Managerial Accounting

Q1) Solve any five. [2 Marks]

1. What is accounting?

Ans –

1) Accounting is use as the language of business.

2) Accounting involves the process of recording the financial transactions in the books of
accounts which are helpful to its users for analysing and interpreting the financial
soundness of business.
3) According to American Accounting Association (AAA), Accounting is, “The process of
identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of the information.”
4) According to R. N. Anthony, “Accounting system is a means of collecting, summarizing,
analysing, and reporting in monetary terms the information of the business.”

2. List any four names of users of accounting information.

Ans –

Here are four users of accounting information:

1) Investors: People who invest money in a business

2) Creditors: People who provide loans to businesses
3) Government Agencies: The accounting information is required by government agencies
like tax-authorities, Securities and Exchange Board of India (SEBI), Company Law Board
(CLB), etc.
4) Customers: Require accounting information to establish good accounting control

3. What is fixed assets?

Ans –

1) Assets are items of property owned by a person or company, which have some value in
terms of money and are available to meet debts or commitments.
2) Fixed assets are those assets which are acquired for the purpose of carrying out
organisations core business activity, viz. manufacturing of goods or providing services.
3) They are not purchased with the intention of selling them and booking profit in the routine
manner of business.
4) Fixed assets may fall under one of the following categories:
a. Tangible Fixed Assets
b. Intangible Fixed Assets
4. What is overheads?

Ans –

1) This category includes cost of indirect material, indirect labour and indirect expenses.
2) Following are the main categories of overheads:
a. Production or Factory Overhead
b. Office or Administration Overhead
c. Selling Overhead
d. Distribution Overhead

5. Write any four objectives of cost accounting?

Ans –

Cost accounting serves various purposes which are as follows:

1) Ascertainment of Cost: The process of ascertainment of costs involves computation of costs

which has been incurred.
2) Estimation of Cost: While costs are ascertained after it has been incurred, the estimation of
costs is done before their actual incidence.
3) Control of Cost: Cost control is related to controlling and reducing costs for the purpose of
improving efficiency.
4) Reduction of Cost: The ending of cost control function is the stating of cost reduction
function.

6. What is Break-Even point?

Ans –

1) Break-Even Point denotes the quantity of sales where the firm neither earns any profit nor
incurs any loss.
2) Ath this volume level, sales revenue is equal to the total cost.
3) Following equations elucidates the concept of break-even point:
Break-Even Sales = Fixed Cost + Variable Cost
4) Break-Even Point is also known as Balancing Point, Equilibrium Point, Critical Point or
No-Profit No-Loss Point.

7. Write any two advantages of Budgetary control.

Ans –

1) A budget may be defined as a financial tool which is used for planning and for projecting
future values, using past experience.
2) Budgetary control is a system of controlling costs which includes the preparation of
budgets, coordinating the departments and establishing responsibilities, comparing actual
performance with the budgeted and acting upon results to achieve maximum profitability.
3) Various advantages of budgetary control are as follows:
 a. Maximisation of Profit: The budgetary controls help the organisation in achieving
maximum profits by properly planning and coordinating various activities.
b. Coordination: The working of different areas of an organisation is coordinated
through the use of budgetary controls.
c. Specific Aims: Budgetary controls help in setting up specific aims which are
important for the purpose of planning and control.

8. What is the distinction between debtor and creditors.

Ans –

Debtors Creditors
A debtor is an entity that owes a debt to The creditors are the counterparties of
another entity. Debtors.
Such debt generally arises due to receipt of They are the entities which
goods and services on credit in the normal supply/extend/provide goods and services
course of business. on credit in the normal course of business.
When the counterpart of this debt They are also referred to as ‘Accounts
arrangement happens to be a bank, the Payable’
debtor is referred to as a ‘Borrower’ or
‘Accounts Receivable’

9. i) Purpose of accounting is to provide financial information to ________________

a) Shareholders b) Tax Authorities
c) Investors d) All of these

ii) Credit may signify __________________

a) Decrease in assets b) Increase in liability
c) Increase in capital d) All of these

