Master of Business Administration Semester I MB0041 – Financial and Management Accounting Assignment Set- 1Q1. Distinction between book keeping and accountancy.Ans. Distinction between Book-keeping and Accountancy:Accountancy is the profession and the practitioners of accountancy are called accountants. Bookkeeping is the basic activity of recording. On recording the transactions and events in the booksof accounts, accounting does the role of analysis and reporting. Accountancy is the profession ofcarrying the activities of book keeping and accounting. Accounting enjoys wider scope andincludes not only book keeping but also analysis, interpretation and reporting of financialinformation. The later part of accounting is the core function of accounting. In the present dayenvironment, sophisticated software packages are available, which facilitate entry of transactionsand preparation of ledger accounts.
Book keeping AccountancyIt is a process of identifying, measuring, It involves summarizing the classifiedrecording and analyzing the transactions transaction, interpreting the analyzed resultsin books of accounts. and communicating the information to the users of financial statement.Adopt principles of accounting Analyzing and interpreting requires skill,for recording knowledge and experienceBook keeping is the first stage of Accountancy follows book keeping. It is theaccounting process secondary stageThe objective is to prepare final accounts The objective is to ascertain net resultsand balance sheet in a systematic manner of financial operations and communicate theat the end of accounting period results to all stakeholders in a manner they understandAccounts executives who perform this Accountants who perform this function needfunction may not require higher level higher analytical skills to interpret the dataof knowledge. and to take appropriate decisionsThe nature of job is routine and clerical The nature of job is non routine but analytical.
Q2. Pass journal entries for the following transactions:a) Madam commenced business with cash Rs. 70000b) Purchased goods on credit 14000c) Withdrew for private use 3000d) Goods purchased for cash 12000e) Paid wages 5000Ans. Accounting equations for the transactionsTransaction Assets = Liabilities + Owners Equity Cash + Good + Debtors + Furniture + Creditors+ Madans Capital1 70,000 70,0002 14,000 14,0003 -3,000 -3,0004 -12,000 12,0005 -5,000 -5000EndEquation 50,000 26,000 0 0 14,000 62,000 76,000 76,000
Q3. Write short notes on:a. Outstanding Expensesb. Prepaid ExpensesAns. (a) Outstanding Expenses Expenses yet to be paid or outstanding expenses for the current period should be charged againstthe current period’s income. The extent to which the amount belongs to the current yearbut payable in the next year is called outstanding expenses.Salaries outstanding (March 20XX month salary paid in April 20XX) ·Rent outstandingSalaries A/c Dr.To outstanding Salaries A/c.Being salary for the month of march 20xx due but not yet paid accounted. (b) Prepaid ExpensesExpenses paid in advance or prepaid expenses should be not be charged against the revenuesrelating to the current period but taken to the coming period. Prepaid expenses form an asset andtherefore prepaid expenses account is debited.Salaries paid in advance·Insurance paid in advance·Rent paid in advance
Example:Insurance premium is paid from April, 2004 to March, 2005 and the amount isRs.3600. Theaccounting year of the firm ends on 31st December, 2004. Therefore the premium relating to Jan,Feb and Mar of amounting to Rs.900 is said to have been paid in advance. To record this internaladjustment, the entry isPrepaid Expenses Account Dr. 900To insurance account 900Being insurance premium for Jan Feb and March 2005 paid in advance accounted.
