Methods to Find Sales and Sundry Debtors Solutions

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					Question1 (b) Write Short notes on following
            I)     Conservatism Principle
            II)    Trail Balance

I)   Conservatism Principle – According to this principle, all anticipated losses
     should be recorded in the books of accounts, but all anticipated or
     unrealized gains should be ignored. On other words, conservatism is the
     policy of playing safe. Provision is made for all known liabilities and losses
     even though the amount cannot be determined with certainty, like- wise,
     when there are different alternatives for recording a transaction, the one
     having least favorable immediate effect on profits as capital should be
     adopted. Following are the principle of conservatism:-

      a) Closing stock is valued at cost price as market price whichever is less.
      b) Provision for a doubtful debt is created in anticipation of actual bad –
      c) Jointly life insurance policy is shown only at sounder value as against
         the amount paid.
      d) Provision for a pending law suit against the firm, which may either be
         decided in its favor.

II)   Trail Balance – Trail balance is the list of debit and credit balances, taken
      out from ledger. It also includes the balances of cash and bank taken from
      cash book.
       According William Pickles,” The statement prepared with the help of
      ledger balance at the end of financial year (or it any other date) to find out
      whether debit total agrees with credit total is called Trail Balance”
      Needs for preparing Trail Balance
      a) To ascertain the arithmetical accuracy of the ledger accounts – The
         trail balance provides a useful check upon the ledger postings. If a trail
         balance tallies, it is proved that the posting to the ledger account is
      b) To help in the detection or location of errors – If a trail balance does
         not tally it indicates that some errors have occurred and the accountant
         will them proceed to locate such errors.
      c) For the preparation of Final accounts – As the trail balance contains
         the list of all the ledger accounts, it provides a basis for further
         processing of accounting data, i.e., preparation of final accounts
         namely Trading and Profit & Loss Accounts and a Balance Sheet.
Question 2 – From the following Trail Balance of Ramesh Chandra at 31 st
December, 2002 prepare Trading Account, Profit & Loss Account and
Balance Sheet:

Dr. Balances            RS.          Cr. Balances              Rs. v
Opening Stock           15,500       Capital                   60,000
Land & Buildings        35,000       Loan from Mr Hari at 9    30,000
                                     % P.A.
Machinery               50,000       Sundry Creditors          11,000
Furniture and Fixture   5,000        Purchase Return           2,100
Purchase                1,06,000     Miscellaneous Receipts    1,200
Salaries                11,000       Sales                     2,07,300
General Expanses        2,500        Provision for Bad debts   600
Rent                    3,000
Postage & Telegram      1,200
Stationary              1,300
Wages                   26,000
Freight & Purchase      2,800
Carriage on Sales       4,000
Repairs                 4,500
Sundry Debtors          30,000
Bad debts               800
Cash in Hand            8,500
Sales Return            5,100
                        3,12,200                               3,12,200

The following further information was given:
(a) Wages for December 2002 amounting to Rs. 2,100 have not yet been paid.
(b) Included in General Expenses is Insurance Premium Rs. 600 paid for the year ending
    31st March 2003.
(c) A provision for Doubtful Debts at 5 percent on Debtors is necessary.
(d) Depreciation is to be charged as follows:
    Land and Building – 2 percent
    Machinery          - 10 percent
    Furniture and fixture – 15 percent
(e) The loan from Mr. Hari was taken on 1st july, 2002. Interest has not been paid yet.
(f) The value of Closing Stock was Rs. 14,900.

