Management Accounting (Bba32) Unit - I

Management Accounting (BBA32) UNIT-1
REF NO: BBA32-U1-01
MANAGEMENT ACCOUNTING (BBA32)

UNIT – I
INTRODUCTION
Management accounting can be viewed as Management-oriented Accounting. Basically it is the study
of managerial aspect of financial accounting, "accounting in relation to management function". It
shows how the accounting function can be re-oriented so as to fit it within the framework of
management activity. The primary task of management accounting is, therefore, to redesign the entire
accounting system so that it may serve the operational needs of the firm. If furnishes definite
accounting information, past, present or future, which may be used as a basis for management action.
The financial data are so devised and systematically development that they become a unique tool for
management decision.
MANAGEMENT ACCOUNTING
Management accounting is not a specific system of accounting. It could be any form of accounting
which enables a business to be conducted more effectively and efficiently. It is largely concerned with
providing economic information to mangers for achieving organizational goals. It is an extension of
the horizon of cost accounting towards newer areas of management. Much management accounting
information is financial in nature but has been organized in a manner relating directly to the decision
on hand. Management Accounting is comprised of two words „Management‟ and „Accounting‟. It
means the study of managerial aspect of accounting. The emphasis of management accounting is to
redesign accounting in such a way that it is helpful to the management in formation of policy, control
of execution and appreciation of effectiveness. Management accounting is of recent origin. This was
first used in 1950 by a team of accountants visiting U. S. A under the auspices of Anglo-American
Council on Productivity
DEFINITIONS OF MANAGEMENT ACCOUNTING
Anglo-American Council on Productivity defines Management Accounting as, “the presentation of accounting
information in such a way as to assist management to the creation of policy and the day to day operation of
an undertaking”
The American Accounting Association defines Management Accounting as “the methods and concepts
necessary for effective planning for choosing among alternative business actions and for control through the
evaluation and interpretation of performances”.
Jawahar Science College, Block-14, Neyveli. Page 1 of 11

The Institute of Chartered Accountants of India defines Management Accounting as follows: “Such of its
techniques and procedures by which accounting mainly seeks to aid the management collectively has come
to be known as management accounting”
From these definitions, it is very clear that financial data is recorded, analysed and presented to the
management in such a way that it becomes useful and helpful in planning and running business operations
more systematically.
OBJECTIVES OF MANAGEMENT ACCOUNTING:
The fundamental objective of management accounting is to enable the management to maximize profits or
minimize losses. The evolution of management accounting has given a new approach to the function of
accounting. The main objectives of management accounting are as follows:
1. Planning and policy formulation:

Planning involves forecasting on the basis of available information, setting goals; framing polices
determining the alternative courses of action and deciding on the programme of activities.
Management accounting can help greatly in this direction. It facilitates the preparation of statements
in the light of past results and gives estimation for the future.
2. Interpretation process:
Management accounting is to present financial information to the management. Financial
information is technical in nature. Therefore, it must be presented in such a way that it is easily
understood. It presents accounting information with the help of statistical devices like charts,
diagrams, graphs, etc.
3. Assists in Decision-making process:
With the help of various modern techniques management accounting makes decision-making process
more scientific. Data relating to cost, price, profit and savings for each of the available alternatives
are collected and analyzed and provides a base for taking sound decisions.
4. Controlling:
Management accounting is a useful for managerial control. Management accounting tools like
standard costing and budgetary control are helpful in controlling performance. Cost control is
effected through the use of standard costing and departmental control is made possible through the
use of budgets. Performance of each and every individual is controlled with the help of management
accounting.
5. Reporting:
Management accounting keeps the management fully informed about the latest position of the
concern through reporting. It helps management to take proper and quick decisions. The
performance of various departments is regularly reported to the top management.

6. Facilitates Organizing:
“Return on Capital Employed” is one of the tools of management accounting. Since management
accounting stresses more on Responsibility Centres with a view to control costs and responsibilities,
it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and
efficiently organization framework.
7. Facilitates Coordination of Operations:
Management accounting provides tools for overall control and coordination of business operations.
Budgets are important means of coordination.
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:
Management accounting involves furnishing of accounting data to the management for basing its
decisions. It helps in improving efficiency and achieving the organizational goals. The following
paragraphs discuss about the nature of management accounting.
1. Provides accounting information:
Management accounting is based on accounting information. Management accounting is a service
function and it provides necessary information to different levels of management. Management
accounting involves the presentation of information in a way it suits managerial needs. The accounting
data collected by accounting department is used for reviewing various policy decisions.
2. Cause and effect analysis.
The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss;
management accounting goes a step further. Management accounting discusses the cause and effect
relationship. The reasons for the loss are probed and the factors directly influencing the profitability
are also studied. Profits are compared to sales, different expenditures, current assets, interest payables,
share capital, etc.
3. Use of special techniques and concepts.
Management accounting uses special techniques and concepts according to necessity to make
accounting data more useful. The techniques usually used include financial planning and analyses,
standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc.
4. Taking important decisions.
It supplies necessary information to the management which may be useful for its decisions. The
historical data is studied to see its possible impact on future decisions. The implications of various
decisions are also taken into account.

5. Achieving of objectives.
Management accounting uses the accounting information in such a way that it helps in formatting
plans and setting up objectives. Comparing actual performance with targeted figures will give an idea
to the management about the performance of various departments. When there are deviations,
corrective measures can be taken at once with the help of budgetary control and standard costing.
6. No fixed norms.
No specific rules are followed in management accounting as that of financial accounting. Though the
tools are the same, their use differs from concern to concern. The deriving of conclusions also depends
upon the intelligence of the management accountant. The presentation will be in the way which suits
the concern most.
7. Increase in efficiency.
The purpose of using accounting information is to increase efficiency of the concern. The performance
appraisal will enable the management to pin-point efficient and inefficient spots. Effort is made to
take corrective measures so that efficiency is improved. The constant review will make the staff cost
– conscious.
8. Supplies information and not decision.
Management accountant is only to guide and not to supply decisions. The data is to be used by the
management for taking various decisions. „How the data to be utilized‟ is will depend upon the caliber
and efficiency of the management.
9. Concerned with forecasting.
The management accounting is concerned with the future. It helps the management in planning and
forecasting. The historical information is used to plan future course of action. The information is
supplied with the object to guide management for taking future decisions.
LIMITATIONS OF MANAGEMENT ACCOUNTING:

Management Accounting is in the process of development. Hence, it suffers form all the limitations
of a new discipline. Some of these limitations are:
1. Limitations of Accounting Records:
Management accounting derives its information from financial accounting, cost accounting and
other records. It is concerned with the rearrangement or modification of data. The correctness or
otherwise of the management accounting depends upon the correctness of these basic records. The
limitations of these records are also the limitations of management accounting.

2. It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool for
management. Ultimate decisions are being taken by management and not by management
accounting.
3. Heavy Cost of Installation:
The installation of management accounting system needs a very elaborate organization. This results
in heavy investment which can be afforded only by big concerns.
4. Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as one has to
make a personal judgment. Personal prejudices and bias affect the objectivity of decisions.
5. Psychological Resistance:
The installation of management accounting involves basic change in organization set up. New rules
and regulations are also required to be framed which affect a number of personnel and hence there
is a possibility of resistance form some or the other.
6. Evolutionary stage:
Management accounting is only in a developmental stage. Its concepts and conventions are not as
exact and established as that of other branches of accounting. Therefore, its results depend to a very
great extent upon the intelligent interpretation of the data of managerial use.
7. Provides only Data:
Management accounting provides data and not decisions. It only informs, not prescribes. This
limitation should also be kept in mind while using the techniques of management accounting.
8. Broad-based Scope:
The scope of management accounting is wide and this creates many difficulties in the
implementations process. Management requires information from both accounting as well as non-
accounting sources. It leads to inexactness and subjectivity in the conclusion obtained through it.
FUNCTIONS OF MANAGEMENT ACCOUNTING
The basic function of management accounting is to assist the management in performing its
functions effectively. The functions of the management are planning, organizing, directing and
controlling. Management accounting helps in the performance of each of these functions in the
following ways:
(i) Provides data:
Management accounting serves as a vital source of data for management planning. The
accounts and documents are a repository of a vast quantity of data about the past progress
of the enterprise, which are a must for making forecasts for the future.

