1. Define accounting. Why is it called language of business?

Accounting is defined as “an art of recording, classifying and

summarizing transactions and events in a significant manner and in
terms of money. It is called language of business because the
financial performance and the financial position of any company need
to be conveyed to the stakeholders of any business concern. This can
be done by systematically preparing the financial statements and
presenting to the interested parties.

2. State the significance of prudence principle?

It is also termed as ‘Conservatism convention’, according to which
“anticipate no profit but provide for all possible losses”, such as
Provisions for Bad debts and discount on debtors, so that the profits
are not inflated.
Hence secret reserves are not permitted.

3. Distinguish ‘grouping’ and ‘marshaling’ of assets and liability.

Grouping means putting together items in Balance Sheet of similar
nature under a common heading.
Marshalling refers to order in which assets and liabilities are shown
in B/S either in order of liquidity or permanency.

4. What is meant by dual aspect of accounting system?

Dual aspect of Accounting describes that every transaction should have
two aspects. Two aspect of transaction are Debit and Credit. Every
‘debit’ has a corresponding credit so the total of all debits must be
equal to total of all credits.

5. What is journal and imprest system of petty cash book?

The advance paid in the beginning of the period and reimbursement of
the amount spent for petty expenses, so that the same amount will be
maintained for meeting the petty expenses, is referred as “imprest”
System.
In journal system, recording of transaction not only be inconvenient
but also consume a lot of valuable time of the cashier. At the end of
month, Petty cashier submits a statement of account of expenses
incurred by him and gets a fresh advance.

6. Define fixed cost and variable cost?

Fixed Costs are the costs that don’t change with changes in the
activity level e.g. salaries & rent.
Variable costs are the costs that are sensitive to changes in level of
activity e.g. raw materials direct labour.
.
7. Why a flexible budget is considered superior to fixed budget?
Flexible budget is superior to fixed budget for following reasons:
a. Fixed budget does not change with level of activity but flexible is
meant for any change in level of activity.
b. Fixed budget is an unrealistic yardstick in case of level of
output does not match with planned budgeting.
c. Flexible budget is more suitable in case of new Venture because of
uncertainties in demand.
8. Determine margin of safety from the information given
below: Total Fixed cost – Rs. 4500; Total variable cost
– Rs.7500;
Total sales – Rs.15000 and units sold – 5000

Sales at BEP: Fixed Expenses/P/v Ratio 7500*3 = 4500

units

5
Contribution: Sales – Variable Exp. =15000-7500 =7500
P/v Ratio = C/S = 7500/4500 = 5/3

MOS = Actual Sales – Sales at BEP 5000-4500 = 500 units.

9. Write a short note on the terms ‘cost’ and ‘costing’.

Cost is the value of resources used up when carrying out the task or
particular activity. It consists of material, labour and resources.
Costing are the techniques or method applying for ascertaining costs.
It covers many aspects like labour overhead and marginal or absorption
costs.

10. State the importance of budgeting.

a. Helps Enforce Planning.
b. Better Coordinate Activities.
c. Helps in Evaluating Performance.
d. Helps in Controlling.
e. Helps in Allocating Resources.
f. Helps in Motivating Managers & Employees.

11. What do you understand by ‘financial statement analysis?

Financial statements analysis is the process of identifying the
financial strength & weakness of the firm by properly establishing
relationship between items of the Balance Sheet and Profit & Loss A/C.
It is to assess and interpret the result of past performance and
current financial position.
12. State the importance of EPS and ROI.
ROI reflects the total earnings produced by the total assets of the
firm. It represents the before tax and interest expenses return on
invested capital.
ROI: PBDIT/Total Assets or Investments.
EPS represents the return per shares issued by the company. It is
directly connected to profitability.
EPS: Net Profit / No. of shares.

13. List any two advantage of trend analysis.

a. Understanding the changes in financial statements from year to year
is easier when Percentages changes are available.
b. Using previous year’s data Percentage change can identify the
future pattern of movements in given data.

14. How does cash flow statement differ from fund flow statement?
a. Cash flow is concerned only with change in cash position while Fund
flow is concerned with change in working capital position.
b. Cash flow is more useful to the management as a tool of financial
analysis in short periods as compared to Fund flow.
c. Another distinction between them is techniques of their
preparations.

15. Explain accounting cycle.

Accounting Cycle is described as follows:
a. Record the transaction in journal or Special journals with voucher.
b. To post the transaction from journal to Ledger for further analysis
and having balances of each account.
c. Prepare the trial balance with the ledger’s balances.
d. To make adjustment and closing entries.
e. Prepare Final Accounts or Financial statements.

16. explain accrual concept

It states that Revenues are recognized when they simply become
receivables. Accrual Concept focuses on the economic impact of
transactions. It makes a distinction between the actual receipt of
cash and the right to receive cash. In this case firm maximizes
Assets.

17. what are the two limitation of financial accounting

a. Accounting information is sometimes based on estimates.

b. Accounting information cannot be used as only test of managerial
performance on basis of more profit.
c. Fixed assets are recorded in the accounting records at the original
cost.

18. explain kaizen costing

Kaizen is Japanese word which means Change for Better. It refers to
continual and gradual improvements made through innovation at large
investments in technology. It is the technique of cost reduction
during the manufacturing process.

19. what is the objective if financial accounting

a. It enables the management to find out the overall as well as
department wise efficiency of the firm.
b. To know the short term and long term solvency of firm.
c. It is used in inter firm comparison for further change in decision
making process.

20. how would you calculate return on investment

ROI tells about the overall profitability of the company in relation
to total investment in company. It is calculated as:
ROI = Operating Profit or PBDIT
___________________________
Total Assets / Total Investment

21. write a two limitation of historical Cost accounting

a. Market value or current value of fixed asset undergoes frequent
changes and financial statements will have to be changed every year.
b. Recording at market value is both costly and time consuming.
c. They are not affected by decision and irrelevant for decision
making.

22. what is trend analysis

Trend Analysis is an important and useful technique of financial
statement analysis. It ascertains a relationship between of each
year’s data to the base year’s data. It involves figuring out the
price index level or growth rate with respect to previous year or year
that has been a standard (Base Year).

23. what are indirect cost

Costs that are not identifiable with the end product are called
indirect costs and include the following: Lubricants, Scrap, Indirect
Material, and Depreciation. Indirect costs are called often overhead
expenses
.
24. Difference between marginal costing and absorption costing
a. Marginal cost values stock at variable cost basis while in
Absorption stock is valued at full cost.
b. In long run decision making based on marginal cost approach nay
result in contribution failing to cover fixed cost and losses being
incurred but absorption does not allow that.
c. Marginal costing aids profit planning whereas Absorption is useful
to identify inefficient utilization of production resources.

25. what are fixed budget

a. This is the budget which is designed to remain unchanged
irrespective of level of activity.
b. It is prepared for definite production and capacity level.
c. It is not adjusted according to activity level and not effective
tools of cost control.

26. What are decision packages?

Each separate activity of the organization is identified and called a
decision package. It comes under Zero Based Budgeting (ZBB) and
identifying activity is part of Activity Based Costing (ABC).It is a
document that identifies and describes a specific activity to
evaluate it and decide whether to approve or disapprove.

27. What is margin of safety?

Margin of safety has great importance in BEA. It is difference between
actual sales to sales at breakeven point.
MOS = Actual Sales – Sales at BEP
MOS= Profit/P/v Ratio.

28. Define a double entry system.

Double Entry accounting first introduced by Luca Fra Paccoli” an
Italian mathematician. Every ‘debit’ has a corresponding credit so the
total of all debits must be equal to total of all credits.

29. What is business entity concept?

The business concern is artificially formed as a separate legal
entity, taking the form of a Proprietorship concern or a Partnership
firm or a Private limited Company or a Public Limited Company. Thus
the Proprietor or Partners or Promoters is/are considered distinct
from his/their own business. Without such a distinction the affairs of
the firm will be mixed up with the private affairs of the Proprietor
or Partners or Promoters and the true picture of the firm will not be
available. Hence the business concern (entity) is to be considered
different from the owner/s also referred as Separate entity concept.

30. Discourse accounting as a information system.

An accounting system consists of personnel, procedures, devices and
record used by an organization which helps in development and
structure of accounting information and communicating this information
to decision makers. Design and capabilities of these systems vary
greatly from organization to organization. In very small business, the
accounting system may consist of little more than a cashbook and a
cheque book and may be an annual interaction with the chartered
accountant for filing tax return. In very large business.

31. Explain the concept of target costing.

It is defined as "a cost management tool for reducing the overall cost
of a product over its entire life-cycle with the help of production,
engineering, research and design". A target cost is the maximum amount
of cost that can be incurred on a product and with it the firm can
still earn the required profit margin from that product at a
particular selling price.
Target costing involves setting a target cost by subtracting a desired
profit margin from a competitive market price. To compete effectively,
organizations must continually redesign their products (or services)
in order to shorten product life cycles.

32. What is current purchasing power of accounting method.

Changes in price level should be reflected in the financial statement
through current purchasing power (CPP). For measuring changes in price
level and incorporating and true changes in financial statements,
index numbers are used. Price Index is used to convert the values of
various items in Financial statements.

33. What is meant by operating activities?

Operating Activities are those which are carried from getting input to
convert in output and getting revenues. This are directly related to
earn profit and related to part of production. They generally result
from the transactions and events that enter into determination of
profit.

34. Mention the purpose of preparing cash flow statement.

a) It is very useful in understanding the cash position of a firm.
b) It helps management to understand the past behavior of the cash
cycle
and to control the usage of cash in future.
c) The repayment of loans.
d) The cash flow statement is helpful in making short-term financial
decision relating to liquidity, and the way and means position of
firm.

