MS - 04 Accounting and Finance for Managers

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ASSIGNMENT

Course Code                      :               MS - 04

Course Title                       :               Accounting and Finance for Managers

Assignment Code            :               MS-10/TMA/SEM - II/2013

Coverage                             :               All Blocks

Note : Attempt all the questions and submit this assignment on or before 30th April, 2014 to the coordinator of your study center.

Q.1. a) Distinguish between Revenue expenditure and Capital expenditure. How are they

treated while preparing the final accounts? If by mistake the accountant of a firm treats a capital expenditure as revenue expenditure, how will it affect the final accounts of the firm? Give an example.

Ans :  Revenue expenditure and Capital expenditure :

Capital Expenditure

Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset.

The cost of acquisition not only includes the cost of purchases but also any additional costs incurred in bringing the fixed asset into its present location and condition (e.g. delivery costs).

Capital expenditure, as opposed to revenue expenditure, is generally of a one-off kind and its benefit is derived over several accounting periods. Capital Expenditure may include the following:

• Purchase costs (less any discount received)
• Delivery costs
• Legal charges
• Installation costs

b) Why is depreciation charged? Explain the two methods of charging depreciation. In which method the value of the asset is reduced to zero earlier. Which one is more rational? Explain why?

Ans :  The Need for depreciation arises for the following reasons:

1. Ascertainment of True Profit or Loss:

Depreciation is a loss. So Unless it is considered like all other expenses and losses, true profit or loss cannot be ascertained. In other words, depreciation must be considered in order to into out true profit or loss of a business.

2. Ascertainment of True Cost of Production:

Goods are produced with the help of plant and machinery which incurs depreciation in the process of production.

3. True Valuation of Assets:

Q.2. What is meant by appropriate capital structure? Discuss the determinants and features of an appropriate capital structure for a corporate body.

Ans : Appropriate Capital structure:

It represents the total long-term investment in a business firm. It includes funds raised through ordinary and preference shares, bonds, debentures, term loans from financial institutions, etc. Any earned revenue and capital surpluses are included.

Capital Structure Planning and features :

Decision regarding what type of capital structure a company should have is of critical importance because of its potential impact on profitability and solvency. The small companies often do not plan their capital structure. The capital structure is allowed to develop without any formal planning. These companies may do well in the short-run, however, sooner or later they face considerable difficulties. The unplanned capital structure does not permit an economical use of funds for the company. A company should therefore plan

Q.3. Explain the important determinants of the Working Capital needs of a firm. Can two firms with different Working Capital achieve the same amount of sales? If so, explain how.

Ans : Determinants of working capital :

1. Small or Large Business

It is the first determinant of working capital that it is affected with the nature of business. Business may be small or large. In small business, company need high working capital because, small business is relating to trading of goods, for starting small business, you need very small fixed capital but need high working capital for paying day to day expenses. But in large business, we require more fixed capital than working capital for purchasing fixed asset.

2. Small or Large Demand

Nature of demand also absolutely affects the working capital need. Some product can be easily sold by businessman, in that business; you need small

Q.4.  a) What do you understand by Budgetary Control? How is it exercised? What steps should be taken for installing a Budgetary Control System in an organization? Discuss.

Ans : Budgetary control system:

No system of planning can be successful without having an effective and efficient system of control. Budgeting is closely connected with control. The exercise of control in the organisation with the help of budgets is known as budgetary control. The process of budgetary control includes

(i) Preparation of various budgets

(ii) Continuous comparison of actual performance with budgetary performance and

(iii) Revision of budgets in the light of changed circumstances.

A system of budgetary control should not become rigid. There should be enough scope for flexibility to provide for individual initiative and drive.

Installing A Budgetary Control System:

b) What is Rolling Budget? How does it differ from flexible Budget? What purpose do these budgets serve?

