FINANCIAL AND MANAGEMENT ACCOUNTING [MAY 2008] 1. Discuss the basic accounting concepts.

[2008/dec2008] Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. The main objective is to maintain uniformity and consistency in accounting records. These concepts constitute the very basis of accounting. All the concepts have been developed over the years from experience and thus they are universally accepted rules. Following are the various accounting concepts that have been discussed in the following sections : Business entity concept assumes that for accounting purposes, the business enterprise and its owner(s) are two separate entities. Money measurement concept assumes that all business transactions must be recorded in the books of accounts in terms of money. Going concern concept states that a business firm will continue to carry on activities for an indefinite period of time. Accounting period concept states that all the business transactions are recorded in the books of accounts on the assumption that profits of transactions is to be ascertained for a specified time period. Accounting cost concept states that all assets are recorded in the books of accounts at their cost price. Dual aspect concept states that every transaction has a dual effect. Realisation concept states that revenue from any business transaction should be included in the accounting records only when it is realized. Matching concept states that the revenue and the expenses incurred to earn the revenue must belong to the same accounting period

1. Highlight the advantages of double entry system. Double entry system is acknowledged as the best method of accounting in the modern world. The following advantages are derived from it. a. Under this system both the aspects of each and every transaction are recorded. So, it is possible to keep complete account. b. Since both the aspects of a transaction are recorded, for each debit there must be a corresponding credit of an equal amount. Therefore, total debits must be equal to total credits. In fact, it is possible to verify the arithmetical accuracy of the books of account by ascertaining whether the two sides become equal or not through a process known as Trial Balance.

c. Under this system "Profit & Loss Account" can be prepared easily by taking together all the accounts relating to incomes or revenues and expenses or losses and thereby the result of the business can be ascertained. d. A balance sheet can be prepared by taking together all the accounts relating to assets and liabilities and thereby the financial position of the business can be assessed. e. Under this system mistakes and defalcations can be detected, this exerts a moral pressure on the accountant and his staff. f. Under this system necessary statistics are easily available so that the management can take appropriate decision and run the business efficiently. g. All the necessary detail about a transaction can be obtained quickly and easily h. The total amount owed by debtors and the total amount owed to creditors can be ascertained easily.

1. Discuss the difference between Financial and Management Accounting.

Financial Accounting
Reports to those outside the organization owners, lenders, tax authorities and regulators. Emphasis is on summaries of financial consequences of past activities. Objectivity and verifiability of data are emphasized. Precision of information is required. Only summarized data for the entire organization is prepared. Must follow Generally Accepted Accounting Principles (GAAP). Mandatory for external reports.

Managerial Accounting
Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation. Emphasis is on decisions affecting the future. Relevance of items relating to decision making is emphasized. Timeliness of information is required. Detailed segment reports about departments, products, customers, and employees are prepared. Need not follow Generally Accepted Accounting Principles (GAAP). Not mandatory.

2. What are the techniques of Financial Statement analysis? Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis Ratio analysis is the most common form of financial analysis. It provides relative measures of the firm's conditions and performance. Horizontal analysis is used to evaluate the trend in the accounts over the years, while vertical analysis, also called a common size financial statement , discloses the internal structure of the firm. It indicates the existing relationship between sales and each income statement account. It shows the mix of assets that produce income and the mix of the sources of capital, whether by current or long-term debt or by equity funding. When using the financial ratios, a financial analyst makes two types of comparisons: (1) Industry comparison. (2) Trend analysis. A firm's present ratio is compared with its past and expected future ratios to determine whether the company's financial condition is improving or deteriorating over time.

1. Write a short note on Inventory turnover ratio. Inventory turnover ratio measures the velocity of conversion of stock into sales. Usually a high inventory turnover/stock velocity indicates efficient management of inventory because more frequently the stocks are sold, the lesser amount of money is required to finance the inventory. A low inventory turnover ratio indicates an inefficient management of inventory. A low inventory turnover implies over-investment in inventories, dull business, poor quality of goods, stock accumulation, accumulation of obsolete and slow moving goods and low profits as compared to total investment.

The inventory turnover ratio is also an index of profitability, where a high ratio signifies more profit, a low ratio signifies low profit. Sometimes, a high inventory turnover ratio may not be accompanied by relatively a high profits. Similarly a high turnover ratio may be due to under-investment in inventories. It may also be mentioned here that there are no rule of thumb or standard for interpreting the inventory turnover ratio. The norms may be different for different firms depending upon the nature of industry and business conditions. However the study of the comparative or trend analysis of inventory turnover is still useful for financial analysis. Formula of Stock Turnover/Inventory Turnover Ratio: The ratio is calculated by dividing the cost of goods sold by the amount of average stock at cost. (a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost] Generally, the cost of goods sold may not be known from the published financial statements. In such circumstances, the inventory turnover ratio may be calculated by dividing net sales by average inventory at cost. If average inventory at cost is not known then inventory at selling price may be taken as the denominator and where the opening inventory is also not known the closing inventory figure may be taken as the average inventory. (b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost] (c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price] (d) [Inventory Turnover Ratio = Net Sales / Inventory] 2. Describe the limitations of Fund Flow Statement. Limitations of Funds Flow Statement Funds flow statement has many advantages; however it has some disadvantages or limitations also. some of the limitations of funds flow statement are 1. Funds flow statement has to be used along with balance sheet and profit and loss account, it cannot be used alone. 2. It does not reveal the cash position of the company, and that is why company has to prepare cash flow statement in addition to funds flow statement. 3. Funds flow statement merely rearranges the data which is there in the books of account and therefore it lacks originality. In simple words it presents the

data in the financial statements in systematic way and therefore many companies tend to avoid preparing funds flow statements. 4. Funds flow statement is basically historic in nature, that is it indicates what happened in the past and it does not communicate anything about the future, only estimates can be made based on the past data and therefore it cannot be used the management for taking decision related to future. 1. Explain the preparation of budget.

