DCA2204 – Principles of financial Accounting and Management:

Assignment Answers Set 1 & Set 2:

1A) a) Accounting information is crucial for businesses and organizations of all sizes because it serves as
the financial backbone of decision-making. It provides a clear and organized record of a company's
financial transactions, helping stakeholders understand its financial health, performance, and overall
viability.

Firstly, accounting information enables businesses to track their income and expenses accurately. This
basic financial data allows companies to calculate their profitability, identify cost-saving opportunities,
and make informed budgeting decisions. It also helps in tax compliance, ensuring that the right amount
of taxes is paid to the government.

Secondly, accounting information aids in financial planning and forecasting. By analyzing historical
financial data, businesses can develop future projections and set realistic goals. This information is
invaluable for securing loans or attracting investors, as it demonstrates a company's ability to generate
returns and repay debts.

Moreover, accounting information enhances transparency and accountability within an organization. It

provides stakeholders such as shareholders, creditors, and management with a reliable source of
information to assess the company's performance and financial stability. This transparency builds trust
and credibility, which can be critical for attracting investors and maintaining healthy relationships with
stakeholders.

b) The Going Concern Concept and the Dual Aspect Concept are fundamental principles in accounting
that guide how financial transactions are recorded and reported. The Going Concern Concept asserts
that, when preparing financial statements, an entity is assumed to continue its operations indefinitely,
at least in the foreseeable future. In other words, accountants assume that a business will not be
liquidated or shut down unless there is concrete evidence to the contrary. This concept underpins the
idea that assets will continue to be used in the company's operations and that liabilities will be paid off
as they come due. It influences how financial statements are prepared, as they should reflect this
ongoing nature of the business. If there are any doubts about the entity's ability to continue operating,
this must be disclosed in the financial statements, highlighting a potential risk to stakeholders. On the
other hand, the Dual Aspect Concept is based on the fundamental accounting equation: Assets =
Liabilities + Equity. This principle emphasizes that every financial transaction has two aspects – a debit
and a credit. Debits increase assets or decrease liabilities/equity, while credits decrease assets or
increase liabilities/equity. This concept ensures that the accounting equation remains balanced,
providing a systematic way to record and track all financial activities. It helps maintain the integrity and
accuracy of financial records, making it easier to identify errors and ensuring that the company's
financial position is accurately reflected in its financial statements.

2A) As requested the journal entries for the required transactions are given below:

1. Rajesh started a business with cash ₹1,00,000:

 Journal Entry:

Debit: Cash ₹1,00,000

Credit: Capital ₹1,00,000

2. Purchased goods from Kohli on credit ₹40,000:

Journal Entry:

Debit: Purchases ₹40,000

Credit: Kohli (Accounts Payable) ₹40,000

3. Sold goods to Harbhajan on credit ₹60,000:

Journal Entry:

Debit: Harbhajan (Accounts Receivable) ₹60,000

Credit: Sales ₹60,000

4. Received Dividend ₹1,000 from Tata Motors:

Journal Entry:

Debit: Cash ₹1,000

Credit: Dividend Income ₹1,000

5. Paid for Advertisement ₹3,000

Journal Entry:

Debit: Advertise expense ₹3,000

Credit: Cash ₹3,000

These journal entries follow the basic accounting principles of double-entry accounting, where every
transaction affects at least two accounts with equal debits and credits, ensuring that the accounting
equation (Assets = Liabilities + Equity) remains in balance.

3A) a) The finance function within an organization serves several vital objectives that are essential for its
overall success.

Firstly, it is responsible for securing and managing the financial resources needed to support the
company's operations. This includes acquiring capital through various means, such as loans,
investments, or equity financing, to ensure the organization has the necessary funds to function
effectively.

Secondly, the finance function aims to allocate these financial resources efficiently. It involves making
strategic decisions on how to distribute funds across different departments and projects, prioritizing
investments that align with the company's goals and objectives. This allocation process helps optimize
the utilization of available funds and maximize the organization's profitability.

Thirdly, finance plays a important role in the risk management. It involves assessing and mitigating
financial risks, such as market fluctuations, credit risks, and liquidity challenges, to safeguard the
company's financial stability. By implementing risk management strategies, the finance function helps
protect the organization from potential financial crises.

Furthermore, finance is responsible for financial planning and budgeting. It involves forecasting future
financial needs, setting financial targets, and creating budgets to guide the company's spending and
financial activities. Effective financial planning enables the organization to make informed decisions and
adapt to changing economic conditions.

Lastly, the finance function focuses on monitoring and reporting financial performance. It generates
financial statements, reports, and key performance indicators to provide management and stakeholders
with insights into the company's financial health. This transparency and accountability are crucial for
building trust with investors, creditors, and other stakeholders, ultimately contributing to the
organization's long-term sustainability and growth.

b) financial planning is like making a roadmap for an organization's money. Here's how it works:

1. Setting Goals: First, decide what financial goals you want to achieve, like making more money,
growing, or paying off debts. Make sure these goals are clear and realistic.

2. Collecting Info: Gather all the financial information you have, like how much money you have, what
you owe, and how much you're making.

3. Checking Your Situation: Look at your current financial situation. Figure out what you're good at and
where you need to improve.

4. Options: Think of different ways to reach your goals. This could involve new strategies, saving money,
expanding, or changing how you get money.

5. Comparing Options: Compare the different ways to reach your goals. Think about what you'll get,
what it might cost, and if it fits with your overall plan.

6. Making the Plan: Once you choose the best way to go, make a detailed plan. This plan tells you what
steps to take, where to put your money, and when to do things.

7. Putting It into Action: Start doing what your plan says. This could mean investing money, getting
funds, or making big decisions based on your plan.

8. Checking and Fixing: Keep an eye on how your plan is working. See if you're on track or if you need to
fix things.
9. Updating the Plan: Your plan isn't set in stone. As things change, like the market or your business,
update your plan to stay on course.

10. Sharing and Reporting: Tell others about your plan and how it's going. Sharing reports and updates
helps everyone understand what's happening. Remember, financial planning isn't a one-time thing. It's a
continuous process to make sure your organization's money is used wisely to reach its goals.

4A)

a) Re-order Level:
Re-order Level = Normal consumption per week × Re-order period
Re-order Level = 600 units/week × 4 weeks
Re-order Level = 2400 units
b) Minimum Level:
Minimum Level is the level at which a reorder should be initiated to ensure that stock doesn't
run out before a new order arrives. It considers the Emergency Re-order period.
Minimum Level = (Minimum consumption per week × Emergency Re-order period) + (Normal
consumption per week × Re-order period)
Minimum Level = (500 units/week × 2 weeks) + (600 units/week × 4 weeks)
Minimum Level = 1000 units + 2400 units
Minimum Level = 3400 units
c) Maximum Level:
Maximum Level is the level at which you should stop reordering to prevent overstocking.
Maximum Level = (Maximum Consumption per week × Re-order period) + Re-order Level
Maximum Level = (800 units/week × 4 weeks) + 2400 units
Maximum Level = 3200 units + 2400 units
Maximum Level = 5600 units
d) Average Stock Level:
Average Stock Level is the average amount of stock you typically hold over a given time.
Average Stock Level = (Re-order Level + Minimum Level) / 2
Average Stock Level = (2400 units + 3400 units) / 2
Average Stock Level = 5800 units / 2
Average Stock Level = 2900 units
e) Danger Level: Danger Level is the point at which stock is critically low, and immediate action is
needed.
Danger Level = Minimum Level - (Minimum Consumption per week × Normal Re-order period)
Danger Level = 3400 units - (500 units/week × 4 weeks)
Danger Level = 3400 units - 2000 units
Danger Level = 1400 units
So, the calculated levels are:
(a) Re-order Level = 2400 units
(b) Minimum Level = 3400 units
(c) Maximum Level = 5600 units
(d) Average Stock Level = 2900 units
 (e) Danger Level = 1400 units

5A) a) Cash management plays a crucial role in the financial health and stability of businesses and
organizations. Several advantages highlight its importance:

Firstly, effective cash management ensures that an entity has enough cash on hand to meet its short-
term obligations and operational needs. This means being able to pay suppliers promptly, cover
employee salaries, and handle unexpected expenses like repairs or emergencies. By maintaining
sufficient liquidity, a business can avoid late payment penalties, maintain its reputation, and seize
opportunities that may require quick cash.

