Q: 1]

Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events. Explain the accounting

process and write the objectives of accounting.

A: 1]

Explanation of accounting process

A sequence of activities involving the recording of how cash is received and paid out in a company or organization. The accounting process in business is based on four accounting methods, which are: the accrual method, the consistency method, the prudence method and the going concern method.As implied earlier, today's electronic accounting systems tend to obscure the traditional forms of the accounting cycle. Nevertheless, the same basic process that bookkeepers and accountants used to perform by hand are present in today's accounting software. Here are the steps in the accounting cycle:

(1) Identify the transaction from source documents, like purchase orders, loan agreements, invoices, etc.

(2) Record the transaction as a journal entry (see the Double-Entry Bookkeeping Section above).

(3) Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been represented as T’s, or so-called T-accounts, with debits on the left and credits on the right.

(4) At the end of the reporting period (usually the end of the month), create a preliminary trial balance of all the accounts as follows:

(a) Netting all the debits and credits in each account to calculate their balances and

(b) Totaling all the left-side (i.e. debit) balances and right-side (i.e. credit) balances. The two columns should be equal.

(5) Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time.

(6) Create an adjusted trial balance of the accounts. Once again, the left-side and right-side entries - i.e. debits and credits - must total to the same amount.

(7) Combine the sums in the various accounts and present them in financial statements created for both internal and external use.

(8) Close the books for the current month by recording the necessary reversing entries to start fresh in the new period (usually the next month).

Nearly all companies create end-of-year financial reports, and a new set of books is begun each year. Depending on the nature of the company and its size, financial reports can be prepared at much more frequent (even daily) intervals. The SEC requires public companies to file financial reports on both a quarterly and yearly basis.

Objectives of accounting The broad objects of Accounting may be briefly stated follows:

1. To maintain the cash accounts through the Cash Book and to find out the Cash

balance on any particular day.

2. To maintain various other Journals for recording day-to –day non –cash transactions.

3. To maintain various Ledger Accounts to find out the exact amounts of incomes and

expenses or gain and losses or receivables and payables.

4. To furnish information regarding Purchases and Sales, both Cash and Credit.

5. To find out the net profit or net loss or surplus or deficit for any particular period.

6. To find out the total capital on a particular date.

7. To find out the positions of assets on a particular date.

8. To find out the position of liabilities on a particular date.

9. To detect any defalcations and to check the frauds and misappropriations of money.

10.To detect the various errors and to rectify those through entries in the journal

proper.

11.To confirm about the arithmetical accuracy of the books of accounts.

12.To help the management by supplying accounting ratios, reports and relevant data.

13.To calculate the cost of productions.

14.To help the management formulate policies for controlling cost, preparation of

quotation for competitive supply etc.

Q: 2]

Journal is a book of original entry and only one journal is maintained if the

business is very small in size and the transactions are limited.Give the meaning

of a subsidiary book. List and explain all the types of subsidiary books.

A: 2]

Explanation of subsidiary books

Most of the big companies are recording the business transactions in one journal

and the posting of the same to the concerned ledger accounts are very difficult tasks and

which require more clerical labor. For avoiding such kind of difficulties most of the

business organizations are subdividing the journal in to subsidiary journals or subsidiary

books. Subsidiary books are those books of original entry in which similar nature of

transactions are recording in a chronological order.

Explanation of all types of subsidiary books

Kinds of Subsidiary Books

There are different kinds of subsidiary books which includes purchase day book, Sales day

book, purchase returns book, Sales returns book, Bills receivable books, Bills payable

books, Cash book.

1. Purchase day book

Purchase day book is used for recording credit purchase of goods only. This will not

record any cash purchase or credit purchase of any assets. The term goods means all the

commodities and services in which the company deals in day to day activities. The

preparation of purchase day book involves the Date column, Particulars column, Invoice

number column, Ledger folio column, inner amount column and Amount column.

2. Sales day book

Sales day book is mainly used for recording credit sales of goods and services in an

organization. This will not record any cash sales or assets sales. The ruling for the

preparation of this book is same as like Purchase day book. This involves the Date column,

Particulars column, Invoice number column, Ledger folio column, inner amount column

and Amount column.

3. Purchase returns book

This is maintained to record the transactions of goods returned to the supplier when

purchase on credit. The ruling of the preparation of purchase return book or returns

outward book involves Date, Particulars, Debit note number, Ledger folio and amount

column.

4. Sales returns book

This book is used to record the goods returned by the customer the goods sold on

credit. The ruling of the preparation of Sales return book or returns inward book involves

Date, Particulars, credit note number and Ledger folio and amount column.

