Q - List out various types of borrowings and explain any one of borrowings

1. Personal Loans
Personal loans are the broadest type of loan category and typically have repayment
terms between 24 and 84 months. They can be used for just about anything except for a
college education or illegal activities. People commonly use personal loans for things
like:
Vacations, Weddings, Emergencies, Medical treatment, Home renovations, Debt
consolidation, Relocating to a new city, Computers or other pricey electronics
Personal loans generally come in two forms: secured and unsecured. Secured loans
are backed by collateral—such as a savings account or a vehicle—that a lender can
take back if you don’t repay your full loan amount.
Unsecured loans, on the other hand, require no collateral and are backed by your
signature alone, hence their alternate name: signature loans. Unsecured loans tend to
be more expensive and require better credit because the lender takes on more risk.
Applying for a personal loan is easy, and typically can be done online through a bank,
credit union or online lender. Borrowers with excellent credit can qualify for the best
personal loans, which come with low interest rates and a range of repayment options.
2. Auto Loans
Auto loans are a type of secured loan that you can use to buy a vehicle with repayment
terms between three to seven years. In this case, the collateral for the loan is the
vehicle itself. If you don’t pay, the lender will repossess the car.
You can typically get auto loans from credit unions, banks, online lenders and even car
dealerships. Some car dealerships have a financing department where they help you
find the best loan from partner lenders. Others operate as “buy-here-pay-here” lenders,
where the dealership itself gives you the loan. These tend to be much more expensive,
though.
3. Student Loans
Student loans are meant to pay for tuition, fees and living expenses at accredited
schools. This means that you generally can’t use student loans to pay for specific types
of education, such as coding bootcamps or informal classes.
There are two types of student loans: federal and private. You get federal student loans
by filling out the Free Application for Federal Student Aid (FAFSA) and working with
your school’s financial aid department. Federal student loans generally come with more
protections and benefits but charge slightly higher interest rates. Private student loans
come with much fewer protections and benefits, but if your credit is good, you could
qualify for better rates.

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4. Mortgage Loans
Mortgages help you finance the purchase of a home, and there are many types of
mortgages available. Banks and credit unions are common mortgage lenders; however,
they may sell their loans to a federally-sponsored group like Fannie Mae or Freddie Mac
if it’s a qualified mortgage.
There are also government-backed loan programs available for certain groups of
people, including:
5. Home Equity Loans
If you have equity in your home, you might be able to use a home equity loan, also
known as a second mortgage. The equity you have in your home—the portion of your
home that you own, and not the bank—secures the loan. You can typically borrow up to
85% of your home’s equity, which is paid out as a lump sum amount and repaid over
five to 30 years.
To find out your home’s equity, simply subtract your mortgage balance from your
home’s assessed value. For example, if you owe $150,000 on your mortgage and your
home is worth $250,000, then your equity is $100,000. Considering the 85% loan limit
rule, and depending on your lender, you could potentially borrow up to $85,000 with
$100,000 in equity.
6. Credit-builder Loans
Credit-builder loans are small, short-term loans that are taken out to help you build
credit. Since they’re marketed toward people with zero or limited credit, you don’t need
good credit to qualify, unlike regular loans. You can typically find credit-builder loans at
credit unions, community banks, Community Development Financial Institutions
(CDFIs), lending circles or online lenders.
Instead of receiving the loan funds up front as you would on a traditional loan, you make
fixed monthly payments and receive the money back at the end of the loan term. Credit-
builder loans typically range between $300 to $3,000 and charge annual percentage
rates (APRs) between 6% and 16%.
Credit-builder loans can be a very affordable and safe way to start building credit,
especially for young people. If you put your payments on auto-pay, for example, you’ll
never have to worry about making your payments and you can build credit entirely on
auto-pilot.
7. Debt Consolidation Loans
Debt consolidation lets you streamline your payments by applying for a new loan to pay
off your other debts, therefore leaving you with only one monthly loan payment. If you
have high-interest debts like credit cards or a high-interest personal loan, a debt
consolidation loan can help you in two ways. First, you could qualify for a lower monthly

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payment. Second, you could qualify for lower rates, which can help you save money
over the long term.
In order to get a debt consolidation loan that improves your payments, though, you’ll
need to first shop around for a lower rate than your current loan or credit card. You’re
also more likely to qualify if your credit has improved since you took out your current
loan or card. Once you qualify, your lender may automatically pay the debts for you, or
you will need to do it yourself.
8. Payday Loans
Payday loans are a type of short-term loan, usually lasting just until your next paycheck.
These loans aren’t credit-based, and so you don’t need good credit to qualify. However,
these loans are often predatory in nature, for a couple of reasons.
First, they charge very high finance fees, which can work out to around 400% APR in
some cases (the finance fee isn’t the same thing as an APR). Second, they allow you to
roll over your loan if you can’t pay it off by your next paycheck. It sounds helpful at
first—until you realize even more fees are tacked on, which trap a lot of people in debt
obligations that can be higher than what they originally borrowed.

9. Small Business Loans

There are several types of small business loans, including Small Business
Administration (SBA) loans, working capital loans, term loans and equipment loans.
These loans help small businesses, typically companies with up to 300 employees, fund
their operations. Local businesses—like landscapers, hair salons, restaurants or family-
owned grocers—and sole proprietors—such as freelancers who still have a traditional
day job—also can apply.
Small business loans typically have more qualification requirements than personal
loans, especially if you’re applying for an SBA loan. However, the rewards are well
worth it because these loans can give your business the financing it needs to grow.
Alternative business financing methods, like invoice factoring or merchant cash
advances, may be more costly, leaving small business loans as the best option for
business financing.
10. Title Loans
Title loans are another type of secured loan where you pledge the title for a vehicle you
own—such as a car, truck or RV—as collateral. Your loan limit typically is anywhere
between 25% to 50% of your car’s value, evaluated by the lender. Lenders that offer
title loans also charge a monthly fee of 25% of the loan amount, which translates to an
annual percentage rate (APR) of at least 300%, making these a costly financing option.
11. Pawnshop Loans

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Pawnshop loans are another type of loan we usually don’t recommend because they’re
very expensive, have small loan limits and require quick repayment. To get a pawnshop
loan, you’ll bring something of value to the pawnbroker, such as a power tool, a piece of
jewelry or a musical instrument.
The pawnbroker will assess the item, and if they offer you a loan, it’ll typically be worth
25% to 60% of the item’s resale value. You’ll receive a pawn ticket, which you’ll need
when you return to repay the loan, typically within 30 days. If you don’t return, or if you
lose your ticket, the pawnbroker gets to keep your item to resell and recoup their
money.
12. Boat Loans
Boat loans are specifically designed to finance the purchase of a boat and are available
through banks, credit unions and online lenders. The loans can either be unsecured or
secured, with secured loans using your boat as collateral. As with any vehicle-related
loan, it’s crucial to keep depreciation in mind.
Boats and other vehicles lose value over time, especially if you buy a new boat. If you
choose a long-term loan, don’t make a very large down payment and/or sell your boat
soon after you buy it, it’s possible to owe more on the loan than you can sell it for. This
means you’ll need to keep paying off the loan even after you sell the boat, and that’s not
an enviable position to be in.
14. Family Loans
Family loans are informal loans that you get from family members (and sometimes
friends). You may choose to turn to family if you can’t qualify for a traditional loan from a
bank or lender, for example.
Family loans can be useful because you don’t need any credit to get one. If your family
member trusts you and they have the financial means to do so, they can choose to give
you the loan.
But that doesn’t mean you should take advantage of your family member’s generosity.
It’s still a good idea to draft up and sign a loan agreement, including interest payments,
due dates, late fees or other consequences for non-payment. You can find draft
agreements and payment calculators online to help you do this.

15. Land Loans

There are a lot of reasons people buy land. Maybe they want to build a house on it,
harvest its natural resources or lease it out to other people and businesses. But land
can be expensive, and that’s where a land loan can come in handy.

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Land loans generally come in two forms: improved and unimproved land loans.
Improved land loans are for plots that are ready to build on. For example, they might
have a well and septic tank already installed, power lines or a driveway. Unimproved
land loans, on the other hand, are for a plot of vacant land, which may or may not be
easy to access.

If you choose to take out a land loan, you can expect to have higher interest rates and
more strict down payments and credit requirements than other property loans because
they’re a more risky transaction for a lender.

Q. Discuss and differentiate Journal and ledger

What is a Journal?
A journal is a subsidiary book of account that records monetary transactions according
to accounting standards. These transactions get recorded in chronological order, and it
gives details about the accounts that are affected by each transaction. It is known as the
first step of the accounting process.
What are its features?
The features of a journal are as follows:
Chronology: The journal entries get recorded in a date-wise order, and it helps in
checking the transactions much more quickly.
Double Entry System: Journal entries follow a system where every transaction is
entered both on the debit and credit sides. It is an example of a dual entry system. One
account gets debited and the other gets credited with the same value.
Daybook: A journal records transactions on a day-to-day basis for consistency and
ease.
Compound Entry: A single entry can have two or more accounts on the same day, and
a journal can also have more than one related transaction.
Explanation: Each transaction includes a short description known as the narration
(within brackets). It helps to explain the nature and purpose of the transaction.

What is a Ledger?
A Ledger is a principal book of account, and its primary purpose is to transfer
transactions from a journal and then classify it into separate accounts. Ledger is also

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known as the book of final entry as it helps businesses prepare accounting statements
like the Trial Balance.
What are its features?
The features of a ledger are as follows:
Two Sides: Every Ledger has two sides – Debit and Credit. The debit entries come on
the left side of a ledger, while the credit entries come on the right side.
Transaction: Every transaction impacts two or more ledger accounts, and it is because
the transaction is related to a particular person, asset, expense or income.
Balancing the ledger: The total debit and credit sides of a ledger must always be the
same. But that is not always the case since the debit side could be more than the credit
side and vice versa. To balance the ledger, we have to record the difference between
the two on the deficient side. When the debit side is more than the credit side, the
balance gets recorded on the credit side, known as debit balance. Similarly, when the
credit side exceeds the debit side, the balance is recorded on the credit side, known as
a credit balance.

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Q. Classification of assets and liabilities
What Are Assets and Liabilities?
A balance sheet is a statement that outlines the financial position of an enterprise. It is
necessary for the balance sheet to show the enterprise’s assets and liabilities based on
their characteristic features.
If assets are the property and possessions of the business, liabilities are its legal
obligations (i.e., the claim by outsiders on the assets of a business).
(No doubt, the Owner’s equity is also a liability that the business owes to the proprietors
or partners.)
Classification of Assets
Assets may be broadly classified into three categories as shown in the below figure.
Three Categories of Assets
1. Fixed Assets
Fixed assets can be divided into the following groups:
Tangible

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Intangible
Wasting
Fictitious
Fixed assets are assets acquired for beneficial use and held permanently in the
business. The business can earn profits by using these assets.
Tangible assets (or definite assets) are fixed assets that can be seen and touched, and
which have volume.
Examples of tangible assets include land, antiques, plants, buildings, fixtures, vehicles,
and equipment and tools.
Intangible assets are assets that cannot be seen or touched, and which have no
volume. Examples include goodwill, patents, trademarks, copyrights, and leaseholds.
Wasting assets are assets that get exhausted or reduce in value when used. Natural
resources, oil, timber, coal, mineral deposits, and quarries are all examples of wasting
assets.
Fictitious assets are assets that are either past accumulated losses or expenses, which
are incurred once in the lifetime of a business and are capitalized for the time being.
These items are not actually assets but are treated as assets.
Due to the intangible nature of fictitious assets, they are sometimes also categorized as
intangible assets.
Examples of fictitious assets include organizational expenses, discounts on issues of
shares, advertising expenses capitalized, and research and development expenses.
2. Floating Assets
Investments in short-term marketable securities that can quickly be converted into cash
can be treated as current assets, whereas investments in long-term marketable
securities can be treated as semi-fixed assets.
Therefore, some investments cannot be categorized either as current assets or fixed
assets.
Their treatment differs depending on their nature and, hence, they are shown midway
between fixed assets and current assets, and are considered floating assets.
3. Current Assets
Current assets are expected to be sold or otherwise used up in the near future. These
assets are readily available for discharging an enterprise's liabilities.
Those items of assets which can be converted into cash quickly without significant loss
of time and money are called liquid assets and fall under the category of current assets.

