Master of
Business Administration – MBA Semester 1
MB0041 –
Financial and Management Accounting – 4 Credits
(Book ID: B1130)
Assignment
Set – 1 (60 Marks)
Q1). The
Balanced Score Card is a framework for integrating measures derived from
strategy. Take an Indian company which has adopted
balance score card successfully and explain how it had derived benefits out of
this framework.
Answer:
TATA motors have adopted balance score card framework
successfully and yields benefits from that.
Case Study: TATA Motors CVBU (Commercial Vehicle
Business Unit)
“TATA Motors Commercial Vehicle Business Unit enhances
balanced scorecard framework”.
Tata Motors is the largest and most prominent market
leader in the manufacture of commercial business vehicles in India
Subsequently, the executive director of CVBU, Mr. Ravi
Kant, called for stringent cost cutting across unit operations, supported by
more effective formulation and execution of strategy. To augment this process,
the management of Tata Motors resolved to adopt the Balanced Scorecard and
Performance Framework as the key tool in the endeavor to rebuild the
Organizational Performance Chart. The challenge here was to undertake
deployment of the Balanced Scorecard across all the functional units and
departments of the CVBU.
Soon, however, with the process underway, the real
problem revealed itself. It turned out that the manual nature of the review
procedures of such a huge structure was well neigh impossible, being, at best,
extremely difficult to implement and incredibly time consuming. A watertight
solution was needed; quickly. After further examination of the situation, a
decision was taken to implement a Balanced Scorecard Automation Tool that would
centralize, integrate and collate the data, providing rapid review and
analytical functionality and presenting a rapid and comprehensive one view
picture of organizational performance.
Commencing this process, the CVBU management reviewed
many solution providers and evaluated each of them upon the basis of a variety
of diverse factors. At the end of this exhaustive process, a solution was
decided in the form of COVENARK Strategist, a prominent Balanced Score Card
Automation Tool developed by MPOWER Information Systems to integrate with the
existing ERP and legacy systems with the help of data integration suite.
The results were immediate and spectacular. Within two
years of this, CVBU had turned over to register a profit of Rs. 107 Million
from the loss of Rs. 108.62 Million, accounting for a whopping 60% of TATA
Motors inventory turnover. The success path of Balanced Score Card did not stop
here. In the beginning CVBU has started the Balanced Scorecard with only
Corporate Level Scorecard; at this time they have expanded it to six Hierarchical
Levels with three hundred and thirty one Scorecards, additionally looking
forward to proliferate it to the lowest level of organizational structure. In
this way, balanced scorecard framework played a vital role in the success story
of TATA Motors CVBU.
Q2). What is
DuPont analysis? Explain all the ratios involved in this analysis. Your answer
should be supported with the chart.
Answer:
A method of performance measurement that was started
by the DuPont Corporation in the 1920. With this method, assets are measured at
their gross book value rather than at net book value in order to produce a
higher return on equity (ROE). It is also known as “DuPont identity”.
DuPont analysis tells us that ROE is affected by three
things:
1.Operating efficiency, which is measured by profit
margin
2.Asset use efficiency, which is measured by total
asset turnover
3.Financial leverage, which is measured by the equity
multiplier
ROE = Profit Margin (Profit/Sales) * Total Asset
Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
Investopedia explains DuPont Analysis
It is believed that measuring assets at gross book
value removes the incentive to avoid investing in new assets. New asset
avoidance can occur as financial accounting depreciation methods artificially
produce lower ROEs in the initial years that an asset is placed into service.
If ROE is unsatisfactory, the DuPont analysis helps locate the part of the
business that is under performing.
The DuPont System expresses the Return on Assets as:
ROA = OPM * ATR
The Operating Profit Margin Ratio is a measure of
operating efficiency and the Asset Turnover Ratio is a measure of asset use
efficiency.
The DuPont System expresses the Return on Equity as:
ROE = (ROA – Interest Expense/Average Assets) * EM
The Equity Multiplier is a form of leverage ratio and
measures financial efficiency.
Below figure shows the DuPont Analysis for a farm
operation
Figure: DuPont Analysis for Farm Operations
DuPont Analysis for Two Farms
Sr.No.
Farmer A
Farmer B
1
Operating
profit margin ratio 0.30 0.12
2
Asset turnover
0.20 0.36
3
ROA (1*2) 0.060
0.043
4
Interest
expense to avg. farm assets 0.05 0.03
5
Equity
multiplier 2.00 1.50
6
ROE (3-4) * 5
0.02 0.02
Farmer A and Farmer B each have a 2 % ROE. The
components of the ratios indicate that the sources of the weakness of the farms
are different. Farmer A has a stronger profit margin ratio but lower asset
turnover compared to Farmer B. Furthermore, Farmer A has a higher leverage
ratio than Farmer B.
The weak ratios for each farm may be decomposed into
components to determine the potential sources of the weakness. To improve asset
turnover Farmer A needs to increase production efficiency or price levels or
reduce current or noncurrent assets. To improve profit margins, Farmer B needs
to increase production efficiency or price levels more than costs or reduce
costs more than revenue.
