Question Papers Suggested Solutions Plus Examiners‟ Reports

This issue of the PATHFINDER is published principally, in response to a growing demand for an aid to:. (i) (ii) (iii) (iv) Candidates preparing to write future examinations of the Institute of Chartered Accountants of Nigeria (ICAN). Unsuccessful candidates in the identification of those areas in which they lost marks and need to improve their knowledge and presentation. Lecturers and students interested in acquisition of knowledge in the relevant subjects contained herein, and The profession; in improving pre-examinations and screening processes, and so the professional performance of candidates.

The answers provided in this publication do not exhaust all possible alternative approaches to solving these questions. Efforts had been made to use the methods, which will save much of the scarce examination time. Also, in order to facilitate teaching, questions may be altered slightly so that some principles or application of them may be more clearly demonstrated. It is hoped that the suggested answers will prove to be of tremendous assistance to students and those who assist them in their preparations for the Institute‟s Examinations.

Although these suggested solutions have been published under the Institute‟s name, they do not represent the views of the Council of the Institute. The suggested solutions are entirely the responsibility of their authors and the Institute will not enter into any correspondence on them.






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... C. According to SAS 26 (Business Combination).... Determining the acquirer Amortizing the Value of assets acquired Recognising and measuring goodwill or a gain from a bargain purchase Separation of the two companies accounting policies Ignoring goodwill or a gain from a bargain purchase. 3...... B.. Which ONE of the following is not required to be disclosed separately by a reporting entity in respect of the carrying amount of goodwill at the beginning and end of the period? (i) (ii) Impairment losses recognised during the period Net exchange differences arising during the period PROFESSIONAL EXAMINATION II – MAY 2010 4 .. D. EXAMINATION... E. C.... D... B.. MULTIPLE-CHOICE QUESTIONS (20 Marks) Which ONE of the following demonstrates the application of the acquisition method in a business combination? A. 2.... E.. which ONE of the following information should be disclosed by a reporting entity in a business combination? A..PATHFINDER ICAN/ THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II – MAY 2010 FINANCIAL REPORTING AND ETHICS Time allowed – 3 hours SECTION A: Attempt All Questions PART I 1......... Non-acquisition related costs The post-acquisition date The percentage of voting equity instruments not acquired The bulk cost of the combination only Acquisition related costs.

if any. 5. Derecognising the fair value of the considerations received. C. Ethics is also referred to as A. iv & v. Moral Ethics PROFESSIONAL EXAMINATION II – MAY 2010 5 . The net amount and accumulated impairment losses at the beginning and end of the period Additional goodwill recognised during the period Any other changes in the carrying amount during the period i & ii iv & v iv only iii only I.PATHFINDER (iii) (iv) (v) A. E. Recognising the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost C. 6. E. ii. Proceeds from sale of shares Dividend paid Interest paid Interest received Proceeds from sale of investment. Derecognising any resulting difference as a gain or loss in profit or loss attributable to the parent D. B. Which ONE of these is NOT an example of cash flow from financing activities? A. 4. event or circumstances that resulted in the loss of control. from the transaction. D. Derecognising the carrying amount of any non-controlling interests in the former subsidiary at the date when control is lost E. Psychological Ethics B. Which ONE of these would a parent company that losses control of a subsidiary not do? A. C. B. D. Recognising the assets and liabilities of the subsidiary at their carrying amounts at the date when control is lost B.

C. ii and iii ii. D. B. Business ethics is NOT an attack on business but rather its first line of defence. iii and iv iii. A. Confidentiality of ethics Objectivity Professional misconduct Integrity Professional competence and due care. v. D. E. PROFESSIONAL EXAMINATION II – MAY 2010 6 . Psychological Egoism Ethical Egoism Virtue Ethics Kohlberg‟s theory of moral development Divine command theory 9. iii and iv i. Moral Philosophy 7. C. Which ONE of the following is NOT identified as fundamental principle of ethics? A. iv. iv and v. D. Compliance Care Commitment Contribution Consequences i. Behavioural Morality D. E. B. ii. C. Moral Physiology E. E. 8.PATHFINDER C. The following are Normative theories of ethics EXCEPT A. B. iii. Which of the following do you consider as the major 3-C characteristics of business ethics? i. iv and v i.

C.000 D. E. The part of Diligence The part of Competence The part of Virtue The part of Altruism The part of Trust. Filade Investments Ltd. enables the acquirer to make all equity purchases and increasing additional financial leverage enables the acquirer to diversify its assets base decreases the market price of the acquirer‟s stock over what it would have been without the acquisition enables the preference shareholders to have adequate claim on their investment increases financial leverage. D. has 10% return on Total Assets of N300. All the ancient Ethicists hold that the part to happiness is ONE of the following: A. 11. PROFESSIONAL EXAMINATION II – MAY 2010 7 . N600. B.000 E. N480. 13.000 B. E. the restructuring can prevent an unwanted takeover the restructuring is expected to create value for shareholders the restructuring is expected to increase company‟s revenue the restructuring will attract more customers into the business the interests of bondholders are negatively affected. D. N750. C. In the long run. N450. N960. an unsuccessful acquisition is ONE that A. B. What is its sales? A.000 C.000 12. The restructuring of a company should not be undertaken if A. E. D.000 and a Net Profit Margin of 5%.PATHFINDER 10. B. C.

Debtors want to determine regularity of their purchases Stockholders want to determine the level of business risk of the company Suppliers want to know if their customers will be able to pay if offered credit Investors want to evaluate market price of the company share Employers are interested in the overall productivity of their employees as indicated by its ability to fund its operations. C.125 1 : 1. 16.PATHFINDER 14. B. C. E. 15. D. B. The market price of company X is N60 per share and that of company Y is N30. 17. People oriented Loyalty to Stockholders and other interested group Modelled through visible unethical actions and traits Focused on setting ethical standards and accountability Based on broad ethical awareness.5 1 : 1. E. B. C. If X offers three-quarters share for each share of Y. B. Therefore all of the following statements are untrue of a Cash Flow Statement EXCEPT A. The features of a compliance driven framework does not include the following: A. D. Judgement Law based Fear driven Obedience/disobedience Mandatory PROFESSIONAL EXAMINATION II – MAY 2010 8 . E. D. C. D.05 1:5 A Cash Flow Statement may provide considerable information about what is really happening in a business beyond what is contained in either Income Statement or the Balance Sheet. E. the ratio of exchange of market price would be A. 1:2 1 : 1. The characteristics of ethical leadership include all of the following EXCEPT A.

it is imperative that you do the following. D. Study Business Ethics Clearly articulate the organisational philosophy and values Become a member of ICAN Provide visible top management support for high ethical standards Encourage formal and informal conversations about ethical issues. E. Which ONE of the following is NOT true of Corporate Governance? A. D. E. In order to promote ethics in your organisation. B. D. C. Which of these is NOT ONE of them? A. It is designed to make managers internalise the welfare of all stakeholders in the firm It aligns shareholders' and managers' interests lead us to better corporate performance There is an important relationship between corporate governance structures and the quality of decision-making particularly in relation to takeovers and mergers Good corporate governance system can guarantee public interest protection Good Corporate governance encourages corporate debacles. In this era of globalization. 20. E. EXCEPT A. C. B. C. setting and promoting ethical conduct Achieving convergence with International Standards Serving the needs of small and medium practices and those of Professional Accountants in business The global reawakening of ethical problems Supporting the growth and development of the accountancy profession worldwide. B.PATHFINDER 18. International Federation of Accountants (IFAC) has focused on four key areas. 19. PROFESSIONAL EXAMINATION II – MAY 2010 9 . Strengthening standards.

Transactions involving entities or businesses under common control in which all are ultimately controlled by the same party or parties but for which the control is not transitory is known as ............. the aggregate cost of the individual transactions is ..................... 4...... In a business combination involving more than one exchange transaction. 10.... The tool that a company uses to communicate its financial performance to its stakeholders is …………………................. This is the official position of . The amount for which an asset could be exchanged or a liability settled.. 7... Whatever an individual believes is right or wrong is right or wrong for that individual. PROFESSIONAL EXAMINATION II – MAY 2010 10 ....... between knowledgeable willing parties in an arm‟s length transaction is referred to as .. 6............. 3.. 9............ the date of exchange is the ... Morality requires people sometimes to follow the common good rather than their own …………...... State any TWO of the public service values that accountants should uphold and never compromise........... The claim that human beings are by nature motivated purely by self-interest (in all their actions they aim to benefit themselves) to secure something that they consider good for themselves is ascribed to ………………. 2....PATHFINDER PART II: SHORT ANSWER QUESTIONS (20 Marks) 1............. 8...................... 5......... When a business combination is achieved in a single exchange transaction.. An entity for which there are users who rely on its financial statements for information that will be useful to them for making decisions is ....

.... 13................... The rules that absolutely allow no exception are known as ......... one should keep promises.......... Basis of accounting where revenue is recognised when earned........ 17............ The assistance of government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity is known as ... habits and laws that determine to what extent an organization should be run is ........................................................ 20........... When an accountant does what is required by valid ethical principles................ When preparing Financial Statements............................................. 16..... he/she is applying ..... The rules that support the belief that other things being equal.. tell the truth.................... regulations..... 15...... and expenses are recognised when obligations are incurred or to match the timing of revenue earned is called ........ Ethical dilemma is a product of ..... 19.... PROFESSIONAL EXAMINATION II – MAY 2010 11 ............................................PATHFINDER 11............... 18.. 14........ items that are normal to the activities of an enterprise but are abnormal as a result of their occurrence and size are called . 12..................... obey the law and so on are referred to as ......... State any prominent ethical principle that is applied in professional ethics. The general set of customs.......... The Financial Statements of a group presented as those of a single economic entity is .....

He has been directing the manager to place almost every order with GOLD NIGERIA LIMITED. Dele is a non-executive director of SUPER NIGERIA LIMITED.PATHFINDER SECTION B – ATTEMPT ANY FOUR QUESTIONS (60 MARKS) QUESTION 1. Required: (a) What are the relevant facts in this case? (2 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 12 . However. although the manager believes that a better price could often have been obtained from OKOKO NIGERIA LIMITED. he takes lunch in the staff restaurant. as well as ignoring the company‟s agreed purchasing strategy. The company‟s success and reputation rely on one core product. Dele attends monthly board meetings. in recent months the purchasing director. and orders of component A are usually placed on a weekly basis. and confirmed prior to each order being placed. seizes the opportunity to seek his opinion on a matter that has been causing her some concern. Oriyomi the purchasing manager. On the days that Mr. In order to manufacture the product. OKOKO NIGERIA LIMITED or GOLD NIGERIA LIMITED. thereby enabling the purchasing department to exercise bargaining power over its suppliers. She is responsible for placing orders for stock. Oluwole. Mr. Mrs. has been taking a more active role in the ordering process.CASE STUDY Mr. which would lead to a reduction in prices in the long term. Prices are obtained from OKOKO NIGERIA LIMITED and GOLD NIGERIA LIMITED on a regular basis. The director told the manager that he has been building an effective relationship with the sales director of GOLD NIGERIA LIMITED. which aims to limit the risk associated with exposure to just one supplier. This has involved regular business lunches and an invitation for the purchasing director and his family to spend a weekend on the sales director‟s private yacht. One day he finds himself in conversation with Mrs. who is unfamiliar with the concept of a non-executive director. The purchasing manager expresses her opinion to Mr. it needs to source two main components A and B. Oriyomi. Dele that the purchasing director is accepting bribes. Component A may be purchased from either of two suppliers. The Board has agreed a strategy that both suppliers will be used. As he explains his role.

Dele give to the purchasing manager? (2 Marks) (iv) What action should be taken in his role as a non-executive director? (2 Marks) (Total 15 Marks) QUESTION 2 The net profit margin is an important ratio to all stakeholders of a reporting entity. (a) (b) (c) (d) List FOUR accounting policies that will have effect on the net profit margin as a measure of operational performance. N N Profit Before Tax 121.000 PROFESSIONAL EXAMINATION II – MAY 2010 13 . Identify and explain any FIVE important areas that the Chairman‟s statement is expected to address. Oriyomi have any moral justification for reporting the case of Mr.900 Less: Taxation 52. Oluwole‟s violation of the company‟s directive? (4 Marks) (iii) What advice should Mr. (8 Marks) (Total 15 Marks) QUESTION 3 The Income Statement For The Year Ended 31 December 2008 relates to Goodway Limited. Oriyomi is true? (5 Marks) (ii) Does Mrs.900 69. Oluwole‟s action if the claim of Mrs. (2 Marks) State any ONE effect of these policies on the net profit margin.PATHFINDER (b) (i) What is the moral foundation of Mr. (4 Marks) How is the effect of accounting policy changes treated in financial statements? (1 Mark) The Chairman‟s statement is a key report that accompanies the Financial Statement presented to the members‟ of a company at its Annual General Meeting (AGM).

The middle market price for the shares on the last day of quotation cum rights was N1.PATHFINDER Less: Transfer to General Reserve Dividends: Preference Shares Ordinary Shares Retained Profit 5.80 per share.000 6% Preference Shares of N1 each and 20. (2 Marks) The company made a Rights Issue of Shares on 1 October 2008 in the proportion of 1 for every 5 shares held at a price of N1.700 Ordinary shares of N1 each.20.800 1 January 2008. Discuss any THREE of them. . (15 Marks) QUESTION 5 (a) (b) Explain the term “creative accounting”? Discuss any FOUR likely reasons for creative accounting. 2008. 2008 under the following circumstances: (i) (ii) (iii) No change in the issued share capital.380 2.00) 59. (4 Marks) The company made a Bonus Issue of one Ordinary Share for every four shares in issue at 30 September. Required: Calculate the Basic and Diluted Earnings Per Share for the year ended 31 December. the issued Share Capital of Goodway Ltd was 23.070 (92.750 1. (9 Marks) (Total 15 Marks) QUESTION 4 There are four theoretical problems associated with the Principle-Based Ethical approach to Business Ethics. (3 Marks) (12 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 14 .

5% Megida‟s Income statements for the year ended 31 December 2009 are as follows: Turnover Cost of sales Gross profit Other operating expenses Operating profit Interest payable Exceptional items (Note 2) Profit Before Tax Taxation Profit after tax Dividends Retained profit for the year Retained profit brought forward Retained profit c/f N‟000 2.870) 555 (215) 340 (34) (120) 186 (90) 96 (90) 6 179 185 PROFESSIONAL EXAMINATION II – MAY 2010 15 .6:1 0.PATHFINDER QUESTION 6 Megida Plc is in the hospitality industry.9:1 46 days 45 days 55 days 40% 6% 3 times 22.425 (1. The specified ratios and the average figures for the industry as at 31 December 2009 are stated below: Return on capital employed Net assets turnover Gross Profit Margin Net profit before tax Current ratio Quick ratio Stockholding period Debtors‟ collection period Creditors‟ payment period Debt to Equity Dividend yield Dividend cover 1.8 times 30% 1.1% 12.

PATHFINDER Balance Sheet Fixed Assets (Note 1) Current Assets Stock Debtors Current Liabilities Bank overdraft Trade creditors Proposed dividend Taxation Net Current Assets 8% Loan Stock Capital and Reserves Ordinary Shares (N0.600 (3. (6 Marks) Comment briefly on the company‟s performance when compared with the industry average in the areas of liquidity and gearing. The Stock Exchange quotation of Megida shares throughout the year averaged N6 per 50k share.5 each) Profit and Loss Accounts N‟000 N‟000 540 275 320 595 35 350 30 85 (500) 95 635 (300) 335 150 185 335 Notes to the Accounts 1.060) 540 2. Depreciation Net Book Value N‟000 3. Required: (a) (b) State THREE uses and THREE limitations of ratio analysis. (9 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 16 . Fixed Assets Cost Accum. 3. Exceptional items relate to losses on the sale of some equipment that had become worthless.

7. 4. C 17. Return on Total Assets is 10% of N300. B 15. D 19. 9. 6. C E C C D E C D E MULTIPLE CHOICE QUESTIONS 10. E 13.PATHFINDER SOLUTIONS TO SECTION A PART I 1. 8. E 20. C 16. C 18. C 11. 2.000 PROFESSIONAL EXAMINATION II – MAY 2010 17 . C TUTORIALS 11. C 14. E 12. 3. 5.

5 Therefore Ratio of Exchange of Market Price = 1 : 1.5 EXAMINERS‟ REPORT The questions test all aspects of the syllabus.PATHFINDER (10% x 300.000) = N30. therefore. Majority of the candidates performed well. However.05) = N600. (3/4 x 60) = N45 (45 ÷ 30) = 1. PROFESSIONAL EXAMINATION II – MAY 2010 18 . a few candidates displayed poor understanding of ethics related questions. the Net Profit is grossed up by 5%: (30.000 14.000 ÷ 0.000 Net Profit Margin = Return on Investment To arrive at Sales figure. Candidates should ensure proper coverage of all areas of the syllabus so as to avoid loss of marks in future examinations.

Business Combination 2. Principles of Utility. 10. Care Ethics. Consolidated Financial Statements or Group Financial Statements 16. Self or Personal Interest. Accountability. Exceptional Items 15. Honesty. Purchase Consideration or Consideration Transferred 6. Confidentiality. Independence. Acquisition Date or Date of Acquisition 5. Fair Value 3. Due Care. Private Good or Interest 11. Integrity. Justice and Duty. Deontologist. Egoism. Ethical or Moral Subjectivism 7. Accrual Concept or Basis 12. Financial Statements or Annual Report 9.PATHFINDER PART II SHORT ANSWER QUESTIONS 1. Psychological Egoism 8. Code of Conduct or Corporate Governance 13. etc. Utilitarianism. Probity. Conflict of Interests 18. Openness. Government Grant 14. Objectivity. Absolutism or Categorical Rules 19. Rule of Ethics or Code of Conduct PROFESSIONAL EXAMINATION II – MAY 2010 19 . Teleology 17. Prima Facie Duty 20. Professionalism. Reporting Entity 4. Competence.

Candidates are advised to ensure full coverage of all areas of the syllabus for good performance in future. The major pitfalls were candidates‟ inability to adequately understand basic theory and principles on ethics. PROFESSIONAL EXAMINATION II – MAY 2010 20 .PATHFINDER EXAMINERS‟ REPORT The questions cover all aspects of the syllabus. Candidates‟ performance was generally average.

(i) (ii) PROFESSIONAL EXAMINATION II – MAY 2010 21 . Oluwole‟s action is a violation of the company‟s strategic position which could at the long run affect the corporate image of the organization as a company that encourages bribes and kick back as the basis of economic transaction. Mr. (i) Contrary to the Company‟s strategic position to buy from either of two suppliers. (ii) (iii) (iv) b. thus intends to keep transacting business with them. The Purchasing Director has directed the Purchasing Manager against the strategic position. Ethical egoism emphasizes satisfaction of one‟s self-interest in the face of others‟ interests. Oluwole‟s attachment to Gold Nigeria Limited is traceable to the personal benefits and bribes he enjoys from the Company. Mr. The company intends to have viable relationship with the two firms. Oluwole‟s action could be said to be a form of disloyalty based on egoism basic tenet. Regular business lunches and an invitation to the Purchasing Director of Super Nigeria Limited and his family to spend weekend in the private yacht of the Sales Director of Gold Nigeria Limited Mr. Mr. Oluwole‟s action can be analyzed within the framework of Ethical egoism. which makes the Purchasing Director to go against the company‟s policy. OR The moral foundation of Mr.PATHFINDER SOLUTIONS TO SECTION B QUESTION 1 a. only one of the recommended companies supplies the needed product. There is a conflict between his personal interest and the general interest of the organization. Oluwole‟s action is that he is operating at level one stage two of Kohlberg theory of moral development where in human action which is self interest driven espouses the “what is in it for me”. Mrs Oriyomi has the moral justification for reporting him to his superiors in order to preserve the corporate image of the organization.

Income/Revenue recognition policy iv. Candidates were expected to identify relevant facts of the case and the moral principles breached by both executive and nonexecutive directors of the company. he may bring the matter up at the Board of Director‟s meeting. Candidates‟ commonest pitfall was the provision of the same points for different subquestions. Depreciation policy ii. QUESTION 2 (a) The following accounting policies will have effect on the net profit margin as a measure of operational performance: i. if the Managing Director/management/relevant authority fails to act. Stock Valuation method iii. Research & Development policy vi. What is expected of Mr. Basis of Accounting v. Candidates need to properly identify relevant points for each question on the case studies. who are better positioned to handle the matter. Dele should advise the Purchasing Manager to report the matter to the Managing Director/management/relevant authority. Candidates displayed good understanding of the case and performance was generally above average. Dele is to discuss the issue of Mr. (iv) EXAMINERS‟ REPORT The question is a case study testing candidates‟ understanding of various ethical issues adopting diverse approaches. Oluwole‟s violation of the company‟s directive with the Managing Director who will decide on the appropriate ways of handling the matter.PATHFINDER (iii) Mr. Fixed assets Capitalization policy PROFESSIONAL EXAMINATION II – MAY 2010 22 . in order to improve performance. However.

