M.B.A. DEGREE EXAMINATION, APRIL/MAY 2013

208 MBT - Financial and Management Accounting

(Regulation 2013) Time : Three hours Maximum : 100 Marks

Answer ALL questions

PART A (10 2 = 20 Marks) 1. Explain Accounting Cycle. 2. What is depreciation? 3. Explain Profit/volume Ratio. 4. Define Cash Flow Statement. 5. Define Cost Accounting. 6. What are the elements of cost? 7. What is Marginal Costing? 8. Define a cost centre. 9. Explain cost-volume-profit analysis. 10. Give various sources of short term working capital

PART B --(5 x 16 = 80). 11. (a). Explain the various accounting concepts and conventions used in the preparation of

accounts.

(or)

(b). From the following Trial Balance of ABC co., Prepare Trading, Profit and Loss account and Balance Sheet as on 31-12-1995.

Rs. Rs.

Cash in hand 2,400

Purchases 2,40,000

Stock as on 1-1-95 70,000

Debtors 1,20,000

Plant & Machinery 30,000

Furniture 30,000

Bills Receivable 40,000

Rent & Taxes 20,000

Wages 32,000

Salaries 37,600

Capital 2,00,000

Bills Payable 44,000

Creditors 48,000

Sales 4,00,000

6,92,000 6,92,000

Adjustments: (i) Closing inventory as on 31-12-1995 Rs.50,000. (ii) Outstanding wages Rs. 5,000. (iii) Goods withdrawn for Personal use Rs. 2000. (iv) Depreciation on plant and machinery@ 10% and on furniture @5%.

12. (a) Evaluate any two methods calculating Depreciation. (or) (b) Sankesh & Co. purchased a machine on 1st January 2005 for Rs. 9,250 and immediately spent Rs.750 on its creation. On 1st July 2006, it purchased another machine for Rs. 2,500 and on 1st July 2007, it sold off the first machine purchased in 2005 for Rs. 7,000 and on the same date it purchased another machine for Rs. 6,250. On 1st July, 2011 the second machine purchased for Rs. 2,500 was also sold for Rs. 500. Depreciation was provided on the machinery on straight line method at10%. Give machinery account for 4 years commenting from 1st January, 2005.

13. (a) A Fund Flow statement is a better substitute for an Income Statement- Discuss.

(or)

(b) From the following Balance Sheets of Aravind Ltd., you are required to prepare the

a) Fund Flow Statement

b) Cash Flow Statement

Liabilities 1989 Rs.

1990 Rs.

Assets 1989 Rs.

1990 Rs.

Share capital Trade creditors Profit&Loss A/c

4,00,000 1,40,000 20,000

5,00,000 90,000 46,000

Cash Debtors Stock Land

60,000 2,40,000 1,60,000 1,00,000

94,000 2,30,000 1,80,000 1,32,000

5,60,000 6,36,000 5,60,000 6,36,000

14.(a). Define Marginal Cost. Marginal costs are primarily used in guiding decision yet to be made. Explain the statement giving examples.

(Or)

(b). From the following information, calculate

1. p/v ratio

2. Break even point

3. Number of unit that must be sold to earn a profit of Rs.60,000 per year

4. Number of unit that must be sold to earn a profit of Rs.90,000 per year

5. Number of units that must be sold to earn a net income of 10% on sales.

Sales price -Rs.20 per unit

Variable cost -Rs.14 per unit

Fixed Cost -79,200

15.(a). what is meant by budget? What are the techniques involved in cash budgeting?

(or)

(b). From the following data you are received to calculate the various Material Variance:

Standard price of X product Rs. 20, standard quantity of X product 100kg.

Standard price of Y product Rs. 30, standard quantity of Y product 200kg.

Standard Price of Z product Rs. 40, standard quantity of Z product 300kg.

Actual price of X product Rs. 15, actual quantity of X product 150kg.

Actual price of Y product Rs. 20, actual quantity of Y product 300kg.

Actual price of Z product Rs.30, actual quantity of Z product 500kg.

M.B.A. DEGREE EXAMINATION, APRIL/MAY 2013

208 MBT - Financial and Management Accounting

(Regulation 2013) Time : Three hours Maximum : 100 Marks

Answer ALL questions

PART A (10 2 = 20 Marks)

1. Explain Accounting Cycle.

Ans. The sequence of six steps in the processing of financial transactions (from the time they occur to their inclusion in financial statements) pertaining to an accounting period. These steps are: (1) analyzing the transactions as they occur, (2) recording them in the journals, (3) posting debits and credits from journal entries to the general ledger, (4) adjusting the assets with a trial balance, (5) preparing financial statements, and (6) closing the temporary accounts.

