UNIT 3 ACCOUNTING Accounting Information and

its Applications
INFORMATION AND ITS
APPLICATIONS
Objectives

After studying this unit, you should be able to appreciate the:

• nature of accounting information

• major purposes of accounting information;

• role of information in the control process;

• the uses of earnings information; and

• uses of information contained in balance sheet.

Structure
3:1 Introduction
3.2 Purposes of Accounting information
3.3 Accounting and Control in Organisation
3.4 Profit and Cash Balance Distinguished
3.5 Uses of Earnings information
3.6 Uses of Balance Sheet
3.7 Summary
3.8 Key Words
3.9 Self- assessment Questions/Exercises
3.10 Further Readings

3.1 INTRODUCTION

As you have observed in Unit I, historically, accounting developed as a system for

reporting information to the owners including shareholders and other investors of the
business. In the process of its evolution, accounting has branched off into two distinct
directions- one dealing with information processing for external uses and the other
dealing with information processing for internal (or managerial) uses. We refer to the
first one as financial accounting and the second as managerial accounting. But when
we talk about accounting information, we generally look at it in a broader sense to
encompass information processing for both internal and external uses. In this unit we
shall deal with some illustrative uses of accounting information so as to give you a
feel of what accounting could contribute.

3.2 PURPOSES OF ACCOUNTING INFORMATION

At the outset, let us share with you that accounting information is useful for (1)
score-keeping, (2)attention-directing, and (3) problem-solving . Let us ask a question:
What precise information should the accountant provide for these purposes?
Obviously, the type-coverage of information needed may vary from organisation to
organisation. Further, the specific information needs in the actual decision-making
process at different organisational levels influence the scope of an accounting
information system. 39
Accounting Framework
Score-keeping: The score keeping function is one of the primary purposes of account-
ing information. It basically deals with the financial health of the enterprise. In other
words, it answers: How are we doing ? Good , bad, or indifferent? Though it appears
to be a simple question, a moment's reflection will show that it is not that simple. It
involves answering questions such as : What is doing good? What is doing bad? Is
profit earned good? If so, how much? Is it that profit alone is not sufficient? Thus we
can go on increasing the string of questions intending to further clarify the basic
question. Thus, score-keeping has two aspects, one is that of keeping record of actual
data on performance- a constant process of measurement and valuation. The other
aspect is concerned with putting the data in relation to predetermined standards. In
order to answer the question whether the performance is good, bad or indifferent we
have to have a constant process of comparison against some norms, standards or
benchmarks. This is achieved by preparing a series of reports based on comparison of
actual data with the planned data.

Activity 3.1

Complete five questions (two are already given below ) that will lead to the assess-
ment of the financial health of a business organisation.

1. How much profit was made by the organisation in the preceding accounting
year?

2. Does the organisation have sufficient funds to meet its day to day
expenditures?

3. …………………………………………………………………………………

4. …………………………………………………………………………………

5. …………………………………………………………………………………

Attention directing : Attention-directing is nothing but the process of giving a signal

to the user of accounting information about the need to take a decision. As such the
accounting information supplied arouses the user's attention to take a decision. For
example, a report from an accountant comparing the actual performance data against
budget data is a score-keeping record. In the hands of a decision-maker it is an
attention-directing information. This would enable him to immediately focus his
attention on the deviations or variances from the budgets or the plans. A whole series
of actions will be triggered by this, namely, evaluation of reasons for the deviation,
remedial actions to be taken, modifications in the feedback for future and so on Most
of the formal reporting takes the form of annual reports. An annual report is the score
card of activities for an accounting period. If properly analysed, this report can be
helpful in understanding the problems of overall nature faced by the enterprise. It can
also help the shareholders in assessing the actual performance of the company vis-a-
vis their expectations.

