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Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the bank at periodical intervals. At the end of every month entries in the cash book are compared with the entries in the pass book. The causes of differences in balances of both the books are scrutinized and then reconciliation statement is prepared. This statement is prepared for a special purpose and once in a month. It is prepared with a view to indicate items which cause difference between the balances as per the bank columns of the cash book and the bank pass book at a particular date.

 The following procedures are followed while preparing the bank reconciliation statement:
* Compare cash book and pass book items.
* Give sign to all the items of cash book and pass book which are matched with each other.
* Make a list of unmatched items found in cash book and pass book.
* Prepare bank reconciliation statement taking balance either from cash book or pass book as a basis.
Adjust the items which cause the disagreement in the balances. Add the items which have decreased the balance on the book with which reconciliation is to be made. On the contrary subtract the amount of those items which have increased the balance.
These procedures should be followed only when the cash book and pass book are to be compared. But if causes of differences are already given, the above procedures need not be followed.
If the causes of disagreement between the cash book and pass book balances are given, the bank reconciliation statement can be prepared either by taking the balance of cash book or pass book. The bank reconciliation statement can be prepared by using either of the following bases.
* Debit balance shown by cash book
* Credit balance shown by cash book (bank overdraft)
* Credit balance shown by pass book
* Debit balance shown by pass book (bank overdraft)

Suspense accounts are temporarily classified as a balance sheet account, usually under the heading of current assets or current liabilities depending on the normal balance. At the end of each accounting period a suspense account reconciliation needs to be carried out and any balance investigated so that correcting adjustments can be made before the final financial statements are issued.

Accounts Payable Suspense Accounts

Accounts payable suspense accounts are opened when you purchase a fixed asset by making payments but will not receive the asset until it is fully paid off. The suspense account lets you record your payments without assigning the payments to a specific equipment or machinery account. Otherwise, combining the payments with an existing fixed asset would distort the value of that asset. Once the final payment is made and the asset is received, you close the suspense account and open a separate account for the new fixed asset.

Suspense Account Journal Entries

Open a suspense account by recording the full amount in question. For example, you might receive an unknown payment for $500. To account for the payment, open a Suspense Account and credit the account with the full $500. To balance the transaction, make a debit to Cash for $500. When you find out which customer made the payment, debit the Suspense Account for $500 and credit your Account Receivable customers account for $500. This closes out your suspense account and posts the payment to the correct customer account

Budgetary control is a system which uses budgets as a means of planning and controlling all aspects of producing and / or selling commodities or services.” — J. Batty

“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.” — Brown and Howard

Characteristics/Features of Budgetary Control:

An effective budgeting system is vital to the success of a business firm. Without a fully coordinated budgeting system, management cannot know the direction business is taking. Budgets are prepared with the following objectives and perform following functions:

(a) Planning

(b) Communicating

(c) Coordination

(d) Control and performance evaluation.

(a) Planning:

All business activities are preceded by planning. Planning at the first instance involves in deciding company’s broad aims and objectives. A budget is nothing but deciding the financial objectives of the firm. A budget incorporates expected performance and present managerial targets.

These targets guide the business operations and help in overcoming problems and analyzing the future. Budgeting influences the formulation of all business strategies and subsequently assists business managers in executing such strategies.

(b) Communication:

It is necessary in an efficient organisation that all people be informed about the objectives, policies, programmes and performances. They should have a clear understanding of the aims and objectives and the part they have to play in goal attainment.

This is made possible through their participation in the budgeting process. Budgets inform each manager of what others have agreed to do. They also inform managers of the resources available to achieve objectives and targets.

(c) Coordination:

Under coordination, all factors of production and all departmental activities are balanced and integrated to achieve the objectives of the organisation. The individual managers, work for their individual interest as well as for the benefit of the organisation as a whole. According to Horngreen, budgets help management to coordinate in the following ways:

(i) Budgets help to search out weaknesses in the organisation structure. The formulation and administration of budgets isolate problems of communication, of fixing responsibility and of working relationship.