10. Write any two objectives of financial statement.

Ans –

1) Financial Statement is a formal and structured record of the financial activities of a business
entity.
2) The objectivities of financial statements are enumerated as follows:
a. Assessment of Past Performance: Trend revealed through the various financial data
like Sales, Cost of Goods Sold, Operating Expenses, Net Income, Cashflow, etc. of
an organisations past performance may be a good pointer to its future performance.
b. Assessment of Current Position: Through the exercise of financial statement
analysis, the current status of an organization with regard to the types of assets held
by it and the nature of its liabilities, etc. can be ascertained.
c. Prediction of Bankruptcy and Failure: Financial Statement Analysis is a vital
technique, through which the possibilities of an organization going bankrupt in
future or the chances of failure of a business can be predicted.
11. i) Which one of the following is current asset?
a) Goodwill b) Machinery
c) Debtors d) Building

ii) The Statement of Financial Position gives the information about

a) Assets and Liabilities b) Income
c) Expenses d) Credit

12. What is Prime Cost?

Ans –

1) The total expenditure inclusive of money, labour and time incurred on goods and services
is called Cost.
2) A prime cost is the total direct costs of production, including raw materials and labour.

13. i) Fixed cost includes ________.

a) Property taxes b) Rent
c) Insurance premium d) All of the above

ii) The point of profit at which the total cost will be equal to total revenue is called :
a) Break-even point b) Margin of safety
c) The profit lines d) Contribution

14. Define standard costing.

Ans –
1) Standard costs are pre-decided costs, which are incurred in and ideal condition of optimum
operational efficiency and utilisation of resources.
2) The standard cost is defined as a pre-determined cost which is calculated from
managements standards of efficient operation and the relevant necessary expenditure.
3) The standard costing is a sophisticated technique under which the standards are decided in
advance and the actual costs are compared with such standard costs.
4) The preparation and use of standard costs, their comparison with actual costs and the
analysis of variance to their causes and points of incidence.

15. i) _______ budget is a budget which is designed to remain unchanged irrespective of

the volume of output or turnover achieved.
a) Fixed b) Flexible
c) Cash d) Sales
 ii) The main objective of budgetary control is :
a) to define the goal of the firm b) to coordinate different departments
c) to plan to achieve its goals d) All of the above

16. What is journalising?

Ans –

1) In bookkeeping and accounting, Journal is a book for recording transactions as and when
they occur.
2) Recording of this transaction is called Journal Entry.
3) The process of recording the business transaction (Journal Entry) is termed as Journalising.

17. State the rule of nominal account.

Ans –

1) The debiting and crediting of the accounts are done on the basis of certain rules. These rules
are called rules of journalising.
2) Types of accounts:
a. Personal Account
b. Real Account
c. Nominal Account
3) The accounts relating to income, expenses, gains and losses are known as Nominal
Accounts. Wages account, Rent account, Commission account, interest received account,
etc. are examples of Nominal Account.
4) These accounts are also known as Fictious Accounts as they do not represent any tangible
assets.
5) Thumb Rule Governing Nominal Accounts
Debit all Expenses or Losses
Credit all Income or Gains

18. What is meant by tangible & intangible assets?

Ans –

• Tangible Assets:
1) Fixed assets which are physically visible and can be touched or felt.
2) Examples of tangible assets are land, buildings, plant and machinery, furniture, vehicles,
etc.

• Intangible Assets:
1) Fixed assets which do have value in monetary terms, but are not visible and cannot be
touched or felt.
2) Examples of intangible assets are trademarks, copyrights, patents, goodwill of company,
etc.
19. What is meant by break-even analysis?

Ans –

1) Cost – Volume – Profit analysis is also known as Break-Even Analysis.

2) The latter term used in narrow or broad sense.
3) In a broad view, break-even analysis studies the relationship between costs, volume and
profit for different levels of production and sales.
4) In a narrow sense, the term break-even analysis determines the level of operation which
gives no profit and no loss. At this point, the total revenue is equal to total costs.
5) According to Matz, Curry and Frank, “A break-even analysis indicates at what level costs
and revenue are in equilibrium.”

