Short Answer Questions

Transcription

1 Short Answer Questions 1. Define accounting. Why is it called language of business? Accounting is defined as an art of recording, classifying and summarizing transactions and events in a significant manner and in terms of money. It is called language of business because the financial performance and the financial position of any company need to be conveyed to the stakeholders of any business concern. This can be done by systematically preparing the financial statements and presenting to the interested parties. 2. State the significance of prudence principle? It is also termed as Conservatism convention, according to which anticipate no profit but provide for all possible losses, such as Provisions for Bad debts and discount on debtors, so that the profits are not inflated. Hence secret reserves are not permitted. 3. Distinguish grouping and marshaling of assets and liability. Grouping means putting together items in Balance Sheet of similar nature under a common heading. Marshalling refers to order in which assets and liabilities are shown in B/S either in order of liquidity or permanency. 4. What is meant by dual aspect of accounting system? Dual aspect of Accounting describes that every transaction should have two aspects. Two aspect of transaction are Debit and Credit. Every debit has a corresponding credit so the total of all debits must be equal to total of all credits. 5. What is journal and imprest system of petty cash book? The advance paid in the beginning of the period and reimbursement of the amount spent for petty expenses, so that the same amount will be maintained for meeting the petty expenses, is referred as imprest System. In journal system, recording of transaction not only be inconvenient but also consume a lot of valuable time of the cashier. At the end of month, Petty cashier submits a statement of account of expenses incurred by him and gets a fresh advance. 6. Define fixed cost and variable cost? Fixed Costs are the costs that don t change with changes in the activity level e.g. salaries & rent. Variable costs are the costs that are sensitive to changes in level of activity e.g. raw materials direct labour.. 7. Why a flexible budget is considered superior to fixed budget? Flexible budget is superior to fixed budget for following reasons: a. Fixed budget does not change with level of activity but flexible is meant for any change in level of activity. b. Fixed budget is an unrealistic yardstick in case of level of output does not match with planned budgeting. c. Flexible budget is more suitable in case of new Venture because of uncertainties in demand.

2 8. Determine margin of safety from the information given below: Total Fixed cost Rs. 4500; Total variable cost Rs.7500; Total sales Rs and units sold 5000 Sales at BEP: Fixed Expenses/P/v Ratio 7500*3 = 4500 units 5 Contribution: Sales Variable Exp. = =7500 P/v Ratio = C/S = 7500/4500 = 5/3 MOS = Actual Sales Sales at BEP = 500 units. 9. Write a short note on the terms cost and costing. Cost is the value of resources used up when carrying out the task or particular activity. It consists of material, labour and resources. Costing are the techniques or method applying for ascertaining costs. It covers many aspects like labour overhead and marginal or absorption costs. 10. State the importance of budgeting. a. Helps Enforce Planning. b. Better Coordinate Activities. c. Helps in Evaluating Performance. d. Helps in Controlling. e. Helps in Allocating Resources. f. Helps in Motivating Managers & Employees. 11. What do you understand by financial statement analysis? Financial statements analysis is the process of identifying the financial strength & weakness of the firm by properly establishing relationship between items of the Balance Sheet and Profit & Loss A/C. It is to assess and interpret the result of past performance and current financial position. 12. State the importance of EPS and ROI. ROI reflects the total earnings produced by the total assets of the firm. It represents the before tax and interest expenses return on invested capital. ROI: PBDIT/Total Assets or Investments. EPS represents the return per shares issued by the company. It is directly connected to profitability. EPS: Net Profit / No. of shares. 13. List any two advantage of trend analysis. a. Understanding the changes in financial statements from year to year is easier when Percentages changes are available. b. Using previous year s data Percentage change can identify the future pattern of movements in given data. 14. How does cash flow statement differ from fund flow statement? a. Cash flow is concerned only with change in cash position while Fund flow is concerned with change in working capital position. b. Cash flow is more useful to the management as a tool of financial analysis in short periods as compared to Fund flow. c. Another distinction between them is techniques of their preparations.

