Short Answer Type Questions

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Q1. Define Accounting

Ans. The main purpose of accounting is to ascertain profit or loss during a specified period, to show financial position
of the business on a particular date and to have control over the firms property. such accounting records are
required to be maintained to measure the income of the business and communicate the information so that it may
be used by managers, owners and other parties.
The American institute of Certified Public Accountants (AICPA) defines the term accounting as follows Accounting is
the process of recording, classifying, summarizing in a significant manner of transactions which are in financial
character and finally results are interpreted.
Q2. Define the Following Terms (a) Capital, (b) Assets, (c) Liability, (d) Debtors, (e) Creditors, (f) Revenue, (g) Bills of
Exchange.
Ans. (a) Capital: It is the money invested by the owner of the business. It is also known as owners equity or as net
worth. It is the total assets minus the liabilities. In other words, excess of assets over liabilities is termed as capital. As
we know that business is considered as a separate entity, hence capital introduced by the owner is also considered as
liability for the business. This can be shown in an algebraic way as follows:
Capital = total assets total liabilities
(b) Assets: Assets are the things/properties of value used by the business in its operations. In other words, anything
by which the firm gets some benefit, is termed as asset. The Institute of Chartered Accountants of India defines
assets as, tangible objects or Intangible rights owned by an enterprise and carrying probable future benefits. The
assets may be broadly classified as fixed assets and current assets:
(i) Fixed Assets are the assets which are purchased for the purpose of operating the business and not for resale such
as land and building, plant and machinery and furniture, etc.
(ii) Current Assets are the assets which are kept for short-term for converting into cash or for resale such as unsold
goods, debtors, bills receivable, bank balance, etc.
(c) Liability: It may be defined as currently existing obligations which a business enterprise requires to meet
sometime in future. According to Accounting Principles Board (APB), liabilities are defined as, economic obligations
of an enterprise that are recognized and measured in conformity with generally accepted accounting principles.
liability is a legal obligation to pay for the transaction that has already taken place. Liabilities may be classified into
three types namely:
(i) Short-term liabilities are such obligations which are payable within one year. Examples are creditors, Bills payable,
overdraft from a bank, etc.
(ii) Long-term liabilities are such obligations which are payable after a period of one year such as debentures, bonds
issued by the company, etc.
(iii) Contingent liability is a liability which arises only on the happening of an uncertain event. If it happens, the
contingent liability is there. If it does not happen, there is no liability. Such liabilities are not shown in the balance
sheet, but are given as a foot note. Example of such liabilities are (i) Liability on account of bills discounted, (ii) Claims
against the firm not acknowledged as debts.
(d) Debtors: The debtors are the persons who owe to an enterprise an amount for receiving goods or services on
credit. The total balance outstanding at the end of a particular date is shown as an asset in the balance sheet of an
enterprise. The debtors are also known as accounts receivables.
(e) Creditors: The creditors are the persons to whom the firm owes for providing goods or services.
(f) Revenue: The amounts which earned by a business by selling a product or rendering its services to the customers
is called revenue. Such as sales, commission, interest, dividends, rent and royalties received. It is the amount which is
added to the capital as a result of business operations.
(g) Bills of Exchange: A written order from one person (the payor) to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at some fixed future date, a certain sum of money, to either
the person identified as payee or to any person presenting the bill of exchange.

Q3. Explain (a) Journal, (b) Ledger.

Ans. (a) Journal is derived from the French word Jour which means a day. Journal means daily record. it is a book of
original record where every transaction is recorded in the first instance and then it is posted to the ledger. the form
in which it is recorded is called Journal entry and recording or entering a transaction in the journal is known as
journalizing. Specimen of Journal Book as follows:
Date Particulars
L.F. Dr. Amount Cr. Amount
Name of Account to be Debited
xxxxx
To (Name of Account to be Credited
xxxxx
(Narration or Explanation)
(b) A ledger account may be defined as a summary statement of all the transactions relating to a person, asset,
expense or income which have taken place during a given period of time and shows their net effect. Specimen of
Ledger Account is as follows:
Dr.
Name of Account
Cr.
Date Particulars
F. Amount Date Particulars
F. Amount
To Name of Credit Account
By Name of Debit Account
Q4. Explain (a) Debit Note, (b) Credit Note
Ans. (a) A debit note is prepared when goods are returned by the purchaser due to some reason. Two copies of this
note are prepared. The original copy is sent to the party (i.e., Seller of goods) to whom goods are returned and the
duplicate copy is kept in the office for office record. it is called a debit note because the partys account is debited
with the amount written in this note for the goods returned. the same debit note becomes credit note from the
receiving partys point of view because he credits the account of the party from whom he receives the note along
with the goods.
(b) A credit note is sent by the seller to the purchaser for the goods returned by the latter to the former. it is called a
credit note because the partys account is credited with the amount written in this note for the goods returned by
the party. The same credit note becomes debit note for the party who has returned the goods because that party
gives debit to the party sending this note for the goods received.
Q5. Capital expenditure versus revenue expenditure.
Ans. Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure
that increases the earning capacity of an existing fixed asset. The cost of acquisition not only includes the cost of
purchases but also any additional costs incurred in bringing the fixed asset into its present location and condition
(e.g. delivery costs).
Revenue expenditure refers to expenditure concerned with the costs of doing business on a day to day basis. When
companies make revenue expenditure, the expense offers immediate benefits, rather than long term ones. This is
differentiated with capital expenditures, which are long term investments to help a business grow and thrive.

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Q6. Objectives of preparing Financial Accounts.

