SMU_MBA-Solved-Assignment-Mb0041 financial and management accounting spring2015_assignment

1. ASSIGNMENT, Drive SPRING 2015
Program MBA, Semester 1
Subject code & name– MB0041-Financial and Management Accounting
Book ID B1624, Credit & Marks 4 CREDIT, 60 MARKS
Q. 1. Analyze the following transaction under traditional approach.
18.1.2011 Received a cheque from a customer, Sanjay at 5 p.m. Rs.20,000
19.1.2011 Paid Ramu by cheque Rs.1,50,000
20.1.2011 Paid salary Rs. 30,000
20.1.2011 Paid rent by cheque Rs. 8,000
21.1.2011 Goods withdrawn for personal use Rs. 5,000
25.1.2011 Paid an advance to suppliers ofgoods Rs. 1,00,000
26.1.2011 Received an advance from customers Rs. 3,00,000
31.1.2011 Paid interest on loan Rs. 5,000
31.1.2011 Paid instalment ofloan Rs. 25,000
31.1.2011 Interest allowed by bank Rs. 8,000
Ans.1. Analysis of Transaction under Traditional Approach are as follows:-
Q. 2. The trial balance ofNilgirisCo Ltd., as taken on 31st December,2002 did not tally and the
difference wascarried to suspense account. The followingerrorswere detectedsubsequently.
a) Sales book total for November was under castby Rs. 1200.
Date Transactions Accounts involved Nature of Account Debit Credit
18-01-2011 Received a cheque Bank Asset 20000
from a customer, Sanjay Asset 20000
sanjay at 5 p.m. Rs. 20000
19-01-2011 Paid ramu by cheque Ramu Liability 150000
Rs. 150000 Bank Asset 150000
20-01-2011 Paid salary Rs. 30000 Salary Expense 30000
Cash Asset 30000
20-01-2011 Paid rent by cheque Rent Expense 8000
RS. 8000 Bank Asset 8000
21-01-2011 Goods withdrawn for Drawings Withdrawal 5000
personal use Rs. 5000 Purchase Expenses 5000
25-01-2011 Paid an advance to Suppliers Liability 100000
suppliers of goods Rs. 100000 Cash(adv.) Asset 100000
26-01-2011 Received an advance from Cash(adv.) Asset 300000
customers Rs. 300000 Customers Asset 300000
31-01-2011 Paid interest on loan Rs. 5000 Interest Expenses 5000
Cash Asset 5000
31-01-2011 Paid installment on loan Loan Liability 25000
Rs. 25000 Bank Asset 25000
31-01-2011 Interest allowed by bank Bank Asset 8000
Rs. 8000 Interest received Income 8000
Analysis of transactions

2. b) Purchaseof new equipment costingRs. 9475 has been posted to Purchases a/c.
c) Discountreceived Rs.1250 and discountallowed Rs.850 in September 2002 have been posted to wrong
sides of discountaccount.
d) A cheque received from Mr. Longford for Rs. 1500 for goods sold to himon credit earlier,though entered
correctly in the cash book has been posted in his accountas Rs.1050.
e) Stocks worth Rs. 255 taken for use by Mr Dayananda,the ManagingDirector, have been entered in sales day
book.
f) Whilecarryingforward,the total in Returns Inwards Book has been taken as Rs. 674 instead of Rs. 647.
g) An amount paid to cashier,Mr.Ramachandra,Rs.775 as salary for the month of November has been
debited to his personal accountas Rs.757.Pass journal entries and drawup the suspenseaccount.
Ans.2- Solution:- Journal entries of all the transactions
Date Particulars LF
Debit
(Rs.)
Credit
(Rs.)
31-12-2002 Suspense accountDr
To Sales account(Being under castingof sales
book rectified)
1,200 1,200
31-12-2002 New Equipment accountDr To Purchases
account(Being wrong debit given to
Purchases accountrectified)
9,475 9,475
31-12-2002 Discountallowed accountDr
Suspense accountDr To Discountreceived
account(Being discountreceived and
discountallowed posted to wrong sides of
discountaccountrectified)
1,700
800
2,500
31-12-2002 Suspense accountDr To Longford’s account
(Being short creditgiven to Longford
rectified)
450 450
31-12-2002 Sales accountDr
To Suspenseaccount (Being stock used for
personal purposewrongly credited to sales
accountrectified)
255 255
31-12-2002 Suspense accountDr
To Returns Inwards account (Beingexcess debit
given to returns inwards accountto the extent
of Rs27,now rectified)
27
27
31-12-2002 Salary accountDr
To Ramachandra‘s account
To Suspenseaccount (Being the wrong debit of
salary to the personal accountof Ramachandra
now rectified)
775
757
18
Suspense account with Conclusion
DiscountreceivedRs.1250is postedonthe wrong side of discountaccount.Discountreceived
(income) shouldbe creditedanddiscountallowed(expenses) shouldbe debited.Insteadof crediting
the discountreceivedaccount,ithasbeen wronglydebited.To rectifythiserror,we needtocredit
discountreceivedaccounttothe extentof Rs.2500 (Rs.1250+ Rs.1250).
In the same context,discountallowed(whichisanexpense) shouldbe debited,insteaditis
credited.Torectifythe error,we needtodebitdiscount allowedtothe extentof Rs.1700 (850 +850).

