Master of Business Administration-

MB0041 – Financial and Management Accounting

Q.1 Explain the Various accounting Concepts and Principles?

Concepts: Concepts take the form of assumptions or conditions, which guide the
accountants while preparing accounting statements.

Types of Accounting Concepts

As said earlier, concepts are the basic assumptions or conditions upon which the science
of accounting is based. There are five basic concepts of accounting, namely – business
entity concept, which is also termed as separate entity concept, going concern concept,
money measurement concept, periodicity concept and accrual concept. Each concept is
discussed below.

Business Separate Entity Concept: The essence of this concept is that business is a
separate entity and it is different from the owner or the proprietor. It is an economic unit
which owns its assets and has its own obligations. This enables the business to segregate
the transactions of the company from the private transactions of the proprietor(s).

Going concern concept: The fundamental assumption is that the business entity will
continue fairly for a long time to come. There is no reason why an enterprise should be
promoted for a short period only to liquidate the business in the foreseeable future. This
assumption is called “going concern concept”.

This concept forms the basis for the distinction between expenditure that will yield
benefit over a long period of time (Fixed Assets) and expenditure whose benefit will be
exhausted in the short term (Current Asset). Similarly liabilities are classified as short
term liabilities and long term liabilities.
Money Measurement Concept: All transactions of a business are recorded in terms of
money. An event or a transaction that cannot be expressed in money terms, cannot be
accounted in the books of accounts.

Periodicity Concept: The time interval for which accounts are prepared is an important
factor even though we assume long life for a business. The accounting period could be
half year or even a quarter. The financial statements should be prepared at the end of each
accounting period so that income statement shows profit or loss for that accounting
period. So also a balance sheet is prepared to depict the financial position of the business.

Accrual Concept: Profit earned or loss suffered for an accounting period is the result of
both cash and credit transactions. It is possible that certain incomes are earned but not
received and similarly certain expenses incurred but not yet paid during an accounting
period. But it is relevant to consider them while computing the financial results just
because they are related to the specific accounting period.

Accounting Principles: Accounting Principles are the rules basing on which accounting
takes place and these rules are universally accepted.

Principle of Income Recognition: According to this concept, revenue is considered as

being earned on the date on which it is realized, i.e., the date on which goods and services
are transferred to customers for cash or for promise. It should further be noted that it is
the amount which the customers are expected to pay which shall be recorded. In effect,
only revenue which is actually realized should be taken to profit and loss account.
Unrealized revenue should not be taken into consideration for determining the profit.

Principle of Expense: Expenses are different from payments. A payment becomes

expenditure or an expense only when such payment is revenue in nature and made for
consideration.

Principle of Matching Cost and Revenue: Revenue earned during a period is compared
with the expenditure incurred to earn that income, whether the expenditure is paid during
that period or not. This is matching cost and revenue principle, which is important to find
out the profit earned for that period. Here costs are reported as expenses in the accounting
period in which the revenue associated with those costs is reported.

Principle of Historical Costs: This is called ‘cost’ principle. All assets are recorded at
the cost of acquisition and this cost is the basis for all subsequent accounting for the
assets. The expenses and the goods purchased are shown at the value at which they are
incurred. The value of the assets is constantly reduced by charging depreciation against
their cost to present their book value in the balance sheet.
Principle of Full Disclosure: The business enterprise should disclose relevant
information to all the parties concerned with the organization. It means that any
information of substance or of interest to the average investors will have to be disclosed
in the financial statements.

Double Aspect Principle: This concept is the most fundamental one for accounting. A
business entity is an independent unit and it receives benefits from some and gives
benefits to some other. Benefit received and benefit given should always match and
balance.

Modifying Principle: The modifying principle states that the cost of applying a
principle should not be more than the benefit derived from. If the cost is more than the
benefit, then that principle should be modified. This is called cost-benefit principle. There
should be flexibility in adopting a principle and the advantage out of the principle should
over weigh the cost of implementing the principle.

