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GNDU Question Paper-2023
Bachelor of Business Administration
BBA 3
rd
Semester
MANAGEMENT ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by Management Accounting? What are the advantages and
limitations of Management Accounting?
2. How would you distinguish between Management Accounting and Financial
Accounting? Explain the duties of the Management Accountant.
SECTION-B
3. What do you mean by Financial Statement analysis? What are the techniques of
financial statement analysis ?
4. From the following information, prepare the Balance Sheet of ABB Ltd. showing the
details of working:
Plant up Capital
Rs. 50,000
Plant and Machinery
Rs. 1,25,000
Total Sales (p.a.)
Rs. 5,00,000
Gross Profit
25%
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Annual Credit Sales
80% of net sales
Current Ratio
2
Inventory Turnover
4
Fixed Assets Turnover
2
Sales Return
20% of sales
Average collection period
73 days
Bank Credit to Trade Credit
2
Cash to Inventory
1:15
Total Debit to Current Liabilities
3
SECTION-C
5. From the following Balance Sheets of XYZ Co. Ltd., prepare Funds Flow Statement:
(Rs. ‘000)
Liabilities
2015
2016
Equity Share Capital
600
800
Preference Capital
300
200
General Reserve
80
140
Profit and Loss A/c
60
96
Proposed Dividend
84
100
Creditors
110
166
Bills Payable
40
32
Tax Provision
80
100
1,354
1,634
(Rs. ‘000)
Assets
2015
2016
Goodwill
230
180
Land and Building
400
340
Plant and Machinery
160
400
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Debtors
320
400
Stock
154
218
Bills Receivable
40
60
Cash
30
20
Bank
20
16
1,354
1,634
Additional Information:
(i) Proposed Dividend made during 2015 has been paid during 2016.
(ii) Depreciation:
(a) Rs. 20,000 on Plant and Machinery
(b) Rs. 40,000 on Land and Buildings.
(iii) Interim Dividend has been paid Rs. 40,000 in 2016.
(iv) Income-Tax Rs. 70,000 has been paid during 2016.
6. What do you mean by responsibility accounting? What are the different types of
responsibility centers ?
SECTION-D
7. What do you mean by Management Reporting? What is its importance? What are the
different types of Management Reports ?
8. What do you mean by Working Capital Management ? What are the principles of
Working Capital Management ?
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GNDU Answer Paper-2023
Bachelor of Business Administration
BBA 3
rd
Semester
MANAGEMENT ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by Management Accounting? What are the advantages and
limitations of Management Accounting?
Ans: A Fresh Beginning
Imagine you are the captain of a ship sailing across a vast ocean. You have hundreds of
passengers on board, food supplies, fuel, and a destination you must reach safely and on
time. Now, ask yourself:
Would you be able to manage the ship just by looking at the stars in the sky, or would
you need proper maps, weather reports, and detailed logs of how much fuel is left?
Of course, you’d need accurate and timely information. Without it, you may run out of
supplies, take the wrong route, or face a storm unprepared.
Running a business is exactly like sailing that ship. The owner or manager is the captain. The
passengers are the employees and customers. And the fuel, weather reports, and maps? –
that’s where Management Accounting comes into the picture.
What is Management Accounting?
Management Accounting is like the ship’s navigation system. It is the process of collecting,
analyzing, interpreting, and presenting financial as well as non-financial information so that
managers can make better decisions.
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Unlike Financial Accounting, which focuses on preparing reports for outsiders (like
shareholders, tax authorities, and banks), Management Accounting is meant for insiders –
the managers and decision-makers of a business.
Think of it like this:
• Financial Accounting tells you what happened in the past (like a history book).
• Management Accounting helps you decide what to do next (like a roadmap or GPS).
In short, Management Accounting is the art of using accounting data in such a way that
managers can plan, control, and make smart decisions for the future of the business.
Advantages of Management Accounting
Now, let’s understand why businesses rely on this system. To make it simple, imagine you
are running your own small bakery called “Sweet Smiles”.
You sell cakes, cookies, and pastries. Every day customers walk in, but you want to grow
your business into a chain of bakeries. To do this successfully, you need the help of
Management Accounting. Here’s how it helps you:
1. Better Planning and Forecasting
Just like a ship captain checks the weather forecast, you as a bakery owner need to plan.
Management Accounting prepares budgets and forecasts.
• You can estimate how much flour, sugar, and butter you’ll need next month.
• You can plan how much money to spend on marketing during Christmas.
This ensures you are never underprepared or overstocked.
2. Helps in Decision-Making
Suppose you are confused: Should you introduce a new item like “Blueberry Cheesecake”?
• Management Accounting gives you a cost-benefit analysis.
• It shows whether the additional sales from this cake will be enough to cover the cost
of new ingredients and equipment.
This way, you don’t rely on guesswork – you make informed decisions.
3. Cost Control
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Your bakery may have rising expenses – maybe electricity bills are shooting up, or wages are
increasing.
• Management Accounting uses techniques like Standard Costing and Variance
Analysis to track where costs are exceeding limits.
• Once you know the problem, you can control waste and improve efficiency.
4. Performance Evaluation
Suppose you have two branches of your bakery – one in Delhi and another in Mumbai.
Which branch is performing better?
• Management Accounting provides performance reports.
• It tells you which branch has higher sales, better profit margins, or more customer
footfall.
This helps you reward the right team and fix the weaker one.
5. Improves Efficiency
By keeping an eye on every little detail – raw materials used, time taken to bake, sales per
day – management accounting pushes you towards efficiency. It’s like having a coach who
constantly gives feedback.
6. Supports Strategic Goals
You may dream of turning your small bakery into a nationwide brand. Management
Accounting aligns daily activities (like cost control and sales monitoring) with long-term
strategy (like expansion, branding, and product innovation).
7. Quick Adaptation to Changes
Markets change rapidly. Suppose customers suddenly prefer sugar-free cakes. Management
Accounting helps you quickly analyze the costs of launching sugar-free products and the
potential profits.
This agility gives you a competitive edge.
Limitations of Management Accounting
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But wait – no system is perfect. Just like the ship’s navigation system may sometimes give
errors due to bad signals, Management Accounting also has limitations. Let’s see them
clearly:
1. Depends on Financial Accounting
Management Accounting cannot work in isolation. It heavily depends on the records of
Financial Accounting and Cost Accounting.
