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BCA 4th Semester, BCA 4040
Accounting and Financial Management

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Q1. Define Accounting. Briefly explain the Entity concepts and Money Measurement Concept
of accounting
Ans:
Accounting is an important endeavor . Accounting was first practiced and then theorized. Accounting
concepts and conventions as used in accountancy are the rules and guidelines by that the accountant lives.
All formal accounting statements should be created, preserved and presented according to the concepts
and conventions that follow.
The Going concern Concept
The Accruals or matching concept
The Entity Concept
The Consistency Concept
Prudence concept
The Entity Concept
A business is an artificial entity distinct from its proprietors. A business entity is an economic unit which
owns its assets and has its own obligations. It also known as the 'accounting entity' concept. The idea here
is that the financial transactions of one individual or a group of individuals must be kept separate from
any unrelated financial transactions of those same individuals or group. The best example here concerns
that of the sole trader or one man business: in this situation you may have the sole trader taking money by
way of 'drawings': money for his own personal use. Despite it being his business and apparently his
money, there are still two aspects to the transaction: the business is 'giving' money and the individual is
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'receiving' money. So, the affairs of the individuals behind a business must be kept separate from the
affairs of the business itself.
Money Measurement Concept
The money measurement concept is one of the simpler concepts. It simply and clearly states that only
those transactions that are true financial transactions may be accounted for. That is, only those
transactions that may be expressed in money values (whatever the currency) are of interest to the
accountant. Each transactions and event must be expressible in monetary terms. If an event cannot be
expressed in monetary terms, it cannot be considered for accounting purposes. For example, if you pass
learning programmed of a university ,it will give you a great deal of satisfaction but that satisfaction
cannot be expressed in monetary terms. This concept implies that the legal currency of a country should
be used for such measurement.
Q2. What is rectification of error ? List and explain the stages where the errors are deducted for
rectification.
Ans.
Errors and their Rectification: Rectification of errors may be define as correction of errors which had
been done in the books of accounts of company due to ignorance or not knowing the principles of
accounting. Sometime, errors may be due to cheating by accountant or other employees. At that case
rectification of errors is so difficult because cheaters try to best to hide the error. At that time,
investigation should be done by independent auditor. Rectification of accounting errors depends on the
stage which they are detected.

There are certain accounting errors which affect the agreement of the trial balance. These are easy to
detect.
Some accounting errors exist in spite of an agreed trial balance. These are difficult to detect.
Rectification of accounting errors depends on the stage which they are detected. There are certain errors
which will disturb the Trial Balance in the sense that me Trial balance will not agree. Following are the
errors:
Error of Principle: An error committed because of lack of proper knowledge of accounting principle or
concept.
Error of Omission: Omission of recording a transaction the primary books.
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Error of Commission: Error of posting the amount in one account instead of another account.
Compensation Error: One error compensates the other error by an identical amount.
Trading Account: It shows the gross profit or loss earned or incurred by a business entity during an
accounting period.
Profit and Loss Account: It shows the net profit or loss earned or incurred by a business entity during an
accounting period.
Profit and Loss Appropriation Account: It shows the distribution of partnership profits among partners.
Balance Sheet: It shows the position of assets and liabilities of a business entity as on a particular date.
Suspense Account: It is an artificial account which appears n the Trial Balance to account for undetected
errors. Once the errors are detected and rectified, the Suspense Account stands eliminated.
Gross Profit: It is arrived at by deducting the direct cost of goods sold from sales proceeds.
Net Profit: Ills the residual of gross profit after setting oft indirect expenses arid, of course, it includes
other income.

Q3. Explain the various steps in financial planning.

Ans:
The financial planning process involves the following steps:

Projection of financial statement

Determination of funds needed

Forecast the availability of funds

Establish and maintain control system

Develop procedures
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1.Projection of financial statement:

Financial statement are the two companys profit & loss account and the balance sheet.These two
statements can be prepared for a certain period of future time and they help the manager to determine the
amount of fund requirement.
2.Determination of funds needed:
Once the projections are drawn in terms of sales products, the cost of productions, marketing activities
,etc., the finance manager can draw up a plan as to the fund requirement based on the time factor. He can
know whether the funds are to be produced on a short term basis or on a long term basis.
3.Forecast the availability of funds:
A company will have a steady flow of funds. If the manager is able to forecast these amounts properly ,
then the moneys to be borrowed can be reduced ,thus saving on the internet payments.
4. Estblish and maintain control system:
Control system is ineffective without adequate planning and the adequacy of planning can be gauged only
through proper control measures. Both these activities are essential for effective utilization of funds.
5. Develop procedures:
Procedures should be developed for basics plans how they should be achieved.
i)