(ii) Modifies data:
The accounting data required for managerial decisions is properly compiled and classified.
For example, purchase figures for different months may be classified to know total
purchases made during each period product-wise, supplier-wise and territory-wise.
(iii) Analyses and interprets data:
The accounting data is analysed meaningfully for effective planning and decision-making.
For this purpose the data is presented in a comparative form. Ratios are calculated and likely
trends are projected.
(iv) Serves as a means of communicating:
Management accounting provides a means of communicating management plans upward,
downward and outward through the organization. Initially, it means identifying the
feasibility and consistency of the various segments of the plan. At later stages it keeps all
parties informed about the plans that have been agreed upon and their roles in these plans.
(v) Facilitates control:
Management accounting helps in translating given objectives and strategy into specified
goals for attainment by a specified time and secures effective accomplishment of these
goals in an efficient manner. All this is made possible through budgetary control and
standard costing which is an integral part of management accounting.
(vi) Uses also qualitative information:
Management accounting does not restrict itself to financial data for helping the management
in decision making but also uses such information which may not be capable of being
measured in monetary terms. Such information may be collected form special surveys,
statistical compilations, engineering records, etc.
SCOPE OF MANAGEMENT ACCOUNTING
Management accounting is concerned with presentation of accounting information in the most useful
way for the management. Its scope is, therefore, quite vast and includes within its fold almost all
aspects of business operations. However, the following areas can rightly be identified as falling within
the ambit of management accounting:
(i) Financial Accounting: Management accounting is mainly concerned with the rearrangement
of the information provided by financial accounting. Hence, management cannot obtain full
control and coordination of operations without a properly designed financial accounting
system.

(ii) Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential
costing and other cost techniques play a useful role in operation and control of the business
undertaking.
(iii) Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in
real terms and profit is calculated with this fact in mind.
(iv) Budgetary Control: This includes framing of budgets, comparison of actual performance
with the budgeted performance, computation of variances, finding of their causes, etc.
(v) Inventory Control: It includes control over inventory from the time it is acquired till its final
disposal.
(vi) Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other statistical
methods make the information more impressive and intelligible.
(vii) Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income
statements and the related reports, cash flow and funds flow statements, scrap reports, etc.
(viii) Taxation: This includes computation of income in accordance with the tax laws, filing of
returns and making tax payments.
(ix) Office Services: This includes maintenance of proper data processing and other office
management services, reporting on best use of mechanical and electronic devices.
(x) Internal Audit: Development of a suitable internal audit system for internal control.
ADVANTAGES OF MANAGEMENT ACCOUNTING:
Management accounting has various advantages. Through an effective management

accounting system, it is possible to enhance the overall performance of the company. Let us
have a look at the advantages of management accounting.
1. Increases Efficiency of the company:

Companies opt for Management accounting as it increases the efficiency of the company in
performing operations. It contributes in striving for better performance by evaluating and
comparing.
Management accounting makes it easier to achieve various results. This indirectly motivates
the employees to strive for better performance. As a result, they receive rewards in the form of
promotions. Thus, management accounting indirectly increases the efficiency of the company
at a whole.
2. Increases the bar of Profitability:
Management accounting includes budgetary control and capital budgeting. The use of this
method makes it easier for the company to cut short the extra expenditure for performing vital
operations. This indirectly increases the bars of profits for the company, as the company is able
to reduce its pricing on the products.
3. Simplifies the decision making in Financial Statements:
Managerial decisions and other activities of management require a simplified report of the
financial statement of the company. For this action, the management accountant creates a
detailed technical report with simpler interpretations. Here, he represents the key facts of the
financial statements. This enables the managing officers to take up appropriate decisions for
the betterment of the company.
4. Enables the fluctuation of business monetary fund:
One of the essential factors in business is the monetary fund. Management accounting enables
control over the fluctuation of this monetary fund. Management accounting studies the flow of
the funds in detail.
Moreover, it helps in maintaining the emergency fund in case of any urgency. Further, it also
helps in eliminating any source within the company that misuses the fund. After all, emergency
preparation should always be kept aside before setting up any business.
5. Cost transparency:
In the corporate world, the majority of the costs come from the Information Technology (IT).
The work of management accounting in the firm is to work with the IT department closely.
This action ensures within budget actions and provides cost transparency to the company.
6. Flexibility and freedom:
A management accounting system is of a flexible nature. These reports do not require to be
made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a
perfect report.
7. Assist in goal completion (Objectives):
The objective of the report presented by the management accountant is to assist in achieving a
long-term goal. It becomes possible to achieve the goal due to the detailed information of the
management accountant, which highlights the strong and weak points of the company. In
addition, this information helps to identify the weakness and takes measures to overcome them.
8. Future prediction from the past result:
Every new system that evolves for the corporate world has a single motive. It is to attain success
in the competitive market. With similar intent, the management accounting system also strives
for betterment in performance.
Thus, with the help of given data of the past (of the company), it provides a chance to prepare
for better future results.
9. Advanced technique and features:
The reasons because of which the management system seems reliable are the special tools and
techniques. To form an accurate and valid report special techniques like budget controlling,
marginal costing, control accounting, etc are used.
The use of the technique may differ according to the issue at hand. However, this technique
makes it easier to make decisions in favour of the company.
10. Marginal costing:
Marginal costing is possible with the aid of a management accountant. It fixes the selling price
of the products created in the organization. Further, it also suggests several ways to use scarce
materials and resources. It also recommends actions based on a fixed cost, contribution, and
other extras.
Although management accounting does not promise perfect decisions, they do increase the
chances of taking effective and efficient decisions.
DISADVANTAGES OF MANAGEMENT ACCOUNTING:

Advantages always bring along certain disadvantages too. Although the management
accounting system has various advantages but no one can ignore the disadvantages. Let us peep
into the drawbacks of management accounting.
1. Based on manually maintained records:

Management accounting system requires information related to financial and cost accounting.
The records prepared by the management accounting officers are based on the maintained
records.
Thus, the efficiency of the records presented relies upon the accuracy of the records that are
maintained.
2. Biased interpretation:
Personal interpretation matters a lot when it comes to decision making. The preparation of these
reports by the management officer is based on the capability of interpretation and
understanding.
Prejudices and biased knowledge of the subject make it impossible for the company to come
to an accurate decision. Thus, it becomes impossible to get effective results at the end of the
day.
3. Deficiency of various vital skills of management accountant:
The job description of a management accountant includes subjects like financial accounting,
cost accounting, economics, and statistics. Further, he or she should have an insight on a bit of
psychology and sociology.
Lack of knowledge regarding these subjects may affect the outcome of management
accounting. Thus, for better working of management accounting, it is essential for the
accountant to have a clear knowledge of the required subjects.
4. Cannot recommend a particular action:
Various alternatives for problem-solving are presented before the management. These
alternatives can be effective or non-effective. Management accountant’s function is to select
any one of the alternatives or toss out all of the given measures.