(b) One effect of these policies on the net profit margin: i. Depreciation policy – Straight-line depreciation compared to reducing balance will reduce profit. The straight-line method will charge the same amount over the life of the asset while reducing balance will charge higher amount in the early years of the assets thereby reporting a lower profit. Stock Valuation method – The method adopted in valuing stock (raw materials, work in progress, finished goods and spares parts) will impact on net profit. For instance, valuation under the First In First Out (FIFO) method will result in a different profit compared to Weighted Average method. Income/Revenue recognition policy – The way in which income/revenue is recognized for sale of goods, rendering of services and in respect of interest, royalty, dividend and long-term contract is capable of affecting net profit for the period. Basis of Accounting - The basis of accounting, whether cash or accrual basis will affect the net profit figure. Research & Development policy – The policy to write off research and development as incurred will reduce profit compared to where only research cost is written off as incurred and development is capitalized. Fixed Assets Capitalisation policy – Fixed Assets Capitalisation policy varies from one organisation to the other. While some may capitalize all fixed assets, others may have a minimum benchmark under the materiality concept.



iv. v.



Accounting policy changes in financial statements should be reflected by retrospective application to prior period, presented as if that policy had always been applied; unless it is impracticable to do so. In case of a change due to new enactment in the accounting standard e.g. IFRS, the change should be accounted for based on the specific transitional provisions set forth in the standard.



(d) Important areas the Chairman‟s statement is expected to address: i. Global environment – Addresses issues affecting global economy such as the current global financial crisis and how it affected the company‟s operations during the period. ii. Domestic economy – This will highlight issues or development within the local economic environment. iii. Company‟s performance – It will cover major achievements of the company during the period under review, including profitability, dividend and bonus. iv. Company‟s strategy – This will cover how the company intends to compete favourably, in view of the issues identified in the domestic economy and global environment. v. Future outlook – It will deal with future prospects of the company including opportunities and challenges. vi. Changes in the Board – It will highlight appointment and retirement of directors during the year under review. vii. Corporate Governance - This will indicate the measures adopted by the company to protect the interest of all the company‟s stakeholders. viii. Major Project(s) - This will enumerate the major project(s) embarked upon or concluded by the company within the year under review.

The question examines candidates‟ knowledge of accounting policies that impact on net profit margin, highlighting the effect and treatment of changes in those policies on operating results. They are also expected to identify and explain areas usually covered in Chairman‟s Statement. Candidates performance was just fair, as some candidates could not differentiate between accounting policies and accounting basis and concepts; and some mixed-up the contents of Directors‟ Report with that of Chairman‟s Statement. Candidates are advised not to neglect any aspect of the syllabus in order to boost their performance.



BASIC EPS i. No change in share capital = PAT – Pref Div x 100 No. of shares DILUTED EPS

69,000 – 1,380 20,700 = 327k



Bonus issue on 30 Sept. 2008: No. of shares before bonus issue Bonus (1 for 4) No. of shares after bonus issue = PAT – Pref Div x 100 No. of shares

20,700 5,175 25,875 69,000 – 1,380 25,875 = 261k


iii .

Rights issue on 1 Oct. 2008 Before rights issue 5 shares Rights issue (1 for 5) 1 share After rights issue 6 shares Theoretical ex-right price (N10.20/6) Bonus element of issue increases shares to Full price element of issue increases shares to Weighted Average No. of shares in issue 1.80 1.20 3.00 20,700 4,140 24,840 1.70 9.00 1.20 10.20 37,260 4,968 42,228 1.70

20,000 x 1.8/1.7 = 21,918 20,700 x 6/5 = 24,840 /12 x 21,918 + 3/12 x 24,840 =16,438+ 6,210 = 22,648

EPS = PAT – Pref Div x 100 No. of shares

69,000 – 1,380 22,648 = 299k



These systems provide guideline to help people evaluate whether acts are morally right or wrong. both believe rational people will choose to follow these ethical guidelines in all aspects of their lives. Although these two systems differ in a number of areas. not just themselves.PBE does not adequately address the issue of ethical motivation. both theorists link rationality with goodness. It lacks motivation which involves answering the question “why should I be good or do right things?” PROFESSIONAL EXAMINATION II – MAY 2010 26 .S Mill‟s Utilitarianism. courses and writings in business ethics appear ineffective due to the theoretical problems created by the dormant Principle-Based Ethics (BPE) of Immanuel Kant‟s formalism and J.PATHFINDER EXAMINERS‟ REPORT The question requests candidates to compute Basic and Diluted Earnings Per Share (EPS) under circumstances of Bonus and Rights Issues. Both Kant and Mill claim that the reasonableness inherent in their respective systems should be self-evident to rational people. In effect. they both start with a group-centered perspective as opposed to a self-centered one. QUESTION 4 Preambles: According to Virtue ethics. It is argued that PBE does not provide the motivation for ethical behaviour but rather provides what constitutes a moral action. Candidates‟ commonest pitfall was the use of wrong formulae for the calculation of Basic and Diluted EPS. (a) An exclusive reliance on PBE has created four recurring problem for business ethicists: (i) Lack of Ethical Motivation . Good people consider everyone. Candidates will perform better if they acquaint themselves with the contents of the Annual Reports of publicly quoted companies and practice with past questions and other standard texts. Further. Most candidates displayed fair understanding of the question.

xi. To increase the normal intensity in business and corporate decisions. Emphasizes Ends rather than Means – PBE involves not so much a theoretical weakness as a practical deficiency. x. Business ethics tends to be predominantly utilitarian. To enhance the level of public trust in business organizations. To facilitate the production/delivery of goods or services that will be in the interest of the consumers. To ensure that business are carried out in accordance with ethical standards. (iii) (iv) (v) (b) The study of Business Ethics is necessary because of the following reasons: i. viii. (Ethical management for profitability). iv.The effectiveness of a principle is determined by the level of understanding of the principle. ii. but the modern form of utilitarianism is less than what Beetham or Mill would accept. In other words. To reduce the negative impact of some sharp business practices in societies. So that the organisation will be able to act in public interest and enhance the level of public trust in business. The problem of adequate understanding . To enhance the welfare of stakeholders. iii. PBE lacks specificity when applied to business ethics‟ cases. Neither formalism nor utilitarianism provides the basis for predictable decisions to specific situations. Rather than an enlightened self-interest which disinterestedly accounts for the concerns of all. Government will benefit from good business ethics because firms will pay their taxes in full as and when due. To enhance business profitability in the long-term. ix. v. To have an understanding of fundamental principles of business conduct. Limited Applicability – The problem with PBE is that both formalism and utilitarianism have peculiar problems that limit their applicability to practical situations when we need to make moral decision. vii. To reduce the incidence of business misconducts and corporate debacles. PROFESSIONAL EXAMINATION II – MAY 2010 27 . PBE does not support business persons with concrete solutions to ethical quandaries. vi. utilitarianism has become a Machiavellian calculation of ends apart from means.PATHFINDER (ii) The Problem of Generality – The failure of PBE involves its generality.

particularly in relation to the calculation of certain „key‟ ratios. The business will be properly managed and not run aground. xiii. (b) Likely reasons for creative accounting: i. Most of the candidates displayed poor understanding of the question. Candidates need to pay more attention to the Sections on Ethics in the syllabus to improve their performance. EXAMINERS‟ REPORT The question expects candidates to discuss theoretical problems associated with Principle-based Ethical approach to business and enumerate reasons for studying Business Ethics. Performance pressure – Companies are often under pressure to perform in order to meet expectations of their stakeholders and the public at large. QUESTION 5 (a) Creative Accounting Creative accounting is a term in general use to describe the practice of applying inappropriate accounting policies or entering into complex or „special purpose‟ transactions with the objective of making a company‟s financial statements appear to disclose a more favourable position. xiv. PROFESSIONAL EXAMINATION II – MAY 2010 28 . Where such a company‟s performance is not up to their expectation. but is nonetheless undesirable as it is intended to mislead users of financial statements. Most commentators believe creative accounting stops short of deliberate fraud. They were off the mark on issues that were expected to be highlighted.PATHFINDER xii. than would otherwise be the case. Creditors and other stakeholders will also benefit from proper business conduct because they will be paid according to terms of payment agreed upon. Employee(s) will benefit because adherence to ethical behaviours ensures that workers salaries/entitlements will be paid fully and as and when due. It will improve the level of fair competition in business and reduce the incidence of unethical business conduct or sharp practices.

vi. To meet or exceed forecast . it could result in management manipulating financial results. To satisfy shareholders who may be unhappy with the company‟s performance. viii.This is very common in many countries and it is now required by the Securities and Exchange Commission in Nigeria that companies should publish their forecast financial statements. Competition – The activities of competitors often put enormous pressure on their peers to perform or out-perform. management may result into creative accounting to meet expectation. To avoid or reduce tax liability or other levies and regulatory fees. To attract or woo investors (local or foreign). v. vii. ii. x. To manage and sustain share price and minimize volatility. iv. To meet minimum standards especially regulatory requirements such as minimum liquidity ratio for banks. This was very common in the Nigerian banking sector before the recent banking crisis. PROFESSIONAL EXAMINATION II – MAY 2010 29 . This led to some banks manipulating their accounts in order to achieve the desired results. Performance based executive rewards – Where the incentives and bonuses of executives are based on performance such as meeting profit targets. Where the actual performance is significantly below the forecast earlier published.PATHFINDER management may be under immense pressure to embark on creative accounting in order to present a better result. ix. Business combination – To resist a take over bid or in an attempt to sell the entity at a higher value than it would have been without creative accounting. iii.

 It facilitates inter firm comparison. Majority of the candidates displayed good understanding of the question and performed very well.  It helps to determine the ability of the firm to meet its current obligations as they fall due. PROFESSIONAL EXAMINATION II – MAY 2010 30 .  It facilitates the assessment of the efficiency with which the firm is utilising assets for income generation. (a)(ii) Limitations of Ratio Analysis:  Comparison of ratios can be misleading unless they are calculated from financial statements prepared under uniform accounting policies.  It aids in the construction of a pattern of a firm‟s behaviour and financial position. acquisition or internal reconstruction. merger. However. few candidates were unable to differentiate between the reasons for and the process of creative accounting.  Liquidation/Reorganisation Decisions: It helps in determining whether or not to liquidate or reorganise a business in form of a business combination.  It helps in predicting the firm‟s future performance.  Investment/Divestment Decisions: It guides in investment decisions as to whether to further invest or divest where such investment is not performing satisfactorily. ratios calculated from financial statements prepared on historic cost basis cannot give a true picture of yearly trends.PATHFINDER EXAMINERS‟ REPORT The question requires candidates to explain the term “Creative Accounting” and discuss the likely reasons for it. Candidates are advised to cover all aspects of the syllabus in their preparation for future examinations.  Due to impact of inflation. QUESTION 6 (a)(i) Usefulness of Ratio Analysis  Performance Measurement: It provides indication of a firm‟s performance and near present financial position.

 Debtors collection period is unreasonably long. the fact that there is no ideal ratio makes the task difficult. but quite acceptable for others. For example.  It takes longer days for Megida Plc to pay its creditors than industry average. For purposes of overall assessment of the financial strength or weakness of a firm. The factors influencing the performance of a firm in one year may change in another. thus rendering horizontal analysis misleading. The company already has an overdraft and the ability to make further interest payments could be in doubt. it is currently beneficial to shareholders. (ii) Gearing: Gearing (as measured by debt/equity) is higher than twice the level of the sectoral/industry average. The company is making an overall return of 34. The balance sheets prepared at different points in time at static in nature and therefore cannot give much information about the pre and post balance sheet events. For instance.     (b) Megida Plc‟s performance compared with industry average: (i) Liquidity: The company shows real cause for concern because:  Its current and quick ratios are worse than the industry average and are far below expected level. The gearing level may become a serious issue if Megida Plc becomes unable to maintain the finance costs. non-financial corporate strengths or weaknesses are not incorporated. which might damage relationship with suppliers leading to curtailment of further credit.6% but only paying 8% (before tax) interest on its loan stock.  High level of stock contributes to the poor quick ratio. PROFESSIONAL EXAMINATION II – MAY 2010 31 . Whilst this may be an uncomfortable level. a current ratio of less than 2 could be dangerous for many firms.PATHFINDER  Only items that can be measured in monetary terms are included in financial statements.  Current liquidity problems appear to be due to high level of trade creditors and huge bank overdrafts. Incidence of creative accounting can give misleading results.

limitations.8 8.1 1.0 3.6:1 0. If it is to replace its old assets in the near future. Candidates will perform well if they familiarize themselves with the theory and practice of interpretation of financial statement. it will need to raise finance.8 12. With the current high level of borrowing.9:1 46 45 55 40 6 3 Megida Plc‟s 16. PROFESSIONAL EXAMINATION II – MAY 2010 32 . computation and interpretation of ratio analysis.PATHFINDER Summary The company‟s liquidity and gearing position is quite poor and give cause for concern.5 30 1. They are also advised to study the basic principles involving computation and interpretation of accounting ratios.19:1 0. Workings: Ratio Return on Capital Employed (ROCE) Net Assets Turnover Net Profit Margin Gross Profit Margin Current Ratio Quick Ratio Stock Holding Period Debt Collection Period Creditors Payment Period Debt to Equity Ratio Dividend Yield Dividend Cover Unit % Times % % Ratio Ratio Days Days Days % % Times Industry Average 22. Candidates displayed good understanding of the computations but could not correctly interprete the ratios in comparison to industry average. this may be a serious problem for the company.64:1 54 48 68 90 27 1 EXAMINERS‟ REPORT The question tests candidates understanding of the uses.0 23 1.

E..... C.. D...... SECTION A: Attempt All Questions PART I 1.. C. PROFESSIONAL EXAMINATION II – MAY 2010 33 . E.... C D. Sensitivity Analysis “How-can” Analysis “What-If” Analysis Optimum level Analysis Quantitative Analysis.. Which of the following is NOT a feature of a well functioning Capital Market? A.... Provision of timely and accurate information Provision of liquidity Selective provision of information about securities Possession of good internal and external efficiency Rapid adjustment of estimates of security prices by investors to reflect their interpretation of the new information received...... Which of the following is NOT an area of application of spreadsheet packages relevant to the financial manager? A.. B...PATHFINDER ICAN/101/V/3 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II – MAY 2010 STRATEGIC FINANCIAL MANAGEMENT Time allowed – 3 hours EXAMINATION NO. MULTIPLE-CHOICE QUESTIONS (20 Marks) The following are in line with good Corporate Governance EXCEPT A... B.. 3. B.. 2... Tax management Development of long and short term strategic plans Adequate investment in human resources Right by the majority shareholders to remove directors that fails to pay dividend Pursuit of wealth maximization objective.. D. E..

the appropriate technique for investment decision is A. known with certainty independent of previous periods cashflows risk free related to the cashflows in previous periods unknown. Probability-tree analysis is best used when cashflows are expected to be A. B. C. Which of the following is NOT a factor to be considered in formulating strategies? A. 5. Organizational culture and value system Protection of top management interests Organizational competence and resources capabilities Market share and penetration Social obligations. D. E. C. A restriction imposed on a borrower by a lender is referred to as A. D.PATHFINDER 4. E. B. E. PROFESSIONAL EXAMINATION II – MAY 2010 34 . B. E. covenant fixed charge accord pledge floating charge. profitability index net present value linear programming internal rate of return cost benefit analysis. C. D. 6. 7. C. B. D. If capital is to be rationed for a period of more than one year.

8 1. 9.5 1. D.7 0.9 10. B. Which of the following is NOT an assumption that underlies an efficient capital market? A.7 What is the Company‟s operating leverage? A. B. 1. Compute the Company‟s financial leverage A. C. C.8 2. D. B. E.8 1. C.9 2.800 Less: Variable costs 720 Fixed cost 480 1. Investors adjust their estimates of security prices slowly to reflect their interpretation of the new information received Expected return implicitly includes risk in the price of the security New information comes to the market in a random fashion PROFESSIONAL EXAMINATION II – MAY 2010 35 .PATHFINDER The following information relates to questions 8 and 9.8 0. E.5 3. The income statement of Cotton Plc for the end of year 2009 is N‟000 N‟000 Sales 1.200 Profit before interest and tax 600 Less: Interest on Debenture 200 Profit before tax 400 Less company tax @ 30% 120 Profit after tax 280 8. 3.

500 1. Total Quality Management Program Evaluation and Review Technique Economic Order Quantity Just-In-Time Automated Teller Machine. E.125 0. The Efficient Market Hypothesis (EMH) assumes that A. D. C. If the market price per share of company X is N90 while that of company Y is N60. B. C. E. D. 11. C. meet its cash obligations before they occur and take advantage of prompt payment discounts meet its cash obligations as they occur and support the proper level of sales keep current and acid-test ratios at or above industry norms support the proper level of sales and take prompt payment discounts keep current and acid-test ratios below industry norms. D. E. B.PATHFINDER D. there are no transaction costs there is perfect foresight there are no levies there are no taxes the successive price changes are independent. 14. risk means that there is jeopardy to the firm for not maintaining sufficient current assets to A. 13. 1. given that company X offers three quarters of its shares for Y. C. B. A large number of profit-maximizing participants analyze and value securities independent of each other The timing of news announcement is independent. E.000 1. In relation to working capital. B. what is the ratio of exchange in value terms? A. E. D.250 PROFESSIONAL EXAMINATION II – MAY 2010 36 . 12. Receiving a required inventory item at the exact time needed describes the term A.667 1.

strategic acquisition divestiture two-tier tender offer shark repellant financial acquisition. B. Economies of scale. expansion and modernization or restructuring of on-going projects Administration of micro-credit programmes of government and high net-worth individuals Elimination of the burden of interest and other financial charges for the entrepreneurs. B. technical and managerial support to the entrepreneurs. Which of the following is NOT an objective of the Small and Medium Enterprises Investment Scheme? A.PATHFINDER 15. C. E. B. The International financial institution that assists developing countries by providing funds for long-term developmental programmes for the benefits of the citizens of those countries is the A. 16. Which of the following factors does not create problem of financing Small and Medium Scale Enterprises? A. D. E. B. D. E. Provision of financial advisory. reactivation. C. development of local technology and generation of job opportunities Facilitation of the flow of funds for the establishment of new Small and Medium Scale Enterprises projects. C. African Export-Import Bank World Bank Group Bank for International Settlement PROFESSIONAL EXAMINATION II – MAY 2010 37 . Stimulation of economic growth. 17. 18. Poor management Inefficiency Low business credibility High risk of failure Little access to new technology. market share dominance and technological advances are reasons most likely to justify a A. C. D.

B. C. Paris Club London Club. Risk resulting from armed conflict or civil unrest Repudiation of contracts with investors by government Risk resulting from domestic business transaction Transfer risk emanating from host country‟s policies on currency conversion and transfer Risk of loss resulting from legislative or administrative actions and omissions of host government 20. E. 19. E. B. E. Ecology Fund Infrastructural Development loan/grant Deficit balance of payment/Trade Financing Domestic loan Financing Special Capital Project Financing.PATHFINDER D. D. PROFESSIONAL EXAMINATION II – MAY 2010 38 . Which of the following is NOT a special borrowing facility at the International Monetary Fund? A. D. The following are categories of risk coverage of the Multilateral Investment Guarantee Agency EXCEPT A. C.

4. who is to do it. claim.. that the market participants place on the company.. short-term decisions about what is to be done.. 5. The electronic worksheet that can be used for a variety of tasks and applications is the ………………………….PATHFINDER PART II – SHORT ANSWER QUESTIONS 1. subject to the budget constraint for the period is the objective of ………………………… The technique of analyzing alternative sequential decisions and possible outcome from them is known as …………………………. (20 MARKS) The fiduciary responsibility of corporate directors and officers towards a company which states that a fiduciary must act in accordance with the interests of the beneficiary. 7. The process of developing detailed. ordinary share has …………………. management. The following information relates to Game Plc: EPS = 40 kobo Market Price per Share = 110 kobo Dividend Yield (DY)= 5 % What is Game Plc‟s dividend cover? 2. 3. 6. The selection of the combination of investment proposals that provides the highest net present value. 9. is known as ……………… The market price of a firm‟s share represents the ……………. The optimal capital structure for a firm is that for which the overall cost of capital is …………………. 10. While preference share has prior claim on income and assets. The theory which states that future patterns of share prices are a repetition of the same pattern of price movements which have occurred in the past is known as …………………… PROFESSIONAL EXAMINATION II – MAY 2010 39 . 8. and how it is to be done is the responsibility of the …………..

The implication of Efficient Market Hypothesis (EMH) is that the time at which new shares are issued is …………………………. Conversion of a subsidiary to a company in which the shares of the company are issued to the parent company is known as ………………. 18. 19.. 15. A major setback in the use of Accounting Rate of Return investment appraisal technique by small and medium scale enterprises is …………………… An International Institution which addresses the balance of payment problem of member countries is ……………… The institution established to act as arbiter in the settlement of transactions emanating from the services of Central Banks and International oriented Commercial banks is the ………………………… Which International Institution is established to provide financial support to the less developed countries that cannot borrow on conventional terms due to debt servicing costs? 14. Merging with an unrelated company is referred to as ………………. 13. Holding cash for the purpose of taking advantage of discounts or investments opportunity is called ………………. motive... Retained earnings are the easiest source of funds to a small firm because the firm has no access to ………….(Average Usage x Average Lead Time) is used to calculate …………………. merger. 20. 16. 17. 12.PATHFINDER 11. PROFESSIONAL EXAMINATION II – MAY 2010 40 . The expression: Re-order level .

