Accounting for Manager

Assignment - A
Answer 1

In the Books of Mr. Walter

Journal
Date/ Particulars LF Debit ($) Credit ($)
Ref
a) Rent a/c Dr. 6000
Walter’s capital/Drawings a/c Dr. 6000
To cash/bank a/c 12000
b) Prepaid Insurance a/c Dr. 500
Walter’s Capital/Drawings a/c Dr. 500
To cash/bank a/c 1000
c) Walter’s capital/Drawings a/c Dr. 2000
To cash/bank a/c 2000
d) Walter’s capital/drawings a/c Dr. 3000
To cash/bank a/c 3000
e) Salary a/c Dr. 500
To salary payable a/c 500
f) Depreciation a/c Dr. 100
To Furniture a/c 100
g) Interest on capital a/c Dr 4500
To Walter’s Capital a/c. 4500
h) Walter’s capital/drawings a/c Dr. 900
To interest on drawings a/c 900
i) Interest on loan (expense) a/c Dr. 3000
To Interest payable/outstanding interest a/c 3000
j) Accrued Interest/interest receivable a/c Dr. 6000
To Interest (income) a/c 6000
k) Cash/bank a/c Dr. 1000
To commission (income) a/c 500
To commission recd in advance a/c 500
l) Brokerage receivable a/c Dr. 500
To Brokerage (income) a/c 500
Total 34500 34500
Answer 2
 Working Note 1
As only ledger balances are given we will first prepare a trial balance, before proceeding to solve the problem
Trial balance as on 31st March 2008

Working note 2
As per adjustment g) manager is entitled to a commission of 10% of net profit after charging such commission.
Assuming the net profit after charging commission is Rs 100.
The commission will be Rs. 10. So the net profit before commission would be Rs. 110 ( Rs 100 + Rs. 10)
In the problem the net profit before commission is Rs 48738. Therefore commission would be
10 X 48738 = Rs 4431
110
Answer 3
In the books of M/s Trinity Foods
Balance sheet as on 30th June 2007

Liabilities Amt Amt Assets Amt Amt

(Rs.) (Rs.) (Rs.) (Rs.)
Capital 100000 Fixed assets 25000
Furniture 25000
Reserves and surplus 47000 Investments -
Profit for the year
Secured loans - Current assets, loans 1,37000
and advances
Unsecured loans -
Cash
Current liabilities and 15000 10000
provisions Bank
77000
Sundry creditors (Ram) Sundry debtor (Rahim)
15000 50000
Misc Exp to the extent -
not written off
Total 1,62000 Total 1,62000
Note: Profit for the year is shown under reserves and surplus. Alternatively if the entity is a proprietary
concern, profit is added to the capital on the liabilities side.
Answer 4
We can comment on the profitability and liquidity position of Safal Enterprises on the basis of comparison of its
profitability and liquidity ratios for the relevant years 2006 & 2007

Profitability is a measure of operating efficiency of the firm and its ability to ensure adequate return to its share
holders. Profitability also indicates that the product is accepted by the public. Moreover, profits provide money for
repaying the debt incurred to finance the firm's resources.
Profitability ratio can be determined in terms of its relationship with sales or investments
Comments on profitability of Safal enterprises
The profit margin namely the gross profit, operating profit and net profit are with reference to sales and indicate
the amount of profit that a firm generates per rupee of sale made . They indicate the management’s efficiency in
manufacturing, administering and selling the products.
As seen from the calculations, the GP ratio, operating ratio and net profit ratio has gone up in the year 2007. This
indicates that Safal enterprises is operating efficiently. Its sales and profit both have increased in 2007 as
compared to 2006.
The return on capital employed ROCE expresses the profitability of the firm in relation to funds supplied by the
creditors as well as the owners taken together, while return on equity ROE ratio reveals how profitably the
owner's funds have been utilised by the firm.
As per the calculations both ROCE and ROE have improved in the year 2007. The ROCE has gone up from
31.25%in 2006 to about 33% in 2007. Similarly the ROE also shows an increase from 41% in 2006 to 47% in
2007
As mentioned in the problem the company in view of its growth potential, has been retaining 55% of its profit and
paying out 45% of its profits as dividend. We can see that in spite of a constant dividend Payout ratio the dividend
per share has gone up to Rs 2.64 per share in 2007 from Rs 2.21 in 2006. This is because the earnings per
share has gone up from Rs.4.92 per share in 2006 to Rs 5.87 in 2007, due to increased profits.
Thus we can conclude that the profitability of the company has improved in 2007.