20. Write two advantages of standard costing.

Ans –

1) Measuring Efficiency: Standard costing may be used as a measuring tool for the
management to measure efficiency.
2) Helpful in Taking Important Decisions: Through the system of standard costing vital
feedback is received by the management, which facilitates decision making process.
3) Facilitates Cost Control: The twin objective of any costing system is cost control and cost
reduction. Both the objectives are achieved in the system of standard costing.

21. Write any four advantages of sole proprietorship.

Ans –

1) Sole Ownership: In this form, the business enterprise is solely owned by an individual.
2) No Separate Legal Entity: A sole proprietorship does not hold any separate legal entity from
that of its owner.
3) Unlimited Liability: The proprietor is the only person liable for all its debts.
4) Non-Profit Sharing: A sole proprietor as an individual is entitled to all profits and all losses.
5) No Legal Formalities: No legal formalities are associated with the establishment or
management of the sole proprietorship business.

22. Mention the different types of expenditure.

Ans –

1) Expenditure is the detail of the expenses and cost incurred in operating the business
activities.
2) The expenditure incurred by an organisation can be classified into two categories –
a. Capital Expenditure
b. Revenue Expenditure
3) Capital Expenditure: It is an expenditure, the benefits of which are reaped over an
extended period of time.
 Examples – Cost of fixed assets like land, building.
4) Revenue Expenditure: It is an expenditure incurred on fixed assets in connection with
their ‘maintenance’ rather than enhancing their earning capacity.
Examples – Expenses incurred in connection with day-to-day conduct of business such as
rent, salaries, wages, power and fuel,

23. A new firm commenced business on 1st January 2024 and purchased goods costing
`90,000 during the year. A sum `6,000 was spent on carriage inwards. At the end of the
financial year the cost of goods still unsold was `12,000. Sales during the period Jan -
March 2024 was `1,20,000. What is the gross profit earned by the firm?

Ans –

To calculate the gross profit, we use the formula:

Gross Profit= Sales − Cost of Goods Sold (COGS)

Step 1: Calculate Cost of Goods Sold (COGS)

The formula for COGS is:

COGS = Opening Stock + Purchases + Carriage Inwards − Closing Stock

Here:

• Opening Stock = 0 (since the business is new)

• Purchases = ₹90,000
• Carriage Inwards = ₹6,000

• Closing Stock = ₹12,000

COGS = 0 + 90,000 + 6,000 − 12,000 = ₹84,000

Step 2: Calculate Gross Profit

Gross Profit = Sales − COGS

Here:

• Sales = ₹1,20,000
• COGS = ₹84,000

Gross Profit = 1,20,000 - 84,000 = ₹36,000

Final Answer: The gross profit earned by the firm is ₹36,000.

24. If fixed cost is `2,50,000 and P/V ratio is 60%, then what is BEP in Rupees?

Ans –

To calculate the Break-Even Point (BEP) in Rupees, we use the following formula:

Fixed Cost
BEP (in Rupees) = -------------------

P/V Ratio

Where:

• Fixed Cost = ₹2,50,000

• P/V Ratio = 60% = 0.60 (since the P/V ratio is given as a percentage, it needs to be
converted into decimal form)

Now, substitute the values into the formula:

2,50,000

BEP (in Rupees) = ------------------- = ₹4,16,667

0.60
Break-Even Point (BEP) = ₹4,16,667

25. Fixed budget is also known as _______

i) Static Budget
ii) Standard Budget
iii) Master Budget
iv) Flexible Budget
 Q2) Solve any Two. [5 Marks]

1. Explain any five accounting concepts with suitable example.

Ans –

1) The word 'Concept' may be defined as "a general idea or understanding of thought".
2) "Accounting concepts" are the necessary assumptions, conditions or postulates upon which
the accounting is based.
3) They are developed to facilitate communication of the accounting and financial information
to all the readers of Financial Statements, so that all readers can interpret the statements
with the same meaning and context.
4) Following are the accounting concepts, which have been broadly accepted by accountants:

I. Separate Entity Concept:

1) There is a presumption under 'Separate Entity Concept' that as far as accounting is
concerned the 'owners of a business organisation' and the 'business organisation itself
are two independent and separate entities.
2) The business transactions undertaken by the owner are altogether separate from the
personal transactions undertaken by him.
For example, the capital invested by the owner in a business is recorded as a liability for
the business. Similarly, if any asset (including cash or goods) belonging to the business is
taken by the owner for his personal use, it is not considered as business expenditure, instead
it is treated as 'withdrawal' or 'drawing' by the owner.
II. Going Concern Concept:
1) Going concern is one of the fundamental assumptions in accounting on the basis of
which financial statements are prepared.
2) The assumption is that a business entity will continue to operate in the foreseeable
future without the need or intention on the part of management to liquidate the entity
and it will realise its assets and settle its obligations in the normal course of the business.
3) In simple words, it means that every business entity has continuity of life and it will not
be dissolved in the near future.
For example, the assumption of going concern is the basis of all the financial transactions
of a business entity like entering into long-term contracts with other parties, obtaining loans
from banks/financial institutions, extending loans, investing in long-term securities,
purchasing bonds/debentures, etc.
III. Money Measurement Concept:
1) In accounting, every transaction is recorded in terms of money, i.e. rupees and paise in
India.
2) Receipt of income, payment of expenses, purchase and sale of assets, etc., are monetary
transactions and therefore are recorded in the books of accounts.
3) The assumption under money measurement concept enables to have a common
measure, in terms of money, for all the transactions, assets and liabilities, which
facilitate the preparation of financial statements.

For example, a company, on a particular day, makes some purchases, viz. 10 office chairs,
50 meters of curtain cloth and 20 rims of A-4 paper, all of which have different measuring
units. However, as all the transactions can be measured in terms of money, they can be
easily recorded in the books of accounts.

IV. Accounting Period Concept:

1) An accounting period is the interval of time at the end of which the financial statements
are prepared to ascertain the financial performance of a company. This is known as
accounting period concept.
2) Although the "going concern" concept emphasises the continuing nature of an
organisation, it is necessary to review its performance. The preparation of financial
statements (balance sheet and profit & loss account) at periodic intervals (known as
accounting period) helps in taking timely corrective action and developing appropriate
strategies.
3) The accounting period is generally of twelve months (which may be a calendar year or
a financial year), although it may be for three months or six months as well in case of
new startup.
For example, preparation of financial statements also serves some other purposes like
calculation of profit, tax calculation, submission of reports to regulators and other
Govemment agencies, etc.

V. Cost Concept:
1) As per this concept, cost of an asset is recorded in the books of accounts at the price
paid to acquire it (including overheads like transportation and installation charges, if
any) and not at the market price.
2) Fixed assets, e.g., land, building, plants, machinery, furniture, fixtures, etc. are taken in
the record at the price paid for acquiring them, which is also termed as 'Historical Cost'.
3) However, the cost of assets recorded at the time of purchase may be systematically
reduced through depreciation.
For example, if a piece of land is purchased to set-up a factory for P50,000 in the books of
accounts this would be recorded at 250,000 only. After sometime there may be an increase
in the market value of the land, but in the books of account, the cost would continue to be
shown at 250,000 only. Further, at the end of the financial year the land would be subject
to depreciation and the reduced cost would be taken over as the opening balance for the
next financial year.
VI. Dual Aspect Concept:
1) This concept follows from the Entity Concept. All entities own certain assets.
2) Such assets are acquired through contributions of those who have provided the funds
for the purpose.
3) Funds are made available either through the surplus of the entity or loans. Logically
such providers of funds are claimants to the assets.
4) At any point of time, the assets will be equal to the claims. It may thus be concluded
that each and every transaction, a business entity enters into, has a dual effect.
5) With every increase in the money owed to others, there has to be an equal increase in
assets or loss.
6) This concept supports the accounting equation, i.e.,
Assets = Owner's Funds (Capital and Reserves) + Liabilities
or
Owner's Funds = Asset - Liabilities
For example, a business is started by Mr. 'X' with an investment of 22,00.000. This
transaction has two aspects, viz. 'Capital Account' and 'Asset Account'. While the amount
lying in 'Capital Account' (P2,50,000) is a liability for the business (which it owes to Mr.
'X'), whereas the amount lying in 'Asset Account' (02,50,000) is an asset for the business.

