2 mark final

8/2/2019 2 Mark Final

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Unit 1 (2 marks)

1) Define Accounting

According to AICPA (American Institute of Certified Public Accountants)

it is defined as the the art of recording, classifying and summarizing in

a significant manner and in terms of money, transactions and events

which are in part at least of a financial character and interpreting the

result thereof.

2) What is mean by accounting?

Accounting is the process of identifying, measuring and

communicating economic information to permit informed judgmentsand decisions by users of information

are classified into two categories as i) Accounting concepts ii)

Accounting conventions.

3) What do you mean by Business Entity Concept?

Business Entity Concept

In accounting business is treated as a separate entity from its

owners. Accounts are prepared to give information about the

business and not those who own it. A distinction is made between

business transactions and personal transaction and also between

business property and personal property of the owners. The

business entity concept is necessary to ascertain the results of

business operations. In case the private and businesstransactions are not segregated, it will not be possible to

determine true profitability of the concern.

4) What do you mean by Going concern Concept?

Going Concern Concept


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It is presumed that the business concern will continue to exist

indefinitely or at least in the near future. The present resource of

the concern is utilized to attain the long term objectives of the

business. This concept is very important in relation to therecording of transactions and preparation of financial statements.

For example, it is only this assumption that while preparing final

accounts of the concern, fixed assets are shown in the balance

sheet at diminishing balance method, i.e. going concern value.

5) What do you mean by Cost Concept?The accounting records are based on cost concept. This concept

is closely related to the going concern concept. The assets and

liabilities of a business are shown at a cost which has been paid

or agreed upon between parties. The figures are recorded on

objectivity basis. There is no room for personal assessment or

bias in showing the figures. If subjectivity is followed in records

then same assets will be valued at different figures by different

individuals. Everybody will have his own view about various

assets.so cost concept is helpful in making truthful records. The

records become more reliable and comparable.

6) Write a short on Duel Aspect Concept?

This concept lies at the heart of whole accounting system.

Modern accounting system is based on dual aspect concept. It isbased on the principle that for every debit transaction. There

must be giver of benefit and also a taker of it. Suppose A

purchase a building of Rs.20,000,he will get building and will part

with the cash for similar amount. So one account will be debited


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another account will be credited The debits will be equal to

credits. The dual aspect concept has credited the system of

double entry book-keeping. It is because of this concept that the

total claims of outsiders and owners are always equal to totalassets of the concern. In form of accounting or balance sheet

equation.

External Liabilities + capital =Total Assets or, Total Liabilities =

Total Assets or, Assets Liabilities=Capital.

7) What do you mean by Money Measurement Concept?

According to this concept only those transactions are recorded in

accounting which can be expressed in terms of money. Money

provides a mechanism by which real resources can be transferred

among different individuals. Money is accepted as a medium of

exchange for goods and services. One is prepared to sell ones

property in exchange for money. The debtors and creditors are

willing to pay and receive money in near future. Thus, money

acts as a medium for immediate exchange for goods and services

and also as a standard for deferred payments. It is because of

this concept that quantitative or non-monetary

things/transactions are either omitted or recorded separately and

do not find any place in the financial statements of a firm.

8) What do you mean by Realization Concept?

This concept is related to the realization of revenue. The revenue

is realized either from sale of products or from rendering of

services. The sale involves a number of stages such as receipt of

order, production or assembling of goods, dispatch of goods,


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transfer of ownership, and receipt of money. A question arises as

to when should the revenue be considered? As a general

principle, sales or profit on sales will be considered to be realized

when either money (cash) is realized or legal obligation iscreated, i.e. ownership or title to the goods is transferred.

9) What do you mean by Matching of Cost and Revenue Concept?

As a general principle, the costs are matched to

revenues to measure the profits .A distinction between present,

past and future expenditure as well as capital and revenue

expense is necessary. The revenues and cost of the same period,product or service are matched. Similarily, the expense whose

utility is to be derived over a number of years are taken to the

balance sheet as deferred revenue expenditure. Capital

expenditures become a part of cost over a number of years

through depreciation.

10) What do you mean by convention of disclosure?