Ans. The final accounts plays an important role for every kind of organization. There are two main objectives of
preparing final accounts: (1) to know the operational results i.e. final accounts are prepared to know the profit or loss
during a particular period through the profit and loss account which is also known as income statement, and (2) to
ascertain the financial position of the business on a particular date through the balance sheet, also known as position
statement.
Q7. Explain the term Cost Centre.
Ans. A cost centre is the smallest segment of activity or area or responsibility for which costs are accumulated.
Typically cost centre are departments but in some instances, a department may contain several cost centre. these
cost centre are the departments or sub-departments of an organization with reference to which cost is collected for
cost ascertainment and cost control. a determination of a suitable cost centre is very important for ascertainment

and control of cost. the manager in charge of a cost centre is held responsible for control of cost of his cost centre.
Types of Cost Centers: 1. Personal and Impersonal cost centers, 2. Operation and process cost centers, 3. Production
and service cost centers.
Q8. Zero based budgeting
Ans. Zero Base Budgeting is a new technique of budgeting introduced first in U.S.A. in a year 1969. The ICMA
terminology defines ZBB as a method of budgeting whereby all activities are re-evaluated each time a budget is
formulated. Each functional budget starts with the assumption that the function does not exist and is a zero cost.
Increment of cost are compared with increment of benefits culminating in the planned maximum benefits for a given
budgeted cost. Generally every year budgets are prepared on basis of last year performance and after making
adjustments regarding increasing or decreasing trends and after providing provisions for contingencies. Such
techniques are known as incremental budgeting. In the ZBB every year is taken as a new year and there is no need to
take previous years figure as a base. In this type of budgeting budgets are prepared taking current year as zero base
and current year performances are evaluated independently from previous year. The ZBB refers to a nil budget as
the starting point.
Q9. Define Standard Costing.
Ans. Standard Costing is the preparation of standard costs and applying them to measure the variations from actual
costs and analyzing the causes of variations with a view to maintain maximum efficiency in production. it is a
technique which uses standards for costs and revenues for the purpose of control through variance analysis. standard
costing may comprise:
1. Ascertainment of standard costs under each element of cost i.e., material, labor, and overhead.
2. Measurement of actual costs.
3. Comparison of the actual costs with the standard costs to find out the variances.
4. Analysis of variances for the purpose of ascertainment of reasons of variances for taking the appropriate
action where necessary so that maximum efficiency may be achieved.
Q10. Define P/V Ration.
Ans. The profit volume ratio is one of the most important ratios for studying the profitability of operations of a
business and establishes the relationship between contribution and sales. this ratio is calculated as under:

=
=

Or

=

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Q11. Define Key Factor.

Ans. A key factor is that factor which puts a limit on production and profit of a business. Usually the limiting factor is
sales. A concern may not be able to sell as much as it can produce. But sometimes a concern can sell all it produces
but production is limited due to the shortage of materials, labor, plant capacity, or capital. In such a case, a decision
has to be taken regarding the choice of the product whose production is to be increased, reduced or stopped.
Ordinarily, when there is no limiting factor, the choice of the product will be on the basis of the highest P/V ratio.
Q12. Explain Transfer Pricing
Ans. Large business units are usually organized into different divisions for better control. In such a situation, if one
division supplies its finished output as input to other division, there arises a very important issue. The issue being at
which price should be transferring unit transfer its product or service. Such price is known as transfer price. Transfer
prices are the amounts charged by one segment of an organization for a product or service that it supplies to another
segment of the same organization.

Long Answer Type Questions

Q1. Explain the Accounting concepts and conventions.
(OR)
Accounting is the process of recording, classifying and summarizing of accounting transactions. Explain
(OR)
The entire accounting system is governed by the practice of accounting. What are the key principles used in
accounting?
(OR)
What are the key accounting conventions?
Ans. Accounting Principles:
Accounting principles or basis may be defined as those rules of action or conduct, which are followed by the
accountants universally while recording the transactions. Thus the uniformity in understanding the accounting
records is possible only when some standard language is used. Accounting principles can be divided into two kinds.
1. Accounting Concepts.
2. Accounting Conventions.

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Accounting Concepts: These are certain basic assumptions according to which accounting work is conducted. The
following are the important accounting concepts:
1. Business entity concept.
2. Going concern concept.
3. Cost concept.
4. Money measurement concept.
5. Dual aspect concept.
6. Accounting period concept.
7. Matching concept
1. Business Entity Concept: According to this concept, the business is treated as a unit or entity separate form
its owners, creditors and others. All the transactions of the business are recorded in the books of accounts
from the point of view of the business as an entity and even the owner is regarded as a creditor to the extent
of his capital.
2. Going Concern Concept: Under this concept it is assumed that a business concern will continue for an
indefinite period and the transactions are recorded in the books. Keeping in view this concept, it is assumed
that the enterprise has neither the attention nor the necessity of liquidation of curtailing the scale of the
operations. If this assumption is not followed, the fact should be disclosed with reasons. Due to this concept,
fixed assets are depreciated on their expected life rather than on the basis of market value.
3. Dual Aspect Concept: This principle is the core of accountancy. All business transactions are recorded as
having a dual aspect. Under this concept "for every debit, there is a credit." For example, Mr. X the proprietor
of the business, starts his business with cash Rs.100,000 and building worth Rs.200,000 then this fact is
recorded at two places assets account and capital account.
4. Cost Concept: The basic idea of the cost concept is that asset is recorded at the price paid to acquire it and
this cost is the basis for all subsequent accounting for the asset. The assets recorded at cost price at the time

of purchase are systematically reduced by the process called depreciation. These assets will ultimately
disappear from the balance sheet when there economic life is over and they have been fully depreciated and
sold as scrap.
5. Money Measurement Concept: This concept underlines the fact that only those transactions, which are
expressed in monetary terms, are recorded. In other words those transactions or events, which cannot be
expressed in terms of money are not recorded in the books though they may be very useful for the business.
6. Accounting Period Concept: Since the life of the business is assumed to be indefinite (going concern concept)
the measurement of the income, according to the above concept, is not possible for a very long period. Thus
it is necessary to know at frequent intervals "how the things are going". Twelve months period is usually
adopted for this purpose. This time interval is called accounting period. The accounting period can begin on
any day.
7. Matching Concept: This concept only makes the entire accounting system as meaningful to determine the
volume of earnings or losses of the firm at every level of transaction; which is an outcome of matching in
between the revenues and expenses. The worth of the transaction is identified through matching of revenues
which are mainly generated from the sales volume and the expenses of the firm at every level.
Accounting Conventions: The following are the important accounting conventions:
1. Convention of consistency
2. Convention of conservatism
3. Convention of disclosure
4. Convention of materiality