3. The difference between discountreceivedanddiscountallowedaccountistransferredtosuspense
account.
Dr SUSPENSE ACCOUNT Cr
Particulars Amount(Rs.) Particulars Amount(Rs.)
To Sales account
To Discount received a/c
To Longford
To Returns Inwards a/c
1,200
800
450
27
By Sales
By Salary
By Balance c/d
255
18
2,204
Total 2,477 Total 2,477
Q. 3. From the given trial balance draft an Adjusted Trial Balance.
Trial Balance as on 31.03.2011.
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
Ans.3- Solution:
Ledger accounts
Furniture and fittings a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d 10000 By Depreciation
By bal c/d
1000
9000
Total 10000 Total 10000
To bal b/d 9000
Buildings a/c
Dr. Cr
Particulars Rs. Particulars Rs.
To bal b/d 500000 By Depreciation
By bal c/d
50000
450000

4. Total 500000 Total 500000
To bal b/d 450000
Bad Debts a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d
To Sundry Debtors
2000
1000
By bal c/d 3000
Total 3000 Total 3000
To bal b/d 3000
Sundry Debtors a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d
To bal c/d
25000 By Bad Debts
By bal c/d
1000
24000
Total 25000 Total 25000
To bal b/d 24000
Taxes and Insurance a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d
To bal c/d
5000 By Prepaid taxes
and Insurance
By bal c/d
2000
3000
Total 5000 Total 5000
To bal b/d 3000
Prepaid taxes and Insurance a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Taxes and
Insurance
2000 By bal c/d 2000
Total 2000 Total 2000
To bal b/d 2000
Salaries a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal b/d
To Outstanding
Salaries
20000
5000
By bal c/d 25000
Total 25000 Total 25000
To bal b/d 25000
Outstanding Salaries a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal c/d 5000 By Salaries 5000
Total 5000 Total 5000

5. By bal b/d 5000
Depreciation a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Furnitureand
fittings
To Buildings
1000
50000
By bal c/d 51000
Total 51000 Total 51000
To bal b/d 51000
Commission a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To Commission
received in
advance
To bal c/d
1000
4000
By bal b/d 5000
Total 5000 Total 5000
By bal b/d 4000
Commission received in advance a/c
Dr. Cr.
Particulars Rs. Particulars Rs.
To bal c/d 1000 By Commission
By
1000
Total 1000 Total 1000
To bal b/d By bal b/d 1000
Adjusted Trial Balance as on 31.03.2011
Debit balances Rs. Adjustments Adjusted amount
Furniture and
Fittings
10000 -1000 9000
Buildings 500000 -50000 450000
Sales Returns 1000 1000
Bad Debts 2000 +1000 3000
Sundry Debtors 25000 -1000 24000
Purchases 90000 90000
Advertising 20000 20000
Cash 10000 10000
Taxes and
Insurance
5000 -2000 3000
General Expenses 7000 7000
Salaries 20000 +5000 25000
Depreciation - 1000+50000 51000
Prepaid Taxes and
Insurance
- 2000 2000
TOTAL 690000 695000
Credit balances Rs.