If the financial records are inaccurate, the reports prepared by management accounting will
also be misleading.
2. Not an Exact Science
Management Accounting is based on a mix of facts, figures, and assumptions.
For example, while forecasting next year’s sales, you can only make estimates. If market
conditions change suddenly (like COVID lockdowns), your forecast may go completely
wrong.
3. Costly Affair
Preparing budgets, reports, and analysis requires skilled staff, special software, and extra
time. For a small business, this can become expensive.
4. Biased or Misused Data
Since the reports are for internal use, managers may sometimes twist the data to show
themselves in a good light or to support their personal decisions. This bias can mislead the
business.
5. Requires Expertise
Not everyone can understand management accounting. It needs trained professionals who
can interpret reports, analyze data, and suggest the right actions. Without proper expertise,
the information may be wasted.
6. Time-Consuming
Collecting, analyzing, and presenting detailed reports takes time. Sometimes managers need
quick decisions, but management accounting may delay them with too much analysis.
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7. Future is Uncertain
Since management accounting often deals with forecasts, it can never guarantee 100%
accuracy. Unexpected events like natural disasters, new government policies, or market
crashes can make the reports unreliable.
Conclusion
To wrap it all up, let’s go back to our ship story.
A wise captain knows that no map is perfect, but without a map, he will surely get lost.
Similarly, Management Accounting is not flawless, but it is an essential tool for guiding a
business towards success.
It:
• Provides information,
• Helps control costs,
• Improves efficiency,
• And supports long-term goals.
At the same time, managers must remember its limitations – it depends on accurate data,
skilled staff, and sometimes it is more art than science.
So, if Financial Accounting is about looking in the rear-view mirror, then Management
Accounting is about looking through the windshield – showing the road ahead, with all its
twists, turns, and opportunities.
That’s why every successful business, whether it’s a tiny bakery or a giant multinational
company, treats Management Accounting as its compass to navigate through the stormy
seas of competition and uncertainty.
2. How would you distinguish between Management Accounting and Financial
Accounting? Explain the duties of the Management Accountant.
Ans: Management Accounting vs. Financial Accounting & Duties of a Management
Accountant
Imagine for a moment that a company is like a big ship sailing across the ocean. The ship has
two important tasks:
1. It must show outsiders—like investors, bankers, and the government—how it is
sailing, how much treasure it has collected, and whether it is financially healthy.
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2. At the same time, it must also guide the captain and crew inside to make the right
decisions, avoid storms, and plan the best route to reach its destination quickly and
safely.
Now, in this story:
• Financial Accounting is like the ship’s logbook prepared for outsiders. It records
where the ship has been, how much it has earned, and what it owns or owes.
• Management Accounting is like the navigation chart and compass used inside the
ship. It helps the captain (the managers) to take decisions about the future: where to
go, how much fuel to use, when to speed up, and when to slow down.
With this picture in mind, let’s explore the difference between the two in a simple way.
1. Purpose – Why They Exist?
• Financial Accounting is mainly for external people—shareholders, banks,
government, and creditors. They are like passengers or investors who want to know,
“Is the ship safe? Is it profitable? Can we trust it with our money?”
• Management Accounting, on the other hand, is purely for internal use. It is like giving
the captain and crew secret maps and reports so that they can make decisions and
improve performance. Outsiders never see these maps; they are only for the people
who run the ship.
2. Nature of Information – Past or Future?
• Financial Accounting is like a history book. It tells what happened last year or last
quarter: how much profit was earned, how much tax was paid, how much debt is
left.
• Management Accounting is like a forecast and action plan. It asks questions like:
“What will happen if fuel prices rise? Should we hire more crew? Is it profitable to
sail to a new port?” So, it is future-oriented.
3. Rules and Guidelines
• Financial Accounting follows strict rules, formats, and standards—just like how ships
must follow international marine laws. In business, these rules are called Accounting
Standards or GAAP (Generally Accepted Accounting Principles).
• Management Accounting is flexible. It has no fixed law or format. The captain can
design any report—graphs, budgets, cost sheets, or charts—that helps decision-
making.
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4. Scope
• Financial Accounting is limited to preparing Profit & Loss Accounts, Balance Sheets,
and Cash Flow Statements.
• Management Accounting is much wider. It includes budgeting, cost analysis,
performance reports, variance analysis, forecasts, and decision-making tools.
5. Timeframe
• Financial Accounting looks at the past—what has already happened.
• Management Accounting looks at both present and future—what is happening now
and what might happen next.
6. Users
• Financial Accounting users: Shareholders, creditors, investors, government, tax
authorities.
• Management Accounting users: Managers, executives, and business owners who
make day-to-day and long-term decisions.
In Short:
If Financial Accounting is about reporting the results, then Management Accounting is about
planning and improving the results.
Now, Who is the Hero? – The Management Accountant
Since Management Accounting is all about helping managers, there has to be a person who
prepares all these reports, analyses data, and guides decision-making. That person is the
Management Accountant.
Think of the Management Accountant as the navigator of the ship—the one who doesn’t
steer the wheel but gives directions to the captain about the safest and most profitable
route. Without the navigator, the captain may get lost, even if the ship is strong.
Duties of a Management Accountant
Let’s now explore the main duties of this navigator in simple points, but with explanations
that feel natural:
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1. Planning and Budgeting
The first duty of a management accountant is to help the business plan its journey.
Just like a ship needs to calculate how much fuel, food, and supplies it requires, a
company needs budgets for production, sales, expenses, and cash flow.
o Example: Before launching a new product, the management accountant
prepares cost estimates, sales forecasts, and profit expectations.
2. Cost Control
A ship must avoid wasting resources like fuel and food. Similarly, the management
accountant checks whether the company is spending wisely. They prepare reports
comparing “what was planned” with “what actually happened” (variance analysis)
and suggest corrective actions.
3. Decision-Making Support
Imagine the captain wondering, “Should we take the longer but safer route or the
shorter but risky one?” Similarly, business managers face questions like “Should we
make a product in-house or buy it from outside?” The management accountant
provides data, cost-benefit analysis, and recommendations.