3 15. Explain accounting cycle. Accounting Cycle is described as follows: a. Record the transaction in journal or Special journals with voucher. b. To post the transaction from journal to Ledger for further analysis and having balances of each account. c. Prepare the trial balance with the ledger s balances. d. To make adjustment and closing entries. e. Prepare Final Accounts or Financial statements. 16. explain accrual concept It states that Revenues are recognized when they simply become receivables. Accrual Concept focuses on the economic impact of transactions. It makes a distinction between the actual receipt of cash and the right to receive cash. In this case firm maximizes Assets. 17. what are the two limitation of financial accounting a. Accounting information is sometimes based on estimates. b. Accounting information cannot be used as only test of managerial performance on basis of more profit. c. Fixed assets are recorded in the accounting records at the original cost. 18. explain kaizen costing Kaizen is Japanese word which means Change for Better. It refers to continual and gradual improvements made through innovation at large investments in technology. It is the technique of cost reduction during the manufacturing process. 19. what is the objective if financial accounting a. It enables the management to find out the overall as well as department wise efficiency of the firm. b. To know the short term and long term solvency of firm. c. It is used in inter firm comparison for further change in decision making process. 20. how would you calculate return on investment ROI tells about the overall profitability of the company in relation to total investment in company. It is calculated as: ROI = Operating Profit or PBDIT Total Assets / Total Investment 21. write a two limitation of historical Cost accounting a. Market value or current value of fixed asset undergoes frequent changes and financial statements will have to be changed every year. b. Recording at market value is both costly and time consuming. c. They are not affected by decision and irrelevant for decision making. 22. what is trend analysis Trend Analysis is an important and useful technique of financial statement analysis. It ascertains a relationship between of each year s data to the base year s data. It involves figuring out the price index level or growth rate with respect to previous year or year that has been a standard (Base Year).

4 23. what are indirect cost Costs that are not identifiable with the end product are called indirect costs and include the following: Lubricants, Scrap, Indirect Material, and Depreciation. Indirect costs are called often overhead expenses. 24. Difference between marginal costing and absorption costing a. Marginal cost values stock at variable cost basis while in Absorption stock is valued at full cost. b. In long run decision making based on marginal cost approach nay result in contribution failing to cover fixed cost and losses being incurred but absorption does not allow that. c. Marginal costing aids profit planning whereas Absorption is useful to identify inefficient utilization of production resources. 25. what are fixed budget a. This is the budget which is designed to remain unchanged irrespective of level of activity. b. It is prepared for definite production and capacity level. c. It is not adjusted according to activity level and not effective tools of cost control. 26. What are decision packages? Each separate activity of the organization is identified and called a decision package. It comes under Zero Based Budgeting (ZBB) and identifying activity is part of Activity Based Costing (ABC).It is a document that identifies and describes a specific activity to evaluate it and decide whether to approve or disapprove. 27. What is margin of safety? Margin of safety has great importance in BEA. It is difference between actual sales to sales at breakeven point. MOS = Actual Sales Sales at BEP MOS= Profit/P/v Ratio. 28. Define a double entry system. Double Entry accounting first introduced by Luca Fra Paccoli an Italian mathematician. Every debit has a corresponding credit so the total of all debits must be equal to total of all credits. 29. What is business entity concept? The business concern is artificially formed as a separate legal entity, taking the form of a Proprietorship concern or a Partnership firm or a Private limited Company or a Public Limited Company. Thus the Proprietor or Partners or Promoters is/are considered distinct from his/their own business. Without such a distinction the affairs of the firm will be mixed up with the private affairs of the Proprietor or Partners or Promoters and the true picture of the firm will not be available. Hence the business concern (entity) is to be considered different from the owner/s also referred as Separate entity concept.

5 30. Discourse accounting as a information system. An accounting system consists of personnel, procedures, devices and record used by an organization which helps in development and structure of accounting information and communicating this information to decision makers. Design and capabilities of these systems vary greatly from organization to organization. In very small business, the accounting system may consist of little more than a cashbook and a cheque book and may be an annual interaction with the chartered accountant for filing tax return. In very large business. 31. Explain the concept of target costing. It is defined as "a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design". A target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price. Target costing involves setting a target cost by subtracting a desired profit margin from a competitive market price. To compete effectively, organizations must continually redesign their products (or services) in order to shorten product life cycles. 32. What is current purchasing power of accounting method. Changes in price level should be reflected in the financial statement through current purchasing power (CPP). For measuring changes in price level and incorporating and true changes in financial statements, index numbers are used. Price Index is used to convert the values of various items in Financial statements. 33. What is meant by operating activities? Operating Activities are those which are carried from getting input to convert in output and getting revenues. This are directly related to earn profit and related to part of production. They generally result from the transactions and events that enter into determination of profit. 34. Mention the purpose of preparing cash flow statement. a) It is very useful in understanding the cash position of a firm. b) It helps management to understand the past behavior of the cash cycle and to control the usage of cash in future. c) The repayment of loans. d) The cash flow statement is helpful in making short-term financial decision relating to liquidity, and the way and means position of firm. 35. How labor mixed variance calculated. LMV is the different in labour cost due to change in composition of the labour force. In order to calculate this variance, the total actual hours spent is compared with the revised standard hours. The revised standard hour are calculated as follows: Actual hours (total).standard ratio LMV = SR (RSH AH)

