Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011 ASSIGNMENT No.

Khurram Shehzad Roll No. AL538093

Note: All questions carry equal marks Q. 1- Accounting information is not an end but a mean to an end for financial making. Discuss in detail!

decision

Accounting Introduction.
Understanding and using accounting information is an important ingredient of any business undertaking. Terms such as sales revenue, net income, cost, expense, operating margin, and cash flow have clearly defined meanings and are commonly used in business-related communications. To become an active participant in the business world, you must gain a basic understanding of these and other accounting concepts. The study of financial accounting, keep in mind that business does not exist solely to earn a return for its investors and creditors that supply a companys financial resources. Business also has a responsibility to operate in a socially responsible manner and to balance its desire for financial success within this broader social responsibility. ACCOUNTING FROM A USERS PERSPECTIVE. Many people think of accounting as simply a highly technical field practiced only by professional accountants. In reality, nearly everyone uses accounting information daily. Accounting information is the means by which we measure and communicate economic events. Whether you manage a business, make investments, or monitor how you receive and use your money, you are working with accounting concepts and accounting information. Our primary goal in this book is to develop your ability to understand and use accounting information in making economic decisions. To do this, you need to understand the following: The nature of economic activities that accounting information describes. The assumptions and measurement techniques involved in developing accounting information. The information that is most relevant for making various types of decisions. Exhibit 11 illustrates how economic activities flow into the accounting process. The accounting process produces accounting information used by decision makers in making economic decisions and taking specific actions. These decisions and actions result in economic activities that continue the cycle. Exhibit 11 THE ACCOUNTING PROCESS

Accounting links decision makers with economic activitiesand with the results of their decisions

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

Types of Accounting Financial Accounting:

Financial accounting refers to information describing the financial resources, obligation, and activities of an economic entity or organization or an individual. The term financial position to describe an entitys financial resources and obligation at a point in time and the term result of operation to describe its financial activities during the year. Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their investment resources. Financial accounting information is use by many different purposes and often call general-purpose accounting information.

Management Accounting.
Management (or managerial) accounting involves the development and interpretation of accounting information intended specifically to assist management in operating the business. Managers use this information in setting the companys overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products, and making virtually all types of managerial decisions. A companys managers and employees constantly need information to run and control daily business operations. For example, they need to know the amount of money in the companys hank accounts; the types, quantities, and dollar amounts of merchandise in the companys warehouse; and the amounts owed to specific creditors. Much management accounting information is financial in nature but is organized in a manner relating directly to the decision at hand.

Tax Accounting
The preparation of income tax returns is a specialized field within accounting. To a great extent, tax returns are based on financial accounting information. However, the information often is adjusted or reorganized to conform with income tax reporting requirements. Although tax information is important for a companys successful operations and is related to financial and management accounting information, it results from a different system and complies with specialized legal requirements that relate to a companys responsibility to pay an appropriate amount of taxes. Laws and regulations governing taxation are often different from those underlying the preparation of financial and management accounting information, so it should not be a surprise that the resulting figures and reports are different. The most challenging aspect of tax accounting is not the preparation of an income tax return, but tax planning. Tax planning means anticipating the tax effects of business transactions and structuring these transactions in a manner that will minimize the income tax burden.

Basic Accounting Standards

Accounting information that is communicated externally to investors, creditor, and others user, must be prepared in accordance with standards that are understood by both the preparers and users of the information. So Standards are put into place so people can rely on the information to be a fair representation of what is purports to represent.

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

Generally Accepted Accounting Priniciples (GAAP)

Theses standards generally accepted accounting principles, often shortened to GAAP. These principles provide the general framework for determinging what information is includes in financial statement and how this informatin is to be prepared and presented. These accounting principles are developed by people, in light of what consider to be the most importatn objectives of financial reporting. The phrase generally accpeted accounting principles refers to the accounting concepts in use in the United States and also Canada, Great Britain, and a number of other countries are quite similar.