Q4. Given variable cost Rs. 5,00,000. Fixed cost Rs. 3,00,000. Net profit Rs. 1,00,000.Sales Rs. 10,00,000.Find :(a) MCSR(b) BEP(c) Profit when sales amounted Rs.12,00,000 (d) sales required to earn a profit of Rs.2,00,000.Hint: Your answers should match this(a) 600000 ; (b) 600000; (c) 600000 ; (d) 1000000Ans. (a) MCSR = Contribution/Sales × 100 Contribution = Sales - Variable Cost = 10,00,000 - 5,00,000 = 5,00,000MCSR = 5,00,000/10,00,000 × 100 = 50% (b) BEP = Fixed Cost/ MCSR = 3,00,000/0.5 = 6,00,000
(c) Profit when sales amounted Rs.12,00,000Contribution 50%Therefore total Contribution12,00,000 × 50% = 6,00,000Less: fixed cost Rs. 3,00,000 Profit= 3,00,000(d) Sales required to earn a profit of Rs.2,00,000.= Fixed Cost + Desired Profit/MCSR= 3,00,000 + 2,00,000/50%= Rs. 10,00,000
Q5. Explain the meaning of Depreciation.Mention the different types of depreciation with examplesAns. Depreciation Depreciation is reduction in the value of an asset due to constant use of the same, which is calledwear and tear. Fixed assets like, buildings, plant, machinery, furniture etc., are subject todepreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss tothe organization.Depreciation account is debited and the concerned asset account is credited. The itemof depreciation may appear in the trial balance, which means that already the concerned asset isreduced by the amount of depreciation. If depreciation is given as an additional adjustment, thenthe depreciation amount should be charged against profit and loss account on one hand and theconcerned asset account is reduced on the other hand in the balance sheet.There are two popular methods of depreciation: Fixed installment method (Straight line method) Reducing balance method (Written down value method)In fixed installment method, depreciation is calculated on cost of the asset. The depreciationcharged remains same throughout the life of the asset. In case of reducing balance method(Diminishing balance method), the depreciation is charged on the reducing balance of thebook value of the asset. The depreciation amount gets reduced year after year during the life ofthe asset. Reducing balance method is more popular and well recognized.Example:The book value of the building is Rs.400000. It is depreciated at 10% on fixed installmentmethod. Show the journal entry and how does it appear in the balance sheet for the first andsecond year under both the methods.Depreciation account Dr. 40,000To building account 40,000Being depreciation amount accounted for.
1. Depreciation charged for the first year under straight line and reducing balance method.2. Balance Sheet as onLiabilities Assets Building 4,00,000 Less 10% 3,60,000 Depreciation 40,000During the first year the depreciation charged is similar under both the methods.3. Depreciation for the second year under:Straight line method Reducing balance method BALANCE SHEET BALANCE SHEETBUILDING 3,60,000 BUILDING 3,60,000LESS 10% LESS 10%SLM 40,000 DEPRECIATION 36,000(10% OF 4,00,000) (10% OF 3,60,000) 3,20,000 3,24,000
Q6. Show the rectification entries for the following: a. The Sales account is under cast by Rs.15,000 b. Goods returned by the customer Mr. of Rs.5650 has been posted in the Return Inward Account as Rs.5560 and in Mr. a/c as Rs.6,550. c. Salary paid Rs.6,000 has been posted to Rent account d. Cash received from Ram posted to Shyam account Rs.7,000 e. Cash received from Jadu Rs.8,640 has been posted to the debit of Madhu’s a/c Ans.DATE PARTICULARS L.F DR. CR.a. Suspense A/c. Dr. 15,000 15,000 To Sales A/c. (Being under casting of sales account rectifies)b. Mr. X A/c. Dr. 900 Return Inward A/c. Dr. 90 To Suspense A/c. 990 (Being wrong posting of return inward rectified)c. Salary A/c. Dr. 6000 To Rent A/c. 6000 (Being wrong posting of rent account rectified)d. Suspense A/c. Dr. 7000 To Ram A/c. 7000 (Being wrong posting of cash received rectified)e. Jadu A/c. Dr. 8640 To Madhu A/c. 8640 (Being wrong debit of madhu account rectified)
