ACCOUNTING FOR MANAGERS

Assignment - A
1.

(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 ?

"conservatism in the balance sheet is of dubious value if attained

at the
expense of conservatism in the income statement, which is far
more
significant."
A branch of accounting that requires a high degree of verification
before making a legal claim to any profit. Accounting
conservatism will recognize all probable losses as they are
discovered and most expenditures as they are incurred. Revenue
will be deferred until it is verified. Having strict revenuerecognition criteria is one of the most common forms of
accounting conservatism.
(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.

A financial statement that summarizes a company's assets,

liabilities and shareholders' equity at a specific point in
time. These three balance sheet segments give investors
an idea as to what the company owns and owes, as well as
the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
Funds flow statement and balance sheet both are the statements of
different nature. Funds flow statement is a statement summarizing the
significant financial changes which occurred between the beginning and
the end of a company's accounting period while balance sheet is a
statement of assets and liabilities at a particular point of time. Here are
some of the important differences between the two:

1. Funds flow statement include only those items which

causes changes in working capital while balance sheet

includes the assets and liabilities of the company and shows
total resources of the company.

2. Funds flow statement can be used for decision making

purpose while balance sheet is used for examining the
financial soundness of the company.

3. Funds flow statement is prepared for the use of

internal management and hence its preparation is not
mandatory, while balance sheet is for the use of external
parties like creditors, shareholders, government and hence its
preparation is mandatory for the company.

4. Funds flow statement is prepared after preparation of

balance sheet and for a relatively short period of time as
compare to balance sheet.
Balance Sheet Items
In this tutorial we discuss the first step in creating the Cash Flow Statement Classifying the items in the Balance Sheet. Basically the classification has to
be in one of the three parts of business :

Operational: Anything related to core operations of the business

(Sale, Purchase, Inventory, etc.) that has a short term (<1 Year)
impact
Investing: Anything that has a long term (> 1 year) implication
(Plant, Machinery, Capital Expenditures, etc.)
Financing: Changes in sources of funds (New Debt, Equity, etc.)

Category
Operating
Investing

Financing

Items
Net Income and Changes in working capital {-(CACL)2011 - (CA-CL)2010 }
Property and Equipment, net, Intangible Assets, net,
Goodwill
Differences of all Long-Term Liabilities and Share Holders
Equities

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 companys 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

Sundry debtors
Stock
Machinery
Furniture
Sundry creditors

Receipts
To Opening balance
To Cash sales
To Receipt from debtors
To Misc. receipts
To Loan from Dass @ 9%
per annum (taken on
1.10.2003)

On 1st April
2003
(Rs.)
1,81,000
1,50,000
2,50,000
40,000
1,10,000

Rs.
5,000
61,000
7,53,000
2,000

On 31st March, 2004

(Rs.)
1,93,000
1,40,000
?
?
1,25,000

Payments
By Payments to creditors
By wages
By Salaries
By Drawings
By Sunday office expenses
1,00,000 By Machinery purchased (on
1.10.2003)
By Closing balance
9,21,000

Rs.
3,50,000
1,60,000
1,50,000
40,000
1,10,000
95,000
16,000
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.

The procedure you would adopt to study the liquidity of a business firm is
to compare the liquidity rations of the business. You do this by comparing
the businesses most liquid assets with its short-term liabilities.

Parties Interested In Financial Statement Analysis

The analysis of financial figures contained in the company's profit and
loss account and balance sheet by employing appropriate technique is
known a financial statement analysis. Financial statement analysis is
useful to different parties to obtain the required information about the
organization. Following are the parties interested in financial statement
analysis.

1. Shareholders
Shareholders are interested in financial statement analysis to know the
profitability of the organization. Profitability shows the growth potentiality
of an organization and safety of investment of shareholders.

2. Investors And Lenders

Investors and lenders are interested to know the solvency position of an
organization. They analyze the financial statement position to know about
the safety of their investment and ability to pay interest and repayment of
principle amount on due date.

