Firs Fi rstt Ed Edit itio ion n
:
Febr Fe brua uary ry 20 2003 03
Second Sec ond Edi Editio tion n :
August Aug ust 200 2003 3
Thir Th ird d Ed Edit itiion
:
May Ma y 20 2004 04
Reprint
:
January 2006 Ja
CONTENTS 1. Finan Financial cial Accounting Accounting
5 - 13
Book Keeping - Double Entry System - Journal - Ledger & Trial Copyright Credits
: :
GENES GE NESIS IS - VBS VBSE E Pr Priv ivat ate e Li Limi mite ted d The En The Enti tire re te team am of GE GENE NESI SIS S & DH DHUR URUV UVA A
- Inte Interes restt on Loan Fro From m a Par Partnertner- Part Partner ners’ s’ Sala Salarie ries s - Rev Revalua aluation tion
Published & Distributed by GENESIS - VBSE (P) Ltd.
of Asse Assets ts & Liabi Liabilitie lities s - Tre Treatme atment nt of Good Goodwill will on Retirement Retirement Revaluation Method of Treatment of Goodwill - Paying off the
Your Nearest Campus
Corporate Office :
Retiring Partner Partner.. 2. Corpor Corporate ate Accou Accounting nting
#13/7, Rosy Towers, 4 th Floor, N.H. Road, Nungambakkam, Chenna Che nnaii - 600034.
15 -34
Issue of Shares - Redemption of Shares - Issue of Debentores Amalgamation Amalgama tion - Internal Re-construction Re-construction - Valuation of Goodwill Valua aluation tion of Shar Shares es - Holding Company - Banking Company
Phone : (044) - 255 22 222 Fax : (044) - 28255937 E-Mail : tally@vsn
[email protected] l.net Dhuruva Solutions Private Limited
Partnership Accounts - Current Accounts - Profit & Loss Appropri Appr opriation ation Account - Inter Interest est on Capit Capital al - Inter Interest est on Draw Drawings ings
Rs. 30 30//-
GENESIS - VBSE Private Private Limited Limited
Balance - Final Accounts - Bank Reconciliation Statement -
Accounts. 3. Cost Acc Accoun ounting ting Your Nearest Campus
Regional Head Office :
Reconciliation of Cost and Financial Accounts - Contract Costing
HA Plaza 1st Floor, Opp. to
-
Telugu University, Public Garden,
Control.
Nampally,, Hyder Nampally Hyderabad abad - 500 001.
Marginal Costing and Cost Cost Volume Volume Profit Analysis - Budgetary Budgetary
4. Manageme Management nt Accounting
Phone : (040) - 234 11 444
Ratio Rati o Analysis Analysis - Work Working ing Capi Capital tal Manag Managemen ementt - Oper Operatin ating g Cycle Cycle -
E-Mail :
[email protected]
Inventory Management - Cost of Capital - Leverage - Cash Flow
All rights are reserved. reserved. No part of this publication may may be reproduced in any form or by any means or stored in any retrieval system, without the prior written permission of the publishers. Limitation of Liability and Disclaimer Clause
The author and the publisher of this book, have taken every effort to ensure that the programmes, procedures and concepts explained in the book are correc cor rect. t. How Howeve everr, the author author and the publisher publisher will not be liab liable le to any person in the event of any damage caused due to the usage of these programmes, procedures and concepts. All trademarks referred to in this book are acknowledged as the properties of their respective owners.
35 - 47
Cost Sheet - Material Costing - Labour Costing - Overheads -
49 - 58
Statement - Fund Flow Statement. 5. Statisti Statistics cs
61 - 78
Measures of Central Tendancy - Measures of Dispersion Correlation - Regression - Demand Analysis - Population and Samples - Probability - Index Numbers. 6. Operati Operations ons Research
81 - 86
Transportation - Queuing Theory - Assignment - Linear Programming Programm ing - Network Analysis - CPM & PERT. GLOSSARY
87 - 95
1
Financial Accounting
BOOK BOO K KEE KEEPIN PING G – DOU DOUBL BLE E ENT ENTRY RY SYS SYSTEM TEM
The Types of Accounts under Double Entry System of Book Keeping are broadly classified into Personal and Impersonal Accounts. I. Persona Personall Accounts - (eg. Debtors, Creditors etc.,) D eb eb it it : Credit Cre dit :
The Receiver. The Giver.
II. Imperson Impersonal al Acc Account ounts s - Thisis furt further her divi divided ded into Real and Nom Nominal inal Accounts. a)
Real Re al Ac Acco count unts s - (eg. Land, Building, Investments.) D eb eb it it : Credit Cre dit :
b)
What comes in. What goes out.
Salary ry Acco Account, unt, Int Interes erestt Acco Account unt,, Nominall Acc Nomina Accoun ounts: ts: (eg. Sala Commission, Rent etc.,) D eb eb it it : Credit Cre dit :
All Expenses and Losses. All Incomes and Gains.
I. Journal, Ledger & Trial Balance : Journal
- This is a Preliminary Record of day to day Business Transactions, which is to give effect to two different Accounts Accoun ts involve involved d in business transactions transactions (i.e., Debit & Cred Credit). it). The Journal Entry shall have narration giving the description of the Transaction recorded.
Ledger
- Ledger is a Permanent record of all Transactions in a summarised summ arised and classified classified form. The Journal entries entries are posted periodically under the Accounting head maintained in General Ledger Register.
Trial Balance
- This is a statement showing the balance of all Ledger Accounts Accoun ts from the General General Ledger Registe Register. r. This is to test the arithmatical accuracy of Books of Accounts.
II. Final Accounts :
Profit & Loss Account and Balance Sheet are the Final Accounts derived from the Trial Balance. The Profit & Loss Account will end with either Net Profit Profit or Net Loss Loss which is the Net result of the operating operating activiti activities es of an Enterprise. The Balance Sheet is a statement prepared as on the reporting date to show the Financial status (i.e., What the Company owns and what it owes)
BANK RECONCILIATION STA STATEMENT TEMENT Meaning :
Pass book is your Banker’s Statement where entries recorded as per your Bank Records. Records. Cash Cash book is your own record of Bank transaction transactions. s. Often we find mismatch between our records and bank records. To reconcile or match these two records we prepare Bank Reconciliation Statement. This statement will start with either our balance or banker’s balance and end with banker’s balance or our balance respectively. The common reasons for mismatch would be the time lag due to cheques clearing clearin g formal formalities, ities, Bank charges automatically automatically debited, etc.,
Alternative Method : Balance as per Cash book Less: Cheques deposited but not yet presented and credited. Insurance Premium paid and bank charges entered in pass book but not recorded in cash book. Interestt debited in pass book but not yet recorded in cash book Interes Payments Paymen ts like telephone charges or to Creditors made directly by the bank but not entered in cash book. Wrong Debit made in the pass book or wrong credit made in the cash book. Add: Cheques issued but not yet presented. Interest credited by the bank but not credited in the cash book Dividend Divide nd , Interes Interest, t, etc. receiv received ed directly by the bank on behalf of the client. Direct receipts from Customers to the bank. Wrong credit made in the pass book or wrong debit made in the cash book. Ÿ Ÿ
Ÿ Ÿ
Ÿ
Ÿ Ÿ Ÿ
Formatt of Bank Recon Forma Reconcili ciliation ation State Statement ment
Ÿ Ÿ
Balance as per Pass Book
Add :
Ÿ
Cheques deposited but not yet presented and credited.
Ÿ
Insurance Insura nce Premium paid and bank charges entered in pass book
Balance as per Pass Book
but not recorded in cash book.
PARTNERSHIP ACCOUNTS
Ÿ
Interestt debited in pass book but not yet recorded in cash book Interes
Definition :
Ÿ
Payments Paymen ts like telephone charges or to Creditors made directly Wrong Debit made in the pass book or wrong credit made in
The Indian partnership Act 1932, Section 4, defines partnership as, “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
the cash book.
Capital :
Ÿ
Cheques issued but not yet presented.
Ÿ
Interest credited by the bank but not credited in the cash book
Partner’s contribution contribution to the business of the firm is called capital. Capital accounts of the partners may be fixed or fluctuating.
Ÿ
Dividend, Interest, etc. received directly by the bank on behalf
(A) When the Capitals are Fixed :
by the bank but not entered in cash book Ÿ
Less :
of the client.
Capital Accounts
Ÿ
Direct receipts from Customers to the bank.
Ÿ
Wrong credit credit made in the pass book or wrong debit made in the cash book.
Date Dat e
Partic Par ticula ulars rs X Rs.
2002 Dec 31 To Balance c/d
Balance as per Cash Book
Y Rs.
Date Da te
2002 Jan.1 xxx xxx
xx x xx x 2003 Jan. Ja n.1 1
6
GENESIS / DHURUVA DHURUVA
GENESIS / DHURUVA DHURUVA
Part Pa rticu icula lars rs
By Balance b/d
By Bala Balanc nce e b/d
X Rs.
Y Rs.
xxx xxx
xxx xxx
xxx
xxx 7
Current Accounts
Profit and Loss
Dr. Date Da te
Appropriation Account
C r. X
Y
Rs.
