CMA (Cost & Management Accountancy) Intermediate: Financial and Cost Accounting Syllabus

Define 'cash equivalents' as per AS 3.

Short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value (generally with original maturity of three months or less).

In the absence of a partnership deed, at what rate is interest on a partner's loan to the firm allowed?

$6\%$ per annum. (No interest on capital, no interest on drawings, no salary; profits/losses shared equally.)

What is the formula for the gaining ratio of a partner?

$$\text{Gaining Ratio} = \text{New Ratio} - \text{Old Ratio}$$ It is computed when a partner retires or dies and the remaining partners acquire the outgoing partner's share.

What is the sacrificing ratio and when is it used?

$$\text{Sacrificing Ratio} = \text{Old Ratio} - \text{New Ratio}$$ It is used on the admission of a partner to determine the proportion in which old partners give up share, and to distribute the incoming partner's goodwill premium.

On the admission of a partner, how is an existing General Reserve (accumulated profit) treated?

It is distributed among the old partners in their old profit-sharing ratio before admission, since it belongs to them.

On the death of a partner, how is the deceased partner's share of profit up to the date of death usually calculated?

On the basis of time or sales: either the previous year's profit (or average profit) is taken proportionately for the period from the start of the year to the date of death, in the partner's profit-sharing ratio.

What is the purpose of preparing a Revaluation Account on admission, retirement or death of a partner?

To record the increase/decrease in the value of assets and liabilities, so that the resulting profit or loss on revaluation is shared among the OLD partners in their old profit-sharing ratio.

On dissolution of a partnership firm, what account is prepared to close the books and what is the order of payment of liabilities?

A Realisation Account is prepared. Order of payment: (1) outside creditors, (2) partners' loans/advances, (3) partners' capital, and (4) any surplus to partners in profit-sharing ratio.

What is the Garner v. Murray rule on dissolution?

When a partner is insolvent and unable to pay his capital deficiency, the solvent partners bear that deficiency in the ratio of their (last agreed) capitals — not in the profit-sharing ratio.

What is piecemeal distribution on dissolution, and name its two methods?

Distributing cash to partners as and when it is realised (rather than waiting for full realisation). Methods: (1) Maximum Loss Method (proportionate capital method) and (2) Highest Relative Capital Method (surplus capital method).

Distinguish between a Dependent Branch and an Independent Branch for accounting purposes.

A Dependent branch keeps no full set of books; the head office maintains records (Debtors System, Stock & Debtors System, Final Accounts System). An Independent branch maintains its own complete double-entry books and prepares its own financial statements.

In the Debtors System of dependent branch accounting, what does the Branch Account represent?

It is a nominal account in the head office books; its balance shows the profit or loss made by the branch for the period.

How are common (indirect) expenses apportioned in Departmental Accounts?

On a suitable equitable basis, e.g. rent on floor area, lighting on number of points/area, depreciation on asset value, selling expenses on sales, carriage inward on purchases, and works manager's salary on time devoted.

What is 'unrealised profit on stock' / stock reserve in departmental accounts?

When one department transfers goods to another at a price above cost, the profit element in the unsold closing stock of the receiving department is unrealised. A stock reserve is created to eliminate this inter-departmental profit.

What is the standard formula to compute an insurance claim for loss of stock by fire?

First find stock on date of fire = Opening stock + Purchases − Cost of goods sold (using G.P. rate on sales). Then: $$\text{Stock destroyed} = \text{Stock on date of fire} - \text{Salvage}$$

Under an average clause in a fire (loss of stock) policy, how is the admissible claim computed?

$$\text{Claim} = \frac{\text{Policy Amount (Sum Insured)}}{\text{Value of Stock on date of fire}} \times \text{Loss of Stock}$$ The average clause applies only when the policy value is less than the actual stock value (under-insurance).

In a Loss of Profit (consequential loss) insurance claim, how is the Gross Profit ratio applied?

$$\text{GP rate} = \frac{\text{Net Profit} + \text{Insured Standing Charges}}{\text{Turnover}} \times 100$$ The claim is computed on Loss of Gross Profit due to short sales plus increased cost of working, less savings in standing charges.

What is the 'indemnity period' in a loss of profit insurance policy?

The maximum period (beginning with the date of damage) during which the results of the business are affected as a consequence of the damage, for which the insurer is liable, as specified in the policy.

What is the term used for premiums received in advance / unexpired risk in insurance company accounts, and how is the reserve typically computed?

Reserve for Unexpired Risks. For miscellaneous/fire business it is commonly $50\%$ of net premium, and for marine business $100\%$ of net premium (as per IRDA norms).

Which key statements does an insurance company prepare under IRDA regulations?

Revenue Account (Form B-RA) for each class of business, Profit and Loss Account (Form B-PL), and Balance Sheet (Form B-BS), as prescribed by the IRDA (Preparation of Financial Statements) Regulations.

In banking company accounts, what is the difference between 'Rebate on Bills Discounted' and discount earned?

Rebate on bills discounted is the unexpired portion of discount on bills that mature after the year-end; it is a liability (income received in advance) and is deducted from discount income to arrive at discount actually earned for the year.

Define Economic Order Quantity (EOQ) and give its formula.

EOQ is the order size that minimises total of ordering and carrying costs. $$EOQ = \sqrt{\frac{2 \cdot A \cdot O}{C}}$$ where $A$ = annual demand, $O$ = ordering cost per order, $C$ = carrying cost per unit per year.

What is ABC analysis of inventory control?

A selective control technique classifying items by value: 'A' items = high value/low quantity (tight control), 'B' items = moderate value/quantity, 'C' items = low value/high quantity (loose control). Often called 'Always Better Control'.

Give the formula for the Re-order Level (ROL) in inventory level setting.

$$\text{ROL} = \text{Maximum usage} \times \text{Maximum lead time}$$ (Alternatively, $\text{ROL} = \text{Safety stock} + (\text{Average usage} \times \text{Average lead time})$.)

Give the formulas for Maximum Stock Level and Minimum Stock Level.

$$\text{Maximum Level} = \text{ROL} + \text{ROQ} - (\text{Min. usage} \times \text{Min. lead time})$$ $$\text{Minimum Level} = \text{ROL} - (\text{Average usage} \times \text{Average lead time})$$

Give the formula for the Average Stock Level.

$$\text{Average Stock Level} = \text{Minimum Level} + \frac{1}{2}\,\text{Re-order Quantity}$$ (or, $\frac{\text{Maximum Level} + \text{Minimum Level}}{2}$).

Under the FIFO method of pricing material issues, how are issues and closing stock valued in a period of rising prices?

Issues are priced at the oldest (earliest) prices, so issue cost is lower; closing stock is valued at the most recent (higher) prices, giving a higher closing stock value and higher reported profit.

How does LIFO pricing of material issues affect issue cost and closing stock during rising prices?

Issues are priced at the latest (most recent) prices, so issue cost is higher and reported profit lower; closing stock is valued at the oldest (lower) prices. (Note: LIFO is not allowed for financial statements under AS 2.)

How is the issue price computed under the Weighted Average method?

$$\text{Weighted Average Price} = \frac{\text{Total cost of materials in stock}}{\text{Total quantity in stock}}$$ recomputed after each new receipt; all issues until the next receipt are priced at this rate.

Distinguish between time-rate and piece-rate systems of labour remuneration.

Time rate: wages = hours worked × rate per hour, irrespective of output (guarantees wages, no output incentive). Piece rate: wages = units produced × rate per unit, linking pay directly to output (incentive to produce more, no guaranteed minimum).

What is labour turnover and name the methods of measuring it?

Labour turnover is the rate of change in the workforce during a period. Methods: (1) Separation Method, (2) Replacement Method, and (3) Flux Method. $$\text{Flux rate} = \frac{\text{No. of separations} + \text{No. of replacements/accessions}}{\text{Average number of workers}} \times 100$$