Juraz -Enhance Your Commerce Skills With Us

Accounting for Management (B.Com)

MODULE I
Introduction to Management Accounting
Management Accounting
According to Robert Anthony "Management accounting is
concerned with accounting information which is useful to
management.”
Nature of Management Accounting
1) Provides accounting information.
2) Decision Making.
3) Studies cause and effect relationship.
4) Uses special techniques.
5) Quantitative and Qualitative information.
6) Multi-disciplinary.
7) Accounting for future.
8) Management-oriented.

Objectives of Management Accounting

1) To collect and supply data for financial analysis.
2) To helps in future planning, controlling and decision making.
3) To evaluate performance.
4) To motivate employees.
5) To communicate up to date information.
6) To helps in policy formulation.
7) To prepare reports.
Scope of Management Accounting
1) Financial accounting.
2) Cost accounting.
3) Statistical methods.
4) Budgeting.
5) Tax accounting.
6) Reporting.
7) Office services.
8) Internal auditing.
9) Interpretation.
Functions of management accounting
1) Management accounting helps the management in planning
2) Management accounting helps in analysis and interpretation.
3) Management accounting provides internal and external
communication.
4) Management accounting is very useful in controlling operations.
5) Management accounting helps in co co-ordinating the activities of
different departments.
6) Management accounting helps in decision making.
Difference between financial and management accounting
Financial Accounting Management Accounting
The purpose is to ascertain profit The purpose is to provide
or loss and financial position. information to management for
decision making.
Records historical data relating to Concerned with future plans and
past. operations
Compulsory Optional
Lays more emphasis on accuracy. Lays more emphasis on quick
and prompt reporting.
Based on generally accepted Not based on rigid principles.
accounting principles and
conventions.
Prepared for a particular period. No specific period.
Limited scope. Wider scope.
External parties are the users. Internal parties are the users.
Audit is compulsory. Audit is not compulsory.
Stock is valued on the principle of No such principle is followed for
cost or market price whichever is value of stock.
less.

Difference between cost accounting and Management Accounting

Cost Accounting Management Accounting
It is used for cost control and It is used for managerial decision
cost reduction. making.
The scope of cost accounting is The scope of management
narrow. accounting is broader.
Statutory audit is mandatory for No statutory audit requirement.
big business.
It is used for management, It is only for management.
shareholders, and vendors.
It considers only quantitative It considers both quantitative
data. and qualitative data.
Only cost accounting principles Principles of cost accounting and
are used. financial accounting are used.
Cost accounting is restricted to It uses financial as well as cost
cost related data. accounting data.
It deals with both present and It deals with future transactions.
future transactions.

Basic Principles of Management Accounting

1) Principle of exception.
2) Principle of objectivity.
3) Principle of consistency.
4) Principle of relevancy.
5) Principle of exception.
6) Principle of objectivity.
7) Principle of consistency.
8) Principle of relevancy.

Need and Importance (Advantages or Uses) of Management

Accounting
1) Proper planning.
2) Effective control.
3) Increased efficiency.
4) Measurement of performance.
5) Maximising profitability.
6) Increase in production.
7) Better customer service.
8) Quick decision making.
Limitations of Management Accounting
1) Based on accounting information.
2) Lack of knowledge.
3) Not a substitute for management.
4) Personal judgement.
5) Costly.
6) Resistance.
Tools and Techniques of Management Accounting
1) Financial Accounting.
2) Financial Analysis.
3) Historical Cost Accounting.
4) Budgetary Control.
5) Standard Costing.
6) Marginal Costing.
7) Decision Accounting.
8) Revaluation Accounting.
Functions of Management Accountant
A. Analytical and advisory functions
1) Planning and control of operations.
2) Measuring the performance of the organisation.
3) Reporting the operational performance.
4) Evaluating policies and program.
5) Preparing reports and statements.
6) Evaluating external factors of the business.

B. Administrative and procedural functions

1) Installation of accounting system.
2) Arranging audit.
3) Introduction of budgeting system.
4) Making capital expenditure decisions.
5) Management of cash.
6) Preparation of financial statement.