Rs.
xxx
xxx
on drawings xxx
xxx
By Partner’s
To Balance
xxx
Salary
Part Pa rtic icul ular ars s
2002 To Drawings Dec 31 To Interest
Da t e
2002
P ar ar t i c ul ul a r s
c/d
Y Rs.
xxx
xxx
Dr. Date
C r. Particulars Rs.
on Capital
By P & L A/c
xxx
xxx
2002
To Interest
By Ba la lan ce ce
2003 To Balance Jan.1
-
xx x
b/d
xxx
b/d
2003
By Balance
Jan.1
xxx xxx
xxx
Date Da te
xxx
-
2002
Rs.
Rs.
To Drawings xxx
xxx
Dec 31 To Interest on drawings xxx To Balance
xxx
Date Da te
Part Pa rtic icul ular ars s
2002
By Balance
Jan.1
b/d
xxx
By Interest
xxx
By P & L A/c
X
Y
Rs.
Rs.
xxx
xxx
Y
xxx
Salary
xxx xxx
2003 20 03
xxx xxx
By Ba Bala lanc nce e b/ b/d d xx xxx x xx xxx x
Jan.1
By Net Profit A/c
xxx
x xx xx
on Drawings X
xxx
Y
xxx xxx
Salary X
xxx
Y
xxx
Profit transferred to X
xxx
Y
xxx xxx xxx
GENESIS / DHURUVA DHURUVA
xxx
Interest on Capital :
Interest is allowed on partners’ capitals only if the partnership agreement specifically allows it at a particular rate. Interest for a year is usually calculated on the opening capital and on the capital introduced during the year. If the date of additional capital introduced during the year is not given, the interest is to be calculated for 6 months. If the rate of interest is not given, it is assumed to be 12% p.a. Entry for interest on capital is D eb eb it it : Credit Cre dit :
8
R s. s.
To Partner’s
xxx xxx xx
By Com Commi miss ssion ion xx xxx x xxx xxx
Rs.
By Interest xx x
xxx xxx
By Partner’s
xxx
xxx
on Ca Capital
c/d
Particulars
To Net C r.
Parti Par ticu cula lars rs
X
xxx
b/d
Dr. Y
Dec 31
xxx xxx
(B) When Capitals are fluctuating :
X
Date
2002
Dec 31 on Capital
By Com Commi miss ssion ion xxx xxx xxx
Rs.
By Interest
Dec.31 xxx
X Rs.
GENESIS / DHURUVA DHURUVA
Interest on Capital Account Respective partner’s Capital ( or current ) Account.
9
If decreasing the existing value of Goodwill, the following entry is : Deb it : Old Partner’s Capital Account Credit : Goodwill Account (Being Value of the Goodwill decreased and old partners debited in the old ratio ) Capital Brought in by the Incoming Partner : Entry for this is : Date
Particulars
L.F.
Debit : Cash Account Dedit : Stock Account Debit : Furniture Account Credit : New Partner’s Capital Account (Being capital brought in by the new partner in cash, stock and furniture)
Debit Rs.
Debit
Goodwill Account
:
Old partner’s Capital Account
Credit :
(Goodwill credited to the Old partners in the old ratio). 5. Paying off the Retiring Partner
When a partner retires, the amount due to him from the firm after all the above adjustments (ie. adjustment for accumulated reserves, revaluation Credit Rs.
............. ............. .............
profit or loss and for goodwill) will be ascertained. This amount may be paid to him in a lump sum immediately or in installments spread over one or more years. When it is not paid immediately, it will be transferred to his loan A/c which will carry Interest at 6% per annum. (i) When the amount is paid entirely at once:
.............
Debit
:
Retiring partner’s Capital Account
Credit
:
Bank / Cash Account
(ii) When the amount is not paid at once
Revaluation of Assets and Liabilities
Revaluation of Assets and Liabilities is equally necessary at the time of Retirement of a Partner or at Admission. When Assets and Liabilities are revalued, their values may increase or decrease. We have already seen in connection with admission that increase in value of Assets and decrease in Liabilities are Profit items of Revaluation. Conversely decrease in Assets and increase in Liabilities are loss items.
Debit
:
Retiring partner’s Capital Account
Credit
:
Retiring partner’s Loan Account
(iii) When the amount is paid partly at once Debit
:
Retiring partner’s Capital Account
Credit
:
Bank / Cash Account
Credit
:
Retiring partner’s Loan Account ______________
Entries for Revaluation here are similar to those in Admission. 4. Treatment of Goodwill on Retirement
At the time of Retirement of a Partner, adjustment for Goodwill of the Firm, if any, has to be made almost in the same way as in admission. The Goodwill treatment that were seen in the context of Admission of a partner, hold good, to a large extent, in retirement too. But we confine ourselves to the Revaluation Method only. Revaluation Method of Treatment of Goodwill
This is very much asking to the Revaluation Method of treatment of Goodwill seen in connection with Admission. The present value of Goodwill of a firm is estimated and brought into record. The entry is: 12
GENESIS / DHURUVA
GENESIS / DHURUVA
13
2
Corporate Accounting ISSUE OF SHARES
Journal Entries in the books of the New Company
1.
Debit Credit
: :
2.
Debit Cr ed it
: :
3.
Debit Credit
: :
Bank Account Share Application Account (Being Share Application Amount received)
Share Application Account Share Capital Account (Being Share Application amount transferred to Share Capital account)
Share Application Account Share Allotment Account (Being the excess amount received on application is used for the Share Allotment Amount)
4.
Debit Credit
: :
5.
Debit Credit
: :
6.
Debit Credit Credit
: : :
7.
Debit Debit Credit
: : :
8.
Debit Credit
: :
9.
Debit Credit
: :
10.
Debit Debit Credit
: : :
11.
Debit Credit Credit
: : :
Share Application Account Bank Account (Being Share Applications rejected)
Share Allotment Account Share Capital Account (Being Share Allotment Amount due at Par)
Share Allotment Account Share Capital Account Share Premium Account (Being Share Allotment due with premium)
Share Allotment Account Discount on issue of shares Share Capital Account (Being Share Allotment amount due with discount)
Bank Account Share Allotment Account (Being share allotment amount received )
Share First and final call Share Capital Account (Being Share First and final call due)
Bank Account Calls in Arrears Share First & Final call (Being share first & final call received )
Share Capital Account Share Forfeiture Account First & Final call account (Being Shares forfeited)
12.
Debit Debit Credit
: : :
Debit Credit
: :
Bank Account Share Forfeiture Account Share Capital Account
5. Issue of Bonus Shares Debit Cr ed it Debit Credit
(Being shares reissued)
13.
Share Forfeiture Account Capital Reserve Account
: : : :
6. Sale of Investments
(Being profit on forfeiture and reissue transferred to Capital Reserve Account)
Debit Credit
: :
Journal Entries in the case of Redeemable Preference Shares
1.
Debit Credit
: :
2.
Debit Credit Credit
: : :
Bank Account Share Capital Account
: : :
(Being debentures issued)
b) For consideration other than cash
Bank Account Shares issued at discount Account Share Capital Account
Debit : Assets account Credit : Vendor account
(Being Shares issued at premium)
Debit : Vendor account Credit : Debenture Account
(Being assets purchased)
REDEMPTION OF SHARES
2. From price point of view
1. Redemption Due Debit Debit Credit
: : :
Redeemable preference share capital Account Premium on Redeemable share Account Preference share holder Account (Being share Redeemable)
: :
Redeemable preference share holder Bank
3. Transfer Premium on Redemption Account Debit Debit Credit
: : :
a) When debenture is issued at discount Debit : Bank Account Debit : Discount Account Credit : Debenture Account b) When debenture is issued at Premium
2. Payment to Redeemed Shares Debit Credit
ISSUE OF DEBENTURES
Debit : Bank account Credit : Debenture account
Bank Account Share Capital Account Share Premium Account (Being Shares issued at premium)
Debit Debit Credit
Ban k A ccou nt Investments
1. From consideration point of view a) Issue of debentures for cash
(Being Shares issued at par)
3.
Capital Redemption Reserve Account Bonus to share holders account Bonus to share holder account Share Capital Account
Share premium Account General Reserve/Reserve Fund Premium on Redemption of preference share capital Account
Debit : Bank Account Credit : Debenture Account Credit : Premium on Debenture Account c) When debenture is issued at Par Debit : Bank Account Credit : Debenture Account
4. Tranfer to capital Redemption Reserve Account Debit C re di t
: :
Reserve Account Capital Redemption Reserve (CRR = Redemption preference share – Fresh Issue of share capital)
16
GENESIS / DHURUVA
GENESIS / DHURUVA
17
s r u o . o i f s s v e e r r R u p r a e g i h e F t Y
VERTICAL FORM OF BALANCE SHEET
Balance Sheet of ......................................................as at ....................... (I) SOURCES OF FUNDS
Schedule No.
Figure as at the end of current f inan cia l year
Figure as at the end of Previous f in an ci al year
(1) Shareholder’s Funds (a) Capital (b) Reserves & Surplus
................ ................
............... ...............
... ..... .... .... ................
(2) Loans Funds (a) Secured Loans (b) Unsecured Loans
................ ................
............... ...............
................ ................
TOTAL
..............................................................
(II) APPLICATION OF FUNDS (1) Fixed Assets (a) Gross Block ................ (b) Less Depreciation ................ (c) Net Blo ck .... ... .... .... . (d) Capital work in progress ................
