SIKKIM MANIPAL UNIVERSITY-Distance Education

Student Name:
Registration Number:
Subject Name:

Dinoop P Malayil
1505001416
Financial and Management Accounting

Course: MBA
LC Code: 03378
Subject Code: MB0041

Question 1Inventory 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 1Guidelines 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.
1. Convention of Income Recognition
The revenue recognition principle is a cornerstone of accrual accounting together
with matching principle. They both determine theaccounting period, in
which revenues and expenses are recognized. According to the principle, revenues
are recognized when they are realized or realizable, and are earned (usually when
goods are transferred or services rendered), no matter when cash is received. In cash
accounting in contrast revenues are recognized when cash is received no matter
when goods or services are sold.
Cash can be received in an earlier or later period than obligations are met (when
goods or services are delivered) and related revenues are recognized that results in
the following two types of accounts:
Accrued revenue: Revenue is recognized before cash is received.
Deferred revenue: Revenue is recognized after cash is received.
Revenue realized during an accounting period is included in the income
2. Convention of Matching Cost and Revenue
The concept is based on the accounting period concept. The objective of maintaining
accounts is to prepare the income statement to ascertain the profit/loss of the entity.
In order to fulfil this objective the 'revenues' of the period for which income
statement is prepared should be matched with costs. 'Matching' means the
appropriate association of related 'revenues' and 'costs'. Profit/loss could be
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ascertained only when the revenue earned during the period is compared with the
expenditure incurred during the same period.
Receipts and payments of cash is irrelevant. The right to receive revenue and
liability to pay the expenses are the criteria. Actual receipt or payment may take
place later on. On account of the periodic matching of costs and revenue concept ,
adjustment is made for all outstanding expenses ,income accrued, prepaid expenses
and unearned income at the time of preparing the financial accounts at the end of
the accounting period.
3. Convention of Historical Costs
In accounting, the practice of recording the historicalcost of an asset as its cost on a
balancesheet. Under the Generally
Accepted
Accounting
Principles, the historical cost is the original cost of an asset that the buyer paid. Man
y assets, particularly
illiquid assets, are recorded on a balance sheet according to the historical cost accou
nting convention. A notable exception to thisrule is the recording of marketable secu
rities, which are recorded according to their marketvalue. It is important to note tha
t thehistorical cost usually bears little or no relationship to the market value after an
asset has been held for several years.
4. Convention of full disclosure
Convention of full disclosure requires that all material and relevant facts concerning
financial statements should be fully disclosed. Full disclosure means that there
should be full, fair and adequate disclosure of accounting information. Adequate
means sufficient set of information to be disclosed. Fair indicates an equitable
treatment of users. Full refers to complete and detailed presentation of information.
Thus, the convention of full disclosure suggests that every financial statement should
fully disclose all relevant information. Let us relate it to the business. The business
provides financial information to all interested parties like investors, lenders,
creditors, shareholders etc. The shareholder would like to know profitability of the
firm while the creditor would like to know the solvency of the business. In the same
way, other parties would be interested in the financial information according to their
requirements. This is possible if financial statement discloses all relevant
information in full, fair and adequate manner.
5. Convention of double aspect.
The basic equation of accounting is
Assets = Equities
Or
Assets = Outsiders' Equity + Owners' Equity

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Or
Assets = Liabilities + Capital
Every transaction affecting an entity has dual aspect on the accounting records. Both
aspects are recorded in the books of accounts. Hence accounting is called ' double entry
system'. The two aspects are expressed as 'debit' and 'credit '.In other words ' for every
debit there is an equivalent credit'.
The term 'assets' denotes the resources owned by a business while equities denote the claims
of various parties against the assets. Equities are two types
i) Owners' Equity and
ii) Outsiders' Equity
Owners' equity otherwise called 'capital' denotes the claims of the owners against the assets
of the entity where as outsiders' equity denotes the claims of creditors, debenture holders
,lenders etc against the assets of the entity.
The dual aspect of transaction may result in change in the assets and equities of the
organization and make them equal.
6. Convention of Materiality
The convention of materiality states that, to make financial statements meaningful,
only material fact i.e. important and relevant information should be supplied to the
users of accounting information. The question that arises here is what is a material
fact. The materiality of a fact depends on its nature and the amount involved.
Material fact means the information of which will influence the decision of its user
7. Convention of Consistency
The convention of consistency means that same accounting principles should be used
for preparing financial statements year after year. A meaningful conclusion can be
drawn from financial statements of the same enterprise when there is comparison
between them over a period of time. But this can be possible only when accounting
policies and practices followed by the enterprise are uniform and consistent over a
period of time. If different accounting procedures and practices are used for
preparing financial statements of different years, then the result will not be
comparable.
8. Convention of Conservatism of Prudence.
This convention is based on the principle that Anticipate no profit, but provide for
all possible losses. It provides guidance for recording transactions in the books of
accounts. It is based on the policy of playing safe in regard to showing profit. The
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main objective of this convention is to show minimum profit. Profit should not be
overstated. If profit shows more than actual, it may lead to distribution of dividend
out of capital. This is not a fair policy and it will lead to the reduction in the capital
of the enterprise.
Question 2Analyse the following transactions according to traditional
approach.
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 2-

Sl
No.
a
b
C
D
E
F
G

Accounts
Involved
Cash A/c
Capital A/c
Cash A/c.
Loan from
Malathi
Furniture A/c
Cash A/c.
Furniture A/c
Meenal A/c.
Purchase A/c
Cash A/c.
Purchase A/c.
Rams A/c.
Cash A/c.