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1. Convention of Consistency: Consistency is a fundamental assumption. Under this convention it is assumed

that accounting practices and policies are consistent from one period to another. For example if the
deprecations charged on fixed assets according to the diminishing balance method, it should be done year
after year. If due to unavoidable circumstances changes become necessary, the change and its effect should
be stated clearly.
2. Convention of Full Disclosure: It is very important convention which apart from legal requirements, demands
that significant information should be disclosed. This convention implies that accounts should be prepared in
such a way that all material information is clearly disclosed to the reader. For example not only various assets
to be stated but also the mode of valuation should be disclosed.
3. Convention of Conservatism: This is the policy of playing safe, it takes into consideration all prospective
losses but leaves all prospective profits. Whenever a decision is to be made on the valuation of the assets, it
will generally be decided in favor of that valuation which underestimates the profits. On account of this
convention, the stock in trade is valued at market or cost price whichever is less.
4. Convention of Materiality: An item should be regarded as material if there is a reason to believe that
knowledge of it would influence the decision of the user of information. According to the principle of
materiality unimportant items are either left out or merged with other items. Sometimes items are shown as
foot-notes or in parentheses according to their relative importance.
Q2. What do you mean by trial balance? Discuss about the errors which are located and which are not located by
trial balance?
Ans. Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the
preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting
of financial statements. Ledger balances are segregated into debit balances and credit balances. Asset and expense
accounts appear on the debit side of the trial balance whereas liabilities, capital and income accounts appear on the
credit side. If all accounting entries are recorded correctly and all the ledger balances are accurately extracted, the
total of all debit balances appearing in the trial balance must equal to the sum of all credit balances. Performa of Trail
balance of as follows:
Company Name
Trial Balance As on .

Account Title

Debit Credit
Rs.
Rs.

Total

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Trial Balance Errors: There can be certain errors in recording the accounting transactions in primary and secondary
books of accounts. When there are some errors in the accounting then the balance of both the sides of trail balance
will not tally. Some of the errors are easy to detect but there are certain errors which are not detected through the
trial balance.
Types of errors: There are two types of errors:
1. Errors which cannot be located by trial balance
2. Errors which can be located by trial balance
1. Errors which cannot be located by trial balance
I. Error of Omission: These errors occur when any business transaction is completely or partially omitted from
the recording in the books of original records. As goods, sold of 10,000 to Mr. Ram, is not entered anywhere in
the original books so its effect will not appear on the ledger and trial balance. Thus, such type of errors can not be
located by trial balance.
II. Error of Commission: Such type of errors are found when one account is debited or credited in the place of
another account. As cash received from Sham 1,000 has been credited in the name of Ram. Such type of errors
do not affect the agreement of the totals of the debit and credit side of the trial balance but they affect the result
of the business.
III. Error of Principle: These errors occur when there is wrong classification between the capital and revenue
nature incomes or expenditures. As the purchases of furniture of 20,000, are entered in the book of purchases
while it should be in furniture account. Such errors can not be located by trial balance.
IV. Compensating Error: When two errors of the same account occur and the effect of one error is compensated
by the effect of other error it is called compensating error. For example, if purchase of 10,000 from Ajay is
credited only by 1,000 while the purchases from Vijay for 1,000 is credited by 10,000. Thus, such type of errors do
not affect on the agreement of the Trial Balance.
V. A wrong entry in a subsidiary book: if a credit purchase of Rs. 465 from Annu is wrongly written as Rs. 564 in
the Purchase Book, such an error will not disclosed by the Trail Balance as the posting on both the debit side of
Purchases Account and credit side of Annus Account will be with the wrong amount of Rs. 564, so the Trail
balance will agree.
2. Errors which can be located by trial balance
I. An Item omitted to be posted form a subsidiary book into the ledger, i.e. a purchase of Rs. 1000 from Navin
omitted to be credited to his account. as a result of this error, the figure of sundry creditors to be shown in the
Trial Balance will reduce by s. 1000.
II. Posting of wrong amount to a ledger account, i.e., A credit sale of rs.2000 to Aarti wrongly posted to her
account as Rs. 200. The effect of this error will be that the figure of sundry debtors to be shown in the Trial
Balance will reduce by rs. 1800.
III. Posting an amount to the wrong side of the ledger account, i.e., Rs. 50 discount allowed to a customer
wrongly posted to the credit instead of the debit side of the Discount Account.
IV. Wrong additions or balancing of ledger accounts.
V. An item in the subsidiary book posted twice to a ledger account.
VI. Wrong totaling of subsidiary books.
VII. Omission of a balance of an account in the Trial Balance, i.e., cash and bank balances may have been omitted
to be included in the Trial Balance.
VIII. Balance of some account wrongly entered in the Trial Balance.
IX. Balance of some account written to the wrong side of the Trial Balance.

X. An error in the totaling of the Trial Balance will bring the disagreement of the Trial Balance.
Q3. What is Cash book? Explain the Kinds of Cash book in detail.
Ans. Cash Book: Cash book is the book of accounts where most of the transactions are generally related with the
receipts and payment of cash. It may be either purchase of goods for cash or sale of goods for cash or it may be either
payment of expenses or receipts of income. All such transactions are recorded separately in a book, which is known
as the cash book. This book is helpful in telling the accurate balance of cash in hand or at bank. All cash transactions
are directly entered into the cash book and on the basis of cash book, ledger accounts are prepared.
Kinds of Cash Book: Generally, four types of cash book are prepared. These are:
1. Simple cash book with one column
2. Cash book with discount column also known as two columns cash book
3. Cash book with Bank and discount column also known as three columns cash book
4. Petty Cash Book
1. Simple Cash Book: Simple cash book is also known as one column cash book. This is just like cash account
where all the transactions relating to receipts and payments of cash are recorded. All the receipts are shown
on the debit side of the account which is on the left-hand side whereas all the payments are put on the credit
side of the account which is on the right-hand side.
Simple Cash Book
Date Receipts L.F Amount Date Payments L.F Amount
2. Cash Book with Discount Columns (also known as Two Columns Cash Book): Two Column Cash Book
contains two additional columns for amounts i.e. (i) for cash receipts or payments, (ii) Discount allowed or
received. The discount is an incentive given or received for prompt payment. To record discount, one
additional column on both the sides of the Cash Book is added. The Cash Book is termed as Cash Book with
discount column because of recording of discount.
Double Column Cash Book
Date Receipts L.F Discount Cash Date Payments L.F Discount Cash
3. Cash Book with Bank and Discount Columns (Three Columns Cash Book): This type of Cash Book is used
by the big business organizations because (i) there are large number of transactions and (ii) receipts and
payments are through cheques. Under this Cash Book three columns meant for (A) Discount, (B) Cash, and (C)
Bank, are shown on both the sides of the Cash Book. Other columns remain as usual. This Cash Book contains
three columns, hence it is termed as Three Column Cash Book. Following is the form of Three Columns Cash
Book:
Three Column Cash Book
Date Receipts L.F Discount Cash Bank Date Payments L.F Discount Cash Bank

