Assignment No.

ACCOUNTING &
FINANCE
(5566)
Executive MBA/MPA

ZAHID NAZIR
Roll.No. AB523655
Semester:Autumn 2008
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Question 1
a). State the group of persons having an interest in a
business organization and examine the nature of their
information needed. Differentiate between
recordative, interpretative and auditive functions of
Accounting.
Marks: 10

(b) How can accounting reports, prepared on a historical

basis after the close of a period, be useful to
managers in directing the activities of business?

Marks: 10

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a).

There are several groups of people who have a stake in a business

organization. They are the following:

• Managers
• Shareholders
• Creditors
• Employees
• Customers
• Banks
• Financial Investors
• Suppliers
• Labour Union
• Potential Investors

Additionally the community at large has economic and social interest

in the activities of such organizations. This interest is expressed at
national level by the concern of government in various aspects of
firm’s activities such as their economic well being, their contribution
to welfare, their part in the growth of national product.

Information needs of various users are:

SHAREHOLDERS & INVESTORS

Since shareholders and other investors have invested their wealth in

a business enterprise, they are interested in knowing about the
profitability of the enterprise, the soundness of their investment and
the growth prospects of the enterprise. Historically, business
accounting developed to supply information to those who had
invested their funds in business enterprises.

CREDITORS

Creditors may be short term or long term lenders. Short term

creditors include suppliers of materials, goods or services. They are

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normally known as trade creditors. Long term creditors are those

who have lent money for a longer period, usually in the form of
secured loans. The main concern of creditors is focused on the credit
worthiness of the firm and its ability to meet its financial obligations.
Therefore they are concerned with the liquidity of the firm, its
profitability and financial soundness. In other words creditors are
mainly interested in information which deals with the solvency,
liquidity and profitability so that they could assess the financial
standing of the firm.

EMPLOYEES

The view that business organizations exist to maximize the returns to

shareholders has been undergoing change as a result of social
changes. A broader view is taken today of economic and social role of
management. The importance of harmonious industrial relations b/w
management and employees can not be over emphasized. That the
employee has a stake in the outcomes of several managerial
decisions is recognized. Greater emphasis on industrial democracy
through employee participation in management decisions has
important implications for the supply information to employees.
Matters like settlement of wages, bonus and profit sharing rest on
adequate disclosure of relevant facts.

GOVERNMENT

In the mixed economy it is considered to be the responsibility of the

government to direct the operation of the economic system in such a
manner that it sub serves the common good. Controls and
regulations on the operation of government agencies collect
information about various aspects of activities of business
organizations. All the information is very important in evolving
policies for managing the economy.

MANAGEMENT
Organizations may or may not exist for the sole purpose of profit.
However, information needs of the managers of both kinds of

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organizations are almost the same, because the managerial process

i.e. planning, organizing and controlling is the same. All these
functions have one thing in common and it is that they all are
concerned with making decisions, which have their own specific
information requirements.

CONSUMERS

Consumer organizations, media, welfare organizations and public at

large are also interested in condensed accounting information in
order to appraise the efficiency and social role of the enterprise in
different sectors of the economy i.e. what levels of profits and
outputs are being achieved and in what manner the growth is being
planned by the enterprises in accordance with the national priorities.

Differentiate between recordative, interpretative and auditive

functions of Accounting.

RECORDATIVE FUCTION

The recording and processing of information usually accounts for a

substantial part of total accounting work. This type of accounting is
called recordative . The processing method employed for recording
may be manual, mechanical or electronic. Computers are also used
widely in modern business for this purpose.

INTERPRETATIVE FUNCTION

The analytical and interpretative work f accounting may be for

internal or external uses and may range from snap answers to
elaborated reports produced by extensive research. Capital project
analysis, financial forecasts and analysis for reorganization, take over
or merger often lead to research based reports.

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AUDITIVE FUNCTION

It focuses on verification of transactions as entered in the books of

account and authentication of financial standards. This function is
done by public professional accountants.

b)
The data reports are prepared on a historical basis in the following
manner. First the data is created and collected on the basis of either
historic or predictive method. The professional methods like:
• Manual
• Mechanical
• Electronic
After the historic data is collected, it is recorded in accordance with
generally accepting accounting theory. A large number of
transactions or events have to be entered in the books of original
entry i.e. journal and ledgers in accordance with the classification
scheme already decided upon. Professional methods lead to data
recording which consist of accounting method. After this data is
evaluated by different methods like internal auditing etc. At the end
we get data reporting activity which may be internal or external.

