finance interwive question & answers

7/31/2019 finance interwive question & answers

1/42

What are the various streams of accounting?

There are three streams of accounting:

1)Financial Accounting: is the process in which business transactions

are recorded systematically in the various books of accountsmaintained by the organization in order to prepare financialstatements. Theses financial statements are basically of two types:First is Profitability Statement or Profit and Loss Account and secondis Balance Sheet.

2)Cost Accounting: is the process of classifying and recording ofexpenditure incurred during the operations of the organization in asystematic way, in order to ascertain the cost of a cost center withthe intention to control the cost.

3)Management Accounting: is the process of analysis, interpretationand presentation of accounting information collected with the help offinancial accounting and cost accounting, in order to assistmanagement in the process of decision making, creation of policy andday to day operation of an organization. Thus, it is clear from theabove that the management accounting is based on financialaccounting and cost accounting.

Explain Financial Accounting. What are its characteris-tic features?

Financial Accounting is the process in which business transactions arerecorded systematically in the various books of accounts maintainedby the organization in order to prepare financial statements. Thesefinancial statements are basically of two types: First is ProfitabilityStatement or Profit and Loss Account and second is Balance Sheet.

Following are the characteristics features of Financial Accounting:1) Monetary Transactions: In financial accounting only transactions inmonetary terms are considered. Transactions not expressed in

monetary terms do not find any place in financial accounting,howsoever important they may be from business point of view.2) Historical Nature: Financial accounting considers only thosetransactions which are of historical nature i.e the transaction whichhave already taken place. No futuristic transactions find any place infinancial accounting, howsoever important they may be frombusiness point of view.3) Legal Requirement: Financial accounting is a legal requirement. Itis necessary to maintain the financial accounting and preparefinancial statements there from. It is also obligatory to get thesefinancial statements audited.

4) External Use: Financial accounting is for those people who are notpart of decision making process regarding the organization like


2/42

investors, customers, suppliers, financial institutions etc. Thus, it isfor external use.5) Disclosure of Financial Status: It discloses the financial status andfinancial performance of the business as a whole.6) Interim Reports: Financial statements which are based on financial

accounting are interim reports and cannot be the final ones.7) Financial Accounting Process: The process of financial accountinggets affected due to the different accounting policies followed by theaccountants. These accounting policies differ mainly in two areas:Valuation of inventory and Calculation of depreciation.

xplain Cost Accounting. What are the objectives of do-ing it?

Cost Accounting is the process of classifying and recording of

expenditure incurred during the operations of the organization in asystematic way, in order to ascertain the cost of a cost center withthe intention to control the cost.

Following are the basic three objectives of Cost Accounting:

1) Ascertainment of Cost and Profitability2) Cost Control3) Presentation of information for managerial decision making.

What are the characteristic features of cost account-

ing?

Following are the characteristic features of Cost Accounting:

1) Cost accounting views the whole organization from the individualcomponent of the organization like a job, a process etc.2) Cost accounting aims at ascertaining the profitability of individualcomponents of the organization.3) It is meant for those people who are part of the decision makingprocess of the organization. Thus, it is only for internal use.

4) It is not a legal requirement. It is not compulsory to maintain costaccounting records.5) In Cost Accounting, data is immediately available which facilitatesin decision making process.6) Cost Accounting considers each and every transaction, whetherrelated to past or future which will have an impact on the business.

Define Management Accounting. What are its objec-tives?

Management Accounting is the process of analysis, interpretation andpresentation of accounting information collected with the help offinancial accounting and cost accounting, in order to assist


3/42

management in the process of decision making, creation of policy andday to day operation of an organization. Thus, it is clear from theabove that the management accounting is based on financialaccounting and cost accounting.

Following are the objectives of Management Accounting:

1) Measuring performance: Management accounting measures twotypes of performance. First is employee performance and the secondis efficiency measurement. The actual performance is measured withthe standardized performance and a report of deviation from thestandard performance is reported to the management for theeffective decision making and also to indicate the effectiveness of themethods in use. Both types of performance management are used tomake corrective actions in order to improve performance.

2) Assess Risk: The aim of management accounting is to assess riskin order to maximize risk.

3) Allocation of Resources: is an important objective of ManagementAccounting.

4) Presentation of various financial statements to the Management.

What are the limitations of Management Accounting?

Limitations of Management Accounting:

1) Management Accounting isbased on financial andcost accounting, in which historical data is used tomake future decisions. Thus, strength and weakness ofthe managerial decisions are based on the strengthand weakness of the accounting records.

2) Management Accounting is useful only to those peo-ple who are in the decision making process.

3) Tools and techniques used in management account-ing only provide information and not ready made deci-sion. Thus, it is only a supplementary service.

4) In Management Accounting, decision is based on themanagers institution as management try to avoidlengthy courses of scientific decision making.

5) Personal prejudices and bias affect the decisions as


4/42

the interpretation of financial information is based onpersonal judgment of tWhat is the scope of Manage-ment accounting?

Following is the scope of Management Accounting:

1) Financial Accounting2) Cost Accounting3) Revaluation accounting4) Control Accounting5) Marginal Costing6) Budgetary Control7) Financial Planning and8) Break Even Analysis9) Decision accounting:

10) Reporting11) Taxation12) Audit

What are the various techniques used to discharge thefunction of management accounting?

Following are the technique used to discharge the function ofmanagement accounting:1) Marginal Costing2) Budgetary Control3) Standard Costing4) Uniform Costing

Compare Financial Accounting and Cost Accounting.

1) Financial Accounting protects the interests of the outsiders dealingwith the organization e.g shareholders, creditors etc. Whereas reportsof Cost Accounting is used for the internal purpose by themanagement to enable the same in discharging various functions in aproper manner.

2) Maintenance of Financial Accounting records and preparation offinancial statements is a legal requirement whereas Cost Accountingis not a legal requirement.

3) Financial Accounting is concerned about the calculation of profitsand state of affairs of the organization as whole whereas Costaccounting deals in cost ascertainment and calculation of profitabilityof the individual products, departments etc.

4) Financial Accounting considers only transactions of historicalfinancial nature whereas Cost Accounting considers not only historicaldata but also future events.


5/42

5) Financial Accounting reports are prepared in the standard formatsin accordance with GAAP whereas Cost accounting information isreported in whatever form management wants

Compare Financial Accounting and Management Ac-counting

1) Financial Accounting reports are used by outside parties such ascreditors, shareholders, tax authorities etc. whereas ManagementAccounting reports are used by managers inside the organization forplanning, directing, controlling and taking decisions.

2) In Financial Accounting, only historical financial transactions areconsidered and do not consider non financial transactions whereas in

Managerial Accounting emphasis is on decisions affecting the future,thus it may consider future data as well s non financial factors.

3) Maintenance of financial accounting records and preparation offinancial statements is a legal requirement whereas ManagementAccounting is not at all legal requirement. Moreover, these systemshave their own reporting formats.

4) In Financial Accounting, precision of information is requiredwhereas in Management Accounting timeliness of information isrequired.

5) In Financial Accounting, only summarized data is prepared for theentire organization whereas in Management Accounting detailedreports are prepared about products, departments, employees andcustomer.

