Accounting for Managers

NOTES FOR MBA – 1ST SEMESTER M. D UNIVERSITY, ROHTAK SUBJECT: - ACCOUNTING FOR MANAGERS \ Ratio A a!"#i# Ratio Analysis is a technique of analyzing financial statements. It helps in estimating financial sounders or weakness. Ratio is quantitative relationship between two items for the purpose of comparison. The items presented in profit and loss account and balance sheet are related to each other. This relationship can be calculated with the help of ratios. or e!ample" profit is related to capital invested in business and debtors are related to credit sales. Thus ratio helps in drawing meaningful conclusions by establishing relationship between various facts. #n the basis of their inter$pretation" unfavorable situations in the future can be avoided. %ence" comparative and significant conclusions cannot be drawn from financial data of different years of a business or of different businesses unless arithmetic relationship is established among such data. D$%i itio :According to &.'atty$( The term accounting ratios) is used to describe significant relationship between figures shown on a balance$sheet" in a profit and loss account" in a budgetary control system or in any their part of the accounting organization.* Thus ratio analysis is a process where by the financial statement is analysis and interpreted through ratios. Fo&'# o% E()&$##i * Ratio:+, +&o)o&tio :- If the current assets of a business are Rs. -".."... and current liabilities Rs. /"-."... the proportion of current assets and current liabilities will be -".."...0/"-."... or /1 /, +$&,$ ta*$: $ In it the relationship between / numbers is e!pressed in percentage form. If the gross profit of business is Rs. -."... and sales are Rs. /" .."... the gross profit is /-2 of sales i.e. -."...3+..4/-2 /" .."... C!a##i%i,atio o% &atio:A,,o&-i * to ).&)o#$:a, b, c, d, 5iquidity Ratios 6rofitability Ratios Turnover or performance or Activity Ratios 5everage or 7apital structure ratios

a, /i0.i-it" Ratio#: - It is also called as working capital or short terms solvency ratio. or the insistence of firm adequate liquidity is essential. 5iquidity means ability of the firm to pay its short terms debts in time" liquidity ratios are calculated to measure

short terms financial position or short terms solvency of the firm. 7ommercial banks and short terms creditors are interested in such type of analysis. 8anagement can also make use of these ratios to find out how efficiently working capital is being used. The important 5iquidity ratios are as follows0$ i, 7urrent Ratio0$ This ratio establishes the relationship between current assets and current 5iabilities. It is calculated by dividing current assets by current liabilities. Ideal current ratio is /2 i.e. current assets should be twice the current liabilities. 7urrent Ratio4 7urrent Assets 7urrent 5iabilities 7urrent assts are those assets which are converted into cash within one year or an operation cycle. They include cash in hand" bank balance" stock" debtors" prepaid e!penses" bills receivable" marketable securities etc. 7urrent liabilities are those liabilities which have to be paid during one year. These include creditors" bill payable" outstanding e!penses" bank overdrafts etc. 9ith its help" ability of the business to pay off its short term liabilities is determined. It helps to find out how many times current assets are there in business as compared to current liabilities. 7urrent assets should be more then current liabilities so that despite fall in their prices" current liabilities could be paid easily. If current ratio is /0+" it means that current liabilities would be paid even if there is -.2 fall in the prices of current assets. :ignificance0 $ The greater this ratio better will be the short term slovely of firm and safer will be the interest of short term creditors. This ratio should neither be too high not too low... %igh ratio is an indicator of weak investment policy of the firm and low ratio increase the risk in payment of short term debts. %igh ratio also means that funds of firm are lying surplus and unutilized. 7urrent Ratios main limitation is that it is a quantitative measuring" not a qualitative one. To ascertain this ratio" all current assets are given equal importance and ignore individual attention to assets. There is different in liquidity of various current assets. 7ash is most liquid assts. #n the other$hand" stock is least liquid of all current assets. ;ebtors" bill recoverable etc. are more liquid as compared to stock but less liquid then cash.

ii, 5iquid Ratio<Acid test Ratio<=uick Ratio0$ This ratio establishes the relationship between liquid assets and current liabilities. 5iquid Ratio 4 5iquid Assets 5iquid liabilities

5iquid Assets are those assets which can immediately or in a short period be 7onverted into cash without much loss. 5iquid assets do not include stock and prepaid e!penses because stock is less liquid and its prices fluctuate. 6repaid e!penses cannot be realized. ⇒5iquid Assets47urrent Assets$stock$6repaid >!penses an ideal liquid ratio is +0+ 9ith the help of this ratio" capacity of firm to pay off its current liabilities immediately is measured. iii, Absolute liquidity Ratio or :uper =uick Ratio or :uper acid test Ratio0$ This ratio is calculated by dividing absolute liquid assets by current liabilities. :uper liquid assets 4 cash? 'ank ? 8arketable securities Ideal absolute liquidity ratio is ..-0+. It means that for every Rs. / liability there should be super acid assets of -. paisa. This ratio is not used much practically. Absolute liquidity Ratio4 7ash ? 'ank ? 8arketable security 7urrent liabilities ii, Turn #ver<Activity<>fficiency Ratio0$

The efficiency of a firm depends on the fact how efficiently its assets are being used in business. The effective utilization of these assets depends on the speed at which these assets are converted in sales. %igher velocity of their conversion in sales indicates that assts are being efficiently managed. @arious type of turnover ratios are0$ +, Inventory turnover ratio0 $ This ratio establishes relationship between costs of goods sold and average inventory. It indicates the fact whether the investment in inventory is within a proper. 5imit or not. 9ith the help of this ratio" it can be ascertained how many times the stock has been converted in to sales during the year. It helps evaluate inventory policy of management. Inventory turnover Ratio 4 7ost of goods sold Average Inventory Average Inventory 4 #pening ? closing stock / 7ost of goods sold 4 opening stock ? 6urchases ? ;irect >!penses Including manufacturing e!penses$7losing stock #R 4 :ales$Aross 6rofit

:ometimes" it is difficult to calculate cost of goods sold on basis of available information. In such case net sales are used in place of cost of goods sold. Inventory turnover ratio 4 Bet sales Average Inventory :imilarly" if the amount of opening stock is not given in question" closing stock is taken in place of average stock. 9hen more then one type of stock is used" for e!ample" stock of raw material stock of working progress and stock of finished goods" then for calculating turnover ratio for each component" the fall ratio should be used0$ Raw 8aterial Turnover Ratio4 7ost of R.8 concerned Average stock of R.8. 9.I.6 Turnover Ratio 4 7ost of goods 8anufactured Average 9.I.6 Inventory Si* i%i,a ,$:It measured rate of sale of stock. It acts as a yardstick of efficient inventory management. The higher this ratio" the better will be" because it is an indicator of efficient inventory management. It means that stock is being sold fast after its purchase and it has not to be kept in go down for a long time. 'ut a high turnover ratio should be analyzed carefully as it may result in lower investment in inventory. 5ower investment in inventory may result in serious consequences in future. irm may not be able to fulfill demand of its customers. ;ue to lessees availability of raw material production process may stop. 5ower inventory turnover ratio is an indicator of in efficient management. It e!presses fact that greater investment has been made in inventories. And may result low quality of production" valuation of closing stock at high price" including of worthless and old product in stock etc. To draw meaningful conclusions from this ratio it should be compared with ratio of previous years and with That of other firms. This ratio is not standardized because it depends on ratio of nature of industry. 6recautions0 $ 9hile using this ratio care must be taken regarding following factors0$ +, :easonal 7onditions0 $ If the balance sheet is prepared at the time of stock season" average inventory will be much less which may give a very high turnover ratio. /, :upply 7onditions0 $ In case of conditions of scarcity" inventory may have to be kept in high quality for meeting future requirements. C, 6rice Trends0$In case of possibility of a rise in prices. 5arger inventory may be kept by business. Reveres will be the case if there is possibility of a fall in prices. D, Trend of volume of business0 $ In case there is trend of sales being sufficiently higher then sales in past" a higher amount of inventory may be kept in past" a higher amount of inventory may be kept.

D$1to&# T.& o2$& &atio:;ebtors or receivable are current assets of business. It measures how quickly debtors of business are realized and indicates liquidity of debtors. This ratio established relationship between credit sales and average debtors. Account receivable include debtors and bill receivable average receivables are calculated by dividing sum of opening and closing balance of receivable by two

;ebtors turnover ratio4 7redit sales Average Account Receivable Average Account Receivables4 #pening E;ebtors F'<R:, ? 7losing E;ebtors F '<Rs, / In case information about credit sales and average debtors is missing this ratio is calculated on the basis of total sales and closing date balances of receivables. ;ebtors turnover ratio4 total :ales Accounts receivable Eclosing,

The second ratio related to debtor)s turnover is average collection period. This ratio is calculated by dividing days in a year by debtor)s turnover ratio. And indicates to what intent debts have been collected in time. ;ebt collectors period4 8onths or days in a year ;ebtor)s turnover

Average collection 6eriod #R Average A<cs Receivable 7redit sales 6er ;ay 7redit sales per day4 Total credit sales ;ays in a year

Si* i%i,a ,$:%igh debtor turnover ratio and low collection period is an indicator of efficient management of debtors. %igher the debtors turnover ratio better it will be for the business. :imilarly" low collection period indicates that debts are being realized quickly and no unnecessary funds are blocked in them. #n the other hand" high average collection period means that firm has used liberal credit policy and debts are realized at a slow rate or lesser efforts to realize debts have been made. @ery small too. Although it indicates lower risk of bed debts but it can affect sales adversely. Thus debtor)s turnover ratio should not be very high or very low. 34$t4$& a2$&a*$ ,o!!$,tio )$&io- o% a 1.#i $## i# )&o)$& o& ot it ,a 1$ $(a'i $- 1" ,o')a&i * t4i# &atio 5it4 &atio o% ot4$& %i&'# i i -.#t&". A# ,o')a&$to a2$&a*$ o% i -.#t&", a %i&' #4o.!- $it4$& .#$ a !i1$&a! ,&$-it )o!i," ot ,&$-it )o!i," #4o.!- 1$ &$#t&i,ti2$. A,t.a! ,o!!$,tio )$&io- o% %i&' #4o.!- 1$ ,o')a&$- 5it4 #ta -a&- a - o t4i# 1a#i# ,&$-it )o!i," ,a 1$ $2a!.at$-. Fo& $(a')!$, it )&$-$t$&'i $- ,o!!$,tio )$&io- i# 67 -a"# a - a,t.a! ,o!!$,tio )$&io- i# 89 -a"#, it '$a # %i&' i# %o!!o5i * !i1$&at$ ,&$-it )o!i," a - -$1to&# a&$ ot 1$i * &$a!i:$- i ti'$. C, 7reditors turnover ratio0$n T4i# &atio $#ta1!i#4$# &$!atio #4i) 1$t5$$ ,&$-it ).&,4a#$# a - ,&$-ito&# 4i*4 ,&$-ito&# t.& o2$& i# a i -i,ato& o% %a,t t4at %i&' )a" it# ,&$-ito&# 0.i,;!" 54i,4 i ,&$a#$ it# ,&$-it 5o&t4i $##. C&$-ito&# t.& o2$& &atio< C&$-it ).&,4a#$# A2$&a*$ a,,o. t# )a"a1!$ Tota! ).&,4a#$-,a#4 ).&,4a#$< ,&$-it ).&,4a#$. A,,o. t )a"a1!$ i ,!.-$# 1ot4 ,&$-ito&# a - 1i!! )a"a1!$. A2$&a*$ )a"'$ t )$&io-< 'o t4# o& -a"# i a "$a& Creditors turnover ratio

Or

Average accounts payable Credit purchase per day

D, 9orking capital turnover ratio0 $ T4i# &atio i -i,at$# 54$t4$& 5o&;i * ,a)ita! 4a# 1$$ $%%i,i$ t!" .#$- to i ,&$a#$ #a!$#. 3o&;i * ,a)ita!< ,.&&$ t A##$t#-C.&&$ t !ia1i!iti$#

3o&;i * ,a)ita! t.& o2$& &atio< N$t #a!$# N$t 5o&;i * ,a)ita! 9= i!ed Assets turnover ratio0$ It indicates how efficiently fi!ed assets of business have been utilized to increase sales. Fi($- A##$t# t.& o2$& &atio< $t #a!$# o& ,o#t o% *oo-# #o!Fixed Assets (Net)

/$2$&a*$ o& Ca)ita! St&.,t.&$ &atio# :olvency of business is related to its debt paying capacity. 9ith the help of liquidity ratio short$term solvency of business can be analyzed. Gnder this head" long$term solvency of business has been analyzed. Bormally the ordinary share holds debenture holders" financials institutions and other long term creditors are interested in these ratios. 9ith the help of these ratios long$term creditors can analyze the capacity of business to pay interest and principal. Therefore" long$term solvency of business means its ability to pay the long term debts and interest therefore regularly. Therefore the long term solvency or financial position has two aspects. +, The ability to principle on due date /, The ability to pay interest regularly. Therefore leverage ratios are divided into two parts. The first type of ratios is those which establish relationship between debt capital and owned capital. These ratios are calculated with the help of date in balance sheet. or e!. ;ebt$equality ratio" debt to assets ratio" equity to assets ratio etc. i.e. under this category. The second type of ratio are called Co2$&a*$ &atio, for e!ample" interest coverage ratio" dividend coverage ratio and total fi!ed coverage ratio. 1= D$1t $0.it" &atio: - The necessary funds for the assets of business are provided by ordinary share holders" preferential shareholders and creditors. In any business these should by equitable balance it affects long$term solvency of business. If a business procures more funds from the owners of business" it will secure the interest of creditors. #n the other hand" if more funds are borrowed instead of employing #wned capital" it will increase risk for creditors as well as shareholders and may face differently in future to pay the debt. This ratio established relationship between the shareholders funds and debt funds. It can be calculated as under0$

;ebt >quity Ratio4 >!ternal >quities I t$& a! E0.iti$# External Equities= Debatesnres !ong ter" loans short ter" creditors

OR /o *-t$&' -$1t > ,. !. I t$& a! E0.iti$# O& S4a&$4o!-$&# %. -#< E0.it" #4a&$ ,a)ita! > )&$%$&$ ,$ #4a&$ ,a)ita! > Ca)ita! &$#$&2$ > &$2$ .$ &$#$&2$# I t$& a! $0.iti$# a&$ a!#o ,a!!$- $t 5o&t4. T4.#, t4$ &atio $#ta1!i#4$# &$!atio #4i) 1$t5$$ i t$& a! %. -# a - $(t$& a! %. -# o% 1.#i $##. G$ $&a!!" t4i# &atio o% 1:1 i# ,o #i-$&$- #ati#%a,to&". T4i# &atio ,a a!#o 1$ $()&$##$i 2a&io.# ot4$& 5a"#. a= D$1t-$0.it" &atio< tota! !o *-t$&' -$1t Tota! !o *-t$&' %. -# 1= D$1t-$0.it" &atio < S4a&$4o!-$&?# %. -# Tota! !o *-t$&' %. -#

1= D$1t-$0.it" &atio< Tota! !o *-t$&' -$1t Tota! !o *-t$&' %. -#

,= D$1t-$0.it" &atio< Tota! !o *-t$&' -$1t S4a&$4o!-$&# %. -# Fi&#t @a= &atio $()&$##$# t4$ &$!atio #4i) 1$t5$$ !o * t$&' -$1t#= S$,o - @1= &atio $()!ai # t4$ &$!atio #4i) 1$t5$$ #4a&$ 4o!-# %. -# a - tota! !o * t$&' %. -#. T4i&- @,= &atio $#ta1!i#4$# &$!atio #4i) 1$t5$$ !o * t$&'# -$1t# a - #4a&$ 4o!-# %. -#.

