MB0041 - FINANCIAL AND MANAGEMENT ACCOUNTING Q1. Inventory in a b!ine!! i! va"e# at t$e en# o% an a&&ontin' (erio#) at eit$er &o!t or *ar+et (ri&e) ,$i&$ever i! "o,er. T$i! i! a&&e(te# &onvention or a (ra&ti&e in a&&ontin'. Give a !*a"" intro#&tion on a&&ontin' &onvention! an# e"&i#ate a"" t$e ei'$t a&&ontin' &onvention!. [Introduction of accounting convention, Explanation of all the 8 types of conventions] An!,er A&&ontin' An!,er A&&ontin' Convention! Accounting conventions are the rules based on which accounting takes place p lace and these rules are ar e universally accepted. here are ten types of accounting conventions, na!ely convention of inco inco!e !e reco recogn gnit itio ion, n, conv conven enti tion on of expen expense se,, conv conven enti tion on of !atc !atchi hing ng cost cost and and reven revenue ue,, conven conventio tion n of histor historica icall cost, cost, conven conventio tion n of full full disclo disclosur sure, e, convent convention ion of double double aspect, aspect, convention of !odifying, convention of !ateriality, convention of consistency, and convention of conservatis!. hey are explained briefly in the following sections. 1.
Conven Conventio tion n o% in&o*e in&o*e re&o'n re&o'niti ition on
According to this concept, revenue is considered as being earned on the date on which it is reali"ed, reali"ed, i.e., the date on which goods and services are transferred to custo!ers for cash or for pro!ise.# . Convention Convention o% *at&$in' *at&$in' &o!t &o!t an# an# revene revene According to this concept, revenue earned during a period is co!pared with the expenditure incurred to earn that inco!e, irrespective of whether the expenditure is paid during that period or not. his is also called !atching cost and revenue principle. /. Conven Conventio tion n o% $i!to $i!tori& ri&a" a" &o!t! &o!t! his convention says that all transactions !ust be recorded at a value at which they were incurred. $uch a value is called %&istorical 'ost# and this principle is called the 'onvention of %'ost#. An asset or transaction !ay have !any other values associated with it like !arket value or replace!ent cost. (ut all assets are recorded at the cost of ac)uisition and this cost is the basis for all subse)uent accounting for the assets. he expenses and the goods purchased are shown at the value at which they are incurred. 4. Conven Conventio tion n o% %"" %"" #i!&" #i!&"o! o!re re his convention re)uires a business to disclose the following*
All the accounting policies adopted in the preparation and presentation of financial
state!ents. If there is any change in the accounting policies in the current year as co!pared to the
previous year+s, the effects of such changes and the reason+s thereof.
he i!plications in ter!s of !oney value- on the financial state!ents due to such change.
. Convention o% #ob"e a!(e&t his concept states that every transaction has two aspects. ne is the receiving aspect and the other is the giving aspect. In accounting language, these two aspects are called %debit# and %credit#. he clai!s on assets will always be e)ual to the assets. he clai!s on assets !ay be of the owners or of the outsiders creditors-. /hile the clai!s of owners are called E)uity or 'apital, the clai!s of outsiders are called 0iabilities. herefore, total liabilities are e)ual to total assets. his concept gives rise to the balance sheet e)uation, i.e., Assets10iabilities 2 'apital. he following balance sheet illustrates this. . Convention o% *ateria"ity his convention states that the benefit derived fro! !easuring, recording, and processing a transaction should 3ustify the cost of doing it. 2.
Convention o% &on!i!ten&y
his convention re)uires that the accounting policies !ust be consistently applied year after year. 'onsistency is re)uired to help co!parison of financial data fro! one period to another. nce a !ethod of accounting is adopted, it should not be changed. A change in an accounting policy !ay be done only when* It is re)uired by law
It is felt that the new policy reflects the financial perfor!ance or position better than the old
policy $uch changed policy !ust be consistently applied for the subse)uent periods. As stated under the full disclosure convention, the change in the accounting policy along with the reason+s and the financial i!plications on the financial state!ents should be disclosed to the users. 3. Convention o% &on!ervati!* or (r#en&e Accountants follow the rule 4anti&i(ate no (ro%it! bt (rovi#e %or a"" anti&i(ate# "o!!e!4. /henever loss is anticipated, sufficient provisions should be !ade. (ut if a profit is anticipated, it should not be recorded until it is actually realised.
