CA Intermediate May 2024 Suggested Answers Group II (All Papers)

FOR CA INTERMEDIATE EXAM PREPARATION

CA Intermediate 2024
Suggested Answers ·
Group II (All Papers)
EXAM YEAR TYPE SUBJECT

CA Intermediate 2024 Suggested Answers Group II (All Papers)
DATE

May 2024

Notes · Sample Papers · Previous Year Papers · Mock Tests

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SUGGESTED ANSWERS TO QUESTIONS SET AT THE

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INTERMEDIATE EXAMINATION
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MAY, 2024

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BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)

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The Suggested Answers published in this volume do not constitute the basis for
evaluation of the students’ answers in the examination. The answers are prepared
by the Faculty of the Board of Studies with a view to assist the students in their
education. While due care is taken in preparation of the answers, if any errors or
omissions are noticed, the same may be brought to the attention of the Joint
Director, Board of Studies. The Council of the Institute is not in anyway
responsible for the correctness or otherwise of the answers published herein.

©THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system, or transmitted, in any form, or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without prior permission, in
writing, from the publisher.

Edition : August, 2024

Website : www.icai.org

Department/ : Board of Studies
Committee

E-mail : [email protected]

Price :

ISBN No. :

Published by : The Publication & CDS Directorate on behalf of The
Institute of Chartered Accountants of India, ICAI
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Contents
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Paper 4. a g
Cost and Management Accounting ............................................ 1 – 27

Paper 5. Auditing and Ethics ................................................................................ 28 – 48

Paper 6. Financial Management and Strategic Management.................. 49 – 83

Examiners’ comments on the performance of the examinees ............................. 84 – 91

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PAPER – 4: COST AND MANAGEMENT
ACCOUNTING
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Question No. 1 is compulsory.

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agIn case, any candidate answers extra question(s)/ sub-question(s) over and
Attempt any four questions out of the remaining five questions.

above the required number, then only the requisite number of questions first
answered in the answer book shall be valued and subsequent extra
question(s) answered shall be ignored.
Working notes should form part of the answer.
Question 1

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(a) Tesco cycles Ltd. used about 3,60,000 cycle locks per annum and the usage

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is fairly constant at 30,000 per month. The cycle lock costs ` 240 each at

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wholesale rate and carrying cost is estimated to be 10% of the annual

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average inventory value. The cost to place an order is ` 1200. It takes 45 days

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to receive delivery from the date of order. In order to avoid any kind of
disruption in assembly line, safety stock of 6,500 cycle locks is always
maintained by Tesco Cycles Ltd.
(Assume 360 days in a year).
Compute:
(i) E.O.Q.
(ii) The re-order level.
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(iii) The company has been offered a quantity discount of 2% on the purchase

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of cycle locks provided the order size is 30,000 units at a time. Advise

em (b) A company produces two products, A and B, through laajoint production
whether quantity discount offer can be accepted?

l as process. The total joint production cost incurred is as a
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under:

Material ` 20,000
Labour ` 10,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Variable overheads ` 6,000
Fixed Overheads ` 24,000
Product A and B can be sold for ` 20 per unit and ` 15 per unit respectively
at split off point. The produced quantities are Product A-2,000 units and
Product B – 4,000 units.
(i) You are required to calculate the joint production cost allocation for each
product using the:
(a) Physical unit method.
(b) Contribution margin method.
(ii) Product B can be further processed by incurring expenditure of
` 12,000. Loss in further processing is 2%. It can be sold @ ` 18 per unit.
Explain the impact on profitability if Product B is further processed.
(c) Following data is available for XYZ Ltd. for the month of February 2024:

Standard working hours 8 hours per day of 6 days per week
No. of weeks in the month 4
Maximum capacity 150 employees
Actual working 125 employees
Actual usage of Budgeted Capacity 86%
Ratio
Efficiency Ratio 110%

You are required to calculate the following:
(i) Actual Hours worked.
(ii) Standard Hours for actual output.
(iii) Activity Ratio.
(iv) Standard Capacity Usage Ratio.
Answer
(a) (i) Calculation of Economic Order Quantity

2AO 2 ×3,60,000 units × `1200
EOQ = = = 6,000 units
C `24

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Where,
A = Annual Demand = 3,60,000 units
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O = Ordering cost per order = `1200
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C = Inventory carrying cost per unit per annum = 10% of `240 = ` 24
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s em Level = Safety Stock + Lead Time Consumption l a
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(ii) Re-order

g la = 6,500 + (1,000 x 45) units = 51,500 units
a Or,
Minimum level of cycle locks + [Average rate of consumption ×
Average time required to obtain fresh delivery]
= 6,500 + (1,000 x 45) units = 51,500 units
(iii) Evaluation of Profitability of Different Options of Order Quantity

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(a) When EOQ is ordered (order size of 6,000 units)

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. units ` 240) (`)
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e units/6,000 units)
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Purchase Cost (3,60,000  8,64,00,000
Ordering Cost
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l` 1,200]
[(3,60,000 
72,000

Carrying Costa (6,000 units `240 ½   
72,000
10/100)
Total Cost 8,65,44,000
(b) When Quantity Discount is accepted (order size of 30,000 units)

(`)
Purchase Cost [3,60,000 units  ` 235.2 (240-
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8,46,72,000

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Ordering Cost [(3,60,000 units/30,000 units)
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

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`1,200]
` 235.2 ½la
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las Carrying Cost (30,000 units 

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 

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3,52,800

a
10/100)
Total Cost 8,50,39,200

Advise – The total cost of inventory is lower if discount is accepted.
Hence, the company is advised to accept the quantity discount.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Working
Calculation of joint cost

Description Amount (`)
Material 20,000
Labour 10,000
Variable overheads 6,000
Total variable cost 36,000
Fixed overheads 24,000
Total joint cost 60,000

(i) (a) Allocation of joint cost using physical unit method:
Product A = `60,000 × 2,000/6,000 = ` 20,000
Product B = `60,000 × 4,000/6,000 = ` 40,000
(b) Allocation of joint cost using contribution margin method:

Description Product-A Product-B
Units produced 2,000 4,000
Selling price per unit (`) 20 15
A. Sales value (`) 40,000 60,000
B. Allocation of joint
variable cost on the basis
of physical unit
`36,000 × 2,000/6,000 (12,000)
`36,000 × 4,000/6,000 (24,000)
C= A-B Contribution 28,000 36,000
D Allocation of fixed joint
cost on the basis of
contribution margin
`24,000 × 28,000/64,000 (10,500)
`24,000 × 36,000/64,000 (13,500)
C-D Profit at split off point 17,500 22,500

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Allocation of Joint Cost on the basis of Contribution Margin Method:

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Particulars Product A Product B

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Allocation of Variable Cost ` 12,000 ` 24,000

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Allocation of Fixed Cost ` 10,500 ` 13,500

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` 22,500 ` 37,500

ag (ii) Profitability after further processing of Product B

Description Amount (`)
Units produced and sold 98% of 4,000 units 3,920
Selling price per unit (`) 18
Sales value (`) 70,560

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Joint cost upto split off point (37,500)
Further processing cost
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s after further processing of product
Profit after further processing 21,060

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gthe following manner:
B can also be doneain
Calculation of the profitability

Profitability after further processing of Product B

Description Amount (`)
Incremental revenue on further processing 10,560
(3,920 x `18)- (4,000 x `15)

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Further processing cost (12,000)

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Incremental loss after further processing
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Impact on profitability on Product B
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If Product B is sold at split off point it earns profit of ` 22,500, but after

ag further processing the profit is reduced to ` 21,060/- i.e. an opportunity
loss of ` 1,440/-.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(c) (i) Actual Hours worked
Actual working Hours
Actual Usage of Budgeted Capacity Ratio = ×100
Budgeted Hours

86% = (Actual working hours÷ Budgeted hours) × 100
Budgeted hours=125 workers × 8 hours× 6 days × 4 weeks = 24,000
hours
Actual hours= 24,000 × 86% = 20,640 hours

(ii) Standard hours for actual output
Standard Hrs
Efficiency ratio = ×100
Actual Hrs
110% = Standard hours÷ Actual hours
Standard hours= 20,640 × 110% = 22,704 hours
Standard Hrs
(iii) Activity ratio = ×100
Budgeted Hrs

= (22,704 ÷ 24,000) × 100 = 94.6%
(iv) Standard capacity usage ratio
Budgeted Hours
= ×100
Max. possible hours in the budgeted period

= {24,000 hours÷ (150 workers × 8 hours× 6 days × 4 weeks)} × 100

= (24,000 ÷ 28,800) × 100 = 83.33%
Question 2
(a) Luxury Designer Pvt. Ltd. is a manufacturing company, which manufactures
readymade designer shirts. It has four customers: two wholesale category
customers and two retail category customers. It has developed the following
Activity- Based Costing system:

Activity Cost Driver Rate ( `)
Order Processing 1,260 per purchase order
Customer Visits 1,500 per customer visit

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Regular Delivery 30 per delivery Km. travelled

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Expedited Delivery 4,490 per expedited delivery

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List selling price per shirt is ` 1,000 and average cost per shirt is ` 600. CEO

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of Luxury Designer Pvt. Ltd. wants to evaluate the profitability of each of the
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four customers for the year 2023, to explore opportunities for increasing
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profitability of his Company in the next year 2024. The following data in
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context of four customers are available for 2023:

Wholesale Retail
Customers Customers
WC-1 WC-2 RC-1 RC-2
Number of Purchase orders 50 65 224 245
Number of Customer visits 10 13 25 22
Regular Deliveries 46 52 175 198

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Kilometers travelled per delivery 15 10 25
Expedited Deliveries
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Average Number of Shirts persShirt
m 16 50 62