(ii) Budgets help to restrain to empire building efforts of executives. Budgets broaden individual thinking by helping to remove unconscious biases on the part of engineers, sales and production officers.

(iii) The existence of the well laid plans is the major step towards achieving coordination. Executives are forced to think of relationships among individual operations and the company as a whole.

Budgeting ensures coordination in the absence of which different departments in an organisation may act in a manner which is beneficial only to their individual departments but not to the firm objectives as a whole.

(d) Control and Performance Evaluation:

Budgets are the basis of performance evaluation as they reflect realistic estimates of acceptable and expected performance. Most managers are interested to know what is expected of them so that they may monitor their own performance.

It is more accurate, reliable and reasonable to measure current performance against a budget rather than against a vague expectation or against results of previous year when conditions might have changed.

Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs. Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities.

Advantages of Break-Even-Analysis:

(1) A very effective tool in the hands of management is profit plan­ning. The higher the break-even point, the less chances are of operating the business at a profit over the years. /(2) Profit performance can be improved/(a) By increasing volume;/(b) By increasing selling price;/(c) By decreasing variable costs, and/(d) By decreasing fixed costs.(3) “It is a desk-top tool for management with which it can plan, control, pre-test, decide and co-ordinate all of its business activ­ities.”/(4) It supplies the necessary framework for decision-making on the part of management. In the words of Spencer A. Tucker — Break-even chart may convey different data and information to the management like television which like cinemas indicate the changing conditions of profit structure.”/(5) It gives an idea about contribution which means the difference between sales and variable cost. So, profit earning capacity of the firm may be known. If from the amount of contribution fixed expenses are deducted, the profit figure will be available./(6) The margin of safety of the firm can be known from this break­even chart. Margin of safety can be known by deducting break­even sales from the actual sales. It plays an important role as an indicator as to how the margin can be increased./(7) The chart enables to prepare a proper budget of the firm. Thus it is possible to maximize profit./(8) By preparing break-even chart, the price policy should be so formulated as to keep the price within the purchasing capacity of the people.

Disadvantages of Break-Even-Chart:/(1) Dependent on certain assumption,/(2) Arbitrary valuation and classification of cost,/(3) Guess on market conditions, and/(4) Less possibility in actual implementation,/Dependent on certain assumptions, such as the price of goods remaining unchanged, whereas the fluctuation in cost is only consid­ered. As such the break-even chart may not be proper indicator to cost analysis. In break-even chart analysis, no proper policy is complied with while classifying the costs./So, this classification is likely to be arbi­trary. Employees too, are not duly qualified with knowledge for such a classification. The chart cannot be accepted without reservation./The concept that market conditions are not changeable, it be­comes unreasonable to rely on such a chart. In break-even chart it is also a drawback to assume that the size of the factory, process and techniques of production remain constant. It the age of technological development such an assumption is abso­lutely unreasonable.

What are common-size financial statements?

Common-size financial statements present the financial statement amounts as a percentage of a base number. For example, the common-size income statement will report the revenue and expense amounts as percentages of net sales. The common-size balance sheet will report each asset, liability, and owner equity amount as a percentage of total assets.

Common-size financial statements allow you to compare the financial statements of large companies with the financial statements of smaller companies, because you are comparing percentages instead of dollars. For example, a small retailer can compare her cost of goods sold (perhaps 78%) to a much larger retailer’s cost of goods sold (perhaps 80%). Similarly, one company’s inventory might be 33% (of total assets) while a competitor’s might be 28%.

Common-size financial statements are related to a technique known as vertical analysis

A ratio analysis is a quantitative analysis of information contained in a company’s financial statements. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability and solvency

Limitations of ratio analysis:/Historical. All of the information used in ratio analysis is derived from actual historical results. This does not mean that the same results will carry forward into the future. However, you can use ratio analysis on pro forma information and compare it to historical results for consistency./Historical versus current cost. The information on the income statement is stated in current costs (or close to it), whereas some elements of the balance sheet may be stated at historical cost (which could vary substantially from current costs). This disparity can result in unusual ratio results./Inflation. If the rate of inflation has changed in any of the periods under review, this can mean that the numbers are not comparable across periods. For example, if the inflation rate was 100% in one year, sales would appear to have doubled over the preceding year, when in fact sales did not change at all./Aggregation. The information in a financial statement line item that you are using for a ratio analysis may have been aggregated differently in the past, so that running the ratio analysis on a trend line does not compare the same information through the entire trend period./Operational changes. A company may change its underlying operational structure to such an extent that a ratio calculated several years ago and compared to the same ratio today would yield a misleading conclusion. For example, if you implemented a constraint analysis system, this might lead to a reduced investment in fixed assets, whereas a ratio analysis might conclude that the company is letting its fixed asset base become too old./Accounting policies. Different companies may have different policies for recording the same accounting transaction. This means that comparing the ratio results of different companies may be like comparing apples and oranges. For example, one company might use accelerated depreciation while another company uses straight-line depreciation, or one company records a sale at gross while the other company does so at net./Business conditions. You need to place ratio analysis in the context of the general business environment. For example, 60 days of sales outstanding might be considered poor in a period of rapidly growing sales, but might be excellent during an economic contraction when customers are in severe financial condition and unable to pay their bills./Interpretation. It can be quite difficult to ascertain the reason for the results of a ratio. For example, a current ratio of 2:1 might appear to be excellent, until you realize that the company just sold a large amount of its stock to bolster its cash position. A more detailed analysis might reveal that the current ratio will only temporarily be at that level, and will probably decline in the near future./Company strategy. It can be dangerous to conduct a ratio analysis comparison between two firms that are pursuing different strategies. For example, one company may be following a low-cost strategy, and so is willing to accept a lower gross margin in exchange for more market share. Conversely, a company in the same industry is focusing on a high customer service strategy where its prices are higher and gross margins are higher, but it will never attain the revenue levels of the first company./Point in time. Some ratios extract information from the balance sheet. Be aware that the information on the balance sheet is only as of the last day of the reporting period. If there was an unusual spike or decline in the account balance on the last day of the reporting period, this can impact the outcome of the ratio analysis

Cash Flow StatementFund Flow Statement
1. It is prepared on the basis of cash and cash equivalents.1. It is prepared on the basis of fund as working capital.
2. Cash from operation is calculated.2. Funds from operation is calculated.
3. Statement of changes in working capital is not prepared.3. Statement of changes in working capital is prepared.
4. It is started with cash flows from operating activities.4. It is started with funds from operation or funds lost in operation.
5. It is ended with closing cash in hand and cash equivalents.5. It is ended with either increase in working capital or decrease in working capital.
6. The reasons for the change in cash are known through cash flow statement.6. The reasons for the change in working capital are known through fund flow statement.
7. Short term financial pIanning is done through cash flow statement.7. Medium term and long term financial planning is done through funds flow statement.
8. Cash flow analysis is based on cash concept.8. Funds flow analysis is based on accrual concept.
9. It is used for preparing cash budgeting.9. It is used for preparing capital budgeting.
10. It shows only changes in cash position.10. It is concerned with the changes in working capital between two balance sheet dates.
11. It is worked as an indicator of improved working capital.11. It is not necessary that an improved fund position will be an indicator of improved and sound cash position.
12. Increase in current liability or decrease in current assets brings decrease in working capital and vice versa.12. Increase in current liability or decrease in current asset brings increase in cash and vice versa.

Trial Balance is a statement which lists all the balances of the Real, Personal and Nominal Account irrespective of Capital or Revenue account. It contains two columns debit and credit. If the transactions are recorded properly by giving dual sided effect and then posted systematically, then the total of both the columns would be identical.

A Balance Sheet is a statement which represents the assets, liabilities and shareholder’s equity of the company is known as Balance Sheet. This statement contains two major heads in which it is classified: One is assets, which is divided into Current and Non – Current Assets. Current Assets are those assets which are readily converted into cash while the Non – Current Assets are those assets with the help of which the company runs the business

Differences Between Trial Balance and Balance Sheet

  1. Statement of debit and credit balances were taken from general ledger is known as Trial Balance. Statement of assets and equity & liabilities is known as Balance Sheet.
  2. Trial Balance does not include closing stock while the Balance Sheet does not include opening stock.
  3. Trial Balance checks the arithmetical accuracy in the recording and posting while balance sheet is prepared to determine the financial position of the company on a specific date
  4. Trial Balance is prepared after posting into ledger whereas Balance Sheet is prepared after the preparation of Trading and Profit & Loss Account.
  5. The Balance Sheet is the part of the Financial Statement while Trial Balance is not a part of the Financial Statement.
  6. Balances of all personal, real and nominal account are shown in the trial balance. On the contrary, Balance sheet shows the balances of personal and real account only.
  7. The trial balance is prepared at the end of each month, quarter, half year or the financial year. Conversely, the balance sheet is prepared at the end of each month.
  8. The trial balance is prepared for internal use only, however, the balance sheet is prepared for both internal and external use, i.e. to inform outside parties about the financial condition of the entity.

Factors Affecting Working Capital Or Determinants Of Working Capital

Requirements Of working capital depend upon various factors such as nature of business, size of business, the flow of business activities. However, small organization relatively needs lesser working capital than the big business organization. Following are the factors which affect the working capital of a firm:/1. Size Of Business Working capital requirement of a firm is directly influenced by the size of its business operation. Big business organizations require more working capital than the small business organization. Therefore, the size of organization is one of the major determinants of working capital./2. Nature Of Business Working capital requirement depends upon the nature of business carried by the firm. Normally, manufacturing industries and trading organizations need more working capital than in the service business organizations. A service sector does not require any amount of stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or trading firm, credit sales and advance related transactions are in large amount. So, they need more working capital. 3. Storage Time Or Processing Period Time needed for keeping the stock in store is called storage period. The amount of working capital is influenced by the storage period. If storage period is high, a firm should keep more quantity of goods in store and hence requires more working capital. Similarly, if the processing time is more, then more stock of goods must be held in store as work-in-progress./4. Credit Period Credit period allowed to customers is also one of the major factors which influence the requirement of working capital. Longer credit period requires more investment in debtors and hence more working capital is needed.But, the firm which allows less credit period to customers needs less working capital./5. Seasonal Requirement In certain business, raw material is not available throughout the year. Such business organizations have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the entire year. Thus, a huge amount is blocked in the form of raw material inventories which gives rise to more working capital requirements./6. Potential Growth Or Expansion Of BusinessIf the business is to be extended in future, more working capital is required. More amount of working capital is required to meet the expansion need of business./7. Changes In Price Level Change in price level also affects the working capital requirements. Generally, the rise in price will require the firm to maintain large amount of working capital as more funds will be required to maintain the sale level of current assets./8. Dividend PolicyThe dividend policy of the firm is an important determinant of working capital. The need for working capital can be met with the retained earning. If a firm retains more profit and distributes lower amount of dividend, it needs less working capital./9. Access To Money MarketIf a firm has good access to capital market, it can raise loan from bank and financial institutions. It results in minimization of need of working capital./10. Working Capital CycleWhen the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital./11. Operating Efficiency The operating efficiency of a firm also affects the firm’s need of working capital. The operating efficiency of the firm results in optimum utilization of assets. The optimum utilization of assets in turn results in more fund release for working capital.

In financial accounting, a cash flow statement, also known as statement of cash flows,[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.

Advantages, Uses or Importance of Cash Flow Statement

The various uses and importance of cash flow analysis can be briefly explained below.

1. It discloses the causes of variations in cash i.e. opening cash and closing cash for a particular period.

2. It facilitates the management for implementing short term financial plan.

3. It is highly useful to management for assessing its ability to meet its short term financial obligations such as payment to sundry creditors, payment of wages and salaries, payment of interest for banks’ and financial institutions’ loans, payment of interest on debentures, payment of dividend to shareholdersand the like.

4. The financial plans of the company can be revised according to necessities on the basis of cash flow analysis.

5. It reflects good or bad management of the business.

6. Some factors are responsible for variations of cash. Such factors can be observed with the help of cash flow analysis.

7. The financial plan and policies are prepared with the help of detailed information of cash flow analysis in the years to come.

8. The banks and financial institutions can decide before lending loan facilities on seeing the cash flow statement.

9. It helps the internal financial management to find out the possibility of retiring long term debt.

10. It helps the top management to coordinate financial operations properly.

11. It highlights the factors which are responsible for lower cash balance in spite of increase in income or vice versa.

12. The cash expenditure can be controlled by comparing cash flow statement and cash budget for the same period.

13. The company can make an arrangement of future cash requirements on the basis of projected cash flow statement.

14. It is used for inter-firm and intra-firm comparison to identify the efficiency of operation.

15. The mismanagement of cash can be properly analyzed and its recurrence can be avoided in the days to come.

16. The projected cash flow statement helps the management to,prepare cash budget.

17. It can be used for appraisal of various capital investment projects just to determine their viability and profitability.

Cost accounting is an accounting method that aims to capture a company’s costs of production by assessing the input costs of each step of production as well as fixed costs, such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance.

Different Methods of Costing

Here’s a breakdown of each different method of costing:

  • Unit costing: This method is also known as “single output costing.” This method of costing is used for products that can be expressed in identical quantitative units. Unit costing is suitable for products that are manufactured by continuous manufacturing activity: for example, brick making, mining, cement manufacturing, dairy operations, or flour mills. Costs are ascertained for convenient units of output.
  • Job costing: Under this method, costs are ascertained for each work order separately as each job has its own specifications and scope. Job costing is used, for example, in painting, car repair, decoration, and building repair.
  • Contract costing: Contract costing is performed for big jobs involving heavy expenditure, long periods of time, and often different work sites. Each contract is treated as a separate unit for costing. This is also known as terminal costing. Projects requiring contract costing include construction of bridges, roads, and buildings.
  • Batch costing: This method of costing is used where units produced in a batch are uniform in nature and design. For the purpose of costing, each batch is treated as an individual job or separate unit. Industries like bakeries and pharmaceuticals usually use the batch costing method.
  • Operating costing or service costing: Operating or service costing is used to ascertain the cost of particular service-oriented units, such as nursing homes, busses, or railways. Each particular service is treated as a separate unit in operating costing. In the case of a nursing home, a unit is treated as the cost of a bed per day, while, for busses, operating cost for a kilometer is treated as a unit.
  • Process costing: This kind of costing is used for products that go through different processes. For example, the manufacturing of clothes involves several processes. The first process is spinning. The output of that spinning process, yarn, is a finished product which can either be sold on the market to weavers, or used as a raw material for a weaving process in the same manufacturing unit. To find out the cost of the yarn, one needs to determine the cost of the spinning process. In the second step, the output of the weaving process, cloth, can also can be sold as a finished product in the market. In this case, the cost of cloth needs to be evaluated. The third process is converting the cloth to a finished product, for example a shirt or pair of trousers. Each process that can result in either a finished good or a raw material for the next process must be evaluated separately. In such multi-process industries, process costing is used to ascertain the cost at each stage of production.
  • Multiple costing or composite costing: When the output is comprised of many assembled parts or components, as with television, motor cars, or electronics gadgets, costs have to be ascertained for each component, as well as with the finished product. Such costing may involve different methods of costing for different components. Therefore, this type of costing is known as composite costing or multiple costing.
  • Uniform costing: This is not a separate method of costing, but rather a system in which a number of firms in the same industry use the same method of costing, using agreed-on principles and standard accounting practices. This helps in setting the price of the product and in inter-firm comparisons


Budgets are nothing but the estimation of future earnings as well as expenditures for a predetermined period of time. Budgeting is an integral part of accounting in the present scenario of globalized business. The preparation of budget is only a beginning job. The important duty of the cost and management accounting system is budgetary control. This is a common tool used by the business executives to plan and control the business activities. Here is an attempt to learn the concept of budgeting and real life application of budgets as well as budgetary control

 Essential steps for installation of budgetary control system

In order to have effective Budgetary Control System, it is appropriate to take the following steps:
1.Budget Manual:
This is a written document specifying the objectives and procedures of budgetary control. It spells out the duties and responsibilities of executives. The budget manual defines the sanctioning powers of the various authorities./2.Budget Centre:A budget centre is that part of organization for which the budget is prepared. Budget centre can be a department, section of a department or any other part of department. Budget centres are necessary for the purpose of ascertaining cost, performance and its control./3.Budget Committee:In a large concern, all the functional heads are the members of the budget committee. They discuss their respective budgets and finalize the budget, after collective decisions. The committee is responsible for its execution and achievement of the goals set./4.Budget Officer:The chief executive appoints some person as the budget officer. He is conversant with the functioning of the various departments. All budgets are presented to the budget officer who places before the budget committee, after making the necessary changes, for its approval. The actual performance of each department is communicated to the budget officer. He determines the variances, analyses the reasons and reports to the top management to take the necessary steps to remove the deviations. The variances are reported to the concerned departments too for necessary action, as may be necessary. As the convener of the budget committee, the main function of Budget officer is co-ordination to ensure achievement of the budgeted targets.
5.Functional Budgets:Separate functional budgets have to be prepared. Examples are Production Budget, Sales Budget, HR Budget, Cash Budget, Capital expenditure Budget and R & D Budget./6.Budget Period:A budget period is the length of the period for which budget is prepared. Normally, budgets like purchases and sales budgets are prepared for one year. However, a capital expenditure budget is prepared for a longer period i.e. 3 to 5 years./7.Determination of Key Factor:Budgets are prepared for all the functional areas such as production, sales, purchases, finance, human resources and research and development. These activities are inter-connected and inter-dependent and so the budgets are. For example, raw material supply may be limited. So, production and sales budgets are prepared, based on the purchase budget. To some of the firms, finance may be a constraint. Then, all other budgets are prepared based on the availability of finance. A factor, which influences all other budgets, is known as key factor or principal factor. A better co-ordination brings better performance, even while facing constraints. The influence of key factor may neither be permanent nor constant. Limited supply of raw materials may be the key factor, till an alternative source of supply for that material is found. When the raw material supply problem is cleared, another factor may create the problem and become key factor. After raw materials problem is eased, sales may become a problem and become a key factor, due to change in trends. The management would be constantly endeavoring to remove the problems associated with key factor for better performance

On the basis of functions/A.Functional Budgets/1.Sales Budget/Sales Budget generally forms the fundamental basis on which all other budgets are built. The budget is based on projected sales to be achieved in a budget period. The Sales Manager is directly responsible for the preparation and execution of this budget. He usually takes various organizational and environmental factors into consideration while preparing the sales budget. It is desirable to break up the entire sales budget on the basis of different products, time periods and sales areas or territories./2.Production Budget This budget provides an estimate of the total volume of production distributed product-wise with the scheduling of operations by days, weeks and months, and a forecast of the inventory of finished products. Generally, the production budget is based on the sales budget. The responsibility for the overall production budget lies with Works Manager and that of departmental production budgets with departmental works managers. /Production budget may be expressed in physical or financial terms or both in relation to production. The production budgets attempt to answer the following questions;/(i)What is to be produced?/(ii)When it is to be produced?/(iii)How it is to be produced?/(iv)Where it is to be produced?/The production budget envisages the production programme for achieving the sales target. It serves as a basis for preparation of related cost budgets, e.g., materials cost budget, labour cost budget, etc. It also facilitates the preparation of a cash budget. The production budget is prepared after taking into consideration several factors like; inventory policies, sales requirements, production stability, plant capacity, availability of materials and labour, time taken in production process, etc./3.The direct materials budget The direct materials’ budget has two components, (i) materials requirement, budget, and (ii) materials procurement or purchase budget. The former deals with the total quantity of materials required during the budget period, while the later deals with the materials to be acquired from the Market during the budget period. Materials to be acquired are estimated after taking into account the losing rind the opening inventories and the materials for which orders have already been placed./4.Direct Labour Budget Direct labour budget like direct materials budget may be divided into two categories such as direct labour requirement budget and direct labour procurement budget. The former deals with the total direct labour requirement in terms of quantity or/and value, while the latter states the additional direct workers to be recruited/.5.Factory Overheads Budget Factory or manufacturing overheads include the cost of indirect material, indirect labour and indirect expenses. Manufacturing overheads may be classified into (i) Fixed Overheads i.e. which tend to remain constant irrespective of change in the volume of output, (ii) Variable Overheads i.e. which tend to vary with the output, and (iii) Semi-variable Overheads i.e. which are partly variable and partly fixed. The manufacturing overheads budget will provide an estimate of these overheads to be incurred during the budget period. Fixed manufacturing overheads can be estimated on the basis of the past information and knowledge of any changes which may occur during the ensuing budget period. Variable overheads are estimated after considering the scheduled production and operating conditions in the budget period./ 6.Administrative Overheads Budget This budget covers the administrative expenses including the salaries of administrative and managerial staff. A careful analysis of the needs of all administrative departments of the enterprise is necessary. The minimum requirements for the efficient operation of each department can be estimated on the basis of costs for the previous years, and after a study of the plans and responsibilities of each administrative department for the budget period. The budget for the entire administrative function is obtained by integrating the separate budgets of all administrative departments./7.Selling and Distribution Overheads Budget This budget includes all expenses relating to selling, advertising, delivery of goods to customers, etc. It is better if such costs are analyzed according to products, types of customers, territories and the sales departments. The responsibility for the preparation of this budget rests with the executives of the sales department. There must be a relationship of selling expenses with the volume of sales expected and an effort should be made to control the costs of distribution. The preparation of the budget would depend on analysis of the market situation by the management, advertising policies, research programmes and the fixed and variable elements./8.Cash Budget Planning cash and controlling its use are important tasks. If the future cash flows are not properly anticipated, it is likely that idle cash balances may be created which may result into unnecessary losses. It may also result in cash deficits and consequent problems. The financial manager should, therefore, plan the needs and uses. Budget is a useful device for this purpose.

How To Prepare Final Accounts

1. Read the list of Trial Balance items and adjustments carefully

2. Record all the debit items given in the Trial Balance on either expenses side of Trading-P&L Account or Asset Side of Balancesheet

3. Record all the credit items given in the Trial Balance on either Income side of Trading-P&L Account or Liabilities Side of Balancesheet

4. Remember to post all the trial balance items only once, but all the adjustments items twice (one debit effect and one credit effect)

5. Balance your trading-P&L a/c first and determine profit/loss

6. Add this profit obtained with the Capital, on the liabilities side of the balance sheet

7. Take the total of the balance sheet.

A fund flow statement is a summary of a firm’s inflow and outflow of funds. In other words, fund flow is a statement which analyzes the inflow and outflow of funds of an organization or firm in a particular period.

The following are the uses, significance or benefits of funds flow statement.

1. The financial resources of the company are analyzed in detail and disclose the changes made between the two balance sheet dates.

2. It gives an answer to the question of there is an inadequate liquid cash position in spite of business making more and more profits.

3. It shows the extent funds were received the ways of usage for a specific period.

4. It shows the possibility of paying more dividend than current earnings or paying normal dividend in the presence of net loss for the period.

5. The cost of capital of the business can be computed on the basis of the sources of funds flow statement.

6. It shows the usage of earned profits of the current year.

7. The sources of previous year funds flow statement may act as a guide for getting funds for future requirements.

8. Sometimes, the company has high liquid cash position even though, there is a net loss for the specific period. The reason for such position is find out through funds flow statement.

9. The application of funds can provide a basis for selection of investment proposals or future capital expenditure decisions.

10. The overall credit worthiness of the company can find out on seeing the funds flow statement.

11. The strength and weakness of financial position of the company are identified on seeing the funds flow statement./12. It helps the management to allot the inadequate resources to meet the requirements of business at productive level./13. It highlights the financial consequences of business operation./14. It tests the effective use of working capital by the management during a particular period./15. It helps the management to frame or change the financial policy of the company./16. It suggests ways to improve working capital position of the company.


Limitations Of Financial Statement Analysis

Although analysis of financial statement is essential to obtain relevant information for making several decisions and formulating corporate plans and policies, it should be carefully performed as it suffers from a number of the following limitations.

1. Mislead the user
The accuracy of financial information largely dependson how accurately financial statements are prepared. If their preparation is wrong, the information obtained from their analysis will also be wrong which may mislead the user in making decisions.

2. Not useful for planning
Since financial statements are prepared by using historical financial data, therefore, the information derived from such statements may not be effective in corporate planning, if the previous situation does not prevail.

3. Qualitative aspects
Then financial statement analysis provides only quantitative information about the company’s financial affairs. However, it fails to provide qualitative information such as management labor relation, customer’s satisfaction, management’s skills and so on which are also equally important for decision making.
4. Comparison not possible
The financial statements are based on historical data. Therefore comparative analysis of financial statements of different years can not be done as inflation distorts the view presented by the statements of different years.

5. Wrong judgement
The skills used in the analysis without adequate knowledge of the subject matter may lead to negative direction . Similarly, biased attitude of the analyst may also lead to wrong judgement and conclusion.

A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. The concept is useful for determining the efficiency with which a business utilizes its assets. In most cases, a high asset turnover ratio is considered good, since it implies that receivables are collected quickly, fixed assets are heavily utilized, and little excess inventory is kept on hand. This implies a minimal need for invested funds, and therefore a high return on investment./Conversely, a low liability turnover ratio (usually in relation to accounts payable) is considered good, since it implies that a company is taking the longest possible amount of time in which to pay its suppliers, and so has use of its cash for a longer period of time.

Examples of turnover ratios are:

  • Accounts receivable turnover ratio. Measures the time it takes to collect an average amount of accounts receivable. It can be impacted by the corporate credit policy, payment terms, the accuracy of billings, the activity level of the collections staff, the promptness of deduction processing, and a multitude of other factors.
  • Inventory turnover ratio. Measures the amount of inventory that must be maintained to support a given amount of sales. It can be impacted by the type of production process flow system used, the presence of obsolete inventory, management’s policy for filling orders, inventory record accuracy, the use of manufacturing outsourcing, and so on.
  • Fixed asset turnover ratio. Measures the fixed asset investment needed to maintain a given amount of sales. It can be impacted by the use of throughput analysis, manufacturing outsourcing, capacity management, and other factors.
  • Accounts payable turnover ratio. Measures the time period over which a company is allowed to hold trade payables before being obligated to pay suppliers. It is primarily impacted by the terms negotiated with suppliers and the presence of early payment discounts.

Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of the firm. Its Importance are given below-

 –Develop and formulate long-term strategic goals – the ability to set long-term goals is essential to the growth and prosperity of any business. The ability to appraise/value investment projects via capital budgeting creates a framework for businesses to plan out future long-term direction./Seek out new investment projects – knowing how to evaluate investment projects gives a business the model to seek and evaluate new projects, an important function for all businesses as they seek to compete and profit in their industry./-Estimate and forecast future cash flows – future cash flows are what create value for businesses overtime. Capital budgeting enables executives to take a potential project and estimate its future cash flows, which then helps determine if such a project should be accepted./-Facilitate the transfer of information – from the time that a project starts off as an idea to the time it is accepted or rejected, numerous decisions have to be made at various levels of authority. The capital budgeting process facilitates the transfer of information to the appropriate decision makers within a company.