Thus, management can only suggest a certain action; however, it cannot guarantee its
effectiveness.
5. Preferences depend upon intuition and experience:
The management accounting works upon a set scientific concept. However, following scientific
guidelines becomes too much of a hassle.
Moreover, scientific decision-making is a complex technique of management accounting. Thus, the
preference is given to intuition and experience at all times. It comparatively becomes easier to make
decisions.
6. Management Accounting has its own limitations:

A management accounting system is merely a tool that facilitates the management accountant
in giving advice for decision-making.
However, the implementation of the actions that are advised depends upon the follow-up action
of the management. Thus, management accounting is limited to giving suggestions.
7. Participation and efforts matter:
A management accounting system is a tool that provides a solution. However, the way of
applying that solution also matters. Thus, for better results giving full efforts and participation
in the task is required.
To attain overall success it is important for all the employees from different levels to give
their full inputs.
8. Broad scope v/s limited knowledge:
Management accounting is a wide concept that is to be taken into consideration before
appointing an accountant. It requires skills and knowledge to look into the matters of monetary
and non-monetary transactions of the company.
Lack of these skills can hamper the overall report and data. Moreover, this data can be
unreliable due to the inefficiencies of the accountant.
9. Not an ideal choice for small-scale organizations:
A management accounting system is a very costly tool. As a result, it is not at all ideal for
small-scale industries or organization.
Due to the high cost, it is not suitable for low budget businesses. In addition, the utility of this
system is restricted to large-scale and complex organizations.
10. Rate of adopting changes:
People say that old habits die-hard. Similarly, changes are hard to adapt. Thus, when a
management accounting system is newly installed in an old setting organization, it depends on
the capabilities of the employee to adapt to the sudden change. So installing a management
accounting system cannot promise instant success.
11. Scope for improvement:
New inventions have a lot of scope for improvement. Similarly, the management accounting
system is a recent invention. Along with the advantages, it also has limitations. Due to its

complex nature, it requires a lot of intelligent interpretation. Therefore, it is safe to say that the
system still needs to evolve.
Impracticable in nature:
Management accounting system is a recent innovation. It works on the availability of old

records, present records, and the previously acquired results.
Thus, it does not work while facing problems apart from financial help. Therefore, it is
impracticable in nature for the overall performance of business organizations.
LIMITATIONS OF MANAGEMENT ACCOUNTING:
Management Accounting is in the process of development. Hence, it suffers from all the
limitations of a new discipline. Some of these limitations are:
1. Limitations of Accounting Records:
Management accounting derives its information from financial accounting, cost accounting and
other records. It is concerned with the rearrangement or modification of data. The correctness
or otherwise of the management accounting depends upon the correctness of these basic
records. The limitations of these records are also the limitations of management accounting.
2. It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool for
management. Ultimate decisions are being taken by management and not by management
accounting.
3. Heavy Cost of Installation:
The installation of management accounting system needs a very elaborate organization. This
results in heavy investment which can be afforded only by big concerns.
4. Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as one has
to make a personal judgment. Personal prejudices and bias affect the objectivity of decisions.
5. Psychological Resistance:
The installation of management accounting involves basic change in organization set up. New
rules and regulations are also required to be framed which affect a number of personnel and
hence there is a possibility of resistance form some or the other.

6. Evolutionary stage:
Management accounting is only in a developmental stage. Its concepts and conventions are not
as exact and established as that of other branches of accounting. Therefore, its results depend
to a very great extent upon the intelligent interpretation of the data of managerial use.
7. Provides only Data:
Management accounting provides data and not decisions. It only informs, not prescribes. This
limitation should also be kept in mind while using the techniques of management accounting.
8. Broad-based Scope:
The scope of management accounting is wide and this creates many difficulties in the
implementations process. Management requires information from both accounting as well as
non-accounting sources. It leads to
MANAGEMENT ACCOUNTANT
Management Accountant is an officer who is entrusted with Management Accounting function

of an organization. He plays a significant role in the decision making process of an
organization. The organizational position of Management Accountant varies from concern to
concern depending upon the pattern of management system. He may be an executive in some
concern, while a member of Board of Directors in case of some other concern. However, he
occupies a key position in the organization.
In large concerns, he is responsible for the installation, development and efficient functioning
of the management accounting system. He designs the frame work of the financial and cost
control reports that provide with the most useful data at the most appropriate time. The
Management Accountant sometimes described as Chief Intelligence Officer because apart form
top management, no one in the organization perhaps knows more about various functions of
the organization than him. Tandon has explained the position of Management Accountant as
follows:
“The management accountant is exactly like the spokes in a wheel, connecting the rim of the
wheel and the hub receiving the information. He processes the information and then returns the
processed information back to where it came from”.

ROLE OF MANAGEMENT ACCOUNTANT
Management Accountant, otherwise called Controller, is considered to be a part of the

management team since he has the responsibility for collecting vital information, both from
within and outside the company. The functions of the controller have been laid down by the
Controller’s Institute of America. These functions are:
1. To establish, coordinate and administer, as an integral part of management, an adequate

plan for the control of operations. Such a plan would provide, to the extent required in the
business cost standards, expense budgets, sales forecasts, profit planning, and programme
for capital investment and financing, together with necessary procedures to effectuate the
plan.
2. To compare performance with operating plan and standards and to report and interpret
the results of operation to all levels of management, and to the owners of the business. This
function includes the formulation and administration of accounting policy and the
compilations of statistical records and special reposts as required.
3. To consult withal segments of management responsible for policy or action conserving any
phase of the operations of business as it relates to the attainment of objective, and the
effectiveness of policies, organization strictures, procedures.
4. To administer tax policies and procedures.
5. To supervise and coordinate preparation of reports to Government agencies.
6. The assured fiscal protection for the assets of the business through adequate internal;
control and proper insurance coverage.
7. To continuously appraise economic and social forces and government influences, and
interpret their effect upon business.
DUTIES AND RESPONSIBILITIES OF MANAGEMENT ACCOUNTANT
The primary duty of Management Accountant is to help management in taking correct policy-
decisions and improving the efficiency of operations. He performs a staff function and also has
line authority over the accountants. If management accountant feels that a decision likely to be
taken by the management based on the information tendered by him shall be detrimental to the
interest of the concern, he should point out this fact to the concerned management, of course,
with tact, patience, firmness and politeness.
On the other hand, if the decision taken happens to be wrong one on account t of inaccuracy,
biased and fabricated data furnished by the management accountant, he shall be held
responsible for wrong decision taken by the management.
Controllers Institute of America has defined the following duties of Management Accountant
or controller:
1. The installation and interpretation of all accounting records of the corporative.
2. The preparation and interpretation of the financial statements and reports of the corporation.
3. Continuous audit of all accounts and records of the corporation wherever located.
4. The compilation of costs of distribution.
5. The compilation of production costs.
6. The taking and costing of all physical inventories.
7. The preparation and filing of tax returns and to the supervision of all matters relating to
taxes.
8. The preparation and interpretation of all statistical records and reports of the corporation.
9. The preparation as budget director, in conjunction with other officers and department
heads, of an annual budget covering all activities of the corporation of submission to the
Board of Directors prior to the beginning of the fiscal year. The authority of the Controller, with respect
to the veto of commitments of expenditures not authorized by the budget shall, from time to time, be
fixed by the board of Directors.
10. The ascertainment currently that the properties of the corporation are properly and
adequately insured.
11. The initiation, preparation and issuance of standard practices relating to all accounting,
matters and procedures and the co-ordination of system throughout the corporation
including clerical and office methods, records, reports and procedures.

12. The maintenance of adequate records of authorized appropriations and the
determination that all sums expended pursuant there into are properly accounted for.
13. The ascertainment currently that financial transactions covered by minutes of the Board
of Directors and/ or the Executive committee are properly executed and recorded.
14. The maintenance of adequate records of all contracts and leases.
15. The approval for payment(and / or countersigning ) of all cheques, promissory notes and
other negotiable instruments of the corporation which have been signed by the treasurer or
such other officers as shall have been authorized by the by=laws of the corporation or form
time to time designated by the Board of Directors.
16. The examination of all warrants for the withdrawal of securities from the vaults of the
corporation and the determination that such withdrawals are made in conformity with the
by- laws and /or regulations established from time by the Board of Directors.
17. The preparation or approval of the regulations or standard practices, required to assure
compliance with orders of regulations issued by duly constituted governmental agencies.
DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT

ACCOUNTING
Accounting, refers to the process of recording, classifying and summarizing in monetary terms,
the business transactions and events and interpreting the results. It is used by entities to keep a
track of their financial transactions. Financial Accounting and Management accounting are the
two branches of accounting. Financial accounting stresses on giving true and a fair view of the
financial position of the company to various parties.
On the contrary, management accounting aims at providing both qualitative and quantitative
information to the managers, so as to assist them in decision making and thus maximizing the
profit. This article excerpt is created to help you learn the significant differences between
financial accounting and management accounting.

BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON
Meaning Financial Accounting is an The accounting system which

accounting system that focuses on provides relevant information to the
the preparation of financial managers to make policies, plans
statement of an organization to and strategies for running the
provide the financial information to business effectively is known as
the interested parties. Management Accounting.
It is compulsory? Yes No
Information Monetary information only. Monetary and non-monetary

information
Objective To provide financial information To assist the management in

to outsiders. planning and decision making
process by providing detailed
information on various matters.
Format Specified Not specified
Time Frame Financial Statements are prepared The reports are prepared as per the
at the end of the accounting period need and requirements of the
which is usually one year. organization.
User Internal and external parties Only internal management.
Reports Summarized Reports about the Complete and Detailed reports

financial position of the regarding various information.
organization
Publishing and Required to be published and Neither published nor audited by

auditing audited by statutory auditors statutory auditors.
Key Differences between Financial Accounting and Management Accounting

The following points explain the major differences between financial accounting and
managerial accounting:

1. Financial Accounting is the branch of accounting which keeps track of all the
financial information of the entity. Management Accounting is that branch of
accounting which records and reports both the financial and nonfinancial
information of an entity.
2. Users of financial accounting are both the internal management of the company
and the external parties while the users of the management accounting are
only the internal management.
3. Financial accounting is to be publicly reported whereas the Management
Accounting is for the use of the organisation and hence it is very confidential.
4. Only monetary information is contained in financial accounting. As against this,
management accounting contains both monetary and non-monetary
information such as the number of workers, the quantity of raw material used
and sold, etc.
5. Financial Accounting is done in the prescribed format, whereas there is no
prescribed format for the Management Accounting.
6. Financial Accounting focuses on providing information about the functioning of
the entity’s business to its users, whereas Management Accounting focuses on
providing information to help them in evaluating the performance and devising
plans for the future.
7. The Financial Accounting is mainly done for a specific period, which is usually
one year. On the other hand, the management accounting is done as per the
needs of the management say quarterly, half yearly, etc.
8. Financial accounting is a must for any company for auditing purposes. On the
contrary, management accounting is voluntary, as no editing is done.
9. Financial accounting information is required to be published and audited by
statutory auditors. Unlike, management accounting, which does not require
information to be published and audited, as they are for internal use only.

FINANCIAL STATEMENT ANALYSIS
Objective: The present lesson explains the discrepancy between accounting income and economic
income; identify the devices used in practice to exploit the use of the bottom line; the use of a firm's
financial statements to calculate standard financial ratios; decompose the return on equity into its key
determinants; carry out comparative analysis; and highlights the uses of financial statement analysis
for different purposes.
INTRODUCTION
Financial statements are an important source of information for evaluating the performance and
prospects of a firm. If properly analysed and interpreted, financial statements can provide valuable
insights into a firm's performance. Analysis of financial statements is of interest to lenders (short term
as well as long term), investors, security analysts, managers, and others. Financial statement analysis
may be done for a variety of purposes, which may range from a simple analysis of the short-term
liquidity position of the firm to a comprehensive assessment of the strengths and weaknesses of the
firm in various areas. It is helpful in assessing corporate excellence, judging creditworthiness,
forecasting bond ratings, evaluating intrinsic value of equity shares, predicting bankruptcy, and
assessing market risk.
FINANCIAL STATEMENTS
Managers, shareholders, creditors and other interested groups seek answers to the following
questions about a firm: What is the financial position of firm at a given point of time? How has the
firm performed financially over a given period of time? What have been the sources and uses of cash
over a given period? To answer these questions, the accountant prepares two principal statements,
the balance sheet and the profit and loss account, and an ancillary statement, the cash flow statement.
BALANCE SHEET
The balance sheet shows the financial condition of a business at a given point of time. As per the
Companies Act, the balance sheet of a company shall be in either the account (horizontal) form or the
report (vertical) form. Exhibit 2.1 shows the balance sheet of Horizon Limited as on March 31, 2005
cast in the account as well as the report form. While the report form is most commonly used by
companies, it is more convenient to explain the contents of the balance sheet of Horizon Limited, cast
in the account form, as given Exhibit

Exhibit 2.1 Account Form

Liabilities Assets
Share capital Fixed assets

Reserves and surplus Investments
Unsecured loans Current assets, loans and advances
Current liabilities and provisions Current assets
Current liabilities Loans and advances
Provisions Miscellaneous expenditure
and losses
Exhibit 2.2 Report Form

I Sources of Funds
(1) Shareholders funds
(a) Share capital
(b) Reserves & surplus
(2) Loan funds
(a) Secured loans
(b) Unsecured loans
II Application of Funds
(1) Fixed assets
(2) Investments
(3) Current assets, loans and advances
Less: Current liabilities and provisions
Net current assets
(4) Miscellaneous expenditure and losses.
Liabilities:
Liabilities defined very broadly represent what the business entity owes others. The Companies Act
classifies them as share capital, reserves and surplus, secured loans, unsecured loans, current liabilities
and provisions
Share Capital:
This is divided into two types: equity capital and preference capital. The first represents the
contribution of equity shareholders who are the owners to the firm. Equity capital, being risk capital,

carries no fixed rate of dividend. Preference capital represents the contribution of preference
shareholders and the dividend rate payable on it is fixed.
Reserves and Surplus:
Reserves and surplus are profits, which have been retained in the firm. There are two types of
reserves: revenue reserves and capital reserves. Revenue reserves represent accumulated retained
earnings from the profits of normal business operations. These are held in various forms: general
reserve, investment allowance reserve, capital redemption reserves, dividend equalization reserve,
and so on. Capital reserves arise out gains, which are not related to normal business operations.
Examples of such gains are the premium on issue of shares or gain on revaluation of assets. Surplus is
the balance in the profit and loss account, which has not been appropriated to any particular reserve
account. Note that reserves and surplus along with equity capital represent owners' equity or net
worth.
Secured Loans:
These are the borrowings of the firm against which specific collateral have been provided. The
important components of secured loans are: debentures, loans from financial institutions, and loans
from commercial banks. Unsecured Loans. These are the borrowing of the firm against which no
specific security has been provided. The major components of unsecured loans are: fixed deposits,
loans and advances from promoters, inter-corporate borrowings, and unsecured loans from banks.
Current liabilities and Provisions:
Current liabilities and provisions, as per the classification under the companies Act, consist of the
amounts due to the suppliers of goods and services bought on credit, advance payments received,
accrued expenses, unclaimed dividend, provisions for taxes, dividends, and so on. Current liabilities
for managerial purposes (as distinct from their definition in the Companies Act) are obligations, which
are expected to mature in the next twelve months. So defined, they include current liabilities and
provisions as per the classification under the Companies Act plus loans (secured and unsecured) which
are repayable within one year from the date of the balance sheet.
Assets:
Broadly speaking, assets represent resources, which are of some value to the firm. They have been
acquired at a specific monetary cost by the firm for the conduct of its operations. Assets are classified
under the Companies Act as fixed assets, investments, current assets, loans and advances,
miscellaneous expenditure and losses.
Fixed Assets:

These assets have two characteristics: they are acquired for use over relatively long periods for
carrying on the operations of the firm and they are ordinarily not meant for resale. Examples of fixed
assets are land, buildings, plant, machinery, patents, and copyrights.
Investments:
These are financial securities owned by the firm. Some investments represent long-term commitment
of funds (usually these are the equity shares of other firms held for income and control purposes).
Other investments are likely to be short term in nature such as holdings of units in mutual fund
schemes and may rightly be classified under current assets for managerial purposes. (Under the
requirements of the Companies Act, however, short term holding of financial securities also has to be
shown under investments and not under current assets.)
Current Assets, Loans and Advances:

This category consists of cash and other assets, which get converted into cash during the operating
cycle of the fir. Current assets are held for a short period of time as against fixed assets, which are
held for relatively longer periods. The major components of current assets are: cash, sundry debtors,
inventories, loans and advances, and prepaid expenses. Cash denotes funds readily disbursable by the
firm. The bulk of it is usually in the form of bank balances and the rest is currency held by the fir.
Sundry debtors (also called accounts receivable) represent the amounts owned to the firm by its
customers who have bought goods and services on credit. Sundry debtors are shown in the balance
sheet at the amount owed, less an allowance for bad debts. Inventories (also called stocks) consist of
raw materials, work-in-process, finished goods, and stores and spares. They are usually reported at
the lower of the cost or market value. Loans and advances are the amounts loaned to employees,
advances given to suppliers and contractors, advance tax paid, and deposits made with governmental
and other agencies. They are shown at the actual amount. Pre-paid expenses are expenditures
incurred for services to be rendered in the future. These are shown at the cost unexpired service.
Miscellaneous Expenditures and Losses:
This category consists of two items: (i) miscellaneous expenditures and (ii) losses. Miscellaneous
expenditures represent certain outlays such as preliminary expenses and developmental expenses,
which have not been written off.
From the Accounting point of view, a loss represents a decrease in owners' equity. Hence, when a loss
occurs, the owners' equity should be reduced by that amount. However, as per company law
requirements, the share capital (representing owners' equity) cannot be reduced when a loss occurs.
So the share capital is kept intact on the left hand side (the liabilities side) of the balance sheet and
the loss is shown on the right hand side (the assets side) of the balance sheet.

PROFIT AND LOSS ACCOUNT
The Companies Act has prescribed a standard form for the balance sheet, but none for the profit and
loss account. However, the Companies Act does require that the information provided should be
adequate to reflect a true and fair picture of the operations of the company for the accounting period.
The Companies Act has also specified that the profit and loss account must show specific information
as required by Schedule IV. The profit and loss account, like the balance sheet, may be presented in
the account form or the report form. Typically, companies employ the report form. The report form
statement may be a single-step statement or a multi-step statement. In a single step statement, all
revenue items are recorded first, then the expense items are show and finally the net profit is given.
While a single step profit and loss account aggregates all revenues and expenses, a multi-step profit
and loss account provides disaggregated information. Further, instead of showing only the final profit
measure, viz., the profit after tax figure, it presents profit measures at intermediate stages as well.
o Net sales
o Cost of goods sold
o Gross profit
o Operating expenses
o Operating profit
o Non-operating surplus/deficit
o Profit before interest and tax
o Interest
o Profit before tax
o Tax
o Profit after tax.
TYPES OF FINANCIAL ANALYSIS
Financial analysis can be classified into different categories depending upon
(1) the material used, and

(2) the modus operandi of analysis.
1. On the Basis of Material Used:
Under this category the financial analysis can be of two types:

a) External Analysis;

b) Internal Analysis
a. External Analysis:
The outsiders to the business carry out this kind of analysis, which includes investors, credit agencies,
government agencies and other creditors who have no access to the internal records of the company.
In the recent times this analysis has gathered momentum towards better corporate governance and
government regulations for more detailed disclosure of information by the companies in their financial
statements.
b. Internal Analysis:
In contrary to the above this analysis is done by those who have access to the books of accounts and
other information related to the business. The analysis is done depending upon the objective to be
achieved through this analysis.
2. On the basis of Modus Operandi:

In this case too, the financial analysis can be of two types:
a) Horizontal Analysis;
b) Vertical Analysis
a) Horizontal Analysis:
Under this financial statements for a number of years are reviewed and analysed. The current year’s
figures are compared with standard or base year.
b)Vertical Analysis:
Under this type of analysis a study is made of the quantitative relationship of the various items in
financial statements on a particular date. For example, the ratios of different items of costs for a
particular period may be calculated with the sales for that period. These types of financial analysis are
useful in comparing the performance of several companies in the same group, or divisions or
departments in the same company. In addition to above, the FSA for a firm can be undertaken in
different ways. There is 'the best' technique of the FSA, which can be applied to all the firms under all
the situations. The type of the FSA undertaken depends upon the person doing the FSA and the
purpose of which the FSA has been undertaken. Different person/parties may undertake the FSA for
different purposes. The persons/parties, who are usually interested in the FSA, may be the
shareholders, the creditors, the financial institutions, the investors and the management itself. The
FSA can be classified into different categories as follows:
a) Internal and External FSA;

b) Dynamic and Static FSA

a) Internal and External FSA:
The FSA is said to be internal when it is done by a person who has access to the books of the account
and other related information of the firm. This type of FSA is conducted for measuring the operational
and managerial efficiency at different hierarchy levels of the firm. This type of analysis is quite
comprehensive and reliable. In order to undertake internal FSA, either an employee of the same firm
or an outside agency may be entrusted the responsibility. External FSA, on the other hand, is one,
which is conducted by an outsider without having any access to the basic accounting record of the
firm. These outsiders may be the creditors, the investors, the shareholders, the credit rating agencies
etc. The external FSA is dependent on the published financial data of the firm and consequently can
serve only limited purpose.
b) Dynamic and Static FSA:
The FSA is said to be dynamic if it covers a period of several years. Financial data/information for
different years is incorporated in the FSA to assess the progress of the firm. This type of FSA is also
called the horizontal analysis. The dynamic FSA is useful for long-term trend analysis and planning. In
dynamic FSA, the figures/data for a year are placed and compared with the figures/data for several
other years and changes from 1 year to another are identified. Since, the dynamic analysis covers a
period of more than 1 year (may be up to 5 years or 10 years), is given a considerable insight into areas
of financial weaknesses and strength of the firm. On the other hand, the static FSA covers a period of
1 year only and the analysis is made on the basis of only one set of financial statements. So, it is study
in terms of information at a particular date only. It is also called vertical FSA. Impliedly, the static FSA
fails to incorporate the periodic changes and therefore, may not be very conducive to a proper
understanding of the financial position of the firm. It may be noted that both the dynamic and static
FSA should be conducted simultaneously as both are indispensable for understanding the profitability
and financial position of the firm. On the basis of the above discussion, it can be said that FSA
investigative and thought provoking process in nature. The basic objective of FSA is financial planning
and forecasting on the basis of meaningful interpretation of the financial information. It is forward
looking exercise. Since, decisions are going to be taken on the basis of the FSA, the analyst must be
careful, precise, analytical, objective and intelligent enough to undertake the FSA in a systematic way.
TOOLS / TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
As already discussed, that the Financial Statement Analysis can be undertaken by different persons
and for different purposes, therefore, the methodology adopted for the Financial Statement Analysis

may be varying from the one situation to another. However, the following are some of the common
techniques of the Financial Statement Analysis:
1. Comparative financial statements.

i) Comparative Balance Sheet
ii) Comparative Income Statement
2. Common-size financial statements,
i) Comparative Balance Sheet
ii) Comparative Income Statement
3. Trend percentages analysis, and
4. Ration Analysis.
5. Fund flow statement
6. Cash flow statement
COMPARATIVE FINANCIAL STATEMENTS (CFS)
In CFS, two or more BS and/or the IS of a firm are presented simultaneously in columnar form. The
financial data for two or more years are placed and presented in adjacent columns and thereby the
financial data is provided a times perspective in order to facilitate periodic comparison. In CFS, the BS
and the IS for number of years are presented in condensed form for year-to year comparison and to
exhibit the magnitude and direction of changes.
The preparation of the CFS is based on the premise that a statement covering a period of a number of
years is more meaningful and significant than for a single year only, and that the financial statements
for one period represent only 1 phase of the long and continuous history of the firm. Nowadays, most
of the published Annual Reports of the companies provide important statistical information about the
company in condensed from for the last so many years.
The presentation of such data enhances the usefulness of these reports and brings out more clearly
the nature and trends of changes affecting the profitability and financial position of the firm. So, the
CFS helps a financial analyst in horizontal analysis of the firm and in establishing operating and
positional trend of the firm. The CFS may be prepared to show the absolute amount of different items
in monetary terms, the amount of periodic changes in monetary terms and the percentages of periodic
changes to reveal the proportionate changes. The CFS can be prepared for both the BS and IS.

