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Name of candidate : Radha Krishnan Unni M S

Address : Flat # 154 Block# D,

Lulu Hyper marketKarama, Dubai

Contact Number : 00971-50-5081525

Course Code : M S 04

Course Title : accounting & finance for managers

Assignment code : ms 04/TMA/Sem1/2009

Roll Number : 002247834

Study center : Wisdom institute , Dubai

Signature :

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Q1. Accounting is an information system. Do you agree? Substantiate youranswer with reasons. How does an accountant help in planning and controlling alarge commercial organization? Explain.

Ans Accounting is an information system for measuring, processing andcommunicating information that is useful in making economic decision.

Every business is conducted to make profit. Accounting knowledge isthere to assist the business man to assess whether the business is making

profit or loss. In accounting brings discipline on how to source money,

how to spend and how much to save. Accounting ensures consistency inthe treatment of various transactions. Accounting involves gathering of

financial data, recording classifying, summarizing and communicate the

results to the owners of the business, or to others allowed to receive this

information.

Accounting should not be confused with Book keeping as Book keeping isthe part of accounting concerned with recording of financial data. Bookkeeping is the process of recording data relating to accountingtransactions in the books of accounts.

Accounting Concepts

The International Accounting Standards Board (IASB) for which Malawi is a

member recognized that accounting information needs to be objective andconsistent. To achieve this, there must be a set of rules which lay down theway in which transactions of the business are recorded. These set of rulesare known asaccounting concept.

There are many concepts applicable in accounting but two are regarded byIASB as the most influential and these are:

Going concern

Implies that the business will continue to operate up to a

foreseeable future. Foreseeable future should at least be a

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period exceeding 12 months. This concept requires that Assetsshould be measured at their historical cost. If the Management of theentity believes that their business will not operate up to aforeseeable future then the assets should be measured at the Breakup basis. i.e. at net selling price.

Accrual

States that accounting transactions should be recognized andrecorded in the year of transaction and not necessarily whenpayment is made or received. Accruals concept also says that thenet profit for the year is the difference between revenues andexpenses incurred to generate those revenues.

Apart from these two fundamental concepts there are other concepts whichshould be considered when producing the financial statements and theseinclude;

Business entity

The concept states that the business exists separately and distinctfrom its owners. This entails that accounting records for thebusiness should be kept separately from the owners privatetransactions. The only time that the personal resources of theproprietor affect the accounting records of a business is when theyintroduce knew capital in business or they take drawings out of it.

Matching Concept

In determining profit or loss at all times, revenues should bematched against expenses incurred in the process of generating

that revenue in the same period. It is necessary to recognize all therevenue/income earned during a period regardless of when moneyis received. In the same way, all expenses incurred by the businessshould be included regardless of when money is paid for them.

Prudence

Accountants should always exercise caution when dealing with

uncertainty but should also maintain neutrality in recordingtransactions. The business is encouraged to take a conservative

approach in reporting its affairs. If the accountant is faced with a

choice of figures, which are both, acceptable to use in the financial

statements he should take a pessimistic rather than an optimisticapproach. This emphasize that it is better for accountants to

underestimate any anticipated profits rather than under estimatingany anticipated loss

Cost

Accounting transactions (assets) should initially be measured attheir historical cost to the business. Cost here should either be theproduction cost if internally constructed or the purchased cost ifacquired externally.

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Unit of Measure

Only transactions which can be measured in monetary valueshould be recognized in the financial statements. This impliesthat any transaction which can not be quantified in monetaryvalue will not be recognized in the financial statements. Thisconcept further explains that the currency of money used as aunit of measurement should be stable.

Consistency

Transactions which are similar should be subjected to the sameaccounting treatment. When ever the business has chosen acertain accounting treatment then they should follow suchtreatment in all accounting years. Change of method should beeffected if the aim is to show a better presentation of financialstatements or the old method has been outlawed by a newaccounting standard or company Act.

How does an accountant help in planning and controlling a large commercial

organizationThe advantages of accounting can be enumerated as follows :

(i) Maintenance of business records. All financial transactions are recc ded in a

systematic manner in books of accounts so that there is no need to rely on memory.

It is not possible for any human being to remember all what happened in daily

operations of a business.

(ii) Preparation of financial statements. Systematic records enable the

accountant to prepare the financial statementstrading and profit and loss

account to calculate profit or loss during a particular accounting period and

balance sheet to state the financial position of the business on a particular

date. Profit is a measure of the successful running of thel business.(iii) Comparison of results. Systematic maintenance of business records

enables the accountant to compare profit of one year with those of earlier

years to know the significant facts about the changes. This helps the business

to plan its future affairs accordingly.

