Short Answer Questions

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, i s 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 dont 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 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. = 4500 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 years 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 ledgers 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 years data to the base years 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 Owners 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 breakeven 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 MOS = 24000*10/3 = 80000 units. 62. What is Semi variable cost? 10-7/10 = 3/10

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 whats left of the assets after liabilities have been deducted. The same as net assets The owners claim on the entitys 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 debtors 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 / (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

Long Answer Questions

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 reorient 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 = Standard dealer margin (30%) shipping & distribution costs profit margin (20%) allocated non-recurring development cost Business unit target cost overhead (45%) 495 (148.50) (15) (66.30) (35) 230.20 (103.59) 126.61

= Direct target Cost (labour & material)

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 decisionmaking 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 BALANCE SHEET 1. It is dynamic in nature. 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.

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.

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 Ba n k 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 reserve to General

By balance b/d By gain on sale of assets By Funds From operations

To depreciation To provision for tax To proposed dividends To loss on sale of assets To Preliminary exp. To balance c/d

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:

Liabilities

Balance Sheet As at. 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 statement1.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 firms 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. 2. 3. 4. 5. 6. Multi-perspective: encompassing the views of people and groups that are important to the organisation. Comprehensive: inclusive of all activities of an organisation. Comparative: able to be viewed in the light of other organizations and addressing the same issues within same organisation over time. Regular: done on an ongoing basis at regular intervals. Verified: checked by people external to the organisation. 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 methodscost-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 decisionmaking. 7. It measures the performance of individuals in an objective manner. 8. It fosters a sense of cost-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 a 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 especially 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. 3. 4. 5.

The The The The

effect of increases and in decreases in sales volume. probable cost per unit of manufactured goods at various production levels. evaluation of changes in production methods. 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 breakeven 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 To provide investors, creditors and other external parties with useful information about the financial performance and cash flow prospects of an enterprise. Primarily financial statementsstatements 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 companys 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.

Types Reports

of

Standards for Presentations Reporting Entity Time period covered Users of information

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 I II Sales 120000 300000 Profit and loss -40000 80000 Contribution Fixed cost

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. Input Process Accounting Concepts Convention Business Transaction and events (collection of Data) Output

and

Profit & Loss A/C Balance Sheet Cash / Fund Flow statements

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

Adjustments: (i) (ii) (iii) Further Bad Debts Rs. 1000 Maintain reserve for doubtful debts @ 5% 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. Particulars Detail Amount Particulars Cr. 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 (750004700) Less: Old provision

3000 1000 3700 1406 9106 4500

4606

Balance Sheet Liabilities Amount(Rs.) Assets Debtors Less: Further Bad Debts New Provision of Debts. Provision of Discount on Debtors. Details 75000 1000 3700 1406 65894 Amount (Rs)

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 1. Is a part of accounting 2. Concerned with record Keeping & Accounting 1. Actual process of presenting the accounts preparing &

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

2. Requires higher level of knowledge 3. Analytical in nature 4. Recording & classifying interpreting transactions analyzing &

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 Unit Total Quantity Unit Total (kilos) Price Rs. (kilos) Price Rs. Rs. Rs. Material A 4 1.00 4.00 2 3.50 7.00 Material B 2 2.00 4.00 1 2.00 2.00 Material C 2 4.00 8.00 3 3.00 9.00 Total 8 2.00 16.00 6 3.00 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 firms 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 firms 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 th e firms 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 firms operating profitability.

D. If the owners (shareholders) receiving an adequate return on their investment We want to know if the earnings available to the firms owners or common equity investors are attractive when compared to the returns of owners of similar companies in the same industry. Dont 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 aspectshould 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

Particulars Material Labour Factory Overhead (30 Rs.)

50% (10000 units) Cost per unit Total Cost 100 1000000 30 300000

60% (12000 units) Cost per unit Total Cost 120 1440000 30 360000

Fixed 40% Variable 60%

12 18

120000 180000

12 18

144000 180000

Adminstrative Overhead (20 Rs.) Fixed 50% 10 Variable 50% 10 Total Cost Profit Selling Price 180 60 240

100000 100000 1800000 600000 2400000

10 10 200 16 216

120000 100000 2344000 192000 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. Ratio) 38. Compute (i) Material Cost variance (ii) Material Price variance and (iii) Material Usage variance from the following information: (New P/V

Standard
Particulars

Actual
Rate per kg

Quantity (Kg)

Quantity (Kg)

Rate

per

kg

Material A Material B

800 400

6.00 4.00

750 500

7.00 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 Share Capital Debentures Creditors Profit & Loss A/C

2006 70000 12000 10360 10740 105106

2007 74000 6000 11840 11360 105207

Assets Cash Debtors Stock Goodwill Land

2006 9000 14900 49200 10000 20000 105106

2007 7800 17700 42700 5000 30000 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

Add

Net Profit as Per B/S Non operating Expenses Goodwill Written off Dividend Paid Depreciation on Land Funds From Operations

620 5000 4000 5000

14000 14620

Fund Flow Statement

Sources Issue of Shares Funds From Operation Decrease in Working Capital

Amount 4000 14620 6380

Applications Purchase of Land Redemption Debentures Dividends Paid of

Amount 15000 6000 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 Credit Wages Manufacturing Office Selling sales purchases Expenses expenses expenses March 60,000 36,000 9,000 4,000 2,000 4,000 April 62,000 38,000 8,000 3,000 1,500 5,000 May 65,000 33,000 10,000 4,500 2,500 4,500 June 58,000 35,000 8,500 3,500 2,000 3,500 July 56,000 39,000 9,500 4,000 1,000 4,500 August 60,000 34,000 8,000 3,000 1,500 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 month. (7) Lag in payment of office and selling expenses one month. Solution: Particular 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 Cash Budget May 1998 Rs 8,000 62,000 70,000 36,000 10,000 3,750 1,500 5,000 ----------56,250 13,750 June 1998 Rs 13,750 64,000 77,750 38,000 8,500 4,000 2,500 4,500 8,000 ------------65,500 12,250 July 1998 Rs 12,250 58,000 70,250 33,000 9,500 3,750 2,000 3,500 1600 ------------53,350 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 forcredit 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 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

31.3.95 400 140 260 40 120 70 20 25 60

31.3.94 300 100 200 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 31.3.1995 31.3.1994 Total assets (excluding Misce. Exp.) 425 Less: creditors and other current liability 25 406 535 129 400

(Rs in lakhs )

Average 466 + 470 +/2 = Rs 468 lakhs (2) Average net worth Capital 250 Reserve 100 366 350

250 116

Less: Misc. expenses 70 306

60 280

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