CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - June 2006

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • June 2006

This Paper has 28 answerable questions with 0 answered.

F—19(MFS) Revised Syllabus
Time Allowed : 3 Hours	Full Marks : 100

The figures in the margin on the right side indicate full marks
Answer Question No. 1 which is compulsory and any five from the rest.
Marks

The figures in the margin on the right side indicate full marks

Answer Question No. 1 which is compulsory and any five from the rest.

Marks

(a)

In the cases below one of the answers is correct. Choose the correct answer and give your workings/reasons briefly:

2x5=10

(i)

An asset was acquired at the beginning of year 1 at a cost of Rs. 4,80,000. The asset is expected to have a residual value of nil and useful life of six years. The straight line method of depreciation is used. At the end of the third year, there are indications that the asset’s carrying amount has been impaired. The recoverable amount is estimated at Rs. 1,00,000. The impairment loss of the asset is:

A.	Rs. 2,20,000
B.	Rs. 1,40,000
C.	Rs. 1,00,000
D.	Rs. 2,40,000 .

(0)

(ii)

Saxy Ltd. has sales of Rs. 12,90,000 with an after-tax profit of Rs. 1,55,000. If the company has an asset turnover ratio of 2.55, the return on assets of the company is:

A.	20.64%
B.	25.64%
C.	28.64%
D.	30.64%

(0)

(iii)

Projects P₁, P₂, P₃ and P₄ have the following features:

	Net present value Rs.	Standard deviation Rs.
P₁	45,000	15,000
P₂	60,000	7,500
P₃	30,000	4,125
P₄	37,500	6,000

dominant project is:

A.	P₁
B.	P₂
C.	P₃
D.	P₄

(0)

(iv)

BLC Ltd. has Rs. 30,00,000 in 8% debentures, net operating profit of Rs. 10,00,000, and an overall capitalization rate of 12%. Its return on equity under the NOI approach is:

A.	14.25%
B.	15.25%
C.	16.25%
D.	17.25%

(0)

(v)

A company is considering undertaking a project that is expected to have a beta of 1.3. If the risk-free rate is 8% and the expected return on market portfolio is 16%, the required rate of return on the project would be:

A.	17.4%
B.	18.4%
C.	19.4%
D.	20.4%

(0)

(b)

From the following, choose the most appropriate answer (only indicate A, B, C, D as you think correct):

10x1=10

(i)

According to AS–17, the revenue of the reportable segments must have at least the following percentage of total revenue of the enterprise:

A.	75%
B.	90%
C.	60%
D.	100%

(0)

(ii)

The normal period of amortization for an intangible asset other than goodwill is

A.	The best estimate of its useful life
B.	A period of 10 years
C.	Useful life or 10 years whichever is shorter
D.	Useful life or 10 years whichever is longer

(0)

(iii)

Under AS–28, estimate of future cash flow should include

A.	Projections of cash inflows from the continuing use of the asset
B.	Cash inflows or outflows from the financial activities
C.	Income tax receipts or payment
D.	All of the above.

(0)

(iv)

Capital Market Line (CML) indicates

A.	Risk–return relationship and measure of risk for efficient portfolio
B.	Linear relationship between risk and expected return for efficient portfolio
C.	All of the above (A and B)
D.	Risk–return relationship and measure of risk for all portfolio.

(0)

(v)

Consider the following statements:

1.	Investor can only expect to receive a return for incurring unsystematic risk.
2.	Systematic risk can be eliminated by holding a well–diversified portfolio shares.

	Statement – 1	Statement − 2
A B C D	True True False False	True False True False

(0)

(vi)

Which of the following is not an assumption of Capital Asset Pricing Model (CAPM)?

A.	Investors are risk-averse
B.	There exists perfect competition
C.	Dividend payout ratio is nil
D.	No taxes or transaction costs are involved.

(0)

(vii)

Beta is a measure of

A.	Firm specific risk
B.	Market risk
C.	All of the above (A and B)
D.	Total risk.

(0)

(viii)

A put option whose strike price is below the market value is called

A.	Butterfly option
B.	At–the money option
C.	In–the money option
D.	Out–of–the money option.

(0)

(ix)

Porter’s model of competitive forces does not include

A.	Existing of substitute products
B.	Bargain power of suppliers
C.	Rivalry among existing firms
D.	Cost reduction.

(0)

(x)

The “Current Value System” refers to a family of approaches which does not include

A.	Current Purchasing Power (CPP)
B.	Current Cost Accounting (CCA)
C.	Economic Value
D.	Net Realisable Value.

(0)

(a)

What is Value Added? How does Value Added differ from Economic Value Added (EVA)?

(0)

(b)

The summarised Profit and Loss Account of Cimex Ltd. for the year ended 31 March 2006 was as follows:

	Rs.
Sales Less: Cost of Goods Sold Gross Profit Less: Office Administration, Selling and Distribution Expenses Net Profit before Interest and Taxes Less: Interest Expenses Net Profit before Tax Less: Income Tax Net Profit after Tax Add: Non–Trading income Profit available for distribution Dividends Paid and Payable	65,00,000 42,00,000 23,00,000 12,00,000 11,00,000 1,80,000 9,20,000 3,80,000 5,40,000 90,000 6,30,000 2,10,000
Analysis of Cost of Goods Sold:
Materials and Supplies Wages Depreciation Electricity	40% 50% 4% 6%
Analysis of Office Administration, Selling and Distribution Expenses:
Salaries Postage, Printing and Stationery Rent, Electricity and Insurance Depreciation	60% 15% 20% 5%

Prepare a Value Added Statement for the year ended 31 March 2006.

(0)

(a)

The following information pertains to RICO Ltd. in respect of the accounting year ending with 31.3.2006.

Net Profit attributable to Equity Shareholders
No. of Equity Shares outstanding
Average fair value per Equity Share during the year
Options outstanding

8% convertible Preference Shares of Rs. 100 each
convertible into 4 Equity Shares each
10% convertible Debentures of Rs. 100 each
convertible into 1 Equity Share each
Corporate Dividend Tax Rate
Corporate Tax Rate

Rs. 200 lakh
40 lakh
Rs. 100
20 lakh with exercise price
of Rs. 60

5lakh

8 lakh
10%
35%

From the given information, you are required to

(i)	Determine the order in which dilutive Shares should be included in the Computation of Weighed average number of Shares, and
(ii)	Calculate the diluted Earnings Per Share (EPS) — with reference to the relevant Accounting Standard.

(0)

(b)

APAR Ltd. is carrying an aircraft in its books at Rs. 60 crores on 31.3.2006 (Balance Sheet date). However, if it is sold, it will fetch Rs. 50 crores and directly attributable disposal cost will be 8% of the Sale proceeds. If the aircraft is used it will generate cash flows for the next 4 years at the end of which period it will have a disposal value of Rs. 6 crores. The anticipated net cash flows for the next 4 years are 18, 15, 15 and 12 crores respectively.

The firm’s cost of Capital is 15%.
You are required to compute the impairment loss on aircraft in accordance with AS–28.
Note: Extract from P.V.table:

P.V. factor at 15% Discount rate are:
Year: P.V.:	0 1.000	1 0.870	2 0.756	3 0.658	4 0.572

(0)

(a)

Explain under Current Cost Accounting (CCA) method what is meant by (i) Gearing Adjustment (ii) Monetary Working Capital Adjustment.

(0)

(b)

Following are the balances taken from the Balance Sheet of CBA Ltd. prepare according to Current Cost Accounting method:

	As on 31.3.2005 Rs.	As on 31.3.2006 Rs.
Debentures Creditors Bank Overdraft Prov. for Taxation Cash Paid up Share Capital General Reserve Proposed Dividend Additionally the following informations are available: Depreciation Adjustment Fixed Assets disposal Cost of Sales Adjustments Monetary Working Capital Adjustment	2,80,000 80,000 1,00,000 30,000 1,00,000 5,00,000 2,41,600 10,000 34,000 36,000 32,400 22,400	2,80,000 70,000 80,000 28,000 1,50,000 6,00,000 3,41,120 12,000 –

You are required to determine:

(i)	Gearing Adjustment
(ii)	Current Cost Adjustment are share other Gearing Aksustment.

(0)

Ratul Ltd. has approached its banker for extending the line of credit from Rs. 1,50,000 to Rs. 3,00,000. The company has Rs. 1,00,000 outstanding at year end. The company has provided the banker with the following:

Balance Sheet asn on 31 March 2006
	Rs.		Rs.
Share holders' Equity Long–term Debt Notes Payable Creditors Accrued Expenses	4,20,000 4,40,000 1,00,000 5,40,000 70,000	Fixed Assets (Net) Current Assets: Stock Debtors Cash	6,40,000 4,00,000 5,00,000 30,000
	18,46,000		18,46,000

Profit and Loss Account for the year ended 31 March 2006
			Rs.
Sales Cost of Goods Sold Gross Profit Operating Expenses: Depreciation Other	1,00,000 9,00,000		50,00,000 37,50,000 12,50,000 10,00,000
Profit before Interest and Taxes (PBIT) Interest Expense Profit before Tax (PBT) Income Tax 40% Profit after Tax			2,50,000 75,000 1,75,000 70,000 1,05,000
Projections for 2006–07: Sales increase Cost of Goods Sold percentage Depreciation Expense increase by Operating Expense increase Increase in Interest Expense Purchase of new equipment Retirement of long–term Debt Tax Rate		20% 75% Rs. 37,000 15% 20% Rs. 1,85,000 Rs. 60,000 Unchanged

Partial Proforma Balance Sheet as on 31 March 2007
	Rs.		Rs.
Share holders' Equity Long–term Debt Creditors Notes Payable Accrued Expenses	? 3,80,000 6,30,000 ? 80,000	Fixed Assets (Net) Current Assets: Stock Debtors Cash	6,88,000 5,48,000 5,80,000 30,000
	18,46,000		18,46,000

The company intends to use the line of credit to the extent necessary to support its operations.
You are required to:

(a)	Prepare a performa Profit and Loss Account for the ended 31 March2007;

(b)	Compute the additional line of credit that will be needed; and

(c)	Complete the proforma Balance Sheet.

6+6+4=16

(0)

A business firm has an inventory of 1000 units at the start of an accounting period. All of these units are sold during the period. At the end of the period it has 1200 units of inventory. There is no withdrawal or introduction of Capital during the period. The following prices prevailed:

		Price per Unit Rs.
Opening Position (1000 Units) Historical Cost Replacement Cost Net Realisable Value Closing Position (1200 Units) Historical Cost Replacement cost Net Realisable Value		20.00 22.00 23.000 30.00 34.00 36.00
Price Index Start of the period End of the period	100 120

The opening inventory was acquired when the price index was 100. The index number prevailed on the date the closing inventory was acquired: 120.
The business firm has no other assets or liablities.
Compute net profit of the period using all posible combinations of bases of valuation and measures of capital maintenance.

(0)

The most recent statement of the financial position of a small wholesale business of a sole trader appears in summarised form as below:

Profit and Loss Account for the year ended 30^th June 2004
	Rs.
Sales Cost of Goods Sold Gross Profit Operating Expenses Net Profit	36,000 23,040 12,960 8,640 4,320

Balance Sheet as at 30^th June 2004
	Rs.	Rs.	Rs.
Fixed Assets, Net of accumulated
Depreciation on a straight line basis			2,350
Current Assets:
Stocks	7,680
Debtors	6,000
Cash	1,178	14,858
Less: Current Liabilities:
Sundry Creditors	1,920
Trade Expenses	720	2,640	12,218
Proprietor’s Interest			14,568

The proprietor is 60 years old and plans to retire in 5 years time. Demand for his product was constant throughout the year ended 30^th June, 2004 and up to that date he had expected to be continue at the same level but he now expects it to fall steadily by an equal monthly amount over the 5 year period beginning in July 2004 and falling to zero by 30^th June, 2009. He asks you to assume that there will be no changes in sales price or purchase price in the products stocked and sold over the period nor in the periods of credit received and allowed nor in stock turnover period and also assume that he can reduce his operating costs by about fifth annually, starting immediately in July 2004.
The business is not seasonal.
You are required to calculate the amount of net cash flow for the year ended 30^th June, 2005.

(0)

Write short notes on the following:

4x4=16

(a)

Corporate Governance Report

(0)

(b)

Real Options

(0)

(c)

Related Party Disclosures

(0)

(d)

Feature of Intangible Assets.

(0)

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