Q. Ana"y!e t$e %o""o,in' tran!a&tion! a&&or#in' to tra#itiona" a((roa&$. a. 1.1.011 nit$a !tarte# $i! b!ine!! ,it$ &a!$ 5!. )00)000 b. .1.011 Borro,e# %ro* Ma"at$i 5!. )00)000 &. .1.011 6r&$a!e# %rnitre 5!. 1)00)000 #. 4.1.011 6r&$a!e# %rnitre %ro* Meena" on &re#it 5!. 1)0)000 e. .1.011 6r&$a!e# 'oo#! %or &a!$ 5!. 0)000 %. .1.011 6r&$a!e# 'oo#! %ro* 5a* on &re#it 5!. )0)000 '. 3.1.011 o"# 'oo#! %or &a!$ 5!. 1))000 $. 3.1.011 o"# 'oo#! to $ya* on &re#it 5!. )000 i. 7.1.011 5e&eive# &a!$ %ro* $ya* 5!. )000 8. 10.1.011 6ai# &a!$ to 5a* 5!. 70)000 9 Fi""in' in a"" t$e #etai"! in t$e tab"e %or a"" t$e tran!a&tion!. Ea&$ tran!a&tion &arrie! one *ar+:1;10<10=> An!,er ". No.
A&&ont! Invo"ve#
Natre o% A%%e&t! A&&ont
Debit? Cre#it
a
'ash a+c 'apital a+c
5eal 7ersonal
'ash is co!ing in $unita is the giver
6ebit 'redit
b
'ash a+c 0oan fro! alathi
5eal 7ersonal
'ash is co!ing in alathi is the giver
6ebit 'redit
c
9urniture a+c 'ash a+c
5eal 5eal
9urniture is co!ing in 'ash is going out
6ebit 'redit
d
9urniture a+c eenl a+c
5eal 7ersonal
9urniture is co!ing in eenal is the giver
6ebit 'redit
e
7urchase a+c 'ash a+c
:o!inal 5eal
7urchase is an expense 'ash is going out
6ebit 'redit
f
7urchase a+c 5a!#s a+c
:o!inal 7ersonal
7urchase is an expense 5a! is the giver
6ebit 'redit
g
'ash a+c $ales a+c
5eal :o!inal
'ash is co!ing in $ales is revenue
6ebit 'redit
h
$hya!#s a+c $ales a+c
7ersonal :o!inal
$haya! is the receiver $ales is revenue
6ebit 'redit
i
'ash a+c $hya!#s a+c
5eal 7ersonal
'ash is co!ing in $hya! is the giver
6ebit 'redit
3
5a!#s a+c 'ash a+c
7ersonal 5eal
5a! is the receiver 'ash is going out
6ebit 'redit
Q/. T$e %o""o,in' ite*! are %on# in t$e tria" ba"an&e o% M?! $ara#a Enter(ri!e on /1!t De&e*ber) 000. n#ry Debtor! 5!.10000 Ba# Debt! ,ritten o%% 5! 7000 Di!&ont a""o,e# to Debtor! 5!. 1300 5e!erve %or Ba# an# #obt%" Debt! /1-1-1777 5!. 100 5e!erve %or #i!&ont on Debtor! /1-1-1777 5!. /00 @o are reire# to (rovi#e t$e ba# an# #obt%" #ebt! at an# %or #i!&ont on #ebtor! at . $o, t$e a#8!t*ent! %or ba# #ebt!) ba# #ebt! re!erve) #i!&ont a&&ont) an# (rovi!ion %or #i!&ont on #ebtor!. 9Ca"&"ation an# or+in'!) Con&"!ion> An!,er
o"tion he a!ount debited to 7;0 account towards 5(6 is co!puted as follows* ld 5(6 15s. @- (ad debts 15s. (alance 15s. :ew 5(6 C>D on<=???? 1 5s. 5(6 to be provided
15s.
