Sikkim Manipal University

Directorate of Distance Education

Q.1. The Balanced Score Card is a framework for integrating meas ures derivedfrom strategy. Take an Indian company which has ado pted balance score cardsuccessfully and explain how it had derived benefits out of this framework
Ans

The Balanced scorecard The Balanced Score Card is a framework for integrating measures derived from strategy. While retaining financial measures of past performance. The Balanced Score Card is more than a measurement system it can be used as an organizing framework for their management processes. The real power of the Balanced Score Card is when it is transformed from a measurement system to a management system. It fills the void that exists in most

management systems the lack of a systematic process to implement and obtain feedback about strategy

Case Study:-Godrej-GE Appliances Limited, Mumbai based consumer appliances. Godrej-GE manufacturing company has number of ongoing management initiatives for quality and cost savings which include six sigma, cost takeout and Target Ten etc. To integrate all the management initiatives under one umbrella, it adopted the balanced scorecard framework. Renaissance Word-wide is the implementing partner for the Balanced Scorecard (BSC) at Godrej-GE Appliances Ltd. Starting with the company's strategy and vision in 1998, Godrej-GE Appliances interviewed, a crosssection of

people including internal and external customers to arrive at a 'linkage diagram' or 'Strategy Mapping', the crux of the BSC process. Followed by people interviews, a detailed workshop in which the senior management helped to ratify the different linkages of the diagram or strategy map i.e. linked objectives, measures,targets and initiatives. Godrej-GE then began to zero in on measurements and management initiatives. The two exercis~s that ran parallel to each other helped the company

arrive at a 3I-item measurement template (from sales to growth targets) and a template for management initiatives. This exercise helped the company to prioritize 20 initiatives from the series of on-going management initiatives.The nonpriority initiatives were either discarded or their implementation was deferred. The measurement template helped the company to set measurable long-term and short-term targets and was rolled out across the company in October 1998. The BSC framework at Godrej-GE Appliances has reaped mixed results; both Positive and Negative. On the Positive front, all the supply chain initiatives tied to the balanced scorecard on supplier management have added to the bottom line, with a gross impact of over Rs.9 crore in savings. Secondly, close to 72 percent of the suppliers are below the 1,000 parts per million defects (4.5 Sigma) benchmark. Thirdly, the process has resulted in a strong upstream supply chain andan improved vendor base backbone. The costs take out and value engineering process has contributed to over Rs. 5 crore. And ultimately the company has reported a profit of Rs. 21 crore in 1998-99 against Rs. 3 crore in the year 1997-98. As observed by Sunder Raman, overall, the process has yielded certain 'powerful' lessons. These are: 1. All internal management initiatives have to be aligned to key statistical objectives, 2 Companies have to hit upon the right strategy, and all actions have to be measurement driven. 3. The balanced scorecard works on a foundation of robust processes and practices.
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Q2.What is DuPont analysis? Explain all the ratios involved in this analysis. Your answer should be supported with the chart. Ans:-A method of performance measurement that was started by the DuPont Corporationin the 1920s. With this method, assets are measured at their gross book value rather thanat 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:- Operating efficiency, which is measured by profit margin- Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * EquityMultiplier (Assets/Equity) DuPont Analysis It is believed that measuring assets at gross book value removes the incentive to avoidinvesting in new assets. New asset avoidance can occur as financial a ccountingdepreciation methods artificially produce lower ROEs in the initial years that an asset isplaced into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.The DuPont System expresses the Return on Assets as: ROA = OPM * ATRThe Operating Profit Margin Ratio is a measure of operating efficiency and the AssetTurnover Ratio is a measure of asset use efficiency.The DuPont System expresses the Return on Equity as:ROE = (ROA Interest

Expense/Average Assets) * EMThe Equity Multiplier is a form of leverage ratio and measures financial efficiency.

Figure shows the DuPont Analysis for a farm operation

Table 1.DuPont Analysis for Two Farms

Table 1. DuPont Analysis for Two Farms
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.
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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 materialfacts. 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 companys accounting department. Although there is no definitive measure of materiality, the accountants 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 ofthis 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.

Ans:-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 Krupas ledger account Rs. 1520, while its 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. Omitting to post an entry from subsidiary book to ledger: If an entry made in the subsidiary book does not get posted to ledger, the trial balance does not tally.

Example: Stationery bill paid Rs.2000 recorded in cash account but is not posted to Stationery account at all. Rectification entry: Stationery account Dr. Rs. 2000 To Suspense a/c Rs. 2000 Being excess credit given to Krupa a/c rectified. ------------------------------------------------------------------------------------------------------------

Q.5 Differentiate Financial Accounting and Management accounting? Ans Financial accounting :is the preparation and communication of financial information to outsiders such as creditors, bankers, government, customers and so on. 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

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of costs, cost determination etc., For both financial accounting and management accounting the financial data

is the same and the reports prepared in financial accounting are also used in management accounting

Distinguish between Financial Accounting & Management Accounting:Listed below are the major differences between Financial accounting and Management accounting.:-

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Financial Accounting

Management Accounting Top, middle and lower level managers use the information for planning and decision making

The primary users of financial accounting information are shareholders, creditors, government authorities, employees etc.

Accounting information is always expressed in terms of money

Management accounting may adopt any measurement unit like labour hours, machine hours or product units for the purpose of analysis Reports are prepared on continuous basis, monthly or weekly or even daily

Financial data is presented for a definite period, say one year or a quarter Financial accounting focuses on historical data

Management accounting is oriented towards future Management accounting makes use of other disciplines like economics, management, information system, operation research etc.,

Financial accounting is a discipline by itself and has its own principles, policies and conventions

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Q6. 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 expenses6,000 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 Dec 31st- 110000

Schedule of changes in working capital: on Details Current Assets Cash in hand Cash at Bank Sundry Debtors Bills Receivable Inventory Total Current Jan 1 13,000 Balance as Effect of WC Increas Dec 31 e Decrease 20.000 7,000

15,000 20,000 5,000 65,000 1,05,00040,000 16,000 30,000 14,000 90,000 84,000 1,99,00 2,59,00

6,000

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Assets(A) Current Liabilities Sundry Creditors Bills Payables Outstanding expenses Bank overdraft Short term loans Total Current Liabilities(B) Working Capital (A)-(B) Net Increase in working capital(balancing figure)

30,000 12,000

58,000 12,000

4,000

28,000 12,000 4,000

6,000 6,000 1,000 30,000 42,000 32,000 36,000 1,10,00 1,49,00 0 0 89,000 1,10,000

21,000

21,000

1,10,00 1,10,00 0 0 71,000 71,000

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