Management Accounting Solved Question Paper 2023
Gauhati University BCOM 5th SEM
(Honours
Elective)
Paper:
COM-HE-5016
(Management Accounting)
Full
Marks: 80
Time: 3
hours
The figures in the margin indicate full marks for the
questions.
1. Answer as directed: 1x10=10
(a) Management Accounting
aims at providing decisions to the management. (State whether the statement is
True or False)
Ans: True
(b) What is Angle of
Incidence?
Ans: Angle of incidence is
an indicator of profit earning capacity above the break-even point. A wider
angle will indicate higher profitability, while a narrow angle will indicate
very low profitability.
(c) _______ contains many
information which are required for effective budgetary planning. (Fill in the
blank)
Ans: Budget manual
(d) Trading on equity
refers to the use of fixed interest bearing securities by a firm to earn more
than their cost so as to increase the return on owners’ equity. (State whether
the statement is True or False)
Ans: True
(e) _______ refers to the
ability of a concern to meet its current obligations as and when they become
due. (Fill in the blank)
Ans: Liquidity
(f) An unfavourable
material price variance occurs when:
(i) There is increase in
price of raw materials.
(ii) There is decrease in
price of raw materials.
(iii) Wastage is less than
anticipated in the manufacturing process.
(iv) Wastage is more than
anticipated in the manufacturing process. (Choose the correct answer)
Ans: (i) There is increase
in price of raw materials.
(g) How is ‘Break-even
analysis’ interpreted in its narrower sense?
Ans: The study of
cost-volume-profit analysis is often referred to as “Break even analysis “and
the two terms are used interchangeably by many. In its narrow sense, it refers
to a technique of determining that level of operations where total revenue
equal total expenses i.e., breakeven point.
(h) At break-even point: (Choose
the correct answer)
(i) There is neither
profit nor loss.
(ii) Total revenue is
equal to total costs.
(iii) Contribution is
equal to fixed costs.
(iv) All of the above.
Ans: (iv) All of the
above.
(i) _______ budget does
not take into consideration any changes in expenditure arising out of changes
in the level of activity. (Fill in the blank)
Ans: Fixed budget
(j) Which of the following
transactions will improve the current ratio?
(Choose the correct answer)
(i) Purchase of goods for
cash.
(ii) Payment to trade
payables.
(iii) Credit purchase of
goods.
(iv) Collection of cash
from trade receivables.
Ans: (ii) Payment to trade
payables.
2. Give brief answers to the following
questions: 2x5=10
(a) Mention two managerial uses of ratio
analysis.
Ans: Managerial uses of ratio analysis
a) To workout short-term
financial position: Ratio analysis helps to work out the short-term financial
position of the company with the help of liquidity ratios. In case short-term
financial position is not healthy efforts are made to improve it.
b) Helpful for forecasting
purposes: Accounting ratios indicate the trend of the business. The trend is
useful for estimating future. With the help of previous years’ ratios,
estimates for future can be made.
(b) Write any two characteristic features of
management accounting.
Ans: Characteristics
or Nature of management accounting
1.
Providing Accounting Information.
Management accounting is based on accounting information. The collection and
classification of data is the primary function of accounting department. The
information so collected is used by the management for taking policy decisions.
Management accounting involves the presentation of information in a way it
suits managerial needs.
2.
Cause and Effect Analysis. Financial
accounting is limited to the preparation of profit and loss account and finding
out the ultimate result, i.e., profit or loss Management accounting goes a step
further. The ‘cause and effect’ relationship is discussed in management
accounting. If there is a loss, the reasons for the loss are probed. If there
is a profit, the factors directly influencing the profitability are also
studies. So the study of cause and effect relationship is possible in
management accounting.
(c) What is PV ratio?
Ans: Profit-Volume
Ratio expresses the relationship between contribution and sales. It indicates
the relative profitability of diff products, processes and departments. Higher
the P/V ratio, more will be the profit and lower the P/V ratio lesser will be
the profit. Hence, it should be the aim of every concern to improve the P/V
ratio which can be done by increasing selling price, reducing variable cost
etc.
(d) What do you mean by Material Price
Variance?
(e) Mention two limitations of Ratio analysis.