6 36. What is meant by expense center? An expense centre is responsibility centre in which inputs not output are measured in monetary terms. Expense or Cost centre a department in organization in which manager is held responsible only for cost incurred and maintain systematic records. 37. What is objective of preparing common size financial statement. Financial statements when presented in absolute figures, it is hard to understand and interpret. So each item is converted into percentage of total assets or capital. We can find how much percentage of cost is incurred in generating so much revenue. 38. Difference between standard cost and estimated cost. Standard cost: (1). It is a regular system of account based upon estimation and time schedule. (2). It is used for effective cost control and to take proper action to maximize efficiency. Estimate cost: a) It used as statistically data which leads to lot of guess work. b) It can be used where costing is in operation. 39. Mention two usage of management accounting. a. Planning & Policy formulation. b. Helps in interpretation process. c. Helps in decision making and controlling. d. Helps in reporting, motivating and organizing. 40. Explain cash budget. This budget represents the amount of cash receipts and payments and a balance during given period. It is prepared for getting useful information on basis of monthly or weekly. a. It ensures sufficient cash. b. It reveals surplus amount and the effect of fluctuations on cash position. 41. Write an accounting equation. What does it signify? An accounting equation is a statement of equality between the resources and the sources which finance the resources and is expressed as follows: Sources of Funds = Uses of Funds Or Equities = Assets Owner s equity + Outsiders liability = Assets 42. Write three principle of accounting. The Going Concern Concept: The entity will continue to operate in the future. The Cost Principle: Assets and services acquired should be recorded at their actual cost. Measurement Concept: The monetary unit is the principle means for measuring assets and equities.

7 43. explain the convention of conservation. Convention of Conservatism:- Anticipate no profits but provide for all possible losses Policy of caution & playing safe. It is also called Prudence Principle. Accountant should record not only actual loss but also losses that likely to occur. E.g. Provision for bad debts, redemption reserve. 44. What are cost driver. Determination of Cost Drivers completes the last stage of the ABC model. Cost Drivers trace, or link, the cost of performing certain Activities to Cost Objects. For example, taking orders for existing customers may be linked to specific customers based on the number of orders taken, if each order takes approximately the same amount of time. If order taking time varies based on the customer, this cost may be linked based on another driver or multiple drivers. 45. How are outstanding expenses treated in final account. These are the expenses incurred within the accounting year but the payment has not been made. O/S or unpaid expenses should be added to the concerned expenses A/C in P&L a/c and will be shown as a current liability in B/S. 46. What is common size statement? This technique of taking the highest figure as the base figure and converting every other figure in that statement to a percentage of the same is known as vertical analysis. This helps us in finding out what has been the relative change as a percentage of the base figure so that we can look at any performance lacunas and understands the reason for the same as also compare with other companies. Involves expressing comparison in percentages of the current period and past period. 47. Explain the term funds. The term funds as cash and they concerned themselves with the movements in the cash account. Funds may be defined in different ways depending upon the purpose of analysis.however; the following are most commonly used definitions: a. Funds mean cash, b. Funds mean net working capital, and c. Funds mean all financial resources. 48. What is human resources accounting. Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organization.

8 49. What is significance of P/E ratio? PRICE EARNING RATIO: PE Ratio indicates the number of times the Earning per Share is covered by its market price. P/E RATIO = Market Price per Equity Share/Earning Per Share This ratio tells us about how much the market discount they earnings. Obviously, the higher the ratio the better. 50. Difference between social cost and social benefit. Social Cost: It may include the effect on social community who might have to live in the shadow of its premises and how it engages with its customers, workplace, and impacts on environment. Social Benefits: customers. Services, users or clients can be involved in the social process. It can be used in strategic planning with great deal of flexibility within the framework. 51. Explain the term cost object. A cost object is tangible input for a product or service provided like labour and material. Cost of employing labour can be directly fixed as for employing labour as per man per hour or per man per day. So the labour is cost object as it is directly associate with it. 52. What is opportunity cost? Opportunity costs are alternative costs or the returns from the next best alternative use of the firms resources which the firm foregoes in order to avail of the returns of the next best use of the same resources e.g.: suppose a businessman can buy a lathe machine or a paper pressing machine with the help of limited capital which can earn him rs 50,000 and rs 70,000. if he chooses the latter he would have foregone the opportunity of earning rs 50,000,thus,his opportunity cost is rs 50, Difference between period cost and product cost. Product cost is the cost of purchasing or manufacturing inventory. Until the goods are sold, product cost represent inventory and they reported as asset in B/S. Costs which are associated with time periods rather than with the purchase or manufacture like selling and general expenses. These are charged directly to expense account on assumption that benefit is recognized when cost is incurred. 54. Difference between direct cost and indirect cost. Direct cost expenses incurred directly in producing the goods or services. It is incurred for and may be conveniently identified with a particular cost center or cost unit. Material, labour and direct expenses. Indirect costs - Not directly chargeable to production of goods. These costs are those costs, which are incurred for the benefit of a number of cost centers or cost unit and therefore, cannot be conveniently. Salary of manager, office Rent and selling and distribution expenses. 55. What is meant by margin of safety and angle of incidence? MARGIN OF SAFTY: It is the difference between the total sales and breakeven sales. It may be expressed in monetary term or as a percentage. MOS= (Actual sales- break- even sales)