Comparative Income Statement (CIS):

A CIS shows the figures of different items of the ISs of the firm in absolute terms, the absolute
changes from one period to another and if desired, the changes in percentage form. The CIS is
helpful in deriving meaningful conclusions regarding changes in sales volume, cost of goods sold,
different expense items etc. From the CIS a financial analyst can quickly ascertain whether sales are
increasing or decreasing and by how much amount or by how much percentage. Similarly, analysis
can be made for other items also.
Comparative Balance Sheet (CBS):
The CBS shows the different assets and liabilities of the firm on different dates to make comparisons
of absolute balances and also of changes if any, from one date to another. The CBS may be helpful in
analysing and evaluating the financial position of the firm over a period of number of years.
Example 2.1 – Comparative Balance Sheet

The following balances sheets of Jawahar Steel Ltd., are given for the years ending on 31st march 2018
and 2019.
31st Mar. 31st Mar. 31st Mar. 31st Mar.
Liabilities Assets
2018(Rs.) 2018(Rs.) 2018(Rs.) 2018(Rs.)
Share Capital: Fixed Assets:
Equity share capital 20,00,000 40,00,000 Land and Building 12,00,000 28,00,000
Reserves and Plant & Machine 6,00,000 18,00,000
Surplus: Furniture & Fix 2,00,000 3,00,000
Capital Reserve 1,00,000 2,00,000 Investment
General Reserve 6,00,000 5,00,000 Subsidiary in X ltd 1,00,000 1,00,000
Secured Loans: Immovable property 8,00,000 4,00,000
10% debentures Current Assets:
Current Liabilities: 2,00,000 4,00,000 Cash
Sundry creditors Book Debts 2,00,000 20,000
12,00,000 8,20,000 Stock in trade 6,00,000 2,00,000
4,00,000 3,00,000
Total 41,00,000 59,20,000 Total 41,00,000 59,20,000
Prepare a comparative balance sheet of the company and study its financial position.
Solution
Jawahar Steel Ltd
Comparative balance sheet as on 31st March 2018 and 2019
Absolute Percentage
31st Mar. 31st Mar.
Particulars Increase/ Increase/
2018 2019
Decrease Decrease
Assets Rs. Rs. Rs. Rs.
Fixed Assets:
Land and Building 12,00,000 28,00,000 16,00,000 133.33

Plant & Machine 6,00,000 18,00,000 12,00,000 200.00

Furniture & Fix 2,00,000 3,00,000 1,00,000 50.00
Total Fixed Assets = A 20,00,000 49,00,000 29,00,000 145.00
Investments:
Subsidiary in X ltd 1,00,000 1,00,000 - -
Immovable property 8,00,000 4,00,000 (4,00,000) (44.44)
Total Investment = B 9,00,000 6,00,000 (4,00,000) (44.44)

Current Assets:
Cash 2,00,000 20,000 (1,80,000) (90.00)
Book Debts 6,00,000 2,00,000 (4,00,000) (66.67)
Stock in trade 4,00,000 3,00,000 (1,00,000) (25.00)
Total Current Assets = C 12,00,000 5,20,000 (6,80,000) (56.67)

Total Assets = (A+B+C) 41,00,000 59,20,000 18,20,000 44.39
Liabilities
Capital and Reserves:
Equity share capital 20,00,000 40,00,000 20,000,00 100.00
Capital Reserve 1,00,000 2,00,000 1,00,000 100.00
General Reserve 6,00,000 5,00,000 (1,00,000) (16.67)
Share holder Fund = A 27,000,00 47,00,000 20,00,000 74.07

Secured Loans:
10% debentures 2,00,000 4,00,000 2,00,000 100.00
Total Secured Loans = B 2,00,000 4,00,000 2,00,000 100.00
Current Liabilities:
Sundry creditors 12,00,000 8,20,000 (3,80,000) (31.67)
Total Current Liabilities = C 12,00,000 8,20,000 (3,80,000) (31.67)
Total liability & Capital 41,00,00 59,20,000 18,20,000 44.39
Example 2.2 – Comparative Income Statement

From the following profit and loss account of Eveready Co.Ltd., for the year ending on 31st march 1998
and 1999, you are required to prepare comparative income statement and comment on the
performance


COMMON SIZE STATEMENT (CSS)
The CSS represents the relationship of different items of a financial statement with some Common
item by expressing each item as a percentage of the Common item. In Common size Balance Sheet,
each item of the Balance Sheet is stated as a percentage of the total of the Balance Sheet. Similarly in
Common size Income Statement, each item is stated as percentage of the Net Sales. The percentages
for different items are computed by dividing the absolute amount of that item by the Common base
(i.e. the Balance Sheet Total or the Net Sales as the case may be) and then multiplying by 100. The
percentage so calculated can be easily compared with the corresponding percentages in some other
period. Thus, the CSS is useful not only in intra-firm comparisons over a series of different year but
also in making inter-firm comparisons for the same year or for several years. The procedure and the
technique of preparation of the CSS can be explained with the help of

Example 2.3.
The following figure relates to the activities of Moon Ltd., for the year ending 31st Dec 1999.
Particulars Rs.
Sales (Net) 16,00,000
Cost of goods sold 7,20,000
Administrative Expenses:
Salaries 1,74,000
Rent and Rates 24,000
Postages and telegrams 10,000
Stationery 74,000
Selling and Distribution expenses:
Salesman Salaries 36,000
Advertising 12,000
Sales commission 15,000
Discount on sales 4,000
Non-operating expenses:
Interest 10,000
Loss on Sale of Building 22,000
Non-Operating Income:
Gain on sale of investments 20,000
You required to study the income statement with the help of common Size Statement.
Solution:
Particulars Amount (Rs.) % of Sales

Net Sales 16,00,000 100.00
Less : Cost of goods sold 7,20,000 45.00
Gross Profit (A) 8,80,000 55.00
Less: Operating Expenses:
Administrative Expenses:
Salaries
1,74,000 10.88
Rent and Rates
24,000 1.50
Postages and telegrams
10,000 0.63
Stationery
74,000 4.63
2,82,000 17.63
Selling and Distribution expenses:
Salesman Salaries
36,000 2.25
Advertising
12,000 0.75
Sales commission
15,000 0.94
Discount on sales
4,000 0.25

67,000 4.19
3,49,000 21.81
Total operating Expenses (B)
5,31,000 33.19
Operating Profit (A-B)
Add: Non-Operating Income:
20,000 1.25
Gain on sale of investments
5,51,000 34.44
Less: Non-operating expenses:
Interest 10,000 0.63
Loss on Sale of Building 22,000 1.38
32,000 2.00
Net Profit 5,19,000 32.44
Interpretation:
The cost of goods sold being 45% of sales is quite reasonable leaving 55% as gross profit. The operating
expenses are 21.81% of sales and non-operating are 2% which shows that various expanses are quite
under control. Operating profit of Rs.5, 31,000 which is 33.19% is satisfactory. The net profit of 32.44%
is on the high side and the company is able to keep various expanses under control. The overall
profitability of the company is good.
Example 2.4.
Following are the two Balance sheets of Jawahar X.Co and Y Co as on 31.12.2019
X Co.Ltd Y Co.Ltd
Assets
Cash 27 72
Sundry debtors 220 226
Stock 100 174
Prepaid expanses 11 21
Other current assets 10 21
Total Current Assets 368 514
Fixed Assets (net) 635 513
Total 1,003 1,027
Liabilities
Current Liability:
Sundry Creditors 42 154
Others 78 62
120 216
Fixed Liabilities 225 318
Total Liabilities
345 534
Capital
658 493
Total
1,003 1,027

From the above data, prepare a common – size balance sheet

Solution:
X Co.Ltd Y Co.Ltd
Assets
Amount % of total Amount % of total
Assets Assets
Current Assets:
Cash 27 2.69 72 7.01
Sundry debtors 220 21.93 226 22.01
Stock 100 9.97 174 16.94
Prepaid expanses 11 1.10 21 2.05
Other current assets 10 1.00 21 2.05
Total Current Assets 368 36.69 514 50.15
Fixed Assets(net) 635 63.31 513 49.95
Total Assets 1,003 100.00 1,207 100.00
Liabilities
X Co.Ltd Y Co.Ltd
Liabilities
Amount % of total Amount % of total Assets
Assets
Sundry creditors
Others 42 4.19 154 15.00
Total Current Liabilities 78 7.78 62 6.04
120 11.96 216 21.03
Fixed Liabilities
Capital
225 22.43 318 30.96
658 65.60 493 48.00
Total Liabilities and capital
1,003 100.00 1,027 100.00
TREND PERCENTAGE ANALYSIS (TPA)
The TPA is a technique of studying several financial statements over a series of years. In TPA, the trend
percentages are calculated for each item by taking the figure of that item for some base year as 100.
So, the trend percentage is the percentage relationship, which each item of different years bears to
the same item in the base year. Any year may be taken as the base year. Any year may be taken as the
base year, but generally the starting/initial year is taken s the base year. So, each item for base year is

taken as 100 and then the same item for other years is expressed as a percentage of the base year.
The TPA which can be used both for the BS as well as the IS has been explained with the help of the
Example 3.3.
From the following data relating to the ABC & Co. for the year 2001 to 2004, calculate the trend
percentages (taking 2001 as base year).
(Figure in Rs.)
_________________________________________________________________
2001 2002 2003 2004
Net Sales 200000 190000 40000 260000
Cost of goods sold 120000 117800 139200 145600
Gross Profit 80000 72200 100800 114400
Less: Expenses 20000 19400 2 2000 24000
Net Profit 60000 52800 78800 90400
____________________________________________________________
Solution:
Trend percentages
2001 2002 2003 2004

Net Sales 100 95.00 120.00 130.00
Less: Cost of goods Sold 100 98.17 116.00 121.33
Gross profit 100 90.25 126.00 143.00
Less: Expanses 100 97.00 110.00 120.00
Net Profit 100 88.00 131.33 150.67
Working for calculating Percentage = Present Year Value / Base Year Value X 100
For 2002 Net sales = 190000 / 200000 X 100 = 95.0
Cost of Goods sold = 117800 / 120000 X 100 = 98.17
For 2002 Net sales = 240000 / 200000 X 100 = 120.00
Cost of Goods sold = 139200 / 120000 X 100 = 116.00
Similarly find all the percentages 2001 value as base value for all years

Interpretation:
On the whole, the 2002 was a bad year but the recovery was made during 2003 with increase in
volume as well as profits. The figures of 2002 when compared with 2001 reveal that the Sales have
reduced by 5%, but the cost of goods sold and the Expenses have decreased only by 1.8% and 3%
respectively. This resulted in decrease in Net Profit by 12%. The position was recovered in 2003 and
not only the decline was arrested but the positive growth was also visible both in 2003 and 2004.
Again, the increase in Net Profit by 31.3% (2003) and 50.6% (2004) is much more than the increased
in sales by 20% and 30% respectively. This again testifies that a substantial portion of the cost of goods
sold and expenses is of fixed nature.
So, the TPA is an important tool of historical analysis. It can be of immense help in making a
comparative analysis over a series of years. The TPA provides brevity and easy readability to several
financial statements as the percentages figures disclose more than the absolute figures. However,
some precautions must be taken while using the TPA as a technique of the AFS as follows:
There should not be a significant and material change in accounting policies over the years. This
consistency is necessary to ensure meaningful comparability.
i. Proper care must be taken while selecting the base year. It must be a normal and a representative
year. Generally the initial year is taken as base year, but intervening year can also be taken as the base
year, if the initial year is not found to be normal year.
ii. The trend percentages should be analysed vis-à-vis the absolute figure to avoid any misleading
conclusions.
iii. If possible, the figures for different year should be adjusted for variations in price level also. For
example, increase in Net Sales by 30% (from 100 in 2001 to 130 in 2004) over 3 years might have
resulted primarily because of increase in selling price and not because of increase in volume.
Quite often, it may be difficult to interpret the increase or decrease in any item (in absolute terms or
in percentages terms) as a desirable change or an undesirable change. For example, decrease in cash
may be discouraging if it is going to affect the liquidity but may be encouraging if it has resulted out
of better cash management. Similarly, increase in inventory may result because of decrease in sales
or because of necessity to maintain a minimum level of stock. In such cases, therefore, the techniques
of CFS, CSS and the TPA may not be of much help. Financial analysts have developed another
technique called the Ratio Analysis, which is presumably the most common and widely used technique
of the FSA.

COMPARATIVE FINANCIAL STATEMENTS (CFS)
In CFS, two or more BS and/or the IS of a firm are presented simultaneously in columnar form. The
financial data for two or more years are placed and presented in adjacent columns and thereby the
financial data is provided a times perspective in order to facilitate periodic comparison. In CFS, the BS
and the IS for number of years are presented in condensed form for year-to year comparison and to
exhibit the magnitude and direction of changes.
The preparation of the CFS is based on the premise that a statement covering a period of a number of
years is more meaningful and significant than for a single year only, and that the financial statements
for one period represent only 1 phase of the long and continuous history of the firm. Nowadays, most
of the published Annual Reports of the companies provide important statistical information about the
company in condensed from for the last so many years.
The presentation of such data enhances the usefulness of these reports and brings out more clearly
the nature and trends of changes affecting the profitability and financial position of the firm. So, the
CFS helps a financial analyst in horizontal analysis of the firm and in establishing operating and
positional trend of the firm. The CFS may be prepared to show the absolute amount of different items
in monetary terms, the amount of periodic changes in monetary terms and the percentages of periodic
changes to reveal the proportionate changes. The CFS can be prepared for both the BS and IS.
Comparative Income Statement (CIS):
A CIS shows the figures of different items of the ISs of the firm in absolute terms, the absolute changes
from one period to another and if desired, the changes in percentage form. The CIS is helpful in
deriving meaningful conclusions regarding changes in sales volume, cost of goods sold, different
expense items etc. From the CIS a financial analyst can quickly ascertain whether sales are increasing
or decreasing and by how much amount or by how much percentage. Similarly, analysis can be made
for other items also.
Comparative Balance Sheet (CBS):
The CBS shows the different assets and liabilities of the firm on different dates to make comparisons
of absolute balances and also of changes if any, from one date to another. The CBS may be helpful in
analysing and evaluating the financial position of the firm over a period of number of years.

Example 2.1 – Comparative Balance Sheet

The following balances sheets of Jawahar Steel Ltd., are given for the years ending on 31st march 2018
and 2019.
31st Mar. 31st Mar. 31st Mar. 31st Mar.

Liabilities Assets
2018(Rs.) 2018(Rs.) 2018(Rs.) 2018(Rs.)
Share Capital: Fixed Assets:
Equity share capital 20,00,000 40,00,000 Land and Building 12,00,000 28,00,000
Reserves and Plant & Machine 6,00,000 18,00,000
Surplus: Furniture & Fix 2,00,000 3,00,000
Capital Reserve 1,00,000 2,00,000 Investment
General Reserve 6,00,000 5,00,000 Subsidiary in X ltd 1,00,000 1,00,000
Secured Loans: Immovable property 8,00,000 4,00,000
10% debentures Current Assets:
Current Liabilities: 2,00,000 4,00,000 Cash
Sundry creditors Book Debts 2,00,000 20,000
12,00,000 8,20,000 Stock in trade 6,00,000 2,00,000
4,00,000 3,00,000
Total 41,00,000 59,20,000 Total 41,00,000 59,20,000
Prepare a comparative balance sheet of the company and study its financial position.
Solution
Jawahar Steel Ltd
Comparative balance sheet as on 31st March 2018 and 2019
Absolute Percentage
31st Mar. 31st Mar.
Particulars Increase/ Increase/
2018 2019
Decrease Decrease
Assets Rs. Rs. Rs. Rs.
Fixed Assets:
Land and Building 12,00,000 28,00,000 16,00,000 133.33
Plant & Machine 6,00,000 18,00,000 12,00,000 200.00
Furniture & Fix 2,00,000 3,00,000 1,00,000 50.00
Total Fixed Assets = A 20,00,000 49,00,000 29,00,000 145.00
Investments:
Subsidiary in X ltd 1,00,000 1,00,000 - -
Immovable property 8,00,000 4,00,000 (4,00,000) (44.44)
Total Investment = B 9,00,000 6,00,000 (4,00,000) (44.44)

Current Assets:
Cash 2,00,000 20,000 (1,80,000) (90.00)
Book Debts 6,00,000 2,00,000 (4,00,000) (66.67)
Stock in trade 4,00,000 3,00,000 (1,00,000) (25.00)
Total Current Assets = C 12,00,000 5,20,000 (6,80,000) (56.67)

Total Assets = (A+B+C) 41,00,000 59,20,000 18,20,000 44.39

Liabilities
Capital and Reserves:
Equity share capital 20,00,000 40,00,000 20,000,00 100.00
Capital Reserve 1,00,000 2,00,000 1,00,000 100.00
General Reserve 6,00,000 5,00,000 (1,00,000) (16.67)
Share holder Fund = A 27,000,00 47,00,000 20,00,000 74.07

Secured Loans:
10% debentures 2,00,000 4,00,000 2,00,000 100.00
Total Secured Loans = B 2,00,000 4,00,000 2,00,000 100.00
Sundry creditors 12,00,000 8,20,000 (3,80,000) (31.67)
Total Current Liabilities = C 12,00,000 8,20,000 (3,80,000) (31.67)
Total liability & Capital 41,00,00 59,20,000 18,20,000 44.39
Example 2.2 – Comparative Income Statement

From the following profit and loss account of Eveready Co.Ltd., for the year ending on 31st march 1998
and 1999, you are required to prepare comparative income statement and comment on the
performance




TRY THIS PROBLEMS

Solution
Ex No .1
Gori limited
Comparative income statement
For the years ended 31st December 1998 and 1999
Increasing or Decreasing in 2005 over

Particulars 2004 2005 2004
Amount Percentage
Net Sales 800 1000 +200 +25
Less: Cost of goods sold 600 750 +150 +25
Gross Profit = A 200 250 +50 +25
Operating Expenses:
Administrative Expanses 20 20 0 0
Selling Expanses 30 40 +10 +33.33
Total Operating Expenses = B 50 60 +10 +20.00
Operating Profit = A-B = C 150 190 +40 +26.67
Non-Operating Exp = D NIL NIL
Net profit = C-D = 150 190 +40 +26.67
Exercise: 2
Vinayaga Travels Limited

Comparative income statement
For the years ended 31st March 2006 and 2007
Increasing or Decreasing in
Particulars 2006 2007 2007 over 2006
Amount Percentage
Net Sales 180000 260000 +80000 +44.44
Purchase Less Return 80000 150000
Other Direct Expanses 20000 50000
Less: Cost goods sold 100000 200000 +100000 +100
Gross Profit = A 80000 60000 -20000 -25
Operating Expenses:
Office Expanses 20000 25000 5000 25
Selling Expanses 10000 15000 5000 50.00
Total Operating Expenses = B 30000 40000 10000 33.33
Operating Profit = A-B = C 50000 20000 -30000 -60.00
Non-Operating Exp
Finance Expanses 10000 8000 -2000 -20.00
Total Non-Operating Expenses = D 10000 8000 -2000 -20.00
Net profit = C-D 40000 12000 -28000 -70.00

Management Accounting (Bba32) Unit - I

Uploaded by

Management Accounting (Bba32) Unit - I

Uploaded by

Management Accounting (BBA32) UNIT-1

REF NO: BBA32-U1-01

MANAGEMENT ACCOUNTING (BBA32)

DEFINITIONS OF MANAGEMENT ACCOUNTING

Jawahar Science College, Block-14, Neyveli. Page 1 of 11

OBJECTIVES OF MANAGEMENT ACCOUNTING:

1. Planning and policy formulation:

Jawahar Science College, Block-14, Neyveli. Page 2 of 11

NATURE AND SCOPE OF MANAGEMENT ACCOUNTING:

Jawahar Science College, Block-14, Neyveli. Page 3 of 11

LIMITATIONS OF MANAGEMENT ACCOUNTING:

Jawahar Science College, Block-14, Neyveli. Page 4 of 11

Jawahar Science College, Block-14, Neyveli. Page 5 of 11

SCOPE OF MANAGEMENT ACCOUNTING

Jawahar Science College, Block-14, Neyveli. Page 6 of 11

ADVANTAGES OF MANAGEMENT ACCOUNTING:

Management accounting has various advantages. Through an effective management

1. Increases Efficiency of the company:

DISADVANTAGES OF MANAGEMENT ACCOUNTING:

1. Based on manually maintained records:

Jawahar Science College, Block-14, Neyveli. Page 9 of 11

6. Management Accounting has its own limitations:

Jawahar Science College, Block-14, Neyveli. Page 10 of 11

Management accounting system is a recent innovation. It works on the availability of old

LIMITATIONS OF MANAGEMENT ACCOUNTING:

1. Limitations of Accounting Records:

3. Heavy Cost of Installation:

Jawahar Science College, Block-14, Neyveli. Page 11 of 11

7. Provides only Data:

Management Accountant is an officer who is entrusted with Management Accounting function

Jawahar Science College, Block-14, Neyveli. Page 12 of 11

Management Accountant, otherwise called Controller, is considered to be a part of the

1. To establish, coordinate and administer, as an integral part of management, an adequate

4. To administer tax policies and procedures.

5. To supervise and coordinate preparation of reports to Government agencies.

DUTIES AND RESPONSIBILITIES OF MANAGEMENT ACCOUNTANT

1. The installation and interpretation of all accounting records of the corporative.

4. The compilation of costs of distribution.

5. The compilation of production costs.

6. The taking and costing of all physical inventories.

Jawahar Science College, Block-14, Neyveli. Page 14 of 11

14. The maintenance of adequate records of all contracts and leases.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT

Jawahar Science College, Block-14, Neyveli. Page 15 of 11

Meaning Financial Accounting is an The accounting system which

Information Monetary information only. Monetary and non-monetary

Objective To provide financial information To assist the management in

Format Specified Not specified

User Internal and external parties Only internal management.

Reports Summarized Reports about the Complete and Detailed reports

Publishing and Required to be published and Neither published nor audited by

Key Differences between Financial Accounting and Management Accounting

Jawahar Science College, Block-14, Neyveli. Page 16 of 11

Jawahar Science College, Block-14, Neyveli. Page 17 of 42

FINANCIAL STATEMENT ANALYSIS

Jawahar Science College, Block-14, Neyveli. Page 18 of 42

Exhibit 2.1 Account Form

Share capital Fixed assets

Exhibit 2.2 Report Form

Jawahar Science College, Block-14, Neyveli. Page 19 of 42

Reserves and Surplus:

Current liabilities and Provisions:

Jawahar Science College, Block-14, Neyveli. Page 20 of 42

Current Assets, Loans and Advances:

Miscellaneous Expenditures and Losses:

Jawahar Science College, Block-14, Neyveli. Page 21 of 42

PROFIT AND LOSS ACCOUNT

Financial analysis can be classified into different categories depending upon

(1) the material used, and

1. On the Basis of Material Used:

Under this category the financial analysis can be of two types:

Jawahar Science College, Block-14, Neyveli. Page 22 of 42

2. On the basis of Modus Operandi:

a) Internal and External FSA;

Jawahar Science College, Block-14, Neyveli. Page 23 of 42

a) Internal and External FSA: