CWA ICWA Final Stage IV : Management Accounting Financial Strategy and Reporting - June 2007

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • June 2007

This Paper has 31 answerable questions with 0 answered.

F—18(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 each of the cases given below, one out of four answers is correct. Indicate the correct answer and give your workings/reasons briefly:

2x5=10

(i)

The growth rate of Ron Ltd. is 10 percent. The company has paid Rs. 5 as current dividend. If the cost of equity is 14%, the price of the company’s Share three years hence will be (rounded up to nearest Rupee)

200.00

183.00

175.00

146.00

(0)

(ii)

The Board of Directors of Bagh Ltd. is dissatisfied with last year’s ROE of 15%. If the profit margin and Asset Turnover Ratio remain unchanged at 8% and .25 respectively, by how much must the Asset to Equity Ratio increase to achieve 20% ROE?

Must increase by 4

Must increase by 0.4

Must increase by 0.5

Data insufficient

(0)

(iii)

An asset has a book value of Rs. 3,60,000. The current replacement cost of an indentical asset is Rs. 4,80,000. The net present value of further cash flows estimated to be generated by the asset is Rs. 6,00,000. What would be the Deprival value of asset, if the net realizable value of the same is Rs. 5,40,000?

Rs. 6,00,000

Rs. 5,40,000

Rs. 4,80,000

Rs. 3,60,000

(0)

(iv)

The current prices of a share of Somani Cement Ltd. is Rs. 55. The company is planning to issue one right share for every four equity shares. If the company targets that the ex–rights value of share shall not fall below Rs. 52, the subscription price for one rights share should be more than or equal to

Rs. 50

Rs. 48

Rs. 43

Rs. 40

(0)

(v)

The systematic risk of the stock of ABN Ltd. is 50, whereas the market risk is 32. The beta of the security will be

3.00

1.56

1.25

None of A, B and C

(0)

(b)

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

10x1=10

(i)

The value of EBIT at which EPS is Zero is called

A.	Financial break even point
B.	EBIT indifference point
C.	Break even EBIT
D.	All of the above.

(0)

(ii)

Net float means

A.	Difference between payment float and collection float
B.	The amount excess of the bank balance for which cheques may be issued
C.	When the net float is positive the balance in banks books is higher than the balance in the firm’s books.
D.	A and C

(0)

(iii)

EPS is nil only when

A.	EBIT is nil
B.	EBIT equals interest
C.	Tax rate is very high
D.	Interest is very high

(0)

(iv)

Which of the following can be termed as the objectives of inflation accounting?

A.	Improving quality of financial information for decision making
B.	Providing a better basis for inter period comparison of financial statements.
C.	To give effect to the changes in purchasing power of money while measuring the income and expenses during an accounting period.
D.	All of (A), (B) and (C) above

(0)

(v)

Hedging through forwards, futures, swaps etc, is an example of

A.	Risk avoidance
B.	Lose control
C.	Risk sharing
D.	Risk transfer.

(0)

(vi)

High asset turnover ratio indicates

A.	Large amount of investment in the fixed assets
B.	Large amount of investment in the current assets
C.	Large amount of sales value in comparison to total assets
D.	Inefficient utilization of the assets.

(0)

(vii)

A good responsibility accounting and reporting system is dependent upon

A.	The correct allocation of controllable fixed costs
B.	The correct allocation of controllable variable costs
C.	Identification of the management level at which all costs are controllable
D.	The proper delegation of responsibility and authority

(0)

(viii)

Disha Co. purchased a three-month US Treasury bill. Disha’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of three months of less when purchased. How should this purchase be reported in Disha’s statement of cash flows?

A.	As an outflow from investing activities
B.	As an outflow from financing activities
C.	As an outflow from operating activities
D.	Not reported in cash flow statement.

(0)

(ix)

In Porter’s Five forces model, which of the following competitive forces determine the strength of competition?

A.	Existing of substitute products
B.	Bargaining power of suppliers
C.	Rivalry among existing firms
D.	All of the above.

(0)

(x)

Which of the following standard deals with related party disclosure?

A.	AS − 17
B.	IAS − 24
C.	AS − 19
D.	IAS − 18

(0)

(a)

MKCLtd. is in the business of manufacturing and export of its product. Sometimes back in 2004, the Government put restriction on export of goods exported by MKCLtd. Due to that restriction MKCLtd. impaired its assets. The company acquired at the end of the year 2000 identifiable assets worth Rs. 5,000 lakhs and paid Rs. 7,500 lakhs, balance is treated as goodwill, The useful life of the identiable assets are 15 years and depreciated on straight–line basis.

When the restrictions were imposed at the end of the year 2004, the company recognized
the impairment loss by determining the recoverable amount of assets at Rs. 3,400 lakhs. In 2006,
Government lifted the restriction imposed on the export and due to this favourable change MKCLtd. re–

estimated recoverable amount, which was estimated at Rs. 4,275 lakhs.

The amortization period for Goodwill to be taken as 5 years as per AS – 14.
Required:

(i)	Calculation and allocation of impairment loss at the end of year 2004.
(ii)	Reversal of an impairment loss and its allocation as per AS – 28 at the end of year 2006.

(0)

(b)

Milton Ltd. initiated a lease for 3 years in respect of an equipment costing Rs. 3,00,000 with expected useful life of 4 years. The asset would revert to Milton Ltd. under the lease agreement. The other information available in respect of lease agreement are:

(i)	The unguaranteed residual value of the equipment after the expiry of the lease term is estimated at Rs. 40,000.
(ii)	The annual payments have been determined in such a way that the present value of the lease payment plus the residual value is equal to the cost of asset.
(iii)	Lease payment is to be made at the end of the year.
(iv)	The implicit rate of interest is 10%.

Ascertain in the hands of Milton Ltd. keeping in view the relevant Accounting Standard

(i)	The annual lease payment
(ii)	The unearned finance income.

Note: Extracted from the table of PV of Re: 1

Year
PVIF at 10%:

0
1,000

1
0.909

2
0826

3
0.751

4
0.683

(0)

(a)

The market received rumour about XYZ Corporation tie–up with a multinational company. This has induced the market price to move up. If the rumour is false, the XYZ Corporation stock price will probably fall dramatically. To protect from this, an investor has bought the call and put options.

He purchased one 3 months call with a striking price of Rs. 42 for Rs. 42 for Rs. 2 premium and paid Re. 1 per share premium for a 3 months put with a striking price of Rs. 40.

(i)	Determine the Investor’s position, if the tie–up offer bids the price of XYZ Corporation’s stock up to Rs. 43 in 3 months.
(ii)	Determine the Investors ending position, if the tie–up programme fails and the price of the stocks falls to Rs. 36 in 3 months.

(0)

(b)

From the following data for certain stock, find the value of a call option:

Price of stock now Exercise price	— —	Rs. 80 Rs. 75
Standard deviation of continuously
Compounded annual return Maturity period Annual interest rate	— — —	0.40 6 months 12%
Give Number of S.D. from Mean, (z) Area of the left or right (one tail):
0.25 0.30 0.55 0.60		0.4013 0.3821 0.2912 0.2578
e^{0.12 x 0.05}	=	1.0060
In 1.0667	=	0.0645

(0)

On the basis of the following income statement pertaining to Dark Ltd., you are required to prepare:

(1)	Gross value added statement; and
(2)	Statement showing reconciliation of gross value added with Profit Before Taxation.

Profit & Loss Account of Dark Ltd. for the year ended 31^st March, 2007
Income	Rs. in thousands	Rs. in thousands
Sales less Returns Dividends & Interest Miscellaneous Income		15,27,956 130 474
(A)		15,28,560
Expenditure
Production & Operational Expenses: Decrease in inventory of Finished Goods Consumption of Raw Materials Power & Lighting Wages, Salaries & Bonus Staff Welfare Expenses Excise Duty Other Manufacturing Expenses	26,054 7,40,821 1,20,030 3,81,760 26,240 14,540 32,565	13,42,010
Administrative Expenses:
Directors' Remuneration Other Administrative Expenses	7,810 32,565	40, 450
Interest on:
9% Mortgage Debentures Long-term Loan from financial institution Bank Overdraft Depreciation on Fixed Assets (B) Profit before Taxation: (A) – (B) Provision for Income Tax @ 35.875% Profit after Taxation Balance of Account as per last Balance Sheet	14,400 10,000 100	24,500 50,600 14,57,560 71,000 25,470 45,530 6,300 51,830
Transferred to
General Reserves 40% of Rs. 45,530 Proposed Dividend @ 22% Tax on Distributed Profits @ 12.81% Surplus carried to Balance Sheet	18,212 22,000 2,818	43,030 8,800

(0)

(a)

Explain the main difference between the Arbitrage Pricing Model (APM) and the CAPM and the practical difficulties of using the APM.

(0)

(b)

The summarised Balance Sheet of Penguin India Ltd. at 31^st March, 2007 was as follows:

	(Rs. in lakhs)	(Rs. in lakhs)
Fixed assets Current Assets Creditors falling due within 1 year Net Current Assets Equity Shares (Rs. 10 par) 7% Preference Shares (Rs. 100 par) Share Premium Account Profit & Loss Account 9% Debentures	590.00 (260.00)	1535.00 330.00 1865.00 200.00 100.00 110.00 655.00 800.00 1,865.00

Additional Information:

(1)

The current price of Equity Shares is Rs. 75 ex-dividend. The projected EPS and DPS for the current year are Rs. 16 and Rs. 10 respectively.

(2)

Dividend indicated on Preference Shares is 11%. The current price of the Preference Shares is Rs. 78.

(3)

The Debenture Interest has also been paid recently and the Debentures are currently trading at Rs. 80 per Rs. 100 nominal.

(4)

Corporation Tax: 35 per cent: Divident Tax: 10 per cent.

Requirements:

(i)

Calculate the gearing ratio for Penguin India Ltd. using

A.	Book Value
B.	Market Value

(ii)

Calculate the Company’s Weighted Average Cost of Capital (WACC) using the respective market values as weighting factors.

(0)

The following is an extract from the Financial Statements of M/s. Gautam Ltd., prepared in historical Cost Accounting method.

Income Statement for the year ended December 31. 2006
Particulars	Rs. in ’000
Sales Revenue Opening Stock Purchases Cost of Goods Sold Depreciation Operating Expenses	1,500 150 1,200 1,150 50 200
Balance Sheet as on December 31, 2006
Particulars	Rs. in ’000
Plant & Machinery Accumulated Depreciation Closing Inventory Accounts Receivable Cash at Bank Equity Capital Reserves & Surplus Accounts Payable	500 100 200 160 40 400 300 100

The Plant & Machinery was purchased on January 01, 2005 and is to be depreciated over its estimated useful life of 10 years using SLM. The Balance of the Reserves & Surplus was Rs. 2 crores at the beginning of the year 2006. Inventory Turnover on an average is two months.

The applicable price indices are given below:

Period	Inventory	Fixed Assets
31.12.2006 31.12.2005 01.01.2005 Average for 2006 Average for Nov./Dec. ’05 Average for Nov./Dec. ’06	142 — — 130 120 140	104 90 80 96 — —

You are required to reconstruct the Financial Statements as per the CCA method. Ignore MWCA (Monetary Working Capital Adjustment) and Gearing Adjustment. All workings should form part of your answer.

(0)

(a)

X Co. Ltd. supplied the following information. You are required to compute the basic earning per share:

	(Accounting year: 1.1.2005 — 31.12.2005)
Net Profit No. of Shares Outstanding prior to the Right Issue	: :	Year 2006: Rs. 20,00,000 Year 2006: Rs. 30,00,000 10,00,000 Shares
Right Issue	:	One new share for each four outstanding i.e. 2,50,000 Shares Rights Issue Price — Rs. 20 Last Date of Exercise Rights — 31.3.2006
Fare Rate of one Equity Share immediately prior to Exercise Right on 31.3.06	:	Rs. 25

(0)

(b)

X Ltd. earned Rs. 1.6 million on Net Asset of Rs. 20 million. The Cost of Capital is 11.5%. Calculate the net percentage Return on Investment and EVA.

(0)

(c)

Mention the assumptions of CAPM.

(0)

Write short notes on (any four) of the following:

4x4=16

(a)

Economic Value Added and its usefulness;

(0)

(b)

Segmental Reporting in India;

(0)

(c)

Currency Options;

(0)

(d)

Monetary Working Capital Adjustment (MWCA);

(0)

(e)

Accounting for knowledge Assets.

(0)

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