VII. Accrual Concept:

1) Under the cash system of accounting, the incomes and expenditures are recorded only
if there is actual receipt or payment in cash, irrespective of the accounting period to
which they belong.
2) But, under the accrual concept, occurrence of claims and obligations in respect of
incomes or expenditures, assets or liabilities, diminution in values, etc., are recorded
even though actual receipts or payments of money may not have taken place.
3) This concept depicts that incomes and expenses need to be recognised as and when they
are earned and incurred respectively, notwithstanding the fact whether the money is
actually received or paid in this regard.
For example, if a company dealing in medicines gets supply of medicine worth 20,000 on
March 29, 2014 (during the year 2013-14) and the payment is made on April 2, 2014
(during the year 2014-15), under the accrual system, the expenditure though incurred
during 2014-15 needs to be recognised for the year 2013-14 (the year during which the
supply was made).
2. Distinguish between Capital expenditure & Revenue expenditure.

Ans –

Basis of Capital expenditure Revenue expenditure

Difference
Nature Expenditure incurred in It is an expenditure incurred on
connection with the acquisition of assets in connection with their
physical assets such as land, maintenance rather than enhancing
building, investments made for their earning capacity.
undertaking new projects, etc. is
termed as Capital Expenditure.
Life of Assets It results in either acquisition of It does not result in either
new fixed assets or increase in the acquisition of new fixed assets or
life of existing fixed assets. increase in the life of existing fixed
assets.
Cost It facilitates reduction in the cost of
It neither facilitates reduction in the
production and improvement in cost of production nor improvement
earning capacity. in earning capacity.
Type It is non-recurring in nature. It is recurring in nature.
Benefit Period The benefits of CapitalThe benefits of Revenue
Expenditure are reaped over an Expenditure are obtained over a
extended period of time i.e., much short period of time.
beyond the current accounting
period.
Amount Amount involved is generally Amount involved is relatively less.
huge.
Examples Land & Building, Plant & Salary, Wages, Electricity, Rent,
Machinery, Furniture, etc. etc.

3. Explain and illustrate the various elements of cost.

Ans –
 The total expenditure inclusive of money, labour and time incurred on goods and services is
called Cost.

I. Material: Commodities or substances used for manufacturing products are called

materials. Materials cane be either direct or indirect.
a) Direct Material:
1) This material can be directly identified with the product.
2) Direct materials can also be easily measured and thus charged directly to the
product.
3) For example, quantity of wood used for making a table can be identified directly to
the product.
b) Indirect Material:
1) These materials are used for manufacturing a product, but these are not direct
materials as these cannot be directly tracked back to the product.
2) These ancillary materials are known as indirect material.
3) Main examples of indirect material are consumable stores and threads.

II. Labour: Like material, labour can also be direct or indirect.

a) Direct Labour:
1) Direct labour includes employees and workers directly involved in the production
of the goods.
2) This type of labour can be identified with the goods or services.
3) The compensation paid to direct labour is known as direct wages.
4) For example, wages paid to a cook in a restaurant is included in the above category.
b) Indirect Labour:
1) Labour which is ancillary to the production of goods or services is known as indirect
labour.
2) The wages paid to such labour are known as indirect wages.
3) Such costs cannot be traced back or identified with the product.
4) Salaries paid to supervisors come under this category.

