[Management Accounting Solved Question Papers, Dibrugarh University Solved Question Papers, 2015, B.Com 5th Sem]
Management Accounting Solved Question Papers
2015 (November)
COMMERCE (General/Speciality)
Course: 503 (Management Accounting)
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
Time: 3 hours
1. (a) write true or false: 1x4=4
a) Management accounting deals only with the
information which is useful to the management. True
b) P/V ratio can be improved by reducing the
fixed cost. False
c) Cash Flow Statement is based upon accrual
basis of accounting. False, Cash
Basis
(b) Fill in the
blanks:
1x5=5
a) The difference between Actual Cost and
Standard Cost is known as Variance
b) Only Quantitative
information is recorded in accounting.
c) Margin of safety can be improved by reducing
the variable cost.
d) Any transaction that increases working capital
is a application of fund.
e) Repayment of borrowing causes cash ____.
2.
Write short notes on any four of the following:
4x4=16
a)
Limitations of management accounting.
Ans:
Limitations
of Management Accounting: Management
accounting, being comparatively a new discipline, suffers from certain
limitations, which limit its effectiveness. These limitations are as follows:
1. Limitations of basic records: Management
accounting derives its information from financial accounting, cost accounting
and other records. The strength and weakness of the management accounting,
therefore, depends upon the strength and weakness of these basic records. In
other words, their limitations are also the limitations of management
accounting.
2. Persistent efforts. The conclusions
draws by the management accountant are not executed automatically. He has to
convince people at all levels. In other words, he must be an efficient salesman
in selling his ideas.
3. Management accounting is only a tool:
Management accounting cannot replace the management. Management accountant is
only an adviser to the management. The decision regarding implementing his
advice is to be taken by the management. There is always a temptation to take
an easy course of arriving at decision by intuition rather than going by the
advice of the management accountant.
4. Wide scope: Management
accounting has a very wide scope incorporating many disciplines. It considers
both monetary as well as non-monetary factors. This all brings inexactness and
subjectivity in the conclusions obtained through it.
b)
Cost-volume-profit analysis.
Ans:
Cost-Volume-Profit
Analysis: Cost-Volume-Profit analysis is analysis of three variables
i.e., cost, volume and profit which
explores the relationship existing amongst costs, revenue, activity
levels and the resulting profit. It aims
at measuring variations of profits and costs with volume, which is significant
for business profit planning.
CVP analysis makes use of principles of
marginal costing. It is an important tool of planning for making short term
decisions. The following are the basic
decision making indicators in Marginal Costing:
(a) Profit Volume Ratio (PV Ratio) /
Contribution Margin ratio
(b) Break Even Point (BEP)
(c) Margin of Safety (MOS)
(d) Indifference Point or Cost Break Even
Point
(e) Shut-down Point
Assumptions in
CVP analysis
The assumptions in CVP analysis are the same as that under
marginal costing.
a) Cost can be
classified into fixed and variable components.
b) Total fixed cost
remain constant at all levels of output
c) The variable cost
change in direct proportion with the volume of output
d) The product mix
remains constant
e) The selling price
per unit remains the same at all the levels of sales
f) There is
synchronization of output and sales, i.e, what ever output is produced , the
same is sold during that period.
c)
Advantages of standard costing. Out of Syllabus
d)
Cash Flow Statement.
Ans:
A Cash Flow Statement is similar to the Funds Flow Statement, but
while preparing funds flow statement all the current assets and current
liabilities are taken into consideration. But in a cash flow statement only
sources and applications of cash are taken into consideration, even liquid
asset like Debtors and Bills Receivables are ignored.
A Cash Flow Statement is a statement, which
summarises the resources of cash available to finance the activities of a
business enterprise and the uses for which such resources have been used during
a particular period of time. Any transaction, which increases the amount of
cash, is a source of cash and any transaction, which decreases the amount of
cash, is an application of cash.
Simply, Cash Flow is a statement which analyses
the reasons for changes in balance of cash in hand and at bank between two
accounting period. It shows the inflows and outflows of cash.
Objectives
of Cash Flow Statement
The Cash Flow Statement is prepared because of
number of merits, which are offered by it. Such merits are also termed as its
objectives. The important objectives are as follows:
A. To Help the Management in Making Future
Financial Policies: Cash Flow statement is very helpful to the
management. The management can make its future financial policies and is in a
position to know about surplus or deficit of cash.
B. Helpful in Declaring Dividends etc.: Cash Flow
Statement is very helpful in declaring dividends etc. This statement can supply
necessary information to understand the liquidity.