35. How labor mixed variance calculated.

LMV is the different in labour cost due to change in composition of
the labour force. In order to calculate this variance, the total
actual hours spent is compared with the revised standard hours. The
revised standard hour are calculated as follows:
Actual hours (total).standard ratio
LMV = SR (RSH – AH)

36. What is meant by expense center?

An expense centre is responsibility centre in which inputs not output
are measured in monetary terms. Expense or Cost centre a department in
organization in which manager is held responsible only for cost
incurred and maintain systematic records.

37. What is objective of preparing common size financial statement.

Financial statements when presented in absolute figures, it is hard to
understand and interpret. So each item is converted into percentage of
total assets or capital.
We can find how much percentage of cost is incurred in generating so
much revenue.

38. Difference between standard cost and estimated cost.

Standard cost:
(1). It is a regular system of account based upon estimation and time
schedule.
(2). It is used for effective cost control and to take proper action
to maximize efficiency.
Estimate cost:
a) It used as statistically data which leads to lot of guess work.
b) It can be used where costing is in operation.

39. Mention two usage of management accounting.

a. Planning & Policy formulation.
b. Helps in interpretation process.
c. Helps in decision making and controlling.
d. Helps in reporting, motivating and organizing.
40. Explain cash budget.
This budget represents the amount of cash receipts and payments and a
balance during given period. It is prepared for getting useful
information on basis of monthly or weekly.
a. It ensures sufficient cash.
b. It reveals surplus amount and the effect of fluctuations on cash
position.

41. Write an accounting equation. What does it signify?

An accounting equation is a statement of equality between the
resources and the sources which finance the resources and is expressed
as follows:
Sources of Funds = Uses of Funds
Or
Equities = Assets
Owner’s equity + Outsiders liability = Assets

42. Write three principle of accounting.

The Going Concern Concept: The entity will continue to operate in the
future.

The Cost Principle: Assets and services acquired should be recorded at

their actual cost.

Measurement Concept: The monetary unit is the principle means for

measuring assets and equities.

43. explain the convention of conservation .

Convention of Conservatism:-
“Anticipate no profits but provide for all possible losses”
Policy of ‘caution’ & ‘playing safe’. It is also called Prudence
Principle. Accountant should record not only actual loss but also
losses that likely to occur. E.g. Provision for bad debts, redemption
reserve.

44. What are cost driver.

Determination of Cost Drivers completes the last stage of the ABC
model. Cost Drivers trace, or link, the cost of performing certain
Activities to Cost Objects.
For example, taking orders for existing customers may be linked to
specific customers based on the number of orders taken, if each order
takes approximately the same amount of time. If order taking time
varies based on the customer, this cost may be linked based on another
driver or multiple drivers.

45. How are outstanding expenses treated in final account.

These are the expenses incurred within the accounting year but the
payment has not been made. O/S or unpaid expenses should be added to
the concerned expenses A/C in P&L a/c and will be shown as a current
liability in B/S.

46. What is common size statement?

This technique of taking the highest figure as the base figure and
converting every other figure in that statement to a percentage of the
same is known as vertical analysis. This helps us in finding out what
has been the relative change as a percentage of the base figure so
that we can look at any performance lacunas and understands the reason
for the same as also compare with other companies. Involves expressing
comparison in percentages of the current period and past period.

47. Explain the term funds.

The term funds as cash and they concerned themselves with the
movements in the cash account. Funds may be defined in different ways
depending upon the purpose of analysis .however; the following are
most commonly used definitions:
a. Funds mean cash,
b. Funds mean net working capital, and
c. Funds mean all financial resources.

48. What is human resources accounting.

Human Resource Accounting is “the process of identifying and measuring
data about human resources and communicating this information to
interested parties”. HRA, thus, not only involves measurement of all
the costs/ investments associated with the recruitment, placement,
training and development of employees, but also the quantification of
the economic value of the people in an organization.

49. What is significance of P/E ratio?

PRICE EARNING RATIO: PE Ratio indicates the number of times the
Earning per Share is covered by its market price.
P/E RATIO = Market Price per Equity Share/Earning Per Share
This ratio tells us about how much the market discount they earnings.
Obviously, the higher the ratio the better.
50. Difference between social cost and social benefit.
Social Cost: It may include the effect on social community who might
have to live in the shadow of its premises and how it engages with its
customers, workplace, and impacts on environment.
Social Benefits: customers. Services, users or clients can be involved
in the social process. It can be used in strategic planning with great
deal of flexibility within the framework.

51. Explain the term cost object.

A cost object is tangible input for a product or service provided
like labour and material. Cost of employing labour can be directly
fixed as for employing labour as “per man per hour” or “per man per
day”. So the labour is cost object as it is directly associate with
it.

52. What is opportunity cost?

Opportunity costs are alternative costs or the returns from the next
best alternative use of the firms resources which the firm foregoes in
order to avail of the returns of the next best use of the same
resources e.g.: suppose a businessman can buy a lathe machine or a
paper pressing machine with the help of limited capital which can earn
him rs 50,000 and rs 70,000. if he chooses the latter he would have
foregone the opportunity of earning rs 50,000,thus ,his opportunity
cost is rs 50,000.

53. Difference between period cost and product cost.

Product cost is the cost of purchasing or manufacturing inventory.
Until the goods are sold, product cost represent inventory and they
reported as asset in B/S.
Costs which are associated with time periods rather than with the
purchase or manufacture like selling and general expenses. These are
charged directly to expense account on assumption that benefit is
recognized when cost is incurred.

54. Difference between direct cost and indirect cost.

Direct cost – expenses incurred directly in producing the goods or
services. It is incurred for and may be conveniently identified with a
particular cost center or cost unit. Material, labour and direct
expenses.
Indirect costs - Not directly chargeable to production of goods. These
costs are those costs, which are incurred for the benefit of a number
of cost centers or cost unit and therefore, cannot be conveniently.
Salary of manager, office Rent and selling and distribution expenses.
55. What is meant by ‘margin of safety’ and ‘angle of incidence’?
MARGIN OF SAFTY: It is the difference between the total sales and
break-even sales. It may be expressed in monetary term or as a
percentage.

MOS= (Actual sales- break- even sales)

ANGLE OF INCIDENCE: this is an angle formed between the cost line and
revenue line where they intersect each other.. It indicate rate of
profit earned by the business.

56. Write a short note on profit center.

Profit Centre is that department where the manager is held responsible
for both costs (inputs) and revenues (outputs) and thus for profit.
Despite the name, a profit centre can exist in nonprofits
organizations.
A centre, whose performance is measured in terms of both - the expense
it incurs and revenue it earns, is termed as a profit centre.

57. Name any four non operating items.

a. Depreciation.
b. Goodwill written off.
c. Loss on sale of Machinery.
d. Preliminary expenses written off.
e. Gain on Sale of Assets.

58. What is Human Resource Accounting?

Human Resource Accounting is “the process of identifying and measuring
data about human resources and communicating this information to
interested parties”. HRA, thus, not only involves measurement of all
the costs/ investments associated with the recruitment, placement,
training and development of employees, but also the quantification of
the economic value of the people in an organization.

59. What is Benchmarking?

Benchmarking is the continual search for the most effective method of
accomplishing a task by comparing existing methods and performance
levels with those of organization or with subunits within the same
organization. These practices are referred to best practices.
Benchmarking is also called Competitive Benchmarking.

60. What is Reengineering?

It is the contrast to the concept of Kaizen Costing, which involves
small & incremental steps toward gradual improvement but Reengineering
involves a giant leap. It is the complete redesign of a process with
an emphasis on finding creative new ways to accomplish an objective.
It is starting from scratch to redesign a business process.

61. Given the following details, Determine the ‘Margin of Safety’

sales.
Profit earned Rs. 24000, Selling price per unit Rs.10; Marginal cost
per unit Rs.7.

MOS = Profit/P/v Ratio

P/V Ratio = Contribution/Sales 10-7/10 = 3/10
MOS = 24000*10/3 = 80000 units.

62. What is Semi variable cost?

It is a cost that comprises both fixed and variable elements. For
example a telephone cost consists of a fixed rental charge and
variable cost associated with calls made.

63. Define Financial Audit.

It is the audit of financial statements and aims to know whether
financial statements are prepared according to Accounting Principles
and Conventions. Whether financial statements present a true & fair
view of business results.

64. From the information given below, calculate Stock Turnover Ratio.
Opening stock – Rs.29000; Closing stock –Rs.31000, sales Rs. 300000;
Gross profit 25% on cost

S.T.R. = Cost of goods sold / Average Stock.

Average Stock = (Opening stock + Closing Stock)/2
G.P. is 25 % on Cost = 20 % on Sales (Remember Note)
G.P. = 300000 * 20 % = 60000
Cost of Goods Sold = Sales – G.P. = 240000
S.T.R. = 240000/30000 = 8 times.

65. Define Cost Audit.

ICMA defines it as the verification of cost accounts and a check on
the adherence to cost accounting plan. Cost Audit is verifying
correctness of cost accounts, cost reports, cost data and costing
methods.

66. Write short notes on :

a. Journal
b. Ledger
A journal is defined as a book containing a chronological record of
transactions. It is the book in which transactions are recorded first
of all under double entry system.
Ledger is book which contains various accounts. Ledger is set of
accounts. It contains all accounts whether Real, Nominal or personal.
It is in Two forms.
a. Bound Ledger b. Loose Leaf Ledger

67. Define Management Audit.

It is detailed & critical review of all aspects of management
including all facets of operations, internal controls, policies &
plans within an organization also known as Operational Audit.

68. What is an Entity?

An accounting entity is an organization that stands apart from other
organizations and individuals as a separate economic unit.
Owner is distinct from entity
Separate legal Entity

69. What is an account? State the name of different types of account.

An account is standardized format used to maintain the separate
recorded and to accumulate date for each of the individual items in
order to facilitate the preparation of periodic financial statements
and to provide a continuous check on the accuracy of the recording
transaction.
Types of Accounts
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts

70. How does an asset differ from Liabilities?

Assets:
It is something a company owns which has future economic value.
Land, Building, equipments, Goodwill are examples of assets.
Liabilities:
It is something a company owes.
Money
Service
Product

71. How does an expense differ from revenues?

Revenues:
They are amounts received or to be received from customers for sales
of products or services.
Sales, Performance of services, Rent, Interest
Expenses:
They are amounts that have been paid or will be paid later for costs
that have been incurred to earn revenue.
Salaries and wages, utilities, Supplies used, Advertising.

