23105373

QP CODE: 23105373 Reg No : .....................

Name : .....................

B.COM DEGREE (CBCS) REGULAR / REAPPEARANCE EXAMINATIONS, MARCH

2023
Sixth Semester
CORE - CO6CRT20 - MANAGEMENT ACCOUNTING
(Common to all B.Com Degree Programmes)
2017 Admission Onwards
EF355BA9
Time: 3 Hours Max. Marks : 80
Instructions to Private candidates only: This question paper contains two sections. Answer SECTION I
questions in the answer-book provided. SECTION II, Internal Examination questions must be answered in the
question paper itself. Follow the detailed instructions given under SECTION II
SECTION I
Part A
Answer any ten questions.
Each question carries 2 marks.

1. Who is a Management Accountant ?

2. What is Financial Planning ?

3. Write a short note on Trend Analysis.

4. Calculate trend percentages from the following taking 2015 as base year. Also interpret
the results.
Year 2015 2016 2017 2018 2019
Sales (Rs.) 2,50,000 3,20,000 3,50,000 4,30,000 5,00,000

5. Define Ratio Analysis.

6. What are Current Liabilities?

7. Write a short note on Debt- Equity Ratios?

8. Calculate Net Profit Ratio:

Net Profit 1,00,000
Net revenue Operations 8,00,000

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9. What do you mean by the term 'Fund'?

10. When does flow of fund takes place?

11. What is meant by Cash Flow from Extraordinary item ? Give an example.

12. Calculate Cash from Operation from the following information :

Net Profit Rs.3,20,000

Opening Stock Rs.60,000
Closing Stock Rs.80,000
(10×2=20)
Part B
Answer any six questions.
Each question carries 5 marks.

13. What are the objectives of Management Accounting ?

14. Explain the uses of Financial Statements.

15. Explain the limitations of Financial Statement Analysis.

16. What are the ratios used for analysing Capital structure of a company?

17. From the following particulars, prepare:

( 1) Stock Turnover Ratio (2) Fixed Assets Turnover Ratio
(3) Debtors Turnover Ratio (4)Creditors Turnover Ratio
(5)Debt Collection Period (6)Debt Payment Period

(Rs in ‘000)
Sales 17,874
Sales Returns 4
Other Income 53
Cost of Sales 15,440
Administration expense 1,843
Depreciation 63
Interest expenses 456
Purchases 15,000
Purchase Return 5
Debtors 10,000
Bills receivable 2,000
Creditors 5,000
Bills payable 3,000

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 Opening stock 4,000
Closing stock 5,000
Fixed Assets 5,000

18. The Balance Sheets of AB Ltd as on 31/03/2018 and 31/03/2019 is given below;
31-12-2018 31-12-2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 5,00,000 6,50,000
b) General reserve 74,000 78,000
c) Profit and Loss Account 86,000 94,000
2. Non-Current Liabilities
8 % Debentures 1,00,000 75,000
3. Current Liabilities
a) Trade Creditors 1,87,000 1,90,000
b) Outstanding Expenses 13,000 16,500
c) Provision for Taxation 50,000 75,000
d) Proposed Dividend 50,000 65,000
Total Liabilities 10,60,000 12,43,500
II. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i)Land and Building 5,75,000 5,17,500
ii) Machinery 2,20,000 3,98,000
iii) Furniture 8,500 7,650
2. Current Assets
i) Stock 1,33,100 1,61,500
ii) Debtors 1,09,500 1,17,300
iii) Bills Receivable 29,550
iv) Cash 13,900 12,000
Total Assets 10,60,000 12,43,500

Prepare a schedule of changes in working capital. Consider provision for taxation and
proposed dividend as current assets.

19. Calculate Funds from Operations from the information given below as on 31/03/2019:
Profit after tax for the year ended 31st March 2019-Rs. 9,50,000.
Gain on sale of building Rs. 68,500.
Goodwill appears in the books at Rs. 2,80,000 out of 10% has been written off during the
year.
Rs. 1,15,000 have been transferred to General Reserve

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 Depreciation has been provided during the year on machinery and furniture at 20% whose
total cost is Rs. 8,50,000.
Loss on sale of machinery Rs. 17,500.
Interest on investment credited to Profit and Loss Account Rs. 1,27,800.
Interim Dividend paid Rs. 75,000.
Patent written off Rs. 27,500.

20. From the following information, find out Cash Flow from Investing Activities
PARTICULARS CLOSING OPENING
BALANCE (Rs.) BALANCE (Rs.)

Machinery at Cost 4,20,000 4,00,000

Accumulated Depreciation 1,10,000 1,00,000
Patents 1,60,000 2,80,00

Additional Information:

1. During the year, a machine costing Rs.40,000 with its accumulated

depreciation of Rs.24,000 was sold for Rs.20,000.
2. Patents were written off to the extent of Rs.40,000 and some patents were sold
at a profit of Rs.20,000.

21. ABC Ltd. provided the following information, calculate Net Cash Flow from Financing
Activities:
PARTICULARS 31st March 2020 31st March 2019
( Rs.) ( Rs.)
Equity Share Capital 12,00,000 10,00,000
12% Debentures 2,00,000 1,00,000

Additional Information :

1. Interest paid on Debentures Rs.19,000.

2. Dividend paid Rs.50,000.
3. During the year, ABC Ltd. issued bonus shares in the ratio of 5:1 by capitalising
reserve.

(6×5=30)

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 Part C
Answer any two questions.
Each question carries 15 marks.

22. From the following Balance Sheets of Texas Ltd as at 31 st March 2018 and 2019,
prepare a Comparative Balance Sheet.
31-03-2018 31-03-2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 3,60,000 4,44,000
b) Profit and Loss Account 1,51,800 1,63,800
2. Non-Current Liabilities
Accumulated Depreciation on Building 1,20,000 1,32,000
3. Current Liabilities
a) Income Tax Payable 12,000 13,200
b) Outstanding Expenses 24,000 48,000
c) Trade Creditors 2,40,000 2,34,000
Total 9,07,800 10,35,000
II. Assets:

1. Non-Current Assets
a) Fixed: Tangible Assets
i) Land 48,000 96,000
ii) Buildings and Equipment 3,60,000 5,76,000
2. Current Assets
i) Stock 2,64,000 96,000
ii) Debtors 1,68,000 1,86,000
iii) Sundry Advances 7,800 9,000
iv) Cash 60,000 72,000
Total 9,07,800 10,35,000

23. From the following information presented by a firm for the year ended 31st December,
prepare the Balance Sheet:

Sales to Net Worth 5 Times

Current Liabilities to Net Worth 50%
Total Debts to Net Worth 60%
Fixed Assets to Net Worth 60%
Current Ratio 2

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 Sales to Stock 10 Times
Debtor’s velocity 9 Times
Annual Sales Rs. 15,00,000
Cash Sales 40% of Sales

24. The following are the summarised Balance Sheets of Essar Ltd as on 31 st March 2018

and 31 st March 2019.

31-03-2018 31-03-2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Equity Share Capital 1,00,000 1,10,000
b) Preference Share Capital 2,20,000 2,50,000
c) Share Premium 20,000 26,000
d) Profit and Loss Account 1,04,000 1,34,000
2. Current Liabilities
a) 12 % Debentures 70,000 64,000
3. Current Liabilities
a) Trade Creditors 38,000 46,000
b) Bills payable 5,000 4,000
c) Provision for Taxation 10,000 12,000
d) Dividends Payable 7,000 8,000

Total Liabilities 5,74,000 6,54,000

II. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i) Machinery 2,00,000 2,30,000
ii) Plant 1,50,000 1,76,000
iii) Building 18,000 18,000
2. Current Assets
i) Cash at Bank 42,000 32,000
ii) Debtors 38,000 38,000
iii) Bills Receivable 42,000 62,000
iv) Stock 84,000 98,000
Total Assets 5,74,000 6,54,000

You are required to prepare Funds Flow Statement.

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25.
From the following summarized Cash Book of S K Ltd. Prepare Cash Flow Statement for
the year ended March 31, 2019 in accordance with AS – 3 :

PARTICULARS Rs. PARTICULARS Rs.

To Balance b/d 10,000 By Payment to Suppliers 4,00,000

To Receipts from Customers 5,00,000 By Purchase of Machine 1,50,000

To Sale of Building 1,90,000 By Purchase of Furniture 50,000
To Issue of Equity Shares 2,00,000 By Wages and Salaries 30,000

To Issue of Preference Shares 1,00,000 By Rent, Rate and Taxes 20,000

By Income Tax 25,000

By Redemp on of Debentures 2,75,000

By Dividends 30,000
By Balance c/d 20,000

10,00,000 10,00,000

(2×15=30)

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23105373

MAHATMA GANDHI UNIVERSITY KOTTAYAM

B. COM DEGREE (CBCS) REGULAR/ REAPPEARANCE

EXAMINATION, MARCH 2023
SIXTH SEMESTER
CORE- CO6CRT20- MANAGEMENT ACCOUNTING

Part A -Answer any ten questions. Each question carries 2 marks.

1) Who is a management accountant?

Any person responsible for the supply of accounting information to management is
known as a management accountant. A management accountant feeds informational
needs of different managerial levels. Management accountant is also known as
controller, comptroller, chief accountant, financial adviser, financial controller etc.

2) What is financial planning?

Financial Planning indicates a firm’s growth, performance, investments, and
requirements of funds during a given period, usually three to five years. Financial
planning involves the preparation of projected or pro forma profit and loss account,
balance sheet and funds flow statement.

3) Write a short note on trend analysis?

Trend analysis is one of the horizontal or dynamic analysis methods used for financial
analysis. Under trend analysis financial statements are analyzed by computing trend
of series of information. This method determines the direction upwards or downwards
and involves the computation of the percentage relationship that each statement item
bears to the same item in base year.

4) Calculate trend percentage from the following taking 2015 as base year.
Also interpret the results.
Year 2015 2016 2017 2018 2019
Sales 2,50,000 3,20,000 3,50,000 4,30,000 5,00,000
Trend Percentage 100 128 140 172 200
The above trend analysis reveals that there is an upward movement of sales over the
years since 2015 and the sales doubled by the year 2019.
Mark distribution (Trend Computation -1 and Interpretation 1)

5) Define Ratio Analysis.

Ratio analysis is a technique of analysis and interpretation of financial statements.
Ratio analysis is the process of establishing and interpreting various ratios for helping
in making certain decisions.

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

6) What are current liabilities?

Current liabilities are those liabilities which are intended to be paid in the ordinary
course of business within a short period of normally one accounting year out of the
current assets or income of the business. E.g. Bills Payable, Sundry Creditors or
Accounts Payable etc.

7) Write a short note on debt-equity Ratio.

Debt -Equity ratio is also known as external- internal equity ratio. Debt -Equity ratio
is calculated to measure the relative claims of outsiders and the owners against the
firm’s assets. It indicates the relationship between the external equities or the
outsiders’ funds and the internal equities or the shareholder’s funds.
𝐿𝑜𝑛𝑔𝑇𝑒𝑟𝑚𝐷𝑒𝑏𝑡
Debt – Equity Ratio= 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′𝑠𝐹𝑢𝑛𝑑

8) Net Profit ratio = (Net Profit / Net revenue from Operations) 100
= (1,00,000/8,00,00) 100 = 12.5 %

9) What do you mean by the term Fund?

The term fund has different meaning under different senses and they are
In a narrow sense fund means cash only.
In a broader sense the term fund refers to money values in whatever form it may exist.
In a popular sense the term fund means working capital.

10) When does flow of fund takes place?

Flow of funds is said to have taken place when any transaction males changes in the
amount of funds available before happening of the transaction. If the effect of
transaction results in the increase of funds, it is called a source of funds and if it
results in the decrease of funds, it is known as an application of funds.

11) What is meant by Cash Flow from Extraordinary item? Give an Example.
Cash flow due to unusual or abnormal situations is known as Cash Flow from
Extraordinary item. As per accounting standard 3 Cash Flow from Extraordinary item
should also be classified under operating, investing, and financing activities.
Example: Proceeds from Earthquake Disaster Settlement, Proceeds from Flood
Disaster Settlement etc.
12)
Computation of cash flow from operating activities
Particulars Amount
Net Profit Before tax and extraordinary items 3,20,000
Add Non-cash and non-operating items debited to P& L A/c -
Less Non-cash and non-operating items credited to P& L A/c -
Operating Profit Before Working Capital Changes 3,20,000
Less Increase in value of stock 20,000
Cash generated from operations before tax 3,00,000
Less Income tax paid -

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Cash flow before extra-ordinary items 3,00,000

Add/ Less Extra ordinary items -
Net Cash flow from operating Activities 3,00,000

Part B - Answer any six questions. Each question carries 5 marks.

13) What are the objectives of management accounting?

I. Planning and policy formulation
II. Helpful in controlling performance.
III. Helpful in Organizing
IV. Helpful in Interpreting Financial Statements
V. Motivating Employees
VI. Helpful in making decisions.
VII. Reporting to Management
VIII. Helpful in Co-ordination
IX. Tax administration

14) Explain the uses of Financial Statements.

The uses of financial statements to different stakeholders of companies are
I. As a report of stewardship
II. As a basis for fiscal policy
III. To determine the legality of dividends
IV. As a guide to advise dividend action
V. As a basis for granting credit
VI. As informative for prospective investors in an enterprise
VII. As a guide to the value of investment already made
VIII. As n aid to government supervision
IX. As a basis for price or rate regulation
X. As a basis for taxation.

15) Explain the limitations of Financial Statement analysis.

a) Financial Statement analysis is only a study of interim reports, b) Financial
Statement analysis is based upon only monetary information and non-
monetary factors are ignored, c) Price level changes are not considered, d)
Changes in accounting procedure by an enterprise may often make financial
analysis misleading, d) Analysis is only a means not an end in itself.

16) What are the ratios used for analyzing the capital structure of a company?
a) Capital Gearing Ratio: This ratio shows the proportion of fixed income bearing
securities to equity shareholder’s fund

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Fixed income bearing securities

Capital Gearing Ratio= 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐹𝑢𝑛𝑑
b) Debt – Equity Ratio: Debt-Equity ratio indicate the proportion of debt fund in
relation to equity or owner’s fund
𝐿𝑜𝑛𝑔 𝑇𝑒𝑟𝑚 𝐷𝑒𝑏𝑡
Debt – Equity Ratio= 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐹𝑢𝑛𝑑
c) Proprietary Ratio: This ration establishes relationship between proprietor’s fund
or Shareholder’s fund and total assets
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐹𝑢𝑛𝑑
Proprietary Ratio= 𝑇𝑜𝑡𝑎𝑙 𝑇𝑎𝑛𝑔𝑖𝑏𝑙𝑒 𝑎𝑠𝑠𝑒𝑡𝑠

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 17,870

17) 1) Stock Turnover ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 = 4,500
= 3.97 times
Or
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 15,440
= = 3.43 times
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘 4,500

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 17,870

2) Fixed Asset Turnover Ratio=𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠= 5,000 =3.57 Times

𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 17,870

3) Debtors Turnover Ratio= 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 = = 1.49 times
12,000

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒 14,995

4) Creditors Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑟𝑎𝑑𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠 = 8,000 = 1.87 times

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠 365

5) Debt Collection Period = = =245 Days
𝐷𝑒𝑏𝑡𝑜𝑟𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 1.49
or
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝐷𝑒𝑏𝑡𝑜𝑠 𝑋 𝑁𝑜.𝑜𝑓 𝑀𝑜𝑛𝑡ℎ𝑠 12,000 𝑋 12
= = 8 months
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 17,870

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑋 365 8,000 𝑋 365

6) Debt Payment Period= = =195 Days
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑠𝑒 14,995
Or
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑋 12
= 6.4 Months
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑠𝑒

18) Value Liberally

Some students might have taken Provision for Taxation and Proposed Dividend as
current assets, since it’s given in question like that. In such cases, based on the
correctness all other items in the schedule marks can be awarded.

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Schedule of Changes in Working Capital

(Provision for Taxation and Proposed Dividend treated as current item)
Effect on Working
31-12- 31-12- Capital
Particulars
2018 2019
Increase Decrease
Current Assets
Stock 133100 161500 28400
Debtors 109500 117300 7800
Bills Receivable 29550 29550
Cash 13900 12000 1900
Total Current Assets 256500 320350

Current Liabilities
Trade Creditors 187000 190000 3000
Outstanding Expenses 13000 16500 3500
Provision for Taxation 50000 75000 25000
Proposed Dividend 50000 65000 15000
Total Current Liabilities 300000 346500
Working Capital (CA-CL) -43500 -26150
Increase in Working
17350 17350
Capital
-26150 -26150 65750 65750

Alternatively
Schedule of Changes in Working Capital
(Provision for Taxation and Proposed Dividend treated as non-current item)

Effect on Working
31-12- Capital
Particulars 31-12-2018
2019
Increase Decrease
Current Assets
Stock 133100 161500 28400
Debtors 109500 117300 7800
Bills Receivable 29550 29550
Cash 13900 12000 1900
Total Current Assets 256500 320350

Current Liabilities
Trade Creditors 187000 190000 3000
Outstanding Expenses 13000 16500 3500
Total Current Liabilities 200000 206500
Working Capital (CA-CL) 56500 113850
Increase in Working
57350 57350
Capital
113850 113850 65750 65750

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

19) Funds From Operations as on 31/03/2019

Particulars Amount
Profit after tax as on 31/03/2019 9,50,000
Add Transfer to general reserve 1,15,000
Interim dividend paid 75,000
Goodwill written off 28,000
Patents written off 27,500
Depreciation 1,70,000
Loss on sale of Machinery 17,500
4,33,000
13,83,000
Less
Gain on sale of Building 68,500
Interest on Investment 1,27,800
1,96,300
Funds from operations 11,86,700

20) Cash flow from Investing activities

Particulars Amount
Purchase of machinery (60000)
Sale of Machinery 20,000
Sale of Patents 1,00,000
Cash flow from investing activities 60,000

Machinery Account
Particulars Amount Particulars Amount
Balance b/d 4,00,000 Bank 20,000
P& L Account 4,000 Depreciation 24,000
Bank ( Purchase -
Balancing
Figure) 60,000
Balance c/d 4,20,000
4,64,000 4,64,000

Value patent account liberally since a correction

is needed to the opening figure Patent Account
Particulars Amount Particulars Amount
Balance b/d 2,80,000 Amortisation 40,000
P& L Account 20,000 Bank (Sale) 1,00,000
Balance c/d 1,60,000
3,00,000 3,00,000

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

21) Cash flow from Financing activities

Particulars Amount
Proceeds from issue of debentures 1,00,000
Interest paid on debentures (19,000)
Dividend paid (50,000)
Cash Flow from Financing Activities 31,000

Part C- Answer any two questions. Each question carries 15 marks.

22) Comparative Balance Sheet of Texas Ltd

Absolute
%
Change
2018 2019 Increase/
Increase/
Decrease
Decrease
I. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i) Land 48,000 96,000 48,000 100.00
ii) Buildings and Equipment 3,60,000 5,76,000 2,16,000 60.00
Total (A) 4,08,000 6,72,000 2,64,000 64.71
2. Current Assets
i) Stock 2,64,000 96,000 (1,68,000) (63.64)
ii) Debtors 1,68,000 1,86,000 18,000 10.71
iii) Sundry Advances 7,800 9,000 1,200 15.38
iv) Cash 60,000 72,000 12,000 20.00
Total (B) 4,99,800 3,63,000 (1,36,800) (27.37)
Total 9,07,800 10,35,000 1,27,200 14.01
II. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 3,60,000 4,44,000 84,000 23.33
b) Profit and Loss Account 1,51,800 1,63,800 12,000 7.91
Total (A) 5,11,800 6,07,800 96,000 18.76
2. Non-Current Liabilities
Accumulated Depreciation on Building 1,20,000 1,32,000 12,000 10.00
Total (B) 1,20,000 1,32,000 12,000 10.00
3. Current Liabilities
a) Income Tax Payable 12,000 13,200 1,200 10.00
b) Outstanding Expenses 24,000 48,000 24,000 100.00
c) Trade Creditors 2,40,000 2,34,000 (6,000) (2.5)
Total (C) 2,76,000 2,95,200 19,200 6.96
Total 9,07,800 10,35,000 1,27,200 14.01

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23105373 Sixth Semester B.Com - Management Accounting (March 2023)

23) Balance Sheet

WN No Amount
I Equity and Liabilities
1) Shareholder’s Fund WN-4 3,00,000
2) Non-Current Liabilities WN-10 30,000
3) Current Liabilities WN-5 1,50,000
Total 4,80,000
II Assets
1) Non- Current Assets
Fixed Asset WN-7 1,80,000
2) Current Assets
Inventories WN-3 1,50,000
Debtors WN-2 1,00,000
Cash and Cash equivalents 50,000
Total WN-9
4,80,000

Working Notes
WN-1 : Calculation of Credit sales
Cash Sales: Credit Sales= 40:60, Credit Sales= 60% of total Sales
60
Credit Sales = 15,00,000 x 100 =₹ 9,00,000
WN-2 : Calculation of Debtors
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 9,00,000 9,00,000
Debtors Velocity = = 9= 𝐷𝑒𝑏𝑡𝑜𝑟𝑠 i.e. Debtors = = ₹ 1,00,000
𝐷𝑒𝑏𝑡𝑜𝑟𝑠 9

WN-3: Calculation of Stock

𝑆𝑎𝑙𝑒𝑠 15,00,000 15,00,000
Sales to Stock= 𝑆𝑡𝑜𝑐𝑘 , 10= i.e. Stock = = ₹ 1,50,000
𝑆𝑡𝑜𝑐𝑘 10

WN-4: Calculation of Net Worth ( Shareholder’s Fund)

𝑆𝑎𝑙𝑒𝑠 15,00,000 15,00,000
Sales to Net worth=𝑁𝑒𝑡𝑤𝑜𝑟𝑡ℎ = 5= 𝑁𝑒𝑡𝑤𝑜𝑟𝑡ℎ , i.e. Net worth = =₹
5
3,00,000
WN-5: Calculation of Current Liabilities
Current Liabilities Current Liabilities
Current Liabilities to Net worth = , i.e. 50% =
𝑁𝑒𝑡𝑤𝑜𝑟𝑡ℎ 3,00,000
Current Liabilities =₹ 1,50,000
WN-6: Calculation of Total Debt
Total Debt Total Debt
Total debt to Net Worth = 𝑁𝑒𝑡𝑤𝑜𝑟𝑡ℎ = 60 % = 3,00,000
Total Debt= 3,00,000 x 60% =₹ 1,80,000
WN-7: Calculation of Fixed Assets
Fixed Assets Fixed Assetst
Fixed Assets to Net Worth = = 60 % =
𝑁𝑒𝑡𝑤𝑜𝑟𝑡ℎ 3,00,000
Fixed Assets= 3,00,000 x 60% = ₹ 1,80,000
WN-8: Calculation of Current assets
Current Assetst Current Assetst
Current Ratio=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 =2= =₹ 1,50,000x 2 = ₹ 3,00,000
1,50,000

8
23105373 Sixth Semester B.Com - Management Accounting (March 2023)

WN-9= Calculation of Cash

Cash = Current Assets –( Debtors+ Inventories )
Cash = 3,00,000- (1,00,000+1,50,000) = ₹ 50,000
WN-10: Calculation of Non-Current Liabilities
Total Debt = Current Liabilities + Non-Current Liabilities
Non-Current Liabilities= Total Debt- Current Liabilities
Non-Current Liabilities= 1,80,000-1,50,000 = ₹ 30,000

24) 1) When Provision for taxation is treated as current liability

Statement of sources and application of funds of Essar Ltd as on 31-03-2019 (8
Marks)
Sources Amount Applications Amount
Proceeds from issue of Equity
Shares 10,000 Purchase of Machinery 30,000
Proceeds from issue of
Preference Shares 30,000 Purchase of Plant 26,000
Share Premium 6,000 Redemption of Debentures 6,000
Net Increase in Working
Funds from operations 30,000 Capital 14,000
76,000 76,000

Schedule of Changes in Working Capital (4 Marks)

Effect on Working
Particulars 2018 2019 Capital
Increase Decrease
Current Assets
Stock 84,000 98,000 14,000
Debtors 38,000 38,000 -
Bills Receivable 42,000 62,000 20,000

Cash 42,000 32,000 10,000

Total Current Assets 2,06,000 2,30,000

Current Liabilities

Trade Creditors 38,000 46,000 8,000

Bills Payable 5,000 4,000 1,000

Provision for Taxation 10,000 12,000 2,000

Dividends Payable 7,000 8,000 1,000

Total Current Liabilities 60,000 70,000
Working Capital (CA- CL) 1,46,000 1,60,000
Net Increase in Working
Capital 14,000 14,000

1,60,000 1,60,000 35,000 35,000

9
23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Funds from operations ( 3 Marks)

Particulars Amount
Balance of P&L Account on 31/03/2019 1,34,000
Less Balance of P&L Account on 31/03/2018 1,04,000
Funds from operations 30,000

Alternatively
2) When Provision for taxation is treated as non-current liability
Statement of sources and application of funds of Essar Ltd as on 31-03-2019 ( 8
Marks)

Sources Amount Applications Amount

Proceeds from issue of Equity Shares 10,000 Purchase of Machinery 30,000
Proceeds from issue of Preference
Shares 30,000 Purchase of Plant 26,000
Share Premium 6,000 Redemption of Debentures 6,000
Net Increase in Working
Funds from operations 32,000 Capital 16,000
78,000 78,000

Schedule of Changes in Working Capital ( 4 Marks)

Effect on Working
Particulars 2018 2019 Capital
Increase Decrease
Current Assets
Stock 84,000 98,000 14,000
Debtors 38,000 38,000 -
Bills Receivable 42,000 62,000 20,000

Cash 42,000 32,000 10,000

Total Current Assets 2,06,000 2,30,000

Current Liabilities

Trade Creditors 38,000 46,000 8,000

Bills Payable 5,000 4,000 1,000

Dividends Payable 7,000 8,000 1,000

Total Current Liabilities 50,000 58,000
Working Capital (CA-CL) 1,56,000 1,72,000
Net Increase in Working
Capital 16,000 16,000

1,72,000 1,72,000 35,000 35,000

10
23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Funds from operations (3 Marks)

Particulars Amount
Balance of P&L Account on 31/03/2019 1,34,000
Less Balance of P&L Account on 31/03/2018 1,04,000
Current year profit 30,000
Add provision for taxation charged during 2019 2,000
Funds from operations 32,000

25) Cash Flow Statement of SK Ltd as on 31/12/2019

Particulars Amount Amount

Cash Flows from Operating Activities
Cash receipts from customers 5,00,000
Cash paid to suppliers 4,00,000
Wages and salaries 30,000
Rent, rates and Taxes 20,000
Cash generated from operations 50,000
Income Taxes paid 25,000
Cash flow before extra-ordinary items 25,000
Extra ordinary items -
A) Net Cash Flow from Operating Activities 25,000

Cash Flows from Investing Activities

Purchase of Machine 1,50,000
Purchase of furniture 50,000
Proceeds from sale of Building 1,90,000
B) Net Cash used in investing activities (10,000)

Cash Flows from Financing Activities

Proceeds from issue of equity shares 2,00,000
Proceeds from issue of preference shares 1,00,000
Redemption of Debentures 2,75,000
Dividends Paid 30,000
C) Net Cash used in Financing activities (5,000)
Net Increase in cash and cash equivalents (A+B+C) 10,000
Add Opening Cash and cash equivalents 10,000
Closing cash and cash equivalents 20,000

11
23105373 Sixth Semester B.Com - Management Accounting (March 2023)

Section II
CO6CRT20- MANAGEMENT ACCOUNTING
MCQ
Maximum Marks: 20
1. D) All of the above
2. D) Only D
3. A) Accounting Ratio
4. A) Wealth Maximization
5. D) None of the above
6. B) Rs. 2,16,400
7. A) Payment of Dividend
8. C) Decrease in creditors
9. D) All of the above
10. A) A unit of money obtained today is worth more than a unit of money obtained in
future
11. Out of Syllabus award full marks to all answers
A) Rs 2 per unit, Rs 5,000
12. A) True
13. Out of Syllabus award full marks to all answers
A) Fixed manufacturing expenses are included in unit cost
14. A) True
15. C) Both a and b
16. Out of Syllabus award full marks to all answers
C) Both a and b
17. D) A, B, C, D
18. Out of Syllabus award full marks to all answers
A) Fixed manufacturing expenses are included in unit cost
19. Out of Syllabus award full marks to all answers
C) Both a and b
20. Out of Syllabus award full marks to all answers
D) All of the Above

12
 QP CODE: 22100973 Reg No : .....................
22100973
Name : .....................

B.COM DEGREE (CBCS) REGULAR / REAPPEARANCE EXAMINATIONS,

APRIL 2022
Sixth Semester
CORE - CO6CRT20 - MANAGEMENT ACCOUNTING
(Common to all B.Com Degree Programmes)
2017 Admission Onwards
73151BFE

Time: 3 Hours Max. Marks : 80

Instructions to Private candidates only: This question paper contains two sections. Answer SECTION I
questions in the answer-book provided. SECTION II, Internal examination questions must be answered in the
question paper itself. Follow the detailed instructions given under SECTION II
SECTION I
Part A
Answer any ten questions.
Each question carries 2 marks.

