Assignment Financial Management of sikkim manipal University

semester 1
Question 1: Inventory in a business is valued at the end of an accounting
period, at either cost or market price, whichever is lower. This is accepted
convention or a practice in accounting.
Give a small introduction on accounting conventions and elucidate all the eight
accounting conventions.
Answer:-Accounting Conventions
Accounting conventions are the rules based on which accounting takes place and these rules are
universally accepted. There are ten types of accounting conventions, namely convention of
income recognition, convention of expense, convention of matching cost and revenue,
convention of historical cost, convention of full disclosure, convention of double aspect,
convention of modifying, convention of materiality, convention of consistency, and convention
of conservatism. They are explained briefly in the following sections.
1. Convention of income recognition
According to this concept, revenue is considered as being earned on the date on which it is
realised, i.e., the date on which goods and services are transferred to customers for cash or for
promise.
A sale is considered to be made when the property in goods (ownership) is transferred from the
seller to buyer.
In case of services, revenue is said to be earned when the service has been delivered.
2. Convention of matching cost and revenue
According to this concept, revenue earned during a period is compared with the expenditure
incurred to earn that income, irrespective of whether the expenditure is paid during that period or
not. This is also called matching cost and revenue principle.
Sales revenue in 2010 Rs. 50,00,000
Expenses incurred during the year Rs. 30,00,000
Expenses actually paid during the year Rs.29,00,000
Rs.1,00,000 though not paid, is still debited to the profit and loss account of 2010.
3. Convention of historical costs
This convention says that all transactions must be recorded at a value at which they were
incurred. Such a value is called Historical Cost and this principle is called the Convention of

Cost. An asset or transaction may have many other values associated with it like market value
or replacement cost. But all assets are recorded at the cost of acquisition and this cost is the basis
for all subsequent accounting for the assets. The expenses and the goods purchased are shown at
the value at which they are incurred.
Example: Land bought for Rs. 5,00,000 will be shown at purchase price irrespective of the
market value.
4 .Convention of full disclosure
This convention requires a business to disclose the following:
All the accounting policies adopted in the preparation and presentation of financial statements.
If there is any change in the accounting policies in the current year as compared to the previous
year/s, the effects of such changes and the reason/s thereof.
The implications (in terms of money value) on the financial statements due to such change.
5. Convention of double aspect
This concept states that every transaction has two aspects. One is the receiving aspect and the
other is the giving aspect. In accounting language, these two aspects are called debit and
credit.
The claims on assets will always be equal to the assets. The claims on assets may be of the
owners or of the outsiders (creditors). While the claims of owners are called Equity or Capital,
the claims of outsiders are called Liabilities. Therefore, total liabilities are equal to total assets.
This concept gives rise to the balance sheet equation, i.e., Assets=Liabilities + Capital.
6 .Convention of materiality
This convention states that the benefit derived from measuring, recording, and processing a
transaction should justify the cost of doing it.
7. Convention of consistency
This convention requires that the accounting policies must be consistently applied year after year.
Consistency is required to help comparison of financial data from one period to another. Once a
method of accounting is adopted, it should not be changed. A change in an accounting policy
may be done only when:

It is required by law
It is felt that the new policy reflects the financial performance or position better than the
old policy.

Such changed policy must be consistently applied for the subsequent periods. As stated
under the full disclosure convention, the change in the accounting policy along with the
reason/s and the financial implications on the financial statements should be disclosed to
the users.

