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MS-04

MBA-Master in Business Administration

MS-04

For Master of Business Administration [MBA]

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Preface

I

ncreasingly, managers in every functional area need to understand

the basic principles of accounting and finance in order to improve the effectiveness of their operations and strategy. Accounting and finance lie at the heart of business. It is possible to survive, for a while at least, without an effective marketing plan, poor human resource management and indeed a poorly designed business strategy. But, if there are serious faults with the management and control of the business’s financial systems, it will fail. Good accounting and financial management helps the business to keep under control; it also provides the owners, management and others with the information and the confidence to make the bold decisions and take the opportunities to help the enterprise grow. The book ‘Accounting and Finance for Managers’ (MS-04) will provide everything which businesspeople and managers need to know about accounting and finance. This book is especially written to help students in preparing for examination. Managers are also expected to be able to analyse and interpret accounting information so that marketing, operations and human resource decisions are made in the light of an understanding of the financial implications of those decisions. In this book, we have tried to cover all important topics from the exams’ point of view. The book is enriched with useful and to-thepoint matter. Previous years question papers have also been included to help students to understand the unique examination structure. We hope that it will be well received by students, teacher and managers. We wish you a successful and rewarding career with us. Feedback in this regard is solicited. ([email protected])

Acknowledgement Our compliments go to the GullyBaba Publishing House (P) Ltd., and its meticulous team who have been enthusiastically working towards the perfection of the book. Their teamwork, initiative and research have been very encouraging. Had it not been for their unflagging support, this work wouldn’t have been possible. The creative freedom provided by them along with their aim of presenting the best to the reader has been a major source of inspiration in this work. Hope that this book would be successful. – GPH Panel of Experts

Publisher’s Note The present book ‘MS-04’ of MS series in the MBA. education programme is targeted for examination purpose as well as enrichment. With the advent of technology and the Internet, there has been no dearth of information available to all; however, finding the relevant and qualitative information, which is focused, is an uphill task. We at GullyBaba Publishing House (P) Ltd., have taken this step to provide quality material which can accentuate in-depth knowledge about the subject. GPH books are a pioneer in the effort of providing unique and quality material to its readers. With our books, you are sure to attain success by making use of this powerful study material. Our site www.gullybaba.com is a vital resource for your examination. The publisher wishes to acknowledge the significant contribution of the Team Members and our experts in bringing out this publication and highly thankful to Almighty God, without His blessings, this endeavor wouldn’t have been successful. – Publisher

Topics Covered Block—1 Accounting Framework Unit—1 Unit—2 Unit—3

Accounting and its Functions Accounting Concepts and Standards Accounting Information and its Application

Block—2 Understanding Financial Statements Unit—4 Unit—5 Unit—6

Construction and Analysis of Balance Sheet Construction and Analysis of Profit and Loss Account Construction and Analysis of Funds Flow and Cash Flow

Block—3 Cost Management Unit—7 Unit—8 Unit—9 Unit—10

Understanding and Classifying Costs Absorption and Marginal Costing Cost – Volume – Profit Analysis Variance Analysis

Block—4 Financial and Investment Analysis Unit—11 Unit—12 Unit—13 Unit—14 Unit—15

Financial Management : An Introduction Ratio Analysis Leverage Analysis Budgeting and Budgetary Control Investment Appraisal Methods

Block—5 Financial Decisions Unit—16 Management of Working Capital Unit—17 Capital Structure Unit—18 Dividend Decisions

Contents Chapter—1 Chapter—2 Chapter—3 Chapter—4 Chapter—5 Chapter—6 Chapter—7 Chapter—8 Chapter—9 Chapter—10 Chapter—11 Chapter—12 Chapter—13 Chapter—14 Chapter—15 Chapter—16 Chapter—17 Chapter—18