1. How does lack of expert knowledge becomes a limitation of a Management Accountant ?

2. What is Budgetary Control ?

3. Write a short note on Financial Statements.

4. Calculate trend percentages from the following taking 2015 as base year. Also interpret
the results.
Year 2015 2016 2017 2018 2019
Gross Profit (Rs.) 25,000 32,000 35,000 43,000 50,000

5. Define Ratio Analysis.

6. Compute Current Ratio. Given: Total Assets Rs. 4,00,000; Fixed Assets Rs. 25,00,000;
Non- Current liabilities Rs. 4,00,000; Non- Current Investment Rs. 5,00,000;
Shareholders' Fund Rs. 28,00,000.

7. What is Stock Turnover Ratio?

8. What is Dividend Per Share?

9. Prepare a proforma of Schedule of Changes in Working Capital.

Page 1/6 Turn Over

10. Compute Funds from Operations: Profit after tax: Rs. 83,000, Provision for Tax: Rs.
25,000, Income tax paid: Rs 35,900, Depreciation Rs.15, 500, Goodwill written off: Rs.
5000.

11. Give two examples of cash inflows from Financing Activities

12.
GSC Ltd. purchased a building for Rs.25,00,000 and paid the consideration by the issue
of Equity Shares. Ajas, the accountant, has prepared the cash flow statement and has
shown the transaction as follows;
Investing Activities: Purchase of Building Rs.25,00,000
Financing Activities: Issue of Equity Shares Rs.25,00,000
Do you think that it is in accordance with per AS – 3?
(10×2=20)
Part B
Answer any six questions.
Each question carries 5 marks.

13. Explain the role and functions of Management Accounting.

14. Explain the objectives of Financial Statement Analysis.

15. Prepare a Common Size Balance Sheet with imaginary figures.

16. Distinguish between solvency and liquidity

17. The Balance Sheet of Alakapuri Ltd. as on 31.03.2019 is given below:

Balance Sheet
Particulars Note No. Amount
I. EQUITY & LIABILITIES
(1) Shareholder’s Fund
(a) Share capital 3,00,000
( b) Reserves & Surplus ( P & L a/c) 40,000
(2) Non-Current Liabilities 1
Long term borrowings (8% debentures) 1,00,000
(3) Current Liabilities 90,000
Total 5,30,000
II. ASSETS
(1) Non- Current Assets:
Fixed Assets 3,60,000
(2) Current assets:
(a) Inventories ( Stock) 50,000
(b) Trade Receivables ( Debtors) 1,16,000
© Cash & Cash Equivalents ( Bank Balance) 4,000
Total 5,30,000

Page 2/6
 Notes to Account
Particulars Amount
1. Share Capital:
Equity share capital 2,00,000
4% Preference share capital 1,00,000
Total 3,00,000

Calculate:
(1) Debt Equity ratio
(2) Proprietory ratio
(3) Fixed Assets to Net worth Ratio
(4) Capital Gearing Ratio

18. What are the objectives of Funds Flow Statement?

19. "Funds Flow Statement presents a decision view of business" Comment.

20. From the following income statement calculate Cash Flow from Operating Activities by
direct method.
Particulars Rs Particulars Rs
To Materials Purchased 50,000 By Sales (Cash) 1,05,000
To Wages Paid 16,000 By Commission Received 7,000
To Wages Outstanding 2,000 By Commission Due 8,000
To Salaries 15,000
To Salaries Outstanding 5,000
To Loss on Sale of Plant 3,000
To Net Profit 29,000
1,20,000 1,20,000

21.
From the following information, calculate Cash Flow from Financing Activities:
Particulars 31st March 2020 31st March 2019
(Rs.) (Rs.)
Equity Share Capital 5,00,000 4,00,000
10% Debentures 1,00,000 1,50,000
Securities Premium Reserve 50,000 40,000
Bank Overdraft 2,00,000 1,50,000
Interest on Bank Overdraft 15,000 10,000

Additional Information : Interest Paid on Debentures Rs.10,000.

(6×5=30)
Part C

Page 3/6 Turn Over

 Answer any two questions.
Each question carries 15 marks.

22. Prepare a comparative income statement from the following details of XY Ltd as on 31 st

March 2018 and 31 st March 2019.

Particulars 31-03-2018 31-03-2019

Sales 20,00,000 16,00,000

Purchases 4,00,000 2,00,000
Opening Stock 6,00,000 3,00,000
Closing Stock 12,00,000 10,00,000
Salaries 8,00,000 9,00,000
Rent and rates 40,00,000 32,00,000
Selling Expenses 10,00,000 8,00,000
Interest Paid 10,000 1,50,000
Tax Paid 70,000 1,10,000
Interest received 52,500 65,000
Administrative Expenses 75,000 76,500

23. You are required to prepare a Balance Sheet from the following data:
1. Current ratio 1.4
2. Liquid ratio 1.0
3. Stock turnover ratio 8( based on closing stock)
4.Gross profit ratio 20%
5. Debt collection period 1.5 months
6. Reserves & surplus to capital 0.6
7. Fixed assets turnover ratio 1.6
8. Capital gearing ratio 0.5
9. Fixed assets to net worth 1.25
10. Sales for the year Rs.10,00,000
From the following balance sheets of Z Ltd as on 31/03/2018 and 2019 given below, you
24.
are required to prepare Funds Flow Statement.
31-03- 31-03-
2018 2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 2,40,000 3,60,000
b) Share Premium 24,000 36,000
c) General reserve 18,000 27,000
d) Profit and Loss Account 58,500 62,400
2. Non-Current Liabilities
a) 8 % Debentures 78,000

Page 4/6
 b)Long Term Provisions
Provision for Taxation 29,400 32,700
3. Current Liabilities
Trade Creditors 1,00,500 1,09,200
Total Liabilities 4,70,400 7,05,300
II. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i) Land and Building 1,66,200 3,39,600
ii) Machinery 1,06,800 1,53,900
iii) Furniture 7,200 4,500
2. Current Assets
i) Stock 66,300 78,000
ii) Debtors 1,09,500 1,17,300
iii) Cash 14,400 12,000
Total Assets 4,70,400 7,05,300

Depreciation written off during the year:

On machinery: Rs. 38,400
On Furniture: Rs. 1,200

25. The JG Ltd. has furnished the following Trading and Profit and Loss Account and also the
balances of Assets and Liabilities.
Income Statement for the year ended 31st March, 2019
Particulars Note No. Rs.
1,00,000
I. Revenue From Operations
1 3,000
II. Other Income

1,03,000
III. Total Revenue (I + II)

IV. Expenses

a. Cost Of Materials Consumed

........
b. Purchase of Stock In trade 65,000
c. Change in Inventories 2 5,000
d. Employee Benefit Expenses (Salaries) 10,000
e. Finance Cost (Interest on loan)
3,000
f. Depreciation and Amortization
5,000
Expenses 2,000

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 g. Other Expense (Loss On sale of Fixed
Assets)
90,000

h. Total Expenses

13,000
6,000
V. Profit Before Tax (III – IV)
VI. Tax

7,000

VII. Profit After Tax (V – VI)

Notes to Accounts :

Particulars Amount (Rs.)

1. Other income

a. Income from investment 2,000

b. Profit in sale of investment 1,000

2. Change in Inventories

a. Opening Stock
15,000
b. Closing Stock
10,000

Assets and Liabilities:

Particulars 1.4.2018 (Rs.) 31.3.2019

(Rs.)
Stock 15,000 10,000
Debtors 10,000 15,000
Creditors 8,000 10,000
Outstanding Salaries 3,000 2,000
Fixed Assets 20,000 25,000

Present the cash flows from the operating activities as they appear in the cash flow
statement under: I) Direct Method II) Indirect Method.

(2×15=30)

Page 6/6
QPCODE: 22100973

B.COM DEGREE (CBCS) REGULAR / REAPPEARANCE EXAMINATIONS,A

Sixth Semester
CORE - CO6CRT20 - MANAGEMENT ACCOUNTING
(Common to all B.Com Degree Programmes)
2017 Admission Onwards
Scheme of valuation

Important Instruction toExaminers -Covid special marking pattern is

applicable. Strictly follow marking pattern in the scheme.

Part A
Answer any Six questions. Each question carries 2 marks.
1. Lack of expert knowledge will be considered as a limitation of Management
Accounting because the use of Management Accounting requires knowledge of a
number of related subjects such as statistics, economics, financial accounting, cost
accounting etc. Lack of knowledge in any of the subjects limits the use of
Management Accounting.
2. Under budgetary control techniques future financial needs are estimated and
arranged according to an orderly basis. It is used to control the financial performance
of business concerns. Business operations are directed in a desired way. Budgets are
used as a tool for planning and control.
3. Financial statements are the annual reports prepared by management at the end of an
accounting period in accordance with Generally Accepted Accounting Principles and
concepts. It is a collection of accounting information which helps the management to
communicate its financial information to various users. Three basic financial
statements are:-Balance sheet,Statement of profit and lossand Cash flow statement
4. Statement Showing Trend Percentages
Year Gross Profit (₹) Trend %

2015 25000 100

2016 32000 128

2017 35000 140

2018 43000 172

2019 50000 200

Interptretation:- Trend percentage of gross profit shows an increasing tendency

throughout the years and it becomes doubled in 2019 than the base year which
shows an improvement in the overall efficiency of the organization.
5. Ratio is the arithmetical expression of the relationship of one number to another.
Ratio analysis is defined as the systematic use of ratio to interpret the financial
statements so that the strengths and weakness of a firm as well as its historical
performance and current financial condition can be determined.
6. Current ratio=current assets/current liabilities
Current assets=40,00,000-25,00,000-5,00,000=10,00,000
Current liabilities=40,00,000-28,00,000-4,00,000=8,00,000
Current ratio=10,00,000/8,00,000=1.25:1
Note:- Since the question has a mistake with regard to the amount of total asset,
consider it in favour of students.
7. Stock Turnover Ratio indicates are relationship between cost of revenue from
operation during the year and average inventory kept during the year. This ratio
measures the velocity with which stock is turned as sales.
Stock turnover ratio = cost of goods sold /Average inventory
8. Dividend per share (DPS) is the sum of declared dividends issued by a company for
every ordinary share outstanding. It is calculated by dividing the total dividends paid
out by a businessover a period of timeby the number of outstanding ordinary shares
issued.
9. Proforma of schedule of changes in Working Capital
Items Previous Current Increase Decrease
year year

Current assets XXX XXX XX

Current Liabilities XXX XXX XX

Working Capital XXX XXX

Increase/Decrease in Working
Capital

10. Fund from operations

Rs.
Profit after tax 83,000
Add:Tax paid 35,900
Profit before tax 1,18,900
Add: Provision for tax 25,000
Depreciation 1,55,00
Goodwill written off 5,000
Fund from operations 1,64,400

11. Cash inflows from financing activities include:

Proceeds of issue of shares
Proceeds of issue of debentures
 Securities premium collected,
Long term loan
(Any two)
12. As per AS-3 only transactions involving receipts& payment of cash are recorded in
Cash flow Statement. Hence it is not in accordance with AS-3 .

Section B
Answer any four questions. Each questions carry 8 marks.
13. Role and functions of Management Accounting:-
● Planning and forecasting
● Modification of data
● Furnishing information as per requirement
● Financial analysis and interpretation
● Co -ordinating
● Decision making
● Controlling
● Communication
● Established standards of performance
● Tax administration
● Use of Qualitative information
14. Objectives of financial statement analysis:
● To assess the financial position of the firm
● To evaluate the financial performance of the firm
● To have a comparative study
● To help in making Future Plans
● Estimate the earning capacity
● To know the progress of the firm
● To measure the efficiency of operations
● To help in decision making
15. Common Size Balance Sheet with imaginary figures.
Particulars Rs. %
1.EQUITY AND LIABILITIES
A) Shareholders fund
i) Share Capital 4,00,000 40
ii) Reserves and surplus 2,00,000 20
B) Non Current Liabilities
i)Debentures 2,00,000 20
C) Current liabilities 2,00,000 20
Total liabilities 10,00,000 100
2. ASSETS
A) Fixed assets 3,00,000 30
B) Current assets
 Stock 3,00,000 30
Debtors 3,00,000 30
Cash and cash equivalents 1,00,000 10
Total assets 10,00,000 100
Note: Value on the basis of the format .
16.
Basis Liquidity Solvency

Meaning Liquidity implies the measure Solvency means the firm's

of the ability of the firm to ability of a business to have
cover its immediate financial sufficient assets to meet its
obligations debts as they fall due for
payment

Obligations Short term Long term

Describes How easily the assets can be How well the firm sustain
converted into cash itself for long time

Ratio Current ratio, acid test ratio, Debt to equity ratio, interest
quick ratio, etc. coverage ratio, etc

Risk Low High

17. Debt equity Ratio= Debt/Equity

= 100000/240000
= 0.417:1
Proprietary Ratio = Shareholders fund/Total tangible assets
= 340000/530000
= 0.64:1
Fixed Asset to Net worth= Fixed asset/Net worth=
=360000/240000
= 1.5:1
Capital gearing ratio = Fixed income bearing securities/Equity shareholders fund
= 200000/240000
=0.83:1
Note:-While calculating debt-equity ratio and fixed asset to net worth ratio,
consider other concepts of equity and networth also.
18. Objectives of fund flow statement
● To explain the changes in financial position
● To disclose the causes of changes in the assets liabilities and capital between
two balance sheet dates
● To disclose all inflows and outflows of funds and their impact on working
capital of the firm.
● To help the management to exercise budgetary control and the capital
expenditure control in the Enterprise
 ● To summarise the financing and investing activities of the enterprise during an
accounting period

19. A fund flow statement is a statement of sources and applications of funds.

It is a statement prepared to analyse the reason for changes in the financial position of
business. Fund flow statement helps in:
● Formulating a realistic Dividend policy
● Taking capital expenditure decision
● Exercising budgetary control and capital expenditure control in the Enterprise
● Judging the financial and operating performance of the business
● Providing indications of the weakness or strength in the general financial
position of the firm
● Arrangement of capital structure for melting long time financial plans and
policies
Therefore fund flow statement presents a decision view of business.
20. Cash Flow From Operating Activities
Particulars Rs Rs
OPERATING CASH RECIPTS
Cash sales 1,05,000
Commission Received 7000 112000
Less: OPERATING CASH PAYMENTS
Wages paid 16000
Salaries paid 15000
Materials purchased 50000 (81000)
Cash generated from operating activities 31000
Less: Income tax paid Nil
Net cash from operations 31000

21. Cash Flow from Financing Activity

Particulars Rs
Issue of Shares 1,00,000
Redemption of debentures (50,000)
Interest paid (10,000)
Cash received from premium on shares 10,000
Cash Flow from Financing Activity 50,000
.Part C
Students can answer 3 questions of 15 marks each .Maximum of 30 marks.
Ignore marks scored over 30.

22. Comparative Income Statement

Particulars 31-3-2018 31-3-2019 Absolute %change
change
Sales 20,00,000 16,00,000 (4,00,000) (20)
Less:Expenses
 Purchase 4,00,000 2,00,000 (2,00,000) (50%)
Change in inventories (6,00,000) (7,00,000) (1,00,000) (16.66%)
Employee Benefit expense 8,00,000 9,00,000 1,00,000 12.5%
Other expense
Rent &rates 40,00,000 32.00,000 (8,00,000) (20%)
Selling expenses 10,00,000 8,00,000 (2,00,000) (20%)
Adm.expenses 75000 76500 1500 2%
Operating Expenses 56,75,000 44,76,500 (11,98,500) (21.11%)
Operating Loss (36,75,000) (28,76,500) 7,98,500 21.72
Add: Non-Operating Income 52,500 65,000 12,500 23.81
Less: Non-Operating
Expenses - interest 10,000 1,50,000 1,40,000 1,400
Net Loss (36,32,500) (29,61,500) 6,71,000 18.47
Tax Paid 70,000 1,10,000 40,000 57.14

Note:-Since some of the expenses given in the question are not in line with the sales
of the organisation, a meaningful comparative statement cannot be prepared with this
question. It might have created a lot of confusion in the minds of the students.
The valuers are expected to consider the correctness of the absolute changes and the
calculation of individual percentages. Marks shall be awarded on the basis of the
correctness of individual items.
The pattern given in the above solution may not be followed by the students as there
is no universally applicable style of presentation. It should also be taken into
account at the time of awarding marks.

23. 1)GP=10,00,000*20%=2,00,000
2) Cost of goods sold=10,00,000-2,00,000=8,00,000
Cost of Sales
3) Stock turnover ratio= =8
Average Stock
8,00,000
=8 .
Closing Stock
Hence Closing Stock = Rs. 1,00,000
Sales 10,00,000
4) Fixed assets turnover ratio= = = 1.6
Fixed Assets FA
Fixed Assets = Rs. 6,25,000
If fixed assets turnover ratio is calculated using the cost of goods sold instead of
sales, the answer will be different (Rs. 5,00,000).
Fixed assets to Net-worth=1.25
Fixed Assets 6,25,000
1.25 = = 1.25
Netwoth NW
Net-worth = Rs. 5,00,000
5) Reserves and Surplus to Capital = 0.6
Reserves and Surplus = 0.6, Capital = 1
Netwoth = R&S + Capital = 0.6 +1 = 1.6 = RsRs, 1,87,500
 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 𝐹𝑢𝑛𝑑𝑠
6) Capital gearing ratio= = 0.5 = FC funds = 0.5 and Equity = 1
Equity
Fixed Cost Funds = 5,00,000 x 0.5 = Rs. 2,50,000

Current Assets
7) Current Ratio = 1.4 = CA = 1.4, CL = 1
Current Liability
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠
Quick Ratio = =1
Current Liability
Since no information is given about Working Capital, for computing current
assets and current liabilities, it is assumed that there is no bank overdraft. Hence Current
liability in both the above equations will be the same.
Current Asset = 1.4, Quick Asset = 1
CA – Quick Asset = Stock
1.4 – 1= 0.4 = Rs. 1,00,000
1,00,000
Current Asset = x 1.4 = Rs.3,50,000
0.4
1,00,000
Current Liability = x 1= Rs. 2,50,000
0.4
8) Average Debt Collection Period = 1.5 months
10,00,000
Debtors = x 1.5 = Rs. 1,25,000
12
9) Other Current Assets
Total Current Assets 3.50,000
Less: Stock (1,00,000)
Less: Debtors (1,25,000)
Other Current Assets 1,25,000
PARTICULARS Rs Rs
1.EQUITY AND LIABILITIES
A) Shareholders fund
Share capital 3,12,500
Reserve and surplus 1,87,500 5,00,000
B)LONG TERM LIABILITIES
Debentures - Debt 2,50,000
c)Current liabilities 2,50,000
Total liabilities 10,00,000

2)assets
A) Fixed Assets 6,25,000
B) NON CURRENT INVESTMENT NIL
C)CURRENT ASSETS
Debtors 125000
Stock 100,000
Other Current Assets 1,25,000
Miscellaneous Expenditure ** 25000
Total Assets 10,00,000
 **Difference between the total assets and total liabilities may be assumed to be
miscellaneous expenditure.
The students may not come up with such an assumption. Even then if all other items
are correct, give full marks.
Students may have some other alternative method of solution as no information is
given about working capital. Marks may be granted in accordance with the number of
correct items. This question deserves liberal valuation.

24 Schedule of Changes in Working Capital

Particulars 2018 2019 Increase Decrease

a )Current Assets Stock 66300 78000 11700

Debtors 109500 117300 7800

Cash 14400 12000 2400

Total (A) 190200 207300

b) Current Trade 100500 109200 8700

liabilities creditors

Total(B) 100500 109200

Working Capital(A-B) 89700 98100 19500 11100

Net increase 8400 8400

Total 98100 98100 19500 19500

Calculation of Fund from Operations

Profit closing balance 62400

Less: profit opening balance 58500

3900

Add: transfer to general reserve 9000

Depreciate furniture 1200

Depreciate machinery 38400

Provision for taxation 32700 81300

Fund From Operations 85200

 Fund Flow Statement
Sources Amount( Application(Rs) Amount(
Rs) Rs)

Issue of equity shares 120000 Purchases of land 173400

Securities premium collected 12000 Purchase of machinery 85500

Issue of debenture 78000 Income tax paid 29400

Sale of furniture 1500 Net increase in working 8400

capital

Fund from operations 85200

296700 296700
Furniture Account
Rs Rs

To balance b/d 7200 By depreciation 1200

By bank -saleb/f 1500

By balance c/d 4500

7200 7200

Machinery Account
Rs. Rs.

To Balance c/d 106800 By Depreciation 38400

To bank - purchase b/f 85500 By Balance c/d 153900

192300 192300

25. CASH FLOW FROM OPERATING ACTIVITIES(DIRECT METHOD)

PARTICULARS Rs Rs
Cash receipts from customers 95000
Less:
Cash paid to suppliers (63000)
Cash paid to employees (11000)
Cash generated from operations 21000
Less: Income tax (6000)
Net cash flow from operating activities 15000
 CASH FLOW FROM OPERATING ACTIVITES (INDIRECT METHOD)
PARTCULARS AMT AMT AMT
A.Net profit before taxation 13000
B.Add:depreciation 5000
Loss on sale of fixed assets 2000

Interest expense 3000 10,000

23000
Less:,profit on sale of investment (1000)

Income from investment (2000) (3000)

Operating profit before working 20,000
capital changes
Add: Decrease in stock 5000
Increase in creditors 2000 7000
27000
Less: Increase in debtors 5000
Decrease in general exp 1000 (6000)
Cash generated from operation 21000
Less: Income tax paid (6000)
NET CASH FLOW FROM 15000
OPERATING ACTIVITIES
Working notes:
Cash paid to employees:- Salaries for the period: 10,000
Add:outstanding at the beginning 3000
Total 13,000
Less:outstanding at the end (2000)
Rs.11000
TOTAL DEBTORS A/C
PARICULARS Rs. PARTICULARS Rs.
To balance b/d 10,000 By cash(b/f) 95000
“sales 1,00,000 By balance c/d 15000
110,000 110,000

TOTAL CREDITORS A/C

PARTICULARS Rs. PARTCULARS Rs.
To cash(B/f) 63000 By balance c/d 8000
“balance c/d 10,000 “purchases 65000
73000 73000
 QP CODE: 21101153 Reg No : .....................

21101153 Name : .....................

B.COM DEGREE (CBCS) EXAMINATION, APRIL 2021

Sixth Semester
CORE - CO6CRT20 - MANAGEMENT ACCOUNTING
Common for B.Com Model I Finance & Taxation, B.Com Model I Co-operation, B.Com Model I Computer
Applications, B.Com Model I Marketing, B.Com Model I Travel & Tourism, B.Com Model III Computer
Applications, B.Com Model III Office Management & Secretarial Practice, B.Com Model III Taxation, B.Com
Model III Travel & Tourism, B.Com Model II Computer Applications, B.Com Model II Finance & Taxation,
B.Com Model II Logistics Management, B.Com Model II Marketing & B.Com Model II Travel & Tourism
2017 Admission Onwards
3373CDF9
Time: 3 Hours Max. Marks : 80
Instructions to Private candidates only: This question paper contains two sections. Answer SECTION I questions in the
answer-book provided. SECTION II, Internal examination questions must be answered in the question paper itself. Follow
the detailed instructions given under SECTION II
SECTION I

Part A
Answer any ten questions.
Each question carries 2 marks.