72. What do you mean by Owners Equity?

It is what’s left of the assets after liabilities have been deducted.
The same as net assets
The owner’s claim on the entity’s assets

73. Differentiate Operating Ratio & Operating Profit Ratio.

Operating Ratio establishes the relationship between the cost of
goods sold plus other operating expenses to net sales.
Operating ratio = Cost of Goods Sold + Operating Expenses * 100

Net Sales
Operating Profit Ratio express relationship between operating profits
and net sales. It is computed as:
Operating Profit Ratio = (Operating Profit / Net Sales) *100

74. What are the sources of Funds?

a. Issue of Share Capital
b. Issue of Debentures for cash or any other asset.
c. Sale of long term investment.
d. Receipts of dividend income, rent income, interest.

75. A firm has opening and closing debtors of Rs.40,000 and Rs. 75,000
respectively and credit sales of Rs. 3,45,000. Calculate the debtor’s
turnover ratio.
Debtors turnover ratio = credit sales/average debtors
=3, 45,000 / 57,000
= 6 time per year.

76. A firm has opening and closing inventory of Rs. 56,000 and Rs.
44,000 respectively. The firm has sold goods for Rs. 5, 00,000 at
gross profit margin of 20% calculate the inventory turnover ratio.
Inventory turnover = cost of goods sold / average inventory
= 5, 00,000 – 1, 00,000 / ½ (56,
000+44, 000)
= 4, 00,000 / 50,000
 = 8 times per year.

77. What do you mean by GAAP (Generally Accepted Accounting

Principles)?
Generally accepted accounting principles (GAAP) - a term that applies
to the broad concepts or guidelines and detailed practices in
accounting, including all the conventions, rules, and procedures that
make up accepted accounting practice at a given time.

78. What are the steps involved in Accounting Cycle?

1. Analyze the transaction
2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the trial balance
5. Prepare financial statements

79. Define type of Activities in Activity Based Costing.

• Unit level: Performed each time a unit is produced
• Batch level: Performed each time a batch is produced
• Product level: Performed to support production of different type of
product
• Customer Level: Performed to support servicing customers
• Facility level: Residuary head

80. What is Balanced Score Card Approach.

A balanced scorecard is a performance measurement and reporting
system that strikes a balance between financial and operating
measures, links performance to rewards, and gives explicit recognition
to the diversity of organizational goals
This enhances the learning process because managers learn the results
of their actions and how these actions are linked to the
organizational goals

Accounting For Management

1. Explain three most significant accounting conventions.

The Matching Convention:
When an event affects the revenues and expenses, the affect on each
should be recognized in the same accounting period.
The sale of the products has two aspects:
1. Revenue aspect
2. Expense aspect.
Revenues earned because the sale is going to fetch you some money and
expenses incurred for producing that product or providing that
services. Correct measurement of the net effect of the sale and
expenses in any accounting period can only be made when you match the
relevant expenses to its related sales. Otherwise it will allow a lot
of freedom for not showing the true profitability of the business.

The Consistency convention:

The accounting policies and methods followed by the company should be
the same every year.
The consistency concept states that once an entity has decided on one
method, it should use the same method for all the same character
unless it has a sound reason to change the method. This is done
because frequent changes in the manner of handling same type of
events, would make it very difficult for the external users to compare
financial statements over different periods. The term consistency as
used here refers to consistency over a period of time and not the
logical consistency.

The Materiality Convention:

Insignificant events would not be recorded if the benefit of recording
them does not justify the cost.
In law, there is something called ‘de minims non curat lex’ , which
means that the court will not consider trivial matters. Similarly the
accounting does not attempt to record events so insignificant that the
work of recording them is not justified by the usefulness of the
results.
But there are no definite rules that separate material information
from immaterial information. So the materiality concept may be taken
to mean that although insignificant events may be disregarded but
there must be full disclosure of all important information.

2. What is target costing? Discuss its methodology.

Target costing is a pricing tool used by the firms. It is designed as
a “cost management tool for reducing the overall cost of a product
over its entire life with the help of production, engineering,
research and design. “A Target cost is the maximum amount of cost that
can be incurred on a product and with it the firm can still earn the
required profit margin from that product at a particular selling
price”.

Methodology:
The following 10 steps are required to install a comprehensive target
costing approach with an organization.
1. Re-orient culture and attitudes. The first and most challenging
step is re-orient thinking toward market-driven pricing and
prioritized customer needs rather than just technical requirements as
a basis for product development. This is a fundamental change from the
attitude in most organizations where cost is the result of the design
rather than the influencer of the design and that pricing is derived
from building up an estimate of the cost of manufacturing a product.
2. Establish a market-driven target price. A target price needs to be
established based upon market factors such as the company position in
the market place (market share), business and market penetration
strategy, competition and competitive price response, targeted market
niche or price point, and elasticity of demand. If the company is
responding to a request for proposal/quotation, the target price is
based on analysis of the price to win considering customer
affordability and competitive analysis.
3. Determine the target cost. Once the target price is established, a
worksheet (see example below) is used to calculate the target cost by
subtracting the standard profit margin, non-recurring development
costs, and any uncontrollable corporate allocations. The target cost
is allocated down to lower level assemblies of subsystems in a manner
consistent with the structure of teams or individual designer
responsibilities.
Target Cost calculation work sheet
Manufacturers suggested retail price - 495
- Standard dealer margin (30%) - (148.50)
- shipping & distribution costs - (15)
- profit margin (20%) - (66.30)
- allocated non-recurring development cost - (35)
= Business unit target cost - 230.20
- overhead (45%) - (103.59)
= Direct target Cost (labour & material) - 126.61
4. Balance target cost with requirements. Before the target cost is
finalized, it must be considered in conjunction with product
requirements. The greatest opportunity to control a product's costs is
through proper setting of requirements or specifications. This
requires a careful understanding of the voice of the customer, use of
conjoint analysis to understand the value that customers place on
particular product capabilities, and use of techniques such as quality
function deployment to help make these tradeoff's among various
product requirements including target cost.
5. Establish a target costing process and a team-based organization. A
well-defined process is required that integrates activities and tasks
to support target costing. This process needs to be based on early and
proactive consideration of target costs and incorporate tools and
methodologies described subsequently. Further, a team-based
organization is required that integrates essential disciplines such as
marketing, engineering, manufacturing, purchasing, and finance.
Responsibilities to support target costing need to be clearly
defined.
6. Brainstorm and analyze alternatives. The second most significant
opportunity to achieve cost reduction is through consideration of
multiple concept and design alternatives for both the product and its
manufacturing and support processes at each stage of the development
cycle. These opportunities can be achieved when there is out-of-the-
box or creative consideration of alternatives coupled with structured
analysis and decision-making methods.
7. Establish product cost models to support decision-making. Product
cost models and cost tables provide the tools to evaluate the
implications of concept and design alternatives. A target cost
worksheet can be used to capture the various elements of product cost,
compare alternatives, as well as track changing estimates against
target cost over the development cycle.
8. Use tools to reduce costs. Use of tools and methodologies related
to design for manufacturability and assembly, design for inspection
and test, modularity and part standardization, and value analysis or
function analysis. These methodologies will consist of guidelines,
databases, training, procedures, and supporting analytic tools.
9. Reduce indirect cost application. Since a significant portion of a
product's costs (typically 30-50%) are indirect, these costs must also
be addressed. The enterprise must examine these costs, re-engineer
indirect business processes, and minimize non-value-added costs. But
in addition to these steps, development personnel generally lack an
understanding of the relationship of these costs to the product and
process design decisions that they make. Use of activity-based costing
and an understanding of the organization's cost drivers can provide a
basis for understanding how design decisions impact indirect costs
and, as a result, allow their avoidance.
10. Measure results and maintain management focus. Current estimated
costs need to be tracked against target cost throughout development
and the rate of closure monitored. Management needs to focus attention
of target cost achievement during design reviews and phase-gate
reviews to communicate the importance of target costing to the
organization.
3. What ratios would you calculate to assess the liquidity position
and solvency position of a firm?
Working capital: Current assets-Current liabilities.
Current ratio: current assets/current liabilities
Acid Test ratio or Quick ratio: Quick assets/Current liabilities
=Current assets-
Inventory-Prepaid Expenses/Current Liabilities
Cash Ratio: Cash+ Marketable securities+ Net receivable and debtors/
Current Liabilities.
Receivable Turnover or Debtors Turnover ratio:
Net credit sales [total sales-cash sales-sales return]/ Average
Debtors or average accounts receivable (times)
Debt Collection Period: 12months/Debtor Turnover
Inventory Turnover Ratio:
Cost of Goods Sold/Average Inventory (times)
Cost of Goods Sold= Sales- Gross profit or
Cost of Goods Sold=Opening Stock+ Purchase+ Direct expenses-Closing
stock.

4. What is the objective of preparing Fund Flow Statement? In what way

it is different from a Balance Sheet?
Objectives: Fund Flow Statement is an essential tool in Financial
Management decision making. The basic purpose of this statement is to
indicate where funds come from and where it was used during a certain
period. Following are the basic objectives of preparing this
statement:
1. It determines the financial consequences of business orientation.
2. It acts as a central device when comparing with budgeted figures.
3. It points out the weak financial position of the company.
4. It points out the causes for changes in working capital.
5. it enables the banker, financial institution or creditor in on
seeing the degree of risk.
6. The management can rearrange the finance more effectively on the
basis of this statement.
7. Various uses of fund can be known after comparing them with the
uses of previous years. Improvement or downfall in the firm can be
assessed.