Accounting and its Functions.................................................1 Accounting Concepts and Standards................................19 Accounting Information and its Application ..................29 Construction and Analysis of Balance Sheet..................35 Construction and Analysis of Profit and Loss Account ......................................................................................45 Construction and Analysis of Funds Flow and Cash Flow..................................................................................75 Understanding and Classifying Costs..............................99 Absorption and Marginal Costing....................................111 Cost – Volume – Profit Analysis ........................................123 Variance Analysis.................................................................133 Financial Management : An Introduction......................145 Ratio Analysis........................................................................153 Leverage Analysis.................................................................177 Budgeting and Budgetary Control...................................187 Investment Appraisal Methods ........................................207 Management of Working Capital......................................219 Capital Structure....................................................................227 Dividend Decisions...............................................................235

Question Papers (1) December: 2009 (Solved)..............................................................................245 (2) June: 2010 (Solved).......................................................................................257 (3) December: 2010 (Solved)..............................................................................265 (4) June: 2011 (Solved)........................................................................................271 (5) December: 2011 (Solved).............................................................................285 (6) June: 2012 (Solved)........................................................................................293 (7) December: 2012 (Solved).............................................................................301 (8) June: 2013........................................................................................................310 (9) December: 2013.............................................................................................313 (10) June: 2014.......................................................................................................316 (11) December: 2014.............................................................................................319 (12) June: 2015.......................................................................................................322 (13) December: 2015.............................................................................................325 (14) June: 2016.......................................................................................................328 (15) December: 2016 (Solved)............................................................................331 (16) June: 2017.......................................................................................................336 (17) December: 2017 (Solved)............................................................................338 (18) June: 2018 (Solved)....................................................................................344 (19) December: 2018 ....................................................................................348 (20) June: 2019 ...............................................................................................350 (21) December: 2019 (Solved).....................................................................352 (22) June: 2020 (Solved)................................................................................361 (23) Febraury: 2021 (Solved)........................................................................371

Accountin g and its Accounting Functions

1

AN OVER VIEW VERVIEW

A

ccounting is often called the language of business. Its purpose is to communicate or report the results of business operations and its various aspects. Previously accounting has been considered with recording, with the emergence of management accounting, the focus of accounting has been shifting from mere recording of transactions to that of aiding the management in decisions. Accounting is the identification, measurement, and communication of financial information about economic entities to interested users. Accounting can be perceived as an information system which has its inputs, processing methods and outputs. The usefulness of accounting lies in its capacity to provide information to various stakeholders in business so that they could arrive at the correct decisions. It is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information. Accountant is the person who manages accounts in the business. The senior accountant is responsible for applying accounting principles and procedures to analyse financial information, prepare accurate and timely financial reports and statements and ensure appropriate accounting control procedure. Accounting is mainly divided into two branches which are: • Financial Accounting is mainly concerned with providing information to internal and external consumers through financial statements. • Management Accounting is mainly concerned with providing information to management for planning and control.

Accounting and Finance for Managers [MS-04]

2

1.1: MEANING AND DEFINITION OF ACCOUNTING Accounting is the application of the process of analysing and recording, in money terms, the financial transactions and events of a business or an individual. Accounting includes the presentation and interpretation of the results of this financial activity so that financial performance can be assessed. Accounting provides the economic information necessary for making investment decisions. •

AICPA (American Institute of Certified Public Accountants) has the meaning of the account as, "Accounting is the art of recording, classifying and for summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof".

•

Accounting is the process of collection. Analysing and reporting financial information (Pride, Hughes, and Kapoor).

Characteristics of Accounting Notable features of accounting are as follows: •

Understandability: This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users — who are generally assumed to have a reasonable knowledge of business and economic activities.

•

Relevance: This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view — usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?).

•

Consistency: This implies consistent treatment of similar items and application of accounting policies.

•

Comparability: This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability.

•

Reliability: This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor).

•

Objectivity: This implies that accounting information is prepared and reported in a “neutral” way. In other words, it is not biased towards a particular user group or vested interest.

Accounting and its Functions

3

Functions of Accounting The main functions of accounting are as follows: • Recording the business transactions of financial character in the books (preparation of first book called ‘Journal’). •

Classifying the recorded data of similar nature in one place (preparation of second book called ‘Ledger’).

•

Summarising the classified data to know the result of business operation and its financial position (preparation of trial balance, income statement and balance sheet).