............... ............... .... ... .... ... . ...............
................ ................ . .. .. .. ... .. .. .. ................
.... ... .... .... . ................
.... ... .... ... . ...............
. .. .. .. ... .. .. .. ................
.... ... .... .... . ................ ................
.... ... .... ... . ............... ...............
... .. .. ... .. .. .. ................ ................
(a) Li abil itie s .... ... .... .... . (b) P rov isio ns .... ... .... .... . Net Current Assets ................ (4) (a) Miscellaneous expenditure to the extent not written off or ad juste d . ....... ... .... . (b) Profit & Loss Account ................
.... ... .... ... . .... ... .... ... . ...............
. .. .. .. ... .. .. .. . .. .. .. ... .. .. .. ................
. .... ... .... ... ...............
. .. .. .. ... .. .. .. ................
(2) Investment (3) Current Assets: Loans & Advances (a) I nve nto ri es (b) Sundry debtors (c) Cash and bank bal ance s (d) Other Current Assets (e) Loans & Advances LESS : Current Liabilities
and Provisions:
TOTAL 18
.............................................................. GENESIS / DHURUVA
)
. . . . . . . . .
r t
o n M f . r r . . R s e r . a s . O e . r u e . F u c Y R . . g e . L i h A F t T ) N d e , O t e s Z I c u e j e n R r d n a a u O l o t t a i r h H , o n s ( b . , s p d s f u . n f e n c . , g h l e t . . a . s e c e e o o n c c . i o S t n . s a T p n d e . , e c l T L t C s . , x t i a s . t A e , . i E r , u , , . v . E r y . S b r d o e s s . c w s c t . t s s n t d S , e . s t : A n e s . e e A a b n s d i . o e A s a , u o . t s h c t D n n L . h t o v . & e s s a c n n n . t e t d n . i s i n d L a . y s a s n e A a e r e s l , v r k d n t a t n o l t d l M m a A l a r c n a t i p l x t e a n o u o n & t e e e e t w t s o e A u s d d i t r a S S R D c h f C L T e o n e . r d t . s ) o ) v . x o l a i u n . i o r . A n B t . ( P F G P I C A ( ( M . . . . s . u . r . . o . o . f i r . . . . s v a . . . . e e . r . e s r . . . u p Y R . . . i g e . . F h . t . . . . . r t . o n . f . . . s e . r r . . . a s . e r . . . e R r u . u . c Y . . . g e . . . . i h . . F t . . , . g d . . m n e . i m . u s r . i d . , o e . n t . m k p a f c e n t t o r r / o r s a t A B o P t P h s u , e : e s s s e S O r e s s i , m n r a o t E h u o I i s o l e s h r i L l r . , S f s T d . p s h e i s , I o c i t i t e p r , & n n e . i t t : L v c s b s a a o i I c : b u u s t a d e : o i t l n i , i o s e n r i n d f B e , r e l i S v o a o L s L r c o n a t P b a s a r r L i , A s o , l t I o , s d a i s . i i b s t C e i d a P & e n P L s L i n o c L p d u & s s y s s o n B t v n i e a e e p e r n i t n e a e S r l r i e o r d e v a i d a R d u o u e , t r s , p e C i r n p x v t t L D s n l s e r d u v P u u x o r a i o a u r n r c d r e e o l t e n u e e d a r C r h e l i S E T D P T e e s e r d a t u l s p p b r c ) ) h x o u n t n a e a u e e h u s i A L C B s C R I C S S D O F S A U A ( (
GENESIS / DHURUVA
19
AMALGAMATION
3. Sale of Assets not taken over (Assuming Profit)
Accounting Standard 14 is applicable only for accounting in the books of Purchasing Company. (Transferee Company).
D eb it : Cash (Sale Proceeds) Credit : Asset (Book Value ) Credit : Realisation (Profit)
A) Books of Transferor Company (Selling Company)
4. Settlement of Liabilities not taken over (Assuming at a Discount)
1. Transfer to Realisation Account a. Assets taken over (at book values).
D eb it : Liabilities Credit : Bank Credit : Realisation
D eb it : Realisation Credit : Assets
(Being settlement of liabilities which is not taken over by
b. Liabilities taken over D eb it : Liabilities Credit : Realisation
transferee company)
5. Realisation Expenses Situation 1 – Borne by Selling Company.
2. Purchase Consideration
D eb it : Realisation Credit : Bank
a. Computation
(Being realisation expenses paid)
Method 1 – Net Assets method Purchase consideration. Aggregate of Assets taken over at agreed values Less Liabilities taken over. These Net Assets would be discharged in the manner agreed between the 2 Companies. Method 2 – Payments Method
Situation 2 – Borne by Purchase Company. a. Realisation expenses spent D eb it : Purchasing Company Credit : Bank (Being realisation expenses met by the purchasing company)
Purchase consideration is the aggregate of payments made in various forms to share holders of Transferor Company. Method 3 – Lump Sum Method Purchase consideration is an absolute sum agreed between the 2 Companies without specific reference to Assets & Liabilities taken over. These Lump Sum is paid in the manner agreed between the 2 companies. b. Due Entry D eb it : Purchasing Company Credit : Realisation (Being purchase consideration due)
c. Receipt D eb it : Shares/ Debentures of Purchasing Company. D eb it : Cash Credit : Purchasing Company (Being purchase consideration received) 20
(Being purchase consideration received)
GENESIS / DHURUVA
b. Reimbursement D eb it : Bank Credit : Purchasing Company (Being realisation expenses reimbursed by the purchasing company)
6. Amount due to Share Holders a. Transfer of Share Capital & Reserves to Shareholders. D eb it : D eb it : Credit : b. Transfer D eb it : Credit :
Share Capital Reserves Share holders of Realisation Profit / Loss ( Assuming Profit ) Realisation Share Holder
7. Settlement to Shareholders of Transferor Company D eb it : Shareholders Credit : Shares / Debentures of Purchasing Company Credit : Bank (Being Shares / Debentures Issued towards settlement) GENESIS / DHURUVA
21
a. Journal entry at the time of Acquisition D eb it : Credit :
2. Outside Liabilities
Amalgamation Adjustment Account Respective statutory Reserve.
a. Waiver of Amount due on Liabilities by the outsider.
Note: a) Statutory Reserve shall appear along with Reserves & Surplus whereas Balance in Amalgamation Adjustment Account will appear in the Assets side under head Miscellaneous Expenses to the extent not written off.
b. Journal entry on Complaints with Conditions Reserve Account no longer to be maintained. D eb it : Credit :
Statutory Reserve Account Amalgamation Adjustment Account.
3. Discharge of Purchase Consideration ( same for both methods ) D eb it : Credit :
Liquidation of Selling Company Equity Shares / Debentures / Cash.
Amalgamation in the nature of merger D eb it : Reserves Credit : Cash
ii.
Amalgamation in the nature of purchase D eb it : Goodwill / Capital Reserves Credit : Cash.
Liabilities Account Reconstruction Account
b. Settlement of Liability at Discount. Debit : Credit : Credit :
Liabilities Account Bank Reconstruction Account.
c. Asset taken over by creditors in discharge of Liability ( Assuming Liability discharged is greater than Book Value of Asset ) Debit : Credit : Credit :
Liabilities Account Asset Account Reconstruction
d. Conversion of Liability into Secured Debentures / Share Capital
4. Realisation expenses borne by Purchasing Company
i.
D eb it : Credit :
D eb it : Credit :
Liabilities Account Debenture / Share Capital.
3. Share Capital
a. Reduction in number of shares - Paid up capital per share being same. D eb it : Credit :
Share capital Account Reconstruction Account
b. Reduction in paid up value per share - No. of shares remaining same. Note : This represents issue of new class of shares with lower face value in lieu
INTERNALRECONSTRUCTION
of old shares.
Meaning:
This is a form of internal arrangement whereby the accumulated losses and unexpired preliminary expenses in the books are written off. This is made possible through Reduction in the face value of the Shares, Reduction in the Paidup value of Shares without reducing the number of Shares, Revaluation of Assets, Waiver of Liability, etc.,
Equity share capital ( old ) Account Equity share capital ( new ) Account Reconstruction Account
c. Consolidation / Sub division of shares D eb it : Equity share capital ( old ) Account Credit : Equity share capital ( new Fixed Value) Account 4. Utilisation of Reconstruction Surplus
1. Assets
a. For writing off b. For writing down value of Assets specified. c. For writing off intangible
a. Revaluation (Assuming Profit) D eb it : Asset Account Credit : Reconstruction Account
D eb it Credit Credit Credit
b. Sale of Unproductive Assets (Assuming Profit) D eb it : Bank Account (Sale Proceeds) Credit : Assets (Book Value) Credit : Reconstruction (Profit ) 24
D eb it : Credit : Credit :
GENESIS / DHURUVA
: : : :
Reconstruction Account Profit / Loss Account Assets Intangible Assets
GENESIS / DHURUVA
25
5. Transfer of Reconstruction surplus (if any ) to Capital Reserve D eb it : Credit :
Reconstruction Account Capital Reserve
2. Super Profits Method: Step 1 : Ascertain Normal Rate of Return (NRR) for the Industry in which the Company whose Goodwill being valued.
Note: Expenses incurred for Reconstruction if any to be debitted to Reconstruc-
Step 2 : Compute actualprofits - operatingprofits made by the Company.
tion Account.
