Sa Pcc-group-II June 2009

Volume 5
PCE, Group - II, 10
Suggested Answers
June, 2009
Volume 5
Suggested Answers
Professional Competence Examination

Professional Competence
Examination
Group II
June, 2009
ISBN: 978-81-8441-280-2
Group II
June, 2009
Board of Studies
The Institute of Chartered Accountants of India
A-94/4, Sector-58, Noida- 201 301
Phone : 0120 - 3045900
Fax : 0120 - 3045940
E-mail : bosnoida@icai.org Board of Studies
Website : http://www.icai.org September / 2009
(Set up by an Act of Parliament)
SUGGESTED ANSWERS TO QUESTIONS SET AT THE
PROFESSIONAL COMPETENCE EXAMINATION

GROUP II
JUNE, 2009
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
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 Director of Studies. The Council of the Institute is not in anyway responsible for the
correctness or otherwise of the answers published herein.
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Published by : The Publication Department on behalf of The Institute of Chartered

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September / 2009 / 25,000 Copies
Contents
Page Nos.
Paper 4. Cost Accounting and Financial Management................................................1 – 26

Paper 5. Taxation ......................................................................................................27 – 44
Paper 6. Information Technology and Strategic Management...................................45 – 60
Summary of Examiners’ comments on the performance of the candidates

PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
All questions are compulsory.
Working notes should form part of the answer.
Question 1
Answer any five of the following:
(i) Two workmen, A and B, produce the same product using the same material. A is paid
bonus according to Halsey plan, while B is paid bonus according to Rowan plan. The
time allowed to manufacture the product is 100 hours. A has taken 60 hours and B has
taken 80 hours to complete the product. The normal hourly rate of wages of workman A
is Rs.24 per hour. The total earnings of both the workers are same. Calculate normal
hourly rate of wages of workman B.
(ii) Distinguish between product cost and period cost.
(iii) A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at
station B and rest of goods at station C. It reaches back directly to station A after getting
reloaded with 18 tonnes of goods at station C. The distance between A to B, B to C and
then from C to A are 270 kms, 150 kms and 325 kms respectively. Compute ‘Absolute
tonnes kms’ and ‘Commercial tones-kms’.
(iv) Following details relating to product X during the month of April, 2009 are available:
Standard cost per unit of X :
Materials : 50 kg @ Rs.40/kg
Actual production : 100 units
Actual material cost : Rs.42/kg
Material price variance : Rs.9,800 (Adverse)
Material usage variance : Rs.4,000 (Favourable)
Calculate the actual quantity of material used during the month April, 2009.
(v) Discuss the components of budgetary control system.
(vi) Following information is available for the first and second quarter of the year 2008-09 of
ABC Limited:
Production (in units) Semi-variable cost
(Rs.)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
PROFESSIONAL COMPETENCE EXAMINATION : JUNE, 2009
You are required to segregate the semi-variable cost and calculate :

(a) Variable cost per unit; and
(b) Total fixed cost. (5 × 2 = 10 Marks)
Answer
(i)
A B
Time Allowed (Hrs.) 100 100
Time Taken (Hrs.) 60 80
Time Saved (Hrs.) 40 20
Let the rate of wages of the worker B is Rs.x per hour
Normal Wages 1440 80x
(Time taken × Hourly rate of wages) (60×24)
Bonus 480 16x
 20 
(1/2 × 40 × 24)   × (80 × x)
 100 
1920 96x
According to the problem,
Total earnings of A = Total earnings of B
1920 = 96x
1920
x = = Rs.20
96
∴ Hourly rate of wages of the worker is Rs.20 per hour.
Alternative Solution:
In case of worker B, in place of x, it can be written as ‘80x hourly rate’.
Hence final equation will be
96x hourly rate = 1920
1920
Hourly rate of B = = Rs. 20
96
(ii) Product Cost vis-à-vis Period cost
Product costs are associated with the purchase and sale of goods. In the production
scenario, such costs are associated with the acquisition and conversion of materials and
2
all other manufacturing inputs into finished product for sale. Hence under absorption cost,
total manufacturing costs constitute inventoriable or product cost.
Periods costs are the costs, which are not assigned to the products but are charged as
expense against revenue of the period in which they are incurred. General Administration,
marketing, sales and distributor overheads are recognized as period costs.
(iii) Absolute tonnes kms
= tonnes (unit of weight) ×Km (Unit of distance)
= 24 tonnes × 270 kms
+ 14 tonnes × 150 kms
+ 18 tonnes × 325 kms
= 6480 + 2100 + 5850
= 14430 tonnes kms
Commercial Tonnes kms
= Average load × total kms travelled
 24 + 14 + 18 
=   tonnes × 745 kms
 3 
= 13906.67 Tonnes km
(iv) Standard cost of materials for actual output Rs.
[(100 units × 50 kg) × Rs.40 per kg] = 2,00,000
Material Usage Variance 4,000 (F)
1,96,000
Material Price Variance 9,800 (A)
Actual cost of materials used 2,05,800
Actual material cost = Rs.42 per kg.
Rs.2,05,800
∴ Actual quantity of materials used during the month = = 4,900 kg.
42
Alternative solution
Material price variance = Rs. 9800 (A)
Actual price per kg. = Rs. 42
Actual quantity of material used = Rs. 9800/(42-40) = 4900 kg
3
(v) Components of budgetary control system

The policy of a business for a defined period is represented by the master budget the
details of which are given in a number of individual budgets called functional budgets.
The functional budgets are broadly grouped under the following heads:
(a) Physical Budgets – Sales Qty, Product Qty., Inventory, Manpower budget.
(b) Cost Budgets – Manufacturing Cost, Administration Cost, sales & distribution cost,
R & D Cost.
(c) Profit Budget
(vi)
Production (Units) Semi Variable Cost (Rs.)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
Difference 6,000 30,000
Change in Semi Variable Cost
Variable Cost per Unit =
Change in Pr oduction
Rs.30,000
=
6,000 units
= Rs.5 per units

Total Fixed Cost = Semi Veriable Cost – (Production x Variable Cost per Unit)
Total fixed cost in Quarter I :
= 2,80,000 – (36,000 × 5)
= 2,80,000 – 1,80,000
= 1,00,000
Total fixed cost in Quarter II :
= 3,10,000 – (42,000 × 5)
= 3,10,000 – 2,10,000
= 1,00,000
Question 2
Following is the sales budget for the first six months of the year 2009 in respect of PQR Ltd. :
Month : Jan. Feb. March April May June
Sales (units) : 10,000 12,000 14,000 15,000 15,000 16,000
4
Finished goods inventory at the end of each month is expected to be 20% of budgeted sales
quantity for the following month. Finished goods inventory was 2,700 units on January 1,
2009. There would be no work-in-progress at the end of any month.
Each unit of finished product requires two types of materials as detailed below:
Material X : 4 kgs @ Rs.10/kg
Material Y : 6 kgs @ Rs.15/kg
Material on hand on January 1, 2009 was 19,000 kgs of material X and 29,000 kgs of material
Y. Monthly closing stock of material is budgeted to be equal to half of the requirements of next
month’s production.
Budgeted direct labour hour per unit of finished product is ¾ hour.
Budgeted direct labour cost for the first quarter of the year 2009 is Rs.10,89,000.
Actual data for the quarter one, ended on March 31, 2009 is as under:
Actual production quantity : 40,000 units
Direct material cost
(Purchase cost based on materials actually issued to production)
Material X : 1,65,000 kgs @ Rs.10.20/kg
Material Y : 2,38,000 kgs @ Rs.15.10/kg
Actual direct labour hours worked : 32,000 hours
Actual direct labour cost : Rs.13,12,000
Required :
(a) Prepare the following budgets:
(i) Monthly production quantity for the quarter one.
(ii) Monthly raw material consumption quantity budget from January, 2009 to April,
2009.
(iii) Materials purchase quantity budget for the quarter one.
(b) Compute the following variances :
(i) Material cost variance
(ii) Material price variance
(iii) Material usage variance
(iv) Direct labour cost variance
(v) Direct labour rate variance
(vi) Direct labour efficiency variance (6 +9 = 15 Marks)
5
Answer
(a) (i) Production Budget for January to March 2009
(Quantitative)
Jan Feb Mar April
Budgeted Sales 10,000 12,000 14,000 15,000
Add: Budgeted Closing Stock 2,400 2,800 3,000 3,000
(20% of sales of next month)
12,400 14,800 17,000 18,000
Less: Opening Stock 2,700 2,400 2,800 3,000
Budgeted Output 9,700 12,400 14,200 15,000
Total Budgeted Output for the Quarter ended March 31, 2009
= (9,700 + 12,400 + 14,200)
= 36,300 units.
(ii) Raw Material Consumption Budget (in quantity)
Month Budgeted Output Material ‘X’ @ 4 kg Material ‘Y’ @ 6 kg
(Units) per unit (Kg) per unit (Kg)
Jan 9,700 38,800 58,200
Feb 12,400 49,600 74,400
Mar 14,200 56,800 85,200
Apr 15,000 60,000 90,000
Total 2,05,200 3,07,800
(iii) Raw Materials Purchase Budget (in quantity)

for the Quarter ended (March 31,2009)
Material X (kg) Material Y (kg)
Raw material required for production 1,45,200 2,17,800
Add: Closing Stock of raw material 30,000 45,000
1,75,200 2,62,800
Less: Opening Stock of raw material 19,000 29,000
Material to be purchased 1,56,200 2,33,800
6
Alternative Solution
(iii) Raw Materials Purchase Budget (in quantity)
Material X
Jan Feb Mar Total
Raw material required for
production(x) 38800 49600 56800 145200
Add: Closing stock of raw material 24800 28400 30000 83200
63600 78000 86800 228400
Less: Opening stock of raw material X 19000 24800 28400 72200
Materials to be purchased X 44600 53200 58400 156200
Raw Materials Purchase Budget (in quantity)
Material Y
Jan Feb Mar Total
Raw material required for production(Y) 58200 74400 85200 217800
Add: Closing stock of raw material 37200 42600 45000 124800
95400 117000 130200 342600
Less: Opening stock of raw material Y 29000 37200 42600 108800
Materials to be purchased Y 66400 79800 87600 233800
(b) Calculation of Material Cost Variance
(a) (b)
Std Price × Std Mix × Std Qty for actual output Std. Price × Std. Mix × Actual Qty.
X – 10 × 4 × 40,000 = 16,00,000 4
X – 10 × × 4, 03,000 = 16,12,000
10
Y – 15 × 6 × 40,000 = 36,00,000 6
Y – 15 × × 4,03,000 = 36,27,000
10
52,00,000
52,39,000
7
(c) (d)
Std Price × Actual Mix × Actual Qty Actual Price × Actual Mix × Actual Qty.
X – 10 × 1,65,000 = 16,50,000 X – 10.20 × 1,65,000 = 16,83,000
Y – 15 × 2,38,000 = 35,70,000 Y – 15.10 × 2,38,000 35,93,800
52,20,000 52,76,800
Direct Material Usage Variance = (a – c)
X– 16,00,000 – 16,50,000 = 50,000 (A)
Y– 36,00,000 – 35,70,000 = 30,000 (F)
52,00,000 – 52,20,000 = 20,000 (A)
Direct Material Price Variance = (c – d)
X– 16,50,000 – 16,83,000 = 33,000 (A)
Y– 35,70,000 – 35,93,800 = 23,800 (A)
52,20,000 – 52,76,800 = 56,800 (A)
Direct Material Cost Variance = (a – d)
X– 16,00,000 – 16,83,000 = 83,000 (A)
Y– 36,00,000 – 35,93,800 = 6,200 (F)
52,00,000 – 52,76,800 = 76,800 (A)
Verification:
Direct Material Cost Variance = Direct Material Usage Variance + Direct Material Price
Variance
= 20,000 (A) + 56,800 (A)
= 76,800 (A)
Alternative Solution (Total basis)
Direct Material Cost Variance = 52, 00,000 – 52, 76,800 =76,800 (A)
Direct Material Price Variance = 52, 20,000 – 52, 76,800 = 56,800 (A)
Direct Material Usage Variance = 52, 20,000 -52, 00,000 = 20,000 (A)
Calculation of Labour Cost Variances:
Budgeted output for the quarter = 36,300 units
Budgeted direct labour hours = 36,300 × ¾ hrs.
= 27,225 hours
8
Standard or Budgeted labour rate per hour

Budgeted direct labour cos t
=
Budgeted direct labour hours
Rs.10,89,000
= = Rs.40
27,225 hours
Standard labour hours for actual output:

= 40,000 units × ¾ hour
= 30,000 hours
Rs.13,12,000
Actual labour hour rate = = Rs.41
32,000 hrs
Direct Labour Efficiency Variance = Standard Rate × (Std. hrs – Actual hrs.)
= Rs.40 × (30,000 – 32,000)
= Rs.80,000 (A)
Direct Labour Rate Variance = Actual hrs. × (Std. Rate – Actual Rate)
= 32,000 × (40 – 41)
= Rs.32,000 (A)
Direct Labour Cost Variance = (Std. rate × Std. hrs.) – (Actual rate × Actual hrs.)
= (40 × 30,000) – (41 × 32,000)
= 12,00,000 – 13,12,000
= 1,12,000 (A)
Verification:
Direct Labour Cost Variance = Direct Labour Efficiency Variance + Direct Labour Rate Variance
= Rs.80,000 (A) + Rs.32,000 (A)
= 1,12,000 (A)
Question 3
(a) A manufacturing company has disclosed a net loss of Rs.2,13,000 as per their cost
accounting records for the year ended March 31, 2009. However, their financial
accounting records disclosed a net loss of Rs.2,58,000 for the same period. A scrutiny of
data of both the sets of books of accounts revealed the following information:
9
Rs.
(i) Factory overheads underabsorbed 5,000
(ii) Administration overheads overabsorbed 3,000
(iii) Depreciation charged in financial accounts 70,000
(iv) Depreciation charged in cost accounts 80,000
(v) Interest on investments not included in cost accounts 20,000
(vi) Income-tax provided in financial accounts 65,000
(vii) Transfer fees (credit in financial accounts) 2,000
(viii) Preliminary expenses written off 3,000
(ix) Over-valuation of closing stock of finished goods in cost accounts 7,000
Prepare a Memorandum Reconciliation Account. (7 Marks)
(b) Describe briefly, how joint costs upto the point of separation may be apportioned
amongst the joint products under the following methods:
(i) Average unit cost method
(ii) Contribution margin method
(iii) Market value at the point of separation
(iv) Market value after further processing
(v) Net realizable value method. (9 Marks)
Answer
(a) Memorandum Reconciliation Account
Particulars Rs. Particulars Rs.
To Net loss as per costing 2,13,000 By Administrative overhead 3,000
books over absorbed in costs
To Factory overheads 5,000 By Depreciation over charged 10,000
under absorbed in cost books (80,000 –
70,000)
To Income tax not provided 65,000 By Interest on investments not 20,000
in cost books included in cost books
To Preliminary expenses 3,000 By Transfer fees not 2,000
written off in financial considered in cost books
books
10
To Over-valuation of 7,000 By Net loss as per financial 2,58,000