Problem-solving : The problem-solving function of accounting information involves

provision of such information which enables the manager to find solutions to the
problems. There are many problems which accounting information could highlight
and provide for their possible solutions, such as make or buy decision with respect to
component, parts or products, continue or drop decisions with respect to product lines
leasing or acquisition decisions with respect to assets etc. Problem-solving is
therefore an important purpose of accounting information system.

Let us summarise the purposes of accounting information:

Accounting, in its score card role, accumulates data and enables interested persons,
both internal and external, to understand and take stock of the organisation's
performance
40
In its attention-directing role accounting information, by reporting and analysing the
data, focuses a manager's attention on operational deficiencies, weaknesses, threats - Accounting Information and
and opportunities. In this role accounting complements day to day operational its Applications
planning and control activities.
In its problem-solving role, accounting enables quantification of the different alterna-
tive solutions, their relative merits and demerits.
Activity 3.2
Fill in the blanks:
1) Financial accounting deals with reporting information for ………..uses and
……………deals with reporting information for managerial uses.
2 Accounting information addresses itself to three distinct activities
(i)……………….…(ii)………………...….(iii)…………….……..…
3 Score-keeping activity involves two functions, first, keeping ……..and
…………second a constant process of………….
4) Attention-directing information triggers the need for taking………in the
recipient's mind.
5) Problem-solving in accounting involves provision of………..to enable
managers to find…………..to problems.

3.3 ACCOUNTING AND CONTROL IN

ORGANISATION
In this course we shall deal with financial and management accounting together. You,
probably know that both these branches of accounting, after all, are concerned with
providing information about the same business.

One of the tasks of the management is to control the operations of the organisation.
Accounting is closely connected with control system in an organisation. To understand
this, let us have a look at the control system in an organisation as shown in Figure
3.1. You know that the organisation is a system of inter-related parts and is linked with
the environment. It derives its inputs from the environment and transforms them with
the help of the operating system into outputs which it delivers to the environment. To
control organisational system, we have first to measure inputs, operations and
outputs. The measurements obtained men have to be evaluated against standards.
This information has to be supplied to the concerned managers so that they could
take appropriate actions form future point of view. In all these activities i.e,
measuring evaluating and providing feedback the accountant is deeply involved. The
process of evaluation brings out deviations which provide the basis for feedback in a
system and lead to changes in inputs for operations to achieve desired outputs.

Figure 3.1 Structure of Control in an Organisation.

41
Accounting Framework
The annual accounts or financial statements of a business comprise balance sheet and
profit and loss account. Sometimes they also include the fund flow statement.

All these statements have only historical significance since they relate to an account-
ing period which has already expired. However, balance sheet and profit and loss
account provide valuable information linking the profit to investment or assets used in
business. We try to measure organisational performance using this information.

The idea of relating profit to asset use can provide a basis for judgement about the
efficiency of an organisation. As business often operates in an environment of
uncertainty, estimation of `normal' profit is not easy. By making the best use of
accounting information of the past in relation to the expectations of future, we try to
make integrated financial plan for an organisation. Such plan includes projections
about level of activity, resource, profit, financial assets, and car resources.

From Figure 3.1 it is obvious that controller (or accountant) and managers obtain such
information which enables them to diagnose the situation and to identify and define the
problem at hand.

Let us try to identify and define a problem in a hypothetical setting. Suppose you are
managing a firm which sells three products p1, p2, p3,. You are confronted with a
problem that the profit of your firm is decreasing. Now falling profit may be. due to
many reasons. The first thing that you would like to do is to identify the problem more
precisely before you set about solving it, Some of the possible hypotheses are: which
of the three products is losing money? Are all of them losing money? If all of them are
losing money, are they losing money to the same extent? Is the firm losing money due
to increasing cost or decreasing prices? Many such question would enable you in
diagnosing the problem more accurately. In general, such questions enable a manager
to specify the causes of the problem.

Let us examine how the accounting information could be helpful in identifying a

problem of this nature. The following table is the summarised profit and loss account of
a firm whose situation has been described above.