Step 3 : Compute actual capital employed - Either Terminal Capital employed or Average Capital employed
6. Others
The scheme of Reconstruction normally provides for: a. Addition to the name of the Company, the words ‘and reduced’ b. Disclosure in Annual Accounts, the particulars of reconstruction ie., Date of High Court Order, Adjustment to the value of Assets & Liabilities. This disclosure is called for a period specified by the court.
=
Opening Capital Employed + Closing Capital 2 (or)
= Closing Capital employed - 1/2 the year profit. (or)
VALUATIONOF GOODWILL
= Opening Capital employed + 1/2 the year profit.
Definition:
Capital employed is calculated under two approaches as follows:
Goodwill is the value of Reputation which the Company / Organisation has gained through its standing in the business. It is the excess earning capacity of such Enterprise / Company.
(a) Shareholders Approach:
Methods of Valuing Goodwill:
Average Profits Method, Super Profits Method, Capitalisation Method & Annuity Method. 1. Average Profits Method:
i) Ascerain Profits of Normal year of the Business Return which shall be adjusted for
(b) Longterm funds Approach Capital employed = Shareholder funds + Longterm borrowings. The Capital employed ascertained as above is referred as Liabilities side approach and is to be adjusted for the changes in values of Operating Assets and after excluding non operating Assets. Capital employed can alternatively be calculated under the Assets side Approach as follows:
a) Non recurring items eg : Profit on sale of Asset
(a) Value of operating Assets to Business.
b) Non Operating items eg : Income from Investments
(b) Less Outside Liabilities
c) Changes in Business Condition eg : Change in Tax rates.
(c) Capital Employed = (a) - (b) Step 4
ii) Computation of Average Profits Note: Simple Average
Capitalemployed= Share capital + Reserves & Surplus – Miscellaneous Expenditure
= For Fluctuating Profits
Weighted Average = For Increasing / Decreasing Profits in a trend.
iii) Goodwill is Computed as the no. of years purchase of average profits.
: Compute Normal Profitj ie., excess of actual profits (2) over normal profit (4)
Step 5 : Compute super profit ie., excess of actual profits (2) over normal profit (4) Step 6 : Goodwill = No. of Years purchase x Super Profits
Note: No. of years purchase represents the multiplication factor.
26
GENESIS / DHURUVA
GENESIS / DHURUVA
27
3. Capitalisation Method
2. Earnings Capitalisation Method
Steps 1,2 and 3 same as in Super profit method.
Step 1 : Compute Earnings Per Share (EPS).
Step 4 : Compute Normal Capital employed.
Step 2 : Ascertain Normal Rate of Return (NRR). Step 3 : Value per share is arrived by capitalising at NRR.
Normal Capital employed =
Actual Profit
x 100
Normal rate of Return Step 5 : Goodwill
= Excess of Normal Capital employed over Actual Capital Employed.
Value per share
=
EPS NRR
x 100
3. Productivity Factor Method Step 1 : Computation of Productivity factor
4. Annuity Method
a. Compute weighted average net worth of a given period.
Goodwill under this method calculated by multiplying the Annuity Factor with the Average Profit or Super Profit.
b. Compute weighted average Profit After Tax (PAT) for the same period. c. Compute Productivity factor
VALUATIONOF SHARES Production Factor
A. Net Asset Value Method
Weighted Average PAT
Step 2 : Ascertain Net worth on the valuation date.
Step 2 : Add Value of Goodwill and Non operating Assets if any
Step 3 : Compute Future Maintainable Profit (FMP).
Future Maintenance Profit = Net Worth x Productivity Factor.
Step 3 : Divide the aggregate of Step 1 & 2 by the number of shares outstanding as at Valuation date. B. Yield based
The Various Methods under this are Dividend Capitalisation Method Earnings Capitalisation Method & Productivity Factor Method. 1. Dividend Capitalisation Method
Step 5 : Ascertain Normal rate of return. Step 6 : Capitalise Adjusted FMP at NRR to arrive at value of business.
of business.
Step 2 : Ascertain Normal rate of return. Step 3 : Capitalise the Dividend per share at above normal rate of return to arrive at value per share.
=
Step 4 : Ascertain Adjusted FMP ie., Future Maintenance Profit as per Step 3 adjusted for changes in business. (eg. Change of tax rate) .
Step 7 : Add : Non operating Assets (eg. Investments ) to above value
Step 1 : Ascertain Dividend per share
Value per share
x 100
Weighted Average Net Worth
Step 1 : Compute Net Operating Asset ( Refer Capital Employed Computation under Valuation of Goodwill ). (eg. Investments)
DPS
Less : Preference Share Capital ( if any ) Step 8 : Value per share = (Step 6 + Step 7) / Number of Shares 4. Market Price Method
x 100
Step 1 : Ascertain Earnings Per Share.
NRR
Step 2 : Ascertain from published sources the Price Earnings Multiples for similar size Company operating in the same industry.
(Where DPS = Dividend Per Share NRR = Normal Rate of Return)
28
=
Step 3 : Value per share = EPS X PE Ratio.
GENESIS / DHURUVA
GENESIS / DHURUVA
29
HOLDING COMPANY
Step 4 : Minority Interest
It is the aggregate of
Consolidated Balance Sheet: Step 1 : The date of Acquisition - This is the basis for segregating profit of Subsidiary Company in to Capital & Revenue profit or in otherwords Preacqusition & Post acquisition profits. Step 2 : The particulars of shareholding as on the date of Consolidated Balance Sheet. Particulars
No of Shares
Percentage of holding
1.Holding Company
XXX
XXX
2.Minority Company
XXX
XXX
Step 3 : Segregation shows analysis of profits of subsidiary as at the date of Consolidated Balance Sheet.
Particulars of Reserves
Capital profit (Pre-Acq uisio n Profit)
Post Acquisition Prof it (Reven ue Reserve)
Post Acquisition Pro fi t (Revenu e Profit)
General Reserve
xxx
xxx
xxx
Other Reserve
xxx
xxx
xxx
Revaluation Reserve
xxx
Nil
Nil
Profit & Loss A/c
xxx
xxx
xxx
Total Note : a)
Profits of subsidiary are segregated as Pre acquisition & Post acquisition on the basis of date of acquisition. (Step 1)
b)
Segregated profits are apportioned between holding Company & MinorityInterest on the basis of shareholding pattern as at the date of consolidated balance sheet.(Step 2)
c)
Preliminary expenses /Miscellaneous expenses shall also be adjusted in the process of segregation of reserves.
a) Share Capital of Subsidiary b) Share of i) Capital Profit ii) Revenue Reserve iii) Revenue Profit Step 5 : Cost of control It is the difference between Cost of Investment of Holding company in subsidiary Company and Value of Holding Company’s Interest in Subsidiary as on the date of acquisition.
Cost of Acquisition: a) Cost of Investments ( as per books ) b) Less : Dividend if any received from subsidiary after the date of acquisition for the period prior to Investment. Value of Investment (Holding Company’s Interest ) a) Holding Company’s Interest in Share Capital of Subsidiary. b) Add : Holding Company’s Share of Capital profits( Step3) Note : If cost of Acquisition > Value of Investment, t hen G oodwi ll = C os t – Value . If value of Acquisition> Cost of Acquisition, then Capital Reserve = Value – Cost.
Step 6 : Inter Company transactions
a) Calculation of Inter Company owings. (Debtors/Creditors and loans given/ loans taken).
b) Creation of Stock Reserve for the unrealized profit on closing stock arising out of inter company sales/purchases. To the extent of Holding Company’s Interest, Stock Reserve is created out of Profit. (Alternatively, stock reserve may also be created for the total unrealized profit) . Step 7 : Reserves for Consolidated Balance Sheet
a) Reserves of Holding Company (as per the books) b) Less Dividend received from subsidiary out of pre acquisition profits adjusted against cost of investment (Step 5) c) Add Holding Company Share of Revenue reserves and Revenue Profits of subsidiary (Step 3) d) Less Stock reserve (Step 6b)
30
GENESIS / DHURUVA
GENESIS / DHURUVA
31
3
Cost Accounting
Profit and Loss Account of a Banking Company Income
Schedule
Interest & discount earned Other incomes
13 14
Amo unt
xxxxxx xxxxxx
Interest expended Operating expenses Provisions & contingencies
15 16
Profit for the year Add: Balance of Profit & Loss Brought forward from Previous Balance sheet
Less: Transfer to statutory reserve fund Transfer to other reserves Interim Dividend, Proposed dividend etc
xxxxxx xxxxxx xxxxxx ———— xxxxxx
xxxxxx xxxxxx
Elements of Cost
xxxxxx ————
Direct
Labour
Indirect
Direct
Indirect
Direct Materials Add xxxxxx ———— xxxxxx ————
:
L es s :
Schedule 16 - Operating Expenses
Schedule 14 - Other Income
All administration expenses like rent, Profit on exchange transaction salary, printing & stationery etc. Less : Loss on Exchange Provisions & contingencies Transaction Bad debts Other incomes (including share of Provision for bad debts dividends from subsidiaries and amount Provision for taxation.
______ GENESIS / DHURUVA
Indirect
Opening stock of Raw Materials Closing stock of Raw Materials
Rs.
xxxx x xx x (-)xxxx xxxx
Direct Costs (if any)
xxxx
Prime Cost
xxxx
Factory overhead
xxxx
:
Less :
Interest on deposits Interest on borrowings Other interest
Direct
Direct Labour
Add
Schedule 13 - Interest & discount Schedule 15 earned Interest Expended
Other Costs
Overheads
Format of Cost Sheet :
Schedules forming part of Profit & Loss Account
34
Mere knowledge of Total Cost cannot fulfill the entire information needs of a management. For a complete control and analysis, classification of Total cost is necessary. Cost sheet will give the components / classification of Total Cost.
Materials
xxxxxx ———— xxxxxx
Balance of Profit & Loss Account carried forward to Balance Sheet
charged against current account )
This is a statement showing various elements of Total Cost of a Product. Need For Cost Sheet :
Less : Expenditure
Discount on bills Interest on loan Interest on overdraft Interest on cash credits
COST SHEET :
Opening work-in progress Closing work-in progress
xxxx (-)xxxx
Factory or Manufact uring or Works Cost
xxxx
Add:- Administrative overhead
xxxx
Cost of Production
Add
:
L es s :
Opening stock of finished goods Closing stock of finished goods
x xx x (-) xxxx
Cost of Production of goods sold
xxxx
Add:- Selling & Distribution overhead
x xx x
Cost of Sales
xxxx
Profit
xxxx
Sales
xxxx
MATERIALCOSTING
5. Labour Utilization = Actual hours / Available hours.
1. Economic ordering quantity or Re-order quantity (ROQ) = 2AO/C Where A = Annual consumption O = Ordering cost per order C = Carrying cost per unit
6. Absenteesm = No of absentees / Average no of employees. 7. Accident frequency per week = No of accidents to date No of weeks of date. 8. Illness =
Hours lost due to Illness / Total labour hours.
2. Re-order level (ROL) = Maximum delivery period x Maximum usage or consumption.
9. Labour productivity = Production in standard hours / Actual hours.
3. Minimum level or minimum stock level = ROL – {Normal usage x Average delivery period}.
11. Earning under straight Piece rate system = No of units X Rate per unit.
4. Maximum level or maximum stock level = ROL + ROQ – (Minimum consumption x Minimum delivery period) 5. Average stock level = (Minimum level + maximum level) ½ or Average stock level = Minimum level + ½ of ROQ or EOQ. 6. Danger Level = Average consumption x Maximum Delivery period. 7. Inventory Turnover Ratio =
Cost of goods sold Average Inventory
8. Safety stock =
Max. lead time - Avg. lead time
9. Carrying Cost = 1/2 x Order Size x Inventory Carrying Cost Per Order.
LABOURCOSTING
13. Merrick’s differential piece rate system Outputs
Payment
Upto 83% 83% to 100% Above 1 00 %
Ordinary piece rate 110% of ordinary piece rate 120% of ordinary piece rate.
Output
Payment
Output below standard
Time rate
Output at standard
20% bonus on time rate
Output above standard
High piece rate on the entire output
15. Halsey Premium plan
Labour Turnover
Earning
Under separation method = No. of Separation during a period Average no. of. Work force during a period
x 100
b) Under replacement method = No of replacement during a period
x 100
Avg. No. of work force during period No.of separations + no.of additions Average no. of workers during a period
= Actual hours x rate per hour + 50% of time saved x Rate per hour.
16. Rowan System Earning
= (Hours worked x rate per hour) + (Time saved / Time allowed) x Hours worked x rate per hour.
where Time saved = Time allowed – Time Taken. 17. Emerson's efficiency bonus Earnings = Actual hours x rate per hour + bonus percentage x hour worked x rate per hour.
c) Flux method = x 100
2. Level of activity = Actual production in standard hours/ budgeted hours. 3. Labour efficiency = Actual production in standard hours Actual hours worked 4. Labour cost per unit = Direct wages / total no of units. 36
12. Earning under Taylor's differential piece rate system = Low Piece rate if the actual output is below standard. High piece rate if the actual output is above standard.
14. Gantt task bonus plan
x Annual Consumption.
360 days
1. a)
10. Earning under time rate = Hours worked X Rate per hour.
GENESIS / DHURUVA
Bonus calculation: Efficiency
Bonus
Upto 66 2/3%
No bonus
66 2/ 3% to 100 %
2 0% o f hou rly rate
above 100%
20% + 1% for every 1% increase in efficiency.
GENESIS / DHURUVA
37
Verification :
DIRECTMATERIAL USAGE VARIANCE
Direct Labour Cost Variance
Direct Material Mix Variance (DMMV) 4. Direct Material Mix Variance (DMMV)
Direct Material Yield Variance (DMYV)
= Direct Labour Rate Variance + Labour Idle Time Variance + Labour Efficiency Variance
DIRECT LABOUR EFFICIENCYVARIANCE Direct Labour Efficiency Variance (DLCV)
= Standard Price × (Revised Standard Quantity – Actual Quantity)
* Revised Standard Quantity = Total Weight of Actual Mix
Direct Labour Mix Variance (DLMV)
× Standard Quantity
Total Weight of Standard Mix 5. Direct Material Yield Variance = Standard Cost per unit × (Standard Output for Actual Mix – Actual Output)
10. Direct Labour Mix Variance * Revised Standard Time
Verification :
Direct Material Usage Variance
= Direct Material Mix Variance + Direct Material Yield Variance
= Standard Rate × (Revised Standard Time – Actual Time) = Total Actual Time
× Standard Time
Total Standard Time * Revised Labour Efficiency Variance = Standard Rate × Standard Time for Actual Output – Revised Standard Time
DIRECT LABOUR COST VARIANCE Direct Labour Cost Variance (DLCV)
Direct Labour Yield Variance (DLYV)
11. Labour Yield Variance Direct Labour Yield Variance = Standard Cost per unit × (Standard Output for Actual Mix – Actual Output)
Direct Labour Ra te Varian ce (DLRV)
Direct Labour Eff ici en cy Va ria nce (D LEV )
* Standard Cost Price Variance
= Total Standard Cost ÷ Standard Output
* Standard Output for Actual Variance = Actual Mix ÷ Standard Mix Verification :
6. Direct Labour Cost Variance = Standard Cost for Actual Output – Actual Cost.
Direct Labour Efficiency Variance= Direct Labour Mix Variance + Direct Labour Yield Variance
or (Standard Rate × Standard Time for Actual Output) – (Actual Rate × Actual Time) 7. Direct Labour Rate Variance = Actual Time × (Standard Rate – Actual Rate) 8. Direct Labour Efficiency Variance
= Standard Rate × Standard Time for Actual Output – Actual Time
9. Idle Time Variance
= Standard Hourly Rate × Idle Hours
42
GENESIS / DHURUVA
III OVERHEAD VARIANCE 12. Overhead Cost Variance (OCV) = Rec ove red Ove rhe ads – Act ua l Overheads * Standard Overhead Rate per unit
= Budgeted Overheads
* Recovered Overheads
= Standard Rate per hour × Standard Hours for Actual Output
Budgeted Output or Budgeted Hours
GENESIS / DHURUVA
43
FIXEDOVERHEADVARIANCE
OVERHEAD COST VARIANCE
Fixed Overhead Cost Variance Variable Overhead Cost Variance (VOCV) 13. Variable Overhead Cost Variance where * Recovered Variable Overheads
Fixed Overhead Cost Variance (FOCV) = Recovered Variable Overheads – Actual Variable Overheads
* Recovered Fixed Overheads
15. Variable Overhead Expenditure Variance
Variance
Fixed Overheads
18. Fixed Overheads Volume Variance
= Actual Output × Standard Fixed Overheads Rate per unit
Variable Overheads Efficiency Variance (VOEFFV) = Actual Time × (Standard Variable Overheads Rate per hour – Actual Variable Overheads Rate per hour or
Budgeted Fixed Overheads Fixed Overheads Volume Variance
Fixed Overhead Efficiency Variance
Efficiency Variance
44
Fixed Overhead Capacity Variance
19. Fixed Overhead Efficiency Variance
= Standard Fixed Overhead Rate per hour × (Standard Hour for Actual Production – Actual Hours)
20. Fixed Overhead Capacity
= Standard Fixed Overhead Rate per
Variance
hour × (Actual Hours Worked – Budgeted Hours)
2 1. Ca pa city Va ri an ce
= S t an d ar d O ve r he ad s – B u dg e te d Overheads
22. Calendar Variance
= Standard Rate per hour (or) per day × Excess or Deficit Hours (or) Days worked
23. Revised Capacity Variance
= Capacity Variance – Calendar Variance
Standard Variable Overheads – Actual Variable Overheads 16. Variable Overheads
= Recovered Fixed Overheads –
= Recovered Fixed Overheads – Actual Fixed Overheads
Variable Overhead Cost Variance (VOCV)
Variable Overheads Expenditure Variance (VOEXPV)
Fixed Overhead Volume Variance
17. Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual = Actual Output × Standard Variable Overheads Rate per unit
* Actual Variable Overheads = Actual Rate per unit × Actual Output or Actual Rate per Hour × Actual Hours 14. Fixed Overhead Cost Variance (FOCV) Where
Fixed Overhead Expenditure Variance
= Standard Variable Overheads Rate per hour × (Standard Hours for Actual Production – Actual Hours)
GENESIS / DHURUVA
GENESIS / DHURUVA
45
