Financial Accounting 1

SMU ASSIGNMENT SEMESTER – 1 MBO025

Financial & Management Accounting SUBMITTED BY: SIDHARTH RAMTEKE MBA ROLL NO.- 520918813 1. Explain any two accounting concepts with example?

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Concepts are the basic assumptions or conditions up on which the science of accounting is based. There are five basic concepts of accounting namely – • • • • •

Business entity concept, Going concern concept, Money measurement concept, Periodicity concept and Accrual concept.

Business separate entity concept: The essence of this concept is that business is a separate entity and different from the owner or the proprietor. This is true in the case all forms of organization. If X starts business, he should not mix up his personnel properties with that of the business. When he invests his funds into the business, it is regarded as capital to the business and capital is a liability from the business point of view. If X withdraws any money fro the business, it is detectable form the capital and to that extent the liability of the business towards the owner is reduced. On the other hand, if the proprietor withdraws money form the business for business purposes, then it is treated as expenditure to the business. This legal separation between business and ownership is kept in mind while recoding the transactions in the books of business. Going concern concept The fundamental assumption is that the business entity will continue fairly for a long time to come. There is no reason why an enterprise should be promoted for a short period only to liquidate the business in the foreseeable future. This assumption is called “Going concern concept”. For this reason accountants value fixed assets on historical cost method. Had the business been setup to last for short period, fixed assets should have been valued at a market price. Besides, going concern concept provides for amortization of the cost of fixed assets over the lifetime of the assets. For example, an entrepreneur purchases a plant for Rs. one crore and it has a life of 10 years. During this period, he sets aside every year certain funds from the income of the business so that it would help him for replacement of the asset at the end of ten years. This process of amortization presupposes that the enterprise will continue to do business fairly for long time.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

2. Prove that accounting equation is satisfied in all the

following transactions of Mr. X i. Commenced business with cash – Rs 80,000 ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000 iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000 iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000 v. Brought scooter for personal use for cash at Rs. 20,000 The accounting equation is, Equity [Working Capital] + Liabilities + Assets i.

Commenced business with cash – Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000 cash and so capital account and cash accounts are affected. Capital is a liability and cash is an asset to the business. This is shown in the transaction number 1, in the table. ii.

Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000

In this transaction, cash account, goods account and liabilities account gets affected. Cash account reduces by Rs. 40,000 Goods account increases by Rs. 40,000 Liabilities account increases by Rs. 30,000 This is shown in the transaction number 2, in the table. iii.

Sold goods for cash –Rs. 40,000 costing Rs. 25,000

In this transaction, goods account, cash account and profit account gets affected. Cash account increases by Rs. 40,000 Goods account reduces by Rs. 25,000 Profit account being owner’s account, it gets credited with Rs 15,000 This is shown in the transaction number 3, in the table.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000 In this transaction, cash and salary accounts are affected. Cash account reduces by Rs. 2,000 ans salary account gets credited by Rs. 2,000 Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the accounts gets affected. This is shown in the transaction number 4, in the table. v. Brought scooter for personal use for cash at Rs. 20,000 The scooter is for personal use, the liability of the business on owner’s capital decreases. Cash account and capital account decreases by Rs. 20,000 This is shown in the transaction number 5, in the table. Assets Goods a/c

Transaction Number

Cash a/c

1

80000

2

-40000

70,000

3

40000

-25000

4

-2000

5

-20000 58000

Salary a/c

Liabilities and owner's equity Mr.X's Liabilities Capital 80000 30000 15000

2000 -20000 45000 105000

2000

30000

75000 105000

3. Show the rectification of entries for the following a. the sales account is undercast by Rs.15,000 b. Goods returned by customer Mr. X of Rs.5650 has been posted in return inward account as Rs.5560 and in Mr. X’s account as Rs. 6550 c. Salary paid Rs.6,000 has been posted to rent account. d. Cash received from Ram posted to Shyam account Rs. 7000 e. Cash received from jadu Rs. 8640 has been posted to the debit of Madhu’s account.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

The below table shows the rectification of entries Particulars

Debit [Rs.]