III. Expenses: Expenses may also be direct or indirect.

a) Direct Expenses:
1) These are expenses which are incurred in the process of manufacturing of goods or
rendering a service.
2) It does not include direct wages and direct material costs.
3) Main instances of such costs are Research & Development expenses.
4) Following are some of the examples of direct expenses; Hiring expenses for a
machinery or an instrument for a specific product, Costs associated with special
drawings, layouts or designs, Maintenance cost of specific equipment's, Royalties
related with production.
b) Indirect Expenses:
1) The expenses which are not directly identifiable with a particular product or service
are categorized under this head.
 2) Following are the main example of such expenses; Factory or production expenses,
Office and administrative expenses, and Selling and distribution expenses.
IV. Overheads:
1) This category includes cost of indirect material, indirect labour and indirect
expenses.
2) Following are the main categories of overheads:
a. Production or Factory Overhead
b. Office or Administration Overhead
c. Selling Overhead
d. Distribution Overhead

4. Explain the different forms of organization.

Ans –

1) A business organisation is structured and operated in an authorised form of ownership.

2) These enterprises are established with a major concern of earning huge profits.
3) A business can be operated by one or a group of persons either privately by the government
or under other public undertakings in the public sector.
4) The type of business is started and owned by a single person and is known as sole
proprietorship.
5) Whereas a business run by two or more persons can be referred to as cooperatives, joint
stock company or partnership firms.

I. Sole Proprietorship:

1) A business which is owned by an individual and is not registered as a limited liability

company with the state is known as a 'sole proprietorship'.
2) It is the easiest form of enterprise ownership and one can be established easily without
having much knowledge about it.
3) For example, an entrepreneur working as a freelancer, a commission-based salesman,
independent contractor, a craftsman on a contract-based job, etc.

• Features of Sole Proprietorship:

1) Sole Ownership: In this form, the business enterprise is solely owned by an individual. The
capital required for the business is arranged from his personal funds or by borrowing funds
from others.
2) No Separate Legal Entity: A sole proprietorship does not hold any separate legal entity from
that of its owner. In the eyes of law, the owner and the business exist together. But the
business will have no existence, if its owner dies or becomes insolvent. Both are considered
as a single unit.
3) Unlimited Liability: The proprietor is the only person liable for all its debts. If the debts of
the company are more and cannot be fulfilled by the assets then the proprietor can involve
his personal property for clearing all dues.
4) No-Profit Sharing: A sole proprietor as an individual is entitled to all profits and all losses.
There is no one to share the profits or losses with him. He is the only person to bear the
entire losses of the company.
5) No Legal Formalities: No legal formalities are associated with the establishment or
management of the sole proprietorship business. However, only a license is required for
running the business.

II. Partnership Firms:

1) Partnership is a contractual agreement between two or more persons who are willing to
share the profits of a business which is owned by all or a single person acting for all.
2) In general, it a business relationship between different persons having a common ownership
or management of a business enterprise.
3) The minimum number of persons required for a partnership is 2 and the maximum limit
can be of 10 members (for banking industries) and 20 members (for other industries).

• Features of Partnership:
1) Two or More Persons: At minimum two persons, and maximum 10 (in banking industry)
and 20 (in other industries), are required for establishing a partnership firm. An individual
cannot form a partnership with himself.
2) Agreement or Contract: There is an agreement or contract held between persons who are
willing to share the business ownership. Usually, no legal problems are associated with
these contracts or agreements as they are registered under specific terms and conditions.
3) Lawful Business: Partnership is an act of managing a business and earning profit, which is
legally permitted by the government. Whereas, partnership formed for other purposes such
as social or charitable work, or any illegal activity like black marketing, smuggling, etc.
does not come under partnership law.
4) Profit Sharing: Under the partnership firm, all the profits are equally or proportionally
shared between the partners as mentioned in the agreement. Likewise, losses are also shared
in the same proportion among the partners.
5) Mutual Agency: Mutual agency is considered as a fundamental characteristic of partnership
firms. As it is very important to have good faith, mutual trust and confidence between the
partners.
III. Joint Stock Companies:

1) A company legally owned by the shareholders and managed by an elected "Board of

Directors", having limited liability in known as the 'Joint Stock Company'.
2) In today's world, Joint Stock Company is the most suitable form of business ownership.
3) It is considered as the only systematic and standard way of managing a business.
4) The Joint Stock Company is an association of persons in an organisation possessing a
separate legal entity, perpetual succession with a unique name and a common seal.
5) The capital of the company is divided into shares which are transferrable, and it also has
limited liability.

• Features of Joint Stock Companies:

1) Artificial Person with a Separate Legal Entity: A Joint Stock Company is intangible in
nature and has no physical existence. It is an artificial person having an independent legal
entity. It can purchase, sell or possess properties under its own seal. Various properties can
be owned by Joint Stock Company and it can purchase or sell them under their seal. This
company can conduct any other business and can sign an agreement with other businesses.
2) Voluntary Association: It is a voluntary association of individuals, which is established by
the people themselves. It is not compulsory to follow any government rules and regulations
while forming it.
3) Perpetual Character: This company exists permanently, it continuous until it is dissolved or
sold off. It involves shareholders, who may join or leave the company or may change hands,
as and when required.
4) Common Seal: Since the company has no physical existence, it is not liable to sign any
document. For this purpose, the company has a common seal with a unique name on it,
which is used for the purpose of signature. This seal is always kept safe and secure. There
must be two directors present as a witness whenever the seal is used by the company on
any document.
5) Limited Liability: In this business form, the shareholders or owners of the company have
limited liability. This liability is limited up to the amount of capital invested by each
shareholder.

IV. Co-operative Organisation:

1) A co-operative organisation is a legal entity which is owned and controlled by a group of
persons having a common motive.
2) There are several attributes of co-operatives like an elected Board of Directors, an
administrative staff, indefinite life span, limited liability, etc.
3) The owner of the company is liable to pay a fixed amount of fee to the co-operatives. The
company's profit is shared by all the members in proportion to their contributions. This
form of organisation is free to pay any kind of tax as they retain no profits.
4) It is an independent organisation which is owned and managed by its members or customers
who buy the company's goods and services.
5) Investors do not have any kind of role to play in a co-operative organisation.
6) The main purpose of co-operatives is to fulfil the needs of its members and owners. Unlike,
a Joint Stock Company, it is not just about accumulating capital from the investors.
7) This organisation follows a principle of 'one member, one vote', and each member has equal
control over the cooperative.
8) The co-operative organisation stands on five pillars, i.e., equality, mutual trust, supervision,
self-reliance and spontaneity. The main strength of an organisation is its cooperative spirit.

• Features of Co-operative Organisation:

1) Voluntary Association: A co-operative organisation is a voluntary association of members.
It is not at all mandatory to become its member.
2) Legal Entity: A co-operative organisation is an autonomous legal entity with a distinctive
identity. After getting registered, it attains a common seal and a permanent succession.
3) Equal Voting Right: Regardless of the number of shares owned by the members of
cooperative society, each member is eligible to vote only once. This confirms that a rich
member or a member with more shares is not allowed to apply his own terms and conditions
as everyone is treated equally.
4) Service Objective: Co-operatives are service-oriented organisations. They provide non-
profit services primarily to their members. However, they can earn profits by rendering
their services to outsiders other than its members.
5) Economic Objective: Along with service objectives, every co-operative organisation also
has economic objectives. These objectives include delivering marketing services, providing
land resources, distributing consumer goods, etc. For example, for an agricultural-based
cooperative, economic objectives will be circulation of enhanced seeds, providing best
fertilizers, low-priced credit facilities, etc.

5. Write the element wise classification of cost.

Ans –

The total expenditure inclusive of money, labour and time incurred on goods and services is
called Cost.

There are several ways in which costs may be classified. Following is the element wise
classification of cost.

The cost may be classified into Direct Cost and Indirect Cost according to elements, viz.
Materials, Labour and Expenses.

I. Material: Substances or commodities used for producing a product are called Materials.
Materials consumed may be direct or indirect.
a) Direct Material Cost: The materials which can be directly identified with the product
are called Direct Material. These materials can be easily measured and can be directly
charged to the product.
For example, steel used for producing a container.
b) Indirect Material Cost: These materials are used for production but cannot be directly
identified with the product. These expenses are included in overhead category.
 For example, consumable stores and stationary.

