1. What is the difference between a Balance Sheet and a Profit & Loss account?

Balance Sheet vs Profit and Loss

The balance sheet is a statement of financial position, whereas the profit and loss is a statement of
financial performance.
The main difference between the two is the time frame in which each is prepared. The profit and loss
statement is an ongoing recording of the business revenues, expenses and end of period profit. The
balance sheet, on the other hand, is a portrayal of the firms financial situation as at the date in which it is
prepared, which is usually the year-end.
The data recorded in a balance sheet and in a profit and loss are different. Profit and loss records
incomes, expenses and profits. A balance sheet records the assets, liabilities, and the capital.

Read more: http://www.differencebetween.com/difference-between-balance-sheet-and-vs-profit-andloss/#ixzz39vAbKYA1

2. What is Depreciation? Why should it be provided?
loss of value of a depreciable asset arising from use, effluxion of
time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the
depreciable amount in each accounting period during the expected
useful life of the asset. Depreciation includes amortisation of assets
whose useful life is predetermined
or
Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset.
Depreciation Accounting deals with the allocation of costs of fixed assets over their useful lives. More
simply, that part of cost of this asset which is being periodically (monthly) allocated as expense into the
Income Statement to match the revenue the asset is generating.

For example, when we buy fixed asset like factory machinery, this is merely an advance payment of which
we expect that this fixed asset is able to enhance or earn certain earnings for the business. Over a period
of time, the fixed asset we buy will become valueless or unable to generate the necessary earnings. To
reflect this continuing diminution in the value of the factory machinery, we need to apply depreciation
accounting.

WHY THE NEED TO PROVIDE FOR DEPRECIATON?

To ascertain the net earnings/profit for an accounting

period, depreciation need to be computed. Depreciation normally
constitutes a major part of the expenses of the business. As the

business buys fixed assets, it expects the fixed assets over the
useful lives are able to generate the necessary revenues for its
business. Whilst revenues being earned and if there is no allocation
of depreciation cost to match these revenue, income will then be
overstated. Depreciation therefore follows very closely to the
matching concept;

The fixed assets in the Balance Sheet will be overstated if

depreciation is not provided for. Only that part of the costs of fixed
assets that have not expired should be reflected in the Balance
sheet otherwise the financial statement will not reflect a true and
fair view;

If depreciation is not provided for and assuming if the whole profits

were withdrawn during the life of the asset, additional capital
would have to be raised when it is time to replace the fixed assets.
By charging depreciation against profits, the ultimate residual
profit available for distribution is lowered and that funds
are retained in the business for future replacement.

3. Should the total of Assets always tally with total of Liabilities?

4. pg 477 balance sheet intro is the ans
http://books.google.co.in/books?
id=kwjftJFC1BAC&pg=PA478&lpg=PA478&dq=3.+Should+the+total+of+Assets+al
ways+tally+with+total+of+Liabilities?&source=bl&ots=KTQPLLtp2B&sig=uUlGnqCxgwbtqEfPTIVcafXZ5s&hl=en&sa=X&ei=pHPmU63rAtTm8AW6_IGoCA&ved=0CDA
Q6AEwAw#v=onepage&q&f=false

5. . Give the difference between the Cash system and the Mercantile system.

Cash Basis Accounting

Under cash basis accounting revenues are recognized and
earned only when cash is received irrespective of when and
how the services were performed or goods delivered.
To put it in different terms, the cash basis of accounting
asks you to take into consideration all those incomes/gains
that have been received in cash or other assets and

expenses/losses that have been paid out in cash or other

assets during the accounting period in consideration.
#
Accrual or Mercantile Basis Accounting
Under accrual or mercantile basis accounting, revenues are
recognized and earned when they are realized or realizable
irrespective of when the cash is received.
To put it in different terms, the accrual basis of
accounting asks you to take into consideration all those
incomes/gains and expenses/losses pertaining to the
accounting period for which you are trying to ascertain the
profits and losses irrespective of whether the incomes are
received in cash or not and the expenses are paid out in
cash or not.
What is a cash flow statement? Where is it used?