6. Bank Over Draft 16000 16000
Capital Account 400000 400000
PurchaseReturns 4000 4000
Sundry Creditors 30000 30000
Commission 5000 -1000 4000
Sales 235000 235000
Outstanding
salaries
- 5000 5000
Commission
received in
advance
- 1000 1000
TOTAL 690000 695000
Q. 4. Compute trend ratios and comment on the financial performance of InfosysTechnologiesLtd.
from the following extract of its income statements of five years.
(Source: Infosys Technologies Ltd. – Annual Report)
Ans.4-
Solution: Infosys Technologies Ltd.
TrendAnalysis
Particulars 2010-11 2009-10 2008-09 2007-08 2006-07
Revenue 27,501 22,742 21,693 16,692 13,893
Operating
Profit
(PBIDT)
8,968 7,861 7,195 5,238 4,391
PAT from
ordinary
activities
6,835 6,218 5,988 4,659 3,856
Trend ratios
Revenue 197.95 163.69 156.14 120.15 100

7. Operating
Profit
(PBIDT)
204.24 179.03 163.86 119.29 100
PAT from
ordinary
activities
177.26 161.26 155.29 120.82 100
Conclusion: The Revenue andOperatingProfit(PBIDT) have almostdoubledinfour years.The PAT
from ordinary activities has increased by 77.26% in the same period
Q. 5. Give the meaning of cash flow analysis and put down the objectives of cash flow
analysis. Explain the preparation of cash flow statement.
Ans.5-
Explanation of preparation of cash flow analysis
Meaningof cash flow analysis:-
Cash flowanalysisisamethodof analyzingthe financing,investing,andoperatingactivitiesof a
company.The primarygoal of cash flowanalysisistoidentify,inatimelymanner,cashflow
problemsaswell ascash flow opportunities.The primarydocumentusedincashflow analysisisthe
cash flowstatement.Since 1988,the SecuritiesandExchange Commission(SEC) hasrequiredevery
companythat filesreportstoinclude acashflow statementwithitsquarterlyandannual reports.
The cash flowstatementisuseful tomanagers,lenders,andinvestorsbecauseittranslatesthe
earningsreportedonthe income statement—whichare subjecttoreportingregulationsand
accountingdecisions—intoasimple summaryof how muchcashthe companyhasgeneratedduring
the periodinquestion."Cashflowmeasuresreal moneyflowinginto,oroutof,a company'sbank
account,"Harry Domashnoteson hisWebsite,WinningInvesting.com."Unlike reportedearnings,
there islittle acompanycan do to overstate itsbankbalance."
Objectivesofcash flowanalysis:-
The purpose of the cash flowstatementistoshow where anentitiescashisbeinggenerated(cash
inflows),andwhere itscashisbeingspent(cashoutflows),over aspecificperiodof time (usually
quarterlyandannually).Itisimportantforanalyzingthe liquidityandlongtermsolvencyof a
company.
The cash flowstatementusescashbasisaccountinginsteadof accrual basisaccountingwhichisused
for the balance sheetandincome statementbymostcompanies.Thisisimportantbecause a
companymay accrue accountingrevenuesbutmaynotactuallyreceive the cash.Thiscouldproduce
profitsandtaxespayable butnotprovide the resourcestostaysolvent.
The primarypurpose of the statementof cashflowsisto provide informationaboutcashreceipts,
cash payments,andthe netchange in cash resultingfromthe operating,investing,andfinancing
activitiesof acompanyduringthe period.
Explanation ofpreparation of cash flow analysis:
BusinessBuilderwillconcentrate oneachof the three sectionsof a cash flow statementindividually.
1. OperatingActivities,2. InvestingActivities,3. FinancingActivities

