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Accounting for mgt 5th sem bit and importance answers
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9/13/24, 9:40 Accounting for mgt 5th sem bit and importanceAM answers
Accounting for management– (Al Jamia Arts and Science College,Poopalam Accounting for management– (Al Jamia Arts and Science College,Poopalam) Accounting for management– (Al Jamia Arts and Science College,Poopalam)
CHAPTER I
Scope of Management accounting Difference between management are profitably used. ▪ Not a substitute for managemen ▪ Statistical techniques and operation
MEANING OF ACCOUNTING ❖ Financial accounting : financial accounting and financial accounting ❖ Principle of accuracy : accuracy in ▪ Personnel research : number of statistical
Accounting is the recording of judgment techniques and operation research
accounting is the base for preparing Financial accounting Management information process should be maintained.
business transaction for getting final results financial statements. It supplies accounting ❖ Forward looking approach : ▪ Costly techniques like LPP, game theory,
▪ Evolutionary
stage
i.e.. Profit or loss. It is the process recording maximum data to management Purpose is to Provide accounting Functions of management accounting ▪ Resistance Networking, probability etc used in
all the financial transactions of the firm in Cost accounting : cost accounting is the ascertain profit or information to ➢ Planning and forecasting Tools of management accounting management accounting for planning
order to find out profitability and financial technique of ascertaining costs. Many loss management for ➢ Modification and verification of data ▪ Financial accounting :Financial and decision making.
position of the business organization. cost accounting tools like budgetary decision making ➢ Analysis and interpretation of data accounting is essential for collecting ▪ Responsibility accounting : it is a
LIMITATIONS OF ACCOUNTING control, standard costing etc are also the Records historical Concerned with ➢ Communication the important information for the system of control in which responsibility
• It provides only past data tools of management accounting. data future plans and ➢ Helping in co-ordination management. is assigned to persons for the control of
• It does not show profit of each job ❖ Budgeting and forecasting : budgeting operations ➢ Helping in decision making ▪ Financial analysis : financial cost.
• It fails to measure control over means expressing plans for a definite Compulsory Optional Difference between management analysis tools like comparative ▪ Other techniques : like risk analysis,
resources period of time. Forecasting is a Lays more emphasis Emphasis on quick accounting and financial accounting statements, common size statements, accounting for price level changes etc.
• It does not measure organizational prediction of what will happen as a on accuracy and prompt Cost accounting Management ratio analysis are used for also used in management accounting.
efficiency result of a given set of condition reporting accounting interpreting financial statements. CHAPTER II
• It fails to provide adequate data for ❖ Cost control techniques : one of the Based on accounting Not based on Purpose is to Provide accounting ▪ Historical cost accounting : the ANALYSIS AND INTERPRETATION OF
price fixation objectives of management accounting is principles accounting ascertain and control information to recording of actual cost after they are FINANCIAL STATEMENTS
• It does not provide data for cost control. It is done with the help of principles cost management for incurred is called historical cost Financial statements
comparison of costs inventory control, standard costing, Prepared for a No specific period decision making accounting. Financial statements are the final product of
• It fails to take into account the price budgeting etc. particular period include only cost Includes financial ▪ Budgetary control : in this system the accounting process. It containing financial
level changes ❖ Interpretation of financial data : Limited scope Wide scope ascertainment and accounting, cost expenditure and revenue are information of a business enterprise. Financial
• It cannot disclose controllable & comparative balance sheet, common size External parties are Internal parties are control accounting, predetermined. statements include Profit and loss account and
uncontrollable costs balance sheet, trend analysis, ratio ▪ Standard costing : in standard Balance sheet.
the users the users budgeting etc
• It provide only limited information analysis etc helps for interpreting Auditing is Not compulsory Use only quantitative Both quantitative costing, costs are predetermined on Objectives of financial statements
for management for decision making financial data. scientific basis. The actual costs are • Information about assets and liabilities
compulsory information and qualitative
Management accounting ❖ Statistical methods : today compared with the standard to find
Basic principles of management information • Provide useful information to various
Management accounting is the accounting management accountants use statistical accounting Deals with cost Deals with both cost out variations. parties
information that is useful to management tools like LPP, game theory etc in the ❖ principles of management by and revenue ▪ Marginal costing : under marginal • Present true and fair view of the
for decision making. decision making process. exception : time and effort of Based on both Concerned with costing, costs are divided into fixed business
Tax accounting : tax planning also an
It is the process of identifying, analyzing, managerial personnel are precious. So historical and current future plans and and variable. Variable costs are taken • Estimate earning capacity of the
interpreting and presenting financial and& important part of management management by exception should be data operations for decision making. business
non-financial information to be used by the accounting. introduced Precedes Start where cost ▪ Decision accounting : decision • Determine debt paying capacity of the
management to plan & control activities.
