Course Code : MMPC-004

Course Title : Accounting For Managers

Assignment Code : MMPC-004/TMA/JULY/2024
Question 1: What are the objectives of preparing Financial Statements? Describe the basic concepts
of income determination.
Answer:
I. Objectives of Preparing Financial Statements
Financial statements are formal records of the financial activities and position of a business, person, or
other entity. The key financial statements include the Balance Sheet, Income Statement (Profit & Loss
Account), and the Cash Flow Statement. The preparation of these statements serves several important
objectives:
1. To Provide Information about Financial Position
Financial statements present the assets, liabilities, and equity of an entity at a specific point in time. This
helps stakeholders assess the solvency, liquidity, and financial stability of the organization.
2. To Show Financial Performance
The Income Statement shows the revenue, expenses, and resulting profit or loss over a specific
accounting period. It provides insights into how well the organization has performed operationally.
3. To Assist in Decision-Making
Financial statements provide data for internal users (like managers) and external users (like investors,
creditors, and regulators) to make informed decisions regarding investment, lending, operations, and
strategic planning.
4. To Facilitate Comparability
By following standardized accounting principles, financial statements allow for comparisons over time
(intra-firm) and between different firms (inter-firm), which is critical for analysis and benchmarking.
5. To Ensure Compliance with Laws and Regulations
Financial statements are often required by statutory authorities (e.g., Companies Act, Income Tax Act,
SEBI). They help ensure that the organization adheres to legal and regulatory requirements.
6. To Support Performance Evaluation
Stakeholders use financial statements to evaluate the efficiency, profitability, and productivity of the
business. It also aids in setting performance benchmarks.
II. Basic Concepts of Income Determination
Income determination is the process of calculating the net income or profit of a business over a given
period. This process is governed by several accounting concepts and principles that ensure consistency,
accuracy, and transparency.
1. Accrual Concept
Under this concept, revenues and expenses are recorded when they are earned or incurred, not necessarily
when cash is received or paid. This ensures that income is matched to the period it relates to.
Example: Revenue from a sale is recorded when the sale occurs, not when payment is received.
2. Matching Concept
Expenses are recorded in the same accounting period in which the related revenues are earned. This
ensures the true profitability of operations in a given period.
Example: Depreciation of machinery used in generating revenue is recorded as an expense in the same
period.
3. Revenue Recognition Concept
Revenue is recognized when it is realized or realizable and earned, regardless of when cash is received.
This concept ensures that revenue figures are not overstated.
Example: Revenue from services is recognized once the service is rendered, not when the payment is
received.
4. Cost Concept
Income determination is based on historical costs of assets rather than market value. This provides
objectivity and reliability in measuring expenses and income.
5. Conservatism or Prudence Concept
When in doubt, anticipate all losses but recognize no gains. This leads to lower reported profits to avoid
overstatement and ensures caution in financial reporting.
Example: Making provisions for doubtful debts reduces income conservatively.
6. Consistency Concept
The same accounting methods and principles should be applied consistently from one accounting period
to another. This ensures comparability of financial results across periods.
7. Going Concern Concept
It is assumed that the business will continue operating for the foreseeable future. This affects how assets
and income are measured and reported.

Conclusion
The objectives of preparing financial statements are multi-fold, including providing accurate information
on the financial health of a business, aiding in decision-making, and ensuring statutory compliance.
Income determination is governed by several fundamental accounting concepts that guide how revenues
and expenses are recognized and matched, ensuring that the reported profit or loss reflects the true
financial performance of the business. Together, these practices enable stakeholders to make informed
and rational economic decisions.

Question 2: In context of Cash Flow Statement, what is cash and cash equivalent? In
whatcategoriescash flows are classified and explain how cash flow in each activity is calculated as
perAS-3. Describe how cash flow statement is prepared under Direct Method.
Answer:
I. What is Cash and Cash Equivalent?
Cash refers to:
 Cash in hand
 Demand deposits with banks
Cash Equivalents are:
 Short-term, highly liquid investments that are:
 o Readily convertible into known amounts of cash
o Subject to an insignificant risk of changes in value
 Typically, these are investments with maturities of three months or less from the date of
acquisition.
Examples: Treasury bills, commercial paper, short-term government bonds, and money market funds.

