DRIVE-FALL 2013

PROGRAM-MBA
SEMESTER-I
MB0041 - FINANCIAL AND MANAGEMENT ACCOUNTING
Q1. Inventory in a business is valued at the end of an accounting period, at either cost or market price,
whichever is lower. This is accepted convention or a practice in accounting. Give a small introduction on
accounting conventions and elucidate all the eight accounting conventions. (Introduction of accounting
convention, Explanation of all the 8 types of conventions) 2, 8
Answer:
Accounting Conventions
Accounting conventions are the rules based on which accounting takes place and these rules are universally
accepted. There are ten types of accounting conventions, namely convention of income recognition, convention of
expense, convention of matching cost and revenue, convention of historical cost, convention of full disclosure,
convention of double aspect, convention of modifying, convention of materiality, convention of consistency, and
convention of conservatism. They are explained briefly in the following sections.
1. Convention of income recognition
According to this concept, revenue is considered as being earned on the date on which it is realized, i.e., the date on
which goods and services are transferred to customers for cash or for promise.
2. Convention of matching cost and revenue
According to this concept, revenue earned during a period is compared with the expenditure incurred to earn that
income, irrespective of whether the expenditure is paid during that period or not. This is also called matching cost and
revenue principle.
3. Convention of historical costs
This convention says that all transactions must be recorded at a value at which they were incurred. Such a value is
called Historical Cost and this principle is called the Convention of Cost. An asset or transaction may have many
other values associated with it like market value or replacement cost. But all assets are recorded at the cost of
acquisition and this cost is the basis for all subsequent accounting for the assets. The expenses and the goods
purchased are shown at the value at which they are incurred.
4. Convention of full disclosure
This convention requires a business to disclose the following:
All the accounting policies adopted in the preparation and presentation of financial statements.
If there is any change in the accounting policies in the current year as compared to the previous year/s, the
effects of such changes and the reason/s thereof.
The implications (in terms of money value) on the financial statements due to such change.
5. Convention of double aspect
This concept states that every transaction has two aspects. One is the receiving aspect and the other is the giving
aspect. In accounting language, these two aspects are called debit and credit. The claims on assets will always be
equal to the assets. The claims on assets may be of the owners or of the outsiders (creditors). While the claims of
owners are called Equity or Capital, the claims of outsiders are called Liabilities. Therefore, total liabilities are equal to
total assets. This concept gives rise to the balance sheet equation, i.e., Assets=Liabilities + Capital. The following
balance sheet illustrates this.
6. Convention of materiality
This convention states that the benefit derived from measuring, recording, and processing a transaction should justify
the cost of doing it.
7. Convention of consistency
This convention requires that the accounting policies must be consistently applied year after year. Consistency is
required to help comparison of financial data from one period to another. Once a method of accounting is adopted, it
should not be changed. A change in an accounting policy may be done only when:

 It is required by law
It is felt that the new policy reflects the financial performance or position better than the old policy
Such changed policy must be consistently applied for the subsequent periods. As stated under the full disclosure
convention, the change in the accounting policy along with the reason/s and the financial implications on the financial
statements should be disclosed to the users.
8. Convention of conservatism or prudence
Accountants follow the rule anticipate no profits but provide for all anticipated losses. Whenever loss is
anticipated, sufficient provisions should be made. But if a profit is anticipated, it should not be recorded until it is
actually realized.
Q2. Write down a table with the accounts involved / the nature of account/its affects/ debit or credit. Please have the
transactions given below and prepare the table as per the instructions given above for each transaction.
a. 1.1.2011 Sunitha started his business with cash Rs. 5, 00,000
b. 2.1.2011 Borrowed from Malathi Rs. 5, 00,000
c. 2.1.2011 Purchased furniture Rs. 1, 00,000
d. 4.1.2011 Purchased furniture from Meenal on credit Rs. 1, 50,000
e. 5.1.2011 Purchased goods for cash Rs. 50,000
f. 6.1.2011 Purchased goods from Ram on credit Rs. 2, 50,000
g. 8.1.2011 Sold goods for cash Rs. 1, 25,000
h. 8.1.2011 Sold goods to Shyam on credit Rs. 55,000
i. 9.1.2011 Received cash from Shyam Rs. 25,000
j. 10.1.2011 Paid cash to Ram Rs. 90,000
(Filling in all the details in the table for all the transactions. Each transaction carries one mark (1*10=10)
Answer:
Sl.
No.