•

Analysis and interprets the summarised data in such a way to get a meaningful judgement about the operational result and financial position of the business).

•

Communicating the interpreted data to the various users such as Owners, Investors, Bank, etc.

Objectives of Accounting The various objectives of Accounting are as follows: • The purpose of accounting to organise the financial details of a business. •

To identify the financial transaction.

•

To organise the financial data into useful information.

•

To measure the value of these information in term of money.

•

To analyse, interpret, and communicate the information to persons or groups both inside and outside the business.

1.2: BRANCHES OF ACCOUNTING In order to meet the ever increasing demands made on accounting by different interested parties, the various branches of accounting have come into existence. (1)

Financial Accounting: The main purpose of financial accounting is to ascertain the true result of the business operations during a particular period of time and to state the financial position of the business on a particular point of time. Financial accounting produces general purpose reports for use by the great variety of people who are interested in the organisation but who are not actively engaged in its day-to-day operation. Financial accounting is the oldest and the other branches have developed from it. The objects of financial accounting can only be achieved by recording business transactions in a systematic manner according to a set of principles.

Accounting and Finance for Managers [MS-04]

4

(2)

(3)

 (a)

(b)

(c)

Cost Accounting: The main object of cost accounting is to determine the cost of goods manufactured or produced by the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes. Managerial Accounting: Management Accounting is comprised of two words ‘Management’ and ‘Accounting’. It is the study of managerial aspect of accounting. The emphasis of management accounting is to redesign accounting in such a way that it is helpful to the management in formation of policy, control of execution and appreciation of effectiveness. It is that system of accounting which helps management in carrying out its functions more efficiently. According to Anglo-American Council on Productivity, “Management Accounting is the presentation of accounting information in such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking”. According to Robert N. Anthony, “Management Accounting is concerned with accounting information that is useful to management". According to The American Accounting Association, “Management Accounting includes the method and concepts necessary for effective planning, for choosing among alternative business actions and for control through the evaluation and interpretation of performances”. Characteristics/Nature of Management Accounting Providing Accounting Information: The collection and classification of data are the primary functions of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs. Cause and Effect Analysis: If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studied. The figures of profits are compared to sales, different expenditures, current assets, interest payables, share capital, etc. So the study of cause and effect relationship is possible in management accounting. Use of Special Techniques and Concepts: The techniques used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.

Accounting and its Functions

(d)

(e)

 (a)

(b)

(c)

(d)

(e)

5

Taking Important Decisions: It supplies necessary information to the management, which may base its decisions on it. The historical data is studied to see its possible impact on future decisions. Achieving of objectives: In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical data is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. Objectives of Management Accounting Planning and Policy Formulation: The object of management accounting is to supply necessary data to the management for formulating plans. Planning is essentially related to taking decisions for future. It also includes forecasting, setting goals and deciding alternative courses of action. Management accountant prepares statements of past results and gives estimations for the future. The figures supplied and opinion given by the management accountant help management in planning and policy helpful in controlling performance. Helpful in Organising: Organisation is related to the establishment of relationship among different individuals in the concern. It also includes the delegation of authority and fixing of responsibility. Management accounting is connected with the establishment of cost centers, preparation of budgets, preparation of cost control accounts and fixing of responsibility for different functions. Helpful in Interpreting Financial Information: The main object of management accounting is to present financial information to the management in such a way that it is easily understood. Motivating Employees: Management accounting helps the management in selecting best alternatives of doing the things. Targets are laid down for the employees. They feel motivated in achieving their targets and further incentives may be given for improving their performance. Helpful in Making Decisions: The management has to take certain important decisions. A decision may have to taken, be about the expansion or diversification of production. There may be a question of replacement of labour with machine or introduction of latest technological device.