6.
7. The cash flow statement reports the cash generated and used during the time interval
specified in its heading. The period of time that the statement covers is chosen by the
company. For example, the heading may state "For the Three Months Ended December 31,
2012" or "The Fiscal Year Ended September 30, 2012".
WHERE?
The purpose of the cash flow statement or statement of cash flows is to provide
information about a company's gross receipts and gross payments for a specified period of
time.
The gross receipts and gross payments will be reported in the cash flow statement according
to one of the following classifications: operating activities, investing activities, and financing
activities. The net change from these three classifications should equal the change in a
company's cash and cash equivalents during the reporting period. For instance, the cash
flow statement for the calendar year 2013 will report the causes of the change in a
company's cash and cash equivalents between its balance sheets of December 31, 2012
and December 31, 2013.
In addition to the cash amounts being reported as operating, investing, and financing
activities, the cash flow statement must disclose other information, including the amount of
interest paid, the amount of income taxes paid, and any significant investing and financing
activities which did not require the use of cash.

The statement of cash flows is to be distributed along with a company's income statement
and balance sheet.

8. . What is overhead? Why is it important?

An accounting term that refers to all ongoing business expenses not
including or related to direct labor, direct materials or third-party
expenses that are billed directly to customers. Overhead must be paid for
on an ongoing basis, regardless of whether a company is doing a high or
low volume of business. It is important not just for budgeting purposes,
but for determining how much a company must charge for its products or
services to make a profit.

Three important reasons that managers allocate overhead costs to products are described in the
following:

Provide information for decision making. Setting prices for products is one
example of a decision that must be made by management. Prices are often
established based on the cost of products. It is not enough to simply include direct
materials and direct labor. Overhead must be considered as well.
Promote efficient use of resources. Several different activities are performed
to produce a product, such as purchasing raw materials, setting up production
machinery, inspecting the final product, and repairing defective products. All of
these activities consume resources (consuming resources is another way of stating
that a cost is associated with each of these activities). If products are charged for
the use of these activities, managers will have an incentive to be efficient in utilizing
the activities.
Comply with U.S. Generally Accepted Accounting Principles (U.S.
GAAP). U.S. GAAP requires that all manufacturing costsdirect materials, direct
labor, and overheadbe assigned to products for inventory costing purposes. This
requires the allocation of overhead costs to products.

9. Give some conventional methods of overhead allocation

10.
The traditional method of cost accounting refers to the allocation
of manufacturing overhead costs to the products manufactured. The
traditional method (also known as the conventional method) assigns or
allocates the factory's indirect costs to the items manufactured on the basis
of volume such as the number of units produced, the direct labor hours, or
the production machine hours. We will use machine hours in our discussion.

By using only machine hours to allocate the manufacturing overhead to

products, it is implying that the machine hours are the underlying cause of

the factory overhead. Traditionally, that may have been reasonable or at least
sufficient for the company's external financial statements. However, in recent
decades the manufacturing overhead has been driven or caused by many
other factors. For example, some customers are likely to demand additional
manufacturing operations for their diverse products. Other customers simply
want great quantities of uniform products.
If a manufacturer wants to know the true cost to produce specific products for
specific customers, the traditional method of cost accounting is
inadequate. Activity based costing (ABC) was developed to overcome the
shortcomings of the traditional method. Instead of just one cost driver such
as machine hours, ABC will use many cost drivers to allocate a
manufacturer's indirect costs. A few of the cost drivers that would be used
under ABC include the number of machine setups, the pounds of material
purchased or used, the number of engineering change orders, the number of
machine hours, and so on.
11. How is ABC superior to conventional methods?

Activity-Based vs Traditional Costing

Assume the Busy Ball Company makes two types of bouncing balls; one has a hollow
center and the other has a solid center. The same equipment is used to produce the
balls in different runs. Between batches, the equipment is cleaned, maintained, and set
up in the proper configuration for the next batch. The hollow center balls are packaged
with two balls per package, and the solid center balls are packaged one per package.
During the year, Busy Ball expects to make 1,000,000 hollow center balls and
2,000,000 solid center balls. The overhead costs incurred have been allocated to
activity pools as follows:

By analyzing the activity pools, the accountants and production managers have
identified the cost drivers, estimated the total expected units for each product, and
calculated the unit cost for each cost driver.

