Name: Sudeep Sharma

Roll Number: 510818304

Learning Centre: 2882

Subject : Financial Management &

Accounting

Assignment No.: MC0065 – 01

Date of Submission at the learning centre:

31/05/2008

Faculty Signature:
MCA I Semester (Revamped) Assignments for SPRING2008 Session
MC0065 – 01

FINANCIAL MANAGEMENT & ACCOUNTING

Q1.Explain the various accounting concepts?
Solution:
There are the necessary assumptions or conditions upon which accounting is
based. Accounting concepts are postulates, assumptions or conditions upon which
accounting records and statement are based. The various accounting concepts are
as follows:

1. Entity Concept:
For accounting purpose the “business” is treated as a separate entity from the
proprietor(s). One can sell goods to himself,, but all the transactions are recorded
in the book of the business. This concepts helps in keeping private affairs of the
proprietor away from the business affairs. E.g. If a proprietor invests Rs.
1,00,000/- in the business, it is deemed that the proprietor has given Rs. 1,00,000/-
to the “business” and it is shown as a “liability” in the books of the business.
Similarly, if the proprietor withdraws Rs. 10,000/- from the business, it is charged
to them.

2. Dual Aspect Concept:

As per this concept, every business transaction has a dual affect. For example, if
Ram starts business with cash Rs. 1,00,000/- there are two aspects of the
transaction: “Asset Account” and “Capital Account”. The business gets asset
(cash) of Rs. 1,00,000/- and on the other hand the business owes Rs. 1,00,000/- to
Ram.

3. Going Business Concept (Continuity of Activity):

It is assumed that the business concern will continue for a fairly long time, unless
and until has entered into a state of liquidation. It is as per this assumption, that
the accountant does not take into account the forced sale values of assets while
valuing them.

4. Money measurement concept:

As per this concept, in accounting everything is recorded in terms of money.
Events or transactions which cannot be expressed in terms of money are not
recorded in the books of accounts, even if they are very important or useful for the
business. Purchase and sale of goods, payment of expenses and receipt of income
are monetary transactions which are recorded in the accounting books however
events like death of an executive, resignation of a manager are such events which
cannot be expressed in money.

5. Cost Concept (Objectivity Concept):

This concept does not recognize the realizable value, the replacement value or the
real worth of an asset. Thus, as per the cost concept
a) as asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and
b) this cost is the basis for all subsequent accounting for the asset.

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For example, if a machine is purchased for Rs. 10,000/- it is recorded in the books
at Rs. 10,000/- and even if its market value at the time of the preparation of the
final account is Rs. 20,000/- or Rs. 60,000/- the same will not considered.

6. Cost-Attach Concept:
This concept is also known as “cost-merge” concept. When a finished good is
produced from the raw material there are certain process and costs which are
involved like labor cost, power and other overhead expenses. These costs have a
capacity to “merge” or “attach” when they are broughtr together.

7. Accounting Period Concept:

An accounting period is the interval of time at the end of which the income
statement and financial position statement (balance sheet) are prepared to know
the results and resources of the business.

8. Accrual Concept:
The accrual system is a method whereby revenue and expenses are identified with
specific periods of time like a month, half year or a year. It implies recording of
revenues and expenses of a particular accounting period, whether they are
received/paid in cash or not.

9. Period Matching of Cost and Revenue Concept:

This concept is based on the period concept. Making profit is the most important
objective that keeps the proprietor engaged in business activities. That is why
most of the accountant’s time is spent in evolving techniques for measuring the
profit/profitability of the concern. To ascertain the profit made during a period, it
is necessary to match “revenues” of the period with the “expenses” of that period.
Income (profit) earned by the business during a period is compared with the
expenditure incurred to earn the revenue.

10. Realization Concept:

According to this concept profit, should be accounted for only when it is actually
realized. Revenue is recognized only when sale is affected or the services are
rendered. However, in order to recognize revenue, receipt of cash us not essential.
Even credit sale results in realization as it creates a definite asset called “Account
Receivable”. However there are certain exception to the concept like in case of
contract accounts, hire purchase etc. Similarly incomes like commission interest
rent etc. are shown in Profit and Loss A/c on accrual basis though they may not be
realized in cash on the date of preparing accounts.

