Master of business administration –MBA Semester 1

MB0041 – FINANCIAL MANAGEMENT $ ACCOUNTING -4 CREDITS

(Book id: 1130)

Q:1 Uncertainty inevitably surrounds many transactions. This should be

recognized by exercising prudence in preparing financial statement. Explain
this concept with the help of an example.

Accountants follow the rules “anticipate no profits but provide for all anticipated
losses”. Whenever risk is anticipated sufficient provision should be made. The
value of investments is normally taken at cost, even if the market value is higher
than the cost. If the market value expected is lower than the cost, then provision
should be made by charging profit and creating investment fluctuation fund. This is
the principal of conservatism and it does not mean that the income or the value of
assets should be intentionally under stated.

Q2 When is the change in accounting policy

ANS—according to As-5 change in accounting policy-should be made only  if the

adoption of a different accounting policy is required:

1. By statute
2. For compliance with an accounting standard
3. If it is considered that the change would result in a more appropriate
presentation of the enter prises

Disclosure

1. New accounting policy

2. Effect in P\L due to new accounting policy

Special point
 1. Any change in an accounting policy , which has a material  effect, should  be
disclosed ,adjustments resulting  from, such  change, should in the financial
statements .
2. Where the effect of such change is not ascertainable, the  fact should be
indicated. 

Q:3 Journalise the following transactions:

1.1.09 Bought goods for Rs 10000

2.1.09 Purchased goods from X Rs 20000.
3.1.09 Bought goods from y for Rs 30000 against a current dated cheque
4.1.09 Purchased goods from z[price list price is Rs30000 and Trade
discount is 10%]
5.1.09 Bought goods of the list price of Rs 125000 from M less 20% trade
discount and2% cash discount. Paid 4% of the amount by cheque?
6.1.09 Returned 1% of the goods supplied by x.
7.1.09 Returned 10% of the goods supplied by y.

Ans:3

Date Particular L. Dr. Amount Cr.

F Amount
1.1.09 Purchase A/C 10000
Dr 10000
To Cash A/C
(Being goods purchase for cash)
2.1.09 20000
Purchase A/c 20000
Dr
To X’s A/C
3.1.09 (Being goods purchase on Credit) 30000
30000
Purchase A/C
Dr
To Bank A/C
4.1.09 (Being goods purchase on current 27000
 dated cheque) 27000

Purchase A/c
5.1.09 Dr 100000
To Z’s A/c 98000
(Being Purchase goods from Z) 2000

Purchase A/C
6.1.09 Dr 2000
To bank A/c 2000
To Discount receive A/c
(Being goods purchase on 2% dis.)
7.1.09 3000
X’s A/C 3000
Dr
To Purchase Return A/C
(Being goods returned by X )

Cash A/C
Dr
To Purchase Return A/c
(Being goods Return by y)
Q 4. Bring out the difference between Funds Flow Statement and Cash Flow
Statement. Mention up to what point in time they similar and from where the
differences begin?

ANS 4.

Cash Flow Analysis Fund Flow Analysis

It is concerned only with the change in Is concerned with change in working
cash position capital position between; two balance
sheet dates.
It merely a record of cash receipts and In fund flow statement net effect of
disbursements receipts and disbursements are recorded.
It is more useful to the management as a It is concerned with the total provision
tool of financial analysis in short period. of funds.
Cash is part of working capital and An improvement in funds positions need
therefore, an improvement in cash not resulting improvement in cash
position results in improvement in the position.
funds position.
An increase in a current liability of An increase in a current liability or
decrease in a current asset will result in decrease in a current asset results
increase in cash position. decrease in working capital
It is based on cash basis. It is based on accrual basis.
It is not based on ledger mode. It is based on ledger principles.
Q 5. A Determine the sales of a firm with the following financial data ?

Current Ratio 1.5

Acid Test Ratio 1.2
Current Liabilities 800000
Inventory Turnover Ratio 5 times

        Current Ratio= Current Asset/Current Liabilities

                     Acid Ratio/ Liquid Ratio/ Quick Ratio

                     =          Current Asset – Stock & Exp

                                      Current Liabilities 

Inventory turnover Ratio =      Cost of Good Sold 

                                                      Avg Inventory

1. Current Ratio =                       1.5

Current Asset =                        ?

Current liabilities =                  800000

Current Ratio =     Current Asset/Current Liabilities

1.5                       = Current Asset/ 800000

Current Asset = 800000*1.5

Current Asset =1200000

Current Asset = 1200000

2. Acid Test Ratio = Current Asset – Stock/ Current Liabilities

1.2   = 1200000- stock

 960000-1200000= Stock

240000= stock 

3. Inventory Turnover Ratio = Net sale / Avg Inventory

                                          5  =  net sale /240000

                       1200000 = Net Sales

QB. What is DU –PONT chart?

ANS:

Return on investments represents the earning power of the company. It depends on

net profit ratio and capital turnover ratio. A change in any of these ratios will
change the firm’s earning capacity. This chart shows how the return on capital
employed is affected by various factors such as cost of goods sold, change in
working capital, change in selling and administrative expenses etc. This chart helps
the management in detecting the core issues that confront the management and it
helps in effective use of capital.

Q 6. From the following data calculate the:

1.Break-even point expressed in terms of sale amount/revenue.

ANS: Breakeven point lies at the point of intersection of sales line and total cost
line. The vertical distance between the sale revenue and the total cost line measures
the estimated net income (after BEP) and the estimated net loss (before BEP) at the
related sales volume. The fixed cost line is parallel to the horizontal axis. The
variable cost line is superimposed on the fixed cost line and moves upward
uniformly with sales volume at the variable cost to volume ratio.

2. Number of units that must be sold to earn a profit of Rs. 60000 per year

Sales price(per unit) Rs. 20

Variable manufacturing cost per unit Rs. 11
Variable selling cost per unit Rs. 3
Fixed factory overheads (per year) 540000
 Fixed selling cost (per year) 252000
 

ANS:                    P/V ratio of sales= Contribution

                             P/V Ratio = 20-14/20*100

                                               =600/20

                                              =30%

       Sales (P.V)                   =Sales + Profit/ P/V Ratio

                                             =792000+60000/30%

                                            =852000/30%

                                      M= 2, 84,000/-