C. Cash Flow Statement is Different than Cash
Budget: Cash budget is prepared with the help of inflow and outflow of
cash. If there is any variation, the same can be corrected.
D. Helpful in devising the cash requirement: Cash flow statement is helpful in devising
the cash requirement for repayment of liabilities and replacement of fixed
assets.
e)
Responsibility accounting.
Ans:
Responsibility accounting is a system used in management
accounting for control of costs. It is used along with other systems like
budgetary control and standard costing. The organization is divided into
different centers called “responsibility centers” and each centre is assigned
to a responsible person.
According to Eric. L. Kohler “
Responsibility Accounting is the classification, management maintenance, review
and appraisal of accounts serving the purpose of providing information on the
quality and standards of performance attained by persons to whom authority has
been assigned.”
Responsibility accounting, therefore, represents a
method of measuring the performances of various divisions of an organization.
The test to identify the division is that the operating performance is
separately identifiable and measurable in some way that is of practical
significance to the management. Responsibility accounting collects and reports
planned and actual accounting information about the inputs and outputs of
responsibility centers.
Features of
Responsibility Accounting
1. It is a control system used by top management for monitoring
and controlling operations of a
business.
2. It is based on clearly defined functions and responsibilities
assigned to executives.
3. The organization is divided into meaningful segments called
responsibility centres.
4. Costs and revenues of each centre and responsibility of them
are fixed on the individuals.
f) Assumptions of
break-even analysis.
Ans:
1.
All costs can be classified into fixed and variable elements. Semi variable
costs are also segregated into fixed and variable elements.
2. The total variable costs change in direct proportion with units
of output. It follows a linear relation with volume of output and sales.
3. The total fixed costs remain constant at all levels of output.
These are incurred for a period and have no relation with output.
4. Only variable costs are treated as product costs and are
charged to output, product, process or operation
5. Fixed costs are treated as ‘Period costs’ and are directly
transferred to Costing Profit and Loss Account.
6. The closing stock is also valued at marginal cost and not at
total cost.
7. The relative profitability of product or department is based on
the contribution it gives and not based on the profit.
8. It is also assumed that the selling price per unit remains the
same i.e, any number of units can be sold at the current market price.
9. The product or sales mix remains constant over a period of
time.
3.
(a) “Management accounting aims at providing financial results of the business
to the management for taking decisions.” Explain by bringing out the advantage
of management accounting. 11
Ans:
The term management accounting refers to accounting for the
management. Management accounting provides necessary information to assist the
management in the creation of policy and in the day-to-day operations. It
enables the management to discharge all its functions i.e. planning,
organization, staffing, direction and control efficiently with the help of accounting
information.
In the words of R.N. Anthony “Management
accounting is concerned with accounting information that is useful to
management”.
Anglo American Council of Productivity
defines management accounting as “Management accounting is the presentation of
accounting information is such a way as to assist management in the creation of
policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose “Management accounting
is the adaptation and analysis of accounting information, and its diagnosis and
explanation in such a way as to assist management”.
From the above explanations, it is clear that
management accounting is that form of accounting which enables a business to be
conducted more efficiently.
The
advantages of management accounting are summarized below:
a) Helps in Decision Making: Management
accounting helps in decision making such as pricing, make or buy, acceptance of
additional orders, selection of suitable product mix etc. These important
decisions are taken with the help of marginal costing technique.
b) Helps in Planning: Planning includes
profit planning, preparation of budgets, programmes of capital investment and
financing. Management accounting assists in planning through budgetary control,
capital budgeting and cost-volume-profit analysis.
c) Helps in Organizing: Management
accounting uses various tools and techniques like budgeting, responsibility
accounting and standard costing. A sound organizational structure is developed
to facilitate the use of these techniques.
d) Facilitates Communication: Management
is provided with up-to-date information through periodical reports. These
reports assist the management in the evaluation of performance and control.
e) Helps in Co-coordinating: The
functional budgets (purchase budget, sales budget, and overhead budget etc.)
are integrated into one known as master budget. This facilitates clear
definition of department goals and coordination of their activities.
f) Evaluation and Control of Performance:
Management accounting is a convenient tool for evaluation of performance. With
the help of ratios and variance analysis, the efficiency of departments can be
measured which assists management in the location of weak spots and in taking
corrective actions.
g) Interpretation of Financial Information:
Management accounting presents information in a simple and purposeful manner.
This facilitates quick decision making.
h) Economic Appraisal: Management
accounting includes appraisal of social and economic forces and government
policies. This appraisal helps the management in assessing their impact on the
business.
