iimm _fundamentals of book keeping and accounting

8/9/2019 Iimm _fundamentals of Book Keeping and Accounting

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Topic: FUNDAMENTALS OF ACCOUNTING AND BOOK KEEPING

Q1. (a) What is Book-keeping and transaction? Explain double entry and single

entry book keeping.

(b) Explain the basic features of accounting principles, also describe its concept.

Answer a.Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping isusually performed by a bookkeeper. Bookkeeping should not be confused withaccounting. The accounting process is usually performed by an accountant. Theaccountant creates reports from the recorded financial transactions recorded by the bookkeeper. There are some common methods of bookkeeping such as the Single-entry bookkeeping system and the Double-entry bookkeeping system. But while these systemsmay be seen as "real" bookkeeping, any process that involves the recording of financialtransactions is a bookkeeping process.Two common bookkeeping systems used by businesses and other organizations are the

single-entry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenueand expense journal. Single-entry bookkeeping is adequate for many small businesses.Double-entry bookkeeping requires posting (recording) each transaction twice, usingdebits and credits.Single-entry system: The primary bookkeeping record in single-entry bookkeeping is thecash book, which is similar to a checking account register but allocates the income andexpenses to various income and expense accounts. Separate account records aremaintained for petty cash, accounts payable and receivable, and other relevanttransactions such as inventory and travel expenses. These days, single entry bookkeepingcan be done with DIY bookkeeping software to speed up manual calculations. Singleentry systems are used in the interest of simplicity. They are usually less expensive tomaintain than double-entry systems because they do not require the services of a trained person.

Double-entry bookkeeping system: ensures the integrity of the financial values recordedin a financial accounting system. It does this by ensuring that each individual transactionis recorded in at least two different nominal ledgers (sections) of the financial accountingsystem and so implementing a double checking system for every transaction. It does this by first identifying values as either a Debit or a Credit value. A Debit value will always be recorded on the debit side (left hand side) of a nominal ledger account and the creditvalue will be recorded on the credit side (right hand side) of a nominal ledger account. Anominal ledger has both a Debit (left) side and a Credit (right) side. If the values on thedebit side are greater than the value of the credit side of the nominal ledger then thatnominal ledger is said to have a debit balance.Each transaction must be recorded on theDebit side of one nominal ledger and that same transaction and value is also recorded onthe Credit side of another nominal ledger hence the expression Double-Entry (entered intwo locations) one debit and one credit. This ensures that when the nominal ledgers(sometimes known as accounts) are placed in a list which has two columns, the leftcolumn for listing nominal ledgers with Debit balances and the right column for ledgers



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with Credit balances, then the total of all the Debit values will equal the total of all theCredit balances. If this does not happen that may mean that one of the transactions wasnot recorded twice, i.e. once as a debit and once as a credit as required in the double-entry bookkeeping system.

Answer b.Financial accounting is information that must be assembled and reported objectively.Third-parties who must rely on such information have a right to be assured that the dataare free from bias and inconsistency, whether deliberate or not. For this reason, financialaccounting relies on certain standards or guides that are called "Generally AcceptedAccounting Principles" (GAAP).Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicateto the reader whether or not the information contained within the statements complieswith GAAP.y Principle of regularity: Regularity can be defined as conformity to enforced rules

and laws.y Principle of consistency: This principle states that when a business has once fixed amethod for the accounting treatment of an item, it will enter all similar items thatfollow in exactly the same way.

y Principle of sincerity: According to this principle, the accounting unit should reflectin good faith the reality of the company's financial status.

y Principle of the permanence of methods: This principle aims at allowing thecoherence and comparison of the financial information published by the company.

y Principle of non-compensation: One should show the full details of the financialinformation and not seek to compensate a debt with an asset, a revenue with anexpense, etc. (see convention of conservatism)

y Principle of prudence: This principle aims at showing the reality "as is´: one shouldnot try to make things look prettier than they are. Typically, revenue should berecorded only when it is certain and a provision should be entered for an expensewhich is probable.

y Principle of continuity: When stating financial information, one should assume thatthe business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it isaccepted that they are at their historical value (see depreciation and going concern).

y Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays asubscription (or lease, etc.), the given revenue should be split to the entire time-spanand not counted for entirely on the date of the transaction.

y Principle of Full Disclosure/Materiality: All information and values pertaining tothe financial position of a business must be disclosed in the records.

