The Institute of Chartered Accountants of Nepal: Suggested Answers of Advanced Accounting

The Institute of Chartered Accountants of Nepal
Suggested Answers of Advanced Accounting
CAP II Examination – December 2010

Marks
Attempt all questions. Working notes should form part of the answer.
1. A & B are in partnership, sharing profits & losses in the ratio of two third and one third
respectively. The books are kept on single entry system; and their statement of affairs
dated 31st Ashadh 2066 showed their position as follows:
Statement of Affairs of A & B as at 31st Ashadh 2066 Amount in Rs.

Fixed Assets:
Building 60,000
Machinery 20,000
Furniture & Fixtures 5,000 85,000
Working Capital:
Current Assets:
Debtors 60,000
Stock 40,000
Cash & Bank 5,000
Bills Receivables 15,000 120,000
Current Liabilities:
Loan 10,000
Creditors 30,000
Bills Payable 25,000 65,000 55,000
Totals 140,000
Represented By:
Capital:
A 100,000
B 40,000 140,000
Additional information are as follows:
On 32nd Ashadh 2067, the books disclosed following information:
Debtors Rs.80, 000 Creditors on open accounts Rs. 85,000
Cash Rs.8, 000 Creditors for Loan Rs.16,000
The stock was valued at Rs. 42,000 and the bills receivable amounted Rs. 14,000. An
examination of cash book showed that during the year, A had drawn on account of profit
Rs. 15,000 and B Rs. 6,000. A had, in addition, withdrawn Rs.20,000 from his capital
account on 30th Poush 2066.
The partners agreed to reduce the existing valuation of Machinery by 5 % and the
Furniture & Fixtures by 10% by way of depreciation. They also agreed to charge 5 % by
way of interest on capital.
Required:
a) Prepare statement of profit, dividing the balance between A and B for the year ended
32nd Ashadh 2067; and
b) Prepare statement of affairs showing the position as at 32nd Ashadh 2067. (10+10=20)
CAP II Examination – December2010
Answer No.1
Statement of Profit & Loss of A and B for the year ended 31stAshad 2067
Figures in Rs.
Combined Closing Capital ( WN 1) 128,000
Add: Combined drawing during the year ( A Rs 3,5000 + B Rs 6000) 41,000
169,000
Less: Combined opening Capital ( Rs 100,000 + Rs 40,000) 140,000
Profit before adjustments 29,000
Less: Adjustments;
Depreciation on Machinery 1000
Depreciation on Furniture & Fixtures 500 1,500
Net Profit 27,500
Less : Interest on capital ( A Rs 4,500 + B Rs 2,000) 6,500
Divisible Profit 21,000
A‘s Share Two third 14,000
B‘s Share One third 7,000
Statement of Affairs as at 31stAshad 2067

Fixed Assets:
Building 60,000
Machinery 20,000
Less: Depreciation 1,000 19,000
Furniture& Fixtures 5,000
Less: Depreciation 500 4,500 83,500
Working Capital:
Current Assets:
Debtors 80,000
Stock 42,000
Cash & bank 8,000
Loan 16,000
Creditors 85,000 101,000 43,000
Total 126,500
Represented By:
Capital
A ( WN 2) 83,500
B ( WN 2) 43,000 126,500
Working Note 1:
Ascertainment of Combined Closing Capital (before adjustments)
Fixed Assets: Rs. Rs.

Building 60,000
Machinery 20,000
Furniture& Fixtures 5,000 85,000
Working Capital:
Current Assets:
Debtors 80,000
Stock 42,000
Cash & bank 8,000
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Creditors for Loan 16,000
Creditors on open account 85,000 101,000 43,000
Total 128,000
Represented By:
Capital ( Balance figure) 128,000
Working Note: 2
Partners‘ Capital A/C
Particulars A (Rs.) B (Rs.) Particulars A (Rs.) B (Rs.)
To Bank (Capital 20,000 - By Balance b/d 100,000 40,000
drawn) By Interest on 4,500 2,000
To Bank (Drawings) 15,000 6,000 Capital
To Bank c/d 83,500 43,000 By Share on Profit 14,000 7,000
118,500 49,000 118,500 49,000
Working Note: 3
Interest on capital:
A: On Rs.100,000 @ 5% for ½ years = Rs. 2,500 and on Rs 80,000 @5% for ½ years= Rs
2,000
B: On Rs. 40,000 @ 5% for 1 years = Rs 2,000
2.
a) Textile Ltd. prepares separate Departmental Profit and Loss Accounts. The nature of
their operation required frequent supply of articles/ services from one department to
another. The company consisted of three departments- A, B and C. It had been decided
that A department will charge, for services supplied to other departments, the cost
thereof plus 10% thereon. Likewise B department will charge the other departments
cost plus 20% thereof in respect of supplies made to them. The C department‘s supplies
to the other departments will be charged at the prevailing rates applicable to outsiders.
The accounts for the year ended on Ashadh 32, 2067 has been closed without taking
into account the interdepartmental transactions.
Following are the departmental transactions:
Rs.
i) Cost of A Department‘s service extended to :B 8,400
C 4,500
ii) Cost of supplies made by B Department to: A 29,800
C 5,400
iii) Value of supplies made by C Department to: A 400
B 5,600
In addition, the following are the charges to be made for interchange of staffs from one
department to another for temporary period during the year:
B‘s staff shifted to A Department 4,400
A‘s staff shifted to B Department 1,100
Required:
Show the net variation in the departmental Profit and Loss Accounts as a result of
above adjustments. 10

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b) The trial balance of Duplex Ltd. as at year ended on 31st March, 2010 shows the
following items:
Dr. (Rs.) Cr. (Rs.)
Advance payment of income-tax 220,000 -
Provision for income tax for the year ended 31.3.2009 - 120,000
The following further information are given :
i) Advance payment of income tax includes Rs. 140,000 for the year 2008/09.
ii) Actual tax liability for the year 2008/09 amounts to Rs. 152,000 and no effect for
the same has so far been given in accounts.
iii) Provision for income tax has to be made for the year 2009/10 for Rs. 160,000.
Required:
(a) Prepare provision for income-tax account,
(b) Prepare advance payment of income tax account,
(c) Prepare liabilities for taxation account and
(d) Show how the relevant items will appear in the profit and loss account and
balance sheet of the Company. (2+2+2+4=10)
Answer No.2
a)
Profit & Loss (Adjustment) Account
Particulars A Rs. B Rs. C Rs. Particulars A Rs. B Rs. C Rs.

To Services from A 9,240 4,950 By Services from A to B 9,240
To Supplies from B 35,760 6,480 By Services from A to C 4,950
To Supplies from C 400 5,600 By Services from B to A 35,760
To Charge in respect of
staff 4,400 1,100 By Services from B to C 6,480
To Increase in Dept.
Profit 30,700 By Services from C to A 400
(or Decrease in Dept.
Loss) By Services from C to B 5,600
By Recovery in respect
of Staff 1,100 4,400
By Decrease in Dept.
Profit
(or Increase in Dept.
Loss) 25,270 5,430
40,560 46,640 11,430 40,560 46,640 11,430
Notes:
10% has been added to cost of A dept. services to find out transfer price for B and C. 20% has been
added to costs of supplies of B dept. to find out transfer price for A and C dept.

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Working Note:
Statement showing transfer price
From Dept. To Dept. Cost/ Value (Rs.) Transfer Price (Rs.)

A B 8,400 9,260
A C 4,500 4,950
B A 29,800 35,760
B C 5,400 6,480
C A 400 400
C B 5,600 5,600
b)
Duplex Ltd.
(a) Provision for Income Tax (2008/09) Account
Dr. Cr.
Rs. Rs.
31.3.10 To Advance Payment of 1.4.09 By Balance b/d 120,000
Income-tax A/c 140,000 31.3.10 By Profit and Loss A/c 32,000
31.3.10 To Liability for (152,000-120,000)
Taxation A/c 12,000
152,000 152,000
Provision for Income-tax (2009/10) Account

Rs. Rs.
31.3.10 To Balance c/d 160,000 31.3.10 By Profit and Loss A/c 160,000
160,000 160,000
(b) Advance Payment of Income Tax Account
Rs. Rs.
31.3.10 To Balance b/d 220,000 31.3.09 By Provision for Income tax
(2008/09) A/c 140,000
By Balance c/d 80,000
220,000 220,000
(c) Liability for Taxation Account
Rs. Rs.
31.3.10 To Balance c/d 12,000 31.3.10 By Provision for
Income tax A/c 12,000
12,000 12,000
Profit and Loss Account
for the year ended 31st March, 2010 (Extracts)
Rs. Rs.
Profit before Taxation -----
Less :Taxation for the year 160,000
Taxation adjustment of previous year 32,000 192,000
Net Profit -----
Balance Sheet of Duplex Ltd.
As at 31st March, 2010 (Extracts)
Liabilities Rs. Assets Rs.
Current Liabilities and Provisions Current Assets, Loans and Advances
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A. Current Liabilities B. Loans and Advances
Liability for Taxation (2008/09) 12,000 Advance payment of
B. Provisions Income-tax 80,000
Provision for Income-tax 160,000
3.
a)
i) What is Debt Service Coverage Ratio? 2
ii) You are given the following particulars:
Current Ratio 2
Working Capital Rs. 400,000
Capital Block to Current Asset 3:2
Fixed Assets to Turnover 1:3
Sales Cash /Credit 1:2
Creditors Velocity 2 Months
Stock Velocity 2 Months
Debtors Velocity 3 Months
Net Profit 10% of Turnover
Reserve 2.5% of Turnover
Debentures/Shares Capital 1:2
Gross Profit 25%
Required:
Prepare the balance sheet on the basis of above information. 8
b)
i) The paid-up capital of Tele Ltd. amounted to Rs.250,000 consisting of 25,000
equity shares of Rs.10 each.
Due to losses incurred by the company continuously, the directors of the company
prepared a scheme for reconstruction which was duly approved by the court. The
terms of reconstruction were as under:
In lieu of their present holdings, the shareholders are to receive:
Fully Paid Equity Shares equal to 2/5th of their holding.
5% Preference Shares fully paid-up to the extent of 20% of the above new
equity shares.
3,000 6% Second Debentures of Rs.10 each.
An issue of 2,500 5% First Debentures of Rs.10 each was made and fully
subscribed in cash.
The assets were reduced as follows:
Goodwill from Rs.150,000 to Rs.75,000.
Machinery from Rs. 50,000 to Rs.37,500.
Leasehold Premises from Rs.75,000 to Rs. 62,500.
Required:
Show the journal entries to give effect to the above scheme of reconstruction. 7
ii) Define the term ‗Indemnity Period‘ and‘ Standard Turnover‘ in relation to
calculation of insurance claim. 3
Answer No.3
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a.i) Debt Servicing means timely payment of loan installments and interest. Normally the
borrower should be able to service debts out of profit. The profit means the amount of
profit available for debt servicing and is represented by Net Profit after tax plus
Depreciation and other non cash charges plus Interest on Debt. A huge coverage ratio
indicates the strength of the business to service its debt properly.
It is calculated as
NPAT + Depn & non cash changes +I
Loan installments + Interest
ii)
Balance Sheet
Capital & Liabilities Rs. Assets Rs.

Share Capital 600,000 Fixed Assets 800,000
Net Profit (P/L A/c) 240,000 Stock 300,000
Reserves 60,000 Debtors 400,000
Debenture 300,000 Other Current Assets 100,000
Sundry Creditors 300,000
Other Current Liabilities 100,000
1,600,000 1,600,000
Working Notes:
Current Assets (CA)

1. Current Ratio =
Current Liabilities (CL)
Or, 2 = CA/ CL
Or, CA = 2 CL
Again,
WC = CA- CL
Or, 400,000= 2CL- CL
Or, CL = Rs. 400,000
& CA = 2* Rs.400,000
CA = Rs.800,000
2. Capital Block: Current Assets = 3:2

If Current Assets = 8,00,000
Capital Block = 12,00,000
3. Debenture: Share Capital = 1:2

Debentures = Share Capital/2
4. Capital Block = Share Capital + Profit + Reserve + Debenture

Let Share Capital be X
Let Sales be Y
Net Profit = 10% of Y = 0.1Y
Reserve = 2.5% of Y = 0.025Y
Capital Block = X+0.1Y+0.025Y+0.5X
or, 1.5X+0.125Y=12,00,000-------------------(I)
5. Fixed Assets : Turnover= 1:3

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Turnover
or, Fixed Assets =
3
Y
Fixed Assets =
3
We know, Capital funds - fixed assets = working capital and
Capital funds = Capital Block
or, 1.5X+0.125Y- Y/3 = 4,00,000
or, 4.5X -0.625Y= 12,00,000 ------------------(ii)
Solving the equation (i) and (ii) we get
X= Share Capital = 6,00,000
Y= Sales = 24,00,000
6 Y 2,400,000
a. Fixed Assets = .= .= 800,000
3 3
1
b. Cash Sales = X 2,400,000 .= 800,000
3
2
c. Credit Sales = X 2,400,000 .= 1,600,000
3
10
d. Net Profit = X 2,400,000 .= 240,000
100
2.5
e. Reserve = X 2,400,000 .= 60,000
100
25
f. Gross Profit = X 2,400,000 .= 600,000
100
Share Capital
g. Debentures = .= 300,000
2
Cost of Goods Sold = 2,400,000- 600,000 = 1,800,000
Average Stock
7. Stock Velocity = x 12 = 2
Cost of goods sold
therefore, Closing Stock = 300,000
In the absence of information here it is assumed that average stock = closing stock
Average Debtors
8. Debtor Velocity = x 12 = 3
Credit Sales
therefore, Closing debtors = 400,000
In the absence of information here it is assumed that average debtors = closing debtors
Other current Assets = 800,000-400,000 -300,000 = 100,000
Average Creditors
9. Creditors Velocity= x 12 = 2
Credit Purchases
therefore, Closing Creditors = 300,000
In the absence of information regarding cash and credit purchase and opening and closing
stock, cost of goods sold is considered.
Other current liabilities = 400,000-300,000 = 100,000

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b.i) (3+2+3 marks
In the books of Tele Ltd.
Journal Entries
Rs. Rs.
Share Capital A/c (Old) Dr. 250,000
To Equity Share Capital A/c 100,000
(2/5 of Rs. 2,50,000)
To 5% Pref. Shares Capital A/c 20,000
(20/100xRs.1,00,000)
To 6% Second Debentures A/C 30,000
To Capital Reduction A/c 100,000
(Being conversion of 25,000 Equity Shares and balance being transferred to

Capital Reduction A/c in accordance with the Scheme of internal
reconstruction as per Special Resolution dated ----- as confirmed by the
Court Order dated---)
Bank A/c Dr. 25,000

To 5% First Debenture A/c 25,000
( Being issue of Rs.25,000 5% First Debentures for cash as per scheme of
internal reconstruction)
Capital Reduction A/c Dr. 100,000

To Goodwill A/c 75,000
To Plant & Machinery A/c 12,500
To Leasehold Premises A/c 12,500
(Sundry Assets written down as per scheme of internal reconstruction)
ii) Indemnity Period

The period beginning with the occurrence of the Damage and ending not later than 12
months thereafter during which the results of the business shall be affected in
consequence of the damage.
Standard Turnover
The turnover during the period in the twelve months immediately before the date of
damage which corresponds with the indemnity period to which such adjustments shall
be made as may be necessary to provide for the trend of the business and for variations
in or special circumstances affecting the business either before or after the damage.
4.
a) State how the Premium Income, Claim Expense and Commission Expense are
computed in case of insurance company. 5
b) Following facts have been extracted from the record of Adarsha Bank Ltd. in respect of
the year ending Ashadh 32, 2067:
On 1-4-2066 Bills for collection were Rs.700,000. During 2066/067 bill received for
collection amounted to Rs. 6,450,000, bills collected were Rs. 4,700,000 and bills
dishonoured and returned were Rs.550,500.
Required:
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Prepare Bills for Collection (Assets) A/C and Bills for Collection (Liability) A/C. 5
c) Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2008:
Inflows Rs. Outflows Rs.
Opening balance: Payment to creditors 90,000
Cash 10,000 Salaries and wages 25,000
Bank 70,000 Payment of overheads 15,000
Share capital 500,000 Fixed assets acquired 400,000
Collection from Debtors 350,000 Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 250,000
Taxation 55,000
Dividends 100,000
Closing balance:
Cash 5,000
Bank 10,000
1,000,000 1,000,000
Required:
Prepare Cash Flow Statement for the year ended 31st March, 2008 in accordance with
Nepal Accounting Standard. 5
Answer No.4
Premium Income:
Premium income should be recognized on cash basis. If the date of premium payment is later
than cash received, the income should be recognized on later date.
Premium on re-insurance accepted may be recognized on accrual basis.
If premium amount is received for more than one year, the amount relating to first year should
be recognized as income and the remaining amount should be treated as deposit. The amount
of deposit should be proportionately treated as income in later years. But, in case of one time
premium, the total amount should be recognized as income. The amount of premium income to
be credited to revenue account for a year may be computed as:
Premium Received on risks undertaken during the year

Direct Insurance
Yearly premium xxxxx
Renewal premium xxxxx
One-time premium xxxxx xxxxx
Re-insurance accepted xxxxx
xxxxx
Less: Premium on re-insurance ceded xxxxx
Premium Income xxxxx
Note:
The above computational and revenue recognition procedure is same for both cases, i. e. for
life insurance business and for non-life insurance business.
Claim Expense:
A claim occurs when a policy falls due for payment. In the case of life insurance business, it will arise
either on death or maturity of policy that is on the expiry of the specified term of years. In the case of
general insurance business, a claim arises only when the loss occurs or the liability arises. The amount
of claim to be charged to revenue account may be worked out as under:
Life Insurance
Claims settled during the year (including legal fees, survey, consultancy charges etc.)
Death claim xxxxx
Maturity claim xxxxx

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Partial maturity claim xxxxx
Surrender claim xxxxx
Other claim xxxxx
Total claim paid xxxxx
Adjustment : Share of re-insurance in total claim xxxxx
Net claim expenses xxxxx
Non-life insurance
Claims settled during the year (including legal fees, survey, consultancy charges etc.)
Claim of current year xxxxx
Claim prior to one f.y. xxxxx
Claim prior to two f.y. xxxxx
Claim prior to three f.y. xxxxx
Claim prior to four or more f.y. xxxxx
Total claim paid xxxxx
Adjustment : Share of re-insurance in total claim xxxxx
Net claim expenses xxxxx
Commission Expenses: In insurance business received through agents, the agency commission
expenses should be booked in the year in which the related premium income is
recognized.Commission expense to be charged to revenue account is computed as follows:
Commission on first year premium xxxxx
Commission on Renewal premium xxxxx
Commission on One-time premium xxxxx
Commission expenses xxxxx
b)
Bills for Collection (Assets) A/c
Date Particulars Rs. Date Particulars Rs.
01/04/2066 To balance b/d 700,000 2066/067 By Bills for collection
2066/067 To Bills for collection (Liabilities) A/c 4,700,000
( Liabilities) A/c 6,450,000 By Bills for collection
(Liabilities) A/c 550,500
32/3/2067 By Balance c/d 1,899,500
7,150,000 7,150,000
Bills for Collection (Liabilities) A/c

Date Particulars Rs. Date Particulars Rs.
2066/067 To Bills for collection 01/04/2066 By Balance b/d 700,000
( Assets) A/c 4,700,000 2066/067 By Bills for collection
To Bills for collection (Assets ) A/c 6,450,000
( Assets) A/c 550,500
32/3/2067 To Balance c/d 1,899,500
7,150,000 7,150,000
C)
Cash Flow Statement
for the year ended 31.3.2008
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Rs. Rs.
Cash flow from operating activities
Cash received from customers 3,50,000
Cash paid to suppliers (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (55,000)
Net cash from operating activities 1,65,000
Cash flow from investing activities
Payment for purchase of fixed assets (4,00,000)
Proceeds from sale of fixed assets 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Dividends paid (1,00,000)
Net cash from financing activities 1,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000
5.
a) X, a construction contractor, undertakes the construction of an industrial complex. He
has separate proposals raised for each unit to be constructed in the industrial complex.
Since each unit was subject to separate negotiation, he was able to identify the costs
and revenues attributable to each unit. Should X treat construction of each unit as a
separate construction contract? 5
b) X Ltd. received a grant of Rs. 2 crores from the Government for the purpose of
installation of special machinery during F/Y 2062/063. The cost of Machinery was Rs.
20 crores and it had a useful life of 9 years. During F/Y 2066/067, the grant has become
refundable due to non-fulfillment of certain conditions attached to it. Assuming the
entire grant was deducted from the cost of machinery in the year of acquisition, state
with reasons, the accounting treatment to be followed in the year 2066/067. 5
c) Indicate any three areas in respect of which different accounting policies may be
adopted by different enterprises. Also indicate the requirements with regard to
disclosure of accounting policies as per the relevant NAS. 5
Answer No.5
a) The provision of Nepal Accounting Standard 13 on ―Construction Contracts‖ Para 8
and 9 explains the situations where accounting segmentation and combination of
construction contracts can be applied. As per para 8 of the standard, when separate
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proposals have been submitted, and separate negotiations have been concluded, costs
and revenues identified separately, the contract for construction of a number of assets
shall be treated as separate construction contracts. Therefore, X has to treat construction
of each unit as a separate construction contract.
b) As per para 32 of NAS 10 ―Accounting for Government Grants‖, the amount
refundable in respect of a government grant related to a specific fixed assets is recorded
by increasing the book value of the asset. Depreciation on the revised book value
provided prospectively over the residual useful life of the asset. In the given case book
value of machinery will be increased by Rs.2 crores in the year 2066/67. The
computation for the depreciation on machinery can be given as :
Cost of Machinery Rs.20 crores
Less: Grant Received Rs. 2 crores
Cost of Machinery Rs.18 crores
Useful life of Machinery 9 Years
Depreciation per year as per straight line method
(assuming residual value to be zero) Rs.18 crores/9 = Rs. 2 crores.
Total depreciation for 4 years (2062/063 to 2065/066) Rs.8 crores.
Book Value in year 2065/066 Rs.(18 – 8) Crores Rs.10 crores.
Add: Grant refunded Rs. 2 crores
Revised Book Value Rs. 12 crores
Remaining useful life 5 Years
Revised Annual Depreciation (Rs. 12 Crores/5) Rs. 2.4 crores.
Thus, book value of machinery will be Rs.12 crores in the year2066/067 and the
depreciation amounting Rs. 2.4 crores will be charged on machinery. Annual
depreciation of Rs.2.4 crores will be charged in the next four years.
c) Areas in which different accounting policies may be adopted: The following are three
areas in which different accounting policies may be adopted by different enterprises:
(i) Methods of depreciation, depletion and amortization.
(ii) Valuation of inventories.
(iii) Valuation of Fixed Assets.
(The above three areas are not exhaustive. There are other areas also)
Disclosure requirements of accounting policies :The disclosure requirements as
prescribed in Accounting Standard 1 (NAS 1) ‗Disclosure of Accounting Policies‘ are
as follows :
(i) All significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed at one place and they should form part of the
financial statements.
(ii) Any change in the accounting policies which has a material effect in the current
period should be disclosed along with the amount, to the extent ascertainable, by which
any item in the financial statement is affected. Where such amount is not ascertainable,
wholly or in part, the fact should be indicated. However, if a change in accounting
policies is reasonably expected to have a material effect in later periods, the fact of such
change should be appropriately disclosed in the period in which the change is made.
(iii) If the fundamental accounting assumptions viz .Going concern, Consistency and
Accrual are followed in the preparation of financial statements, specific disclosure is
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not required. If a fundamental accounting assumption is not followed, the fact should be
disclosed.
6. Write short notes on: (5×2=10)
a) Sale and lease back transaction

b) Price earnings ratio
c) Concepts of capital accounting in partnership business
d) Conditions to be satisfied to capitalize the borrowing costs
e) Firm underwriting
Answer No.6
a) Sale and Lease Back Transaction
A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of
the same asset back to the vendor. The lease payments and the sale price are usually
interdependent as they are negotiated as a package. The accounting treatment of a sale and
leaseback transaction depends upon the type of lease involved.
b) Price earnings ratio

Price earnings ratio indicates sensitivity of market price of a share with its earnings per share.
Generally, low P/E ratio indicates the possibility of share price increase in future as far as the
effect of earning is considered and vice versa. It is calculated as price per share divided by
earnings per share. The price per share (numerator) is the market price of a single share of the
stock. The Earnings per share (denominator) is the Net Income of the company for the most
recent 12 month period, divided by number of shares outstanding.
c) Concept of Capital.
There are two methods of accounting- Fixed Capital Method and Fluctuating Capital Method.
In fixed capital method, generally initial capital contributions by the partners are credited to
partners‘ capital accounts and al subsequent transactions and events are dealt with through
current accounts. On the contrary, under the fluctuating capital method, no current account is
maintained. All such transactions and events are passed through capital accounts.
d) Capitalization of borrowing costs as part of the cost of a qualifying asset should commence
only when all the following conditions are satisfied:
1. The expenditure is being incurred for the Acquisition, construction or production of a
qualifying asset;
2. Borrowing costs are being incurred; and
3. Activities that are necessary to prepare the asset for its intended use or sale, (including
any technical or administrative work prior to the commencement of physical
construction but excluding such activities during which no production or development
take place) are in progress.
e) ‗Firm‘ underwriting‘ signifies a definite commitment to take up a specified number of
shares irrespective of the number of shares subscribed for by the public. In such a case,
unless it has been otherwise agreed, the underwriter‘s liability is determined without taking

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into account the number of shares taken up ‗firm‘ by him, i.e. the underwriter is obliged to
take up :
1. the number of shares he has applied for ‗firm‘; and
2. the number of shares he is obliged to take up on the basis of the underwriting agreement.