3. Creditors
Creditors are interested in analyzing the financial statements in order to
know the short term liquidity position of an organization. Creditors
analyse the financial statement to know either the organization is enable

to pay the amount of short term liabilities on due date.

4. Management
Management is interested to analyze the financial statement for
measuring the effectivenessof its policies and decisions.It analyze the
financial statements to know short term and long term solvency
position,profitability,liquidity position and return on investment from the
business.

5. Government
Government is interested to analyze the financial position in determining
the amount of tax liability. It also helps for formulating effective plans and
policies for economic growth.

Financial Ratio Analysis is the calculation and comparison of main indicators ratios which are derived from the information given in a company's financial
statements (which must be from similar points in time and preferably audited financial
statements and developed in the same manner). It involves methods of calculating
and interpreting financial ratios in order to assess a firm's performance and status.
This Analysis is primarily designed to meet informational needs of investors, creditors
and management. The objective of ratio analysis is the comparative measurement
of financial data to facilitate wise investment, credit and managerial decisions. Some
examples of analysis, according to the needs to be satisfied, are:

Horizontal Analysis - the analysis is based on a year-to-year comparison of

a firm's ratios,
Vertical Analysis - the comparison of Balance Sheet accounts either using

ratios or not, to get useful information and draw useful conclusions, and
Cross-sectional Analysis - ratios are used and compared between several
firms of the same industry in order to draw conclusions about an entity's
profitability and financial performance. Inter-firm Analysis can be categorized
under Cross-sectional, as the analysis is done by using some basic ratios of the
Industry in which the firm under analysis belongs to (and specifically,
the average of all the firms of the industry) as benchmarks or the basis for our
firm's overall performance evaluation.

6.

From the following particulars, determine the bank balance as per pass book

of Priya & Co. as on 28th February 2008.

Credit balance as per cash book on 28th February, 2008 was Rs. 15,000
Interest charged by the bank up to 28th February Rs. 500 was recorded in
the pass book.
Bank charges made by the bank Rs. 125 were also recorded only in the pass
book.
Out of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750
were cleared and credited by the bankers.
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.
Dividends on shares Rs. 4,500 were collected by the bankers directly, for
which Priya & Co. did not have any information.
7 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 20o/o pre-tax and interest return on 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.
8.

(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?

The master budget is the aggregation of all lowerlevel budgetsproduced by a company's various functional areas, and also
includes budgeted financial statements, a cash forecast, and a financing
plan.

Cash Budget
Cash budget is a financial budget prepared to calculate the budgeted cash inflows and
outflows during a period and the budgeted cash balance at the end of the period.
Cash budget helps the managers to determine any excessive idle cash or cash
shortage that is expected during the period. Such information helps the managers
to plan accordingly. For example if any cash shortage in expected in future, the
managers plan to change the credit policy or to borrow money and if excessive idle
cash is expected, they plan to invest it or to use it for the repayment of loan.

All businesses need to maintain a safe level of cash to enable them to carry on business
activities. The managers of a business need to determine that safe level. The cash
budget is then prepared by taking into consideration, that safe level of cash. Thus, if a
cash shortage is expected during a period, a plan is made to borrow cash.
Cash budget is a component of master budget and it is based on the following
components of master budget:
Schedule of expected cash collections
Schedule of expected cash payments
Selling and administrative expense budget

There are three basis approaches to valuing inventory that are allowed by Generally accepted
accounting principles (GAAP) (a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material
bought earliest in the period, while the cost of inventory is based upon the cost of material bought later
in the year. This results in inventory being valued close to current replacement cost. During periods of
inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three
approaches, and the highest net income.
(b) Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material
bought towards the end of the period, resulting in costs that closely approximate current costs. The
inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During
periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the
three approaches, and the lowest net income.
(c) Weighted Average: Under the weighted average approach, both inventory and the cost of goods

sold are based upon the average cost of all units bought during the period. When inventory turns over
rapidly this approach will more closely resemble FIFO than LIFO.