Secondly, cash management helps optimize the use of funds. Idle cash sitting in a bank account earns
minimal interest, and in some cases, it may even erode due to inflation. By analyzing cash flow patterns
and investing excess funds wisely, organizations can generate additional income through interest,
investments, or other financial instruments.

Thirdly, cash management enhances financial planning and forecasting. By monitoring cash flows, a
company gains insight into its revenue and expense patterns, allowing it to make more accurate
financial projections. This, in turn, aids in setting realistic budgets, making informed investment
decisions, and identifying areas where cost reductions or revenue enhancements may be needed.

Moreover, efficient cash management reduces reliance on external financing sources like loans or credit
lines. By better managing internal cash flows, a business can reduce its interest expenses and lower its
overall financial risk. This also helps maintain a positive credit rating, which is essential for securing
favorable lending terms when needed.

Additionally, cash management enhances decision-making. With a clear view of available funds and
financial health, organizations can make strategic choices with confidence, whether it's expanding
operations, pursuing new ventures, or weathering economic downturns.

b) Costs are divided into different groups based on how they act when things change in a business. This
helps companies make smart choices about money and how to run things better.

There are three main types:

1. Fixed Costs: These costs stay the same no matter what happens in the business. Things like rent
or salaries that don't change when you make stuff are fixed costs. They don't affect short term
decisions about how much to make.
2. Variable Costs: These costs change when the business changes. For example, the cost of
materials or worker wages goes up when you produce more stuff. They're important when
deciding how much to make and how much to charge.
3. Semi-Variable Costs (Mixed Costs): These costs have a bit of both. Some of it stays the same,
and some changes. For instance, your electricity bill might have a fixed part and a part that
depends on how much you use.

Understanding these costs helps make better plans and decisions. Knowing how costs behave helps
a business manage money, set prices, and make decisions that lead to success.
 6A) a) To calculate the breakeven sales in rupees, we can use the following formula:

Breakeven Sales (in rupees) = Fixed costs / Contribution Margin

First, let us calculate the contribution margin per unit:

Contribution Margin per unit = Selling price per unit – variable cost per unit

Contribution Margin per unit = Rs. 40 – Rs. 30 = Rs. 10

Now, we can calculate the breakeven sales:

Breakeven sales (in rupees) = Rs.40000 / Rs. 10 = Rs. 4000

So, the breakeven sales in rupees will be Rs. 4000.

b) To determine the net profit, the sales should be 20% above the breakeven point, the following
steps are given below:

1. Calculate the breakeven sales (as calculated in part a).

Breakeven sales = Rs. 4000

2. Determine the sales are at 20% above the breakeven point:

Sales at 20% above BEP = Breakeven Sales + (20% of Breakeven Sales)

Sales at 20% above BEP = Rs. 4000 + (0.20 * Rs. 4000) = Rs. 4000 + Rs. 800 = Rs. 4800

3. Now Calculate the total contribution margin of the sales level:

Total Contribution margin = Contribution margin per unit * Sales at 20% above BEP

Total Contribution margin = Rs. 10 * Rs. 4800 = Rs. 48000

4. finally calculate the net profit by subtracting fixed overheads from the total contribution margin:

Net profit = Total Contribution margin - fixed overheads

Net Profit = Rs. 48000 – Rs. 40000 = Rs. 8000

So, when sales are 20% above the breakeven point, the net profit will be 8000 rs.