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Suggested Answers of Audit and Assurance
Marks
Attempt all the questions.
1. G
ive your opinions with reason on the following cases: (45=20)
a) An auditor of New Nepal Ltd. audited and signed the accompanying financial statement
of the company as of July 15, 2010 (Corresponding to 31st Ashad, 2067). Date of the
signature of the audit report was August 16, 2010.
b) Shareholder of ABC Ltd. appointed Goddar & Co. as statutory auditor for last financial
year. During the audit, auditor found that previous auditor had issued qualified audit
report in respect of assets which was overstated by Rs.15 Million and a director‘s capital
account was credited by that amount. After series of discussion, current auditor reached
in to conclusion that he was appointed for the current financial year and he is not
responsible for the misstatement in previous year which is already reported by previous
auditor.
c) STU Bank Ltd. appointed you as due diligence auditor to find reason of loss in
international Wool Ltd. The company imports woolen threads and manufactures and
exports woolen sweaters to Wall Mart. Profit margin in such business after input vat
refund is 26%. International Wool Ltd. imported woolen raw materials of Rs. 200 million
and sales was 220 million in F/Y 2009/10. Cost of raw materials is inclusive of all
material input. Opening and closing stock remained the same for the year. How would
you plan your audit work and what area would you focus?
d) XYZ Hotels Ltd. has incurred loss and one of its illiterate director wants your assistance
to find out exactly what happened in the company. He suspects that the company has paid
excessive interest on its borrowing. He has found average of 12 month end borrowing
balance was Rs. 120 million and prevailing interest rate was 10% for the year. Interest
paid for 12 month was Rs. 12 million. Suggest to the director on this matter how he can
verify this matter.
Answer No.1
a)
Audit of financial statement is normally carried out for a full financial year. Financial
year as per the prevelling law is first of Shrawan to the end of Ashad month as per Nepali
calendar. Date of the audit report should be after the date of financial year end and after
completation of audit functions. However, in above mentioned case, date of financial
statements is July 15,2010,which is 1 day short of actual financial year end i.e. July
16,2010( corresponding to 32 ashad 2067).This may happen in following situations:
a) An assurance assignment was for audit of financial statements of that date.
b) Company ended its operation from that date.
c) Company is merged to another company from that date.
d) Company went in to liquidation from that date.
e) Auditor signed wrong dated financial statement.
Therefore the auditor should check out the relevant date of financial statements under
audit before signing the report.
b) As per NSA 510 Initial Engagements- Opening Balances, for initial audit engagements,
the auditor should obtain sufficient appropriate audit evidence that (a)the opening balance
do not contain misstatements that materially affect the current period‘s financial
statements; (b) the prior period‘s closing balances have been correctly brought forward to
the current period or, when appropriate, have been restated. If the effect of the
misstatement is not properly accounted for and adequately disclosed, the auditor should
express a qualified opinion or an adverse opinion, as appropriate. Since the misstatement
is carried forward during the current year, it has affected current year position as well and
accordingly the, auditor‘s contention is not valid. Goddar &Co. should qualify his report
quantifying the misstatements unless management is ready to correct the statements.
c) Based on the information furnished, audit plan of international wool Ltd. is to obtain or
update the knowledge of the business including consideration of the entity‘s organization,
accounting systems, operating charecteristics and the nature of its assets, liabilities,
revenues and expenses. After initial assessment and knowledge about the nature of
business, areas for special attention can be identified. In this case following areas need
special attention:
1) Whether proper accounting policy is adopted or not.
2) Whether VAT input/VAT refund is excluded from the cost or not
3) Whether process loss is normal and comparable to the industry or not.
4) Whether pilferage and theft of raw material is properly controlled or not.
5) Whether raw material cost and sales value was properly accounted or not.
6) Whether other items of revenue or expenses pertaining to business are properly
recorded in the book of accounts or not.
d) Average interest cost on the average borrowing by XYZ Hotels Ltd. is matching with
prevailing interest rate. However, detailed verification of borrowing and interest expenses
booked need to be carried out as following:
1) Examine the date, rate and amount of borrowing with reference to borrowing
documents.
2) Verify booking date of the balances in individual accounts and total of borrowing
balance.
3) Examine whether there is a procedure for obtaining confirmation of balance
periodically.
4) Check calculations of interest and examine whether interest expenses has been
accurately provided for with reference to the duration of borrowing.
5) Trace the amount of borrowing in to bank account and interest and loan repayment
from bank account.
6) Examine whether borrowing is properly authorized and whether internal control
procedures have been followed.
7) Examine that other items of liability is not booked as borrowing.
2. A
nswer the following:
a) What are the basic elements of an assurance engagement? 7

b) An statutory auditor of a commercial Bank is requested to report about frauds. The
management suspects that in two loan files there could be fraud. The auditor has already
found a case of misuse of authority relating to a loan amount of Rs. 2500000 resulting
into loss to the Bank to the extent of that amount. However, the auditor was unable to
find fraud in any other loan transactions. Suggest the auditor about his course of action. 8
Answer No.2
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a)
i) Three party relationship: Assurance engagements involve three separate parties: a
practitioner, a responsible party and intended users.
ii) An appropriate subject matter: Subject matter information may be the reorganization,
measurement, presentation and disclosers represented in financial statements, key
indicators, special documents, assertion about effectiveness or statement of compliance
depending on the nature of assurance engagements.
iii) Suitable criteria: Criteria can be formal or informal depending up on the nature of
assurance engagement. It may be Nepal Standards on Auditing or an established internal
control framework or individual control objectives specifically designed for the
engagement or applicable law, regulation or contract.
iv) Sufficient appropriate evidence: The practitioner plans and performs an assurance
engagement with an attitude of professional skepticism to obtain sufficient appropriate
evidence about whether the subject matter information is free of material misstatement.
The practitioner considers materiality, assurance engagement risk, and the quantity and
quality of available evidence when planning and performing the engagement.
v) Assurance report: The practitioner provides a written report containing a conclusion that
conveys the assurance obtained about the subject matter information.
b) The primary responsibly for the prevention and detection of fraud and error rests with
both those charged with the governance and the management of an entity. The auditor
should obtain evidence that management acknowledges its responsibility for the fair
presentation of the financial statements in accordance with the relevant financial
reporting framework, and has approved the financial statements.
Objective of an audit of financial statements is to enable an auditor to express an opinion
on such financial statements and not the detection and prevention of fraud and error.
Audit involves exercise of judgement. Also, the nature of the audit evidence enables the
auditor to draw only reasonable conclusions therefrom. Because of the inherent
limitation of an audit, there is an unavoidable risk that some material misstatements may
remain undiscovered. While in many situations, the discovery is not the main objective of
audit nor is the auditor‘s program of work specifically designed for such discovery. The
audit cannot, therefore be relied upon to ensure the discovery of all frauds or errors but
where the auditor has such indication, he should extend his procedures to confirm or
dispel his suspicions.
3. G
ive your comments on the following: (35=15)
a) Kathmandu Boarding School was established in year 2010. It recently constructed

swimming pool of 2020 meter size behind its main building. Due to Vastusastra
problem, the swimming pool was reconstructed toward 5 meter west side of the building.
Relocation of the pool incurred additional cost of 20%. Suggest, how this cost be booked
in account.
b) Management of MNO production House argues that the auditor should accept the figure
of stock verification conducted by internal audit. The management is willing to certify
this figure. The engagement partner, however, insists that stock verification should be
carried out again by management in presence of his assistants on 25% of locations.
c) PR Sharma & Co. appointed you as an assistant auditor for audit of a business
organization. You were asked to prepare internal control questionnaire for audit of
payments of the organization.
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Answer No 3
a) According to NAS 6 Property, Plant and Equipment, the expenditure for relocation of
swimming pool should be capitalized. However, the carrying amount of those parts that
are replaced should be derecognized in accordance with the de-recognition provisions.
b) The auditor should obtain sufficient and appropriate audit evidence from compliance and
substantive procedures to form his opinion. Accordingly, the auditor can demand the
physical verification be done in the presence of his assistants to obtain a level assurance
of the inventory system in place. However, auditor should also consider the reliance that
may be placed in the report of internal audit in accordance with NSA 610 considering the
work of Internal Auditing. Where such reliance may be placed in the work of an internal
audit, the physical verification is not necessary.
c) Internal control questionnaire for audit of payment is as given below:
1) Are the duties related to payment segregated and rotated periodically?

2) Are the financial powers properly laid down and reasonable?
3) Have the financial powers of various authorities been intimated to various
departments?
4) Whether proper and adequate documents are maintained for each payment?
5) Is the arithmetical accuracy, price, quality, timing and other terms and conditions ( of
the contract) is ensured before approving a payment?
6) Are payments made through account payee cheques except in exceptional cases?
7) Are bills marked as ‗paid‘ once the payment has been made? Are there adequate
controls to ensure that payment is not made twice against the same bill?
8) Is the person/party, to whom payment is made, properly identified?
9) Is issue of cheque properly controlled? Are all cheques pre numbred? Is each cheque
duly accounted for?
10) Is there a system of sending monthly statement of accounts to suppliers and other
parties?
11) Are there adequate controls for safe custody of cheque books?
4. A
nswer the following: (35=15)
a) Ramila & Associates is a proprietorship firm of chartered accountant. Ramila, the

proprietor of the firm, was the board member of Lalima Bank Ltd till 32 Asadh, 2067.
During the AGM of Bank for the financial year 2066/67, she has been appointed as
statutory auditor for the financial year 2067/68. Should she accept the said appointment?
b) What is accounting estimates? Provide eight examples of accounting estimates.

c) What is the importance of working papers to the auditor? List out the documents to be
kept in permanent audit files.
Answer No.4
a) As per section 8.4 of Code of Ethics issued by ICAN, ―when professional accountants in
public practice are or were, within the period under current review or immediately
preceding an assignment: a) a member of the board, an officer or employee of a
company; or b) a partner of or in the employment of, a member of the board or an officer
or employee of a company. They would be regarded as having an interest which could
detract from independence when reporting on that company‖.
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Accordingly as per above Para, CA Ramila was board member of the bank immediately
preceding an assignment and the period is not less two years, hence she should not accept
this assignment as statutory auditor for the financial year 2067/68.
b) Accounting estimate means an approximation of the amount of an item in the absence of

a precise means of measurement. On this ICAN has issued NSA 540. The examples are:
i. Allowances to reduce inventory and accounts receivable to their estimated
realizable value.
ii. Provisions to allocate the cost of fixed assets over their estimated useful life.
iii. Accrued Revenue.
iv. Provision for taxation.
v. Provision for a loss from lawsuit.
vi. Insurer`s liability for outstanding claim.
vii. Losses on construction contracts in progress.
viii. Amortization of certain items like goodwill and deferred revenue expenditure.
c) Working papers are the property of the auditor. In view of the importance of working
papers to the auditor, ICAN has issued NSA 230/Documentation. The importance of
working papers are: i.) to assist in the planning and performance of the audit, ii.) to assist
in the supervision and review of the audit work and iii.) to provide evidence of the audit
work performed to support the auditor`s opinion.
Working paper files are generally divided in to two types as per nature of documents;
namely permanent working paper files (permanent audit files) and current working paper
files (current audit files). The contents of permanent audit files are:
i. information concerning the legal and organizational structure of the client. In the
case of a company, this includes the Memorandum and Articles of Association. In
case of a statutory corporation, this includes the Act and Regulations, under which
the corporation functions,
ii. extracts or copies of important legal documents, agreements and minutes relevant
to the audit,
iii. a record of the study and evaluation of the internal controls related to the
accounting system. This might be in the form of narrative descriptions,
questionnaires or flow charts, or some combination thereof,
iv. copies of audited financial statements of previous years,
v. analysis of significant ratios and trends,
vi. copies of management letters issued by the auditor, if any,
vii. record of communication with the retiring auditor, if any before acceptance of the
appointment as auditor,
viii. notes regarding significant accounting policies and
ix. significant audit observations of earlier years.
5. A
nswer the following: (35=15)
a) Define the concept of internal control and explain its inherent limitations.
b) List out the circumstances, where auditing is done through the computer.
c) Briefly explain the concept of Materiality.
Answer No.5
(a) The concept of internal control may be defined as the plan of organization and all the
methods and procedures adopted by the management of an entity to assist in achieving
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management‘s objectives of ensuring the orderly and efficient conduct of its business,
including adherence to management policies, the safeguarding of assets, prevention and
detection of fraud and error, the accuracy and completeness of the accounting records,
and the timely preparation of reliable financial information. The system of internal
control extends beyond those matters which relate directly to the functions of the
accounting system and comprises control environment and control procedures. Internal
control is an essential prerequisite for efficient and effective management of any
organization. It is thus, a primary responsibility of every management to establish and
maintain an adequate system of internal control appropriate to the size and nature of the
business of the entity.
An internal control system can provide only reasonable, not absolute, assurance that the
management‘s objectives in establishing the system are achieved. This is because there
are some inherent limitations of internal control. These limitations are mentioned
hereunder:
(a) Controls have to be cost effective. Hence, some control mechanisms may not have
been implemented merely because they are not cost-effective.
(b) Most control tools are directed at transactions of a usual nature. Therefore,
transactions of unusual nature might have been escaped from such controls.
(c) The human error potentiality prevails everywhere, even in the control systems.
(d) Any system of control has its limitations in preventing frauds through collusion
between two or more persons.
(e) Controls may not change with the pace of changes in conditions.
(f) Management itself may manipulate transactions or accounting estimates.
(g) A member of management may himself override the control system.
b) The auditor can use the computer to test the logic and controls prevalent within the system
and the records generated by the system. Depending upon the complexity of the
application system being audited, the approach may be different. It may be fairly simple or
may require extensive technical competence on the part of the auditor. Circumstances that
may cause to conduct audit through the computer are as follows:
(a) The application system processes large volume of input and produces large volumes
of output that make extensive direct examination of the validity of input and output
difficult.
(b) Significant parts of the internal control system are embodied in the computer system.
(c) The logic of the system is complex and there are large portions that facilitate use of
the system or efficient processing.
(d) Because of cost-benefit considerations, there are substantial gaps in the visible audit
trail.
c) Materiality is an important consideration for an auditor to evaluate whether the financial

statements reflect a true and fair view or not. The auditor should consider materiality and its
relationship with audit risk when conducting an audit. The Nepal Accounting Standards Board's
"Framework for the Preparation and Presentation of Financial Statements" defines Materiality in
the following terms: "Information is material if its omission or misstatement could influence the
economic decisions of users taken on the basis of the financial statements. Materiality depends
on the size of the item or error judged in the particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point rather than being a primary
qualitative characteristic which information must have if it is to be useful."
In designing the audit plan, the auditor establishes an acceptable materiality level so as to detect
quantitatively material misstatements. However, both the amount (quantity) and nature (quality)
of misstatements need to be considered. Examples of qualitative misstatements would be the
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inadequate or improper description of an accounting policy when it is likely that a user of the
financial statements would be misled by the description, and failure to disclose the breach of
regulatory requirements when it is likely that the consequent imposition of regulatory restrictions
will significantly impair operating capability.
The auditor should consider the possibility of misstatements of relatively small amounts that,
cumulatively, could have a material effect on the financial statements. For example, an error in a
month end procedure could be an indication of a potential material misstatement if that error is
repeated each month.
The auditor should also consider materiality at both the overall financial statement level and in
relation to individual account balances, classes of transactions and disclosures. Materiality may
be influenced by considerations such as legal and regulatory requirements and considerations
relating to individual financial statement account balances and relationships. This process may
result in different materiality levels depending on the aspect of the financial statements being
considered.
While determining the nature, timing and extent of audit procedures; and evaluating the effect of
misstatements, the auditor should consider the materiality. When planning the audit, the auditor
should consider what would make the financial statements materially misstated. The auditor's
assessment of materiality, related to specific account balances and classes of transactions, helps
the auditor decide such questions as what items to examine and whether to use sampling and
analytical procedures. This enables the auditor to select audit procedures that, in combination,
can be expected to reduce audit risk to an acceptably low level. There is an inverse relationship
between materiality and the level of audit risk, that is, the higher the materiality level, the lower
the audit risk and vice versa.
The auditor in addition to exercising professional judgment should consider any legislation or
regulation which may impact that assessment while assessing materiality in the case of the public
sector. In the public sector, materiality is also based on the ―context and nature‖ of an item and
includes, for example, sensitivity as well as value. Sensitivity covers a variety of matters such as
compliance with authorities, legislative concern or public interest.
6. W
rite short notes on the following (Any Two): (25=10)
a) Permanent Audit File.

b) Impairment of assets.
c) Cut off Procedure.
d) Performance Audit.
Answer No.6
(a) In a recurring audit, the file of working papers that are relevant to more than one audit
engagement or core documents are often kept separately in a file known as permanent
audit file. Permanent audit file is updated regularly with information of continuing
importance to succeeding audit. As per NSA 230-Audit Documentation a permanent
audit file normally includes:
i. Information concerning the legal and organizational structure of the client. In the
case of a company, this includes the memorandum and articles of association. In
the case of a statutory corporation, this includes the Act and Regulations under
which the corporation operates.
ii. Extracts or copies of important legal documents, agreements and minutes relevant
to the audit.

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iii. A record of the study and evaluation of the internal controls related to the
accounting system.
iv. Copies of audited financial statements of previous years.
v. Analysis of significant ratios and trends.
vi. Copies of management letters issued by the auditor if any.
vii. Record of communication with the retiring auditor, if any before acceptance of
the appointment as a auditor and
viii. Notes regarding significant accounting policies.
b) A
n asset is impaired when the carrying amount of the asset exceeds its recoverable amount.
The difference between the carrying amount of an asset and recoverable amount is
termed as impairment loss. Besides charging annual depreciation on assets by the reason
of normal wear and tear, afflux ion of time and obsolescence to reinstate the correct value
of the assets considering the future cash flows that the asset can generate, impairment
loss needs to be provided. Some indications that an asset might have been impaired are
mentioned as follows:
(a) S
ignificant changes with an adverse effect on the entity have taken place during the
period, or will take place in the near future, in the technological, market,
economic or legal environment in which the entity operates or in the market to
which an asset is dedicated.
(b) T
he carrying amount of the net assets of the entity is more than its market
capitalization.
(c) E
vidence is available of obsolescence or physical damage of an asset.
(d)
Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected.
If any of the above indications is present, an entity is required to make a formal estimate
of recoverable amount and impairment loss need to be provided.
c) It refers to the procedure adopted by the management to ensure that transactions of one
period are separated from those at the commencement of the next accounting period. The
cut off r is very significant so as to ensure that revenue and expenditures of one year do
not get recorded in the following year since it will distort the true and fair view of the
accounts. These procedures are applied to ensure that:
(a) The proper procedure has been followed for adjusting the inventory to take into
account movements to and from inventory, which have taken place between the
stock taking date and balance sheet date where stock has been taken on a date
other than the balance sheet date.
(b) Goods sold have been excluded from the inventories and credit has been taken for
the sales in the case of credit sales.
(c) Goods purchased have been in the inventories and that the liabilities have been
provided for in case of credit purchase.
d) Performance audit refers to the evaluation of the economy, efficiency and effectiveness
of selected activities of the client. In this situation, economy is concerned with
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minimizing the cost of resources acquired or used, having regard to appropriate quality.
Efficiency refers to the relationship between the output of goods/ services or other results
and the resources used to produce them. Here, the auditor examines how far maximum
output is attained for a given input.
Similarly, effectiveness refers to the relationship between the intended results and the
actual results of the activity. Thus, the auditor examines how successfully the outputs in
the form of goods/ services or other results achieve policy objectives, operational goals
and other expected effects.
In practice, therefore, while carrying out the performance audit, the auditor looks at these
different aspects together particularly when considering the closely linked aspects of
economy and efficiency.
7. J
ustify with reason, whether following statement is true or false. (25=10)
a) G
enerally, purpose of misstatement in a financial statement of a medium sized sole
proprietorship business in Nepal is to benefit proprietor himself.
b) Audit plan is substitute for audit program.
Answer No.7
a) True: Typical medium sized business in Nepal, tend to mispresents their financial
statements to benefit their proprietor by way of lowering or reducing tax liability by
understanding income or over standing the expenses. Typical medium sized business-
man tends to lower payment of tax or do not want to pay any tax. Some time such
business man may mistake his financial statements to justify his loan application to a
bank and financial institutions. In other situations such financial statements may be
misstated to mislead the various stakeholders or users of such financial statements so that
benefits is derived by proprietor of such business.
b) The statement is false: Audit plan is initial step of audit. Whereas, audit program is
setting up of procedures that are needed to implement the audit plan. Overall audit plan is
for expected scope ans conduct of audit. On the other hand audit program shows nature,
time and extend of audit procedures.
In planning an audit, auditor should consider facteo such as complexity of the audit, the
environment in which the clint operates, his previous experience with the clint and
knowledge of clint‘s business. The audit program serves as a set of instructions to the
assistants involved in the audit and a means to control the proper execution of the work.
Therefore, audit program supplement the audit plat for execution and it does not stand out
as substitute.