Ans: In spite of many
advantages, there are certain limitations of the ratio analysis techniques. The
following are the main limitations of accounting ratios:
a) Limited Comparability:
Different firms apply different accounting policies. Therefore, the ratio of
one firm cannot always be compared with the ratio of other firm.
b) False Results:
Accounting ratios are based on data drawn from accounting records. In case that
data is correct, then only the ratios will be correct. For example, valuation
of stock is based on very high price, the profits of the
concern will be inflated and it will indicate a wrong financial position. The
data therefore must be absolutely correct.
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3. Answer the following questions: (any four) 5x4=20
(a) Explain briefly the role of management
accountant in a business enterprise.
Ans: Any person
responsible for the supply of accounting information to management is known as
management accountant. He feeds informational needs of different managerial
levels. He is known by different names in different organisations, i.e.,
Controller, Comptroller, Chief Accountant, Financial Adviser, Financial
Controller, etc. It is essential to determine the status of management
accountant in the organisation. It is also necessary to determine his scope of
work and responsibility.
If
management accountant provides the facts as an accurately as are needed and are
presented in a manner which allows proper analysis and interpretation, then he
cannot be held responsible for any wrong judgement by the management. On the
other hand, if the information is biased, inaccurate or it is not presented
properly then responsibility will lie on the management accountant.
Functions of Management Accountant
The
functions of management accountant depend upon his status in the organisation,
needs of the enterprise and personal capabilities of the persons. But still
some functions are commonly performed by management accountants. The Financial
Executives Institute, America has specified the functions of the controller as
follows:
1.
Planning for Control. Management
accountant establishes co-ordinates and maintains as integrated plan for the
control of operations. Such a plan would provide cost standards, expense
budgets, sales forecasts, capital investment programme, profit planning and the
system to effectuate the plans.
2.
Reporting. Management accountant
measures performance against given plans and standards. The results of
operations are interpreted to all levels of management. This function will
include installation of accounting and costing systems and recording of actual
performance so as to find out deviations, if any.
Duties of Management Accountant
The
primary duty of management accountant is to help management in taking correct
policy decisions and improving efficiency of entrepreneurial operations. This
duty may require him not only to help management with the necessary information
from the business sources but he may have to collect information from outside
sources too. The information is made useful by arranging and re-adjusting in
such a way that the management is able to understand its significance and
utility for managerial purposes. Generally, following duties are performed by
the management accountant:
1.
Collection of Information. The
information used in management accounting is collected from a number of sources
both inside and outside the business. The management accountant will first
decide about the type of information required and then the relevant source for
it.
2.
Evaluation of Information. The next duty
of the management accountant after the collection of information is to evaluate
it. The management accountant will distinguish between relevant and irrelevant
information. He will also assess the utility of the information. He will leave
irrelevant and unnecessary information and management will be supplied only
necessary information in a systematic manner.
(b) Describe briefly any five requisites for a
successful budgetary control system.
A budgetary control system
can prove successful only when certain conditions and attitudes exist, absence
of which will negate to a large extent the value of a budget system in any
business. Such conditions and attitudes which are essential for effective
budgeting are as follows:
1. Support of Top
Management: If the budget system is to be successful, it must be fully
supported by every member of the management and the impetus and direction must
come from the very top management. No control system can be effective unless
the organisation is convinced that the top management considers the system to
be import.
2. Participation by
Responsible Executives: Those entrusted with the performance of the budgets
should participate in the process of setting the budget figures. This will
ensure proper implementation of budget programmes.
3. Reasonable Goals: The
budget figures should be realistic and represent reasonably attainable goals.
The responsible executives should agree that the budget goals are reasonable
and attainable.
4. Clearly Defined
Organisation: In order to derive maximum benefits from the budget system, well
defined responsibility centers should be built up within the organisation. The
controllable costs for each responsibility centres should be separately shown.
5. Continuous Budget
Education: The best way to ensure the active interest of the responsible
supervisors is continuous budget education in respect of objectives, potentials
& techniques of budgeting. This may be accomplished through written
manuals, meetings etc., whereby preparation of budgets, actual results achieved
etc., may be discussed.
