SMU ASSIGNMENT OF MCA 3RD SAM ASSIGNMENT OF FINANCIAL AND NANAGEMENT ACCOUNTING

ASSIGNMENT OF FINANCIAL AND NANAGEMENT ACCOUNTING

Question No. 1. Explain the process involved in accounting. What are the objective of accounting?

Ans. The following are the process of accounting:

1.         Identifying the transactions and events – This is the first step in the accounting process. It recognizes the transactions of financial character that are essential to be recorded in the books of accounts. When money, goods, or services are transferred from one person or account to another person or account, it is known as a transaction.

2.        Measuring – This means expressing the value of events and transactions in terms of money (Rupees in India). Measuring has become an important challenge for the accountants and the business entities. This is due to the following reasons:

a)      Changing nature of business activities – The complexity of today’s business models has also changed the way accounting needs to be done. Technology enabled services like web designing and financial services like wealth management are the thriving businesses. The nature of such business activities is such that it becomes difficult to measure the transactions in terms of money.

b)      Business crossing international borders – All business entities today, whether small or big, have transactions crossing the borders. They have spending or earnings and payables and receivables in foreign currencies. Measuring such transactions is a big challenge as they have to be translated into home currency before they can be recorded

3.       Recording – The next process after measuring the transactions is the recording. It deals with recording of identified transactions and events in a systematic manner in the books of original entry in accordance with the principles of accountancy. The book in which transactions are first recorded is called the Journal.

4.       Classifying – All the recorded transactions do not make any sense unless they are processed and presented in a manner that is useful to the intended user. The functions of classifying and summarizing serve this purpose. Classifying deals with periodic grouping of transactions of similar nature. For this purpose, a separate book called Ledger is maintained. It is a book where transactions of similar nature are maintained at one place. The transactions that appear in the books of original entry (Journal) are transferred to appropriate places in the book of final entry (Ledger) by a process called Posting. For example, all purchases of goods made for cash or on credit on different dates are brought to purchases account.

5.       Summarizing – The end objective of any business is to make profit. To know if this objective was achieved, it is necessary to summarize all the transactions that occurred and are recorded. This requires analyzing total expenses or losses, total income or gain, total assets, and total liabilities. This function involves the preparation of financial statements such as income statement, balance sheet, statement of changes in financial position, and cash flow statement.

6.       Analyzing – It deals with the establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Its purpose is to identify the financial strengths and weaknesses of an enterprise. It involves using various tools like Ratio Analysis, Fund Flow Analysis, Cash Flow Analysis, etc. (discussed in subsequent units).

7.       Interpreting – This step explains the importance of all the data’s in a manner that the end users of financial statements can make a meaningful judgment about the financial position and profitability of the business.

8.       Communicating – It deals with communicating the analyzed and interpreted data in the form of financial reports or statements to the users of financial information. For example, Profit and Loss account, Balance Sheet, Cash Flow and Funds Flow statement, Auditor’s report, etc. It is an important part of Accounting to decide what to communicate, how to communicate, how much to communicate, when to communicate, and in what form to communicate.

Objective of Accounting

Accounting involves the following function and objectives:

·        Accounting assists in systematic recording of all business events or transactions.

·        Accounting measures the financial performance of an enterprise.

·        Accounting facilitates reporting of results to both internal and external users. The management requires information for internal purpose at various levels of operations.

·        Accounting is required to fulfil the statutory requirements of various regulatory bodies such as Registrar of Companies, Securities Exchange Board of India (SEBI) income tax authorities, and the Government.

·        Accounting helps in internal control by holding the concerned persons responsible for any errors, lapses, or under performances.

Question. No. 2. Briefly explain the role of management accounting. Also describe the function of management accounting.

Ans. Roles of management accounting 

Management accounting helps the management in the following:

·        It guides the management to fix most appropriate objectives for the company and also ensures that the objectives set at different levels are aligned.

·        It helps in developing alternative courses of action.

·        It provides data or information about the alternative courses of action.

·        It provides tools to evaluate the alternative courses of action.

·        It guides the management in implementing the best course of action.

·        It provides tools for performance measurement.

·        It provides information and tools for taking corrective action.

Function of management accounting

The following are the important function of management accounting.

·        Forecasting and planning – Management accounting helps in short-term and long-term forecasts of profit, capital investment and financing, sales, demand, and costs.

·        Controlling performance – Management accounting is very helpful in controlling the financial performance of an organization. It compares actual performance with operating plans and standards. It also reports and interprets the results of operations to all the levels of management.

·        Coordination – Management accountant consults various departments and is responsible for policy decisions. Co-ordination increases the efficiency of an organization.

·        Other functions – Management accounting serves in a number of other ways. It supplies useful information to different functional authorities. It provides accounting information and advice for price determination and pricing decisions. It also helps in making certain strategic decisions, decisions regarding seasonal or temporary suspension of production, make or buy decisions, replacement decisions, etc.

Question.No.3. What is fund flow analysis? What are the objectives of analyzing flow of fund?

Ans. Analysis of flow of funds

It refers to the process of understanding the reasons that were responsible for the change in the working capital. It involves identifying the sources and applications of funds.

