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Management Accounting Solved Papers: November' 2015 | Dibrugarh University | B.Com 5th Sem

2015 (November)
COMMERCE (General/Speciality)
Course: 503 (Management Accounting)
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) Write True or False:             1x3=3
a)      Management accounting deals only with the information which is useful to the management.           True
b)      P/V ratio can be improved by reducing the fixed cost.                            False
c)       Cash Flow Statement is based upon accrual basis of accounting.        False, Cash Basis
(b) Fill in the blanks:                        1x5=5
a)      The difference between Actual Cost and Standard Cost is known as Variance
b)      Only Quantitative information is recorded in accounting.
c)       Margin of safety can be improved by reducing the variable cost.
d)      Any transaction that increases working capital is a application of fund.
e)      Repayment of borrowing causes cash ____.
2. Write short notes on any four of the following:             4x4=16

CONCEPT OF FLEXIBLE BUDGET WITH SOLVED QUESTION PAPERS 
CONCEPT OF CASH BUDGET WITH SOLVED QUESTION PAPERS


a)      Limitations of management accounting.
Ans: Limitations of Management Accounting: Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows:
1. Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting, therefore, depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting.
2. Persistent efforts. The conclusions draws by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas.
3. Management accounting is only a tool: Management accounting cannot replace the management. Management accountant is only an adviser to the management. The decision regarding implementing his advice is to be taken by the management. There is always a temptation to take an easy course of arriving at decision by intuition rather than going by the advice of the management accountant.
4. Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as non-monetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it.
b)      Cost-volume-profit analysis.
Ans: Cost-Volume-Profit Analysis: Cost-Volume-Profit analysis is analysis of three variables i.e., cost, volume and profit which  explores the relationship existing amongst costs, revenue, activity levels and the resulting  profit. It aims at measuring variations of profits and costs with volume, which is significant for business profit planning.
CVP analysis makes use of principles of marginal costing. It is an important tool of planning for making short term decisions.  The following are the basic decision making indicators in Marginal Costing:
(a) Profit Volume Ratio (PV Ratio) / Contribution Margin ratio
(b) Break Even Point (BEP)
(c) Margin of Safety (MOS)
(d) Indifference Point or Cost Break Even Point
(e) Shut-down Point
Assumptions in CVP analysis
The assumptions in CVP analysis are the same as that under marginal costing.
a)      Cost can be classified into fixed and variable components.
b)      Total fixed cost remain constant at all levels of output
c)       The variable cost change in direct proportion with the volume of output
d)      The product mix remains constant
e)      The selling price per unit remains the same at all the levels of sales
f)       There is synchronization of output and sales, i.e, what ever output is produced , the same is sold during that period.

c)       Advantages of standard costing.                       Out of Syllabus
d)      Cash Flow Statement.
Ans: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.
A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.
Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.
Objectives of Cash Flow Statement
The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows:
A.      To Help the Management in Making Future Financial Policies: Cash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash.
B.      Helpful in Declaring Dividends etc.: Cash Flow Statement is very helpful in declaring dividends etc. This statement can supply necessary information to understand the liquidity.
C.      Cash Flow Statement is Different than Cash Budget: Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.
D.      Helpful in devising the cash requirement:  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.

e)      Responsibility accounting.
Ans: Responsibility accounting is a system used in management accounting for control of costs. It is used along with other systems like budgetary control and standard costing. The organization is divided into different centers called “responsibility centers” and each centre is assigned to a responsible person.
According to Eric. L. Kohler “ Responsibility Accounting is the classification, management maintenance, review and appraisal of accounts serving the purpose of providing information on the quality and standards of performance attained by persons to whom authority has been assigned.”
Responsibility accounting, therefore, represents a method of measuring the performances of various divisions of an organization. The test to identify the division is that the operating performance is separately identifiable and measurable in some way that is of practical significance to the management. Responsibility accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers.
Features of Responsibility Accounting
1. It is a control system used by top management for monitoring and controlling operations of a business.
2. It is based on clearly defined functions and responsibilities assigned to executives.
3. The organization is divided into meaningful segments called responsibility centres.
4. Costs and revenues of each centre and responsibility of them are fixed on the individuals.

f)       Assumptions of break-even analysis.