Internation Accounting Standards Board (IASB)

If an entity goes internation they would use they would use the Internation Accounting Standards Board (IASB). Different in financial reporting practices between countries can pose significant problem. IASB is playing a leading role in harmonizing accounting standards around the world. IASB issues Internation Financial Reporting Standards (IFRSs)

Objectives of Accounting
The basic objective of accounting is to provide information to the interested users to enable them to make business decisions. The necessary information, particularly in the case of external users, is provided in the basic financial statements: Profit and loss statement and Balance sheet. Besides the above sources of information, the internal users, officers and staff of the enterprise, can obtain additional information from the records of business. Thus the primary objectives of accounting can be stated as : 1. Maintenance of Records of Business transactions. 2. Calculation of Profit or Loss 3. Depiction of Financial Position. 4. Provide Information to the Users

DECISION MAKING AND THE ROLE OF ACCOUNTING 1. The nature of decisions and the decision-making process.
Decisions have to be made by all individuals every day. Decision making arises because of the need to choose between alternatives. Careful consideration must be given to all information available at the time because of the long-term consequences a decision made now will have. There are four main steps in the decision-making process:

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

(1) Identify each situation in which a decision is needed and determine the goals we wish to achieve. (2) Identify the relevant information needed to determine possible available alternatives. (3) Identify and obtain information needed to assess the consequences or outcomes of the alternatives. (4) Choose a course of action which will achieve the goals established in step 1.

2. The wide range of economic decisions made in the marketplace.

Usually, decision making involves the use of scarce economic resources which are traded in the marketplace at a price. However, many factors apart from the monetary impact, such as personal taste, social factors, environmental factors, religious and/or moral factors, and government policy, must be considered. Economic decisions usually involve an inwards or outwards flow of money or monetary equivalents. Economic decisions are made in many different markets, be they retail, wholesale, the stock market, local or international. Hence, if decision makers are to make informed decisions then some knowledge of accounting measurement systems, concepts and standards is desirable.

3. The nature of accounting and its main functions.

Accounting is a service activity. It uses words and symbols to communicate financial information useful for decision making. The terminology and symbols used have developed from the earliest known accounting records. As a profession, accounting has evolved in response to societys need for economic information to help people make economic decisions. Accounting is often called the language of business. To be effective, the recipient must understand the message that the sender intends to convey. You must learn the meaning of the words and symbols used by accountants. Many people with little knowledge of accounting must interpret accounting data. Accounting has been defined as the process of identifying, measuring, recording and communicating economic information to permit informed judgments and economic decisions. The primary purpose of accounting is to help persons make economic decisions. In our society resources must be allocated among and within all kinds of entities. Accounting information provides the basis for making decisions about resource allocation. To be useful, data must be identified, measured, recorded, classified, summarized and communicated to potential users. These are the critical elements of accounting. Accounting information is financial information about economic activities. All economic entities (e.g. businesses, government agencies, families, charitable entities) need such information because it is used for making economic decisions about those entities. An economic event of an entity is referred to as a transaction. Transactions are of two types: external and internal. Computers have had a significant impact on the accounting process and hence the recording process is much more efficient and reliable.

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

4. The potential users of accounting information.

The ultimate objective of accounting is to provide information in reports which can be used by internal and external decision makers. The preparation of this information for users (decision makers) outside the entity is called financial accounting. Such users might be investors, or creditors of the entity. The preparation of information for use by decision makers inside the entity to plan and control operations is called management accounting. Inside users means management. Management uses the same financial statements as outside decision makers, plus internal reports and summaries prepared specifically for it. Accounting reports can be special-purpose reports to meet the needs of a specific user group, or general-purpose reports for the general use of external users.

5. Using information to make simple economic decisions.

Economic decisions are made every day. Take the example from the text. A business opportunity is identified which will satisfy the ambitions of the entrepreneur. Some research reveals that there is an opening for such a business. Factors considered in the planning stage are investment needs, financing, estimates of operating costs and how much to charge for services, finally culminating in the decision to proceed with the business. To summaries, there is the establishment of implicit goals, the collection of information about the proposed business, and consideration of future consequences. As the business proceeds, accounting information is needed to monitor how well the business actually performs in comparison with the estimates, how and when to replace assets, and how income tax and goods and services tax (GST) will impact on the business.