Long term strategic plan

ii)

Short term operating plan

Long term strategic plan :

Long term plans generally range over a period of 2-5 years. These plans reflect the impact of long term
investments and financial decisions of the company. Generally, these plans focus on acquiring capital
assets, R & D expenditure, new market penetration strategies, process engineering techniques, new and
innovative product development strategies etc.
Short term operating plan :
These plans cover a period of 1-2 years. They deal with the implication of short term decisions. These
plans are generally called budgeting and include planning and controlling activities in the short run. The
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short term plans consist of aspects such as sales ,productions, levels of inventories to be maintained
,number of men to be used , cash flows etc.
Q4. What is inventory management and explain the following
1. Economic Order quantity
2. Reorder point
Ans. The term inventory refers to the stockpile of products. Inventory comprises of those assets which
will be sold off in the near future and moneys recovered. Inventory consists of three type of assets raw
materials, semi finished goods , & finished goods. Raw material inventory consists of those items which
are purchased by the firm to be converted into finished goods.
Inventory management is the control of all above-mentioned assets to obtain the goal of minimizing total
costs direct and indirect -- that are associated with holding inventories. Stock constitute a very
significant part of current assets. A rough estimate says , out of the total current assets with Indian public
companies, more than 60% account for inventories. The sheer size of this asset tells us the amount of fund
required. It , therefore ,becomes necessary to manage inventories in a berry efficient way and avoid
unnecessary hold-ups.
a. Economic Order quantity:
Economic Order quantity refers to the optimal order size that will result in the lowest ordering and
carrying costs for an item of inventory based on its expected usage. The optimum level of the inventory is
referred to as the Economic Order Quantity. It is the economic lot size.EOQ is defined as that level of
inventory order that minimizes the total cost associated with the inventory management. The model is
based on the following assumption ; nevertheless , it is the most widely used technique in inventory
control.

Constant or uniform demand

Constant unit price

Constant carrying costs

Constant ordering costs

Total cost

Carrying cost

costs

Ordering Cost

Q*

Ordering size

Economic Order quantity :

Optimum Production Quantity
The formula for ECQ model is 2AS/ C
Where A refers to the annual usage,
S refers to ordering cost,
C refers to cost of carrying inventory per unit per annum
b.

Re-order point :
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In the EOQ model, it was assumed that there is no time lag between ordering and procuring of
materials. There the re-order point for replenishing the stocks occurs at that level when the
inventory level drops to zero and because of instant delivery by suppliers, the stock levels bounce
back. But rarely do we come accross such situations in real life .The is always a lead time
between ordering date & receipt of materials. Due to this, the reorder level is always higher than
zero. The question now is what should be the level of inventory before fresh order is placed?
Factors such as the time required to re-stock and the usage rate of the said material are to be
considered to decide on this issue.
Re-order point = Normal consumption during lead time + safety stock Reorder level = Average
usage Lead time
Q5. Explain the different steps involved in preparation of Fund Flow Statements.
Ans: Steps in Preparation of Fund Flow Statement
1. Preparation of schedule changes in working capital (taking current items only).
2. Preparation of adjusted profit and loss account (to know fund from [or] fund lost in operations).
3. Preparation of accounts for non-current items (Ascertain the hidden information).
4. Preparation of the fund flow statement.

Fund from operation can be ascertained by preparing adjusted profit and loss account. It may be prepared
in statement form or account form.

To ascertain the hidden information, we have to prepare accounts for all non-current items of assets and
liabilities (whether adjustment is given or not) then only easier to find the inflow and outflow of funds.
Q6. What is cost ? Discuss the factors involved in estimating the cost
Ans.