The disclosure of all significant information is one of the

important accounting conventions. It implies that accounts should

be prepared in such a way that all material information is clearly

disclosed to the reader. This information should not only include

figures given in the final accounts but also information whichoccurs after the preparation of balance sheet but before the

presentation of financial statements. The idea behind this

convention is that anybody who wants to study the financial


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statements should not be prejudiced by concealing any facts. He

should be able to make a free judgment.

11) What do you mean by Convention of Consistency?

The convention of consistency means that same accounting

principles should be used for preparing financial statements for

different periods. It enables management to draw important

conclusions regarding the working of the concern over a longer

period. It allows a

Comparison in the different periods. If different accounting

procedures and processes are

Used for preparing financial statements of different years then the

results will not be comparable because these will be based on different

postulates.

12) What do you mean by Convention of conservatism?

The conversion of conservatism means cautious approach or policy

of play safe. This convention ensures that the uncertainties and

risks inherent in business transactions should be given proper

consideration. If there is possibility of loss, it should be taken into

account at the earliest. On the other hand, a prospect of profit

should be ignored upto the time it does not materialize.

13) What do you mean by Convention of Materiality?

According to this convention only those events should be recorded

which have a significant bearing and insignificant things should be


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ignored. The avoidance of insignificant things will not materiality

affects the records of the business. It should be seen that the

efforts involved in recording the events should be worth the labour

involved in it. There is no formula in making a distinction betweenmaterial and immaterial events. It is a matter of judgment and it is

left to the accountant for taking a decision

14)What is ratio analysis?

A ratio is a simple arithmetical expression of the relationship of one number to

another. It may be defined as the indicated quotient of two mathematical

expressions.

15)What are the objectives of ratio analysis

Measuring the profitability

Judging operational efficiency of business

Assessing the solvency of business

Measuring short and long-term financial position of company

Facilitating comparative analysis of performance

16. What is liquidity ratio?

Liquidity Ratios are ratios that come off the the Balance Sheet and hence measure the

liquidity of the company as on a particular day i.e the day that the Balance Sheet was

prepared. These ratios are important in measuring the ability of a company to meet both

its short term and long term obligations.

17.What is current ratio?


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This ratio is obtained by dividing the 'Total Current Assets' of a company by its

'Total Current Liabilities'. The ratio is regarded as a test of liquidity for a company.

It expresses the 'working capital' relationship of current assets available to meet the

company's current obligations.

Current Ratio = Total Current Assets/ Total Current Liabilities

18.What is quick ratio?

This ratio is obtained by dividing the 'Total Quick Assets' of a company by

its 'Total Current Liabilities'. Sometimes a company could be carrying heavy

inventory as part of its current assets, which might be obsolete or slowmoving. Thus eliminating inventory from current assets and then doing the

liquidity test is measured by this ratio. The ratio is regarded as an acid test of

liquidity for a company. It expresses the true 'working capital' relationship of

its cash, accounts receivables, prepaids and notes receivables available to

meet the company's current obligations.

Quick Ratio = Total Quick Assets/ Total Current Liabilities

Quick Assets = Total Current Assets (minus) Inventory

19. What is absolute liquid ratio?

Absolute liquid ratio extends the logic further and eliminates accounts receivable

(sundry debtors and bills receivables) also. Though receivables are more liquid as

comparable to inventory but still there may be doubts considering their time and

amount of realization. Therefore, absolute liquidity ratio relates cash, bank and

marketable securities to the current liabilities. Since absolute liquidity ratio lays down

very strict and exacting standard of liquidity, therefore, acceptable norm of this ratio is

50 percent. It means absolute liquid assets worth one half of the value of current


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liabilities are sufficient for satisfactory liquid position of a business. However, this ratio

is not as popular as the previous two ratios discussed.

Absolute liquid ratio = Absolute liquid assets / Current liabilities

Where absolute liquid assets = Cash + Bank + marketable securities

20.What is debt-equity ratio?

Debt-to-Equity ratio indicates the relationship between the external equities or

outsiders funds and the internal equities or shareholders funds.

It is also known as external internal equity ratio. It is determined to ascertain

soundness of the long term financial policies of the company.

