Financial and Management Accounting Assignment - I

Q 1 Explain the process involved in accounting. Let us now study the process of accounting in detail. 1. Identifying the transactions and events This is the first step in the accounting process. It recognises the transactions of financial character that are essential to be recorded in the books of accounts. When money,goods, or services are transferred from one person or account to another person or account, it is known as a transaction. 2. Measuring This means expressing the value of events and transactions in terms of money (Rupees in India).Measuring has become an important challenge for the accountants and the business entities. 3. Recording The next process after measuring the transactions is the recording. It deals with recording of identified transactions and events in a systematic manner in the books of original entry in accordance with the principles of accountancy. The book in which transactions are first recorded is called the Journal. 4. Classifying All the recorded transactions do not make any sense unless they are processed and presented in a manner that is useful to the intended user. The functions of classifying and summarising serve this purpose. Classifying deals with periodic grouping of transactions of similar nature. For this purpose, a separate book called Ledger is maintained. It is a book where transactions of similar nature are maintained at one place. The transactions that appear in the books of original entry (Journal) are transferred to appropriate places in the book of final entry (Ledger) by a process called Posting. 5. Summarising The end objective of any business is to make profit. To know if this objective was achieved, it is necessary to summarise all the transactions that occurred and are recorded. This requires analysing total expenses or losses, total income or gain, total assets, and total liabilities. This function involves the preparation of financial statements such as income statement, balance sheet, statement of changes in financial position, and cash flow statement. 6. Analysing It deals with the establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Its purpose is to identify the financial strengths and weaknesses of an enterprise. It involves using various tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, etc. (discussed in subsequent units). 7. Interpreting This step explains the importance of all the datas in a manner that the end users of financial statements can make a meaningful judgment about the financial position and profitability of the business. 8. Communicating It deals with communicating the analysed and interpreted data in the form of financial reports or statements to theusers of financial information. For example, Profit and Loss account, Balance Sheet, Cash Flow and Funds Flow statement, Auditors report, etc. It is an important part of Accounting to decide what to communicate, how to communicate, how much to communicate, when to communicate, and in what form to communicate.

Q 2 The salaries paid in 2004 is Rs. 5,00,000; Salaries outstanding is Rs. 20,000; Salaries paid in advance for 2004 is Rs. 30,000. What is the actual salary expenditure for 2004? Which accounting principle is involved in this and explain that principle. Rs. 490000 (500000 + 20000 30000); Matching cost and revenue principle. Matching cost and revenue principle According to this concept, revenue earned during a period is compared with the expenditure incurred to earn that income, irrespective of whether the expenditure is paid during that period or not. This is also called matching cost and revenue principle. While preparing the final accounts, adjustments are made for outstanding expenses, prepaid expenses, outstanding income, and income received in advance.

Q 3 Find the value of the following: a. If the total assets are Rs. 87,000 and the liabilities are Rs. 47,000, find out the amount of capital. b. If the capital of proprietor is Rs. 4,00,000 and the total assets are Rs. 6,00,000, what is the amount of liabilities to outsiders? c. If creditors are Rs. 56,000, bank overdraft is Rs.1,00,000, and outstanding expenses are Rs. 8,000, what is the total amount of assets? d. Fixed assets are Rs.70,000 and current assets are Rs.1,00,000 and the creditors are Rs.30,000. What is capital? Accounting equation Asset = Liabilities + Capital A Capital = Asset-Liabilities Capital = 87000-47000=40000 B Liabilities= Asset Capital = 600000-400000 = 200000 C D Rs.164000 Rs.140000

Q 4. Enter the following transactions in the single column cash book of Gopichand. March, 2003 1st. Commenced business with cash 20000 2nd. Bought goods for cash 5000 3rd. Sold goods for cash 4000 4th. Goods purchased from Ravi Kumar 10000 10th. Paid to Ravi Kumar 7000 14th. Cash sales 8000 18th. Purchased furniture for office 4000 22nd. Paid wages 500 25th. Paid rent 600 30th. Received commission 4000 30th. Withdrew for personal purpose 1000 Cash balance 170000 Hint: Goods Purchased from Ravi Kumar is a credit purchase.