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Suggested Answers of Corporate and Other Laws

Marks
All questions are compulsory.
Part: "A"
1.
a) ABC telecom Ltd., a debt free listed company, having a fully paid up equity share capital of
Rs. 15.00 billion, Cash and Bank Balance of Rs. 20.00 billion and Free reserves of Rs. 20.00
billion wants to improve the profitability of the company through reduction of capital.
Advice the company regarding the power of the company to purchase it own securities in the
light of Section 77A. (1) and (2) of the Companies Act, 1956? 8
b) XYZ Entertainment Company Limited, which commenced business in the June 2007 wants
to bid for the recently introduced Kochi Team of the Indian Premier League and for the
purpose has approached Ms. Deepika Padukone, an actress to be the Brand Ambassador for
the team for a three year period. Ms. Padukone has proposed a two tier remuneration for the
assignment namely Rs. 200.00 million in cash per year for a three year period plus a sweat
equity of at least ten percent of XYZ Entertainment Company Limited. Suggest whether the
above arrangement would be legally acceptable in the light of the provisions of Section 79A
as inserted by the Companies (Amendment) Act, 1999 to the Companies Act, 1956. 7
c) A draws a bill on B for Rs.500 payable to the order of A. B accepts the bill, but
subsequently dishonors it by non-payment. A sues B on the bill. B proves that it was
accepted for values as to Rs.400 and as an accommodation to the plaintiff as to the residue.
Do you think A can recover the whole amount from B? Discuss with the relevant provision
of Negotiable Instrument Act, 1881. 5
d) Company registered with limited liability should insert the word ‗limited‘ in its name suffix.
Can it be revoked in any condition? 5
Answer No.1
a) The provision section 77 A (1) & (2) of the Companies Act, 1956 in respect of power of
company to purchase its own securities are as follows:
1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-
section (2) of this section and section 77B, a company may purchase its own shares or other
specified securities (hereinafter referred to as "buy-back") out of-
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities:
Provided that no buy-back of any kind of shares or other specified securities shall be made
out of the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities.
(2) No company shall purchase its own shares or other specified securities under sub-section
(1) unless-
(a) the buy-back is authorized by its articles;
(b) a special resolution has been passed in general meeting of the company authorizing
the buy-back:
Provided that nothing in this clause shall apply in and case where-
(A) the buy-back is or less than ten percent of the total paid-up equity capital and free
reserves of the company; and
(B) such buy-back has been authorized by the Board by means of a resolution passed at its
meeting:
Provided further that no offer of buy-back shall be made within a period of three hundred
and sixty-five days reckoned from the date of the preceding offer of buy-back, if any;
Explanation: For the purpose of this clause, the expression "offer of buy-back" means the
offer of such buy-back made in pursuance of the resolution of the Board referred in the first
proviso;
(c) the buy-back is or less than twenty five percent of the total paid-up capital and
free reserves of the company:
Provided that the buy-back of equity shares in any financial year shall not exceed
twenty-five percent of its total paid-up equity capital in that financial year;
(d) the ratio of the debt owed by the company is not more than twice the capital and
free reserves after such buy-back:
Provided that the Central Government may prescribe a higher ratio of the debt than
the specified under this clause for a class or classes of companies;
Explanation- For the purposes of this clause, the expression "debt" includes all
amounts of unsecured and secured debts;
(e) all the shares or other specified securities for buy-back are fully paid –up;
(f) the buy-back of the shares or other specified securities listed on any recognized
stock exchange is in accordance with the regulations made by the Securities and
Exchange Board of India in this behalf;
(g) the buy-back in respect of shares or other specified securities other than those
specified in clause (f) is in accordance with the guidelines as may be prescribed.
Considering the above mentioned provisions of the Companies Act the buy-back can be
arranged up to 25 percent of the paid up capital and free reserves of the company complying
the conditions as specified in the above mentioned section.
b) Section 79A Issue of sweat equity shares
(1) Notwithstanding anything contained in section 79, a company may issue sweat equity shares of
a class of shares already issued if the following conditions are fulfilled, namely:-
(a) the issue of sweat equity shares is authorized by a special resolution passed by the company in
the general meeting;
(b) the resolution specifies the number of shares, current market price, consideration, if any, and the
class or classes of directors or employees to whom such equity shares are to be issued;
(c) not less than one year has, at the date of the issue, elapsed since the date on which the company
was entitled to commence business;

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(d) the sweat equity shares of a company whose equity shares are listed on a recognized stock
exchange are issued in accordance with the regulations made by the Securities and Exchange Board
of India in this behalf:
Provided that in the case of a company whose equity shares are not listed on any recognized stock
exchange, the sweat equity shares are issued in accordance with the guidelines as may be
prescribed.
Explanation I.- For the purpose of this sub-section, the expression "a company" means the company
incorporated, formed and registered under this Act and includes its subsidiary company
incorporated in a country outside India.
Explanation II.- For the purpose of this Act, the expression "sweat equity shares" means equity
shares issued by the company to employees or directors at a discount or for consideration other than
cash for providing know-how or making available rights in the nature of intellectual property rights
or value additions, by whatever name called.
(2) All the limitations, restrictions and provisions relating to equity shares shall be applicable to
such sweat equity shares under sub-section (1)
Ms. Padukone is neither employee nor director of the company. The company cannot provide Sweat
Equity Shares to Ms. Padukone, however for other cases, it can be negotiated with her.
c) Negotiable Instrument Act, 1881
Section 44.Partial absence or failure of money consideration-
When the consideration for which a person signed a promissory note, bill of exchange or cheque
consisted of money, and was originally absent in part or has subsequently failed in part, the sum
which the holder standing in immediate relation with such signer is entitled to receive from him is
proportionally reduced.
Explanation—The drawer of bill of exchange stands in immediate relation with the acceptor. The
maker of the promissory note, bill of exchange or cheque stands in immediate relation with the
payee, and the endorser with his endorsee. Other signers may by agreement stand in immediate
relation with a holder.
In the light of above provision A can only recover Rs.400.
d) According to provision of Sec. 25 of the Company Act, 1956 the suffix of ‗limited‘ may be
revoked by the central government in following conditions:
i. It should be a limited company.
ii. The objectives should be any of promoting commerce, art, science, religious, charity,
and any other useful objects.
iii. It intends to apply its profit if any, or other Income in promoting its objects, and to
prohibit the payment of any dividend to its members
Then Central Government grant a licence to revoke the suffix ‗limited‘

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Part: "B"
2.
a) Mr. Kushal an Accountant at Zeta Ltd. is being alleged for insider trading. Mr. Kushal
contends that the matter which is being alleged has been already published outside Nepal.
Enumerate the provisions on insider trading and information or notice deemed to have been
made public as per the Securities Act 2063. 6
b) Standard Chartered Bank Nepal has lent Rs. 8.00 crores against mortgaged collateral
securities worth Rs. 12.00 crores to M/s XYZ Ltd. Liquidation proceedings has commenced
against the company pursuant to the Companies Act, 2063. The Bank intends to auction the
property and recover its dues directly. However the other creditors of the company are
demanding that the collateral security should also be brought under the liquidation process
but the Bank does not want to go through the process. Advice the Bank regarding its rights
vis-à-vis the provisions of the Companies Act, 2063. 5
c) What demands or claims cannot be submitted before General Manager under Labor Act,
2048?
Answer No.2
a) Section 91 and Section 93 of Securities Act, 2063 stipulate the provisions on Insider trading and
information or notice deemed to have been made Public respectively.
Section 91
(1) If any person deals in securities or causes any other person to deal in securities on the basis of
any insider information or notice that are unpublished or communicates any information or notice
known to such a person in the course of the discharge of his or her duties in manner likely to affect
the price of securities such a person shall be deemed to have been committed an insider trading in
securities.
Explanation: For the purposes of this sub-section, "insider information or notice" means any such
specific kind of information or notice not published by a body corporate issuing any securities as
may be capable of affecting the price of such securities if such information or notice is disclosed.
(2) Notwithstanding anything contained in sub-section (1), any transactions already carried on shall
not be deemed to be affected at all merely by the reason that an insider trading has been committed.
Section 93
On any of the following conditions, any information or notice shall be deemed to have been made
public:
(i) If any matter has been published with intent to inform the investors and their business advisers in
accordance with the bye-laws of a stock exchange,
(ii) If there is a provision made under the law that the general public can see an information or a
notice contained in any records,
(iii) If there is a provision that any person desiring to deal in securities is escorted to the business
room of a stock exchange so that such a person can know such an information or a notice,
(iv) If there is a provision that any person desiring to obtain or see such information or notice or get
a copy thereof can obtain and see the same,
(v) If it has been communicated to any specific class, out of the general public,

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(vi) If there is a provision that information can be obtained only upon payment of fees or if such
information or a notice has been published outside the State of Nepal.
Under sub clause (Vi) above, if such information or a notice has been published outside the State of
Nepal it shall be deemed to have been made public. So, the contention of Mr Kushal as the matter
which is being alleged has been already published outside Nepal is valid and he shall not be
penalized on the alleged matter.
b) Section 135 secures the rights of secured creditors as follows:

Section 135 - Right of secured creditors not to be affected:
The commencement of liquidation proceedings of a company pursuant to this Chapter shall not be
deemed to prejudice in any manner the right of the secured creditors who have lent moneys against
the security of any property of the company to enforce or otherwise deal with such secured property
under the prevailing law.
Considering the above mentioned provisions of the Companies Act 2063 the Bank can move ahead
with the auction process and recover the dues in compliance with other prevailing laws.
c) According to section 75 of the labour Act 2048, the following demand or claim shall not be
allowed to submit –
(i) Which is contrary to the Constitution of Nepal;
(ii) Which would affect other's interest due to being based on un-testified or baseless allegation;
(iii) Matter which is prejudicial to the personal conduct of any worker or employee;
(iv) Matters unrelated to the Enterprise; and
(v) Where a period of two years has not elapsed since the date of last collective agreement.
4
3.
a) State the provisions of Audit Committee as provided in the Companies Act, 2063. 5
b) Enumerate the circumstances on which a chairperson and a member may be removed from
office under the Securities Act, 2063. 5
Answer No.3
a) The following provisions are made in Companies Act, 2063 with regard to Audit committee
(Section 164)
(1) A listed capital with paid up capital of thirty million rupees or more or a company which is
fully or partly owned by the Government of Nepal shall form an audit committee under the
chairmanship of a director who is not involved in the day-to-day operations of the company and
consisting of at least three members.
(2) Any person who is a close relative of the chief executive of a company shall not be eligible to
be a member of the audit committee formed pursuant to sub-section (1).
(3) At least one member of the audit committee shall be an experienced person having obtained
professional certificate on accounting or a person having gained experience in accounting and
financial field after having obtained at least bachelor‘s degree in accounts, commerce, management,
finance or economics.

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(4) The report of board of directors required to be prepared by a company shall set out a short
description of the activities of the audit committee, working policies adopted by the board of
directors to implement the suggestions, if any, given by the audit committee, the allowances or
facilities, if any, received by the members of the audit committee and the names of the members of
audit committee.
(5) The audit committee may, for inquiring into any matter, notify the managing director of the
company, chief executive of the company or other director, auditor, internal auditor and accounts
chief involved in the day-to-day operations of the company to attend its meeting; and it shall be
their duty to be present in the meeting of that committee if they are so notified.
(6) The board of directors shall implement the suggestions given by the audit committee in respect
of the accounts and financial management of the company; and where any suggestion cannot be
implemented, the board of directors shall also mention the reasons for the same in its report.
(7) Any company shall arrange for such means and resources as may be adequate for the fulfillment
of responsibilities of the audit committee; and the audit committee may fix its internal rules of
procedures on its own.
(8) The chairman of the audit committee shall be present in the annual general meeting of the
company.
(9) The audit committee shall meet as per necessity.
b) Section 12 of the Securities Act, 2063 lays down the following circumstance on which a chair
person and a member may be removed from office.
i. Where there occurs a circumstance for removal of chairperson or the member referred to in section
(ii) the Government of Nepal shall remove the chairperson & member as the case may be,
Provided that prior to making such removal, the Government of Nepal shall not deprive the
concerned person of a reasonable opportunity to defend himself/herself
ii. The chairperson and the member, as the case may be, shall be removed from his or her office in
any of the following circumstance:
a) If he or she is disqualified to be a chairperson and a member, as the case may be, pursuant to
section 11
b) If he or she commits any act contrary to interest of investors in securities or any act that may
cause loss or damage to the development of capital market
c) If he or she suffer from lack of competence to implement, or cause to be implemented such
functions required to be performed by the Board to attain the objectives of the Board pursuant to
this Act or the rules framed under this Act,
d) If he or she has been held disqualified to carry on any occupation or business by the reason
of misconduct and his or her certificate has been revoked or he or she has thus been restricted to
carry on a business.
e) If he or she remains absent from three consecutive meetings of the Board without giving a
notice.
4.
a) What are the provisions regarding quorum required for a general meeting as per the
Companies Act, 2063? 5
b) Koirala Ltd. has not sent any reports to Registrar of Companies for a long period, including
change of registered office address. Registrar of Companies issued public notice in newspaper
intending to cancellation of name from Company Roster, but the company could not answer it
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because the notice published date was called for a "Nepal Bandha" and newspaper were not reached
to the company. After three years of cancellation, director of company got knowledge that their
company was cancelled before three years. What shall be the impacts of transaction done on those
periods? Can it be revive again? Explain with reference to Companies Act, 2063. 5
Answer No 4
a) Quorum for a general meeting as per Companies Act 2063 (Section 73)
(1) A quorum for the general meeting of a private company shall be as specified in the articles of
association of such company.
(2) Unless the articles of association of a public company provides for a larger number for the
quorum, no proceedings of the meeting of the public company shall be conducted unless at least
three shareholders of the total shareholders, representing more than fifty per cent of the total
number of allotted shares of that company, are present either in person or by proxy.
(3) Where a meeting cannot be held because of quorum as referred to in sub-section (2), and the
meeting is called for the second time by giving a notice of at least seven days, nothing shall prevent
the holding of such a meeting if at least three shareholders, representing twenty five per cent of the
total number of allotted shares of the company, are present either in person or by proxy.
(4) Notwithstanding anything contained elsewhere in this Section, in the case of a company
incorporated under the proviso to sub-section (2) of Section 3 or a company incorporated under sub-
section(1) of Section 173, the presence of three shareholders as mentioned in sub-section (2) or (3)
shall not be mandatory.
b)
Companies Act 2063: Power of Office to cancel registration (Section 136):
(1) The Office may cancel the registration of a company in the following circumstance:
(a) If the promoter of the company makes an application, showing a reason for the failure to
commence the business of the company, and accompanied by the prescribed fees, for the
cancellation of the registration of the company:
(b) If the company is in default in submitting to the Office the returns as referred to in Section 80 or
fails pay the fine as referred to in Section 81 for three consecutive financial years; or
(c) If based on the proofs received in the course of administration of the company, the Office has a
reasonable ground to believe that the company is not carrying on its business or the company is not
in operation.
(2) If it is required to cancel the registration of any company pursuant to Sub-section (1), the Office
shall, prior to the cancellation of registration, give a notice, accompanied by the reason for such
registration, to the concerned company.
(3) while sending a notice to a company pursuant to Sub-section (2), the notice shall be sent to the
company at its registered office or to any officer of such company if the address of the registered
office of such company is not registered with the Office or if the office of the company is not
located at the address registered and to the address of every Promoter as mentioned in the
memorandum of association of the company if even the address of such officer is not available to
the Office or is not known.

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(4) A notice given pursuant to Sub-section (2) shall also be published in a national daily newspaper,
as per necessity.
(5) If the company fails to make an application, specifying the reasons that the registration of the
company should not be canceled, within two months from the date of receipt by the company of a
notice pursuant to Sub-section (2) or, despite the making of such application, the reasons specified
are not found reasonable, the registration of such company may be canceled.
(6) If the registration of a company is canceled pursuant to Subsection (5), information thereof shall
be given to the concerned directors and shall also be published in a national daily newspaper.
According to Sec. 137 of Company Act, 2063, deregistration of company by Registrar of

Companies can be challenged within 5 years from date of decision of deregistration in one case
only. In case Registrar of Company issued a notice, having reply period of 2 months intending to
deregister and the company, if not replied or replied but Registrar is unsatisfied with registration,
Registrar itself can deregister the company. In the given case of Koirala Ltd., ROC has sent the
notice, but registered office has shifted from there where it was registered. The public notices were
issued but director were unknown of it and the ROC decided to deregistration. The transactions
were done without noticed of deregistration for three years.
In those cases, any member of or creditor of company may apply for court to revive the company
within 5 years. The company can be revived upon the decision of court in this favour. If court
decided so, all the transactions were deemed as done by a normal company and valid for law. The
legal status of company shall be deemed as perpetual within the period of deregistration as normal
company.
5.
a) Mr. Dilli Ram Bajgain has been elected as a director in Lena Bank Ltd., state the provisions
on disclosure by directors as provided in the Banks and Financial Institutions Act, 2063. 5
b) What are the matters as prescribed by Audit Act, 2048 those can be audited in view of
propriety by the Auditor General? 5
c) Enumerate the classification of Industries as per the Industrial Enterprises Act, 2049. 5
Answer No.5
a) Mr. Dilli Ram has to make a disclosure under Section 22 of the BAFIA within seven days
after assuming the office of director as follows:
Section 22 - Disclosure by directors:

(1) Every director shall, no later than seven days after assuming the office of director, disclose in
writing to the bank or financial institution the following matters:
(a) If he or she or any of his or her family members has entered into or going to enter into any kind
of contract with the concerned bank or financial institution, details thereof;
(b) If he or she has any kind of interest in the appointment of the chief executive, managing
director, secretary, auditor and general manager, details thereof;
(c) Particulars of such shares or debentures in the concerned bank or financial institution or in its
holding or subsidiary company as subscribed by him or her or by his or her family;
(d) If he or she is a director of any company, details thereof;
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(e) If any member of his or her family is working as an officer of the bank or financial institution,
details thereof;
(f) Such other details prescribed by the Rastra Bank as required to be disclosed by the director to the
Board.
(2) In making disclosure pursuant to sub-section (1), a copy of the written agreement, if any,
concluded between the director or his or her family member shall be submitted, and failing such
agreement, substantial and necessary matters concerning the transaction or financial interest or
involvement shall be set out.
(3) The information provided by a director pursuant to sub-section (1) shall be forwarded to the
Rastra Bank within seven days; and upon receipt of such information, the Rastra Bank shall record
the same in a separate register maintained for this purpose.
b) According to Sec. 5 of Audit Act, 2048, following are the matters to be audited in view of
Propriety by the Auditor General:
(a) On the propriety of any expenditure and its authorization, if in the opinion of the Auditor General
such expenditure is a reckless one or is an abuse of national property, whether movable or
immovable, despite that the expenditure confirms to the authorization, and
(b) On the propriety of all authorizations issued in respect of any grant of national property whether
movable or immovable, or underwriting of any revenue, or any contract, license or permits relating
to mining, forest, water resources, etc. and any other act of abandoning movable or immovable
assets of the nation.
c) Under Industrial Enterprises Act, 2049 Industries are classified as follows:
Sec 3:
(i) Manufacturing Industries: Industries which produce goods by utilizing or processing raw
materials, semi-processed materials, by products or waste products or any other goods.
(ii) Energy Based Industries: Industries generating energy from water resources, wind, solar, coal,
natural oil, gas, bio-gas or any other sources.
(iii) Agro and Forest Based Industries: Business mainly based on agriculture or forest products such
as integrated sericulture and silk production, horticulture and fruit processing, animal husbandry,
dairy industry, poultry farming, fishery, tea gardening and processing, coffee farming and
processing, horticulture and herb processing, vegetable seed farming, mushroom, vegetable farming
or vegetable processing, tissue culture, green house, beekeeping, honey production, rubber farming,
floriculture and production and forestry related business such as lease-hold forests, agro-forestry
etc.
(iv) Mineral Industries: Mineral excavation or processing thereof.
(v) Tourism Industries: Tourist lodging, motel, hotel, restaurant, resort, travel agency, skiing,
gliding, water rafting, cable car complex, pony trekking, trekking, hot air ballooning, parasailing,
golf course, polo, horse riding etc.
(vi) Service Industries: Workshop, printing press, consultancy service, ginning and bailing business,
cinematography, construction business, public transportation business, photography, hospital,
nursing home, educational and training institution, laboratory, air services, cold storage etc.
(vii) Construction Industries: Road, bridge, ropeway, railway, trolley bus, tunnel, tunnel, flying
bridge and industrial, commercial and residential complex construction and operation.

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Sec 4. Cottage Industries: The traditional industries utilizing specific skill or local raw materials
and resources, and labour intensive and related with national tradition, art and culture as mentioned
in Annex 1 shall be named as cottage industries.
Sec 5. Small Industries: Industries with a fixed asset of up to an amount of thirty million rupees
shall be named as small industries.
Sec 6. Medium Industries: Industries with a fixed asset between thirty million rupees and one
hundred million rupees shall be named as medium industries.
Sec 7. Large Industries: Industries with a fixed asset of more than one hundred million rupees shall
be named as large industries.
6.
a) State the provisions on punishment as provided in Section 41 of the Nepal Chartered
Accountants Act, 2053. 5
b) When can Nepal Rastra Bank refuse to issue license to carry on financial transaction?
Discuss with the provision of BAFIA, 2063. 5
Answer No.6
a) Provisions regarding punishment as provided in the Nepal Chartered Act 2053 are as follows:
(1) A person, who carries out auditing without obtaining a Certificate of Practice,
pursuant to this Act, shall be liable of punishment with a penalty of maximum two
thousand rupees or with an imprisonment for a maximum period of three months or with
both.
(2) A person, who in contravention of Section 6 uses the name or the seal of the
Institute or exercises any type of authority bestowed to the Institute, shall be punished
with a penalty of one thousand rupees maximum on first conviction, and on any
subsequent conviction thereafter, a maximum penalty of five thousand rupees or
imprisonment for a maximum period of six months or both.
Provided that this sub-section shall not apply to the organizations or university
established under their own legislation or the units within the Institute.

