Course Code: MCO - 05
Course Title: Accounting for Managerial Decisions
Assignment Code: MCO - 05/TMA/2019-20
Coverage: All Blocks
Maximum Marks: 100
Attempt all the questions
1. What is Cash flow statement? Explain the various techniques of preparing cash flow statement. How does it help the management in decision making?        (20)
Ans: Cash Flow Statement: 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.
Preparation of Cash flow statement/Various activities under cash flow statement (AS-3)
Cash flow statement is a statement which shows the movement of cash and cash equivalents over a particular period of time. It comprised of three sections: Operating activities, investing activities and financing activities. There are two methods of preparing cash flow statement: the direct method preferred by FASB and indirect method preferred by most businesses because of its simplicity. The difference between the two methods lies in the operating section only. Investing and financing activities calculation are same under both the methods.
A) Section one: Cash flow from operating activities: Operating activities are the principal revenue generating activities of the business. These are cash flows from regular course of operations such as manufacturing, trading etc. All activities that are not investing or financing activities are included under operating activities.
Examples of Operating Activities:
Ø  Cash receipts from the sale of goods and rendering of services. (Source)
Ø  Cash payments to suppliers of goods and services. (application)
Ø  Cash receipts from royalties, fees, commission and other revenue. (Source)
Ø  Cash payments to and on behalf of employees for wages, etc. (application)
Ø  Cash payments and refunds of income taxes. (application)
Under indirect method cash flow from operating activities is calculated with the help of net profit before tax and extraordinary items. Non-cash and non-operating expenses and losses are added and non-cash and non-operating incomes are deducted from net profit before tax and extraordinary items to find net cash flow from operating activities before working capital change. After this changes in working capital is adjusted and payment of taxes during the year is deducted to find cash flow from operating activities.
B) Section two: Cash from investing activities: The investing activities of a business include all cash flow arises due to acquisition and disposal of long term assets (whether tangible and intangible) and investments. Acquisition or disposal of companies also comes under investing activities. These are separately discloses in cash flow statement.
Examples of Investing Activities:
Ø  Cash payments to acquire long term fixed assets (tangible and intangible) and investments. (application)
Ø  Cash receipts from the disposal of long term fixed assets (including intangibles) and investments. (Source)
Ø  Cash payments for purchase or of shares, warrants, or debt instruments of other enterprises and interest in joint ventures. (application)
Ø  Cash receipts from sale of shares, warrants, debt instruments of other enterprises and interest in joint ventures. (source)
Ø  Cash receipts from repayments of advances and loans made to third parties. (source)
All the sources of cash from investing activities are added and all the applications of cash in investing activities are deducted to find net cash flow from investing activities.
C) Section three: Cash flows from financing activities: Financing activities are the activities which results in changes in the size and composition of the owner’s capital and borrowings of the enterprises from other sources. The financing activities of a firm include issuing or redemption of share capital, issue and redemption of debentures, raising and repayment of long term loans etc. Dividends and Interest paid are also come under financing activities. 2
Examples of Financing Activities: (Sources and applications of cash flow)
Ø  Cash proceeds from the issue of shares or other similar instruments. (source)
Ø  Cash proceeds from the issue of debentures, loans, bonds and other short term borrowings. (source)
Ø  Buy-back of equity shares. (application)
Ø  Cash repayments of the amounts borrowed including redemption of debentures. (application)
Ø  Payments of dividends and interest on borrowings. (application)
All the sources of cash from financing activities are added and all the applications of cash in financing activities are deducted to find net cash flow from financing activities.
Last section – Bottom line: All the cash flows from three sections are added to find net cash flow during the year. Thereafter opening balance of cash and cash equivalent s are added with this amount and the resulting amount will be the closing balance of cash and cash equivalents. Here cash and cash equivalents means:
Cash: Cash comprises cash on hand and demand deposits with banks.
Cash Equivalents: Cash Equivalents are short-term, highly liquid investments that are readily convertible cash. Examples of cash equivalents are: (a) treasury bills, (b) commercial paper, (c) money market funds and (d) Investments in preference shares and redeemable within three months.   
Importance of Cash Flow statement in Managerial decision taking:
Cash flow statement is very useful to the management for short-term planning due to the following reasons:
(i) Show the relationship of net income to changes in the business cash: Generally there is direct relation between net income and cash. High net income leads to increase in cash and vice versa. But there may be a situation where a company’s net income is high but decrease in cash balance and increase in cash balance when net income is low. Every user is interested to know the reasons or difference between the net income and net cash provided by operations.
(ii) Helpful in preparing Cash Budget: A Cash Budget is an estimate of cash receipts and disbursement for a future period of time. Cash Flow Statement provides help to the management to prepare Cash Budget. A comparison of cash budget and cash flow statement reveals the extent to which the sources of the business were generated and used as per the plans of the business.
(iii) Measurement of Liquidity:  Liquidity means ability of a business enterprise to pay off its liabilities when due. Cash Flow Statement helps to know about the sources where from the cash will be available to pay off the liabilities.
(iv) Dividend Decisions: The Capacity of the firm to pay dividends to shareholders depends on the generation of cash flows. Cash flow statement helps the management to know about the sources of cash to pay off dividend.
(v) Prediction of sickness:  With the help of preparing cash from operation a business enterprise may come to know about cash losses in operation. It helps to predict this type of sickness.
(vi) Future Guide: Most of the users are interested to assess the ability of the firm in generating future cash flows, its timing and certainty. These questions can be answered by analysing the cash flow statement.
(vii) The use of cash in investing and financing Transaction: Information in cash flow statement would be useful to find out as to how cash has been obtained from investing and financing activities and how cash has been used to invest and repay borrowings etc. The statement would be useful to users to ascertain the following:
a)      The change in the net assets of the business.
b)      The change in the financial structure.
c)      The financing of expansion.
d)      The utilisation of finance obtained by the enterprise.
e)      The impact of investing and financing activities on the cash balance of the enterprise.
(viii) Enhances the Comparability of report: It enhances the comparability of the reporting of operating performance by different enterprises, because it eliminates the effect of using different accounting treatments for the same transactions and events.
2. Standard cost of product is:                                             (20)
Actual Cost:
Hours Taken
Idle time (in hour)
Total Hours
6 hours per unit
Rs. 4 per hour