IV. SALES VARIANCES
Note :
1. Standard Overhead Rate per unit =
Budgeted Overheads Budgeted Output
2. Standard Overhead Rate per hour =
Budgeted Overheads
With reference to Turnover
2 5. Valu e Vari an ce
=
Bud ge te d Sa le s – Actu al Sale s
2 6. Price Varian ce
=
Stan dard Sal es – Act ual Sale s
Budgeted Hours 3. Standard Hours for Actual Output =
Budgeted Hours
or Actual Quantity sold × (Standard Price – Actual Price)
× Actual Output
Budgeted Output 4. Standard Output for Actual Time
=
Budgeted Output
× Actual Hours
27. Volume Variance
=
Budgeted Hours
Standard Price × (Budgeted Quantity – Actual Quantity) or
5. Recovered or Absorbed Overheads = Standard Rate per unit × Actual Output
Budgeted Sales – Standard Sales 2 8. Mix Va ria nce
=
* Revised Standard Quantity
=
or Standard Rateper unit × Standard Hours for Actual Output 6. Budgeted Overheads
Total Quantity of Actual Mix
= S ta ndar d Rat e p er un it × Budgeted Output
Total Quantity of Standard Mix
7. S ta nda rd Over hea ds
= Standard Rate p er u nit × Standard Output for Actual Time
29. Quantity Variance
=
Budgeted Sales – Revised Standard Sales
=
Stan dard P rofi t – Act ua l Pro fit or
With Reference to Profit
3 0. Price Varian ce
Or Standard Rate per hour × Actual Hours 8. A ctual Overheads
= Actual Rate per unit × Actual Output
Actual Quantity × (Standard Profit per unit – Actual Profit per unit) 31. Volume Variance
=
46
GENESIS / DHURUVA
Budgeted Profit – Standard Profit or
Or Actual Rate per Hour × Actual Hours
×
Standard Quantity
or S ta nd ar d R at e p er h ou r × Budgeted Hours
Stan dard Price × (Revise d Sta nda rd Quantity – Actual Quantity)
Standard Rate of Profit × (Budgeted Quantity – Actual Quantity) 32. Mix Variance
=
Revised Standard Profit – Standard Profit
33. Quantity Variance
=
Budgeted Profit – Revised Standard Profit
GENESIS / DHURUVA
47
4
Management Accounting RATIO ANALYSIS
Profitability Ratios :
1. Return on Capital Employed (ROCE) or Return on Investment (ROI) ROI
=
or
=
Profit Capital Invested
_______________________
Net Profit
______________
x
Sales
_______________________
Sa les
x 100
Ca pit al I nve ste d
2. Earnings per Share (EPS) =
Profit after tax & Dividend
____________________________________
No. of equity shares Or Profit available for equity sharehholders
________________________________________________________________
No. of equity share
3. Gross Profit Margin =
Sales - cost of goods sold
___________________________________________
x100
Sales Or =
Gross Profit
__________________
x100
Sales
4. Net Profit Margin
=
Net Profit before interest and tax ____________________________________________________ Net Sales
5.CashProfitRatio
=
Cash profit ________________
x 100
Sales 6. Cash Profit
=
Net Profit + Depreciation
7.Return onassets
=
_________________________
Net Profit after Tax Total assets
x 100
x100
8) Return on Shareholders funds or Return on = net worth 9 ) Net worth
Current Assets - Inventories Prepaid expenses
Net Profit after interest and tax _________________________________________________
x100
2 ) Qu ick or Li qui d rati o
=
Eq uit y Capi ta l + Rese rves an d S ur pl us
Activity or Turnover Ratios 1) Inventory turnover ratio
Long-term debt
=
=
_______________________________
Average Inventory where
Shareholders Equity =
_______________________________
Cost of Sales
or
_______________________________
Cost of goods sold Average Inventory
Shareholders funds
2) Shareholders Equity ratio
_______________________________________________
Current Liabilities
Solvency ratios Long-term Solvency ratios 1) Debt-Equity ratio
=
Net worth
___________________________________
Average Inventory
=
Opening Stock + Closing Stock _________________________________________________ 2
Total assets (Tangible) Long-term debt 3) Debt to Net worth ratio
=
2) Inventory ratio
___________________________
=
Fixed interest bearing funds =
______________________________________________
Equity Shareholder's funds 5) Fixed assets to Long-term
Fixed assets =
3) Debtors turnover ratio =
Net Profit after tax
=
5) Bad debts to sales ratio =
______________________________
Profit before interest, depreciation and tax =
________________________________
Interest charges
Short-term Solvency Ratios :
6) Average payment period = (in days)
Or
=
x 365
Credit Sales Bad Debts
__________________
Average Creditors
__________________________
x 365
Purchases 365
______________________________________
Creditors turnover Ratio
Current Assets 1) Current ratio
Average Debtors
___________________________
Sales
Dividend
7) Interest Cover
Net Credit Sales
____________________________
Average Debtors 4) Average Debtors collection period (in days)
__________________________
Long-term funds
6) Dividend Coverage ratio=
x 100
Current assets
Net worth
4) Capital Gearing ratio
Inventory
_____________________
_________________________
Current Liabilities
50
GENESIS / DHURUVA
GENESIS / DHURUVA
51
7) Creditors turnover ratio
=
Credit Purchase
___________________________
8) FixedAssets turnover ratio =
Sales _____________________
Market test Ratios
x 100
Average Creditors
=
Sales
___________________
x 100
Total assets 10) Working Capital turnover ratio
=
=
_______________________________
2) Dividend Yield Ratio
=
Dividend per Share _____________________________ x100 Market Price
3) Price Earnings ratio
=
_________________________________
x 100
Fixed assets
9) Total assets turnover ratio
________________________
x 100
Working Capital Management
Working Capital
=
x 100
goods conversion Period + Book debts conversion period
Capital employed
2) Net Operating Cycle =
Material consumed
____________________________
=
=
Labour Cost __________________
period C.A. 3) Working Capital Leverage
=
4) Administrat ive expenses ratio
=
5) Selling and Distribution expenses ratio
52
Where, C.A.
D
Factory expenses x 100 Sales ___________________________
Administrative expense s ___________________________________
_____________________
T.A. -
D C.A.
=
Current assets
T.A.
=
Total assets (i.e. Net fixed assets + Current assets)
C.A.
=
Change in Current assets.
Debtors and Inventory Management
x100
Economic Order Quantity (EOQ)
Sales
E OQ =
=
x 100
Sales
3) Factory overhead ratio
Gross Operating Cycle - Payment deferral
x 100
Sales
2) Labour Cost ratio
Raw material conversion period + Work-inprocess conversion period + Finished
Sales
___________________________
Operating Ratios 1) Material Cost ratio
Current market price Earnings per Share
Sales
1) Gross Operating Cycle = 11) Sales to Capital employed ratio
Dividend per Share Earnings per Share
1) Dividend Payout ratio
Selling and Distribution expenses
__________________________________________________
x100
Sales
GENESIS / DHURUVA
Where
=
2AB / CS A B
-
Annual demand Ord eri ng co st
C
-
Carrying costage
S
-
Price perunit
GENESIS / DHURUVA
53
CASH FLOW STATEMENT
Inventory Levels
R e -o r d er L e v el = M a xi m um u s a ge x M a x im u m r e o r d er Period. Minimum Stock Level = Re-order level - (Average or Normal Usage x Average lead Time)
Maximum Stock level = Re-order level + Economic Order Quantity - (Minimum usage x Minimum reorderperiod)
The sources and uses are summarised under 3 heads:
Cash from
Operating Activities
C as h g en er a te d from operations
COSTOF CAPITALAND LEVERAGE Cost of Equity (KE)
Dividend Yield method
=
C as hf lo ws r el a ti n g to acquisition/disposal o f a ss et s / i nv es tm en ts
C as h fl ow r el at in g to financing of an e nt er pr is e.
A. Cash Flows from Operating Activities
x 100
DIRECT METHOD
1. Cash receipts from customers
Leverage
2. Cash paid to Suppliers/employees/expenses
EBIT EB T
1) Financial Leverage
=
_________
2)OperatingLeverage
=
_______________
3. Cash generated from operations 4. Taxes Paid
Contribution
5. Cash flow before Extra-ordinary items
EBIT =
6. + / - Extra - ordinaryItems
Contribution ________________ EBT
7. Net Cashflow from operating activites (or)
Where EBIT= Earnings Before Interest and Tax.
INDIRECT METHOD (Alternative Method)
EBT = Earnings Before Tax.
1. PBT & Extra-ordinary items. 2. Depreciation and other non-cash items.
Statement of Marginal Cost
54
C as h f ro m s ou rc e forming part of f i na n ci n g a n d investing activities.
Financing Activities
Form of Cash Flow Statement
Dividend __________________ Market Price
3) Total L everage
Investing Activities
3. +/- Non-operating items.
Sales
xxx
4. Operating Profit before Working Capital changes.
Less : Variable Cost
xxx
5. Adjustments for Working Capital changes.
Contribution
xxx
6. Cash generated from operations.
Less : Fixed Cost
xxx
7. Taxes paid.
Profit (EBIT)
xxx
8. Cash flow before extra-ordinary items.
Less : Interest
xxx
9. +/- Extra Ordinary Items.
