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1Ans:- Introduction to financial managementFinancial Management can be defined as:
The management of the finances of a business / organisation in order to achieve financialobjectivesTaking a commercial business as the most common organisational structure, the key
objectives of financial management would be to:
Create wealth for the business
Generate cash, and
Provide an adequate return on investment bearing in mind the risks that the business is
taking and the resources invested
There are three key elements to the process of financial management:
(1) Financial PlanningManagement need to ensure that enough funding is available at the right time to meet the
needs of the business. In the short term, funding may be needed to invest in equipment
and stocks, pay employees and fund sales made on credit.
In the medium and long term, funding may be required for significant additions to the
productive capacity of the business or to make acquisitions.
(2) Financial ControlFinancial control is a critically important activity to help the business ensure that the
business is meeting its objectives. Financial control addresses questions such as:
Are assets being used efficiently?
Are the businesses assets secure?
Do management act in the best interest of shareholders and in accordance with business
rules?
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(3) Financial Decision-makingThe key aspects of financial decision-making relate to investment, financing and dividends:
Investments must be financed in some way however there are always financing
alternatives that can be considered. For example it is possible to raise finance from selling
new shares, borrowing from banks or taking credit from suppliers
A key financing decision is whether profits earned by the business should be retained
rather than distributed to shareholders via dividends. If dividends are too high, the
business may be starved of funding to reinvest in growing revenues and profits further.
Accounting concepts and conventions
In drawing up accounting statements, whether they are external "financial accounts" or
internally-focused "management accounts", a clear objective has to be that the accounts
fairly reflect the true "substance" of the business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a true and fair view .The true and fair view is applied in ensuring and assessing whether accounts do indeed
portray accurately the business' activities.
To support the application of the "true and fair view", accounting has adopted certain
concepts and conventions which help to ensure that accounting information is presented
accurately and consistently.
Accounting ConventionsThe most commonly encountered convention is the historical cost convention . Thisrequires transactions to be recorded at the price ruling at the time, and for assets to be
valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in
the economy.
The other conventions you will encounter in a set of accounts can be summarised as
follows:
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Monetarymeasurement
Accountants do not account for items unless they can be quantified in
monetary terms. Items that are not accounted for (unless someone is
prepared to pay something for them) include things like workforce
skill, morale, market leadership, brand recognition, quality of
management etc.
Separate Entity This convention seeks to ensure that private transactions and mattersrelating to the owners of a business are segregated from transactions
that relate to the business.
Realisation With this convention, accounts recognise transactions (and any profitsarising from them) at the point of sale or transfer of legal ownership -
rather than just when cash actually changes hands. For example, a
company that makes a sale to a customer can recognise that sale
when the transaction is legal - at the point of contract. The actualpayment due from the customer may not arise until several weeks (or
months) later - if the customer has been granted some credit terms.
Materiality An important convention. As we can see from the application ofaccounting standards and accounting policies, the preparation of
accounts involves a high degree of judgement. Where decisions are
required about the appropriateness of a particular accounting
judgement, the "materiality" convention suggests that this should only
be an issue if the judgement is "significant" or "material" to a user of
the accounts. The concept of "materiality" is an important issue for
auditors of financial accounts.
Accounting ConceptsFour important accounting concepts underpin the preparation of any set of accounts:
GoingConcern
Accountants assume, unless there is evidence to the contrary, that a
company is not going broke. This has important implications for the
valuation of assets and liabilities.
Consistency Transactions and valuation methods are treated the same way fromyear to year, or period to period. Users of accounts can, therefore,
make more meaningful comparisons of financial performance from
year to year. Where accounting policies are changed, companies are
required to disclose this fact and explain the impact of any change.
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Prudence Profits are not recognised until a sale has been completed. In addition,a cautious view is taken for future problems and costs of the business
(the are "provided for" in the accounts" as soon as their is a reasonable
chance that such costs will be incurred in the future.
Matching (orAccruals )
Income should be properly "matched" with the expenses of a given
accounting period.
Key Characteristics of Accounting InformationThere is general agreement that, before it can be regarded as useful in satisfying the needs
of various user groups, accounting information should satisfy the following criteria:
Criteria What it means for the preparation of accounting informationUnderstandability This implies the expression, with clarity, of accounting information
in such a way that it will be understandable to users - who are
generally assumed to have a reasonable knowledge of business and
economic activities
Relevance This implies that, to be useful, accounting information must assist auser to form, confirm or maybe revise a view - usually in the context
of making a decision (e.g. should I invest, should I lend money to
this business? Should I work for this business?)
Consistency This implies consistent treatment of similar items and application ofaccounting policies
Comparability This implies the ability for users to be able to compare similarcompanies in the same industry group and to make comparisons of
performance over time. Much of the work that goes into setting
accounting standards is based around the need for comparability.
Reliability This implies that the accounting information that is presented istruthful, accurate, complete (nothing significant missed out) and
capable of being verified (e.g. by a potential investor).
Objectivity This implies that accounting information is prepared and reported ina "neutral" way. In other words, it is not biased towards a particular
user group or vested interest
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2Ans:- We can divideaccounting errors with followingways:
1. Errors of Principle
In accounting, if accountant records any transactionagainst the rules of double entry system, then this
mistake is called error of principle. For example,accountant takes all capital expenditures as revenueexpenditures and passes the entry of machinery
purchased in purchase account.
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2. Clerical Errors
We can separate clerical mistakes with following ways:
a) Errors of Omission
If accountant forgets to pass the journal entry of any transaction or ifhe records only one part of transaction, then these mistakes are called
errors of omission. Accountant can also forget to post any journalentry in ledger accounts.
b) Errors of Commission
If accountant passes the wrong entry or posts wrong side of ledgeraccounts or writes wrong amount or calculates wrong total of any
account, then these types of mistakes are called errors of commission.Some of errors of commission can easy find out by making trial
balance but some errors of commission can not find out through trialbalance.
c) Compensating Errors
Sometime we compensate one error with any other errors. For
example we write Rs. 500 less in the credit side of sales account butsame time we write less Rs. 500 in the debit side of purchase account.This is the error which can not be revealed through trial balance.
3Ans :- Thefinancial statementsof anorganizationmade up at the
end of an accounting period,usually thefiscal year.For a manufacturer, the finalaccountsconsist of (1)manufacturing
account,(2)trading account, (3)profit and loss account,and
(4)profitandlossappropriation account.Acommercialcompany'sfinal accounts will include all of the above
except themanufacturingaccount. Together, these accounts show
thegross profit,net income,anddistributionof net incomefiguresofthe company.
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PERFORMA OF FINAL ACCOUNT
TRADING ACCOUNT OF M/S.........for the year ending on.............
PARTICULARS AMOUNTRs. P.
PARTICULARS AMOUNTRs. P.
To Opening Stock
To PurchasesLess : Purchases
Returnsor Returns
Outward
(or Returns Cr.Bal)To Expensesincurred in bringing
thegoods to their
present conditionand location
Wages, or
Wages and
Salaries orProductive Wages
or
ManufacturingWages
To Carriage, orCarriage Inward,
or
Carriage on
Purchases or
Freight InwardTo Octroi
To Dock Charges(Inward)
To Customs Duty onimported goods
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
..................
By Sales
Goods SoldLess : Sales
Returns(or Returns
Inward)
(or Returns Dr.bal)By Closing StockBy Gross
LossTransferred toProfit and Loss
A/c
..................
..................
..................
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To Motive Power,
Coal, Gas,Water and Oil,
Grease, etc.
Fuel, Heating andLighting
To Royalties basedon ProductionTo Gross
Profittransferred to
Profit and LossAccount
.................. ..................
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PROFIT AND LOSS ACCOUNTfor the year ending on.............
PARTICULARS AMOUNTRs. P.
PARTICULARS AMOUNTRs. P.
To Gross Losstransferred
(from Trading
Account)To Salaries
To Rent, Rates and
TaxesTo Printing & StationeryTo Postage & Telegrams
To Legal Charges
To Telephone Exp.To Insurance PremiumTo Entertainment Exp.To Repairs an Renewals
To Interest on Loan
To Interest on CapitalTo Sundry Trade
Expenses
To Loss on Sale of
AssetsTo ConveyanceTo CharityTo Bank Charges
To Office Expenses
To Establishment Exp.To General Expenses
To Loss in Exchange
To Licence FeeTo Brokerage
To Electricity Exp.To Loss by Fire, TheftTo Commission
To Advertisement
To Cartage outwardTo Export DutyTo Discount
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By Gross Profittransferred
from Trading
AccountBy Rent from Tenants
By Discount (Cr.)
By CommissionBy Interest (Cr.)By Bad Debts
Recovered
By Apprentice PremiumBy Income fromInvestmentsBy Dividends on Shares
By Difference in
exchange (Cr.)By Miscellaneous
Income
By Profit on Sale of
AssetsBy Net Losstransferred to
Capital Account
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xxxx
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xxxx
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To Packing Expenses
To Traveling Exp.To Bad DebtsTo Audit Fees
To DepreciationTo Net Profit transferred
to Capital Account
xxxx
xxxx xxxx
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BALANCE SHEET OF..........as at..............
LIABILITIES AMOUNTRS. P.
ASSETS AMOUNTRs. P.
CapitalAdd: NetProfit
..........Add: Intt. On
Capital ..........
Less: NetLoss..........
Less: Drawings
..........Less: Int. onDrawings ...........Bank Overdraft
Loans
Sundry CreditorsBills Payable
Tax Payable
..........
..........
..........
..........
..........
..........
GoodwillLand and BuildingsPlant and Machinery
Motor VanComputer
Books
FurnitureClosing StockDebtors
Investment
Bills ReceivableCash at BankCash in Hand
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
..........
.......... ..........