11. Verifiable Objective Evidence Concept:

According to this concept all accounting transactions should be evidenced and
supported by objective documents. These documents include invoices, contract,
correspondence, vouchers, bills, passbooks, cheque etc.

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 Q2. a) What is Balance Sheet Equation?
Solution:
“Balance Sheet shows the sources from which funds currently used to operate
the business have been obtained. (i.e. liabilities and owner’s equity) and the
types of property and property rights, in which these funds are currently locked up
(i.e. assets).”
Balance sheet may be considered as a summarized sheet of balances remaining
in the books of accounts, after the preparation of the Profit and Loss Account.
Thus a Balance Sheet can be rightly called as a statement of owes on a
particular date. The things that the business owns are called “Assets” and the
various sums of money that it owes are called “liabilities” (including that of the
owner)

The term “Balance Sheet” comes from the fact that the total assets must be equal
to total liabilities, they balance each other. The liabilities side shows the various
sources from which money was made available for the assets and the assets
side shows the way those funds were employed in the business.

A balance sheet is so called because its two sides must always balance, i.e., the
assets must be equal to the liabilities plus owner’s funds. This can be expressed
in the form of an equation
Assets = Liabilities + net Capital

The entire balance sheet rests on the above equation. Thus, the above equation
is called the Balance Sheet Equation.

Q2 b) Explain the various items appearing in a Balance Sheet ?

There are two sides of a balance sheet Assets and Liabilities. The various items
appeared in a Balance Sheet in assets column are as follows:

1) Fixed Assets:
Fixed Assets are called along-term assests. They do not flow through the cash
cycle of business within one year or normal operating cycle. They are major
sources of revenue to the business. They do not vary day in and day out due to
routine business transactions.
Classification of Fixed Assets
Fixed Assets are further classified into three categories:
a) Tangible movable assets
b) Tangible immovable assets
c) Intangible assets

a) Tangible movable assets

These are the assets which can be seen, touched and moved from one place to
another place. Plant and Machinery, furniture and fixtures, transportation
equipments etc. are tangible movable assets.

b) Tangible immovable assets

These are the assets which can be seen and touched but cannot be moved from
one place to another place. Eg land buildings, mines, oil wells etc.

c) Intangible assets
These are the assets which cannot be seen and touched. However there
existence can only be imagined such as patents, trade marks, copyrights,
goodwill etc.

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2) Investments:
Investments may be shot-term and long- term. Short- term investments are
marketable securites and they represent temporary investments of idle funds.
These investments can be disposed off by the company at its own will at any
time.
Long- term investments are held for long time. They are required to be held by
the very nature of business. Here the intention of the investor is to retain the
securities for a longer period of time. Eg Bonds of the other companies.

3) Current Assets and Quick Assets:

Current assets include cash, assets that are likely to become or converted into
cash, or assets that are otherwise consumed in the normal process or within one
year from the balance sheet date and the cash thus generated is available to pay
current liabilities. E.g. Cash Balance, Back Balance, Short term investments,
Debtors, Expenses paid in advance etc.
Quick assets are known as near cash assets. Quick assets are those which can
be converted into cash quickly. Therefore, they are also known as liquid assets.
Debtors and cash advances can be converted into cash at a short notice.

The various items appears on the Liabilities column are as follows:

1) Proprietor’s Funds or Owner’s Equity:
These are the funds provided by the owner or the Shareholders. In case of sole
trading concern, the sole trader is the single proprietor of the business. In case of
partnership firms, partners are the owners and in case of companies, the
shareholders are the proprietors. Proprietors Fund represents the interest of the
proprietors in the business. This is the amount belonging to the proprietors.
Proprietors fund is also called as “proprietors equity”, “Owners Fund”, Owners
equity” or Shareholder’s Fund.

2) Long-term Liabilities:
Company raises finance either from owners or through external borrowings.
External borrowings of a company which constitutes its “owed funds” are
important sources of log-term finance. These borrowings are termed as Long-
term Liabilities They may be fully secured or partly secured or unsecured.

a) Secured Loans:
It refers to loans which are secured by a fixed or floating charge on the assets of
the business. It includes:
i) Debentures
ii) Loans and advances from banks
iii) Loans and advances from subsidiaries and
iv) Other loans and advances

The nature of security should be specified in each case. Loans from directors,
secretaries, treasures and managers should be shown under this head.

b) Unsecured Loans:
It refers to the loans which are not secured by assets of the business. It is not
covered by any security. It includes:
i) Fixed Deposits
ii) Loans ad advances from subsidiaries
iii) Shot-term loans and advances from banks and from others
iv) Other loans and advances: loans from directors, secretaries, treasures and
managers should be shown separately.

