Mba i Accounting for Management [14mba13] Solution

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ACCOUNTING FOR MANAGERS 14MBA13

DEPT.OF MBA-SJBIT 1

Solved VTU-Question Paper

Module-1

1. What are the functions of accounting? June/July 2015 (3Marks)

a) Record Keeping Function

b)

Managerial Functionc) Legal Requirement function

d) Language of Business

2. Explain any 3 uses of financial statements in brief. Give examples of decisions that

are based on accounting information. Dec.14/Jan15 (3 Marks)

Facilitate to replace memory: Accounting facilitates replace human memory by

maintaining complete record of financial transactions.

Facilitates to comply with legal requirements: Accounting facilitates to comply with legal

requirements which require an Enterprise to maintain books of accounts. For e.g. Sec 209

of the Companies Act 1956, requires a company to maintain proper books of accounts onaccrual basis.

Facilitate to ascertain net results of operations: Accounting facilitates to ascertain net result

of operations by preparing Income Statement or P&L A/c. Facilitates to ascertain financial position: Accounting facilitates to ascertain financial

position by preparing Balance Sheet.

Facilitates the users to take decisions: Accounting facilitates the users to take decisions bycommunicating accounting information to them.

3. What is GAAP? Explain the need for accounting standard. June/July 2015 (7Marks)

Accounting standard is a selected set of accounting policies or broad guidelines regarding the

principles and methods to be chosen out of several alternatives. Standards conform to applicablelaws, customs, and usage and business environment.

ObjectiveThe main objective of accounting standards is to harmonize the diverse accounting policies and

practices at present in use in India.

Importance or Advantages of setting Accounting standards

Reduction in variations:Standards reduce to a reasonable extent or eliminate altogether confusing variances in the

accounting treatment used to prepare financial statements.

Disclosure beyond that required by law;There are certain areas where important information is not statutorily required to be disclosed.

Standards may call for disclosure beyond that required by law.Facilitates comparison:

The application of accounting standards would to a limited extent, facilitate comparison of

financial statements of companies situated in different parts of the world and also of different

companies situated in the same industry.




DEPT.OF MBA-SJBIT 2

4. What are the concepts and conventions of accounting? Explain them in brief.

June/July 2015, Dec.14/Jan15 (10Marks)

Accounting Concepts

Accounting Entity Concept According to this assumption, a business is treated as a separate entity that is distinct from its

owner(s), and all other economic proprietors. This concept requires that for accounting purposes adistinction should be made between (i) personal transactions and business transactions, and (ii)

transactions of one business entity and those of another business entity.

Money measurement Concept

According to this concept, only those transactions which are capable of being expressed in term ofmoney are included in the accounting records. Non-monetary transactions should be ignored. E.g.

Guarantee given by bank, Strikes, Lockouts, Layoff etc

Accounting Period Concept

According to this concept, the economic life of an enterprise is artificially split into periodicintervals which are known as accounting periods at the end of which an income statement and

position statement are prepared to show the performance and financial position.

Going Concern ConceptAccording to this concept, the enterprise is normally viewed as a going concern that is, continuing

in operation for the foreseeable future. Generally Accepted Accounting Principles (GAAPs)

GAAPs may be defined as those rules of action or conduct which are derived from experience and

practice and when they prove useful, they become accepted as principles of accounting.

Conventions of accounting:

Duality Principle

The duality aspects of transaction is the basis of double entry records. The entry made for eachtransaction is composed of two parts-one for debit and another for credit. Every debit has equal

amount of credit.Revenue Recognition PrincipleThis principle is mainly concerned with the revenue being recognized in the Income Statement

(P&L A/c) of an enterprise. Revenue is the gross inflow of cash. It includes receivable from sale

of goods, rendering of services and use of enterprise resources, interests, royalties and dividends.Revenue is recognized in the period in which it is earned irrespective of the fact whether it is

received or not during that period.

Historical Cost Principle

According to this principle, an asset is ordinarily recorded in the accounting records at the price

paid to acquire it at the time of its acquisition and the cost becomes the basis for the accountsduring the period of acquisition and subsequent accounting periods. The cost of an asset is

systematically reduced from year to year by charging depreciation and the asset is shown in the balance sheet at book value.

Matching Principle

According to this principle, the expenses incurred in an accounting period should be matched with

the revenues recognized on all goods sold during a period, cost of those goods sold should also be

charged to that period. In Trial balance all debits should be matched with all credits. In B/S, assets

side should be matched with liabilities side.