Distinction between Fund Flow Statement and Balance Sheet:

FUND FLOW STATEMENT

1. It is dynamic in nature.
2. It incorporates items causing changes in working capital.

3. It is a management tool for financial analysis and helps in

decision making.

4. The preparation of this statement is a post Balance Sheet exercise.

BALANCE SHEET

1. It is static in nature. It is prepared at the end of the accounting

period and portrays the financial position of the firm on a particular
date.

2. It includes the balance of real and personal account and shows the
total resource.

3. It reveals the financial position of a firm and one can examine the
soundness of the firm.

4. I t is the end product of all accounting operation for a particular

period of time.

5. What problems do adoption of Price Level Accounting or Inflation

Accounting serves?
One of the key factor in selling product under competitive market
condition is product pricing. The significance of pricing goes much
beyond the simple question of determining product profitability.
Adoption of price level accounting serves some major problems. They
are:
1. The system is not acceptable to Income tax authorities.
2. Too much calculation makes complications.
3. Changes in prices are never ending process.
4. The amount of depreciation will be lower in time of deflation.
5. The profit calculated on the system of price level accounting may
not be a realistic profit.

6. What is the scope of Cost Accounting? Discuss briefly different

types of cost.
Scope of Cost Accounting:
1. It enables the management to ascertain the cost of product, jobs,
service or units of production so as to develop cost standards.
2. Cost data are useful in the determination of selling price or
quotation.
3. The object is to minimize the cost of manufacturing. Comparison of
actual cost with standard reveals the interdependencies variance.
4. The central theme is to provide information, largely in the areas
of cost, which will be useful in controlling the operation of a
business in a broad sense.

Different Types of Cost:

Fixed cost - cost which does not vary and remains constant within a
given period of time and range of activity in spite of fluctuations in
production.eg. rent, supervisor salary, interest on loan.
Variable cost – varies directly in proportion to every increase or
decrease in the volume or output of production. eg. raw material,
direct labour.
Semi-Variable costs – contains a fixed and variable element eg.
utilities.
Step costs – remain constant over a range of activity. eg. production
supervisor if second shift is added.
Product cost – cost which become part of the cost of the product
rather than an expense of the period. eg. Cost of raw materials
Period costs – costs which are not associated with production eg.
Salesmen salaries, commission etc.
Direct cost – expenses incurred directly in producing the goods or
services
Indirect costs - Not directly chargeable to production of goods
Committed costs – unavoidable fixed costs like depreciation, rent,
salaries etc.,
Discretionary costs – costs set at a fixed amount for a specific time
period eg., advertisement budget, research 7 development expenditure
etc.
Relevant costs – costs which could be changed by managerial decisions
( closing down of non-profitable retail shop)
Irrelevant costs- costs not affected by the managerial decisions
(prepaid rent for the shop, unrecovered costs which will be scrapped)
Shut down costs – certain fixed costs continue to be paid at times of
less or no production
Sunk costs –historical or past costs already incurred for future
indefinite period of time (investment on fixed assets)
Imputed costs (or hypothetical costs) – are ‘notional’ costs which do
not involve in any cash outlay (rent of own property, salary to
proprietor/ partner, interest on capital)
Differential cost- difference in total costs between two alternatives
Incremental costs – choice of an alternative results in increase in
total costs, such increase is incremental cost
Decremental costs- such decrease in costs
Opportunity costs – cost sacrificed by selecting the alternate choice
Production, selling & distribution costs

7. Define Budget and Budgetary control. Discuss the advantages of

budgetary control in an organisation.
Budget:
“Budget is an estimate of future needs arranged according to an
orderly basis, covering some or all of the activities of an enterprise
for definite period of time in future to attain the objective.”-George
R. Terry.
Budgetary control:
“Budgetary control means the establishment of budgets relating to the
responsibilities of the executives of the requirements of the policy
and continuous comparison of actual with budgeted results either to
secure by individual action the objective of that policy or to provide
basis for its revision”
Advantages:
The advantages or benefits of budgetary control are as follows:
1. Budgets fix the goals and targets without which operations lack
directions.
2. Reduction in cost and elimination of efficiency is achieved
automatically.
3. The budgets facilitate to maintain order efforts and brings about
efficiency in results.
4. An effective system of budgetary control results in coordinate
effort of all persons involved.
5. It enables the management to decentralize responsibility without
losing control of the business since it pin-point efficiency.
6. Budgetary control and standard costing goes hand by hand. It
promotes mutual cooperation and team sprits among the persons
involved.
7. It ensures that the capital employed at a particular level is kept
at a minimum level.
8. It facilitates an intelligent and planned forecast for future.
9. It is a good guide to management for making future plans.
10.It aims to maximization of profit through cost control and proper
utilization of recourses.
11. It brings to light the inefficiency and weaknesses on comparing
actual performance with budget. Thus management can take remedial
measures.
12. It is a guide to management in the field of research and
development in future.
13. It evaluates the performance.
14. Since budget provides advance information, financial crisis can be
avoided.
15. It acts as a safety signal for the management. It prevents
wastages of all types.

8. Explain the role of an accountant.

The role of an accountant is as follows:
1. To establish, coordinate, administer as an integral part of
management, an adequate plan for the control of operation.
2. To compare performance with operating plan and standards and to
report and interpret the results of operation to all level of
management.
3. To consult with all segment of management responsible for policy
or action concerning any phase of the operation of the business as it
relates to the attainment of objectives.
4. To administer tax policies and procedures.
5. To supervise and coordinate preparation of reports of government
agencies.
6. To assure fiscal protection for the assets of the business through
adequate internal control and proper insurance coverage.
7. To continuously appraise economic and social forces and government
influences and interpretation their effect upon business.
8. Providing help in the design of an information system.
9. Helps in budget preparation.
10.Coordinating budget making and report preparation activities.
11.Preparing the performance report, control report, special
managerial report and division making.
12 Interpretating accounting data based on the particular requirements
of the managers in a gives situations.

9. What is meant by Fund Flow Statement? How it is prepared?

Fund Flow Statement is a financial statement which reveals the methods
by which the business has been financed and how it has use its funds
between opening and closing balance sheet dates. Thus a fund flow
statement is a report on movement funds explaining where from works
capital originated and where into the same goes during an accounting
period.
Preparation of Fund Flow Statement:
The fund flow statement requires preparation of two statements:
1. Statement changes in working capital
2. Funds from Operation
3. Fund Flow Statement

Schedule of changes in working capital:

Many business enterprises prefer to prepare schedule of changes in
working capital, while preparing a funds flow statement, on a working
capital basis. This schedule in changes in working capital provides
information concerning the changes in each individual current assets
and current liabilities accounts. This schedule is a part of fund flow
statement and increase in working capital indicated by schedule
changes in working capital will be equal to the amount of changes in
working capital as found by fund flow statement. The format of
schedule of changes in Working capital is as follows:

Schedule of changes in Working

Capital
Items As on current year As on previous year Increase Decrease
A. Current Assets:
Cash
Bank
debtors
Stock
Prepaid expenses
Total CA
B. Current liabilities:
Bank overdraft
Creditors
Outstanding exp.
Total CL
Net increase/
Decrease in WC

Funds from Operation

By preparing adjusted profit and loss accuont
Dr.
Cr.
Particulars Rs Particulars Rs.
To goodwill written off
To transfer to General reserve
To depreciation
To provision for tax
To proposed dividends
To loss on sale of assets
To Preliminary exp.
To balance c/d By balance b/d
By gain on sale of assets
By Funds From operations

Fund Flow Statement

Sources of fund Rs Application of funds Rs
Funds From Operations
Sale of Fixed Assets
Issue of Shares (Equity & Preference)
Issue of Debentures
Long-Term borrowings
Decrease in Working Capital Funds Lost in operations
Payments of Dividend
Payment of Tax
Purchase of Fixed Assets
Payment of long-term loans
Redemption of debentures
Redemption of Pref.capital
Increase in Working capital

11. Define Budgeting. State the objectives of budgeting.

Budgeting:
Budgeting is defined as “The entire process of preparing the budget is
known as budgeting” –Batty.
Objectives:
1. To obtain more economic use of capital
2. To prevent waste and reduce expenses.
3. To facilitate various departments to operate efficiently and
economically.
4. To plan and control the income and expenditure of the firm
5. To create a good business practice by planning future.
6. To fix responsibilities on different departments or heads. 7. To
coordinate the various activities of various departments.
8. To ensure the availability of working capital.
9. To smooth out seasonal variations buy developing new products.
10.To ensure matching of sales with productions.
11. What is meant by CVP (Cost Volume Profit) analysis? What are the
assumptions used in it? Limitations of Cost Volume Profit analysis.
Cost profit volume analysis is a systematic method of examining the
relationships between selling price, total sales revenue, volume of
production expenses and profits. This analysis simplifies the real
world conditions that a business enterprise likely to face.
Assumptions used in CVP analysis:
1. CVP analysis focuses on prices, revenues, volume, cost, profits and
sales mix and on the interrelationship between them during the short
run.
2. In CVP analysis, all expenses classified into fixed and variable.
Semi-variable expenses have to be divided into their fixed and
variable elements.
3. CVP analysis may be used in setting selling prices, selecting the
product mix to sell, choosing among alternatives marketing strategies
and analysis the effects of cost increase or decrease on the
profitability of the business enterprise.

