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MB0025: Financial &Management Accounting[Assignment SET1 & SET2]

Name : P. Srinath

SMDUE ID : 520923307

Center : Mehbub College Campus, SecunderabadSubject Code : MB0025

Subject : Financial & Management Accounting

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ASSIGNMENT MBA SEM I Subject Code:

MB0025 SET 1

1. Explain any two accounting concepts with example?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 ofthe 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 enterpriseshould 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

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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.

2. Prove that accounting equation is satisfied in all the followingtransactions of Mr. X

i. Commenced business with cash Rs 80,000ii. Purchased goods for cash Rs 40,000 and on credit Rs.30,000iii.Sold goods for cash Rs. 40,000 costing Rs. 25,000iv.Paid salary Rs. 2,000 and salary outstanding Rs. 1,000v. 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

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Goods account reduces by Rs. 25,000

Profit account being owners account, it gets credited with Rs 15,000

This is shown in the transaction number 3, in the table.

iv. Paid salary Rs. 2,000 and salary outstanding Rs. 1,000In 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 none 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. 20,000The scooter is for personal use, the liability of the business on owners

capital decreases.Cash account and capital account decreases by Rs. 20,000

This is shown in the transaction number 5, in the table.

Transaction

Number

Assets

Liabilities and owner's

equity

Cash

a/c

Goods

a/c

Salary

a/c Liabilities

Mr.X's

Capital

1 80000 80000

2 -40000 70,000 30000

3 40000 -25000 15000

4 -2000 2000

5 -20000 -20000

58000 45000 2000 30000 75000

105000 105000

3. Show the rectification of entries for the following

a. the sales account is undercast by Rs.15,000

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b. Goods returned by customer Mr. X of Rs.5650 has been

posted in return inward account as Rs.5560 and in Mr. Xs

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 Madhus account.

The below table shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr

To Sales account

15,000

15,000

Suspense account Dr

To Return account

Mr. Xs account Dr

To Suspense account

90

900

90

900

Salary account Dr

To rent account

6000

6000

Shyam account Dr

To Ram account

7000

7000

Jadu account Dr

To Madhu account

8640

8640

4. The following balances are extracted from the books of KiranTrading Co on 31st March 2000. You are required to preparetrading and profit and loss account and a balance sheet as onthat date:

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Opening Stock 5,00

0

Commission received 2,000

B/R 22,50

0

Return Outward 2,500

Purchases 1,95,00

0

Trade Expenses 1,000

Wages 14,00

0

Office furniture 5,000

Insurance 5,500 Cash in hand 2,500

Sundry Debtors 1,50,00

0

Cash at bank 23,750

Carriage Inwards 4,00

0

Rent and Taxes 5,500

Commission Paid 4,00

0

Carriage Outward 7,250

Interest on Capital 3,50

0

Sales 2,50,00

0

Stationery 2,250 Bills Payable 15,000

Return Inwards 6,500 Creditors 98,250

Capital 89,50

0

The closing stock was valued at Rs.1,25,000

Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

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Opening stock 5,000 Sales - Return Inward243,50

0

Purchases - Return Outward 192,500 Closing Stock125,00

0

Carriage Inwards 4,000

Wages 14,000

Gross Profit153,00

0

368,500368,50

0

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

Dr Cr

Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000

Insurance 5,500 Comission Received 2,000

Trade Expenses 1,000

Commission Paid 4,000

Interest on Capital 3,500

Staionary 2,250

Carriage Outward 7,250

Net Profit 126,000

155,000 155,000

Balance Sheet Account of M/s Kiran Trading Co

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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

Net Profit from P & L Account 126,000 Cash in Bank 23,750

B/R 22,500

Closing Stock 125,000

328,75

0328,750

5. Write a note on:

a. outstanding expenses

b. prepaid expenses

a. Out standing expenses:

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 bepaid 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:

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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.

ASSIGNMENT MBA SEM I Subject Code:

MB0025 SET 2

1. Budgetary Control is a technique of managerial control

through budgets. Elaborate.

Modern business world is full of competition, uncertainty and exposed todifferent types of risks. The complexity of managerial problems has led todevelopment of various managerial tools, techniques and proceduresuseful for the management in managing the business successfully. In thisdirection, planning and control plays an important role. Budgeting is themost common and powerful standard device of palling and control.

Budgetary control is a technique of managerial control throughbudgets. A budget is a quantitative expression of plan of action. . It is a

pre-determined detailed plan of action developed as a guide for futureoperation. According to Wheldon Budgetary control is the planning inadvance of the various functions of business so that the business as awhole can be controlled. Budgetary controls deals with planning,coordination, recording appraisal and follow-up of actions.

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The procedure for preparing plan in respect of future financial andphysical requirements is generally called Budgeting. It is a forwardplanning exercise. It involves the preparation in advance of thequantitative as well as the financial statements to indicate the intention ofthe management in respect of the various aspects of the business.

Budgetary control is applied to a system of management accountingcontrol by which all operations and output are forecasted far ahead aspossible and actual results when known are compared with the budgetestimates.

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.

Therefore, the objectives can be summarized as follows:

To conform to 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.

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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 amere estimates. Scientific methods should be adopted for forecasting.

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 = 2.6

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Liquid ratio = 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= 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 ofgross profit to net salesexpressed as a percentage. It expresses the relationship between grossprofit and sales.

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[Gross Profit Ratio = (Gross profit / Net sales) 100]Cost Of Goods Sold [COGS] = Opening stock + Purchases closing

stock

= 70000 + 350000-35000

COGS = 385000 Rs.

Gross Profit = (Sales Sales returns) - COGS

= (500000 50000) 385000

= 450000 385000

Gross Profit = 65000 Rs.

Net Sales = Sales Sales returns

= 500000 50000

= 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales) 100]

= (65000/450000) X 100

= 14.4%

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

Liabilities 2002Rs.

2003Rs.

Assets 2002Rs.

2003Rs.

Capital 80,000 85,000

Cash in Hand 4,000 9,000

P&L a/c 14,500 24,500

Sundry Debtors 16,500

19,500

Sundry Creditors 9,000

5,000

Stock 9,000

7,000

Long-term Loans - 5,000

Machinery 24,000

34,000

Building 50,000

50,000

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Total 1,03,500

1,19,500

Total 1,03,500

1,19,500

Schedule of changes in working capital

Details Balance as on

Effect on Working

Capital

2002 2003 Increase Decrease

Liabilities

Sundry Creditors 9,000 5,000 - 4,000

Long term loans 0 5,000 5000P&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

Net increase in Working

capital 5000 9000

35,000 35,000 20,000 20,000

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4. Bring out the difference between cash flow and funds flow

statement.

Difference between Cash Flow and Funds Flow StatementThe 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 isprepared.

3. FFS shows the causes of the changes in net working capital. CFS showsthe causes for the change in cash

4. In FFS, no opening or closing balances are recorded. But in CFS bothare incorporated

5. FFS is not based on the Ledger mode. But CFS is prepared on the basisof 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 rigid10. FFS is more relevant for long range financial strategy. CFS

concentrates on short term aspects mostly affecting the liquidity of thebusiness.

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 100

No. Of computers sold 100

Unit selling price per computer 42000

unit variable cost per computer 28000

Sales revenue =No. Of computers

sold X unit selling price4200000

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Less variable cost (100 X 28000) -2800000

Less Fixed expenses -1400000

Profit or loss 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= (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 increasesproportionately with activity. Variable cost fixed per unit but varies in

total.

Cost Variable Analysis:

Break Even Chart is used in Cost variable analysis.

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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.

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