AFM Question Bank - Lecture notes 1 PDF

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DEPARTMENT OF MANAGEMENT STUDIES BA 5103 – ACCOUNTING FOR MANAGEMENT QUESTION BANK – TWO MARKS 1. What is meant by accounting? Accounting is defined as, “the art of recording, classifying and summarizing in a significant manner in terms of cash transactions and events”. 2. What is meant by Management accounting? The term Management accounting refers to accounting for the management that accounting which provides necessary information to the management for discharging its function. 3. What are accounting concepts? The term concepts include those basic assumptions (or) conditions upon which the science of accounting is based. It includes the following accounting concepts; • Separate Entity Concept *Accounting period concept • Going concern concept *Periodic matching of cost & • Money measurement concept *Revenue concept • Cost concept *Realization concept. • Dual Aspect concept 4. What are the objectives of financial accounting? • Maintenance of Records of business transactions • Calculation of Profit or Loss • Processing of financial position • Provide information to the parties 5. What is double entry system of book keeping? The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits. 6. State the major drawbacks of historical accounting. • Failure to disclose current worth of the enterprise • Uncomparable items in financial statements • Difficult replacement of fixed assets • Inaccurate determination of profit • Mixing up of holding and operating profits

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7. Define Inflation accounting. The American Institute of certified public Accountants defines the inflation accounting as a system accounting, which purposes to record as a built-in mechanism. It refers to the process of adjusting the financial statements of a company to show the real financial position of the company during inflationary period. 8. What is GAAP? GAAP is a Generally Accepted Accounting Principles, defined as those rules of action adopted by the accountant universally while recording accounting transaction. These principles can be classified into 2 categories; • Accounting Concepts • Accounting Conventions. 9. Define HRA. HRA is an accounting for people as an organizational resource. It involves measuring the cost incurred by business firm and other organizations to recruit, select, hire, train and develop human asset. HRA is the process of identifying and measuring data about human resource and communicating this information to interested parties. 10. Mention the objectives of accounting. • Systematic recording of Business transactions. • Ascertainment of results • Ascertainment of Financial Position • Communicating information to various users. 11. What are statutory books? A company is required to maintain proper books of accounts and also other books where proper information about the company will be kept recorded for reference. These books are called statutory books. The main statutory books are; *The register of charges *The register of members *The register of debenture holders *The index of members *The register of foreign members *The minute books *The register of contracts *The register of Directors, Managers. 12. What is ESOP scheme? The Companies Act 2000 (amendment) has inserted a new clause (15A) in Section 2 of the Companies Act 1956, introduced a special scheme known as ‘Employee Stock Option’ exclusively for the benefit of employees of the company. It means the option given to whole time directors, officers and employees of a company which gives the benefit (or) right to purchase (or) subscribe at a future date to the securities offered by the company at a predetermined price. 13. What is preferential allotment? Preferential allotment is a process in which shares are allotted to a specific group of people or companies which are interested in it on preferential basis. Company which allots shares states that whenever it will pay dividend, preference shares holders will be

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paid first. This can be done by any company which is listed on exchange and all rules and regulations stated by SEBI are to be followed to do so. 14. What is Buyback of securities? Buy back of shares means repurchase by a company of its own shares (or) other specified option (or) other securities (or) may be notified by central government out of; • Its free reserves • The Securities premium accounts • The proceeds of any shares (or) other specified securities. 15. Define Company. According to Company act of 1956, a Company is defined as “an association of many persons who contribute money (or) money’s worth to a common stock and employee it in some common trade (or) business and who share the profit or loss arising therefrom”. 16. What is meant by profit or loss prior to incorporation? Sometimes a company acquires a running business from a day prior to its incorporation, if many company has earned profit from the date of purchase to date of incorporation, such profit is called profit prior to incorporation. 17. State the meaning of P&L appropriation account. P/L appropriation is the part of financial statement of company. When a company makes its P/L account its net profit transferred to credit side of P&L appropriation account. P&L account shows only the Net profit (or) Loss from operation of business, but P&L appropriation a/c shows all non-operational adjustments which are needed for proper distribution of net profit between shareholders and company for future use. 18. List out the features of a company. • Separate Legal existence Separate Property • Limited Liability Perpetual Succession • Transfer of Shares Common Seal 19. Mention various Kinds of Companies. I. On the basis of Formation; Charted Companies Statutory Companies Registered Companies III. On the basis of Public Limited Private Companies Public Companies

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II. On the basis of Liability Limited Companies Guarantee Companies Unlimited Companies IV. On the basis of Ownership Government Company Holding Company Subsidiary Company

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20. Write down the meaning of Forfeiture of Shares. Forfeiture means taking away of the shares by the company for non-payment of any money due on any call on the shares held by the shareholders. 21. What is the meaning of ‘Funds from Operations’? Funds from operations are the first and the foremost source of funds for any firm. The funds from operations do not necessary mean the profits as shown by the P/L a/c of a firm, because there are many non-fund (or) non-operating items which have been either debited (or) credited to P/L a/c 22. What is the difference between current ratio and liquid ratio? S.NO Current Ratio Liquid Ratio Current ratio is most commonly Liquid ratio shows the ability of a 1. used to perform the short – term business to meet its immediate financial financial analysis. commitments. 2. It is otherwise called as Working It is also known as acid test ratio or quick Capital Ratio ratio 3. Current ratio of 2:1 is considered Quick ratio of 1:1 is considered satisfactory satisfactory 23. Define cash flow analysis. A cash flow statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalent in an enterprise during a specific period of time. 24. Write down the limitations of ratio analysis. • Reliability of ratios depends upon the correctness of the basic data • An individual ratio may be itself be meaningful • Ratios are not always comparable • Ratios sometimes give a misleading picture • Ratios ignore qualitative factors • Change in price levels makes ratio analysis ineffective • There is no single standard for comparison • Ratios based on past financial statements are no indicators of future. 25. State any 2 objectives of preparing a cash flow statement. • Useful in cash planning • Assesses cash flow from operating activities • Payment of dividends • Cash from investing and financing activities • Explains reasons for surplus or shortage of cash 26. Name the various tools used for financial statement analysis. *Comparative Statement *Common size statement *Trend analysis *Ratio analysis *Fund flow statement *Cash flow statement.

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27. Define Fund Flow Statement. “Fund flow statement is prepared to indicate in summary form, changes occurring in items of financial position between two different balance sheet dates”. Such a statement is prepared to indicate the increases and utilization of resources of a business during an accounting period. 28. Define Ratio Analysis. A ratio is a simple arithmetical expression of the relationship of one number to another. Ratio analysis is defined as analysis and interpretation of financial statement through ratio. 29. Define Trend Analysis. Trend analysis determines the direction (ie) upward or downward and involves the computation of the percentage relationship that the each statement item bears to the same item in base year. 30. The following information is given; Current ratio = 2.5:1, Working capital = Rs.90,000 Find out current asset and current liability. Working capital = current asset – current liability 90,000 = 2.5 – 1 90,000 = 1.5 Current asset = (90,000/1.5)*2.5 = Rs.1,50,000 Current Liability = (90,000/1.5)*1 = Rs.60,000 31. What is Cost Sheet? A cost sheet is “a document which provides for the assembly of the detailed cost of a cost centre or cost unit”. All expenses relating to product are extracted from financial accounting and analyzed under expenses heads in the form of statements. This tabulated statement is called Cost Sheet. 32. Define Marginal costing. Marginal costing is defined as the ascertainment of marginal cost and of the effect on profit of changes in volume of output by differentiating between fixed and variable cost. Marginal costing is also known as direct or variable or incremental costing. 33. What is Process costing? A process refers to the stage of production. If a product passes through different stages, then it is essential to ascertain the cost of each stage or process is called process costing.