9 ANGLE OF INCIDENCE: this is an angle formed between the cost line and revenue line where they intersect each other.. It indicate rate of profit earned by the business. 56. Write a short note on profit center. Profit Centre is that department where the manager is held responsible for both costs (inputs) and revenues (outputs) and thus for profit. Despite the name, a profit centre can exist in nonprofits organizations. A centre, whose performance is measured in terms of both - the expense it incurs and revenue it earns, is termed as a profit centre. 57. Name any four non operating items. a. Depreciation. b. Goodwill written off. c. Loss on sale of Machinery. d. Preliminary expenses written off. e. Gain on Sale of Assets. 58. What is Human Resource Accounting? Human Resource Accounting is the process of identifying and measuring data about human resources and communicating this information to interested parties. HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organization. 59. What is Benchmarking? Benchmarking is the continual search for the most effective method of accomplishing a task by comparing existing methods and performance levels with those of organization or with subunits within the same organization. These practices are referred to best practices. Benchmarking is also called Competitive Benchmarking. 60. What is Reengineering? It is the contrast to the concept of Kaizen Costing, which involves small & incremental steps toward gradual improvement but Reengineering involves a giant leap. It is the complete redesign of a process with an emphasis on finding creative new ways to accomplish an objective. It is starting from scratch to redesign a business process. 61. Given the following details, Determine the Margin of Safety sales. Profit earned Rs , Selling price per unit Rs.10; Marginal cost per unit Rs.7. MOS = Profit/P/v Ratio P/V Ratio = Contribution/Sales 10-7/10 = 3/10 MOS = 24000*10/3 = units. 62. What is Semi variable cost?

10 It is a cost that comprises both fixed and variable elements. For example a telephone cost consists of a fixed rental charge and variable cost associated with calls made. 63. Define Financial Audit. It is the audit of financial statements and aims to know whether financial statements are prepared according to Accounting Principles and Conventions. Whether financial statements present a true & fair view of business results. 64. From the information given below, calculate Stock Turnover Ratio. Opening stock Rs.29000; Closing stock Rs.31000, sales Rs ; Gross profit 25% on cost S.T.R. = Cost of goods sold / Average Stock. Average Stock = (Opening stock + Closing Stock)/2 G.P. is 25 % on Cost = 20 % on Sales (Remember Note) G.P. = * 20 % = Cost of Goods Sold = Sales G.P. = S.T.R. = /30000 = 8 times. 65. Define Cost Audit. ICMA defines it as the verification of cost accounts and a check on the adherence to cost accounting plan. Cost Audit is verifying correctness of cost accounts, cost reports, cost data and costing methods. 66. Write short notes on : a. Journal b. Ledger A journal is defined as a book containing a chronological record of transactions. It is the book in which transactions are recorded first of all under double entry system. Ledger is book which contains various accounts. Ledger is set of accounts. It contains all accounts whether Real, Nominal or personal. It is in Two forms. a. Bound Ledger b. Loose Leaf Ledger 67. Define Management Audit. It is detailed & critical review of all aspects of management including all facets of operations, internal controls, policies & plans within an organization also known as Operational Audit. 68. What is an Entity? An accounting entity is an organization that stands apart from other organizations and individuals as a separate economic unit. Owner is distinct from entity Separate legal Entity 69. What is an account? State the name of different types of account. An account is standardized format used to maintain the separate recorded and to accumulate date for each of the individual items in order to facilitate the preparation of periodic financial statements and to provide a continuous check on the accuracy of the recording transaction.

11 Types of Accounts 1. Personal Accounts 2. Real Accounts 3. Nominal Accounts 70. How does an asset differ from Liabilities? Assets: It is something a company owns which has future economic value. Land, Building, equipments, Goodwill are examples of assets. Liabilities: It is something a company owes. Money Service Product 71. How does an expense differ from revenues? Revenues: They are amounts received or to be received from customers for sales of products or services. Sales, Performance of services, Rent, Interest Expenses: They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. Salaries and wages, utilities, Supplies used, Advertising. 72. What do you mean by Owners Equity? It is what s left of the assets after liabilities have been deducted. The same as net assets The owner s claim on the entity s assets 73. Differentiate Operating Ratio & Operating Profit Ratio. Operating Ratio establishes the relationship between the cost of goods sold plus other operating expenses to net sales. Operating ratio = Cost of Goods Sold + Operating Expenses * 100 Net Sales Operating Profit Ratio express relationship between operating profits and net sales. It is computed as: Operating Profit Ratio = (Operating Profit / Net Sales) * What are the sources of Funds? a. Issue of Share Capital b. Issue of Debentures for cash or any other asset. c. Sale of long term investment. d. Receipts of dividend income, rent income, interest. 75. A firm has opening and closing debtors of Rs.40,000 and Rs. 75,000 respectively and credit sales of Rs. 3,45,000. Calculate the debtor s turnover ratio. Debtors turnover ratio = credit sales/average debtors

