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Dear Students, Please attempt all the assignment questions given in this leaflet/booklet and submit it to the Coordinator

of the study center, you are attached with, on or before 31st October, 2009.
MS-04: ACCOUNTING AND FINANCE FOR MANAGERS ASSIGNMENT Course Code : MS-04 Course Title : Accounting and Finances for Managers Assignment Code : MS-04/TMA/SEM-II/2009 Coverage : All Blocks Note : Please attempt all questions and send them to the Coordinator of the study centre you are attached with. Q1. What do you mean by accounting? Explain the various concepts of accounting and the need for having accounting standards?

Accounting is the art of recording, classifying and summarizing in the significant manner and in terms of money, transaction and events which are in the part at least of a financial character and interpreting the result thereof. As per the definition accounting and bookkeeping is the simple art of record keeping. Every good record keeping system including classification transaction and event as well as their summarization for ready reference. Essentially the transaction and event are to be measured in the terms of money. Measurement in the terms of money means measuring at the ruling currency of county like rupees in India, Dollar in U.S.A The transaction and events must have at least in part financial characteristics. The inauguration of new branches of a bank is an event without having financial character, while the business disposed of by the branch is an event having financial character. Accounting and Bookkeeping also interprets the recorded classified and summarized transaction and events. However the above mention definition does not reflect the present day accounting function. The dimension of accounting and bookkeeping is much broader then that described in the above definition. A widely accepted definition is accounting is given by the American Accounting Association in 1966 which treated accounting as The process of identifying, measuring and communicating economic information to permit informed judgments and decision by users as accounts.

An examination of the various elements of the definition shows the role of accounting although many of its implements may become clear as the course advances. 1) There are curtains users of accounts. Earlier it was viewed that accounting is for the owner of the business but change social relationship diluted the earlier thanking. It is now believed that users of accounts includes, employee, ledgers, suppliers and other trade creditors, customers, government and other agencies and the public at large. 2) The users need data for judgment and decisions. 3) Accounting is a process of identifying users information requirement as also generating, recording and communicating such information to users. It also a common measurement unit e.g.: money. Accounting provides the art of presenting information systematically to the users of accounts. Information is useless and meaningless unless it is relevant and material to a users decision. The information should be free of any biases. The users should understand mot only the financial results depicted by accounting figures but also should be able to access its reliability and compare it which information about attractive opportunity and the past experience. Accounting data is more useful if it stresses economic substance rather than technical form.

Accounting concept and conventions In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities. To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently. Accounting Conventions The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost. Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.

The other conventions you will encounter in a set of accounts can be summarised as follows: Monetary measurement Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

Separate Entity This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business. Realisation With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms. Materiality An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for auditors of financial accounts. Accounting Concepts Four important accounting concepts underpin the preparation of any set of accounts: Going Concern Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important implications for the valuation of assets and liabilities. Consistency Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting policies are changed, companies are required to disclose this fact and explain the impact of any change. Prudence Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs will be incurred in the future. Matching (or Income should be properly "matched" with the expenses of a given "Accruals") accounting period.

Key Characteristics of Accounting Information There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Criteria What it means for the preparation of accounting information

Understandability This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities Relevance This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) Consistency Comparability This implies consistent treatment of similar items and application of accounting policies This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor). This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest

Reliability

Objectivity

Accounting standards are needed so that financial statements will fairly and consistently describe financial performance. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies would be difficult. Accounting standards used today are referred to as Generally Accepted Accounting Principles (GAAP). These principles are "generally accepted" because an authoritative body has set them or the accounting profession widely accepts them as appropriate.

The transition around the world to International Financial Reporting Standards (IFRS) which were formerly known as International Accounting Standards (IAS) - is the most important development ever seen in the world of accounting.

Q2.

The balance sheets of ABC Ltd. as on 31-3-2008 and 31-3-2007 are as given below:

ABC Ltd. Balance Sheets 31-3-08 Sources of Funds Share Capital Reserves and Surplus General Reserve P&L A/c Share Premium Capital Reserve Secured Loans Unsecured Loans Total Applications of Funds Fixed Assets Gross Block Less: Accumulated Depn. Net Block Capital Work-in-progress Investments Current Assets, Loans and Advances A. Current Assets Inventories Raw materials Work-in-progress Finished goods Sundry Debtors Prepayments Cash and Bank Balances B. Loans and Advances Advance tax Loans to employees (longterm) Less: Current Liabilities of Provisions A Current Liabilities Sundry Creditors Outstanding Expenses B. Provisions Provisions for Retirement Benefits of employees Tax Provision 5,000 1,000 400 1,000 1,000 3,400 4,000 3,000 15,400 800 200 500 1,500 3,000 1,000 9,500 4,000 31-3-07