Q2. (a) What do you understand by ³Final Account´ illustrate with the help of a

chart the process of final account.



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(b) Which all techniques are adopted while doing financial forecasting, also explain

problems in financial forecasting.

Answer a.

Simply defined Final account can be the accounts made up only at the end of a firm's

financial year. For a manufacturing firm, the final accounts consist of (1) manufacturingaccount, (2) trading account, (3) profit and loss account, and (4) profit and lossappropriation account. A trading firm's final accounts will include all of the above exceptthe manufacturing account. Together, these accounts generate the gross profit, netincome, and distribution of net income figures of the firm. The Final Account is made upof 5 schedules and a summary sheet that reports the totals from all the schedules. Theschedules are listed below and are explained on the back of this page.S chedule A ± Inventory Assets and Values and Adjustments to InventoryS chedule B ± Income Earned by Estate after Date of Death

S chedule C ± DisbursementsS chedule D ± Assets DistributedS chedule E

±

Assets remaining to be distributedS ummary S heet

S CHEDULE ³A´ ± Inventory Assets and Values and Adjustments to Inventory

To prepare this schedule, list the assets and values of the estate as noted on the inventoryand show the changes that have occurred to these assets and values since the inventorywas first prepared. For example, the value of certain inventory assets may not have beenknown at the time of filing an inventory, such as CPP death benefit and rebates. Or anasset may have been assigned a value at the time of inventory and later sold for more or less money. These would be adjustments to the inventory and need to be shown on thisschedule. Do not show any income earned after death as adjustments to inventory.S CHEDULE ³B´ ± Income Earned by Estate after Date of Death

To prepare this schedule, list any and all income earned by the estate after the date of death, such as interest on bank accounts or investments, rental income, and dividends.S CHEDULE ³C´ ± DisbursementsTo prepare this schedule, list the disbursements paid by the estate. Include such items asambulance, probate opening tax, Royal Gazette advertisement costs, Indian Customs andRevenue Agency payments, funeral expenses, and bank charges. Include the date of the payment, which was paid, what it was for, and the amount.S CHEDULE ³D´ ± Assets Distributed

To prepare this schedule, list specific bequests that have been distributed (as per the Will)and any partial distribution of monies that have been made to beneficiaries.S CHEDULE ³E´ ± Assets remaining to be distributed To prepare this schedule, list all remaining assets in the control of the personalrepresentative on the date of the application for passing the estate accounts.S ummary S heet

To prepare this summary sheet, transfer the total from each schedule onto the summary page at the appropriate line. Subtotal where indicated on the summary form. Do notcomplete the area for ³closing expenses´ (personal representative expenses, personalrepresentative commission, solicitor¶s account, and probate tax re-evaluation). Leave the



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rest of the form blank. The Registrar will help you complete this when you review theestate accounting together.

Answer b.

A financial forecast is normally an estimate of future financial outcomes for a company.

Using historical internal accounting and sales data, in addition to external market andeconomic indicators, a financial forecast is an economist's best guess of what will happento a company in financial terms over a given time period -- which is usually one year.Arguably, the most difficult aspect of preparing a financial forecast is predicting revenue.Future costs can be estimated by using historical accounting data; variable costs are also afunction of sales. Unlike a financial plan or a budget a financial forecast doesn't have to be used as a planning document. Outside analysts can use a financial forecast to estimatea company's success in the coming year.S tart with S trategic Planning

Financial Planning starts at the top of the organization with strategic planning. Since strategicdecisions have financial implications, you must start your budgeting process within the

strategic planning process. Failure to link and connect budgeting with strategic planning canresult in budgets that are "dead on arrival." Strategic planning is a formal process for establishing goals and objectives over the long run. Strategic planning involves developing amission statement that captures why the organization exists and plans for how the organizationwill thrive in the future. Strategic objectives and corresponding goals are developed based on avery thorough assessment of the organization and the external environment. Finally, strategic plans are implemented by developing an Operating or Action Plan. Within this OperatingPlan, we will include a complete set of financial plans or budgets.