II. Classification of Cash Flows under AS-3

As per Accounting Standard - 3 (AS-3), cash flows are classified into three main categories:

1. Operating Activities
These include principal revenue-generating activities of the enterprise and other activities that are not
investing or financing.
Examples:
 Cash receipts from sale of goods/services
 Cash payments to suppliers and employees
 Cash paid for operating expenses
 Income tax paid (unless clearly related to investing/financing)
Calculation (Two Methods):
 Direct Method: Cash receipts – Cash payments
 Indirect Method: Net Profit + Non-cash Expenses +/– Changes in Working Capital

2. Investing Activities
These relate to the acquisition and disposal of long-term assets and other investments.
Examples:
 Cash outflows for purchasing fixed assets (e.g., plant, equipment)
 Cash inflows from sale of assets
 Investments in shares, debentures, or mutual funds
 Loans given or repaid by others
How Calculated:
 Add cash inflows from sale of assets/investments
 Subtract cash outflows for purchase of assets/investments

3. Financing Activities
These involve changes in the size and composition of the owner’s capital and borrowings.
Examples:
  Proceeds from issue of shares or debentures
 Repayment of loans or redemption of debentures
 Payment of dividends
 Buyback of shares
How Calculated:
 Add inflows from capital raised or loans taken
 Subtract outflows like repayment of debt, interest paid, and dividends paid

III. Preparation of Cash Flow Statement Under Direct Method (AS-3)

Under the Direct Method, the actual cash receipts and payments from operating activities are reported.
Steps to Prepare Cash Flow Statement (Direct Method)
A. Cash Flows from Operating Activities
You start by collecting data from the income statement and adjusting it to convert the accrual basis to
cash basis:
1. Cash Receipts from Customers
= Sales Revenue – Increase in Debtors (or + Decrease in Debtors)
2. Cash Paid to Suppliers and Employees
= COGS + Operating Expenses – (Increase in Creditors + Outstanding Expenses)
3. Cash Generated from Operations
= Cash Receipts – Cash Payments
4. Income Tax Paid
= As per tax records (adjusted for any advance tax or refund)
Net Cash Flow from Operating Activities = Cash Inflows – Cash Outflows

B. Cash Flows from Investing Activities

 Cash received from sale of fixed assets
 Cash paid for purchase of fixed assets
 Cash flows from investments
Net Cash Flow from Investing Activities = Inflows – Outflows

C. Cash Flows from Financing Activities

 Proceeds from issue of shares or debentures
 Loans taken or repaid
 Dividends and interest paid
Net Cash Flow from Financing Activities = Inflows – Outflows
D. Net Increase/Decrease in Cash and Cash Equivalents
This is calculated as:
Net Cash Flow = Cash Flow from Operating + Investing + Financing Activities

E. Reconciliation
Reconcile the change with the cash and cash equivalents at the beginning and end of the period:
Closing Cash & Cash Equivalents = Opening Balance + Net Increase/Decrease

Example Summary Format (Direct Method)

A. Cash Flows from Operating Activities
Cash received from customers ₹ XXX
Cash paid to suppliers and employees (₹ XXX)
Cash generated from operations ₹ XXX
Income tax paid (₹ XXX)
Net Cash from Operating Activities ₹ XXX

B. Cash Flows from Investing Activities

Sale of fixed assets ₹XXX
Purchase of fixed assets (₹XXX)
Net Cash from Investing Activities ₹XXX

C. Cash Flows from Financing Activities

Issue of shares or borrowings ₹XXX
Dividend paid (₹XXX)
Net Cash from Financing Activities ₹XXX

D. Net Increase/Decrease in Cash & Equivalents ₹ XXX

E. Cash & Cash Equivalents at Beginning ₹ XXX
F. Cash & Cash Equivalents at End ₹ XXX

Conclusion
The Cash Flow Statement under AS-3 helps assess the liquidity, solvency, and financial flexibility of a
business. It provides crucial insights into how cash is generated and used across different business
activities. Using the Direct Method, organizations can present a transparent view of their actual cash
movements, making it easier for managers and stakeholders to analyze operational efficiency and
investment decisions.
Question 3: What is an Annual Report? Discuss in brief the contents of an annual report and
describethe non audited information contained in an Annual Report of any company.
Answer:
I. What is an Annual Report?
An Annual Report is a comprehensive document issued by a company at the end of its financial year. It
presents the company's financial performance, position, and key business activities during the year. It is
intended primarily for shareholders and other stakeholders (investors, regulators, analysts, and the public)
to evaluate the company's progress, profitability, strategy, and governance.
The Companies Act, 2013 mandates listed and certain unlisted companies in India to publish an annual
report. It contains both audited financial statements and non-audited qualitative information.
II. Contents of an Annual Report (Brief Overview)
An annual report typically includes the following major sections:
1. Director’s Report
 Overview of business operations
 Dividend declaration
 Reserves
 Risk management
 Internal controls
 Future outlook
 Conservation of energy and technology absorption
 Corporate governance disclosures

2. Management Discussion and Analysis (MD&A)

 Industry structure and developments
 Opportunities and threats
 Segment-wise or product-wise performance
 Outlook
 Risks and concerns
 Internal control systems
 Financial performance overview

3. Corporate Governance Report

 Composition of the Board of Directors
 Meetings held
 Committees (Audit, Nomination & Remuneration, CSR, etc.)
 Compliance with SEBI regulations
 Disclosures regarding related-party transactions, whistleblower policy, etc.