Set- 2Q1. Distinguish between Management Accounting and Financial Accounting?Ans. Distinction between Financial Accounting and Management AccountingFinancial accounting is the preparation and communication of financial information to outsiderssuch as creditors, bankers, government, customers and so on. Another objective of financialaccounting is to give complete picture of the enterprise to shareholders. Management accountingon the other hand aims at preparing and reporting the financial data to the management onregular basis. Management is entrusted with the responsibility of taking appropriate decisions,planning, performance evaluation, control, management of costs, cost determination etc., Forboth financial accounting and management accounting the financial data is the same and thereports prepared in financial accounting are also used in management accounting But thefollowing are major differences between Financial accounting and Management accounting. Financial accounting Management accountingThe primary users of financial accounting Top, middle and lower level managers use theinformation are shareholders, creditors, information for planning and decision makinggovernment authorities, employees etc.Accounting information is always expressed in Management accounting may adopt anyterms of money measurement unit like labour hours, machine hours or product units for the purpose of analysisFinancial data is presented for a definite period, Reports are prepared on continuous basis,say one year or a quarter monthly or weekly or even dailyFinancial accounting focuses on historical data Management accounting is oriented towards futureFinancial accounting is a discipline by itself and Management accounting makes use ofhas its own principles, policies and conventions other disciplines like economics, management, information system, operation research etc.,
Q2. Enter the following transactions in the single column cash book of Gopichand.March, 20031st Commenced business with cash 200002nd Bought goods for cash 50003rd Sold goods for cash 40004thGoods purchased from Ravi Kumar 1000010thPaid to Ravi Kumar 700014thCash sales 800018thPurchased furniture for office 400022nd Paid wages 50025thPaid rent 60030thReceived Commission 400030th Withdrew for personal purpose 100031stPaid salary 900Hint:Goods Purchased from Ravi Kumar is a credit purchaseBalance c/f should be 17000Ans. Single column cash book of GopichandDate Receipt Cash Date Payments CashMARCH MARCH2003 20031ST To Capital 20,000 2nd By Goods 5,0003rd To Sales 4,000 10th By Ravi 7,000 Kumar14th To Sales 8,000 18th By Office 4,000 Furniture30th To 4,000 22nd By Wages 500 Commission 25th By Rent 600 th 30 By Drawings 1,000 31st By Salary 900 st 31 By Bal. c/d. 17,000 36,000 36,000
Q3. What is cash flow statement and how is the cash flow statement subdivided?Ans.Cash flow statement, also known as Statement accounting for variations in cash, Where Got Where GoneStatement. It shows the movement of cash and their causes during the period underconsideration. The statement is significant to the stakeholders of the company and is preparedto show the impact of financial policies and procedures on the cash position. It takes into accountall the transactions that have a direct impact upon cash and cash equivalent.According to Accounting Standard 3 (Revised) method cash flow statement is sub divided intothree parts: (i) cash flow from operating activities (ii) cash flow from investing activities (iii) cash flow from financing activities. 1. Cash flow from Operating Activities: Operating activities are the principal revenue producing activities of the enterprise. Therefore,they generally result from the transactions and other events that enter into the determinationof net profit or loss. The amount of cash flows arising from operating activities is a key indicator ofthe extent to which the operations of the enterprise have generated sufficient cash flows tomaintain the operating capability of the enterprise, pay dividends, repay loans and make newinvestments without recourse to external source of financing. Information about the specificcomponents of future operating cash flows is useful in conjunction with other information inforecasting future operating cash flows.Computation of Operating Profit before Working capital changes:The Net Profit shown in the Profit and Loss Account will have to be adjusted for non-cash itemsFor find out operating profit before working capital changes. Some if these items are as follows: i. Depreciation:Depreciation does not result in outflow of cash and, therefore, net profit willHave to be increased by the amount of depreciation or development rebate charged, in order tofind out the real cash generated from operations.