1,500 units
7,600 units
Total labour cost announced to Rs. 40,000. Calculate Labour Variance.

3. What do you understand by ‘Zero Based Budgeting’? State the benefits that accrue from it and also its disadvantages. (20)
Ans: Zero Based Budgeting: ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.
Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero, instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or decreasing. 
‘Zero base budgeting’ was originally developed by Peter A. Pyher at Texas Instruments. Peter A. Pyher has defined ZBB as “an operating, planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why we should spend any money at all”.
CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget is set."
Benefits and Limitations of Zero Base Budgeting
The major benefits of the use of zero base budgeting can be the following:
a)      Zero base budgeting examines all existing and new programmes and activities. It also makes the managers analyse their functions, establish priorities and rank them. This exercise helps in identifying inefficient or obsolete functions within the area of responsibility. In this way resources are allocated from low priority programmes to high priority programmes.
b)      This system facilitates identification of duplication of efforts among organisational units. Such inefficient activities are eliminated and some other activities are merged. 
c)      All expenditures, under this system are critically reviewed and justified and all operations activities are evaluated in greater detail in terms of their cost- effectiveness and cost-benefits. This requires managers to find alternative ways of performing their activities which may result in more efficient procedures. 
d)      ZBB promotes the tendency to initiate studies and improvements during the period of operation as the persons at the helm of affairs know that the process would be exercised next year and their knowledge and training would enhance efficiency and cost-effectiveness. 
e)      ZBB provides for quick budget adjustments during the year. If revenue falls short in this process, it offers the capability to quickly and rationally modify goals and expectations to correspond to a realistic and affordable plan of operations. 
f)       ZBB ensures greater participation of personnel in formulation and ranking processes. This helps in promoting level of job satisfaction and thus resulting in better control and operational efficiency in the organisation. 
g)      Zero base budgeting is a flexible tool that can be applied on a selective basis. It does not have to be applied throughout the entire organisation or even in all the service departments. Keeping in view the limitations of time, money and persons available to install, operate and monitor it the management thus can select priority areas to which zero base budgeting may be applied. 
Limitations of ZBB can be summed up as:
a)      It challenges the past practices, performance, attitudes, of people. 
b)      It requires more time and effort. 
c)      Detailed costs and necessary information for decision packages often are not made available. 
d)      It increases paper work to unmanageable proportions. 
e)      Ranking a large number of decision packages becomes an unwieldy process. 
f)       Identifying various levels of funding, particularly the minimum level is a difficult task.

4. The following data are available from the records of a company:                              (20)
Variable cost
Fixed Cost
Rs. 60,000
Rs. 30,000
Rs. 15,000
You are required to :
a)         Calculate the P/V Ratio, Break – Even Point and Margin of Safety at this level.
b)        Calculate the effect of 10% increase in the sale price.
c)         Calculate the effect of 10% decrease in the sale price.

5. What do you mean by the term ‘Budgetary Control’? What are its advantages? Also explain the statement that, “A budget is a means and Budgetary control is the end result”.    (20)
Ans: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.
Wheldon characterizes budgetary control as planning in advance of the various functions of a business so that the business as a whole is controlled.
I.C.M.A. define budgetary control as “the establishment of budgets, relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual actions the objectives of that policy or to provide a basis for its revision”.
Advantages of Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
a)      Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
b)      Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.
c)      Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
d)      Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.
e)      Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.
f)       Standard Costing and Variance analysis: It creates suitable conditions for the implementation of standard costing system in a business organization. It reveals the deviations to management from the budgeted figures after making a comparison with actual figures.
g)      Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviation can determined only at the end of the financial period.
h)      Consciousness: It creates budget consciousness among the employees. By fixing targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.
i)        Reduces Costs: In the present day competitive world budgetary control has a significant role to play. Every businessman tries to reduce the cost of production for increasing sales. He tries to have those combinations of products where profitability is more.
j)        Policy formulation: It helps in the review of current trends and framing of future policies.
Budget is a means and budgetary control is the end results
Budget: A budget is the monetary and / or quantitative expression of business plans and policies to be pursued in the future period of time. Budgeting is preparing budgets and other procedures for planning, coordination and control or business enterprises.
I.C.M.A. defines a budget as “A financial and / or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective”.
Budgeting refers to the process of preparing the budgets. It involves a detailed study of business environment clearly grasping the management objectives, the available resources of the enterprise and capacity of the enterprise.
Budgeting is defined by J.Batty as under: “The entire process of preparing the budgets is known as budgeting”.
Thus budgeting is a process of making the budget plans. Preparation of budgets or budgeting is a planning function and their implementation is a control function. ‘Budgetary control’ starts with budgeting and ends with control.
Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.


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