ASSIGNMENT

NAME MUKUL GAUTAM

ROLL NO. 2314507870
SESSION AUG/SEP 2023
PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER I
COURSE CODE & NAME DMBA104- FINANCIAL AND MANAGEMENT ACCOUNTING

Assignment Set – 1

Ans 1. In accounting, several fundamental concepts and principles provide the foundation for
preparing financial statements and conducting financial reporting. These concepts ensure
consistency, reliability, and comparability in financial information across different entities.

Here are some key accounting concepts explained in detail:

1. Entity Concept:

Definition: The entity concept states that the business is considered a separate entity from its
owners or other businesses. The financial transactions of the business are recorded and reported
independently of the personal finances of the owners.

Implication: All financial transactions and activities related to the business are recorded in the
business's accounting records, distinct from the personal finances of its owners.

2. Going Concern Concept:

Definition: The going concern concept assumes that a business will continue to operate indefinitely
unless there is evidence to the contrary. It implies that the business is not expected to liquidate in
the near future.

Implication: Assets are recorded at their historical cost rather than their liquidation value, assuming
that the business will continue to use them in its operations.

3. Money Measurement Concept:

Definition: The money measurement concept states that only transactions that can be expressed in
monetary terms are recorded in the accounting system. Non-monetary events or transactions that
cannot be measured in money are not included.

Implication: Certain valuable but non-monetary items, such as employee morale or customer
satisfaction, are not directly recorded in financial statements.
4. Cost Concept:

Definition: The cost concept implies that assets are recorded at their historical cost, representing the
amount of money paid or its equivalent at the time of acquisition.

Implication: The historical cost is used as the basis for valuing assets in the financial statements,
rather than their current market values.

5. Dual Aspect Concept:

Definition: The dual aspect concept is based on the accounting equation: Assets = Liabilities + Equity.
Every transaction has dual effects, affecting at least two accounts.

Implication: For every debit entry made in one account, there must be an equal and opposite credit
entry in another account, ensuring the accounting equation remains balanced.

6. Accrual Concept:

Definition: The accrual concept recognizes revenue and expenses in the accounting period to which
they relate, rather than when the cash is received or paid.

Implication: It ensures that financial statements provide a more accurate representation of a

company's financial performance and position by matching revenues with the expenses incurred to
earn those revenues.

7. Consistency Concept:

Definition: The consistency concept states that once an accounting method or principle is adopted, it
should be consistently applied over time, providing comparability between financial periods.

Implication: Changes in accounting policies are allowed, but they must be disclosed, and the impact
on financial statements should be explained to maintain transparency and comparability.

8. Materiality Concept:

Definition: The materiality concept asserts that insignificant items need not be accounted for with
the same degree of detail and accuracy as significant ones. Materiality is relative to the size and
nature of the item.

Implication: It allows for practicality in financial reporting, acknowledging that immaterial items do
not significantly impact the understanding of financial statements.

9. Conservatism Concept:

Definition: The conservatism concept suggests that when faced with uncertainty, accountants should
choose methods and estimates that result in lower profits and lower asset values to avoid
overstating financial performance and position.
Implication: This concept promotes prudence and caution in financial reporting, especially when
dealing with uncertain situations.

10. Realization Concept:

Definition: The realization concept states that revenue is recognized when it is earned, and not
necessarily when the cash is received. For expenses, they are recognized when incurred and not
necessarily when paid.

Implication: This concept ensures that financial statements reflect the economic substance of
transactions, recognizing revenue and expenses in the period in which they contribute to the
generation of income.

Ans 2. Subsidiary Books in Accounting:

Subsidiary books, also known as special journals, are a set of books used to record specific types of
transactions in a systematic manner. These books are employed in addition to the general journal to
streamline the recording process and improve efficiency in accounting. Subsidiary books are
particularly useful in organizations with a high volume of transactions of similar types.

Some common types of subsidiary books include:

1. Cash Book:

The Cash Book is used to record all cash transactions, including both receipts and payments. It is a
comprehensive record that provides details of cash and bank transactions in a chronological order.