12 =3, 45,000 / 57,000 = 6 time per year. 76. A firm has opening and closing inventory of Rs. 56,000 and Rs. 44,000 respectively. The firm has sold goods for Rs. 5, 00,000 at gross profit margin of 20% calculate the inventory turnover ratio. Inventory turnover = cost of goods sold / average inventory = 5, 00,000 1, 00,000 / ½ (56, , 000) = 4, 00,000 / 50,000 = 8 times per year. 77. What do you mean by GAAP (Generally Accepted Accounting Principles)? Generally accepted accounting principles (GAAP) - a term that applies to the broad concepts or guidelines and detailed practices in accounting, including all the conventions, rules, and procedures that make up accepted accounting practice at a given time. 78. What are the steps involved in Accounting Cycle? 1. Analyze the transaction 2. Journalize the transaction 3. Post the transaction to accounts in ledger 4. Prepare the trial balance 5. Prepare financial statements 79. Define type of Activities in Activity Based Costing. Unit level: Performed each time a unit is produced Batch level: Performed each time a batch is produced Product level: Performed to support production of different type of product Customer Level: Performed to support servicing customers Facility level: Residuary head 80. What is Balanced Score Card Approach. A balanced scorecard is a performance measurement and reporting system that strikes a balance between financial and operating measures, links performance to rewards, and gives explicit recognition to the diversity of organizational goals This enhances the learning process because managers learn the results of their actions and how these actions are linked to the organizational goals

13 Long Answer Questions 1. Explain three most significant accounting conventions. The Matching Convention: When an event affects the revenues and expenses, the affect on each should be recognized in the same accounting period. The sale of the products has two aspects: 1. Revenue aspect 2. Expense aspect. Revenues earned because the sale is going to fetch you some money and expenses incurred for producing that product or providing that services. Correct measurement of the net effect of the sale and expenses in any accounting period can only be made when you match the relevant expenses to its related sales. Otherwise it will allow a lot of freedom for not showing the true profitability of the business. The Consistency convention: The accounting policies and methods followed by the company should be the same every year. The consistency concept states that once an entity has decided on one method, it should use the same method for all the same character unless it has a sound reason to change the method. This is done because frequent changes in the manner of handling same type of events, would make it very difficult for the external users to compare financial statements over different periods. The term consistency as used here refers to consistency over a period of time and not the logical consistency. The Materiality Convention: Insignificant events would not be recorded if the benefit of recording them does not justify the cost. In law, there is something called de minims non curat lex, which means that the court will not consider trivial matters. Similarly the accounting does not attempt to record events so insignificant that the work of recording them is not justified by the usefulness of the results. But there are no definite rules that separate material information from immaterial information. So the materiality concept may be taken to mean that although insignificant events may be disregarded but there must be full disclosure of all important information. 2. What is target costing? Discuss its methodology. Target costing is a pricing tool used by the firms. It is designed as a cost management tool for reducing the overall cost of a product over its entire life with the help of production, engineering, research and design. A Target cost is the maximum amount of cost that can be incurred on a product and with it the firm can still earn the required profit margin from that product at a particular selling price. Methodology: The following 10 steps are required to install a comprehensive target costing approach with an organization.

14 1. Re-orient culture and attitudes. The first and most challenging step is reorient thinking toward market-driven pricing and prioritized customer needs rather than just technical requirements as a basis for product development. This is a fundamental change from the attitude in most organizations where cost is the result of the design rather than the influencer of the design and that pricing is derived from building up an estimate of the cost of manufacturing a product. 2. Establish a market-driven target price. A target price needs to be established based upon market factors such as the company position in the market place (market share), business and market penetration strategy, competition and competitive price response, targeted market niche or price point, and elasticity of demand. If the company is responding to a request for proposal/quotation, the target price is based on analysis of the price to win considering customer affordability and competitive analysis. 3. Determine the target cost. Once the target price is established, a worksheet (see example below) is used to calculate the target cost by subtracting the standard profit margin, non-recurring development costs, and any uncontrollable corporate allocations. The target cost is allocated down to lower level assemblies of subsystems in a manner consistent with the structure of teams or individual designer responsibilities. Target Cost calculation work sheet Manufacturers suggested retail price Standard dealer margin (30%) - (148.50) - shipping & distribution costs - (15) - profit margin (20%) - (66.30) - allocated non-recurring development cost - (35) = Business unit target cost overhead (45%) - (103.59) = Direct target Cost (labour & material) Balance target cost with requirements. Before the target cost is finalized, it must be considered in conjunction with product requirements. The greatest opportunity to control a product's costs is through proper setting of requirements or specifications. This requires a careful understanding of the voice of the customer, use of conjoint analysis to understand the value that customers place on particular product capabilities, and use of techniques such as quality function deployment to help make these tradeoff's among various product requirements including target cost. 5. Establish a target costing process and a team-based organization. A well-defined process is required that integrates activities and tasks to support target costing. This process needs to be based on early and proactive consideration of target costs and incorporate tools and methodologies