You are required to determine: (a) the net present value of the initial project and comment on its acceptability.5 However. The required rate of return of Goody-Goody plc is 10 per cent. if not successful the company will not invest the N15million and there will be no expected incremental cashflows.8million. N9million in each year.5million. N6.2million. Acquisition and installation will cost N18million over the next 2 years. The probability of success is 60 percent with an expected incremental cash flow from year 6 to 10 as follows: Incremental Cash flow (N‟m) 8.5 0. Comment on its acceptability.PATHFINDER SECTION B – ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks) QUESTION 1 . Expected cash inflows associated with the project from year 3 to 8 are N2.5million respectively. N6. N5million and N1. and it is imperative to buy a new machinery. The company‟s current facilities cannot be used to manufacture the new – size reservoir.CASE STUDY GOODY-GOODY PLC Goody-Goody Plc is a fast growing profitable company situated in a commercial city in the southern part of the country. (10 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 41 .0 5.8million.4 Probability 0. (5 Marks) (b) the worth of the project if the option to expand is considered. It specializes in the manufacture and distribution of water reservoirs. If the project is successful the company has an option to invest additional N15 million to secure a wider market at the end of year 5. The management of Goody-Goody Plc has just identified a niche market in certain northern cities requiring a particular size of reservoir not currently manufactured by the company. N3.

All the three securities lie on the Securities Market Line (SML). PROFESSIONAL EXAMINATION II – MAY 2010 42 .PATHFINDER QUESTION 2 “Good Corporate Governance can help manage the problems of conflicting interest of the stakeholders of an organization. The risk of the market as measured by its standard deviation is 8%.” In the context of the statement above. Details of his securities in the stock market (which is regarded as efficient) with the associated risk characteristics are given below: SECURITIES Standard deviation (%) Correlation coefficient (%) Proportion of amount invested (%) X 5 80 30 Y 15 40 30 Z 14 60 40 The expected return on shares in general and on the basis of past return and inflationary expectation was estimated to be 20%. you are required to: (a) (b) define Corporate Governance (2 Marks) state FOUR key elements in Corporate Governance aimed at controlling the ability of the directors to promote their own interest and ensure adequate disclosure of their activities. (3 Marks) (Total 15 Marks) (c) (d) QUESTION 3 (a) (b) List the THREE forms of capital market efficiency (3 Marks) A valued client of your stock broking firm has asked for your advice on his investment portfolio. (4 Marks) list SIX areas covered by the code of good Corporate Governance practice. (6 Marks) list THREE main characteristics of Decision Support System (DSS). It is expected that the risk premium will be about 5%.

000 2. state THREE functions of the Treasury Manager in an organization. If the offer was successful Beta will use Ocean‟s distribution facilities to expand its sales of fertilizers to farmers and this would result in an increased cash flow of N4.800.200. (4 Marks) Extracts from the financial statements of TERMAC are given below: N 5.PATHFINDER You are required to prepare the following computations for a discussion with your client.000 350.5million per year after tax. (3 Marks) List FOUR symptoms of overtrading. PROFESSIONAL EXAMINATION II – MAY 2010 43 . you are required to calculate the length of the cash operating cycle of the company.000.000 4.000 700. (8 Marks) (Total 15 Marks) QUESTION 5 Beta Plc made an offer of 1 of its ordinary shares for every 2 shares in Ocean Plc on 5 June 2009. Beta‟s financial analyst estimate that the capitalized value of the cash flow is N45 million.000 602.000 Sales Cost of sales Purchases Raw materials Work in progress Finished Goods stock Debtors Creditors Assuming that all sales and purchases are on credit and a year of 365days.500 420.000 800. as a prelude to your advice: (i) (ii) The expected portfolio return The risk of the portfolio (8 Marks) (4 Marks) (Total 15 Marks) QUESTION 4 (a) (b) (c) In relation to cash management.

Ignore the 50k increase in Beta Plc‟s share price mentioned in (b) above. BALANCE SHEET AS AT 31 DECEMBER 2008 Beta Plc N‟m 750 900 (600) 1.PATHFINDER Extract from the accounts of the two companies are given below. You are required to: (a) (b) (c) calculate the price earnings ratios of Beta Plc and Ocean Plc before the Merger. (3 Marks) determine what the price earnings ratio of the group will be if the value of Beta Plc‟s shares increases by 50k after the merger. (3 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 44 .050 (300) 750 300 450 750 300 Ocean Plc N‟m 360 210 (210) 360 (180) 180 150 30 180 150 N‟m 30 21 9 Fixed Assets Current Assets Less current liabilities Total assets less curr. (4 Marks) calculate the market capitalization of Beta Plc after the merger assuming that the stock market is rational and that there are no events other than those which would influence the share price. Liabilities Less long term loans Issued share capital and reserves: Share capital N1 each 50k each Reserves Note: Current Assets include stock of Income statement for the year ended 31/12/2008 N‟m Profit after taxation 150 Dividends 60 Retained Profit 90 Price per share of Beta Plc is N5 while that of Ocean Plc is N2.

(5 Marks) (Total 15 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 45 .PATHFINDER (d) calculate the net dividend income the holder of 1 share in Ocean Plc would receive before and after the merger assuming that Beta maintains the same dividend per share as before the merger. (5 Marks) (Total 15 Marks) QUESTION 6 (a) (b) In relation to overseas investment decision. ii. distinguish between Foreign Direct Investment and Foreign Portfolio Investment. (3 Marks) (3 Marks) (c) List FIVE special borrowing facilities at the International Monetary Fund (IMF). State the THREE objectives of setting up the World Bank. List the THREE institutions that make up the World Bank Group. (4 Marks) i.

13. 3. 15. 16. 17. 18. 20.PATHFINDER SOLUTIONS TO SECTION A PART 1 .MULTIPLE CHOICE QUESTIONS 1. 2. 12. D C E B C D A B C A E B D C A E D B C D PROFESSIONAL EXAMINATION II – MAY 2010 46 . 14. 9. 7. 4. 11. 6. 5. 19. 8. 10.

000 = = = EBIT 600.000 = 1.000  720. PBIT 600 = = 1.000 600.5 PBT 400 CONTRIBUTION 1.125 4 60 240 EXAMINERS‟ REPORT The questions test candidates‟ knowledge of various aspects of the syllabus.000 400. PROFESSIONAL EXAMINATION II – MAY 2010 47 . Virtually all the candidates attempted the questions and performance was average.080.000 OR 1.PATHFINDER TUTORIALS 8.80 14. Some of the candidates showed good understanding of the questions while some had problems in proffering appropriate solutions.000 1.800.80 9. 3 90 270 x = = 1. VARIABLECO ST = PBT 720. Candidates are advised to ensure adequate coverage of the syllabus for better performance.

14. 6. 12. 13.SHORT ANSWER QUESTIONS 1. 5. 19.05 x110 5. Dividend cover = EPS 40 40 = = DYxMV 0. 3. TUTORIAL 9. Agency relationship or Loyalty Value Middle level Spread sheet package Capital rationing Decision tree or Probability tree Minimum or Lowest Residual 7. 8. 10. 7. 17. 18.27 times PROFESSIONAL EXAMINATION II – MAY 2010 48 .27 times Chartist or Technical Immaterial or Irrelevant or Not important Speculative Minimum stock level or Safety stock or Buffer stock Conglomerate Spin-off Capital market or Bank loan Ignoring the time value of money The International Monetary Fund (IMF) Bank for International Settlement International Development Association (IDA).PATHFINDER PART II . 16. 4. 2. 15. 9. 11.50 = 7. 20.

Candidates are advised to read wide and in-depth when preparing for the examinations of the Institute for better result. PROFESSIONAL EXAMINATION II – MAY 2010 49 .PATHFINDER EXAMINERS‟ REPORT The questions test candidates‟ knowledge of the various aspects of the syllabus. Many of the candidates did not have a good understanding of some of the questions hence gave wrong answers or failed to answer them. Almost all the candidates attempted the questions but performance was below average.

44 0.4665 699.700 6.55 0.8264 (7.75 (118.7 6.7513 2.800 3.5132 3.566.85 0.35) 0.300) 6.685.500 DF PV 10% N‟000 0.64 0.303.0 5.40 0.000) Inflow N‟000 6.3856 2.200 5.5 0.60) 0.800 6.4665 3.700 6.841.035.6830 2.181.5 Expected value N‟m 4.438.PATHFINDER SOLUTIONS TO SECTION B QUESTION 1 – CASE STUDY (a) GOODY-GOODY PLC Computation of NPV of the initial project Year 1 2 3 4 5 6 7 8 Cash flow N‟000 (9.00 0.700 PROFESSIONAL EXAMINATION II – MAY 2010 50 .960 (b) Incremental Cash Flow Incremental cash flow N‟m 8.5645 3.6209 4.4241 2.103.0 2.700 6.595.47 0.583.4 Probability 0.000) 2.700 6.5132 2.000) (9.125.700 Net flow N‟000 (8.437.499.000 1.96) Comment: The project should not be undertaken because it has a negative NPV of N118.90) 0.500 6.7 DF PV 10% N‟000 0.700 6.90 0.9091 (8.700 6.5645 (4.700 6.63 Year 6 7 8 9 10 Outflow N‟000 (15.52 7.

Some candidates also failed to apply or use the given probability in the question which will enable them to arrive at the expected value of the cash inflow. Almost all the candidates attempted the question but most of them understood only the part (a) of the question and demonstrated lack of understanding of the (b) part.220 From the calculations. then the overall project‟s net present value will be: N4. Candidates are advised to take time to read.382.60 x N7. It is the system by which companies are directed and managed in the best interest of the owners and other stakeholders.303.960 = N4. EXAMINERS‟ REPORT The question tests candidates‟ knowledge of investment appraisal technique under capital investment decisions aspect of the syllabus.180 Since the initial project‟s net present value is negative i. structures and relationship through which the Board of Directors oversees what the executives do to achieve the objective of the company.960).180 – N118.263. then the NPV = 0.e. Candidates‟ commonest pitfalls were their inability to determine the timing of the cash flows (inflows and outflows).PATHFINDER If the probability of success is 60 per cent. (N118.630 = N4. Therefore. QUESTION 2 (a) Corporate Governance as defined by Dayton (1984) is the process. It refers to the role of the Board PROFESSIONAL EXAMINATION II – MAY 2010 51 . understand and interprete questions appropriately and note the specific requirements before attempting them. hence performance was poor.382. the additional N15 million and the incremental expected cash flows are worthwhile hence the option to expand is recommended if the project is to be embarked upon. investing an additional N15 million brings about a positive NPV which wipes out the negative NPV of the initial project.

executives and non-executives. Appointment of Audit Committee. corporate disclosure framework and shareholder‟s participation. (ix) Provision of a framework for the pursuit of the organisation‟s strategy in an ethical and effective way to safeguard against misuse of all resources. supervision and (v) Maximisation of corporate value through enhancement of transparency and efficiency. Prevention of exploitation of investors by the managers. (b) Key elements in Corporate Governance aimed at controlling the ability of the directors to promote their own interest and ensure adequate disclosure of their activities include: (i) Allowance for a review of audit regulations. PROFESSIONAL EXAMINATION II – MAY 2010 52 . best ethical practices. This is to improve the accountability and transparency of companies‟ compliance to statutory regulation.PATHFINDER of Directors. This is to assist the Board of Directors in managing the accuracy and integrity of the financial statements of the company by making sure that the statements comply with the legal and regulatory requirements and the efficiency of the company‟s internal audit functions. (vi) (vii) (viii) Ensuring that the suppliers of finance to companies have their rewards. consumer protection and so on. Prevention of fraudulent practices through the mechanisms designed by the Board and management. managerial system which promotes creative (ii) (iii) (iv) Enhanced overall performance through good management within set best practice guidelines. Existence of a entrepreneurship. shareholders right and to other action taken by shareholders to influence corporate decisions.

It is intended to provide a wide range of alternative information gathering and analytical tools with a major emphasis on flexibility and user friendliness. thereby enhancing problem solving process. Information is produced by analytical modelling of financial data. Laying solid foundation for management. Recognising the legitimate interest of stakeholders. (ii) (iii) (iv) (v) PROFESSIONAL EXAMINATION II – MAY 2010 53 . and Adherence to the corporate governance code of conduct for company directors published under the aegis of Securities and Exchange Commission (SEC). Respecting the rights of shareholders. It allows for interactive enquiries and responses between financial managers and the system. Structuring the Board to add value. opportunity and threats. There are no predetermined solutions or reporting formats. It is an information system that combines data. Recognising and managing risk. Promoting ethical and responsible decision making. (viii) Remunerating fairly and responsibly. Safeguarding the integrity of financial reporting. analytical tools and models to support semi-structured and unstructured decision making. It provides support but neither replaces the manager‟s judgement nor provide predetermined solutions. Encouraging enhanced performance evaluation. (d) Characteristics of Decision Support System (DSS) include: (i) It is an information system used by senior managers to carry out analysis of specific problems.PATHFINDER (c) Areas covered by the code of good Corporate Governance practice include: (i) (ii) (iii) (iv) (v) (vi) (vii) (ix) (x) (xi) The independent directors.

PATHFINDER EXAMINERS‟ REPORT The question tests candidates‟ knowledge of the meaning. most of them avoided the question and those who attempted it. Also. gave wrong answers. However.08 = 0.5 PROFESSIONAL EXAMINATION II – MAY 2010 54 .05 x 0. Many candidates attempted the question but performance was poor. Most of them performed well in part (a) of the question but did not quite understand the requirements of parts (b) and (c) hence the interchange of some requirements of part (b) with those of part (c). candidates‟ understanding of part (d) was poor. as a result.8 0. It also tests candidates‟ understanding of Decision Support Systems (DSS). Candidates‟ commonest pitfall in parts (b) and (c) was their inability to differentiate between the code and the key elements of corporate governance. QUESTION 3 (a) The three forms of capital market efficiency are: (i) (ii) (iii) (b) i Weak form Semi-strong form and Strong form. their commonest pitfall in part (d) of the question was their inadequate knowledge of Information Technology (IT). elements and code of good corporate governance. Calculation of beta factors for each of the security: x x Co x m Security: X = = Standard deviation x Correlation coefficient Market standard deviation 0. Candidates are advised to study extensively and understand the questions before attempting them. They should also endeavour to improve their knowledge of Information Technology (IT) as it is an important aspect of the syllabus.

08 0.15 x 0.75 (20−15)% 15% + 1.05 (20−15)% = = = 17.6 0.05 Expected Return for each security = E(Ri) = Rf +  (Rm –Rf) where: E(Ri) is expected return on the security Rf is the risk-free return Rm is the expected market return  is the beta (risk) of the security X Y Z = = = 15% + 0.100% = 18.25% Expected return on the portfolio is derived from the following formula. Therefore the expected return on the portfolio using the above formula is: (0.3 x 18. E(Rp) = Wx E(Rx) + Wy E(Ry) + Wz E(Rz) where: X.75 1.975% = 19% (ii) The risk of the portfolio is the addition of the Beta factor for each security X proportion of the available investment funds invested in each security PROFESSIONAL EXAMINATION II – MAY 2010 55 .75% 20.250% + 5.4 x 20.75)% + (0.5% 18.3 x 17.625% + 8. and Z are the securities E(Rp) is the expected return on portfolio E(Rx) is the expected return of security X and Wx is the proportion of the available investment funds invested in security X.PATHFINDER Y Z = = 0.25)% = 5.4 0.08 = = 0. Y.14 x 0.50)% + (0.5 (20−15)% 15% + 0.

which is: = = = Determination of Rf i. Rm –Rf 0. Few candidates attempted the question and performance was poor. they were unable to interprete and identify the figures to use in solving the problems. The remaining candidates performed poorly.795 79.3) + (0.20 0. Candidates‟ commonest pitfalls were their inability to get the formula right and where they are able to state the formula correctly.05 x 0.150 + 0.PATHFINDER i.4) 0.20 – Rf −Rf Rf = = = = = Premium 0.05 0. They should also endeavour to understand the principles involved in the interpretation of formulae.75 x 0.5 x 0.15 15% EXAMINERS‟ REPORT The question tests candidates‟ knowledge of portfolio management with particular reference to Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis (EMH).05 – 0.3) + (1.e. PROFESSIONAL EXAMINATION II – MAY 2010 56 . Candidates are advised to read wide and in-depth for the Institute‟s examinations. Some candidates that attempted the question got the formula right and therefore did well.e  p =  x x Wx +  y x Wy +  z x Wz (0.420 0.225 + 0.5% = 80%.

budgets. Increase in assets financed by a small increase in proprietors‟ capital (e. This is achieved through the preparation of cash Management of cash flows through the management of cash collections and disbursements. Substantial increase in overhead costs resulting in a fall in net profit margins.g. Rapid increase in the volume of current assets and possibly fixed assets. maturity and marketability of the investment.PATHFINDER QUESTION 4 (a) Functions of the Treasury Manager in relation to cash management include: (i) (ii) Cash planning. This is done through the selection of investment opportunities taking into consideration the safety. Investing surplus cash in marketable securities or short term investment opportunities to earn profits. This is achieved by acceleration of cash collection and control of disbursements. retained profits) while most increases are financed by trade creditors (repayment period to creditors become much slower). Maintaining a sound cash position through determination of the optimum cash balance by matching the cost of excess cash and danger of cash deficiency. High stock turnover and low average collection period which means that the rate of increase in stocks and debtors would be greater than the rate of increase in sales. (iii) (iv) (v) (b) Symptoms of overtrading include: (i) (ii) Rapid growth in turnover (sales). Banking and custody of cash. (iii) (iv) PROFESSIONAL EXAMINATION II – MAY 2010 57 .

500 x 365 days 5. Calculation of the length of the cash operating cycle Raw material stock turnover period = Average stock of raw materials Purchases x 365 days = 700.000 1 = 30.000 1 = 91.000 x 365 days 2.000 x 365 days 4. Decline in the ratio of working capital to sales Decline in the ratio of debtors to trade creditors Decline in the current and acid test ratios (vii) (c) (i) Bank overdrafts reach or exceed the limit of the facilities agreed with the banker.42 days = 30 days 800. (vi) Major decline in the debt and liquidity ratios.800.800.52 days = 70 days (ii) Work-in-progress stock turnover period = Work-in-progress x 365 days = Cost of goods sold 1 Finished goods stock turnover period = Finished goods stock x 365 days = Cost of goods sold 1 Debtors‟ collection period = Debtors x 365 days = Sales 1 (iii) (iv) 602.000 x 365 days 4.75 days = 55 days PROFESSIONAL EXAMINATION II – MAY 2010 58 . e.000 1 = 69.PATHFINDER (v) Decline in gross profit ratio as a result of higher purchase costs.g.25 days = 91 days 350.000.200.000 1 = 54.200.98 days = 44 days (v) Creditors‟ payment period = Creditors x 365 days = Purchases 1 420.000 x 365 days 1 2.000 1 = 43.

The (c) part of the question was well understood by many candidates. However. Most of the candidates attempted the question and performance was fair.PATHFINDER Therefore. P/E ratio computation before merger: Beta Plc N‟m EPS = PAT No of shares = 150 600 = 0. candidates failed to limit themselves to the question asked and therefore performed poorly while the (b) part was not well attempted. their commonest pitfall in part (a) of the question was their inability to differentiate between the cash management functions of the treasury manager and his general functions while the (b) part was not well understood by most of the candidates. in part (a). The commonest pitfall of the few candidates that performed poorly in part (c) of the question was their inability to get the correct formula to use in calculating the operating cycle for each of the working capital item. understand and interprete questions appropriately and note the specific requirements to ensure that they answer questions correctly. the length of the cash Operating cycle = 180. QUESTION 5 (a) BETA AND OCEAN PLC Price Earnings. However.25 Ocean Plc N‟m 30 150 = 0. It also tests candidates‟ knowledge of overtrading and calculation of cash operating cycle.2 PROFESSIONAL EXAMINATION II – MAY 2010 59 . Candidates are advised to take time to read.42 days = 180 days EXAMINERS‟ REPORT The question tests candidates‟ knowledge of the functions of the Treasury Manager with respect to cash management.

500.PATHFINDER P/E ratio = Share price = EPS N5 N0.27 If EPS = N0.5 184.0 4.000 675.27 = 20. the Price Earning (P/E) Ratio of the group would be: N5.27 and Share price = N5. Total earnings Beta Ocean Increased cash flow Therefore EPS = N‟m 150.37 times PROFESSIONAL EXAMINATION II – MAY 2010 60 .25 = 20 times (b) P/E ratio computation for the group after merger P/E ratio EPS = = Share Price Earnings Per Share Total Earnings No of shares Total market value Total Earnings N2 N0.50 (given) Then.000.20 = 10 times No of shares = (600 + 75)m = 675 million shares.50 0.000 = N0.5 184.0 30.

a holder of 1 share in Ocean Plc will now get 10k ÷2 = 5k since the ratio of offer is 2:1. = PROFESSIONAL EXAMINATION II – MAY 2010 61 .000.000 150.0 Capitalisation of Ocean Plc (pre-merger) = 150m x N2.000 300 45 3.000. before the merger.10 Therefore. capitalisation of group after merger (d) Calculation of dividend income of the holder of 1 share in Ocean Plc before and after merger assuming Beta maintains the same dividend per share as before the merger.000. (14k −5k) on each of their shareholding since they were earning 14k on each holding. Dividend per share (DPS) of holder of 1 share in Ocean Plc: Before merger: DPS = = N21.000 = N0.000 600.000 N0.000.14 After merger: assuming Beta Plc maintains the same dividend per share as before the merger: DPS 60.0 Value of merger benefit (given) Therefore.PATHFINDER (c) Calculation of market capitalisation of Beta Plc (after merger) Nmillion = = = = 3.345 Capitalisation of Beta Plc (pre-merger) = 600m x N5. that is. Comment: The shareholders of Ocean Plc would be losing 9k.