6) Preparation of Financial Accounting is based of Generally AcceptedAccounting Principles whereas Management Accounting does notfollow such principles to prepare reports.

7) Financial reports generated by the Financial Accounting arerequired to be accurate whereas accuracy is notthe prerequisite ofmanagement accounting.

Compare Cost Accounting and Management Accounting

1) The scope of management accounting is broader than that of costaccounting.

2) Both the accounting streams are not a legal requirement.

3) Cost accounting provides only cost information for managerial usewhereas management accounting provides all types of accounting


6/42

information i.e., cost accounting as well as financial accountinginformation.

4) In Cost accounting, the main emphasis is on cost ascertainmentand cost control whereas in management accounting the main

emphasis is on decision-making.

5) The various techniques used by cost accounting are standardcosting, budgetary control, marginal costing and cost-volume-profitanalysis, uniform costing and inter-firm comparison, etc. whereasmanagement accounting also uses these techniques but also usestechniques like ratio analysis, funds flow statement, statisticalanalysis etc.

6) Cost Accounting is a part of Management Accounting whereasManagement accounting is an extension of managerial aspects ofcost accounting with the ultimate intention to protect the interests ofthe business.

What do you mean by accounting concepts? List them.

Accounting concepts are those basis assumptions upon which basicprocess of accounting is based. Following are the basic accountingconcepts:

1) Business Entity Concept

2) Dual Aspect Concept

3) Going Concern Concept

4) Accounting Period

5) Concept Cost Concept

6) Money Measurement Concept

7) Matching Concept

Explain the following:

a) Business Entity Concept:According to this concept, the business has a separate legalidentity than the person who owns the business. Theaccounting process is carried out for the business and not forthe person who is carrying out the business. This concept isapplicable to both, corporate and non corporate organizations.

b) Dual Aspect Concept:


7/42

According to this concept, every transaction has two affects.This basic relationship between assets and liabilities whichmeans that the assets are equal to the liabilities remains thesame.

c) Going Concern Concept:According to this concept, the organization is going to be inexistence for an indefinite period of time and is not likely toclose down the business in the shorter period of time. Thisaffects the valuation of assets and liabilities.

d) Accounting Period Concept:According to this concept, the indefinite period of time isdivided into shorter time periods, each one being in the form ofAccounting period, in order to facilitate the preparation offinancial statements on periodical basis. Selection ofaccounting period depends on characteristics like businessorganization, statutory requirements etc.

e) Cost Concept:According to this concept, an asset is recorded at the cost atwhich it is acquired instead of taking current market prices ofvarious assets.

f) Money Measurement Concept:According to this concept, only those transactions find place in

the accounting records, which can be expressed in terms ofmoney. This is the major drawback of financial accounting andfinancial statements.

g) Matching Concept:According to this concept, while calculating the profits duringthe accounting period in a correct manner, all the expenses andcosts incurred during the period, whether paid or not, should bematched with the income generated during the period.


a)Convention of Conservation

This accounting convention is generally expressed as to anticipateall the future losses and expenses, without considering the futureincomes and profits unless they are actually realized. This conceptemphasizes that profits should never be overstated or anticipated.This convention generally applies to the valuation of current assets as

they are valued at cost or market price whichever is lower.


8/42

b)Convention of Materiality

This accounting convention proposed that while accounting onlythose transactions will be considered which have material impact onfinancial status of the organization and other transactions which have

insignificant effect will be ignored.. It gives relative importance to anitem or event.

c) Convention of Consistency

This accounting convention proposes that the same accountingprinciples, procedures and policies should be used consistently on aperiod to period basis for preparing financial statements to facilitatecomparison of financial statements on period to period basis. If anychanges are made in the accounting procedures or policies, then itshould be disclosed explicitly while preparing the financialstatements.

What are the various systems of Accounting? Explainthem.

There are two systems of Accounting:

1) Cash System of Accounting: This system records only cash receiptsand payments. This system assumes that there are no credittransactions. In this system of accounting, expenses are considered

only when they are paid and incomes are considered when they areactually received. This system is used by the organizations which areestablished for non profit purpose. But this system is considered to bedefective in nature as it does not show the actual profits earned andthe current state of affairs of the organization.

2) Mercantile or Accrual System of Accounting: In this system,expenses and incomes are considered during that period to whichthey pertain. This system of accounting is considered to be ideal butit may result into unrealized profits which might reflect in the books ofthe accounts on which the organization have to pay taxes too. All thecompany forms of organization are legally required to followMercantile or Accrual System of Accounting.

What are the different types of expenditures consid-ered for the purpose of accounting?

For the accounting purpose expenditures are classified in three types:

* Capital Expenditureis an amount incurred for acquiring the longterm assets such as land, building, equipments which are continually

used for the purpose of earning revenue. These are not meant forsale. These costs are recorded in accounts namely Plant, Property,


9/42

Equipment. Benefits from such expenditure are spread over severalaccounting years.

E.g. Interest on capital paid, Expenditure on purchase or installationof an asset, brokerage and commission paid.

* Revenue Expenditureis the expenditure incurred in oneaccounting year and the benefits from which is also enjoyed in thesame period only. This expenditure does not increase the earningcapacity of the business but maintains the existing earning capacityof the business. It included all the expenses which are incurred duringday to day running of business. The benefits of this expenditure arefor short period and are not forwarded to the next year. Thisexpenditure is on recurring nature.

Eg: Purchase of raw material, selling and distribution expenses,Salaries, wages etc.

* Deferred Revenue Expenditureis a revenue expenditure whichhas been incurred during an accounting year but the benefit of whichmay be extended to a number of years. And these are charged toprofit and loss account. E.g. Development expenditure, Advertisementetc.

What are capital expenditures? Is it Ok to considerthese expenditures while calculating the profitability

of during a certain period?

Capital Expenditure is an amount incurred for acquiring the long termassets such as land, building, equipments which are continually usedfor the purpose of earning revenue. These are not meant for sale.These costs are recorded in accounts namely Plant, Property,Equipment. Benefits from such expenditure are spread over severalaccounting years.

E.g. Interest on capital paid, Expenditure on purchase or installation

of an asset, brokerage and commission paid.

No, Capital expenditure should not be considered while calculatingprofitability as benefits incurred from the capital expenditure are longterm benefits and cannot be shown in the same financial years inwhich they were paid for. They need to be spread over a number ofyears to show the true position in balance sheet as well as profit andloss account.

Explain Revenue Expenditure. Does it affect the prof-itability statement in a period? Explain.


10/42

Revenue Expenditure is the expenditure incurred in one accountingyear and the benefits from which is also enjoyed in the same periodonly. This expenditure does not increase the earning capacity of thebusiness but maintains the existing earning capacity of the business.It included all the expenses which are incurred during day to day

running of business. The benefits of this expenditure are for shortperiod and are not forwarded to the next year. This expenditure is onrecurring nature.

As the return on revenue expenditure is received in the same periodthus the entries relating to the revenue expenditure will affect theprofitability statements as all the entries are passed in the sameaccounting year, the year in which they were incurred.

Explain deferred expenditures. How are these expens-

es dealt with in profitability statement?

Deferred Revenue Expenditure is revenue expenditure, incurred toreceive benefits over a number of years say 3 or 5 years. Theseexpenses are neither incurred to acquire capital assets nor thebenefits of such expenditure is received in the same accountingperiod during which they were paid. Thus they dont affectprofitability statement as they are not transferred to the profitabilitystatement in the period during which they are paid for. They arecharged to profit and loss account over a number of years dependingupon the benefit accrued.

What do you mean by accounting concepts? List them.

Accounting concepts are those basis assumptions upon which basicprocess of accounting is based. Following are the basic accountingconcepts:

1) Business Entity Concept

2) Dual Aspect Concept

3) Going Concern Concept

4) Accounting Period

5) Concept Cost Concept

6) Money Measurement Concept

7) Matching Concept



11/42

a) Business Entity Concept:According to this concept, the business has a separate legal identitythan the person who owns the business. The accounting process iscarried out for the business and not for the person who is carrying outthe business. This concept is applicable to both, corporate and non

corporate organizations.

b) Dual Aspect Concept:According to this concept, every transaction has two affects. Thisbasic relationship between assets and liabilities which means that theassets are equal to the liabilities remains the same.

c) Going Concern Concept:According to this concept, the organization is going to be in existencefor an indefinite period of time and is not likely to close down thebusiness in the shorter period of time. This affects the valuation ofassets and liabilities.

d) Accounting Period Concept:According to this concept, the indefinite period of time is divided intoshorter time periods, each one being in the form of Accountingperiod, in order to facilitate the preparation of financial statements onperiodical basis. Selection of accounting period depends oncharacteristics like business organization, statutory requirements etc.

e) Cost Concept:

According to this concept, an asset is recorded at the cost at which itis acquired instead of taking current market prices of various assets.

f) Money Measurement Concept:According to this concept, only those transactions find place in theaccounting records, which can be expressed in terms of money. Thisis the major drawback of financial accounting and financialstatements.

g) Matching Concept:According to this concept, while calculating the profits during the

accounting period in a correct manner, all the expenses and costsincurred during the period, whether paid or not, should be matchedwith the income generated during the period.


a)Convention of Conservation

This accounting convention is generally expressed as to anticipateall the future losses and expenses, without considering the future

incomes and profits unless they are actually realized. This conceptemphasizes that profits should never be overstated or anticipated.


12/42

This convention generally applies to the valuation of current assets asthey are valued at cost or market price whichever is lower.

b)Convention of Materiality

This accounting convention proposed that while accounting onlythose transactions will be considered which have material impact onfinancial status of the organization and other transactions which haveinsignificant effect will be ignored.. It gives relative importance to anitem or event.

c) Convention of Consistency

This accounting convention proposes that the same accountingprinciples, procedures and policies should be used consistently on aperiod to period basis for preparing financial statements to facilitatecomparison of financial statements on period to period basis. If anychanges are made in the accounting procedures or policies, then itshould be disclosed explicitly while preparing the financialstatements.

What are Nominal Accounts? List accounts consistingthe Nominal Account.

Nominal Accounts are the accounts of Incomes, Expenses, Losses andGains. Nominal Accounts consist of the following types of accounts:

-Insurance Account-Wages Account-Interest Paid or Received Account-Commission Paid or Received Account-Telephone Expenses Account-Salary Account

What is the principal of Double Entry system of ac-counting? What are the advantages of Double Entry

system of accounting?

The principal of Double Entry system of Accounting is Every debithas a corresponding credit hence the total of all debits has to beequal to the total of all credits. In simple words, every businesstransaction affects two accounts. If one account is debited then theother account will be credited with the similar amount. For example: ifthe business purchases a machinery worth Rs. 500000, thenmachinery account gets debited with amount Rs. 500000 as thebusiness is receiving an asset for its operation, on the other side cashaccount automatically gets credited with the same amount of Rs.

500000 as cash is going out of the business.


13/42

Advantages of Double Entry system of Accounting:

-It considers both the aspects of business transaction-Arithmetic accuracy of the accounting records can be checked andverified by preparing trial balance

-Correct results of the operations can be ascertained by preparingFinal Accounts-Correct valuation of assets and liabilities at any point of time bypreparing Balance sheet

What are the rules of double entry book keeping forvarious types of accounts?

Following are the basic rules of double entry book keeping for varioustypes of accounts:

-Personal Account : Debit the Receiver, Credit the Giver-Real Account : Debit what comes in, Credit what goes out-Nominal Account : Debit all the Expenses, Credit all the Incomes

What is depreciation? What are the causes of deprecia-tion? Is it a cost? Why?

Depreciation is a permanent, gradual and continuous reduction in thebook value of the fixed asset. Except Land all the fixed assets e.g.Car, Machinery, Furniture etc depreciates in value making the asset

useless after the end of a certain period.

Following are the causes of Depreciation:

-Wear and Tear due to regular use of the asset-Deterioration occurs with the passage of time, whether the asset isin use or not-Damages done to the assets due to an accident like fire, mishandlingetc.-Depletion of Asset

-Obsolescence i.e. due to new technology in use, new inventions,innovations etc.

Yes, depreciation is a cost. It is a historical cost, which is chargedagainst profits of the organisation reducing the profitability. It is anon-cash cost as it is never paid or incurred in cash.

What is the need of depreciation account?

According to the matching principle of accounting, the costs incurredin the accounting year should be matched with the revenue or

income earned during the same accounting year. Thus, it is necessaryto spread the cost of fixed asset less scrap or realizable value after


14/42

the useful life of the fixed asset is over and this process of ascertainthe same is called depreciation accounting. Thus, depreciationaccount is needed for mainly two purposes:

To ascertain due profits and to represent the value of the fixed asset

at its unexpired cost i.e book value of the asset less depreciation.

What is the effect of depreciation of assets on profitsreceived by owners?

Depreciation forms a part of cost which is used for arriving at correct estimation of profits,which then is distributed to the owners of the business in the form of dividend. Addition ofdepreciation to the cost reduces the amount of distributable profits. By maintaining a de-preciation account a part of the distributable profit is retained in the business as a reservewhich is used to purchase new machinery or for other purposes in the future which reducesthe profits or dividends received by the owners.List various methods for calculating depre-ciation.

Methods for calculating depreciation are:

-Straight Line Method-Written Down Value(Reducing Balance)Method-Production Unit Method-Production Hour Method-Joint Factor Rate Method-Revaluation Method-Renewal Method

Explain straight line method to calculate depreciation.What are it advantages and limitations?

It is the simplest and most often used technique. The componentsused to calculate Straight Line Method are:

-Cost of Asset-Estimated Scrap vale-is the value of the asset at the end of life of theasset-Estimated life of Asset

Formula to calculate:

Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life ofAsset in years

The main advantage of this method is that an equal amount ofdepreciation is charged every year throughout the life of the Assetwhich makes the calculation of depreciation easy.

But the limitation of this method is that the amount of depreciationcharged on the asset in the later years is high due to the reducedvalue of the asset.


15/42

Explain Written Down Value (Reducing Balance)method to calculate depreciation. What are the bene-fits of this method?

In Written Down Value Method, the rate of depreciation ispredetermined. This is done by deducting the amount of depreciationcharged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amountof depreciation charged is high and it gradually starts decreasingduring the subsequent years.


Depreciation = 1-N= number of yearsR= Residual/Scrap ValueC=Cost of the asset

The main benefit of this method is that it recognises this fact that inthe initial phase of an asset, costs of maintenance, repairs etc. areless which goes on increasing with the progressing life of the asset.Thus, by charging higher amount of depreciation in the initial yearsand gradually decreasing the amount of depreciation counterbalanceboth the lower amount of repairs and maintenance cost in the initial

years and the gradual increase later on. It can be noted here that thewritten down value can never be zero.

Explain production unit method to calculate deprecia-tion.

Production Unit Method is also a method of calculatingdepreciation. According to this method, rate of depre-ciation is predetermined at per unit, which is calculat-ed on the basis of total number of units produced dur-ing the life of the asset. This method gives more im-portance to the usage factor. Higher the number ofunits produced, higher will be the amount of deprecia-tion and vice versa.


Rate of Depreciation per unit = (Cost of machine Esti-mated Scrap Value) / EstimatedExplain annuity method

of calculating depreciation.


16/42

In this method, the purchase of an asset is considered an investmentof capital on which a certain rate of interest is earned. The cost of theasset and the interest are written down annually by equal instalmentsuntil the book value of the asset is reduced to nil. The annual chargeby way of depreciation is found out from the annuity tables. The

annual charge for depreciation will be credited to asset account anddebited to depreciation account while the interest will be debited toasset account and credited to interest account. The disadvantage ofthis method is that it is a complicated method to charge depreciation.Secondly, the burden on Profit and Loss account goes on increasingwith the passage of time and the amount of interest goes ondiminishing as years pass by. Thus this method is best suited to thoseassets which require considerable investment and dont requirefrequent additions.

Explain joint factor rate method of calculating depreci-ation.

This method is also used to calculate amount of depreciation. In thismethod the depreciation is provided partly at a fixed rate on timebasis and partly at a variable rate on usage basis. number of unitsproduced

What is sinking fund method of calculating deprecia-tion?

It is also known as Depreciation fund method. Under this method asinking fund or depreciation fund is created. Every year the profit andloss account is debited and fund account is credited with a sum,which is calculated such that the annual sum credited to the fundaccount which is accumulating throughout the life of the asset will beequal to the sum required to replace the old asset. The mainadvantage of this method is that it accumulates interest or dividendsby regular investment of cash outside the business e.g.in securities tofinance the replacement of the assets, which has become useless.But on the other hand this method has disadvantage also as the

burden of profit and loss account goes on increasing as years pass bysince the amount spent on repairs and maintenance goes onincreasing due to the wear and tear of the asset and the amount ofdepreciation remains same.

Explain endowment policy method of calculating de-preciation.

This method is similar to Sinking Fund method except in this methodinstead of investing in securities the amount set aside is used to paypremium on an Endowment Policy. And the policy should mature onthe date on which the ceases its useful life. This collected money isthen used to replace the expired asset.


17/42

Explain revaluation method to calculate depreciation

Under this method the fixed assets are valued at the end of eachaccounting period. The difference between the value at the beginningof the period and the value at the end of the period represents the

depreciation value which is charged against the profit and lossaccount. This method is used in case of assets like loose tools,packages, Farmers livestock etc.

Formula for Calculating:

Depreciation = Value of asset at the end Value of asset at thebeginning + Any new purchases

Explain renewal method to calculate depreciation.

In this method the full cost of the asset is charged as depreciationduring the period in which the asset is renewed. No depreciation ischarged in between the period. This method can be used if the assetis of small value and is renewed frequently.

What method of depreciation calculation is used to cal-culate the tax liability according to Income Tax Act,1961?

According to Income Tax Act, 1961 Written Down Method ofdepreciation is used to calculate the tax liability. In this method,depreciation is charged at predetermined rate, which is calculated onthe balance of cost of asset less amount of depreciation previouslycharged. The rate at which the depreciation will be calculated is alsospecified in the Income Tax Act 1961.

How is depreciation calculated as per schedule XIV ofCompanies Act, 1956?

As per Schedule XIV of Companies Act, 1956 the company can

calculate the depreciation by using either Straight Line Method orWritten Down Value Method. The rate to calculate depreciation is alsospecified in Schedule XIV. If any addition has been made to any assetduring the financial year, depreciation on such an asset will becalculated on pro-rata basis from the date of such addition or uptothe date on which such asset has been sold.

How are the fixed assets categorized to calculate thedepreciation as per schedule XIV of Companies Act,1956?

To calculate depreciation as per Schedule XIV of Companies Act, 1956


18/42

the fixed assets are categorized as below:

-Buildings-Factory Buildings as well as Administration buildings-Plant and Machinery-Furniture

-Vehicles-Computer Installations

Does depreciation generate funds for replacement ofassets?

Yes, depreciation generate funds for replacement ofassets. When depreciation is charged against the as-set, a significant portion is taken out of the profits ev-ery year during the lifetime of the existing assets, and

is retained and accumulated without being distributedto the owners as dividend. Thus at the end of the lifeof the existing asset, the business will have somefunds to replace old asset with the new one.Compare:Depreciation as per Companies Act and Income Tax Act

Under the Companies Act: Depreciation is computed either using thestraight line method or written down value method. In straight linemethod the amount of depreciation is uniform for all the years wherein written down method the amount of depreciation is highest in the

first year and gradually decreases in the subsequent years.

Under Income Tax Act: Depreciation is computed using written downvalue method. Also it is charged on the block of assets and not onindividual assets. The block of assets means a group of assets forwhich the same rate of depreciation is applicable.

What is Journalizing? What are the columns of a jour-nal?

Journalizing is the process of recoding business transactions in theJournal in chronological order, as and when the transactions takeplace. Journal is also known as Book of Original Entry or the Book ofPrime Entry.

Journal has following five columns:

-Date-Particulars-Ledger Folio-Amount Debited

-Amount Credited


19/42

Explain Compound Journal Entry.

In day to day business, various similar transactions take place on thesame day and every account is either debited or credited. Thusinstead of passing different entries, a compound entry can be passed,

which involves more than one debit or more than one credit or both.This makes the journal less bulky and avoids duplication.

What are subsidiary books? Why are they maintained?

Subsidiary book is the sub division of Journal. These are known asbooks of prime entry or books of original entry as all the transactionsare recorded in their original form. In these books the details of thetransactions are recorded as they take place from day to day in aclassified manner.

The important subsidiary books used are as following:-

-Cash Book: Used to record all the cash receipts and payments.-Purchase Book: Used to record all the credit purchases.-Sales Book: Used to record all the credit sales-Purchase Return Book: Used to record all goods returned bybusiness to the supplier-Sales Return Book: Used to record all good returned by thecustomer to the business.-Bills Receivable Book: Used to record all accepted bills received by

business.-Bills Payable Book: Used to record all bill accepted by us to ourcreditors.-Journal Proper: Used to record those transactions for which there isno separate book.

These subsidiary books are maintained because it may be impossibleto record each transaction into the ledger as it occurs. And thesebooks record the details of the transactions and therefore help theledger to become brief. Future reference and any desired analysisbecomes easy as transactions of similar nature are recorded together.

List the type of transactions entered in Journal proper.

The Journal proper is used to record following transactions:-

-Opening Entries: are the entries which are made at the starting ofthe financial year.

-Closing Entries: At the close of the accounting period balancesfrom the various accounts are transferred in order to balance the


20/42

books of accounts. Thus, this process of transferring balances of thetrading and profit and loss account at the end of year is called closingthe books and entries passed at that time are called closing entries.

-Transfer Entries: are the entries which are passed in order to

transfer one account to another account.

-Adjustment Entries: are passed at the end of an accounting periodin order to modify the accounts.

-Rectification Entries: are passed to rectify the error detected thebooks through an entry in journal proper.

-Entries for rare transactions: Journal proper is used for raretransactions.

-Entries for which there is no special journal: When thetransactions cannot be recorded in the above sub journals then thesame are entered in the journal proper.

Examples of such transactions are: Distribution of goods as freesample, Goods destroyed by fire, etc

Explain Cash book.

Cash book is a book of original entry in which all the transactions

relating to cash receipts and payments are recorded in chronologicalorder. Cash receipt is entered on the debit side and cash payment isrecorded on credit side of the cash book. There are three types ofcash book:

-Single Column Cash Book: This record only cash receipts andpayments. It has only one money column on debit and credit side.Cash received is entered on the debit side and cash payments areentered on the credit side.

-Double/ Two Column Cash Book: This type of Cash book has twocolumns of cash and discount on both the debit and credit side.

-Three Column Cash Book: This cash book has three columns ofcash, bank and discount on both the debit and credit side.

At the end of specified period the cash book is balanced. Excess ofdebit balance is posted on credit side as By balance c/d to balanceboth the sides. From the start of the next period the balance on thecredit side is brought down on the debit side by To balance b/d nrecords total amount to the supplier.


21/42

Explain Purchase day book.

Purchase Day book (Purchase Register)is the book oforiginal entry in which all the transactions relating toonly credit purchase are recorded. Cash purchases donot find place in purchase day book as they are record-ed in Cash book. At the end of every month purchaseday book is totalled. The total amount show the totalgoods purchased on credit. The total of purchase bookis debited to the purchase account and the accounts ofthe suppliers of goods are credited with the amountstanding against their names. Ruling of purchase daybook is different from a journal. There are five columnsin a purchase day book: first column records Date, sec-

ond column records name of the supplier, quantity sup-plied, Rate at which quantity supplied, description,etc. , third column records Invoice number, fourth col-umn records Ledger Folio, fifth columExplain Sales Daybook

Sales Day book (Sales Register): is the book of original entry in whichall the transactions relating to only credit sales made by thebusinessman are recorded. Sales day book is totaled every month.The total of sales book is credited to the sales account and the

accounts of the customers to whom goods are sold are debited withthe amount standing against their names. Just like purchase day booksales day book also has five columns: Date, Particulars, InvoiceNumber, Ledger Folio and Amount to enter all the details.

Explain Purchase return register

Purchase Return Register is the register or book in which thetransactions relating to goods returned to the suppliers are recorded.It is also known as Purchase outward book or Purchase return daybook. When goods are returned to the supplier a debit note is issuedby the businessman, which is an intimation to the supplier that theamount is being debited to his account. The ruling of this book andthe entries made are absolutely same as Purchase day book. Thetotal of purchase returns is credited to purchase return account,goods being sent out and the account of suppliers to whom goods arereturned are debited, as they receive goods.

Explain Sales Returns Register.

Sales Returns Register is the register or book in which transactions

relating to goods returned to the businessman from its customers arerecorded. It is also know as Sales inward book or Sales return day


22/42

book. A credit note is sent by the businessman to the customer whohas returned the goods. It is a statement which states that theaccount of the customer has been credited with the amount of goodsreturned to the businessman. The ruling of Sales returns register isabsolutely same as Sales day book. The total of sales returns book is

debited to sales return account and the account of customers arecredited with the same amount rare transactions

Explain Journal proper

Journal proper is the book of original entry in whichthose miscellaneous transactions are recorded whichdo not find place in any other books. It is also calledmiscellaneous journal. The Journal proper is used torecord following transactions:-

-Opening Entries-Closing Entries- Transfer Entries- Adjustment Entries- Rectification Entries- Entries fohat is a Ledger? What do you mean byLedger Posting?

Ledger is the book where the transactions of similar nature pertainingto a person, asset, liability, income or expenditure are drawn from thejournal or subsidiary books where the transactions are recorded in achronological order and posted account wise in the Ledger account.Ledger maintains all types of accounts i.e. Personal, Real and NominalAccount.

All the business transactions are first recorded in Journal or Subsidiarybooks in a chronological order when they actually take place and fromthere the transactions of similar nature are transferred to Ledger andthis process of transferring is called as Ledger Posting.

What are control ledgers? What are the purposes ofmaintaining it?

In a business, sometimes it is not feasible to carry accounts of all thesuppliers and customers in the main ledger. In such cases apart fromGeneral or main ledger, the control ledgers are maintained. Controlledgers records the individual accounts. In the end of the period,balance shown in the main ledger has to tally with the balance in theindividual ledger accounts maintained in the control ledger. Purposes

of maintaining control ledgers are:


23/42


24/42

components namely Manufacturing Account, Trading Account, Profitand Loss Account and Profit and Loss Appropriation Account. Grossprofit or Gross loss so calculated in trading account is taken to theprofit and loss account.

What are the components of Profit and Loss Account?Explain them

All expenses, losses, incomes and gains are the components of Profitand Loss Account:

Expenses and losses are shown on the debit side of Profit & LossAccount. Following is the list:

Administrative Expenses:

* Office Salaries* Postage & Telephone* Traveling & Conveyance* Legal Charges* Office Rent* Depreciation* Audit Fees* Insurance* Repairs & Renewals

Selling and Distribution Expenses:

* Advertisement* Carriage Outward* Free Samples* Bad Debts* Sales Commission

Incomes and Gains are shown on the credit side of the Profit & LossAccount. Following is the list:

Gross Profit (balance forwarded from the Trading account)

Other Income:

* Discount received* Commission received* Non-Trading Income* Interest received* Bad Debts recovered* Rent received

* Profit on the sale of assets


25/42

What is a Balance Sheet? Why is it prepared?

Balance Sheet is a Statement showing financial position of thebusiness on a particular date. It has two side one source of funds i.eLiabilities, the left side of the balance sheet and application of funds

i.e assets, the right side of the balance sheet. It is prepared afterpreparing trading and profit and loss account and has balances of realand personal accounts grouped and arranged in a proper way asassets and liabilities. It is prepared to know the exact financialposition of the business on the last date of the financial year.

List the type of items which appear under the liabilityside of a balance sheet.

Items which appear under the liability side of Balance Sheet are:

* Capital* Long Term Liabilities* Loan from bank* Mortgage* Current Liabilities* Sundry Creditors* Advance from Customers* Outstanding Expenses* Income Received in Advance

What types of items appear under the assets side?

