Assignment-I

Q: Define role of management accounting in the organization.

Ans: The purpose of management accounting in the organization is to support competitive
decision making by collecting, processing, and communicating information that helps
management plan, control, and evaluate business processes and company strategy. The
interesting thing about management accounting is that it is rare to find an individual within
a company with the title of management accountant. Often many individuals function as
accountants within the organization, but these individuals typically operate as financial
accountants, costs accountants, tax accountants, or internal auditors. However, the ability
to develop and use good management accounting (which covers a lot more ground than the
product costing done by cost accountants) is actually an important ability for many
individuals, including finance professionals, operational and marketing managers, top-level
executives, and information technologists.
Generally, in a very large company, each division has a top accountant called the controller,
and much of the management accounting that is done in these divisions comes under the
leadership of the controller. On the other hand, the controller usually reports to the vice
president of finance for the division who, in turn, reports to the divisions president and/or
overall chief financial officer (CFO). All of these individuals are responsible for the flow of
good accounting information that supports the planning, control, and evaluation work that
takes place within the organization
Q: Define Ratio analysis.
Ans: Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick
indication of a firm's financial performance in several key areas. The ratios are categorized
as Short-term Solvency Ratios, Debt Management Ratios, Asset Management Ratios,
Profitability Ratios, and Market Value Ratios
Q: What do you mean by Fund Flow Statement? What are the uses of Fund Flow
statement? Give a Specimen.
Ans: Meaning of Fund Flow Statement:
Funds Flow Statement is a statement prepared to analyse the reasons for changes in the
Financial Position of a Company between 2 Balance Sheets. It shows the inflow and outflow
of funds i.e. Sources and Applications of funds for a particular period.
Uses, Benefits, Significance & Importance of Fund flow statement:
The following are the uses, significance or benefits of funds flow statement.
1. The financial resources of the company are analyzed in detail and disclose the changes
made between the two balance sheet dates.
2. It gives an answer to the question of there is an inadequate liquid cash position in spite of
business making more and more profits.
3. It shows the extent funds were received the ways of usage for a specific period.
4. It shows the possibility of paying more dividend than current earnings or paying normal
dividend in the presence of net loss for the period.

5. The cost of capital of the business can be computed on the basis of the sources of funds
flow statement.
6. It shows the usage of earned profits of the current year.
7. The sources of previous year funds flow statement may act as a guide for getting funds
for future requirements.
8. Sometimes, the company has high liquid cash position even though, there is a net loss for
the specific period. The reason for such position is find out through funds flow statement.
9. The application of funds can provide a basis for selection of investment proposals or
future capital expenditure decisions.
10. The overall credit worthiness of the company can find out on seeing the funds flow
statement.
11. The strength and weakness of financial position of the company are identified on seeing
the funds flow statement.
12. It helps the management to allot the inadequate resources to meet the requirements of
business at productive level.
13. It highlights the financial consequences of business operation.
14. It tests the effective use of working capital by the management during a particular
period.
15. It helps the management to frame or change the financial policy of the company.
16. It suggests ways to improve working capital position of the company.
Preparation of Funds Flow Statement (With Specimen)
The preparation of funds flow statement using the following two statements, i.e.
(a) Statement or Schedule of Changes in Working Capital,
(b) Sources and Uses of Funds Statement.
(a) Statement of Changes in Working Capital:
Since a funds flow statement depicts changes in working capital, it will be better to prepare
first the schedule of changes in working capital before preparing a Funds Flow Statement.
The statement of changes in working capital or simply called working capital statement is
prepared with the help of current assets and current liabilities. There is no effect of
additional information given separately, and such information will affect only the funds flow
statement.

While preparing the statement of changes in working capital, the current assets may be
shown either at their gross values, showing provisions as current liabilities, or at their net
values after deducting such provisions.
Rules for preparing the statement of changes in working capital:
(i) Increase in a current asset, results in increase (+) in working capital.
(ii) Decrease in a current asset; result in decreases (-) in working capital.
(iii) Increase in a current liability, results in decrease (-) in working capital.
(iv) Decrease in a current liability, results in increase (+) in working capital.