Such direct investment usually involves acquisition of a controlling interest in an overseas branch or subsidiary. Candidates‟ commonest pitfalls in answering the question were their lack of an indepth knowledge of the principles involved in mergers and acquisitions. It involves the purchase of shares or loan stock in an overseas business organisation. (b)(i) The three financial institutions that make up the World Bank Group are: * * * The International Bank for Reconstruction and Development (IBRD). Candidates had fair knowledge of the question. PROFESSIONAL EXAMINATION II – MAY 2010 62 . Candidates are advised to ensure adequate coverage of all sections of the syllabus and note the specific requirements of a question before attempting it. Foreign Portfolio Investment (FPI) refers to participation in overseas investment without any control over the running of the business. They performed well in part (a) of the question while parts (b) and (d) were fairly attempted but they displayed a very poor understanding of part (c). Most candidates attempted the question and performance was above average. The International Development Association (IDA) and The International Finance Corporation (IFC). QUESTION 6 (a) Foreign Direct Investment (FDI) refers to a lasting interest in an enterprise in another economy where the investor‟s purpose is to have an effective voice in the management of the enterprise. Firms which invest overseas are examples of multinational corporations.PATHFINDER EXAMINERS‟ REPORT The question tests candidates‟ knowledge of mergers and acquisition with special emphasis on evaluation of financial performance of merged companies. On the other hand. and their inability to sift and properly obtain the correct figures to use for the calculations demanded in the questions.

Candidates‟ commonest pitfall in part (a) of the question was their non-understanding of the meaning of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). They should also give consideration to International Finance in their preparations. that the most urgent needs are satisfied first. particularly the parts (a) and (b) was poor while the part (c) of the question was fairly attempted.   (c) The special borrowing facilities at the International Monetary Fund (IMF) include: (i) (ii) (iii) (iv) (v) Ecology Fund Infrastructural Development loan/grant Deficit balance of payment/Trade Financing Budget Deficit Financing Special Capital Project Financing. Candidates‟ understanding of the question. Promoting long-range balanced growth of International trade and the maintenance of equilibrium in the balance of payments by encouraging international investment for the development of the productive resources of member countries. They were therefore unable to define the two types of Foreign investments. ADB and so on. Candidates are advised to always cover the syllabus adequately for better result. PROFESSIONAL EXAMINATION II – MAY 2010 63 . in so far as it makes or guarantees loans. Many candidates attempted the question but performance was below average. In part (b) of the question. candidates were unable to list the three institutions that made up the World Bank Group. Ensuring. It also tests candidates‟ understanding of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).PATHFINDER (ii) The objectives of setting up the World Bank include:  Assisting in the reconstruction and development of the territories of members by facilitating investment of capital for productive purposes. IMF. EXAMINERS‟ REPORT The question tests candidates‟ knowledge of international financial management with emphasis on the major international financial institutions such as the World Bank Group.

. D... C. 3.. MULTIPLE-CHOICE QUESTIONS (20 Marks) Which ONE of the following details is disclosed in the Tax Clearance Certificate of a limited liability company? A. PROFESSIONAL EXAMINATION II – MAY 2010 64 ..... B. SECTION A: Attempt All Questions PART I 1. 2..PATHFINDER ICAN/ THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION II – MAY 2010 ADVANCED TAXATION Time allowed – 3 hours EXAMINATION NO. C. What is the expiry date of an unrestricted Tax Clearance Certificate? A....... Total profit Tax withheld Tax paid Total expenses Adjusted profit...... E.... D... 31st August of the year of issue 30th September of the year of issue 31st December of the year of issue 30th November of the year of issue 31st October of the year of issue.... Why are penalties imposed by tax authorities? A. C. B. E. E.. B.. D.. To punish tax payers To encourage prompt collection of taxes To discourage collection of taxes To punish tax defaulters To punish tax payers....

PROFESSIONAL EXAMINATION II – MAY 2010 65 . Which ONE of the following does a Tax Clearance Certificate show? A. B. C. D. B. Which one of the following represents the assessable profit of a company for any accounting period under Petroleum Profits Tax Act CAP P13 LFN 2004? A. The date of issue The names of the directors The names of the shareholders The date of appointment of the directors The date of change in accounting date. E. E. Proceeds of sale of chargeable oil sold by the company in that period Value of all chargeable oil disposed of by the company in that period Value of chargeable natural gas All income incidental to and arising from anyone or more of its petroleum operations Cost of extraction of oil. C. Seismic survey Systemic survey Systematic survey Systems survey Systems review and survey. D. E.PATHFINDER 4. B. E. D. 5. 6. C. D. 7. B. Adjusted profit after adjusting for capital allowances of the current period Adjusted profit after adjusting for balancing allowances and previous years losses Adjusted profit after adjusting for losses and balancing charges Adjusted profit after adjusting for losses and capital allowances Adjusted profit after adjusting for losses from previous accounting periods. In which ONE of the following services does an oil service company engage? A. Which one of the following is not included in the chargeable profit of a petroleum company? A. C.

C. 9. A period from 1 August to 31 July of the same year A period from 1 September to 31 August of the same year A period of one year preceding the year of operation A period of one year from 1 January to 31 December of the same year A period of one year from the date a company first makes a sale of bulk disposal of chargeable oil. 11. D. B. E. Which ONE of the following determines a dispute as to the date of the first sale of chargeable oil? A. B. B. E. Creditors ledger Sales Day Book Debtors ledger Nominal ledger Payroll. Which ONE of the following is to kept by a vatable person? A. 10. D. D. D. PROFESSIONAL EXAMINATION II – MAY 2010 66 .PATHFINDER 8. What is the accounting period for all companies engaged in petroleum operations? A. C. C. E. Federal Inland Revenue Service Board Joint Tax Board Department of Petroleum Resources Director of Petroleum Resources Director of Petroleum services. B. C. E. What is chargeable profit under Petroleum Profits Tax Act CAP P13 LFN 2004? A. Assessable profit less the capital allowances and balancing allowance Assessable profit less the balancing allowance Assessable profit less the capital allowances allowed by the Act Assessable profit less the losses for the previous period Assessable Profit after deduction of allowance expenses.

Which ONE of the following. C. B. Where there is no contravention of the provisions of the Act governing pioneer industries Where production day is less than one year When qualifying expenditure is more than N50. B. Spouse of the person making the disposal Trustee of a unit trust A Partnership A company A legal practitioner. Which of the following is VAT exempt? A. C. D.000 for company not indigenously controlled Where there is an application from the pioneer company. D. C. Assets transferred to trustees by the settler Termination of a life interest in a settlement Where transaction is between connected person Transactions were not done at arms‟ length Transactions done at arms‟ length. under Capital Gains Tax. 13. 14. E. Which ONE of the following is not a case of computing chargeable gains using open market values? A. E. E. 15.PATHFINDER 12. Computers Motor vehicles Books and educational materials Shredding machines Cement. Which ONE of the following is not ground for which a pioneer certificate can be revoked? A. D. B.000 for an indigenous controlled company Where qualifying expenditure is less than N150. C. E. B. D. PROFESSIONAL EXAMINATION II – MAY 2010 67 . are connected persons? A.

000 N 900. C.000. C. D. Which ONE of the following does not qualify as a pioneer industry? A. 18.000 N1. E. What is the adjusted profits assuming a tax rate of 30%? A.100. Allowable expense Non allowable expense Partly allowable expense Relief allowable expense Non reliable expense. D. On the last day before the cessation occurred On the day of the cessation On the day such monies were collected On the day such monies were banked On the day such monies were received for. The Manufacture of motor vehicles The Manufacture of salt The Manufacture of iron and steel The Manufacture of glass and glassware The Manufacture of pharmaceuticals. When are monies received after cessation of business deemed to have been paid? A.PATHFINDER 16. C. 17. B. B. How is the fine paid by a company on behalf of a drunken driver treated for drunk driving in computing adjusted profit? A.000 as its tax liability for 2008 year of assessment. XYZ Ltd paid N300. B.000 PROFESSIONAL EXAMINATION II – MAY 2010 68 .200. N1. E. E. E. D.000 N1. C. D. 19. B.000 N 800.

000 N5.000 N5. E. if the Depreciation not included in the adjusted profit is N300. what is the new adjusted profit? A.000.300. C.PATHFINDER 20.700.700.300. B. N6.000 N6. The adjusted profit of a company is N6.000.000.500 PROFESSIONAL EXAMINATION II – MAY 2010 69 .300 N6. D.600.

000 in a given year as company tax... 4...PATHFINDER PART II: SHORT ANSWER QUESTIONS (20 Marks) 1. What is the maximum period covered by a Tax Audit? Minimum Tax applies to companies that have been in business for …………. What do you mean in taxation when you say an expense is an allowable deduction? How will you determine the assessable profit for the third year of assessment under commencement provisions? Eru Nigeria Limited paid N6. In which way is Investment Allowance in Petroleum Profit Tax Act Cap P13 LFN 2004 similar to Initial Allowance under Companies Income Tax Act Cap C21 LFN 2004? What is the tax holiday granted as an incentive to companies engaged in downstream sector in the gas industry? 14..000. 11... What was the total profit using a tax rate of 30%? Why is Value Added Tax (VAT) described as an indirect tax? What is the penalty for failure to collect VAT under the VAT law? Dividend distributed by unit trust are profits…………. 5.. 6. The information circulars or departmental instructions..... How will the profits of a non-resident company carrying on the business of shipping in and outside Nigeria be taxed? Tax can be ……………………by converting sole proprietorship to a limited liability company.. 10. PROFESSIONAL EXAMINATION II – MAY 2010 70 . 7.. 3.. 13.from tax.years and beyond... 2. 12. 8.... issued by the Federal Inland Revenue Service Board are for …………………. 9....... What is an Original Assessment?..

19.. Dividends distributed during the tax holiday period by companies engaged in the downstream sector of the gas industry and where the investment is in foreign currency attract an incentive.11 of Petroleum Profits Tax Act Cap P13 LFN 2004 as amended provides that gifts and donations are not……in ascertaining the adjusted profit of a petroleum company.PATHFINDER 15. PROFESSIONAL EXAMINATION II – MAY 2010 71 . 18. 17. 20. Sec. What is paid to confer legal approval on an instrument of apprenticeship? Who is empowered by law to appoint the State Commissioner for Stamp Duties? 16. All non-productive rents incurred by a company are known as…………….. What is this incentive? Petroleum profits are assessed to tax on………………….

Your talk is expected to address the following issues with emphasis on the tax implications of each: (a) Legal form of the proposed business: (i) (ii) (iii) Registering as a Business Name Registering the business as a Partnership Incorporating a Limited Liability Company. (15 Marks) Note: Your talk should be presented in a Report format to the Club. PROFESSIONAL EXAMINATION II – MAY 2010 72 .000 360.000 190.PATHFINDER SECTION B – ANSWER QUESTION ONE AND ANY OTHER THREE (60 Marks) QUESTION 1 .000. QUESTION 2 Empire Nigeria Limited is owned by Nigerians and has been in business since year 2003.000. Options of election by a Taxpayer and Revenue. How the profits of the business will be taxed on cessation.000 180. (b) (c) (d) How the profits of the business will be taxed on commencement. The results of the company as at 31 December 2008 are as follows: Assets employed N N Fixed Assets Current Assets Less: Current Liabilities Net Current Assets Net Assets 550.CASE STUDY You have been invited by a Club of young Nigerian Business Executives to give a talk on the topic “commencing a thriving business in Nigeria and the tax implications”.000 370.

(5 Marks) Note: Ignore restriction on capital allowance that can be relieved.000. The cost of advertising per site is 1.000 60. Capital allowances for 2008 year of assessment amounted to N950. 2008 was N240.100. (4 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 73 .000.000.000. (5 Marks) Compute the company‟s income tax liability for 2009 year of assessment. (5 Marks) (Total 15 Marks) (c) QUESTION 3 Pee Dee Concept Limited is into advertising business. Assessable Profit was N2.000.000. Give THREE examples of each.000. The company agrees to advertise a product on a one metre by one metre sheet poster board at six different sites.PATHFINDER FINANCED BY: Share Capital Statutory Reserves General Reserves Long Term Loans 140.000 370.000 100. Gross Profit was N35. You are required to: (a) (b) Compute the company‟s minimum tax liability for 2009 year of assessment.000.000.000 70.500 at a commission of 5½%.000.000. Unrelieved capital allowances brought forward from 2007 year of assessment was N600.000.000 You are provided with the following additional information: (a) (b) (c) (d) (e) The turnover of the company during the year ended 31 December. You are required to: (a) Calculate the VAT due to the relevant tax authority on this transaction. Differentiate between Direct and Indirect Taxes.

500.000 for 2008 tax year.000 on 31 December. The company spent N250.000. (6 Marks) List any FIVE details to be furnished in a VAT Invoice. The market value of the remaining plant and machinery was N750. what are the Royalties‟ Rates? (3 Marks) (Total 15 Marks) Lazarus Company Limited purchased the following assets: Type Plant and Machinery Amount N1. The actual tax liability as per the audited accounts of the company filed at the tax office by its auditors was finally agreed at N89. PROFESSIONAL EXAMINATION II – MAY 2010 74 .000 as expenses incidental to the sale.000. 2005 for N1.850. 2005. (5 Marks) What are tax offsets under the Petroleum Profits Tax Act Cap P13 LFN 2004 as amended? (4 Marks) Explain briefly the Joint Venture Contracts (JVCs) Tax Regime.000 Part of the plant and machinery was sold on 31 December. (5 Marks) (Total 15 Marks) QUESTION 4 The estimated tax liability of Integrity Petroleum Limited was N84.200.PATHFINDER (b) (c) Who is a VATable person under the VAT enabling law? Give FIVE examples. (3 Marks) (b) (c) (d) QUESTION 5 (a) Date 1/4/01 Under the Production Sharing Contracts (PSC).000. Required: (a) Prepare the schedule of stream of payments to the tax authority for 2008 tax year. assuming the company was served notice of assessment in November 2008.

000 51.300 11.275.800. Other expenses include disallowable expenses of N100. Its core business is carriage of passengers.151. With respect to Capital Gains Tax Act Cap C1 LFN 2004.450 4.382.033.160 126.185. N N 50. 2006 as follows: Income from passengers flight on other routes Income from cargo loaded into aircraft on other routes Income from passengers flight from Nigeria Income from cargo loaded into aircraft from Nigeria Deduct: Depreciation Staff salaries General provision Other expenses Net profit You are given the following additional information: (a) Capital allowances were agreed with the relevant authority at 110% of depreciation charged.000.660 122.000 12. The new cost of the remaining asset.750. (i) (ii) Explain briefly what is meant by “Roll Over Relief”. You are given its financial results for the year ended 31 December. mails and livestock into and out of Nigeria.460 464.800 (b) PROFESSIONAL EXAMINATION II – MAY 2010 75 . The capital gains tax.PATHFINDER You are required to compute: (i) (ii) (iii) (b) The chargeable gain on the asset sold. What are allowable expenditure? (3 Marks) (4 Marks) (4 Marks) (2 Marks) (2 Marks) QUESTION 6 Barabas Airline Limited is a foreign company incorporated in Ghana.110 50.500 3.600 136.360.

000 10. (1 Mark) Explain briefly tax incentives to the following lines of businesses: (i) (ii) (iii) Small Companies Wholly Export Business Unit Trust (1 Mark) (1 Mark) (1 Mark) (c) State any FOUR powers and functions of the Federal Inland Revenue Service Board.000 5.000 20. (6 Marks) (Total 15 Marks) 1. CAPITAL ALLOWANCES Office Equipment Motor Vehicles Office Building Furniture & Fittings Industrial Building Non-Industrial Building Plant and Machinery .Agricultural Production . PROFESSIONAL EXAMINATION II – MAY 2010 76 .PATHFINDER You are required to: (a) (i) (ii) (iii) (b) Compute the total profits of company for Nigerian Tax purposes.Others INVESTMENT ALLOWANCE TAX-FREE ALLOWANCE: Rent Transport Utility Meal Subsidy TAX RATES Initial % 50 50 15 25 15 15 95 50 10% Maximum Per Year N 150. (4 Marks) Calculate the income tax liability for the relevant year of assessment.000 Annual % 25 25 10 10 10 10 NIL 25 2. 3. (1 Mark) Calculate the education tax liability.

N2. 10. 6. 6.000 5 Next 30. 9.000 15 Next 50.000 25 Note: Annual income of N30.000 10% of Annual Basic Salary PERSONAL INCOME TAX RELIEF/ALLOWANCES (a) Personal Allowance .000 plus 20% of Earned Income (b) Children Allowance .N2.PATHFINDER Entertainment Leave 4.000 or 10% of Earned Income (whichever is higher) (e) Life Assurance .Actual premium paid RATES OF PERSONAL INCOME TAX: Taxable Income Rate of Tax N % First 30.500 per annum per unmarried child subject to a maximum of four children (c) Dependent Relative . 7.N5.000 20 Over 160.000 each (d) Disabled Persons .5% will be charged on the total income. COMPANIES INCOME TAX RATE EDUCATION TAX CAPITAL GAINS TAX VALUE ADDED TAX 30% 2% 10% 5% 5. WITHHOLDING TAXES Type of Payment Dividend. Rent Royalties Contract supplies Building construction activities Consultancy/Professional services Management services Commissions Technical services Directors‟ fees Rates (Companies) 10% 15% 5% 5% 10% 10% 10% 10% 10% Rates (Non-corporate) 10% 15% 5% 5% 5% 5% 5% 5% 10% PROFESSIONAL EXAMINATION II – MAY 2010 77 .000 and below is exempted from tax but a minimum tax of 0. Interest. 8.N5.000 10 Next 50.

2. 15. 10. 4.PATHFINDER SOLUTION TO SECTION A PART 1 1. 17. 9. 18. 12. 19. 3. 5. C C D A A E E C D D B C A E A A B A C A MULTIPLE-CHOICE QUESTIONS PROFESSIONAL EXAMINATION II – MAY 2010 78 . 6. 20. 16. 13. 8. 7. 14. 11.

PATHFINDER EXAMINERS‟ REPORT The questions test candidates‟ knowledge of virtually all parts of the syllabus. tax administration. PROFESSIONAL EXAMINATION II – MAY 2010 79 . VAT. The questions were well attempted by the candidates. commencement and cessation of businesses. connected persons. pioneer industry. assessable and chargeable profits on Oil and Gas. Candidates‟ performance was good. Capital Gains Tax.

where tax evasion is involved. Profit is calculated thus: Profit = (a/c) . 7. 8. livestock and goods 4. (i) Preceding year basis (PYB). the basis shall be the 1st 12 months as in the second tax year.(b/c) c c a= b= c= Profit and Loss of the company before depreciation Allowance claimable by way of depreciation Total sums receivable in respect of the carriage of passengers. This is an assessment raised by the tax authority to which no objection has been raised by the taxpayer. that is. exclusively and necessarily incurred and can be deducted from income in arriving at the assessable profit. 2. the preceeding year basis (PYB) PROFESSIONAL EXAMINATION II – MAY 2010 80 . Managed/mitigated. Four. there is no time limit for reopening tax assessment/tax audit. The expense is wholly. 6. However. Guidance of stakeholders. reasonably. 3. mails.PATHFINDER PART II SHORT ANSWER QUESTIONS 1. Tax is now charged on the Profit Tax Payable must not be less than 2% of c above for any accounting period. 5. the profit of 12 months‟ period ending in the second tax year. Where there is no 12 months account. (ii) Option based on actual (iii) Where the basis period is less than 12months. Six years.

14. 11. 18. it is the final consumer of the goods and services that bears the burden. 30 1 Because it is a consumption tax that devolves in successive stages such that at the end. Tutorials 5.000.000. 20. in that. 12. Initial tax-free period of three (3) years which may be renewed for an additional period of two(2) years subject to satisfactory performance of the business. 16.PATHFINDER 9. Allowable. Dead rents. Actual year. 13. computes and assesses on a basis not materially different from the provisions of Companies Income Tax Act Cap C21 LFN 2004 as amended. Stamp Duty. The dividend is tax-exempt. (i) The tax authority of the country in which the company that chartered or owns the ship is domiciled. the ratios cannot for any reason be satisfactorily applied. 15. Exempted.000 x 100 = N20. 19.000. the deemed profits to be derived from Nigeria may be PROFESSIONAL EXAMINATION II – MAY 2010 81 . (ii) Where at the time of assessment. it is claimable in the year the asset is first put into use and only once in the life of the asset to the business. Investment allowance under PPTA Cap P13 LFN 2004 as amended is similar to initial allowance under CITA Cap C21 LFN 2004 as amended. State Civil Service Commission. 17. 150% of the amount not collected plus 5% interest above CBN rediscount rate. N6. 10.

