CWA ICWA Final - Stage IV : Management Accounting Financial Strategy and Reporting - December 2009

CWA ICWA Final - Stage IV • Management Accounting Financial Strategy and Reporting • December 2009

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 (carrying 20 marks) which is compulsory and any five (each carrying 16 marks) from the rest.
Please answer all bits of a question at one place. Working notes should form part of the answer.
Marks

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

Answer Question No. 1 (carrying 20 marks) which is compulsory
and any five (each carrying 16 marks) from the rest.

Please answer all bits of a question at one place.
Working notes should form part of the answer.

Marks

(a)

In each of the cases given below, one out of four answers is correct. Indicate the correct answer (=1 mark) and give your workings/reasons briefly in support of your answer.

2x5=10

(i)

KOOTCHAR LTD. is a chemical company having Return On Asset (ROA) of 10% and Debt/Equity (D/E) ratio of 2 for the year ended 31^st March 2009. If the internal rate on Debt is 5%, the Return On Equity (ROE) will be (Tax rate assumed to zero).

A.	20%
B.	19%
C.	9%
D.	Data Insufficient.

(0)

(ii)

Assume that call option on ABC Ltd. are to expire to–today. They have an exercise price of Rs.70, the share is trading at Rs.65 and the Option is selling at Rs.7. What is the net arbitrage profit?

A.	Rs.7
B.	Rs.12
C.	Rs.10
D.	Rs.15

(0)

(iii)

ASLEEN TEXTILES LTD. paid dividends per share of Rs.3.56 during the recently ended financial year and dividends are expected to grow 5.5% a year forever. The Beta Co–efficient of the stock of Asleen Textiles Ltd. is 0.90. What would be the intrinsic value of the share if the return on the market index is 12% and the risk free rate of interest is 6.25%?

A.	Rs.68.65
B.	Rs.65.56
C.	Rs.63.39
D.	None of the (A), (B), (C)

(0)

(iv)

MISS ARTITHI, an investor, has purchased a 3 months call option. On the Equity Share of VENTEXT LTD. for Rs.15 with exercise price of Rs.360. It has a present market price per share of Rs.336. At the end of 3 months Miss Artithi expected the share price to be in the following range of Rs.300 to Rs.400 with varying probability:

Expected price
Probability

Rs.300
0.30

Rs.350
0.40

Rs.400
0.30

What will be the expected value of call option price at maturity date?(ignoring time value of money).

A.	Rs.34.00
B.	Rs.30.00
C.	Rs.12.00
D.	Incomplete information.

(0)

(v)

The following information are regarding the Fixed Assets of XYZ Ltd.

Fixed Assets purchased on 1.4.2007: Rs.7,50,000.
Revaluation + 20% on 1.4.2009
Expected life: 15 years

The company charged straight line depreciation. How much will be credited to Revaluation Reserve A/c?

A.	Rs.1,20,000
B.	Rs.1,40,000
C.	Rs.1,50,000
D.	Rs.1,30,000

(0)

(b)

Choose the most appropriate one from the stated options and write it down (only indicate A, B, C, D as you think correct).

1x10

(i)

Which one of the following intangibles should not be recognised as per AS–26?

A.	Internally generated goodwill
B.	Licenses
C.	Patents
D.	Trade marks

(0)

(ii)

As per AS–20 if and enterprise has more than one class of Equity Shares, net profit or loss for the period is to be apportioned over the different classes of shares in accordance with

A.	The paid up capital of different of classes
B.	Their dividend rights.
C.	The number of shares in each class of shares.
D.	The issue price of each class shares.

(0)

(iii)

Realizability is crucial:

A.	in recognition of profit.
B.	in determination of fair value
C.	in determination of current value
D.	None of A, B, C

(0)

(iv)

Fair value is consistent with the:

A.	Present value
B.	Historical value
C.	Current value
D.	None of A, B, C

(0)

(v)

Current value systems of accounting for price level changes include:

A.	Economic value
B.	Current purchasing power
C.	Index at CPP date
D.	None of A, B, C

(0)

(vi)

According to AS–28, estimates of future cash flow should not include:

A.	Cash flow from financing activities.
B.	Cash flow from the continuing use of the assets.
C.	Cash flow to be received for the disposal of asset at the end of its useful life.
D.	None of A, B, C.

(0)

(vii)

An increase in which of the following variables will increase the value of put option and decrease the value of a call option?

A.	Stock volatility
B.	Time to expiration
C.	Current stock price
D.	Cash dividends

(0)

(viii)

Unsystematic risk affects:

A.	a single asset
B.	a large number of assets
C.	a small group of assets
D.	Both A and C of the above

(0)

(ix)

Business system analysis includes the analysis of:

A.	product design
B.	after–sales service
C.	product idea generation
D.	both A and B of the above

(0)

(x)

A project should be accepted when

A.	NPV = Zero
B.	NPV > 1
C.	NPV < 1
D.	None of A, B, C

(0)

A company, proposing to expand its production, can go in either for an automatic machine costing Rs.2,24,000, with an estimated life of 5 1/2 years or an ordinary machine costing Rs.60,000 having an estimated life of 8 years.
The annual sales and costs are estimated as follows:

		Automatic Machine Rs.	Ordinary Machine Rs.
1. 2. 3.	Sales Costs: Material Labour Variable Overhead	1,50,000 50,000 12,000 24,000	1,50,000 50,000 60,000 20,000

(a)	You as a Management Accountant of the firm compute the comparative profitability of the proposals under the Pay–Back period and Return on Investment methods.

(b)	Explain the difference in the result obtained under the two methods.

(c)	Submit a Report, with your recommendation, to the President of the Company.

8+4+4=16

(0)

(a)

RAY GOLD LTD. acquired an equipment on lease from ROLTA LTD. (Lessor) on April 1, 2009 for 3 years. Its useful life is 5 years. Both the cost and the fair market value of the equipment are Rs.9,00,000. The amount (Annual lease payment will be paid in 3 installments and at the termination of lease ROLTA LTD. (Lessor) will get back the equipment. The unguaranteed residual value at the end of 3 years is Rs.1,20,000. The (internal rate of return) IRR of the investments is 10%.
∴ [Given PVIFA (10%, 3 years) = 2.4868 and PVIFA (10%, 3 years) = 0.7513]
Requirements:

(i)	State with reason whether the lease constitute finance lease.

(ii)	Calculate unearned finance income, _____________ with reference to AS–19.

2+3=5

(0)

(b)

The following information pertains to TROMA LTD. for the year ending March 31.

	(Amount in Rs. thousand)
	2009	2008
Net Profit before Tax Current Tax Tax relating to earlier years Deferred Tax Profit after Tax	750.00 100.00 60.00 75.00 515.00	250.00 75.00 (32.50) 25.00 182.50
Other Information:

(i)	Profit includes compensation from Govt. of India towards loss on account of earlier year in 2006 (non–taxable).	250.00	Nil
(ii)	Outstanding convertible 8% preference shares 2,500 issued and paid on 30.09.2007. Face Value Rs. 100, conversion ratio 10 equity shares for every preference shares.
(iii)	15% convertible debentures of Rs.1,000 each. Total Face Value Rs.2,50,000 to be converted into 10 Equity shares per Debentures issued and paid on 30.06.2007.
(iv)	Total number of Equity shares outstanding as on 31.03.2009, 50,000 including Bonus shares issued on 01.01.2009 of 25,000 shares, Face value Rs.100.
(v)	The effective Tax rate of the company is 40%.

You are required to calculate the Earnings shares (EPS) – Keeping in view the relevant Accounting standard (AS – 20).

5+5+1

(0)

The Balance Sheet of Modern Manufacturing Ltd. as on 31^st March, 2009 is as below:–

			(Rs.in lakhs)
Liabilities		Assets
40,000 Equity shares of Rs.100 each Reserves & Surplus 10,000 6% cumulative preference Share of 100 each 20,000 9.5% cumulative preference Share of Rs.100 each 1000 7% Debenture of Rs.1000 each Current Liabilities & Provisions	40 20 10 20 10 50	Fixed Assets Less: Depreciation Current Assets	100 25	75 75
	150			150

Other financial data

Average market price

(i)
(ii)
(iii)
(iv)

per equity share
per 6% cum. Pref. share
per 9.5% cum. Pref. share
Per 7% Debenture

Rs.
Rs.
Rs.
Rs.

125
65
102
90

2.
3.
4.

Book value of Equity share
Average earning per share
E/P (18/125)

Rs.
Rs.

18
150
14.4%

Assume That corporate tax rate is 50% required to compute:

(a)	Cost of Capital weighted by Book values. [4]

(b)	Cost of Capital weighted by Market values. [4]

(c)	Explain major considerations in capital structure planning. [4]

(d)	Explain the situation of "Trading on equity". [4]

4+4+4+4
=16

(0)

(a)

Explain the differences between the Capital Market Line and Security Market Line.

(0)

(b)

If the risk–free return is 10% and the expected return on BSE index is 18% (and risk measurement by standard deviation is 5%), how would you construct and efficient portfolio to produce a 16% expected return and what would be its risk?

(0)

(c)

Explain the applications of capital asset pricing model.

(0)

The following information is extracted from the financial statements of GREEN INVIRON LTD. prepared in historical Cost Accounting method.

Income Statement for the year ended March 31, 2009.
	(Amount in Rs.Lakh)
Sales Revenue Opening Stock Purchases Cost of Goods Sold Depreciation Operating Expenses	3,000 300 2,400 2,300 100 400
Balance Sheet as on March 31, 2009.
	(Amount in Rs.Lakh)
Plant and Machinery Accumulated Depreciation Closing Inventory Accounts Receivable Cash at Bank Equity Capital Reserves & Surplus Accounts payable	1,000 200 400 320 80 800 600 200

The Plant & Machinery was purchased on April 01, 2007 and is to be depreciated over its estimated useful life of 10 years using Straight Line Method. The Balance of the Reserves & Surplus was Rs.4 crores at April 01, 2008. Inventory Turnover on an average is two months.

The applicable price indicates are given below:

Period	Inventory	Fixed Assets
31.03.2009 31.03.2008 01.04.2007 Average for 2008–09 Average for Feb/March ’2008 Average for Feb/March’ 2009	142 — — 130 120 140	104 90 80 96 — —

Required:

Reconstruct the Financial statements as per Current Cost Accounting(CCA) method. Ignore MWCA(Monetary Working Capital Adjustment) and Gearing Adjustment. All workings should form part of your answer.

4+6+6=16

(0)

(a)

What are the features or characteristics of Economic Value Added(EVA) which make it as an anchor for an integrated financial management system?

(0)

(b)

The abridged financial statements of MULTIPLEX LTD. for the year 2007–08 and 2008–09 are given below:

Profit and Loss Account for the years
	(Amount Rs.in lakh)
	2007–08	2008–09
Turnover Pre–tax Accounting Profit Taxation Profit after Tax Dividend Retained Earning	4,975.00 1,050.00 315.00 735.00 250.00 485.00	5,900.00 1,325.00 400.00 925.00 300.00 625.00
Balance Sheet as at
	(Amount Rs.in lakh)
	31^st March 2007–08	31^st March 2008–09
Fixed Assets Net Current Assets	1,850.00 2,000.00	2,400.00 2,500.00
	3,850.00	4,900.00
Financed by: Shareholders Funds Medium and long term Bank Loans	2,975.00 875.00	3,600.00 1,300.00
	3,850.00	4,900.00

Pre–tax accounting profit is taken after deducting the economic depreciation of the company’s Fixed Assets (also depreciation used for tax purpose).

Additionally, the following information are available:

(i)	Economic depreciation was Rs.475 lakh in 2007–08 and Rs.525 lakh in 2008–09
(ii)	Interest expenses were Rs.65 lakh in 2007–08 and Rs.90 lakh in 2008–09.
(iii)	Other non–cash expenses were Rs.160 lakh in 2007–08 and Rs.180 lakh in 2008–09.
(iv)	Corporate tax rate in 2007–08 and 2008–09 was 30%.
(v)	Multiplex Ltd. had non–capitalised leases value at Rs.175 lakh in each year 2007–08 to 2008–09.
(vi)	The company’s cost of Equity was estimated as 14% in 2007–08 and 16% in 2008–09.
(vii)	The company’s pre–tax cost of debt was estimated as 7% in 2007–08 and 8% in 2008–09.
(viii)	The target capital structure is 75% Equity and 25% Debt.
(ix)	Balance sheet capital employed at the end of 2006–07 was Rs.3475 lakh. Required: Estimate Economic Value Added (EVA) for MULTIPLEX LTD. for the year 2007–08 and 2008–09.

5+5=10

(0)

Write short notes on any four out of the following:

4x4=16

(a)

Impairment loss for discontinuing operation;

(0)

(b)

Common Size Financial Statement;

(0)

(c)

Deprival Value;

(0)

(d)

Internal rate of return method;

(0)

(e)

Decision Tree;

(0)

(f)

Related party transactions.

(0)

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