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 3) Current Liabilities and Quick Liabilities:

Current liabilities are those short-term obligation of an enterprise which mature

within one year or within the operating cycle. They constitute short-term sources
of finance.
They are as follows:
i) Sundry creditors
i) Bills Payable
iii) Interest accrued but not due
iv) taxes Payable
v) wages and Salaries
vi) Unclaimed Dividends
vii) Bank Overdraft

Quick Liabilities are the current liabilities which mature within a very short period
of time.

4) Reserves and Surplus:

There might be some obligations to the company which may be compulsory or
voluntary, foreseen or unforeseen, recurring or non-recurring. To paid such
obligations, companies generally create reserves out of profits. Such a reserve is
also termed as “Retained Earning” or “Plough Back” profits.

Q3. What are three statements prepared while making a fund flow
analysis? Explain with the help of examples.
Solution:
The three statements prepared while making a fund flow analysis are :
A) Statement of changes in Working Capital.
B) Calculation of Funds from Operations
C) Calculation of the Sources and Applications of funds.

A) Statement of changes in Working Capital.

This statement is to explain the net change in Working Capital, as arrived in the
Funds Flow Statement. All Current Assets and Current Liabilities are individually
listed. Against each account, the figure pertaining to that account at the beginning
and at the end of the accounting period is shown. The net change in its position is
also shown. The changes taking place with respect to each account should add
up to equal the net change in working capital.
Note1: Increase in current assets and decrease in current liabilities – The
acquisition of current assets and repayment of current liabilities will result in funds
outflow. The funds may be applied to finance an increase in stock, debtors etc. or
to reduce the amount owed to trade creditors, bank overdraft, bills payable.
Note2: Decrease in Current Assets and Increase in Current Liabilities: The
reduction in current assets e.g. stocks or debtor’s balanced will result in release
of funds to be applied elsewhere.

B) Calculation of Funds from Operations

During the course of trading activity, a company generates revenue mainly in the
form of sale proceeds and pays for costs. The difference between these two
items will be the amount of funds generated by the trading operations.

C) Calculation of the Sources and Applications of funds.

1) Sources:
It includes:
Funds raised from Shares, Debentures and Long-term Loans:

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 The Long-term funds are injected into the business during the year by issue of
any shares and debentures and by raising long-term loans. In any premium is
collected that is also form part of funds raised from the above said sources of
finance.
Sale off fixed assets and Long-term investments:
Any amount generated from sale of fixed assets or long-term investments is a
source of funds. While preparation of funds flow statement the gross sale
proceeds from sale is taken as source of funds.

2) Application:
The use of funds in an organization takes place in the following forms:
Repayment of Preference Capital or Debentures or Long-term Debit:
This represents the application of organisation’s funds released from business
through redemption of preference shares or debentures, repayment of long-term
loans previously made by the organization. Any reduction in equity capital is also
taken as application of funds.
Purchase of fixed assets or long-term investments:
The funds used to purchase long-term assets are usually the most significant
application of funds during the year. This group includes capital expenditure on
land, buildings, plant and machinery, furniture and fittings, vehicles and long-term
investments outside the business.
Distribution of dividends and payment of taxes:
The dividends to the shareholders and tax paid during the year is the application
of funds for the firm.
Loss from operations:
Losses made in the trading activities use up the funds. If costs exceed revenue, a
cash outflow will be experienced.

Example:
Following are the summarized Balance Sheet of “X” Ltd. As on 31st December 2004
and 2005. You are required to prepare funds flow statement for the year ended 31st
December, 2005
Liabilities 2004 2005 Assets 2004 2005
Share capital 1,00,000 1,25,000 Goodwill - 2,500
General Reserve 25,000 30,000 Buildings 1,00,000 95,000
P & L A/c 15,250 15,300 Plant 75,000 84,500
Bank Loan (Long-term) 35,000 67,600 Stock 50,000 37,000
Creditor 75,000 - Debtors 40,000 32,100
Provision for Tax 15,000 17,500 Bank - 4,000
Cash 250 300
2,65,250 2,55,400 2,65,250 2,55,400

Additional Information:
(i) Dividend of Rs. 11,500 was paid.
(ii) Depreciation written off on plant Rs. 7,000 and on buildings Rs. 5,000.
(iii) Provision for tax was made during the year Rs. 16,500.