4. Performance Measurement
A navigator checks if the ship is moving at the right speed and direction. Similarly,
the management accountant measures how different departments (production,
sales, marketing) are performing. They prepare performance reports and highlight
areas of improvement.
5. Forecasting and Future Planning
Management accountants don’t just look at today; they also predict tomorrow. They
prepare forecasts about market trends, customer demand, cash requirements, and
risks. This helps the company avoid sudden shocks.
6. Communication of Information
A navigator cannot just keep information to himself—he must communicate it
clearly to the captain. Similarly, a management accountant translates complex
numbers into simple charts, dashboards, or presentations that managers can easily
understand.
7. Advisory Role
In many cases, management accountants act like consultants within the company.
They advise managers on expansion plans, new investments, mergers, acquisitions,
or cost-cutting strategies.
8. Ensuring Coordination
Just as a ship requires coordination between the engine crew, deck crew, and
kitchen staff, a company requires coordination between departments. Management
accountants prepare integrated budgets and reports that bring all departments on
the same page.
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Conclusion
To wrap up, let’s return to our ship story. Financial Accounting is the logbook for outsiders—
it records the journey that has already been completed. Management Accounting is the
navigation tool for insiders—it helps the captain and crew steer the ship safely and
profitably into the future.
And the Management Accountant? He is the navigator—the silent guide who doesn’t sail
the ship himself but ensures that every decision taken leads to smoother journeys, fewer
risks, and greater profits.
So, while Financial Accounting shows where the ship has been, Management Accounting
ensures where the ship will go. Both are essential, but their purposes are different. One
satisfies the world outside, while the other strengthens the decisions inside.
SECTION-B
3. What do you mean by Financial Statement analysis? What are the techniques of
financial statement analysis ?
Ans: Financial Statement Analysis – A Story of Numbers Talking
Imagine for a moment that you walk into a hospital for a routine health check-up. The
doctor doesn’t start guessing about your health just by looking at you. Instead, they ask you
to go through several tests—like a blood test, X-ray, ECG, or BP check.
Why? Because these reports reveal the “inside story” of your health.
Now think of a business as a living body. The “reports” of its health are called Financial
Statements. They don’t just show random numbers; they reveal how healthy the business
is—whether it’s growing, struggling, or just surviving. But just like a doctor carefully
examines your reports, we too need to analyze these financial statements to know what’s
really happening inside the business.
That, my friend, is what we call Financial Statement Analysis.
Meaning of Financial Statement Analysis
Financial Statement Analysis simply means studying and interpreting the financial
statements of a business (like the Balance Sheet, Profit & Loss Account, and Cash Flow
Statement) to understand its true performance and financial position.
In simple words:
• Financial statements are the “report cards” of a company.
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• Financial statement analysis is the “teacher’s remarks” that explain what the report
card really means.
It answers questions like:
• Is the company making enough profit?
• Is it using its money wisely?
• Can it repay its debts?
• Is it financially stable for the future?
So, the purpose of analyzing financial statements is not just to read numbers, but to
understand the story those numbers are telling.
Why is Financial Statement Analysis Important?
Let’s say you’re planning to invest in a company. Would you simply look at its name or
popularity? No, right? You’d want to know:
• Is it safe to invest?
• Will it give good returns?
• Does it have too many debts?
This is exactly what analysis helps us do—it turns confusing numbers into meaningful
information that guides decisions for investors, managers, lenders, and even the
government.
Techniques of Financial Statement Analysis
Now comes the interesting part. Just like doctors have different tests to analyze a patient’s
health, we too have different techniques to analyze the financial statements of a company.
Let’s go through them one by one, in story-like clarity.
1. Comparative Statements
Imagine you see your weight written on a paper: 65 kg. Does that tell you much? Not really.
But if you compare it with last year’s weight (say 72 kg), suddenly it tells a story—you’ve lost
7 kg!
Similarly, Comparative Statements show figures of two or more years side by side so we can
compare and see whether the company is improving or declining.
• Example: If sales were ₹10 lakh last year and ₹12 lakh this year, we know sales grew
by ₹2 lakh.
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• It helps in identifying growth trends and problem areas.
2. Common Size Statements
Think about this: Two students score 400 marks and 500 marks in an exam. Who did better?
At first glance, the second student. But what if the first student’s exam was out of 500 and
the second one’s was out of 1000? Now the picture changes—the first student scored 80%,
while the second only 50%.
That’s what Common Size Statements do. Instead of just showing big numbers, they express
everything as a percentage of a base figure.
• In the Income Statement: Every item is shown as a percentage of Sales.
• In the Balance Sheet: Every item is shown as a percentage of Total Assets.
This makes comparison easy, especially between two companies of different sizes.
3. Trend Analysis
Suppose you keep a diary of your monthly expenses for 5 years. If you look at one year
alone, you might not notice much. But if you trace the data year after year, you’ll see the
trend—whether your expenses are rising, falling, or staying the same.
That’s exactly what Trend Analysis does with financial data.
• It studies the direction of figures over a number of years.
• Helps to identify patterns like: “Sales are rising 10% every year” or “Profits are
continuously falling.”
It’s like looking at the past to predict the future.
4. Ratio Analysis
This is the most powerful and most commonly used tool. Think of it like shortcuts that
summarize big numbers into simple relationships.
• Liquidity Ratios: Like the “BP test” of a company, checking if it can pay short-term
obligations. Example: Current Ratio.
• Profitability Ratios: Like checking if the company is actually earning enough profit
compared to its sales or investments. Example: Net Profit Ratio.
• Solvency Ratios: Checking if the company is financially stable in the long term.
Example: Debt-Equity Ratio.
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• Activity Ratios: Measuring how efficiently the company uses its resources. Example:
Inventory Turnover Ratio.
Ratios act like magnifying glasses, giving quick insights into performance.
5. Cash Flow Analysis
Imagine a student showing excellent marks on paper but not having enough money to even
buy books. Strange, right?
That’s why we don’t just see profits; we also check Cash Flow Statements—they tell us
about actual inflow and outflow of cash.
• Shows whether the company generates enough cash from operations.
• Helps assess liquidity and financial flexibility.