Liquidity means the ability of the firm to meet its current /short term payment obligations, when they become due
for payment.
The ratios which indicate the liquidity of a firm are current ratio and liquidity ratio.
The current ratio indicates the rupee of current assets available to meet each rupee of current liability. The
higher the current ratio, the more the firm's ability to meet its current obligations and greater is the safety of funds
of short term creditors. The thumb rule is to have a current ratio of 2:1.
The quick ratio or liquidity ratio also known as the acid test ratio is a better indicator as it excludes inventory and
other less liquid assets as a means to repay short term obligations. The standard ratio is 1:1.
Comments on liquidity position of Safal entreprises
In case of Safal enterprises the current ratio has slightly gone down from 3.42 to 3.01 in 2007. However, it
is much above the standard ratio of 2:1. Too high a current ratio is also not advisable, as it indicates slack
management practices in the form of excess inventories and poor credit management in terms of overextended
accounts receivables.
As regards liquidity ratio of Safal enterprises, it is quite good. It has slightly gone down from 1.72 in 2006 to
1.53 in 2007. This indicates that, in fact the management is slowly moving from a conservative policy, which
means lower returns and risks to an aggressive policy to produce higher profitability and a better risk-return trade
off.
In conclusion we may say that a fall in the current ratio and quick ratio in 2007 is an indication of better
management of short term funds by Safal Enterprises, in view of its future growth potential.
Answer 5
Note: (There seems to be a typo error as inventory is missing in the current assets. It is assumed that
Inventory value of Gloria Ltd and Victoria Ltd is 93.5 and 162.45 respectively. )
With the limited information available to us namely only the balance sheet of both the companies we can compare
the financial positions of Gloria Ltd and Victoria Ltd by calculating a couple of short term and long term solvency
ratios.

Comments:
Short term financial position
Short term financial position of both the companies can be gauged by the current ratio
and the quick ratio. The standard ratio is 2:1 and 1:1 respectively. Both the companies
have very high ratios. This means that both companies do not have any danger of short
term insolvency. However they are higher for Gloria Ltd when compared with that of
Victoria Ltd.
But one should keep in mind that very high liquidity ratios may mean that the
management is following a very conservative liquidity policy. The value of inventory of
both the companies is also very high. It is 67% of current assets in case of Gloria Ltd and
65% of current assets in case of Victoria Ltd. One of the reasons for heavy inventory
could be that they both have a longer production cycle. One optimistic view could be that
their sales are growing phenomenally and they do not want to miss out on future
opportunities. The pessimistic view could be that demand for their product is declining
leading to mounting stocks. In absence of the sales and profitability figures, it is difficult
to conclude whether the situation is good or bad. But taking the optimistic view we may
say that the short term financial position of both the companies is good. It is slightly
better in case of Gloria Ltd. In other words Gloria Ltd is more conservative than Victoria
Ltd.
Long term financial position
The Proprietary ratio is the test of long term financial and credit strength of a business. It
shows how much of the total assets are financed out of proprietor’s funds. Capital gearing
ratio complements the proprietary ratio. It shows the relationship between owned capital
and borrowed capital (which is entitled to a fixed rate of return).
In case of Gloria Ltd out of every rupee of assets employed 80 paise is contributed by the
equity share holders. In case of Victoria Ltd the shareholders have contributed 58 paise
for every rupee of asset employed. Since Gloria Ltd is having a higher proprietary ratio it
is financially more sound than Victoria Ltd.
A comparison of the capital gearing ratio of both the companies reveals that Victoria Ltd
has more debt content in its capital structure than Gloria Ltd.
Gloria Ltd which has a low capital gearing ratio will be viewed as favourable from long
term creditors point of view. As the debt content in the capital structure is low, lenders
will be willing to lend money. However, they would like to know about the profitability of
the company, which determines the repaying capacity, before lending. But from
shareholders point of view, it is losing out on the opportunity of trading on equity. Hence,
it would mean low earnings per share for the shareholders.
Victoria Ltd on the other hand is highly geared and lucrative investment haven from the
shareholders’ point of view. It would increase the return on shareholder’s funds.
However, such a company may find it difficult to bear the heavy fixed interest burden
during a lean period.
In conclusion we may say that both the companies have sound financial position. But, we
need to know the sales potential and profitability of both the companies, before deciding
which company is in a better position, as high ratios and low ratios have both positive
and negative consequences, from the perspective of lenders and owners.
 Assignment - B
Answer 1
As per working note the cost of raw material purchased is Rs. 1,10000
Working note
The missing figure of cost of raw material purchased can be determined by making a backward calculation from
the given prime cost
Particulars Amount (Rs.) Amount (Rs.)
Opening stock of raw material 0
Add Purchase of raw material (balancing figure) 110000
(raw material consumed +closing RM – exps on purchases)
Add: expenses on purchases (given) 10000
Less: Closing stock of raw material (given) -20000
Raw material consumed (prime cost-direct labour) 100000
Direct labour cost (given) 100000