Date

Particular s Receipts To Cash To Sales To sales To Commiss ion

V N o

LF

Amount Rs

Date

Particulars Payments

V No

LF

Amou nt Rs 5000 10000 7000 4000

2003 March 1 3 14

20000 4000 8000 4000

2003 March 2

10 18

By Purchases By Ravi kumar To ravikumar By furniture By Wages By Rent By Bal c/d

22 25 30 Total 36000

500 600 1000 36000

Q 5. Find out the missing figures. Office stationery Opening stock Purchased during the year Closing stock Consumed for the year 5000 25000 3000 ? Consumables 8000 ? 6000 24000

Hint : Office stationery consumed for the year =27000 Consumables purchased during the year = 22000 Missing figures In office stationary Consumed for the year = Opening stock + Purchased during the year Closing stock = 5000+25000-3000 = 27000 In consumables Purchased during the year = Consumed for the year+ Closing stock- Opening stock

= 24000 + 6000 - 8000 = 22000

Q 6. Explain the tools of management accounting. Management accounting provides several tools or techniques to the management for managing its functions, particularly planning and controlling. 1. Traditional tools The following are the traditional tools of management accounting. Ratio analysis It helps the management in keeping track of the expenses, profitability, solvency position, etc. Funds flow analysis It helps in critical evaluation of the changes in working capital. Cash flow analysis It helps in critical evaluation of the changes in the cash. Marginal costing It is a technique of differentiating between product costs and period costs and allocating only variable costs to the products. Budgetary control It involves preparation of budgets in advance for the purpose of controlling costs. Standard costing It is a technique of controlling costs. It imposes pre-determined costs for production of goods and services and insists on adherence to such predetermined costs. Responsibility accounting It is a system under which costs are accumulated and reported at each level of responsibility. The accounting and cost data may be used by the management at each level for controlling the operations and their costs. Activity based costing It is a system in which costs are first identified with activities and then with products. 2. Balanced scorecard The balanced scorecard is a contemporary performance measurement system for an organization. It is a framework for integrating measures derived from strategy. While retaining financial measures of past performance, the balanced scorecard introduces the drivers of future financial performance. The drivers (customer, internal business process, learning, and growth perspectives) are derived from the organisation's strategy translated into objectives and measures. 3. Cost Management System (CMS) The explosion in technology coupled with increasing worldwide competition, is forcing managers to produce high quality goods and services in order to provide outstanding customer service and at the lowest possible cost. Horngren and others define a CMS as a collection of tools and techniques that identifies how managements decisions affect costs. 4. Value added Instead of selling a piece of wood as it is, think of converting it into a chair and then selling it. Which one would fetch more money to you? Obviously, it is the chair. By converting the piece of wood into a chair you have added value to it. You have increased the realisable value of the wood. This is called the Value Added. The value added can be quantified and used as a measure of performance.

Financial and Management Accounting Assignment II

Q 1. Compute trend ratios and comment on the financial performance of Infosys Technologies Ltd. from the following extract of its income statements of five years. (in Rs. Crore) Particul 2010-11 2009-10 2008-09 2007-08 2006-07 ars Revenue 27,501 22,742 21,693 16,692 13,893 Operatin 8,968 7,861 7,195 5,238 4,391 g Profit (PBIDT) PAT 6,835 6,218 5,988 4,659 3,856 from ordinary activities (Source: Infosys Technologies Ltd. Annual Report) Hint: The Revenue and Operating Profit (PBIDT) have almost doubled in four years. The PAT from ordinary activities has increased by 77.26% in the same period. Particulars Revenue Operating Profit (PBIDT) PAT from ordinary activities Trend ratios Revenue Operating Profit (PBIDT) PAT from ordinary activities 2010-11 27,501 8,968 6,835 2009-10 22,742 7,861 6,218 2008-09 21,693 7,195 5,988 2007-08 16,692 5,238 4,659 2006-07 13,893 4,391 3,856

197.95 204.24 177.26

163.69 179.03 161.26

156.14 163.86 155.29

120.15 119.29 120.82

100 100 100

2. What is fund flow analysis? What are the objectives of analysing flow of fund? From the following balance sheets of Joy Ltd., prepare a cash flow statement under indirect method. Liabilities 2005 2006 Equity share 3,00,000 4,00,000 capital 8% redeemable 1,50,000 1,00,000 pref. share capital General reserve 40,000 70,000 Profit and loss 30,000 48,000 Proposed dividend 42,000 50,000 Sundry creditors 55,000 83,000 Bills payable 20,000 16,000 Provision for 40,000 50,000 taxation Total 6,77,000 8,17,000 Assets Goodwill 1,15,000 90,000 Land and building 2,00,000 1,70,000 Plant 80,000 2,00,000 Sundry debtors 1,60,000 2,00,000 Stock 77,000 1,09,000 Bills receivable 20,000 30,000
Cash Bank Total 15,000 10,000 6,77,000 10,000 8,000 8,17,000

Additional Information a) Depreciation of Rs.10,000 and Rs.20,000 has been changed on plant and building during the current year. b) An interim dividend of Rs.20,000 has been paid during the current year. c) Rs.35,000 was paid during the current year for income tax. Hint: Cash flow from operating activities Rs.1,25,000; Cash flow from investing activities (Rs.1,20,000); Cash flow from financing activities (Rs.12,000).

