MB0041-FINANCIAL AND MANAGEMENT

ACCOUNTING
Q.(1) Analyze the following transaction under traditional approach.
ANS.
1) 18.1.2011 Received a cheque from a customer, Sanjay at 5 p.m. Rs.20,000
2) 19.1.2011 Paid Ramu by cheque Rs.1,50,000
3) 20.1.2011 Paid salary Rs. 30,000
4) 20.1.2011 Paid rent by cheque Rs. 8,000
5) 21.1.2011 Goods withdrawn for personal use Rs. 5,000
6) 25.1.2011 Paid an advance to suppliers of goods Rs. 1,00,000
7) 26.1.2011 Received an advance from customers Rs. 3,00,000
8) 31.interest on loan Rs. 5,000
9) 31.1.2011 Paid installment of loan Rs. 25,000
10) 31.1.2011 Interest allowed by bank Rs. 8,000
ANS.

S.No.

Accounts Involved

Nature of
Account

Affects

Debit/Credit

1.

Cash a/c

Real

Debit

Sanjay a/c

Personal

Cash (Cheque) is
coming in Sanjay
is the giver

Ramu a/c

Personal

Debit

Bank a/c

Personal

Ramu is the
receiver
Bank is the giver

3.

Salary a/c

Nominal

Debit

4.

Cash a/c
Rent a/c

Real
Nominal

Salary is an
expense
Cash is going out
Rent is expense

5.

Bank a/c
Drawings a/c

Personal
Personal

Credit
Debit

Purchase a/c
Adv. To Suppliers a/c
Cash a/c

Nominal
Personal

Personal

Bank is the giver

Sanjay is the
receiver
Decrease is stock
Suppliers are the
receiver
Cash is going out
Cash is coming in
Customers are
givers

Nominal

Interest is expense

Debit

2.

6.
7.

Cash a/c

8.

Advance from
customers a/c
Interest on loans a/c

Real
Real

Cash a/c
9.

10.

Credit

Credit

Credit
Debit

Credit
Debit
Credit
Debit
Credit

Cash is going out

Loan a/c

Real
Personal

Cash a/c

Real

Bank a/c

Personal

Bank interested a/c

Nominal

Lender is the
receiver
Cash is going out
Bank is the
receiver
Bank interest is an
income

Credit
Debit
Credit
Debit
Credit

Q.(2) The
trial balance
of Nilgiris
Co Ltd., has
taken on 31st
December,
2002 did not
tally and the
difference
was carried
to suspense
account. The
following
errors were
detected

subsequently.
a) Sales book total for November was under cast by Rs. 1200.
b) Purchase of new equipment costing Rs. 9475 has been posted to Purchases a/c.
c) Discount received Rs.1250 and discount allowed Rs. 850 in September 2002 have been posted to
wrong sides of discount account.
d) A cheque received from Mr. Long ford for Rs. 1500 for goods sold to him on credit earlier,
though entered correctly in the cash book has been posted in his account as Rs. 1050.
e) Stocks worth Rs. 255 taken for use by Mr. Dayananda, the Managing Director, have been entered
in sales day book.

f) While carrying forward, the total in Returns Inwards Book has been taken as Rs. 674 instead of
Rs. 647.
g) An amount paid to cashier, Mr. Ramachandra, Rs. 775 as salary for the month of November has
been debited to his personal account as Rs. 757.
Pass journal entries and draw up the suspense account.
ANS.
Date

Particulars

31.12.2002

Suspense a/c Dr

LF

Debit
Rs.

Credit
Rs.

1200

To Sales a/c

1200

(Being under casting of sales book rectified)

31.12.2002

New Equipment a/c Dr

To Purchase

9475

a/c

(Being wrong debit given to purchase account rectified)

31.12.2002

Discount allowed a/c Dr

9475
1700

Suspense a/c
To Discount received a/c

800

(Discount received and discount allowed posted to wrong

sides of discount a/c rectified
31-12-2002

Suspense a/c Dr

2500
450

To Langfords a/c

450

(Being short credit given to Langford rectified)

31.12.2002

Sales a/c Dr

255

To Suspense a/c

255

(Being stock used for personal purpose wrongly credited

to sales account rectified)
31.12.2002

Suspense a/c Dr

27

To Returns Inwards a/c

27

(Being excess debit given to returns inwards account to

the extent of Rs27, now rectified)
31.12.2002

Salary a/c Dr

775

To Ramachandras a/c

757

To Suspense a/c
(Being the wrong debit of salary to the personal account
of Ramachandra now rectified)

18

Q.(3) From the given trial balance drafts an Adjusted Trial Balance.
Trial Balance as on 31.033.2011
Debit balances

Rs.