Ans : Rolling budget :

A rolling budget is also known as a continuous budget, a perpetual budget, or a rolling horizon budget. We will use the following example to explain the meaning of a rolling budget. Let's assume that a company's accounting year ends on each December 31. Prior to the start of the year 2013, the company prepares its annual budget which is detailed by month for January through December 2013. This budget could become a rolling budget if after January 2013 the company drops the budget for January 2013 and adds the budget for January 2014. This rolling budget now covers the one year, or 12-month, period of February 1, 2013 through January 31, 2014. At the end of February 2013, the rolling budget will drop February 2013 and will add February 2014. At this point the rolling budget will cover the one year period of March 1, 2013 through February 29, 2014.

                                                                                   

Flexible budget:

A budget may be defined as a quantitative expression of a business plan for a specified future period, usually a year. It is simply a financial forecast for a future period. A budget is a short-term financial plan. It is an action plan to guide managers in achieving the objectives of a firm. A budget is a comprehensive and coordinate plan, expressed in financial terms, for the operations and resources of an enterprise for some specific period in the future.

The Flexible budget is designed to change in accordance with the level of activity attained. Thus, when a budget is prepared in such a manner that the budgeted cost for any level of activity is available, it is termed as flexible budget.

Purpose of rolling budget :

1. Flexibility:

The rolling budget incorporates changes from the previous period into the next, overlapping period, increasing continuity and oversight. Rolling budgets, therefore, are more up-to-date than a static budget, which does not consider the changes taking place during a forecast period.

2. Responsiveness :

Rolling budgets help you to be more responsive to unexpected changes in your circumstances and allow you to make adjustments for those changes in coming periods. You won't have to wait until the entire budget period ends to take account of changes.

3. Administration :

A disadvantage of a rolling budget is that it is similar to preparing a new budget again and again. Such a budget requires you to regularly gather the facts from the previous period. Furthermore, rolling budgets require robust information systems and skilled personnel to extract accurate information for the various subcategories.

4. Justification :

Preparation of rolling budgets is not advisable when the circumstances or conditions are not constantly changing. It may be a waste of your time and resources to prepare rolling budgets in unvarying environments. If your business is not exposed to extremely varying elements of commerce or the greater economy, a rolling budget will be an unwise choice.

Purpose of flexible budget :

1. Adjustment for Predictions :

When you prepare a static or fixed budget, you assume that you can predetermine sales and production quantities. Because of various factors beyond your control, however, these numbers hardly turn out to be as predicted.

2. Adapting Change :

The business environment around you changes rapidly; therefore, you must adapt to these changes to make your business a success story.

3. Control and Evaluation :

If you find a change in your sales or production volume, you can reorganize your fund allocation based on changed circumstances.

4. Inflation and Variance :

It’s likely that you’ll face variations in the cost of materials, selling price, wages and production overhead. You need to take care of these variations and make necessary adjustments.

Q,5. Following are the balance sheets of a limited company as on 31st December, 2000 and 2001.

Liabilities	2000 rs	2001 rs	Assests	2000 rs	2001 rs
Share Capital	54000	74000	Goodwill	3000	2520
Reserves	13000	15500	Buildings	50950	48000
P. & L. A/c	8600	8800	Plant	35000	43000
Bank Loan (Long-term)	25000	-	Stock	25500	18800
Creditors	28000	24000	Debtors	22000	16200
Bills Payable	8000	8500	Cash	150	180
			Bank	-	2100
	1,36,600	1,30,800		1,36,600	1,30,800

Taking into account the following additional information, you are required to prepare funds flow statement and statement of change in working capital.

(a) Dividend paid was Rs. 6,000.

(b) Rs. 3,600 was written off as depreciation on plant and Rs. 2,950 on buildings.

(c) Profit on sale of plant was Rs. 3,000.

Ans :    Profit and loss adjustment account :

To transfer to general reserve        (15500 – 13000)	2500	By bal b/d	8600
To Dividend	6000	By profit on sale of plant	3000

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