Without inflation all three inventory valuation methods would produce the same
results. However, prices do tend to rise over the years, and the company's
method costing method affects the valuation ratios.
The FIFO method assumes that the first unit in inventory is the first until sold. FIFO
gives a more accurate value for ending inventory on the balance sheet. On the other
hand, FIFO increases net income and increased net income can increase taxes owed.
The LIFO method assumes the last item entering inventory is the first sold. During
periods of inflation LIFO shows ending inventory on the balance sheet much lower than
what the inventory is truly worth at current prices, this means lower net income due to a
higher cost of goods sold.
The average cost method takes a weighted average of all units available for sale
during the accounting period and then uses that average cost to determine the value
of COGS and ending inventory.
Provisions of Accounting Standard 2 (AS-2) with regards to inventory valuation are as
follows:Inventory
As per the definition of inventory or closing stock it includes following things;
Items which are held for sale in the normal course of business that is finished stock of goods.
Work-in-progress (WIP) for such sale. Goods which are not yet finished or ready to sale.
Raw material which is not even issued for production while valuation of closing stock or
inventory. It also includes consumable stores item.

Applicability
AS-2 is not applicable to following cases.
Work in process in the construction contract business including, directly related to service contract.
Any financial instruments held as stock in trade which includes shares, debentures, bonds etc.
Other inventories like livestock, agricultural product and forest product, natural gases and mineral
oils etc.
Work in progress in the business of banking, consulting and service business. That means it
includes incomplete consulting service, merchant banking service and medical service in process.
All of above are not cover under the definition of inventory/ closing stock that's why this
accounting standard if not become applicable to above cases or in the course of business.

Cost of inventory
Valuation of inventory is made at cost or market/ net realisable value whichever
is lower. So that for the purpose of valuation cost of inventory is required to
obtain. There can be three types of cost are included in the inventory which are
as follow.
Purchase cost

1. Invoice price at which goods are purchased

2. Duties and taxes paid

3. Freight inward

4. Any other expenditure directly relating to acquiring goods

Above cost should be reduced by following

1. Duties and taxes received or receivable back from the tax authority

2. Trade discount

3. Rebate

4. Duty drawback

Cost of conversion
After purchasing the raw material or goods during the production time whatever
cost is paid or payable will be considered as conversion cost. It includes direct
labour, material and other direct expense plus allocation of fixed and variable
production overhead incurred for conversion or raw material in to finished goods.
Following things should be considered for conversion cost of the inventory.
1. Fixed production overhead it includes indirect cost for production
which remains constant without relating to numbers of units produced.
For example depreciation and maintenance of factory building.

2. Variable overhead indirect cost of production which depends on the

number of units are produced such as packing material and other
supporting material to finished product.

3. Allocation of fixed expense should be made on the bases of normal

capacity and allocation of variable cost will be done on the basis of
actual numbers of units are produced.

Other cost
It includes any other expenditure incurred to bring inventory or stock in the
present location and condition.
All three are the major part of the cost which required to be considered for
valuation of the inventory. But it should not include abnormal wastage relating to
material and labour, storage cost, administrative expenses & selling and
distribution expenses.

Methods of valuation of inventory

There are numbers of method for valuation of the inventory in the normal course
of business which includes FIFO, LIFO, weighted average cost, standard cost and
retail method. But practically following two methods only used.
FIFO (first in first out)

 Weighted average

Net realisable value

Net realisable value means normal selling price of the goods less estimated
expenditure to sale such goods. It is estimated value on the basis of reliable
evidence at time of valuation. Estimation of net realisable value can be done on
the following basis.
If the finished goods in which raw material and supply is used is sold at cost or above the cost,
then the estimated realisable value of raw material and supplies is considered more than cost.
It the finished goods in which raw material and supply are used is sold at below cost then the
estimated realisable value of raw material or supply is equal to replacement price of raw material or
supply.