2. Write a short note on Return on Average Investment method.

Average Return on Investment, also known as rate of return, rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. It is usually expressed as a percentage rather than a fraction. It is derived by combining some bigger numbers and some smaller numbers, some years better than the average and some worse than average years. This is how averages work. It measures the cash generated by or lost due to the investment. It measures the cash flow or income streaming to the investor from an investment, in relation to the amount invested. The Cash flow can be in the form of profit, interest, dividends, or capital gain/loss. Capital gain/loss occurs when the market value or resale value of the investment increases or decreases respectively. Any investment carries significant risk, the investor will lose some or all of the invested capital or even gain. For example, investments in company stock shares put capital at risk; the capital value (price) of a stock share constantly changes. Since all stock shares have some changes in price with time, the changes in price directly affects Average Return on Investment for stock investments. It should be noted that this investment is a measure of profitability and not a measure of size. In general, the higher the investment risk, the greater the potential investment return, and the greater the potential investment loss. Financial experts advise customers to just hang in there through the bad times, taking advantage of the drop in your fund's share price to buy more at bargain prices. Switching from one fund to another in Average Return on Investment can sometimes be a big mistake

3. Describe the advantages of Ratio analysis. Ratio analysis is an important tool for analyzing the company's financial performance. The following are the important advantages of the accounting ratios.

1. Analyzing Financial Statements : Ratio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as

investors, management. bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose. 2. Judging Efficiency: Accounting ratios are important for judging the company's efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits. 3. Locating Weakness : Accounting ratios can also be used in locating weakness of the company's operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them. 4. Formulating Plans :Although accounting ratios are used to analyze the company's past financial performance, they can also be used to establish future trends of its financial performance. As a result, they help formulate the company's future plans. 5. Comparing Performance: It is essential for a company to know how well it is performing over the years and as compared to the other firms of the similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison. 1. Describe the features of management accounting. Management accounting is primarily concerned with financial information. Management accountants take information provided by financial accountants and use it to analyze the business and make decisions based on that information. The information is used internally only for future business plans, such as budgets and forecasting. Management Accounting Management accounting is performed by management teams in a company to analyze the financial information produced by accountants within the business. The information management accountants determine is used to further goals within the company. Management accountants do not handle daily transactions of the business, but instead work towards improving profitability and growth for the company. Internal Role Financial accountants provide accounting information to outsiders, such as lending institutions, stockholders and anyone else interested in the business. Management

accounting is different because all the information provided stays internally within the company. The information is used to make sound business decisions for future plans for the company. These accountants budget for and forecast the companys strategic goals. They set, implement and monitor internal controls of the company, ensuring they are developed properly and work well for the company. They also carefully monitor budgets, making sure that companies are spending their money wisely and appropriately. They look for new trends and try to keep up with them by implementing new technology into future plans.

Reports All the information that management accountants provide is in the form of reports. These reports cover a multitude of topics, including employee performance and actual versus planned performance and results. Another type of report generated by these accountants is a business update. Update reports provide information about orders received, sales and projected sales. Management accountants frequently compare plans versus actual occurrences. Their job consists of future planning for the company and making sure the plans work and are efficient. If there is a specific problem happening in the company, such as a production or profitability issue, management accountants study the problem and produce a report about it to remedy the situation 1. INTENDED USERS: managerial accounting information is aimed at helping managers within the organization make decisions. In contrast, financial accounting is aimed at providing information to parties outside the organization. 2. REGULATION: While Financial Accountants follow GAAP set by professional bodies in each country, Managerial Accountants make use of procedures and processes that are not regulated by a standard-setting bodies. 3. TIME PERIOD: Managerial Accounting provides top management with reports that are future-oriented, while Financial Accounting provides reports based on historical information. 4. CONFIDENTIALITY: Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. 5. TYPE OF INFORMATION: Rather than a specific set of financial documents, managerial accounting has a broad range of reports that are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. 2. Explain the types of budgets.

3. Describe the importance of capital budgeting. The Importance Of Capital Budgeting Capital budgeting (or investment appraisal) is the planning process used to determine a firms expenditures on assets whose cash flows are expected to extend beyond one year such as new machinery, equipments, etc. It is also the process of identifying, analyzing and selecting investment projects whose cash flows are expected to extend beyond one year such as research and development project. Capital expenditures can be very large and have a significant impact on the firms financial performance. Besides, the investments take time to mature and capital assets are long-term, therefore, if a mistake were done in the capital budgeting process, it will affect the firm for a long period of time. Basically, the importance of capital budgeting are as follow: 1) Avoid forecast error The future success of a business largely depends on the investment decisions that corporate managers make today. Investment decisions may result in a major departure from what the company has been doing in the past. Through making capital investments, firm acquires the long-lived fixed assets that generate the firms future cash flows and determine its level of profitability. Thus, this decision greatly influences a firms ability to achieve its financial objectives.

