AMITY SCHOOL OF DISTANCE LEARNING

Post Box No. 503, Sector-44

Noida – 201303

ACCOUNTING FOR MANAGERS

Assignment A
Marks 10
Answer all questions.

l. (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 ?
(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.

2. (a) Discuss the importance of ratio analysis for inter-firm and intra-firm comparisons
including circumstances responsible for its limitations .If any
(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.

3. 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%
4. Bose has supplied the following information about his business to Summary of Cash
book for the year ended 31st March, 2004 is as follows :

Assets and Liabilities On 1st April 2003 On 31st March, 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

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 2,000By Drawings
40,000
To Loan from Dass @ 9% By Sunday office expenses
1,10,000
per annum (taken on 1.10.2003) 1,00,000 By Machinery purchased (on
95,000
1.10.2003)
16,000
By Closing balance
9,21,000 9,21,000

Discount allowed totaled 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 31sl March, 2004 and the
balance sheet as on that date.

5. What procedure would you adopt to study the liquidity of a business firm?
Who are all the parties interested in knowing this accounting information?
What ratio or other financial statement analysis technique will you adopt for this.
 Assignment B
Marks 10
Answer all questions.

1. 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 upto 28th February.
f) Dividends on shares Rs. 4,500 were collected by the bankers directly, for which Priya &
Co. did not have any information.

2. 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 1.50
overheads

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 20o/o 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.

3. (a) What is Master Budget? How it is different from Cash Budget?

(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?
4. Case study: Please read the case study given below and answer questions given at the end.

Case Study

Labor standards

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. he 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
cost system and answering questions. The new standards were not related to incentive pay but
were introduced when wages were increased to Rs7 per hour.

The standard cost system was implemented on January 1, 19--. At the end of six months of
operation, these statistics on labor performance were presented to executive management:
 January February March April May June

Production (units) 5,100 5,000 4,700 4,500 4,300 4,400

Direct labor hours 3,000 2,900 2,900 3,000 3,000 3,100

Quantity Variances:

Variance based on labor standard Rs3150 Rs2,800 Rs3,850 Rs5,250 Rs5,950

Rs6,300 U
(one unit each 30 minutes) U* U U U U
Variance based on cost standard Rs2,800 Rs3,033 Rs1,633 Rs933 Rs1,167
-0-
(one unit each 40 minutes) F F F U U
*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.

 Assignment C
Marks 10
Answer all questions.

Tick Marks (√) the most appropriate answer

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 Rs1800 of supplies on hand at January 1, 2006. During 2006, supplies with a
cost of Rs7, 000 were purchased. At December 31, 2006, the actual supplies on hand
amounts to Rs2, 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 (Rs6, 200) and the sales price of
the merchandise (Rs6, 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 understand 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
conclusions 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 Rs396,000 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 Rs30,970 were incurred. A performance report
utilizing flexible budgeting would report a flexible budget variance for indirect labor of:-

a. Rs170 unfavorable.
b. Rs170 favorable.
c. Rs2, 030 unfavorable.
 d. Rs2, 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 dependent on a number of estimates. When a change in an estimate is

required, the change is made:

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.
d. all of the above.
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.