Objectives of analyzing flow of funds

The analysis of flow of funds is undertaken with the objective of understanding the following:

·        What have been the sources of working capital during the current year?

·        What have been the applications of working capital during the current year?

·        Were the long-term investments financed using the long-term sources of finance?

·        How much (what percentage) of working capital has been funded using the permanent (long-term) sources of finance?

Question.No.4. What is cash flow statement and how is the cash flow statement subdivided?

Ans. Cash flow analysis is an important tool of financial analysis. It is the process of understanding the change in position with respect to cash in the current year and the reasons responsible for such a change. Incidentally, the analysis also helps us to understand whether the investing and financing decision taken by the company during the year are appropriate are not.

Cash flow analysis is presented in the form of a statement. Such a statement is called a cash flow statement.

Cash flow statement subdivided:

The preparation of cash flow statement is similar to the preparation of fund flow statement. It requires the identification of the sources of cash and the uses of cash.

A source of cash is a transaction which brings an inflow of cash. An application of cash is a transaction which leads to an outflow of cash.

Following is the list of transactions that results in a source of cash or application of cash.

Sources of cash:

·        Cash from operations

·        Proceeds of issue of

a)      Equity shares

b)      Preference shares

·        Proceeds of issue of

a)      Debentures

b)      Bonds

·        Raising long-term debts from banks and financial institutions

·        Raising mortgage loans (long-term)

·        Sale of assets

a)      Tangible assets like land, buildings, equipment’s, machinery, vehicles, etc.

b)      Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.

·        Sale of investments like shares, bonds, debentures, etc.

Applications or uses of cash:

·        Cash lost in operations (adjusted net loss

·        Buy back of equity share

·        Redemption of redeemable preference shares

·        Redemption of redeemable bonds or debenture

·        Repaying of long-term debts from banks and financial institutions

·        Repaying of mortgage loans (long-term)

·        Purchasing of assets

·        Tangible assets like land, buildings, equipment’s, machinery, vehicles, etc.

·        Intangible assets like patent rights, copyrights, brand names, goodwill, licenses, etc.

·        Purchasing of investments like shares, bonds, debentures, etc.

It may be noted that the sources of cash increase the cash balance and applications of cash decrease the cash balance.

Question.No.5. What are the merits of budgets?

Ans. The merits of budgetary control are as follows:

1. It aims at the maximization of profits.

2. Budgets fix the goals and targets without which operations lack direction.

3. It reduces the cost and eliminates inefficiencies.

4. It facilitates to make ordered effort and brings about overall efficiency in the results.

5. It ensures that the capital employed at a particular level is kept at a minimum level.

6. It enables the management to decentralize responsibility without losing control.

7. It is a good guide to the management for making future plans. Based on budgetary control, realistic budgets can be drawn.

8. It facilitates an intelligent and planned forecast of the future.

9. It acts as a safety signal for the management. It prevents all types of wastages.

10. It brings to light the inefficiencies and weaknesses on comparing actual performance with the budget. Management can take timely remedial measures.

11. It avoids financial crisis since budget provides advance information.

12. It is a guide to the management in the field of research and development in the future.

Question.No.6. Describe the essential features of budgetary control.

Ans. Essential Features of Budgetary Control

An effective budgeting system should have essential features to get the best results. In this direction, the following may be considered as essential features of an effective budgeting.

·        Business policies defined – The top management of an organization should have an action plan for every activity and department. Every budget should reflect the business policies formulated from time to time. The policies should be precise, clearly defined, and the same must be communicated to the persons involved in the execution.

·        Forecasting – Business forecasts are the foundation of budgets. Time and again, discussions should be arranged to derive the most profitable combinations of forecasts. As far as possible, quantitative techniques should be used while forecasting.

·        Formation of budget committee – A budget committee is a group of representatives of various important departments in an organization. The functions of the committee should be specified clearly. The committee plays a vital role in the preparation and execution of the budget estimated. It brings co-ordination among other departments. It aids in the finalization of policies and programs. Non-financial activities are also considered to make it a wholesome affair.

·        Accounting system – To make the budget a successful document, there should be proper flow of accurate and timely information. The accounting adopted by the organization should be proper and must be fine-tuned from time to time.

·        Organizational efficiency – To make the budget preparation and its subsequent implementation a success, an efficient, adequate and the best organization is necessary. A budgeting system should always be supported by a sound organizational structure. There must be a clear cut demarcation of lines of authority and responsibility. There must also be a delegation of authority from top to bottom line.

·        Management philosophy – Every management should set a healthy philosophy while opting for the budget. Management must wholeheartedly support the activities which develop a budget. Encouragement should flow from the top management. All the members must be involved to make it a workable preposition and a dream-driven document.

·        Reporting system – Proper feedback system should be established. Provision should be made for corrective measures whenever comparative measures are proposed.

·        Availability of statistical information – Since budgets are always prepared and expressed in quantitative terms, it is essential that sufficient and accurate relevant data is available to each department.

·        Motivation – Since budget acts as a mirror, the entire organization should become smart in its approach. Every employee, both executive and non-executive should be a part of the overall exercise. Employees should be persuaded than pressurized to appreciate the benefits of the budgets so that the fruits can be shared by all the members of the organization.

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