8. Convention of conservatism or prudence

Accountants follow the rule anticipate no profits but provide for all anticipated losses.
Whenever loss is anticipated, sufficient provisions should be made. But if a profit is anticipated,
it should not be recorded until it is actually realized.
Question 2. Write down a table with the accounts involved / the nature of
account/its affects/ debit or credit.
Please have the transactions given below and prepare the table as per the
instructions given above for each transaction.
a. 1.1.2011 Sunitha started his business with cash Rs. 5,00,000
b. 2.1.2011 Borrowed from MalathiRs. 5,00,000
c. 2.1.2011 Purchased furniture Rs. 1,00,000
d. 4.1.2011 Purchased furniture from Meenal on credit Rs. 1,50,000
e. 5.1.2011 Purchased goods for cash Rs. 50,000
f. 6.1.2011 Purchased goods from Ram on credit Rs. 2,50,000
g. 8.1.2011 Sold goods for cash Rs. 1,25,000
h. 8.1.2011 Sold goods to Shyam on credit Rs. 55,000
i. 9.1.2011 Received cash from ShyamRs. 25,000
j. 10.1.2011 Paid cash to Ram Rs. 90,000

Answer: Analysis of Transaction under Traditional Approach

Sl
no.

Accounts
Involved

Nature of
Account

Affects

Debit/Credit

Cash a/c
Capital a/c

Real
Personal

Cash is coming in
Sunita is the giver

Debit
Credit

Cash a/c
Loan from
Malathi

Real
Personal

Cash is coming in
Malathi is the giver

Debit
Credit

Furniture a/c
Cash a/c

Real
Real

Furniture is coming in
Cash is going out

Debit
Credit

Furniture a/c
Meenal a/c

Real
Personal

Furniture is coming in
Meenal is the giver

Debit
Credit

Purchase a/c
Cash a/c

Nominal
Real

Purchase is an expense
Cash is going out

Debit
Credit

Purchase a/c
Rams a/c

Nominal
Personal

Purchase is an expense
Ram is the giver

Debit
Credit

Cash a/c
Sales a/c

Real
Nominal

Cash is coming in
Sales is revenue

Debit
Credit

Shyams a/c
Sales a/c

Personal
Nominal

Shyam is the receiver

Sales is revenue

Debit
Credit

Cash a/c
Shyams a/c

Real
Personal

Cash is coming in
Shyam is the giver

Debit
Credit

Rams a/c
Cash a/c

Personal
Real

Ram is the receiver

Cash is going out

Debit
Credit

Question 3. From the given trial balance, draft an Adjusted Trial Balance.
Adjustments:
1. Charge depreciation at 10% on Buildings and Furniture and fittings.
2. Write off further bad debts 1000
3. Taxes and Insurance prepaid 2000
4. Outstanding salaries 5000
5. Commission received in advance1000
Answer:-

Solution: Ledger accounts

DrFurniture and fittings a/c
Particulars

Cr.

Rs.

To bal b/d

Particulars

Total

15000 By Depreciation
By bal c/d
15000 Total

To bal b/d

13500

DrBuildings a/c
Particulars

1500
13500
15000

Cr.
Rs.

To bal b/d

Particulars

Total

500000 By Depreciation
By bal c/d
500000 Total

To bal b/d

450000

DrBad Debts a/c

Particulars

Rs.

Rs.
50000
450000
500000

Cr.
Rs.

Particulars

Rs.

To bal b/d
To Sundry
Debtors
Total

2000 By bal c/d

1000

3000

3000

3000

To bal b/d

3000

Total

DrSundry Debtors a/c

Particulars

Cr.

Rs.

Particulars

To bal b/d
To bal c/d
Total

25000 By Bad Debts

By bal c/d
25000 Total

To bal b/d

24000

DrTaxes and Insurance a/c

Particulars

1000
24000
25000

Cr.

Rs.

Particulars

To bal b/d
To bal c/d
Total

5000 By Prepaid taxes

and Insurance
By bal c/d
5000 Total

To bal b/d

3000

DrPrepaid taxes and Insurance a/c

Particulars

Rs.

Rs.
2000
3000
5000

Cr.

Rs.

Particulars

Rs.

To Taxes and
Insurance

2000 By bal c/d

2000

Total

2000 Total

2000

To bal b/d

2000

DrSalaries a/c
Particulars
To bal b/d
To Outstanding
Salaries
Total

Cr.
Rs.

Particulars

Rs.

20000 By bal c/d

5000

25000

25000 Total

25000

To bal b/d

25000

DrDepreciation a/c
Particulars

Cr.
Rs.