Installation of management accounting system

1) Preparing organisational manual.
2) Preparing forms and returns.
3) Requisite staffing.
4) Classifying records and integrating the systems.
5) Introducing standard cost techniques.
6) Setting up budgetary control system.
7) Introducing operation research techniques.
Recent trends in management reporting
1) Cash flow reporting.
2) Segment reporting.
3) Financial reporting using.
4) Interim financial reporting.
5) Economic value added.
6) Corporate governance report.
7) Environmental reporting.
8) Brand valuation.
9) Vertical form of financial analysis.
10) Uses chart, graphs and diagrams.
11) Business responsibility reporting.
12) Management discussion and analysis report.
 MODULE II
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS

Financial Analysis
Financial analysis simply refers to analysis of financial statement of a
company.
Financial statement
These are formal records of the financial activities and position of a
business.
Analysis and interpretation of financial statement
It is an attempt to determine the significance and meaning of
financial statement data.
Features of financial analysis
1. To know the profitability of the firm.
2. To know the solvency of the firm.
3. To know the liquidity of the firm.
4. To know the efficiency of the management of the firm.
5. To know the financial strength and weakness of the firm.

Types of financial analysis

1. Internal analysis
These are those analysis done by internal parties. It is a detailed
financial analysis.
2. External analysis
These are those analysis done by external parties. It is not a detailed
financial analysis.
3. Long term analysis
These are those analysis for ascertaining long term profitability,
solvency, and stability of the firm.
4. Short term analysis
These are those analysis for ascertaining short term solvency of the
firm.
5. Horizontal analysis
It refers to comparison of financial data of a company for several
years.
6. Vertical analysis
It refers to the study of relationship of the various items in the
financial statements of one accounting period.

Tools and techniques for financial statement analysis

1.Comparative statements
2.Common size statements
3.Trend analysis
4.Ratio analysis
5.Cashflow analysis
Comparative Statement
It is a statement used to compare a particular financial statement
with prior period statements.
Comparative balance sheet
It is a statement that shows the financial position of an organisation
over different periods.
Comparative income statement
It is a statement that present the result of multiple account periods
in separate columns.
Common size statement
It is a tool of financial managers to use analysis of financial
statement. These are expressed in percentage form.
Common size income statement
It is an income statement in which each line item is expressed as a
percentage of the value of revenue or sales.
Common size balance sheet
It is a balance sheet that display both the numerical value and
relative percentage for total assets, total liabilities and equity
accounts.
Trend Analysis
It is an analysis of trend of the firm by comparing its financial
statements to analyse the trend of the market or future.

MODULE III
RATIO ANALYSIS
Ratio
Ratio is the simple arithmetic expression of the relationship of one
number to another.
Ratio analysis
It is a technique of analysis and interpretation of financial
statements.
Accounting Ratio
Ratio calculated in the basis of accounting information are called
accounting ratio.
Objectives / Purpose of Ratio analysis
1. To study short term solvency of a firm.
2. To study long term solvency of a firm.
3. To determine profitability of a firm.
4. To facilitate comparison.
5. To helps in managerial decision making.
6. To measure the performance of a firm.
7. To communicate strength and weakness of a firm.
Advantages/ Importance of Ratio Analysis
1. Advantages to Management
a) Helps in formulating policies.
b) Helps in planning and forecasting.
c) Helps in decision making
2. Advantages to shareholders
a) Helps in investors in selecting best companies for investment.
b) Helps in evaluating performance of companies.
c) Helps in calculating values of shares.
3. Advantages to government
a) Helps in tax planning.
b) Helps government to study cost structure of industries.
4. Advantages to Creditors
a) Helps in measuring liquidity positions.
b) Helps to know strength and weakness of companies.
5. Advantages to employees
a) Demand more wages and benefits.
b) Know the financial health of companies.
Limitations of Ratio Analysis
1. Inherent limitations of accounting.
2. Non-monetary factors ignored.
3. qualitative factors ignored.
4. Window dressing.
5. Not a substitute for judgement.
6. Price level changes.
7. Lack of adequate standard.
8. Need for comparative analysis.
Functional classification of ratios
Liquidity Solvency Activity / Profitability
Ratios /Leverage Ratios Turnover ratios ratios
Current Ratio Debt Equity ratio Inventory Gross profit
turnover ratio ratio
Quick Ratio Proprietary ratio Debtors Operating
turnover ratio ratio
Total asset to Creditors Operating
debt ratio turnover ratio profit ratio
Fixed asset Net profit
turnover ratio ratio
Working capital Expense Ratio
turnover ratio