I ,a#$ o% @a= a - @1= a &atio o% 7.9:1 a - i ,a#$ o% @,= a &atio o% 1:1 i# ,o #i-$&$- i-$a! a - #ati#%a,to&". Si* i%i,a ,$:T4i# &atio i# 2$&" #i* i%i,a t %o& t4$ $2a!.atio o% ,a)ita! #t&.,t.&$ o% a %i&'. T4i# &atio $()!ai # t4$ %a,t i 54at )&o)o&tio t4$ o5 $&# a - ,&$-it io # o% t4$ 1.#i $## 4a2$ )&o2i-$- %. -#. C&$-ito&# ,a ; o5 54$t4$& t4$i& i t$&$#t i# #a%$ o& ot. I% t4$ #4a&$4o!-$&# %. -# a&$ i ,&$a#i *, t4$i& i t$&$#t 5i!! ,o ti .$ to 1$ #a%$. O t4$ ot4$& 4a -, i% t4$ %. -# )&o2i-$- 1" ,&$-ito&# a&$ i ,&$a#i *, t4$i& i t$&$#t# ,a 1$ $ -a *$&$-. I% t4$ -$1t $0.it" &atio i# 1:A6, it '$a # t4at %i& $2$&" o $ &.)$$ o% $(t$& a! !ia1i!it", t4$&$ a&$ A R#. O% #4a&$4o!-$&# %. -#, ∴ ,o$-ito&# 4a2$ a #a%$t" 'a&*i o% 97B... I% t4$ -$1t-$0.it" &atio i# 0.it$ 4i*4, ,&$-ito&# o% t4$ %i&' 5i!! t&" to i t$&%a,$ i t4$ a%%ai&# o% t4$ %i&'. T4$ %i&' 'a" 4a2$ to 1$a& a 1.&-$ o% %i($i t$&$#t ,4a *$# i t4$ "$a&# o% !o5 )&o%it. It 5i!! a!#o 4a2$ to a,,$)t &$#t&i,ti2$ ,o -itio # %o& &ai#i * %.&t4$& %. -# i %.t.&$. B.t t4$ o5 $&# o% 1.#i $## 5i!! ,o t&o! t4$ a%%ai&# 5it4 t4$i& !i'it$- %. -#. I% t4$ %i&' ,a $a& 4i*4 &at$ o% )&o%it a# ,o')a&$- to t4$ &at$ o% i t$&$#t )a"a1!$, it ,a 'a(i'i:$ t4$ &$t.& %o& #4a&$4o!-$&# 1" .#i * 4i*4 -$1t $0.it" &atio. ii= 6roprietary Ratio0 $ It i# a ot4$& %o&' o% -$1t $0.it" &atio a - a!#o ; o5 a# $t 5o&t4 to tota! a##$t# &atio. It $#ta1!i#4$- t4$ &$!atio #4i) 1$t5$$ #4a&$4o!-$&# %. -# a - tota! a##$t# o% 1.#i $##. It# 'ai o1C$,ti2$ i# to %i - o.t 4o5 '.,4 %. -# 4a2$ 1$$ )&o2i-$- 1" #4a&$4o!-$&# %o& i 2$#t'$ t i a##$t# o% 1.#i $##.

+&o)&i$ta&" &atio< S4a&$4o!-$&# %. -# Tota! A##$t# S4a&$4o!-$&# %. -#< o&-i a&" #4a&$ ,a)ita!> +&$%$&$ ,$ #4a&$ ,a)ita! > Ca)ita! a - &$2$ .$ &$#$&2$# S)$,ia! &$#$&2$# %o& #)$,i%i, o1C$,ti2$ #4o.!- 1$ i ,!.-$-. Tota! a##$t#< Fi($- a##$t# > ,.&&$ t a##$t# T4$ i ta *i1!$ a##$t# !i;$ *oo-5i!!, )ot$ t, $t,. #4o.!- 1$ i ,!.-$- to t4$ $(t$ t o% t4$i& 'a&;$t 2a!.$. Si* i%i,a ,$:T4i# &atio i# 0.it$ #i* i%i,a t %o& t4$ ,&$-ito&# o% 1.#i $##. 3it4 t4$ 4$!) o% t4i# &atio, it ,a 1$ a#,$&tai $- i 54at )&o)o&tio o5 $&# 4a2$ )&o2i-$- %. -# %o& i 2$#t'$ t i a##$t# o% 1.#i $##. T4$ 4i*4$& t4$ &atio, t4$ 'o&$ )&o%ita1!$ it i# %o& t4$ ,&$-ito&# a - t4$ !$## 'a a*$'$ t 5i!! 4a2$ to -$)$ - $(t$& a! %. -#. I% t4$ &atio i# !o5 t4$ ,&$-ito&# ,a 1$ #.#)i,io # a1o.t t4$ &$)a"'$ t o% t4$i& -$1t o !i0.i-atio o% ,o')a "∴ , $(t$& a! %. -# #4o.!- 1$ .ti!i:$- to a !i'it$- $(t$ t...

Fi($- A##$t# i!ed Assets are included after changing depreciation. #wner)s funds are the same as internal equities in the debt equity ratio. The higher value of proprieties funds over fi!ed assets in a measured of long term financial soundness of long term financial soundness of business. The lower the berrer will be for the long term solvency of business because proprietor)s funds will be available for working capital capital also. or e!ample" i% the fi!ed assets are Rs. +H... and proprietary funds are rs. /D"... this ratio will be ..I- E Rs. +H"... ,. It means that I-2 of proprietary Rs. /D"... unds are invested in fi!ed assets and balance /-2 are used as working capital. or industrial units the standard is usually -2 if the ratio is more than one" it means that a part of fi!ed assets has been debt capitalJ iii, C.&&$ t a##$t# to )&o)&i$ta&" %. -# &atio: - This ratio establishes relationship between current assets and proprietary funds. The main obKectives of proprietary fund have been invested in current assets. ormula" 7urrent Assets 6roprietary fund

iv,

Ca)ita! *$a&i * &atio: - >stablishes relationship between ordinary share capital and fi!ed cost bearing securities. In fi!ed cost bearing capital we include performance share capital and debt funds. i!ed cost bearing capital4 debentures ? performance share capital?
8ortgage loan

>quity shares capital 7apital gearing ratio4 i!ed cost bearing capital

If in capital structure of firm" fi!ed cost sear ties are more than equity share capital it will be called high capital gearing. #n the other hand" of amount of fi!ed cost bearing securities is less than amount of equity share capital" it will be low capital gearing. The main obKective of searing fi!ed cost bearing capital in capital structure is to ma!imize return for equity shareholders. :hareholders get residual profit after paying fi!ed interest on loans and fi!ed rate of dividend to performance shareholders.

+&o%ita1i!it" Ratio: +&o%ita1i!it" #t&$ *t4$ # t4$ !o *-t$&' #o!2$ ," o% t4$ 1.#i $##. /o5 )&o%ita1i!it" i# t4$ &$#.!t o% 4i*4$& $()$ #$# o& !o5$& #a!$#. T4$&$%o&$, )&o%ita1i!it" &atio# a&$ ,a!,.!at$- to ; o5 a #5$&# o% t4$ %o!!o5i * 0.$#tio #:-

i= ii= iii= i2= 2= 2i=

A&$ t4$ )&o%it $a& $- 1" t4$ %i&' a-$0.at$D 34at i# t4$ &at$ o% &$t.& o ,a)ita! $')!o"$-D 34at i# t4$ &at$ o% $t )&o%it a - *&o## )&o%it o #a!$#D 34at i# t4$ $a& i * )$& #4a&$D Ho5 '.,4 -i2i-$- 5a# -i#t&i1.t$-D 34at i# t4$ &at$ o% &$t.& o #4a&$4o!-$&?# %. -#D

+&o%ita1i!it" &atio# ,a 1$ ,a!,.!at$- o t4$ 1a#i# o% #a!$# o& ,a)ita! $')!o"$-. +&o%ita1i!it" Ratio R$!at$- to Sa!$#:These ratios are calculated on the basis of sales. If a firm does not earn adequate profit on sales" it will be difficult for it to pay operating e!penses and the owners will not get any return. These ratios are as under. +. G&o## )&o%it &atio: - T4i# &atio $#ta1!i#4$# &$!atio #4i) 1$t5$$ *&o## )&o%it a - #a!$#. It ,a 1$ ,a!,.!at$- a# . -$&:#ross pro$it ratio= gross pro$it Net %ales &'(( N$t #a!$#< *&o## #a!$#-#a!$# &$t.& G&o## )&o%it< N$t #a!$#-Co#t o% *oo-# #o!Co#t o% *oo-# #o!- i a t&a-i * ,o ,$& i# ,a!,.!at$- 1" a--i * #to,;, ).&,4a#$# a -i&$,t $()$ #$# a - #.1 t&a-i * t4$ ,!o#i * #to,;... I ,a#$ o% %i&'# $ *a*$- i 'a .%a,t.&i * o% *oo-#, ,o#t o% *oo-# #o!- i# $0.a! to t4$ ,o#t o% &a5 'at$&ia!, -i&$,t !a1o&, -i&$,t $()$ #$# a - 'a .%a,t.&i * $()$ #$#. G&o## )&o%it i# t4$ &$#.!t o% &atio o #!i) a'o * #a!$# a - ,o#t# a - )&i,$. It ,a 1$ #$- o& &$-.,$- 1" ,4a *i * a " o% t4$#$ 2a&ia1!$#. Hi*4 *&o## )&o%it i# t4$ #i* o% $%%i,i$ t 'a a*$'$ t. I ,&$a#$ i )&i,$ o& &$-.,tio i ,o#t# ,a a!#o &$#.!t i 4i*4 *&o## )&o%it &atio. So'$ti'$#, !o5$& Va!.atio o% o)$ i * #to,; o& 4i*4$& 2a!.atio o% ,!o#i * #to,;, ,a a!#o i ,&$a#$ *&o## )&o%it &atio∴ , t4$ &$a#o %o& 4i*4 o& !o5 *&o## )&o%it &atio #4o.!- 1$ )&o)$&!" a a!":$-. T4$#$ ,a 1$ #$2$&a! &$a#o # %o& !o5 *&o## )&o%it &atio, #.,4 a# 4i*4 ,o#t o% )&o-.,tio o2$& 2a!.atio o% o)$ i * #to,; a - . -$& 2a!.atio o% ,!o#i * #to,; &$-.,tio i #$!!i * )&i,$ o% *oo-#, !o5 -$'a - $t,. T4$ &at$ o% *&o## )&o%it i a 1.#i $## #4o.!- 1$ #.,4 t4at -i2i-$- at t4$ )&o)$& &at$ ,o.!- 1$ *i2$ to t4$ o5 $&# a%t$& '$$ti * %i&'# a!! o)$&atio # $()$ #$# a - %i($- ,o#t#. E(a')!$:)* Co"pute the gross pro$it ratio $ro" the $ollo+ing particulars,R#. R#.

Opening stoc. 1urchase C!o#i * Sto,; So!.tio #:-

/(0(((

1urchase returns

20((( 40 '(0(((

'0 3(0((( %ales E7,777 Sa!$# R$t.& # 17,777

Cost o$ goods sold= Opening stoc.

Net purchases-closing stoc.

<R#. 97,777 > @R#. 1, F7,777-R#. 8,777= –R#. E7,777 < R#. 1, 6F,777 G&o## +&o%it< N$t Sa!$#-Co#t o% *oo-# #o!< @R#. A, 17,777-R#. 17,777= - R#. 1, 6F,777 <R#. F8,777 G&o## +&o%it Ratio < G&o## +&o%it G177 N$t Sa!$# R#. F8,777 < @R#. A, 17,777-R#. 17,777= <6AB 9= R$t.& o #4a&$4o!-$&# %. -:Return on capital employed highlights overall profitability on funds invested by creditors and shareholders. Return on shareholders fund evaluates prop ability of funds invested by owners. ;ividend to preference shareholders is paid out of earning after ta! and balance of profits is available out of equity shareholders. These are various measures for return on shareholders fund$ a, Return on total shareholder fund. b, Return on equity shareholders fund. c, >arning per share. 6rice evening ratio4 It is calculated by dividing market price of a share by earning per share. 6<> ratio4 8arket price of share >ps This ratio indicates what value of shares fetches from market for each rupee of >ps. It also tells us whether share of a company are valued high or low. d, ;ividend per share e, ;ividend payout ratio f, ;ividend and >arning yield g, 6rice earning ratio. G177

a, R$t.& o tota! #4a&$4o!-$&# %. -#: - To calculated this ratio net profit ta!es are divided by total shareholders funds. 9ith the help of this ratio" it can be ascertained how effectively the funds of the shareholders are being utilized. Relative profitability and soundness can be evaluated by comparing this ratio with that of other firms. :hareholders) unds are also known as Bet 9orth. b, Return on total shareholder)s equity or funds 4 Bet profit after ta! Total shareholders equity 3+..

c, R$t.& o $0.it" #4a&$4o!-$&#? %. -#: - >quity shareholders are the actual owners of business because they bear all risk. They participate in management. They are the owners of all their profits lefts paying the dividend to performance shareholders. Therefore" it is essential to evaluate the profitability of the business from viewpoint of ordinary shareholders. This ratio is calculated by dividing the net profit after ta!es and preference dividend by equity shareholders) funds.
Return on >quity shareholders) funds4 net profit after ta! and preference dividend
>quity shareholder) funds 3+..

d, Ea& i * )$& #4a&$ o& E+S: - This ratio measures the earning per share available to ordinary shareholders. >quity shareholders have the right to all profits left after payment of ta!es and preference dividend. This ratio is calculated by dividing the profit available for equity shareholders by the number of equity shares issued.
>6:4 Bet profit after Ta! and 6reference ;ividend Bumber of >quity :hares

This ratio is quite significant. >6: affects the market value of share. It is an indicator of the dividend paying capacity of the firm. 'y comparing the >6: with firm management can know whether ordinary share capital is being utilized effectively or not. e, Di2i-$ - )$& #4a&$ o& D+S: - All the profit after ta! and preference dividend available for equity shareholders is not distributed among them as dividend. Rather apart of it is retained in business. The balance of profits is distributed among equity shareholders. To calculate dividend per share" we divide the profits distributed as dividend among shareholders by number of equity shares. 6rofit distributed to >quity :hareholders ;6:4 Bumber of >quity :hares f, Di2i-$ --+a"o.t &atio o& DH+ &atio: - The ratio is also called pay out ratio. This ratio establishes relationship between the earning available for ordinary shareholders and the dividend paid to them. Total ;ividend paid to >quity :hareholders ;<64

Total net profit belonging to equity shareholders #R ;<p4 ;6: >6: 3+..

g, Di2i-$ - a - $a& i * "i$!-: - #ne more ratio can be used to evaluate the profitability from the stand point of ordinary shareholders. It is known as dividend and earning yield. >arning per share E>6:, and dividend per share E;6:, are calculated on the basis of book value of share but yield is always calculated on the basis of market value of sharers. This ratio is also called earning price ratio. ;6: ;ividend yield4 8arket value per share

