MB0041- Finance & Management Accounting MBA 1st Semester Assignment Set 1

Ans. 1. Principles of Materiality: - While important details of financial status must be informed to all relevant parties, insignificant facts, which do not influence any decisions of the investors or any interested group, need not to b e communicated. Such less significant facts are not regarded as material facts. What is material and what is not material depends upon the nature of information and the party to whom the information is provided. While income has to be shown for income tax purposes, the amount can be rounded off to the nearest ten and fraction does not matter. The statement of account sent to a debtor contains all the details regarding invoices raised, amount outstanding during a particular period. Principles of Full disclosure: - The business enterprise should disclose relevant information to all the parties concerned with the organization. It means that any information of substance or of interest to the average investors will have to be disclosed in the financial statements. The company Act 1956 requires that income statement and balance sheet of a company must give a fair and true view of the state of affairs of the company. Full discloser of all relevant facts in accounts is the necessity in order to make accounting record useful. It is not a new thing , but is based on convention. Even in older times people used to speak truth and in full was incorporated in accounts too. Thus, full discloser is a very important convention. For examples: - a hotel should report the building of a new wing, or the future acquisition of another property. A restaurant facing a lawsuit from a customer who was injured by tripping over a frayed carpet edge should disclose the contingency of the lawsuit. Similarly, is accounting practices of the current financial statements were changed and differ from those previously reported, the changes should be disclosed. Changes from one period to the next that affect current and future business operations should be reported if possible. Changes of this nature include changes made to the method used to determine depreciation expenses or to the method of inventory valuation, such changes would increase or decrease the value of ending inventory, cost of sale, gross margin and net income or loss. All changes disclosed should indicate the dollar effects such disclosures have on financial statements.

Ans. 2. Journal Entry of M/s Ventak Enterprise Pvt Ltd.

Date
01.01.2009 01.01.2009 01.01.2009 01.01.2009 02.01.2009 03.01.2009

Particular
Cash A/c Dr. To capital A/c (Being cash brought in for capital) Purchase goods A/c Dr. To cash A/c (Being Goods purchased for cash) Purchase furniture A/c Dr. To cash A/c (Being Furniture purchased) Cash A/c Dr. To Bank A/c (Being current account opened) (No Entry will be made for instruction) Purchase A/c Dr. To Bank A/c To Delivery Charges (Being goods purchase from Ritik Supplied at 12% trade discount) Purchase A/c Dr. To Bank A/c To Discount A/c (Being goods purchase from Murali at 12% trade discount & 5% cash discount) (No Entry will be made. Receiving orders is no a transaction) Packing & Delivery Charges A/c Dr. Shyam A/c Dr. To Sales (Being goods supplied to shyam) Mr X Dr. Trade discount A/c Dr. Cash discount A/c Dr. To Sales A/c (Being goods to Mr X at a profit 20% on sale less 10% trade discount & Cash discount) Drawing A/c Dr. Profit A/c Dr. To Cash A/c (Being goods taken by proprietor for his personal use) (No Entry will be made) Bank A/c Dr. To cash A/c (Being paid 80% on account) (No Entry will be passed) Life Insurance Premium A/c - Dr. To Cash A/c (Being Insurance Paid) Salary A/c - Dr. To Cash A/c (Being cash embezzled by an employee)

L. F.

Debit Amount (in Rs.)

200000

Credit Amount (In Rs.)

200000

100000 100000 50000 50000 100000 100000 89000 88000 1000 88000 83600 4400

04.01.2009

05.01.2009 06.01.2009

1000 90000 91000 84672 9600 1728 96000 3000 1000 4000 80000 80000

07.01.2009

08.01.2009

09.01.2009 10.01.2009 11.01.2009 12.01.2009 13.01.2009

1000 1000 1000 1000

Capital Account Date Particular Amount Date (In Rs) 200000 01.01.2009 01.02.2009 Particular By Cash A/c By balance b/d Amount (In Rs.) 200000 200000

01.01.2009 To Balance C/d Cash Account Date Particular

01.01.2009 To Capital A/c To Bank A/c

Amount Date (In Rs) 200000 01.01.2009 100000 01.01.2009 08.01.2099 10.01.2009 12.01.2009 13.01.2009 31.01.2009

Particular By purchase By Furniture By Drawing & Profit By Bank By LIC By Salary By Balance c/d

Amount (In Rs.) 100000 50000 4000 80000 1000 1000 64000 300000

01.02.2009 To balance b/d

300000 64000 Trial Balance

S.N. 1 2 3 4 5 6 7

Particular Capital Furniture Sales (91000 + 96000) Goods Drawing Purchase (86400 + 83600) Cash

L.F.