Closing Stock of books
finished goods in cost
books
2,93,000 2,93,000
(b) Methods of apportioning joint cost among the joint products:
(i) Average Unit Cost Method: under this method, total process cost (upto the point
of separation) is divided by total units of joint products produced. On division
average cost per unit of production is obtained. The effect of application of this
method is that all joint products will have uniform cost per unit.
(ii) Contribution Margin Method: under this method joint costs are segregated into
two parts – variable and fixed. The variable costs are apportioned over the joint
products on the basis of units produced (average method) or physical quantities. If
the products are further processed, then all variable cost incurred be added to the
variable cost determined earlier. Then contribution is calculated by deducting
variable cost from their respective sales values. The fixed costs are then
apportioned over the joint products on the basis of contribution ratios.
(iii) Market Value at the Time of Separation: This method is used for apportioning
joint costs to joint products upto the split off point. It is difficult to apply if the market
value of the products at the point of separation are not available. The joint cost may
be apportioned in the ratio of sales values of different joint products.
(iv) Market Value after further Processing: Here the basis of apportionment of joint
costs is the total sales value of finished products at the further processing. The use
of this method is unfair where further processing costs after the point of separation
are disproportionate or when all the joint products are not subjected to further
processing.
(v) Net Realisable Value Method: Here joint costs is apportioned on the basis of net
realisable value of the joint products,
Net Realisable Value = Sale value of joint products (at finished stage)
(-) estimated profit margin
(-) selling & distribution expenses, if any
(-) post split off cost
Question 4
Answer any three of the following:
(i) Discuss accounting treatment of spoilage and defectives in cost accounting.
(ii) Discuss accounting treatment of idle capacity costs in cost accounting.
11
(iii) A contract is estimated to be 80% complete in its first year of construction as certified.
The contractee pays 75% of value of work certified, as and when certified and makes the
final payment on the completion of contract. Following information is available for the first
year:
Rs.
Cost of work-in-progress uncertified 8,000
Profit transferred to Profit & Loss A/c at the end of year I on incomplete 60,000
contract
Cost of work to date 88,000
Calculate the value of work- in-progress certified and amount of contract price.
(iv) Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to
product Z during the quarter II of the financial year2009-10 will be Rs.2,80,000.
Calculate the sales revenue required to achieve a quarterly profit of Rs. 70,000.
(3 x 3 = 9 Marks)
Answer
(i) Accounting of Spoilage and Defectives:
Spoilage is the tem used for materials which are badly damaged in manufacturing
operations, and it cannot rectified economically and hence taken out of the process to be
disposed of in some manner without further processing.
Normal spoilage costs are included in costs either charging it to production order or by
charging it to production overheads so that it is spread over all products. Any value
realized from spoilage is credited to production order or production overhead account as
the case may be.
Cost of abnormal spoilage is charged to costing P/L A/c.
Defectives: Signifies those units or portions of production which can be rectified and
turned cut as good units by application of additional material, labour or other service.
Defectives are charged to general overheads or department overheads depending upon
their traceability. They are charged to good production, when second have a normal
value and defective rectified into ‘second’ or ‘first’ are normal.
Costing P/L A/c – in case of abnormal nature .
(ii) Treatment of Idle Capacity Cost
(a) If idle capacity is due to unavoidable reasons such as repairs & maintenance,
change over of job etc., a supplementary overhead rate may be used to recover the
idle capacity cost. In this case, the costs are charged to production capacity utilized.
(b) If idle capacity cost is due to avoidable reasons such as faulty planning, power
failure etc, the cost should be charged to P/L A/c.
12
(c) If idle capacity is due to seasonal factors, then the cost should be charged to cost of
production by inflating overhead rates.
(iii) As the contract is 80% complete, so 2/3rd of the notional profit on cash basis has been
transferred to Profit & Loss A/c in the first year of contract.
2
∴ Amount transferred to Profit & Loss A/c = × Notional Profit × % of cost received
3
2 75
or , 60,000 = × Notional Profit ×
3 100
60,000 × 3 × 100
or, Notional Profit =
2 × 75
= Rs.1,20,000
Computation of Value of Work Certified
Cost of work to date = Rs. 88,000
Add: Notional Profit = Rs.1,20,000
Rs.2,08,000
Less: Cost of Work Uncertified = 8,000
Value of Work Certified = Rs.2,00,000
Since the Value of Work Certified is 80% of the Contract Price, therefore
Value of Work Certified
Contract Price =
80%
Rs.2,00,000
=
80%
= Rs.2,50,000
(iv) P/V ratio = 28%
Quarterly fixed Cost = Rs.2,80,000
Desired Profit = Rs.70,000
Sales revenue required to achieve desired profit
Fixed Cost + Desired Pr ofit
=
P / V ratio
2,80,000 + 70,000
= = Rs.12,50,000
28%
13
Question 5
(i) Write a short note on functions of Treasury department.
(ii) Discuss the concept of American Depository Receipts.
(iii) How is Debt service coverage ratio calculated? What is its significance?
(iv) Discuss conflict in profit versus wealth maximization objective.
(v) Discuss the concept of Debt-Equity or EBIT-EPS indifference point, while determining the
capital structure of a company.
(vi) Discuss the benefits to the originator of Debt Securitization. (5 x 2 = 10 Marks)
Answer
(i) Functions of Treasury Department
(a) Cash Management: The efficient collection and payment of cash both inside the
organization and to third parties is the function of treasury department. Treasury
normally manages surplus funds in an investment portfolio.
(b) Currency Management: The treasury department manages the foreign currency
risk exposure of the company. It advises on the currency to be used when invoicing
overseas sales. It also manages any net exchange exposures in accordance with
the company policy.
(c) Fund Management: Treasury department is responsible for planning and sourcing
of company’s short, medium, and long - term cash needs. It also participates in the
decision on capital structure and forecasts future interest and foreign currency
rates.
(d) Banking: Since short-term finance can come in the form of bank loans or through
the sale of commercial paper in the money market, therefore, treasury department
carries out negotiations with bankers and acts as the initial point of contact with
them.
(e) Corporate Finance: Treasury department is involved with both acquisition and
divestment activities within the group. In addition, it is often responsible for investor
relations.
(ii) Concept of American Depository Receipts
American Depository Receipts (ADRs) are securities offered by non- US companies who
want to list on any of the US exchanges. It is a derivative instrument. It represents a
certain number of company’s shares. These are used by depository bank against a fee
income. ADRs allow US investors to buy shares of these companies without the cost of
14
investing directly in a foreign stock exchange. ADRs are listed on either NYSE or
NASDAQ. It facilitates integration of global capital markets. The company can use the
ADR route either to get international listing or to raise money in international capital
market.
(iii) Calculation of Debt Service Coverage Ratio (DSCR) and its Significance
The debt service coverage ratio can be calculated as under:
Earnings available for debt service
Debt Service Coverage Ratio =
Interest + Installments
EBITDA
Or, Debt Service Coverage Ratio =
Principal Repayment Due
Interest +
1 − Tc
Debt service coverage ratio indicates the capacity of a firm to service a particular level of
debt i.e. repayment of principal and interest. High credit rating firms target DSCR to be
greater than 2 in its entire loan life. High DSCR facilitates the firm to borrow at the most
competitive rates.
(iv) Conflict in Profit versus Wealth Maximization Objective
Profit maximisation is a short–term objective and cannot be the sole objective of a
company. It is at best a limited objective. If profit is given undue importance, a number of
problems can arise like the term profit is vague, profit maximisation has to be attempted
with a realisation of risks involved, it does not take into account the time pattern of
returns and as an objective it is too narrow.
Whereas, on the other hand, wealth maximisation, is a long-term objective and means
that the company is using its resources in a good manner. If the share value is to stay
high, the company has to reduce its costs and use the resources properly. If the
company follows the goal of wealth maximisation, it means that the company will promote
only those policies that will lead to an efficient allocation of resources.
(v) Concept of Debt-Equity or EBIT-EPS Indifference Point while Determining the
Capital Structure of a Company
The determination of optimum level of debt in the capital structure of a company is a
formidable task and is a major policy decision. It ensures that the firm is able to service
its debt as well as contain its interest cost. Determination of optimum level of debt
involves equalizing between return and risk.
EBIT – EPS analysis is a widely used tool to determine level of debt in a firm. Through
this analysis, a comparison can be drawn for various methods of financing by obtaining
indifference point. It is a point to the EBIT level at which EPS remains unchanged
15
irrespective of debt-equity mix. The indifference point for the capital mix (equity share
capital and debt) can be determined as follows:
(EBIT − I1 ) (1 − T ) (EBIT − I2 )(1 − T )
=
E1 E2
(vi) Benefits to the Originator of Debt Securitization

The benefits to the originator of debt securitization are as follows:
(a) The assets are shifted off the balance sheet, thus giving the originator recourse to
off balance sheet funding.
(b) It converts illiquid assets to liquid portfolio.
(c) It facilitates better balance sheet management as assets are transferred off
balance sheet facilitating satisfaction of capital adequacy norms.
(d) The originator's credit rating enhances.
Question 6
Balance Sheets of RST Limited as on March 31, 2008 and March 31, 2009 are as under:
Liabilities 31.3.2008 31.3.2009 Assets 31.3.2008 31.3.2009

Rs. Rs. Rs. Rs.
Equity Share Land &
Capital (Rs. Building 6,00,000 7,00,000
10 face value
10,00,000 12,00,000
per share)
General 3,50,000 2,00,000 Plant & 9,00,000 11,00,000
Reserve Machinery
9% Investments 2,50,000 2,50,000
Preference 3,00,000 5,00,000 (Long-term)
Share Capital
Share 25,000 4,000 Stock 3,60,000 3,50,000
Premium A/c
Profit & Loss 2,00,000 3,00,000 Debtors 3,00,000 3,90,000
A/c
8% 3,00,000 1,00,000 Cash & Bank 1,00,000 95,000
Debentures
16
Creditors 2,05,000 3,00,000 Prepaid 15,000 20,000

Expenses
Bills Payable 45,000 81,000 Advance Tax 80,000 1,05,000
Payment
Provision for 70,000 1,00,000 Preliminary 40,000 35,000
Tax Expenses
Proposed
Dividend 1,50,000 2,60,000 __________ _________
26,45,000 30,45,000 26,45,000 30,45,000
Additional information:
(i) Depreciation charged on building and plant and machinery during the year 2008-09 were
Rs. 50,000 and Rs. 1,20,000 respectively.
(ii) During the year an old machine costing Rs. 1,50,000 was sold for Rs. 32,000. Its written
down value was Rs. 40,000 on date of sale.
(iii) During the year, income tax for the year 2007-08 was assessed at Rs. 76,000. A cheque
of Rs. 4,000 was received along with the assessment order towards refund of income tax
paid in excess, by way of advance tax in earlier years.
(iv) Proposed dividend for 2007-08 was paid during the year 2008-09.
(v) 9% Preference shares of Rs. 3,00,000, which were due for redemption, were redeemed
during the year 2008-09 at a premium of 5%, out of the proceeds of fresh issue of 9%
Preference shares.
(vi) Bonus shares were issued to the existing equity shareholders at the rate of one share for
every five shares held on 31.3.2008 out of general reserves.
(vii) Debentures were redeemed at the beginning of the year at a premium of 3%.
(viii) Interim dividend paid during the year 2008-09 was Rs. 50,000.
Required:
(a) Schedule of Changes in Working Capital; and
(b) Fund Flow Statement for the year ended March 31, 2009. (5 + 10 = 15 Marks)
17
Answer
(a) Schedule of Changes in Working Capital
Particulars 31.3.08 31.3.09 Effect on Working
Capital
Increase Decrease
Rs. Rs. Rs. Rs.
Current Assets:
Stock 3,60,000 3,50,000 - 10,000
Debtors 3,00,000 3,90,000 90,000 -
Cash and Bank 1,00,000 95,000 - 5,000
Prepaid Expenses 15,000 20,000 5,000 -
Total (A) 7,75,000 8,55,000
Current Liabilities:
Creditors 2,05,000 3,00,000 - 95,000
Bills Payable 45,000 81,000 - 36,000
Total (B) 2,50,000 3,81,000
Net Working Capital (A-B) 5,25,000 4,74,000 -
Net Decrease in Working Capital - 51,000 51,000 -
5,25,000 5,25,000 1,46,000 1,46,000
(b) Funds Flow Statement for the year ended 31st March, 2009
Sources of Fund Rs.
Funds from Operation 7,49,000
Issue of 9% Preference Shares 5,00,000
Sales of Plant & Machinery 32,000
Refund of Income Tax 4,000
Financial Resources Provided (A) 12,85,000
Applications of Fund Rs.

