Accounting for Managers PART A (Descriptive Type) = 27 PART B (Case Study) = 4 PART C (Short Question) = 160 Instant Downloadable Solution from AiDLo.com
PART A Descriptive Type Question Question 1: From the following particulars, prepare a haw, reconciliation statement, showing the balance as per pass book on 31st March, 1979: The following cheques were paid into firm's current account in March, 1979, but were credited by the bank in April, 1979.A=Rs. 2,500, B=Rs. 3,500 and C=Rs. 1,900.The following cheques were issued by the firm in March, 1979 and are cashed in April, 1979.P= Rs. 2,500, Q=Rs. 4,500 and R=Rs. 4,000.A cheque of Rs. 1,000 which was received from a customer was entered in; the bank column of cash book in March, 1979. but the same was paid into the bank in Awn), 1979.The pass book shows a credit of Rs. 2,500 for interest and debit of Rs.1000 for bank charges. The balance as per cash book was Rs. 1,80,000 on 31st March, 1979. Question 2: Inder drew upon on Mohan a bill for Rs. 9,000 on 1 April for three months, forth mutual accommodation. Mohan accepted the draft. On 4 April Inder got it discounted at 6% p.a. and remitted one-third of the proceeds to Mohan. At maturity, Inder was not able to send the required sums and asked Mohan to receive two month Promissory Note for Rs 6,090 which Mohan did. Mohan go to the note discounted for Rs 6,000 and met his acceptance. Inder became insolvent just before his h is Promissory Note was due for payment. Only On ly 50% was received from his estate. Give Journal entries in the books of both Inder and Mohan. Question 3(a): What do you understand by the concept of conservatism? Why is it also called the concept of prudence? Why is it not applied as strongly today as it used to be in the Past? Question 3(b): What is a Balance Sheet? How does a Funds Flow Statement differ from a Balance Sheet? Enumerate the items which are usually shown in a Balance Sheet and a Funds Flow Statement. Question 4: Journalize the following transactions tr ansactions in the books of Mr. Walter: a) Paid rent of building $ 12,000 half of the building is used by the proprietor for residential use. b) Paid fire insurance of the above building in advance $ 1,000. c) Paid life insurance premium $ 2,000. d) Paid income-tax $ 3,000. e) Salary due to clerk $ 500. f) Charge depreciation on furniture @ 10% p.a. for 1 month (furniture $ 12,000). g) Provide interest on capital ($ 60,000) at 15% p.a. for 6 months, h) Charge interest on drawing (10,000) at 18% p.a. for 6 months. i) Provide interest on loan to Ram ($ 100,000) at 18% p.a. for 2 months, j) Charge interest on loan to Shyam ($ 200,000) at 18% p.a. for 2 months, months, k) Received commission $ 1,000 half of which is in advance. I) Brokerage due to us $ 500
Question 5: Name the accounting concept violated, if any, in each of the following situations and explain them in detail. a) The Rs 1,00,000 figure for inventory on a Balance Sheet is the amount for which it could be sold on the balance sheet date. b) The Balance Sheet of a retail store which has experienced a gross profit of 40% on sales contains an item of merchandise inventory of Rs. 1,15,00,000 Merchandise inventory (at cost) Rs 69,00,000. c) Company M does not charge annual depreciation, preferring instead to show the entire difference between original cost and proceeds of sale as a gain or loss in the period when the assets is sold. It has followed this practice pra ctice for many years. Question 6: From the following Trial Balance extracted from the books off M/s Jayshee Trade, Bombay, prepare Trading and Profit and Loss Alc for the year ended 31 Dec. 1992 and a Balance sheet as on that date: You are given following further information: 1. Interest of Rs.150 was due from bank but it was not received 2. It was decided to increase Reserve for bad and doubtful debts to Rs.2,800 after writing off Rs.500 as bad debts during the year. 3. Provide depreciation at 5% p.a. on building and 10% p.a. on Furniture & Fixture. 4. A Bill of Rs. 250 for printing of advertisement in newspaper remained unpaid at the end of the year. Question 7: What is meant by financial statements? Discuss the utility and significance of financial statements to various parties interested in the business concern? Question 8: What is a trial balance? What are the different columns of a trial balance? Explain the different methods of preparing trial balance. Question 9: On 1st July 1994, Raj & Co. purchased machinery worth Rs. 40,000. On 1st July 1996 it buys additional machinery worth Rs. 10,000. On 30th June, 1997, half of the machinery purchased on 1st July 19:94 is sold for Rs.9.500. The company writes off 10% on the original cost. The accounts are closed every year on 31st December. Show the machinery account for four years accounts are closed on December 31, ever year. Question 10: Balance Sheet of ASD Co. Ltd. At the end of the 2005 and 2006 are given below: Liabilities
2005
2006
Assets
2005
2206
Share Capital
1,00,000
1,50,000
Freehold Land
1,00,000
1,00,000
Share Premium
---
5,000
Plant at Cost
1,04,000
1,00,000
General Reserve
50,000
60,000
Furniture at Cost
7,000
9,000
Profit & Loss A/C
10,000
17,000
Investments cost
60,000
80,000
12% Debenture
70,000
50,000
Debtors
30,000
70,000
Provision for Dep. On Plant
50,000
56,000
Stock 60,000
65,000
Provision Furniture
5,000
6,000
Cash 30,000
45,000
Provision for Taxation
20,000
30,000
S. Creditors
86,000
95,000
for
Dep.
