1) (a) Concept of Conservatism implies using conservatism while preparing financial

statements i.e. income should not be accounted for unless it has actually been
earned but expenses, even if just anticipated should be provided for. According to
this concept, revenues should be recognized only when they are realized, while
expenses should be recognized as soon as they are reasonably possible. For
instance, suppose a firm sells 100units of a product on credit for Rs.10, 000. Until
the payment is received, it will not be recorded in the accounting books. However, if
the firm receives information that the customer has lost his assets and is likely to
default the payment, the possible loss is immediately provided for in the firms
books. The rule is to recognize revenue when it is reasonably certain and recognize
expenses as soon as they are reasonably possible. The reasons for accounting in
this manner are so that financial statements do not overstate the companys
financial position. It is also called the concept of prudence as it essentially involves
exercising prudence in recording income and expenses/losses in the financial
statements so that anticipated income are not recorded whereas likely losses are
provided for. However, this concept is not applied as strongly today as it used to be
in the past for the reason that the modern world saw a considerable increase in
corporate frauds e.g. Enron case in USA and Satyam in India.Also, there is a decline
in assuming corporate social responsibilities due to superfluous issues of gaining
publicity and brand building. These two major issues call for increased transparency
in financial statements and hence, the decline in use of age old concept of
conservatism
(b) A Balance Sheet is a type of financial statement of an entity, indicating the
financial position at a given point of time. It is the statement of Assets and Liabilities
as on a particular date. The various items of a Balance Sheet can be grouped under
two heads, viz: assets and liabilities. Funds Flow statement determines the sources
of cash flowing into the firm and the application of that cash by the firm. The
various items of a Funds Flow Statement can be grouped under two heads, viz:
inflow of funds (sources) or outflow of funds (applications). While the Balance Sheet
shows only the monetary value of each source and application of funds at the end
of the year, funds flow statement depicts the extent of changes in each source and
application of funds during the year. If we take the Balance Sheet for two
consecutive years and work out the change for each item, we are able to arrive at
the Funds Flow Statement items. The various items usually shown in a Balance
Sheet are:
Assets side:
(1) Fixed assets
a) Gross block (b) Less depreciation (c) Net block (d) Capital work-in-progress (2)
Investments (3) Current assets, loans, and advances: (a) Inventories (b) Sundry
debtors (c) Cash and bank balances (d) Other current assets (e) Loans and

advances (4) Deferred Revenue Expenditure: (a) Miscellaneous expenditure to the

extent not written off or adjusted (b) Profit and Loss account
Liabilities side:
(1) Shareholder's funds (a) Capital (b) Reserves and Surplus (2) Loan funds (a)
Secured loans (b) Unsecured loans
Current liabilities and provisions:

2) (a) Ratio analysis implies the systematic use of ratios to interpret the financial
statements so that the strength and weaknesses of a firm as well as its historical
performance and current financial position can be determined. With the help of ratio
analysis conclusion can be drawn regarding several aspects such as financial health,
profitability and operational efficiency of the undertaking. Ratio analysis is very
useful in making inter-firm comparison as it helps to draw a comparison between
the entities within the same industry or otherwise following the same accounting
procedure. It provides the relevant financial information for the comparative firms
with a view to improving their productivity & profitability .Ratio analysis helps in
intra firm comparison by providing necessary data. An inter firm comparison
indicates relative position. It provides the relevant data for the comparison of the
performance of different departments. If comparison shows a variance, the possible
reasons of variations may be identified and if results are negative, the action may
be initiated immediately to bring them in line. However, in spite of being such a
useful tool, it is not free from its limitations. A single ratio is of a limited use and it is
essential to have a comparative study. The base used for ratio analysis viz: financial
statements have their own limitations. Also, they consider only the quantitative
aspects of business transactions where as there are various other non-quantitative
aspects such as quality of work force which considerably affect profitability and
productivity. Also, ratio analysis as a tool is also limited by changes in accounting
procedures/policies.
(b) Pay-out Ratio means the amount of earnings paid out in dividends to
shareholders. Investors can use the payout ratio to determine what companies are
doing with their earnings. It can be calculated as:A very low payout ratio indicates
that a company is primarily focused on retaining its earnings rather than paying out
dividends.
A very low payout ratio indicates that a company is primarily focused on retaining
its earnings rather than paying out dividends.
The pay-out ratio also indicates how well earnings support the dividend payment.
The lower the ratio, the more secure the dividend because smaller dividends are
easier to payout than larger dividends. The major factor to be considered in