Purchase of Land and Building 1,50,000
Purchase of Plant and Machinery 3,60,000
18
Redemption of Debentures 2,06,000

Redemption of Preference Shares 3,15,000
Payment of Tax 1,05,000
Payment of Interim Dividend 50,000
Payment of Dividend (2007-08) 1,50,000
Financial Resources Applied (B) 13,36,000
Net Decrease in Working Capital (A - B) 51,000
Working Notes:
Estimation of Funds from Operation Rs.
Profit and Loss A/c Balance on 31.3.2009 3,00,000
Add: Depreciation on Land and Building 50,000
Depreciation on Plant and Machinery 1,20,000
Loss on Sale of Plant and Machinery 8,000
( 40,000 – 32,000)
Preliminary Expenses written off 5,000
(40,000 – 35,000)
Transfer to General Reserve 50,000
Proposed Dividend 2,60,000
Provision for Taxation 1,06,000
Interim Dividend paid 50,000
6,49,000
9,49,000
Less: Profit and Loss A/c balance on 31.3.08 2,00,000
Funds from Operation 7,49,000
Plant & Machinery A/c

Rs. Rs.
To Balance b/d 9,00,000 By Depreciation 1,20,000
To Bank (Purchase 3,60,000 By Bank (Sale) 32,000
(Bal. Fig.) By P/L A/c (Loss on Sale) 8,000
_______ By Balance c/d 11,00,000
12,60,000 12,60,000
19
Provision for Taxation A/c

Rs. Rs.
To Advance tax 76,000 By Balance b/d 70,000
payment A/c
To Balance c/d 1,00,000 By P/L A/c (additional 6,000
provision for 2007-08)
By P/L A/c (Provision for
_______ 08-09) 1,00,000
1,76,000 1,76,000
Advance Tax Payment A/c
Rs. Rs.
To Balance b/d 80,000 By Provision for taxation A/c 76,000
To Bank (paid for 08-09) 1,05,000 By Bank (Refund of tax) 4,000

_______ By Balance c/d 1,05,000
1,85000 1,85,000
8% Debentures A/c
Rs. Rs.
To Bank ( 2,00,000 x 2,06,000 By Balance b/d 3,00,000
103%) (redemption)
To Balance c/d 1,00,000 By Premium on redemption

of Debentures A/c 6,000
3,06,000 3,06,000
9% Preference Share Capital A/c
Rs. Rs.
To Bank A/c ( 3,00,000 x 3,15,000 By Balance b/d 3,00,000
105%) (redemption)
To Balance c/d 5,00,000 By Premium on 15,000

redemption of Preference
shares A/c
_______ By Bank (Issue) 5,00,000
8,15,000 8,15,000
20
Securities Premium A/c

Rs. Rs.
To Premium on 6,000 By Balance b/d 25,000
redemption of debentures
A/c
To Premium on
redemption of preference
15,000
shares A/c
To Balance c/d 4,000 _____
25,000 25,000
General Reserve A/c

Rs. Rs.
To Bonus to 2,00,000 By Balance b/d 3,50,000
Shareholders A/c
To Balance c/d 2,00,000 By P/L A/c (transfer) b/f 50,000

4,00,000 4,00,000
Land and Building A/c

Rs. Rs.
To Balance b/d 6,00,000 By Depreciation 50,000
To Bank (Purchase) (Bal. Fig.) 1,50,000 By Balance c/d 7,00,000
7,50,000 7,50,000
Question 7
(a) The capital structure of MNP Ltd. is as under:
9% Debenture Rs. 2,75,000
11% Preference shares Rs. 2,25,000
Equity shares (face value : Rs. 10 per share) Rs. 5,00,000
Rs. 10,00,000
Additional information:
(i) Rs. 100 per debenture redeemable at par has 2% floatation cost and 10 years of
maturity. The market price per debenture is Rs. 105.
21
(ii) Rs. 100 per preference share redeemable at par has 3% floatation cost and 10
years of maturity. The market price per preference share is Rs. 106.
(iii) Equity share has Rs. 4 floatation cost and market price per share of Rs. 24. The
next year expected dividend is Rs. 2 per share with annual growth of 5%. The firm
has a practice of paying all earnings in the form of dividends.
(iv) Corporate Income-tax rate is 35%.
Required :
Calculate Weighted Average Cost of Capital (WACC) using market value weights.
(b) A company is required to choose between two machines A and B. The two machines are
designed differently, but have identical capacity and do exactly the same job. Machine A
costs Rs. 6,00,000 and will last for 3 years. It costs Rs. 1,20,000 per year to run.
Machine B is an ‘economy’ model costing Rs. 4,00,000 but will last only for two years,
and costs Rs. 1,80,000 per year to run. These are real cash flows. The costs are
forecasted in rupees of constant purchasing power. Opportunity cost of capital is 10%.
Which machine company should buy? Ignore tax.
PVIF0.10, 1 = 0.9091, PVIF0. 10, 2 = 0.8264, PVIF0. 10, 3 = 0.7513. (9 + 7 = 16 Marks)
Answer
(a) Computation of Weighted Average Cost of Capital using Market Value Weights
Cost of Equity (ke)
D1
Ke = +g
Po
Rs. 2
= + 5%
Rs. 24 − Rs. 4
= 15%
Cost of Debt (kd)

I (1 − T ) + (RV − NP) / N
Kd =
(RV + NP) / 2
9(1 − 0.35) + (100 − 98) / 10

=
(100 + 98) / 2
5.85 + 0.20
= = 6.11%
99
22
Cost of Preference Shares (kp)

PD + (RV − NP) / N
Kp =
(RV + NP) / 2
11 + (100 − 97) / 10
=
(100 + 97) / 2
11.30
= = 11.47%
98.5
Calculation of WACC using Market Value Weights
Source of Capital Market Weights to Specific Total Cost
Value (Rs.) Total Capital Cost
Debentures (Rs. 105 per 2,88,750 0.1672 0.0611 0.0102
debenture)
Preference Shares (Rs. 106 per 2,38,500 0.1381 0.1147 0.0158
preference share)
Equity Shares (Rs. 24 per share) 12,00,000 0.6947 0.1500 0.1042
17,27,250 1.00 0.1302
WACC using market value weights = 13.02%

(b) Advise to the Management Regarding Buying of Machines
Statement Showing Evaluation of Two Machines
Machines A B
Purchase cost (Rs.): (i) 6,00,000 4,00,000
Life of machines (years) 3 2
Running cost of machine per year (Rs.): (ii) 1,20,000 1,80,000
Cumulative present value factor for 1-3 years @ 10%: (iii) 2.4868 -
Cumulative present value factor for 1-2 years @ 10%: (iv) - 1.7355
Present value of running cost of machines (Rs.): (v) 2,98,416 3,12,390
[(ii) × (iii)] [(ii) × (iv)]
Cash outflow of machines (Rs.): (vi)=(i) +(v) 8,98,416 7,12,390
Equivalent present value of annual cash outflow 3,61,273.93 4,10,481.13
[(vi)÷(iii)] [(vi) ÷(iv)]
23
Recommendation: The Company should buy Machine A since its equivalent cash
outflow is less than Machine B.
Question 8
Answer any three of the following:
(i) A firm maintains a separate account for cash disbursement. Total disbursements are Rs.
2,62,500 per month. Administrative and transaction cost of transferring cash to
disbursement account is Rs. 25 per transfer. Marketable securities yield is 7.5% per
annum.
Determine the optimum cash balance according to William J Baumol model.
(ii) A firm has a total sales of Rs. 12,00,000 and its average collection period is 90 days. The
past experience indicates that bad debt losses are 1.5% on sales. The expenditure
incurred by the firm in administering receivable collection efforts are Rs. 50,000. A factor
is prepared to buy the firm’s receivables by charging 2% commission. The factor will pay
advance on receivables to the firm at an interest rate of 16% p.a. after withholding 10%
as reserve. Calculate effective cost of factoring to the firm. Assume 360 days in a year.
(iii) Explain the concept of discounted payback period.
(iv) Discuss the composition of Return on Equity (ROE) using the DuPont model.
(3 x 3 = 9 Marks)
Answer
(i) Determination of Optimal Cash Balance according to William J. Baumol Model
The formula for determining optimum cash balance is:
2U× P
C=
S
2 × 2,62,500 × 12 × 25
C =
0.075
15,75,00,000
=
0.075
= 2,10,00,00,000
Optimum Cash Balance, C, = Rs. 45,826
24
(ii) Computation of Effective Cost of Factoring

Average level of Receivables = 12,00,000 × 90/360 3,00,000
Factoring Commission = 3,00,000 × 2/100 6,000
Factoring Reserve = 3,00,000 × 10/100 30,000
Amount Available for Advance = Rs. 3,00,000-(6,000+30,000) 2,64,000
Factor will deduct his interest @ 16% :-
Rs. 2,64,000 × 16 × 90
Interest = = Rs. 10,560
360 × 100
Advance to be paid = Rs. 2,64,000 – Rs. 10,560 = Rs. 2,53,440

Annual Cost of Factoring to the Firm: Rs.
Factoring Commission (Rs. 6,000 × 360/90) 24,000
Interest Charges (Rs. 10,560 × 360/90) 42,240
Total 66,240
Firm’s Savings on taking Factoring Service: Rs.

Cost of Administration Saved 50,000
Cost of Bad Debts (Rs. 12,00,000 x 1.5/100) avoided 18,000
Total 68,000
Net Benefit to the Firm (Rs. 68,000 – Rs. 66,240) 1,760
Rs. 66,240 × 100 26.136%

Effective Cost of Factoring =
2,53,440
Effective Cost of Factoring = 26.136%

(iii) Concept of Discounted Payback Period
Payback period is time taken to recover the original investment from project cash flows. It
is also termed as break even period. The focus of the analysis is on liquidity aspect and it
suffers from the limitation of ignoring time value of money and profitability. Discounted
payback period considers present value of cash flows, discounted at company’s cost of
25
capital to estimate breakeven period i.e. it is that period in which future discounted
cashflows equal the initial outflow. The shorter the period, better it is. It also ignores post
discounted payback period cash flows.
(iv) Composition of Return on Equity using the DuPont Model
There are three components in the calculation of return on equity using the traditional
DuPont model- the net profit margin, asset turnover, and the equity multiplier. By
examining each input individually, the sources of a company's return on equity can be
discovered and compared to its competitors.
(a) Net Profit Margin: The net profit margin is simply the after-tax profit a company
generates for each rupee of revenue.
Net profit margin = Net Income ÷ Revenue
Net profit margin is a safety cushion; the lower the margin, lesser the room for error.
(b) Asset Turnover: The asset turnover ratio is a measure of how effectively a company
converts its assets into sales. It is calculated as follows:
Asset Turnover = Revenue ÷ Assets
The asset turnover ratio tends to be inversely related to the net profit margin; i.e.,
the higher the net profit margin, the lower the asset turnover.
(c) Equity Multiplier: It is possible for a company with terrible sales and margins to take
on excessive debt and artificially increase its return on equity. The equity multiplier,
a measure of financial leverage, allows the investor to see what portion of the return
on equity is the result of debt. The equity multiplier is calculated as follows:
Equity Multiplier = Assets ÷ Shareholders’ Equity.
Calculation of Return on Equity
To calculate the return on equity using the DuPont model, simply multiply the three
components (net profit margin, asset turnover, and equity multiplier.)
Return on Equity = Net profit margin× Asset turnover × Equity multiplier
26
The Suggested Answers for Part I of Paper – 5: Taxation are based on the provisions
applicable for A.Y.2009-10, which is the assessment year relevant for June 2009 examination.
PAPER – 5: TAXATION
Answer all questions

Question 1
Answer any five out of the following six sub-divisions, with reference to the provisions of the
Income-tax Act, 1961 for the assessment year 2009-2010:
(a) Whether the income derived from saplings or seedlings grown in a nursery is taxable
under the Income- Act, 1961?
(b) When will tax not required to be deducted at source on interest payable to a resident on
any bond or security issued by a company though the aggregate amount of interest
exceeds Rs.2,500, the basic exemption limit under section 193 of the Act?
(c) When is a charitable trust required to file its audit report alongwith return of income?
State with reason, whether the following statements are True or False:
(d) A notice under section 143(2) of the Act for scrutiny/regular assessment shall not be
issued on an assessee after the expiry of six months from the end of the financial year in
which the return is furnished.
(e) Mr. X, Karta of HUF, claims that the HUF is non-resident as the business of HUF is
transacted from UK and all the policy decisions are taken there.
(f) Mr. P, a shareholder of a closely held company, holding 16% shares, received advances
from that company which is to be deemed as dividend from an Indian Company, hence
exempted under section 10(34) of the Income-tax Act, 1961. (5 x 2 =10 Marks)
Answer
(a) As per Explanation 3 to section 2(1A) of the Act, income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income and exempt from
tax, whether or not the basic operations were carried out on land.
(b) As per section 193 of the Act, no tax is required to be deducted at source on any interest
payable to a resident on any bond or security issued by a company, where the following
conditions are satisfied -
(i) where such security is in dematerialised form and
(ii) is listed on a recognised stock exchange in India.
(c) A charitable trust is required to get its accounts audited by a Chartered Accountant and
file the audit report in the prescribed form, duly signed and verified by such accountant,
along with its return of income when the total income of the trust before giving effect to
section 11 and 12 exceeds the maximum amount not chargeable to tax i.e. Rs.1,50,000.
PROFESSIONAL COMPETENCE EXAMINATION: JUNE, 2009
(d) True, the time limit for issuance of notice under section 143(2) has been revised w.e.f.
1.4.2008. Accordingly, notice under section 143(2) cannot be issued after the expiry of
six months from the end of the financial year in which the return of income is furnished.
(e) True, A HUF is considered to be a non-resident where the control and management of its
affairs are situated wholly outside India. In the given case, since all the policy decisions
of HUF are taken from UK, the HUF is a non-resident.
(f) False, as per section 10(34) of the Act, only income by way of dividend referred to in
section 115-O shall be exempt in the hands of shareholders. Corporate dividend tax is
not leviable on deemed dividend under section 2(22)(e) and hence, such deemed
dividend is not exempt under section 10(34).
Question 2
Mr. X is a resident individual. His Profit and Loss account for the year ending 31st March, 2009 is
given below:
To Amount By Amount
General charges 35,650 Gross Profit 5,25,860
Insurance 3,550 Commission 6,800
Staff Salary 1,12,560 Rent received 37,500
Donation to political party 1,000 Interest on debentures (Net amount
Rs.22,450 plus TDS Rs. 2,550) 25,000
Fringe benefit tax 2,400 Agricultural income 45,000
Depreciation 1,25,656 Short term capital gain on sale of
investment 29,000
Administrative expenses 42,500 Dividend from Indian Company 16,000
Advance tax 17,000
Net Profit 3,44,894
6,85,160 6,85,160
(i) Depreciation has been calculated as per the Income Tax Rules at Rs. 75,000
(ii) He has deposited Rs. 35,000 in a notified scheme under Post Office Time Deposit Rules,
1981 for five year time.
(iii) He had bought 200 shares of AB Co. Ltd. on 5.12.2007 @ Rs. 75 each, 150 shares of
PQ Co. Ltd. on 3.8.2008 @ Rs. 112 each and 150 shares of AB Co. Ltd. on 05.09.2008
@ Rs. 60 each. He sold all the shares of AB Co. Ltd. on 15.12.2008 @ Rs. 98 each and
sold the shares of PQ CO. Ltd. on 10.3.2009 @ Rs. 102 each. All shares were sold in
National Stock Exchange through a registered broker.
28
(iv) One of his life insurance policies was matured on 14.6.2008. The sum assured was Rs.
1,00,000 and amount received on maturity was Rs. 1,62,850.
(v) Donation to the political party represented the contribution made to a political party
registered under section 29A of the Representation of the People Act, 1951.
(vi) Income tax department refunds Rs. 42,580 (including interest of Rs. 1,470) which was
directly credited in his personal savings account.
(vii) He incurred expenditure of Rs. 40,000 on treatment of his dependent father who was
suffering from specified disease as defined in rule 11DD of Income Tax Rules, 1962. The
payment of medical expenses was made by cheque and an amount of Rs. 7,500 was
reimbursed to him by an insurance company.
(vii) Bad debt of a business which was discontinued in earlier years, recovered during the
year Rs. 15,000.
Compute total income and tax payable thereon by Mr. X for the assessment year 2009 -
2010. (20 Marks)
Answer
Computation of taxable income and tax payable by Mr. X for the Assessment year 2009-10
Particulars Rs. Rs. Rs.