>6: >arning yield4 8arket value per share Si* i%i,a ,$ o% Ratio-A a!"#i# Ratio analysis is an important technique of analysis of financial statement. It helps to determine efficiency of business as well as short term and long$term financial soundness of business on the basis of which management can take various important decisions. It is not only significant for management but also for all parties including creditors" investors and financial institutions. ollowing are the main uses of ratio analysis.$ +, U#$%.! i a a!"#i# o% %i a ,ia! #tat$'$ t#:According ratios are useful for understanding financial position of concern. #ne may quickly perceive the relationships without working out the ratio" but that merely gives roughly idea. According ratios are an e!tremely useful device for analyzing the financial statements$ the '<s and profit and loss igures alone convey no meaning. A ratio becomes significant only when considered along with other figures. Thus" ( inancial ratio are useful because they summaries briefly the results of detailed and complicated computations.* C, Gseful in &udging the operating efficiency of 'usiness0$ Ratio analysis is also helpful it assess the managerial efficiency. It helps to determine whether the assets are being used optimally or not. They are also useful for diagnosis of financial health of business concern" which is done by evaluating liquidity" solvency"

profitability" etc. :uch an evaluation enables management to assess financial requirements and capabilities of various business units. 8= U#$%.! %o& %o&$,a#ti * ).&)o#$#:Accounting ratios are also very useful for forecasting purposes. :uppose sale this year are Rs. +. lakes and average amount of stock in hand were rs. /" .."... showing that it is +<of sales. If the fi! wishes to increase sales ne!t year to Rs. / task It must be ready to carry a stock of Rs. /" D."... i.e. +/" .."...<-. :imilar other requirements can be worked out. 5ook at it in another way. 7apital Etotal, used this year is Rs -" ."... leading to sales of Rs +." .. ..." i.e." two times the capital employed. If the firm Is thinking of investing another rs./" .."... as capital" in the past scale of operations it must produce an additional scale of Rs. D" .."... i.e. Rs. /" .."...3/. Accounting ratios tabulated for a number of years indicates the trend of business. This helps in preparation of estimates for the future. Ratios also help in computing other figures if one figure is available. :uppose" it is known that ratio of ways to sales is +-2" it is then easy to calculate amt. To be spent on ways if the amt. #f e!pected sale is known 9= U#$%.! i !o,ati * t4$ 5$a; #)ot# o% 1.#i $##:Accounting ratios are of great assistance in locating the weak spots in the business even though overall performance may be quit well. 8anagement can then pay attention to the weakness and take remedial action for e!ample" if the firm find that the increase in distribution e!penses is more then proportionate to the result achieved" then can be e!amined in detailed and depth to remove any wastage that may be there. F= U#$%.! i ,o')a&i#o o% )$&%o&'a ,$:A firm would like to compare its performance with that of other firms and of industry in general. The comparison is called (interfere*. If the performance of different units belonging to the same firm is to be compared" it is called (intra$firm comparison*. :uch comparison is almost impossible without proper accounting ratios" such as progress of a firm from year to year cannot be measured without the help of ratios. I, B$ $%it to ot4$& )a&ti$# i t$&$#t$- i 1.#i $##0$ 7reditors can determine short term slovenly of business with the help of ratio analysis. inancial institutions and long term creditors can determine whether the business is capable to reply their loan and interest in time. Investors can decide about future investment in the firm. I= H$!)# i -$t$&'i i * t&$ -#:'y the use of ratio analysis the trend in profit" sales" cost etc. of the previous year can be determined by analysis of the financial statements and future forecasts based on these forecasts. /i'itatio # o% &atio a a!"#i#:-

>!cept in few cases" a<citing ratios by themselves are not significant$ they assume significance only when compared with the relevant rations of other firms Eor of the industry in general, or of the previous periods. The profit of a firm to sales is -20 whether this is satisfactory or not will depend upon the figures for the previous years or figures for the other firm. Thus to get the true message from the ratio)s relating to a firm" they must be set against ratios of previous period or of other firms. The following are the main limitations of accounting ratios. Gi2$ %a!#$ &$#.!t# i% t4$ &atio# a&$ 1a#$- o i ,o&&$,t a,,o. ti * -ata Accounting ratios are based on accounting dates. If accounting data is not correct ratio also suffer from all weaknesses of the accounting system itself. or e!ample" if inventory values are inflated" not only will one have an encaggerated view of profitability of the concern" but also of its financial position. Therefore" unless the balance sheet and the profit and loss account are reliable" the ratios based on there would not be reliable. Thus" the basis data must be absolutely reliable" if the ratio worked out on its basis is to be relied upon. /, Di%%$&$ t '$a i * a&$ ).t o -i%%$&$ t t$&'#:>lements and sub elements of financial statements are not uniquely defined. A firm may work out ratio on the basis of profit after interest and income ta!L another firm may consider profits before interest but after ta!L a third firm may take profits before interest and ta!. #bviously" the ratios that will be worked out will be different and will not be compatible. 'efore comparison is made" one must see the ratio have been worked out on the same basis. C, Not ,o')a&a1!$ i% -i%%$&$ t %i&' %o!!o5 -i%%$&$ t a,,o. ti * )o!i,i$# 9hen two firms result are being compared" it should be kept in mind that the firm may follow different accounting polices" or e!ample" one firm may change depreciation on the straight$line basis and the other on diminishing value. :uch differences will not make some of the accounting ratios strictly incomparable unless adKustment for different accounting policies followed is made. C, +&i,$ !$2$! ,4a *$# a%%$,t &atio a a!"#i#:7hanges in price level often make comparison of figures for the various years difficult. or e!ample" the ratio of sales to fi!ed assets in +MDD would be much higher then +MM. due to rising prices. This is because although sales are recorded in the price level of +MMD" fi!ed assets do not reflect their current value. It should" however" be noted in thisL connection that the sales will be e!pressed in terms of current prices whereas the fi!ed assets would be e!pressed still on the basis of cost which is incurred in past. %ence" figures of the past years must be adKusted in the light of price level changes before comparing the ratios of these years. 9= R$#.!t 'a" 1$ 'i#!$a-i * i t4$ a1#$ ,$ o% a1#o!.t$ -ata:Ratios" sometimes give a misleading picture in the absence of absolute data from which such ratios are derived. or e!. #ne firm produces +... units in one year and

/"... units ne!t yearL the progress is +..2. Another firm raises production from N"... units to /"... units the progress in only CC + 2. The second firm will appear less active if C Than first firm if only the rate of increase is compared. It is therefore useful if" along with ratios" absolutes figures are also studied$ unless the firm being studied is equal in all respects. In fact one should be e!tremely careful which compares the results of one firm with those of another" if two firms offer in any significant manner" say in size location etc. F= I* o&$ 0.a!itati2$ %a,to&#:Accounting ratios considers quantitative factors and ignore qualitative factors which distorted conclusions. or e!. $ credit is granted to customer on basis of financial position but ultimately it also depends on managerial ability of customers. Gnder such circumstance conclusion derived from ratio analysis would be misleading. E= /i'it$- .#$ o% #i *!$ &atio:9hatever the conclusions are drawn from anal sing the financial statement" they should not be based on single ratiosL rather all the related ratios should be considered for this purpose. :ingle ratio cannot provide all information)s on a particular aspects. or e!. #n the basis of all the current assets liquidity position of business can be considered sound but in case the proportion of stock in current assets is e!cessive the liquidity position cannot be considered sound. Therefore all the ratios relating to liquidity should be calculated. H, Di%%i,.!t" i %o&$,a#ti *: - Ratio is calculated on the basis of previous year)s performance. To forecasting the future on their basis is difficult because it is not necessary that the part events like managerial policies" economic circumstances will continue in future also. 8eaning of financial statement A financial statement is an organized collection of data. Its purpose is to convey financial aspect of business. It shows financial position through balance sheet and series of activities over a given period of time by income statement. Thus" the term financial statement refers to two basic statements O +. Income statement /. 'alance sheet #f course business may also prepare C. :tatement of Retained >arnings. D. :tatement of changes in financial position.

inancial :tatements

Income :tatement

'alance :heet

:tatement of Retained >arnings

:tatement of changes in financial position

+.

I ,o'$ #tat$'$ tH+&o%it J /o## A,,o. t O It e!plains what has happened to a business as a Result of operations between two balance sheet dates. or this purpose it matches revenues F costs incurred in process of earning revenue F shows net profit earned or loss suffered during a particular period. Ba!a ,$ #4$$t O It is a statement of financial position of a business at a specified moment of time. It represents all assets owned by business F equities of owner and outsides against those assets at that time. The difference between income statement and balance sheet is that income statement for a period F balance sheet on a particular date. Stat$'$ t o% R$tai $- Ea& i *# O Retained >arnings means accumulated e!cess of earnings over losses F dividends. The balance shown by Income :tatement is transferred to balance sheet through this statement after making necessary appropriations. This statement is also transferred as 6rofit F 5oss Appropriation A<7. Stat$'$ t o% ,4a *$# i %i a ,ia! )o#itio O or better understanding of affairs of business" it is essential to identify movement of working capital or cash in or out of business" which is available in statement of changes in financial position.

/.

C.

D.

561O78ANCE OF CO%8 ACCO9N85N# The limitations of financial accounting have made the management to realize the importance of cost accounting. 9hatever may be type of business" it involves e!penditure on labour" material and other items required for the manufacturing of product. As management has to see that no machine remains idle" efficient F proper utilization of products is made and costs are properly ascertained. 'esides" management" creditors and employees are benefited in many ways by installation of good costing system. 7ost accounting serves as an important tool in bringing prosperity to nations. Thus" importances of 7ost Accounting are as under O a, Co#ti * a# a ai- to 'a a*$'$ t – It provides invaluable help to management. It provides detailed costing information to management to enable them to maintain effective control over stores and inventory to increase efficiency of organization and to check wastage and losses. It facilitates delegation of responsibility for important task. or all these" management should be capable of using information provided by cost accounts in proper way. The various advantages divided by management from good costing system are as follows O

+, 7ost accounting helps in period of trade depression and trade competition In period of trade depression" organization cannot afford to have losses" which pass unchecked. 8anagement must know areas where economics may be sought" waste eliminated F efficiency increased. #rganization should also create environment for its growth and should know actual cost of their product before starting any scheme of price reduction. Adequate costing facilitates this. /, Aids in price fi!ation 7osting records help the producer to fi! or change the prices of product though 5aw of ;emand F :upply determines the price of articles to great e!tent. C, %elps in >stimates O The chances of losing a contract due to over$rating or under$rating can be minimized through adequate cost records because costing provides reliable basis upon which tenders and estimates may be prepared. D, %elps in canalizing production on right lines by making difference b<w profitable and non$profitable activities. 7oncentrating on profitable operation F eliminating non$profitable ones can ma!imize profit. -, 9astages are eliminated O As it is possible to know the cost of articles at each stage" it become possible to check various forms of waste such as time" e!pense etc. in use of machinery F tools etc. N, 8akes comparison possible O 6roper maintenance of costing records provides various costing data for comparison" which in turn helps management in formulation of future lines of action. I, 6rovides data for periodical 6rofit F 5oss Account O Adequate costing records provide management with such data that are necessary for preparation of 6rofit F 5oss A<7 and balance sheet at regular intervals. H, %elps in determining F enhancing efficiency O 5osses due to wastage of materials" idle time of workers" poor supervision etc. will be disclosed by cost accountant. Thus the efficiency can be measured" cost can be controlled and various steps can be taken to measure efficiency. M, %elps in inventory control O 7osting furnishes control which management requires in respect of stock of materials" work$in$progress and finished goods. +., %elps in cost reduction O in long run when alternatives are tried. This is particularly important in present day content of global competition.

++, Assists in increasing productivity O 6roductivity of material F labour is required to be increased to have growth and more profitability in the organization. b, Co#ti * a# a ai- to C&$-ito&# – As investors" bankers and other moneylenders are interested in knowing success of business" so proper costing records help them in knowing profitability and future prospects of enterprise by studying reports submitted by cost accountants. Co#ti * a# a ai- to E')!o"$$# – 9orkers have vital interest in industry in which they work. If efficient costing system is installed they are benefited in number of ways because they get incentives" bonus as increase in consumer goods directly increases their remuneration. Co#ti * a# a ai- to Natio a! E,o o'" – An efficient costing system brings prosperity to business thereby resulting increased government revenue. The economic development of country takes place due to control of cost" elimination of wastages and thus nation as a whole is benefited.

c,

d,

7ecti$ication o$ Errors :ometimes businessmen commit errors while posting 5edger. 'ut it is not necessary such errors may be located at same time. >rrors are generally located after accounts have been closed. 'efore knowing rectification of error" it is necessary to know kinds of errors. >rrors can be classified as follows O A. E&&o&# o% O'i##io O These are of / types O +, 6artial #mission0 $ 9hen the transaction is partially not recorded in books of Accounts i.e. when transaction is entered in subsidiary book but is not posted to 5edger. >!amples0 a. 7ash paid to supplier entered on payment side of cash book but not posted to debit of supplier)s account. b. A credit purchase entered in purchase book but not posted in to credit of supplier)s book. /, 7omplete #mission0 $ %ere the transaction is completely omitted from books. >!amples0 goods purchased from PA) was not recorded anywhere in books. '. E&&o& o% Co''i##io O :uch error take place when some transactions is incorrectly recorded in books of Accounts. These mistakes arise often due to ignorance of bookkeeper. >!amples0 $

+, >ntering wrong amount in subsidiary book. A sale of Rs.C-. may be entered in sales book as Rs.-C. due to wrong transposition of figure. /, A sale transaction may be entered in 6urchase book F 6urchase transaction may be entered in :ales book. C, 9rong casting in subsidiary book. The daybooks are totaled periodically F amounts are posted to relevant accounts in 5edger. The process of totaling is referred to as casting. This has been e!plained as follows0 $ &an + &an /. &an C+ 6urchase book Q R S Aetting this total is called 7asting. Rs./-. Rs.C+. Rs.+-+ Rs.I++

;r.

Q A<7 'y 6urchase

7r. Rs./-.

;r.

R A<7 'y 6urchase S A<7 'y 6urchase

7r. Rs.C+. 7r. Rs.+-+

;r.

;r. To To To

6urchase A<7 Q R S #r /-. C+. +-+ /++ #ver or under casting

7r.

To sundries

D, 6osting wrong amount to wrong side of proper account etc.

7.

E&&o& o% +&i ,i)!$ O :uch error takes place when a transaction is recorded without having regard to fundamental principles of book$keeping and accountancy. >!amples0 $ E+, 7apital >!penditure may be treated as revenue e!penditure or vice versa such as e!penses incurred in constructing a go down are treated as repairs. Co')$ #ati * E&&o& O :ometimes deficiency of one error is compensated by another error. These are called compensating errors. >!ample0 $ A)s A<7 was to be debited with Rs.+. but it was debited with Rs.+..

;.

Cash :udget 7ash budget is an important financial budget. 7ash is center of all business decisions. 7ash is invested in business to generate cash. According to Auttman F ;ougal (7ash 'udget is an estimate of cash receipts F disbursement for future period of time*. O1C$,ti2$#: E+,. To integrate cash inflows F outflows arising out of various functional budgets at different time intervals" say monthly" quarterly or yearly. E/,. To assess proKected cash deficits" at different time intervals so that finance can be raised at required time to keep other activities of organization continue as per plan. EC,. to assess proKected cash surplus at different time intervals and draw investment plans so that no cash remain idle. ED,. to set limit of cash holding by organization at different point of time for smooth functioning. Gtility<Importance0$ E+,. It ensures that sufficient cash is available when required. E/,. It reveals surplus of cash so that suitable short$term or long$term investment plan may be worked out. EC,. It reveals whether cash e!penditure proKects can be financed internally. ED,. It e!ercise control over cash F liquidity of firm. E-,. It shows any e!pected shortage of cash so that action may be taken e.g. bank overdraft may be arranged. +&$)a&atio :For"at o$ Cash :udget 'udget period0 &an TTTTTT to 8arch TTTTTT

+a&ti,.!a&# F$1 @R#.= Ma&,4 @R#.= O)$ i * Ba!a ,$ @A= 7ash Receipts 7ash :ales 7ollection from ;ebtors Issue of :hares Raising of loan Issue of debentures :ale of Investments :ale of i!ed Assets TotalE', 7ash 6ayment 7ash 6urchases 6ayment to creditors 6ayment of >!penses actory >!penses Administration >!penses 6ayment of Ta! 6ayment of ;ividend 6urchase of i!ed Asset 6urchase of Investment TotalE7, 7losing 'alanceE;, 4EA?'$7,

Ja @R#.=

D$)&$,iatio
M$a i *:- The world P;epreciation) is derived from a 5atin word P;epressed) if we analysis this word Pde) means decline and Ppretium) means price" decline in price or decrease in value of assets whether these may be fi!ed assets or capital assets. Thus depreciation is the gradual and permanent decrease in value of assets due to wear and tear" effe!cion of time" absolves scUne or any other case. D$%i itio :According to R.B carter" (;epreciation is gradual decrease in value of assets due to wear and tear or from any other cause*. According to 6ickles" (;epreciation may be defined as the permanent and continues damnation in quality" quantity or value of an asset.* C4a&a,t$&i#ti,# o% -$)&$,iatio :1= It is reduction in book value of fi!ed assets.

