MB0025- Financial & Management Accounting 2009

SOLVED ASSIGNMENTS- MBA SEM -I

MB0025- Financial & Management Accounting

SMU: Directorate of Distance Education Tejas Jani - 520929319

MB0025- Financial & Management Accounting 2009

SET ONE
Q.1 Explain any two concepts of accounting with example?
Concepts are the basic assumptions or conditions up on which the science of accounting is based. There are five basic concepts of accounting namelyy y y y y

Business entity concept Going concern concept Money measurement concept Periodicity concept Accrual concept

 Business separate entity concept: The essence of this concept is that business is a separate entity and different from the owner or the proprietor. This is true in the case all forms of organization. If X starts business, he should not mix up his personnel properties with that of the business. When he invests his funds into the business, it is regarded as capital to the business and capital is a liability from the business point of view. If X withdraws any money from the business, it is detectable form the capital and to that extent the liability of the business towards the owner is reduced. On the other hand, if the proprietor withdraws money from the business for business purposes, then it is treated as expenditure to the business. This legal separation between business and ownership is kept in mind while recoding the transactions in the books of business.  Going concern concept: The fundamental assumption is that the business entity will continue fairly for a long time to come. There is no reason why an enterprise should be promoted for a short period only to liquidate the business in the foreseeable future. This assumption is called Going concern concept. For this reason accountants value fixed assets on historical cost method. Had the business been setup to last for short period, fixed assets should have been valued at a market price. Besides, going concern concept provides for amortization of the cost of fixed assets over the lifetime of the assets. For example, an entrepreneur purchases a plant for Rs. one crore and it has a life of 10 years. During this period, he sets aside every year certain funds from the income of the business so that it would help him for replacement of the asset at the end of ten years. This process of amortization presupposes that the enterprise will continue to do business fairly for long time.

Q.2 Prove that accounting equation is satisfied in all the following transactions of Mr. X 1. Commenced business with cash Rs 80,000
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MB0025- Financial & Management Accounting 2009

2. Purchased goods for cash Rs 40,000 and on credit Rs. 30,000 3. Sold goods for cash Rs. 40,000 costing Rs. 25,000 4. Paid salary Rs. 2,000 and salary outstanding Rs. 1,000 5. Brought scooter for personal use for cash at Rs. 20,000 Solution: The accounting equation is, Equity [Working Capital] + Liabilities + Assets Commenced business with cash Rs 80,000 In the first transaction, the business receives a capital of Rs. 80,000 cash and so capital account and cash accounts are affected. Capital is a liability and cash is an asset to the business. This is shown in the transaction number 1, in the table. Purchased goods for cash Rs 40,000 and on credit Rs. 30,000 In this transaction, cash account, goods account and liabilities account gets affected. Cash account reduces by Rs. 40,000 Goods account increases by Rs. 40,000 Liabilities account increases by Rs. 30,000 This is shown in the transaction number 2, in the table.

Sold goods for cash Rs. 40,000 costing Rs. 25,000 In this transaction, goods account, cash account and profit account gets affected. Cash account increases by Rs. 40,000 Goods account reduces by Rs. 25,000 Profit account being owners account, it gets credited with Rs 15,000 This is shown in the transaction number 3, in the table.

Paid salary Rs. 2,000 and salary outstanding Rs. 1,000 In this transaction, cash and salary accounts are affected.
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MB0025- Financial & Management Accounting 2009

Cash account reduces by Rs. 2,000 and salary account gets credited by Rs. 2,000 Outstanding salary is Rs. 1,000 which is not paid yet, hence any of the accounts gets affected. This is shown in the transaction number 4, in the table.

Brought scooter for personal use for cash at Rs. 20,000 The scooter is for personal use, the liability of the business on owners capital decreases. Cash account and capital account decreases by Rs. 20,000

This is shown in the transaction number 5, in the table.

Assets Transaction Number 1 2 3 4 5 Cash a/c 80000 -40000 40000 -2000 -20000 58000 45000 105000 2000 70,000 -25000 2000 Goods a/c Salary a/c

Liabilities and owner's equity Mr.X's Capital 80000 30000 15000

Liabilities

-20000 30000 105000 75000

Q.3 Show the rectification of entries for the following: a. The sales account is under cast by Rs.15, 000

MB0025- Financial & Management Accounting 2009

b. Goods returned by customer Mr. X of Rs.5650 has been posted in return inward account as Rs.5560 and in Mr. Xs account as Rs. 6550 c. Salary paid Rs.6, 000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs. 7000 e. Cash received from jadu Rs. 8640 has been posted to the debit of Madhus account.

Solution: The below table shows the rectification of entries

Particulars Suspense account Dr

Debit [Rs.] 15,000

Credit [Rs.]

To Sales account Suspense account Dr 90

15,000

To Return account

90

Mr. Xs account

Dr

900

To Suspense account Salary account Dr 6000

900

To rent account Shyam account Dr 7000

6000

To Ram account

7000

MB0025- Financial & Management Accounting 2009

Jadu account

Dr

8640

To Madhu account

8640

Q.4 The following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to prepare trading and profit and loss account and a balance sheet as on that date: Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards Commission Paid Interest on Capital Stationery Return Inwards 5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500 Commission received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes Carriage Outward Sales Bills Payable Creditors Capital 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 89,500

MB0025- Financial & Management Accounting 2009

The closing stock was valued at Rs.1, 25,00

Solution: Trading account of M/s Kiran Trading Co

Trading Account Dr Opening stock Purchases - Return Outward Carriage Inwards Wages Gross Profit 5,000 Sales - Return Inward 192,500 Closing Stock 4,000 14,000 153,000 368,500 368,500 Cr 243,500 125,000

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account Dr Rent and Taxes Insurance Trade Expenses Commission Paid Interest on Capital Stationary Carriage Outward Net Profit 5,500 by Trading a/c Gross Profit 5,500 Commission Received 1,000 4,000 3,500 2,250 7,250 126,000 Cr 153,000 2,000

MB0025- Financial & Management Accounting 2009

155,000 Balance Sheet Account of M/s Kiran Trading Co

155,000

Balance Sheet Capital and Liabilities Bills Payable Capital Creditors Net Profit from P & L Account Assets 15,000 Sundry Debtors 89,500 Office Furniture 98,250 Cash in Hand 126,000 Cash in Bank B/R Closing Stock 328,750 150,000 5,000 2,500 23,750 22,500 125,000 328,750

Q.5 Write a note on: a. outstanding expenses b. prepaid expenses a. Outstanding expenses: Expenses due but not paid are known as outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If the final accounts are prepared for the year ending 31st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the journal proper is:

Concerned Expenses account

Dr

To outstanding expenses account. Outstanding expenses account indicates liability for the current year and it will appear in the balance sheet.

MB0025- Financial & Management Accounting 2009

b. Prepaid expenses: Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses account is debited. For example, insurance premium is paid from April, 2004 to March, 2005; and the amount is Rs. 3600. The financial year ends by 31st December, 2004. Therefore the premium relating to Jan, Feb. and March of 2005 Rs. 900 is said to have been paid in advance. To record this internal adjustment, the entry is: Prepaid Expenses account To insurance account Dr 900 900

Note that outstanding or prepaid expenses accounts are regarded as personal accounts.

SET TWO
1. Budgetary Control is a technique of managerial control through budgets. Elaborate. Modern business world is full of competition, uncertainty and exposed to different types of risks. The complexity of managerial problems has led to development of various managerial tools, techniques and procedures useful for the management in managing the business successfully. In this direction, planning and control plays an important role. Budgeting is the most common and powerful standard device of palling and control. Budgetary control is a technique of managerial control through budgets. A budget is a quantitative expression of plan of action. . It is a pre-determined detailed plan of action developed as a guide for future operation. According to Wheldon Budgetary control is the planning in advance of the various functions of business so that the business as a whole can be controlled. Budgetary controls deals with planning, coordination, recording appraisal and follow-up of actions. The procedure for preparing plan in respect of future financial and physical requirements is generally called Budgeting. It is a forward planning exercise. It involves the preparation in advance of the quantitative as well as the financial statements to indicate the intention of the management in respect of the various aspects of the business. Budgetary control is applied to a system of management accounting control by which all operations and output are forecasted far ahead as possible and actual results when known are compared with the budget estimates. Budgeting is a forward planning. It basically serves as a tool for management control. The objectives of budgeting may be taken as:
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MB0025- Financial & Management Accounting 2009 y y y y

To forecast and plan for future to avoid losses and to maximize profits. To help the concern in planning the activities both physical and financial. To bring about coordination between different functions of the enterprise. To control; actual actions by ensuring that actual are in tune with targets