Ans: 1. All costs can be classified into fixed and variable elements. Semi variable costs are also segregated into fixed and variable elements.
2. The total variable costs change in direct proportion with units of output. It follows a linear relation with volume of output and sales.
3. The total fixed costs remain constant at all levels of output. These are incurred for a period and have no relation with output.
4. Only variable costs are treated as product costs and are charged to output, product, process or operation
5. Fixed costs are treated as ‘Period costs’ and are directly transferred to Costing Profit and Loss Account.
6. The closing stock is also valued at marginal cost and not at total cost.
7. The relative profitability of product or department is based on the contribution it gives and not based on the profit.
8. It is also assumed that the selling price per unit remains the same i.e, any number of units can be sold at the current market price.
9. The product or sales mix remains constant over a period of time.

3. (a) “Management accounting aims at providing financial results of the business to the management for taking decisions.” Explain by bringing out the advantage of management accounting.                          11
Ans: The term management accounting refers to accounting for the management. Management accounting provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information.
In the words of R.N. Anthony “Management accounting is concerned with accounting information that is useful to management”.
Anglo American Council of Productivity defines management accounting as “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking”.
According to T.G. Rose “Management accounting is the adaptation and analysis of accounting information, and its diagnosis and explanation in such a way as to assist management”.
From the above explanations, it is clear that management accounting is that form of accounting which enables a business to be conducted more efficiently.
The advantages of management accounting are summarized below:
a)      Helps in Decision Making: Management accounting helps in decision making such as pricing, make or buy, acceptance of additional orders, selection of suitable product mix etc. These important decisions are taken with the help of marginal costing technique.
b)      Helps in Planning: Planning includes profit planning, preparation of budgets, programmes of capital investment and financing. Management accounting assists in planning through budgetary control, capital budgeting and cost-volume-profit analysis.
c)       Helps in Organizing: Management accounting uses various tools and techniques like budgeting, responsibility accounting and standard costing. A sound organizational structure is developed to facilitate the use of these techniques.
d)      Facilitates Communication: Management is provided with up-to-date information through periodical reports. These reports assist the management in the evaluation of performance and control.
e)      Helps in Co-coordinating: The functional budgets (purchase budget, sales budget, and overhead budget etc.) are integrated into one known as master budget. This facilitates clear definition of department goals and coordination of their activities.
f)       Evaluation and Control of Performance: Management accounting is a convenient tool for evaluation of performance. With the help of ratios and variance analysis, the efficiency of departments can be measured which assists management in the location of weak spots and in taking corrective actions.
g)      Interpretation of Financial Information: Management accounting presents information in a simple and purposeful manner. This facilitates quick decision making.
h)      Economic Appraisal: Management accounting includes appraisal of social and economic forces and government policies. This appraisal helps the management in assessing their impact on the business.
Or
(b) Explain the characteristic features of management accounting. What are the tools which make it useful for the management?                  4+7=11
Ans: Characteristics of Management Accounting
1)      Helps in decision making: It helps management in decision making. The information provided through management accounting is only for internal use of management and it not distributed to third parties.
2)      Technique of Selective Nature: Management Accounting is a technique of selective nature. It takes into consideration only that data from the income statement and position state merit which is relevant and useful to the management. Only that information is communicated to the management which is helpful for taking decisions on various aspects of the business.
3)      It is an optional technique: There are no statutory obligations regarding adoption of management accounting tool nor are there any obligations to furnish management accounting information. A firm may choose to adopt management accounting techniques totally depends upon its utility and desirability.
4)      Provides Data and not the Decisions: The management accountant is not taking any decision but provides data which is helpful to the management in decision-making. It can inform but cannot prescribe. It is just like a map which guides the traveller where he will be if he travels in one direction or another. Much depends on the efficiency and wisdom of the management for utilizing the information provided by the management accountant.
5)      Concerned with Future: Management accounting unlike the financial accounting deals with the forecast with the future. It helps in planning the future because decisions are always taken for the future course of action.