On
at
Question 5: Name the accounting concept violated, if any, in each of the following situations and explain them in detail. a) The Rs 1,00,000 figure for inventory on a Balance Sheet is the amount for which it could be sold on the balance sheet date. b) The Balance Sheet of a retail store which has experienced a gross profit of 40% on sales contains an item of merchandise inventory of Rs. 1,15,00,000 Merchandise inventory (at cost) Rs 69,00,000. c) Company M does not charge annual depreciation, preferring instead to show the entire difference between original cost and proceeds of sale as a gain or loss in the period when the assets is sold. It has followed this practice pra ctice for many years. Question 6: From the following Trial Balance extracted from the books off M/s Jayshee Trade, Bombay, prepare Trading and Profit and Loss Alc for the year ended 31 Dec. 1992 and a Balance sheet as on that date: You are given following further information: 1. Interest of Rs.150 was due from bank but it was not received 2. It was decided to increase Reserve for bad and doubtful debts to Rs.2,800 after writing off Rs.500 as bad debts during the year. 3. Provide depreciation at 5% p.a. on building and 10% p.a. on Furniture & Fixture. 4. A Bill of Rs. 250 for printing of advertisement in newspaper remained unpaid at the end of the year. Question 7: What is meant by financial statements? Discuss the utility and significance of financial statements to various parties interested in the business concern? Question 8: What is a trial balance? What are the different columns of a trial balance? Explain the different methods of preparing trial balance. Question 9: On 1st July 1994, Raj & Co. purchased machinery worth Rs. 40,000. On 1st July 1996 it buys additional machinery worth Rs. 10,000. On 30th June, 1997, half of the machinery purchased on 1st July 19:94 is sold for Rs.9.500. The company writes off 10% on the original cost. The accounts are closed every year on 31st December. Show the machinery account for four years accounts are closed on December 31, ever year. Question 10: Balance Sheet of ASD Co. Ltd. At the end of the 2005 and 2006 are given below: Liabilities
2005
2006
Assets
2005
2206
Share Capital
1,00,000
1,50,000
Freehold Land
1,00,000
1,00,000
Share Premium
---
5,000
Plant at Cost
1,04,000
1,00,000
General Reserve
50,000
60,000
Furniture at Cost
7,000
9,000
Profit & Loss A/C
10,000
17,000
Investments cost
60,000
80,000
12% Debenture
70,000
50,000
Debtors
30,000
70,000
Provision for Dep. On Plant
50,000
56,000
Stock 60,000
65,000
Provision Furniture
5,000
6,000
Cash 30,000
45,000
Provision for Taxation
20,000
30,000
S. Creditors
86,000
95,000
for
Dep.
On
at
TOTAL 3,91,000 4,69,000 3,91,000 4,69,000 A Plant purchased for Rs. 4,000 (Depreciation Rs 2,000) 2,00 0) was sold for cash for Rs800 on o n 30th September, 2006. On 30, June 2006, an item of furniture was purchased for Rs. 2,000. These were the only transactions concerning fixed assets during 2006. A dividend of 22.5 % on original shares was paid. Question 11: The Cash book of Mr A shows Rs. 8,364 as the balance at bank as on 31st December 2006 but you find that this does not agree with the balance as per Bank Pass Book. On scrutiny, you find following discrepancies. 1. On 15th December, the payment side of the Cash Book was under cast by Rs 100. 2. A cheque for Rs. 131 issued on 25 December, was recorded in the Cash column. 3. One deposit of Rs. 150 was recorded in the Cash Book as if there is not Bank column there in. 4. On 18th December, the debit balance of Rs. 1,526 as on the previous day, was brought forward as a credit balance. 5. Of the total cheques amounting to Rs. 11,514 drawn in the last week of December, cheques aggregating Rs 7,815 were encashed in December. 6. Dividends of Rs.250 collected by the bank and subscription of Rs.100 paid by it, were not recorded in the cash book. 7. One out going cheque of Rs. 350 was recorded twice in the cash Book. Prepare Bank Reconciliation Statement as on 31 December 2006. Question 12:. "Cost may be classified in a variety of ways according to their nature and, the information needs of the manage meant". me ant". Explain. Question 13: On 31st March 2006 the following Trail Balance has been extracted from the books of a Rahul. Dr. Balance Cr. Balance Drawings account
3000
Rahul's Capital A/c 30000
Sundry Debtors
19100
Sundry Debtors 8401
Interest on Loan
200
5% Loan on Mortgage(01.04.05) 8500
Cash in Hand
3050
Bad Debts Provision 710
Opening Stock (01.04.05)
5839
Sales 111243
Moto r Vehicles
9000
Purchase Returns 1346
Cash at Bank
4555
Discounts 440
Land & Building
12000
Bills Payable 2714
Bad Debts
625
Rent Received 250
Purchases
67458
Sales Return
7821
Carriage outward
1404
Advertisement
2264
General expenses
4489
Bills Recoverable
6882
Carriage Inward
3929
Establishment
8097
Rates, Taxes & Ins. 3891 Prepare Trading Profit & Loss account for the year ending 31.03.2006 and a Balance Sheet as on that date after considering following matters: 1. Depreciate Land & Bulding at 5% p.a. and motor Vehicles at 15% p.a. 2. Salaries amounting to Rs 700 and Rates amounting to Rs 400 are due. 3. Goods destroyed due to fire worth Rs 200. 4. A Pro v. For Doubtful debts is to be brought upto 5% of sundry debtors. 5. Stock a on 31.03.06 is Rs.6250. 6. Goods worth Rs. 500 is taken by proprietor for personal use and no entry for the same is made in books of acco unts. 7. Prepaid insurance amounted to Rs 175. 8. Provide manager's commission @ 5% on net profit after charging such commission. Question 14(a): Discuss the importance of ratio analysis for inter-firm and intra-firm comparisons including circumstances responsible for its limitations. If any Question 14(b): Why do you understand by the term 'pay-out ratio'? What factors are taken into consideration while determining pay-out ratio? Should a company follow a fixed pay-out ratio policy? Discuss fully. Question 15: From the ratios and other data given below for Bharat Auto Accessories Ltd. indicate your interpretation of the company's financial position, operating efficiency and profitability. Year I Year II Year III Current Ratio
265%
278%
302%
Acid Test Ratio
115%
110%
99%
Working Capital Turnover (times)
2.75
3.00
3.25
Receivables Turnover
9.83
8.41
7.20
Average Collection Period (Days)
37
43
50
Inventory to Working Capital
95%
100%
110%
Inventory Turnover (times)
6.11
6.01
5.41
Income per Equity Share
5.10
4.05
2.50
Net Income to Net Worth
11.07% 8.5%
7.0%
Operating Expenses to Net Sales
22%
23%
25%
Sales increase during the year
10%
16%
23%
Cost of goods sold to Net Sales 70%
71%
73%
Dividend per share
Rs. 3
Rs.3
Rs.3
Fixed Assets to Net Worth
16.4%
18%
22.7%
Net Profit on Net Sales
7.03%
5.09%
2.0%
Question 16: Bose has supplied the following information about his business for the year ended 31st March, 2004 is as follows: Assets Liabilities
and
On 1st 2003
April
On 31st 2004
Rs.