Liquid Ratio
It refers to ability of a concern to meet its current obligations.
Current Ratio
It is the ratio of current asset to current liabilities. It shows the
relationship between total current assets and current liabilities. It is
also know as working capital ratio or bankers ratio.
Quick Ratio
It is the ratio of quick asset to current liabilities. It is the measure of
the instant debt paying ability of a business. It is also called acid test
ratio or liquid ratio.
Difference between current ratio and quick ratio
Current Ratio Quick Ratio
It indicates whether a firm is It indicates whether a firm is
able to pay its current liabilities able to pay its current liabilities
within a year. quickly or within a month.
It expresses relationship It expresses the relationship
between current assets and between quick assets and
current liabilities. current liabilities.
Ideal standard is 2:1 Ideal standard is 1:1
Inventories are taken into Inventories is ignored in the
account I the calculation of calculation of quick ratio
current ratio.

Window Dressing
It is a practice of improving current ratio through manipulation of
accounts.
Window dressing can be done in the following ways
1. Increase in the inventory values.
2. Postponement of purchase of fixed assets for cash.
3. Selling a fixed asset for cash.
4. Paying of current liabilities.
5. Considering short term liabilities as long term.
Debt Equity Ratio
It is a type of ratio which expresses the relationship between debt
and equity. This ratio is also known as security ratio or external
internal ratio.
Total Asset to Debt Ratio
It is a type of ratio which expresses the relationship between total
asset and total liabilities of a business. It is also called solvency ratio.
Proprietary Ratio
It is a ratio which establishes the relationship between shareholders
fund and total asset. This ratio is also known as equity ratio or net
worth ratio.
Fixed Asset Ratio
It is a ratio of fixed asset to long term funds or capital employed.
Capital Gearing Ratio
It is a ratio which indicates the relationship between fixed interest
bearing securities and equity shareholders fund.
Interest Coverage Ratio
It is a ratio which establishes the relationship between operating
profits and interest charges.
Dividend coverage ratio
It is a ratio which measures the ability of a company to pay dividend
or preference shares carrying a fixed rate of dividend.
Overall coverage ratio
It measures the ability of a company to service all fixed obligations
out of its earnings.
Activity ratios
It shows how effectively a firm uses its available resources or assets.
These ratios indicate efficiency in asset management.
a) Inventory turnover Ratio
It is a type of ratio which shows the relationship between cost of
goods sold and average inventory. It is also known as stock turnover
ratio.
Stock Velocity
Stock turnover ratio expressed in time. It can also be expressed in
days or months. It is called stock velocity or stock turnover period.
b) Debtors turnover ratio
It is a ratio which explains the relationship between net credit sales
and average debtors. It is also known as receivable turnover ratio.
Average collection period
Debtors turnover ratio expressed in days or months. It is called
average collection period or debtors velocity.
c) Creditors turnover ratio
It shows relationship between net credit purchases and average
creditors. It is also called payable turnover ratio.