[Debt Equity Ratio = External Equities / Internal Equities]

21. What is gross profit ratio?

Gross profit ratio (GP ratio) is the ratio of gross profit to net sales expressed as a

percentage. It expresses the relationship between gross profit and sales.

[Gross Profit Ratio = (Gross profit / Net sales) 100]

22. What is net profit ratio?

Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as

percentage.

Components of net profit ratio:

The two basic components of the net profit ratio are the net profit and sales. The net

profits are obtained after deducting income-tax and, generally, non-operating

expenses and incomes are excluded from the net profits for calculating this ratio.


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Thus, incomes such as interest on investments outside the business, profit on sales

of fixed assets and losses on sales of fixed assets, etc are excluded.

Formula:

Net Profit Ratio = (Net profit / Net sales) 100

23. What is operating ratio

Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales.

It is generally expressed in percentage.

Operating ratio measures the cost of operations per dollar of sales. This is closely

related to the ratio of operating profit to net sales.

Components:

The two basic components for the calculation of operating ratio are operating

cost (cost of goods sold plus operating expenses) and net sales. Operating

expenses normally include (a) administrative and office expenses and (b) selling

and distribution expenses. Financial charges such as interest, provision for

taxation etc. are generally excluded from operating expenses.

Formula of operating ratio:

Operating Ratio = [(Cost of goods sold + Operating expenses) / Net sales] 100

24. What is expenses ratio?

Expense ratios indicate the relationship of various expenses to net sales. The

operating ratio reveals the average total variations in expenses. But some of the

expenses may be increasing while some may be falling. Hence, expense ratios are
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calculated by dividing each item of expenses or group of expense with the net sales

to analyze the cause of variation of the operating ratio.

The ratio can be calculated for individual items of expense or a group of items of a

particular type of expense like cost of sales ratio, administrative expense ratio,

selling expense ratio, materials consumed ratio, etc. The lower the operating ratio,

the larger is the profitability and higher the operating ratio, lower is the profitability.

While interpreting expense ratio, it must be remembered that for a fixed expense

like rent, the ratio will fall if the sales increase and for a variable expense, the ratio

in proportion to sales shall remain nearly the same.

Formula of Expense Ratio:

Particular Expense = (Particular expense / Net sales) 100

25. What is return on shareholder investment or networth?

It is the ratio of net profit to share holder's investment. It is the relationship between

net profit (after interest and tax) and share holder's/proprietor's fund.

This ratio establishes the profitability from the share holders' point of view. The

ratio is generally calculated in percentage.

Components:

The two basic components of this ratio are net profits and shareholder's funds.

Shareholder's funds include equity share capital, (preference share capital) and all

reserves and surplus belonging to shareholders. Net profit means net income after

payment of interest and income tax because those will be the only profits available

for share holders.

Formula of return on shareholder's investment or net worth Ratio:


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[Return on share holder's investment = {Net profit (after interest and tax) / Share

holder's fund} 100]

26. What is earnings per share ratio?

Earnings per share ratio (EPS Ratio) is a small variation of return on equity capital

ratio and is calculated by dividing the net profit after taxes and preference dividend

by the total number of equity shares.

Formula of Earnings Per Share Ratio:

The formula of earnings per share is:

Earnings per share (EPS) Ratio = (Net profit after tax Preference dividend) / No.

of equity shares (common shares)

27. What is dividend yield ratio?

Dividend yield ratio is the relationship between dividends per share and the market

value of the shares.

Share holders are real owners of a company and they are interested in real sense in

the earnings distributed and paid to them as dividend. Therefore, dividend yield

ratio is calculated to evaluate the relationship between dividends per share paid and

the market value of the shares.

Formula of Dividend Yield Ratio:

Following formula is used for the calculation of dividend yield ratio:

Dividend Yield Ratio = Dividend Per Share / Market Value Per Share

28. What is inventory or stock turnover ratio?
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Stock turn over ratio and inventory turn over ratio are the same. This ratio is a

relationship between the cost of goods sold during a particular period of time and

the cost of average inventory during a particular period. It is expressed in number of

times. Stock turn over ratio/Inventory turn over ratio indicates the number of timethe stock has been turned over during the period and evaluates the efficiency with

which a firm is able to manage its inventory. This ratio indicates whether investment

in stock is within proper limit or not.