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Average Selling Price pergShirt
215 110 18 15

a ` 700 ` 800 ` 900 ` 950
You are required to:
Calculate the customer-level operating income and operating income as a %
of revenues in 2023 and rank them on the basis of relative profitability.
(b) Star Airlines operates a single aircraft of 180 seats capacity between city 'ND'
and 'GA'. The average normal occupancy is estimated at 70% per flight. The

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average one-way fare is ` 12,500 from city 'ND" to 'GA'. The costs of

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operation of the flight as collected by an expert analyst are:
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. flight
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` 270sper passenger
Fuel cost (Variable) per flight from ‘ND’ to ‘GA’ ` 2,28,000 per

s em Food served on flight from ‘ND’ to ‘GA’
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gla (no charge to passenger)
a7.5% of fare
a Commission paid to Travel Agents
(All ticket booking through agents)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Fixed costs:
Lease & landing charges per flight ‘ND’ to ‘GA’ ` 9,12,000
Salaries of flight crew per flight ‘ND’ to ‘GA’ ` 90,000
Note: Assume that fuel costs are unaffected by the actual number of
passengers on a flight.
You are required to:
(i) Calculate the net operating income that Star Airlines makes per flight
from 'ND' to 'GA'.
(ii) Star Airlines expects that its occupancy will increase to 144 passengers
per flight if the fare is reduced to ` 11,670. Advise whether this proposal
should be implemented or not.
Answer
(a) Working note:
Computation of revenues (at listed price), discount, cost of goods sold
and customer level operating activities costs:

Wholesale Category Retail Category
Customers Customers
WC-1 WC-2 RC-1 RC-2
Number of shirts 10,750 7,150 4,032 3,675
sold (a) (215x50) (110x65) (18x224) (15x245)
Revenues (at listed
price) (`): (b) 1,07,50,000 71,50,000 40,32,000 36,75,000
{(a) × ` 1,000)}
Discount (`): (c)
{(a) × Discount per 32,25,000 14,30,000 4,03,200 1,83,750
shirt}
Cost of shirts (`) : (d)
64,50,000 42,90,000 24,19,200 22,05,000
{(a) × ` 600}
Order taking costs
63,000 81,900 2,82,240 3,08,700
(`):

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(No. of purchase ×
`1,260)

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Customer visits

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costs (`)

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15,000 19,500 37,500 33,000

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(No. of customer

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visits × ` 1,500)

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Delivery vehicles
costs (`)
(Kms travelled by 27,600 23,400 52,500 1,48,500
delivery vehicles ×
` 30 per km.)
Cost of expediting
deliveries (`)
{No. of expedited 22,450 71,840 2,24,500 2,78,380

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deliveries ×
` 4,490}
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Total cost of
customer level

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1,28,050 1,96,640 5,96,740 7,68,580

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operating activities
(`)

Computation of Customer level operating income

Wholesale Category Retail Category
Customers Customers
WC-1 WC-2 RC-1 RC-2

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Revenues

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(At list price)

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1,07,50,000 71,50,000 40,32,000 36,75,000

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(Refer to working

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a (Refer
note)
to working 32,25,000 14,30,000 4,03,200 1,83,750

Revenue 75,25,000 57,20,000 36,28,800 34,91,250

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(At actual price)
Less: Cost of shirts
(Refer to working 64,50,000 42,90,000 24,19,200 22,05,000
note)
Gross margin 10,75,000 14,30,000 12,09,600 12,86,250
Less: Customer level
operating activities
costs 1,28,050 1,96,640 5,96,740 7,68,580
(Refer to working
note)
Customer level
9,46,950 12,33,360 6,12,860 5,17,670
operating income
Operating income as
12.584% 21.562% 16.889% 14.828%
a % of revenues
Rank IV I II III

(b) (i) No. of passengers 180 seats  70% = 126

(`) (`)
Fare collection (126 passengers  `12,500) 15,75,000
Variable costs:
Fuel 2,28,000
Food (126 passengers  `270) 34,020
Commission (7.5 % of `15,75,000) 1,18,125 3,80,145
Contribution per flight 11,94,855
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 1,92,855

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(ii)

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Fare collection (144 passengers  `11,670) 16,80,480

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Variable costs:
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. (144 passengers  `270) em
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Fuel 2,28,000

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e Commission (7.5% of `16,80,480) l a
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38,880

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1,26,036 3,92,916
Contribution 12,87,564
Fixed costs:
Lease and Landing Charges 9,12,000
Salaries of flight Crew 90,000 10,02,000
Net income per flight 2,85,564

There is an increase in contribution by ` 92,709. Hence the proposal is

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acceptable.

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e60% capacity and produces 12,000 units of
Question 3

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gl to increase the working capacity either
(a) A factory is currently working at

to 70% or 90% level. It isaestimated that at both the levels, it will be able to
a product. Management is thinking

sell all the produced units. The other details are as under:
• At 70% capacity, the cost of raw materials increases by 4% and the
selling price falls by 3%.
• At 90% capacity, the cost of raw materials increases by 5% and selling
price falls by 4%.

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• At 60% capacity, the product cost is ` 360 per unit and it is sold at ` 400

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per unit.

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• The unit cost of 360 consists of the following:

`la
las Material
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a ` 60
200

ag Labour
Factory overhead ` 60 (50 % fixed)
Administrative & Selling overhead ` 40 (60 % fixed)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

• Additional advertising cost of ` 20,000 is to be incurred for selling the
product above 80% capacity.
You are required to:
(i) Calculate the profits of the company when the factory works at 60%,
70% and 90% capacity level.
(ii) Offer your comments regarding increase in the capacity based on profit
calculated.
(b) S.K. Manufacturing Co. Ltd. showed a net profit of ` 5,40,400 as per their cost
accounts for the year ended 31.03.2004. However, the financial books
disclosed a net profit of ` 2,60,500 for the same period. The following
information was revealed as a result of scrutiny of the figures of both the sets
of books:
`
Factory overheads under absorbed 84,800
Administrative overheads over absorbed 24,000
Interest paid on bank borrowings 50,000
Interest & Divided received 65,200
Notional rent of own premises charged in cost accounts 60,000
Losses on the sales of fixed assets and investments 48,000
Donations and subscriptions 18,800
Overvaluation of closing stock of finished goods in Cost 1,25,000
accounts
Store adjustments (credited in financial books) 7,500
Depreciation over charged in cost accounts 40,000
Income tax provided 1,50,000

You are required to:
(i) Prepare a reconciliation statement taking net profit as per cost accounts
as base.
(ii) State when is the reconciliation statement of Cost and Financial accounts
not required?

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Answer
(a) (i) Expense Budget at 60%, 70% & 90% level
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60% (12,000 70% (14,000 90% (18,000
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Per Per Per
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Amount Amount Amount

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unit unit unit

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(`) (`) (`)

a Sales (A)
(`) (`) (`)
400 48,00,000 388 54,32,000 384 69,12,000
Variable Costs:
210
Direct Material 200 24,00,000 208 29,12,000
37,80,000
Direct Wages 60 7,20,000 60 8,40,000 60 10,80,000
Variable Factory
30 3,60,000 30 4,20,000 30 5,40,000
Overheads

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Variable
Administrative &
m. 16 2,24,000
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16 1,92,000 16 2,88,000
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Selling
Overheads
a
gl 36,72,000 314 43,96,000
Total
Cost (B)
Variable
a306 316 56,88,000

Contribution
94 11,28,000 74 10,36,000 68 12,24,000
(C)=(A–B)
Fixed Costs:
Fixed Factory
-- 3,60,000 -- 3,60,000 -- 3,60,000
Overheads (50%)

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Fixed

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Administrative &
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-- 2,88,000 -- 2,88,000 -- 2,88,000

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Selling

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Overheads (60%)

las Adverting Cost -- -- --
a g 20,000

ag Total Fixed Costs
(D)
-- 6,48,000 -- 6,48,000 -- 6,68,000

Profit (C – D) -- 4,80,000 -- 3,88,000 -- 5,56,000

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(ii) Comment: Increase of production capacity to 90% is likely to increase
the profit to maximum of ` 5,56,000 due to increase in contribution
while fixed cost is slightly increased due to in advertising cost. At 70%
capacity, profit is reduced to minimum of ` 3,88,00 due to decrease in
selling price by 3% along with increase in raw material cost by 4%
resulting in decrease of contribution. Therefore, it is recommended
that factory should operate at 90% capacity.
(b) (i) Statement of Reconciliation of profit as obtained under Cost and
Financial Accounts

(`) (`)
Profit as per Cost Records 5,40,400
Add: Administrative Overhead over
absorbed 24,000
Interest & Dividend Received 65,200
Notional rent of own premises 60,000
Stores adjustments (credited in
financial books) 7,500
Depreciation over charged in cost
accounts 40,000 1,96,700
7,37,100
Less: Factory overheads under absorbed 84,800
Interest paid on bank borrowings 50,000
Losses on sale of fixed assets and
investments 48,000
Donations and subscriptions 18,800
Over-valuation of closing stock of
finished goods in cost accounts 1,25,000
Income tax 1,50,000 (4,76,600)
Profit as per Financial Records 2,60,500

(ii) Circumstances where reconciliation statement can be avoided:
When the Cost and Financial Accounts are integrated - there is no need

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

to have a separate reconciliation statement between the two sets of
accounts. Integration means that the same set of accounts fulfil the

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requirement of both i.e., Cost and Financial Accounts.

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Question 4

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(a) Meta Company Ltd. is engaged in the production of product ‘Trio' which

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passes through two different processes Process P and Process Q. Other

g linformation obtained from books of account for the year is as follows:
a Particulars Process P Process Q
Raw material used 10,000 ---
Raw material cost per unit ` 80 ---
Direct wages ` 52,000 ` 78,000
Direct Expenses ` 8,600 ` 11,100
Selling price per unit of output ` 130 ` 190

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Production overheads of ` 3,00,000 are recovered as percentage of direct

emwas:
wages.