For example, if the firm invests too much it will cause higher depreciation and expenses. On the other hand, if the firm does not invest enough, the firm will face a problem of inadequate capacity and thus, lose its market share to its competitors. 2) Helps firm to plan its financing Proper capital budgeting analysis is critical to a firms successful performance because capital investment decisions can improve cash flows and lead to higher stock prices. Yet, poor decisions can lead to financial distress and even to bankruptcy. Although a tactical investment decision generally involves a relatively small amount of funds, strategic investment decisions may require large... 4. What are the types of errors in accounting? We can divide accounting errors with following ways: 1. Errors of Principle : In accounting, if accountant records any transaction against the rules of double entry system, then this mistake is called error of principle. For example, accountant takes all capital expenditures as revenue

expenditures and passes the entry of machinery purchased in purchase account. 2. Clerical Errors We can separate clerical mistakes with following ways: a) Errors of Omission : If accountant forgets to pass the journal entry of any transaction or if he records only one part of transaction, then these mistakes are called errors of omission. Accountant can also forget to post any journal entry in ledger accounts. b) Errors of Commission : If accountant passes the wrong entry or posts wrong side of ledger accounts or writes wrong amount or calculates wrong total of any account, then these types of mistakes are called errors of commission. Some of errors of commission can easy find out by making trial balance but some errors of commission cannot find out through trial balance. c) Compensating Errors: Sometime we compensate one error with any other errors. For example we write Rs. 500 less in the credit side of sales account but same time we write less Rs. 500 in the debit side of purchase account. This is the error which cannot be revealed through trial balance.

1. Describe the uses of analysis of financial statements. We know business is mainly concerned with the financial activities. In order to ascertain the financial status of the business every enterprise prepares certain statements, known as financial statements. Financial statements are mainly prepared for decision making purposes. But the information as is provided in the financial statements is not adequately helpful in drawing a meaningful conclusion. Thus, an effective analysis and interpretation of financial statements is required. Analysis means establishing a meaningful relationship between various items of the two financial statements with each other in such a way that a conclusion is drawn. By financial statements we mean two statements : (i) Profit and loss Account or Income Statement (ii) Balance Sheet or Position Statement

These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and position statement. It determines financial strength and weaknesses of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability, financial soundness and future prospects of the business units. Financial analysis serves the following purposes : Measuring the profitability : The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest and dividend. Indicating the trend of Achievements : Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc. can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged. Assessing the growth potential of the business : The trend and other analysis of the business provides sufficient information indicating the growth potential of the business. Comparative position in relation to other firms : The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales, expenses, profitability and utilising capital, etc. Assess overall financial strength : The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of new machines and equipments are provided from internal sources of the business or not if yes, how much? And also to assess how much funds have been received from external sources. Assess solvency of the firm : The different tools of an analysis tell us whether the firm has sufficient funds to meet its short term and long term liabilities or not.

1. Describe the methods of preparing a cash flow statement.

Cash flow statement is a financial statement that reveals how much cash comes into a business and how much goes out. This document or stamen is considered as a necessary companion to an income statement and a balance sheet when evaluating the financial condition of a business. Preparing cash flow statement is very essential when doing any business as it will help you avoid your business running out of money. The main purpose for cash flow statement preparation is to report the sources and uses of cash during the reporting period. Statement of cash flow can be prepared in several different formats. Lets find out the methods for preparing cash flow statement. Direct method Direct method of preparing cash flow statement is a very simple and result is more easily understood report. In this direct method, you are analyzing or evaluating your cash and bank accounts to identify cash flow during the period. You could use a detailed general ledger report that shows all the entries to the cash and bank accounts. Then you would determine the offsetting entry for each cash entry so as to determine where each cash movement should be reported on the cash flow statement. The other way of determining cash flows through direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting so as to arrive at the net cash effect for that particular line item for the period. In cash flow statement preparation under direct method, the report only contains the information of the period covered and does not have information to the income statement and balance sheet. The information reported in this method is somewhat straightforward. When you use the direct format of cash flow statement, there should also be a reconciliation schedule attached, which in essence is the indirect method. Indirect method Indirect method of preparing cash flow statement is frequently used and most common method. This method of reporting cash flow statement is less expensive to use. To prepare cash flow statement via this method you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement. It shows the change in net working capital. Under this method you are basically evaluating your income and expense accounts, and working capital. 2. E x p l a i n t h e s c o p e o f A c c o u n t i n g . 3. What is a Trial Balance? Bring out the objectives of preparing a Trial Balance.

A trial balance is a list of all the nominal ledger (general ledger) accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit

balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance. Objectives Of Trial Balance : The following are the important objectives of trial balance 1. To Check The Arithmetical Accuracy Trial balance is based on the double-entry principle of debit equals credit or credit equals debit. As a result, the debit and credit columns of trial balance must always be equal. If they do, it is assumed that the recordings of financial transactions are accurate. Conversely, if they do not, it is assumed that they are not arithmetically accurate. Therefore, one important purpose of preparing trial balance is to provide a check on the arithmetical accuracy of the recordings of the financial transactions. 2. To Help Locate Accounting Errors Since the trial balance indicates if there is any error committed in the journal and the ledger, it helps the accountant to locate the error because the starting point of locating errors is trial balance itself. 3. To Summarize The Financial Transactions A business performs several numbers of financial transactions during a certain period of time. The transactions themselves can not portray any picture of the financial affairs of the business. For that purpose, a summary of the transactions has to be drawn. The trial balance is prepared with a view to summarize all the financial transactions of the business. 4. To Provide The Basis For Preparing Final Accounts Final accounts are prepared to show profit and loss and the financial position of the business at the end of an accounting period. These accounts are prepared by using the debit and credit of all ledger accounts. Therefore, since the trial balance is a statement of the debit and credit balances of the ledger accounts, it provides the basis for the preparation of the final accounts 4. How the profit or loss will be calculated under conversion method?