Average payment period

Creditors turnover ratio expressed in days or months. It is known as
average payment period or creditors velocity.
d) Working capital turnover ratio
The relation between sales and working capital is called working
capital turnover ratio.
e) Fixed asset turnover ratio
It is a ratio which establishes the relationship between net sales and
fixed assets.
Profitability Ratios
It refers to ability of a firm to earn income.
Gross profit ratio
This is the ratio of gross profit to sales expressed as percentage. It is
also known as gross margin.
Operating ratio
It is a ratio expresses the relationship between operating cost and
sales. It indicates overall efficiency in operating the business.
Operating profit ratio
It is a ratio which explains the relationship between operating profits
and net sales.
Net profit Ratio
It is a ratio of net profit earned by business and its net sales. It
measures overall profitability.
Return on investment (ROI)
ROI measure the overall profitability. It establishes the relationship
between profit or return on investment
Uses / Advantages of ROI
1. It measures overall profitability.
2. It measures success of business.
3. It helps in investment decision.
4. It is useful for planning capital structure.
5. It is a foundation of optimum utilisation of assets.
6. It can be used to determine price of a product.
Market Test Ratios
Market test ratios are used for evaluating shares and stock which are
traded in the market. Market test ratios are also known as investors
ratios or stock market ratios or market valuation ratios.
Earnings Per Share (EPS)
This ratio indicates the profits available for each equity share. It is
calculated by dividing the earnings (profits) available to equity
shareholders by the number of equity shares issued.
Dividend Per Share (DPS)
It is the amount of profit distributed to equity shareholders divided
by the number of equity shares outstanding.
Du Pont Chart
Du Pont Chart shows the analysis of profitability that breaks down
ROI between profit margin and capital turnover. It shows the
interaction of operating net profit ratio and capital turnover ratio. It
helps the management to visualise the different forces affecting
profits.

MODULE IV
FUND FLOW AND CASH FLOW ANALYSIS
Fund
Fund means working capital of the excess of current assets over
current liabilities.
Fund flow
Inflow and outflow of fund in a business is called fund flow.
Fund flow statement
It is a statement showing sources and applications of fund in a
business.
Objectives of fund flow statement
1. To serve as a technique of managing working capital.
2. to know changes in working capital.
3. To anticipate position of working capital.
4. To reveal short term financial strength and weakness of business.
5. To provide basis for budgeting.
6. To assess growth of a firm.
Importance / Uses / Benefits of fund flow statement
1. Financial analysis and control.
2. Financial planning and budget preparation.
3. Helpful in comparative study.
4. Knowledge of managerial policies.
5. Useful to bankers and money lenders.
6. Act as a future guide.
7. Proper allocation of resources.
Limitations of fund flow statement
1. It does not reveal cash positions.
2. It is not useful as cash flow statement.
3. It is not a substitute for income statement.
4. It is not a substitute for balance sheet.
5. It cannot reveal continuous changes.
6. It is not original in character.
Difference between fund flow statement and balance sheet
(Position statement)
Fund flow statement Balance Sheet
It is a statement of changes in It is a statement of assets and
assets and liabilities. liabilities.
It is optional. It is statutory.
It is useful to internal parties. It is useful to external parties.
It is a supplementary financial It is a primary financial
statement. statement.
It is prepared after balance It is prepared at the end of the
sheet is prepared. accounting period.
It is prepared to show sources It is prepared to show financial
and uses of fund. position.

Preliminary Techniques of Fund flow statement

1. Classification of items into current and non-current.
2. Identification of transactions which cause flow of fund.
3. Calculation of fund from operation.
4. Preparation of fund flow statement.
Fund from operation
It is the fund generated from business operation. It is an internal
source of fund. Sales are the main source of inflow of fund.
Schedule of changes in working capital
It is a statement which is prepared by recording changes in current
assets and current liabilities during the accounting period.
Difference between schedule of changes in working capital and
fund flow statement
Schedule of changes in working Fund flow statement
capital
It is prepared with current assets It is prepared with non-current
and current liabilities. assets and non current liabilities.
It shows changes in current It shows sources and
asset and current liabilities. applications of fund.
Fund from operation is not Fund from operation is shown.
shown.
Prepared to know changes in Prepared to know overall
working capital. operation of a firm.
It is prepared with the help of It is prepared with the help of
balance sheet. P/L account and balance sheet.