DEPT.OF MBA-SJBIT 3

Full Disclosure PrincipleAccording to this principle, the financial statements should act as means of conveying and not

concealing. The financial statements must disclosure all the relevant and reliable information. Itshould be full, fair and adequate so that the users can take correct assessment about the financial

performance and position of the enterprise.

Objectivity PrincipleAccording to this principle, the accounting data should be definite, verifiable and free from bias

of the accountant. This principle requires that each recorded transaction in the books of accounts

should have an adequate evidence to support it. (E.g. vouchers, receipts, invoices etc.)

Module-2

1. What is purchase book? Explain purchase book with imaginary transaction.

Dec.14/Jan15 (3Marks)

This book is kept with the object of recording credit purchases of goods for resale. Each inwardinvoice after it has been entered as to calculations and also to the quantity, quality and price of the

goods received is numbered consecutively and then entered in the purchase books.

Postings: Each personal a/c is credited with its respective amount and the monthly total of this

book is debited to purchases a/c in the Ledger.

2. What is journal? How is it different from ledger? (7Marks)

A daily record of events or business; a private journal is usually referred to as a

Below each journal entry a brief explanation of the transaction is given within the brackets is called

narration

Ledger is a secondary book of entry. The journal entries are posted to the ledger at the end of each period. Ledger is a book containing various account. In this book, separate account is opened for

each and every transactions of different nature.

Module-3

1. Define depreciation June/July 2015 (3Marks)

Depreciation is a non-cash expense that reduces the value of an asset over time. When it's stated

that depreciation is "non-cash," it means that depreciation is taken as an accounting entry, and that

the amount of cash held by the business is not affected. Business assets that can be depreciatedinclude equipment, machinery, technology and computers, office furniture, buildings and

improvements to buildings, leasehold improvements, and business vehicles. Land cannot be

depreciated because it appreciates instead of depreciating.




DEPT.OF MBA-SJBIT 4

2. Differentiate between Trial balance and balance sheet (7Marks)Trial Balance is a statement of ledger balances. In this statement four columns are provided for

recording the serial number, name of accounts, debit balances and a credit balances. The total ofsuch balances must be equal.

Rules Debit : All assets, expenses & losses

Credit : All liabilities, incomes & gainsA Balance Sheet is a statement depicting the financial position of the business on a specific date.Balance sheet is defined as a still-photograph of the state of affairs of

the business at a particular date. The financial position of a business is revealed by its assets and

liabilities on a particular date.

Module-41. What is Leverage ratio? June/July 2015 (3Marks)

Leverage refers to the use of debt finance. While debt capital is a cheaper source of finance, it is

also riskier source of finance. Leverage ratios help in assessing the risk arising from the use of

debt capital.

2. What is marshalling of balance sheet? Dec.14/Jan15 (3Marks)

Marshalling of balance sheet is to show assets and liabilities in specific order or arrangement. We

can either show assets and liabilities in liquidity order or permanence order.

3. What is common size statement? Dec.14/Jan15 (3Marks)

In vertical analysis of financial statements, an item is used as a base value and all other accounts

in the financial statement are compared to this base value. On the balance sheet, total assets equal

100% and each asset is stated as a percentage of total assets. Similarly, total liabilities and

stockholder's equity are assigned 100%, with a given liability or equity account stated as a

percentage of total liabilities and stockholder's equity. On the income statement, 100% is assigned

to net sales, with all revenue and expense accounts then related to it. Figure is assumed to be 100and all figures are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total of

assets or liabilities is taken as 100 and all figures are expressed as a percentage of this total.

4. Write a short note on comparative, common size, trend analysis and ratio analysis

(10Marks)

COMPARATIVE FINANCIAL STATEMENTS

A simple method for financial analysis is Comparative Financial Statements. Comparative

financial statements will contain items at least for two periods. Changes – increases and decreases – in income statement and balance sheet over period are shown. Comparative Financial Statements

can be prepared for more than two periods or on more than two dates.

Common size financial statements are those in which figures reported are converted into

percentages to some common base. In the income statement, the sale figure is assumed to be 100and all figures are expressed as a percentage of sales. Similarly, in the Balance Sheet, the total ofassets or liabilities is taken as 100 and all figures are expressed as a percentage of this total.




DEPT.OF MBA-SJBIT 5

TREND ANALYSIS

Trend percentages are immensely useful in making a comparative study of financial statementsfor several years.

The method of calculating trend percentages involves the calculation of percentage relationshipthat each item bears to the same item in the base year.

Any year may be taken as the base year. It is usually the earliest year. Any intervening yearmay also be taken as the base year.

Each item of base year is taken as 100 and on that basis the percentage for each item of the

years is calculated.

These percentages can also be taken as Index Numbers showing relative changes in thefinancial data resulting with the passage of time.

Ratios for Financial Statement Analysis

A ratio gives the mathematical relationship between one variable and another. Ratios are

well known and most widely used tools for financial analysis.

The various types of ratios have been classified into the following categories:

1. Liquidity ratios

2. Turnover ratios3. Profitability ratios

4. Ownership ratios

Module-5

1. What is Forensic Accounting? June/July 2015, Dec.14/Jan15 (3Marks)

Forensic Accounting, A branch of accounting that uses investigative skills to determine theaccuracy of a company's financial statements in a legal dispute. The word forensic means "suitablefor a court of law." Thus, forensic accountants are used in fraud investigations, breach of contract

disputes, and other disagreements that require court action. Forensic accountants are often retained

by one or both parties in such dispute to bolster their cases

2. What do you mean by IFRS? State the objectives. June/July 2015, Dec.14/Jan15

(7Marks)

The International Financial Reporting Standards refer to the reporting standards of finance as set

by the international accounting standards. Both IFRS and Indian Accounting Standards have

different accounting standards. However, with the growing market trend, the need of a common

set of accounting standards was felt by all. Hence, IFRS is to be followed. However, with thedifferences in the standards existing between both the bodies, a careful handling is to be carried

out. Following are few changes that will be made in case IFRS is issued and made compulsory:

•AS-1: Disclosure of accounting principlesIFRS-/IAS-1: Adoption of international financial reporting standards/presentation of financial

statements.

•AS-3: cash flow statements




DEPT.OF MBA-SJBIT 6

IAS-7: cash flow statements

•AS-4: events after the balance sheet date

IAS-10: events recorded after the balance sheet date• AS-5: changes in accounting policies and accounting errors

IAS-8: prior period changes and accounting policies and errors changes

3. What is window dressing? Explain any 5 techniques of window dressing June/July

2015, Dec.14/Jan15 (10 Marks)

It is the act or instance of making something appear deceptively attractive or favorable; something

used to create a deceptively attractive or favorable impression. The act or practice of giving

something superficial appeal by skilful presentation.

Nature of Window Dressing

1. Inflate the sales from the current year by advancing the sales from the following year.

2. Alter the ‘other income’ figure by playing with non-operational figures like sale of fixed

assets.3.

Fiddle with the method and rate of depreciation. (A switch may be effected from the written

down value method to the straight line method or vice versa.)

4. Change the method of stock valuation from, say, direct costing to absorption, to minimizethe cost of goods sold.

5. Capitalise certain expenses like research and development costs and product promotion

cost that are ordinarily written off in the profit and loss account.

Module-6

1.

What do you understand by the term Corporate Governance? June/July 2015(3Marks)

Corporate governance is the set of processes, customs, policies, laws and institutions affecting the

way in which a corporation is directed, administered or controlled. Corporate governance also

includes the relationships among the many players involved (the stakeholders) and the goals for

which the corporation is governed. The principal players are the shareholders, management and

the board of directors. Other stakeholders include employees, suppliers, customers, banks and

other lenders, regulators, the environment and the community at large.

Corporate governance is a multi-faceted subject. An important theme of corporate governance

deals with issues of accountability and fiduciary duty, essentially advocating the implementation

of guidelines and mechanisms to ensure good behaviour and protect shareholders. Another keyfocus is the economic efficiency view, through which the corporate governance system should aim

to optimize economic results, with a strong emphasis on shareholders welfare. There are yet other

aspects to the corporate governance subject, such as the stakeholder view, which calls for more

attention and accountability to players other than the shareholders (e.g.: the employees or the

environment).




DEPT.OF MBA-SJBIT 7

2. What is Human Resource Accounting? Is it essential? June/July 2015, Dec.14/Jan15

(7Marks)

Human Resource Accounting is the process of identifying and measuring data about Human

Resources and communicating this information to the interested parties. It is an attempt to identify

and report the Investments made in Human Resources of an organisation that are currently not

accounted for in the Conventional Accounting Practices.Methods of Human Resource Accounting

Quite a few Models have been suggested in the past for the Human Resource Accounting and these

can be classified into 2 parts each having various Models. Some of the Important ones are:-A. Cost Based Models

I. Capitalization of Historical Costs Model

II. Replacement Costs Model

III. Opportunity Cost Model

B. Value Based Models

I. Present Value of Future Earnings Model/ Lev and Schwartz Model

II. Reward Valuation Model/ Flamholtz Model

III. Valuation on Group Basis

3. What is meant by Accounting Standard? Explain any 6 AS in brief. Dec.14/Jan15 (10

Marks)

The Accounting standards bring uniformity in the preparation and presentation of financial

statements and aids in comparison of different financial statements of companies in the same ordifferent industries.

Procedure for framing Accounting Standards

received by ICAI assigned to ASB

AS-1 Disclosure of Accounting

Policies

AS-2(Revised) Valuation of inventoriesAS-3(Revised) Cash Flow Statements

AS-4(Revised) Contingencies and Events

occurring after BalanceSheet Date

AS-5(Revised) Net Profit or Loss, prior

period items and changes in

Accounting policies

AS-6(Revised) Depreciation Accounting




DEPT.OF MBA-SJBIT 8

Module-7

1. What do you understand by the previous year and Assessment year? June/July 2015

(3Marks)

Previous Year {Sec 3} : It means the Financial year immediately preceding Assessment Year {Sec

2 (9)}

Assessment Year {Sec 2 (9)} : It is the period of 12 months commencing from 1 st April of every

year and ends with 31st March of next year

2. What is deduction? Explain the deduction available to individual under 80C.

June/July 2015, Dec.14/Jan15 (7 Marks)

Further the Government Policy of attracting investment and activity in the desired direction and to

provide stimulus to growth or to meet social objectives, concession in the form of ‘deduction’ f rom

Taxable Income is allowed. Chapter VI-A of the Income-tax Act, 1961 contains such deduction

provisions. In computing Total Income of an assesse deductions under sections 80C to 80U are

permissible from “Gross Total Income”.

“Gross Total Income” means the aggregate of income computed under each head as per

provisions of the Act, and but before making any deductions under this chapter.

1. Life insurance premium on the life of self, spouse and child

2. Contribution to PPF on the life of self, spouse and child

3. Contribution to SPF & RPF for self only

4. Housing loan repayment to the extent of principle amount

5. Subscription to notified NABARD bonds

6. Tuition fees paid to the university, school, college or education institution located in India

for full time education of children other than donation

7. Five years’ time deposit under post office savings scheme

8. Subscription to NSC

9. Term deposit of at least 5 years with a scheduled bank

3. Define the term Income. Explain any 4 heads of income in brief. Dec.14/Jan15

(7Marks)

Total Income {Sec 2 (45)}: T.I means the amount of income referred to in Sec 5

The Incomes earned by an assesse have been classified in to five major heads. They are

1.

Income from salary2. Income from house property

3. Profits and Gains of Business or Profession

4. Capital Gain

5. Income from Other Source




DEPT.OF MBA-SJBIT 9

4. Describe the Income tax sales rates applicable for individual for the annual year 2014-

15. June/July 2015, Dec.14/Jan15. (10 Marks)

Rates of income-tax for assessment year 2014-15

1. Rates of Income Tax

(A) I. In the case of every Individual (other than those covered in part (II) or (III) below) orHindu Undivided Family or AOP/BOI (other than a co-operative society) whether incorporated

or not, or every artificial judicial person

Up to `2,00,000 Nil

`2,00,001 to `5,00,000 10%`5,00,001 to `10,00,000 20%

Above `10,00,000 30%

II. In the case of every individual, being a resident in India, who is of the age of 60 years or

more but less than 80 years at any time during the previous year.

Up to `2,50,000 Nil

`2,50,001 to `5,00,000 10%`5,00,001 to `10,00,000 20%

Above `10,00,000 30%

III. In the case of every individual, being a resident in India, who is of the age of 80 years ormore at any time during the previous year.

Up to `5,00,000 Nil

`5,00,001 to `10,00,000 20%

Above `10,00,000 30%

Surcharge: The amount of income-tax computed in accordance with the above rates shall be

increased by a surcharge at the rate of 10% of such income-tax in case of a person having atotal income exceeding `1 crore.

Cess: ‘Education Cess’ @ 2% and SHEC @ 1% on income tax (inclusive of surcharge, if

applicable) shall be chargeable.

Mba i Accounting for Management [14mba13] Solution

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