5. What do you mean by Financial Statements? What are the objectives of Financial Statements?

6. What are the limitations of ratio analysis?

Though ratio analysis is an important tool for analyzing the financial statements of the company and has many advantages, however it has certain limitations. Lets look at some of the limitations of the ratio analysis 1. While ratio analysis can be great for comparison between companies, however if there is only one company then ratio analysis can be misleading. 2. Since ratio analysis is done from the data in the financial statements like profit and loss and balance sheet, in case of any mistakes in those financial statements will reflect in the ratios also 3. Since Ratios are easy to manipulate they are misused by managers for window dressing; window dressing refers to presenting of better picture of the company than what it is. 4. Ratio analysis does not take into account the qualitative factors; it only presents the figures as they are. So for example it may possible that company may have higher current ratio indicating that liquidity position of the company is good, however if large portion of those current asset includes inventory then it does not mean a sound liquidity position. 5. Ratios are not same for everybody that is different people have different perception regarding the ratios. So a current ratio of 2:1 may be good for some people, however some people may think it is not adequate. 6. Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting 7. Ratios are generally distorted by inflation

1. Compare Fund Flow Statement and Cash Flow Statement.[May 2010]

We have fully explained the meaning and importance of both the statements-Funds Flow an Cash Flow statements. A distinction between these two statements may be briefed as under:-

(i) Funds Flow Statement is concerned with all items constituting funds (Working Capital)for the business while Cash Flow Statement deals only with cash transactions. In other words, a transaction affecting working capital

other than cash will affect Funds statement, and not the Cash Flow Statement. (ii) In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash Flow Statement, individual item involving cash is taken into account.

(iii) Funds Flow statement is started with the opening cash balance and closed with the closing cash balance records only cash transactions.

(iv) Cash Flow Statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement.
2. Explain the Organisational setup for Budgetary control.

3. What are the objectives of Capital budgeting? 4. Define accounting. What are the functions of accounting? 5. Give the rules for Journalising. Journalising is a systematic process of recording financial transaction. Such recording are made in terms of debit and credit. In it, financial transactions are recorded in the original book. Rules of journalising Every financial transaction of a business organization has dual effect.It means that every financial transaction of a business involves at least two accounts. One account is debited and the other account is credited. Before journalising a transaction, following three steps must be borne in mind. 1. Firstly, we need to find out the two aspects or two fold effects of a transaction. 2. Secondly, we need to identify the accounts whether they are personal, real or nominal accounts. 3. Finally, we need to use the rules of debit and credit.

There are two concept available for recording financial transactions of business organization. They are:- Traditional concepts and modern concept. Traditional concept of journalising is also known as British Approach and modern concept of journalising is also known as American Approach.

Step1. Identify the accounts involved in the transaction. Step 2. Classify the accounts into Personal, Real or Nominal. Personal accounts------------ Accounts related to persons(natural or artificial). Real accounts------------------ Accounts related to assets. Nominal accounts------------- Accounts related to incomes and expenditures. Step 3. Apply the following rules......... Type of account Personal Real Nominal Incomes and Gains. Rule for Debit or Credit Debit the Receiver, Credit the Giver. Debit what comes in, Credit what goes out. Debit all the Expenses and Losses, Credit all the

6. What is single entry system? Explain its limitations.

Single entry system or single entry bookkeeping is an accounting method which relies on one side accounting. Though double entry is common among business houses, single entry is a bare essential and very important for small business houses. While few of these single entries would hold only information regarding cash, accounts receivable, accounts payable and taxes while information regarding assets, inventory, expenses and revenues are not recorded. Such non recorded information is preserved in the form of memorandums. Such information is used in income statements and balance sheets. Simplicity of Single Entry : Single entry is simple and maintained with the least expense since it could be done with the help of an untrained person. However the data would not be useful for the management to control and plan the business. While detecting errors is easy in double entry, single entry does not alert the clerks errors. Single entry does not exist in reality and refers to defective accounting that

falls short of accurate double entry system. Revenues and expenses could be showed in a single column of rows or in two columns in single entry. Additional columns may be added to classify revenues and expenses.

The limitations or defects or disadvantages of single entry system may be summed up as follows: Under this system only partial and incomplete record is maintained because two fold aspects of transactions are generally ignored. As the two fold aspects of every transaction are not recorded, a trial balance cannot be drawn up to test the arithmetical accuracy of the records. A nominal accounts are not maintained, a profit and loss account cannot be prepared for want of information regarding the various income and expenditures. As no real accounts are maintained the preparation of balance sheet is not possible.