EBT
xxx
10. Net Cashflow from Operating Activities. GENESIS / DHURUVA
GENESIS / DHURUVA
55
B. Cash flow investing activities.
Current Liabilities
1. Sale proceeds of assets
xxx
Sundry Creditors
2.
x xx
Provision for Taxation *
3. Income from investments
xxx
Proposed Dividend
4. Purchase of Assets
xxx
Bank overdraft
5. Purchases of Investments
x xx
Sale proceeds of investments
Bills Payable etc.
Net Cash from investing activities
x xx
C. Cash flow from financing activities
Total (B)
xxxx
Increase / Decrease in
1. Issue of Shares
xxx
2. Additional borrowings
xxx
3. Redemption of Shares
xxx
4. Redemption of Borrowings
x xx
5. Payment of Dividend
xxx
6. Payment of Interest on longterm borrowings
xxx
Working Capital (A - B) * Provision for Taxation and Proposed dividend can be taken as current assets provided there are no adjustments. If there is adjustments, Seperate Ledger accounts have to be opened and they have to be treated as non current assets as explained below Dr
Net Increase/Decrease in Cash and Cash equivalent
xxx
Provision for Taxation A/c
Cr
Particulars
Rs. P.
Particulars
To Cash (taxpaid)
xxx
By Balance b/d
xxx
To Balance c/d
xxx
By Profit and Loss A/c
xxx
Rs.
xxx
1. Definition of Cash and Cash Equivalents. Dr
Accumulated Depreciation A/c
Particulars
Rs. P.
Particulars
Rs.
4.
To Fixed Assets A/c
xxx
By Balance b/d
xxx
To Balance c/d
xxx
By Profit and Loss A/c
xxx
xxx
Fund generally refers to Working Capital Steps. Previous Year
Current Year
Dr
Increase
Decrease
Current Assets
Total (A)
Fixed Asset A/c
Particulars
Rs. P.
Particulars
Rs.
xxx
By cash (sale)
xxx
To Profit & Loss
xxx
To Cash (Purchases)
xxx
By Depreciation
xxx
By Profit for Loss
xxx
By Balance c/d
xxx
xxx _____
GENESIS / DHURUVA
_____
_____
_____
xxx
xxxx GENESIS / DHURUVA
P.
_____
xxxx
_____
Cr
To Balance b/d (profit on sale)
Stock Debtors Prepaid expenses Bank Cash, etc
xxx _____
I Schedule of changes in Working Capital
_____
P.
_____
Funds Flow Statement
Cr
3. Management statement on commitments against cash balance. I n c re a s e i n o p e r a ti n g c a p a b il i t y o f a n e n t er p r is e o r c a s h required to maintain operating Capability.
_____
xxx _____
2. Reconciliation of Cash and Cash Equivalents.
Particulars
P.
_____
Notes (Forming Part of Cash Flow Statement)
56
xxxx
57
Dr
Adjusted Profit and Loss Account
Cr
Particulars
Rs. P.
Particulars
Rs.
To General Reserve
xxx
By Balance b/d
xxx
To Goodwill w/o
xxx
By Profit on Sale A/c
xxx
To Provision for Taxation
xxx
By Funds from operations
xxx
To Depreciation
xxx
P.
To Proposed Dividend (current year)
xxx
To Loss on sale of asset
xxx
To Balance c/d
xxx _____
xxx
_____
_____
_____
_____
xxx _____
Funds Flow Statement Sources
Rs. P.
Applications
Increase in Share Capital
xxx
Redemption of pref. shares
xxx
Rs.
Issure of Share
xx x
Redemption of debentures
xx x
S ale of F ix ed A ss ets
x xx
P ur cha se of F ixed A ssets
x xx
Decrease in working capital
x xx
Payment of Tax
x xx
Funds from operations
x xx
Payment of Dividend
x xx
Receipt of Loans
x xx
Increase in working capital
x xx
Payment of Loans
xxx
P.
_____
xxx
xxx _____
______
58
GENESIS / DHURUVA
5
Statistics MEASURES OF CENTRAL TENDANCY
Arithmetic Mean : (i) Raw Data: Direct Method x =
x N
Format : X
N
x
N
Short Cut Method : x
=
A +
d N
Format : X
N
d=x–A
N
d
where A = Assumed Mean (ii) Discrete Series : Direct Method x =
fx N
where f = frequency x = Variable in question N = Total No.of observations(ie) f Format : X
f
fx
N
fx
Shortcut Method : x = A +
Median (i) Raw Data
fd N
th
N + 1 2
Size of
where A = Assumed Mean d = (x – A) N = f Format : X
f
Format : S.No.
d=X–A
Data in ascending order
fd
fd
N (iii) Continuous Series : Direct Method : x =
item
(ii) Discrete Data th
N + 1 2
Size of
fm N
item.
Format :
where
Data in ascending order
lower limit + upper limit
m = midpoint =
f
cf
2
N = f Format :
N Class
Midpoint(m) f
fm Where cf = cumulative frequency
fm
N
(iii) Continuous Data :
Short Cut Method : x = A +
fd N
where A = Assumed Mean format Class
m
f
d=
N
m A i
fd
N 2 c .f .
Median =
L +
where L = c.f. = F = i =
lowest limit, inclass interval cumulative frequency frequency of the median class Class interval
F
× i
Format : Class
fd
f
cf
where A = Assumed Mean i = width of the class interval 62
GENESIS / DHURUVA
GENESIS / DHURUVA
63
Mode :
(iii)Continuous Data :
(i) Raw Data: The numberoccurs more number of times.
G.M. = Antilog
(ii) Discrete Series : Number with higher frequency
Format:
f log m f
Class
(iii) Continuous Series : Mode
=
where f 1 = f 0
=
f 2 = L = Format
L
+
f 1 f 0 2f 1 f 0 f 2
×
m
f
log m f log m
i
flogm Harmonic Mean : (i) Raw Data
Frequencyprevious to modal class Frequency ofthe modal class
N
Frequency next to modal class Lowest class limit of the modal class
H.M. =
1 x
Format: Class
f
x
1/x
1/x
Geometric Mean : (ii) Discrete
(i) Raw Data
N
log x G.M. = Antilog N
H.M. =
Format :
Format: x
f x
x
log x
log x
f
f/x
N
f/x
(iii) Continuous
(ii) Discrete Data :
N
H.M. =
f log x G.M. = Antilog f Format :
x
f
N 64
log x
f m
Format: Class
f log x
flogx
m
f
f/m
f/m GENESIS / DHURUVA
GENESIS / DHURUVA
65
Standard Deviation :
MEASURESOF DISPERSION Mean Deviation : (i) Raw Data
(i) Raw:
)
s =
M.D =
(
x x
x 2
or M.D.=
,where X = x x
N
Format:
N
( x x ) X
x
x2
D N
Where, |D| = Deviation from median ignoring sign. Format : X |D|
x2
N (ii) Discrete Series : (a)Actual Mean
D
N (ii) Discrete M.D =
fX 2
s =
N
where x = x x
(
f x x f
)
Format: x
( x x ) X
f
fX
fX2
or M.D =
f D N
fX2
N
Format : X
f
C.F.
|D|
(b) Assumed Mean
f|D|
s = f|D|
N
(
N
fd N
2
where d = (x – A) Format :
(iii) Continuous
f m x f Format : M.D =
fd 2
x
)
Class
f
cf
m
|D|
f
(x – A)d
N
f|D|
fd
fd2
fd
fd2
(c) StepDeviation
f|D|
66
s =
GENESIS / DHURUVA
GENESIS / DHURUVA
fd 2 fd N N
2
× i
67
Format :
CORRELATION x
x a = d i
f
fd
(i) Direct Method
fd 2
N xy ( x )(y )
r
fd
N
=
fd 2 fd N N
=
× i
x2
y
y2
xy
x
x2
y
y2
xy
xy
i
r
i = ClassInterval Format : m
=
x 2 . y 2
where f
m A = d i
N
X
fd
fd2
fd
fd
=
(i) Quartile deviation
=
(ii) Co-efficientof Quartiledeviation
=
2
1
Q 3 Q1
6 D
=
X = x x
x
X = 0
(
X2
y
Y = y y
X2
y
Y = 0
)
Y2
XY
Y2
XY
N 3 N
r
Q 3 + Q1
fd 2 fd N N
)
N dxdy dx dy
Q 3 Q1
x
(
x 2
2
=
N dx (dx)
2
2
N dy2 (dy)
2
Format: x
dx = x–A
dx2
N
dx
dx2
d = X–A f = frequency
(iv) Co-efficient of variation
( y y )
=
Assumed Mean :
2
(iii) Deviation taken from assumed mean(s) =
( x x ) ; Y
Format:
Quartile Deviation :
where
x
(ii) Simple Method
(m A )
Class
2
2
Where d
2
Format:
fd2
(iii) Continuous Series :
s =
N (y 2 ) (y )
N x 2 ( x )
×100
y
dy = y–A
dy2
dxdy
dy
dy2
dxdy
Rank Correlation (i) When ranks are given : R 68
GENESIS / DHURUVA
=
GENESIS / DHURUVA
69
Format :
2. Deviations taken R1
R2
D2
D = R1 – R2
x on y
D2
=
1
r
x y
=
xy y 2
r
6D 2 x
N 3 N
Format :
=
Rx
y
Ry
d2 (iii) Equal Ranks : 1
N
D2
D = Rx – Ry
y y
=
x
;
)
y
=
y
N
y on x x
R
(
=
(ii) When ranks are not given : R
x y y y
x x
6D 2 +
=
y = x Format: r
1 (m 3 m )+ 1 (m 3 m )+ .......... 12 12 N 3 N
r
x x x y
(
)
xy x 2
x
x = x x
x2
y
y = y y
y2
x
x = 0
x2
y
y = 0
y2 xy
xy
Format : x
R1
y
R2
D = R1 – R2
D2
3. Wrong observatioin in Regressioin equations
D2
n(xy) – xy
REGRESSION
y on x, byx
1. Equation x on y x = a + by x = Na + bxy xy= ay + by2
__________________
nx2 – ( x)2 n(xy) – xy
x on y, bxy =
Equation y on x y = a + bx y = Na + bx xy= ax + bx2
_________________
ny2 – ( y)2
4. To find mean values ( x, y ) of two regression equations. a 1 x + b 1 y + c1 = 0 a 2 x + b 2 y + c2 = 0
Format :
70
=
x
y
xy
x2
y2
x
y
xy
x2
y2 GENESIS / DHURUVA
GENESIS / DHURUVA
71
DEMAND ANALYSIS z=
1.