Tools and Techniques Used in Management Accounting
Management accountant supplies information to the management so that latter may be able to discharge all its functions, i.e., planning organization, staffing, direction and control sincerely and faithfully. For doing this, the management accountant uses the following tools and techniques.
a)      Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.
b)      Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.
c)       Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be make with the standard costs. Such comparison may be helpful to the management for cost control and for future planning.
d)      Standard costing: Standard costing is the establishment of standard costs under most efficient operating conditions, comparison of actual with the standard, calculation and analysis of variance, in order to know the reasons and to pinpoint the responsibility and to take remedial action so that adverse things may not happen again. This aspect is necessary to have cost control.
e)      Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.
f)       Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.
g)      Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.
h)      Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise.
i)        Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.
j)        Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.
k)      Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.
l)        Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.
4. (a) The following information is given by XYZ Ltd. :

Selling price per unit                                                                      
Variable cost per unit                                                                     
Fixed cost                                                                                
Rs.
10
6
24,000
You are required to calculate:
a)      Break-even sales (in units);
b)      Sales to earn a profit of 10% on sales;
c)       New BEP, if selling price is reduced by 10%.
d)      New selling price, if BEP is to be brought down to 4800 units.             2+3+3+3=11
Or
(b) “Marginal costing is a very useful technique to management for cost control, profit planning and decision making.” Explain.                                11
Ans: Marginal Costing: It is the technique of costing in which only marginal costs or variable are charged to output or production. The cost of the output includes only variable costs .Fixed costs are not charged to output. These are regarded as ‘Period Costs’. These are incurred for a period. Therefore, these fixed costs are directly transferred to Costing Profit and Loss Account.
According to CIMA, marginal costing is “the ascertainment, by differentiating between fixed and variable costs, of marginal costs and of the effect on profit of changes in volume or type of output. Under marginal costing, it is assumed that all costs can be classified into fixed and variable costs. Fixed costs remain constant irrespective of the volume of output. Variable costs change in direct proportion with the volume of output. The variable or marginal cost per unit remains constant at all levels of output.”
Thus, Marginal costing is defined as the ascertainment of marginal cost and of the ‘effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs. Marginal costing is mainly concerned with providing information to management to assist in decision making and to exercise control. Marginal costing is also known as ‘variable costing’ or ‘out of pocket costing’.
Marginal costing and Beak even analysis are very useful to management. The important uses of marginal costing and Break Even analysis are the following:
1)      Cost control: Marginal costing divides total cost into fixed and variable cost. Fixed Cost can be controlled by the Top management to a limited extent and Variable costs can be controlled by the lower level of management. Marginal costing by concentrating all efforts on the variable costs can control total cost.
2)      Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs. An analysis of contribution made by each product provides a basis for profit-planning in an organisation with wide range of products.
3)      Fixation of selling price: Generally prices are determined by demand and supply of products and services. But under special market conditions marginal costing is helpful in deciding the prices at which management should sell. When marginal cost is applied to fixation of selling price, it should be remembered that the price cannot be less than marginal cost. But under the following situation, a company shall sell its products below the marginal cost:
a)      To maintain production and to keep employees occupied during a trade depression.
b)      To prevent loss of future orders.
c)       To dispose of perishable goods.
d)      To eliminate competition of weaker rivals.
e)      To introduce a new product.
f)       To help in selling a co-joined product which is making substantial profit?
g)      To explore foreign market
4)      Make or Buy: Marginal costing helps the management in deciding whether to make a component part within the factory or to buy it from an outside supplier. Here, the decision is taken by comparing the marginal cost of producing the component part with the price quoted by the supplier. If the marginal cost is below the supplier’s price, it is profitable to produce the component within the factory. Whereas if the supplier’s price is less than the marginal cost of producing the component, then it is profitable to buy the component from outside.
5)      Closing down of a department or discontinuing a product: The firm that has several departments or products may be faced with this situation, where one department or product shows a net loss. Should this product or department be eliminated? In marginal costing, so far as a department or product is giving a positive contribution then that department or product shall not be discontinued. If that department or product is discontinued the overall profit is decreased.
6)      Selection of a Product/ sales mix: The marginal costing technique is useful for deciding the optimum product/sales mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce maximum units of that product which shows the highest P/V ratio so as to maximize profits.