<=>?? ??? B>?? 8??? >?? 8???@B>??-
he a!ount debited to 7;0 account towards 5eserve for 6iscount on 6ebtors is co!puted as follows* 5s.<=???? F 5s.8??? :ew 5(6-1 ood 6ebtors ld 5eserve for 6iscount on 6rs 0ess 6iscount on 6rs (alance 5eserve :ew 5eserve for 6iscount at GD n good 6rs <>G??? 5eserve for 6iscount to
15s.<>G??? 15s.HG?? 15s.<8?? 15s.<??
15s.H??
be provided now
15s.<=? H?? @<??-
Con&"!ion In the balance sheet, the $undry debtors are reduced by bad debts shown outside the trial balance, the new 5(6, discount on debtors shown outside the trial b alance and the new 5eserve for discount on debtors.
Q4. T$e re(ort! (re(are# in %inan&ia" a&&ontin' are a"!o !e# in t$e *ana'e*ent a&&ontin'. Bt t$ere are %e, *a8or #i%%eren&e! bet,een %inan&ia" a&&ontin' an# *ana'e*ent a&&ontin'. E("ain t$e #i%%eren&e! bet,een %inan&ia" a&&ontin' an# *ana'e*ent a&&ontin' in vario! #i*en!ion!. :ritin' #o,n a"" t$e #i%%eren&e! bet,een t$e %inan&ia" an# *ana'e*ent a&&ontin'=
An!,er Di*en!ion
Finan&ia" a&&ontin'
Mana'e*ent a&&ontin'
Jsers
he pri!ary users of financial accounting infor!ation are external users like shareholders, creditors, govern!ent authorities, e!ployees, etc.
he pri!ary users of !anage!ent accounting are internal users like top, !iddle, and lower level !anagers.
7urpose
5eporting financial perfor!ance and financial position to enable the users to take financial decisions.
o help the !anage!ent in planning, decision !aking, !onitoring, and controlling.
:eed
It is a statutory re)uire!ent. /hat to report, how to report, how !uch to report, when to report, in which for! to report, etc. are stipulated by 0aw or $tandards.
It is optional. /hat to report, how to report, how !uch to report, when to report, in which for! to report, etc. are decided by the !anage!ent as per the needs of the co!pany or !anage!ent.
Expression of infor!ation
Accounting infor!ation is always expressed in ter!s of !oney.
anage!ent accounting !ay adopt any !easure!ent unit like labour hours, !achine hours, or product units for the purpose of analysis.
5eporting ti!ing and fre)uency
9inancial data is presented for a definite period, say one year or a )uarter.
5eports are prepared on a continuous basis, !onthly, weekly, or even daily.
i!e perspective
9inancial accounting focuses on historical data.
anage!ent accounting is oriented towards the future.
$ources of principles
9inancial accounting is a discipline by itself and has its own principles, policies and conventions AA7-.
anage!ent accounting !akes use of other disciplines like econo!ics, !anage!ent, infor!ation syste!, operation research, etc.