Rs.
Sundry debtors
1,81,000
1,93,000
Stock
1,50,000
1,40,000
Machinery
2,50,000
?
Furniture
40,000
?
Sundry creditors
1,10,000
1,25,000
March,
Receipts
Rs.
Payments
Rs.
To Opening balance
5,000
By Payments to creditors
3,50,000
To Cash sales
61,000
By wages
1,60,000
To Receipt from debtors
7,53,000
By Salaries
1,50,000
To Misc. receipts
2,000
By Drawings
40,000
By Sunday office expenses
1,10,000
By Machinery purchased (on 1.10.2003)
95,000
By Closing balance
16,000
To Loan from Dass @ 9% per annum (taken on 1.10.2003)
1,00,000
9,21,000
9,21,000
Discount allowed totalled Rs.7,000 and discount received was Rs. 4,000. Bad debts written off were Rs. 8,000. Depreciation was written off on furniture @5% per annum and machinery @ 10% per annum under the straight line method of depreciation. The office expenses included Rs.5,000 paid as insurance premium for the year ending 30th June, 2004. Wages amounting to Rs.20,000 were still due on 31st March, 2004 Prepare trading and profit and loss account for the year ended 31st March, 2004 and the balance sheet as on that date.
Question 17 (a): What procedure would you adopt to study the liquidity of a business firm? Question 17 (b) Who are all the parties interested in knowing this accounting information? Question 17 (c) What ratio or other financial statement analysis technique will you adopt for this. Question 18: From the following particulars, determine the bank balance as per pass book of Priya & Co. as on 28th February 2008. a) Credit balance as per cash book on 28th February, 2008 was Rs. 15,000 b) Interest charged by the bank up to 28th February Rs. 500 was recorded in the pass book. c) Bank charges made by the bank Rs. 125 were also recorded only in the pass book. d) Out of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750 were cleared and credited by the bankers. e) Two cheques of Rs. 7,500 and Rs. 15,000 were issued but out of them only one cheque of Rs. 7,500 was presented for payment up to 28th February. f) Dividends on shares Rs. 4,500 were collected by the bankers directly, for which Priya & Co. did not have any information.
Question 19: A company manufactures a single product in its factory utilizing 600% of its capacity. The selling price and cost details are given below: Rs. Sales (6,000 units)
5,40,000
Direct materials
96,000
Direct labour
1,20,000
Direct expenses
19,000
Fixed overheads: Factory
2,00,000
Administration
21,000
Selling and Distribution
25,000
12.5% of factory overheads and 20% of selling and distribution overheads are variable with production and sales. Administrative overheads are wholly fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company decides to introduce a new product with marginal investment but largely using the existing plant and machinery. The cost estimates of the new product are as follows:
Cost elements
Rs. per unit
Direct materials
16.00
Direct labour
15.00
Direct expenses
1.50
Variable factory overheads
2.00
Variable selling and distribution overheads
1.50
It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are expected to increase by 10%, while fixed selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads remain unchanged. However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost of the project to Rs. 8.75 lakh. The company considers that 20% pre-tax and interest return on investment is the minimum acceptable to justify any new investment. You are required to (a) Decide whether the new product be introduced. (b) Make any further observation/recommendations about profitability of the company on the basis of the above data, after making assumption that the present investment is Rs. 8 lakh. Question 20(a): What is Master Budget? How it is different from Cash Budget? Question 20(b): What are the various methods of inventory valuation? Explain the effect of inventory valuation methods on profit during inflation. What are the provisions of Accounting Standard 2 (AS-2) with regards to inventory valuation? Question 21: From following figures extracted from the books of Mr. XYZ, you are required to prepare a Trading & Profit & Loss Account for the year ended 31 st March, 2008 and a Balance Sheet as on that date after making the necessary adjustments.
$
$
Mr. XYZ's Capital
228,800
Stock 1.4.2007
38,500
Mr. XYZ' Drawings
13,200
Wages
35,200
Plant & Machinery
99,000
Sundry creditors
44,000
Freehold property
66,000
Postage & Telegrams
1,540
Purchases
110,000
Insurance
1,760
Rtuens outwards
1,100
Gas & fuel
2,970
Salaries
13,200
Bad debts
660
Office Expenses
2,750
Office rent
2,860
Discount A/c (Dr.)
5,500
Loose tools
2,900
Sundry Debtors
29,260
Factory lighting
1,100
Loan to Mr. Krish @10% p.a.
44,000
Provision for doubtful debts
880
Interest on loan to Mr. Krish
1,100
Balance on 1.4.2007 Cash at bank
29,260
Cash in hand
2,640
Bills payable
5,500
Sales
231,440
Adjustments: a) Stock on 31st March, 2008 was valued at $ 72,600 b) A new machine was installed during the year costing $15,400 but it is not recorded in the books as on payment was made for it. Wages $ 1,100 paid for its erection has been debited to the wages account. c) Depreciate: a. Plant & machine by 33.33% b. Furniture by 10% c. Freehold property by 6% d) Loose tools were valued at $ 1.760 as on 31.3.2008 e) Of the sundry debtors Rs.660 are bad and should be written off. f) Maintain a provision of 5% on sundry debtors for doubtful debts. g) The manager is entitled to a commission of 10% of the net profits after charging such commission. Question 22: Following is the Trial Balance of M/s. Trinity Foods as on 30 th June 2007 (after closing Nominal Accounts). Prepare a Balance Sheet on the basis of this trial balance. Particulars
Debit (Rs.)
Cash
10,000
Capital
100,000
Bank
77,000
Furniture
25,000
Ram Rahim
Credit (in Rs.)
15,000 50,000
Trading & Profit & Loss
47,000
162,000
162,000
Question 23: Given below are the financial statements of Safal Enterprises, using the tool of ratio analysis comment on the profitability and liquidity position of the firm for the year 2006-07. Total no. of
shares outstanding for the firm is 2.69crores. In the view of growth opportunities in the near future the firm has been maintaining a policy of 45% payout. Summarized P & L of Safal Enterprises For the year ended 31 March Particulars
2006
2007
( Rs. In crores)
Sales
132.00
144.00
Other income
12.00
15.00
Cost of sales
102.96
110.02
Gross margin
29.04
33.98
Administration
12.44
14.36
Selling & distribution
4.42
5.36
Profit before interest & tax (PBIT)
24.18
29.26
Interest
3.00
4.01
Profit before tax (PBT)
21.18
25.26
Provision for taxes
7.94
9.47
Profit after tax (PAT)
13.24
15.79
Operating expenses
Balance Sheet of Safal Enterprises
Particulars
31/03/06
31/03/07
(Rs in crores)
Assets Fixed assets
31.25
37.50
Inventory
14.56
16.64
Accounts receivable
13.20
15.43
Cash
1.50
1.75
Less: Current liabilities
8.55
11.25
Net current assets
20.71
22.57
Current assets
Total Assets
51.96
60.07
Share capital
27.00
27.00
Reserves & Surplus
4.96
6.36
Debt(bng term)
20.00
26.71
Total
51.96
60.07
Liabilities &owners equity
Question 24: Given below are the balance sheets of the two firms- Gloria Ltd and Victoria Ltd as on 31st March 2007. Gloria Ltd.
Victoria Ltd.
Cash and Bank balance
12.70
38.60
Marketable securities
10.00
21.00
Sundry debtors
22.00
23.70
Prepaid expenses
93.50
162.45
Current Assets
1.12
2.14
Fixed Assets (Net)
139.32
247.90
Total Assets
589.00
642.00
728.323
889.895
Sundry creditors
6.75
26.45
Notes payable
6.56
6.45
Long term debt
130.01
345.00
Equity
585.00
512.00
Total
728.323
889.895
Assets
Liabilities and Owners Equity
Can the financial positions of the two firms be compared assuming that the two firms fall in the same industry? Question 25: Find out the cost of raw material purchased from the data given below: Particulars
Rs.
Prime cost
200,000
Closing stock of raw material
20,000
Direct labour cost
100,000
Expenses on purchases'
10,000
Question 26:The product of a manufacturing concern passes through two processes A and B and then to finished stock. It is ascertained that in process A normally 5% of the total input is scrap which realizes Rs. 80 per tone. From the following information relating to process A for the month of August 2007, prepare process A account Materials
500 tonnes
Cost of materials
Rs. 125 per tonne
Wages
Rs. 14,000
Manufacturing overheads
Rs. 4,000
Output
415 tonnes
Question 27: Ahmedabad Company Ltd. manufactures and sells four types of products under the brand name Ambience, Luxury, Comfort and Lavish. The sales mix in value comprises the following: Brand name
Percentage
Ambience
33 1/3
Luxury
412/3
Comfort
16 2/3
Lavish
8 1/3 _____ 100
The total budgeted sales (100%) are $ 600,000 per month. The operating costs are: Ambience 60% of selling price Luxury Luxury 68% of selling price Comfort Comfort 80% of selling price Lavish Lavish 40% of selling price The fixed costs are $. 159,000 per month. A) Calculate the breakeven point for the products on an overall basis. b) It has been proposed to change the sales mix as follows, with the sales per month remaining at $. 6,00,000:
Brand Name
Percentage
Ambience
25
Luxury
40
Comfort
30
Lavish
05 -------100
Assuming that this proposal is implemented, calculate the new breakeven point.
PART B Case Study – 1 BHARAT COMPANY AND VISHAL COMPANY
Comparative financial Information for Bharat Co. and Vishal Co. for the years 1988 and 1989 is given below 4. Vishal Co. revalued its fixed assets in the beginning of 1989 increasing its fixed assets by 200% and net increase of Rs.400 crores on account of revaluation was credited to revaluation reserve included in the reserve. Questions From the financial information given above, you are required to compute various financial ratios so as to discuss the following:1. Which company has got a better liquidity position to pay off its short-term commitments? 2. What is the rate of return on the total investment for both the Companies? 3. Which company bas got a better rate of return? Is the difference in the rate of return (above) due to a better rate of profit on the business conducted or due to a higher volume of business per rupee invested? 4. Which company provides the highest safety margin to its debenture holders? 5. What is the return available to preference sha reholders in Bharat Co.?
6. Which company appears to have a higher return per rupee invested in operating assets? 7. Calculate the operating cycle for both the companies. Which company is in a better position as regards the operating cycle? (Operating cycle is the time of conversion of current assets into each position) 8. Comment on the depreciation policy as reflected in the financial information of two companies. 9. Assuming the market value of the equity shares of Bharat Co. is twice that of its book value, while that for Vishal Company is one-and-a-half times of its book value. Which company ba s a higher price-earning ratio? What is the dividend yield for both?
Case Study – 2 The Chief Cost Accountant of a company running an orchard with an adequate supply of labour, presents the following data and requests yo u to advice about the area to be allo tted fo r the cultivation of various types of fruits, which would result in maximization of profits. The company contemplates growing Apples, Lemons, Oranges and Peaches:
Particulars
Apples
Lemons
Oranges
Peaches
Selling Price per Box
(Rs.) 15
15
30
45
Seaso n's yield in boxes per acre
500
150
100
200
Costs: Material per Acre
Rs. 270
Rs. 105
Rs. 90
Rs. 150
Labour Cost: Growing per Acre
Rs. 300
Rs. 225
Rs. 150
Rs. 195
Picking and packing cost per box
Rs. 1.50
Rs. 1.50
Rs. 3
Rs. 4.50
Transport cost per box
Rs 3
Rs 3
Rs 1.50
Rs 4.50
The total fixed costs in each season would be Rs. 2,10,000. The following limitations are also placed before you. (a) The area available is 450 acres but out of this, 300 acres are suitable for growing only Oranges and Lemons. The balance of 150 acres is suitable for growing any of the four fruits. (b) As the produce may be hypothecated to banks area allotted for any fru it should be demarcated in complete acres and not in fractio ns o f acres. (c) The marketing strategy of the company requires the compulsor y production of all
the four types of fruits in a season and the minimum quantity of any one type to be 18,000 boxes. Calculate the total that would accrue if your advice is fo llowed.