Accounting and Finance for Managers [MS-04]

6

(f)

 (a)

(b)

(c)

(d)

(e)

(f)

 (a)

(b)

(c)

Reporting to Management: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This helps management in taking proper and timely decisions. Functions of Management Accounting Planning and Forecasting: Management fixes various targets to be achieved by the business in near future. Planning and forecasting are essential for achieving business objectives. One of the important functions of the management accounting is to help management in planning for short-term and long-term periods and also in making forecasts for the future. Modification of Data: Management accounting helps in modifying accounting data. The information is modified in such a way that it becomes useful for the management. Financial Analysis and Interpretation: Management accountant undertakes the job of presenting financial data in a simplified way. Financial data is generally collected and presented in a technical way. Facilitates Managerial Control: Management accounting is very useful in controlling performance. All accounting efforts are directed towards control of the enterprise. The standards of various departments and individuals are set-up. Communication: Management accounting establishes communication within the organisation and with the outside world. Use of Qualitative Information: The field of management accounting is not restricted to the use of monetary data only. It collects and uses qualitative information also. Need/Importance of Management Accounting Increasing Efficiency: Management accounting increases efficiency of business operations. The targets of different departments are fixed in advance and the achievement of these goals is a tool for measuring their efficiency. Proper Planning: Management is able to plan various operations with the help of accounting information. The technique of budgeting is helpful in forecasting various activities. Measurements of Performance: The systems of budgetary control and standard costing enable the measurement of performance. In standard costing, standards are determined and then actual cost is compared with standard cost. It enables the

Accounting and its Functions

(d)

(e)

(f)

7

management to find out deviations between standard cost and actual cost. The performance will be good if actual cost does not exceed the standard cost. Budgetary control system helps in measuring efficiency of all employees. Maximising Profitability: The thrust of various management techniques is to control cost of production and increase efficiency of each and every individual in the organisation. The steps of controlling costs are able to reduce cost of production. The profits of the enterprise are maximised with the help of management accounting system. Improves Service to Customers: The cost control devices employed in management accounting enable the reduction of prices. All employees in the concern are made cost conscious. The quality of products becomes good because quality standard are predetermined. The customers are supplied good quality goods at reasonable prices. The increase in production of goods also enhances supply of goods to customers. Effective Management Control: The tools and techniques of management accounting are helpful to the management in planning, coordinating and controlling activities of the concern. The setting of standard and assessing actual performance regularly enables the management to have “management by exception”.

1.3: ACCOUNTING AND BOOK-KEEPING ACCOUNTING Accounting is concerned with the design of the system of records, policy-making, data analysis, preparation of report and interpretation. Book-Keeping There is two system of book-keeping: (1) Single Entry System: It is an incomplete record of the business transaction. There is no definite method and principles of this system. The small traders use this system. (2) Double Entry System: As there are two aspects in every transaction. So if we record both the aspect of a transaction, it is called double entry system. This system is called double-entry because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and the other are being credited, with the total debits of the transaction equal to the total credits. Following are the some advantages of double entry system: (a) This system provides complete record. (b) This system provides up-to-date information.

Also Available MS-1 : Management Functions and Behaviour MS-2 : Management of Human Resources MS-3 : Economic and Social Environment MS-4 : Accounting and Finance for Managers MS-5 : Management of Machines & Materials MS-6 : Marketing for Managers MS-7 : Information Systems for Managers MS-8 : Quantitative Analysis for Managerial Applications MS-9 : Managerial Economics MS-10 : Organizational Design, Development and Change MS-11 : Strategic Management MS-21 : Social Processes and Behavioural Issues MS-22 : Human Resource Development MS-23 : Human Resource Planning MS-24 : Employment Relations MS-25 : Managing Change in Organizations MS-26 : Organizational Dynamics MS-27 : Wage and Salary Administration MS-28 : Labour Laws MS-41 : Working Capital Management MS-42 : Capital Investment & Financing Decisions MS-43 : Management Control Systems MS-44 : Security Analysis and Portfolio Management MS-45 : International Financial Management MS-46 : Management of Financial Services MS-51 : Operations Research MS-52 : Project Management MS-54 : Management of Information Systems MS-65 : Marketing of Services MS-91 : Advanced Strategic Management MS-95 : Research Methodology for Man. Decisions MS-96 : Total Quality Management MS-612 : Retail Management