Particulars

To Furniture and
fittings
To Buildings
Total

50000
51500 Total

To bal b/d

51500

1500 By bal c/d

DrCommission a/c
Particulars

Rs.
51500
51500

Cr.
Rs.

To Commission
received in
advance
To bal c/d
Total

Particulars

Rs.

1000 By bal c/d

5000

4000
5000 Total

5000

By bal b/d
DrCommission received in advance a/c
Particulars

Rs.

4000
Cr.

Particulars

Rs.

To bal c/d

1000 By Commission

1000

Total

1000 Total

1000

By bal b/d

1000

Adjusted Trial Balance as on 31.03.2013

Debit Balances
Rs.
Adjustments
Adjusted amount
Furniture and fitings
15000
-1500
13500
Buildings
500000
-50000
450000
Sales returns
1000
1000
Bad debts
2000
+1000
3000
Sundry debtors
25000
-1000
24000

Purchases
Advertising
Cash
Taxes and insurance
General expenses
Salaries
Depreciation
Prepaid taxes and
insurance
TOTAL
Credit Balances
Bank Over Draft
Capital Account
Purchase return
Sundry Creditors
Commission
Sales
Outstanding Salaries
Commission received in
advance
TOTAL

90000
20000
10000
5000
7000
20000

-2000
+5000
1500+50000
2000

695000
Rs.
16000
400000
4000
35000
5000
235000

90000
20000
10000
3000
7000
25000
51500
2000
700000

-1000
5000
1000

695000

16000
400000
4000
35000
4000
235000
5000
1000
700000

Question 4. The reports prepared in financial accounting are also used in the
management accounting. But there are few major differences between financial
accounting and management accounting.
Explain the differences between financial accounting and management
accounting in various dimensions.
Answer: Distinction Between Management Accounting and Financial Accounting
Financial accounting is the preparation and communication of financial information to
outsiders such as creditors, bankers, government, customers, etc. Another objective of
financial accounting is to give complete picture of the enterprise to shareholders. Management
accounting on the other hand, aims at preparing and reporting the financial data to the
management on regular basis. Management is entrusted with the responsibility of taking
appropriate decisions, planning, performance evaluation, control, management of costs, cost
determination, etc. For both financial accounting and management accounting the financial
data are the same. The reports prepared in financial accounting are also used in management
accounting. But there are a few major differences between financial accounting and
management accounting

Differences Between Financial Accounting and Management Accounting

Dimension
Users

Financial accounting
The primary users of financial accounting

Management accounting
The primary users of

information are external users like

shareholders, creditors, government
authorities, employees, etc.

management accounting are

internal users like top, middle,
and lower level managers.

Purpose

Reporting financial performance and

financial position to enable the users to take
financial decisions.

To help the management in

planning, decision making,
monitoring, and controlling.

Need

It is a statutory requirement. What to report,

how to report, how much to report, when to
report, in which form to report, etc. are
stipulated by Law or Standards.

It is optional. What to report,

how to report, how much to
report, when to report, in
which form to report, etc. are
decided by the management as
per the needs of the company
or management.

Expression of
information

Accounting information is always expressed

in terms of money.

Management accounting may

adopt any measurement unit
like labour hours, machine
hours, or product units for the
purpose of analysis.

Reporting
timing and
frequency

Financial data is presented for a definite

period, say one year or a quarter.

Reports are prepared on a

continuous basis, monthly,
weekly, or even daily.

Time
perspective

Financial accounting focuses on historical

data.

Management accounting is
oriented towards the future.

Sources of
principles

Financial accounting is a discipline by itself

and has its own principles, policies and
conventions (GAAP).

Management accounting
makes use of other disciplines
like economics, management,
information system, operation
research, etc.