(iv)Decision-making. For day-to-day solving of a number of problems like what

should be the selling price of goods produced? Whether a part should be

made in the factory or purchased from outside? etc., the accountant helps the

management by providing the relevant information.

(v) Good evidence in courts. Records of business transactions are treated assatisfactory evidence in courts of law.

(vi)Planning and control operations. Planning operations like sales, production,

cash requirements for next accounting periods are achieved with the help of

accounting information and estimates based on that information. Management

is also interested in observing that the operations in the business are going on

according to plan and all the departments are spending within their prescribed

limits.

(vii) Provides information to interested groups. Various interested parties ar

groups like owners, creditors, management, employees, government, consumers,

creditors are interested in accounting information related to various aspects,

viz., sales, production, profits, etc. Accounting provides suitable information to

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such interested parties.

(viii) Taxation problems. In settlement of taxation matters, systematicmaintenance of records is a big help.

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(ix)Valuation of business. Accounting records kept in a proper way enable abusiness unit to determine the purchase or sale price in a simple manner.

(x) An insolvent person is able to explain the past transactions without difficultyif proper accounting records are maintained.

Q2. Prepare a cash flow statement from the following Balance Sheets as at 31-3-08and 31-3-07. presented by PNX fertilizers Ltd.

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Other Information :

1) Fixed assets costing Rs. 4,00,000, accumulated depreciation Rs. 3,00,000 weresold for Rs. 1,50,000.

2) Actual tax liability for 2006-07 was Rs. 5,00,000.

3) Loans represent long term loans given to group companies.

4) Interest on loan funds for 2006-07 was Rs. 14,21,000 and interest anddividend income

were Rs.4,02,000.

5) Investments costing Rs. 20,00,000 were sold for Rs. 25,00,000.

Cash flow Statement of MNG Fertilizers

For the year ended 31.3 .2007Cash flow from Operating Activities ( R s . i n t h o u s a n d )Change in general reserve (200)Change in profit and loss account (250)Proposed dividend 3,400Provision for tax 0

Profit before tax 2,950

Add: Depreciation 550Add: Miscellaneous Expenses 50Add/(Less): Profit /(loss) on sale of fixed assets (50)Add/(Less): Profit /(loss) on sale of investments (500) 50Funds flow from operations 3,000Add: Interest paid 1,421Less: Interest and Dividend Received (402)Add/(Less): Working Capital AdjustmentsInventories 90Debtors 110Creditors (150)

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Outstanding expenses 30 80

Cash flow from Operating Activities (before Tax) 4,099Less: Advance tax for 2006-2007 0Cash flow from Operating Activities (after tax) 4,099Cash flow from Financing ActivitiesIssue of sharesFace value 1,500Premium 750 2,250

Repayment of Secured Loans (200)Raising of Unsecured Loans 1,350Net loan 1,150Interest payment (1 ,421)Dividend payment for 2006 (2 ,800)

(821)

Cash flow from Investment ActivitiesPurchase of Fixed Assets (1,800)Sale of Fixed Assets 150Capital WIP (1,860)Fixed Assets (Net) (3 ,510)Purchase of Investments (1,330)

Sale Proceeds of Investments 2,500Investments (Net) 1,170Loans (1 ,500)Interest and Dividend Income 402

(3 , 4 3 8 )Cash Flow StatementCash flow from Operating Activities (after tax) 4,099Cash flow from Financing Activities (821)Cash flow from Investment Activities (3,438)

(160)Add : Cash and cash equivalents as on 31.3.2006 280Cash and cash equivalents as on 31.3.2007 120

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Statement of equivalent production

Material Labour & Overhead

Particulars Units Particulars Units Units Units

Opening WIP - opening WIP - -

Current Current

Introduction 1050 Introduction 950 950 950

closing WIP 100 100 50

Total 1050 1050 1050 1000

Data For Variances

Standard Actual

Rate Amount Rate Amount

Material (1*1050) 1.50 1575.00 1100 1.60

1760.00

Labour (3*1000) 1.00 3000.00 2700 1.20

3240.00Overhead (3*1000) 2.50 7500.00 2700 2.75

7425.00

Standard Output = 1050units Actual Output = 950units

DMCV = (Standard Cost - Actual Cost)

= (1575 - 1760)

= 185(A)

DMPV =(Standard Price - Actual Price) * Actual Quantity

= (1.50 - 1.60) * 1100

= 110(A)