❖ Reporting : basic responsibility of ❖ principles of objective : objectives of management accounting ends making is the process of selecting the firm
Definition management accountant is to prepare the organization should be considered best alternative from different
accounting • Decide the future prospects of the
According
“ to Robert Anthony report. ❖ consistent : when presenting Importance or advantages of management alternatives. The cost of different concern
management accounting is concerned with
❖ Office service information uniform policy should accounting alternatives are analyzed and most Importance or uses or utilities of financial
accounting information which is useful to
❖ Internal auditing followed for same activity. ▪ Proper planning favourable alternatives are selected. statements
management”
Objectives of management accounting ❖ Principles of relevancy : focuses its Effective control ▪ Revaluation accounting : this is a ❖ Importance to management:
Nature of management accounting
➢ to help for planning attention on relevant data. ▪ Quick decision making method for overcoming the problem management make use of financial
▪ Provides accounting information ➢ to help in interpreting financial data of replacement of assets in a period statements for ascertaining the earning
❖ Principles of integration : management Increased efficiency
▪ Decision making ➢ to assist in controlling activities of rising prices.
accounting is based on the integration of Measurement of performance capacity, profitability, financial position
▪ Studies cause & effect relationship ➢ to help in co-ordination ▪ Management information etc.
all managerial information. Maximizing profitability
▪ Use special techniques ➢ to motivate employees system(MIS): it is a system that ❖ Importance to investors : FS provides
❖ Principle of revaluation of accounting Increase in production
▪ Quantitative & qualitative ➢ to help in decision making collect data, stores and process data information to investors regarding
▪ Accounting for future : management accounting uses the Improve standard of living of people
➢ communication and provides information to earning power, debt paying capacity, etc
principles of revaluation accounting in Economic development
▪ No fixed form allowed ➢ help in organizing order to keep the data up to date. Limitation of management accounting managers for planning, controlling to determine whether to buy or sell the
▪ Assist
management ➢ to help in policy ❖ Principles of utilization : should reveal Based on accounting information and decision making. shares of the concerned company.
formulation
▪ Increase ➢ to report
whether or not resources of the business ▪ Lack of knowledge
efficiency
Accounting for management– (Al Jamia Arts and Science College,Poopalam
Accounting for management– (Al Jamia Arts and Science College,Poopalam) Accounting for management– (Al Jamia Arts and Science College,Poopalam)
❖ Importance to creditors: to analyze
• Determining the debt paying ❖ Analysis CHAPTER III ▪ Inherent limitations of accounting •
to meet its current liabilities.
capacity
debt paying capacity and solvency To judge present and future profitability ❖
Interpretation RATIO ANALYSIS ▪ Change of accounting procedure Solvency ratios or Leverage ratios–
position. • To make inter-firm Tools Of Financial Analysis Ratio ▪ Window dressing The term solvency refers to the ability of
❖ Importance to banks : for granting A ratio is a simple arithmetical expression of ▪ Personal bias a firm to pay its outside liabilities(both long
comparison Comparative income statement
• Measure managerial
efficiency
loans, banks have to analyze the To solve the internal problems of the Under comparative income statement two the relationship of one number to another. In ▪ Incomparable term and short term). Solvency ratios are used
solvency and profitability position of firm. years’ expenses and incomes are compared simple language ratio is one number expressed ▪ Price level changes. to analyze the long term financial position of a
the business. by analyzing the increase or decrease in in terms of another and can be worked out by • Ratios no substitutes. business.
