10x 2 = 20 Marks

What are Journals?

A journal is a detailed account that records all the financial transactions of a business, to be used for future reconciling
of and transfer to other official accounting records, such as the general ledger. A journal states the date of a transaction,
which accounts were affected, and the amounts, usually in a double-entry bookkeeping method.
What are Ledgers
A ledger is the principal book or computer file for recording and totaling economic transactions measured in terms of a
monetary unit of account by account type, with debits and credits in separate columns and a beginning monetary
balance and ending monetary balance for each account
List out the Objectives of Financial statement Analysis?
(i) To assess the earning capacity or profitability of the firm. (ii) To assess the operational efficiency and managerial
effectiveness. (iii) To assess the short term as well as long term solvency position of the firm. (iv) To identify the reasons
for change in profitability and financial position of the firm
What are funds flow statements?
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that
shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis
down to operating, investing, and financing activities.
What are cash flow statements?
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that
shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis
down to operating, investing, and financing activities.
What is marginal costing?
A conventional marginal cost is incremented by one unit; that is, it is the cost of producing one more unit of a good.
Intuitively, marginal cost at each level of production includes the cost of any additional inputs required to produce the
next unit.
What is margin of safety?
Margin of safety is the difference between the intrinsic value of a stock and its market price. Another definition: In break-
even analysis, from the discipline of accounting, margin of safety is how much output or sales level can fall before a
business reaches its break-even point.
What are make or buy decisions?
The make or buy decision involves whether to manufacture a product in-house or to purchase it from a third party. The
outcome of this analysis should be a decision that maximizes the long-term financial outcome for a company
What is budget?
The definition of a budget is an itemized summary of planned expenses for a given period along with the estimated
income for that period. ... An example of budget is how much a family spends on all expenses in a month. An example
of budget is how much a person plans on spending on a new bed
What is budgeting control?
Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given
accounting period. In other words, budgetary control is a process for managers to set financial and performance goals
with budgets, compare the actual results, and adjust performance, as it is needed.
What is P/V ratio?
The Profit Volume (P/V) Ratio is the measurement of the rate of change of profit due to change in volume of sales. It is
one of the important ratios for computing profitability as it indicates contribution earned with respect of sales. The PV
ratio or P/V ratio is arrived by using following formula
What is a balance sheet?
A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owner's equity
at a particular point in time.The income statement, which shows net income for a specific period of time, such as a
month, quarter, or year.
What are the objective of financial accounting?
In a practical sense, the main objective of financial accounting is to accurately prepare an organization's
final accounts for a specific period, otherwise known as financial statements. The three primary financial statements
are the income statement, the balance sheet, and the statement of cash flows.
What is absorption costing?
Total absorption costing is a method of Accounting cost which entails the full cost of manufacturing or providing a
service. TAC includes not just the costs of materials and labour, but also of all manufacturing overheads. The cost of
each cost center can be direct or indirect.
What is the objective of cost accounting?
Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of
cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of
each activity, assisting management in decision making and determination of break
What is a cost Centre?
A cost center is a department or function within an organization that does not directly add to profit but still costs the
organization money to operate. Cost centers only contribute to a company's profitability indirectly, unlike a
profit center, which contributes to profitability directly through its actions.
What is a cost sheet?
A cost sheet is a report on which is accumulated all of the costs associated with a product or production job. A cost
sheet is used to compile the margin earned on a product or job, and can form the basis for the setting of prices on
similar products in the future
What is master budget
A master budget is an expensive business strategy that documents expected future sales, productions levels,
purchases, future expenses incurred, capital investments, and even loads to be acquired and repaid. In other words, the
master budget includes all other financial budgets as wells as a budgeted income statement and balance sheet.

5 x 6 = 30 Marks
Distinguish cost accounting & Management accounting?
S.No. Cost Accounting Management Accounting

1 The main objective of cost accounting is to The primary objective of management accounting is to provide
assist the management in cost control and necessary information to the management in the process of its
decision-making. planning, controlling, and performance evaluation, and decision-
making.

2 Cost accounting system uses quantitative Management accounting uses both quantitative and qualitative
cost data that can be measured in data. It also uses those data that cannot be measured in terms of
monitory terms. money.

