Set-1 Answers: 1. What is Depreciation? 1.

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow. 2. A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred. 2. elements of an accounting system? There are 10 basic elements. They are 1) Assets 2) Liabilities 3) Owner's or Stockholder's Equity 4) Investments by Owner 5) Distributions to Owner 6) Comprehensive Income 7) Revenue 8) Expenses 9) Gains and 10) Losses. 3. Prepare Flexible Budget? The flexible budget is a performance evaluation tool. It cannot be prepared before the end of the period. A flexible budget adjusts the static budget for the actual level of output. The flexible budget asks the question: If I had known at the beginning of the period what my output volume (units produced or units sold) would be, what would my budget have looked like? The motivation for the flexible budget is to compare apples to apples. If the factory actually produced 10,000 units, then management should compare actual factory costs for 10,000 units to what the factory should have spent to make 10,000 units, not to what the factory should have spent to make 9,000 units or 11,000 units or any other production level.

The flexible budget variance is the difference between any line-item in the flexible budget and the corresponding line-item from the statement of actual results.

The following steps are used to prepare a flexible budget:

1. Determine the budgeted variable cost per unit of output. Also determine the budgeted sales price per unit of output, if the entity to which the budget applies generates revenue (e.g., the retailer or the hospital). 2. Determine the budgeted level of fixed costs. 3. Determine the actual volume of output achieved (e.g., units produced for a factory, units sold for a retailer, patient days for a hospital). 4. Build the flexible budget based on the budgeted cost information from steps 1 and 2, and the actual volume of output from step. 4. Concept of Profit/Volume Ratio This is popularly known as P/V Ratio. It expresses the relationship between contribution and sales. It is expressed in percentage. P/V ratio can be calculated in either of the following ways.

where S

= Contribution (being the difference between sales and variable costs) V = Variable Costs

= Sales ,

P/V ratio can be determined by expressing change in profit or loss in relation to change in sales. P/V ratio indicates the relative profitability of different products, processes and departments. P/V ratio is most important to watch in business. It is the indicator of the rate at which the organization is earning profit. A high ratio indicates high profitability and a low ratio indicates low profitability. It is useful for calculating Break Even Point, and at a given level of sales, what sales are required to earn a certain amount of profit etc. Limitations of P/V Ratio Following limitations should be kept in mind while using P/V Ratio. a)It heavily depends on contribution. b) It fails to consider the capital outlays required by additional productive capacity. c) It indicates only relative profitability. d) Over simplification may lead to erroneous conclusion. 5. Cash flow statement A cash flow statement, also known as statement of cash flows or funds flow statement, [1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow

of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. [1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. 6. (2) Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to note that FFO is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement. 6. (3) The Source and Application of Funds Statement shows the total sources of new funds raised between Balance Sheet dates and the total uses of those funds in the same period. The Source and Application of Funds Statement tells exactly where the company got their money from and how it was spent. It tells whether management has made sound investment decisions. 6. (4) An illustration is an image presented as a drawing, painting, photograph or other work of art that is created to elucidate or dictate sensual information (such as a story, poem or newspaper article) by providing a visual representation graphically. 7. Combined Ratios Combined Ratios or Inter-Statement Ratios relate two items or two groups of items of which one is from Balance Sheet and one of the revenue statements. a) Return on Capital Employed (ROCE) This ratio explains the relationship between total profits earned by the business and total investments made or total assets employed. This ratio, thus measures the overall efficiency of the business operations. This ratio is alternatively known as Return on Total Resources. This ratio shows the earnings capacity of the business. The earning rate should not be less than that of other companies in the same industry. Otherwise, the market value of shares will be low.This ratio also indicates how well and how economically the assets are being used. It discloses the overall efficiency of the management in utilizing the resources or assets at its disposal. 8. An audit is an accounting procedure under which the financial records of a company or individual are closely inspected to make sure that they are accurate. An audit keeps a company honest and also reassures employees and investors as to the financial status of the organization. There are two primary types of audit: internal audits and independent audits.