1. Income from House Property ( Note 1) 26,250
2. Profits and gain of business or profession (Note 2) 2,78,450
3. Capital gains (Note 3) 33,200
4. Income from other sources (Note 4) 26,470
Gross Total income 3,64,370
Less : Deductions under Chapter VIA
(i) Deduction under section 80C (Note 5) 35,000
(ii) Deduction under section 80DDB in respect of 40,000
expenditure on medical treatment incurred on
treatment of his father
Less: Expenditure reimbursed by insurance 32,500
company 7,500
(iii) Deduction under section 80GGC in respect of
contribution to the Political Party (Note 11) 1,000 68,500
Total income 2,95,870
29
Components of total income

Special Income
Short-term capital gains from sale of 4,200
shares (chargeable at a special rate of
15% u/s 111A)
Normal income 2,91,670
2,95,870
Computation of tax
Tax on short-term capital gains from sale of 630
shares @ 15% of Rs.4,200
Tax on agricultural income plus non-
agricultural income aggregating to Rs.3,36,670
First 1,50,000 NIL 0
Next 1,50,000 10% 15,000
Balance 36,670 20% 7,334
3,36,670 22,334 22,334
22,964
Less: Tax on agricultural
income plus basic exemption
limit aggregating to
Rs.1,95,000
First 1,50,000 Nil 0
Next 45,000 10% 4,500
1,95,000 4,500 4,500
Income tax payable 18,464
Add : Education cess @ 2% 369
Secondary and higher education cess @ 1% 185
Total tax 19,018
Less : Tax deducted at source 2,550
16,468
Less: Advance tax paid 17,000
Tax refundable 532
30
Notes:
1. Computation of Income from House Property
Gross Annual Value (GAV) 37,500
Rent received is taken as the GAV in the absence of other
information
Less: Municipal taxes paid Nil
Net Annual Value (NAV) 37,500
Less: Deduction under section 24 @ 30% of NAV 11,250
Income from House Property 26,250
2. Computation of Profits and gains of business or profession
Net profit as per Profit & Loss account 3,44,894
Add : Inadmissible expenses
Depreciation charges 1,25,656
Advance tax (Note 9) 17,000
Fringe Benefit tax (Note 9) 2,400
Donation to political party 1,000
1,46,056
Add: Recovery of bad debt (Note 8) 15,000
5,05,950
Less : Income chargeable under any other head / exempt
income
Rent received 37,500
Interest on debentures (gross) 25,000
Agricultural income (Note 10) 45,000
Short term capital gain on sale of investment 29,000
Dividend from Indian Company (Note 10) 16,000 1,52,500
3,53,450
Less: Depreciation as per Income-tax Act 75,000
Profits and gains of business or profession 2,78,450
3. Computation of Capital Gains

Short term capital gains on sale of investment 29,000
Short term capital gains on sale of shares
Shares of AB Co. Ltd.
Sale consideration 150 shares @ Rs.98 each 14,700
Less: Cost of 150 shares @ Rs.60 each 9,000 5,700
31
Shares of PQ Co. Ltd.

Sale consideration 150 shares @ Rs.102 each 15,300
Less: Cost of 150 shares @ Rs.112 each 16,800 (1500) 4,200
33,200
Long term capital gains on sale of shares
Long-term capital gains on sale of 200 shares of AB Co. Ltd. is exempt Nil
under section 10(38).
Since the holding period of 200 shares of AB Ltd. is more than twelve
months, the capital gain on sale of such shares is a long-term capital gain
and hence, exempt from income-tax.
Capital Gains 33,200
4. Computation of Income from other sources

Interest on debentures 25,000
Interest on refund from IT authority (Note 7) 1,470
Income from other sources 26,470
5. The Finance Act, 2008 has amended section 80C to include within its fold, five year time
deposit in an account under Post Office Time Deposit Rules, 1981.
6. The maturity proceeds of the life insurance policy are exempt under section 10(10D)
assuming that the policy does not fall under the exceptions stated under that section.
7. Refund of income tax is not taxable. However, interest on refund is chargeable to tax
under the head “Income from other sources”.
8. Recovery of bad debts, assumed to be allowed in full in an earlier year, is taxable under
section 41(4), whether or not the business or profession in respect of which the deduction
has been allowed is in existence at the time when it is recovered.
9. Advance tax and Fringe Benefit Tax are not allowable as deduction.
10. Agricultural income is exempt under section 10(1) and dividend from an Indian company is
exempt from tax under section 10(34).
11. Contribution to a Political Party registered under section 29A of the Representation of the
People Act, 1951 is deductible under section 80GGC.
Question 3
(a) Mr. Ashok Kumar, an employee of a PSU, furnishes the following particulars for the
previous year ending 31.3.2009:
Rs.
i. Salary income for the year 5,25,000
ii. Salary for Financial Year 2006-07 received during the year 40,000
32
iii. Assessed Income for the Financial Year 2006-07 1,40,000

You are requested by the assessee to compute relief under section 89 of the Income-tax
Act, 1961, in terms of tax payable for assessment year 2009-10.
The rates of Income-tax for the assessment year 2007-08 are:
Tax Rate (%)
On first Rs. 1,00,000 Nil
On Rs. 1,00,000 - Rs. 1,50,000 10
On Rs. 1,50,000 - Rs. 2,50,000 20
Above Rs. 2,50,000 30
Education cess 2
(7 Marks)
(b) Mr. Kumar is the owner of a residential house which was purchased in September, 1992
for Rs. 50,00,000. He sold the said house on 5th August, 2008 for Rs. 24,00,000.
Valuation as per stamp valuation authority of the said plot of land was Rs. 35,00,000. He
invested Rs. 8,00,000 in NHAI Bonds on 12th January, 2009. He purchased a
residential house on 8th September, 2008 for Rs. 12,00,000. He gives other particulars
as follows:
Interest on Bank Deposit Rs. 32,000
Investment in public provident fund Rs. 12,000
You are requested to calculate the taxable income for the assessment year 2009-2010
and the tax liability, if any.
Cost inflation index for F.Y. 1992-93 and 2008-09 are 223 and 582 respectively.(8 Marks)
Answer
(a) Computation of Relief under section 89 for the Assessment Year 2009-10
Particulars Rs. Rs.
Salary Income for the year excluding the arrears 5,25,000
Add: Arrears relating to Financial Year 2006-07 40,000
Total Income 5,65,000
Tax on Rs.5,65,000
First Rs.1,50,000 Nil 0
Next Rs.1,50,000 10% 15,000
Next Rs.2,00,000 20% 40,000
Balance__65,000 30% 19,500
5,65,000 74,500
Add: Education cess @ 2% 1,490
33
Secondary and higher education cess @1% 745

Total (A) 76,735
Total Income excluding arrears 5,25,000

Tax on Rs.5,25,000
First Rs.1,50,000 Nil 0
Next Rs.1,50,000 10% 15,000
Next Rs.2,00,000 20% 40,000
Balance __25,000 30% 7,500
5,25,000 62,500
Add : Education cess @ 2% 1,250
Secondary and higher education cess @ 1% 625
Total (B) 64,375
Difference between A & B I 12,360

Assessment Year 2007-08
Total Income assessed 1,40,000
Add: Arrears relating to Financial year 2006-07 40,000
Total income (including arrears) 1,80,000
Tax on Rs.1,80,000 11,000
Add: Education Cess @ 2% 220
Total (C) 11,220
Total Income excluding arrears 1,40,000
Tax on Rs.1,40,000 4,000
Add: Education Cess @ 2% 80
Total (D) 4,080
Difference between C & D II 7,140
Relief under section 89 (I – II) 5,220

(b) Computation of total income and tax liability of Mr. Kumar for the A.Y.2009-10
Particulars Rs. Rs.
Capital Gains:
Sale price of the residential house 24,00,000
Valuation as per Stamp Valuation authority 35,00,000
(Value to be taken is the higher of actual sale price or valuation
adopted for stamp duty purpose as per section 50C)
34
Therefore, Consideration for the purpose of Capital Gains 35,00,000

Less: Indexed Cost of Acquisition = 50,00,000 x 582 / 223 1,30,49,327
Long-term Capital Loss (to be carried forward to the (95,49,327)
succeeding year for set-off against only long-term capital gains -
can be carried forward for a maximum of 8 years)
Income from other sources:
Interest on bank deposits 32,000
Gross Total Income 32,000
Less: Deduction under Chapter VI-A
Section 80C – Investment in PPF 12,000
Total Income 20,000
Tax liability (There is no tax liability since the total income is Nil
less than the basic exemption limit)
Question 4
(a) (i) Mr. Abhik, an individual, made payment of health insurance premium to GIC in an
approved scheme. Premium paid on his health is Rs. 10,000 and his spouse’s
health is Rs. 15,000 during the year 2008-09. He also paid health insurance
premium of Rs. 25,000 on his father’s health who is a senior citizen and not
dependent on him. The payments have not been made by cash. Compute the
amount of deduction under Chapter VI - A of the Act, available to Mr. Abhik from his
gross total income for the assessment year 2009-10. (3 Marks)
(ii) Mr. Abhik's father, who is a senior citizen had pledged his residential house to a
bank under a notified reverse mortgage scheme. He was getting loan from bank in
monthly installments. Mr. Abhik's father did not repay the loan on maturity and gave
possession of the house to the bank to discharge his loan. How will the treatment
of long-term capital gain be made on such reverse mortgage transaction? (3 Marks)
(b) Ms. Geeta, a resident individual, provides the following details of her income / losses for
the year ended 31.3.2009:
(i) Salary received as a partner from a partnership firm Rs. 7,50,000.
(ii) Loss on sale of shares listed in BSE Rs. 3,00,000. Shares were held for 15 months
and STT paid on sale.
(iii) Long-term capital gain on sale of land Rs. 5,00,000.
(iv) Rs. 51,000 received in cash from friends in party.
(v) Rs. 55,000, received towards dividend on listed equity shares of domestic
companies.
35
(vi) Brought forward business loss of assessment year 2007- 08 Rs. 12,50,000.
The return for assessment year 2007-08 was filed in time.
Compute gross total income of Ms. Geeta for the assessment year 2009 -10 and
ascertain the amount of loss that can be carried forward. (8 Marks)
Answer
(a) (i) Mr. Abhik will be eligible to claim deduction under section 80D on payment of health
insurance premium to GIC in a medical insurance scheme approved by the Central
Government. The premium is paid otherwise than by way of cash and hence
qualifies for deduction under section 80D. Therefore, the amount of deduction
under section 80D would be –
Particulars Amount
(Rs.)
On health insurance premium paid on the health of himself and his 15,000
spouse (Rs.10,000 + Rs.15,000 = Rs.25,000, but restricted to
Rs.15,000)
On health insurance premium paid on the health of his father,
Rs.25,000 but restricted to Rs.20,000 in the case of a parent, who
is a senior citizen (whether dependent or not) 20,000
Total deduction under section 80D 35,000
(ii) The Finance Act, 2008 has inserted clause (xvi) in section 47 to provide that any
transfer of a capital asset in a transaction of reverse mortgage under a scheme
made and notified by the Central Government shall not be considered as a transfer
for the purpose of capital gain.
Accordingly, the transaction made by Mr. Abhik's father will not be regarded as a
transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a
loan, either in lump sum or in installment, in a transaction of reverse mortgage
would be exempt from income-tax.
However, capital gains tax liability would be attracted at the stage of alienation of
the mortgaged property by the bank for the purposes of recovering the loan.
(b) Computation of Gross Total Income of Ms. Geeta for the Assessment Year
2009-10
Particulars Rs.
Profits and gains of business and profession
Salary received as a partner from a partnership firm is taxable under 7,50,000
the head “Profits and gains of business and profession”
Less: brought forward business loss of assessment year 2007-08 to be 7,50,000
36
set-off against business income