Dr. Amount (Rs.) 50000

Cr. Amount (Rs.) 200000 187000

100000 3000 170000 64000 387000

387000

Ans. 3. Types of Errors that are disclosed by trial balance: - Accountants prepare trial balance to checks this correctness of accounts. If total of debits balances does not agree with the total of credit balances, it is a clear cut indication that certain errors have been committed while recording the transactions the books of original entry or subsidiary books. All errors of accounting procedure can be classified as errors of principle: When a transaction is recorded again the fundamental principles of accounting, it is an error of principle. For Example if revenue expenditure is treated as capital expenditure or vice versa. Clerical Error: - Errors of Omission when a transaction is either wholly or partially not recorded in the books, it is an error of omission. Error of Commission: - When an entry is inco09rrctly recorded either wholly or partially incorrect posting, calculation, casting or balancing. Compensating errors: - Sometimes an error is counter-balanced by another in such a way that is not disclosed by the trial balance. Correction of Errors in next accounting period. As stated earlier, that it is advisable to locate and rectify the error before preparing the final accounts for the year. But in certain cases when after considerable search, the accountant fails to locate the error and he is in a hurry to prepare the final accounts of the business for filing the return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to a newly opened suspense Account In the next accounting period as and when the errors are located these are corrected with references to suspense account. When all the error are disclosed and rectified the suspense account shall be closed automatically. Those errors which do not affect the trial balance cant be corrected with the help of suspense account. For Example - It is found that debit total of trial balance was less by Rs. 500/- for the reason that wilsons account was not debited with Rs. 500/- the following rectifying entry is required to be passed. From the point of view of rectification of the error, these can be divided into 2 groups: Error affecting one account only Errors affecting two or more accounts Errors affecting one account: Casting error , error of posting, carry forward, balancing, Omission from Trial balance.

Such errors should first of all be located and rectified. These are rectified either with the help of journal entry of by giving an explanatory note in the account concerned. Rectification: - All types of errors in accounts can be rectified at two stages: 1. Before preparation of the final accounts 2. After Preparation of the final accounts Errors rectified within the accounting period. The Proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed also gives effect to the entry that should have been passed, But while errors are being rectified before the preparation of final accounting.

Ans. 4. (a) Return on Capital Employed = Fixed asset + Investment + Current Asset Current Liability = 87500 + 25000 + 30000 + 13500 + 7000 30000 = Rs. 133000/(b) Current Ratio = Current Assets Current Liability 30000 + 13500 + 7000 30000 50500 = 30000 =1.683 =
(c) Fixed Assets to net worth

Fixed Assets Shareholders fund 87500 = 50000 + 10000 =

(d) Debt-Equity ratio

87500 = 1.458 60000

Fixed equity Internal equity 20000 = 50000 + 10000 =

(e) Return on owners Capital

20000 = 0.333 60000

Net Profit 100 Share holders equity 21000 = 100 = 42 50000 = Ans. 5. Trial Balance

S.N.

Particular

L.F.

Dr. Amount (Rs.)

Cr. Amount (Rs.) 13450

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Capital Cash in hand Bank Overdraft Sales Purchases Return Inward Return Outward Carriage Outward Carriage Inward Salaries Wages Sundry Debtors Sundry Creditors Opening Stock on 01.01.2006 Land & Building Plant & Machinery Trade Expenses

1400 9320 236400 106400 13400 2960 2360 14260 9600 3660 16300 37360 94120

15 16 17

15000 20900 2090 299490 299490

Ans. 6. First lets distinguish between a bad and a doubtful debt. A debt owing to a business that is not expected to be paid is a bad debt. A doubtful debt is a debt, which the business considers may not be paid. The Distinction is important because the accounting treatment differs, as shown below Double Entry. Bad and Doubtful debts from part of the double entry book keeping system. Note that the general principles of double entry book keeping are not covered here but form part of the ICM Accounting unit. Accounting Treatment for Bad Debts: If we decide that there is no probability of collecting an overdue amount, we need to reduce the balance sitting on that customers account to zero. We do not want to show a balance owing that in act will never be recovered because this would be over stating our debtors and therefore overstating our assets. We need to reflect this expense in our accounts and therefore transfer the balance to the profit and loss account.