3 Determination of cost and cost control are Efficient and effective performance of a concern is the primary
the primary roles of cost accounting. role of management accounting.

4 Success of cost accounting does not Success of management accounting depends on sound financial
depend upon management accounting accounting system and cost accounting systems of a concern.
system.

5 Cost-related data as obtained from Management accounting is based on the data as received from
financial accounting is the base of cost financial accounting and cost accounting.
accounting.

6 Provides future cost-related decisions Provides historical and predictive information for future decision-
based on the historical cost information. making.

7 Cost accounting reports are useful to the Management accounting prepares reports exclusively meant for
management as well as the shareholders the management.
and creditors of a concern.

8 Only cost accounting principles are used Principals of cost accounting and financial accounting are used in
in it. management accounting.

9 Statutory audit of cost accounting reports No statutory requirement of audit for reports.
are necessary in some cases, especially
big business houses.

10 Cost accounting is restricted to cost- Management accounting uses financial accounting data as well
related data. as cost accounting data.
Distinguish funds flow & cash flow statements?

Basis of Funds Flow Statement Cash Flow Statement

Difference
Basis of Funds flow statement is based on broader Cash flow statement is based on narrow concept i.e. cash,
Analysis concept i.e. working capital. which is only one of the elements of working capital.

Source Funds flow statement tells about the various Cash flow statement stars with the opening balance of cash
sources from where the funds generated with and reaches to the closing balance of cash by proceeding
various uses to which they are put. through sources and uses.

Usage Funds flow statement is more useful in Cash flow statement is useful in understanding the short-term
assessing the long-range financial strategy. phenomena affecting the liquidity of the business.

Schedule of In funds flow statement changes in current In cash flow statement changes in current assets and current
Changes in assets and current liabilities are shown through liabilities are shown in the cash flow statement itself.
Working the schedule of changes in working capital.
Capital
End Result Funds flow statement shows the causes of Cash flow statement shows the causes the changes in cash.
changes in net working capital.

Principal of Funds flow statement is in alignment with the In cash flow statement data obtained on accrual basis are
Accounting accrual basis of accounting. converted into cash basis.

What are the types of profitability ration? Briefly explain

There are various profitability ratios which are used by companies to provide useful insights into the financial well-being
and performance of the business.
All of these ratios can be generalized into two categories, as follows:
A. Margin Ratios
Margin ratios represent the company’s ability to convert sales into profits at various degrees of measurement.
B. Return Ratios
Return ratios represent the company’s ability to generate returns to its shareholders.
Most companies refer to profitability ratios when analyzing business productivity, through comparing income to sales,
assets, and equity.
Six of the most frequently used profitability ratios are:

#1 Gross Profit Margin

Gross profit margin – compares gross profit to sales revenue. This shows how much a business is earning, taking into
account the needed costs to produce its goods and services. A high gross profit margin ratio reflects a higher efficiency
of core operations, meaning it can still cover operating expenses, fixed costs, dividends, and depreciation, while also
providing net earnings to the business. On the other hand, a low profit margin indicates a high cost of goods sold, which
can be attributed to adverse purchasing policies, low selling prices, low sales, stiff market competition, or wrong sales
promotion policies.

#2 EBITDA Margin
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It represents the profitability of a
company before taking into account non-operating items like interest and taxes, as well as non-cash items like
depreciation and amortization. The benefit of analyzing a company’s EBITDA margin is that it is easy to compare it to
other companies since it excludes expenses that may be volatile or somewhat discretionary. The downside of EBTIDA
margin is that it can be very different from net profit and actual cash flow generation, which are better indicators of
company performance. EBITDA is widely used in many valuation methods.

#3 Operating Profit Margin

Operating profit margin – looks at earnings as a percentage of sales before interest expense and income taxes are
deduced. Companies with high operating profit margins are generally more well-equipped to pay for fixed costs and
interest on obligations, have better chances to survive an economic slowdown, and are more capable of offering lower
prices than their competitors that have a lower profit margin. Operating profit margin is frequently used to assess the
strength of a company’s management since good management can substantially improve the profitability of a company
over and above its operating costs.
#4 Net Profit Margin
Net profit margin is the bottom line. It looks at a company’s net income and divides it into total revenue. It provides the
final picture of how profitable a company is after all expenses including interest and taxes have been taken into account.
A reason to use the net profit margin as a measure of profitability is that it takes everything into account. A drawback of
this metric is that it includes a lot of “noise” such as one-time expenses and gains, which makes it harder for
compatibility sake.

#5 Cash Flow Margin

Cash flow margin – expresses the relationship between cash flows from operating activities and sales generated by the
business. It measures the ability of the company to convert sales into cash. The higher the percentage of cash flow
means the more cash available from sales to pay for suppliers, dividends, utilities, and service debt, as well as to
purchase capital assets. Negative cash flow, however, means that even if the business is generating sales or profits, it
may still be losing money. In the instance of a company with inadequate cash flow, the company may opt to borrow
funds or to raise money through investors in order to keep operations going.
Managing cash flow is critical to a company’s success because always having adequate cash flow both minimizes
expenses (e.g., avoid late payment fees and extra interest expense) and enables a company to take advantage of any
extra profit or growth opportunities that may arise (e.g. the opportunity to purchase at a substantial discount the
inventory of a competitor who goes out of business).

#6 Return on Assets
Return on assets (ROA), as the name suggests, shows the percentage of net earnings relative to the company’s total
assets. The ROA ratio specifically reveals how much after-tax profit a company generates for every one dollar of assets
it holds. It also measures the asset intensity of a business. The lower the profit per dollar of assets, the more asset-
intensive a company is considered to be. Highly asset-intensive companies require big investments to purchase
machinery and equipment in order to generate income. Examples of industries that are typically very asset-intensive
include telecommunications services, car manufacturers, and railroads. Examples of less asset-intensive companies are
advertising agencies and software companies.

#7 Return on Equity
Return on equity (ROE) – expresses the percentage of net income relative to stockholders’ equity, or the rate of return
on the money that equity investors have put into the business. The ROE ratio is one that is particularly watched by stock
analysts and investors. A favorably high ROE ratio is often cited as a reason to purchase a company’s stock.
Companies with a high return on equity are usually more capable of generating cash internally, and therefore less
dependent on debt financing.

#8 Return on Invested Capital

Return on invested capital (ROIC) is a measure of return generated by all providers of capital, including
both bondholders and shareholders. It is similar to the ROE ratio, but more all-encompassing in its scope since it
includes returns generated from capital supplied by bondholders.
The simplified ROIC formula can be calculated as: EBIT x (1 – tax rate) / (value of debt + value of + equity). EBIT is
used because it represents income generated before subtracting interest expenses, and therefore represents earnings
that are available to all investors, not just to shareholders.

Discuss the significance of reporting to management?

Importance of management reporting

Management reporting plays an important role in current business environment .It gives a clear picture to executive
teams about the financial health of an organisation but doesn’t provide much information that help them to understand
how the business is performing at an operational level.

Characteristics of a Good Internal Management Reporting System:

Major characteristics of a good Internal Management Reporting Environment would be to meet all of the goals set out
below:

• Accuracy: Despite the inherent complexity, management reports need to be accurate. They need to represent
the company’s best estimate of the results at that point in time, and thus be believable to senior management.

• Timeframe: Information must be timely or it is rendered useless. Using technology widely available today,
companies can have information faster and more often than was possible even just a few years ago.
• Cost cutting: Management reports should never be so difficult to assemble that they do not justify their own
costs, both in terms of actual dollars spent as well as the cost of not having full buy-in from managers.
 • Detail: Ultimately, reports should be generated at the level where business decisions are made, and thus where
they can make the greatest impact. A firm must balance the competing objectives of accuracy and parsimony
against greater levels of detail.

What are the objectives of budgetary control?

The very objective of budgetary control is the allocation of responsibility with budgeted figures and develops a basis for
the measurement of performance to find the efficiency of business operation.
The general objectives of the budgetary control are presented below:

1. Planning: A budget is a plan that is prepared before a definite period of time to attain given objective. The budgetary
control compels the management at all levels to prepare the business activities to be performed in the days to come.
The reason is that a budget is prepared and implemented with the following objectives.

1. A budget is prepared after careful study and research thereby proper guidance is given to the executives.
2. A budget is used as mechanism through which management’s objectives and policies are affected.
3. A budget is used as a communication bridge between the top management executives and operatives in an
organization. The operatives are implementing policies of top management.
4. Out of available many alternatives, a suitable profitable course of action is selected.
5. A budget discloses the policy of the organization in numerical terms and attainable in a specific time.

2. Co-ordination: Co-ordination means an orderly arrangement of business activities in the pursuit of a common
purpose. The business activities are properly co-ordinates and achieved with the help of budgetary control technique. The
reason is that the line manager alone does not prepare a budget. A budget has close relationship with other budgets.
For example: The sales manager prepares sales budget on the basis of production budget. Likewise, the production
budget is prepared on the basis of raw materials budget, direct labor hours budget and machine hours budget. Hence,
the departmental budgets are interrelated and interdependent. A master budget is prepared through integration of various
budgets. In other words, a business organization is running through the coordination of various functional area executives.
Effective co-ordination is also based on adequate communication network. Every employee of the organization should
be informed in advance what is planned, how it is planned and when and by whom it is to be accomplished. In this way,
co-ordination is being achieved through budgetary control technique.

3. Control: Nothing can be achieved without exercising control. Mere framing and communicating the objectives are not
bringing anything to the organization. Hence there is a need of control mechanism such as budgetary control that is
used to achieve the objectives of organization.
Budgetary control places the responsibility of achieving targets on the executives who participated in the budgetary
planning function. With regard to the budgetary control, the actual performance of each functional area is measured and
compared with per-determined target i.e budget. Based on the comparison, if there is any difference, the reasons for such
differences were investigated, analyzed and take corrective action.
The budgetary control makes every executives became cost consciousness. Hence, there is no much difficulty on the
part of management to take severe action on executives. In other words, proper control can be exercised over expenditure.
Distinguish book keeping & accounting?

What are the steps in financial statement analysis?

There are generally six steps to developing an effective analysis of financial statements.

1. Identify the industry economic characteristics.

First, determine a value chain analysis for the industry—the chain of activities involved in the creation, manufacture and
distribution of the firm’s products and/or services. Techniques such as Porter’s Five Forces or analysis of economic
attributes are typically used in this step.

2. Identify company strategies.

Next, look at the nature of the product/service being offered by the firm, including the uniqueness of product, level of
profit margins, creation of brand loyalty and control of costs. Additionally, factors such as supply chain integration,
geographic diversification and industry diversification should be considered.
3. Assess the quality of the firm’s financial statements.

Review the key financial statements within the context of the relevant accounting standards. In examining balance sheet
accounts, issues such as recognition, valuation and classification are keys to proper evaluation. The main question
should be whether this balance sheet is a complete representation of the firm’s economic position. When evaluating the
income statement, the main point is to properly assess the quality of earnings as a complete representation of the firm’s
economic performance. Evaluation of the statement of cash flows helps in understanding the impact of the firm’s
liquidity position from its operations, investments and financial activities over the period—in essence, where funds came
from, where they went, and how the overall liquidity of the firm was affected.

4. Analyze current profitability and risk.

This is the step where financial professionals can really add value in the evaluation of the firm and its financial
statements. The most common analysis tools are key financial statement ratios relating to liquidity, asset management,
profitability, debt management/coverage and risk/market valuation. With respect to profitability, there are two broad
questions to be asked: how profitable are the operations of the firm relative to its assets—independent of how the firm
finances those assets—and how profitable is the firm from the perspective of the equity shareholders. It is also
important to learn how to disaggregate return measures into primary impact factors. Lastly, it is critical to analyze any
financial statement ratios in a comparative manner, looking at the current ratios in relation to those from earlier periods
or relative to other firms or industry averages.

5. Prepare forecasted financial statements.

Although often challenging, financial professionals must make reasonable assumptions about the future of the firm (and
its industry) and determine how these assumptions will impact both the cash flows and the funding. This often takes the
form of pro-forma financial statements, based on techniques such as the percent of sales approach.

6. Value the firm.

While there are many valuation approaches, the most common is a type of discounted cash flow methodology. These
cash flows could be in the form of projected dividends, or more detailed techniques such as free cash flows to either the
equity holders or on enterprise basis. Other approaches may include using relative valuation or accounting-based
measures such as economic value added.

What are the limitations of cash flow analysis?

Limitations of Cash Flow Statement:

Though the Cash Flow Statement is a very useful tool of financial analysis, it has its limitations which must be kept in
mind at the time of its use. These limitations are:

i. Non-cash Transactions are ignored: The Cash Flow Statement shows only inflows and outflows of cash. It does not
show non-cash transactions like the purchase of buildings by the issue of shares or debentures to the vendors or issue
of bonus shares.

ii. Not a substitute for an Income Statement: An income statement shows both cash and non-cash items. The
income statement shows the net income of the firm whereas the Cash Flow Statement shows only the net cash inflows
or outflows which do not represent the net profits or losses of the enterprise.

iii. Historical in Nature: It rearranges the existing information available in the income statement and the balance sheet.
It will become more useful if it is accompanied by the projected Cash Flow Statement.

iv. Ignorance: It ignores basic accounting concept, i.e., accrual concept.

v. What is Cash: It is difficult to precisely define the term ‘cash’. There are controversies over a number of items like
cheques, stamps, postal orders, etc. to be included in cash.

vii. Does not reveal true liquidity position: A Cash flow statement reveals the inflow and outflow of cash but the
exclusion of near cash items from cash obscures the true reporting of the firm’s liquidity position.

vii. Working Capital ignored: Working Capital being a wider concept of funds, a funds flow statement presents a more
complete picture than cash flow statement.
 List out the objectives of reporting?

According to International Accounting Standard Board (IASB), the objective of financial reporting is “to provide
information about the financial position, performance and changes in financial position of an enterprise that is useful to a
wide range of users in making economic decisions.”
The following points sum up the objectives & purposes of financial reporting –
1. Providing information to the management of an organization which is used for the purpose of planning, analysis,
benchmarking and decision making.
2. Providing information to investors, promoters, debt provider and creditors which is used to enable them to male rational
and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about various aspects of an
organization.
4. Providing information about the economic resources of an organization, claims to those resources (liabilities & owner’s
equity) and how these resources and claims have undergone change over a period of time.
5. Providing information as to how an organization is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an organization as to how
diligently & ethically they are discharging their fiduciary duties & responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union & Government.

10 x 3 = 30 Marks
Explain accounting concepts & convention?

Accounting Concepts
Four important accounting concepts underpin the preparation of any set of accounts:
Going Concern
Accountants assume, unless there is evidence to the contrary, that a company is not going broke. This has important
implications for the valuation of assets and liabilities.
Consistency
Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts
can, therefore, make more meaningful comparisons of financial performance from year to year. Where accounting
policies are changed, companies are required to disclose this fact and explain the impact of any change.
Prudence
Profits are not recognised until a sale has been completed. In addition, a cautious view is taken for future problems and
costs of the business (the are "provided for" in the accounts" as soon as their is a reasonable chance that such costs
will be incurred in the future.
Matching (or "Accruals")
Income should be properly "matched" with the expenses of a given accounting period.
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be
recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
The other conventions you will encounter in a set of accounts can be summarised as follows:
Monetary measurement
Accountants do not account for items unless they can be quantified in monetary terms. Items that are not accounted for
(unless someone is prepared to pay something for them) include things like workforce skill, morale, market leadership,
brand recognition, quality of management etc.
Separate Entity
This convention seeks to ensure that private transactions and matters relating to the owners of a business are
segregated from transactions that relate to the business.
Realisation
With this convention, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer
of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a
customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from
the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.
Materiality
An important convention. As we can see from the application of accounting standards and accounting policies, the
preparation of accounts involves a high degree of judgement. Where decisions are required about the appropriateness
of a particular accounting judgement, the "materiality" convention suggests that this should only be an issue if the
judgement is "significant" or "material" to a user of the accounts. The concept of "materiality" is an important issue for
auditors of financial accounts.
Explain the types of budgets?

1. Incremental budgeting
Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to obtain the current year’s
budget. It is the most common method of budgeting because it is simple and easy to understand. Incremental
budgeting is appropriate to use if the primary cost drivers do not change from year to year. However, there are some
problems with using the method:

• It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an opportunity to grow his
budget by 10% every year, he will simply take that opportunity to attain a bigger budget, while not putting effort
into seeking ways to cut costs or economize.
• It is likely to result in budgetary slack. For example, a manager might overstate the size of the budget that the
team actually needs so it appears that the team is always under budget.
• It is also likely to ignore external drivers of activity and performance. For example, there is very high inflation in
certain input costs. Incremental budgeting ignores any external factors and simply assumes the cost will grow
by, for example, 10% this year.

2. Activity-based budgeting
Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the
targets or outputs set by the company. For example, a company sets an output target of $100 million in revenues. The
company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out
the costs of carrying out these activities.

3. Value proposition budgeting

In value proposition budgeting, the budgeter considers the following questions:

• Why is this amount included in the budget?

• Does the item create value for customers, staff, or other stakeholders?
• Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?
Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers
value for the business. Value proposition budgeting aims to avoid unnecessary expenditures – although it is not as
precisely aimed at that goal as our final budgeting option, zero-based budgeting.

4. Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the assumption that all
department budgets are zero and must be rebuilt from scratch. Managers must be able to justify every single expense.
No expenditures are automatically “okayed”. Zero-based budgeting is very tight, aiming to avoid any and all
expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind
of bottom-up budgeting can be a highly effective way to “shake things up”.
The zero-based approach is good to use when there is an urgent need for cost containment, for example, in a situation
where a company is going through a financial restructuring or a major economic or market downturn that requires it to
reduce the budget dramatically.
Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs. However, it
can be an extremely time-consuming approach, so many companies only use this approach occasionally.

1. Incremental budgeting
Incremental budgeting takes last year’s actual figures and adds or subtracts a percentage to obtain the current year’s
budget. It is the most common method of budgeting because it is simple and easy to understand. Incremental
budgeting is appropriate to use if the primary cost drivers do not change from year to year. However, there are some
problems with using the method:

• It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an opportunity to grow his
budget by 10% every year, he will simply take that opportunity to attain a bigger budget, while not putting effort
into seeking ways to cut costs or economize.
• It is likely to result in budgetary slack. For example, a manager might overstate the size of the budget that the
team actually needs so it appears that the team is always under budget.
• It is also likely to ignore external drivers of activity and performance. For example, there is very high inflation in
certain input costs. Incremental budgeting ignores any external factors and simply assumes the cost will grow
by, for example, 10% this year.
2. Activity-based budgeting
Activity-based budgeting is a top-down budgeting approach that determines the amount of inputs required to support the
targets or outputs set by the company. For example, a company sets an output target of $100 million in revenues. The
company will need to first determine the activities that need to be undertaken to meet the sales target, and then find out
the costs of carrying out these activities.
3. Value proposition budgeting
In value proposition budgeting, the budgeter considers the following questions:

• Why is this amount included in the budget?

• Does the item create value for customers, staff, or other stakeholders?
• Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?
Value proposition budgeting is really a mindset about making sure that everything that is included in the budget delivers
value for the business. Value proposition budgeting aims to avoid unnecessary expenditures – although it is not as
precisely aimed at that goal as our final budgeting option, zero-based budgeting.

4. Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the assumption that all
department budgets are zero and must be rebuilt from scratch. Managers must be able to justify every single expense.
No expenditures are automatically “okayed”. Zero-based budgeting is very tight, aiming to avoid any and all
expenditures that are not considered absolutely essential to the company’s successful (profitable) operation. This kind
of bottom-up budgeting can be a highly effective way to “shake things up”.
The zero-based approach is good to use when there is an urgent need for cost containment, for example, in a situation
where a company is going through a financial restructuring or a major economic or market downturn that requires it to
reduce the budget dramatically.
Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs. However, it
can be an extremely time-consuming approach, so many companies only use this approach occasionally.
Levels of Involvement in Budgeting Process
We want buy-in and acceptance from the entire organization in the budgeting process, but we also want a well-defined
budget and one that is not manipulated by people. There is always a trade-off between goal congruence and
involvement. The three themes outlined below need to be taken into consideration with all types of budgets.

Imposed budgeting
Imposed budgeting is a top-down process where executives adhere to a goal that they set for the company. Managers
follow the goals and impose budget targets for activities and costs. It can be effective if a company is in a turnaround
situation where they need to meet some difficult goals, but there might be very little goal congruence.

Negotiated budgeting
Negotiated budgeting is a combination of both top-down and bottom-up budgeting methods. Executives may outline
some of the targets they would like to hit, but at the same time, there is shared responsibility for budget preparation
between managers and employees. This increased involvement in the budgeting process by lower-level employees may
make it easier to adhere to budget targets, as the employees feel like they have a more personal interest in the success
of the budget plan.

Participative budgeting
Participative budgeting is a roll-up approach where employees work from the bottom up to recommend targets to the
executives. The executives may provide some input, but they more or less take the recommendations as given by
department managers and other employees (within reason, of course). Operations are treated as autonomous
subsidiaries and are given a lot of freedom to set up the budget.
Briefly explain the techniques of financial statements?
(1) Vertical Analysis
(2) Trend Analysis
(3) Ratio Analysis.
(1) Vertical Analysis:
Vertical Analysis uses percentages to show the relationship of the different parts to the total in a single statement.
Vertical analysis sets a total figure in the statement equal to 100 percent and computes the percentage of each
component of that figure. The figure to be used as 100 per cent will be total assets or total liabilities and equity capital in
the case of balance sheet and revenue or sales in the case of the profit and loss account.
(2) Trend Analysis:
Using the previous year’s data of a business enterprise, trend analysis can be done to observe percentage changes
over time in selected data. In trend analysis, percentage changes are calculated for several successive years instead of
between two years. Trend analysis is important because, with its long-run view, it may point to basic changes in the
nature of the business. By looking at a trend in a particular ratio, one may find whether that ratio is falling, rising or
remaining relatively constant. From this observation, a problem is detected or the sign of a good management is found.
Trend analysis uses an index number over a period of time. For index numbers, one year, the base year is equal to 100
per cent. Other years are measured in relation to that amount. For example, an analyst may be interested in sales and
earnings trends for the past five years.
For this purpose, sales and earnings data of a company are given below to prepare further the trend analysis or
percentages:

The above data show a fairly healthy growth pattern but the pattern of change from year to year can be determined
more precisely by calculating trend percentages. To do this, a base year is selected and then the data are divided for
each of the other years by the base year data. The resultant figures are actually indexes of the changes occurring
throughout the period. If year 1 is chosen as the base year, all data for year-2 through 5 will be related to year 1, which
is represented as 100%.

To create the following table, each year sales is divided-from year 2 through years 5 – by Rs 202, the year 1
sales. Similarly, the net earnings for years 2 through 5 are divided by Rs 10.9, the year 1 net earnings

The trend percentages reveal that the growth in earnings outstripped the growth in sales for years 2 and 3, then fell
below the sales growth in the last two years. It is clear in this analysis of comparative statements that a disproportionate
increase in operating expenses emerged in year 5. One may analyse the year 4 data to determine if net income was
affected for the same reason or if the reduced growth was caused by other factors.
(3) Ratio Analysis:
Ratio analysis is an important means of expressing the relationship between two numbers. A ratio can be computed
from any pair of numbers. To be useful, a ratio must represent a meaningful relationship, but use of ratios cannot take
the place of studying the underlying data.
Ratios are guides or shortcuts that are useful in evaluating the financial position and operations of a company and in
comparing them to previous years or to other companies. The primary purpose of ratios is to point out areas for further
investigation. They should be used in connection with a general understanding of the company and its environment.
Comparison of income statement and balance sheet numbers, in the form of ratios, can create difficulties due to the
timing of the financial statements. Specifically, the profit and loss account covers the entire fiscal period, whereas the
balance sheet is for a single point in time, the end of the period. Ideally then, to compare an income statement figure
such as sales to a balance sheet figure such as receivable, we usually need a reasonable measure of average
receivables for the year that the sales figure cover.
However, these data are not available to the external analyst. In some cases, the analyst should take the next best
approach, by using an average of beginning and ending balance sheet figures. This approach smooth’s out changes
from beginning to end, but it does not eliminate problem due to seasonal and cyclical changes. It also does not reflect
changes that occur unevenly throughout the year.