Or
(b)
Explain the characteristic features of management accounting. What are the
tools which make it useful for the
management? 4+7=11
Ans: Characteristics of
Management Accounting
1)
Helps
in decision making: It helps management in decision making. The information
provided through management accounting is only for internal use of management
and it not distributed to third parties.
2)
Technique
of Selective Nature: Management
Accounting is a technique of selective nature. It takes into consideration only
that data from the income statement and position state merit which is relevant
and useful to the management. Only that information is communicated to the
management which is helpful for taking decisions on various aspects of the
business.
3)
It is an optional
technique: There are no statutory obligations regarding adoption of management
accounting tool nor are there any obligations to furnish management accounting
information. A firm may choose to adopt management accounting techniques
totally depends upon its utility and desirability.
4) Provides Data and
not the Decisions: The management
accountant is not taking any decision but provides data which is helpful to the
management in decision-making. It can inform but cannot prescribe. It is just
like a map which guides the traveller where he will be if he travels in one
direction or another. Much depends on the efficiency and wisdom of the
management for utilizing the information provided by the management accountant.
5) Concerned with
Future: Management
accounting unlike the financial accounting deals with the forecast with the
future. It helps in planning the future because decisions are always taken for
the future course of action.
Tools and Techniques Used in
Management Accounting
Management Accounting | |
Chapter Wise Notes | Chapter Wise MCQs |
1. Introduction to Management Accounting 5. Budget and Budgetary Control Also Read: | |
Management Accounting Important Questions for Upcoming Exams (Dibrugarh University) | |
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Management Accounting Question Papers: 2013 2014 2015 2016 2017 2018 2019 | |
Management accountant
supplies information to the management so that latter may be able to discharge
all its functions, i.e., planning organization, staffing, direction and control
sincerely and faithfully. For doing this, the management accountant uses the
following tools and techniques.
a) Financial planning: Financial planning
is the act of deciding in advance about the financial activities necessary for
the concern to achieve its primary objectives. It includes determining both
long term and short term financial objectives of the enterprise, formulating
financial policies and developing the financial procedure to achieve the
objectives. The role of financial policies cannot be emphasized to achieve the
maximum return on the capital employed. Financial policies may relate to the
determination of the amount of capital required, sources of funds, govern the
determination and distribution of income, act as a guide in the use of debt and
equity capital and determination of the optimum level of investment in various
assets.
b) Analysis of financial statements: The
analysis is an attempt to determine the significance and meaning of the
financial statement data so that a forecast may be made of the prospects for
future earnings, ability to pay interest and debt maturities and profitability
of a sound dividend policy. The techniques of such analysis are comparative
financial statements, trend analysis, funds flow statement and ratio analysis.
This analysis results in the presentation of information which will help the
business executive, investors and creditors.
c) Historical cost accounting: The
historical cost accounting provides past data to the management relating to the
cost of each job, process and department so that comparison may be make with
the standard costs. Such comparison may be helpful to the management for cost
control and for future planning.
d) Standard costing: Standard costing is
the establishment of standard costs under most efficient operating conditions,
comparison of actual with the standard, calculation and analysis of variance,
in order to know the reasons and to pinpoint the responsibility and to take
remedial action so that adverse things may not happen again. This aspect is
necessary to have cost control.
e) Budgetary control: The management
accountant uses the total of budgetary control for planning and control of the
various activities of the business. Budgetary control is an important technique
of directing business operations in a desired direction, i.e. achieve a satisfactory
return on investment.
f) Marginal costing: The management
accountant uses the technique of marginal costing, differential costing and
break even analysis for cost control, decision-making and profit maximization.
g) Funds flow statement: The management
accountant uses the technique of funds flow statement in order to analyze the
changes in the financial position of a business enterprise between two dates.
It tells wherefrom the funds are coming in the business and how these are being
used in the business. It helps a lot in financial analysis and control, future
guidance and comparative studies.
h) Cash flow statement: A funds flow
statement based on increase or decrease in working capital is very useful in
long-range financial planning. It is quite possible that these may be
sufficient working capital as revealed by the funds flow statement and still
the company may be unable to meet its current liabilities as and when they fall
due. It may be due to an accumulation of investments and an increase in trade
debtors. In such a situation, a cash flow statement is more useful because it
gives detailed information of cash inflow and outflow. Cash flow statement is
an important tool of cash control because it summarizes sources of cash inflow
and uses of cash outflows of a firm during a particular period of time, say a
month or a year. It is very useful tool for liquidity analysis of the
enterprise.
