The document provides a comprehensive overview of management accounting, including definitions, principles, and various analytical techniques such as ratio analysis, fund flow statements, and cash flow statements. It discusses the relationship between management, accounting, and decision-making processes, highlighting the importance of financial information for internal management. Additionally, it outlines the sources and applications of funds in the context of financial analysis and control.

1. MANAGEMENT ACCOUNTING
RATIO ANALYSIS
BY:
SMT.UMA MINAJIGI REUR
HEAD, DEPT. OF COMMERCE & MANAGEMENT
SMT. V G DEGREE COLLEGE FOR WOMEN, KALABURAGI

2. MANAGEMENT
ACCOUNTING
B.COM SIXTH SEMESTER
&
BBA FOURTH SEMESTER
6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING

3. B.COM SIXTH SEMESTER
6.3: PRINCIPLES OF MANAGEMENT ACCOUNTING
Unit I: Management Accounting (08 Hours):
Definition and objectives of Management Accounting - Relationship between Cost, Financial and Managerial Accounting.
Unit II : Financial Statements (15 Hours):
Nature, uses and limitations. Analysis and interpretations – meaning, procedure, objectives, and importance. Comparative
statement, Common Size Statements and Trend Analysis - practical problems.
Unit III: Ratio Analysis (15 Hours):
Definition and meaning of Ratio Analysis, importance and limitations, Profitability Ratio – Gross profit Ratio, operating
Ratio, Overall profitability ratio – Earning per share. Turnover Ratios- Inventory Turnover Ratio, Debtors Turnover Ratio,
Debt collection period , Creditors Turnover Ratio, Debt payment period, Liquidity Ratio- current ratio, liquid ratio.
Financial positions and Leverage Ratios- Debt Equity Ratio, Proprietary Ratio - Problems thereon.
Unit IV: Analysis through Leverages (12 Hours):
Meaning- types of Leverages- operating – financial and combined leverages- problems thereon.
Unit V: Fund Flow Statement (15 Hours):
Meaning , uses and limitations – preparation of fund-flow statement. Cash Flow Statement: Meaning and preparation of
Cash flow statement- problems thereon.

4. Management Accounting
The term Management Accounting consists of two words: “Management” and “Accounting”.
Management is a technique of managing men. Its an art of getting things done by others.
Hence, for a successful execution of all activities, management has to to take various decisions
at every level. To take proper decisions, correct information is required. Such information is
provided by accounting.
Accounting is the process of identifying, measuring and communicating economic information
to management and outsiders. Such information’s help management to take decisions.
Management Accounting is the process of identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of financial information in order to plan the
formulation of policies to plan and control the operations of the controlling of business
operations.

5. Definition:
J.S. Batty defines, “Management accounting is the term used
to describe the accounting methods, systems and techniques
which coupled with special knowledge and ability to assist
management in its task of maximising profit and minimising
losses.”
Management Accounting is a system for gathering data and
other financial information primarily for the internal needs of
management. It is designed to assist internal management in
the efficient formulation, execution and appraisal of business
plans.

6. Meaning of Funds Flow Statement:
It is a statement which discloses the analytical information about the different
sources of a fund and the application of the same in an accounting cycle.
It deals with the transactions which change either the amount of current assets and
current liabilities (in the form of decrease or increase in working capital) or fixed assets,
long-term loans including ownership fund.
It gives a clear picture about the movement of funds between the opening and closing
dates of the Balance Sheet. It is also called the Statement of Sources and Applications of
Funds, Movement of Funds Statement; Where Got-Where Gone Statement: Inflow and
Outflow of Fund Statement etc.
No doubt, Funds Flow Statement is an important indicator of financial analysis and
control. It is valuable and also helps to determine how the funds are financed. The
financial analyst can evaluate the future flows of a firm on the basis of past data.
Funds Flow Statement

7. Funds Flow Statement statement supplies an efficient method for
the financial manager in order to assess the
(a)growth of the firm,
(b)its resulting financial needs, and
(c)to determine the best way to finance those needs.
In particular, funds flow statements are very useful in planning
intermediate and long-term financing.

