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MP Taps and Fittings Enterprise*

CASELET, FINANCIAL MANAGEMENT
ET Cases - FLAME, 7 Pages
AUTHOR(S) : Dr. Manisha Singh, Faculty Member, IBS, Bangalore

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MP Taps and Fittings Enterprise

 

Mr. Manohar Prakash could not believe his luck. Just when he thought that the difficult days were over and the situation was under control, news came about accident of his accountant Mr. Arun Chandra. He was also informed that all the books of accounts were destroyed in the same accident. It was March 2016 now, the financial year closing time, the time to prepare the final accounts. What was to be done now …?

Background

Manohar Prakash (Manohar) and Arun Chandra (Arun) worked in SriRam Faucet Ltd., Okhla, Delhi, as Chief Marketing Manager and Senior Accounts Officer respectively. SriRam Faucet Ltd. used to manufacture taps and faucets and supply them to the construction companies like DLF, Parshwanath, Ansals, Amrapali, Unitech, etc. The business was good and the salary (INR40,000 per month) was adequate for Manohar. However, he always felt that he could earn more with little more efforts. As a Chief Marketing Manager, he used to interact a lot with the purchase heads, production heads, and CEOs of these construction companies. He had realized during these interactions that the home buyers always looked for variety as well as better features from the taps and faucets they bought and were ready to pay more for better utility products. He could see the supply gap on these lines and understood that the market needed more players who could cater to these needs........

Preparing for the Set-up

Armed with these information, Manohar went ahead to acquire infrastructure. He rented a building to serve as his factory cum office in Patparganj, Delhi, belonging to his friend Nixit Arnold (Nexit) who waived off the security deposit of INR 50,000 for him. Nixit let out his homeat a discounted rent of INR15,000 per month only (which otherwise would have amounted to at least INR20,000 per month)but with a condition in the rental agreement that if the ROI of the faucet business is more than 20% after first year, the rent would be revised upward by 20% in the second year and by 10% thereafter every year. Mahonar agreed and promised to send him the copy of his Profit and Loss account at the year end.............

Beginning of the Operations

The operations in the factory started in the last week of April after an order of 250 ‘wall-mounted kitchen faucets with spray/stream/foam selector options’ was received from Amrapali builders for one of their semi-luxury residential project in Noida Extension. Mahonar made sure that the quality of the faucets was the best and also that the delivery was as per schedule on May 15th 2015. He believed that a good word of mouth would ensure regular flow of orders from other customers as well...............

Issues and Challenges

However, things after the initial euphoria were not as rosy as Manohar thought. There were no orders. For the entire duration between mid-May to mid-June, he kept on knocking the doors of those construction companies for procuring sales orders. But there were hardly any requisitions from those builders mostly due to the logjam of Farmers - Greater Noida Urban development authority in the area where maximum residential projects were coming up..............

The Turnaround

Aditya did not disappoint him. Mid-July onwards, Manohar saw a steady flow of orders from builders across the city as well as outside of which only sales worth INR600,000 was through Manohar’s efforts and old contacts. So much so that he had to hire 5 additional workers in his factory from September 1st 2015 onwards at a wage rate of INR6,000 per month to ensure timely deliveries.............

The Data Loss

This was the last official conversation he had with Arun. After coming back from his vacation, Arun worked doubly hard to complete the pending accounting work for preparing final accounts. He used to take the journal books and ledger to his house after office for checking the work done by office manager in his absence and used to bring them back to the office the next day...........

Reports Available

This was a big setback for Manohar. There were no books of accounts to refer to, though he had a report prepared by Arun as a summary of major expenses paid (except salary, wages and rent) and of incomes through sales till December 31st 2015 on cash as well as credit basis (Exhibit III)..........

Assignment Questions

I. Clarify all the doubts (as mentioned above) divulged by Manohar by citing relevant accounting principles.

a) How should he treat the sale which was on approval basis? No approval was received till March 31st 2016, although his sales manager had assured him that the customer had liked the product and was keeping it.
b) How should he treat the rumor of his customer going into bankruptcy?
c) Should he include the sales order of INR210,000 from BPTP builder in his P/L account?
d) Before starting his business, Manohar had paid for information about types of faucets and their customization work. Could he show this in his final accounts? And in what way?
e) ........................

Exhibits

Exhibit I: Types of Faucets

Exhibit II: Additional Customization Required

Exhibit III: Summary Report of Incomes and Expenses Paid

Teaching Note Preview

MP Taps and Fittings Enterprise

 

Synopsis

Preparation of final accounts i.e., Trading and Profit & Loss (P/L) account, Cash Flow Statement and Balance Sheet is the basic requirement for all the business entities. While the format for preparing these final accounts has been specified as per schedule VI of the Companies Act 2013 for the public limited companies, the same is not mandatory for sole proprietors. However, the sole proprietors have to still prepare these financial statements, i.e., P/L account, Balance Sheet and Cash Flow statement at the end of each financial year for various purposes like calculating their tax liability and filing tax returns, applying for business loan, making capital expenditure decisions etc., apart from determining their business profitability and financial position.

The recording of business transactions and preparation of final accounts are based on Generally Accepted Accounting Principles (GAAP), accounting standards issued by Institute of Chartered Accountants of India (ICAI). These principles are rule of actions adopted by the accountants universally while recording accounting transactions which comprise of concepts and conventions. While the accounting concepts are basic assumptions on which accounting is based, the conventions are customs or traditions which guide the accountant while preparing financial statements.

Taking the above into consideration, the case describes the various situations and transactions where the recording of business transactions would be done using the various accounting concepts and conventions practiced by accountants in India as well as abroad.

It begins with a brief history about the formation of sole proprietorship business entity ‘MP Taps and Fittings Enterprise’ and then talks about various business activities and transactions during the year. Through this, the case tries to bring to the light the importance of recording the business transactions and treatment of the adjustment entries while preparing the financial statements.

Prerequisite Conceptual Understandings (PCUs)

• S N Maheshwari & S K Maheshwari, “An Introduction to Accountancy”
• Asish K Bhattacharyya, “Indian Accounting Standards: Practices, Comparisons, and Interpretations”
• http://www.icai.org/post.html?post_id=8660/Accounting Conventions and Standards, September 1st2014 (accessed date: March 12th 2015)
• http://www.yourarticlelibrary.com/accounting/final-accounts/types-of-adjustments-entries-in-finalaccounts/61564/

Case Positioning and Setting

MBA program – Financial Accounting course – To discuss various issues pertaining to the treatment of business transactions and preparation of final accounts

Expected Learning Outcomes

• Understand the application of accounting principles in recording of financial transactions
• Analyze the treatment of adjustment entries in the preparation of final accounts
• Understand the concept of Return On Investment (ROI) and its importance
• Discuss the concept of providing for future losses or cash requirements
• Analyze the differences between book profit and cash profit

Teaching Strategy

It would include questioning students in a way that helps them evaluate the concepts behind the statements and questions. Students would use domain knowledge and apply concepts relevant to the case to solve the stated problems.........

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Abstract

The caselet highlights the importance of applying the accounting concepts and conventions mandated by Institute of Chartered Accountants of India (ICAI) for preparation of final accounts by the business enterprises. It begins with a brief history about the formation of sole proprietorship business entity ‘MP Taps and Fittings Enterprise’ and then talks about various business activities and transactions during the year. Through this, the case tries to bring to the light the importance of recording the business transactions and treatment of the adjustment entries while preparing the financial statements. It also describes the various situations where the recording of business transaction would be done using different accounting concepts and conventions practiced by accountants in India as well as abroad.


Pedagogical Objectives

  • To understand the application of accounting principles in recording of financial transactions
  • To analyze the treatment of adjustment entries in the preparation of final accounts
  • To understand the concept of Return On Investment (ROI) and its importance
  • To discuss the concept of providing for future losses or cash requirements

Case Positioning and Setting
MBA program – Financial Accounting course – To discuss various issues pertaining to the treatment of business transactions, understand the applicability of accounting principles and preparation of final accounts


* FLAME INTERNATIONAL CASE CONFERENCE 2016

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- Abstract
- Caselet
- Teaching Note (**ONLY for Academicians)
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