6. The role of accounting information in the decisionmaking process.

Financial information is needed before any economic decision is made. Financial accounting information focuses on actual events. For the purpose of decision making, the past is used as a guide to future estimates of the consequences of different alternatives. The accountant can help significantly in the areas of budgeting, investigating, interpreting and communicating results for use by both internal and external decision makers.

7. The differences between accounting for management and accounting for external users.
Management accounting is that area of accounting concerned with providing financial and other information to management in an organisation to enable them to carry out their planning, controlling and decision-making responsibilities. Financial accounting is concerned with reporting general-purpose information to users external to an entity in order to help them make sound economic decisions about the entitys performance and financial position. The distinction between management and financial accounting can be identified by reference to (1) The main users of the reports,

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011 (2) The types of reports produced, (3) The frequency of reports, (4) The content and format of reports, (5) External verification.

Khurram Shehzad Roll No. AL538093

8. How the accounting profession is organized in Australia.

Accountants in Australia are represented by two professional organisations: CPA Australia and the Institute of Chartered Accountants in Australia (ICAA). Entry to these two professional bodies requires that a number of conditions be satisfied. Certified Practising Accountants (CPAs) and Chartered Accountants (CAs) are required to undertake ongoing professional development activities to maintain their level of membership.

9. The different areas of the economy in which accountants work.

Accountants generally work in one of three main areas: public accounting, commerce and industry, or not-for-profit entities, which include government departments at all levels, churches, hospitals, clubs and charities. Public accountants tend to specialize in one of four general services: auditing and assurance, taxation, advisory, and insolvency and administration. Accountants in commerce and industry may be involved in six areas: general accounting, cost accounting, accounting information systems, budgeting, taxation and internal auditing. Not-for-profit accounting involves many of the problems and decisions encountered in private industry, but may require a different approach in some respects owing to the absence of a profit motive.

10. The importance of ethics in business and accounting.

Most businesses appreciate the importance of ethical behavior. Regular unethical behaviour by managers, owners, employers and customers must eventually lead to the collapse of the entity. Financial reports and the audit and assurance services functions of accounting represent controlling influences. CPA Australia and the ICAA have issued a joint Code of Professional Conduct (CPC) to provide an authoritative guide to members on acceptable professional behavior. The rules are mandatory for members and severe penalties are imposed on members who break the rules.

Conclusions.
From a management accounting point of view the primary purpose of management is to make decisions that may be classified as marketing, production, and financial. The tactical decisions which must be preceded by strategic decisions provide the historical data from which the accountant prepares financial statements. In addition to being statements summarizing historical transactions, financial statements may be regarded as a descriptive model for decision making. Every item or element on the financial statements is the result of a decision or decisions. For each decision, there exists a management accounting tool that may be used to make a good decision. However, the management accounting tools can be used only if the management accountant is successful in providing the information demanded by the particular tool.

Q. 2- What is accounting equation? Describe its importance, Draw hypothetical accounting equation of a pharmaceutical firm and show the impact of following transactions;

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

Transaction 1: The owner deposits Rs.5000 in the checking account to begin operations Transaction 2: The business purchases a computer, on credit, for Rs.2500. Transaction 3: The business purchases office supplies using Rs.550 cash. Transaction 4: A business purchases a building for Rs.100,000 with a Rs.25,000 cash down payment and a loan for the Rs.75,000 outstanding. Transaction5: The business sells goods for Rs.1,200 cash. Transaction 6: The business pays its rent monthly rent of Rs.950 using a company check. Transaction 7: The business owner withdraws Rs.2,000 for his personal use.

Accounting equation.
From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a companys financial position. The financial position of a company is measured by the following items: Assets (what it owns) Liabilities (what it owes to others) Owners Equity (the difference between assets and liabilities) The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is: Assets = Liabilities + Owners Equity The accounting equation for a corporation is: Assets = Liabilities + Stockholders Equity Assets are a companys resourcesthings the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owners (or stockholders) equity. Liabilities are a companys obligationsamounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways: (1) as claims by creditors against the companys assets, and (2) a sourcealong with owner or stockholder equityof the companys assets. Owners equity or stockholders equity is the amount left over after liabilities are deducted from assets: Assets Liabilities = Owners (or Stockholders) Equity. Owners or stockholders equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners. If a company keeps accurate records, the accounting equation will always be in balance, meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a companys accounts. For example, when a company borrows money from a bank, the companys assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase and one asset will

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double entry accounting. A company keeps track of all of its transactions by recording them in accounts in the companys general ledger. Each account in the general ledger is designated as to its type: asset, liability, owners equity, revenue, expense, gain, or loss account.