Financial Plans (Budgets) Operating Plan S trategic PlanModels are built around the collection of equations, logic, and data that flows according to therelationships between operating variables and financial outputs. Financial variables (costs,

sales, investments, taxes, etc.) can be manipulated by the user so that the user can see theoutcome of a decision before it is made. This can help facilitate strategic thinking within the budgeting process. Two types of financial models are simulation and optimization. Simulationattempts to duplicate the effects of a decision and show its impact. Optimization seeks tooptimize (maximize or minimize) a forecast objective (revenues, production costs, etc.).Financial models provide decision support services for improvements within budgeting. Someof the benefits of financial models include: Shows the results of planning under a variety of assumptions, allowing the user to assess

the impacts of estimates that have been used. Generates the Budgeted Income Statement and Budgeted Balance Sheet as well as

forecasted financials by business unit or department.In order to build a financial model, we need to establish variables, parameters, andrelationships. Additionally, we can divide variables into three types:1. Control Variables: The inputs that the company can control, such as the level of debt

financing or the level of capital spending.2. External Variables: Inputs that the company cannot control, such as economic conditions,

consumer spending, interest rates, etc.

3. Policy Variables: Goals and objectives of the company can impact the expected outcomes.For example, management may set targets for sales, profitability, and costs.



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Parameters are the baselines or boundaries for the financial model. For example, the level of debt may have a minimum and maximum value. We also will set our beginning account balances within the financial model. Relationships are the logic and specifications required for making things work. For example, the Budgeted Balance Sheet will require that Assets =

Liabilities + Equity. Several equations will be used within the financial model.M

any of theseequations will be relational; i.e. if we change sales prices, total revenues will change.Equations are tested and added to the financial model to make it complete. Equations can beexpanded into business and decision rules so that users do not have to worry about calculatingthings like return on equity. The financial model takes care of critical rules for running the business or making decisions.One of the biggest challenges within financial planning and budgeting is how do we make itvalue-added. Budgeting requires clear channels of communication, support from upper-levelmanagement, participation from various personnel, and predictive characteristics. Budgetingshould not strive for accuracy, but should strive to support the decision making process. If wefocus too much on accuracy, we will end-up with a budgeting process that incurs time and

costs in excess of the benefits derived. The challenge is to make financial planning a value-added activity that helps the organization achieve its strategic goals and objectives.

Q3. (a) Define Cost and Cost accounting; also give out objectives of cost accounting.

(b) As a Cost accountant what all concepts will you keep in mind in a Concern?

Answer aIn business, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is analternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost.In this case, money is the input that is gone in order to acquire the thing. This acquisitioncost may be the sum of the cost of production as incurred by the original producer, andfurther costs of transaction as incurred by the acquirer over and above the price paid tothe producer. Usually, the price also includes a mark-up for profit over the cost of production. Costs are often further described based on their timing or their applicability.In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitabilityor social use of funds. Managers use cost accounting to support decision-making to cut acompany's costs and improve profitability. As a form of management accounting, cost

accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically. Costs are measured in units of nominal currency by convention. Costaccounting can be viewed as translating the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values.There are various managerial accounting approaches:

y Standardized or Standard Cost Accountingy Lean accounting



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y Activity-based Costingy Resource Consumption Accountingy Throughput Accountingy Marginal Costing / Cost-Volume-Profit Analysis

Classical Cost Elements are:

1.

RawM

aterials2. Labor 3. Indirect Expenses / Overhead

In modern cost accounting, the concept of recording historical costs was taken further, byallocating the company's fixed costs over a given period of time to the items producedduring that period, and recording the result as the total cost of production. This allowedthe full cost of products that were not sold in the period they were produced to berecorded in inventory using a variety of complex accounting methods, which wasconsistent with the principles of GAAP (Generally Accepted Accounting Principles). Italso essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the "standard cost" for any given product. For example: if the railway

coach company normally produced 40 coaches per month, and the fixed costs were still$1000/month, then each coach could be said to incur an overhead of $25 ($1000/40).Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach. This method tended to slightly distort the resulting unit cost, but in mass production industries that made one product line, and where the fixed costs wererelatively low, the distortion was very minor. For example: if the railway coach companymade 100 coaches one month, then the unit cost would become $310 per coach ($300 +($1000/100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000/50)), a relatively minor difference. An important part of standard cost accounting is a variance analysis which breaks down the variation betweenactual cost and standard costs into various components (volume variation, material costvariation, labor cost variation, etc.) so managers can understand why costs were different

from what was planned and take appropriate action to correct the situation.These are the following important objectives of cost accounting:y Ascertainment of Cost: The primary objectives of the cost accounting are to ascertain

cost of each product, process, job, operation or service rendered.y Ascertainment of Profitability: Cost accounting determines the profitability of each

product, process, job, operation or service rendered. The statement of profit or lossesand Balance Sheet also submitted to the management periodically.