1. Differentiate between Fixed Installment And reducing Balance Metho d of Depreciation with Suitable example. 3. On Ist June 2003, Anand Tyres company. purchased Machinery worth Rs. 760000/and incurred Rs 40000/- on installation. On Ist October 2003 it buys additional second hand machinery worth Rs. 285000/-and incurred Rs. 15000/- on overhauling of Machinery. On Ist July 2005, half of the Machinery which was purchased on Ist April 2003 is sold for Rs. 115000/- The company writes o ff Depreciation at 10% o n Straig ht Line method. The accounts are closed every year on 31 December. From Ist Jan 2005 , company has changed the method of depreciation fro m Straight Line method to Written down value metho d Prepare Machinery Account for three years and aslso caslculate profit or loss on sale of Machinery. 4. What do you mean Accounting equation? What are its constituents? Briefly explain with suitable example, purpose of preparation of Accounting Equation?
Case Study – 3 Geeta & Company has experienced increased production costs. The primary area of concern identified by management is direct labor. The company is considering adopting a standard cost system to help control labor and other costs. Useful historical data are not available because detailed production records have not been maintained. To establish labor standards, Geeta & Company has retained an engineering consulting firm. After a complete study of the work process, the consultants recommended a labor standard of one unit of production every 30 minutes, or 16 units per day for each worker. The consultants further advised that Geeta's wage rates were below the prevailing rate of Rs per hour 'Geeta's production vice-president thought that this labor standard was too tight, and from experience with the labor force, believed that a labor standard of 40 minutes per unit or 12 units per day for each worker would be more reasonable, the president of Geeta & Company believed the standard should be set at a high level to motivate the workers and to provide adequate information for control and reasonable cost comparison. After much discussion, management decided to use a dual standard. The labor standard of one unit every 30 minutes, recommended by the consulting firm, would be employed in the plant as a motivation device, while a cost standard of 40 minutes per unit would be used in reporting. Management also concluded that the workers would not be informed of the cost standard used for reporting purposes. The production vice president conducted several sessions prior to
implementation in the plant, informing the workers of the new standard cool system and answering questions. The new standards were not related to incentive pay but were introduced when wages were increased to Rs 7 per hour. The standard cost system was implemented on January 1, 2007. At the end of six months of operation, these statistics on labor performance were presented to executive management:
Jan
Feb
Mar
Apr
May
June
5,100
5,000
4,700
4,500
4,300
4,400
Direct labor 3,000 hours
2,900
2,900
3,000
3,000
3,100
RS.5.950U
Rs6,300 U
Rs.933 U
RS.1.167 U
Production (units)
Quantity Variances:
Variance based on labor standard (one unit each 30 minutes) Variance based on cost standard (one unit each 40 minutes)
Rs.3150
Rs2,800
RS5.250 Rs3,850U
U*
U
Rs.3,033 Rs.2,800F
U
Rs.1,633 -0-
F
F
*U = Unfavorable; F = Favorable Materials quality, labor mix, and plant facilities and conditions have not changed to a significant extent during the six month period.
Questions:
1. Describe the impact of different types of standards on motivations, and specifically, the likely effect on motivation of adopting the labor standard recommended for Geeta & Company by the engineering firm.
2. Please advise the company in reviewing the standards.
Case Study – 4 Bajaj Auto Limited: The Unprecedented Growth Story
Bajaj Auto Limited is the flagship company of the Bajaj Group. The company manufactures two & three wheelers. Mr. Rahul Bajaj is the present Chairman of the company. The company was incorporated in the year 1945 as M/s Bachraj Trading Corporation Private Ltd. The promoters hold about 30% equity, whereas Indian public holds about 26% and institutional investors have more than 27% stake in the company. The products manufactured by Bajaj Auto are scooters, motor cycles, auto spares parts, machine tools, steel and engineering products. The company also produces threewheelers as goods carriers such as pick-up or delivery vans and passenger carriers such as auto-rickshaws. Bajaj Auto has a network of 498 dealers, 1,500 authorized service centres and 162 exclusive three-wheeler dealers spread across the country. Bajaj Auto has also diversified into the general as well as life insurance business through its subsidiaries Bajaj Allianz General Insurance Company Ltd, respectively. The Bajaj brand has presence in many countries such as Sri Lanka, Mexico, Bangladesh, Columbia, Peru, Egypt, etc. The main competitors of the company in the two-wheelers and three-wheelers segment are- Hero Honda Motors Ltd, Kinetic Motor Co Ltd, LML ltd, Maharashtra Scooters Ltd, and TVS Motor Co. Ltd. The company sold close to 23 lakh vehicles in 2005-06, which is a record performance in its history. The sales of motorcycles manufactured grew by 32% in 2005-06 compared to a market growth of below 19%. For the fifth successive year, the company raised its market share in the motorcycle segment. Today it stands at almost 31%. Sales increased by almost 31% to an all-time high of Rs 9,285 crore in 2005-06. the export of the company in all its product categories has also been unprecedented during the FY 2005-06 as is reflected in the figures given below:
Table A Product-wise exports of Bajaj Auto Ltd
2005-06
2004-05
Growth
Product
Motorcycles Total two-wheelers Three-wheelers Total vehicles
(in numbers)
(in percentage)
165,288
123,946
33
174,907
130,945
34
75,297
65,765
14
250,204
196,710
27