5. Bills receivable books

It is used to record the transactions when the bills received from the customer for

credit sales. This provides a medium for posting bills receivable transaction. The

preparation of this book involves Date when received, Drawer, Acceptor, Where payable,

date of bill, term, due date ledger folio, Amount, remarks columns.

6. Bills payable books

This is used to record the acceptances given to the suppliers for credit purchase.

The preparation of bills payable book involves Date of acceptance, giver, payee, Where

payable, date of bill, term, due date, ledger folio, Amount, remarks columns.

7. Cash book

The cash book is used to record all the receipts and payments of cash. For the

preparation of cash book there are different rules are available according to the nature of

business. The different forms of cash book are as follows:-

a. Simple Cash book – This is the simple form of cash book.

b. Two column cash book – This type of cash book have two columns like cash column and

discount column.

c. Three column cash book – This involves three columns such as Bank column, cash

column and discount column.

d. Petty cash book - This is used to record petty expenses like postage, cartage, printing

and stationery etc. in the day to day business activities.

Q: 3]

For the following balances extracted from a trial balance, prepare a trading account.

ParticularsAmount in Rs.Stock on 1-1-2004 70700Returns inwards 3000Returns outwards 3000

Purchases 102000

Debtors 56000Creditors 45000Carriage inwards 5000Carriage outwards 4000Import duty on materials received from abroad

6000

Clearing charges 7000Rent of business shop 12000Royalty paid to extract materials 10000Fire insurance on stock 2000Wages paid to workers 8000Office salaries 10000Cash discount 1000Gas, electricity, and water 4000Sales 25000

0

A: 2]

Trading AccountParticulars Amount (Rs.) Particulars Amount (Rs.)  CR DR   CR DRTo Opening Stock   70700 By Sales 250000  To Purchases

102000  Less Return Inwards

3000 247000

Less Returns Outwards 3000 99000 By closing   56000To Carriage Inwards   5000      To Wages   8000      To Fire Insurance on stock   2000      To Gas, Electricity and Water   4000      To Import duty   6000      To Clearing charges   7000      To Royalty paid to extract materials

  10000 

   

To Gross Profit   91300          303000     303000

Q: 4]

Write short notes on:a) Cost Management System (CMS)b) Value added

A: 4]

a) Cost Management System(CMS)A cost management system (CMS) consists of a set of formal methods developed for planning and controlling an organization’s cost-managing activities relative to its short-term activities and long-term strategies. It should provide information to meet two major challenges: profitability in the short term and maintaining a competitive position in the long term.

 Organizational role of a CMS:

Managing core competencies so as to exploit opportunities and fend off threats Linking plans and strategies to actual organizational performance

Dual focus of a cost management system:

  Short Run Long RunObjective Organizational efficiency SurvivalFocus Specific costs:

manufacturing service

marketing

administration

Cost categories:

customers suppliers

products

distribution channels

Important characteristics of information

Timely

Accurate

Highly specific

Short term

Periodic

Reasonably accurate

Broad focus

Long term

 Six primary goals of a cost management system:

1. Develop reasonably accurate product costs2. Assess product/service life-cycle performance

3. Improve understanding of processes and activities

4. Control costs

5. Measure performance

6. Allow pursuit of organizational strategies

 Primarily a CMS should provide means to develop accurate product or service costs. Traceability has been made easier by bar codes and radio frequency identification (RFID). Product and service costs are used to plan, prepare financial statements, assess individual product/service profitability and period profitability, to establish process for cost-plus contracts and create a basis for performance measurements.

 The CMS should provide information about life-cycle performance of a product or service. This is not provided by the financial statements. This information gives managers a basis to relate costs incurred in one stage to costs and profitability of other stages.

 A CMS should help managers understand processes and activities, so that they can make cost-beneficial improvements in the production and processing systems.

 Control of costs, the original purpose of cost management systems, is still important. Costs can only be controlled when the related activity is monitored, the cost driver is known and the information is available.

 The CMS should generate information helping managers measure and evaluate performance, including not only human and equipment performance but also future investment opportunities.

 The Cost management system should generate information needed to define and implement organizational strategies.  In the current global market, firms must be certain that a link exists between goals, objectives and organizational activities: organizational strategy

b) Value added

The enhancement a company gives its product or service before offering the product to customers. Value added is used to describe instances where a firm takes a product that may be considered a homogeneous product, with few differences (if any) from that of a competitor, and provides potential customers with a feature or add-on that gives it a greater sense of value.

A value add can either increase the product's price or value. For example, offering one year of free support on a new computer would be a value-added feature. Additionally, individuals can bring value add to services that they perform, such as bringing advanced financial modeling skills to a position in which the hiring manager may not have foreseen the need for such skills.