Principle of Materiality: While important details of financial status must be informed to

all relevant parties, insignificant facts which do not influence any decisions of the
investors or any interested group, need not be communicated. Such less significant facts
are not regarded as material facts. What is material and what is not material depends upon
the nature of information and the party to whom the information is provided. While
income has to be shown for income tax purposes, the amount can be rounded off to the
nearest ten and fraction does not matter. The statement of account sent to a debtor
contains all the details regarding invoices raised, amount outstanding during a particular
period. The information on debtors furnished to Registrar of Companies need not be in
detail.

Principle of Consistency: Consistency is required to help comparison of financial data

from one period to another. Once a method of accounting is adopted, it should not be
changed. For instance if stock is valued under FIFO method in first year it should be
valued under the same method in the subsequent years also. Likewise if the firm chooses
to depreciate assets under diminishing balance method, it should continue to do so year
after year, unless the management takes a policy decision to change the depreciation
method. Any change in the accounting methods should be informed to the concerned
authorities with justification.

Principle of Conservatism or Prudence: Accountants follow the rule “anticipate no

profits but provide for all anticipated losses “. Whenever risk is anticipated sufficient
provision should be made. The value of investments is normally taken at cost, even if the
market value is higher than the cost. If the market value expected is lower than the cost,
then provision should be made by charging profit and creating investment fluctuation
fund. This is the principle of conservatism and it does not mean that the income or the
value of assets should be intentionally under stated.

Q.2 Pass journal entries for the following transactions

1. Madan commenced business with cash Rs. 70000
2. Purchased goods on credit 14000
3. Withdrew for private use 3000
4. Goods purchased for cash 12000
5. Paid wages 5000

Answer:

Solution:

Transaction Accounts affected Account to be debited and account to be

No in the books of the credited
business
01 Capital account and Cash account being real account is debited
cash account and Capital account being personal account
is credited
02 Goods account and Goods account being real account is
creditors account debited and creditor’s account being
personal account is credited
03 Personal drawings Drawings account being personal account
account and cash is debited and cash account being real
account account is credited
04 Goods account and Goods account being real account is
cash account debited and cash account being real
account is credited
05 Wages account and Wages account being nominal account is
cash account debited and cash account being real
account is credited

Accounting equations for the transactions

 Liabilities + Owners
Assets =
Equity
Transaction
Furniture + Madan's
Cash + Good + Debtors + Creditors +
= Capital
1 70,000 70,000

2 14,000 14,000

3 -3,000 -3,000

4 -12,000 12,000

5 -5,000 -5000

End 50,000 26,000 0 0 14,000 62,000

Equation 76,000 76,000

Q.3 Explain the various types of errors disclosed by Trial Balance?

Errors affecting Trial Balance or Errors Disclosed by Trial Balance:

If the Trial Balance does not tally, it will indicate that certain errors have been committed
which have affected the agreement of the Trial Balance. The accountant will then proceed
to find out the errors and ultimately the errors will be located. Such errors are called
‘Errors Disclosed by Trial Balance or Errors which affect the agreement of Trial Balance.
Until such errors are rectified, the Trial Balance will not agree. Some of these types of
errors are as follows:

Wrong Casting: If the total of the Cash Book or some other Subsidiary Book is wrong,
the Trial Balance will not tally. For example, the total of the Purchase book has been
added Rs. 2000 in excess. When this total will be posted to the debit side of the purchase
account, it will also show an excess debit of Rs. 2000 and hence, the Trial Balance will
not tally.

Posting to the Wrong Side: If instead of posting an amount on the debit side of an
account, it is posted on the credit side, or vice versa, the Trial balance will not tally. For
example, goods for Rs. 2000 from Gopal. If instead of posting the amount on the credit
side of Gopal’s account it is posted to his debit, the debit side of the Trial Balance will
exceed the credit by Rs. 4,000.

Posting of Wrong Amount: The Trial Balance will not tally if the posting in an account
is made with an incorrect amount. For example, goods for Rs. 600 have been purchased
from Mahendra. If, it has been correctly entered in the Purchase Book or purchase
account, but while posting to Mehendra’s account, in credit side (correct side) the amount
posted is Rs. 60 instead of Rs. 600, the Trial Balance will not tally.