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(3) A person, who has not obtained a Certificate of Practice and is proved to have
signed any document in capacity of the member holding Certificate of Practice, shall be
liable to punishment with a penalty up to two thousand rupees or imprisonment for a
period of up to three months or both.
(4) A member, who commits any act contrary to the provisions of this Act or
Regulations framed under this Act other than the provisions of this section, shall be
suspended for a maximum period of five years and shall be liable of punishment with a
maximum penalty of two thousand rupees or imprisonment for a maximum period of
three months or both.
(5) A complainant who lodges a complaint, without any reasonable cause to make
complaint and it is proved that the complaint was made with an intention to harass a
member, shall be liable to punishment with fine up to one thousand rupees.
(6) The complain cases, except those to be heard under Section 14, lodged in the
Council against any member, pursuant to Section 35, shall be instituted in the concerned
Appellate Court.
b)
Power to refuse to issue license to carry on financial transactions under Section 32 of
BAFIA
(1) Notwithstanding anything contained in Section 30, the Rastra Bank may, in any of the
following circumstances, refuse to issue a license to any bank or financial institution to carry on
the financial transactions:
(a) If, in view of the existing condition and potentiality of the banking or financial sector, it does
not appear appropriate to grant a license to additional bank or financial institution to carry on
the financial transactions;
(b) If, in the light of the situation mentioned in Clause (a), for the protection of the interests of
depositors, it does not appear just and appropriate to issue a license to carry on the financial
transactions;
(c) If it does not appear that the details or requirements referred to in Sections 29 and 30 have
been completed.
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(2) If there exists a situation where the license to carry on the financial transactions cannot be
issued to any bank or financial institution pursuant to Sub-section (1), the Rastra Bank shall give
a notice thereof, accompanied by the reason for the same, to the concerned bank or financial
institution within one hundred twenty days from the date of application. If the Rastra Bank has
requested for any additional details within that period, such notice shall be given within ninety
days from the date of receipt of such details.
7. Write short notes on the following: (3×5=15)

a) Substituted Agent
b) Bailment
c) Liability of guarantor in case of Negotiable Instrument Act, 2034
Answer No.7
a) Substituted agents are not sub agents. They are agents of the principal. Where the principal
appoints an agent and if the agent identifies another person to carry out the acts ordered by
principal, than the second person is not to be treated as a sub agent but only as an agent of the
original principal.
For example 'A" directs 'B' his solicitor to sell his property by auction and 'B' appoints 'C' an
auctioneer. In this regard, 'C' is an agent of 'A' and not a sub agent.
While selecting a "substituted agent" the agent is bound to exercise same amount of diligence as a
man of ordinary prudence and if he does so he will not be responsible for acts or negligence of the
substituted agent.
For example 'X' consigns goods to 'Y' a merchant for sale. 'Y' in due course employs and auctioneer
in goods to sell goods of 'X' and also allows him to receive the proceeds of sale. The auctioneer
becomes insolvent afterwards without handing over the proceeds. Here 'Y' will not be responsible to
'X' as he has discharged his duties as a man of ordinary prudence and diligence.
b) Bailment etymologically means 'handing over' or 'change of possession'. Bailment is an act

whereby goods are delivered by one person to another for some purpose, on a contract, that the
goods shall, when the purpose is accomplished be returned or otherwise disposed of according to
the directions of the person delivering them. The person who delivers the goods is the bailor and the
person to whom the goods are delivered is the bailee.
For example where 'X' delivers his car for repair to 'Y', 'X' is the bailor and 'Y' is the bailee.
The essential characteristics of bailment are:
i) Bailment is based upon a contract. Sometimes it could be implied by law as it
happens in the case of finder of lost goods.
ii) Bailment is only for moveable goods and never for immovable goods or money.
iii) In bailment possession of goods changes. Possession change can happen by physical
deliver or by any action which has the effect of placing the goods in the possession
of bailee.
iv) In bailment bailor continues to be the owner of goods as there is no change in
ownership.
v) Bailee is obliged to return the goods physically to the balor. The bailee cannot
deliver some other gods even of higher value.
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c) In case the payer fails to pay the sum as indicated in the negotiable instruments like bill of
exchange or promissory notes, and then the reimbursement of payable can be done directly from
affairs of the guarantor. According to Sec. 23 of Negotiable Instrument Act, 2034, the guarantor
cannot claim that the payment firstly required to pay from the estate of main creditor.

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Suggested Answers of Cost and Management Accounting
Marks
All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. Electronic Equipments Limited manufactures CD players. The management accountant of

the company has prepared the following provisional operating statement for a period:
Rs. Rs.
Sales (30,000 CD players) 375,000
Less: Other Costs (32,000 CD players)
Direct materials 128,000
Direct labour 96,000
Production overhead (64% variable and 36% fixed) 50,000
S & D overhead (75% variable with sales and 25% fixed) 20,000 294,000
Net profit for the year (prior to stock adjustment) 81,000
The following additional information was also available:

a. Fixed production overhead contained Rs. 2,500 of depreciation relating to plant &
equipment which is surplus to current requirements.
b. Over the period, 32,000 units were manufactured.
c. There was no opening stock for current period. In the preparation of the provisional
operating statement, no account has been taken of the closing stock at the end of current
period. For the purposes of internal management accounting, stocks of finished goods are
valued at variable manufacturing cost only.
The management is currently beginning to prepare the budget for the next period. There are
several factors to be considered:
(i) To make better use of the surplus plant & equipment, the company‘s technical manager
has suggested commencing manufacture of disk drives and modems for personal
computers. Disk drives will absorb Rs. 1,500 of the depreciation charge with modems
allocated the remaining Rs. 1,000.
(ii) The manufacturing and sales managers have estimated that the surplus plant &
equipment will be sufficient to produce 5,000 disk drives and 10,000 modems; and
these quantities can be sold in the current market. However, the sales manager has
insisted that, by the end of the period, the company should be carrying minimum buffer
stocks of 10% of annual production for both disk drives and modems.
(iii) Stock levels of CD players should be unchanged, but production levels are expected to
remain at the same as in the current period. The sales manager believes that the
demand for CD players will continue to grow.
(iv) The purchasing manager has forecasted that the direct materials costs of CD players
will increase by Re.1 per unit. All other variable costs of CD players will remain at the
unit cost levels incurred in the current period.
(v) For the new products, the following estimates have been made and assembled at the
projected manufacturing volume levels:
Disk Drives (Rs.) Modems (Rs.)
Total variable costs:
Direct materials 15,000 10,000
Direct labour 10,000 25,000
Factory overhead 2,500 15,000
Additional fixed overhead, excluding depreciation:
Factory overhead 8,000 13,500
Selling & distribution overhead 2,250 6,750
(vi) The production manager has projected a 60% increase in the fixed element of selling &
distribution overheads (for CD players only) in the budget period. Variable selling and
distribution overheads will be incurred at 2% of sales value for both disk drives and
modems.
(vii) The market will sustain the following prices for the products for the next period:
CD Players: Rs. 15.00 /unit, Disk Drives: Rs. 12.00 /unit, and
Modems Rs. 10.00 /unit
(viii) The management accountant has estimated that the investment in fixed assets and
working capital for next period in the three product lines will be as follows:
CD Players: Rs. 325,000; Disk Drives: Rs. 80,000; and Modems: Rs. 60,000.
You are required to: (7+10+3=20)
a) Compute the break-even number of CD players for the current period.
b) Prepare a budgeted Profit and Loss Account for the next period incorporating the impact
of the introduction of the new products and identifying product profitability.
c) Compute the return on investment for each product for the next period.
Solution to Question No.1
a. Computation of the break-even number of CD players for the current period

Particulars Rs.
Sales 375,000
Less: Variable Costs (Notes)
Direct materials (100% variable) (a) 120,000
Direct labour (100% variable) (a) 90,000
Production overhead (64% variable) (b) 30,000
S & D overhead (75% variable) (c) 15,000 255,000
Contribution margin 120,000
Less: Fixed Costs
Production overhead (36% fixed) (b) 18,000
S & D overhead (25% fixed) (c) 5,000 23,000
Net profit for the year 97,000
Breakeven point
Contribution margin per unit = Rs.120,000/ 30,000 units = Rs.4
BEP= Fixed Costs/ CM per unit= Rs.23,000/ Rs.4 = 5,750 units
Notes:

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(a) Direct materials & Direct labour are both given as costs of production of 32,000
units. Therefore, they require both to be scaled downwards to 30,000 units sales
for a variable costing format profit & loss account.
(b) Total factory overhead of Rs.50,000 splits into 64% variable (Rs.32,000) and
36% fixed (Rs.18,000). The variable element relates to the manufacture of 32,000
units. Again, it has to be scaled down for 30,000 units.
(c) Total selling & distribution overhead of Rs.20,000 splits into 75% variable
(Rs.15,000) and 25% fixed (Rs.5,000). The variable element is already in line
with sales and hence, there is no requirement to adjust.
b. Preparation of budgeted Profit and Loss Account for the next period
incorporating the impact of the introduction of the new products and
identifying product profitability
CD Disk
Players Drives Modems Notes
Sales Volumes (unit) 32,000 4,500 9,000
Selling Price per unit (Rs.) 15 12 10
Sales Revenue (Rs.) 480,000 54,000 90,000 (a)
Variable costs (Rs.):
Direct materials 160,000 13,500 9,000
(b & c)
Direct labour 96,000 9,000 22,500 (b
& c)
Variable production overhead 32,000 2,250 13,500 (b
& c)
Variable selling & distribution 16,000 1,080 1,800 (d)
304,000 25,830 46,800
Fixed costs (Rs.):

Factory overhead 18,000 8,000 13,500
Depreciation adjustment -2,500 1,500 1,000 (e)
Selling & distribution (+60%) 8,000 2,250 6,750
Total costs (Rs.) 327,500 37,580 68,050
Net Profit (Rs.) 152,500 16,420 21,950
Notes:
(a) The quantity of CD players produced is identical to 2000 – namely 32 000
units. Production and stocks have not changed, and therefore, the number of
units sold is identical to the units produced – namely 32 000 units.
(b) The variable costs of direct materials, direct labour and factory overhead are
increased in the budget in proportion to increase in volume of CD players
(32 000/30 000).
(c) The variable costs for disk drives and modems have been scaled down to the
actual sales levels from the production cost data provided.
(d) Variable selling & distribution costs are computed as per the additional notes.
(e) Depreciation adjustment represents a re-allocation of the depreciation on the
surplus equipment to the new product lines.
c. Computation of the Return on Investment for each product for the next
period.

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CD Disk Modems
Players Drives
ROI= Net Profit/ Investment= 152,500 16,420 21,950
325,000 80,000 60,000
46.9% 20.5% 36.6%
2.
a) A factory has three production departments P1, P2 and P3 and two service departments S1
and S2. Budgeted overheads for the next fiscal year have been allocated/apportioned by
the cost department among the five departments. The secondary distribution of service
department overheads is pending and the following details are given to you:
Department Overheads apportioned/allocated Estimated level of activity
P1 Rs. 48,000 5,000 machine hours
Apportionment of service departments costs
S1 Rs. 16,000 P1 (20%), P2 (40%) P3 (20%), S2 (20%)
S2 Rs. 24,000 P1 (10%), P2 (60%), P3 (20%), S1 (10%)
You are required to calculate the overhead rate per machine hour of each production
department after completing the distribution of service department costs. 8
b) What is maximum and minimum stock level? Explain how these are calculated. 6
c) Two workmen BED and DEB, produce the same product using the same material. Their
normal wage rate is also the same. BED is paid bonus according to the Rowan system,
while DEB is paid bonus according to the Halsey System. The time allowed to make the
product is 100 hours. BED takes 60 hours while DEB takes 80 hours to complete the
product. The factory overhead rate is Rs.10 per man-hour actually worked. The factory
cost for the product for BED is Rs. 7,280 and for DEB it is Rs. 7,600.
You are required to find the normal rate of wages of BED and DEB. 6
Solution to Question No. 2 (a)
It is given in the question that the secondary distribution of service department overhead is
pending. The same is thus attempted by the use of simultaneous equation method.
Let the total overheads of department S1 = x and
Let total overheads of department S2 = y
Based on the given information and applying simultaneous equation, we get:
x = 16,000 + 0.1 y (i)
y = 24,000 + 0.2 x (ii)
Multiplying equation (ii) by 5, we get:
5 y = 120,000 + x, Or x = 5y – 120,000
By deducting equation (i) from equation (iii), we get:

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y = 27,755
x = 18,775
With these figures, the secondary distribution of service departments' overhead would be as
given in the following table.
Production Departments P1 (Rs.) P2 (Rs.) P3 (Rs.) Total (Rs.)
Direct Allocation: 48,000 112,000 52,000 212,000

Department S1 (80% of Rs. 18,775) 3,755 7,510 3,755 15,020
Department S2 (90% of Rs. 27,755) 2,776 16,653 5,551 24,980
Total: 54,531 136,163 61,306 252,000
Budgeted capacity (machine hours) 5,000 12,000 6,000
Overhead rate per machine hour Rs. 10.91 Rs. 11.35 Rs. 10.22
Solution to Question No. 2 (b)

Maximum level of stock indicates the maximum quantity of an item of material which should be
held in stock at any time. The stock in hand is regulated in such a way that normally, it does not
exceed this level.
While fixing the maximum level, following factors needs to be considered:
i) Maximum requirement of the material for production purpose,
ii) Rate of consumption and time lag between the date of order and receipt of material (lead
time),
iii) Nature and properties of the material, e.g. this level is kept low for materials which are
liable to quick deterioration.
iv) Cost of storage and insurance,
v) Economy in prices: Maximum levels for items which are available at discount in bulk
purchase are generally high.
vi) Financial considerations: Available of funds and price of the items.
Minimum level of stock indicates the lowest quantity of an item of material which must be
maintained in hand at all times so that there is no stoppage of production due to the
unavailability of material.
While fixing the minimum level, following factors are considered:
i) Nature of the item: No minimum level is necessary for special materials purchased against
the specific orders of a customer.
ii) Rate of consumption of the material.
iii) Lead time.
Calculation of Maximum and Minimum Stock Level:

Maximum and minimum level is calculated in the following manner:
Maximum Level = Reorder level + Reordering Quantity – Minimum consumption during the
period required to obtain delivery
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Minimum Level = Reorder level – (Normal usage per period x Average Delivery Time)
Solution to Question No. 2 (c)

Let x be the cost of material and y be the normal rate of wage per hour.
Factory cost of workman BED:
Material cost Rs. x
Wages 60 y
Bonus under Rowan System: Time saved x Hours Worked x Rate per Hour
Time allowed
Overhead (60 x 10) = Rs. 600
Factory cost = x + 60 y + 24 y + Rs. 600 = Rs. 7,280, Or x + 84 y = Rs. 6,680 … (i)
Factory cost of workman DEB:

Material Rs. x
Wages 80 y
Bonus under Halsey Premium Plan = (Hours Saved x 50)/ 100 x Rate per Hour
= 20 x ½ y = 10 y
Overhead (80 x 10) = Rs. 800
Factory cost = x + 80y + 10 y + Rs. 800 = 7,600, Or x + 90 y = Rs. 6,800 … … (ii)
Deducting equations (i) from (ii), 6 y = 120, Or, y = 120/6 = 20
The normal rate of wages is therefore Rs. 20 per Hour.
3.
a) A farm incurred Rs. 65,000 of production cost in a joint process to grow a crop with two
joint products, A and B. The following are data related to the operations:
Joint Tons of Sales Price per Per Ton Separate Per Ton Separate Per Ton
Products Production Ton at Split-off costs if sold at costs if processed Final Sales
(Rs.) Split-off (Rs.) further (Rs.) Price (Rs.)
A 45 950 50 236 1,450
B 20 1200 110 200 1,600
You are required to allocate the joint process cost to A and B using: (2+3+3=8)
i) Sales value at split-off.
ii) Net realizable value at split-off.
iii) Approximated net realizable after split-off.
b) In a factory, works overheads are absorbed at 60% of labour cost and office overheads
are 20 % of works cost.
You are required to prepare the following if total expenditure consists of material Rs.
200,000; wages Rs. 150,000; factory expenses Rs. 100,000 and office expenses is Rs.
85,000. 10% of the output is in stock at the end and sales are Rs. 520,000. (3.5+3.5+1=8)
i) Cost sheet,

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ii) Trading and Profit and Loss Account, and
iii) Reconciliation Statement
c) The manufacturing cost of a work order is Rs. 1,000. 8% of the production against that
order is spoiled and the rejection is estimated to have a realizable value of Rs. 20 only.
The normal rate of spoilage is 2%.
You are required to record this in the costing journal. 4
Solution to Question No 3 (a)

(i) Allocation of the joint process cost using the sales value at split-off
Joint Tons of Sales Sales Ratio of Joint Allocated

Products Production Price per Value Allocation Cost Joint
Ton at (Rs.) (Rs.) Cost
Split-off (Rs.)
(Rs.)
A 45 950 42,750 64% 65,000 41,600
B 20 1200 24,000 36% 65,000 23,400
Total 65 66,750 65,000
Working note 1:
Ratio of Allocation = Sales Value of Each Product/ Total Sales Value
A= 42750/66750 =0.64 =64%
B= 24000/66750 =0.36 =36%
(ii) Allocation of the joint process cost using the net realizable value at split-off
Joint Tons of NRP per Net Ratio of Joint Allocated

Products Production Ton at Realizable Allocation Cost Joint
Split-off Value (Rs.) Cost
(Rs.) (Rs.) (Rs.)
A 45 900 40,500 65% 65,000 42,250
B 20 1,090 21,800 35% 65,000 22,750
Total 65 62,300 65,000
Working note 2:
NRP at split-off = SP at split-off – sales cost at split off
A= Rs.950-Rs.50=Rs.900
B= Rs.1,200-Rs.110= Rs.1,090
Ratio of Allocation = NRV of Each Product/ Total NRV

A= 40500/62300 =0.65 =65%
B= 21800/62300 =0.35 =35%

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(iii) Allocation of the joint process cost using the approximated net realizable value
after split-off
Joint Tons of Approx. Approx. Ratio of Joint Allocated

Products Production NRP per Net Allocation Cost Joint
Ton after Realizable (Rs.) Cost
Split-off Value (Rs.)
(Rs.) (Rs.)
A 45 1,164 52,380 67% 65,000 43,550
B 20 1,290 25,800 33% 65,000 21,450
Total 65 78,180 65,000
Working note 3:
NRP at split-off = Final SP – sales cost at split off – further processing cost
A= Rs.1,450-Rs.50-Rs.236=Rs.1,164
B= Rs.1,600-Rs.110-Rs.200= Rs.1,290
Ratio of Allocation = Approx. NRV of Each Product/ Total NRV

A= 52380/78180 =0.67 =67%
B= 25800/78180 =0.33 =33%
Solution to Question No 3 (b)

i) Cost Sheet
Particulars Amount
Rs.
Material 2,00,000
Wages 1,50,000
Prime Cost 3,50,000
Factory Overhead (60% of Rs. 1,50,000) 90,000
Works Cost 4,40,000
Office Overheads (20% of works cost) 88,000
Cost of Production 5,28,000
Cost of goods sold Rs.

4,75,200
Profit 44,800
Sales 5,20,000
Profit as per accounts= Rs. 44,800
ii) Trading and Profit and Loss Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Material 2,00,000 By Sales 5,20,000
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To Wages 1,50,000 By Closing Stock
To Gross profit c/d 2,22,800 52,800

5,72,800 5,72,800
To Factory Expenses 1,00,000 By Gross Profit b/d 2,22,800
To Office Expenses 85,000
To Net Profit c/d 37,800
2,22,800 2,22,800
iii) Reconciliation Statement

Rs.
Profit as per cost accounts 44,800
Add: Overcharged in Cost accounts: Office overheads 3,000
47,800
Less: Undercharged in Cost accounts: Factory Overhead 10,000
Profit as per financial records 37,800
Solution to Question No 3 (c)

Actual loss is Rs.60, i.e. Rs. 80 less Rs. 20 recoverable as materials. Of this net loss, Rs. 15 is
normal and Rs. 45 is the abnormal loss to be debited to the Costing profit and Loss account. The
accounting entries necessary for recording the above facts would be:
Rs. Rs.
Materials Control Account Dr. 20
Overhead Control account Dr. 15
Costing Profit and Loss Account Dr. 45
To Work-in Progress Control Account 80
In the case of defectives, being inherent in the manufacturing process, the rectification cost may
be charged to the specific jobs in which they have arisen. In case defectives cannot be identified
with jobs, the cost of rectification may be treated as factory overheads. Abnormal defectives
should be written off to the costing Profit and Loss Account.
4.
a) Sharma Engineering Company undertakes long-term contracts which involve the
fabrications of pre-stressed concrete blocks and the erection of the same on consumer‘s
site.
The following information is supplied regarding the contract which is incomplete on 32

Ashadh 2067:
Rs.
Cost incurred:
Fabrication costs to date:
Direct materials 280,000
Direct labour 90,000
Overheads 75,000
445,000
Erection cost to date 15,000
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Total: 460,000
Contract price 819,000
Cash received on account 600,000
Technical estimate of work completed to date:
Fabrication 80%
Direct labour and overheads 75%
Erection 25%
You are required to prepare a statement for submission to the management indicating
therein the: (4.5+4.5=9)
i) Estimated profit on the completion of the contract, and
ii) Estimated profit to-date on the contract.
b) In a certain factory, Type A and Type B machines have been designed to produce the
same product but Type A is less automatic than type B and requires somewhat more
labour to operate. Pertinent costs are as follows.
Type A Type B
Set up cost Rs. 400 Rs. 600
Variable cost per unit 4.90 4.40
You are required to suggest which type of machine should be used to process various
sized orders and verify your answer by calculating total costs for the chosen levels of
production. 6
c) Briefly describe the methods of constructing flexible budget. 5
Solution to Question No. 4 (a)
Statement showing the Estimated Profit to date and on Completion of Contract

Cost to Date
% % Further Total
Cost Elements Completion (Amount in Completion Cost Rs. Cost Rs.
Rs.)
Fabrication Cost:
Direct materials 80 280,000 20 70,000 350,000
Direct labour 75 90,000 25 30,000 120,000
Overheads 75 75,000 25 25,000 100,000
Sub-total: Fabrication Cost 445,000 125,000 570,000
Erection cost 25 15,000 75 45,000 60,000
Total Rs. 460,000 170,000 630,000
Estimated profit 138,000 51,000 189,000
(See Working Note 1) 598,000 221,000 819,000
Working Notes:
1. Estimated profit to date has been calculated as follows:
Profit on the whole contract x Costs incurred so far = 189,000 x 460,000 = Rs. 138,000
Total contract costs 630,000

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The amount of profit to date can also alternatively be calculated on the following basis:
Estimated profit on the whole contract x Cash received/Contract price
= 189,000 x 600,000 = Rs. 138,462.
819,000
It has been presumed that further costs will be incurred on the same pattern as they have been
incurred until now. There are no chances of increase in costs due to inflation or any other reason.
Solution to Question No. 4 (b)