Reporting entity

Overall organisation

Responsibility centres within

the organisation

Form of reports

Income statement (Profit and Loss a/c)

Balance sheet
Cash flow statement

MIS reports
Performance reports
Control reports
Cost statements
Variance statements
Budgets
Estimate statements
Flowcharts

Question 5. Draw the Balance Sheet for the following information provided by
SandeepLtd...
a. Current Ratio: 2.50
b. Liquidity Ratio: 1.50
c. Net Working Capital: Rs.300000
d. Stock Turnover Ratio: 6 times
e. Ratio of Gross Profit to Sales: 20%
f. Fixed Asset Turnover Ratio : 2 times
g. Average Debt collection period: 2 months
h. Fixed Assets to Net Worth: 0.80
i. Reserve and Surplus to Capital: 0.50
Answer: -Working Notes
If Current Liabilities = 1
Current Assets = 2.5
Working Capital (2.5 -1) = 1.5
Therefore Current Assets (2.5/1.5) x
300000
Current Liabilities (1/1.5) x300000

= 300000
= 500000
= 200000

Liquidity Ratio = 1.5

=300000
Current Liabilities = 200000
=200000
Therefore Liquid Asset (200000 x 1.5)
Inventories (Current asset Liquid asset)
Stock Turnover Ratio = 6 times
Cost of sales (6 x 200000)
Gross Profit Ratio = 20%
Gross Profit
If Sales is 100; Gross Profit is 20
Hence cost of sales is (100-20) = 80
Therefore Gross Profit is (20/80) x 1200000
Sales ( Cost of Sales + Gross Profit)

= 1200000
= 300000
=1500000

Fixed Asset Turnover ratio = 2 times

(Cost of sales/Fixed assets)
Therefore Fixed Assets (1200000/2)

= 600000

Debtors Collection Period = 2 months

(Months in a year /Debtors turnover)
Debtors Turnover Ratio (12/2) = 6 times
(Sales/ Debtors)
Debtors (1500000/6)
Fixed Assets to Shareholders Net worth =
0.80
Share holders Net worth(600000/0.80)

= 250000

=750000

Reserves and Surplus to Capital = 0.50

If capital is 1: reserves and Surplus is 0.5
Reserves and Surplus + Capital =
Shareholders Net worth (0.5 +1 =1.5)
Reserves and Surplus (7500000 x(0.5/1.5)
Therefore share Capital

=250000
=500000

Balance sheet
Liabilities
Capital
Reserves and Surplus
Long-term Debt
Current Liabilities
Total

Rs.
500000
250000
150000
200000
1100000

Assets
Fixed Assets
Inventories
Debtors
Bank
Total

Rs.
600000
200000
250000
50000
1100000

Question 6. Write the main differences between cash flow analysis and fund flow analysis.

Following is the balance sheet for the period ending 31st

March 2011 and 2012. If the current years net loss is
Rs.38,000, Calculate the cash flow from operating
activities. 31st MARCH
2011
Short-term loan to 15,000

2012
18,000

employees
Creditors
Provision for

30,000
1,200

8,000
-

doubtful debts
Bills payable
Stock in trade
Bills receivable
Prepaid expenses
Outstanding

18,000
15,000
10,000
800
300

20,000
13,000
22,000
600
500

expenses

Answer:Difference between Cash Flow Analysis and Fund Flow Analysis

Cash Flow Analysis

Fund Flow Analysis

1. It is concerned only with the change in cash

1. It is concerned with change in working

position

capital position between two balance sheet

dates.

2. It is merely a record of cash receipts and

2. Net effect of receipts and disbursements are

disbursements

recorded.

3. Cash is part of working capital and therefore

3. An improvement in funds positions need not

an improvement in cash position results in

result in improvement in cash position

improvement in the funds position

4. It is cash based

4. It is accrual based

Solution:

Statement Showing Cash Flow from Operating Activities

Net Loss

(38,000)

Add: Decrease in current assets

Decrease in stock

2000

Decrease in prepaid expenses

200

Increase in current liabilities

Increase in outstanding expenses

200

Increase in bills payable

2000

+4400
(33600)

Less: Increase in current assets

Increase in short-term loan to the employees

3000

Increase in bills receivable

10000

Decrease in creditors

22000
1200

(36,200)

Decrease in provision for doubtful debts

Net cash lost in operating activities

(69,800)