UNIT 3

1 What is oligopoly? What is cost- based pricing?

The term oligopoly is derived from two Greek words, oligos meaning a few, and pollen meaning to
sell. Oligopoly is the form of imperfect competition where there are a few firms in the market,
producing either a homogeneous product or producing products, which are close but not perfect
substitute of each other.

Cost Based Pricing There are three versions of the cost – based pricing. Full – cost or break even
pricing, cost plus pricing and the marginal cost pricing. Under the first version, price just equals the
average (total) cost. In the second version, some mark-up is added to the average cost in arriving at
the price. In the last version, price is set equal to the marginal cost.

2 Demonstrate about Production Function?

The production function shows the relation between input changes and output changes. It also
shows the maximum amount of output that can be obtained by the firm from a fixed quantity of
resources. It is the process in which the inputs (The factors of production such as land, labour,
capital, technology, etc) are converted into outputs (The goods and service).
3 Compare Monopoly Vs Oligopoly.
4 A manufacturer sells his product at Rs. 5 each. Variable costs are Rs. 2 per unit and the
fixed costs amount to Rs. 60,000.
a) Calculate the breakeven point. b) What would be the profit if he sells 30,000
units?

a) To calculate the breakeven point:

Breakeven Point (in units) = Fixed Costs / (Selling Price per unit - Variable Cost per unit) Breakeven
Point = Rs. 60,000 / (Rs. 5 - Rs. 2) Breakeven Point = Rs. 60,000 / Rs. 3 Breakeven Point = 20,000
units

b) To find the profit when selling 30,000 units:

Profit = (Selling Price per unit - Variable Cost per unit) * Number of units sold - Fixed Costs Profit =
(Rs. 5 - Rs. 2) * 30,000 - Rs. 60,000 Profit = Rs. 3 * 30,000 - Rs. 60,000 Profit = Rs. 90,000 - Rs. 60,000
Profit = Rs. 30,000

Therefore, the breakeven point is 20,000 units, and if the manufacturer sells 30,000 units, the profit
will be Rs. 30,000.

5 How do you classify markets on the basis of competition?

Markets can be classified based on competition into four primary types:

1. Perfect Competition: Many buyers and sellers with homogeneous products. No individual
seller can influence the market price. Examples include agricultural markets.

2. Monopolistic Competition: Many buyers and sellers offering differentiated products. Firms
have some control over pricing due to product differentiation. Examples include the market
for clothing brands.

3. Oligopoly: A few large sellers dominating the market. Each firm's actions significantly impact
competitors. Examples include the automotive industry.

4. Monopoly: A single seller with a unique product. This firm controls the entire market and sets
the price. Examples include utilities like water or electricity in certain areas.
 Unit 4
A 1 Explain how a ledger account can be maintained?
ledger account is maintained through a systematic record-keeping process that tracks financial
transactions for a specific category, such as cash, accounts receivable, or expenses. To maintain a
ledger account, follow these steps:
Identify the account: Determine the specific category or asset you want to track.
Record transactions: Log every financial transaction related to that account, including date,
description, debit (money in), and credit (money out) entries.
Balance the account: Calculate the account's balance by adding up the debit and credit entries.
Debits should equal credits for the account to be in balance.
Update regularly: Continuously update the ledger account as new transactions occur.
Prepare financial reports: Use the ledger account data to create financial statements and reports.
2 What is Accounting Equation?

The accounting equation, in short, is: Assets = Liabilities + Equity. It represents the fundamental
principle of accounting that states that a company's total assets must always equal the sum of its
liabilities and equity. It provides a framework for understanding how a company's resources (assets)
are financed, either through debts (liabilities) or owner's investment (equity). This equation forms
the basis for double-entry bookkeeping and ensures that the company's books are always in
balance.
3 Explain about conservatism?
Conservatism in accounting emphasizes prudence by recognizing potential losses promptly,
restraining premature recognition of gains, and writing down assets when their values are impaired.
This approach ensures financial statements provide a cautious and reliable representation of a
company's financial position, even if it means reporting lower profits and asset values.
4 Journalise the following transactions.
1.1.2018 Commences with cash Rs.10,00,000
3.1.2018 Purchased Goods worth Rs. 2,00,000
8.1.2018 Sold goods to Mr. Raghu Rs. 1,00,000
30.1.2018 Rent paid Rs. 10,000
Here are the journal entries for the provided transactions:
1. On 1st January 2018, the company commences with cash:
- Journal Entry:
- Debit: Cash Rs. 10,00,000
2. On 3rd January 2018, the company purchased goods worth Rs. 2,00,000:
- Journal Entry:
- Debit: Purchases Rs. 2,00,000
- Credit: Cash Rs. 2,00,000
3. On 8th January 2018, the company sold goods to Mr. Raghu for Rs. 1,00,000:
 - Journal Entry:
- Debit: Cash Rs. 1,00,000
- Credit: Sales Rs. 1,00,000
4. On 30th January 2018, the company paid rent:
- Journal Entry:
- Debit: Rent Expense Rs. 10,000
- Credit: Cash Rs. 10,000
These journal entries record the financial transactions for the company during the specified dates.

5 Differences between trial balance and balance sheet.

Trial Balance Balance Sheet

1. It is a list of balances extracted from the 1. It is a statement of assets and

ledger accounts. liabilities.
2. It contains the balances of all accounts i.e. 2. It contains the balances of only
real, nominal and personal a/c’s those accounts which represent
. assets and liabilities.
3. It is prepared before the preparation of the 3. It is prepared after the preparation
trading and profit and loss accounts. of the trading and profit and loss
4. It does not contain the value of closing stock account.
of goods. 4. It contains the value of closing sti
5. Expenses due but not paid and incomes due which appears on the assets side
but not received do not appear in the trial 5. Expenses due but not paid appea
balance. on the liabilities side and income
due but not received appear on th
assets side of the balance sheet.

6 Explain the following:

a) Debtor b) creditor c) closing stock d) outstanding expenses e) Bad debts f) Drawings g) Journal

a) Debtor: A debtor owes money to a company for goods or services provided.

b) Creditor: A creditor is owed money by a company for goods or services the company received.
c) Closing Stock: The value of unsold goods at the end of an accounting period.
d) Outstanding Expenses: Unpaid expenses incurred but not yet settled.
e) Bad Debts: Amounts owed by debtors that are unlikely to be collected.
f) Drawings: Withdrawals of assets or funds by the owner for personal use.
g) Journal: A record of financial transactions in chronological order, serving as the primary book of
original entry in accounting.
 1
Outline the pros and cons of double entry system of accounting. And also explain functins of
accounting.

Pros of Double Entry System of Accounting:

1. Accuracy: It promotes accuracy by ensuring that debits equal credits, reducing errors.
2. Complete Record: Every transaction is recorded twice, providing a comprehensive financial
record.
3. Financial Control: Helps in tracking and controlling financial activities, enhancing
management's control.
4. Financial Analysis: Facilitates financial analysis, making it easier to assess a company's
financial health.
5. Legal Compliance: Generally accepted and required by accounting standards and laws.
Cons of Double Entry System of Accounting:
1. Complexity: Can be more complex and time-consuming compared to single-entry systems.
2. Skills Required: Requires a good understanding of accounting principles, which may be a
limitation for some.
3. Costly: May require more resources and professional expertise.
Functions of Accounting:
1. Recording Transactions: Accounting records and classifies financial transactions for future
reference.
2. Financial Reporting: Prepares financial statements like the balance sheet and income
statement.
3. Budgeting and Planning: Helps in setting financial goals, budgeting, and financial planning.
4. Tax Compliance: Assists in calculating and reporting taxes to regulatory authorities.
5. Auditing: Provides financial data for internal and external audits.
6. Decision-Making: Offers data for informed business decisions.
7. Risk Management: Assists in assessing financial risks and developing strategies to mitigate
them.
8. Asset Management: Tracks and manages the use and depreciation of assets.
9. Performance Evaluation: Evaluates a company's financial performance and efficiency.
10.Stakeholder Communication: Communicates financial information to stakeholders,
including shareholders, creditors, and investors.
 2 What are rule of maintaining of books of accounts? Explain
Maintaining books of accounts follows certain rules and principles to ensure accurate and consistent
financial records. Here are some key rules:
1. Consistency: Use consistent accounting methods and principles, which means once you
choose a method (e.g., accrual or cash basis), stick with it.
2. Timeliness: Record transactions promptly, ideally as they occur, to prevent errors or
omissions.
3. Completeness: Record all financial transactions, ensuring nothing is left out.
4. Accuracy: Ensure that all entries are accurate and mathematically correct. Cross-verify totals
and balances.
5. Neutrality: Maintain objectivity and avoid bias in recording transactions. Use reliable and
verifiable data.
6. Materiality: Focus on significant transactions and avoid excessive detail for minor items to
keep records manageable.
7. Prudence: Adopt a conservative approach by recognizing potential losses and liabilities
promptly, but only recognizing gains when realized.
8. Relevance: Record information that is relevant and necessary for financial reporting and
decision-making.
9. Separation of Business and Personal Transactions: Keep personal expenses and business
transactions separate to maintain the integrity of financial records.
10.Retention of Records: Store financial documents, records, and backups for a legally required
period (varies by jurisdiction).

3 What is trial balance? State its objectives and significance?

A trial balance is a fundamental accounting report that lists the closing balances of all general ledger
accounts at a specific point in time. It's prepared by a company or an accountant to ensure that the
total debits equal the total credits after posting all financial transactions to the ledger. The main
objective of the trial balance is to serve as an internal check to ensure the accuracy and completeness
of the recording of financial transactions before preparing the financial statements.
Objectives of a trial balance:
1. Accuracy Check: It helps in verifying the accuracy of the accounting records by ensuring that
the total debits equal the total credits in the ledger.
2. Identifying Errors: It helps in identifying errors in recording or posting transactions, such as
mathematical mistakes, double entries, omissions, or incorrect account postings.
3. Basis for Financial Statements: A trial balance serves as a basis for the preparation of
financial statements like the income statement and balance sheet.
Significance of a trial balance:
 1. Accuracy Assurance: It provides a snapshot of the ledger at a particular time, ensuring that
the debits and credits balance. If they do not balance, it indicates an error that needs to be
identified and corrected.
2. Error Detection: Discrepancies in the trial balance help in locating errors in the accounting
process. For instance, if a trial balance doesn't balance, it could be due to an error in the
ledger or journal entries.
3. Preparation of Financial Statements: It's a crucial step in preparing accurate financial
statements, as the data from the trial balance is used in the creation of the income
statement and balance sheet.
4. Internal Control: It serves as an internal control mechanism by ensuring that the accounting
system is in balance before finalizing financial statements, reducing the risk of material
misstatements.
it doesn't guarantee the absence of errors. It can't detect all types of errors, such as compensating
errors or errors of principle. Therefore, a trial balance should be used in conjunction with other
internal controls and verification procedures for comprehensive accuracy in financial reporting.

4 Explaining the various accounting concepts and conventions?

A trial balance is a financial statement that lists all the ledger accounts of a business and their
respective debit or credit balances to ensure the total debits equal the total credits. It's a tool used by
accountants to verify the accuracy of the accounting records before preparing financial statements.
Objectives of a trial balance:
1. Identifying Errors: It helps in spotting errors, such as posting mistakes, inaccuracy in
recording transactions, or miscalculations in the ledger accounts.
2. Ensuring Accuracy: Verifies the equality of total debits and total credits, ensuring that the
double-entry accounting system is being maintained correctly.
Significance:
1. Accuracy Check: Helps in detecting errors and ensuring the accuracy of financial records
before finalizing the financial statements.
2. Basis for Financial Statements: Acts as a foundation for the preparation of financial
statements like the income statement and balance sheet, ensuring their accuracy and
reliability.
3. Support for Decision Making: Provides a clearer financial picture, aiding management in
making informed decisions based on reliable financial data.
In summary, the trial balance serves as a preliminary check to validate the accuracy of accounting
records and is crucial in preparing dependable financial statements.
5 What is the difference between a journal and ledger.
 Unit 5
1 Define Ratio Analysis. And also explain its significance.
RATIO ANALYSIS

Ratio analysis is the process of determining and interpreting numerical relationships based on
financial statements. By computing ratios, it is easy to understand the financial position of the firm.
Ratio analysis is used to focus on financial issues such as liquidity, profitability and solvency of a
given firm.

2 Explain about Turnover ratios and capital structure ratios.

TURNOVER RATIOS:

INVENTORY TURNOVER RATIO:

It is also called stock turnover ratio. It indicates the number of times the average stock is being sold
during a given accounting period. It establishes the relation between the cost of goods sold during a
given period and the average amount of inventory outstanding during that period. The higher the
inventory turnover ratio, the better is the performance of the firm in selling its stocks.

DEBTORS TURNOVER RATIO:

Debtor’s turnover ratio reveals the number of times the average debtors are collected during a
given accounting period. In other words, It shows how quickly the firm is in a position to collect its
debts. It is necessary to keep close monitoring of realization of debts because it directly affect the
working capital position.

3 Explain Du pont Chart.

DUPONT CHART:

The elements that go into computation of earning power have been built into the following chart by
Du Pont Company for the first time and hence it is called Du Pont Chart.
4. Describe cash flow statement
Cash Flow Statement

It deals with flow of cash which includes cash equivalents as well as cash. This statement is an
additional information to the users of Financial Statements. The statement shows the incoming and
outgoing of cash. The statement assesses the capability of the enterprise to generate cash and
utilize it. Thus a Cash-Flow statement may be defined as a summary of receipts and disbursements
of cash for a particular period of time.

6 What are the Application of funds and sources of funds.

Here are some applications of funds:
Debt capital: Funds used to repay a government's debt
Investments: Includes short-term working capital, fixed assets, and other investments in the long
term
Working capital: Funds found in the closing balance sheet of a company
Cash flow: Adequate amount of cash and liquidity is critical for a business to grow
Here are some sources of funds:
Debt Businesses may raise funds by borrowing debt personally from a bank or by issuing debt
securities
Equity: A firm can earn funds by selling shares, which are ownership risks to investors who become
stockholders
Commercial paper : A short-term unsecured promissory note issued by firms that have a fairly high
credit rating
1 What is funds flow statement? Discuss its utility.
A funds flow statement, also known as a statement of changes in financial position, is a financial
statement that provides a comprehensive overview of a company's sources and uses of funds over a
specific period. It is a crucial tool for financial analysis and decision-making, offering valuable
insights into a company's liquidity, financial health, and management of its financial resources.

The funds flow statement primarily consists of two sections:

1. Sources of Funds:
This section outlines how a company generated funds during the specified period. It typically
includes items such as:
a. Net income from the income statement.
b. Non-operating income, such as the sale of assets or investments.
c. Proceeds from the issuance of debt or equity.
d. Any other sources of funds like government grants or loans.
2. Uses of Funds:
This section details how the company utilized the funds it generated. Common uses of funds
include:
a. Capital expenditures (purchase of assets like property, plant, and equipment).
b. Repayment of debt or loans.
c. Payment of dividends to shareholders.
d. Investments in marketable securities.
e. Working capital changes, including fluctuations in current assets and liabilities.
The funds flow statement is a valuable tool for several reasons:
1. **Liquidity Analysis:** It helps assess a company's ability to meet its short-term and long-term
financial obligations. By examining the sources and uses of funds, one can determine if a company is
efficiently managing its working capital.
2. **Financial Planning:** Companies can use funds flow statements to plan for future financial
needs. By understanding how funds were generated and used in the past, they can make informed
decisions about capital investments, financing options, and dividend distributions.
3. **Performance Evaluation:** Investors, creditors, and management use funds flow statements to
evaluate a company's financial performance and management's ability to allocate resources
effectively.
4. **Identifying Trends:** Funds flow statements can reveal trends in a company's financial
management. For example, consistent negative cash flows from operating activities might indicate
operational inefficiencies.
5. **Financial Restructuring:** In cases where a company is facing financial difficulties, a funds flow
statement can help identify the root causes and guide the restructuring process. It can highlight
areas where cost-cutting or strategic changes are needed.
6. **Investor Confidence:** Transparency in financial reporting, including funds flow statements,
can enhance investor confidence and trust in a company's financial stability.
7. **Risk Assessment:** By examining the sources and uses of funds, stakeholders can assess the
financial risks a company may face, such as overreliance on debt financing or a failure to generate
sufficient operating cash flows.
8. **Regulatory Compliance:** Many regulatory authorities and accounting standards require
companies to prepare and disclose funds flow statements. Compliance with these standards is
essential for maintaining legal and financial integrity.
In conclusion, the funds flow statement is a vital component of financial reporting and analysis. It
provides a comprehensive overview of a company's financial activities, helping stakeholders make
informed decisions, assess financial health, and plan for the future. Its utility extends to investors,
creditors, management, and regulatory bodies, ensuring the transparency and accountability of
financial operations in the corporate world.

2 Ratios are really helpful for financial statement analysis. Distinguish your
answer.
Ratios are indeed invaluable for financial statement analysis, but they serve a different purpose
compared to the funds flow statement.

Ratios: Ratios offer a snapshot of a company's financial health by comparing key figures, like
profitability, liquidity, and solvency. They are essential for quick comparisons, benchmarking, and
identifying trends. Ratios provide insights into the efficiency and performance of various aspects of
a business, helping stakeholders make informed decisions and assess its overall financial condition.

Funds Flow Statement: Unlike ratios, a funds flow statement provides a dynamic view of a
company's financial activities over a specific period, detailing the sources and uses of funds. It helps
in tracking how funds have been generated and allocated, emphasizing changes in a company's
financial position. It's crucial for understanding the movement of cash and identifying the reasons
behind these changes, aiding in long-term financial planning, identifying trends, and evaluating
financial strategies.

In summary, while ratios are essential for quick assessments and comparisons, the funds flow
statement offers a detailed historical perspective on a company's financial activities, enabling
stakeholders to delve into the reasons behind financial changes and make strategic decisions. Both
are valuable tools, each with its unique role in financial analysis.