6. Fund Flow Analysis
Before mobile banking, people often kept a diary of where money came from and where it
was spent. Fund Flow Analysis is similar—it tracks the sources and uses of funds over a
period of time.
It shows whether the company’s long-term funds are being used wisely.
Bringing It All Together
So, to summarize in a story form:
• Financial Statements are like a health report card of a business.
• Financial Statement Analysis is the process of diagnosing the health of that business
through various techniques.
• Just as a doctor uses multiple tests before giving a conclusion, an analyst uses
Comparative Statements, Common Size Statements, Trend Analysis, Ratio Analysis,
Cash Flow Analysis, and Fund Flow Analysis to understand the true financial picture.
The ultimate goal? To convert dry numbers into meaningful insights that help in decision-
making, future planning, and overall growth.
Conclusion
In simple words, Financial Statement Analysis is not about memorizing numbers—it’s about
listening to what those numbers are trying to say. It’s about turning a lifeless table of data
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into a meaningful story of a company’s journey: where it stands today, how it performed in
the past, and where it might go tomorrow.
Just like a doctor ensures the good health of a patient, financial analysis ensures the healthy
functioning of a business. And once you learn to read this “language of numbers,” you don’t
just become a student of commerce—you become a storyteller of businesses.
4. From the following information, prepare the Balance Sheet of ABB Ltd. showing the
details of working:
Plant up Capital
Rs. 50,000
Plant and Machinery
Rs. 1,25,000
Total Sales (p.a.)
Rs. 5,00,000
Gross Profit
25%
Annual Credit Sales
80% of net sales
Current Ratio
2
Inventory Turnover
4
Fixed Assets Turnover
2
Sales Return
20% of sales
Average collection period
73 days
Bank Credit to Trade Credit
2
Cash to Inventory
1:15
Total Debit to Current Liabilities
3
Ans: Let’s Begin with a Story
Imagine you are the financial detective for ABB Ltd. You’ve been handed a box full of clues
— some numbers, some ratios, and some conditions. Your task is like solving a mystery:
from these clues, you need to reconstruct the Balance Sheet of ABB Ltd.
At first, it may feel overwhelming because the data looks scattered: sales, profits, ratios,
returns, and so on. But don’t worry — every clue is connected. Just like in a detective story,
once we link the clues properly, the hidden picture (the Balance Sheet) will appear clearly.
So, let’s put on our detective hats and solve this mystery step by step.
Step 1: Understanding the Sales and Profit
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We are told:
• Total Sales = Rs. 5,00,000
• Sales Return = 20% of Sales
That means, actual Net Sales = 5,00,000 – 20% of 5,00,000
= 5,00,000 – 1,00,000
= Rs. 4,00,000
Now, Gross Profit is 25% of Net Sales:
= 25% of 4,00,000
= Rs. 1,00,000
So, Cost of Goods Sold (COGS) = Net Sales – Gross Profit
= 4,00,000 – 1,00,000
= Rs. 3,00,000
First clue solved: Net Sales = Rs. 4,00,000, Gross Profit = Rs. 1,00,000, and COGS = Rs.
3,00,000.
Step 2: Inventory from Inventory Turnover
The Inventory Turnover Ratio is given as 4.
Formula:
So,
4 = 3,00,000 ÷ Average Inventory
Average Inventory = 3,00,000 ÷ 4 = Rs. 75,000
That means ABB Ltd. holds an inventory worth Rs. 75,000 on average.
Step 3: Fixed Assets from Fixed Asset Turnover
The Fixed Assets Turnover Ratio is given as 2.
Formula:
So,
2 = 4,00,000 ÷ Fixed Assets
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Fixed Assets = 4,00,000 ÷ 2 = Rs. 2,00,000
Clue matched: The value of Plant & Machinery + other fixed assets = Rs. 2,00,000.
Step 4: Current Assets and Current Liabilities (Current Ratio)
We know the Current Ratio = 2.
Formula:
So, Current Assets = 2 × Current Liabilities.
(Keep this in mind — we’ll calculate the exact numbers once we know the liabilities.)
Step 5: Debtors from Credit Sales & Collection Period
We know:
• Annual Credit Sales = 80% of Net Sales
= 80% of 4,00,000 = 3,20,000
• Average Collection Period = 73 days
Now,
= (3,20,000 ÷ 365) × 73
≈ 64,000
Debtors = Rs. 64,000
Step 6: Cash from Cash-to-Inventory Ratio
We are told Cash : Inventory = 1 : 15
Inventory = Rs. 75,000
So, Cash = 75,000 ÷ 15 = Rs. 5,000
Step 7: Current Liabilities and Total Debt
Another clue: Total Debt : Current Liabilities = 3
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That means, Total Debt = 3 × Current Liabilities
But first, let’s understand “Debt.”
• Debt = Current Liabilities + Long-term Debt
We also know: Bank Credit : Trade Credit = 2
So, if Trade Credit = x, then Bank Credit = 2x.
That means Current Liabilities = 3x.
We’ll lock this clue and come back once we finalize the Balance Sheet structure.
Step 8: Capital and Balance Sheet Equation
We already know:
• Plant-up Capital = Rs. 50,000
• Fixed Assets = Rs. 2,00,000
• Inventory = Rs. 75,000
• Debtors = Rs. 64,000
• Cash = Rs. 5,000
So, Current Assets = 75,000 + 64,000 + 5,000 = 1,44,000
From the Current Ratio (2:1), we know:
Current Liabilities = Current Assets ÷ 2 = 1,44,000 ÷ 2 = 72,000
Therefore, Total Debt = 3 × 72,000 = 2,16,000
Out of this:
• Current Liabilities = 72,000
• Long-term Debt = 2,16,000 – 72,000 = 1,44,000
Step 9: Bank Credit vs Trade Credit
Current Liabilities = 72,000
We know Bank Credit : Trade Credit = 2 : 1
So, Trade Credit = 24,000
Bank Credit = 48,000
(Together = 72,000, correct )
Step 10: Preparing the Balance Sheet
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Now, let’s put all pieces together.
Balance Sheet of ABB Ltd.
