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Student name:   Course:  semester 1
Registration number:                                                                   Lc code:    
Subject name:  Financial And Management Accounting Subject code:     mb0041    

Note –Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

1 Inventory in a business is valued at the end of an accounting period, at either cost or market price, whichever is lower. This is accepted convention or a practice in accounting. Give a small introduction on accounting conventions and elucidate all the eight accounting conventions.

Answer:- Accounting conventions are the rules based on which accounting takes place and these rules are universally accepted. There are ten types of accounting conventions, namely convention of income recognition, convention of expense, convention of matching cost and revenue, convention of historical cost, convention of full disclosure, convention of double aspect, convention of modifying, convention of materiality, convention of consistency, and convention of conservatism. They are explained briefly in the following sections.

1 Convention of income recognition: According to this concept, revenue is considered as being earned on the date on which it is realized, i.e., the date on which goods and services are transferred to customers for cash or for promise.

2 Convention of matching cost and revenue: According to this concept, revenue earned during a period is compared with the expenditure incurred to earn that income, irrespective of whether the expenditure is paid during that period or not. This is also called matching cost and revenue principle.

3 Convention of historical costs: This convention says that all transactions must be recorded at a value at which they were incurred. Such a value is called ‘Historical Cost’ and this principle is called the Convention of ‘Cost’. An asset or transaction may have many other values associated with it like market value or replacement cost.

4 Convention of full disclosure: This convention requires a business to disclose the following:

  • All the accounting policies adopted in the preparation and presentation of financial statements.
  • If there is any change in the accounting policies in the current year as compared to the previous year/s, the effects of such changes and the reason/s thereof.
  • The implications (in terms of money value) on the financial statements due to such change.

5 Convention of double aspect: This concept states that every transaction has two aspects. One is the receiving aspect and the other is the giving aspect. In accounting language, these two aspects are called ‘debit’ and ‘credit’. The claims on assets will always be equal to the assets. The claims on assets may be of the owners or of the outsiders (creditors). While the claims of owners are called Equity or Capital, the claims of outsiders are called Liabilities. Therefore, total liabilities are equal to total assets. This concept gives rise to the balance sheet equation, i.e., Assets=Liabilities + Capital.

6 Convention of materiality: This convention states that the benefit derived from measuring, recording, and processing a transaction should justify the cost of doing it.

7 Convention of consistency: This convention requires that the accounting policies must be consistently applied year after year. Consistency is required to help comparison of financial data from one period to another. Once a method of accounting is adopted, it should not be changed. A change in an accounting policy may be done only when:

  • It is required by law
  • It is felt that the new policy reflects the financial performance or position better than the old policy

8 Convention of conservatism or prudence: Accountants follow the rule “anticipate no profits but provide for all anticipated losses“. Whenever loss is anticipated, sufficient provisions should be made. But if a profit is anticipated, it should not be recorded until it is actually realized.

2 Analyse the following transactions according to traditional approach.

  1. 1.1.2011 Sunitha started his business with cash Rs. 5,00,000 b. 2.1.2011 Borrowed from Malathi Rs. 5,00,000 c. 2.1.2011 Purchased furniture Rs. 1,00,000 d. 4.1.2011 Purchased furniture from Meenal on credit Rs. 1,50,000 e. 5.1.2011 Purchased goods for cash Rs. 50,000 f. 6.1.2011 Purchased goods from Ram on credit Rs. 2,50,000 g. 8.1.2011 Sold goods for cash Rs. 1,25,000 h. 8.1.2011 Sold goods to Shyam on credit Rs. 55,000 i. 9.1.2011 Received cash from Shyam Rs. 25,000 j. 10.1.2011 Paid cash to Ram Rs. 90,000

Solution:- Analysis of Transaction under Traditional Approach

Sl. No. Accounts  Involved Nature of Account Affects Debit/ Credit
a Cash a/cCapital a/c RealPersonal Cash is coming inSunitha is the giver DebitCredit
b Cash a/cLoan from Mahesh RealPersonal Cash is coming inMalathi is the giver DebitCredit
c Furniture a/cCash a/c RealReal Furniture is coming inCash is going out DebitCredit
d Furniture a/cMohan a/c RealPersonal Furniture is coming inMeenal is the giver DebitCredit
e Purchase a/cCash a/c NominalReal Purchase is an expenseCash is going out DebitCredit
f Purchase a/cRam’s a/c Nominal Personal Purchase is an expenseRam is the giver DebitCredit
g Cash a/cSales a/c RealNominal Cash is coming inSales is revenue DebitCredit
h Shyam’s a/cSales a/c PersonalNominal Shyam is the receiverSales is revenue DebitCredit
i Cash a/cShyam’s a/c RealPersonal Cash is coming inShyam is the giver DebitCredit
j Ram’s a/cCash a/c PersonalReal Ram is the receiverCash is going out DebitCredit


3 The following items are found in the trial balance of M/s Sharada Enterprise on 31st December, 2000.

Sundry Debtors Rs.160000

Bad Debts written off Rs 9000

Discount allowed to Debtors Rs. 1800

Reserve for Bad and doubtful Debts 31-12-1999 Rs. 16500

Reserve for discount on Debtors 31-12-1999 Rs. 3200

You are required to provide the bad and doubtful debts at 5% and for discount on debtors at 2%. Show the adjustments for bad debts, bad debts reserve, discount account, and provision for discount on debtors.


The amount debited to P&L account towards RBD is computed as follows:

Old RBD                                            = Rs. 16500

(-) Bad debts                                       = Rs. 9000

Balance                                               = Rs. 7500

New RBD @5% on160000                = Rs. 8000

RBD to be provided                           = Rs. 500 (8000-7500)

The amount debited to P&L account towards Reserve for Discount on Debtors is computed as follows:

Good Debtors                                                 = Rs.160000 – Rs.8000 (New RBD)= Rs.152000

Old Reserve for

Discount on Drs                                  = Rs.3200

Less Discount on Drs                          = Rs.1800

Balance Reserve                                  = Rs.1400

New Reserve for Discount at 2%

On good Drs 152000                          = Rs.3040

Reserve for Discount to be

provided now                                      = Rs.1640 (3040 -1400)

Conclusion:- In the balance sheet, the Sundry debtors are reduced by bad debts shown outside the trial balance, the new RBD, discount on debtors shown outside the trial balance and the new Reserve for discount on debtors.


4 The reports prepared in financial accounting are also used in the management accounting. But there are few major differences between financial accounting and management accounting. Explain the differences between financial accounting and management accounting in various dimensions.


Dimension Financial accounting Management accounting


The primary users of financial accounting information are external users like shareholders, creditors, government authorities, employees, etc The primary users of management accounting are internal users like top, middle, and lower level managers.
Purpose  Reporting financial performance and financial position to enable the users to take financial decisions.  To help the management in planning, decision making, monitoring, and controlling.
Need  It is a statutory requirement. What to report, how to report, how much to report, when to report, in which form to report, etc. are stipulated by Law or Standards. It is optional. What to report, how to report, how much to report, when to report, in which form to report, etc. are decided by the management as per the needs of the company
Expression of information  Accounting information is always expressed in terms of money.  Management accounting may adopt any measurement unit like labour hours, machine hours, or product units for the purpose of analysis.
Reporting timing and frequency


Financial data is presented for a definite period, say one year or a quarter Reports are prepared on a continuous basis, monthly, weekly, or even daily.
Time perspective  Financial accounting focuses on historical data.  Management accounting is oriented towards the future.
Sources of principles  Financial accounting is a discipline by itself and has its own principles, policies and conventions (GAAP). Management accounting makes use of other disciplines like economics, management, information system, operation research, etc.
Reporting entity  Overall organisation  Responsibility centres within the organisatiom
Form of reports  Income statement (Profit and Loss a/c)Balance sheet

Cash flow statement

MIS reports,Performance reportsControl reports, Cost statements

Variance statements, Budgets

Estimate statements, Flowcharts


5 Draw the Balance Sheet for the following information provided by Sandeep Ltd..

  1. Current Ratio : 2.50 b. Liquidity Ratio : 1.50 c. Net Working Capital : Rs.300000 d. Stock Turnover Ratio : 6 times e. Ratio of Gross Profit to Sales : 20% f. Fixed Asset Turnover Ratio : 2 times g. Average Debt collection period : 2 months h. Fixed Assets to Net Worth : 0.80 i. Reserve and Surplus to Capital : 0.50


Liabilities Rs. Assets Rs.
CapitalReserves and Surplus

Long-term Debt

Current Liabilities





Fixed AssetsInventories







Total 1100000 Total 1100000


 If Current Liabilities = 1Current Assets = 2.5

Working Capital (2.5 -1) = 1.5

Therefore Current Assets (2.5/1.5) x 300000

Current Liabilities (1/1.5) x 300000


= 300000

= 500000

= 200000


Liquidity Ratio = 1.5Current Liabilities = 200000

Therefore Liquid Asset (200000 x 1.5)

Inventories (Current asset – Liquid asset)





Stock Turnover Ratio = 6 timesCost of sales (6 x 200000)

Gross Profit Ratio = 20%

Gross Profit

If Sales is 100; Gross Profit is 20

Hence cost of sales is (100-20) = 80

Therefore Gross Profit is (20/80) x 1200000

Sales ( Cost of Sales + Gross Profit)

= 1200000 



= 300000





Fixed Asset Turnover ratio = 2 times(Cost of sales/Fixed assets)

Therefore Fixed Assets (1200000/2)


Debtor’s Collection Period = 2 months

(Months in a year /Debtor’s turnover)

Debtor’s Turnover Ratio (12/2) = 6 times

(Sales/ Debtors)

Debtors (1500000/6)

= 600000 




= 250000


Fixed Assets to Shareholders’ Net worth = 0.80Share holders’ Net worth(600000/0.80)


Reserves and Surplus to Capital = 0.50

If capital is 1: reserves and Surplus is 0.5

Reserves and Surplus + Capital = Shareholder’s Net worth (0.5 +1 =1.5)

Reserves and Surplus (7500000 x(0.5/1.5)

Therefore share Capital





6 Write the main differences between cash flow analysis and fund flow analysis.

Answer:- Difference Between Cash Flow Analysis and Fund Flow Analysis

Cash Flow Analysis

  1. It is concerned only with the change in cash position
  2. It is merely a record of cash receipts and disbursements
  3. Cash is part of working capital and therefore an improvement in cash position results in improvement in the funds position
  4. It is cash based

Fund Flow Analysis

  1. It is concerned with change in working capital position between two balance sheet dates.
  2. Net effect of receipts and disbursements are recorded.
  3. An improvement in funds positions need not result in improvement in cash position
  4. It is accrual based

Following is the balance sheet for the period ending 31st March 2011 and 2012. If the current year’s net loss is Rs.38,000, Calculate the cash flow from operating activities.

Solution:                      Statement Showing Cash Flow from Operating Activities

Net Loss   (38,000)
Add: Decrease in current assets
Decrease in stock 2,000
Decrease in prepaid expenses 200
Increase in current liabilities
Increase in outstanding expenses 200
Increase in bills payable 2,000 + 4,400
Less: Increase in current assets
Increase in short-term loan to the employees 3,000
Increase in bills receivable 10,000
Decrease in creditorsDecrease in provision for doubtful debts 22,0001,200
Net cash lost in operating activities   (69,800)


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