Sources and applications of fund

Sources of Fund Applications of fund
Issue of shares Redemption of shares
Issue of debentures Redemption of debentures
Medium and long term loan. Repayment of loans
Sales of fixed assets. Purchase of fixed assets
Sale of investment Purchase of investment
Cash
Cash comprises of cash in hand and demand deposits with bank.
Cash Equivalents
These are short term, highly liquid investment that are readily
convertible into cash.
Cash Flow
Inflow and outflow of cash and cash equivalents in a business is
called cash flow.
Cash flow statement
It is a statement which describes the inflow and outflow of cash and
cash equivalents in an enterprise during a specified period of time.
Objectives of cash flow statement
1. To assess and monitor liquid resources in the enterprise.
2. To control liquid resources in enterprise.
3. To prevent holding of excessive cash resources.
4. To help in capital budgeting.
5. To maintain optimum level of cash resources.
Importance / Uses / Advantages of Cash flow Statement
1. Helpful in short term planning.
2. Helpful in formulation of financial policies.
3. Provide a basis for cash budget.
4. Helpful in control.
5. Helpful in financial decision.
6. Reveals liquidity and solvency.
7. Helps in efficient cash management.
 Limitations of cash flow statement
1. Ignores non cash transactions.
2. Not a substitute for income statement.
3. Historical in nature.
4. Limited scope.
5. Does not present true picture of liquidity.
6. Easily influenced by managerial decisions.
Difference between cash flow statement and fund flow statement
Cash Flow Statement Fund Flow Statement
It is prepared on cash basis It is prepared on working capital basis
It is prepared on cash concept It is prepared on accrual concept.
It is presented in prescribed format. It is not presented in prescribed format.
It is useful for short term analysis. It is useful for long term analysis.
It is used for cash planning. It is used for financial planning.
Schedule of changes in working Schedule of changes in working capital
capital is not required. is required.
Classification of cash flows
1. Cash flow from operating activities.
2. Cash flow from investing activities.
3. Cash flow from financing activities.
1. Cash flow from operating activities
These are cash flows from regular course of operations of a business.
Examples:
a) Cash sales
b) Cash received from debtors
c) cash purchase of goods
d) Cash paid to suppliers.
e) Wage paid to employees.
2. Cash flow from investing activities
Investing activities includes purchase and sale of fixed assets.
Examples
a) Cash payment to purchase fixed asset.
b) Cash receipts from sale of fixed assets.
c) Cash payment to purchase shares, debentures etc.
d) Cash receipts from sales of shares, debentures etc.
3. Cash flow from financing activities
The financing activities of a firm include issuing or redemption of
share capital, debentures and raising and repayment of loans.
Examples
a) Cash proceeds from issue of shares.
b) Cash proceeds from issue of debentures.
c) Cash proceeds from raising of loans.
d) Redemption of shares.
e) Redemption of debentures.
f) Repayment of loans.
Steps for preparation of cash flow statements
1. Compute the net increase or decrease in cash or cash equivalents.
2. Calculate net cash flow from operating activities.
3. Calculate net cash flow from investing activities.
4. Calculate net cash flow from financing activities.
5. Prepare a formal cash flow statement highlighting the net cash
flow from operating, investing and financing activities.
6. Make an aggregate net cash flow from these three activities.
7. Report significant non cash transactions.

