This document defines key accounting terms and concepts such as financial accounting, the objectives of accounting, users of accounting information, basic accounting terms, final accounts including the profit and loss account and balance sheet. It also discusses adjustments made in the accounts including closing stock, outstanding expenses, depreciation, and bad debts. Methods of depreciation such as straight-line, declining balance, and sum-of-years digits are explained. The document concludes with discussions on cost analysis, cost classification, break-even analysis, and alternative analysis.
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1. FINANCIAL ACCOUNTING
Definitions:
The AICPA (American Institute of Certified Public Accountants) has defined
the Financial Accounting as “the art of recording, classifying and summarizing in a
significant manner in terms of money transactions and events which in part, at least
of a financial character and interpreting the results thereof.”
American Accounting Association defines accounting as “the process of
identifying, measuring and communicating economic information to permit
informed judgements and decisions by users of the information.”
2. Objectives of Accounting:
1. To ascertain whether the business operations have been profitable or not.
2. To ascertain the financial position of the business.
3. To generate information
Users:
1. Owners
2. Creditors
3. Investors
4. Employees
5. Government
6. Public
7. Research Scholars
8. Managers
3. Few Basic Terms:
1. Business Transactions
2. Debtor
3. Creditor
4. Capital
5. Goods
6. Assets
7. Equity
8. Income
9. Expenditure
10. Drawing
11. Loss
12. Voucher
13. Turnover
14. Net worth
4. FINAL ACCOUNTS
1.PROFIT & LOSS Account (Income Statement)
(i) Trading A/c
(ii) Profit &loss A/c
2. Balance Sheet (B/s)
8. Fictitious Assets
The word fictitious literally means fake, imaginary or not true. Hence, fictitious assets means the
assets which are not actually assets of the company though these assets are shown in the assets
side of the balance sheet.
Fictitious assets are the expenses or losses which are not fully written off (not offset in the Profit
and Loss A/c) during particular accounting period. These expenses or losses are spread over more
than one years. The part of these expenses or losses to be shown in the profit and loss account
and the remaining amount will be carried forward to the following years. These remaining amount
will be shown in the Balance Sheet of the company.
9. Adjustments:
1. Closing Stock
2. Outstanding expenses
3. Prepaid (Unexpired) expenses
4. Accrued Income
5. Income received in advance
6. Depreciation
7. Bad Debts
8. Bad debts Provision
9. Provision on discount for debtors
10. Interest on Capital
11. Interest on Drawings
12. Reserve for Discount on Creditors
13. Loss of Stock by Fire
14. Goods distributed as free samples
10. 1. Closing Stock:
The two fold effect will be
(i) It will be shown on the credit side of Trading account.
(ii) It will be shown on assets side of Balance sheet.
2. Outstanding Expenses:
The two fold effect will be
(i) It will be shown on the debit side of Trading or Profit & Loss
account by way of addition to the expenses
(ii) It will be shown on liabilities side of Balance sheet.
11. 3. Prepaid (Unexpired) expenses:
The two fold effect will be
(i) Prepaid expenses will be shown in the Profit & Loss account by
way of deduction from the expenses
(ii) These will be shown on assets side of Balance sheet.
4. Accrued Income:
The two fold effect will be
(i) It will be shown on the credit side of Profit & Loss account by way
of addition to income.
(ii) It will be shown on assets side of the Balance sheet.
12. 5. Income received in advance:
The two fold effect will be
(i) It is shown on the credit side of Profit & Loss account by way of
deduction from the income.
(ii) It will be shown on liabiliies side of the Balance sheet.
6. Depreciation:
The two fold effect will be
(i) It is shown on the debit side of Profit & Loss account.
(ii) It is shown on assets side of the Balance sheet by way of deduction
from the value of concerned asset.
13. 7.Bad Debts:
The two fold effect will be
(i) It is shown on the debit side of Profit & Loss account.
(ii) It is shown on assets side of the Balance sheet by way of deduction
from sundry debtors.
8. Bad debts Provision: (Provision for Bad Debts)
The two fold effect will be
(i) It is shown on the debit side of Profit & Loss account or by way of
addition to Bad Debts.(Old provision for doubtful debts at the
beginning of the year will be deducted)
(ii) It is shown on assets side of the Balance sheet by way of deduction
from sundry debtors.(after deduction of further bad debts)
14. 9. Provision on discount for debtors:
The two fold effect will be
(i) Such provision will be shown on the debit side of Profit & Loss
account
(ii) It will be shown by way of deduction from sundry debtors.(after
deduction of further bad debts and Bad debts provision) on the
assets side of the Balance sheet.