II. Labour: Like material, labour can also be divided into direct and indirect category.
a) Direct Labour Cost: Wages and salaries paid to workers and employees directly
involved in the process of manufacturing goods is known as Direct Labour.
For example, wages paid to machine operators.
b) Indirect Labour Cost: Wages and salaries paid to workers ancillary to production
process are included in Indirect Labour. The contribution of such workers cannot be directly
traced to the product.
For example, wages for storekeepers.

III. Expenses: Expenses may also be direct or indirect.

a) Direct Expenses: These expenses are incurred in relation to a specific product. This
category does not include direct material cost and direct wages.
For example, cost of secret formula and special drawing.
b) Indirect Expenses: These expenses cannot be directly and completely allocated to
specific product or cost centre.
For example, office and administrative expenses.

6. Compare and Contrast Capital Receipts and Revenue Receipts.

Ans –

1) A receipt is a written document that provides information of the items or sum of money that
has been acknowledged for the exchange of goods and services.
2) The receipt gives the entitlement of the property which is obtained in exchange to it.
3) There are two types of receipts are as follows:

a) Capital Receipts: The receipts which are non-recurring in nature and provide long term
benefits is known as Capital Receipts.

For example, Mr Shyam as a proprietor introduced 1,00,000 capitals in the business. This
capital amount is known as capital receipts. Similarly, he sells the building for a sum of 50,000
this receipt is also known capital receipts.

b) Revenue Receipts: The receipts which are recurring in nature and provide short term
benefits and used for operating of the business activities (everyday needs) is known as Revenue
Receipts.

For example, receipts like income received from sale of goods or sale of old newspapers or
scrap which have no book value are revenue receipts.
 Basis of Capital Receipts Revenue Receipts
Difference
Effect The effect of capital receipts are The effect of revenue receipts are
long term effect that provides short term effect that have current
long term benefits to the benefits to the business.
business.
Occurrence The nature of the occurrence of The nature of the occurrence of
capital receipts is non-recurring revenue receipts is recurring and
and irregular. regular.
Visibility It is treated as a liability so its It is treated as income so its shown
shown in the Balance Sheet on in profit and loss account on the
the liability side credit side.
Generation of Capital receipts helps in Revenue receipt does not help in
Receipt generation of revenue receipts by generation of capital receipts.
owner investment.
Increase or The capital receipts either raises The revenue receipts does not affect
decrease of the the value of liabilities or reduces the value of liabilities or asset.
value of asset or the value of an asset.
liabilities
Example Usually the capital receipts Usually the revenue receipts
incurred the expenses of revenue incurred the expenses of capital
nature. nature.
For example, additional capital For example, purchase of building
invested by owner that incurred for a company is capital
the revenue expenses that expenditure but rent received on
payment of interest on capital of building is a revenue receipt.
business.

7. Explain objectives of Preparing Financial Statements.

Ans –

1) Financial Statement is a formal and structured record of the financial activities of a business
entity.
2) The financial statements provide a summary of the accounts of a business enterprise, the
balance sheet reflecting the assets, liabilities and capital as on a certain date and the income
statement showing the results of operations during a certain period.
3) The financial statements are a form of reports which helps management in decision making
process.
4) The objectivities of financial statements are enumerated as follows:
a) Assessment of Past Performance: Trend revealed through the various financial data
like Sales, Cost of Goods Sold, Operating Expenses, Net Income, Cashflow, etc. of an
organisations past performance may be a good pointer to its future performance.
b) Assessment of Current Position: Through the exercise of financial statement analysis,
the current status of an organization with regard to the types of assets held by it and the
nature of its liabilities, etc. can be ascertained.
c) Prediction of Profitability and Growth Prospects: The assessment and forecasting
of the Earning Prospects of a business organization can be made through the exercise
of Financial Statement Analysis. It helps investors in comparing and choosing an
investment out of the many investment opportunities.
d) Prediction of Bankruptcy and Failure: Financial Statement Analysis is a vital
technique, through which the possibilities of an organization going bankrupt in future
or the chances of failure of a business can be predicted.
e) Assessment of the Operational Efficiency: Financial Statement Analysis facilitates
the assessment of the Operational Efficiency of an organizations management. It can
be done through setting standards of performance on the basis of certain parameters and
comparing them with the actual performance of the organization.