ii. Amortization of intangible assets:Goodwill, preliminary expenses, etc., when written off should therefore, be added back to profitsto find out the cash from operations. iii. Loss on Sale of fixed assets:It does not result in outflow of cash and, therefore, should be added back of profits. iv. Gains from sale of fixed assets:Since a sale of fixed assets is taken as a separate source of cash, it should be deducted from netprofits. v. Creation of reserves:If profit for the year has been arrived at after charging transfers to reserves, such transfers shouldbe added back to profits. If cash operations show a net loss, such net loss after makingadjustments for non-cash items will be shown as an application of cash. Thus cash fromoperations is computed on the pattern of computation of Funds from operations.Cash generated from Operations To find the cash from operations, adjustments will have to be made for µchanges in currentassets and current liabilities arising on account of operations. Any decrease in current assets or any increase in current liabilities between two periods should be added back to Operating profit before working capital changes. Likewise any increase in current assets or any decrease in current liabilities should be deducted from Operating profit before working capital changes to arrive at cash generated from Operations.
Computation of Net Cash Flow from Operating Activities: From cash generated from operations Income tax paid, cash flow from extraordinary items(if any) should be adjusted (subtracted) to arrive at Net cash flow from operating activities. 2. Cash Flow from Investing Activities Transactions like purchase or sale of fixed assets proceeds from sale of equipments, Interest onInvestment received, Dividends received are recorded. 3. Cash Flow from Financing Activities Transactions such as proceeds from issue of shares, debentures, proceeds from long term loans,repayment of long term loans, Interest paid on debentures, dividend paymentto equity, preference share holders are shown to arrive at net cash used in financing activities.Purchase of plant and machinery on lease or hire purchase should be shown separately asdeferred credit. However the cost of machinery purchased will be shown as application of cash.Computation of Net Increase in Cash and Cash Equivalent The net cash flow from operating, investing and financing activities is added to arrive at netincrease in cash and cash equivalent. To this cash and cash equivalent at the beginning ofthe period is added to get cash and cash equivalent at the end of the period.
Q4. A large retail stores makes 25% of its sales for cash and the balance on 30 days net.Due to faulty collection practice, there have been losses from bad debts to the extent of 1 %of credit sales on average in the past. The experience of the store tells that normally 60 %of credit sales are collected in the month following the sale, 25% in the second followingmonth and 14 % in the third following month. Sales in the preceding three months havebeen January 2007 Rs.80,000, February Rs.1,00,000 and March Rs.1,40,000. Sales for thenext three months are estimated as April Rs.1,50,000, May Rs.1,10,000 and JuneRs.1,00,000. Prepare a schedule of projected cash collection.Hint: Cash Receipts: April Rs. 1,27,650, May Rs. 1,31,750, June Rs. 1,17,325Ans. Statement of expected Cash ReceiptsCollections from April May JuneCash Sales 37,500 27,500 25,000Collections From Debtors- January 8,400 - - February 18,750 10,500 - March 63,000 26,250 14,700 April - 67,500 28,125 May - - 49,500Total 127,650 131,750 117,325
Assume that the credit policy is enforced strictly, what would be the cash receiptsCash Sales:Debtors 37,500 27,500 25,000March 105000 - -April - 112500 -May - - 82500Total 142,500 140,000 107,500Forecasts of cash payments:The items of expenditures differ from business to business. The normal items which come underthe lists are:1. Cash purchases2. Payment to creditors or suppliers3. Payments to Bills payable4. Payment to employees in the nature of wages, salaries5. Manufacturing, selling and distribution and administration expenses6. Repayments of bank load and special obligations such as bonus, donations, advances
7. Interest and dividend payments8. Capital expenditures for acquiring assets of enduring benefit9. Payment of tax liability10. Other expenses of periodic natureThe quantum of amount likely to be spending on the above each item is generally determinedwith reference to functional budgets of the concerns. The policy of the management will alsoplay a crucial role. It is the policy which determines the ratio of cash purchases and creditpurchases. In many cases, the time lag affects the amount of expenditures to be incurred in aparticular period. The formula adopted for the expenses payable in next month is: month’samount x time lag.
Q5. What are the guidelines that deal with reserve for discount on debtors? What are Baddebts also mention the accounting treatment of bad debts.Ans. Reserves for Discount on DebtorsThere are two types of discounts allowed to customers in a business. One is trade discount andthe other is cash discount. After anticipating the amount of cash discount allowable, a provisionis made in the current year itself. In the subsequent years, the actual discount allowed is setoff against the provision for discount on debtors. Every year, the amount of provision fordiscount on debtors is deducted from the profits.The following guide lines may be kept in mind while dealing with the reserve for discounton debtors1. If a reserve for discount on debtors do not exist and cash discount is allowed then transfer thediscount to P&L account.2. Any fresh reserve for discount on debtors is to be made, debit the P&L Account with theamount of reserve.3. If provision for discount on debtors exists at the time of providing discount, then write off thediscount from the provision already made for the purpose.4. New provision should then be calculated and only as much as required to bring the existingprovision to the new figure should be debited to P&L Account.5. If the new provision required is lower than the provision already existing (old), then thedifference shows profit and transfer the same to P&L Account.Bad Debts Bad debts are those debts which are not recovered. Bad debts form loss to the business andreduce the amount of debtors .Since bad debts are losses, they are debited and the debtor’saccount is credited. If bad debts are recovered, cash account is debited and bad debts recoveredaccount is credited.
Accounting treatment of Bad debts:A. If bad debts are identified and shown in trial balance:B. If bad debts are shown outside the trial balance: This denotes bad debts that they were identified after the preparation of Trial Balance. Twoadjustments should be incorporated.Example:The sundry debtors for the year 2005 are Rs.50000. The bad debts amounted toRs.4000 as on 31-12-2005 already shown in the trail balance. Write off further bad debtsRs.5000. Show how theabove internal adjustments appear in the Profit and loss account and Balance Sheet.Solution: Bad debts shown in the trial balance is Rs.4000 and not shown in the trial balance isRs.5000.Toincorporate those bad debts not yet shown in the trial balance.
Q6. Prepare a Statement of changes in working capitals fromthe following information.Particulars April 1 March 31Share Capital 50,000 50,000Retained earnings 14,000 48,000Fixed Assets at cost 80,000 90,000Provision for Depreciation on Fixed Assets 22,000 27,000Investments in shares of subsidiaries 15,000 15,000Government securities 6,0000 12,0008% Debentures (redeemable in 5 equal annual installment of 20,000 -Rs.20,000 each, from the current yearPrepaid expense 21,000 4,000Outstanding expenses 5,000 12,000Creditors and Bills Payables 30,000 25,000Debtors and Bills Receivables 18,000 20,000Cash and Bank balances 5,000 13,000Provision for Doubtful Debts 4,000 2,000Prepare Statement of Changes in Working CapitalNote: If the investments are in the form of Government Securities, it is treated as currentassets.Hint: working capital: Balance as on April1st 11000 and 31st March 20000.
Ans. Statement of changes in working capital during the yearDETAILS BALANCE AS ON EFFECT ON W.C APRIL 1ST MARCH INCREASE DECREASE 31STCURRENT ASSETSCASH & BANK BALANCE 5000 13000 8000 ---------------DEBTORS & B.R. 18000 20000 2000 ---------------GOVT. SECURITIES 6000 12000 6000 ---------------PREPAID EXPENSES 21000 14000 -------------- 7000TOAL SAY A. 50000 59000 -------------- ---------------CURRENT LIABILITIESOUTSTANDING EXPENSES 5000 12000 --------------- 7000CREDITORS & B.P. 30000 25000 5000 ----------------PROVISION FOR DOUBTFUL 4000 2000 2000 ----------------DEBTSTOTAL SAY B. 39000 39000 ---------------- ----------------WORKING CAPITALA MINUS B 11000 20000 ---------------- ----------------NET INCREASE IN WORKING 9000 --------------- ------------------ 9000CAPITAL 20000 20000 23000 23000