Limitations:
There are certain limitations faced by CVP analysis. These are:
1. The function of profit projection is virtually important to
financial analyst, but it is not without it shortcomings. Clear
assignment of costs to either a fixed or variable category is not
always possible. The interpretations of several analysts probably
differ.
2. Direct labour is usually classified as a variable cost. Any change
in production volume will have a direct effect on labour in the same
direction. If management decides on a temporary shutdown of
operations, the effect on the variability of labour cost may not
correspond directly. If for example the company wishes to retain it
highly experienced and skilled personnel during the shutdown period so
as not to lose them, the fluctuating nature of direct labour changed.
3. Another major weakness of cost volume profit analysis as a planning
or controlling device occurs in a manufacturing business. The
assumption by the analyst the sales and production volumes will always
be the same may be valid in theory but not in fact.
4. Analysis covering an extended period o time required a common
denominator for all component periods so that data examined will be
equivalent. Where costs and prices have changed drastically,
adjustments based on current costs and prices produce a more uniform
result.
12. What is meant by Balance Sheet? Gives it specimen.
Balance Sheet:
A Balance Sheet, also commonly referred as statement of financial
position, is a statement of assets and liabilities of business
enterprises at a particular date. The Balance Sheet summarizes and
reveals the financial position of an enterprise on a particular date,
by showing what It own and what it owes. Because the balance sheet is
a snapshot of an instant in time, it is a status report rather than
flow report.
Specimen of Balance Sheet:

Balance Sheet
As at………………….
Liabilities Amt(Rs) Assets Amt(Rs)
Current liabilities
Bank overdraft
Outstanding expenses
Bills payable
Sundry creditors
Income received in advance
Fixed non-current liabilities
Loan
Capital
Opening balance
Add: Net profit
(Less loss)
Less: Drawings
------
------
------
------
------

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

-------

Current Assets
Cash in hand
Cash at bank
Prepaid expenses
Sundry debtors
Accrued income
Bills receivable
Stock(closing)
Non-current Assets[Fixed
Assets]
Investments
Furniture, Fittings, Loose tools
Plant and Machinery
Building
Land
Goodwill
-------
-------
-------
-------
-------
-------
-------

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

-------
-------
-------
-------
13. Explain the various steps involved in Activity Based Budgeting.
Various steps involved in Activity Based Costing are:
1. Identify resources: Resources represents the expenditures of an
organisation. Eg. Include production labour, sales and marketing
labour, occupancy and utilities, equipments and supplies. Activity
Based Costing links these cost to products, customers or services.
2. Identify activities: Activities represents the work performed in an
organisation. ABC activities for sales department in a typical
organisation might include:
a. Making sales call to existing customers.
b. Making sales calls to potential customers.
c. Making customer service calls.
d. Training product representation.
e. Distributing samples.
f. Attending trade shows and other events.
g. Evaluating products and improving product knowledge
ABC accounts for these costs based on what activities caused them to
occur. By determining the actual activities that occurs in various
departments, it is then possible to more accurately relate these costs
to customers, products and services.
3. Identify cost objects: ABC provides profitability by one or more
cost objects, usually represented by products, customers and/or
services. Cost Object profitability is utilized to identify money
losing customers, to validate separate divisions or business units, or
to measure the performance of individual projects, jobs, or contracts.
Defining the outputs to be viewed is an important step in a successful
ABC implementation.
4. Determine resources drivers: Resources drivers provide the link
between the expenditure of an organisation and the activities
performed within the organisation.
For example, the total salary of a customer service representative
would likely be allocated to the Activities performed based on the
amount of time spent performing the Activity. If 50% of her time is
spent performing the activity, taking orders for existing customers,
50% of her salary (including all costs such as benefits, taxes, and
insurance) would be allocated to this Activity.
5. Determine cost drivers: Determine cost drivers completes the last
stage of the model. Cost drivers trace or link, the cost of performing
certain activities or cost objects.
For example, taking orders for existing customers may be linked to
specific customers based on the number of orders taken, if each order
takes approximately the same amount of time. If order taking time
varies based on the customer, this cost may be linked based on another
driver or multiple drivers.

14. What is meant by Financial Analysis? Discuss its tools in brief.

Financial Analysis:
According to Lev, “Financial Statement Analysis is an information
processing system designed to provide data for decision making models,
such as the portfolio selection model, bank lending decision model and
corporate management models“.
Tools:
A financial analyst can adopt the following tools for analysis the
financial statement. These are also termed as methods of financial
statement-
1.Comparative Financial Statements:
The percentage analysis increases and decreases in corresponding items
in comparative financial statement is called horizontal analysis
2. Common Size Statement:
It involves expressing comparison in percentages. Common size
statement may be prepared in order to compare percentage of a current
period with past period to compare individuals business, or to compare
one business with industry percentages published by trade
associations.
3. Trend ratios or Trend Analysis:
Using the previous years data of a business enterprise, trend analysis
can be done to observe percentages changes over time in selected data.
In this, percentage changes are calculated for several successive
years instead of between two years.
4. Statement showing changes in Working capital:
Many business enterprises prefer to prepare schedule of changes in
working capital, while preparing a funds flow statement, on a working
capital basis. This schedule in changes in working capital provides
information concerning the changes in each individual current assets
and current liabilities accounts. This schedule is a part of fund flow
statement and increase in working capital indicated by schedule
changes in working capital will be equal to the amount of changes in
working capital as found by fund flow statement.
5. Fund Flow and Cash Flow Analysis:
Fund Flow Statement is a financial statement which reveals the methods
by which the business has been financed and how it has use its funds
between opening and closing balance sheet dates. Thus a fund flow
statement is a report on movement funds explaining where from works
capital originated and where into the same goes during an accounting
period.
Cash Flow Statement concentrate to transactions that have a direct
impact on cash. It deals with the inflow and outflow cash between
balance Sheet dates.
6. Ratio Analysis:
Financial ratios provide the analyst with a means for making
meaningful comparison of a firm’s financial data over tine and with
other firms. Thus, financial ratios represent an attempt to
standardized financial information in order or facilitate meaningful
comparisons.
15. What do you mean by Social Accounting? What are the key principles
of Social Accounting? Explain the process involved in this.
Social Accounting:
Social accounting is a method by which a business seeks to place a
value on the impact on society of its operations. This might include
the following impacts on the environment: waste; the effect on society
of the packaging it produces; and how much fuel it uses in its company
cars. It can also include the effect on the local community who might
have to live in the shadow of its premises, and how it engages with
the community, its customers and workforce.
Key principles:
1. Multi-perspective: encompassing the views of people and groups that
are important to the organisation.
2. Comprehensive: inclusive of all activities of an organisation.
3. Comparative: able to be viewed in the light of other organizations
and addressing the same issues within same organisation over time.
4. Regular: done on an ongoing basis at regular intervals.
5. Verified: checked by people external to the organisation.
6. Disclosed: readily available to others inside and outside of the
organisation.

Process involved in Social accounting:

Step 1 Planning: In the first stage of social accounting, the
organisation clarifies its mission, objectives and activities as well
as its underpinning values. It also analyses its stakeholders through
completing a ‘stakeholder map’. These exercises help the organisation
to make explicit what it does, why and how it does it, and who it
works with and whom it seeks to benefit.
Step 2 Accounting: In this phase, an organisation decides the ‘scope’
or focus of the social accounts, especially if it will build a
comprehensive picture over time. The organisation then sets up ways of
collecting relevant information over a period of time to report on
performance and impact against its values and its objectives,
encompassing both quantitative and qualitative. The information is
then brought together and analyzed.
Step 3 Reporting and audit: The information that was collected,
collated and analyzed in Step 2 is brought together in a single
document, which serves as a draft of the social accounts. People from
outside the organisation (a Social Audit Panel) then review this
document to check that the report is based on information that has
been properly gathered and interpreted. When the Panel is satisfied
with the report and its findings, the organisation can make its report
available to the stakeholders and wider public in full or as a shorter
summary. Social Accounting and Audit is really about examining the
‘social, environmental and economic’ performance and impact of an
organisation. There are a variety of key terms which are included in
the glossary as part of the new, revised manual.

16. What do you mean by Human Resource Accounting? State its purposes.
What is the usefulness of Human Resource Accounting?
Human Resource Accounting:
Human Resource Accounting is “the process of identifying and measuring
data about human resources and communicating this information to
interested parties”. HRA, thus, not only involves measurement of all
the costs/ investments associated with the recruitment, placement,
training and development of employees, but also the quantification of
the economic value of the people in an organization.
HRA Needs
• Knowledge / Information /Skills
• Intellectual capacity
• Employees Attitudes
• Experience
• Employee Turnover
Purposes of this accounting:
HRA serves the following purposes in an organisation:
1. It furnishes cost/value information for making management decisions
about acquiring, allocating, developing, and maintaining human
resources in order to attain cost-effectiveness;
2. It allows management personnel to monitor effectively the use of
human resources;
3. It provides a sound and effective basis of human asset control,
that is, whether the asset is appreciated, depleted or conserved;
4. It helps in the development of management principles by classifying
the financial consequences of various practices.
Usefulness:
HRA is a management tool which is designed to assist senior management
in understanding the long term cost and benefit implications of their
HR decisions so that better business decisions can be taken. If such
accounting is not done, then the management runs the risk of taking
decisions that may improve profits in the short run but may also have
severe repercussions in future.

HRA also provides the HR professionals and management with information

for managing the human resources efficiently and effectively. Such
information is essential for performing the critical HR functions of
acquiring, developing, allocating, conserving, utilizing, evaluating
and rewarding in a proper way. These functions are the key
transformational processes that convert human resources from ‘raw’
inputs (in the form of individuals, groups and the total human
organization) to outputs in the form of goods and services. HRA
indicates whether these processes are adding value or enhancing
unnecessary costs.
Human capital also provides expert services such as consulting,
financial planning and assurance services, which are valuable, and
very much in demand. Basically HRA can be tracked through two methods—
cost-based analysis and value-based analysis. The cost-based approach
focuses on the cost parameters, which may relate to historical cost,
replacement cost, or opportunity cost. The value-based approach
suggests that the value of human resources depends upon their capacity
to generate revenue.