Balance Sheet and Income Statement

The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a companys assets, liabilities, and owners (or stockholders) equity at a specific point in time. Like the accounting equation, it shows that a companys total amount of assets equals the total amount of liabilities plus owners (or stockholders) equity. The income statement is the financial statement that reports a companys revenues and expenses and the resulting net income. While the balance sheet is concerned with one point in time, the income statement covers a time interval or period of time. The income statement will explain part of the change in the owners or stockholders equity during the time interval between two balance sheets. Examples In our examples in the following pages of this topic, we show how a given transaction affects the accounting equation. We also show how the same transaction affects specific accounts by providing the journal entry that is used to record the transaction in the companys general ledger. Our examples will show the effect of each transaction on the balance sheet and income statement. Our examples also assume that the accrual basis of accounting is being followed. The owner's equity in the basic accounting equation is sometimes expanded to show the accounts that make up owner's equity: Owner's Capital, Revenues, Expenses, and Owner's Draws. Instead of the accounting equation, Assets = Liabilities + Owner's Equity, the expanded accounting equation is: Assets = Liabilities + Owner's Capital + Revenues Expenses Owner's Draws The eight transactions that we had listed under the basic accounting equation Transaction 8, are shown in the following expanded accounting equation: Accounting Equation of Pharmaceutical Firm: T Assets=
1 2 3 4 5 6 7 Cash= 5000 Computer=2500 Cash= (550) Building= 100000 Cash= 1200 Payment= (950) Cash= (2000) 105200

Liability
A/P= 2500

+ Capital
Cash= 5000

- Expense

+Revenu e

- draw

Purchase=(550) A/P=75000 Cash= 25000 Sale=1200 Rent= (950) Cash(2000) 105200

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093

Q. 3 The following balances were extracted from the books of accounts of Asad Chemicals Ltd at 30th June, 2010. Balances as at 30th June, 2009 Particulars Rupees Freehold land and building at cost 32,000 Bank overdraft 27,200 Cash in hand 1680 Inventory 74,400 Creditors 18,560 10% debentures 34,000 Dividend proposed 8% preference shares 1600 Dividend proposed ordinary shares 6000 Accrued expenses 2400 General Reserves(on 1st July, 2008 Rs.8000) 20,000 Share capital 2008% preference shares of Rs.100 each 6000 ordinary shares of Rs.10 each 20,000 60,000 Investment at cost 14,800 Motor vehicle at cost 37,200 Provision for depreciation on motor vehicle on 30th June, 2009 9600 Plant and machinery at cost 84,960 Provision for depreciation on plant and machinery on 30th June, 2009 24,160 Retained income (on 1st July, 2009 Rs 28000) 32,800 Share premium 14,240 Account receivable 25,520 The authorized share capital = 400, 8% preference shares of 100 each 1200 ordinary shares of Rs 10 each Requirements: Prepare the trial balance and balance sheet of Asad Chemicals as on 30th June, 2010 Ascertain the income for the year.

M/S Asad chemicals Trial balance as of 30-06-2009

Particulars
Land and building Bank over draft Cash in hand Inventory Creditors 10% Debenture Dividend proposed---8% Dividend proposed ordinary share Accrued expenses General Reserves Preference share Ordinary share Investment at cost Motor Vehicle Depreciation Plant and machinery Depreciation Retained Income Share premium A/R Total

Debit amount
32000 1680 74400

Credit Amount
27200 18560 34000 1600 6000 2400 20000 20000 60000

37200 (9600) 84960 (24160)

14800 27600 60800 32800 14240 25520 251040 214560

Course: Accounting and Finance (5566) Level: COL MBA Program: Spring, 2011

Khurram Shehzad Roll No. AL538093