(b) Funds Flow Statement:

The total difference between the total sources and application will be shown as either
increase or decrease in working capital or funds and this could be verified with the net
increase/decrease in working capital as derived from the above statement. The change in
working capital may also be verified by calculating working capital separately.
While preparing a Funds Flow Statement, current assets and current liabilities are to be
ignored. Attention is to be given to changes in Fixed Assets and Fixed Liabilities.

Assignment-II

Q: What do you mean by current ratio?

Ans: The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay
off its short-term liabilities with its current assets. The current ratio is an important measure
of liquidity because short-term liabilities are due within the next year.
Current Ratio: Current assets/
Current Liabilities
The thumb rule or standard used for the same is 2:1
Q; Explain Indifference Point.
Ans: Point of indifference is also known as equivalency point. It may be defined as that level
of EBIT (earnings before interest & tax) at which EPS (earning per share) is same in all
alternatives. It can be expressed as below:
Point of indifference (Formula):
Alternative I
Alternative II
(X-I1) (1-t)- P.D.1
(X-I2) (1-t)- P.D.2
S1
S2

X= EBIT Level
I= Interest payable under each plan
t= Tax
P.D.= Preference Dividend
Q: Write a Note on cash flow statement. Write a specimen of cash flow statement
with imaginary figures.
Ans: Meaning of Statement of Cash Flows
A statement of cash flows is a financial statement which summarizes cash transactions of a
business during a given accounting period and classifies them under three heads, namely,
cash flows from operating, investing and financing activities. It shows how cash moved
during the period by indicating whether a particular line item is a cash in-flow or a cash outflow. The term cash as used in the statement of cash flows refers to both cash and cash
equivalents. Cash flow statement provides relevant information in assessing a company's
liquidity, quality of earnings and solvency.
As stated above, a statement of cash flows comprises of three sections:
1.

Cash Flows from Operating Activities

This section includes cash flows from the principal revenue generation activities such as
sale and purchase of goods and services. Cash flows from operating activities can be
computed using two methods. One is the Direct Method and the other Indirect Method.
2. Cash Flows from Investing Activities
Cash flows from investing activities are cash in-flows and out-flows related to activities
that are intended to generate income and cash flows in future. This includes cash in-flows
and out-flows from sale and purchase of long-term assets.
3. Cash Flows from Financing Activities
Cash flows from financing activities are the cash flows related to transactions with
stockholders and creditors such as issuance of share capital, purchase of treasury stock,
dividend payments etc.

Assignment-III

Q: Define Financial Leverage.

Ans: Financial leverage is the degree to which a company uses fixed-income securities
such as debt and preferred equity. The more debt financing a company uses, the higher its
financial leverage. It is also known as trading on equity.
In simple words we can say that financial leverage means use of debt along with equity so
as to minimize risk & maximize return up to an extent.
Degree of financial leverage= %
change in EPS
%
Change in EBIT
Q: What is the relationship between EBIT- EPS?
Ans: As objective of every company is maximize the wealth of shareholders i.e. EPS. It can
be increased by increasing EBIT. Following is the relation between EBIT & EPS.
Amount (in Rs.)
Particulars
EBIT (Earning before interest & Tax)
Less: Interest Payable
Earning after interest but before Tax
less: Tax
Earnings after Tax
Less: Preference Dividend
Earnings available to equity shareholders

Alternate I

Alternate II

xxxx

xxxx

(xxxx)

(xxxx)

xxxx

xxxx

(xxxx)

(xxxx)

xxxx

xxxx

(xxxx)

(xxxx)

xxxx

xxxx

EPS=Earnings available to equity shareholders

Number of Equity shares outstanding
Q: AB Ltd. Needs Rs. 10,00,000 for expansion. The expansion is expected to yield an annual
EBIT of Rs. 1,60,000. In choosing a financial plan, AB ltd. has an objective of maximizing EPS.
It is considering the possibility of issuing equity shares & raising debt of Rs. 1,00,000 or Rs.
4,00,000 or Rs. 6,00,000. The current market price per share is Rs. 25 & is expected to drop
to Rs. 20 if the funds are borrowed in excess of Rs. 5 Lac.
Funds can be borrowed at the rates indicated below:
a) Upto Rs. 1,00,000 @ 8%
b) Over Rs. 1,00,000 upto Rs. 5,00,000 @ 12%
c) Over Rs. 5,00,000 @18%
Assume a tax rate is 50%. Determine the EPS under each plan & suggest the best
plan.

Ans: Evaluation of Alternatives by comparing these plans:

Particulars

EBIT
Less: Interest Payable
Earning after interest but before
Tax
less: Tax
Earning after Tax
Less: Preference Dividend
Earning available to equity
shareholders
EPS=Earning available to equity
shareholders
Number of equity Shares
outstanding
Number of equity shares

Alternate
I
Debt:
100000
Equity:
900000
160000
(8000)

Amount (in Rs.)

Alternate
Alternate
II
III
Debt:
Debt:
400000
600000
Equity:
Equity:
600000
400000
160000
160000
(44000)
(74000)

152000
(76000)
76000
(0.000)

116000
(58000)
58000
(0.000)

86000
(43000)
43000
(0.000)

76000

58000

43000

Rs. 2.11
36000

Rs. 2.41
24000

Rs. 2.15
20000

Comment: Second alternative is best as EPS is highest in this alternate i.e. Rs. 2.41 per
share as compared to alternative I & III.

Assignment-IV
Q: The following information is given to you:
Current ratio= 2.5, Acid test ratio=1.5 & current liabilities= Rs. 50,000
Find out: i) current assets, ii) liquid assets & inventory
Ans:
Current ratio= Current assets
Current Liabilities
So by putting current ratio = 2.5 & current liabilities of Rs. 50000 in this formula we get
current assets as Rs. 1,25,000
Liquid Ratio=

Liquid Assets
Current Liabilities

So by putting Liquid ratio = 1.5 & current liabilities of Rs. 50000 in this formula we get Liquid
assets as Rs. 75,000
Liquid Assets= current assets Inventory- Prepaid Expenses
Liquid Assets= current assets InventoryPrepaid Expenses
So by putting Liquid Assets = Rs.75000 & current Assets =Rs. 1,25,000 in this formula we
get Inventory as Rs. 50,000.
Assumption: Prepaid Expenses are assumed to be nil.
Q: Write a note on management audit.
Ans: Management Audit is an assessment of methods and policies of an organization's
management in the administration and the use of resources, tactical and strategic planning,
and employee and organizational improvement.
A systematic assessment of methods and policies of an organization's management in the
administration and the use of resources, tactical and strategic planning, and employee and
organizational improvement.
The objectives of a management audit are to
(1) Establish the current level of effectiveness
(2) Suggest improvements
(3) Lay down standards for future performance.
Management auditors (employees of the company or independent consultants) do not
appraise individual performance, but may critically evaluate the senior executives as a
management team. See also performance audit.
Q: Define management accounting. Write a detailed note on functions & scope of
management accounting along with functions of management accountant.
Ans: Meaning of Management Accounting:
The term Management Accounting, observe, Broad and Carmichael, covers all those
services by which the accounting department can assist the top management and other
departments in the formation of policy, control of execution and appreciation of

effectiveness. This definition points out that management is entrusted with the primary task
of planning, execution and control of the operating activities of an enterprise. It constantly
needs accounting information on which to base its decision. A decision based on data is
usually correct and the risk of erring is minimized. The position of the management in
respect of its functions can be compared to that of an army general who wants to wage a
successful battle. A general can hardly fight successfully unless he gets full information
about the surrounding situation and the extent of effectiveness of each of his battalions and,
to the extent possible, even the enemy's intentions. Like a general a successful
management too strives to outstrip other competitors in the field by streamlining its
operating efficiency. It needs a thorough knowledge of the situation and the circumstances
in which the firm operates. Such knowledge can only be gained through the processed
financial data rendered by the accounting department on the basis of which it can take
policy decision regarding execution, control, etc. It is here that the role of management
accounting comes in.
Definition:
According to J. L. Batty, Management accounting is concerned with accounting information
that is useful for the management.
FUNCTIONS OF MANAGEMENT ACCOUNTING
The basic function of management accounting is to assist the management in performing its
functions effectively. The functions of the management are planning, organizing, directing
and controlling. Management accounting helps in the performance of each of these functions
in the following ways:
(i) Provides data: Management accounting serves as a vital source of data for
management planning. The accounts and documents are a repository of a vast quantity of
data about the past progress of the enterprise, which are a must for making forecasts for the
future.
(ii) Modifies data: The accounting data required for managerial decisions is properly
compiled and classified. For example, purchase figures for different months may be
classified to know total purchases made during each period product-wise, supplier-wise and
territory-wise.
(iii) Analyses and interprets data: The accounting data is analyzed meaningfully for
effective planning and decision-making. For this purpose the data is presented in a
comparative form. Ratios are calculated and likely trends are projected.
(iv) Serves as a means of communicating: Management accounting provides a means of
communicating management plans upward, downward and outward through the
organization. Initially, it means identifying the feasibility and consistency of the various
segments of the plan. At later stages it keeps all parties informed about the plans that have
been agreed upon and their roles in these plans.
(v) Facilitates control: Management accounting helps in translating given objectives and
strategy into specified goals for attainment by a specified time and secures effective
accomplishment of these goals in an efficient manner. All this is made possible through
budgetary control and standard costing which is an integral part of management accounting.
(vi) Uses also qualitative information: Management accounting does not restrict itself to
financial data for helping the management in decision making but also uses such
information which may not be capable of being measured in monetary terms. Such
information may be collected form special surveys, statistical compilations, engineering
records, etc.

SCOPE OF MANAGEMENT ACCOUNTING

Management accounting is concerned with presentation of accounting information in the
most useful way for the management. Its scope is, therefore, quite vast and includes within
its fold almost all aspects of business operations. However, the following areas can rightly be
identified as falling within the ambit of management accounting:
(i) Financial Accounting: Management accounting is mainly concerned with the
rearrangement of the information provided by financial accounting. Hence, management
cannot obtain full control and coordination of operations without a properly designed
financial accounting system.
(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis,
differential costing and other cost techniques play a useful role in operation and control of
the business undertaking.
(iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained
intact in real terms and profit is calculated with this fact in mind.
(iv) Budgetary Control: This includes framing of budgets, comparison of actual
performance with the budgeted performance, computation of variances, finding of their
causes, etc
(v) Inventory Control: It includes control over inventory from the time it is acquired till its
final disposal.
(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other
statistical methods make the information more impressive and intelligible.
(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income
statements and the related reports, cash flow and funds flow statements, scrap reports, etc.
(viii) Taxation: This includes computation of income in accordance with the tax laws, filing
of returns and making tax payments.
(ix) Office Services: This includes maintenance of proper data processing and other office
management services, reporting on best use of mechanical and electronic devices.
(x) Internal Audit: Development of a suitable internal audit system for internal control.
FUNCTIONS OF MANAGEMENT ACCOUNTANT
It is the duty of the management accountant to keep all levels of management informed of
their real position. He has, therefore, varied functions to perform. His important functions
can be summarized as follows:
(i) Planning: He has to establish, coordinate and administer as an integral part of
management, an adequate plan for the control of the operations. Such a plan would include
profit planning, programmes of capital investment and financing, sales forecasts, expenses
budgets and cost standards.
(ii) Controlling: He has to compare actual performance with operating plans and standards
and to report and interpret the results of operations to all levels of management and the
owners of the business. This is done through the compilation of appropriate accounting and
statistical records and reports.

(iii) Coordinating: He consults all segments of management responsible for policy or

action. Such consultation might concern any phase of the operation of the business having
to do with attainment of objectives and the effectiveness of the organizational structures
and policies.
(iv) Other functions: He administers tax policies and procedures. He supervises and
coordinated the preparation of reports to governmental agencies. He ensures fiscal
protection for the assets of the business through adequate internal control and proper
insurance coverage. He carries out continuous appraisal economic and social forces and the
government influences, and interprets their effect on the business. It should be noted that
the functions of a Management Accountant are more of those of a 'staff official'. He, in
addition to processing historical data, supplies a good deal of information concerning the
future operations in line with the management's needs. Besides serving top management
with information concerning the company as a whole, he supplies detailed information to the
line officers regarding alternative plans and their profitability, which help them in decisionmaking. As a matter of fact the Management Accountant should not bother himself
regarding the decision taken by the line officials after tendering advice unless he has
reasonable grounds to believe that such a decision is going to affect the interests of
corporation adversely.
In such an event also he should report it to the concerned level of management with tact,
firmness combined with politeness