Nil
Capital Gains
Long term capital gain on sale of land – (See Note 2) 5,00,000
Income from other sources
Cash gift received from friends - since the value of cash gift 51,000
exceeds Rs.50,000, the entire sum is taxable
Dividend received from a domestic company is exempt
under section 10(34) Nil
51,000
Gross Total Income 5,51,000
Notes –
1. Balance brought forward business loss of assessment year 2007-08 of Rs.5,00,000
has to be carried forward to the next year.
2. Long-term capital loss on sale of shares cannot be set-off against long-term capital
gain on sale of land since loss from an exempt source cannot be set-off against
profit from a taxable source. Further, long-term capital gain on sale of listed shares
on which STT is paid is exempt under section 10(38), loss on sale of listed shares is
a loss from an exempt source. So it cannot be set-off against long-term capital gain
on sale of land, which is a profit from a taxable source.
Question 5
Answer any four of the following five sub-divisions with regard to the provisions of the Income-
tax Act, 1961:
(a) Explain "Previous year" for undisclosed sources of income.
(b) Define the meaning of "Infrastructure Capital Fund" as per section 2(26B) of the Income-
tax Act, 1961.
(c) Explain the meaning of expression "advancement of any other object of general public
utility" in the context of "Charitable Purpose" defined under section 2(15) of the Act.
(d) What is the meaning of ‘Incorrect claim’ apparent from any information in the return of
income which needs prima face adjustment under section 143(1) of the Act?
(e) Enlist the installments of advance tax and due dates thereon in case of companies.
(4 x 4 = 16 Marks)
37
Answer
(a) Previous Year
There are many occasions when the Assessing Officer detects cash credits, unexplained
investments, unexplained expenditure etc., the source for which is not satisfactorily
explained by the assessee to the Assessing Officer. The income from these undisclosed
sources of income would be deemed to be the income of that financial year for which
assessee failed to explain the nature or source of income.
(i) Cash credit - previous year is that previous year for which Assessing Officer finds
any credit in the books of the assessee.
(ii) Unexplained Investments - previous year is that financial year in which the
assessee has made investments which are not recorded in the books of account.
(iii) Unexplained money etc. - previous year is that financial year in which the assessee
is found to be owner of any money, bullion, jewellery or other valuable article which
are not recorded in the books of account.
(iv) Amount of investments etc. not fully disclosed in the books of account - previous
year is that financial year in which the assessee is found to be the owner of any
money, bullion, jewellery or other valuable article the value of which exceeds the
amount recorded in the books of account.
(v) Unexplained expenditure – previous year is that financial year in which the
assessee incurs unexplained expenditure.
(vi) Amount borrowed or repaid on hundi – previous year is that financial year in which
the assessee has borrowed any amount on a hundi or repaid any amount due
thereon other than through account-payee cheque drawn on a bank.
Note - Students may mention any two out of six examples given above.
(b) Infrastructure Capital Fund
As per section 2(26B) of the Act, "Infrastructure Capital Fund" means such fund
operating under a trust deed registered under the provisions of the Registration Act, 1908
established to raise monies by the trustees for investment by way of acquiring shares or
providing long term finance to -
(i) any enterprise or undertaking wholly engaged in the business referred to in section
80-IA(4) or section 80-IAB(1) or
(ii) an undertaking developing and building a housing project referred to in section 80-
IB(10) or
38
(iii) a project for constructing a hotel of not less than three-star category as classified by
the Central Government or
(iv) a project for constructing a hospital with atleast 100 beds for patients.
(c) Advancement of any other object of general public utility
The proviso to section 2(15) of the Act provides that “advancement of any other object of
general public utility" shall not be a charitable purpose, if it involves carrying on of:
(i) any activity in the nature of trade, commerce or business, or
(ii) any activity of rendering of any service in relation to any trade, commerce or
business,
for a cess or fee or any other consideration, irrespective of the nature of use or
application of the income from such activity or the retention of such income, by the
concerned entity.
The expression "advancement of any other object of general public utility" includes any
object which will be beneficial even to a segment of society and not necessarily to the
whole mankind. However, the object should not be for the benefit of specified individuals.
(d) “An incorrect claim apparent from any information in the return of income” shall mean the
following claims, on the basis of an entry, in the return, -
(i) claim of an item, which is inconsistent with another entry of the same or some other
item in the return of income;
(ii) claim in respect of which the information required to be furnished under the Act to
substantiate the entry has not been so furnished; or
(iii) claim in respect of deduction, where such deduction exceeds the specified statutory
limit expressed as monetary amount or percentage or ratio or fraction.
(e) Advance tax shall be payable by companies as per the following schedule of
installments:
Companies - four installments
Due date of installment Amount payable
On or before the 15th June Not less than 15% of advance tax liability
On or before the 15th September Not less than 45% of advance tax liability, as
reduced by the amount, if any, paid in the
earlier installment
On before the 15th December Not less than 75% of advance tax liability, as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments
39
On before the 15th March The whole amount of advance tax liability, as
reduced by the amount or amounts, if any, paid
in the earlier installment or installments
Question 6
(a) Mr. X, a service provider who pays service tax regularly, was of the opinion that a
particular service was not liable for service tax. He, therefore, did not charge service tax
in his bill. He received the bill amount without service tax. How will service tax liability of
Mr. X be determined in such case?
(b) Whether service tax return can be furnished after the due date?
(c) How can the excess payment of service tax be adjusted?
(d) Discuss the accountability of an “input service distributor” who may not be liable to pay
service tax.
(e) Discuss the word “transparency” in the context of VAT system.
(f) When does a small service provider require to register under the Finance Act, 1994, but
not liable to collect and pay service tax? (5 x 2 = 10 Marks)
Answer
(a) The liability of a service provider or person liable to pay service tax under rule 2(1)(d) of
the Service Tax Rules, 1994, to pay service tax is not contingent upon the service
provider realizing or charging the service tax at the prevailing rate. The statutory liability
does not get extinguished if the service provider fails to charge or realize the service tax
from the service receiver. In this case, the amount received from the service receiver will
be taken to be inclusive of service tax. Accordingly, service tax payable by the service
provider shall be ascertained by making back calculations in the following manner:-
Amount received × Service tax rate

Service tax payable =
(100 + Service tax rate )
(b) A delayed return can be furnished by paying the prescribed late fee. Section 70(1) of
the Finance Act, 1994 as amended inter alia provides for filing of periodical return after
the due date with the prescribed late fee of not more than Rs. 2,000/-.
(c) Where an assessee has paid to the credit of Central Government any amount in excess
of the amount required to be paid towards service tax liability for a month or quarter, as
the case may be, the assessee may adjust such excess amount paid by him against his
service tax liability for the succeeding month or quarter, as the case may be. However,
such an adjustment would be subject to the following conditions mentioned below:
40
(i) Self-adjustment of excess credit would not be allowed in case of reasons involving
interpretation of law, taxability, classification, valuation or applicability of any
exemption notification.
(ii) Excess amount paid and proposed to be adjusted should not exceed Rs.1,00,000
for the relevant month or quarter except in case of assessees opting for centralized
registration.
(iii) Adjustment can be made only in the succeeding month or quarter.
(iv) The details of self-adjustment should be intimated to the Superintendent of Central
Excise within a period of 15 days from the date of such adjustment.
(d) As per Notification No. 27/2005 dated 07.06.2005, Central Government has notified that
an input service distributor is required to make an application for registration even though
he may not be liable to pay service tax.
(e) Out of total consideration paid for purchase of material, the buyer knows the tax
component under a VAT system. Thus, the system ensures transparency. This
transparency enables the State Government to know as to what is the exact amount of
tax coming at each stage. Thus, it is a great aid to the Government while taking
decisions with regards to rate of tax etc.
(f) When the gross receipts of a small service provider do not exceed Rs. 10 lakh in the
preceding financial year, he is not liable to pay service tax in the current financial year till
the ‘aggregate value of taxable service’ does not exceed Rs. 10 lakh during the period.
However, he is liable to get registered when the gross receipts in any financial year
exceeds Rs. 9 lakh within a period of 30 days from the date of exceeding the threshold
limit of Rs. 9 lakh.
Therefore, when in preceding financial year the aggregate value of taxable services
exceeds Rs. 9 lakh, but does not exceed Rs. 10 lakh, the small service provider shall be
required to get registered, but he shall not be liable to collect and pay service tax till the
aggregate value of taxable services is less than Rs. 10 lakh in current financial year.
Question 7
(a) Compute the VAT amount payable by Mr. A who purchases goods from a manufacturer
on payment of Rs. 2,25,000 (including VAT) and earns 10% profit on sale to retailers.
VAT rate on purchase and sale is 12.5%. (3 Marks)
(b) An unregistered “service provider” provides following details in respect of taxable
services provided during the financial year 2008-09:
Date Particulars Amount
(Rs.)
30.6.2008 Advance received from a customer 1,00,000
41
30.9.2008 Part payment received against a bill of Rs. 5,00,000

9,50,000 raised on a customer
31.12.2008 Money received against taxable services provided 3,00,000
during December, 08
31.1.2009 Taxable services rendered during January, 09 1,00,000
31.3.2009 Taxable services rendered during March, 09 2,00,000
The service tax provider complies with the provisions of registration and collection of
service tax as per service tax laws. He gets registered during the year. He received the
money against the bills raised during the month of January and March 2009. Compute
the service tax liability of service provider for the year 2008-09 considering service tax @
12.36%. (3 Marks)
Answer
(a) Computation of VAT payable by Mr. A:-
Amount (Rs.)
Payment made to manufacturer 2,25,000
Less: VAT paid (2,25,000 x 12.5)/112.5 25,000
Purchase price 2,00,000
Add: Profit margin (10% of Cost Price) 20,000
Sale price before VAT 2,20,000
Add: VAT @ 12.5% on Rs. 2,20,000 27,500
Invoice value after 10% profit margin 2,47,500
VAT charged in invoice 27,500

Less: VAT input credit (2,25,000 x 12.5)/112.5 25,000
VAT payable by Mr. A 2,500
(b) As per Notification No. 27/2005 dated 07.06.2005, Central Government has notified that
any service provider whose aggregate value of taxable service in a financial year
exceeds Rs. 9 lakh is required to make an application for registration within a period of
30 days from the date of exceeding the threshold limit of Rs. 9 lakh.
Further, Notification No. 6/2005-ST dated 01.03.2005 as amended provides that a small
service provider is eligible to avail exemption from service tax on aggregate value of
taxable services not exceeding Rs. 10 lakh in any financial year subject to the condition
that during the preceding financial year, the aggregate value of all taxable services
provided by him did not exceed Rs. 10 lakh.
42
In given question, since the service provider is not registered in preceding financial year
2007-08, it implies that his aggregate value of taxable services during 2007-08 was less
than Rs. 9 lakh. Consequently, he is eligible for exemption under Notification No. 6/2005
dated 01.03.2005 available to small service providers in financial year 2008-09.
However, the service provider will no more remain an unregistered dealer as his gross
receipts exceed Rs. 9 lakh during the financial year 2008-09.
Computation of service tax liability of service provider for the service provided during the
financial year 2008-09:-
Date Particulars Receipt
Amount (Rs.)
30/06/08 Advance received 1,00,000
30/09/08 Part payment received 5,00,000
31/12/08 Receipts against taxable services 3,00,000
31/01/09 Receipts against taxable services 1,00,000
31/03/09 Receipt against taxable services 2,00,000
Total Receipts against taxable services 12,00,000
Less: Exemption for small service providers 10,00,000
Receipts liable to service tax 2,00,000
Service tax payable @12.36% 24,720
Question 8
(a) How is the value of taxable services is determined when the consideration against
taxable services is received in other than monetary terms?
(b) What are the sources of Service Tax Law?
(c) How can an auditor play role to ensure that the tax payers discharge their tax liability
properly under the VAT system?
(d) Discuss the ‘subtraction method’ for computation of VAT. (3 x 3 = 9 Marks)
Answer
(a) Section 67 of the Finance Act, 1994 as amended provides that
If the consideration for a taxable service is not wholly or partly in terms of money, then the
value of such service shall be such amount in money, with the addition of service tax
charged, is equivalent to the consideration.
In other words, where the service rendered is for a consideration not wholly or partly
consisting of money, the value of the taxable service is equivalent to the total value of the
43
consideration. However, the total of such money and non-money value of the consideration
has to be treated as inclusive of the service tax payable thereon.
For instance, Mr. A, a Chartered Accountant provided taxable professional service to one
of his clients. For rendering services, Mr. A charges Rs. 20,000 from his client and also
asks his client to give him a law book worth Rs. 2,472. The total consideration in this
case will be Rs. 22,472 and the value of the taxable service shall be Rs. 20,000 (Rs.
22,472 × 100/100+12.36) and Rs. 2,472 shall be the service tax payable.
(b) There is no independent statute on service tax as yet. However, the sources of service
tax law are:-
i. Finance Act, 1994
ii. Rules on service tax
iii. Notifications on service tax
iv. Circulars or Office Letters (Instructions) on service tax
v. Orders on service tax and
vi. Trade notices on service tax
(c) Under the VAT system, trust has been reposed on tax payers, as there will be no regular
assessment of all VAT returns, but only a few VAT returns will be taken up for scrutiny
assessment. In other cases, the return filed by the trader will be accepted. It will not be
also seen whether proper records have been maintained by the trader.
As a consequence, a check on compliance becomes essential. Chartered Accountants
can ensure tax compliance by:-
(i) helping the client in systematic record keeping;
(ii) helping the client in interpretation of the provisions of VAT law, and
(iii) performing audit of VAT accounts.
(iv) reporting the under-assessment, if any, made by the dealer requiring additional
payment or
(v) reporting any excess payment of tax warranting refund to the tax payers.
(d) Under the subtraction method, the tax is charged only on the value added at each stage
of the sale of the goods. Since, the total value of goods sold is not taken into account,
the question of grant of claim for set-off or tax credit does not arise.
This method is normally applied where the tax is not charged separately. Under this
method for imposing tax, ‘value added’ is simply taken as the difference between sales
and purchases.
44
PAPER – 6 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
Section−A: Information Technology
Attempt all questions.
Question 1
(a) Describe briefly the following terms:
(i) VPDN
(ii) Folder
(iii) DDL Compiler
(iv) Shareware
(v) Clock Speed (5x1 = 5 Marks)
(b) Explain each of the following:
(i) Real Time Data Warehouse
(ii) MMX
(iii) Online Backup
(iv) Index Field
(v) Operating System (5x1 = 5 Marks)
Answers
(a) (i) VPDN: VPDN (Virtual Private Dial-Up Network) is a user to LAN connection used
by a company that has employees who need to connect to the private network from
various remote locations.
(ii) Folder: Folder, also called a Directory, is a tool for organizing files on a disk.
Folders can contain files or other folders, so it is possible to set up a hierarchical
system of folders on the computer.
(iii) DDL Compiler: DDL Compiler converts data definition statements into a set of
tables. Tables contain meta-data (data about the data) concerning the database. It
gives rise to a format that can be used by other components of the database.
(iv) Shareware: Shareware is a software developed by individual and small companies
that cannot afford to market their software world wide or by a company that wants to
release a demonstration version of its commercial product.
(v) Clock Speed: The clock speed is the speed at which the processor executes
instructions. It is measured in megahertz (MHz) e.g. a 450 MHz processor performs
450 million instructions per second.
(b) (i) Real time Data Warehouse: A Real time data warehouse is updated on a
transaction or event basis, every time an operational system performs a transaction
such as an order or a delivery or a booking etc.
(ii) MMX: MMX stands for Multimedia Extensions—a set of instructions built in to the
CPU, specifically intended for improving the performance of multimedia or graphic
applications—mainly games.
(iii) Online Backup: Data base back-up can be performed while the database is being
actively accessed (online). It is performed by executing the command-line or from
the 'Backup Database' utility. When this process begins, the database engine
externalizes all cached data pages kept in memory to the database file(s) on disk.
This process is called a checkpoint. The database engine continues recording
activity in the transaction log file while the database is backed up. The log file is
backed up after the backup utility finishes backing up the database.
(iv) Index Field: Index fields are used to store relevant information along with a
document. The data input to an Index Field is used to find those documents when
needed. The program provides up to 25 user-definable Index Fields in an Index Set.
(v) Operating System: Operating System is defined as an integrated system of pro-
grams which supervises the operation of the CPU, controls the input/output
functions of the computer system, translates the programming languages into the
machine languages and provides various support services.
Question 2
Answer the following questions:
(a) Define an Expert system. Describe the components of an Expert system. (7 Marks)
OR
(b) Describe the ways a computer network can help business. (7 Marks)
(c) What are the challenges faced by the management of a data center. (3 Marks)
Answers
(a) Expert System: An expert system (ES) is a computerized information system that allows
non-experts to make decisions comparable to those of an expert. Expert systems are
used for complex or ill-structured tasks that require experience and specialized
knowledge in narrow, specific subject areas.
Components of an Expert system are : (shown in figure below)
(i) Knowledge base: This includes the data, knowledge, relationships, rules of thumb
(heuristics), and decision rules used by experts to solve a particular type of
problem.
(ii) Inference engine: This program contains the logic and reasoning mechanisms that
simulate the expert logic process and deliver advice. It uses data obtained from
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PAPER - 6 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
both the knowledge base and the user to make associations and inferences, form its
conclusions, and recommend a course of action.
User
User at a PC interface Expert
Inference Knowledge
engine acquisitio
n facility
Explanatio
n facility
Knowledge
engineer at a PC
Fig. Major components of an Expert System