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Schedule of changes in working capital (Rs.)
Particulars 2004 2005 Increases Decreases
Current Assets
Cash 250 300 50 -
Bank - 4,000 4,000 7,900
Debtor 40,000 32,100 - 13,000
Stock 50,000 37,000 -
------------------- ------------------ -
90,250 73,400
-------------------- -------------------

Funds Flow Statement

Sources Rs. Particulars Rs.
Funds from operations 45,050 Purchase of Plant 16,500
Issue of Shares 25,000 Income tax paid 14,000
Bank Loan 32,600 Dividend Paid 11,500
Goodwill Paid 2,500
Net Increase in Working capital 58,150
1,02,650 1,02,650

Working Notes:
Share Capital A/c
Particulars Rs. Particulars Rs.
To Balance c/d 1,25,000 By Balance b/d 1,00,000
By Bank A/c 25,000
1,25,000 1,25,000

General Reserve A/c

Particulars Rs. Particulars Rs.
To Balance c/d 30,0000 By Balance b/d 25,000
By P & L A/c 5,000
30,0000 30,0000

Provision for Taxation A/c

Particulars Rs. Particulars Rs.
To Bank A/c 14,0000 By balance b/d 15,000
To Balance c/d 17,500 By P & L A/c 16,500
31,500 31,500

Bank Loan A/c

Particulars Rs. Particulars Rs.
To Balance c/d 67,600 By Balance b/d 35,000
By Bank A/c 32,600
67,600 67,600

Land and Building A/c

Particulars Rs. Particulars Rs.
To Balance c/d 1,00,000 To Depreciation a/c 5,000
By balance c/d 95,000
1,00,000 1,00,000

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Q4. a) How costs are divided and presented in a cost sheet ?
Solution:

Total cost is divided into various sub groups each of which has been explained here:

Prime Cost:
It comprises of all direct materials, direct labour and direct expenses. It is also know
as “flat cost”

Prime Cost = Direct Materials + Direct Labour + Direct Expenses.

Works cost:
It is also know as factory cost or cost of manufacture. It is the cost of manufacturing
an article. It includes prime cost and factory overheads.

Works Cost = Prime cost + Factory Overheads.

Cost of Production:
It represents factory cost plus administrative overheads.

Cost of Production = factory Cost + Administrative Overheads.

Total Cost:
It represents cost of production plus selling & distribution overheads.

Total Cost = Cost of Production + selling & Distribution overheads

Selling price:
It is the price which includes total cost plus margin of profit (or minus loss if ) any.

Selling Price = Total cost + Profit (-Loss)

Q4 b) How costs are classified on the basis of behavior of cost?

On the basis of behavior of cost, cost is classified into the following:
1) Fixed Cost
2) Variable Cost

1) Fixed Cost
It is that portion of the total cost which remains constant irrespective of output up
to the capacity limit. It is called as a period cost as it is concerned with period. It
depends upon the passage of time. It is also referred to as non-variable cost or stand
by cost or capacity cost. It tends to be unaffected by variations in output. These costs
provide conditions for production rather than costs of production. They are created by
contractual obligations and managerial decisions. Rent of premises, Taxes and
insurance, staff salaries are examples for fixed cost.

2) Variable Cost:
This cost varied according to the output in other words, it is a cost which changes
according to the changes in output. It tends to vary in direct proportion to output. If
the output is decreased, variable cost will also decrease. It is concerned with output
of product. Therefore, it is called as a product cost. If the output is doubled, variable
cost will also be doubled. E.g. direct material, direct labour, direct expenses and
variable overheads are variable costs.

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3) Semi-Variable Cost:
This is also referred to as semi-fixed or partly variable cost. It remains constant
up to a certain level and registers change afterwards. These costs vary in some
degree with volume but not in direct or same proportion. Such costs are fixed only in
relation to specified constant conditions. For example, repairs and maintenance of
machinery, telephone charges, maintenance of building, supervision, professional tax
etc. are semi-variable costs.

5. a) What are Material and Labor Cost Standards ?

b) How variance analysis is done as to these standards?

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