8. OperatingActivities
Cash flowfromoperatingactivitiesisprobablythe mostcomplex sectionbecausethere are two
methodsof computingit.The directmethodwill be introducedfirst.However,the directmethodis
NOT the mostwidelyusedmethodtocalculate the cashflow fromoperatingactivities.Many
companiesuse the IndirectMethod.The choice of methoddoesnotchange the amountof cash flow
reportedfromoperatingactivities.The directandindirectmethodsare justtworoutestothe same
destination.Nomatterwhichmethodyouselect,the philosophybehindwhatconstitutescashflow
fromoperatingactivitiesisthe same:
Cash flowfromoperatingactivitiesisanycashtransactionrelatedtothe company’songoing
businessthatisthe businessactivitiesthatare responsibleformostof the profits.Operating
activitiesusuallyinvolve producinganddeliveringgoodsandprovidingservices.Cashflow from
operationsisthe healthiestmeansof generatingcash.Overtime,cashfromoperationswill show the
extenttowhichday-to-dayoperatingactivitieshave generatedmore cashthanhas beenused.
 Cash flowfromoperatingactivities — The directmethodfollowingisthe underlyingformula
for the directmethodof computingthe operatingactivitiessectionof acash flow statement:
 Cash ReceivedfromSalesof GoodsandServices
 Cash PaidforOperatingGoodsand Services
Cash Flow from OperatingActivities.
The operatingactivitiessectionof acash-flow statementreportsthe informationlistedbelow.These
are the line itemsthatyouwill needtofill intocomplete acashflow statement.
Cash FlowfromOperatingActivities:
(+) Cashreceivedfromcustomers
(+) Otheroperatingcashreceipts(if any)
(−) Cashpaidto suppliers(includingsuppliersof inventory,insurance, advertising,etc.)
(−) Cashpaidto employees
(−) Interestpaid
(−) Income taxespaid
(−) Otheroperatingpayments,if any
(=) Total NetCash Provided(Used) byOperatingActivities
As youcan see,anyuse of cash (suchas paymentstosuppliersor employees) issubtractedandany
source of cash (suchas cash sales) isaddedtocompute total netcash from operatingactivities.Here
isan example of howa small business’cashflow fromoperatingactivitiesusingthe directmethod
mightlook:
XYZ Company
Cash Flow from Operating Activities
Direct Method
Sources of cash (additions):
Cash received from customers
Dividends received
Cash provided by operating activities
Uses of cash (subtractions):
Cash paid for inventory
Cash paid for insurance
Cash paid for selling expenses
Interest paid
Taxes paid
Net Cash from Operating Activities

9. While itseemssimpleenough,there are variousreasonsthatmanycompaniesdonotoptfor this
format.One reasonmay be the numberof calculationsnecessarytocompute some of the
categories,suchascash receivedfromcustomers.Whilecomputerizedaccountingsystemscould
make thisrelativelyeasy,asmall businesswithmanysmall cashsalesanda manual accounting
systemmightfinditharderto determine total cashreceived.
To compile astatementof cash flowsfromoperationsusingthe directmethod, anin-depth
knowledge of the businessanditsaccountingmethodsisrequired.Thatis,the preparerneedstobe
thoroughlyfamiliarwiththe mannerinwhichsalesare recordedandexpensesare incurredand
paid.Asa small businessowner,thismightbe informationthatyouare verycomfortable
assembling.If thisisthe case,thenprepare the statementof cashflowsforyourbusinessbyusing
the directmethod.
As notedearlier,evenif the directmethodisused,netincomeissuchanimportantaccounting
conceptthat an additional statementreconcilingthe netincome shownonthe profitandloss
statementwithcashflowfromoperatingactivitiesmustbe prepared.Whatthismeansisthat
accordingto generallyacceptedaccountingprinciples,if youprepare cashflow fromoperating
activitiesusingthe directmethod,youmustalsoprepare itbythe indirectmethodona
supplemental statement.(While itmaystrike youastwice as much work,informationonthe direct
methodispresentedinthisBusinessBuilderbecause itisthe methodpreferredbybankersand
accountants.)
We will continue workingthroughthe preparationof acash flow statementusingthe directmethod.
Thenan explanationof the indirectmethodwill be given.ThisBusinessBuilderassumesthatyouwill
be workingthroughbothmethodsinorderto choose whichmethodwill workbestforyou.
Informationonfinancingandinvestingactivitiesincludedin the descriptionof the directmethodis
importantforboth typesof cash flowstatements.
InvestingActivities
Cash flowfrominvestingactivitiesisthe secondpartof bothtypesof cash flow statements.Investing
activitiesare the changestoyour cash positionowingtothe buyingorsellingof noncurrentassets.
Thisincludessellingandreplacingequipmentthatwearsoutor acquiringa new buildingorlandso
that yourcompanycan grow.
Investingactivitiescanalsoinclude the purchase orsale of stock,bonds,and securities.Lending
moneyandreceivingloanpaymentsare alsoconsideredinvestingactivities.Forasmall business,the
investingactivitiessectionof acash flowstatementusuallyreportsthe followinginformation:
Cash Flowsfrom InvestingActivities:
(+) Proceedsfromsale of assets
(−) Purchasesof propertyandequipment
(=) Total NetCash Provided(Used) byinvestingactivities
For a givenperiod,youmaynothave much inthe way of investingactivities.Butovertime,itisan
importantconsiderationforassessinghow youhave chosentouse the cashgeneratedbyyour
business.
FinancingActivities
Financingactivitiesonacash flowstatementreflectborrowingmoneyandrepayingmoney,issuing
stock,and payingdividends.The financingactivitiessectionof the cashflow statementcanbe
reducedtothe followingformula:
 Cash receivedfromissuesof debtandcapital stock
 Cash receivedfordivid.andreacquisitionof debt&cap. Stock
Cash flowfrom financing activities:-
For a small business,the financingactivitiessectionof acash flow statementusuallyreportsthe
followinginformation:
(+) Netborrowingunderline of creditagreement
(+) Proceedsfromnewborrowings
(−) Repaymentof loans