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4. Petty Cash Book: The Petty Cash Book records all the transactions which are very small in terms of money.
In such situation, a fixed amount of cash in the beginning of the month is given to a person who is known as
petty cashier. After a fixed period say a week or month, he is again reimbursed or paid back the amount
whatever he has spent at the end of week or period. Such a system is known as imprest system.
Analytical Petty Cash Book
Voucher
Total
Printing &
Receipts
Date
Particulars
Cartage
Postage
No.
Amount
Stationery

Q4. Cost may be classified in a variety of ways according to their nature and information needs of management.
Discuss this statement giving examples of classification required for different purposes.
(OR)
What is Cost Classification? Classify it, in detail.
(OR)

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Discuss analytically, direct and indirect costing.

Ans. Classification of Cost: Costs can be classified according to:
1. General classification
2. Technical classification
General Classification: Generally, the costs are classified as follows:
I. Product vs Period Costs: Product costs include all the costs that are involved in acquiring or making product. For a
manufacturer, they would be the direct materials, direct labor, and manufacturing overhead used in making its
products.
Period costs cannot be assigned to the products or to the cost of inventory. These costs are expensed on the income
statement in the period in which they are incurred, using the usual rules of accrual accounting that we learn in
financial accounting.
II. Direct vs Indirect Costs: Direct costs are those costs that can be traced to specific segments of operations. Direct
cost of the product can be classified into three major categories.
- Direct Material: Direct material which is especially used as a major ingredient for the production of a
product.
- Direct Labour: Direct labour is the cost of the labour which is directly involved in the production of either a
product or service.
- Direct Expenses: Direct expenses which are incurred by the firm with the production of either a product or
service. The excise duty and octroi duty are known as direct expenses in connection with the production of
articles and so on.
Indirect costs are those costs that can not be identified with particular segments.
- Indirect Material: The material which is spent cannot be measured for a product is known as indirect
material.
- Indirect Labour: Indirect labour is the cost of the labour incurred by the firm other than the direct labour
cannot be apportioned.
- Indirect Expenses: Indirect expenses are the expenses other than that of the direct expenses in the
production of a product. The expenses which are not directly part of the production process of a product or
service known as indirect expenses.
III. Manufacturing vs Non-manufacturing Costs: Manufacturing costs are product costs consisting of Direct Material
(DM), Direct Labor (DL) and Manufacturing Overhead (MOH, OH). Manufacturing Costs = DM + DL + MOH
Non-manufacturing costs are period costs incurred in selling and administrative activities.
Technical Classification
I. By Nature or Element or Analytical Segmentation: The costs are classified into three major categories Materials,
Labour, and Expenses.
II. By Functions: Under this methodology, the costs are classified into various divisions or functions of the enterprise
viz. Production cost, Administration cost, Selling & Distribution cost and so on.
III. By Variability: Fixed cost: It is cost which do not vary irrespective level of an activity or production.
Variable cost: It is a cost which varies in along with the level of an activity or production like material consumption
and so on.
Semi variable cost: It is a cost which is fixed up to certain level of an activity. Later it fluctuates or varies in line with
the level of production. It is known in other words as step cost.
IV. By Controllability: Controllable costs: Cost which can be controlled through some measures known as controllable
costs. All variable cost are considered to be controllable in segment to some extent.
Uncontrollable costs: Costs which cannot be controlled are known as uncontrollable costs. All fixed costs are very
difficult to control or bring down; they rigid or fixed irrespective to the level of production.
V. By Normality: Normal cost: It is the cost which is normally incurred at a given level of output in the conditions in
which that level of output is normally achieved.
Abnormal cost: It is the cost which is not normally incurred at a given level of output in the conditions in which that
level of output is normally attained.
VI. By Time. Historical costs: The costs are accumulated or ascertained only after the incurrence known as past cost
or historical costs.

Predetermined costs: These costs are determined or estimated in advance to any activity by considering the past
events which are normally affecting the costs.
VII. For Planning and Control Notes: Standard cost: Standard cost is a cost scientifically determined by way of
assuming a particular level of efficiency in utilization of material, labour and indirect expenses. The prepared
standards are compared with the actual performance of the firm in studying the variances in between them. The
variances are studied and analyzed through an exclusive analysis.
Budget: A budget is detailed plan of operation for some specific future period. It is an estimate prepared in advance
of the period to which it applies. It acts as a business barometer as it is complete programme of activities of the
business for the period covered.

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Q5. Define cost accounting. What are the elements of cost?

