CWA/ICWA Final :: Management Accounting—Financial Strategy and Reporting : June 2004

*F-18(MFS)* *Revised Syllabus*
Time Allowed : 3 Hours		Full Marks : 100
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:

5x2

(i)

ABC Ltde purchased the net assets of BCD Ltd on 1st April, 2004 for Rs. 16,00,000. The Balance Sheet of BCD Ltd on that date disclosed the following:

Goodwill
Plant and Machinery
Net Current assets

Rs. 1,50,000
Rs. 7,25,000
Rs. 4,35,000

The fair value of plant and machinery is Rs. 9,00,000. Net current Assets are started at fair value. The amount of Goodwill on purchase is :

(a)

Rs.2,90,000

(b)

Rs.2,65,000

(c)

Rs. 1,15,000

(d)

None of the above.

(ii)

An investor has Rs.5,00,000 to invest. What will be his expected risk premium in investing in equity versus risk-free securities in the following conditions:

Investment
Equity

Risk-free security

Probability
0.6
.04
1

Expected return
Rs. 2,00,000
(-) Rs.1,50,000
Rs.25,000

(a)

Rs. 35,000

(b)

Rs. 45,000

(c)

Rs.60,000

(d)

Rs.85,000

(iii)

A company has net sales of Rs.300 lakhs, cash expenses (including taxes) of Rs.140 lakhs and Depreciation expenses of Rs.50 lakhs. If debtors increase over the period by Rs.40 lakhs, cash from operation will be:

(a)

Rs.160 lakhs

(b)

Rs. 170 lakhs

(c)

Rs. 120 lakhs

(d)

Rs. 110 lakhs

(iv)

The value of an asset being held at net book value of Rs.2,10,000 has impaired. The selling price of the asset is Rs.2,00,000. an amount of Rs.4,00,000 is to be spent in realizing the selling price. The estimated present value of the asset is Rs.1,90,000. he value of impairment will amount to :

(a)

Rs. 14,000

(b)

Rs. 20,000

(c)

Rs. 10,000

(d)

None of these.

(v)

The risk-free rate is 10% and the expected return on market portfolio is 16%. A company considers a project that is expected to have a beta of 1.5. what is the required rate of return on the project under CAPM:

(a)

20%

(b)

18%

(c)

22%

(d)

19%

(b)

From the following choose the most appropriate answer. (only indicate a, b, c, d, as you thing correct)

10x1

(i)

In an inflationary period the use if FIFO will make which one of the following more realistic:

(a)

Balance Sheet;

(b)

Profit & Loss Account

(c)

Cash flow statement

(d)

None of these

(ii)

A company acquires a machine with estimated life of 10 years. If the company uses the reducing balance method instead of the straight line method, then

(a)	Profit will be higher in the 10th year.
(b)	Depreciation expense will be lower in the first year.
(c)	Total depreciation expenses for 10years will be lower.
(d)	Scrapping the machine in the 8th year will result in larger loss.

(iii)

A firm seeks to increase its current ratio from 1.5 before it closing date of the accounts. The action that would make it possible is:

(a)	Delaying payment of salaries.
(b)	Increase charge of depreciation.
(c)	Making cash payments to creditors
(d)	Selling marketable securities for cash at book value.

(iv)

To bring a tangible fixed asset into working condition following is not a directly attributable cost:

(a)	Import duty,	(b)	Initial delivery and handling
(c)	Professional fee,	(d)	Cost of design error.

(v)

Under the financial capital maintenance concept, the capital to be maintained is:

(a)	Productive capacity of the business.
(b)	The amount put into the business by the owners.
(c)	The purchasing power of the amount put into the business by both the owners and creditors.
(d)	The purchasing power of the sum originally put into the business by the owners.

(vi)

Porter’s model of competitive forces does not include:

(a)	existence of substitute products.	(b)	bargaining power of customers.
(c)	entry barriers	(d)	cost effectiveness.

(vii)

If current ratio is given as 2.5, liquid assets are Rs.60,000, then the value of the stock will be:

(a)

Rs.60,000

(b)

Rs.40,000

(c)

Rs.20,000

(d)

None of these

(viii)

Angle of incidence defines:

(a)	Systematic risk in CAPM model;
(b)	Post BEP relationship between total cost and total revenue,
(c)	Incidental factors in investments,
(d)	Marginal cost of production.

(ix)

The choice of skimming price strategy will be useful when:

(a)	You are entering the market with a new research product.
(b)	Operating in a perfect competitive market,
(c)	Operating in a price sensitive market,
(d)	Operating at the maturity stage of the product life cycle.

(x)

It is incorrect to say that:

(a)	When the asset underlying the futures contract is different from the asset whose price is to be hedged, it is called a cross hedge,
(b)	The scope of regression line of changes in the spot prices on charges in the future prices yields the optimum hedge ratio.
(c)	Derivatives derive their values from some underlying variable which may be share price, share price index etc,
(d)	A call option gives its holder the right to buy any quantity of the underlying asset from te other party at a pre-specified price.

(a)

Empire Enterprises Ltd. imported a machine from Germany at a cost of Euros 1,50,000. the exchange rate at the time of import was Rs.55 for 1 Euro. Customs duty was paid at 15% on this cost. The customs department applied a standard exchange rate of Rs.52 for 1 Euro for this purpose of computation. Other port charges, inward transport and octroi amounted to Rs. 2 lakhs.

Please turn over

( 2 )

F-18(MFS)
Revised syllabus

Marks

An engineer was invited from Germany for installation. His fees and expenses came to Rs.3 lakhs in rupees plus 10,000 Euros. This was remitted out at Rs.56 for 1 Euro.
A loan of Rs.50,000 was taken for the acquisition fo the machine at an interest of 8% per annum.
The loan was distributed on 1st September 2003. The exchange rate was Rs.55.80 for 1 Euro on this date.

The machine was installed and put to commercial use on 1st February 2004.
Depreciation is charged on straight line basis in the books of account at 13.91% per annum.
The exchange rate on 31st March 2004 was Rs.57 for 1 Euro. The exchange rate on 31st March 2005 was Rs. 59 for 1 Euro.

10% of the loan was repaid on 1st October, 2004. the exchange rate was Rs.57.75 on this day.
From the above information work out the following:

(i)	Original cost fo the machine in the books of accounts.
(ii)	Depreciation for the financial year ended 31st March 2004;
(iii)	Book value as on 31st March 2004;
(iv)	Exchange rate differences if any charged to P & L for the financial year ended 31st March 2004;
(v)	Depreciation for the financial year to end 31st March2005;
(vi)	Book value as on 31st March 2005
(vii)	Exchange rate differences if any to be charged to P & L for the financial year to end 31st March 2004.

Note: Apply the revised and latest accounting standards as applicable in India.

(b)

A plant was acquired 15 years ago at a cost of Rs.5 crores. Its accumulated depreciation as at 31st March 2004 is Rs.4.15 crores. Depreciation estimated for the financial year 2004-05 is Rs.25 lakhs. Estimated net selling price as at 31st March 2004 is Rs.30 lakhs which is expected to decline by 20% by the end of the current financial year.
Its value in use has been computed at Rs.35 lakhs as of 1st April 2004 which is expected to decrease by 30% by the end of the financial year.

(i)	Assuming other contributions for applicability of the impairment Accounting Standard are satisfied, what should by the carrying amount of this plan as at 31st March, 2005?
(ii)	How much is the amount of write off estimated for the financial year to end on 31st March, 2005?
(iii)	If the plant had been revalued ten years ago and the current reserve against this plat were to be Rs.12 lakhs, how would answers to (i) and (ii) above changes?
(iv)	If the value in use was zero and the enterprise were required to incur a cost of Rs.2 lakhs to dispose off the plant, what would be your responses to questions (i) and (ii) above?
(v)	What would be the liability if any in question (iv) above?

(a)

Ganguly International Ltd is developing a new production process. During the financial year ended 31st March 2004, the total expenditure incurred on this process was Rs.50 lakhs. The production process met the criteria for recognition as an intangible asset on 1st December2003. expenditure incurred till this date was Rs.22 lakhs

Further expenditure incurred on the process for the financial year ending 31st March 2005 was Rs.80 lakhs. As at 31st March 2005, the recoverable amount of the know how embodied in the process is estimated to be Rs.72 lakhs. This includes estimates of future cash outflows as well as inflows:
You are required to work out:

(i)	What is the expenditure to be charged to the P&L Account for the financial year ended 31t March 2004? (Ignore depreciation for this purpose)
(ii)	What is the carrying amount of the intangible asset as at 31st March 2004?
(iii)	What is the expenditure to be charged to the P & L Account for the financial year ended 31st March 2005? (Ignore depreciation for this purpose)
(iv)	What is the carrying amount of the intangible asset as at 31st March 2005?

(b)

Dravid investments Ltd deals in equity derivatives. Their current portfolio comprises of the following instruments:

Infosys Rs.5600 call Expiry June 2004 2,000 units bought at Rs.197 each (cost)
Infosys Rs.5700 call Expiry June 2004 3,600 units bought at Rs.131 each (cost)
Infosys Rs.5400 put Expiry June 2004 4,000 units bought at Rs.81 each (cost)

What will the profit or loss to Dravid investment Ltd in the following situations?

(i)	Infosys closes on the expiry day at Rs.6.041
(ii)	Infosys closes on the expiry day at Rs. 5.812
(iii)	Infosys closes on the expiry day at Rs.5.085

XYZ Ltd, has been offered a contract to manufacture three special communication systems machines for a municipal corporation for Rs.30,00,000. manufacture id to take a total of three years at the rate of one machine per year. Payment will be made as follows:

At the start of manufacture
At the end of first year
Upon completion

Rs.15,00,000
Rs.5,00,000
Rs.10,00,000

A special equipment is required to do the job. The equipment costs Rs. 8,00,000. It is to be installed and paid for immediately. Upon completion of the work, it can be sold for Rs.2,50,000.
The management accounting department of XYZ Ltd has prepared the following estimates of other resource requirements:

(a)

Materials

Tyep	Quantity (tons)	Available in stock now (tons)	Original cost/ton Rs.	Current purchase price per ton Rs.
MM – 1 MM – 2	120 60	60 20	2,800 2,000	4,000 3,000

Please turn over

( 3 )

F-18(MFS)
Revised syllabus

Marks

MM -1 is regularly used by the company in its different contracts. MM – 2 is a special type of material. If the stock is not used in the contract under consideration, it will have to be disposed of immediately at a cost of Rs.400 per ton. Materials for the contract are to be purchased and paid for annually in advance. Material prices are expected to increase at an annual compound rate of 10% owing to installation and other factors.

(b)

Labour
Estimated labour requirements

Skilled
Unskilled

18,000 hours
30,000 hours

Current wage rates are Rs.40 per hour and skilled labour and Rs.15 per hour for unskilled labour. Wages are expected to increase at an annual compound rate of 8%.

(c)

Overheads:
The company allocates overheads to contracts at a rate of Rs.60 per skilled labour hour, computed as follows:

Fixed overhead (including depreciation of Rs.20) Variable overhead		Rs.45.00 Rs.15.00
		Rs.60.00

Both fixed and variable overhead expenses are expected to increase at an annual compound rate of 6%.
The current price is likely to hold for the next 12 months. All cash flows (other than those mentioned above) arise on the last date of the year to which they relate.
The company needs a minimum return of 16% on its contracts. The present value of Re.1 at 16%.

Year 1
2
3

0.86
0.74
0.64

Calculate the project’s net present value and state whether XYZ Ltd, should undertake manufacture of the special communication system machines. Show all supporting calculations. Ignore taxation.

(a)

(i)	What is deprival value?
(ii)	How would you compute deprival value in the following cases?

2+6

	I Rs.	II Rs.	III Rs.
Historical cost (depreciated) Replacement cost of identical assets Net present value (value-in- use) Net realizable value	20,000 25,000 30,000 28,000	25,000 22,000 21,000 20,000	30,000 40,000 50,000 45,000

(b)

(i)	Explain the concept of “Physical capital maintenance”
(ii)	An enterprise starts the accounting period with the following:

2+6

Cash Machines Stock	Rs. 20,000 10 units 100 units
The enterprise ends the period with:
Cash Machines Stock	Rs.30,000 11 units 120 units
Replacement costs at the end of the year:
Machines Stock	Rs.10,000/unit Rs.25 /unit

Compute net profit of the enterprise if capital is maintained in physical terms and if replacement cost is used as the basis of valuation.
Ignore transactions with the owners.

Tukla Enterprise Limited has achieved an impressive rate of growth in its earnings per share (EPS) over a three year period. The following figures have been extracted from the company’s financial accounts:
Extracts from the profit and loss accounts for the years ended 31st March

12+4

	2002 Rs. lakhs	2003 Rs. lakhs	2004 Rs. lakhs
Net sales Cost of sales Profit before interest and taxes (PBIT) Interest expense Tax expense	600.00 552.00 48.00 16.00 14.00	601.00 544.80 56.20 22.00 14.20	602.00 536.80 65.20 30.00 14.40
Avg. no.of equity shares outstanding (lakhs)	15.00	13.00	12.00

Extracts from Balance Sheets as at 31st March

	2002 Rs. lakhs	2003 Rs. lakhs	2004 Rs. lakhs
Total assets Long-term debt Short –term debt Equity shares (Rs.10) Reserve and surplus	500.00 180.00 10.00 150.00 160.00	540.00 230.00 8.00 130.00 172.00	590.00 280.00 10.00 120.00 180.00

Required:
(a) Identify the variables that have contributed to he company’s EPS growth
(b) Is the growth in EPS transitory or is it sustainable? Explain.
Compute relevant rations and other relevant financial statistics to support your conclusions.

(a)

Distinguish between value added (VA) and economic value added (EVA)?

(b)

Explain the concept of market value added (MVA). How is EVA connected with MVA?

(c)

From the following information concerning Nebula Ltd. , prepare a statement showing computation of EVA for the year ended 31st March 2004:

Summarized Profit and Loss Account for the year ended 31st March 2004
	Rs.	Rs.
Sales Cost of goods sold Gross profit Expenses General Office and administration Selling and distribution Profit before interest and tax (PBIT) Interest Profit before tax (PBT) Tax 40% Profit after tax	2,00,000 2,50,000 64,000 36,000	20,00,000 12,00,000 8,00,000 5,14,000 2,86,000 36,000 2,50,000 1,00,000 1,50,000

Summarized Balance Sheet as on 31st Marc 2004
Liabilities	Rs.	Assets	Rs.
Equity shares Reserves Term loan Current liabilities	2,40,000 1,60,000 2,40,000 1,60,000	Fixed assets (Net) Current assets Stock Debtors Bank	6,00,000 1,20,000 60,000 20,000
	8,00,000		8,00,000

Other particulars:

1.	General expenses include R & D expenses of Rs.80,000. For EVA computation R & D expenses are to be considered as an investment .
2.	Cost of goods sold include depreciation expense of Rs.60,000.
3.	The expectation return of shareholders is 12%.

Write short note (any four)

(a)	Related party transaction
(b)	Segment reporting
(c)	Common size financial statement
(d)	Gering adjustment;
(e)	Corporate governance report

4x4=16

__________

CWA/ICWA Final :: Management Accounting - Financial Strategy and Reporting : June 2004