Difference in set up (fixed) cost = Rs. 600 – Rs. 400 = Rs. 200
Difference in variable cost per unit = Rs. 4.90 – Rs. 4.40 = Re 0.50
Break Even Point = Difference in set-up cost = Rs. 200/Re 0.50 = 400 units
Difference in variable cost
Type A Type B
Set-up (fixed) costs Rs. 400 Rs. 600
Variable costs Rs. 1,960 Rs. 1,760
Rs. 2,360 Rs. 2,360
Hence, machine A should be used for less than 400 units as its set-up cost is lower. Similarly,
Machine B should be used for order of more than 400 units as its variable cost per unit is lower,
which will offset the higher set-up costs.
These points are made clear by verification of total costs at production levels of 399 units and
401 units, as follows:
_________________________________________________________________________________________________________________________________________________
Particulars 399 units 401 units

Type A Type B Type A Type B
Set-up costs Rs. 400.00 Rs. 600.00 Rs. 400.00 Rs. 600.00
Variable costs 1,955.10 1,755.60 1,964.90 1,764.40
2,355.10 2,355.60 2,364.90 2,364.40
Answer to Question No. 4 (c)

Methods of Constructing Flexible Budget
Following methods are generally followed in preparing a flexible budget.
(i) Segregating the items of cost into fixed, variable and semi-variable components and
presenting the figures for different levels in a tabular form
At the start of preparing flexible budget, the unit in terms of which different levels of activities
are to be expressed is first selected. It is necessary to set the budget cost allowance for the
budget centres.
(ii) Express the budget cost allowance under the heading fixed, variable and semi-variable.
Fixed cost remains the same for all levels of operations. The fixed cost per unit will change
depending upon the actual level of activity. Variable cost per unit remains the same. Semi-

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variable cost is segregated into fixed and variable component and is then shown under the
respective categories.
(iii) One budget for normal production
One budget is prepared for normal level of activity by making estimates of cost at that level.
Each type of fixed and variable cost is then indicated as a ratio or a rate per unit of output. The
rate per unit of output may be expressed in terms of units, labour hours or machine hours.
(iv) Flexible Budget for Other Level of Activities
Flexible budget for other level of activities is then determined by applying the rate per unit of
output to different output levels for which the flexible budgets are desired.
Method of graphic presentation: Flexible budget is also prepared by graphic method. Under this
method, an estimate is made of the fixed and variable expenses at various levels of activity. The
figures are then plotted on a graph to get the curves for these levels. The budget cost allowance
for a particular levels of activities can be found through this method.
OR
4.
a) A company is considering three alternative proposals for conveyance facilities for its
sales executive who has to do considerable travelling, approximately 20,000 kilometers
every year. The proposals are as follows:
Proposal I: Purchase and maintain its own fleet of cars. The average cost of a car is Rs.
1,500,000.
Proposal II: Allow the executive to use his own car and reimburse expenses at the rate
of Rs. 16.00 per kilometer and also bear insurance costs.
Proposal III: Hire car from an agency at Rs. 200,000 per year per car. The company will
have to bear costs of petrol, taxes and tyres.
The following further particulars are also available:
Petrol: Rs. 6 per km. Repairs and maintenance: Rs. 2.00 per km.
Tyre: Rs. 1.20 per km. Insurance: Rs. 12,000 per car per annum
Taxes: Rs. 8,000 per car Life of the car: 5 years with annual mileage of 20,000
kms. per annum
Resale value of the car: Rs. 300,000 at the end of the 5th year.
You are required to work out the relative costs of the three proposals and rank them. 8
b) Moon Paints Ltd. has an annual demand from a single customer for 50,000 liters of a
paint product. The total demand can be made up of a range of colour will be produced in
a continuous production run after which a set-up of the machinery will be required to
accommodate the colour change. The total output of each colour will be stored and then
delivered to the customer as a single load immediately before production of the next
colour commences.
The set-up costs are Rs. 100 per set-up. This service is supplied by an outside company
as required.
The holding costs are incurred on rented storage space which costs Rs. 50 per sq. meter
per annum. Each square meter can hold 250 liters suitably stacked.
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You are required to: (5.5+1.5=7)
i) Calculate the total cost per year where batches may range from 4,000 to 10,000 liters
in multiples of 2,000 liters and choose the production batch size which will minimize
total cost.
ii) Use the economic batch size formula to calculate the batch size which will minimize
total cost.
c) Briefly discuss the main purpose of inter-firm comparison. 5
Solution to Question No. 4 (a) OR

Alternative Proposals _
I. Use of Company's Car II. Use of Own Car III. Use of Hired Car
Rs. Per annum Rs. per km. Rs. per km. Rs. Per km.
Reimbursement (A) 16.00 10.00*
Fixed Cost (B)
Insurance 12,000 0.60** 
Taxes 8,000 
Depreciation 240,000 
Total: 260,000
Fixed cost per km. (Rs. 260,000/20,000 km.)13.00 0.40
Running and Maintenance Cost
Per car per km.
Petrol 6.00  6.00
Repairs and Maintenance 2.00  
Tyre 1.20  1.20
Total cost per km. (A + B + C) 22.20 16.60 17.60
Cost for 20,000 kms. 444,000 332,000 352,000
Ranking of Alternative Proposals: III I II
Decision: Alternative II is the best alternative among the available three alternatives.
Solution to Question No. 4 (b) OR

Production batch size which minimizes the total cost
___________________________________________________________________________________________________________________________________________________
Production Set-up costs Holding costs Total Costs

Batch size (lit.) per annum (Rs.) per annum (Rs.) per annum (Rs.)
___________________________________________________________________________________________________________________________________________________
4,000 1,250 400 1,650

6,000 833 600 1,433
8,000 625 800 1,425
10,000 500 1,000 1,500
____________________________________________________________________________________________________________________________________________________
Working Notes:

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For a production batch size of 6,000 liters:
1. Number of set-up per year = 50,000/6,000 = 8.33
Hence annual set-up cost per year = 8.33 x Rs. 100 = Rs. 833
2. Average quantity in stock = 6,000/2 = 3,000 liters
This assumes a constant rate of production. At the start of a batch, stock is zero. At the end, the
stock equals the batch size. Hence, on an average, 50% of the batch is on stock at any point of
time.
Holding cost = 3,000 liters x Rs. 50/250 = Rs. 600.
The above table clearly reveals that the total cost is minimum at Rs. 1,425 when the production
batch size is 8,000 liters.
(i) Batch Size which minimizes total cost as per Economic Batch Size Formula
Economic production batch size = = = 7,071.
Solution to Question No. 4 (c) OR

The main purpose of inter-firm comparison is to motivate the management to improve the
efficiency by showing the present level of achievements and possible weakness areas. Such a
comparison can be instrumental in overcoming following types of problems/weaknesses facing a
business entity.
i) Profit adequacy:
Profit is the principal factor to motivate any commercial venture or organization. The relation of
profit to capital employed is the general norm employed to assess the efficiency or return of
commercial firms. If the return on capital employed is less than that of other efficient firms
within the industry, it is an indicator to show that some factors are not operating efficiently
within the firm in question. These can be isolated by means of the various ratios computed for
the firm and other competitors. Suitable corrective and follow up actions is then initiated to
improve the profitability situation of the concerned firm.
ii) Efficiency in selling:
The operating profit to total sales and to capital employed are vital ratios to indicate the profit-
earning capacity of a firm. The first ratio indicates the total margin earned by the sales expressed
as a percentage. On the other hand, the sales to capital employed indicates how much is sold per
rupee invested. A comparison of these ratios with efficient firms and subsequent analysis of the
reasons could throw out areas where the firm needs improvement for improving the efficiency.
iii) Production efficiency:
In order that the firm earns reasonable return, it is necessary that the production departments
produce required volume of output at reasonable costs. For this purpose, the factory cost of sales
is broken down into direct material, direct wages and production overhead costs. A comparison
of these figures with other firms of the industry may point out the sources of inefficiencies. For
instances, production efficiency of a firm as compared to efficient firms within an industry may
have been affected by lower labour untilization or lower labour utilization.
5. Distinguish between: (42.5=10)

a) Cost control and cost reduction

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b) Fixed and flexible budgeting
c) Cost centre and cost unit
d) Absorption costing and marginal costing
Answer to Question No. 5
a) Cost control and cost reduction:

Cost control is one of the primary objectives for the establishment of a cost accounting system
in an organization. It is defined as the regulation of the costs of operating an undertaking by
executive action. Cost control is exercised through a number of techniques such as standard
costing, budgetary control, inventory control, quality control and performance evaluation,
analysis and reporting.
Cost reduction may be termed as maximizing profits by reducing cost through economies and
savings in cost of manufacture, administration selling and distribution.
It is defined as the real and permanent reduction in the units costs of goods manufactures or
services provided without impairing their suitability for the use intended.
According to above definition, reduction in costs should be real and permanent. Thus, reductions
due to windfalls, changes in government policy such as reduction in taxes or duties do not fall
under the purview of cost reduction.
b) Fixed and flexible budgeting:

A fixed budget is one which is designed for a specific planned level of output and is not adjusted
to the level of activity attained at the time of comparison between the budgeted and actual costs.
Thus, fixed budgets are established only for a small period of time when the actual output is not
anticipated to differ much from the budgeted output. Although not adjusted to the actual volume
attained, a fixed budget is liable to revision in case actual operations differ significantly from
those planned.
A fixed budget is ineffective as a tool for cost control. It is because the difference can not be
explained while comparing the actual cost with a fixed budget.
Flexible budget is a budget which is designed to change based on the fluctuations in output or
turnover. Thus, the flexible budget provides budgeted costs for any level of activity actually
attained.
Flexible budgets may also be used for adjusting budgets to suit current conditions which may
arise due to seasonal variations or changes in the length of the working period.
Flexible budget is useful for the purpose of control since it takes into consideration the changes
in the actual circumstances than previously anticipated.
c) Cost centre and cost unit

Cost centre is defined as a location, person or item or group of equipment for which cost may be
ascertained and used for the purpose of cost control.
In a manufacturing entity, the cost centres generally follow the pattern or layout of the
departments or sections of the factory. As a result, the cost centres are either production cost
centres or service cost centres.

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The number of cost centres and the size of each vary from one organization to another. These
depend on the expenditure involved and the requirements of the management for the purpose of
cost control. Keeping the number of cost centres high will be expensive while having very few
cost centres may defeat the very purpose of cost control.
Cost unit is a device for the purpose of breaking up or separting costs into small sub-divisions
attributable to products or services. It is the unit of quantity of product, service, or time in
relation to which costs may be determined or expressed.
Thus, cost may be ascertained per tonne of steel, per tonne-kilometre of a transport service or
cost per machine hour.
d) Absorption costing (and marginal costing*)

Absorption costing does not recognize the difference between fixed costs and variable costs.
The statements prepared under this costing method explain in depth the past profits, past losses
and past costs but do not help in predicting the future results.
Marginal costing is the costing system in which variable costs are charged to the cost units and
fixed cost of the period are written off in full against the aggregate contribution.
The difference between absorption costing and marginal costing is summarized as follows:
Absorption costing Marginal costing

1. Both fixed cost and variable costs are 1. Only variable cost is considered for these
considered for product costing and inventory purposes.
valuation.
2. Fixed cost is charged to the production. 2. Fixed overhead is treated as period cost and
profitability of products is judged in terms of
P/V ratio.
3. Net profit of each product is derived after 3. Data is presented to highlight the total
deducting fixed overheads. contribution and contribution of individual
products.
4. Due to the impact of fixed overheads, unit 4. Unit cost of production is not affected by the
cost of production is affected due to the difference in the level of opening and closing
difference in the level of opening and closing stock.;
stock.
* This was missing in the question set.
6. Answer any FOUR of the following questions: (42.5=10)

a) Mention the main advantage of cost plus contracts.
b) Briefly explain your understanding of the term 'rolling budget'.
c) Explain briefly the conditions when supplementary rates are used.
d) Explain the reasons why some companies normally prepare the sales budget first among
all functional budgets while the other companies start with the labour or other budget
first in the budgetary planning process.
e) What are the advantages of cost audit to the management? Explain in brief.

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Answer to Question No. 6
a) Main advantages of cost plus contracts are:
 Contractor is protected from risk of fluctuation in market price of material, labour and
services.
 Contractee can insure a fair price of the market.
 It is useful specially when the work to be done is not definitely fixed at the time of
making the estimate.
 Contractee can ensure himself about ‗the cost of the contract‘ as he is empowered to
examine the books and documents of the contractor to ascertain the veracity of the
cost of the contract.
b) Rolling budget
It is the budget continuously updated by adding a further period, say a month, quarter or year
and deducting the earliest period. This type of budget is beneficial where future costs and
activities can not be forecast on a reliable manner.
In the preparation of rolling budget, the budgeting is a continuous process. As the month, quarter
or year passes, forecast for that period is dropped and a forecast for a further month, quarter or
year is added in such a way that there is always a forecast of a fixed period say, a year or 2-year,
or 3-year is available.
The preparation of a rolling budget is always a costly affair. However, the use of such a budget
always reduces the operational variances.
c) The conditions when supplementary rates are used

When the amount of under absorbed and over absorbed overhead is significant or large, because
of differences due to wrong estimation, then the cost of product needs to be adjusted by using
supplementary rates (under and over absorption/actual overhead) to avoid misleading
impression.
d) Reasons for preparing the sales budget or labour or other budget first among all
functional budgets
The budgetary planning process usually starts with sales budget because a company is usually
restricted from making and selling more of its products. Under this assumption, sales demand is
the principal budget factor, in which it restricts the performance or level of activity of a
company.
The other limiting factors could be machine capacity, distribution and selling resources, the
availability of key raw materials or labour. However, if the principal budget factor is the
availability of labour, the first functional budget to prepare is the labour budget, in which a
company needs to consider how the limited labour hours are assigned to the optimal mix of
products to maximise its profit.
e) Advantages of Cost Audit to the Management

i) Cost audit assists in the detection of errors and frauds.
ii) Cost audited data is more reliable for the preparation of accurate cost reports and returns
for presentation to the parties interested. The inventory valuation certified by the cost
auditor is considered correct and reliable.

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iii) Cost audit contributes towards the improved cost accounting methods and thus ensures
better internal control.
iv) The disclosures made in the cost audit reports create cost consciousness in the
management.
v) The cost auditor points out avoidable wasteful routine and procedures and recommends for
the introduction of an efficient cost routine. Thus it will help to reduce expenditure in cost
accounts and at the same time, ensures promptness in its preparation.
vi) Cost audit aids the management to initiate action for economic and efficient usage of
labour, material and other resources. This will lead to higher productivity and better
utilization of resources.
vii) Audited cost data is useful for the purpose of inter-firm comparison.
viii) Cost audit may be useful in identifying the symptoms of sickness in an enterprise. Suitable
remedial measures could be initiated in such situations.

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Suggested Answers of Financial Management

Marks
Attempt all questions. Working notes should form part of the answer.
1. The following are the financial statements of PQR Ltd. for 2066/67.
Balance Sheet of PQR Ltd. as on Ashadh end 2066/67
Liabilities Amount (Rs.) Assets Amount (Rs.)

Equity Share Capital 210,000 Cash 105,000
Reserves 420,000 Debtors 525,000
Preference Share Capital 420,000 Stock 735,000
Long-term Debts 1,260,000 Fixed Assets (Net) 1,575,000
Creditors 420,000 Goodwill 210,000
Bills Payable 210,000
Outstanding Expenses 60,000
Provision for Tax 150,000
3,150,000 3,150,000
Income Statement of PQR Ltd.

for the year ending Ashadh, 2067
Rs. Rs.
Sales
Cash 420,000
Credit 1,680,000 2,100,000
Less: Expenses
Cost of Goods Sold 1,260,000
Selling, Administration and General Expenses 210,000
Depreciation 147,000
Interest on Long-term Debt 63,000 1,680,000
Profit Before Taxes 420,000
Taxes 210,000
Profit After Taxes 210,000
Less: Preference Dividend 25,500
Net Profit for Ordinary Shareholders 184,500
Add: Reserve at 1 Shrawan 2066 273,000
Profit Available to Ordinary Shareholders 457,500
Less: Dividend Paid to Equity Shareholders 37,500
Reserve at Ashadh end 2067 420,000
The ratios for the previous two years relating to the company and the industry
ratios are given below:
2064/065 2065/066 Industry

Current Ratio 2.54 2.10 2.30
Acid-test Ratio 1.10 0.96 1.20
Debtors Turnover 6.00 4.80 7.00
Stock Turnover 3.80 3.05 3.85
Long-term Debt to Total Capital 37% 42% 34%
Gross Profit Margin 38% 41% 40%
Net Profit Margin 18% 16% 15%

Return on Equity 24% 29% 19%
Return on Total Assets 7% 6.8% 8%
Tangible Assets Turnover 0.80 0.70 1.00
Interest Coverage 10 9 10
Based on the above financial statement and ratios of the company and the industry provided
above, you are required to:
a) Calculate the same ratios as provided above for 2066/067,
b) Evaluate the company‘s financial position of the company on the basis of these ratios and
past ratios of the company and the industry,
c) Using relevant ratios, indicate what decision would be taken in the following situations:
i) PQR Ltd. wants to buy materials of Rs. 210,000 on a three months credit from a
domestic supplier company.
ii) PQR Ltd. wants to issue 15% debentures of Rs. 600,000 with a 10 year maturity
period. (11+5+4)
Answer No.1
Solution to Question No. 1
(a) The ratios for 2066/067 for PQR Ltd. are computed as follows:
__________________________________________________________________________
Computation Ratio for 2066/067
___________________________________________________________________________________________________________________________________________________________
1. Current Ratio 1,365,000/840,000 1.63

2. Acid-test Ratio 630,000/840,000 0.75
3. Debtors Turnover 1,680,000/525,000 3.20
4. Stock Turnover 1,260,000/735,000 1.71
5. Long-term Debt to Total Capital 1,260,000/.2,100,000 60%
6. Gross Profit Margin 840,000/2,100,000 40%
7. Net Profit Margin 210,000/2,100,000 10%
8. Return on Equity 184,800/420,000* 44%
9. Return on Total Assets (420,000 + 63,000) (1 – 0.5)/2,940,000* 8.2%
10. Tangible Assets Turnover 2,100,000/2,940,000* 0.71
11. Interest Coverage 483,000/63,000 7.67
___________________________________________________________________________________________________________________________________________________________
_
* Intangible assets of Rs. 210,000 excluded.
(b) Based on the ratios computed above, evaluation of the company’s position is
presented below:

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i. The liquidity position of the firm is falling which is evident from the Ratios 1 to 4
computed above.
ii. The gross profit margin is constant and matches with the industry average, but the net
profit margin ratio is declining. The two ratios together imply that the company‘s
selling and administrative expenses, depreciation and interest charges are on the rise.
iii. The decline in the net margin is partly due to rapid increase in debt (Ratio 5). This
increase also explains why the return on equity (Ratio 8) has been rising while the
return on assets is declining (Ratio 9).
iv. The decline in the net margin and the return on assets can also be attributed to the
decline in assets turnover (Ratio 10).
v. The impact of the increase in debt and overall decline in profitability are also shown by
reduction in the interest coverage (Ratio 11).
(c) Decision under Different Situations:

(i) The supplier would be more concerned with the liquidity of current assets of the
company. Therefore, Ratios 1 to 4 are more relevant to the supplier. In view of the
deteriorating liquidity position and the lengthy terms of payment, the credit may not be
granted to the company.
(ii) The company may find difficulty in selling the debentures. Already, it has a high
leverage ratio. If the debentures are issued its leverage ratio will increase to 68.89 per
cent (Rs. 1,860,000/Rs. 2,700,000) and the interest coverage ratio at the same level of
earning will decline to 4.06. In addition, the liquidity and the profitability of the
company are also declining. Therefore, it is not proper time to issue the debentures.
2.
a) Applying Capital Asset Pricing Model answer the following, the market portfolio has
following characteristics and other information are provided below:
Standard Deviation of security j 20%

Standard Deviation of market portfolio 15%
Expected Return of market portfolio 13%
Correlation between possible returns for security j and the market portfolio 0.80
Risk Free Rate 7%
Required: (3+3+3+1=10)
i) What is the expected return of security j?
ii) What would happen to the required return if the standard deviation of security j is
30?
iii) What would happen if the correlation coefficient is 0.70?
iv) What is the functional relationship between the required return for a security and
market risk?
b) R
ock Star Company Ltd. is attempting to establish the current assets policy. Fixed Assets are
Rs. 600,000 and the company plans to maintain a 50 percent debt to Total assets ratio. The
interest rate is 10 percent on all debt. As a financial consultant, the Rock Star Company
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seeks your advice on three alternatives of current asset policies: 40 %, 50%, 60% of
projected sales. The company expects to earn 15 percent before interest and taxes on sales of
Rs. 3 Million. Tax Rate applicable for the company is 40 percent. Provide your advice to the
company by showing Return on Equity under each alternative.
Answer No.2
a)
Given,
Standard Deviation of security j (σ j) = 20%
Standard Deviation of market Portfolio (σ m) = 15%
Expected Return of market portfolio E(R m) = 13%
Correlation between the security and market(r jm) = 0.80
Risk Free Rate(R f) = 7%
a.
Calculation of Beta
βj = r jm * σ j * σ m / σ m2
= 0.80* 20 * 15 / (15) 2
= 1.067
Required Rate of Return E(R j) = R f + [E(R m) - (R f)] βj
= 7% + [13% - 7%]1.067
= 13.40%
b.
Calculation of Beta
βj = r jm * σ j * σ m / σ m2
= 0.80* 30 * 15 / (15) 2
= 1.60
= 7% + [13% - 7%]1.6
= 16.6%
Hence the required return would increase.
c.
βj = r jm * σ j * σ m / σ m2
= 0.70* 20 * 15 / (15) 2
= 0.9333
= 7% + [13% - 7%] 0.9333
= 12.60%
Hence the required return would decrease.
d. The relationship is linear throughout and is called Security Market Line. The important point
to stress is that in market equilibrium, an expected return relationship with the market portfolio
is implied for all securities.
b)
Given
Fixed Assets = Rs. 600,000
Debt to assets ratio = 50%
Interest on debt = 10%
EBIT = 15% of sales
Sales = Rs. 3 Million
Tax Rate (T) = 40%
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Current Assets alternatives = 40 % of sales, 50% of sales, 60% of sales

Return on Equity (ROE) (%) = Required

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Rock Star Company's Balance Sheet under three alternatives

Alternatives 40% of sales 50% of sales 60% of sales
Current Assets 1,200,000 1,500,000 1,800,000
Fixed Assets 600,000 600,000 600,000
Total Assets 1,800,000 2,100,000 2,400,000
Debt 900,000 1,050,000 1,200,000
Equity 900,000 1,050,000 1,200,000
Total Liabilities and 1,800,000 2,100,000 2,400,000
Equity
Computation of Interest
Total Debt (Rs.) 900,000 1,050,000 1,200,000
Total Interest( 10% of 90,000 105,000 120,000
total debt)
Rock Star Company's Income Statement under three alternatives