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Examples of current assets include cash, bank balance, accounts receivables (sundry
debtors and bills receivables), and stock that can be realized quickly.

Classification of Liabilities
Liabilities may be classified into four categories, as shown in the figure below.
Four Categories of Liabilities
As indicated above, liabilities can be divided into the following groups:
Fixed liabilities
Long-term liabilities
Current liabilities
Contingent liabilities
1. Fixed Liabilities
Fixed liabilities are due to the owners/partners/shareholders of an enterprise, and they
are payable only on dissolution/liquidation of the enterprise.

2. Long-Term Liabilities
These are in the nature of long-term loans (e.g., 5-10 years) or debentures that are
payable on or after the lapse of the term consented to in the borrowing
agreement/document.
3. Current Liabilities
These are short-term obligations payable within the next accounting period/year or
payable within a very short period (e.g., 1-3 months).
Examples of current liabilities include accounts payable (sundry creditors and bills
payable), short-term bank overdrafts, and short-term temporary loans.
4. Contingent Liabilities
Contingent liabilities arise depending on the happenings of certain events. Such
liabilities may or may not arise. However, it is important to be cautious about them.
Consider the example of a case that is pending in a court of law concerning a disputed
payment or compensation claim.

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If the case is decided against the enterprise, then liability arises. Otherwise, there is no
obligation to pay and, as such, no liability.
Bills discounted, as well as guarantees given against loans from another enterprise or
person, may also cause liability if the other person does not honor the commitment.
If the person honors the commitment, then no liability arises. This means that the
liability is 'probable'.
Probable liabilities are treated as contingent liabilities, and a note is given for such
liabilities below the balance sheet.

Q. Explain Accounting Process –

What Is Accounting?
Accounting is the process of recording financial transactions pertaining to a business.
The accounting process includes summarizing, analyzing, and reporting these
transactions to oversight agencies, regulators, and tax collection entities. The financial
statements used in accounting are a concise summary of financial transactions over an
accounting period, summarizing a company's operations, financial position, and cash
flows.
KEY TAKEAWAYS
Regardless of the size of a business, accounting is a necessary function for decision
making, cost planning, and measurement of economic performance.
A bookkeeper can handle basic accounting needs, but a Certified Public Accountant
(CPA) should be utilized for larger or more advanced accounting tasks.
Two important types of accounting for businesses are managerial accounting and cost
accounting. Managerial accounting helps management teams make business decisions,
while cost accounting helps business owners decide how much a product should cost.
Professional accountants follow a set of standards known as the Generally Accepted
Accounting Principles (GAAP) when preparing financial statements.
Accounting is an important function of strategic planning, external compliance,
fundraising, and operations management.
What Is the Purpose of Accounting?
Accounting is one of the key functions of almost any business. It may be handled by a
bookkeeper or an accountant at a small firm, or by sizable finance departments with
dozens of employees at larger companies. The reports generated by various streams of
accounting, such as cost accounting and managerial accounting, are invaluable in
helping management make informed business decisions.

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The financial statements that summarize a large company's operations, financial
position, and cash flows over a particular period are concise and consolidated reports
based on thousands of individual financial transactions. As a result, all professional
accounting designations are the culmination of years of study and rigorous
examinations combined with a minimum number of years of practical accounting
experience.
What Are the Different Types of Accounting?
Financial Accounting
Financial accounting refers to the processes used to generate interim and annual
financial statements. The results of all financial transactions that occur during an
accounting period are summarized in the balance sheet, income statement, and cash
flow statement. The financial statements of most companies are audited annually by an
external CPA firm.
For some, such as publicly traded companies, audits are a legal requirement.
However, lenders also typically require the results of an external audit annually as part
of their debt covenants. Therefore, most companies will have annual audits for one
reason or another
Managerial Accounting
Managerial accounting uses much of the same data as financial accounting, but it
organizes and utilizes information in different ways. Namely, in managerial accounting,
an accountant generates monthly or quarterly reports that a business's management
team can use to make decisions about how the business operates. Managerial
accounting also encompasses many other facets of accounting, including budgeting,
forecasting, and various financial analysis tools. Essentially, any information that may
be useful to management falls underneath this umbrella.
Cost Accounting
Just as managerial accounting helps businesses make decisions about management,
cost accounting helps businesses make decisions about costing. Essentially, cost
accounting considers all of the costs related to producing a product. Analysts,
managers, business owners, and accountants use this information to determine what
their products should cost. In cost accounting, money is cast as an economic factor in
production, whereas in financial accounting, money is considered to be a measure of a
company's economic performance.
Tax Accounting
While financial accountants often use one set of rules to report the financial position of a
company, tax accountants often use a different set of rules. These rules are set at the
federal, state, or local level based on what return is being filed. Tax accounts balance

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compliance with reporting rules while also attempting to minimize a company's tax
liability through thoughtful strategic decision-making. A tax accountant often oversees
the entire tax process of a company: the strategic creation of the organization chart, the
operations, the compliance, the reporting, and the remittance of tax liability.

Q. Explain the following.

(i) Standard Costing
(ii) Activity Based costing
What is Standard Costing?
The term’ standard cost’ consists of two parts: ‘ standard’ and ‘cost.’ ‘Standards’ can be
established concerning quantities and qualities like materials and labor. A cost is an
expression of the value established by the standard.
Standard costs are the scientifically predetermined costs of manufacturing a single unit
or several units of product or rendering service during a specified future period.
The Chartered Institute of Management Accountants, London, defines standard cost as
“a standard expressed in money. It is developed from an assessment of the value of
cost elements. It mainly provides bases for performance measurement, valuing stock,
control by exception reporting, and establishing selling prices.”
Advantages of Standard Cost
Standard costing provides several key advantages for organizations, including:
Improved cost control: By using standard costs, organizations can identify any
deviations from the expected cost of production and take corrective action if necessary.
This helps to control costs and improve overall financial performance.
Better decision-making: Standard costs provide a basis for making informed decisions
about pricing, production processes, and product mix. This allows organizations to
optimize their operations and maximize profits.
Better cost visibility: Standard costing provides a clear picture of the costs associated
with producing a product or providing a service, making it easier to identify areas for
cost reduction.
Improved budgeting: Standard costing provides a foundation for creating accurate
budgets and allows organizations to monitor their progress against budgeted costs. This
helps organizations stay within budget and achieve their financial goals.
Increased efficiency: Standard costing helps organizations to streamline their operations
and enhance efficiency by identifying areas for improvement and reducing waste.

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Improved performance measurement: Standard costing allows organizations to
measure the performance of different departments, products, and processes and make
informed decisions about allocating resources.
Increased accountability: Standard costing provides a clear picture of the costs
associated with different aspects of an organization’s operations. Also, it can be used to
hold managers and employees accountable for their performance
What Is Activity-Based Costing (ABC)?
Activity-based costing (ABC) is a costing method that assigns overhead and indirect
costs to related products and services. This accounting method of costing recognizes
the relationship between costs, overhead activities, and manufactured products,
assigning indirect costs to products less arbitrarily than traditional costing methods.
However, some indirect costs, such as management and office staff salaries, are
difficult to assign to a product.
How Activity-Based Costing (ABC) Works
Activity-based costing (ABC) is mostly used in the manufacturing industry since it
enhances the reliability of cost data, hence producing nearly true costs and better
classifying the costs incurred by the company during its production process.
This costing system is used in target costing, product costing, product line profitability
analysis, customer profitability analysis, and service pricing. Activity-based costing is
used to get a better grasp on costs, allowing companies to form a more appropriate
pricing strategy.
The formula for activity-based costing is the cost pool total divided by cost driver, which
yields the cost driver rate. The cost driver rate is used in activity-based costing to
calculate the amount of overhead and indirect costs related to a particular activity.
The ABC calculation is as follows:
Identify all the activities required to create the product.
Divide the activities into cost pools, which includes all the individual costs related to an
activity—such as manufacturing. Calculate the total overhead of each cost pool.
Assign each cost pool activity cost drivers, such as hours or units.
Calculate the cost driver rate by dividing the total overhead in each cost pool by the total
cost drivers.
Divide the total overhead of each cost pool by the total cost drivers to get the cost driver
rate.
Multiply the cost driver rate by the number of cost drivers.

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Requirements for Activity-Based Costing (ABC)
The ABC system of cost accounting is based on activities, which are any events, units
of work, or tasks with a specific goal, such as setting up machines for production,
designing products, distributing finished goods, or operating machines. Activities
consume overhead resources and are considered cost objects.
Under the ABC system, an activity can also be considered as any transaction or event
that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an
allocation base. Examples of cost drivers include machine setups, maintenance
requests, consumed power, purchase orders, quality inspections, or production orders.
There are two categories of activity measures: transaction drivers, which involves
counting how many times an activity occurs, and duration drivers, which measure how
long an activity takes to complete.
Unlike traditional cost measurement systems that depend on volume count, such as
machine hours and/or direct labor hours to allocate indirect or overhead costs to
products, the ABC system classifies five broad levels of activity that are, to a certain
extent, unrelated to how many units are produced. These levels include batch-level
activity, unit-level activity, customer-level activity, organization-sustaining activity, and
product-level activity.
Benefits of Activity-Based Costing (ABC)
Activity-based costing (ABC) enhances the costing process in three ways. First, it
expands the number of cost pools that can be used to assemble overhead costs.
Instead of accumulating all costs in one company-wide pool, it pools costs by activity.
Second, it creates new bases for assigning overhead costs to items such that costs are
allocated based on the activities that generate costs instead of on volume measures,
such as machine hours or direct labor costs.
Finally, ABC alters the nature of several indirect costs, making costs previously
considered indirect—such as depreciation, utilities, or salaries—traceable to certain
activities. Alternatively, ABC transfers overhead costs from high-volume products to
low-volume products, raising the unit cost of low-volume products.
KEY TAKEAWAYS
Activity-based costing (ABC) is a method of assigning overhead and indirect costs—
such as salaries and utilities—to products and services.
The ABC system of cost accounting is based on activities, which are considered any
event, unit of work, or task with a specific goal.
An activity is a cost driver, such as purchase orders or machine setups.

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The cost driver rate, which is the cost pool total divided by cost driver, is used to
calculate the amount of overhead and indirect costs related to a particular activity.
ABC is used to get a better grasp on costs, allowing companies to form a more
appropriate pricing strategy.

Q. Explain the following with help of case study.

(i) Goods Service Tax (GST)
(ii) Value Added Tax (VAT)
What Is the Goods and Services Tax (GST)?
The goods and services tax (GST) is a value-added tax (VAT) levied on most goods
and services sold for domestic consumption. The GST is paid by consumers, but it is
remitted to the government by the businesses selling the goods and services.
Critics point out, however, that the GST may disproportionately burden people whose
self-reported income are in the lowest and middle income brackets, making it a
regressive tax.
These critics argue that GST can therefore exacerbate income inequality and
contribute to social and economic disparities. In order to address these concerns, some
countries have introduced GST exemptions or reduced GST rates on essential goods
and services, such as food and healthcare. Others have implemented GST credits or
rebates to help offset the impact of GST on lower-income households.
Goods and services tax should not be confused with the generation-skipping trust, also
abbreviated GST (and its related taxation, GSTT).
Understanding the Goods and Services Tax (GST)
The goods and services tax (GST) is an indirect federal sales tax that is applied to the
cost of certain goods and services. The business adds the GST to the price of the
product, and a customer who buys the product pays the sales price inclusive of the
GST. The GST portion is collected by the business or seller and forwarded to the
government. It is also referred to as Value-Added Tax (VAT) in some countries.
Most countries with a GST have a single unified GST system, which means that a single
tax rate is applied throughout the country. A country with a unified GST platform merges
central taxes (e.g., sales tax, excise duty tax, and service tax) with state-level taxes
(e.g., entertainment tax, entry tax, transfer tax, sin tax, and luxury tax) and collects them
as one single tax. These countries tax virtually everything at a single rate.
Critiques of the GST:

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A GST is generally considered to be a regressive tax, meaning that it takes a relatively
larger percentage of income from lower-income households compared to higher-income
households.
This is because GST is levied uniformly on the consumption of goods and services,
rather than on income or wealth.
Lower-income households tend to spend a larger proportion of their income on
consumables, such as food and household goods, which are subject to GST. As a
result, GST can disproportionately burden lower-income households.
Because of this. some countries with GST are discussing possible adjustments that
might make the tax more progressive, which takes a larger percentage from higher-
income earners.
Example: India's Adoption of the GST
India established a dual GST structure in 2017, which was the biggest reform in the
country's tax structure in decades.
The main objective of incorporating the GST was to eliminate tax on tax, or double
taxation, which cascades from the manufacturing level to the consumption level
For example, a manufacturer that makes notebooks obtains the raw materials for, say,
Rs. 10, which includes a 10% tax. This means that they pay Rs. 1 in tax for Rs. 9 worth
of materials. In the process of manufacturing the notebook, the manufacturer adds
value to the original materials of Rs. 5, for a total value of Rs. 10 + Rs. 5 = Rs. 15. The
10% tax due on the finished good will be Rs. 1.50. Under a GST system, the previous
tax paid can be applied against this additional tax to bring the effective tax rate to Rs.
1.50 – Rs. 1.00 = Rs. 0.50.
In turn, the wholesaler purchases the notebook for Rs. 15 and sells it to the retailer at a
Rs. 2.50 markup value for Rs. 17.50. The 10% tax on the gross value of the good will be
Rs. 1.75, which the wholesaler can apply against the tax on the original cost price from
the manufacturer (i.e., Rs. 15). The wholesaler's effective tax rate will, thus, be Rs. 1.75
– Rs. 1.50 = Rs. 0.25.
Similarly, if the retailer's margin is Rs. 1.50, his effective tax rate will be (10% x Rs. 19)
– Rs. 1.75 = Rs. 0.15. Total tax that cascades from manufacturer to retailer will be Rs. 1
+ Rs. 0.50 + Rs. 0.25 + Rs. 0.15 = Rs. 1.90
KEY TAKEAWAYS
The goods and services tax (GST) is a tax on goods and services sold domestically for
consumption.
The tax is included in the final price and paid by consumers at point of sale and passed
to the government by the seller.

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The GST is usually taxed as a single rate across a nation.
Governments prefer GST as it simplifies the taxation system and reduces tax
avoidance.
Critics of GST say it burdens lower income earners more than higher income earners.

What Is Value-Added Tax (VAT)?

Value-added tax (VAT) is a consumption tax on goods and services that is levied at
each stage of the supply chain where value is added, from initial production to the point
of sale. The amount of VAT the user pays is based on the cost of the product minus any
costs of materials in the product that have already been taxed at a previous stage.
Understanding Value-Added Tax (VAT)
VAT is based on consumption rather than income. In contrast to a progressive income
tax, which levies more taxes on the wealthy, VAT is charged equally on every purchase.
More than 160 countries use a VAT system. It is most commonly found in the European
Union (EU). Nevertheless, it is not without controversy.
Advocates say VAT raises government revenues without charging wealthy taxpayers
more, as income taxes do. It also is considered simpler and more standardized than a
traditional sales tax, with fewer compliance issues.
Critics argue that VAT is essentially a regressive tax that places an undue economic
burden on lower-income consumers while increasing the bureaucratic burden on
businesses. Both critics and proponents of VAT generally argue it being an alternative
to income tax. That is not necessarily the case because many countries have both an
income tax and a VAT.
How a Value-Added Tax Works
VAT is levied on the gross margin at each point in the process of manufacturing,
distributing, and selling an item. The tax is assessed and collected at each stage. That
is different from a sales tax system, in which the tax is assessed and paid only by the
consumer at the very end of the supply chain.
Say, for example, a candy called Dulce is manufactured and sold in the imaginary
country of Alexia. Alexia has a 10% VAT.
KEY TAKEAWAYS:
Value-added tax, or VAT, is added to a product at every point of the supply chain where
value is added to it.

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Advocates of VATs claim that they raise government revenues without punishing the
wealthy by charging them more through an income tax. Critics say that VATs place an
undue economic burden on lower-income taxpayers.
Although many industrialized countries have VAT, the United States is not one of them.

Q. Explain the following Liquidity Ratios

1. Current Ratio
2. Quick Ratio
What Is the Current Ratio?
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company
can maximize the current assets on its balance sheet to satisfy its current debt and
other payables.
A current ratio that is in line with the industry average or slightly higher is generally
considered acceptable. A current ratio that is lower than the industry average may
indicate a higher risk of distress or default. Similarly, if a company has a very high
current ratio compared with its peer group, it indicates that management may not be
using its assets efficiently.
The current ratio is called current because, unlike some other liquidity ratios, it
incorporates all current assets and current liabilities. The current ratio is sometimes
called the working capital ratio.
Formula and Calculation for the Current Ratio
To calculate the ratio, analysts compare a company’s current assets to its current
liabilities.
Current Ratio = Current Asset / Current Liabilities
Current assets listed on a company’s balance sheet include cash, accounts receivable,
inventory, and other current assets (OCA) that are expected to be liquidated or turned
into cash in less than one year.
Current liabilities include accounts payable, wages, taxes payable, short-term debts,
and the current portion of long-term debt.
Understanding the Current Ratio:
The current ratio measures a company’s ability to pay current, or short-term, liabilities
(debts and payables) with its current, or short-term, assets, such as cash, inventory,
and receivables.

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In many cases, a company with a current ratio of less than 1.00 does not have the
capital on hand to meet its short-term obligations if they were all due at once, while a
current ratio greater than 1.00 indicates that the company has the financial resources to
remain solvent in the short term. However, because the current ratio at any one time is
just a snapshot, it is usually not a complete representation of a company’s short-term
liquidity or longer-term solvency.
For example, a company may have a very high current ratio, but its accounts receivable
may be very aged, perhaps because its customers pay slowly, which may be hidden in
the current ratio. Some of the accounts receivable may even need to be written off.
Analysts also must consider the quality of a company’s other assets vs. its obligations. If
the inventory is unable to be sold, the current ratio may still look acceptable at one point
in time, even though the company may be headed for default.
KEY TAKEAWAYS
The current ratio compares all of a company’s current assets to its current liabilities.
These are usually defined as assets that are cash or will be turned into cash in a year or
less and liabilities that will be paid in a year or less.
The current ratio helps investors understand more about a company’s ability to cover its
short-term debt with its current assets and make apples-to-apples comparisons with its
competitors and peers.
One weakness of the current ratio is its difficulty of comparing the measure across
industry groups.
Others include the overgeneralization of the specific asset and liability balances, and
the lack of trending information

What Is the Quick Ratio?

The quick ratio is an indicator of a company’s short-term liquidity position and measures
a company’s ability to meet its short-term obligations with its most liquid assets.
Since it indicates the company’s ability to instantly use its near-cash assets (assets that
can be converted quickly to cash) to pay down its current liabilities, it is also called the
acid test ratio. An "acid test" is a slang term for a quick test designed to produce instant
results.
Understanding the Quick Ratio:
The quick ratio measures the dollar amount of liquid assets available against the dollar
amount of current liabilities of a company. Liquid assets are those current assets that
can be quickly converted into cash with minimal impact on the price received in the

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open market, while current liabilities are a company's debts or obligations that are due
to be paid to creditors within one year.
A result of 1 is considered to be the normal quick ratio. It indicates that the company is
fully equipped with exactly enough assets to be instantly liquidated to pay off its current
liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay off
its current liabilities in the short term, while a company having a quick ratio higher than 1
can instantly get rid of its current liabilities. For instance, a quick ratio of 1.5 indicates
that a company has $1.50 of liquid assets available to cover each $1 of its current
liabilities.
While such numbers-based ratios offer insight into the viability and certain aspects of a
business, they may not provide a complete picture of the overall health of the business.
It is important to look at other associated measures to assess the true picture of a
company's financial health.
Quick Ratio Formula
There's a few different ways to calculate the quick ratio. The most common approach is
to add the most liquid assets and divide the total by current liabilities:
Quick Ratio= Quick Assets / Current Liabilities
Quick assets are defined as the most liquid current assets that can easily be exchanged
for cash. For most companies, quick assets are limited to just a few types of assets:
Quick Assets=Cash+CE+MS+NAR
where:
CE=Cash equivalents
MS=Marketable securities
NAR=Net accounts receivable
Depending on what type of current assets a company has on its balance sheet, a
company may also calculate quick assets by deducting illiquid current assets from its
balance sheet. For example, consider that inventory and prepaid expenses may not be
easily or quickly converted to cash, a company may calculate quick assets as follows:
Quick Assets=TCA−Inventory−PE
TCA=Total current assets
PE=Prepaid expenses
KEY TAKEAWAYS
The quick ratio measures a company's capacity to pay its current liabilities without
needing to sell its inventory or obtain additional financing.

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The quick ratio is considered a more conservative measure than the current ratio, which
includes all current assets as coverage for current liabilities.
The quick ratio is calculated by dividing a company's most liquid assets like cash, cash
equivalents, marketable securities, and accounts receivables by total current liabilities.
Specific current assets such as prepaids and inventory are excluded as those may not
be as easily convertible to cash or may require substantial discounts to liquidate.
The higher the ratio result, the better a company's liquidity and financial health; the
lower the ratio, the more likely the company will struggle with paying debts.

Q. Explain the concept of International Financial Reporting standards (IFRS)

What Are International Financial Reporting Standards (IFRS)?
International Financial Reporting Standards (IFRS) are a set of accounting rules for the
financial statements of public companies that are intended to make them consistent,
transparent, and easily comparable around the world.
IFRS currently has complete profiles for 167 jurisdictions, including those in the
European Union. The United States uses a different system, the generally accepted
accounting principles (GAAP).
The IFRS is issued by the International Accounting Standards Board (IASB).
The IFRS system is sometimes confused with International Accounting Standards (IAS),
which are the older standards that IFRS replaced in 2001.
Understanding International Financial Reporting Standards (IFRS):
IFRS specify in detail how companies must maintain their records and report their
expenses and income. They were established to create a common accounting language
that could be understood globally by investors, auditors, government regulators, and
other interested parties.
The standards are designed to bring consistency to accounting language, practices, and
statements, and to help businesses and investors make educated financial analyses
and decisions.
They were developed by the International Accounting Standards Board, which is part of
the not-for-profit, London-based IFRS Foundation. The Foundation says it sets the
standards to “bring transparency, accountability, and efficiency to financial markets
around the world."
IFRS vs. GAAP

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Public companies in the U.S. are required to use a rival system, the generally accepted
accounting principles (GAAP). The GAAP standards were developed by the Financial
Standards Accounting Board (FSAB) and the Governmental Accounting Standards
Board (GASB).
The Securities and Exchange Commission (SEC) has said it won't switch to
International Financial Reporting Standards but will continue reviewing a proposal to
allow IFRS information to supplement U.S. financial filings.
There are differences between IFRS and GAAP reporting. For example, IFRS is not as
strict in defining revenue and allows companies to report revenue sooner. A balance
sheet using this system might show a higher stream of revenue than a GAAP version of
the same balance sheet.
IFRS also has different requirements for reporting expenses. For example, if a company
is spending money on development or on investment for the future, it doesn't
necessarily have to be reported as an expense. It can be capitalized instead.
KEY TAKEAWAYS
International Financial Reporting Standards (IFRS) were created to bring consistency
and integrity to accounting standards and practices, regardless of the company or the
country.
They were issued by the London-based Accounting Standards Board (IASB) and
address record keeping, account reporting, and other aspects of financial reporting.
The IFRS system replaced the International Accounting Standards (IAS) in 2001.
IFRS fosters greater corporate transparency.
IFRS is not used by all countries; for example, the U.S. uses generally accepted
accounting principles (GAAP).
Q. Explain any of the three financial ratios.
1. Debt equity ratio;
2. Debt ratio;
3. Proprietary ratio;
4. Total Assets to Debt Ratio;
5. Interest Coverage Ratio.
What Is Debt-to-Equity (D/E) Ratio?
Debt-to-equity (D/E) ratio is used to evaluate a company’s financial leverage and is
calculated by dividing a company’s total liabilities by its shareholder equity. D/E ratio is
an important metric in corporate finance. It is a measure of the degree to which a
company is financing its operations with debt rather than its own resources. Debt-to-
equity ratio is a particular type of gearing ratio.

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D/E Ratio Formula and Calculation

Debt to Equity ratio=Total Liabilities / Total Shareholders’ Equity

The information needed to calculate D/E ratio can be found on a listed company’s
balance sheet. Subtracting the value of liabilities on the balance sheet from that of total
assets shown there provides the figure for shareholder equity, which is a rearranged
version of this balance sheet equation:
Assets=Liabilities+Shareholder Equity
These balance sheet categories may include items that would not normally be
considered debt or equity in the traditional sense of a loan or an asset. Because the
ratio can be distorted by retained earnings or losses, intangible assets, and pension
plan adjustments, further research is usually needed to understand to what extent a
company relies on debt.
KEY TAKEAWAYS
Debt-to-equity (D/E) ratio compares a company’s total liabilities with its shareholder
equity and can be used to assess the extent of its reliance on debt.
D/E ratios vary by industry and are best used to compare direct competitors or to
measure change in the company’s reliance on debt over time.
Among similar companies, a higher D/E ratio suggests more risk, while a particularly
low one may indicate that a business is not taking advantage of debt financing to
expand.
Investors will often modify the D/E ratio to consider only long-term debt because it
carries more risk than short-term obligations.
To get a clearer picture and facilitate comparisons, analysts and investors will often
modify the D/E ratio. They also assess the D/E ratio in the context of short-term
leverage ratios, profitability, and growth expectations.

What Is the Debt Ratio?

The term debt ratio refers to a financial ratio that measures the extent of a company’s
leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed as
a decimal or percentage. It can be interpreted as the proportion of a company’s assets
that are financed by debt.
A ratio greater than 1 shows that a considerable amount of a company's assets are
funded by debt, which means the company has more liabilities than assets. A high ratio
indicates that a company may be at risk of default on its loans if interest rates suddenly

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rise. A ratio below 1 means that a greater portion of a company's assets is funded by
equity.
Debt Ratio Formula and Calculation
As noted above, a company's debt ratio is a measure of the extent of its financial
leverage. This ratio varies widely across industries. Capital-intensive businesses, such
as utilities and pipelines tend to have much higher debt ratios than others like the
technology sector.
The formula for calculating a company's debt ratio is:
Debt ratio= Total assets /Total debt
So if a company has total assets of $100 million and total debt of $30 million, its debt
ratio is 0.3 or 30%. Is this company in a better financial situation than one with a debt
ratio of 40%?
The answer depends on the industry.
A debt ratio of 30% may be too high for an industry with volatile cash flows, in which
most businesses take on little debt. A company with a high debt ratio relative to its
peers would probably find it expensive to borrow and could find itself in a crunch if
circumstances change. Conversely, a debt level of 40% may be easily manageable for
a company in a sector such as utilities, where cash flows are stable and higher debt
ratios are the norm.
A debt ratio greater than 1.0 (100%) tells you that a company has more debt than
assets. Meanwhile, a debt ratio of less than 100% indicates that a company has more
assets than debt. Used in conjunction with other measures of financial health, the debt
ratio can help investors determine a company's risk level.

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What is Proprietary Ratio?
Proprietary ratio is a type of solvency ratio that is useful for determining the amount or
contribution of shareholders or proprietors towards the total assets of the business.
It is also known as equity ratio or shareholder equity ratio or net worth ratio. The main
purpose of this ratio is to determine the proportion of the total assets of a business that
is funded by the proprietors.
Proprietary ratio can be used to evaluate the stability of the capital structure of a
business or company and also show how the assets of a business are formed by
issuing a number of equity shares rather than taking loans or debt from outside.
It also indicates how much the shareholders will receive in the event of liquidation of the
company.
The proprietary ratio is expressed in the form of a percentage and is calculated by
dividing the shareholders equity with the total assets of the business.
In a condition such as when the shareholders equity contributes to 100% or the
complete assets of the company is financed by shareholders, it implies that no external
debt was required for financing the business.
Also, equity capital is more expensive than the debt capital.
A high proprietary ratio indicates that a business is in a strong position and provides
relief to creditors, while a low proprietary ratio shows the dependence of the company

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on the debt financing in order to run its business. It also indicates that creditors will lose
interest for providing finance to such a company. Interest rates will become high and
there is also a high risk of bankruptcy.
Calculation of Proprietary Ratio
Proprietary ratio or equity ratio can be calculated with the help of the following formula.
It is represented as
Proprietary Ratio = Proprietors Funds / Total Assets
Where,
Proprietors funds refers to the funds provided by equity shareholders and total assets
refer to the combined funds of both debt (financing obtained from outside) and equity
(shareholder or proprietors funds).

What Is the Total-Debt-to-Total-Assets Ratio?

Total-debt-to-total-assets is a leverage ratio that defines how much debt a company
owns compared to its assets. Using this metric, analysts can compare one company's
leverage with that of other companies in the same industry. This information can reflect
how financially stable a company is. The higher the ratio, the higher the degree of
leverage (DoL) and, consequently, the higher the risk of investing in that company.
Understanding the Total-Debt-to-Total-Assets Ratio
The total-debt-to-total-assets ratio analyzes a company's balance sheet. The calculation
includes long-term and short-term debt (borrowings maturing within one year) of the
company. It also encompasses all assets—both tangible and intangible. It indicates how
much debt is used to carry a firm's assets, and how those assets might be used to
service debt. It, therefore, measures a firm's degree of leverage.
Debt servicing payments must be made under all circumstances, otherwise, the
company would breach its debt covenants and run the risk of being forced into
bankruptcy by creditors. While other liabilities such as accounts payable and long-term
leases can be negotiated to some extent, there is very little “wiggle room” with debt
covenants
A company with a high degree of leverage may thus find it more difficult to stay afloat
during a recession than one with low leverage. It should be noted that the total debt
measure does not include short-term liabilities such as accounts payable and long-term
liabilities such as capital leases and pension plan obligations.
The total-debt-to-total-assets formula is the quotient of total debt divided by total assets.
As shown below, total debt includes both short-term and long-term liabilities. All
company assets, including short-term, long-term, capital, tangible, or other.

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If the calculation yields a result greater than 1, this means the company is technically
insolvent as it has more liabilities than all of its assets combined. More often, the total-
debt-to-total assets ratio will be less than one. A calculation of 0.5 (or 50%) means that
50% of the company's assets are financed using debt (with the other half being financed
through equity).

KEY TAKEAWAYS
The total-debt-to-total-assets ratio shows the degree to which a company has used debt
to finance its assets.
The calculation considers all of the company's debt, not just loans and bonds payable,
and considers all assets, including intangibles.
The total-debt-to-total-assets ratio is calculated by dividing a company's total amount of
debt by the company's total amount of assets.
If a company has a total-debt-to-total-assets ratio of 0.4, 40% of its assets are financed
by creditors, and 60% are financed by owners' (shareholders') equity.
The ratio does not inform users of the composition of assets nor how a single
company's ratio may compare to others in the same industry.
What Is the Interest Coverage Ratio?
The interest coverage ratio is a debt and profitability ratio used to determine how easily
a company can pay interest on its outstanding debt. The interest coverage ratio is
calculated by dividing a company's earnings before interest and taxes (EBIT) by its
interest expense during a given period.
The interest coverage ratio is sometimes called the times interest earned (TIE) ratio.
Lenders, investors, and creditors often use this formula to determine a company's
riskiness relative to its current debt or for future borrowing.
Formula and Calculation of the Interest Coverage Ratio
The "coverage" in the interest coverage ratio stands for the length of time—typically the
number of quarters or fiscal years—for which interest payments can be made with the
company's currently available earnings. In simpler terms, it represents how many times
the company can pay its obligations using its earnings.

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The lower the ratio, the more the company is burdened by debt expenses and the less
capital it has to use in other ways. When a company's interest coverage ratio is only 1.5
or lower, its ability to meet interest expenses may be questionable.
Companies need to have more than enough earnings to cover interest payments in
order to survive future and perhaps unforeseeable financial hardships that may arise. A
company’s ability to meet its interest obligations is an aspect of its solvency and is thus
an important factor in the return for shareholders.

KEY TAKEAWAYS
The interest coverage ratio is used to measure how well a firm can pay the interest due
on outstanding debt.
The interest coverage ratio is calculated by dividing a company's earnings before
interest and taxes (EBIT) by its interest expense during a given period.
Some variations of the formula use EBITDA or EBIAT instead of EBIT to calculate the
ratio.
Generally, a higher coverage ratio is better, although the ideal ratio may vary by
industry.

Q . Explain the concept of Generally accepted Accounting Principle GAAP?

What Are the Generally Accepted Accounting Principles (GAAP)?
Generally accepted accounting principles (GAAP) refer to a common set of accounting
rules, standards, and procedures issued by the Financial Accounting Standards Board
(FASB). Public companies in the U.S. must follow GAAP when their accountants
compile their financial statements.
GAAP is guided by ten key tenets and is a rules-based set of standards. It is often
compared with the International Financial Reporting Standards (IFRS), which is
considered more of a principles-based standard. IFRS is a more international standard,
and there have been recent efforts to transition GAAP reporting to IFRS.
Understanding GAAP

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GAAP is a combination of authoritative standards (set by policy boards) and the
commonly accepted ways of recording and reporting accounting information. GAAP
aims to improve the clarity, consistency, and comparability of the communication of
financial information.
GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial
reporting method. Internationally, the equivalent to GAAP in the U.S. is referred to as
International Financial Reporting Standards (IFRS). IFRS is currently used in 166
jurisdictions.
GAAP helps govern the world of accounting according to general rules and guidelines. It
attempts to standardize and regulate the definitions, assumptions, and methods used in
accounting across all industries. GAAP covers such topics as revenue recognition,
balance sheet classification, and materiality.
The ultimate goal of GAAP is to ensure a company's financial statements are complete,
consistent, and comparable. This makes it easier for investors to analyze and extract
useful information from the company's financial statements, including trend data over a
period of time. It also facilitates the comparison of financial information across different
companies.
The 10 Key Principles of GAAP:
Principle of Regularity
Principle of Consistency
Principle of Sincerity
Principle of Permanence of Methods
Principle of Non-Compensation
Principle of Prudence
Principle of Continuity
Principle of Periodicity
Principle of Materiality
Principle of Utmost Good Faith

Compliance With GAAP

If a corporation's stock is publicly traded, its financial statements must adhere to rules
established by the U.S. Securities and Exchange Commission (SEC). The SEC requires
that publicly traded companies in the U.S. regularly file GAAP-compliant financial
statements in order to remain publicly listed on the stock exchanges.

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GAAP compliance is ensured through an appropriate auditor's opinion, resulting from an
external audit by a certified public accounting (CPA) firm.
Although it is not required for non-publicly traded companies, GAAP is viewed favorably
by lenders and creditors. Most financial institutions will require annual GAAP-compliant
financial statements as a part of their debt covenants when issuing business loans. As a
result, most companies in the United States do follow GAAP.
If a financial statement is not prepared using GAAP, investors should be cautious.
Without GAAP, comparing financial statements of different companies would be
extremely difficult, even within the same industry, making an apples-to-apples
comparison hard. Some companies may report both GAAP and non-GAAP measures
when reporting their financial results. GAAP regulations require that non-GAAP
measures be identified in financial statements and other public disclosures, such as
press releases.
Where Are Generally Accepted Accounting Principles (GAAP) Used?
GAAP is a set of procedures and guidelines used by companies to prepare their
financial statements and other accounting disclosures. The standards are prepared by
the Financial Accounting Standards Board (FASB), which is an independent non-profit
organization. The purpose of GAAP standards is to help ensure that the financial
information provided to investors and regulators is accurate, reliable, and consistent
with one another.

Why Is GAAP Important?

GAAP is important because it helps maintain trust in the financial markets. If not for
GAAP, investors would be more reluctant to trust the information presented to them by
companies because they would have less confidence in its integrity. Without that trust,
we might see fewer transactions, potentially leading to higher transaction costs and a
less robust economy. GAAP also helps investors analyze companies by making it
easier to perform “apples to apples” comparisons between one company and another
KEY TAKEAWAYS
GAAP is the set of accounting rules set forth by the FASB that U.S. companies must
follow when putting together financial statements.
GAAP aims to improve the clarity, consistency, and comparability of the communication
of financial information.
GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial
reporting method.
The ultimate goal of GAAP is to ensure a company's financial statements are complete,
consistent, and comparable.

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GAAP is used mainly in the U.S., while most other jurisdictions use the IFRS standards.

Q. What are the objectives and importance of cost accounting and finance?
Cost accounting is a business practice in which you record, examine, summarize, and
understand the money that a business spent on a process, product, or service. It can
help an organization control cost and engage in strategic planning to improve cost
efficiency. Cost accounting helps management decide where they need to cut back and
where they need to increase costs.
Importance of cost accounting
Cost accounting has many advantages. Here are some of the ways it can help a
business:
1. Controlling costs: Cost accounting helps the management foresee the cost price and
selling price of a product or a service, which helps them formulate business policies.
With cost value as a reference, the management can come up with techniques to
control costs with an aim to achieve maximum profitability.
2. Determining the total per-unit cost: Cost accounting techniques help in determining
the total per-unit cost of a product or a service, so that the business can fix the selling
price for it.

3. Showing profitable and non-profitable activities: This information helps the

management put an end to non-profitable activities while developing and expanding the
profitable ones.
4. Comparing costs over time: The data in the cost sheets prepared for various time
periods helps in comparing the cost for the same product or a service over a period of
time.
Elements of cost in cost accounting:
The elements of cost are broadly classified into material, labor, and expenses. Each of
them is further divided into direct and indirect costs. The indirect material, labor and
expenses can be categorized as overhead costs.
Let’s take a detailed look at these elements.
Material cost: This is the cost of the basic substances that are used to produce an item.
It can be further classified into direct material and indirect material.
Direct material: Materials which are directly involved in the manufacturing of a product
and are present in the finished product constitute direct material. For example, wood
used to make furniture, or cloth used to make a shirt.

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Indirect material: Materials which are instrumental in the production of finished goods
but cannot be assigned to specific physical units. For example, a pair of scissors to cut
the cloth for the shirt, or a saw to cut the wood for furniture.
Labor cost: These are the human resources required to convert materials into finished
goods. They can be further classified into direct and indirect labor.
Direct labor: People who are involved actively during the manufacturing of products. For
example, production or manufacturing labor.
Indirect labor: Employees who are not directly involved in the manufacturing process
and whose labor cannot be assigned to one particular product. For example, sales
representatives and directors.
Expenses: Costs incurred by a business, other than material and labor costs, generally
fall under this category. They are further divided into direct and indirect expenses.
Direct expenses: These are also called chargeable expenses and are usually
associated with specific cost units. For example, direct labor, cost of raw materials,
utilities, and rent.
Indirect expenses: All expenses that do not fall under direct expenses are considered
indirect expenses. For example, printing costs, utility bills, and legal consultation.
Overhead costs: The general understanding is that overhead costs are similar to
indirect expenses. But overhead actually has a wider meaning, which includes indirect
labor, indirect material, and indirect expenses.

Overhead costs can be classified into the following three categories:

Factory overhead: This includes overhead cost incurred due to manufacturing,
production, or any other type of cost that is responsible for the smooth functioning of a
factory. For example, factory rent, insurance, and utilities.
Office and administrative overhead: These are expenses connected to the management
and administration of a business. For example, office rent, printers, and stationery.
Selling and distribution overhead: These are expenses related to marketing a product,
acquiring orders, and dispatching goods and services.

Methods of cost accounting

There are four main types of cost accounting techniques.
1. Standard cost accounting: This type of cost accounting uses ratios to check the
utilization of labor and goods to produce goods in a standard environment. This

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assessment is called a variance analysis. However, this method is somewhat dated.
When it was introduced a century ago, it made sense to use labor as the only cost
measurement, as it was an important cost driver. With time, overhead costs have
increased compared to labor.
2. Activity-based cost accounting: In this method, the cost of each activity performed in
an organization is allocated to a specific product or service. The way in which these
costs are assigned to cost objects is first decided by performing activity analysis. This
improves the costing accuracy of products and services.
3. Lean accounting: This is a compilation of principles and processes that provides
numerical feedback to manufacturers applying lean manufacturing and inventory
practices. Lean manufacturing helps management accelerate processes, eradicate
errors, and free up production capacity.
Lean accounting does not rely on activity-based costing or standard costing; instead, it
uses visual and lean-focused performance measurements.
4. Marginal costing: Marginal cost is defined as the additional cost involved in
manufacturing an extra unit of output. This method is also called the cost-profit-volume
analysis. Marginal cost analysis looks at the relationship between production volume,
selling price, costs, expenses and profits. It is calculated by subtracting variable cost
from revenue, then dividing by revenue.
Conclusion
Cost accounting is a system of recording and analyzing the cost of products or services
in order to contribute towards strategic planning and improve cost efficiency. It’s
important for many parties involved in a business, including management, employees,
and consumers. Although cost accounting and financial accounting are interrelated,
they provide different results. Cost accounting tells you about the cost of producing
individual items, while financial accounting shows you profit and loss for the company
as a whole. While there are advantages to using a dedicated cost accounting system, a
company that’s efficient enough to track its own costs can manage all its records
without having a formal system in place.

Q. Differentiate financial accounting and cost accounting.

Cost Accounting
Cost accounting seems to be the branch of accounting which records, summarises, and
reports cost data on a regular basis. Its fundamental duty is to determine and manage
expenditures. It assists cost data clients in making judgments about determining selling
prices, regulating expenses, forecasting plans and activities, measuring worker
productivity, and so forth. Cost accounting contributes to the efficacy of financial
reporting by giving necessary details, which eventually leads to the organization’s smart

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decision-making procedure. It tracks the costs spent at each stage of manufacturing
that is from the entry of the item to the result generated and each price has been
documented.
Financial Accounting
Financial accounting would be the area of accounting that maintains a full track of all
cash transactions of such entities and publishes those at the conclusion of the fiscal
period in correct forms, increasing the usability of the finance results among its clients.
Financial information is used by a wide range of people, from internal administration to
third-party vendors. The main goal of financial accounting would be to prepare financial
statements in a certain way for a specific accounting time frame of a business. It
contains the Income Report, Balance Sheet, as well as Cash Cycle Statement, which
aid in tracking an organization’s performance, profitability, as well as financial condition
through time. The information offered through financial accounting seems to be
important in comparing and evaluating the outcomes of several organisations on
numerous aspects. Furthermore, the performance as well as profitability of several
financial periods may be effortlessly compared.

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Q. Break Even point & % Margin of safety.
What Is the Breakeven Point (BEP)?
The breakeven point (breakeven price) for a trade or investment is determined by
comparing the market price of an asset to the original cost; the breakeven point is
reached when the two prices are equal.
In corporate accounting, the breakeven point (BEP) formula is determined by dividing
the total fixed costs associated with production by the revenue per individual unit minus
the variable costs per unit. In this case, fixed costs refer to those that do not change
depending upon the number of units sold. Put differently, the breakeven point is the
production level at which total revenues for a product equal total expenses.
KEY TAKEAWAYS
In accounting, the breakeven point is calculated by dividing the fixed costs of production
by the price per unit minus the variable costs of production.
The breakeven point is the level of production at which the costs of production equal the
revenues for a product.
In investing, the breakeven point is said to be achieved when the market price of an
asset is the same as its original cost.
A breakeven analysis can help with finding missing expenses, limiting decisions based
on emotions, establishing goals, securing funding, and setting appropriate prices.

What is Margin of Safety?

The margin of safety is a financial ratio that measures the amount of sales that have
exceeded the break-even point. This financial ratio indicates the actual profit of the
company once it pays for all fixed and variable costs. You might wonder why it is known
as the safety margin ratio. This is the threshold amount below which a company will
start facing loss. To remain profitable, the company must have a positive margin of
safety. Once the company reaches the break-even point, it is no loss and no profit
position.
Margin of Safety Formula
Here, the current sales are estimated. Let us take a look at different safety margin
formulas.
Margin of safety ratio
Current sales (estimated) – break even point / current sales(estimated)

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Margin of safety ( in percentage)
[current sales – break even point / current sales] x 100
Margin of safety (in units)
Safety margin (units) = current sales – breakeven point/sales price per unit
Margin of safety (in dollars)
Current (estimated) sales – break even point

Q. What are the methods of depreciation? Explain four methods of depreciation

Depreciation accounts for decreases in the value of a company’s assets over time. In
the United States, accountants must adhere to generally accepted accounting principles
(GAAP) in calculating and reporting depreciation on financial statements. GAAP is a set
of rules that includes the details, complexities, and legalities of business and corporate
accounting. GAAP guidelines highlight several separate, allowable methods of
depreciation that accounting professionals may use.
Methods of Depreciation
The four depreciation methods include straight-line, declining balance, sum-of-the-
years' digits, and units of production.
Straight-Line Depreciation
The straight-line method is the most common and simplest to use. A company
estimates an asset's useful life and salvage value (scrap value) at the end of its life.
Depreciation determined by this method must be expensed in each year of the asset's
estimated lifespan.
Declining Balance Depreciation
The declining balance method is a type of accelerated depreciation used to write off
depreciation costs earlier in an asset's life and to minimize tax exposure. With this
method, fixed assets depreciate more so early in life rather than evenly over their entire
estimated useful life.
This method often is used if an asset is expected to lose greater value or have greater
utility in earlier years. It also helps to create a larger realized gain when the asset is
sold. Some companies may use the double-declining balance equation for more
aggressive depreciation and early expense management.
Sum-of-the-Years' Digits Depreciation
The sum-of-the-years'-digits method (SYD) accelerates depreciation as well but less
aggressively than the declining balance method. Annual depreciation is derived using

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the total of the number of years of the asset's useful life. The SYD depreciation equation
is more appropriate than the straight-line calculation if an asset loses value more
quickly, or has a greater production capacity, during its earlier years.
Units of Production Depreciation
The units of production method assigns an equal expense rate to each unit produced.
It's most useful where an asset's value lies in the number of units it produces or in how
much it's used, rather than in its lifespan. The formula determines the expense for the
accounting period multiplied by the number of units produced.
Examples
Let's say, ABC company purchases machinery for $25,000. This asset's salvage value
is $500 and its useful life is 10 years. The examples below demonstrate how the
formula for each depreciation method would work and how the company would benefit.
1. Calculating Depreciation Using the Straight-Line Method
Formula: (cost of asset - salvage value)/useful life
Method in action: ($25,000 - $500)/10 = $2,450
Result: ABC's yearly tax deduction is $2,450 over the life of the asset.
2. Calculating Depreciation Using the Declining Balance Method
Formula: current book value x depreciation rate
Method in action: $25,000 x 30% = $7,500
Result: ABC's depreciation amount in the first year is $7,500. In the second year, the
current book value would be $17,500 ($25,000 - $7,500). So, the depreciation amount
would be $5,250 ($17,500 x 30%). And so on.
3. Calculating Depreciation Using the Sum-of-the-Years' Digits Method
Formula: (remaining lifespan/SYD) x (asset cost - salvage value) where SYD equals the
total of all the years in the lifespan
Method in action: SYD = 55 (1+2+3+4+5+6+7+8+9+10); (10/55) x ($25,000 - $500) =
$4,454
Result: in the first year, ABC can deduct $4,454 in depreciation expense. In the second
year, the deduction would be $4,009 ((9/55) x $24,500). And so on.
4. Calculating Depreciation Using the Units of Production Method
Formula: (asset cost - salvage value)/estimated units over asset's life x actual units
made
Method in action: ($25,000 - 500)/50,000 x 5,000 = $2,450

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Result: ABC's depreciation expense is $2,450 for the year. This method will produce
results that vary annually depending on the number of units made.

Q. What is the importance of financial ratio and which financial ratio is most
important?

Why is financial ratio analysis important?

Analyzing your company’s financial ratios can provide you with valuable insights into
profitability, liquidity, efficiency and more. These ratios can help you visualize how your
company has performed over a given period of time. You can also compare your
company’s financial ratios with industry averages to see how you compare to other
businesses in your sector.
Financial ratios may also be used by investors to determine the health of a business. If
your company is publicly traded, it’s a good idea to monitor key financial ratios, as these
numbers can impact how investors view your company. By understanding the factors
that affect these ratios, you can take steps to produce results that will be more attractive
to investors.
Important financial ratios for companies
There are a number of different financial ratios that can be calculated, measured and
monitored. Typically, ratios are not examined alone, but are looked at in combination
with other performance indicators. Below, we cover some key financial ratios used to
assess business performance.
Cash flow ratios

Current ratio
Current assets / Current liabilities
Quick ratio
Current assets – inventory / Current liabilities
Accounts receivable days (AR days)
Accounts receivable / Net sales x 365

Leverage ratios

Debt-to-equity
Total debt / Equity

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Debt-to-asset
Total debt / Assets
Interest coverage ratio
Operating income / Interest expenses

Profitability ratios

Gross profit margin

Net sales - cost of goods sold / Net sales
Operating profit margin
Operating income / Net sales
Earnings before interest, taxes, depreciation and amortization (EBITDA) margin
EBITDA / Net sales

Q. What is meant by Budgetary control? State essential requirements of

budgetary control? And objectives of budgetary control system ?
Budgetary control refers to the process of planning, controlling, and monitoring the
organization’s revenue and expenses to ensure that they align with the budget. It
involves creating budgets for various business activities, monitoring actual performance
against the budget, identifying variations, and taking corrective actions to bring the
budget back on track.
According to Brown and Howard, “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.”
The main aim of budgetary control is to ensure the efficient use of resources and
achieve the organization’s objectives. It is the setting and adjusting of the financial plans
for a business, organization, or individual to check whether they are utilizing their
resources productively and systematically. Budgetary control aims to help organizations
achieve their financial goals and objectives by ensuring that they are not overspending
or underutilizing their resources. It is an essential tool for planning and managing
financial resources and can help organizations to make informed financial decisions. It
is important for the financial management of the company.
Objectives of Budgetary Control
The main objectives of budgetary control are as follows:
1. Planning: Planning is an initial and basic step of any organization. It involves
creating a financial plan for a specific time on which the future actions and

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 decisions of the organization depend. Budgetary control lays out a plan for
income and money to be spent, providing a direction for the company’s financial
activities over a predetermined period. This ensures that the company’s financial
resources are carefully allocated and productively employed.
2. Coordination: The next objective is to coordinate or align the business or financial
operations with the organization’s overall goals and objectives, ensuring that all
departments and activities work towards a common goal. Since the departments
discuss and coordinate with each other, it also helps to ensure that financial
information is accurate, consistent, and transparent throughout the organization,
which is essential for effective budgetary control.
3. Decision Making: It is one of the primary steps of budgetary control which
provides a solid foundation on which to make crucial decisions that affect the
future and working of the organization. With the help of budgetary control,
management has access to precise and timely information on the organization’s
financial performance. Making wise decisions about the allocation of resources,
capital expenditures, and other important business decisions can be
accomplished with the use of this information.
4. Cost Control: Cost control is a way in which the organization can keep a check
on the budget and expenses and ensure that they do not exceed revenue goals.
It is also important to identify the areas where the costs can be reduced. It
prevents wastage or misuse of resources and increases efficiency. A budgetary
control technique for comparing actual spending to the budgeted amount. A
company can then take the necessary corrective action after identifying any
potential expenditures or inefficiencies.
5. Resource Allocation: It is necessary to ensure the optimum utilization of
resources by allocating them to the most significant areas according to the
priority and requirements that promote the organization’s objectives. A budget
allows a company to prioritize its expenditures and direct resources to where
they are most required or will yield the highest returns.
6. Performance Measurement: Performance measurement is a tool or a way to
evaluate the actual performance of the organization concerning the budget,
analyze and understand the problems in different areas and take appropriate
actions where needed. This improves the overall efficiency of the organization.
Business owners and staff are held responsible for their financial performance by
creating and monitoring budgets. This may promote an environment of
understanding and answerability within the company.
7. Communication: It is one of the main advantages of budgetary control along with
motivation. It is essential to communicate the financial goals and objectives to all
levels or departments of the organization so that every employee in the
organization recognizes the importance of their role and gets motivated to work
accordingly to accomplish the set target and take accountability for their actions.
8. Achievement of financial targets: The most important benefit of budgetary control
is to make sure that the organization achieves its set goal or target while keeping

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 a check on its expenses and waste of resources. By identifying places where
expenditures can be decreased or eliminated, budgetary control can help in
enhancing the effectiveness of the organization. This ensures that the
organization saves costs and increases profitability.
The advantages of budgetary control are:
1. Participation: Budgetary control allows the employees of the organization to
participate in the process and contribute their maximum effort towards
achieving the goal.
2. Top management support: Budgetary control is a process that works mainly
with the assistance of the top management like the directors, managers, etc.
Therefore, if the management is supportive and cooperative, this system of
budget control becomes easier and more efficient.
3. Reduce cost: It manages the cost of production of the company by effective
planning of financial activities and ensures that the resources are being
utilized properly so that there is minimum wastage. This brings down the
cost of operation to the organization.
4. Maximization of profit: Through planned goals and proper coordination, the
organization functions efficiently as all the activities are adequately
performed and the expenditures and capital are put to use correctly with the
help of the process of budgetary control.
5. Specific aims: The process of budgetary control makes the goal of the
organization clearer and easier to accomplish. The expenses and resources
are well allocated into areas required and help avoid unnecessary wastage
in terms of time and money. Therefore, the improved control over activities
and finance makes the goal more definite for the organization.
6. Tool for measuring performance: The budgetary control acts as a tool for
measuring performance. It helps compare the result achieved by the
organization and the objectives that were set earlier while planning. It
detects the areas that need attention and provides assistance or solutions.

Limitations of Budgetary Control

While budgetary control is important in achieving the goal set by the organization but
there are also a number of limitations to it. Some of them are as follows:
1. Limited to the financial aspect: The concept or process of budgetary control
solely focuses on only the financial outlook of the organization. The other
issues like customer satisfaction, employee benefit, safety issues, etc. are
disregarded.
2. No stability: It is almost impossible to have a stable business environment.
Considering that the business condition remains constant, the process of
budgetary control may not be accurate for a lot of the financial decisions.
The organization can find it difficult to work or adjust according to the
changes it faces.

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 3. Inflexibility: Budgetary control depends on specific capital and limited time.
However, this can create inflexibility in the organization as the employees
might not be ready for a change and keep new ideas and projects to
themselves, which would have benefited the organization.
4. Dependent on assumptions: Budgets are often dependent on financial
aspects like expenses, revenue, and future profits. Since these data are
mostly based on previous years’ performances, they might not be helpful or
accurate for future reference. If any of those assumptions turn out to be
wrong, the organization can suffer some kind of loss or damage.
5. Time-consuming: Making a detailed budget report can take up a lot of time
and effort that otherwise would have been used for other important activities
such as strategic planning, customer service, and product development.
Though budgeting helps reduce the wastage of resources, a long process of
monitoring, planning, and adjusting can exhaust a lot of resources too.

Making Budgetary Control Effective

Not all budgetary control processes prove to be effective for the company. Due to its
drawbacks, it may face hardships. But there are several ways through which an
organization can improve its process of budgetary control. Here are a few steps that
can be followed-
1. Establish clear financial goals: The organization should set goals or
objectives that are practical, doable, and in line with the organization’s
overall plan. This is the first step in the budgetary control process. This can
work only when the organization is working according to the strategy
planned and making a budget.
2. Include relevant stakeholders: The stakeholders have an important role in
the organization. Therefore, the stakeholders, managers, executives, and
department heads should all be included in the budgetary control process.
This makes sure that everyone has a stake in meeting the budgeted goals
and helps to focus everyone’s efforts on the organization’s objectives. They
understand the importance of their roles and work diligently towards the
goal.
3. Regular monitoring: Monitoring of the actual performance should be done
regularly. As part of the budgetary control process, actual performance
should be regularly compared to predetermined budgetary goals. This
enables managers to spot any deviations in the early stages of the process
of budgeting and take steps to fix them.
4. Effective communication: The budgetary control information should be
effectively communicated to all important stakeholders. This ensures that
the information is delivered frequently, and the directors and stakeholders
are updated on the performance of the organization, identifying any areas
that need attention, and involving stakeholders in decision-making.
5. Use performance indicators: Performance indicators and benchmarks can
assist firms in comparing their performance to industry norms and

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 determining where there is a need for improvement, and actions can be
taken accordingly.
6. Constant review and adjustment: The budgetary control process should be
regularly examined, and changes should be made by the business
environment, performance statistics, and stakeholder feedback.

Q. What is mean by labour turnover and what is its causes?

Employees can end their association with an organisation for several reasons, such as
professional growth or job dissatisfaction. It is normal to expect employees to leave
after a period, but a high frequency may prove to be a difficulty for organisations
looking to grow. Understanding the causes of employee turnover and its harmful
effects may help in managing the situation and retaining valuable employees. In this
article, we look at the definition of labour turnover, along with its typical causes and
effects.

What Is Labour Turnover?

Labour turnover, also known as employee or staffing turnover, is the frequency with
which the employees of an organisation leave their jobs. It can be because of attrition,
layoff or resignations. It is necessary to measure employee turnover because it is an
important indicator of the state of a workplace and also helps senior-level
management to take measures to decrease it

What Is The Labour Turnover Rate?

It is a measurement of employees leaving the company within a certain period.
Companies usually express this metric as an annual rate, often in terms of a
percentage. Human resources departments typically use this to measure how effective
a company's methods are in retaining employees. A high turnover rate shows poor
company culture and flawed hiring decisions. In contrast, a low turnover rate shows
potential hires, clients and investors that the company is performing well since the
workforce is engaged and satisfied in their roles.

What Are The Causes Of Employee Turnover?

There are two significant types of causes for employee turnover, namely avoidable
and unavoidable causes. Here are a few of the common avoidable and unavoidable
factors that cause an employee to leave the organisation:

Excess work
When employees feel overburdened by their work responsibilities, companies might
notice an increased employee turnover rate. It is because they may become
despondent and unproductive, and sometimes, they may lose interest in the job. You
may check the workload of all employees to make sure you allocate work evenly. If
they are not, ask people to take on some tasks of those who have more work to finish.

Insufficient recognition

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Organisations that value the presence and contributions of their employees are more
likely to have a low employee turnover rate. The opposite is also true. A lack of
employee recognition can lead to low employee morale and decreased productivity,
which may cause an increase in staff turnover rate. Managers who continually provide
feedback and recognition for a job well done are likely to retain their team for a long
time.

Poor company culture

If a company does not have a culture that is conducive to growth, it can have a
negative impact on its employees. When people do not operate in a positive culture,
they can become stressed and unhappy with their job. This is usually not ideal for any
company because it increases staff turnover and, as a result, it may become
increasingly expensive and difficult to hire top talents if they develop a poor reputation.
A company may proactively work to improve their company culture and make sure it
supports its employees.

Inadequate growth opportunities

The modern workforce prioritises learning and development opportunities when joining
a new company. If there is a lack of such opportunities, new employees may not join
and existing employees may want to leave for a company that can provide them with
growth opportunities. Often, the inability to get timely raises and promotions can
persuade people to leave an organisation.

Job dissatisfaction
Being dissatisfied with one's job results in poor performance, which can eventually
result in an employee leaving the organisation. A few ways to prevent employee
turnover due to job dissatisfaction include having a clear work structure, giving
employees clear objectives and goals and giving employees clear rewards for
excellent job performance. It is also important to have good communication with
employees.

Insufficient salary
It is important for employers to understand that if they pay lower than a candidate
believes they deserve or require, then the employees are less likely to remain at the
company for long. If you want to get the best talent, try to offer basic salaries for the
position and qualifications, along with timely incentives and other benefits such as
healthcare.

Personal issues
When employees leave voluntarily from their workplace, the reasons can vary. Some
employees can even leave because of personal reasons such as health issues, death
in the family or family planning. As these causes are typically out of either party's
control, it is often difficult to change the situation. In such cases, organisations can
only respond by taking immediate action by recruiting new employees who are
competent enough to perform the job well.

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Poor performance
A well-trained staff is a crucial aspect of any successful company. An employee's job
can depend on the way they manage their work. The inability to do so consistently
may cause losses to the organisation. Managers can try to manage these
shortcomings by providing required training and resources for better execution of
tasks. Still, if an employee cannot perform, it may persuade organisations to replace
them with more trained staff.

Q. ABC Analysis in inventory

ABC method of inventory control involves a system that controls inventory and is used
for materials and throughout the distribution management. It is also known as
selective inventory control or SIC.

ABC analysis is a method in which inventory is divided into three categories, i.e. A, B,
and C in descending value. The items in the A category have the highest value, B
category items are of lower value than A, and C category items have the lowest value.

Inventory control and management are critical for a business. They help to keep their
costs under control. The ABC analysis helps the business to control inventory by
letting the management focus on the highest value goods (the A-items) and not on the
many low-value goods (the C-items).

ABC Method of Inventory Control

It has become an indispensable part of a business and the ABC analysis is widely
used for unfinished good, manufactured products, spare parts, components, finished
items and assembly items. Under this method, the management divides the items into
three categories A, B and C; where A is the most important item and C the least
valuable.

ABC inventory analysis is based on the Pareto Principle. The Pareto Principle states
that 80% of the sales volume are generated from the top 20% of the items. It means
that the top 20% of the items will generate 80% of the revenue for the business. It is
also known as the 80/20 rule.

This method is significant to identify the top category of inventory items that generate
a high percentage of yearly consumption. It helps the managers to optimize the
inventory levels and achieve efficient use of stock management resources.

Need for Prioritizing Inventory

Item A:
In the ABC model of inventory control, items categorized under A are goods that
register the highest value in terms of annual consumption. It is interesting to note that
the top 70 to 80 percent of the yearly consumption value of the company comes from

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only about 10 to 20 percent of the total inventory items. Hence, it is crucial to prioritize
these items.

Item B:
These are items that have a medium consumption value. These amount to about 30
percent of the total inventory in a company which accounts for about 15 to 20 percent
of annual consumption value.

Item C:
The items placed in this category have the lowest consumption value and account for
less than 5 percent of the annual consumption value that comes from about 50
percent of the total inventory items.

Note: The annual consumption value is calculated by the formula: (Annual demand) ×
(item cost per unit)

Policies Governing the ABC Method of Inventory Management

The idea behind using the ABC analysis is to leverage the imbalances of sales. This
means that each item must be given the appropriate amount of weight depending on
their class:

Item A:
a) These are subjected to strict inventory control and are given highly secured areas in
terms of storage

b) These goods have a better forecast for sales

c) These are also the items that require frequent reorders on a daily or a weekly basis

d) They are kept as a priority item and efforts are made to avoid unavailability or
stock-out of these items

Item B:
a) These items are not as important as items under section A or as trivial as items
categorized under C

b) The important thing to note is that since these items lie in between A and C, they
are monitored for potential inclusion towards category A or in a contrary situation
towards category C

Item C:
a) These items are manufactured less often and follow the policy of having only one of
its item on hand or in some cases they are reordered when a purchase is actually
made

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b) Since these are low demand goods with a comparatively higher risk of cost in terms
of excessive inventory, it is an ideal situation for these items to stock-out after each
purchase

c) The questions managers find themselves dealing with when it comes to items in
category C is not how many units to keep in stock but rather whether it is even needed
to have to these items in store at all.

Uses of ABC Analysis

The ABC analysis is widely used in supply chain management and stock checking and
inventory system and is implemented as a cycle counting system. It is most important
for companies that seek to bring down their working capital and carrying costs. This
done by analysing the inventory that is in excess stock and those that are obsolete by
making way for items that are readily sold. This helps avoid keeping the working
capital available for use rather than keeping it tied up in unhealthy inventory.

When a company is better able to check its stock and maintain control over the high-
value goods it helps them to keep track of the value of the assets that are being held
at a time. It also brings order to the reordering process and ensures that those items
are in stock to meet the demands.

The items that fall under the C category are those that slow-moving and need not be
re-ordered with the same frequency as item A or item B. When you put the goods into
these three categories, it is helpful for both the wholesalers and the distributors to
identify the items that need to be stocked and those that can be replaced.

Advantages of Implementing the ABC Method of Inventory Control

• This method helps businesses to maintain control over the costly items which
have large amounts of capital invested in them.
• It provides a method to the madness of keeping track of all the inventory. Not
only does it reduce unnecessary staff expenses but more importantly it ensures
optimum levels of stock is maintained at all times.
• The ABC method makes sure that the stock turnover ratio is maintained at a
comparatively higher level through a systematic control of inventories.
• The storage expenses are cut down considerably with this tool.
• There is provision to have enough C category stocks to be maintained without
compromising on the more important items.

Disadvantages of using the ABC Analysis

• For this method to work and render successful results, there must be proper
standardization in place for materials in the store.
• It requires a good system of coding of materials already in operation for this
analysis to work.
• Since this analysis takes into consideration the monetary value of the items, it
ignores other factors that may be more important for your business. Hence, this
distinction is vital.

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The ABC model works in a manner as to get prime attention to the important items or
the critical few and not have unnecessary attention be spent on the not so important
items or the trivial many. Each category has a differing management control in place.
This prioritization of attention and focus is vital to keep the costs in check and under
control in the supply chain system. To get the best results it is important that items that
involve a lot of costs are given the due management attention.

Q. Zero based Budgeting

What Is Zero-Based Budgeting (ZBB)?

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be
justified for each new period. The process of zero-based budgeting starts from a "zero
base," and every function within an organization is analyzed for its needs and costs.
The budgets are then built around what is needed for the upcoming period, regardless
of whether each budget is higher or lower than the previous one.

How Zero-Based Budgeting (ZBB) Works

In business, ZBB allows top-level strategic goals to be implemented into the budgeting
process by tying them to specific functional areas of the organization, where costs can
be first grouped and then measured against previous results and current expectations.

Because of its detail-oriented nature, zero-based budgeting may be a rolling process

done over several years, with a few functional areas reviewed at a time by managers
or group leaders. Zero-based budgeting can help lower costs by avoiding blanket
increases or decreases to a prior period's budget. It is, however, a time-consuming
process that takes much longer than traditional, cost-based budgeting.

The practice also favors areas that achieve direct revenues or production, as their
contributions are more easily justifiable than in departments such as client service and
research and development.

Zero-based budgeting, primarily used in business, can be used by individuals and

families, too.

Example of Zero-Based Budgeting

Suppose a construction equipment company implements a zero-based budgeting
process calling for closer scrutiny of manufacturing department expenses. The
company notices that the cost of certain parts used in its final products and
outsourced to another manufacturer increases by 5% every year. The company can
make those parts in-house using its workers. After weighing the positives and
negatives of in-house manufacturing, the company finds it can make the parts more
cheaply than the outside supplier.

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Instead of blindly increasing the budget by a certain percentage and masking the cost
increase, the company can identify a situation in which it can decide to make the part
itself or buy the part from the external supplier for its end products.

KEY TAKEAWAYS
Zero-based budgeting is a technique used by companies, but this type of budgeting
can be used by individuals and families.
Budgets are created around the monetary needs for each upcoming period, like a
month.
Traditional budgeting and zero-based budgeting are two methods used to track
expenditures.
Zero-based budgeting helps managers tackle lower costs in a company.

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Q. Explain the following method of cost classification.
i) According to elements;

Material, Labour and Expenses. Each of these three elements can be direct and indirect, i.e.,
direct materials and indirect materials, direct labour and indirect labour, direct expenses and
indirect expenses.

ii) According to Functions or Operations.

The cost classification by function flows the pattern of basic managerial activities. So, this cost is
classified as production, administration, selling, etc. Production Costs: These costs are related to
the real construction or manufacturing of the goods.

Q. Operating cycle ratios

What is an operating cycle?

An operating cycle refers to the time it takes a company to buy goods, sell them and receive
cash from the sale of said goods. In other words, it's how long it takes a company to turn its
inventories into cash.

The length of an operating cycle is dependent upon the industry. Understanding a company's
operating cycle can help determine its financial health by giving it an idea of whether or not it'll
be able to pay off any liabilities.

For example, if a business has a short operating cycle, this means it'll be receiving payment at a
steady rate. The faster the company generates cash, the more it'll be able to pay off any
outstanding debts or expand its business accordingly.

The flow of a cash operating cycle is as follows:

1. Obtaining raw material
2. Producing goods
3. Having finished goods
4. Having receivables from making a sale
5. Obtaining cash (receiving payment from customers)
It's also important to differentiate an operating cycle from a cash cycle. Whereas they're both
helpful and provide invaluable insight, a cash cycle lets companies see how they're able to
manage cash flow, whereas an operating cycle determines the efficiency of the operation.

Related: Learn About Being an Inventory Specialist

Why is the operating cycle important?
The operating cycle is important because it can tell a business owner how quickly the company
is able to sell inventory. Simply put, it determines the company's efficiency.

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A shorter operating cycle is more favorable as it means the company has enough cash to
maintain operations, recover investments and meet various obligations. In contrast, if a business
has a longer operating cycle, it means the company requires more cash to maintain operations.

Just as there are many influences on a company's operating cycle, there are also many ways that
an operating cycle can help determine a company's financial standing. The better a business
owner understands the company's operating cycle, the better that owner will be able to make
decisions for the benefit of the business.

Related: Learn About Being an Inventory Manager

How to determine an operating cycle
In order to determine a company's efficiency, business owners need to calculate their operating
cycle. Follow these steps to make this calculation:

1. Determine the inventory period

A business owner first needs its company's inventory period when calculating its operating
cycle. An inventory period refers to how long a company holds its inventory before it's sold. The
inventory period can be calculated as follows:

Inventory period = 365 / inventory turnover

To determine a company's inventory turnover, divide the cost of goods sold by the average
inventory. The average inventory refers to the average of a company's opening and closing
inventory. This can be found on the company's balance sheet, whereas the cost of goods sold
can be found on the company's income statement.

Related: 13 Basics of Small Business Finance To Know (Plus Their Benefits)

2. Determine the company's accounts receivable
Business owners also need to know their accounts receivable in their operating cycle
calculation. Accounts receivable refers to the amount of money a customer owes a company.
Accounts receivable can be calculated as follows:

Accounts receivable period = 365 / receivables turnover

To determine a company's receivables turnover, divide credit sales by the average accounts
receivable.

Read more: Q&A: What Is Accounts Receivable and How Does It Work?
3. Calculate the operating cycle
The following formula can be used for calculating the operating cycle:

Operating cycle = inventory period + accounts receivable period

This equation can also be used:

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Operating cycle = (365 / (cost of goods sold / average inventory)) + (365 / (credit sales / average
accounts receivable))

The resulting number is the number of days in the company's operating cycle.

Related: Business Development Skills: Definition and Examples

Tips for shortening a company's operating cycle
Here are several tips to consider when attempting to shorten a company's operating cycle:

Implement a stricter credit policy: Customers are more apt to pay for their purchases on time if
companies have a stricter credit policy.
Reduce the time period on payment terms: The quicker a company is able to collect accounts
receivables, the shorter their operating cycle is likely to be.
Quickly sell a company's inventory: The quicker a company sells its inventory, the shorter its
operating cycle should be.
Related: How To Calculate Receivables Turnover Ratio (With Examples)
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Examples of operating cycles
To understand operating cycles, it's important to consider various scenarios. Here are some
examples of operating cycles:

Example 1
Let's say Cindy owns a clothing store. Her company's operating cycle would begin when she
started paying for the materials to make various garments. The operating cycle wouldn't end in
this case until all clothing items are produced, sold and the cash has been received from various
customers.

Example 2
Let's say Bob owns a bakery and he's trying to determine how well operations are running at his
shop. To do this, he'll need to calculate his company's operating cycle. This means the cycle
would start when he began paying for the goods, materials and ingredients used to make
various pastries and baked goods. His bakery's operating cycle wouldn't end until all of his
baked goods have been sold to customers and he's received cash from his sales.

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Q. Profitability Ratio –

Profitability ratios are a type of accounting ratio that helps in determining the financial
performance of business at the end of an accounting period. Profitability ratios show how well a
company is able to make profits from its operations.

Let us now discuss the types of profitability ratios.

Types of Profitability Ratios

The following types of profitability ratios are discussed for the students of Class 12 Accountancy
as per the new syllabus prescribed by CBSE:

1. Gross Profit Ratio

2. Operating Ratio
3. Operating Profit Ratio
4. Net Profit Ratio
5. Return on Investment (ROI)
6. Return on Net Worth
7. Earnings per share
8. Book Value per share
9. Dividend Payout Ratio
10. Price Earning Ratio

Gross Profit Ratio

Gross Profit Ratio is a profitability ratio that measures the relationship between the gross profit
and net sales revenue. When it is expressed as a percentage, it is also known as the Gross Profit
Margin.

Formula for Gross Profit ratio is

Gross Profit Ratio = Gross Profit/Net Revenue of Operations × 100

A fluctuating gross profit ratio is indicative of inferior product or management practices.

Operating Ratio
Operating ratio is calculated to determine the cost of operation in relation to the revenue
earned from the operations.

The formula for operating ratio is as follows

Operating Ratio = (Cost of Revenue from Operations + Operating Expenses)/

Net Revenue from Operations ×100

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Operating Profit Ratio
Operating profit ratio is a type of profitability ratio that is used for determining the operating
profit and net revenue generated from the operations. It is expressed as a percentage.

The formula for calculating operating profit ratio is:

Operating Profit Ratio = Operating Profit/ Revenue from Operations × 100

Or Operating Profit Ratio = 100 – Operating ratio

Net Profit Ratio

Net profit ratio is an important profitability ratio that shows the relationship between net sales
and net profit after tax. When expressed as percentage, it is known as net profit margin.

Formula for net profit ratio is

Net Profit Ratio = Net Profit after tax ÷ Net sales

Or

Net Profit Ratio = Net profit/Revenue from Operations × 100

It helps investors in determining whether the company’s management is able to generate profit
from the sales and how well the operating costs and costs related to overhead are contained.

Also read: Net Profit Ratio

Return on Capital Employed (ROCE) or Return on Investment (ROI)

Return on capital employed (ROCE) or Return on Investment is a profitability ratio that
measures how well a company is able to generate profits from its capital. It is an important ratio
that is mostly used by investors while screening for companies to invest.

The formula for calculating Return on Capital Employed is :

ROCE or ROI = EBIT ÷ Capital Employed × 100

Where EBIT = Earnings before interest and taxes or Profit before interest and taxes

Capital Employed = Total Assets – Current Liabilities

Return on Net Worth

This is also known as Return on Shareholders funds and is used for determining whether the
investment done by the shareholders are able to generate profitable returns or not.

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It should always be higher than the return on investment which otherwise would indicate that
the company funds are not utilised properly.

The formula for Return on Net Worth is calculated as :

Return on Shareholders’ Fund = Profit after Tax / Shareholders’ Funds × 100

Or Return on Net Worth = Profit after Tax / Shareholders’ Funds × 100

Earnings Per Share (EPS)

Earnings per share or EPS is a profitability ratio that measures the extent to which a company
earns profit. It is calculated by dividing the net profit earned by outstanding shares.

The formula for calculating EPS is:

Earnings per share = Net Profit ÷ Total no. of shares outstanding

Having higher EPS translates into more profitability for the company.

Book Value Per Share

Book value per share is referred to as the equity that is available to the the common
shareholders divided by the number of outstanding shares

Equity can be calculated by:

Equity funds = Shareholders funds – Preference share capital

The formula for calculating book value per share is:

Book Value per Share = (Shareholders’ Equity – Preferred Equity) / Total Outstanding Common
Shares.

Dividend Payout Ratio

Dividend payout ratio calculates the amount paid to shareholders as dividends in relation to the
amount of net income generated by the business.

It can be calculated as follows:

Dividend Payout Ratio (DPR) : Dividends per share / Earnings per share

Price Earnings Ratio

This is also known as P/E Ratio. It establishes a relationship between the stock (share) price of a
company and the earnings per share. It is very helpful for investors as they will be more

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interested in knowing the profitability of the shares of the company and how much profitable it
will be in future.

P/E ratio is calculated as follows:

P/E Ratio = Market value per share ÷ Earnings per share

It shows if the company’s stock is overvalued or undervalued.

This concludes the article on the topic of Profitability Ratios, which is an important topic for
students of Class 12 Commerce. For more such interesting articles, stay tuned to BYJU’S.

Q Financial Leverage ratios

Common leverage ratios include the debt-equity ratio, equity multiplier, degree of financial
leverage, and consumer leverage ratio.

Q. Balance Score card

What Is a Balanced Scorecard (BSC)?

The term balanced scorecard (BSC) refers to a strategic management
performance metric used to identify and improve various internal business
functions and their resulting external outcomes. Used to measure and provide
feedback to organizations, balanced scorecards are common among companies
in the United States, the United Kingdom, Japan, and Europe. Data collection is
crucial to providing quantitative results as managers and executives gather and
interpret the information. Company personnel can use this information to make
better decisions for the future of their organizations.

KEY TAKEAWAYS

• A balanced scorecard is a performance metric sed to identify, improve,

and control a business's various functions and resulting outcomes.
• The concept of BSCs was first introduced in 1992 by David Norton and
Robert Kaplan, who took previous metric performance measures and
adapted them to include nonfinancial information.

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 • BSCs were originally developed for for-profit companies but were later
adapted for use by nonprofits and government agencies.
• The balanced scorecard involves measuring four main aspects of a
business: Learning and growth, business processes, customers, and
finance.
• BSCs allow companies to pool information in a single report, to provide
information into service and quality in addition to financial performance,
and to help improve efficiencies.

Q. Sources of funds and explain briefly

Summary
The main sources of funding are retained earnings, debt capital, and equity
capital.
Companies use retained earnings from business operations to expand or
distribute dividends to their shareholders.
Businesses raise funds by borrowing debt privately from a bank or by going
public (issuing debt securities).
Companies obtain equity funding by exchanging ownership rights for cash
coming from equity investors.

Retained Earnings
Businesses aim to maximize profits by selling a product or rendering service for
a price higher than what it costs them to produce the goods. It is the most
primitive source of funding for any company.
After generating profits, a company decides what to do with the earned capital
and how to allocate it efficiently. The retained earnings can be distributed to
shareholders as dividends, or the company can reduce the number of shares
outstanding by initiating a stock repurchase campaign.

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