Short Answer Questions 1. Define accounting. Why is it called language of business? Accounting is defined as ―an art of recording, classifying and summarizing transactions and events in a significant manner and in terms of money. It is called language of business because the financial performance and the financial position of any company need to be conveyed to the stakeholders of any business concern. This can be done by systematically preparing the financial statements and presenting to the interested parties. 2. State the significance of prudence principle? It is also termed as ‗Conservatism convention‘, according to which ―anticipate no profit but provide for all possible losses‖, such as Provisions for Bad debts and discount on debtors, so that the profits are not inflated. Hence secret reserves are not permitted. 3. Distinguish ‘grouping’ and ‘marshaling’ of assets and liability. Grouping means putting together items in Balance Sheet of similar nature under a common heading. Marshalling refers to order in which assets and liabilities are shown in B/S either in order of liquidity or permanency. 4. What is meant by dual aspect of accounting system? Dual aspect of Accounting describes that every transaction should have two aspects. Two aspect of transaction are Debit and Credit. Every ‗debit‘ has a corresponding credit so the total of all debits must be equal to total of all credits. 5. What is journal and imprest system of petty cash book? The advance paid in the beginning of the period and reimbursement of the amount spent for petty expenses, so that the same amount will be maintained for meeting the petty expenses, i s referred as ―imprest‖ System. In journal system, recording of transaction not only be inconvenient but also consume a lot of valuable time of the cashier. At the end of month, Petty cashier submits a statement of account of expenses incurred by him and gets a fresh advance. 6. Define fixed cost and variable cost? Fixed Costs are the costs that don‘t change with changes in the activity level e.g. salaries & rent. Variable costs are the costs that are sensitive to changes in level of activity e.g. raw materials direct labour. . 7. Why a flexible budget is considered superior to fixed budget? Flexible budget is superior to fixed budget for following reasons: a. Fixed budget does not change with level of activity but flexible is meant for any change in level of activity. b. Fixed budget is an unrealistic yardstick in case of level of output does not match with planned budgeting. c. Flexible budget is more suitable in case of new Venture because of uncertainties in demand.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Short Answer Questions
1. Define accounting. Why is it called language of business?
Accounting is defined as ―an art of recording, classifying and summarizing
transactions and events in a significant manner and in terms of money. It is
called language of business because the financial performance and the
financial position of any company need to be conveyed to the stakeholders of
any business concern. This can be done by systematically preparing the
financial statements and presenting to the interested parties.
2. State the significance of prudence principle?
It is also termed as ‗Conservatism convention‘, according to which ―anticipate
no profit but provide for all possible losses‖, such as Provisions for Bad debts
and discount on debtors, so that the profits are not inflated.
Hence secret reserves are not permitted.
3. Distinguish ‘grouping’ and ‘marshaling’ of assets and liability.
Grouping means putting together items in Balance Sheet of similar nature
under a common heading.
Marshalling refers to order in which assets and liabilities are shown in B/S
either in order of liquidity or permanency.
4. What is meant by dual aspect of accounting system?
Dual aspect of Accounting describes that every transaction should have two
aspects. Two aspect of transaction are Debit and Credit. Every ‗debit‘ has a
corresponding credit so the total of all debits must be equal to total of all
credits.
5. What is journal and imprest system of petty cash book?
The advance paid in the beginning of the period and reimbursement of the
amount spent for petty expenses, so that the same amount will be
maintained for meeting the petty expenses, is referred as ―imprest‖ System.
In journal system, recording of transaction not only be inconvenient but also
consume a lot of valuable time of the cashier. At the end of month, Petty
cashier submits a statement of account of expenses incurred by him and gets
a fresh advance.
6. Define fixed cost and variable cost?
Fixed Costs are the costs that don‘t change with changes in the activity level
e.g. salaries & rent.
Variable costs are the costs that are sensitive to changes in level of activity
e.g. raw materials direct labour. .
7. Why a flexible budget is considered superior to fixed budget?
Flexible budget is superior to fixed budget for following reasons:
a. Fixed budget does not change with level of activity but flexible is meant
for any change in level of activity.
b. Fixed budget is an unrealistic yardstick in case of level of output does
not match with planned budgeting.
c. Flexible budget is more suitable in case of new Venture because of
uncertainties in demand.