Figures in Rs.

Year 2002 2003

Sales 1000 1000

Less:
Cost of goods 400 500
Depreciation 200 200
Other operating expenses 100 700 100 80
Profit 300 200

From the above, it is clear that in one year the profit has declined by Rs. 100. An
examination of the profit and loss account would show' that sales have remained the
s a m e a n d all expenses other than the cost of goods sold have also remained the
same: We are now in a position to state the problem thus:

Problem : Decrease in profits during the period has come about as a result of overall
increase in the cost of goods sold.

If the organisation was dealing with a single product, the problem is easily identifi-
able. But as it is dealing with three products, you have to answer the question: Which
product is losing money? The product-wise accounting information with respect to .
sales and costs can help us in identifying the problem better.
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Year 2002 2003
Accounting Information and
Products P1 P2 P3 P3 P3 its Applications

Sales 300 300 400 400 400 200

Less: Cost of sales 150 150 100 200 200 100
Gross Profit 150 150 300 200 200 100

(Please recall that other costs which are common to all the products did not change)
With the above additional information on different products you can now redefine the
problem more precisely
Problem: 1 Sales of P1 and P. have increased. Cost of sales retains the same
relationship with sales.
2. Sales of P3 had decreased. Cost of sales in relation to sales had doubled.
What we have done is nothing but a very simple use of accounting information to
pin-point the problem so that we could initiate action.

3.4 PROFIT AND CASH BALANCE

DISTINGUISHED
How do we evaluate the results of a firm ? The answers could be many depending on
what your interests are. But there is no difference of opinion regarding two important
aspects.
1. What is the worth of the business?
2. How much does it earn?
The results of-these two inquiries usually become the basis for several decision of the
management and their action plans. The initiatives the management takes in connec-
tion with improving the profitability of the enterprise and its worth will, in a large
measure, be a reflection of managerial effectiveness.
Illustration
Shyam decided to start a small casting and machine shop. He undertakes job orders .
for castings. He hired a shop floor with a backyard, bought the necessary equipment
and hired a few workers. Shyam though he had very successful operation during the
first year, because he was engaged throughout the year.

He tried to prepare his accounts and discovered that his collection from customers
was Rs. 24,000 and he had borrowed Rs. 30,000 from the bank. He had spent Rs.
72,000 for running the business. He had run down his savings substantially (Exhibit
3.1). Shyam discussed the situation with his friend who is a graduate student of
management. He worked out Shyam's operating results for the period (Exhibit 3.2).
Exhibit 3.1
Shyam Enterprises
Summary of Cash transactions
Figures in Rs.
Receipts Payments
Receipts from bank loan 30,000 Wages to employees 12,000
Collections from customers 24,000 Materials purchased 36,000
Payment of installment for
equipment purchased 5,000
Electricity charges 1,000
Withdrawals for personal use 15,000
Other Payments for Expenses 3,000
54,000 72,000
Excess payments over Rs. 18,000
receipts 43
Accounting Framework
Shyam's friend with the help of Exhibit 3.2 could convince Shyam that the situation
not very bad. For proper appreciation of the situation he gathered several pieces of

information, as given below:

1. He made sales of Rs.36,000 (at selling price), one-third of it (Rs.12,000) is

yet be collected. In other words, on an average 4 month's sales remain
uncollected.

2 Even though he purchased materials worth-Rs. 36,000 he consumed only one-

half of it for- production and sales. In other words, materials sufficient for
one yea consumption remain in inventory.