Suspense account

Dr

15,000

To Sales account Suspense account

15,000 Dr

90

To Return account Mr. X’s account

90 Dr

900

To Suspense account Salary account

Dr

900 6000

To rent account Shyam account

6000 Dr

7000

To Ram account Jadu account

Credit [Rs.]

7000 Dr

To Madhu account

8640 8640

4. The

following balances are extracted from the books of Kiran Trading Co on 31st March 2000. You are required to prepare trading and profit and loss account and a balance sheet as on that date:

Opening Stock B/R Purchases Wages Insurance Sundry Debtors Carriage Inwards

5,000 Commission 22,500 1,95,000 14,000 5,500 1,50,000 4,000

received Return Outward Trade Expenses Office furniture Cash in hand Cash at bank Rent and Taxes

2,000 2,500 1,000 5,000 2,500 23,750 5,500

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Commission

4,000 Carriage

7,250

Paid Interest

Outward 3,500 Sales

2,50,000

on

Capital Stationery Return Inwards

2,250 6,500

Bills Payable Creditors Capital The closing stock was valued at Rs.1,25,000

15,000 98,250 89,500

Trading account of M/s Kiran Trading Co Trading Account Dr

Cr

Opening stock

5,000 Sales - Return Inward

Purchases - Return Outward Carriage Inwards Wages Gross Profit

192,500 Closing Stock

243,500 125,000

4,000 14,000 153,000 368,500

368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account Dr

Cr

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Rent and Taxes

5,500 by Trading a/c Gross Profit

Insurance

5,500 Comission Received

Trade Expenses

1,000

Commission Paid

4,000

Interest on Capital

3,500

Staionary

2,250

Carriage Outward

7,250

Net Profit

153,000 2,000

126,000 155,000

155,000

Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet Capital and Liabilities

Assets

Bills Payable

15,000 Sundry Debtors

150,000

Capital

89,500 Office Furniture

5,000

Creditors

98,250 Cash in Hand

2,500

126,000 Cash in Bank

23,750

B/R

22,500

Net Profit from P & L Account

Closing Stock 328,750

5. Write a note on: a. outstanding expenses b. prepaid expenses

a. Out standing expenses:

125,000 328,750

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Expenses due but not paid are known a outstanding expenses. Wages, salaries, rent, commission etc payable in the current month are paid in the following month. If the final accounts are prepared for the year ending 31st December, then the expenses payable for December will be paid in January of next year. The extent to which the amount belongs to the current year but payable in the next year is called outstanding expenses. To record that aspect, the journal entry drawn in the journal proper is: Concerned Expenses account

Dr

To outstanding expenses account. Outstanding expenses account indicates liability for the current year and it will appear in the balance sheet. b. Prepaid expenses: Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form an asset and therefore prepaid expenses account is debited. For example, insurance premium is paid from April, 2004 to March, 2005; and the amount is Rs. 3600. The financial year ends by 31st December, 2004. Therefore the premium relating to Jan, Feb. and March of 2005 Rs. 900 is said to have been paid in advance. To record this internal adjustment, the entry is: Prepaid Expenses account

Dr 900

To insurance account 900 Note that outstanding or prepaid expenses accounts are regarded as personal accounts. SET-2 Q4. Bring out the difference between cash flow and funds flow statement. •

fund flow statement is prepared on the accrual basis of accounting(i.e weather cash realized or not )where as in cash flow statement data is obtained in accrual basis are converted into cash basis.

ASSIGNMENTS- MBA Sem-I MB0025 – •

•

•

Financial & Management Accounting

funds flow statement checks and tallies the funds raised from various sources and uses or applications of those funds in a given period of time.cash flow statement reconciles the opening bal. of cash with the closing bal. of cash by proceeding through cash flows from operating ,investing and financing activities . fund flow statement is a broader concept which is based on the working capital ,where as cash flow statement is based on the flow of cash which is one of the element of working capital . Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period.