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la 3/4 of the output of Process P was passed
Actual output of the two processes
P-9,200 units and Q-6,400gunits.
a balance was sold. The entire output of process Q
th

on to the Process Q and the
was sold.
Management & Selling expenses during the year were ` 1,70,000.
These are not allocable to the processes.
The normal loss of the two processes, calculated on the input of every process
was:

o m
m c
The Loss of Process P was sold at ` 5 per unit and that of Q at ` 8. per unit.
Process P- 6% and Process Q-10%

c. o s em
em gl a
Assume that Process P and Process Q are not the responsibility centres.

las a
g
You are required to prepare:

a (i) Process P Account
(ii) Process Q Account
(iii) Abnormal Loss and Abnormal Gain Account

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(iv) Costing Profit & Loss Account.
(b) The cost variance report was being discussed at a review meeting where in
Cost Accountant of the company reported under-absorption of production
overheads.
The following information was available from the cost records of the
company at the end of financial year 2023-24:
• Actual production overheads incurred were ` 4,50,000 which included
` 42,000 on account of 'written off obsolete stores.
• 18,000 units were produced during the year out of which 10,000 units
were sold and 8,000 units of finished goods were in stock.
• There were also 5,000 units in progress which may be reckoned as 40%
complete.
• The actual machine hours worked during the period were 43,000.
ABC Ltd. absorbs the production overheads at a predetermined rate of ` 8
per machine hour.
On investigation, it has been found that 20% of the under-absorption of
production overheads was due to defective planning and the rest was
attributable to normal increase in costs of indirect materials and indirect
labour.
You are required to:
(i) Calculate the amount of under-absorption of production overheads
during the year 2023-24; and
(ii) Show the treatment of under-absorption of production overheads in cost
accounts.
Answer
(a) Process- P Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Material 10,000 8,00,000 By Normal 600 3,000
Loss
To Wages 52,000 By Process Q

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To Direct Exp. 8,600 (9,200 × 3/4) 6,900 7,17,600
To Production 1,20,000 By Costing

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Overheads Profit and Loss

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(3,00,000 × 2/5) (P&L) (9,200 ×

. em
s
1/4) 2,300 2,39,200

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s ag
By Abnormal

l a Loss 200 20,800

ag 10,000
9,80,600-3,000
9,80,600 10,000 9,80,600

Cost per unit = = ` 104 per unit
10,000-600
Process- Q Account
Particulars Units Amount Particulars Units Amount
(`) (`)
To Process P 6,900 7,17,600 By Normal 690 5,520

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Loss
To Wages
.78,000
To Direct Exp.
s em 11,100 By Costing 6,400 10,11,200

g l a P&L
To Production
Overheads a 180,000

(3,00,000 × 3/5)
To Abnormal Gain 190 30,020
7,090 10,16,720 7,090 10,16,720
9,86,700-5,520
Cost per unit = = `158 per unit
6900-690

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Abnormal Loss Account

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Particulars Units Amount Particulars Units Amount
(`)
s em 1,000 (`)

s em To Process- P 200
By Costing P&Lg
20,800 By Bank
la200

gla a 19,800

a 200 20,800 200 20,800

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Abnormal Gain Account

Particulars Units Amount Particulars Units Amount
(`) (`)
To Normal Loss 190 1,520 By Process 190 30,020
Q
To Costing Profit and 28,500
Loss
190 30,020 190 30,020

Costing Profit & Loss Account for the year
Dr. Cr.

Particulars Amount Particulars Amount
(`) (`)
To Cost of Sales By Sales
P - 2,39,200 P 2300 @ 130
Q - 10,11,200 12,50,400 Q 6400 @ 190 15,15,000
To Abnormal Loss 19,800 By Abnormal Gain 28,500
To Selling Expense 1,70,000

To Net Profit 1,03,300
15,43,500 15,43,500
(b) (i) Amount of under-absorption of production overheads during the
current year
(`)
Total production overheads actually incurred 4,50,000
during the current year
Less : ‘Written off’ obsolete stores 42,000
Net production overheads actually incurred : (A) 4,08,000
Production overheads absorbed by 43,000 machine
hours@ ` 8 per hour : (B) 3,44,000

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Amount of under – absorption of production overheads :

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[(A) – (B)] 64,000
(ii) Accounting
o m
treatment of under absorption of production
c. o
.c em
overheads
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eproduced, and 5,000 units were 40% complete, 20% of the under- gla s
s
is given in the statement of the question that 18,000 units were

g la absorbed overheads were due to defective planning and the rest werea
a attributable to normal increase in costs of indirect materials and
indirect labour.

1. (20 % of ` 64,000) i.e., ` 12,800 of under-absorbed
overheads were due to defective planning. This ` 12,800
being abnormal, should be debited to the Costing
Profit and Loss A/c.

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2. Balance (80% of ` 64,000) i.e., ` 51,200

. co
of under-absorbed overheads should be ` 51,200

em
distributed over work-in-progress, finished goods

a s
and cost of sales by using supplementary rate.
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a g
Total under-absorbed overheads ` 64,000

Apportionment of unabsorbed overheads of ` 51,200 over, work-in progress,
finished goods and cost of sales

Equivalent (`)
Completed Units
Work-in-Progress

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(5,000 units × 40%×` 2.56) 2,000 5,120

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(Refer to working note)

em
Finished goods
se
la8,000 20,480
las (8,000 units × ` 2.56)
a g
ag Cost of sales
(10,000 units × ` 2,56) 10,000 25,600
20,000 51,200

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Working Note
51,200
Supplementary rate per unit = = ` 2.56
20,000

Question 5
(a) Super Ltd, a manufacturing company is facing the problem of high labour
turnover in the factory. Before analysing the causes and taking remedial
steps, the management of the company wants to ascertain the profit lost for
the year 2022-23 on account of labour turnover. For this purpose, it has given
you the following information:
(i) Sales for the last year 2022-23 was ` 2,16,80,000 and P/V ratio was 15%.
(ii) The total number of actual hours worked by the direct labour force was
5,00,000 hours. The actual direct labour hours included 60,000 hours
attributable to training new recruits, out of which 40% of the hours were
unproductive.
(iii) Due to delays by the Personnel Department in filling vacancies on
account of labour turnover, 95,000 potential productive hours (excluding
unproductive training hours) were lost.
(iv) 1,500 units of the output produced during training period were defective.
Cost of rectification of defective units was ` 40 per unit.
(v) Settlement cost of the workers leaving the organization was ` 2,37,880.
(vi) Recruitment and Selection cost was ` 1,40,000.
(vii) Cost of Training and Induction was ` 1,61,950.
Assuming that the potential production lost as a consequence of labour
turnover could have been sold at prevailing prices, find the profit lost for the
year 2022-23 on account of labour turnover.
(b) The following information is given by PQR Ltd:

Year Sales (`) Profit (Loss ( `)
2022-23 1,80,00,000 (3,80,000)
2023-24 2,40,00,000 11,20,000

You are required to:
(i) Calculate the Break even sales.

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(ii) In 2024-25, it is estimated that the variable cost will go up by 5% and
fixed cost will reduce by ` 4,80,000. Selling price will remain same.

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Calculate the sales volume to earn a profit of ` 15,00,000.

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(c) Discuss Feedback Control and Feedforward Control system of budgetary

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control.
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a ag
Answer
(a) lWorkings:
ag (i) Computation of productive hours
Actual hours worked (given) 5,00,000
Less: Unproductive training hours 24,000
Actual productive hours 4,76,000
(ii) Productive hours lost:

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Loss of potential productive hours+ Unproductive training hours

em
= 95,000 + 24,000 = 1,19,000 hours
(iii) Loss of contribution due sto
Salesvalue gl
a unproductive hours :

= a ×Total unproductive hours
Actual productive hours
` 2,16,80,000
= × 1,19,000 hours= ` 54,20,000
4,76,000 hrs

Contribution lost for 1,19,000 hours= ` 54,20,000 x 15% = `8,13,000

Computation of profit forgone on account of employee turnover

o m(`)
m .c
c. o m
se 2,37,880
Contribution foregone (as calculated above) 8,13,000

em la
Settlement cost due to leaving

las Recruitment and Selection cost
a g 1,40,000

ag Training and Induction costs 1,61,950
Cost of Rectification (1500 units x `40) 60,000
Profit foregone 14,12,830

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

The above question can also be solved in alternative way after
taking proper assumptions
Workings:
(i) Computation of productive hours

Actual hours worked (given) 5,00,000
Less: Unproductive training hours 24,000
Actual productive hours 4,76,000

(ii) Productive hours lost:
Loss of potential productive hours
= 95,000 hours
(iii) Loss of contribution due to unproductive hours :
Salesvalue
= ×Total unproductive hours
Actual productive hours
` 2,16,80,000
= × 95,000 hours = ` 43,26,891
4,76,000 hrs

Contribution lost for 95,000 hours= ` 43,26,891 x 15%
= ` 6,49,034(approx.)
Computation of profit forgone on account of employee
turnover

(`)
Contribution foregone (as calculated above) 6,49,034
Settlement cost due to leaving 2,37,880
Recruitment and Selection cost 1,40,000
Training and Induction costs 1,61,950
Cost of Rectification (1500 units x `40) 60,000
Profit foregone 12,48,864

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

Fixed Cost
(b) (i) Break-even sales =
P/V Ratio

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Change in Profit 15,00,000
×100 or, 2,40,00,000-1,80,00,000 ×100
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P/V Ratio =

co
Change in Sales

. em
s
15,00,00

m
×100 or, 25%
e a
Or,

s l
60,00,000

l a ag
ag Fixed Cost = Contribution – Profit
= ` 2,40,00,000 × 25% - ` 11,20,000
= ` 60,00,000 – ` 11,20,000 = ` 48,80,000
48,80,000
Break-even sales = = ` 1,95,20,000
25%
(iii) Desired Contribution in 2024-25 = Revised Fixed Cost + Target Profit

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= (` 48,80,000- ` 4,80,000) + ` 15,00,000

em Cost ratio =75%.
= ` 59,00,000
Earlier P/V ratio = 25%. SosVariable

g lasame.
a
Selling price remain the
Variable cost increased by 5% i.e. Variable Cost ratio will be 78.75%
(75+5%of 75).
Now revised P/V ratio=21.25%
59,00,000
Sales Volume in 2024-25= = ` 2,77,64,706(approx.)
21.25%
If it is assumed that variable cost will go up by 5% on total. So, it will
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be increased from 75% to 80% and solution can be done in following
m
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way:
(i) Desired Contribution in 2024-25 = Revised Fixed Cost +eTarget
em s
la + ` 15,00,000
las a g
= (` 48,80,000-` 4,80,000)

ag = ` 59,00,000
Earlier P/V ratio = 25%. So Variable Cost ratio =75%.
Selling price remain the same.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Variable cost increased by 5% i.e. Variable Cost ratio will be 80%
(75%+5%).
Now revised P/V ratio=20%
59,00,000
Sales Volume in 2024-25== = ` 2,95,00,000
20%
(c) There are two types of budgetary control system based on timing of action:
Feedback Control: The feedback system of budgetary control, the actual
results for the budgeted period are collected and compared with the
budgeted figures. The exercise of variance identification is done after the
completion of the budget period. The variances are reported and based on
the report corrective actions are taken, responsibility is fixed and based on
experience, modification in future targets is implemented. As the name
suggests, it is an Ex-post Corrective control system of budget.
This system of budgetary control is common in organistions where
Management Information System (MIS) is not so robust and where data is
obtained only after the finalisation of books of account. Though this type
of control system is less expensive to maintain but has limitations.
Feedforward Control: This the opposite of feedback control system of
budgetary control. It is Ex-Ante Preventive control mechanism of budgetary
control. The budgets are set at the inception of the budgeted period and
the actual results are continuously monitored and compared. The targets
are kept realistic as far as possible and the targets are reviewed and reset
if necessary.
This budgetary control system requires a robust MIS supported by
integrated ERP system enabling an entity to get data as and when desired
basis. This system is very expensive and beneficial for the organisations
where the business environment is dynamic and information has important
role in getting edge in competition and todays data warfare.
Question 6
(a) Distinguish between cost control and cost reduction.
(b) Distinguish between Waste and Scrap. Discuss the treatment of normal and
abnormal scrap in Cost Accounts.

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SUGGESTED ANSWER COST AND MANAGEMENT ACCOUNTING

(c) Describe Unit Costing and Batch Costing. Give three examples of industries
for each method where these are used.

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OR
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(d) Describe briefly idle time and explain the treatment of idle time in cost

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eThe setting up time for the machine in case of Direct Worker Mr. A. g
accounts in following situations:
l a s
a s
l(ii) Normal break time for lunch in case of Indirect Worker Mr. B.
(i)
a
g
a (iii) Time lost due to breakdown of machine in case of Worker Mr. C.
Answer
(a)

Cost Control Cost Reduction

1. Cost control aims at 1. Cost reduction is concerned
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maintaining the costs in with reducing costs. It
.
em
accordance with the challenges all standards and

s
established standards. endeavours to improvise them

l a continuously
2. Cost control seeks gto attain 2. Cost reduction recognises no
a
lowest possible cost under condition as permanent, since a
existing conditions. change will result in lower cost.
3. In case of cost control, 3. In case of cost reduction, it is on
emphasis is on past and present and future.
present
4. Cost control is a preventive 4. Cost reduction is a corrective
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function function. It operates even when

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an efficient cost control system

s e exists.

s em 5. Cost control ends when 5. Cost reduction ahas no visible
gl a continuous
gla targets are achieved. end and is
a
a process.

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Difference between Waste and Scrap

Waste Scrap
1. The portion of raw material 1. The output which is
which is lost during storage/ discarded and disposed off
production and discarded. without further treatment.
2. It is connected with raw material 2. It is the loss connected with
or inputs to the production the output
process.
3. Waste of materials may be visible 3. Scraps are generally
or invisible. identifiable and has
physical substance.
4. Generally, waste has no 4. Scraps are termed as by-
recoverable value. products and has small
recoverable value.

Treatment of Scrap
Normal- The cost of scrap is borne by good units and income arises on
account of realisable value is deducted from the cost.
Abnormal- The scrap account should be charged with full cost. The credit
is given to the job or process concerned. The profit or loss in the scrap
account, on realisation, will be transferred to the Costing Profit and Loss
Account.
(c) Unit costing is that method of costing where the output produced is
identical and each unit of output requires identical cost. Under this method
costs, are collected and analysed element wise and then total cost per unit
is ascertained by dividing the total cost with the number of units produced.
Such a method of costing is used in the industries like paper, cement, steel
works, mining, breweries etc.
Batch Costing: Batch Costing is a type of specific order costing where
articles are manufactured in predetermined lots, known as batch. Cost per
unit in a batch is ascertained by dividing the total cost of a batch by the
number of units produced in that batch.

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Such a method of costing is used in the case of pharmaceutical or drug
industries, readymade garment industries, industries, manufacturing

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electronic parts of T.V. radio sets etc.

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OR

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(c) The time during which no production is carried-out because the worker

s l
a ag
remains idle but are paid. In other words, it is the difference between the

g ltime paid and the time booked. Idle time can be normal or abnormal.
a Situation Idle Time Treatment
The setting up time for the Normal idle time It is treated as a part of
machine in case of Direct cost of production. It is
Worker Mr. A to be considered while
setting of standard
hours or standard rate.

m
Normal rest time, break Normal idle time It is to be considered

c. o
time for lunch in case of for the computation of

em
Indirect Worker Mr. B overhead rate.

s
down of machines in casea time
Time lost due to break- Abnormal
l
idle It is to be shown as a

g
separate item in the
of Worker Mr. C a Costing Profit and Loss
Account.

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s em g la
gla a
a

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PAPER – 5 : AUDITING AND ETHICS

Question No.1 is compulsory.
Attempt any four questions from the remaining five questions.
Question 1
(a) APR & Associates, a Chartered Accountant firm, are appointed as the
auditors of Time Ltd. and Bakes Ltd. The volume and nature of business of
both the companies are entirely different. CA R is the engagement partner
for Bakes Ltd. CA P is the engagement partner for Time Ltd. CA R formulates
an Audit Programme for conducting the audit of Bakes Ltd. He suggests CA
P to use the same audit programme for Time Ltd. But CA P is of the opinion
that this audit programme will not be useful for the audit of Time Ltd.
In light of the above, mention the matters that should generally be
considered while preparing an Audit Programme. Is CA P correct in
emphasizing for a different Audit Programme for Time Ltd.? (4 Marks)
(b) ABC & Co. are in the business of manufacturing toys. The stock taking process
has been done by the company as on 31.3.2024. The company has used FIFO
method for valuation of its inventories. The cost of inventory as on 31.3.24 is
` 25,25,000/- and the net realizable value of the inventory on the same date
is ` 25,24,000/-.
The cost of inventory includes the following:
(1) Material purchase cost - ` 25,05,000/-
(2) Allocated transport cost - ` 18,000/-
(3) Abnormal wastage - ` 2,000/-
The management seeks your advice in arriving at the value of inventory to
be shown in the financial statements of the company. What should be the
value of inventory in accordance with AS-2? (4 Marks)
(c) Mr. Z, at the time of appointment as an independent director in EF Ltd. a
listed company, came to know that the Companies Act, 2013 has placed a
greater emphasis on the effective implementation and reporting on internal
controls for a listed Company. He wants to know the responsibilities as casted

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SUGGESTED ANSWER AUDITING AND ETHICS

under Companies Act, 2013 with regards to Internal Financial Control for (1)
Directors (2) Independent directors and (3) Audit committee as per section

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134(5)(e), 149(8) & 177(4) (vii) respectively of the Companies Act, 2013.

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(3 Marks)

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(d) CA B, an auditor, after the completion of busy audit season, was occupied in

a s
assembling of final audit files of one of his client. First of all, he started

l a g
ag
preparing various documents of that client and then kept those documents
in various folders. He was preparing documents as well as audit file in paper
form because he believed that it is mandatory. He could complete
documentation as well as assembling of final audit file of that client after
three months from the date of audit report. Generally, he retains audit file of
the clients for 4 years from the date of audit report. Check the validity of the
action of CA B. (3 Marks)
Answer

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(a) Following matters should be considered generally while preparing an Audit

em of the assignment.
Programme:

a s
(1) Stay within the scope and limitation
(2) Prepare a written auditlprogramme setting forth the procedures that
g
a the audit plan.
are needed to implement

(3) Determine the evidence reasonably available and identify the best
evidence for deriving the necessary satisfaction.
(4) Apply only those steps and procedures which are useful in
accomplishing the verification purpose in the specific situation.

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(5) Include the audit objectives for each area and sufficient details which

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serve as a set of instructions for the assistants involved in audit and
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c. o help in controlling the proper execution of the work.

se
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s em (6) Consider all possibilities of error.
g l a
gla a items.
(7) Co-ordinate the procedures to be applied to related
a Evolving one audit programme- Not Practicable for All businesses:
Businesses vary in nature, size and composition; work which is suitable to
one business may not be suitable to others; efficiency and operation of

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

internal controls and the exact nature of the service to be rendered by the
auditor are the other factors that vary from assignment to assignment. On
account of such variations, evolving one audit programme applicable to all
business under all circumstances is not practicable.
In view of above mentioned provisions, CA. P is correct in emphasizing for
a different audit programme for Time Ltd.
(b) Value of Inventory: Inventory to be recognized at the lower of cost and
net realizable value in accordance with AS 2 - Inventories. Further, any
costs that could not be reasonably allocated to the cost of production (e.g.
general and administrative costs) and any abnormal wastage have been
excluded from the cost of inventory. An acceptable valuation basis (e.g.
FIFO, Weighted average etc.) has been used to value inventory as at the
period-end.
In the given situation, ABC & Co. is using FIFO method for valuation of its
inventories. Further, cost of inventory as on 31.03.2024 is rupees 25,25,000
which includes material purchase cost of rupees 25,05,000, allocated cost
of transport of rupees 18,000 and abnormal wastage of rupees 2,000. Net
realizable value of said inventory is ` 25,24,000. In view of provisions of AS
2, cost allocated to transport for inventory is relating to bringing the
inventory to the location, thus it will be added in cost of material. However,
abnormal wastage of rupees 2000 should be excluded from cost of
inventory.
Thus, cost of inventory will be ` 25,25,000 – ` 2,000 = 25,23,000 rupees
and Net realizable value of inventory is ` 25,24,000.
For valuation in accordance with AS 2, “Inventory”, lower of cost and net
realizable value will be considered. Accordingly, ` 25,23,000 to be
considered as value of inventory in the given situation.
(c) Internal financial controls as per regulatory requirements: The
Companies Act, 2013 has placed a greater emphasis on the effective
implementation and reporting on the internal controls for a company. The
term “internal financial controls” is used at some places in Companies Act,
2013 casting responsibilities as under: -

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SUGGESTED ANSWER AUDITING AND ETHICS

Relevant provision of Nature of Responsibility
Companies Act,2013

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Section 134(5)(e) In case of listed Companies, the
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Directors’ responsibility statement shall

m . state that the Directors had laid down
s e
a s e Internal financial controls to be
g la
l
followed by the company and that such
a
ag
Internal financial controls are adequate
and were operating effectively.
As per Section 149(8) of the Act The company and independent
directors shall abide by the provisions
specified in Schedule IV which lays
down the Code for independent
Directors. As per this code, the role and
functions of independent directors
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include that they shall satisfy

.
themselves on the integrity of financial

s eminformation and that financial controls

g l a and the systems of risk management

a
are robust and defensible.
Section 177(4)(vii) of the Act Every audit Committee shall act in
accordance with the terms of reference
specified in writing by the Board which
shall, inter alia, include - evaluation of
internal financial controls and risk
management systems.

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(d) Assembly of the Final Audit File:

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Audit documentation may be recorded on paper or on electronic or other
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media. Audit file may be defined as one or more folders or other storage

s em la
media, in physical or electronic form, containing the records that comprise

la
the audit documentation for a specific engagement. Hence the views of CA
a g
ag B that audit documentation should be maintained mandatorily in paper
form is not correct.
The auditor shall prepare audit documentation on timely basis. Preparing
sufficient and appropriate audit documentation on a timely basis helps to

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enhance the quality of the audit and facilitates the effective review and
evaluation of the audit evidence obtained and conclusions reached before
the auditor’s report is finalized. Documentation prepared after the audit
work has been performed is likely to be less accurate than documentation
prepared at the time such work is performed. Completing the audit
Documentation by CA B not on timely basis is not proper.
An appropriate time limit within which to complete the assembly of the
final audit file is ordinarily not more than 60 days after the date of the
auditor’s report. In the given situation, CA. B, after completion of audit
season, is completing the audit file as well as assembling of final audit files
of his client after three months of the date of audit report which is not valid
as per SQC 1.
SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and Related Services”, requires
firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is
no shorter than seven years from the date of the auditor’s report, or, if later,
the date of the group auditor’s report. He retains audit file of the client for
4 years from the date of audit report is also non-compliance of SQC 1.
Question 2
(a) CA Q is the engagement partner for the audit of a Departmental store. As a
part of the risk assessment procedure, he wants to make inquiries of the
management and others within the entity. What kind of information can the
auditor get by inquiring from the following?
(i) Internal audit personnel
(ii) In-house legal counsel
(iii) Marketing or sales personnel
(iv) Information systems personnel (4 Marks)
(b) CA Z, the auditor of MNO Ltd., during the course of audit, assesses a risk of
material misstatements regarding the litigations and claims involving the
company. CA Z is not convinced with the management's explanations
regarding the status of the litigations or claims. It is considered unlikely that
the entity's external legal counsel will respond appropriately to a letter of
general enquiry. The auditor sent a letter of specific enquiry requesting the

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entity's external legal counsel to communicate directly with the auditor. List
out the inclusions in the letter of specific enquiry.

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In certain circumstances the auditor may judge it necessary to meet with
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entity's external legal counsel to discuss the likely outcome of the litigations

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or claims. What will be auditor's reporting responsibility if the management
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refuses to give permission to the auditor to communicate or meet with the

l a
external legal counsel? (4 Marks)
a g
a(c)g JKit was
Ltd. was having a 'Pager' manufacturing plant and looking at the demand
of the view that the company will grow continuously in future. But,
with the introduction of mobile phones in the market, the plant was shut
down completely. The shareholders of the company were of the view that
auditor failed to perform their duty and have not informed to them about the
company's inability to continue its business, otherwise they might not have
suffered the loss. List down the factors giving rise to the inherent limitations
due to which auditor cannot provide a guarantee that the financial
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statements are free from material misstatement due to fraud or error.

m
e bed-sheets and pillow covers. They have
(3 Marks)

s
la Accountants, as their auditors. The auditor
(d) B Ltd. is a company manufacturing

g
a with his team members. As the work progressed,
appointed M/s C & Co., Chartered
is establishing audit strategy
they came to know that the company has diversified its business and now
they are also planning to manufacture wooden furniture. The auditor, in his
professional judgement, considers this to be a significant factor in directing
the engagement team’s efforts. Give examples of factors that, in auditor’s
professional judgement, are significant in directing the engagement team’s
efforts. (3 Marks)

m
c. o
Answer

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c. o m provide
(a) Inquiries of Management and Others Within the Entity:
(i) Inquiries directed toward internal audit personnelemay
em l s
a during the year
las g
a internal control
information about internal audit procedures performed

ag relating to the design and effectiveness of the entity’s
and whether management has satisfactorily responded to findings
from those procedures.

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(ii) Inquiries directed toward in-house legal counsel may provide
information about such matters as litigation, compliance with laws and
regulations, knowledge of fraud or suspected fraud affecting the entity,
warranties, post-sales obligations, arrangements (such as joint
ventures) with business partners and the meaning of contract.
(iii) Inquiries directed towards marketing or sales personnel may
provide information about changes in the entity’s marketing strategies,
sales trends, or contractual arrangements with its customers.
(iv) Inquiries directed to information systems personnel may provide
information about system changes, system or control failures, or other
information system-related risks.
(b) A letter of specific inquiry includes:
(i) A list of litigation and claims;
(ii) Where available, management’s assessment of the outcome of each of
the identified litigation and claims and its estimate of the financial
implications, including costs involved; and
(iii) A request that the entity’s external legal counsel confirm the
reasonableness of management’s assessments and provide the auditor
with further information if the list is considered by the entity’s external
legal counsel to be incomplete or incorrect.
In certain circumstances, the auditor also may judge it necessary to meet
with the entity’s external legal counsel to discuss the likely outcome of the
litigation or claims. Further, if management refuses to give the auditor
permission to communicate or meet with the entity’s external legal counsel,
or the entity’s external legal counsel refuses to respond appropriately to
the letter of inquiry, or is prohibited from responding, and the auditor is
unable to obtain sufficient appropriate evidence by performing alternate
audit procedures, the auditor shall modify the opinion in the auditor’s
report in accordance with SA 705.
Alternatively, if the auditor is able to perform alternate audit procedures
and can obtain sufficient and appropriate audit evidence to resolve the
issue, then he can give an unmodified opinion.

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(c) Inherent limitations of audit: The process of audit suffers from certain
inbuilt limitations due to which an auditor cannot obtain an absolute

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assurance that financial statements are free from misstatement due to

m
fraud or error. These fundamental limitations arise due to the following

.
factors: -
c o e m
m making many judgments by management. These judgments las
einvolves
s
(1) Nature of financial reporting: Preparation of financial statements

l a may involve subjective decisions or a degree of uncertainty. Therefore,a
g
ag auditor may not be able to obtain absolute assurance that financial
statements are free from material misstatements due to frauds or
errors.
(2) Nature of Audit procedures: The auditor carries out his work by
obtaining audit evidence through performance of audit procedures.
However, there are practical and legal limitations on ability of auditor
to obtain audit evidence. For example, an auditor does not test all
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transactions and balances. He forms his opinion only by testing

.
em
samples. It is an example of practical limitation on auditor’s ability to

s
obtain audit evidence.

g l a
Management may not provide complete information as requested by
a
auditor. There is no way by which auditor can force management to
provide complete information as may be requested by auditor. In case
he is not provided with required information, he can only report. It is
an example of legal limitation on auditor’s ability to obtain audit
evidence. Further, fraud may involve sophisticated and carefully
organized schemes.
(3) Not in nature of investigation: Audit is not an official investigation.

m
Hence, auditor cannot obtain absolute assurance that financial

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statements are free from material misstatements due to frauds or

c. o m
(4) Timeliness of financial reporting and decrease inserelevance of
errors.

s em g la decreases over
la time and auditor cannot verify each and everya matter. Therefore, a
information over time: The relevance of information

ag balance has to be struck between reliability of information and cost of
obtaining it.

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(5) Future events: Future events or conditions may affect an entity
adversely. Adverse events may seriously affect ability of an entity to
continue its business. The business may cease to exist in future due to
change in market conditions, emergence of new business models or
products or due to onset of some adverse events.
(d) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts: The auditor
needs to direct efforts of engagement team towards matters that in his
professional judgment are significant. Preliminary identification of material
classes of transactions, account balances and disclosures help auditor in
establishing overall audit strategy. More energies need to be devoted to
significant matters to obtain desired outcomes. Few examples are listed as
under: -
(i) Volume of transactions which may determine whether it is more
efficient for the auditor to rely on internal control.
(ii) Significant industry developments such as changes in industry
regulations and new reporting requirements.
(iii) Significant changes in the financial reporting framework, such as
changes in accounting standards.
(iv) Other significant relevant developments, such as changes in the legal
environment affecting the entity.
Question 3
(a) CA E is auditor of LM Ltd. Before commencing with current year's audit, he
initiated planning for the audit. Planning includes the need to consider
certain matters, prior to the identification and assessment of the risk of
material misstatements. Enumerate such matters. (4 Marks)
(b) The management of PQ Ltd. changed during the period under audit. Mr. G
an auditor, at the time of receiving written representation on the
management responsibilities from the management, was in a dilemma
related to the date of and period(s) covered by the written representation.
Further, new management was of the view that they can give written
representation from the date they took over and not for the prior period when
old management were managing affairs of the company. Guide the auditor
& the management in this respect. (4 Marks)

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(c) You are appointed as the auditor of a company manufacturing paints. The
company has a robust system of internal control. Most of the controls in the

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company are automated and they are working effectively. However, in

m
certain situations, manual elements in internal controls are more suitable.

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What are the circumstances where manual elements in internal controls may
s e m
em
be more suitable? (3 Marks)
la
l a s
(d) M/s PSR & Associates are the auditors of The Saturn Hotel, a chain of five-
a g
ag
star hotels. Since the nature of their business is prone to frauds, the company
has appointed internal auditors at various locations. The company has also
devised a system of effective and efficient internal controls. The auditors, M/s
PSR & Associates, want to use the work of the internal auditors. In order to
ensure effectiveness, what kind of coordination should be there between the
external auditor and the internal audit function? (3 Marks)
Answer

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(a) Nature of Audit Planning- A Continuous and iterative process: Planning

c. o
includes the need to consider, prior to the auditor’s identification and

ebemapplied as risk assessment procedures.
assessment of the risks of material misstatement, such matters as: -

a s
2. Obtaining a generalglunderstanding of the legal and regulatory
1. The analytical procedures to

framework applicablea to the entity and how the entity is complying
with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures.

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(b) As per SA 580, “Written Representations”, the date of the written

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representations shall be as near as practicable to, but not after, the date of
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the auditor’s report on the financial statements. The written

em la
representations shall be for all financial statements and period(s) referred

las to in the auditor’s report.
Furthermore, because the auditor is concerned with a
g
ag events occurring up to
the date of the auditor’s report that may require adjustment to or
disclosure in the financial statements, the written representations are dated

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

as near as practicable to, but not after, the date of the auditor’s report on
the financial statements.
The written representations are for all periods referred to in the auditor’s
report because management needs to reaffirm that the written
representations it previously made with respect to the prior periods remain
appropriate.
Situations may arise where current management were not present during
all periods referred to in the auditor’s report. Such persons may assert that
they are not in a position to provide some or all of the written
representations because they were not in place during the period. This fact,
however, does not diminish such persons’ responsibilities for the financial
statements as a whole. Accordingly, the requirement for the auditor to
request from them written representations that cover the whole of the
relevant period(s) still applies. In view of above, management is required to
provide the written representation for all the periods even when current
management were not present during all periods referred to in the
auditor’s report.
(c) Manual elements vs automated elements in entity’s internal control:
Manual elements in internal control may be more suitable in the following
circumstances:
 Where judgment and discretion are required.
 Large, unusual or non-recurring transactions.
 Circumstances where errors are difficult to define, anticipate or predict.
 In changing circumstances that require a control response outside the
scope of an existing automated control.
 In monitoring the effectiveness of automated controls.
(d) As per SA 610, “Using the Work of Internal Auditors”, coordination
between the external auditor and the internal audit function is effective
when, for example;
(i) Discussions take place at appropriate intervals throughout the period.
(ii) The external auditor informs the internal audit function of significant
matters that may affect the function.

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(iii) The external auditor is advised of and has access to relevant reports of
the internal audit function and is informed of any significant matters

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that come to the attention of the function when such matters may

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affect the work of the external auditor so that the external auditor is

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able to consider the implications of such matters for the audit
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engagement.
la
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Question 4
a g
a(a)g M/s KLM & Co. Chartered Accountants, a partnership firm, while designing
tests of controls and tests of details in MN Ltd. has to determine the items for
testing that can be effective in meeting the purpose of the audit procedure.
For this, they decided to select specific items from a population. State the
factors that can be considered by the audit firm for selecting specific items
from a population and also state the specific items that can be included for
such testing. (4 Marks)

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(b) Mr. L is a principal auditor of OP Ltd. There are several divisions of OP Ltd.

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that are audited by other auditors. State the procedures Mr. L should

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ordinarily perform to obtain sufficient and appropriate audit evidence that

a s
the work of other auditors is adequate for the principal auditor's purpose in

l
g
the context of this assignment. (4 Marks)
a
(c) LD Ltd. has given below loans to the following borrowers during the financial
year 2023-24. Mr. В an auditor wants your guidance regarding additional
regulatory information required to be provided under the Companies
Act, 2013:

Borrowers Maximum Loan granted Outstanding Loan
during the year 2023-2024 as at 31/03/2024
(` in Lakh) (` in Lakh)
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X (Promoter) 20 15
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c. o m
Y (Director) 30 25

em
Z (KMP) 10
la 10se05
las A (Related Party) 20
a g
ag Others
Total
80
160
65
120

(3 Marks)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(d) XY and Associates are auditors of PQR Ltd., which provides electrical
components on project basis. The purchases are huge and the auditor wants
to make sure that all the purchases made during the period are recorded and
there is no understatement or overstatement. For this purpose the audit team
have performed procedures like cut-off tests, correct treatment of goods in
transit, obtaining written representations and performing analytical
procedures. What are the analytical procedures required to be performed to
obtain audit evidence as to overall reasonableness of purchase quantity and
price? (3 Marks)
Answer
(a) The auditor may decide to select specific items from a population. In
making this decision, factors that may be relevant include:
(i) the auditor’s understanding of the entity,
(ii) the assessed risks of material misstatement, and
(iii) the characteristics of the population being tested.
Specific items selected may include:
 High value or key items: The auditor may decide to select specific items
within a population because they are of high value, or exhibit some other
characteristic.
 All items over a certain amount: The auditor may decide to examine
items whose recorded values exceed a certain amount so as to verify a
large proportion of the total amount of a class of transactions or account
balance.
 Items to obtain information: The auditor may examine items to obtain
information about matters such as the nature of the entity or the nature
of transactions.
(b) The principal auditor should perform procedures to obtain sufficient
appropriate audit evidence, that the work of the other auditor is adequate for
the principal auditor's purposes, in the context of the specific assignment.
When using the work of another auditor, the principal auditor should
ordinarily perform the following procedures:
(i) Advise the other auditor of the use that is to be made of the other
auditor's work and report and make sufficient arrangements for

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co-ordination of their efforts at the planning stage of the audit. The
principal auditor would inform the other auditor of matters such as are

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as requiring special consideration, procedures for the identification of

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inter -component transactions that may require disclosure and the

.c o
time-table for completion of audit; and
e m
m requirements and obtain representation as to compliance las
ereporting
s
(ii) advise the other auditor of the significant accounting, auditing and

l a a g
ag (iii) The principal auditor might discuss with the other auditor the audit
with them.

procedures applied or review a written summary of the other auditor’s
procedures and findings which may be in the form of a completed
questionnaire or check-list. The principal auditor may also wish to visit
the other auditor.
(c) As additional regulatory requirements, following disclosures shall be made

m
where Loans or Advances in the nature of loans are granted to promoters,

c. o
Directors, KMPs and the related parties (as defined under Companies Act,

(a) repayable on demand or se
m
2013,) either severally or jointly with any other person, that are:

g a or period of repayment.
lterms
a
(b) without specifying any

Type of Borrower Amount of loan or Percentage to the total
advance in the nature Loans and Advances in
of loan outstanding the nature of loans
(` In Lakhs) (` in Lakhs)
X (Promoter) 15 12.5% =15/120 X 100

m
Y (Director) 25 20.833% =25/120 X 100

m c o
8.333% =10/120 X. 100
Z (KMP) 05 4.167% =5/120 X 100

c. o A (Related Party) 10
s em
s em (d) The auditor should perform analytical procedures a
l
evidence as to overall reasonableness of purchasegquantity and price
a
to obtain audit

l a
ag which may include:
(i) Consumption Analysis: Auditor should scrutinize raw material
consumed as per manufacturing account and compare the same with

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

previous years with closing stock and ask for the reasons from the
management, if any significant variations are found.
(ii) Stock Composition Analysis: Auditor to collect the reports from
management for composition of stock i.e. raw materials as a
percentage of total stock and compare the same with previous year
and ask for reasons from management in case of significant variations.
(iii) Ratios: Auditor should compare the creditors turnover ratios and stock
turnover ratios of the current year with previous years.
(iv) Quantitative Reconciliation: Auditor should review quantitative
reconciliation of closing stocks with opening stock, purchases and
consumption.
Question 5
(a) PQ & Co. want to diversify its business and for that purpose they want to
raise money by issuing shares to the general public. The face value of the
shares is ` 100 but the directors of the company propose to issue the shares
at a discounted rate of ` 95/- so as to receive more response. The statutory
auditor, however, objects to the same as it is not allowed as per the
Companies Act, 2013. State the provisions of Section 53 of the Companies
Act, 2013 with reference to shares issued at a discount and the consequences
where the company fails to comply with the provisions of this section.
(4 Marks)
(b) HR & Associates are the auditors of a large manufacturing company. The
company has recently invested huge amount in Property, Plant and
Equipment (PPE) for its new unit. They have added many incidental expenses
to the cost of PPE. The junior audit team members are not sure about which
costs should be excluded from the cost of PPE. Give examples of costs that
should not form part of costs of PPE. (4 Marks)
(c) A professional accountant is expected to comply with the fundamental
principles of professional ethics at all times. Explain which fundamental
principle governing professional ethics is violated in the following situations?
(1) A chartered accountant in practice accepted the appointment as an
auditor of a firm in which his sister was a partner.

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(2) A chartered accountant in practice was approached by his friend to seek
some insider information about a company, which was a client of the

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chartered accountant. He could not refuse his friend's request.

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(3) A chartered accountant in practice failed to inform his client about the

m .
change in laws applicable to his client. (3 Marks)
s e
a s e
(d) You have been appointed as the statutory auditor of a limited company. The
g la
l a
ag
company is registered as a Nidhi company. What are the reporting
requirements of a Nidhi company under the Companies Auditor's Report
Order, 2020? (3 Marks)
Answer
(a) Shares issued at a discount: According to Section 53 of the Companies
Act, 2013,
(1) a company shall not issue shares at a discount, except in the case of an

m
issue of sweat equity shares given under Section 54 of the Companies
Act, 2013.
c o
. a discounted price shall be void.
m
e in above sub-sections (1) and (2), a
(2) any share issued by a company at
s
lata a discount to its creditors when its debt is
Notwithstanding anything contained
g
converted into shares inapursuance of any statutory resolution plan or debt
company may issue shares

restructuring scheme in accordance with any guidelines or directions or
regulations specified by the Reserve Bank of India under the Reserve Bank of
India Act, 1934 or the Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section,
such company and every officer who is in default shall be liable to a
penalty which may extend to an amount equal to the amount raised
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through the issue of shares at a discount or five lakh rupees, whichever
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is less, and the company shall also be liable to refund all monies received

em se
with interest at the rate of twelve per cent. per annum from the date of

s l a
issue of such shares to the persons to whom such shares have been
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la a
issued.

ag (b) Examples of costs that are not costs of an item of property, plant and
equipment are:
(i) costs of opening a new facility or business, such as, inauguration costs;

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(ii) costs of introducing a new product or service (including costs of
advertising and promotional activities);
(iii) costs of conducting business in a new location or with a new class of
customer (including costs of staff training); and
(iv) administration and other general overhead costs.
(c) Fundamental Principles:
(1) Objectivity: The principle of objectivity requires that a professional
accountant shall not undertake a professional activity if a circumstance
or relationship unduly influences the accountant’s professional
judgment regarding that activity. Objectivity principle will be violated
in the given situation where a chartered accountant in practice
accepted the appointment as an auditor of a firm in which his sister
was a partner.
(2) Confidentiality: Confidentiality principle requires a professional
accountant to respect the confidentiality of information acquired as a
result of professional or business relationships. Confidentiality
principle will be violated in the given situation where a chartered
accountant in practice could not refuse his friends requested to seek
some insider information about a client company of the chartered
accountant.
(3) Professional Competence and Due care: A professional accountant
shall comply with the principle of professional competence and due
care, which requires an accountant to attain and maintain professional
knowledge and skill at the level required to ensure that a client or
employing organization receives competent professional service,
based on current technical and professional standards and relevant
legislation; and act diligently and in accordance with applicable
technical and professional standards. Professional Competence and
Due Care principle will be violated in the situation where a chartered
accountant in practice failed to inform his client about the change in
laws applicable to his client.

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(d) Reporting requirements of a Nidhi Company under the CARO 2020: The
auditor is required to report under clause (xii) of Paragraph 3 of CARO 2020:

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(a) whether the Nidhi Company has complied with the Net Owned Funds
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to Deposits in the ratio of 1:20 to meet out the liability;

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(b) whether the Nidhi Company is maintaining ten per cent.

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unencumbered term deposits as specified in the Nidhi Rules, 2014 to
a g
ag (c) whether there has been any default in payment of interest on deposits
meet out the liability;

or repayment thereof for any period and if so, the details thereof.
Question 6
(a) CA M is the engagement partner of the firm M/s Y2Z LLP and he is auditing
the financial statements of a listed entity ABC Ltd. The audit firm has
determined that an engagement quality control review is required for this

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assignment. Discuss the responsibilities of CA M as an engagement partner

.
for engagement quality control review as per SA-220. (4 Marks)

s em
OR

g l a
a
(a) Sanskar Foundation is a Non-Governmental Organisation (NGO) for orphan
children. They have received voluntary contribution of ` 50 lacs from the
promoters, specifying that ` 20 lacs are towards the Corpus contribution and
` 30 lacs are towards Revolving fund. Explain the terms "Corpus contribution"
and "Revolving fund". (4 Marks)
(b) MNB bank advanced certain loans guaranteed by government. State the
prudential norms for asset classification and income recognition of such

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loans. (4 Marks)

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(c) Mr. D an auditor, while auditing ACE Ltd., identified certain misstatements in
m
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relation to particular class of transactions and account balances. He had

s em communicated same to those charged with governance and also taken
g la
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written representation for the same. State the audit documentation required

a by the auditor regarding misstatements identified during the audit.

(3 Marks)

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(d) JK Ltd. has opened a new manufacturing unit and for that they want plant &
machinery. Since the capital outflow will be huge, they are considering of
taking it on lease. They have approached several parties and have shortlisted
one of them who is ready to give the plant on lease for 11 years, which is
approximately the estimated economic life of the asset. As per the agreement,
JK Ltd. will bear the insurance and maintenance expenses of the asset. Which
kind of lease agreement have JK Ltd. entered into and what is the ownership
status, the accounting treatment and the tax benefits of the same?

(3 Marks)
Answer
(a) Engagement Performance: As per SA 220, for audits of financial
statements of listed entities, and those other audit engagements, if any, for
which the firm has determined that an engagement quality control review
is required, the engagement partner shall:
(i) Determine that an engagement quality control reviewer has been
appointed.
(ii) Discuss significant matters arising during the audit engagement,
including those identified during the engagement quality control
review, with the engagement quality control reviewer.
(iii) Not date the auditor’s report until the completion of the engagement
quality control review.
(iv) If differences of opinion arise within the engagement team, with those
consulted or, where applicable, between the engagement partner and
the engagement quality control reviewer, the engagement team shall
follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.
or
(a) A contribution made towards the capital or the corpus of an NGO is
known as corpus contribution. The donors are generally required to
specify whether the donation/grant given by him shall form part of the
corpus of the NGO. Such contributions are generally given with reference
to the total funds required by an NGO.

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SUGGESTED ANSWER AUDITING AND ETHICS

The objective of a contribution or grant towards a Revolving Fund is to
rotate the amount by giving temporary loans from the fund to other NGO

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or beneficiaries for their projects and then recover the loan so as to give

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temporary loans again and so on. However, any interest earned from the

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beneficiary on such temporary loans from the revolving fund could be
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either added back to the fund or credited to the Income and Expenditure
la
a s
Account depending on restrictions laid down by the authority providing
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the contribution (for the revolving fund) or by the rules and regulations laid
down by the concerned NGO in this regard.
(b) Government Guaranteed Advances (In case of accounts overdue for
more than 90 days): Central Government. Guaranteed Advances, where
the guarantee is not invoked/ repudiated would be classified as Standard
Assets, but regarded as NPA for Income Recognition purpose.
The situation would be different if the advance is guaranteed by State
Government, where advance is to be considered NPA if it remains overdue
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for more than 90 days for both Provisioning and Income recognition

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purposes.
Alternative Solution:

l a s
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Government Guaranteed Advances (In case of accounts overdue for
not more than 90 days):
Asset Classification: In case of advances guaranteed by both Central
Government and State Government, they would be classified as Standard
Advances in the following manner:

Classification of Advances Particulars
Standard Regular Accounts not overdue

o m
c
Special Mention Accounts:
m Accounts showing stress signals .
c. o m60 days
1. SMA 0
Accounts overdue between 31eto
em
2. SMA 1
s
la61 to 90 days
las 3. SMA 2
a g
Accounts overdue between

ag

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Income Recognition
Income would be recognised for all the accounts which are not overdue for
more than 90 days, on accrual basis, in case of advances guaranteed by
both Central Government and State Government.
(c) Documentation regarding misstatements identified during audit: The
audit documentation shall include:
(i) The amount below which misstatements would be regarded as clearly
trivial;
(ii) All misstatements accumulated during the audit and whether they have
been corrected; and
(iii) The auditor’s conclusion as to whether uncorrected misstatements are
material, individually or in aggregate, and the basis for that conclusion.
(d) In the given situation, JK Ltd. has opened a new manufacturing unit and for
that they want plant & machinery. They have taken the plant on lease for
11 years, which is approximately the estimated economic life of the asset.
As per the agreement, JK Ltd. will bear the insurance and maintenance
expenses of the asset.
Same will be considered as Finance Lease as per AS-19 since the lease term
is for a major part of the economic life of the asset even if title is not
transferred.
Status of Ownership: Ownership transfer option at the end of the lease
period is with the lessee. Title may or may not be eventually transferred.
Accounting treatment: Finance lease is treated like loan arrangement.
Hence, the asset ownership is considered of that of the lessee and thus
appears on the balance sheet of the lessee.
Tax benefit: Lessee can claim both interest and depreciation expense as
financial lease is treated like a loan.

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PAPER – 6: FINANCIAL MANAGEMENT AND
STRATEGIC MANAGEMENT
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l a s SECTION A: FINANCIAL MANAGEMENT
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Question No. 1 is compulsory.
Attempt any two questions out of the remaining three questions.
In case, any candidate answers extra question(s)/ sub-question(s) over and
above the required number, then only the requisite number of questions first
answered in the answer book shall be valued and subsequent extra
question(s) answered shall be ignored.
Working notes should form part of the answer.

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Question 1
(a) Theme Ltd provides you the following. information:

s em
la
12.5 % Debt ` 45,00,000
Debt to Equity ratio
a g 1.5 : 1
Return on Shareholder's fund 54%
Operating Ratio 85%
Ratio of operating expenses to Cost of Goods sold 2:6
Tax rate 25%
Fixed Assets ` 39,00,000

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Current Ratio 1.8 : 1

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c. o m
You are required to calculate:

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(i) Interest Coverage Ratio
la se
las (ii) Gross Profit Ratio
a g
ag (iii) Current Assets

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

(b) Alpha Limited has provided following information:

Equity Share Capital 25,000 Shares @ ` 100 per Share
15% Debentures 10,000 Debentures@ ` 750/- per Debenture
Sales 50 Lakhs units@ ` 20 per unit
Variable Cost ` 12.50 per unit
Fixed Costs ` 175.00 Lakhs

Due to recent policy changes and entry of foreign competitors in the sector,
Alpha Limited expects the sales may decline by 15-20%, However, selling
price and other costs will remain the same. Corporate Taxes will
continue@20%.
You are required to calculate the decrease in Earnings per share, Degree of
Operating Leverage and Financial Leverage separately if sales are declined
by (i) 15%; and (ii) 20%;
(c) Following is the sales information in respect of Bright Ltd:
Annual Sales (90 % on credit) ` 7,50,00,000
Credit period 45 days
Average Collection period 70 days
Bad debts 0.75%
Credit administration cost (out of which 2/5th is avoidable) ` 18,60,000
A factor firm has offered to manage the company's debtors on a non-
recourse basis at a service charge of 2%. Factor agrees to grant advance
against debtors at in interest rate of 14% after withholding 20% as reserve.
Payment period guaranteed by factor is 45 days. The cost of capital of the
company is 12.5%. One time redundancy payment of ` 50,000 is required to
be made to factor.
Calculate the effective cost of factoring to the company. (Assume 360 days in
a year)
Answer
(a) Working Notes:
Debt = ` 45,00,000

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FINANCIAL MANAGEMENT AND
SUGGESTED ANSWER STRATEGIC MANAGEMENT

Interest = ` 45,00,000 x 12.5%= 5,62,500

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Total Debt

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Debt to Equity = 1.5:1 =

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Shareholders'Equity

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Equity = ` 30,00,000

a s e NetProfitafter taxes
g la
l a
Return of Shareholder’s funds = 54% = ×100

ag Profit after tax (PAT)
Equity shareholders'fund

= 54% x Equity = `16,20,000
Profit before tax (PBT)(1-25%) = Profit after tax
= `16,20,000/75% = `21,60,000
Earning before interest and tax (EBIT) = PBT + Interest
= `21,60,000 + ` 5,62,500
= `27,22,500

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(i) Interest Coverage Ratio = EBIT/Interest

c. o= `27,22,500/`5,62,500
em = 4.84 Times
s= 1 - Operating Ratio
g l a
a
(ii) Operating Profit Ratio
= 1 – 0.85 = 0.15 or 15%
Operating Profit
0.15 = ×100
Sales
Sales = EBIT or Operating Profit /0.15
= ` 27,22,500 / 0.15

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= ` 1,81,50,000

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Operating expenses
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Operating ratio = =2:6=1:3
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se
Cost of goods sold ( COGS )

s em Operating expenses = 1/3COGS
g la
gla Operating cost = Sales – Operating profit a
a = ` 1,81,50,000 - ` 27,22,500
= ` 1,54,27,500

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

` 1,54,27,500 = COGS + Operating expenses
` 1,54,27,500 = COGS + 1/3COGS
COGS = ` 1,15,70,625
Gross profit = Sales – COGS
= 1,81,50,000 – 1,15,70,625
= ` 65,79,375
Gross Profit
Gross Profit ratio = ×100
Sales
= 65,79,375/1,81,50,000
= 0.3625 or 36.25%
Gross profit and sales can be calculated in alternative way also.
However, there will be no change in GP ratio i.e 36.25%
Current Assets
(iii) Current Ratio =
CurrentLiabilities

= 1.8
Current Assets = 1.8 Current Liabilities
Total of Balance sheet liability = Equity + Debt + Current Liabilities
=30,00,000+45,00,000+CL ……….(2)
Total Balance sheet asset = Fixed Assets + Current Assets
= 39 lakhs + CA= 39 + 1.8CL…….(3)
Equating 2 and 3,
75,00,000 + CL = 39,00,000 + 1.8CL
0.8CL = 36,00,000
CL =` 45,00,000
Current Assets = 1.8 CL = 1.8 x 45 lakhs= ` 81,00,000

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FINANCIAL MANAGEMENT AND
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(b) Income Statement with required calculations

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Particulars (`) (`) (`)

o m Existing Sales declined Sales declined

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Sales in. units
by 15% by 20%

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s emprice per unit la
50,00,000 42,50,000 40,00,000

laVariable Cost per unit a g
g
Sales 20 20 20

a Contribution per unit (12.50)
7.5
(12.50)
7.5
(12.50)
7.5
Contribution 3,75,00,000 3,18,75,000 3,00,00,000
Fixed expenses (1,75,00,000) (1,75,00,000) (1,75,00,000)
EBIT 2,00,00,000 1,43,75,000 1,25,00,000
Debenture Interest (11,25,000) (11,25,000) (11,25,000)

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EBT 1,88,75,000 1,32,50,000 1,13,75,000
Tax @ 20%
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(37,75,000) (26,50,000) (22,75,000)
Profit after tax (PAT)
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e 25,000
1,51,00,000 1,06,00,000 91,00,000
No. of shares
la s 25,000 25,000

ag ` 1,51,
Earnings per share (EPS) 00, 000 ` 1,06,00,000 ` 91, 00, 000
PAT 25, 000 25,000 25, 000
=
No. of shares
= ` 604 = `424 = `364
(i) Decrease in EPS = `180 = `240
Or Or
% Decrease in % Decrease in
180 240
EPS =  100 EPS = 

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604 604

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= 29.80% 100

c. o e` m
= 39.73%

=s
em ` 3,18,75,000 a ` 1,25,00,000
l
(ii) Operating leverage = 3,00,00,000

las =
Contribution
a g
g
EBIT ` 1, 43,75,000
a
= 2.40
Or = 2.22 Or
Or 37.50/20
28.125/15 = 1.875

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SUGGESTED ANSWER INTERMEDIATE EXAMINATION: MAY 2024

Degree of Operating 1.875
leverage
Percentage change in EBIT
=
Percentage change in sales
(iii) Financial Leverage ` 1, 43, 75, 000 ` 1, 25, 00, 000
= =
EBIT ` 1,32,50, 000 ` 1,13, 75, 000
=
EBT = 1.08 = 1.10
Or Or Or
Degree of Financial 29.80/28.125 39.735/37.50
Leverage = 1.06 = 1.06
Percentage change in EPS
=
Percentage change in EBIT

(c) Evaluation of Factoring Proposal

Particulars ` `
A. Savings due to factoring
Bad Debts saved 0.75% x 7.5 crores ` 5,06,250
x 90%
Administration cost saved 18.6 lakhs x 2/5 ` 7,44,000
Interest saved due to 7.5 crores x 90% ` 5,85,937.5
reduction in average x (70-45)/ 360 x 12.5%
collection period
Total ` 18,36,187.5
B. Costs of factoring:
Service charge 7.5 crores x 90% x 2% ` 13,50,000
Interest cost ` 1,15,171.875 ` 9,21,375
x 360/45
Redundancy Payment ` 50,000
Total ` 23.21,375
C. Net Annual cost to the ` 4,85,187.5
Firm: (A-B)
Rate of effective cost of ` 4,85,187.5/ 7.504%
factoring ` 64,66,078.125 x 100

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FINANCIAL MANAGEMENT AND
SUGGESTED ANSWER STRATEGIC MANAGEMENT

Advice: Since the rate of effective cost of factoring is less than the existing
cost of capital, therefore, the proposal is acceptable.
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Credit Sales = ` 7.5 crores x 90% = ` 6,75,00,000
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Average level of receivables = ` 6.75 crores x 45/360 = ` 84,37,500
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s emcharge = 2% of ` 84,37,500 g la
a = 20% of ` 84,37,500
Service ` 1,68,750

lReserve ` 16,87,500a
g
a Total (i) ` 18,56,250
Thus, the amount available for advance is
Average level of receivables ` 84,37,500
Less: Total (i) from above ` 18,56,250
(ii) ` 65,81,250

om
Less: Interest @ 14% p.a. for 45 days ` 1,15,171.875

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emcost is taken as irrelevant for decision
Net Amount of Advance available. ` 64,66,078.125

s
a to the Firm will be ` 4,35,187.5 and Rate of
Note: Alternatively, if redundancy
l
g
a will be ` 4,35,187.5/` 64,66,078.125 x 100
making, then Net Annual cost
effective cost of factoring
= 6.730%
If average level of receivables is considered for 70 days then the
calculation can be done in following way:
Evaluation of Factoring Proposal
Credit Sales = ` 7.5 crores X 90% = ` 6,75,00,000

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Average level of receivables = ` 6.75 crores x 70/360 = ` 1,31,25,000

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Service charge = 2% of ` 1,31,25,000 ` 2,62,500

em
Reserve = 20% of ` 1,31,25,000
la se ` 26,25,000
las Total (i)
a g ` 28,87,500

ag Thus, the amount available for advance is
Average level of receivables ` 1,31,25,000
Less: Total (i) from above ` 28,87,500

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