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34. What is Target Costing? Target costing can be viewed as a proactive cost management tool used to reduce the total cost of the product, over its complete lifecycle, through production, engineering, research and design. It helps the firm in managing the business in reaping profits in the extremely competitive market. 35. What is Activity based costing or (ABC)? Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing. 36. What is mean by breakeven point? The break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Break-even point can be described as a point where there is no net profit or loss. 37. Define ‘Job order costing’. Job order costing is a method “applies where work is undertaken to customer’s special requirements”. Job order costing is a job or work order for which costs are separately collected and accumulated. 38. State the features of Marginal costing. • Marginal costing is a technique of control or decision making. • Under marginal costing the total cost is classified as fixed and variable costs. • Contribution is ascertained by reducing the marginal cost or variable cost from the selling price. • Profit is ascertained by reducing the fixed cost from the contribution of all the products or departments or processes or divisions, etc. 39. Why are cost accounts necessary? Cost accounting is an essential part of every business. It helps to provide better understanding of fixed and variable costs to a business. Cost accounting classifies and records these costs, which helps to measure financial performance of the organization. 40. Define Budgetary Control. Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving of derivations if any, which are to be eliminated in the future. Thus, budget is a means and budgetary control is the end result. 41. What is the need for codification of accounts? The primary purpose of the Codification was to mitigate the difficulty of locating, understanding and applying the various levels of hierarchy of GAAP that were issued by numerous standard setting bodies over the years. The FASB believes these difficulties may have resulted in the incorrect application of GAAP.

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42. Mention the uses of pre-packaged accounting software. Accounting software is a type of application software that records and processes transactions data within functional modules such as accounts payable, accounts receivable, journal, etc. ... Pre package soft wares are easy to use as they are menu driven. Also it is very cost effective. 43. What do you mean by Codification? Code is an identification mark. Generally, computerised accounting involves codification of accounts. Codification of accounts is needed where there are numerous accounts heads in an organisation. There is a hierarchical relationship between the groups and its components. In order to maintain the hierarchical relationships between a group and its sub-groups, proper codification is required. The coding scheme of account heads should be such that it leads to grouping of accounts at various levels so as to generate various reports. 44. What do you understand by computerized accounting system? Computerized accounting system is software that helps businesses to manage the big financial transactions, data, reports, and statements with high efficiency, speed, and better accuracy. Better quality work, lower operating costs, better efficiency, greater accuracy and minimum errors are some of the advantages of Computerized Accounting. 45. Mention the hierarchy of Ledgers. Accounting master files are created with codes and description of accounts. In a hierarchical coded system reports can be generated based on codes. General ledger, Debtors ledger and Creditors ledger are automatically created by any standard software. At the time of creation, some of the account heads are indicated to the system as cash, bank, debtors and creditors. The system then automatically posts sales to debtor’s a/c and purchases to creditor’s a/c 46. Name any 4 prepackaged accounting soft wares. • Tally • Spreadsheet programs like Lotus, MS Excel • Bank 2000 • Quick FA • DacEasy • Win CA 47. What are the salient features of accounting in computerized environment? • On-screen input and print outs • Automatic updating • Automatic stock adjustments • Integration of database with the accounting programme • Automatic calculation of payroll

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48. Mention the advantages of computerized accounting. • Simplicity • Speed • Power • Flexibility • Real Time • Online Help 49. State the disadvantages of computerized accounting. • Customizing the accounting packages is not easy. • More expensive • Constant pressure for updating hardware and software system • Security of data sometimes becomes risky. • Lacks of deficient employers. 50. What is meant by Grouping of accounts? The main unit of classification is the major head which is further divided into minor heads. Each minor head may have number of sub-heads. After classification of accounts into various groups namely, major, minor and sub-heads and allotting codes to each account these are programmed into the computer system. A proper codification requires a systematic grouping of accounts. The major groups or heads could be Assets, Liabilities, Revenues and Expenses. The sub- groups or minor heads could be capital, non-current liabilities, current assets, sales and so on. 13 Marks – Questions (Other than Problems) 1. What is meant by generally accepted accounting Principles? Explain in detail about accounting concepts and conventions. 2. Explain in detail about Human Resource Accounting. 3. Define Inflation accounting. Explain the advantages and disadvantages of Inflation accounting. 4. Write a note on Employee stock option and explain its features. 5. Discuss the need and advantages of Buy back of securities. 6. Explain the importance of preparing fund flow statement and cash flow statement and mention its difference. 7. How are costs classified? Briefly describe each of such costs. 8. Explain the different methods of costing. 9. Briefly explain the importance and features of computer in accounting. 10. Enumerate the advantages and disadvantages of computerized accounting.

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