i)
Decision
making: Whenever there are different alternatives of doing a particular
work, it becomes necessary to select the best out of all alternatives. This
requires decision on the part of the management. The management accounting
helps the management through the techniques of marginal costing, capital
budgeting, differential costing to select the best alternative which will
maximize the profits of the business.
j)
Revaluation
accounting: The management accountant through this technique assures the
maintenance and preservation of the capital of the enterprise. It brings into
account the impact of changes in the prices on the preparation of the financial
statements.
k) Statistical and graphical techniques:
The management accountant uses various statistical and graphical techniques in
order to make the information more meaningful and presentation of the same in
such form so that it may help the management in decision-making. The techniques
used are Master Chart, Chart of sales and Earnings, Investment chart, Linear
Programming, Statistical Quality control, etc.
l)
Communication
(or Reporting): The success for failure of the management is dependent on
the fact, whether requisite information is provided to the management in right
form at the right time so as to enable them to carry out the functions of
planning controlling and decision-making effectively. The management accountant
will prepare the necessary reports for providing information to the different
levels of management by proper selection of data to be presented, organization
of data and selecting the appropriate method of reporting.
4. (a) The following information is given by XYZ Ltd. :
Selling price per
unit
Variable cost per
unit
Fixed
cost
|
Rs.
10
6
24,000
|
You are required to calculate:
a)
Break-even sales
(in units);
b)
Sales to earn a
profit of 10% on sales;
c)
New BEP, if selling
price is reduced by 10%.
d)
New selling price,
if BEP is to be brought down to 4800 units.
2+3+3+3=11
Or
(b)
“Marginal costing is a very useful technique to management for cost control,
profit planning and decision making.” Explain.
11
Ans:
Marginal Costing: It is the
technique of costing in which only marginal costs or variable are charged to
output or production. The cost of the output includes only variable costs
.Fixed costs are not charged to output. These are regarded as ‘Period Costs’.
These are incurred for a period. Therefore, these fixed costs are directly
transferred to Costing Profit and Loss Account.
According to CIMA, marginal costing is “the ascertainment, by
differentiating between fixed and variable costs, of marginal costs and of the
effect on profit of changes in volume or type of output. Under marginal
costing, it is assumed that all costs can be classified into fixed and variable
costs. Fixed costs remain constant irrespective of the volume of output.
Variable costs change in direct proportion with the volume of output. The
variable or marginal cost per unit remains constant at all levels of output.”
Thus, Marginal costing is defined as the
ascertainment of marginal cost and of the ‘effect on profit of changes in
volume or type of output by differentiating between fixed costs and variable
costs. Marginal costing is mainly concerned with providing information to
management to assist in decision making and to exercise control. Marginal
costing is also known as ‘variable costing’ or ‘out of pocket costing’.
Marginal costing and Beak even analysis are very useful to
management. The important uses of marginal costing and Break Even analysis are
the following:
1) Cost control: Marginal
costing divides total cost into fixed and variable cost. Fixed Cost can be
controlled by the Top management to a limited extent and Variable costs can be
controlled by the lower level of management. Marginal costing by concentrating
all efforts on the variable costs can control total cost.
2) Profit Planning: It helps
in short-term profit planning by making a study of relationship between cost,
volume and Profits, both in terms of quantity and graphs. An analysis of
contribution made by each product provides a basis for profit-planning in an
organisation with wide range of products.
3) Fixation of selling price: Generally
prices are determined by demand and supply of products and services. But under
special market conditions marginal costing is helpful in deciding the prices at
which management should sell. When marginal cost is applied to fixation of
selling price, it should be remembered that the price cannot be less than
marginal cost. But under the following situation, a company shall sell its
products below the marginal cost:
a)
To maintain production and to keep employees
occupied during a trade depression.
b)
To prevent loss of future orders.
c)
To dispose of perishable goods.
d)
To eliminate competition of weaker rivals.
e)
To introduce a new product.
f)
To help in selling a co-joined product which is
making substantial profit?
g)
To explore foreign market
4) Make or
Buy: Marginal costing helps the management in
deciding whether to make a component part within the factory or to buy it from
an outside supplier. Here, the decision is taken by comparing the marginal cost
of producing the component part with the price quoted by the supplier. If the
marginal cost is below the supplier’s price, it is profitable to produce the
component within the factory. Whereas if the supplier’s price is less than the
marginal cost of producing the component, then it is profitable to buy the
component from outside.