Data Creation and Collection

Historic Predictive

Professional Data Recording Data Evaluation

Methods
Budgetary
Accounting Control
Manual Performance
Mechanical Accounting
Theory Analysis funds
Electronic Method Flow Analysis
Auditing

Data Reporting

External Internal

Scope of Accounting showing which reports are prepared

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Question 2
a). Examine the role of accounting concepts in the preparation of
financial statements. Do you find any of the accounting
concepts conflicting with each other? Give examples.
Marks: 10

(b) The transactions for Shah transport service are as follows:

1. Shah invested Rs.600,000.
2. Truck was purchased by the business for Rs.430,000.
3. Equipment purchased on credit for Rs.9,000.
4. A bill of Rs 7,200 for transporting goods was sent to Mr.
Abbassi.
5. Cash received Rs.6,000 from Mr. Abbasi
6. Received Rs.22,300 in Cash for transporting goods
7. Payment of Rs.5,000 was made for the equipment
purchased in 3.
8. Paid expenses Rs.1,700 in cash.
9. Cash Rs.1,200 withdrawn from business for Shah’s
personal use
REQUIRED:
i. Arrange the asset, liability and owners equity accounts in
an equation.
ii. Show by addition and subtraction the effects of the
transactions on the balance sheet equation. Show new
balance after each transaction and identify each owner’s
equity transaction by type.
Marks: 10

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a).

ACCOUNTING CONCEPTS
Accounting concepts are the ground rules of accounting that are (or
should be) followed in preparation of all accounts and financial
statements.

The four fundamental concepts are:

1). Accruals concept:

Revenue and expenses are taken account of when they occur

and not when the cash is received or paid out.

2). Consistency concept:

Once an entity has chosen an accounting method, it should

continue to use the same method, except for a sound reason
to do otherwise. Any change in the accounting method must
be disclosed.

3). Going concern:

It is assumed that the business entity for which accounts are

being prepared is solvent and viable, and will continue to be in
business in the foreseeable future.

4). Prudence concept:

Revenue and profits are included in the balance sheet only

when they are realized (or there is reasonable 'certainty' of
realizing them) but liabilities are included when there is a
reasonable 'possibility' of incurring them. Also called
conservation concept.

Other concepts include

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5). Accounting equation:

Total assets of an entity equal total liabilities plus owners'

equity.

6). Accounting period:

Financial records pertaining only to a specific period are to be

considered in preparing accounts for that period.

7). Cost basis:

Asset value recorded in the account books should be the actual

cost paid, and not the asset's current market value.

8). Entity:

Accounting records reflect the financial activities of a specific

business or organization, and not of its owners or employees.

9). Full disclosure:

Financial statements and their notes (footnotes) should

contain all pertinent data.

10). Lower of cost or market value:

Inventory is valued either at cost or the market value

(whichever is lower) to reflect the effects of obsolescence.

11). Maintenance of capital:

Profit can be realized only after capital of the firm has been
restored to its original level, or is maintained at a
predetermined level.

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12). Matching:

Transactions affecting both revenues and expenses should be

recognized in the same accounting period.

13). Materiality:

Relatively minor events may be ignored, but the major ones

should be fully disclosed.

14). Money measurement:

Accounting process records only those activities that can be

expressed in monetary terms (with some exceptions, as in
cost-accounting).

15). Monetary measurement:

Only the activities measurable in terms of money should be

recorded.

16) Objectivity:

Financial statements should be based only on verifiable

evidence, comprising an audit trail.

17). Realization:

Any change in the market value of an asset or liability is not

recognized as a profit or loss until the asset is sold or the
liability is paid off (discharged).

18). Unit of Measurement:

Financial data should be recorded with a common unit of

measure (dollar, pound sterling, yen, etc.). Also called
accounting conventions, accounting postulates, or accounting
principles.

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While going through all these concepts, we have developed a feeling

that they come in conflict with each other. For example, a firm
acquired a piece of land in 1975 at a price of Rs. 60,000. Factory
premises were constructed in 1976 and operation started in 1977.
The firm has a great success with a profit profile for the past 18 years.
The balance sheet for the year 1995 is being prepared and land is
required to be valued. The estimated current market price of this
land is Rs.600,000.