2. What is depreciation?

Ans. A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.

3. Explain Profit/volume Ratio?

Ans. CVP analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This break-even point can be an initial examination that precedes more detailed CVP analysis.

4. Define Cash Flow Statement?

Ans. In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.

5.Define Cost Accounting?

Ans. "Cost accounting is an expanded phase of the general or financial accounting of a business concern which provides management promptly with the cost of producing or selling each article or of rendering a particular service". In other words, cost accounting is a step further to and a refinement of financial accounting. in which cost of manufacturing and selling each product or job or rendering service is determined, not at the time of accounting period but at the time when the product is manufactured or any service is rendered.

6.What are the elements of cost?

Ans.There are broadly three elements of cost - (1) material, (2) labor and (3) expenses.

7.What is Marginal Costing?

Ans.The increase or decrease in the total cost of a production run for making one additional unit of an item. It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for. Marginal costs are variable costs consisting of labor and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses). In companies where average costs are fairly constant, marginal cost is usually equal to average cost.

8.Define a cost centre.

Ans.A defined area, machine, or person to whom direct and indirect costs are allocated. A distinctly identifiable department, division, or unit of an organization whose managers are responsible for all its associated costs and for ensuring adherence to its budgets. Also called cost pool or expense center. See also profit center and revenue center.

9. Explain cost-volume-profit analysis?

Ans. cost-volume-profit (CVP) analysis is a alternative term for breakeven analysis. Study of the mathematical relationship between costs and sales revenue, under a given set of assumptions regarding the firm's fixed costs and variable costs. In this financial analysis, the objective is to determine (in manufacturing) number of products that must be sold at a given price to cover the costs, or (in project financing) number of months or years required by the forecasted total net cash flowto equal estimated total project cost. An integral part of financial planning, it is performed either by using a breakeven-formula or by drawing a breakeven graph.

10.Give various sources of short term working capital?

Ans. Bank loan

Commercial paper

Trade financing

Receivable factoring

PART B --(5 x 16 = 80). 11(a). Explain the various accounting concepts and conventions used in the preparation of accounts.

Ans. Accounting concepts and conventions evolved as a result of information needed by the users of accounting information which became conflicting over time because of different methodology or procedure used in its preparation .it was thereby adopted to ensure that accounting information is presented accurately and consistently Accounting concepts and conventions could be defined as ground or laid down rules of accounting that should be followed in preparation of all accounts and financial statements. There are different kinds of accounting concepts and conventions The concepts include

i. GOING CONCERN CONCEPT II. ENTITY CONCEPT III. MATCHING OR ACCURAL CONCEPT IV. REALISATION CONCEPT V. HISTORICAL COST CONCEPT VI. DUAL ASPECT CONCEPT

THE VARIOUS KINDS OF CONVENTION INCLUDE

i. CONSISTENCY ii. MATERIALITY iii. PRUDENCE OR CONSERVATISM iv. OBJECTIVITY v. DISCLOSURE

11(b). From the following Trial Balance of ABC co., Prepare Trading, Profit and Loss account and Balance Sheet as on 31-12-1995.

Rs. Rs.

Cash in hand 2,400

Purchases 2,40,000

Stock as on 1-1-95 70,000

Debtors 1,20,000

Plant & Machinery 30,000

Furniture 30,000

Bills Receivable 40,000

Rent & Taxes 20,000

Wages 32,000

Salaries 37,600

Capital 2,00,000

Bills Payable 44,000

Creditors 48,000

Sales 4,00,000

6,92,000 6,92,000

Adjustments: (v) Closing inventory as on 31-12-1995 Rs.50,000. (vi) Outstanding wages Rs. 5,000. (vii) Goods withdrawn for Personal use Rs. 2000. (viii) Depreciation on plant and machinery@ 10% and on furniture @5%.

11 b.Ans. Trading A/c of ABC co., As on 31-12-1995

Particulars Amount Amount Particulars Amount Amount

To (Opening) Stock 70000 By Sales 400000

To Purchas 240000 By Closing Stock 50000 To Wages 32000 Add O/s Wages 5000 37000 To Gross Profit 103000

450000 450000

P & L A/c of ABC co., As on 31-12-1995

Particulars Amount Amount Particulars Amount Amount

To Salary 37600 By Gross Profit 103000

To Depreciation Plant & Mech. 3000 Furniture 1500 4500

To Rent & Taxes 20000 To Drawings 2000

38900 103000 103000

Balance Sheet of ABC co., As on 31-12-1995

Liabilities Amount Amount Assets Amount Amount Capital 200000 Cash in Hand 2400 Less Drawing 2000 P &M 30000

198000 Less Dep 10 % 3000 27000 Less Net Loss 38900 159100

Furniture 30000 Bills Payable 44000 Less Dep 5 % 1500 28500 Creditors 48000 Debtors 120000 O/s Wages 5000 Bills payable 40000 Suspense A/c 11800 C/s Stock 50000

267900 267900

12(a) Evaluate any two methods calculating Depreciation? Ans.

