Assignment Code: MMPC-004/TMA/JULY/2024

Course Code: MMPC-004

Assignment Name: Accounting For Managers

Year: 2024

Verification Status: Verified by Professor

1. What are the objectives of preparing Financial Statements? Describe the basic concepts of income determination. 

Ans) Objectives of Preparing Financial Statements 

Financial statements are formal records that provide an overview of a company's financial performance and position over a specific period. The primary objectives of preparing financial statements are: 

1. Provide Information to Stakeholders: Financial statements serve as a critical source of information for various stakeholders, including investors, creditors, employees, regulators, and management. These stakeholders use the information to make informed decisions regarding investment, credit, employment, and compliance. 

2. Assess Financial Performance: The income statement or profit and loss statement shows the company's profitability over a period by summarizing revenues, expenses, and net profit or loss. This helps stakeholders evaluate the company’s financial performance and its capacity to generate profits. 

3. Evaluate Financial Position: The balance sheet provides a snapshot of a company's assets, liabilities, and shareholders' equity at a specific point in time. It helps in assessing the company’s financial stability, liquidity, and capital structure. 

4. Aid in Decision-Making: Financial statements provide management with insights into the company's operations, enabling them to make strategic decisions regarding resource allocation, cost control, pricing, and expansion. 

5. Ensure Legal Compliance: Companies are required to prepare financial statements as per statutory regulations and accounting standards. This ensures transparency, accuracy, and consistency in financial reporting, fostering trust among stakeholders. 

6. Facilitate Taxation and Auditing: Financial statements provide the basis for determining tax liabilities and are used by external auditors to verify the accuracy and fairness of the company's financial records. 

Basic Concepts of Income Determination 

Income determination is a crucial concept in accounting that deals with measuring the financial performance of a business. The key concepts include: 

1. Revenue Recognition Principle: Revenue is recognized when it is earned, irrespective of when the cash is received. This principle ensures that income is recorded in the period it is earned, which aligns with the accrual basis of accounting. It prevents the overstatement or understatement of income. 

2. Matching Principle: This principle states that expenses should be matched with the revenues they help generate in the same accounting period. For example, the cost of goods sold is recorded in the same period as the revenue from the sale of those goods. This helps in presenting a true picture of the company’s profitability. 

3. Accrual Basis of Accounting: Under this concept, income is recognized when it is earned, and expenses are recognized when they are incurred, regardless of when the cash transactions occur. This method provides a more accurate reflection of a company’s financial performance over a period. 

4. Conservatism Principle: This principle dictates that potential expenses and losses should be recognized as soon as they are foreseeable, but revenues should only be recognized when they are certain. This approach ensures that the company does not overstate its financial position. 

5. Consistency Concept: This concept requires that companies consistently apply the same accounting methods and principles from one period to another. This consistency allows for meaningful comparison of financial statements over different periods, aiding in income determination. 

6. Materiality Concept: Only those transactions that have a significant impact on the financial statements should be recorded. Insignificant details are omitted to avoid clutter and provide a clearer view of the business’s financial position. 

7. Cost Principle: All assets are recorded at their original cost of purchase. This principle ensures that the financial statements are not distorted by fluctuating market values, thus providing a consistent basis for evaluating financial performance. 

2. In context of Cash Flow Statement, what is cash and cash equivalent? In what categories cash flows are classified and explain how cash flow in each activity is calculated as per AS-3. Describe how cash flow statement is prepared under Direct Method. 

Ans) Cash and Cash Equivalents in a Cash Flow Statement 

Cash and cash equivalents refer to the most liquid assets on a company's balance sheet, which are easily convertible to a known amount of cash with minimal risk of changes in value. These typically include: 

1. Cash: Actual money available in the form of currency or bank balances. 

2. Cash Equivalents: Short-term, highly liquid investments that are readily convertible to cash. Examples include treasury bills, commercial paper, and money market funds with a maturity of three months or less from the acquisition date. 

Cash and cash equivalents are the starting point for preparing a cash flow statement, which shows the inflows and outflows of cash over a period, providing insights into a company's liquidity and financial health. 