Should we recommend that land valued at Rs. 600,000. ? The answer

is “NO”. Obviously land would be carded on balance sheet as its
original cost of Rs. 60,000 only. This decision is supported by several
of the concepts. First of all, the stability of purchasing power of
money implied in the money measurement concept prevents us from
recognizing increase in value as a result of changing price levels. Then
the realization concept will not allow unrealized profits to be
included as long as land is held by the firm and not sold away. We
may note that the continuity or going concern concept makes any
possible market value of land irrelevant for balance sheet because
the firm has to continue in business and land will be needed by it for
its own use. In this regard, it could be argued that if land was shown
on the balance sheet as its estimated current market value, the
owner might decide to discontinue the business, sell the land and
retire. The estimate of current profit market value figure may be
suspect. It raises many questions. Do we have a market quotation for
an identical plot of land? Has a similar to land been sold recently and
can we pick it up as verifiable evidence of the current market place?
Is it possible to estimate the value of land without factory buildings
and other facilities constructed on it? The answer is “NO” and the
conservation concept will then deter us from accepting an estimate
of market value since it can not be ascertained with reasonable
accuracy.

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Question 3
Dr. Fazal Karim, a psychologist, moved from Shikarpur to set up an office
in Islamabad. After one month, the business had the following assets.
Cash in hand Rs. 2,800
Cash at bank Rs. 25,000
Debtors Rs. 12,680
Office Supplies Rs. 8,000
Office Equipment Rs. 70,500.

The creditors were Rs.12,600 for purchase of office equipment on credit.

During march 2004 following transaction were completed:
a. Paid one month rent by cheque for the office Rs.3,500
b. Billed Rs.2,460 for services rendered to a client
c. Paid Rs.3,000 by cheque for office equipment purchased
d. Paid for office supplies Rs.1,000 in cash
e. Received a cheque for Rs.23,800 for ICI for services provided to their
employees
f. Made payment on account owed Rs.3,600 by cheque
g. Withdrew Rs.5,500 from bank for personal use
h. Paid telephone bill Rs.970
i. Received Rs.1,290 cash from patients previously billed
j. Purchased additional office equipment on credit Rs.33,600
k. Paid secretary’s salary Rs.3000 by cheque.
REQUIRED:
Prepare Balance Sheet after transactions a to k has occurred

Marks: 20

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DR. FAZAL KARIM (PSYCHOLOGIST)

BALANCE SHEET

as on 31st March, 2004

Assets (PKR) Liabilities & (PKR)

Owners Equity
Cash in Hand 2,120 Creditors 42,600

Cash at Bank 30,200 Capital 1,19,670

Debtors 13,850

Office Supplies 9,000

Office 1,07,100
Equipments

TOTAL 1,62,270 TOTAL 1,62,270

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Question 4
Following is the summarized Profit and Loss account of
Khan Enterprises for five consecutive periods. Complete
the same by supplying the missing information:
1 2 3 4 5
Sales 1000 3000 5000
Cost of Goods 500 800 2500 3000
Sold
Gross Profit 700 1000 1500
Admin Expenses 100 300 400
Selling & 150 200 500 600
Distribution Exp
Operating Profit 200 400 1000
Other Incomes 150 200 500
Net Profit 300 1000
Before Tax
Corporate 200 300
Income Tax
Profit after Tax 150 500 800

Marks: 20

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1 2 3 4 5
Sales 1000 1500 3000 4000 5000

Cost of Goods 500 800 2000 2500 3000

Sold
Gross Profit 500 700 1000 1500 2000

Admin Expenses 100 300 300 400 400

Selling & 150 200 300 500 600

Distribution Exp
Operating Profit 250 200 400 600 1000

Other Incomes 150 100 200 400 500

Net Profit Before 400 300 600 1000 1500

Tax
Corporate 200 150 300 500 700
Income Tax
Profit after Tax 200 150 300 500 800

i.e.

Gross Profit = Sales - Cost of goods sold

Net Profit = Gross Profit - Expenses
Net Profit after tax = Net profit before tax - Income tax
Net Profit before tax = Operating Profit + Other Incomes

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Question 5
a). Equipment costing Rs.76,000 was purchased by Saqib
Corporation, at the beginning of the current year. The
company will depreciate the equipment by the
declining-balance method, but it has not determined
whether the rate will be at 150 percent or 200 percent
of the straight line rate. The estimated useful life of
the equipment is eight years. Prepare a comparison of
the two alternative rates for management for the first
two years Saqib Corporation owns the equipment.

