Sample Questions

 

Q. Narrate the role of computers in accounting. (June 03)

Computers are probably the only tool available that can help us in storage and organization of data and information. Today computer industry is the biggest industry worldwide and has a great impact on the society. The computers became popular because of the following features:

• Speed
• Reliability
• Diligence
• Versatility
• Large memory.

 Role of computers in accounting & Business organizations

Help in Operations: Computers help in various accounting operations like invoicing, calculation of wages, maintaining ledger, etc.

Help in Controlling: With the help of computers, a business concern can have better control over its operation. They help in budgetary control, sales analysis, credit control, etc.

A computer can process almost any type of information required by a business. Some areas where computers are most popular are listed below:

• Inventory control
• System analysis
• Inventory control
• Sales accounting
• Market research
• Purchase accounting
• Planning & control
• Quality control
• Management accounting

 

Q. Examine the utility of available software for performing accounting and finance functions. Put forth your suggestions for an ideal computerized system of accounting & finance. (June 03)

The modern age is called the "Computer Age" or "Information Age" because computers are becoming very popular. People use computers in a wide variety of ways. In business, computers track inventories with bar codes and scanners, check the credit status of customers, and transfer funds electronically. In homes, tiny computers embedded in the electronic circuitry of most appliances control the indoor temperature, operate home security systems, tell the time, and turn videocassette recorders on and off. Computers in automobiles regulate the flow of fuel, thereby increasing gas mileage. Computers also entertain, creating digitized sound on stereo systems or computer-animated features from a digitally encoded laser disc. Computer programs, or applications, exist to aid every level of education, from programs that teach simple addition or sentence construction to programs that teach advanced calculus. Educators use computers to track grades and prepare notes; with computer-controlled projection units, they can add graphics, sound, and animation to their lectures. Computers are used extensively in scientific research to solve mathematical problems, display complicated data, or model systems that are too costly or impractical to build, such as testing the air flow around the next generation of space shuttles. The military employs computers in sophisticated communications to encode and unscramble messages, and to keep track of personnel and supplies.

 The computers have become popular because of:

• Speed
• Reliability
• Diligence
• Versatility
• Large memory.

There are many softwares available in the market for the purpose of maintaining accounts such as TALLY, BUSSY, Account Manager, etc. The most widely accepted is the TALLY. TALLY provides the following functions for accounting procedure:

• Maintaining ledger & journals
• Preparing balance sheet, profit & loss a/c.
• Ratio Analysis
• Maintaining funds & cash flow statement
• Preparing reports

 Ideal computerized system of accounting & finance must be able to perform following functions:

• Generating reports
• Fast access of accounts
• Comparison of records
• Easy maintenance
• Flexible
• Cheap
• Should have some artificial intelligence
• Secure
• Forecasting should be allowed
• Record processing should be easy

Q. Explain the latest and other important sources of long-term and short-term financing. (June 02)

Following are some long-term & short-term sources of financing for a business:

 Long-term sources

Shares: It is the most important source for raising permanent or long-term capital. Section 86 of Companies Act, 1956 provides that share capital of a company formed after April 1, 1956 or the share capital issued after that date, shall be of only two kinds, viz. Preference share capital and equity share capital.

Preference shares: According to Section 85 of The Companies Act, 1956, a preference share is one, which fulfills the following conditions:

1. A preference share has a preferential right to dividend to be paid either as a fixed amount or an amount calculated by a fixed rate which may be either free of or subject to income tax.
2. A preference share has the right to the repayment of capital before any thing is paid to equity shareholders on the winding up of the company.

Equity Shares: According to Section 85 of The Companies Act, 1956, an equity share is a share which is not a preference share.

Equity shares entitle to whole of the profits earned by the company, after a fixed dividend on preference shares that has been paid by it, are equity shares. Equity shares have no right to either a fixed dividend or repayment of a pre-determined amount of capital in the event of winding of the company.

Debentures: When a company desires to borrow a considerable sum of money for its expansion, it invites the general public to subscribe to its debentures. A debenture is a certificate issued by the company acknowledging the debt due by it to its holders and is issued by means of a prospectus in the same manner as shares. The following are the various types of debentures issued by a company: Simple or naked Debentures, Secured and Mortgage Debentures, Redeemable Debentures, Perpetual or Irredeemable Debentures, Convertible Debentures, Non-Convertible Debentures.

Public Deposits: Public deposits are the fixed deposits accepted by a business enterprise directly from the public. This source of raising short-term & medium finance was very popular in absence of banking facilities. Public deposits have several advantages such as simple & convenient source of finance taxation benefits, trading on equity, no need of securities and an inexpensive source of finance.

Ploughing back of profits: It means reinvestment by concern of its surplus earnings in the business. It is an internal source of finance & is suitable for an established firm for its expansion, replacement, etc.

Loans from Financial Institutions: Several financial institutions like LIC, State Finance Corporation, Industrial Development bank, etc. also provide loans. This source is more suitable for medium term demands of working capital. Interest is charged at fixed rate on these loans.

 Short-term Sources

Trade Credit: It is the credit extended by the suppliers of goods in the normal course of business. It is an important source of short-term finance. The credit-worthiness of the firm and the confidence of its suppliers are the main basis of securing trade-credit.

Advance payment: Some business houses get advances from their customers and agents. It is a cheap source of finance.

Installment Credit: In this method assets are purchased and the possession of goods is taken immediately but the payment is made in installments. Generally, interest is charged on the unpaid amount.

Commercial Paper: It represents unsecured promissory notes issued by firms to raise short-term funds. In India only large companies enjoy high credit rating & can issue commercial paper to raise short-term funds.

Deferred Income: These are incomes received in advance before supplying goods or providing services.

Q. What do you understand by Cash Flow Statement? What are the broad headings and important sub-classifications to be incorporated under as per accounting standard? (June 03)

A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only those sources of funds are taken which provide cash and only the uses of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.

A Cash Flow Statement is a statement, which summarizes the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.

 

Cash Flow Statement for the year ending----

 

Q. Elucidate the various cost reduction techniques, highlighting the importance of cost reduction under the present scenario. How is it different from cost control? (June 02)

Cost accounting is concerned with:

• Ascertaining the costs
• Controlling the costs
• Reducing the costs

Cost reduction is different than cost control methods. These may involve the following:

• More production in a specified time. Thus cost pert unit will be less.
• More production with the available work force
• Optimum utilization of plant and machinery

The main idea behind the cost reduction technique is to reduce cost of production per unit of a product. Cost reduction techniques to reduce material costs are inventory control techniques. These include EOQ (Economic Order Quantity) which reduces inventory-carrying costs. Queuing technique help in optimum utilization of plant & machinery.

 Difference between Cost Controlling & Cost Reduction Techniques

Both are part of cost accounting. The former starts before production starts, but the latter takes place during the production process. Cost control can be applied to direct cost only but cost reduction techniques can be applied for both direct & indirect costs. Cost control is used in direct labour costs, by choosing minimum labour for desired production. Cost reduction techniques will see that the labour is used for obtaining more than targeted production.

 

Q. Write short notes on the following:

• Accounting for price level changes (June 02)
• Shareholder's Funds. (Dec. 02)

Accounting for price level changes (June 02)

Price level changes often make the comparison of figures difficult over a period of time. Due to rising prices, the value of fixed assets continuously increases year after year. In such cases if any comparison is to be made, then proper adjustments for price level must be made. The assets acquired at different times are shown at the historical costs, as a result the financial analysis will not yield dependable results. A change in the price affects the validity of ratios calculated for different times.

Similarly, there may be two firms- one having purchased the assets at a lower price and another at a higher price. Return on investment calculated for these firms will differ substantially. The firm which purchased the assets at lower price, will show a higher rate of return than the firm which purchased the assets at a higher price. Therefore, results of inter-firm comparison may also not be dependable.

Shareholder's Funds. (Dec. 02)

Shareholder funds includes Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets. Shareholders funds is termed as a liability of the company and is shown on the liability side of balance sheet.

Q. How will you compute return on capital employed? Explain with the help of imaginary figures, taking items of Profit & Loss acount and Balance sheet (June 03)

This ratio shows the relationship between the profit earned before interest and tax and the capital employed to earn such profit.

 

Return on Capital Employed		Net Profit before Interest, Tax and Dividend
	=		x	100
		Capital Employed

Where Capital Employed = Share Capital (Equity + Preference) + Reserves and Surplus + Long-term Loans – Fictitious Assets

Or Capital Employed = Fixed Assets + Current Assets – Current Liabilities

Objective and Significance: Return on capital employed measures the profit, which a firm earns on investing a unit of capital. The profit being the net result of all operations, the return on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great importance to the shareholders and investors and also to management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. This ratio influences the market price of the shares. The higher the ratio, the better it is.

Example: Following is the Balance Sheet of Wye Ltd. as on December 31, 2004:

Find out the Return on Investment (Return on capital employed).

Return on Investment		Net Profit before Interest and Tax
	=		x	100
		Capital Employed

 

	Rs. 6,00,000
=		x	100	=	15.4%
	Rs. 39,00,000

Workings

Net Profit before Interest = Rs. 5,00,000 + Rs. 1,00,000 (Interest on Loan) = Rs. 6,00,000

Capital Employed = Fixed Assets + Current Asset – Current Liabilities

= Rs. 29,00,00 + Rs. 25,00,000 – Rs. 15,00,000 = Rs. 39,00,000

Or

Capital Employed = Share Capital + Reserves and Surplus + Long-term Loans – Fictitious Assets

= Rs. 20,00,000 + Rs. 5,00,000 + Rs. 5,00,000 + Rs. 10,00,000 – Rs. 1,00,000 = Rs. 39,00,000

Q. Anil invested Rs. 40,000 of his own in a florist shop and borrowed another Rs. 20,000 from a bank for business use. At the end of first year of operations, he found Rs. 72,000 in his shop's bank account. He owed his suppliers Rs. 12,000 and had not repaid the bank loan. He had no other business assets other than cash. During the year he paid himself a salary of Rs. 24,000

i) What conclusions would you draw from his first year's operations?

ii) For what decisions could this information be used?                                                            

 

(June 01)

 

Statement of affairs of Mr. Anil

 

Statement showing profit or loss

(i) In the first year anil has earned a profit of Rs. 24,000

(ii) This type of information is useful in preparing financial accounts, balance sheet, calculating ratios, etc., Earnings information is useful because it helps in measuring the achievement of the business. It helps in identifying the problems currently by the firm.

Q. Regent Ltd. has a sales revenue of Rs. 10,000 and depreciation for the period is Rs 2,000. The other expenses are Rs 9,000.

(1) What would be the net loss for the period ?

(2) What is the amount of funds generated from operations during the period ?

(3) Under what circumstances can the funds from operations be zero ?

(Dec. 01)

Solutions :

(i)

Sales revenue	10,000
Less: Operating expenses	9,000
Contribution	1,000
Less: Depreciation	2,000
Net loss	(1,000)

(ii) Funds from operation = Net loss + Depreciation

= (1,000) + 2,000

= Rs. 1,000

(iii) Funds from operation can be zero when the operating expenses excluding depreciation are equal to sales revenue.