Ans. Cost accounting is the classification, recording and appropriate allocation of expenditure for the determination
of the products or services, and for the suitable presentation of data for the purpose of control and management.
The cost accounting normally includes the cost of job or contract, batch, process and so on. It normally illustrates the
following compartments of the cost aspect of the organization viz. production, administration, selling and
distribution.
Elements of Cost

1. Material
(a) Direct material: To obtain the materials that will be converted into the finished product, the manufacturer
purchases raw materials. Raw materials are the basic materials and parts used in the manufacturing process. Direct
material is Opening stock + Purchases Closing stock
(b) Indirect material: Some raw materials cannot be easily associated with the finished product. These are considered
indirect materials.
2. Labour

(a) Direct labour: The work of factory employees that can be physically and directly associated with converting raw
materials into finished goods is considered direct labour.
(b) Indirect labour: In contrast, the wages of maintenance people, time-keepers, and supervisors are usually
identified as indirect labour. Their efforts have no physical association with the finished product, or it is impractical to
trace the costs to the goods produced.
3. Expenses
(a) Direct Expenses: Apart from material and labour, many a times there is need to insert some specific expenses such
as production royalties to be paid to the holders of manufacturing/patent rights, hire/purchase of certain special
machine tools for one-time jobs, etc. This category of cost is termed as direct expenses.
(b) Indirect expenses: Indirect expenses consist of costs that are indirectly associated with the manufacture of the
finished product.
4. Overhead
The term overhead includes indirect material, indirect labor and indirect expenses. Thus, all indirect costs are
overheads. A manufacturing organization can broadly be divided into the following three divisions:
(a) Factory Overheads:
(i) Indirect material used in a factory such as lubricants, oil, consumable stores, etc.
(ii) Indirect labor such as gatekeeper, timekeeper, works managers salary, etc.
(iii) Indirect expenses such as factory rent, factory insurance, factory lighting, etc.
(b) Office and Administration Overheads:
(i) Indirect materials used in an office such as printing and stationery material, brooms and dusters, etc.
(ii) Indirect labor such as salaries payable to office manager, office accountant, clerks, etc.
(iii) Indirect expenses such as rent, insurance, lighting of the office.
(c) Selling and Distribution Overheads:
(i) Indirect materials used such as packing material, printing and stationery material, etc.
(ii) Indirect labor such as salaries of salesmen and sales manager, etc.
(iii) Indirect expenses such as rent, insurance, advertising expenses, etc.

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Q6. What do you understand by Ratio analysis. Explain Various Rations.

Ans. A tool used by the management to conduct a quantitative analysis of information in a company's financial
statements. Ratios are calculated from current year numbers and are then compared to previous years, other
companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is
predominately used by proponents of fundamental analysis.

Classification of Ratios
1. Liquidity Ratios
2. Long-term Solvency and Leverage Ratios / Capital Structure Ratios
3. Activity Ratios or Asset Management Ratios / Turnover Ratios

4. Profitability Ratios
1. Liquidity Ratios:
- Current Ratio: Current ratio may be defined as the relationship between current assets and current liabilities. This
ratio, also known as working capital ratio, is a measure of general liquidity and is most widely used to make the
analysis of a short-term financial position or liquidity of a firm. it is calculated as follows:

- Quick Assets Ratio: Quick Ratio, also known as Acid Test or Liquid Ratio, is a more rigorous test of liquidity than the
current ratio. it is calculated as follows:

- Absolute Liquid Ratio Or Cash Ratio: It is calculates as follows

2. Long-term Solvency and Leverage Ratios / Capital Structure Ratios

- Debt-Equity Ratio: Debt-Equity Ratio, also known as External-Internal Equity Ratio is calculated to measure the
relative claims of outsiders and the owners (i.e., shareholder) against the firms assets. the ratio indicates the
relationship between the external equities or the outsiders funds and the internal equities or the shareholders funds,
thus.

Outsiders Funds/ External Equities includes all debts/liabilities to outsiders, whether long-term or short-term or
whether in the form of debentures bonds, mortgages or bills.
Shareholders Funds/ Internal Equities includes equity share capital, preference share capital, capital reserves,
revenue reserves and reserves representing accumulated profits and surpluses like reserves for contingencies, sinking
funds, etc.
Accumulated losses and deferred expenses, if any, should be deducted from the total to find out shareholders funds.
- Proprietary Ratio: The ratio illustrates the relationship in between the owners' contribution and the total volume of
assets.

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- Fixed Assets Ratio: The ratio establishes the relationship in between the fixed assets and long-term source of funds.
3. Activity Ratios or Asset Management Ratios
- Inventory Turnover Ratio: The ratio expresses the speed of converting the stock into sales. In other words, how fast
the stock is being converted into sales in a year.

- Debtors or Receivable Turnover Ratio: This ratio exhibits the speed of the collection process of the firm in collecting
the overdues amount from the debtors and against Bills receivables.

- Creditors/Payables Turnover Ratio: It shows effectiveness of the firm in making use of credit period allowed by the
creditors during the moment of credit purchase.

4. Profitability Ratios:
- Gross Profit Ratio: The ratio elucidates the relationship in between the gross profit and sales volume.

- Net Profit Ratio: The ratio expresses the relationship in between the net profit and sales volume.

- Operating Profit Ratio: The operating ratio is establishing the relationship in between the cost of goods sold and
operating expenses with the total sales volume.

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Q7. What is meant by financial statement analysis? What are its types?
Ans. A financial statement is a collection of data organized according to logical and consistent accounting procedures.
Its purpose is to convey and understanding of some financial aspects of a business firm. It may show a position at a
moment in time, as in the case of a balance sheet, or may reveal a series of activities over a given period of time, as in
the case of an income statement. The term Financial Statement generally refers to the two statements: (i) the
position statement of the balance sheet; and (ii) the income statement or the profit and loss account. These
statements are used to convey to management and other interested outsiders the profitability and financial position
of a firm.
The term Financial Statement Analysis, also known as analysis and interpretation of financial statements, refers to
the process of determining financial strengths and weaknesses of the firm by establishing strategic relationship
between the items of the balance sheet, profit and loss account and other operative data.

