Name of candidate : Radha Krishnan Unni M S

Address : Flat # 154 Block# D,

Lulu Hyper market
Karama, Dubai

Contact Number : 00971-50-5081525

Course Code : M S 04

Course Title : accounting & finance for managers

Assignment code : ms 04/TMA/Sem1/2009

Roll Number : 002247834

Study center : Wisdom institute , Dubai

Signature :
Q1. “Accounting is an information system”. Do you agree? Substantiate your
answer with reasons. How does an accountant help in planning and controlling a
large commercial organization? Explain.

Ans Accounting is an information system for measuring, processing and

communicating information that is useful in making economic decision.

Every business is conducted to make profit. Accounting knowledge is

there to assist the business man to assess whether the business is making
profit or loss. In accounting brings discipline on how to source money,
how to spend and how much to save. Accounting ensures consistency in
the treatment of various transactions. Accounting involves gathering of
financial data, recording classifying, summarizing and communicate the
results to the owners of the business, or to others allowed to receive this
information.

Accounting should not be confused with Book keeping as Book keeping is

the part of accounting concerned with recording of financial data. Book
keeping is the process of recording data relating to accounting
transactions in the books of accounts.

Accounting Concepts

The International Accounting Standards Board (IASB) for which Malawi is a

member recognized that accounting information needs to be objective and
consistent. To achieve this, there must be a set of rules which lay down the
way in which transactions of the business are recorded. These set of rules
are known asaccounting concept.

There are many concepts applicable in accounting but two are regarded by
IASB as the most influential and these are:

Going concern
Implies that the business will continue to operate up to a
foreseeable future. Foreseeable future should at least be a
1
 period exceeding 12 months. This concept requires that Assets
should be measured at their historical cost. If the Management of the
entity believes that their business will not operate up to a
foreseeable future then the assets should be measured at the Break
up basis. i.e. at net selling price.
• Accrual
States that accounting transactions should be recognized and
recorded in the year of transaction and not necessarily when
payment is made or received. Accruals concept also says that the
net profit for the year is the difference between revenues and
expenses incurred to generate those revenues.

Apart from these two fundamental concepts there are other concepts which
should be considered when producing the financial statements and these
include;

• Business entity
The concept states that the business exists separately and distinct
from its owners. This entails that accounting records for the
business should be kept separately from the owner’s private
transactions. The only time that the personal resources of the
proprietor affect the accounting records of a business is when they
introduce knew capital in business or they take drawings out of it.

• Matching Concept
In determining profit or loss at all times, revenues should be
matched against expenses incurred in the process of generating
that revenue in the same period. It is necessary to recognize all the
revenue/income earned during a period regardless of when money
is received. In the same way, all expenses incurred by the business
should be included regardless of when money is paid for them.

• Prudence
Accountants should always exercise caution when dealing with
uncertainty but should also maintain neutrality in recording
transactions. The business is encouraged to take a conservative
approach in reporting its affairs. If the accountant is faced with a
choice of figures, which are both, acceptable to use in the financial
statements he should take a pessimistic rather than an optimistic
approach. This emphasize that it is better for accountants to
underestimate any anticipated profits rather than under estimating
any anticipated loss
• Cost
Accounting transactions (assets) should initially be measured at
their historical cost to the business. Cost here should either be the
production cost if internally constructed or the purchased cost if
acquired externally.
2
 • Unit of Measure
Only transactions which can be measured in monetary value
should be recognized in the financial statements. This implies
that any transaction which can not be quantified in monetary
value will not be recognized in the financial statements. This
concept further explains that the currency of money used as a
unit of measurement should be stable.
• Consistency
Transactions which are similar should be subjected to the same
accounting treatment. When ever the business has chosen a
certain accounting treatment then they should follow such
treatment in all accounting years. Change of method should be
effected if the aim is to show a better presentation of financial
statements or the old method has been outlawed by a new
accounting standard or company Act.