Alternatives 40% of sales 50% of sales 60% of sales
Sales 3,000,000 3,000,000 3,000,000
EBIT( 15%) 450,000 450,000 450,000
Less: Interest( 10%) 90,000 105,000 120,000
EBT 360,000 345,000 330,000
Tax( 40%) 144,000 138,000 132,000
EAT 216,000 207,000 198,000
ROE(%) 24 19.7 16.5
3.
a) Y
ou are evaluating a proposal to invest in two companies whose past ten years of returns are as
shown below:
Percent Returns during the Year
Company
1 2 3 4 5 6 7 8 9 10
ABC 37 24 -7 6 18 32 -5 21 18 6
DEF 32 29 -12 1 15 30 0 18 27 10
In respect of the above companies, you are required to: (4+2.5+1.5+2=10)

i) Calculate the standard deviation of each company‘s returns,

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ii) Calculate the correlation coefficient of the two company‘s returns,

iii) Determine the standard deviation of your portfolio and the average yearly return,
assuming that you had placed 50% of your money in each company‘s share, and
iv) Determine the percentage investment in each which would have resulted in the lowest
risk.
b) Weather Coats Paint Ltd. has fixed operating costs of Rs. 36 million a year. Variable
operating costs are 180 per half liter of paint produced, and the average selling price is Rs.
200 per half liter.
You are required to answer the following questions with computations to support each one of
your answer. (2.5 + 1.5 + 1 = 5)
i) What is the annual operating break-even point in half liters (QBE) and in rupees of sales
(SBE)?
ii) What would be the effect on the operating break-even point (QBE) of a simultaneous decline
to Rs. 170 per half liter in the variable operating costs and an increment of 20 per cent in the
fixed cost?
iii) Compute the degree of operating leverage (DOL) at the current sales level of 2 million half
liters.
Answer No.3
a)
(i) Standard Deviation of Returns
Average Returns of the companies are:
R ABC = (37 + 24 – 7 + 6 + 18 + 32 – 5 + 21 + 18 + 6)/10 = 15%
R DEF = (32 + 29 – 12 + 1 + 15 + 30 + 0 + 18 + 27 + 10)/10 = 15%
Standard Deviation of ABC and DEF companies are computed as shown below.
σ ABC = √ (37 – 15)2 + (24 – 15) 2 + (– 7 – 15) 2 + (6 – 15) 2 + (18 – 15) 2 + (32 – 15) 2 + (–5–15)
2
+ (21 – 15) 2 + ( 18 – 15) 2 + (6 – 15) 2
√ 10
= √ (22)2 + (9) 2 + (– 22) 2 + ( – 9) 2 + (3) 2 + (17) 2 + ( – 20) 2 + (6) 2 + ( 3) 2 + ( – 9) 2
√ 10
= √ 484 + 81 + 484 + 81 + 9 + 289 + 400 + 36 + 9 + 81 = √ 1954 = 13.98
√10 √10
σ DEF = √ (32 – 15)2 + (29 – 15) 2 + (– 12 – 15) 2 + (1–15) 2 + (15–15) 2 + (30–15) 2 +(0 – 15) 2 +
(18 – 15) 2 + ( 27 – 15) 2 + (10 – 15) 2
√ 10
= √ (17)2 + (14) 2 + (– 27) 2 + ( – 14) 2 + (0) 2 + (15) 2 + (– 15) 2 + ( 3) 2 + ( 12) 2 + (– 5) 2
√ 10
= √ 289 + 196 + 729 + 196 + 0 + 225 + 225 + 9 + 144 + 25 = √ 2038 = 14.28
√10 √10
(ii) Correlation Coefficient of Returns
Cov. ABC DEF = √ (37 – 15) (32 – 15) + (24 – 15) (29 – 15) + (– 7 – 15) (– 12 – 15) + (6 – 15)
(1 – 15) + (18 – 15) (15 – 15) + (32 – 15) (30 – 15) + ( – 5 – 15)( 0 – 15) +
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(21 – 15) (18 – 15) + ( 18 – 15) ( 27 – 15) + (6 – 15) (10 – 15)

10
= (37 – 15) (32 – 15) + (24 – 15) (29 – 15) + (– 7 – 15) (– 12 – 15) + (6 – 15) (1 – 15) +
(18 – 15) (15 – 15) + (32 – 15) (30 – 15) + ( – 5 – 15)( 0 – 15) + (21 – 15) (18 – 15)
+ ( 18 – 15) ( 27 – 15) + (6 – 15) (10 – 15)
10
= (22) (17) + (9) (14) + (– 22) (– 27) + (– 9) (–14) + (3) (0) + (17) (15) + (– 20) ( –15) +
(6) (3) + ( 3) ( 12) + ( – 9) (– 5)
10
= 374 + 126 + 594 + 126 + 0 + 255 + 300 + 18 + 36 + 45 = 1874/10 = 187.4
10
Correlation Coefficient = Cov. ABC DEF = 187.4 = 0.93
σ ABC σ DEF 13.98 x 14.28
(iii) Standard Deviation of the Portfolio and Average Yearly Return,

Assuming 50% Investment in Both the Company’s Share
σ P = √ (WABC2 σ ABC2 + W DEF2 σ DEF2 + 2 WABC W DEF Correlation Coeff. σ ABC σ DEF)
= √ [(0.5)2 (13.98)2 + (0.5)2 (14.28)2 + 2 (0.5) (0.5) (13.98) (14.28) (0.93)]
= √ (48.86 + 50.97 + 92.82) = √ 192.65 = 13.88
E (RP) = 0.5 (15) + 0.5 (15) = 15%
(iv) Percentage Investment in each which

would have resulted in the Lowest Risk
Using the minimum variance equation and let W stand for ABC,
WABC = σ 22 – σ1 σ2 σ1,2 = (14.28) 2 – (13.98) (14.28) (0.93)
σ 12 + σ22 – σ1 σ2 σ1, 2 (13.98)
2 2
+ (14.28) – 2 (13.98) (14.28) (0.93)
= 203.981 – 185.65 = 18.33 = 0.6537, Or 65.37
195.44 + 203.91 – 371.31 28.04
WDEF = 1 – 0.6537 = 0.3463, Or 34.63%
b)
(i) Computation of QBE and SBE

QBE = Rs. 36 Million = Rs. 36 Million = 1,800,000 half liters
Rs. 200 – Rs. 180 Rs. 20
SBE = Rs. 36 Million = Rs. 36 Million = Rs. 36 Million = Rs. 360,000,000 in annual
sales
1 – (Rs. 180/Rs. 200) 1 – 0.90 0.10
(ii) Effect of a Decline to Rs. 160 per half liter in the variable operating costs and an
Increase of 25 per cent in the Fixed Cost on QBE
QBE = Rs. 36 Million x 1.25 = Rs. 45 Million = 1,500,000 half liters
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Rs. 200 – Rs. 170 Rs. 30
(iii) Degree of Operating Leverage (DOL) at the current sales level of 2 Million half
liters
DOL 2 million units = 2 Million = 2 Million = 10
(2 – 1.8) Million 0.2 Million
4.
a) Following data related to Universal Manufacturers Ltd. is made available to you.
Particulars Year 1 Year 2
Stocks:
Raw Materials Rs. 300,000 Rs. 405,000
Work-in-process 210,000 270,000
Finished Goods 315,000 360,000
Purchase of Raw Materials 1,440,000 2,025,000
Cost of Goods Sold 2,100,000 2,700,000
Sales 2,400,000 3,000,000
Debtors 480,000 750,000
Creditors 240,000 270,000
You are required to compute the duration of the operating cycle for each of the two years and
comment on the increase/decrease. (Assume 360 days per year for the purpose of computations.)
b) Fast Growing Ltd. has outstanding a Rs. 1000 face value bond with a 12% coupon rate
and 3 years remaining until final maturity. Interest payments are made semi-annually.
You are required to answer the following questions with appropriate supporting computations:(2.5+1.5=4)
i) What value should you place on this bond if your nominal annual required rate of return is 10 per
cent; and
ii) Assuming a bond similar to the one described above except that is a zero-coupon, pure discount
bond, what value should you place on this bond if your nominal annual required rate of return is
16 per cent. (Assume a semiannual compounding.)
c) An investor has made investment in the equity share of Pacific Chemicals Ltd. The
capitalization rate of the company is 20 per cent and the current dividend is 25 per share.
You are required to calculate the value of the company‘s equity share if the company is slowly
sinking with an annual decline rate of 10% in the dividend.
3
Answer no.4
a)
Determination of Operating Cycle:
Particulars Year 1 Year 2

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(i) Raw Materials Holding Period:

360 days x Stock of Raw Materials 360 x Rs. 300,000 = 75 360 x Rs. 405,000 = 72
Cost of Raw Materials Consumed* Rs. 1,440,000 Rs. 2,025,000
(* Assumed to be equivalent to purchases)
(ii) Less: Creditors Payment Period:
360 days x Creditors 360 x Rs. 240,000 = (60) 360 x Rs. 270,000 =
(48)
Purchases Rs. 1,440,000 Rs. 2,025,000
(iii) Work-in-process Holding Period:
360 days x Stock of WIP . 360 x Rs. 210,000 = 36 360 x Rs. 270,000 = 36
Cost of Goods Manufactured Rs. 2,100,000 Rs. 2,700,000
(iv) Finished Goods Holding Period:
360 days x Stock of Finished Goods 360 x Rs. 315,000 = 54 360 x Rs. 36,000 = 48
Cost of Goods Sold Rs. 2,100,000 Rs. 2,700,000
(v) Debtors Collection Period:
360 days x Debtors 360 x Rs. 480,000 = 72 360 x Rs. 750,000 = 90
Credit Sales** Rs. 2,400,000 Rs. 3,000,000
(** Assumed to be equal to total sales)
Duration of Operating Cycle [Sum of (i) to (v)] 177 198
Comment on the Increase/Decrease:

The duration of the operating cycle has increased by 21 days in Year 2 as compared to Year 1. It
will necessitate more working capital in Year 2. This increase has been primarily caused by an
increase in debtors‘ collection period and decrease in creditors‘ payment period as shown in the
following table.
____________________________________________________________________________________________________________________
Increase in Debtors‘ Collection Period: 18 days

Decrease in Creditors‘ Payment Period: 12
Less: Decrease in Raw Material Holding Period: (3)
Less: Decrease in Finished Goods Holding Period: (6)
Net Increase in Operating Cycle: 21
____________________________________________________________________________________________________________________
_
b)
(i) Value of Bond when kd = 10%
We have, value of a bond (V) = I/2 (PVIFA kd, 2n) + MV (PVIF kd, 2n), where
 kd is the investor‘s required rate of return
 n is the number of years and 2n is the number of semi-annual periods until maturity.
 I/2 is the periodic interest payment
 MV is the maturity value of the bond
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Substituting the given values in the above formula, we get:

V = (Rs. 120/ 2) (PVIFA 0.05, 6) + Rs. 1000 (PVIF 0.05, 6)
= Rs. 60 (5.076) + Rs. 1,000 (0.746)
= Rs. 304.56 + Rs. 746 = Rs. 1,050.56.
(ii) Value of Zero Coupon Bond when kd = 16%
The value of this type of bond is found out simply by discounting the maturity value of the bond
to the present. Thus,
V = Rs. 1,000 (PVIF 0.08, 6) = Rs. 1,000 (0.630) = Rs. 630
c)
The value of the company‘s equity share is given by the following formula:
Ve = D1/(k – g), where D1 is the dividend in the year 1, k is the capitalization rate and g is the
growth rate in dividend.
The value of equity share in the given condition is derived as follows:

Ve = Rs. 25 (1 – 0.10)/[(0.20 – (– 0.10)] = Rs. 25 x 0.90/0.30 = Rs. 22.50/0.30 = Rs. 75
5.
a) As an investment manager, you are provided with the following information:
Investment in Initial Dividend Market Price Beta

Price (Rs.) at the year (Risk
(Rs.) end (Rs.) Factor)
Equity Share of ABC Cement Ltd. 250 20 400 0.8
Equity Share of BCD Sugar Ltd. 350 20 600 0.7
Equity Share of DEF Distillery Ltd. 450 20 1,050 0.5
Government of Nepal Bonds 1,000 140 1,005 0.99
Risk-free return may be taken at 15%.
You are required to calculate: (3+4+2=9)
i) Expected rate of return on market portfolio,
ii) Expected rate of return of individual portfolio using Capital Asset Pricing Model (CAPM),
iii) Average return of portfolio.
b) The bonds of Express Ltd. are currently selling at Rs. 130. They have 9 percent coupon
rate of interest and Rs. 100 par value. The interest is paid annually and the bonds have 20 years
to maturity.
You are required to: (4+2=6)
i) Compute the Yield to Maturity (YTM) of the bond.
ii) Explain the difference between YTM and coupon rate of interest of the bond.
Answer No.5
a)
Investment
Investment Dividend (Rs.) Capital Gain(Rs.)
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Amount (Rs.)
Equity Share of ABC Cement Ltd. 250 20 150
Equity Share of BCD Sugar Ltd. 350 20 250
Equity Share of DEF Distillery Ltd. 450 20 600
Government of Nepal Bonds 1,000 140 5
Total: 2,050 200 1,005
(i) Expected Rate of Return on Market Portfolio :
= Dividend Earned + Capital Appreciation x 100

Initial Investment
= 200 + 1,005 x 100 = 1,205/2,050 x 100 = 58.78%
2,050
(ii) Expected rate of return of individual portfolio using Capital Asset Pricing Model
(CAPM)
Now, we can calculate the expected rate of return on individual portfolio by applying
CAPM.
E (Ri) = Rf + βi (Rm – Rf)
ABC Cement Ltd = 15 + 0.8 (58.78 – 15) = 15 + 0.8 x 43.78 = 50.02%
BCD Sugar Ltd = 15 + 0.7 (58.78 – 15) = 15 + 0.7 x 43.78 = 45.65%
DEF Distillery Ltd. = 15 + 0.5 (58.78 – 15) = 15 + 0.5 x 43.78 = 36.89%
Government of Nepal Bonds = 15 + 0.99 (58.78 – 15) = 15 + 0.99 x 43.78 = 58.34%
(iii) Average Return of the Portfolio:

= (50.02 + 45.65 + 36.89 + 58.34)/4 = 190.90/4 = 47.73%
Alternatively, the Average Return could also be found out on the basis of average of beta
factors of all securities in the portfolio in the following manner.
Average of Betas = (0.8 + 0.7 + 0.5 + 0.99)/4 = 2.99/4 = 0.7475
Average Return = 15 + 0.7475 (58.78 – 15) = 15 + 0.7475 x 43.78 = 15 + 32.73 = 47.73%
b)
i) We have,
B = I x (PVIFAkd n) + M x (PVIF kd n)
Where,
B = Value of the Bond
I = Annual Interest Paid
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n = Number of Years to Maturity

M = Par/Maturity Value
kd = Required Return on the Bond
Information given in the problem are:

B = Rs. 140
I (Annual Interest Paid) = Rs. 100 X 0.09 = Rs. 9
M (Par/Maturity Value) = Rs. 100
n = 20
kd = 9
Let us try a lower rate of 7 per cent in the formula:

B = I x (PVIFAkd, n) + M x (PVIF kd, n) = Rs. 9 x (PVIFA 7, 20 ) + Rs. 100 x (PVIF 7, 20)
= (Rs. 9 x 10.594) + Rs. 100 x 0.258) = Rs, 95.35 + Rs. 25.80 = Rs. 121.15.
Since Rs. 121.15 < Rs. 135, let us try still a lower rate of 6 per cent.
B = I x (PVIFAkd n) + M x (PVIF kd n) = Rs. 9 x (PVIFA 6, 20 ) + Rs. 100 x (PVIF 6, 20)
= (Rs. 9 x 11.470) + Rs. 100 x 0.312) = Rs, 103.23 + Rs. 31.20 = Rs. 134.43.
By interpolation, YTM = 6% + (134.43 – 130) % = 6% + (4.43/13.28) % = (6 + 0.33) %

(134.43– 121.15)
= 6.33% approximately.
11) The YTM (6.33%) is below the coupon interest rate (9%) of the bond since its
market value (Rs. 130) is above its par value (Rs. 100).
ii) Explanation Ragarding the difference between YTM and Coupon Rate
Yield to maturity (YTM) is the expected rate of return on a bond if bought at its current market
price and held to maturity. It is also called the bond‘s internal rate of return (IRR).
The underlying feature of bond price is that YTM < coupon rate when a bond sells at a premium
and vice versa. Similarly, YTM = coupon rate when a bond sells at par.
In the present case, the bond is selling at a premium of Rs. 30 as compared to the par value of
Rs. 100. This is the reason for the YTM (6.33%) being lower than the coupon interest rate of
9%.
6. Write short notes on: (4x2.5=10)

a) Direct and indirect costs associated with financial distress
b) Revolving credit agreement
c) Perpetuity Rate of Return
d) Leveraged Buyout
Answer No.6
a) Financial distress arises when a firm is not able to meet its obligations towards the payment of
interest and principal to the debt providers which can lead to bankruptcy. Direct costs of
financial distress include the costs of insolvency.
Following are the other direct costs of financial distress:

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i. Long period taken in the bankruptcy cases may cause deterioration of the conditions of the
company‘s assets.
ii. Liquidation of the assets may be delayed due to conflicting interests of creditors and other
stakeholders.
iii. When the assets are sold under distress prices, they may fetch a price that is significantly
lower than their current values.
iv. Legal and administrative costs related to the bankruptcy proceedings are generally quite
high.
b) A revolving credit agreement is a formal commitment by a bank to lend up to a certain

amount of money to a company over a specified period of time. This type of debt is for a short
term, usually up to 3 months. The company may, however, renew or borrow additional amount
up to the limit of agreement throughout the duration of the commitment. Although commitment
can be obtained for a shorter period as well, most revolving credit commitments are provided for
3 years.
The interest term of the revolving credit agreements are similar to but slightly higher (usually
between 0.25 to 0.50 per cent higher) than the rate at which a firm can borrow on a short term
basis under a line of credit. The banks generally charge commitment fee usually around 0.5 per
cent per annum on the difference between the amount borrowed and the maximum limit amount.
This type of borrowing arrangement is very useful at times when the firm is not certain about its
fund requirements. The borrowing company will have flexibility in the access to funds at the
time of uncertainty and can make more definite credit arrangement when the situation of
uncertainty is resolved.
c) Perpetuity Rate of Return - Perpetuity Rate of Return (PRR) is a conversion of Profitability

Index (PI) into a perpetuity percentage rate of return of a project. In other words, it is PI of a
project expressed in terms of the Perpetuity rate of return. So it is just the product of PI and
required rate of return from the project under consideration. It gives the financial manager the
instrument for the comparison among projects in percentage terms. This method can be used to
rank the projects of equal lives and risks. But it is not useful to rank the mutually exclusive
projects of unequal lives and different risks.
d) Leveraged Buyout – It is an ownership transfer consummated primarily with debt. Sometimes
it is also called as asset- based financing, the debt is secured by the assets of the enterprise
involved. While some leveraged buyouts involve the acquisition of an entire company, many
involve the purchase of a division of a company or some other subunit. Frequently the sale is to
the management of the division being sold, the company having decided that the division no
longer fits its strategic objectives. Another distinct feature is that leveraged buyouts are cash
purchases, as opposed to stock purchases. Finally the business unit involved invariably becomes
a privately held as opposed to a publicly held company.
7. Distinguish between: (4x2.5=10)

a) Systematic Risk and Unsystematic Risk
b) Investment Decision and Financing Decision
c) Bonus share and stock-split
d) Operating leverage and financial leverage
Answer No.7
a) Systematic Risk and Unsystematic Risk. – Systematic risk is the variability of a security's
return with that of the overall stock market. Risks of inflation, Interest Rate Risk are example of
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this kind of risk. This type of risk affects all firms in the economy and a particular firm cannot
avoid it. This is also known as Unavoidable Risk.
Unsystematic risk is the amount of a stock's variance unexplained by overall market movements.
It can be diversified away; hence it is known as Avoidable Risk. A strike may affect only one
company; a new competitor may begin to produce essentially the same product; a technological
breakthrough can make an existing product obsolete. However, by diversification this kind of
risk can be reduced and even eliminated if diversification is efficient.
b) Investment Decision and Financing Decision - Investment decision refers to the capital
expenditure decision. Companies lock up a large amount of funds for future benefits as a result
of the investment decision. It involves risk and it changes the business risk complexion of a
company. In addition, it brings about changes in the composition of assets and determines the
total amount of assets held by a company. This has two important aspects: the evaluation of the
profitability of the project and measurement of cut off rate of return.
After determining the total financial requirement, a financial manager should decide when,
where from and how to raise funds to meet the financial requirement to implement the
investment decision. Funds can be raised from different sources like Short term or Long term.
Funds may be raised by issuing different instruments of debt such as bonds, debenture,
commercial papers and issuing common or preference shares. Cost of the fund varies according
to the sources. A financial manager should make appropriate mix up of funds raised from
different sources in order to minimize the overall cost of capital and maximize the value of the
firm.
c) A bonus share is simply the payment of additional ordinary shares to the existing
shareholders. It is only a bookkeeping shift from the reserve and surplus account to the ordinary
share capital account of the company. A shareholder‘s proportional ownership in the firms
remains unchanged following the bonus issue.
Bonus shares are sometimes employed to conserve cash. Instead of increasing cash dividend as
earnings rise, a company may desire to retain a greater proportion of its earnings and declare the
issue of bonus share.
Stock split is an increase in the number of shares outstanding by a proportional reduction in the
face value of the share. The main purpose behind the stock split is to place the company‘s share
in a more popular trading range thus attracting more buyers.
In the issue of bonus share, face value of the share remains unaffected. On the other hand, a
share split causes the face value to come below the previous value.
Unless there is an increase in the earnings of the company, bonus issue will have the effect of
bring down the earnings per share. Accordingly, it will be difficult for the company to maintain
the earlier dividend per share. Similarly, it will be difficult for a company to maintain the same
cash dividend per share before and after a stock split.
d) Operating leverage occurs when there is fixed operating cost associated with the production
of goods and services. Fixed operating costs are incurred with an assumption that sales volume
will produce revenues more than sufficient to cover all fixed and variable operating costs.
Fixed operating costs do not vary with the change in the volume. On the other hand, variable
operating costs vary directly with the level of output. Therefore, if volume is to change, it is the
effect of fixed operating costs which causes the profit of a firm to change.

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The effect of presence of fixed operating costs (or operating leverage) is that a change in the
volume of sales will bring about more than proportional change in operating profit (or loss) of
the company.
Financing leverage is due to the use of fixed financing costs by the firm. It is employed with a
view to increase the return to ordinary shareholders. Favourable leverage occurs when the firm
used funds obtained at a fixed cost to earn more than the fixed cost of financing paid by it. If any
profit is left after paying the fixed financing costs, it belongs to the ordinary shareholders.
There is no choice for the management on the operating fixed costs. For example, a heavy
industry requires huge investment resulting in a large operating cost in the form of depreciation.
This cannot be avoided. On the other hand, financial leverage is always a choice item. Firms
need not have financing through long-term debt or preference share. They have the option to
finance their operations and capital expenditures from internal sources and through the issue of
equity shares.