determining the payout ratio is the dividend policy of the company. Young, fastgrowing companies are typically focused on reinvesting earnings in order to grow
the business. As such, they generally sport low (or even zero) dividend payout
ratios. At the same time ,larger, more-established companies can usually afford to
return a larger percentage of earnings to stockholders. Also, another factor to be
considered is the type of industry in which the company is operating. For example,
the banking sector usually pays out a large amount of its profits. Certain other
sectors like real estate investment trusts are required by law to distribute a certain
percentage of their earnings. Funds requirement of the company and its available
liquidity is another factor which is considered while determining the pay-out. Some
companies prefer to follow a fixed pay-out ratio policy irrespective of the earnings
made. This is a welcome policy from the point of view of the investors. But, the
company should take into account various important factors such as its need for
future investment and growth, cash requirements and debt obligations.
3) The financial position of a concern is mainly judged by its current ratio, acid test
ratio, working capital turnover ,fixed assets to net worth. In the given case of Bharat
Auto Accessories Ltd, the current ratio has gone up from 265% to 302% over a
period of three years. It is a measure of the degree to which current assets cover
current liabilities (Current Assets /Current Liabilities). A high ratio indicates a good
probability the enterprise can retire current debts. However, the acid test ratio has
gone down from115% to 99%, which is not a very good sign. It is a measure of the
amount of liquid assets available to offset current debt (Cash + Accounts Receivable
/ Current Liabilities). A healthy enterprise will always keep this ratio at 1.0or higher.
Also, the fixed asset to net worth ratio is 16.4% for Yr. I and has gone up to 22.7%
for Yr. III. This ratio is a measure of the extent of an enterprise's investment in nonliquid and often over valued fixed assets (Fixed Assets / Liabilities + Equity). A ratio
of .75 or higher is usually undesirable as it indicates possible over-investment. The
operating efficiency of a concern can be viewed by its receivables turnover, average
collection period, inventory turnover, operating expenses to net sales. The
receivables turnover has gone down from 9.83 to 7.20,reflecting that expenses as a
percentage of revenue or earnings has gone down over the three year period, which
is a good sign. An increasing average collection period indicates that the concern is
offering too liberal credit terms and has inefficient credit collection. The inventory
turnover has gone down from 6.11 to 5.41 times indicating declining sales and
excessive inventory which again reflects poor operating efficiency. The operating
expense to net sales has increased from 22% to 25% which indicates that the
organization has lowered its ability to generate profits in case of declining revenues.
The indicators of profitability are income per equity share, net income to net worth,
and net profit on net sales. All these ratios have declined considerably over the
three year period. This indicates declining profitability over the years. Thus, on a
review of the various ratios, we conclude that Bharat Auto Accessories Ltd does not
have a strong financial position, is not very efficient in its operations and is
undergoing a period of declining profitability.

Assignment B

1)
Different standards have different impact on motivation. In the given case, where
the labor standard recommended by the engineering firm is adopted by Geeta &
company, the six-month operation period showed a decline in production and an
unfavorable quantity variance for each of the six months in the said period. In the
other case where the management used the internally set labor standard, there was
a favorable quantity variance for the first three months ; thereby implying that the
actual production was more than the standard production. In the fourth month,
there was no variance in production and in the fifth and sixth month, there was an
unfavorable variance, thereby implying that the actual production was less than
standard production. Thus, we see that the standard recommended by the
engineering firm had a negative impact on motivation as it was less than the
standard production. But, in the case of internally set standards, there was a
positive impact on motivation for first three months; neutral in the fourth month;
and negative impact in fifth and sixth month.

2)
The labor standard recommended by the consulting firm should not be used as a
motivational device as it is having a negative impact. The cost standard used for
reporting had a positive or neutral impact for greater part of the period and a
negative impact for two months. Therefore, the company should try and adopt labor
standards similar to those ones