The activity by product is shown in the following table.

To calculate the per unit overhead costs under ABC, the costs assigned to each product
are divided by the number of units produced. In this case, the unit cost for a hollow
center ball is $0.52 and the unit cost for a solid center ball is $0.44.

Under the traditional method of allocating overhead based on direct labor dollars, the
total costs for all balls would be divided by total direct labor dollars for all balls to
determine the per unit cost. Estimated direct labor costs for the year are $1,512,000, of
which $378,000 is for hollow center balls and $1,134,000 is for solid center balls. The
per unit direct labor costs are $0.38 for hollow center balls ($378,000 1,000,000)
and $0.57 for solid center balls ($1,134,000 2,000,000). The per unit cost to produce
balls is calculated in two steps:

Calculate the predetermined overhead rate by dividing total overhead costs by

total direct labor dollars.

Allocate overhead to each type of product by multiplying the overhead cost per
direct labor dollar by the per unit direct labor dollars for hollow center balls and
for solid center balls.

What is Cost Volume Profit Analysis? How is contribution margin calculated?

Cost-Volume-Profit Analysis
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and
volume affect a company's operating income and net income. In performing this
analysis, there are several assumptions made, including:

Sales price per unit is constant.

Variable costs per unit are constant.

Total fixed costs are constant.

Everything produced is sold.

Costs are only affected because activity changes.

If a company sells more than one product, they are sold in the same mix.

CVP analysis requires that all the company's costs, including manufacturing,
selling, and administrative costs, be identified as variable or fixed.
Contribution margin and contribution margin ratio
Key calculations when using CVP analysis are the contribution margin and
the contribution margin ratio. The contribution margin represents the amount
of income or profit the company made before deducting its fixed costs. Said
another way, it is the amount of sales dollars available to cover (or contribute to)
fixed costs. When calculated as a ratio, it is the percent of sales dollars available
to cover fixed costs. Once fixed costs are covered, the next dollar of sales results
in the company having income.
The contribution margin is sales revenue minus all variable costs. It may be
calculated using dollars or on a per unit basis. If The Three M's, Inc., has sales of
$750,000 and total variable costs of $450,000, its contribution margin is
$300,000. Assuming the company sold 250,000 units during the year, the per unit
sales price is $3 and the total variable cost per unit is $1.80. The contribution
margin per unit is $1.20. The contribution margin ratio is 40%. It can be
calculated using either the contribution margin in dollars or the contribution
margin per unit. To calculate the contribution margin ratio, the contribution
margin is divided by the sales or revenues amount.

Break-even point
The breakeven point represents the level of sales where net income equals zero.
In other words, the point where sales revenue equals total variable costs plus
total fixed costs, and contribution margin equals fixed costs. Using the previous
information and given that the company has fixed costs of $300,000, the break
even income statement shows zero net income.

This income statement format is known as the contribution margin income

statement and is used for internal reporting only.
The $1.80 per unit or $450,000 of variable costs represent all variable costs
including costs classified as manufacturing costs, selling expenses, and
administrative expenses. Similarly, the fixed costs represent total manufacturing,
selling, and administrative fixed costs.
Breakeven point in dollars. The breakeven point in sales dollars of $750,000
is calculated by dividing total fixed costs of $300,000 by the contribution margin
ratio of 40%.

Another way to calculate breakeven sales dollars is to use the mathematical

equation.

In this equation, the variable costs are stated as a percent of sales. If a unit has a
$3.00 selling price and variable costs of $1.80, variable costs as a percent of sales
is 60% ($1.80 $3.00). Using fixed costs of $300,000, the breakeven equation
is shown below.

