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

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

This Paper has 32 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.
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 which is compulsory and any five 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 (=1 mark):

2x5=10

(i)

CALRISK LTD. Currently pays a dividend of Rs.3 per share that is expected to grow at a rate 10% per annum for the next two years, after which it is expected to grow at rate of 8% forever. What value would you place on the stock of this company if a 15% rate of return is required? (Rounded off your answer to the nearest integer).[Given:PVIF (15%, 1 year, 2 years) = 0.8696, 0.7561]

A.	Rs.52.19
B.	Rs.47.96
C.	Rs.42.21
D.	None of A, B, C

(0)

(ii)

The total asset–turnover ratio and total asset to net–worth of ALEENA LTD. are 1.5 and 2.00 respectively. If the net–profit margin of the company is 5 per cent, its return on Equity (ROE) will be

A.	10.00%
B.	12.50%
C.	15.00%
D.	Insufficient information

(0)

(iii)

The covariance between the return on shares of AKRUTI LTD. and the return on market index is 25. What would be the systematic risk of Akruti Ltd. Shares, if the variance of the return on the market index is 20?

A.	20.00
B.	25.00
C.	31.25
D.	None of A, B, C

(0)

(iv)

In September 2008, a six month call on VINTEX LTD’s stock with an exercise price of Rs.30 sold for Rs.6. The stock price was Rs.25. The risk–free interest rate was 6% per annum. How much would you be willing to pay for a six month put on Vintex Ltd.’s stock with same exercise price? [Given: PVIF (6%, ½ year) = 0.9709]

A.	Rs.7.40
B.	Rs.12.50
C.	Rs.10.13
D.	Rs.15.31

(0)

(v)

BHARATI LTD. has an asset having book value of Rs.5,40,000. The current replacement cost of an identical asset is Rs.7,20,000. The net present value of future cash flows estimated to be generated by the asset is Rs.9,00,000. What would be the Deprival Value of the asset, if the net realizable value of the same is Rs.8,00,000?

A.	Rs.9,00,000.
B.	Rs.8,00,000.
C.	Rs.7,20,000.
D.	Rs.5,40,000.

(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=10

(i)

As per the Accounting Standard (AS)–20 which of the following is not potential equity shares?

A.	Share Warrants
B.	Employee Stock Option Plans
C.	Redeemable Preference Shares
D.	Convertible Preference Shares

(0)

(ii)

The CAPM establishes a linear relationship between which of the following two parameters?

A.	Alpha of the security and the risk–free rate of return.
B.	Alpha of the security and its beta
C.	Required rate of return of a security and its systematic risk.
D.	Required rate of return of a security and its expected rate of return.

(0)

(iii)

Four companies, have the following P/E ratios:
P–17, Q–24, R–12, S–8, —Which of the statement about the companies is incorrect?

A.	Q’s share price must be twice that of R
B.	P’s share price is 17 times its earnings.
C.	S has the lowest share price relative to its earnings growth
D.	Q has the greatest expectations of future earnings growth.

(0)

(iv)

In put–Call parity, the pay–offs of buying a stock can be replicated by

A.	Buying a Call and writing a put option.
B.	Buying a Call and buying a put option.
C.	Writing a Call and writing a put option.
D.	Buying two Calls and a put option

(0)

(v)

Equity multiplier is defined in Du Pont analysis as

A.	EPS/Market price of shares
B.	EPS/Book value of shares
C.	Average assets/Average equity
D.	PAT/Networth

(0)

(vi)

The ratio of the systematic risk or security to total risk can be symbolically represented as

A.	Market variance
B.	Beta
C.	Alpha
D.	Coefficient of determination

(0)

(vii)

As per As–17 the revenue of the reportable segments must have at least the following percentage of total revenue of the enterprise:

A.	75%
B.	80%
C.	90%
D.	60%

(0)

(viii)

The Capital Market line depicts the risk–return relationship for

A.	Aggressive securities
B.	Zero Beta portfolios
C.	Efficient Portfolios
D.	None of the above

(0)

(ix)

According to As–29, Restructuring Cost does not include –

A.	Cost of sale or termination of line business
B.	Cost of retraining or relocating continuing staff
C.	Marketing cost
D.	Both B and C above

(0)

(x)

Under the CPP method of Price level Accounting which of the following is not considered as Monetary Asset?

A.	Fixed Interest investments
B.	Debtors
C.	Inventory
D.	Both B and C of the above

(0)

(a)

Discuss the key factors that influence the value of a Call option.

(0)

(b)

An investor purchase Reliance May Futures (500 shares tick size) at Rs.1,200 and write a Rs.1,245 May call option at a premium of Rs.12(500 shares tick size). As on May 20, spot price rises and so the Future price and the Call premium. Future price rises to Rs.1,230 and Call premium rises to Rs.18. Brokerage is 0.045% for the transaction value of Futures and strike price net of Call premium for option.

(i)	Find out the profit/(loss) of the investor, if he/she settles the transaction on that date and at stated prices. (Assuming no transaction taxes and service taxes exist)

(ii)	Why did the investor write a Call? Why did he/she buy a Call subsequently to settle the written Call, he/she needed to buy a Call?

(2+2+2+2)
+(1+2)
=16

(0)

(a)

ENRON LTD. is developing a new distribution system of its material. The following are the costs incurred at different stages on research and development of the system:

Year	Phase/Expenses	Amount(Rs. In crore)
2004 2005 2006 2007 2008	Research Research Development Development Development	4 5 15 18 20

On 31.12.2008 ENRON LTD. identified the level of cost of savings at Rs.8 crore per annum expected to be achieved by the new system over a period of 5 years, in addition this system developed can be marketed by way of consultancy which will earn cash flow of Rs.5 crore per annum. ENRON LTD. demonstrated that new system meet the criteria of asset recognition on 01.01.2006. The incremental financing cost is 10% which represents current market assessment of the time value of money. System shall be available for use from 2009. Presuming that no active market exist to determine the selling price of product i.e. System Developed.
You are required to determine:

(i)	The amount/cost which will be expensed and to be capitalized as intangible assets.

(ii)	Impairment loss to be recognized for the year ended 31.12.2008.

(iii)

The value of new distribution system to be carried in the Balance Sheet – keeping in view the relevant Accounting Standards (AS–26 and As–28).

[Given PVIF at 10% for year 1 to 5:0.909, 0.826, 0.751, 0.683, 0.621]

3+4+2

(0)

(b)

Following is the data regarding five segments of GALAXY LTD:

(Rs.in lakh)

Particulars	Segments					Total
Particulars	M	N	O	P	R	Total
1. Segment Revenue: (a) External Sales (b) Internal Sales	—– 200	300 60	100 40	60 –	40 –	500 300
Total Revenue (a+b)	200	360	140	60	40	800
2. Segment Result: [Profit/(Loss)] 3. Segment Assets	30 50	50 100	(20) 30	15 15	5 5	80 200

The Director (finance) is of opinion that segments ‘M’ and ‘N’ alone should be reported.

Is he justified in his view? ‘ Discuss with reference to AS’17.

2+5

(0)

(a)

NAVIN ENTERPRISES LTD. provides the following extracts from its accounts as at 31st March, 2009:

	Rs.
Capital and Reserves Debt: Corporation Bank Loan (12%) Axis Bank Loan (13.5%) Capital Employed Profit before Tax Provision for Tax Profit after Tax	1,50,00,000 1,00,00,000 2,50,00,000 5,00,00,000 1,80,00,000 45,00,000 1,35,00,000

The risk–free rate of return in the economy is 10% and the premium expected from business in general is 5%. The beta of Navin Enterprises Ltd. shares is currently 1.28.

(i)	Work out the weighted Average Cost of Capital (WACC) in percentage terms (accurate to two decimal places)

(ii)	If beta is reduced to 1.18 in future, what will be the impact on the WACC?

5+5

(0)

(b)

DEEPAK CORPN. Had outstanding equity shares 50,00,000 on 01.01.2009. Net profit for the year is Rs.1,00,00,000; Deepak Corpn. Had 12%, 1,00,000 convertible debentures outstanding of Rs.100 each to be converted into 10 equity shares. Tax rate is 30%. Calculate (i) Basic EPS (ii) Diluted EPS.

1+5

(0)

(a)

Explain under Current Cost Accounting (CCA) method, what is meant by (i) Gearing Adjustment (ii) Cost of Sales Adjustment.

(0)

(b)

The summarized current cost Balance Sheet of NAVEENA LTD. are as follows:

(Rs. In thousand)
	31.3.2009	31.3.2008
Fixed Assets Stock Debtors less Creditors Taxation Proposed Dividends	5,950 3,450 1,725 (550) (250)	5,600 1,500 1,200 (430) (200)
Total	10,325	7,670
Share Capital Reserves Loan less Cash	3,000 2,990 5,990 4,335	3,000 1,615 4,615 3,055
Total	10,325	7,670

The historical cost Profit & Loss Account for the year ended 31.3.2009 are as follows:

(Rs. In thousand)
Turnover Operating Profit Interest Payable Profit before Tax Tax Profit after Tax Proposed Dividend Retained Profit	16,200 1,770 400 1,370 550 820 250 570

Notes:

(i)

The following current cost adjustments have been calculated:

(Rs. In thousand)
Cost of Sales Monetary Working Capital Depreciation	275 205 350

(ii)

The following are the movements of current cost Reserves;
Surplus or Revaluation:

(Rs. In thousand)
Fixed Assets Stock	1,200 350

You are required to prepare:

(i)	The current cost Profit & Loss Account for the year ending 31.3.2009.
(ii)	Statement of retained Profits/Reserve for the year ending 31.3.2009.

4+4+2

(0)

The following Balances are extracted from the Account of ENDALCO LTD. (EL) in respect of the Accounting year ended on March 31, 2009:

(Amount in Rs.lakh)
Sales (for 2008–2009) Fixed Assets Bank Overdraft(31.3.2009) Long–term Debt(31.3.2009) Equity Shares (Rs.10 each) Reserve and Surplus	300.00 75.00 7.50 45.00 15.00 75.00

Forecast for the year 2009–10:

(i)	Sales will increased by 25%. They will spread evenly throughout the year. There will be no further increase in Sales in the following year.
(ii)	Year–end Cash Balance should be a minimum of 2.5% annual Sales.
(iii)	Inventory Turnover:8times.
(iv)	Additional Capital Expenditure will equal depreciation.
(v)	Sundry Creditros:1 month‘s purchase.
(vi)	Upper limit of Bank borrowing :Rs.10 lakh.
(vii)	Accurals:3% of Sales.
(viii)	Gross margin:40% of Sales.
(ix)	Net Profit margin (after tax): 8% of Sales.
(x)	Average collection period:2 months.
(xi)	Purchases:50% of the cost of goods sold.
(xii)	Redemption of long–term Debts at the year of year:Rs.11.25 lakh.
(xiii)	The Company (EL) is subject to 40% Corporate Tax Rate.

Requirements:

(a)	Prepare a Proforma Profit &Loss Account for the year ended March 31, 2010.
(b)	Prepare a Proforma Balance Sheet as on 31st March, 2010. (All relevant workings are to be shown).

6+7+3
=16

(0)

(a)

Discuss the steps involved in implementing EVA (Economic Value Added) system.

(0)

(b)

SITERAZE LTD. (SL) engaged in manufacturing business furnishes the following Profit & loss Account:

Profit & Loss Account for the year ended March 31, 2009
(Amount in Rs. lakh)
Particulars	Notes
Turnover Other Income	1	2,982 104 3,086
Expenditure:
Operating Expenses Interest on 8% Debentures Interest on Cash Credit Excise Duty	2 3	2,670 98 15 195 2,978
Profit before Depreciation Less: Depreciation Profit before Tax		108 35 73
Provision for Tax Profit after tax Less: Transfer to Fixed Assets Replacement Reserve Less: Dividend Paid Retained Profit	4	38 35 6 29 12 17

Notes:

(1)	Turnover is based on invoice value and net sales tax.
(2)	Salaries, wages and other employee benefits amounting to Rs.1,476 lakh are included in operating expenses.
(3)	Cash credit represents a temporary source of finance. It has not been considered as a part of capital.
(4)	Tansfer of Rs.5.00 lakh to the credit of deferred tax account is included in provision for tax.

Required:

(i)	Prepare Value Added Statement for the year ended March 31, 2009 and

(ii)	Reconcile total Value Added with profit before taxation.

7+3

(0)

Write short notes on any four out of the following:

4x4=16

(a)

Onerous Contract;

(0)

(b)

Quality Financial Reporting (QFR);

(0)

(c)

Cash Generating Unit in the context of Accounting for impairment loss;

(0)

(d)

Global Reporting Initiative (GRI);

(0)

(e)

Currency Option;

(0)

(f)

Earning Value (Equity Share).

(0)

Disclaimer ♣ Privacy Policy ♣ Who We Are ♣ Terms of Service