15 described subsequently. Further, a team-based organization is required that integrates essential disciplines such as marketing, engineering, manufacturing, purchasing, and finance. Responsibilities to support target costing need to be clearly defined. 6. Brainstorm and analyze alternatives. The second most significant opportunity to achieve cost reduction is through consideration of multiple concept and design alternatives for both the product and its manufacturing and support processes at each stage of the development cycle. These opportunities can be achieved when there is out-of-the-box or creative consideration of alternatives coupled with structured analysis and decisionmaking methods. 7. Establish product cost models to support decision-making. Product cost models and cost tables provide the tools to evaluate the implications of concept and design alternatives. A target cost worksheet can be used to capture the various elements of product cost, compare alternatives, as well as track changing estimates against target cost over the development cycle. 8. Use tools to reduce costs. Use of tools and methodologies related to design for manufacturability and assembly, design for inspection and test, modularity and part standardization, and value analysis or function analysis. These methodologies will consist of guidelines, databases, training, procedures, and supporting analytic tools. 9. Reduce indirect cost application. Since a significant portion of a product's costs (typically 30-50%) are indirect, these costs must also be addressed. The enterprise must examine these costs, re-engineer indirect business processes, and minimize non-value-added costs. But in addition to these steps, development personnel generally lack an understanding of the relationship of these costs to the product and process design decisions that they make. Use of activity-based costing and an understanding of the organization's cost drivers can provide a basis for understanding how design decisions impact indirect costs and, as a result, allow their avoidance. 10. Measure results and maintain management focus. Current estimated costs need to be tracked against target cost throughout development and the rate of closure monitored. Management needs to focus attention of target cost achievement during design reviews and phase-gate reviews to communicate the importance of target costing to the organization. 3. What ratios would you calculate to assess the liquidity position and solvency position of a firm? Working capital: Current assets-current liabilities. Current ratio: current assets/current liabilities Acid Test ratio or Quick ratio: Quick assets/current liabilities =Current assets-inventory-prepaid Expenses/Current Liabilities Cash Ratio: Cash+ Marketable securities+ Net receivable and debtors/ Current Liabilities.

16 Receivable Turnover or Debtors Turnover ratio: Net credit sales [total sales-cash sales-sales return]/ Average Debtors or average accounts receivable (times) Debt Collection Period: 12months/Debtor Turnover Inventory Turnover Ratio: Cost of Goods Sold/Average Inventory (times) Cost of Goods Sold= Sales- Gross profit or Cost of Goods Sold=Opening Stock+ Purchase+ Direct expenses-closing stock. 4. What is the objective of preparing Fund Flow Statement? In what way it is different from a Balance Sheet? Objectives: Fund Flow Statement is an essential tool in Financial Management decision making. The basic purpose of this statement is to indicate where funds come from and where it was used during a certain period. Following are the basic objectives of preparing this statement: 1. It determines the financial consequences of business orientation. 2. It acts as a central device when comparing with budgeted figures. 3. It points out the weak financial position of the company. 4. It points out the causes for changes in working capital. 5. it enables the banker, financial institution or creditor in on seeing the degree of risk. 6. The management can rearrange the finance more effectively on the basis of this statement. 7. Various uses of fund can be known after comparing them with the uses of previous years. Improvement or downfall in the firm can be assessed. Distinction between Fund Flow Statement and Balance Sheet: FUND FLOW STATEMENT BALANCE SHEET 1. It is dynamic in nature. 2. It incorporates items causing changes in working capital. 3. It is a management tool for financial analysis and helps in decision making. 4. The preparation of this statement is a post Balance Sheet exercise. 1. It is static in nature. It is prepared at the end of the accounting period and portrays the financial position of the firm on a particular date. 2. It includes the balance of real and personal account and shows the total resource. 3. It reveals the financial position of a firm and one can examine the soundness of the firm. 4. I t is the end product of all accounting operation for a particular period of time. 5. What problems do adoption of Price Level Accounting or Inflation Accounting serves? One of the key factor in selling product under competitive market condition is product pricing. The significance of pricing goes much beyond the simple question of