A= It reduces book value of assets and not its market value. 6= The reduction in book value of an asset is permanent gradual and continuing nature. 8= It is a continuous process because book value is reduced either with use of assets or over a passes of time. Ca.#$# o% D$)&$,iatio #:+, Co #ta t .#$0 $ The value of an assets decrease because of its constant use. This is more applicable on machinery. /, 3it4 t4$ )a##a*$ o% ti'$0 $ The values of assets also decrease with passage of time. C, A,,i-$ t0 $ Accident loss may be permanent but it is not continuing and gradual. D, A1#o!2$ #,K $: - If a better machine comes on a market the old machine may have to be scrapped even though they are capable of being run physically. -, Fa!! i 'a&;$t )&i,$: - 8arket conditions may charge the market price of current assets but not book value of fi!ed assets. N$$- %o& )&o2i-i * -$)&$,iatio :1= To %i - o.t $t )&o%it: - The business man has to certain e!penses in earning revenue. all in value of assets used in this process is a part of cost of should be shown correct net profit. A= To %i - o.t ,o&&$,t %i a ,ia! )o#itio :$ If the depreciation is not provided assets shown in the balance sheet will not show correct values and thus balance sheet will not provide time picture. 6= Fo& &$)!a,$'$ t o% a##$t#: - The business man takes advantage from use of fi!ed assets and time comes when these assets become totally useless and need to be replaced. 'y maintaining a depreciation fund or by taking insurance policy out of depreciation provided" he can easily replace such assets. 8= To #)&$a- o2$& a .'1$& o% "$a&# t4$ 1.&-$ o% 5&iti * o%% a##$t#: $ A business takes an advantage of assets for many years which he purchases for his business. If its burden is put on profit and loss A<c of one year it will not be reasonable. Therefore it is proper that it is spread over a number of years. 9= To *i2$ ,o&&$,t i %o&'atio to ,&$-ito&#: - 7reditors give loan to businessman and assets of business stand as surety for such a loan. Thus if these assets are not shown in balance sheet at their proper value" the creditors may be misguided. F= +&o)$& a,$ a t o% ,o#t o% )&o-.,tio : - It is a cost of production if it is not properly recorded in profit and loss A<c" the cost of production will not be time. E= 3&iti * o%% o% ,a)ita! a# )&o%it: - If proper depreciation is not accounted for then profit will be higher and when distributed will affect the capital after sometime the capital will be thus subs fanatically reduced and would have been distributed in form of profits. M$t4o- o% D$)&$,iatio +, St&ai*4t !i $ '$t4o- o& %i($- i #ta!!'$ t '$t4o- o& o&i*i a! ,o#t !i $ '$t4oo& %i($- )$&,$ ta*$ '$t4o-:Gnder this method" the amount and depreciation is informed from year to year. This fi!ed amount of depreciation is charged to profit and loss A<c every year. :o this is also called equal installment method. The annual amount of depreciation can be easily

calculated. #ut of cost of assets its scrap value is deducted and it is divided by number of year of its estimated life. This is the amount of depreciation. Thus" 7ost price$:crap @alue ;eprecation4 5ife of Assets Thus the book value of asset will be zero at the e!piry of e!pected life of assets. E(a')!$:If life asset is +. years" rate of depreciation is +.2 of cost every year and cost is Rs. /.".... Then the depreciation will be Rs. /... per annum. If in a first year" the asset may not have been used for whole of year in that case only proportionate amount will be provided as depreciation. :uppose in above case asset is installed on + April and account is closed on C+ dec. in that case depreciation for the year will be Rs. +-.. i.e. /."... 3 +. 3 M +.. +/ The entry for depreciation is0$ +, or providing depreciation0$ EI, ;epreciation A<c ;r. To Assets A<c E'y name, V or depreciation of the assetW Eii, 6rofit and loss A<c ;r. To ;epreciation A<c V or amount of depreciation charged to profit and loss A<cW /, or sale pf scrap on e!piry life0$ 7ash A<c ;r. To Assets A<c E'y name, V or sale of price of scrap realizedW A-2a ta*$#:+, This method is very easy. /, The value of assets can be reduced to zero. C, @alue of depreciation can be easily known. Di#a-2a ta*$#:+, In beginning the asset depreciation less and in last years it depreciates more quickly. 'ut under this method amount of depreciation remain same every year. /, Bo provision for interest is mode on value of asset. C, 9hen machine is old enough it)s repairing charge increase. 'ut no attention is paid on this fact under this method. Fo& E(a')!$:-

A purchased a machine for Rs. ++"... on &an +" +MHN. The estimated life of machine is +. years. After which its break up value will be Rs. +... only. ind out amount of annual depreciation and propose machinery account for first three years. So!.tio :;epreciation4 7ost price$ :crap value 5ife of Assets 4 ;r. ;ate +MHN &an + ++...$+... 4+...Rs. +. 6articulars Amount To cash ++"... A<c ++"... +MHI &an + To 'alance '<d +."... +."... +MHI ;ec C+ ;ec C+ 'y ;epreciation A<c 'y 'alance 7<d ;ate +MHN ;ec.C+ ;ec.C+ 6articulars 'y ;epreciation A<c 7r. Amount +"... +."... ++"... +... M... +."...

+MHH &an +

To 'alance '<d

M"...

+MHH ;ec C+ ;ec C+

'y ;epreciation A<c 'y 'alance 7<d

+... H... M"...

M"... +MHM &an

To balance '<d

H...

C, Di'i i#4i * Ba!a ,$ M$t4o- @o& 5&itt$ -o5 2a!.$ '$t4o-= Gnder this method also cost of assets less estimated scrap value has to be written off over its estimated useful life. A certain percentage is calculated on book value and not cost of assets. Thus the amount of depreciations goes on falling every year. The value of asset never comes to zero under this method. A-2a ta*$:-

+, Gnder this method there is equal burden of depreciation and repairs on profit loss A<c /, The book value of assets never falls to zero. C, This method is recognized by income ta! law. D, This is very simple. -, It needs no difficult calculation. Di#a-2a ta*$#:+, 6roper and sufficient depreciation is not provided under this method because rate of depreciation is kept very low. /, Bo account is kept of interest on value of assets. C, Rate of depreciation cannot be easily decided. D, Fi($- B.-*$t:Acc. To I.7.8A" 5ondon"* i!ed budget is" (a budget designed to remain unchanged irrespective of level of activity actually attained.* Thus a budget proposed for a fi!ed level of activity is known as a fi!ed budget. It is a fi!ed budget is one" which is designed for a specific planned output level and is not adKusted to the level of activity attained at the time of comparison between budget and actual cost. A fi!ed budget can be established only for a small period of time when the actual output is not anticipated to differ much from the budgeted output. %owever" a fi!ed budget is liable to revision due to0$ +, /, C, D, Too much dependence of sales upon e!ternal factors. Too many seasonal fluctuations. Impossible to pre$Kudge the customize reaction towards a new return Gnpredictability of labour supply.

'ut such revision of becomes a very complicated task. #n A<c these limits of fi!ed budget" fle!ible budgeting is preformed. These budgets are most suited for fi!ed e!penses but they have only a limited application and in effective as a tool for cost control. F!$(i1!$ 1.-*$t:Acc. To I78A" 5ondon" (a fle!ible budget is a budget which by recognizing the difference between fi!ed" semi$variable and variable cost is designed to change in relation to the level of activity attained.* le!ible budget is one which is prepared in such a manner as to facilitate determination of budgeted cost for any level of activity. It is also known as (@ariable budget* or sliding scale budget*. If a budget is prepared for I.2 level of prod. Activity and the actual level of activity level of activity changes to H.2 or N.2L this budget can be easily adKusted to the requested level. Thus budgets are fle!ible.

In order to prepare fle!ible budgets" the e!penses are disulfide according to their variability in to fi!ed" variable and semi$variable costs. +, i!ed cost remains fi!ed irrespective of volume of output. /, @.c changes with the volume or level of output. C, :emi$variable costs are partly fi!ed and partly variable. F$at.&$ o% %!$(i1!$ 1.-*$t:+, They are prepared for a range of activity instead of single level. /, They provide a very dynamic basis for comparison because they are automatically geared to change in volumes. C, They provide a tailor$made budget for a particular volume. D, These are based upon adequate knowledge of cost behavior pattern. N$$- %o& %!$(i1!$ 1.-*$t:+, 9here the demand for the product changes a according to change in taste and fashion. /, :easonal flue bat ions in sales and< or production for e!ample soft drinks industry" woolen industries" raincoats etc. C, 9here level of activity fluctuate due to frequent introduction of new product. D, 9here customer)s reaction towards a new product is almost impossible to foresee and to product -, 9hen production is aimed out only after receiving customer)s order. N, 9here business depends heavily on e!port markets. I, 9here sales are unpredictable due to typical nature of business and influents of e!ternal factors. H, &obs or contracts are under taken which very in size and specification etc. Si* i%i,a ,$ o% F.B:A fi!ed budget is productivity of no uses because the actual level of operation does not invariably conform to budgeted level of activity. :o to overcome this defect fle!ible budget is introduced. le!ible budget as compared to fi!ed budget has many merits to its credit which specifies significance of fle!ible budgeting. :ome of the advantages are0$ +, It presents details regarding output" cost sales and profit for varying level of business operations which makes the managerial analysis more practicable and feasible. /, It make possible the comparison of actual performance and budgeted for actual level of operations in a very easy and understanding way. C, i!ed budget fails to achieve the obKective of cost control and hence fle!ible budget becomes an indispensable tool for achieving the obKective of cost reduction and cost control. D, Xeeping into A<c the e!act and precise forecasts for a rigid level of operation can be made. As such it is useful to for coast for varying level of operation. This is possible only by adopting fle!ible budgetary system. #n account of above merits the utility of fle!ible budget greatly increased. In addition to above" there is some business concern for whom fle!ible budgeting in

most desirable simply because it is difficult Kob to prepare precise and accurate estimates of production < sales. ;ifference between fi!ed and fle!ible budget0$ D$%i itio Fi($It known as rigid or infle!ible budget. 5evel of activity It operates on one level of activity and less than one set of conditions. It assumes that these will be no change in the prevailing conditions" which is unrealistic. Analysis of variance %ere all cost like .7" @.7" and :.@7 are related to only level of activity so variance analysis does not give useful information. 7ost ascertainment and If the budgeted and price fi!ation actual activity levels differ significantly" then the aspects like cost ascertainment and price fi!ation do not reveal a correct picture. 'asis of comparison 7omp of actual performance with budgeted target will be meaning less especially where there is difference between the / activity levels. F!$(i1!$ It is not rigid It consists of various budgets for different level of activity.

%ere analysis of variance provides useful information as each cost is analyzed acc. To its behavior. .'. at different level activity facilitates ascertainment of cost" fi!ations of :.6 and tendering of quotations. It provides a meaningful basis of comp. #f the A. perf. 9ith the budgeted targets.

Ratio#:A, 6rofitability ratio or ', Activity ratio or turnover ratio or performance 7, inancial ratio or solvency ratio ;, 8iscellaneous ratio or market test ratio.

A Return on investment Return on share holders Return on fi!ed assets Aross profit or gross margin B.6 ratio #pening ratio

' 7op. Turnover :tock 9.7ap Total asset ;ebaters 7reditors

7 5iquidity 7urrent liquid :olvency ;ebt$>quity 6roprietors i!ed Assets ;ebt$service 7ap gearing

; >arning per share 6ay out ;ividend yield 6rice earning

6eaning o$ :udget A budget is a detailed plan of operators for some specific future period. It is an estimate prepared is advance of period to which it applies. It acts as a business barometer as it is complete programmed of activities of business for the period covered. A,,o&-i * to CIMA, /o -o , 1.-*$t i# -$%i $- a#, LFi a ,ia! a - 0.a titati2$ #tat$'$ t, )&$)a&$- )&io& to -$%i it$ )$&io- o% ti'$, o% )o!i," to 1$ ).&#.$- -.&i * t4at )$&io-, %o& t4$ ).&)o#$ o% attai i * a *i2$ o1C$,ti2$#.M T4.# t4$ $##$ tia!# o% 1.-*$t# a&$:EA, It i# )&$)a&$- i a-2a ,$ J i# 1a#$- o %.t.&$ )!a o% a,tio #. @B= It &$!at$# to a %.t.&$ )$&io- J i# 1a#$- o o1C$,ti2$# to 1$ attai $-. @C= It i# a #tat$'$ t $()&$##$- i 'o $ta&" J )4"#i,a! . it# )&$)a&$- %o& i')!$'$ tatio o% )o!i," %o&'.!at$- 1" 'a a*$'$ t. Di%%$&$ t t")$# o% 1.-*$t# a&$ )&$)a&$- 1" a i -.#t&ia! ,o ,$& %o& -i%%$&$ t ).&)o#$#. A #a!$# 1.-*$t i# )&$)a&$- %o& ).&)o#$ o% %o&$,a#ti * #a!$# %o& %.t.&$ )$&io-. A 'a#t$& 1.-*$t $'1o-i$# %o&$,a#t# - %o& #a!$# J ot4$& i ,o'$# %o& 'a .%a,t.&i *, 'a&;$ti * J ot4$& $()$ #$# 1$#i-$# %o&$,a#ti * t4$ %i*.&$# %o& )&o%it o& !o##. B.-*$t VHS Fo&$,a#ti * A forecasting is a statement of facts likely to occur. A,,o&-i * to CIMA, /o -o , a %o&$,a#t i#, La #tat$'$ t o% )&o1a1!$ $2$ t#M. At )!a i * #ta*$ it i# $,$##a&" to )&$)a&$ %o&$,a#t o% )&o1a1!$ ,o.&#$# o% a,tio %o& 1.#i $## i %.t.&$. +!a # o& 1.-*$t a&$ )&$)a&$- o t4$ 1a#i# o% t4$#$ %o&$,a#t i o&-$& to a,4i$2$ o1C$,ti2$# o% t4$ o&*a i:atio . T4$ %o&$,a#t o% a %. ,tio $$- ot $,$##a&i!" 1$ ,oo&-i at$- 54i,4 i# $$-$- 1$%o&$ i #ta!!atio o% 1.-*$t. A %o&$,a#t i# t4$&$%o&$ a 1a#i# o% 1.-*$t. A 1.-*$t i# a #tat$'$ t o% )!a $- $2$ t# *$ $&a!!" $()&$##$- i %i a ,ia! J 0.a titati2$ t$&'#. It i# *$ $&a!!" $2o!2$- %&o' %o&$,a#t. A %o&$,a#t -$ ot$# #o'$ -$*&$$ o% 1o##i $## 54i!$ a N1.-*$t? -$ ot$# a -$%i it$ ta&*$t.