• Methods of cash flow: 1.Direct Method : presenting information in:Statement of A. operating Activities, B. B. Investment Activities C. C. Financial Activities 2.Indirect Method :uses net income as base & make adjustments to that income(cash & non-cash)transactions. • •

Funds Flow Statement :Statement showing the sorce & application of funds during the period.

•

Major Difference:

•

The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.

•

FFS is showing the fund for the future activites of the Company.

•

Cash flow is nothing but flow of cash during a particular period of time. It is a strong Analysis tools used by Large and medium scale companies to make Analysis of Inflow and Outflow of money during a particular period of time. Now a days even small scale industries are using this tools.

•

Fund Flow shows the flow of money from different Activities. This helps the management to make analysis of the FLow of funds from activities such as Operating Activites, Investment Activities, Financing Activities etc.

•

Funds Flow Statement is concerned with all items constituting funds (Working Capital)for the business while Cash Flow

ASSIGNMENTS- MBA Sem-I MB0025 –

•

Financial & Management Accounting

Statement deals only with cash transactions. In other words, a transaction affecting working capital other than cash will affect Funds statement, and not the Cash Flow Statement. In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash Flow Statement, individual item involving cash is taken into account.

•

Funds Flow statement is started with the opening cash balance and closed with the closing cash balance records only cash transactions.

•

Cash Flow Statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement

•

Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period.

1. Budgetary Control is a technique of managerial control through budgets. Elaborate. Modern business world is full of competition, uncertainty and exposed to different types of risks. The complexity of managerial problems has led to development of various managerial tools, techniques and procedures useful for the management in managing the business

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

successfully. In this direction, planning and control plays an important role. Budgeting is the most common and powerful standard device of palling and control. Budgetary control is a technique of managerial control through budgets. A budget is a quantitative expression of plan of action. . It is a pre-determined detailed plan of action developed as a guide for future operation. According to Wheldon “Budgetary control is the planning in advance of the various functions of business so that the business as a whole can be controlled”. Budgetary controls deals with planning, coordination, recording appraisal and follow-up of actions. The procedure for preparing plan in respect of future financial and physical requirements is generally called “Budgeting”. It is a forward planning exercise. It involves the preparation in advance of the quantitative as well as the financial statements to indicate the intention of the management in respect of the various aspects of the business. Budgetary control is applied to a system of management accounting control by which all operations and output are forecasted far ahead as possible and actual results when known are compared with the budget estimates. Budgeting is a forward planning. It basically serves as a tool for management control. The objectives of budgeting may be taken as: • To forecast and plan for future to avoid losses and to maximize profits. •

To help the concern in planning the activities both physical and financial.

•

To bring about coordination between different functions of the enterprise.

•

To control; actual actions by ensuring that actual are in tune with targets

Budgetary control: When one relates control function to budget, we find a system what is generally termed as budgetary control. Control signifies such systematic efforts which help the management to know whether actual performance is in line with predetermined goal, policy and plans. It is basically a measurement tool. Yardsticks should be laid down. Standards must be set up.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Therefore, the objectives can be summarized as follows: • To conform with good business practice by planning for the future. •

To coordinate the various divisions of a business.

•

To establish divisional and departmental responsibilities.

•

To forecast operating activities and financial position.

•

To operate most efficiently the divisions, departments and cost center.

•

To avoid waste, to reduce expenses and to obtain the income desired.

•

To obtain more economical use of capital available for the efficient operation.

•

To provide more definite assurance of earning the proper return on capital employed.

•

To centralize management control.

•

To show the management where action is needed to remedy a situation.

•

To help in controlling cash.

•

To help in obtaining better inventory control and turnover.