EXAMINERS‟ REPORT The questions test candidates‟ knowledge of various aspects of the syllabus.and period covered by a Tax audit. livestock and goods shipped or loaded in Nigeria. The questions were well attempted by the candidates. similarities between Investment allowance in Petroleum Profits Tax Act Cap P13 LFN 2004 and Initial allowance under Companies Income Tax Act C21 LFN 2004. Candidates should endeavour to go through the syllabus thoroughly. mails.PATHFINDER computed on a fair percentage on the full sum receivable in respect of the carriage of passengers. Many of the candidates did not really understand the concepts of indirect tax. PROFESSIONAL EXAMINATION II – MAY 2010 82 .

In other words. The issues of VAT. It is my honour to be invited by your club to give a talk on the above subject matter. Withholding Tax is also expected to be deducted and remitted by the business to the relevant tax authority. PAYE and Withholding Tax are also applicable here. the business name must be registered with the Federal Inland Revenue Service for VAT purposes. Commencing A Thriving Business in Nigeria And The Tax Implications. It means that there is no distinct difference between the owner and the management. which will be addressed as follows: (a) Legal Form of The Proposed Business. (iii) PROFESSIONAL EXAMINATION II – MAY 2010 83 . The issues of VAT. For the employees of the business. its owners and the management. the business name must be registered with the relevant State Internal Revenue Service for the purpose of Pay As You Earn scheme. However. Incorporating a Limited Liability Company confers the status of a separate entity on the business. PAYE and Withholding Tax are also applicable here. The company is thus assessed to tax in its name and not on the income of the promoters. The position of the tax law is that of recognition of the partners as separate individuals for tax purposes.PATHFINDER SOLUTIONS TO SECTION B QUESTION 1 Ladies and Gentlemen. (i) Registering a business name confers on your business the sole proprietorship status. it recognizes a separation between the company. The tax law recognises this as such as the Total Taxable Income of the sole proprietor represents that of the business name. (ii) Registering the business as a partnership recognizes that the coming together of the partners is for profit purposes. The tax laws recognize a separate life for the company compared with the promoters of the company.

 For the second year of assessment the assessable income (if the tax payer does not give notice of election in writing). the basis period shall be the first twelve months of trade. profession or vacation. the assessable profit is the amount of the profits from the date of commencement to 31 December of that year. the assessable income is the income of the preceding year provided the person does not give notice of election in writing. With commencement rule.PATHFINDER (b) How the profits of the business will be taxed on commencement. Where the accounting period ending in the second tax year is less than 12 months.  For the third and subsequent years. which is referred to as overlap profit. No relief is available for overlap profit in Nigeria. The commencement provisions are also applicable here. Commencement provisions are also applicable. The basis of taxing the assessable profits of a business name operator or a sole trader are as follows:  In the first year of assessment. (i) The profits of a business name operator or a sole trader are taxed under the Personal Income Tax Act Cap P8 LFN2004 as amended. is the amount of the income of one year from the date of the commencement in Nigeria of the trade or business. in which a trade or business is carried on in Nigeria. The Profits made by a limited liability company are taxed under the Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria (LFN) 2004 as amended to date. (iii) PROFESSIONAL EXAMINATION II – MAY 2010 84 . (ii) Profits made by a partnership are taxed as income in the hands of the individual partners under the Personal Income Tax Act Cap P8 LFN 2004 as amended. it is possible for profit of the first accounting period to be assessed to tax more than once.

whichever is higher. PROFESSIONAL EXAMINATION II – MAY 2010 85 . (ii) (iii) The same rules as above are applicable in taxation of profits of partnership on cessation. The revenue office has the option of choosing whichever is higher of the two. profession or vocation for the year of assessment following that in which the cassation occurs. profession or vocation in Nigeria.PATHFINDER (c) How the profits of the business will be taxed on cessation (i) Where an individual permanently ceases to carry on a trade or business. The same rules as in (1) are applicable to limited liability companies. The tax payer can revoke the earlier election within one year of the end of the third assessment year. such sum shall be deemed to have been received or paid by the company on the last day before cessation occurred. where necessary. the taxpayer can elect to be assessed on actual basis in the second and third years of assessment provided the notice is given in writing. Where after the date on which a company has permanently ceased to carry on a trade or business. any sum which would have been included in or deducted from the profits of that trade or business if it had been received or paid prior to that date. The election should be made within two years after the end of second assessment year or within one year of the end of the third assessment year. The provision of option is also the same here. business. The individual shall not however be deemed to derive assessable income from such trade. the income will be either the actual income of that year or the assessable income computed under the general rules of the preceding year basis (PYB). (d) Option of Election by a Taxpayer and Revenue This topic is being discussed separately to emphasise the major differences between commencement rules and cessation provisions. the assessable income therefrom shall be as regards the amount of the income of that year. The provision of option is also the same here. Under commencement rules. As for the penultimate year of assessment.

Options between taxpayers and Revenue Offices are also tested. Most of the candidates attempted the question. EXAMINERS‟REPORT The question tests the ability of candidates to talk on professional issues in a social gathering. While thanking you for your patience and understanding. I do hope that you have gained tremendously from today‟s talk. Ladies and Gentlemen. PROFESSIONAL EXAMINATION II – MAY 2010 86 . Thank you. Candidates are advised to have a better understanding of the different forms of businesses and their tax implications. Candidates‟ performance was below average. of the assessable profits based on the actual and preceding year basis. I am most grateful to be privileged to be with you on this occasion. Questions are however welcome on issues not too clear to you. It also tests candidates‟ ability on legal form of business concerns.PATHFINDER Under cessation. Some of the candidates were unable to distinguish between registration of different forms of businesses and their tax implications. the Revenue has the option of choosing the assessable profits of the penultimate year between the higher. the tax implications of the different businesses and taxation of profits with special emphasis on commencement and cessation rules.

Empire Nigeria Ltd. (a) Computation of Minimum Tax Liability 2009 Assessment Year (a) (i) 0.5% of Gross Profit i.e .5% of N35,000,000 (ii) 0.5% of Net Assets i.e .5% of N300,000,000 (iii) 0.25% of Paid up capital i.e 25% of N140,000,000 (b) 0.25% of Turnover i.e N500,000 0.125% of N240,000,000 – N500,000 N N 175,000 1,500,000 1,500,000 350,000 1,250

Note: The highest above is N1,500,000,which will be added to the figure using turnover.

299,375 1,799,375


Computation of Company‟s Income Tax Liability 2009 Assessment Year Assessable Profit Deduct Unrelieved capital allowances bfd Current year capital allowance Total Profits Tax on N550,000 at 30% Education Tax 2% of N2,100,000 Total Tax Liability N 600,000 950,000 N 2,100,000

(1,550,000) 550,000 165,000 42,000 207,000


Direct Tax This form of tax is assessable profit directly on the tax payer who is required to pay tax on his property, income or. They are paid mainly on income, capital and property.



Indirect Taxes. These taxes are imposed on commodities before they reach the consumer, and are paid by those upon whom they ultimately fall, not as taxes, but as part of the selling prices of the commodities. Direct Taxes Personal Income Tax Capital Gains Tax Petroleum Profit Tax Companies Income Tax Education Tax Withholding Tax Indirect Taxes Value Added Tax Sales Tax, Customs Excise Duties Goods and Services Tax Customs Import Duties Stamp Duties.

Tutorials There was no need for limiting capital allowances to 2/3 because the question was specific on this.

This question tests candidates‟ knowledge of minimum tax liability, computation of assessable profits and understanding of Direct and Indirect taxes. The question was attempted by many candidates. Candidates‟ performance was below average. Most of the candidates display lack of understanding of minimum tax and indirect taxes. Some disregarded the instruction on restriction of capital allowance. Candidates should endeavour to understand issues involved in the computation of assessable profits and other related issues thoroughly.



(a) PEE DEE CONCEPT LIMITED COMPUTATION OF VAT PAYABLE Cost of the site (1500 x 6 ) Add: Commission 5½% of N9,000 VAT @ 5% to FIRS (b) VATABLE PERSON A person that deals in Vatable Goods and Services Examples of Vatable persons are: (i) (ii) (iii) (iv) (v) (c) A limited liability company A partnership A sole trader An individual A club dealing in vatable goods. N 9,000 495 9,495 475

DETAILS TO BE FURNISHED IN A VAT INVOICE (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Suppliers Tax identification Number (TIN) Name and address of purchaser Vat registration number Amount payable before Vat The date of invoice Tax charged Rate applied Goods supplied Net amount payable after Vat Gross amount of the Transaction.

The question tests the candidates‟ understanding of VAT, Vatable person, Vat invoice, relevant authority in VAT.



000 1 /12 of N84.000.000.000 7.e N89.000 7. Candidates‟ performance was average.000. Candidates are advised to get acquainted with the provisions of the ACTS. Some candidates that attempted the question could not get the computation right.000 1 /12 of N84.000.000 Final tax i.000.000. Date March 2008 April 2008 May 2008 June 2008 July 2008 August 2008 September 2008 October 2008 November 2008 December 2008 Basis of Computation /12 of N84. Many did not understand the issue of Vatable person whom they described as agents of VAT.000 7.000 – N63.000.000.000 7.000.000 N89.500.000 26.000 1 /12 of N84.500.000 1 /12 of N84.500.000 1 1 Amount Paid N 7.000 7.000.e actual Tax already paid i.000. that is.000 for 2008 Tax Year.000 7.000 7.000.000 (b) The expenses generally referred to as tax offsets are: (i) (ii) (iii) Investment tax credit Royalties on chargeable oil won and locally disposed off Non-Productive Rents.000 /12 of N84.000 1 /12 of N84.000 1 /12 of N84.000 1 /12 of N84.500.000.000. QUESTION 4 (a) INTEGRITY PETROLEUM LIMITED Schedule of Stream of Payments of the Tax Liability of N89.000.PATHFINDER It was attempted by many candidates. any rent which is deductible but it is not deducted from any royalties under an oil prospecting license or oil mining lease PROFESSIONAL EXAMINATION II – MAY 2010 90 .000.000.

A “tax inversion penalty” clause was introduced because of criticism on the fact that this regime is disincentive to cost minimization. pipelines. Savings by the Government are countered by the Transfer Pricing and Avoidance Scheme introduced.000 metres water depth 4% Above 1.PATHFINDER (iv) All sums whose liability was incurred by the Company during the period to the Federal Government of Nigeria by way of Customs and Excise Duties levied in respect of plant storage tanks. (c) Joint Venture Contracts Under the Petroleum Profit Tax Act Cap P13 LFN 2004 as modified by MOU 2000 and the letters from the minister of Petroleum Resources. Candidates‟ performance was average. PROFESSIONAL EXAMINATION II – MAY 2010 91 . this is a joint venture between the NNPC and the operators for which NNPC meets its equity contribution through the “Cash Calls” and the companies provide the counterpart funding. The Companies lift the crude in the ratio of their equity participation. (d) Royalties‟ Rates Under The Production Sharing Contract Up to 200 metres water depth 162/3% 201 – 500 metres water depth 12% 501 – 800 metres water depth 8% 801 – 1. Joint Venture Contracts (JVC) and Royalties under Production Sharing Contract.000 metres water depth 0% EXAMINERS‟REPORT The question tests candidates‟ understanding of Petroleum Profits Tax Payments schedule. tools. Candidates are advised to have a better understanding of the areas tested. They have become part of S. machinery and equipment. essential for use in the company‟s operations. Many candidates attempted the question. 10 and S.17 of Petroleum Profits Tax Act deductions.

000 1.200.000 (853.850.000 x 1.PATHFINDER QUESTION 5 (a) i LAZARUS COMPANY LIMITED COMPUTATION OF CHARGEABLE GAIN Sales proceed Less: Selling expenses Net sales proceed Less: Cost A x C A+B 1.000) 1.000 Chargeable gain N 1.000 .000 (250.853.154 74.850.154 (iii) Cost of remaining asset = = Note: Where A = Value of part disposed of B = Value of part not disposed of C = Total cost of the asset.850.600.846) 746.154 (ii) LAZARUS COMPANY LIMITED COMPUTATION OF CAPITAL GAINS TAX Chargeable gains Capital Gain Tax @ 10% N 746.200.846 N346.000+750.615 1. PROFESSIONAL EXAMINATION II – MAY 2010 92 .

Allowable expenditure:  Any expenditure wholly and exclusively incurred on an asset for the purpose of enhancing its value and reflected in its state or nature at the time of disposal  Any expenditure that has not wasted away before disposal. Full relief is obtained only when the total consideration for the sale of the old asset is applied in the acquisition of the new asset or assets of the same class. a relief is granted. allowable expenses and Rollover relief. in full. Partial relief is obtained where part of the sales consideration of the old asset is applied in the acquisition of the new asset. The company will be entitled to deduct the gains arising on disposal from the cost of the new asset.  Any expenditure wholly and exclusively incurred in establishing. PROFESSIONAL EXAMINATION II – MAY 2010 93 . preserving or defending the title or right over an asset. Candidates are advised to endeavour to understand the specific issues in the ACTS. market value in calculating gains. maintenance and redecoration are not.PATHFINDER (b)i Rollover Relief Where a company carrying on a trade or business disposes an asset used in the business and applies the proceeds in acquiring new assets of the same class as the old ones which are to be used in the business. The candidates did not exhibit good awareness of the specific provisions of the Acts. The question was well attempted by the candidates and the performance was average. Cleaning a picture is allowable but insurance cost is not. hence extensions and improvements to property are allowable but repairs. The amount is restricted to the applied amount. (ii) EXAMINERS‟REPORT The question tests candidates‟ understanding of Capital Gains Tax.

550.950) 23.300 11.766.PATHFINDER QUESTION 6 BARABAS AIRLINE LIMITED (a) (i) Computation of Total Profits of the Non-Resident Company Income Derived in Nigeria Passengers flight from Nigeria Cargo loaded into aircraft from Nigeria Total Computation of Global Adjusted Profit of the Company Net Profit Add Back: Depreciation General Provision Disallowable expenses Adjusted Profit Note: Adjusted Profit Ratio 122.460 Calculation of Tax Liability Assessable profit = 97.800.887.500 Total Income Income Tax Liability at 30% iii Calculation of Education Tax Education Tax NIL 23.598 (510.000 N 122.100 122.750.460 N 464.500 50.3% x 24.460 = Less capital allowance 110% x 464.151.994 N 12.160 24.550.900 x 100 = 97.800 615.600 100.900 ii PROFESSIONAL EXAMINATION II – MAY 2010 94 .766.185.648 7.012.376.3% 126.

dividends received from small companies in the first five years shall be exempted from tax. Income and Wages Commission. Stipulate remuneration. Also. Powers and functions of the Federal Inland Revenue Service Board are to : Provide the general policy guidelines relating to the functions of the Service. Also. allowances. benefits and pensions of staff and employees in consultation with the National Salaries. Manage and superintend the policies of the Service on matters relating to the administration of the revenue assessment. Review and approve the strategic plans of the Service. b. ii iii. are necessary to ensure the efficient performance of the functions of the service under the Act. the profit of a company whose products are exclusive input for the manufacturing of goods for export are exempted from tax. (c) (i) (ii) (iii) (iv) (v) (vi) PROFESSIONAL EXAMINATION II – MAY 2010 95 . which in its opinion. gains on disposal of investments in a unit trust are exempted from Capital Gains Tax. Education tax is payable only by companies registered in Nigeria according to Section 1(2) of the Education Tax Act 2004 CAP E4 LFN as amended. and Do such other things. provided the proceeds are reinvested. it is not liable to education tax.PATHFINDER Education Tax Being a non-resident company. i Small Companies – Small companies with turnover of not more than N1 million in the first three years shall be taxed at reduced corporate tax rate of 20%. Also. Employ and determine the terms and conditions of service including disciplinary measures of the employees of the Service. collection and accounting system under the Act or any enactment of the law. Wholly Export Business – Dividends from investments in wholly export oriented businesses are exempted from tax. Unit Trust – Dividends received from a Unit trust are exempted from tax.

Candidates are advised to read and understand the contents of the syllabus very well. Candidates‟ performance was below average. The questions was well attempted by the candidates. The candidates displayed lack of understanding of computation of the income tax of non-resident companies in the Airline industry.PATHFINDER EXAMINERS‟REPORT The question tests candidates‟ understanding of the computation of Total Profits of a Non-Resident Company in the Airline business with emphasis on income tax and education Tax. PROFESSIONAL EXAMINATION II – MAY 2010 96 .

.. SECTION B – READ & DIGEST CASE STUDY ACENCO TEA PLC BACKGROUND Acenco Tea Limited was incorporated in 2000 with a share capital of 750. For this reason.PATHFINDER ICAN/101/Z/4 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION III – MAY 2010 MULTI-DISCIPLINARY CASE STUDY Time allowed – 2 hours EXAMINATION NO.. Life sure.. The company imported and marketed tea brands: Life safe.. The sales revenue had reached N20 million within five years when three different brands of tea from different countries had been imported and blended to make its products...... This process had always taken most of their time. while other issues were denied serious consideration before decisions were taken. brand loyalty to its products had been achieved.000 ordinary shares N1. the corporate structure had become more elaborate as more professional managers were employed to meet the management requirements and other needs of the company. administrative procedure or segregation of duties.. The directors of the company were Messrs Bamidele and Korede... They considered themselves as good “Jolly friends” and not as employees of the company...00 each.. and it had established a strong market share in the country. Due to the tremendous growth.... Simon. Bamidele and Korede were the only shareholders and Executive Directors of the company and they related as friends and decisions were taken at informal meetings...... who came to visit him in his office... met the duo in a meeting and he had to wait for some hours before getting their attention.. The company grew considerably and by 2006... and Life secure. Mr. a friend of Bamidele.. When Simon PROFESSIONAL EXAMINATION II – MAY 2010 97 . there were no job descriptions.....

However. however. both of you have to make a decision as to whether you would continue to run this company like a real live and profitable business or you are going to continue to hold eight-hour staff or friendly meetings every Wednesday and dwell on philosophical attributes of tea bags”. He promised to concentrate on marketing and product development and to use environmentally appropriate product designs that would eliminate the use of strings and tags on most tea bags. Brisko Plc bought the best small companies in Nigeria. Acenco Tea Ltd became the largest Nigerian importer of branded tea in the country by 2005. Bamidele was concerned with designing an organization that has good intention for almost everybody without discrimination between management and workforce. who objected to Brisko Plc hiring an undercover agent to investigate suspected drug use in Acenco Tea Ltd. This opinion expressed. Following an aborted buyout by Tinton Tea Ltd in 2008. In 2010. Fehinbu. Brisko Plc‟s approach to employees also angered long-serving employees. He said. and socially conscious organizations.PATHFINDER met him. Korede had become disenchanted with the changing corporate structure. described the problem of informal organizational structure of the company. he could not hide his opinion about the time spent at meetings and he said “sometime. Bamidele returned to the company confessing that he missed the corporate world that he had worked so hard to build. along the line. The structural development in the company had grown beyond the directors and each had to make a decision about his interest in the company. Bamidele. Korede left the company for other business ventures but remained a shareholder and director. Lagos. Acenco‟s diversification into coffee drinks was also not successful. He truly did his best to restore the previous “hang loose” atmosphere of the workers by installing showers PROFESSIONAL EXAMINATION II – MAY 2010 98 . adjusted better to Acenco‟s elaborate structure and blended his role of corporate executive with his free spirited outlook to life. It sought to relieve boredom in the production department through participation in quality circles and job rotation. a financial specialist. Bamidele also left the company two years later to devote his personal time to a number of non-profit. the management of Acenco Tea Ltd acquired the former. It offered its employees a profit-sharing plan and health insurance package. The number of employees had risen to 200 and the company has relocated its office to Ogba Industrial Area. Brisko Plc pushed Acenco Tea Ltd into new product lines and sought to expand the company‟s activities into international markets and the other changes were not successful. In 2006. was employed to replace Bamidele and he promised to effect few changes in the company. This was just a way of appreciating the loyalty and spirit of devotion of the workers. The only thing I intend to change is “the small”.

The company established methods. more changes occurred. there was a problem as to who should be in charge of the implementation of the planned structural development. and became the Deputy. therefore. MANAGEMENT STRUCTURE AND THE EXECUTIVES Since Bamidele resumed at Acenco Tea Ltd after its acquisition by Brisko Plc. Chief Executive of Brisko Plc. Fehinbu was however advised to relinquish the position of Chief Executive to Bamidele. Kekereowo and Bamidele were friends and Bamidele did not object to the acquisition of 49 per cent when Korede decided to sell his shares. Sales volume. In reply. The structures of the company as reviewed. Both worked together amicably and the cooperation between them enabled the expansion policy of the company to be implemented successfully. financials or physical assets and geographical spread are also indications of an organization‟s size. The founders realized the links of “hands-on” management quite early in the company‟s history. to clear the issue. Bamidele had no business being its Chief Executive again. Fehinbu.PATHFINDER for employees who biked to work and a track for noon time runners and roller bladers. have been completed and the management was determined to continue to control the larger part of the market. Bamidele said to Fehinbu “You are the Chief Executive in practical reality because you will see to the effective implementation of the expansion policy of the company and I trust. procedures and structures that differed from those of other subunits because each subunit had a different task to perform. Kekereowo explained that Brisko Plc acquired only 49 percent of the share capital of Acenco Tea Ltd. you will PROFESSIONAL EXAMINATION II – MAY 2010 99 . He encouraged a return to the corporate uniform of old-jeans and T-shirts. It also planned to expand its operations to the neighbouring countries in which its brands of tea could be marketed. sent a memo to Kekereowo. It was believed in some quarters that since Acenco Tea Ltd had been acquired by Brisko Plc. The company was divided into more units when it became larger. Bamidele refused to sell his own shares representing 51 percent of Acenco Tea Ltd capital. which he did. This corporate policy was based on the belief that an organization‟s size determines the number of persons employed. and Fehinbu had earlier been hired as the Chief Executive. Managers and other specialists were employed and responsibilities were divided among them and new levels and sub-units were created to handle specialized functions in the organization. It has become necessary from early “family and friends” days to the present day to effect drastic changes in the company‟s structure. and after Brisko Plc‟s acquisition of Acenco Tea Ltd. which belonged to Korede.