Prime cost (given) 200000

Answer 2
Process A a/c

Unit Amount Unit Amount

tonne (Rs.) tonne (Rs.)
s s
To material 500 62500 By Normal loss 25 2000
(WN 1)
To wages 14000 By abnormal loss 60 9916
(WN 2) (WN2) (WN3)
To manufacturing 4000 By Process B 415 68584
overheads
(WN3)
Total 500 80500 Total 500 80500
Working notes
1. Normal loss : Given it is 5% of input ie…5%of 500 tones = 25 tonnes
This is sold as scrap @ Rs. 80 per ton i.e. 25 tonnes X Rs. 80 = Rs. 2000
2. Abnormal loss = Normal output – Actual output
(where normal output = input –Normal loss) i.e. 500tonnes -25 tonnes = 475 tonnes
= 475 tonnes – 415 tonnes
= 60 tonnes
 3. Normal output = 475 tonnes
Normal cost = Rs. 80500 – Rs. 2000
= Rs. 78500
Therefore cost per unit = Normal output/ Normal cost
= 78500/475
= Rs. 165.263
Value of abnormal loss = 60 tonnes X Rs. 165.263
= Rs. 9915.78 r/off to Rs. 9916
Value of output transferred to Process B = 415 tonnes X Rs. 165.263
= Rs. 68584.14 r/off Rs. 68584

Answer 3 a)
Given total sales is $ 600000 per month of which
Ambience 33 1/3 % =$ 200000
Luxury 41 2/3 = $ 250000
Comfort 16 2/3 = $ 100000
Lavish 8 1/3 = $ 50000
Statement showing brand wise sales, operating cost and weighted P/V ratio
Ambience Luxury comfort lavish Total
a. Sales ($) 200000 250000 100000 50000 600000
b. operating cost 120000 170000 80000 20000 390000
c. Contribution (a-b) 80000 80000 20000 30000 210000
P/V ratio (c /a)% 40% 32% 20% 60% 35%
Operating costs are taken as follows
Ambience 60% of selling price
Luxury 68% of selling price
Comfort 80% of selling price
Lavish 40% of selling price
Overall Breakeven point = Total fixed costs
Weighted P/V ratio
= $ 159000/35%
= $ 454286
Answer 3 b)
The sales of each brand based on the revised sales mix will be
Ambience 25 % =$ 150000
Luxury 40% = $ 240000
Comfort 30% = $ 180000
Lavish 5% = $ 30000
Statement showing brand wise revised sales, operating cost and weighted P/V ratio
 Ambience Luxury comfort lavish Total
a. Sales ($) 150000 240000 180000 30000 600000
b. operating cost 90000 163200 144000 12000 409200
c. Contribution (a-b) 60000 76800 36000 18000 190800
P/V ratio (c /a)% 40% 32% 20% 60% 31.8%
Newl Breakeven point = Total fixed costs
New weighted P/V ratio
= $ 159000/31.8%
= $ 500000
 Case Study