10. Interest on Capital:
The two fold effect will be
(i) It is shown on the debit side of Profit & Loss account.
(ii) It is shown on liabilities side of the Balance sheet by way of
addition to the capital.
15. 11. Interest on Drawings:
The two fold effect will be
(i) It is shown on the credit side of Profit & Loss account.
(ii) It is shown on liabilities side of the Balance sheet by way of
addition to the drawings which are ultimately deducted from the
Capital.
12. Reserve for Discount on Creditors:
The two fold effect will be
(i) It is shown on the credit side of Profit & Loss account.
(ii) It is shown on liabilities side of the Balance sheet by way of
deduction from Sundry Creditors.
16. 13. Loss of Stock by Fire: In business, the loss of stock may occur due
to fire. The position of the business may be:
a) All the stock is fully insured
b) The stock is partly insured
c) The stock is not insured at all
a) If the stock is fully insured:
The double effect of this entry will be
i) It will be shown on the credit side of the Trading account
ii) It is shown on the assets side of the Balance Sheet.
17. b) If the stock is partly insured:
The two fold effect will be
i) It will be shown on the credit side of the Trading account with the
value of the stock and shown on the debit side of the Profit & Loss
A/c for that part of the stock which is not insured
ii) Loss of stock by fire is shown on the assets side of the Balance
sheet with the amount which is to be realized from the Insurance
company i.e., that part of the loss which is insured.
c) If the stock is not insured at all, the loss will be born by the firm.
The double effect will be
i) It is shown on the credit side of the Trading account
ii) It is shown in the debit side of the Profit & Loss account.
18. 14. Goods distributed as free samples:
The two fold effect will be
i) It is deducted from the purchases,
ii) It is also shown in the debit side of the Profit & Loss Account as
advertisement expenses.
19. DEPRECIATION
Depreciation is a systematic and rational process of distributing the cost of tangible assets
over the life of the assets.
Costs to be allocated= Acquisition cost- Solvage value
Allocated over the estimated useful life of assets
Allocation method should be systematic and rational.
Depreciation Methods: 1. Depreciation methods based on Time:
a) Straight Line Method
b) Declining Balance Method
c) Sum - of - the Year’s Digits Method
2. Depreciation based on Use (Activity)
a) Sinking Fund Method
b) Annuity Method
20. Straight Line Depreciation:
Depreciation = (Cost-Residual value)/Useful Life
Example: On April 1, 2010 A company purchased an equipment at the Cost of Rs. 1,20,000.
This equipment is estimated to have 5 year useful life . At the end of 5th year the scrap value will be
Rs. 20,000. Calculate depreciation expenses for 2011, 2012 and 2013 using straight line method.
Value of the Machinery= Rs.1,20,000
Residual Value= Rs.20,000
Life time = 5 years
Depreciation =(1,20,000-20,000)/5
= 20,000
2011,2012,2013,2014 &2015= Rs. 20,000 ]
21. Declining Balance Depreciation Method:
Depreciation = Book value X Depreciation Rate
Book Value = Cost – Accumulated depreciation
Example: A Machine cost Rs. 2,00,000 and Depreciation Rate is 10%. Calculate Depreciation in
Declining Balance Method.
Depreciation for the first year= 2,00,000X10/100=20,000
Depreciation for the second year =(2,00,000-20,000)1,80,000X10/100=18,000
Depreciation for the third year = (2,00,000-38,000)1,62,000X10/100=16,200
22. Sum-of - the Year’s Digits Method:
Depreciation Expense = (Cost-Solvage value) X Fraction
Fraction for the First Year = n/(1+2+3+……..+n)
Fraction for the second Year = (n-1)/(1+2+3+……..+n)
Fraction for the Third Year = (n-2)/(1+2+3+……..+n)
Fraction for the Last Year = (n-3)/(1+2+3+……..+n)
‘n’ represents the no of years for useful life.
