What do you understand by the concept of conservatism

| October 22, 2018

AMITY SCHOOL OF DISTANCE LEARNING
Post
Box No. 503, Sector-44
Noida –
201303

ACCOUNTING
FOR MANAGERS
Assignment
A
Marks 10
Answer all questions.

l. (a) What do you
understand by the concept of conservatism ? Why is it also called the concept
of prudence? Why is it not applied as strongly today as it used to be in the
Past ?
(b) What is a Balance
Sheet ? How does a Funds Flow Statement differ from a .IE5/ms-4-accounting-and-finance-for-managers-question-paper-7067.htm”>Balance Sheet ? Enumerate the items which are usually shown in
a Balance Sheet and a Funds Flow Statement.

2. (a) Discuss
the importance of ratio analysis for inter-firm and intra-firm comparisons
including circumstances
responsible for its limitations .If any
(b) Why do you understand by the term ‘pay-out ratio’?
What factors are taken into consideration
while determining pay-out ratio? Should a company follow a fixed pay-out ratio policy? Discuss fully.

3. From the
ratios and other data given below for Bharat Auto Accessories Ltd. indicate
your interpretation of the company’s
financial position, operating efficiency and profitability.

Year
I

Year
II

Year
III

Current
Ratio

265%

278%

302%

Acid
Test Ratio

115%

110%

99%

Working
Capital Turnover (times)

2.75

3.00

3.25

Receivables
Turnover

9.83

8.41

7.20

Average
Collection Period (Days)

37

43

50

Inventory
to Working Capital

95%

100%

110%

Inventory
Turnover (times)

6.11

6.01

5.41

Income
per Equity Share

5.10

4.05

2.50

Net
Income to Net Worth

11.07%

8.5%

7.0%

Operating
Expenses to Net Sales

22%

23%

25%

Sales
increase during the year

10%

16%

23%

Cost
of goods sold to Net Sales

70%

71%

73%

Dividend
per share

Rs.
3

Rs.
3

Rs.
3

Fixed
Assets to Net Worth

16.4%

18%

22.7%

Net
Profit on Net Sales

7.03%

5.09%

2.0%

4. Bose has
supplied the following information about his business to Summary of .IE5/Amity%20Precis/Costing/CS%20Foundation%20%20Financial%20Accounting%20%20June%202004.htm”>Cash book for the
year ended 31st March, 2004 is as follows :

Assets and Liabilities

On 1st
April 2003
(Rs.)

On 31st
March, 2004
(Rs.)

Sundry debtors
Stock
Machinery
Furniture
Sundry creditors

1,81,000

1,50,000
2,50,000
40,000
1,10,000

1,93,000

1,40,000
?
?
1,25,000

Receipts

Rs.

Payments

Rs.

To Opening balance
To Cash sales
To Receipt from debtors
To Misc. receipts
To Loan from Dass @ 9%
per annum (taken on 1.10.2003)

5,000
61,000
7,53,000
2,000

1,00,000

By Payments to creditors
By wages
By Salaries
By Drawings
By Sunday office expenses
By Machinery purchased (on 1.10.2003)
By Closing balance

3,50,000
1,60,000
1,50,000
40,000
1,10,000
95,000
16,000

9,21,000

9,21,000

Discount allowed totaled
Rs.7,000 and discount received was Rs.4,000. Bad debts written off were
Rs.8,000. Depreciation was written off on furniture @5% per annum and machinery
@10% per annum under the straight line method of depreciation. The office
expenses included Rs.5,000 paid as .IE5/Amity%20Precis/Costing/CS%20Foundation%20%20Financial%20Accounting%20%20June%202004.htm”>insurance premium .gif”>
for the year ending 30th June, 2004. Wages amounting to Rs.20,000
were still due on 31st March, 2004.

Prepare trading and .IE5/Amity%20Precis/Costing/CS%20Foundation%20%20Financial%20Accounting%20%20June%202004.htm”>profit and loss account for the year ended 31sl March, 2004
and the balance sheet as on that date.