ep =
dx / dp
_________
=
dx
_ _ __ _ __
p
_ __ _
(elasticity of demand)
x/p dp x Where ‘x’ is quantity and ‘p’ is price
99% = p1 - p 2 + 2.58 S.E of (p 1 - p 2) 4. Sampling of Variables:
Average quantity x / p
a. For large samples (n> 30).
ep -1
i)
_______
AR
S.E. Confidence limits: 95% = p1 - p 2 +1.96 S.E of (p1 - p 2)
Marginal quantity dx / dp
2. MR =
ep ds
____
x- µ
ii)
s/A
dA
Test of specified population mean (s.d.known) Z
3. Advertisement Elasticity of Sales : eA =
P1 - P2
0 _________
=
(S.E = / n )
/ n
Difference or equality of two means (s.d.known) x1 - x 2 Z = ________________ S.E
Population and Samples
S.E. ( x1 - x 2 )
1. z = Observed value - expected value
12 + 22
=
_____
Standard Error Signof alternative hypothesis # > < Sign # > <
_____
n 1 + n2 Type ofTest Two - sided One - sided to right One - sided to left
1%
2 (1/n1 + 1/n2)
(or)
iii) S.E. of the difference between two s.d. S.E (1 2 )
=
5%
2.58 2.33 -2.33
1.96 1.645 - 1.645
2 1 ____
2n1
+
22
____
2n2
iv) S.E. (correlation coefficient) =
1 - g2 ________
n b. For small samples (n < 30)
2. Sampling of Attributes. S.E. of p = pq/n Confidencelimits P +
i) 1.96 (SE of P)
Test of specifiedpopulationmean (sd known) z = x - µ0 ____________
Difference or Equality of two proportions.
S.E. of (p1 - p 2) = PQ (1/n1 + 1/n2) n1p1 + n2p2 P = ______________ , Q = 1 - P n1 + n 2 72
ii)
n
Difference of means (s.d known) z = x1 - x 2 _________
S.E GENESIS / DHURUVA
GENESIS / DHURUVA
73
C. S.E
12
=
_____
22
(i) Test of goodness of fit
_____
+
n1
][2 test
Where f 0 = observed frequency;
f e =
row total x column total ____________________________
Condfidence limits = x + t .025 (s1 / n - 1
Total frequency d.f. (rows - 1) x (column - 1)
iv) Difference or Equality of two sample means (s.d unknown) x1 - x 2
_ __ __ __ _
S
n1 + n 2 2
n s +n s
S
=
PROBABILITY
n1n2
_ _ __ _ __ _ _
1. P(A)
2
1 1 2 2 _________________
1- g
=
3. P(AUB) =
P(A) + P(B)- P(AnB) (Not Mutually Exclusive)
4. P(AUBUC) =
. n-2
2
vi) For F test equality of two S.d. (for unknown means) n1 s 12 = _______ s 12 n1 -1
n2 -1
s22
=
_______
S22 74
5. P(AnB)
=
P(A) . P(B) (Independent ) P(A) . P(B/A) (Dependent)
6. P(AnBnC) =
P(A). P(B). P(C) ( Independent)
P(B) = P(AnB) + P(AnB) 8. P(AUB)= 1 - P(AnB)
S12
F
P(A) + P(B)+ P(C)
7. P(A) = P(AnB) + P(AnB)
n
2 _______
1 - P(A)
P(A)+ P(B)+ P(C)- P(AnB)- P(BnC)P(CnA) + P(AnBnC)
d.f = n - 2
s 22 =
P(B) = r/ n
P(A) + P(B) + 0 (Mutually Exclusive)
g ________
r/ n
2. P (A )
v) In case of correlation coefficient : =
=
1
n1 + n2 - 2
t
f e = expected frequency
(ii) Test of independence of attributes
d.f = n - 1.
=
(f - f )
2 o e _______________
f e
iii) To test a specified mean (s.d is not known) x - µ0 t = _________ n-1 s
t
=
n2
d.f. = (n1 - 1) (n 2 - 1)
P(AnB) = 1 - P(AUB)
GENESIS / DHURUVA
GENESIS / DHURUVA
75
9. Mutually exclusive - P(AnB) = 0
II.
Mutually exhaustive - P(AUB) = 1 Equally likely if P(A) = P(B). 10. Variance s.d.
Simple Average of Relatives
=
E(x2) - m2 where m = E(x) = xip i
=
E(x2) - m2
Mean = np, Variance = npq, =
npq
_______
where m
=
2) Paasche's Method
np
P01 =
14. Normal Distribution z = x - µ
x 100.
p0q1 p1q0
________
p1q1
________
+
p0q0
x 100.
p0q1
2
4) Fisher'sIdeal Index µ
= =
mean Standard deviation
P01 =
Index Numbers
Unweighted
Simple Aggr ega tive
Simple A ve ra ge of Relatives
Weighted Aggregative
Weighted A ve rag e o f of Relatives
_______
p1q1
________
x
p0q0
x 100
p0q1
p1q0 + p1q1
p
Where
x 100.
_____________________
x 100
p0q0 + p0q1
6) Kelly's Method P01 =
Simple Aggregative Method. 1 ______
p1q0
5) Marshall - Edgeworth Method Weighted
P01 =
76
_______
______________________
________
P01 =
p1q1
3) Dorbish and Bowley's Method
= m
x!
I.
x 100.
p0q0
P01 =
13. Poisson Distribution
Where
x 100
p0
p1q0 P01 =
12. Binomial Distribution
f(x)=
1 _____
1) Laspeyeres Method
P(Ai) P(B/Ai)
__________
Where P =
III. Weighted Index Number. (Aggregative)
____________________
e-mmx
p
_______
N
11. Bayee Theorem - P(Ai / B) = P(A1) . P(B/A1)
f(x) = nCr pr qn-r
logP
P01 = antilog
p1q
_______
x 100
poq q
=
q0 + q 1
__________
2
p0 GENESIS / DHURUVA
GENESIS / DHURUVA
77
IV. Weighted average of Relative
PV P01 =
_______
Where
V
P V V
= = =
Price relative Value Weights p0q0
p
P01 =
1 _____
x 100
p0 V. Quantity or Volume index Numbers.
p1q P01 =
_______
x 100
p0q
VI. Value index numbers
V
=
p1q1
_______
x 100
p0q0
______
78
GENESIS / DHURUVA
6
Operations Research 1. TRANSPORTATION
VOGEL’S Approximation Method (VAM)
Step 1 : Verify whether the given problem is maximisation or minimisation. If it is maximisation, convert it into minimisation by selectinglargest element and subtract the element from the other element. Step 2 : Verify whether availability = requirement. If availability < requirement, introduce a dummy row with zero if no other information is available. If requirement < availability, introduce a dummy column if no other detail are given. Step 3 : Find out the penality for each Row and each Column where the penalty is difference between the smallest and next smallest element. Note : If there is a tie, then Penality = 0 Step 4 : Enter through the largest penalty and select the lowest cost cell. Step 5 : Check the availability with requirement corresponding to the lowest cost cell and whichever is minimum, allocate that quantity. Step 6 : Write down the balance after allocation and if the balance quantity is ‘0’. Delete that row or column or both. Step 7 : Recompute the penalty after omitting the deleted numbers for each row and each column and repeat the procedure from step 4 till the requirements are met. Note : 1. If there is a tie in the largest penalty enter through each one of them and mark the lowest cost cell. Compare these lowest cost cells and whichever is minimum select that cell. 2. If there is a tie in the lowest cost cell also, select the cell where maximum quantity is allocated. 3. If there is a tie in the maximum quantity, select the cell where it is maximum. Step 8 : Multiply each allocation with corresponding cost and find out the total cost. Step 9 : Test for optimality using Modi’s method. Note : 1. In the case of maximisation problem after allocating by Vogel’s Approximation method transfer all the allocation to the maximisation matrix for finding out initial total value. 2. Optimality test for maximisation problem is carried out only on minimisation matrix.