:asis o$ Destination @1= E2$ t#

:udget It &$!at$# to )!a $- $2$ t# i.$. )o!i," J )&o*&a''$&# to 1$ %o!!o5$- i a %.t.&$ )$&io- . -$& )!a $- ,o -itio . It i# .#.a!!" )!a $- #$)a&at$!" %o& $a,4 aH, )$&io-. It ,o')&i#$# 54o!$ 1.#i $## . it #$,tio a! 1.-*$t# a&$ ,oo&-i at$i to !o*i,a! 54o!$. It i# a too! o% ,o t&o! a# it &$)&$#$ t# a,tio # 54i,4 ,a 1$ #4a)$- a,,o&-i * to ,o -itio 54i,4 'a" o& 'a" ot 4a))$ . +&o,$## o% 1.-*$t #ta&t# 54$&$ %o&$,a#t a - ,o 2$&t# it i to a 1.-*$t. It i# 'a-$ i &$#)$,t o% t4o#$ #)4$&$# 54i,4 a&$ &$!at$- to 1.#i $##. +.&)o#$ o% B.-*$ti *

Forecast It i# ,o ,$& $- 5it4 )&o1a1!$ $2$ t# !i;$!" to 4a))$ . -$& a ti,i)at$,o -itio -.&i * #)$,i%i$)$&io- o% ti'$. It 'a" ,o2$& a !o * )$&ioo& "$a&#. It 'a" ,o2$& !i'it$%. ,tio # o% 1.#i $## a# #a!$# %o&$,a#t. It -o$# ot ,o ot$ a " #$&2$ o% ,o t&o! a# %o&$,a#t i# '$&$!" a #tat$'$ t o% %.t.&$ $2$ t#. T4$ %. ,tio # o% %o&$,a#t a - 5it4 t4$ %o&$,a#t o% !i;$!" $2$ t#. It i# 'a-$ i #$2$&a! ot4$& #)4$&$# 54i,4 'a" ot 1$ ,o $,t$- 5it4 1.-*$ti * )&o,$##.

@A= +$&io@6= Co2$&a*$ @8= Co t&o!

@9= +&o,$## @F= S)4$&$

T4$ 'aCo& ).&)o#$ O i')o&ta t o% 1.-*$t# o& 1.-*$ti * a&$:@1= :tatement of e!pectations0 A %i&' $#ta1!i#4$# !o * &a *$ o1C$,ti2$# 54i,4 a&$ ).&#.$- i #.,,$##i2$, #4o&t &. #t$)# i %.t.&$ )$&io- o% ti'$. A 1.-*$t i# a '$a # to a,4i$2$ t4$#$ *oa!# 1" 'ai tai i * &$!atio #4i) 1$t5$$ #4o&t &. *oa!# J !o * &. . O1C$,ti2$# o% %i&':-It 4$!)# to ,!a&i%" a##.')tio # . -$&!"i * %.t.&$ *oa!#. Fo& $(a')!$:- I% #a!$# ta&*$t %o& $(t "$a&?# %o&'.!at$-, 1.-*$t *i2$# -$tai! a1o.t )&i,$#, 0.a titi$#, #a!$# $%%o&t $t,. 54i,4 a&$ 1a#$- o .'1$& o% %a,to&# #.,4 a# -$'a - a - #.))!", t$,4 o!o*i,a! ,4a *$#, $,o o'i, ,o -itio # $t,. @A= Co''. i,atio : T4$ )$o)!$ o% $ t$&)&i#$# #4o.!- ; o5 54at *oa!# a&$, t4$" #4o.!- . -$&#ta - a - #.))o&t t4$'. To) 'a a*$'$ t ,o''. i,at$# 1.-*$t to !o5$& !$2$! #o a# to 'a;$ t4$' ,!$a& 54at i# to 1$ a,4i$2$-. @6= +!a i *: It i# $##$ tia! to a,,o')!i#4 *oa!#. It &$-.,$# . ,$&tai t" a )&o2i-$# -i&$,to&# to $')!o"$$# 1" -$t$&'i i * ,o.&#$ o% a,tio # i a-2a ,$. B.-*$ti * ,o')i!$# 'a a*$'$ t to )!a i a ,o')&$4$ #i2$ 5a". +!a i * i 2o!2$# 54at #4o.!- 1$ -o $ 4o5 *oa!# 'a" &$#)o #i1i!it" a - 1$ 4$!- a,,o. ta1!$. @8= Coo&-i atio : To i')!i$# )&o)$& 1a!a ,$ 1H5 !a1o.&, 'at$&ia! J ot4$& &$#o.&,$# #o t4at *oa!# a&$ attai $- at 'i ,o#t. T4$ a,ti2iti$# o% 2a&io.# -$)a&t'$ t#

'.#t &$'ai i 4a&'o " 5it4 $a,4 ot4$&. Fo& $(a')!$, t4$&$ #4o.!- 1$ ,oo&-i at$1H5 a,ti2iti$# o% )&o-.,tio -$)tt a - #a!$# -$)tt. It i# . -$#i&a1!$ to )&o-.,$ a )&o-.,t 54i,4 ,a ot 1$ )&o%ita1!$ #o!- to #a!$# -$)tt. /i;$5i#$, #a!$# -$)tt #4o.!ot ,&$at$ -$'a - %o& )&o-.,t 54i,4 ,a ot 1$ )&o-.,$- 1" )&o-.,tio -$)tt. @9= Co t&o!: It ,o #i#t# o% a,tio $,$##a&" to $ #.&$ t4at )$&%o&'a ,$ o% o&*. ,o %o&'# to )!a # a - o1C$,ti2$#. Co t&o! o% )$&%o&'a ,$ i# )o##i1!$ 5it4 )&$ -$t$&'i $- #ta -a&- 54i,4 a&$ !ai- -o5 i 1.-*$t. T4.#, 1.-*$ti * 'a;$# ,o t&o! )o##i1!$ 1" ,o ti .o.# ,o')a&i#o o% a,t.a! )$&%o&'a ,$ 5it4 t4at o% 1.-*$t #o a# to &$)o&t 2a&iatio # %&o' 1.-*$t to '*'t o% ,o&&$,ti2$ a,tio #.

E##$ tia!# o% B.-*$ti *:A successful and sound budgeting system is based upon certain pre requisites which represent mgmt attitude" org structures and managerial approaches necessary for effective and efficient application of budgeting system. The following are some imp essentials or fundamental of a successful budgeting. E+, Top management support0 A 1.-*$ti * #"#t$' 5i!! %ai! i# it ot i #ta!!$- a #.))o&t$- 1" to) '*'t 1$,a.#$ it i# a i')o&ta t 'a a*$'$ t too. A ,o')a " 5i!! 1$ a1!$ to i')!$'$ t 1.-*$t )!a # $%%i,i$ t!" i% to) '*'t 4a# )o#iti2$ attit.-$ to5a&-# 1.-*$ti * a - *i2$# -i&$,tio # %o& 1.-*$t i')!$'$ tatio #. B.-*$t $#ti'at$# a&$ *$ $&a!!" )&o)o#$- 1" !i $ 'a a*$& 1.t to) 'a a*$'$ t 4a# &$#)o #i1i!it" o% ,oo&-i ati * 1.-*$t o% -i%% -$)a&t'$ t# a - a))&o2i * t4$' %i a!!" a - i itiat$# %o!!o5-.) )&o,$-.&$ to #$$ t4at t4$&$ $%%$,ti2$ i')!$'$ tatio o% 1.-*$t#. E/, 7lear and realistic goals0 B.-*$ti * i# a '$a # to a,4i$2$ *oa!# a - o1C$,ti2$# a - it ,a ot #.,,$$- i% *oa!# a&$ ot ,!$a& 1$,a.#$ t4$&$ 5i!! 1$ !a,; o% )&o)$& -i&$,tio , a - $%%o&t o% '*'t 5i!! 1$ 5a#t$-. T4$&$%o&$ t4$ %i a ,ia! 'a a*$& '.#t $ #.&$ t4at o1C$,ti2$# a - *oa! 4a2$ 1$$ )&o)$&!" !ai- -o5 , #4o.!- 1$ 5&itt$ i %o&'a! t$&'#, &$a#o a1!$ a - &$a!i#ti,. B.-*$t *oa!# #4o.!- ot 1$ #$t at too 4i*4 o& too !o5 !$2$!. Goa!# #$t a 4i*4 !$2$! a&$ i')o##i1!$ to attai a - $')!o"$$# -o ?t ).t a " #$&io.# $%%o&t# to a,4i$2$ t4$'. Goa!# #$t at a 2$&" !o5 !$2$! -o ?t )&o2i-$ a " ,4a!!$ *$ to $')!o"$$# a - t4$" a&$ !$## 'oti2at$-. Goa!# %o& a $ t$&)&i#$ -$)$ - o 'a " %a,to&# #.,4 a# #i:$, a*$ o% $ t$&)&i#$, at.&$ o% a,ti2iti$# a - ot4$& %a,to&#. EC, Assignment of Authority and Responsibility0 A #o. - o&*a i:atio a! #t&.,t.&$ i# $##$ tia! %o& #.,,$## o% 1.-*$ta&" #"#t$'. A.t4o&iti$# a - &$#)o #i1i!iti$# o% $a,4 'a a*$& #4o.!- 1$ ,!$a&!" i-$ ti%i$- a - $#ta1!i#4$- 54i,4 )&o2i-$ a $%%$,ti2$ '$a # to a,4i$2$ $ t$&)&i#$ o1C$,ti2$# i $%%i,i$ t 'a $&. I% t4$&$ i# o &$!atio #4i) 1H5 1.-*$ti * #"#t$' a - o&* #t&.,t.&$ o% $ t$&)&i#$ )!a i * a - ,o t&o! 5o.!- ot 1$ $%%$,ti2$. I t4$ a1#$ ,$ o% ,!$a& – ,.t a##i* '$ t o%

a.t4o&iti$# a - &$#)o #i1i!iti$# $it4$& 'a a*$& ,a ot 1$ 4$!- a,,o. ta1!$ %o& t4o#$ a,ti2iti$# %o& 54i,4 t4$" 4a2$ o &$#)o #i1i!iti$#. 7reation of Responsibility centers0 As the large firm cannot be surprised by an individual or few individuals so for effective control of all activities" each sub unit has certain activities to perform and its manager is assigned specific authority and responsibilities to carry out those activities. The sub$unit of an enterprise for purpose of control is called responsibility center or decision center. The imp criteria of creating it is that unit of org should be separable and identifiable for operating purposes and perform once measurement should be possible. A-2a ta*$# o% B.-*$ti * 'udgeting is the important management tool" it a way of managing. 8any benefits are derived from budgeting although it is a mean not an end itself. It is feed forward process that is it makes an evaluation of variables likely to affect the future operation of enterprises" it predict future with reasonable precision and removes uncertainty to great e!tent. The following are some of more signifies advantages of budgeting0 1=Fo&,$- )!a i * 0'udgeting compels the management to plan for future. The budgeting process the management look ahead and become the more effective and efficient in administrating business operation It installs into the managers the habit of evaluating carefully their problems and related variable before making any decision. A=Coo&-i at$- o)$&atio 0 It helps to coordinate" integrate and balance efforts of various departments in light of overall obKectives of enterprises. This result in good harmony among departments. 6=+$&%o&'a ,$ $2a!.atio a - ,o t&o! 0'udgeting facilitates control by fi!ing standards and then compare the standard with actuals to evaluate performance. If any deviation occurs measurable steps are taken. 8=E%%$,ti2$ ,o''. i,atio 0It improves quality of communication The enterprises obKectives budget goals "plans" authority and responsibility and procedures to implement plans are clearly written and communicated Through budgets to all individuals in the enterprises. This results in the better understanding and a good relations among managers and subordinates. 9=O)ti'.' .ti!i:atio # o% &$#o.&,$#: It help to make the optimum utilization of the resources that is capital and human by directing their effort in most profitable channels. F=+&o-.,ti2it" i')&o2$'$ t0 It increases morale and thus the productivity of employees by seeking their participation in the formulation of plans and policies bringing harmony between individual goal and the enterprises obKective by providing incentives to perform more effectively. E=+&o%it 'i -$- $##: 'udgeting develops the atmosphere of profit mindedness and the cost conciouness .It helps in preventing waste" reducing e!pences and attaining desired return on investments.

I=Ma a*$'$ t 1" $(,$)tio : 8anagement give the attention on important matters through budgeting reports and facilitates the management by e!ception and thereby saves time and energy P=E%%i,i$ ,": It measures efficiency "permits self evaluation and indicates progress in attaining enterprises obKectives. /i'itatio # i 1.-*$ti * 1=B.-*$t )!a i# 1a#$- o $#ti'at$#0 'udgeting is not an e!act science and it based on facts and managerial Kudgement which suffers from personal biases. The success or failure of budget depends to a large e!tent upon accuracy of basic estimates or forecasts. A=Co ti o.# a-a)tatio 0'udgeting is the dynamic process The installation of perfect system of budgeting is not possible in the short period .'usiness conditions change rapidly therefore budgeting programme should be continuously adapted. and should be continous process .8anagement should not loose patience and go on trying various technique and procedure in developing and using budgeting system to achieve the success. 6=I')!$'$ tatio 0 Gnless budget is properly implemented "budget programme will not work. or success of budgeting programe it is essential that it is understood by all and all person s in the enterprises must have full involvement in preparation and e!ecution of budgets" otherwise budgeting will not be effective. 8=Ma a*$'$ t ,o')!a,$ ,"0 'udgeting is a management tool$ a way of managing and not the management .To get the best result of managing "management should use budgeting with intelligence and foresight along with the other managerial techniques. 9=U $,$##a&" -$tai!#: 'udgeting will be ineffective and e!pensive if it is unnecessarily detailed and complicated A budget should be precise format and simple to understand and should be fle!ible. F=Goo- ,o %!i,t: If budget set does not matches with the purpose of budgeting of enterprises then there will be conflict and confuses so there must be harmony with enterprises aims. E=E2a!.atio : 'udgeting will hide inefficiencies instead of reveling them if a proper system evaluation lacks. There should be continous evaluation of actual performance and standards should be re$ e!amined regularly. I=U &$a!i#ti, ta&*$t#0 'udget will lower morale and productivity if unrealistic targets are set and if it is used as pressure tactic I/ O II :tages in Installing 6rofit 6anning and 7ontrol :ystem0 $ A comprehensive system of profit planning and control involves the following steps0 A formulation and clear statement of broad" long$range obKective of the enterpriseL