8. Sources of Funds:
Transactions which result in an increase in the amount of fund or
working capital are called sources of fund.
The following are the sources of funds:
1. Funds from operations, operating profit or trading profit.
2. Non operating incomes.
3. Refund of Income Tax (received).
4. Issue of Shares for cash or for any other current asset.
5. Issue of debentures for cash or for any other current asset.
6. Long term and medium term loans borrowed.
7. Long term or medium term deposits accepted.
8. Sale of long term investments for cash or for any other current asset.
9. Sale of fixed assets for cash or for any other current asset.

9. Application of Funds:
Transactions which result in decrease in fund are called uses or
applications of fund.
The following are the application of funds:
1. Funds lost in operations, operating loss or trading loss.
2. Non operating expenses.
3. Redemption of redeemable preference Shares for cash or for any other
current asset.
4. Redemption of debentures for cash or for any other current asset.
5. Redemption of Long term and medium term loans in cash or in any other
current asset.
6. Redemption of Long term or medium term deposits in cash or in any other
current asset.
7. Purchase of long term investments for cash or for any other current asset.
8. Purchase of fixed assets for cash or for any other current asset.
9. Drawings.

10. Preparation of Funds Flow Statement
1. Preparation of Statement of changes in working capital.
2. Preparation of Fixed Assets accounts.
3. Ascertain the funds from operations.
4. Finally preparation of Funds flow statement.

11. Funds Flow Statement
Sources of Funds Amount Amount
1. Funds from operations, operating profit or trading
profit.
2. Non operating incomes such as dividend
3. Issue of Shares for cash or for any other current asset.
4. Issue of debentures for cash or for any other current
asset.
5. Long term and medium term loans borrowed.
6. Long term or medium term deposits accepted.
7. Sale of long term investments for cash or for any other
current asset.
8. Sale of fixed assets for cash or for any other current
asset.
9. Decrease in Working Capital (as per statement of
schedule of changes in working capital)
X
X
X
X
X
X
X
X
X
Sources of Funds XX

12. Application of Funds Amount Amount
1. Funds lost in operations, operating loss or trading loss.
2. Non operating expenses such as dividend paid, income
tax paid, fines paid etc.
3. Redemption of redeemable preference Shares for cash
or for any other current asset.
4. Redemption of debentures for cash or for any other
current asset.
5. Redemption of Long term and medium term loans in
cash or in any other current asset.
6. Redemption of Long term or medium term deposits in
cash or in any other current asset.
7. Purchase of long term investments for cash or for any
other current asset.
8. Purchase of fixed assets for cash or for any other
current asset.
9. Drawings.
10. Increase in Working Capital (as per statement of
schedule of changes in working capital)
X
X
X
X
X
X
X
X
X
X
Application of Funds XX

13. Treatment of various items:
Provision for taxation: It will appear in Statement of changes of Working Capital.
No further treatment in Funds Flow Statement
Proposed Dividend: It will appear in Statement of changes of Working Capital.
No further treatment in Funds Flow Statement
Interim Dividend: It adds back to profit in funds from operations.
It appears on application side of Funds Flow Statement

14. Illustration 15:
The following are the statement of Assets and Liabilities of a concern as on 31-12-2017 and 2018. Prepare statement of
schedule of changes in working capital.
Statement of Assets & Liabilities
Particulars 31-12-2017 31-12-2018
Amount Amount Amount Amount
I. Equity & Liabilities
1. Shareholders fund
Share Capital 1,00,000 1,20,000
Reserves & Surplus 13,500 1,13,500 41,700 1,61,700
2. Non-Current Liabilities
Long Term Borrowings -- 26,000
3. Current Liabilities
Trade Payables 33,500 36,400
Short Term Provisions 19,800 53,300 22,900 59,300
Total 1,66,800 2,47,000
II. Assets
1. Non-Current Assets
a. Fixed Assets
Tangible Assets 93,400 1,67,000
2. Current Assets
Inventories 36,500 38,000
Trade receivables 32,100 38,000
Cash & Cash Equivalents 4,800 73,400 4,000 80,000
Total 1,66,800 2,47,000
Depreciation written off during the year on machinery Rs.12,000 and on furniture Rs.400.