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Suggested Answers of Business Communication and Marketing
Marks
All Questions are compulsory.
Section -'A': Business Communication

1. Re
ad the following case on Pillsbury carefully and respond the questions based on it. (4 2.5=10)
In the early 1990s, few formal channels of communication were in place at Pillsbury. When new
management arrived and the company was restructured, all that changed. ―We started a business-
focused employee newspaper,‖ said Lou de Ocejo, human resources vice president. ―We started
having CEO luncheons every month, and communication meetings with all functions at least once a
quarter. We tried to do a lot of things to tell people what this new age at Pillsbury was all about.‖
Most difficult, though was getting employees to talk back. Management wanted to know what was
going right and what was going wrong. It wanted product ideas and suggestions for improving
procedures. But employees, in most organizations, are cautious, despite pep talks from managers
about how their doors are always open.
Then Pillsbury installed a unique feedback tool, a hotline called ―In Touch.‖ This toll-free, third-
party voice mail service allows employees to leave anonymous messages about any subject at any
time. At first, employees were cynical, but over time they began to respond. More than 2,300
messages have now been recorded. Employees reported such problems as faulty work systems and
ineffective supervisors. But they also provided many new product ideas and cost-saving
suggestions, such as recommendations for pizza toppings and ways to recycle surplus paper.
―Getting this feedback wasn‘t fun the first time out, and sometimes it still isn‘t,‖ reported Lou de
Ocejo, ―but the system does just what we need it to do.‖
Issues:
a) Why are informal channels of communication dangerous in times of organizational upheaval?
b) What obstacles may interrupt the downward, upward, and horizontal flow of information in
organizations undergoing restructuring, such as Pillsbury?
c) How could Pillsbury‘s ―In Touch‖ voice mail system break down common barriers to
communication?
d) Why do some companies continue feedback system when it isn‘t always fun, and sometimes it‘s
even offensive?
Answer to Q. no. 1
a) Informal channels of communication are asystematic, and they mostly create rumors which are
often false. At the time of organizational upheaval such false rumors may obstruct the
organizational establishment and hinder the work. Since it is not clearly known to staff and other
related personnel what will happen the next, such communication channels create confusion and
insecurity in them.
b) Organizational restructuring also suggests restructuring of attitude, feelings and emotions, a factor
that is hard to change. For instance, when Pillsbury decided to lunch an open communication tool
and environment, it was not just about external transformation. It entailed the rewiring of inner
world of relations and emotions. It is difficult for top executives to smother their egos and be ready
to listen to their subordinates and hear complains and suggestions against them. The subordinate
may not be that open as expected because they may fear the indirect reprimanding. So far as
horizontal peers are concerned, their ego and sense of competition may come in between marring
the ideal set for the reconstruction.
c) Pillsbury‘s ―InTouch‖ voicemail system proved to be comfortable to all the employees since they
could drop their messages and suggestions anonymously. The messages and criticisms which the
employees can not put personally against their managers were also posted with ease. In this way,
Pillsbury‘s voicemail system could break the common communication barrier.
d) Though sometimes such voicemail feedback system can be harmful and often offensive, it often
helps the people in management to know if there is any problem or malfunctioning in the company.
Besides, some of the feedbacks really become constructive. Therefore, the companies continue with
the feedback even though it‘s not always fun.
2. W
hat is a resume? Assuming that the UNDP Office in Nepal is looking for an Administrative
Assistant to be placed in its Head Office in Kathmandu, prepare a complete persuasive resume.
(2+8=10)
Answer to Q. no. 2
Resume or CV is a document that describes the applicant‘s qualifications including his/her
profile, goals, skills, academic degree, training and professional experience so that the prospective
employers can see an overall preview of how he/she can contribute to their company in capacity as
the post applied. All these details in a resume are presented in a standard and recognized order; they
cannot be put down in a random fashion. Down below is a sample of a resume:
Sample Resume for Administrative Assistant
Prem Basnet
Address: Kathmandu Metropolitan City-10, New Baneshwor, Kathmandu
Phone: 977-01-4456783 Cell: 977-01-9841345217
Email: mail2prembasnet@yahoo.com
Sex: Male, Date of Birth: September 23, 1980
Summary:
Experienced administrative assistant with ten years of experience providing support to executives
and school administrators. Expert in all office technology and practices. Excellent interpersonal
skills. Works with accuracy and efficiency. Earned Associates Degree in Business Administration
from Tribhuvan University.
Skills:
 Filing
 10-key calculator
 Office machines
 Communications
 Correspondence
 Client relations
 Mail delivery
 Highly organized

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 MS Word & MS Excel

 Procurement
 Bookkeeping
Experience:
Kathmandu University, Kathmandu 2007 - till date
Administrative Assistant
Perform a broad range of administrative and clerical duties to the Foreign Language Department.
Input student grades data into online database, help in departmental scholarship award decisions,
and provide administrative support student TAs.
 Designed templates to automate production of award letters and other common
correspondence, reducing generation time by 55%.
 Performed accurate and rapid data entry to ensure timely grade postings.
 Created Excel Spreadsheets to summarize grade distribution for university administrators.
 Handled large phone system for professors and students.
 Developed thorough guidelines for operating office equipment to reduce repair calls by
10%.
Lord Buddha Academy, Manipal University, Kathmandu 2005-2007
Office Assistant
Performed various clerical and administrative duties for Lord Buddha Academy for Biotechnology
and Interior Design Departments, including scheduling meetings and appointments, department
publicity, typing, filing, emailing and answering phones.
 Helped with grading and the posting of grades.

 Organized departmental meeting schedules to eliminate conflicts and ensure attendance.
 Arranged meetings with students and faculty. Organized student contact information and
messages for professors.
Crimson International College, Kathmandu 2003-2005
Clerk
Reported directly to principal, provided key clerical support for 30 teachers and 400 students.
Worked directly with parents, students, suppliers and the media.
 Handled large phone system.

 Organized principal‘s mail and incoming calls to reduce interruptions.
 Achieved 20% discount by ordering college supplies in bulk quarterly.
 Wrote and edited monthly newsletters to parents.
 Created and distributed reports to assist principal with college scheduling: calendars, lunch
verification, student progress report, supplies, inventory and mailing databases.
Education and Training

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Associate of Arts Degree (Business Administration), 2004
Shankardev Campus, Tribhuvan University, Kathmandu, Nepal
Additional Courses
Microsoft Office for Administrative Assistant
Basic Bookkeeping
FAFSA Processing
Customer Service Training
3. Pr
epare a full-fledged meeting minute of the AGM of any national financial institution in capacity as
the institution‘s Member Secretary. 10
Answer to Q. no. 3
Sample Meeting Minutes of AGM
October 30, 2010
Date: Monday 29, 2010
Meeting Start Time: 10:00 am
Meeting Finish Time: 1:00 pm
Chairperson: Rajendra Shahi
Present: Sabita Nakarmi (Deputy Chairperson), Sajan Sakya (Director), Drona Acharya (Managing
Director), Krishna Belbase (Director), Sharmila Panthi (Director)
In Attendance: Shreedhar Gautam (Member Secretary and CEO), 25% shareholders of the
institution‘s shares and ten observers.
Location: Rastriya Shabhagriha, Exhibition Road, Kathmandu
1. Apologies: Nil
2. Chairperson’s Address:
The Chairperson opened the meeting at 10.00 am as scheduled and noted that as more than five
shareholders (representing greater than 50% of the institution‘s issued shares) were in attendance, a
quorum existed and the meeting was formally declared open.

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The Chairperson indicated that the meeting was convened under Notice of Meeting distributed
on 26 September 2010 which was greater than 28 days from today‘s date and therefore the meeting
was appropriately constituted.
The Chairperson indicated that the Minutes of the last General Meeting of the institution held on
October 25 2009 were available to the meeting.
Proxy details were read to the meeting and distributed as per the attached schedule 26
September 2010.
3. The Chairperson invited the Managing Director to address the meeting on current matters
relating to the institution’s business.
4. Financial Statements and Reports
4.1 The meeting received and considered the financial statements and reports for the year ending 30
July 2010. These statements were included in the annual report to all shareholders and are tabled
here.
4.2 It was noted that there was no statutory requirement for these statements to be adopted, passed
or resolved at this Annual General Meeting and gave the shareholders the opportunity to ask
questions.
4.3 A number of questions raised by shareholders were responded to by the Chairperson and the
Managing Director.
5. Remuneration Report (Resolution 1)
5.1 The Chairperson proposed that the Remuneration Report as set out in the Annual Report for the
financial year ended 30 July 2010 be adopted. The Chairperson indicated that this resolution
required an advisory vote only from shareholders and does not serve to bind the institution or its
Directors.
5.2 The Chairperson invited questions in connection with the Remuneration Report. Questions
raised by shareholders were responded to by the Chairperson.
5.3 Resolution was seconded by Suman Pokhrel.
5.4 Resolution was passed on a show of hands.
6. Re-election of Sajan Sakya (Resolution 2)
6.1 The Chairperson proposed that Mr. Sajan Sakya , a Director retiring by rotation in accordance
with clause 24 of the institution‘s constitution, and being eligible, be re-elected as a director of the
institution.
6.2 Resolution was seconded by Sakuntala Sapkota.
6.3 Resolution was passed on a show of hands.

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7. Re-election of Mrs. Sharmila Panthi (Resolution 3)
7.1 The Chairperson proposed that Mrs. Sharmila Panthi, being a Director appointed during the year
and being eligible, be re-elected as a Director of the institution.
7.2 Resolution was seconded by Pramod Thakuri.
7.3 Resolution was passed on a unanimous show of hands.
The Chairperson thanked the staff and Directors for the efforts during the past successful year.
The Chairperson also thanked our legal team, Hari Sapkota and Chidananda Yadav for their
continued support along with shareholders for their support and attendance at the meeting.
There being no further business the meeting closed at 1.00 pm.
4. Di
scuss listening process and its barriers. 10
Answer to Q. no. 4
Listening takes place in four stages—perception, interpretation, evaluation, and action. Barriers,
however, can obstruct the listening process. These barriers may be physical or mental.
Perception: The listening process begins when you hear sounds and concentrate on them. There
may be numerous kinds of sounds around us, but until we tuned to them these sounds just go
unnoticed. The conscious act of listening begins when we focus on the sounds around us and select
those we choose to hear. We tune in when we sense that the message is important, when we are
interested in the topic, or when we are in the mood to listen. Perception is reduced by impaired
hearing, noisy surrounding, inattention, and pseudolistening. Pseudolistening occurs when listeners
―fake‖ it. They look as if they are listening, but their minds are wandering far off.
Interpretation: Once we have focused our attention on a sound or message, we begin to interpret,
or decode, it. Interpretation of a message is colored by our cultural, educational and social frames of
reference. The meanings we attach to the speaker‘s words are filtered through oer expectations and
total life experiences. Thus, our interpretation of the speaker‘s meaning may be quite different from
what the speaker intended because our frame of reference is different.
Evaluation: After interpreting the meaning of a message, you analyze its merit and draw
conclusions. To do this, we attempt to separate fact from opinion. Good listeners try to be objective,
and they avoid prejudging the message. The appearance and mannerism of the speaker can also
affect a listener‘s evaluation of a message. A juror, for example, might jump to the conclusion that
an accused man is guilty because of his fierce expression or his substandard English. Thus, to
evaluate a message accurately and objectively, we should consider all the information, be aware of
our own biases, and avoid jumping to hasty conclusions.
Action: Responding to a message may involve storing the message in memory for future use,
reacting with a physical response (a frown, a smile, a laugh), or supplying feedback to the speaker.
Listener feedback is essential because it helps clarify the message so that it can be decoded
accurately. Feedback also helps the speaker to find out whether the message is getting through
clearly. In one-to-one conversation, of course, no clear distinction exists between the roles of
listener and speaker—we give or receive feedback as our role alternates.

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5. W
rite short notes on the followings (Any Four): (4×2.5=10)
c) Letter of authorization
d) Upward communication
e) Career objectives
f) Internal unethical dealing and external unethical dealing
g) Use of graphics in non-verbal communication
Answer to Q. no. 5
a) Unless the report is self initiated, someone has asked you to produce a report. Hence, your opening
words in the transmittal document refer to that request and it is called the letter of authorization.
Include the date. Remember that much time may have passed since the initial request and that even
the requester may have forgotten the details. Some report writers include in the appendix the actual
report request as supplementary information.
b) Upward communication, also known as bottom-up communication, is the one in which
communication takes place from bottom to top level. Here, juniors communicate as senders to the
seniors as receivers. Opposite to the downward communication, it is the democratic form of
communication in which lower ranking employees can have communication access the high ranking
staff.
c) Opinion is divided on the effect of including a career objective on a resume. Recruiters think such
statements indicate that a candidate has made a commitment to a career. Moreover, career
objectives make the recruiter‘s life easier by quickly classifying the resume. But such declarations
can also disqualify a candidate if the stated objective doesn‘t match a company‘s job description.
d) Internal and external unethical dealings: Some organizations violate ethical morals to stand and
show themselves as good achievers or to make progress overnight without making any great efforts.
In doing this, established ethical norms and values are violated and unethical things are done.
The unethical practices within the organization is called internal unethical dealing and the other in
which one organization violates ethical norms and values in its dealing with external organizations
is called unethical external dealing.
e) Graphics are presentation in lines, boxes, circles, figures, and sketches used to explain and
clarify things which words may or may not do. As a part of sign language, it is abundantly used in
non-verbal communication, where words can be of little or no use.

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Section -'B': Marketing
6. Read the following case carefully and answer the question that follows:
Close-up, the youth brand, was the first gel toothpaste launched in India in 1975 and has remained
the category leader ever since. The brand arose out of a universal need for confidence in a social
situation, starting with fresh breath. In 2002, Close-Up was re-launched in two variants – Close-Up
Tingly Red and Close-Up Eucalyptus Waves. Both products with their superior formulation provide
superior cleaning, enhanced flavor and a freshness that extends from nose to throat. The
communication for Close-Up focuses on the base line ‗for the most kissable fresh breath‘ which
encourages young people to go out and get a life.
The new flavors are in line with HLL‘s (Hindustan Lever Limited) endeavor continuously innovates
and offer new advanced products to the consumers. These flavors have been especially designed to
win over competition consumers.
Recently, Close-Up Whitening, the tooth whitening variant, was introduced with a unique self-
check device called ―shade card‖. This helps consumers identify how ‗yellow‘ their teeth really are
and also to track the improvement in teeth color as they use the paste. The toothpaste helps teeth get
whiter in four weeks of regular use.
Questions:
a) O
n the basis of above given information explain the product attributes of Close-up and marketing
strategy of HHL 5
b) Id
entify the target market for Close-Up and provide some suggestions to increase its market share. 5
Answer to Q. No. 6
a)
So far product attributes of close-up is concerned in a long history it has gone through changes,
modification looking at competition. Superior cleaning, safety of teeth, beauty, flavor, freshness
from nose to throats, tooth whitening variant, self check device, kissable breath, etc. are the major
attributes found in close-up tooth paste targeted mainly to young people.
Hindustan Lever Limited (HLL) has to follow product line expansion and product positioning
strategy as most suitable marketing strategy to satisfy consumers as well as face competition.
b)
Target market of HLL seems to be kissable fresh breath to teenagers. Now product line expansion
as well as whitening teeth to attract new groups to product line. As stated earlier favorable product

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attributes of close-up has made it capable to attract large number of consumers.
HLL has followed good marketing strategy leading towards success. It has to continue to study
market as well as customers reactions, regular monitoring of the market and maintain product
quality, whitening teeth and kissable breath can be the appropriate strategy to increase its market
share.
7.
a) Explain the importance of marketing to consumers. 5
b)
What are the ingredients of the marketing concept? Describe in short. 5
Answer to Q. No. 7
a)
i. Delivering the standard of living
Marketing delivers the standard of living to consumers by offering products and services they need.
If the firm doesn‘t perform marketing properly, consumers will be dissatisfied with the quality of
products and product performance. That‘s why, the marketing firm offers its product in accordance
with glad consumer who dictates.
ii. Providing various information

Marketing provides consumer with various information about the product such as product attributes,
product performance, price, benefits that they get after buying, product availability in right quantity
at right place method of use etc. As a result, they become more selective and efficient in buying
products of their need.
iii. Improving quality of life

Marketing plays its role in improving consumer‘s quality of life by encouraging producers to
produce safer and hygienic products. Manufacturers produce their products considering public
service messages. That is why, many promising firms have started to write on the packages ―sugar
free food, cholesterol free oils and foods, antiseptic cream, friendly instruments of family planning
etc.
iv. Enhancing beliefs

By providing qualitative and affordable products and services to consumers through various
convenient distributing centers and facilitating after sale services, the firm enhances consumer
beliefs on products and services.
v. Promoting life style

Marketing promotes consumer‘s choice relating to the quality, size, model and design of products
that they use are advanced. The advanced family prefers foreign goods where as the average people
rely on the products of value satisfaction. Today‘s sophisticated, luxurious, advanced products make
people‘s life more comfortable.
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b)
i. Target market Selection
Infact, everyone has differed needs and wants. Hence, marketers moves toward identifying
segments that are highly affected by demographic, phychographic and behavioral need differences.
Thus, marketers do best when they select their target markets carefully and prepare tailored
marketing progam.
ii. Customer needs evaluation

All manufacturing activities of the organization should be focused on determining and satisfying
target customers needs and wants. These needs are defined from the customer point of view i.e.
stated needs, real needs, unstated needs, delight needs and secret needs.
iii. Choosing integrated marketing programmes

In modern marketing environment, delivers of customer value and satisfaction is complex task.
When all the company‘s departments work together to serve the customer‘s interests, the result is
integrated marketing. Integrated marketing takes place on three levels i.e.
First, Coordination with in marketing department
Second, Coordination with in entire organization.
Third, Coordination with concerned external institutions (the key parties)
iv. Achieving marketing objectives

The ultimate purpose of the marketing concept is to achieve marketing objectives i.e. profit, sales
volume, market share survive and growth through customer satisfaction.
8.
a) What is market segmentation? List the factors that are required for effective market
segmentation. 5
b) Describe the main price discounts popularly used by marketers in Nepal. 5
Answer to Q. No. 8
a)
Market segmentation is a process of dividing the total market for a product or service into several
smaller groups, such that the members of each group are similar with respect to the factors that
influence demand .By dividing the total market to distinct smaller groups helps to identify real need
and characteristics of buyers. Mass marketing, product variety marketing, individual marketing and
target marketing are some of the common approaches found in dealing with the market.
Following factors are to be considered for marking market segmentation effective:
 Heterogeneous needs and characteristics

 The needs and characteristics are measurable
 The market is accessible to the marketer, and
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 It is large enough to be profitable.
b)
Discounts are the rates or percentages of the deduction granted by the seller to the customer for
making purchase of goods. In other words, discount means to put a reduced value on the product.
While allowances are also discounts allowed for the task or work performed accordingly.
There are several forms of discounts and allowances;
i. Quantity discount: Quantity discounts are the deductions from a seller‘s
price list intended to encourage customers to buy in larges amounts. Therefore, the customers
buying larger quantity get high discount than the customers buying small quantity.
ii. Trade discount: Trade discounts are the deductions from manufacturer‘s
price list offered to buyers (i.e., resellers including wholesalers and retailers) in payment for
marketing functions the buyers will perform. Therefore, the manufacturer provides trade discounts
to the wholesalers and retailers for buying and selling his products to the final consumers.
iii. Cash discount: Cash discounts are deductions granted by the seller to the
buyers for paying their bills within a specified time, or for cash sales. Therefore, the customers
willing to make cash payment upon the purchase of goods from the seller get better or attractive
discount compared to the customers willing to purchase goods on credit.
iv. Price-off: Price-off discounts are deductions granted by a manufacturer to
the customers temporarily to attract their attention towards the product. It is printed in the package
and the discounts are granted for a specified time may for one week, two weeks, or month. But it
may not be for more than three months.
v. Seasonal discount: Seasonal discounts are deductions granted by the traders
like wholesalers and retailers to the buyers to reduce their old stock of goods. This type of discount
is provided to the seasonal goods such as readymade clothes, wool products, etc.
9.
a) What are the messages that the product life-cycle communicates to the marketers? 5
b) Discuss main features of organizational buying behavior. 5
Answer to Q. No. 9
a)
Actually, the product life cycle is an attempt to recognize distinct stages in the sales and profit
history of the product. To say that a product has a life cycle is to communicate the following four
things:
 Products have a limited life after which the product may be dead if
appropriate strategies are not adopted accordingly.
 Product sales pass through distinct stages, each posing different challenges to
the seller.
 Product profits rise and fall at different stages of the product life cycle.
 Products require different marketing, financial, manufacturing, purchasing,
and personnel strategies at different stages of their life cycle.
b)
The nature of business market demand has some distinct characteristics;
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i. Demand is derived from the demand for the consumer products in which that
business product is used;
ii. Demand for business products is inelastic i.e., there is a very little changes in
the demand in response to its price;
iii. Demand is widely fluctuating i.e., business users take more inventories or
less inventories when they expect drastic changes that may take place in prices of the products or in
national economy;
iv. Buyers are well informed about what they are buying than are ultimate
consumers.
v. Organizational buying is usually regulated by law. Every organization may
have ites own purchase policy and rule regarding the purchase of necessary goods and services from
the seller or suppliers. No organization can buy on random basis as does by the individual cosumer.
Organizations have to follow its purchase policy and rules.
vi. Organizational buyers usually buy goods in lot sizes as compared to the
individual consumer.
10. Briefly explain any five of the followings: (5×2=10)
a) Warehousing
b) Marketing research.
c) Application of marketing mix in business.
d) E-commerce
e) Push and pull strategy.
f) Sales promotion and its methods
Answer to Q. No. 10
a)
The word storage means holding the stock of goods for a longer period as the goods are not
immediately in demand, Warehousing involves more than storage. Warehouse perform many
functions of wholesaler, retailer and producer. Products held in inventory are physically stored in a
warehouse. Warehousing embraces a set of functions such as assembling, dividing and storing
products and preparing them for re-shipping. Warehousing vests the products with time and place
utility and in the case of some commodities. ‗form utility as well‘
b)
Marketing research is a systematic and objective search for and analysis of information relevant to
the identification and solution of marketing problems. Marketing research is generally conducted to
solve a particular problem of the firm. It obtains unique information for special decision-making
needs. It is considered as apart of the MIS because it can develop large amounts of marketing
information.
The main function or objective of marketing research is to provide most relevant or most pertinent
information to the managers for marketing decision-making. However, an ideal marketing research
must need to include at least four qualities or terms:
 It is a systematic search

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 It is objective search
 It is an informative search
 It is a problem-focused study
 It is a decisive search
c)
Marketing mix is applied in business basically to match the firm‘s product/services to the target
customers or target market. In other words, marketing mix is applied in business to design and offer
a right product with right price to right customers at right place at right time or right market
situation communicating through right promotion tools.
d)
E-commerce relates with selling products and services electronically i.e. through internet all
marketing efforts to inform, promote, and sale of products. It is a part of e-business which is done
through online marketing. Consumers place order for the product and services and sell them through
internet. The online systems of marketing is becoming popular as direct marketing channel. Internet
as global web of computer network, facilitated by different user friendly user friendly software to
connect business to consumers in general. E-mail has also contributed in making communication
link between the company and consumers.
e)
Push and pull strategy is one of the factor affecting promotion mix of a company. A good
promotion blend is very important for successful marketing. The promotion mix is also affected by
whether companies adopt push or pull strategy.
In push strategy the promotion is directed at the marketing intermediaries (sales force). The
manufacturer persuades wholesales to carry the product, while wholesalers convince retailers to sell
the product to consumers and retailers pushes the products to consumers by convincing at the time
of sale and displays.
But under pull strategy the producer build consumer awareness through mass advertising. Retailers
place orders to wholesalers and wholesalers to manufacturer to meet customer demand. Consumer
promotions are stressed as demand comes from down to upward direction.
f)
Sales promotion involves marketing activities, other than advertising, publicity, or personal selling,
that stimulate consumer purchases and dealer effectiveness. The forms of sales promotion include
trade shows, demonstrations, coupons, rebates, samples, contests, and many additional activities
that bridge personal selling and advertising.
Sales promotion tools are generally short term measures designed to stimulate quicker and greater
purchase of products or services by consumers or traders. The use of sales promotion has been
significantly increasing in the modern business. It is especially due to increase in competition is the
market. Therefore, sales promotion is also called as ―aggressive selling‖.
Sales promotion tools are directed resellers or channel members, and sales force of the company.
Therefore, those are three methods of sales promotion namely:
i. Consumer promotion,
ii. Trade or Dealer promotion, and
iii. Sales force promotion.
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For each target group, usually separate sales promotion tools are offered.

