MANAGEMENT ACCOUNTING

(Theory Questions and Answers)

Chapter 1- INTRODUCTION

QUESTION & ANSWER COVERING FOR 2 MARKS:

Q1. What do you mean by “Management accounting”? (June-09/12/14)

Ans: The term Management accounting refers to accounting for the management i.e., accounting
which provides necessary information to the management for discharging its functions such as
planning, organizing, directing & controlling of business operations.
Q2. Define Management accounting.
Ans: Management accounting firm of the Anglo American Council of Productivity defines
Management accounting as, “It is the presentation of accounting information in such a way as to
assist management in the creation of policy and in the day-by-day operations of an undertaking”.
Q3. State any two objectives of Management Accounting. (June-08/12)
Ans: 1. To help in the management in the preparation of budgets covering all function.
2. To assist management in motivating the employees of the organization & there by increase
the efficiency.
3. To plan & implement systematic allocation of responsibilities for the implementation of plans
and budgets.
Q4. State any two limitations of management accounting. (J-10/11)
Ans: 1. It derives its information from financial accounting, cost accounting & other records. 2.
Management accounting is only a tool. 3. The installation of management accounting systems
requires heavy cost.
Q5. Name the tools of management accounting. (J-10/12)
Ans: 1) Financial statement analysis 2) Fund flow analysis 3) Cash flow analysis 4) Costing
techniques 5) Budgetary control 6) Management reporting
Q6. Explain the concept of Management accounting.
Ans:(Write the meaning of Management accounting)
Q7. Outline the scope of Management accounting.
Ans: The following areas are identified as falling within the ambit of Management accounting: 1)
Financial accounting 2) Costing Accounting 3) Budgetary control 4) Statistical Methods 5) Taxation
6) Inventory control etc.
Q8. State the limitations of financial accounting.
Ans: a) The information provided by financial accounts is not of much use for internal management
of the company.
b) It is not flexible. It is standardized and more rigid.
c) It considers only monetary events.
Q9. State any four functions of management accounting/Accountant. (June-07/13)
Ans: a) Provision of data b) Modification of data c) Analysis and interpretation of data. d)
Facilitating management control
Q10 Sate any two differences between Management accounting & Cost Accounting. (M-11/14)
Ans: Refer Q No. B4
Q11. Who is a management accountant? (M-13)
Ans: He is one of officer of the company concerned with preparing the reports based on analyisis and
interpretations of financial results. He submits such reports to the higher authorities for timely
management decision.

QUESTION & ANSWER COVERING FOR 5 MARKS:

QB1. State and analyze the functions & objectives of management accounting [or]
“Management accounting serves as a tool to management”- discuss.[or] “Management
accounting has been evolved to meet the needs of management”- discuss. (J-10)
Ans: The important functions of Management accounting are as under:

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 1. Provision of data: Management accounting provides valuable data to the management for
the formulation of future policies and plans (i.e. for management planning).
2. Modification of data: Management accounting modifies the available accounting data by
rearranging the same through the process of classification & combination.
3. Analysis and interpretation of data: Management accounting analyses and interprets the
financial or accounting data meaningfully for effective management planning & decision-
making.
4. Facilitating management control: That is management accounting helps in translating the
given objectives and strategies in to specified goals for attainment by a specific time and
secure the effective accomplishment of the specified goals.
5. Satisfaction of the informational needs of the different levels of a management:
Management accounting satisfies the informational needs of the different levels of
management by processing the accounting and other data is such a way as to satisfy the
needs of the different levels of management.

QB2. State the nature of management Accounting.

Ans: The nature of management accounting can be clearly understood its following characteristics:
1. Recent origin: Management accounting is of recent origin. It is process of evolution or
development. So, it is subject to all those difficulties, which any new discipline (i.e, subject) of
study has to face.
2. A science as well as art: Management accounting is partly an art. It is a science in so far as
the collection and processing of data is concerned. It is art in so far as the interpretation and
presentation and presentation of the data to the management is concerned.
3. Macro approach: The approach of management accounting is macro. In the sense that it
considers and interprets the operational data in the wider environment in the in which the
business actually operates.
4. Highly sensitive to management needs: Management accounting is a highly sensitive to
management needs. That is, management accounting concerns it self with the presentation of
all the data needed by the management at the required time in the most suitable form ( i.e. in
the form most useful to the management)
5. Selective and discriminating in reporting data: management accounting is selective and
discriminating in reporting of data. That is it emphasizes and highlights the relevant facts,
out of the mass of data, which would be useful to the management in solving the problems at
hand.
6. Highly personalized service: Management accounting is a highly personalized serviced in
the sense that the efficiency and the faith fullness with which management accounting serves
the management depends upon the skill and competence of the management accountant,
who is responsible for the designing and operation of the management accounting system.

QB3. State the nature and scope of management Accounting.

Ans: The following aspects, areas or tasks may rightly be identified as falling within the ambit (i.e.
scope) of management accounting.
1. Financial accounting: Management accounting is mainly concerned with the modifications
or re arrangement of the information provided by financial accounting falls within the ambit
of management accounting.
2. Cost accounting: The cost accounting techniques such as standard costing, marginal costing
etc, are comprised in management accounting. So, one can rightly say that cost accounting
falls within the ambit of management accounting.
3. Budgetary control: Budgetary control includes framing of budgets, comparison of actual
performance with budgeted performance, computation of variances analysis of the causes for
variances and the adoption of remedies. Budgetary control is one of the important tasks of
management accounting. That means, management accounting includes within its fold
budgetary control.
4. Inventory or material control: Inventory control includes control over inventory or material
from the time it is acquired till its final disposal. One of the tasks or aspects of management
accounting is inventory control. That means inventory control falls within the ambit of
management accounting.

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 5. Revaluation accounting: Management accounting includes within its fold revaluation
accounting. Revaluation accounting or replacement accounting is mainly concerned with
ensuring that capital is maintained intact in real terms and profit is calculated with this fact
in mind.
6. Statistical methods: Statistical methods or tools, such as graphs charts diagrams, index
numbers time series regression analysis, sampling technique etc. make the information
provided to the management impressive, comprehensive and intelligible. So one can rightly
say that statistical methods form one of the facts of management accounting and fall within
the ambit of management accounting
7. Operations research: Modern management is faced with highly complicated business
problem in its decision making process. To solve these problems operations research
techniques, such as linear programming, queuing theory, decision theory etc. are used. So
operations research techniques are one of the facets or areas of management accounting.
8. Organization & methods: Management accounting covers organisation and methods.
Organisation and methods deal with organisations, reduction of cost and improvement of the
efficiency of accounting and also of the office systems, procedures and operations

QB4. Distinguish between financial Accounting and Management Accounting. (June-09/08/12)

Ans:
Points of difference Financial Accounting Management Accounting
1. Age. 1. It is a several centuries old 1. It is just a few decades old.
2. Auditing. 2. Auditing of statements 2. Auditing of statements prepared
prepared here is compulsory in here is not compulsory.
case of joint stock companies.
3. Events considered 3. It considers only the monetary 3. It is interested in monetary events
events (i.e. only those economic & also in non-monetary economic
events which can be expressed events like technical innovations,
in terms of money). personnel in the organization etc.
4. Focus 4. Here the focus is on all the 4. Here the focus is on the internal
aspects of the business details of any particular aspect of
operation. the business operation.
5. User of data 5. It is primarily intended for 5. It is primarily meant for internal
external use. use.
6. Data presented 6. It is concerned only with 6. It is concerned with the past data
historical or past data. as well as the estimates for the
future.
7. Periodicity of 7. The period of reporting is much 7. This accounting furnishes
Reporting longer here. Generally, financial information quickly and at short
statements are prepared at the intervals as per the requirements of
end of every accounting year. the management.
8. Coverage 8. It deals with the overall 8. It deals with details of the various
performance of the business as divisions, departments, personnel
a whole. in the organization and other sub-
divisions of the concern
9. Publication 9. Publication of statements 9. Publication of the statements
prepared here is compulsory for prepared here is not compulsory
joint stock companies. here.
10. Dependence 10. It can exist independently. 10 This depends on Financial
Accounting.

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 Chapter –2: ANALYSIS OF FINANCIAL STATEMENTS
QUESTION & ANSWER COVERING FOR 2 MARKS:
Q1. What are financial statements?
Ans: A financial statement is an organized collection of data according to logical and consistent
accounting procedures. The term financial statements generally refer to two basic statements: 1)
Income statement 2) The balance sheet
Q2. Give the meaning of Common size Statement. (June-07/10)
Ans: It is one of the tools of financial analysis. In this, figures reported are converted into
percentages to some common base. In the income statement the sale figure is assumed to be 100%
and all figures are expressed as % of sales. Similarly in the balance sheet the total of assets or
liabilities is taken as 100% and all the figures are expressed as a % of this total.
Q3. What are the tools of financial analysis?
Ans: 1) Comparative Financial Statement 2) Common size Financial Statement
3) Trend percentages.4) Fund Flow Analysis 5) Ratio analysis.
Q4. What do you understood by Comparative financial statements? (June-09/11/14)
Ans: It refers to those statements in which figures for two or more periods are placed side by side to
facilitate comparison. Both income statements and balance sheet can be prepared in the form of
comparative financial statements.
Q5. What is Trend analysis? (June-09/08/07/12/13/14)
Ans: Comparing the past data over a period of time with a base year is called Trend analysis. The
method of trend percentages involves the calculation of % relation ship, which each item bears to the
same item in the base year. Any year may be taken as the base year and each item of the base year is
taken as 100% and on that basis the % for each item for every year is calculated.
Q6. On the basis of modus of operandi how do you classify financial analysis? (Or) Compare
horizontal and vertical analysis.
Ans: On the basis of modus of operandi (i.e. method of operation) financial analysis is classified into
two types namely horizontal analysis and vertical analysis.
Horizontal analysis: When financial statements of a number of years are studied and
analysed, then it is said to be horizontal financial analysis.
Vertical analysis: When a single set of financial statements relating to just one accounting
year are analysed, then it is said to be vertical financial analysis.
Q7. Write a note on internal analysis. (June-08)
Ans: Internal analysis is the analysis done by internal parties who have access to the books of
accounts and the internal records of the concern. It is done for managerial purposes. It is done by
the finance and accounting departments for performance appraisal and for assessing the profitability
of different activities or departments.
Q8. Define Financial Statement Analysis. (M-11)
Ans: Financial Statement Analysis refers to grouping up of various components of financial
statements on the basis of the nature or characteristics of such components. For ex. Share capital,
all kinds of accumulated reserves and surplus are grouped under one group namely, proprietors’
Funds, because by nature these components belong to shareholders.

Chapter 3: RATIO ANALYSIS

QUESTION & ANSWER COVERING FOR 2 MARKS:

Q1. What is accounting ratio?(M-11)

Ans: An accounting ratio is the relationship between two accounting figures expressed
mathematically. In short, it is the numerical relationship between two accounting figures.
Q2. What is an operating ratio or operating cost ratio?
Ans: The ratio matches the cost of goods sold and other operating expenses with sales. It is
expressed as: Operating Costs X 100
Net sales

Q3. What is liquid ratio? Or (Quick, Liquidity, Acid test ratio) (June-07)
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Ans: This ratio represents the relation ship between liquid assets and current Liabilities. It is an
indication of short-term solvency of a firm. It is expressed as: Liquid Assets
Current Liabilities
Q4. State any four components of Current Assets.(M-14)
Ans: Cash, Bank balance, stock in trade, debtors, prepaid expenses, B/R etc.
Q5. State any four Balance sheet Ratios.
Ans: Balance sheet ratios are ratios, which are derived from the information available in the relevant
balance sheet. For ex. Current ratio, Liquid ratio, Debt equity ratio, Net worth ratio etc.
Q6. State the significance of current ratio.
Ans: The current ratio is an index of the concern’s financial stability since it shows the extent of the
working capital. The ideal current ratio is 2:1. A higher current ratio would indicate inadequate
employment of funds while a poor current ratio shows the business is trading beyond its resources.
Q7. What do you mean by debt equity ratio? (June-09/07)
Ans: It is a ratio, which establishes the relationship between long term debt and shareholders funds
of a concern. It provides the extent to which the firm depends on outsider for its existence. It can be
expressed as: Long term debt
Shareholders funds
Q8. What do you mean by “Net working Capital or ‘Working Capital’”?(M-14)
Ans: It is excess of current assets over current liabilities.
Net working capital = Current assets-Current liabilities.
Q9. What accounting heads are included in owner’s fund?
Ans: Shareholders fund include both preference and equity share capital and all reserves and profits
less fictitious assets.
Q10. What is earning per share? How do you compute ‘Earning per share’? (J-10)
Ans: Earning per share is the return out of the divisible profits on each equity share. It is computed
as under:
EPS = Net profit after tax and preferential dividends
No. of shares.
Q11. What is Ratio Analysis? (June-09/12/13)
Ans: Ratio analysis is the technique of interpretation of financial statements with the help of the
accounting ratios derived from the financial statements.
Q12.What is Pricing Ratio or Price Earning Ratio? (June-08)
Ans: This indicates the number of times the EPS is covered by its market price.
This can be expressed as: Market price per equity share
Earning per share
Q13. What is Activity Ratio, Efficiency Ratio or Turn over ratio?
Ans: This ratio indicates the efficiency with which the capital employed is rotated in the business.
It indicates how well the assets are being made use and the speed with which they are converted
into sales.
Q14. How do you calculate average collection period?
Ans: It can be calculated as below:
1) Months or days in a year (or)2) Average debtors X Months /days in a year
Debtor’s turnover ratio Net Credit sales
Q15. What are solvency ratios or ‘Financial’?
Ans: These ratios indicate the financial position of a company. They may be:
1. Short-term solvency ratios such as current ratio and liquid ratios.
2. Long-term solvency ratio as debt equity ratio, Proprietary ratio etc.
Q16. What is Return on Capital Employed or Return on Investment or overall profitability
ratio? (J-10)
Ans: It indicates the percentage of return on the total capital employed in the business.
It is calculated as: Operating profit X 100
Capital Employed
Q17. State the components of liquid ratio.
Ans: It includes Liquid assets such as Debtors, Cash, Bank, B/R etc. and Liquid liabilities such as
B/P, Creditors, Tax provision, proposed dividends etc.

Q18. How do you calculate 'Dividend Payout Ratio? (June-08)

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Ans: It is the ratio between dividend per equity share and earning per equity share. It is calculated as
under: Dividend per Equity share
Earning per Equity share
Q19. What do you understand by the term Return On Investment? (M-11)
Ans: It is the return on capital employed. It matches the relationship between operating profits of the
concern and the capital employed. A return above 15% is considered to be ideal.
Q20. Explain the significance of Price Earning Ratio.(M-11)
Ans: This is the ratio between market price per share and EPS. It indicates the number of times EPS
is covered by its market price. Higher price earning ratio, signifies better chances of appreciation in
the market prices of shares and vice versa.
Q21. Mention any four Balance Sheet Ratios/Solvency Ratio/Financial Ratios. (M-12)
Ans: Current Ratio, Quick Ratio, Debt Equity Ratio, Solvency Ratio, Net worth Ratio etc.

QUESTION & ANSWER COVERING FOR 5 MARKS:

Q. What are the managerial uses of ratio analysis (or) accounting ratios? (Or) What is the role
of accounting ratios in managerial decision making? (May-07/09)
Ans: The important uses of ratio analysis to management are as under:
a) It simplifies the understanding of financial statements.
b) It is an instrument for diagnosing the financial health of a business.
c) It is a valuable aid to the management in the efficient discharge of the basic function of
forecasting and planning.
d) It serves as an effective means of communication.
e) It is helpful to the management for decision-making, formulation of policies and performance
appraisal.
f) It helps the management in having effective control over the various operations of the
enterprise.
g) It facilitates intra-firm comparison.
h) It is helpful in establishing standard costing system and budgetary control.

Chapter- 4: FUNDS FLOW AND CASH FLOW ANALYSIS

QUESTION & ANSWER COVERING FOR 2 MARKS:

Q1. What do you mean by Funds Flow statement?(FFS) (June-08/07/14)

Ans It is statement, which depicts the changes in working capital, or it denotes the sources from
which additional funds were derived and the uses to which these funds were put.
Q2. How do you treat provision for taxation while preparing FFS?
Ans: 1. When given only in balance sheet: The opening balance is taken on the application side and
closing Balance on the debit side of P&L a/c.
2. When given only in the adjustments: Same amount is taken on debit side of P&L a/c and
application side of FFS.
3. When given both in adjustments and Balance sheet: Here we should prepare a provision for
taxation a/c and the balance that we get is transferred to Adjustment P&L A/c and any
amount paid is transferred to application side.
Q3. What is Cash flow?
Ans: It means the movement of cash in or out of the business. It may be direct i.e., actual cash flow
or indirect i.e., Notional cash flow.
Q4. What is notional cash flow? (June-08)
Ans: It refers to indirect movement of cash in or out of the business. This may result due to increase
in debtors on account of credit sales or increase in creditors on account of credit purchases.
Q5. What is Cash flow Statement?(M-11/12/14)
Ans: It is a statement, which depicts the changes in the cash position of a concern between one
balance sheet date and another.
Q6. What is the object of Cash flow analysis?
Ans: The chief object of cash flow analysis is to show the causes of changes in cash position between
two balance sheet periods.

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Q7. Distinguish between funds flow and cash flow
Ans: Fund flow refers to inflow or outflow (i.e. increase or decrease) of working capital. Where as cash
flow refers to inflow or outflow (i.e. increase or decrease) cash and cash equivalents such as demand
deposits and treasury bills.
Q8. What are the non-operating incomes and expenses?
Ans: The non-operating incomes are: Interest on investments received, dividends on shares received,
Profit on sale of fixed assets, Discount received on redemption of debentures or creditors etc.
The non-operating expenses and losses are: Depreciation of fixed assets, Amortization of fixed assets
like goodwill patents etc., Loss on sale of fixed assets and investments, Provision for taxation,
dividends paid.
Q9. When does funds flow takes place?
Ans: Any transaction between one current item & one non current item or between two current items
with different amounts will give rise for a flow of fund.
Q10. Is depreciation a source of fund? Why?
Ans: While ascertaining the fund from operations, depreciation is added to the net profit for the year.
Because of this fact, it is erroneously held by some that depreciation is a source of fund. But
depreciation is neither a source of fund nor a use of fund. This is because depreciation is a non fund
or non-current item.
Q11. State any two objectives of preparing cash flow statement. (June-08)
Ans: 1) To ascertain causes of changes in the cash position of an enterprise between two balance
sheet periods.
2) To help in effective and efficient cash planning.
Q12. How do you ascertain the cash flow from operations? (June-08)
Ans: Cash flow from operations is obtained by adding to the operating cash profits, the decrease in
current assets and increase in current liabilities and deducting there from any increase in current
assets and decrease in current liabilities.
Q13. Write a note on Cash from financing activities. (June-08)
Ans: Cash from financing activities implies amount of cash received from issuing of shares,
debentures or by raising long term loans.
Q14. What is fund flow? (M-13)
Ans: Fund flow or flow of funds refers to change in the working capital. If a transaction leads to
increase in the working capital there is said to be inflow of funds or application of funds.
Q15. What is Cash Fund?
Ans: As per AS-3 issued by the Institute of Chartered Accountants of India, the term ‘Cash’ includes:
a) Cash in hand b) Demand deposits with banks (i.e cash at bank) c) Cash equivalents. (i.e. short
term highly liquid investments that are readily convertible into known amounts of cash and which
are subject to an insignificant risk of changes in value.
Q15. Give the meaning of ‘Cash Equivalents’.(M-13)
Ans: Refer above question.

QUESTION & ANSWER COVERING FOR 5 MARKS:

Q15. What are the various sources and uses of funds? (May-07/09)
Ans: The various sources of funds are as under:
a) Funds from operations or operating profits.
b) Non-operating incomes such as dividend received on investments on shares, interest received
on investments etc.
c) Refund of income tax received.
d) Issue of shares for cash or for any other current asset.
e) Issue of debentures for cash or for any other current asset.
f) Long-term and medium term loans borrowed.
g) Sale of long-term investments for cash or for any other current assets.
h) Sale of fixed assets for cash or for any other current assets.
The various uses or application of funds are as under:
a) Funds lost in operations or operating loss.
b) Non-operating expenses such as dividends paid on shares, income tax paid, donations given,
fines and penalties paid etc.
c) Redemption of redeemable preference shares in cash or in any other current assets.
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 d) Repayment of long term and medium term loans in cash or in any other current assets.
e) Purchase of long term investments for cash or for any other current assets.
f) Acquisition of fixed assets for cash or for any other current assets

Q16. Analyze the Managerial uses of Fund Flow Statement. (May-07)

Ans: The FFS is one of the tools for the proper management of the fund.
1. It is helpful in knowing the sources & uses of fund.
2. It suggests the ways in which the working capital position can be improved.
3. It can be used in planning a sound dividend policy.
4. It is helpful in planning the temporary investment of idle funds.
5. It is useful in assessing the efficiency of the management in the utilization of fund.
6. It is useful in forecasting the flow of funds and in projecting the working capital requirements.
7. It indicates as to how much portion of the net working capital is provided by fund flow from
operations.
8. It points out the effectiveness with which the management has handled working capital
during a given period.
9. On a comparison of the fund flow statements of a concern for a number of years, it is possible
for one to obtain useful information about the financial methods used in the past.
10. It helps a lending bank to know whether the bank advance has been utilized by the borrower
for the purpose for which it has been sanctioned.

Q17. List out any Ten Non fund items. (June-09)

Ans: a) Depreciation charged on fixed assets, b) Amount written off on any intangible asset like
goodwill, patent or trade marks, c) Loss on sale of investments, d) Amount written off on fictitious
assets e) Loss on sale of fixed assets, f) Provision for doubtful debts made during the year. g)
Provision for taxation made during the year h) Interest on investments i) Dividend on shares paid
or received j) Profit on sale of investments k) Profit on sale of fixed assets etc.

Q18. How do you calculate cash from operating activities as per AS-3 under direct method?
(J-08)
Ans: It is calculated as under:
Particualrs Rs.
1. Cash flow from Operating Activities:
Closing Balance of P & L a/c xxx
Add: Transfer to general Reserve/other reserves xxx
Interim Dividend Paid xxx
Proposed Dividends xxx
Provision for tax made during the year xxx
Goodwill /patents/other intangible assets written off xxx
Fictitious asset written off xxx
Depreciation on fixed assets xxx
Premium on redemption of pref. shares /debentures xxx
xxx
Less: Profit on sale of Fixed assets/Investments xxx
Dividends/interest received on investments xxx
Discount received on redemption of pref shares/debentures. xxx

Less: Opening Profits as per P&L A/c xxx

Operating cash profits xxx
Add: Decrease in Current Assets and Increase in Current Liabilities xxx
Less: Increase in Current Assets and Decrease in Current Liabilities xxx
Less: Income Tax actually paid xxx
Net cash inflow(+)/outflow (-) from operating activities xxx

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Q19. Distinguish between Fund Flow Statement & Cash Flow Statement.(May-07/13)
Ans: The differences between Fund Flow Statement and Cash Flow Statement are:
1. A FFS is based on the working capital concept of fund but CFS is based on the cash concept of
fund.
2. A FFS depicts the changes in the working capital position of an enterprise between two balance
sheet periods. Whereas, CFS depicts the changes in the cash position of an enterprise between
two balance sheet periods
3. A FFS deals with the all items of working capital. But CFS deals with the inflow & out flow of only
cash which is only one items of working capital.
4. FFS is main statement. Whereas, CFS is only a supplementary statement.
5. In FFS classification of assets & liabilities is necessary. But no such classification is necessary in
CFS.
6. FFS necessitates the preparation of a separate schedule of changes in working capital. But CFS
does not necessitate the preparation of a separate schedule of changes in working capital.
7. A FFS does not start with any opening balance and does not end with any closing balance. But
CFS starts with opening cash balance and ends with closing cash balance.
8. An improvement in cash position will definitely result in an improvement in working capital
position of a business, but an improvement in working capital position need not necessarily
result in an improvement in cash position of a business.
9. FFS is a useful technique of financial analysis in relatively long periods. CFS is a useful technique
of financial analysis for short periods.

Q19. Write any five advantages of Cash Flow Statement. (M-11)

Ans: Following are some of the advantages of cash flow statement.
a) It enables the company for proper cash planning for the future period.
b) It gives the information about the amount of cash generated by the operations.
c) It reveals the reasons for lower cash position in spite of higher profit and vice-versa.
d) It highlights the short term solvency or liquidly of the firm.
e) It helps to evaluate the efficiency of the management in managing the cash.

Chapter 5: MANAGEMENT REPORTING

QUESTION & ANSWER COVERING FOR 2 MARKS:

Q1. What are the objects of management reporting? (June-07/12/13/14)
Ans: 1. To make sound judgments on the basis of operating results.
2. To secure understanding & acceptance by all those engaged in the enterprise.
Q2. What is management reporting? (J-10)
Ans: It is an organized method of providing each manager with all the data he requires for his
managerial decision making with ease and greater confidence.
Q3. What are the modes of reporting?
Ans: They are: (1) Written (2) Graphic (3) Oral.
Q4. Define a report.
Ans: According to Johnson and savage, “A good business report is a communication that contains
factual information, organized and presented in clear, correct and coherent language”
Q5. State the types of reports under functional classification.
Ans: a) Operating reports and b) Financial Reports
Q6. What do you mean by Control Reports? (June-08)
Ans: Control reports are reports which help in controlling the different activities of the organisation.
They provide facts properly collected and analysed to suit the different levels of management. They
are of the nature of routine reports.
Q7. Name any four management reports for middle level managers.(M-11)
Ans: For works manager: a) Department wise Weekly report of idle time and idle capacity
b) Department wise weekly report of scrap
c) Weekly report of production cost.
For Divisional manager:
a) Monthly report of budgeted and actual sales – (area wise or product wise)
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 b) Monthly report of credit collections, outstanding debts and bad debts.
c) Monthly report of orders booked, orders executed and orders outstanding.

QUESTION & ANSWER COVERING FOR 5 MARKS:

Q7. Discuss the essentials (or) principles of a good management reporting system. What are
the requisites/essentials/principles or good report? (Or) Discuss the general principles to be
observed while preparing reports. (May-07)
Ans: A good management reporting system should have certain essentials. The essentials or
requisites of a good management reporting system are:
1. Relevant information: A good management reporting system should provide only such
information as are required for the evaluation of each manger’s area of responsibility.
2. Continuous flow of information: It should provide for continuous and systematic flow of
information from the right level of authority to the level of authority where the decisions are to be
taken.
3. Proper form: It should ensure that the required information is presented in proper form, i.e. in a
form which helps the recipient of the information to understand the data easily and take the
necessary decisions quickly.
4. Proper time: It should ensure that the required information is supplied at the right time so that
prompt decision can be taken by the recipient of the information in time.
5. Flexibility: It should be flexible, in the sense that it should be capable of being adjusted easily
according to the requirements of the user of the information.
6. Cost benefit analysis: It should ensure that the worth of benefits derived from the information
presented must be much more than the costs incurred on the collection and presentation of the
information.

Q8. What is a report? What are the uses/objectives of report to management? (june-09/10/11)
Ans: A Report is factual communication of results by a lower level authority to a higher level
authority. The uses of reports to the management are as under.
a) Information is the life-blood of business and report are the vehicles carrying the relevant
information to the management.
b) By providing information to the management about each individual department, reports
enable the mgt to feel the pulse of the whole undertaking.
c) Reports enable in giving the proper feed back of operating results to the mgt.
d) Reports form the basis for all managerial decisions.
e) Reports are also an essential means of cost control.
f) Reports provide valuable information for future reference.
g) Reports also serve legal requirements.
h) Reports help the management to measure the performance of employees.

Q9. Explain briefly different kinds of reports. (June-08)

Ans: The various bases of classification and the different kinds of reports are:
1. Classification of Reports according to purpose: According to the purpose reports may be
classified as under:
a) External Reports: These are the reports mean for persons outside the business such as the
shareholders the Govt., the creditors etc. Examples of external reports are the published
annual reports.
b) Internal Reports: These are the reports meant for the different levels of management within
the enterprise. These reports may be further classified into different types based on different
levels of management.
2. Classification of reports based on period of submission: According to the period of
submission, reports can be classified into two kinds:
a) Routine reports: These are periodical reports covering the normal activities of the concern.
They are submitted to different levels of management as per the fixed time schedule.
b) Special Reports: These are the reports which are required for special or specific purposes.
3. Classification of Reports according to function: According to function reports may be
classified into two categories as under:

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 a) Operating Reports: These are the reports which provi9de information about the operations of
the concern at different functional levels.
b) Financial Reports: These are the reports which provide useful information about the
financial position of the concern. These can be further classified as statistic reports and
dynamic reports.

QUESTION & ANSWER COVERING FOR 15 MARKS:

SPECIMENS OF MANAGEMENT REPORTS
Specimen 1:
The profit of Bhaskar Ltd. is declining year by year. You, as a management accountant of that
company draft a report to the management explaining the reasons for declining profits and
suggest the corrective measures. (June-09/12 – 15 marks, M-14- 8 marks)
Ans:
Bhaskar ltd.
10, J.C Road,
Bangalore – 56005 21st November 2014
To
The managing director,
Bhaskar ltd.
10, J.C Road,
Bangalore – 560052
Dear Sir,
Sub: Report of declining profits.
In pursuance of your instructions for ascertaining the reasons for declining profits of our
company year by year, I submit here under the reasons for declining profits, and my suggestions for
checking the decline in profits.
Reason for declining profits:
In my view the reasons for declining profits are:
a) Lower sales: The sales of our company have been constantly declining by more than 20%
over the past three years. The fall in sales is due to higher prices of our products, severe
competition in the market, faulty product mix and poor sales promotion measures.
b) Higher costs: A higher price of our products when compared to competitors also is one of
the causes for the decline in sales of our products. Higher costs of our products are partly
due to under utilization of our plant capacity, inadequate control over wastage of materials,
labour and overheads and partly due to general rise in costs of materials, labour & overheads.
c) Faulty product mix: The present product mix of our company is faulty. Out of our five
products A,B,C,D & E, only products A & B give sufficient contributions. The contribution of
product C is just sufficient to cover its costs. Product D&E are sold at a loss.
d) Inefficient sales force: The sales force has become inefficient due to lack of proper incentives
and motivation resulting in slump sales.
Suggestions:
The following are the suggestions for checking the declining trend in profits:
1) Improving sales: since efforts must be made by our company to increase the volume of sales.
The volume of sales can be improved through proper control of product price and effective
sales promotion measures.
2) Full utilization of plant capacity and effective control over costs: Costs & prices of our
products can be reduced considerably through full utilization of our plant capacity and
effective control over waste of all kinds. Reduction in costs and prices of our products through
full utilization of plant capacity and control of costs will certainly contribute to increase in
sales.
3) Change in product mix: As stated earlier, defective product mix is one of the reasons for
declining profits. As products D and E have negative contributions & the contribution of
product c is not adequate, it is better that products C, D and E can be dropped and efforts
may be made for the expansion of production and sales of products A and B.
4) Proper sales promotion measure: One of the reasons for declining profits is severe
competition faced by our products in the market. This situation can be corrected only

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 through effective sale promotion measures like effective advertising and sales men ship
techniques and liberal credit policies.

Yours faithfully,

R.Murthy
(Management Accountant.)
Specimen 2:
The directors of Anita steels ltd. are facing the problem of working capital. They are not in a
position to coordinate the inflow and outflow of cash. Examine the existing management of
working capital and submit a report to the management on your findings and
recommendations to correct the situation./ SMYLtd. is facing the problem of working capital.
Cash inflows are not matching with [he cash outflows. After examining the existing situation,
submit a report to the management on your findings and suggestions (June-08 – 15 marks)
Ans:
Anita steels Ltd.,
180, B.C. Road,
Bangalore 560032 1st January, 2015
To
The board of Directors,
Anita steels Ltd.,180, B.C. Road,
Bangalore 560032
Dear Sirs,
Sub: Report on problem of working capital management.
As per your letter dated 15-12-2007, assigning to me the task of studying the problem of
working capital management and suggesting measures to improve it, I would like to report as under-
Reasons:
The reasons for the inadequacy of working capital in the company are as follows:
a) The chief reason for the inadequacy of working capital is the absence of sound liquidity
management. The absence of sound liquidity management has contributed to lack of co
ordination between inflows and out flows of cash and the consequent shortage of working
capital.
b) The management of inventory in the company is also unsound. The unsound inventory
management has resulted in huge investment in closing inventories of poor selling lines, and
consequent locking up of funds and shortage of working capital.
c) The credit management has also been ineffective in the company. The liberal credit policy and
the inefficient recovery process have resulted in considerable increase in sundry debtors.
d) The company has not been able to obtain sufficient period of credit from its suppliers. While
the average period of credit allowed by the company to its debtors is about 75 days, the
period of credit obtained by the company from suppliers is just 30 days. This is also
responsible for the shortage of working capital.
Suggestions:
In my opinion the following measures would help to correct the situations:
1) There should be much improvement in the cash management in the company. This would
help to coordinate the inflows & out flows of cash and overcome the problem of shortage
of working capital.
2) Improvement should be made in the inventory management. There should be proper
purchase policy which would ensure the purchases of only good selling lines and only in
required quantities.
3) The credit policy of the company requires considerable improvement. The credit of our
concern should be made stricter. The average period of credit allowed to debtors should be
reduced from the present 75 days to at least 45 days and the collection department
should make more efforts to collect the outstanding debts in time
4) Efforts should also be made to obtain sufficient period of credit from our suppliers. The
period of credit obtained from our suppliers should be increased from the present level of
30 days to 45 days. This would contribute to proper co-ordination between the inflow of
cash from debtors and the out flows of cash to creditors.

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 5) More emphasis should also be laid on cash sales. This would improve the working capital
and cash position of the company.

Yours faithfully,

R.Sampath
(Management Accountant)

Specimen 3:
In spite of increasing profits, Lath & Co. Ltd., for the last three years, is having shortage of
cash due to which dividends cannot be paid. Draft a report to management diagnosing and
suggesting the appropriate action to remedy the situation.

Ans: Lath & Co. Ltd.,

Landsdown Road, Mysore - 2
1st April, 2015
The managing director,
Lath & Co. Ltd.,
Landsdown Road,
Mysore – 2
Dear Sir,
Sub: Report on Shortage of cash
It is a matter of deep concern that in spite of increasing profit for the last 3 years. The company
cannot pay dividend due to shortage of cash.
As requested by you I have assessed whole situation carefully & in my opinion the following
causes responsible for the situation:
1) Though the company has increasing profits during last 3years, it did not conserve profit by
creating sufficient reserves. This is partly responsible for shortage of cash faced by the concern.
2) During last 3 years there has been Deterioration in the liquidity position of the company. During
last 3 years the increase in current liabilities has been much more than increase in current
assets this has led to decrease in working capital and shortage of cash for payment of dividend.
3) An examination of the total sales, net tangible worth and net working capital of the company
shows symptoms of over-trading resorted to by the company. This factor is also responsible for
the shortage of cash.
4) A scrutiny of the structure of the current assets clearly shows that huge amount has been
locked up in closing inventories leading to shortage of cash.
5) A study of the sales and debtors figures clearly reveal that credit sales have been expanding at a
very high rate because of liberal credit policy and the amount of sundry debtors has been
showing an increasing trend because of poor recovery of debts. This factor is also responsible for
shortage of cash.

Suggestions:
I strongly feel that the following corrective measures would certainly help to remedy the situation and
to prove the cash position of the company:
a. The company should conserve profits by creating reserves. This would certainly improve the
cash position of the company.
b. The company should stop the practice of over trading.
c. Greater emphasis must be laid on cash sales. This would considerably improve the cash
position of the company.
d. The amount locked up in closing inventories must be reduced by disposing of the obsolete
and slow moving goods.
e. Special efforts must be made by the collection department to recover the debts in time this
would go along way in improving the cash position of the company.
Yours faithfully,
R.Rajesh
(Management accountant)

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Specimen 4:
The Production manager of Raju Co.Ltd., is experiencing difficulties like power shortage,
higher labour absenteeism & non availability of raw materials on time. These have caused the
decline in production. You as a management consultant of the company make an in depth
study of these problems and report to the management suggesting suitable solutions.
Ans:
To
The managing Director Mangalore 575002
Raju co. Ltd., 1st March, 2015
12, Nithya industrial Estate
Mangalore 575002

Dear Sir,
Sub: Report on problems of power shortage and high labour absenteeism & non
availability of raw materials on time.
As requested by you I have made a thorough study of company’s problems of power shortage
and high labour absenteeism & non availability of raw materials on time and I would like to report as
follows:
Reasons:
1) The main reason for the shortage of power supply is the short supply of hydro electric power
by the Karnataka Electricity Board. The K E B has not been able to generate enough hydro
electric power owing to the failure of monsoon rains which feed the hydro electric dams in the
state.
Another reason for shortage of power supply is the inadequate production and supply
of thermal power in state. The inadequate production of thermal power in the state is mainly
due to shortage of coal for thermal power generation.
Yet another reason for the shortage of power supply is the growing demand for power
not only from industries and commercial establishments but also from farmers and domestic
consumers.
2) The high labour absenteeism in the company is mainly due to bad working conditions and the
inadequate rewards for the labour force in the company.
3) The main reason for the non availability of raw materials on time is the general scarcity of the
raw materials, which is demanded by many competing firms.
Another reason for the non-availability of raw materials on time is the dependency of
the company on just one supplier for the supply of the raw materials.
Suggestions:
In my opinion, the following measures would be taken to overcome the problems of shortage of power
supply, high labour absenteeism and non-availability of raw materials on time.
1. As there may not be uninterrupted supply of hydroelectric power and improvement in the
supply of thermal power in the state in the present circumstances, the company should have
an additional source of power to supplement the present hydro-electric power supply. The
additional source of power supply can take the form of power generated trough the
installation of generators working on diesel.
2. The high labour absenteeism can be tackled by providing better working conditions in the
factory and providing higher emoluments and non-monetary incentives to the labourers. The
incentives, both monetary and non-monetary, offered to the workers must be attractive
enough to make the workers regular in attendance. There should also be proper labour
disciplinary measures.
3. The problem of non-availability of raw materials on time can be overcome by having more
than one supplier for the supply of raw materials, placing purchase orders well in advance,
installation of effective inventory control measures and also by finding out suitable
substitutes for the material in question.

Yours faithfully,

R.Sampath
(Management Accountant)

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Specimen-5
ABC Company is facing the problem of raw material shortage. As a production manager, you
are required to draft a report suggesting re-formulation of purchase policy to have
uninterrupted supply of raw materials.
Ans: ABC Company Ltd.
15, M.G.Road, Udupi -575006.
1st March, 2015
To
The managing Director
15, M.G.Road,
Udupi -575006.

Dear Sir,
Sub: Report on problems of raw materials shortage.

As directed by you, I have made a thorough study of the problem of raw material shortage faced by
our company, and submit my report as under:
Reasons:
a) The main reason for the shortage of raw materials is the undue delay in the supply of raw
material by our supplier. The delay is due to the delay in placing the purchase order by our
concern.
b) Another reason for the shortage of raw material is our dependence on just one supplier for
the supply of the raw materials.
c) Another reason for the shortage of raw materials is that the raw material in question is
needed for the manufacture of a number of products by a number of manufacturers and
consequently, there is heavy demand for the raw material, which the suppliers are not able to
meet.
Suggestions:
In my view, the following measures would go a long way to solve the problem of shortage of raw
material faced by our organization.
The purchase policy of our company should be reformulated on the following lines:
a) There should be timely placing of purchase orders by our organization.
b) We should depend upon two or more supplier for the supply of material.
c) Proper arrangement must be made with all the selected suppliers for the supply of raw
materials in time.
d) Effective inventory control techniques should be installed to avoid wastage and loss of raw
material and top ensure uninterrupted supply of raw material for production.
e) As there is heavy demand for the material in question, and as the material in question is
scarce, it is necessary for our organization to find out suitable substitutes for the raw
material required by us.

Yours faithfully,

R.Sampath
(Management Accountant)

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