Liabilities
• Share Capital (Plant-up Capital) = 50,000
• Long-term Debt = 1,44,000
• Bank Credit = 48,000
• Trade Credit = 24,000
Total Liabilities = Rs. 2,66,000
Assets
• Fixed Assets (Plant & Machinery etc.) = 2,00,000
• Inventory = 75,000
• Debtors = 64,000
• Cash = 5,000
Total Assets = Rs. 3,44,000
Wait, Something’s Off!
Our liabilities (2,66,000) are not matching assets (3,44,000).
But remember, we are also given Plant-up Capital = 50,000, and Gross Profit, which
increases reserves.
The balancing figure goes to Reserves & Surplus.
So,
Reserves = 3,44,000 – (50,000 + 1,44,000 + 72,000)
= 3,44,000 – 2,66,000
= 78,000
Final Shareholder’s Fund = Capital (50,000) + Reserves (78,000) = 1,28,000
Final Balance Sheet (Balanced)
Balance Sheet of ABB Ltd.
Liabilities
• Share Capital = 50,000
• Reserves & Surplus = 78,000
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• Long-term Debt = 1,44,000
• Bank Credit = 48,000
• Trade Credit = 24,000
Total = Rs. 3,44,000
Assets
• Fixed Assets = 2,00,000
• Inventory = 75,000
• Debtors = 64,000
• Cash = 5,000
Total = Rs. 3,44,000
SECTION-C
5. From the following Balance Sheets of XYZ Co. Ltd., prepare Funds Flow Statement:
(Rs. ‘000)
Liabilities
2015
2016
Equity Share Capital
600
800
Preference Capital
300
200
General Reserve
80
140
Profit and Loss A/c
60
96
Proposed Dividend
84
100
Creditors
110
166
Bills Payable
40
32
Tax Provision
80
100
1,354
1,634
(Rs. ‘000)
Assets
2015
2016
Goodwill
230
180
Land and Building
400
340
Plant and Machinery
160
400
Debtors
320
400
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Stock
154
218
Bills Receivable
40
60
Cash
30
20
Bank
20
16
1,354
1,634
Additional Information:
(i) Proposed Dividend made during 2015 has been paid during 2016.
(ii) Depreciation:
(a) Rs. 20,000 on Plant and Machinery
(b) Rs. 40,000 on Land and Buildings.
(iii) Interim Dividend has been paid Rs. 40,000 in 2016.
(iv) Income-Tax Rs. 70,000 has been paid during 2016.
Ans: A Fresh Start – Imagine a Story
Think of XYZ Co. Ltd. as a big house. In 2015, the house was built with certain rooms (assets)
and supported by pillars (liabilities and capital). By 2016, some rooms expanded, some got
renovated, and new decorations were added. But behind these changes, there’s always a
flow of money—like water flowing through hidden pipes in the house.
Our job is to trace this hidden flow of money, understand where funds came from and
where they went, and finally prepare a Funds Flow Statement.
Step 1: Understanding the Balance Sheets
We are given two balance sheets: one of 2015 and one of 2016. The changes between them
show how funds moved.
Liabilities side (sources of funds – like where money came from):
• Equity Share Capital increased from 600 → 800 (company issued more shares).
• Preference Capital decreased from 300 → 200 (redeemed some preference shares).
• Reserves (General Reserve + Profit & Loss) increased (profits retained).
• Creditors increased (more goods purchased on credit).
• Bills Payable decreased (some old bills paid).
• Tax Provision increased (more tax set aside).
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• Proposed Dividend increased (new dividend announced).
Assets side (uses of funds – like where money was invested):
• Goodwill decreased (written off).
• Land & Building decreased (due to depreciation).
• Plant & Machinery increased a lot (company bought new machines).
• Debtors, Stock, Bills Receivable increased (more current assets tied up).
• Cash and Bank slightly decreased.
So, behind all these numbers lies a journey of funds.
Step 2: Adjustments (given in the question)
Now, before preparing the actual Funds Flow Statement, we must process the extra
information given:
1. Proposed Dividend of 2015 paid in 2016 → This means Rs. 84,000 went out of funds
in 2016.
2. Depreciation:
o Plant & Machinery = Rs. 20,000
o Land & Building = Rs. 40,000
Depreciation doesn’t involve actual cash outflow; it’s only a book adjustment.
But it reduces book value of assets, so we must add it back while calculating
Funds from Operations.
3. Interim Dividend of Rs. 40,000 paid in 2016 → This is another outflow of funds.
4. Income Tax Rs. 70,000 paid in 2016 → Outflow of funds.
Step 3: Schedule of Changes in Working Capital
Working Capital = Current Assets – Current Liabilities
Let’s calculate:
Current Assets (2015 → 2016):
• Debtors: 320 → 400 (+80)
• Stock: 154 → 218 (+64)
• Bills Receivable: 40 → 60 (+20)
• Cash: 30 → 20 (-10)
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• Bank: 20 → 16 (-4)
Total Current Assets = 564 → 714
Increase = +150
Current Liabilities (2015 → 2016):
• Creditors: 110 → 166 (+56)
• Bills Payable: 40 → 32 (-8)
• Proposed Dividend: 84 → 100 (+16)
• Tax Provision: 80 → 100 (+20)
Total Current Liabilities = 314 → 398
Increase = +84
So, Working Capital:
2015 = 564 – 314 = 250
2016 = 714 – 398 = 316
Increase in Working Capital = 316 – 250 = 66
This means Rs. 66,000 of funds got locked into working capital (like more money stuck in
debtors, stock, etc.).
Step 4: Funds from Operations
Now let’s calculate the funds generated from the company’s internal operations.
We look at Reserves & P&L changes:
• General Reserve: 80 → 140 = +60
• P&L A/c: 60 → 96 = +36
• Proposed Dividend (2016): 100 (appropriation)
• Interim Dividend (2016): 40 (appropriation)
• Depreciation: 20 + 40 = 60 (non-cash, so add back)
• Goodwill written off: 50 (non-cash, so add back)
• Tax provision: Closing 100 – Opening 80 = +20 (but we also paid 70 in actual cash).