;etermination of the goals of the various departments or sub$unit" and their role and significance in the accomplishment of broad" long$range obKective. This includes preparation of decentralized product and service plans" plans for growth rates" profit margins" returns on investment etc.L ;etermination of basic policies and strategies to be pursued in the performance of enterprise goals as well as the department goalsL ormulation of formal budgets and proKected statements like cash inflow and outflowL working capital flows capital budget" statements of costs and revenues" proKected balance sheets etc. 8easurement of actual performance against budgets" plans and standardsL In addition to the planning and budgeting of financial items like sales revenues" costs. 6rofit planning also involves logistic and facilitates planning to ensure an adequate supplies of materials and supplies" and availability of operating capacity to carry out production and sales during the ensuring period. 5ikewise" profit$planning leads to good deal of personal planning so that an adequate and well trained work force is available to achieve the target set in profit plans. In most cases" sales revenue is the key$inde! of most other activities throughout the enterprise. The process of developing a comprehensive profit plan is too comple! and cumbersome for frequent repetition. The mgmt has to resort to short$period planning in the form of financial and operating profit plans for the various segments of the enterprise. %owever" these plans have to be fitted into the broad and long$range obKective reflected in the comprehensive plan. As a matter of fact" short$range planning is a step to modify broad obKectives to meet the charges within and without the enterprise. rom the above discussion it may be said that all planning and control system necessarily provide for the O :etting of profit obKectives0 $ 6rofit generation is a desirable goal of business enterprise. 6rofit obKectives may be set in term of a desired rate of return on capital for the enterprise as a whole. In the setting of this obKectives factors like business risk" economic environment" political situations" market condition" general and specific industry)s rate of return" will have to be considered by the top mgmt. The general and specific industries rate of return may serve as an inde! for formulating rate of return for the enterprise. 'ut" this will have to be adKusted in the light of specific conditions affecting the enterprise. 6reparation of 6rofit budget0 $ The broad profit obKectives and the sub$profit obKectives" in order to be accomplished" have to be worked and e!pressed in absolute terms in the form of budgets. 'udgets should be developed Kointly by profit responsible e!ecutives" their subordinates and their immediate superiors. The purpose of this multilevel participation is to secure a more realistic plan and to increase the motivational impact of the final plan. 'udget process and methods are affected to a great e!tent by the type of organization structure and the e!tent of deviation of authority within the org. It also differs from activity to activity and from division to division. It also differs from enterprise to enterprise" depending upon e!tent of sophistication e!isting in an enterprise. Analysis for profit performance0 $ 'udget serves as a guide for action of the operational manager and also as a tool to measure and compare performance with the budget. :uch comparison b<w budgeted and actual performances of various managers reveal the deviation from the planned profit path. Two commonly accepted techniques for analyzing profit performance are Ea, 6rofit budget performance analysisL and Eb, break$even analysis. Advantage of profit planning and control

6rofit planning and control provide a systematic and practical approach for effectively bringing a greater degree of practicability and success to the mgmt process. In addition" a sound system of profit planning and control provides the following advantages0 It provides an opportunity for an early and proper consideration of basic policies. It enables mgmt to plan for the most economical use of resources in the form of labour" material" capital etc" It relieves the e!ecutives from drudgery of day$to$day problems and enables them to concentrate and devote more time for planning and creative thinking. ;rawbacks of profit planning and control0 $ In the installation and application of profit planning and control system the following inherent drawbacks should be kept in mind0 6rofit plan are based on estimates. Their value would depend upon the accuracy of the basic estimates" which emerge from managerial Kudgments" which may" at times" be tempered by subKectivity. This calls for a considerable degree of fle!ibility in the interpretations and utilization of profit results. The e!ecution of profit planning is never automatic involvement of the e!ecutives at the formulation stage" proper authority and responsibility and a systematic coordination of various segments of the enterprise is essential for its e!ecution. 6rofit planning and control is Kust a tool in the hands of mgmt and aids the mgmt in accomplishing its task. It cannot replace mgmt. There is always a temptation for too much formalization in the formulation and use of profit planning system.

Utilities of cash flow statement The purpose of cash flow statement is to provide information about the cash flows associated with the period of operations and also about the entity)s investing and financing activities during the period. This information is important to shareholders" part of whose investment return Edividends, is dependent on cash flows a and to lenders" whose interest payment and principal repayment require the use of cash. The welfare of other constituents of a company including its employees" its suppliers" and the local bodies that may levy ta!es on it" depends to varying degrees on the company)s activity to generate adequate cash flows to fulfill its financial obligations. The usefulness of cash flow statement can be summarized as follow0 +, +&$-i,at$ %.t.&$ ,a#4 %!o5#:The cash flow statement males it possible to predict the amounts" timing and uncertainty of future cash flows on the basis of what has happened in the past. This approach is better than accrual basis data presented by profit and loss account and the balance sheet. /, D$t$&'i $ t4$ a1i!it" to )a" -i2i-$ -# a - ot4$& ,o''it'$ t#:A cash flow statement indicates the sources and uses of cash under suitable headings such as operating" investing and financing activities. :hareholders are interested in receiving dividends on their investments in the shares. 7reditors want to receive their interest and principal amount on time. The statement of cash flows helps investors and creditors to predict whether the business can make these payments. C, S4o5 t4$ &$!atio #4i) o% $t i ,o'$ to ,4a *$# i t4$ 1.#i $## ,a#4: - Gsually cash and net income move together. %igh levels of income tend to lead to increase

in cash and vice$versa. A company)s cash balance can decrease when its net income is high" and cash can increase when income is low. The users want to know the difference between the net profit and net cash provided by operations. The net profit shows the progress of the business during the year while cash flow related more to the liquidity of the business. The users can assess the reliability of net profit with the help of cash flow statement. D, E%%i,i$ ," i ,a#4 'a a*$'$ t: - 7ash flow analysis helps in evaluating financial policies and cash position. It facilities the management to plan and co$ordinate the financial operations properly. The management can estimate how much funds are needed" from which source they will be derived" how much can be generated internally and how much should be arranged from outside. -, Di#,!o#$# t4$ 'o2$'$ t ,a#4: - A comparison of cash flow statement for the previous year with the budget for that year would indicate to what e!tent the resources of the enterprise were raised and applied. A comparison of the original forecast with actual result may highlight trend of movement that might otherwise undetected. Di#ti ,tio 1$t5$$ %. -# %!o5 a - ,a#4 %!o5 #tat$'$ t#:$ a, b, c, unds flow statement is consonant with the accrual basis of accounting while in case flow statementL data obtained on accrual basis are converted into cash basis. unds flow analysis is more relevant and useful in assessing the long range financial strategy" while cash flow analysis is useful in understanding the short term phenomena affecting liquidity of the business. unds flow statement tallies the funds generated from various sauces with various uses to which they are put. 7ash$flow statements show the cash flows form operating" financing and investment is adKusted to the opening balance of cash and cash equivalent to arrive at the closing balance. unds flow analyses is based on a broader concept that is working capital" while cash$flow analysis proceeds on the narrow concept that is cash" which is one element of working capital. Thus" cash flow statement provides details of cash movements where as the funds flow statement provides the details of funds movement. unds flow statement does not contain any opening and closing balance whereas in cash flow statement opening as well as closing balance of cash and cash equivalents is given. Ca#4 %!o5 #tat$'$ t:9here it is derived to e!plain to management the source of cash and its uses during period of time a statement known as cash flow statement is prepared. A statement of cash flow report inflows Ereceipts, and outflows Epayment, of cash and its equivalents of an organization during a particular period. A statement of cash flow report cash receipts and payment classified according to maKor activates$operations" investing and financial during the period. MD$ till end 8anagement by e!ception0 The principle (management by e!ception* can be made applicable in the business. This helps the mgmt in concentrating its attention on cases

d,

e,

which are off standard i.e. below or above the standard set in the trend of cost is portrayed and therefore" a pattern is provided for the elimination of undesirable factors causing damage to the business. 'etter economy efficiency" productivity0 8anagerial review of costs is more effective as the operations are scrutinized carefully and in efficiencies are disclosed. 8en" machines and materials are more effectively utilized and thus the economics can be affected in business together with based productivity. 'esides it" a lot of clerical lab our is also saved and economy is attained in calculation and computations. 5imitation of :7 :tandard costing is a powerful mgmt aid in planning" control" F decision$making. 'ut if it is improperly handled F if due consideration is not given to various constraints in developing and using standards" it can create problems for mgmt. The following are the limitation$$Y ;ifficulty in setting standards  it is difficult to forecast cost as some of factors influencing them are unpredictable. :econdly" standards are set by human beings" whose preKudices and biases are likely to influence the establishment of standards. Infle!ibility of standards0 :tandards have the tendency of becoming infle!ible or rigid overtime. :tandard set at a point of time are based on assumptions of operating conditions which may change frequently and its diff to revise standard conditions change. The frequent revision of standard is diff as well as e!pensive. If standards are revised frequently they will mar the performance and efficiently evaluation criterion. #n other hand if standards are not revised for changes in operating cycle" they would become unrealistic. Therefore in real practice standards should be revised for every change operating conditions" but they should be certainly adKusted if the change is significant. 6roblems in @ariance Analysis 0$Y :tandard costing helps in managerial control through variance analysis. It is difficult to e!plain variance when need arises to distinguish between controllable F non$controllable elements of variances. 8ore over" if a variance is caused by random factors" it becomes more difficult to e!plain the variance. ;iscouraging Impact of :tandards 0$Y :tandards are sometimes considered to have discouraging impact on efficiency F morale of individuals. :ome of recent studies reveal that workers F supervisors do not welcome standards because they consider them to be oppressive F resist them. Gnsuitable for :mall irms 0$Y In small org." 6roduction operations are simple F therefore detailed analysis may not be necessary. ailure due to Top 8anagement Apathy 0$Y or success" top management should not only take keen interest in it but should also seek participation of all. At times" it becomes difficult to seek real support of top management. They may not disagree to idea of introducing standard cost system but at same time may not take interest in its effective implementations.

Standard costing v/s budgetary control

'oth standard costing and budgetary control achieve the same obKective of minimum efficiency and cost reductions by establishing predetermined standards" comparing actual performance with predetermined standards and taking corrective measures where necessary. Thus" although both are useful tools to the mgmt in controlling costs" they differ in following respects0 $ 6oint of ;istinction E+, 'asis E/, Application EC, :cope :tandard costing :tandards are based on technical assessment It is applied to manufacture of a product" process or services. Thus it is intensive in application. :tandards are set mainly for production and production e!pends. Therefore it has narrow scope :tandards setup targets" which are to be attained by actual performance. 'udgetary control 'udgets are based on past assessment It deals with operations of a department of business as a whole. It is e!tensive. 'udgets are compiled for all items of income and e!pend fore. Therefore" it has wider scope.

ED, 5imit of e!penses E-, 6roKection

EN, @ariance

EI, orecasting

'udgets setup ma! limits of e!penses above which actual e!penditure should not normally e!ceed. :tandards are 'udgets are proKections of financial 6roKections of cost account because accounts. 'ecause financial cost accounting deals with accounting deals with overall individual products" ascertaining efficiency of the business such as and controlling their costs. And sales functions" purchase functions" standard costs aim at efficiency at production functions etc. every point. In standard costing" variance is In this technique" variances are not analyzed in detail according to revealed through accounts but are their originating causes. Thus" revealed in total :tandard costing reveals variances through different accounts. :tandard costs do not tell what the 'udgets are anticipated or e!pected costs are e!pected to be but rather costs meant to be used for what the cost should be under forecasting requirements of material specific conditions of production " lab our " cash etc. performance and as such cannot be used for the purpose of forecasting

i!ed budget v<s le!ible budget 6oint of ;istinction E+, le!ibility i!ed budget It is fle!ible and does not change with the actual volume of o<p achieved. le!ible budget It is fle!ible and can be suitably recanted quickly according to level of activity attained. It is designed to change according to changed conditions costs are classified according to the nature of their variability.

E/, 7ondition EC, 7lassification of costs ED, 7omparison

E-, orecasting EN, 'udget

It assumes that conditions would remain static. 7osts are not classified according to their variability i.e. fi!ed variable and semi$variable. 7omparison of actual and budgeted performance cannot be done correctly if the volume of o<p differs It is difficult to forecast accurately the results in it. #nly one budget at a fi!ed level of activity is prepared due to an unrealistic e!pectation on the part of mgmt i.e. all condition will remain unaltered. It is possible to ascertain costs correctly if there is a change in circumstances. It has a limited application and is ineffective as a tool for cost control. If the budgeted and actual activity levels vary" the correct ascertainment of costs and fi!ation of prices becomes difficult.

It is designed to change to change according to changed conditions. 7osts are classified according to the nature of their variability. 7omparisons are realistic as the changed plan figures are placed against actual ones. It clearly shows impact of various e!penses on the operational aspect of the business. Gnder it" series of budgets are prepared at different levels of activity. 7osts can be easily ascertained at different levels of activity under this type of budget. It has more applications and be used as a tool for effective cost control. It helps in fi!ations of price and submission of tenders due to correct ascertainment of costs.

EI, Ascertainment of costs EH, Tool for costs control EM, i!ation of price and sub mission of tenders.

7ost accounting v<s financial accounting 6oint of distinctions E+, 6urpose E/, orm of account inancial Accounting It provides information about the business in general way. It tells about These accounts are kept in such a way as to meet the requirement of companies) act and income ta! act. 7ost Accounting It provides information to mgmt for proper planning" operation" control and decision$making. These accounts are generally kept voluntarily to meet requirement of mgmt. 'ut now companies act has made it obligatory to keep cost records in some manufacturing industries. It records the e!penditure in an obKective manner. I.e. according to the purpose for which the costs are included. It provides detailed system of control for material" labor and overhead costs with the help of standard costing and budgetary control

EC, Recording

ED, 7ontrol

It classified records and analysis the transaction in subKective manner i.e. according to nature of e!panses. It lays emphasis on the recording aspect without attaching any importance to control

E-, 6eriodicity of reporting EN, Analysis of profit

It reports operating results and financial position at end of year. inancial accounts are accounts of whole business. They are independent in nature and disclose net profit or loss of business as a whole. It uses only monetary information It deals mainly with actual figures and facts :tock are valued at cost or market price which over is less B&$a; E2$ A a!"#i#

It gives information through cost reports to mgmt as and when desired. It is only a part of financial account and discloses profit or loss of each product" Kob" and service. It uses both monetary and non monetary information It deals partly with facts and figures and partly with estimates. :tocks are valued at cost.

EI, Information EH, igures EM, :tock valuation

It is a widely used technique to study the cost $volume Oprofit relationship. The narrower interpretation of term break Oeven analysis refers to system of determination of that level of activity where total cost equals total selling price. The broader interpretation refers to that system of analysis which determines probable profit at any level of activity. It portrays the relationship between the cost of production" volume of production and sales value. 'reak Oeven analysis indicates the level of sales at which cost and revenue are in equilibrium .The equilibrium point is commonly known as break even point" The break even point is that point of sales volume at which total revenue is equal to total cost. Uti!it" o% B&$a; E2$ A a!"#i#: It is the most useful technique of profit planning and control. It is a device to e!plain the relationship between the cost volume profit .The utility of break even analysis lies in the following advantages0 +, +&o2i-$- -$tai!$- a - . -$&#ta -a1!$ i %o&'atio : 'reak even analysis is a simple concept to present and interpret accounting data. 8any business e!ecutives and other are unable to understand accounting data contained in the financial statements and reports but break even charts visualizes information very clearly and a look at a glance shall give a vivid picture of whole affairs. The different elements of cost direct material" direct labour" overheads Efactory" office and selling etc, can be presented through an analytical break even chart. urther the information is in a simple format therefore it is clearly understandable even to layman. A= +&o%ita1i!it" o% )&o-.,t a - 1.#i $## ,a 1$ ; o5 : The profitability of different can be known with the help of break even chart" besides the level no profit no loss .The problem of managerial decision regarding temporary or permanent shutdown of business or continuation at a loss can be solved by break even analysis .It is thus provides the basis information for profit improvement studies and it is useful starting point for the detailed investigation.

6= E%%$,t# o% ,4a *i * o% ,o#t a - #a!$# )&i,$ ,a 1$ -$'o #t&at$-: The effect of changes of fi!ed and variable cost at different level of production on profits can be demonstrated by graph legibly. In other words relationship of cost" volume" profit at different level of activity and varying selling prices is shown through chart. Thus it studied requisites for survival of the company. D, Co#t ,o t&o! ,a 1$ a a!":$-: The relative importance of fi!ed in the total cost of product can be analyzed and if the total cost are high" they can be controlled by the management. Thus it is a managerial tool for control and reduction of cost" elimination of wastages and achieving better efficiency. 9= E,o o'" a - $%%i,i$ ," ,a 1$ a%%$,t$-: The capacity can be utilized to fullest possible e!tent and economies of scale and capacity utilization can be affected. 7omparative plant efficiency can be studied on break even chart. The efficiency of output is indicated by the angle of incidence formed at intersection of sales line and the variable cost. F= Dia* o#ti, too!: It is useful diagnostic tool. It indicates to management the cause of increasing break even point and falling profit the analysis of these causes will reveal that what action should be taken. If break even point as a percentage of capacity is increasing" it indicates the unfavorable condition and need immediate action .It is possible that due to plant e!pansion absolute break even point may increase. This situation where break even point as a percentage of capacity may does not increase" is not unfavorable .