The Entries are as follows: Debit: Bad debt A/c Credit: Customers account Transferring to the final account: Debit: Profit and loss account Credit: Bed debt account. Accounting Treatment for doubtful debts: A doubtful debt may not turn into a bad debt. In fact, it may not be possible to isolate specific customers when computing an amount which may turn bad. But however we arrive at this figure, prudence dictates that we should provide for this in our final accounts. The accounting entries will be as follows: Debit: Profit and loss account Credit: Provision for bad debts The Provision will be shown on the balance sheet as a deduction from debtors. Increases to the provision in subsequent year will be debited to the profit and less account. The procision will be calculated after all bad debts have been written off. Note that the auditor pay particular attention to bad debt provisions because of the ease with which they can be used to manipulate profit and crate a hidden reserve. Example: - Alice Beeton runs a food and drink business. Her customer are given 60 days credit. Alice is about to prepare her accounts as at the year ending 30 June 2000. Alice has run a number of promotions this year and has determined that the provision for bad debts will need to be increased from 2% to 3% of her debtors. The net debtors for last year were 28,000. Debtors are currently 32,900. 31st March F 12500 31st May A Ward 400 Show all the relevant entries in the accounts. The profit and loss account shows the expenses incurred the bad debts and increase in the provision for bad debts.

MB0041- Finance & Management Accounting MBA 1st Semester Assignment Set 2
Ans. 1. An Introduction and its perspectives Kaplan and Norton observed that due to the involvement of numerable variables in the attainment of corporate goals it was becoming increasingly difficult for management to obtain a perfect balance between the operational and financial factors. In order to resolve this problem they developed the balanced scorecard approach, which supplemented traditional financial measures with criteria that measured performance from the perspective of customers, internal business processes and learning and growth. This approach enable companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth. It provides a framework involving critical indicators for key business factors to balance the long term and short term objectives. The balance scorecard approach provides a clear prescription as to what companies should measure in order to balance the financial perspective. The balanced scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action. The balanced score card retains traditional financial measures. Nut financial measures tell the story of past events, an adequate story for term capabilities and customer relationships were no critical for success. The Score card suggest that we view the organization from four perspective: a. The Learning and growth perspectives: b. The Business Process perspective: c. The customer Perspective: d. The Financial Perspective: Indian Company adapted Balance score card The balanced scorecard is a framework for integrating the measures derived from the vision and strategy of an organization with the financial measures of its past performance. The objective and measures are drawn from four perspectives: Financial, Customer, Internal business process and learning and growth. The concept is still new to Indian Corporate, through it was developed some time ago in 1992. In the India Context, Organization like the Murugappa group and the Mahindras have adopted the Balanced scorecard. But overall there are not more 4-5 Organization in Indian That are using this technique. From the above points, It becomes cl3ear that the Balanced scorecard technique offers numerous advantages to the organization using it. But as far as corporate India is concerned, there is little awareness among the organization about this newly used tool of performance measurement with the integration of the financial markets worldwide, it is high time for the Indian companies to implement this technique at the earliest. As for as the implementation aspect is concerned, it takes approximately six months to a year which is not a very long period. Therefore, it is advised that the organization should comne forward and realize the true potential of Balanced scorecard.

Ans. 2.