10. (−) Principal paymentsundercapital leaseobligations
(−) Dividends/distributions/withdrawalspaid
(+) Proceedsfromissuance of stock
(+) Partner/ownercapital contributions
(=) Total NetCash Provided(Used) byfinancingactivities
As youcan see,thissectionof the cash flow statementisregisteringinflowsof cashfromloans
receivedandloansrepaid,andothercashinflowsfromoutsidersandowners.If youhave paid
dividendsortakenmoneyfromthe business,itshouldbe reportedhere.
CASH FLOW FROM OPERATING ACTIVITIES — INDIRECT METHOD
The indirectmethodof computingcashflow fromoperatingactivitiesstartswithnetincome (from
the income statementorP & L statement).Thennetincome isadjustedtotake intoaccount changes
duringthe periodasshownon the balance sheet.Adjustmentsare made forchangesinthe following
accounts:depreciationandamortization,accountsreceivable,inventory,accountspayable,accrued
wagespayable,prepaidinsurance,andincome taxespayable.Fora verysmall business,all of the
accounts maynot apply.
Here is whatcash flowfromoperatingactivitiesusingthe indirectmethodlookslike.Note thatthis
statementisforthe same firmand time periodasthe example illustratingthe directmethod.The
amountof cash flowfromoperationsisthe same,the onlydifference isthe methodusedtoreport
it.
XYZ Company
Cash Flow from Operating Activities
Indirect Method
Net income
Adjustments:
Depreciation and amortization
Deferred taxes
Decrease in accounts receivable
Increase in inventories
Increase in accounts payable
Increase in accrued interest receivable
Increase in accrued interest payable
Gain on sale of property
Net cash flow from operating activities
Q. 6. Write the assumptions of marginal costing. Differentiate between absorption costing
and marginal costing.
Ans.6- Marginal Cost may be definedasthe amountof any givenvolume of outputbywhich
aggregate costsare changesif the volume of outputisincreasedbyone unit"
Marginal Costingdistinguishesbetweenfixedcostsvariable costs.The marginal Costof
productis itsvariable cost.It includesdirectmaterials,directlabor,directexpensesandthe variable
part of overheads.The termmarginal costinghasbeendefinedasthe ascertainmentof marginal
cost and the effectof profitorchangesin volume ortype of outputby differentiatingbetweenfixed
costs andvariable costs."Inthe technique of costingonlyvariable costandchargesto cost unitsand