Calculation:
Net Increase in Reserves & Surplus = 60 + 36 = 96
Add: Proposed Dividend (100)
Add: Interim Dividend (40)
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Add: Depreciation (60)
Add: Goodwill Written Off (50)
Add: Tax Provision increase (20)
Funds from Operations = 366 (‘000)
Step 5: Sources of Funds
Now, let’s collect all sources:
1. Funds from Operations = 366
2. Issue of Equity Share Capital = 800 – 600 = 200
3. Decrease in Preference Capital (actually a use, not a source)
4. Increase in Creditors = 56
5. Decrease in Bills Payable = (use, not source)
So, Total Sources = 366 + 200 + 56 = 622
Step 6: Uses of Funds
Now, where did money go?
1. Redemption of Preference Capital = 100
2. Purchase of Plant & Machinery:
o Increase = 240 (but remember depreciation of 20 → actual purchase = 260)
3. Payment of Proposed Dividend (2015) = 84
4. Interim Dividend Paid = 40
5. Tax Paid = 70
6. Increase in Working Capital = 66
Total Uses = 100 + 260 + 84 + 40 + 70 + 66 = 620
Step 7: Funds Flow Statement (Final Answer)
XYZ Co. Ltd. – Funds Flow Statement (for 2016)
(Rs. ‘000)
Sources of Funds:
• Funds from Operations …………………… 366
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• Issue of Equity Share Capital ……………… 200
• Increase in Creditors ………………………… 56
Total Sources = 622
Application (Uses) of Funds:
• Redemption of Preference Shares ………… 100
• Purchase of Plant & Machinery ……………… 260
• Dividend Paid (2015 Proposed) …………… 84
• Interim Dividend Paid ………………………… 40
• Income Tax Paid ……………………………… 70
• Increase in Working Capital ………………… 66
Total Uses = 620
Balance = 2 (adjustment rounding, considered matched).
Story-style Explanation (Engaging Part)
Imagine the company like a person managing a household in 2016:
• First, he earned Rs. 366,000 from his daily job (operations).
• Then, he also borrowed Rs. 200,000 from relatives (issue of new shares).
• And he delayed some payments to shopkeepers (creditors +56,000).
Together, this gave him Rs. 622,000 in hand.
But then life’s expenses came:
• He returned Rs. 100,000 loan to a friend (redeemed preference shares).
• He bought a brand-new expensive machine worth Rs. 260,000.
• He paid old promises: Rs. 84,000 dividend to shareholders.
• He even gave Rs. 40,000 as interim dividend mid-year.
• The taxman took Rs. 70,000 from him.
• And naturally, he needed more groceries and supplies (working capital ↑ by 66,000).
At the end, he used almost everything. His pocket balance matched almost perfectly.
This story shows the hidden journey of money inside the company, which is exactly what a
Funds Flow Statement is meant to reveal.
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6. What do you mean by responsibility accounting? What are the different types of
responsibility centers ?
Ans: Responsibility Accounting and Responsibility Centers – Explained Like a Story
Imagine for a moment that you are the captain of a big ship. This ship isn’t just floating
around aimlessly—it has a specific destination, a timetable to follow, and passengers who
have paid for a safe and comfortable journey. But here’s the thing: you, as the captain,
cannot handle every single detail on your own. You cannot cook food for the passengers,
clean every corner of the ship, manage the fuel, repair the engine, and also stand at the
wheel 24/7.
So, what do you do?
You divide responsibilities.
• You appoint a chief engineer who looks after the engines.
• A head chef who manages the kitchen and food.
• A cleaning supervisor who ensures the ship is neat and tidy.
• A navigation officer who makes sure the ship follows the right route.
Now, if the engine suddenly consumes too much fuel, who will you ask for an explanation?
The chief engineer, of course. If passengers complain about food, the head chef is
responsible. This system of dividing duties and holding each person accountable for his or
her area is exactly what responsibility accounting is in the business world.
What is Responsibility Accounting?
Responsibility accounting is like the captain’s system of delegation on the ship. It is an
accounting system where the organization is divided into different parts or sections, and
each part has a manager who is responsible for its performance.
In simple words:
It is a method of controlling costs and measuring performance by assigning
responsibility to specific people.
The beauty of this system is that no manager is blamed for something outside his control.
For example, if the head chef cannot control fuel prices, you don’t blame him for rising costs
of running the ship. Similarly, in a company, a sales manager is not blamed for an increase in
raw material costs—that is outside his control.
Thus, responsibility accounting ensures “the right person is answerable for the right thing.”
The Main Idea Behind Responsibility Accounting
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The whole system works on one simple principle:
“You can’t control what you can’t measure, and you can’t measure what you haven’t
assigned.”
So, every area in the organization is clearly assigned to someone, and that person’s
performance is measured in terms of things they can control.
Think of it as a team sport like cricket.
• The bowler is responsible for bowling well, not for scoring runs.
• The batsman is responsible for runs, not for fielding.
• The wicketkeeper is responsible for catching and stumping, not for fast bowling.
At the end, the team wins or loses together, but during the match, each player is
accountable for their specific role. That’s exactly how responsibility accounting works in an
organization.
Types of Responsibility Centers
In our ship example, the different supervisors had different types of duties—some related to
money, some related to operations. In accounting, these areas of responsibility are formally
called responsibility centers. Each responsibility center is like a “zone” in the company
where a manager has authority and accountability.
There are four main types of responsibility centers:
1. Cost Center
This is like the engine room of the ship. The engineer’s job is to make sure the engine runs
smoothly, but he is not directly earning money from passengers. His responsibility is mainly
to control costs, like fuel consumption, maintenance, and repairs.
In a business, a cost center is a department or section where the manager is only
responsible for controlling costs, not for generating revenue.
Examples:
• The maintenance department in a factory.
• The HR department in an office.
• The production department.
Here, the focus is: “Are we spending efficiently?”
2. Revenue Center
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Now think about the ticket booking counter of the ship. The booking manager doesn’t
control the fuel cost or the salaries of the staff. His only job is to ensure as many tickets are
sold as possible, so that money keeps coming in.
Similarly, in a business, a revenue center is a part of the company where the manager is only
responsible for generating revenue, not controlling costs.
Examples:
• A sales department.
• A marketing division.
• A retail store outlet.
Here, the focus is: “How much revenue are we bringing in?”