Omission of Posting of One Side of an Entry: For example if Rs. 500 have been
received from Ram and correctly entered in the Cash Book or Cash Account but if it is
mmitted to be posted on the credit side of Ram’s Account, the Trial Balance will not
tally.

Double Posting in a Single Account: For example if Rs. 500 have been received from
Shyam Lal and correctly entered in the Cash Account, but if it is posted twice on the
credit side of Shyam Lal’s account, the Trial Balance will not tally.
Errors of Totalling and Balancing of Accounts in the Ledger: Errors may occur in the
totaling of debit or credit sides of accounts in the Ledger or in the balancing of accounts
in the Ledger. Because the balances of accounts are transferred to the Trial Balance, Then
the Trial balance will not tally.
Q.4 From the following balances extracted from Trial balance, prepare
Trading Account.
The closing stock at the end of the period is Rs. 56000
Particulars Amount in Rs.
Stock on 1-1-2004 70700
Returns inwards 3000
Returns outwards 3000
Purchases 102000
Debtors 56000
Creditors 45000
Carriage inwards 5000
Carriage outwards 4000
Import duty on materials received from abroad 6000
Clearing charges 7000
Rent of business shop 12000
Royalty paid to extract materials 10000
Fire insurance on stock 2000
Wages paid to workers 8000
Office salaries 10000
Cash discount 1000
Gas, electricity and water 4000
Sales 250000
Q.5 Differentiate Financial Accounting and Management accounting?

Distinction between Financial Accounting and Management Accounting

Financial accounting is the preparation and communication of financial information to

outsiders such as creditors, bankers, government, customers and so on. Another objective
of financial accounting is to give complete picture of the enterprise to shareholders.
Management accounting on the other hand aims at preparing and reporting the financial
data to the management on regular basis. Management is entrusted with the responsibility
of taking appropriate decisions, planning, performance evaluation, control, management
of costs, cost determination etc., For both financial accounting and management
accounting the financial data is the same and the reports prepared in financial accounting
are also used in management accounting But the following are major differences between
Financial accounting and Management accounting.

Financial accounting Management accounting

· The primary users of financial accounting· Top, middle and lower level managers use
information are shareholders, creditors, the information for planning and decision
government authorities, employees etc., making
· Accounting information is always · Management accounting may adopt any
expressed in terms of money measurement unit like labour hours, machine
hours or product units for the purpose of
analysis
· Financial data is presented for a definite · Reports are prepared on continuous basis,
period, say one year or a quarter monthly or weekly or even daily
· Financial accounting focuses on · Management accounting is oriented towards
historical data future
· Financial accounting is a discipline by · Management accounting makes use of other
itself and has its own principles, policies disciplines like economics, management,
and conventions information system, operation research etc.,

Q.6 Following is the Balance Sheet of M/s Srinivas Ltd. You are
required to prepare a Fund Flow Statement.

Particulars 2006 2007 Particulars 2006 2007

Equity Share 50,000 65,000 Cash balances 10,000 13,000
capital
Profit & Loss 14,750 17,000 Debtors 25,000 27,000
Trade Creditors 29,000 31,000 Investment 5,000 nil
Mortgage 10,000 15,000 Fixed Assets 50,000 80,000
Short term loans 15,000 16,500 Less: (5,250) (7000)
Depreciation
Accrued expenses 8,000 7,500 Goodwill 5,000 nil
Stock 37,000 39,000
Total 1, 26,750 1, 52,000 Total 1, 26,750 1, 52,000

Additional Information:

1. Depreciation provided is Rs.1750.

2. Write off goodwill.

3. Dividend paid Rs.3500.

 Master of Business Administration-
MB0041 – Financial and Management Accounting

Q.1 Explain the tools of Management accounting?

Tools of Management Accounting:

Management Accounting uses the following tools or techniques to fulfill its
responsibilities and duties towards management.
• Financial Statement Analysis
• Funds Flow Analysis
• Cash Flow Analysis
• Costing Techniques that includes marginal costing, differential costing, standard
costing, and responsibility costing
• Budgetary control
• Management Reporting.