Types of Financial Analysis

On the basis of Material Used
External Analysis

Internal Analysis

On the Basis of Modus Operandi

Horizontal Analysis

Vertical Analysis

On the basis of material used:

A. External Analysis: This analysis is done by outsiders who do not have access to the detailed internal
accounting records of the business firm. These outsiders include investors, potential investors, creditors
potential creditors, government agencies, credit agencies and the general public.
B. Internal Analysis: The analysis conducted by persons who have access to the internal accounting records of a
business firm is known as internal analysis. Such an analysis can, therefore, be performed by executives and
employees of the organization as well as government agencies which have statutory powers vested in them.
On the basis of modus operandi:
1. Horizontal analysis: Horizontal analysis refers to the comparison of financial data of a company for several
years. The figures for this type of analysis are presented horizontally over a number of columns. The figures
of the various years are compared with standard or base year. It is also known as Dynamic Analysis.
2. Vertical Analysis: Vertical analysis refers to the study or relationship of the various items in the financial
statements of one accounting period. In this types of analysis the figures from financial statement of a year
are compared with a base selected from the same years statement. It is also known as Static Analysis.
Q8. Define Funds flow statement. What are its objectives? Explain the steps to prepare funds flow statement.
(OR)
Explain the process of preparing the statement of changes in working capital.
(OR)
Draft the pro forma of the Fund Flow Statement.
(OR)
Fund flow statements can be used to identify a variety of problems in the way a company operates. Illustrate the
statement by the help of suitable examples.
Ans. Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise
between beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a
period of time.
Foulke defines this statement as: A statement of sources and application of funds is a technical device designed to
analyze the changes in the financial condition of a business enterprise between two dates.

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Objectives of Fund Flow Statement Analysis

Fund flow statement has following objectives:
1. It pinpoints the mobilization of resources and the further utilization of resources.
2. It highlights the financing of the general expansion of the business firms.
3. It exemplifies the utilization of debt finance in the structure of financing.
4. It portrays the relationship between the financing, investments, liquidity and dividend decision of the firm during
the given point of time.
Steps in the Preparation of Fund Flow Statement
1. Statement or schedule of Changes in Working Capital: Working Capital means the excess of current assets
over current liabilities. Statement of changes in working capital is prepared to show the changes in the
working capital between the two balance sheet dates. This statement is prepared with the help of current

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assets and current liabilities derived from the two balance sheets. As, Working Capital = Current Assets
Current Liabilities. A typical form of statement or schedule of changes in working capital is as follows:
Statement of Schedule of Changes in Working Capital
Effect on Working Capital
Particulars
Previous Year Current Year Increase
Decrease
Current Assets:
Cash in hand
Cash at bank
Bills receivable
Sundry Debtors
Temporary Investments
Stocks/Inventories
Prepaid Expenses
Accrued Incomes
Total Current Assets
Current Liabilities:
Bills Payable
Sundry Creditors
Outstanding Expenses
Bank Overdraft
Short-term Advances
Dividends Payable
Proposed Dividends*
Provision for Taxation*
Total current Liabilities
Working Capital (CA-CL)
Net Increase or Decrease in Working Capital
*May or may not be a current liability.
2. Second step is the preparation of Non-current A/c items-Changes in the volume of Non-current A/cs have to
be prepared only in order to quantify the flow fund i.e. either sources or application of fund.
3. Calculation of Funds From Operations or Funds Lost in Operations by preparing of Adjusted Profit & Loss A/c.
Adjusted Profit & Loss A/s as follows
Adjusted Profit & Loss Account
To Depreciation & Depletion or Amortization of
By opening Balance (of P& L A/c)
fictitious and intangible assets, such as:
By Transfer from excess provisions
Goodwill, Patents, Trade Marks, Preliminary
By Appreciation in the value of fixed
Expenses etc.
assets
To appropriation of Retained Earnings, such as:
By Dividend received
Transfers to General Reserve, Dividend
By Interest on investments
Equalization Fund, Sinking Fund, etc.
By Profit on sale of Fixed or nonTo Loss on sales of nay non-current or fixed
current assets
asset
By Funds From Operations (balancing
To dividends (Including interim dividend)
figure in case debit side exceeds credit
To Proposed Dividend (if not taken as a current
side)
liability)
To Provision for taxation (if not taken as a
current liability)
To Closing Balance (of P&L a/c)
To Funds Lost in Operations (balancing figure, in
case credit side exceeds the debit side)

4. Preparation of fund flow statement: Fund Flow Statement is a statement which indicates various sources
from which funds (working capital) have been obtained during a certain period and the uses or applications
to which these funds have been put during that period.
Funds Flow Statement
Sources
Amount Applications
Amount
Funds from operations
Funds lost in Operations
Issue of Share Capital
Redemption of preference share capital
Issue of Debentures
Redemption of Debentures
Raising of long-term loans
Repayment of long-term loans
Receipts from partly paid shares, called up
Purchase on non-current (fixed) assets
Sale of non-current (fixed) assets
Purchase of long term investments
Non-trading receipts such as dividends
Non trading payments
Sale of long term investments
Payment of dividends
Net Decrease in Working Capital
Payment of Tax
Net increase in working capital

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Q9. What is cash flow statement? Discuss Accounting Standard -3 with regard to preparation of cash flow
statement.
(OR)
Since everything has some utility, analyze the cash flow statement analyses and explain its various utilities.
(OR)
Discuss the procedure of determining cash provided by operating activities. Give suitable example to illustrate
your answer.
Ans. The cash flow statement is being prepared on the basis of an extracted information of historical records of the
enterprise. Cash flow statements can be prepared for a year, for six months, for quarterly and even for monthly. The
cash includes not only means that cash in hand but also cash at bank.
The following are the main motives of preparing the cash flow statement:
1. To identify the causes for the cash balance changes in between two different time periods, with the help of
corresponding two different balance sheets.
2. To enlist the factors of influence on the reduction of cash balance as well as to indicate the reasons though
the profit is earned during the year and vice-versa.
AS-3 Revised Cash Flow Statement
Cash flow statement provides information about the cash receipts and payments of an enterprises for a given period.
It provides important information that supplements the profit and loss account and balance sheet.
The statement of cash flows is required to be reported by Accounting Standard-3 (Revised) issued by the Institute of
Chartered Accountants of India in March 1997 Which replaces the 'Changes in Financial Position' as per AS-3.