7)      Evaluation of Performance: The different products and divisions have different profit earning potentialities. The Performance of each product and division can be brought out by means of Marginal cost analysis, and improvement can be made where necessary.
8)      Limiting Factor: When a limiting factor restricts the output, a contribution analysis based on the limiting factor can help maximizing profit. For example, if machine availability is the limiting factor, then machine hour utilisation by each product shall be ascertained and contribution shall be expressed as so many rupees per machine hour utilized. Then, emphasis is given on the product which gives highest contribution.
9)      Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where managerial problems are simplified by the use of marginal costing :
a)      Analysis of Effect of change in Price.
b)      Maintaining a desired level of profit.
c)       Alternative methods of production.
d)      Diversification of products.
e)      Alternative course of action etc.
5. (a) A factory is currently running at 50% capacity and produces 5000 units at a cost of Rs. 90 per unit as per details given below:
Raw materials –
Labour –
Factory overhead –
Administrative overhead –
The current selling price is Rs. 100 per unit.
Rs. 50
Rs. 15
Rs. 15 (Rs. 6 fixed)
Rs. 10 ( Rs. 5 fixed)
At 60% working, raw material cost per unit increases by 2% and selling price per unit falls by 2%.
At 80% working, raw material cost, per unit increases by 5% and selling price per unit falls by 5%.
Estimate profits of the factory at 60% and 80% working and offer your comments.                                   9+3=12
Or
(b) What do you mean by cash budget? What are its advantages? How is it prepared?                                    3+3+6=12
Ans: Cash Budget: A cash budget is a budget or plan of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payments. In other words, a cash budget is an estimated projection of the company's cash position in the future.
Management usually develops the cash budget after the sales, purchases, and capital expenditures budgets are already made. These budgets need to be made before the cash budget in order to accurately estimate how cash will be affected during the period. For example, management needs to know a sales estimate before it can predict how much cash will be collected during the period. Management uses the cash budget to manage the cash flows of a company. In other words, management must make sure the company has enough cash to pay its bills when they come due.
Chartered Institute of Management Accountant (CIMA) defines cash budgets as a short-term fiscal plan expressed in money which is prepared in advance. It helps to determine the cash-inflow and cash-outflow of the business.
Advantages of Cash Budget
Cash budget is an important tool in the hands of financial management for the planning and control of the working capital to ensure the solvency of the firm.  The importance of cash budget may be summarised as follow:
(1) Helpful in Planning. Cash budget helps planning for the most efficient use of cash. It points out cash surplus or deficiency at selected point of time and enables the management to arrange for the deficiency before time or to plan for investing the surplus money as profitable as possible without any threat to the liquidity. 
(2) Forecasting the Future needs. Cash budget forecasts the future needs of funds, its time and the amount well in advance. It, thus, helps planning for raising the funds through the most profitable sources at reasonable terms and costs. 
(3) Maintenance of Ample cash Balance. Cash is the basis of liquidity of the enterprise. Cash budget helps in maintaining the liquidity. It suggests adequate cash balance for expected requirements and a fair margin for the contingencies. 
(4) Controlling Cash Expenditure. Cash budget acts as a controlling device. The expenses of various departments in the firm can best be controlled so as not to exceed the budgeted limit. 
(5) Evaluation of Performance. Cash budget acts as a standard for evaluating the financial performance. 
(6) Testing the Influence of proposed Expansion Programme. Cash budget forecasts the inflows from a proposed expansion or investment programme and testify its impact on cash position.
(7) Sound Dividend Policy. Cash budget plans for cash dividend to shareholders, consistent with the liquid position of the firm. It helps in following a sound consistent dividend policy. 
(8) Basis of Long-term Planning and Co-ordination. Cash budget helps in co-coordinating the various finance functions, such as sales, credit, investment, working capital etc. it is an important basis of long term financial planning and helpful in the study of long term financing with respect to probable amount, timing, forms of security and methods of repayment.
Methods of Preparation of Cash Budget
(1) Receipts and Payments Method
(2) Adjusted Profit and Loss Method or Adjusted Earnings Method or Cash Flow Method. 
(3) Balance-Sheet Method.
The above methods of preparing cash budget represent different approaches.