4. Auditor’s Report (Statutory Audit Report)

 Opinion on financial statements
 Auditor’s responsibilities
 Key audit matters
 Compliance with laws and standards

5. Financial Statements (Audited)

 Balance Sheet
 Profit and Loss Account
  Cash Flow Statement
 Notes to Accounts
 Statement of Changes in Equity

6. Shareholder Information
 Shareholding pattern
 Stock performance
 Dividend history
 Registrar and transfer agent info
III. Non-Audited Information in the Annual Report
Apart from the audited financial statements, the annual report contains non-audited (unaudited)
information, which is qualitative, forward-looking, or explanatory in nature. These are not subject to
statutory audit but are important for understanding the context of the financials and strategic direction.
Some Key Non-Audited Sections Include:
1. Chairman’s/CEO’s Message
 Narrative from the top leadership
 Summarizes performance, challenges, opportunities, and vision
 Not audited, but influential in setting the tone of the report

2. Management Discussion and Analysis (MD&A)

 Analyzed and written by company management
 Discusses financial and operational performance, industry trends, future risks
 Provides forward-looking insights
 Not verified by auditors, but essential for stakeholders

3. Corporate Social Responsibility (CSR) Report

 Describes CSR initiatives undertaken during the year
 Includes social projects, sustainability measures, community engagement
 Reviewed by the Board, not part of statutory audit

4. Corporate Governance Report

 Although partly regulated by SEBI/Companies Act, much of the disclosure here (like Board
behavior, ethics, etc.) is narrative and not audited

5. Environmental, Social, and Governance (ESG) Reports

 Voluntary or semi-regulated disclosures
 Include data on energy consumption, emissions, diversity, and sustainability
 Growing in importance for investors but not audited

6. Future Plans and Strategic Outlook

 Mentioned in MD&A or CEO message
 Includes targets, business expansion plans, and R&D strategies
 Speculative and not subject to audit

7. Awards, Recognitions, and Certifications

 Listed as part of achievements
 Based on third-party recognition or internal reporting
 Not included in the audit scope
Conclusion
The Annual Report serves as a key document for communicating a company’s performance, governance,
and outlook. While the audited section (financial statements and audit report) gives a true and fair view of
the financial position, the non-audited information—like management discussions, CSR efforts, and
strategic directions—offers valuable insights into the company’s philosophy, priorities, and future
roadmap. Together, these components help investors and stakeholders make well-informed decisions.

Ques 4: What is Human Resource Accounting? How can it be used as a decision tool
byManagement?
Answer:
I. What is Human Resource Accounting (HRA)?
Human Resource Accounting (HRA) refers to the process of identifying, measuring, and reporting
the value of human resources in the financial statements of an organization. It is a system that treats
employees as valuable assets and attempts to quantify their worth to the organization just like physical
assets (such as machinery or buildings).
Unlike traditional accounting, which records physical and financial assets, HRA aims to reflect the
investment in human capital (e.g., recruitment, training, experience) and its contribution to business
performance.
Definition (Flamholtz, 1974):
"Human Resource Accounting is the process of identifying and measuring data about human resources
and communicating this information to interested parties."
II. Objectives of Human Resource Accounting
1. To provide cost and value information about human assets.
2. To assist in decision-making related to human resources.
3. To monitor the effectiveness of human resource utilization.
4. To help in budgeting and strategic planning.
5. To facilitate the valuation of employees during mergers, acquisitions, or restructuring.
III. Methods of Valuation in HRA
Some commonly used models to measure the value of human resources include:
1. Historical Cost Approach – Records actual costs incurred in recruiting, hiring, and training.
2. Replacement Cost Approach – Measures how much it would cost to replace an existing
employee with a similar one.
3. Present Value of Future Earnings – Estimates the present value of future earnings of
employees.
4. Economic Value Model – Values employees based on their expected contribution to future
profits.
IV. Use of Human Resource Accounting as a Decision Tool by Management
HRA can be a powerful decision-making tool for managers in the following ways:
1. Recruitment and Talent Acquisition
 Helps assess the cost-benefit of hiring decisions.
 Guides budgeting for training and onboarding programs.
 Aids in comparing internal vs. external hiring costs.
2. Training and Development Investments
 HRA allows tracking the returns on investment (ROI) in employee development.
 Helps identify skill gaps and evaluate the impact of training on performance.
3. Employee Retention and Succession Planning
 High turnover costs can be quantified, encouraging investment in employee engagement and
retention strategies.
 Helps in identifying high-value employees for succession planning.
4. Strategic Planning and Forecasting
 Facilitates manpower planning based on productivity and value contribution.
 Helps forecast the impact of HR policies on long-term profitability.
5. Performance Appraisal and Compensation
 Encourages linking compensation with the value generated by employees.
 Promotes a performance-based reward system.
6. Mergers and Acquisitions
 The valuation of human assets helps determine the true value of a company during M&A deals.
 Highlights hidden assets that might not be captured in traditional accounting.
7. Disclosure and Transparency
 Improves stakeholder confidence by showing the organization’s commitment to human capital.
 Useful for investors and analysts who increasingly value ESG (Environmental, Social,
Governance) factors.
V. Limitations of HRA
 Lack of universally accepted models
 Human value is subjective and hard to quantify accurately
 Psychological and ethical concerns about "valuing people like machines"
 Not mandatory under traditional financial reporting systems