Trading and Profit & loss A/c of Ramesh Chandra on 31 December 2002

Particulars                       Amt       Particulars                    Amt.
To opening stock                  15500     By Sales           207300
To net purchase     106000                  Less Return          5100      202200
Less Return           2100        1003900
To wages             26000                  By Closing Stock               14900
Add o/s wages         2100        28100
To freight                        2800
To Gross profit (Transferred
to P & L A/c)                     66800
                                  217100                                   217100

To salaries                                 By Gross profit
To General Expenses 2500
Less prepaid insurance 150                  By miscellaneous Receipts
To Rent                                     By Provisional     for   Bad
                                  3000                                     600
To postage & Telegrams                      debts
To Stationary
To Carriage on Sales
To Repairs                        4500
To Depreciation
Land & Building        700
Machinery             5000
Furniture              750
To Bad debts               800
Add provision
For Doubtful debt          1500
To interest on loan
To net profit Tr. to B/S          31150
                                  68600                                    68600
Balance sheet of M/S Ramesh Chander on 31st December 2002

Liabilities                    Amt      Assets                      Amt.
Capital                60000            Land & Building     35000
Add Net Profit         31150   91150    Less Depreciation    700    34300

Loan                   30000            Machinery           50000
Add interest on loss    1350   31350    Less Depreciation    5000
Sundry Creditors               11000    Furniture           5000
                                        Less Depreciation    750
Outstanding wages              2100                                 4250
                                        Sundry Debtors      30000
                                        Less Provision on    1500
                                        Doubtful debt               28500

                                        Cash in hand                8500

                                        Closing Stock               14900

                                        Prepaid Insurance           150

                               135600                               135600
                                   Unit – II
Question 3 – What is ‘Fund Flow Statement’? Explain the different sources
and applications of fund with suitable illustration.

The balance sheet of a firm discloses the position of assets, liabilities and capital
at the end of particular year. But it doesn‟t disclose the causes of changes in
these items between the end of previous year and the end of current year.
Therefore, an additional statement called „funds flow statement‟ is prepared to
show the changes in assets, liabilities and capital between the dates of two
balance sheets. Funds flow statement is known by various other names also,
such as “ Statement of sources and Application of Funds” and “where got and
where gone statement”.
A “statement of changes in financial position‟ summarizes for the period covered
by it, the changes in the financial position including the sources from which funds
were obtained by enterprise and the specific uses to which such funds are

Sources of funds

1. Funds (profits) from operations – Profits resulting from business operations
   are the most important sources of funds. Various non – funds items are
   added back to the figure of net profit as shown by the profit or loss account,
   such as Depreciation, goodwill written off, Preliminary Expenses written off,
   discount written off, transfer to reserve, loss on sale of fixed assets etc.
   Similarly, various non-trading income are deducted from profits such as,
   dividend received and gains on sales of fixed assets.

2. Issue of shares – When shares are issued for cash they are source of funds
   because the net amount received from the issue of shares increases the
   working capital. If the shares are issued at a premium, the premium is also a
   source of funds. But when shares are issued for some fixed asset, they are
   not source of funds.
                            Balance Sheet

Liabilities         92    93              Assets               92     93
Share capital    500000 600000

Issue of share Capital Rs. 100000 will be shown as sources.
3. Issue of Debenture – When debentures are issued for cash, they are result in
   increase of working capital.

                          Balance Sheet
Liabilities         92    93           Assets                 92     93
Debenture       100000 120000
Issue of debentures Rs 20000 will be shown in sources.

4. Raising long term loans:- long term loans such as public deposits, loans taken
   from banks and financial institutions or loans taken on the mortage of assets,
   all result in increase of working capital and hence they are shown as source
   of funds.

                          Balance Sheet
Liabilities         92    93            Assets                92     93
Loan @ 12% 100000 500000
Rs 50000 will show in sources as issue of loan.

5. Sale of Fixed Assets – When fixed assets are sold for cash, there is
   increased in working capital and it becomes sources of funds.

                           Balance Sheet
Liabilities         92     93         Assets             92    93
                                      Plant & Machinery 100000 800000

Application or uses of funds
 The transactions that decrease the working capital are application or uses of
Following are the main uses of funds

1) Loss from operations – Just as profit from operations is treated as a source of
   funds, in the same way, loss from operations should be treated as an
   application if funds. Funds lost in operations result in an outflow of funds from
   business as a result of which either there is decrease in current assets or
   increase in current liabilities.
2) Redemption (or repayment) of share capital -: Pay back of Equity shares and
   redemption of preference shares result in the decrease of cash or working
   capital. Hence it is an application of funds. The premium paid on redemption
   is also an application of funds.

         Balance Sheet
Liabilities         92 93                Assets               92     93
Share capital 200000 150000
Redemption of share capital Rs 50000 will be shown on application side.
3) Redemption of debentures – Just as redemption of preference shares is an
   application of funds, similarly, the redemption of debentures is also an
   application of funds. The premium paid on redemption is also an application
   of funds. But when debentures are converted into shares, there is no effect on
   funds because it affects neither a current asset nor a liability.

                            Balance Sheet

Liabilities         92    93           Assets              92     93
Debentures       200000 180000
Rs. 20000 will be shown as redemption of debentures in application side.

4) Repayment of long Term loans – When long term loans are paid off, it results
   in decrease, of cash or current assets. Hence it is an application of funds.

                            Balance Sheet

Liabilities         92    93             Assets             92     93
Loans            200000 170000
Rs. 300000 will be shown in application side as repayment of loss.

5) Purchase of fixed Assets – When fixed assets such as land, building,
   machinery goodwill, long-term investments etc are purchase for cash, and
   they result in decrease of current assets. Hence, there is an application of

                          Balance Sheet
Liabilities         92    93           Assets             92     93
                                     Plant & Machinery 200000 275000
Rs. 75000 will be shown as purchase of plant and Machinery on application.

6) Non Trading Payment – If the provision for tax and proposed dividends are
   treated as on current liabilities, their payment will be an application of funds.
   But if only a provision has been made for tax or dividend, it will not be an
   application of funds.

                         Balance Sheet
Liabilities                92    93             Assets              92       93
Proposed dividend     10000 20000
Rs. 10000 will be shown in application side as payment of dividend.
Question 4 – following are the ratios relating to trading activities of
National Trader ltd.

Debtor’s velocity           3month
Stock velocity              8month
Creditor’s velocity         2month
Gross profit Ratio          25 percent

Gross profit for the year ended 31st December, 2002 amounts to RS..
4,00,000. Closing of the year is Rs. 10000 above the opening stock, bills
receivable amount to Rs. 25000 and bills payable to Rs. 10000. Find out
a) Sales
b) Sundry Debtors
c) Closing Stock
d) Sundry Creditors

Debtors velocity            3month
Stock velocity              8month
Creditors velocity          2month
Gross profit Ratio          25 percent

Gross profit Ratio = Gross profit * 100
                     Net sales

25 = 400000 * 100
     net sales

Net Sale = 400000 * 100

Net Sales = Rs 1600000

Cost of good sold = Sales – Gross profit
                  = 1600000 – 400000
Cost of Good Sold = 1200000.

Stock velocity =         Avg.Stock        * 12
                      Cost of good sold

8     =            Avg.Stock          * 12
Average Stock = Rs 800000.
Average Stock       = Opening Stock + Closing Stock
Let opening stock be x
Closing stock = x+10000
Average stock = x+x+10000
800000      = 2x + 10000
1600000 = 2x + 100000
   2x     = 1590000
    x     = 795000
Opening Stock = Rs. 795000
Closing stock = 795000+10000
Closing Stock = 805000

Debtors Velocity     = 3 Month
                     = Debtors + Bills receivable * 12
                          Credit Sales
Let Debtors be x
             3       = x + 25000 *12
       4800000       = 12x + 300000
       4500000       = 12x
             x       = 375000
       Debtors       = 375000

Creditors Velocity = 2 month
                   = Creditors + Bills payable   * 12
                         Credit purchase

Cost of Goods Sold = Opening Stock + Purchase – Closing Stock
      1200000      = 795000 + Purchase - 805000
      1200000      = Purchase – 100000
      Purchase     = 1210000

Creditors Velocity   =     Creditor +B/P    * 12
                           Credit purchase
              2      =     Creditor + 10000 *12
let creditors be x
               2     =    x + 10000 *12
       2420000       =    (x + 10000) * 12
       201667        =    x + 10000
       x    =        191667
Creditors   =        191667.
Unit -III
Question – 5 What do you understand by management accounting? Explain
the scope and importance of management accounting?


Management accounting has been defined by the Anglo – American council on
productivity as “the presentation of accounting information in such a way as to
assist the management in the creation of policy and operation of day – to - day
undertaking. It is therefore, the provision, analysis, reporting and discussion of
accounting information as a guide to management in the day to day running and
future planning of the business, as distinguished from the recording part of the
accounting function for historical and statutory purposes. The accountant does
not furnish only routine figures to the management but renders a well – designed
service and advice and management can work on the principle of reporting by
expectation whereby only items calling for special attention are brought to the
notice of senior management and not a multitude routine.

Scope of Management Accounting

The following are the different fields, which are covered under management

1. Financial Accounting provides the basic information for analysis for
   management use. The historical data, records and accounting details help
   management to plan for future. Management, accounting is futuristic but
   future trends and tendencies are always based on the past; hence the need
   for financial accounting first.
2. Management accounting techniques are primarily cost accounting techniques.
   The techniques of marginal costing, budgetary control and standard costing
   which are techniques of cost control are important tools of control in the
   hands of management.
3. For planning business affairs, forecasting and budgeting both are very
   significant. Forecasts provide the basis for budgets. Predetermined targets
   help people in business to perform tasks accordingly and if there are
   deviations, corrective steps can be taken by management.
4. Auditing, of course, internal, audit has become so important these days that
   management relies heavily on it for fixing responsibilities and taking action
   against individuals. The system is used as a basis for performance appraisal.
5. Reporting is another significant aspect of management accounting. Prompt
   and timely reports are prepared at lower managerial levels and submitted to
   middle level management and by middle – level management to top level
6. Financial analysis is a part of management accounting. Through analysis of
   financial statements, interpretations can be made about the profitability,
   solvency and liquidity positions of an enterprise.
7. Management accounting lays out its hands on different control procedures
   and methods. As a matter of fact, the basic objectives is to use various
   resources available in the most economical, effectiveness, and efficient
   manner and this can be fulfilled when different techniques of control are
   adopted and implemented successfully.
8. Tax has become an important part of business life. How can such a crucial
   burden on the funds of the enterprise be left ignored by management

Importance of management Accounting

Management accounting is the blending of all process connected with financial
and cost accounting and is also concerned with the establishment and operation
of the internal controls. The shaping timing and circulation of resulting information
consitute so to speak, the premise on which management functions is carried
out. But for the informational materials supplied by the management accountant,
planning, control and operating.actiuies would have been lacking objectively and
The importance of management accounting has increased very rapidly in recent
times due to the improvement in analytical and problem solving techniques and
the availability of more efficient data processing equipment. With these help of
these techniques and apparatus. The management accountant is able to process
data and satisfies the management informational needs for assessing the causes
and effects of cost and revenues changes, the cost implication, whether it would
be profitable to process a by – product beyond the split off or to sell it without
further processing whether output should be expanded beyond the existing live
and similar other matters.

Management accounting involves a process of selective and discriminating
reporting data. It emphasizes and highlights the revenant facts, out of the mass
of delta – facts, which would be useful in the solutions of problems at hand. Thus
it aids and facilitate prompt, decision making by the management.
Question 6
(a) - Compare LIFO with FIFO as methods of inventory valuation.
(b) – Discuss the brief different methods of cost accountings.

Answer (a)

  1. LIFO method is based on the assumption that last item of material
     purchased is the first to be issued. While FIFO is based on the material first
     received are the first to issue.
  2. In LIFO price of the last consignment is used for pricing material issues
     until it is exhausted. In FIFO units issued are priced at the oldest cost price
     listed in stock ledger sheets.
  3. LIFO helps reducing the burden of income tax during period of rising price.
     FIFO is not suitable in times of rising or falling prices.