(c) Sale of a company for two consecutive
months Rs. 3,80,000 and Rs. 4,20,000. The company’s net profit for these months
amounted to Rs. 24,000 and Rs. 40,000 respectively. Assuming that there is no
any other change, calculate P/V ratio and fixed cost.
Ans:
(d) Distinguish between Budgetary Control and
Standard Costing.
Ans: Both
standard costing and budgetary control achieve the same objective of maximum
efficiency and cost reduction by establishing predetermined standards,
comparing actual performance with the predetermined standards and taking
corrective measures, where necessary. Thus, although both are useful tools to
the management in controlling costs, they differ in the following respects:
|
Budgetary Control |
Standard Costing |
|
Budgetary control deals with the
operations of a department of business as a whole. |
Standard costing is applied to
manufacturing of a product, process or processes or providing a service. |
|
It is extensive in its
application, as it deals with the operation of department or business as a
Whole. |
It is intensive, as it is applied to
manufacturing of a product or providing a service. |
|
Budgets are prepared for sales,
production, cash etc. |
It is determined by classifying
recording and allocating expenses to cost unit. |
|
It is a part of financial account, a
projection of all financial accounts. |
It is a part of cost account, a
projection of all cost accounts. |
|
Control is exercised by taking into
account budgets and actual. Variances are not revealed through accounts. |
Variances are revealed through
difference accounts. |
(e) What do you mean by variance analysis?
Discuss its importance briefly.
Ans: Variance analysis is
the process of analysing variance by sub-dividing the total variance in such a
way that management can assign responsibility for off standard performance. It,
thus, involves the measurement of the deviation of actual performance from the
intended performance. That is, variance analysis is a tool to measure performances
and based on the principle of management by exception. In variance analysis,
the attention of management is drawn not only to the monetary value of
unfavourable and favourable managerial performance but also to the
responsibility and causes for the same. After the standard costs have been
fixed, the next stage in the operation of standard costing is to ascertain the
actual cost of each element and compare them with the standard already set.
Computation and analysis of variances is the main objective of standard
costing. Actual cost and the standard cost is known as the ‘cost variance’.
As per I.C.M.A, Variance
Analysis is “the resolution into constituent parts and explanation of
variances”. The definition indicates two aspects-resolutions into constituent
parts is the first aspect which is nothing but subdivision of the total cost
variance. Explanation of variance includes the probing and inquiry for causes
and responsible persons”.
UTILITY OF VARIANCES
ANALYSIS
1. Variances are analysed
to find out the causes or circumstances leading to it so that management can
exercise proper control. Variance analysis sub divides the total variance based
on difference contributory causes. This gives a clear picture of the different
reasons for the overall variance.
2. The sub division of
variance establishes and highlights the interrelationship between different
variances.
3. Variance analysis
‘explains’ the causes for each variance. It paves way for fixing responsibility
for all variances.
4. It highlights all
inefficient performances and the extent of inefficiency.
5. It is a powerful tool
leading to cost control. Analysis of variances is helpful in controlling the
performance and achieving the profits that have been planned.
6. It enables the top
management to practice ‘management by exception’ by focusing on the problem
areas. It helps the management to concentrate only on operations and segments
of an enterprise where deviations are there from targeted performance.
(f) Write any five limitations of Financial
Statement analysis.
Ans: Limitations of
financial analysis: Financial analysis suffers from various limitations which
are given below:
1. Historical Analysis:
Financial analysis analysed what has happened till date but it does not reflect
the future. Persons like shareholders, investors etc., are mainly interested in
knowing the likely position in future.
2. Ignores Price Level
Changes: Price level change and purchasing power of money are inversely
related. A change in the price level makes the financial analysis of different
accounting years invalid because accounting records ignores change in value of
money.
3. Qualitative aspect
Ignored: Since the financial statements are based on quantitative aspects only,
the quality aspect such as quality of management, quality of labour force etc.,
are ignored while carrying out the analysis of financial statements.
4. Suffers from the
Limitations of financial statements: Since analysis of financial statements is
based on the information given in the financial statements, it suffers from all
such limitations from which the financial statements suffer.