Uses of financial analysis
❖ Importance to customers : to know ▪ Importance to shareholders- return each item. It also discloses percentage of dividing one number into the other. A ratio can Classification or Types ratios • Debt equity ratio- This ratio indicates
whether the company will be able to Importance to creditors – to know be expressed in the form of a fraction, number
changes. On the basis of accounting statement the relative proportion of debt and
supply the of goods and services to position of business Comparative balance sheet of times, percentage or in proportion. ❖ Balance sheet or financial ratios : equity in financing the assets of a firm.it
them. ▪ Importance to management- decision The CBS shows the different assets and Expression of ratio these ratios are calculated by using expresses the relationship between debt
❖ Importance to employees liabilities of the firm on different dates to Proportion balance sheet items. Eg : current and equity.
making
:employees want to know the Importance to employees- profitability make comparisons of absolute balances and • Percentage ratio, fixed asset ratio etc. it may be two types such as long term
profitability of the firm, whether they also of changes if any, from one date to • Times ❖ Profit and loss account ratio : debt equity & total debt equity ratio.
Importance to government- tax matter
provide salary increment, bonus, Limitations of financial analysis another. The CBS may be helpful in • Fraction calculated by using P & L a/c. eg : Net • Proprietary ratio – proprietary ratio
fringe benefits etc. ❖ Limitation of financial statements analyzing and evaluating the financial Ratio analysis profit ratio, G/P ratio etc. establishes the relationship between
❖ Importance to Government : to ❖ Ignore price level changes position of the firm over a period of number Analysis of financial statement with the help of ❖ Combined ratio : by using both shareholders’ fund and total asset. This
know how much the firm have to pay of years. accounting ratios is called ratio analysis. balance sheet and P&L a/c. eg : stock shows how much fund have been
Ignore qualitative aspects
the tax to the government. ❖ Spots the symptoms but not diagnosis Common Size Balance sheet Importance or advantages of ratio analysis turnover ratio contributed by the shareholders in the
Limitations of Financial statements ❖ Personal judgment A statement in which balance sheet items {a} Managerial uses of Ratio analysis On the basis of importance total assets of the firm.
• Not precise (due to based on Helps in decision making Primary ratios : the success of any
Types of financial analysis are expressed as the ratio of each asset to ❖
Fixed asset ratio – it is the ratio of fixed to
assumptions and conventions) total assets and the ratio of each liability is ▪ Helps in financial forecasting and business is measured by the amount long term fund or capital employed. The
On the basis of material used
• Influence of personal judgment • External analysis : analysis is done by expressed as a ratio of total liabilities is planning of profit earned. Eg : NP ratio, GP objective calculating this ratio is to ascertain
• Historical records called common-size balance sheet. The Helps in communicating ratio the proportion of long term funds invested in
• Incomplete (only quantitative data) outsiders like investors, creditors etc. common size balance sheet can be used to Helps in co-ordination ❖ Secondary ratios : these ratios are fixed assets.
• Ignore price level changes • Internal analysis : done by the ▪ Helps in control mainly used to explain primary
compare companies of differing size. • Total asset to total debt ratio –
• Static statement management. Common size Income statement {b}Utility to Shareholders/ Investors ratios. This ratio expresses the relationship between
• Lack of comparability On the basis of objectives of the analysis An investor is particularly interested to
The items in Income statement can be On the basis of function total asset and total liabilities. Total assets
• They are dump (further data are Short term analysis: to determine shown as percentages of sales to show the know about the Long term financial position Liquidity ratios
short include total fixed and total current assets.
–
required for further analysis) term solvency, liquidity and earning relation of each item to sales. A significant and profitability position The term liquidity refers to the firm’s Total liabilities include total outside liabilities.
Financial analysis: capacity of the business. relationship can be established between {c}Utility to Creditors ability to meet its current liabilities when It measures the overall solvency of the firm.
The process of analyzing & interpreting Long term analysis : to determine long items of income statement and volume of The creditors or suppliers extend short they become due. Liquidity ratios are used Turnover ratios /activity ratios –
financial statements such as income term solvency, stability and future earing sales. term credit to the concern. They are interested to measure the liquidity position or short Turnover ratios show how efficiently a
statement and balance sheet is called capacity etc. Trend Analysis to know whether financial position of the term financial position of the firm. firm uses its available resources or assets.
financial analysis On the basis of modes operandi It is used when 3 or more years’ concern warrants their payments at a specified • Current ratio – it defined as the These ratios indicate efficiency in asset
Meaning of analysis comparison is given. time or not. ratio of current assets to current management.