The DuPont analysis is an excellent method to
determine the strengths and weaknesses of a farm. A low or declining ROE is a
signal that there may be a weakness. However, using the analysis you can better
determine the source of weakness. Asset management, expense control, production
efficiency or marketing could be potential sources of weakness within the farm.
Expressing the individual components rather than interpreting ROE itself may
identify these weaknesses more readily.
Q3). Accounting
Principles are the rules based on which accounting takes place and these rules
are universally accepted. Explain the principles of materiality and principles
of full disclosure. Explain why these two principles are contradicting each
other. Your answer should be substantiated with relevant examples.
Ans: Principle of materiality :
While important details of financial status must be
informed to all relevant parties, insignificant facts which do not influence
any decisions of the investors or any interested group, need not be
communicated. Such less significant facts are not regarded as material facts.
What is material and what is not material depends upon the nature of
information and the party to whom the information is provided. While income has
to be shown for income tax purposes, the amount can be rounded off to the
nearest ten and fraction does not matter. The statement of account sent to a
debtor contains all the details regarding invoices raised, amount outstanding
during a particular period. The information on debtors furnished to Registrar
of Companies need not be in detail.
Principle of Full Disclosure
The business enterprise should disclose relevant
information to all the parties concerned with the organization. It means that
any information of substance or of interest to the average investors will have
to be disclosed in the financial statements.
The Companies Act, 1956 requires that income statement
and balance sheet of a company must give a fair and true view of the state of
affairs of the company.
If change has a material effect in current period and
the effect of change is ascertainable the amount of change should be disclosed.
??If the change has a material effect in current
period and the effect of change is not ascertainable wholly or in part, the
fact should be disclosed.
??If change has no material effect in current period
but which is reasonably accepted to have a material effect in later periods,
the fact of such change should be appropriately disclosed.
Materiality principle: Accountants follow the
materiality principle, which states that the requirements of any accounting
principle may be ignored when there is no effect on the users of financial
information. Certainly, tracking individual paper clips or pieces of paper is
immaterial and excessively burdensome to any company’s accounting department.
Although there is no definitive measure of materiality, the accountant’s
judgment on such matters must be sound. Several thousand dollars may not be
material to an entity such as General Motors, but that same figure is quite
material to a small, family-owned business.
Full disclosure means to disclose all the details of a
security problem which are known. It is a philosophy of security management
completely opposed to the idea of security through obscurity. The concept of
full disclosure is controversial, but not new; it has been an issue for
locksmiths since the 19th century. Full disclosure requires that full details
of security vulnerability are disclosed to the public, including details of the
vulnerability and how to detect and exploit it. The theory behind full
disclosure is that releasing vulnerability information results in quicker fixes
and better security. Fixes are produced faster because vendors and authors are
forced to respond in order to save face. Security is improved because the
window of exposure, the amount of time the vulnerability is open to attack, is
reduced. The full disclosure principle states that any future event that may or
will occur, and that will have a material economic impact on the financial
position of the business, should be disclosed to probable and potential readers
of the statements. Such disclosures are most frequently made by footnotes. For
example, a hotel should report the building of a new wing, or the future
acquisition of another property. A restaurant facing a lawsuit from a customer
who was injured by tripping over a frayed carpet edge should disclose the
contingency of the lawsuit. Similarly, if accounting practices of the current
financial statements were changed and differ from those previously reported,
the changes should be disclosed. Changes from one period to the next that
affect current and future business operations should be reported if possible.
Changes of this nature include changes made to the method used to determine
depreciation expense or to the method of inventory valuation; such changes
would increase or decrease the value of ending inventory, cost of sales, gross
margin, and net income or loss. All changes disclosed should indicate the
dollar effects such disclosures have on financial statements.
Q4) Explain any
two types of errors that are disclosed by trial balance with examples and
rectification entry.
Answer:
An error is an unintentionally committed mistake. When
the Trial Balance does not tally it is a clear indication that there are some
errors in the preparation of accounts. The errors may be committed at various
stages
Journalizing,
Posting,
Casting (totaling),
Balancing,
Transferring to trial balance and so on.
Mere tallying of the trial balance does not ensure an
error free statement. There are certain errors such as errors of omission,
error of principle and compensating errors are not disclosed by trial balance
while errors of casting, posting to wrong side of an account or posting a wrong
amount can be detected by trial balance.
Errors whether disclosed or not disclosed by trial
balance, have to be corrected or rectified in order to obtain the correct
picture of profit or loss. It should be remembered that errors will have their
impact not only on profit but also on the asset and liability position of the
business organization.
Posting a wrong amount: This mistake may occur while
posting an entry from subsidiary book to ledger.
Example: Cash received from Krupa Rs. 1250 is posted
to Krupa’s ledger account Rs. 1520, while it’s correct posted in cash a/c
Rectification entry:
Krupa account
Dr. Rs. 270
To Suspense a/c Rs. 270
Being excess credit given to Krupa a/c rectified.