Set-2

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1. Purpose of Trial Balance? Explain the contents of trial balance. Trial Balance as, a list or abstract of the balances or of total debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establish a basic summary for financial statements. Purposes of Trial Balance A Trial Balance is a list of accounts showing debit balances and credit balances. It serves the following purposes: 1. To ascertain arithmetical accuracy of the accounts opened in the ledger. 2. To know the balance of any Ledger Account. 3. To serve as an evidence of the fact that the double entry has been completed in respect of every transaction. 4. To facilitate preparation of final accounts promptly. 5. To help the proprietor to draw conclusions by comparing trial balances of past and present. Contents of trial balance a) Heading: -The heading of a trial balance is written at the top. It is essential to mention the date on which the accounts have been closed and the trial balance is extracted. b) Columns: - A trial balance has four columns. The first column is meant for recording names or heads of those accounts in the ledger whose balances or totals are to be entered. The second column is meant for recording the number of that page in the ledger on which the concerned accounts appear. The third and fourth columns are meant for recording the amounts of debit and credit respectively. c) Total: -The debit and credit balances of all the accounts appearing in the ledger and entered in the trial balance are totaled. The total of debit column must agree with the total of the credit column.

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2. Balance sheet Ratios

These ratios deal with the relationships between two items, or groups of items, which are together found in the balance sheet. Ratio of current assets and current liabilities, ratio of stock to working capital etc. are some examples.

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3. Classification of Ratios There is no dearth of financial ratios today. There are ratios for different purposes, for different types of users and for different types of analysis. Ratios can be grouped under the following heads: a) Traditional classification, b) Functional classification c) Users angle.

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4. Difference Between Funds Flow Statement and P & L A/c Following are the main differences between a Funds Flow Statement and Profit and Loss Account: 1. Objective The main objective of preparing a Funds Flow Statement is to ascertain the funds generated from operations. The statement reveals the sources of funds and their uses. The main objective of preparing a Profit and Loss Account is to ascertain the net profit earned / loss incurred by the company out of the business operations at the end of a particular period. 2. Basis The Funds Flow Statement is prepared based on the financial statement of two consequent years. A Profit and Loss Account is prepared on the basis of nominal accounts in the ledger. 3. Usefulness The Funds Flow Statement is useful for creditors and management. The profit and loss account is useful not only to creditors and management but also to the shareholders and outside parties.
4. Type of data used The Funds Flow Statement takes into account only the funds

available from trading operations but also the funds available from other sources like issue of share capital / debentures, sale of fixed assets etc. Whereas the profit and loss account use only income and expenditure transactions relating to trading operations of a particulars period.
5. Legal Necessity Preparation of Funds Flow Statement is not a statutory

obligation and is left to the discretion of management. Preparation of Profit and Loss Account is a statutory obligation.

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5. Overheads and Non-cost Items Overheads Aggregate of indirect cost is referred to as overheads. It is also called as on cost or Supplementary Cost. It arises as a result of overall operation of a business. According to Weldon overhead means the cost of indirect material, indirect labour and such other expenses, including services as cannot conveniently be charged to direct specific cost units. It includes all manufacturing and non-manufacturing supplies and services. Classification of Overheads 1. Factory Overheads: It is the aggregate of all the factory expenses incurred in connection with manufacture of a product. These are incurred in connection with running of factory. They include the items of expenses viz., factory salary, work managers salary, factory repairs, rent of factory premises, factory lighting, lubricants, factory power, drawing office salary, haulage (cost of internal transport) depreciation of plant and machinery unproductive wages, estimation expenses, royalties, loose tools written off, material handling charges, time office salaries, counting house salaries etc. 2. Administrative Overheads or Office Overheads: It is the aggregate of all the expenses as regards administration. It is the cost of office service or decision making. It consists of the following expenses: Staff salaries, printing and stationery, postage and telegram, telephone charges, rent of office premises, office conveyance, printing and stationery and repairs and depreciation of office premises and furniture etc. 3. Selling and Distribution Overheads: It is the aggregate of all the expense incurred in connection with the sales and distribution of finished product and services. It is the cost of sales and distribution services. Non-cost items: -Non-cost items are those items which do not form part of cost of a product. Such items should not be considered while ascertaining cost of a product. These are items included in profit and loss A/c as per principles of Financial Accountancy but not related to product. For examples, Income-tax paid, provision for Income-tax, interest on capital, interest on loan, profit on sale of fixed assets, loss on sale of fixed assets, transfer fees received, transfer to reserves, any other appropriation of profit, commission to Managing Director or Partners, capital loss, donations, capital expenditure, discount on shares and debentures Goodwill written off, Preliminary expenses written off, brokerage, pure financial expenses or losses and expenses not related to the business, wealth tax, bonus to directors and employees (if it is based on profit), expenses of raising capital, penalties and fines.