12,000 3,000 9,000 3,000 2,000

10,000 2,000 8,000 5,00

700 250 150 1,200 200 500 3,000 1,400 1,000 5,400

600 300 200 1,300 150 400 2,950 9,00 5,00 4,350

8,00 4,00 3,50 1,450

9,50 3,00 3,00 1,000

Proposed Dividend Net Current Assets Total

1,000 4,000 1,400 15,400

8,00 3,350 1,000 9,500

Additional Information: 1. Actual tax liability for 2006-07was Rs. 950 lacs; 2. A piece of machinery costing Rs. 500 lacs, accumulated depreciation Rs. 200 lacs was sold for Rs. 250 lacs. The loss was charged to profit and loss account; 3. A portion of secured loan as on 31-3-07 amounting to Rs. 400 lacs was converted into equity at a premium Rs. 200 lacs. There was also fresh issue of equity at 100% premium. 4. Out of secured loans as on 31-3-08 Rs 500 lacs were short-term loans. 5. Out of unsecured loans, short-term loans were to the extent of Rs. 400 lacs and Rs. 500 lacs respectively as on 31-3-07 and 31-3-08. 6. Out of investments Rs. 200 lacs were current investments as on 31-3-07 and Rs. 500 lacs were current investments as on 31-3-08. 7. There was a revaluation of fixed assets during 2007-08 and the revaluation profit Rs. 500 lacs was charged to capital reserve. From the information given above, you are required to prepare: a) b) Statement showing changes in working capital Funds flow statement.

Q3. Explain briefly the technique of marginal costing. In what ways do you consider this technique useful in management accounting? Meaning of marginal costing

Marginal costing distinguishes between fixed and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads. Marginal costing is formally defined as: The accounting system in which variable cots are charged to cost units and fixed costs of period are written off in full against the aggregate contribution. Its special value is in recognizing cost behaviour and hence assisting in decision-making. The term contribution mentioned in the definition is the term given to the difference between Sales and Marginal Cost. Thus Marginal Cost = Variable Cost = Direct Labour + Direct Material +

Direct Expenses + Variable Overheads Contribution = Sales - Marginal Cost The term marginal cost sometimes refers to the marginal cost per unit and sometimes to the total marginal costs of a department or batch or operation. The meaning is usually clear from the context. Marginal costing involves ascertaining marginal costs. Since marginal costs are direct cost, this costing technique is also known as direct costing; In marginal costing, fixed costs are never charged to production. They are treated as period charge and is written off to the profit and loss account in the period incurred; Once marginal cost is ascertained contribution can be computed. Contribution is the excess of revenue over marginal costs. The marginal cost statement is the basic document/format to capture the marginal costs. Note: Alternative names for marginal costing are the contribution approach and direct costing. Principles of MC
1. For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the relevant range). Therefore, selling an extra item of product or service: Revenue will increase by the sales value of the item sold Costs will increase by the variable cost per unit Profit will increase by the amount of contribution earned from the extra item 2. The volume of sales falls by one item the profit will fall by the amount of contribution earned from the item. 3. Profit measurement should be based on an analysis of total contribution. Since fixed costs relate to a period of time, and do not change with increases or decreases in sales volume, it is misleading to charge units of sale with a share of fixed costs 4. When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased Technique of Mariginal costing

1.Cost Classification The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique 2. Stock/Inventory Valuation Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method 3. Marginal Contribution Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments Importance and Use of Marginal Costing

Q4. Ravi Co Ltd. is considering the following investment projects: Cash flows (Rs.) Projects A B C D Year0 -10,000 -10,000 -10,000 -10,000 Year1 +10,000 +7,500 +2,000 +10,000 Year2 +7,500 +4,000 +3,000 Year3 +12,000 +3,000

a) Rank the projects according to each of the following methods : (i) Pay back (ii) ARR (iii) IRR and (iv) NPV- assuming discount rates of 10% and 30% b) Assuming that the projects are independent, which one should be accepted? If the projects are mutually exclusive, which project is the best?

Q5. What role is played by a financial manager in matter of dividend policy. Discuss the
alternatives that he might consider and the factors which he should take into consideration before finalizing his views on dividend policy?

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