1. Define Management Accounting.

2. What is meant by Responsilibity Accounting?

3. Write a short note on Financial Statement Analysis.

4. Write a short note on vertical analysis.

5. Define Ratio Analysis.

6. What is Fixed Assets to Properitor's Fund Ratio?

Inventory turnover ratio is 2.5 times. Average Inventory is Rs. 20,000. Calculate cost of revenue for
7.
operations and Revenue from operations, if profit earned is 25% of cost.

8. What is Return on Shareholders fund?

9. Compute Funds from Operations: Profit after tax: Rs. 2, 63,000, Provision for Tax: Rs. 1,15,000,
Profit on sale of machinery: Rs. 25,000, Depreciation Rs.75, 500, Interest on investment: Rs.50,000.

10. How will you treat proposed dividend while preparing the Funds Flow Statement.

11. What is meant by Cash Ouflow ? Give an example.

Calculate Cash from Operations from the following information :

12.

Net Profit Rs.3,20,000

Opening Stock Rs.60,000
Closing Stock Rs.80,000
(10×2=20)

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 Part B
Answer any six questions.
Each question carries 5 marks.

13. How does Management Accounting differ from Cost Accounting?

14. Explain the different types of Financial Statements.

15. Prepare a Common Size Statement of Profit and Loss of H Ltd from the following information.
Particulars 31-03-2019
Revenue From Operations 4,00,000
Cost of materials consumed 1,82,000
Employee Benefit Expenses 42,000
Depreciation 24,000
5 % of Revenue
Other Expenses
from operations
Other Income 1,200
Income Tax 50%

16. Examine the relationship between Solvency, Liquidity and Profitability.

17. Calculate the value of Current Asset, Liquid assets and Stock in Trade. Given, Current Ratio is
2.25:1, Quick Ratio: 1.25:1 and Current liabilities is Rs.30,000.

18. What is 'Funds Flow Statement'? Examine its managerial uses.

Prepare a Statement of Changes in Working Capital from the Balance Sheet given below;
19.
2018 2019
Capital and Liabilities:
Share Capital 3,00,000 3,75,000
Trade Creditors 1,06,000 70,000
Profit and Loss Account 14,000 31,000
Total Liabilities 4,20,000 4,76,000
Assets:
Machinery 70,000 1,00,000
Stock-in- trade 1,21,000 1,36,000
Debtors 1,81,000 1,70,000
Cash 48,000 70,000
Total Assets 4,20,000 4,76,000

From the following information, find out Cash Flow from Investing Activities
20.
PARTICULARS CLOSING OPENING
BALANCE BALANCE (Rs.)
(Rs.)

Machinery at Cost 4,20,000 4,00,000

Accumulated Depreciation 1,10,000 1,00,000
Patents 1,60,000 2,80,00

Additional Information:

Page 2/6
 1. During the year, a machine costing Rs.40,000 with its accumulated depreciation of
Rs.24,000 was sold for Rs.20,000.
2. Patents were written off to the extent of Rs.40,000 and some patents were sold at a profit
of Rs.20,000.

From the following information, calculate Cash Flow from Financing Activities:
21.
Particulars 31st March 2020 31st March 2019
(Rs.) (Rs.)
Equity Share Capital 5,00,000 4,00,000
10% Debentures 1,00,000 1,50,000
Securities Premium Reserve 50,000 40,000
Bank Overdraft 2,00,000 1,50,000
Interest on Bank Overdraft 15,000 10,000

Additional Information : Interest Paid on Debentures Rs.10,000.

(6×5=30)
Part C
Answer any two questions.
Each question carries 15 marks.

22. From the following Balance Sheets of Lavender Ltd as at 31 st March 2018 and 2019, prepare a
Comparative Balance Sheet.
31-03-2018 31-03-2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 5,00,000 10,00,000
b) Profit and Loss Account 2,50,000 8,60,000
2. Non-Current Liabilities
a) Long- Term Borrowings 2,00,000 1,50,000
b) Long -Term Provisions 50,000 60,000
3. Current Liabilities
a) Income Tax Payable 15,000 20,000
b) Trade Creditors 40,000 30,000
Total 10,55,000 21,20,000
II. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i) Buildings and Equipment 7,00,000 15,00,000
ii) Long Term Loans and
3,00,000 4,00,000
Advances
2. Current Assets
a) Stock 10,000 50,000
b) Debtors 16,000 59,000
c) Sundry Advances 14,000 21,000
d) Cash 15,000 90,000
Total 10,55,000 21,20,000

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23. From the following Balance Sheets of Samba Ltd. at 31st March 2019 and 31st March 2018, prepare
the Cash Flow Statement:
Particulars Note No. 31st March 2019 (Rs.) 31st March 2018 (Rs.)
I. EQUITY AND LIABILITIES
1. Shareholder’s Funds
(a) Share Capital 1 7,50,000 7,50,000
(b) Reserves and Surplus 2 3,10,000 (20,000)
2. Non - Current Liabilities
Long Term Borrowings (8% Debentures) 2,60,000 1,50,000
3. Current Liabilities
(a) 8% Bank Loan 40,000 50,000
(b)Trade Payables 1,20,000 1,10,000
(c) Short Term Provisions 3 50,000 40,000

TOTAL 15,30,000 10,80,000

II. ASSETS
1. Non- Current Assets
(a) Fixed Assets
(i) Tangible Assets (Net) 8,60,000 6,20,000
(ii) Intangible Assets (Goodwill) 15,000 40,000
(b) Non- Current Investments 1,25,000 80,000
2. Current Assets
(a) Current Investments 5,000 15,000
(b) Inventories 1,95,000 1,00,000
(c) Trade Receivables 2,00,000 2,00,000
(d) Cash and Cash Equivalents 1,30,000 25,000

TOTAL 15,30,000 10,80,000

Notes to Accounts

Particulars 31st March 2019 (Rs) 31st March 2018 (Rs)

1. Share Capital
Equity Share Capital 5,50,000 4,50,000
10% Preference Share Capital 2,00,000 3,00,000
7,50,000 7,50,000
2. Reserves and Surplus
Securities Premium Reserve 10,000 ….
General Reserve 1,50,000 1,20,000
Surplus a/c 1,50,000 (1,40,000)
3,10,000 (20,000)
3. Short - Term Provisions
Provision for Tax 50,000 50,000

Additional Information:

Page 4/6
 1. During the year a piece of machinery costing Rs.60,000 on which depreciation was charged
was Rs.20,000 was sold at 50 % of its book value. Depreciation provided on tangible assets
was Rs.60,000
2. Income Tax Rs.45,000 was provided.
3. At the end of the year Preference shares were redeemed at a premium of 5 %.
4. Additional Debentures were issued at par on 1st October 2018 and Bank loan was repaid
on the same date.

24. From the following balance sheets given below, you are required to prepare Funds Flow Statement.
31-12- 31-12-
2018 2019
I. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 1,10,000 1,50,000
b) Reserves and Surplus
General Reserves 4,000 4,000
Profit and Loss Account 2,000 2,400
2) Non- Current Liabilities
a) 9% Debentures 12,000 14,000
b) Long Term Provisions
c) Provision for Taxation 6,000 8,400
3) Current Liabilities
a) Trade Creditors 49,000 35,600
b) Proposed Dividend 10,000 11,600
Total Liabilities 1,93,000 2,26,000
II. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets
i)Land and Building 60,000 50,000
ii) Plant and Machinery 30,000 50,000
2. Current Assets
i) Stock 60,000 70,000
ii) Debtors 40,000 48,000
iii) Bank 2,400 7,000
iv) Cash 600 1,000
Total Assets 1,93,000 2,26,000

25. Given:

Receivables Turnover 4
Payables Turnover 6
Inventory Turnover 8
Capital Turnover Ratio 2 Times
Fixed Assets Turnover Ratio 8 Times
Gross Profit Ratio 25%
Gross Profit during the year amounted to Rs. 80,000. There is no long term loan or overdraft.

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Reserves and surplus amount to Rs. 28,000. Ending inventory of the year is Rs. 2,000 above the
beginning inventory. Notes receivable amount to Rs. 5,000 and notes payable are Rs. 2,000.
Prepare a Balance Sheet on the basis of the information given above.

(2×15=30)

Page 6/6
QP Code: 21101153

SCHEME
Sixth Semester B.Com (CBCS) Degree Examination, April 2021

Course Course - CO6CRT20 - MANAGEMENT ACCOUNTING

PART A
1. Define Management Accounting
● Management accounting is a branch of accounting which is concerned with accounting
information useful for management.
● According to CIMA, London, “Management accounting is the application of professional
knowledge and skill in the preparation of accounting information in such a way as to
assist management in formation of policies and in the planning and control of
operations of the undertaking”.
2. What is meant by Responsibility Accounting?
● Responsibility accounting is a system of management accounting under which
accountability is established according to responsibility delegated to various levels.
3. Write short note on Financial Statement Analysis
● Financial statement analysis is the process of determining the significant operating and
financial characteristics of a firm from accounting data.
4. What is Vertical Analysis?
● It is also known as static analysis
● When ratios are calculated from the items of income statement or Balance Sheet of one
year, it is called vertical analysis.
5. Define Ratio Analysis
Ratio analysis is the analysis of financial statements with the help of ratios.
It includes comparison and interpretation of the ratios and their use for future projections.
6. What is Fixed Assets to Proprietors Ratio?
● The ratio shows the relationship between fixed assets and shareholders’ funds.
● The purpose of this ratio is to find out the proportion of owners fund invested in fixed
assets.
Fixed assets to Proprietors Ratio = Fixed assets
Shareholders’ fund.
7. Inventory turnover ratio is 2.5 times. Average inventory is 20000. Calculate cost of
revenue for operations and revenue from operations, if profit earned is 25% of cost.
Inventory Turnover Ratio = Cost of Revenue from Operations
Average inventory
i.e 2.5 = Cost of goods sold
20000
Cost of goods sold = 50000.
Profit = 50000 x 25% =12500.
Revenue from operations = 50000+12500= 62500
8. What is return on shareholders fund?
● This ratio shows the rate of profit on shareholders’ fund.
● It relates the profit available for shareholders on their total investment.

Return on shareholders’ fund = Net Profit (after interest and tax)

Shareholders’ fund

9. Calculate fund from operations. Profit after tax Rs. 2, 63,000. Provision for tax
Rs.1,15,000. Profit on sale of machinery Rs.25,000. Depreciation Rs. 75, 500. Interest on
investment Rs.50000.

Calculation of Fund from Operation

Particulars Amount Amount

Profit after tax 263000
Add: Provision for tax 115000
Depreciation 75500 190500
453500
Less: Interest on investments 50000
Profit on sale of machinery 25000 75000
Fund from operation 378500

10. How will you treat proposed dividend while preparing fund flow statements?
● According to circumstances of each case, proposed dividend may be treated as non-
current liability or current liability.
● If it is treated as a non-current liability, then separate ledger account is opened.
● If it is treated as current liability, it is shown in schedule of changes in working capital.
11. What is meant by cash outflow. Give an example.
● It is the amount of cash that a business disburses.
● Example- Cash payments to suppliers.
12. Calculate cash from operations from the following information:
Net profit Rs. 320000
Opening stock Rs. 50000
Closing stock Rs. 80000

Calculation of Cash from operations

Net profit 320000
Adjustments for non-cash non-operating activities :
Increase in current asset (30000)
Net cash from Operations 290000
=======
 PART B
13. How does Management Accounting differ from Cost Accounting?
Basis Cost accounting Management accounting
Meaning For ascertaining the cost of a It is concerned with accounting
product or rendering service information useful to management
Objective It is to record the cost of It is meant for helping the management
producing a product or providing in formulating policies and plans.
service
Scope The scope is narrow and it deals Scope is wide which includes financial
primarily with cost accounting, cost accounting, budgeting,
ascertainment tax planning etc.
Principles Certain principles and policies No specific principles are followed
are followed
Data used Only those transactions which It uses both quantitative and
can be expressed in figures are qualitative information
considered
Nature It uses mainly past and present Generally concerned with projections
figures of figures for the future.
Auditing Cost accounts are to be audited No compulsory audit in management
compulsorily in certain industries accounting.

14. Explain different types of financial statements

● Profit and loss account (Income statement)- It is prepared to determine the operational
position of the concern. It is s statement of revenues earned and expenses incurred for
earning the revenue
● Balance sheet (Position statement)- Balance sheet shows all the assets owned by the
concern and all liabilities and claims owed to owners and outsiders.
● Cash flow statement- it is an analytical statement prepared to study the impact of business
transactions of a particular period on the most liquid form of assets namely, cash and cash
equivalents.
● Fund flow statements- It is a statement which shows the movement of funds, indicating the
various means by which funds are obtained during a particular period and also the ways in
which these funds are employed.

15. Prepare a common size statement of Profit and Loss of H Ltd from the following
information:

Particulars 31.03.2019
Revenue from operations 400000
Cost of materials consumed 182000
Employee benefit expenses 42000
Depreciation 24000
Other expenses 5 % of revenue from operations
Other income 1200
Income tax 50%
 H LTD
Common Size Statement
Particulars Note No Amount Percentage
I. Revenue from Operations 400000 100.0
II. Other Income 1200 0.30
III. Total Revenue 401200 100.3
IV. Expenses:-
Cost of Materials Consumed 182000 45.5
Employee Benefit Expense 42000 10.5
Depreciation 24000 6.0
Other Expenses 20000 5.0
Total expenses 268000 67.0
V. Profit Before Tax 133200 33.33
Less: Tax 66600 16.7
Profit after Tax 66600 16.7

16. Examine the relationship between Solvency, Liquidity and Profitability

● Liquidity ratio is the ratio that describes the company’s ability to meet short-term
liabilities.
● Solvency ratio describes the company’s ability to meet long-term obligations
● Profitability ratios measures company’s ability to generate profits.
17. Calculate the value of current assets, liquid assets and stock in trade. Given current ratio
is 2.25, quick ratio 1.25 and current liabilities is Rs. 30000.
Current ratio = Current Assets
Current Liability
2.25 = Current Asset
30000 Current asset = 67500.
Quick ratio = Liquid assets
Current Liability
1.25 = Liquid assets
30000 Liquid asset = 37500.
Stock = Current asset – liquid asset = 67500- 37500 = 30000

18. What is fund flow statement? Examine its managerial uses.

● It is a statement which shows the movement of funds, indicating the various means by
which funds are obtained during a particular period and also the ways in which these
funds are employed.
● Uses of fund flow statement:-
1. Provides a detailed analysis
2. Shows sources and uses of funds
3. Helps in computation of cost of capital
4. Acts as a future guide
5. Basis for future capital expenditure decisions
6. Indication of weakness or strength
7. Throws light on consequences of business operations
8. Budget comparison
9. Helps in proper allocation of resources
10. Helps in formulation of policies
19. Prepare a statement of changes in working capital form the balance sheet given below:
Particulars 2018 2019
Capital and liabilities:
Share capital 300000 375000
Trade creditors 106000 70000
Profit and loss account 14000 31000
Total liabilities 420000 476000
Assets:
Machinery 70000 100000
Stock-in-trade 121000 136000
Debtors 181000 170000
Cash 48000 70000
Total Assets 420000 476000

Answer
Statement of Changes in Working Capital
Particulars Previous year Current year Effect on working capital
Increase Decrease
A. Current Assets
Stock-in-trade 121000 136000 15000
Debtors 181000 170000 11000
Cash 48000 70000 22000
Total A 350000 376000
B. Current Liabilities
Trade creditors 106000 70000 36000
Total B 106000 70000
C. Working capital (A-B) 244000 306000 73000 11000
Net Increase in Working Capital 62000 62000
Total 306000 306000 73000 73000

20. From the following information, find out Cash Flow from Investing activities (Value
liberally)

Particulars Closing Balance Opening Balance

Machinery on cost 420000 400000
Accumulated depreciation 110000 100000
Patents 160000 280000
1. During the year, a machine costing Rs.40000 with its accumulated depreciation of Rs.24000
was sold for Rs.20000.
2. Patents were written off to the extent of 40000 and some patents were sold at a profit of
Rs.20000.
Cash flow from investing activity:
Purchase of machinery (60000)
Sale of machinery 20000
Sale of patent 100000
Cash flow from investing activity 60000
 Machinery Account
Particulars Amount Particulars Amount
Balance b/d 400000 Cash 20000
Profit and loss 4000 Accumulated 24000
Cash (purchase) 60000 depreciation 420000
Balance c/d
464000 464000
Patents Account
Particulars Amount Particulars Amount
Balance b/d *280000 Cash (bf) 100000
Profit and loss 20000 Profit & Loss A/c 40000
(written off)
Balance c/d 160000
300000 300000

21. Cash Flow from Financing Activity

Issue of shares 100000
Redemption of debentures (50000)
Interest paid (10000)
Bank OD 50000
Cash received from premium on issue of shares 10000
100000
Here Rs.5000 interest on Bank OD is treated as outstanding expense.
 PART C
22
Comparative Balance Sheet for the year ended 31st March 2018 and 2019.

Increase/ Increase /
Particulars 2018 2019 Decrease Decrease
Rs. %
Equity and liabilities:
1. Shareholders fund
a. Share capital 500000 1000000 500000 100
b. Profit and loss a/c 250000 860000 610000 244
Total 750000 1860000 1110000 148
Non-current Liabilities
a. Long term borrowings 200000 150000 (50000) (25)
b. Long term provisions 50000 60000 10000 20
Total 250000 210000 (40000) (16)
Current liabilities
a. Income tax 15000 20000 5000 33.3
b. Trade creditors 40000 30000 (10000) (25)
Total 55000 50000 (5000) (9.09)
TOTAL 1055000 2120000 1065000 100.9
Assets:
Non-current assets:
Tangible assets
a. Building and equipment 700000 1500000 800000 11402
b. Long term loans and advances 300000 400000 100000 33.33
Total 1000000 1900000 900000 90
Current Assets
a. Stock 10000 50000 40000 400
b. Debtors 16000 59000 43000 268.75
c. Sundry advances 14000 21000 7000 50
d. Cash 15000 90000 75000 500
Total 55000 220000 165000 300
TOTAL 1055000 2120000 1065000 100.9
23) CASH FLOW STATEMENT
for the year ended 31st March 2019
Particulars Rs. Rs.
A. A. Cash Flow from Operating Activities:
B. Closing Balance of Surplus Account 150000
C. Less: Opening Balance of Surplus Account (140000)
Current Year Profit 290000
D. Add : Transfer to Reserve (150000 -120000) 30000
E. : Tax Provision made 45000
F. : Interest on Bank Loan (Working Note 1 ) 3600
G. : Debenture Interest Paid (Working Note 2 ) 16400
H. : Loss on Sale of Tangible Asset (Working Note 3 ) 20000
I. : Amortization of Goodwill (40000-15000) 25000
J. : Premium on Redemption of Preference Shares (10000 X 5%) 5000
K. : Depreciation on Tangible Asset 60000
Net Profit before Working Capital Changes 495000
Less: Increase in Inventories (95000)
L. Add: Increase in Trade Payables 10000
Add: Decrease in Investment 10000
Cash Generated from Operations 420000
Less: Income Tax Paid (Working Note 4 ) (35000)
A. Net Cash used in Operating Activities 385000

B. Cash Flow from Investing Activities:

M. : Sale of Tangible Assets 20000
N. : Purchase of Tangible Assets (340000)
O. : Purchase of Investments (125000-80000) (45000)
B. Cash Flow from Investing Activities (365000)
P.
C. Cash Flow from Financing Activities:
Q. : Issue of Share Capital (550000-450000) 100000
R. : Redemption of Preference Shares at Premium of 5% ( 100000X105%) (105000)
S. : Debentures Issued 110000
T. : Debenture Interest Paid (Working Note 2 ) (16400)
U. : Bank Loan Repaid (10000)
V. : Interest on Bank Loan Paid (Working Note 1 ) (3600)
W. : Share Premium Received 10000
C. Cash Flow from Financing Activities 85000
Net Increase in Cash( A+B+C)
105000
Add: Opening Cash Balance 1- 4 - 2019
25000
Closing Cash Balance 130000
Working Notes:

1. Interest on Bank Loan

10000 X 8/100 X 6/12 = 400
40000 X 8/100 = 3200
Total Interest = 3600
=====
 2. Debenture Interest
150000X 8/100 = 12000
110000X 8/100 X 6/12 = 4400
Total Interest 16400
======
3. Tangible Assets Account
Particulars Rs. Particulars Rs.
To Balance b/d 620000 By Depreciation 60000
By Cash ( Sale) 20000
To Cash (Purchases) 340000 By Loss on Sale 20000
( Balancing Figure) By Balance c/d 860000
Total 960000 Total 960000

4. Loss on Sale of Tangible Assets

Cost of Asset = 60000

Less: Depreciation = (20000)
Book Value = 40000
Less: Sales Price ( 40000X 50/100)M = (20000)
Loss on Sale = 20000
=====
5. Provision for Taxation Account
Particulars Rs. Particulars Rs.
To Cash (Paid) 35000 By Balance b/d 40000
( Balancing Figure) By P/L A/c 45000
To Balance c/d 50000
Total 85000 Total 85000

24.

Schedule of Changes in Working Capital

Effect on Working Capital
Particulars Previous year Current year Increase Decrease
A. Current assets
Stock 60000 70000 10000
Debtors 40000 48000 8000
Cash 600 1000 400
Bank 2400 7000 4600
Total 103000 126000
B. Current liabilities 13400
Trade creditors 49000 35600
Total 49000 35600
C. Working capital (A-B) 54000 90400 36400 00000
Net increase in Working Capital 36400 -------- -------- 36400
90400 90400 36400 36400
 Fund Flow Statement
Sources Amount Application Amount
Issue of share 40000 Tax paid 6000
Issue of debentures 2000 Dividend paid 10000
Fund from operations 31660 Purchase of plant 20000
Interest on debentures 1260
Net increase in working capital 36400
73660 73660

Fund from Operations

Closing Balance of P&L A/c 2400
Less: Opening Balance of P&L A/c 2000
Current year profit 400
Add: Interest on debentures 1260
Depreciation on building 10000
Provision for tax 8400
Proposed dividend 11600
Fund from Operations 31660

Provision for Taxation Account

Particulars Amount Particulars Amount
To Cash 6000 By Balance B/d 6000
To Balance c/d 8400 By P&L A/c (BF) -Current Year 8400
Provision
14400 14400

Proposed Dividend Account

Particulars Amount Particulars Amount
To Cash 10000 By Balance b/d 10000
To Balance c/d 11600 By P&L A/c (BF) 11600
21600 21600

25.
Balance Sheet as on……………………
Liabilities Rs. Assets Rs.
Share Holders Fund: Fixed Assets 30000
Share Capital 92000 Current Assets:
Reserves and Surplus 28000 120000 Inventory 31000
Current Liabilities: Accounts Receivable 75000
Accounts Payable 38333 Notes Receivables 5000
Notes Payable 2000 Cash/ Bank ( Balancing Figure) 19333
Total 160333 Total 160333
Working Note:
1 Gross Profit Ratio = Gross Profit X 100 = 25
Sales
2 Sales = 80000 = 320000
25%
3 Cost of Sales = Sales- Gross Profit
= 320000-80000=240000
4 Inventory Turnover Ratio = Cost of Goods Sold
Average inventory
8 = 240000
Average inventory

Average inventory = 240000

8
Average inventory = 30000

Average inventory = Opening Inventory + (Opening Inventory+ 2000)

2

30000= 2 X Opening Inventory + 2000

2
60000= 2 X Opening Inventory + 2000

60000-2000 = 2 X Opening Inventory

Opening Inventory = 58000 = 29000

2
Closing Inventory = 29000+ 2000 = 31000

5 Receivables Turnover Ratio = Sales

Accounts Receivable

4 = 320000
Accounts Receivable

Account Receivable = 320000 = 80000

8

6 Sundry Debtors = Accounts Receivable -Notes Receivable

= 80000 – 5000 = 75000

7 Purchases = Cost of Sales + 2000( Excess Closing Inventory)

= 240000+2000 = 242000

8 Payables Turnover Ratio= Purchases

Accounts Payable

Accounts Payable = 242000 = 40333

6
9 Sundry Creditors = Accounts Payables – Notes Payable

= 40333 – 2000 = 38333

10 Fixed Assets Turnover Ratio = Cost of Sales
Fixed Assets
8 = 240000
Fixed Assets

Fixed Assets = 240000 = 30000

8
11 Capital Turnover Ratio = Cost of Sales
Capital

2 = 240000
Capital

Capital = 240000 = 120000

2
12 Share Capital = Capital Employed – Reserves and Surpluses

= 120000 – 28000 = 92000

======@@@======
 20100483

QP CODE: 20100483 Reg No *************

53 Name *************

BCOM DEGREE (CBCs) EXAMINATION, MARCH 2020

Sixth Semester
Core course - CO6CRT20 - MANAGEMENT ACCOUNTING

B.Com Model I Finance & Taxation.B.Com Model I Co-operation,B.Com Model I Computer

Aplications.B.Com Model 1 Travel & Tourism.B.Com Model II Computer Applications.B.Com Model 1I
Finance& Tavation.B.Com Model 11 Logistics ManagementB.Com Model 1l Marketing.B.Com Model II
Travel & Tourism.B.Com Model 11 Computer Applications B.Com Model 11l Office Management &
Secretarial Practice.B.Com Model 11 Taxation,B.Com Model II Travel & Tourism
2017 Admission Onwards
46B43B39
Instructions to Private candidates only: This question paper contains two sections. Answer Section I
questions in the answer-book provided. SECTION II Internal Examination questions must be answered in
the question paper itself. Follow the detailed instructions given under SECTION II
SECTION I

Time: 3 Hours Marks: 80

Part A

Answer any ten questions.

Each question carries 2 marks.

1. How is personal judgement a limitation of management accounting?

2. What is Zero Base Budgeting technique ?

3. Write a short note on Financial Statement Analysis.

4 List the objectives of Comparative Balance Sheet.

5. Write a note on Ratio Analysis.

6. Write a note on Secondary ratios

7 What is Interest Coverage Ratio?

8. Calculate Gross Profit Ratio from the following:

Opening Inventory 40,000 Carriage 60,000
Wages 1, 00,000 Revenue trom Operations 8, 00,000
Purchases 3, 00,000 Closing nventory 60.000

Page 1/7 Turn Over

 Write a short note Funds Flow
on
Analysis.
.Compute Funds from Operations: Profit after tax: Rs. 2. 63,000, Provision lor 1ax: Rs. 1.15,000,

roit on sale of machinery: Rs. 25,000. Depreciation Rs.75, 500, Interest on investment:

Rs.50.000.