Conclusion
Human Resource Accounting is an emerging concept that recognizes employees as key assets rather
than mere costs. When used effectively, it helps management make informed, strategic decisions
regarding recruitment, training, retention, and performance evaluation. Although still not widely adopted
in conventional accounting systems, HRA has great potential as a managerial and strategic decision-
making tool, especially in knowledge-based industries.
Question 5a: Compute Profit when:

Sales Rs. 4,00,000

Fixed Cost Rs. 80,000

BEP Rs. 3,20,000

Answer:
To compute Profit, we use the formula related to Break-Even Analysis:
Formula:
Profit = Sales−Break-Even Sales
Profit = (Total Sales−Break-Even Sales)×P/V Ratio
But since we don’t yet have the P/V Ratio (Profit-Volume Ratio), we can use this simpler method:
Step 1: Contribution = Sales – Variable Cost
At Break-Even Point (BEP):
Contribution=Fixed Cost
So,
At BEP Rs. 3,20,000, Contribution=Rs.80,000
Therefore,
P/V Ratio=Contribution / Sales=80,000 / 3,20,000=0.25 or 25%
Step 2: Calculate Contribution at Actual Sales
Contribution at Rs. 4,00,000 sales=25%×4,00,000=Rs.1,00,000
Step 3: Compute Profit
Profit=Contribution−Fixed Cost=1,00,000−80,000=Rs.20,000
Final Answer: Profit = Rs. 20,000

Here’s the calculation illustrated in a clear table format for better understanding:

Profit Computation Table:

Particulars Amount (Rs.)

1. Total Sales 4,00,000

2. Break-Even Sales (BEP) 3,20,000

3. Fixed Cost 80,000

4. Contribution at BEP 80,000

 5. P/V Ratio (80,000 / 3,20,000) 25%

6. Contribution at Sales of Rs. 4,00,000 (25% of 1,00,000

4,00,000)

7. Profit = Contribution – Fixed Cost 20,000

Conclusion:
Profit = Rs. 20,000
Question 5b: Compute Sales when:

Fixed Cost Rs. 40,000

Profit Rs. 20,000

BEP Rs. 80,000

Answer:
To compute Sales, given:
 Fixed Cost = Rs. 40,000
 Profit = Rs. 20,000
 Break-Even Point (BEP) = Rs. 80,000
Step-by-Step Calculation
Step 1: Contribution at BEP = Fixed Cost
At Break-Even Sales of Rs. 80,000:
Contribution=Fixed Cost=Rs.40,000
Step 2: Calculate P/V Ratio
P/V Ratio=Contribution / Sales=40,000 / 80,000=0.5 or 50%
Step 3: Contribution = Fixed Cost + Profit
Required Contribution=40,000+20,000=Rs.60,000
Step 4: Sales = Contribution / P/V Ratio
Sales=60,000 / 0.5=Rs.1,20,000
Illustration in Table Form

Particulars Amount (Rs.)

Fixed Cost 40,000

Profit Desired 20,000

Contribution Required (Fixed Cost + Profit) 60,000

P/V Ratio (From BEP) 50%

Sales Required = Contribution ÷ P/V Ratio 1,20,000

Final Answer: Sales = Rs. 1,20,000