Anish AbrahamRegistration No: 541111322

MBA Semester 1

MB0041- Financial and Management Accounting

4 Credits

(Book ID: B1130)

Assignment Set- 2 (60 Marks)

Q.1 Selected financial information about Vijay merchant company is given below:

2010 2009

Sales 69,000 43,000

Cost of Goods Sold 57,000 32,500

Debtors 7,200 3,000

Inventories 11,400 5,500

Cash 1,500 800

Other current assets 4,000 2,700

Current liabilities 16,000 11,000

Compute the current ratio, quick ratio, average debt collection period and inventory

turnover for 2009 and 2010. State whether there is a favorable or unfavorable

change in liquidity from 2009 to 2010. At the beginning of 2009, the company had

debtors of Rs..2500 and inventory of Rs.3000. [10 Marks]

Answer

Current ratioCurrent ratio = Current assets / Current liabilitiesCurrent ratio (2010) = 7200+11400+1500+4000

16000Current ratio (2010) = 1.5 :1

Current ratio (2009) = 3000+5500+800+270011000

Current ratio (2009) = 1.09 :1

Quick ratioQuick ratio = Current assets(less inventory + other current assets)

Current liabilitiesQuick ratio (2010) = 7200+1500

16000Quick ratio (2010) = 0.54 :1

Quick ratio (2009) = 3000+80011000

Quick ratio (2009) = 0.35 : 1

Average debt collection periodDebtors turnover ratio = Net credit sales / Average debtorsDebt collection period = Months or Days in year / Debtors turnover ratio

Debtors turnover ratio (2010) = 69000/ (7200+3000) 2

Debtors turnover ratio (2010) = 13.52

Debt collection period (2010) = 365 / 13.52Debt collection period (2010) = 27 days

Debtors turnover ratio (2009) = 43000/ (3000+2500) 2

Debtors turnover ratio (2009) = 15.64

Debt collection period (2009) = 365 / 15.64Debt collection period (2009) = 24 days

Inventories turnover ratioInventories turnover ratio = Cost of goods sold / Average inventoryInventory holding period = 12 months / Inventory turnover ratio

Inventories turnover ratio (2010) = 57000 / (11400+5500)2

Inventories turnover ratio (2010) = 6.75

Inventory holding period (2010) = 365 / 6.75Inventory holding period (2010) = 54 days

Inventories turnover ratio (2009) = 32500 / (5500+3000)2

Inventories turnover ratio (2009) = 7.647Inventory holding period (2009) = 365 / 7.647Inventory holding period (2009) = 48 days

There is a favourable change in liquidity from 2009 to 2010 as indicated by the improvement in Current ration and Quick ratio.

Q.2 Explain different methods of costing. Your answer should be studded with

examples (preferably firm name and product) for each method of costing.

[10 Marks]

Answer

The following are the methods of costing

1. Job Costing: This type of costing is used in those businesses where production is carried out as per specific order and customer specification.

a) Batch Costing: This method is used to determine the cost of a group of identical products. The batch consists of similar products is a unit and not a single item within the branch.

Example: Ranbaxy - Production of tablet / Mattel Inc – Production of toys (Hot-wheels)

b) Contract Costing: This method is based on the principle of job costing used by house builders and civil contractor. The contract becomes the cost unit for which relevant costs are determined.Example: GMR – Construction of Airport

Gammon India Ltd – Transportation projects

c) Composite Costing: In this method costs are accumulated for different components of the product and then combined because the nature of the product is complex.Example: Airbus – Manufacture of Aero planes

Sirosky – Helicopter manufacturer

2. Process Costing: This method is used in those industries wheremanufacture is done continuously thereby it is difficult to trace costs to specific units. The total cost is averaged for the number of unitsmanufactured.

a) Unit Costing: This method is used when a single item is produced and the final product is composed of homogeneous units. The cost per unit is obtained by dividing the total cost by the total number of units manufactured.Example: India cement - cement

Nestle – chocolates

b) Operating Costing: This method is used by service industries. The unit cost differs among these services depending upon the nature of services being rendered.Example: Southern travels – Transport buses

Star Cruises - Holiday cruise packages

c) Operation Costing: This product costing is used when conversion activities are very similar across products lines but the direct materials differ significantly.Example: Phillips – Manufacturers of LCD / LED TVs

IBM - Manufacturers of Desktop / Lap-top computers

Q.3 State the importance of differentiating between the fixed costs and variable

costs in managerial decision. [10 Marks]

Answer

It is very important to distinguish between fixed and variable costs in managerial

decisions as the management has the discretionary power to make some costs

either fixed, variable of partly fixed and partly variable which will have a direct impact

on the performance of the organization. For example the remuneration of sales

persons can be treated as fixed cost wherein it will become a salary fixed per month

which may not induce additional motivation on the part of the sales team to sell

more. Whereas if the management decides to treat this compensation to sales

persons as variable cost by rewarding them with commission linked to their sales

this may result in motivating the sales team to surpass targets and sell more. A

similar scenario can be applied to the workers in a production line where they are

paid a fixed salary or a piece-rate remuneration or a salary combined with piece-rate

beyond a certain targeted level of output. Differentiating the fixed and variable cost

will also enable the management to take measures to control them by identifying

alternatives that will be most suited to the organizational goals. Cost of storage

space in an administrative environment is likely to be higher than in a warehousing

environment and the management can control this cost as per the requirement of

the business. Variable costs can also be controlled in similar ways by identifying

appropriate cost effective alternatives for example appropriate lighting source and

it’s usage in production line and administrative areas.

Q.4 Following are the extracts from the trial balance of a firm as at 31st March 2009

Name of the account Dr Cr

Sundry debtors 2,05,000

Bad debts 3,000

Additional Information

1) After preparing the trial balance, it is learnt that Mr.X a debtor has become

insolvent and nothing could be recoverd from him and, therefore the entire

amount of Rs.5,000 due from him was irrecoverable.

2) Create 10% provision for doubtful debt.

Required: Pass the necessary journal entries and show the sundry debtors

account, bad debts account, provision for doubtful debts account, P&L a/c and

Balance sheet as at 31st March 2009. [10 Marks]

Answer

Journal Entry

Particulars Dr Cr

Profit & Loss A/c Dr

To Bad Debts A/c

(Being bad debt transferred to P&L a/c)

3000

3000

Bad Debts A/c Dr

To Sundry Debtors A/c

(Being Mr. X balance transferred to Bad Debts from debtors)

5000

5000

Profit & Loss A/c Dr

To Bad Debts A/c

(Being additional Bad Debts written off)

5000

5000

Profit & Loss A/c Dr

To Provision for Doubtful debts account A/c

(Being 10% provision provided)

20000

20000

Ledger Posting

Sundry Debtors A/c

Dr CrTo Bal b/d   205,000            By Bad debts A/c   5,000                         By Bal c/d   200,000

    205,000   205,000

Bad debts A/cDr CrTo Bal c/d   3,000      To Sundry Debtors 5,000 By Profit & Loss A/c   3,000     By Profit & Loss A/c   5,000                                   0

  8,000   8,000

Provision for doubtful debts A/c

Dr Cr      By Profit & Loss A/c   20,000                                           To Bal c/d 20,000   0

  20,000   20,000

Profit & Loss A/c for year ended 31st March 2009

Dr CrBad debts  Amt Amt   Amt AmtTo Bad debts A/c (Old) 3,000        To Bad debts A/c (New) 5,000 8,000      To Provision for doubtful debts   20,000                                             By Bal c/d   28,000

    28,000     28,000

Balance Sheet as at 31st March 2009Dr crLiabilities   Amt Amt   Asset Amt Amt                 Sundry debtors 205,000        Less: Bad debt new 5,000 200,000            

     Provision for doubtful debts   20,000

                      

    0     220,000

Q.5 A change in credit policy has caused an increase in sales, an increase in discounts taken, a decrease in the amount of bad debts, and a decrease in investment in accounts receivable. Based upon this information, the company’s (select the best one and give reason)

1) Average collection period has decreased2) Percentage discount offered has decreased3) Accounts receivable turnover has decreased4) Working Capital has increased.

[10 Marks]

Answer

As the result of increase in sales, decrease in bad-debts and decrease in investment in accounts receivable the working capital has been favourably affected as increase in sales and decrease in investment in AR indicates realization of debtors in shorter period which improves the liquidity of the company by converting AR in cash/bank balances.

Q.6 Identify the users of accounting information. [10 Marks]

Answer

a. Investors: Investors may be broadly classified as retail investors, high net worth individuals, Institutional investors both domestic and foreign. As chief provider of risk capital, investors are keen to know both the return from their investments and the associated risk. Potential investors need information to judge prospects for their investments.

b. Lenders: Banks, Financial Institutions and debenture holders are the main lenders and they need information about the financial stability of the borrower enterprise. They are interested in information that would enable them to determine whether their borrower has the capability to repay the loans along with the interest due on it.

c. Regulators Rating Agencies and Security Analyst: Investors and creditors seek the assistance of information specialist in assessing prospective returns. Equity analyst, bond analyst and credit rating agencies offer a wide range of information in the form of answering queries on television shows, providing trends in business newspapers on a particular stock, offer valuable information in seminars, discussion groups, meetings and interviews. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials, visit their premises and make constant enquiry using e-mails, teleconference and video conference. Firms build a good rapport with such type of information seekers to gain visibility in the market.

d. Management: Management needs information to review the firms short term solvency and long term solvency. It has to ensure effective utilization of its resources, profitability in terms of turnover and investment. It has to decide upon the course of action to be taken in future and also may be interested in acquiring other business which is undervalued.

e. Employees, Trade Union and Tax authorities: Employees are keen to know about the general health of the organization in terms of stability and profitability. Current employees have a natural interest in the financial condition of the firm as their compensation will depend on the financial performance of the firm. Trade unions use financial reports for negotiating wage package, declaration of bonus and other benefits. Tax authorities need information to assess the tax liability of the firm.

f. Customers: Customers have an interest in the accounting information about the continuation of company especially when they have established a long term involvement with or are dependent on the company.

g. Government and regulatory agencies: Government and the regulatory agencies require information to obtain timely and correct information, to regulate the activities of the enterprise if any. They seek information when tax laws need to be amended, to provide institutional support to the lagging industries. The regulatory agencies use financial reports to take action against the firm when appropriate returns are not filed in time or when the returns fails to provide true and fair position of the business or to take appropriate action against the firm when complaints / misappropriation are being lodged. Stock exchange has a legitimate interest in financial reports of publicly held enterprise to ensure efficient operation of capital market.

h. The Public: Every firm has a social responsibility. Firms depend on local economy to meet their varied needs. They may get patronage from local government in the form of capital subsidy, cheap land or tax sops in the form of tax holidays for certain period of time. Prosperity of the enterprise may lead to prosperity of the economy both directly and indirectly.