Importance: The Cash Book is crucial for maintaining a real-time record of cash flows, enabling quick
reconciliation, and ensuring accuracy in financial reporting.

2. Sales Day Book (Sales Journal):

The Sales Day Book is used to record all credit sales of goods or services. It includes details such as
the date of sale, name of the customer, invoice number, and the amount of the sale.

Importance: This book helps in tracking credit sales, monitoring customer accounts, and generating
information for the preparation of sales invoices and financial statements.

3. Purchase Day Book (Purchases Journal):

The Purchase Day Book records all credit purchases of goods or services. It includes information such
as the date of purchase, name of the supplier, invoice number, and the amount of the purchase.

Importance: The Purchase Day Book facilitates the systematic recording of credit purchases, aids in
monitoring supplier accounts, and provides data for the preparation of purchase invoices and
financial statements.
4. Sales Return Book (Sales Returns Journal):

The Sales Return Book is used to record the return of goods by customers. It includes details such as
the date of return, name of the customer, invoice number, and the value of the returned goods.

Importance: This book helps in tracking and analyzing sales returns, adjusting customer accounts,
and ensuring accurate reporting of net sales.

5. Purchase Return Book (Purchases Returns Journal):

The Purchase Return Book records the return of goods to suppliers. It includes information such as
the date of return, name of the supplier, invoice number, and the value of the returned goods.

Importance: This book facilitates the recording and analysis of purchase returns, helps in adjusting
supplier accounts, and ensures accurate reporting of net purchases.

6. Journal Proper (General Journal):

The Journal Proper is a general journal used to record transactions that do not fit into any of the
specialized subsidiary books. It includes diverse transactions such as adjustments, accruals, and non-
routine entries.

Importance: The Journal Proper ensures that all transactions, regardless of their nature, are
appropriately recorded in the accounting system.

Specimen of Sales Day Book and Purchase Day Book:

Let's demonstrate a simplified specimen for the Sales Day Book and Purchase Day Book:

Sales Day Book (Sales Journal):

Date Invoice No. Customer Name Amount

2023-01-02 001 ABC Electronics $5,000

2023-01-05 002 XYZ Corporation $8,500

2023-01-08 003 LMN Retailers $3,200

Purchase Day Book (Purchases Journal):

Date Invoice No. Supplier Name Amount

2023-01-03 101 PQR Suppliers $6,000

2023-01-06 102 RST Distributors $9,500

2023-01-09 103 UVW Enterprises $4,800

In these specimens, each row represents a separate transaction recorded in the Sales Day Book and
Purchase Day Book, respectively. The information includes the date of the transaction, invoice
number, the name of the customer or supplier, and the corresponding amount. These subsidiary
books provide a clear and organized way to manage specific types of transactions efficiently.

Ans 3. Trading Account

Trading Account for the year ended 31-12-2022

Particular Amount
Opening Stock (1-1-2022) 70,000
Add: Purchases 1,02,000
Less: Returns Outwards 3,000
Carriage Inwards 5,000
Import Duty on Materials 6,000
Clearing Charges 7,000
Royalty paid 10,000
Wages paid 8,000

2,85,700
Less: Closing Stock (31-12-2022) [To be determined]
Cost of Goods Sold (COGS) [To be determined]
Gross Profit (Sales - COGS) [To be determined]

Note-
Calculate the Closing Stock and complete the Trading Account:

Closing Stock = Opening Stock + Net Purchases − Cost of Goods Sold

Net Purchases = Purchases − Returns Outwards + Carriage Inwards + Import Duty + Clearing Charges
+ Royalty + Wages Paid

Net Purchases = 1,02,000−3,000+5,000+6,000+7,000+10,000+8,000=1,35,000

Closing Stock = 70,700+1,35,000−COGS

Now, substitute the values to complete the Trading Account.

Assignment Set – 2

Ans 1.

Cash Flow from Operating Activities=Net Profit (or Loss)+Non-cash Expenses (or Losses)−Non-cash
Revenues (or Gains)+Changes in Working Capital

Let's analyze the changes in working capital accounts:

Changes in Current Assets:

Δ Stock in Trade = Stock in Trade (2018) - Stock in Trade (2019) = Rs. 15,000 - Rs. 13,000 = Rs. 2,000
(Increase)

Δ Bills Receivable = Bills Receivable (2019) - Bills Receivable (2018) = Rs. 22,000 - Rs. 10,000 = Rs.
12,000 (Increase)

Δ Prepaid Expenses = Prepaid Expenses (2018) - Prepaid Expenses (2019) = Rs. 800 - Rs. 600 = Rs. 200
(Decrease)

Changes in Current Liabilities:

Δ Creditors = Creditors (2018) - Creditors (2019) = Rs. 8,000 - Rs. 30,000 = Rs. 22,000 (Decrease)
Δ Bills Payable = Bills Payable (2019) - Bills Payable (2018) = Rs. 20,000 - Rs. 18,000 = Rs. 2,000
(Increase)

Δ Outstanding Expenses = Outstanding Expenses (2019) - Outstanding Expenses (2018) = Rs. 500 - Rs.
300 = Rs. 200 (Increase)

Now, substitute these changes into the formula:

Cash Flow from Operating Activities=−Rs.38,000+Non-cash Expenses (or Losses)−Non-cash Revenues

(or Gains)+(ΔStock in Trade+ΔBills Receivable+ΔPrepaid Expenses+ΔCreditors+ΔBills
Payable+ΔOutstanding Expenses)

Cash Flow from Operating Activities=−Rs.38,000+Non-cash Expenses (or Losses)−Non-cash Revenues

(or Gains)+(Rs.2,000+Rs.12,000−Rs.200+Rs.22,000+Rs.2,000+Rs.200)

Cash Flow from Operating Activities=−Rs.38,000+Non-cash Expenses (or Losses)−Non-cash Revenues

(or Gains)+Rs.38,000

Cash Flow from Operating Activities=Non-cash Expenses (or Losses)−Non-cash Revenues (or Gains)

Now, if we assume that there are no other non-cash expenses or revenues, we can simplify the
formula to:

Cash Flow from Operating Activities = 38,000

Therefore, the cash flow from operating activities for the current year is Rs. 38,000.

Ans 2. Marginal Costing:

Marginal Costing is a costing technique in which only variable costs are considered for decision-
making, while fixed costs are treated as period costs and are not allocated to products or services. It
is also known as direct costing, variable costing, or differential costing. The key focus in marginal
costing is on understanding the impact of changes in volume or activity levels on the total costs and
profits.
Assumptions of Marginal Costing

Variable Costs: Marginal costing assumes that variable costs vary directly with the volume of
production or activity. Variable costs per unit remain constant, and total variable costs change
proportionately with the level of output.

Fixed Costs: Fixed costs are assumed to remain constant in total within the relevant range of activity.
These costs are considered as period costs and are not allocated to products.

Sales Mix: Marginal costing assumes a constant sales mix, meaning that the proportion of different
products sold remains constant even if the overall sales volume changes.

Production and Sales Equality: It is assumed that all units produced are sold during the period, and
there is no change in the inventory levels.

Stable Prices: Marginal costing assumes that the prices of raw materials and finished goods remain
stable, and there are no significant fluctuations.

Homogeneous Production: The production and sales are assumed to be homogeneous, meaning that
there is only one product or that products are similar and have the same variable cost ratio.

No Disturbance in Productivity: It is assumed that there is no significant change in productivity or

efficiency during the period.

Limitations of Marginal Costing:

Incomplete Picture: Marginal costing provides only a partial view of the total cost structure, as it
ignores fixed production costs. Consequently, it may not be suitable for long-term decision-making.