11. What is meant by Cash Flow from Extraordinary item ? Give an example.

12. GSC Ltd. purchased a building for Rs.25,00,000 and paid the consideration by the issue of Equity
Shares. Ajas, the accountant, has prepared the cash flow statement and has shown the transaction

as follows;

Investing Activities: Purchase of Building Rs.25,00,000

Financing Activities: Issue of Equity Shares Rs.25,00,000
Do you think that it is in accordance with
per AS-3?

(10x2-20)
Part B

Answer anm six questions.

Each question carries 5 marks.

13. How does Management Accounting differ from Cost Accounting?

14. Explain the uses of Financial Statements.

15. Prepare a Comparative Balance Sheet from the following information.

Particulars 31-03-2018 31-03-2019

Land and Buildings 25,00,000 35,00,00o
Goodwill 7,00,000 10,00,000
Equity Share capital 32,00,000 33,00,000|
Governemnt Bonds
6.00,000 6,00,000|
General Reserve
7.00.000 2,00,000
Trade Receivables 6,40,000 7,90,000
Short Term Investments
5,00,000 2,00,000
9 % Debentures
11.50,000| 16,00.000
Cash in hand
50,000 25.000
Inventories 6,00,000 3,50,000
Trade Payables 2,80,000|4,50,000
Preference Share Capital
1,40,000 7,00,000
Profit and Loss Account
2.70,000 2,90.000
|Cash at Bank
1.50.000 75.000
16. Explain the significance of Current Ratio and Quick Ratio with suitable
example.

Page 2/7
17. Following are the particulars of a company given to you.
(1) Receivable Turnover 90 days (360 days a year)

Turnover 3 times
(2) Inventory
= 3 months
(3) Payables Turnover

(4) Gross Profit Ratio 25%

The following are the additional information:

I. Gross profit for the year comes to Rs. 18,000.

2. Closing inventory is Rs. 2,000 above the opening stock.
3. Bills receivable amounted to Rs. 2.500
4. Bills Payable amounted to Rs. 1,000

Find out:
(A)Sales (B) Debtors (C) Closing Inventory (D)Sundry Creditors

18. The Balance Sheets of Texas Ltd as on 31/03/2018 and 31/03/2019 is given below;

31-12-2018 31-12-2019
1. Equity and Liabilities:
1. Share Holder's Fund
a) Share Capital 5,00,000| 6,50,000
b) General reserve 74,000| 78,000|
c) Profit and Loss Account 86,000 94.000
2. Current Liabilities
a) Trade Creditors 1,87,000 1,90,000
b) Outstanding Expenses 13,000 16,50
c) Provision for Taxation 50,000 75,000
ä) Proposed Dividend 50,000| 65,000
Total Liabilities
9,60,000 11,68,500
I1. Assets:

|1. Non-Current Assets

a) Fixed: Tangible Assets
Land and Building 4,75,000 4,17,500
i) Machinery 2,20,000 3,98,000
ii) Furniture 8.500 7,650
2. Current Assets

i) Stock 1,33,100 1,86,500

i) Debtors 1,08,500 1,15,300
ii) Bills Receivable
29550
iv) Cash
14,900 14,000
Total Assets10,60,000 11,68,500

Page 3/7 Turn Over

 will 1orm part of the answer.
a schedule of changes in working capital. Your
assumptions
rcpare

omment.
9 F u n d s Flow Statement presents a decision view of business"

20. Calculate Cash from Operations from the following:

.Profit made during the year Rs.3,00,000 afterconsidering the following items:
a. Depreciation - Rs.10,000

b. Amortisation of Goodwill - Rs.6,000

c. Transfer to General Reserve Rs.8,000

d. Profit on sale of land Rs.3,000

current liabilities
I1. Following is the position of the current assets and

PARTICULARS 31st March 2019 31Sst March 2020

(Rs.) (Rs.)
Debtors 15,000 12,000
Creditors 10,000 15,000
Bills Receivable 8,000 10,000

Prepaid Expenses 2,000 8,000

21. ABC Ltd. provided the following information, calculate Net Cash Flow from Financing Activities:
PARTICULARS 31st March 2020 31st March 2019
(Rs.) Rs.)
|Equity Share Capital 12,00,000 10,00,000
12% Debentures 2,00,000 1,00,000

Additional
Information

1. Interest paid on Debentures Rs.19,000.

2. Dividend paid Rs.50,000.

3. During the year, ABC Ltd. sued bonus shares in the ratio of
5:1 by capitalising reserve.

(65-30)

Part C
Auswer my two
questions
Euh question carries 15 marks.

Page 4/7
 22. From the following Balanee Sheet of RS Ltd as at 31 st March 2019, prepare a Common Size

Balanee Sheet.
31-03-2019
. Equity and lLiabilitics:
1. Share 1older's Fund

a) Share Capital 3,60,000

b) Preference Share Capital 2,00,000
c) Prolit and Loss Account 1.51.800
d) General Reserve 78.000
2. Non-Current Liabilities
a) 10% Debentures 4.50,000
b) Long Term Borrowings 7.80,000
c)Accumulated Depreciation on
1,20,000
Building
d) Long Term Provisions 2,15,000
3. Current Liabilities

a) Income Tax Payable 12,000

b) Outstanding Expenses 24,000
c) Trade Creditors 2,40,000
Total 26,30,800
11. Assets:

1. Non-Current Assets
a) Fixed: Tangible Assets

i) Land 11,20,000
ii) Buildings and Equipment 3,60,000
b) Fixed: Intangible Assets
i) Goodwill
3.75,000
ii) Trade Marks 1,25.000
2. Current Assets
i) Stock 2,64,000
ii) Deblors 1,68,000
ii) Sundry Advances 1,07,800
iv) Cash at Bank 1,01,000
v) Cash in Hand 10,000
Total 26,30,800
23. From the following information relating to Moon Light prepare a Balance Sheet as on 31.3.2015:

1. Current Ratio 2.5

2. Liquid Ratio .5

Page 5/7 Turn Over

 3. Net Working Capital Rs. 3,00.000

4. Cost of Sales/ Closing Stock 8 times

5. G.P Ratio 20%

6. Average Debt Collection Period 1.5 Months

7. Fixed Assets/ Proprietor's Net worth 0.75

8. Reserves & Surplus/ Capital 0.50

24. From the following balance sheets given below. you are requiredto prepare Funds Flow Statement.

31-12-2018 31-12-2019
|1. Equity and Liabilities:

1. Share Holder's Fund

a) Share Capital 1,10.000 1,50,000|
b) Reserves and Surplus

General Reserves 4,000 4.000

Profit and Loss Account 2,000 2.400
2) Non- Current Liabilities
a) 9% Debentures 12,000| 14,000
b) Long Term Provisions

c)Provision for Taxation 6,000 8,400|

3) Current Liabilities

a) Trade Creditors 49,000 35,600

b) Proposed Dividend 10,000 11,600
Total Liabilities 1,93,000 2,26,000
11. Assets:
1. Non-Current Assets
a) Fixed: Tangible Assets

iLand and Building 60,000 50.000

ii) Plant and Machinery 30,000 50,000
2. Current Assets

i) Stock 60,000 70,000

ii) Debtors 40,000 48,000
ii) Bank 2,400 7,000
iv) Cash 600 1,000
Total Assets 1,93,000 2,26,000
25. The Comparative Balance Sheets of a company is given below

Particulars Note No. 31st March 2018

(Rs) 31st March 2019 (Rs)
I. EQUITY AND LIABILITIES

Page 6/7
 1. Shareholder's Funds
(a) Share Capital 35,000 37,000
(b) Profit and Loss Balance 5,020 5,280
2. Non - Current Liabilities
Long Term Borrowings : Debentures 6,000 3.000
3. Current Liabilities

(a)Trade Payables 5,180 5,920

TOTAL 51,200 51,200
I1. ASSETS

1. Non-Current Assets
(a) Land 10,000 15,000
(b) Goodwill 5,000 2,500
2. Current Assets

(b) Inventories 24,600 21.350

(c) Trade Receivables 7,450 8,850
(d) Cash and Cash Equivalents: Cash 4,500 3.900
(e) Provision for bad and doubtful debts (350) (400)

TOTAL 51,200 51,200

Additional Information:

1. Dividend Paid amounted to Rs. 1,750

2. Land was purchased for Rs.5.000 and the amount provided for writing off goodwill was

Rs.2,500
3. Debentures were paid to the extent of Rs.3,000

(2x15-30)

Page 7/7
 QP code 20100483
BCOM DEGREE (CBCS) EXAMINATION, MARCH 2020
Sixth Semester
Core course – C06CRT20 - MANAGEMENT ACCOUNTING

Time: 3 Hours Marks: 80

Part A
Answer any ten questions.
Each question carries 2 marks.

1. Personal bias of the individual can affect the objectivity and effectiveness of the
conclusions and recommendations. The interpretation of results of financial analysis is very
much influenced by the capability of the management accountant so that two management
accountants can come with different interpretations on same set of financial statements.
Therefore, personal judgment becomes the limitation of management accounting.

2. Zero base budgeting refers to a system of budgeting which is not based on any historical
data, but is developed on the basis of likely activities of the future period. Since the
budgeting is based on zero, it is known as zero based budgeting.

3. Financial statement analysis refers to the process of evaluating the relationship between
component parts of a financial statement to obtain a better understanding of a firm’s
financial position and performance. It helps the top management to evaluate the past
performance, present financial and liquidity positions, etc.

4. Following are the objectives of comparative balance sheet:

a. To forecast the financial position of the concern.

b. To know the extent of increase or decrease in various items of balance sheet.

c. To study the direction of change or trend in business concern.

d. To facilitate the comparison of items in balance sheet for two or more years.

5. Ratio analysis is the technique of identifying the financial strength and weakness of the
business enterprise by logically establishing the relationship between two items or group
of items having a mutual cause and effect relationship, of Balance Sheet or Income
 Statement or both and interpreting the results thereof in order to derive meaningful
conclusions. To put it simply, it the process of analysis and interpretation of financial
statements with the help of ratios.

6. Secondary rations are the ratios which is used to explain the primary ratios. In general,
primary ratios are very important compared to secondary ratios. For example, return on
capital employed is a primary ratio and is important as business functions to earn profit.
Secondary ratios are used for inter-firm comparison.

7. Interest coverage ratio establishes relationship between profit before interest and tax and
interest charges. This ratio measures the long-term financial position of the company. It
indicates the firm’s ability to pay off interest on debt fund out of profits earned during the
year.

Interest coverage ratio= Earnings before Interest and Tax

Fixed interest
8. Gross profit ratio = Gross profit
Net sales
Gross profit = Net sales- Cost of goods sold
Cost of goods sold = Opening stock + Wages + Purchases +Carriage - Closing stock
= 40,000 + 1,00,000 + 3,00,000 + 60,000 - 60,000
= 4,40,000
Gross profit = 8,00,000 - 4,40,000
= 3,60,000
Gross profit ratio = 3,60,000 *100 = 45%
8,00,000

9. A fund flow statement is a statement of sources and application of fund. It is a statement

prepared to analyse the reasons for changes in the financial position of a company between
two balance sheet dates. It shows the inflow and outflow of fund and applications of fund
for a particular period. It explains the changes in working capital position of a company
between two balance sheet dates.
10.
PARTICULARS AMOUNT AMOUNT
Profit after tax 2,63,000
Add:
Provision for tax 1,15,000
Depreciation 75,500 1,90,500
 Less:
Profit on sale of machinery (25,000)
Interest on investment (50,000) (75,000)
Fund from operations 3,78,500

11. Cash flow from extra ordinary items are gains or losses that arises from unusual activities.
Examples are bad debts recovered, winnings from lotteries, insurance proceeds from
earthquake disaster settlement, etc.
12. Non cash transactions are excluded from the cash flow from statement. What the
accountant has done is not in accordance with AS-3.

Part B
Answer any six questions.
Each question carries 5 marks.
13.
COST ACCOUNTING MANAGEMENT ACCOUNTING
Cost accounting refers to the process of Any form of accounting which enables a
recording , classifying, allocating and business to be conducted more
reporting various costs incurred in the efficiently can be regarded as
operations of an enterprise management accounting.
It precedes management accounting. It starts where cost accounting ends.
Scope of cost accounting is concerned Scope includes financial accounting,
with cost control and cost ascertainment cost accounting, tax planning etc.
Certain principles and procedures are No such specific rules are followed.
followed.
Cost accountant is placed at lower level Management accountant is placed at
management higher levels of management.
Cost accounting can be implemented Management accounting cannot be
without installing management installed in the absence of cost
accounting. accounting.
Award marks for any five differences.
14. Financial statements are the annual reports prepared by management at the end of an
accounting period in accordance with the Generally Accepted Accounting Principles and
concepts. Following are the uses of financial statements to different parties.
a. Owners: Funds are properly utilized or not.
b. Employees: Helps the employees in matters of incentives and remuneration.
c. Management: Helps in decision making process.
d. Creditors: Helps to know about short - term and long-term liquidity of the business.
e. Government: Helps in tax computation and ensures all the legal provisions are
followed.
f. Investors: helps to know about current position, trend and future progress of the
concern.
 g. Bankers: Helps in ensuring whether company is solvent.
h. Public: Ensures whether company fulfills its social obligation or not.
i. Others: Trade associations, chamber of commerce etc. analyses the financial
statements to judge the financial position of the concern.
15. Comparative Balance Sheet
31-30- increase /
PARTICULARS 2018 31-03-2019 decrease %increase/decrease
I EQUITY AND LIABILITIES
1 Shareholders fund
(a) Share capital 33,40,000 40,00,000 6,60,000 20%
(b) Reserves and Surplus 9,70,000 4,90,000 -4,80,000 -49%
(A)Total 43,10,000 44,90,000 1,80,000 4%
2 Non-current liabilities
9% Debentures 11,50,000 16,00,000 4,50,000 39%
(B) Total 11,50,000 16,00,000 4,50,000 39%
3 Current liabilities
Trade payables 2,80,000 4,50,000 1,70,000 61%
(C) Total 2,80,000 4,50,000 1,70,000 61%
Total (A+B+C) 57,40,000 65,40,000 8,00,000 14%
II ASSETS:
1 Non-current assets
(a) Fixed assets:
(I) Tangible assets 25,00,000 35,00,000 10,00,000 40%
(II) Intangible assets 7,00,000 10,00,000 3,00,000 43%
(b) Non-current
investments 6,00,000 6,00,000
(A)Total 38,00,000 51,00,000 13,00,000 34%
2 Current Assets
(a) Short term investment 5,00,000 2,00,000 -3,00,000 -60%
(b) Inventories 6,00,000 3,50,000 -2,50,000 -42%
(c) Trade receivables 6,40,000 7,90,000 1,50,000 23%
(d) Cash and cash
equivalents 2,00,000 1,00,000 -1,00,000 -50%
(B) Total 19,40,000 14,40,000 -5,00,000 -26%
Total (A+B+C) 57,40,000 65,40,000 8,00,000 14%

16. Significance of Current ratio and Quick Ratio

Students are expected to calculate current ratio (Current Asset/Current Liability) and quick
ratio (Quick Assets/Current Liability) with imaginary figures. Using the results, the
following points must be explained.
Current Ratio
a. This ratio explains the relationship between current assets and current liabilities.
b. Current ratio is an indicator of short-term solvency of firm.
c. Helps in analyzing the efficient management of working capital.
d. Represents the margin of safety.
e. Ideal ratio 2:1
f. Higher ratio indicates better short-term solvency.
g. Lower ratio indicates lack of liquidity and shortage of working capital.
h. Too high ratio calls for further investigation as it may be the result of idle funds.
Quick Ratio
a. This ratio explains the relationship between quick assets and current liabilities.
b. Ideal ratio 1:1
c. High quick ratio indicates good liquidity position.
d. Lower quick ratio indicates poor liquidity position.
e. Best test of short-term financial position.
17.

Gross profit=18,000

Gross profit ratio=25%

(A) Sales =18,000/25*100

=72,000
Receivables turnover = 90 days
Average receivable/sales*360 =90
Average receivable=90*sales/360
=90*72,000/360
=18,000
Average receivables=Debtors + Bills Receivable
Debtors = average receivables – bills receivables
(B) Debtors = 18,000-2,500
=15,500
Inventory turnover=3 times
Cost of goods sold/average inventory=3 times
Cost of goods sold= sales- gross profit
=72,000-18,000
=54,000
54,000/average inventory=3 times
Average inventory = 54,000/3
=18,000
 Let us consider ‘x’ as opening inventory and’ x+2,000’ as closing inventory
x+x+2,000/2=18,000
2x+2,000=36,000
2x=36,000-2,000
X=34,000/2=17,000
Opening inventory=17,000
(C) Closing inventory=17,000+2,000
=19,000
Payables turnover= 3 months
Average payable/net purchase*12=3
Average payable=3*net purchase/12
Purchase=cost of gods sold+ closing stock-opening stock
=54,000+19,000-17,000
=56,000
Average payables=3*56,000/12
=14,000
(D) Sundry creditors=average payables-bills payable
=14,000-1,000
=13,000
18. Schedule of Changes in Working Capital
PARTICULARS 31-3-2018 31-3-2019 INCREASE DECREASE
A)current assets
a) stock
1,33,100 1,86,500 53,400
b) debtors 1,08,500 1,15,300 6,800
c) bills receivable 29,550 29,550
d)cash 14,900 14,000 900
Total (A) 2,56,500 3,45,350
B)current liabilities
a)creditors 1,87,000 1,90,000 3,000
13,000 16,500 3,500
b)outstanding expenses
Total (B) 2,00,000 2,06,500
Working capital (A-B) 56,500 1,38,850

Net increase in working 82,350 82,350

capital
1,38,850 1,38,850 89,750
 Total 89,750

Note: Provision for tax and proposed dividend are taken as non-current liability.

19. A fund flow statement is a statement of sources and applications of funds. It is a statement
prepared to analyze the reasons for changes in the financial position of business. Fund flow
statement helps in :

a) Formulating a realistic dividend policy.

b) Taking capital expenditure decisions

c) Exercising budgetary control and capital expenditure control in the enterprise.

d) Judging the financial and operating performance of the business.

e) Providing indication of the weakness or strength in the general financial position of the
firm.

f) Rearrangement of capital structure , formulating long term financial plans and policies

Therefore, fund flow statement presents a decision view of business.

20. Cash flow from Operating Activities

PARTICULARS AMOUNT AMOUNT
Cash flow from operating activities
Profit made during the year 3,00,000
Add: Non-operating expenses
Depreciation 10,000
Amortisation 6,000
Transfer to general reserve 8,000 24,000
Less: Non-operating incomes
Profit on sale of land 3,000 (3,000)
Cash generated before adjusting working capital items 3,21,000
Add: increase in current liability- creditors 5,000
Decrease in current asset – debtors 3,000 8,000
Less: increase in current asset -bills receivable 2,000
-prepaid expense 6,000 (8,000)
Cash from operations 3,21,000

21. Cash flow from Investing Activities

PARTICULARS AMOUNT
Cash flow from financing activities
 Issue of debentures (2,00,000-1,00,00) 1,00,000
Interest paid on debenture -19,000
Dividend paid -50,000
Net cash flow from financing activities 31,000
Note: Issue of bonus share incurs no cash flow. Therefore, no treatment required.
Part c
Answer any two questions
Each question carries 15 marks

22. Common Size Statement

Particulars 31-03-2019 % of balance sheet items to the
total
1.Equity and liabilities
1. shareholders fund
a) Share capital 3,60,000 14%
b) Preference share capital 2,00,000 8%
c) Profit and loss account 1,51,800 6%
d) General reserve 78,000 3%
(A) Total 7,89,800 30%
2. Non-current liabilities
a) 10% Debentures 4,50,000 17%
b) Long term borrowings 7,80,000 30%
c) Accumulated depreciation on 1,20,000 5%
building
d) Long term provisions 2,15,000 8%
(B) Total 15,65,000 59%
3. Current liabilities
a) Income tax payable 12,000 0.45%
b) Outstanding expenses 24,000 0.91%
c) Trade creditors 2,40,000 9.00%
(C) Total 2,76,000 10%
Grand Total (A+B+C) 26,30,800 100%

II Assets
1. Non-current asset
a) Fixed: Tangible assets
i) Land 11,20,000 42%
ii) Buildings and equipment 3,60,000 14%
b) Fixed: intangible assets
i) Goodwill 3,75,000 14%
ii) Trademarks 1,25,000 5%
(A) Total 19,80,000 75%
2. Current asset
i) Stock 2,64,000 10%
ii) Debtors 1,68,000 6%
 iii) Sundry advances 1,07,800 4%
iv) Cash at bank 1,01,000 4%
v) Cash in hand 10,000 .38%
(B) Total 6,50,800 25%
Grand Total (A+B+C) 26,30,800 100%
Comments
a. The proportion of debt in the capital structure is more compared to shareholders funds.
b. The total current liabilities come to 10% of the balance sheet size whereas current assets
come to 25%.
(Award 12 marks for common size statement and 3 marks for interpretation (at least
two points)

23.
a. Current ratio = 2.5:1
Current asset/current liabilities=2.5/1

Current asset=2.5current liabilities

We have, current asset – current liability=3,00,000

2.5 CL-CL=3,00,000

1.5 CL=3,00,000

* CL=2,00,000

* CA=2.5*CL=2.5*2,00,000=5,00,000

b. Liquid ratio=1.5:1

Liquid assets/Current liabilities=1.5/1

Liquid assets =1.5*CL

=1.5*2,00,000

=3,00,000

*Inventory =Current asset- Liquid assets

=5,00,000-3,00,000

= 2,00,000

c. Cost of sales/closing stock=8 times

Cost of sales=8*closing stock

 = 8*2,00,000

=16,00,000

Gross profit ratio=20%

Cost of sales=80%

*Sales=16,00,000/80%=20,00,000

*Average debt collection period=1.5 month

Debtors/sales*12=1.5

Debtors =1.5*20,00,000/12k

=2,50,000

d. Fixed assets to networth ratio is 0.75, it means that 0.25 of networth has been invested
in working capital.
Therefore networth or shareholders fund is 3,00,000/0.25 =12,00,000.
Hence fixed assets = 12,00,000 X 0.75 =9,00,000.
e. Reserves and Surplus + Share Capital = 12,00,000
.50 share capital + share capital = 12,00,000
Share capital = 8,00,000 and Reserves and surplus =4,00,000.

f. Other current assets = 5,00,000- debtors – inventories = 50,000. It can be assumed as

cash also.

Balance Sheet
Liabilities Amount Asset Amount
Proprietors net worth Fixed asset 9,00,000
Capital 8,00,000 Current asset
Reserves 4,00,000 12,00,000 Inventory 2,00,000
Current liabilities 2,00,000 Debtors 2,50,000
Cash 50,000 5,00,000
14,00,000 14,00,000

24.
Schedule of changes in working capital
 31-12-2018 31-12-2019 INCREASE DECREASE
Current asset
Stock 60,000 70,000 10,000
Debtors 40,000 48,000 8,000
Bank 2,400 7,000 4,600
Cash 600 1,000 400
Total (A) 1,03,000 1,26,000
Current liabilities
Trade creditors 49,000 35,600 13,400
Total(B) 49,000 35,600
Working capital 54,000 90,400
Net increase in working capital 36,400 36,400

90,400 90,400 36,400 36,400

Dr Provision for taxation Cr

Particulars Amount Particulars Amount
Bank 6000 Balance b/d 6,000
Balance c/d 8,400 Profit and loss a/c(b/f) 8,400
14,400 14,400

Dr Proposed dividend a/c Cr

Particulars Amount Particulars Amount
Bank 10,000 Balance b/d 10,000
Balance c/d 11,600 Profit and loss a/c(b/f) 11,600
21,600 21,600
Note: It is assumed that opening balance of provision for tax and proposed dividend is paid
during the year.

Fund from operations

Particulars Amount
Current year profit(2,400-2000) 400
Add: Provision for tax 8,400
Proposed dividend 11,600
Fund from operations 20,400

Fund flow statement

Sources of funds Amount Applications of funds Amount
Fund from operations 20,400 Net increase in working capital 36,400
Issue of share capital 40,000 Purchase of plant and machinery 20,000
Issue of debentures 2,000 Tax paid 6,000
Sale of land and building 10,000 Dividend paid 10,000
72,400 72,400
25) The question is incomplete. Students may do cash flow statement or fund flow
statement. Give marks for both the answers. Value liberally. Don’t give marks for just
attending the question as it is easy for students to understand that they are required to
do FFS or CFS.

Cash Flow Statement

Increase in profit and loss account 260
Adjustments for non cash and non operating expenses:
Provision for doubtful debts 50
Dividend 1750
Goodwill written off 2500
Operating profit before working capital changes 4,560
Increase in trade payables 740
Decrease in stock 3,250
Increase in debtors (1,400)
Cash generated from operations 7,150
Less Income Tax xx
A. Net cash flow from operating activities 7,150
Purchase of Land (5,000)
B. Net Cash flow from investing activities (5,000)
Issue of share capital 2,000
Redemption of debentures (3,000)
Dividend paid (1,750)
C. Net Cash flow from financing activities (2,750)
Net increase in cash and cash equivalents (600)
Cash and cash equivalents at the beginning 4,500
Cash and cash equivalents at the end 3,900
 MODULE
INTRODUCTION TO MANAGEMENT ACCOUNTING
Modern Accounting can be classified in to three categories:
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
I. FINANCIAL ACCOUNTING
Financial Accounting may be defined as the art and science of recording
and classifying business transactions and preparing summaries of the same
for determining the profit or loss of the year and the financial position of the
concern as on a particular date.
Thus Financial Accounting is the process of collecting, recording,
classifying and summarising financial date for the needs of
management, shareholders, creditors, banks and the government.

OBJECTIVES OF FINANCIAL ACCOUNTING

1. Recording business transactions systematically
It is necessary to maintain a systematic record of every business
transaction.
2. Calculation of Profit earned or Loss incurred
Another objective of Financial Accounting is to ascertain the profit earned or loss
suffered during a particular period. It gives information regarding goods
purchased and sold, expenses incurred and revenues earned during a particular
year.
3. Depiction of Financial Position of the firm
Ascertaining profit or loss is not enough. The businessman is also interested
in knowing the financial position of the business. For this purpose, a Balance
sheet is prepared.
4. Assisting Management
Systematic accounting helps the management in effective decision making,
efficient control on Cash management, preparing budget and forecasting,
etc.
5. Assessing the Progress of the business
Financial Accounting helps in assessing the progress of business from
year-toyear, as proper accounting facilitates both inter-firm as well as
intra-firm comparison.
6. Detecting and Preventing Errors and frauds
It is necessary to detect and prevent errors and frauds, mismanagement of
finance, etc. Systematic recording helps in the easy detection and
rectification of errors, frauds and inefficiencies, if any.
7. To Portray the Liquidity position
For this purpose, it prepares a cash flow statement showing inflows and
outflows of cash from operating, investing and financing activities.
8. To File Tax Returns
One of the main objectives of accounting is to provide adequate data for
filing returns relating to Income Tax and Goods and Service Tax.
II. COST ACCOUNTING
Cost Accounting is developed on account of growth of factory system,
intensive competition and complexities of modern business. Cost
accounting is helpful in evaluating performance through various techniques
like marginal costing, standard costing and budgetary control. It is used for
cost ascertainment, cost control and decision making.
Cost Accounting is defines as "the process of accounting for cost from the
point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units. In its widest usage it
embraces the preparation of statistical data, the application of cost control
methods and the ascertainment of the profitability of activities carried out or
planned".

FUNCTIONS OR OBJECTIVES OF COST ACCOUNTING

Following are the basic objectives of Cost accounting:
1. Ascertainment of Cost
Cost ascertainment is the basic objective of cost accounting. The cost of a
product is ascertained under each element of cost.
2. Cost Control
Cost Control is the most important function of cost accounting.
Predetermined costs are developed through standards and budgets to
achieve this objective.

3. Cost Reduction
Cost reduction aims at reducing the cost by means of reducing wastages,
effective utilisation of labour, reducing idle time, value analysis and fixation
of standards.
4.Fixation of Selling price
Cost accounting provides all the necessary cost data that helps in fixing
selling prices.
5. Evaluation of performance
Cost accounting constantly evaluates performance by comparing actuals with
standards. Any deviation is noted and analysed, thereby individual
performance 15 automatically assessed.
6. Decision making
The central theme is to provide information, largely in the area of costs,
which will be useful in controlling the operations of a business and taking
managerial decisions.

III. MANAGEMENT ACCOUNTING

MEANING AND DEFINITION
.It is the study of managerial aspects of accounting. It is a tool in the
hands of management to exercise control and decision making.
Management accounting provides accounting information to
management for efficient decision making. Thus we can say that
Management Accounting is an intelligent arm of management.
definition
"Management Accounting is concerned with accounting information that is
useful to management".
CHARACTERISTICS OF MANAGEMENT ACCOUNTING
Following are the important characteristics of management accounting:
1. Providing Financial Information
Management Accounting is concerned more with presentation of financial
information to the management for reviewing policies and decision making,
than with the collection of such data.
2. Cause and effect relationship
Management Accounting analyses the cause and effect of the facts and
figures given in the Profit and Loss account and Balance sheet. If there is
any loss, causes for the loss are investigated. If there is any profit, the
various factors affecting the profit are also analysed.
3. Providing of Information and not Decisions
It provides the requisite data and not decisions. It is essentially a service
activity which aids the managers at different levels to arrive at their
decisions.
4. Use of Special Techniques and Concepts
Management Accounting employs special techniques like Marginal Costing,
Standard Costing, Budgetary Control, Responsibility Accounting, Cash flow,
Funds flow, Ratios, Activity Based Costing etc to make accounting data
more powerful and helpful to the management.
5. Achievement of Objectives
Management Accounting is helpful in realising the objectives of the
enterprise.
6. Improving Efficiency
The main purpose of management accounting is to provide information to
increase efficiency. The actual performance is compared with the
pre-determined targets. The positive deviations are reviewed and the negative
deviations are corrected. This is possible through variance analysis.
7. Decision Making
Management accounting provides relevant information to the management
to take various vital decisions.
8. No fixed conventions and standards
Financial accounting has various established accounting standards and
principles in preparing financial accounts. But management accounting has
no such fixed standards or principles. The tools and techniques applied by
the management accounting are same, but application of these techniques
varies from concern to concern and situation to situation.
9.Forecasting
Forecasting is possible with the help of management accounting. It is helpful
in planning and laying down objectives.

SCOPE OF MANAGEMENT ACCOUNTING

The scope of management accounting is very wide and it includes a variety
of aspects of business operations. The data supplied by financial accounting
serves as a basis for management accounting.
Following are some of the areas of specialisation included in the orbit of
management accounting:
1. Financial Accounting
Financial Accounting pertains to recording all business transactions in the
books of prime entry, posting them in to respective ledger accounts,
balancing them and preparing a trial balance. This in turn forms the basis for
analysis and interpretation for furnishing meaningful data to the
management. Thus management accounting is closely related and
connected with financial accounting. It depends on financial accounting
which limits its scope.
2. Cost Accounting
Cost Accounting reveals efficiency of various divisions, departments and
products. It also provides the necessary tools such as Marginal Costing,
Standard Costing, Budgetary Control Inventory Control, Activity Based
Costing etc for cost control and decision making Thus Cost Accounting is an
integral part of management accounting.
3. Forecasting and Budgeting
This refers to the formulation of budgets and forecasts, by estimating
expenditure and revenue for a given period. Targets are fixed for various
departments and responsibility is assigned for achieving the targets. Actual
results are compared with the present targets and performance is evaluated.
4. Cost Control Techniques
Cost control techniques serve as effective tools for comparing the actual
results with the pre-determined figures as laid down in budgeting. They
greatly help in translating the budgets in to operating plans. Standard
Costing is an effective cost control technique.
5. Inventory Control
This includes planning and control of inventory from the time of acquision of
material to the stage of disposal of inventory. This is done through various
techniques of inventory control like ABC analysis, VED analysis, Just In
Time Inventory (JIT), Physical stock verification, etc.
6. Statistical Analysis
Statistical tools include charts, diagrams, graphs, index numbers, etc. These
tools are used to make the information more useful. Time series analysis,
Regression analysis and other sampling techniques are used for the
purpose of forecasting.
7. Analysis and Interpretation of Data
Financial statements are analysed and compared with past statement,
compared with those of other firms and standards set. The analysis and
interpretation helps the management in drawing conclusion.
8. Tax Accounting
This necessitates the computation of profits in accordance with the
provisions of the Income Tax Act and also prompt filing of returns
periodically and payment of taxes. Tax planning is done by following various
tax incentives offered by the central and state governments.
9. Internal Audit
Internal audit helps the management in fixing individual responsibility for
internal control.
10. Office Services
This mainly relates to the maintenance of data processing and other office
management services like printing. stenciling. duplicating, dealing of inward
and outward mails,
12. Methods and Procedures
These are concerned with standardisation of methods and procedures in a
Management for improving efficiency as well as for reducing the cost
considerably.
OBJECTIVES OF MANAGEMENT ACCOUNTING
1. Planning and Policy Formulation
Planning is one of the primary functions of management. It is
essentially related to taking decisions in future. Management
accountant can help a lot in these planning and policy formulation
processes.
2. Helps in Decision Making
Management accounting helps the decision making process. The
management has to take certain important decisions about the expansion or
diversification of production. The information provided by the management
accountant helps the management in selecting a suitable alternative and
taking correct decisions.
3. Helps in Controlling
Management Accounting is a useful device of managerial control.
Management Accounting devices like Standard Costing, Budgetary Control
and Activity Based Costing are helpful in controlling performance.
4. Helps in Organising
Organising includes the delegation of authority, decentralisation and fixing of
responsibility. Management accounting is connected with the establishment
of cost centres, profit centres, responsibility centres, preparation of budgets,
and fixing of responsibility for different functions. All these aspects are
helpful in setting up effective and efficient organisation framework.
5. Helps in the Interpretation Process
The main object of management accounting is to present financial
information to the management in an understandable manner. This is
possible with the help of statistical devices like diagrams, charts, graphs,
index numbers, etc.
6. Motivates the Employees
Delegation increases the job satisfaction of employees and encourages
them to look forward. It motivates the employees to attain the targets given
to them. Incentives may be given to them for improving their performance.
7. Helps in Co-ordination
Management accounting helps in overall control and co-ordination of It
provides tools which are useful for co-ordinating the activities of operations.
It provides tools which are use different departments.
8. Reporting to Management
Timely and clear reports are essential for taking appropriate decision and
action. Thus one of the basic objectives of management accounting is to
keep the management well informed about the operations of the business.
The performance of various departments is also regularly communicated to
the top management.
9. Helpful in Tax Administration
Taxation plays a crucial role in the profitability of an enterprise. Tax
administration and tax planning are carried out with the advice and guidance
of management accountant.
10. Assists the Management to manage better
Management Accounting assists the management in several ways in its
functions. It is an integral part of business management. It provides all types
of assistance to the management in performing all of its functions. Thus the
main objective of management accounting is “to serve the needs of
management” or “to enable the manager to manage better".
FUNCTIONS OF MANAGEMENT ACCOUNTING
1. Planning and Forecasting
One of the major functions of the management accountant is to help
management in the selection of company goals and in the formulation of
policies and strategies to allocate resources to achieve these goals.
2. Modification of Data
Accounting data as such are not suitable for managerial decision making
and control. It is the function of management accounting to modify the
available accounting data by re-arranging in such a way that it becomes
useful for management,
3. Furnishes Information as per Requirements
Management accounting furnishes statistical information according to the
varying requirements of the different levels of management at periodic
intervals.
4. Financial Analysis and Interpretation
The accounting data is analysed and interpreted meaningfully for effective
planning and decision making. Interpretation is the most important function
of management accounting. Thus analysis and interpretation of data are
considered as the back-bone of management accounting,
5. Co-ordinating
Budgeting, financial reporting and analysis and interpretation are the
techniques commonly used by the management accountants to co-ordinate
efficiently the various activities of the business. The supply of adequate
information at the proper time will increase the efficiency of management.
6. Decision Making
Management Accounting furnishes accounting data and statistical
information required for decision making which will affect the survival and
growth of the business
8. Communication
The management accounting is an important medium of communication.
Different levels of management need different types of communication. This
is possible through management accounting..
9. Tax Administration
The responsibilities of a management accountant also include tax
administration. This task involves tax planning, tax management, filing of
returns in time to tax authorities and supervision of all matters relating to tax
administration.
10. Use of Qualitative Information
Mere financial data and its analysis and interpretation are not sufficient for
decision making purposes. Management accounting uses qualitative
informations like case studies, market surveys, productivity reports,
economic forecasts, sales analysis, etc also before taking vital decisions.

Financial Accounting Management Accounting

The purpose of financial accounting The purpose of management
is to ascertain profit or loss and the accounting is to provide information
financial position and present it to to the management for decision
owners, creditors, government, etc. making
Financial accounting is concerned Management accounting is
with external reporting. concerned with internal reporting.
Financial accounting is concerned Management accounting is
with historical costs and records concerned with future plans and
relating to the past. Thus, financial operations. Thus management
accounting is historical and objective. accounting is subjective and relates
to the future.
Financial accounting follows the Management accounting is not
double entry system for recording based on the double entry system.
business transactions.
Financial accounting data is primarily Management accounting is not
meant for external users. The bound to use the Generally Accepted
Generally Accepted Accounting Accounting principles. It can use any
Principles (GAAP) are extensively accounting technique which
used while recording business generates useful information to the
transactions. management.
Financial statements are prepared Management accounting reports and
for a definite period, usually for a statements are prepared whenever
year. It requires that financial needed.Reports may be prepared on
statements be prepared at regular monthly, weekly even daily basis.
time intervals.
All informations under financial Besides monetary units, the
accounting are in terms of money. management accountant may find it
necessary to use such measures as
number of labour hours, machine
hours, products units, etc for the
purpose of analysis and decision
making.
Financial accounting focuses on the Management accounting provides
company as a whole. detailed information about products,
individual activities, operations, etc.
Financial accounting is also known Management accounting is also
as external accounting, produces known as internal accounting,
information and reports for external identifies, collects, classifies and
users. reports information that is useful to
managers in planning, control and
decision making
Financial statements are governed There is no statutory regulation by
by the provisions of the Companies fixing the norms and standards for
Act and Income Tax Act in force. preparation and presentation of
accounting statements under this
system. There is no legal compulsion
in this regard so far.
Financial Accounting is more rigid Management Accounting is more
as it has to obey the Accounting flexible.
standards and principles.

Cost Accounting Management Accounting

It precedes management accounting It starts where cost accounting ends.

The main objective of cost The function of management

accounting is to ascertain and control accounting is to provide information
the cost of products or services. to management for taking
managerial decisions.
It focuses mainly on cost control, It focuses mainly on decision making
keeping within budgeted and from the given set of course of
standard limits. action.
Cost accounting uses only management accounting uses both
quantitative information qualitative and quantitative
information
Cost accounting is concerned mainly Management accounting has a wide
with cost ascertainment and cost scope and it includes financial
control. Thus it has narrow scope. accounting, cost accounting,
budgeting, tax planning and
reporting to management.
Cost accounting is based on both Management accounting deals with
historical and present data Certain future projections on the basis of
principles and procedures are historical and present cost data.
followed in cost accounting.
It serves the needs of both internal No such specific rules are followed
management and external parties. in management accounting
Cost accountant is generally placed It serves the needs of only internal
at a lower level of hierarchy than a management.
management accountant.
Cost accounting can be installed Management accounting cannot be
without management accounting installed in the absence of cost
accounting.

Tools and techniques of management accounting

1. Based on Financial Accounting Information:
(1) Analysis of Financial Statements through Ratio Analysis.
(2) Analysis of Financial Statements through Comparative Statements,
Common size statements, Trend, Graphs and Diagrams.
(3) Funds Flow Analysis.
(4) Cash Flow Analysis.
2. Based on Cost Accounting Information:
(1) Marginal Costing
(2) Differential Costing
(3) Standard Costing
(4) Variance Analysis
3. Based on Future Information:
(1) Budget and Budgetary Control
(2) Business forecasting
(3) Project Appraisal and Evaluation Techniques like Return on Investment
Method, Pay Back Method, Net present Value Method, Internal Rate of
Return Method, etc.
4. Based on Mathematics
(1) Operations Research
(2) Linear Programming
(3) Network Analysis
(4) Queuing theory and Game Theory
(5) Simulation Theory
5. Miscellaneous Tools
(1) Managerial Reporting
(2) Historical Cost Accounting
(3) Integrated Accounting
(4) Financial Planning
(5) Revaluation Accounting
(6) Decision making Accounting
(7) Management Information System

important tools and techniques

1. Financial Planning
The main objective of any business organization is maximization of
profit.This objective is achieved by making as the best or sound financial
planning. financial planning is considered as the best tool for achieving
business objectives.
2. Financial Statement Analysis
Profit and Loss account and Balancesheet are important financials
statements are analysed for different period. This type of analysis helps the
management to know the rate of business concern.
3. Cost Accounting
Cost accounting presents cost data in product wise, process wise,
department wise, branch wise and the like. These cost data are compared
with predetermined costs. This comparison of two costs enables the
management to decide the reasons responsible for the difference between
these costs.
4. Fund Flow Analysis
This analysis finds out the movement of fund from one period to another.
Moreover, this analysis is very useful to know whether the fund is properly
used or not in a year when compared to the previous year.
 5. Cash Flow Analysis
The movement of cash from one period to another can be found out through
this analysis. Besides, the reasons for cash balance and changes between
two periods can also be found out. It studies the cash from operation and the
movement of cash in a period.
6. Standard Costing
Standard cost is a predetermined cost. It provides a yard stick for measuring
actual performance. It is used to find the reasons for the deviations if any.
Standard costing is an important technique for cost control.
7. Marginal Costing
Marginal costing technique is used to fix the selling price, selection of best
sales mix, best use of scarce raw materials or resources, to take make or
buy decision. acceptance or rejection of bulk order and foreign order and the
like. This is based on the fixed cost, variable cost and contribution.
9. Revaluation Accounting
The fixed assets are revalued as per revaluation accounting method so that
the properly represented with the assets value. It helps to find out the fair
return on capital employed. The effect of inflation on the fixed assets is
tackled here.
10. Statistical Techniques
There are a lot of statistical techniques used in removing management
problems. Methods of Least square, Regression and Quality control etc. are
some examples of statistical techniques.
11. Historical Cost Accounting
It means that costs are recorded after being incurred. This is used for
comparing with predetermined costs to evaluate performance.

ADVANTAGES OF MANAGEMENT ACCOUNTING

1. It helps to increase the efficiency of all functions of management.
2. It helps in target fixing, decision making, price fixing, selection of product
mix and so on.
3. It ensures efficient regulation of business activities by establishing
efficient system of planning and budgeting.
4. It is useful in controlling wastages and defects.
5. It helps in complete communication between all levels of management.
6. It helps in controlling the cost of production, thus increasing the rate of
profit.
7. It ensures effective control by comparing actual results with the standards.
8. It maintains a good public relation by providing quality services to the
customers.
8. It provides means to motivate the employees of the organisation.
10. It helps in evaluating the efficiency and effectiveness of the company's
business policies with the incorporation of management audit.

LIMITATIONS OF MANAGEMENT ACCOUNTING

1. Management Accounting depends on financial accounting and cost
accounting. If these records are not reliable, it will adversely affect the
effectiveness of management accounting.
2. Decisions taken by the management accountant may or may not be
executed by the management
3. It is very expensive. Only big organisations can adopt this method of
accounting.
4. There is possibility of opposition or resistance from the employees
because of the introduction of new rules and regulations.
5. It is only in the developing stage. So its concepts, techniques and
analytical tools are imperfect
6. It provides only data and not decisions.
7. It is only a tool to the management and not an alternative of management.
8. Personal bias of the individuals can affect the objectivity and
effectiveness of the conclusions and recommendations.
9. The scope of management accounting is wide and broad-based and this
creates many difficulties in the implementation process.
10. The use of management accounting requires the knowledge of a number
of related subjects such as statistics, economics, financial accounting,
psychology, sociology, cost accounting, mathematics etc. Lack of
knowledge in any of these subjects limits the use of management
accounting.
 MODULE
RATIO ANALYSIS
It analyses financial data from the firm's Profit and Loss Account
and Balance sheet. Accounting ratios show the relationship
between items given in financial statements.
Definition
“The relationship of one term to another, expressed in simple
mathematical form is known as ratio".
Ratio may be expressed in the following four ways:
(1) Pure Ratio or Proportion: It is expressed by the simple
division of one number by another.
(2) Rate or Times: In this type, it is calculated how many times a
figure is in comparison their figure.
3) percentage: in this type the relation between two figure is
expressed in hundredth
4) Fraction: it is calculated by dividing the more favourable figure

Objectives, Purpose and Importance of Ratio Analysis

(1) To provide deeper analysis of profitability, liquidity and efficiency of
the business.
(2) To identify the strength and weakness of the concern.
(3) To compare the financial performance of one firm with another
firm.
(4) To interpret the firm's present ratios with past ratios.
(5) To convert the complex data into understandable form.
(6) To assist in taking judicious decisions by management and
various interested parties.
(7) To provide information useful for making estimates and
preparing plans for the future.
(8) To evaluate the policies of the company.
Significance, Advantages and Uses of Ratio Analysis
1. Simplification of Accounting Data: Ratio analysis presents
complex accounting data into simpler and understandable form by
expressing the items in percentages. It establishes the relationship
between financial statement items in most simple languages.
Helps in Analysis and Decision making: Ratio analysis helps the
various stakeholders like creditors, employees, owners, banks etc,
to obtain information regarding financial performance and position
of the concern. This helps them to take decisions by the process of
analysis and interpretation.
Helps in Comparison: Ratio analysis helps in both intra-firm
comparison (ie, comparing the present ratios with the past ratios by
the same firm itself) and interfirm comparison (ie, comparing the
financial performance and position of a firm with another firm).
4. Provides Ideal Standards: Ratio analysis provides ideal
standards for measuring efficiency. Actual ratios can be compared
with ideal ratios for evaluating efficiency and effectiveness.
5. Helps in the Evaluation of overall performance: Ratio analysis helps
in the evaluation of overall performance of the concern by analysing the
profitability, liquidity, solvency etc.
6. Helps in Forecasting: Ratio analysis establishes relationship
between two accounting variable which are interrelated. This helps in
forecasting and preparing plans for the future.
7. Helps in Controlling: Ratios relating liquidity, solvency and
profitability help the management to control financial activities. It helps
the management to discharge their managerial functions like planning,
organising, directing, controlling etc.
8. Helps in Estimating the Trend: Accounting ratios of a number
of years reveal the trend of financial statement components such
as costs, revenue from operations, net profit etc.
9. Helps in Management Functions: The ratio analysis helps the
management in the process of discharge of its managerial
functions such as planning, control, co ordination, etc.
Limitations of Ratio Analysis
1. Limitation due to Accounting Data
Ratios are calculated on the basis of information provided by the financial
statements. If the accounting informations are not accurate, ratio
analysis becomes meaningless. Financial statements are prepared on
the basis of historical facts. So, the ratio analysis suffers the limitations of
accounting data.
2. Problems of Price Level Changes
The ratios of various years are not comparable because price level
changes are not taken into account while preparing financial
statements.
3. Ignores Qualitative Factors
Ratio analysis is a quantitative measurement. It ignores the
qualitative factors like honesty, moral values, ability etc.
4. Difficult for Comparison
Inter-firm comparison is not possible if the two firms follow different
accounting policies.
5. Affected by Personal Judgement
Ratios can be interpreted differently by different people. Personal
judgement in making conclusions leads to the analysis meaningless.
Ratios are only a means not an end in itself.
6. Limited Use of single ratio
The conclusions drawn from single ratio may not be accurate. It is
essential to study two or more connected ratios to draw valid
conclusions,
7. Lack of Proper Standards
Fixation of ideal ratios or standards are a difficult task. Circumstances
are different from one firm to another. Hence no single ideal ratio can
be fixed for all organisations.

Classification of Ratios
1. Traditional Classification
This classification has been on the basis of financial statements to
which the determinants of a ratio belong. On this basis the ratios
could be classified as:
(i) Profit and Loss Account Ratio means ratios calculated on the
basis of the items of the Profit and Loss Account only.
(ii) Balance Sheet Ratio means ratios calculated on the basis of
items given in the Balance sheet only
(iii) Composite Ratio or Mixed Ratio means ratios based on
figures of Profit and Loss Account and Balance sheet.
2. Functional Classification
The traditional classification has been found to be too crude and
unsuitable because analysis of Balance sheet and Income
statement cannot be done in isolation
Therefore, ratios are classified according to their functions as
follows:
 Liquidity Ratios: These ratios reveal the capacity of the business
enterprise to meet its short term obligations out of its short-term
resources.
(ii) Solvency Ratios: These ratios are also called Leverage ratios or
Efficiency ratios. The long-term solvency of the business can be
examined by using solvency ratios or leverage ratios.
(iii) Activity Ratios: These ratios are used to measure the effectiveness of
asset management.

A. LIQUIDITY RATIOS (Short-term Solvency Ratios)

Liquidity means the firm's ability to meet its current obligations out of current
resources or assets. Liquidity ratios measure the short-term financial
strength and weakness of a firm.
Liquidity ratios include:
(i) Current ratio; (ii) Quick ratio; (iii)Absolute Liquidity ratio
(i) Current Ratio
Current ratio explains the relationship between current assets and
current liabilities. It measures whether a firm has enough resources
to meet its short-term obligations. It is also called as “Working
Capital Ratio'.
Components of Current Ratio
1. Current Assets: Current assets are those assets which can be
converted within one year or 12 months from the date of
Balancesheet.
Current Liabilities: Current liabilities are short term obligation
within one year or 12 months from the date of Balancesheet.

(ii) Quick Ratio or Acid Test Ratio or Liquid Ratio

Quick ratio explains the relationship between quick assets and
current liabilities. It indicates whether a firm has the ability to meet
its current liabilities within a month or immediately. An asset is said
to be liquid if it can be converted into cash within a short period
without loss of value.

Components of Quick Assets:

Quick assets or liquid assets include all those assets which can be
converted into cash and cash equivalents very shortly
 Liquid assets include:
1. Cash and Cash Equivalents (Cash in hand, Cash at Bank,
Marketable Securities)
2. Trade Receivables:
(i) Bills Receivable
(ii) Sundry debtors, Less provision for doubtful debts
3. Short Term Investments
4. Short term loans and advances
(iii) Absolute Liquidity Ratio
This ratio explains the relationship between absolute liquid assets
and current liabilities.
Components of Absolute Liquid Assets:
• Current investment, Marketable securities, Short term/temporary
investments.
• Cash in hand and cash at bank

B. SOLVENCY RATIOS (Long Term Solvency Ratios)

Solvency Ratios are those ratios which evaluate the company's
ability to meet its long term liabilities. It establishes the relationship
between owned funds and loaned funds. It measures the long-term
financial position of the company.
Solvency ratios include:
(i) Debt-Equity Ratio (ii) Proprietary Ratio (iii) Interest Coverage
Ratio (iv) Fixed Assets to Long Term Fund Ratio (v) Fixed Assets
to Proprietor's Fund Ratio (vi) Capital Gearing Ratio (vii) Overall
Solvency Ratio
(i) Debt-Equity Ratio
Debt-Equity ratio indicates the proportion of debt fund in relation to
equity or owner's fund. It is also known as Debt-Net worth ratio or
External-Internal Equity ratio.
Components of Long Term Debts: Long Term Debts include
Debentures, Bonde Mortgage loans, Bank loans, Loans from
Financial Institutions, Public Deposits
Components of External Liabilities: External Liabilities debts and
Current liabilities.
Components of Shareholders' Fund
1. Share capital : Equity and Preference Share Capital
2. Reserves & Surplus, less Accumulated losses.
(i) Reserves and Surplus include General Reserve, Capital
Reserve, Securities premium Reserve, Profit and Loss Account
Credit Balance, etc.
(ii) Accumulated losses, include Preliminary expenses, Discount on
issue of shares and Debentures, Profit and Loss account debit
balance, etc.
Shareholders' fund = Share capital + Reserves & Surplus -
Accumulated Lossess
(ii) Proprietary Ratio
Proprietary ratio establishes relationship between proprietor's fund
or shareholders fund and total asset.
(iii) Interest Coverage Ratio
It establishes relationship between profit before interest and tax
and interest charges. It indicates the firm's ability to pay off interest
on Debt fund out of profits earned during the year.
(iv) Fixed Assets Ratio
This ratio establishes the relationship between fixed assets and
long term funds. It is also called long term funds to fixed assets
ratio.
Components of Net fixed asset: Gross fixed assets, less
depreciation.
Components of Long term fund: Equity share capital, Preference
share capital, Reserves & Surplus, Debentures and other Long
Term Loans, Significance
(V) Fixed Assets to Proprietors' fund
It establishes relationship between fixed asset and shareholders
fund. It indicates the percentage of owner's fund invested in fixed
assets.
Components of Net Fixed Asset: Gross Fixed Assets, less
Depreciation.
Components of shareholders' fund: Share capital, Reserves &
Surplus, less Accumulated Losses.
(vi) Capital Gearing Ratio
This ratio shows the proportion of fixed income bearing securities to
equity shareholders' fund. It helps to analyse the capital structure
and level of leverage of the company.
Components of fixed income bearing securities:
(i) Preference share capital (ii) Debentures
(iii) Long term loans
Components of Equity Shareholders' fund:
(i) Equity share capital (ii) Reserves & Surplus

(vii) Overall Solvency Ratio

It is the ratio of total liabilities to total assets. It indicates the ratio in
which the company's assets that are financed through debt.
Components of Total liabilities
(i) Non Current Liabilities (ii) Current Liabilities
Components of Total assets
(i) Non Current Assets (ii) Current Assets

C. TURNOVER RATIOS (ACTIVITY RATIOS)

The turnover ratios disclose the relationship between the level of
sales or cost of goods sold and the investments in various assets. It
indicates the speed with which assets are being converted into
revenue. Higher turnover ratio means better utilisation of assets
which reflects higher efficiency and profitability.
The turnover ratios include:
(i) Inventory Turnover Ratio
(ii) Trade Receivables Turnover Ratio
(iii) Average Debt Collection Period
(iv) Trade Payables Turnover Ratio
(v) Average Payment Period
(vi) Working Capital Turnover Ratio
(i) Inventory Turnover Ratio (Stock Turnover ratio or Stock
Velocity)
This ratio indicates the relationship between the cost of revenue
from operations during the year and average inventory kept during
the year.

(ii) Debtors Turnover Ratio (Trade Receivables Turnover Ratio)

This ratio expresses the relationship between net credit sales and
average account receivables. It measures the number of times the
receivables are rotated in a year in terms of sales.
(iii) Average Debt Collection Period
Average Debt collection period is the average number of days or
month within which the cash is collected from trade receivables.
(iv) Creditors Turnover Ratio (Trade Payables Turnover Ratio)
This ratio expresses the relationship between net credit purchases
and average trade payables. This ratio is also known as trade
payables turnover ratio or creditors' velocity.

(v) Average Payment Period

to its trad follows:
Average payment period is the average number of days or month
which is normally taken by the firm to make payment its trade
payables.
(vi) Working Capital Turnover Ratio
This ratio establishes the relationship between Revenue from
Operations (Net Sales) and net working capital. This ratio shows
how much sales are generated by each rupee which is invested in
working capital.
(vii) Capital Turnover Ratio
This ratio shows the relationship between net sales and capital
employed in the business. It indicates the efficiency of capital by
computing how many time capital is turned over in a stated period.
(viii) Fixed Assets Turnover Ratio
This ratio establishes the relationship between net sales and net
fixed assets. It determines whether the investments made in fixed
assets have really helped in generating sales.
D. PROFITABILITY RATIOS
The primary objective of every business is to earn profit. Profitability
ratios are used to evaluate the performance and efficiency of the
business concerns.
Profitability ratios can be classified in to two:
1) Profitability ratios related to sales.
2) Profitability ratios related to investment.
1) Profitability Ratios related to Sales
In these ratios the profits earned is compared with the sales inorder
to evaluate the operational efficiency of the business concerns. It
includes:
i) Gross Profit Ratio
ii) Net Profit Ratio
iii) Operating Ratio
iv) Operating Profit Ratio
v) Expense Ratio

2) Profitability Ratios related to Investment

These ratios compare the earnings with investments ie, capital
employed or networth. It includes:
i) Return on Investment
ii) Return on shareholders' fund
iii) Return on Equity
iv) Return on Total Assets Earnings Per Share
v) Price Earning Ratio
vi) Dividend Yield Ratio
vii) Dividend Payout Ratio
(i) Gross Profit Ratio
This ratio establishes the relation between Gross profit and
Revenue from operations (Net sales). It expresses the gross
margin as a percentage of sales. It is also known as "Gross profit
margin ratio'.
ii) Net Profit Ratio
It establishes the relationship between net profit and sales. It shows
the net profit margin to sales.

(iii) Operating Ratio

It establishes the relationship between cost of revenue from
operations and operating expenses to the net sales. The
non-operating incomes and expenses are not considered for the
calculation of operating ratio.
(iv) Operating Profit Ratio
It establishes the relationship between operating profit and revenue
from operations.
(v) Expense Ratio
It establishes the relation between various components of
expenses to revenue from operations. These ratios disclose the
portion of sales or revenue consumed by various expenses.
(vi) Return on Investment (Return on Capital Employed)
This shows the relationship between profits earned and capital
employed. This is an indicator of overall profitability and efficiency
of a business. It is also known as Rate of Return or Return on
Capital Employed.
(vii) Return on Shareholders' Fund
It shows the relationship between profits available to the
shareholders and shareholder's fund. It measures the profitability
from the shareholders' point of view.
(viii) Return on Equity
It establishes the relationship between net profit and equity
shareholders fund.
(ix) Return on Total Assets
This ratio establishes the relationship between net profit and total
assets of the company.
(x) Earnings Per Share (EPS)
This ratio measures the profit available to equity share holders per
share. It is calculated by dividing the profit available to the equity
shareholders by the number of equity shares. The profit available to
the equity share holders means "Net profit after interest, tax and
preference dividend".
DU-PONT CONTROL CHART
The Du-Pont Control Chart is a management control chart developed by
Du Pont Company of the USA. The various factors affecting the Return on
Investment (ROI) are illustrated through this chart. ROI represents the
earning power of the business. It depends on Net Profit Ratio and Capital
Turnover Ratio.
A change in any one of the two ratios will change the earning power
of the business (ROI) and it is affected by a number of factors.
 MODULE 4
FUNDS FLOW ANALYSIS
Meaning of Funds Flow Statement
A Funds Flow Statement is a statement of sources and applications of
fund. It is a statement prepared to analyse the reasons for changes in the
financial position of a company between two Balance Sheet dates.
Funds Flow Statement is a statement which discloses the analytical
information about the different sources of fund and application of
the same in an accounting cycle.
Definitions of Funds Flow Statement
According to Robert. N. Anthony, "the Funds Flow Statement is a
statement which describes the sources from which additional funds
were derived and the uses to which these funds were put".
1. Current Assets
The term 'current assets' includes assets which are required
with the intention of converting them in to cash during the
normal business operations of the com with in a period of one
year.
According to Grady, current assets include cash and other
assets or resources commonly identified as those, which are
reasonably expected to be realised in cash during the normal
operating cycle of the business
Current assets include the following:
1. Cash and Cash Equivalents
2. Trade Receivables
3. Inventory
4. Current investments or Temporary investments
5. Prepaid expenses, accrued incomes, short term loans given or
advances recoverable.
2. Current Liabilities
Current liabilities are those liabilities which are payable with in a
period of twelve months from the date of Balance sheet or with in
the operating cycle, out of the use of existing current assets or the
creation of other current liabilities.
Current liabilities include the following:
1. Trade payables (Trade creditors and Bills payable)
2. Outstanding expenses
3. Bank overdraft and short-term loans from banks.
4. Advance payments received or income received in advance.
5. Current maturities of long-term loans
6. Short term provisions

3. Non-Current Assets
All assets other than current assets come with in the category of
non-current assets. Such assets are bought with the intention of
using them, for a long period of time.
Non-current assets include fixed tangible assets like Land and
Building, Plant and Machinery, Furniture and fixtures, Long-term
investments or Trade investments, etc and Intangible assets like
goodwill, patent rights, trade marks, etc.
Fictitious assets like preliminary expenses, discount on issue of
shares and debentures, Profit and Loss account debit balance, etc
will also come under this category
4. Non-Current Liabilities
All liabilities other than current liabilities come within the category of
Non-current liabilities. They include share capital, debentures,
long-term loans, securities premium reserve, Profit and Loss
account credit balance, Revenue and Capital reserves, etc.

general Rules for finding out transactions involving change in

work capital
The following general rules are to be kept in mind for finding out
transaction inyolving change in working capital:
1. There will be "flow of fund if a transaction involves:
(1) Current assets and Non-Current Assets, Eg: Purchase of land
and building for cash, sale of machinery for cash, etc.
(2) Current Assets and Non-Current Liabilities, Ex: Redemption of
Debentures in Cash, Issue of Debentures for cash, etc.
(3) Current Assets and Capital, Eg: Issue of shares for cash,
Redemption of preference shares, etc.
(4) Current Liabilities and Non-Current Liabilities, Eg: Creditors paid
off in Debentures. (5) Current Liabilities and Capital, Eg: Creditors
paid off in shares.
(5) Current Liabilities and Non-Current Assets, Eg: A piece of land
given to a creditor in satisfaction of his claim,

2. There will be 'no flow of fund' if a transaction involves

(1) Current Assets and Current Assets, Eg: Cash collected from
debtors, sale of stock for cash or on credit, etc.
(2) Current Assets and Current Liabilities, Eg; Cash paid to
creditors, purchase of goods (stock) on credit, etc.
(3) Current liabilities and Current Liabilities, Eg: Bills payable
accepted in favour of creditors.
(4) Non-Current Assets and Non-Current Liabilities, Eg: Land and
Buildings purchased and payment in debentures.
(5) Non-Current Assets and Capital, Eg: Building purchased and
payment in shares.
(6) Non-Current Liabilities and Capital, Eg: Conversion of
Debentures in to shares.

Objectives of Funds Flow Statement

1. To explain the changes in financial position.
2. To disclose the causes of changes in the assets, liabilities and
capital between two Balance sheet dates.
3. To summarise the financing and investing activities of the
enterprise during an accounting period.
4. To disclose all inflows and outflows of fund and their net impact
on working capital of the firm.
5.To help the management to exercise budgetary control and
capital expenditure control in the enterprise.
Importance or Advantages of Funds Flow Statement
1. It shows the changes in the financial position of the company
between two accounting periods.
2. It helps in analysing the reasons for changes in the financial
position of the company.
3. It shows the working capital position of the company. This helps
to test if working capital has been effectively used or not.
4. Projected funds flow statement can be used for putting up
necessary controls and budgetary allocations.
5. It shows how the funds were obtained and used during a period.
6. It gives an indication of any weakness or strength in the general
financial position of a firm.
6. It throws light on the financial consequences of business
operations.
7. It helps in the formulation of a realistic dividend policy.
8. It is the basis for future capital expenditure decisions.
Limitations of Funds Flow Statement
1. It is not a substitute of an income statement or a balancesheet. It
provides only some information as regards changes in working
capital.
2. It lacks originality because this statement is merely a systematic
rearrangement of items in financial statements over two accounting
periods.
3. It is based on historical data. It doesnot give much clarity of current
and future
costs of the company. Hence it does not reveal the realistic comparison of the
profit position of the company.
4. It is static. It cannot reveal continuous changes.
5. Changes in cash are more important and relevant for financial
management rather than working capital.
6. It is not a basic financial statement, rather it is a secondary
statement. It is not of much use.
7. The effect of transactions between current assets and current
liabilities is not shown in the statement.
8. It also ignores transactions between non-current assets and
non-current liabilities.
9. It is not generally considered as a sophisticated technique of
financial analysis.
Funds Flow Statement Balance sheet
it is dynamic in nature. it is static in nature
It is prepared for a particular It is prepared as on particular
accounting period date.
It is prepared with the help of It is prepared with the help of
Profit and Loss account and Trial Balance.
Balance sheet of two
consecutive years
It is a statement showing is a statement of assets,
changes in working capital of a liabilities and capital as on a
business during an accounting particular date.
period
It is a tool for financial analysis, It It is the end product of the
generally useful to the accounting cycle, and meant for
management. general purpose.
The preparation of Fund Flow The preparation of Balance
Statement is only optional sheet is compulsory.

Funds Flow Statement Income Statement

Funds Flow Statement is the It is a summary of total income,
statement of changes in and total expenses and losses of
financial position. a particular period.
The main objective of Funds The main objective of an income
Flow Statement is to show the statement is to determine the net
sources and application of fund profit or net loss of the business
during a particular year during a particular year
Funds flow statement is Income statement is prepared
prepared on the basis of on the basis of nominal
Balancesheet. accounts.
Funds flow statement is helpful Income statement is helpful in
in determining the net changes measuring the profitability of a
in working capital. firm.
The preparation of Funds flow It is compulsory to prepare an
statement is optional income statement.
It is mainly concerned with flow It is not concerned with flow of
of fund. funds.
It records both capital and It records only revenue items.
revenue items

Funds Flow Statement Schedule of changes in

Working Capital
A Funds Flow Statement is A Schedule of changes in
prepared on the basis of working capital is prepared with
Non-Current Assets and the help of Current Assets and
Non-Current Liabilities. Current Liabilities.
It shows the sources and It shows the changes in Current
applications of fund of the Assets and Current Liabilities.
business.
It is prepared with the help of It is prepared with the help of
Income Statement, two two Consecutive Balance
consecutive Balance sheets and Sheets.
Additional information.
It is prepared in order to show It is prepared to work out the net
the overall inflow and outflow of increase or decrease in working
working capital during a period capital.
of time.
 lOMoARcPSD|27824667

RATIO ANALYSIS- EQUATIONS

Simple format of P&L a/c (Income Statement)
Net revenue from operations (Net sales) XX
(-) Cost of revenue from operations (Cost of goods sold) XX
Gross profit XX
(-) Operating expenses (Indirect Expenses) XX
(+) Operating income XX
Operating profit (EBIT) XX
(-) Interest XX
EBT XX
(-) Tax XX
Net Profit (EAT) XX
(-) Preference dividend XX
Earnings available to equity shareholders XX
(÷) No. of equity shares XX
Earnings per share (EPS) XX

I. Liquidity Ratios/ Short term Solvency Ratios

Sl. Ratios Equation Ideal
No Ratio
1 Current Ratio 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 2:1
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
2 Quick Ratio/Acid test Ratio/ Liquid 𝑸𝒖𝒊𝒄𝒌/𝑳𝒊𝒒𝒖𝒊𝒅 𝑨𝒔𝒔𝒆𝒕𝒔 1:1
Ratio 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
3 Absolute Liquid Ratio 𝑪𝒂𝒔𝒉 & 𝑪𝒂𝒔𝒉 𝑬𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕𝒔 1:2
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

(Cash & cash equivalents includes marketable

securities)
Working Capital = Current Assets – Current Liabilities

Current Assets = Total Assets/ Liabilities – Non-Current Assets

Current Liabilities = Total Liabilities/ Assets – [Shareholders Fund (Share capital + Reserves & Surplus) + Non-Current Liabilities]

When only working capital and current ratio is given;

Proportion of Current Asset
Current Assets = Working Capital x Proportion of Working Capital

Proportion of Current Liabilities

Current Liabilities = Working Capital x Proportion of Working Capital

Stock in trade/ Inventories = Current Assets – Liquid Assets

II. Solvency Ratios/ Long term Solvency & Leverage Ratios (Capital Structure Ratios)
Sl. Ratios Equation Ideal
No Ratio
1. Debt-Equity Ratio (D/E 𝑫𝒆𝒃𝒕 𝑳𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒅𝒆𝒃𝒕𝒔 2:1
𝑶𝑹
Ratio) 𝑬𝒒𝒖𝒊𝒕𝒚 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔 𝒇𝒖𝒏𝒅 𝒐𝒓 𝑵𝒆𝒕 𝒘𝒐𝒓𝒕𝒉

Long term debts = Long term borrowings (debentures, bank loans, public deposits) + Long term provisions (employees
provident fund, pension fund, etc)
Shareholder’s fund = Share capital (Equity & Preference) + Reserves & Surplus

1
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 lOMoARcPSD|27824667

2. Proprietary Ratio 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔𝒇𝒖𝒏𝒅 1:3

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

3. Solvency Ratio 𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 𝒕𝒐 𝒐𝒖𝒕𝒔𝒊𝒅𝒆𝒓𝒔 -

𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

Total liabilities to outsiders = Current liabilities + Non-Current liabilities

4. Fixed Asset Ratio 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕 (𝒂𝒇𝒕𝒆𝒓 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏) 1:1

𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒏𝒈 𝒕𝒆𝒓𝒎 𝒇𝒖𝒏𝒅𝒔

Total long-term funds = Shareholder’s fund + Non-Current liabilities

5. Interest Coverage Ratio/ 𝑬𝑩𝑰𝑻 6 or 7

Debt Service Ratio 𝑭𝒊𝒙𝒆𝒅 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒉𝒂𝒓𝒈𝒆𝒔 times
Fixed interest charges = Interest on debentures, bonds & other long-term borrowings

6 Fixed Assets to Net Worth 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔 -

Ratio 𝑵𝒆𝒕 𝒘𝒐𝒓𝒕𝒉 𝒐𝒓 𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔𝒇𝒖𝒏𝒅

7. Capital Gearing Ratio 𝑭𝒊𝒙𝒆𝒅 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑩𝒆𝒂𝒓𝒊𝒏𝒈 𝑭𝒖𝒏𝒅𝒔 -

𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔𝒇𝒖𝒏𝒅 𝒆𝒙𝒄𝒍𝒖𝒅𝒊𝒏𝒈 𝑷𝒓𝒆𝒇𝒆𝒓𝒏𝒄𝒆 𝒔𝒉𝒂𝒓𝒆 𝒄𝒂𝒑𝒊𝒕𝒂𝒍

Fixed interest-bearing funds = Preference share capital + debentures + long term loans

III. Profitability Ratios

a) General Profitability Ratios

Sl. Ratios Equation

No
1. Gross Profit Ratio 𝑮𝒓𝒐𝒔𝒔 𝑷𝒓𝒐𝒇𝒊𝒕
𝒙 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔 𝒊. 𝒆. , 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔

Gross profit = Revenue from operations (Sales) – Cost of revenue for operations (Cost of goods sold)
Cost of revenue for operations = Opening inventory + Purchases + Direct expenses – Closing inventory
OR
Cost of revenue from operations = Revenue from operations- Gross profit

2. Net Profit Ratio/ Net Profit 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙 𝒃𝒖𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝒙 𝟏𝟎𝟎
Margin Ratio 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

(Preference dividend)
Net profit = Gross profit – Indirect expenses & losses + Other incomes – Tax
Indirect expenses & losses = Office expenses + Selling expenses + Interest on long term borrowings + Accidental
losses

3. Operating Ratio 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒐𝒔𝒕

𝒙 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

Operating cost = Cost of revenue for operations + Operating expenses – Operating incomes
Operating expenses = Employee benefit expenses + Depreciation & amortisation expenses + Other expenses

4. Operating Profit Ratio 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑷𝒓𝒐𝒇𝒊𝒕

𝒙 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔
Or

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100 – Operating Ratio

Operating profit = Revenue from operations – Operating cost

Or
Operating profit = Net profit + Non operating expenses – Non operating income

5. Expenses Ratio 𝑷𝒂𝒓𝒕𝒊𝒄𝒖𝒍𝒂𝒓 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔

𝒙 𝟏𝟎𝟎
𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

b) Overall Profitability Ratios

Sl. Ratios Equation

No
1. Return on Shareholder's Fund 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒕𝒂𝒙 𝒃𝒖𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝒙 𝟏𝟎𝟎
𝑺𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔 𝑭𝒖𝒏𝒅

(Preference dividend)
2. Return on Equity Share Capital 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕, 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒑𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝒙 𝟏𝟎𝟎
𝑬𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆 𝒄𝒂𝒑𝒊𝒕𝒂𝒍

3. Return on Capital Employed (Yield 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕, 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝒙 𝟏𝟎𝟎
on Capital/ Return on Investment) 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑬𝒎𝒑𝒍𝒐𝒚𝒆𝒅

Capital employed = Shareholders fund + Non current liabilities

Or
Capital employed = Non current assets + Net working capital
Or
Capital employed = Total assets – Current liabilities
4. Earnings Per Share (EPS) 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒗𝒂𝒊𝒍𝒂𝒃𝒍𝒆 𝒕𝒐 𝒕𝒉𝒆 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔
(𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕, 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅)
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒔 𝒊𝒔𝒔𝒖𝒆𝒅

5. Price-Earning (P.E) Ratio 𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆

𝑬𝑷𝑺

6. Dividend Yield Ratio 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆

𝒙 𝟏𝟎𝟎
𝑴𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆

7. Dividend Pay Out Ratio (D/P 𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆

Ratio) 𝑬𝑷𝑺
OR
𝑻𝒐𝒕𝒂𝒍 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒂𝒊𝒅 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔
𝒙 𝟏𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝒏𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒍𝒐𝒏𝒈𝒊𝒏𝒈 𝒕𝒐 𝒆𝒒𝒖𝒊𝒕𝒚 𝒔𝒉𝒂𝒓𝒆𝒉𝒐𝒍𝒅𝒆𝒓𝒔

8. Return on Total Assets 𝑵𝒆𝒕 𝑷𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕, 𝒕𝒂𝒙 𝒂𝒏𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅
𝒙 𝟏𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

9. Capital Turnover Ratio 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

𝒙 𝟏𝟎𝟎
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅

10. Cover for Preference Dividend 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒂𝒇𝒕𝒆𝒓 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝒕𝒂𝒙
𝒙 𝟏𝟎𝟎
𝑷𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅

11. Cover for Equity Dividend 𝑬𝑷𝑺

𝒙 𝟏𝟎𝟎
𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒆𝒒𝒖𝒊𝒕𝒚

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IV. Activity Ratios (Turnover Ratios)

Sl. Ratios Equation
No
1. Inventory Turnover Ratio (Stock turnover 𝑪𝒐𝒔𝒕 𝒐𝒇 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔
ratio or Stock velocity) 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 + 𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

Average Inventory = 𝟐

Average age of inventory (Inventory holding 𝑵𝒐.𝒐𝒇 𝒅𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓

In days = 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐
period/ Stock realisation period)
𝑵𝒐.𝒐𝒇 𝒎𝒐𝒏𝒕𝒉𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
In months = 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐

2. Fixed Assets Turnover Ratio 𝑵𝒆𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔

3. Working Capital Turnover Ratio 𝑵𝒆𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔

𝑵𝒆𝒕 𝒘𝒐𝒓𝒌𝒊𝒏𝒈 𝒄𝒂𝒑𝒊𝒕𝒂𝒍

4. Trade Receivables Turnover Ratio 𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔 (𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒔𝒂𝒍𝒆𝒔)
(Debtors turnover ratio/Debtor’s velocity) 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
Net credit sales = Total sales – Cash sales – Sales returns

𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 + 𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔

Average trade receivables = 𝟐
(Study note on page no. 3.52)
Average collection period 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔
In days = 𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔 × 𝟑𝟔𝟓
OR
𝑵𝒐.𝒐𝒇 𝒅𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
In days = 𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔

In months = × 𝟏𝟐
𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 𝒇𝒓𝒐𝒎 𝒐𝒑𝒆𝒓𝒂𝒕𝒊𝒐𝒏𝒔
OR
𝑵𝒐.𝒐𝒇 𝒎𝒐𝒏𝒕𝒉𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
In months = 𝑻𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐

5. Trade Payables Turnover Ratio (Creditors 𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔

turnover ratio/Creditor’s velocity) 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔

Net credit purchases = Total purchases – Cash purchases – Purchase returns

𝑶𝒑𝒆𝒏𝒊𝒏𝒈 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 + 𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝒕𝒓𝒂𝒅𝒆 𝒓𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔

Average trade receivables = 𝟐
(Study note on page no. 3.54)
Average payment period 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔
In days = × 𝟑𝟔𝟓
𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
OR
𝑵𝒐.𝒐𝒇 𝒅𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
In days = 𝑻𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒃𝒍𝒆𝒔 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒕𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔

In months = × 𝟏𝟐
𝑵𝒆𝒕 𝒄𝒓𝒆𝒅𝒊𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
OR
𝑵𝒐.𝒐𝒇 𝒎𝒐𝒏𝒕𝒉𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓
In months =
𝑻𝒓𝒂𝒅𝒆 𝒑𝒂𝒚𝒂𝒃𝒍𝒆𝒔 𝒕𝒖𝒓𝒏𝒐𝒗𝒆𝒓 𝒓𝒂𝒕𝒊𝒐

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Current Assets + Non-Current Assets = Shareholders Fund + Current Liabilities

=>Current Assets – Current Liabilities = Shareholders Fund – Non-Current Assets
=> Working Capital = Shareholders Fund – Non-Current Assets (Fixed Assets)

Total Assets = Current Assets + Non-Current Assets (Fixed Assets)

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Other Income
Interest Income
Rental Income
Gain on Sale of Assets
Dividend Income

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 Module 5
CASH FLOW STATEMENT
A statement showing the sources and uses of cash prepared from
the Income Statement and Position Statement is called Cash Flow
Statement. It simply reveals the inflow and outflow of cash during a
particular year.
A cash flow statement can be defined as "a statement which
summarises the sources of Cash inflows and uses of Cash outflows
of a firm during a narticular period of time”.
Objectives of Cash Flow Statement (Advantages or uses)
A cash flow statement is of primary importance to the financial
management. It is an essential tool of short-term financial analysis.
Its main uses are as follows:
1. Cash flow statement is very useful in the evaluation of cash
position of a firm. Since cash is the basis for carrying on business
operations, it is very useful in evaluating the current cash position.
2. It helps the management in understanding the past behavior of
cash cycle and in controlling the uses of cash in future.
3. The repayment of loans, replacement of assets and other such
programmes can be planned on its basis.
4. A comparison of the cash flow statement with budgeted forecast of
cash for the same period helps in comparison and control of cash
expenditures.
5. This statement is helpful in short-term financial decisions relating
to liquidity and short-term solvency.
6. It helps effective cash management possible.
7.It enhances the comparability of the reporting of operating
performance by different enterprises.

Limitations of Cash Flow Statement

In spite of the various uses and advantages, cash flow statement
suffers from the following limitations:
1. Cash Flow Statement cannot replace funds flow statement as it
cannot reveal the financial position of the concern in totality.
2. The cash balance as disclosed by the Cash flow statement may
not represent the real liquidity position of the business, as it can be
easily influenced by postponing purchases and other payments.
3. Cash flow statement cannot replace the Income statement or
Funds flow statement. Each of them has a separate function to
perform.
4. A cash flow statement cannot be equated with the Income
statement. An income statement takes in to account both cash and
non-cash items. Hence cash fund does not mean net income of the
business.
5. Working capital is a wider concept of fund. Thus, a Funds Flow
Statement presents a more complete picture than a cash flow
statement.
6. Cash flow statement is not suitable for judging the profitability of
a firm, as non-cash charges are ignored while calculating cash flow
from operating activities.
7. It does not conform with the Companies Act. Therefore, it is not
acceptable byl "Laws of the Land”. It is prepared as per AS-3.
Funds Flow Statement Cash Flow Statement

Funds Flow Analysis is Cash Flow Analysis is

concerned with change in concerned only
working capital position between with the change in cash position.
two Balance sheet dates
This considers changes in all A Cash flow statement is merely
current assets and all current a record of cash receipts and
liabilities. cash
disbursements.
Funds Flow Analysis is more This is more useful in short-term
useful in long term planning. planning
This indicates inflow and outflow This indicates inflow and outflow
of fund. of only cash.
Improvement in working capital Improvement in cash position
does not mean improvement in results in improvement in
cash position. working capital because cash is
one constituent of working
capital
Funds flow analysis is a vast As compared to funds flow
concept which includes flow of analaysis, cash flow analysis is
cash also a narrow concept
It measures solvency of a firm. It measures liquidity position
it indicates the overall credit It is used for Cash Budgeting
worthiness of the business.

PREPARATION OF CASH FLOW STATEMENT

The cash flow statement shall be prepared in accordance with the
Accounting Standard on “Cash Flow Statement (AS-3)” issued by
the Institute of Chartered Accountants of India. AS-3 is mandatory
for listed companies, banks, financial institutions, insurance
companies, all other business enterprises whose turnover exceeds
50 crores, etc.
AS-3 insists that Cash Flow Statement should reveal distinctly the
Cash flows from Operating Activities, Cash flows from Investing
Activities and Cash flows from Financing Activities. The total cash
flows from these three activities will be the net increase or decrease
in cash and cash equivalents during that period. When the opening
balance of cash and cash equivalents is added to the net increase
or decrease, the total will be the closing balance of cash and cash
equivalents:
KEY TERMS
Cash : Cash comprises Cash in hand and Cash at Bank (Demand
deposit with banks)
Cash Equivalents: Cash Equivalents are short term, highly liquid
investments that are readily convertible in to cash with in very short
period (less than three months) and which are subject to an
insignificant risk of changes in value.
Cash Flows: Cash flows are inflows and outflows of Cash and
Cash Equivalents.
Operating Activities: Operating Activities are the principal
revenue producing activities of the enterprise and other investing
and financing activities.
Investing Activities: Investing Activities are the acquisition and
disposal of long-term assets not included in Cash Equivalents.
Financing Activities: Financing Activities are activities that result in
changes in the size and composition of owner's capital and
Borrowings of the enterprise.
Classification of Cash Flows
According to AS-3 as Cash flow statement should be presented in a
manner that it reports inflows and outflows of cash by classifying
them in to three categories, namely, operating, investing and
financing activities.
Thus, Cash flows are classified into three main categories:
(1) Cash Flows from Operating Activities
Operating activities are the main revenue generating activities of an
enterprise. As such, they include Cash flows from those
transactions and events which enter into the ascertainment of net
profit or loss of the enterprise. Examples of Cash flows arising from
operating activities are:
(a) Cash receipts from the sale of goods and rendering of services;
(b) Cash receipts from royalties, fees, commissions and other
revenues;
(b) Cash receipts from Debtors and Bills Receivables;
(c) Cash payments for purchase of goods and services;
(d) Cash payments to Creditors and Bills payables;
(e) Cash payment of wages, salaries and other payments to
employees;
(f) Cash payments or refund of income tax

(2) Cash Flows from Investing Activities

It is include the purchase and sale of long term assets such as
land and buildings, plant and machinery, non-current investments,
etc.
(a) Cash payments to purchase fixed assets
(b) Cash receipts from sale of fixed assets (including intangibles);
(c) Cash payments to acquire shares and debentures of other
enterprises;
(d) Cash receipts from sale of shares and debentures of other
enterprises;
e. Cash receipts on account of interest and dividend on
investments
(f) Cash advances and loans made to third parties;
(3) Cash Flows from Financing Activities
Financing activities are the activities that result in change in capital
and borrowings of the enterprise. Examples of cash flows arising
from financing activities are:
(a) Cash receipts from issue of Shares;
(b) Cash receipts from issue of Debentures;
(c) Cash receipts from short-term and long-term borrowings
(including Bank overdraft and long term loans);
(d) Repayment in connection with Redemption of Preference shares;
(e) Repayment in connection with Redemption of Debentures:
(f) Repayment of loans and overdraft:
(g) Cash payment for Buy back of Equity shares;
(h) Cash payments of dividend on preference and equity shares:
 COMPARATIVE BALANCE SHEET

N Previous Current Absolute percentag

o year year change. e
Particulars

A B C D
I.Equity& liabilities
1.shareholders fund
a. share capital xx xx xx xx
b.reserves and surplus xx xx xx xx

A. Total xx xx xx xx
2. Non-current liabilities
a. Long term borrowings xx xx xx xx
b. Long term provisions xx xx xx xx
B. Total xx xx xx xx
3. current liabilities
a.Short term borrowings xx xx xx xx
b.trade payable xx Xx Xx Xx
c.other current liabilities Xx Xx Xx Xx
d.short term provisions xx xx xx xx
C. Total xx xx xx xx
GRAND TOTAL (A+B+C) xx xx xx xx
II. ASSETS:
1. non current assets
a.fixed assets:
i. tangible assets Xx Xx Xx Xx
ii. Intangible assets Xx Xx Xx Xx
b.Non-current investments Xx Xx Xx Xx
c. Long term loans and xx xx xx xx
advances
A. Total xx xx xx xx

2. Current assets
a. Current investments Xx Xx Xx Xx
b. Inventories Xx Xx Xx Xx
c. Trade receivables Xx Xx Xx Xx
d. Cash and cash xx xx xx Xx
equivalants
 e. Short term loans Xx Xx Xx Xx
and advances
f. Othercurrent assets xx xx xx xx
B. total xx xx xx xx

Grand Total (A+B) xx xx xx xx

COMPARATIVE STATEMENT OF PROFIT & LOSS

Particulars N Previous Current Absolute increase

O Year Year change or
decrease
(%)

I. Revenue from Operations Xx Xx Xx Xx

II. Other Incomes xx xx xx xx
III. Total Revenue (I + II) xx xx xx xx
IV. Less: Expenses:
Cost of materials consumed Xx Xx Xx Xx
Xx Xx Xx Xx
Purchase of stock in trade Xxx Xx Xx Xx
Change in Inventories Xx Xxx Xx Xx
Employee Benefit Expense Xxx Xx Xx Xxx
Xxx Xxx Xxx Xxx
Finance costs
Depreciation and Amortization Xxx Xxx Xx Xx
expenses
Other expenses xx xxx xx xx

Total Expenses xx xx xx xx
V. Profit Before Tax (III – IV) xx xx xx xx
VI. Income Tax (xx) (xx) (xx) (xx)
VII. Profit After Tax (V - VI) xx xx xx xx
 COMMONSIZE BALANCE SHEET

Absolute Amounts %of balance sheet items

to the total
N
o
Particulars Current Current Previous Previous
year year year year

A B C D
I.Equity& liabilities
1.shareholders fund
a. share capital xx xx xx xx
b.reserves and surplus xx xx xx xx

A . Total xx xx xx xx
4. Non-current liabilities
a.Long term borrowings xx xx xx xx
b.Long term provisions xx xx xx xx
B. Total xx xx xx xx
5. current liabilities
a.Short term borrowings xx xx xx xx
b.trade payable xx Xx Xx Xx
c.other current liabilities Xx Xx Xx Xx
d.short term provisions xx xx xx xx
C.Total xx xx xx xx
GRAND TOTAL (A+B+C) xx xx 100 100
II. ASSETS:
1. non current assets
a.fixed assets:
i. tangible assets Xx Xx Xx Xx
ii. Intangible assets Xx Xx Xx Xx
b.Non-current investments Xx Xx Xx Xx
c. Long term loans and xx xx xx xx
advances
A. Total xx xx xx xx

3. Current assets
a.Current investments Xx Xx Xx Xx
b. Inventories Xx Xx Xx Xx
 c. Trade receivables Xx Xx Xx Xx
d.Cash and cash Xx xx Xx Xx
equivalants
e.Short term loans and Xx Xx Xx Xx
advances
f. Othercurrent assets xx xx xx xx
B.total xx xx xx xx

Grand Total (A+B) xx xx 100 100

Common size statement of profit & loss

Absolute amount % of revenue from

operations
Particulars N Previous Current Absolute increase
O Year Year change or
decrease
(%)

II. Revenue from Operations Xx Xx Xx Xx

II. Other Incomes xx xx xx xx
III. Total Revenue (I + II) xx xx xx xx
IV. Less: Expenses:
Cost of materials consumed Xx Xx Xx Xx
Xx Xx Xx Xx
Purchase of stock in trade Xxx Xx Xx Xx
Change in Inventories Xx Xxx Xx Xx
Employee Benefit Expense Xxx Xx Xx Xxx
Xxx Xxx Xxx Xxx
Finance costs
Depreciation and Amortization Xxx Xxx Xx Xx
expenses
Other expenses xx xxx xx xx

Total Expenses xx xx xx xx
V. Profit Before Tax (III – IV) xx xx xx xx
VI. Less: Income Tax (xx) (xx) (xx) (xx)
VII. Profit After Tax (V - VI) xx xx xx xx
 Previous Current Effect on Working
Items Year Year Capital
Increase Decrease
A. Current Assets
Cash in Hand
Cash at Bank
Marketable Securities
Bills Receivable
Sundry Debtors
Stock in Trade
Prepaid Expenses
Accrued Income

(A) Total

B. Current Liabilities
Sundry creditors
Bills payable
Bank overdraft
Outstanding Expenses
Dividend payable
Tax payable
Income Received in Advance
Short Term Borrowings

(B) Total

C. Working Capital (A - B)
D. Net Increase/Decrease in
working Capital

(E) Total
 CALCULATION OF FUNDS FROM OPERATIONS

Profit and Loss closing balance Xx

Less: Profit and Loss opening balance Xx
Xx
Current Year's Profit
Add: 1. Depreciation and Depletion xx
2. Amortization of Goodwill/Patent Right Xx
Xxx
3. Fictitious assets written off
Xx
4. Transfer to Reserve Xx
5. Proposed Dividend Xx
Xx
6. Provision for Tax
Xx
7. Loss on sale of assets Xx
8. Loss on sale of investments Xx
9. Interim Dividend paid Xx
Xx
10. Loss on Revaluation of Fixed Asset
11. Any other Non-cash Expenditure like Xx Xx
premium of Redemption of preference shares
and Debentures Xxx

Less: 1. Profit on sale of Fixed Assets Xx

2. Profit on sales of investments Xx
3. Dividend Received Xxx
4. Profit on Revaluation of Fixed Asset Funds Xxx xxx
from operation
xxx
 Calculation of funds from Operations

Net profit made during the year Xx

Add: 1. Depreciation on Fixed Assets Xx
2. Loss on Sale of Fixed Assets Xx
3. Loss on sale of Investments Xx
4. Goodwill written off Xx
5. Preliminary Expenses written off Xx
6. Discount on issue of shares Xx
or debentures written off Xx
7. Provision for Tax Xxx
Xxx
xx

Less: 1. Profit on Sale of Fixed Assets Xx

2. Profit on Sale of Investments Xx
3. Dividend Received Funds from operation Xx xx

xxx

CASH FLOW STATEMENT

Particulars
A. Cash Flows from Operating Activities:
Cash Revenue from operations (Cash Sales) Xx
Cash Receipts from customers (Receipts from Debtors) Xx
Cash purchases Xx
Cash paid to suppliers (Payment to creditors) Xx
Cash paid to Employees Xx
Cash paid for operating expenses (Xx)
Cash generated from operations Xx
Income Tax paid (Xx)
Cash flows before Extra ordinary items Xx
Extra ordinary receipt Xx
Extra ordinary payment (Xx)
(A) Net Cash Flow from Operating Activities xxx

B. Cash Flows from Investing Activities Xx

Proceeds from the sale of Tangible Fixed Assets Xx
Proceeds from the sale of Intangible Fixed Assets Xx
Cash paid for purchase of Tangible Fixed Assets (Xx)
Cash paid for Purchase of Intangible Fixed Assets (Xx)
Proceeds from the sale of Investments Xx
Cash paid for the purchase of Investment Xx
Interest received Xx
Dividend received xx
B) Net Cash Flow from Investing Activities xxx

Ć Cash Flows from Financing Activities

Proceeds from the issue of Shares
Securities premium collected
Proceeds from the issue of Debentures
Proceeds from Long-term loans
Proceeds from Short-term borrowings
Redemption of Preference shares
Redemption of Debentures
Repayment of Long-term loans
Re-payment of short-term
Borrowings Interest paid on Borrowings
Dividend paid (Final Dividend paid and Interim Dividend
paid)
Increase in Bank Overdraft
Decrease in Bank Overdraft
(C) Net Cash Flow from Financing Activities Xx
 Net Increase (Decrease) in Cash and Cash Equivalents Xx
(A+B+C)
Add: Cash and Cash Equivalents at the beginning of the xx
year
Cash and Cash Equivalents at the end of the year xx

CASH FLOW STATEMENT

Particulars
A. Cash Flows from Operating Activities
Net Profit Before Tax XX
Add: Adjustment for Non-Cash and Non-operating Expenses
Depreciation Preliminary X
Expenses written off X
Discount on issue of Shares and Debentures written off X
Goodwill written off X
Patent Right written off X
Loss on sale of Investments X
Loss on sale of Fixed Assets X
Interest on Long Term Borrowings X
Any other Non-Cash item x xx
Less: Adjustment for Non-operating Incomes
Interest Received X
Dividend Received X
Gain on sale of Fixed Assets X
Rent Received x xx
Operating Profit or Loss Before Working Capital Adjustments
Add: Decrease in Current Assets X
Add: Increase in Current Liabilities (Except Bank overdraft) x xx
Xx
Less: Increase in Current Assets X
Less: Decrease in Current Liabilities x xx
 Cash Generated from operations Xx
Less: Income Tax paid (Xx)
Cash flow Before Extra Ordinary items Xx
Add/Less: Extra Ordinary items, if any xx
(A) Net Cash Flow from (used in) Operating Activities xx
B. Cash Flows from Investing Activities
Proceeds from the Sale of Tangible Fixed Assets X
Proceeds from the Sale of Intangible Fixed Assets X
Proceeds from the Sale of Non-Current Investments X
Interest Received on Investments X
Rent Received X
Dividend Received X
Purchase of Tangible Fixed Assets X
Purchase of Intangible Fixed Assets X
Purchase of Non-Current Investments X
(B) Net Cash Flow from (used in) Investing Activities xx
C. Cash Flows from Financing Activities
Proceeds from issue of Shares X
Proceeds from issue of Debentures X
Securities premium collected X
Proceeds from Long-Term Borrowings X
Proceeds from Short-Term Borrowings X
Redemption of Preference shares X
Redemption of Debentures X
Repayment of Long Term X
Repayment of Short-Term Borrowings X
Interest on Long Term and Short-Term Borrowings paid X
Interest on Debenture paid X
Final Dividend paid X
Interim Dividend paid x
(C) Net Cash Flow from (used in) Financing Activities Xx
Net Increase (Decrease) in Cash and Cash Equivalents (A+B+C) Xx
Add: Cash and Cash Equivalents in the beginning of the year Xx
Cash and Cash Equivalents at the end of the year xx
 lOMoARcPSD|27824667

Distinction between Management Accounting And Financial Accounting

Points of Difference Financial Accounting Management Accounting

Period or time span financial statements are management Accounting
prepared for a definitely reports and statements
period usually for a year are prepared whenever
it requires that financial needed reports may be
statements be prepared prepared on monthly
at regular time intervals weekly even daily basis
Unit of measurement all information sandal besides monetary units
financial accounting are the management
in terms of money accountant may find it
necessary to use such
measures as number of
labor-hours machine-
hours product units
except for the purpose of
analysis and decision
making
Focus Financial accounting management Accounting
focuses on the company provides detailed
as a whole information about
products individual
activities operation extra.
subject matter and scope Financial accounting is Management Accounting
also known as external is also known as internal
accounting.produce according identifies
information and reports collects classifies and
for external users. reports information that
is useful to managers in
planning control and

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 lOMoARcPSD|27824667

decision making
Purpose the purpose of financial the purpose of
accounting is to ascertain management accounting
profit or loss and the is to provide information
financial position and to the management for
presented to owners decision making
creditors government
etc.
Reporting Faisal accounting is Management accounting
concerned with external is concerned with the
reporting internal reporting
Nature of informations financial accounting is management accounting
used concerned with the is concerned with future
historical costs and plans and operations
records relating to the does management
past does financial accounting is subjective
accounting is historical and relates to the future
and objective
accounting method financial accounting Management accounting
follows the double entry is not based on the
system for recording double entry system
business transactions
Legal compulsion financial statements are there is no statutory
governed by the regulation by fixing the
provisions of the norms and standards for
companies act and preparation and
income tax act in force presentation of
the preparation of accounting statements
financial statements is under this system there
legally compulsory for is no legal compulsion in
every joint stock

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 lOMoARcPSD|27824667

company this regard so far

Flexibility financial accounting is Management accounting
more rigid as it has to is more flexible
obey the according
standards and principles
Audit financial statements the management
prepared under financial accounting statements
accounting system are and reports are means
audited by a chartered for internal purpose and
accountant as these are they are not subject to
published documents audits
Precision in financial accounting in management
only actual figures are accounting no emphasize
recorded and there is no is given to actual figures
room for approximation the approximated figures
are considered more
useful than actual figures
Publication financial accounting management accounting
statements are mostly is intended for internal
main for external use use therefore its results
therefore final accounts are not published
and and all the ports are
published for the benefit
of the public
shareholders etc.
Format of statements in financial accounting in management
system the financial accounting expenses and
statements are prepared incomes are reported by
under different forms various responsibilities
such as income and therefore
statements position management Accounting

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 lOMoARcPSD|27824667

statement and revenue differs from financial

and capital property accounting on
accounts Extra. methodology also.

financial accounting and management Accounting and interrelated .

management Accounting depends on financial accounting which is the main
source of information.

the main objective of financial accounting is to ascertain profit or loss and we

will the financial position of the business .the main objective of management
accounting is to provide information to the management for decision making
financial accounting and management Accounting are like the two legs of the
same human the function of both of them is to ensure that the management
progress towards a better future.

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 Management Accounting

Modern Accounting can be classified in to two

1. Financial Accounting
2. Cost Accounting
3. Management Accounting
What is Financial Accounting?
Financial Accounting is the process of collecting, recording, classifying, and summarising
financial data for the needs of management , shareholders, creditors, banks and
management.
Objectives of financial Accounting

 Recording business transactions systematically

 Calculation of profit earned or loss incurred.
 To know the financial position of the firm.
 Assisting management
 Assessing the progress of the business
 Detecting and preventing errors and frauds.
 To portray the Liquidity position
 To file Tax returns
 Communicating accounting details to various users like owners, banks, investors,
employees, government authorities etc.

Cost Accounting
It is the process of accounting for cost from the point at which the expenditure
incurred or committed to the establishment of its ultimate relationship with cost centres
and cost units.
Functions/objectives of cost accounting

1. Ascertainment of cost
2. Cost control
3. Cost Reduction
4. Fixation of selling price
5. Evaluation of performance
6. Decision making
 Management Accounting
Meaning
It means Accounting for management. It is the study of managerial aspects of accounting.
It is a tool in the hands of management to exercise control and decision making.
Definition
According to Certified Institute of Management Accountants (CIMA)
Management Accounting is the presentation of Accounting information in such a manner as
to assist the management in the creation of policy and day-to-day operations of an
undertaking.
Features of Management Accounting

1. Providing financial information

2. Cause and Effect relationship
3. Proving of information and not decision
4. Achievement of objectives
5. Improving Efficiency
6. Decision making
7. No fixed standards and conventions
Financial accounting has various standards and principles in preparing financial
accounts. But management accounting has no such standards and principles.
8. Forecasting
9. Vital branch of Accounting
Scope of Management Accounting

1. Financial Accounting
2. Cost Accounting
3. Forecasting and budgeting
4. Cost Control Technique
5. Inventory Control
6. Statistical Analysis
7. Analysis and interpretation of Data
8. Tax Accounting
9. Internal Audit
10.Reporting to Management
11.Office services
12.Methods and procedures
13.Inflation Accounting
14.Financial Management.
 Objectives of Management Accounting

 Planning and Policy Formulation

 Helps in Decision Making
 Helps in Controlling
 Helps in organising
 Helps in interpretation process
 Motivates the employees
 Helps in co-ordination
 Reporting to Management
 Helpful in Tax Administration
 Assist the management to manage better.

Functions of Management Accounting

 Planning and forecasting

 Modification of Data
 Furnishes information as per Requirement
 Financial Analysis and Interpretation
 Co-ordinating
 Decision making
 Controlling
 Communication
 Establishes standard of performance
 Tax Administration
 Use of Qualitative Information.

Advantages of Management Accounting

1. It helps to increase the efficiency of all functions of management.

2. It helps in decision making, price fixing, selection of product mix and so on.
3. It is useful in controlling wastage and defects.
4. It helps in complete communication between all levels of management.
5. It helps in controlling the cost of production, thus increasing the rate of return.
6. It provides means to motivate the employees.
7. It ensures effective controll by comparing actual results with standards.
8. It maintains a good public relation by providing quality services to the customers.
9. It helps in the development of realistic data in respect of future transaction
10.It provides technique for useful interpretation of accounting information.
11. It makes possible the efficient utilisation of available resources and thereby
increase the return on capital employed.
Limitations of Management Accounting
1. Management Accounting depends on financial accounting and cost accounting. If
these records are not reliable, it will adversely affect the effectiveness of
management accounting.
2. Decisions taken by management accountant may or may not be executed by the
management.
3. It is very expensive.
4. There is a possibility of resistance from the employees because of introduction of
new rules and regulations.
5. It provides only data and not decisions.
6. It is only a tool to management and not an alternative of management.
7. Personal bias of individuals can affect the effectiveness of conclusion and
recommendations.
8. The scope of management accounting is wide and broad. This creates many
difficulties in implementation.
9. The use of management accounting requires the knowledge of number of related
subjects such as statistics, economics, financial accounting, cost accounting,
mathematics etc.so the lack of knowledge in any of these subjects limits the use of
management accounting.

Difference between Financial Accounting and management Accounting

Basis Financial Accounting Management Accounting

Purpose The purpose is to The purpose is to provide
ascertain profit/ loss and accounting information
financial position. to the management for
decision making.
Reporting It is concerned with It is concerned with
external reporting internal reporting.
Accounting method It follows double entry Does not follow double
system entry system
Period It is prepared for a Prepared whenever
definite period usually needed. It may be
for a year prepared monthly,
weekly, even daily.
Unit of measurement All information under Management accounting
financial accounting are uses units such as
in monetary basis. machine hours, labour
hours, product units etc
Focus It focuses on company as Provides detailed
a whole information about
 products, individual
activities, operations etc
Flexibility More rigid as it has to More rigid
obey accounting
principles and standards.
Audit Financial statements are Management accounting
audited by Chartered statements are meant for
Accountants internal purpose so they
need not to be audited.
Publication These statements are Meant for internal use.
meant for external use. So the results are not
So published for the published.
benefits of public,
shareholders etc.

Tools and Techniques used in management Accounting

 Financial planning
 Financial statement analysis
 Cost Accounting
 Cash flow analysis
 Fund flow analysis
 Standard costing
 Marginal costing
 Budgetary control
 Management Information System
 Management Reporting
 Ratio analysis
 Control accounting
 Decision making accounting

Basis Cost Accounting Management Accounting

Point of occurrence It precedes Management It starts where cost
accounting accounting ends.
Purpose/Objective The main objective is to The objective is to
ascertain and control the provide information to
cost of product or service the management for
decision making
Focus Mainly focus on cost Mainly focus on decision
control making
Data coverage It uses quantitative It uses qualitative data
information
Scope Cost accounting is It has wider scope.
concerned with cost
ascertainment and cost
control. so it has narrow
scope.
Nature It is based on both It deals with future
historical and present projections on the basis
data of historical and present
data.
Utility It serves the needs of It serves the needs of
both internal and only internal
external management management
Position in hierarchy Cost accounting is Management accounting
generally placed at lower assumes a superior level.
levels of hierarchy.
Installation Cost accounting can be Management accounting
installed without can not be installed in
management accounting the absence of cost
accounting.
 MODULE 2

Financial statement analysis

Financial statements
Financial statements are the annual reports prepared by the management at the end of
an accounting period in accordance with Generally Accepted Accounting Principle and
concepts. The three basic financial statements are,

 Balancesheet
 Statement of Profit & Loss
 Cash Flow statement

Objectives of financial statements

1. To know the profitability of business
2. To know the solvency of the business
3. To provide information about efficiency and effectiveness of management
regarding the proper utilisation of resources.
4. To take remedial measures for deviation between actual and budgeted
performance.
5. To evaluate the earning capacity of the film.
6. To know the accounting policies followed by the firm during the accounting
period.
7. To explain the social impact of the business by evaluating the external
factors that affect the business.

Significance/advantages/uses of financial statements

Financial statement provides advantages to the following parties;

 Owners
 Employees
 Management
 Creditors
 Government
 Investors
 Bankers
 Public

Limitations of financial statements

 Incomplete and inexact information
 Lack of qualitative information
  Historical in nature
 Personal bias and prejudices
 Fails to disclose inflationary effects
 Not sufficient for decision making
 Intangible assets not recorded

Types of financial statements

1. Balancesheet or position statement

Balancesheet is the financial summary of assets, liabilities and capital of an individual or

organisation at a specific point of time.

2. Statement of profit and loss (Income statement)

Income statement is the statement of revenue and expenses incurred for earning revenue
during a particular period. It shows the net profit or net loss of an organisation.

Particulars Note Figures for the Figures for the

No. current previous reporting
reporting period period

I.Revenue from operations xx xx

II. Other Income xx xx

III. Total Revenue Xx xx

IV. Expenses;
a. Cost of materials consumed xx xx
b. Purchase of stock in trade xx xx
c. Change in inventories of finished xx xx
Goods
d. Work in progress and stock in trade xx xx
e. Employee Benefit Expenses xx xx
f. Finance Cost xx xx
g. Depreciation and Amortisation xx xx
 Expenses
h. Other expenses

Total Expenses xx xx

V. Profit Before Tax (III-IV) xx xx

VI. Less: Tax (xx) (xx)

VII. Profit After Tax (V-VI) Xx Xx

3.Statement of change in Equity

It explains the change in company’s capital, reserves and retained earnings over the
accounting period. The term ‘owner’s equity’ means the claims of the owners of business
against the assets of the firm.
4.Explanatory notes.
The notes may be related to the method of depreciation, valuation of closing stock,
contingent liabilities etc. The notes are required by the full disclosure principle.

Financial statement analysis

Financial statement analysis is the process of analysing a company’s financial statements for
decision making purpose and to understand the overall health of an organisation.

Objectives/advantages of financial statement analysis

 To assess the financial position of the firm.

 To evaluate the financial performance of the firm.
 To have comparative study
 To help in making future plans.
 To estimate the earning capacity.
 To know the progress of the firm.
 To measure the efficiency of operation.
 To help in decision making.

Limitations of financial statement analysis

 Only a tool, not a conclusive proof.

 Unreliable figures
  Change in accounting methods
 Historical data
 Different interpretations
 Price level changes
 Limitations of the tools of analysis
Types of Financial statement analysis

1. On the basis of modus Operandi

Modus operandi means mode of operation.

a. Horizontal analysis
When the financial statements of number of years are analysed, the analysis is
called horizontal analysis. It involves making comparison and establishing
relationship among items.
E.g. Comparative financial statement analysis, Trend analysis.
b. In vertical analysis, the financial statement of a single year or a particular date
analysed with the help of proper devices like ratios. Here financial statement
items are expressed as a percentage of total.
E.g Common size statement, ratios,

2. On the basis of objectives.

a. Short term analysis

It is concerned with working capital analysis. It measures the liquidity
position of the firm.
c. Long term analysis
It involves the study of a firm’s ability to meet the interest cost and
repayment schedule of its long term obligations.

3. On the basis of materials used

a. External Analysis.
It is done by outsiders who do not have access to the detailed internal
accounting records of the business firm.
b. internal analysis
It is done by persons who have access to the detailed accounting records of the
business.

Tools of financial statement analysis

1. Comparative statements.
2. Common size statement
 3. Trend analysis
4. Ratio analysis
5. Cash Flow Analysis
6. Fund Flow Analysis
7. Break even Analysis

Comparative statement
When financial statement figures for 2 or more years are analysed for comparing the
profitability and financial position, these are called as comparative statements.

Comparative balancesheet

It is the balance sheet which shows the increase or decrease in assets, capital and liabilities
of the same concern, for different periods of time

Particulars Note Previous Current Absolute change Percentage of

No. year year Increase/decrease change

1.Equity and Liability

1. Shareholders fund
a. Share capital xx xx xx xx
b. Reserves and surplus xx xx xx xx
Total xx xx xx Xx
2. Non-current liability
a. Long term borrowings xx xx xx xx
b. Long term provisions xx xx xx xx

xx xx xx Xx
Total
3.Current liability
a. short term borrowings xx xx xx xx
xx xx xx xx
b. Trade payables
c. other current liability xx xx xx xx
xx Xx xx Xx
d. short term provisions
 Total xx xx xx Xx
Grand total (1+2+3) xx xx xx Xx
1. Non Current assets
xx xx xx xx
a. Fixed asset xx
b.Non current investment xx xx xx xx
xx
c. Long term loans and
xx xx xx xx
advances xx

Total xx xx xx Xx
2. Current assets.
a. Current investment
xx xx xx xx
b. inventories
xx xx xx xx
c. trade receivables.
xx xx xx
xx
d. cash and cash
xx xx xx
equivalents
xx
xx xx xx
e. short term loans xx

Total

Comparative income statement

It is the statement of profit or loss which shows the increase or decrease in various items of
cost, expenses and incomes over a number of years.
 Particulars Note Previous Current Absolute %
year change
No. Year Increase/
Increase/
Decrease
Decrease

I. Revenue from xx xx xx Xx
operations
xx xx xx Xx
II. Other Incomes
xx xx Xx Xx
III. Total Revenue (I+II)
IV Less: Expenses
a. cost of materials consumed xx xx xx xx

b. purchase of stock in trade xx xx xx xx

c. Change in Inventories xx xx xx xx

d. Employee Benefit Expenses xx xx xx xx

e. Finance cost xx xx xx xx

f. Depreciation and xx xx xx xx
amortization Expense
g. Other expenses xx xx xx xx

Total Expenses Xx xx Xx Xx

V. Profit Before Tax (III-IV) xx xx xx xx

VI. Less: Tax xx xx xx xx

VII. Profit After Tax (V-VI) Xx xx Xx Xx

Common size balance sheet

It is the balancesheet which shows the relationship of each assets to total assets and also
each item of equity and liability to the total.
 Common size income statement
It is a statement of profit or loss which shows the relationship of expenses and incomes to
revenues from operations.
COMMON SIZE STATEMENT OF PROFIT AND LOSS

Particulars Absolute Amount % of Revenue from

Note Operations
No Current Previous Current Previous
Year Year Year Y ear

I. Revenue from xx xx Xx xx
operations
xx xx Xx xx
II. Other Incomes

xx xx Xx Xx
III. Total Revenue (I+II)

IV Less: Expenses
xx xx xx xx
a. cost of materials consumed
xx xx xx xx
b. purchase of stock in trade
xx xx xx xx
c. Change in Inventories
xx xx xx xx
d. Employee Benefit Expenses
xx xx xx xx
e. Finance cost
xx xx xx xx
f. Depreciation and amortization
Expense
g. Other expenses xx xx xx xx

xx xx xx Xx
Total Expenses

V. Profit Before Tax (III-IV) xx xx xx xx

VI. Less: Tax xx xx xx xx
VII. Profit After Tax (V-VI) xx xx Xx xx
 MODULE 3

RATIO ANALYSIS
Ratio
Ratio means the arithmetical expression of relationship of one number to another.
Ratio Analysis
Ratio analysis is the technique of analysis of financial statements with the help of ratios.

Advantages of ratio analysis

 Simplification of accounting data
 Helps in analysis and Decision making
 Helps in comparison
 Provides ideal standards
 Helps in forecasting
 Helps in controlling
 Helps in taking investment decisions.
 Helps in estimating the trend.

Limitations of ratio analysis

 Limitation due to accounting data
 Problems of price level changes
 Difficult for comparison
 Limited use of single ratio
 Lack of proper standards.

Ratios

1. Liquidity ratios

A. Current Ratio
It explains the relationship of current assets to current liabilities
Current assets/current liability
B. Quick ratio
It explains the relationship of quick assets to current liability
Quick assets / current liability
2. Solvency ratios
 A. Debt Equity ratio

Long term debt/ shareholders fund

B. Proprietary Ratio

Shareholders fund /Total Tangible assets

C. Overall solvency ratios

Total debt/ Total tangible assets.

3. Activity Ratios

A. Inventory turnover ratios

Cost of goods sold / average inventory

B. Inventory Turnover Period

Days or months in a year/Inventory turnover Ratio

C. Fixed asset turnover ratio

Revenue from operations/fixed assets.

D. Working capital turnover ratio

Revenue from operations /working capital

E. Capital turnover ratio

Revenue from operations /Capital employed

F. Debtors Turnover Ratio

Net credit sales/Average Trade Receivables

G. Average debt collection period

Average Trade Receivables/Net credit sales X 365

H. Trade payables turnover ratio

Credit purchase /Average Trade Payables

4. Profitability Ratios.

A. Gross profit Ratio

Gross profit/ Revenue from operations x100

B. Net profit ratio

Net profit after tax/Revenue from operations x 100

C. Operating profit ratio

Operating profit/ Revenue from operations x 100

D. Return on total assets

EBIT/Total Tangible Asset

E. EPS

Earnings after interest and tax/ No. of equity shares

F. Price Earning Ratio

Market price per equity share/EPS

G. Interest coverage ratio

EBIT/ Fixed interest charges

H. Dividend yield Ratio
Dividend per share/ Market price share x 100
I. Dividend Pay-out Ratio
Dividend per equity share/ EPS X 100
MODULE: 4
FUNDS FLOW ANALYSIS
Meaning of Fund
In narrow sense, the term ‘fund ‘means cash. In a broader sense ‘fund’ means money
values in whatever form it may exist. In a popular sense ‘fund ‘means working capital i.e.,
the excess of current assets over current liabilities
Meaning of ‘Flow of Fund’
The term ‘flow ‘means change and the term ‘flow of fund ‘means change in fund or change
in working capital. Any increase or decrease in working capital means’ funds flow’ or’ flow of
funds’
Meaning of Fund Flow Statement
It is a statement which shows the movement of funds, indicating the various means by
which the funds are obtained during a particular period and also the ways in which these
funds are employed
Definition
“A statement which describes the sources from which additional funds were derived and
the uses to which these funds were put.” – Robert N Anthony
Objectives/ Importance/Need/Purpose/ Managerial uses of Fund Flow statement
1. Provides a detailed analysis.
2. Shows sources and uses of funds.
3. Helps in computation of cost of capital.
4. Act as a future guide.
5. Basis for future capital expenditure decisions.
6. Indication of weakness or strength of a firm.
7. Throws light on consequences of business operations.
8. Budget comparison.
9. Helps in proper allocation of resources.
10. Helps in formulation of policies.
Limitations of Fund Flow statement

1. Historical in nature.
2. Secondary Data.
3. No information on changes.
4. Effect of transactions. It ignores transaction between long term assets and long-
term liabilities.
5. Not a sophisticated technique of financial analysis.
Differences between Fund flow Statement and Income Statement

Basis Income Statement Fund flow Statement

Meaning A statement of profit and loss A statement showing the
showing revenue earned and movement of funds between two
expenses incurred Balance Sheet dates
Objective To determine the net profit or net To show the sources and
loss of the business application of fund during a
particular year
Purpose It shows the net profit or loss It shows the changes in working
capital
Scope It has a limited scope It has a wider scope

Period It is prepared yearly It is prepared after short intervals

Statutory or It is compulsory to prepare income The preparation of fund flow

not statement statement is optional
Format It is prepared in prescribed format There is no prescribed format for
as per Sec. III of Company Act 2013 preparing fund flow statement

Items It records only revenue items It records both capital and

considered revenue items

Differences between Fund flow Statement and Balance Sheet

Basis Balance Sheet Fund flow Statement

Meaning It is a statement of assets and It is a statement shows the
liabilities at a particular date movement of funds between two
between two Balance Sheet dates.
Objective It shows the financial position on a It shows the sources and
particular date. application of fund between two
periods
Presentation It shows the position of both It shows the changes in working
current and noncurrent assets and capital, either increase or decrease
liabilities
Tools of It is the end product of accounting It is a tool for financial analysis,
analysis cycle and meant for general generally useful to the
purpose management
Period It is prepared at end of the It is prepared occasionally
accounting period
Statutory or Preparation of Balance Sheet is Preparation of fund flow
not compulsory statement is optional
Format It is prepared in prescribed format There is no prescribed format for
as per Sec. III of Company Act 2013 preparing fund flow statement

Items It exhibits assets and liabilities It exhibits sources and application

of funds
Differences between Fund flow Statement and Schedule of Changes in Working Capital

SL.NO Fund Flow Statement Schedule of Changes in Working Capital

1 It is prepared on the basis of Non- It is prepared with the help of Current
Current Assets & Non-Current Assets & Current Liabilities
Liabilities
2 It shows the sources and application It shows the changes in Current Assets
of fund of the business and Current Liabilities
3 It is prepared with the help of income It is prepared with the help of two
statement, two consecutive Balance consecutive Balance Sheets
Sheets & additional information
4 It shows the overall inflow and It shows the net increase or decrease in
outflow of working capital during a working capital
period

Preparation of Fund Flow Analysis

The fund flow analysis involves the preparation of two statements. They are:
1.Schedule of Changes in working capital, and
2. Statement of sources and application of funds
Schedule of changes in working capital
It is prepared to measure the increase or decrease in working capital over a period of time.
It is prepared with the help of only current assets and current liabilities
Working Capital = Current Assets – Current Liabilities

FORMAT OF SCHEDULE OF CHANGES IN WORKING CAPITAL

Particulars Previous Current Effect on Working capital

Year Year
RS Rs Increase Decrease
Rs Rs
A Current Assets:
Cash in hand
Cash at Bank
Bills Receivable
Sundry Debtors
Closing Stock
Prepaid Expenses
Accrued Income
(A) Total
B Current Liabilities
Sundry Creditors
Bills Payable
 Bank Overdraft
Out Standing Expenses
Dividend Payable
Tax Payable
Short Term Borrowings
Income Received in advance
(B) Total
(C) Working Capital (A-B)
(D) Net Increase or Decrease
in Working Capital

2. STATEMENT OF SOURCES AND APPLICATION OF FUNDS (FUND FLOW STATEMENT)

A fund flow statement gives out a summary of the inflows and outflows of fund. It is
prepared on the basis of changes in fixed assets, long term liabilities and share capital.
Additional information given as per adjustment must also be considered

FORMAT OF FUNDS FLOW STATEMENT

SOURCES Rs APPLICATIONS Rs
1. Issue of shares 1.Redemption of Preference Shares
2. Issue of debenture 2. Redemption of debentures
3. Long term borrowings 3.Repayment of loans
4. Sale of Fixed Assets 4.Purchase of Fixed Assets
5. Sale of Investments 5. Purchase of Investments
6. Income from investments 6.Payment of Income tax
7. Fund from operations 7.Payment of Final Dividend
Net Decrease in Working Capital 8.Payment of Interim Dividend
9.Outfliow of Fund account of
operation (Operating loss)
Net Increase in Working Capital
Total Total

FUND FROM OPERATIONS

It is an internal source of fund as it generates fund. It is calculated by adding non-operating
and non- cash expenses and deducting non-operating income from the net profit. It is
calculated as under:
 FORMAT OF FUND FROM OPERATIONS

Particulars Rs Rs

Profit and Loss Account Closing Balance xxxx

(Surplus account Closing balance)
Less: Profit and Loss account Opening balance xxx
(Surplus account Opening balance)
Current Year’s Profit xxxx
Add: 1. Depreciation and Depletion xxx
2. Amortization of Goodwill/Patent Right xxx
3. Fictitious assets written off (Preliminary Expenses) xxx
4. Transfer to reserve xxx
5.Proposed Dividend xxx
6.Provision for Tax xxx
7.Loss on sale of assets xxx
8.Losson sale of investments xxx
9.Interim Dividend paid xxx
10.Loss on revaluation of Fixed asset xxx
11.Any other non-cash expenditure xxx xxxx
xxxxx
Less: 1. Profit on sale of fixed asset xxx
2.Profit on sale of investment xxx
3.Dividend received xxx
4. Profit on revaluation of fixed asset xxx xxxx
FUND FROM OPERATION xxxx

How will you treat proposed dividend while preparing fund flow statement?
According to circumstances of each case, proposed dividend may be treated as current
liability or non-current liability

 If it is treated as a current liability, it is shown in Schedule of changes in working

capital, no separate ledger account is opened
 If it is treated as non-current liability, then separate ledger account is opened:
(a) Dividend paid during the current year is show as an application of fund in the
Fund flow Statement
(b) Dividend proposed during the current year has to be added back to current
year’s profit while calculating Fund from operation.

How will you treat provision for tax while preparing fund flow statement?
According to circumstances of each case, provision for tax may be treated as current liability
or non-current liability
  If it is treated as a current liability, it is shown in Schedule of changes in working
capital, no separate ledger account is opened
 If it is treated as non-current liability, then separate ledger account is opened:
(c) Tax paid during the current year is show as an application of fund in the Fund
flow statement
(d) Provision for tax created during the current year has to be added back to
current year’s profit while calculating Fund from operation.

Is Depreciation a source of fund?

Depreciation means reduction in the value of fixed tangible asset due to wear & tear,
obsolescence etc. It is a non-cash expense and charged to profit & loss account. It does not
generate fund itself. It is an operating cost, there is no actual flow of cash. It is added with
current year’s profit in fund flow statement because it has been deducted to calculate the
net profit. So, it can not be treated as a source of fund.

MODULE 5
CASH FLOW STATEMENT

Meaning of Cash flow statement

A statement showing the sources and uses of cash prepared from the Income Statement
and Position Statement is called Cash Flow Statement. It is a financial statement that
summarizes the sources of cash inflows and uses of cash outflows of a firm during a
particular period of time, under operating, investing and financing activities of a business
enterprises.
Definition
A cashflow statement can be defined as, “a statement which summarises the sources of
cash inflows and uses of cash outflows of a firm during a particular period of time.”

OBJECTIVES/USES/NEED/PUPOSES/SIGNIFICANCE OF CASFH FLOW STATEMENT

1. Measurement of cash
2. Development of sound financial policies
3. Analysis of repaying capacity
 4. Studying past behavior
5. Studying factors reducing cash balance
6. Controlling cash expenditure
7. Assessing liquidity and solvency positions
8. Evaluating future cash flows
9. Supply necessary information to the users

LIMITATIONS OF CASHFLOW STATEMENT

1. Does not depict the true cash liquidity

2. Does not reveal net income
3. Does not present a complete picture
4. Easy influence on cash balance
5. Not a substitute to fund flow statements
6. Gives misleading results.
7. Not suitable for judging the profitability of a firm
8. Inter-industry comparison is not possible

Differences between Fund flow Statement and Cash Statement

Basis Cash flow Statement Fund flow Statement

Meaning A statement showing the reasons A statement showing the
for change in cash position from movement of funds between two
one period to another Balance Sheet dates
Measurement It measures Liquidity It measures Solvency

Purpose It shows the causes for the changes It shows the causes of changes in
in cash position working capital
Scope It deals only with cash It deals with all components of
working capital including cash
Period of It is useful for short- term financing It is useful for long-term financing
financing
Basis of It follows accrual basis of It follows cash basis of accounting
accounting accounting
Format It is prepared in prescribed form as There is no prescribed format for
given in AS3 preparing fund flow statement

Items It is merely a record of cash It considers changes in all current

considered receipts and cash disbursements. assets and all current liabilities,
Nature It is a financial statement It is not a financial statement.
. What is meant by cash inflow? Give an example.
Cash inflow is the money going in to a business which could be from operating, investing
and financing activities. Receipt of cash from a non-cash item is termed as cash inflow. It
describes all of the income that is brought to a business. It is the movement of cash in to the
business.
Examples: Revenue from customer, Cash receipt from sales

. What is meant by cash outflow? Give an example.

Cash outflow is the money going outside the business. It is the amount of cash that a
business disburses. It is the movement of cash outside the business.
Examples: Cash payment to suppliers, Cash payment to purchase of fixed assets.

PREPARATION OF CASH FLOW STATEMENT

AS -3 insists that the cashflow statement should reveal distinctly the cash flows from
operating activities, investing activities and financing activities. The total cashflows from
these three activities will be the net increase or decrease in cash or cash equivalents during
that period. When the opening balance of cash and cash equivalent is added to the net
increase or decrease, the total will be the closing balance of cash and cash equivalents. Cash
flows are classified in to three main categories:
1. Cash Flows from Operating Activities
Cash flows from those transactions and events which enter in to the ascertainment
of net profit or loss of the enterprises.

Cash Inflows Cash Outflows

1.Cash Sales 1. Cash Purchases
2.Cash received from Royalty, Fees, 2. Cash Paid to Creditors or Trade
and Commission Receivables
3.Cash received from Debtors or 3. Payment of operating expenses
Trade Receivables. like wages, salaries, selling expenses
etc.
4.Payment of Income Tax

2. Cash Flows from Investing Activities

Investing activities include the purchase and sale of long-term assets such as land
and buildings, plant and machinery, non-current investments, etc. These activities
also include interest received from investments, dividend received, etc.
 Cash Inflows Cash Outflows
1.Proceeds from sale of Fixed Assets 1. Purchase of Fixed Assets
2. Proceeds from sale of non-current 2. Purchase of Non-Current
Investments Investments
3.Interest received on investments

4. Dividend received from

investments

3. Cash Flow from Financing activities

Financing activities result in the changes in the size and composition of share capital
and borrowings of the enterprise. These activities include payment of interest on
borrowings and dividends to shareholders.

Cash Inflows Cash Outflows

1.Proceeds from issue of shares in 1. Redemption of preference shares
cash
2. Proceeds from issue of Debentures 2. Redemption of Debentures
in cash
3.Long-term borrowings raised 3. Repayment of loans

4. Short-term borrowings raised 4. Repayment of short-term

(increase in overdraft) borrowings (decrease in overdraft)
5.Payment of dividend

6.Payment of interest on long-term

loans and short-term loans
7.Payment of share issue expenses.
 FORMAT OF CASH FLOW STATEMENT (DIRECT METHOD)

Particulars Rs Rs

A. Cash Flows from Operating Activities:

Cash Revenue from operations (Cash Sales) xxx
Cash Receipt from customers xxx
Cash Purchases (xxx)
Cash paid to suppliers (xxx)
Cash paid to employees (xx)
Cash paid for operating expenses xxxx
Cash generated from operations xx
Income Tax paid (xx)
Cash flows before Extra-ordinary items xxx
Extra ordinary receipt xx
Extra ordinary payment (xx)
(A).Net Cash Flows from Operating Activities xxxx
B. Cash Flows from Investing Activities
Proceeds from the sale of Tangible Fixed Assets xxx
Proceeds from the sale of Intangible Fixed Assets xxx
Cash paid for purchase of Tangible Fixed Assets (xx)
Cash paid for purchase of Intangible Fixed Assets (xx)
Proceeds from the sale of Investments xxx
Cash paid for purchase of Investments (xx)
(B).Net Cash Flows from Investing Activities xxx
C. Cash Flows from Financing Activities
Proceeds from the issue of shares xxx
Securities premium collected xxx
Proceeds from the issue of Debentures xxx
Proceeds from long-term loans xx
Proceeds from short-term borrowings xx
Redemption of preference shares (xx)
Redemption of debentures (xx)
Repayment of long-term loans (xx)
Repayment of short-term borrowings (xx)
Dividend paid (xx)
Interest paid on borrowings (xx)
Increase in Bank Overdraft xx
Decrease in Bank Overdraft (xx)
(C). Net Cash Flows from Financing Activities xxxx
Net Increase (Decrease) in Cash and Cash Equivalents (A+B+C) XXXX
Add: Cash and Cash Equivalents at the beginning of the year xxx
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR XXXX
 FORMAT OF CASH FLOW STATEMENT (INDIRECT METHOD)

Particulars Rs Rs

A. Cash Flows from Operating Activities:

Net Profit Before Tax xxx
Add: Adjustment for Non-Cash and Non-operating Expenses
Depreciation xx
Preliminary Expenses written off xx
Discount on issue of shares and debentures written off xx
Goodwill written off xx
Patent Right written off xx
Loss on sale of Investments xx
Loss on sale of Fixed Assets xx
Interest on long-term borrowings (Interest on debentures) xx
Any other non-Cash item xx xxx
Less: Adjustment for Non-operating Expenses
Interest Received xx
Dividend Received xx
Gain on sale of Fixed Assets xx
Rent Received xx (xx)
Operating Profit or Loss Before Working Capital Adjustments xxx
Add: Decrease in Current Assets (Except cash in hand &cash at bank) xx
Add: Increase in Current Liabilities (Except Bank overdraft) xx xxx
xxxx
Less: Increase in Current Assets (Except cash in hand &cash at bank) (xx)
Less: Decrease in Current Liabilities (Except Bank Overdraft) (xx) (xx)
Cash Generated from operations xxx
Less: Income Tax Paid (Net of Tax Refund Received) (xx)
Cash flow Before Extra-ordinary items xxx
Add/Less: Extra Ordinary items, if any xx
(A) NET CASH FLOW FROM (Used in) OPERATING ACTIVITIES XXX
B. Cash Flows from Investing Activities:
Proceeds from the sale of Tangible Fixed Assets xx
Proceeds from the sale of Intangible Fixed Assets xx
Proceeds from the sale of Non-current Investments xx
Interest Received on Investments xx
Rent Received xx
Dividend Received xx
Purchase of Tangible Fixed Assets (xx)
Purchase of Intangible Fixed Assets (xx)
Purchase of Non-current Investments (xx)
(B) CASH FLOWS FROM (used in) INVESTING ACTIVITIES XXX
C. Cash Flows from Financing Activities:
Proceeds from the issue of shares xxx
Securities premium collected xxx
Proceeds from the issue of Debentures xxx
Proceeds from long-term Borrowings xxx
Proceeds from short-term Borrowings (increase in Bank overdraft) xx
Redemption of preference shares (xx)
Redemption of debentures (xx)
Repayment of long-term loans (xx)
Repayment of short-term borrowings (Decrease in Bank overdraft) (xx)
Interest on long-term & short-term borrowings paid (xx)
Interest on debentures paid (xx)
Final dividend paid (xx)
Interim dividend paid (xx)
(C)CASH FLOWS FROM (used in) FINANCING ACTIVITIES XXX
Net Increase (Decrease) in Cash and Cash Equivalents (A+B+C) XXXX
Add: Cash and Cash Equivalents in the beginning of the year xx
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR XXXX