Categories of Cash Flows as per AS-3 

According to Accounting Standard 3 (AS-3) on Cash Flow Statements, cash flows are classified into three categories: 

Operating Activities: These are the principal revenue-generating activities of the business and include all cash transactions related to the day-to-day operations. Cash flows from operating activities are calculated by adjusting the net profit or loss for non-cash items, such as depreciation, changes in working capital (receivables, payables, inventory), and other adjustments like gains or losses from investing and financing activities. 

Investing Activities: These involve cash flows related to the acquisition and disposal of long-term assets, such as property, plant, and equipment, and investments. Cash inflows include sales of assets, repayments of loans given to others, and receipts from investments. Cash outflows include purchases of assets and investments, and loans given to others. The net cash flow from investing activities is determined by subtracting the total cash outflows from the total cash inflows related to investing activities. 

Financing Activities: These relate to activities that change the size and composition of the equity capital and borrowings of the company. Cash inflows include proceeds from issuing shares, debentures, bonds, and borrowings. Cash outflows include repayment of loans, redemption of shares, and dividend payments. The net cash flow from financing activities is calculated by subtracting cash outflows from cash inflows associated with financing. 

Preparation of Cash Flow Statement under Direct Method 

The Direct Method of preparing a cash flow statement involves reporting all major classes of gross cash receipts and payments. This method provides a detailed view of cash inflows and outflows from operating activities. 

(a) Operating Activities: 

1. List all cash receipts, such as cash received from customers, cash paid to suppliers, and cash paid to employees. 

2. Include cash payments for operating expenses like rent, utilities, and taxes. 

3. The net cash flow from operating activities is obtained by subtracting total cash payments from total cash receipts. 

(b) Investing Activities: 

1. Identify cash inflows from the sale of long-term assets, investments, or interest received. 

2. Identify cash outflows for purchasing long-term assets, investments, or loans given. 

3. Calculate the net cash flow from investing activities by subtracting the cash outflows from the cash inflows. 

(c) Financing Activities: 

1. Record cash inflows from issuing shares, bonds, or borrowings. 

2. Record cash outflows such as repayments of borrowings, dividends paid, and interest paid. 

3. The net cash flow from financing activities is determined by subtracting cash outflows from cash inflows. 

Steps to Prepare a Cash Flow Statement Using the Direct Method 

(a) Calculate Cash Flow from Operating Activities: 

1. Start by listing all cash received from customers. 

2. Subtract cash paid to suppliers for goods and services. 

3. Deduct cash paid to employees and other operating expenses. 

(b) Calculate Cash Flow from Investing Activities: 

1. Record the cash inflows from sales of property, plant, and equipment. 

2. Deduct cash outflows from purchasing fixed assets or investments. 

(c) Calculate Cash Flow from Financing Activities: 

1. List cash inflows from issuing shares, bonds, or obtaining loans. 

2. Subtract cash outflows from repaying loans, paying dividends, or redeeming shares. 

(d) Combine the Results: 

1. Sum the net cash flows from operating, investing, and financing activities. 

2. Add this total to the opening cash and cash equivalents to arrive at the closing balance. 

3. What is an Annual Report? Discuss in brief the contents of an annual report and describe the non audited information contained in an Annual Report of any company. 

Ans) Annual Report 

An Annual Report is a comprehensive document issued yearly by a company to its shareholders, stakeholders, and the public. It provides detailed information about the company’s financial performance, business activities, and overall strategy over the past year. The primary purpose of an annual report is to provide transparency and accountability, allowing stakeholders to assess the company's financial health, operational effectiveness, and future prospects. 

Contents of an Annual Report 

An annual report typically includes both audited and non-audited information. The primary contents of an annual report are: 

1. Chairperson's or CEO's Message: This section provides an overview from the company's chairperson or CEO, highlighting key achievements, strategic direction, challenges faced, and future outlook. It sets the tone for the report and often includes insights into the industry and market conditions. 

2. Business Overview: This section offers a detailed description of the company’s operations, including its products or services, market segments, geographical presence, and significant business developments during the year. It may also outline the company’s mission, vision, and values. 