How does an accountant help in planning and controlling a large commercial

organization
The advantages of accounting can be enumerated as follows :
(i) Maintenance of business records. All financial transactions are recc ded in a
systematic manner in books of accounts so that there is no need to rely on memory.
It is not possible for any human being to remember all what happened in daily
operations of a business.
(ii) Preparation of financial statements. Systematic records enable the
accountant to prepare the financial statements—trading and profit and loss
account to calculate profit or loss during a particular accounting period and
balance sheet to state the financial position of the business on a particular
date. Profit is a measure of the successful running of thel business.
(iii) Comparison of results. Systematic maintenance of business records
enables the accountant to compare profit of one year with those of earlier
years to know the significant facts about the changes. This helps the business
to plan its future affairs accordingly.
(iv)Decision-making. For day-to-day solving of a number of problems like what
should be the selling price of goods produced? Whether a part should be
made in the factory or purchased from outside? etc., the accountant helps the
management by providing the relevant information.
(v) Good evidence in courts. Records of business transactions are treated as
satisfactory evidence in courts of law.
(vi) Planning and control operations. Planning operations like sales, production,
cash requirements for next accounting periods are achieved with the help of
accounting information and estimates based on that information. Management
is also interested in observing that the operations in the business are going on
according to plan and all the departments are spending within their prescribed
limits.
(vii) Provides information to interested groups. Various interested parties ar
groups like owners, creditors, management, employees, government, consumers,
creditors are interested in accounting information related to various aspects,
viz., sales, production, profits, etc. Accounting provides suitable information to
 such interested parties.
(viii) Taxation problems. In settlement of taxation matters, systematic
maintenance of records is a big help.
3
 (ix)Valuation of business. Accounting records kept in a proper way enable a
business unit to determine the purchase or sale price in a simple manner.
(x) An insolvent person is able to explain the past transactions without difficulty
if proper accounting records are maintained.

Q2. Prepare a cash flow statement from the following Balance Sheets as at 31-3-08
and 31-3-07. presented by PNX fertilizers Ltd.

4
Other Information :
1) Fixed assets costing Rs. 4,00,000, accumulated depreciation Rs. 3,00,000 were
sold for Rs. 1,50,000.
2) Actual tax liability for 2006-07 was Rs. 5,00,000.
3) Loans represent long term loans given to group companies.
4) Interest on loan funds for 2006-07 was Rs. 14,21,000 and interest and
dividend income
were Rs.4,02,000.
5) Investments costing Rs. 20,00,000 were sold for Rs. 25,00,000.
Cash flow Statement of MNG Fertilizers
F o r th e y e a r e n d e d 3 1 .3 .2 0 0 7
Cash flow from Operating Activities (R s . in th o u s a n d )
Change in general reserve (200)
Change in profit and loss account (250)
Proposed dividend 3,400
Provision for tax 0
Profit before tax 2,950
Add: Depreciation 550
Add: Miscellaneous Expenses 50
Add/(Less): Profit /(loss) on sale of fixed assets (50)
Add/(Less): Profit /(loss) on sale of investments (500) 50
Funds flow from operations 3,000
Add: Interest paid 1,421
Less: Interest and Dividend Received (402)
Add/(Less): Working Capital Adjustments
Inventories 90
Debtors 110
Creditors (150)
5
Outstanding expenses 30 80
Cash flow from Operating Activities (before Tax) 4,099
Less: Advance tax for 2006-2007 0
Cash flow from Operating Activities (after tax) 4,099
Cash flow from Financing Activities
Issue of shares
Face value 1,500
Premium 750 2,250
Repayment of Secured Loans (200)
Raising of Unsecured Loans 1,350
Net loan 1,150
Interest payment (1 ,4 2 1 )
Dividend payment for 2006 (2 ,8 0 0 )
(82 1 )
Cash flow from Investment Activities
Purchase of Fixed Assets (1,8 00)
Sale of Fixed Assets 150
Capital WIP (1,8 60)
Fixed Assets (Net) (3 ,5 1 0 )
Purchase of Investments (1,3 30)
Sale Proceeds of Investments 2,500
Investments (Net) 1,170
Loans (1 ,5 0 0 )
Interest and Dividend Income 402
(3 ,4 3 8 )
Cash Flow Statement
Cash flow from Operating Activities (after tax) 4,099
Cash flow from Financing Activities (82 1 )
Cash flow from Investment Activities (3 ,4 3 8 )
(16 0 )
Add : Cash and cash equivalents as on 31.3.2006 280
Cash and cash equivalents as on 31.3.2007 120

6
Statement of equivalent production

Material Labour & Overhead

Particulars Units Particulars Units Units Units

Opening WIP - opening WIP - -

Current Current
Introduction 1050 Introduction 950 950 950

closing WIP 100 100 50

Total 1050 1050 1050 1000

Data For Variances

Standard Actual
Rate Amount Rate Amount

Material (1*1050) 1.50 1575.00 1100 1.60

1760.00
Labour (3*1000) 1.00 3000.00 2700 1.20
3240.00
Overhead (3*1000) 2.50 7500.00 2700 2.75
7425.00

Standard Output = 1050units Actual Output = 950units

DMCV = (Standard Cost - Actual Cost)