Accounting records and financial statements prepared on the basis of accounting records do not

provide all the information required by managers of a business. Organizations have to maintain many
other types of records . One such record is cost record. Cost records provide cost data to managers. What
is the meaning of cost, how costs are classified and determined has been discussed in this Unit. Cost
classification is the process of grouping costs according to their common features. Cost is classified as
follow:
1 . on the basis of behaviour of cost
2 . on the basis of elements of cost
This concept is based on the notion that only the costs paid to acquire an asset are relevant and thus
should be the only costs to be shown in the accounts. For example, fixed assets are shown on the balance
sheet at the price paid to acquire them; that is, their historic cost less depreciation written off to date.
There is a problem in this area. That is the one of value. The accountant will rarely talk of value in this
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context since the use of such a term implies personal bias. After all, the value of an asset as far as I am
concerned may be different to the value of the same asset as far as you may be concerned. The application
of the cost concept ensures that subjective judgments play no part in the drawing up of accounting
statements.
Estimation of Cost
Very often ,the management desires to know , What will be the cost ? even before the production starts.
The purpose to know the cost before it is incurred might be different. It may be to keep the cost before it
is incurred might be different. It may be to keep the cost within control or it is may be used for profit
planning. Many times ,it is required to submit tenders, to give quotations, to prepare the price lists etc. For
this purpose the estimation of probable cost of production is essential. This requires the past cost data to
analyzed, present circumstances are taken into consideration and future is to be projected. This involves
the study of each and every element of cost and their nature of behaviour. Keeping in view the nature of
behavior of elements of cost ,it can be classified into following three categories.
a)

Fixed Cost.

b)

Variable cost.

c)

Semi variable cost.

We will discuss in detail the nature of behaviour of cost hereinafter :

a) Fixed Cost :
Fixed cost is that cost which remains unaffected even though there is change in the level of output. It
remains constant at all the levels of output for a given period of time. Examples of such costs are rent,
rates and taxes of factory premises, salary of general manager , foreman ,watchman, insurance,
depreciation etc. These expenses are incurred according to the unit of time and not according to level
of production. Hence , sometimes they are called as periodic cost .For example ,such fixed cost is
ascertained in a particular concern RS. 12,000/- per month. Assume the capacity of this concern is to
produce 1000 per month. If the concern produces 100 units or 500 units or 700 units or 1000 units
this fixed cost will remain constant at all these levels of output. We will discuss this principle with the
help of the above data at different levels or output.

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Level of output
(units)

Fixed Cost
(Rs)

Cost per Unit

(Rs)

100

12,000

120

300

12,000

40

500

12,000

24

800

12,000

15

1000

12,000

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Conclusion : Fixed cost remains fixed at all the levels of output (If within capacity) and does not get
affected even though there is change in the level of output. However , fixed cost per unit changes, if there
is change in the level of output. Fixed cost also changes in the long run sometimes.
b) Variable Cost :
It is the cost which tends to vary directly with the volume of output. If there is increase in output this
cost increases and if there is decrease in level of output this cost decrease. The change in the variable cost
takes in the same direction in which the level of output changes. This cost consists of Direct wages, Direct
Expenses and some part of indirect expenses which varies according to the level of output. Normally this
cost changes in the same proportion in which proportion the output changes. Hence ,these expenses are
called as variable expenses. Say for example ,if standard unit of expenses on direct materials will change
if level of output changes. We will discuss this principle with the help of the some data at different level
of output.

Level of output
(units)

Variable

Cost per Unit (Rs)

Expenses
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(Direct Material)
100

2,000

20

300

6,000

20

500

10,000

20

800

16,000

20

1000

20,000

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Conclusion : Variable expenses change directly in relation to change in level of output on the same
proportion in which proportion the level of output changes. However , variable expenses per unit will
remain the same.Here we have assumed the price level remains unchanged.
c) Semi Variable Cost:
This is the third category of the nature of behaviour of the expenses. These expenses are nether fixed
and nor variable. These expenses change in the same direction in which the level of output changes. Thus
these expenses are partly fixed and partly variable in nature .Example of such expenses is depreciation of
Plant & Machinery, maintenance of factory building etc. These expenses will increase if factory is run
from single shift to double shift to triple shift. Depreciation and maintenance will increase but not in the
same ratio the output increase. Thus, These expenses are neither fixed nor variable cent percent. Hence
they are called as semi-variable expenses.
Conclusion: The expenses change in the same direction but not in the same proportion, in which
proportion , the output changes. The change in expenses largely depends on the nature of expenses. No
hard and fast rule can be established in relation to semi variable cost. The management is specifically
required to study the trend of expenses which are semi variable in nature.

CONTACT ME TO GET FULLY SOLVED SMU

ASSIGNMENTS/PROJECT/SYNOPSIS/EXAM GUIDE PAPER
Email Id: mrinal833@gmail.com
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Contact no- 9706665251/9706665232/

www.smuassignmentandproject.com
COST= 100 RS PER SUBJECT

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