SESSION

JUL/AUG 2021

PROGRAM

MASTEROF BUSINESS ADMINISTRATION (MBA)

SEMESTER

COURSE CODE & NAME

DMBA104– FINANCIAL AND MANAGEMENT ACCOUNTING

1. Discuss 5 accounting concepts with suitable example of each concept.

Ans.

1. Business separate entity concept

This concept states that business is a separate entity and it is different from the
proprietor or the owner. In this concept a company can own assets and incur
liabilities in its own name. This separation not only has important legal implication
but also has an accounting implication. This enables the business to segregate the
transactions of the company from the private transactions of the proprietor(s). It
distinguishes between the personal assets and liabilities of the owners with that of
the business.

Example: Personal bank account of the proprietor, cash withdrawal from business
for private purpose should be accounted separately.

2. Going concern concept

In this concept the business entity will continue fairly for a long time to come. It
assumes that there is neither the necessity nor the intention to close down either the
entire business or substantial operations of the business.

3. Money measurement concept

All transactions of a business are recorded in terms of money. This concept is
basically concerned with the problem of measuring the value of transactions.
Certain transactions are either already expressed in terms of money or easily
measured in terms of money. For example, cost of inputs, prices of assets, etc.
Other assets or transactions that are difficult to measure and express in terms of
money are ignored. For example, value of the brand, intelligence of people, etc.

4. Periodicity (accounting period) concept

As per the going concern concept, the life of business is indefinite. This makes it
difficult to wait indefinitely to stop and look back at how the company performed
and also makes it too late to take corrective actions if any. Hence, the indefinite life
of business is split into regular intervals of time. Such regular time intervals are
called accounting periods.

5. Accrual concept
The following are the features of this concept:
• Expenses incurred for an accounting period must be recorded in that accounting
period regardless of whether it is actually paid in that accounting period or not.
• Income earned for an accounting period must be recorded in that accounting
period regardless of whether it is actually received in that accounting period or not

Example: On 31st December, 2006, interest receivable on fixed deposit was Rs.
12000. The interest amount was credited to a bank account in February 2007 (two
months later). According to accrual concept, the income from interest is Rs.12000
though it is received after 31stDecember, 2006.
 2. Prepare trading account of XYZ for the year ending 31 March 2019 from
the following information:

Purchases 13,00,000

Sales 15,00,000

Stock (April 1, 2018) 40,000

Wages 30,000

Carriage inwards 14,000

Returns outwards 3,000

Returns inwards 2,500

Freight 15,000

Additional information: Stock on 31 March 2019 was Rs. 1,70,000

Answer:

Trading Account

Particulars Rs Particulars Rs

To Opening Stock 40,000 By Sales 14,97,500

15,00,000
To Purchases 12,97,000
13,00,000 Returns (2500)

Returns
30,000 1,70,000
(3000)
By closing stock
14,000
To Wages
15,000
To Carriage Inwards

To Freight
2,71,500
To Gross profit 16,67,500 16,67,500

3. Distinguish between management accounting and financial accounting.

Answer. Financial accounting is the preparation and communication of financial

information to outsiders such as creditors, bankers, government, customers, etc.
Another objective of financial accounting is to give complete picture of the
enterprise to shareholders. Management accounting on the other hand, aims at
preparing and reporting the financial data to the management

on regular basis. Management is entrusted with the responsibility of taking

appropriate decisions, planning, performance evaluation, control, management of
costs, cost determination, etc. For both financial accounting and management
accounting the financial data are the same. The reports prepared in financial
accounting are also used in management accounting.

But there are a few major differences between financial accounting and
management accounting

Dimension Financial accounting Management accounting

Users The primary users of The primary users of
financial management accounting
accounting information are
are internal users like top,
external users like middle,
shareholders, and lower level managers
creditors, government
authorities,
employees, etc.
Purpose Reporting financial To help the management
performance in
and financial position to planning, decision
enable making,
the users to take financial monitoring, and
decisions. controlling.
It is a statutory It is optional. What to
Need requirement. What report,
to report, how to report, how to report, how much
how much to
to report, when to report, report, when to report, in
in which which
form to report, etc. are form to report, etc. are
stipulated decided
by Law or Standards. by the management as per
the
needs of the company or
management.
Expression of Accounting information is Management accounting
information always may
expressed in terms of adopt any measurement
money. unit
like labour hours,
machine
hours, or product units for
the
purpose of analysis
Reporting timing and Financial data is Reports are prepared on a
frequency presented for a continuous basis,
definite period, say one monthly,
year or a weekly, or even daily
quarter.
Time perspective Financial accounting Management accounting
focuses on is
historical data. oriented towards the
future.

Sources of principles Financial accounting is a Management accounting

discipline by itself and makes use of other
has its own disciplines
principles, policies and like economics,
conventions (GAAP). management,
information system,
operation
research, etc.
Reporting entity Overall organisation Responsibility centres
within
 the organisation
Form of reports Income statement (Profit MIS reports
and Loss Performance reports
a/c) Control reports
Balance sheet Cost statements
Cash flow statement Variance statements
Budgets
Estimate statements
Flowcharts

SET 2

4. The Balance Sheet of Punjab Auto Limited as on 31‐12‐2020 was as follows:

Particulars Rs. Particular Rs.

Equity Share 40,000 Plant and 24,000

Capital Machinery
Capital Reserve 8,000 Land and 40,000
Buildings
8% Loan on 32,000 Furniture & 16,000
Mortgage Fixtures
Creditors 16,000 Stock 12,000

Bank overdraft 4,000 Debtors 12,000

Investments 4,000
Taxation: (Short‐term)
Current 4,000
Future 4,000
Profit and Loss 12,000 Cash in hand 12,000
A/c

120000 120000
From the above, compute (a) Debt‐Equity Ratio and (b) Proprietary Ratio.

Answer:

Debt Equity Ratio

The debt-to-equity (D/E) ratio is used to evaluate a company's financial
leverage and is calculated by dividing a company’s total liabilities by
its shareholder equity. The D/E ratio is an important metric used in corporate
finance. It is a measure of the degree to which a company is financing its
operations through debt versus wholly owned funds. More specifically, it reflects
the ability of shareholder equity to cover all outstanding debts in the event of a
business downturn. The debt-to-equity ratio is a particular type of gearing ratio.

These balance sheet categories may contain individual accounts that would not
normally be considered “debt” or “equity” in the traditional sense of a loan or the
book value of an asset. Because the ratio can be distorted by retained
earnings/losses, intangible assets, and pension plan adjustments, further research
is usually needed to understand a company’s true leverage.

32000
Debt Equity Ratio = Debt/Equity = 40000+8000 = .67

Propriety Ratio

The proprietary ratio (also known as the equity ratio) is the proportion of
shareholders' equity to total assets, and as such provides a rough estimate of the
amount of capitalization currently used to support a business. If the ratio is
high, this indicates that a company has a sufficient amount of equity to support
the functions of the business, and probably has room in its financial structure to
take on additional debt, if necessary. Conversely, a low ratio indicates that a
business may be making use of too much debt or trade payables, rather than
equity, to support operations (which may place the company at risk of
bankruptcy).

Thus, the equity ratio is a general indicator of financial stability. It should be

used in conjunction with the net profit ratio and an examination of the
statement of cash flows to gain a better overview of the financial circumstances
of a business. These additional measures reveal the ability of a business to earn
a profit and generate cash flows, respectively.
 40000+8000
Propriety Ratio = Shareholders funds/ Total Assets = 120000
= .4

5. State the purpose or objective of preparing a cash flow statement. Also give
any two examples of cash flows from operating activities, investing activities
and financing activities.

Answer:

Meaning of Cash Flow Analysis

Cash flow analysis is an important tool of financial analysis. It is the process of
understanding the change in position with respect to cash in the current year and
the reasons responsible for such a change. Incidentally, the analysis also helps us to
understand whether the investing and financing decision taken by the company
during the year are appropriate are not.
Cash flow analysis is presented in the form of a statement. Such a statement is
called a cash flow statement.

Objectives of Cash Flow Analysis

Cash flow analysis is done with the objective of understanding some of the
following important questions:
• What is the change in the cash position of the firm for the current year as
compared to the previous year?
• How good was the liquidity position of the firm?
• What were the sources of cash during the current year?
• How much cash was generated from operations?
• What were the applications of cash during the current year?
• How much cash was spent on investment activities, such as purchase of new
plant and machinery, purchase of land?

The preparation of cash flow statement is similar to the preparation of fund flow
statement. It requires the identification of the sources of cash and the uses of cash.
A source of cash is a transaction which brings an inflow of cash. An application of
cash is a transaction which leads to an outflow of cash.

Following is the list of transactions that results in a source of cash or application of

cash.
Sources of cash:
• Cash from operations
• Proceeds of issue of
o Equity shares
o Preference shares
• Proceeds of issue of
o Debentures
o Bonds
• Raising long-term debts from banks and financial institutions
• Raising mortgage loans (long-term)
• Sale of assets
o Tangible assets like land, buildings, equipments, machinery, vehicles, etc.
o Intangible assets like patent rights, copyrights, brand names, goodwill, licences,
etc.
• Sale of investments like shares, bonds, debentures, etc.

Applications or uses of cash:

• Cash lost in operations (adjusted net loss)
• Buy back of equity shares
• Redemption of redeemable preference shares
• Redemption of redeemable bonds or debentures
• Repaying of long-term debts from banks and financial institutions
• Repaying of mortgage loans (long-term)
• Purchasing of assets
o Tangible assets like land, buildings, equipments, machinery, vehicles, etc.
o Intangible assets like patent rights, copyrights, brand names, goodwill, licences,
etc.
• Purchasing of investments like shares, bonds, debentures, etc.
It may be noted that the sources of cash increase the cash balance and applications
of cash decrease the cash balance.

Examples of cash flows from Operating activities are:

a) cash receipts from the sale of goods and the rendering of services;
b) cash receipts from royalties, fees, commissions and other revenue;
c) cash payments to suppliers for goods and services;
d) cash payments to and on behalf of employees;
e) cash receipts and cash payments of an insurance enterprise for premiums and
claims, annuities and other policy benefits;
f) cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities; and g) cash receipts and
payments relating to futures contracts, forward contracts, option contracts and
swap contracts when the contracts are held for dealing or trading purposes.

Examples of cash flows arising from Investing activities are:

a) cash payments to acquire fixed assets (including intangibles). These payments
include those relating to capitalised research and development costs and self-
constructed fixed assets;
b) cash receipts from disposal of fixed assets (including intangibles);
c) cash payments to acquire shares, warrants or debt instruments of other
enterprises and interests in joint ventures (other than payments for those
instruments considered to be cash equivalents and those held for dealing or trading
purposes);
d) cash receipts from disposal of shares, warrants or debt instruments of other
enterprises and interests in joint ventures (other than receipts from those
instruments considered to be cash equivalents and those held for dealing or trading
purposes);
e) cash advances and loans made to third parties (other than advances and loans
made by a financial enterprise);
f) cash receipts from the repayment of advances and loans made to third parties
(other than advances and loans of a financial enterprise);
g) cash payments for futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading purposes,
or the payments are classified as financing activities; and
h) cash receipts from futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading purposes,
or the receipts are classified as financing activities.

Examples of cash flows arising from Financing activities are:

a) cash proceeds from issuing shares or other similar instruments;
b) cash proceeds from issuing debentures, loans, notes, bonds, and other short or
long-term borrowings; and
c) cash repayments of amounts borrowed. Cash flows from operating activities can
be found out by
a) the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
b) the indirect method, whereby net profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
6. Discuss the steps involved in standard costing. Also state the Differences
between Standard Costing and Budgetary Control.

Answer. Following are the steps involved in standard costing...

1. Establishment of standards
It is the first step in the standard costing process. Standards have to be set
separately for each item of cost. It needs to be done very meticulously.

2. Comparison of actual costs with the predetermined standards.

It is the next step in standard costing. It needs to be ensured that a correct
comparison is made. The actual costs must be compared with the standard cost for
actual output.

3. Analysing the variances (deviations) of actual costs from the standard costs.
The difference between the standard cost and the actual cost is called the variance.
The variances are to be analysed for each item of cost separately.

4. Reporting
The variance may be favourable or unfavourable. In either case, it should be
reported to the management for taking corrective actions wherever necessary.

Differences between Standard Costing and Budgetary Control

1. The scope of budgetary control is wider. It is an integrated plan of action and a

coordinated plan with respect to all functions of an enterprise. On the other hand,
the scope of standard costing is limited to the operating level.

2. Budgetary control targets are based on past actual data adjusted to future trends.
In standard costing, standards are based on technical assessment.

3. Budgeted targets work as the maximum limit of expenses which should not
exceed the actual expenditure. Standards are attainable level of performance.

4. Budgetary control emphasises the forecasting aspect of future operations.

Standard costing scope and utility is limited to only operating level of the concern.
5. Variance analysis is not compulsory in budgetary control though companies
normally do it. Even when it is done, no accounting entry is passed in the books for
the variance. But variance analysis is an essential part of standard costing.
Variances are analysed and journal entries are passed and posted to the ledger
accounts in the costing books.

6. Budgetary control can be operated in parts. That is, as per the needs of the
management, only functional budgets may be prepared. A standard costing system
cannot be operated in parts. All items of expenditure included in the cost units are
to be accounted for.