Financial Statements are indicators of two significant factors that include profitability and
financial soundness. Analysis and interpretation of financial statements enables full
diagnosis of the profitability and financial soundness of the firm. Analysis means
methodical classification of the data given in the financial statements. Methodical
classification enables comparison of the various inter-connected figures with each other.
Interpretation explains the meaning and significance of the data.
Funds Flow Analysis is an important tool for management accountant. It reveals the
changes in working capital position, the sources from which the working capital was
obtained and the purpose for which it was used. It also reveals the changes that have
taken place behind the Balance Sheet.

Cash Flow Statement identifies the sources and application of cash. It is prepared on the
basis of actual or estimated data. It depicts the changes in the cash position from one
period to another. A projected cash flow or a cash budget will help the management in
ascertaining how much cash will be available to meet obligations to trade creditors, to
pay bank loans and to pay dividends to the shareholders.

Standard Costing is the preparation and use of standard costs, their comparison with
actual costs and the analysis of variance. It discloses the cost of deviations from
standards. It aims at assessing the cost of a product, process or operation under standard
operating conditions.

Budgetary Control has become an essential tool of management for controlling costs and
to maximize profit. It helps to compare the current performance with pre-planned
performance thereby correcting the deviations if any.

Management Reporting System is an organized method of providing each manager with

all the data and only those data which he needs for his decisions, when he needs them and
in a form which aids his understanding and stimulates his action.

Q.2 Find the contribution and profit earned if the selling price per unit
is Rs.25, variable cost per unit Rs.20 and fixed cost Rs.3,05,000 for the
output of 80,000 units.

ANSWER-
contribution = sale - variable csot
= 25 - 20
= 5 Rs
contribution for 80000 units = 5 x 80000
= 400000 Rs.

Profit = contribution - fixed cost

= 400000-305000
Profit = 95000 Rs.

Q.3 Explain the essential features of budgetary control?

Essential Features Of Budgetary Control

An effective budgeting system should have essential features to get best results. In this
direction, the following may be considered as essential features of an effective budgeting.

Business Policies defined: The top management of an organization strives to have an

action plan for every activity and for each department. Every budget should reflect the
business policies formulated from time to time. The policies should be precise and the
same must be clearly defined. No ambiguity should enter the document. Clear knowledge
should be provided to all the personnel concerned who are going to execute the policies.
Periodic suggestions should be called for.

Forecasting: Business forecasts are the foundation of budgets. Time and again
discussions should be arranged to derive the most profitable combinations of forecasts.
Better results can be anticipated based on the sound forecasts. As far as possible,
quantitative techniques should be made use of while forecasting

Formation of Budget Committee: A budget committee is a group of representatives of

various important departments in an organization. The functions of committee should be
specified clearly. The committee plays a vital role in the preparation and execution of
budget estimated. It brings coordination among other departments. It aids in the
finalization of policies and programs. Non-financial activities are also considered to make
it a wholesome affair.

Accounting System: To make the budget a successful document, there should be proper
flow of accurate and timely information. The accounting adopted by the organization
should be proper and must be fine-tuned from time to time

Organizational efficiency: To make the budget preparation and its subsequent

implementation a success, an efficient, adequate and best organization is necessary a
budgeting system should always be supported by a sound organizational structure. There
must be a clear cut demarcation of lines of authority and responsibility. There must also
be a delegation of authority from top to bottom line. .

Management Philosophy: Every management should set a healthy philosophy while

opting for the budget. Management must wholehear4tedly support the activities which
developing a budget. Encouragement should flow from top management. All the
members must be involved to make it a workable preposition and a dream-driven
document.

Reporting system: Proper feed back system should be established. Provision should be
made for corrective measures whenever comparative measures are proposed.

Availability of statistical information: Since budgets are always prepared and expressed
in quantitative terms, it is essential that sufficient and accurate relevant data should be
made available to each department.

Motivation: Since budget acts as a mirror, the entire organization should become smart
in its approach. Every employees both executive and non-executives should be made part
of the overall exercise. Employees should be persuaded than pressurized to appreciate the
benefits of the budgets so that the fruits can be shared by all the members of the
organization.

