Name Chander Shekher
M.Com – 3rd Semester
Subject Name: Management Accounting
Subject code: MCC 304
Q1What are the limitations of management accounting
Limitations of Management Accounting
Management accounting, being comparatively a new discipline, suffers from certain limitations, which limit its effectiveness. These limitations are as follows: (i) Limitations of basic records: Management accounting derives its information from financial accounting, cost accounting and other records. The strength and weakness of the management accounting depends upon the strength and weakness of these basic records. In other words, their limitations are also the limitations of management accounting. (ii) Persistent efforts: The conclusions drawn by the management accountant are not executed automatically. He has to convince people at all levels. In other words, he must be an efficient salesman in selling his ideas. (iii) Management accounting is only a tool: Management accounting cannot replace the management. It is only an adviser to the management. The decisions regarding implementing his advice are to be taken by the management. There is always a temptation to take an easy course of arriving at a decision by intuition rather than going by the advice of the management accountant. (iv) Wide scope: Management accounting has a very wide scope incorporating many disciplines. It considers both monetary as well as nonmonetary factors. This all brings inexactness and subjectivity in the conclusions obtained through it. (v) Top-heavy structure: The installation of management accounting system requires heavy costs on account of an elaborate organization and numerous rules and regulations. It can, therefore, be adopted only by big concerns. (vi) Opposition to change: Management accounting demands a breakaway from traditional accounting practices. It calls for a rearrangement of the personnel and their activities which is generally not liked by the people involved.
Q2Explain the significance of financial analysis
Significance of Financial Analysis
The financial statements provide a summarized view of the operations of a firm. As a matter of fact, one can know much about a firm by a careful examination of its financial statements. However, the focus of the financial analysis is on the key figures contained in the financial statements and the significant relationship that exists between them. Thus, financial analysis helps in evaluating the relationship between different items constituting the financial statements and obtaining a better understanding about the financial position and the performance of the firm. The significance of financial analysis can be summarized as follows: (i) Helps in screening: Financial analysis can serve as a preliminary screening tool in the selection of investments. It greatly helps the investors in studying ‘3 Ps’, i.e., Prospects, Payment and Protection. The prospects of a firm can be judged by looking to both, its present and the future profitability. The capacity of payment can be judged on the basis of present and prospective liquidity of the firm. The protection can be judged on the basis of tangible assets backing, which the firm enjoys. (ii) Helps in forecasting: Financial analysis can be used as a forecasting tool for future profitability and financial soundness of the business. A comparative study of the key figures in the financial statements facilitates this work. (iii) Helps in diagnosis: The financial analysis helps the management in identifying the factors responsible for creating managerial, operating and other problems. (iv) Helps in evaluation: The financial analysis is an important tool for evaluating the performance of both the management and the organization. It is, thus, a yardstick used by the financial analyst to evaluate the financial condition and performance of the firm.
Q3Discuss the limitations of accounting ratios.