5. What procedure would you adopt to study
the liquidity of a business firm?
Who are all the parties
interested in knowing this accounting information?
What ratio or other financial
statement analysis technique will you adopt for this.

Assignment B
Marks
10
Answer
all questions.

1. From the following particulars,
determine the bank balance as per pass book of Priya & Co. as on 28th February 2008.
a)
Credit
balance as per cash book on 28th February, 2008 was Rs. 15,000
b)
Interest
charged by the bank up to 28th February Rs. 500 was recorded in the pass book.
c)
Bank
charges made by the bank Rs. 125 were also recorded only in the pass book.
d)
Out
of the cheques of Rs. 25,000 paid into the bank, cheques of Rs. 18,750 were
cleared and credited by the bankers.
e)
Two
cheques of Rs. 7,500 and Rs. 15,000 were issued but out of them only one cheque
of Rs. 7,500 was presented for payment upto 28th February.
f)
Dividends
on shares Rs. 4,500 were collected by the bankers directly, for which Priya
& Co. did not have any information.

2.
A company manufactures a single
product in its factory utilizing 600% of its capacity. The selling price and cost details are
given below:

Rs.

Sales
(6,000 units)

5,40,000

Direct
materials

96,000

Direct
labour

1,20,000

Direct
expenses

19,000

Fixed
overheads :

Factory

2,00,000

Administration

21,000

Selling
and Distribution

25,000

12.5%
of factory overheads and 20% of selling and distribution overheads are variable with production and
sales. Administrative overheads are wholly fixed. Since the existing product could not achieve
budgeted level for two consecutive years, the Company
decides to introduce a .IE5/ms-4-accounting-and-finance-for-managers-question-paper-7067.htm”>new product with marginal investment but largely using the existing plant and machinery.
The cost estimates of the new
product are as follows:

Cost
elements

Rs.
per unit

Direct
materials

16.00

Direct
labour

15.00

Direct
expenses

1.50

Variable
factory overheads

2.00

Variable
selling and distribution overheads

1.50

It is expected that 2,000 units of
the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are
expected to increase by 10%, while fixed selling and distribution expenses will go up by Rs. 12,500 annually.
Administrative overheads remain unchanged.
However, there will be an increase of working capital to the extent of Rs.
75,000, which would take the total cost of the .IE5/ms-4-accounting-and-finance-for-managers-question-paper-7067.htm”>project to Rs. 8.75 lakh.
The
company considers that 20o/o pre-tax and interest .IE5/ms-4-accounting-and-finance-for-managers-question-paper-7067.htm”>return on investment
.IE5/ms-4-accounting-and-finance-for-managers-question-paper-7067.htm”>.gif”>
is
the minimum acceptable to justify any new investment.
You
are required to

(a)
Decide whether the new product be introduced.

(b)
Make any further observation/recommendations about profitability of the company
on the basis of the above data , after making assumption that the present
investment is Rs. 8 lakh.

3. (a) What
is Master Budget? How it is different
from Cash Budget?

(b) What
are the various methods of inventory valuation? Explain the effect of inventory valuation methods on profit
during inflation. What are the provisions of Accounting
Standard 2 (AS-2) with regards to inventory valuation?
4. Case study: Please read the case study given below and
answer questions given at the end.