Straight-line Method of Depreciation

In straight line depreciation method, depreciation is charged uniformly over the life of an asset. In this method, residual value of the asset is subtracted from its cost to get the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of periods to get the depreciation expense per period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method.

Formula

The formula to calculate the straight-line depreciation of an asset for a period is:

Depreciation =Cost Salvage Value

Life in Number of Periods

Declining balance method of depreciation is a technique of accelerated depreciation in which the amount of depreciation that is charged to an asset declines over time. In other words, more depreciation is charged during the beginning of the life time and less is charged during the end.

Why more depreciation is charged in beginning years? The reason is that assets are usually more productive when they are new and their productivity declines gradually. Thus, in the early years of their life time, assets generate more revenue as compared to the revenue generated in later years of their life. According to the matching principle of accounting, we should depreciate more of the asset's cost in early years to match the depreciation expense with the revenue earned from the use of the asset.

Formula and Calculation Procedure

Declining balance depreciation is calculated using the following formula:

Depreciation = Depreciation Rate Book Value of Asset

Depreciation rate is given by the following formula:

Depreciation Rate = Accelerator Straight Line Rate.

12.(b) Sankesh & Co. purchased a machine on 1st January 2005 for Rs. 9,250 and immediately spent Rs.750 on its creation. On 1st July 2006, it purchased another machine for Rs. 2,500 and on 1st July 2007, it sold off the first machine purchased in 2005 for Rs. 7,000 and on the same date it purchased another machine for Rs. 6,250. On 1st July, 2011 the second machine purchased for Rs. 2,500 was also sold for Rs. 500. Depreciation was provided on the machinery on straight line method at10%. Give machinery account for 4 years commenting from 1st January, 2005.

Leger A/c Machinery A/c

Dr Cr Date Particulars Amount Date Particulars Amount

1st Jan 2005 To Bank A/c 9250 31 Dec 2005 By Dep Mech1 925 31 Dec 2005 By Bank A/c 750 By Bal C/d 7575 9250 9250

1st Jan 2006 To Bal B/d 7575 31 Dec 2006 By Dep Mech1 758 To Bank A/c 2500 31 Dec 2006 By Dep Mech2 250 31 Dec 2006 By Bal C/d 9067

10075 10075

1st Jan 2007 To Bal B/d 9067 31 Dec 2007 By Bank A/c 7000 1st Jan 2007 To P & L A/c 1476 31 Dec 2007 By Dep Mech1 341 6250 31 Dec 2007 By Dep Mech2 225 31 Dec 2007 By Dep Mech3 313 31 Dec 2007 By Bal C/d 8914

16793 16793

1st Jan 2008 To Bal B/d 8914 31 Dec 2007 By Dep Mech2 225 31 Dec 2007 By Dep Mech3 594 31 Dec 2007 By Bal C/d 8095

8914 8914

13(a) A Fund Flow statement is a better substitute for an Income Statement- Discuss. Every business establishment usually prepares the balance sheet at the end of the fiscal

year which highlights the financial position of the yester years It is subject to change in the volume of the business not only illustrates the financial structure but also expresses

the value of the applications in the liabilities side and assets side respectively. Normally,

Balance sheet reveals the status of the firm only at the end of the year, not at the

beginning of the year. It never discloses the changes in between the value position of the

firm at two different time periods/dates.

The method of portraying the changes on the volume of financial position is the statement

fund flow statement. To put them in nutshell, fund between two different time periods. It is

further illustrated that the changes in the financial position or the movement or flow of fund

A report on the movement of funds or working capital. In a narrow sense the term fund

means cash and the fund flow statement depicts the cash receipts and cash disbursements/

payments. It highlights the changes in the cash receipts and payments as a cash flow

statement in addition to the cash balances i.e., opening cash balance and closing cash

balance. Contrary to the earlier, the fund means working capital i.e., the differences

between the current assets and current liabilities.