Answer
Some key financial ratios are calculated to enable answering the questions following the case study
Name of ratio Formula March 05 March 06
Operating profit ratio % PBIT x 100 1110.33 x 100 1614.31 x 100
sales 7078.06 9284.84
15.69% 19.38%
Net profit ratio % PAT x 100 760.34 x 100 1104.60 x 100
sales 7078.06 9284.84
10.74% 11.89%
ROCE % (PAT + Int) X 100 (760.34+.67) x 100 (1104.60 +.34) x 100
Capital employed (4447.16 +1229.17) (5349.79 +1469.44)
13.41% 16.20%
ROE % PAT X 100 760.34 x 100 1104.60 X 100
shareholders funds 4447.16 5349.79
17.10% 20.65%
Dividend payout ratio% Dividend x 100 288.64 x100 461.5 x 100
PAT 760.34 1104.6
38.00% 41.78%
Debt equity ratio 1229.17 1469.44
long term debt 4447.16 5349.79
shareholders eqty 0.28 times 0.28 times
Interest coverage ratio PBIT 1481.66 1996.87
Interest 0.67 0.34
2211 times 5873 times
Current ratio Current assets 3607.63 6550.06
Current liabilities 4284.64 7773.20
0.84 times 0.84 times
Quick ratio Quick assets 1559.33 4406.19
Current liabilities 4284.64 7773.20
0.36 times 0.57 times
Stock turnover ratio Sales/cl. inventory 7078.06 9284.84
224.70 274.47
31.50 times 33.82 times
Fixed asset turnover ratio Sales/ net fixed assets 7078.06 9284.84
1205.64 1230.77
5. 87 times 7.54 times
Capital turnover ratio Sales/capital 7078.06 9284.84
 employed 5676.33 6819.23
1.25 times 1.36 times