Credit balance

Rs.

Furniture and
Fittings

10000

Bank Over Draft

16000

Buildings

500000

Capital A/C

400000

Sales Return

1000

Purchase Returns

4000

Sundry Debtors

25000

Sundry Creditors

30000

Purchases

90000

Commission

5000

Advertising

20000

Sales

235000

Cash

10000

Taxes and Insurance

5000

General Expenses

7000

Salaries

20000

TOTAL

690000

690000

Adjustments:
1. Charge depreciation at 10% on Buildings and Furniture and fittings.
2. Write off further bad debts 1000
3. Taxes and Insurance prepaid 2000
4. Outstanding salaries 5000
5. Commission received in advance1000
ANS.

Ledger accounts
Dr.

Furniture and fittings a/c

Cr.

Particulars

Rs.

Particulars

Rs.

To bal b/d

10000

By Depreciation

1000

By bal c/d

9000

Total

10000

Total

10000

To bal b/d

9000

Dr.

Buildings a/c

Cr.
Particulars
To bal b/d

Rs
500000

Particulars

Rs.

By Depreciation
By bal c/d

50000
450000

Total

500000

To bal b/d

450000

Total

Bad Debts a/c

Dr.
Cr.

500000

Particulars

Rs.

Particulars

Rs.

To bal b/d

2000

To Sundry Debtors

1000

By bal c/d

3000

Total

3000

Total

3000

By bal b/d
Particulars

3000
Rs.

To bal b/d

25000

Total

25000

To bal b/d

24000

Particulars

Rs.

By Bad Debt.

1000

By bal c/d

24000

Total

25000

Sundry Debtors a/c

Dr.
Cr.

Taxes and Insurance a/c

Dr.

Cr.
Particulars

To bal b/d

Rs.
5000

Particulars
By Prepaid taxes and Insurance

Rs.
2000

By bal c/d
3000
Total

5000

To bal b/d

3000

Total

Prepaid taxes and Insurance a/c

5000

Dr.
Cr.
Particulars

Rs

Particulars

Rs

To Taxes and Insurance

2000

By bal c/d

2000

Total

2000

Total

2000

To bal b/d

2000

Salaries a/c
Dr.
Cr.
Particulars
To bal b/d

Rs
20000

Particulars

Rs

By bal c/d

25000

Total

25000

To Outstanding Salaries
5000
Total

25000

By bal b/d

25000

Outstanding Salaries a/c

Dr.
Cr.
Particulars

Rs.

Particulars

Rs.

To bal c/d

5000

By Salaries

5000

Total

5000

Total

5000

By bal b/d

5000

Depreciation a/c
Dr.
Cr.
Particulars

Rs.

Particulars

Rs.

To Furniture and fittings

1000

To Buildings

50000

Total

51000

By bal b/d

51000

By bal c/d

51000

Total

51000

Commission a/c
Dr.
Cr.
Particulars

Rs.

To Commission received in
advance
To bal c/d
Total

1000

Particulars

Rs.

By bal b/d

5000

Total

5000

By bal b/d

4000

4000
5000

Commission received in advance a/c

Dr.
Cr.
Particulars

Rs.

To bal c/d

1000

Total

1000

Particulars

Rs.

By Commission

1000

Total

1000

By bal b/d

1000

Adjusted Trial Balance as on 31.03.2011

Debit balances

Rs.

Adjustments

Adjustments

Amount
Furniture and Fittings
Buildings

10000

-1000

9000

500000

-50000

450000

Sales Returns

1000

Bad Debts

2000

+1000

3000

Sundry Debtors

25000

+1000

24000

Purchases

90000

90000

Advertising

20000

20000

Cash

10000

10000

Taxes and Insurance

5000

General Expenses

7000

Salaries

1000

-2000

7000

20000

5000

Depreciation

Prepaid Taxes and Insurance

TOTAL

1000+50000
2000

690000

Credit balances

3000

25000
51000
2000
695000

Rs.