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6. Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Cash flow can e.g. be used for calculating parameters.

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7. Merits and Demerits of Budgetary Control Merits:

Budgetary control establishes a basis for internal audit by regularly evaluating departmental results. By reporting information which has not gone according to plan, it economises on managerial time and maximises efficiency. This is called Management by exception reporting. Scarce resources would be allocated in an optimal way, thus controlling expenditure. It forces management to plan ahead so that long-term goals are achieved. Communication is increased throughout the firm and coordination is improved. An effective budgetary control system will allow people to participate in the setting of budgets, and thereby have a motivational impact on the work force. Individual and corporate goal are aligned. Areas of efficiency and inefficiency are identified. Variance analysis will prompt remedial action where necessary. The budget provides a yardstick against which the performance of the firm can be evaluated. It is better to compare actual with budget rather than with the past, since the latter may no longer be suitable for current and expected conditions. People are made responsible for items of cost and revenue, i.e., areas of responsibility are clearly delineated.

Demerits:

Budgets are perceived by the work force as pressure devices imposed by top management. This can have an adverse effect on labour relations. It can be difficult to motivate an apathetic work force.

The pressure in the budgeting system may result in inaccurate record keeping. Manager may over-estimate costs in order that they will not be held responsible in the future for over spending. The difference between the minimum necessary costs and the costs built into the budget is called slack. Departmental conflict arises because of competition for resource allocation. Departments blame each other if targets are not achieved. Uncertainties can occur in the system, e.g. uncertainly over demand, inflation, technological change, competition, weather etc. It may be difficult to align individual and corporate goal. Individual goals often may contradict the firms goals. It is important to match responsibilities with control, otherwise a manager will be demotivated. Costs can only be controlled by a manager if they occur within a certain time span and can be influenced by that manager. A problem arises when a cost can be influenced by more than one person. Managers are often accused of wasting expenditure when they either: a. demand a grater budget allowance than is really needed, or b. unnecessary spend in order to fully utilise their allowance through fear of future cutbacks. Zero base budgeting can overcome this problem.

Sub-optimal decisions may arise when a manager tries to enhance his short-run performance in a way which is detrimental to the organisation as a whole, e.g. delaying expenditure on urgently needed repairs. They are based on assumed conditions (e.g. rates of interest) and relationship (e.g. product-wise held constant) that are not varied to reflect the actual circumstances that come about. They make allowance for tasks to be performed only in relation to volume rather than on time. They compare current costs with estimates based only on historical analysis. Their short-term horizon limits the perspective, so short-term results may be sought at the expenses of longer term stability or success. They have a built-in bias that tends to perpetuate inefficiencies. For example, next years budget is determined by increasing last years by 15 per cent, irrespective of the efficiency factor in the last year. As with all types of budgets the game of beating the system may take more energy than is being devoted to running the business.

The fragile internal logic of static budget will be destroyed if top management reacts to draft budgets by requiring changes to be made to particular items which are then not reflected through the whole budget.

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8. Difference between Historical Costing Vs Standard Costing Historical costing :

Actual cost adjustment is delayed until after the completion of the operation and there is no indication of efficient or inefficient performance. The time-lag in reporting costs delays the introduction of corrective action The necessary investigation is time-consuming

Standard Costing:

Standard costing is a system which introduces cost control and cost reduction Standard costs are carefully prepared estimates of the cost of operations, carried out under specified working condition. Management is motivate and employees are given an incentive. A yardstick is provided to measure performance Only variances are investigated by use of the principle of exceptions. Corrective action can be taken at an early stage.