Disclosure in financial statement

Valuation of inventory is made on comparison of cost and net realisable value
whichever is lower. This value should be disclosed in the financial statements.
Other things relating to inventory to be disclosed in accordance with Accounting
Standard-1 are accounting policies adopted in measuring inventory, cost formula
and classification of inventory such as finished goods, raw material & WIP and
stores and spares etc.

Assignment B
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
(one unit each 30 minutes)
Variance based on cost
standard
(one unit each 40 minutes)

Rs3150 Rs2,800 Rs3,850 Rs5,250

U*
U
U
U

Rs5,950

U Rs6,300

Rs2,800 Rs3,033 Rs1,633

F
F
F

Rs933

U Rs1,167

-0-

*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.

Question 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.
Answer:
Different standards have different impact on motivation. In the given case, where thelabor
standard recommended by the engineering firm is adopted by Geeta & company, thesixmonth operation period showed a decline in production and an unfavourable quantity
variancefor each of the six months in the said period. In the other case where the
management used theinternally set labour standard, there was a favourable quantity variance

for the first three months; thereby implying that the actual production was more than the
standard producton. In the fourthmonth, there was no variance in production and in the fifth
and sixth month, there was anunfavourable variance, thereby implying that the actual
production was less than standard production.Thus, we see that the
standard recommended by the engineering firm had a negativeimpact on motivation as it
was less than the standard production. But, in the case of internally setstandards, there was a
positive impact on motivation for first three months; neutral in the fourthmonth; and
negative impact in fifth and sixth month
Question 2: Please advise the company in reviewing the standards.
Answer:
The labour standard recommended by the consulting firm should not be used as
amotivational device as it is having a negative impact, The cost standard used for reporting
had
a positive or neutral impact for greater part of the period and a negative impact for two mont
hs.Therefore, the company should try and adopt labour standards similar to those ones.

Assignment C
1. Which of the following statements is true concerning assets?
Options

They are recorded at cost and adjusted for inflation.

They are recorded at market value for financial reporting because historical cost is arbitrary.
Accounting principles require that companies report assets on the income statement.
Assets are measured using the cost concept.

2. When the concept of conservation is applied to the Balance Sheet, it

results in
Options

Overstatement of Capital
Understatement of Capital
Overstatement of Assets
Understatement of Assets.

3. Which of the following is a correct expression of the accounting equation?

Options

Assets - Liabilities + Owners Equity

Assets = Liabilities - Owners Equity
Assets + Owners Equity = Liabilities

Assets = Liabilities + Owners Equity

4. How is the balance sheet linked to the other financial statements?

Options

The beginning retained earnings balance on the statement of retained earnings becomes the
amount of retained earnings reported on the balance sheet.
Retained earnings is added to total assets and reported on the balance sheet.
Net income increases retained earnings on the statement of retained earnings, which ultimately
increases retained earnings on the balance sheet.
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:
Options

Double entry system

Debit
Credit
Journalizing

6. If the sum of the debits and credits in a trial balance is not equal, then
Options

There is no concern because the two amounts are not meant to be equal.
The chart of accounts also does not balance.
It is safe to proceed with the preparation of financial statements.
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:
Options

Supplies, Rs7, 000; Supplies Expense, Rs2, 300.

Supplies, Rs1, 800; Supplies Expense, Rs7, 000.
Supplies, Rs2, 300; Supplies Expense, Rs6, 500.

Supplies, Rs2, 300; Supplies Expense, Rs3, 900.

8. In the statement of changes in financial position, uses of resources are defined as:
Options

Transaction debits
Fund increases
Transaction credits
Fund decreases

9. Most firms elected to define funds in the statement of changes in financial position
as:
Options

Cash
Working capital
Current assets
Owners Equity

10. The funds flow statement included:

Options

All sources and uses of resources.

Only cash transactions.
Only transactions affecting current assets.
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?
Options

Depreciation expense
Gain from asset disposal
Interest expense
Amortization of premium on debt

12. In the cash flow statement, cash is defined as: