When amount is paid to Anand, his account should have been debited. On the other hand, his account was credited for a wrong amount of Rs.34.37. Hence there has been excess credit to the extent of Rs.78.74 (44.37 + 34.37). To rectify this double error we need to debit Anand's account to the extent of Rs.78.74 and credit suspense account.
2. Purchases account was over debited by Rs.9 (Rs.154.50 - Rs.145.50). To rectify this error we need to credit purchase account to the extent of Rs.9 and debit suspense account.
3. Repairs spent on building are, by mistake debited to building account. This is error of principle. Repairs account is debited and buildings account is credited to rectify the error.
4. Discount received from B has not been taken to records. This is an error of omission. Therefore, it is now brought to accounts. This has not affected the trial balance.
5. When old furniture is sold, the furniture account should have been credited. On the other hand, sales account was credited against to the principle of accounting. To rectify the error, sales account is debited and old furniture account is credited.
Q2. Distinguish between management accounting and financial accounting.
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Answer: Financial accounting is the preparation and communication of financial information to outsiders such as creditors, bankers, government, customers and so on. Another objective of financial accounting is to give complete picture of the enterprise to shareholders. Management accounting on the other hand aims at preparing and reporting the financial data to the management on regular basis. Management is entrusted with the responsibility of taking appropriate decisions, planning, performance evaluation, control, management of costs, cost determination etc., For both financial accounting and management accounting the financial data is the same and the reports prepared in financial accounting are also used in management accounting But the following are major differences between Financial accounting and Management accounting.
The primary users of financial accounting information are shareholders, creditors,
government authorities, employees etc.,
Top, middle and lower level managers use the information for planning and decision making
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
Financial data is presented for a definite period, say one year or a quarter
Reports are prepared on continuous basis, monthly or weekly or even daily
Financial accounting focuses on historical data
Management accounting is oriented towards future
Financial accounting is a discipline by itself and has its own principles, policies and conventions
Management accounting makes use of other disciplines like economics, management, information system, operation research etc.,
Q3. Draw the Balance Sheet for the following information provided by Sarawath Ltd..
a. 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
Hint: B/S total 1100000
Balance Sheet â€¦â€¦
Reserves & Surplus
If Current Liabilities = 1
Current Assets = 2.5
Working Capital (2.5 -1) = 1.5 = 300000
Therefore Current Assets (2.5/1.5) x 300000 = 500000
Current Liabilities (1/1.5) x 300000 = 200000
Liquidity Ratio = 1.5
Current Liabilities = 200000
Therefore Liquid Asset (200000 x 1.5) = 300000
Inventories (Current asset - Liquid asset) = 200000
Stock Turnover Ratio = 6 times
Cost of sales (6 x 200000) = 1200000
Gross Profit Ratio = 20%
If Sales is 100; Gross Profit is 20
Hence cost of sales is (100-20) = 80
Therefore Gross Profit is (20/80) x 1200000 = 300000
Sales ( Cost of Sales + Gross Profit) = 1500000
Fixed Asset Turnover ratio = 2 times
(cost of sales/Fixed assets)
Always on Time
Marked to Standard
Therefore Fixed Assets (1200000/2) = 600000
Debtors Collection Period = 2 months
(Months in a year /Debtors turnover)
Debtors Turnover Ratio (12/2) = 6 times
Debtors (1500000/6) = 250000
Fixed Assets to Shareholders' Net worth = 0.80
Share holders' Net worth(600000 /0.80) = 750000
Reserves & Surplus to Capital = 0.50
If capital is 1: reserves & Surplus is 0.5
Reserves & Surplus + Capital = Shareholder's Net
worth (0.5 +1 =1.5)
Reserves & Surplus (7500000 x(0.5/1.5) = 250000
Therefore share Capital = 500000
Q4. Following is the balance sheet for the period ending 31st March 2006 and 2007. If the current year's net loss is Rs.38,000, calculate the cash flow from operating activities.
Short-term loan to employees
Provision for doubtful debts
Stock in trade
Hint: Net cash lost in operating activities (69800)
Answer: Statement showing Cash flows 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 Creditors 22,000
Decrease in Provision for doubtful debts 1,200 (36,200)
Net cash lost in operating activities (69,800)
Q5. The following data are related to the manufacture of a standard product during the month of July 2009.
Raw materials consumed
Machine hours worked
Machine hours rate
20% of works cost
Re.0.50 per unit
16,000 @ Rs.4 per unit
Prepare a cost sheet from the above to show:
a. The cost per unit
b. The profit per unit sold and profit for the period
Hint: Profit = 24000
Answer: Units produced 17,100
Raw materials consumed
Direct Expense(900 x 5 )
Add: Factory overheads
FACTORY /WORKS COST
Add: Admn. overheads (20% of works
COST OF PRODUCTION
Add: Selling overheads(0.50 per unit)
16000 x 0.50 = 8,000
Add: op. stock of F. goods
Less: Cl. Stock of F. Goods (1100 units)
1100 x 2.00 = 2200
Cost of Sales (sold 16,000 units)
Profit 1.50 x 16,000 = 24,000
Sales 16,000 x 4.00 = 64,000
Q6. Write the differences between absorption costing and management costing.
It is known as full costing. Both fixed and variable are included to ascertain the cost
Only variable costs are included. Fixed costs are recovered from contribution.
Different unit costs are obtained at different levels of output because of fixed expenses remaining the same
Marginal cost per unit remain same at different levels of output because variable expenses vary in the same proportion in which output varies
Difference between sales and total cost (marginal cost and fixed cost) is profit
Difference between sales and marginal cost is contribution and difference between contribution and fixed cost is profit or loss
A portion of fixed cost is carried forward to the next period because closing stock of work-in-progress and finished goods is valued at cost of
production which is inclusive of fixed cost
Stock of work-in-progress and finished goods are valued at marginal cost. Fixed cost of a particular period is charged to that very period and is not carried over to the next period.
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The apportionment of fixed expenses on an arbitrary basis gives rise to over or under absorption of overheads
Only variable cost are charged to products hence marginal costing does not lead to over or under absorption of fixed overheads.
It affects managerial decisions in the areas such as whether to accept the export order or not, whether to buy or manufacture etc
It is very helpful in taking managerial decisions because it takes into consideration the additional cost involved only assuming fixed expenses remaining constant.
Costs are classified according to functional basis such as production cost, office and administrative cost and selling and distribution costs
Costs are classified according to the behavior of costs - fixed costs and variable costs.
It fails to establish relationship of cost, volume and profit
CVP relationship is an integral part of marginal costing.