y Classification of Cost: Cost accounting classifies cost in to different elements such asmaterials, laborer and expenses. It has further been divided as direct cost and indirectcost for cost control and recording.

y Control of Cost: Cost accounting aims at controlling cost by setting standards andcompared with the actual, the deviation or variation between two is identified andnecessary steps are taken to control them.

y Fixation or Selling Prices: Cost accounting guides management in regard to fixationof selling prices of the products. It is also helpful for preparing tender and quotations.



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Answer b.Full cost accounting (FCA) generally refers to the process of collecting and presentinginformation (costs as well as advantages) for each proposed alternative when a decision isnecessary. It is a conventional method of cost accounting that traces direct costs and

allocates indirect costs. A synonym, true cost accounting (TCA) is also often used.Experts consider both terms problematic as definitions of "true" and "full" are inherentlysubjective. Full cost accounting embodies several key concepts that distinguish it fromstandard accounting techniques. The following list highlights the basic tenets of FCA.1. Accounting for costs rather than outlays2. Accounting for hidden costs and externalities3. Accounting for overhead and indirect costs4. Accounting for past and future outlays5. Accounting for costs according to lifecycle of the productCosts rather than outlaysAn outlay is an expenditure of cash to acquire or use a resource. A cost is the cash value

of the resource as it is used. For example, an outlay is made when a vehicle is purchased, but the cost of the vehicle is incurred over its active life (e.g., 10 years). The cost of thevehicle must be allocated over a period of time because every year of its use contributesto the depreciation of the vehicle's value. Hidden costsWith FCA, the value of goods and services is reflected as a cost even if no cash outlay isinvolved. One community might receive a grant from a state, for example, to purchaseequipment. This equipment has value, even though the community did not pay for it incash. The equipment, therefore, should be valued in an FCA analysis.Overhead and indirect costs

FCA accounts for all overhead and indirect costs, including those that are shared withother public agencies. Overhead and indirect costs might include legal services,administrative support, data processing, billing, and purchasing. Environmental costs asindirect costs include the full range of costs throughout the life-cycle of a product (Lifecycle assessment), some of which even do not show up in the firm's bottom line. It is alsocontain fixed overhead, fixed administration expense etc. Past and future outlaysPast and future cash outlays often do not appear on annual budgets under cash accountingsystems. Past (or upfront) costs are initial investments necessary to implement servicessuch as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlaysare costs incurred to complete operations such as facility closure and post closure care,equipment retirement, and post-employment health and retirement benefits.

Q4. (a) Explain the process of determining the Cost of an item; describe through a

table the components of total cost.

(b) Define with the help of a chart working Capital management, explain credit

policy.



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Q5. (a) How do you define budgetary capital expenditure? Also explain ³Pay Back´

and ³Accounting of Rate of Return´ methods.

(b) Narrate the principal advantages of a budgetary control system; also give out

phases in budgetary Control.

Answer a.Capital Expenditures is referred as amount of money needed to spend on capital items or fixed assets such as land, buildings, roads, equipment, etc. that are projected to generateincome in the future. Capital expenditures to be budgeted include replacement,acquisition, or construction of plants and major equipment. Capital Expenditure Budget is plan prepared for individual capital expenditure projects. Simple Payback Method:Payback considers the initial investment costs and the resulting annual cash flow. The payback period is the amount of time (usually measured in years) to recover the initialinvestment in an opportunity. Unfortunately, the payback method doesn¶t account for savings that may continue from a project after the initial investment is paid back from the

profits of the project, but this method is helpful for a ³first-cut´ analysis of a project.1. Payback with Equal Annual S avings

