MB0041- FINANCIAL AND MANAGEMENT ACCOUNTING

ASSIGNMENT

DRIVE	SUMMER 2015
PROGRAM	MBADS / MBAHCSN3 / MBAN2 / PGDBAN2 / MBAFLEX
SEMESTER	I
SUBJECT CODE & NAME	MB0041- FINANCIAL AND MANAGEMENT ACCOUNTING
BK ID	B1624
CREDITS	4
MARKS	60

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

Q.1 Inventory in a business is valued at the end of an accounting period, at either cost or market price, whichever is lower. This is accepted convention or a practice in accounting.  Give a small introduction on accounting conventions and elucidate all the eight accounting conventions.

Answer : Accounting convention :

Guidelines that arise from the practical application of accounting principles. An accounting convention is not a legally-binding practice; rather, it is a generally-accepted convention based on customs, and is designed to help accountants overcome practical problems that arise out of the preparation of financial statements. As customs change, so to will accounting conventions. If an oversight organization, such as the Securities and Exchange Commission (SEC) or the Financial Accounting Standards Board (FASB) set forth a guideline that addresses the same topic as the accounting convention, the accounting convention will no longer be applicable.

Explanation of all the 8 types of conventions  :

The various kinds of convention include:

1. Consistency:

It states that accounting method used in one accounting period should be the same as the method used for events or transactions which are materially similar in other period (i.e. accounting practices should remain unchanged from period to period ). This also involves treatment of transaction and valuation method. Consistency is also advisable so that the comparison of accounting figures over time is meaningful. Consistency also states that if a change becomes necessary, the change and its effect should be clearly stated.

2. Materiality:

An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investors. An item is also considered material if its omission or misstatement could distort the financial statement such that it influences the economic decision of users taken on the basis of financial statement.

3. Prudence or conservatism:

This is an accounting practice that emphasizes great care in the anticipation of possible gains while possible losses are efficiently provided for. Prudence requires an accountant to attempt to ensure that the degree of success is not overstated. It also makes provision for possible bad and doubtful debts out of current year’s profit.

4. Objectivity:

This convention states that the financial statement should be made on verifiable evidence.

5. Disclosure:

It states that information relating to the economic affairs of the enterprise which are of material interest should be clearly disclosed to the readers.

6. Monetary measurement:

               

Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for (unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership, brand recognition, quality of management etc.

7. Separate Entity:

               

This convention seeks to ensure that private transactions and matters relating to the owners of a business are segregated from transactions that relate to the business.

8. Dual aspect concept:

This concept ensures that transaction are recorded in books at least in two accounts, if one account is debited it’s also credited with the same amount in a different account. The recording system is also known as double entry system. Assets = Liabilities + Capital.

Q. 2 Write down a table with the accounts involved / the nature of account/its affects/ debit or

credit. Please have the transactions given below and prepare the table as per the instructions given above

for each transaction.

a. 1.1.2011 Sunitha started his business with cash Rs. 5,00,000

b. 2.1.2011 Borrowed from Malathi Rs. 5,00,000

c. 2.1.2011 Purchased furniture Rs. 1,00,000

d. 4.1.2011 Purchased furniture from Meenal on credit Rs. 1,50,000

e. 5.1.2011 Purchased goods for cash Rs. 50,000

f. 6.1.2011 Purchased goods from Ram on credit Rs. 2,50,000

g. 8.1.2011 Sold goods for cash Rs. 1,25,000

h. 8.1.2011 Sold goods to Shyam on credit Rs. 55,000

i. 9.1.2011 Received cash from Shyam Rs. 25,000

j. 10.1.2011 Paid cash to Ram Rs. 90,000

Answer :The each transaction  as per the instructions gicen below:

Sl No	Accounts involved	Nature of Account	Affects	Debit/Credit
a	Cash A/c Capital A/c	Real Personal	Cash is Coming in Sunitha is the giver	Debit Credit
b	Cash A/c Loan from Malathi	Real Personal	Cash is Coming in Malathi is the giver	Debit Credit
c	Furniture A/c Cash A/c	Real Real	Furniture is Coming in Cash is going out	Debit Credit
d	Furniture A/c Meenal A/c	Real Real	Furniture is Coming in Meenal is going out	Debit Credit
e	Purchase A/c Cash A/c	Nominal Real	Purchase is an expensive Cash is going out	Debit Credit
f	Purchase A/c Ram’s A/c	Nominal Personal	Purchase is an expensive Ram is the giver	Debit Credit
g	Cash A/c Sales A/c	Real Personal	Cash is coming in Sales is revenue	Debit Credit
h	Shyam’s A/c Sales A/c	Personal Nominal	Shayam is the receiver Sales is the revenue	Debit Credit
i	Cash A/c Shyam’s A/c	Real Personal	Cash is  coming in Shyam is the giver	Debit Credit
j	Ram’s A/c Cash A/c	Personal Real	Ram is the receiver cash is going out	Debit Credit