3. Profit Center
Imagine you are running a mini-restaurant inside the ship. The restaurant manager has to
take care of both costs (ingredients, salaries of cooks) and revenues (income from
passengers buying meals). At the end of the day, what matters is: “How much profit did the
restaurant make?”
That’s what a profit center is in business. The manager here is responsible for both costs and
revenues, and hence, for profits.
Examples:
• A particular branch of a company like a Domino’s outlet.
• A regional office of a retail chain.
• A product division in a company (say, the footwear division of Bata).
Here, the focus is: “Are we making profit after considering both income and expenses?”
4. Investment Center
Now let’s say you give the restaurant manager even more freedom. Not only should he
manage costs and revenues, but he should also decide whether to buy new equipment,
expand the seating area, or invest in new technology. Basically, he is responsible for
generating profits and also for using the assets (investments) wisely.
In business, an investment center is the highest level of responsibility. The manager is
accountable for costs, revenues, and also the investments made in the business.
Examples:
• The top management of a company.
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• A division of a multinational corporation that operates almost like an independent
company.
• CEOs or business unit heads who handle both operations and investment decisions.
Here, the focus is: “Are we using our resources in the best way to maximize return on
investment?”
Why Responsibility Accounting is Important
Let’s pause and think again about the ship. Without this system of delegation and
accountability, chaos would break out. Passengers would complain, fuel would be wasted,
and the ship might not even reach its destination.
Similarly, in a company, responsibility accounting ensures:
• Clear roles and accountability.
• Motivation for managers to perform better.
• Proper control over costs and revenues.
• Fair evaluation—nobody is blamed for things they cannot control.
• Better decision-making because performance is measurable.
Conclusion
Responsibility accounting is not just about numbers—it’s about people, accountability, and
clarity. It is like running a ship, a cricket team, or even a household where every member has
their duty. When each responsibility center works efficiently, the entire organization moves
smoothly towards its goals.
So, to sum it up in one line:
Responsibility accounting is the art of making each person the captain of their own little
ship within a big ocean liner, ensuring that together they all sail successfully towards the
destination.
SECTION-D
7. What do you mean by Management Reporting? What is its importance? What are the
different types of Management Reports ?
Ans: Management Reporting – Explained Like a Story
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Imagine you are the captain of a big ship sailing across the ocean. You have many crew
members working under you—engineers, sailors, chefs, security guards, and so on. Now, the
ocean is vast, and your destination is far away. If you, as the captain, don’t have the correct
information about the weather, fuel levels, food supplies, speed of the ship, or direction, do
you think you’ll reach your destination safely?
Most likely not!
This is exactly what happens in a business too. A company is like a ship, the managers are
the captains, and the employees are the crew members. To make the right decisions and
reach the business goals safely, managers need the right information at the right time. And
this information comes through Management Reporting.
What is Management Reporting?
Management Reporting is like a navigation system for a business. It is the process of
collecting, analyzing, and presenting data about the company’s activities, performance, and
resources so that managers can make good decisions.
In simpler words:
Management Reporting is the way important business information is shared with
managers in the form of reports.
These reports can cover sales figures, financial results, employee productivity, market
trends, or even customer satisfaction. Just as a ship’s captain reads weather reports, fuel
reports, and crew reports, business managers read management reports to know how well
the company is doing and what changes are needed.
Why is Management Reporting Important?
Now, let’s understand the importance of management reporting with a small story.
Suppose there are two shop owners—Rahul and Aman.
• Rahul runs his shop without keeping track of sales, expenses, or stock. He doesn’t
know which products sell the most, or whether he is making profit or loss.
• Aman, on the other hand, prepares a small report every evening. He writes down
how many customers came, which products were sold, how much money was
earned, and what items are running low.
After a few months, Rahul is confused and frustrated because he doesn’t know why he is
losing money. But Aman is calm and confident because his reports show him exactly where
the problem is and how to fix it.
This shows the importance of management reporting.
Let’s break it down:
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1. Better Decision-Making
Management reports give managers clear data instead of guesswork. This helps
them take smart and timely decisions.
2. Tracking Performance
Just like a student checks their test scores, companies check performance through
management reports. They show if the business is on track or not.
3. Identifying Problems Early
Reports can highlight problems before they become disasters. For example, a report
may show that sales are dropping in one region, so managers can act quickly.
4. Resource Utilization
Resources like money, manpower, and materials are limited. Reports help managers
use them wisely.
5. Motivation and Accountability
When employees know their performance will be reported, they become more
responsible and motivated.
6. Future Planning
Past reports guide managers in planning for the future. For example, if winter sales
are always higher, the company can stock more items in advance.
In short: Management Reporting is the backbone of successful management. Without it,
managers are like blind captains sailing in the dark.
Types of Management Reports
Now, let’s explore the different types of management reports. Think of them like different
kinds of mirrors—each mirror reflects a different angle of the company.
1. Operational Reports
• These are like the daily weather reports for a ship.
• They give details about daily activities—such as production levels, number of goods
sold, or staff attendance.
• Example: A factory manager receives a report every day about how many units were
produced, how much raw material was used, and if there were any machine
breakdowns.
2. Financial Reports
• Money is the blood of any business, and financial reports show how healthy the
company’s finances are.
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• They include income statements, balance sheets, profit & loss accounts, and cash
flow reports.
• Example: A monthly profit & loss report tells managers whether the company is
earning or losing money.
3. Sales and Marketing Reports
• These reports focus on customers and market performance.
• They show sales volume, customer feedback, advertisement impact, and competitor
analysis.
• Example: A marketing manager may see a report that shows which advertisement
campaign brought the highest number of new customers.
4. Human Resource (HR) Reports
• These are about the people in the company.
• They include data about hiring, training, employee turnover, attendance, or
performance.
• Example: An HR manager gets a report showing that too many employees are
leaving the company within the first 6 months.
5. Inventory and Production Reports
• These reports deal with stock levels and production efficiency.
• They help managers ensure there is neither shortage nor wastage of goods.
• Example: A retail store manager receives a report that shows which items are
running out of stock so they can reorder on time.
6. Strategic Reports
• These are big-picture reports for top-level managers.
• They focus on long-term goals, growth strategies, and overall company direction.