Steps In Budgetary Control The procedure to be followed in the preparation and control of budget may differ from business to business. But, a general pattern of outline of budget preparation and control may go a long way to achieve the end results. The steps are as follows: Formulation of policies: The business policies are the foundation stone of budget construction. Function policies should be formulated in advance. Long-range policies with short term projections should be made for the functional areas such as sales, production, inventory, cash management, capital expenditure. Preparation of forecasts: Based on the formulated policies, forecast should be made in respect of each function. Activity based concepts should be introduced at the micro level for each function Forecasts should not be considered as a mere estimates. Scientific methods should be adopted for forecasting.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Analysis of various factors based on past, and present, future forecast should be made. Preparation of budgets: Forecasts are converted into written codified document. Such written documents can be used for coordination purposes. Function budgets will act as guidelines for implementation. Forecast combinations: While developing the budgets, through a Master Budget various permutations and combination processes are considered and developed. Based on this, establishment of the most preferred one which will yield optimum benefits should be considered. All the factor components should be identified which are likely to cause disturbances while implementing the budgets

2. a. Given: Current ratio Liquid ratio

= 2.6 = 1.4

Working Capital = Rs.1,10,000 Calculate (1) Current assets (2) current liabilities (3) Liquid Asset (4) Stock

Given data is working capital, hence: Working capital = Current assets - current liabilities ----- [1] Current Ratio = CA / CL = 2.6 In the absence of any value, the current liability is always taken as 1 unit 2.6 = CA / 1 and cross multiplying , CA is 2.6 Substituting CA in [1], Working capital = 2.6 - 1 = 1.6 For 1.6 WCR = Working capital value is Rs1,10,000 For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750 For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 = Rs.68,750 Liquid Ratio =Liquid asset / current liabilities 1.4 = Liquid asset / 2,86,000 Liquid asset = 1.4 X 68,750 = 96,250 Liquid asset = Current asset – Stock Therefore, Stock = Current Asset – Liquid Asset = 1,78,750 – 96250

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

= Rs. 82,500

b. Calculate Gross Profit Ratio from the following figures: Sales

Rs.5,00,000

Sales return

Rs.50,000

Closing stock

Rs.35,000

Opening stock

Rs.70,000

Purchases

Rs.3,50,000

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. [Gross Profit Ratio = (Gross profit / Net sales) × 100] Cost Of Goods Sold [COGS] stock COGS Gross Profit Gross Profit Net Sales

= = = =

= Opening stock + Purchases – closing = 70000 + 350000-35000 = 385000 Rs.

(Sales – Sales returns) - COGS (500000 – 50000) – 385000 450000 – 385000 65000 Rs.

= Sales – Sales returns = 500000 – 50000 = 450000 Rs.

Gross Profit Ratio

= (Gross profit / Net sales) × 100] = (65000/450000) X 100 = 14.4%

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

3. From the following Balance Sheet of William & Co Ltd., you are required to prepare a Schedule of Changes in Working capital & Statement of Sources and Application of funds. Balance Sheet Liabilitie s Capital

2002 Rs. 80,000

2003 Rs. 85,000

P&L a/c

14,500

24,500

Sundry Creditors Longterm Loans

Total

9,000

5,000

-

5,000

1,03,50 0

1,19,50 0

Assets

2002 Rs. 4,000

2003 Rs. 9,000

16,500

19,500

9,000

7,000

Machiner y

24,000

34,000

Building

50,000

50,000

Total

1,03,50 0

1,19,500

Cash in Hand Sundry Debtors Stock

Schedule of changes in working capital Balance as on Effect on Working Capital Details 2002 2003 Increase Decrease Liabilities Sundry Creditors 9,000 5,000 4,000 Long term loans 0 5,000 5000 P&La/c 14500 24500 10000 Total liabilities [B] 23,500 34,500 10,000 9,000 Assets Cash in Hand 4000 9000 5000 Sundry Debtors 16500 19500 3000 Stock 9000 7000 2000 Machinery 24000 34000 10000 Total Assets (A) 53500 69500 10000 2000 Working Capital A-B