3 .The following items are found in the trial balance of M/s Sharada Enterprise on 31st December, 2000.

Sundry Debtors Rs.160000

Bad Debts written off Rs 9000

Discount allowed to Debtors Rs. 1800

Reserve for Bad and doubtful Debts 31-12-1999 Rs. 16500

Reserve for discount on Debtors 31-12-1999 Rs. 3200

You are required to provide the bad and doubtful debts at 5% and for discount on debtors at 2%. Show the adjustments for bad debts, bad debts reserve, discount account, and provision for discount on debtors.

Hint: RBD to be provided = 500

Reserve for discount to be provided now =1640

(Calculation of amount debited to P/L a/c towards RBD 3 marks ; calculation of amount debited to P/L a/c towards reserve for discount on debtors 5 marks; conclusion with summary 2 marks)

Answer : Solution:

The amount debited to P&L account towards RBD is computed as follows:

Old RBD            = Rs.16500

(-) Bad debts    = Rs. 9000

Balance             = Rs. 7500

New RBD @5%on 160000   = Rs. 8000

RBD to be provided               = Rs.500(8000-7500)

The amount debited to P&L account towards Reserve for Discount on Debtors is computed as follows:

Good Debtors            = Rs. 160000-Rs. 8000(New RBD) = Rs. 152000

Old Reserve for discount on Drs= Rs. 3200

Less Discount on Drs= Rs. 1800

Balance Reserve                               = Rs.1400

New Reserve for Discount at 2% on good Drs 152000 = Rs. 3040

Reserve for Discount to be provided now                       = Rs. 1640(3040-1400)

In the balance sheet, the Sundry debtors are reduced by bad debts shown outside the trial balance, the new RBD, discount on debtors shown outside the trial balance, the new RBD, discount on debtors shown outside the trial balance and the new Reserve for discount on debtors.

Q.4  The reports prepared in financial accounting are also used in the management accounting. But there are few major differences between financial accounting and management accounting.

Explain the differences between financial accounting and management accounting in various

dimensions.

Answer : Differences between the financial and management accounting  :

Financial accounting is the preparation and communication of financial information to outsiders such as creditors, bankers, government, customers etc. Another objective of financial accounting is to give complete picture of the enterprise to shareholders. Management accounting on the other hand aims at preparing and reporting the financial data to the management on regular basis. Management is entrusted with the responsibility of taking appropriate decisions, planning, performance evaluation, control, management of costs, cost determination, etc. For both financial accounting and management accounting the financial data are the same. The reports prepared in financial accounting are also used in management accounting but there a few major differences between financial accounting and management accounting.

Difference between Financial Accounting and Management Accounting

Dimension	Financial accounting	Management Accounting
Users	The primary users of financial accounting information are external users like shareholders, creditors, government authorities, employees etc.	The primary uses of management accounting are internal users like top, middle, and lower level management.
Purpose	Reporting financial performance and financial position to enable the users to take financial decisions.	To help the management in planning, decisions making, monitoring, and controlling.
Need	It is a statutory requirement. What to report, how to report, how much to report, when to report, in which form to report, etc, are stipulated by law or standard.	It is optional. What to report, how to report, how much to report, when to report, in which form to report, etc., are decided by the management as per the needs of the company or management.
Expression of information	Accounting information is always expressed in terms of money.	Management accounting may adopt any measurement unit like labor hours, machine hours, or product units for the purpose of analysis.
Reporting timing and frequency	Financial data is presented for a definite period, say one year or a quarter.	Reports are prepared on a continuous basis, monthly, weekly or even daily.
Time perspective	Financial accounting focuses on historical data	Management accounting is oriented towards the future.
Sources of principles	Financial accounting is a discipline by itself and has its own principles, policies and conventions (GAAP)	Management accounting makes use of other discipline like economics, management, information system, operational researches.
Reporting entity	Overall organization	Responsibility centers within the organization.
Form of reports	Income statement ( profit and Loss a/c) balance sheet cash flow statement	MIS reports performance reports control reports, cost statements, variance statements, budgets, estimate statements flowcharts.

