ASSIGNMENTS - MBA - I SEMESTER

MB0025

SET 1

Financial and Management Accounting

1. Explain any two concepts of accounting with examples.

Concepts are the basic assumptions or conditions up on which the science of
accounting is based. There are five basic concepts of accounting namely –

• Business entity concept,

• Going concern concept,
• Money measurement concept,
• Periodicity concept and
• Accrual concept.

Business separate entity concept:

The essence of this concept is that business is a separate entity and different from
the owner or the proprietor. This is true in the case all forms of organization. If X
starts business, he should not mix up his personnel properties with that of the
business. When he invests his funds into the business, it is regarded as capital to the
business and capital is a liability from the business point of view. If X withdraws any
money for the business, it is detectable form the capital and to that extent the
liability of the business towards the owner is reduced. On the other hand, if the
proprietor withdraws money from the business for business purposes, then it is
treated as expenditure to the business. This legal separation between business and
ownership is kept in mind while recoding the transactions in the books of business.

Going concern concept

The fundamental assumption is that the business entity will continue fairly for a long
time to come. There is no reason why an enterprise should be promoted for a short
period only to liquidate the business in the foreseeable future. This assumption is
called “Going concern concept”. For this reason accountants value fixed assets on
historical cost method. Had the business been setup to last for short period, fixed
assets should have been valued at a market price. Besides, going concern concept
provides for amortization of the cost of fixed assets over the lifetime of the assets.
For example, an entrepreneur purchases a plant for Rs. one crore and it has a life of
10 years. During this period, he sets aside every year certain funds from the income
of the business so that it would help him for replacement of the asset at the end of
ten years. This process of amortization presupposes that the enterprise will continue
to do business fairly for long time.

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 2. Prove that accounting equation is satisfied in all the following
transactions of Mr.X

Commenced business with cash – Rs.80,000

Purchased goods for cash – Rs.40,000 and on credit Rs.30,000

Sold goods for cash – Rs.40,000 costing Rs.25,000

Paid salary – Rs.2,000 and salary outstanding Rs.1,000

Bought scooter for personal use for cash at Rs.20,000

The accounting equation is, Equity [Working Capital] + Liabilities + Assets

i. Commenced business with cash – Rs 80,000

In the first transaction, the business receives a capital of Rs. 80,000 cash and so
capital account and cash accounts are affected. Capital is a liability and cash is an
asset to the business.

This is shown in the transaction number 1, in the table A.

ii. Purchased goods for cash –Rs 40,000 and on credit Rs. 30,000
In this transaction, cash account, goods account and liabilities account gets affected.

Cash account reduces by Rs. 40,000

Goods account increases by Rs. 40,000

Liabilities account increases by Rs. 30,000

This is shown in the transaction number 2, in the table A.

iii. Sold goods for cash –Rs. 40,000 costing Rs. 25,000
In this transaction, goods account, cash account and profit account gets affected.

Cash account increases by Rs. 40,000

Goods account reduces by Rs. 25,000

Profit account being owner’s account, it gets credited with Rs 15,000

This is shown in the transaction number 3, in the table A.

iv. Paid salary – Rs. 2,000 and salary outstanding Rs. 1,000
In this transaction, cash and salary accounts are affected.

Cash account reduces by Rs. 2,000 as salary account gets credited by Rs. 2,000

Outstanding salary is Rs. 1,000 which is not paid yet, hence none of the accounts
gets affected.

This is shown in the transaction number 4, in the table A.

v. Brought scooter for personal use for cash at Rs. 20,000

The scooter is for personal use, the liability of the business on owner’s capital
decreases.

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Cash account and capital account decreases by Rs. 20,000

This is shown in the transaction number 5, in the table A.

TABLE A

Liabilities and owner's

Assets equity

Transaction Cash Goods Salary Mr.X's

Number a/c a/c a/c Liabilities Capital

1 80000 80000

2 -40000 70,000 30000

3 40000 -25000 15000

4 -2000 2000

5 -20000 -20000

58000 45000 2000 30000 75000

105000 105000

3. Show the rectification entries for the following:

a. The Sales account is undercast by Rs.15,000

b. Goods returned by the customer Mr.X of Rs.5650 has been posted

in the Return Inward Account as Rs.5560 and in Mr.X a/c as
Rs.6,550.

c. Salary paid Rs.6,000 has been posted to Rent account

d. Cash received from Ram posted to Shyam account Rs.7,000

e. Cash received from Jadu Rs.8,640 has been posted to the debit of
Madhu’s a/c

The table below shows the rectification of entries

Particulars Debit [Rs.] Credit [Rs.]

Suspense account Dr 15,000

To Sales account 15,000

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Suspense account Dr 90

To Return account 90

Mr. X’s account Dr 900

To Suspense account 900

Salary account Dr 6000

To rent account 6000

Shyam account Dr 7000

To Ram account 7000

Jadu account Dr 8640

To Madhu account 8640

4. The following balances are extracted from the books of Kiran Trading
Co on 31st March 2000. You are required to prepare trading and profit
and loss account and a balance sheet as on that date:
Opening Stock 5,000 Commission received 2,000
B/R 22,500 Return Outward 2,500
Purchases 1,95,000 Trade Expenses 1,000
Wages 14,000 Office furniture 5,000
Insurance 5,500 Cash in hand 2,500
Sundry Debtors 1,50,000 Cash at bank 23,750
Carriage Inwards 4,000 Rent and Taxes 5,500
Commission Paid 4,000 Carriage Outward 7,250
Interest on Capital 3,500 Sales 2,50,000
Stationery 2,250 Bills Payable 15,000
Return Inwards 6,500 Creditors 98,250
Capital 89,500
The closing stock was valued at Rs.1,25,000

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 Trading account of M/s Kiran Trading Co

Trading Account

Dr Cr

Opening stock 5,000 Sales - Return Inward 243,500

Purchases - Return Outward 192,500 Closing Stock 125,000

Carriage Inwards 4,000

Wages 14,000

Gross Profit 153,000

368,500 368,500

Profit and Loss Account of M/s Kiran Trading Co

Profit and Loss Account

Dr Cr

Rent and Taxes 5,500 by Trading a/c Gross Profit 153,000

Insurance 5,500 Commission Received 2,000

Trade Expenses 1,000

Commission Paid 4,000

Interest on Capital 3,500

Staionary 2,250

Carriage Outward 7,250

Net Profit 126,000

155,000 155,000

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 Balance Sheet Account of M/s Kiran Trading Co

Balance Sheet

Capital and Liabilities Assets

Bills Payable 15,000 Sundry Debtors 150,000

Capital 89,500 Office Furniture 5,000

Creditors 98,250 Cash in Hand 2,500

Net Profit from P & L Account 126,000 Cash in Bank 23,750

B/R 22,500

Closing Stock 125,000

328,750 328,750

5. Write short notes on :

(10 Marks)

a. Outstanding Expenses

Expenses due but not paid are known as outstanding expenses. Wages, salaries,
rent, commission etc payable in the current month are paid in the following month. If
the final accounts are prepared for the year ending 31 st December, then the
expenses payable for December will be paid in January of next year. The extent to
which the amount belongs to the current year but payable in the next year is called
outstanding expenses. To record that aspect, the journal entry drawn in the journal
proper is:

Concerned Expenses account Dr

To outstanding expenses account.

Outstanding expenses account indicates liability for the current year and it will
appear in the balance sheet.

b. Prepaid Expenses

Expenses paid in advance are regarded as prepaid expenses. Prepaid expenses form
an asset and therefore prepaid expenses account is debited. For example, insurance
premium is paid from April, 2004 to March, 2005; and the amount is Rs. 3600. The
financial year ends by 31st December, 2004. Therefore the premium relating to Jan,
Feb. and March of 2005 Rs. 900 is said to have been paid in advance. To record this
internal adjustment, the entry is:

Prepaid Expenses account Dr 900

To insurance account 900

Note that outstanding or prepaid expenses accounts are regarded as personal

accounts.

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 ASSIGNMENTS - MBA - I SEMESTER

MB0025

SET 2

Financial and Management Accounting

1. Budgetary Control is a technique of managerial control through budgets.

Elaborate.

Modern business world is full of competition, uncertainty and exposed to different

types of risks. The complexity of managerial problems has led to development of
various managerial tools, techniques and procedures useful for the management in
managing the business successfully. In this direction, planning and control plays an
important role. Budgeting is the most common and powerful standard device of
palling and control.

Budgetary control is a technique of managerial control through budgets. A

budget is a quantitative expression of plan of action. . It is a pre-determined detailed
plan of action developed as a guide for future operation. According to Wheldon
“Budgetary control is the planning in advance of the various functions of business so
that the business as a whole can be controlled”. Budgetary controls deals with
planning, coordination, recording appraisal and follow-up of actions.

The procedure for preparing plan in respect of future financial and physical
requirements is generally called “Budgeting”. It is a forward planning exercise. It
involves the preparation in advance of the quantitative as well as the financial
statements to indicate the intention of the management in respect of the various
aspects of the business.

Budgetary control is applied to a system of management accounting control by

which all operations and output are forecasted far ahead as possible and actual
results when known are compared with the budget estimates.

Budgeting is a forward planning. It basically serves as a tool for management

control. The objectives of budgeting may be taken as:

• To forecast and plan for future to avoid losses and to maximize profits.

• To help the concern in planning the activities both physical and financial.

