MMPC-004 Solved Assignment

Q1. Why do organisations prepare financial statements, and what ideas help in measuring income?

Why financial statements are prepared

Financial statements are prepared to present a structured and consistent summary of a business’s activities for a financial year, so that different users (owners, investors, creditors, regulators, etc.) can understand the business and take economic decisions.

Key objectives (what they help you judge)

• Profitability: whether the entity can generate profit after meeting business expenses out of sales revenue.
• Liquidity: whether the entity can meet current obligations on time without disturbing normal operations (i.e., without being forced to sell essential operating assets).
• Solvency: whether the entity can meet all its debts if the business were liquidated (a solvent business typically has more assets than debt).

These three are reflected through the Profit & Loss statement, Cash Flow statement, and Balance Sheet respectively.

Basic concepts used in income determination (how income is measured in accounts)

• Accounting period concept: since a going concern continues indefinitely, income is measured for convenient time segments (usually one year) so that performance can be reported and compared.
• Accrual basis: revenues are recorded when earned and expenses when incurred, not merely when cash is received or paid. This keeps income aligned to the period to which it belongs.
• Realisation principle: revenue is recognised only when it is reasonably certain/realizable (e.g., when goods/services are supplied and invoiced, not when an order is received).
• Matching concept: expenses of a period should be matched with the revenues of that same period, so profit is not overstated or understated.
• Capital vs revenue distinction: income measurement depends on correctly separating revenue items (reported in the income statement) from capital items (reported in the balance sheet).

Practical “how it feels” when preparing accounts

When closing monthly or yearly accounts, the biggest real-world discipline is ensuring cut-offs: recording sales when the service is rendered (even if cash is pending), and recognising expenses when the benefit is consumed (even if payment is later). This is exactly what accrual + realisation + matching enforce, so that the final relationship Revenue − Expense = Profit/Loss reflects the correct period performance.

Q2. Explain cash and cash equivalents, and how cash flows are classified and computed under AS-3 (including the direct method).

Meaning of cash and cash equivalents (AS-3 basis)

• Cash: includes cash in hand and demand deposits with banks.
• Cash equivalents: short-term, highly liquid investments that are readily convertible into known cash amounts, with insignificant risk of value changes; typically with a maturity of three months or less and held for short-term cash needs rather than investment purposes.

Examples commonly treated as cash equivalents include marketable securities and money-market instruments such as commercial paper and treasury bills with short maturity.

Why a cash flow statement is used

A cash flow statement explains historical changes in cash and cash equivalents by classifying cash movements into operating, investing, and financing activities, helping users understand sources and uses of cash and evaluate liquidity and cash management.

Classification of cash flows under AS-3

• Operating activities: cash flows from the entity’s primary revenue-generating activities (core business). Typical operating inflows/outflows include cash receipts from sales/services and cash payments to suppliers, employees, and taxes.
• Investing activities: cash flows related to acquisition and disposal of long-term assets and investments not treated as cash equivalents (e.g., purchase/sale of fixed assets, certain investment receipts such as dividends/interest received in cash).
• Financing activities: cash flows that change the size/composition of owners’ capital and borrowings (e.g., proceeds from shares/borrowings; repayments, interest paid, dividends paid).

How the computation is structured (AS-3 format idea)

$$ \text{Net change in cash and cash equivalents} = A + B + C $$

Where A = net cash from operating activities, B = net cash from investing activities, and C = net cash from financing activities; then reconcile opening to closing cash and cash equivalents.

Direct method (operating activities): what you do step-by-step

Under the direct method, you list major classes of gross cash receipts and gross cash payments. The difference is the net cash from operating activities. In practice, this means converting accrual-based revenue/expense figures into actual cash receipts/payments (e.g., adjusting for receivables and payables).

• Cash receipts from customers: derived by adjusting credit sales with changes in accounts receivable.
• Cash paid to suppliers: derived by adjusting purchases with changes in accounts payable and inventory relationships as described in the material.
• Cash paid to employees: derived by adjusting wages/salaries expense with changes in outstanding wages/salaries payable.

Non-cash charges (e.g., depreciation/amortisation type items) are not included in cash flows, and certain non-cash investing/financing transactions are excluded from the cash flow statement.

Q3. What is an Annual Report, what does it contain, and what kind of information is treated as non-audited?

Meaning of an Annual Report (AR)

An Annual Report is the yearly communication package through which a company presents a consolidated picture of its performance, position, and key disclosures to stakeholders. In the course, it is also described as a document that carries rich information about the company and can indicate its future direction.

Broad contents of an Annual Report (as organised in the course material)

The Annual Report is typically organised into four broad parts:

• Non-audited information
• Financial statements
• Notes to the accounts
• Accounting policies

1) Financial statements (what the AR includes as statements)

The AR includes three core financial statements that together explain business performance, financial position, and cash movement:

• Profit & Loss Statement (performance over the period)
• Balance Sheet (position at the end of the period)
• Cash Flow Statement (movement of cash between two points of time)

The course also highlights these as the main statements needed for a holistic understanding of business operations.

2) Notes to the accounts (why they matter)

Notes add detail that is not fully visible on the face of the statements. They support the financial statements by providing:

• narrative explanations and break-ups of items reported in the statements, and
• information on items that do not qualify for recognition directly in those statements (where required).

They also enable cross-referencing from each line item in the statements to the related explanatory note, so users can interpret figures correctly.

3) Accounting policies (what this section tells the reader)

This part summarises the key accounting methods and bases applied while preparing the financial statements (for example, how certain assets are valued, how depreciation/amortisation is treated, and other measurement/recognition choices). In practical reading, this section is essential because it helps you judge whether results are comparable across years and whether any policy choices may influence reported profit or asset values.

4) Non-audited information (what it usually covers)

Non-audited information refers to the narrative and supplementary sections of the Annual Report that are not the audited financial statements themselves. In student terms, this is the “story around the numbers” — context, highlights, business developments, and forward-looking discussion — which the course connects to the Annual Report’s role in communicating broad information and future plans.

Q4. Define Human Resource Accounting (HRA) and explain how it supports managerial decisions.

Meaning of Human Resource Accounting (HRA)

Human Resource Accounting focuses on identifying, measuring, and communicating information about human resources. The logic is that people generate future benefits, and therefore the costs incurred to recruit, train, and develop employees can be analysed like investments rather than being viewed only as routine expenses.

How HRA is treated and presented (as per the block)

• The material notes that expenditure on human resource development can be treated as a capital expenditure, then capitalised and amortised over its useful life.
• It also mentions that many companies show such valuation in a separate statement (including in the annual report context).

HRA as a decision tool (practical uses for management)

• Manpower planning: supports decisions on staffing levels and capability building by making human resource investment more visible.
• Recruitment, training, and development decisions: helps compare costs and expected benefits of hiring vs. developing internal talent.
• Deployment decisions: supports transfers, promotions, and placement by linking people decisions to value and cost considerations.
• Performance and productivity focus: encourages management to evaluate whether HR investments are improving organisational outcomes.

In day-to-day decision-making, this means managers can discuss people choices (hire, train, retain, redeploy) using a more structured “investment and benefit” language, rather than treating workforce spending as a black-box expense line.

Q5. Cost–Volume–Profit (CVP) numericals based on Break-Even Point (BEP)

Given tools (relationships used in the blocks)

• Contribution = Sales − Variable Cost.
• Contribution = Fixed Cost + Profit.
• P/V ratio = Contribution / Sales.
• BEP (sales value) = Fixed Cost / P/V ratio.

(a) Find profit when Sales = Rs. 4,00,000; Fixed Cost = Rs. 80,000; BEP (sales) = Rs. 3,20,000

$$ \text{P/V ratio} = \frac{\text{Fixed Cost}}{\text{BEP (sales)}} = \frac{80{,}000}{320{,}000} = 0.25 $$ $$ \text{Contribution} = \text{Sales} \times \text{P/V ratio} = 400{,}000 \times 0.25 = 100{,}000 $$ $$ \text{Profit} = \text{Contribution} – \text{Fixed Cost} = 100{,}000 – 80{,}000 = 20{,}000 $$

Answer (a): Profit = Rs. 20,000.

(b) Find sales when Fixed Cost = Rs. 40,000; Desired Profit = Rs. 20,000; BEP (sales) = Rs. 80,000

$$ \text{P/V ratio} = \frac{\text{Fixed Cost}}{\text{BEP (sales)}} = \frac{40{,}000}{80{,}000} = 0.50 $$ $$ \text{Required Contribution} = \text{Fixed Cost} + \text{Profit} = 40{,}000 + 20{,}000 = 60{,}000 $$ $$ \text{Required Sales} = \frac{\text{Required Contribution}}{\text{P/V ratio}} = \frac{60{,}000}{0.50} = 120{,}000 $$

Answer (b): Required Sales = Rs. 1,20,000.