5eporting entity
verall organisation
5esponsibility centres within the organisation
9or! of reports
Inco!e state!ent 7rofit and 0oss a+c(alance sheet
I$ reports 7erfor!ance reports 'ontrol reports
'ash flow state!ent
'ost state!ents Kariance state!ents (udgets Esti!ate state!ents 9lowcharts
Q Dra, t$e Ba"an&e $eet %or t$e %o""o,in' in%or*ation (rovi#e# by an#ee( Lt#.. a. Crrent 5atio .0 b. Lii#ity 5atio 1.0 &. Net or+in' Ca(ita" 5!./00000 #. to&+ Trnover 5atio ti*e! e. 5atio o% Gro!! 6ro%it to a"e! 0 %. Fie# A!!et Trnover 5atio ti*e! '. Avera'e Debt &o""e&tion (erio# *ont$! $. Fie# A!!et! to Net ort$ 0.30 i. 5e!erve an# r("! to Ca(ita" 0.0
7reparation of (alance sheet Includes all the ratios-
5s. >????? G>???? <>???? G????? <
Assets 9ixed Assets Inventories 6ebtors (ank otal
5s. =????? G????? G>???? >???? <
or+in' Note! If 'urrent 0iabilities
1<
'urrent Assets
1G.>
/orking 'apitalG.>@<-
1 <.>
1H?????
herefore 'urrent AssetsG.>+<.>-xH?????
1>?????
'urrent 0iabilities<+<.>-xH?????
1G?????
0i)uidity 5atio
1<.>
'urrent 0iabilities
1G?????
herefore 0i)uid AssetsG?????x<.>-
1H?????
Inventories'urrent asset@0i)uid Asset-
1G?????
$tock urnover ratio 1= ti!es 'ost of sales=xG?????-
1
ross 7rofit 5atio 1G?D ross 7rofit If $ales is
1H?????
$alescost of $ales 2ross 7rofit-
<>?????
9ixed Asset urnover ratio
1G ti!es
'ost of $ales+9ixed Assetsherefore 9ixed Assets
1=?????
6ebtor#s 'ollection 7eriod 1G !onths onths in a year+ 6ebtor#s urnover6ebtor#s urnover 5atio
1= ti!es
$ales+6ebtors6ebtors<>?????+=-
1G>????
9ixed Assets to $hareholders# :et worth 1?.8? $hareholder#s net worth =?????+?+8?-
1B>????
5eserves and $urplus to 'apital 1?.>? If capital is <* reserves and surplus is ?.> 5eserves and surplus 2 capital1 shareholder#s net worth?.>2<1<.>5eserves and $urplus B>?????x?.>+<.>-
1G>????
herefore share capital
1>?????
Q. rite t$e *ain #i%%eren&e! bet,een &a!$ %"o, ana"y!i! an# %n# %"o, ana"y!i!. Fo""o,in' i! t$e ba"an&e !$eet %or t$e (erio# en#in' /1!t Mar&$ 011 an# 01. I% t$e &rrent year! net "o!! i! 5!./3)000) Ca"&"ate t$e &a!$ %"o, %ro* o(eratin' a&tivitie!.
6ifferences between cash flow and fund flow analysis, 7reparation of state!ent showing cash flow fro! operating activities- , = o"tion Di%%eren&e bet,een Ca!$ F"o, Ana"y!i! an# Fn# F"o, Ana"y!i! Tab"e 10.1 !$o,! t$e differences between cash flow analysis and fund flow analysis. Ca!$ F"o, Ana"y!i!
Fn# F"o, Ana"y!i!
<. It is concerned only with the change in cash position
It is concerned with change in <. working capital position between two balance sheet dates.
G. It is !erely a record of cash receipts and disburse!ents
G. :et effect of receipts and disburse!ents are recorded.
'ash is part of working capital H. and H. An i!prove!ent in funds positions therefore an i!prove!ent in need not result in i!prove!ent in cash cash position results in i!prove!ent in position the funds position . It is cash based
. It is accrual based
$tate!ent showing cash flows fro! operating activities :et 0oss
H8,??? -
A66* 6ecrease in 'urrent Assets 7rovision for doubtful debts
<,G??
$tock
G,???
7repaid expenses
G??
Increase in current liabilities utstanding expenses (ills payable
G?? G,??? 2 >,=?? MMMMMMMMMM HG,?? -
6E6J' L Increase in current assets $hort ter! loan
H,???
(ills receivable
'reditors
GG,??? 2 H>,??? MMMMMMMM
:et cash loan in operating activities
=B,?? -