(1) Receipts and Payments Method: It is the most simple and popular method of preparing cash budget. The method is most commonly used in forecasting the short term cash position. It is just like receipts and payment method in technique. It shows yearly cash position with proper breakups by quarters and months. For the purpose of preparing cash budget under this method, cash information’s are collected from other budgets such as sales budget, salary and wages budget, overhead budgets, material budget etc. 
Under this method cash budget is divided into two parts. One part shows the timing and the amount of cash receipts and other part shows the timing and the amount of cash disbursements. Cash receipts and cash disbursements are estimated as under:
(i)     Estimation of Cash Receipts: The amount of cash receipts can be estimated from the following items:
(a)    Cash receipts arising from Operations. It includes advances form customers, estimated cash receipts from sales, debtors and collection of bills receivables. In estimating the amount of cash sales, cash-discount policy of the firm should be taken into account. Forecasting the receipts from credit sales, i.e., receipts from customers, B/R etc. Credit policy, terms of sales, position of customers, customers of the trade, any time lag between sale and collection should be considered.
(b)   Non-operating Cash Receipts. It includes revenue receipts of non-operating nature and includes receipts from interest, dividend, rent, commission, royalty, sale of scrap, refund of tax etc. 
(ii) Estimation of Cash Disbursements. The amount of cash disbursement can be estimated from the following items:
(a) Disbursement for operations Such as disbursements for cash purchases, wages and overheads, payment to creditors, bonus and other remunerations such as gratuities, pensions etc. and advances to suppliers. Terms of purchases, discounts receivable and time lag between the time of purchase and payment are taken into consideration. 
(b) Disbursement for non-operating functions. It includes financial expenses on non operative functions such as interest, rent, dividend, donations, income tax and other taxes etc. 
(c) Disbursement for capital transactions. Such as expenditure for expansion, payment of loans and overdrafts, redemption of debentures and preference capital etc. 
In preparing cash budget, total budgeted cash receipts are added to the opening balance of cash and then the total budgeted disbursements are deducted there from to know the closing balance of cash. If opening cash balance and estimated total cash receipts are much larger than the estimated payments, there will be cash balance at close and management should take the necessary steps, to invest surplus funds for short period. On the other hand, if there is cash shortage, the management must plan the borrowings for short period to manage the deficiency.
(2) Adjusted Profit and Loss Method or Adjusted Earnings Method or Cash Flow Method: The method is suitable for preparing the long term estimates of cash inflows and outflows. It is also called cash-flow statement. Under this method, profit and loss account is adjusted to know the cash estimates. This method is useful in budgetary control technique.
Under this method, closing cash balance can be known by adding profits for the period to the opening cash balance because the theory is based on the elementary assumption that profits of a business are equal to cash. Thus if we assume that there are no credit transactions, capital transactions, accruals, provisions, stock fluctuations, or appropriations of profit, the balance of profit as shown by the profit and loss account should b equal to the cash balance in the case book. However, such a situation will never exist in actual practice, the assumption needs adjustments. In preparing the cash forecasts, one proceeds with the budgeted profit for the period and then adjusts this figure by the items mentioned below-
Items to be Added
(i) All non-cash items shown in the debit side of profit and loss account should be added to the budgeted profit because these items do not involve any cash outflows-depreciation, deferred revenue expenditure, writing off of intangible assets, prepaid expenses etc. 
(ii) Changes in working capital which results in inflow of cash balances such as increase in closing stock, debtors and decrease in sundry creditors and other liabilities, redemption of preference shares and debentures, payment of dividend, purchase capital assets, investment etc.

(3) Balance-Sheet Method: This method is similar to that of profit and loss adjustment method, a budgeted balance sheet is prepared for the next period showing all items of assets and liabilities except cash balance which is found out as the balancing figure of the two sides of balance sheet.
If the asst side exceeds the liability side the balance shall reveal the bank over-draft and if the liability side is heavier than the asset side, the difference represents the bank balance.
6. (a) X Ltd. furnished the following particulars for the year 2014:                            Out of Syllabus
Actual output – 900 units
Budgeted output – 1000 units
Actual fixed overhead – Rs. 49,500
Budgeted fixed overhead – Rs. 50,000
Standard time per unit – 2 hours
Actual clock hours – 1900 hours (including 200 hours as idle time)
You are required to calculate the following variances:                     2x5=10
a)      Overhead Cost Variance.
b)      Overhead Volume Variance.
c)       Overhead Capacity Variance.
d)      Overhead Efficiency Variance.
e)      Overhead Idle Time Variance.
