Accounting Questions and Answers

Sensitivity Analysis

What is Sensitivity Analysis? – Definition Sensitivity analysis involves examining what happens to a budget when changes are made in the assumption on which it is based. It is also known as ‘what-if’ analysis, and can be carried out using a spreadsheet or with manual calculations. Manual calculations are easier if they focus only on …

Sensitivity Analysis Read More »

Control Ratios

What are Control Ratios? Under the system of budgetary control, the actual performances are compared with budgeted performances so as to determine the deviations or variances. The deviations or variances may be favorable or unfavorable and may be expressed in terms of absolute figures or in terms of ratios. The ratios in terms of which …

Control Ratios Read More »

Cash Management

Why a business needs cash management? Cash is important Current Asset for running a business. Cash is always needed for running a business enterprise on scientific lines. A reasonable cash balance is always preferred it should not be less than the demand nor more than the reasonable demand. The lesser quantity of cash then legitimate …

Cash Management Read More »

Cost Audit

Definition of Cost Audit The term Cost Audit means the examination of books of account and vouchers to ascertain their accuracy. The exact calculation of the cost of a product is called Cost Audit. Meaning ‘Audit‘ may be described as a systematic examination of the books, vouchers and records of a business to enable the …

Cost Audit Read More »

Objectives and techniques of inventory management

Inventory is an important item of current Assets which also form an important element of firm’s working capital. The capable finance manager will follow proper balance of inventories needed for production schedule and this ultimately suits the interests of its valued customers. The management of inventories faces the following two basic problems. (a) Management of …

Objectives and techniques of inventory management Read More »

Inventory Management

Definition Inventory Management refers to fixation of minimum and maximum limits, determining the size of inventory to be maintained. Consideration regarding issue prices, norms of receipts and inspection, determining the EOQ, providing proper store facilities and keeping an effective check on obsolescence are some of the considerations which are covered under inventory management. Inventories are …

Inventory Management Read More »

Management Audit

What is Management Audit? In Management Audit the evaluation of managerial abilities and techniques is carried out. The various plans prepared by management, its policies, programs, procedures their Audit is management Audit. It is popularly known as operational management or efficiency Auditor. The Accounting kept for managerial purpose are called Management Accounting, similarly, the detailed …

Management Audit Read More »

Need and Scope of Management Audit

The management of business at present becoming more and more complex. The use of specialised techniques such as operational research, statistical sampling, electronic data processing, production control etc. require the services of experts. The directors are not experts in every field of Management. If anything goes wrong then directors have to face the criticism. This …

Need and Scope of Management Audit Read More »

Working Capital

What is Working Capital? The term working capital refers to the portion of total capital which is used to run the business efficiently and regularly. It is also known as short term capital, circulating capital or liquid capital. Working capital, in other words, means management of Current Assets: Cash in hand, Cash at Bank, Bill …

Working Capital Read More »

Various aspects and role of financial planning in financial management

Aspects of Financial Planning 1. Amount of Capital to be raised. Financial planning anticipates the amount of capital required for the establishment of the enterprise and also for carrying out business operations. 2. Determining the form and proportionate amount of securities to be raised. The financial manager has to take decisions about the capital structure …

Various aspects and role of financial planning in financial management Read More »

Over-Capitalization

Definition and Explanation Over-capitalization is that aspect of a business enterprise, wherein long term funds (share capital, debentures and loans) exceed the amount of optimum capitalization. The company earns reasonably fair return on its investment in case of proper capitalization. In case of over-capitalization, the rate of return in lesser than the rate of return …

Over-Capitalization Read More »

Capital budgeting important problems and solutions

Problem 1 The cost of a project is $50,000 and it generates cash inflows of $20,000, $15,000, $25,000 and $10,000 in four years. Using present value index method, appraise profitability of the proposed investment assuming a 10% rate of discount. Solution Calculation of present value and profitability index Year Cash Inflows Present Value Factor Present …

Capital budgeting important problems and solutions Read More »

Capital Budgeting

Capital budgeting tries to determine the capital investment requirements of the business, e.g., acquisition of machinery, building, etc. The plans of the business to modernize or go in for additions of long-term investment will influence the cash budget in the current year. Therefore, capital expenditure decisions must be anticipated in advance and integrated into the …

Capital Budgeting Read More »

Undercapitalization

What is undercapitalization? Under-capitalization is a situation, wherein the company has insufficient capital but large amount of secret reserve. There is generally appreciation in the value of land and building, plant, machinery, and goodwill etc. but the company does not show the appreciation in its books of accounts. These assets earn handsome earning and the …

Undercapitalization Read More »

Fund flow statement practical problems and solutions

Question 1 Prepare fund  flow statement from the following: 1. Increase in working capital: $4,000 2. Net profit $10,750 before written off goodwill 3. Depreciation on fixed assets: $1,750 4. Dividend paid: $3,500 5. Goodwill written off $5,000 out of profits 6. $5,000 share capital was issued for cash 7. Machinery purchased for $10,000 Solution …

Fund flow statement practical problems and solutions Read More »

What is Capital Structure? How to determine the capital structure?

Capital Structure While deciding the capital structure of the company the promoters will have to decide the proportion of capital to be raised by issue of shares and debentures. It should be noted that shareholders are paid dividend out of profit so they bear the risk involved in carrying out the business activities. According to …

What is Capital Structure? How to determine the capital structure? Read More »

Difference between fund flow statement and balance sheet and income statement

Difference between Fund Flow Statement and Balance Sheet The main differences between fund flow statement and balance sheet are as under. Basis of difference Fund Flow Statement Balance Sheet Nature Fund flow statement is designed to show changes in financial position of an organization. Thus it is dynamic in nature. Balance sheet is to highlight …

Difference between fund flow statement and balance sheet and income statement Read More »

Various sources of raising funds for a business

Sources of Business Finance To meet long term, medium term and short term financial requirements, the company may adopt the following sources of fund raising derives. Methods for Raising Long Term Funds 1. Issue of shares. 2. Issue of Debentures. 3. Loan from specialized financial institutions. 4. Ploughing back of earnings (for existing companies) Methods …

Various sources of raising funds for a business Read More »

Q.1. What is Ratio Analysis? Discuss Importance and limitations of Ratio Analysis.

Answer Meaning of ratio The term ratio analysis is used in quantitative relationship between two variables. The Ratios are needed for evaluating the financial statement. The use of ratios in the hands of financial experts works as a tool for evaluating different financial statements. Definitions of Ratio Analysis Following are some authentic definitions of Ratio …

Q.1. What is Ratio Analysis? Discuss Importance and limitations of Ratio Analysis. Read More »

Marginal Costing

Marginal Costing definition Marginal costing refers to the method of costing which is concerned with changes in costs resulting from changes in the volume or range of output and sales. Increase or decrease in total costs which are brought about by an increase or decrease in the volume of production and sale is known as …

Marginal Costing Read More »

Q. 2. Explain balance sheet ratios with examples

Answer The following are the important balance sheet ratios: Current Ratio Current ratio can be calculated as: Current ratio = Current assets / Current liabilities Current assets are: cash in hand, cash at bank, bills receivable, sundry debtors, inventories, work in progress and prepaid expenses. Current liabilities are: Bills payable, sundry creditors, sundry outstanding expenses. …

Q. 2. Explain balance sheet ratios with examples Read More »

Q. 2. Define Contribution and Break-Even Point (BEP)

Answer Contribution: The term contribution refers to the excess of selling price over variable cost of a product. Thus, it is a difference between sale price and variable cost. Contribution (C) = Sales – Variable Cost or Fixed Cost + Profit Example When sale is $80,000 variable cost 40,000, fixed cost $30,000. Calculate contribution. Contribution …

Q. 2. Define Contribution and Break-Even Point (BEP) Read More »

Q. 3. Define Cost Volume Profit (C.V.P), Profit Volume Ratio (PVR) and Margin of Safety (MOS).

Answer Cost Volume Profit (C. V. P.). Profit depends upon many factors, but most important is the cost of Manufacturer, volume of sales and selling price of the product. The three factors of cost, volume and profit are inter-connected and dependent on each other. Profit depends upon sales, slaes price depends upon cost, volume of …

Q. 3. Define Cost Volume Profit (C.V.P), Profit Volume Ratio (PVR) and Margin of Safety (MOS). Read More »

Q. 1. Define Budget and Budgetary Control, What are its various objectives?

Answer Modern business is full of instability and uncertainties. On one hand, keen competition, Govt. policies, different laws, Govt. regulations and different New techniques of production and above all the changing consumer behavior, in such situation that businessman will get success, who can face these challenges. The impact of these has been that all businessmen …

Q. 1. Define Budget and Budgetary Control, What are its various objectives? Read More »

Q. 2. Discuss the budgetary control limitations.

Answer Limitations of Budgetary Control While the advantages of a budgetary technique are unquestionably impressive and for reading, certain limitations and pitfalls of budgeting need to be mentioned. 1. Budgeting control based on estimates Budgeting is not an exact science; a certain amount of estimate is present in all budgetary plans. A revision or modification …

Q. 2. Discuss the budgetary control limitations. Read More »

Q. 3. Explain in brief the various factors for budgetary control.

What are the main requirements of a good budgetary system or what are the steps for budget installation? Answer The following are the chief factors needed for budgetary control: 1. Objectives The first important requirement for the budget is the clear cut objective of the budget which needs well defined organizational system through which the …

Q. 3. Explain in brief the various factors for budgetary control. Read More »

Q. 4. What are functional budgets? Which functional budgets are commonly used by the Management?

The budget satisfies different purposes. Thus different types of budgets are commonly used. The budget can be grouped as: 1. Time budget. Short period or long period budget. 2. Functional budget. Functional budgets Functional Budget is that budget which is associated with the functions of an organization. For examples: Sales budget, Production budget, Labor budget, …

Q. 4. What are functional budgets? Which functional budgets are commonly used by the Management? Read More »

Q. 1. What is Standard Costing? What are its features ? Discuss the essentials of an effective standard costing.

Answer: What is standard costing? The efficiency of management, among other things, depends upon the control of costs. For controlling costs management should not only know the actual cost. but also see the variation in pre-determined cost to actual costs. Standard costing is the most effective way of controlling costs. It provides criteria to evaluate and …

Q. 1. What is Standard Costing? What are its features ? Discuss the essentials of an effective standard costing. Read More »

Scroll to Top