1. Explain the nature of financial statements. Financial statements indicate the financial strength of an enterprise and communicate financial information to the different interested parties. According to the American Institute of Certified Public Accountants (AICPA), Financial statements reflect a combination of recorded facts, accounting conventions and personal judgements and judgements and conventions applied affect them materially. Accordingly, the nature of financial statements may be explained as follows: a. Recorded Facts: Financial transactions that take place are recorded in the books of accounts of the concern in monetary value. Financial statement are prepared taking those recorded transactions. These recorded facts reflect results of past activities of the enterprise and accordingly, they are called historical evidences/ On the basis of these historical evidences as recorded during an accounting period, these statements are prepared at the end of the accounting period. Hence one of the natures of financial statements is that they are prepared on the basis of past recorded facts.

ii. Accounting conventions: Some accounting principles, concepts, conventions and postulates are appliled while preparing financial statements. These

principles, concepts conventions and postulates are applied in preparing financial statements in order to make them reliable, meaningful and comparable. Concepts of materiality, consistency, periodicity, conservatism, full disclosures etc., are examples of such accounting principles, concepts, conventions and postulates that are applied in the financial statements. iii. Periodic Information: Financial statements exhibit periodical financial information of an entity. As these are prepared generally at the end of every accounting year, these provide relevant financial information for that accounting year. iv. Summary of Activities: financial statements should incorporate summary of the financial information of all activities of the concern. It includes financial information of operating, investing and financing activities of the concern. V. Prime Aid for Financial Analysis: Financial Statements provide prime information for financial analysis of a concern. These act as the prime aid for financial analysis by disclosing all the material information before the users. vi. Legal conformity: Financial statements must disclose all the information as required by the law of the country. vii. Personal judgements: financial statemetns are not prepared only on the basis of established accounting principles and conventions and legal requirements, personal judgements of accountants and management are also applied in some cases for preparing them. 1. Explain the various classification of ratios. 2. What are the managerial uses of fund flow statement? Fund Flow statement is an invaluable analytical tool for a financial manager for the purpose of evaluating the employment of funds by a firm and also to assess sources of such funds. Managerial Uses of Fund flow statement are:1. The foremost use of the fund flow statement is to explain the reasons for changes in the assets and liabilities between two balance sheet dates. 2. Fund flow statement gives details about the funds obtatined and used in past. Based upon this detail, manager can take correct actions at appropriate times. 3. Fund flow statement acts as a control device when compared with budgeted figures. It also gives guidance to the finance manager for taking remedial action if there is any deviation. 4. It helps the management to formulate various financial polices viz dividend, bonus etc., 5. It gives guidance to the management with regard to working capital. Through fund flow statement, management can take proper steps for

effective utilization of surplus working capital or in case of inadequacy, suitable arrangement can be made for improving the working capital positon. 6. It identifies the strong and weak financial areas of the firm. 7. It gives answers for various financial intricate questions: a. How much funds were generated? b. How were the funds used? 8. Effective utilization of available resources and scarce resources should be allocated according to the preferential needs. 9. With the help of fund flow statement, financial and lending institutions can easily evaluate the credit worthiness and repaying capacity of the borrowing company. 10.It enables the management to reformulate the firms financial activity on the basis of the statement. 1. What is meant by master budget?

A large collective budget that combines all of the departments' individual budgets is often called a master budget. It is used by company executives to determine how much the business is earning and spending as a collective unit. The results of the budget are used to pinpoint budget issues, excessive spending or sales patterns.

Definition
The master budget is a collection of all smaller budgets used within a company. This includes the individual purchase budgets; production budgets for services and company product; fixed-expenses budgets for the business operations; and all of the flexible expenses the business spends on travel, business dining and marketing campaigns. All of the budgets are added up by creating specific categories under the master budget. For example, if the marketing budget has an events expense category, the master budget will have an events category where the amount for marketing event expenses will be added. Any other department that has an events category in the budget will be added to the events category in the master budget.

Features
A master budget may have specific features, depending on how large the master budget is for the given business. For example, the master budget may include various charts to organize all of the financial amounts and data, or graphs to visually display the numeric values of the business. If the master budget is being compared to an older master budget in order to show how the business has grown, it will most likely encompass both graphs and charts, along with written text that discusses the changes that have occurred.

Advantages and Disadvantages

A master budget has both advantages and disadvantages. Advantages include being able to see the company's finances as a whole and to identify any major budget issues that may plague the business. Identifying these issues allows the company to plan ahead and make budget cuts, for example. Disadvantages include the lack of specific data for each department or area of the business, along with the difficulty in presenting the data, which can be hard to read and understand.

1. Explain the importance of capital budgeting. Capital Budgeting is the technique of long-term planning and analysis of outflows and inflows of funds relating to some investment objectives. It is the planning of capital expenditure which provided return over a number of years. According to Charles. T. Horngreen Capital Budgeting is long term planning for making and financing proposed capital outlay. Capital Budgeting is the process of making investment decisions in the capital expenditure which are essentially long-term projects, the benefits of which are expected to be received over a number of years. Therefore, it is the decision making process by which firms evaluate their future long term investments like purchase of new fixed assets, new investments to be made outside the firm and so on. Importance of Capital Budgeting: Capital budgeting has an immense importance to every concern for its long-term decision-maing due to the following reasons. (1) Capital budgeting decisions involve a huge investment. As the resources are limited, it is very important to judge the viability of the proposed capital expenditure. (2) Funds involved in the capital budgeting are not only huge but more or less permanently blocked in the organization. In this respect, it involves longer time and greater risk. So careful planning is essential. (3) Long term effect on profitability (4) National importance generation of employment, economic activities and economic growth. (5) Complications of investment decisions. 1. Describe the scope of accounting. 2. Briefly explain the accounting conventions. The term "conventions" includes those customs or traditions which guide the accountants while preparing the accounting statements. The following are the important accounting conventions. Convention Convention Convention Convention of of of of Disclosure Materiality Consistency Conservatism