Appropriate approvals were granted to the company to issue a prospectus for the public offer of the shares. The cost of implementation of the production of Life Rich Beverage was given as follows. The pilot market test was successful. The number of shares later was increased to 10 million ordinary shares of 50kobo each.000 ordinary shares of N1. based on the acceptance rate of 85 percent. and I promise not to disappoint you and Kekereowo. Life Rich has been developed from the Acenco Tea Plc Research and Development department under the company‟s Chief Nutritionist. The present share capital of 750. FINANCIAL POLICY Acenco Tea Ltd planned to raise funds from the Capital Market to finance its expansion and structural development. the company applied to the Corporate Affairs Commission for approval to change its name to Acenco Tea Plc as a public limited liability company. The appropriate resolution was passed at the Board of Directors‟ meeting.500. Plant and Machinery Advertising/Marketing Research and Development Registration of Life Rich Drink Market Survey N100 million N 25 million N 15 million N 5 million N 5 million N150 million PROFESSIONAL EXAMINATION II – MAY 2010 100 . the market survey had been carried out and the response was equally encouraging.00 each was altered to 1. a kind of beverage that enriches the life of the consumers. Jemgbo. The shares were oversubscribed by 20% and the issue cost was agreed to be 5% of the total amount realized. As a prelude to the implementation of the proposal. Mrs.” Now that the management problem had been resolved. It also applied to the Securities and Exchange Commission and Nigerian Stock Exchange for approval to issue 10 million ordinary shares at N8.PATHFINDER not disappoint us. produce and market beverage drink by producing Life Rich. This process was completed without much delay and the application was approved.00 each.” Fehinbu said in reply “I sincerely appreciate the confidence you repose in my ability. the following proposals for developmental and expansion programmes were submitted by the management to the Board of Directors of Acenco Tea Limited. Earlier. PRODUCTION OF LIFE RICH BEVERAGE Acenco Tea Plc proposed to develop.000 ordinary shares of 50kobo each.

Expansion proposals of the company included the acquisition of some important marketing companies in the beverage industry. Total amount to be considered as a loss was shown in Appendix III based on the standard cost of production (Appendix V). To implement this proposal. In furtherance of the proposal to expand its market to the neighbouring countries. The group‟s management. management recruited twelve branch managers and four regional managers. Acenco Tea Plc could not receive the full export value due to unexpected bill of exchange problems which occurred from the initial order documents. the quantities of Life Rich Tea Beverage that would be PROFESSIONAL EXAMINATION II – MAY 2010 101 . All transactions. it incorporated three companies with share capital subscribed by the citizens of those countries with Acenco Tea Plc as the parent company. as soon as the branches and regional offices had been established. while all regional offices transactions would be captured by computer central information systems. Acenco Tea (Togo) S. tele-conferencing and less travelling between branches.PATHFINDER EXPANSION OF OPERATIONS Acenco Tea Plc planned to expand its marketing operations to neighbouring countries and to market its brands of Life Tea in those countries.A and Acenco Tea (Ghana) Plc. Implementing this proposal required an effective organization structure and adequate capacity building. The subsidiary companies imported tea brands and Life Rich Beverages (see Appendix II). therefore. including sales. regional offices and group office. In view of this.. Acenco Tea (Benin) S. The following companies were accordingly incorporated. because they would do more of electronic transactions. The countries of Benin. orders. personnel and other transactions would automatically and simultaneously be in the branch and the regional offices. Each branch activity or performance would be by electronic transactions and would be linked to the regional offices by computer systems.A. MARKETING EXPANSION IN NIGERIA Acenco Tea Plc opened more branches in major cities and towns in the six geographical zones of the country. Togo and Ghana were selected. which would enable the marketing team to push into market. the management appointed Babakekere & Co (Solicitors) who have branch offices in each of the selected countries to incorporate subsidiaries in the respective countries. Each branch is managed by a branch manager and a regional manager controls three branch managers. It was difficult to transfer all the proceeds into Nigeria. stock level. They were sent for training in information technology. instructed the Chief Executives of the subsidiary companies to consider the amount that could not be transferred as a loss.

The companies have distribution networks that Acenco Tea Plc would need for marketing its products. OPERATIONAL CONTROL The management had reviewed the developmental and expansion policies as illustrated in the previous paragraphs and was satisfied with the results and would want effective control systems to be established to ensure efficiency in the performance of all units in the group. therefore. Tunder. Fehinbu and Marketing Director. Ojulowo. Kehinde & Associates (Information Technology Consultants) were contracted to link all computer systems to a reputable internet service provider.PATHFINDER required and which would also enable consumers to have access to the product without difficulties. The Board‟s decisions were communicated in a letter of offer to the Board of Distribution Network Plc. For the implementation of the Information technology project. Insider information concerning performances and operations were collected and analysed. which would enable the managers to become more efficient and save the travelling time from branch offices. The companies were: (a) Distribution Network PLC and (b) Central Distribution Limited. The offer was five shares of Distribution Network Plc for three shares of Acenco Tea Plc. had a meeting to compile a list of possible companies for acquisition that could be presented to the Board of Directors. PROFESSIONAL EXAMINATION II – MAY 2010 102 . regional offices and group head office for information that could be supplied or obtained through computer systems. Management. therefore. Tele-conferencing can be “closed” or “open. The Board of Directors met and decided to go ahead with the acquisition of the company. recommended Distribution Network Plc to be taken over. They concluded on two major distribution and marketing companies that were distributing the products of the competitors. The Board of Distribution Network Plc accepted the offer and recommended that the shareholders should accept the offer. The Balance Sheet of Distribution Network Plc is on Appendix IV. They recommended Distribution Network Plc as the appropriate candidate for acquisition. An innovation was introduced into the systems by which managers would participate in tele-conferencing without leaving their locations or offices.” “Closed” tele-conferencing is for selected persons that are connected to the system to participate while “open” teleconferencing entails participating with a password to the computer. Management. needs to identify companies that would be acquired without much difficulties.

JIT is a fundamental principle that can be applied anywhere in the cycle of material flow within any manufacturing environment. Inventory must neither be too high nor too low. JIT approach to the inventory problem is to ensure that the needed materials arrive at the place they are needed just-in-time to be used in the production of finished products. It was realized that the major machine currently in use for production would be due for replacement if the expansion was to PROFESSIONAL EXAMINATION II – MAY 2010 103 . distribution. The installation of these communication systems was to increase the transmission. Communication systems include the use of telephone. flexible manufacturing systems and computer integrated manufacturing systems. the Production Director of Acenco Tea Plc group instructed all Production Managers in the group to adopt Just-In-Time system. shareholding. He. should be responsible for operational controls that involved production. material resource planning systems.PATHFINDER It was decided that Director. a part of the communication system as envisaged.000 units of product A. Advanced Manufacturing Technology (AMT). however. Based on the above instruction. efficient utilization of workers‟ time or hours at work and other cost related operational problems. information technology systems. the Production Manager. speed. REPLACEMENT OF EXISTING MACHINE The successful acquisition of Distribution Network Plc and the establishment of subsidiary companies in the neighbouring countries opened a wider market opportunity for the distribution and sales of the branded tea and beverages of Acenco Tea Plc nationally and internationally. In view of its importance. The ordering cost was N1. automated material planning systems. Achieving these objectives depends on effective communication.200. The cost price of product A was N150 per unit. was mindful of the optimum quantities that could be ordered.250 per order and the carrying cost of inventory was 20% of the ordering cost. A classic problem in manufacturing is to balance the cost of carrying inventory against the cost of being cut off stock. sales volume. requested for the purchase of 7. fax machine. is a family of technologies that include computer-assisted design and engineering systems. automated materials handling system. Just-In-Time (JIT) system and Total Quality Management are two such systems. Group Operations. accuracy and quality of job performance. but must ensure that orders are of optimum sizes and must arrive just-in-time for production. Jeff Mosetan. The usual motivation for designing operational systems is to increase the efficiency. accuracy and reduce human traffic. electronic mail and tele-conferencing. Inventory also requires space and insurance.

not only a component. if you are confident about the proposal and submit to the PROFESSIONAL EXAMINATION II – MAY 2010 104 .000. Engineer Fukoye decided to pre-empt Mosetan‟s reaction by asking for his opinion on the proposal to replace ZK105 machine. Fukoye did not argue.” “In view of your insistence to replace the equipment. but a report on its characteristics. the cost of equipment.000 (ii) Annual savings in labour costs 350.000 (iii) Annual scrap and quality non-conformance savings 300. This equipment would save on materials handling and labour and would produce a more consistent output for a wider product range. Engineer Fukoye did his homework and also the analysis on the proposed new equipment and though he knew the likely reaction of Mosetan. It required little labour for its operation but its input and output materials handling systems had often caused problems. installation. he raised the issue of the replacement of the equipment again. went to his office and after the usual social chat. the process produced. wrote on it. Mosetan then replied “I am not bothered about all you have submitted because it would be your responsibility to justify the forecasts and projections and you will be held accountable for your failure. he dared not present the proposal to him without proper analysis and appraisal. I will advise that you prepare the capital expenditure budget. ZK105 machine had become expensive to maintain and Fukoye the Chief Engineer was determined to replace it. Mosetan wanted to be convinced of its practicability.PATHFINDER be undertaken by the company. Mosetan was not surprised because Fukoye‟s predecessor had unsuccessfully tried to convince him on two occasions to replace ZK105 equipment with ZK107. He reached out for a piece of paper and in a studious mood. The components of the equipment were a collection of electronic components which were “attached” to a printed circuit board and when tested.000 On further interrogation. had proposed to replace it with the latest equipment.850. The Chief Engineer. He. Fukoye opined that the payback period would be less than five years which Mr. etc which were estimated to be N3. The equipment/machine was ZK105 which was purchased ten years ago and its performance may not meet the projected demand. but wrote and listed the benefits and these included: N (i) Annual savings in maintenance and downtime 400. therefore. Fukoye was surprised and felt that he had been outsmarted by the Production Manager and decided to explain the benefits that would be derived. the ZK107. if the equipment should be replaced.

If the observations of Poko were carefully taken into consideration. after due observation. we will see what would be the outcome. in his memo to all financial managers in the group. In conclusion. it would be necessary to justify whether the rate of 20% compares favourably with the likely internal rate of return on the project. Kingsley. Kingsley. explained to them what cash management control system would involve and how it would operate. Poko further observed and said “I noticed that you have not found savings in inventory or disadvantage in energy consumption which in my opinion were also important”. the Group Finance Manager.PATHFINDER Divisional Finance Director for approval and then. to design a cash management control system in the group‟s operations that would ensure efficient cash management in the organization. He decided to reorganize the cash management control system in the group‟s operations and accordingly instructed Mr. He was welcomed by the Divisional Finance Director like a stranger from a distant land. He eventually found Mr. Poko. Deputy Chief Executive and a financial specialist was disturbed by the incidence of financial mis-statements that were discovered in the accounts of Distribution Network Plc. He completed the capital expenditure budget as advised and submitted to the Divisional Finance office for consideration and approval. “You will however defend the costs and the benefits of the estimates” he warned Fukoye. He has responsibility PROFESSIONAL EXAMINATION II – MAY 2010 105 . we can use an inflation free rate of 20% for this class of capital expenditure and a ten year planning horizon”. we usually use the net present value to appraise capital projects”. CASH MANAGEMENT AND CONTROL Mr.” Fukoye has discovered from the conversation he had with the Production Manager that he had to do his homework well if he wanted to succeed. Cash management is an important function of the Financial Manager. Poko. Fehinbu. “as you have not built inflation into your forecasts. no decision could be taken on the replacement of ZK105 machine with ZK107 until all the above facts have been taken into consideration. creating a certain curiosity. said “I am sure. Poko explained and continued. He went further and said” the payback period is only a rough guide and for this reason. a young-looking Chartered Accountant who specialized in project analysis and appraisal and they settled down to a real discussion about the capital expenditure budget. this is a good job with good idea but you have missed a few tricks in setting out the argument”.

which would be opened in all nominated banks. and avoid dealing with any bank with poor customer services. Accounts B and C would only be used for expenses to be incurred by the Group office. subsidiaries and associate companies and determine the financial parameters of high and low financial funding. an efficient cash management system should be established for the company by its management through the following actions: Make accurate forecasts of cash inflows and outflows and where appropriate. in order to find and evaluate answers to some key questions that could lead to improvement in services and reduction in bank charges. subsidiaries and branches. B and C. PROFESSIONAL EXAMINATION II – MAY 2010 106 . cheques. if any of the company bankers makes frequent or repetitive errors in processing electronic transfers. In order to ensure efficient management of funds. idle cash which would reduce the profits of the company. apply the excess funds to the needs of the company. He should consistently ensure that all cheques deposited in the banks are cleared within the shortest business working days to improve the liquidity of the company. drafts. You must ensure that banks could offer the company the full range of banking services at competitive charges. inefficient services by the banks. Set and monitor the borrowing limits for the branches. Due to large amount of sales that would result from the expansion programmes. it would be necessary to inform the appropriate bank management to avoid undue charges to the company‟s account. The accounts would be designated A. Inefficient cash management would result into loss of revenue through excessive bank charges. It is therefore necessary to monitor cash management portfolio and always review the services provided by the banks at intervals or at least once in a year. It should be realized that. It is equally important to give adequate information about the problems and complexity of the business or activities as well as the operations management of the company.PATHFINDER to establish efficient cash management team that would work with business to obtain good results. or handling of documentation. The Financial Manager has the responsibility to ensure that fund transfers are handled carefully and that the outgoing funds transfers would appropriately be timed to allow for maximum use. a new cash management control system would be established to ensure that all sales receipts are paid into one main receiving bank account.

PATHFINDER The new cash management control system requires that approval of transfer of funds from Account A to any account would be effected by a letter signed by the Chief Executive with Group Finance Officer or Group Finance Director and Group Treasurer. but all withdrawals from Accounts B and C should be by cheques. The Managing Director therefore set up a committee which had the Group Finance Director as Chairman. would require the purchase of two new ZK 108 machines that would make production more efficient with the following benefits per month in standard cost of production of Life Rich Beverage. Director of Operations and Production Manager as members. it would require a restructuring of its share capital through the appropriate financing programme.000 tons per annum. For efficient operations. STRUCTURAL AND DEVELOPMENTAL PROGRAMMES Acenco Tea PLC had completed the structural and developmental programmes and was ready to initiate a strategic development plan that would make the company one of the largest tea and beverage producers in Africa. The letter would be delivered to the Manager of the bank concerned instructing him to transfer the amount in question from Account A to B in case of Acenco Tea Plc or from Account B to C in case of Distribution Network Plc and branches of Acenco Tea Plc. and Increase in the production of Life Rich Beverage to 300. For this purpose. The committee. it had been recommended that the Cash Management Control System be computerised. Issue of 5% Preference Shares. As a rule. Option (d) above. (Appendix II). no cheque should be drawn on Account A. after several meetings. Issue of 5% Debenture Stock. (i) (ii) (iii) (iv) Reduction in divisional expenses Savings in direct material usage Savings in group office overhead Savings in direct labour 25. recommended the following financing options for the group‟s expansion: (a) (b) (c) (d) Rights Issue. Each company or branch in the group must therefore prepare its monthly cash forecast not later than two weeks before the 1 st day of the month following and it must be received by the Group Treasurer not later than 25th of each month to ensure smooth operations in the following month.5% 10% 20% 25% PROFESSIONAL EXAMINATION II – MAY 2010 107 .

000 each.5 million N2. Acenco Tea PLC decided to build its new factory on the plots allocated by the Ogun State Government along Lagos–Sagamu Express way. he said “good soup requires PROFESSIONAL EXAMINATION II – MAY 2010 108 .5 million N0. The committee recommended that the proposed new factory should be built along the Lagos-Sagamu Express way.75 million N1. (b) Offer a Rights Issue of 75 million ordinary shares at N5.0 million N1. On the receipt of the building plans. It applied for the approval of the factory building plans from the Building Approval Department of the Ministry of Lands and Housing. the following financing options for approval: (a) Increase share capital to 100. Sebikan was the Third party officer of Acenco Tea Plc and he was appointed to follow and see through the eventual approval of the building plans. The relevant approved fees were to be paid to government and other agencies.00 each.000. it recommended to the Board of Directors. The recommendations were accepted and approved by the Board of Directors and the appropriate resolutions were passed at its meeting. He submitted the building plans and other relevant documents for approval to Owonimo.PATHFINDER (v) (vi) Savings in scrap value Savings in indirect labour Life expectancy of the machines: Expected rate of return 5% 25% 10 years 20% Cost of ZK108 machine was estimated to be N4.000 ordinary shares of 50 kobo each.500. and (d) Issue N5 million 7½% Debenture stocks. The cost of the factory was estimated at N150 million. The land was leased for 99 years from Ogun State Government and the following payments would be made to the government and its agencies: * Factory building plans approval fee * Surveyor General Office (Delineation of plot fee) * Governor‟s Consent fee * Lease Rent for 25 years * Miscellaneous expenses N5. (c) Issue N10 million 15% Preference shares of N1. The cost of issue of 15% Preference shares and 7½% Debenture Stock would be 5% on the amount realized and 5½% on the Rights Issue.00 each.2 million The management accepted the recommendation by the committee and in order to finance the projects. It also approved the estimated cost of the factory buildings as N150 million. the officer in charge.

” He said. you have to grease palms before processing the building plans and I have been waiting for you to respond” Sebikan then asked him to name his price and Owonimo said “N1. However. Sebikan was asked to meet with the representatives of the community. He called Owonimo a week later to know the progress on the application he submitted the previous week. He replied and said “I told you earlier.5 million will not be too much for your company”.PATHFINDER money” and your company must be prepared to spend money before approval can be granted. farmers could not bring their products to the market. while the cost would be mounting daily”. Furthermore. because the company is a pioneer member of “Don‟t Give and Don‟t Take Bribe Initiative. the community wanted assurance that their environment would be protected against effluent waste. the bribe should be paid but it should be entered in the books as miscellaneous expenses. The construction of the factory building was temporarily stopped because the community protested against the company‟s lack of social responsibility. Sebikan had a serious responsibility to discharge which was the approval of the factory building plans. “The Board of Directors would have to choose between paying bribe and allowing the job to take off in good time or be delayed. Acenco Tea PLC was a pioneer member of the “Don‟t Give and Don‟t Take Bribe Initiative”. he reported the demand to the Fehinbu.” Owonimo collected the factory building plans and other documents. “It would not be a problem as long as all the money spent will be covered by official receipts. and in view of this situation. Deputy Chief Executive Officer. Sebikan replied. who said “I doubt whether the Board of Directors would approve payment of bribe. The meeting was held and the community agreed to allow the construction to continue on the conditions that: PROFESSIONAL EXAMINATION II – MAY 2010 109 . a Non–Governmental Organization (NGO) that was established to fight corruption in the business sector. It was agreed that the interest of the company was paramount and it has to be protected. and advised Sebikan to call him later to know the progress. The community claimed that the earthen road was destroyed by the contractor‟s heavy equipment and consequently. He brought it up at the Board meeting and it was discussed and agreed not to be recorded as discussed. Sebikan then replied and said “I will report to the management for appropriate action”. Sebikan was not sure whether the management would accede to paying bribe to Owonimo.

at one of its meetings. (c) a scholarship scheme would be introduced for the villages‟ brilliant indigent students in secondary and tertiary institutions. It therefore appointed Success Bank Plc as its financial adviser for the takeover bid that would be considered. It could dictate the price of its products or condition the behavior of the consumers in the product market. (b) the company would reconstruct the roads damaged by the heavy equipment. MARKET LEADERSHIP Acenco Tea Plc being the largest tea and beverage manufacturing company in Nigeria and West Africa. Absolute market leadership could be possible if absolute monopoly could be achieved in the case of a large-scale company like Acenco Tea Plc. The increased capacity created marketing problems which had to be resolved as quickly as possible to avoid a glut of finished products which would occupy the warehouse and might necessitate hiring additional warehouses outside the factory premises with the consequence of increasing the carrying cost of finished products. It therefore needs to provide a marketing strategy by which it could dictate the trends in the market in terms of price and supply. approved the demands by the community because they felt socially responsible to them. The Board of Directors. When the acquisition had been effected. and (d) the company would sponsor Ilosiwaju Day festival each year. it planned to consolidate its control in the market by acquiring Tesco Tea Plc. Acenco Tea Plc group would be able to control between 85% and 90% of the tea and beverage market in Nigeria and West Africa.PATHFINDER (a) third party insurance would be taken out to compensate any one that might suffer from the effluent wastes. This would cost the company about N10 million each year. Acenco Tea Plc completed the factory buildings and all machines and equipment were installed. Sebikan reported the decision of the meeting to the Chief Executive who in turn reported to the Board of Directors. Market leadership is a position where it would directly or indirectly dictate or effect a change in demand or supply in a market on its own through the manipulation of price. PROFESSIONAL EXAMINATION II – MAY 2010 110 . quantity and marketing strategies. Production commenced as planned and capacity increased by 80 percent. In view of its bid to assume market leadership. aimed at market leadership of the tea and beverage market.