Marks: 10

b). What do you understand by cost accounting? State its

objectives. Explain what is COST and its different
elements in detail.

Marks: 10

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a).

Solution:

Rate = 100 / Estimated Life = 100 / 8 = 12.5

First rate = 12.5 x 150% = 18.75%

2nd Rate = 12.5 x 200% = 25%

Years Computation Depreciation Accumulative Book Value

Expense Depreciation (PKR)
1st Rate
0 76,000

1 76,000 x 18.75% 14,250 14,250 61,750

2 61,750 x 18.75% 11,578 25,828 50,172

nd
2 Rate
0 76,000

1 76,000 x 25% 19,000 19,000 57,000

2 57,000 x 25% 14,250 33,250 42,750

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b).

COST ACCOUNTING

“Cost accounting is an approach to evaluating the overall costs that

are associated with conducting business.”

Generally based on standard accounting practices, cost accounting is

one of the tools that managers utilize to determine what type and
how much expenses is involved with maintaining the current
business model. When it comes to measuring how wisely company
resources are being utilized, cost accounting helps to provide the
data relevant to the current situation. One of the many benefits of
cost accounting is that it turns data into information, knowledge and
wisdom about a business entity’s operations that is useful for:

• measuring performance
• reducing or managing costs
• determining the fees or prices for goods and services
• deciding to authorize, modify or discontinue a program or
activity

OBJECTIVES OF COST ACCOUNTING

The Cost Accounting has following primary objectives.

• It enables you to budget the production operations of your

company; you can compare the actual performance of those
operations against the budget to supply each level of
management with the information essential to make timely,
accurate and effective decisions.
• It provides a detailed cost subledger to your company's
General Ledger. These principal objectives are met through the
use of the various data elements that are maintained in the
Cost Accounting database.
• Cost accounting is all about ascertaining the cost, controlling
the cost and reducing the cost.

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COST
The amount of expenses (actual / notional) incurred on or
attributable to a given thing is called cost.

However the term cost cannot be exactly defined. Its

interpretation depends on:

a). the nature of business or industry

b). the context in which is used

In a business where selling and distribution expenses are quite

normal, the cost of article may be calculated without
considering the selling and distribution overheads. For
example, prime cost include expenditure on direct materials,
direct labor and direct expenses. Money spent on material is
termed as cost of material, that spent on labor as cost of labor
and so on. However endeavor should be made to obtain as far
as possible the accurate cost of a product or service.

ELEMENTS OF COST
The elements of cost are shown in the following figure.

COST

Materials Labour Expenses

Direct Indirect Direct Indirect Direct Indirect

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The main elements of cost are:

i) MATERIALS

The substance from which the product is made is known as

material. It may be in a raw or manufactured form. It can be
direct as well as indirect.

a). Direct Material

All the materials which becomes integral part of the

finished product is called direct material. Its examples
are, all materials / components, primary packaging
materials e.g. carton, wrapping etc.

b). Indirect Material

All materials which are used for purposes ancillary to the

businesses and which cannot be assigned to specific
physical units is called indirect materials. Examples are,
consumable stores, printing and stationary material.

ii). LABOUR

Human effort needed in which materials are converted

into finished products is called labour. It is of two types.

a). Direct Labour

Labour which takes an active and direct part in the

production of a particular product is called direct labour.
Direct labour costs are traceable to specific product.

b). Indirect Labour

Labour which is not directly involved in the

manufacturing of a product e.g. labour involved in
transportation, warehouse labour, time keepers etc.

iii). EXPENSES

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They can be direct or indirect

a). Direct Expenses

Expenses which can be directly, conveniently and wholly

allocated to specific cost units are called direct expenses.
Examples are, hiring of a specific equipment for a
particular job, cost of defective work etc.

b). Indirect Expenses

Those expenses which cannot be directly, conveniently

and wholly allocated to specific cost units are called
indirect expenses. Examples are rent, lighting, insurance
charges etc.

Overheads include indirect materials, labour and

expenses, so all indirect costs are overheads.

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