Or
(b) What is standard costing? How would you distinguish it from budgetary control? Point out the limitations of standard costing.                                2+4+4=10
7. (a) Following are the Balance Sheets of Tulsian Ltd. for the year ending on 31st March, 2013 and 31st March, 2014:
Assets
31.03.2013
31.03.2014
Fixed Assets
10% Investment (long term)
Debtors
Stock
Cash
Underwriting Commission
Discount on Issue of Debentures
10,20,000
60,000
80,000
3,80,000
1,20,000
5,000
15,000
12,40,000
1,60,000
1,50,000
3,70,000
3,60,000
6,000
4,000
16,80,000
22,90,000
Liabilities
31.03.2013
31.03.2014
Equity Share Capital
18% Preference Share Capital
Profit & Loss A/c
Reserves
14% Debentures
Creditors
Bank Overdraft
Proposed Dividend
Provision for Tax
Provision for Doubtful Debts
Unpaid Dividend
Unpaid Interest on Debentures
6,00,000
4,00,000
1,00,000
1,20,000
2,00,000
40,000
60,000
1,20,000
20,000
20,000
-
-
8,00,000
2,00,000
4,00,000
1,40,000
3,00,000
1,50,000
50,000
1,50,000
40,000
30,000
20,000
10,000
16,80,000
22,90,000
Additional Information:
a)      A machine costing Rs. 1,40,000 (depreciation provided thereon Rs. 60,000) was sold for Rs. 50,000. Depreciation charged during the year was Rs. 1,40,000.
b)      An interim dividend @ 15% was paid on equity shares. New shares and debentures were issued on 31.03.2014.
c)       Tax paid during the year was Rs. 10,000.
d)      On 31.03.2014, some investments were purchased for Rs. 1,80,000 and some investments were sold at a profit of 20% on sale.
e)      Preference shares were redeemed on 31.03.2014 at a premium of 5%.
You are required to prepare Cash Flow Statement as per AS-3 (Revised) by indirect method.                                      12
Or
(b) Discuss the importance of Fund Flow Statement. How do you determine whether a particular change is in the nature of a source or of an application of fund?                                     8+4=12
Ans: Importance of Funds Flow Statement: A funds flow statement is an essential tool for the financial analysis and is of primary importance to the financial management. The basic purpose of funds flow statement is to reveal the changes in the working capital on two balance sheet dates. It also describes the source from which additional working capital has been financed and the uses to which working capital has been applied. By making use of projected funds flow statement the management can come to know the adequacy or inadequacy of working capital even in advance. One can plan the intermediate and long term financing of the firm, repayment of long term debts, expansion of the business, allocation of resources etc. The significance of funds flow statement are explained as follows:
(1) Analysis of Financial Position: Funds flow statement is useful for long term financial analysis. Such analysis is of great help to management, shareholders, creditors, brokers etc. It helps in answering the following questions:
(i) Where have the profits gone?
(ii)  How was it possible to distribute dividends in absence of or in excess of current income for the period?
(iii) How was the sale proceeds of plant and machinery used?
(iv) How was the sale proceeds of plant and machinery used?
(v) How were the debts retired?
(vi) What became to the proceeds of share issue or debenture issue?
(vii) How was the increase in working capital financed?
(viii) Where did the profits go?
Though it is not easy to find the definite answers to such questions because funds derived from a particular source are rarely used for a particular purpose. However, certain useful assumptions can often be made and reasonable conclusions are usually not difficult to arrive at.
(2) Evaluation of the Firm's Financing: One of the important use of this statement is that it evaluates the firm' financing capacity. The analysis of sources of funds reveals how the firm's financed its development projects in the past i.e., from internal sources or from external sources. It also reveals the rate of growth of the firm.
(3) Test of Adequacy: The funds flow statement analysis helps the management to test whether the working capital has been effectively used on not and whether the working capital level is adequate or inadequate for the requirement of business.