5) Closing down of a
department or discontinuing a product: The firm that has several departments or
products may be faced with this situation, where one department or
product shows a net loss. Should this product or department be
eliminated? In marginal costing, so far as a department or product is
giving a positive contribution then that department or product shall not
be discontinued. If that department or product is discontinued the overall profit
is decreased.
6) Selection of a
Product/ sales mix: The marginal costing technique is useful for
deciding the optimum product/sales
mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce
maximum units of that product which shows
the highest P/V ratio so as to maximize profits.
7) Evaluation of Performance: The
different products and divisions have different profit earning potentialities.
The Performance of each product and division can be brought out by means of
Marginal cost analysis, and improvement can be made where necessary.
8) Limiting
Factor: When a limiting factor restricts the
output, a contribution analysis based on the limiting factor can help
maximizing profit. For example, if machine availability is the limiting factor,
then machine hour utilisation by each product shall be ascertained and
contribution shall be expressed as so many rupees per machine hour utilized.
Then, emphasis is given on the product which gives highest contribution.
9) Helpful in
taking Key Managerial Decisions: In addition
to above, the following are the important areas where managerial problems are
simplified by the use of marginal costing :
a)
Analysis of Effect
of change in Price.
b)
Maintaining a
desired level of profit.
c)
Alternative methods
of production.
d)
Diversification of
products.
e)
Alternative course
of action etc.
5. (a) A factory is currently running at 50% capacity and produces
5000 units at a cost of Rs. 90 per unit as per details given below:
Raw materials –
Labour –
Factory overhead –
Administrative overhead –
The current selling price is Rs.
100 per unit.
|
Rs. 50
Rs. 15
Rs. 15 (Rs. 6 fixed)
Rs. 10 ( Rs. 5 fixed)
|
At 60% working, raw material cost per unit increases by 2% and
selling price per unit falls by 2%.
At 80% working, raw material cost, per unit increases by 5% and
selling price per unit falls by 5%.
Estimate profits of the factory at 60% and 80% working and offer
your comments. 9+3=12
Or
(b)
What do you mean by cash budget? What are its advantages? How is it
prepared? 3+3+6=12
Ans: Cash Budget: A cash budget is a budget or plan of expected
cash receipts and disbursements during the period. These cash inflows and
outflows include revenues collected, expenses paid, and loans receipts and
payments. In other words, a cash budget is an estimated projection of the
company's cash position in the future.
Management usually develops the cash budget
after the sales, purchases, and capital expenditures budgets are already made.
These budgets need to be made before the cash budget in order to accurately
estimate how cash will be affected during the period. For example, management
needs to know a sales estimate before it can predict how much cash will be
collected during the period. Management uses the cash budget to manage the cash
flows of a company. In other words, management must make sure the company has
enough cash to pay its bills when they come due.
Chartered Institute of Management Accountant (CIMA) defines
cash budgets as a short-term fiscal plan expressed in money which is prepared
in advance. It helps to determine the cash-inflow and cash-outflow of the
business.
Advantages of
Cash Budget
Cash budget is
an important tool in the hands of financial management for the planning and
control of the working capital to ensure the solvency of the firm.
The importance of cash budget may be summarised
as follow:
(1) Helpful
in Planning. Cash budget helps planning for the most efficient use
of cash. It points out cash surplus or deficiency at selected point of time and
enables the management to arrange for the deficiency before time or to plan for
investing the surplus money as profitable as possible without any threat to the
liquidity.
(2)
Forecasting the Future needs. Cash budget forecasts the future needs of funds, its
time and the amount well in advance. It, thus, helps planning for raising the
funds through the most profitable sources at reasonable terms and costs.
(3)
Maintenance of Ample cash Balance. Cash is the basis of liquidity of the enterprise. Cash
budget helps in maintaining the liquidity. It suggests adequate cash balance
for expected requirements and a fair margin for the contingencies.
(4)
Controlling Cash Expenditure. Cash budget acts as a controlling device. The expenses
of various departments in the firm can best be controlled so as not to exceed
the budgeted limit.
(5)
Evaluation of Performance. Cash budget acts as a standard for evaluating the
financial performance.
(6) Testing
the Influence of proposed Expansion Programme. Cash
budget forecasts the inflows from a proposed expansion or investment programme
and testify its impact on cash position.
(7) Sound
Dividend Policy. Cash budget plans for cash dividend to shareholders,
consistent with the liquid position of the firm. It helps in following a sound
consistent dividend policy.