Q.4 A large retail stores makes 25% of its sales for cash and the balance on 30 days
net. Due to faulty collection practice, there have been losses from bad debts to the e
xtent of 1 % of credit sales on average in the past. The experience of the store tells
that normally 60 % of credit sales are collected in the month following the sale, 25%
in the second following month and 14 % in the third following month. Sales in the
preceding three months have been January 2007 Rs.80,000, February Rs.1,00,000
and March Rs.1,40,000. Sales for the next three months are estimated as April
Rs.1,50,000, May Rs.1,10,000 and June Rs.1,00,000. Prepare a schedule of projected
cash collection.

ANSWER-
Statement of expected Cash Receipts
Collection form April May June
Cash sales 37,500 27,500 25,000
Collection from Debtors - January 8,400 - -
February 18,750 10,500 -
March 63,000 36,350 14,700
April - 67,500 28,125
May - - 49,500
127,65 141,85
Total 0 0 117,325

Assume that the credit policy is enforced strictly ,what would be the cash receipts.

Cash sales :
Debtors 37,500 27,500 25,000
March 105000 - -
April - 112500 -
May - - 82,500
140,00
Total 142,500 0 107,500

Forecasts of cash payments: The items of expenditures differ from business to

business. The normal items which come under the lists are :

1. Cash purchases
2. Payment to creditors or suppliers
3. Payments to Bills payable
4. Payment to employees in the nature of wages, salaries
5. Manufacturing, selling and distribution and administration expenses
6. Repayments of bank load and special obligations such as bonus, donations, advances
7. Interest and dividend payments
8. Capital expenditures for acquiring assets of enduring benefit
9. Payment of tax liability
10. Other expenses of periodic nature
The quantum of amount likely to be spend on the above each item is generally
determined with reference to functional budgets of the concerns. The policy of the
management will also play a crucial role. It is the policy which determines the ratio of
cash purchases and credit purchases. In many cases, the time lag affects the amount of
expenditures to be incurred in a particular period. The formula adopted for the expenses
payable in next month is : month’s amount x time lag

Q.5 A factory works on standard costing system. The standard estimates

of material for the manufacture of 1000 units of a commodity are 400 kg
at Rs. 2.50 per kg. When 2000 units of a commodity are manufactured,
it is found that 820 kgs of material is consumed at Rs. 2.60 per kg.
Calculate the material variance

First calculate the standard quantity and standard cost.

Standard quantity : For manufacture of 1000 units, the standard estimates = 400 kgs.
Therefore, for actual manufactured quantity, the standard is 2000 x 400 / 1000 or 800
kgs.

Standard cost = Standard quantity x Standard rate

=> 800 x Rs.25
=> Rs.2,000
Actual Cost = 820 x Rs. 2.60
=> Rs. 2,132
Material cost variance = Standard cost – Actual cost
= > 2000 – 21312
=> 132 ADV.
Material price variance = (SR – AR ) AQ
=> 2.5-0 – 2.60 x 820
=> Rs.82 ADV
Material usage variance = 800 – 820 x 2.50
=> Rs.50 ADV

Q.6 The Anchor Company Ltd produces most of its electrical parts in its own plant.
The company is at present considering the feasibility of buying a part from an
outside supplier for Rs. 4.5 per part. If this were done, monthly costs would increase
by Rs. 1,000.
The part under consideration is manufactured in Department 1 along with
numerous other parts. On account of discontinuing the production of this part,
Department 1 would have somewhat reduced operations. The average monthly
usage production of this part is 20,000 units. The costs of producing this part on per
unit basis are as follows.

Material Rs. 1.80

Labour (half-hour) 2.40

Fixed overheads 0.80

Total costs 5.00

ANSWER-

PARTICULARS Make Cost Buy Cost

Per Per
Total unit Total unit
Relevant Costs:
3600
Materials (20000Units) 0 1.8 - -
4800
Labour 0 2.4 - -
9000
Purchasing Cost (20000Units) - - 0 4.5
Additional Cost of Purchasing from outside - - 1000 0.05
8400 9100
0 4.2 0 4.55
7000 Per
Differential Costs Month
Favoring Making Of
the part 0.35

The company should be continue the practice of producing the part in Department- 1