11. fixedcostsare to be writtenoff againstcontributionforthatperiodcontributionisnothingbutthe
excessof sale price overmarginal cost.
If the cost functionisdifferentiable joining,the marginal costisthe costof the nextunitproduced
referringtothe basicvolume.
If the cost functionisnotdifferentiable,the marginal costcanbe expressedasfollows.
Assumptionof Marginal Costing:
The Marginal Costingtechnique isbasedonthe following assumptions:-
1. All elementsof costscanbe dividedintotwoparts viz.variable andfixed
2. Variable costremainconstantperunitand fluctuatesdirectlyinproportiontochange inthe
volume of output.
3. FixedCostremainconstantat all levelsof production.The share of fixedcostperunitoutputvary
accordingto the volume of production.
4. The sellingprice perunitremainsunchangedatall levelsof activity
5. The volume of outputisthe onlyfactor whichinfluencesthe cost.
6. No closingstock.
7. Linerrelationshipbetweenthe revenueandcost.
Absorptioncosting vs Marginal Costing
The systemof computingthe cost of productionisknownas costing.The mainpurpose of any
costingsystemisto identifythe costincurredforthe production of a unitoutput.In a manufacturing
company,identifyingthe costassociatedwithaunitproductis veryimportanttoprice the product
such that the companycouldmake a profitand survive toexistinthe future.Bothabsorptioncosting
and marginal costingare traditional systemof costing.Bothmethodshave theirownprosandcons.
In modernmanagementaccounting,there are some sophisticatedcostingmethodssuchasactivity
basedcosting(ABC) thatare verypopular.Those methodsare builtupjustbyaddingand amending
some principlesof the principlesof traditional costingsystem.
Marginal Costing:- Marginal costingcalculatesthe cost to be incurredwhenanadditional unitis
produced.Prime cost,whichincludesdirectmaterial,direct labor,directexpenses,andvariable
overheadsare the maincomponentsof marginal costing.Contributionisaconceptdevelopedalong
withmarginal costing.Contributionisthe netsalesrevenue tothe variable cost.Undermarginal
costingmethods,fixedcostsare not takenintoaccount basedon the argumentthat fixedcostlike
factoryrent,utilities,amortization,etc.are tobe incurred,whetherthe productionisdone ornot.In
marginal costing,fixedcostare treatedasperiodcost.Oftenmanagersrequire marginal costingto
make decisionsasitcontainscoststhat vary withthe numberof unitproduced.Marginal costingis
alsoknownas ‘variable costing’and‘directcosting’.

12. AbsorptionCosting: - UnderAbsorptioncostingmethod,notonlythe variable costs,but fixedcosts
alsoabsorbedbythe product. Most accountingprinciplesrequire absorptioncostingforthe purpose
of external reporting.Thismethodisalwaysusedtoprepare financial statements.Adsorption
costingisusedto calculate profitandstock valuationinthe financial statement.Asstockcannotbe
undervaluedinthismethod,InlandRevenue requiresthiscosting.Fixedcostsare takenintoaccount
on the assumptionthattheymustbe recovered.The terms‘Full absorptioncosting’and‘Full costing’
alsodenote the absorptioncosting.
Difference betweenMarginal Costingand AbsorptionCosting:
•Though,marginal costingandabsorptioncostingare two traditional costingtechniques,theyhave
theirownunique principlesthatdrawa fine line that separatesone fromanother.
•In marginal costing,contributioniscalculated,whereasthisisnotcalculatedunderabsorption
costing.
•Whenvaluingthe stocksundermarginal costing,onlythe variable costsare considered,whereas
valuationof stockunderabsorptioncostingincludescostsincurredforthe productionfunctionalso.
•Generally,the value of inventoryishigherunderabsorptioncostingthanmarginal costing.
•Marginal costingisoftenusedforinternal reportingpurposes(facilitate the decisionmakingof
managers),while absorptioncostingisrequiredforexternal reportingpurposes,suchasincome tax
reporting.
• Contributionmustbe calculatedundermarginal costingsystem, whereasgrossprofitwill be
calculatedunderabsorptioncostingmethod.