5. Not free from Bias:
Financial statements are largely affected by the personal judgment of the
accountant in selecting accounting policies. Therefore, financial are not free
from bias.
6. Variation is accounting
practices: Different firms follow different accounting practices. Therefore, a
meaningful comparison of their financial statements is not possible.
4. Answer the following questions: (any four)
(a) “The subject of management accounting is
very important and useful for optimum utilisation of resources. It is an
indispensable discipline for management.” Elucidate this statement. 10
Ans: Main objective of
management accounting is to help the management in performing its functions
efficiently. The major functions of management are planning, organizing,
directing and controlling. Management accounting helps the management in
performing these functions effectively. Management accounting helps the
management is two ways:
I.
Providing necessary accounting information to management
II.
Helps in various activities and tasks performed by the management.
I. Providing necessary accounting information to
management:
(a) Measuring: For helping
the management in measuring the work efficiency in different areas it is done
on the past and present incidents with context to the future. In standard
costing and budgetary any control, standard and actual performance is compared
to find out efficiency.
(b) Recording: In
management accounting both the quantitative and qualitative types of data are
included and this accounting is done on the basis of assumptions and even those
items which cannot be expressed financially are included in management
accounting.
(c) Analysis: The work of
management accounting is to collect and analyze the fact related to the
managerial problems and then present them in clear and simple way.
(d) Reporting: For the use
of management various reports are prepared. Generally, two types of reports are
prepared:
a. Regular Reports
b. Special Reports.
II. Helping in
Managerial works and Activities:
The
main functions of management are planning, organizing, staffing, directing and
controlling. Management accounting provides information to the various levels
of managers to fulfill the above mentioned responsibilities properly and
effectively. It is helpful in various management functions as under:
(a) Planning: Through
management accounting forecasts regarding the sales, purchases, production etc.
can be obtained, which helps in making justifiable plans. The tools of
management accounting like standard costing, cost -volume-profit analysis etc.
are of great managerial costing, help in planning.
(b) Organizing: In
management accounting whole organization is divided into various departments,
on the basis of work or production, and then detailed information is prepared
to simplify the thing. The budgetary control and establishing cost centre
techniques of management accounting helps which result in efficient management.
(c) Staffing: Merit rating
and job evaluation are two important functions to be performed for staffing.
Generally, only those employs are useful for the organization, whose value of
work done by them is more than the value paid to them. Thus by doing cost-benefit
analysis management accounting is useful in staffing functions.
(d) Directing: For proper
directing, the essentials are co-ordination, leadership, communications and
motivation. In all these tasks management accounting is of great help. By analyzing
the financial and non-financial motivational factors, management accounting can
be an asset to find out the best motivational factor.
(e) Co-ordination: The
targets of different departments are communicated to them and their performance
is reported to the management from time to time. This continual reporting helps
the management in coordinating various activities to improve the overall
performance.
Advantages and Limitations of
Management Accounting
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.
(b) What is meant by Zero-based budgeting?
State the advantages and limitations of Zero-based budgeting. 2+4+4=10
Ans: Zero Based
Budgeting
ZBB is
defined as ‘a method of budgeting which requires each cost element to be
specifically justified, as though the activities to which the budget relates
were being undertaken for the first time. Without approval, the budget
allowance is zero’.
Zero –
base budgeting is so called because it requires each budget to be prepared and
justified from zero, instead of simple using last year’s budget as a base. In
Zero Based budgeting no reference is made to previous level expenditure. Zero
based budgeting is completely indifferent to whether total budget is increasing
or decreasing.
‘Zero
base budgeting’ was originally developed by Peter A. Pyher at Texas
Instruments. Peter A. Pyher has defined ZBB as “an operating, planning and
budgeting process which requires each manager to justify his entire budget
request in detail from scratch (hence zero base) and shifts the burden of proof
to each manager to justify why we should spend any money at all”.
CIMA
has defined it “as a method of budgeting whereby all activities are revaluated
each time a budget is set."