Q: 5]

Ajay industries manufactures a product X. On 1st January, 2007, there were 5000 units of finished product in stock.Work-in-progress Rs.57, 400Raw materials Rs.1, 16,200

The information available from cost records for the year

Direct material 9,06,900Direct labour 3,26,400Freight on R M purchased 55,700

Indirect labour 1,21,600Other factory overhead 3,17,300Stock of raw materials on 31st

Dec 200796,400

Work-in-progress on 31st Dec 2007

78,200Sales (1,50,000 units) 30,00,

000Indirect materials 2,13,900

There are 15000 units of finished stock in hand on 31st December 2007. Prepare a statement of cost and profit assuming that opening stock of finished goods is to be valued at the same cost per unit as the finished stock at the end of the period. Preparation of statement of cost and profit

A: 5]

Direct Material  Opening stock of raw material 1,16,200Add: Purchases 9,06,900Add: Freight on raw materials purchased 55,700Less: Closing stock of raw material 96,400Material Consumption 9,82,400Direct Wages 3,26,400

Prime Cost13,08,80

0Add: Factory Overheads  Indirect Labor 1,21,600

Indirect Materials 2,13,900Other factory Overheads 3,17,300

Gross Factory cost19,61,60

0Add: Opening Work in Progress 57,400Less: Closing Work in progress 78,200

Net Factory cost19,40,80

0Add: Administrative Overheads Nil

Cost of Production19,40,80

0Add: Opening stock of finished products (5000 x 12.50) 62,500Less: Closing finished stock (15,000 x 12.13) 1,81,950

Cost of goods sold18,21,35

0Add: Selling exp. (1,50,000 x 0.50) 75,000

Cost of sales18,96,35

0

Profit11,03,65

0

Sales30,00,00

0

Prime Cost:13,08,800

Gross Factory cost:

19,61,600Net Factory cost: 19,40,800Cost of

Production:19,40,800Cost of goods

sold:18,21,350Cost of sales 18,96,35

0Profit: 11,03,650

Q: 6]Assume a company is considering dropping product B from its line because accounting statement

shows that product B is being sold at a loss.

ProductIncome Statement

A B C Total

Sales revenue 50,000 7,500 12,500 70,000

Cost of sales:        

D. material 7,500 1,000 1,500 10,000

D. labour 15,000 2,000 2,500 19,500

Indirect manufacturing cost (50% of Direct labour)

7,500 1,000 1,250 9,750

Total 30,000 4,000 5,250 39,250

Gross margin on sales 20,000 3,500 7,250 30,750

Selling and Admn 12,500 4,500 4,000 21,000

Net income 7,500 -1,000 3,250 9,750

Additional information:a) Factory overhead cost is made up of fixed cost of Rs. 5850 and variable cost of Rs. 3900.b) Variable cost by products are: A - Rs. 3000, B - Rs. 400, and C - Rs. 500.c) Fixed costs and expense will not be changed if product B is eliminated.d) Variable selling and administrative expenses to the extent of Rs. 11000 can be traced to the product: A - Rs.7,500, B - Rs.1500, and C - Rs. 2000.e) Fixed selling and administration expense are Rs. 10000.

A: 6]

Product   

Income Statement

 

         

 

A B C Total   

           

Sales revenue 

50,000 7,500 12,500 70,000           

Less V.C         

           

D. Material 

7,500 1,000 1,500 10,000           

D. Labour 

15,000 2,000 2,500 19,500           

Factory overhead 

3,000 400 500 3,000           

Selling and administration cost 7,500 1,500 2,000 11,000           

Total 

33,000 4,900 6,500 44,400           

Contribution 

17,000 2,600 6,000 25,600           

Less: Fixed cost         

           

Factory overhead       

5,850           

Selling and administration overhead

     

10,000           

Total fixed cost       

15,850           

Net income       

9,750           

If the sale of product B was discontinued, the marginal contribution would be lost and the net income would be reduced by Rs.2600.

Assume that after dropping product B, the sales of product A has increased by 10%. The total profit of the firm will not increase by this sales increase. Product A makes only a marginal contribution of 34% (17000/50000).

Sales revenue of product A 50000 100%     

Variable cost of product A 33000 66%     

Marginal contribution of product A 17000 34%     

On additional sales of Rs.5000, the marginal contribution would be Rs.1700.Sales revenue 10% of 50000 5000   

Variable cost 66% 3300   

Marginal contribution (34%) 1700   

This contribution is less than Rs.2600 now being realized on the sales of product B. It would take additional sales of product A of approximately Rs.7647 to equal the marginal contribution of Rs.2600 now being made by product B:

It is possible that the dropping of product B may result in reduction in some of the fixed costs. Product B now contributes Rs.2600 towards recovery of fixed costs and expenses. Only if the fixed costs and expenses can be reduced by more than this amount, it is advisable to drop product B.