DU PONT CHART
Rate of Return on Assets EAT as percentage of sales Sale s Fixed assets Multiplied by percentage of sales

Assets Turnover

EAT

Divided by

Sales

Divided by

Total Assets

Gross Profit = sales less cost of goods sold Minus Expenses: selling, Administrative & Interest Minus Income tax

Current Plus Assets Alternativel y Shareholder equity Plus Long-term borrowed funds Plus Current Liabilities

DU PONT ANALYSIS

A method of performance measurement that was started by the DUPONT corporation in the 1920s. With this method, assets are measured at their gross book value rather thin at net book value in order to produce a higher return on equity (ROE). It is also known as DU PONT identy. The apex of the Du pont chart is the teturtn on total assets (ROTA) defined as the product of the net profits margin (NPM) and total assets turnover ratio (TATR). Net Profit Net Profit Net Sales = Total Asset Net Sales Total Assets -

Such decomposition helps in understanding how the return on total assets is influenced by the net profit margin and the total assets turnover ratio. A manager has basically three ways of improving operating performace in terms of ROA and ROE. These are : Increase capital asset turnover Increase operating profit margins Change financial leverage

Each of these primary drivers is impacted by the specific decisions on cost control, efficiency, productivity, marketing choices etc.

Ans. 3 Statement of charge in Working Capital

Particular 1998 Rs. Rs. 1999Increase Rs. 30000 90000 10000 50000 30000 200000 60000 10000 20000 80000 120000

Current Assets Debtors 50000 Stock 80000 Bills receivable 70000 Bank 40000 Total Current Assets (A) 240000 Current Liabilities Creditors 50000 Bills Payable 30000 Total Current Liabilities(B) 80000 Working Capital (A-B) 160000

Net Decrease in Working Capital 40000 40000 160000 160000 60000

Adjusted Profit & Loss A/c

Pa ula rtic r T g o oodwill writtenoff T Prelim ryexpense o ina write off T losson S le of o a mc a hine T tra o nsfer of reserve T prov o isionfor ta x T prov o isionfor deprec tiononla & ia nd B uilding T prov o isionfor deprec tiononPla & ia nt Ma hina c ry T Profit &lossA/c o D r. Am ount Pa ula rtic r (R s) 5 0 B Profit &lossA/c 00 y C r. Am ount (R s) 400 00

2 0 B Profit on S le of Investm 6 0 00 y a ent 0 0 4 0 B fund fromopera 00 y tion 100 00 400 00 120 200

100 70

400 00 500 00 180 600

180 600

Fund Flow Statement

S ourc es Issue of S res ha S le of Ma hine a c S le of Investm a ent Fundsfromopera tion D rea in W ec se orking C pita a l

D r. Am ount (R s) 100 500 200 00 300 60 120 200

C r. Am ount (R s) R edem ptionof debentures 5 0 0 00 Purc se of Pla ha nt 110 400 Purc se of L nd ha a 90 00 Purc se of Investm ha ent 180 300 Applic tion a 300 00 380 600

4 0 0 T xPa 0 0 a id 380 600

Ans. 4. Material Standard SQ kg Material A Material B Total Less : Loss 5% 140 260 400 20 380 SR Rs 25 36 SC Rs 3500 9360 12860 Actual AQ kg 125 275 400 AR Rs 27 34 AC Rs 3375 9350 12725

(a) Material cost variance = standard cost Actual Cost

= SQ SR AQ AR Material A = 140 25 125 27 = 3500 3375 = 125 (Fav) Material B = 260 36 275 34 = 9360 9350 = 10 (Fav) (b) Material price Variance = (Standard Price Actual Price) Actual Quantity = (SP - AP) AQ Material A = (25 27) 125 = 250 (Adv) Material B = (36 34) 275 = 550 (Fav)
(c) Material Mix Variance = (Revised standard quantity for each material Actual Material mix

variance quantity for each material) standard price

Revised Standard Quantity (RSQ) = Total weight of actual mix Standard Quantity Total weight of Standard mix

RSQ of Material A =

400 140 400

= 140 Material Mix Variance of Material A = (140 125) 25

= 375 (Fav)
RSQ of Material B =

400 260 400

= 260 Material Mix Variance of Material B = (260 - 275) 36

= 540 (Adv) (d) Material Yield Variance = (Standard yield Actual yield) Standard rate per unit of output Material A = (380 365) 25 = 375 (Fav) Material B = (380 365) 36 = 540 (Fav)