15. Notes to Accounts
Particulars 31-12-2017 31-12-2018
Amount Amount
Note 1: Share Capital
Equity Shares of Rs.10 each 1,00,000 1,20,000
Share Capital 1,00,000 1,20,000
Note 2: Reserves & Surplus
Share Premium -- 10,000
General Reserve 6,000 11,000
Profit & Loss 7,500 20,700
Reserves & Surplus 13,500 41,700
Note 3: Long Term Borrowings
8% Debentures -- 26,000
Long Term Borrowings 26,000
Note 4: Trade Payable
Sundry Creditors 33,500 36,400
Trade Payable 33,500 36,400
Note 5: Short Term Provisions
Provision for Taxation 9,800 10,900
Proposed Dividend 10,000 12,000
Short Term Provisions 19,800 22,900

16. Particulars 31-12-2017 31-12-2018
Amount Amount
Note 6: Tangible Assets
Land & Building 55,400 1,13,200
Machinery 35,600 51,300
Furniture 2,400 2,500
Tangible Assets 93,400 1,67,000
Note 7: Inventories
Stock 36,500 38,000
Inventories 36,500 38,000
Note 8: Trade Receivables
Sundry Debtors 32,100 38,000
Trade Receivables 32,100 38,000
Note 10: Cash & Cash Equivalents
Cash 4,800 4,000
Cash & Cash Equivalents 4,800 4,000

17. Solution:
Statement of schedule of changes in working capital
Particulars 2017 2018 Increase in
Working
Capital
Decrease in
Working
Capital
A. Current Assets
Inventories
Trade Receivables
Cash & Cash
Equivalents
B. Current Liabilities
Sundry Creditors
Provision for Tax
Working Capital (A-B)
Increase in Working
Capital
36,500
32,100
4,800
73,400
38,000
38,000
4,000
80,000
1,500
5,900
33,500
9,800
53,300
36,400
10,900
59,300
7,400
2,900
1,100
800
20,100
600
20,700
20,700
20,700 7,400 7,400
6,800
600
Total Current Assets
(A)
Proposed Dividend 10,000 12,000 2,000
Total Current Liabilities
(B)

18. Funds from Operations
Profit as per profit & Loss A/c (Closing balance) 20,700
Add: Non Cash/ Non Operating expenses
1. Transfer to any reserves (Increase in GR) (11,000 – 6,000) 5,000
2. Depreciation on Building 12,000
3. Depreciation on Furniture 400 17,400
31,800
Less: Non Cash/ Non Operating Incomes
Profit as per P & L A/c (opening balance) 7,500
Net funds from operations 30,600
Particulars Amount
Amount

19. Calculation of Fixed Assets a/c :
Adjustments: Depreciation Rs.12,000 on Machinery and Rs.400 on Furniture.
Land & Buildings A/C
Opening Value of fixed asset 55,400
Less: Closing value of fixed asset 1,13,200
Purchase of Land & Building 57,800
Machinery A/C
Opening Value of fixed asset 35,600
Less: Depreciation 12,000
Written down value 23,600
Less: Closing value of fixed asset 51,300
Purchase of Machinery 27,700
Furniture A/C
Opening Value of fixed asset 2,400
Less: Depreciation 400
Written down value 2,000
Less: Closing value of fixed asset 2,500
Purchase of Furniture 500
Particulars 2016 2017
Fixed Assets:
Land & Buildings
Machinery
Furniture
55,400
35,600
2,400
1,13,200
51,300
2,500

20. Funds Flow Statement
Sources of Funds
Issue of Share Capital 20,000
Share Premium 10,000
Issue of Debentures 26,000
Funds from operations 30,600 86,600
Application of Funds
Purchase of Machinery 27,700
Purchase of Land & Building 57,800
Purchase of Furniture 500
Increase in Working Capital 600 86,600
Particulars Amount
Amount

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