17. Define Responsibility accounting. Discuss the advantages of

responsibly accounting. What is Balanced Score Card Approach.
Responsibility Accounting:
Eric Kohier defines Responsibility Accounting as “a method of
accounting in which costs are identified with persons assumed to be
capable of controlling them, rather than with products or functions.
It differs from activity accounting, in that it does not in itself
require an organizational grouping by activities and sub-activities or
provides a systematic criterion of system design.”
Purpose
Social responsibility includes;
1. Financial (Profits)
2. Social (people)
3. Environmental ( Planet)
Advantages:
1. It introduces sound system of control - a system of closer control.
2. Each and every individual in the organization is assigned some
responsibility and they are accountable for their work.
3. Everybody knows what is expected of him. Nobody can shift
responsibility to anybody else if something goes wrong.
4. It is effective tool of cost control and cost reduction applied
with budgetary control and standard costing.
5. It facilitates the management to set realistic plans and budgets.
6. It is not only a control device but also facilitates
decentralization of decision-making.
7. It measures the performance of individuals in an objective manner.
8. It fosters a sense of co

st-consciousness among managers and their

subordinates.
9. It helps the management to make an effective delegation of
authority and required responsibility as well.
10. Under the system of Responsibility Accounting, detailed
information is collected about costs and revenues, on a continuous
basis and the data is helpful in planning for future costs and
revenues.
11. Timely corrective action can be taken and better control over
costs can be achieved.

Balanced Score Card:

A balanced scorecard is a performance measurement and reporting system
that strikes a balance between financial and operating measures, links
performance to rewards, and gives explicit recognition to the
diversity of organizational goals. One advantage of the balanced
scorecard approach is that line managers can see the relationship
between non-financial measures, which they often can relate more
easily to their own actions, and the financial measures that relate to
organizational goals. Another advantage of the balanced scorecard is
its focus on performance measures from each of the following four
components of the successful organization.
1. Financial Strength
2. Customer Satisfaction
3. Business Process Improvement
4. Organizational Learning
This enhances the learning process because managers learn the results
of their actions and how these actions are linked to the
organizational goals.

18. What is the study of Variance Analysis? How it helps in cost

control.
Variance analysis is the process of analyzing variances by sub-
dividing the total variance in such a way that management can assign
responsibility for of standard performance.
Variance Analysis are important tools of cost control and cost
reduction and they generate an atmosphere of cost consciousness in the
organisation. In short, the uses of variances are:
1. Comparison of actual with standard cost which reveals the
efficiency or inefficiency of performance.
2. it its a tool of cost control and cost reduction.
3. It helps the management to apply the principle of management by
exception.
4. It helps the management to maximize the profits by analyzing the
variances into controllable and uncontrollable; the controllable
variances are further analyzed so as to bring a cost reduction,
indirectly more profit.
5. Future planning and programs are based costing and variance
analysis need a complete study of organisation. Thus, the factors of
profits can be known and future plan made.
6. Within an organisation, a cost consciousness is created along with
the team spirit. The variance analysis and fact finding further boost
the profits of the organisation.

19. What is meant by Inflation Accounting? Give its uses.

Inflation Accounting:
Inflation or price level accounting is a method of measuring the
impact of changes in general purchasing power of the dollar. Inflation
is measured and reported in the financial statement. Purchasing power
gains and losses on monetary item are reflected in this.
Uses of Inflation Accounting:
1. Since assets are shown in current value, Balance Sheet exhibits a
fair view of the financial position of a firm.
2. Depreciation is calculated on the value of assets to the business
and not on their historical cost- a correct method. It facilitates
easy replacements.
3. Profit and loss account will not overstate business income.
4. Inflation accounting shows current profits based on current prices.
5. Financial ratios based on figures, adjusted to current value are
more meaningful.
6. Profit or loss is determined by matching cost and the revenue at
current values which are comparable – a realistic assessment of
performance.
7. Inflation accounting gives correct information, based on current
price to the workers and shareholders.

20. Discuss the advantages and disadvantages of Zero Based budgeting.

Advantages of Zero Based Budgeting:
1. It represents a move towards allocation of resources by need and
benefit and thus results in more efficient allocation of resources.
2. It identifies and eliminates the wastages and obsolete operations.
3. It ensures that the best possible methods of performing jobs are
and that new ideas emerge.
4. It creates an questioning attitude rather than one which accepts
that current practices represents the value for money.
5. It increased the staff involvement which may lead to improve
motivation and greater involvement in the job.
6. It increases the communication within the organisation.
7. Managers become more aware of the costs of inputs which help them
to identify priorities.
8. The documentation of decision packages provides management with a
deep, coordinated knowledge of all organizational activities.
9. It is useful specially for service departments where it can be
difficult to identify output.
Disadvantages of Zero Based Budgeting:
1. The costs involved in preparing a vast number of decision packages
in a large firm are very high.
2. It is very time-consuming and large amount of additional paper work
are involved.
3. Managers develop fear and feel threatened by ZBB and therefore may
oppose new ideas and change.
4. the ranking of decision packages and allocation of resources is
subjective to a certain degree, which can result in departmental
conflict.
5. Administration and communication of ZBB process may become critical
problems; because more managers become involved in this process than
in most budgeting and planning procedures and these problems are
further compounded in large organization.

21. Describe the importance and uses of Break Even Analysis.

Importance:
A break even analysis is performed to identify the level of operation
at which the entity had covered all costs but has not yet earned any
profit. The break-even point identifies the volume of activity at
which total revenues equal total cost. This is an important point to
the management because it represents a minimum acceptable level of
operations and it indicates that profitable operations can only
results when the level of activity exceeds the break-even point.
Uses:
The break-even point is helpful to management for forecasting,
evaluating managerial efficiency and decision making.
As a forecasting tool, the break-even point can aid in determining the
following:
1. The requirement of the sales department that justify a proposed
investment in plant expansion.
2. The effect of increases and in decreases in sales volume.
3. The probable cost per unit of manufactured goods at various
production levels.
4. The evaluation of changes in production methods.
5. The planning of profit objectives.

Managerial efficiency may be evaluated by comparing actual break-even

results with predetermined levels. If properly considered by
management, the level of break-even point can be important tools when
used in conjunction with the analysis of sales mix and the conversion
of variable costs to fixed costs.

22. Is accounting an information system? Differentiate between

Financial Accounting and Management accounting.
An accounting system consists of personnel, procedures, devices and
records used by an organisation which helps in developing and
structure of accounting information and communication this information
to decision makers. Design and capabilities of these systems are
varying greatly from organisation to organisation. In very small
businesses, the accounting systems may consists of little more than a
cashbook and cheque book and may be an annual interaction with the
chartered accountant for filling tax returns. In very large business,
accounting system would include computers, expensive ERP software like
SAP, highly trained employees and accounting reports that provides the
backbone for controlling the daily operation of every department.
Still the basic purpose of the accounting system remains the same, to
meet the organizations need for accounting information as efficiently
as possible.
Accounting should be viewed as an information system for simple reason
that it would help focus attention on the information provided by it.
Accounting helps users in taking better decision by providing
relevant, timely and cost-effective information on the financial and
operational parameters.

Difference between Financial and Management accounting:

Financial Accounting Management Accounting
Purpose

Types of Reports
Standards for Presentations

Reporting Entity

Time period covered

Users of information To provide investors, creditors and other

external parties with useful information about the financial
performance and cash flow prospects of an enterprise.

Primarily financial statements-statements of financial position or

balance sheet, profit and loss accounts, cash flow statements and
related notes and supplemental disclosure that provide investors,
creditors and other users information to support external decision
making prices.
Generally accepted accounting principles, including those formally
established in the authoritative accounting literature and standards
industry practice
Usually the company is viewed as whole.

Usually a year, quarter or month. Most reports focus on completed

periods. Emphasis is placed on the current period, with prior periods
often shown for comparison.
Outsiders as well as managers. For financial statements, these
outsiders include stockholders, creditors, prospective investors,
regulatory authorities and the general public.
To provide managers with information useful for planning, evaluating
and rewarding performance and sharing with other outsider parties. To
apportion decision making authority over firms resources.
Many different types of reports, depending on the nature of the
business and the specific information needs of management.

Rules are set within each organisation to produce information most

relevant to the needs of management.
A component of company’s value chain such as a business segment
supplier, customers, product line, department or product.
Any period year, quarter. Month, week, days even a work shift. Some
reports are historical in nature; others focus on estimates of results
expected in future periods.
Management, customers, auditors, suppliers and others involved in an
organization value chain.

23. Discuss the three most important concepts of accounting.

1. Business Entity Concept:
The business concern is artificially formed as a separate legal
entity, taking the form of a Proprietorship concern or a Partnership
firm or a Private limited Company or a Public Limited Company. Thus
the Proprietor or Partners or Promoters is/are considered distinct
from his/their own business. Without such a distinction the affairs of
the firm will be mixed up with the private affairs of the Proprietor
or Partners or Promoters and the true picture of the firm will not be
available. Hence the business concern (entity) is to be considered
different from the owner/s also referred as Separate entity concept.

2. Money measurement concept:

The transactions to be recorded in the books of accounts have to be
expressed in monetary terms only for the purpose of measuring and
assessing the actual income earned or loss incurred in a business. For
example: the efficiency of a manager which resulted in improvement in
business cannot be recorded in the books because it cannot be
quantitatively measured. Hence only those events having money value
can be entered in the books of accounts.