8. Determine margin of safety from the information given below:
Total Fixed cost – Rs. 4500; Total variable cost – Rs.7500;
Total sales – Rs.15000 and units sold – 5000
Sales at BEP: Fixed Expenses/P/v Ratio 7500*3 = 4500 units 5 Contribution: Sales – Variable Exp. =15000-7500 =7500 P/v Ratio = C/S = 7500/4500 = 5/3 MOS = Actual Sales – Sales at BEP 5000-4500 = 500 units.
9. Write a short note on the terms ‘cost’ and ‘costing’.
Cost is the value of resources used up when carrying out the task or
particular activity. It consists of material, labour and resources. Costing are
the techniques or method applying for ascertaining costs. It covers many
aspects like labour overhead and marginal or absorption costs.
10. State the importance of budgeting.
a. Helps Enforce Planning.
b. Better Coordinate Activities.
c. Helps in Evaluating Performance.
d. Helps in Controlling.
e. Helps in Allocating Resources.
f. Helps in Motivating Managers & Employees.
11. What do you understand by ‘financial statement analysis?
Financial statements analysis is the process of identifying the financial
strength & weakness of the firm by properly establishing relationship between
items of the Balance Sheet and Profit & Loss A/C. It is to assess and interpret
the result of past performance and current financial position.
12. State the importance of EPS and ROI.
ROI reflects the total earnings produced by the total assets of the firm. It
represents the before tax and interest expenses return on invested capital.
ROI: PBDIT/Total Assets or Investments.
EPS represents the return per shares issued by the company. It is directly
connected to profitability.
EPS: Net Profit / No. of shares.
13. List any two advantage of trend analysis.
a. Understanding the changes in financial statements from year to year is
easier when Percentages changes are available.
b. Using previous year‘s data Percentage change can identify the future
pattern of movements in given data.
14. How does cash flow statement differ from fund flow statement?
a. Cash flow is concerned only with change in cash position while Fund flow
is concerned with change in working capital position.
b. Cash flow is more useful to the management as a tool of financial analysis
in short periods as compared to Fund flow.
c. Another distinction between them is techniques of their preparations.
15. Explain accounting cycle.
Accounting Cycle is described as follows:
a. Record the transaction in journal or Special journals with voucher.
b. To post the transaction from journal to Ledger for further analysis and
having balances of each account.
c. Prepare the trial balance with the ledger‘s balances.
d. To make adjustment and closing entries.
e. Prepare Final Accounts or Financial statements.
16. explain accrual concept
It states that Revenues are recognized when they simply become receivables.
Accrual Concept focuses on the economic impact of transactions. It makes a
distinction between the actual receipt of cash and the right to receive cash. In
this case firm maximizes Assets.
17. what are the two limitation of financial accounting
a. Accounting information is sometimes based on estimates.
b. Accounting information cannot be used as only test of managerial
performance on basis of more profit.
c. Fixed assets are recorded in the accounting records at the original cost.
18. explain kaizen costing
Kaizen is Japanese word which means Change for Better. It refers to continual
and gradual improvements made through innovation at large investments in
technology. It is the technique of cost reduction during the manufacturing
process.
19. what is the objective if financial accounting
a. It enables the management to find out the overall as well as department
wise efficiency of the firm.
b. To know the short term and long term solvency of firm.
c. It is used in inter firm comparison for further change in decision making
process.
20. how would you calculate return on investment
ROI tells about the overall profitability of the company in relation to total
investment in company. It is calculated as:
ROI = Operating Profit or PBDIT
___________________________
Total Assets / Total Investment
21. write a two limitation of historical Cost accounting
a. Market value or current value of fixed asset undergoes frequent changes
and financial statements will have to be changed every year.
b. Recording at market value is both costly and time consuming.
c. They are not affected by decision and irrelevant for decision making.
22. what is trend analysis
Trend Analysis is an important and useful technique of financial statement
analysis. It ascertains a relationship between of each year‘s data to the base
year‘s data. It involves figuring out the price index level or growth rate with
respect to previous year or year that has been a standard (Base Year).
23. what are indirect cost
Costs that are not identifiable with the end product are called indirect costs
and include the following: Lubricants, Scrap, Indirect Material, and
Depreciation. Indirect costs are called often overhead expenses .
24. Difference between marginal costing and absorption costing
a. Marginal cost values stock at variable cost basis while in Absorption stock
is valued at full cost.
b. In long run decision making based on marginal cost approach nay result in
contribution failing to cover fixed cost and losses being incurred but
absorption does not allow that.
c. Marginal costing aids profit planning whereas Absorption is useful to
identify inefficient utilization of production resources.
25. what are fixed budget
a. This is the budget which is designed to remain unchanged irrespective of
level of activity.
b. It is prepared for definite production and capacity level.
c. It is not adjusted according to activity level and not effective tools of cost
control.
26. What are decision packages?
Each separate activity of the organization is identified and called a decision
package. It comes under Zero Based Budgeting (ZBB) and identifying activity
is part of Activity Based Costing (ABC).It is a document that identifies and
describes a specific activity to evaluate it and decide whether to approve or
disapprove.
27. What is margin of safety?
Margin of safety has great importance in BEA. It is difference between actual
sales to sales at breakeven point.
MOS = Actual Sales – Sales at BEP
MOS= Profit/P/v Ratio.
28. Define a double entry system.
Double Entry accounting first introduced by Luca Fra Paccoli‖ an Italian
mathematician. Every ‗debit‘ has a corresponding credit so the total of all debits
must be equal to total of all credits.
29. What is business entity concept?
The business concern is artificially formed as a separate legal entity, taking
the form of a Proprietorship concern or a Partnership firm or a Private limited
Company or a Public Limited Company. Thus the Proprietor or Partners or
Promoters is/are considered distinct from his/their own business. Without
such a distinction the affairs of the firm will be mixed up with the private
affairs of the Proprietor or Partners or Promoters and the true picture of the
firm will not be available. Hence the business concern (entity) is to be
considered different from the owner/s also referred as Separate entity
concept.
30. Discourse accounting as a information system.
An accounting system consists of personnel, procedures, devices and record
used by an organization which helps in development and structure of
accounting information and communicating this information to decision
makers. Design and capabilities of these systems vary greatly from
organization to organization. In very small business, the accounting system
may consist of little more than a cashbook and a cheque book and may be an
annual interaction with the chartered accountant for filing tax return. In very
large business.
31. Explain the concept of target costing.
It is defined as "a cost management tool for reducing the overall cost of a
product over its entire life-cycle with the help of production, engineering,
research and design". A target cost is the maximum amount of cost that can
be incurred on a product and with it the firm can still earn the required profit
margin from that product at a particular selling price.
Target costing involves setting a target cost by subtracting a desired profit
margin from a competitive market price. To compete effectively, organizations
must continually redesign their products (or services) in order to shorten
product life cycles.
32. What is current purchasing power of accounting method.
Changes in price level should be reflected in the financial statement through
current purchasing power (CPP). For measuring changes in price level and
incorporating and true changes in financial statements, index numbers are
used. Price Index is used to convert the values of various items in Financial
statements.
33. What is meant by operating activities?
Operating Activities are those which are carried from getting input to convert
in output and getting revenues. This are directly related to earn profit and
related to part of production. They generally result from the transactions and
events that enter into determination of profit.
34. Mention the purpose of preparing cash flow statement.
a) It is very useful in understanding the cash position of a firm.
b) It helps management to understand the past behavior of the cash
cycle
and to control the usage of cash in future.
c) The repayment of loans.
d) The cash flow statement is helpful in making short-term financial
decision relating to liquidity, and the way and means position of firm.
35. How labor mixed variance calculated.
LMV is the different in labour cost due to change in composition of the labour
force. In order to calculate this variance, the total actual hours spent is
compared with the revised standard hours. The revised standard hour are
calculated as follows:
Actual hours (total).standard ratio
LMV = SR (RSH – AH)
36. What is meant by expense center?
An expense centre is responsibility centre in which inputs not output are
measured in monetary terms. Expense or Cost centre a department in
organization in which manager is held responsible only for cost incurred and
maintain systematic records.
37. What is objective of preparing common size financial statement.
Financial statements when presented in absolute figures, it is hard to
understand and interpret. So each item is converted into percentage of total
assets or capital.
We can find how much percentage of cost is incurred in generating so much
revenue.
38. Difference between standard cost and estimated cost.
Standard cost:
(1). It is a regular system of account based upon estimation and time
schedule.
(2). It is used for effective cost control and to take proper action to
maximize efficiency.
Estimate cost:
a) It used as statistically data which leads to lot of guess work.
b) It can be used where costing is in operation.
39. Mention two usage of management accounting.
a. Planning & Policy formulation.
b. Helps in interpretation process.
c. Helps in decision making and controlling.
d. Helps in reporting, motivating and organizing.
40. Explain cash budget.
This budget represents the amount of cash receipts and payments and a
balance during given period. It is prepared for getting useful information on
basis of monthly or weekly.
a. It ensures sufficient cash.
b. It reveals surplus amount and the effect of fluctuations on cash
position.
41. Write an accounting equation. What does it signify?
An accounting equation is a statement of equality between the resources
and the sources which finance the resources and is expressed as follows:
Sources of Funds = Uses of Funds
Or
Equities = Assets
Owner‘s equity + Outsiders liability = Assets
42. Write three principle of accounting.
The Going Concern Concept: The entity will continue to operate in the future.
The Cost Principle: Assets and services acquired should be recorded at their
actual cost.
Measurement Concept: The monetary unit is the principle means for
measuring assets and equities.
43. explain the convention of conservation .
Convention of Conservatism:-
―Anticipate no profits but provide for all possible losses‖
Policy of ‗caution‘ & ‗playing safe‘. It is also called Prudence Principle.
Accountant should record not only actual loss but also losses that likely to
occur. E.g. Provision for bad debts, redemption reserve.
44. What are cost driver.
Determination of Cost Drivers completes the last stage of the ABC model.
Cost Drivers trace, or link, the cost of performing certain Activities to Cost
Objects.
For example, taking orders for existing customers may be linked to specific
customers based on the number of orders taken, if each order takes
approximately the same amount of time. If order taking time varies based on
the customer, this cost may be linked based on another driver or multiple
drivers.
45. How are outstanding expenses treated in final account.
These are the expenses incurred within the accounting year but the payment
has not been made. O/S or unpaid expenses should be added to the
concerned expenses A/C in P&L a/c and will be shown as a current liability in B/S.
46. What is common size statement?
This technique of taking the highest figure as the base figure and converting
every other figure in that statement to a percentage of the same is known as
vertical analysis. This helps us in finding out what has been the relative
change as a percentage of the base figure so that we can look at any
performance lacunas and understands the reason for the same as also
compare with other companies. Involves expressing comparison in
percentages of the current period and past period.
47. Explain the term funds.
The term funds as cash and they concerned themselves with the movements
in the cash account. Funds may be defined in different ways depending upon
the purpose of analysis .however; the following are most commonly used
definitions:
a. Funds mean cash,
b. Funds mean net working capital, and
c. Funds mean all financial resources.
48. What is human resources accounting.
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested
parties‖. HRA, thus, not only involves measurement of all the costs/
investments associated with the recruitment, placement, training and
development of employees, but also the quantification of the economic value
of the people in an organization.
49. What is significance of P/E ratio?
PRICE EARNING RATIO: PE Ratio indicates the number of times the Earning
per Share is covered by its market price.
P/E RATIO = Market Price per Equity Share/Earning Per Share
This ratio tells us about how much the market discount they earnings.
Obviously, the higher the ratio the better.
50. Difference between social cost and social benefit.
Social Cost: It may include the effect on social community who might have to
live in the shadow of its premises and how it engages with its customers,
workplace, and impacts on environment.
Social Benefits: customers. Services, users or clients can be involved in the
social process. It can be used in strategic planning with great deal of flexibility
within the framework.
51. Explain the term cost object.
A cost object is tangible input for a product or service provided like labour
and material. Cost of employing labour can be directly fixed as for employing
labour as ―per man per hour‖ or ―per man per day‖. So the labour is cost
object as it is directly associate with it.
52. What is opportunity cost?
Opportunity costs are alternative costs or the returns from the next best
alternative use of the firms resources which the firm foregoes in order to avail
of the returns of the next best use of the same resources e.g.: suppose a
businessman can buy a lathe machine or a paper pressing machine with the
help of limited capital which can earn him rs 50,000 and rs 70,000. if he
chooses the latter he would have foregone the opportunity of earning rs
50,000,thus ,his opportunity cost is rs 50,000.
53. Difference between period cost and product cost.
Product cost is the cost of purchasing or manufacturing inventory. Until the
goods are sold, product cost represent inventory and they reported as asset
in B/S.
Costs which are associated with time periods rather than with the purchase or
manufacture like selling and general expenses. These are charged directly to
expense account on assumption that benefit is recognized when cost is
incurred.
54. Difference between direct cost and indirect cost.
Direct cost – expenses incurred directly in producing the goods or services.
It is incurred for and may be conveniently identified with a particular cost
center or cost unit. Material, labour and direct expenses.
Indirect costs - Not directly chargeable to production of goods. These costs
are those costs, which are incurred for the benefit of a number of cost centers
or cost unit and therefore, cannot be conveniently. Salary of manager, office
Rent and selling and distribution expenses.
55. What is meant by ‘margin of safety’ and ‘angle of incidence’?
MARGIN OF SAFTY: It is the difference between the total sales and break-
even sales. It may be expressed in monetary term or as a percentage.
MOS= (Actual sales- break- even sales)
ANGLE OF INCIDENCE: this is an angle formed between the cost line and
revenue line where they intersect each other.. It indicate rate of profit earned by the business.
56. Write a short note on profit center.
Profit Centre is that department where the manager is held responsible for
both costs (inputs) and revenues (outputs) and thus for profit. Despite the
name, a profit centre can exist in nonprofits organizations.
A centre, whose performance is measured in terms of both - the expense it
incurs and revenue it earns, is termed as a profit centre.
57. Name any four non operating items.
a. Depreciation.
b. Goodwill written off.
c. Loss on sale of Machinery.
d. Preliminary expenses written off.
e. Gain on Sale of Assets.
58. What is Human Resource Accounting?
Human Resource Accounting is ―the process of identifying and measuring data
about human resources and communicating this information to interested
parties‖. HRA, thus, not only involves measurement of all the costs/
investments associated with the recruitment, placement, training and
development of employees, but also the quantification of the economic value
of the people in an organization.
59. What is Benchmarking?
Benchmarking is the continual search for the most effective method of
accomplishing a task by comparing existing methods and performance levels
with those of organization or with subunits within the same organization.
These practices are referred to best practices. Benchmarking is also called
Competitive Benchmarking.
60. What is Reengineering?
It is the contrast to the concept of Kaizen Costing, which involves small &
incremental steps toward gradual improvement but Reengineering involves a
giant leap. It is the complete redesign of a process with an emphasis on
finding creative new ways to accomplish an objective. It is starting from
scratch to redesign a business process.
61. Given the following details, Determine the ‘Margin of Safety’
sales.
Profit earned Rs. 24000, Selling price per unit Rs.10; Marginal cost
per unit Rs.7.
MOS = Profit/P/v Ratio
P/V Ratio = Contribution/Sales 10-7/10 = 3/10
MOS = 24000*10/3 = 80000 units.
62. What is Semi variable cost?
It is a cost that comprises both fixed and variable elements. For example a
telephone cost consists of a fixed rental charge and variable cost associated
with calls made.
63. Define Financial Audit.
It is the audit of financial statements and aims to know whether financial
statements are prepared according to Accounting Principles and Conventions.
Whether financial statements present a true & fair view of business results.
64. From the information given below, calculate Stock Turnover Ratio.