3. Cash generation during the year was Rs.54,000 whereas the need for
payment amounted to Rs. 72,000

Exhibit3.2
Shyam Enterprises
Operating Summary

Figures in Rs.
Collections from sales 24,000
Sales yet to be collected 12,000
36,000
Less:
Cost of sales:
Purchases of materials paid 36,000
Inventory at close 18,000 18,000
Wages 12,000
Electricity 1,000
Other expenses 3,000
Total expenses 34,000
Net profits 2,000

Exhibit 3.2 is based on the additional information presented above and shows that
shyam has made a profit of Rs. 2,000 on sales of Rs.36,000. You will appreciate that
there is a fundamental difference in approach and utility of information contained in
the two Exhibits. While Exhibit 3.1 looks at the problem purely from the viewpoint a
increases and decreased in cash. Exhibit 3.2 summarises all the revenues and
expensed which belong to the period of one year irrespective of whether or not all the
revenues have been received in cash and whether or not all the expenses have been paid
in cash In fact, in doing so we are making practical use of Accrual Concept
(discussed in the preceding unit) and principles of revenue recognition ( discussed in
unit 5). You may note that cash balance is not synonymous with net profit earned by
the business. A business firm might have earned a profit and still be short of cash and
vice-versa. In this particular example you have seen that the business has earned a
profit of Rs. 2,000 but without cash balance showing any surplus. In fact, payments,
as shown in Exhibit 3.1, have far. exceeded in receipts. The excess of payments over
receipts amounted to Rs.18,000 and this deficit was financed through the personal
savings of Shyam. Since payments can never be more than receipts, the deficit must
have been made good through Shyam's personal sources. This subject will be further
expanded in Unit 6 dealing with funds flow and cash flow analysis.

3.5 USES OF EARNINGS INFORMATION

The earnings information is useful for (1) measuring accomplishment, (2) deciding
how much could be withdrawn from the business without impairing its current level of
44
operations, (3) identifying the problems. and (4) determining a market value for the
Accounting Information and
enterprise. its Applications
Accomplishments : Profit is an important indicator of the accomplishment of
business. Other things remaining the same, higher the profits greater is the
accomplishment. Accomplishment of Shyam's enterprise can be summarised as
follows:
It has earned a net profit of Rs. 2,000 during the year (Exhibit 3.2)

At the same time, it should be seen from Exhibit 3.1 that there is a severe cash con-
straint. Understandably, it was the start up situation which might have been respon-
sible for the cash constraint.

The profit earned in the very first year of operations shows that the business could be
viable. But Shyam will have to predict several aspects such as whether sales can
increase, whether costs remain the same, whether the earnings rate remains the same,
and so on. At the same time, he will have to ensure better management of his cash
resources.

Appropriation Decision : An important question with which owners of a business are

often confronted is: How much money can be withdrawn without impairing its current
level of operations? This question in fact is concerned with appropriation decision. A
prudent management would not only like to maintain the capital or the present
capability of the enterprise intact but would also plan for future growth. The maxi-
mum amount that the owners can withdraw from business for their personal expenses
should be I limited to the amount of earnings which remain after making good all the
resources that have been used (or consumed) in the process of generating those
earnings. In other words, it is the net profit after charging depreciation and all other
losses incurred in the course of business operations that is available to the owners for
withdrawal, provided the business has no tax liability. In case the business has tax
liability the amount that can be withdrawn will be reduced by the estimated amount of
tax liability. Thus, the remainder is the amount which is available for withdrawal
without impairing its current level of operations. However, if business has any plan
for future growth, the amount available for withdrawal by or distribution among
owners shall be further reduced by a portion of profit ( or cash) needed for future
growth depending upon the judgement of the management . in this context, the with-
drawal by Shyam of Rs.15,000 against a profit of Rs.2,000 cannot be defended.

Problem Identification Using Earnings Data: From the earnings data several
problem areas can be identified. This is best done by computing ratios i.e, by examin-
ing the relationship of one item of earnings statement with another item. This will be
taken up in details in a subsequent unit. At this stage it may only be stated that the
lower earnings may be on accounts of excessive cost of inputs, excessive expenditure
on overheads or low margin of profit on sales or excessive piling of inventories or
other unanticipated losses. Insofar as Shyam's enterprise is concerned, we can
identify two problems even from the very limited data that we have regarding his
business. They are:
1) The inventory acquisition was not in tune with production and sales. This has
led to large amount of accumulated inventory to the tune of one year's
consumption.
2) Credit granted to customers, shown by credit sales, amounts to four months,
sales. This shows either grant of credit on liberal terms or slow collection of
receivables.
However, an analysis of operating summary along with cash summary will show that
the business is facing a cash crisis since the present cash needs and cash availability
are not in tune with each other.