Q 3 Calculate the cost of raw materials purchased from the following data: Opening stock of raw materials Rs.10,000 Closing stock of raw materials Rs.15,000 Expenses on purchases Rs.5,000 Direct wages Rs.50, 000 Prime costs Rs.1, 00,000 Hint: Cost of Raw Materials purchased is Rs.50,000 Cost Sheet Particular Opening stock of raw materials Add: Expenses on purchases Total Less: Closing stock of raw materials Value of Raw Material Consumed Direct Wages(II) Prime Cost (I) Cost of Raw Material= (I-II) Rs 10,000 5000 15,000 15000 Rs

0 50,000 100000 50,000

Q 4 Distinguish between absorption costing and marginal costing

Absorption Costing It is known as full costing. Both fixed and variable are included to ascertain the cost. Different unit costs are obtained at different levels of output because of fixed expenses remaining the same. Difference between sales and total cost (marginal cost and fixed cost) is profit.

A portion of fixed cost is carried forward to the next period because closing stock of work-in-progress and finished goods are valued at the cost of production, which is inclusive of fixed cost.

Marginal Costing Only variable costs are included. Fixed costs are recovered from contribution. Marginal cost per unit remains same at different levels of output because variable expenses vary in the same proportion in which output varies. Difference between sales and marginal cost is contribution and difference between contribution and fixed cost is profit or loss. Stock of work-in-progress and finished goods are valued at marginal cost. Fixed cost of a particular period is charged to that very period and is not carried over to the next period.

The apportionment of fixed expenses on Products are charged only with an arbitrary basis gives rise to over or variable cost, hence marginal costing under absorption of overheads. does not lead to over or under absorption of fixed overheads. It affects managerial decisions in certain It is very helpful in taking managerial areas. E.g., whether to accept the decisions. It considers the additional export order or not, whether to buy or cost involved, assuming fixed manufacture, etc. expenses to remain constant. Costs are classified according to Costs are classified according to the functional basis such as production behaviour of costs fixed costs and cost, office and administrative cost, and variable costs. selling and distribution costs. It fails to establish relationship of cost, CVP relationship is an integral part of volume, and profit. marginal costing.

Q 5 The Anchor Company Ltd. produces most of its electrical parts in its own plant. The company is at present considering the feasibility of buying a part from an outside supplier for Rs.4.50 per part. If this is done, monthly costs would increase by Rs.1,000. The part under consideration is manufactured in department 1 along with numerous other parts. On account of discontinuing the production of this part, department 1 would have somewhat reduced operations. The average monthly usage production of this part is 20,000 units. The costs of producing this part on per unit basis are as follows. Material Rs. 1.80 Labour (half-hour) 2.40 Fixed overheads 0.80 Total costs 5.00 Should the company produce this part or should it buy from an outside supplier? Hint: Differential costs Favouring making of the parts 7,000 per month 0.35 er unit

Decision Analysis

Particulars

Costs of Making Total Per unit

Costs of Buying Total Per unit 4.50 0.05 4.55

Relevant costs: Materials (20000 units) Labour Purchasing cost (20000 units) Additional cost of purchasing from outside Differential costs Favouring making of the parts

36,000 48,000 -

1.80 2.40 -

90,000 1,000 91,000

84,000 4.20 7,000 per month 0.35 per unit

The company should continue the practice of producing the part in department 1

Q 6 Explain the essential features of budgetary control An effective budgeting system should have essential features to get the best results. The following points considered as essential features of an effective budgeting. Business policies defined The top management of an organisation should have an action plan for every activity and department. Every budget should reflect the business policies formulated from time to time. The policies should be precise, clearly defined, and the same must be communicated to the persons involved in the execution. Forecasting Business forecasts are the foundation of budgets. Time and again, discussions should be arranged to derive the most profitable combinations of forecasts. As far as possible, quantitative techniques should be used while forecasting Formation of budget committee A budget committee is a group of representatives of various important departments in an organisation. The functions of the committee should be specified clearly. The committee plays a vital role in the preparation and execution of the budget estimated. It aids in the finalisation of policies and programs. Non-financial activities are also considered to make it a wholesome affair. Accounting system To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organisation should be proper and must be fine-tuned from time to time Organisational efficiency To make the budget preparation and its subsequent implementation a success, an efficient, adequate and the best organisation is necessary. A budgeting system should always be supported by a sound organisational structure. There must be a clear cut demarcation of lines of authority and responsibility. Management philosophy Every management should set a healthy philosophy while opting for the budget. Management must wholeheartedly support the activities which develop a budget. Reporting system Proper feedback system should be established. Provision should be made for corrective measures whenever comparative measures are proposed. Availability of statistical information Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data is available to each department. Motivation Since budget acts as a mirror, the entire organisation should become smart in its approach. Every employee, both executive and non-executive should be a part of the overall exercise. Employees should be persuaded than pressurised to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organisation.