Components of the Ratio:

Average inventory and cost of goods sold are the two elements of this ratio. Average

inventory is calculated by adding the stock in the beginning and at the and of the

period and dividing it by two. In case of monthly balances of stock, all the monthly

balances are added and the total is divided by the number of months for which the

average is calculated.

Formula of Stock Turnover/Inventory Turnover Ratio:

The ratio is calculated by dividing the cost of goods sold by the amount of average

stock at cost.

(a) [Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost]

(b) [Inventory Turnover Ratio = Net Sales / Average Inventory at Cost]

(c) [Inventory Turnover Ratio = Net Sales / Average inventory at Selling Price]

(d) [Inventory Turnover Ratio = Net Sales / Inventory]

29. What is fixed asset to proprietor fund ratio?


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Fixed assets to proprietor's fund ratio establishes the relationship between fixed

assets and shareholders funds.

The purpose of this ratio is to indicate the percentage of the owner's funds invested

in fixed assets.

Formula:

Fixed Assets to Proprietors Fund = Fixed Assets / Proprietors Fund

The fixed assets are considered at their book value and the proprietor's funds consist

of the same items as internal equities in the case ofdebt equity ratio.

30. What is the ratio of current asset to shareholder funds?

Current Assets to Proprietors' Fund Ratio establishes the relationship between

current assets and shareholder's funds.

The purpose of this ratio is to calculate the percentage of shareholders funds

invested in current assets.

Formula:

Current Assets to Proprietors Funds = Current Assets / Proprietor's Funds

31. What is cash flow analysis?

32. What is fund flow analysis?

33. What are the steps involved in fund flow analysis?
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Unit 3(2marks)

1. What is budget?

An itemized forecast of an individual's or company's income and expenses

expected for some period in the future. With a budget, an individual is able to

carefully look at how much money they are taking in during a given period, and

figure out the best way to divide it among a variety of categories. When making a

personal budget, an individual will typically designate the appropriate amount of

money to fixed expenses such as rent, carpayments, orutilitybills, and then make

an educated estimation for how much money they will spend in other categories,

such as groceries, clothing, or entertainment. By keeping track of where one's

money goes, one may be less likely to overspend, and more likely to meet their

financialgoals.
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2. What is budgetary control?

Methodical control of an organization's operations through establishment of

standards and targets regarding income and expenditure, and a continuous

monitoring and adjustment ofperformance against them.

3. What is organization chart?

4. What is sales budget?

Sales budget is a functional budget. The product wise as well as regional breaks up

of sales estimates are incorporated in the sales budget. The sales budget begins with

the previous year actual and incorporates the likely changes

5. What is production budget?

The production budget is prepared based on the sales estimate incorporated in the

sales budget. The adjustments with respect to the opening and closing stock positionsthat are policy decisions of the business are then made to prepare the production budget.

6. What is purchase budget?

The purchase budget is another functional budget that estimates the purchase
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requirement of materials utilized in the production process. The purchase budget is

based on the production budget and the standard material consumption requirement for

the production estimates.

7. What is expenditure budget?

Expenditure budgets may be drafted as fixed / flexible budgets. A fixed budget is one

which is prepared keeping in mind one level of activity. It is defined as one which is

designed to remain unchanged irrespective of the level of activity attained.

8. What is cash budget?

A cash budget consolidates all the cash inflows and outflows for the business. The

cash budget is also a functional budget. The cash budget helps the business to plan

the project purchases as well as to provide for the loan requirements. The cash

budgets also help in defining the repayment plans for short and long term loans of

the business.

9. what is master budget?

The master budget is the summary of various functional budgets. It is prepared by

integrating various budget into one consolidated budget so as to represent the

budgeted profit & loss a/c and the budgeted balancesheet as at the end of the budget

period.

10. what is zero based budgeting?


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11. What are the steps involved in zero based budgeting?

12. What are the benefits of zero based budgeting

13. What is computerized accounting

14.

Unit 2(2 marks)

1. What is cost accounting

Cost accounting is that branch of the accounting information system, which records,

measures and reports information about costs. The primary purpose of cost accounting

is cost ascertainment and its use in decision-making and performance evaluation. It is

also useful in planning and controlling.

