22722255 Financial Accounting 1

8/14/2019 22722255 Financial Accounting 1

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SMU

ASSIGNMENT

SEMESTER 1MB0025

Financial and Management

Accounting

SUBMITTED BY:

ANIL KUMAR JOSHI

MBA

ROLL NO.- 520949950


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ASSIGNMENTS- MBA Sem-I

MB0025 Financial and Management Accounting

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 startsbusiness, 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 legalseparation 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 timeto 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 havebeen 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 setsaside 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.


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2. Prove that accounting equation is satisfied in all the following transactions 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. 25,000

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. 40,000Liabilities 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. 40,000Goods account reduces by Rs. 25,000

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


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. 2,000Outstanding salary is Rs. 1,000 which is not paid yet, hence non of the accounts gets

affected.


v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owners capital decreases.Cash account and capital account decreases by Rs. 20,000


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TransactionNumber

Assets

Liabilities and owner's

equity

Casha/c Goodsa/c Salarya/c Liabilities Mr.X'sCapital

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


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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. 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


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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 5,000 Commission received 2,000

B/R 22,500 Return Outward 2,500

Purchases 1,95,000 Trade Expenses 1,000

Wages 14,000 Office furniture 5,000

Insurance 5,500 Cash in hand 2,500

Sundry Debtors 1,50,000 Cash at bank 23,750

Carriage Inwards 4,000 Rent and Taxes 5,500

Commission Paid 4,000 Carriage Outward 7,250

Interest on Capital 3,500 Sales 2,50,000

Stationery 2,250 Bills Payable 15,000

Return Inwards 6,500 Creditors 98,250Capital 89,500

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

Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

Opening stock 5,000 Sales - Return Inward 243,500

Purchases - Return Outward 192,500 Closing Stock 125,000

Carriage Inwards 4,000

Wages 14,000

Gross Profit 153,000

368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account


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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

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

328,750 328,750


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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 be paid in January of next year. The extent to which the amount belongsto 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 anasset 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 of2005 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.


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SET-2

1. Budgetary Control is a technique of managerial control through budgets.

Elaborate.

Modern business world is full of competition, uncertainty and exposed to different typesof 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 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 awhole 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 requirementsis 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 whichall 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 whatis 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 laiddown. Standards must be set up.

Therefore, the objectives can be summarized as follows:

To conform with good business practice by planning for the future.


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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 budgetconstruction. Function policies should be formulated in advance. Long-range policieswith 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. Scientificmethods 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 asguidelines for implementation.

Forecast combinations:While developing the budgets, through a Master Budget variouspermutations 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 causedisturbances while implementing the budgets


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2. a. Given: Current ratio = 2.6

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 = 2.6In 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 Rs1,10,000For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750For 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


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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 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] = 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%


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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 2002

Rs.

2003

Rs.

Assets 2002

Rs.

2003

Rs.

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

Total 1,03,500 1,19,50

0

Total 1,03,50

0

1,19,500

Schedule of changes in working capital

DetailsBalance as on Effect on Working Capital

2002 2003 Increase Decrease

Liabilities

Sundry Creditors 9,000 5,000 - 4,0

Long term loans 0 5,000 50P&La/c 14500 24500 10000

Total liabilities [B] 23,500 34,500 10,000 9,0

Assets

Cash in Hand 4000 9000 5000

Sundry Debtors 16500 19500 3000

Stock 9000 7000 20

Machinery 24000 34000 10000

Total Assets (A) 53500 69500 10000 20

Working Capital A-B 30,000 35,000

Net increase in Working capital 5000

35,000 35,000 20,000 20,0


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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 thecauses 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 Ledgerprinciples.

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 cashreceipts 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.

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

12. Funds flow statement checks and tallies the funds raised from various sources anduses or applications of those funds in a given period of time. Cash flow statement

reconciles the opening bal. of cash with the closing balance of cash by proceeding

through cash flows from operating, investing and financing activities.13. 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 duringthe period.

Methods of cash flow:

1. Direct Method : presenting information in statement of:

a. operating Activities,b. Investment Activities

c. Financial Activities


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2. Indirect Method: uses net income as base & make adjustments to those income

(cash & non-cash) transactions.

Funds Flow Statement: Statement showing the source & application of funds during theperiod.

Major Difference:

1. The CFS allows investors to understand how a companys operations are running,

where its money is coming from, and how it is being spent.2. FFS is showing the fund for the future activities of the Company.

3. 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 makeAnalysis of Inflow and outflow of money during a particular period of time.

Nowadays even small scale industries are using these tools.

4. 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 asOperating Activities, Investment Activities, Financing Activities etc.

5. Funds Flow Statement is concerned with all items constituting funds (Working

Capital) for the business while Cash Flow Statement deals only with cashtransactions. In other words, a transaction affecting working capital other than

cash will affect Funds statement, and not the Cash Flow Statement.

6. In Funds Flow Statement, net increase or decrease in working capital is recordedwhile in Cash Flow statement, individual item involving cash is taken into

account.

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

8. 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

Statement9. Cash Flow Statement: Statement showing changes in inflow & outflow of cash

during the period.


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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 anincome 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 price

4200000

Less variable cost (100 X 28000) -2800000Less 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, 40,000MOS = Actual Sales BEP Sales

= (55,000 x 6) 2,40,000

MOS = Rs.90,000


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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 constructingthe chart, the following assumption is normally considered.

a) Costs are classified into fixed and variable costsb) 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 ofchanges 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 costh) Unit produced and sold are same.

Documents

22722255 Financial Accounting 1