The last calculation using the mathematical equation is the same as the break
even sales formula using the fixed costs and the contribution margin ratio
previously discussed in this chapter.
Breakeven point in units. The breakeven point in units of 250,000 is
calculated by dividing fixed costs of $300,000 by contribution margin per unit of
$1.20.

The breakeven point in units may also be calculated using the mathematical
equation where X equals breakeven units.

Again it should be noted that the last portion of the calculation using the
mathematical equation is the same as the first calculation of breakeven units that
used the contribution margin per unit. Once the breakeven point in units has
been calculated, the breakeven point in sales dollars may be calculated by
multiplying the number of breakeven units by the selling price per unit. This also
works in reverse. If the breakeven point in sales dollars is known, it can be
divided by the selling price per unit to determine the breakeven point in units.

Targeted income

CVP analysis is also used when a company is trying to determine what level of
sales is necessary to reach a specific level of income, also called targeted
income. To calculate the required sales level, the targeted income is added to
fixed costs, and the total is divided by the contribution margin ratio to determine
required sales dollars, or the total is divided by contribution margin per unit to
determine the required sales level in units.

Using the data from the previous example, what level of sales would be required if
the company wanted $60,000 of income? The $60,000 of income required is
called the targeted income. The required sales level is $900,000 and the required
number of units is 300,000. Why is the answer $900,000 instead of $810,000
($750,000 [breakeven sales] plus $60,000)? Remember that there are additional
variable costs incurred every time an additional unit is sold, and these costs
reduce the extra revenues when calculating income.

This calculation of targeted income assumes it is being calculated for a division as

it ignores income taxes. If a targeted net income (income after taxes) is being
calculated, then income taxes would also be added to fixed costs along with
targeted net income.

Assuming the company has a 40% income tax rate, its breakeven point in sales
is $1,000,000 and breakeven point in units is 333,333. The amount of income
taxes used in the calculation is $40,000 ([$60,000 net income (1 .40 tax
rate)] $60,000).

A summarized contribution margin income statement can be used to prove these

calculations.

A comparison of the overhead per unit calculated using the ABC and traditional methods
often shows very different results:

In this example, the overhead charged to the hollow ball using ABC is $0.52 and much
higher than the $0.35 calculated under the traditional method. The $0.52 is a more
accurate cost for making decisions about pricing and production. For the solid center
ball, the overhead calculated is $0.44 per unit using the ABC method and $0.53 per unit
using the traditional method. The reason for the differences is the traditional method
determines the cost allocation using direct labor dollars only, so a product with high
direct labor dollars gets allocated more of the overhead costs than a product with low
direct labor dollars. The number of orders, setups, or tests the product actually uses
does not impact the allocation of overhead costs when direct labor dollars are used to
allocate overhead.
ABC provides a way to allocate costs more accurately when overhead costs are not
incurred at the same rate as direct labor dollars. The more activities identified, the
more complex the costing system becomes. Computer systems are needed for complex
ABC systems. Some companies limit the number of activities used in the costing system
to keep the system manageable. While this approach may result in some allocations
being arbitrary, using ABC does provide a more accurate estimate of costs for use in
making management decisions.
10.Draw the Break even chart.
https://www.youtube.com/watch?v=_5xAHM35xbY

Break-Even Analysis

$25,000
$20,000
$15,000
$10,000

TFC

TVC

TC

Sales

Profit

$5,000
$0
0

400

800

1200

1600

2000

2400

2800

3200

3600

4000

($5,000)
Break-Even Point
(units) =
Total Fixed Costs
Variable Cost per
Unit
Sales Price per Unit

2,000

TFC =

$3,000

VCU =
SPU =

$3.50
$5.00

Formulas:

BEP (units) = TFC

BEP ($'s) = BEP (

Copyright, 2014, Jaxworks, All Rights Reserved.

11.What are the steps involved in the preparation of budgets.

What are the steps in preparing a budget?

Many organizations prepare budgets that they use as a method of comparison when evaluating their
actual results over the next year. The process of preparing a budget should be highly regimented and
follow a set schedule, so that the completed budget is ready for use by the beginning of the next fiscal
year.

Here are the basic steps to follow:

1.