2. What are the classification of cost

The costs are classified into various categories according to the purpose and requirements

of the firm. Some of the most important classifications are as follows.

i. By nature or Element or Analytical segmentation

ii. By functions

iii. Direct and Indirect cost

iv. By variability

v. By controllability


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vi. By normality

vii. By time

3. What is marginal costing?.

According to ICMA, London "Marginal cost is the amount at any given volume of output,by which aggregate costs are charged, if the volume of output is increased or decreased by

one unit."

4. What is break even point?

Break Even Point is the point at which the Total Cost is equivalent to Total Revenue. At

the break even point the business neither earns profit nor incurs a loss. It means that the

firm's cost is recovered at the minimum level of production.

5. What is p/v ratio?

PV ratio is Profit Volume ratio which establishes the relationship in between the profit

and volume of sales. It is a ratio normally expressed in terms of contribution towards

volume of sales. It is expressed in terms of percentage.

p/v ratio = contribution /sales x100

6. What is variance?

It is the difference between actual cost and standard cost during accounting period.

It refers to variation of actual result with planned result

7. What are the forms of variances?

Adverse/negative/unfaviorable variance

Positive/favourable variance

8. What are the types of variance?

Material variances


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Labor variances

Overhead variances

Sales variances

Margin variances

9. What is material cost variance?

Material cost variance represents the difference between the actual material value

and standard material value for a given output.

MCV = (SP x SQ) - ( AP x AQ)

10. What is material price variance?

Material price variance captures that part of cost variance which is due to the

difference in price per unit of materials. The formula for the measurement of material

price variance (MPV) will be:

MPV = (SP - AP) x AQ.

11. What is material usage variance?

Material usage variance is that part of cost variance which is due to the difference

in the utilization of material quantity. The formula for the measurement of material

usage variance (MUV) will be:

MUV = (SQ - AQ) x SP

12. what is labour cost variance?

Labor cost variance represents the difference between the actual labor cost paid and

standard labor cost for a given output.

LCV = (SR x SH) - ( AR x AH)


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13. What is material mix and yield variance?

Price and quantity variances of direct materials are explained on direct materials price

variance and direct materials quantity variance pages respectively. Here, our focus is to

explain the calculation of materials mix variance and materials yield variance.

14 . Formulas of Material Mix and Yield Variance:

1. Materials Mix Variance:

Actual quantities at individual standard materials costs Actual quantities at weighted

average of standard materials costs

2. Materials Yield Variance:

Actual quantities at weighted average of standard materials costs Actual output quantity

at tandard materials cost

15. what is labour rate variance?

Labor rate variance captures that part of cost variance which is due to the difference

in wage rate of labor. The formula for the measurement of labor rate variance (LRV)

will be:

LRV = (SR - AR) x AH.

16. What is labour usage variance?

Labor efficiency variance measures that part of cost variance which is due to the difference

in the efficient performance of labor. The formula for the measurement of labor efficiency

variance (LEV) will be:

LEV = (SH - AH) x SR
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17.What is labour mix variance?

It is also known as Gang composition Variance. It is similar to Material Mix variance

and is a part of labour efficiency variance. Labour mix variance arises only when two

or more different types of workers employed and the composition of actual grade of

workers differ from the standard composition of workers. The change in the labour

composition may be due to shortage of one grade of labour. This variance indicate how

much labour cost variance is there due to the change in labour composition. It is

calculated with the help of the following formula:

Labour Mix Variance = Standard Cost of Standard Mix Standard Cost of Actual

Mix

LMV = SCSM SCAM,

18. What is standard costing?

STANDARD COSTING is a control method involving the preparation of detailed

cost and sales budgets. Such budgets are then compared with the actual results for a

specific account period and any significant variances between the actual and the

budgeted results are investigated. Unexpected trends are corrected if they are not

acceptable or they cannot be accommodated.


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Unit 4

1. What is capital budgeting

It is the process of making investment decision in capital expenditures. Capital

expenditure defined as an expenditure the benefits of which are expected to be

received more than one year.It is incurred in one point of time and the benefits

are received in different point of time in future.