(8) Basis
of Long-term Planning and Co-ordination. Cash
budget helps in co-coordinating the various finance functions, such as sales,
credit, investment, working capital etc. it is an important basis of long term
financial planning and helpful in the study of long term financing with respect
to probable amount, timing, forms of security and methods of repayment.
Methods
of Preparation of Cash Budget
(1) Receipts and Payments Method
(2) Adjusted Profit and Loss
Method or Adjusted Earnings Method or Cash Flow Method.
(3) Balance-Sheet Method.
The above methods of preparing cash budget
represent different approaches.
(1)
Receipts and Payments Method: It is the most simple and popular method of
preparing cash budget. The method is most commonly used in forecasting the
short term cash position. It is just like receipts and payment method in
technique. It shows yearly cash position with proper breakups by quarters and
months. For the purpose of preparing cash budget under this method, cash
information’s are collected from other budgets such as sales budget, salary and
wages budget, overhead budgets, material budget etc.
Under this method cash budget is divided into
two parts. One part shows the timing and the amount of cash receipts and other
part shows the timing and the amount of cash disbursements. Cash receipts and
cash disbursements are estimated as under:
(i)
Estimation of Cash Receipts: The
amount of cash receipts can be estimated from the following items:
(a)
Cash receipts arising from
Operations. It includes advances form customers, estimated cash
receipts from sales, debtors and collection of bills receivables. In estimating
the amount of cash sales, cash-discount policy of the firm should be taken into
account. Forecasting the receipts from credit sales, i.e., receipts from
customers, B/R etc. Credit policy, terms of sales, position of customers,
customers of the trade, any time lag between sale and collection should be
considered.
(b)
Non-operating Cash Receipts. It
includes revenue receipts of non-operating nature and includes receipts from
interest, dividend, rent, commission, royalty, sale of scrap, refund of tax
etc.
(ii) Estimation of Cash
Disbursements. The amount of cash disbursement can be estimated from
the following items:
(a) Disbursement for
operations Such as disbursements for cash purchases, wages and
overheads, payment to creditors, bonus and other remunerations such as
gratuities, pensions etc. and advances to suppliers. Terms of purchases,
discounts receivable and time lag between the time of purchase and payment are
taken into consideration.
(b) Disbursement for
non-operating functions. It includes financial expenses on non
operative functions such as interest, rent, dividend, donations, income tax and
other taxes etc.
(c) Disbursement for capital
transactions. Such as expenditure for expansion, payment of loans and
overdrafts, redemption of debentures and preference capital etc.
In preparing cash budget, total
budgeted cash receipts are added to the opening balance of cash and then the
total budgeted disbursements are deducted there from to know the closing
balance of cash. If opening cash balance and estimated total cash receipts are
much larger than the estimated payments, there will be cash balance at close
and management should take the necessary steps, to invest surplus funds for
short period. On the other hand, if there is cash shortage, the management must
plan the borrowings for short period to manage the deficiency.
(2) Adjusted Profit and Loss Method or Adjusted Earnings Method or
Cash Flow Method: The method is suitable for preparing the long term
estimates of cash inflows and outflows. It is also called cash-flow statement.
Under this method, profit and loss account is adjusted to know the cash
estimates. This method is useful in budgetary control technique.
Under this method, closing cash
balance can be known by adding profits for the period to the opening cash
balance because the theory is based on the elementary assumption that profits
of a business are equal to cash. Thus if we assume that there are no credit
transactions, capital transactions, accruals, provisions, stock fluctuations,
or appropriations of profit, the balance of profit as shown by the profit and
loss account should b equal to the cash balance in the case book. However, such
a situation will never exist in actual practice, the assumption needs
adjustments. In preparing the cash forecasts, one proceeds with the budgeted
profit for the period and then adjusts this figure by the items mentioned
below-
Items to be Added
(i) All non-cash
items shown in the debit side of profit and loss account should be added to the
budgeted profit because these items do not involve any cash
outflows-depreciation, deferred revenue expenditure, writing off of intangible
assets, prepaid expenses etc.
(ii) Changes in
working capital which results in inflow of cash balances such as increase in
closing stock, debtors and decrease in sundry creditors and other liabilities,
redemption of preference shares and debentures, payment of dividend, purchase
capital assets, investment etc.
(3) Balance-Sheet Method: This method is
similar to that of profit and loss adjustment method, a budgeted balance sheet
is prepared for the next period showing all items of assets and liabilities
except cash balance which is found out as the balancing figure of the two sides
of balance sheet.
If the asst side exceeds the
liability side the balance shall reveal the bank over-draft and if the
liability side is heavier than the asset side, the difference represents the
bank balance.