Update budget assumptions. Review the assumptions about the company's business
environment that were used as the basis for the last budget, and update as necessary.

2.

Review bottlenecks. Determine the capacity level of the primary bottleneck that is constraining
the company from generating further sales, and define how this will impact any additional
company revenue growth.

3.

Available funding. Determine the most likely amount of funding that will be available during
the budget period, which may limit growth plans.

4.

Step costing points. Determine whether any step costs will be incurred during the likely range
of business activity in the upcoming budget period, and define the amount of these costs and
at what activity levels they will be incurred.

5.

Create budget package. Copy forward the basic budgeting instructions from the instruction
packet used in the preceding year. Update it by including the year-to-date actual expenses
incurred in the current year, and also annualize this information for the full current year. Add a
commentary to the packet, stating step costing information, bottlenecks, and expected
funding limitations for the upcoming budget year.

6.

Issue budget package. Issue the budget package personally, where possible, and answer any
questions from recipients. Also state the due date for the first draft of the budget package.

7.

Obtain revenue forecast. Obtain the revenue forecast from the sales manager, validate it with
the CEO, and then distribute it to the other department managers. They use the revenue
information as the basis for developing their own budgets.

8.

Obtain department budgets. Obtain the budgets from all departments, check for errors, and
compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as
necessary.

9.

Obtain capital budget requests. Validate all capital budget requests and forward them to the
senior management team with comments and recommendations.

10. Update the budget model. Input all budget information into the master budget model.
11. Review the budget. Meet with the senior management team to review the budget. Highlight
possible constraint issues, and any limitations caused by funding limitations. Note all

comments made by the management team, and forward this information back to the budget
originators, with requests to modify their budgets.
12. Process budget iterations. Track outstanding budget change requests, and update the budget
model with new iterations as they arrive.
13. Issue the budget. Create a bound version of the budget and distribute it to all authorized
recipients.
14. Load the budget. Load the budget information into the financial software, so that you can
generate budget versus actual reports.

12.What is the principle behind dividing cost into fixed and variable.
DINT GET ANS FOR THIS
13.What is Asset turnover ratio? How is it important?
13.What is Asset turn
Asset turnovers basic formula is simply sales divided by assets:

Sales revenue Total assets

Most experts recommend using average total assets in the formula. To determine this figure, add total assets at the
beginning of the year to total assets at the end of the year and divide by two.
If, for instance, annual sales totaled $4.5 million, and total assets were $1.84 million at the beginning of the year and
$1.78 million at the year end, the average total assets would be $1.81 million, and the asset turnover ratio would be:

4,500,000 1,810,000 = 2.49

A variation of the formula is:

Sales revenue Fixed assets

If average fixed assets were $900,000, then asset turnover would be:

4,500,000 900,000 = 5
over ratio? How is it important?

What It Measures

The amount of sales generated for every dollars worth of assets over a given period.
Back to top

Why It Is Important
Asset turnover measures how well a company is leveraging its assets to produce revenue. A well-managed
manufacturer, for example, will make its plant and equipment work hard for the business by minimizing idle time for
machines.
The higher the number the betterwithin reason. As a rule of thumb, companies with low profit margins tend to have
high asset turnover; those with high profit margins have low asset turnover.
This ratio can also show how capital intensive a business is. Some businesses, such as software developers, can
generate tremendous sales per dollar of assets because their assets are modest. At the other end of the scale,
electric utilities, heavy industry manufacturers, and even cable TV companies need a huge asset base to generate
sales.
Finally, asset turnover serves as a tool to keep managers mindful of the companys balance sheet along with its profit
and loss account.

14.What is Du Pont Analysis. Demonstrate its importance.

A method of performance measurement that was started by the DuPont

Corporation in the 1920s. With this method, assets are measured at their
gross book value rather than at net book value in order to produce a
higher return on equity (ROE). It is also known as "DuPont identity".
DuPont analysis tells us that ROE is affected by three things:
- Operating efficiency, which is measured by profit margin
- Asset use efficiency, which is measured by total asset turnover
- Financial leverage, which is measured by the equity multiplier
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover
(Sales/Assets) * Equity Multiplier (Assets/Equity)
The main strength of the Dupont models of analysis is the way in which it indirectly takes
into consideration an extremely broad set of information to create its outcome. While the
formula starts with only a few key input ratios, the inputs to these factors actually represents
a much larger picture of our investment opportunity overall. This breadth is known as the
Dupont Tree, and is demonstrative of just how much information we are covering. For

example, through the asset turnover ratio input, we are indirectly tapping into a great deal of
information that we can learn from the balance sheet, income statement, and their
interlocking relationship. Included below is a visual representation of the Dupont tree, which
illustrates just how much of a companys operating aspects are covered.

.
15.What is common size statement?

Definition of 'Common Size Balance Sheet'

A balance sheet that displays both the numeric value of all entries and the
percentage each entry is relative to the total value of related entries. On a
common size balance sheet, an asset is compared to total assets, a liability to
total liabilities and stockholder equity to total stockholder equity.

Definition of 'Common Size Balance Sheet'

A balance sheet that displays both the numeric value of all entries and the
percentage each entry is relative to the total value of related entries. On a
common size balance sheet, an asset is compared to total assets, a liability to

total liabilities and stockholder equity to total stockholder equity.

Investopedia explains 'Common Size Balance Sheet'

Common size balance sheets make it easier to analyze changes to a companys
balance sheet over multiple time periods. By indicating a percentage in addition
to the actual entry value, analysts can tell not only if the total value of a
companys inventory increased in real terms compared to the previous year, but
whether the inventory represents the same percentage of total assets.
Common size balance sheets are not a type of financial reporting required in
GAAP, but are useful for business owners. In order to create the sheet, the
business must first determine its total assets, total liabilities and total
stockholder equity. The business then adds a column to its standard balance
sheet that will contain the percentage of each item compared to the total. Each
major entry type on the sheet is then divided by the total value of its category.

For example, if a companys total assets is $6.8 million (the numbers in the
chart are quoted in thousands) and the amount of cash it has on hand is $1
million, then cash represents approximately 15% of total assets ($1 million /
$6.8 million x 100). This figure can then be compared to the previous year. In
the above case, cash has decreased relative to total assets compared to the
previous year.

16.How is PE ratio calculated?

How
Price
Earnings
isisCalculated
The mostthe
common
price to
to earnings
ratio thatRatio
is tracked
known as the trailing

P/E. This

calculation uses the earnings per share (EPS) from the past four quarters and the current share price.
The equation to run the calculation is highlighted below.

P/E
= Share Price / Earnings Per Share
A stock that is currently trading at $20 per share that reported earnings over the past 12 months of
$1.00 per share would have a P/E = 20. This calculation is represented below Trailing P/E = $20 / $1.00 or 20
If the projected earnings for the company were expected to reach $1.25 in the next 12 months, an
investor could calculate the future P/E using the same equation. In this scenario, the future P/E
would equal 16. This is important information for an investor as the current share price may seem
like a good bargain compared to the future.
Future P/E = $20 / $1.25 or 16
There are also some price to earnings calculations that use a combination of past and future earnings
projections. One version takes the earnings results from the past two quarters and adds them to
projections from the next two future quarters.
Since there are plenty of different ways to calculate and represent a P/E, it is important for the
investor to understand the differences.

17.What is EPS?
Earnings per share (EPS) is the monetary value of earnings per each outstanding share of a
company's common stock.
In the United States, the Financial Accounting Standards Board (FASB) requires companies' income
statements to report EPS for each major category of the income statement: continuing operations,
discontinued operations, extraordinary items, and net income.

Calculating EPS[edit]
Preferred stock rights have precedence over common stock. Therefore, dividends declared on
preferred shares are subtracted before calculating the EPS. When preferred shares are cumulative,
the annual dividends are deducted whether they have been declared or not. Dividends in arrears are
not relevant when calculating EPS.

Earnings per share (basic formula)

Earnings per share (net income formula)

Earnings per share (continuing operations formula)