MCA (Sem-1) Theory Examination, 2016-17 Accounting and Financial Management Section - A a) Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. b) Accounting: Accounting is an information system includes the process of recording, classifying, summarizing, reporting, analyzing and interpreting the financial condition and performance of a business in order to communicate it to stakeholders for business decision making c) Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. d) An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. e) Productive wages is an direct expenses. The wages paid to the workers which are directly involved in the production is known as productive wages. Section - B Ans.2 accounting cycle refers to the specific steps that are involved in completing the accounting process. The cycle is like a circle. It begins at one point and revolves through specific steps, before starting again at the same point and then repeating those same steps. The length of the accounting cycle varies from company to company. The accounting process or cycle has the following five steps. 1. Identifying the financial transaction A business may perform several transactions. Of which, only financial transactions are recorded in accounts. In the first step of the accounting process, therefore, financial transactions are identified. Financial transactions are those which are expressed in monetary terms. 2. Recording Of Financial Transactions In the second step of accounting process, all financial transactions performed by the business are systematically recorded in the journal, and subsidiary books. 3. Classifying Financial Transactions In the third step of accounting process, financial transactions are classified mainly into the transaction related with persons that include enterprises, persons, assets and income-expenses. Then, they are recorded in their respective ledger accounts, such as debtors' and creditors' accounts, land and building accounts, commission received accounts, and rent account. 4. Summarizing Financial Transactions
All financial transactions are summarized in this step of accounting process. They are summarized by preparing a trial balance. Preparation of trial balance helps to prepare final accounts which disclose the profit and loss and financial position. 5. Communicating The Results Of Business In the last step of accounting process, the results of business operations such as profit or loss and the company's financial position are communicated to the users. Those users include owners, creditors and managers who need financial information for decision making purposes. Ans-3- Book keeping is the process of recording, in chronological order, the daily transactions of a business entity. It forms part of the accounting information system. On the other hand, Accounting is an information system includes the process of recording, classifying, summarizing, reporting, analyzing and interpreting the financial condition and performance of a business in order to communicate it to stakeholders for business decision making. Double entry system is a record keeping system under which every transaction is recorded in at least two accounts. In double entry accounting, the total of all debit entries must match the total of all credit entries. When this happens, the transaction is said to be "in balance." For example when we purchases furniture in this transaction furniture is coming so Debit furniture and cash is going so credit the cash. Advantages Companies are able to maintain a complete record of every transaction classified as assets, liabilities, expenses, revenue, capital and recorded accordingly. Allows companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records. The trial balance helps to maintain the accuracy of all books of accounts. The financial position of a company can be ascertained at the end of each accounting period, through the preparation of the balance sheet. The matching principle allows companies to accurately assess the profit earned or loss suffered during a period together with details by the preparation of Profit and Loss Account. It provides checks and balances, which prevents frauds and misappropriations as complete information about assets and liabilities are recorded. Affords complete information for purposes of control permitting accounts to be maintained in as much detail as necessary. Disadvantages Double-entry bookkeeping system is complex and harder to understand. The overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further go up as books of accounts become complex in nature. Significant amount of time is required to be spent on recording and maintaining double-entry books of accounts, as every entry needs to be entered twice and cross-checked.
In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot be detected and the trail balance will still tally despite the mistake. Ans-4- Accounting conventions means the guidelines that are followed for preparing financial statements. Conventions may undergo a change with time to bring about improvement in the quality of accounting information. The term 'Concepts' includes those basic assumptions or conditions upon which the accounting is based. The following are the accounting concepts : The Business Entity Concept : According to this concept Business and Businessmen have separate entity to each other that means they are two different persons and the businessman is just like a creditor for the business which can claim an amount equal to the capital, so all the transactions related to businessmen are recorded separately in the business just like in the case of creditor. The Money Measurement Concept : According to the money measurement concept only those transactions and events are recorded in the books which can be measured in terms of money. Non monetary transactions are not recorded in the accounting though they may be very useful for the business. The Going Concern Concept : According to the going concern concept business will continue forever, it will not be closed in near future. Accounting Period Concept : according to this accounting period, each company closed their account at the end of 12 months. These 12 months can be of calendar year or financial year but for the income tax purpose it should be financial year. The Cost Concept : According to the cost concept an asset is recorded in the books at original price that is the price paid to acquire it and reduce it by charging depreciation. The Dual Aspect Concept : According to the dual aspect concept every transaction has two aspects debit and credit. If something is coming there must be something going. The Revenue Recognition Concept : According to the revenue recognition concept revenue is considered to have been realised when a transaction has been entered into and the obligation to receive amount has been established. The Matching Concept : Income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue. The Accrual Concept : According to the accrual concept a transaction is recorded at the time when it takes place not when the settlement takes place. The Verifiable Objective Concept : According to the verifiable objective concept there should be an evidence of each transaction. These evidence includes cash memo, sales bill, credit note etc. Ans-5 A cash flow statement provides information about the changes in cash and cash equivalents of a business by classifying cash flows into operating, investing and financing activities. It is a key report to be prepared for each accounting period for which financial statements are presented by an enterprise. Advantages of Cash Flow Statement
Cash Flow Statements help in knowing the liquidity / actual cash position of the company which funds flow and P&L are unable to specify. As the liquidity position is known, any shortfalls can be arranged for or excess can be used for the growth of the business Any discrepancy in the financial reporting can be gauged through the cash flow statement by comparing the cash position of both. Cash is the basis of all financial operations. Therefore, a projected cash flow statement will enable the management to plan and control the financial operations properly. Cash Flow analysis together with the ratio analysis helps measure the profitability and financial position of business. Cash flow statement helps in internal financial management as it is useful in formulation of financial plans. Sol-6- Sol-7-
Ans-8- Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step towards the preparation of financial statements. It is usually prepared at the end of an accounting period to assist in the drafting of financial statements. The following are some of the errors, which cause the Trial Balance to disagree, in brief: 1. Wrong Totaling of Subsidiary Books: 2. Posting of the Wrong Amount: 3. Posting an Amount on the Wrong side of the Account: 4. Posting Twice to a Ledger: 5. Omission of an account from the Trial Balance (Cash, Bank etc.): 6. Wrong additions or balancing of ledger accounts. 7. Balance of account written to the wrong side of the Trial Balance. 8. Errors made in preparing the list of Debtors and Creditors. 9. Errors made in carrying forward the total from one page to another page. 10. There may be some items to which double entry is incomplete. 11. Wrong totals of the Trial Balance. Ans-9- Out of syllabus Sol-10-
Ans-11- Ratio analysis is used to evaluate various aspects of a company's operating and financial performance such as its efficiency, liquidity, profitability and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating. Advantages 1. It simplifies the financial statements. 2. It helps in comparing companies of different size with each other. 3. It helps in trend analysis which involves comparing a single company over a period. 4. It highlights important information in simple form quickly. A user can judge a company by just looking at few numbers instead of reading the whole financial statements.
Limitations Despite usefulness, financial ratio analysis has some disadvantages. Some key demerits of financial ratio analysis are: 1. Different companies operate in different industries each having different environmental conditions such as regulation, market structure, etc. Such factors are so significant that a comparison of two companies from different industries might be misleading. 2. Financial accounting information is affected by estimates and assumptions. Accounting standards allow different accounting policies, which impairs comparability and hence ratio analysis is less useful in such situations. 3. Ratio analysis explains relationships between past information while users are more concerned about current and future information. Sol-12-