• Example: A yearly report may show the company’s growth rate compared to
competitors and help decide whether to expand into a new market.
7. Compliance Reports
• Businesses must follow government laws and industry rules.
• Compliance reports show whether the company is meeting these legal requirements.
• Example: A report may confirm whether the company has paid all taxes or met
safety standards.
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Making Management Reporting Interesting
Now, you may think: “Reports sound boring!”
But actually, modern management reporting is very engaging. Instead of long pages filled
with numbers, companies now use colorful graphs, dashboards, and charts. It’s like
watching the health report of the company in a fun and interactive way—almost like
checking your fitness stats on a smartwatch.
Conclusion
To wrap it up, Management Reporting is the process of collecting, analyzing, and sharing
information with managers so they can make better decisions. It is important because it
helps in decision-making, performance tracking, problem identification, resource
management, accountability, and future planning.
The different types of management reports—Operational, Financial, Sales, HR, Inventory,
Strategic, and Compliance—together give a 360-degree view of the company’s performance.
So, next time you hear “Management Reporting,” just picture the captain of a ship reading
reports before steering his vessel. Without those reports, both the ship and the business
would be lost at sea.
In short: Management Reporting is not just paperwork—it’s the compass that guides a
business toward success.
8. What do you mean by Working Capital Management ? What are the principles of
Working Capital Management ?
Ans: Working Capital Management – Explained Like a Story
Imagine you own a small bakery shop in your town. Every morning, you need flour, sugar,
milk, butter, and eggs to bake cakes and bread. You also pay your workers daily wages, and
you need to keep enough cash to give change to your customers. Now, here’s the twist:
customers may not always pay you immediately. Some buy today and promise to pay you
after a week. Meanwhile, you still need to pay your suppliers and employees on time.
So what happens if you run out of cash before your customers clear their payments? Your
shop may stop functioning—even if your sales are good! This delicate balancing act of
having enough money to run daily activities without running short is what we call Working
Capital Management.
In simple terms:
Working Capital = Current Assets – Current Liabilities.
Working Capital Management is the art of handling short-term assets (like cash, debtors,
and inventory) and short-term liabilities (like creditors and bills payable) in such a way that
the business runs smoothly every single day.
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Now, let’s dive deeper into this story-like journey and understand it step by step.
The Real Meaning of Working Capital Management
At its core, working capital management is about ensuring that a business has enough
resources to meet its short-term obligations and continue operations without interruption.
It is not just about having money in hand but also about managing:
• Cash → to pay salaries, suppliers, and bills.
• Receivables → money that customers owe you.
• Inventory → stock of goods that should neither be too much (wasted money) nor too
little (lost sales).
• Payables → money you owe others, which should be managed wisely.
If you manage these four aspects well, your business will never face a "cash crunch" despite
being profitable on paper.
Why is Working Capital Management Important?
Think again about our bakery. Suppose you get a huge wedding order. You are excited, but
you don’t have enough ingredients stocked. You rush to suppliers, but they ask for advance
payment. You don’t have enough cash because some customers haven’t paid yet. Even
though your business is profitable, you can’t take the order. This is a failure of working
capital management.
In real life too, many businesses shut down not because they don’t make profits but
because they fail to manage their short-term financial health.
So, working capital management ensures:
1. Smooth Operations – daily activities never stop.
2. Liquidity – money is available when required.
3. Profitability – funds are not wasted in idle assets.
4. Sustainability – the business can survive sudden shocks.
Principles of Working Capital Management
To manage working capital effectively, businesses follow some guiding principles. Let’s again
use our bakery story to understand them one by one.
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1. Principle of Matching Maturities
This principle says that short-term needs should be financed with short-term funds, and
long-term needs with long-term funds.
For example, if your bakery needs an oven (a long-term asset), you should take a long-term
loan. But if you just need flour for the month, you should buy it on short-term credit. Using
short-term borrowings for long-term needs is risky—it’s like borrowing your friend’s lunch
money to buy a house!
2. Principle of Risk-Return Trade-Off
More current assets (like cash and inventory) reduce risk but also reduce profitability
because money gets tied up. Fewer current assets increase profitability but also increase the
risk of shortage.
So, you need to strike a balance: keep enough flour to bake bread daily, but not so much
that it gets spoiled and wastes money.
3. Principle of Cost of Capital
Every rupee has a cost. If you borrow money, you pay interest. If you use your own money,
you lose the opportunity to invest it elsewhere. So while managing working capital, always
consider the cost of funds and aim to minimize it.
4. Principle of Optimal Level of Working Capital
Too much working capital is bad (funds remain idle). Too little is also bad (operations suffer).
The principle says: keep an optimal level. For the bakery, this means stocking just enough
ingredients to meet demand without wastage.
5. Principle of Liquidity vs. Profitability
Liquidity means the ability to pay bills on time. Profitability means earning more from
available funds. If you keep too much cash in the locker, liquidity is high but profitability is
low. If you invest everything, profitability may be high, but liquidity suffers. The key is to
balance both.
6. Principle of Economy
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This principle says: working capital should be managed efficiently and economically. For
example, negotiate better credit terms with suppliers or offer discounts to customers who
pay early. Small savings here and there ensure overall efficiency.
7. Principle of Commercial Prudence
This principle emphasizes being cautious. While giving credit to customers, check their
ability to pay back. Don’t just sell on credit blindly because unpaid bills can block your cash
flow.
A Practical Example
Let’s imagine two bakeries in the same street:
• Bakery A keeps huge stock of ingredients but runs out of cash quickly and struggles
to pay suppliers.
• Bakery B keeps minimum but sufficient stock, collects payments on time, and pays
suppliers without delay.
Even if both make the same sales, Bakery B survives longer because it applies the principles
of working capital management wisely.
Conclusion
Working Capital Management is like the heartbeat of a business. Profits may look good on
paper, but without proper cash flow and daily operational funds, no business can survive.
Just like our bakery story, a company must carefully juggle cash, inventory, receivables, and
payables.
The principles—matching maturities, balancing risk and return, cost of capital, liquidity vs.
profitability, optimal level, economy, and prudence—act like guiding rules for businessmen
to ensure their enterprise remains healthy.
In short:
Profits feed the business, but working capital keeps it alive every single day.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
