Management Accounting & Fund Flow Statements PDF

## What is Management Accounting? **Page No. 1** **Nature & Scope of Management Accounting** **Introduction:** The management accounting is concerned with managerial aspects of financial accounting. As the process if management, it involves taking decisions with respect to day to day operation...

## What is Management Accounting? **Page No. 1** **Nature & Scope of Management Accounting** **Introduction:** The management accounting is concerned with managerial aspects of financial accounting. As the process if management, it involves taking decisions with respect to day to day operations of entity as well as making plans for future. **Meaning:** Management accounting is the: * Identification * Accumulation * Preparation * Communication * Measurement * Analyses * Interpretation * of information that assist managers in fulfilling organizational objectives. Management Accounting is all about supplying right information to right people at right time. According to ICA England and Wales, "Any form of accounting which enables a business to be conducted more efficiently can be regarded as management accounting." Management Accounting is that branch of accounting that produces information for managers within an organization. **Page No. 2** **Nature of Management Accounting** The basic objective of management accounting is to serve the needs of management. Management accounting begins where financial accounting ends. Here are some of the brief of management accountings | **Nature** | **Nature** | |---|---|---| | Service Function | Historical Data | | Futuristic Approach | Cause Effect Relation | | No Format | Analyse & Interpretation | | Management Oriented | Monetary /Non-Monetary | | No Accounting Rules | Science / Art | **Service Function:** Management Accounting is basically concerned with providing information to management gathered from financial records for taking decisions and satisfying informational needs of management. **Historical Data:** Management Accounting use historical data provided by financial accounts for planning and decision making. It heavily depend upon the accounting information and data recorded in books. **Having Futuristic Approach:** It highlights on future. The tools & techniques of management accounting like standard & budgetary control, etc. It provides assistance to management for decision making in future. **Page No. 3** **Examine Cause/Effect Relation:** It examines causative relation between different variables. It examines why profit and loss increases or decreases in comparison with past records. It examines the relation on profitability of concern. **No Prescribed Format:** It does not follow set of rules and format. It is basically concerned with problem of choice and decision making. **Analyse & Interpretation of Data:** It is concerned with analyse and interpretation of data to make it more meaningful and useful for management in process of planning & decision making. **Management Oriented:** It is highly sensitive to management needs. It modifies accounting data to satisfy internal needs of management. **Monetary /Non-Monetary:** It takes into consideration both financial and economic variables. Economic measures are not always expressed in monetary terms but non-monetary are also collected and analyzed. **No Accounting Rules:** Management Accounting used only internally, therefore not bound by any set of rules of general accounting system. **Page No. 4** **Both Science / Art:** Data are always found by collection, processing and analyze of facts quantified in figures, so its regarded as science and also involve human impulse and judgement, so, it is both science and art. **Scope of Management Accounting** Management accounting not only covers financial data but extend its boundaries to costing also. It studies the variance by comparing actual results with planned targets. **Financial Accounting:** It is traditional system. The transaction in accounting and records in financial accounting is used by management for planning and decision making by using tools / techniques. Thus, without it, management accounting is inoperative. **Cost Accounting:** It is the backbone of management accounting. It is a process of recording and analysis expenditure relating to products and services. Management accounting uses the cost data in general and in particular because any activity can be described by organization is in Cost.. **Page No. 5** **Budgetary Control:** It means drawing systematic plan for utilization of resource of enterprise and it is a technique of comparing actuals with budgeted figures. It is important tool for management accounting. It helps in co-ordination and co-operation of various activities to achieve common goal. **Inventory Control:** Proper inventory control is utmost important to meet needs of production and sales with minimum cost. This responsibility is to be discharged by management accountant. **Office Service:** In order to discharge responsibility, management accountant has to use office services and information, so, he must well equipped to deal with filing, copying, and able to evaluate utility of different office procedure and machines. **Reporting:** Management accounting is concerned with reporting function. To keep management well informed, it is his responsibility of management accountant to present information in form of clear reports. **Internal Audit:** Management accounting use information supplied by internal audit for effective management control. **Tax Accounting:** Overall, these are the nature and scope of management accounting used for making decisions. **Page No. 6** But, tax planning is important to take benefit of all deductions, exemptions, rebates, so liability reduces to minimum. The management accountant should have complete knowledge of business taxation. The filing and payment of tax responsibility has to be discharged by management accountant. **Capital Budgeting:** It describes the long term planning and decisions about capital investment and expansion. Management accounting helps the management on planning and controlling decisions for programs or projects which require huge investment and effect financial result over period longer than year.. **Management Information System:** In traditional times, management accounting aims at presenting useful information manually, but with advancement in technology now information is supplied to management with help of computers. The information can be preserved in mechanical way and supplied by management accountant. So, MIS play vital role in supplying information in simplest manner to users. **Conclusion:** At the end, management accounting plays crucial role in accounting. It has scopes through which management use its tools and give information for decision making. ## What is Fund Flow Statement? **Page No. 10** **Section - B** **Fund Flow: Uses & Significance** **Introduction:** Fund Flow statement shows the purpose of this activity of business. Basically, the funds are available during the period and where the application of such funds is made.. **Concept of Fund:** Fund has different meaning and interpretation, eg- Cash Fund, Capital Fund, Working Capital Fund. | **Concept of Fund** | **Concept of Fund** | **Concept of Fund** | **Concept of Fund** | |---|---|---|---| | As Literal Cashie | As Financial Sources | As Working Capital | [Cash & Cash Equivalents] | [Capital Employed] | **Current Assets ** **Current Liabilities** **Meaning:** The 'flow' means change and term 'flow' of 'fund' means change in funds. The fund flow statements report the flow of funds to firm during year ie it shows sources and uses of working capital between two balance sheet dates. The flow of funds is recognized by degree of changes in amount of working capital. **Page No. 11** **Fund Flow Statement:** The fund flow statement is a report on financial operations, changes, flows or movement of funds taken place between two accounting periods. According to Foulke, "A statement of sources and application of funds is a technical device designed to analyse the change in financial condition of business enterprise between two dates". **Fund Flow Diagram** | **Fund Flow Diagram** | **Fund Flow Diagram** | |---|---| | A Current Assets ⬅️ A Non Current Assets | A Current Liabilities ↔️ A Non-Current Liabilities | **Flow of Funds** **One Current & Other Non Current** **No Flow of Funds** **Both Current OR Both Non-Current** **Sources of Funds:** Areas from where fund flow into business. | **Sources of Funds** | **Sources of Funds** | **Sources of Funds** | |---|---|---| | Funds From Operations | Issue of debentures | | | | | Issue of Share Capital | | Sale of Fixed Assets | | | | | Sale of Long-Term Investment | Non- Trading Receipts | **Application of Funds:** Areas from where funds flow | **Application of Funds** | **Application of Funds** | **Application of Funds** | |---|---|---| | Redemption of Dehentures | Fund Lost in operations | | | Out of business | | Repayment of loans | | | | Purchasing of fixed Assets | | | Payment of dividend and taxes | | **Uses & Significance of Fund Flow St.** Fund flow statement plays a crucial role in evaluation of overall performance. These statement provides the financial and investing operations of business. Here, the following uses of statements: * Estimating the amount of funds needed for growth. * Improving rate of income on assets * Planning temporary investments of surplus funds and planning for working capital. * Planning the payment of dividends. * Securing additional funds when needed. **Page No. 12** **Analyse of Financial Position:** One important use of statement is to have a rich insight into the financial operations of concern. It analyse traditional financial statements viz, profit/loss Alc, balance sheet. These statements gives static view about resources but cannot predict the information how these resources are used during particular period. Fund Flow statement explains how said resources are utilized and impact on liquidity of firm. **An Instrument for Proper Allocation of Resources:** Resources are always limited. It is therefore, a need of evolving an order of priorities for allocation of resources during expansion programs. Funds have to be raised as different phases of expansion programs gets their place. Fund Flow statement helps the management to take proper decisions about allocation of business resources and prevents business from becoming a helpless victim of unplanned action. **Page No. 13** **As A Future Guide:** As in depth analysis of fund flow statements of several years reveal certain valuable information for financial manager for planning future financial requirements of firm. It acts as a business guide. The management can formulate its financial policies such as dividend policy, reserve policy, etc.. **Control Device:** A fund flow statement act as a control device as the statement is compared with budgeted figures to exhibit extent to which the funds were utilized according to plan and remedial steps are taken if there is any deviation. **Appraising of Working Capital:** A projected funds flow statement, no doubt, helps the management to know about how working capital has been efficiently used and at a same time suggests also how to improve working capital position for future on basis of past and present information presented by statement. **Page No. 14** **Tool of Communication** It provides necessary information to users about resources that contribute towards funds. In present world, it provides useful information to bankers, creditors, financial institution, etc regarding amount of debt required in purpose, terms of repayment, etc. **Highlight Movement of Funds:** For prosperity and stability of business, management should be aware of various sources from where the funds been generated and utilized. It increases the decision making ability of management as fund flow acting as a guide. **Answers to Various Baffled Questions:** It highlight answers to following questions: * Where have profit gone? * Did firm pay its debts? * Causes of changes in working capital. **Conclusion:** Overall, fund flow statement shows various means by which funds have been obtained and used in business over a specified period [Cash Inflows outflows]. **Page No. 15** **Supply 5000 Bells at 24.50 each.** **What is Transfer Price? Explain its Methods?** **Section - D** **Transfer Price & Methods** **Introduction:** A large business concern decentralized into convenient separate business segments and a manager is placed in charge of operations of each segment or division, made him responsible for cost incurred and revenues earned by it. The profits and performance of each division is measured separately. In such concern, there may be a transfer of goods from one division to another division. The price charged for transfer of goods of one divisions to another division is the cost of receiving division and income of supplying division. It means transfer price fix will affect both division profitability. **Meaning:** Transfer pricing is the notional value at which goods and services are transferred between divisions in a decentralized organization. Transfer pricing is needed to monitor the flow of goods and services among divisions of company and to facilitate divisional performance measurement. **Page No. 16** The transfer price can have impact on divisional performance and hence lot of care is to be taken while fixation of same. Following factors should be taken before fixation of transfer prices: * Transfer price should help in accurate measurement of divisional performances. * It should motivate the divisional managers to maximize the profitability of their divisions. * Autonomy and authority of a division should be ensured. * Transfer price should allow 'GOAL CONGRUENCE', which means that the objectives of divisional managers match with those of organization **Objectives of Transfer Pricing:** * To evaluate the current performance and profitability of each individual unit. * To improve overall profitability position. * Divisional Autonomy * To assist in decision making. * Simple and Easy * To provide relevant information * For accurate estimation of earnings on proposed investment decisions **Methods of Transfer Pricing:** The Finance Act 2001 introduced detailed transfer pricing rule with effect from April, 2001. Rules laid emphasis on arm's length price [ALP]. The determination of transfer prices is extremely difficult and complicated task. There are several method of price fixation: **Methods:** | **Pricing Based on Cost** | **Pricing Based on Cost** | **Pricing Based on Cost** | **Pricing Based on Cost** | |---|---|---|---| | **Actual Cost Method** | **Cost Plus Method** | **Standard Cost Method** | **Marginal Cost Method** | **Pricing Based on Cost:** These are divided into four methods: * **Actual Cost Method:** Under this method, actual cost of production is taken as transfer price for inter divisional transfers. Such actual cost may consist of variable or sometimes total cost. This method is useful for those ints where responsibility of profit performance is centralized. Under this method, it is difficult to measure performance of each profit centre.. **Page No. 17** * **Cost Plus Method:** Transfer price is fixed by adding a reasonable return on capital employed to total cost. This method is applied when transfer involves addition of value through manufacturing processes or other services between related parties. * **Standard Cost Method:** Transfer price is fixed on basis of standard cost. The difference between standard and actual cost being variance is absorbed by transferring division. This method is simple and easy to follow. * **Marginal Cost Method:** Transfer price is determined on basis of marginal cost. Fixed cost is unavoidable and not charged to buying division. Under this method, profitability for transferor is affected to greater extent. **Market Price Method:** Under this method, transfer price will be determined according to market price. The concept of opportunity cost comes into play. The transferee accepts products at price which he would have paid he purchased in open market. Thus, transferor, while getting fair price doesn't pass on his efficiency or inefficiency to transfree. Thus, this method is widely used as long as normal price exists in open market in unrelated transactions. **Negotiated Pricing Method:** Transfer price fixed through negotiations between selling and buying divisions. Sometimes, it may happen that concerned product may be available in market at cheaper price than charged by selling division. So, the buying division tempted to buy from outside sellers than selling divisions. So, alternatively, selling division notice that in outside market, product is sold higher but buying division not ready to pay market price. Here, selling division reluctant to sell at price less than market price. **Page No. 18** Therefore, it becomes beneficial for both the divisions to negotiate prices and arrive at prices which are mutually beneficial for both divisions. Such prices are called negotiated prices'. **Opportunity Cost Method** This pricing recognizes minimum price that the selling division is ready to accept and the maximum price that the buying division is ready to pay. The final price may be based on these minimum expectation of both these divisions. The most ideal situation when minimum price expected by selling division is less than maximum price accepted by buying division. It may happen rarely and there is possibility of conflicts. It is clear that fixation of price is delicate decision. **Conclusion:** In the end, we can understand that there might be clash interest between selling and buying division in fixation of transfer price. Overall interest of organisation should be taken into consideration & overall 'GOAL CONGRUENCE' should be given utmost importance rather than interests of selling / buying divisions.