DMUV =(Standard Usage - Actual Usage)

= (1050 - 1100) * 1.50

= 75(A)

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Reconcilation -

[ DMCV = DMPV + DMUV ]

DLCV = (3000 -3240) = 240(F)

DLRV = (1.00-1.20) *

2700 = 540(A)

DL Efficiency V = (3000 - 2700) * 1

= 300(F)

Reconcilation -

[ DLCV = DLRV + DLEV ]

VOCV = (Standard Cost - Actual Cost)

= (7500 -7425)

= 75(F)

VO Expenditure V = (Standard Rate - Actual Rate) * ActualHours = (2.50 - 2.75) * 2700= 675(A)

VO Efficiency V = (Standard Hours - Actual Hours) * StandardRate = (3000 - 2700) * 2.50= 750(F)

Reconcilation -

[ VOCV = VO Expenditure V + VO Efficiency V ]

Q4. Collect information about the different types of budgets prepared in your

organization or any other organization of your choice and discuss the relevanceof these budgets to the organization under consideration.

Ans TYPES OF BUDGETS

There are various types of budgets. Some of the important ones have been discussedbelow :

Sales Budget

The Sales Budget, generally, forms the fundamental basis on which all the other

budgets are built up. The budget is essentially a forecast of sales to be achieved in a

budget period. The Sales Manager should be made directly responsible for the

preparation and execution of this budget. He should take into consideration the

following factors while preparing the sales budget :(a) Past sales figures and trend. The record of previous experience forms the

most reliable guide as to future sales as the past performances is related to

actual business conditions. However, the other factors such as seasonal

fluctuations, growth of market, trade cycles etc., should not be lost sight of.

(b) Salesman's estimates. Salesmen are in a position to estimate the potential

demand of the customers more accurately because they come in direct

contact with the customers. However, proper discount should be made for

over-optimistic or too conservative estimates of the salesmen depending upon

their temperament.

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(c) Plant capacity. It should be the endeavour of the business to ensure properutilisation of plant facilities and that the sale budget provides an economicand balanced production in the

factory.

(d) General trade prospects. The general trade prospects considerably affect the

sales.

Valuable information can be gathered in this connection from trade papers andmagazines.

(e) Orders or hand. In case of industries where production is quite a lengthyprocess, orders on hand also have a considerable influence on the amount ofsales.

(I) Proposed expansion of discontinuance of products. It affects sales and, therefore,it should also be considered.

(g) Seasonal fluctuations. Past experience will be the best guide in this respect.

However, efforts should be made to minimise the effects of seasonal fluctuations

by giving special concessions or off-season discounts thus increasing the volume

of sales.

(h) Potential market. Market research should be carried out for ascertaining thepotential market for the company's products. Such an estimate is made onthe basis of expected population growth, purchasing power of consumers and

buying habits of the people.

(i) Availability of material and supply. Adequate supply of raw materials andother supplies must be ensured before drafting the sales programme.

(j) Financial aspect. Expansion of sales usually require increase in capital outlayalso, therefore, sales budget must be kept within the bounds of financialcapacity.

(k) Other factors :

(i) The nature and degree of competition within the industry:

(ii) Cost of distributing goods;

(iii) Governments control, rules and regulations related to the industry; and

Production Budget

This budget provides an estimate of the total volume of production productwise

with the schedulling of operations by days, weeks and months and a forecast of the

closing finished product inventory. Generally the production budget is based upon

the sales budget but in case of And it difficult to forecast sales on account of

frequent changes in style and fashion, d upon past experience. The responsibility of

the Total Production Budget lies with Works Manager and that of DepartmentalProduction Budgets lies with Departmental Works Managers.

The production budget may be expressed in quantitative or financial units or both.The objects of its preparation are :

1. To answer the following questions :

(a) What is to be produced ?

(b) When is it to be produced ?

(c) How is it to be produced ?

(d) Where is it to be produced ?

2. To chalk down and organise the production programme for achieving the sales target.

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3. To serve as a basis for preparation of production cost budgets, for example,materials cost budget, labour cost budget, etc.

4. To prepare a cash forecast.

There are two problems connected with the production budgets : (i) determining theannual production required and (ii) pro-rating it throughout the year. The p inning of

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production programme is essential to have sufficient stock for sales to keepinventories within reasonable limits and to manufacture goods most economically.To achieve it, the following factors should

be taken into consideration.

(i) Inventory policies. Inventory standards should be predetermined so thatneither there is a shortage nor over-stocking of goods.

(ii) Sales requirements. The quantity of goods to be sold would decide to a greatextent how much is to be produced. Therefore, this budget depends upon thesales budget.

(iii) Production stability. For reduction of costs, stability in employment

and better utilisation of plant facilities, the production should be evenly

distributed throughout the year. In case of seasonal industries, since it is not

possible to have stable levels of production or inventory, an effort should be

made to have the optimum balance between the two.

(iv)Plant capacity. How much can be produced depends upon the available plantcapacity. There must be sufficient capacity to produce the annualrequirements and also to meet seasonal high demands.

(v) Availability of materials and labour. Adequate and timely supply of raw materialsand labour force should have an important effect on the planning of production.

(vi)Time taken in production process. The production should commence well intime keeping in view how much time it would take in the factory to translatethe raw materials into finished goods.

Cost of Production Budget

After determining the volume of production, it is necessary to determine the cost ofprocuring this output. Cost of production includes materials, labour and overheadsand, therefore, separate budgets for each of these items will be prepared.

Materials budget. Materials may be direct or indirect. The materials budget generally

deals only with the direct materials. Indirect materials are generally included in the

works overhead budget. The preparation of materials budget includes the following :

(a) The preparation of estimates of raw materials requirements.

(b) The scheduling of purchases in required quantities at the required time.

(c) The controlling of raw material inventories.

Material requirements are estimated regarding each class of products by

multiplying the exact material requirement for each class of product by the number

of units of that class. The total quantity required for the budget period is first

estimated and then is further broken down by component time period (months andquarters) in the materials budget. The break-up and length of the period should be

in uniformity with the production budget.

In case of concerns whose raw materials requirements can be standardised, the

materials budget can be prepared very exactly on this basis. In case it is not

possible, the percentage of raw materials to total cost of products should be

calculated on the basis of the historical data. On the basis of this information a

rough estimate can be made regarding the raw materials required for the budgeted

output. The figure should further be adjusted taking into account the current price

trends and the normal wastage of materials in the course of production.

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The Buying Department should proceed to find the most profitable means ofprocuring the requisite quantity and quality of raw materials. Consideration mustalso be given to the amount of stock to be carried fonvard.

The materials budget can be classified into two categories (i) materials requirement

budget (ii) materials procurement or purchase budget. The former tells about the total

quantity of materials required during the budget period; while the latter tells about the

materials to be acquired from the market during the budget period. Materials to beacquired are estimated after taking into account the closing inventory and the opening

inventory of the materials for which orders have already been placed.

Direct labour budget. The direct labour budget tells about the estimates of direct labour

requirements essential for carrying out the budgeted output. In preparation of this

budget previous records of the percentage labour cost in the total cost of each product,

group or department will be considerably helpful. The budget may give details

regarding direct labour costs only, or both direct labour hours and cost. In the former

case the cost can be calculated by making an estimate of cost per unit of production.

The cost per unit multiplied by the budgeted units will give the estimated cost of directlabour. In the latter case estimates will have to be made about (i) direct labour hours

and (ii) average wage rate. Internal factors such as the method of wage payment, the

type of production process and the available costing records will determine whether and

how it is possible to express production in terms of direct labour hours. The average

wage rate payable for a particular product or department, will be calculated on the

basis of the historical ratio between wages paid and direct labour hours worked in the

department or for the product after taking into account the current conditions.

Direct Labour Budget (like Direct Materials Budget) may be divided into two categories :

(i) Direct Labour Requirement Budget (ii) Direct Labour Procurement Budget. Theformer tells about the total direct labour required in terms of quantity or/and valuewhile the latter will state the additional direct workers to be recruited.

Factory overhead budget

Manufacturing or Factory overheads include the cost of indirect labour, indirect material

and indirect expenses. The manufacturing overheads can be classified into three categories,

(i) Fixed i.e. which tend to remain constant irrespective of any change in the volume of

output (ii) Variable i. e, which tend to vary with the output and (iii) Semi-Variable i.e.

which are partly variable and partly fixed. The manufacturing overheads budget will

provide an estimate of all these overheads to be incurred in the budget period. Fixed

manufacturing overheads can be estimated without much difficulty on the basis of the past

information and knowledge of any changes which are likely to occur during the ensuing

budget period. Variable overheads are estimated after considering the scheduled

production and operating conditions in the budget period.

Administrative overhead budget

The budget covers expenses of all administrative offices, and of management salaries. A

careful analysis of the needs of all administrative departments of the enterprise is very

necessary. The minimum requirements for the efficient operation of each department can

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be estimated on the basis of costs for prior years. and after a study of the plans and

responsibilities of each administrative department for the budget period. The budget for

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the entire administrative division will be prepared by totalling the separate budgetsof all administrative departments.

Selling and distribution overhead budget

The budget includes all expenses relating to selling, advertising, delivery of goods to

customers etc. It is better, if such costs are analysed according to products, types of

customers, territories, and the sales departments in the organisation itself. The

responsibility for the preparation of this budget rests with the executives of the sales

departments. There must be a co-ordination of selling expenses with the volume of

sales expected and an effort should be made to control the costs of distribution. The

preparation of the budget would depend on the analysis of the market situations by

the management, advertising policies, research programmes and the fixed and

variable elements

Capital Expenditure Budget

The budget provides a guidance as to the amount of capital that may be needed forprocurement of capital assets during the budget period. The budget is prepared

after taking into account the available productive capacities, probable reallocation

of existing assets and possible for improvement in production techniques. If

necessary separate budgets may be prepared for b each item of assets. such as a

building budget, a plant and equipment budget possible etc.

Plant Utilisation Budget

Plant Utilisation Budget is a part of the plan and equipment budget. It represents plant

and equipment facility required to meet the budgeted target production during thebudget period. The plant capacities or facilities may be expressed in terms of financial

units such as working hours or rate of production of number of products.

Following are the main purposes of plant utilisation budget.

I. It determines the load on each process and the number of or groups of machine orinvestment required on plant during the budgeted period.

2. It indicates cost centres which are over-loaded so that corrective measuresmay be taken in time. Such measures may be in any of the following forms :

(i) Plant may be required to work overtime;

(ii) Certain jobs may be sub-contracted:

(iii) Production facility may be expanded.

3. It helps rephrasing the sales and production budgets where it is not possible toincrease the production capacity by putting additional load on the processesinvolved.

4. It identifies the surplus capacity available at a particular plant or in aprocess so that efforts can be made to boost sales to take full advantage of thesurplus capacity.

Cash Budget

A cash budget is a forecast of the cash position by time periods for a specific

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duration of time. Cash forecast may be made for a short period or a long duration.

The cash budget forms an important part in co-ordinating efficient working of the

company. It tells about the working capital required and available at different

periods. The budget is prepared by the Chief Accountant.

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The main objectives of preparing cash budget are as under :

(i) The probable cash position as a result of planned operations isindicated, and thus the excess or shortages of cash is known. This helps in

arranging short term borrowings in advance to meet the situation of shortageof cash or making investments in times of excess of cash.

(ii) Cash can be co-ordinated in relation to total working capital. sales,investment and debt.

(iii) A sound basis for credit and for current control of cash position isestablished.

Q5. Yenki Ltd. is considering two mutually exclusive projects A and B. Project Acosts Rs. 30,000 and Project B Rs. 36,000. The NPV probability distribution foreach project is as given below :

You are required to compute:

i) the expected Net Present Value of Projects A and B.

ii) The risk attached to each project i.e., Standard deviation of eachprobability distribution.

iii) The Profitability Index of each project.

Which project do you consider more risky and why?

(I) Cal. of Expected NPV

A.3000 X 0.1 + 6000 X 0.4 + 12000 X 0.4 + 15000 X 0.1 = 9000

B.3000 X 0.2 + 6000 X 0.3 + 12000 X 0.3 + 15000 X 0.2 = 9000

(II) Cal. Of S.D.

X (NPV X-MEAN P P(X-MEAN)2

ESTIMATE) (X-9000)3000 -6000 0.1 36,00,000

6000 -3000 0.4 36,00,000

12000 +3000 0.4 36,00,000

15000 +6000 0.1 36,00,000

1,44,00,000

S.D.A. = 1, 44, 00, 000 =3794.73

X (NPV X-MEAN P P(X-MEAN)2

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ESTIMATE) (X-9000)

3000 -6000 0.2 72,00,000

6000 -3000 0.3 72,00,000

12000 +3000 0.3 72,00,000

15000 +6000 0.2 72,00,0001,98,00,000

S.D.A. = 1, 98, 00, 0000 =4449.72

Project B is more risky expected NPV of both of same but S.D. of Project B ishigher than A.

(III)

P IA

=

P.V.I.

=

39000

= 1.3P.V. P R O J E C T C O S T A30000

P IB

=

P.V.I.=

45000= 1.25

P.V. PROJECT COSTB 36000

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