Budgetary control: When one relates control function to budget, we find a system what is generally termed as budgetary control. Control signifies such systematic efforts which help the management to know whether actual performance is in line with predetermined goal, policy and plans. It is basically a measurement tool. Yardsticks should be laid down. Standards must be set up. Therefore, the objectives can be summarized as follows:
y y y y y y y y y y y y

To conform with good business practice by planning for the future. To coordinate the various divisions of a business. To establish divisional and departmental responsibilities. To forecast operating activities and financial position. To operate most efficiently the divisions, departments and cost center. To avoid waste, to reduce expenses and to obtain the income desired. To obtain more economical use of capital available for the efficient operation. To provide more definite assurance of earning the proper return on capital employed. To centralize management control. To show the management where action is needed to remedy a situation. To help in controlling cash. To help in obtaining better inventory control and turnover.

Steps in Budgetary Control The procedure to be followed in the preparation and control of budget may differ from business to business. But, a general pattern of outline of budget preparation and control may go a long way to achieve the end results. The steps are as follows: Formulation of policies: The business policies are the foundation stone of budget construction. Function policies should be formulated in advance. Long-range policies with short term projections should be made for the functional areas such as sales, production, inventory, cash management, capital expenditure.  Preparation of forecasts: Based on the formulated policies, forecast should be made in respect of each function. Activity based concepts should be introduced at the micro level for each function Forecasts should not be considered as a mere estimates. Scientific methods should be adopted for forecasting. Analysis of various factors based on past, and present, future forecast should be made.

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MB0025- Financial & Management Accounting 2009

 Preparation of budgets: Forecasts are converted into written codified document. Such written documents can be used for coordination purposes. Function budgets will act as guidelines for implementation.  Forecast combinations: While developing the budgets, through a Master Budget various permutations and combination processes are considered and developed. Based on this, establishment of the most preferred one which will yield optimum benefits should be considered. All the factor components should be identified which are likely to cause disturbances while implementing the budgets 2. a. Given: Current ratio = 2.6 Liquid ratio = 1.4 Working Capital = Rs.1,10,000 Calculate (1) Current assets (2) current liabilities (3) Liquid Asset (4) Stock Given data is working capital, hence: Working capital = Current assets - current liabilities ----- [1] Current Ratio = CA / CL = 2.6 In the absence of any value, the current liability is always taken as 1 unit 2.6 = CA / 1 and cross multiplying , CA is 2.6 Substituting CA in [1], Working capital = 2.6 - 1 = 1.6 For 1.6 WCR = Working capital value is Rs1,10,000 For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750 For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 = Rs.68,750 Liquid Ratio =Liquid asset / current liabilities 1.4 = Liquid asset / 2,86,000 Liquid asset = 1.4 X 68,750 = 96,250 Liquid asset = Current asset Stock Therefore,
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Stock = Current Asset Liquid Asset = 1,78,750 96250 = Rs. 82,500

b. Calculate Gross Profit Ratio from the following figures: Sales Rs.5,00,000 Sales return Rs.50,000 Closing stock Rs.35,000 Opening stock Rs.70,000 Purchases Rs.3,50,000 Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. [Gross Profit Ratio = (Gross profit / Net sales) 100] Cost Of Goods Sold [COGS] = Opening stock + Purchases closing stock = 70000 + 350000-35000 COGS = 385000 Rs.

Gross Profit

= (Sales Sales returns) - COGS = (500000 50000) 385000 = 450000 385000

Gross Profit = 65000 Rs. Net Sales = Sales Sales returns = 500000 50000 = 450000 Rs Gross Profit Ratio = (Gross profit / Net sales) 100] = (65000/450000) X 100 = 14.4%

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3. From the following Balance Sheet of William & Co Ltd., you are required to prepare a Schedule of Changes in Working capital & Statement of Sources and Application of funds. Balance Sheet Liabilities 2002 2003 Assets 2002 2003 Rs. Rs. Rs. Rs. Capital 80,000 85,000 Cash in Hand 4,000 9,000 P&L a/c 14,500 24,500 Sundry Debtors 16,500 19,500 Sundry Creditors 9,000 5,000 Stock 9,000 7,000 Long-term Loans 5,000 Machinery 24,000 34,000 Building 50,000 50,000 Total 1,03,500 1,19,500 Total 1,03,500 1,19,500