= (1575 - 1760)
= 185(A)

DMPV =(Standard Price - Actual Price) * Actual Quantity

= (1.50 - 1.60) * 1100
= 110(A)

DMUV =(Standard Usage - Actual Usage)

= (1050 - 1100) * 1.50
= 75(A)
7
Reconcilation -

[ DMCV = DMPV + DMUV ]

DLCV = (3000 -
3240) = 240(F)

DLRV = (1.00-1.20) *
2700 = 540(A)

DL Efficiency V = (3000 - 2700) * 1

= 300(F)

Reconcilation -

[ DLCV = DLRV + DLEV ]

VOCV = (Standard Cost - Actual Cost)

= (7500 -7425)
= 75(F)

VO Expenditure V = (Standard Rate - Actual Rate) * Actual

Hours = (2.50 - 2.75) * 2700
= 675(A)

VO Efficiency V = (Standard Hours - Actual Hours) * Standard

Rate = (3000 - 2700) * 2.50
= 750(F)

Reconcilation -

[ VOCV = VO Expenditure V + VO Efficiency V ]

Q4. Collect information about the different types of budgets prepared in your
organization or any other organization of your choice and discuss the relevance
of these budgets to the organization under consideration.
Ans TYPES OF BUDGETS
There are various types of budgets. Some of the important ones have been discussed
below :
Sales Budget
The Sales Budget, generally, forms the fundamental basis on which all the other
budgets are built up. The budget is essentially a forecast of sales to be achieved in a
budget period. The Sales Manager should be made directly responsible for the
preparation and execution of this budget. He should take into consideration the
following factors while preparing the sales budget :
(a) Past sales figures and trend. The record of previous experience forms the
most reliable guide as to future sales as the past performances is related to
actual business conditions. However, the other factors such as seasonal
fluctuations, growth of market, trade cycles etc., should not be lost sight of.
(b) Salesman's estimates. Salesmen are in a position to estimate the potential
demand of the customers more accurately because they come in direct
contact with the customers. However, proper discount should be made for
over-optimistic or too conservative estimates of the salesmen depending upon
their temperament.
8
 (c) Plant capacity. It should be the endeavour of the business to ensure proper
utilisation of plant facilities and that the sale budget provides an economic
and balanced production in the
factory.
(d) General trade prospects. The general trade prospects considerably affect the
sales.
Valuable information can be gathered in this connection from trade papers and
magazines.
(e) Orders or hand. In case of industries where production is quite a lengthy
process, orders on hand also have a considerable influence on the amount of
sales.
(I) Proposed expansion of discontinuance of products. It affects sales and, therefore,
it should also be considered.
(g) Seasonal fluctuations. Past experience will be the best guide in this respect.
However, efforts should be made to minimise the effects of seasonal fluctuations
by giving special concessions or off-season discounts thus increasing the volume
of sales.
(h) Potential market. Market research should be carried out for ascertaining the
potential market for the company's products. Such an estimate is made on
the basis of expected population growth, purchasing power of consumers and
buying habits of the people.
(i) Availability of material and supply. Adequate supply of raw materials and
other supplies must be ensured before drafting the sales programme.
(j) Financial aspect. Expansion of sales usually require increase in capital outlay
also, therefore, sales budget must be kept within the bounds of financial
capacity.
(k) Other factors :
(i) The nature and degree of competition within the industry:
(ii) Cost of distributing goods;
(iii) Governments control, rules and regulations related to the industry; and

Production Budget
This budget provides an estimate of the total volume of production productwise
with the schedulling of operations by days, weeks and months and a forecast of the
closing finished product inventory. Generally the production budget is based upon
the sales budget but in case of And it difficult to forecast sales on account of
frequent changes in style and fashion, d upon past experience. The responsibility of
the Total Production Budget lies with Works Manager and that of Departmental
Production Budgets lies with Departmental Works Managers.
The production budget may be expressed in quantitative or financial units or both.
The objects of its preparation are :
1. To answer the following questions :
(a) What is to be produced ?
(b) When is it to be produced ?
(c) How is it to be produced ?
(d) Where is it to be produced ?
2. To chalk down and organise the production programme for achieving the sales target.
 3. To serve as a basis for preparation of production cost budgets, for example,
materials cost budget, labour cost budget, etc.
4. To prepare a cash forecast.
There are two problems connected with the production budgets : (i) determining the
annual production required and (ii) pro-rating it throughout the year. The p inning of
9
 production programme is essential to have sufficient stock for sales to keep
inventories within reasonable limits and to manufacture goods most economically.
To achieve it, the following factors should
be taken into consideration.
(i) Inventory policies. Inventory standards should be predetermined so that
neither there is a shortage nor over-stocking of goods.
(ii) Sales requirements. The quantity of goods to be sold would decide to a great
extent how much is to be produced. Therefore, this budget depends upon the
sales budget.
(iii) Production stability. For reduction of costs, stability in employment
and better utilisation of plant facilities, the production should be evenly
distributed throughout the year. In case of seasonal industries, since it is not
possible to have stable levels of production or inventory, an effort should be
made to have the optimum balance between the two.
(iv)Plant capacity. How much can be produced depends upon the available plant
capacity. There must be sufficient capacity to produce the annual
requirements and also to meet seasonal high demands.
(v) Availability of materials and labour. Adequate and timely supply of raw materials
and labour force should have an important effect on the planning of production.
(vi)Time taken in production process. The production should commence well in
time keeping in view how much time it would take in the factory to translate
the raw materials into finished goods.