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Suggested Answers of Income Tax and VAT

Marks
Attempt all questions. Working note should form part of the answer.
4. Answer the following with reference to the Indian Income Tax Act, 1961.
a) Which are the incomes exempted under section 11? 3
b) How would you determine the residential status of a company? Can a company be not
ordinarily resident in India? 3
c) Which period will be treated as previous year for Income Tax purposes for the assessment
year 2009-10 in the following cases: 4
i) Amit starts a new business on 1-11-2008 and prepared final accounts on 6-6-2009.
ii) Mohan joined service in a company on 1-1-2009 at Rs. 16,000 per month. His next
increment in salary will be on 1-1-2010. Prior to this he was unemployed.
iii) Sunil Sharma is a registered doctor and keeps his Income and Expenditure Account on
calendar year basis.
iv) Ashish bought a house on 1-8-2008 and let it out at Rs. 80,000 per month.
Answer No.1
a) The following incomes of a religious or charitable trust or institution are not included in the
total income:
i. Income from property held under trust wholly for charitable or religious purposes.
ii. Income from property held under trust which is applied in part only for charitable or
religious purposes.
iii. Income from property held under trust which is applied for charitable purposes outside
India.
iv. Voluntary contributions forming part of corpus.
The above incomes of a religious or charitable trust will be exempted provided it complied the other
relevant provisions of Income Tax Act, 1961.
b) As per section 6(3), a company is said to be a resident in India in any previous year if:
i. It is an Indian company, or
ii. During the relevant previous year, the control and management of its affairs is situated
wholly in India.
Excepting individual and HUF, all other persons are classified either as resident or non-resident.
They are not to be further classified as ordinary resident or as not ordinary resident. Therefore, a
company cannot be not ordinarily resident in India.
c) The following will be the related previous year for income tax purposes for the assessment year
2009-10:
i. 1-11-2008 to 31-3-2009
ii. 1-1-2009 to 31-3-2009
iii. 1-4-2008 to 31-3-2009
iv. 1-8-2008 to 31-3-2009
5.
a) Mr. A, a resident natural person, is a musician deriving income from concerts performed
from various countries outside Nepal. During Financial Year 2066/67, he performed
concerts in India. Details of his assessable income and tax paid in the country as aforesaid
where the concerts were given are:
Income Tax
India Rs. 1,000,000 Rs. 300,000
Also, he earned Rs. 5,00,000 in Nepal during the financial year 2066/67.
Assuming that he has chosen to be couple, find his tax liability on his total income and
amount for foreign tax credit available to him under section 71(1) for the income year
2066/67. 10
b) Mr. A has been working in the capacity of senior manager for XYZ Co. Ltd. The company
provided him a Volkswagon car for official as well as personal use. The current market price
of the car is Rs. 57,00,000. Details of Mr. A‘s remuneration during the Income year 2066/67
are as follows:
Salary Rs. 1,50,000 per month
Grade Rs. 75,000 per annum
Allowance Rs. 7,000 per month
Other Allowances Rs. 9,000 per month
Quantify the amount for the vehicle facility provided for computing Mr. A‘s taxable income
from remuneration for the F/Y 2066/67.
Will the answer be different in case XYZ Co. Ltd. hired Mr. A for four months in the
capacity of consultant for a fee of Rs. 7,00,000 in total? 5
c) Mr. Ram & Mr. Shyam jointly owned a house property costing Rs. 5,00,00,000. At the time
of acquisition of the said house property, Mr. Ram had invested Rs. 1 crore and rest of the
amount invested by Mr. Shyam. This house property has been sold out for Rs. 6,40,00,000,
and incurred Rs. 7,00,000 on account of brokerage commission plus other incidental
charges.
You are required to appropriate between Mr. Ram & Mr. Shyam- as per sec 30 of
Income Tax Act 2058- for the net income that originated from the jointly owned investment.
5
Answer No.2
a) Income earned
Nepal Rs. 5,00,000
India Rs. 10,00,000
Total assessable income Rs. 15,00,000
Less admissible deductions _____-______
Total taxable income Rs. 15,00,000
Total tax liability (working note) Rs. 3,15,000

Less Allowable foreign tax credit:
On Indian Income (working note) Rs. (2,10,000)
Net tax liability Rs. 1,05,000

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Working note:
Computation of average tax rate for foreign tax credit
Assessable income earned in Nepal Rs. 5,00,000

Assessable income earned in India Rs. 10,00,000
Total assessable income Rs. 15,00,000
Less: deductions ______-_____
Total taxable income Rs. 15,00,000
Tax liability computation: (India)

Up to Rs. 2,00,000 Rs. Nil
Next Rs. 1,00,000 @ 15% Rs. 15,000
Bal. Rs. 12,00,000 @ 25% Rs. 3,00,000
Total Rs. 3,15,000
Therefore, average tax rate= 3,15,000/15,00,000 * 100 = 21%

a) Assessable income earned in India = Rs. 10,00,000
b) Tax paid in India = Rs. 3,00,000
c) Tax to be paid as per average tax rate = Rs. 10,00,000 * 21% = Rs. 2,10,000
d) Excess tax paid to be carried forward for next year (b-c) = Rs. 90,000 [10]
Note: Due to different interpretations, in case any student charges 1% or Rs. 2,00,000, that
should also be treated as right answer.
b) As per the provisions of Income Tax Act 2058 and rules made there under, cost free vehicle facility
provided to be used for official and personal use by employer to employee, or worker or other
persons getting remuneration on monthly basis, has to be quantified in terms of value to be included
in his total remuneration for tax purpose. In such cases, value of such free of cost vehicle facility has
to be quantified at the rate of 0.5% of total salary and grade. Therefore, amount to be included in his
taxable income has been quantified as:
Salary (Rs. 1,50,000 *12) Rs. 18,00,000

Grade Rs. 75,000
Total salary with grade Rs. 18,75,000
Amount to be quantified = Rs. 18,75,000 * 0.5/100 = Rs. 9,375
Therefore, Rs. 9,375 has to be included in his remuneration on account of cost free vehicle provided
to be used for official as well as personal uses.
In case Mr. A is employed in the capacity of consultant then values for such cost free vehicle is to be
quantified for the purpose of including in his taxable business income. Such value to be quantified is
1% of the current market price of such vehicle or car.
Car will be quantified as:

1% of Rs. 57,00,000 = Rs. 57,000/3 = Rs. 19,000
Total taxable business income of Mr. A is

Consulting fees Rs. 7,00,000
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Cost free vehicle/car Rs. 19,000

Total Rs. 7,19,000
c) For the purpose of calculating a person‘s income from an investment which is jointly owned with
another person, amounts to be included and deducted in that calculations should be apportioned
among the joint in proportion to their respective interests in the investment. [sec 30]
Mr. Ram Mr. Shyam
Investment Rs. 1 crore Rs. 4 crore
Investment ratio is 1:4
Computation of net income:

Sales (Incoming) Rs. 6.40 crore
Less: brokerage commission Rs. 0.07 crore
Balance Rs. 6.33 crore
Total initial investment (Outgoing) Rs. 5.00 crore
Net Income Rs. 1.33 crore
Net income of Rs. 1.33 crore to be appropriated based on contributory ratio of 1:4 between Mr. Ram
& Mr. Shyam are as follows:
Mr. Ram Mr. Shyam Total

Net Income Rs. 26,60,000 Rs. 1,06,40,000 Rs. 1,33,00,000
6.
a) From the following Income Statement of M/S ABC Pvt. Ltd., prepare the taxable income for
the income year 2066/67. 10
Rs. In ‗000
Sales 8,000
Cost of sales 5,000
Gross profit 3,000
Administrative expenses 500
Donation 100
Interest expenses 300
Pollution control expenses 1,500
Research & Development expenses 1,000
Depreciation 50
Balance (450)
Other Income 50
Net Profit/ (loss) (400)
b) What is the provision under sec 12(ka) of Income Tax Act 2058 as regards expenses
incurred towards ancient, religious and cultural heritage conservation and sports
development activities? 5
c) Write in brief the provisions of Income Tax Act in case of a married resident couple elect to
be treated as a couple. 5
Answer No 3
a) Computation of taxable income of M/S ABC Pvt. Ltd. for the income year 2066/67.
Rs. in ‗000
Income

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Sales 8,000
Other income 50__
Total Income (A) 8,050
Less: admissible deductions
Cost of sales 5,000
Administrative expenses 500
Depreciation 50
Interest Expenses 300
5,850 5,850
Adjusted Taxable income 2,200
Research & Development expenses
50% of ATI Rs. 2200= Rs. 1,100
Actual expense Rs. 1,000 1,000
Pollution control expenses

50% of ATI Rs. 2200=Rs. 1,100
Actual expense Rs. 1,500 1,100
Donation
Actual expenses Rs. 100
5% of ATI Rs. 110
Maximum Rs. 100 100
Taxable income 0
Note 1: The unabsorbed pollution control cost Rs. 400 could be capitalized to Block D assets.
Note 2: It is supposed that donation is not given to tax exempted entity.
Note: In case any student supposes that the donation is not given to tax exempted entity, the answer
should also be treated right. [10]
b) Under the provisions of Income Tax Act, with the prior approval from the Inland Revenue
Department, a company may claim to have the taxable income from a income year reduced by
expenses incurred towards the conservation of Ancient, Religious and Cultural heritage in Nepal or
construction of the physical infrastructure of public interest under sports development in Nepal.
However, the deduction as aforesaid is limited to the lesser of Rs. 10 crore or 10% of assessable
income. [5]
c) In the case of a married resident couples, each spouse is taxed separately. However, married resident
couples may choose to be treated as a couple for a particular income year. In such cases, their
income will be clubbed and added together, and the basic exemption threshold for couple applies. If
a couple elects to be taxed as couple, each spouse is jointly and severely liable together with the
other spouse that the tax for the couple is paid.
If the income of both spouses is calculated separately, each spouse can claim the basic threshold
applicable for individuals
7.
a) Mr. Ram Kumar has opened a bank account with Grameen Biaks Bank in Parbat with a
deposit of Rs. 50,000 with interest at the rate of 8 percent per annum. During the year, the

35 of 97
bank has to pay Mr. Ram Kumar Rs. 4000 as Bank Interest. The bank seeks for your advice
regarding the applicability of withholding tax?
If for same deposit of Rs. 50,000 with the interest rate of 24%, the bank has to pay Rs.
12,000 for that year, then will your answer differ? 5
b) A tax payer had applied for an administrative review with Director General of IRD as per
section 115 of the Act. But now he is not satisfied and got aggrieved by the decision of IRD
as per section 115. As a tax consultant, you have to advise him on the remedy available by
making appeal to revenue tribunal with the brief procedure for making it. 5
Answer No.4
a) As per section 88(4)(cha) of the act, in case of deposits made in rural community based
micro finance, grameen bikas bank, postal savings bank, cooperative as mentioned in section
11(2) of the act, interest is accrued upto Rs.10,000 per annnum, then withholding tax shall
not be applicable.
In the first case, annual interest from Grameen Bikas Bank is Rs. 4000 which is within
thelimit of Rs. 10,000, so withholding tax is not applicable. But in the second case, it
exceeds the limit of Rs.10,000, hence withholding tax is applicable.
b) As per section 116 of the act, a tax payer who is aggrieved by a decision of IRD on an
application filed as per section 115 or the tax payer has supposed that the application is
rejected due to expiry of a period of 60 days, may appeal to Revenue Tribunal in accordance
with Revenue Tribunal Act 2031. The tax payer who appeals with the revenue tribunal
should file a copy of the notice of the appeal with IRD within 15 days of doing so. As per
sec. 116(3) of the act, the enforcement of a decision taken by a tax officer shall not be
treated as stayed unless the tribunal stays or otherwise affects the enforcement of a decision
of the tax officer until the appeal is settled.
The procedures for making an appeal are given in Revenue Tribunal Rules. An applicant
should deposit an amount equal to a sum of 50% of the tax amount assessed by the tax
officer and total amount of fines imposed by him. An appeal to a revenue tribunal should be
filed within 35 days of the receipt of assessment order by the tax payer or the taxpayer
receives the decision of IRD or treats the application rejected by IRD.
The documents of appeal should include the following information:
 Names and addresses of the plaintiff and defendant.
 If the appeal is against any decision, the full details of the case.
 A statement that the appeal is filed within the prescribed time and the fees required is
enclosed with the appeal.
 Reasons of dissatisfaction, sections and rules in support of your appeal and demands of the
plaintiff.
 Any case history with regard to similar application.
 Any other course of action of the tribunal required by the plaintiff with regard to the appeal.
8.
Value Added Tax Act
a) State with reason whether the following statements are True or False. 10
36 of 97
i) A person shall apply for the registration of VAT in the format prescribed in Schedule
– 3 of VAT Regulation, 2053.
ii) A shopkeeper can issue abbreviated tax invoice for the transaction upto Rs.10,000.
iii) A registered person shall preserve all the VAT records upto 6 years.
iv) A separate record for purchase and sale shall be maintained for the used goods which
have purchase price more than Rs. 20,000.
v) Government organizations shall take VAT bill purchasing goods and services above
Rs. 5,000.
vi) The rate of VAT for the import of goods and services will be same as VAT
applicable for the purchase of goods and services in Nepal.
vii) In the case of purchase and sale of land and building, VAT is not applicable.
viii) In the case of import of goods from USA, the place of transaction is USA.
ix) A foreign tourist can take refund of VAT on the purchase of goods amounting to Rs.
15,000 or more.
x) VAT will not applicable in cable car service.
b) Fat Limited has following transactions during the month of Baisakh, 2067, find the amount
of VAT credit available for the month of Jestha:
Amount (Rs.)
Opening Credit available 12,000
Purchases net of VAT 10,00,000
Salary for the month 1,50,000
Electricity expenses 10,000
Telephone expenses with VAT 13,560
Fuel expenses with VAT 28,250
Purchase of car with VAT 11,30,000
Purchase of office supplies net of VAT 1,50,000
Total sales for the month 15,00,000
Additional information:
All the sales of the company were VAT applicable. Out of office supplies Rs. 20,000
purchased by taking abbreviated tax invoice. In purchases, Rs. 375,000 is import of raw
material and customs office has valued these goods Rs. 450,000. Fuel expenses consists
expenses for petrol used for office vehicle. 6
c) A dealer manufactured goods worth Rs. 10 million which were exempt under schedule I of
VAT Act out of the goods purchased partly VAT exempt and partly goods liable to VAT.
VAT exempt goods amounting to Rs. 7 million were used for the production of goods which
were exported. The Dealer claims that all the exports were zero rated and he should get full
credit for VAT on exempted goods. Consider his claim and to set off the VAT paid by him
on the inputs. 4
Answer No 5
a) State with reason whether the following statements are True or False.
a) False. Application for VAT registration shall be filed in the format prescribed in
Schedule – 1 of VAT Regulation, 2053.
b) False. Abbreviated tax invoice can be issued by the shopkeeper for the transaction upto
Rs. 5,000.
37 of 97
c) True. VAT records shall be preserved by registered person for 6 years (Rule 23(7) of
VAT Regulation, 2053)
d) False. Separate record shall be maintained for used goods costing Rs. 10,000 or more.
e) True. As per Rule 56 of VAT Regulation, Government organizations shall take VAT bill
for the purchases more than Rs. 5,000.
f) True. Same rate of VAT shall be applicable to import and local purchases.
g) True. Land and building is included in Schedule – I of VAT ACT.
h) False. In case of goods import in Nepal, customs entry point will be the place of
transaction.
i) True. As per section 25Ka of VAT Act, tourists can take refund of VAT on the purchase
of goods amounting to Rs. 15,000 or more.
j) False. VAT is applicable in Cable car service as it is excluded in Schedule – I of VAT

Act.
b)
Calculation of VAT Credit Available for Jestha, 2067
Amount (Rs.)
VAT collected in Sales 195,000
VAT Credit on Input:
VAT paid on purchases 139,750
VAT paid on telephone expenses 1,560
VAT credit available on car 52,000
VAT paid on office Supplies 16,900 210,210
Net VAT Credit for the month 15,210
Add: Opening credit available 12,000
Opening VAT credit available for the month of Jestha 27,210
Note:
1. VAT paid on purchases:
Local purchase (1,000,000-3,75,000)*13% 81,250
Import (450,000*13%) 58,500
Total VAT paid on purchases 139,750
2. Credit available on Car purchase

Total VAT paid 130,000
40% credit available 52,000
3. Credit available on VAT paid on Office Supplies

Total Office supplies Net of VAT 150,000
Less: Purchesed by taking Abbreviated Tax invoice 20,000

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Credit available on office supplies purchase 130,000

VAT Credit on office supplies (13% of Rs. 130,000) Rs. 16,900
4. VAT credit cannot be claimed in the purchases of petrol.
c)
No Vat is collectible on the sale of the goods whether those goods are sold locally or exported if
those goods are exempt under schedule I. Since the goods are listed in schedule I, according to
section 5(3) of VAT Act, the exports of those goods are not entitled to zero tax facility under
schedule II.
As per Section 5(3), no deduction or refund is applicable with regard to VAT paid on goods used
for VAT exempt transaction. Hence, the dealer can not claim any input VAT paid on the purchases
against his export sale also in this case.
9.
a) Gi
nger Cellular Ltd., a cellular mobile Phone Set producing domestic enterprise, is engaged in
producing and selling of cellular mobile phone sets. As a tax expert, Ginger Ltd. seeks your
advice on the refund of VAT paid on purchase of its raw materials. Give your opinion on this.
5
b) Ms. Amita is a proprietor of a VAT registered firm. For the month of Shrawan 2067, she has
collected VAT of Rs. 200,000 which she has to deposit within 25th Bhadra. But on Bhadra
10,2067, she has delivered a baby boy due to that she could not deposit the VAT amount within
Bhadra 25. The tax officer wants to levy additional fee of 10% per annum on her. She has
submitted an application to Director General IRD on Bhadra 26, 2067 for waiver of additional
fee levied by the tax officer as the non payment of VAT was due to the circumstances beyond
her control. Can DG waive that additional fee levy imposed by the tax officer? Give your
opinion. 5
c) What are the records to be maintained by registered dealer dealing in used or second hand
materials? 5
d) Discuss the provision of Debit and Credit Note in VAT Rules. 5
Answer No 6
a) As per clause 20 of Schedule 1 of the VAT Act, sixty percent of the VAT paid on purchases of
mobile sets by importer or 60% of the VAT paid on raw materials for producing mobile sets,
shall be refunded by the Inland Revenue Department on producing evidence that the mobile sets
are sold. The procedure of the refund shall be as prescribed by Inland Revenue Department.
In the case given, Ginger cellular is a cellular mobile set producing company, so 60% of VAT
paid it on purchase of raw materials shall be refunded by IRD if it can produce the evidence that
the produced mobiles are sold.
b) As per rule 35 of the VAT Rules, In case a woman required to pay tax delivers a child; up to
thirty five days of the date of delivery is considered as circumstances beyond the control.
Further, as per Rule 36 of VAT Rules, For the remission of the additional charges pursuant to sub-
section (4) of Section 19 of the Act, an application shall be submitted to the Director General within
thirty days of the expiry of time-limit prescribed for payment of tax. In case an application is not
submitted within the time-limit referred, the waiver of additional charges shall not be granted.

39 of 97
In this case, she has made an application within the limit mentioned in Rule 36. So applying the
provision of section 19(4) of the Act which states " If a taxpayer applies to the Director General
for the exemption of the additional charges levied due to non payment of VAT within time
stating the reason that the failure to make a timely payment was caused by extraordinary
circumstances beyond the taxpayer's control, the Director General may, if he finds the reason
reasonable, exempt such charges.
The Director General after the necessary verification of the matter can waive the additional fee
levied.
c) As per Rule 33 of the VAT Rules, a registered person who is dealing in used or secondhand
goods has to maintain the purchase register and sales register containing the following
information:
Related to Purchases:
 Date of Purchase
 Particulars giving full information of the goods
 Buying price excluding tax
 Rate of tax
 Amount of tax
 Total amount paid.
Related to Sales:
 Date of sale
 Selling price excluding tax
 Difference between the buying price and the selling price
 Rate of tax
 Amount of tax
 Total amount received
In case the buying price of every item of used goods exceeds Rs. 10,000, separate records of
buying or selling shall be maintained.
Failure to maintain the above records satisfactorily may attract the tax officer imposing VAT on
the total selling price of the goods sold by such taxpayer and the tax officer may issue a written
order requiring him to pay such tax along with the next tax return.
d) When a person issues an invoice for supply of goods or services, but after the invoice is issued it
is required to change the value as mentioned in the invoice due to any reason, the person has to
issue debit note or credit note for such changes in value of the goods.
Rule 20 of VAT Rules has not prescribed any format for debit and credit note but the debit or
credit note must include the following information:
 Serial Number of the debit or credit note
 Date of issue
 Name, address and registration number of supplier
 Recipient's name, address and registration number if he is a registered person.
 Number and date of the tax invoice connected with the transaction.
 particulars of the goods or services and reason of issuing the credit or debit note
 Amount debited or credited.
 Tax Amount debited or credited.

40 of 97
The tax payer has to keep a copy of such debit or credit note received or issued. The taxpayer
has to maintain a register for recording monthly details of debit note or credit note received or
issued during the month.

41 of 97

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The Institute of Chartered Accountants of Nepal

Suggested Answers of Advanced Accounting

CAP II Examination – December 2010

Statement of Affairs of A & B as at 31st Ashadh 2066 Amount in Rs.

Statement of Affairs as at 31stAshad 2067

Fixed Assets: Rs. Rs.