Q5).
Distinguish between financial accounting and management accounting.
Answer:
Financial Accounting vs. Management Accounting
Business is a diverse field and involves knowledge in
various subjects. In business, one must know about finance, economics,
marketing, and accounting, among other things. Accounting is the most
challenging among them because it involves recording, summarizing, analyzing,
verifying and reporting the results of business and financial transactions.
Accounting also has various fields; two of the most
commonly used are Financial Accounting and Management Accounting. Listed below
are their features.
Financial Accounting
Financial accounting is concerned with the preparation
of financial statements for the use of the stockholders, suppliers, banks,
employees, government agencies and the owners of the business enterprise.
It is intended to aid in the reduction of problems
that may arise in the day to day transactions of the business. It publishes an
annual report that summarizes an organization’s financial data that are taken
from their records.
It is governed by local and international accounting
standards. Its main purpose is to produce financial statements, provide
information that can be used in the decision making and planning and to help an
organization meet regulatory requirements. It is a legal requirement of all
publicly traded organization.
Management Accounting
Management accounting is concerned in providing basis
for decision making and use of information by managers within an organization.
It helps identify, measure, accumulate, analyze and interpret information to be
used in planning, evaluation and control to ensure the proper use of an
organization’s resources.
It also provides financial reports to shareholders,
creditors, regulatory agencies and tax agencies. Management accounting involves
sales forecasting reports, budget and comparative analysis, feasibility studies
and merger or consolidation reports.
It is intended to provide information that is more a
forecast than a background, to managers within the organization, is
confidential and is computed by using information systems rather than general
financial accounting standards. It is used in strategic, performance and risk
management.
Management accounting has the following concepts:
Cost accounting which is a central element is
managerial accounting.
Grenzplankostenrechnung (GPK) which a German costing
method that provides ways on how to calculate costs that are assigned to a
product or service.
Lean accounting which is accounting for lean
enterprise.
Resource consumption accounting (RCA) which provides
managers with information to support an organization’s optimization.
Throughput accounting which recognizes modern
production processes’ need for each other.
Transfer pricing which is used in manufacturing and
banking.
Summary
Financial accounting is legally required from an organization,
while management accounting is not.
Financial accounting must be reviewed by a separate
accounting firm, while management accounting is not required of this.
Financial accounting is concerned about how the
financial resources of the organization will affect its performance, while
management accounting is concerned in how the reports will affect the behavior
and performance of its employees.
Financial accounting is governed by both local and
international accounting standards, while management accounting is not.
Financial accounting is historical in nature, that is,
the reports are based on an organization’s previous performance and dealings,
while management accounting is a forecast.
Q6). XYZ Ltd
provides the following information. Prepare a schedule of changes in working capital
XYZ Ltd provides the following information. Prepare a
schedule of changes in working capital
5 days ago by GEP Faculty 0 .Q. XYZ Ltd provides the
following information.
January 1
December 31
Sundry Debtors 65,000 1,05,000
Cash in hand 13,000 20,000
Cash at Bank 15,000 20,000
Bills Receivable 16,000 30,000
Inventory 90,000 84,000
Bills Payables 12,000 8,000
Outstanding expenses 6,000 5,000
Sundry Creditors 30,000 58,000
Bank Overdraft 30,000 42,000
Short term Loans 32,000 36,000
Prepare a schedule of changes in working capital
Hint: Net Working capital: Jan 1st 89000 and Dec31st
110000
Answer:
Schedule of changes in working capital:
|
|
Balance as on
|
|
Effect of WC
|
|
|
Details
|
Jan 1
|
Dec 31
|
Increase
|
Decrease
|
|
Current
Assets
|
|
|
|
|
|
Cash in hand
|
13,000
|
20.000
|
7,000
|
|
|
Cash at Bank
|
15,000
|
20,000
|
5,000
|
|
|
Sundry Debtors
|
65,000
|
1,05,000
|
40,000
|
|
|
Bills Receivable
|
16,000
|
30,000
|
14,000
|
|
|
Inventory
|
90,000
|
84,000
|
-
|
6,000
|
|
Total Current Assets(A)
|
1,99,000
|
2,59,000
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Sundry Creditors
|
30,000
|
58,000
|
-
|
28,000
|
|
Bills Payables
|
12,000
|
12,000
|
4,000
|
-
|
|
Outstanding expenses
|
6,000
|
6,000
|
1,000
|
-
|
|
Bank overdraft
|
30,000
|
42,000
|
-
|
12,000
|
|
Short term loans
|
32,000
|
36,000
|
-
|
4,000
|
|
Total Current Liabilities(B)
|
1,10,000
|
1,49,000
|
|
|
|
Working Capital (A)-(B)
|
89,000
|
1,10,000
|
|
|
|
Net Increase in working capital(balancing figure)
|
21,000
|
|
|
21,000
|
|
|
1,10,000
|
1,10,000
|
71,000
|
71,000
|
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