(iii) User interface: This program allows the user to design, create, update, use, and
communicate with the expert system.
(iv) Explanation facility: This facility provides the user with an explanation of the logic
the ES used to arrive at its conclusion.
(v) Knowledge acquisition facility: Building a knowledge base, referred to as
knowledge engineering, involves both a human expert and a knowledge engineer.
The knowledge engineer is responsible for extracting an individual’s expertise and
using the knowledge acquisition facility to enter it into the knowledge base.
(b) A computer network can help the business in following ways:
(i) File Sharing: File sharing is the most common function provided by networks and
consists of grouping all data files together on a server or servers. When all data files
in an organization are concentrated in one place, it is much easier for staff to share
documents and other data.
47
(ii) Print Sharing: When printers are made available over the network, multiple users
can print to the same printer. This facility can reduce the number of printers the
organization must purchase, maintain and supply.
(iii) E-Mail: Internal or "group" email enables the staff of an office to communicate with
each other quickly and effectively. Group email applications also provide capabilities
for contact management, scheduling and task assignment.
(iv) Fax Sharing: Through the use of a shared modem(s) connected directly to the
network server, fax sharing permits users to fax documents directly from their
computers without ever having to print them out on paper.
(v) Remote Access: Staff often require access to their email, documents or other data
from locations outside the office. A highly desirable network function, remote access
allows users to dial in to an organization's network via telephone and access all the
network resources that they can access when they're in the office.
(vi) Shared Databases: Shared databases are an important subset of file sharing. If the
organization maintains an extensive database, a network is the only effective way to
make the database available to multiple users at the same time.
(vii) Fault Tolerance: This is the process of making sure that there are several lines of
defense against accidental data loss. Tape backups, servers attached to an
uninterruptible power supply and redundant hardware are examples of such defense
lines.
(viii) Internet Access and Security: When computers are connected via a network, they
can share a common, network connection to the Internet. This facilitates email,
document transfer and access to the resources available on the World Wide Web.
(ix) Communication and collaboration: A network allows employees to share files,
view other people's work, and exchange ideas more efficiently.
(x) Organization: A variety of network scheduling software is available that makes it
possible to arrange meetings without constantly checking everyone's schedules.
(c) Challenges faced by the management of a data center are as follows:
(i) Maintaining a skilled staff and high infrastructure needed for daily data center
operations: A company needs to have staff which is expert at network management
and has software/operating system skills and hardware skills. A company has to
employ a large number of such people.
(ii) Maximizing uptime and performance: While establishing sufficient redundancy
and maintaining watertight security, data centers have to maintain maximum uptime
and system performance.
(iii) Technology Selection: The other challenges that enterprise data centers face is
technology selection, which is crucial to the operations of the facility keeping
business objectives in mind.
48
(iv) Resource balancing: The enterprise chief technical officer today needs to strike a
working balance between reduced operational budgets, increased demands on
existing infrastructure, maximizing availability, ensuring round-the-clock monitoring
and management, and the periodic upgrades that today’s technology demands.
Question 3
(a) Describe in brief the various components of Client Server Architecture. (4 Marks)
(b) What are the various views taken into account, while designing the architecture of a
Database. Which view is user dependent and which one is user independent? Which
view is storage device oriented? (3+2+1=6 Marks)
OR
(c) Why documentation is required? List any 4 types of documentations required to be
prepared prior to delivery of customized software to a customer.
Answers
(a) The various components of Client-Server Architecture are as follows:
(i) Client: Clients, which are typically PCs, are the “users” of the services offered by
the servers. There are basically three types of clients:
♦ Non-Graphical User Interface (GUI) Clients: These require a minimum amount
of human interaction e.g. ATMs, cell phones, fax machines, and robots.
♦ GUI-Clients: These are human interaction models usually involving
object/action models like the pull-down menus in Windows 3-X.
♦ Object-Oriented User Interface (OOUI) Clients: These take GUI-Clients even
further with expanded visual formats, multiple workplaces, and object
interaction rather than application interaction. Windows 95 is a common OOUI
Client.
(ii) Server: Servers await request from the client and regulate access to shared
resources and perform action based on client request. File servers make it possible
to share files across a network by maintaining a shared library of documents, data,
and images. Database servers, transaction servers and web servers are some of
the servers used in client server architecture.
(iii) Middleware: The network system implemented within the client/server technology is
termed as Middleware. It is all the distributed software needed to allow clients and
servers to interact. General middleware allows for communication, directory
services, queuing, distributed file sharing, and printing.
(iv) Fat-client or Fat-server: Fat-client allows more of the processing to take place on
the client, like with a file server or database server. Fat-servers place more
emphasis on the server and try to minimize the processing done by clients.
Transactions, GroupWare, and web servers are examples of Fat Servers. Fat
Clients are also referred to as “2-Tier” systems and Fat-servers as “3-Tier” systems.
49
(b) The following three views are taken into account, while designing the architecture of a
database.
(i) External view (User View)
(ii) Conceptual (Global view)
(iii) Internal View (Physical view)
External view (User View) encircles the following:
♦ It is at the highest level of the database abstraction.
♦ It includes only those portions of database or application programs which are
of concern to the users.
♦ It is described by means of a scheme, called the external schema.
♦ It is defined by the users or written by the programmers.
Conceptual (Global view) which is viewed by the Data Base Administrator,
encompasses the following –
♦ All database entities and relationships among them are included.
♦ Single view represents the entire database.
♦ It is defined by the conceptual schema.
♦ It describes all records, relationships and constraints or boundaries.
♦ Data description to render it independent of the physical representation.
Internal View (Physical view) contains the following:
♦ It is at the lowest level of database abstraction.
♦ It is closest to the physical storage method.
♦ It indicates how data will be stored.
♦ It describes data structure.
♦ It describes access methods.
♦ It is expressed by internal schema.
External view is user-dependent as external view is also referred as User View.
Conceptual and Internal views are user-independent.
Internal view is storage device oriented.
(c) The documentation is an important aspect of Software Development Life Cycle which
provides a method to understand the various issues related with software development
and provide a method to access details related to system study, system development,
system testing, system operational details, details related to preventive maintenance and
details associated with further modification aspects of the software.
Four important documentations required to be prepared prior to delivery of customized
software to customer are as follows:
(i) Strategic and Application Plans.
(ii) Application Systems and Program Documentation.
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(iii) System Software and Utility Program Documentation.

(iv) Database Documentation, Operation Manuals, User Manuals, Testing Manual,
Standard Manual, Preventive Maintenance Manual, and Backup Manual are other
important documentations.
Question 4
Frame the problem for which the given flowchart has been drawn. See the Abbreviations
defined below:
Start
Input Cust, Amt, Prod
Is Prod Yes Disc = Amt * 0.15

TV?
No
Is Prod Yes Is Cust Yes

Disc = Amt * 0.12
FR? = ST ?
No No
Disc = 0 No Is Prod Disc = Amt * 0.15

MS?
Yes
Is Cust Yes
Disc = Amt * 0.10
= ST ?
No
No Is Amt > Yes

Disc = 0 Disc = Amt * 0.18
1.0 Lac
PRINT Prod, Disc
Stop
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Cust : Client, Prod : Product , Amt : Amount, Disc : Discount, TV : Television, FR : Fridge,
MS : Music system, ST : Student
Answer
The flowchart drawn is for the following problem:
A company engaged in selling electronic items to different class of clients has adapted the
following discount policy:
(i) A discount of 15% is offered on TV irrespective of category of client and the value of
order.
(ii) On purchase of fridge, a discount of 15% is allowed to others and 12% to students,
irrespective of the value of the order.
(iii) On Music system, others are offered a discount of 18% only if the value of order is more
than Rs 1 Lac. Students are offered a discount of 10% irrespective of the value of order.
Prepare a flowchart to print the product type and discount allowed to a customer.
Note: It is a sample formation of the problem. Students can frame the problem in their own
language based on the above three conditions.
Question 5
(a) What do you understand by the term EFT? Describe, in brief, the different EFT systems
in operations. (5 Marks)
(b) Explain the OSI Model of communication. (5 Marks)
Answer
(a) EFT stands for "Electronic Funds Transfer" and represents the way the business can
receive direct deposit of all payments from the financial institution to the company bank
account. This payment mechanism moves money between accounts in a fast, paperless
way. The different EFT systems in operation are as follows:
(i) Automated Teller Machines (ATMs): This allow the consumer to do their banking
without assistance of a human teller. These machines are used with a debit or EFT
card and a code, which is often called a Personal Identification Number or “PIN.”
(ii) Point-of-Sale (POS) Transactions: Some debit or EFT cards allow transfer of
funds electronically from the consumer’s account to the merchant’s account while
shopping.
(iii) Telephone Transfers: Consumer can transfer funds from one account to another
account by telephonic instructions.
(iv) Preauthorized Transfers: The account holder authorizes the bank or a third party
to withdraw or deposit the funds from or into his account.
52
(b) OSI or the Open System Interconnection Model of Communication has been outlined
by International Organization for Standardization (ISO) to facilitate communication among
the various hardware and software platforms which are heterogeneous in nature. It
consists of following seven layers of functions:
(i) Physical Layer: This first layer is a hardware layer which specifies mechanical
features as well as electromagnetic features of the connection between the devices
and the transmission.
(ii) Data Link Layer: This is the second layer and is also a hardware layer which
specifies channel access control method and ensures reliable transfer of data
through the transmission medium.
(iii) Network Layer: This is the third layer and makes a choice of the physical route of
transmission.
(iv) Transport Layer: This is the fourth layer and ensures reliable transfer of data
between user processes, assembles and disassembles message packets, provides
error recovery and flow control. At this layer, multiplexing and encryption take place.
(v) Session Layer: This is the fifth layer and establishes, maintains and terminates
sessions (dialogues) between user processes. Identification and authentication are
undertaken at this layer level.
(vi) Presentation Layer: This is the sixth layer which controls on screen display of
data, transforms data to a standard application interface. Encryption, data
compression can also be undertaken at this layer.
(vii) Application Layer: This is the seventh layer which provides services for file
transfer, file sharing, etc. Database concurrency and deadlock situation controls are
undertaken at this layer.
Section B : Strategic Management
Question 6
State with reasons which of the following statements is correct or incorrect (Attempt any
three):
(a) Strategic management is a bundle of tricks and magic.
(b) The purpose of SWOT analysis is to rank organisations.
(c) SBU concepts facilitate multi-business operations.
(d) PLC is an S shaped curve.
(e) The rate and magnitude of changes that can affect organisations are decreasing
dramatically. (3 × 2 = 6 Marks)
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Answer
(a) Incorrect: No, Strategic management is not a bundle of tricks and magic. It involves
systematic and analytical thinking and action. Although, the success or failure of a
strategy is dependent on several extraneous factors, it can not be stated that a strategy
is a trick or magic. Formation of strategy requires careful planning and requires strong
conceptual, analytical, and visionary skills.
(b) Incorrect: SWOT analysis stands for the analysis of strengths, weaknesses
opportunities, and threats. It is not used for ranking of organizations. It is a tool for
organizational and environmental appraisal necessary for formulating effective strategies.
(c) Correct: Organizing business along SBU lines and creating strategic business units has
become a common practice for multi-product/service and global organizations. It is a
convenient and intelligent grouping of activities along distinct businesses and has
replaced the conventional groupings. SBU facilitates strategic planning, gaining product-
related/market-related specialization, gaining cost-economies and more rational
organizational structure.
(d) Correct: Product Life cycle (PLC) which is a graphical depiction of sales over time is an
‘S’ shaped curve with four stages – introduction, growth, maturity and decline. The
pattern is shared by all product group and families though the duration for each phase is
different in each case. Identification of PLC stages for a product/service offers useful
insights for marketing management.
(e) Incorrect: No, the reality is just the other way round. Business environment especially
after globalisation and liberalisation is witnessing changes that are fast paced and have
far-reaching implications for businesses. This is true for economic, political,
technological, legal, and socio-cultural factors. This has created strong pressures on
organization for proactive adaptation to environmental changes for survival growth and
competitive edge.
Question 7
Answer briefly any two of the following:
(a) Can a change in the elected government affect the business environment? Explain.
(b) Enlist the components of marketing mix.
(c) Differentiate clearly between forward and backward integration. (2 × 2 = 4 Marks)
Answer
(a) The type of government running a country is a powerful influence on business.
Businesses are highly guided and influenced by government actions. Change in the
elected government relates to the change in political environment. To an extent, even
legal environment may change with the changes in the Government. It has a strong
54
bearing on the conduct of business as it leads to significant changes in the economic

