THE STUDENTS'JOURNAL

MARCH 2014

CONTENTS
1.0 TITBITS ABOUT ICAG SCHOOL
1.0 THE CONCEPT OF FINANCIAL ASSETS, FINANCIAL LIABILITIES AND EQUITY
INSTRUMENTS: IAS 39
2.0 COST ALLOCATION AND ABSORPTION INTO PRODUCTS
3.0 PLANNING, CONTROLLING AND RECORDING AUDIT WORK
4.0 TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS: IAS 21
5.0 PAST EXAMINATION QUESTIONS AND SUGGESTED SOLUTIONS











TITBITS ON ICAG SCHOOL

The Educational Unit

The Educational Unit is responsible for planning, coordinating and organizing tuition for registered
students of the Institutes Professional and ATSWA programmes. The Unit is also charged with the
responsibility of assisting and supporting students to achieving academic and personal success.

ICAG School
The rational for establishing the ICAG School has been to offer students with quality tuition in the
Institutes Professional and ATSWA programmes. The School has since its inception focused its
attention on getting qualified, well trained and experienced lecturers to handle students in all the subject
areas. As part of its desire to vigorously promote teaching and learning, the Educational Unit ensures
effective monitoring and evaluation of both lecturers and students performances through test and
appraisals.
Current Enrolment
From an initial student enrolment of 155 in 2010, the School can currently boast of a population of not
less than 1,000 students per session. It admitted for the 2013 November diet a total of 826 students into its
various streams of Regular / Morning, Evening and the Weekend School.
Admission and Duration
Students are admitted into the various streams after going through the Institute students registration.
Study manuals are provided to students who register to attend classes. The School also has a discount
policy of 10% of the total amount if full payment is made within a stipulated time.
The School is being run on sessional basis; January to April and from July to October, each for a period
of four months for the Professional programme. For the ATSWA programme, classes are organized from
May to August and from November to February.

Fees and Terms of Payment
Students and billed on the basis of the hours and the number of subjects registered. This is summarized
on what is been referred to as fee list which contains information such as the Part/ Level, the number of
subjects and the amount involved. Concessions are given to students to make part payment, at least 75%
on registration of the total fees charged. The remaining 25% is paid a month later.
Teaching and Learning Environment
The ICAG School can be touted as an excellent tuition center with well trained and qualified professional
facilitators. The School can also boast of air conditioned classrooms and assures you of not just tuition but
complete educational training that prepares students for the job market. Library facilities are available
throughout the week ( Saturdays and Sundays inclusive). Students are also allowed to hold detailed and
continuous discussions among themselves after classes to have better understanding and appreciation of the
course and its content.
The ICAG School is located at the Accountancy House at East Legon, on the Trinity College-UPS Road,
Other Tuition Centres
Apart from the ICAG School, students who are offering the ICAG Programmes can contact any of the
following tuition centres:
Name: Centre for Business Studies
Location: Adjacent to Ghana Law School Mokola Accra
Contact: Mr. Addo
Phone: 027 622 23 30

Name: N-A Professional Institute of Business Studies
Location: Ebenezer Secondary School Dansoman, Accra
Contact: Mr. Nkrumah-Agyeefi
Phone: 020 813 10 81

Name: DASQ Business School
Location: Paa Grant Street, Commercial Area, Near Brains Place - Community 10 Tema
Contact:
Phone: 024 476 80 65 and 024 431 55 87

** The Educational Unit shall up-date the list of other tuition providers in due course. Do not hesitate to
contact the ICAG Secretariat for further details.










2.0 THE CONCEPT OF FINANCIAL ASSETS, FINANCIAL LIABILITIES AND EQUITY
INSTRUMENTS : IAS 39
Learning objectives:
After reading through this article, you should be able to:
a. Explain what is financial asset, financial liability and equity instrument.
b. Be able to differentiate between these financial instruments.
c. Understand various components of financial assets, financial liabilities and equity instruments.
d. Know how to recognize, measure and present these financial instruments in the financial statements.
e. Disclosure requirements in the financial statements.
FINANCIAL ASSETS
A financial asset is an intangible asset that derives value because of a contractual claim. Examples include
bank deposits, bonds and stocks. Unlike land and property which are tangible, physical assets
financial assets do not necessarily have physical worth. Financial assets are usually more liquid than
tangible assets, such as land or real estate, and are traded on financial markets. An asset with a physical
value such as real estate, equipment, machinery, gold or oil is a non-financial asset. For example, gold is
considered non-financial asset because it has inherent value based on its use in jewelry, electronics,
dentistry, ornamentation and historically as currency. Cash, on the other hand, is a financial asset because
its value is based on what it represents. The paper the cash is printed on has very little value by itself.
The value of a financial asset can be based on the value of a non-financial asset. For example, the value
of a futures contract is based on the value of the commodities represented by that contract. Commodities,
which are tangible objects with inherent value, are an example of a non-financial asset. Futures contracts,
which do not have inherent physical value and whose value is based on the assets they represent, are an
example of a financial asset.
According to the International Financial Reporting Standards (IFRS), a financial asset is defined as one
of the following:
Cash and cash equivalent; - cash and cash equivalents are cash on hand and in bank accounts, and
their equivalents in various currencies. Cash equivalents include short-term (up to 3 months)
liquid investments into securities, travelers cheques, and other financial assets that meet the
definition of cash equivalents. If an entity enters into a short-term credit agreement and it is
allowed to make payment transactions that exceed its bank account balance, the value of a
financial asset is equal to zero, and the amount exceeding the closing balance is recognized as a
financial liability.
Equity instruments of another entity; - these include securities issued other entities such as shares,
bonds, and other securities that are purchased with an intention to obtain economic benefits.
Contractual right to receive cash or another financial asset from another entity or to exchange
financial assets or financial liabilities with another entity under conditions that are potentially
favorable to the entity. These include amounts receivable from sold goods, rendered services or
originated loans, prepayments for financial assets, and other contractual financial debts receivable
by the entity.
Contract that will or may be settled in the entitys equity instruments and is either a non-
derivative for which the entity is or may be obliged to receive a variable number of the entitys
own equity instruments, or a derivative that will or may be settled other than by exchange of a
fixed amount of cash or another financial asset for a fixed number of the entitys own equity
instruments.
In the balance sheet financial assets are classified as non-current and current assets. Non-current financial
assets (except for the current portion of amounts receivable and originated loans) comprise; non-current
investments into other entities, originated loans, amounts receivable after one year, and other financial
assets that meet the definition of non-current assets. Current financial assets (including the current portion
of amounts receivable and originated loans) comprise; current investments into other entities, originated
short-term loans, amounts receivable within one year, cash and cash equivalents, and other financial
assets that meet the definition of current assets. In the balance sheet cash is usually included in the current
assets. However, if the use of cash is restricted for more than one year, i.e., cash is held in a deposit
account, it shall be presented as non-current asset.
Treatment of financial assets under IFRS Recognition and Measurement of financial assets under IFRS
Under IFRS, and in accordance of IAS 39, financial assets are classified into four broad categories which
determine the way in which they are initially measured:
Financial assets at fair value through profit or loss: - Financial assets held for trading, i.e. which
were acquired or incurred principally for the purpose of selling, are part of a portfolio with
evidence of short-term profit-taking or are derivatives, and are measured at fair value through
profit or loss. Held-to-maturity investments: - Financial assets with fixed or with determinable
payments and fixed maturity which the company has to be willing and able to hold till maturity
are classified as held-to-maturity investments. Held-to-maturity investments are either
measured at fair value through profit or loss by designation or determined to be financial assets
available for sale by designation. Examples of held-to-maturity financial assets include bonds
with a fixed interest rate and specified maturity date, if the bond-owner intends to hold them to
maturity or receive substantially all their carrying value. Equity securities are not considered to be
held-to-maturity financial assets, since their maturity is not usually specified. Available-for-sale
financial assets are classified as held-to-maturity financial assets only when an entity which
acquired them has an intention and ability to hold them until maturity date without taking an
opportunity to sell. Financial assets are not classified as held-to-maturity financial assets if: an
entity intends to hold financial assets for an indefinite period, an entity is prepared to sell the
financial asset, or the issuer has a right to re-purchase the financial assets for the amount
significantly lower than its amortized cost.
Loans and receivables: - Financial assets with fixed or determinable payments which are not
listed in an active market are considered to be loans and receivables. Loans and receivables are
also either measured at fair value through profit or loss by designation or determined to be
financial assets available for sale by designation. Examples of originated non-current and current
loans and amounts receivable include customers, loan receivers, employees, and other financial
debts to an entity. Financial assets do not include prepayments for non-financial assets such as
tangible assets, intangible assets, inventories or services.
Available-for-sale: - All other financial assets are categorized as financial assets available for sale
and are measured at fair value through profit or loss by designation. Examples of available-for-
sale financial assets include purchased loans or other amounts receivable, other entitys shares,
bonds or other securities purchased by an entity for trading purposes. Available-for-sale financial
assets also include non-current financial assets that the entity intends to sell within one year after
the balance sheet date.
For financial assets to be measured at fair value through profit or loss by designation, designation is only
possible at the amount the asset was initially recognized at. Moreover, designation is not possible for
equity instruments which are not traded in an active market and the fair value of which cannot be reliably
determined. Further (alternative) requirements for designation are e.g. at least a clear diminution of a
mismatch with other financial assets or liabilities, an internal valuation and reporting and steering at fair
value, or a combined contract with an embedded derivative which is not immaterial and which may be
separated. Regarding financial assets available for sale by designation, designation is only possible at the
amount the asset was initially recognized at as well. However, there are no further restrictions or
requirements.
The classification depends on the purpose for which assets are bought and held. Management decides on
their initial classification at the time of initial recognition, subsequently checking that it still applies at the
end of each reporting period. The main characteristics of the assets mentioned above are as follows:
Financial assets at fair value through profit or loss
This is made up of two sub-categories: - financial assets held specifically for trading purposes; and
financial assets to be measured at fair value under the fair value option designation. This category also
includes all financial investments, other than equity instruments that do not have a price quoted on an
active market, but for which the fair value can be determined. Derivatives are included in this category,
unless they are designated as hedging instruments, and their fair value is booked to the Income Statement.
At the time of initial recognition, financial assets held for trading are recognized at fair value, not
including the transaction costs or income associated with the same instruments, which are recognized in
the Income Statement. All of the assets in this category are classified as current if they are held for trading
purposes or if they are expected to be sold within 12 months from the end of the reporting period.
Designation of a financial instrument to this category is considered final (IAS 39 envisages some
exceptional circumstances in which said financial assets may be reclassified in another category) and can
only be done on initial recognition.
Held-to-maturity investments
These are non-derivative assets with fixed or determinable payments and fixed maturities which the group
or entity intends to hold to maturity (e.g. subscribed bonds). The intention and ability to hold the security
to maturity has to be evaluated on initial recognition and confirmed at the end of each reporting period. In
the case of early disposal of securities belonging to this category (for a significant amount and not
motivated by particular events), the entire portfolio is reclassified to financial assets available for sale and
restated at fair value.
Loans and receivables
These are non-derivative financial assets with fixed or determinable payments that are not quoted on an
active market and in which the group or entity does not intend to trade. They are included in current assets
except for the portion falling due beyond 12 months from the end of the reporting period, which is
classified as non-current.
Available-for-sale financial assets
This is a residual category represented by non-derivative financial assets that are designated as available
for sale and which have not been assigned to one of the previous categories. Available-for-sale financial
assets are recorded at their fair value including related purchase costs. They are classified as non-current
assets, unless management intends to dispose of them within 12 months from the end of the reporting
period.
Subsequent measurement
Gains and losses on financial assets at fair value through profit or loss are immediately booked to the
Income Statement. Available-for-sale financial assets are measured at fair value unless a market price
or fair value cannot be reliably determined. In this case the cost method is used. Gains and losses on
Available-for-sale financial assets are booked to a separate item under Other Comprehensive Income
until they have been sold or ceased to exist, or until it has been ascertained that they have suffered an
impairment loss. When such events take place, all gains or losses recognized and booked to Other
Comprehensive Income up to that moment are transferred to the Income Statement.
Fair value is the amount for which an asset could be exchanged, or a liability settled, in an arms length
transaction between informed and independent parties. Consequently, it is assumed that the holder is a
going concern entity and that none of the parties needs to liquidate their assets in a forced sale at
unfavorable conditions. In the case of securities traded on regulated markets, fair value is determined
with reference to the bid price at the close of trading at the end of the reporting period. In cases where no
market valuation is available for an investment, fair value is determined either on the basis of the current
market value of another very similar financial instrument or by using appropriate financial techniques
(such as discounted cash flow analysis). Purchases or sales regulated at market prices are recognized on
the day of trading, which is the day on which the group or entity takes a commitment to buy or sell the
asset. In situations where the fair value cannot be reliably determined, the financial asset is carried at cost,
with disclosure in the notes of its type and the reasons for measuring it at cost.
Held-to-maturity investments and Loans and receivables
These are measured at their amortized cost using the effective interest rate and taking account of any
discounts or premiums obtained at the time of acquisition so that they can be recognized over the entire
period until their maturity. Gains or losses are booked to the Income Statement either at the time that the
investment reaches maturity or when an impairment arises, in the same way that they are recognized
during the normal process of amortization that is part of the amortized cost method.
Investments in financial assets can only be derecognized once the contractual rights to receive the cash
flows deriving from such investments have expired (e.g. final redemption of bonds) or if the group or
entity transfers the financial asset and all of the risks and benefits attached to it.
FINANCIAL LIABILITY
A financial liability is defined as one of the following type of liabilities as per the Accounting Standards:
A contractual obligation;
to deliver cash or another financial asset to another entity;
to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the entity;
A contract that will/may be settled in the entitys own equity instruments and is;
a non-derivative resulting in delivering a variable number of the entitys own equity instruments;
a derivative that will/may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of entitys own equity instruments.
Examples of financial liabilities are accounts payable, loans issued by an entity, interest payments,
derivative financial liabilities, and received prepayments for financial assets on sale.
The entitys obligation to issue its equity instruments or to deliver them is not a financial liability, since
the entity is not obligated to pay cash or transfer other financial assets. Convertible bonds are recorded in
accounting books and presented in the balance sheet as financial liabilities until their conversion into
ordinary shares are effected. Preference shares, despite having some features of financial liabilities, are
attributed to the entitys equity.
In the balance sheet financial liabilities are classified as non-current and current liabilities. Non-current
financial liabilities (except for the current portion) comprise: amounts payable after one year, and other
financial liabilities that meet the definition of a non-current liability. Current financial liabilities
(including the current portion of non-current liabilities) comprise: amounts payable within one year, and
other current financial liabilities that meet the definition of current liabilities. The value of financial
liabilities in accounting and financial statements depends on their nature and the chosen method of
measurement. For the purpose of measuring, financial liabilities are classified into three categories: linked
to market prices; non-current not linked to market prices; and current not linked to market prices.
Financial liabilities are classified as linked to market prices if a change in their value is linked to
fluctuations in the fair value of certain securities or in a market quoted rate that determines the fair value
of these securities. Examples of financial liabilities linked to market prices are: securities borrowed from
another entity and sold for a time in an active market that must be returned to the lender after buying them
back in the active market at the closing quoted market price. These financial liabilities arise from an
intention to receive economic benefits from a short-term decrease in a securitys price. Another one is
contractual obligation, the amount of which changes in proportion to the quoted market rate.
Initial recognition and measurement of financial assets
A financial asset shall be recognized in accounting when, and only when, an entity receives or in
accordance with the ongoing contract obtains a right to receive cash or another financial asset. Forecast
transactions and received guarantees are not recognized as the entitys assets as long as they do not meet
the definition of financial assets.
At initial recognition, an entity shall measure a financial asset at its acquisition cost. The Acquisition cost
of a financial asset might also include direct transaction costs. Acquisition cost is determined on the basis
of the amount of cash paid or payable for a financial asset or the value of another delivered asset. If
payment for a purchased asset is deferred for a period longer than 12 months, and the interest rate is not
prescribed by the contract or it significantly differs from the market rate, the acquisition cost is
determined by discounting the total payable amount to the present value at the market interest rate.
Acquisition cost of a financial asset received in an exchange transaction is determined by adding all
related transaction costs to the value prescribed by the exchange agreement. If the value of the asset is not
prescribed by the exchange agreement,, the acquisition cost of the financial asset equals to the fair value
of the financial asset given up in exchange.
Initial recognition and measurement of financial liabilities
Financial liabilities shall be recognized in accounting when, and only when, an entity assumes an
obligation to deliver cash or another financial asset. Forecast transactions and originated financial
guarantees that are not yet due are not recognized as the entitys liabilities as long as they do not meet the
definition of a financial liability.
At initial recognition, an entity shall measure a financial liability at cost, i.e., at the value of the received
asset or service. Related transaction costs shall be recognized as expenses in the income statement in the
same period when they are incurred. The cost of a financial liability incurred in an exchange transaction is
determined on the basis of the value prescribed by the exchange agreement. If the exchange agreement
does not prescribe the value of the newly incurred liability, the cost of the financial liability equals to the
fair value of the financial liability given up in exchange.
Subsequent measurement of financial assets
At each balance sheet date financial assets shall be re-measured as follows: - available-for-sale financial
assets shall be measured at their fair value; non-current loans and amounts receivable (including the
current portion of non-current loans and amounts receivable), and held-to-maturity financial assets shall
be measured at amortized cost; and current loans and amounts receivable shall be measured at acquisition
cost less impairment (loss due to decrease in value). Investments in securities that do not have a quoted
market price in an active market and whose fair value cannot be determined, in financial statements shall
be measured at acquisition cost less impairment.
Financial assets that are not measured at fair value and have fixed maturities shall be measured at
amortized cost using the effective interest rate method. The entitys originated or taken over non-current
loans and amounts receivable after one year are measured at amortized cost, regardless of whether the
entity intends to hold them to maturity.
Subsequent measurement of financial liabilities
At each balance sheet date financial liabilities (except for current liabilities not linked to market prices)
shall be revalued as follows: - linked to market prices at fair value; other non-current financial liabilities
(including the current portion of non-current liabilities) at amortized cost; and other current financial
liabilities at cost.
De-recognition of financial assets and financial liabilities
An entity shall derecognize a financial asset (or part of it) when, and only when, it loses the right to
control the asset (or part of it). The entity loses the right to control the asset when it obtains all expected
benefits as specified by the contract, the right expires, or the entity transfers these rights to other entities.
An example of transferring rights to control a financial asset is a factoring agreement, under which an
entity transfers the right to collect its trade debtors to another entity.
A transfer of amounts receivable (debts) (i.e., factoring without a right of recourse whereas a buyer of
debts does not have a right to renounce the agreement) is regarded as the sale of debts, and they are
derecognized immediately if: - by selling the debts the entity transfers substantially all risks related to
recovering these debts, and their repurchase is not provided for; debts being transferred can be reliably
measured (doubtful debts, discounts, debt collection expenses, etc); the buyers refusal of the transaction
is not provided for.
If a transfer of debts does not meet these requirements, it is called a transfer of debts with collateral (i.e.,
factoring with a right of recourse, whereas a buyer of debts has a right to recover cash from a seller of
debts if the sellers debtors do not pay). In accounting such transaction is treated as a collateral loan. In
this case, debts are derecognized after the receipt of total consideration specified by the agreement. If the
ownership of a financial asset is transferred to another entity in exchange for cash or another
consideration but this transfer does not comply with the requirements for de-recognition, the entity
transferring the right of ownership treats the transaction as a collateral loan. For example, an entity enters
into a repurchase agreement to transfer the right of ownership of an asset to another entity, but still
controls the asset and will repurchase the right of ownership after a specified period of time.
In determining whether an entity has lost a right to control an asset, one must take into consideration the
assets location and control. If the transferee still controls the asset, it shall not derecognize the asset in its
accounting. For example, an entity enters into a transaction to transfer the right of ownership of an asset
to another entity but retains the right to receive economic rewards from this asset and has an obligation to
repurchase the transferred right by repaying the cash, whereas the entity obtaining the right of ownership
receives income only from lending cash. On de-recognition of a financial asset or part of it after its
transfer or due to other reasons, the result (profit or loss), if any, of the transaction is presented in the
income statement.
When an issued guarantee is recognized as a financial liability, it is measured at its fair value until the end
of the guarantee period. If the fair value cannot be measured reliably, it is measured at the higher of the
amount stated in the letter of guarantee and the amount of provision for the guarantee. An entity shall
derecognize a financial guarantee or a part of it when, the liability is discharged or cancelled or expires.
The result (profit or loss), if any, of a transferred or otherwise terminated financial liability (or a part of
it), shall be presented in the income statement.
If a creditor has exempted a guarantor from an obligation to pay, but the guarantor has to assume the
obligation again because the initial debtor has failed to meet its obligations, the guarantor shall recognize
a new financial liability equal to the re-measured fair value of the guarantee. If an entity transfers a part
of, or entire financial liability to others and thus creates a new financial asset or assumes a new financial
liability, the transferred financial liability or its part shall be derecognized.
Fair value of a financial asset and financial liability
Fair value of a financial asset or financial liability can be measured reliably, if the fluctuations in their fair
values are not significant or the probabilities of various estimates within the range can be reasonably
assessed and used in estimating fair value. Examples of cases when fair value of a financial asset or
financial liability can be reliably measured: - the price is quoted in an active securities market; the price is
determined by an independent expert and cash flows from a financial asset or financial liability can be
reliably measured; fair value is determined applying a measurement model that estimates fair value on the
basis of data which can be reliably measured, since it is received from active markets.
Gain and loss arising from a change in fair value of a financial asset and financial liability
A gain or loss arising from a change in fair value of a financial asset or financial liability shall be included
in the income statement of the reporting period. Amortization amount for the reporting period of a
financial asset measured at amortized cost is recognized in the income (interest) from financing activities
items of the income statement. Amortization amount for the reporting period of a financial liability that
was measured at amortized cost is recognized in the expenses (interest) for financing activities items of
the income statement. Interest and losses related to financial liabilities shall be recognized as expenses in
the income statement. Gain related to the change in the fair value of financial liabilities shall be
recognized as income in the income statement.
Impairment of financial assets (loss due to decrease in value)
A value of a non-current financial asset has decreased if its carrying value is greater than expected
recoverable amount of this asset. At each balance sheet date an entity shall assess whether there is any
objective evidence that the value of a non-current financial asset (or a group of assets) may decrease. If
such evidence exists, the entity shall calculate an expected recoverable amount of this asset (or a group of
assets) and recognize loss due to decrease in value.
Evidence that a financial asset (or a group of financial assets) is impaired is based on information that: -
the issuer has significant financial difficulties; there is a breach of contract, such as a default in interest or
principal payments; the lender, for economic or legal reasons related to the borrowers financial
difficulties, has granted the borrower concessions that the lender would not otherwise consider; there is a
large probability that the issuer will enter bankruptcy or other form of reorganization; impairment loss
was recognized in the previous reporting period; the disappearance of an active market for this asset due
to financial difficulties; the previous experience suggests that the total value of the amounts receivable
will not be recovered.
If it is probable that the entity will not recover its amounts receivable (principal and interest) or held-to-
maturity financial asset, the impairment loss (therein doubtful debts) shall be recognized. The amount of
loss shall be included in the income statement of the reporting period. Impairment loss of each individual
item of financial assets shall be measured and recognized separately. Impairment loss of a group of
similar financial assets may be measured and recognized jointly. Impairment loss of an asset can be
calculated on the basis of its fair value determined according to the quoted market price. Impairment of a
financial asset carried at amortized cost is measured using effective interest rate. If a loan, amount, or
held-to-maturity financial asset has a variable interest rate specified by the contract, the effective interest
rate for determining recoverable amount can be the average of interest rates specified by the contract.
If an asset is pledged as collateral and it is probable that the right to buy it back will be lost, the owner of
the asset measures impairment loss on the basis of fair value of the collateral. If during the subsequent
period the amount of impairment or doubtful debt decrease, the derecognized amount must be reversed.
After the reversal of the derecognized amount, the carrying amount of the financial asset shall not exceed
its acquisition or amortized cost, which would apply if the impairment had not been recognized. The
reversed amount shall be included into the income statement of the reporting period.
The carrying amount of a financial asset that is not carried at fair value because its fair value cannot be
reliably measured shall be tested for indications of impairment at each balance sheet date. This is
performed on the basis of analysis of discounted expected net cash flows. If there are any indications of
impairment of a financial asset, impairment loss is equal to the difference between the carrying amount
and the recoverable amount of the asset.
Disclosure information in financial statements
In complete explanatory notes to financial statements the following information shall be disclosed: -
accounting policy for financial assets and financial liabilities; criteria for recognition of financial assets
and financial liabilities; methods of accounting for investments; a description of cash and cash
equivalents; methods used to measure financial assets and financial liabilities and the assumptions applied
in determining which methods to use.
Other information to disclose includes; the acquisition cost and fair value of a group of available-for-sale
financial assets and the fair value of financial liabilities linked to market prices. If the fair value of these
groups of financial assets and financial liabilities is not measured, or measured but not presented in the
balance sheet, the reasons for not measuring or not presenting the fair value shall be disclosed; profit and
loss recognized in the income statement due to changes in value of financial assets or financial liabilities;
discount rates applied; the acquisition cost of non-current financial assets, their carrying amount and its
change during the reporting period; originated loans (in groups) to other entities, specifying their
currencies, interest rates, maturities, received collaterals, etc.
The entity must also disclose held-to-maturity financial assets, their maturities, interest rates; the amount
of cash, the use of which is restricted for a period longer than one year; the largest groups of amounts
receivable and doubtful debts; the amounts of cash equivalents; and amounts payable and received loans
on the basis of settlement periods, specifying debt commitments, the execution of which is secured by
state guarantee and (or) entitys assets, separately.
EQUITY INSTRUMENTS
An equity instrument refers to a document which serves as a legally applicable evidence of the ownership
right in a firm, like a share certificate. Equity instruments are, generally, issued to company shareholders
and are used to fund the business. It is, however, not necessary that the issued equity must return a
dividend for it is based on profits and the terms of the business.
Categories of equity instrument
The equity instruments can be divided into numerous categories, the most common ones being:
Common stock is one of the equity instruments issued by a public company to raise funds from
the public. The shareholders have the privilege of being entitled to co-ownership of the company
in addition to having the right to vote at the shareholders meeting as per the proportion of shares.
Besides, they also have rights to take decision in important issues like raising capital to pay
dividends and merging business. Moreover, the shareholders can also apply for new shares when
the company has increased capital or issues a new allocation to the shareholders.
Convertible debenture is another type of equity instrument which is similar to common bonds, the
only difference being that a convertible debenture can be converted into common stock during the
particular rates and prices mentioned in the prospectus. Convertible debentures are quite popular
for profitable returns from converted stock are higher than those from common bonds.
Preferred stock, another equity instrument, involves shareholders participation as a business
owner as in common stock. The variation lies in the fact that the preferred shareholders are
entitled to receive repayment of capital prior to the common shareholders. If an entity issues
preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory
redemption feature at a future date, the substance is that they are a contractual obligation to
deliver cash and, therefore, should be recognized as a liability. In contrast, preference shares that
do not have a fixed maturity and where the issuer does not have a contractual obligation to make
any payment are equity. In this example even though both instruments are legally termed
preference shares they have different contractual terms and one is financial liability while the
other is equity.
Depository receipt is an equity instrument which entitles the rights to preference common bonds,
ordinary debenture, and convertible debentures. Investors holding a depository receipt get
benefits as shareholders of listed companies in every respect, be it the voting rights or financial
rights in the listed companies.
Transferable Subscription Rights (TSR) is an equity instrument issued by a company to all
shareholders in proportion to number of shares already held by them. This instrument is used as
evidence in shares of the company. The existing shareholders can sell/transfer their rights to
others if they do not want to exercise their shares.