Bank Over Draft

16000

16000

Capital Account

400000

400000

Purchase Returns

4000

4000

Sundry Creditors

30000

30000

Commission

5000

Sales

-1000

235000

4000
235000

Outstanding salaries

5000

5000

Commission received in advance

1000

1000

TOTAL

690000

695000

Q.(4) 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)
Particulars

2010-11

2009-10

2008-09

2007-08

2006-07

Revenue

27,501

22,742

21,693

16,692

13,893

Operating Profit
(PBIDT)

8,968

7,861

7,195

5,238

4,391

PAT from ordinary

activities

6,835

6,218

5,988

4,659

3,856

(Source: Infosys Technologies Ltd. Annual Report)

ANS.
Infosys Technologies Ltd.
Trend Analysis
Particulars

2010-11

2009-10

2008-09

2007-08

2006-07

Revenue

27,501

22,742

21,693

16,692

13,893

Operating Profit (PBIDT)

8,968

7,861

7,195

5,238

4,391

PAT from ordinary

activities

6,835

6,218

5,988

4,659

3,856

Trend ratios
Revenue

197.95

163.14

156.14

120.15

100

Operating Profit (PBIDT)

204.24

179.03

163.86

119.29

100

PAT from ordinary

activities

177.26

161.26

155.29

120.82

100

Conclusion: 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.
Q.(5) Give the meaning of cash flow analysis and put down the objectives of cash flow analysis.
Explain the preparation of cash flow statement.
ANS. 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:

a. What is the change in the cash position of the firm for the current year as compared to the previous
year?
b. How good was the liquidity position of the firm?
c. What were the sources of cash during the current year?
d. How much cash was generated from operations?
e. What were the applications of cash during the current year?
f. How much cash was spent on investment activities, such as purchase of new plant and machinery,
purchase of land?
Preparation of cash flow analysis: 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.
Sources of cash:
a. Cash from operations
b. Proceeds of issue of
(i) Equity shares, (ii) Preference shares
c. Proceeds of issue of
(i) Debentures, (ii) Bonds
d. Raising long-term debts from banks and financial institutions
e. Raising mortgage loans (long-term)
f. Sale of assets
(i) Tangible assets like land, buildings, equipments, machinery, vehicles, etc.
(ii) Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.
g. Sale of investments like shares, bonds, debentures, etc.
Applications or uses of cash:
a. Cash lost in operations (adjusted net loss)
b. Buy back of equity shares
c. Redemption of redeemable preference shares
e. Redemption of redeemable bonds or debentures
f. Repaying of long-term debts from banks and financial institutions

g. Repaying of mortgage loans (long-term)

h. Purchasing of assets
(i) Tangible assets like land, buildings, equipments, machinery, vehicles, etc.
(ii) Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.
Q.(6) Write the assumptions of marginal costing. Differentiate between absorption costing and
marginal costing.
ANS. Assumptions of Marginal Costing:
1. Segregation of cost into fixed and variable: The whole principle of marginal costing is based on the
idea that some costs vary with production while some costs dont. Therefore, it is assumed that a clear
bifurcation between fixed and variable costs is possible. Even if some costs do not entirely qualify as
fixed or as variable, it is still possible to separate such mixed cost with respect to the amount, which
remains fixed and the amount which varies with production.
2. Volume is the only factor which influences the cost: It is assumed that other factors like the demands,
tastes, and preferences of consumers, availability of substitute products, availability and price of inputs,
etc. are constant. Hence, volume is the only factor which influences the cost.
3. Constant selling price: It is assumed that the selling price will be constant for any level of sales.
4. Constant total fixed cost: It is assumed that the total fixed cost will be constant for any level of
production.
5. Constant variable cost per unit: It is assumed that the variable cost per unit will be constant for any
level of production.
6. No closing stock: It is assumed that the firm will be able to sell all its production. All the units
produced would be sold. Hence, there would be no opening and closing stocks.
7. Linear relationship between costs and revenues: It is assumed that the costs and revenues are
linearly related to volume. The change in costs and revenues is proportionate to the change in volume
(number of units sold).
Differences of marginal and absorption costing:
Absorption Costing

Marginal Costing

It is known as full costing. Both fixed and

variable are included to ascertain the cost.

Only variable costs are included. Fixed costs are

recovered from contribution.

Different unit costs are obtained at

different levels of output because of fixed
expenses remaining the same.

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 total cost

(marginal cost and fixed cost) is profit.

Difference between sales and marginal cost is

contribution and difference between contribution
and fixed cost is profit or loss.

A portion of fixed cost is carried forward

Stock of work-in-progress and finished goods are

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.

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

an arbitrary basis gives rise to over or
under absorption of overheads.

Products are charged only with variable cost, hence

marginal costing does not lead to over or under
absorption of fixed overheads.

It affects managerial decisions in certain

areas. E.g., whether to accept the export
order or not, whether to buy or
manufacture, etc.

It is very helpful in taking managerial decisions. It

considers the additional cost involved, assuming
fixed expenses to remain constant.

Costs are classified according to

functional basis such as production cost,
office and administrative cost, and selling
and distribution costs.

Costs are classified according to the behaviour of

costs fixed costs and variable costs.

It fails to establish relationship of cost,

volume, and profit.

CVP relationship is an integral part of marginal

costing.