Cash Flow Statement Accounting Standard-3 (Revised)

XYZ CO.
Amount
A. Cash Flow From Operating Activities
Net Profit/Loss before tax and extraordinary items
Adjustments for:
Depreciation
Less
Gain/Loss on sale of fixed assets
Add/Less
Foreign exchange
Add/Less
Miscellaneous expenditure written off
Add
Investment Income
Less
Interest
Add/Less
Dividend
Add/Less
Operating profit before working capital changes

Adjustments for:
Trade and other receivables
Inventories
Trade Payables
Cash generated from operations
Interest Paid
Direct Taxes Paid
Net Cash from Operating Activities
B. Cash Flow From Investing Activities
Purchase of Fixed Assets
Sale of fixed assets
Purchase of investments
Sale of investments
Interest received
Dividend received
Net Cash from/Used in investing Activities
C. Cash Flow From Financing Activities
Proceeds from issue of share capital
Proceeds from long term borrowings/banks
Payment of long term borrowings
Dividend Paid
Redemption of Shares
Net Cash from/used in financing activities
Net Increase/Decrease in Cash and Cash Equivalents
Add Cash and Cash Equivalents as at. (Opening Balance)
Cash and Cash Equivalents as at. (Closing Balance)

Add/Less
Add/Less
Add/Less
Less
Less
Result (-ive or +ive)
Less
Add
Less
Add
Add
Add
Result (-ve or +ve)
Add
Add
Less
Less
Less
Result (-ive or +ive)

Q10. What is a Budget? Critically explain different types of budget.

(OR)
Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing
and/ or selling commodities and services. Comment.
Ans. Budgetary Control is a system of planning and controlling the cost with the help of budgets. Budgetary control is
used to ensure that actual results do not deviate from the planned course more than necessary. Budgetary control is
defined as a system which estimated all the operations and output in advance and comparing the same with actual
result for controlling purpose. The process starts with preparation of budget relating to various activities and ends
with taking up various steps in case actual figures differ from budgeted figure.
Tool of management used to plan, carryout and control the operations of the business.

Coverage

Capacity

Condition

Period

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Budget

Functional
Budgets

Fixed
Budgets

Basic
Budgets

Long Term
Budgets

On the basis of coverage

1. Functional budget. The functional budget is a budget which relates to any of the functions performed by an
organization like sales, production, cash, research and development etc. The functional budgets which are generally
prepared by undertaking are as follows:
a. Sales budget
b. Production budget
c. Material budget
d. Direct Labour budget and personal budget
e. Manufacturing overhead budget
f. Selling and Distribution overhead budget
g. Office and Administration overhead budget
h. Plant utilization budget
i. Capital utilization budget
j. Research and development budget
k. Cash budget
l. Advertisement budget
2.
Master budget. Master budget is a summary of all the functional budgets. A Master budget is the summary
budget incorporating its components functional budgets and which is finally approved, adopted and employed.
Master budget summarizes the functional budget to produce a budgeted profit and loss account and budgeted
Balance budget in casual form for preparing one report.

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On basis of Capacity
1. Fixed Budget. The ICMA terminology defines fixed budget as, a budget which is designed to remain unchanged
irrespective of the volume of output or turnover attained.
Fixed Budget is defined as budget which remains unchanged irrespective of volume of output or turnover
attained. This budget is drawn for one level of activity. This budget does not provide change in expenditures arising
out of change in the anticipated conditions and activities. Therefore this budget is useful only when the actual level of
performance corresponds to budgeted level of performance. Fixed Budget does not provide meaningful ground for
comparison and controlling tool for the management.
2. Flexible Budget. Flexible Budget is defined by the ICMA terminology as a budget which by recognizing the
difference in behavior between fixed and variable costs in relation to fluctuations the difference in behavior between
fixed and variable costs in relation to fluctuations in output, turnover or other variable factors such as number of
employees, is designed to change appropriately with such fluctuation.
Flexible budget can be applied at every level of capacity. This budget varies according to change in output
that is why this budget is known as flexible budget. In these budget overheads expenses are set at. One particular
level that they can very according to change in almost every capacity level. This budget serves as useful tool for
comparison and controlling purpose.
On basis of condition

1. Basic Budget. The budget which is prepared for use unaltered for the long period of time is known as basic budget.
The ICMA terminology defines a basic budget as a budget which is established for use unaltered over a long period
of time. This budget does not take into consideration current condition, changes and is suitable only under set or
standard conditions. Basic budget is more useful for the top level management in formulating policies.
2. Current Budget. The ICMA terminology defines a current budget as a budget which is established for use over a
short period and is related to the current condition. This budget can be defined as a budget which is prepared for
short period of time and for current condition. This budget takes into consideration current conditions prevailing in
the business. Current budget motivates the people in preparing the budget as they are sure of attaining the
objectives of the budget.
On the basis of period
1. Short term Budget. The budget prepared for the short period that is less than one year is known as short term
budget. Sometimes they are prepared for a month also. Short term budget is suitable for those type of activities. The
trend of which is difficult to forecast for long periods. Cash budget and material budget are the examples of short
term budget.
2. Long Term Budget. The budget prepared for long period i.e. more than one year is known as long term budget.
These budget are prepared to help the management in business forecasting and in future planning. Research and
development budget, Capital expenditure budget are the main examples of long term budget.

Q11. Standard costing is a tool, which replaces the bottle neck of the historical costing. Give some suggestions to
support the above statement.
(OR)
Standard is nothing but an expected or anticipated performance in normal situations. Do you think the process of
setting the revenue standards is same as the cost standard ?
(OR)
As standard is a relative expression, one has to determine for oneself what one deems appropriate as a standard.
Discuss.

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Ans. Standard costing is a predetermined cost which is estimated from managements standard of efficient operation
and the relevant necessary expenditure.
The following are the main advantages of standard costing:
1. Standard costing is a valuable aid to management in formulating price and production policies and in performing
managerial functions.
2. Human beings often work hard to achieve standards that are within their reach; therefore, setting up of such
standards will almost automatically mean greater efficiency in operations. Further, almost everyone will think in
terms of setting the targets and of achieving them. This will be specially so if the system of rewards and punishment
is also geared to the results.
3. Even for valuation of inventory, standard cost should be the proper basis. If actual costs are high only because
there has been a wastage of resources, it is not proper to capitalize those losses by including them in the value of
inventory. Nothing becomes more valuable simply because of wastage and, therefore, inventory values should better
be determined on the basis of standard costs.
4. In short, one can say that if a firm practices standard costing on proper lines, i.e., standards are themselves
determined in a way that will not impose too great a burden on the worker or other employees or the firm, it may
infuse in the minds of the staff a desire to achieve the standards and thus show greater efficiency.
5. At every stage of setting the standards, simplification and standardization of productions, methods and operations
are effected and waste of time and material is eliminated. This assists in managerial planning for efficient operation
and benefits all the divisions of the concern.