Schedule of changes in working capital Details Liabilities Sundry Creditors Long term loans P&La/c Total liabilities [B] Assets Cash in Hand Sundry Debtors Stock Machinery Total Assets (A) Working Capital A-B Net increase in Working capital 4000 16500 9000 24000 53500 30,000 5000 35,000 9000 19500 7000 34000 69500 35,000 9000 35,000 20,000 20,000 5000 3000 2000 10000 10000 2000 9,000 0 14500 23,500 5,000 5,000 24500 34,500 10000 10,000 4,000 5000 9,000 Balance as on Effect on Working Capital 2002 2003 Increase Decrease

4. Bring out the difference between cash flow and funds flow statement. Difference Between Cash Flow And Funds Flow Statement The major differences between the two are : 1. FFS is related with accrual basis whereas CFS is on cash basis. For this the, it is necessary to convert the accrual to cash basis.
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MB0025- Financial & Management Accounting 2009

2. In FFS, a Schedule of changes in working capital de-linking the current assets and current liabilities are made. But in CFS, no schedule is prepared. 3. FFS shows the causes of the changes in net working capital. CFS shows the causes for the change in cash 4. In FFS, no opening or closing balances are recorded. But in CFS both are incorporated 5. FFS is not based on the Ledger mode. But CFS is prepared on the basis of Ledger principles. 6. In FFS, To and By are indicated. In CFS, these are not indicated. 7. In FFS, net effect of receipts and disbursements are recorded. In CFS only cash receipts and payments are recorded. 8. FFS is concerned with the total provision of funds. CFS is concerned with only cash. 9. FFS is flexible but CFS is rigid 10. FFS is more relevant for long range financial strategy. CFS concentrates on short term aspects mostly affecting the liquidity of the business. 5a. DELL computers sell 100 PCs at Rs.42,000. The variable expenses amount to Rs.28,000 per PC. The total fixed expenses is Rs.14,00,000. Prepare an income statement. Income Statement No. Of computers produced No. Of computers sold Unit selling price per computer unit variable cost per computer Sales revenue =No. Of computers sold X unit selling price Less variable cost (100 X 28000) Less Fixed expenses Profit or loss

100 100 42000 28000 4200000 -2800000 -1400000 0

b. Calculate BEP and MOS Sales at present are 55,000 units per annum. Selling price is Rs.6 per unit. Prime cost Rs.3 per unit. Variable overheads is Re.1 per unit. Fixed cost Rs.80,000 per annum. Sales at present 50,000 units per annum. Selling price Rs.6 per unit, Prime cost Rs.3 per unit. Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum. Solution: BEP = Fixed cost / (SP VC) per unit = 80,000 / (6 4)
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MB0025- Financial & Management Accounting 2009

= 80,000 / 2 BEP = 40,000 units. BEP in rupees = BEP in units x selling price per unit = 40,000 x Rs.6 = Rs.2, 40,000 MOS = Actual Sales BEP Sales = (55,000 x 6) 2,40,000 MOS = Rs.90,000 6.What is cost variable analysis? A variable cost changes in total in direct proportion to a change in the level of activity or cost driver. If activity increases, say by 20%, total variable cost also increases by 20 %. The total variable cost increases proportionately with activity. Variable cost fixed per unit but varies in total. Cost Variable Analysis: Break Even Chart is used in Cost variable analysis. It is a graphic or visual presentation of the relationship between costs, volume and profit. It indicates the point of production at which there is neither profit nor loss. It also indicates the estimated profit or loss at different levels of production. While constructing the chart, the following assumption is normally considered. a) Costs are classified into fixed and variable costs b) Fixed costs shall remain fixed during the relevant volume range of graph. c) Variable cost per unit will remain constant during the relevant volume range of graph d) Selling price per unit will remain constant e) Sales mix remains constant. f) Production and sales volume are equal g) There exists a linear relationship between costs and revenue. h) Linear relationship is indicated by way of straight line.

Break Even Analysis

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MB0025- Financial & Management Accounting 2009

It is an extension of or even part of marginal costing. It is a technique of studying cost volume profit relationship. Basically, the break even analysis is aimed at measuring the variations of cost with volume. It is a simple method of presenting the effect of changes in volume on profits. It is also known as CVP analysis. The various assumptions are: a) All costs can be classified into fixed and variable b) Sales mix will remain constant. c) There will be no change in general price level d) The state of technology, Methods of production and efficiency remain unchanged. e) Costs and revenues are influenced only by volume

f) Cost and revenues are linear. g) Stocks are valued at marginal cost h) Unit produced and sold are same.

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