Distinguish Between Management Accounting And Financial Accounting Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

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.

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.

Financial accounting

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

Answer:

Balance Sheet ……

Liabilities

Rs.

Assets

Rs.

Capital

500000

Fixed Assets

600000

Reserves & Surplus

250000

Inventories

200000

Long-term Debt

150000

Debtors

250000

Current Liabilities

200000

Bank

50000

Total

1100000

Total

1100000

Working Notes

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%

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 = 300000

Sales ( Cost of Sales + Gross Profit) = 1500000

Fixed Asset Turnover ratio = 2 times

(cost of sales/Fixed assets)

Therefore Fixed Assets (1200000/2) = 600000

Debtors Collection Period = 2 months

(Months in a year /Debtors turnover)

Debtors Turnover Ratio (12/2) = 6 times

(Sales/ Debtors)

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.

Particulars

31st March

2006

2007

Short-term loan to employees

15000

18000

Creditors

30000

8000

Provision for doubtful debts

1200

0

Bills payable

18000

20000

Stock in trade

15000

13000

Bills receivable

10000

22000

Prepaid expenses

800

600

Outstanding expenses

300

500

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

(33,600)

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

Rs.15,000

Direct wages

Rs. 9,000

Machine hours worked

900 hours

Machine hours rate

Rs.5

Administrative overheads

20% of works cost

Selling overheads

Re.0.50 per unit

Units produced

17,100

Units Sold

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

Particulars

Amount

Cost/unit

Raw materials consumed

15,000

0.88

Direct Wages

9,000

0.53

Direct Expense(900 x 5 )

4,500

0.26

Prime cost

28,500

1.67

Add: Factory overheads

NIL

FACTORY /WORKS COST

28,500

1.67

Add: Admn. overheads (20% of works

cost)

5,700

0.33

COST OF PRODUCTION

34,200

2.00

Add: Selling overheads(0.50 per unit)

16000 x 0.50 = 8,000

8,000

0.50

Add: op. stock of F. goods

NIL

Less: Cl. Stock of F. Goods (1100 units)

1100 x 2.00 = 2200

(2,200)

Cost of Sales (sold 16,000 units)

40,000

2.50

Profit 1.50 x 16,000 = 24,000

24,000

1.50

Sales 16,000 x 4.00 = 64,000

64,000

4.00

Q6. Write the differences between absorption costing and management costing.

Answer:

Absorption Costing

Marginal 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.

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.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.