Accounts
Involved

Nature of
Account

Affects

Debit/
Credit

Cash a/c
Capital a/c

Real
Personal

Cash is coming in
Sunita is the giver

Debit
Credit

Cash a/c
Loan from
Malathi

Real
Personal

Cash is coming in
Malathi is the giver

Debit
Credit

Furniture a/c
Cash a/c

Real
Real

Furniture is coming in
Cash is going out

Debit
Credit

Furniture a/c
Meenl a/c

Real
Personal

Furniture is coming in
Meenal is the giver

Debit
Credit

Purchase a/c
Cash a/c

Nominal
Real

Purchase is an expense
Cash is going out

Debit
Credit

Purchase a/c
Rams a/c

Nominal
Personal

Purchase is an expense
Ram is the giver

Debit
Credit

Cash a/c
Sales a/c

Real
Nominal

Cash is coming in
Sales is revenue

Debit
Credit

Shyams a/c
Sales a/c

Personal
Nominal

Shayam is the receiver

Sales is revenue

Debit
Credit

Cash a/c
Shyams a/c

Real
Personal

Cash is coming in
Shyam is the giver

Debit
Credit

Rams a/c
Cash a/c

Personal
Real

Ram is the receiver

Cash is going out

Debit
Credit

Q3. From the given trial balance, draft an Adjusted Trial Balance.

Adjustments:
1. Charge depreciation at 10% on Buildings and Furniture and fittings.
2. Write off further bad debts 1000
3. Taxes and Insurance prepaid 2000
4. Outstanding salaries 5000
5. Commission received in advance1000
(Preparation of all the ledger a/cs, Preparation of adjusted trial balance as on 31.3.2013) 5, 5
Answer:
Solution:
Ledger accounts
Furniture and fittings a/c
Dr.

Cr.

Particulars

Rs.

Particulars

Rs.

To bal b/d

10000

By Depreciation

1000

By bal c/d

9000

Total

10000

Total

10000

To bal b/d

9000

Buildings a/c
Dr.
Particulars
To bal b/d

Cr.
Rs.

Particulars

Rs.

500000

By Depreciation

50000

Total

500000

To bal b/d

450000

By bal c/d

450000

Total

500000

Bad Debts a/c

Dr.

Cr.

Particulars
Dr.
To bal b/d

Rs.
Particulars
Sundry Debtors
a/c

Rs.
Cr.

2000

To Sundry Debtors
Particulars

1000
Rs.

By
bal c/d
Particulars

3000
Rs.

Total
To
bal b/d
To bal c/d
To bal b/d

3000
25000

Total
By Bad Debts
By bal c/d

3000
1000
24000

Total

25000

Total

25000

To bal b/d

24000

3000

Taxes and Insurance a/c

Dr.

Cr.

Particulars

Rs.

Particulars

Rs.

To bal b/d

5000

By Prepaid taxes and Insurance

2000

By bal c/d

3000

Total

5000

To bal c/d
Total

5000

To bal b/d

3000

Debit balances

Adjusted Trial Balance as on 31.03.2011

Rs.
Adjustments

Adjusted amount

Furniture and Fittings

10000

-1000

9000

Buildings

500000

-50000

450000

Sales Returns

1000

Bad Debts

2000

+1000

3000

Sundry Debtors

25000

-1000

24000

Purchases

90000

90000

Advertising

20000

20000

Cash

10000

10000

Taxes and Insurance

5000

1000

-2000

3000

General Expenses

7000

Salaries

20000

7000
+5000

Depreciation

1000+50000

Prepaid Taxes and Insurance

2000

25000
51000
2000

TOTAL

690000

695000

Credit balances

Rs.

Bank Over Draft

16000

16000

Capital Account

400000

400000

Purchase Returns

4000

4000

Sundry Creditors

30000

30000

Commission

5000

Sales

235000

Outstanding salaries

5000

5000

1000

1000

-1000

4000
235000

Commission received in
advance
TOTAL

690000

695000

Q4. The reports prepared in financial accounting are also used in the management accounting. But there are
few major differences between financial accounting and management accounting. Explain the differences
between financial accounting and management accounting in various dimensions. (Writing down all the
differences between the financial and management accounting)
Answer:
Dimension

Financial accounting

Management accounting

Users

The primary users of financial

accounting information are
external users like shareholders,
creditors, government authorities,
employees, etc.

The primary users of

management accounting are
internal users like top, middle,
and lower level managers.

Purpose

Reporting financial performance

and financial position to enable
the users to take financial
decisions.

To help the management in

planning, decision making,
monitoring, and controlling.