Note.:
a) In absence of information about capital employed and fixed assets for the year 2004 average capital
employed and average fixed assets is not used in the computation of ROCE, Capital turnover ratio
and Fixed asset turnover ratio.
b) In absence of value of cost of sales, sales figures are used for inventory turnover ratio, capital
turnover ratio and fixed asset turnover ratio.
Answers
1. The first for ratios, namely operating profit , net profit , ROCE and ROE indicate that the company ‘s
profitability has increased in the year ended March 2006 when compared with the figures for March
2005. This shows that with increase in sales the profits have also gone up. The company has truly
transformed from being a price warrior to a price leader. Due to the efforts made towards technology
development and product development, the company has also managed to cut down its operational
costs thereby leading to increase in profit.
The return on capital employed and the return on equity has also improved in year ended March
2006. The company has distributed this increased earnings to the share holders. This is witnessed by
an increase in the dividend payout ratio from 38% of earnings in 2005 to close to 42% in 2006.
Bajaj Auto has successfully increased its sales of motor cycles to attain a market share of 31% in this
segment. It is also increasing its brand presence in other countries.
However, in order to sustain its increased profitably, the company can focus on the following options:
a) Focus on high margin products in order to retain and enhance its operating margin.
b) Tap the export market more efficiently, by creating technologically superior vehicles, with lesser
carbon emission
c) Target the youth of the country and also the female population by giving trendy two-wheelers
d) Make motor cycles and two wheelers for the different classes of masses, i.e. entry level for the
lower and middle class and premium products for the upper class.
e) Expand its dealer and distribution network to tap the huge potential in the rural areas.
2. The current ratio and the liquidity ratio are indicative of the attractiveness of the company for the short
term lenders. Though the standard ratio is 2:1 and 1:1 respectively, it varies with the nature of
business. In case of Bajaj the current ratio is more or less constant at 0.84:1 in both the years. The
quick ratio has increased from 0.36 to 0.5t times in 2006. The fact that the company’s sales are
increasing and also because of the nature of the business (two wheeler sales are through dealers and
distributors with upfront payment from customers) there is no reason for worry. Also the fact that it has
investments to the tune of Rs 5273 crores and Rs.6865 crores in 2005 and 2006, respectively is an
indication that Bajaj Auto is a cash rich company. Hence the lenders both short term and long term
will have no problem in extending credit to it.
The long term lenders basically look at the debt equity ratio and interest coverage ratio of a company
in order to guage the repayment capacity of the borrower. In case of Bajaj Auto the debt equity is
quite low i.e. .. for every rupee of its own funds, the borrowed funds are only 28 paise. A capital
intensive company can have a debt equity of as high as 2:1 ratio. Hence Bajaj Auto will be a favourite
destination for the long term lenders as well. The lender’s comfort level is enhanced by the fact that it
has a very high interest coverage ratio. The company can easily repay its debts out of its pretax
profits.
3. How efficiently the firm is utilizing its resources can be identified by computing and comparing the
various activity ratios. Higher the activity ratios means better is the utilization of resources of the
company. A look at the stock turnover ratio, fixed asset turnover ratio and capital turnover ratio for
both the years 2005 and 2006 reveals an ascending trend. This proves that the company is making
 efficient use of its resources.

Part - C

Mark 'True' or 'False':

1. Accounting is a language of business. True

2. Accounting is a service function. True

3. Accounting records only those transactions and events which are financial character. True

4. Drawings reduce capital. True

5. Capital is increased by profit and decreased by losses. True

6. The system of recording transaction on the basis of their two old (it should be fold)aspects is called

double entry system. True

7. Purchases made from B for cash should be debited to B. False

8. Earnings of revenue means increase in Cash/Bank balance. False

9. The balance of an account is always known by the side which is shorter. False

10. The return of goods by a customer should be debited to Returns Inwards Account. True

11. Goods bought for resale are referred to as Stocks. True

12. If the business has any liability, the proprietor's capital must be more than the total assets. False

13. Withdrawal of money by the owner is an expense for the business. False

14. Ledger is called the book of final entry. True

15. Cash book is used to record all receipts and payments of cash. True

16. Sales book is used to record all credit sales. True

17. The journal is not a book of original entry. False

18. Goodwill is an intangible asset. True

19. Salaries & Wages appearing in the trial balance are shown on the liabilities side of the balance sheet.

False

20. The profit & loss account is one of the financial statements. True

21. Share having preferential right as to dividend and repayment of capital are termed as equity share

capital. False

22. Shares which are not preference shares are called equity shares. True
23. The amount of share premium received by the company is shown under the heading reserves &

surplus in the company's balance sheet. True

24. Debenture holders are not the member of the company. True

25. There are no legal restrictions, similar to shares, for issue of debentures at discount. True

26. Fixed cost per unit remains constant. False

27. Direct cost is that cost which can not be easily allocated to cost units. False

28. Selling overheads form a part of cost of production. False

29. Manufacturing and administrative overheads are different. True

30. Total fixed cost remains unaffected by the change in volume of output. True

31. Variable cost per unit remains fixed. True

32. In chemical industries unit costing is used. False

33. The output of a process is transferred to next process. True

34. Good units bear the abnormal loss arising in the process costing. False

35. Excess of pre-estimated loss over actual loss is known as abnormal loss. False

36. Marginal costing is a method of ascertaining cost. False

37. A firm earns no profit or incurs no loss at BEP. True

38. Margin of Safety implies 'Break Even Point'. False

39. In marginal costing, stock is valued at fixed costs. False

40. Sales below BEP mean profit. False