Cost of Production Budget

After determining the volume of production, it is necessary to determine the cost of
procuring this output. Cost of production includes materials, labour and overheads
and, therefore, separate budgets for each of these items will be prepared.
Materials budget. Materials may be direct or indirect. The materials budget generally
deals only with the direct materials. Indirect materials are generally included in the
works overhead budget. The preparation of materials budget includes the following :
(a) The preparation of estimates of raw materials requirements.
(b) The scheduling of purchases in required quantities at the required time.
(c) The controlling of raw material inventories.
Material requirements are estimated regarding each class of products by
multiplying the exact material requirement for each class of product by the number
of units of that class. The total quantity required for the budget period is first
estimated and then is further broken down by component time period (months and
quarters) in the materials budget. The break-up and length of the period should be
in uniformity with the production budget.
In case of concerns whose raw materials requirements can be standardised, the
materials budget can be prepared very exactly on this basis. In case it is not
possible, the percentage of raw materials to total cost of products should be
calculated on the basis of the historical data. On the basis of this information a
rough estimate can be made regarding the raw materials required for the budgeted
output. The figure should further be adjusted taking into account the current price
trends and the normal wastage of materials in the course of production.
1
0
The Buying Department should proceed to find the most profitable means of
procuring the requisite quantity and quality of raw materials. Consideration must
also be given to the amount of stock to be carried fonvard.
The materials budget can be classified into two categories (i) materials requirement
budget (ii) materials procurement or purchase budget. The former tells about the total
quantity of materials required during the budget period; while the latter tells about the
materials to be acquired from the market during the budget period. Materials to be
acquired are estimated after taking into account the closing inventory and the opening
inventory of the materials for which orders have already been placed.

Direct labour budget. The direct labour budget tells about the estimates of direct labour
requirements essential for carrying out the budgeted output. In preparation of this
budget previous records of the percentage labour cost in the total cost of each product,
group or department will be considerably helpful. The budget may give details
regarding direct labour costs only, or both direct labour hours and cost. In the former
case the cost can be calculated by making an estimate of cost per unit of production.
The cost per unit multiplied by the budgeted units will give the estimated cost of direct
labour. In the latter case estimates will have to be made about (i) direct labour hours
and (ii) average wage rate. Internal factors such as the method of wage payment, the
type of production process and the available costing records will determine whether and
how it is possible to express production in terms of direct labour hours. The average
wage rate payable for a particular product or department, will be calculated on the
basis of the historical ratio between wages paid and direct labour hours worked in the
department or for the product after taking into account the current conditions.
Direct Labour Budget (like Direct Materials Budget) may be divided into two categories :
(i) Direct Labour Requirement Budget (ii) Direct Labour Procurement Budget. The
former tells about the total direct labour required in terms of quantity or/and value
while the latter will state the additional direct workers to be recruited.

Factory overhead budget

Manufacturing or Factory overheads include the cost of indirect labour, indirect material
and indirect expenses. The manufacturing overheads can be classified into three categories,
(i) Fixed i.e. which tend to remain constant irrespective of any change in the volume of
output (ii) Variable i. e, which tend to vary with the output and (iii) Semi-Variable i.e.
which are partly variable and partly fixed. The manufacturing overheads budget will
provide an estimate of all these overheads to be incurred in the budget period. Fixed
manufacturing overheads can be estimated without much difficulty on the basis of the past
information and knowledge of any changes which are likely to occur during the ensuing
budget period. Variable overheads are estimated after considering the scheduled
production and operating conditions in the budget period.