policies and the regulatory framework. It generally reflects the political ideology of the
political party or alliances. The government’s policy of promoting select sectors further
impacts the functioning of business organizations.
Businesses are affected by the factors such as political stability, the political ideology and
practices of the ruling party, the purposefulness and efficiency of governmental agencies,
the extent and nature of governmental intervention in the economy and the industry,
Government policies (fiscal, monetary, industrial, labour and export-import policies),
specific legal enactments and framework and so on.
(b) Marketing mix is a systematic way of classifying the key decision areas of marketing
management. It is the set of controllable marketing variables that the firm blends to
produce the response it wants in the target market. The original framework of marketing
mix comprises of 4Ps- product, price, place and promotion. These are subsequently
expanded to highlight certain other key decision areas like people, processes, and
physical evidence. The elements of original framework are:
• Product: It stands for the “goods-and-service” combination the company offers to
the target market.
• Price: It stands for the amount of money customers have to pay to obtain the
product.
• Place: It stands for company activities that make the product available to target
consumers and include marketing channel, distribution policies and geographical
availablity.
• Promotion: It stands for activities that communicate the merits of the product and
persuade target consumers to buy it.
(c) Forward and backward integration forms part of vertically integrated diversification. In
vertically integrated diversification, firms opt to engage in businesses that are vertically
related to the existing business of the firm. The firm remains vertically within the same
process. While diversifying firms opt to engage in businesses that are linked forward or
backward in the chain and enters specific product/process steps with the intention of
making them into new businesses for the firm.
Backward integration is a step towards, creation of effective supply by entering business
of input providers. Strategy employed to expand profits and gain greater control over
production of a product whereby a company will purchase or build a business that will
increase its own supply capability or lessen its cost of production. On the other hand
forward integration is moving forward in the value chain and entering business lines that
use existing products. Forward integration will also take place where organisations enter
into businesses of distribution channels.
55
Question
Describe the construction of BCG matrix and discuss its utility in strategic management.
(5 + 5 = 10 Marks)
Answer
Companies that are large enough to be organized into strategic business units face the
challenge of allocating resources among those units. In the early 1970's the Boston
Consulting Group developed a model for managing a portfolio of different business units or
major product lines. The BCG growth-share matrix named after its developer facilitates
portfolio analysis of a company having invested in diverse businesses with varying scope of
profits and growth.
The BCG matrix can be used to determine what priorities should be given in the product
portfolio of a business unit. Using the BCG approach, a company classifies its different
businesses on a two-dimensional growth share matrix. Two dimensions are market share and
market growth rate. In the matrix:
• The vertical axis represents market growth rate and provides a measure of market
attractiveness.
• The horizontal axis represents relative market share and serves as a measure of
company strength in the market.
Thus the BCG matrix depicts four quadrants as per following:
High Stars Question Marks
Market Growth Rate
Low Cash Cows Dogs
High Low
Relative Market Share
Different types of business represented by either products or SBUs can be classified for
portfolio analyses through BCG matrix. They have been depicted by meaningful metaphors,
namely:
(a) Stars are products or SBUs that are growing rapidly. They also need heavy investment
to maintain their position and finance their rapid growth potential. They represent best
opportunities for expansion.
(b) Cash Cows are low-growth, high market share businesses or products. They generate
cash and have low costs. They are established, successful, and need less investment to
maintain their market share. In long run when the growth rate slows down, stars become
cash cows.
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(c) Question Marks, sometimes called problem children or wildcats, are low market share
business in high-growth markets. They require a lot of cash to hold their share. They
need heavy investments with low potential to generate cash. Question marks if left
unattended are capable of becoming cash traps. Since growth rate is high, increasing it
should be relatively easier. It is for business organisations to turn them stars and then to
cash cows when the growth rate reduces.
(d) Dogs are low-growth, low-share businesses and products. They may generate enough
cash to maintain themselves, but do not have much future. Sometimes they may need
cash to survive. Dogs should be minimised by means of divestment or liquidation.
The BCG matrix is useful for classification of products, SBUs, or businesses, and for selecting
appropriate strategies for each type as follows.
(a) Build with the aim for long-term growth and strong future.
(b) Hold or preserve the existing market share.
(c) Harvest or maximize short-term cash flows.
(d) Divest, sell or liquidate and ensure better utilization of resources elsewhere.
Thus BCG matrix is a powerful tool for strategic planning analysis and choice.
Question 9
Define Business Process Re-engineering. Briefly outline the steps therein. (4 + 6 = 10 Marks)
Answer
Business Process Reengineering (BPR) is an approach to unusual improvement in operating
effectiveness through the redesigning of critical business processes and supporting business
systems. It is revolutionary redesign of key business processes that involves examination of
the basic process itself. It looks at the minute details of the process, such as why the work is
done, who does it, where is it done and when it is done. BPR refers to the analysis and
redesign of workflows and processes both within the organization and between the
organization and the external entities like suppliers, distributors, and service providers.
The orientation of redesigning efforts is basically radical. In other words, it is a total
deconstruction and rethinking of business process in its entirety, unconstrained by its existing
structure and pattern. Its objective is to obtain quantum jump in process performance in terms
of time, cost, output, quality, and responsiveness to customers. BPR is a revolutionary
redesigning of key business processes.
BPR involves the following steps:
1. Determining objectives and framework: Objectives are the desired end results of the
redesign process which the management and organization attempts to achieve. This will
provide the required focus, direction, and motivation for the redesign process. It helps in
building a comprehensive foundation for the reengineering process.
57
2. Identify customers and determine their needs: The designers have to understand
customers - their profile, their steps in acquiring, using and disposing a product. The
purpose is to redesign business process that clearly provides added value to the
customer.
3. Study the existing process: The existing processes will provide an important base for
the redesigners. The purpose is to gain an understanding of the ‘what’, and ‘why’ of the
targeted process. However, some companies go through the reengineering process with
clean perspective without laying emphasis on the past processes.
4. Formulate a redesign process plan: The information gained through the earlier steps is
translated into an ideal redesign process. Formulation of redesign plan is the real crux
of the reengineering efforts. Customer focussed redesign concepts are identified and
formulated. In this step alternative processes are considered and the best is selected.
5. Implement the redesign: It is easier to formulate new process than to implement them.
Implementation of the redesigned process and application of other knowledge gained
from the previous steps is key to achieve dramatic improvements. It is the joint
responsibility of the designers and management to operationalise the new process.
Question 10
Read the following case study and answer the questions given at the end:
Meters Limited is a company engaged in the designing, manufacturing, and marketing of
instruments like speed meters, oil pressure gauges, and so on, that are fitted into two and four
wheelers. Their current investment in assets is around Rs. 5 crores and their last year
turnover was Rs. 15 crores, just adequate enough to breakeven. The company has been
witnessing over the last couple of years, a fall in their market share prices since many
customers are switching over to a new range of electronic instruments from the range of
mechanical instruments that have been the mainstay of Meters Limited.
The company has received a firm offer of cooperation from a competitor who is similarly
placed in respect of product range. The offer implies the following:
(i) transfer of the manufacturing line from the competitor to Meters Limited;
(ii) manufacture of mechanical instruments by Meters Limited for the competitor to the
latter's specifications and brand name; and
(iii) marketing by the competitor.
The benefits that will accrue to Meters Limited will be better utilization of its installed capacity
and appropriate financial compensation for the manufacturing effort.
The production manager of Meters Limited has welcomed the proposal and points out that it
will enable the company to make profits. The sales manager is doubtful about the same since
the demand for mechanical instruments is shrinking. The Chief Executive is studying the
offer.
58
(a) What is divestment strategy? Do you see it being practised in the given case? Explain.
(5 Marks)
(b) What is stability strategy? Should Meters Limited adopt it? (5 Marks)
(c) What is expansion strategy? What are the implications for Meters Limited in case it is
adopted? (5 Marks)
(d) What is your suggestion to the Chief Executive? (5 Marks)
Answer
(a) Divestment strategy implies exiting from one or more of existing business activities or
lines due to strategic reasons. Divestment strategy involves the sale or liquidation of a
portion of business, or a major division, profit centre or SBU. Divestment is usually a
part of rehabilitation or restructuring plan and is adopted when a turnaround has been
attempted but has proved to be unsuccessful. The option of a turnaround may even be
ignored if it is obvious that divestment is the only answer.
In the given case study, technological obsolescence appears to be a major reason
leading to divestment. The competitor firm making offer to Meters Limited seems to be
interested in divesting in manufacturing activities and concentrate on marketing.
(b) One of the important goals of a business enterprise is stability to safeguard its existing
interests and strengths, to pursue well established and tested objectives, to continue in
the chosen business path, to maintain operational efficiency on a sustained basis, to
consolidate the commanding position already reached, and to optimise returns on the
resources committed in the business.
A stability strategy is pursued by a firm when:
• It continues to serve in the same or similar markets and deals in same products and
services.
• The strategic decisions focus on incremental improvement of functional
performance.
Stability strategy doesn’t seam to be the appropriate strategy for Meters Limited. In view
of fast approaching product obsolescence, Meters Limited should look for such strategy
that would help in gaining market share in the new segment rather than battling in a
segment that is declining. They cannot afford to maintain the same market posture and
maintain same level of effort. As there are significant changes in their external
environment, they need to make adjustments for their sustenance.
(c) Expansion Strategy is a proactive strategy implying making new investments and
venturing into new business, products and/or markets. It is true growth strategy, having
lot of business risk but nevertheless resulting in good rewards. Expansion strategy is
implemented by redefining the business by adding the scope of business substantially
59
increasing the efforts of the current business. Expansion is a promising and popular
strategy that tends to be equated with dynamism, vigor, promise and success.
The markets for products of Meters Ltd with their existing technology are in the state of
decline. They are being replaced by newer electronic technology. It would be a good
idea to acquire the electronic technology and move out of the market that is reducing and
has little scope. They may also consider expanding through diversification in other
related and unrelated products.
(d) A combination Strategy is recommended for Meters Limited. The competitor is trying to
adopt divestment. They are outsourcing manufacturing and retaining marketing with
them. It would be very convenient for them to get out of the market in future. If Meters
Limited accepts this preposition, they run the risk of continuing manufacturing in
dwindling market followed by product obsolescence. At the same time, they have a
medium-term objective of utilizing their installed capacity and making some profits. The
Following package is recommended:
(i) Invest in new product development to facilitate quick switchover to the new
technology.
(ii) Meters Ltd also need time to invest in emerging new technology and pursue
expansion strategy. The offer of competitor may be considered for acceptance, in
case there is clear buy-back arrangement for bringing in sales revenue and profits
with less competition.
(iii) In longer run, they should divest the existing products.
(iv) They should identify other areas for expansion. This will enable Meters Ltd to
spread their risks.
60
SUMMARY OF EXAMINERS’ COMMENTS ON THE PERFORMANCE OF CANDIDATES
PAPER − 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT
General Comments
The overall performance of the candidates was average. Performance revealed lack of in-
depth knowledge and rigorous study. The candidates need to understand the subjects
conceptually and also fine tune their presentation skills. Candidates are advised to practice
the practical problems more extensively and pay attention towards properly presenting their
answers supported by adequate working notes. It is also advised that the candidates read the
question paper thoroughly before attempting it and attempt different parts of the same
question consecutively rather than in a random manner.
Specific Comments
Question1.(i) This practical question related to ‘Labour Costing’ was attempted by majority of
the candidates. Most of the candidates have applied their knowledge to solve this question
correctly.
(ii) This theory question was related to ‘Basic Concepts’ of Cost Accounting. Many of the
examinees explained ‘Product Cost and Period Cost’ well.
(iii) This practical question related to ‘Operating Costing’ was attempted by the majority of
the candidates. Maximum of the students were able to compute ‘Absolute Tonnes Kms. and
Commercial Tonnes Kms.’ correctly.
(iv) This practical question was related to ‘Standard Costing’. An understanding of ‘Material
variance is required to solve this problem. Many of the examinees were able to calculate the
actual quantity of material used.
(v) This theory question part related to ‘Budgets and Budgetary Control’ was answered well
by majority of the students.
(vi) This Practical question related to ‘Segregation of Semi-variable Costs into Fixed and
Variable Costs’ was correctly answered by many of the students.
Question 2. Part A: This part of the numerical question is related to ‘Budgets and Budgetary
Control’ was attempted successfully by majority of the candidates.
Part-B: While solving this part of numerical, students were not able to calculate ‘Direct
Material Cost, Price, Usage’ variance correctly. Many of them failed to understand the
problem correctly.
Question 3.(a) This numerical problem from ‘Non-Integrated Accounts’ requires a sound
understanding of ‘Reconciliation’. Majority of the Examinees failed to prepare ‘Memorandum
Reconciliation Account’ correctly.
PROFESSIONAL COMPETENCE EXAMINATION :JUNE, 2009
(b) This theory question part was attempted by majority of the students, but many of them
answered the sub parts of this question sketchily.
Question 4.(i) This theory question is related to ‘Materials’ was well answered by the
students.
(ii) This theory question part related to ‘Overhead’ was wrongly answered by maximum
number of candidates. They were not able to explain the accounting treatment of idle capacity
cost in cost accounting.
(iii) The answer given by majority of the candidates to this question related to contract
costing was satisfactory.
(iv) This practical question related to P/V ratio of Marginal costing was very well answered by
the majority number of students.
Question 5. (i) Short note on Functions of Treasury Department was answered correctly by
most of the candidates.
(ii) Concept of American Depository Receipts was answered well by majority of the
candidates.
(iii) The part on Computation of Debt Service Coverage Ratio was well written by most of the
candidates. However, majority of the candidates did not mention its significance.
(iv) A large percentage of the candidates discussed conflict in profit versus wealth
maximization objective well. However, a few of them only explained the two objectives in brief.
(v) Very few candidates discussed the concept of Debt-Equity or EBIT-EPS indifference
point while determining the capital structure of a company on correct lines.
(vi) Majority of the candidates did not discuss the benefits to the originator of Debt
Securitisation.
Question 6. Majority of the candidates failed to prepare the schedule of changes in working
capital on correct lines. A large number of them did not indicate the difference as an increase
or decrease in each item. The candidates have not presented their answers supported by
proper working notes in preparation of funds flow statement.
Question 7.(a) A large percentage of the candidates did not arrive at the correct figure of
weighted average cost of capital as they wrongly computed the cost of debt and cost of
preference shares.
(b) This part of the question was well attempted by majority of the candidates. However, a
few candidates calculated net present value of the two machines instead of equalized annual
cost.
62
SUMMARY OF EXAMINERS’ COMMENTS
Question 8. (i) Majority of the candidates determined the optimum cash balance according to
William J Baumol model on correct lines.
(ii) While most of the candidates attempted the problem, only a few of them could calculate
the effective cost of factoring to the firm correctly.
(iii) A large percentage of candidates explained properly the concept of discounted payback
period.
(iv) Only a small percentage of the candidates discussed the composition of Return on Equity
(ROE) using the DuPont model.
PAPER − 5 : TAXATION
General Comments
The standard of the question paper is good. Overall performance of the candidates was not
very satisfactory, particularly in problem oriented questions. Most of the candidates have not
properly presented the solutions to computational problems stepwise in an orderly manner.
Candidates should avoid attempting different parts of the same question at different places.
Some Candidates have exhibited poor knowledge of the basic provisions of the Act and also
of the recent amendments to the Income Tax Act.
Specific Comments
Question 1. Most of the sub-divisions were based on recent amendments. Since several
students did not know the recent changes in provisions, they could not answer satisfactorily.
(a) Most of the candidates have not answered the question. They stated that income from
saplings or seedlings is a business income.
(b) Most of the candidates have not explained the basic exemption limit under section 193 of
the Act.
(e) Most of the candidates answered that residential status of HUF is depend on the
residential status of karta, if karta is non-resident then HUF is also non resident.
(f) Only few students were able to give the answer correctly. Majority of the candidates
have stated that advances from company are deemed dividend. Hence, exempted under
Section 10(34) of the Act.
Question 2. Most of the candidates have not understood the problem and failed to compute
income - tax correctly. Some common mistakes are:-
(1) Most of the candidates have included rent received and commission under the head
‘Income from other sources’ instead of rent as house property income and commission as
business income.
63
(2) Majority of the candidates have treated amount received on maturity of life insurance as
income from other sources, though it is exempt from tax.
(3) Many candidates have included short term profit on sale of investment under the head
income from other sources instead of showing the same under the head income from capital
gain.
(4) Most of the candidates calculate the long term capital gain but indexation was not done.
Many candidates are unaware of the provisions of section 10(38) that long - term capital gain
on listed shares is subject to security transaction tax.
(5) Majority of the candidates have taken the refund of income tax under the head income
from other sources. They forget that only interest portion is shown under other sources.
(6) Most of the students mistook safety salary as salary of proprietor.
Question 3.(a) Many of the candidates who knew the concept, failed to calculate education
cess and special higher education cess as applicable. Consequently, the relief under section
89 was computed incorrectly.
(b) Most of the candidates have considered that there would be a printing mistake in
question paper as far as the purchase price of the residential property is concerned. They
gave alternative answers assuming that the purchase price of the property is Rs.5 lakhs
(purchase price printed Rs.50 lakhs whereas the sale consideration is only Rs.35 lakhs).
Question 4.(a) (i) Most of the candidates disallowed the deduction under section 80D in
respect of premium paid for father because he was not dependent on assessee. Some of the
students were not aware of the provisions of section 80D, they confused with section 80C.
(ii) Most of the candidates have failed to understand the concept of “Reverse Mortgage”
especially capital gains treatment.
(b) Majority of the candidates were not aware of the provisions as far as setting off Short
Term Capital Loss incurred on sale of shares for which STT is paid and wrongly set off the
same with the long term Capital Gains. Few of the candidates have treated salary from
partnership firm under the head “Salary” instead of income from business. Many candidates
were not aware of the provisional of section 71 and they set off the loss from capital gain from
the income from other sources.
Question 5. (a) Most of the candidates have explained the cases when income of a previous
year will be assessed in the previous year itself. They did not explain the previous year from
undisclosed sources of income.
(b) Mostly candidates were not aware of the provisions of section 2(26B).
(c) Most of the candidates have explained that advancement of any other object of general
public utility is included in charitable purpose and does not explain the other provisions of
Section 2(15) of the Act.
64
(e) Most of the candidates were mentioned the correct percentage of amount payable but
none of them could mention the words ‘as reduced by the amount earlier paid’ in IInd, IIIrd &
IVth instalments.
Question 6. (a) Most of the candidates attempted the question correctly.
(b) Majority of the candidates failed to mention the amount of late fees required to be paid
along with delayed return.
(e) Most of the students answered this question satisfactorily.
Question 7.(a) A large number of candidates calculated the input VAT correctly. However, they
included the VAT while computing the invoice price thereby leading to wrong computation of output
VAT.
(b) Few candidates charged the service tax on accrual basis. Some students included whole
amount of bill raised against the customer in the value of taxable services instead of including
payment on only the receipt basis.
Question 8.(a) Most of the candidates explained the concept well but failed to give an example.
(b) Only a few students explained properly the ‘sources of Service Tax Law’. Most of them
misunderstood the term ‘sources’ mentioned in the question as the services taxable under the
service tax law and based their answer on those lines, thereby mentioning a few such services.
(c) Majority of the answers were vague and not to the point.
(d) Only a few students were able to give all the points in this question correctly. Majority of the
students only explained the calculation part of VAT under this method.
PAPER − 6 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION – A : INFORMATION TECHNOLOGY