6. (a) X Ltd. furnished the
following particulars for the year 2014: Out
of Syllabus
Actual output – 900 units
Budgeted output – 1000 units
Actual fixed overhead – Rs. 49,500
Budgeted fixed overhead – Rs.
50,000
Standard time per unit – 2 hours
Actual clock hours – 1900 hours
(including 200 hours as idle time)
|
You are required to calculate the following variances:
2x5=10
a)
Overhead Cost Variance.
b)
Overhead Volume Variance.
c)
Overhead Capacity Variance.
d)
Overhead Efficiency Variance.
e)
Overhead Idle Time Variance.
Or
(b) What is standard costing? How would you distinguish it from
budgetary control? Point out the limitations of standard costing.
2+4+4=10
7.
(a) Following are the Balance Sheets of Tulsian Ltd. for the year ending on 31st March,
2013 and 31st March, 2014:
Assets
|
31.03.2013
|
31.03.2014
|
Fixed Assets
10% Investment (long term)
Debtors
Stock
Cash
Underwriting Commission
Discount on Issue of Debentures
|
10,20,000
60,000
80,000
3,80,000
1,20,000
5,000
15,000
|
12,40,000
1,60,000
1,50,000
3,70,000
3,60,000
6,000
4,000
|
16,80,000
|
22,90,000
|
|
Liabilities
|
31.03.2013
|
31.03.2014
|
Equity Share Capital
18% Preference Share Capital
Profit & Loss A/c
Reserves
14% Debentures
Creditors
Bank Overdraft
Proposed Dividend
Provision for Tax
Provision for Doubtful Debts
Unpaid Dividend
Unpaid Interest on Debentures
|
6,00,000
4,00,000
1,00,000
1,20,000
2,00,000
40,000
60,000
1,20,000
20,000
20,000
-
-
|
8,00,000
2,00,000
4,00,000
1,40,000
3,00,000
1,50,000
50,000
1,50,000
40,000
30,000
20,000
10,000
|
16,80,000
|
22,90,000
|
Additional
Information:
a)
A machine costing Rs. 1,40,000 (depreciation
provided thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation charged
during the year was Rs. 1,40,000.
b)
An interim dividend @ 15% was paid on equity shares.
New shares and debentures were issued on 31.03.2014.
c)
Tax paid during the year was Rs. 10,000.
d)
On 31.03.2014, some investments were purchased
for Rs. 1,80,000 and some investments were sold at a profit of 20% on sale.
e)
Preference shares were redeemed on 31.03.2014
at a premium of 5%.
You
are required to prepare Cash Flow Statement as per AS-3 (Revised) by indirect
method. 12
Or
(b)
Discuss the importance of Fund Flow Statement. How do you determine whether a
particular change is in the nature of a source or of an application of
fund?
8+4=12
Ans:
Importance of Funds Flow Statement: A funds flow statement is an
essential tool for the financial analysis and is of primary importance to the
financial management. The basic purpose of funds flow statement is to reveal
the changes in the working capital on two balance sheet dates. It also
describes the source from which additional working capital has been financed
and the uses to which working capital has been applied. By making use of
projected funds flow statement the management can come to know the adequacy or
inadequacy of working capital even in advance. One can plan the intermediate
and long term financing of the firm, repayment of long term debts, expansion of
the business, allocation of resources etc. The significance of funds flow
statement are explained as follows:
(1) Analysis of Financial Position:
Funds flow statement is useful for long term financial analysis. Such analysis
is of great help to management, shareholders, creditors, brokers etc. It helps
in answering the following questions:
(i)
Where have the profits gone?
(ii) How was it possible to distribute
dividends in absence of or in excess of current income for the period?
(iii)
How was the sale proceeds of plant and machinery used?
(iv) How
was the sale proceeds of plant and machinery used?
(v) How
were the debts retired?
(vi) What
became to the proceeds of share issue or debenture issue?
(vii)
How was the increase in working capital financed?
(viii)
Where did the profits go?
Though it is not easy to find the definite
answers to such questions because funds derived from a particular source are
rarely used for a particular purpose. However, certain useful assumptions can
often be made and reasonable conclusions are usually not difficult to arrive
at.
(2) Evaluation of the Firm's Financing: One
of the important use of this statement is that it evaluates the firm' financing
capacity. The analysis of sources of funds reveals how the firm's financed its
development projects in the past i.e., from internal sources or from external
sources. It also reveals the rate of growth of the firm.