Nature of
Account
Real
Personal
Real
Personal

Affects
Cash is coming in
Sunitha is the giver
Cash is coming in
Malathi is the giver

Debit/
Credit
Debit
Credit
Debit
Credit

Real
Real
Real
Personal
Nominal
Real
Real
Personal
Real

Furniture is coming in
Cash is going out
Furniture is coming in
Meenal is the giver
Purchase is an expense
Cash is going out
Purchase is an expense
Ram is the giver
Cash is coming in

Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
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H
I
J

Sales A/c.
Shyams A/c
Sales A/.c.
Cash A/c
Shyams A/c.
Rams A/c.
Cash A/c.

Nominal
Personal
Nominal
Real
Personal
Personal
Real

Sales is revenue
Shyam is the receiver
Sales is revenue
Cash is coming in
Shyam is the giver
Ram is the receiver
Cash is going out

Credit
Debit
Credit
Debit
Credit
Debit
Credit

Question 3The 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.
Answer 3The amont debited tp P& L account towards RBD is compted as follows.
Old RBD
=Rs.16,500
(-) Bad Debts
= Rs.9,000
Balance
=Rs. 7,500
New RBD@5% on Rs.1,60,000/= 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 Debtors
=Rs.3200
Less Discount on Debtors
=Rs.1800
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Balance Reserve
=Rs.1400
New Reserve for Discount at 2% on Good Debtors 152000 =Rs.3040
Reserve for discount to be provided Now= Rs.1640(3040-1400)
Reserve for Discount to be provided now.
In the balance shee, the Sundry Debtors are reduced by bad debts shownthe trial blance,the
new RBD,discount on debtors shown outside the trial balance and the new reserve for
discount on Debtors.

Question 4The 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 4DIMENSION
Users

Purpose

Need

FINANCIAL ACCONTING
The primary users of
financial
accounting
information are external
users like share holders,
creditors,
government
authorities, employees etc.
Reporting
financial
performance and financial
position to enable the users
to take financial decisions.
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
standards.

MANAGEMENT
ACCONTING
The primary users of
management accounting are
internal users like top,
middle and lower level
manager.
To help the management in
planning, decision making
monitoring and controlling
It is optional. What to
report, how to report, how
mch to report, when to
report, in which form to
report etc are decided by the
management as per the
needs of the management or
the company.
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Expression of information

Repoirting
frequency

timing

Time perspective
Sources of principle

Reporting entity
Form of reports

Accounting information is Management

accounting
always expressed in terms of may adopt any measurement
money.
nit like labour hours,
machine hours or product
units for the purpose of
analysis.
and Financial data is presented Reports are prepared on
for a definite period, sy one continuous basis, monthly
year or a quarter.
wekly or even daily.
Financial accounting focuses Management accounting is
on historical data
oriented towards the future.
Financial accounting is a This makes use of other
discipline by itself and has disciplines
economics,
its own principles, policies management,
information
an d conventions(GAAP)
system, operation research
etc.
Overall organisation
Responsibility centres within
the organisation.
Income statement (Profit MIS report
and loss account)
Performance report
Balance sheet
Control reports
Cash flow statement
Cost statement
Variance statement
Bdget
Estimate statements
Flow charts

Question 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 : Rs.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 5
Balance sheet
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Liabilities
Capital
Reserves and Surplus
Long term Debt
Current Libilities
Total

Rs.
500000
250000
150000
200000
1100000

Assets
Fixed Asset
Inventories
Debtors
Bank
Total

Rs.
600000
200000
250000
50000
1100000

Question 6Write 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 years net loss is
Rs.38,000, Calculate the cash flow from operating activities.
2011
2012
Short-term loan to 15,000
18,000
employees
Creditors
30,000
8,000
Provision for
1,200
doubtful debts
Bills payable
18,000
20,000
Stock in trade
15,000
13,000
Bills receivable
10,000
22,000
Prepaid expenses 800
600
Outstanding
300
500
expenses
Answer 6Cash flow analysis
It is concerned only with the change in cash
position
It is merely a record of cash receipts and
disbursements
Cash is part of working capital and therefore an
improvement in cash position result in
improvement in funds position
It is cash based

Fund flow analysis

It is concerned with change in working capital
position between two balance sheet dates.
Net effect of receipts and disbursements are
recorded
An improvement in funds position need not
result in improvement in cash position
It is accrual based

Statement Showing Cash Flow From Operating Activities

Net Loss
Add: Decrease in current assets
Decrease in stock
2000

(38000)

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Decrease in prepaid expenses

Increase in current liabilities
Increase in outstanding expenses
Increase in bills payable
Less: Increase in current assets
Increase in short term loan to the
employees
Increase in bills receivable
Decrease in creditors
Decrease in provision for doubtful debts
Net cash lost in operating activities

200
200
2000

+4400
(33600)

3000
10000
22000
1200

(36200)
(69800)

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