Need

It is a statutory requirement. What

to report, how to report, how much
to report, when to report, in which
form to report, etc. are stipulated
by Law or Standards.

It is optional. What to report,

how to report, how much to
report, when to report, in which
form to report, etc. are decided
by the management as per the

needs of the company or

management.
Expression
of
information

Accounting information is always

expressed in terms of money.

Management accounting may

adopt any measurement unit
like labour hours, machine
hours, or product units for the
purpose of analysis.

Reporting
timing and
frequency

Financial data is presented for a

definite period, say one year or a
quarter.

Reports are prepared on a

continuous basis, monthly,
weekly, or even daily.

Time
perspective

Financial accounting focuses on

historical data.

Management accounting is
oriented towards the future.

Sources of
principles

Financial accounting is a
discipline by itself and has its own
principles, policies and
conventions (GAAP).

Management accounting
makes use of other disciplines
like economics, management,
information system, operation
research, etc.

Reporting
entity

Overall organisation

Responsibility centres within

the organisation

Form of
reports

Income statement (Profit and Loss

a/c)
Balance sheet
Cash flow statement

MIS reports
Performance reports
Control reports
Cost statements
Variance statements
Budgets
Estimate statements
Flowcharts

Q5 Draw the Balance Sheet for the following information provided by Sandeep Ltd.
a. Current Ratio: 2.50
b. Liquidity Ratio: 1.50
c. Net Working Capital: Rs.300000
d. Stock Turnover Ratio: 6 times
e. Ratio of Gross Profit to Sales: 20%
f. Fixed Asset Turnover Ratio : 2 times
g. Average Debt collection period: 2 months
h. Fixed Assets to Net Worth: 0.80
i. Reserve and Surplus to Capital: 0.50

(Preparation of Balance sheet (Includes all the ratios) 10

Solution: The Balance Sheet is given below:

Liabilities
Capital
Reserves and Surplus
Long-term Debt
Current Liabilities
Total

Rs.
500000
250000
150000
200000
1100000

Assets
Fixed Assets
Inventories
Debtors
Bank
Total

Working Notes:
If Current Liabilities
=1
Current Assets
=2.5
Working Capital(2.5-1)
= 1.5
Therefore Current Assets(2.5/1.5)x300000
Current Liabilities(1/1.5)x300000

=300000
=500000
=200000

Liquidity Ratio
=1.5
Current Liabilities
=200000
Therefore Liquid Assets(200000x1.5)
Inventories(Current asset-Liquid Asset)

=300000
=200000

Stock Turnover ratio =6 times

Cost of sales(6x200000)
Gross Profit Ratio =20%
Gross Profit
If Sales is 100; Gross Profits is 20
Hence cost of sales is (100-20)=80
Therefore Gross Profit is (20/80)x1200000
Sales(cost of Sales +Gross Profit)

Rs.
600000
200000
250000
50000
1100000

=1200000

=300000
1500000

Fixed Asset Turnover ratio

=2 times
(Cost of Sales/Fixed Assets)
Therefore Fixed Assets(1200000/2)

=600000

Debtors Collection Period =2 months

(Months in a year/ Debtors Turnover)
Debtors Turnover Ratio(12/2) =6 times
(Sales/Debtors)
Debtors(1500000/6)

=250000

Fixed Assets to Shareholders Net worth =0.80

Shareholders net worth (600000/0/80)

=750000

Reserves and Surplus to Capital =0.50

If capital is 1: reserves and surplus is 0.5
Reserves and surplus + capital= shareholders net
worth(0.5+1=1.5)
Reserves and Surplus (7500000x(0.5/1.5)
=250000
Therefore share capital
=500000
Q6. Write the main differences between cash flow analysis and fund flow analysis.
Following is the balance sheet for the period ending 31st March 2011 and 2012. If the current years net loss is
Rs.38,000, Calculate the cash flow from operating activities.

(Differences between cash flow and fund flow analysis, Preparation of statement showing cash flow from
operating activities) 4, 6
Solution: Statement showing cash flows from operating activities
Net Loss
ADD: Decrease in Current Assets
Provision for doubtful debts
Stock
Prepaid expenses
Increase in current liabilities
Outstanding expenses
Bills payable

(38,000)
1,200
2,000
200
200
2,000
+ 5,600
__________
(32,400 )

DEDUCT ; Increase in current assets

Short term loan
Bills receivable
Creditors

Net cash loan in operating activities

3,000
10,000
22,000
+ 35,000
________
(67,400)