Convention of Disclosure: The disclosure of all significant information is one of the important accounting conventions. It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. The term disclosure does not imply that all information that any one could desire is to be included in accounting statements. The term only implies that there is to a

sufficient disclosure of information which is of material in trust to proprietors, present and potential creditors and investors. The idea behind this convention is that any body who want to study the financial statements should not be mislead. He should be able to make a free judgment. The disclosures can be in the way of foot notes. Within the body of financial statements, in the minutes of meeting of directors etc. Convention of Materiality: It refers to the relative importance of an item or even. According to this convention only those events or items should be recorded which have a significant bearing and insignificant things should be ignored. This is because otherwise accounting will be unnecessarily over burden with minute details. There is no formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision. It should be noted that an item material for one concern may be immaterial for another. Similarly, an item material in one year may not be material in the next year. Convention of Consistency: This convention means that accounting practices should remain uncharged from one period to another. For example, if stock is valued at cost or market price whichever is less; this principle should be followed year after year. Similarly, if depreciation is charged on fixed assets according to diminishing balance method, it should be done year after year. This is necessary for the purpose of comparison. However, consistency does not mean inflexibility. It does not forbid introduction of improved accounting techniques. If a change becomes necessary, the change and its effect should be stated clearly. Convention of Conservatism: This convention means a caution approach or policy of "play safe". This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration. If there is a possibility of loss, it should be taken into account at the earliest. On the other hand, a prospect of profit should be ignored up to the time it does not materialise. On account of this reason, the accountants follow the rule 'anticipate no profit but provide for all possible losses'. On account of this convention, the inventory is valued 'at cost or market price whichever is less.' The effect of the above is that in case market price has gone down then provide for the 'anticipated loss' but if the market price has gone up then ignore the 'anticipated profits.' Similarly a provision is made for possible bad and doubtful debt out of current year's profits.

1. Distinguish between Trade Discount and Cash Discount. Trade Discount Trade discount is issued by deduction in list price Trade discount is given with the aim to Cash Discount Cash discount is issued by deduction in payable amount of debtors Cash discount is given with the aim to

purchase at high quantity Trade discount is shown as deduction in Invoice There is no any accounting treatment for trade discount. Trade discount is related to quantity of the goods purchased. There is no need to give cash discount with trade discount

get payment fastly and before payment date Cash Discount is not shown as deduction in Invoice There is accounting treatment for cash discount both in vendor and buyers day book. Cash Discount is related to the amount of payment but not to quantity of goods If seller has given trade discount, cash discount can be given after trade discount

2. What is Balance sheet? State the object of preparing balance sheet. Definition and Explanation: A balance sheet is a statement drawn up at the end of each trading period stating therein all the assets and liabilities of a business arranged in the customary order to exhibit the true and correct state of affairs of the concern as on a given date. A balance sheet is prepared from a trial balance after the balances of nominal accounts are transferred to the trading account or to the profit and loss account. The remaining balances of personal or real accounts represent either assets or liabilities at the closing date. These assets and liabilities are shown in the balance sheet in a classified form - the assets being shown on the right side and the liabilities on the left hand side.

Balance Sheet as at .......... Liabilities Bills Payable Loans Trade Creditors Capital Rs. Assets Cash in hand Cash at Bank Investments Bills Receivables Debtors Stock (Closing) Stores Furniture & Fixtures Plant & Machinery Land & Buildings Rs.

Main Objectives of Balance Sheet

The main objectives of preparing a Balance Sheet is to ascertain the financial position of the business on a particular date. While ascertaining the financial position, we also obtain the following additional information: Nature and Value of the assets: A balance sheet contains various assets in classified, from with their respective values and as such it gives a clear picture about the nature and the value of different assets Comprising fixed assets, current assets etc. Nature and extent of liabilities and actual capital: Like assets, a balance sheet also contains different liabilities in a classified form and shows the amount of liabilities the business owes to different types of creditors. It also shows the actual capital of the business at the end of trading period, representing the excess of assets over liabilities. Solvency of the business: If the assets exceed the liabilities the business is considered as solvent. Greater is the difference, stronger is the financial position. On the other hand, if liabilities exceed the assets, the business is considered as insolvent. Over-trading and under-trading: If the total creditors exceed assets - Cash, Bank, Investments, Debtors etc., the position of the business is financially unsound, indicating over-trading. For sound financial position, a business must have sufficient working capital. On the other hand, under-trading indicates excess liquid assets over current liabilities, showing idleness of the funds.

3. Explain the limitations of Ratio analysis.

Drawbacks & limitations of ratio analysis Ratio analysis is widely used in practice in business. Teams of investment analysts pour over the historical and forecast financial information of quoted companies using ratio analysis as part of their toolkit of methods for assessing financial performance. Venture capitalists and banker use the ratios featured here and others when they consider investing in, or loaning to businesses. The main strength of ratio analysis is that it encourages a systematic approach to analyze performance.

However, it is also important to remember some of the drawbacks of ratio analysis Ratios deal mainly in numbers they dont address issues like product quality, customer service, employee morale and so on (though those factors play an important role in financial performance) Ratios largely look at the past, not the future. However, investment analysts will make assumptions about future performance using ratios Ratios are most useful when they are used to compare performance over a long period of time or against comparable businesses and an industry this information is not always available Financial information can be massaged in several ways to make the figures used for ratios more attractive. For example, many businesses delay payments to trade creditors at the end of the financial year to make the cash balance higher than normal and the creditor days figure higher too.