If annual cash flows are equal, the payback period is found by dividing the initialinvestment by the annual savings.Payback Period = Initial Investment Cost(In years) Annual Operating Savings2. Payback with Unequal Annual S avingsThe previous example assumes that the annual cash flow is the same each year. In reality,there are significant costs such as depreciation and taxes that will cause cash flows tovary each year. If the annual cash flow differs from year to year, the payback period isdetermined when the accrued cash savings equal the initial investment costs (i.e., whenthe cumulative cash flow balance equals zero). Net Present Value (NPV) Method One of the advantages of the Net Present Value (NPV) method is that is accounts for thetime-value of money (i.e., the value of a dollar tomorrow is not the same as a dollar today). The NPV method determines the worth of a project over time, in today¶s dollars.Unlike the payback method, NPV also accounts for the savings that occur after the payback period. The greater the NPV value of a project, the more profitable it is. Thismethod can be used to rate and compare the profitability of several competing options.The accounting rate of return (ARR) is a very simple (in fact overly simple) rate of return: average profit ÷ average investment as a percentage. Where average meansarithmetic mean.The profit number used is operating profit (usually from a particular project). Theaverage investment is the book value of assets tied up (in the project). This is importantas the profit figure used is after depreciation and amortisation. The means that value of assets used should also be after depreciation and amortisation as well. ARR is most oftenused internally when selecting projects. It can also be used to measure the performance of projects and subsidiaries within an organisation. It is rarely used by investors, and shouldnot be used at all, because:



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y Cash flows are more important to investors, and ARR is based on numbers thatinclude non-cash items.

y ARR does not take into account the time value of money ² the value of cashflows does not diminish with time as is the case with NPV and IRR.

y It does not adjust for the greater risk to longer term forecasts.y

There are better alternatives which are not significantly more difficult to calculate.The accounting rate of return is conceptually similar to payback period, and its flaws, in particular, are similar. A very important difference is that it tends to favour higher risk decisions (because future profits are insufficiently discounted for risk, as well as for timevalue), whereas use of the payback period leads to overly conservative decisions.Because ARR does not take into account the time value of money, and because it iswholly unadjusted for non-cash items, any method of selecting investments based on it isnecessarily seriously flawed. Its only advantage is that it is very easy to calculate. It isfairly easy to construct (realistic) examples where it will lead to different choices from NPV, and the NPV led decision is clearly correct.

Answer b.T here are a number of advantages to budgeting and budgetary control :· Compels management to think about the future, which is probably the most importantfeature of a budgetary planning and control system. Forces management has to look ahead, to set out detailed plans for achieving the targets for each department, operationand (ideally) each manager, to anticipate and give the organization purpose and direction.· Promotes coordination and communication.· Clearly defines areas of responsibility. Requires managers of budget centers to be maderesponsible for the achievement of budget targets for the operations under their personalcontrol.· Provides a basis for performance appraisal (variance analysis). A budget is basically ayardstick against which actual performance is measured and assessed. Control is provided by comparisons of actual results against budget plan. Departures from budget can then beinvestigated and the reasons for the differences can be divided into controllable and non-controllable factors.· Enables remedial action to be taken as variances emerge.· Motivates employees by participating in the setting of budgets.· Improves the allocation of scarce resources.· Economizes management time by using the management by exception principle. No system of planning can be successful without having an effective and efficient systemof control. Budgeting is closely connected with control. The exercise of control in theorganization with the help of budgets is known as budgetary control. The process of budgetary control includes the following phases:1. Preparation of various budgets.

2. Continuous comparison of actual performance with budgetary performance.3. Revision of budgets in the light of changed circumstances.A system of budgetary control should not become rigid. There should be enough scope of flexibility to provide for individual initiative and drive. Budgetary control is an importantdevice for making the organization. More efficient on all fronts. It is an important tool for controlling costs and achieving the overall objectives.



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Q6. Write any five short notes.

(a) Financial and Master Budget.

The FinancialM

aster budget aggregates related budgets, or a family of budgets, whichare produced by most organizations. A business is likely to have a range of budgets for varying departments within the organization.Some examples of the different budgets are:y Sales budgets, for the sale of products. These budgets may be broken up by

department or state office.y Cash flow budgets, which are based on the expected cash from sales and other

revenue generating sources and include payments of expenses, loans and capitalequipment purchases.

y Budgets predicting the financial position at the end of the budget period, whichincludes expected assets, liabilities, planned inventory and cash at hand.

y General expense budgets covering all overheads, such as rents, plant and equipmentand general administrative expenses.

