Management Accounting Interview Questions & Answers

5 avg. rating (100% score) - 2 votes

Management Accounting Interview Questions & Answers

Do you want to explore the career of a Management Accountant? If yes, then go ahead and browse the wisdomjobs page to get an insight of the career of a Management Accountant. Here you will get information about the skills and education required to take up a Management Accounting job, their responsibilities, their job growth and what salary they can expect. In a Management Accounting job, you can gain experience in completing internal financial processes and producing reports that assist the company leaders to take up important financial decisions. To learn more about the Management Accounting job browse the wisdomjobs page. We also help you to prepare for your job interview by providing you the Management Accounting job interview questions and answers.

Management Accounting Interview Questions

Management Accounting Interview Questions
    1. Question 1. What Are The Various Streams Of Accounting?

      Answer :

      There are three streams of accounting:

      1. Financial Accounting: is the process in which business transactions are recorded systematically in the various books of accounts maintained by the organization in order to prepare financial statements. Theses financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.
      2. Cost Accounting: is the process of classifying and recording of expenditure incurred during the operations of the organization in a systematic way, in order to ascertain the cost of a cost center with the intention to control the cost.
      3. Management Accounting: is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.

    2. Question 2. Explain Financial Accounting. What Are Its Characteristic Features?

      Answer :

      Financial Accounting is the process in which business transactions are recorded systematically in the various books of accounts maintained by the organization in order to prepare financial statements. These financial statements are basically of two types: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet.

      Following are the characteristics features of Financial Accounting:

      1. Monetary Transactions: In financial accounting only transactions in monetary terms are considered. Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever important they may be from business point of view.
      2. Historical Nature: Financial accounting considers only those transactions which are of historical nature i.e the transaction which have already taken place. No futuristic transactions find any place in financial accounting, howsoever important they may be from business point of view.
      3. Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the financial accounting and prepare financial statements there from. It is also obligatory to get these financial statements audited.
      4. External Use: Financial accounting is for those people who are not part of decision making process regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for external use.
      5. Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole.
      6. Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones.
      7. Financial Accounting Process: The process of financial accounting gets affected due to the different accounting policies followed by the accountants. These accounting policies differ mainly in two areas: Valuation of inventory and Calculation of depreciation.

    3. Question 3. Explain Cost Accounting. What Are The Objectives Of Doing It?

      Answer :

      Cost Accounting is the process of classifying and recording of expenditure incurred during the operations of the organization in a systematic way, in order to ascertain the cost of a cost center with the intention to control the cost.

      Following are the basic three objectives of Cost Accounting:

      1. Ascertainment of Cost and Profitability
      2. Cost Control
      3. Presentation of information for managerial decision making.

    4. Question 4. What Are The Characteristic Features Of Cost Accounting?

      Answer :

      Following are the characteristic features of Cost Accounting:

      1. Cost accounting views the whole organization from the individual component of the organization like a job, a process etc.
      2. Cost accounting aims at ascertaining the profitability of individual components of the organization.
      3. It is meant for those people who are part of the decision making process of the organization. Thus, it is only for internal use.
      4. It is not a legal requirement. It is not compulsory to maintain cost accounting records.
      5. In Cost Accounting, data is immediately available which facilitates in decision making process.
      6. Cost Accounting considers each and every transaction, whether related to past or future which will have an impact on the business.

    5. Question 5. Define Management Accounting. What Are Its Objectives?

      Answer :

      Management Accounting is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.

      Following are the objectives of Management Accounting:

      1. Measuring performance: Management accounting measures two types of performance. First is employee performance and the second is efficiency measurement. The actual performance is measured with the standardized performance and a report of deviation from the standard performance is reported to the management for the effective decision making and also to indicate the effectiveness of the methods in use. Both types of performance management are used to make corrective actions in order to improve performance. 
      2. Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.
      3. Allocation of Resources: is an important objective of Management Accounting.
      4. Presentation of various financial statements to the Management.

    6. Question 6. What Are The Limitations Of Management Accounting?

      Answer :

      Limitations of Management Accounting:

      1. Management Accounting is based on financial and cost accounting, in which historical data is used to make future decisions. Thus, strength and weakness of the managerial decisions are based on the strength and weakness of the accounting records.
      2. Management Accounting is useful only to those people who are in the decision making process. 
      3. Tools and techniques used in management accounting only provide information and not ready made decision. Thus, it is only a supplementary service.
      4. In Management Accounting, decision is based on the manager’s institution as management try to avoid lengthy courses of scientific decision making.
      5. Personal prejudices and bias affect the decisions as the interpretation of financial information is based on personal judgment of the interpreter.

    7. Question 7. What Is The Scope Of Management Accounting?

      Answer :

      Following is the scope of Management Accounting:

      1. Financial Accounting
      2. Cost Accounting
      3. Revaluation accounting
      4. Control Accounting 
      5. Marginal Costing 
      6. Budgetary Control
      7. Financial Planning and 
      8. Break Even Analysis 
      9. Decision accounting: 
      10. Reporting
      11. Taxation
      12. Audit

    8. Question 8. What Are The Various Techniques Used To Discharge The Function Of Management Accounting?

      Answer :

      Following are the technique used to discharge the function of management accounting:

      1. Marginal Costing 
      2. Budgetary Control
      3. Standard Costing
      4. Uniform Costing

    9. Question 9. Compare Financial Accounting And Cost Accounting.?

      Answer :

      1. Financial Accounting protects the interests of the outsiders dealing with the organization e.g shareholders, creditors etc. Whereas reports of Cost Accounting is used for the internal purpose by the management to enable the same in discharging various functions in a proper manner.
      2. Maintenance of Financial Accounting records and preparation of financial statements is a legal requirement whereas Cost Accounting is not a legal requirement. 
      3. Financial Accounting is concerned about the calculation of profits and state of affairs of the organization as whole whereas Cost accounting deals in cost ascertainment and calculation of profitability of the individual products, departments etc. 
      4. Financial Accounting considers only transactions of historical financial nature whereas Cost Accounting considers not only historical data but also future events.
      5. Financial Accounting reports are prepared in the standard formats in accordance with GAAP whereas Cost accounting information is reported in whatever form management wants

    10. Question 10. Compare Financial Accounting And Management Accounting?

      Answer :

      1. Financial Accounting reports are used by outside parties such as creditors, shareholders, tax authorities etc. whereas Management Accounting reports are used by managers inside the organization for planning, directing, controlling and taking decisions. 
      2. In Financial Accounting, only historical financial transactions are considered and do not consider non financial transactions whereas in Managerial Accounting emphasis is on decisions affecting the future, thus it may consider future data as well s non financial factors.
      3. Maintenance of financial accounting records and preparation of financial statements is a legal requirement whereas Management Accounting is not at all legal requirement. Moreover, these systems have their own reporting formats.
      4. In Financial Accounting, precision of information is required whereas in Management Accounting timeliness of information is required.
      5. In Financial Accounting, only summarized data is prepared for the entire organization whereas in Management Accounting detailed reports are prepared about products, departments, employees and customer.
      6. Preparation of Financial Accounting is based of Generally Accepted Accounting Principles whereas Management Accounting does not follow such principles to prepare reports.
      7. Financial reports generated by the Financial Accounting are required to be accurate whereas accuracy is not the prerequisite of management accounting.

    11. Question 11. Compare Cost Accounting And Management Accounting?

      Answer :

      1. The scope of management accounting is broader than that of cost accounting. 
      2. Both the accounting streams are not a legal requirement.
      3. Cost accounting provides only cost information for managerial use whereas management accounting provides all types of accounting information i.e., cost accounting as well as financial accounting information.
      4. In Cost accounting, the main emphasis is on cost ascertainment and cost control whereas in management accounting the main emphasis is on decision-making.
      5. The various techniques used by cost accounting are standard costing, budgetary control, marginal costing and cost-volume-profit analysis, uniform costing and inter-firm comparison, etc. whereas management accounting also uses these techniques but also uses techniques like ratio analysis, funds flow statement, statistical analysis etc.
      6. Cost Accounting is a part of Management Accounting whereas Management accounting is an extension of managerial aspects of cost accounting with the ultimate intention to protect the interests of the business.

    12. Question 12. What Do You Mean By Accounting Concepts? List Them.?

      Answer :

      Accounting concepts are those basis assumptions upon which basic process of accounting is based.

      Following are the basic accounting concepts:

      1. Business Entity Concept
      2. Dual Aspect Concept
      3. Going Concern Concept
      4. Accounting Period 
      5. Concept Cost Concept 
      6. Money Measurement Concept
      7. Matching Concept

      Explain the following:

      1. Business Entity Concept: According to this concept, the business has a separate legal identity than the person who owns the business. The accounting process is carried out for the business and not for the person who is carrying out the business. This concept is applicable to both, corporate and non corporate organizations.
      2. Dual Aspect Concept: According to this concept, every transaction has two affects. This basic relationship between assets and liabilities which means that the assets are equal to the liabilities remains the same.
      3. Going Concern Concept: According to this concept, the organization is going to be in existence for an indefinite period of time and is not likely to close down the business in the shorter period of time. This affects the valuation of assets and liabilities.
      4. Accounting Period Concept: According to this concept, the indefinite period of time is divided into shorter time periods, each one being in the form of Accounting period, in order to facilitate the preparation of financial statements on periodical basis. Selection of accounting period depends on characteristics like business organization, statutory requirements etc.
      5. Cost Concept: According to this concept, an asset is recorded at the cost at which it is acquired instead of taking current market prices of various assets.
      6. Money Measurement Concept: According to this concept, only those transactions find place in the accounting records, which can be expressed in terms of money. This is the major drawback of financial accounting and financial statements.
      7. Matching Concept: According to this concept, while calculating the profits during the accounting period in a correct manner, all the expenses and costs incurred during the period, whether paid or not, should be matched with the income generated during the period.

    13. Question 13. Explain A)convention Of Conservation B)convention Of Materiality C) Convention Of Consistency

      Answer :

      a)Convention of Conservation 

      This accounting convention is generally expressed as to “anticipate all the future losses and expenses, without considering the future incomes and profits unless they are actually realized.” This concept emphasizes that profits should never be overstated or anticipated. This convention generally applies to the valuation of current assets as they are valued at cost or market price whichever is lower. 

      b)Convention of Materiality

      This accounting convention proposed that while accounting only those transactions will be considered which have material impact on financial status of the organization and other transactions which have insignificant effect will be ignored.. It gives relative importance to an item or event.

      c) Convention of Consistency

      This accounting convention proposes that the same accounting principles, procedures and policies should be used consistently on a period to period basis for preparing financial statements to facilitate comparison of financial statements on period to period basis. If any changes are made in the accounting procedures or policies, then it should be disclosed explicitly while preparing the financial statements.

    14. Question 14. What Are The Various Systems Of Accounting? Explain Them.

      Answer :

      There are two systems of Accounting:

      1) Cash System of Accounting: This system records only cash receipts and payments. This system assumes that there are no credit transactions. In this system of accounting, expenses are considered only when they are paid and incomes are considered when they are actually received. This system is used by the organizations which are established for non profit purpose. But this system is considered to be defective in nature as it does not show the actual profits earned and the current state of affairs of the organization.

      2) Mercantile or Accrual System of Accounting: In this system, expenses and incomes are considered during that period to which they pertain. This system of accounting is considered to be ideal but it may result into unrealized profits which might reflect in the books of the accounts on which the organization have to pay taxes too. All the company forms of organization are legally required to follow Mercantile or Accrual System of Accounting.

    15. Question 15. What Are The Different Types Of Expenditures Considered For The Purpose Of Accounting?

      Answer :

      For the accounting purpose expenditures are classified in three types:

      Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.

      E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.

      Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only. This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business. The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature. 

      Eg: Purchase of raw material, selling and distribution expenses, Salaries, wages etc.

      Deferred Revenue Expenditure is a revenue expenditure which has been incurred during an accounting year but the benefit of which may be extended to a number of years. And these are charged to profit and loss account. E.g. Development expenditure, Advertisement etc.

    16. Question 16. Define Management Accounting?

      Answer :

      Management Accounting is the process of analysis, interpretation and presentation of accounting information collected with the help of financial accounting and cost accounting, in order to assist management in the process of decision making, creation of policy and day to day operation of an organization. Thus, it is clear from the above that the management accounting is based on financial accounting and cost accounting.

    17. Question 17. What Are Its Objectives Of Management Accounting?

      Answer :

      1. Measuring performance: Management accounting measures two types of performance. First is employee performance and the second is efficiency measurement. The actual performance is measured with the standardized performance and a report of deviation from the standard performance is reported to the management for the effective decision making and also to indicate the effectiveness of the methods in use. Both types of performance management are used to make corrective actions in order to improve performance. 
      2. Assess Risk: The aim of management accounting is to assess risk in order to maximize risk.
      3. Allocation of Resources: is an important objective of Management Accounting.
      4. Presentation of various financial statements to the Management.

    18. Question 18. What Are Capital Expenditures? Is It Ok To Consider These Expenditures While Calculating The Profitability Of During A Certain Period?

      Answer :

      Capital Expenditure is an amount incurred for acquiring the long term assets such as land, building, equipments which are continually used for the purpose of earning revenue. These are not meant for sale. These costs are recorded in accounts namely Plant, Property, Equipment. Benefits from such expenditure are spread over several accounting years.

      E.g. Interest on capital paid, Expenditure on purchase or installation of an asset, brokerage and commission paid.

      No, Capital expenditure should not be considered while calculating profitability as benefits incurred from the capital expenditure are long term benefits and cannot be shown in the same financial years in which they were paid for. They need to be spread over a number of years to show the true position in balance sheet as well as profit and loss account.

    19. Question 19. Explain Revenue Expenditure. Does It Affect The Profitability Statement In A Period?

      Answer :

      Revenue Expenditure is the expenditure incurred in one accounting year and the benefits from which is also enjoyed in the same period only. This expenditure does not increase the earning capacity of the business but maintains the existing earning capacity of the business. It included all the expenses which are incurred during day to day running of business. The benefits of this expenditure are for short period and are not forwarded to the next year. This expenditure is on recurring nature. 

      As the return on revenue expenditure is received in the same period thus the entries relating to the revenue expenditure will affect the profitability statements as all the entries are passed in the same accounting year, the year in which they were incurred.

    20. Question 20. Explain Deferred Expenditures. How Are These Expenses Dealt With In Profitability Statement?

      Answer :

      Deferred Revenue Expenditure is revenue expenditure, incurred to receive benefits over a number of years say 3 or 5 years. These expenses are neither incurred to acquire capital assets nor the benefits of such expenditure is received in the same accounting period during which they were paid. Thus they don’t affect profitability statement as they are not transferred to the profitability statement in the period during which they are paid for. They are charged to profit and loss account over a number of years depending upon the benefit accrued.

    21. Question 21. Explain Personal Accounts. List Different Accounts Consisting Personal Account.

      Answer :

      Personal Accounts are the accounts of persons or organisations with whom the organisation deals in various capacities.

      Personal Accounts consist of following types of accounts:

      1. Accounts of Customers
      2. Accounts of Suppliers
      3. Accounts of Bank/Financial Institutions
      4. Capital Account

    22. Question 22. Explain Real Accounts. List Different Accounts Consisting Real Accounts In Practical Circumstances.?

      Answer :

      Real accounts are the accounts of assets which the company owns and accounts of liabilities which the company owes. Real Account may also consist of some intangible assets.

      Real Accounts consist of following types of accounts:

      1. Building Account
      2. Furniture Account
      3. Machinery Account
      4. Land Account
      5. Goodwill Account
      6. Patent Trade Marks Account

    23. Question 23. What Are Nominal Accounts? List Accounts Consisting The Nominal Account.

      Answer :

      Nominal Accounts are the accounts of Incomes, Expenses, Losses and Gains.

      Nominal Accounts consist of the following types of accounts:

      1. Insurance Account
      2. Wages Account
      3. Interest Paid or Received Account
      4. Commission Paid or Received Account
      5. Telephone Expenses Account
      6. Salary Account

    24. Question 24. What Is The Principal Of Double Entry System Of Accounting? What Are The Advantages Of Double Entry System Of Accounting?

      Answer :

      The principal of Double Entry system of Accounting is “Every debit has a corresponding credit” hence the total of all debits has to be equal to the total of all credits. In simple words, every business transaction affects two accounts. If one account is debited then the other account will be credited with the similar amount. For example: if the business purchases a machinery worth Rs. 500000, then machinery account gets debited with amount Rs. 500000 as the business is receiving an asset for its operation, on the other side cash account automatically gets credited with the same amount of Rs. 500000 as cash is going out of the business.

      Advantages of Double Entry system of Accounting:

      1. It considers both the aspects of business transaction
      2. Arithmetic accuracy of the accounting records can be checked and verified by preparing trial balance
      3. Correct results of the operations can be ascertained by preparing Final Accounts
      4. Correct valuation of assets and liabilities at any point of time by preparing Balance sheet

    25. Question 25. What Are The Rules Of Double Entry Book Keeping For Various Types Of Accounts?

      Answer :

      Following are the basic rules of double entry book keeping for various types of accounts:

      Personal Account : Debit the Receiver, Credit the Giver

      Real Account : Debit what comes in, Credit what goes out

      Nominal Account : Debit all the Expenses, Credit all the Incomes

    26. Question 26. What Is Trial Balance? What Does An Accurate Trial Balance Suggest?

      Answer :

      Trial Balance is a summary of all the balances of various ledger accounts and Cash/Book accounts of an organization at any given date. For the preparation of Trial Balance the entire Ledger accounts and Cash book/Bank book are required to be balanced to get the closing balance. Assets and Expenses accounts having debit balance are posted on debit side whereas Income and Liability accounts having credit balance are posted on credit side of the Trial Balance.

      An accurate Trial Balance is an evidence that all the transactions are recorded and posted in the General Ledger account as per the accounting principles. It also ensures arithmetical accuracy of the process of ledger posting.

    27. Question 27. What Is Depreciation? What Are The Causes Of Depreciation? Is It A Cost? Why?

      Answer :

      Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed asset. Except Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the asset useless after the end of a certain period.

      Following are the causes of Depreciation:

      1. Wear and Tear due to regular use of the asset
      2. Deterioration occurs with the passage of time, whether the asset is in use or not
      3. Damages done to the assets due to an accident like fire, mishandling etc.
      4. Depletion of Asset
      5. Obsolescence i.e. due to new technology in use, new inventions, innovations etc.

      Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the organisation reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.

    28. Question 28. What Is The Need Of Depreciation Account?

      Answer :

      According to the matching principle of accounting, the costs incurred in the accounting year should be matched with the revenue or income earned during the same accounting year. Thus, it is necessary to spread the cost of fixed asset less scrap or realizable value after the useful life of the fixed asset is over and this process of ascertain the same is called depreciation accounting. 

      Thus, depreciation account is needed for mainly two purposes:

      To ascertain due profits and to represent the value of the fixed asset at its unexpired cost i.e book value of the asset less depreciation.

    29. Question 29. What Is The Effect Of Depreciation Of Assets On Profits Received By Owners?

      Answer :

      Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which then is distributed to the owners of the business in the form of dividend. Addition of depreciation to the cost reduces the amount of distributable profits. 

      By maintaining a depreciation account a part of the distributable profit is retained in the business as a reserve which is used to purchase new machinery or for other purposes in the future which reduces the profits or dividends received by the owners.

    30. Question 30. List Various Methods For Calculating Depreciation.?

      Answer :

      Methods for calculating depreciation are:

      1. Straight Line Method
      2. Written Down Value(Reducing Balance)Method
      3. Production Unit Method
      4. Production Hour Method
      5. Joint Factor Rate Method
      6. Revaluation Method
      7. Renewal Method

    31. Question 31. Explain Straight Line Method To Calculate Depreciation. What Are It Advantages And Limitations?

      Answer :

      It is the simplest and most often used technique. The components used to calculate Straight Line Method are:

      1. Cost of Asset
      2. Estimated Scrap vale-is the value of the asset at the end of life of the asset
      3. Estimated life of Asset

      Formula to calculate:

      Depreciation = (Cost of Asset-Estimated Scrap Vale)/Estimated life of Asset in years

      The main advantage of this method is that an equal amount of depreciation is charged every year throughout the life of the Asset which makes the calculation of depreciation easy.

      But the limitation of this method is that the amount of depreciation charged on the asset in the later years is high due to the reduced value of the asset.

    32. Question 32. Explain Written Down Value (reducing Balance) Method To Calculate Depreciation. What Are The Benefits Of This Method?

      Answer :

      In Written Down Value Method, the rate of depreciation is predetermined. This is done by deducting the amount of depreciation charged before from the balance of cost of asset (Cost of Asset-Estimated Scrap Value). In simple words, in the first year the amount of depreciation charged is high and it gradually starts decreasing during the subsequent years.

      Formula to calculate:

      Depreciation = 1- 

      N= number of years

      R= Residual/Scrap Value

      C=Cost of the asset

      The main benefit of this method is that it recognises this fact that in the initial phase of an asset, costs of maintenance, repairs etc. are less which goes on increasing with the progressing life of the asset. Thus, by charging higher amount of depreciation in the initial years and gradually decreasing the amount of depreciation counterbalance both the lower amount of repairs and maintenance cost in the initial years and the gradual increase later on. It can be noted here that the written down value can never be zero.

    33. Question 33. Explain Production Unit Method To Calculate Depreciation.

      Answer :

      Production Unit Method is also a method of calculating depreciation. According to this method, rate of depreciation is predetermined at per unit, which is calculated on the basis of total number of units produced during the life of the asset. This method gives more importance to the usage factor. Higher the number of units produced, higher will be the amount of depreciation and vice versa.

      Formula to calculate:

      Rate of Depreciation per unit = (Cost of machine – Estimated Scrap Value) / Estimated number of units produced

    34. Question 34. Explain Annuity Method Of Calculating Depreciation.?

      Answer :

      In this method, the purchase of an asset is considered an investment of capital on which a certain rate of interest is earned. The cost of the asset and the interest are written down annually by equal instalments until the book value of the asset is reduced to nil. 

      The annual charge by way of depreciation is found out from the annuity tables. The annual charge for depreciation will be credited to asset account and debited to depreciation account while the interest will be debited to asset account and credited to interest account. The disadvantage of this method is that it is a complicated method to charge depreciation. Secondly, the burden on Profit and Loss account goes on increasing with the passage of time and the amount of interest goes on diminishing as years pass by. 

      Thus this method is best suited to those assets which require considerable investment and don’t require frequent additions.

    35. Question 35. Explain Joint Factor Rate Method Of Calculating Depreciation.?

      Answer :

      This method is also used to calculate amount of depreciation. In this method the depreciation is provided partly at a fixed rate on time basis and partly at a variable rate on usage basis.

    36. Question 36. What Is Sinking Fund Method Of Calculating Depreciation?

      Answer :

      It is also known as Depreciation fund method. Under this method a sinking fund or depreciation fund is created. Every year the profit and loss account is debited and fund account is credited with a sum, which is calculated such that the annual sum credited to the fund account which is accumulating throughout the life of the asset will be equal to the sum required to replace the old asset. The main advantage of this method is that it accumulates interest or dividends by regular investment of cash outside the business e.g.in securities to finance the replacement of the assets, which has become useless. 

      But on the other hand this method has disadvantage also as the burden of profit and loss account goes on increasing as years pass by since the amount spent on repairs and maintenance goes on increasing due to the wear and tear of the asset and the amount of depreciation remains same.

    37. Question 37. Explain Endowment Policy Method Of Calculating Depreciation.?

      Answer :

      This method is similar to Sinking Fund method except in this method instead of investing in securities the amount set aside is used to pay premium on an Endowment Policy. And the policy should mature on the date on which the ceases its useful life. This collected money is then used to replace the expired asset.

    38. Question 38. What Method Of Depreciation Calculation Is Used To Calculate The Tax Liability According To Income Tax Act, 1961?

      Answer :

      According to Income Tax Act, 1961 Written Down Method of depreciation is used to calculate the tax liability. In this method, depreciation is charged at predetermined rate, which is calculated on the balance of cost of asset less amount of depreciation previously charged. The rate at which the depreciation will be calculated is also specified in the Income Tax Act 1961.

    39. Question 39. How Is Depreciation Calculated As Per Schedule Xiv Of Companies Act, 1956?

      Answer :

      As per Schedule XIV of Companies Act, 1956 the company can calculate the depreciation by using either Straight Line Method or Written Down Value Method. 

      The rate to calculate depreciation is also specified in Schedule XIV. If any addition has been made to any asset during the financial year, depreciation on such an asset will be calculated on pro-rata basis from the date of such addition or upto the date on which such asset has been sold.

    40. Question 40. How Are The Fixed Assets Categorized To Calculate The Depreciation As Per Schedule Xiv Of Companies Act, 1956?

      Answer :

      To calculate depreciation as per Schedule XIV of Companies Act, 1956 the fixed assets are categorized as below:

      1. Buildings-Factory Buildings as well as Administration buildings
      2. Plant and Machinery
      3. Furniture
      4. Vehicles
      5. Computer Installations 

    41. Question 41. Does Depreciation Generate Funds For Replacement Of Assets?

      Answer :

      Yes, depreciation generate funds for replacement of assets. When depreciation is charged against the asset, a significant portion is taken out of the profits every year during the lifetime of the existing assets, and is retained and accumulated without being distributed to the owners as dividend. Thus at the end of the life of the existing asset, the business will have some funds to replace old asset with the new one.

    42. Question 42. Compare: Depreciation As Per Companies Act And Income Tax Act?

      Answer :

      Under the Companies Act: Depreciation is computed either using the straight line method or written down value method. In straight line method the amount of depreciation is uniform for all the years where in written down method the amount of depreciation is highest in the first year and gradually decreases in the subsequent years.

      Under Income Tax Act: Depreciation is computed using written down value method. Also it is charged on the block of assets and not on individual assets. The block of assets means a group of assets for which the same rate of depreciation is applicable.

    43. Question 43. What Is Journalizing? What Are The Columns Of A Journal?

      Answer :

      Journalizing is the process of recoding business transactions in the Journal in chronological order, as and when the transactions take place. Journal is also known as Book of Original Entry or the Book of Prime Entry.

      Journal has following five columns:

      1. Date
      2. Particulars
      3. Ledger Folio
      4. Amount Debited
      5. Amount Credited

    44. Question 44. Explain Compound Journal Entry.?

      Answer :

      In day to day business, various similar transactions take place on the same day and every account is either debited or credited. Thus instead of passing different entries, a compound entry can be passed, which involves more than one debit or more than one credit or both. This makes the journal less bulky and avoids duplication.

    45. Question 45. What Are Subsidiary Books? Why Are They Maintained?

      Answer :

      Subsidiary book is the sub division of Journal. These are known as books of prime entry or books of original entry as all the transactions are recorded in their original form. In these books the details of the transactions are recorded as they take place from day to day in a classified manner.

      The important subsidiary books used are as following:-

      Cash Book : Used to record all the cash receipts and payments.

      Purchase Book : Used to record all the credit purchases.

      Sales Book : Used to record all the credit sales

      Purchase Return Book : Used to record all goods returned by business to the supplier

      Sales Return Book : Used to record all good returned by the customer to the business.

      Bills Receivable Book : Used to record all accepted bills received by business.

      Bills Payable Book : Used to record all bill accepted by us to our creditors.

      Journal Proper : Used to record those transactions for which there is no separate book.

      These subsidiary books are maintained because it may be impossible to record each transaction into the ledger as it occurs. And these books record the details of the transactions and therefore help the ledger to become brief. Future reference and any desired analysis becomes easy as transactions of similar nature are recorded together.

    46. Question 46. What Is A Ledger? What Do You Mean By Ledger Posting?

      Answer :

      Ledger is the book where the transactions of similar nature pertaining to a person, asset, liability, income or expenditure are drawn from the journal or subsidiary books where the transactions are recorded in a chronological order and posted account wise in the Ledger account. Ledger maintains all types of accounts i.e. Personal, Real and Nominal Account.

      All the business transactions are first recorded in Journal or Subsidiary books in a chronological order when they actually take place and from there the transactions of similar nature are transferred to Ledger and this process of transferring is called as Ledger Posting.

    47. Question 47. What Are Control Ledgers? What Are The Purposes Of Maintaining It?

      Answer :

      In a business, sometimes it is not feasible to carry accounts of all the suppliers and customers in the main ledger. In such cases apart from General or main ledger, the control ledgers are maintained. Control ledgers records the individual accounts. In the end of the period, balance shown in the main ledger has to tally with the balance in the individual ledger accounts maintained in the control ledger.

      Purposes of maintaining control ledgers are:

      1. Sundry Debtors
      2. Sundry Creditors
      3. Advances to Staff

    48. Question 48. What Do You Mean By Balancing Of Ledger Account?

      Answer :

      To know the net effect of all the business transactions recorded in the ledger account, the accounts need to be balanced. Thus, Balancing of Ledger Account means the balances of Debit and Credit side should be equal and this involves following steps:

      1. First total of both the sides are taken.
      2. Secondly difference between the totals of both the sides is calculated.
      3. If the debit side is in excess to the credit side then place the difference on the credit side by writing By Balance c/fd.
      4. If the total of credit side is in excess to the debit side, place the difference on the debit side by writing To Balance c/fd.
      5. After placing the difference on the appropriate side, make sure the totals of both the sides are equal.

    49. Question 49. Why Are Profit And Loss Accounts Prepared?

      Answer :

      Profit and Loss Account is a period statement which is prepared to show the profit or loss incurred by the Organization in the year for which it is prepared. It is prepared to disclose the result of operations of all the business transactions during a given period of time. It is also known as profitability statement .It is the final result of all business transactions of the organization. Profit and Loss account has four components namely Manufacturing Account, Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account. Gross profit or Gross loss so calculated in trading account is taken to the profit and loss account.

    50. Question 50. What Is A Balance Sheet? Why Is It Prepared?

      Answer :

      Balance Sheet is a Statement showing financial position of the business on a particular date. It has two side one source of funds i.e Liabilities, the left side of the balance sheet and application of funds i.e assets, the right side of the balance sheet. It is prepared after preparing trading and profit and loss account and has balances of real and personal accounts grouped and arranged in a proper way as assets and liabilities. It is prepared to know the exact financial position of the business on the last date of the financial year.

    51. Question 51. List The Type Of Items Which Appear Under The Liability Side Of A Balance Sheet.

      Answer :

      Items which appear under the liability side of Balance Sheet are:

      • Capital
      • Long Term Liabilities
      • Loan from bank
      • Mortgage
      • Current Liabilities
      • Sundry Creditors
      • Advance from Customers
      • Outstanding Expenses
      • Income Received in Advance

    52. Question 52. What Are Adjustment Entries? Why Are They Passed?

      Answer :

      Adjustment entries are the entries which are passed at the end of each accounting period to adjust the nominal and other accounts so that correct net profit or net loss is indicated in profit and loss account and balance sheet may also represent the true and fair view of the financial condition of the business.

      It is essential to pass these adjustment entries before preparing final statements. Otherwise in the absence of these entries the profit and loss statement will be misleading and balance sheet will not show the true financial condition of the business.

    53. Question 53. Explain Bank Reconciliation Statement. Why Is It Prepared?

      Answer :

      Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the bank at periodical intervals. At the end of every month entries in the cash book are compared with the entries in the pass book. The causes of differences in balances of both the books are scrutinized and then reconciliation statement is prepared.

      This statement is prepared for a special purpose and once in a month. It is prepared with a view to indicate items which cause difference between the balances as per the bank columns of the cash book and the bank pass book at a particular date.

    54. Question 54. What Are The Reasons Which Cause Pass Book Of The Bank And Your Bank Book Not Tally?

      Answer :

      • Cheques deposited into the bank but not yet collected
      • Cheques issued but not yet presented for payment
      • Bank charges
      • Amount collected by bank on standing instructions of the concern.
      • Amount paid by the bank on standing instructions of the concern.
      • Interest debited by the bank
      • Interest credited by the bank
      • Direct payment by customers into the bank account
      • Dishonour of cheques
      • Clerical errors

    55. Question 55. What Type Of Errors Do Not Affect The Trial Balance?

      Answer :

      Following are the types of errors which do not affect the Trial Balance:

      1. Compensating Error
      2. Errors of Principle
      3. Errors of Omission
      4. Errors of Commission
      5. Wrong amount recorded in the subsidiary books

    56. Question 56. What Is Cost Accountancy? What Are The Objects Of Cost Accountancy?

      Answer :

      Cost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.

      Following are the objects of Cost Accountancy:

      1. Ascertainment of Cost and Profitability
      2. Determining Selling Price
      3. Facilitating Cost Control
      4. Presentation of information for effective managerial decision
      5. Provide basis for operating policy
      6. Facilitating preparation of financial or other statements

    57. Question 57. What Is The Difference Between Costing And Cost Accounting?

      Answer :

      Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost.

    58. Question 58. What Is Cost Centre?

      Answer :

      Cost centre is defined as a location, machine, person, department, division, or any equipment or group of these, in relation to which direct and indirect costs may be ascertained and used for the purpose of cost control. Thus, an organisation for the costing purposes is divided in convenient units and one of the convenient units is known as cost centre. Example: collecting, sorting, washing of clothes are the various activities which are separate cost centre in a laundry.

      The cost centre facilitates this function of cost control. Thus, correct identification of cost centre is a prerequisite for the successful implementation of cost accounting process. This also facilitates the fixation of responsibility in the correct manner.

    59. Question 59. What Are The Various Elements Of Costs?

      Answer :

      There are three elements of cost:

      Material Cost: This is the cost of material or the commodity used by the organisation for its production purpose. Material is the substance, from which a product is made. Thus, it may be in a raw or a manufactured state. It can be direct or indirect.

      Direct Material Cost: forms an integral part of the finished product and is identified with the individual cost centre. It is also described as process material, stores material, production material, etc. Example: Raw materials purchased or purchased primary packing material, etc.

      Indirect Material Cost: is used for ancillary purposes of the business and cannot be conveniently identified with the individual cost centre. Example: Consumable stores, oil and waste, printing and stationery material etc.

      Labour Cost: This is the cost, incurred in the form of remuneration paid to the employees or labours of the organisation. The workforce required to convert material into finished product is called labour. It can be direct or indirect.

      Direct Labour Cost: is the cost incurred on those employees who directly take part in the manufacturing process and easily identified with the individual cost centre.

      Indirect Labour Cost: is the cost incurred on those employees who do not directly take part in the manufacturing process and cannot identified with the individual cost centre. Example: salary of foreman, salesmen, director’s salary, etc.

      Expenses: are the costs of services provided to the organisation. It can be direct or indirect.

      Direct Expenses: are the expenses which can be directly identified with the individual cost centres. Example: hire charges of machinery, cost of defective work for a particular job or contract etc.

      Indirect Expenses: are the expenses which cannot be directly identified with the individual cost centres. Example: rent, lighting, telephone expenses, etc.

    60. Question 60. Explain Gross Profit.?

      Answer :

      Gross Profit is a company’s revenue minus its cost of goods sold. It is also known as gross margin and gross income. It is calculated by subtracting all costs related to sales i.e manufacturing expenses, raw materials, labour, selling and advertisement expenses from sales. It is an indication of the managements’ efficiency to use labour and material in the production process.

      Gross Profit = Net Sales – Cost of Goods Sold

    61. Question 61. How Do You Calculate The Following Inventory Levels?

      Answer :

      • Re-order level = Maximum Lead Time x Minimum Lead Time
      • Maximum level = Reorder Level + Reorder Quantity – (Minimum Usage x Minimum Lead Time)
      • Minimum level = Reorder Level – (Normal Usage x Normal Lead Time)
      • Danger level = Maximum Level x Lead time for Emergency purchases

    62. Question 62. What Can Be The Discrepancies In Material Receipt?

      Answer :

      There are two categories of material discrepancies:

      First category includes:-

      1. Quantity received in excess
      2. Quantity received in short
      3. Quantity damaged
      4. Receipt of incorrect quantity of material.
      5. These discrepancies are normally caused by the transportation system.
      6. Second category includes – Discrepancies in quality of material supplied.
      7. These discrepancies are caused by the manufacturer.

    63. Question 63. What Is Time Booking? What Are The Different Methods Used For Doing This?

      Answer :

      Time booking is recording the time actually spent by a worker on various jobs done by him in the factory for cost analysis and dividing labour cost into various jobs and departments. It also helps in control over wastage of time- idle time.

      Different methods used for time booking are:

      1. Daily Time Sheets
      2. Weekly Time Sheets
      3. Job Cards

      Daily Time Sheets: Under this method, a daily time sheet is provided to each worker on which time spent by him on various work orders is mentioned. This method can be conveniently used if the worker works on various jobs of short duration like in maintenance jobs. But this method is disadvantages also as it involves considerable paper work.

      Weekly Time Sheets: In this method time is recorded for all the jobs done during the week instead of recording the work done for a day only. One sheet is allotted to each worker. It involves less paper work. These types of weekly time sheets are useful for intermittent types of jobs like construction work.

      Job Card: Job Card is a method of recording details of time with reference to the jobs or work orders undertaken by the workers. This method facilitates the computation of labour cost with reference to jobs or work orders.

    64. Question 64. What Does Reconciliation Of Time Attended And Time Booked Tell Us?

      Answer :

      If the company is maintaining a system of time card and job card, the problem of reconciliation becomes simple as both the details are on the same card. If the time booked as per the job cards is less than the attendance time, this shows the idle time during which the worker has not done any work, though he was present in the factory. Thus, reconciliation of time attended and time booked tells us the actual amount of work done by the worker in comparison with the number of hours spent by him in the factory.

    65. Question 65. Define Simultaneous Equation Method And Repeated Distribution Method?

      Answer :

      Simultaneous equation method:- is the method where the amount of each production department can be obtained by solving simultaneous method.

      Repeated distribution method:- is where the overheads of service department are distributed to other departments on agreed percentage, and this process is repeated till the amount of overheads are exhausted to consider further apportionment.

    66. Question 66. What Is Budget? What Are Its Characteristics?

      Answer :

      A budget is a financial document or an action plan which is prepared and used to project future income and expenses. It outlines an organisation’s financial and operational goals. It can also include non- monetary information with the monetary information. They need to be made and approved in advance of the year in which they are to be used or implemented.

      Following are the characteristics of a good budget:

      1. It is expressed in quantitative or monetary terms.
      2. It is prepared for a fixed period of time It is prepared before the period in which it commences.
      3. Practical to implement.
      4. It spells out the objects and the policies to be pursued in order to achieve the objective of the organisation.
      5. Many people are involved in drawing up a budget.
      6. Flexible enough to allow changes in the changing environment.
      7. Prepared on the basis of established standards of performance.
      8. Analysis of cost and revenues.
      9. On the basis of budget report performance of the organisation is constantly monitored.

    67. Question 67. What Is Budgetary Control? What Are Its Characteristics?

      Answer :

      Budgetary Control is a methodical control technique whereby budgets are prepared relating the responsibilities of budget holders. It is a continuous comparison of actual results with budgeted results, to ensure that the objectives of the company’s policy are achieved; or to provide a basis for the change of those objectives. In simple terms, it is the analysis of the plans which the organisation has made; what was the result when those plans were implemented practically. After practical implementation of the budget if any variation is seen in the actual result to the budget result then the reasons for the variations are fount out and corrective actions are taken to correct variations.

      Following are the characteristics of Budgetary control:

      1. It deals with the establishment of the budgets.
      2. A control technique where actual results are extracted from the organisation’s operations and compared with the budget prepared.
      3. Any differences or variations are computed and made the responsibility of key individual who can either take actions for maintain the favourable variations or revise the budgets.

Financial Management Tutorial

Management Accounting Practice Tests

All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd DMCA.com Protection Status

Financial Management Tutorial