Q.5 Draw the Balance Sheet for the following information provided by Sandeep Ltd..

a. current ratio : 2.50

b. liquidity ratio : 1.50

c. net working capital : 300000

d. stock turnover ratio : 6 times

e. Ratio of Gross Profit to Sales : 20%

f. Fixed Asset Turnover Ratio                : 2 times

g. Average Debt collection period          : 2 months

h. Fixed Assets to Net Worth : 0.80

i. Reserve and Surplus to Capital: 0.50

Answer:

A Preparation of Balance sheet

                                                                                Balance Sheet

Liabilities	Rs.	Assets	Rs
Capital	500000	Fixed Assets	600000
Reserves and Surplus	250000	Inventories	200000
Long-term Debt	150000	Debtors	250000
Current Liabilities	200000	Bank	50000
Total	1100000	Total	1100000

                                                                                Working Notes

If current Liabilities                                  =1 Current Assets                                          = 2.5 Working capital (2.5 -1)                           = 1.5 Therefore Current Assets (2.5/1.5) * 300000 Current Liabilities (1/1.5) * 300000

= 300000 = 500000 = 200000

Liquidity Ratio                                  =1.5 Current Liabilities                            = 200000 Therefore Current Liquid Asset (200000*1.5) Inventories (Current Asset – liquid asset )

= 300000 = 200000

Stock Turnover ratio                  = 6times Cost of sales (6*200000) Gross Profit ratio                             = 20% Gross profit If sales is 100; gross profit  is 20 Hence cost of sales is (100-20) =80 Therefore Gross Profit is (20/80) * 1200000 Sales (cost of sales + Gross profit )

=1200000 = 300000 = 1500000

Fixed Assets turnover ratio      =2 times (cost of sales/fixed assets) Therefore Fixed Assets (1200000*2)

=600000

Debtor’s collection Period    = 2times (Month in a year /Debtor’s turnover) Debtor’s Turnover ratio (12/2)     =6times ( Sales/Debtors) Debtors ( 1500000/6)

= 250000

Fixed assets to shareholders net worth =0.80 Shareholder’s Net worth (600000/0.80)

= 750000

Reserves and surplus to capital  =0.50 If capital is 1: reserves and surplus is 0.5 Reserves and Surplus +capital = Shareholder’s net worth (0.5+1=1.5) Reserves and surplus (7500000*(0.5/1.5) Therefore share capital

= 250000 =500000

Q.6  Write the main differences between cash flow analysis and fund flow analysis. 

Following is the balance sheet for the period ending 31st   March 2011 and 2012. If the current

year’s net loss is Rs.38,000, Calculate the cash flow from operating activities.

		31st march
	2011	2012
Short-term loan to employees	15000	18000
creditors	30000	8000
Provision for doubtful debts	1200
Bills payable	18000	20000
Stock in trade	15000	13000
Bills receivable	10000	22000
Prepaid expenses	800	600
Outstanding expenses	300	500

Answer : Differences between cash flow and fund flow analysis

Cash Flow Analysis	Fund Flow Analysis
It is concerned only with the change in cash position.	It is concerned with change in working capital position between two balance sheet dates.
It is merely a record of cash receipts and disbursements	Net effect of receipts and disbursement are recorded.
Cash is part of working capital and therefore an improvement in cash position results in improvement in the funds position	An improvement in funds positions   need not result in improvement in cash position
It is cash based	It is accrual based

b.Preparation of statement showing cash flow from operating activities :

Answer : Statement showing cash flow from operating activities

Net Loss		(38,000)
Add: Decrease in current assets
Decrease in stock	2,000
Decrease in prepaid expenses	200
Increase in current liabilities
Increase in outstanding expenses	200
Increase in bills payable	2,000	+4.400
		(33,600)
Less: Increase in current assets
Increase in short-term loan to the employee	3,000
Increase in bills receivable	10,000
Decrease in creditors	22,000
Decrease in provision for doubtful debts	1,200	(36,200)
Net cash lost in operating activities		(69.800)