y A further list is provided in the next major section under Budget Planning ProcessesA manufacturing business will have a series of budgets covering production, inventoryand purchases, sales of units and marketing expenses. These types of budgets, and others,are components of the "Financial Master Budget" which is the overall collection of budgets for the operation of the organization. Such budgets parallel Master andAggregate Plans covered in the earlier operations planning component of this Unit of Study. Each of these budgets is linked in some way to each other, for instance, marketing budgets will be determined by the projected volume of sales. The production budget willalso take into consideration the budget for inventory of components required for themanufacture of items and capital expenditure budgets will be determined by the need to purchase or upgrade equipment or vehicles. Most budgets reflect the cash flow whether they deal with sales, general expenses, direct labor or material purchases. Budgeting maylead to greater cash flow when the business exceeds its budget expectations (i.e. there is positive variance). This could be due to increased, or the same level of output with lesslabor, which would reduce the cash paid in wages. This might also occur with an increasein sales without additional marketing costs. It must be remembered that this would havethe opposite effect if the variance were negative. For example, an increase in componentcosts or lack of efficiency in producing a product would have a negative effect on cashflow.

(b) Indian Financial Market.

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange(BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over thelast few years, there has been a rapid change in the Indian securities market, especially inthe secondary market. Advanced technology and online-based transactions havemodernized the stock exchanges. In terms of the number of companies listed and totalmarket capitalization, the Indian equity market is considered large relative to the



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country¶s stage of economic development. The number of listed companies increasedfrom 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization hasgrown almost 11 times during the same period. The debt market, however, is almostnonexistent in India even though there has been a large volume of Government bondstraded. Banks and financial institutions have been holding a substantial part of these

bonds as statutory liquidity requirement. The portfolio restrictions on financialinstitutions¶ statutory liquidity requirement are still in place. A primary auction marketfor Government securities has been created and a primary dealer system was introducedin 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds,out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking themonopoly of the Unit Trust of India (UTI), which maintains a dominant position. Before1992, many factors obstructed the expansion of equity trading. Fresh capital issues werecontrolled through the Capital Issues Control Act. Trading practices were not transparent,and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of

the capital market. The Securities and Exchange Board of India (SEBI) was established in1988. Despite the rules it set, problems continued to exist, including those relating todisclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and underwriters. There have been significant reforms in the regulation of thesecurities market since 1992 in conjunction with overall economic and financial reforms.In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automationof stock trading, integration of national markets, and efficiency of market operations.India has seen a tremendous change in the secondary market for equity. Its equity marketwill most likely be comparable with the world¶s most advanced secondary markets withina year or two. The key ingredients that underlie market quality in India¶s equity marketare: Exchanges based on open electronic limit order book; Nationwide integrated market with a large number of informed traders and fluency of short or long positions; and No counterparty risk.Among the processes that have already started and are soon to be fully implemented areelectronic settlement trade and exchange-traded derivatives. Before 1995, markets inIndia used open outcry, a trading process in which traders shouted and hand signaledfrom within a pit. One major policy initiated by SEBI from 1993 involved the shift of allexchanges to screen-based trading, motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book wasthe National Stock Exchange (NSE), which started trading debt instruments in June 1994and equity in November 1994. In March 1995, BSE shifted from open outcry to a limitorder book market. Currently, 17 of India¶s stock exchanges have adopted openelectronic limit order.

(c) Security and Exchange Board of India (SEBI).

SEBI is the regulator for the Securities Market in India. Originally set up by theGovernment of India in 1988, it acquired statutory form in 1992 with SEBI Act 1992



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being passed by the Indian Parliament. Chaired by C B Bhave, SEBI is headquartered inthe popular business district of Bandra-Kurla complex in Mumbai, and has Northern,Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai andAhmedabad.SEBI has to be responsive to the needs of three groups, which constitute the market:

y the issuers of securities

y the investorsy the market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation andenforcement action in its executive function and it passes rulings and orders in its judicialcapacity. Though this makes it very powerful, there is an appeals process to createaccountability. There is a Securities Appellate Tribunal which is a three member tribunaland is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi.A second appeal lies directly to the Supreme Court. SEBI has enjoyed success as aregulator by pushing systemic reforms aggressively and successively (e.g. the quick

movement towards making the markets electronic and paperless rolling settlement onT+2 bases). SEBI has been active in setting up the regulations as required under law.SEBI has also been instrumental in taking quick and effective steps in light of the globalmeltdown and the Satyam fiasco. It had increased the extent and quantity of disclosuresto be made by Indian corporate promoters. More recently, insight of the global meltdown,it liberalized the takeover code to facilitate investments by removing regulatory strictures.