• To bring about coordination between different functions of the enterprise.

• To control; actual actions by ensuring that actual are in tune with targets

Budgetary control: When one relates control function to budget, we find a system
what is generally termed as budgetary control. Control signifies such systematic
efforts which help the management to know whether actual performance is in line
with predetermined goal, policy and plans. It is basically a measurement tool.
Yardsticks should be laid down. Standards must be set up.

Therefore, the objectives can be summarized as follows:

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• To conform with good business practice by planning for the future.

• To coordinate the various divisions of a business.

• To establish divisional and departmental responsibilities.

• To forecast operating activities and financial position.

• To operate most efficiently the divisions, departments and cost center.

• To avoid waste, to reduce expenses and to obtain the income desired.

• To obtain more economical use of capital available for the efficient operation.

• To provide more definite assurance of earning the proper return on capital

employed.

• To centralize management control.

• To show the management where action is needed to remedy a situation.

• To help in controlling cash.

• To help in obtaining better inventory control and turnover.

Steps In Budgetary Control

The procedure to be followed in the preparation and control of budget may differ
from business to business. But, a general pattern of outline of budget preparation
and control may go a long way to achieve the end results. The steps are as follows:

Formulation of policies: The business policies are the foundation stone of budget
construction. Function policies should be formulated in advance. Long-range policies
with short term projections should be made for the functional areas such as sales,
production, inventory, cash management, capital expenditure.

Preparation of forecasts:

Based on the formulated policies, forecast should be made in respect of each

function. Activity based concepts should be introduced at the micro level for each
function Forecasts should not be considered as a mere estimates. Scientific methods
should be adopted for forecasting. Analysis of various factors based on past, and
present, future forecast should be made.

Preparation of budgets:

Forecasts are converted into written codified document. Such written documents can
be used for coordination purposes. Function budgets will act as guidelines for
implementation.

Forecast combinations:

While developing the budgets, through a Master Budget various permutations and
combination processes are considered and developed. Based on this, establishment
of the most preferred one which will yield optimum benefits should be considered. All

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the factor components should be identified which are likely to cause disturbances
while implementing the budgets

2. a. Given: Current ratio = 2.6

Liquid ratio = 1.4

Working Capital = Rs.1,10,000

Calculate (1) Current assets (2) current liabilities

(3) Liquid Asset (4) Stock

Given data is working capital, hence:

Working capital = Current assets - current liabilities ----- [1]

Current Ratio = CA / CL = 2.6

In the absence of any value, the current liability is always taken as 1 unit

2.6 = CA / 1 and cross multiplying , CA is 2.6

Substituting CA in [1],

Working capital = 2.6 - 1 = 1.6

For 1.6 WCR = Working capital value is Rs1,10,000

For 2.6 CAR, the current asset is Rs.1,10,000 x 2.6 / 1.6 = Rs.1,78,750

For 1 CLR, the current liability is 1,10,000 x 1 / 1.6 = Rs.68,750

Liquid Ratio =Liquid asset / current liabilities

1.4 = Liquid asset / 2,86,000

Liquid asset = 1.4 X 68,750

= 96,250

Liquid asset = Current asset – Stock

Therefore,

Stock = Current Asset – Liquid Asset

= 1,78,750 – 96250

= Rs. 82,500

b. Calculate Gross Profit Ratio from the following figures:

Sales Rs.5,00,000
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Sales return Rs.50,000

Closing stock Rs.35,000

Opening stock Rs.70,000

Purchases Rs.3,50,000

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed
as a percentage. It expresses the relationship between gross profit and sales.

[Gross Profit Ratio = (Gross profit / Net sales) × 100]

Cost Of Goods Sold [COGS] = Opening stock + Purchases – closing stock

= 70000 + 350000-35000

COGS = 385000 Rs.

Gross Profit = (Sales – Sales returns) - COGS

= (500000 – 50000) – 385000

= 450000 – 385000

Gross Profit = 65000 Rs.

Net Sales = Sales – Sales returns

= 500000 – 50000

= 450000 Rs.

Gross Profit Ratio = (Gross profit / Net sales) × 100]

= (65000/450000) X 100

= 14.4%

3. From the following Balance Sheet of William & Co Ltd., you are required
to prepare a Schedule of Changes in Working capital & Statement of
Sources and Application of funds.

Balance Sheet

Liabilities 2002 2003 Assets 2002 2003

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 Rs. Rs. Rs. Rs.