Case
Study

Labor
standards
Geeta & Company has experienced
increased production costs. The primary area of concern identified by
management is direct labor. The company is considering adopting a standard cost
system to help control labor and other costs. Useful
historical data are not available because detailed production records have not
been maintained.
To establish labor standards, Geeta
& Company has retained an engineering consulting firm.
After a complete study of the work process, the consultants recommended a labor
standard of one unit of production every 30 minutes, or 16 units per day for
each worker. The consultants further advised that Geeta’s wage rates were below
the prevailing rate of Rs per hour.
`Geeta’s production vice-president
thought that this labor standard was too tight, and from experience with the
labor force, believed that a labor standard of 40 minutes per unit or 12 units
per day for each worker would be more reasonable. he president of Geeta &
Company believed the standard should be set at a high level to motivate the
workers and to provide adequate information for control and reasonable cost
comparison. After much discussion, management decided to use a dual
standard. The labor standard of one unit every 30 minutes, recommended by the
consulting firm, would be employed in the plant as a motivation device, while a
cost standard of 40 minutes per unit would be used in reporting. Management
also concluded that the workers would not be informed of the cost standard used
for reporting purposes. The production vice-president conducted several
sessions prior to implementation in the plant, informing the workers of the new
standard cost system and answering questions. The new standards were not
related to incentive pay but were introduced when wages were increased to Rs7
per hour.
The standard cost system was
implemented on January 1, 19–. At the end of six months of operation, these
statistics on labor performance were presented to executive management:

January

February

March

April

May

June

Production (units)

5,100

5,000

4,700

4,500

4,300

4,400

Direct labor hours

3,000

2,900

2,900

3,000

3,000

3,100

Quantity Variances:

Variance based on
labor standard
(one unit each 30
minutes)

Rs3150
U*

Rs2,800
U

Rs3,850
U

Rs5,250 U

Rs5,950 U

Rs6,300 U

Variance based on
cost standard
(one unit each 40
minutes)

Rs2,800
F

Rs3,033
F

Rs1,633
F

-0-

Rs933 U

Rs1,167 U

*U =
Unfavorable; F = Favorable
Materials
quality, labor mix, and plant facilities and conditions have not changed to a
significant extent during the six month period.
Questions:
1.
Describe
the impact of different types of standards on motivations, and specifically,
the likely effect on motivation of adopting the labor standard recommended for
Geeta & Company by the engineering firm.

2.
Please
advise the company in reviewing the standards.

Assignment
C
Marks 10
Answer all questions.

Tick Marks (√) the most appropriate answer

1. Which of the following statements is
true concerning assets?

a.
They are recorded at cost and adjusted for inflation.
b.
They are recorded at market value for financial reporting because historical
cost is
arbitrary.
c.
Accounting principles require that companies report assets on the income
statement.
d. Assets are measured using the cost
concept.

2. When the concept of conservation is
applied to the Balance Sheet, it results in

a. Overstatement of Capital
b. Understatement of Capital
c. Overstatement of Assets
d. Understatement of Assets.

3. Which of the following is a correct
expression of the accounting equation?

a.
Assets – Liabilities + Owners’ Equity
b.
Assets = Liabilities – Owners’ Equity
c.
Assets + Owners’ Equity = Liabilities
d.
Assets = Liabilities + Owners’ Equity

4. How is the balance sheet linked to the
other financial statements?

a.
The beginning retained earnings balance on the statement of retained earnings
becomes the amount of retained earnings
reported on the balance sheet.
b.
Retained earnings is added to total assets and reported on the balance sheet.
c.
Net income increases retained earnings on the statement of retained earnings,
which
ultimately increases retained earnings on
the balance sheet.
d.
There is no link between the balance sheet and the other statements.

5. The process of recording the economic
effects of business transactions in a book of original
entry:

a.
Double entry system
b.
Debit
c.
Credit
d.
Journalizing

6. If the sum of the debits and credits in
a trial balance is not equal, then

a.
There is no concern because the two amounts are not meant to be equal.
b.
The chart of accounts also does not balance.
c.
It is safe to proceed with the preparation of financial statements.
d.
Most likely an error was made in posting journal entries to the general ledger
or in
preparing the trial balance.