3. Financial Statements: These are the core components of an annual report, consisting of: 

4. Balance Sheet: Shows the company's financial position, including assets, liabilities, and shareholders' equity at the end of the financial year. 

5. Income Statement: Details the company's revenues, expenses, and profits or losses over the financial year. 

6. Cash Flow Statement: Provides an overview of cash inflows and outflows from operating, investing, and financing activities. 

7. Statement of Changes in Equity: Illustrates changes in the company’s equity, including retained earnings and share capital. 

8.  Management Discussion and Analysis (MD&A): This section provides management's perspective on the financial results, explaining the reasons behind the financial performance, market trends, risks, opportunities, and future strategies. 

9. Auditor’s Report: An independent auditor’s report that verifies the accuracy and fairness of the financial statements. It confirms whether the financial statements comply with the relevant accounting standards. 

10. Corporate Governance Report: Outlines the company's governance structure, board composition, and practices to ensure compliance with corporate governance standards. It may include details about board meetings, committees, and policies on ethics and transparency. 

11. Sustainability and Corporate Social Responsibility (CSR) Report: Many companies include information on their sustainability practices, CSR initiatives, and the impact of their activities on the environment, society, and economy. 

     

Non-Audited Information in an Annual Report 

Non-audited information in an annual report provides additional context and insights that are not part of the formal financial statements. These sections are usually prepared by the company’s management and are not subject to the same rigorous audit processes as the financial statements.

Key non-audited information includes:  

1. Chairperson’s or CEO’s Message: This is a narrative section that reflects the top management’s outlook, strategic vision, and achievements. It is intended to provide a qualitative perspective on the company's performance, rather than a quantitative one. 

2. Management Discussion and Analysis (MD&A): Although this section discusses financial performance, it includes forward-looking statements, assumptions, and subjective analysis that are not audited. It offers management’s interpretation of the company’s financial data and its future expectations. 

3. Business Overview and Operational Highlights: Descriptions of the company's business model, market presence, competitive strategy, and operational highlights are not audited. They are meant to provide stakeholders with a better understanding of how the company operates and its competitive positioning. 

4. Corporate Governance Report: While some parts of the corporate governance report may be audited, such as compliance with specific regulations, many sections, including details on board practices, ethics policies, and governance improvements, are generally non-audited. 

5. Sustainability and CSR Report: Information regarding the company’s environmental, social, and governance (ESG) activities is typically non-audited. This section covers initiatives related to sustainability, social impact, diversity, community engagement, and environmental practices. 

6. Market and Economic Overview: This provides insights into the macroeconomic environment, industry trends, and market conditions that may have impacted the company's performance. It includes forecasts and analysis that are inherently forward-looking and not audited. 

7. Future Plans and Strategic Outlook: The company may outline its future plans, strategic goals, and potential challenges in this section. As these are based on projections and management’s expectations, they are not subject to audit. 

4. What is Human Resource Accounting? How can it be used as a decision tool by Management? 

Ans) Human Resource Accounting 

Human Resource Accounting (HRA) is a specialized area of accounting that focuses on identifying, measuring, and reporting the value of a company’s human resources. It involves quantifying the economic value of employees as organizational assets and incorporating this value into financial statements. Unlike traditional accounting, which primarily deals with tangible assets like machinery, buildings, and inventory, HRA considers human capital—such as the skills, experience, knowledge, and abilities of employees—as valuable resources that contribute significantly to an organization’s success. 

HRA is based on the premise that human resources are not only crucial for generating future economic benefits but also that their value should be recognized and reported in a manner similar to other physical and financial assets. By assigning a monetary value to human resources, organizations can better understand the costs and benefits associated with hiring, training, developing, and retaining employees. 

How Human Resource Accounting is Used as a Decision Tool by Management 

Human Resource Accounting can serve as an essential decision-making tool for management in various ways: 

Better Workforce Planning: HRA provides insights into the costs and value of human resources, enabling management to make informed decisions about hiring, training, and development. By understanding the value of human capital, management can strategically plan workforce requirements, ensuring the right skills are available to meet organizational goals. 