Answer (b)
Costing has been defined as “the technique and process of ascertaining cost”
Job costing where production is not highly respective and in addition consist of
distinct to be lots so that material and labor costs can be identified by order
number, the system of jobs costing is used. This method of costing is very
common in commercial industries and drop for going shops and in plants making
specialized industrial equipment‟s. In all these cases on accounts are opened for
each job and all approved expenditure is charged them to.

CONTRACT COSTING - Contract costing does not in principal differs from job
costing. A contract is a big job while a job in a small contract. The term is usually
applied where at different sites large scale contracts are carried contractors, etc.
this system of costing is used.

COST PLUS COSTING- In contract where besides „cost ‟ an agreed sum or
percentage to covers overheads and profit is paid to contractor, the system is
returned as cost plus costing.

BATCH COSTING- Where order or jobs are arranged in different batches after
taking into account the commercial of producing articles, batch costing in
employed. this in this method the cost of group of products is ascertained. The
unit of cost is a batch of groups of identical products instead of a signal order of
PROCESS COSTING-If a product passes through different stages each distinct
and well defined, its is desired to know the cost of production at each stage. In
order to ascertained the same process account is opened for each process.

OPERATION COSTING - Operation costing is a further refinement of process
operation costing. The system is employed in industries where mass or reptitine
production is carried out or where article or components have to be should semi
finished stage, or for convenience of issue for elder operations. The procedure of
costing except that cost unit is as operation instead of a process.

Unit costing (out put costing or single costing)
In this method cost per unit of output or production as curtained and the amount
of each element where constituting such cost is determined where the product
can be expressed in identical quantitative unit and where manufacture is
continuos, this type of costing is applied. Cost statement or cost sheet are
prepared under which the nations items of express are classified and the total
expenditure is divided by total quantity produced in order to arrive at per unit cost
of production.

OPERATING COSTING-This system is employed where expenses are incurred
for previous of service such as those rendered by bus companies, electricity
companies of railways companies. The total expenses regarding operation are
denied by the unit as may be appropriate(eg, total number of passenger-Kms in
case of bus company,) and cost per unit of service is calculated.

DEPARTMENTAL COSTING -Ascertained of the cost of output of each
department separately is the objective of departmental costing. Where a factor is
divided into a number of departments, this method is adopted.

MULTIPLE COSTING (COMPOSITE COSTING)- Under this system the cost of
different sections of production are combined after finding out the cost of each
and every part manufactured. The system of ascertaining cost in this way is
applicable plots e.g motor cars, engineers. Machine tools, type writer, radio,
cycle, etc.
                             Unit -IV
Question 7 What do you mean by marginal costing? Discuss in brief its
application decision making.

Ans 7. Marginal costing is a system of ascertaining cost and not a method of
costing like single or out put costing contract costing or forces costing. It is a
technique of determining cost and helping the management to knew the effect on
profits of changes in the institute of cost and works accountant London as the
amount at any given cost are changed if the amount at any given volume of
output by which aggregate cost are changed if the volume of output is increased
of decreased by one unit. Marginal costing necessitates the classification of costs
into fixed and variable. Marginal costing is basically conserved write the
ascertainment of product or variable cost of the product i.e. marginal costing is
also known as direct costing variable costing.


1. fixation of selling price

Marginal cost of a product represents the minimum price for that product and any
sale below the marginal cost would entail a cash loss. The price not only
connivers the marginal cost but also makes a reasonable contribution towards
the common find to cover fixed overheads. The fixation of such a price for a
product would be easier profitability of the concern is known.

 The industries has to cnt price of its products from time to time on account
completing, govt. regulation and other completing seasons. The contribution per
reduced while the Industries is interested in maintaining level of its profits.