Tesco Tea Plc was the second largest producer of tea and beverage in West Africa with a total of 46. Chairman of Acenco Tea Plc telephoned Brown and asked him for time to discuss a possible takeover. became Chief Executive Officer of Tesco Tea Plc. In addition. The first rumour that Tesco Tea Plc might be a potential bid target occurred in April 2009 after Tesco Tea Plc group issued a profit warning. He had initial responsibility for tea production. could be achieved and effect change in demand and price at will. Brown‟s credibility as the new Chief Executive. The Board of Directors decided on the takeover bid of Tesco Tea Plc after careful analysis and consideration of the financial and management data that were considered relevant to the takeover bid. Tesco Tea Plc was the parent company of an international group of companies. the takeover bid plan leaked and the management of Tesco Tea Plc prepared in advance to resist it. had attained market leadership position in Ghana as shown in Appendix VI. The takeover bid was launched on 20 June. the beverage division was disposed of in 2008. However. 2009 was N63 million. Nigeria. He became the Chief Executive Officer designate in December 2008 and finally.100 tons in 2009. Effective market leadership through the control of the market. He had previously held a number of positions in Pacific Oil and had been a director of Premier Tea Plc in South Africa in 2007. if successful. would enable the group to predetermine production and sales of a given quantity and marketing same to yield an aggregate net profit for the group. became the substantive Chief Executive Officer in January 2009. Tesco Tea Plc. Tea contributed more to the group sales and operating profit. The main producers in the industry can be divided into categories as shown in Appendix VI. Mr. The businesses remain largely independent and there was limited sharing of skills and expertise.PATHFINDER Tesco Tea Plc controlled 90% of the Ghana region market of tea and beverage. whose core business was the production and marketing of tea and beverage. a Chartered Accountant. The price of N4. The company was quoted on both the Nigerian and Ghanaian Stock Exchanges and its market capitalization as at 21 May. Temidire. The takeover bid. marketing and distribution in Ghana where he was the initiator of the establishment of Sisco Tea Ltd. 2009 with an all cash bid. He was recently employed at the time of the take-over bid. This came only six weeks after the announcement of half year results and this seriously undermined Mr.5 million. Brown.20 per share was mentioned but this did not go down well with him and it was dismissed by Brown. which valued Tesco Tea Plc at N70. an associate company of Tesco Tea Plc in Lagos. PROFESSIONAL EXAMINATION II – MAY 2010 111 .

” “We have exciting growth prospects.70 per share. Acenco Tea PLC market share and major competitors by country was as shown in Appendix VI. The document stated that: “Acenco Tea Plc‟s chairman has congratulated our management for doing all the right things” He was right to say so:    “We have a business that is fundamentally changed. The offer represented a premium of 14% over Tesco Tea Plc as at Thursday closing price on Ghana Stock Exchange before any significant speculation in the market concerning a possible bid for Tesco Tea Plc. The first significant document that was issued by Tesco Tea Plc was the early release of the group‟s 2008 results on 25 April.700 tons (Appendix VI).6% of sales and more than 50% of operating profit as shown in Appendix IX. TESCO TEA PLC‟S RESPONSE The initial response of Tesco Tea Plc was to dismiss the bid as significantly undermining the company. It was acknowledged by analysts that the two groups were strategically a good fit. Tea contributed approximately 68. TAKEOVER BID On 29 April.0 per share for the bid to succeed. They can be described as two elephants but the consensus was that the price would have to be close to N5. 2009. “We have invested carefully.” and PROFESSIONAL EXAMINATION II – MAY 2010 112 . Acenco Tea Plc was the largest producer of tea and beverage in West Africa with a total of 51. 2009. building leading positions in our chosen markets.PATHFINDER ACENCO TEA PLC In 2009. ACENCO TEA PLC ATTACKED TESCO TEA PLC Acenco Tea Plc attacked Tesco Tea Plc primarily for mistakes made in the past on investments and diversification strategy which had effect on its international operations and results and had made Tesco Tea Plc to fall behind its international competitors. Acenco Tea Plc announced a pre conditional offer for Tesco Tea Plc of N4. refocused on our strength in tea packaging and tea branding”.

provided the profit forecasts in the Business Plan and were considered achievable.80 per share which was seen as relatively conservative. They had been heavily involved in producing the defence plan in 2009. The document announced details of the projected benefits arising from such cost savings and included forecast of the benefits to be achieved and would be of the order of N5. financial information including accounts. Early in the defence process.” The document also showed that the net dividend for 2008 would be N1. Solid Planners Bank was instructed to reduce the profit forecast in the 2009-2012 plan to bring them down to more achievable levels. held a number of meetings PROFESSIONAL EXAMINATION II – MAY 2010 113 . The final blow in Tesco Tea Plc‟s defence was launched on 27 April.70 per share undervalued the Tesco Tea Plc group. Solid Planners Bank PLC had access to Tesco Tea Plc‟s. DESPERATE MOVE Acenco Tea PLC in its desperate move bought shares from the stock exchange floor through its broker. The discounted cash flow analysis that was prepared for the Board of Tesco Tea Plc valued the business at N4. The document also reiterated that Acenco Tea Plc‟s bid undervalued the company.20 per share by year 2012.50 per share which was an increase compared with internal plan (Appendix IX). The total shares bought represented 44.5% of total shareholdings. Tesco Tea Plc announced its operational improvements programme. During the last ten days of the offer period. Olade. 2009 when it promised to deliver the benefits as indicated in the document. The valuation which seemed to be a reasonable estimate. TAKE-OVER BID DEFENCE PLAN Tesco Tea Plc‟s financial advisers at the time of the bid were Solid Planners Bank Plc. shareholders were indifferent and did not want to talk to the management of Tesco Tea Plc until the final offer from Acenco Tea PLC had been made and no further information could be realized. Their valuation presented to the Board in April 2009 was prepared based on the Business Plan for 2009-2012. Tesco Tea Plc however intended to achieve actual results lower than planned and profit projections were sometimes too optimistic – (Appendix VI). They steered the conduct of the defence itself. Mr. The valuation supported the claim that the Acenco Tea Plc‟s bid of N4.PATHFINDER  “We will deliver substantial performance improvement and cost savings in the near future. Brown and the Finance Director. forecasts and budgets.

March 2010. However. Acenco Tea Plc then announced that it had received acceptances that represented 44. because the total shareholdings in Tesco Tea Plc that was acquired by Acenco Tea Plc were less than 51% of the whole shareholdings in Tesco Tea Plc. The world‟s financial and economic crisis had begun to take its toll on the banks in Nigeria but this had not yet manifested to the general public. the lobbying by Tesco Tea Plc management paid off. there was no unnecessary pressure on the customer by the bank. they were solid and financially strong banks. SUCCESS BANK PLC IN CRISIS Banks in Nigeria went through share capital consolidation exercise in 2005 and Success Bank PLC was one of the 25 banks that were successfully re-energized and recapitalized during this period. when Sentel Assurance publicly backed the decisions of the management of Tesco Tea Plc. the management of the bank had no doubt about the repayment of the facilities and furthermore all facilities were secured on the assets of the company. These banks had solid capital base and in general terms.5% of the shareholders of Tesco Tea Plc. however the financial and economic indicators had exposed the financial sectors to liquidity problems. The share capital was initially increased to N25 billion and few other banks subsequently increased share capital and also raised further funds from the capital market. The company also serviced the loans according to the terms of the contracts as and when due and for this reason. As an important and most valued customer. The Central Bank of Nigeria.5 billion as at 25. the tone changed when a PROFESSIONAL EXAMINATION II – MAY 2010 114 . This was followed by other shareholders and the bid was finally rejected. The takeover bid of Tesco Tea Plc finally failed. Each account could be used to obtain facilities including overdrafts and loans. Acenco Tea Plc negotiated and obtained facilities from Success Bank Plc on different accounts which in total amounted to N12. the financial watchdog. As the final days of the bid approached. and is considered independent for the purpose of obtaining facilities.PATHFINDER with the institutional investor in an attempt to persuade them to back the management and reject the bid offer. It had different accounts with the bank. Acenco Tea Plc was one of the most valuable customers of Success Bank Plc. Success Bank Plc was considered as one of the strong banks in Nigeria. initially expressed confidence in the banking sector and assured that the banks in the country were financially solid to withstand the effects of the economic downturn.

The EFCC officials called on Fehinbu.65 billion. an investigation was ordered to be carried out on the finances of the banks concerned. The investigator completed their assignments and submitted their reports to the management which confirmed the amount owed to Success bank Plc to be N12. It was discovered that N1. Further investigations and analysis were carried out and serious financial crisis was discovered which confirmed the recklessness of some of the Executive Directors of the banks concerned. The audit reports revealed that all was not well with some of the banks and confirmed that their liquidity was in great danger. The investigation was to establish the amounts that customers owed the banks and establish which persons or organizations had not been servicing their loans or facilities. Gbenro & Co (Chartered Accountants) was one of the firms that were appointed to carry out the investigation and establishment of the list of debtors. PROFESSIONAL EXAMINATION II – MAY 2010 115 . It was clear that the report might be used as evidence against each customer and executive directors of the banks.6 billion and in view of this disagreement. In order to accelerate the recovery of loans and facilities outstanding and funds mismanaged by the bank officials. He ordered that the bank‟s accounts be audited. In order to establish the exact amount misappropriated by the Executive Directors of the banks.6 billion.5 million was paid to Mr. the Central Bank Governor invited the Economic and Financial Crimes Commission to assist the Central Bank and the banks. the Central Bank had to go to court to obtain the order and permission for such recovery actions. to demand for terms of repayment of N16 billion facilities owed to Success Bank Plc. Sebikan replied and said “yes”.6 billion or N16billion claimed by the Success Bank PLC during the investigation. he said “the amount was paid to grease the palms of an official in the Ministry of Land and Housing for the approval of the factory building plans. They were accused of financial mismanagement and abuse of their official positions. the Chief Executive of Acenco Tea Plc. Acenco Tea PLC was reported to owe Success Bank Plc N16 billion while Acenco Tea Plc confirmed owing N12. Owonimo and this was included in miscellaneous cost of the factory building which was financed partly through bank loans. In addition. The Chief Investigator asked for the purpose for which the amount was disbursed.PATHFINDER new governor of the Central Bank of Nigeria assumed office and he accused few banks‟ Chief Executive Officers of financial misdeeds. it had appointed Dede & Co (Chartered Accountants) to investigate its bank accounts with Success Bank PLC to confirm its claim of N12. The Chief Investigator then said “this was a bribe you paid to the official”. Sebikan was called to explain and after a long pause. Fehinbu informed them that Acenco Tea Plc owed N12.

PATHFINDER On the receipt of the investigators‟ report. in charge was also charged for lack of professional ethics and she was relieved of her position in the company. the Chief Executive Officer of Acenco Tea Plc. The Chief Investigator replied “we stand by our report and we will be ready to defend it even before any court of the land”.” He further said “you might be called upon to justify the correctness of the amount before a court of law”. The customer was treated and adequate compensation was paid without going to court. Fehinbu. Jare. The remaining portion of the beverage and the tin were recalled and tested and it was confirmed that the content was contaminated through the water used in the factory. Mrs. who was in charge of water quality was careless in the discharge of her professional responsibility and thereby made the company liable to public ridicule which was against business ethics and values. the Chemist. It was discovered that the Chemist. The management thereafter set up a committee to examine the manufacturing process in order to avoid reoccurrence in future. Mrs Jare. thanked Dede & Co and said “Acenco Tea Plc is a responsible company that appreciates accountability and financial prudence in its dealings with third parties. PROFESSIONAL AND BUSINESS ETHICS The management of Acenco Tea Plc was informed that one of the consumers of Life Rich Beverage had complained about stomach pains after consuming the beverage. PROFESSIONAL EXAMINATION II – MAY 2010 116 .

000 1.000.350.000.650.000 331.250.000 750.000 Fixed Assets Current Assets: Stock Debtor Bank Current Liabilities: Creditors Taxation Loan Net Current Assets Net Assets Share Capital 10.700 1.000 2.900 539.000.000 ord.PATHFINDER APPENDIX 1: ACENCO TEA PLC: BALANCE SHEET AS AT 31 DECEMBER 2009 N 71.785.774.420.000 1.800 1.000 750.000 1.894.000 986.400 2.200 934.000 1.000 250.000 1.700 902.757 62 kobo 37 kobo N1.000 2006 N 1.000 1.120.700 .929 63 kobo 38 kobo N1.000 2.700 992.645.010.000 11.000 1.000 1.770.000 ord.500.000 635.814.685.000 2.400 2.000 5.000 5.2 kobo 8.000 82.000 1.685.79 PROFESSIONAL EXAMINATION II – MAY 2010 117 .000 952.000 2.000 862.600 1.000 2007 N 1.000 3.800 1.000.000 EPS Dividend per share Net Assets per share 10.000 3.894.225.200 297.636.000 2.000 948.906.000 820.000 962.000 2.000 2.636.000 720.120.335.050.500.000 75.062. shares of ord.000 800.500.645.740.5 kobo N8.000 ordinary shares of 50 kobo each Share Premium General Reserves Revenue Reserves Notes 1.828.105.255.750. 1.800.000 935.350.250.26 68 kobo 41 kobo N1.035.000 17.045.000 1.000 1.000 2008 N 1.000 1. shares of shares of 50 ord. shares of 50 kobo each 50 kobo each kobo each 50 kobo each 12.000 11.000 789.200 750.023.200 2.000 82.

PATHFINDER APPENDIX II EXPORT RECORD ACENCO TEA (BENIN) ACENCO TEA (TOGO) S.A ACENCO TEA (GHANA) PLC Products Qty of export (tons) 500 tons 300 tons 600 tons 80 tons Export price N 100 120 140 400 Qty of export (tons) 600 tons 400 tons 800 tons 100 tons Export price N 120 140 160 500 Qty of export (tons) 800 tons 600 tons 1200 tons 200 tons 2. N1.900 tons NOTE: 1 (one) packet of tea bags contains 100 grams 1 (one) tin of Life Rich Beverage contains 500 grams EXCHANGE RATE: N1.800 tons Export price N 140 160 180 600 Total (tons) Life Sure Tea Life Secure Tea Life Safe Tea Life Rich Beverage 1900 tons 1300 tons 2600 tons 380 tons 6.00 = 5 Cedis PROFESSIONAL EXAMINATION II – MAY 2010 118 .180 tons 1.480 tons 1.00 = 260 CFA.


Product Quantities Tons Life Sure tea Life secure tea Life safe tea Life rich (beverage) 1,764,000 500 300 600 80 Grams (000) 500,000 300,000 600,000 80,000 Grain per packet Price per packet N 100 120 140 400 Amount (N‟000)

Quantities Tons Grams (000) 600,000 400,000 800,000 100,000 Grain per packet Price per packet N 120 140 160 500 Amount N‟000

Quantities Tons Grams (000) Grain per packet Price per packet N 140 160 180 600 Amount N‟000

100 100 100 500

500,000 360,000 840,000 64,000

600 400 800 100

100 100 100 500

720,000 560,000 1280,000 100,000

800 600

800,000 600,000

100 100 100 500

1,120,000 960,000 2,160,000 240,000

1200 1,200,000 200 200,000





2,660,000 260 = 10,230769 CFA 8696154 CFA 1534615 CFA

4480,000,000 5 = 896,000,000 C 761,600,000 C 13,440,000 C


FIXED ASSETS Current Assets: Stock Debtors Bank Current Liabilities: Creditors Taxation Dividend Net Assets Share capital: 8,000,000 ordinary shares of 50kobo each General Reserve Revenue Reserves Shareholders‟ Funds Loan Account 8,663,000 33,760,000 3,592,000 855,000 1,500,000 5,947,000 N 4,225,000 2,500,000 1,500,000 8,225,000 N 45,645,000

2,278,000 47,923,000


42,423,000 46,423,000 1,500,000 47,923,000


N Direct labour Direct materials Indirect labour Electricity Maintenance/repairs Supplies Supervision Division admin. Expenses Group office Overhead Depreciation TOTAL Production batch volume Number of tins 98,000 700,000 48,000 25,000 16,200 4,000 40,000 25,000 35,000 130,000 1,121,200 400 batch 800,000 tins


DIAGRAM OF CASH MANAGEMENT CONTROL The schematic diagram will be as shown below: ORIGINATOR ACENCO TEA PLC MOVEMENTS BANK A All sales receipts and other income BANK B BANK C All sales receipts and other income are paid to Bank FROM A TO B BN TRANSFER FOR EXPENSES AND PAYMENTS DISTRIBUTION All sales NETWORK PLC receipts and other income TRANSFER FOR PAYMENT ALL BRANCHES All sales receipts and other income TRANSFER FOR PAYMENTS FROM B TO C FROM B TO C PROFESSIONAL EXAMINATION II – MAY 2010 .

2 8.2 15.5 14.0 4.5 36.5 4.6 15.5 Production % Change Export % Change Consumption % Change PROFESSIONAL EXAMINATION II – MAY 2010 123 .9 12.8 13.4 2007 Tea Bev.9 52.6 7.6 8.5 28.5 47.10 4.4 12.5 8.4) 51.0 31.8 Bev.2 132.9 14.1 2009 Tea Bev.7 9.2 35.6 10.4 32.0 57.PATHFINDER APPENDIX VI PRODUCERS BY COUNTRY Nigeria Togo Benin Ghana Total Tea Bev.5 12.4 4.4 6.4 11.5 7.5 5.0 40.5 5. Tea Bev.9 5.0 66.6 4.9 43. (000) (000) 174.7 2.4 7.7 2008 Tea Bev.4 1. Tea Bev.5 15.4 74.0 8.2 11.1 Tesco 10.8 13. (000) (000) 140.8 7.2 3. (000) 56.0 13.9 (18. Tea Bev.2 5.5 2.2 8.7 108. (000) (000) 115. Acenco 16.4 10.2 APPENDIX VII TEA AND BEVERAGE MARKET IN WEST AFRICA 2006 Tea (000) 131.4 2.5 22.1 120.7 100. Tea Bev.2 10.9 60.

6 34.00 2009 N(000) 230.940 102.757 2008 N(000) 642.250 15.780 21.929 2009 N(000) 685.200 2.4 67.700 2.60 (1.70 APPENDIX IX ACENCO TEA PLC FINANCIAL DATA 2006 N(000) Group Turnover Operating profit Operating margin % Profit before tax Earnings per share (k) Net dividend Net Assets per share 352.470 63 kobo 38 kobo N1.200 68 kobo 41 kobo N1.26 PROFESSIONAL EXAMINATION II – MAY 2010 124 .000 36.5 kobo N8.550 22.000 35.6 80.90 2007 N(000) 194.3 26.000 16.40 4.3 29.PATHFINDER APPENDIX VIII TESCO TEA PLC FINANCIAL DATA 2006 N(000) Group Turnover Operating Profit Operating margin (%) Profit before tax Earnings per share (k) Net dividend (kobo) Net Assets 190.000 107.000 33.700 91.000 30.200 2.800 1.380 28.82 56.20 1.000 17.40 2008 N(000) 202.90 1.79 2007 N(000) 420.750 12 kobo 8.3 31.12 2.000 14.300 62 kobo 37 kobo N1.0 53.30 3.000 18.600 77.30 1.50) 4.

500.000 7.000 13.194.080 1.030 43.314.670 4.500 6.065.475.678.960 40.000.500.500 7.342.140 5.404.829.000 500.500 59.393.270 2.200.885.30 N1.575.314.440 7.820 5.000 34.40 N2.852.541.940 28.000 3.420 N1.000 share of 50k each General Reserves Revenue Reserves Loan Account Dividend per share Earnings per share Net Assets per share 6.561.040 N1.398.375.308.70 60.008.500.20 N1.750 46.480 162.090 8.040 4.300 9.120 33.00 50.370 6.710 5.030 44.030 44.017.588.040 52.113.440 11.750 11.980 6.000 7.040 11.059.500.420 49.30 N4.220 55.134.040 60.070 3.730 70.560 1.517.40 N2.145.783.500 10.920 2.840 1.222.580 3.840 9.824.175.310 192.610 5.859.650 202.017.000 4.620 3.12 N2.051.660.814.000 500.005.567.121.50 N2.006.940 38.160 176.440 N1.420 50.60 N4.058.110 1.870 4.290 5.90 PROFESSIONAL EXAMINATION II – MAY 2010 125 .000 2.750 5.90 N3.375.059.257.710 Fixed Assets Current Assets: Stock Debtors Bank Current Liabilities: Creditors Taxation Dividend Net Current Assets Net Assets Share Capital 15.000 70.162.150 1.006.375.PATHFINDER APPENDIX X TESCO TEA PLC BALANCE SHEET AS AT DECEMBER FIVE YEAR FINANCIAL DATA 2009 2008 2007 2006 N N N N 65.