2. What are the Methods of capital budgeting / evaluation of investment proposals

(A) Traditional methods or Non-Discounted method

(i) pay-back period method or pay out or pay off method

(ii) Improvement of traditional approach to pay back period method


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(iii) Rate of return method or accounting method

(B) Time-adjusted method or discounted methods

(i) Net Present Value method

(ii) Internal Rate of Return method

(iii)Profitability Index method

3.What is Pay-back period method

This method represent the period in which total investment in permanent asset pays back

itself. It measure the period of time for the original cost of a project to be recovered fromthe additional earning of a project itself.

Investment are ranked according to the length of the payback period, investment withshorter payback period is preferred.

4. What is Rate of Return method (ARR)

This method takes in to account the earnings expected from the investment over

their whole life. It is known as accounting rate of return.

The project which gives the higher rate of return is selected when compared to one

with lower rate of return.

(a) Average rate of return method

= Total profit (after depreciation & Taxes) * 100

Net investment in the project * No of years of profits

What is Net present value method(NPV)

It is a modern method of evaluating investment proposals. It takes into consideration

time value of money and calculates the return on investment by introducing the factor of

time element.


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The net present values of all inflows and outflows of cash occurring during the entire life of

the project is determined separately for each year by discounting these flow by firms cost

of capital or predetermined rate.

Profitability index method or Benefit cost Ratio (P.I)

It is also called Benefit cost ratio is the relationship between present value of cash

inflow and present value of cash outflow

PI (Gross) = present value of cash inflows

Present value of cash outflows/ Initial Investment

Internal Rate of Return Method (IRR)

Under the internal rate of return method, the cash flows of a project are discounted

at a suitable rate by hit and trial method, which equates the net present value so calculated

to the amount of investment.

Cost of capital

The cost of capital of a firm is the minimum rate of return expected by its investors.

It is the weighted average cost of various sources of finance used by the firm. The capital

used may be debt, preference shares, retained earnings and equity shares.

What is Computation of cost of capital

A. Computation of cost of specific source of finance

B. Computation of cost of weighted average cost of capital

Computation of specific source of finance

What is Cost of debt

It is the rate of interest payable on debt.

Debenture before tax

Issued at par

Issued at premium or discount


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Debenture after tax

Cost of redeemable debt

The debt is to be redeemed after a certain period during the life time of the firm.

Such debt issued is known as redeemable debt.

Before tax cost of redeemable debt

After tax cost of redeemable debt

What is Cost of preference capital

A fixed rate of dividend is payable on preference shares. Dividend is payable at

the discretion of the board of directors and there is no legal binding to pay

dividend. In case dividend are not paid, it will affect the fund raising capacity of

the firm. Hence dividends are paid regularly except when there is no profit

Issued at par

Issued at premium or discount

Cost of redeemable preference shares

Redeemable preference shares are issued which can be redeemed or

cancelled on maturity date

Cost of equity share capital

The cost of equity is the maximum rate of return that the company must earn on

equity financed position of its investments in order to leave or unchanged themarket price of its stock.

It may or may not be paid. Shareholders invest money in equity shares on theexpectation of getting dividend and the company must earn this minimum rate so

that the market price of the shares remains unchanged.

(a) Dividend yield method or dividend / price ratio method

According to this method the cost of equity capital is the discount rate that

equates the present value of expected future dividend per share with the netproceeds of a share


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(b) Dividend yield plus growth in dividend method

Dividends of a firm are expected to grow at a constant rate and the dividend

payout ratio is constant.

(c) Earnings yield method

According to this method the cost of equity capital is the discount rate that

equates the present value of expected future earnings per share with the net

proceeds of a share

(i) Cost of retained earnings

The retained earnings do not involve any cost because a firm is not required to

pay dividend on retained earnings. But shareholder expect return on retained

earnings.

The cost of retained earnings may be considered as the rate of return which theexisting shareholders can obtain by investing the after-tax dividend in alternativeopportunity of equal qualities.

Computation of weighted average cost of capital

CAPITAL STRUCTURE

According to Gerestenbeg,capital structure of a company refers to the composition or

make-up of its captialisation and it includes all long-term capital resources Viz: loans,

reserves, shares and bonds.


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2 mark final

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