7.
Z
Ltd had Rs1800 of supplies on hand at January 1, 2006. During 2006, supplies with
a cost of Rs7, 000 were purchased. At
December 31, 2006, the actual supplies on hand amounts
to Rs2, 300. After the adjustments are recorded and posted at December 31, 2006, the balances in the Supplies
and Supplies Expense accounts will be:

a.
Supplies, Rs7, 000; Supplies Expense, Rs2, 300.
b.
Supplies, Rs1, 800; Supplies Expense, Rs7, 000.
c.
Supplies, Rs2, 300; Supplies Expense, Rs6, 500.
d.
Supplies, Rs2, 300; Supplies Expense, Rs3, 900.

8. In
the statement of changes in financial position, uses of resources are defined
as:

a. Transaction debits
b. Fund increases
c. Transaction credits
d. Fund decreases

9. Most firms elected to define funds in
the statement of changes in financial position as:

a. Cash
b. Working capital
c. Current assets
d. Owners’ Equity

10. The funds flow statement included:

a. All sources and uses of resources.
b. Only cash transactions.
c. Only transactions affecting current assets.
d. Only transactions affecting fund accounts.

11. Which of the following is not an example
of a non-fund adjustment to income required in preparing the statement of
changes in financial position when funds were defined as working capital?

a. Depreciation expense
b. Gain from asset disposal
c. Interest expense
d. Amortization of premium on debt

12. In the cash flow statement, cash is
defined as:

a. Quick assets
b. Literal cash on hand or on demand deposit, plus cash equivalents.
c. Literal cash on hand or on demand
deposit, plus marketable securities.
d. All of the above

13. Flexible
budgets

a. Accommodate
changes in the inflation rate.

b. Accommodate changes in activity levels.
c. Are
used to evaluate capacity utilization.
d. Are
static budgets that have been revised for changes in prices.

14 Which of the following statements
regarding changing inventory methods is true?

a.
A change in inventory methods can be justified if the change is made to better
match
profits with revenue.
b.
The effect of changing inventory method does not need to be disclosed.
c.
Tax advantages are valid justification for changing inventory methods.
d.
One place that the reader of an annual report would be able to identify that a
company
changed inventory methods is the footnotes
to the financial statements.

Use
the information presented below to answer the questions that follow. Solid Co.
received a non-interest-bearing note from Y Ltd. on October 1, 2006. The amount
of the note due at the maturity date is Rs6, 200. The note was accepted by Solid
for merchandise sold to Bedrock with a selling price of Rs6, 000. The note is
due in 3 months.

15. The difference of Rs200 between the
amount of the note (Rs6, 200) and the sales price of the merchandise
(Rs6, 000)

a.
Is the interest explicitly included in the amount of the note.
b.
Will be recorded in a contra account, Discount on Notes Receivable, by Co.
c.
Will be recorded as interest revenue on October 1, 2006.
d.
Is an error made in preparing the note.

16. Which of the following combination of
financial statements would provide the most in- depth
information to help understand a company’s liquidity?

a.
Income statement and statement of cash flows.
b.
Balance sheet and statement of cash flows.
c.
Balance sheet and income statement.
d.
Statement of retained earnings and statement of cash flows.

17. Y Ltd sold equipment for Rs4, 000. This
resulted in a Rs1, 500 loss. What is the impact of this sale on the working capital?

a.
Reduces working capital.
b.
Increases working capital.
c.
Has no affect on working capital at all.
d.
The increase offsets the decrease.

18. If a company’s asset turnover rate
increased from 2005 to 2006, which of the following conclusions can be made?

a.
The company was less efficient during 2006 in using its assets to produce profits.
b.
The company produced more sales in 2006 for each dollar invested in assets.
c.
The company was more profitable in 2005.
d.
The company is over-invested in assets in 2006.

19. X Ltd’s master budget calls for the
production of 6,000 units of product monthly.
The master budget includes
indirect labor of Rs396,000 annually; X Ltd considers indirect labor to be a variable cost.
During the month of September, 5,600 units of product were produced, and indirect labor costs of
Rs30,970 were incurred. A performance
report utilizing flexible
budgeting would report a flexible budget variance for indirect labor of:-

a. Rs170 unfavorable.
b. Rs170 favorable.
c. Rs2, 030 unfavorable.
d. Rs2,
030 favorable.