Items which appear under the assets side of Balance Sheet are:

Fixed Assets:

* Land,* Building,* Machinery,* Furniture,

* Vehicles,* Computers

Investments

Current Assets:

* Stock,* Sundry Debtors,* Cash Balance,* Bank Balance,

* Prepaid Expenses


26/42

hat are adjustment entries? Why are they passed?

Adjustment entries are the entries which are passed at the end ofeach accounting period to adjust the nominal and other accounts sothat correct net profit or net loss is indicated in profit and loss

account and balance sheet may also represent the true and fair viewof the financial condition of the business.

It is essential to pass these adjustment entries before preparing finalstatements. Otherwise in the absence of these entries the profit andloss statement will be misleading and balance sheet will not show thetrue financial condition of the business.

Preparing final accounts

a.) Closing Stock

Following entry will be passed:

Closing stock account Debit

Trading account - Credit

b.) Depreciation


Depreciation account Debit

Fixed asset account Credit

c.) Outstanding Expenses


Expenses account Debit

Outstanding account - Credit

d.) Prepaid Expenses


Prepaid expenses account Debit

Expenses account Credit


27/42

e.) Accrued Income


Accrued Income account Debit

Income account - Credit

f.) Income received in advance


Income account Debit

Income received in advance account - Credit

g.) Bad debts


Bad Debts account Debit

Sundry Debtors account - Credit

h.) Provision for doubtful debts


Provision for Doubtful Debts account Debit


i.) Provision for discount on Debtors


Provision for Discount for Debtors account Debit


j.) Interest on Capital


Interest on capital account Debit

Capital account - Credit

k.) Drawings


28/42


Drawing account Debit

Sales account - Credit

l.) Deferred revenue expenditure written off


Deferred revenue expenditure written off account Debit

Deferred revenue expenditure account - Credit

m.) Abnormal Loss


Abnormal Loss account Debit

Stock destroyed account Credit

If the organization has insured the stock with the insurance companythen the insurance company settles the claim, either in full or part. Inthat case the following entry will be passed:

Insurance company account Debit

Abnormal loss account Debit

Stock destroyed - Credit

n.) Goods distributed as free samples


Advertisement account Debit

Sales account - Credit

o.) Goods sent on approval basis:

Goods sent on approval basis should not be treated as sales till thegoods are finally approved by the customer because property ingoods is not transferred until the said period is over. If the goods senton approval basis are treated as sales then closing stock will be

increased by the cost of such goods sent on approval basis.


29/42

p.) Commission payable to the manager:


Commission account Debit

Commission payable account Credit

Explain Bank Reconciliation Statement. Why is it pre-pared?

Bank Reconciliation Statement is a statement prepared to reconcilethe balances of cash book maintained by the concern and pass bookmaintained by the bank at periodical intervals. At the end of everymonth entries in the cash book are compared with the entries in the

pass book. The causes of differences in balances of both the booksare scrutinized and then reconciliation statement is prepared. Thisstatement is prepared for a special purpose and once in a month. It isprepared with a view to indicate items which cause differencebetween the balances as per the bank columns of the cash book andthe bank pass book at a particular date.

What are the reasons which cause pass book of thebank and your bank book not tally?

* Cheques deposited into the bank but not yet collected

* Cheques issued but not yet presented for payment* Bank charges* Amount collected by bank on standing instructions of the concern.* Amount paid by the bank on standing instructions of the concern.* Interest debited by the bank* Interest credited by the bank* Direct payment by customers into the bank account* Dishonour of cheques* Clerical errors

What are the important things to be rememberedwhile preparing a bank reconciliation statement?

While preparing a bank reconciliation statement following importantpoints need to be remembered:

* Bank Reconciliation Statement is prepared either by starting withthe Bank pass book balance or Cash book balance.* If the balance of the Cash book is taken as a starting point thenCash book balance is to be adjusted in accordance with the entriespassed in the Bank pass book and vice versa. For example: If thebalance is taken as per the Cash book then the following items will beadded:


30/42

* Cheques issued but not presented for payment;* Amount credited in Passbook but not in Cash book;* Deposits made in the bank directly;* Wrong credits given by bank;* Interest credited in the Passbook.

The following items will be subtracted:

* Cheques deposited but not cleared;* Interest/Bank Charges debited by bank* Direct payments made by bank not entered in Cash book* Cheques dishonoured not recorded in cash book* Wrong debits given by bank* If it is prepared with the Bank balance as per the bank passbook,then the above procedure will be reversed i.e the items will be addedto the pass book which were deducted from the cash book balanceand those items will be deducted from the bank pass book balancewhich were added to the cash book balance.

What are the groups under which errors in accountingare placed?

Errors in accounting are placed in the following main groups:

- Error of Omission- Error of Commission

- Error of Principle- Compensating Error

What are the types of errors which have an effect onTrial Balance?

Following are the types of errors which affect agreement of TrialBalance:

- Wrong totalling of subsidiary books

- Posting on the wrong side of the account- Posting of the wrong amount- Omission of posting an amount in the ledger- Error of balancing

What type of errors do not affect the Trial Balance?

Following are the types of errors which do not affect the Trial Balance:

- Compensating Error- Errors of Principle

- Errors of Omission- Errors of Commission


31/42

- Wrong amount recorded in the subsidiary books

What steps would you take to locate the errors in caseTrial Balance disagrees?

In case Trial Balance disagrees, following steps should be taken tolocate the errors:

-Totalling of all the subsidiary books and trial balance should bechecked carefully.

-Opening balances of all the accounts are properly brought down inthe current years books of account.

-Ledger accounts have been properly balanced and the balances of

ledger accounts have been correctly shown in the trial balance.

-To locate some errors the difference in the trial balance in halved.

-Another way is dividing the difference in the trial balance by 9.

-If the difference gets divisible without leaving any reminder thatindicates the transposition of the amounts.

-To locate certain other errors, current year trial balance can becompared with the trial balance of the previous year.

What measures would you take to rectify the errors?

If the trial balance does not agree, in such case to close the books ofaccounts the difference in the trial balance is posted in a suspenseaccount and then the trial balance is tallied. As the balance in theSuspense account needs to be nil. Thus, attempts are made to locatethe errors and the rectification is made through suspense account. Itshould be remembered that Suspense account exists till the time allthe errors are located and rectified making the balance of Suspense

account nil.

The other way of rectifying the errors is by passing rectificationentries. These entries are passed when the errors which affect twoaccount and do not affect the agreement in the Trial balance. In thismethod of rectification the following steps are taken:

- First find out the wrong entry passed- Second, write the correct entry which should have passed.- Third, to nullify the wrong effect, reverse the same and reinstate thecorrect by passing rectification entry.

For e.g.: Rs. 200 received from Ravi have been credited to Ram.


32/42

Wrong Entry: Cash A/c----------Dr. 200To, Ram A/c 200

Correct Entry: Cash A/c----------Dr. 200

To, Ravi A/c 200

Rectification Entry: Ram A/c--------Dr. 200 To, Ravi A/c 200To, Ravi A/c 200

What is cost accountancy? What are the objects ofCost Accountancy?