Determining the market value of a Firm: You will recall that we have viewed the
business as a distinct operating entity. The economic value of the firm is determined 45
Accounting Framework
by the size and reliability of the stream of earnings (cash flows) produced by the
business. Let us attempt the valuation of a hypothetical firm. Bharat Kitchenaids,
which was incorporated as a company in 1998 by four non-resident young Indians to
market a simple but revolutionary cooking gas lighter invented by one of its
founders. In order to conserve its limited capital the company opened its business in
rented premises with Rs.80,000 worth of equipment used mainly for research and
development work. Arrangements were made with an established manufacturer to
make the gas lighter on order under rigid supervision of one of the members of the
young team. Because the gas lighter was able to meet a long felt need, the company
reported a modest profit in its very first year of operations.

The four-man team was remarkably well balanced combining talents in engineering
research, marketing and management. In the next two years they developed three
more appliances that were well received in the market. By 2003 the turnover had
grown to about Rs. crore and net profit amounted to Rs. 14 Lakhs. At this point the
total investment (or equity) of the owners amounted to Rs.32 lakhs. Annual earnings,
therefore, represented an after tax rate of return of approximately 4 4 per cent of the
equity. The high return could be attributed to using the facilities of other manufactur-
ers rather than building their own, the patents that the company registered and the
scientific and managerial skill the team possessed.

An interesting development then took place. A large manufacturer in the household

goods sector wanted to acquire the company and offered the owners a very attractive
price. The four owners wanted to consider the offer (and make a decision) but asked
for a few weeks time to make up their mind.

The owners knew that they had established a solid position in the industry and had no
doubt that they would be able to maintain this position. They, however, felt that the
potential for further growth was limited . They drew very good salaries which they
would continue to enjoy even if they were to sell the business.

To work how much equity in the Bharat Kitchenaids was worth to them so that they .
could take a decision on the price offered, the four men started by forecasting the
company's future profits or cash flows( we shall assume here that the figures of
profits and cash flows are the same). They believed that the net profit would continue
to be around Rs.14 lakhs each year for the next 10 years. Further, if they did not sell
out in 2004, they could sell their interest in business (that is their equity) 19 years
later for about Rs.50 lakhs. In accordance with these estimates the anticipated net
earnings from continued ownership would be as follows:

Year Earnings

1 to 10 14 lakhs a year

10 50 lakhs

You know that money has time value. You attach more value to an amount to be
received now than the one to be received, say, a year or two later. Rs. 14 lakhs of
profit to be received in the second year will be of lesser value to you than Rs. 14 lakhs
to be received in the first year. Similarly Rs. 14 lakhs to be received in the third year
will be of lesser value to you than Rs.14 lakhs to be received in the second year, and
so on. In other words, the value of amounts to be received in future will progressively
decline as time passes by. The process of reducing the future earnings to present
values is known as discounting, but for this purpose a discounting rate is required.
The discounting rate is nothing but the return which the owners desire to earn on their
investment. The desired rate of return in a way is a rate of return which satisfies the
owners of investment.