(3) Test of Adequacy: The funds flow
statement analysis helps the management to test whether the working capital has
been effectively used on not and whether the working capital level is adequate
or inadequate for the requirement of business.
(4) An Instrument for Allocation of Resources:
In modern large scale business, available funds are always short for
expansion programmes and there is always a problem of allocation of resources.
Funds flow statement helps management to take policy decisions and to decide
about the financing policies and capital expenditure programmes for future.
(5) Guide for investors: The funds flow
statement analysis helps the investors to decide whether the company has
managed funds properly or not. It indicates the financial soundness of a company
which helps the investor to decide whether to invest money in the company or
not.
(6) A tool for Measuring credit worthiness:
Funds flow statement indicates the credit worthiness of a company which helps
the lenders to decide whether to lend money to the company or not.
(7) Future Guide: A projected funds flow
statement can be prepared and resources can be properly allocated after an
analysis of the present state of affairs. The optimal utilisation of available
funds is necessary for the overall growth of the enterprise. A projected funds
flow statement gives a clear cut direction to the management in this regard.
(8) It
helps in lending or borrowing operations and policies: Lending institution,
such as Banks, IFS, IDBI etc. also requires the funds flow statement besides
the financial statements in order to know the credit worthiness of the concern
and also its ability to convert assets into cash for making the payments at the
scheduled time.
Meaning of Flow of Funds
The term flow means movement and includes both inflow and outflow
of fund. The term flow of funds means the transfer of economic values from one
asset of equity to another. Flow of funds is said to have taken place when any
transaction makes changes in the amount of funds available before happening of
the transaction. In effect, transaction results in increase of funds are called
inflow of funds and transaction which decreases funds are called outflow of
funds. Further if a transaction does not changes the funds , it is said to have
no flow of funds. According to working capital concept of fund, the term flow
of funds means movement of funds in the working capital. A transaction which
increases the working capital is called inflow of funds and which decreases
working capital is called outflow of funds.
Rule of flow of funds: The flow of fund occurs when a transaction
changes on the one hand a non current account and on the other hand a current
account and vice versa It means that a change in non current account followed
by a change in another non current account or a change in a current account
followed by a change in another current account will not result in the flow of
fund.
Current and non current accounts
Current accounts are accounts of current assets and current
liabilities. Current assets are those assets which are in the ordinary course
of business can be or will be converted into cash within a short period of
normally one accounting year E.g. Cash in hand and at bank, Bills receivable,
sundry debtors, short term loans and advances inventories, prepaid expenses and
accrued incomes Current liabilities are those liabilities which are intended to
be paid within the ordinary course of business within a short period of
normally one accounting year out of the current assets or the income of the
business. It includes sundry creditors, bills payable outstanding expenses bank
overdraft etc.
Noncurrent assets are assets other than current assets and include
goodwill land, plant and machinery furniture trademarks etc. Noncurrent
liabilities are liabilities other than current liabilities and include all
other long term liabilities such as equity share capital debentures , long term
loans etc.
To know whether a transaction results in flow of funds the
following procedure can be applied
1. Analyze the transaction and find out the accounts involved
2. Make journal entry of the transaction
3. Determine whether the accounts involved in the transaction are
current or non current
4. If both accounts are current, either current assets or
liabilities, it doesn’t result in flow of funds
5. If both accounts are noncurrent, either noncurrent assets or
noncurrent liabilities, it doesn’t result in flow of funds.
6. If accounts involved are such that one is a current account
while the other is a non current account, it results in flow of funds
E.g.1.cash collected from debtors
Cash A/c……………….Dr
To Debtors A/c
Both cash and debtors a/c are current accounts and hence do not
result in flow of funds. The transaction results in increase in cash and at the
same time an equal decrease in debtors and thus do not result in change in
working capital or funds.
E.g.2.purchase of new machinery in exchange of old machinery. Here
also both the accounts involved are non current accounts and do not result in
flow of funds
Eg.3.issue of shares for cash
Cash A/c……………….Dr
To share capital
Here one account is current and the other is non current and
results in flow of funds. Here cash increases without any increase in current
liability and results in increase in working capital and thus results in flow
of funds.
In simple language funds move when a
transaction affects:
Ø a current asset and a Non-current asset,
Ø a current asset and a Non-current
liability, or
Ø a Non-current and a current liability,
or
Ø a fixed liability and current liability;
and
Funds do not move when the transaction
affects:
Ø a current asset and a current
liabilities, or
Ø a Non-current asset and a Non-current
liability, or
Ø only noncurrent liabilities
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