Sometimes price have to be fixed below the total cost of the product. This
becomes necessary to meet the situation arising during trade depression. It will
be enough in such period if the marginal cost is recorded. The selling price may
be fixed at a level a bone this cost through it may not be enough to come the
total cost. This is becomes in such period any managing contribution towards
recovery of fixed cost is good contribution at all . a price less than the total cost
but abone marginal cost may be acceptable when a specific order has been
received and it shall not different the home market.
Selling at marginal cost may be recommended below the extra ordinary situation
i)     When it is designed to eliminate weak competition;
ii)    When the production is to be kept continued because otherwise there is a
       danger of heavy cases on account of shut down;
iii)   When goods are likely to be furnished by the passage of time.
iv)    When a new product is to be introduced in the market or an existing one is
       to be made more popular.
v)     When one product can be sold with profit in combination with some often

CPV analysis helps the manager ement in making decisions introducing
alternative choices. We are explaining below how managerial decisions are taken
through CVP analysis.

 Pursing that fixed cost will remain inflected, decision regarding sales production
mix is taken on the basis of the contribution per unit or each product. The product
which given the highest contribution should be given the highest priority and the
product shose contribution is the least should be given the least priority. A
product giving Negative contribution should be discontinued to continue its
production are other reasons to continue its production


Decision regarding selling foods in a new market (whether Indian or foreign)
should be taken after consideration the following follows:
i)    Whether the firm has surplus capacity to meet the new demands:
ii)   What price is being offered by the new market? In any case it should be
      product plus any additional expenditure to be incurred to meet the specific
      requirements of the new market.
iii)  Whether the sale of goods in the new market will effect the present market
      for the goods? It particularly trade incase of sale of goods in a foreign
      market at a price lower than the domestic market price.


The following factors should be consideration before trading a division abort the
discontinuing of a product line:

i)     The contribution of a product given by the product
ii)    The capacity utilisation whether the firm is working to full capacity or below
       normal capacity.
iii)   the availability of product to replace discount which the firm wants to
       discontinue and which is already accounting for a significant proportion of
       total capacity.
iv)    The long term prospects in the market for the product.
v)     The effect on sale of other products. In the same cases the discontinue of
       product may result in heavy decline in sale of other product of the firm.

Whether a particular part of the finished product is to be manufactured within the
industries or it has to be brought form outside will depends on the consideration
of marginal costs. The marginal cost of manufacturing is to be companed with the
purchased price of the relevant material and if the marginal cost is more than the
purchase price a decision as to buying it from the market can be taken.

Sometimes a business is knowned with the problem of continuing or suspending
the business operation. Such suspicion of business operations may be of a
temporary or a permanent nature. In the case it may be turned as shut down
while in a latter case operation.shut down may be necessary due to some
temporary difficulties depression in the market; inadequate inequality of raw
material power etc. while deciding whether to shut down between the cost e.g lay
off or retrenchment compensation to worker loss of good will purchasing and
storing cost plant etc. and benefit e.g sawing of fixed costs according to
operating is aduisable to shut down or vice versa.
Q6a) lifo method is based on the assumption that last items of material
purchased is the first to be issued.
2) in lifo price of the last consignment is used for pricing Merrill issues until it is
in LIFO unit issued are priced at the oldest cost price listed in stock ledger
4. lifo helps on reducing the burden of income tax during period of rising
3.fifo is not suitable In time of rising or falling price.
5. in lifo stock in hand is valued at price which might have become out date
     when compared with current inventory price.
In lifo stock considered of recent purchased of materiel hence its value is based
on percent price condition.
Q8. Preapre a Flexible Budget for production at 80 percent and 100 percent
activity on the basis of the following infrmation;
Production at 50% capacity 5,000 units
Raw Material                      Rs. 80 per unit
Direct Labour              Rs. 80 per unit
Expenses                   Rs. 15 per unit
Factory expenses Rs. 50000 (50% fixed) 25000
25000 administration expenses Rs. 60000(60% variable)


                    Flexible Budget
Particulars         50%               80%               100%
Raw material        400000            640000            800000
Direct labour       250000            400000            500000
Expenses            75000             120000            150000
Factory exp         25000             40000             50000
Variable    (admi+ 36000              57600             72000
gen) exp
Total variable cost 786000            1257600           1572000
Fixed cost
Factory Exp         25000             25000             25000
Administration exp 24000              24000             24000
Total cost          835000            1306600           1621000

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