Benefits and Limitations of Zero Base Budgeting
The major benefits of the use of zero base
budgeting can be the following:
a) Zero base budgeting examines all existing and new programmes and
activities. It also makes the managers analyse their functions, establish priorities
and rank them. This exercise helps in identifying inefficient or obsolete
functions within the area of responsibility. In this way resources are allocated from
low priority programmes to high priority programmes.
b) This system facilitates identification of duplication of efforts
among organisational units. Such inefficient activities are eliminated and some other
activities are merged.
c) All expenditures, under this system are critically reviewed and
justified and all operations activities are evaluated in greater detail in terms of
their cost- effectiveness and cost-benefits. This requires managers to find
alternative ways of performing their activities which may result in more efficient
procedures.
d) ZBB promotes the tendency to initiate studies and improvements
during the period of operation as the persons at the helm of affairs know that
the process would be exercised next year and their knowledge and training
would enhance efficiency and cost-effectiveness.
e) ZBB provides for quick budget adjustments during the year. If
revenue falls short in this process, it offers the capability to quickly and
rationally modify goals and expectations to correspond to a realistic and affordable plan of
operations.
f)
ZBB ensures greater participation of personnel in formulation and
ranking processes. This helps in promoting level of job satisfaction and
thus resulting in better control and operational efficiency in the organisation.
g) Zero base budgeting is a flexible tool that can be applied on a
selective basis. It does not have to be applied throughout the entire organisation or
even in all the service departments. Keeping in view the limitations of time,
money and persons available to install, operate and monitor it the management thus
can select priority areas to which zero base budgeting may be applied.
Limitations of ZBB can be summed up as:
a) It challenges the past practices, performance, attitudes, of
people.
b) It requires more time and effort.
c) Detailed costs and necessary information for decision packages
often are not made available.
d) It increases paper work to unmanageable proportions.
e) Ranking a large number of decision packages becomes an unwieldy
process.
f)
Identifying various levels of
funding, particularly the minimum level is a difficult task.
(c) Describe briefly the limitations of
Financial Accounting and point out how Management Accounting helps in
overcoming them. 10
(d) The expenses for the
production of 5,000 units of a product in a factory are given as follows: 10
|
|
Per unit (Rs.) |
|
Materials Labour Variable factory
overheads Fixed factory
overheads Administrative
expenses (5% variable) Variable selling
expenses (80% variable) Fixed distribution
expenses (10% fixed) |
50.00 20.00 15.00 10.00 10.00 4.80 0.50 |
The total cost of sales
per unit was Rs. 116.00. You are required to prepare a budget for the
production of 8,000 units.
(e) (i) Given:
5+5=10
Profit Rs. 200
Sales Rs. 2,000
Variable Cost 75% of sales
Find break-even sales and profit when sales
are Rs. 3,200.
(ii) Given:
Break-even sales Rs. 8,000
Fixed Costs Rs. 3,200
Find profit when sales are Rs. 10,000 and
sales when profit is Rs. 2,400.
(f) “Ratio analysis is only a technique for
making judgments and not a substitute for judgments. Explain. 10
Ans: Ratio
analysis is the method or process of expressing relationship between items or
group of items in the financial statement are computed, determined and
presented. It is an attempt to draw quantitative measures or guides concerning
the financial health and profitability of an enterprise. It can be used in
trend and static analysis. It is the process of comparison of one figure or
item or group of items with another, which make a ratio, and the appraisal of
the ratios to make proper analysis of the strengths and weakness of the
operations of an enterprise.
According
to Myers, “Ratio analysis of financial statements is a study of relationship
among various financial factors in a business as disclosed by a single set of
statements and a study of trend of these factors as shown in a series of
statements."
Objectives
of Ratio analysis
a)
To know the area of the business which
need more attention.
b)
To know about the potential areas
which can be improved with the effort in the desired direction.
c)
To provide a deeper analysis of the
profitability, liquidity, solvency and efficiency levels in the business.
d)
To provide information for decision
making.
e)
To Judge Operational efficiency
f)
Structural analysis of the company
g)
Proper Utilization of resources and
h)
Leverage or external financing
Advantages
and Uses of Ratio Analysis
There are
various groups of people who are interested in analysis of financial position
of a company used the ratio analysis to work out a particular financial
characteristic of the company in which they are interested. Ratio analysis
helps the various groups in the following manner:
a)
To work out the profitability:
Accounting ratio help to measure the profitability of the business by calculating
the various profitability ratios. It helps the management to know about the
earning capacity of the business concern.
b)
Helpful in analysis of financial
statement: Ratio analysis help the outsiders just like creditors, shareholders,
debenture-holders, bankers to know about the profitability and ability of the
company to pay them interest and dividend etc.
c)
Helpful in comparative analysis of the
performance: With the help of ratio analysis a company may have comparative
study of its performance to the previous years. In this way company comes to
know about its weak point and be able to improve them.