1. What is zero-base budgeting? Explain its process.

Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, the managers start with last year's budget and add to it (or subtract from it) according to anticipated needs. This is an incremental approach to budgeting in which the previous year's budget is taken for granted as a baseline. This approach is called incremental budgeting. ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations. The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward The basic process of zero-based budgeting is to justify budget requests every budgeting cycle, regardless of prior period budgets. The following sections address the specifics including the history, implementation, drawbacks and solutions, and behavioral impacts of zero-based budgeting
Zero Based Budgeting (ZBB)

Zero based budget Start each budget period afresh-not based on historical data Budgets are zero unless managers make the case for resources-the relevant manager must justify the whole of the budget allocation It means that each activity is questioned as if it were new before any resources are allocated to it. Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities. Zero based budgets are designed to prevent budgets creeping up each year with inflation Advantages of ZBB Forces budget setters to examine every item. Allocation of resources linked to results and needs. Develops a questioning attitude. Wastage and budget slack should be eliminated. Prevents creeping budgets based on previous years figures with an added on percentage. Encourages managers to look for alternatives. Disadvantages of ZBB It a complex time consuming process Short term benefits may be emphasised to the detriment of long term planning Affected by internal politics - can result in annual conflicts over budget allocation

2. Write a note on : (a) Pay back method

Definition and Explanation:

The payback is another method to evaluate an investment project. The payback method focuses on the payback period. The payback period is the length of time that it takes for a project to recoup its initial cost out of the cash receipts that it generates. This period is some times referred to as" the time that it takes for an investment to pay for itself." The basic premise of the payback method is that the more quickly the cost of an investment can be recovered, the more desirable is the investment. The payback period is expressed in years. When the net annual cash inflow is the same every year, the following formula can be used to calculate the payback period.

Formula / Equation:
The formula or equation for the calculation of payback period is as follows: Payback period = Investment required / Net annual cash inflow*
*If new equipment is replacing old equipment, this becomes incremental net annual cash inflow.

To illustrate the payback method, consider the following example:

Example:
York company needs a new milling machine. The company is considering two machines. Machine A and machine B. Machine A costs Rs.15,000 and will reduce operating cost by Rs. 5,000 per year. Machine B costs only Rs. 12,000 but will also reduce operating costs by Rs. 5,000 per year. Required:

Calculate payback period. Which machine should be purchased according to payback method?

Calculation:
Machine A payback period = 15,000 / 5,000 = 3.0 years Machine B payback period = 12,000 / 5,000 = 2.4 years According to payback calculations, York company should purchase machine B, since it has a shorter payback period than machine A.

(b)

Accounting rate of return method.

Accounting Rate of Return (ARR) : According to this Method, Various proposals are ranked in order to rate of earnings on the investment in the projects concerned. The project which shows highest rate of return is selected and others are ruled out. The Accounting rate of Return is found out by dividing the average income after taxed by the average investment, i.e., average net value after depreciation. The accounting rate of return, thus, is an average rate and can be determined by the following equation.
Accounting Rate of Return (ARR) = Average income / Average investment

There are two variants of the accounting rate of return (a) Original Investment Method, and (b) Average Investment Method. (a) Original Investment Method: Under this method average annual earnings or profits over the life of the project are divided by the total outlay of capital project, i.e., the original investment. Thus ARR under this method is the ratio between average annual profits and original investment established. We can express the ARR in the following way.
ARR= Average annual profits over the life of the project / Original Investment

(b) Average Investment Method: Under average investment method, average annual earnings are divided by the average amount of investment. Average investment is calculated, by dividing the original investment by two or by a figure representing the mid-point between the original outlay and the salvage of the investment. Generally accounting rate of return method is represented by the average investment method. Rate of return. Rate of Return, as the term is used in our foregoing discussion, may be calculated by taking (a) income before taxes and depreciation, (b) income before tax and after depreciation. (c) income before depreciation an after tax, and (d) income after tax an depreciation, as the numerator. The use of different concepts of income or earnings as well as of investment is made. Original investment or average investment will give different measures of the accounting rate of return.

1. Why trial balance is prepared?

Features and Objectives of Preparing Trial Balance:

A trial balance can be defined as a statement of balances extracted from the various accounts in the ledger with a view to test the arithmetical accuracy of the books of account. It is has two sides debit and credit and they both should be equal.

Features of trial balance :

1. Trial balance can be prepared anytime during the accounting period. 2. It is prepared to check the arithmetical accuracy of posting of entries from journal to ledger, in other words it is an instrument for carrying out the job of checking and testing. 3. It is not a part of the double entry system of book keeping but only for checking the accuracy of posting. However it does not reveal all errors.

Objectives of preparing trial balance:

1. It ensures that all transactions have been recorded with the same debit and credit amounts 2. It makes the preparation of trading, profit and loss account and balance sheet easy by making available the balances of all account at single place.

3. By identifying errors in the books of accounts it helps in rectifying those errors before the preparation of the final accounts. 1. Give the meaning of ledger.

A ledger is the principal book for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which list individual transactions by date. Every transaction flows from a journal to one or more ledgers. A company's financial statements are generated from summary totals in the ledgers Ledgers include: Sales ledger, records accounts receivable. This ledger consists of the financial transactions made by customers to the company. Purchase ledger records money spent for purchasing by the company. General ledger representing the 5 main account types: assets, liabilities, income, expenses, and equity. For every debit recorded in a ledger, there must be a corresponding credit so that the debits equal the credits in the grand totals.