20. Which of the following is not an advantage for using standard
costs for variance analysis?

a.
Standards
simplify product costing.
b.
Standards
are developed using past costs and are available at a relatively low cost.
c.
Standards
are usually expressed on a per unit basis.
d.
Standards
can take into account expected changes planned to occur in the budgeted period.

21. The main purpose of cost accounting is
to-

a.
Maximize profits,
b.
Provide information to management for decision making
c.
help in fixing selling price
d.
To watch cash flows

22. Conversion cost is total of:

a.
Direct
material and direct wages
b.
Direct
material, direct wages, and production overheads
c.
Direct
wages and production overheads.
d.
None
of the above.

23. A cost, which does not involve cash
outlay, is called:

a.
Historical
cost
b.
Imputed
cost
c.
Out
of pocket cost.
d.
Explicit
cost.

24. Committed fixed costs are those, which:

a.
Arise
from yearly budget appropriations
b.
Are
incurred because management can afford
c.
Arise
from additional capacity.
d.
All
of above

25. Cost
of research undertaken at the request of the customer should be:

a.
Charged
to costing profit and loss account
b.
Charged
to selling overheads
c.
Recovered
from the customer.
d.
All
of above

26. Salaries due for the month of March will
appear

a. On the Receipt side of the Cash Book
b.
On the Payment side of the Cash Book
c.
As a contra entry
d.
Nowhere in the Cash Book.

27. Liabilities of business are Rs. 11,220
and owner’s equity is Rs. 15,000. The assets of the business will be.

a.
Rs. 3,780.
b.
Rs. 26,220.
c.
Rs. 11,220.
d.
Rs. 15,000.

28.
An entry of Rs. 320 has been
debited to Eknath’s account at Rs. 230. If is an error of

a.
Principle.
b.
Omission.
c.
Commission.
d.
Compensatory.

29. Unearned revenues are:

a. Prepayments.
b. Liabilities.
c. Temporary accounts.
d. Both a and b above.

30. The revenue recognition principle
requires that sales revenues be recognized:

a. When cash is received.
b. When the merchandise is ordered.
c. When the goods are transferred from the
seller to the buyer.
d. None of the above.

31. All of the following are “other
receivables” except:

a. Petty cash.
b. Interest receivable.
c. Income taxes refundable.
d. Advances to employees.

32.
Depreciation is dependent on a
number of estimates. When a change in an estimate is required, the change is made:

a. in the current year.
b. in the future year.
c. to prior periods.
d. both a and b above.

33.
In order to pay a dividend:

a. the corporation must have adequate retained
earnings.
b. the board of directors must declare a
dividend.
c. the corporation must have adequate
cash.
d. all of the above.

34. Cash flow activities that include the
cash effects of transactions that create revenues and expenses and thus enter into the determination of net
income are referred to as:

a. Investing activities.
b. Financing activities.
c. Operating activities.
d. All of the above.

35. All of the following are used in
preparing a statement of cash flows except:

a. A trial balance.
b. Comparative balance sheet.
c. Current income statement.
d. Additional information.

36. Depreciation
is result of

a.
Usage.
b.
Time.
c.
Obsolescence.
d.
All of the above.

37. Outstanding
Expenses are the examples of

a. Personal
Accounts.
b. Real Accounts.
c. Nominal Accounts.
d. None of the above.

38. Liquid
Assets are inclusive of all current assets except

a.
Inventories.
b.
Prepaid Expenses.
c.
Cash.
d.
Both (a) and (b) above.

39. Management Accounting is mainly related
to

a.
Presentation of Figures from Financial Accounting.
b.
Presentation of Figures from Cost Accounting.
b.
Principles
c.
Both (a) and (b) above.

40. Variance Analysis is done with regards
to actuals with-
a.
Standards.
b.
Budgeted Figures.
c.
Benchmarks
d.
All of the above.

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