!i"itation o$ brea. even analysis
Though break even analysis is a simple and useful concept but it is based on the certain assumption which limits its utility and general applicability. %owever it suffers from the following limitations0 1= Ba#$- o t4$ %a!#$ a##.')tio #0 A= Co#t #$*&$*atio : It is difficult to classified fi!ed and variable cost. %owever some of the can be easily identified as fi!ed such as rent of building" or variable such as direct material cost but a large number of cost belong to mi!ed category .such cost known as semi$variable cost consists of fi!ed as well as variable cost and are difficult to separate. B= Fi($- ,o#t &$'ai # ,o #ta t: The assumption that fi!ed costs remain constant does not hold good. If a firm has zero output some of fi!ed cost can certainly be reduced or eliminated. or e!ample some of the supervisors can be dismissed and the salaries can be reduced. #n the other hand if the company uses its ideal capacity additional fi!ed cost may be incurred. Thus fi!ed costs are not constant and can change in the stepwise fashion.

C= Va&ia1!$ ,o#t 2$&" )&o)o&tio at$!"0 The variable cost does not change in the same proportion as volume of production or sales changes. for e!ample if the company increases its production or sales it need more workers who may be less efficient and less e!perienced or e!isting workers need overtime and company have to pay for it. :imilarly material cost will be less due to purchase" discounts" if purchases in bulk. :o lines drawn are not straight and sometimes a curved line is obtained in respect of total cost. -= C4a *$ i #$!!i * )&i,$: :imilarly selling price may remain the constant under the perfect competition. 'ut in the real market situation of monopolistic completion or oligopoly selling price have to be reduced to increase the sales volume. Thus sales revenue will not change in the direct proportion with output. $= Sto,; ,4a *$# -o ot a%%$,t i ,o'$#: The break even chart depicts volume of production or sales along ! a!is and thus ignores the effect of changes in stock volume. As a matter of fact it is assumed that stock changes will not affect income" but it is not true since the absorption of fi!ed cost depends on the production and not on sales. A= /i'it$- i %o&'atio 0 can be presented in a single break even chart. If we have to study changes of fi!ed cost" variable cost and selling prices" a number of charts will have to be drawn up :imilarly when a number of products are manufactured it would a difficult task to present information through single break even chart. 6=S4o&t t$&' %o,.#: It is a short term technique of profit planning and can not be used for the long term planning because it lead to long term decision. or e!ample a company wishes to increase his productive capacity and it may not yield enough revenue in the first year. Thus in the term of break even analysis company may drop idea of adding to productive capacity" but it may be beneficial over a long period of time. 8= NO $,$##it": There is no necessity of preparing the break even charts on account of the following reasons0 A= Si')!$ ta1.!atio #.%%i,i$ t0 because result of cost and sales can serve the purpose which is served by break even chart. %ence the need of presentation through chart and using mathematical tool of break even analysis does not arise. 1= Co ,!.#i2$ *.i-a ,$ ot )&o2i-$-0 Bo conclusive basis for action is provided to management by technique of breakeven analysis" ,= Di%%i,.!t to . -$&#ta -0 The chart becomes very complicated and difficult to understand particularly for the non technical man" if number of lines or curves depicted on graph is large -= No 1a#i# %o& ,o')a&ati2$ $%%i,i$ ,": 7harts do not provide any basis for the comparative efficiency between the different units. In spite of all above limitation it remain an important tool for the profit planning what is needed is that financial analyst should understand underlying assumption and their corresponding limitation and adKust his data appropriately to suits his needs.

Ma&*i a! ,o#ti * M$a i *0 According to 7I8A terminology 8arginal costing is ascertainment of marginal cost and of the effect on the profit of changes in volume or the type of output by differentiating between the fi!ed and the variable cost. In this technique only variable cost are changed to operation" processes or products" leaving all the indirect cost to be written off against profits in period in which they arise. It is clear from above that only variable cost form part of product in the technique of marginal costing because only variable cost are changed if output is increased or decreased and fi!ed cost remain the same. 9ith the increase of one unit of production may be single or batch of article)s the total cost of production increased and this increase in the total cost of production from e!isting level to new level if known as marginal cost. This will be clear from the following e!ample0 A factory produces -.. fans per annum. The variable cost per fan is Rs -. .fi!ed e!penses are Rs +....per annum. Thus the cost sheet of -.. fans will be as follows0 @ariable cost E-.. 3-., /-... i!ed cost +.... Total cost C-... If the production is increased by one unit i.e. it becomes -.+ fans per annum" 7ost sheet will appear as follows0 @ariable cost E-+.3-., /-.-. i!ed cost +.... Total cost C-.-. Therefore marginal cost per unit is Rs -. Fo&'.!a: 8arginal cost4 direct material ?direct labour cost? other variable cost F$at.&$# o% Ma&*i a! ,o#ti *: +, It is a technique of costing which is used to ascertain marginal cost and to know the impact of variable cost on the volume of output. /, All cost is classified into fi!ed and variable cost on the basis of variability .>ven semi$ fi!ed cost is segregated into fi!ed and variable cost. C, @ariable cost alone are changed to production .fi!ed cost are recovered from contribution. D, @aluation of stock of work in progress and finished goods is done on the basis of marginal cost. -, :elling price is based on the marginal cost plus contribution.

N, 6rofit is calculated by deducting the marginal cost and fi!ed cost from the sales. I, 7ost volume profit Ebreak even, analysis is one of the integral parts of the marginal costing. H, The profitability of product is based on the contribution made available by each product.

6arginal costing vs* Absorption costing
M$a i * o% Ma&*i a! ,o#ti * M$a i * o% A1#o&)tio ,o#ti *0 Absorption costing is a technique of ascertaining cost. In this technique both variable and fi!ed cost are charged to product" operation pr process. It is also (full operation costing technique* ollowing are the points of difference between the absorption costing and marginal costing0 Ba#i# A1#o&)tio 'a&*i a! +, 7ost all costs fi!ed and variable only variable cost are included. Are included for ascertain$ fi!ed cost are removed from Ing the cost. 7ontribution. Thus marginal cost4 Absorption cost4fi!ed? total cost$ E$, fi!ed cost @ariable cost /, ;ifferent unit cost are marginal cost per unit will remain #btained at different level same at different level of output #f output because of because variable e!penses vary in i!ed e!penses remaining same proportion in which output :ame. @aries C, 6rofit difference between sales difference between sales and And total cost is profit. 8arginal cost is contribution And difference between contributions And fi!ed cost is profit or loss. D, Absorption of the apportionment of fi!$ only variable cost are charged to #verheads ed e!penses on an arbiter$ products. 8arginal cost technique ary basis gives rises to do not lead to over and under #ver or under absorption absorption of fi!ed overheads. #f overheads which Gltimately makes product 7ost inaccurate and unreal $iable. -, ;ecisions it is not very helpful in the technique of marginal costing Taking managerial is very helpful in taking managerial ;ecisions such as whether decisions because it takes into To accept e!port order or consideration the additional cost Bot" whether to buy or involved only assuming fi!ed 8anufacture. 8inimum e!penses remain constant. 6rice to be charged during ;epression etc. N, 7lassification cost are classified according cost are classified according To functional basis such as to behaviour of cost i.e. fi!ed

I, Relationship

6roduction cost" office or administrative cost and selling and distribution cost. It fails to establish relation ship of cost" volume and profit as cost are seldom " classified into fi!ed and variable.

and variable cost. cost Ovolume $profit relationship is an integral part of marginal cost studies as cost are classified Into fi!ed and variable costs.

A-2a ta*$# o% Ma&*i a! ,o#ti *: 9ith the help of marginal costing technique managerial decisions can be taken regarding the several matters are discussed as under0 1=Ho5 '.,4 to )&o-.,$0 The level of output which is most profitable for a running concern can be determined. Therefore production capacity can be utilized to the ma!imum possible e!tent. Ascertainment of most profitable relationship between cost" price and volume of business shall also assist management in fi!ing the best selling prices. Thus ma!imisation of profit can be achieved and profit planning becomes easier on the basis of applying marginal costing technique A=34at to )&o-.,$0 The manufacture of which product should be undertaken can be decided upon after comparing profitability results of different products. 7ertain products or activities may turn to be unprofitable with the passage of time. 9hen e!isting capacity is to be utilized for producing the different product in varying quantities marginal costing is the good guide for deciding the optimum combination of products to match the available capacity and resources. Thus for the choice of alternative products and introduction of new products marginal costing technique is helpful to a great e!tent. 6=34$t4$& to )&o-.,$0 The decision whether a particular product should be manufactured in factory or bought from outside sources can be taken at comparing prices at which it can from outside and marginal cost of producing that article in the factory. 8=Ho5 to )&o-.,$. a=M$t4o- o% 'a .%a,t.&$0 9hen a particular product can be manufactured by two or more methods the ascertainment of marginal cost of manufacturing product under each method shall be helpful in deciding as to which method should be adopted for its manufacture. 1=Ha - o& 'a,4i $ !a1o.&0 The problem of employing machine or to produce entirely by hand labour can be solved with the help of marginal costing technique. 9=34$ to )&o-.,$0 In periods of trade recession whether the production

on the plant is to be suspended temporarily or permanently closed down can be decided upon after carefully e!amining marginal cost structure. F=At 54at ,o#t to )&o-.,$ a=E%%i,i$ ," a - $,o o'" o% )!a t# :The marginal cost indicates efficiency and economy of different plants over different ranges of products volume and output 1=No )&o%it o !o## )oi t: 9ith the help of technique of break even charts involved under the marginal costing system point of no profit on loss can be raveled and information can be presented to the management so as to facilitate the comparisons. ,=/$a#$ o& o5 $&#4i) o% )!a t: The cost of lease and ownership are studied and better alternative is adopted after Kudging and assessing the minimum sacrifice and ma!imum differential gain through technique of marginal costing. -=Co#t ,o t&o!: cost control can be effected through comparing fi!ed and variable elements of cost with the budgeted costs. $=I 2$ to&" 2a!.atio 0 'ecomes the more realistic when it is based on the marginal cost. ruitful results can be derived by combining this technique with the standard costing and budgetary control technique . T Thus we can see technique of marginal costing is of immense value for managerial decisions. /i'itatio # o% 'a&*i a! ,o#ti *: 1=C!a##i%i,atio # i to %i($- i to 2a&ia1!$ $!$'$ t# a -i%%i,.!t ta#; It is tough Kob to analysis cost under the fi!ed and variable elements since the nature of the cost is not certain in some cases. 7ertain cost may be partly fi!ed and partly variable and the division of such cost into fi!ed and variable parts separately is based in the assumptions and not facts. 7ertain overheads have no relations to volume of output or even with the time thus they cannot be categorised either fi!ed or variable .8anagement decisions regarding bonus to workers "facilities to administrative staff etc. are taken without an consideration of time or production volume. A=Fa.!t" -$,i#io # 0If the fi!ed overheads are not taken into consideration management decision regarding the price fi!ing manufacturing the product etc. may prove to be faulty and deceptive. 8arginal costs of the different products may be same" still manufacture of a particular product may not be profitable on account of heavy fi!ed costs. 6=Di%%i,.!t a))!i,atio 0 The application of marginal costing technique is difficult in most concerns. It cannot be easily applied in the Kob costing. 8=U -$& o& o2$& &$,o2$&" o% o2$&4$a-#0 As variable overheads are estimated and not based on the actual" there under and over recovery of overheads may results. 9=B$tt$& t$,4 i0.$ a2ai!a1!$0 The system of budgetary control and the standard costing serve the purpose better than the marginal costing system. Through variance analysis impact on the profitability due to changes in the volume and the efficiency can be studied and hence this technique is not required.

A))!i,atio o% Ma&*i a! ,o#ti *: 8arginal costing is a very useful tool for the management because of its following applications0 1=Co#t ,o t&o! 08arginal costing divides the total cost into fi!ed and variable cost and bring out the reason as to why profits are decreasing in spite of increasing in sales. 8oreover in marginal costing fi!ed cost are not eliminated at all. These are shown separately as deduction from contribution instead of merging with cost of sales. This helps management to control fi!ed cost in long period as these cost are programmed in advance. A=+&o%it )!a i *: ie planning for the future operation in such a way as to ma!imize the profit .Absorption costing fails to bring out the correct effect of change in sales price" variable cost or product mi! on profit of concern but that is possible with the marginal costing. 6=E2a!.atio o% )$&%o&'a ,$:It is useful for evaluating performance of each sector of concern by making difference fi!ed and variable e!penses. A product or the department will give the higher contribution should be performed if the fi!ed e!penses remain the same. 8=D$,i#io 'a;i * a=Fi(atio o% #$!!i * )&i,$ 08arginal cost of product represents minimum price for that product and any sale below the marginal cost would lead to loss .The price of product should be fi!ed at a level which not only covers the marginal cost but also make the reasonable contribution to cover the fi!ed overheads. 1=Mai tai i * a -$#i&$- !$2$! o% )&o%it0 The industry has to cut its price of product from time to time on account of competition" government regulations and other reasons. :o the contribution per unit is reduced while industry is interested in maintaining the minimum level of its profit. :o the volume of sales at which company earned desired level of profit can be determined through the marginal costing. ,=S$!$,tio o% #.ita1!$ )&o-.,t 'i(: 3hen the factory manufactures more than one product" a problem is faced by the management as to which product mi! will give the ma!imum profit. The best product mi! is that which yield ma!imum contribution and the production of that product should be increased .The product which give the less contribution should be reduced or closed down. The effect f sales mi! can be seen by comparing p<v ratio and break even point. -=Ma;$ o& 1." -$,i#io 09hether a particular part of finished product is to be manufactured within the industry or it has to be brought from outside will depend on the consideration of marginal cost. 8arginal cost of manufacturing is to be compared with purchase price of relevant material and if the cost is more than the purchase price a decision is to buy product from market .%owever certain non cost factors must be considered0 1=I %a2o.& o% 'a;i *: a,Ideal facility available

b,=uality of market supply c,;esirability of maintaining certain facilities A=I %a2o.& o% 1."i * a,5ack of capacity required b,9ider selection etc. $=A!t$& at$ '$t4o- o% )&o-.,tio 08arginal costing is helpful in comparing the alternative method of production ie machine work or hand work . The method gives the greatest contributionEassuming fi!ed cost remain the same,is to be adopted where however fi!ed e!penses change the decision will be taken on the basis of profit planning. %=E()!o&i * t4$ $5 'a&;$t#0 ;ecision regarding selling goods in the new markets Ewhether Indian or oreign,should be taken after considering following factors0 +,9hether firm has surplus capacity to meet new demandJ. /,9hat price is being offered by new marketJ C,9hether sale of goods in new market will affect present market for goodsJ *=S4.t -o5 o& ,o ti .$: 9hile deciding whether to shut down not a comparison has been made between+ cost$e.g loss of goodwill "compensation to workers" packing and storing cost of plant / benefits$e.g saving of fi!ed cost etc. on account of shut down .In case benefits e!ceed the cost it is advisable to shut down or vice$ versa.