6. Costing procedure is simplified. There is a reduction in paperwork in accounting and less number of forms and
records are required. There is considerable saving in clerical time and expenditure, leading to reduction in the cost of
the costing system.
7. This system facilitates delegation of authority and fixation of responsibility for each department or individual.
8. Where constantly reviewed, the standards provides means for achieving cost reduction. This is attained through
improved quality of products, better materials and men, effective selection and use of capital resources, etc.
9. Standard costs assist in performance analysis by providing ready means for preparation and interpretation of
information.
10. This facilitates the integration of accounts so that reconciliation between cost accounts and financial accounts
may be eliminated.
Limitations of Standard Costing
Standard costing has certain limitations. These are the following:
1. Establishment of standard costs is difficult in practice. Even if the particular type of standard to be used has been
properly defined, there is no guarantee that the standard established will have the same tightness or looseness as
envisaged throughout the organization.
2. In course of time, the standards become rigid, it is not always possible to change standards to keep pace with
frequent changes in the manufacturing conditions. Frequent revision of standards is costly and creates problems.
3. Standard costing is an expensive technique for a small concern.
4. It is difficult to set accurate standard costs. Improperly set standards may do more harm than good.
5. It is not easy to distinguish variances as controllable or uncontrollable.
6. Since business conditions are changing, the standards are to be revised frequently. Revision of standards is a
tedious and costly process.
Q.12 Examine various kinds of managerial decisions.
Ans. Various kinds of managerial decisions are:
Make or Buy Decisions
The firms, which are routinely in need of spares, accessories are bought from the outsiders instead of any production
or manufacturing, though the requirement is at regular intervals. Most of the automobile manufacturers are usually
buying the components from outside instead of producing them on their own. The Maruti Udyog Ltd. had given a
contract to the Nettur Technical Training Foundation, Bangalore to design the tool for the panel and to manufacture
regularly to the tune of the orders. The leading four wheeler manufacture in India is buying the panel from the NTTF
on contract basis in stead of manufacturing.

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Own or Hire
Marginal costing helps in taking the decisions regarding the capital investment. Marginal costing helps to take the
decisions for owning the capital asset or hire the asset. Example: If company X needs a machinery for a specific
project and after that project there is no use of the machinery then company can decide to hire the machinery for
that project. A company has its own trucks for transporting raw materials and finished products from one place to
another. It seeks to replace these trucks by keeping public carriers. In making this decision, of course, the
depreciation of the trucks is not to be considered but the management should take into account the present
expenditure on fuel, salary to drive and maintenance.
Shut Down or Continue
Marginal costing technique helps in deciding the profitability of a product. It provides the information in a manner
that tells us how much each product contributes towards fixed cost and profit; the product or department that gives
least contribution should be discarded except for a short period. If the management is to choose some product out of
the given ones, then the products giving the highest contribution should be chosen and those giving the least
should be discontinued.

Q.13 Pricing plays a very important role in the marketing strategy of a firm and a significant one in the overall
success. Evaluate the statement.
Ans. Pricing which is apart of overall marketing strategy plays a very critical role in the success of a company as it is
able to increase the profitability and or increase the market share.
Objectives of Pricing Decisions
The following are the key objectives of pricing decisions:
1. The important pricing objective is to exploit the firms competitive position in the market place.
2. The products are priced in such a way that sufficient resources are made available for the firms expansion,
developmental investment, etc.
3. Some companies adopt the main pricing objectives so as to maintain or to improve the market share towards the
product. A good market share is a better indication of progress.
4. The pricing objectives may be to meet or prevent competition.
5. It also prevents price war amongst the competitors.
6. Product Line pricing to maximize long-term profits is another price objective.

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Types of Pricing Decisions

The following are the key types of pricing decisions:
1. Perceived Value Pricing Method: In this method, prices are decided on the basis of customers perceived value.
They see the buyers perceptions of value, not the sellers cost as the key indicator of pricing. They use various
promotional methods like advertising and brand building for creating this perception.
2. Value Pricing Method: In this method, the marketer charges fairly low price for a high quality offering. This method
proposes that price represents a high value offer to consumers.
3. Going Rate Pricing: In this method, the firm bases its price on the average price of the product in the industry or
prices charged by competitors.
4. Sealed Bid Pricing: In this method, the firms submit bids in sealed covers for the price of the job or the service. This
is based on firms expectation about the level at which the competitor is likely to set up prices rather than on the cost
structure of the firm.
5. Psychological Pricing: In this method, the marketer bases prices on the psychology of consumers. Many consumers
perceive price as an indicator of quality. While evaluating products, buyers carry a reference price in their mind and
evaluate the alternatives on the basis of this reference price. Sellers often manipulate these reference points and
decide their pricing strategy.
6. Odd Pricing: In this method, the buyer charges an odd price to get noticed by the consumer. A typical example of
odd pricing is the pricing strategy followed by Bata. Bata prices are always an odd number like 899.99 etc.
7. Geographical Pricing: This is a method in which the marketer decides pricing strategy depending on location of the
customer like domestic pricing, international pricing, third world pricing, etc. Multinational firms follow such a pricing
strategy as they operate in different geographic locations.
8. Discriminatory Pricing: This is a method is which the marketer discriminates his pricing on certain basis like type of
customer, location and so on. It occurs when a company sells product or service at two or more prices that do not
reflect a proportional difference in the costs. One can sell at different prices in different segments. Different prices
for different forms of the same product can sell the same product at two different levels depending on the image
differences.