Even more impressive has been the growth in company's operating EBITDA, which increased by 47% to touch Rs 1805 crore during 2005-06. Consequently the operating EBITDA margin grew by 220 basis points to 17.9% of the sales and operating income. Earnings per share have been risen from Rs 75.60 to Rs 111.00 in the current year. Dividend too has grown to Rs 40 per share (400%) for the year ended 31 st March 2006 as against Rs 25 per share in 2005. Over the past few years, Bajaj Auto has focused on his technology development, and product development in anticipation of market needs, scaling up its manufacturing facilities, implementing best-in-class production systems, rationalizing vendors, slashing costs while upgrading quality, restructuring dealerships, and distribution channels. These capabilities enabled the company to create exciting new products, which have set benchmarks in styling, design, and technology. The company's products are creating a customer pull at all price points and the company has now transformed from being a price warrior to a price leader. The results of these strategies are reflected in its financial statements as follows (refer Table B and C): Table B Profit and Loss Account for Bajaj Auto Ltd for the year ended
March 2003
March 2004
March 2005
4987.05
5721.44
7078.06
9284.84
297.10
507.04
516.41
602.52
32.92
10.87
-11.57
50.10
5317.07
6239.35
7582.90
9937.46
4335.16
5017.92
6286.91
8131.87
March 2006
(Rs in crore)
Sales Other income Change in stocks
Expenditure Profit & Loss
PBDIT Interest Depreciation PBT Tax provision PAT
981.91
1221.43
1295.99
1805.59
1.12
0.94
0.67
0.34
171.42
184.32
185.66
191.28
809.37
1036.17
1109.66
1613.97
274.44
285.41
349.32
509.37
534.93
750.76
760.34
1104.60
159.81
Dividends
285.37
288.64
461.50
Table C Assets and Liabilities of Bajaj Auto Ltd as on 31 March 2006
Mar 05
Mar 06
Liabilities
Mar 05 Assets
Rs in crore
Net Worth
Paid up Equity capital
Bonus Equity capital
Minority interest Reserves & Surplus
Free reserves Share reserves
Mar 06
premium
Other free reserves
Rs in crore
4447.16
5349.79
101.18
101.18
114.17
114.17
89.46
148.79
4256.52
5099.82
4233.28
5076.58
87.07
285.78
4146.21
4790.80
Gross assets
fixed
2870.02
3092.28
9.14
25.26
Less: cumulative depreciation
1660.32
1834.19
Net Assets
1205.64
1230.77
5273.83
6865.43
9.20
6.43
224.70
274.47
3116.05
5799.11
Capital WIP
fixed
Investments Deferred assets
tax
Inventories
Receivables
Specific reserves
Borrowings
Deferred liabilities
tax
Current liabilities &provision s
Sundry Creditors Other liabilities
current
Provisions
Total Liabilities
23.24
23.24
176.97
302.54
1229.17
1469.44
Debtors exceeding months
0.20
1.13
139.90
87.58
Advances/loan s to corporate bodies
62.29
33.66
4284.64
7773.20
Group/associat e companies
34.44
19.41
833.86
1404.40
Other companies
27.85
14.25
1169.04
3674.37
Advance payment of tax
1823.60
1869.40
2281.74
2694.43
Other receivables
1053.19
3593.51
Cash & Bank balance
266.88
476.48
Intangible/DR E not written off
4.57
27.32
10100.8 7
14680.0 1
10100.8 7
14680.0 1
Sundry debtors
Total Assets
6
Notwithstanding its excellent financial performance in the years following its major strategic shift, the management of the firm believes in the philosophy that the quest for perfection is eternal. To preclude the complacency from setting in, the management not only sets higher standards it also continuously monitors its performance and benchmarks with the industry performance in general and their closest competitors' results in particular.
Discuss
1. Is the profitability performance of the firm satisfactory? If not, how can it be improved? 2. How attractive is the firm from the short-term and long-term lenders, perspective? Does the firm appear to be the favorite destination in the automobile sector (twowheelers and three-wheelers segment) for the lenders? 3. How efficient is the firm been in utilizing the resources at its disposal? How do you think the company can improve upon its efficiency?
PART C Short Question – Set 1 1. What is Accounting? What are its objectives and limitations? 2. Distinguish between Book-keeping and Accounting. 3. Explain briefly the meaning of 'financial transactions'. 4. Distinguish between fixed assets and floating assets. 5. Write notes on creditors for goods. 6. What do you mean by material facts in accounting? 7. Explain the term 'Dual Aspects' briefly. 8. Differentiate between gross income and net income. 9. What is the meaning of double entry accounting? 10. What do you understand by Money Measurement Concept? 11. Explain the convention of consistency. 12. Explain the meaning of expenses. Also differentiate between direct and indirect expenses.
13. What is a Balance Sheet? 14. What do you understand by trial balance? 15. What is an Income Statement? 16. Define Financial Analysis. 17. What is the importance of financial statements for creditors? 18. What do you mean by accounting ratios? 19. What is a current asset? 20. What is a current liability? 21. How would you determine whether an asset is current asset or a current asset? 22. What is current ratio? What does in indicate? 23. How do you compute 'Stock-turnover rate'? What does it indicate? 24. Differentiate between gross profit ratio and operating profit ratio. 25. How is working capital turnover ratio calculated? 26. What is an operating ratio? How do you calculate it? What does it indicate? 27. Illustrate the method of determining debtors turnover ratio? What does it indicate? 28. Explain any three accounting ratios based on sales. 29. What is a funds flow statement? 30. Is depreciation a source of funds? Give reasons in support of your answer. 31. Enumerate four heads of sources and application of funds. 32. Distinguish between funds flow statement and position statement
33. Which transactions do not affect the flow of funds? 34. What type of transactions result in the flow of funds? 35. What do you understand by overheads? 36. Distinguish between overhead apportionment and over-head absorption. 37. Why are the following items added to profit to calculate the fund from operations? (i) Depreciation; ii) Loss on sale of fixed assets; iii) Goodwill written off; iv) Transfer to General Reserve. 38. What is a Cash Flow Statement? 39. Explain the meaning -Non-Cash Items". 40. Enumerate the "Sources of Cash".