17 determining product profitability. Adoption of price level accounting serves some major problems. They are: 1. The system is not acceptable to Income tax authorities. 2. Too much calculation makes complications. 3. Changes in prices are never ending process. 4. The amount of depreciation will be lower in time of deflation. 5. The profit calculated on the system of price level accounting may not be a realistic profit. 6. What is the scope of Cost Accounting? Discuss briefly different types of cost. Scope of Cost Accounting: 1. It enables the management to ascertain the cost of product, jobs, service or units of production so as to develop cost standards. 2. Cost data are useful in the determination of selling price or quotation. 3. The object is to minimize the cost of manufacturing. Comparison of actual cost with standard reveals the interdependencies variance. 4. The central theme is to provide information, largely in the areas of cost, which will be useful in controlling the operation of a business in a broad sense. Different Types of Cost: Fixed cost - cost which does not vary and remains constant within a given period of time and range of activity in spite of fluctuations in production.eg. rent, supervisor salary, interest on loan. Variable cost varies directly in proportion to every increase or decrease in the volume or output of production. eg. raw material, direct labour. Semi-Variable costs contains a fixed and variable element eg. utilities. Step costs remain constant over a range of activity. eg. production supervisor if second shift is added. Product cost cost which become part of the cost of the product rather than an expense of the period. eg. Cost of raw materials Period costs costs which are not associated with production eg. Salesmen salaries, commission etc. Direct cost expenses incurred directly in producing the goods or services Indirect costs - Not directly chargeable to production of goods Committed costs unavoidable fixed costs like depreciation, rent, salaries etc., Discretionary costs costs set at a fixed amount for a specific time period eg., advertisement budget, research 7 development expenditure etc. Relevant costs costs which could be changed by managerial decisions ( closing down of non-profitable retail shop) Irrelevant costs- costs not affected by the managerial decisions (prepaid rent for the shop, unrecovered costs which will be scrapped) Shut down costs certain fixed costs continue to be paid at times of less or no production Sunk costs historical or past costs already incurred for future indefinite period of time (investment on fixed assets) Imputed costs (or hypothetical costs) are notional costs which do not involve in any cash outlay (rent of own property, salary to proprietor/ partner, interest on capital) Differential cost- difference in total costs between two alternatives Incremental costs choice of an alternative results in increase in total costs, such increase is incremental cost

18 Decremental costs- such decrease in costs Opportunity costs cost sacrificed by selecting the alternate choice Production, selling & distribution costs 7. Define Budget and Budgetary control. Discuss the advantages of budgetary control in an organisation. Budget: Budget is an estimate of future needs arranged according to an orderly basis, covering some or all of the activities of an enterprise for definite period of time in future to attain the objective. -George R. Terry. Budgetary control: Budgetary control means the establishment of budgets relating to the responsibilities of the executives of the requirements of the policy and continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide basis for its revision Advantages: The advantages or benefits of budgetary control are as follows: 1. Budgets fix the goals and targets without which operations lack directions. 2. Reduction in cost and elimination of efficiency is achieved automatically. 3. The budgets facilitate to maintain order efforts and brings about efficiency in results. 4. An effective system of budgetary control results in coordinate effort of all persons involved. 5. It enables the management to decentralize responsibility without losing control of the business since it pin-point efficiency. 6. Budgetary control and standard costing goes hand by hand. It promotes mutual cooperation and team sprits among the persons involved. 7. It ensures that the capital employed at a particular level is kept at a minimum level. 8. It facilitates an intelligent and planned forecast for future. 9. It is a good guide to management for making future plans. 10.It aims to maximization of profit through cost control and proper utilization of recourses. 11. It brings to light the inefficiency and weaknesses on comparing actual performance with budget. Thus management can take remedial measures. 12. It is a guide to management in the field of research and development in future. 13. It evaluates the performance. 14. Since budget provides advance information, financial crisis can be avoided. 15. It acts as a safety signal for the management. It prevents wastages of all types. 8. Explain the role of an accountant. The role of an accountant is as follows: 1. To establish, coordinate, administer as an integral part of management, an adequate plan for the control of operation. 2. To compare performance with operating plan and standards and to report and interpret the results of operation to all level of management. 3. To consult with all segment of management responsible for policy or action concerning any phase of the operation of the business as it relates to the attainment of objectives. 4. To administer tax policies and procedures. 5. To supervise and coordinate preparation of reports of government agencies.