MODULE V
MARGINAL COSTING AND CVP ANALYSIS
Variable Cost
Variable costs are those costs which vary in proportion to change in
the volume of production or level of activity.
Fixed Cost
Fixed costs are those costs which do not change as the volume of
production or level of activity changes.
Marginal Cost
It is the additional cost of producing an additional unit.
Marginal Costing
It is the ascertainment by differentiating between fixed cost and
variable cost.
Characteristics of marginal costing
1. It is a technique for managerial decision making.
2. All costs are classified into fixed and variable.
3. Fixed costs are charged against profit of the period.
4. Selling price is equal to variable cost plus contribution.
Assumptions of marginal costing
1. All costs are divided into fixed and variable.
2. Fixed cost remains constant at all levels of activities.
3. Total variable costs vary, but variable cost per unit does not vary.
4. There is no stock.
5. Selling price remains constant.
6. Price of material remains constant.
7. Rates of labour remains constant.
Advantages / Importance of marginal costing
1. Easy and simple.
2. Simple valuation of stock.
3. Better cost control.
4. Ascertainment of profitability.
5. Profit planning.
6. Decision making.
7. Pricing policy.
Disadvantages of marginal costing
1. Difficulty in separating cost.
2. Under valuation of stock.
3. Time factor ignored.
4. Wrong basis for pricing.
5. More emphasis on sales.
6. Short run analysis.
7. Difficulty in application.
 Absorption costing
It is a technique whereby fixed costs as well as variable costs are
allotted to cost units.
Difference between absorption costing and marginal costing
Absorption Costing Marginal Costing
All costs are charged. Only variable cost is charged.
Not useful for decision making. Useful for decision making.
Suitable for external reporting. Suitable for internal reporting.
The decisions are based on profit. The decisions are based on contribution.
When production increases, cost Cost per unit same at all levels of
per unit reduces. production.
Direct costing
It is a specialised form of cost analysis that only uses variable costs to
make decisions.
Cost Volume Profit Analysis (CVP Analysis)
CVP analysis is the study of the effect on future profit of changes in
fixed cost, variable cost, sales price, quantity and mix.
Objectives / Uses of CVP analysis
1. To forecast profit.
2. To determine pricing policies.
3. To evaluate business performance.
4. To facilitate budget preparation.
5. To achieve cost control.
6. To helps in decision making.
7. to determine break even point.
Technique of CVP analysis
1. Contribution margin analysis.
2. Margin of safety analysis
Contribution
It refers to excess of sales over variable costs. It is the marginal
profit. It is also known as gross margin.
Uses / Importance of contribution
1. It helps in fixing selling price.
2. It determines break even point.
3. It helps to find out profitability of various products.
4. It helps in make or buy decisions.
5. It helps to determine key factor.
6. It indicates profit potential of a business.
7. It highlights relationship of cost, sales and profit.
Break Even Point
It is the point at which total sales revenue is equal to total cost. It is
the point of no profit no loss.
Break Even Analysis
It is a method of studying the relationship amongst sales, revenue,
fixed costs and variable costs to determine the level of activities at
which costs are equal to sales revenue.
Assumptions of CVP / Break Even analysis
1. All costs can be divided into fixed and variable.
2. Variable costs are vary in direct proportion.
3. Fixed cost remains constant.
4. Selling price per unit remains constant.
5. Sales mix remains constant.
6. Efficiency of plant remains constant.
7. Productivity per work remains constant.
Break Even Chart
It is the graphical presentation of break even point. It shows
relationship between sales, volume, variable and fixed cost.
Angle of incidence
It is the angle caused by the intersection of the total sales line and
total cost line at the break-even point.
Margin of Safety
It is the difference between actual sales and break-even sales.
Cash break even point
It is the number of units to be produced to give a contribution equal
to cash fixed cost.
Profit Volume Chart (P/V Chart)
It is a chart which shows the amount of profit or loss at different
levels of output.
Marginal Costing in Managerial decision making
1. Fixation of selling price.
2. Whether to accept a special order or not.
3. Whether to accept an export order or not.
4. selection of suitable sales mix.
5. Make or buy decision.
6. Whether to discontinue a product or not.
7. Key factor
8. Shut down point
Make or Buy Decision
Marginal costing helps the management in deciding whether to make
a component part within the factory or to buy it from outside
suppliers.
Key Factor
A factor which restricts the volume of operation of the firm is
knowns as key factor.

This is just a theory short notes from all the modules. You need to
refer all the available materials covering your syllabus.

ALL THE BEST

Prepared By:
JUBAIR MAJEED
For study materials, Please Contact

8089778065 (whatsapp only)