Cost accountancy is the application of costing and cost accountingprinciples, methods and techniques to the science, art and practice of

cost control and the ascertainment of profitability as well as thepresentation of information for the purpose of managerial decisionmaking.

Following are the objects of Cost Accountancy:

-Ascertainment of Cost and Profitability-Determining Selling Price-Facilitating Cost Control-Presentation of information for effective managerial decision-Provide basis for operating policy

-Facilitating preparation of financial or other statements

What is the difference between costing and cost ac-counting?

Costing is the process of ascertaining costs whereas cost accountingis the process of recording various costs in a systematic manner, inorder to prepare statistical date to ascertain cost.

What is cost centre?

Cost centre is defined as a location, machine, person, department,division, or any equipment or group of these, in relation to whichdirect and indirect costs may be ascertained and used for the purposeof cost control. Thus, an organisation for the costing purposes isdivided in convenient units and one of the convenient units is knownas cost centre. Example: collecting, sorting, washing of clothes arethe various activities which are separate cost centre in a laundry. Thecost centre facilitates this function of cost control. Thus, correctidentification of cost centre is a prerequisite for the successfulimplementation of cost accounting process. This also facilitates the

fixation of responsibility in the correct manner.


33/42

Compare the following:

a.) Impersonal and personal cost centres:

Impersonal Cost Centre: consist items of impersonal nature like an

equipment or location. Example of Impersonal Cost Centre: adepartment, a branch, a region of sale, etc.

Personal Cost Centre: consist items of personal nature like a person ora group of persons. Example of Personal Cost Centre: RegionalManager, Sales Manager, Marketing Manger, etc.

b.) Production and service cost centres:

Production Cost Centre: is the place where the production activity is

carried on. Example of Production Cost Centre: a assembly shop, apaint shop etc.

Service Cost Centre: is the place where all types of assistance aregiven to the production activities. Example of Service Cost Centre:the store department, the labour office, the account/costingdepartment etc.

Explain Direct cost and Indirect cost.

Direct Costare all the expenses which can be identified with the

individual product, service or job cost centre. In the manufacturingprocess of products, materials are purchased, labours are hired andwages are paid to them. All these take active and direct part in themanufacturing process.

Indirect Costare all the expenses which cannot be identified withthe individual product, service or job cost centre. The totals of indirectcosts are termed as overheads. Example: salaries of storekeepers,foremen, work managers salary etc.

Explain fixed, variable and semi-variable costs.Fixed Costis the cost which remains constant or unaffected byvariations in the volume of output within a given period of time.Example: Rent or rates, Insurance charges, etc.

Variable Costis the cost which varies directly in proportion withevery increase or decrease in the volume of output with a given aperiod of time. Example: Wages paid to labours, cost of directmaterial, consumable stores, etc.

Semi-variable Costis the cost which is neither fixed nor variable innature. These remain fixed at certain level of operations while may


34/42

vary proportionately at other levels of operations. Example:maintenance cost, repairs, power, etc.

Explain controllable and uncontrollable costs.

Controllable Costare the costs which can be influenced by theaction of a specified member of the undertaking. They are incurred ina particular responsibility centres can be influenced by the action ofthe executive heading that responsibility centre. For example: Directlabour cost, direct material cost, direct expenses controllable by theshop level management.

Uncontrollable Costare the costs which cannot be influenced by theaction of a specified member of the undertaking. For example: aforeman incharge of a tool room can only control costs pertaining to

the same department and the matters which come directly under hiscontrol, not the costs apportioned to other department. Theexpenditure which is controllable by an individual may beuncontrollable by another individual.

Explain Normal and Abnormal Costs.

Normal Cost are the normal or regular costs which are incurred in thenormal conditions during the normal operations of the organization.They are the sum of actual direct materials cost, actual labour costand other direct expense. Example: repairs, maintenance, salaries

paid to employees.

Abnormal Cost are the costs which are unusual or irregular which arenot incurred due to abnormal situation s of the operations orproductions. Example: destruction due to fire, shut down ofmachinery, lock outs, etc.

Explain Opportunity Cost and Differential Cost.

Opportunity Cost is the cost incurred by the organisation when one

alternative is selected over another. For example: A person has Rs.100000 and he has two options to invest his money, either invests infixed deposit scheme or buy a land with the money. If he decides toput is money to buy the land then the loss of interest which he couldhave received on fixed deposit would be an opportunity cost.

Differential Cost is the difference between the costs of twoalternatives. It includes both cost increase and cost decrease. It canbe either variable or fixed. Example: Cost of first alternative = 10000;Cost of second alternative = 5000; Differential Cost = 10000 5000= 5000

Explain Sunk Cost.


35/42


36/42

-Lack of Support from Top Management Resistance and noncooperation from the Staff

-Shortage of trained staff

-Non suitability for the nature of product and nature of business

-The cost involved in installing this system may be too high.

What are the various elements of costs?

There are three elements of cost:

-Material Cost:This is the cost of material or the commodity used bythe organisation for its production purpose. Material is the substance,

from which a product is made. Thus, it may be in a raw or amanufactured state. It can be direct or indirect.

-Direct Material Cost forms an integral part of the finished productand is identified with the individual cost centre. It is also described asprocess material, stores material, production material, etc. Example:Raw materials purchased or purchased primary packing material, etc.

-Indirect Material Cost is used for ancillary purposes of the businessand cannot be conveniently identified with the individual cost centre.Example: Consumable stores, oil and waste, printing and stationery

material etc.

-Labour Cost:This is the cost, incurred in the form of remunerationpaid to the employees or labours of the organisation. The workforcerequired to convert material into finished product is called labour. Itcan be direct or indirect.

-Direct Labour Cost is the cost incurred on those employees whodirectly take part in the manufacturing process and easily identifiedwith the individual cost centre.

-Indirect Labour Cost is the cost incurred on those employees whodo not directly take part in the manufacturing process and cannotidentified with the individual cost centre. Example: salary of foreman,salesmen, directors salary, etc.

-Expenses:are the costs of services provided to the organisation. Itcan be direct or indirect.

-Direct Expenses are the expenses which can be directly identifiedwith the individual cost centres. Example: hire charges of machinery,

cost of defective work for a particular job or contract etc.


37/42

-Indirect Expenses are the expenses which cannot be directlyidentified with the individual cost centres. Example: rent, lighting,telephone expenses, etc.

What are overheads? How are they classified?