• Horizontal analysis : FS for number of
Analysis here means, simplification of Ratio analysis {d}utility to the Employees liabilities. It shows the relationship • Stock turnover ratio –
financial data in the financial statements. It years are analyzed, it is called horizontal A ratio is a simple arithmetical expression The employees are also interested in the between total current assets and Inventory or stock turnover ratio shows the
analysis eg . comparative balance sheet, of the relationship of one number to financial position of the concern especially current liabilities relationship between costs of goods sold and
refers to making the data to speak. comparative income statement, trend
Meaning of interpretation another. profitability because their wage increases and • Quick ratio / Liquid ratio–liquid average inventory or stock. It indicates
analysis, FFS, CFS etc. amount of fringe benefits are related to the the ratio is the ratio of liquid assets to number of times the s tock is converted
Here it means, explaining the meaning and • Vertical analysis : this refers to the study Fund flow analysis
in to
significance of the data so simplified. Analysis and interpretation of fund or volume of profits earned by the concern. current liabilities. It is the measure of sales.
Purpose/ objects of financial analysis of relationship of various items in the FS for working capital changes for the particular {e}Utility to government the instant debt paying ability of the o Stock velocity – generally stock
• Helps in decision making one accounting period. Eg : common size period is called Fund flow analysis Government is interested to know the overall business. turnover ratio is expresses in
• To assess financial statements, ratio analysis etc. Cash flow analysis strength of the industry. •
Absolute quick ratio/super quick times. It can also expressed in
position
• Ascertain operating performance
Procedures of financial analysis Analysis and interpretation of cash or cash limitations of ratio analysis ratio –it is the ratio of absolute liquid months or days. Then it is called
Re arrangement of financial statements
• To determine solvency and liquidity ▪
equivalents changes for the particular Limited use of a single ratio. asset to current liabiltities.it is uses stock velocity.
of the business period is called cash flow analysis ▪ Lack of adequate standards to analyze cash position of business
❖ Comparison
Accounting for management– (Al Jamia Arts and Science College,Poopalam
Accounting for management– (Al Jamia Arts and Science College,Poopalam) Accounting for management– (Al Jamia Arts and Science College,Poopalam)
•
Debtors turnover ratio– Rule of thumb or standard for ratios policies like dividend policies, issue of decreases the working capital of liquid cash at the end, FFS explains Difference between absorption costing and
Debtors turnover ratios explains the The ideal or standard ratio fixed by the shares etc. ▪ A decrease in current liabilities reasons for a net increase or decrease in marginal costing
relationship between net credit sales and different experts for different ratios is called 9. Creditors and financial institutions who increases working capital working capital Absorption costing Marginal costing
average debtors including bills receivables. rule of thumb. have lend money to the firm can assess the 1. Preparation of ledger accounts to 5. it is presented in prescribed format as Both fixed and Only variable costs
This shows how quickly debtors are CHAPTER IV financial strengths and repayment capacity show hidden transactions per AS-3, . Not presented in prescribed variable costs are are charged
converted in to cash. It indicates how FUND FLOW ANALYSIS based on funds. 2. Preparation of fund from operation format. charged.
efficiently the firm collects cash from Fund = working capital Limitations of FFS 3. Fund flow statement 6.