(4) An Instrument for Allocation of Resources: In modern large scale business, available funds are always short for expansion programmes and there is always a problem of allocation of resources. Funds flow statement helps management to take policy decisions and to decide about the financing policies and capital expenditure programmes for future.
(5) Guide for investors: The funds flow statement analysis helps the investors to decide whether the company has managed funds properly or not. It indicates the financial soundness of a company which helps the investor to decide whether to invest money in the company or not.
(6) A tool for Measuring credit worthiness: Funds flow statement indicates the credit worthiness of a company which helps the lenders to decide whether to lend money to the company or not.
(7) Future Guide: A projected funds flow statement can be prepared and resources can be properly allocated after an analysis of the present state of affairs. The optimal utilisation of available funds is necessary for the overall growth of the enterprise. A projected funds flow statement gives a clear cut direction to the management in this regard.
(8) It helps in lending or borrowing operations and policies: Lending institution, such as Banks, IFS, IDBI etc. also requires the funds flow statement besides the financial statements in order to know the credit worthiness of the concern and also its ability to convert assets into cash for making the payments at the scheduled time.
Meaning of Flow of Funds
The term flow means movement and includes both inflow and outflow of fund. The term flow of funds means the transfer of economic values from one asset of equity to another. Flow of funds is said to have taken place when any transaction makes changes in the amount of funds available before happening of the transaction. In effect, transaction results in increase of funds are called inflow of funds and transaction which decreases funds are called outflow of funds. Further if a transaction does not changes the funds , it is said to have no flow of funds. According to working capital concept of fund, the term flow of funds means movement of funds in the working capital. A transaction which increases the working capital is called inflow of funds and which decreases working capital is called outflow of funds.
Rule of flow of funds: The flow of fund occurs when a transaction changes on the one hand a non current account and on the other hand a current account and vice versa It means that a change in non current account followed by a change in another non current account or a change in a current account followed by a change in another current account will not result in the flow of fund.
Current and non current accounts
Current accounts are accounts of current assets and current liabilities. Current assets are those assets which are in the ordinary course of business can be or will be converted into cash within a short period of normally one accounting year E.g. Cash in hand and at bank, Bills receivable, sundry debtors, short term loans and advances inventories, prepaid expenses and accrued incomes Current liabilities are those liabilities which are intended to be paid within the ordinary course of business within a short period of normally one accounting year out of the current assets or the income of the business. It includes sundry creditors, bills payable outstanding expenses bank overdraft etc.
Noncurrent assets are assets other than current assets and include goodwill land, plant and machinery furniture trademarks etc. Noncurrent liabilities are liabilities other than current liabilities and include all other long term liabilities such as equity share capital debentures , long term loans etc.
To know whether a transaction results in flow of funds the following procedure can be applied
1. Analyze the transaction and find out the accounts involved
2. Make journal entry of the transaction
3. Determine whether the accounts involved in the transaction are current or non current
4. If both accounts are current, either current assets or liabilities, it doesn’t result in flow of funds
5. If both accounts are noncurrent, either noncurrent assets or noncurrent liabilities, it doesn’t result in flow of funds.
6. If accounts involved are such that one is a current account while the other is a non current account, it results in flow of funds
E.g.1.cash collected from debtors
Cash A/c……………….Dr
To Debtors A/c
Both cash and debtors a/c are current accounts and hence do not result in flow of funds. The transaction results in increase in cash and at the same time an equal decrease in debtors and thus do not result in change in working capital or funds.
E.g.2.purchase of new machinery in exchange of old machinery. Here also both the accounts involved are non current accounts and do not result in flow of funds
Eg.3.issue of shares for cash
Cash A/c……………….Dr
To share capital
Here one account is current and the other is non current and results in flow of funds. Here cash increases without any increase in current liability and results in increase in working capital and thus results in flow of funds.
In simple language funds move when a transaction affects:
Ø  a current asset and a Non-current asset,
Ø  a current asset and a Non-current liability, or
Ø  a Non-current and a current liability, or
Ø  a fixed liability and current liability; and
Funds do not move when the transaction affects:
Ø  a current asset and a current liabilities, or
Ø  a Non-current asset and a Non-current liability, or
Ø  only noncurrent liabilities

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