Overheads are the aggregate of Indirect Material cost, Indirect Labourand Indirect Expenses. Thus, sum of all indirect costs are overheads.They are of three types:

-Factory Overheads-Office and Administration Overheads-Selling and Distribution Overheads


a.) Factory Overheads: are the overheads which are incurred fromthe stage of procurement of materials till the stage of finished goods.They include:

- Indirect Materials such as lubricants, cotton waste, consumablestores etc.- Indirect Labour such as storekeeper, time keeper, works managerssalary etc.- Indirect Expenses such as cost of factory lighting, carriage inwardcost, depreciation on factory building, rent/insurance of

building/machinery etc.

b.) Office and Admin overheads: are the overheads incurred forthe overall administrative work of the organisation. They include:

- Indirect Materials such as office supplies, stationery and printingitems, brooms etc.- Indirect Labour such as salaries payable to manager, clerk etc.- Indirect Expenses such as lighting, bank charges, legal/auditcharges, rent/insurance of office.

c.) Selling and Distribution Overheads: are the overheadsincurred from the stage of final manufacturing of finished goods tillthe stage of goods sold in the market and collection of dues from thecustomers. They include:

- Indirect Materials such as samples, packing materials, etc.- Indirect Labour such as salaries and commission payable to salesmanager, salesmen etc.- Indirect Expenses such as rent, carriage outwards, warehousecharges, discount offered to customers, advertising expenses, bad

debts etc


38/42

Explain Gross Profit.

Gross Profit is a companys revenue minus its cost of goods sold. It isalso known as gross margin and gross income. It is calculated bysubtracting all costs related to sales i.e manufacturing expenses, raw

materials, labour, selling and advertisement expenses from sales. It isan indication of the managements efficiency to use labour andmaterial in the production process.

Gross Profit = Net Sales Cost of Goods Sold

Explain Net Profit.

Net Profit/ Operating Profit Net profit, also known as operating profit isactual earnings of the company in a given period of time. It is a

measure of the profitability after accounting for all costs. In simpleterms, net profit is the money left over after paying all the expensesincluding taxes and interest. It is the calculated by subtracting totalexpenses from total revenues. Net income can be either distributedamong shareholders of the company or held by the firm as retainedearnings for the future purposes.

Net Profit = Gross Profit Total OperatingExpenses Taxes Interest

What are the steps in procurement of material?

Following are the steps in procurement of material:

Purchase Requisition is an indication to the purchase department topurchase certain material required for the production. Followingparticulars appear in the purchase requisition

-Material to be purchased-When it is required-How much to be purchased

-Selection of Source of Supply-Single Tender-Limited Tender-Open Tender-Global Tender-Purchase Order-Description of Materials to be supplied-Quantity to be supplied-Cash and trade discount Rates at which materials are supplied-Additional charges e.g. Excise duty, Sales tax, packing charges,insurance Instructions in respect of delivery

-Guarantee clause-Inspection clause


39/42

-Method of settlement of disputes-Terms of payment Receipt and Inspection-After the receipt of materials, inspection of the material is done.Inspection of materials means that the quantity actually received iscompared with the quantity ordered; also the quality of the material

is inspected.

Invoice received from the supplier is compared along with thepurchase order, goods received note and inspection note.

Why should over stocking be avoided?

Due to the following consequences over stockingshould be avoided:

-Funds get blocked which could be used elsewhere

-More storage facilities are required

-High costs of storage and maintenance

-Deterioration of quality and obsolescence of stock

-HWhat can be the consequences of under stocking?

The following can be the consequences of under stocking:

-Production process cannot be operated efficiently, resulting deliveryschedules.

-Firm may end up paying an idle labour force due to the productionhold ups.

-Organisation may loose its important customers, due to the delay inmeeting customers orders.

-Unfavourable prices and quality Increased administration costs.

-Due to under stocking it will not be easy for the organisation to meetthe unexpected demands of customers.

What can be the discrepancies in material receipt?

There are two categories of material discrepancies:

First category includes-

-Quantity received in excess


40/42

-Quantity received in short-Quantity damaged-Receipt of incorrect quantity of material.These discrepancies are normally caused by the transportationsystem.

Second category includes Discrepancies in quality of materialsupplied.These discrepancies are caused by the manufacturer.

Differentiate between Bin Card and Stores Ledger.

-Bin Card is a quantitative record of the individual item of its receipts,issues and closing balance whereas Stores Ledger records both thequantity and cost of receipts, issues and balances of item of material

received.

-Bin Card is prepared by stores department whereas Stores Ledger isprepared by costing department.

-In Bin Card system, entries are made immediately after eachtransaction. In Store Ledger, entries are made periodically.

- In Bin Card, postings are made before a transaction. In Store Ledger,posting is made after a transaction.

-Bin Card is kept attached to the bins inside the store as to enable toidentify the stock. Store Ledger is kept outside the store.

What can be the reasons for bin card and stores ledgernot getting reconciled?

The following can be the reasons for bin card and stores ledger fornot getting reconciled:

-Arithmetical error in calculating balances of the sheets.

-If posting of the transaction has been made on wrong bin card orstores ledger sheet.

-If issues transactions are treated as receipt transaction or vice versa,then this may create the difference in both the balances.

-Non posting of certain amount in any of the sheets.

Explain valuation of receipts.

Valuation of receipts is the price billed in the invoices by the supplier.Following points should be kept in mind for this purpose:


41/42

-The trade discount is deducted from the basic price and all otheramounts as billed by the supplier are added, like excise duty, salestax, octroi duty, etc.

-Joint costs may be distributed on the basis of the basic price of thematerial.

-In case of imported material, the cost of the material consists of abasic price, customs duty, clearing charges, transport chares, etc.

Explain valuation of issues and valuation of returns.

a.) Valuation of issuesis a complex process because the materialmay be issued out of various lots which might have been purchased

at various prices. Following methods are used for this purpose:

- First in First out(FIFO)- Last in First out (LIFO)- Average Price Method- Simple Average Method- Weighted Average Method- Highest in First out- Market Price- Specific Price- Standard Price

b.) Valuation of returnsindicates the material returned by theproduction department to stores department. This valuation is doneon two basis:

- At the same price at which issued- At the current price of issues


a.) Average Price Method- is the method by which the value oftotal assets or expenses is assumed to be equal to the average costof the total assets or expenses. Under this method, it is assumed thatthe cost of inventory is based on the average cost of the goodsavailable for sale during the period. It is computed by dividing thetotal cost of goods by the total units which gives a weighted averageunit cost for the units of the closing inventory.

b.) Weighted Average Method- is the method of calculation inwhich the weighted average of both the lot sizes as well as the pricesof the lot. This method is best for valuing material issues. This

method is very useful where the prices and quantities of items vary.Practically, this method is very simple to calculate.


42/42

What are the techniques of inventory control?

The techniques of inventory control are:

-Economic Order Quantity

-Fixation of Inventory Levels-Maximum Level-Minimum Level-Average Level-Re-order Level-Danger Level

Explain EOQ.

Economic Order Quantity (EOQ)is the quantity which is fixed in

such a way that the variable costs for managing the inventory can beminimized. This consists of two parts: Ordering Cost and CarryingCost. Ordering cost consists of all the costs associated with theadministrative efforts connected with preparation of purchaserequisitions, enquiries, filing tenders, and comparative statementsetc. which are incurred in ordering materials. Carrying cost consists ofall the costs which are incurred in carrying or holding the inventorylike godown rent, insurance handling expenses etc. There is a inverserelationship between ordering cost and ordering cost. An effort shouldbe made to balance both the costs, which is possible at EconomicOrder Quantity where the total variable cost of managing the

inventory is minimum.

Date post:	05-Apr-2018
Category:	Documents
Upload:	babasab-patil-karrisatte
View:	222 times
Download:	0 times

finance interwive question & answers

Documents