Multiple Choice Question – Set 1 1. Accounting principles are generally based on: (a) Practicability (b) Subjectivity (c) Convenience in recording. (d) None of the above 2. Explain briefly the Dual Aspect Concept of Accounting: 3. In case of Debt becoming bad, the amount should be credited to: (a) Debtor's account (b) Bad Debt account (c) Sales Account (d) None of the above 4. Explain the term "Accounting Cycle". 5. Explain the term Ledger Posting? 6. When a firm maintains "Three Column Cash Book" it need not maintain: (a) Cash account in the Ledger (b) Bank Account in the Ledger (c) Discount Account in the Ledger (d) Both Cash & Bank Account in the Ledger
7. What is Contra Entry? 8. Purchases book is used to record: (a) All purchases of goods (b) All credit purchases (c) All credit purchases of goods (d) All credit purchases of assets other than goods. 9. Explain the Imprest system of "Petty Cash Book". 10. Cost of Goods Sold = Op stock + Net Purchases __ Expenses on Purchasing Goods __ Cl. Stock. 11. Interest on drawing is: (a) Expenditure for the business (b) Expense for the business (c) Gain for the business. 12. Distinguish between Error of Omission, Error of Principle and Error of Commission. 13. What do you understand by the term Depreciation, Depletion and amortization. Also give example of each. 14. Distinguish between "Straight Line Method of Depreciation" and "Diminishing Balance Method" of providing depreciation. Which method of depreciation is suitable for Plant & Machinery and why? 15. Define financial ratios. 16. Give any three formulas of Solvency Ratios. 17. What is the need for Financial Analysis? How Ratio analysis technique helps in it? 18. Write short note on market value/ Book value of shares. 19. Tax paid is (a) Application of Fund (b) Source of Fund (c) No Flow of Fund (d) None of the above 20. Distinguish between Funds Flow Statement and Cash Flow Statement. 21. Cash from operation is equal to (a) Net Profit plus increase in outstanding expense (b) Net Profit plus increase in debtors
(c) Net Profit plus increase in stock (d) None of the above 22. Define Cost Accounting. How is it different from Management Accounting and Financial Accounting? 23. Explain Out of Pocket Cost? 24. Define Activity Base Costing, Back Flush Costing Life cycle Costing. 25. Give few examples of purely financial charges. 26. How is Direct cost differ from indirect cost? 27. Distinguish between LIFO and FIFO methods of inventory valuations. 28. Why do we require proper inventory valuation. 29. Define Budget and Budgetary Control. 30. Define Master Budget, Programme Budget, Production Budget and Cash budget. 31. Define Zero Base Budgeting. Give limitations of ZBB. 32. How Standard Costing differs from Historical Costing? 33. List major uses of Standard Costing. 34. Direct Material Cost Variance Analysis with the help of an example. 35. Define marginal costing, Break - Even analysis P/V Ratio. 36. Show Break - Even point, angle of incidence and Margin of safety graphically with the help of an example. 37. When fixed Cost is Rs 10000 and P/V/Ratio is 50%, the Break even po int is _____ (a) Rs 40000 (b) Rs. 35000 (c) Rs. 20000 (d ) Rs. 45000 38. When P/V ratio is 40% and Sales Value Rs 10000 the variable cost will be _____ (a) Rs. 2000 (b) Rs. 6000 (c) Rs. 8000 (d ) Rs 7000 39. Contribution margin is also known as ____________. 40. Define absorption costing.
Multiple Choice Question – Set 2 1. Which of the following statements is true concerning assets? (a). They are recorded at cost and adjusted for inflation. (b). They are recorded at market value for financial reporting because historical cost is arbitrary. (c). Accounting principles require that companies report assets on the income statement. (d). Assets are measured using the cost concept. 2. When the concept of conservation is applied to the Balance Sheet, it results in (a). Overstatement of Capital (b). Understatement of Capital (c). Overstatement of Assets (d). Understatement of Assets. 3. Which of the following is a correct expression of the accounting equation? (a). Assets - Liabilities + Owners' Equity (b). Assets = Liabilities - Owners' Equity (c). Assets + Owners' Equity = Liabilities (d). Assets = Liabilities + Owners' Equity 4. How is the balance sheet linked to the other financial statements? (a). The beginning retained earnings balance on the statement of retained earnings becomes the amount of retained earnings reported on the balance sheet. (b). Retained earnings is added to total assets and reported on the balance sheet. (c). Net income increases retained earnings on the statement of retained earnings, which ultimately increases retained earnings on the balance sheet. (d). There is no link between the balance sheet and the other statements. 5. The process of recording the economic effects of business transactions in a book of original entry: (a). Double entry system (b). Debit (c). Credit (d). Journalizing 6. If the sum of the debits and credits in a trial balance is not equal, then (a). There is no concern because the two amounts are not meant to be equal. (b). The chart of accounts also does not balance. (c). It is safe to proceed with the preparation of financial statements.
(d). Most likely an error was- made in posting journal entries to the general ledger or in preparing the trial balance. 7. Z Ltd had Rs. 1800 of supplies on hand at January 1, 2006. During 2006, supplies with a cost of Rs. 7,000 were purchased. At December 31, 2006, the actual supplies on hand amounts to Rs. 2,300. After the adjustments are recorded and posted at December 31, 2006, the balances in the Supplies and Supplies Expense accounts will be: (a). Supplies, Rs7, 000; Supplies Expense, Rs2, 300. (b). Supplies, Rs1, 800; Supplies Expense, Rs7, 000. (c). Supplies, Rs2, 300; Supplies Expense, Rs6, 500. (d). Supplies, Rs2, 300; Supplies Expense, Rs3, 900. 8. In the statement of changes in financial position, uses of resources are defined as: (a). Transaction debits (b). Fund increases (c). Transaction credits (d). Fund decreases 9. Most firms elected to define funds in the statement of changes in financial position as: (a). Cash (b). Working capital (c). Current assets (d). Owners' Equity 10. The funds flow statement included: (a). All sources and uses of resources. (b). Only cash transactions. (c). Only transactions affecting current assets. (d). Only transactions affecting fund accounts. 11. Which of the following is not an example of a non-fund adjustment to income required in preparing the statement of changes in financial position when funds were defined as working capital? (a). Depreciation expense (b). Gain from asset disposal (c). Interest expense (d). Amortization of premium on debt 12. In the cash flow statement, cash is defined as: (a). Quick assets (b). Literal cash on hand or on demand deposit, plus cash equivalents. (c). Literal cash on hand or on demand deposit, plus marketable securities. (d). All of the above
13. Flexible budgets (a). Accommodate changes in the inflation rate. (b). Accommodate changes in activity levels. (c). Are used to evaluate capacity utilization. (d). Are static budgets that have been revised for changes in prices. 14. Which of the following statements regarding changing inventory methods is true? (a). A change in inventory methods can be justified if the change is made to better match profits with revenue. (b). The effect of changing inventory method does not need to be disclosed. (c). Tax advantages are valid justification for changing inventory methods. (d). One place that the reader of an annual report would be able to identify that a company changed inventory methods is the footnotes to the financial statements. Use the information presented below to answer the questions that follow. Solid Co. received a non-interest-bearing note from Y Ltd. on October 1, 2006. The amount of the note due at the maturity date is Rs6, 200. The note was accepted by Solid for merchandise sold to Bedrock with a selling price of Rs6, 000. The note is due in 3 months. 15. The difference of Rs200 between the amount of the note (Rs. 6,200) and the sales price of the merchandise (Rs. 6,000) (a). Is the interest explicitly included in the amount of the note. (b). Will be recorded in a contra account, Discount on Notes Receivable, by Co. (c). Will be recorded as interest revenue on October 1, 2006. (d). Is an error made in preparing the note. 16. Which of the following combination of financial statements would provide the most in-depth information to help under stand a company's liquidity? (a). Income statement and statement of cash flows. (b). Balance sheet and statement of cash flows. (c). Balance sheet and income statement. (d). Statement of retained earnings and statement of cash flows. 17. Y Ltd sold equipment for Rs4, 000. This resulted in a Rs1, 500 loss. What is the impact of this sale on the working capital? (a). Reduces working capital. (b). Increases working capital. (c). Has no affect on working capital at all. (d). The increase offsets the decrease. 18. If a company's asset turnover rate increased from 2005 to 2006, which of the following cone usions can be made? (a). The company was less efficient during 2006 in using its assets to produce profits. (b). The company produced more sales in 2006 for each dollar invested in assets.