The term flow denotes the change. Flow of funds means the change in funds or in

working capital. The change on the working capital leads to the net changes taken place

on the working capital i.e., especially due to either increase or decrease in the working

capital. The Various Facets of Fund flow statement are as follows:

Statement of sources and application of funds

Statement changes in financial position

Analysis of working capital changes and

Movement of funds statement

Objectives of fund flow statement analysis: (1) It pinpoints the mobilization of resources and the further utilization of resources (2) It highlights the financing of the general expansion of the business firms

(3) It exemplifies the utilization of debt finance in the structure of financing (4) It portrays the relationship between the financing, investment, liquidity and dividend decision of the firm during the given point of time.

Limitations of income statement

Income statements should help investors and creditors determine the past financial performance of the enterprise, predict future performance, and assess the capability of generating future cash flows through report of the income and expenses. However, information of an income statement has several limitations:

Items that might be relevant but cannot be reliably measured are not reported (e.g. brand recognition and loyalty).

Some numbers depend on accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).

Some numbers depend on judgments and estimates (e.g. depreciation expense depends on estimated useful life and salvage value).

13. b.From the following Balance Sheets of Aravind Ltd., you are required to prepare the

a) Fund Flow Statement b) Cash Flow Statement

Liabilities 1989 Rs.

1990 Rs.

Assets 1989 Rs.

1990 Rs.

Share capital Trade creditors Profit& Loss A/c

4,00,000 1,40,000 20,000

5,00,000 90,000 46,000

Cash Debtors Stock Land

60,000 2,40,000 1,60,000 1,00,000

94,000 2,30,000 1,80,000 1,32,000

5,60,000 6,36,000 5,60,000 6,36,000

A)Fund Flow Statement

Schedule of changes in working capital

Particulars 1989 Rs.

1990 Rs.

Changes in Working Capital Increase Decrease

Current Assets Cash Debtors Stocks

Total A

Current Liabilities Trade creditors Total B

Working capital(A-B)

Increase in Working capital

60,000 2,40,000 1,60,000

94,000 2,30,000 1,80,000

34,000 -

20,000

50,000

-

10,000 -

-

94,000

4,60,000 5,04,000

1,40,000

90,000 1,40,000 90,000

3,20,000 94,000

4,14,000 -

4,14,000 4,14,000 1,04,000 1,04,000

Adjusted profit &Loss A/C

Particulars Rs. Particulars Rs.

To balance c/d (closing profit &lossA/C

46,000

By balance b/d (opening profit &loss A/C) By funds from operation( bal.fig)

20,000

26,000

46,000 46,000

Land A/C

Particulars Rs. Particulars Rs. To balance b/d To Bank (purchase bal.fig)

1,00,000 32,000

By balance c/d

1,32,000

1,32,000 1,32,000

Fund Flow Statement

Sources of funds Rs. Application of Funds Rs.

Fund from operation Issue of shares

26,000 1,00,000

Purchase of land Increase in working capital

32,000 94,000

1,26,000 1,26,000

B) Cash flow statement

Statement showing the cash from operation

Particulars Rs. Particulars Rs. Funds from operation (46,000-20,000) Decrease in debtors(2,40,000-2,30,000)

Cash out flow on account of operations

26,000

10,000

34,000

Decrease in creditors (1,40,000-90,000)

Increase in stock (1,80,000-1,60,000)

50,000

20,000

70,000 1,32,000

Aravind Ltd. Cash flow statement for the year 1990

Sources of cash Rs. Application of cash Rs. Opening Balance of cash Issue of shares (5,00,000-4,00,000)

60,000 1,00,000

Cash out flow on account of operations Purchase of land Closing balance of cash

34,000 32,000 94,000

70,000 1,32,000

14.(a). Define Marginal Cost. Marginal costs are primarily used in guiding decision yet to be made. Explain the statement giving examples.

In economics and finance, marginal cost is the change in the total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. For example, if producing additional vehicles requires building a new factory, the marginal cost of the extra vehicles includes the cost of the new factory. In practice, this analysis is segregated into short and long-run cases, so that over the longest run, all costs become marginal. At each level of production and time period being considered, marginal costs

include all costs that vary with the level of production, whereas other costs that do not vary with production are considered fixed.

The decision to buy, discontinuing present production, depends on whether the capacity that is released by the non-manufacture of the component can be profitably utilized, elsewhere, or not. Role of Fixed Costs: Fixed costs are sunk costs. What is sunk cannot be retrieved in the same condition. Fixed costs cannot be reversed, without loss. Machinery purchased, already, cannot be sold, without loss, in terms of money. Fixed costs that are incurred are not relevant for our decision-making. Costs that will be incurred, in any event, should not be considered in the decision-making. In other words, the existing fixed costs, which cannot be saved, do not influence the decision as those costs are already incurred and cannot be reversed, whether the firms makes or buys. Decision-making between purchase and continuation of production: Decision depends on whether the machinery that is freed would remain idle or can be utilized profitably, elsewhere. Machinery turns idle: Let us consider the first situation. If the machinery remains idle, existing fixed costs related to that machinery is not to be considered for decision-making. Compare variable costs only with the market price of the material. If we stop making the component in the factory and buy it from the market, what we can save is only future variable costs, but not the fixed costs, already incurred. The firm would continue to incur costs on the idle machine.