In CFS a schedule of changes in working Stock of finished Stock of finished
debtors. Working capital=Current assets – current ❖ Based on historical data CHAPTER V capital is not required. In FFS a schedule of goods and work in goods and work in
o Average collection period – liabilities ❖ Only rearrangement of data CASH FLOW ANALYSIS changes in working capital is prepared to progress are valued progress are valued
it means the number of days or In a narrow sense it means cash and in a ❖ Cannot reveal continuous changes Cash flow statements ascertain the net increase or decrease in at total cost at marginal cost
months for which debtors broader sense it is capital or all financial ❖ Does note account those do not Cash flow statement is a statement working capital Profit is the basis for Contribution is the
remain outstanding. resources of a business. But the fund is related with working capital. which describes the inflows and outflows of CHAPTER VI decision making base for decision
• Creditors turnover ratio commonly used in its popular sense as working Difference between fund flow statement cash and cash equivalents in an enterprise MARGINAL COSTING making
–
Creditors turnover ratio shows the capital or net current assets. Thus for and balance sheet during a specified period of time. It explains Marginal cost Suitable for external Suitable for internal
relationship between net credit purchase accounting purpose and for preparing funds Fund flow Balance sheet the reasons for changes in a firm’s cash additional cost incurred due to producing reporting reporting
and average creditors including bills flow statements , the term fund means working statement position during an year. an additional unit is called marginal cost. When the production Cost per unit remains
payable. It indicates the number of times capital of the excess of current assets over Statement of It is the statement classification of cash flows Marginal costing increases cost per the same at all levels
the creditors are paid. current liabilities. changes in assets of assets and ▪ Cash flows from operating activities It is the technique of costing in which only unit reduces of production
o Average payment period -It meaning and concept of flow of funds and liabilities liabilities. ▪ Cash flows from investing activities marginal costs or variable are charged to For long term pricing For planning,
means the credit period The term flow means movement and Prepared to show Prepared to ▪ Cash flows from financing activities output or production. The cost of the output policy controlling and
enjoyed by the firm in paying includes both inflow and outflow of fund. The the sources and ascertain financial Importance of CFS includes only variable costs .Fixed costs are decision making in
creditors. term flow of funds means the transfer of uses of fund during position of the firm ❖ Helps in short term planning not charged to output. short run
• Working capital turnover ratio economic values from one asset of equity to a period of time. ❖ Helps in formulating financial policies Features of marginal costing Emphasis on Emphasis on selling
• Fixed asset turnover another. Prepared after Prepared at the end ❖ Base for cash budget • Method of production and pricing aspects
ratio costing
Profitability ratios - the term profitability Objectives/ purpose of FFS balance sheet is of an accounting ❖ Reveal liquidity and solvency • All cost are classified into fixed and Determination of profit under marginal
refers to the ability of a firm to earn Tool for managing working capital prepared period ❖ Helps in efficient cash management variable costing
maximum profit. Profitability ratio measure To know the changes in working capital
No legal Required to ❖ Show the changes in cash position • Only variable costs are Sales XXX
charged
the ability of the firm to earn an adequate • Reveal short term financial strength and compulsory prepare. ❖ Helps in cash control • Tock are valued at variable costs Less variable cost XXX
return on sales. weakness Useful to internal Useful to external ❖ Helps in short term financial decision Absorption costing Contribution XX
• Gross profit ratio - this is the • Anticipate working capital position management parties Limitations of CFS It is the conventional technique. Under this Less fixed cost XX
ratio
of gross profit to sales expressed in Reveal important changes have taken
There is no There is prescribed • Ignores non cash items both fixed cost and variable cost are taken Profit XX
percentage. The main objective of • Historical nature into consideration. No difference is made
place prescribed format format. CVP analysis/Cost profit volume analysis
computing this ratio is to determine Provide a base of budgeting • Limited scope between the fixed and variable. It is also
Steps in preparing fund flow statement It is the study of relationship between cost,
the efficiency in trading or Assess growth of the firm. 1.Statement or schedule of changes in • Easily influenced by managerial decision known as full cost or total cost technique. profit and volume of production.
production activity. Importance of fund flow statement working capital • Does not present true Limitation of absorption costing Importance of marginal costing/CVP
picture.
• Net profit ratio – Net profit ratio is 1.It helps in the analysis of financial Working capital means the excess of Difference between cash flow statement & ❖ Not helpful in selection of product analysis
Operations
the ratio of net profit earned by a 2.It gives answers to many questions like current assets over current liabilities. funds flow statement mix, make or buy decision etc. ➢ Profit Planning
business and its net sales. The happening of N.P, proceeds of sale of F.A etc. Statement of changes in working capital is 1.CFSt is a statement which discloses the ❖ Not helpful for planning and ➢ Cost control
objective of calculating this ratio is to 3. It helps in the proper allocation of resources prepared to show the changes in the inflows and outflows of cash during a period, controlling costs. ➢ Decision making
measure the overall profitability. 4. It acts as a guide for future to the working capital between the two balance FFS is a statement which discloses the sources ❖ Not helpful in flexible budget, tendor ➢ Fixation of selling price
• Operating ratio – operating ratio management. sheet dates. and uses of funds or working capital during a or quotation. ➢ simple valuation of stock
express the relationship between 5. It helps in appraising the use of working Working capital = Current assets - period ❖ Cost per unit will change due to ➢ ascertainment of profitability
operating cost and sales. It indicates capital Current liabilities 2. CFS is prepared on cash basis, FFS is existence fixed cost. Limitation of marginal costing
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