Administrative overhead budget

The budget covers expenses of all administrative offices, and of management salaries. A
careful analysis of the needs of all administrative departments of the enterprise is very
necessary. The minimum requirements for the efficient operation of each department can
be estimated on the basis of costs for prior years. and after a study of the plans and
responsibilities of each administrative department for the budget period. The budget for

1
1
 the entire administrative division will be prepared by totalling the separate budgets
of all administrative departments.

Selling and distribution overhead budget

The budget includes all expenses relating to selling, advertising, delivery of goods to
customers etc. It is better, if such costs are analysed according to products, types of
customers, territories, and the sales departments in the organisation itself. The
responsibility for the preparation of this budget rests with the executives of the sales
departments. There must be a co-ordination of selling expenses with the volume of
sales expected and an effort should be made to control the costs of distribution. The
preparation of the budget would depend on the analysis of the market situations by
the management, advertising policies, research programmes and the fixed and
variable elements

Capital Expenditure Budget

The budget provides a guidance as to the amount of capital that may be needed for
procurement of capital assets during the budget period. The budget is prepared
after taking into account the available productive capacities, probable reallocation
of existing assets and possible for improvement in production techniques. If
necessary separate budgets may be prepared for b each item of assets. such as a
building budget, a plant and equipment budget possible etc.

Plant Utilisation Budget

Plant Utilisation Budget is a part of the plan and equipment budget. It represents plant
and equipment facility required to meet the budgeted target production during the
budget period. The plant capacities or facilities may be expressed in terms of financial
units such as working hours or rate of production of number of products.
Following are the main purposes of plant utilisation budget.
I. It determines the load on each process and the number of or groups of machine or
investment required on plant during the budgeted period.
2. It indicates cost centres which are over-loaded so that corrective measures
may be taken in time. Such measures may be in any of the following forms :
(i) Plant may be required to work overtime;
(ii) Certain jobs may be sub-contracted:
(iii) Production facility may be expanded.
3. It helps rephrasing the sales and production budgets where it is not possible to
increase the production capacity by putting additional load on the processes
involved.
4. It identifies the surplus capacity available at a particular plant or in a
process so that efforts can be made to boost sales to take full advantage of the
surplus capacity.

Cash Budget

A cash budget is a forecast of the cash position by time periods for a specific
duration of time. Cash forecast may be made for a short period or a long duration.
The cash budget forms an important part in co-ordinating efficient working of the
company. It tells about the working capital required and available at different
periods. The budget is prepared by the Chief Accountant.
1
2
The main objectives of preparing cash budget are as under :
(i) The probable cash position as a result of planned operations is
indicated, and thus the excess or shortages of cash is known. This helps in
arranging short term borrowings in advance to meet the situation of shortage
of cash or making investments in times of excess of cash.
(ii) Cash can be co-ordinated in relation to total working capital. sales,
investment and debt.
(iii) A sound basis for credit and for current control of cash position is
established.

Q5. Yenki Ltd. is considering two mutually exclusive projects A and B. Project A
costs Rs. 30,000 and Project B Rs. 36,000. The NPV probability distribution for
each project is as given below :

You are required to compute:

i) the expected Net Present Value of Projects A and B.
ii) The risk attached to each project i.e., Standard deviation of each
probability distribution.
iii) The Profitability Index of each project.
Which project do you consider more risky and why?

(I) Cal. of Expected NPV

A.3000 X 0.1 + 6000 X 0.4 + 12000 X 0.4 + 15000 X 0.1 = 9000
B.3000 X 0.2 + 6000 X 0.3 + 12000 X 0.3 + 15000 X 0.2 = 9000
(II) Cal. Of S.D.

X (NPV X-MEAN P P(X-MEAN)2

ESTIMATE) (X-9000)
3000 -6000 0.1 36,00,000
6000 -3000 0.4 36,00,000
12000 +3000 0.4 36,00,000
15000 +6000 0.1 36,00,000
1,44,00,000

S.D.A. = 1, 44, 00, 000 =3794.73

X (NPV X-MEAN P P(X-MEAN)2

ESTIMATE) (X-9000)
3000 -6000 0.2 72,00,000
6000 -3000 0.3 72,00,000
12000 +3000 0.3 72,00,000
15000 +6000 0.2 72,00,000
1,98,00,000

S.D.A. = 1, 98, 00, 0000 =4449.72

Project B is more risky expected NPV of both of same but S.D. of Project B is
higher than A.

P IA P.V .I . 39000
(III) = = = 1.3
P.V .PROJECT COST A 30000
P IB
=
P.V .I . = 45000 = 1.25
P.V .PROJECT COSTB 36000

----------------------------------------------------------------