General Comments
The overall performance of the candidates was average. Examiners were of the view that in-
depth subject knowledge and concentrated study required to attempt the questions correctly,
were missing in the answers given by the examinees. Examinees have been advised to study
the prescribed study material in depth thoroughly and need to understand each and every
question logically. They should provide to the point answers and also need to fine-tune their
writing skills and presentation.
Specific Comments
Question 1. This theory question consisted of two parts (a) and (b) with 5 sub-parts in each
part. Examinees attempted in this question satisfactorily except for specific parts 1(a) (i) on
VPDN, 1(a) (iii) DDL compiler, 1(a) (iv) Shareware and 1(b) (i) Real time Data Warehouse,
1(b) (ii) MMX, 1(b) (iii) Online Backup and 1(b) (iv) Index Field. Candidates failed to explain
65
these terms appropriately.

Question 2. This question was a choice based question which consisted of three parts – Part
(a) based on “Expert System”, part (b) based on “Computer Networks” and part (c) based on
“Data Center”, out of which there was an internal choice between parts (a) and (b).
Most of the examinees attempted the Q.2(a) part satisfactorily, but the answers to parts (b)
and (c) were general and ambiguous. The answers were mainly given using common sense
and the candidates exhibited poor conceptual clarity on the topics – “The scope of computer
networks in business” and “Challenges faced in managing a data centre”.
Question 3. This question consisted of three parts – Part (a) based on “Client Server
Architecture”, part (b) based on “Database Architecture and its Views” and part (c) based on
“Documentations and its types”, out of which there was an internal choice between parts (b)
and (c).
Most of the examinees have answered part (a) correctly but very few have managed to
attempt parts (b) and (c) adequately. In part (b), the examinees were confused and lacked
concrete understanding of the terms “architecture” and “views”, whereas in part (c), the word
“documentation” was misunderstood by many of the students.
Question 4. This question based on “Flowcharts” required students to formulate the problem
after analyzing the flow chart. Most of the examinees understood the flowchart well and scored
maximum in this question.
Question 5. This question consisted of two parts (a) and (b) - Part (a) based on “EFT
Systems” and part (b) based on “OSI Model of Communication”.
Most of the candidates attempted part (a) suitably but large number of examinees were unable
to explain OSI Model and its layers.
SECTION – B : STRATEGIC MANAGEMENT

General Comments
The question paper is simple and well balanced covering most of the syllabus. In the portion
related to subject of Strategic Management the performance of candidates, in general, was not
satisfactory. Their answers do not reveal that they made proper study required for preparation.
In several cases, candidates were not having knowledge of the concepts asked in the question
paper. Accordingly, they were not able to attempt the required number of questions. Problems
were also found in language, expression and presentation. Particularly a large number of
candidates attempting in English language were unable to construct even simple sentences.
To perform better in the examinations students have no alternative but to study hard and get
conceptual clarity. They should also devote more time and do a lot of writing practice.
66
Specific Comments
Question 6. The answers that were written by some of the candidates were very poor. They
were not able to support their answers about the correctness or incorrectness of the
statements with proper reasoning.
Question 7. The answers were not satisfactory. They were either too brief or were vague.
Some problems were found in the understanding of the concept of marketing mix. A majority
of the candidates faced difficulty in differentiating between forward and backward integration.
Question 8. The basic concept of BCG matrix was known to several candidates. However,
many examinees were not able to explain its utility in strategic management.
Question 9. From the answers it was felt that a large number of the candidates have either
not studied the concept of Business Process Reengineering or they were not able to
comprehend it. Many examinees have written irrelevant answers based on their own
guesswork. The answers, in general, were very poor. Neither Business Process
Reengineering nor its steps were properly written in majority of the cases.
Question 10. Candidates had reasonable knowledge of stability and expansion strategy.
However, divestment was unfamiliar to several candidates. Candidates also faced difficulty in
articulating the facts given in the case and link them with the theoretical concepts in their
answers. Some candidates had unnecessarily repeated the sentences given in the case.
67
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Course inclusive of conversion form
– With Form Nos. 102 and 103 100 40
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71
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72
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Management
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Management - Vol. I
3. PI.O&M 3 O&M Organising Functions of Dr. N. Mishra
Management - Vol. II
Professional Education (Course – II)
4. PII.AC 1 Accounting Evolution and Harmonisation Sh. Y.M. Kale
of Accounting Standards
73
5. PII.BCL 1 Busi. & Corp. Laws Indian Contract Act-Vol.I Dr. G.K. Kapoor
6. PII.BCL 2 Busi. & Corp. Laws Indian Contract Act-Vol.II Dr. G.K. Kapoor
7. PII.BCL 3 Busi. & Corp. Laws Indian Contract Act-Vol.III Dr. G.K. Kapoor
8. PII.BCL 4 Busi. & Corp. Laws Sale of Goods Act Sh S.K. Chakravertty
9. PII.BCL 6 Busi. & Corp. Laws Transfer and Transmission Sh.P.T.Giridharan
of Shares
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11. PII.COST 1 Costing Overheads Dr. P.K. Khurana
12. PII.IT 1 Income-tax & Concept of Income, Capital Sh. R Devarajan
Central Sales Tax & Revenue and Previous Year
13. PII.IT 2 Income-tax & Central Sales Tax Sh. A.K. Chandak
Central Sales Tax (Vol. I - II)
Final
14. FI.AC 1 Adv. Accounting Valuation of Shares Sh.Amitav Kothari
15. FI.AC 2 Adv. Accounting Evolution and Harmonisation Sh. Y.M. Kale
of Accounting Standards
16. FI.MAC 1 Management Accounting Working Capital and Dr.N.K. Agrawal
& Financial Analysis Investment Decisions
17. FI.AUD 1 Auditing Importance of Concurrent Sh. P.N. Shah
Audit in Banks
18. FI.AUD2 Auditing Management & Sh. Rahul Roy
Operational Audit
19. FI.C.LAW 1 Corporate Laws & Amalgamation & Merger under Sh. S.B. Mathur
Secretarial Practice Companies Act, 1956 (Vol. I - II)
20. FI.DTL 1 Direct Taxes Tax Planning Sh. Sukumar
Bhattacharyya
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Volume 5

PCE, Group - II, 10

Professional Competence Examination

PROFESSIONAL COMPETENCE EXAMINATION

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Department/Committee : Board of Studies

ISBN No. : 978-81-8441-280-2

Published by : The Publication Department on behalf of The Institute of Chartered

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

Paper 4. Cost Accounting and Financial Management................................................1 – 26

Summary of Examiners’ comments on the performance of the candidates

You are required to segregate the semi-variable cost and calculate :

(v) Components of budgetary control system

= Rs.5 per units

(iii) Raw Materials Purchase Budget (in quantity)

Standard or Budgeted labour rate per hour

Standard labour hours for actual output:

To Over-valuation of 7,000 By Net loss as per financial 2,58,000

(vi) Benefits to the Originator of Debt Securitization

Liabilities 31.3.2008 31.3.2009 Assets 31.3.2008 31.3.2009

Creditors 2,05,000 3,00,000 Prepaid 15,000 20,000

5,25,000 5,25,000 1,46,000 1,46,000

Applications of Fund Rs.

Redemption of Debentures 2,06,000

Plant & Machinery A/c

Provision for Taxation A/c

To Bank (paid for 08-09) 1,05,000 By Bank (Refund of tax) 4,000

To Balance c/d 1,00,000 By Premium on redemption

To Balance c/d 5,00,000 By Premium on 15,000

Securities Premium A/c

General Reserve A/c

To Balance c/d 2,00,000 By P/L A/c (transfer) b/f 50,000

Land and Building A/c

Cost of Debt (kd)

9(1 − 0.35) + (100 − 98) / 10

Cost of Preference Shares (kp)

WACC using market value weights = 13.02%

Optimum Cash Balance, C, = Rs. 45,826

(ii) Computation of Effective Cost of Factoring

Advance to be paid = Rs. 2,64,000 – Rs. 10,560 = Rs. 2,53,440

Firm’s Savings on taking Factoring Service: Rs.

Net Benefit to the Firm (Rs. 68,000 – Rs. 66,240) 1,760

Rs. 66,240 × 100 26.136%

Effective Cost of Factoring = 26.136%

Answer all questions

Particulars Rs. Rs. Rs.

Components of total income

3. Computation of Capital Gains

Shares of PQ Co. Ltd.

4. Computation of Income from other sources

iii. Assessed Income for the Financial Year 2006-07 1,40,000

Secondary and higher education cess @1% 745

Total Income excluding arrears 5,25,000

Difference between A & B I 12,360

Relief under section 89 (I – II) 5,220

Therefore, Consideration for the purpose of Capital Gains 35,00,000

set-off against business income

Amount received × Service tax rate

30.9.2008 Part payment received against a bill of Rs. 5,00,000

VAT charged in invoice 27,500

Fig. Major components of an Expert System

(iii) System Software and Utility Program Documentation.

Input Cust, Amt, Prod

Is Prod Yes Disc = Amt * 0.15