Treatment of Fixed Costs: Fixed costs are treated as period costs and are not allocated to products.
This may result in understating the total cost of production and affecting pricing decisions.
Difficulty in Cost Allocation: In industries where products are joint or by-products, allocating fixed
costs becomes challenging under marginal costing. This can lead to distorted profitability figures.
Absorption Costing for External Reporting: Marginal costing is not suitable for external reporting,
where absorption costing is often required for compliance with accounting standards.
Inability to Reflect Profitability: In certain situations, marginal costing may not reflect the true
profitability of a product, especially if there are significant differences in production and sales
volumes.

Fixed Costs as Essential: In reality, fixed costs are essential for production capacity, and treating
them as period costs may lead to incorrect decisions regarding the expansion or contraction of
production.
Sales Mix Variation: If there is a variation in the sales mix, marginal costing may not provide accurate
information about the profitability of different products.

Difficulty in Cost Control: Since marginal costing focuses on variable costs, it may be challenging to
control and manage fixed costs effectively.

Neglect of Inventory Valuation: Marginal costing neglects the valuation of closing stock by not
allocating fixed production costs to it. This can distort the financial position of a business.
May Encourage Short-Term Focus: Marginal costing is often criticized for encouraging a short-term
focus, as it primarily considers the impact of changes in volume on costs and profits.

Ans 3. Budgetary Control:

Budgetary control is a management control tool that involves the preparation of budgets (financial
and non-financial) and the use of these budgets to monitor and control the performance of an
organization. It is a systematic and formalized approach to planning, coordinating, and controlling
business activities based on a predetermined set of objectives.

Essential Features of Budgetary Control:

1. Setting Clear Objectives:

Feature: The process starts with setting clear and specific objectives for the organization. These
objectives may include financial targets, sales goals, production levels, and other performance
indicators.

2. Preparation of Budgets:

Feature: The next step involves the preparation of various types of budgets, such as the master
budget, sales budget, production budget, cash budget, and other functional budgets. These budgets
serve as a roadmap for the organization's activities.

3. Coordination of Activities:

Feature: Budgetary control emphasizes coordination among different departments and functional
areas. The budgets of various departments are interrelated and should be consistent with each
other to ensure overall organizational harmony.

4. Participation in Budgeting:

Feature: Budgetary control encourages the participation of managers and employees in the
budgeting process. Input from different levels of the organization ensures that budgets are realistic,
achievable, and accepted by those responsible for their implementation.

5. Communication:

Feature: Effective communication is crucial in the budgetary control process. The organization's
objectives, as reflected in the budgets, should be clearly communicated to all relevant personnel.
Regular communication ensures that everyone is aligned with the organizational goals.
6. Periodic Review and Monitoring:

Feature: Budgetary control involves continuous monitoring of actual performance against budgeted
figures. Periodic reviews are conducted to assess the progress, identify variations, and take
corrective actions if necessary.

7. Flexibility:

Feature: Budgetary control recognizes the need for flexibility. As business conditions change,
organizations may need to adjust their budgets. Flexible budgets allow for modifications to
accommodate unexpected changes and uncertainties.

8. Responsibility Accounting:

Feature: Responsibility accounting is a key aspect of budgetary control. Each manager is assigned
specific responsibilities, and budgets are used to measure actual performance against these
responsibilities. This helps in evaluating individual and departmental performance.

9. Feedback and Corrective Action:

Feature: The budgetary control system provides a feedback mechanism. Variations between actual
and budgeted figures are analyzed, and corrective actions are taken to address any deviations. This
process ensures that the organization stays on track toward its objectives.

10. Performance Evaluation:

Feature: Budgetary control facilitates the evaluation of performance at various levels of the
organization. It helps in identifying areas of success and areas that require improvement.
Performance evaluation is essential for recognizing and rewarding achievements.

11. Cost Consciousness:

Feature: Budgetary control promotes cost consciousness among managers and employees. By
comparing actual costs with budgeted costs, organizations can identify areas of inefficiency and take
measures to control costs.

12. Strategic Planning:

Feature: Budgetary control is closely linked to strategic planning. The budgets reflect the
organization's strategic priorities, and the control process ensures that activities are aligned with the
overall strategy.