30,000

35,000

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

Net increase in Working capital

5000 35,000

9000 35,000

20,000

4. Bring out the difference between cash flow and funds flow statement. Difference Between Cash Flow And Funds Flow Statement The major differences between the two are : 1. FFS is related with accrual basis whereas CFS is on cash basis. For this the, it is necessary to convert the accrual to cash basis. 2. In FFS, a Schedule of changes in working capital de-linking the current assets and current liabilities are made. But in CFS, no schedule is prepared. 3. FFS shows the causes of the changes in net working capital. CFS shows the causes for the change in cash 4. In FFS, no opening or closing balances are recorded. But in CFS both are incorporated 5. FFS is not based on the Ledger mode. But CFS is prepared on the basis of Ledger principles. 6. In FFS, “To” and “By” are indicated. In CFS, these are not indicated. 7. In FFS, net effect of receipts and disbursements are recorded. In CFS only cash receipts and payments are recorded. 8. FFS is concerned with the total provision of funds. CFS is concerned with only cash. 9. FFS is flexible but CFS is rigid 10. FFS is more relevant for long range financial strategy. CFS concentrates on short term aspects mostly affecting the liquidity of the business.

20,000

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

5a. DELL computers sell 100 PCs at Rs.42,000. The variable expenses amount to Rs.28,000 per PC. The total fixed expenses is Rs.14,00,000. Prepare an income statement. Income Statement No. Of computers produced No. Of computers sold Unit selling price per computer unit variable cost per computer Sales revenue =No. Of computers sold X unit selling price Less variable cost (100 X 28000) Less Fixed expenses Profit or loss

100 100 42000 28000 4200000 -2800000 -1400000 0

b. Calculate BEP and MOS Sales at present are 55,000 units per annum. Selling price is Rs.6 per unit. Prime cost Rs.3 per unit. Variable overheads is Re.1 per unit. Fixed cost Rs.80,000 per annum. Sales at present 50,000 units per annum. Selling price Rs.6 per unit, Prime cost Rs.3 per unit. Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum. Solution: BEP = Fixed cost / (SP – VC) per unit = 80,000 / (6 – 4) = 80,000 / 2 BEP = 40,000 units. BEP in rupees = BEP in units x selling price per unit = 40,000 x Rs.6 = Rs.2, 40,000 MOS = Actual Sales – BEP Sales

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting

= (55,000 x 6) – 2,40,000 MOS = Rs.90,000

6.What is cost variable analysis? A variable cost changes in total in direct proportion to a change in the level of activity or cost driver. If activity increases, say by 20%, total variable cost also increases by 20 %. The total variable cost increases proportionately with activity. Variable cost fixed per unit but varies in total. Cost Variable Analysis: Break Even Chart is used in Cost variable analysis. It is a graphic or visual presentation of the relationship between costs, volume and profit. It indicates the point of production at which there is neither profit nor loss. It also indicates the estimated profit or loss at different levels of production. While constructing the chart, the following assumption is normally considered. a) Costs are classified into fixed and variable costs b) Fixed costs shall remain fixed during the relevant volume range of graph. c) Variable cost per unit will remain constant during the relevant volume range of graph d) Selling price per unit will remain constant e) Sales mix remains constant. f) Production and sales volume are equal g) There exists a linear relationship between costs and revenue. h) Linear relationship is indicated by way of straight line. Break Even Analysis It is an extension of or even part of marginal costing. It is a technique of studying cost volume profit relationship. Basically, the break even analysis is aimed at measuring the variations of cost with volume. It is a simple method of presenting the effect of changes in volume on profits. It is also known as CVP analysis. The various assumptions are: a) All costs can be classified into fixed and variable b) Sales mix will remain constant. c) There will be no change in general price level d) The state of technology, Methods of production and efficiency remain unchanged. e) Costs and revenues are influenced only by volume f) Cost and revenues are linear. g) Stocks are valued at marginal cost h) Unit produced and sold are same.

ASSIGNMENTS- MBA Sem-I MB0025 –

Financial & Management Accounting