R.!$# %o& )&$)a&i * t4$ T&ia! Ba!a ,$ 9hen balance of accounts are given and it is asked to prepare the trial balance from these balance" we should follow following rules0 1=A!! $()$ #$# a - !o##$# a&$ -$1it 1a!a ,$#: As all the e!penses and losses are debit balances they are shown on the debit side eg purchases" wages" import and e!port duties" postage and telegram e!pences "discount allowed " salaries "return inwards and interest paid "electricity "stationary" telephone e!penses insurance office e!penses repairs etc. A=A!! i ,o'$ a - *ai a&$ ,&$-it 1a!a ,$#: As all income and gain are credit balances they are shown on the credit side e.g sales" purchase return "interest received and discounts received "interest on investments etc. 6=All assets drawing and reserve on liabilities are debit balances. All these are shown in the debit balance of the trial balance. e.g furniture bills receivable" plant and machinery cash in hand "cash at bank "prepaid e!penses" goodwill etc. 8=7apital "reserve on assets created out of profit and other liabilities are credit balances and shown on the credit side of the trial balance e.g loan "bill payable "outstanding e!penses "reserve for bad debts" discount on debtors "general reserve fund "provident fund etc. 9=#pening stock is the debit balance

F=Bote closing stock is always shown below the trial balance. C!a##i%i,atio o% a##$t# 1=/i0.i- a##$t#0 are those which are represented by cash or those which can be easily converted into money such as cash in hand" cash at bank" investments "bill receivable A=Fi($- a##$t#0 are those whish are to be acquired to be retained permanently for purpose of carrying on business such assets are purchased once and last for many years such as land and building" machinery" furniture. They are also called long life assets or capital assets. 6=F!oati * a##$t# 0are such assets which are acquired either for purpose of resale or held temporarily in course of business for their subsequent conversions in to money such as stock in trade "book debt etc. The division of fi!ed asset and floating asset is not permanent and will depend upon the nature on business. or eg furniture is fi!ed asset for businessman but it will be floating asset for those who deal in furniture goods. 8=3a#ti * a##$t#: are such assets as are consumed through being worked as mines etc e.g leasehold land " copyright etc. 9=Fi,titio.# a##$t#: which are not represented by any tangible property such as preliminary e!penses "prepaid e!penses etc. F=I ta *i1!$ a##$t# 0are those which we cannot see or touch Z.g goodwill. /ia1i!iti$# 1=Fi($- !ia1i!iti$# 0such debts that are payable after a long period eg a long term loan. A=C.&&$ t !ia1i!iti$#0 that are payable time to time e.g bank overdraft "bills payableetc. 6=Co ti *$ t !ia1i!iti$#: such debts that are become payable on happening of specific incident are called contingent liabilities. or e!ample abc sold goods to %arish for Rs/...on credit and !yz stands as surety for harish .however harish becomes insolvent. Bow !yz has to pay Rs/... to abc. This amount is a contingent liability for !yz. ollowing are the eg of contingent liability + 'ill discountable before maturity / Aurantee undertaken.

1arties interested in the analysis o$ Financial state"ent
@arious internal and e!ternal parties are interested in the financial statements. The nature of interest is also different. rom the analysis of financial statement each party is interested in the business can find out whether his interest are safe" whether business is progressing whether business can pay the debts in time" what is earning capacity of the businessJ Thus the obKective of the financial analysis can be varied for various parties including management "creditors" banks" ta! officials "government etc. :imilarly it has its significance for all of them. 9ithout analysis it is difficult to understand the comple!ities of business and the decision taken by business can be wrong and misleading. The various parties are interested in the financial statement0

Ma a*$'$ t: 8anagement requires the different types of information for the decision making due to increase in the size and the comple!ities in the business which can be collected from financial statement. These statement e!plain the facts relating to creditability efficiency performance financials soundness etc. It helps the management not only in the financial planning but also in the financial control. At the time of financial planning" management can ascertain the effects of its decisions on the profitability" financial position and efficiency. :imilarly at the time of control management can find out the rationality and weakness of its previous decisions and can take the steps to correct them in future. 8anagement can determine whether the interest of all the parties are safe and can compare some of important factors like profit e!penses financial position liquidity efficiency debt paying capacity with other business. Fo& C&$-ito&#: 'usiness takes two types of loan that is short term and long term. :hort term creditors are interested in debt paying capacity of business in time from the analysis of financial statements .These creditors can ascertain the liquidity of business. 5ong term creditors wish that their loan and interest on them are paid in time. Therefore these are interested in the financial soundness and profitability of business and if the long term profitability is satisfactory "business will be able to pay off the debt with the interest in time . Fo& I 2$#to&#: The shareholders of the company can evaluate the efficiency of management by financial analysis and find out whether their investment is safe and whether their capital is being utilized properly. r this purpose" they can analysis the financial position and earning capacity of business. They are interested in the ma!imum rate of dividend and increase in the market value of shares and with the help of financial analysis "they can determine the rate of dividend in the previous and can forecast the future the future rate. Fo& /a1o.&: Trade unions also analysis the cost and profit of business . They also analysis future earning capacity of business. They ascertain whether the company)s profit are adequate to pay them wages. They also determine whether the company can increase their wages and pay them bonus or not. Fo& Go2$& '$ t0 Through analysis of the financial statement government can determine whether the provisions of 8RT6 Act apply on the company or not. :imilarly government can decide whether the company is following different statutory provisions or not. +.1!i,: inancial statement are also beneficial for the lawyers" researchers" and consumers because they get information about the position of business future growth plans and the opportunities for advancement.

Ta(atio a.t4o&iti$#: are interested knowing the profits of business so that the income ta! can be imposed these on. :imilarly sale ta! authorities are interested in the sales and e!cise authorities in the production of goods. Thus the financial statement help them in determining ta!es payable. Sto,; $(,4a *$ 0is an institution which facilities dealings of sale and purchase of shares and debentures of companies. The stock e!change give financial information about the companies to their members. Thus we find that the different parties have interest in the financial statement for the different purposes. Ma a*$'$ t A,,o. ti * M$a i *: The term management accounting refers to accounting for the management i.e. accounting which provides the necessary information to management for discharging its functions. The functions of management are planning" organizing "directing and controlling. Thus the management accounting provides information to management so that the planning "organizing" directing "controlling of business operation can be done in orderly manner. It provides information to managers about the planning day to day operation of business" determining policies and to make the various type of decisions. D$%i itio #: According to &. 'atty"* 8anagement accounting is the term used to describe accounting methods" system and technique which coupled with special knowledge and ability" assist management in its task of ma!imising profit and minimizes the losses* According to R. B. Anthony (8anagement Accounting is concerned with accounting information that is useful to management*. According to Anglo American 7ouncil of productivity"* management accounting is the presentation of accounting information in such a way as to assist management in creation of policy and day to day operation of an undertaking ( F. ,tio # o% Ma a*$'$ t a,,o. ti * : In a wider sense statistical data are collected in management accounting besides they are presented " analysed and interpreted to help the management . Fo!!o5i * a&$ t4$ 'ai # %. ,tio # o% Ma a*$'$ t a,,o. ti *M 1=+&o2i-$# -ata 08anagement accounting prepares plans for management and provides data to take right decision .These data relate to previous progress of business A=Mo-i%i$# -ata 0The data available in financial books are not appropriate to take decision or for e!ercising control .These data are modified and classified e!ample the total sale of a period can be classified on the basis of product "area sales "etc. 6=A a!"#i# a - i t$&)&$tatio o% -ata 0 or the effective planning and decision making "accounting data are analysed in a meaning manner and results are detailed out. or this purpose "data are presented in a comparative form and methods to analysed them are used" such as comparative financial statements "common size statements " trends "percentage" ratios etc.

8=U#$ o% 0.a!itati2$ i %o&'atio 0 It not only provides quantitative but also qualitative information which helps in decision making. :uch information include information received by special statistical investigation "engineering accounts" behavioural effects of different management accounting techniques etc. 9=To 4$!) i )!a i * 08anagement formulates plan for different activities to achieve business goals. Gnder these plans policies are determined and budget are prepared. It provides necessary information about cost and benefits of different alternatives. :ale budget "cash budget and e!penditure budget are based on forecasts. These forecasts are made on basis of financial accounting. F=To 4$!) i o&*a i:atio :To implement plans" tasks "authorities and responsibilities are assigned to people at work. After the completion of tasks" performance of each department is evaluated. or this purpose management accounting collects necessary data" to what e!tent delegation was effective can be analysed on the basis of information provided by management accounting. ETo 4$!) i 'oti2atio : or the efficient and effective implementation of plans it is necessary to motivate people and through management accounting" management gets the different accounting information from time to time on the basis of which people are motivated. I=To 4$!) i ,oo&-i at$-: The budgets prepared by different departments can be self O contradictory but management accounting removes the contradiction and establishes the coordination. P=Co''. i,atio 0 It communicates information from one department to other and from lower level to top levels through reports. 17=To 4$!) i ,o t&o!0 To see whether the work is being done as per the pre determined plans or not is called control. In management accounting information about the actual performance of person is compared with pre$determined performance and thereafter deviations are calculated and efforts are made to remove them. If the standards are not found to be accurate" necessary changes are made. budegtary and standard control are important component of management accounting. 11To 4$!) i -$,i#io 'a;i *: In management different decisions are made at a different levels. 8anagement accounting provides information to arrive at the right decision which are collected from internal and e!ternal sources. It also provides data about the cost and profitability of these alternatives. :ome of decision include make or buy decision" fi!ation of selling price of product" use of key resources "drop of product " profit planning etc. Ma a*$'$ t A,,o. ti * 2H# Fi a ,ia! Ma a*$'$ t: 8anagement accounting is complementary to financial accounting because in the management accounting data are derived from the financial records and presented to management after reorganizing them. ;espite this interpretation" two systems are different from each other.

'asis +, #bKective

8anagement Accounting

inancial Accounting

its main obKective is to help it provides information to 8anagement in planning and shareholders" creditors" banks decision$making. Therefore" government etc. regarding the it provides information to profit or loss and financial management for its internal use position of business. Thus and it is internal reporting it is e!ternal reporting system. :ystem. It transacts profitability or performance of different department products" inventory etc. in detail. It transacts overall position of business because financial statement e!plain position of of business in reality..

/,:ubKect 8atter

C,Bature of data used

It is concerned with future It presents monetary inform$ therefore uses detailed" statistical ation of historic events and past and future data and transactions. Information. It needs information regularly at the end of smaller periods and therefore in management accounting" more emphasis is laid on providing quick info$ rmation and at the smaller intervals. ;ata presented in it need not be completely accurate as they are presented in app$ ro!imate amount. It is voluntary and has no legal compulsion. There is no legal form or rules for statement or reports under it. These statements can be changed to satisfy changing needs of management. It records both monetary and non $ monetary transactions. >.g. technical innovations" >mployer or employee relation$ ship" reputation of business in public etc. :imilarly" price 5evel accounting is prepared To incorporate price level 7hanges. The period of financial statements is quite long as compared to management accounting. inancial state$ ment Ebalance sheet" profit or loss account,are normally prepared at the end of year. ;ata presented in it need to be complete and accurate.

D, 6eriodicity

-,Accuracy

N,7ompulsion I,5egal formalities

It is necessary for every 'usiness doe to legal provisions. financial accounts are prepared under provisions of companies Act +M-N and its accounts are to be maintained on double entry :ystem. It records only those transa$ ctions which can be e!pressed in money form.

H,8onetary Transactions

F. -# %!o5 #tat$'$ t G$ $&a! &.!$#: The following general rules should be considered to know whether a transaction causes increase or decrease in the working capital0 +, 9orking capital in the e!cess of the current assets over the current liabilities. /,Increase in the current assets means increase in the working capital. C,;ecrease in the current assets causes decrease in the working capital. D,Increase in the current liabilities causes decrease in the working capital. -,;ecrease in current liabilities increase in the working capital. NIncrease in the current assets and the simultaneous increase in the current liabilities does not effect the working capital. I,;ecrease in the current assets and the simultaneous decrease in the current liabilities does not effect the working capital. 9orking capital changes only when one non current account and the other current account .if a transaction affects both the current account or both the non current accounts it does not affects the funds i.e. working capital and there will not be any flow of funds. O1C$,ti2$# o& #i* i%i,a ,$ o% %. - %!o5 #tat$'$ t#0 The main obKectives of funds flow statements are to e!plain the changes in the working capital over a fi!ed period of time. ollowing some other obKectives of funds flow statement0 +, To provide information about the activities of raising finance and the investments. /, To ascertain the amount of available fund from the operation of business and other sources. C, To understand the use of financial resources of business. D, To know the reason for changes in the financial position of business. unds flow statement not only helps the internal management of a business to take the various financial decisions but it also provides a number of useful information to various outside parties like the banks "financial institutions" shareholders" debentures holders etc. the significance of funds flow statements can be underlined as under0 +, This statement is useful in finding the answers to some important financial questions0 a, 9here has the profit goneJ b, 9hy is the dividend not increasingJ 7, %ow could the dividend be distributed in the certain period even after the less profit or when net losses were suffered by the businessJ d,9hy is the net working capital less even after the adequate profitJ. e,9hy is the net working capital high although the business suffered lossesJ. f,9hy should the funds be borrowed to purchase new plant and the equipment when there is already necessary cash available.J A=H$!)%.! i %i a ,ia! a a!"#i#: unds flow statements is an important instrument for the financial management .9ith its help financial manager can find out from which sources the working capital has acquired and how these available resources were in the previous year. 'alance sheet e!plains the static effect of business operations on a particular date. The causes of the effect of these transactions can be e!plained through fund flow statement .It helps ascertain how much

funds were acquired from the business operations. :ometimes profits are high but available cash is less. It helps to ascertain the causes for it. :imilarly if the cash is surplus despite lesser profits the reasons can be analyzed. 6= H$!)%.! i -$t$&'i i * -i2i-$ - )o!i,"0 sometimes the business has adequate profits but it does not have cash to distribute dividend. In such case fond flow statement helps the manager determine proper dividend policy .It helps decide whether to distribute the dividend or not. If it is distributed then from here and how much funds will be managed for it. D, %elpful in deciding the financial policies0 This statement helps the financial manager in ascertaining how much long term funds have been used for acquiring the fi!ed assets. or the efficient financial management long term loans and for the management of permanent working capital short term funds should never be used for the payment of long term loans or for the purchase of the fi!ed assets. It can create the problems for the payment of the current liabilities in future. Thus the funds flow statement helps in the policy determination. -, %elpful in working capital management0 or the efficient operation of management of the business adequate working capital is necessary. The adequacy of working capital increases the credit worthiness of business and enables the business to take advantage of special opportunities. und flow statement is a measure of proper working capital management. It helps analyses the effects of its various components. If a business has more tan required working capital" arrangements for its investment can be made to increase the profits. #n the other hand if the working capital is inadequate timely arrangements to acquire it can be made. F= H$!)%.! i )!a i * %o& %.t.&$. uture plans can be made on the basis of funds flow statement. If business plans to e!pand it helps ascertain how much funds will be available from the business operations and how much funds will have to be raised from the other sources. I, %elpful in raising the funds0 und flow statement is also required by banks and other financial institution at the time of raising the loans. 9ith the help of this statement theses institution determine financial stability and the ability to produce funds by the normal activities .It helps in determining whether the loans will be safeJ 9hether the business will be able to pay the interest in timeJ 9hether the repayment of loan in future will be possibleJ Accordingly they can take the decisions to grant the loan or invest their funds in the business. I= U#$%.! i ot4$& %i&'#: #ther firms can compare their fund flow statement with the statement of an efficient firm and can ascertain the deficiencies of their financial manager. They can take the steps to remove these deficiencies. P= U#$%.! to #4a&$4o!-$&#0 :hareholders also get the information about the financial policies with the help of fund flow statement. They can know how the funds have been used in the business. Are their interests safeJ Is the dividend being distributed out of profits or other sourcesJ To what e!tent is the business dependent on the outside loansJ %ow the

amount has been received from issue of new shares or debentures been usedJ #n the basis of this information they can take their investment decisions.