1. Explain the objectives of budgeting. Objectives of budgeting are: Provide structure: A budget is especially useful for giving a company guidance regarding the direction in which it is supposed to be going. Thus, it forms the basis for planning what to do next. A budget only provides a significant amount of structure when management refers to it constantly, and judges employee performance based on the expectations outlined within it. Predict cash flows: A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns. These companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises. A budget is useful for predicting cash flows, but yields increasingly unreliable results further into the future. Thus, providing a view of cash flows is only a reasonable budgeting objective if it covers the next few months of the budget. Allocate resources: Some companies use the budgeting process as a tool for deciding where to allocate funds to various activities, such as fixed asset purchases. Though a valid objective, it should be combined with capacity constraint analysis

(which is more of an industrial engineering function than a financial function) to determine where resources should really be allocated. Model scenarios: If a company is faced with a number of possible paths down which it can travel, then you can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction. Though useful, this objective can result in highly unlikely results if management lets itself become overly optimistic in inputting assumptions into the budget model. Measure performance: A common objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the budget. This is a treacherous objective, since employees attempt to modify the budget to make their personal objectives easier to achieve (known as budgetary slack). 2. Write a short note on NPV. Net present value method (NPV), and other is the internal rate of return method (also called the time adjusted rate of return method). Under the net present value method, the present value of a project's cash inflows is compared to the present value of the project's cash outflows. The difference between the present value of these cash flows is called "the net present value". This net present value determines whether or not the project is an acceptable investment. NPV is an indicator of how much value an investment or project adds to the firm. With a particular project,
If the net present value is
Positive Zero Negative

Then the project is

Acceptable since it promises a return greater than the required rate of return Acceptable, since it promises a return equal to the required rate of return. Not acceptable, since it promises a return less than the required rate of return

To illustrate consider the following data. Example 1: Harper company is contemplating the purchase of a machine capable of performing certain operations that are now performed manually. The machine will cost $5,000, and it will last for five years. At the end of five-years period the machine will have a zero scrap value. Use of the machine will reduce labor costs by $1,800 per year.

Harper company requires a minimum pretax return of 20% on all investment projects. Should the machine be purchased? Harper company must determine whether a cash investment now of $5,000 can be justified if it will result in an $1,800 reduction in cost each year over the next five years. It may appear that the answer is obvious since the total cost savings is $9,000 (5 $1800). However, the company can earn a 20% return by investing its money elsewhere. It is not enough that the cost reductions cover just the original cost of the machine. they must also yield at least 20% return or the company would be better off investing the money elsewhere. To determine whether the investment is desirable, the stream of annual $1,800 cost savings is discounted to its present value and then compared to the cost of the new machine. Since Harper company requires a minimum return of 20% on all investment projects, this rate is used in the discounting process and is called the discount rate. This analysis is shown below.
Initial Cost Life of the project (year) Annual cost savings Salvage value Required rate of return Item Annual cost savings Initial investment Net present value Years 15 Now Amount of cash flows $1,800 (5,000) 20% Factor 2.991* 1,000 $5,000 5 $1,800 0 20% Present value of cash flows $ 5,384 (5,000) --------$ 384 ======

*Present value of an annuity of $1 in arrears. (From - Table 4)

Future Value and Present Value Tables

page

According to this analysis, Harper company should purchase the new machine. The present value of the cost savings is $5,384, as compared to a present value of only $5,000 for the required investment (cost of the machine). Deducting the present value of the required investment from the present value of the cost savings a net value of $384. Whenever the net present value is zero or greater, as in our example, an investment project is acceptable. Whenever the net present value is negative an investment project is not acceptable. 3. List out and explain subsidiary book. Though the principle of journalising all transactions, known as continental system of bookkeeping is quite perfect in actual business but in a large business it is found inconvenient to Journalise every transaction and sometime it becomes rather impossible for one man to Journalise numerous transactions on a business in one journal. Therefore, the journal is sub-divided into different journals known as the subsidiary books or books of prime entry or books of original entry. These are the

books in which are recorded the details of transactions as they take place from day to day, in a classified manner. In every trading concern, the transactions, however numerous they may be, can be grouped into small number of classes. The journal is divided in such a way that a separate book is used for each class of transactions. The important subsidiary books used in modern business world are the following:1. 2. 3. 4. 5. 6. 7. 8. Cash Book: It is used to record all cash receipts and payments. Purchases Book: It is used to record all credit purchases. Sales Book: It is used to record all credit sales Purchases returns book: It is used to record all goods returned by us to our suppliers. Sales Returns Book: It is used to record all goods returned to us by our customers. Bills Receivable Book: It is used to record all accepted bills received by us. Bills payable Book: It is used to record all bill accepted by us to our creditors. Journal Proper: It is used for recording those transactions for which there is no separate book.

All these subsidiary books are called books of original entry, as transactions in their original form are entered therein. Advantages of Different Journals: The advantages of having several books of original entry in place of one journal may be stated to as follows: It may be impossible to record each transaction into the ledger as it occurs. Subsidiary books record the details of the transactions and therefore, helps the ledger to become brief. As similar transactions are recorded together in the same book, future reference to any of them becomes easy. The chance of fraudulent alteration in an account is reduced as the book of original entry keeps records of the transactions in a chronological order. The work of posting can be entrusted to several clerks at the same time and thus the ledger of a large business can be written up much more quickly. As each journal contains separately transactions of similar nature any desired analysis can be made conveniently.

1. Explain different accounting ratios. 2. What are the objectives for preparing cash budget?