Limitations
of Ratio Analysis
In spite
of many advantages, there are certain limitations of the ratio analysis
techniques. The following are the main limitations of accounting ratios:
a)
Limited Comparability: Different firms
apply different accounting policies. Therefore, the ratio of one firm cannot
always be compared with the ratio of other firm.
b)
False Results: Accounting ratios are
based on data drawn from accounting records. In case that data is correct, then
only the ratios will be correct. For example, valuation of stock is based on
very high price, the profits of the concern will be inflated and it will
indicate a wrong financial position. The data therefore must be absolutely
correct.
c)
Effect of Price Level Changes: Price
level changes often make the comparison of figures difficult over a period of
time. Changes in price affect the cost of production, sales and also the value
of assets. Therefore, it is necessary to make proper adjustment for price-level
changes before any comparison.
d)
Qualitative factors are ignored: Ratio
analysis is a technique of quantitative analysis and thus, ignores qualitative
factors, which may be important in decision making. For example, average
collection period may be equal to standard credit period, but some debtors may
be in the list of doubtful debts, which is not disclosed by ratio analysis.
e)
Effect of window-dressing: In order to
cover up their bad financial position some companies resort to window dressing.
They may record the accounting data according to the convenience to show the
financial position of the company in a better way.
f)
Costly Technique: Ratio analysis is a
costly technique and can be used by big business houses. Small business units
are not able to afford it.
g)
Misleading Results: In the absence of
absolute data, the result may be misleading. For example, the gross profit of
two firms is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales
are Rs. 20,000 and profit earned by the other one is Rs. 10, 00,000 and sales
are Rs. 40, 00,000. Even the profitability of the two firms is same but the
magnitude of their business is quite different.
(g) From the following particulars find out: 10
(i) Material cost variance.
(ii) Material price variance and
(iii) Material usage variance.
|
Quantity of
material purchased Value of material
purchased Standard quantity
of material required per tonne of finished product Standard rate of
material Opening stock of
material Closing stock of
material Finished
production during the year |
3,000
units Rs.
9,000 25
units Rs. 2
per unit Nil 500
units 80
tonnes |
(h) (i) Write an explanatory note on
common-size statement. 5+5=10
Ans: Common Size
Statements: These
are the statements which indicate the relationship of different items of a
financial statement with a common item by expressing each item as a percentage
of that common item. The percentage thus calculated can be easily compared with
the results of corresponding percentages of the previous year or of some other
firms, as the numbers are brought to common base. Such statements also allow an
analyst to compare the operating and financing characteristics of two companies
of different sizes in the same industry. Thus, common size statements are
useful, both, in intra-firm comparisons over different years and also in making
inter-firm comparisons for the same year or for several years. This analysis is
also known as ‘Vertical analysis’.
Merits of Common Size Statements:
a)
A common size statement facilitates
both types of analysis, horizontal as well as vertical. It allows both
comparisons across the years and also each individual item as shown in
financial statements.
b)
Comparison of the performance and
financial condition in respect of different units of the same industry can also
be done.
c)
These statements help the management
in making forecasts for the future.
Demerits of Common Size Statements:
a)
If there is no identical head of
accounts, then inter-firm comparison will be difficult.
b)
Inter-firm comparison may be
misleading if the firms are not of the same age and size, follow different
accounting policies.
c)
Inter-period comparison will also be
misleading if there are frequent changes in accounting policies.
(ii) Given:
Sales Rs. 3,50,000
Sales returns Rs. 20,000
Gross profit ratio 20%
Inventory turnover ratio 8
times
Opening Inventory exceeds
closing inventory by Rs. 14,000.
Find opening and closing
inventory.
***
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