Capital 80,000 85,000 Cash in 4,000 9,000

Hand

P&L a/c 14,500 24,500 Sundry 16,500 19,500

Debtors

Sundry 9,000 5,000 Stock 9,000 7,000

Creditors

Long-term - 5,000 Machinery 24,000 34,000

Loans

Building 50,000 50,000

Total 1,03,500 1,19,500 Total 1,03,500 1,19,500

Schedule of changes in working capital

Balance as on Effect on Working Capital

Details
2002 2003 Increase Decrease

Liabilities

Sundry Creditors 9,000 5,000 - 4,000

Long term loans 0 5,000 5000

P&La/c 14500 24500 10000

Total liabilities [B] 23,500 34,500 10,000 9,000

Assets

Cash in Hand 4000 9000 5000

Sundry Debtors 16500 19500 3000

Stock 9000 7000 2000

Machinery 24000 34000 10000

Total Assets (A) 53500 69500 10000 2000

Working Capital A-B 30,000 35,000

Net increase in Working capital 5000 9000

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 35,000 35,000 20,000 20,000

4. Bring out the difference between cash flow and funds flow statement.

Difference Between Cash Flow And Funds Flow Statement

The major differences between the two are :

1. FFS is related with accrual basis whereas CFS is on cash basis. For this the, it
is necessary to convert the accrual to cash basis.

2. In FFS, a Schedule of changes in working capital de-linking the current assets

and current liabilities are made. But in CFS, no schedule is prepared.

3. FFS shows the causes of the changes in net working capital. CFS shows the
causes for the change in cash

4. In FFS, no opening or closing balances are recorded. But in CFS both are
incorporated

5. FFS is not based on the Ledger mode. But CFS is prepared on the basis of
Ledger principles.

6. In FFS, “To” and “By” are indicated. In CFS, these are not indicated.

7. In FFS, net effect of receipts and disbursements are recorded. In CFS only
cash receipts and payments are recorded.

8. FFS is concerned with the total provision of funds. CFS is concerned with only
cash.

9. FFS is flexible but CFS is rigid

10. FFS is more relevant for long range financial strategy. CFS concentrates on
short term aspects mostly affecting the liquidity of the business.

5a. DELL computers sell 100 PCs at Rs.42,000. The variable expenses
amount to Rs.28,000 per PC. The total fixed expenses is Rs.14,00,000.
Prepare an income statement.

Income Statement

No. Of computers produced 100

No. Of computers sold 100

Unit selling price per computer 42000

unit variable cost per computer 28000

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 Sales revenue =No. Of computers sold 4200000
X unit selling price

Less variable cost (100 X 28000) -2800000

Less Fixed expenses -1400000

Profit or loss 0

b. Calculate BEP and MOS

Sales at present are 55,000 units per annum. Selling price is Rs.6 per unit.
Prime cost Rs.3 per unit. Variable overheads is Re.1 per unit. Fixed cost
Rs.80,000 per annum.

Sales at present 50,000 units per annum. Selling price Rs.6 per unit, Prime cost Rs.3
per unit. Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum.

Solution:

BEP = Fixed cost / (SP – VC) per unit

= 80,000 / (6 – 4)

= 80,000 / 2

BEP = 40,000 units.

BEP in rupees = BEP in units x selling price per unit

= 40,000 x Rs.6

= Rs.2, 40,000

MOS = Actual Sales – BEP Sales

= (55,000 x 6) – 2,40,000

MOS = Rs.90,000

6.What is cost variable analysis?

A variable cost changes in total in direct proportion to a change in the level of

activity or cost driver. If activity increases, say by 20%, total variable cost also
increases by 20 %. The total variable cost increases proportionately with activity.
Variable cost fixed per unit but varies in total.

Cost Variable Analysis:

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Break Even Chart is used in Cost variable analysis.

It is a graphic or visual presentation of the relationship between costs, volume and

profit. It indicates the point of production at which there is neither profit nor loss. It
also indicates the estimated profit or loss at different levels of production. While
constructing the chart, the following assumption is normally considered.

a) Costs are classified into fixed and variable costs

b) Fixed costs shall remain fixed during the relevant volume range of graph.

c) Variable cost per unit will remain constant during the relevant volume range of
graph

d) Selling price per unit will remain constant

e) Sales mix remains constant.

f) Production and sales volume are equal

g) There exists a linear relationship between costs and revenue.

h) Linear relationship is indicated by way of straight line.

Break Even Analysis

It is an extension of or even part of marginal costing. It is a technique of studying

cost volume profit relationship. Basically, the break even analysis is aimed at
measuring the variations of cost with volume. It is a simple method of
presenting the effect of changes in volume on profits. It is also known as CVP
analysis. The various assumptions are:

a) All costs can be classified into fixed and variable

b) Sales mix will remain constant.

c) There will be no change in general price level

d) The state of technology, Methods of production and efficiency remain unchanged.

e) Costs and revenues are influenced only by volume

f) Cost and revenues are linear.

g) Stocks are valued at marginal cost

h) Unit produced and sold are same.

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