(d) Capital and Revenue.

(e) Net operating profitability.In corporate finance, net operating profit after tax or NOPAT is a company's after-taxoperating profit for all investors, including shareholders and debt holders. It is equal to NOPLAT and is defined as follows:

NOPAT = Operating profit x (1 - Tax Rate)An alternative formula is as follows

NOPAT = Net Profit after Tax + after tax Interest Expense ± after tax InterestIncome

For companies with no debt and thus no interest expense, NOPAT is equal to net profit.In other words, NOPAT represents the company's operating profit that would accrue toshareholders (after taxes) if the company had no debt.Another fully equivalent expression is

NOPAT = AdjEBIT - CashOpTaxWhere:

y AdjEBIT represents adjusted earnings before interest and taxes (adjusted EBIT)y CashOpTax represents cash operating taxes.

(g) Classifications of costs.



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The term cost is used in many different ways in managerial accounting. The reason is thatthere are many types of costs, and these costs are classified differently according to theimmediate need of management. For example, managers may want cost data to prepareexternal financial reports, to prepare planning budgets, or to make decisions. Eachdifferent use of cost data demands a different classification and definition of cost. For

example, the preparations of external financial reports require historical cost data,whereas decision making may require predictions about future costs. In the following paragraphs we have discussed many of possible use of cost data and how costs aredefined and classified for each use. Manufacturing and Non-manufacturing Costs: Manufacturing costs are those costs thatare directly involved in manufacturing of products and services. Examples of manufacturing costs are raw material costs and salary of labor workers. Manufacturingcost is divided into three broad categories by most companies. Product Costs versus Period Costs: Product costs include all the costs that are involvedin acquiring or making product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Period costs are all the costs

that are not included in product costs. These costs are expensed on the income statementin the period in which they are incurred, using the usual rules of accrual accounting thatwe learn in financial accounting.Cost Classifications on Financial S tatement: Merchandising and manufacturing firms, both prepare financial statement reports for creditors, stockholders, and others to showthe financial condition of the firm and the firm's earnings performance over somespecified intervals. Merchandising companies simply purchase goods and resale them tocustomers. Financial statement reports are therefore simple in case of merchandisingcompanies. The financial statements prepared by manufacturing companies are morecomplex than the statements prepared by a merchandising company.Cost Classifications for Predicting Cost Behavior (Variable and Fixed cost): Quitefrequently, it is necessary to predict how a certain cost will behave in response to achange in activity. Cost behavior refers to how a cost will react or respond to changes inthe level of business activity. As the level of activity rises and falls, a particular cost mayrise and fall as well--or it may remain constant. For planning purposes, a manager must be able to anticipate which of these will happen; and if a cost can be expected to change,the manager must know by how much it will change. To help make such distinctions,costs are often characterized as variable or fixed. Mixed or S emi variable Cost: Mixed cost is also known as semi-variable cost. Amixed/semi variable cost is one that contains both variable and fixed cost elements. Therelationship between mixed cost and level of activity can be expressed by the equation y= a + bX.Cost classification for Assigning Costs to Cost Objects (Direct and Indirect Cost): Adirect cost is a cost that can be easily and conveniently traced to the particular cost objectunder consideration. A cost object is any thing for which cost data is required including products, customer¶s jobs and organizational subunits. An indirect cost is a cost thatcannot be easily and conveniently traced to the particular cost object under consideration. Decision making costs--cost classification for decision making: Costs can be classifiedfor decision making purposes. Costs are important feature of many business decisions.



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For decision making purposes cost is usually classified as differential cost, opportunitycost, and sunk cost. It is essential to have a firm grasp of these cost concepts.Quality Costs: Quality cost can be defined as a cost that is incurred to avoid defaults before the products are shipped to the customers or to satisfy the customers by removingthe faults if defaulted products have been shipped to customers to secure the good will of

the company. Quality costs can be broken down into four broad groups. Two of thesegroups are known as prevention costs and appraisal costs. These are incurred in an effortto keep defective products from falling into the hands of customers. The other two groupsof costs are known as internal failure costs and external failure costs. These are incurred because defects are produced despite efforts to prevent them. These are also known ascosts of poor quality.

iimm _fundamentals of book keeping and accounting

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