Cost-Benefit Analysis of Training Programs: Management can use HRA to evaluate the effectiveness of training and development programs by measuring their impact on the value of human resources. It helps assess whether the investment in training leads to increased productivity, skill enhancement, and employee retention, allowing management to allocate resources to programs with the highest return on investment. 

Employee Retention Strategies: HRA can help management identify the cost implications of employee turnover, including the loss of skills, experience, and knowledge. By quantifying these costs, management can develop strategies to improve employee engagement and retention, such as creating competitive compensation packages, career development opportunities, and a positive work environment. 

Performance Measurement and Appraisal: HRA provides a framework for measuring the value contribution of individual employees or teams. By assigning a financial value to employees’ skills and performance, management can develop more objective and data-driven performance appraisal systems. This can lead to better recognition and reward mechanisms, fostering motivation and enhancing overall productivity. 

Decision-Making in Mergers and Acquisitions: During mergers, acquisitions, or strategic partnerships, HRA can be used to assess the value of human capital in the target company. This valuation helps in determining the overall worth of the acquisition and ensures that both tangible and intangible assets are considered in the negotiation process. 

Improving Financial Reporting and Transparency: Integrating human resource value into financial statements enhances the accuracy and comprehensiveness of financial reporting. This transparency helps stakeholders, such as investors, creditors, and regulators, better understand the organization's long-term growth potential, reducing the risk of undervaluing or overvaluing a company based solely on its physical and financial assets. 

Identifying Skill Gaps and Succession Planning: HRA allows management to identify existing skill gaps within the organization by analyzing the current value and capabilities of human resources. This information is crucial for succession planning, ensuring that the company has a pipeline of talent ready to take on key roles in the future. 

Enhanced Strategic Planning: HRA provides valuable data on the economic impact of human resources, enabling management to make strategic decisions related to expansion, diversification, and market entry. By understanding the value of human capital, management can align workforce capabilities with long-term business objectives, ensuring optimal use of human resources. 

Risk Management: By valuing human resources, HRA helps management identify potential risks associated with the loss of key employees, skill shortages, or changes in labor market conditions. This information is vital for developing contingency plans and strategies to mitigate such risks. 

Supporting Budgeting and Forecasting: HRA aids in budgeting and forecasting by providing a clearer picture of human resource costs and their impact on the organization’s profitability. Management can use this information to forecast future expenses related to recruitment, training, and employee benefits, ensuring that financial plans are aligned with strategic goals. 

5. A) Compute Profit when  

Ans) To compute the profit, we can use the formula: 

However, since we have the Break-Even Point (BEP), we can calculate the variable cost from the BEP. The formula for BEP in terms of sales, fixed cost, and contribution margin ratio is: 

 From this, the contribution margin ratio (CMR) can be calculated as: 

Now, let's substitute the values 

 The contribution margin ratio is 25%. This means that 25% of the sales amount contributes to covering fixed costs and generating profit. 

Now, to find the total contribution from the actual sales: 

 Now, we can find the profit by subtracting the fixed costs from the total contribution: 

 Profit = Rs. 20,000. 

B) Compute Sales When - 

Ans) To compute the sales when fixed costs, profit, and break-even point (BEP) are given, we need to determine the total sales required to achieve the given profit. 

1. Determine the Contribution Margin Ratio (CMR) 

The Contribution Margin Ratio (CMR) can be calculated using the fixed cost and break-even point (BEP). At the break-even point, the total contribution equals the fixed costs. 

 Substitute the values: 

2. Calculate Required Contribution: 

To achieve the desired profit, the required contribution (total contribution from sales) must cover both the fixed costs and the desired profit: 

 Substitute the values: 

3. Calculate the Sales:  

Now, calculate the sales needed to achieve the required contribution using the contribution margin ratio: 

Substitute the values: 

To achieve a profit of Rs. 20,000, with fixed costs of Rs. 40,000 and a break-even point of Rs. 80,000, the required sales are Rs. 1,20,000.