(c). The company was more profitable in 2005. (d). The company is over-invested in assets in 2006. 19. X Ltd's master budget calls for the production of 6,000 units of product monthly; The master budget includes indirect labor of Rs. 396,000 annually; X Ltd considers indirect labor to be a variable cost. During the month of September, 5,600 units of product were produced, and indirect labor costs of Rs. 30,970 were incurred. A performance report utilizing flexible budgeting would report a flexible budget variance for indirect labor of:(a). Rs. 170 unfavorable. (b). Rs. 170 favorable. (c). Rs. 2,030 unfavorable. (d). Rs. 2,030 favorable. 20. Which of the following is not an advantage for using standard costs for variance analysis? (a). Standards simplify product costing. (b). Standards are developed using past costs and are available at a relatively low cost. (c). Standards are usually expressed on a per unit basis. (d). Standards can take into account expected changes planned to occur in the budgeted period. 21. The main purpose of cost accounting is to(a). Maximize profits, (b). Provide information to management for decision making (c). help in fixing selling price (d). To watch cash flows 22. Conversion cost is total of: (a). Direct material and direct wages (b). Direct material, direct wages, and production overheads (c). Direct wages and production overheads. (d). None of the above. 23. A cost, which does not involve cash outlay, is called: (a). Historical cost (b). Imputed cost (c). Out of pocket cost. (d). Explicit cost. 24. Committed fixed costs are those, which: (a). Arise from yearly budget appropriations (b). Are incurred because management can afford (c). Arise from additional capacity. (d). All of above
25. Cost of research undertaken at the request of the customer should be: (a). Charged to costing profit and loss account (b). Charged to selling overheads (c). Recovered from the customer. (d). All of above 26. Salaries due for the month of March will appear (a). On the Receipt side of the Cash Book (b). On the Payment side of the Cash Book (c). As a contra entry (d). Nowhere in the Cash Book. 27. Liabilities of business are Rs. 11,220 and owner's equity is Rs. 15,000. The assets of the business will be. (a). Rs. 3,780. (b). Rs. 26,220. (c). Rs. 11,220. (d). Rs. 15,000. 28. An entry of Rs. 320 has been debited to Eknath's account at Rs. 230. If is an error of (a). Principle. (b). Omission. (c). Commission. (d). Compensatory. 29. Unearned revenues are: (a). Prepayments. (b). Liabilities. (c). Temporary accounts. (d). Both a and b above. 30. The revenue recognition principle requires that sales revenues be recognized: (a). When cash is received. (b). When the merchandise is ordered. (c). When the goods are transferred from the seller to the buyer. (d). None of the above. 31. All of the following are "other receivables" except: (a). Petty cash. (b). Interest receivable. (c). Income taxes refundable. (d). Advances to employees.
32. Depreciation is depsndent on a number of estimates. When a change in an estimate is required, the change is ma (a). in the current year. (b). in the future year. (c). to prior periods. (d). both a and b above. 33. In order to pay a dividend: (a). the corporation must have adequate retained earnings. (b). the board of directors must declare a dividend. (c). the corporation must have adequate cash. 34. Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income are referred to as: (a). Investing activities. (b). Financing activities. (c). Operating activities. (d). All of the above. 35. All of the following are used in preparing a statement of cash flows except: (a). A trial balance. (b). Comparative balance sheet. (c). Current income statement. (d). Additional information. 36. Depreciation is result of (a). Usage. (b). Time. (c). Obsolescence. (d). All of the above. 37. Outstanding Expenses are the examples of (a). Personal Accounts. (b). Real Accounts. (c). Nominal Accounts. (d). None of the above. 38. Liquid Assets are inclusive of all current assets except (a). Inventories. (b). Prepaid Expenses. (c). Cash. (d). Both (a) and (b) above.
39. Management Accounting is mainly related to (a). Presentation of Figures from Financial Accounting. (b). Presentation of Figures from Cost Accounting. (b). Principles (c). Both (a) and (b) above. 40. Variance Analysis is done with regards to actuals with(a). Standards. (b). Budgeted Figures. (c). Benchmarks (d). All of the above.
True or False- Set 1 Mark 'True' or 'False':
1.
Accounting is a language of business.
2.
Accounting is a service function.
3. Accounting records only those transactions and events which are financial character. 4.
Drawings reduce capital.
5.
Capital is increased by profit and decreased by losses.
6. The system of recording transaction on the basis of their two old aspects is called double entry system. 7.
Purchases made from B for cash should be debited to B.
8.
Earnings of revenue means increase in Cash/Bank balance
9.
The balance of an account is always known by the side which is shorter.
10. The return of goods by a customer should be debited to Returns Inwards Account.
11.
Goods bought for resale are referred to as Stocks
12. If the business has any liability, the proprietor's capital must be more than the total assets. 13.
Withdrawal of money by the owner is an expense for the business.
14.
Ledger is called the book of final entry.
15.
Cash book is used to record all receipts and payments of cash.
16.
Sales book is used to record all credit sales.
17.
The journal is not a book of original entry.
18.
Goodwill is an intangible asset.
19. Salaries & Wages appearing in the trial balance are shown on the liabilities side of the balance sheet. 20.
The profit & loss account is one of the financial statements.
21. Share having preferential right as to dividend and repayment of capital are termed as equity share capital. 22.
Shares which are not preference shares are called equity shares.
23. The amount of share premium received by the company is shown under the heading reserves & surplus in the company's balance sheet. 24.
Debenture holders are not the member of the company.
25. There are no legal restrictions, similar to shares, for issue of debentures at discount. 26.
Fixed cost per unit remains constant.
27.
Direct cost is that cost which can not be easily allocated to cost units.