3. Going Concern concept:

This assumes that the business will continue to exist forever. Any
business is not started with an intention of closing it down in the
near future. This concept affirms that it will be continuing its
business without the intention or necessity of winding up of its
business and to permanently continue its business keeping in view
earning returns on the investment made.
24. In a certain period the company sold 8000 units at Rs.15 per unit
and incurred a loss of Rs.5 per unit. In another period the company
sold 20000 units and incurred a profit of Rs. 4 per unit. What would
be the Break Even Point in terms of Rupees and Units.
Solution:
Period Sales Profit and loss Contribution Fixed
cost
I 120000 -40000
II 300000 80000

P/v ratio = Change in profit / Change in sales*100

 = 80000-(-40000) / 300000-120000 *100
=120000 / 180000*100
= 67%
Contribution (1) = 120000*67% =80400
And (2) = 300000*67%=20100
Fixed cost:-
Contribution = FC+ Profit and loss
So FC = Contribution-profit
FC (1) = 80400-(-40000) =120400
FC (2) = 201000-80000 =121000
BEP = FC / P/v ratio
= 121000/67*100
= 180597
BEP (Unit)
= 180597/15=12039 Units.
25. Discuss accounting as an information system.
Accounting is often referred to as the language of business. The
primary aim of language to serve as a means of communication.
Accounting is used to communicate financial and other information to
people, organization, government etc about various aspects of business
and non business activities.
An Accounting system consists of personnel , procedures, devices and
records used by an organization which helps in development and
structure of accounting information and communicating this information
to decision makers. Design and capabilities of these systems vary from
organizations to organizations.
Profit & Loss A/C
Balance Sheet
Cash / Fund Flow statements

Input
Process Output
Accounting Concepts and Convention

Business Transaction and events (collection of Data)

26 . The Trial balance shows the following details ;
Bad debts 3000 Reserve for Bad Assets 4500
Debtors 75000

Adjustments:
(i) Further Bad Debts Rs. 1000
(ii) Maintain reserve for doubtful debts @ 5%
(iii) Maintain reserve for discount on debtors @ 2%
Show the Profit & loss account and Balance sheet after the above
adjustments made, relating to bad debts ; discount on debtors and net
debtors.
Solution: Trading & Profit & Loss Account
Dr. Cr.

Particulars Detail Amount Particulars Amount

To Bad Debts
Add: Further bad debts.
Provision for doubtful debts
5 % on (75000-1000) = 3700
Reserve for discount on debtors
2 % on 70300 (75000-4700)

Less: Old provision 3000

1000

3700

1406
9106
4500

4606

Balance Sheet
Liabilities Amount(Rs.) Assets Details Amount (Rs)
Debtors
Less: Further Bad Debts
New Provision of Debts.
Provision of Discount on Debtors. 75000
1000

3700

1406
65894

27. Define the Limitation of Financial Ratios.

Limitation of financial ratios:
Financial statement analysis through ratios is useful because they
highlight relationship between items in the financial statements.
However, they have a number of limitations which should be kept in
mind while preparing or using them.
(1) Ratios are based on accounting figures given in the financial
statements. However, accounting figures are themselves subject to
deficiencies, approximations, diversity in practice or even
manipulation to some extent.
(2) Ratio have inherent problem of comparability. companies otherwise
similar may employ different accounting methods, which can cause
problems in comparing certain key relationship.
(3) Inflation may limit the utility of accounting ratios. Due to
inflation, historical cost-based financial and accounting figures do
not reflect current value figures, especially in the case of assets
purchased at different dates by the different enterprises.
(4) Accounting ratios are not totally dependable and they must be
used after giving due weightage to general economic conditions,
industry situation, position of firms within the industry, mode of
operations, size of firm, diversity of product which can make the
business enterprises completely dissimilar and thus affect the
computation of accounting ratios.
(5) The different methods of computations also influence the utility
of accounting ratio. The different concept used for determining
numerator and denominator in a particular accounting ratio will not
help in drawing reliable conclusions even in identical situations.

28. Who are the users of accounting Information?

Accounting is of primary importance to the managers. However, other
persons such as creditors, prospective investors, employees, etc. are
also interested in the accounting information.
1. Proprietors.
A business is done with the objective of making profit. Its
profitability and financial soundness are, therefore, matters of prime
importance to the proprietors who have invested their money in the
business.
2. Managers.
In a sole proprietary business, usually the proprietor is the manager.
In case of a partnership business either some or all the partners
participate in the management of the business. They, therefore, act
both as managers as well as owners.

3. Creditors.
Creditors are the persons who have extended credit to the company.
They are also interested in the financial statements because they will
help them in ascertaining the enterprise will be in a position to meet
its commitment towards them both regording payments and principals.
4. Prospective investors.
A person who is contemplating an investment in a business will like to
knopwn about its profitability and financial position.
5. Employees.The employees are interested in the financial statement
on accounts of taxation, labour and corporate laws.
6.Citizen
An ordinary citizen may be interested in the accounting records of the
institutions with which he comes I contact in his daily life e.g.
bank, temple, public utilities such as gas, transport, electricity
companies. In a broader sense, he is also interested in the account of
a Government Company, a public utility concern etc. as a voter and a
tax payer.

29. Differentiate between Book-keeping and accounting.

Book-keeping Accounting
1. Is a part of accounting

2. Concerned with record Keeping & maintenance Of accounting records.

3. Routine & clerical in nature

4. Involves identifying, measuring Involves summarizing

5. Is primary stage
6. Is to maintain primary records
1. Actual process of preparing & presenting the
accounts

2. Requires higher level of knowledge

3. Analytical in nature
4. Recording & classifying analyzing & interpreting transactions

5. Is secondary stage
6. Is to ascertain net results of operations and financial
position.

30. from the following information regarding a standard product,

compute
(1) Price (2) usage and (3) mix variance:
Standard Actual
Quantity
(kilos) Unit
Price
Rs. Total
Rs. Quantity
(kilos) Unit
Price
Rs. Total
Rs.
Material A
Material B
Material C
Total 4
2
2
8 1.00
2.00
4.00
2.00 4.00
4.00
8.00
16.00 2
1
3
6 3.50
2.00
3.00
3.00 7.00
2.00
9.00
18.00

Solution
1. Price variance= Actual quantity * (Standard price – Actual Price)
Material A =2 * (Re.1- Rs. 3.50)= Rs. 5 (Adverse)
Material B =1 * (Rs.1 – Rs. 2) = Rs. –
Material C = 3* (Rs. 4 – Rs.3) =Rs. 3 (Favorable)
=Rs. 2
( Adverse)

2. Usage Variance= Standard price * (Standard quantity – actual

quantity)
Material A =Re.1 * (4-2) =Rs.2 (Favorable)
Material B =Rs.2 * (2-1) =Rs.2 (Favorable)
Material C =Rs.4 * (2-3) =Rs.4 (Adverse)
=Nil

31. Discuss ratios are the shortcut in Financial Statement Analysis

Or
Discuss the importance of ratios.

By using the ratio we can know the following information of a firm:

A. Liquidity of the firm:
The liquidity of a business defined as its ability to meet maturing
debt obligations. That is, does or will the firm have the resources to
pay the creditors when the debt comes due?
There are two ways to approach the liquidity question.
1. We can look at the firm’s assets that are relatively liquid in
nature and compare them to the amount of the debt coming due in the
near term
2. We can look at how quickly the firm’s liquid assets are being
converted into cash.
B. Financing of assets:
Two primary ratios used to answer this question are the debt ratio and
times interest earned.

C. Management generating adequate operating profits on the firm’s

assets:
We have several choices as to how we measure profits, operating
profits, or net profits. As net profit includes the unwanted effects
of the firms financing policies, this leaves operating profits as our
best choice in measuring the firm’s operating profitability.

D. If the owners (shareholders) receiving an adequate return on their

investment
We want to know if the earnings available to the firm’s owners or
common equity investors are attractive when compared to the returns of
owners of similar companies in the same industry.
Don’t jump to conclusions that the ratios are the ultimate tools of
financial analysis and would give you straight answers regarding the
financial health of the company. They would not. Almost any ratio
analyzed by itself can give you misleading indications.
Financial ratios can be divided into five basic categories. These
categories consist of liquidity ratios, efficiency ratios, and
leverage ratios. Profitability ratios and market value ratios.
32. Discuss the advantages and limitations of Standard Costing
Advantages:
Advantages of Standard costing all as under:
a. Standards are the building blocks used to compile budgets.
b. Actual costs can be compared with standard costs in order to
measure performance.
c. The setting of standards should results in the best resources and
methods being used, which will increase efficiency.
d. It highlights areas of strength and weakness.
e. Standard costs can be used to value stock and as a basis for
setting wage incentives schemes.
f. It operates through the management by exception principals, where
only those variances, that are outside certain tolerance limits, are
investigated thereby economizing on managerial time.
g. Standard costing simplifies bookkeeping, as information is recorded
at standard, instead of a number of historic figures.
h. Control action is immediate, for, as soon as material is issued
from store in order to make a product it can be compared with the
standard material which should have been for the actual productions.
i. Managers are made responsible for standards.
Limitations:
a. heavy load of input data is required which is expensive.
b. Standard costing is only applicable in organizations where
processes or jobs are of a repetitive nature.
c. Unless standards are set which are accurate respect to labour
efficiency, quality, and price of material, any comparison with actual
will be meaningless.
d. because of uncertainty , especially that related to inflation,
standards needs to be continually updated and revised.

33. What is posting? State relationship between Journal and Ledger.

Posting:-
Posting is the process of transferring debits and credits from the
journal and other books of original entry to their respective account
in the ledger. The aim of posting is to make a classified and
summarized record of business transactions in appropriate accounts.
Rules regarding posting:
1. Separate accounts should be opened in the ledger for the posting
the different transaction recorded in the book of original entity.
2. All the transaction pertaining to one account should be posted in
the same account.
3. Two aspect of the business transaction namely- debit aspect and
credit aspect-should be posted on the debit side and credit side of
the account respectively.

Relationship between Journal and ledger:

Journal and ledger are the most important books maintained in an

enterprise. They are closely interrelated. Business transactions are
recoded first in Journal and other books of original entry and then
from these books they are transferred to ledger. Journal records
transactions in a chronological order while the ledger records the
transactions in a classified from. Journal, being the book of original
entry or more reliable as compared to ledger.
A journal is not useful in answering a question such as, what is the
balance of cash at a certain date. This question is answered by
referring to the ledger, which summarizes the cumulative effect of
recorded transactions in separate account accounts. This is
accomplished by transferring or posting information from the journal
into appropriate accounts in the ledger.
35. What are the objectives of Human Resource Accounting? Discuss its
utility.
Human Resource Accounting is “the process of identifying and
measuring data about human resources and communicating this
information to interested parties”. HRA, thus, not only involves
measurement of all the costs/ investments associated with the
recruitment, placement, training and development of employees, but
also the quantification of the economic value of the people in an
organization.
Objectives:
HRA serves the following purposes in an organization:
1. It furnishes cost/value information for making management decisions
about acquiring, allocating, developing, and maintaining human
resources in order to attain cost-effectiveness;
2. It allows management personnel to monitor effectively the use of
human resources;
3. It provides a sound and effective basis of human asset control,
that is, whether the asset is appreciated, depleted or conserved;
4. It helps in the development of management principles by classifying
the financial consequences of various practices.