The owners in this case thought that the rate of 15 per cent after taxes was a satisfactory
return on investment for the type of business they were engaged in. The question
46
before them was how much the anticipated earnings were worth presently at this rate.
A t 15 per cent desired rate they calculated the present value of the stream of earnings Accounting Information and
of Rs. 14 lakhs a year for ten years plus Rs.50 lakhs they were to receive at the end of its Applications
10th year. They found that the present value was Rs.82.62 lakhs. You must be won-
dering how they calculated this figure. The mechanics of calculating the present value
of future earnings (or cash flows) will be explained in Unit -15 (Block-4). Till then we
ask you to hold your inquisitiveness. However, in accordance with the concept of
present value that we have just explained, you will agree with us that the present value
of earning of Rs.140 laths to be received over a period of 10 years and lump sum of
Rs. 50 lakhs to be received at the end of 10th year. i.e., a total amount of Rs. 190
lakhs, must be considerably less than this amount.

Under these assumptions, therefore, the owners would not accept an offer of an
amount less than say Rs. 80 lakhs which is the present value of the business or their
equity. However, if the owners feel that Bharati Kitchenaids would continue to
produce Rs. 14 lakhs a year indefinitely if it is managed adequately, the present value
can be calculated simply by dividing the annual earnings by the desired rate of return:

On this basis the value of owner's business would be 93.33 lakhs. The process of
ascertaining the value of business with the help of earnings and a desired rate of
return is also known as the capitalisation of earnings. It means that if Rs. 93.33
lakhs is paid for infinitely long series of payments of Rs. 14 lakhs a year, the rate of
return on investment will be 15 per cent:

3.6 USES OF BALANCE SHEET

The balance sheet is a summary of a firms' assets and liabilities, including share
capital and reserves at a defined moment in time. That is why it has been described as
a snapshot or still picture of the financial position of a business entity. It is also called
the position statement.

In addition to profit and loss account, the various groups interested in the company
can also draw useful inferences form an analysis of the information contained in the
balance sheet. Shareholders usually have twin interests: an interest in receiving a
regular income and an interest in the appreciation of their investment in shares. The
market worth of their shares depends not only on the dividends they receive but also
on the extent of retained earnings which the company has accumulated over the years.
The materialisation of the shareholders' expectations regarding bonus shares also
depends on the retained earnings built up by the company. Investment decisions of the
prospective investors and disinvestment decisions of the existing investors are influ-
enced by the composition of assets and liabilities shown in the balance sheet.

The main interest of the trade creditors, centres on the liquidity position of the com-
pany. They would like to make an assessment as to whether the company will be able
to meet its obligations when the occasion arises. They are, therefore, concerned about
the working capital available with the enterprise and its cash resources. All this
information can be gleaned form the balance sheet. The interest of long-term creditors
lies in two things; they are interested in the regular servicing of their debts ( that is
payment of periodic interest) and repayments of their loans after the expiry of
stipulated period.
47
Accounting Framework
They are interested not only in the profitability of the enterprise but also in its long-
term solvency and financial viability. A study of the balance sheet of the company
over the past several years can yield a lot of useful information to such long -term
investors.

Similarly, other interested parties like regulatory and developmental agencies of the
Government, consumer and welfare organisations can derive useful conclusions from

a study of the balance sheet about the working of the corporate sector and its
contribution to the national economy.

It should be emphasised here that it is not the profit and loss account and the balance
sheet in isolation with each other but both of them in conjunction with each other that
can yield a harvest of information for the interested parties or analysts. All this
pertains to the broad area of analysis of financial statements which will be taken up in
details in a subsequent unit.

Activity 3.3

1 Mention four important uses of earnings information.

i)……………………………………………………………………………….

ii)………………………………………………………………………………

iii)……………………………………………………………………………...

iv)……………………………………………………………………………...

2. Mention the three parts into which net profits are usually appropriated.

i)……………………………………………………………………………….

ii)………………………………………………………………………………

iii)……………………………………………………………………………...

3. Value of a firm is determined mainly on the basis of ……………of earnings.

3.7 SUMMARY
Accounting information system addresses itself to three important business related
problems, namely, score-keeping , attention-directing and problem-solving .
Accounting information acquires relevance only in the context of an organisation. In
this context accounting is closely related to control, Accounting helps in the process
of guiding actions of the organisation into desired directions. In the process of
initiating control actions, it helps the whole gamut of activities involving planning,
organising and controlling.

