowed by suppliers is two months, the payment: for
credit purchases in March shall be made in May and so on.
(4) One-half of the manufacturing expenses of April and one –half of those of May
shall be paid in May, (1/2 of Rs. 3,000) + (1/2 of Rs 4,500) Rs. 3750 and so on.
(5) Office and selling expenses of April shall be paid in May and so on.
You are given the following information for the year 1994-95
Sales 600
PBIT 150
Interest 24
Provision for tax 60
All the figures given above are rupees in lakhs.
From the above particular calculate for the year 1994-95:
(a) Return on capital employed Ratio.
(b) Stock turnover ratio
(c) Return on net worth
(d) Current ratio
(e) Proprietary Ratio
Solution:
(a) Return on capital employed Ratio.
PBIT / Average capital employed *100
= 150 / 403 *100
= 37.22%
(b) Stock turnover ratio
Sales / average stock
600 / 110
= 5.45 times
(c) Return on net worth
PAT / Average *100
= 235 / 129
=22.53%
(d) Current Ratio
Current Assets / current liabilities
= 235 / 129
=1.82 times
306 280
Average: 306 + 280 / 2 = Rs 293 Lakhs
Proprietary funds as on 31.3.95 mean net worth as on that Rs 306 Lakhs.
(3) Profit after tax (PAT) (Rs in lakhs)
PBIT 150
Less: Interest 24
--------
126
Less: Tax 60
---------
66
(4) Current Assets as on 31.3.95 (Rs in lakhs)
Stock 120
Debtors 70
Cash /Bank 20
Other current Assets 25
-------
--
235