MS-04

Management Programme

ASSIGNMENT SECOND SEMESTER 2011

MS-04: ACCOUNTING AND FINANCE FOR MANAGERS

School of Management Studies INDIRA GANDHI NATIONAL OPEN UNIVERSITY MAIDAN GARHI, NEW DELHI 110 068

ASSIGNMENT Course Code Course Title Assignment Code Coverage : : : : MS - 04 Accounting and Finance for Managers MS-04/SEM - II /2011 All Blocks

Note : Answer all the questions and submit this assignment on or before 31st October 2011, to the coordinator of your study center. 1. Discuss and explain the relevance of the following accounting concepts a) Business entity b) Money measurement
The money measurement concept underlines the fact that in accounting, every recorded event or transaction is measured in terms of money. Using this principle, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books. Thus, it is not acceptable to record such non-quantifiable items as employee skill levels or the quality of customer service. One of the basic principles in accounting is "The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements. The inflation which occurs over the passage of time is not considered. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:

Employee skill level Employee working conditions Value of an in-house brand Product durability The quality of customer support or field service The efficiency of administrative processes

All of the preceding factors are indirectly reflected in the financial results of a business, because they have an impact on either revenues, expenses, assets, or liabilities. For example, a high level of customer support will likely lead to increased customer retention and a higher propensity to buy from the company again, which therefore impacts revenues. Or, if employee working conditions are poor, this leads to greater employee turnover, which increases labor-related expenses.

The key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements.

c) Continuity

d) e) f) g) h) i)

Cost Accrual Conservatism Materiality Consistency Periodicity

2. From the Profit and Loss Account of X Limited given below, find out the amount of

funds from operations. Profit and Loss Account of X Ltd. For the year ending 31st December, 2010 Rs. 15,000 By Gross Profit b/d 2,000 By Profit on Sales of 8,000 Fixed 15,000 Assets 4,000 By Dividend received 3,000 12,000 4,500 15,000 80,000 2,41,500 4,00,000 15,000 75,000 1,96,500 2,86,500 By Balance b/d By Net Profit for the year By Tax Refunds

To Salaries To Printing and Stationery To Advertisement To Depreciation on Assets To Discount on Issue of Shares To Commission To Good will written of To Loss on Sale of Investment To Establishment Expenses To Provision for Taxation To Net Profit To General Reserve To Proposed Dividend To Balance c/d

Rs. 3,70.000 20,000 10,000

4,00,000 25,000 2,41,500 20,000 2,86,500

3.

What is CVP analysis? Does it differ from break-even analysis?

4.

S Limited is considering for purchase of a machine. There are two possible machines which will produce the additional output. Details of these machines are as follows:

Capital Cost Sales at standard Price Costs: Labour Materials Factory Overheads Administration Cost Selling Costs Expected life in years Other Information: (a)

Machine x Rs. 60,000 1,00,000 10,000 8,000 12,000 4,000 2,000 2

Machine Y Rs. 60,000 80,000 6,000 10,000 10,000 2,000 2,000 3

The costs shown above relate to annual expenditure resulting from each machine. Sales are expected to continue at the rates shown for each year for the full life of each machine;

(b) (c) (d)

Tax to be paid may be assumed at 50% of net earnings; Interest on capital is to be ignored; The appropriate rate of interest for converting to present value may be taken at 10%.

On the basis of the facts given above, show the most profitable investment by the following methods. (i) (ii) (iii) Pay-back Period, Return on Investment; and Net Present Value on Investment.

5. What is working capital? Explain the importance of working capital management and discuss about the determinants of working capital requirement.