Utility of Human Resource Accounting:

1. It through lights on the strength and weakness of the existing
workforce in an organization. This is in turn, helps the management in
recruitment planning where to hire people or not.
2. It provides valuable feedback to managers regarding the
effectiveness of the Human Resource policies and practices.
3. It helps potential investors judge a company better on the strength
of the human assets utilized therein. If two companies offer the same
rate of return on capital employed, information on human resources can
help investors decide which company to be picked up as an investment.
4. It helps management in taking appropriate decisions regarding the
use of human assets in an organization that is whether to hire new
recruits or promote people internally.

36. A factory is currently working at 50% capacity and the product

cost per unit is given below:
Material - Rs. 100; Labour – Rs. 30; factory overheads (40% fixed)
– Rs. 30 ; Administrative overheads (50% fixed) – Rs.20. The product
is sold at Rs.240 per unit and the factory produces 10000 units at 50%
capacity level. Estimate the profit and total cost if the factory
works at 60% by preparing a flexible budget. At 60% working, raw
material cost increases by 20% and selling price falls by 10%.
Solution: Flexible Budget

50% (10000 units) 60% (12000 units)

Particulars Cost per unit Total Cost Cost per unit Total Cost
Material 100 1000000 120 1440000
Labour 30 300000 30 360000
Factory Overhead (30 Rs.)
Fixed 40% 12 120000 12 144000
Variable 60% 18 180000 18 180000
Adminstrative Overhead (20 Rs.)
Fixed 50% 10 100000 10 120000
Variable 50% 10 100000 10 100000

Total Cost 180 1800000 200 2344000

Profit 60 600000 16 192000
Selling Price 240 2400000 216 2592000

37. A company budgets for a production of 150000 units. The variable

cost per unit is Rs.14 and fixed cost Rs. 2 per unit. The company
fixes its selling price to fetch a profit of 15% on cost.
a) Find the break-Even Point
b) Determine the P/V ratio
c) If it reduces the selling price by 5%, what is the new BEP and P/v
ratio.
d) What would be the sales, at the reduced price if the desired profit
is Rs.3,96,000
Solution:
Total Cost = 14 + 2 = 16 Rs. Profit = 15 % of 16 = 2.40 Rs.
Selling Price = Cost + Profit 16 + 2.40 = 18.40 Rs.
Contribution: Sales – Variable Cost & 18.40 – 14 = 4.40
a. P/V Ratio = Contribution/Sales 4.40/18.40 = 24% (23.9%)
b. BEP: Fixed Cost / P/v Ratio fixed Cost =
300000 (150000*2)

= (300000 * 18.40)/ 4.40 = 1254545 Rs.

BEP in units. 68181 units (1254545/18.40)

c. New Selling Price = 18.40- (18.4*5%) = 17.48 Rs.

New P/V ratio = 3.48/17.48 = 20 % (19.9%)
New BEP = (300000*17.48)/3.48 = 1506896 Rs. Or 86206 units.
d. Estimated Sales = Fixed Cost + Desired Profit
P/V Ratio
Estimated Sales = (300000 + 396000)/19.9% = 3497487 Rs.
(New P/V Ratio)

38. Compute (i) Material Cost variance (ii) Material Price variance
and (iii) Material Usage variance from the following information:
Standard Actual
Particulars Quantity (Kg) Rate per kg Quantity
(Kg) Rate per kg
Material A 800 6.00 750 7.00
Material B 400 4.00 500 5.00

Solution: Material Cost Variance = (SQ * SP) – (AQ*AP)

= 6400-7750 = 1350 (A)
Material Price Variance = (SP-AP) * AQ
A = (6-7)*750 = 750 (A)
B = (4-5)*500 = 500 (A)

1250(A)
Material Usage Variance = (SQ-AQ)*SP
A = (800-750)*6 = 300 (F)
 B = (400-500)*4 =400 (A)
100
(A)
39. Prepare Fund Flow Statement.
Liabilities 2006 2007 Assets 2006 2007
Share Capital 70000 74000 Cash 9000 7800
Debentures 12000 6000 Debtors 14900 17700
Creditors 10360 11840 Stock 49200 42700
Profit & Loss A/C 10740 11360 Goodwill 10000 5000
Land 20000 30000
105106 105207 105106 105207

Additional Information:
a. Dividends Paid for 4000 Rs.
b. Land Purchased for 15000 Rs.
c. Decrease in Working Capital is 6380 Rs. (calculated)
Solution: Funds From Operation

Net Profit as Per B/S 620

Add Non operating Expenses
Goodwill Written off 5000
Dividend Paid 4000
Depreciation on Land 5000 14000

Funds From Operations 14620

Fund Flow Statement

Sources Amount Applications Amount
Issue of Shares 4000 Purchase of Land 15000
Funds From Operation 14620 Redemption of Debentures 6000
Decrease in Working Capital 6380 Dividends Paid 4000

25000 25000

40. Preparing a cash budget for the months of may, June and July,
1998 on the basis of the following information:
(1) Income and expenditure forces:
Months Credit sales Credit purchases Wages Manufacturing
Expenses Office expenses Selling expenses
March
April
May
June
July
August 60,000
62,000
65,000
58,000
56,000
60,000 36,000
38,000
33,000
35,000
39,000
34,000 9,000
8,000
10,000
8,500
9,500
8,000 4,000
3,000
4,500
3,500
4,000
3,000 2,000
1,500
2,500
2,000
1,000
1,500 4,000
5,000
4,500
3,500
4,500
4,500

(2) Cash balance on 1st may, 1998 Rs 8,000

(3) Plant costing Rs. 16,000 is due for delivery in July, payable 10%
on delivery and the balance after 3 months.
(4) Advance tax of Rs.8, 000 each is payable in march and June.
(5) Period of credit allowed (1) by suppliers – two months, and (2) to
customers-one month.
(6) Lag in payment of manufacturing expenses – ½ month.
(7) Lag in payment of office and selling expenses – one month.

Solution:
Cash Budget
Particular May 1998 Rs June 1998 Rs July 1998 Rs
Opening balance
Estimated cash receipts
Debtors (credit sales)

Estimated cash payment

Creditors (credit purchases)
Wages
Manufacturing expenses
Office expenses
Selling expenses
Plant- payment on delivery
Advance tax 8,000

62,000
70,000

36,000
10,000
3,750
1,500
5,000
-
-
-----------
56,250
13,750

64,000
77,750

38,000
8,500
4,000
2,500
4,500
-
8,000
-------------
65,500 12,250
58,000
70,250

33,000
9,500
3,750
2,000
3,500
1600
-
-------------
53,350
13,750 12,250 16,900

Working Notes: (1) Opening for June has been written finding closing
balance for May, and for July after finding the closing balance for
June.
(2) Since the period of credit allowed to customers is one month, the
payments for- credit purchases in March shall be made in May and so
on.
(3) Since the period of credit allowed by suppliers is two months, the
payment: for credit purchases in March shall be made in May and so on.
(4) One-half of the manufacturing expenses of April and one –half of
those of May shall be paid in May, (1/2 of Rs. 3,000) + (1/2 of Rs
4,500) Rs. 3750 and so on.
(5) Office and selling expenses of April shall be paid in May and so
on.

41. The balance sheet of Y Ltd. stood as follows as on:

Liabilities 31.3.95 31.3.94 Assets 31.3.95 31.3.94
Capital
Reserves
Loans
Creditors and other current Liabilities 250
116
100

129
 250
100
120

25 Fixed assets
Less: Depreciation

Investment
Stock
Debtors
Cash /bank
Other current Assets
Misc. Expenditure 400

140
260
40
120
70
20

25

60 300

100
200
30
100
50
20

25

70
595 495 595 495
You are given the following information for the year 1994-95
Sales
600
PBIT
150
Interest
24
Provision for tax 60
All the figures given above are rupees in lakhs.
From the above particular calculate for the year 1994-95:
(a) Return on capital employed Ratio.
(b) Stock turnover ratio
(c) Return on net worth
(d) Current ratio
(e) Proprietary Ratio
Solution:
(a) Return on capital employed Ratio.
PBIT / Average capital employed *100
= 150 / 403 *100
= 37.22%
(b) Stock turnover ratio
Sales / average stock
600 / 110
= 5.45 times
(c) Return on net worth
PAT / Average *100
= 235 / 129
=22.53%
(d) Current Ratio
Current Assets / current liabilities
= 235 / 129
=1.82 times

(e) Proprietary Ratio

Proprietary funds / total assets –Misc. expenses
= 306 / 595-60
=0.57
Working notes:
(1) Average capital
employed (Rs in
lakhs )

31.3.1995 31.3.1994
Total assets (excluding Misce. Exp.)
535 425
Less: creditors and other current liability
129 25
406 400

Average 466 + 470 +/2 = Rs 468 lakhs

(2) Average net worth

Capital
250 250
Reserve
116 100

366 350
Less: Misc. expenses
60 70
306 280

Average: 306 + 280 / 2 = Rs 293 Lakhs

Proprietary funds as on 31.3.95 mean net worth as on that Rs 306
Lakhs.
(3) Profit after tax
(PAT)
(Rs in lakhs)

PBIT
150
Less:
Interest
24

--------

126
Less:
Tax
60

---------

66
(4) Current Assets as on
31.3.95 (Rs in
lakhs)
Stock
120
Debtors
70
Cash /
Bank
20
Other current
Assets
25

---------

235