19 6. To assure fiscal protection for the assets of the business through adequate internal control and proper insurance coverage. 7. To continuously appraise economic and social forces and government influences and interpretation their effect upon business. 8. Providing help in the design of an information system. 9. Helps in budget preparation. 10.Coordinating budget making and report preparation activities. 11.Preparing the performance report, control report, special managerial report and division making. 12 Interpretating accounting data based on the particular requirements of the managers in a gives situations. 9. What is meant by Fund Flow Statement? How it is prepared? Fund Flow Statement is a financial statement which reveals the methods by which the business has been financed and how it has use its funds between opening and closing balance sheet dates. Thus a fund flow statement is a report on movement funds explaining where from works capital originated and where into the same goes during an accounting period. Preparation of Fund Flow Statement: The fund flow statement requires preparation of two statements: 1. Statement changes in working capital 2. Funds from Operation 3. Fund Flow Statement Schedule of changes in working capital: Many business enterprises prefer to prepare schedule of changes in working capital, while preparing a funds flow statement, on a working capital basis. This schedule in changes in working capital provides information concerning the changes in each individual current assets and current liabilities accounts. This schedule is a part of fund flow statement and increase in working capital indicated by schedule changes in working capital will be equal to the amount of changes in working capital as found by fund flow statement. The format of schedule of changes in Working capital is as follows: Schedule of changes in Working Capital Items As on current year As on previous year Increase Decrease

20 A. Current Assets: Cash Bank debtors Stock Prepaid expenses Total CA B. Current liabilities: Bank overdraft Creditors Outstanding exp. Total CL Net increase/ Decrease in WC Funds from Operation By preparing adjusted profit and loss accuont Dr. Cr. Particulars Rs Particulars Rs. To goodwill written off To transfer to General reserve To depreciation To provision for tax To proposed dividends To loss on sale of assets To Preliminary exp. To balance c/d By balance b/d By gain on sale of assets By Funds From operations Fund Flow Statement

21 Sources of fund Rs Application of funds Rs Funds From Operations Sale of Fixed Assets Issue of Shares (Equity & Preference) Issue of Debentures Long-Term borrowings Decrease in Working Capital Funds Lost in operations Payments of Dividend Payment of Tax Purchase of Fixed Assets Payment of long-term loans Redemption of debentures Redemption of Pref.capital Increase in Working capital 11. Define Budgeting. State the objectives of budgeting. Budgeting: Budgeting is defined as The entire process of preparing the budget is known as budgeting Batty. Objectives: 1. To obtain more economic use of capital 2. To prevent waste and reduce expenses. 3. To facilitate various departments to operate efficiently and economically. 4. To plan and control the income and expenditure of the firm 5. To create a good business practice by planning future. 6. To fix responsibilities on different departments or heads. 7. To coordinate the various activities of various departments. 8. To ensure the availability of working capital. 9. To smooth out seasonal variations buy developing new products. 10.To ensure matching of sales with productions. 11. What is meant by CVP (Cost Volume Profit) analysis? What are the assumptions used in it? Limitations of Cost Volume Profit analysis. Cost profit volume analysis is a systematic method of examining the relationships between selling price, total sales revenue, volume of production expenses and profits. This analysis simplifies the real world conditions that a business enterprise likely to face. Assumptions used in CVP analysis: 1. CVP analysis focuses on prices, revenues, volume, cost, profits and sales mix and on the interrelationship between them during the short run. 2. In CVP analysis, all expenses classified into fixed and variable. Semi-variable expenses have to be divided into their fixed and variable elements.

22 3. CVP analysis may be used in setting selling prices, selecting the product mix to sell, choosing among alternatives marketing strategies and analysis the effects of cost increase or decrease on the profitability of the business enterprise. Limitations: There are certain limitations faced by CVP analysis. These are: 1. The function of profit projection is virtually important to financial analyst, but it is not without it shortcomings. Clear assignment of costs to either a fixed or variable category is not always possible. The interpretations of several analysts probably differ. 2. Direct labour is usually classified as a variable cost. Any change in production volume will have a direct effect on labour in the same direction. If management decides on a temporary shutdown of operations, the effect on the variability of labour cost may not correspond directly. If for example the company wishes to retain it highly experienced and skilled personnel during the shutdown period so as not to lose them, the fluctuating nature of direct labour changed. 3. Another major weakness of cost volume profit analysis as a planning or controlling device occurs in a manufacturing business. The assumption by the analyst the sales and production volumes will always be the same may be valid in theory but not in fact. 4. Analysis covering an extended period o time required a common denominator for all component periods so that data examined will be equivalent. Where costs and prices have changed drastically, adjustments based on current costs and prices produce a more uniform result. 12. What is meant by Balance Sheet? Gives it specimen. Balance Sheet: A Balance Sheet, also commonly referred as statement of financial position, is a statement of assets and liabilities of business enterprises at a particular date. The Balance Sheet summarizes and reveals the financial position of an enterprise on a particular date, by showing what It own and what it owes. Because the balance sheet is a snapshot of an instant in time, it is a status report rather than flow report. Specimen of Balance Sheet: Balance Sheet As at. Liabilities Amt(Rs) Assets Amt(Rs)