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Comprehensive Assignement for MANAC: PGCBM 21, XLRI Jamshedpur

February 20, 2012

COMPREHENSIVE ASSIGNMENT

FOR

MANAGEMENT ACCOUNTING

PGCBM 2012 (BATCH 21)

XLRI JAMSHEDPUR

Done by

Sajith P P (SMS ID: 110421)

([email protected])

Bangalore Cunningham Road

Submitted to

Dr Ram Kumar Kakani


February 20, 2012

Contents THE PROBLEM ......................................................................................................................................... 3

ASSUMPTIONS AND REQUIREMENTS ............................................................................................... 3

CONDITIONS .................................................................................................................................... 3

REQUIRED: Part I (Compulsory and worth 30 marks) ........................................................................ 4

REQUIRED: Part II (Compulsory and worth 10 marks) ....................................................................... 4

THE ANSWER ........................................................................................................................................... 5

PART I: CHRONOLOGICAL STATEMENTS AND FINANCIAL STATEMENTS ............................................ 6

PART II: FINANCIAL STATEMENT ANALYSIS AND CASH FLOW ANALYSIS .......................................... 18


February 20, 2012

THE PROBLEM

You are launching into a business in the name and style of your choice. It has to be a manufacturing

business. It means that your business would involve, buying materials, transforming it using plant and

machinery, and selling it. Keep in mind the conditions given in this assignment. Strictly adhere to the

conditions.

ASSUMPTIONS AND REQUIREMENTS

You can make any assumption, provided they are reasonable in an actual business situation, subject to

the conditions 1 to 11 (detailed below). Realistic nature of the assignment would involve factors such as

volume of turnover, cost structure, type and nature of transaction. Please draw up the accounts and

reports in proper form as if they were made out for a real life business.

CONDITIONS

1. Date of commencement of business is to be your date of birth.

For example, if your date of birth is 10th January 1981 then your date of commencement will be 10th

January.

2.1 Capital to be contributed will depend on the last three digits of your SMS Id as listed below:

001 to 200: Your Register/roll number multiplied by Rs 6




All others: Your Register/roll number multiplied by Rs 7

So, SMS Id 2215595 will have a contributed capital of Rs. 6,646,785.

2.2 Long term loans equal to maximum of 2 times the capital is available at the rate of 10% per annum.

Long term loan has to be at least equal to capital.

3. Every student will have at least 30% of his total assets invested in fixed assets. Depreciation on

monthly basis is to be computed using the straight line method of depreciation. Life of asset can vary

between 5 to 10 years for different assets.

4. Credit sales can be seven times cash sales.

5. Credit purchase can be eight times cash purchase.

6. Wage cost could be 10% to 30% of sales.

7. Cash balance at the end of any year is to be maximum of 4 month and minimums of 1 month cash

expenses. Deployment of surplus cash on short term inter-corporate market at 6% per annum is possible.


February 20, 2012

8. Sales volume will increase by 10% over the previous month, sale price will increase by 5% over the

previous month and purchase price will increase by 5% every 15 days, all reckoned on a calendar month

basis.

9. All other costs will remain stable over the period.

10. Assume no gestation period. That is, the business starts operations from day one. Irrespective of

your starting date of business – your first accounting period would end on 31st march of that year [with

a condition of business running for at least 3 months].

For example:

If you start a business on 10 Jan. 1981, then your first accounting period will end on 31

March 1982.

If you start a business on 31 Dec. 1980, then your first accounting period will end on 31

March 1981.

11. You need to have at least 10 transactions per accounting period.

REQUIRED: Part I (Compulsory and worth 30 marks)

1) You are required to prepare the accounts of the business as if owned by you as an individual

proprietorship in any name and style of your choice, with in the frame work of the conditions one

through eleven detailed above, for three accounting periods.

2) Prepare a precise chronological statement of all transactions.

3) Prepare all the three financial statement [i.e. Balance Sheet, Income Statement and Cash Flow

Statement] for each accounting period. You need to have three periods.

REQUIRED: Part II (Compulsory and worth 10 marks)

1) Analyze the financial statement of the company using common ratios discussed in the class, for the

above three accounting periods.

2) Analyze the cash flow statement of the company, prepared as above.


February 20, 2012

THE ANSWER

THE BUSINESS

The demand for flex printing / digital printing is increasing day by day as the number of self proclaimed

leaders / social workers / Gods / Avatars are increasing. Big banners, cut outs with the smiley faces and

crossed hands became a common entity in almost all the places for all the festivals or celebrations.

My business named ’DigitalPrinters’ will take the orders from the customers and print and deliver the

banners or posters to them. The cost of the deliverables will be calculated on the basis of the size of the

poster, type of the printing and the amount of ink used.

COMPLIANCE STATEMENTS

1. Date of Commencement of business is the Date of Birth.

Date of Birth 06-01-1982.

So, the business should start on 6th January.

2. Initial Capital to be contributed.

Calculated based on the SMS ID: 110421

Initial Captial will be 110421*3 = 331263 Rs


February 20, 2012

PART I: CHRONOLOGICAL STATEMENTS AND FINANCIAL STATEMENTS

1. PERIOD 06-01-1982 TO 31-03-1983

CHRONOLOGICAL STATEMENT OF TRANSACTIONS FOR THE PERIOD 06-01-1982 TO 31-03-1983

Sl No Date Transaction

22400 6th Jan 2000 Started the business 'DigitalPrinter' with initial Capital 331236 Rs.

2 15th Jan 2000 Bank loan of 500000 Rs at an interest rate of 10% PA for 10 Years.

3 30th Jan 2000 Bought GARROS EJ-1601B Printer for 490800 Rs with life time 10 Years on cash basis.

4 2nd Feb 2000 Bought Furnitures and other items worth 20000 Rs on credit with life time 5 Years.

5 5th Feb 2000

Bought 10000 ltr Ink worth 4000 Rs on Credit. 1/2 ltr will be used for priting one square feet canvas and 1/4 ltr will be used for printing 1 square feet paper.

6 5th Feb 2000 Bought 10000 suqare feet Paper on Credit at the rate of 1 Rs per 10 square feet.

7 5th Feb 2000 Bought 1000 suqare feet canvas on Credit at the rate of 1 Rs per square feet.

8 20th Feb 2000 Printed two 50 square feet flex in canvas for the advertisement of the Company DigitalPrinters

9 21st Feb 2000 Paid 200 Rs for installing the flex.

10 3rd March

2000 Delivered 50 sqaure feet flex using canvas to local leader at the rate of 50 Rs per square feet on cash basis.

11 10th April

2000 Delivered two 30 square feet flex using canvas to local club for their annual celbration at th rate of 53 Rs per square feet on credit basis.

12 5th May 2000 Delivered 1000 notices of 1 sqaure feet to new firm for their advertisement at the rate of 5 Rs per square feet on cash basis

13 10th June

2000 Delivered 1500 notices of 1 sqaure feet to new firm for their advertisement at the rate of 8 Rs per square feet on cash basis.

14 2nd Aug 2000 Delivered two 50 square feet flex using canvas to local political leader at the rate of 55 for Independence Day wishes on cash basis.

15 10th Aug 2000 Delivered 2000 notices of 1 sqaure feet to school for Independence day celebration at the rate of 9 Rs per square feet on cash basis.

16 10th Sep 2000 Received the amount from local club for the flex delivered on credit basis on 10th April

17 15th Nov 2000 Paid 500 Rs for the paper and canvas bought on credit basis on 5th February

18 15th Dec 2000 Delivered three 50 square feet flex using canvas to local political leader at the rate of 58 for X'Mas and New Year wishes on cash basis.

19 20th Dec 2000 Delivered four 50 square feet flex using canvas to local club at the rate of 58 for X'Mas and New Year wishes on credit basis.


February 20, 2012

20 15th Jan 2001 Paid 50000 Rs to Bank as a interest of last year

21 31st March

2001 Adjustment on Depreciation of Printer for 2000_2001

22 31st March

2001 Adjustment on Depreciation of Furniture for 2000_2001

23 31st March

2001 Took a Dividend of 10000 Rs

Table 1.1 Transactions for Period 06-01-1982 to 31-03-1983

BALANCE SHEET FOR THE PERIOD 06-01-1982 TO 31-03-1983

Digital Printers Balance Sheet for the Period 06-01-1982 to 31-03-1983

Assets Liabilities and Owner's Equity

Cash 783936 Payables 25500

Inventory 4308 Loan 500000

Prepaid Rent 0

Total Liabalities 525500

Total Current Assets 788244

Capital 708636

Fixed Assets 510800 Profit 64908

Total Fixed Assets 510800 Total Owners Equity 773544

Long Term Assets 0

Total Long Term Assets 0

Total Assets 1299044 Total Liabalities and Owners Equity 1299044

Table 1.2 Balance Sheets for Period 06-01-1982 to 31-03-1983


February 20, 2012

PROFIT AND LOSS STATEMENT FOR THE PERIOD 06-01-1982 TO 31-03-1983

Digital Printers Profit and Loss Statement for the Period 06-01-1982 to 31-03-1983

Item Amount

Sales 66480

Less : Cost of Good Sold -1572

Gross Profit 64908

Less : Sales Expenses 0

Less : Administration Expense 0

Less : General Expense -320

EBIDTA 64588

Less : Depreciation Expenses -53080

Operating Profit 11508

Add : Other Income 0

Adjusted for Extraordinary & Past Period Items 0

EBIT 11508

Less : Interest Expenses -50000

PBT -38492

Less : Income Tax Expenses 0

PAT -38492

Less : Dividends for the period -10000

Profit / Loss Transferred to Balance Sheet -48492

Table 1.3 Profit and Loss Statement for Period 06-01-1982 to 31-03-1983


February 20, 2012

CASH FLOW STATEMENT FOR THE PERIOD 06-01-1982 TO 31-03-1983

Digital Printers Cash Flow Statement for the Period 06-01-1922 to 31-03-19833

Operating Activities Amount

Cash received from customers 54880

Cash paid to suppliers -500

Interest Paid -50000

Expense -320

A) Net Cash Flow from Operating Activities 4060

Investing Activities

Printer Purchase 490800

Furniture Purchase 0

B) Net Cash Flow from Investing Activities 490800

Financing Activities

Equity Invested 331236

Loan Taken 500000

C) Net Cash Flow from Financing Activities 831126

Starting Cash Balance 0

Changes in the cash during the Year due to above activities (A+B+C) 1325986

Ending Cash Balance 1325986

Table 1.4 Cash Flow Statements for Period 06-01-1982 to 31-03-1983


February 20, 2012

2. PERIOD 01-04-1983 TO 31-03-1984


Sl No Date Transaction

1 2nd April 1983 Paid 4000 for the Ink bought on 5th Feb 1982

2 2nd April 1983 Bought 5000 ltr Ink worth 4200 Rs on Credit.

3 15th April

1983 Delivered three 60 square feet flex using canvas to local temple at the rate of 65 Rs per square feet for festivals on credit basis.

4 7th Sept 1983 Bought 1500 square feet canvas on credit basis at the rate or 3.5 Rs per square feet.

5 7th Sept 1983 Delivered 2500 1 square feet notice using paper to local party at the rate of 10 Rs per square feet for elections on cash basis.

6 19th Oct 1983 Paid 5000 Rs for the furniture bought on credit basis on 2nd February

7 28th Oct 1983 Delivered ten 40 square feet flex using canvas at the rate of 68 Rs per square feet for elections on cash basis.

8 3rd Nov 1983 Paid 1000 Rs for Canvas bought on 5th Fe 2012

9 3rd Nov 1983

Delivered fifteen 30 square feet flex using canvas to local party at the rate of 68 Rs per square feet for elections on cash basis.

10 5th Dec 1983 Delivered 3000 notices of 1 sqaure feet at the rate of 10.50 Rs per square feet on cash basis.

11 8th Dec 1983 Bought 10000 square feet paper on credit basis at the rate or 2.5 Rs per square 10 feet.

12 10th Dec 1983 Delivered 3200 notices of 1 sqaure feet at the rate of 10.50 Rs per square feet on cash basis.

13 15th Dec 1983 Delivered ten 50 square feet flex using canvas at the rate of 70 Rs per square feet for elections on credit basis.

14 3rd Jan 1984 Received 11600 Rs for the item sold on 20th Dec 2012

15 10 th Jan 1984 Paid 50000 Rs to Bank as a interest of last year

16 31st March

1984 Adjustment on Depreciation of Printer for 12 Months at the rate of 4090 per month (Strainght Line Method)

17 31st March

1984 Adjustment on Depreciation of Furniture for 12 Months at the rate of 333.33 per month (Strainght Line Method)



February 20, 2012






Prepaid Rent 0



Capital 667156



Long Term Assets 0





February 20, 2012



Item Amount

Sales 194600


Gross Profit 191024



Less : General Expense 0

EBIDTA 191024





EBIT 137944


PBT 87944


PAT 87944

Less : Dividends for the period 0

Profit / Loss Transferred to Balance Sheet 87944



February 20, 2012


Digital Printers Cash Flow Statement for the Period 01-04-1983 to 31-03-1984



Cash paid to suppliers -10000


Expense 0



Printer Purchase 0




Equity Invested 0

Loan Taken 0







February 20, 2012

3. PERIOD 01-04-1984 TO 31-03-1985


1 5th April 1984 Took a dividend or 50000 Rs

2 10th April

1984 Started a Fixed Account and Invested Rs 10000 for 10 Years for 6% per annum.

3 3rd May 1984 Bought new furnitures worth Rs 1000 on credit with lifetime 5 Years

4 5th May 1984 Bought new set of electrical items for Rs 750 on credit with lifetime 5 Years

5 1st June 1984 Apponited a new employee with salary 15% of total year’s sales.

6 10th July 1984 Bought 10000 square feet of canvas worth 55000 Rs at the rate of 5.5 Rs per square feet on credit basis.

7 30th July 1984 Maintenance work for Printer for Rs 2500

8 5th Aug 1984 Maintenance work for Press for Rs 2000

9 6th Sep 1984 Received Rs 11700 for the sale on 15th April 1983

10 5th Oct 1984 Delivered seventeen 50 square feet flex using canvas at the rate of 75 Rs per square feet on credit basis.

11 10th Nov 1984 Delivered twentty 50 square feet flex using canvas at the rate of 78 Rs per square feet on cash basis.

12 1st Dec 1984 Received Rs 35000 for the sale on 15th Dec 1983

13 20th Dec 1984 Paid a salary of 1500 to employee.

14 25th Dec 1984 Delivered 3500 notices of 1 sqaure feet at the rate of 11 Rs per square feet on cash basis.

15 30th Jan 1985 Delivered twentty five 50 square feet flex using canvas at the rate of 80 Rs per square feet on cash basis.

16 26th Feb 1985 Delivered thirty 50 square feet flex using canvas at the rate of 85 Rs per square feet on cash basis.

17 1st March

1985 Paid 50000 Rs to Bank as a interest of last year

18 31st March

1985 Adjustment on Depreciation of Printer for 12 Months at the rate of 4090 per month (Strainght Line Method)

19 31st March

1985 Adjustment on Depreciation of Furniture for 12 Months at the rate of 333.33 per month (Strainght Line Method)



February 20, 2012








Capital 604776



Long Term Assets 10000





February 20, 2012



Item Amount

Sales 407750


Gross Profit 381700



Less : General Expense -4500

EBIDTA 377200





EBIT 324120


PBT 274120


PAT 274120

Less : Dividends for the period -50000

Profit / Loss Transferred to Balance Sheet 224120



February 20, 2012


Digital Printers Cash Flow Statement for the Period 01-04-1984to 31-03-1985



Cash paid to suppliers 0


Expense -4500



Electric Items Purchase 0




Equity Invested 10000

Loan Taken 0







February 20, 2012

PART II: FINANCIAL STATEMENT ANALYSIS AND CASH FLOW ANALYSIS

1. FINANCIAL RATIOS ANALYSIS

Financial Ratios Digital Printers FY1983 to FY1985

Solvency FY1983(15M) FY1984(12M) FY1985(12M)

Short Term Solvency

Net Working Capital 262744 518448 879098

Current Ratios 1.49 2.03 2.73

Quick Ratios 1.49 1.96 2.6

Average Daily Expense 141.11 135.62 74.05

Cash Cover for Daily Expense 5555.49 7249.78 17848.29

Quick Asset Cover for Daily Expense 5555.49 7249.78 17848.29

Current Asset Cover for Daily Expense 5586.02 7509.2 18714.35

Current Liabalities Cover for Daily Expense 180.71 368.3 1440.91

Operating Cycle Activities

Accounts Receivable Turnover 5.73 4.16 6.39

Average Collection Period (Days) 78.35 87.74 57.12

Inventory Turnover 0.72 0.2 0.81

Inventory Conversion Period (Days) 11.82 3.29 28.7

Average Payable Period 7483.33 5214.28 1520.83

Long Term Solvency

Total Debt to Total Capital 0.67 0.54 0.4

Long-Term Debt to Total Capital 0.64 0.48 0.32

Long-Term Debt to Fixed Assets 0.97 1.11 1.13

Times Interest Covered 0.23 2.75 6.48

Times Fixed Charge Covered 0.23 2.75 6.48

Equity Multiplier 1.67 1.54 1.4

Gearing (%) 64.63 48.74 32.19

Profitability FY1983(15M) FY1984(12M) FY1985(12M)

Margin on Sales

Gross Profit Margin (%) 97.63 98.16 93.61

Operating Profit Margin (%) 17.31 70.88 79.48

Net Profit Margin (%) -57.9 45.19 67.22

Earnings Before Interest and Tax 11508 137944 324120

Profit Before Tax -38492 87944 274120

Return on Investment

Operating Profit to Operating Asset (%) 1.77 10.13 20.5


February 20, 2012

Net Income to Total Asset (%) -7.46 6.46 14.17

Return on Equity (%) -9.84 9.94 24.87

Efficiency of Use of Assets

Total Asset Turnover 0.1 0.14 0.25

Operating Asset Turnover 0.1 0.14 0.25

Working Capital Turnover 0.17 0.22 0.36

Shareholder Equity Turnover 0.17 0.22 0.37

Returns per Share of Equity

Earnings per Share -38492 87944 274120

Dividens per Share 10000 0.0 50000

2. CASH FLOW STATEMENT ANALYSIS

1. Profitability

Margin on Sales

Margin on Sales FY1983(15M) FY1984(12M) FY1985(12M)

Gross Profit Margin (%) 97.63 98.16 93.61

Operating Profit Margin (%) 17.31 70.88 79.48

Net Profit Margin (%) -57.9 45.19 67.22

Earnings Before Interest and Tax 11508 137944 324120

Profit Before Tax -38492 87944 274120

During the first financial period, the company was in loss and during the subsequent periods,

the company turned into a complete profitable one. In FY1983, the sales were very less, which

causes the company to be in loss. Increase in sales in the last two periods made the company to

comback from the initial loss and made the company to more profitable one.

Return on Investment

Return on Investment FY1983(15M) FY1984(12M) FY1985(12M)

Operating Profit to Operating Asset (%) 1.77 10.13 20.5

Net Income to Total Asset (%) -7.46 6.46 14.17

Return on Equity (%) -9.84 9.94 24.87


February 20, 2012

While setting up the company, the fixed asset (Printer) was bought using the cash borrowed as

long term loan. And since the sales during the first period was very less when compared to the

last two periods, the return on investment during the first period was very less. In the

subsequent periods, there was no additional purchase of the assets and the increase in the sales

volume made the company more profitable.

Efficiency of Use of Assets

Efficiency of Use of Assets FY1983(15M) FY1984(12M) FY1985(12M)

Total Asset Turnover 0.1 0.14 0.25

Operating Asset Turnover 0.1 0.14 0.25

Working Capital Turnover 0.17 0.22 0.36

Shareholder Equity Turnover 0.17 0.22 0.37

During the first period, evnthough the fixed assets were new and without the depreciation, the

total production was very low. But for the subsequent periods, the production was increased

tremendously and hence the sales. And there were no addition to the operating assets and to

the fixed assets. All these factors made the increase in Efficiency of use of assets.

Returns per Share Equity

Returns per Share of Equity FY1983(15M) FY1984(12M) FY1985(12M)

Earnings per Share -38492 87944 274120

Dividens per Share 10000 0.0 50000

Since the compnay was in loss during the first period, the Earnings per Share were very low

compared to the last two periods. But as the compnay moved from loss to profit, the Earnings

per Share also increased.

Dividends were taken only during two periods.

2. Solvency

Short Term Solvency

Short Term Solvency FY1983(15M) FY1984(12M) FY1985(12M)

Net Working Capital 262744 518448 879098

Current Ratios 1.49 2.03 2.73

Quick Ratios 1.49 1.96 2.6

Average Daily Expense 141.11 135.62 74.05

Cash Cover for Daily Expense 5555.49 7249.78 17848.29

Quick Asset Cover for Daily Expense 5555.49 7249.78 17848.29

Current Asset Cover for Daily Expense 5586.02 7509.2 18714.35


February 20, 2012

Current Liabalities Cover for Daily Expense 180.71 368.3 1440.91

The company has taken an aggressive approach in working capital financing and hence there is an

increase in the Net Working Capital, Current Ratios and Quick Ratios during these periods.

The Average Daily expense is declaining for these periods from 141.11 to 135.62 to 74.05. The

overall increase in sales and decrease in Average Daily Expense leads to the increase in Cash Cover,

Quick Asset Cover, Current Asset Cove and Current Liabalities Cover.

Operating Cycle Activities

Operating Cycle Activities FY1983(15M) FY1984(12M) FY1985(12M)

Accounts Receivable Turnover 5.73 4.16 6.39

Average Collection Period (Days) 78.35 87.74 57.12

Inventory Turnover 0.72 0.2 0.81

Inventory Conversion Period (Days) 11.82 3.29 28.7

Average Payable Period 7483.33 5214.28 1520.83

Since there was no standard meassures for collecting the money of the goods sold on credit basis

Accounts Receivable Turnover and Average Collection Period are fluctuating for the three periods.

Inventory Turnover is also fluctuating for the three years. During the second period, a lot of

invenories were bought and hence the turnover is decreased. A lot of additional Inventories

decreased the Inventory Conversion Period of the second Period.

Since the company has decided to pay back the money for the purchased done on credit basis, the

Average Payable Period is decreased during the three years.

Long Term Solvency

Long Term Solvency FY1983(15M) FY1984(12M) FY1985(12M)

Total Debt to Total Capital 0.67 0.54 0.4

Long-Term Debt to Total Capital 0.64 0.48 0.32

Long-Term Debt to Fixed Assets 0.97 1.11 1.13

Times Interest Covered 0.23 2.75 6.48

Times Fixed Charge Covered 0.23 2.75 6.48

Equity Multiplier 1.67 1.54 1.4

Gearing (%) 64.63 48.74 32.19


February 20, 2012

Company is moving towards a good position as the Debits Ration is decreasing and the Interest

Coverage and Fixed Charge Coverage are increasing. The Equity Multiplier is decreased from

1.67 in 1983 to 1.4 in 1985. This shows that the company’s dependency on debits is decreasing

as the sales and cash inflow is increasing.

The Gearing Percentage ((Long Term Liabalities/Capital Emplyoed)*100) is decresing as the

company moving forward and coming out of the financial risk due to the long term liabalities.

Overall, the Company Digital Printers is moving to complete pforitable one since the starting in 1982. In

the first year, the main source of the cash was from the iniitial investement and the bank loan. In the

following years, there was no long term liabalities and the main source of cash was from the net

earnings from the sales. Since the company is single ownered and single employed for the first two

periods, the cash outflow in the form of dividends and salary was very less. Cash outflow in the form of

taxes is also not present since the company started as sole propreitership company.

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