Example: A Company purchased an asset on Jan1, 2010.What is the amount of Depreciation
expense for the year ended Dec 2010? Acquision cost of the asset is Rs. 1,00,000. Useful life of the
asset is 5 years. Residual value at the end of the useful life is Rs.10,000.Calculate depreciation in
Sum-of-the Year’s Digits Method.
Fraction for the first year= 5/(1+2+3+4+5)=5/15
Fraction for the second year=4/15,
Fraction for the 3rd year =3/15, Fraction for the 4th year= 2/15,fraction for the fifth year=1/15
23. Depreciation for the first year = 1,00,000-10,000=90,000X5/15= 30,000
Depreciation for the second year =90,000X4/15= 24,000
Depreciation for the Third year= 90,000X3/15 =18,000
Depreciation for the fourth year =90,000X2/15 = 12,000
Depreciation for the last year = 90,000X1/15 = 6000
The value of asset= Rs.1,000, Life time = 5years, solvage value=100.
Prepare a table consisting of Book value ,Total depreciable cost,
Depreciation rate, depreciation expenditure, Accumulated
depreciation, and Book value at the end of the year.
24. Bookvalue Total
depreciable cost
Depreciation rate Depreciation
expenditure
Accumulated
depreciation
Book value at
the end of the
year
1000
700
460
280
160
900
900
900
900
900
5/15
4/15
3/15
2/15
1/15
300
240
180
120
60
300
540
720
840
900
700
460
280
160
100
25. 4. Annuity Method:
Example: A Firm purchased a 5 years leese for Rs. 40,000 on first January. It decides
to write off depreciation on the Annuity Method. Presuming the rate of interest to
be 5% per annum.
According to the Annuity table, the annual charge for Depreciation reckoning Interest at 5%p.a. would be:
0.230975X40,000 = Rs.9,239
5. Sinking Fund/ Depreciation Fund Method/Amortization Fund Method
26. Example: M/s Ranadeep Huda purchased a machinery at Rs.60,000.
The life time is four years. Depreciation rate under Declining Balance
method is 10%. Calculate depreciation for all 4 years under all methods
based on time.
1. Straight Line Method:
Depreciation = (Cost-Residual value)/Useful Life
Depreciation= 60,000/4=15,000
Note: Under straight line method the depreciation is similar in all the
years though out life time of the machinery.
27. 2. Diminishing Balance Method:
Depreciation = Book value X Depreciation Rate
Book Value = Cost – Accumulated depreciation
Depreciation for the first year = 60,000 X 10/100=6000
Depreciation for the second year =(60,000-6000) X 10/100=5,400
Depreciation for the third year= (60,000-11,400) X 10/100=4,860
Depreciation for the fourth year = (60,000-16,260) X 10/100=4374
28. 3. Sum-of - the Year’s Digits Method:
Depreciation Expense = (Cost-Solvage value) X Fraction
Depreciation for the first year =60,000 X 4/10= 24,000
Depreciation for the second year =60,000 X3/10=18,000
Depreciation for the third year=60,000 x2/10= 12,000
Depreciation for the fourth year =60,000 X 1/10= 6000
29. Amortization:
The action or process of gradually writing off the initial cost of
an asset.
The action or process of reducing or paying off a debt with
regular payments. Ex: Home loan
A period in which a debt is reduced or paid off by regular
payments.
30. Engineering Economics
Economics:
It is the science which studies the economic activities of man and Society.
Definitions:
Alfred Marshall, defines Economics as “ the study of mankind in the ordinary
business of life.”
Adam Smith, defines Economics as “the study of the nature and causes of National
wealth”.
According to Ruskin “ Economics is the science of getting rich.”
Managerial Economics: Haynes, Mote and Paul
“It is the economics applied in Decision making, it is a special branch of economics
bridging the gap between abstract theory and managerial practice.”
Engineering Economics: ?
31. Engineering Economics is the integration of economic theory with
engineering practice and business practice for the purpose of
facilitating the decision making and forward planning.
Scope:
1. Theory of Demand
a) Demand analysis
b) Demand Theory
1. Theory of Production
2. Theory of Exchange or Price theory
3. Theory of Profit
4. Theory of Capital & Investment
5. Environmental issues
32. COST ANALYSIS
Cost: The expenses which are incurred for producing a unit.
The management uses the concept of cost:
1. To determine the profit of the firm
2. To determine whether a commodity is worth producing at a given cost or
not?
3. To fix the price of a product
4. To find out whether a particular investment should or should not be
made and so on.
Determinants of cost of Production:
The size of the plant, the level of production, the utilization of the
plant, the nature of technology used, the process of various inputs like raw
materials, labour, power etc., Managerial and labour efficiency etc.
33. Cost concepts & Classification
1. Actual Cost & Opportunity Cost
2. Past Cost & Future Cost
3. Original Cost and Replacement Cost
4. Explicit Cost and Implicit Cost
5. Sunk Cost & Increment Cost
6. Out of Pocket Cost & Book Cost
7. Fixed Cost & Variable Cost
34. BREAK EVEN ANALYSIS
Break - even analysis involves the study of revenue and costs of a
firm in relation to its volume of sales.
The Break – even point (BEP) is that volume at which the total
revenue of the firm equals to its total cost, it is no profit no loss point.
Break Even Point is explained in two ways.
1. BEP in terms of Volume of Output
2. BEP in terms of sales value
37. Alternative Analysis:
Total Fixed cost Total Fixed Cost
B.E.P.= ________________________ = ________________
Contribution margin per unit Selling Price- AVC
Example: Total Fixed cost=Rs.4,000, Average Variable Cost=Rs.2/-
Selling Price= Rs.4/-
BEP= TFC =
SP-AVC
38. Verification: Rs.
Total Revenue =2000 x 4 = 8000
Total cost:
Total fixed cost 4000
Total Variable
Cost 2000 x 2=4000 = 8000
Profit/Loss Nil
39. 2. BEP in terms of Sales Value:
Total Fixed cost
B.E.P.= ________________________
Contribution margin per unit
The Contribution margin =
Total Revenue - Total Variable Cost =0.4= 15,000-TVC- = 9000
Total revenue 15,000
Example: Total revenue from sales = Rs.20,000 Total Variable Cost = Rs.12,000
Total Fixed cost = Rs. 6000, Calculate BEP.
Contribution Margin = 20000-12000 = 2/5 or 0.4
20000
BEP = 6000/0.4= Rs.15,000
40. Verification: Rs.
Total revenue 15,000
Total Cost:
Total fixed cost: 6000
TVC(0.6X15,000)
(20,000----12000
15,000 ---?) 9000 15000
Profit/Loss Nil
41. Assumptions: BEP analysis is based on
1. The volume of sales and the volume of production are assumed to
be every thing produced is sold and there is no closing inventory.
2. Price is assumed to be constant and total revenue is perfectly varies
with the physical volume of production.
3. All costs are either perfectly variable or absolutely fixed over the
range of volume of production.
USES of Break Even Analysis:
1. Safety Margin
2. Target Profit
3. Change in Price
42. 1. Safety Margin:
Actual Sales – BEP Sales
Safety Margin= Actual Sales
Example: Sales= 4,000 units BEP = 2,500 units
Safety Margin= 4000-2500 = 37.5%
2500
43. 2. Target Profit:
Fixed Cost+ Target/Desired Profit
Target Sales Volume = Contribution margin per unit or p/v ratio
Example:
Total Fixed Cost= Rs.10,000 , AVC = Rs.2, Sales price = Rs.4
Calculate Target Sales Volume?
Target Sales Volume = 4000+10,000 =7000 Units
4-2
44. Verification:
Total Revenue 7000 units x Rs. 4 = Rs. 28,000
Total cost: Total Fixed cost =4000
Total Variable cost 7000x2=14000 = Rs. 18,000
Desired Profit = Rs. 10,000
45. 3. Change in Price:
Total Fixed Cost + Total Profit
New Sales Volume = New Selling Price -AVC
Example:
Total Fixed Cost= Rs.4,000 , AVC = Rs.2, Sales price = Rs.4
Desired Profit = Rs.10,000, Price per unit is reduced to Rs 3.50.
Calculate New Sales Volume?
New Sales Volume =4000+10000 =9,333.33 Units.
3.50-2
46. Verification:
Total Revenue 9,333.33units x Rs. 3.50 = Rs. 32,666.67
Total cost: Total Fixed cost = 4000
Total Variable cost 9,333x2=18666.67 = Rs. 22,666.67
Desired Profit = Rs. 10,000. 00
Limitations of BEP-?
1. Price is rarely constant
2. The Cost functions are assumed to be linear. This is not true in
practice.
3. The BE Analysis is based on the assumption that, prices, cost etc.
are given and would not change. In practice, costs and revenues
change over time.
47. Benefit-cost analysis - Replacement analysis
Benefit Cost Analysis (BCA) or CBA:
Definition:
A systematic process for calculating and comparing benefits and
costs of a project , for taking a decision or Government policy. A project
is considered cost-effective when the BCR is 1.0 or greater.
It has two purposes:
1. To determine if it is a sound investment/decision.
2. To provide a basis for comparing projects. It involves comparing the
total expected cost of each option against the total expected
benefits, to see whether the benefits outweigh the costs and by
how much.
48. TIME VALUE OF MONEY
Reasons for Time Preference of Money:
Risk
Preference for Consumption
Investment Opportunities
Techniques of Money:
There are two techniques for adjusting the Time value of money:
1. Compounding Technique
2. Discounting or Present Value Technique
1. Compounding Technique: Investment =100 Interest=10% Period=1 year
V =V (1+i)
V =
= Rs.
49. If the period is 2 years 3 years
10 Years ?
**Calculate the compound value of Rs.10,000 at the end of 3years at
12% rate of interest.
50. 2. Discounting or Present Value Technique
Future value n period
Present value
____ = Rs.1000 i =10% n= 1year
(1+i)
1000 = Rs. 909
1+0.10
51.
52. WORKING CAPITAL
Capital: Total Investment of the business is called Capital.
Factors Determining the capital requirements:
1. Cost of Fixed assets
2. Cost of current assets
3. Cost of promotion
4. Cost of establishing the business
5. Cost of Financing
6. Cost of intangible assets
Classification of Capital:
1. Fixed Capital
2. Working Capital
53. 1. Fixed Capital:
Definition:
“The funds required for the acquisition of those assets that are to be used over for a long period –
such assets as land, building, machinery, equipment and tools.-Shubin
Factors determining the requirements of Fixed capital:
1. Nature or character of business
2. Size of the business
3. Type of the business
4. Production techniques
5. Number of activities undertaken by the enterprise
6. Non- current and intangible assets
7. Mode of acquisition of fixed assets
54. 2. Working Capital
Definition:
1. “Working capital is the amount of funds necessary to cover the cost of operating the enterprise”
–Shubin
2. “Circulating capital means current assets of a company that are changed in the ordinary course of
business from one form to another, as for example from cash to inventories, inventories to
receivables, receivables in to cash.” -Genestenberg
55. Factors determining working capital requirements:
1. Nature or character of Business
2. Size of the business/ Scale of operations
3. Production policy
4. Manufacturing process/ Length of production cycle
5. Seasonal variations
6. Working capital cycle
7. Credit policy
8. Business cycle
9. Rate of growth of the business
10. Earning Capacity & Dividend policy
11. Price Level changes
12. Other factors
56. Classification of working capital:
a. On the basis of Concept
b. On the basis of Time
a. Concepts of Working capital:
1. Gross working capital
2. Net working capital (CA-CL)
b. On the basis of Time:
Working Capital
________________________________________
Permanent or Fixed W.C Temporary or Variable W.C
________________ ____________
Regular W.C . Reserve W.C. Seasonal W.C. Special W.C.
57.
58. Importance or Advantages of Adequate Working Capital:
1. Regular supply of Raw materials
2. Regular payment of salaries, wages and other day to day commitments
3. Quick and regular return on Investments
4. Good will
5. Cash discounts
6. Easy loans
7. Exploitation of favorable market conditions
8. Ability to face crisis
9. High Moral
10. Solvency of the business
59. Source of Corporate Finance:
1. Raising of owned capital
2. Raising of Borrowed capital
FINANCIAL REQUIREMENTS
_____________________________________________________________
SHORT TERM MEDIUM TERM LONG TERM
1. Bank Credit 1. Issue of Debentures 1. Issue of shares
2. Customer advances 2. Issue of Preference Shares 2. Issue of Debentures
3. Trade Credit 3. Bank Loans 3. Ploughing-back of profits
4. Installment Credit 4. Public Deposits 4. Loans from specialized
5. Indigenous Bankers 5. Loans from Financial institutions Financial Institutions
60. CAPITAL BUDGETING
Meaning: It means to prepare a systematic and scientific outline of the investment of available
capital.
Definitions:
1. “Capital Budgeting is a long term planning for making and financing proposed capital outlays”.
- Charles T Horngren
2. “Capital Budgeting is a kind of thinking, that is necessary to design and carry through the
systematic program for investing stock holder’s money”.
- Joel Dean
Need of Capital Budgeting:
1. Control on capital Investment
2. Efficient Management of Capital Expenditure
3. Forecasting of profit
4. Control on Uncertainty and Risk
61. Methods of Capital Budgeting or Evaluation of Investment Proposals:
(A) Traditional Methods
(1) Pay- back period
(2) Accounting Rate of Return Method or Average Rate of Return Method
(ARR Method)
(B) Time – adjusted method or Discounted methods
(1) Net Present Value Method (NPV Method)
(2) Internal Rate of Return Method (IRR Method)
(3) Profitability Index Method (PI Method)
(4) Discounted pay - back period Method
62. A) Traditional Methods:
1. Pay – back period:
The number of years/period required to recover the original investment is called Pay – back
period.
Pay – back period = Cash outlay of the Project or Original cost of the Asset
Annual Cash Inflows
Annual Cash Inflows= Profits before depreciation and after Taxes
Examples:
1. A project costs Rs.1,00,000 and yields an annual cash inflows of Rs. 20,000 for 8 years. Calculate
its Pay-back period.
Solution: Pay – back period = Cash outlay of the Project or Original cost of the Asset
Annual Cash Inflows
=1,00,000/20,000= 5 Years.
63. 2. Determine the pay – back period for a project which requires a cash out lay of Rs. 10,000 and
generates cash inflows of Rs. 2,000, Rs. 4000, Rs.3,000 and Rs 2,000 in the first, second, third and
fourth years respectively.
Solution:
Years Annual Cash Inflows Rs. Cumulative Annual Cash
Inflows Rs.
1
2
3
4
2,000
4,000
3,000
2,000
2,000
6,000
9,000
11,000
65. 3. A project costs Rs. 5,00,000 and yields annually a profit of Rs.80,000 after depreciation @
12%p.a. but before tax of 50%. Calculate the Pay- back period.
Solution:
Profit before Tax Rs. 80,000
Tax 50% Rs. 40,000
Profit after tax Rs. 40,000
Add: Dep 12% Rs. 60,000
Annual Cash Inflows Rs.1,00,000
Pay- back period = Original cost of the project/Annual cash inflows
= 5,00,000/1,00,000=5 years.
66. 4. There are two projects X and Y. Each project requires an investment of Rs. 20,000. You are
required to rank these projects according to the pay –back period method from the following
information.: (Net Profit before Depreciation and Taxes)
Years Project X Rs. Project Y Rs.
1st 1,000 2,000
2nd 2,000 4,000
3rd 4,000 6,000
4th 5,000 8,000
5th 8,000 ---
Years Proj X Annual
cash Inflows
Rs.
Cumulative
cash inflows
Rs.
Proj Y Annual
Cash Inflows
Rs.
Cumulative
cash inflows
Rs.
1
2
3
4
5
1,000
2,000
4,000
5,000
8,000
1,000
3,000
7,000
12,000
20,000
2,000
4,000
6,000
8,000
----
2,000
6,000
12,000
20,000
67. 2. Accounting Rate of Return Method (ARR Method):
ARR = Average Annual Profit after dep. and taxes X 100
Average Investment or Net Investment/2
Ex: Calculate the Average rate of return for projects A and B from the following.
Project A Project B
Investments Rs. 20,000 Rs.30,000
Expected life (No solvage value) 4 years 5 years
Projected Net Income (after interest, depreciation and taxes)
Years Project A Project B
1 2,000 3,000
2 1,500 3,000
3 1,500 2,000
4 1,000 1,000
5 --- 1,000
If the required rate of return is 12% which project should be undertaken?
68. ARR = Average Annual Profit after dep. and taxes X 100
Average Investment or Net Investment/2
Project A:
ARR = (6,000/4) X100 = 15%
20,000/2
Project B:
ARR = (10,000/5) X 100 = 13.33%
30,000/2
Note: The average return on average investment is higher in case of project A and is also higher
than the required rate of return of 12% and hence Project A is suggested to be undertaken.
69. 2. A Project requires an investment of Rs.5,00,000 and has a scrap value of Rs.20,000 after 5 years.
It is expected to yield profits after depreciation and taxes during the Five years amounting to
Rs40,000, Rs.60,000, Rs.70,000, Rs.50,000 and Rs.20,000. Calculate the Accounting Rate of Return
Method on the Investment.
70. (B) Time Adjusted or Discounted Cash Flow Methods:
1.Net Present Value Method (NPV): Considers the Time Value of Money.
Present Value (PV) = 1/(1+r)n
r = rate of interest
n =number of years
NPV =Total Present Value of Cash Inflows - Total Present Value of Cash Outflows
71. INFLATION
Definition: In Economics, Inflation is a rise in the general level of prices of goods & services in an
economy over a period of time. The over all general upward price movement of goods and services
in an economy, usually as measured by the Consumer Price Index and the Producer Price Index.
Theories:
1. Demand –pull Inflation
2. Cost-push Inflation
3. Quantity theory of Money
4. Phillips curve
5. Price expectations & Inflation
6. Wage –price spiral – cost- push & demand –pull Inflation
7. Sectoral Inflation
8. Administered power price inflation
9. Market power inflation
72. Measures to control Inflation:
(A) Monetary measures:
1. Bank Rate policy
2. Open market operations
3. Variable Reserve Ratio
4. Credit Rationing
(B) Fiscal measures:
1. Public Borrowing
2. Public Revenue
3. Public Expenditures
(C) Realistic measures:
1. Increase the supply of goods and services
2. Population planning
3. Price control policy
4. Economic Planning
73. RISK & UNCERTAINTY
Definition: Risk is a condition in which there is a possibility of an adverse deviation from a derived
outcome that is expected or hoped for.
Uncertainty: Opposite of certainty. It refers to a state of mind characterized by doubt, based on a
lack of knowledge about what will or will not happen in the future.
Classification of Risks:
1. Financial & Non Financial risks
2. Static and Dynamic Risks
3. Fundamental & Particular Risks
4. Pure & Speculative Risks
(i) Personal Risk
(ii) Property Risk
(iii) Liability Risk
(iv) Risks arising from failure of others.
74. RISK MANAGEMENT
Definition: Risk Management is a scientific approach to dealing with pure risks by
anticipating possible accidental losses and designing and implementing the procedures that
minimize the occurrence of loss or the financial impact of the losses that do occur.
Risk management tools:
1. Risk Control
(i) Risk avoidance
(ii) Risk Reduction
2. Risk Financing
(i) Risk Retention
(ii) Risk Transfer
75. BUDGET AND BUDGETARY CONTROL
Definition of Budget: “A plan quantified in monetary items, prepared and approved prior to a
defined period of time, usually showing planned income to be generated and or expenditure to be
incurred during that period and the capital to be employed to attain a given objective.” -- ICMA
(Institute of Cost and Management Accountants)
Definition of Budgetary Control:
“The establishment of budgets relating the responsibilities of executives to the requirements of a
policy and the continuous, comparison of actual with budgeted result either to secure by individual
action the objective of that policy or to provide a basis for its revision”. ---ICMA
Steps in Budgetary Control:
1. Preparation of the budget
2. Publishing the budget
3. Measuring the results
4. Comparing the results with the budget
5. Reporting the results of the above activity
6. Correcting the unfavorable variances
76. Objectives of Budgetary Control:
1. Planning and Co-ordination
2. Clarification of Authority and Responsibility
3. Communication
4. Motivation
5. Control
77. Essential Requirements of Budgetary Control:
1. Budget must have the complete cooperation of the Chief executive
2. The ultimate realization of the maximum amount of profit should always be kept uppermost.
3. Responsibility for the preparation of the estimate should rest on those individuals responsible
for performance.
4. The budget must be realistic and the goals attainable.
5. A budget committee should be established consisting of the budget director, the chief executive
officer, and the executives of the various divisions of the organization.
6. The budget should cover all phases of operations.
7. Budgeting should be continuous.
8. Periodic reports should be prepared promptly, comparing budget and actual results.
9. The accounting system must be adequate.
10. A good organization must be developed.
78. Advantages and Limitations of Budgetary Control:
1. It helps the process of planning by reducing it to concrete numerical goals.
2. It provides an effective means by which top management can delegate authority and
responsibility
3. It keeps expenditure under check and constantly remind employees and management of the
targets and goals to be achieved
4. As a control devise, it supplies the means of checking results and comparing performance of
revealing weaknesses and making corrections
5. The budget is not merely an instrument of planning but also a tool of coordination it brings
together the activities of various sections, departments and divisions in an overall perspective.
6. It helps in determining the policies of the factory.
7. It gives complete information in advance regarding the amount of capital needed for the
budget period.
8. It gives the idea of where executive action is required.
9. It aids in measuring performance of each department of the factory.
10. It promotes cooperation among the different executives for determining future plans.
79. 11. It acts as a control tool for administration
12. It centralizes management control.
Limitations:
1. The budget is always based on estimates. The success or failure of a budget, to a large extent,
depends upon the accuracy of estimates.
2. To evolve a budgetary control depends upon the system, normally, it takes several years as it
has to be tried, improved and discarded depending upon the changing circumstances.
3. The success of budgetary control depends upon the enthusiastic participation of all levels of
management. But it is difficult to secure the wholehearted cooperation of all in a factory.
4. Budgeting is only a tool of management but it cannot replace management.
5. It may be difficult to install a system of budgetary control in small factories owing to
expenditure involved.
80. Organization for Budgetary Control:
1. Organization Chart
2. Budget Officer
3. Budget Committee
4. Budget Centre
5. Budget Manual
6. Chart of Accounts
7. Budget Period
8. Key Factor
81. BIDDING
Invitation for Bidding: IFB /ITB is an invitation to contractors or equipment suppliers through a
bidding process to submit a proposal on a specific project to be realized or product or service to be
furnished.
Bidding: Bidding is a competitive offer to set a price by an individual or business for a product or
service or a demand that something be done.
Types of Bidding:
1. Online bidding
2. Timed Bidding
3. Item Rated Bidding
4. Lumpsum Bidding
5. Engineering Procurement Construction (EPC)
Escalation:
An escalator clause is also known as an escalation clause, where the provision allows for
an automatic increase in the wages or prices. The increase in the wages and prices are
included in contracts such that they must be activated when certain conditions occur, such
as when the cost of living or inflation increases.
82. Five steps of a Bidding Process:
1. Specifications
2. Request for Bids
3. Bidding
4. Reviewing the Bids
5. Awarding the Contract
How to write an estimate for a Bid Proposal:
1. Format
2. Hourly wage
3. Materials
4. Description of service
5. Duration
6. Authorized Signature
7. Payment details
83. PROJECT APPRAISAL /PERFORMANCE APPRAISAL
Definition: Systematic and comprehensive review of the economic, environmental, financial, social,
technical and other such aspects of a project to determine if it will meet its objectives.
It is generic term that refers to the process of assessing in a structured way, the case for
proceeding with a project or proposal. It often involves comparing various options, using economic
appraisal or some other decision analysis technique.
Yield: Amount yielded; product –applied especially to products resulting from growth or cultivation.
Process:
1. Initial assessment
2. Define problem and long-list
3. Consult and short-list
4. Develop options
5. Compare and select project
84. Methods of Project appraisal
1. Economic analysis
2. Financial analysis
3. Market analysis
(i) Opinion polling method
(ii) Life cycle segmentation Analysis
4. Technical feasibility
Types of Project appraisal:
Cost-benefit analysis
Cost effective analysis
Scoring and weighting
NPV, IRR, PI
Pay back method, ARR
Investment risk and security analysis
85. TAXATION
• Income tax is a direct tax that a government levies on the income of
its citizens. ... Income does not only mean money earned in the form
of salary. It also includes income from house property, profits from
business, gains from profession (such as bonus), capital gains income,
and 'income from other sources’.
• Corporation tax is a tax imposed on the net income of the company.
Description: Companies, both private and public which are registered
in India under the Companies Act 1956, are liable to pay corporate
tax. ... If the net income exceeds Rs 10 cr, surcharge at the rate of 10%
is levied.
• Income tax primarily consists of tax on income paid by individuals and
Hindu Undivided Families (HUFs). Corporation tax is the tax paid by
companies on the profit they make