There may not necessarily be an exact correspondence between cash balance and the
profit earned during an accounting period.

The earnings information is useful for several purposes. It helps in measuring

achievement of business and its management. It provides a basis for appropriation
decisions and for determining the market value of the firm. It helps to identify the
problems currently faced by the enterprise.

They balance sheet reflects the financial position of the enterprise. It provides useful
information to various users of information who might be interested in the firm. A
proper analysis of the information contained in the balance sheet can enable them to
draw conclusions which in turn help them in taking decisions.
48
 3.8 KEY WORDS Accounting Information and
its Applications
Problem-solving role of accounting consists of supplying such information as would
be useful to managers for taking a variety of routine and non-routine decisions.

Profit and loss Account is a summary of the revenues and expenses, including gains
and losses from extraordinary items of a business unit for an accounting period.

Balance Sheet is a statement of financial position of a business unit disclosing an.

given moment of time its assets, liabilities and ownership equities.

Appropriation of net profit means the (allocation) disposal of net profit for various
purposes. In the case of non-corporate entities, the net profit is distributed to the
owners. In the case of corporate entities usually a part of the net profit is provided for
estimated tax liability, a part is retained in business to strengthen its financial position
and for, future growth, a part is distributed to shareholders in the form of dividends
and any amount left is carried forward to the next ,period.

3.9 SELF-ASSESSMENT QUESTIONS/EXERCISES

1. What are the purposes of accounting information? Explain briefly. What purpose, in
your opinion, is the most important and why?
2. "Accounting is closely connected with control". Elaborate the statement and discuss
the role of accounting feedback in the process of control.
3. Explain the uses of earnings information. Can you think of uses other than the four
uses mentioned in this unit?
4. What is a Balance Sheet and what information it conveys to an outsider?
5. What groups of people would be interested in accounting reports and why?
6. "An outsider, who reads the data relating to the business as revealed by the ac-
counting statements, tends to assume that accounting gives an exact picture of the
business." Utilising your understanding of accounting concepts, including the limi-
tations imposed by such concepts on accounting information, discuss the above
statements with your fellow students/accounting colleagues/office friends.
7. Ram invested Rs.20,000 of his own money in small service business and borrowed
another Rs. 10,000 from a bank, also for business use. At the end of his first year of
operations, he found that there was Rs.34,000 in the enterprise's bank account. He
owed his suppliers Rs. 6,000 and had not repaid the bank loan. His business assets
other than cash were negligible. During the year he had paid himself his salary of Rs.
12, 000.
a) What conclusions would you draw about his first year's operations?
b) For what decisions would this information be used? What additional information
would the decision makers be likely to call for in making these decisions?

Answers to Activities

Activity 3.2

1. External, management accounting.

2. (i) Score-keeping, (ii) attention-direction and (iii) problem-solving.

3. Records of actuals, comparison.

4. Decisions.

5. Information, solutions. 49
Accounting Framework Activity 3.3

1. (i) Measuring accomplishment,

(ii) Profit distribution

(iii) Identifying problems

(iv) Market valuation of the firm

2. (i) Taxation

(ii) Distribution to owners

(iii) Retained earnings

3. Future stream

3.10 FURTHER READINGS

Paul D. Kimmel, Jerry J. Weygandt, Donald. E. Kieso, March 2003. Financio
Accounting: Tools for Business Decision Making, 3rd Edition. Wiley Pub ;hers :
Canada.

Meigs, Walter, B. and Robert F. Meigs, 1987. Accounting: The Basis for Business
Decisions, McGraw Hill: New York (Chapter 1)

Gray, Jack and Kenneth S. Johnston, 1977. Accounting and Management Ac 9n,
Tata McGraw Hill: New Delhi (Chapter 2).

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