14.(b). From the following information, calculate

1. p/v ratio

2. Break even point

3. Number of unit that must be sold to earn a profit of Rs.60,000 per year

4. Number of unit that must be sold to earn a profit of Rs.90,000 per year

5. Number of units that must be sold to earn a net income of 10% on sales.

Sales price -Rs.20 per unit

Variable cost -Rs.14 per unit

Fixed Cost -79,200

Ans.

1. p/v ratio = contribution /sales x100

2. Break even point

Break-even is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point can be calculated by equation method, contribution method or graphical method. The equation method is based on the cost-volume-profit (CVP) formula:

px = vx + FC + Profit

Where, p is the price per unit, x is the number of units, v is variable cost per unit and FC is total fixed cost.

Calculation

BEP in Sales Units

At break-even point the profit is zero therefore the CVP formula is simplified to:

px = vx + FC

Solving the above equation for x which equals break-even point in sales units, we get:

Break-even Sales Units = x = FC

p v

BEP in Sales Dollars

Break-even point in number of sales dollars is calculated using the following formula:

Break-even Sales Dollars = Price per Unit Break-even Sales Units

15.(a). what is meant by budget? What are the techniques involved in cash budgeting? A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms.

The Major Capital Budgeting Techniques A variety of measures have evolved over time to analyze capital budgeting requests. The better methods use time value of money concepts. Older methods, like the payback period, have the deficiency of not using time value techniques and will eventually fall by the wayside and be replaced in companies by the newer, superior methods of evaluation.

Very Important: A capital budgeting analysis conducts a test to see if the benefits (i.e., cash inflows) are large enough to repay the company for three things: (1) the cost of the asset, (2) the cost of financing the asset (e.g., interest, etc.), and (3) a rate of return (called a risk

premium) that compensates the company for potential errors made when estimating cash flows that will occur in the distant future.

Let's take a look at the most popular techniques for analyzing a capital budgeting proposal.

1. Payback Period

Alright, let's get this out of the way up front: the Payback Period isn't a very good method. After all, it doesn't use the time value of money principle, making it the weakest of the methods that we will discuss here. However, it is still used by a large number of companies, so we'll include it in our list of popular methods.

What is the payback period? By definition, it is the length of time that it takes to recover your investment.

For example, to recover $30,000 at the rate of $10,000 per year would take 3.0 years. Companies that use this method will set some arbitrary payback period for all capital budgeting projects, such as a rule that only projects with a payback period of 2.5 years or less will be accepted. (At a payback period of 3 years in the example above, that project would be rejected.) The payback period method is decreasing in use every year and doesn't deserve extensive coverage here.

2. Net Present Value

Using a minimum rate of return known as the hurdle rate, the net present value of an investment is the present value of the cash inflows minus the present value of the cash outflows. A more common way of expressing this is to say that the net present value (NPV) is the present value of the benefits (PVB) minus the present value of the costs (PVC)

NPV = PVB - PVC

15. (b). From the following data you are received to calculate the various Material Variance:

Standard price of X product Rs. 20, standard quantity of X product 100kg.

Standard price of Y product Rs. 30, standard quantity of Y product 200kg.

Standard Price of Z product Rs. 40, standard quantity of Z product 300kg.

Actual price of X product Rs. 15, actual quantity of X product 150kg.

Actual price of Y product Rs. 20, actual quantity of Y product 300kg.

Actual price of Z product Rs.30, actual quantity of Z product 500kg.

(i)Material Price Variance:

The difference in cost which has been resulted from price being different to standard is known as material price variance. Therefore, it is the multiplication of actual usage with the difference in price.

The formula is: Actual quantity * Price Difference

Or, Actual quantity * (Standard price-Actual price) Or, Actual quantity * Standard price Actual quantity * Actual price Or, Standard cost of actual quantity Actual cost

(ii) Material Usage Variance:

The difference arising between actual usage & expected usage (i.e. for producing the actual output, what should have been used) multiplied by the standard price is known as the material variance.

The formula is: Standard price * Usage difference

Or, Standard price * (Standard Usage-Actual Usage) Or, Standard price * Standard Usage Standard price * Actual Usage Or, Standard cost of standard quantity Standard cost of actual quantity