PATHFINDER SCHEDULE OF APPENDICES APPENDIX I APPENDIX II APPENDIX III APPENDIX IV APPENDIX V APPENDIX VI APPENDIX VII APPENDIX VIII APPENDIX IX APPENDIX X Acenco Tea Plc: Four-Year Balance sheet Export record Export sales of Life Rich to subsidiaries of Acenco Tea Plc (Showing Transfers) Distribution Network Plc – Balance Sheet as at 31 December. 2009 Acenco Tea Plc: Standard cost of production of Life Rich Beverage Producers of Tea and Beverage by country Tea and Beverage Market in West Africa Tesco Tea Plc – Four-Year Financial Data Acenco Tea Plc – Four-Year Financial Data Tesco Tea Plc Four-Year Balance Sheet PROFESSIONAL EXAMINATION II – MAY 2010 126 .

A rational decision making process will operate where the following assumptions subsist EXCEPT A..... C.. D.. D.. Enterprise systems software Middle ware Internally written enterprise applications Laptop computers Software licensing agreements. E.. E. The existence of perfect information Clearly defined problems dampened by an ambiguous system Clearly identified criteria that could be objectively weighted Existence of clear goals and preferences which are stable over time Existence of a unique chance.... 2. B.... Making ICT Investments without expectation of immediate payback Taking action that creates opportunity for later operational ICT projects Considering the opportunities in the option underlying asset Choosing among various ICT investments and rejecting non-relevant ICT programs Designing ICT prototyping that maximizes the value of an application development project.... B. the alternative that will yield the maximum pay-off...... C.. Software assets include all EXCEPT A.... SECTION A – PART I MULTIPLE CHOICE QUESTIONS 1... D. Option pricing methods in evaluating Information Technology investments include all EXCEPT A...PATHFINDER ICAN/101/Z/4 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA PROFESSIONAL EXAMINATION III – MAY 2010 MULTI-DISCIPLINARY CASE STUDY Time allowed – 3 hours (10 MARKS) EXAMINATION NO. C. B.. E.. 3. PROFESSIONAL EXAMINATION II – MAY 2010 127 ...

ONE of the following is NOT the objective of management accounting information A. E. It consists of the following major factors EXCEPT A. Increased productivity Reduced employee turnover Decreasing need for supervision Reducing employee turnover Creation of a pool of readily available replacement for personnel who may leave. D. 5. B. C. Companies embark on training and development programmes for the following reasons. To analyse the profitability of the business To prepare accurate financial statements useful for management decision making To put a value on stocks To plan for the future To control the business. C. E. Product Distribution Customers‟ taste Promotion Price . D. 6. B. C. E. 7. The marketing mix describes the specific combination of marketing elements used to achieve the marketing objectives and satisfy the target market. The immediate priorities of a checklist of investigation in a case of fraud case include all EXCEPT ONE of the following: A.PATHFINDER 4. EXCEPT A. E. 8. Reaction to changes in activity PROFESSIONAL EXAMINATION II – MAY 2010 128 . C. D. The major bases of cost classification are all but ONE of the following: A. B. B. Securing the assets Prevention of further fraud Curtailing authorization Initiating possible civil/criminal proceedings Beginning interviews of employees suspected of involvement immediately. D.

Jide. D. What is the traffic intensity of the eatery? A. can serve 30 customers in one hour while customers arrive at the eating joint at the rate of 40 people per hour. E. 10.25 1. Fraud by duress . E. 9. C. B. Fraud by impersonation C. Small Restaurant. When some people pretend to be someone who they are not or to be doing something they cannot do or selling something they don‟t possess. Fraud by false representation D. 0.75 1. Department.75 1. an attendant at Mr. C.25 PROFESSIONAL EXAMINATION II – MAY 2010 129 .PATHFINDER B. Process or Cost Centre The magnitude of the expenditure in Naira value Natural characteristics Economic characteristics. Responsibility – by Plant. they are committing: A. Fraud by failing to disclose information B.42 0. D. Fraud by abuse of position E.

10. 2. 8.. PROFESSIONAL EXAMINATION II – MAY 2010 130 . SHORT-ANSWER QUESTIONS (30 MARKS) A system designed to compare projected (forecast) results with future objectives so that corrective action may be taken in advance is described as …………… The Fraud Risk Triangle proposes that risk is predicated on the existence of three factors. Research engineering is the decomposition and analysis of competitor‟s products in order to determine how they are made ………………. 11. What is the systematic and detailed comparison of the performance of different companies generally operating in a common industry called? The benefits produced by an investment which are immediately obvious and measurable are known as ………………. 7. An increase in value which would be created by having available one additional unit of a limiting resource at its original cost is known as ……………. get and keep its clients. The measure of the firm‟s ability to meet its current obligation is measured by ……………… The profits of oil marketing companies are assessed under ……………… Act. 4. What are these strategies called? A flexible budget is one which by recognizing different cost behavior patterns. 6. is designed to change as …………… changes.. 5. these are …………………………………. and the way in which future development may proceed.PATHFINDER PART II 1. The joining together of a number of personal computers or other devices in a network that operates within a limited geographical area is referred to as …………………. 9. 3. ………………………… and ……………………… VAT incurred by a business on purchased goods and services is known as …………………… The strategies of cost leadership and differentiation are ways in which a firm can find. 12.

15. A concept in law in which someone can be deemed to have. 19. Complete the following Claxton (1998) decision process model 17.. PROFESSIONAL EXAMINATION II – MAY 2010 131 . Plant. Real world Opinions Facts External filter Interior filter 18. as though the activities to which the budget relates were being undertaken for the first time is ………………. Total ICT costs involve the following: ………. knowledge from the facts available is referred to as ………………. 14. A marketing strategy by which a firm observes what others are doing to improve its own product is known as ………………. fixtures and fittings which are subjects of financial leases are dealt with in the financial statements by debiting “Equipment on Lease” and crediting ………………………………………. 20.PATHFINDER 13. A mode of offer of existing shares by a divestor to the public is known as ……………. A method of budgeting which requires each cost element to be specifically justified. software cost and ………. Undercover deals in the capital market are known as …………………. costs. costs.. equipment. 16. or to be able to infer.

24. A chart on which activities and their durations are represented by lines drawn to a time scale is known as ……………… Job Analysis is a systematic ……………. good or …………. The aim of …………. to collect all information pertinent to each task performed by an employee. is to find out about customers‟ wants and where they want them. 22. PROFESSIONAL EXAMINATION II – MAY 2010 132 . 28. 25. the memorandum accounts book used for monitoring government expenditure to ensure that there is no extra-budgetary spending is known as …………… Gains from disposal of stocks and shares. 23.PATHFINDER 21. Ethics is the behaviour or conduct in business transactions that are considered to be right or …………. In government accounting system. from Capital Gains Tax. 30. gains by ecclesiastical. 27. 26. 29. charitable or educational institutions are ………. Geographical spread is one of the methods of market ……………... A situation where a master is made responsible for the torts or wrongs committed by his servant while engaged in the course of his employment is called ………… What is the most unique and common characteristic of nearly all the techniques of operations research? The term that best describes moving away company business from identifiable risk is …………….

ATTEMPT ALL QUESTIONS QUESTION 1 From the extract of relevant data from the books of Acenco Tea Plc with respect to Life Rich Beverage. (3 Marks) (Total 12 Marks) Bamidele returned to claim the position of Chief Executive of Acenco Tea Plc after the acquisition by Brisko Plc and created management problems. (6Marks) How will Brisko Plc treat Acenco Tea Plc in its books? (2 Marks) (Total 8 Marks) (5 Marks) QUESTION 3 (a) (b) QUESTION 4 (a) (b) Calculate acquisition value of Distribution Network Plc. (2 Marks) Describe how Just-In-time system operates to achieve optimum inventory. (4 Marks) Calculate the Economic Order Quantity of product A required. (4 Marks) Standard cost per tin. (4 Marks) (Total 9 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 133 . Calculate the Net Value of the public share offer by Acenco Tea Plc. (4 Marks) (Total 14 Marks) (60 MARKS) QUESTION 2 (a) (b) (c) Describe tele-conferencing System and how it operates. (5 Marks) Which of the costs of investment on Life Rich Beverages qualifies for capital allowances? (4 Marks) Calculate the capital allowances due on the investment for Life Rich Beverage.PATHFINDER SECTION B . calculate: (a) (b) (c) (d) Standard cost per batch. Comment on the development with reference to Companies and Allied Matters Act 2004.

PATHFINDER QUESTION 5 Determine whether the export sales of Life Rich Beverage to subsidiary companies was profitable. whether ZK107 machine should be purchased to replace ZK105 machine. (5 Marks) Advise the Director (Operations). (6 Marks) QUESTION 6 (a) (b) Describe the type of organization structure of Acenco Tea Plc. (6 Marks) (Total 11 Marks) PROFESSIONAL EXAMINATION II – MAY 2010 134 .

10. C D B B C C C C B A TUTORIAL 10. Auditing. law and operations research.PATHFINDER SOLUTIONS TO SECTION A MULTIPLE CHOICE QUESTIONS 1. 8. Management Accounting. 5. Service rate Arrival rate = 30/40 = 0. 3. 2. 9. 4. 7. Business Environment. The performance of candidates was average. SFM.75 = Traffic Intensity EXAMINERS‟ REPORT The ten questions test IT. 6. PROFESSIONAL EXAMINATION II – MAY 2010 135 .

4. Input VAT Marketing Strategies Variable Cost Inter firm comparison Returns Local Area Network (LAN) Operational or functional Marginal Revenue (MR) Short term solvency/Liquidity/ Acid test Companies Income Tax Insider trading Offer for sale Benchmarking Zero-Based Decision process Hardware. Business Plan. 13. 14. Opportunity. 2. 18. 12. Maintenance PROFESSIONAL EXAMINATION II – MAY 2010 136 . Will. 9. 5.PATHFINDER SHORT-ANSWER QUESTIONS 1. 3. 15. 7. 6. 11. 8. 17. Escape. 16. 10.

25. 21. 30. 27. 22. Bad Vicarious liability Mathematical model/modeling Hedging Marketing research Critical path analysis/Critical path Study Segmentation or identification. Lessor‟s account Ratio decidendi Vote book Exempted Wrong. PROFESSIONAL EXAMINATION II – MAY 2010 137 . The performance of the candidates was average. 29.PATHFINDER 19. 20. 26. EXAMINERS‟ REPORT The thirty questions test all the courses in the professional examinations syllabus of the Institute. 28. 23. 24.

A complete JIT system begins with production.000 25.33 JIT System The goals of a Just-In-Time system are to eliminate non-value added practices.200 ÷ 800. and reduce costs while increasing quality.000 130.200 N2.653 Standard cost of production per tin = 1. continuously improve efficiency.000 98.327 N1. continues through the manufacturing plant and even includes the types of transactions processed by the accounting system.PATHFINDER SOLUTIONS TO SECTION B QUESTION 1 (a) STANDARD COST OF PRODUCTION Direct Materials Direct Labour Overheads: Indirect Labour Electricity Maintenance/Repairs Supplies Supervision Depreciation Total Standard Cost of Production Standard Cost Per batch 1.000 16.200 4.200 400 (b) N 700.061. waste of time and waste of materials.000 = 263.000 40. A characteristic of the Just-In-Time system is its continuous focus on eliminating all waste from a system e.g waste of assets.061.200 1.000 48. (c) PROFESSIONAL EXAMINATION II – MAY 2010 138 . includes deliveries to a company‟s production facilities.000 = N1. excessive inventory.061.

Next.485 Units 20% of N1. eliminate those which could not keep up with the delivery dates.PATHFINDER A company must ensure that it receives products/spare parts/materials from its suppliers on the exact date and at the exact time when they are needed.000)1250 250 = 8. the purchasing staff must investigate and evaluate every supplier. deliveries should be sent straight to the production floor for immediate use in manufacturing products. the company must install system. As soon as suppliers certify their delivery and quality.250 N250 PROFESSIONAL EXAMINATION II – MAY 2010 139 . (d) Economic Order Quantity (EOQ) 2QO = where C Q O C = = = estimated annual quantity used in units (can be found in the annual purchases budget) ordering cost estimated cost to carry one unit in stock for one year. In addition.200. Economic Order Quantity (EOQ) is an estimate of the number of units per order that will be the least costly and provide the optimal balance between the costs of ordering and the costs of carrying inventory Working I EOQ = 2(7. Drivers then bring small deliveries of product to the company possibly going to the extreme of dropping them off at the specific machines that will use them first. For this reason. which may be as simple as a fax machine or as advanced as an electronic data interchange system or linked computer system through what tests are to be sent to the company. the set up times for concerns machinery is shortened. so that there is no time to inspect incoming parts for defects.

The major pitfall was the use of administrative overhead cost in calculating standard cost per batch and standard cost per tin. marginal and absorption costing. The candidates‟ understanding of l (a) and I (b) of the question was very poor but they demonstrated good knowledge and understanding of part I (c) and I (d). Video phones. Teleconferencing system also makes use of television that uses point-to-multipoint technology that is broadcast to any use within the range of the transmitter.000. Video cameras (web cam) on computers now allow personal computer users to teleconference over the internet.PATHFINDER EXAMINERS‟ REPORT The question tests candidates‟ Knowledge of Standard Cost. (b) The of investment on life Rich Beverages which qualifies for Capital Allowances is Plant and machinery (c) Computation of Capital Allowance Initial allowance Annual allowance Investment allowance Cost of Plant and Machinery - N 100. is a convenient way for business people to meet and communicate without the expense or inconvenience of travel. can also send private or public television images and have been used in news reporting in remote locations.000 50% 25% 10% . Candidates are advised to improve their knowledge of costing system and the difference between direct. It is also a system in which television picture links two physically separated parties.000.000 PROFESSIONAL EXAMINATION II – MAY 2010 140 . Just-In-Time system and Economic Order Quantity in Cost and Management Accounting. indirect. which use tiny video cameras and rely on satellite technology. QUESTION 2 Teleconferencing is a system of video conferencing that uses a restricted band of frequencies and allows participants to be connected by telephone lines.N100.

000 N50.500.000.500.000) 37.000 72.a = 100 = 4 25 50.000 12.000.000 = 12.I) Annual allowance (W.500.000 (62.000.PATHFINDER Cost Initial allowance @ 50% (W.000 N 100.000 = 25% p.000.000 100 1 Annual allowance: Cost Initial allowance Annual allowance = N 50.000.000 10.000) 50.000 10.000.000. especially conferencing system and computation of capital allowances in taxation.500. PROFESSIONAL EXAMINATION II – MAY 2010 141 .000 (50.000 1 Note: Investment allowance is not taken into consideration in determining the Tax Written Down Value of Qualifying Capital Expenditure Summary of Capital allowance Initial allowance Annual allowance Investment allowance I Workings Initial allowance: 50 x 100.000.000 = II N 100.000 p.500.II) Tax Written Down Value Investment allowance 10% of Cost = 10/100 x 100.000.000 N 50.000 4 EXAMINERS‟ REPORT The question tests candidates‟ knowledge of Information Technology.000.

The profits attributable to Brisko Plc will be consolidated in the Company‟s Group accounts. Additionally. having consideration for Bamidele‟s majority holding in the shares of Acenco Tea Limited. Many candidates approached the question from the point of ethical issues involved and/or corporate politics which was not required by the examiner. The pitfall was the inability of candidates to identify investment cost qualifying for capital allowances and ascertaining the basis of computation of capital allowances and applicable rates of each category of qualifying capital expenditure. candidates could not interprete the issues involved.PATHFINDER Candidates‟ performance was above average. (b) Associated Company Brisko Plc will trust Acenco Plc as an associated company since its owns only 49% of Acenco Tea Plc‟s share capital. he is right to reclaim the Chief Executive position in line with Section 263(s) of CAMA 2004. Candidates are advised to study and understand the basis of capital allowances. There was a mix-up. QUESTION 3 (a) The seeming management problem that could have been created was resolved amicably between Bamidele and Fehinbu. Candidates are advised to study widely for future examinations. EXAMINERS‟ REPORT The question tests the candidates‟ understanding of CAMA LFN 2004 on appointment of directors. However. PROFESSIONAL EXAMINATION II – MAY 2010 142 . Candidates‟ performance was below average.

000.000.592.000 Less: Current Liabilities: Creditors Taxation Dividend 3.000 N 45.500.000 8.000 2.e 8.000 = N4.000 Price per share i.05 x 80.99 = = (b) Net value of the public shares offered by Acenco Tea Plc.PATHFINDER QUESTION 4 (a) Acquisition Value of Distribution Network Plc i Fixed Assets Current Assets: Stocks Debtors Bank N 4.000 1.278.947.500.000 Issue cost was agreed at 5% of the total cost = 0.000.000 8.923.000 ordinary shares 2.000 N47.000 1.000 47.000 N5.645.225.225.923.000 855.000 5.500.000 PROFESSIONAL EXAMINATION II – MAY 2010 143 .000.000. The total issue cost is N8 per share x 10m = 80.

000 cedi x 5) Total revenue transferred to HQ Nigeria BENIN N‟000 1.000 TOGO N‟000 GHANA N‟000 Total N‟000 1.000. The amount transferred in appendix II should read amount transferable while amount not transferred shared read amount transferred. The candidates‟ performance was very poor as there was lack of understanding of the question by the majority of the candidates.808. Candidates were able to identify the data but failed to use the data appropriately.808.499.000 4.400 PROFESSIONAL EXAMINATION II – MAY 2010 144 .000 3.000 1.000 EXAMINERS‟ REPORT This question tests candidates‟ knowledge of mergers and acquisition as well as the valuation of acquisition cost of new companies and the valuation of shares issued.766.923 cfa x 260) (8.400 2.600.499.000.261.568.000  The Net Value of the Public Shares offered by Acenco Tea Plc is N76.696.000 3.000.261. and the last column is assured loss on transfer which be treated as loss to HQ.154 x 260) (761.000 3. Candidates are advised to read widely to improve their knowledge of basic accounting and financial management concepts.808.499.PATHFINDER The Net value of the offer is: Total Issue Value Less Issuing Cost N 80. Conversion to Naira Amount transferred to HQ: (5.000 7. QUESTION 5  a.400 2.400 2.

Candidates are advised to pay more attention to their studies. export sales of life Rich Beverage to subsidiary companies was not profitable. As simple as the question is.200 800.360.438.000 tins Standard cost for tin = = c. EXAMINERS‟ REPORT The question tests candidates‟ knowledge of the financial relationship between parents and subsidiary companies.000 1. over 90% of the candidates did not understand it.000 N1. Actual Amount transferred (2) above Less cost of tins transferred (6.180 tons x 2000 tons/500gm) (12.568. expenses Group price/QH Number of tins = 800. Standard cost of production of life Rich Beverage Total as per appendix‟ v Less: Division admin.360. PROFESSIONAL EXAMINATION II – MAY 2010 145 .800) (8. The commonest pitfall was the lack of understanding of the concept and appropriate technique to use in answering the question.121.200 60.33) Loss N 25.400) In view of the above.200 N 1.870.33 N‟000 7.000 x standard cost per tin) (12.000 N 1.400 (16.PATHFINDER b.061.061.000 x 1.000 35.

It is a Holding Company which will have:  The Group Managing Director reporting to the Board of Directors Chief Executives of subsidiary companies reporting to the Group Managing Director.  PROFESSIONAL EXAMINATION II – MAY 2010 146 . Line Managers reporting to the Chief Executives of subsidiary companies.PATHFINDER QUESTION 6 (a) (i) (ii) Organisation structure of Acenco Tea Plc is described as follows: A public limited liability company capable of being listed on the stock exchange.

PATHFINDER ACENCO TEA PLC Board of Directors Group Managing Director Chief Executive Acenco Tea (Togo) Chief Executive Acenco Tea (Benin) Chief Executive Acenco Tea (Ghana) Sales Manager Financial Accountant Manager Financial Accountant Financial Accountant Manager PROFESSIONAL EXAMINATION II – MAY 2010 147 .

000 0.6944 3 1.850.4823 5 1.125 552.10 years = (1.050.125 OR Initial cost Savings .000 0.000 1. EXAMINERS‟ REPORT The question tests candidates‟ knowledge of organisational structure and replacement theory.050.1615 NPV PV -3.000 0.000 0.000 0.000 0.5787 4 1.3. PURCHASE OF ZK107 MACHINE Year Cost Factor 0 351.850.3349 7 1. Candidates are advised to study widely on other subjects which are linkages especially management concepts.230 203.4019 6 506.575 N552.490 169.2326 9 1. 2K107 should be purchased. The candidates‟ performance was below average.000 874.000 0.050.055 244. PROFESSIONAL EXAMINATION II – MAY 2010 148 .050.b.402.000 0.000 0.415 421. Many of the candidates criticised the organizational structure instead of describing it as required by the question.000 1 1.1925) NPV The machine.645 293.000 4.000 2 1.125 N .1938 10 1.000 x 4.050.850.2791 8 1.965 729.120 607.

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