3.0 Cost Allocation and Absorption into Products
Learning objectives:
After reading through this topic, you should be able to:
a. Understand how to allocate costs to products
b. Differentiate between direct and indirect costs
c. Present information on cost from a given data
d. Differentiate marginal costing and absorption costing
e. When to apply marginal costing or absorption costing

Assignment of Direct and Indirect Costs
Costs that are assigned to cost objects can be divided into categories - direct costs and indirect costs.
Indirect costs are sometimes termed overheads.
Direct cost can be accurately traced to cost objects because they can be specifically and exclusively traced
to a particular cost object. Whereas indirect costs cannot. Where a cost can be directly assigned to a cost
object the term cost tracing is used.
A cost allocation is the process of assigning costs when a measure does not exist for the quantity of
resources consumed by a particular cost object. The basis that is used to allocate costs objects is called an
allocation base or cost driver. E.g. cost of receiving materials which is influenced by number of receipts
where the allocation base is significant determinant cost we describe it as cause-and-effect allocations.
Where a cost allocation base is used that is not a significant determinant of its cost the term arbitrary
allocation is used e.g. direct labour hours used to allocate cost of materials received.
- Two types of systems can be used to assign indirect costs to cost objects - traditional costing system
and Activity Based Costing System (ABC). Traditional Costing System relies on arbitrary cost
allocations. ABC uses cause- and - effect costs allocations.





Direct Cost



Cost
Objects
Indirect cost Traditional System
ABC
System
Cost allocation




Cost centres and cost pools are used to describe a location to which overhead costs are initially
assigned. The total costs accumulated in each cost centre are then assigned to cost objects using a separate
allocation base for each centre.
Cost Allocation Process
A. Assign all manufacturing overheads to production and service cost centres. To do this requires the
preparation of an overhead analysis sheet.
Cost Basis of allocation
1. Property taxes, lighting and heating, rent Floor Area
Insurance of building etc

2. Employee related expenses. Number of employees, i.e work management,
works canteen, pay roll
3. Depreciation and insurance of plant Book value of plant and machinery

B. Reallocation of the costs assigned to service cost centres to production cost centres.
C. Compute separate overhead rates for service cost centres to production cost centre.
Allocate overheads of each production centre to products passing through that centre using the
appropriate base for allocation. The most common used by traditional costing system are machine hours,
direct labour hours, direct wages, direct materials cost, number of units produced, prime cost. The
overhead rates are calculated by applying the following formula:
Total cost Centre overhead
Overhead Allocation Base
(ie, direct labour hours , machine hours, direct labour cost, direct material cost)
D. Assign Cost Centre overheads to products or other chosen cost objects. The final step is to allocate the
overheads to products passing through the production centres.
Illustration 1
Fig 1 Cost Allocation and Cost Tracing
ABC Ltd manufactures two products, A and B. Product A is a low sales volume product with direct costs
of GH100. It is manufactured in batches of 100 units and each requires 5 hours in machine centre X, 10
hours in machine centre Y and 10 hours in the assembly centre. Product B is a high sales volume product
thus enabling it to be manufactured in larger batches. It is manufactured in batches of 200 units and each
unit requires 10 hours in machine centre X, 2 hours in machine centre Y and 20 hours in the assembly
centre. Direct cost of GH 200 have been assigned to product B. The total overheads for the machine
centre X is GH 4,300,000 and total machine hours are 2,000,000. Machine Centre Y = GHC 3,800,000
and 1,000,000 machine hours, Assembly centre is GHC3600,000 and 2,000,000 labour hours.
Solution
Product A GH
Direct cost(100 units x 100) 10,000
Overhead allocations:
Machine centre A: (100 units x 5hrs x 2.15) 1,075
Machine centre B: (100units x 10hrs x 3.80) 3,800
Assembly (100 x 10hrs x 1.80) 1,800
Total cost 16,675
Cost per unit (
16,675
100
) = GH166.75
Product B
GH
Direct cost (200 units x 200) 40,000
Overhead allocation:
Machine centre A (200 x 20hrs x 2.15) 4,300
Machine centre B (200 x 20hrs x 3.80) 15,200
Assembly (200 x 20 x 1.80) 7,200
Total cost 66,700
Cost per unit (66,700/200) = GHC333.50
Workings
Computation of overhead absorption rates:
Total Cost Centre overhead
Overhead allocation base

Machine centre X = 4,300,000
2,000,000
= 2.15/machine hour

Machine centre Y = 3,800,000
1,000,000
= 3.80/machine hour

Assembly department = 3,600,000
2,000,000
= 1.80 per direct labour hour.


Illustration 2
The annual overhead cost for Cosmos Enterprise Limited which has three production centres (two
machine centres and one assembly centre) and two service centres (procurement and general factory
support) are as follows:
Indirect wages and supervision GHC GHC
Machine centre X : 1,000,000
Y: 1,000,000
Assembly 1,500,000
Materials procurement 1,100,000
General factory support 1,480,000 6,080,000
Indirect materials:
Machine X: 500,000
Y: 805,000
Assembly 105,000
Material procurement
General factory support 10,000 1,420,000
Lighting and Heating 500,000
Property taxes 1,000,000
Insurance of machinery 150,000
Depreciation of machinery 1,500,000
Insurance of buildings 250,000
Salaries of works management 800,000
Canteen services 1,000,000 5,200,000
Total cost 12,700,000
The following information is also available:
Book value Area occupied No of direct labour machine
of machinery (Sq metres) emplyees hours hours

Machine shop X 8,000,000 10,000 300 1,000,000 2000,000
Y 5,000,000 5,000 200 1,000,000 1,000,000
Assembly 1,000,000 15,000 300 2,000,000
Stores 500,000 15,000 100
Maintenance 500,000 5,000 100
15,000,000 50,000 1000

Details of total materials issued (i.e. direct and indirect materials) to the production centres are as follows:

Machine Shop X 4,000,000
Machine Shop Y 3,000,000
Assembly 1,000,000
8,000,000

You are required to allocate the overheads listed above to the production and service centres.
Production Centres Service
Centres
Expenditure Basis of Total Machine Machine Assembly Material General
Allocation centre X centre Y procurement factory
Support
Indirect wages
and supervision Direct 6,080,000 1,000,000 1,000,000 1,500,000 1100,000 1480,000
Indirect materials Direct 1,420,000 500,000 805,000 105,000 10,000
Light and heating Area 500,000 100,000 50,000 150,000 150,000 50,000
Property taxes Area 1000,000 200,000 100,000 300,000 300,000 100,000
Insurance of machinery Book
value 150,000 80,000 50,000 10,000 5,000 5,000
Depr. of machinery Book
value 1,500,000 800,000 500,000 100,000 50,000 50,000
Insurance of buildings Area 250,000 50,000 25,000 75,000 75,000 25,000

Salaries of workers mgt. No of
Employees 800,000 240,000 160,000 240,000 80,000 80,000

Canteen services No of
Employees 1,000,000 300,000 200,000 300,000 100,000 100,000
12,700,000 3,270,000 2,890,000 2,780,000 1,860,000 1,900,000
Stage 2
Reallocation of service Centre costs to production centres
Materials procurements:
value of material issued 930,000 697,500 232,500 (1,860,000) ---------
General factory support:
direct labour hrs 475,000 475,000 950,000 ------- (1,900,000)
Stage 3
Machine hrs and direct labour hrs = 2,000,000 1,000,000 2,000,000
machine hr overhead rate 4,675,000 4,062,500
2,000,000 1,000,000
2.3375 4.0625
=2.34 4.06

direct labour hour overhead rate = 3,962,500
2,000,000
1.98125
= 1.98

Absorption Costing and Marginal/Variable Costing
Absorption costing is sometimes referred to as full costing. It is a costing system in which all the fixed
manufacturing overheads are allocated to products. The alternative system, which assigns only variable
manufacturing cost to products is called variable costing/marginal costing/direct costing. These are
illustrated the diagrams below


Fig 1: Absorption costing Cost





















Non manufacturing cost Manufacturing
cost
Manufacturing cost

Non manufacturing cost
Material
Labour Overhead
Work in Progress
Finished
Goods
Profit and Loss
Cost
material Labour Overhead
Variable overhead
Fig 2: Marginal Costing





Fig 1 B Diagram showing Variable Costing


External and Internal Reporting
Absorption costing is required for external reporting purposes. For inventory valuation purposes all costs
relating to the inventory should be taken into consideration. For consistency and comparison purposes,
stocks should be valued using absorption or full costing. This method is recommended by the IFRS. IFRS
states ''in order to match costs, cost of finished goods and WIP should comprise that expenditure which
have been incurred in the normal course of business in bringing the product or service to its present
location and condition. Such costs will include related product overheads, even though these may occur
on time basis''.
For management or internal reporting purposes variable costing or absorption costing can be used to
access the productivity of each product or segment of the organization. Most organizations use variable
costing for decision making purposes.
Example:
The following information is available for periods 1 6 for the Samuelson Company

Unit Selling Price 10
Unit Variable Cost 6
Fixed cost for each period 300,000
The Company produces only one product. Budgeted activity is expected to average 150,000 units per
period and production and sales for each period as follows:
1 2 3 4 5 6
Units Sold 150 120 180 150 140 160
Work in progress
Units Produced 150 150 150 150 170 140
All figures are in 1000's of units.
There are no opening stocks at the start of period 1 and the actual manufacturing fixed overhead incurred
was 300,000 per period. We shall also assume that manufacturing overheads are 100,000 per period.
Solution: Variable Costing Approach
Periods
1 2 3 4 5 6
Open Stock 180 180
Production Cost 900 900 900 900 1,020 840
Closing Stock (180) (180) (60)
Cost of Sales 900 720 1080 900 840 960
Fixed Cost 300 300 300 300 300 300
Total Cost 1,200 1,020 1,380 1,200 1,140 1,260
Sales 1,500 1,200 1,800 1,500 1,400 1,600
Gross profit 300 180 420 300 260 340
Less: Non
manufacturing costs 100 100 100 100 100 100

Net Profit 200 80 320 200 160 240



2. Absorption Costing Approach
Periods
1 2 3 4 5 6
Open Stock 240 240
Production Cost 1,200 1,200 1,200 1,200 1,360 1,120
Closing Stock (240) (240) (80)
Cost of Sales 1,200 960 1,440 1,200 1,120 1,280
Adjustment for under/(over)
Recovery of stock (40) 20

Total cost 1200 960 1440 1200 1080 1300
Sales 1500 1200 1800 1500 1400 1600
Gross Profit 300 240 360 300 320 300
Less Non manufacturing
Factory Cost 100 100 100 100 100 100
Net Profit 200 140 260 200 220 200

Workings :
Budgeted period production = 150,000
Fixed cost = 300,000
Fixed cost per unit = 300000
150000
= 2
Total cost therefore is (6+2)=8

2. Under/over recovery of overhead
i. Production for period 5 = 170,000
Fixed Cost absorbed (170,000 x 2) = 340,000
Fixed cost incurred = 300,000
over recovery of cost = 40,000
Since over recovery we subtract

ii. Period 6 production = 140,000
fixed cost absorbed = 280,000
fixed cost incurred = 300,000
under recovery of cost = 20,000
Since it is under recovery we add to total cost.

Comparison of their impact on profit - Absorption and Variable Costing
a. Profits are equal for periods 1 and 4.
b. Profits are higher for absorption costing in periods 2 and 5.
c. Profits are higher for Variable costing for periods 3 and 6.
a. Production equals sales
If production equals sales for both methods as in periods 1 and 4 inventories will neither increase or
decrease thus, whenever sales are equal to production the profit will be the same for both the absorption
and variable costing systems.
b. Production exceeds sales
In periods 2 and 5 the absorption costing system produces higher profit: In both periods production
exceeds sales. Profits are higher for absorption costing when production exceeds sales because inventories
are increasing. The effect is that greater amount of fixed overheads in the closing stock is being deducted
from the expenses of the period than is being brought forward in the period. In general if production is in
excess of sales the absorption costing system will show a higher profit than the variable costing system.
c. Sales exceeds production
In period 3 and 6 the variable costing system produces higher profit: in both periods sales exceeds
production. When this occurs inventories decline and a higher amount of fixed overheads will need to be
brought forward as an expense in the opening inventory than is being deducted in the costing inventory
adjustment. As a general rule if sales are in excess of production the variable costing system will show a
higher profit than the absorption costing system.

Some Arguments In Support Of Variable Costing
a) Variable costing provides more useful information for decision making. The separation of fixed
and variable costs helps to provide relevant information about costs for decision making.
Relevant costs are required for variety of short term decisions; for example whether to make or
buy externally, whether to accept or reject an order etc.
b) Variable costing removes from profit the effect of inventory changes. With variable costing profit
is a function of sales volume, whereas with absorption costing profit is a function of both sales
and production. In absorption costing it is possible for profit to decline when sales volume
increases. Where levels fluctuate significantly, profit may be distorted when they are calculated
based on absorption costing system since the stock changes will significantly affect the amount of
fixed overheads allocated to an accounting period.

c) Variable costing avoids fixed overheads being capitalized in unsuitable stocks. In a period when
sales demand decreases a company can end up with surplus stocks on hand. With an absorption
costing only a portion of fixed overhead incurred during the period will be allocated as an
expense because the remainder will be absorbed in the valuation of surplus stock. If these stocks
cannot be disposed of, profit calculation will be misleading for the overheads will have been
deferred to later accounting periods.
Some Arguments In Support Of Absorption Costing
a) Absorption costing does not understate the importance of fixed costs. It is argued that decisions
based on a variable costing system may concentrate only on sales revenues and variable costs and
ignore the fact that fixed cost must be met in the long run. For example, if a pricing decision is
based on variable costs only then sales revenue may be insufficient to cover all the costs. The use
of absorption costing system to allocate fixed costs are to ensure that all costs covered.
b) Absorption costing avoids fictitious losses being reported. In a business that relies on seasonal
sales and in which production is built up outside the sales season to meet demand the full amount
of fixed overheads incurred will be charged in a variable costing system against sales. In those
periods where production is being built up for sales in a later season, sales revenue will be low
but fixed costs will be charged as an expense. The result is that losses will be reported during
out-of-season periods and large profits will be reported in the periods when the goods are sold.
By contrast in absorption costing fixed overheads will be deferred and included in closing stock
valuation and will be recorded as expense only when they are sold. Losses are therefore unlikely
to be reported in the periods when stocks are being built up. In these circumstances absorption
costing appears to provide the more logical profit calculation.
c) Fixed overheads are essential for production. The production of goods is not possible if fixed
manufacturing costs are not incurred. Consequently fixed manufacturing overheads should be
allocated to units produced and included in the inventory.
d) Absorption costing system is consistent with external reporting. Top management may prefer
their internal profit reporting system to be consistent with the external financial accounting
absorption costing system so that they will be congruent with the measures used by financial
markets to appraise overall company with the international financial reporting standards (IFRS).







4.0 Planning, Controlling and Recording the Audit Work
Learning objectives:
After reading through this topic, you should be able to:
a. Understand the importance of planning to the auditor
b. Understand how to control your work as an auditor and record them
c. Know what working papers are and their importance to the auditor
d. Differentiate the two types of working papers
e. Differentiate the contents of current and permanent files
a. Planning
The purposes of planning the audit are:
1. To establish the means of achieving the objectives of the audit.
2. To assist in the direction and control of audit work.
3. To ensure that the work is completed expeditiously( and hence minimize costs)

b. Typical planning procedures
1. Consider the background of the clients business and attempt to ascertain any problems for that
sector of industry or commerce which may affect his audit.
2. Consider an outline plan to the audit including the extent to which the auditor may wish to rely
upon internal controls and the extent to which work can be allocated to interim or final audit
stages.
3. Review matters raised in the audit of the previous year by examining his files and discussion
points with staff previously involved in the audit to ascertain those facts which may have
relevance to the current year.
4. Assess the effect of any changes in legislation or accounting practice on the financial statements
of the client.
5. Review any management or interim accounts which the client may have prepared as these may
indicate areas of concern in his audit.
6. Meet the senior management of the client to identify problem areas, e.g. materials variances
between budgeted and actual results.
7. Consider the timing of significant phases in the preparation of the financial statements.
8. Consider the extent of which the clients employees may be able to analyze and summarize the
financial data and the relevance to his audit of work carried out by the clients Internal Auditors.
9. Determine the number and grade of staff to be allocated to each stage of the audit.
10. Consult members of the audit team to discuss any foreseeable problems.
11. A budget should be prepared allocating the time for each member of the audit team.
12. The client should be informed of the expected date of attendance by the Auditors staff and his
agreement obtained.
Quality Control
The reporting partner needs to be satisfied that on each audit the work is being performed to an acceptable
standard. The most important elements of control of an audit are the direction and supervision of the audit
staff and the review of the work they have done.
Typical control procedures:
a. Allocation of staff: - audit staff should be adequately trained such that they understand their
responsibilities and the objectives of the work which they are expected to perform.
b. Working papers: - the basic control requirement is that all audit work performed is properly
recorded. If working papers are standardized this help to ensure that the work is both performed
and is recorded as it is performed.
c. Review: - this can take various forms, hot review, post-audit review, audit review department,
peer review and consultation.
Recording
Working papers are vital to the planning and control functions mentioned above. The papers contain
various elements of audit evidence gathered by the auditor. The reasons for preparing audit working
papers include the following:
a. Working papers give the partners the assurance that in-charge auditor(s) have properly completed
the job by obtaining the relevant evidence.
b. Working papers provide evidence that an effective audit has been carried out. They set out
difficulties encountered, evidence of work performed and conclusions drawn.
c. Working papers increase the efficiency and effectiveness of the audit by ensuring that the
members of the audit staff carry out their duties in a systematic way and understanding the
significance of the tasks they are performing.
Working papers should serve the following purposes/objectives
1. They assist the engagement partner in assessing whether or not work assigned to staff has been
properly carried out.
2. Working papers provide to an appreciable degree evidence of work performed and the various
conclusions drawn thereon in enabling the auditor to express his opinion on the financial
statement.
3. They serve as a tool for training staff on the job and ensure consistency and uniformity of work
done.
4. The preparation of audit working papers encourages the auditor to adopt a methodical approach.
5. Working papers serve as a documentary house for future reference.
6. They provide an important basis for the evaluation of the professional competence of audit staff.
7. They provide a permanent record for data collected in the course of audit.
Contents of Working papers
Although the quantity, type and content of working papers will vary with the circumstances, they should
generally be sufficiently extensive to cover the following;
1. How exceptions or points noted for management letter have been dealt with.
2. How queries or review points raised by manager and /or partner were cleared or disposed of.
3. Evidence that;
a. Audit strategy has been properly prepared.
b. Work has been properly planned and carried out in accordance with strategy
c. Work has been supervised and reviewed accordingly.
4. Evidence that the accounts or information upon which the auditor is reporting are in agreement
with clients books and other accounting records.
5. The make- up of assets and liabilities appearing in the balance sheet including information as to
how their existence, ownership, valuation etc. have been verified.
6. Analysis of figures appearing in the profit and loss accounts.
7. A description of the firms accounting system and the extent to which and the manner in which
the firms system of internal control has been reviewed and evaluated in determining the auditing
procedures to be adopted.
Qualities of working papers
A good working paper should possess the following qualities;
a. Heading: - a working paper should have a heading defining its objective. The name of the clients,
financial year end, name of staff preparing the working paper and date of preparation should be
explicitly stated.
b. Easily readable: - the general appearance of working papers should be legible and neat capable of
being read without difficulty.
c. Precision and understandability: - the working papers should be so clear and understanding to the
extent that a person professionally competent but not involved in the execution of the work will
readily understand it.
d. Completeness and accuracy: - working papers should be free from unessential information and be
complete.
e. Conclusions: - working papers should include the auditors conclusion arrived at after examining
evidence obtained.
f. Items relating to preparation: - the source of records from which the information is drawn should
be stated e.g. ledger, account, invoice etc.
Preparation of working papers
The following points should be noted when preparing working papers
a. They should be given the appropriate heading
b. Every working paper should be prepared in a permanent form either in ink or ball- pen. Pencils
may be used for preparing flow charts.
Current Audit files (working papers)
This relates primarily to the set of draft accounts or statement being audited and should normally
contain the following:
1. A signed copy of accounts or statements on which the auditor is reporting.
2. An index (cross-referenced), internal control questionnaires, standard audit programmes and
relevant flow charts.
3. A schedule of each item in the draft account prepared by management.
4. Check-lists concerning compliance with companies code, accounting standards (IFRS) and any
other statutory requirement.
5. A record showing queries raised during the audit and their disposal.
6. A schedule of important statistics, working ratios and comparative figures.
7. Extracts of relevant minutes of directors or shareholders' meetings cross referenced to working
schedules.
8. Letters of representation i.e., written confirmation and opinion expressed in respect of matters
such as values placed on stock, goodwill, contingent liabilities, etc
9. Pending litigation letters from company solicitors.
Permanent Audit files (working papers)
This contains matters of continuing importance affecting the company and should be suitably kept and
indexed. The documents to be found on the file are:
1. A copy of the letter of engagement of the Auditors.
2. A copy of the updated Regulations of the Company or in case of partnership, the agreement
(partnership deed)
3. A description of the companys business
4. The Organizational Chart showing management structure of the company with specimen
signatures attached.
5. A list of books and places of which they are kept and the names of the officials responsible for
their maintenance.
6. Updated internal control questionnaires supported by flow charts.
7. Addresses of the registered office and all other premises.
8. An outline of organizational history.
9. Correspondences on the companys internal control matters.
10. The firms Internal Audit and accounting instruction.
11. A list of companys directors, their positions and if possible their shareholdings.
12. A list of all properties and investments owned by the company.
13. A list of insurance policies undertaken by the company.
14. Names and addresses of bankers, solicitors, valuers, insurers etc
The permanent file is updated during each years audit. All superseded documents are removed and
replaced accordingly.
QUESTIONS
1. Discuss the functions and essential contents of Audit working papers.
2. What are audit working papers and for what purpose are they kept?
3. Explain and state the content of current and permanent audit files.
4. What are the characteristics of good working papers
5.0 Translation of Foreign Currency Financial Statements (IAS 21)
Learning objectives:
After reading through this topic, you should be able to:
a. How to translate a financial statement of a foreign entity to the investor entity's currency
b. Understand the functional currency and presentation currency
c. How to convert items from functional currency to presentation currency
d. Differentiate between monetary items and nonmonetary items
INTRODUCTION
IAS 21 adopted the functional currency approach that requires the foreign entity to present all of its
transactions in its functional currency. Translation is the process of converting transactions denominated
in its functional currency into the investors presentation currency. Presentation currency is the currency
in which the entitys financial statements are presented. There is no limitation on the selection of a
presentation currency by a reporting entity. Functional currency is the currency of the primary economic
environment in which the entity operates. That is the currency which the reporting entity measures the
items in its financial statements, and which may differ from the presentation currency in some instances.
If an entitys transactions are denominated in other than its functional currency, the foreign transactions
must first be adjusted to their equivalent functional currency value before translating to the presentation
currency (if different from the functional currency).
Three different situations that can arise in translating foreign currency financial statements are illustrated
below:
Foreign
entity,s
local
currency
Foreign
entitys
functional
currency
Investors
presentation
currency
Translation method Exchange
differences
Euro Euro GHC Translation to the presentation
currency at the closing rate for all
assets and liabilities
Other
comprehensive
income (OCI) and
equity
Euro GHC GHC Translation to the functional
currency (which is also the
presentation currency) at the closing
rate for all monetary items
Gain (or loss) in
profit or loss
Dollar Euro GHC 1. Translation to functional
currency
2. Translation to the
presentation currency
Gain (or loss in
profit or loss
OCI and equity

IAS 21 prescribes two sets of requirements when translating foreign currency financial statements. The
first is to report foreign currency transactions by each individual entity, which may be part of reporting
group, in the individual entities functional currencies or re-measuring the foreign currency financial
statements into the functional currency. The second is to translate the entitys financial statements (e.g.
those of subsidiaries) from the functional currency into presentation currency (e.g. of the parent).
Translation of functional currency financial statements into a presentation currency
If the investors presentation currency (e.g. GHC) differs from the foreign entitys functional currency
(e.g. euro), the foreign entitys financial statements have to be translated into the presentation currency
when preparing consolidated financial statements. In accordance with IAS 21, the method used for
translation of the foreign currency financial statements from the functional currency into the presentation
currency is essentially what is commonly called the current (closing) rate method. Under this method, all
assets and liabilities, both monetary and non-monetary, are translated at the closing (end of the reporting
period) rate. However, financial statements of preceding years should be translated at the rate(s)
appropriately applied when these translations were first performed (i.e. not to be updated to current
closing or average rates). The following rules should be used in translating the financial statements of a
foreign entity:
1. All assets and liabilities in the current year-end statement of financial position, whether monetary
or non-monetary, should be translated at the closing rate in effect at the date of that statement of
financial position.
2. Income and expense items in each statement of comprehensive income should be translated at the
exchange rates at the dates of the transactions, except when the foreign entity reports in a
currency of a hyperinflationary economy, in which case they should be translated at closing rate.
3. All resulting exchange differences should be recognized in other comprehensive income (OCI)
and reclassified from equity to profit or loss on the disposal of the net investment in a foreign
entity.
4. All assets and liabilities in prior period statements of financial position, being presented currently
(as comparative information) whether monetary or non-monetary, are translated at the exchange
rates (closing rates) in effect at the date of each of the statements of financial position.
5. Income and expense items in prior period statements of income, being presented currently are
translated at the exchange rates as of the dates of the original transactions (or averages, where
appropriate).
The theoretical basis for this translation approach is the net investment concept wherein the foreign
entity is viewed as a separate entity that the parent invested into, rather than being considered as part of
the parents operations.
Translation (re-measurement) of financial statements into functional currency
When a foreign entity keeps its books and records in a currency other than its functional currency,
translation of foreign currency items presented in the statement of financial position into functional
currency (re-measurement) is driven by the distinction between monetary and non-monetary items.
Foreign currency monetary items are translated using the closing rate (the spot exchange rate at the end of
the reporting period). Foreign currency non-monetary items are translated using the historical exchange
rates. There is a presumption that the effect of exchange rate changes on the foreign operations net assets
will directly affect the parents cash flows, so the exchange rate adjustments are reported in the parents
profit or loss.
In general, translation of non-monetary items (inventory, plant assets, etc) is done by applying the
historical exchange rates. The historical rates are those in effect when the asset was acquired or (less
often) when the non-monetary liability was incurred, but if there was a subsequent revaluation, if this is
permitted under IFRS, then using the exchange rate at the date when the fair value was determined.
When a gain or loss on non-monetary item is recognized in profit or loss (e.g. from applying lower of cost
or realizable value for inventory), any exchange component of that gain or loss should be recognized in
profit or loss. When, on the other hand, a gain or loss on a non-monetary item is recognized under IFRS
in Other Comprehensive Income (OCI) (e.g. from revaluation of plant assets, or from fair value
adjustments made to available-for-sale-securities investments), any exchange component of that gain or
loss should also be recognized in other comprehensive income.
As a result of conversion into functional currency, if a foreign unit is in a net monetary asset position
(monetary assets in excess of monetary liabilities), an increase in the direct exchange rate causes a
favorable result (gain) to be reported in profit or loss; if it is in a net monetary liability position (monetary
liabilities in excess of monetary assets), it reports an unfavorable result (loss). If a foreign unit is in a net
monetary asset position, a decrease in the direct exchange rate causes an unfavorable result (loss) to
report, but if it is in a net monetary liability position, a favorable result (gain) is reported.
In cases when an entity keeps its books and records in a currency (say dollar) other than its functional
currency (say euro), and other than the presentation currency of the parent (GHC), the two-step
translation process would be required: (1) translation of the financial statements (from dollar) into
functional currency (euro), and (2) translation of functional currency (euro) into reporting currency
(GHC).
Net investment in foreign operation
A special rule applies to a net investment in a foreign operation. According to IAS 21, when the reporting
entity has a monetary item that is receivable from or payable to a foreign operation for which settlement is
neither planned nor likely to occur in the foreseeable future, this is, in substance, a part of the entitys net
investment in its foreign operation. This item should be accounted for as follows:
Exchange differences arising from translation of monetary items forming part of the net
investment in the foreign operation should be reflected in profit or loss in the separate financial
statements of the foreign operation, but;
In the consolidated financial statements which include the investor/parent and the foreign
operation, the exchange difference should be recognized initially on other comprehensive income
(OCI) and reclassified from equity to profit or loss upon disposal of the foreign operation.
Note that when a monetary item is a component of a reporting entitys net investment in a foreign
operation and it is denominated in the functional currency of the reporting entity, an exchange difference
arises only in the foreign operations individual financial statements. Conversely, if the item is
denominated in the functional currency of the foreign operation, an exchange difference arises only in the
reporting entitys separate financial statements.

Monetary and Nonmonetary items
For purposes of applying IAS 21, it is important to understand the distinction between monetary and
nonmonetary items. Monetary items are those granting or imposing "a right to receive, or an obligation to
deliver, a fixed or determinable number of units of currency." In contrast, nonmonetary items are those
exhibiting "the absence of a right to receive, or an obligation to deliver, a fixed or determinable number of
units of currency." Examples of monetary items include accounts and notes receivable; pensions and other
employee benefits to be paid in cash; provisions that are to be settled in cash; and cash dividends that are
properly recognized as a liability. Examples of nonmonetary items include inventories; amounts prepaid
for goods or services (e.g. prepaid insurance); property, plant and equipment; goodwill; other intangible
assets; and provisions that are to be settled by the delivery of a nonmonetary asset.
Consolidation of foreign operations
The most commonly encountered need for translating foreign currency financial statements into the
investor entity reporting currency is when the parent entity is preparing consolidated financial statements,
and one or more of the subsidiaries have reported in their respective (local) currencies. The same need
presents itself if an investee or joint ventures financial information is to be incorporated via the
proportionate consolidation or the equity method of accounting. When consolidating the assets, liabilities,
income, and expenses of a foreign operation with those of the reporting entity, the general consolidation
processes apply, including the elimination of intra-group balances and intra-group transactions. Goodwill
and any adjustments to the carrying amounts of foreign operations assets and liabilities should be
expressed in the functional currency and translated using the closing rate.
Illustration
Gold Coast ltd, a Ghanaian based company has a 100% owned subsidiary in US that began operations in
2012. The subsidiarys operations consist of utilizing company-owned space in an office building. This
building, which cost five million dollars, was financed primarily by US banks, although the parent did
invest two million dollars in the US operation. All revenues and cash expenses are received and paid in
USD. The subsidiary also maintains its books and records in USD, its functional currency.
The financial statements of the US subsidiary are to be translated (from the functional currency USD to
the presentation currency GHC) for incorporation into the Ghanaian parents financial statements. The
subsidiarys statement of financial position at December 31, 2012, and its combined statement of income
and retained earnings for the year ended December 31, 2012, is presented below in USD.
Statement of Financial position as at December, 31 2012 (in thousands of USD)
Assets Liabilities and shareholders equity
Cash 500 Accounts payable 300
Note receivable 200 Unearned rent 100
Land 1,000 Mortgage payable 4,000
Building 5,000 Ordinary shares 400
Accumulated depreciation (100) Additional paid-in-capital 1,600
Retained earnings 200
Total liabilities and
Total assets 6,600 Shareholders equity 6,600

Combined Statement of Profit or Loss and Retained Earnings for the Year Ended Dec 31, 2012
Revenue 2,000
Operating expenses (including depreciation expenses of 100) 1,700
Profit for the year 300
Add retained earnings, January 1, 2012 -----
Deduct dividends (100)
Retained earnings, December 31, 2012 200
Various assumed exchange rates for 2012 are as follows:
GHC 1 = $0.90 at the beginning of 2012 (when the ordinary shares were issued and the land and building
were financed through mortgage)
GHC1 = $1.05 weighted average for 2012
GHC1 = $1.10 at the date the dividends were declared and the unearned rent was received.
GHC1 = 1.20 closing (December 31, 2012)
The US companys financial statements must be translated into GHC in terms of the provisions of IAS 21
(i.e. by the current rate method). This translation process is illustrated below.
Statement of Financial Position Translation at December 31, 2012 (in USD000)
Assets USD Exchange rate GHC
Cash 500 1.20 600
Accounts receivable 200 1.20 240
Land 1,000 1.20 1,200
Building (net) 4,900 1.20 5,880
Total assets 6,600 7,920

Liabilities and shareholders equity
Accounts payable 300 1.20 360
Unearned rent 100 1.20 120
Mortgage payable 4,000 1.20 4,800
Ordinary shares 400 0.90 360
Additional paid-in capital 1,600 0.90 1,440
Retained earnings 200 (see Note 1) 205
Cumulative exchange difference
(translation adjustments) ------ 635
Total liabilities and shareholders
Equity 6,600 7,920
Combined statement of Profit or Loss and Retained Earnings Translation for the Year Ended
December 31, 2012 in (USD000)
USD Exchange rate GHC
Revenue 2,000 1.05 2,100
Expenses (including GHC100 depreciation) 1,700 1.05 1,785
Profit for the year 300 315
Add retained earnings, January 1 ------ ------
Deduct dividends (100) 1.10 (110)
Retained earnings, December 31 200 (Note 1) 205

Statement of Cash Flows Translation for the year Ended December 31, 2012
USD Exchange rate GHC
Operating activities
Profit for the year 300 1.05 315
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation 100 1.05 105
Increase in accounts receivable (200) 1.05 (210)
Increase in accounts payable 300 1.05 315
Increase in unearned rent 100 1.10 110
Net cash provided by operating activities 600 635
Investing activities
Purchase of land (1,000) 0.90 (900)
Purchase of building (5,000) 0.90 (4,500)
Net cash used by investing activities (6,000) (5,400)
Financing activities
Ordinary shares issue 2,000 0.90 1,800
Mortgage payable 4,000 0.90 3,600
Dividends paid (100) 1.10 (110)
Net cash provided by financing 5,900 5,290
Effect on exchange rate changes on cash N/A (balancing item) 75
Increase in cash and cash equivalents 500 600
Cash at the beginning of year ----- -----
Cash at end of year 500 1.20 600
The following points should be noted concerning the translation into the presentation currency:
All assets and liabilities are translated using the closing rate at the end of the reporting period
(USD1 = GHC1.20). All revenues and expenses should be translated at the rates in effect when
these items are recognized during the period. Due to practical considerations, however, weighted
average rates can be used to translate revenues and expenses (USD1 = GHC1.05) only if such
weighted rates approximate actual rates that were ruling at the time of the transactions.
Shareholders equity accounts are translated by using historical exchange rates. Ordinary shares
were issued at the beginning of 2012 when the exchange rate was USD1 = GHC0.90. The
translated balance of retained earnings is the result of the weighted average rate applied to
revenues and expenses and the specific rate in effect when the dividends were declared (USD1 =
GHC1.10).
Cumulative exchange differences (translation adjustments) result from translating all assets and
liabilities at the closing (current) rate, while shareholders equity is translated by using historical
and weighted average rates. The adjustments have no direct effect on cash flows; however,
changes in exchange rate will have an indirect effect on sale or liquidation. Prior to this time, the
effect is uncertain and remote. Also, the effect is due to the net investment rather than the
subsidiarys operations. For these reasons the translation adjustments balance is reported as
other comprehensive income item in the statement of comprehensive income and as a separate
component in the shareholders equity in the Ghanaian companys consolidated statement of
financial position.
The cumulative exchange differences (translation adjustments) credit of $635 is calculated as
follows:
Net asset at the beginning of 2012 (after
shares were issued and land and building were
acquired through mortgage financing) USD2, 000 (1.20 0.90) = GHC600 credit
Profit for the year USD300 (1.20 1.05) = 45 credit
Dividends USD100 (1.20 1.10) = 10 debit
Exchange difference (translation adjustment) GHC635 credit

Since the net exchange differences (translation adjustments) balance that appears as a separate
component of shareholders equity is cumulative in nature, the change in this balance went from
zero to GHC635 at the end of 2012. The translation adjustment has a credit balance because the
US entity was in a net asset position during the period (assets in excess of liabilities) and the spot
exchange rate at the end of the period is higher than the exchange rate at the beginning of the
period or average for the period.











PAST EXAMINATION QUESTIONS AND SUGGESTED ANSWERS
FINANCIAL MANAGEMENT
QUESTION 1

(a) Outline the financial benefits and disadvantages inherent in a demerger and indicate circumstances
where it might be an appropriate course of action. (10 marks)
(b) East Ltd has been approached by a foreign government which is privatizing its countrys railway
system. This country is politically unstable. It would like East Ltd to sign up for a four year joint
venture which would require an initial investment by East Ltd of approximately GHC200 million.
It is possible that the contract could be renegotiated at the end of the four year period. This is the
first time that East Ltds management has been asked to consider an investment overseas.
Required:
Explain to East Ltds management:
(i) The strategies that East Ltd could employ to limit the effects of political risk within this proposal.
(7 marks)
(ii) How a Net Present Value (NPV) appraisal for this overseas investment might prove problematic for
East Ltd compared to a normal Ghanaian-based appraisal. (3 marks)


QUESTION 2

(a) Landy Ltd needs to invest in a motor van in order to distribute its products and have to choose
between buying or leasing it. The motor van can be leased for a four year period at GHC40,000 per
annum. The maintenance and service costs are included in the price. Alternatively, Landy can buy
the motor van for GHC120,000 and at the end of four years, its residual value will be GHC20,000.
The maintenance and service costs are estimated to be GHC13,000 each year. The companys cost
of borrowing is 12%.

As a financial controller, you are required to advise Landy Ltd whether the company should lease
or buy the motor van. (Ignore taxation) (10 marks)
(b) Tinklers Enterprise operates a large departmental store in the Western Region of Ghana, which
was founded many years ago. Key figures from its financial statements for the year ended 31 May
2012 are shown below:
GHCm
Revenue
Gross profit
Net profit
Land and buildings (book value)
Land and buildings (market value)
Long-term loans
Bank overdraft
Shareholders funds
10.00
3.00
0.50
10.00
20.00
5.00
1.00
4.00
The Tinkler family holds 40% of the ordinary voting shares of the company. The shareholdings of
the family have become widely dispersed around family trusts and individual family members. The
last family members to be a part of the management of the business retired two years ago. The
family is considering the following strategies put forward by the board for their consideration.
(1) Borrow GHC1 million to develop key departments, with an estimated contribution of
GHC200,000 per year before interest.
(2) Sell the business in six months time to a large rival in exchange for shares with a current
market value of GHC10 million.
(3) Sell the business in management buy out for GHC10 million, one half payable immediately
and the other half in one years time.
(4) Close down the business immediately, this would incur estimated closure costs of GHC5
million.
Required:
Prepare a report advising the Tinkler family as to the merits and risks involved with the four financial
strategies outlined above. (10 marks)


QUESTION 3
(a) Lambert Ltd is an all-equity printing company. It has 40 million ordinary shares in issue and a
market capitalisation of GHC78.4 million (ex-div). Extracts from its financial statements for the
year to 31 August 2012 are shown below:
GHC000
Profit before taxation
Less: Corporate tax at 28%
Profit after taxation
17,014
(4,764)
12,250

The dividend payout ratio was 100%. Annual earnings and the dividend payout ratio have not
changed over the last few years and are expected to continue at present levels for the foreseeable
future.

Lamberts senior management is considering altering the capital structure of the business and
thereby taking advantage of the tax shield. It plans to achieve this by buying back 20% of the
companys equity shares and paying for this by issuing 9% irredeemable debentures at par. The
share would be purchased for 10 pesewas per share above the current share price.
Accordingly, you, a member of Lamberts finance team, have been asked to demonstrate the impact
of such a plan on the value of the company and its cost of capital.
You should assume a corporate tax rate of 28%.
Required:
(i) Calculate Lamberts current cost of equity capital. (2 marks)
(ii) On the assumption that Lamberts current price-earnings ratio remains the same, advise
Lamberts management of the effect of its share buy-back scheme on the companys:
(a) Total market capitalisation; (3 marks)
(b) Cost of equity; and (2 marks)
(c) Weighted Average Cost of Capital (3 marks)
(iii) Explain why Lamberts price-earnings ratio might fall rather than stay constant as a result
of the change in its financial structure. (3 marks)
(iv) Explain the effect of the tax shield on a companys market capitalisation. (2 marks)
(b) Pittway Companys next annual dividend is expected to be GHC4. The growth rate in dividends
over the following three years is forecast at 15%. After that, Pittways growth rate is expected to
equal the industry average of 5%. If the required rate of return is 18%, what is the current value of
the stock? (5 marks)


QUESTION 4
(a) Your brother is planning to retire in 18 years time. He currently has GHC250,000, and he would
like to have GHC1,000,000 when he retires.
You are required to compute the annual rate of interest he would have to earn on his GHC250,000
in order to reach his goal, assuming he saves no more money. (6 marks)
(b) The prize in last weeks lottery was estimated to be worth GHC35 million. If you were lucky
enough to win, then it will pay you GHC1.75 million per year over the next 20 years. Assume that
the first instalment is received immediately.
Required:
(i) If interest rate is 8%, what is the present value of the prize? (5 marks)
(ii) If interest rate is 8%, what is the future value after 20 years? (5 marks)
(iii) How would your answers change if the payments were received at the end of each year?

QUESTION 5
(a) Zimbo Ltd is a listed, all-equity financed company which manufactures parts for digital cameras. It
is a relatively small operator in a rapidly changing market with high fixed costs. The company
pays out all available profits as dividends.
Zimbo Ltds stated capital consists of 150 million shares issued at GHC1 per share. On 30
September 2012 it expects to pay an annual dividend of 20p per share. In the absence of any
further investment the company expects the next three annual dividend payments also to be 20p,
but thereafter a 2% per annum growth rate is expected in perpetuity. The companys cost of equity
is currently 15% per annum.
The Marketing Director is proposing a new investment in plant and equipment to manufacture
equipment for digital televisions. This would require an initial outlay of GHC50 million on 30
September 2012. If this investment were financed by a 1 for 3 rights issue, it would enable the
annual dividend per share to be increased to 21p on 30 September 2013 and all further dividends
would be increased by 4% per annum. The new investment is, however, more risky than the
average of existing investments, as a result of which the companys overall cost of equity would
increase to 16% per annum if the company were to remain all-equity financed.
The Finance Director argues, however, to the contrary. It is nonsense to continue to be all-equity
financed. I believe that we could finance the new investment by an issue on 30 September 2012 of
8% irredeemable debentures. Debt would be far cheaper than equity and the interest is available
for tax relief.
The Company Accountant has reservations. New debt finance would add financial risk on top of
the existing high operating risk, which is a particular concern due to the uncertainty of future sales.
I believe that we should continue to use equity finance, particularly with the additional risk of this
new investment; a rights issue is the best way of doing this.
The Managing Director is not sure of what to do.
Assume a corporation tax rate of 28%.
Required:
(1) Assuming that Zimbo Ltd remains all-equity financed, and using the dividend valuation model,
calculate the expected ex-dividend price per share at 30 September 2012 on each of the following
bases:
(i) The new investment does not take place
(ii) The new investment takes place
Based on the above computations, determine whether the new investment should be undertaken.
(8 marks)
(2) As an external consultant to the company, advise the company on the implications of the new
investment and the most appropriate method of financing.
Your advice should include an analysis of the concerns expressed by the Directors and the
Company Accountant. (5 marks)
(b) The Board of Directors of Crown Oil Ghana Limited have taken a decision to source a foreign loan
facility to expand its business activities at the oil rig enclave. However, the Board is indifferent
about the factors that affect their decision to hedge its market rate exposure.
You are required to:
Identify four (4) main factors that must influence the companys decision to hedge its interest rate risk.
(4 marks)
(c) Brown Limited has invested in bond security with the following data available on the bond:
Face value GHC1,000
Coupon rate 16%
Redemption value GHC1,000
Years to maturing 6
Yield to maturity 17%
Required:
How much must you pay for the bond security? (3 marks)



FINANCIAL MANAGEMENT - SOLUTIONS
SOLUTION 1
a) A demerger results in the splitting up of a firm into smaller, legally separate firms. The financial
benefits and disadvantages are largely dependent upon the individual situation. Among them are:
Advantages:
1. It is a corporate restructuring strategy that can help a company to raise equity.
2. It helps management to focus on the core operations of the company.
3. Shareholders would get better information about the business unit because it issues separate
financial statements.
4. It helps to reduce internal competition for corporate funds.
Disadvantages:
1. There is difficulty in accessing credit as the de-merged firm may be smaller.
2. The synergy of being a larger firm may be lost.
Reasons for De-merger
1. Where a company has grown too large for its management structure.
2. Selling an unprofitable part or unit to ensure survival of the whole business.
3. Where one part of the company has either a higher or lower level of risk than the other parts.

b) i. Political risk is defined as the probability of a multinational company being significantly
affected by political events in a host country or a change in the political relationship between a
host country and one or more other countries.
Policies to manage Political Risk
1. Insurance against political risk
2. Negotiation of Agreement
Here, political risk can be addressed by the negotiation of concession agreements with host
governments setting out the rules and restrictions under which the investing company can
expect to conduct its business.
3. Financing and Operating Policies:
Reduce the exposure of political risk by operating policies such as:
- Locating different stages of construction in different countries
- Controlling the means by which finished gods are exported
- Marketing and treasury management outside the host country.
Reduce the exposure of political risk by choosing appropriate financing policies such as:
- Secure unconditional guarantees from the host government
(i) Negotiations with local government obtain a concession agreement. Transfer
of capital, remittances, local finance and government intervention.
- Insurance make use of the insurance to protect against nationalization, currency risk
- Management structure decide on the most effective structure for the business, such as a
joint venture.
(ii) Choice of exchange rate for future cash flows
- What are the local tax rates? Is there a double tax agreement?
- What discount rate should be used? Would the level of risk affect it?

SOLUTION 2
(a) The cost of leasing the van can be calculated as follows:
Year Cash Flow D/F 12% P.V.
1
2
3
4
(40,000)
(40,000)
(40,000)
(40,000)
0.8979
0.7972
0.7118
0.6355
NPV
(35,916)
(31,888)
(28,472)
(25,420)
(121,696)

The cost of buying the van can be calculated as

Year
Purchase
Costs_

DCF

PV
Service
Costs_

PV
0
1
(120,000) 1.0000
0.8979
(120,000) -
(13,000)
(120,000)
(11,372.70)
2
3
4

Scrap
0.7972
0.7118
0.6355

0.6355
(13,000)
(13,000)
(13,000)

20,000
(10,363.60)
(9,253.40)
(8,261.50)
(39,551.26)
12,710
NPV (146,841.26)
Advice: Landy Ltd should lease the van
(b) REPORT
To: The Tinkler Family
From: An Accountant
Date: Today
Subject: Financial Strategies Under consideration
I have outlined the merits and risks involved with the financial strategies that you are considering.
Option 1: GHC1 million borrowing to finance the development of key departments
This option could be said to represent (further) organic growth by the company, that is to say the
funding of internally-generated projects.
The merits of this strategy would be that:
The company and the family keep control of the business
The costs of the project are spread over time
The rate of change with the business is likely to be slower than under other options.

The main risks would be:
The risk that the project does not succeed (the strategy seems to be a defensive one
what the company can afford rather than a clear strategy to differentiate the business)
The process may be too slow and tentative for the company to survive
The lenders are likely to want a relatively high rate of interest, given the companys
current gearing level, bank overdraft and net current assets at zero although the land
and buildings would seem to provide god security.

Option 2: Sell to a Rival
This option may be said to represent the disposal (or possible acquisition) option.
The main merit of this option would be that the risks of investing in the business would be removed.

Similarly, the concentration of risk in one entity could be replaced by investment in a more balanced
portfolio.
The main risk would be that the price being offered could be deemed to be too low. (The land and
buildings are said to be worth GHC20 million and the net assets are worth GHC14 million (GHC20m
[GHC5m + GHC1m])
It could be deemed a risk of the offer that it is an offer of shares in the rival rather than cash.
This offer has the advantage of a degree of certainty (despite the possible change in share value). The
rival is well established; this should reduce risk.
The shareholders might incur capital gains tax upon disposal of the shares.
The timing of payment (in six months time) is likely to be at least as good as the other offers.
Option 3: Management Buy-out
The main merit of this financial strategy is that it is a cheaper alternative to a close down.
Management should be familiar with the business, paying a reasonable price and having a good chance of
success.
The main risks are likely to be that
There is no guarantee of success
It is often difficult for MBO teams to immediately finance for a full buy-out
Management may be concentrating on the buy-out rather than increasing current profits for the
business
Successful MBOs can lead to big gains for management on which the previous shareholders
will have lost out.
In this particular case, the Tinkler family would be at risk to the extent of GHC5 million until the second
installment of the consideration were paid and have no control over the operations of the business during
this period.
Again, the price of GHC10 million may be deemed to be too low the net assets are worth GHC14
million.
Option 4: Closing the Business
Closing the business represents the liquidation option. The main merit of this approach is that it allows
the assets of the business to be converted into cash before there are (financial) losses and value is lost to
shareholders.
The main risks are that the assets fail to realize the expected values and/or costs are greater than expected.
It appears that liquidation might not be attractive an option for Tinkler.

GHC
Land and buildings at market value 20
Less Closure costs (5)
Net 15
Less Bank overdraft and long-term loans (6)
Realizable 9
This compares with GHC10 million offered by the rival and by the MBO.
SOLUTION 3
(a) (i) Lamberts cost of capital:
Dividend/market capitalization = GHC12.25m = 15.625%
GHC78.40m
OR
r = Do x 100 = GHC12.25m = 0.30625
Po 40m
r0 = GHC78.40m = 1.96
40m
r = 0.30625 = 15.625%
1.96
(ii) Current P/E ratio = market capitalisation/Earnings = GHC78.40m = 6.4
GHC12.25m
Income statement (after buy-back)
GHC000 GHC000
Profit before interest and taxation
Less: Debenture interest (9% x GHC16.48m [W1])
Profit before taxation
Less: taxation (28%)
Profit after taxation
Market capitalisation of equity (6.4 x GHC11.182m)
17,014
(1,483)
15,531
(4,349)
11,182





71,565
Market value of debentures
Total market capitalisation
16,480
88,045
New Cost of equity
D0 = GHC11.182m = 0.34944
32m
P0 = 1.96
Therefore new r = 0.34944 x 100 = 17.828%
1.96
Weighted average cost of capital
WACC = {17.828% x 71.565} + {9% (1 0.28) x 16.480} = 15.7%
71.565 + 16.48 71.565 + 16.48
WORKI NG 1
Buy-out of shares
20% x equity shares = 40m x 20% 8m shares
Current share price (GHC78.4m/40m) GHC1.96
Buy back price (GHC1.96 + GHC0.10) GHC20.6
Funds required for buy-back (8m x GHC2.06) GHC16.48m
(iii) The price-earnings ratio may fall because the equity holders require a higher rate of return (ke)
because of the companys increased financial risk, caused by introducing debt into Lamberts
capital structure. However at lower levels of gearing this may not be the case and equity holders
would not demand an increased return on their investment.
(iv) Debenture/loan interest is an allowable expense in a tax computation and as a result a geared
company would pay less tax than an equivalent ungeared company. So the former will have more
cash to pay out to investors and will be worth more.
Value of debt + equity = Value of equity in + Tax shield
in a geared firm equivalent ungeared firm
WACC falls as gearing level rises and so the value of the company rises. Eventually, at higher
levels of gearing, WACC will rise again and the value of the company will fall.

Pittway Company
(b) Current value of stock
Div DF@ 18% PV x Div
1 4 0.8474 3.3896
2 4.6 0.7181 3.30326
3 5.29 0.6086 3.219494
4 6.0835 0.51578 3.13774
13.050094
P4 = 6.0835 (1.05) = 49.13596
0.18 0.05
PV price = 0.51578 + 49.13596 = 25.343
Hence P0 = 13.050094 + 25.343 = $38.39
SOLUTION 4
(a) Future Value (FV) = 1,000,000
Present Value (PV) = 250,000
Time Period (N) = 18 years
FV = PV (1 + i)
n

= 1,000,000 = 250,000(1 + i)
18

= (1 + i)
18
= 1,000,000/250,000
= (1 + i)
18
= 4
= 1 + I = (4)
1/18

= I = 1.08 - 1 = 0.08 or 8%
The required rate of interest to reach the goal is 8%.
(b) Payment (MPT) = GHC1.75 million
Number of periods (n) = 20 years,
i. Present value of annuity (PVA) = ? interest rate (i) = 8%

1_ 1 ___
1 - (1 + i)
n
1 (1 + 0.08)
20

PVA = PMT x i (1 + i) = GHC1.75 0.08 (1 + 0.08)
= GHC1.75 x 9.8181 x 1.08
= GHC18.56 million
ii. Future Value of Annuity (FVA) = ?, Interest rate (i) = 8%

(1 + i)
n
- 1
FVA = PMT i (1 + i)

(1 + 0.08)
20
- 1
= GHC1.75 0.08 (1 + 0.08)

= GHC1.75 x 45.7620 x 1.08
= GHC86.486 million
iii. PVA and FVA assuming payments received at the end of year,
Present value annuity (PVA) =? Interest rate (i) = 8%
We have,
1__
1 - (1 + i)
n

PVA = PMT x i
1___
1 - (1 + 0.08)
20

= GHC1.75 x 0.08
= GHC1.75 x 9.8181
= GHC17.18 million
FV one year payment

(1 + 0.08)
20

= GHC1.75 x 0.08 -1
= GHC80.08 million
SOLUTION 5
(i) The price if new investment does not take place
Div DF@ 15% PV x Div
1 0.20 0.8695 0.1739
2 0.20 0.7561 0.15122
3 0.20 0.6575 0.1315
0.45662
P3 = 0.20 (1.02) = 1.5692
0.15 0.02
PV price = 0.6575 x 1.5692 = 1.03174
P0 = 0.45662 + 1.03174 = 1.488369
Value of equity excluding project = GHC1.4884 x 150 million shares = GHC223, 260,000
(ii) If the new investment take place
0.21__
Share price = 0.16-0.04 = 1.75 i.e. GHC1.75
Value of equity including project = GHC1.75 x 200 million = GHC350,000,000
GHC
Difference in values (350M - 223.26M) 126,740,000
Initial outlay (50,000,000)
Value generated by investment 76,740,000
Thus the new investment appears to be viable.
(a) REPORT
To: The Directors, Zimbo plc
From: A Jones, External Consultant
Date: Today
Subject: Investment and financing of digital television investment
The new investment is significant in relation to the existing size of the company and is a
departure into a related, but new, market. The implications for returns, risk, liquidity and form of
finance thus need to be carefully considered.
The new investment
Returns
The calculations provided in appendix 1 (part (a)) show that, using the divided model, there is an
increase in share price and hence the project appears to be worthwhile. One minor concern is
that, in effect, profits net of taxes are distributed and thus the increase in annual dividend is an
increase in profit rather than cash flows. The information relating to cash flows of the project has
not been provided. Nevertheless, in the longer term profits are equivalent to cash and the
dividend stream is maintained in perpetuity. Therefore the two can, in this instance, be seen as
more or less equivalent.
Additionally, there appears to be a significant increase in the value of the company, so there is
consideration margin for error.
Risk (Company Accountant and Managing Director)
The existing business relating to digital cameras appear to be risky in the sense of sales volatility
and in terms of cost structure (operating gearing). Nevertheless, the question of introducing some
financial gearing should not be ruled out entirely on risk grounds without considering other
issues. The problem of gearing is examined below.
Debt financing (Finance Director)
The company currently has zero gearing. The introduction of debt to finance the project will
produce an advantage with respect to the value of the tax shield on interest.
The finance director is not, however, correct in stating that debt finance at 8% is necessary
cheaper than equity at 15%. The risk of the project is greater than the average of existing
projects, but if the project were debt financed there would be further financial risk exposure for
shareholders in addition to the operating risk. In a perfect world the cost of equity would rise
sufficiently to maintain the weighted average cost of capital at 15%, but with the tax advantage of
debt it would be a little lower than this.
This point relates to the irrelevance of gearing. This concerns a perfect world (eg no tax, equal
borrowing and lending rates, risk averse investors, costless transactions, zero bankruptcy costs).
The tax shield generates an advantage to gearing but ultimately bankruptcy costs will create
additional cost to gearing as debt approaches high levels. Moreover, gearing will increase both
company specific and systematic risk and, in the latter case, will demand a price in the market.
A further cost of debt may be the existence of restrictive covenants, which may prevent the
company from taking certain actions, such as the issuing of further debt ranking above this issue.
The importance of financial flexibility would thus need to be considered.
A final point relates to the form of debt. The finance director argues for a publicly-issued
debenture, but consideration should also be given to privately-issued debt, eg from a bank. This
type of debt tends to have lower interest rates and issue costs than debenture, but more covenants
and other forms of controls.
Rights issue (Company Accountant)
Where a company faces high operating and business risk it may be prudent to limit financial
gearing. The question of the optimal level of gearing is, however, a question of balancing costs
and benefits and, even where other types of risk are high, this does not entirely exclude the
possibility of debt. The debt financing of this new investment would give a gearing level which
would not be high but would still need to be considered after a more detailed examination and
quantification of operating and business risk.
Regarding the right issue, its main function is to implement pre-emption rights in respect of
existing shareholders, such that they capture the value of the new project and have the
opportunity to maintain their share of equity and control in the company.
The issue costs, while smaller than a public issue of shares, and possibly debentures, are likely to
be greater with a rights issue than with privately-issued debt.
Conclusion
The project looks to be viable with a considerable margin of safety, notwithstanding the fact that
it is likely to result in an increased risk to all finance providers. The optimal form of financing is,
however, far from clear: it should be the subject of further detailed analysis and negotiation with
the potential finance providers.
(b) Interest rate risk is concerned with the sensitivity of profit and operating cash flows to changes in
interest rates. A company will need to analyze how its profits and cash flows are likely to change
in response to forecast changes in interest rate and takes decision as to whether action is
necessary.
Factors which could influence the decision to hedge interest rate risk include:
- Future financing plan
- Volatility of interest rate
- Effect of changes in interest on profits
- Effects of changes in interest rate on cash flow
(c) Coupon rate (interest) = 16% @ GHC1,000 = GHC160
GHC
PV of interest GHC160 @ 3.589 = 574.24
PV of redemption value GHC1,000 = 390.00
0.390 _____
Market value 964.24
Or
Market value = 1 - 1_
(1 + r)
n
x Interest + FV_
r (1 + r)n
1 - 1_ 1000
(1.17)
6
x 160 + (1.17)
6


= GHC 964.109

FINANCIAL REPORTING
QUESTION 1

(a) A conceptual framework of accounting is a coherent system of interrelated objectives and
fundamental principles which prescribes the nature, function and limits of financial accounting and
financial statements.

Required:
i. Outline five (5) objectives the IASBs conceptual framework of accounting seeks to achieve.
(5 marks)
ii. State the main contents of the IASBs conceptual framework for financial reporting (5 m)
(b) You are the Financial Accountant of Adom Ltd. The assistant accountant responsible for preparing
the 2012 annual financial statements is considering the accounting treatment of the following non-
current assets and has approached you for guidance.
i. Adom Ltd acquired a property on 1 January 2007 at a cost of GHC400,000 and immediately
occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years.
Subsequent to its acquisition, the asset was measured at depreciated cost until 1 July 2012 when
management of Adom Ltd decided to convert the building into an investment property (mainly for
rentals). Following this decision, the property was fair valued at GHC373,800. Adom Ltd adopted
the fair value model for subsequent measurement of the investment property. At 31 December
2012, it was fair valued at GHC380,000.
Required:
Account for the treatment of this property in the 2012 financial statements of Adom Ltd.(5 mark
ii. Adom Ltd had the following loans in place at the beginning and end of 2012

1 January 31 December
2012 2012
GHC GHC
12.5% Debenture stocks (repayable in 2015) 480,000 480,000
15% Bank loan [repayable in 2014] 320,000 320,000
On 1 January 2012 the company began the construction of a qualifying asset , a piece of machine for
hydro electric plant at a cost of GHC400,000 , using existing borrowings (the 12.5% debenture and the
15% bank loan). Expenditure drawn down for the construction was GHC120,000 on 1 January 2012;
GHC80,000 on 1 May 2012 and GHC200,000 on 1 October 2012. The machine was completed and put
to use on 31 December 2012.
Required:
Calculate the borrowing costs to be capitalized for the machine. (5 marks)

QUESTION 2
Saana Ltd is a listed company on the Ghana Stock Exchange. The Assistant Accountant has prepared a
draft statement of financial position of the company as at 31
st
March 2012 as follows:
GHC GHC
Non-current Assets:
Freehold property
Plant and machinery
Investment property

Current Assets:
Inventories
Trade receivables & prepayment
Bank

Total assets

Equity & Liabilities
Stated capital
Capital surplus
Income surplus
Provisions and Liabilities
Deferred tax (1/4/2011)
10% Loan Note
Current Liabilities
Trade creditors
Provision for plant overhaul
Taxation
Total equity, Liabilities & Provisions






302,000
156,000
69,000

630,000
550,000
75,000
1,255,000




527,000
1,782,000


800,000
17,000
483,000

94,000
70,000

237,000
60,000
21,000
1,782,000


In the course of an audit, you obtained the following additional information which has not been duly
considered by the Assistant Accountant in drafting the financial statements.
i. The income statement has been charged with GHC16,000 being the first of four equal annual rental
payments for an excavating plant. The first payment was made on 1
st
April 2011. Management of
Saana Ltd has advised that this is a finance lease. The plant had a cash price of GHC56,000 at the
inception of the lease which has an implicit interest rate of 10% per annum.
ii. None of the fixed assets have been depreciated for the current year. The freehold property should
be depreciated at 2% on its cost of GHC630,000. Plant, other than the leased plant, is depreciated
at 20% on a reducing balance basis. The leased plant is depreciated on straight line basis over the
four years life of the lease.
iii. The investment property is a freehold property carried at its valuation on 31
st
March 2011. Its
value at 31
st
March 2012 has been assessed by a qualified surveyor at GHC62,000.
iv. During the stock taking on 31
st
March 2012, items that had cost GHC30,000 were identified as
being either damaged or slow moving. It is estimated that they will realise only GHC20,000 in
total, on which sales commission of 10% will be payable.
An invoice of materials delivered on 12
th
March 2012 for GHC2,500 has been discovered. It has
not been recorded though the materials were included in the stock count.
v. Saana Ltd operates some heavy excavating plant which requires a major overhaul every three years.
The overhaul is estimated to cost GHC90,000 and is due to be carried out in April 2013. The
provision of GHC60,000 represents two annual amounts of GHC30,000 made in the years 2011
and 2012.
vi. The deferred tax provision required at 31
st
March 2012 has been calculated at GHC112,500.
vii. The GHC70,000 loan note was issued at par on 1
st
April 2011 and redeemable after 3 years at a
premium of GHC4,724 giving an effective interest rate of 12% per annum. Interest is paid in
arrears at 31 March. The accountant charged interest at 10% (GHC7,000) to the income statement.
Required:
(1) Prepare a revised Income Surplus Account for the year ended 31
st
March 2012.(9 marks)
(2) Redraft the Statement of Financial Position of Saana Ltd as at 31
st
March 2012.(11 marks)

QUESTION 3
Talim and Kum entered into partnership in the retail business. The partnership agreement provided as
follows:
a. Profits and Losses should be shared equally.
b. Interest on Partners Capital Accounts to be allowed at 10% per annum before a sharing of profits
and losses.
c. A fixed charge of GHC320 would be charged on current accounts with a deficit balance
outstanding at the beginning of the year. This amount should be charged only to the second half of
the year.
After many years of successful operations, Malita, their Administrative Manager was admitted as a
partner with effect from 1
st
July 2012. Malita was to take one-fifth of the profit after interest on capital.
Talim and Kum shared the balance in the ratio of 2:1 respectively.
It was decided among the partners that, Malitas share of profit should not fall below GHC1,000 per
month. Any shortfall was to be contributed by Talim and Kum.
i. Malita was required to bring in GHC15,000 cash as his capital contribution. Malita paid the
amount on the date of admission. In addition, Malita was to retain 50% of his share, of profit at the
end of each year to be credited to his capital account until his capital account balance equals that of
Talim.
ii. With the admission of Malita, the partners agreed to value goodwill at 3 years purchase of the
firms average profits for the last 3 years up to the date of the admission. No goodwill account was
to be left in the books.
The profits for the last three years are as follows:
Year to 31 December 2009 GHC18,200
Year to 31 December 2010 GHC19,000
Year to 31 December 2011 GHC21,500
iii. A revaluation of the land and buildings resulted in surplus of GHC15,200 and the new value of the
building was to be brought into the books, whilst the vehicles were to be reduced by GHC10,000 at
that date. Included in wages and salaries is an amount of GHC600 per month which previously
was being paid to Malita.
iv. Assume profits accrue evenly throughout the year. No adjustments had yet been made in respect of
Malitas admission.
v. Depreciation on equipment and vehicle is to be charged at 20% per annum and a provision for
doubtful debts of 5% is to be made on receivables.
Below is the Trial Balance of the Firm as at 31 December 2012
GHC GHC
Land and building at cost
Motor vehicles at cost
36,000
22,000


Office equipment
Accumulated depreciation (01/01/2012):
Buildings
Office equipment
Motor vehicles
Inventories 31/12/2012
Cost of sales
Operating expenses
Wages and salaries
Sales
Trade receivables
Trade payables
Bank
Capital accounts:
Talim
Kum
Malita
Current accounts:
Talim
Kum
Malita

20,000




18,400
38,000
15,000
8,000

6,800

29,000






6,000
______
199,200


12,000
2,000
2,000




120,000

5,200


25,000
15,000
15,000

3,000

-__
199,200


Required: Prepare

(a) Income Statement for the year ended 31 December 2012.
(b) Appropriation account for the year ended 31 December 2012.
(c) Partners capital and current account in Columnar form.
(d) Statement of financial position as at 31 December 2012 15 marks

QUESTION 4
(a) As a newly employed Accountant of Peace Limited, you have been presented with the financial
statements as follows:
Statement of Comprehensive Income for the year ended 31
st
December
2012
GHC
2011
GHC
Net Turnover
Cost of Sales
Gross Profit

General, Administrative and Selling Expenses
Operating profit

Debenture Interest Expenses
Investment Income
Profit before tax
Corporate Tax
456,500
(295,000)
161,500

(109,500)
52,000

(14,500)
5,000
42,500
(12,500)
420,000
(227,000)
193,000

(93,000)
100,000

(3,000)
4,500
101,500
(15,000)
Profit after tax

Statement of income surplus
Balance b/f
Net Profit

Dividend: Preference Shares
Ordinary Shares
30,000


149,500
30,000
179,500
(10,000)
(12,000)
157,500
86,500


89,500
86,500
176,000
(9,000)
(17,500)
149,500


Statement of Financial Position as at 31
st
December:
2012
GHC
2011
GHC
Assets
Goodwill
Tangible Fixed Assets
Inventories
Accounts Receivable
Bank and Cash on hand

Liabilities:
Accounts Payable
Accruals
Debentures
Stated Capital
Preference Shares
Ordinary Shares
Income Surplus

10,000
106,000
147,000
80,000
26,000
369,000

37,500
25,500
58,500

40,000
50,000
157,500
369,000

5,000
132,000
118,500
24,000
28,500
308,000

26,500
20,000
37,000

25,000
50,000
149,500
308,000

You are required to:
(i) Compute for the two years the following ratios:
1. Return on Capital Employed
2. Assets Turnover
3. Current Ratio
4. Debt/Equity Ratio
5. Interest Cover (10 marks)
(ii) Write a report to the Finance Director commenting on the financial performance and position of the
company. (5 marks)
( b) Saviour Plant Pool (SPP) leased a tractor to Pramso Gold Mines (PGM) on the following terms:
Lease term Four years
Inception of lease 1 January 2012
Annual payments (in advance) GHC22,000
Residual value of tractor guaranteed by PGM GHC10,000
Expected residual value at the end of lease GHC12,000
Fair value of the leased asset at the inception of lease GHC82,966
Initial direct costs incurred by SPP GHC700
Interest rate implicit in the lease 11% per annum
Discount factors at 11% per annum are as follows:
Year 0 1 2 3 4
Discount Factor 1.0 0.901 0.812 0.731 0.659

Required:
Prepare extracts for the financial statements of SPP for the year ended 31 December 2012.(10 m)


QUESTION 5
Peace Ltd acquired 450,000 ordinary shares of Happy Ltd on 1
st
January 2011 for GHC1,540,000. At
that date the balance on the retained earnings of Happy Ltd was a credit of GHC140,000 and the balance
on the capital surplus was a credit of GHC28,000. The statement of financial position of Peace Ltd and
Happy Ltd at 31 December 2012 is as follows:
Peace Ltd
GHC000
Happy Ltd
GHC000
ASSETS:
Non-current Assets:
Property, Plant and Equipment
Investment in Shares

Current Assets:
Inventories
Trade Receivables
Current Account of Happy Ltd
Cash and Cash Equivalents

Total Assets
EQUITY AND LIABITLIES:
Equity:
Stated Capital
Capital Surplus
Retained Earnings

Non-current Liabilities:
Mortgage Loan
Current Liabilities
Trade Payables
Current Account of Peace Ltd



6,720
2,740
9,460

360
370
75
15
820
10,280


5,000
200
1,210
6,410

3,200

670
_____
10,280


820
-_
820

170
230
-
10
410
1,230


600
40
220
860

50

270
50
1,230
Additional information:
i) The investment in shares in the statement of financial position of Peace Ltd consists of the
investment in Happy Ltd (at cost) and investments in Joy Ltd. The investment in Joy constitutes
10% of the Stated Capital of the investee entity.
ii) The fair value of the plant of Happy was GHC200,000 in excess of its carrying amount at 1
st

January 2011. This plant is to be depreciated over five years from the acquisition date on a straight
line basis with no residual value. Happy Ltd has not reflected these adjustments in its financial
statements.
iii) Peace Ltd sold a plant to Happy Ltd on 1
st
January 2012 for GHC96,000. The plant had cost
GHC100,000 in January 2011 and had a carrying amount of GHC80,000 on 1 January 2012. The
plant is to be depreciated over its estimated remaining useful life of four years.
iv) Peace Ltd sold goods to Happy Ltd at a price of GHC25,000 on 29 December 2012 which were not
received by Happy Ltd until 3
rd
January 2013. Peace Ltd calculates selling price at a mark-up of
25% on cost.
v) A major customer of Happy Ltd with an outstanding balance of GHC20,000 went into receivership
just prior to the end of the reporting period. It is unlikely that any part of the outstanding balance
will be received. Happy Ltds financial accountant has forgotten to adjust for this.
vi) It is the policy of the group to value non-controlling interest at proportionate share of the net assets
of the subsidiary.
vii) Peace Ltd undertakes annual review of goodwill impairment. At 31 December 2012, an
impairment of GHC400,000 was identified in respect of Happy Ltd.
Required:
Prepare the consolidated statement of financial position of Peace Ltd group as at 31 December 2012.
(20 marks)



FINANCIAL REPORTING SOLUTIONS
SOLUTION 1
(A) (i) The purpose of this framework is to
Assist the IASB in the development of future accounting standards and in its review of
existing accounting standards
Assist the IASB by providing a basis for reducing the number of alternative accounting
treatments
Assist national standard-setting bodies in developing national standards
Assist accountants to apply relevant accounting standards in preparing financial statements
and in dealing with topics that do not form the subject of International accounting standards;
Assist auditors in forming an opinion as to whether financial statements conform with
relevant accounting standards;
Assist users of financial statements in interpreting the information contained in financial
statements prepared in conformity with International Accounting Standards

(ii) The specific topics discussed under the framework are as follows:
The objectives of financial Statements;
User groups
Assumptions underlying financial statement preparation;
Qualitative Characteristics of financial statements;
The elements of financial statements; their recognition and their measurement
The concepts of capital maintenance
(B) (i) Income Statement for the year ended 31 December 2012:
Expenses GHC
Depreciation charge 4,000
(400,000/50 years x 6/12)
Other income
Fair valuation surplus-Investment Property 6,200
380,000-373,800

Statement of Financial Position as at 31 December 2012
Non-Current Assets GHC
Investment Property 380,000
Equity
Revaluation Surplus 17,800
(373,800 356,000)
GHC
(ii) 13.5% X 120,000 16,200
13.5% X 80,000 X 8/12 7,200
13.5% x 200,000 x 3/12 6,750
30,15
Weighted Average rate
1 480,000 0.6 12.5% 7.5%
2` 320,000 0.4 15% 6%__
13.5%
SOLUTION 2
Saana Ltd
Statement of Financial Position as at 31
st
March 2012
GHC GHC
Non-current Assets:
Freehold property (630,000 12,600)
Plant (Owned) (550,000 110,000)
Leased plant (56,000 14,000)
Investment property

Current Assets:
Stocks (302,000 12,000)
Trade receivables
Bank payments

Total assets
Equity:
Stated capital
Capital surplus
Income surplus

Long Term Liabilities & Provisions:
Finance lease obligation
5% Loan Notes







290,000
156,000
69,000










28,000
71,400

617,400
440,000
42,000
62,000
1,161,400




515,000
1,676,400

800,000
17,000
371,000
1,187,500




Deferred tax
Current Liabilities:
Trade payables (237,000 + 2,500)
Accrued : Lease finance interest
Finance lease obligation
Taxation

Total Equity and liabilities
112,500


239,500
4,000
12,000
21,000





211,900





276,500
1,676,400




WORKINGS:
W1 Treat the lease as finance lease
GHC
Cash price 56,000
1
st
instalment 16,000
Capital outstanding 40,000
Interest at 10% per annum 4,000
Capital outstanding 40,000
Split into current liability and long term liabilities
2
nd
instalment payable 16,000
:. Capital element = 16,000 40,000 x 10%
= 12,000
:. Long term liability = 40,000 12,000
= 28,000
W2 Depreciation on fixed assets:
Freehold property (630,000 x 2%) = 12,600
Owned plant (550,000 x 20%) = 110,000
Leased plant (56,000 x 25%) = 14,000
136,600
W3 Damaged and slow moving stock to be written down to estimated realizable value:

Saleable value 20,000
Less 10% commission 2,000
NRV 18,000
:. Write down 30,000 (3,600 x 5)
= 12,000
W4 Provision for future repairs does not meet the definition of a liability under IAS 37 and must be
reversed. This will increase current year profit and the previous year by GHC60,000
W5 IAS 39 Financial Instruments requires this type of loan to be valued at amortised cost as follows:
Amortised cost 1/1/2012 70,000
Interest expenses at E/R of 12% 8,400
Interest paid at 10% (7,000)
Amortised cost at 31/12/2012 71,400

Income Surplus Adjustments: GHC

Balance b/fwd
Add back provision for plant overhaul
Lease rented reserved
Less lease interest (W1)
Depreciation: (W2)
Buildings
Owned plant
Leased plant
Fair valuation deficit Investment property
Stock write down
Unrecorded credit
Increase in deferred tax (112,500 94,000)
Amortisation of loan note (8,400 7,000)
Revised income surplus balance
483,000
60,000
16,000
(4,000)

(12,600)
(110,000)
(14,000)
(13,000)
(12,000)
(2,500)
(18,500)
(1,400)
731,000


SOLUTION 3
(a) Income Statement for the six-month period ended:
30
th
June 2012 31 December 2012
GHC GHC GHC GHC
Sales
Cost of sales
Gross profit
Operating expenses
Wages and salaries (W1)
Doubtful debts provision
Depreciation (W2)

Net profit c/d



7,500
5,800
170
4,200
60,000
(19,000)
41,000




(17,670)
23,330



7,500
2,200
170
3,200
60,000
(19,000)
41,000




(13,070)
27,930

(b) Income Appropriation Account
GHC GHC
Net profit b/d
Interest on current account
Interest on capitals:
Talim
Kum
Malita

Share of profit:
Talim
Kum
Malita
23,330
-

(1,250)
(750)
-__
21,330

10,665
10,665
-___
21,330
27,930
320

(1,250)
(750)
(750)
25,500

13,000
6,500

6,000
25,500

(c) Capital Accounts
Talim
GHC
Kum
GHC

Malita
GHC
Talim
GHC
Kum
GHC
Malita
GHC
Goodwill
Balance c/d
38,896
25,169

______
64,065
19,448
34,617

_____
54,065
14,586
3,414

_____
18,000
Balance b/f
Revaluation
surplus
Goodwill
Capital retention
25,000
2,600
36,465
-__
64,065
15,000
2,600
36,465
-
__
54,065
15,000
-
-

3,000
18,000

Current Accounts
Talim
GHC
Kum
GHC

Malita
GHC

Talim
GHC
Kum
GHC

Malita
GHC
Balance b/f
Int. on current
a/c
Capital retention
Balance c/f
-
25,169
-
29,164
64,065
6,000
320
-
12,345
18,665
-
-
3,000

3,750
6,750
Balance b/f
Int. on capitals
Share of profit

3,000
2,500
23,665
_____
29,165
-
1,500
17,165
_____
18,665
-
750

6,000
_____
6,750


(d) Talim, Kum and Malita
Statement of Financial Position
As at 31
st
December 2012
GHC GHC
Non-current assets:
Land and buildings (36,000 12,000 + 15,200)
Motor vehicles (22,000 2,000 10,000 3,400)
Office equipment (20,000 2,000 4,000)

Current assets:
Inventories
Trade receivables (6,800 340)
Bank



Financed By;
Capital Accounts:
Talim
Kum
Malita



Current Accounts:
Talim
Kum
Malita

Trade payables






18,400
6,460
29,000




25,169
34,671
3,414





29,165
12,345
3,750

39,200
6,600
14,000
59,800




53,860
113,660





63,200







45,260
5,200
113,600

SOLUTION 4

a) PEACE LTD
Formula 2012 2011

i)



ii)



ROCE



Assets
Turnover


EBIT x 100
Capital Employed


Sales___
Capital Employed


52,000 x 100
306,000
= 17%

456,500
306,000
= 1.49 times

50,000 x 100
261,500
= 19.1%

420,000
2,615,000
= 1.16 times

iii)



iv)



v)



vi)
Current
Ratio


Quick
Ratio


Debt/Equity
Ratio


Interest
Cover
Current Assets
Current Liability


Current Assets Inventories
Current Liabilities


Debt x 100
Equity


EBIT
Interest
253,000
63,000
= 4.02:1

253,000 - 147,000
63,000
= 1.68:1

985,000 x 100
207,500
= 47.47%

52,000
14,500
= 3.59 times
171,000
46,500
= 3.68:1

171,000 118,500
46,500
= 1.13:1

62,000 x 100
199,500
= 31%

50,000
3,000
= 16.67 times


b) REPORT
To: Financial Director
From: Accountant
Date:
Subject: Analysis of the Performance of Peace Ltd
Following the discussions on the above subject, I wish to submit this report for your study and
consideration.
Profitability:
Over the two years, the profit level has declined from return of 19.1% (2011) on the companys
investment to 17% (2012).
Liquidity
There has been an improvement in the companys ability to settle its current liabilities from its
current assets from 3.68:1 (2011) to 4.02:1 (2012)
Solvency
Over the period the company has more equity than prior charged capital. But the proportion of
capital to prior charged capital has increased from 31% (2011) to 47.47% (2012).
Generally the company has experienced declining trends in its performance with the exception of
liquidity.
I shall be glad to deal with further questions you may tend to ask in future.
Thank you.

Yours faithfully,

Accountant
Alternative to 4b.
If a student takes net investment in finance lease to be fair value of the leased asset plus the initial
direct cost that is GHC82,966 + 700 = GHC83,666 he/she be marked correct
The net investment in the lease is as follows:
Date Description Gross
Investment
GHC
DF @ 11% Net
Investment
GHC
1/1/2012
1/1/2013
1/1/2014
1/1/2015
31/12/2015

31/12/2015
1
st
Instalment
2
nd
Instalment
3
rd
Instalment
4
th
Instalment
Guaranteed residual value

Unguaranteed residual value
22,000
22,000
22,000
22,000
10,000
98,000
2,000
100,000
1
0.901
0.812
0.732
0.659

0.659
22,000
19,820
17,864
16,104
6,590
82,380
1,318
83,698
Financial Statement Extracts:
i. Income statement extract GHC
Finance Income 6,787/6,783
ii. Statement of financial Position (extract)
Non-current Assets:
Finance lease receivable 46,485/46,449
Current Assets:
Finance lease receivable 22,000
Workings

1/1/2012 Net investment 83,698/ 83,666
1/1/2012 Instalment in advance (22,000)/22,000)
61,698/ 61,000
1/1/2012 31/12/2012 Interest Income @ (11%) 6,787/ 6,783
Balance at 31/12/2011 68,485/ 68449


SOLUTION 5
Peace Ltd
Consolidated Statement of Financial Position as at 31
st
December 2011
GHC000 GHC000
Assets:
Non-Current Assets:
PPE 6,720 + 820 + (200 80) 12
Intangible Goodwill
Investment


7,648
414
1,200
9,262

Current Assets:
Inventories (360 + 170 5 + 25)
Trade receivables (370 + 230 20)
Cash & cash equivalence (15 + 10)
Total Assets
Equity & Liabilities:
Equity attributable to owners of Peace Ltd
Ordinary shares
Capital surplus
Retained earnings

Non-controlling interest
Total equity
Non-Current liabilities:
Mortgage loan (3,200 + 50)
Current Liabilities:
Trade payables (670 + 270)
Total equity and Liabilities


550
580
25
1,155
10,417



5,000
209
778
5,987
240
6,227


3,250

940
10,417


Workings All workings in GHC000

(i) Control structure:
Peace
NCI

75%
25%
100%

(ii)

Goodwill Happy Ltd
Cost of Investment
Net worth acquired:
Share Capital 600
Capital surplus 28
Retained earnings 140
75% Interest 968
Goodwill
Impairment loss
Balance c/d


1,540




726
814
(400)
414

(iii) Intra-Group adjustments
a) Peace receivables
Inventory in transit
Happy payables

b) PURP PPE
Carrying amount after transfer
96 - (96 x 25%)
Carrying amount if not transferred
80 (20% of 100)


75
(25)
50



72


60
12

(iv)

Non-Controlling Interest
Net Worth of Happy per
Draft SFOP

Adjustments:
Fair Value Adjustment
Additional depreciation
20% x 200 x 2years
Bad debts

25% Interest





860


200

(80)
(20)
960
240

(v)

Retained Earnings:
Peace: Balance b/f
PURP: Plant
Inventory


Happy
75% of (220 20 80) 140
Goodwill impairment



1,210
(12)
(5)
1,193


(15)
Balance c/d (400)
778




(vi)

Capital Surplus
Peace Ltd
Happy 75% of (40 28)


200
9
209

AUDITING AND INTERNAL REVIEW
QUESTION 1
The modern approach to auditing is to first ascertain the clients system of internal controls, to confirm
that it is in fact working, to evaluate it and only then to carry out further work in the areas that the
evaluation has shown to be weak.
Required:
(i) Describe how in the course of an audit of a manufacturing company an auditor should ascertain the
clients system of internal control. (4 marks)
(ii) In recording the system of internal control, the auditor may make use of
(a) narrative notes
(b) flow charts; and
(c) internal control questionnaires.
Enumerate the main advantages of using each of these three (3) forms of recording(8 mark
(iii) Explain why it is necessary for the auditor to record the system of internal control, particularly as
the client may change the system from year to year. (5 marks)
(iv) Explain the use of the audit notes on the system of internal control in the design of compliance
tests. (3 marks)

QUESTION 2
Obolo Distilleries Company is a large manufacturing and wholesaling group. The company maintains an
Internal Audit Department reporting directly to the Managing Director.
Required:
(a) Describe four (4) categories of functions that the Internal Audit Department may carry out.
(b) List the aims which the internal and external auditors may have in common. (5 marks)
(c) List three (3) of the factors that will influence the external auditor in deciding on the extent to
which he may rely on the work of the Internal Audit Department. (3 marks)
(d) State four (4) specific ways in which the Internal Audit Department could assist the external
auditor. (4 marks)
(e) Internal Auditing is a fast growing area of activity for accountants. Discuss why this is so.

QUESTION 3
Audit Evidence must be reviewed critically with respect to its validity and relevance as evidence before
it is permitted to influence the mind of the auditor with respect to the assertion at issue.
Required:
(a) An auditor is considering a file of copies of credit sale invoices as evidence for the credit sales
figure in the accounts. How would he assess the validity and relevance of this file as audit
evidence? (4 marks)
(b) A mail order company invoices its customers with up to five ladies dresses. Most customers
accept and pay for one or two dresses and return the rest. A credit note is then issued. The
accounts incorporate a provision for returnable dresses at the year end. The audit is completed very
quickly and events after the reporting period not usable by the auditor as evidence.
What evidence would the auditor regard as valid and relevant in respect of the provision

(c) What factors would influence an auditor in considering the acceptability as evidence of certificates
received from third parties? (6 marks)
(d) A building contracting company has constructed an office block on its own land for its own use.
State the evidence the auditor would require on the cost of the building.(6 marks)


QUESTION 4
You are required to state:
(a) What circumstances might indicate that an enterprise is no longer a going concern. (12 mk)
(b) The audit procedures you would employ to satisfy yourself that an enterprise has sufficient cash
resources to meet its needs as they arise. (8 marks)

QUESTION 5
(a) When considering accepting appointment, auditors should obtain information from certain sources.
State five (5) of these sources. (5 marks)
(b) When determining the need to use the work of an expert the auditor would consider certain factors.
Briefly state five (5) of these factors. (5 marks)
(c) There are various types of Computer Assisted Audit Techniques (CAATs) that are in use by the
auditor for his work.
Required:
State in brief the following types of CAATs.
(i) Logical path analysis (1 marks)
(ii) Code comparison programs (1 marks)
(d) You are the auditor of Shaishie Company Limited, in Accra. The CEO, Nii Amu, returned from a
seminar on Auditing and Investigations where the resource person who is a Chartered Accountant
stressed on test- checking as a technique. Nii Amu did not understand what test checking is all
about and has cursed his stars for attending the seminar.
Required:

(i) Explain Test-checking. (4 marks)
(ii) State three (3) advantages of test-checking to Nii Amu. (3 marks)


AUDIT AND INTERNAL REVIEW - SOLUTIONS
SOLUTION 1
(i) The ascertainment techniques to be used by the auditor will depend on the form of information
available and on the complexity of the system. Both of these factors are in turn largely dependent
on the size of the company.
In every audit except the first, the starting point will be the systems notes on the permanent audit
file as recorded at the previous audit, and the auditors objective will be to ascertain the systems
changes which have occurred and to amend his notes accordingly.
(ii) The main ascertainment techniques available are:
(a) reference to existing notes;
(b) discussions with management;
(c) use of ICQs and ICEs;
(d) obtaining copy of clients systems manual, if any;
(e) inspection of the format of accounting records, including obtaining copies of special
forms used;
(f) obtain a list of staff and their duties;
(g) observation of procedures;
(h) discussion with internal auditors to obtain clarification of any points of difficulty and to
review their audit programme, which forms part of the system.
When an understanding of the system has been built up by the use of these techniques, a walk-
through test should be carried out in each systems area. This will require the selection of one or
two representative transactions and the tracing of them through all processing stages with the
object of confirming that the auditors understanding of the system is in line with the facts.
(iii) A record of the system of internal control is necessary to provide the auditor with convenient
reference material when he is assessing the adequacy of the systems and for use as a basis in later
audits.
The planning of audit tests is also based upon the systems record, including the decision
whether to apply compliance tests or substantive tests, and the selection of potentially weak areas
requiring special audit attention.
The review of the audit work by the manager and responsible partner can scarcely be done
properly without full systems documentation on the permanent file.
Apart from the individual importance of each of the points made above, their collective
importance means that failure to record the system would weaken the auditors position should an
action for negligence ever be brought against him.

(iv) Compliance tests are indeed to check the application of internal controls. It is scarcely possible
for the auditor to become sufficiently familiar with the key controls to design such tests without
proper systems documentation.
By a study of his chosen method of systems recording, the auditor will see how the clients
system works to provide control over important points and so decide how best to seek audit
evidence of the operation and effectiveness of controls.

SOLUTION 2
(a) Four categories of function carried out by the internal audit department are:

(i) Routine testing to detect errors and fraud;
(ii) Operational auditing reviewing and reporting on the efficiency of systems department
by department as required;
(iii) Advising on new systems (either arising from (ii) or for new departments);
(iv) Actually devising new systems and supervising their installation.

(b) (i) The establishment and maintenance of a satisfactory and efficient system of
internal control;
(ii) The maintenance of proper accounting records and returns from branches.
(iii) Safe custody of the companys assets;
(iv) The detection and elimination of errors and fraud;
(v) Summarising all the above points, the existence and maintenance of an accurate
information system, for management on the basis of which accurate financial statements
can be prepared.

(c) (i) The professional qualification held;
(ii) The intellectual and technical calibre of the internal audit staff, s revealed by previous
experience and a current appraisal of the work of the internal audit department;
(iii) The independence of the department (e.g. preferably report to the board of directors
generally, or to an audit committee, rather than to an individual like the senior accounting
executive);
(iv) The scope of the departments work, and in particular its ability to select its own areas for
attention;
(v) Adequacy or otherwise of the internal audit working papers and other documentation,
including training and guidance manuals;
(vi) Adequacy or otherwise of internal audit planning and control.

(d) (i) By provision of detailed information as to the working of the clients system in
case of difficulty in obtaining details in order ways;
(ii) By enabling the external auditor to reduce the scope of the detailed work in some areas in
which the internal auditor has already carried out substantial detailed testing;
(iii) By coordinating visits to branches;
(iv) By making known to the external auditor areas shown to be defective on the basis of the
internal audit, thereby enabling the external auditor to concentrate his attention where it is
most needed.

(e) Factors contributing to the growth in internal auditing are:
(i) The growth in size and complexity of systems, as a result of growth in the size of
companies through mergers and takeovers;
(ii) Growth in complexity of systems caused by computerization;
(iii) In some cases, appreciation that external audit fees can be saved by an efficient internal
audit;
(iv) The wish to improve the efficiency of the organisation.
Overall, an increasing realisation that in a large organisation an internal audit department can
move than pay for itself through the economies it can bring about in operating cost and, to lesser
extent, in external audit fees.

SOLUTION 3
(a) The file of sales invoices is the main evidence available to verify the credit sales figure in the
accounts and it is thus highly pertinent to the auditor. Its validity must be assessed by checking
its accuracy and completeness.
This may be done by reviewing the control over the preparation of sales invoices paying
particular attention to:
(i) Agreement of sales records with despatch and stock records;
(ii) Independence of staff involvement in invoice preparation from those concerned with
despatch and stock;
(iii) Internal audit procedures; if any
Other relevant checks include:
i. Cut-off checks;
ii. Reconciliation of total sales with records of stock purchases and production;
iii. Gross profit ratio;
iv. Audit work on debtor verification, including circulation;
v. Audit work on cash receipts from customers.
(b) If reference to post-balance sheet events is impossible, the only approach is to consider the
adequacy of the provision in the light of past experience, measuring the provision made against th
level of sales and returns at earlier dates. Care would be needed to ensure that the auditor did not
overlook the possible incidence of seasonal factors or of changes in fashion which may increase
the return rate.

Over a period of years it is likely that a base of statistics could be built up by the client and the
auditor to permit reasonable forecasting by the client and assessment of those forecasts by the
auditor.
(c) (i) The materiality of the item covered;
(ii) The status and integrity of the third party issuing the certificate;
(iii) Whether the third party held the item covered in the normal course of business (Re City
equitable Fire Assurance Co. Ltd, 1924);
(iv) The facts that the evidence is independent of the client, subject to investigation of
possible relationships between the client and the third party;
(v) The extent of which the certificate is supported by other internal and external evidence;
(vi) The fact that a certificate is in writing.
(d) The main source of evidence will be the clients costing records which will be subjected to
compliance and substantive tests to establish their accuracy, with particular reference to non-
routine matters like the new office block. The allocation of overheads to the job should be
checked.
Other steps will include:
(i) Confirm authorisation for construction in board minute, which should give maximum cost
authorised;
(ii) Compare actual costs with budgets and with available external evidence as to cost of
comparable buildings;
(iii) Vouch outside costs like architects fees, if any, and accounts from sub-contractors;
(iv) Obtain confirmation of the value and accuracy of cost figures in the letter of representation.
(e) In the case of a very small company the audit evidence would likely to be based on extended
substantive testing and representations from the directors. Overall tests to confirm the validity of
the picture presented by the financial statements would be important.
For a very large company, the auditor would expect to find a comprehensive system of internal
control and would test its effectiveness by means of compliance tests backed by limited
substantive tests. There would probably also be internal auditors providing further assurance that
the system was functioning satisfactorily.


SOLUTION 4
(a) If his client is getting into financial difficulties, the auditor is likely to become aware of many
symptoms before he begins his formal review of the companys going concern status.
Important factors indicating that the business may no longer be a going concern are:
(i) Trading losses eroding the capital base;
(ii) Creditors issuing writs;
(iii) Declining turnover leading to serious under-recovery of fixed expenses which cannot be
rapidly reduced;
(iv) Change in fashion or technological change rendering major stocks obsolete;
(v) Exhaustion of bank finance without prospects of negotiating fresh facilities;
(vi) Dependence on short-term finance for long-term purposes;
(vii) Dependence on a small number of products, customers, or suppliers, accompanied by
evidence of the loss or failure of one or more of them;
(viii) Decline in current ratio and quick ratio;
(ix) Rapid development of trade resulting in pressure on working capital (overtrading);
(x) Pending lawsuit which would involve the company in uninsured damages beyond its
ability to pay;
(xi) Onerous product guarantee liabilities;
(xii) Post-balance sheet events involving one or more of items (i) to (ix) above.
(b) (i) Analysis of trends in ratio:
- Current ratio
- Quick ratio
- Trade debtors to credit sales
- Trade debtors to credit purchases
- Finished goods stock to cost of sales.
(ii) Study each of cash budgets for next twelve months, in the light of knowledge of accuracy
of past forecasts and knowledge of likely future events and trends in the companys
activities, including projected capital expenditure, pension commitments, loan repayments
and any other major inflows and outflows.
(iii) Preview of post-balance sheet events affecting the position.
(iv) If the company is a member of a group and relies on group financing, obtain written
confirmation from the holding company that support will continue.
(v) Ask directors for permission to discuss possible costs and damages arising in connection
with pending law suits.
(vi) Discuss the whole matter with the directors to confirm that they are aware of any future
problems and are taking appropriate action where necessary.
(vii) Include confirmation of the going concern status in the letter of representation.


SOLUTION 5
(a) Companies Code Requirements
The Code requires the auditor to state in his report whether the accounts show a true and fair view
of the profit or loss for the period and of the state of the companys affairs at the end of the
period, and whether the accounts have been properly prepared in accordance with the Companies
Code.
The Code also requires four further matters to be covered by the report, without their being
specifically stated:

(i) Whether proper accounting records have been kept;
(ii) Whether returns adequate for the purpose of the audit have been received from branches
not visited;
(iii) Whether the accounts are in agreement with the accounting records and returns;
(iv) Whether the auditor has obtained all information and explanations necessary for the
purpose of the audit.
(b) Requirements for Auditing Standards
The Auditing Standards and five further requirements to those under the Companies Code, all of
which must be stated in the report:
(i) Whether the financial statements have been audited in accordance with approved Auditing
Standards;
(ii) Whether the statement of sources and application of funds shows a true and fair view;
(iii) The accounting convention used in preparing the financial statements (eg historical cost);
(iv) Whether inflation adjusted accounts, if prepared, have been properly prepared; (if inflation
adjusted accounts disclosing more information than is called for by SSAP 16, or if the
inflation adjusted accounts are the main accounts, then the report on the inflation adjusted
accounts of the documents reported on and of the addressees of the report.


SOLUTION 6
(a) Five sources to obtain information are:
i. Communication with the previous auditors;
ii. The clients most recent annual accounts;
iii. Other business publications of the client;
iv. Press report on the clients activities;
v. Credit rating from client rating agencies;
vi. Reference from existing clients.
(b) i. Expert means a person or firm possessing special skill, knowledge and
experience in a particular field other than accounting and auditing.
ii
a) The engagement terms knowledge and previous experience of the matter being
considered;
b) The risk of material misstatement based on the nature, complexity and materiality of
the matter being considered; and
c) The quantity and quality of other audit evidence expected to be obtained.

(c) i. Logical path analysis, which will draw flowcharts of the program logic.
ii. Code comparison programs, which compare the original specific program to the current
program to defect unauthorized amendments.

(d) i. Test-checking is the technique adopted in auditing by means of which a small number
of transactions are examined in detail. If this small sample is found to be
satisfactory, then it is assumed that a larger number would also prove to be
satisfactory and therefore, the amount of detailed checking is kept to a minimum.
It is essential, however, that the sample selected should represent the whole of the period to
be covered and not be confined to one small area.
Whilst the documentary evidence is being examined in relation to the entries in the books,
the auditor should also be scrutinizing the system f internal check, to prove that it is being
carried out properly, for so often the system being practised falls far short of that laid down
by the management.

ii. Three (3) Advantages of Test-Checking
a. That whilst the volume of checking is reduced, the value of the checking is reduced,
the value of the checking is maintained, provided it is applied intelligently.
b. That the system of internal check is scrutinized and any weakness brought out into the
open for discussion with management.
c. That it leaves the auditor with more time to devote to the verification of the assets and
liabilities of the business.
d. That because of the time saved on checking the routine transactions in detail, the
accounts may be presented to the client earlier than would otherwise be possible.

BUSINESS MANAGEMENT

QUESTION 1
Stakeholders have influence on the operations of business organisations and they expect to be treated
fairly by these organisations.
Identify five (5) stakeholders of an organisation and explain their expectations. 20 marks

QUESTION 2
(a) Managers use formal and informal means in communicating information to subordinates in their
organisations.
As a Manager of your organisation, describe four (4) means of communication that you would
adopt in your organisation. (8 marks)
(b) Successful organisations always anticipate and undergo changes in their environment.

i. Define organisational change. (2 marks)
ii. Explain four (4) means a manger can use to manage changes in the organisation.
QUESTION 3
Well motivated employees tend to perform more effectively leading to high productivity.
(a) Explain the Equity Theory of Motivation. (3 marks)
(b) Explain two (2) implications of the theory to a Manager. (5 marks)
(c) Identify and explain four (4) techniques used to motivate work groups.(12 marks)

QUESTION 4
In running the affairs of an organisation on behalf of the shareholders, the Board of Directors perform
some specific functions.
Explain five (5) of these functions. 20 marks

QUESTION 5
In addition to the power of his position, a Manager must possess good leadership qualities in order to
succeed on his job.
(a) Explain the term Leadership (5 marks)
(b) Explain five (5) sources of a leaders power. (15 marks)

QUESTION 6
Although planning is key to the effective performance of both Managers and organisations, some
managers feel reluctant to plan.
(a) Explain the concept of Planning. (2 marks)
(b) Give four (4) reasons why some Managers do not plan. (8 marks)
(c) Explain five (5) ways by which decision making can be improved upon in an organisation.

QUESTION 7
For an organisation to be successful, it has to ensure that there is an effective control system in place.
Explain five (5) control techniques used in an organisation.

BUSINESS MANAGEMENT - SOLUTIONS
SOLUTION 1
(a) Shareholders these are the owners of the organisation who have contributed the capital for its
operations. Shareholders of a profit making organisation expect the managers to run it in such a
way as to enable it make profits and be able to pay them dividends at the end of each year. They
also will expect the value of the shares to appreciate so that shareholders value will be enhanced.
Shareholders of a company which does not pay dividends over a period will seek to dispose of
their shares.
(b) Customers Business organisations indicate they exist to serve the needs and wants of their
customers. Customers of an organisation expect that the goods and services to be made available
to them, reach them at the time they require them and at reasonable price. Customers also expect
goods and services to be of good quality and will expect to be treated fairly.

(c) Employees are another group of stakeholders who expect to be paid fair and adequate wages
while they expend their energies in their attempt to achieve the goals and objectives of the firm.
Employees will also expect the organisation to provide a safe and healthy working environment.
Generally, the more satisfied employees feel in their job environment, the more likely their efforts
will result in producing improvement.

(d) The community in which an organisation operates is another stakeholder. Communities permit
organisations to operate on the assumption that the firm will not create any environmental and
other problems. They would also expect the organisation to contribute towards improving the
quality of life of the people in the community.
(e) Creditors as stakeholders are those who extend credit and other facilities to an organisation. They
naturally will expect that an organisation to repay loans and other facilities granted at agreed
times and in agreed manner. Financiers will also expect that the organisation will continue to
operate so that they will continue to do business with each other.
(f) Another stakeholder of an organisation is the government and its agencies. Organisations are
expected to comply with many regulations in order to be able to operate. For example, an
organisation is expected to file annual returns, pay taxes and respect district assembly by- laws.
A pharmaceutical manufacturing company has to register its products with the Food and Drugs
Board and also observe Environmental Protection Agency rules and regulations.

SOLUTION 2
(a) 1. A means of communication in an organisation is face-to-face communication. This
communication can take place either as informal as during a meeting or on the spur of the
moment such as gathering of staff during break time. An advantage of this channel of
communication is its speed. Once contact is made with the other, the message is transmitted and
received.
2. Another means of communication in an organisation is the use of telephone.
The telephone enables one to get in touch with others outside ones local settings. For example it
allows one to be in touch with another employee who is halfway around the world in seconds. A
telephone assists in revealing how well a message is received.
3. Another means of communication is electronic mail (e-mail). This allows workers to send and
respond to messages via the computer. An advantage of e-mail is it is very fast and cheap to use.
E-mail enables workers to leave messages for others to pick up at their convenience.
4. Written communication is another means through which workers exchange information. In an
organisation, written communication comes in the form of letter, memorandums, reports and
newsletters. An advantage of written communication is that it is permanent, and so serves as a
source of future reference. It is also easier to understand than speech.
5. Another means of communication is staff meeting. Staff meeting is a grouping of co-workers to
discuss business or organisational issues. During such meetings issues as decisions taken by
management and progress being made towards achievement of goals are communicated to staff.
This is important as workers become well informed.

(b) i. Every organisation operates in a variable environment which is constantly undergoing
change. Organisation change is defined as any alteration that managers make to alter the way
things or activities are carried out in the organisation. Both internal and external factors can affect
or influence the change that takes place in an organisation.

ii. 1. A means of managing change in an organisation is to involve employees in the planning and
implementation of the change process. This creates a sense of ownership.
Employees will therefore own the change, resulting in less resistance to the change.
2. Another way of managing change is for management to motivate employees to accept the
change. This can be done by the use of incentives and creating an environment that will promote
and reward those who portray the new behaviours required by the change process.
3. Another means to manage change in an organisation is to prepare the staff to deal with the
change. A means of doing this is to provide them with training. Training enables them to be equipped
with the new skills and techniques needed to enhance the new expected behaviours.
4. The responsibility for change management rests with management. To achieve a successful
change management, the managers of the organisation should explain the new system,
policies, targets, structures etc to employees as early as possible. By this they facilitate and
enable change as they assist their staff to understand reasons, aims and ways of responding
positively to the new changes.
5. Managers can also manage changes in their organisation if they are able to make employees
align their goals with that of the organisation. If the expected benefits disadvantage workers,
while it provides mangers with higher pay and dividends, the staff would resist the change.
6. In order to manage change successfully, managers should ensure that the pace of change is
such that employees have the time to adjust and adapt to the change. This reduces the risk of
resistance. If a change is gradual people will have enough time to adapt and adjust to the new
processes.

SOLUTION 3
(a) The equity theory of motivation revolves around the premise that an individuals motivation
depends on his/her evaluation of the equity or fairness of the reward given him/her. Equity refers
to the ratio between inputs that is efforts or skill exerted on the job, and the jobs rewards that is
salary, promotions, incentives etc. compared with the rewards received by others performing
similar jobs and providing similar job inputs.
(b) i. The theory implies that employees tend to compare their salaries and other rewards for
their efforts with what others are receiving for similar efforts. Their motivation, job performance
and job satisfaction tend to improve when they realise that their pay compares favourably with
others performing similar jobs and exerting similar efforts.
ii. The theory also implies that when an employee perceives that he is being underpaid as compared
to what others performing similar jobs and exerting similar efforts are receiving, he develops a
feeling of in-equity and might try resolving the problem by working less. On the other hand, an
employee who perceives that he is being paid for higher than what others are receiving for similar
job/efforts tends to work harder.
(c) i. Financial rewards includes wages, bonuses, profit sharing and stock ownership
schemes. Money is important motivator of workers because it is all-embracing. It is often a
reflexion of other motivators and helps satisfy the individuals physiological safety and social
esteem and even self actualisation needs.
Money could be effective as a motivator if it is related to the employees performance, and
background of employees is taken into consideration. Financial rewards may be more important
to people who have not satisfied most of their physiological needs than those who have largely
satisfied these needs.
ii. Worker participation employees could be motivated to work harder when they are allowed to
take part in the decision making process. As a motivation technique, participation satisfies the
physiological growth, achievement and recognition needs of the employees. Employees who take
part in making a decision develop a sense of commitment to the decision and ensure that it is
implemented.
iii. Favourable condition of work employees could be motivated by providing them with good
conditions of work such as recreational facilities, accommodation, canteen services, free medical
care etc.
iv. Job enrichment and job enlargement. Employees may be motivated by enlarging or enriching
their jobs. Job enrichment involves redesigning the content of the job to make it more interesting
and challenging. Job enlargement on the other hand has to do with expanding the scope of the job
to include extra duties and responsibilities.
v. Right management and leadership style. This is important because management must get work
done through people. Where management exercises the right kind of leadership, employees are
better motivated to contribute their best to organisational goals.
vi. Personal development employees may be motivated to put in extra efforts when they are given
the chance to advance themselves through promotion, training and development as well as setting
realistic targets for employees.


SOLUTION 4
The functions of the Board of Directors of an organisation include the following:
1. They are expected to protect the interests of the shareholders. It is the duty of the directors to
ensure that they do not do anything which will injure the interests of the owners of the business
for which they have been appointed to run and for which reason they are paid fees and
allowances.
2. They are to hire and fire senior managers of the firm. It is duty of directors to recruit, select,
place and retain managers of the organisation and where necessary, fire them.
3. The Board of Directors of a business organisation is expected to approve budgets, authorise
expenditure and the disposition of profits or losses accrued in the conduct of the business.
4. They are also required to formulate or approve the policies and strategies of the organisation.
5. Directors are to guide the organisations affairs in accordance with the enabling legislation in the
case of state owned enterprises or the Companies Code in the case of a limited liability company.
6. They are also expected to provide the linkage between the organisation and its stakeholders. An
organisation has many stakeholders like government agencies, customers, suppliers, creditors and
labour unions and the directors are expected to ensure that the organisation relates effectively
with these stakeholders.


SOLUTION 5
(a) Leadership is the act of influencing a group of people to willing strive to achieve pre-determined
objectives, it is an intentional influence exercised in a given situation and directed towards the
attainment of goals. To lead is to guide, direct and influence the activities or behaviour of a
person or group toward goal achievement in a given situation.
(b) The main sources of a leaders power include the following:
i. Reward power is what is based on the followers perception that the leader has the ability
and resources to obtain rewards for those who comply with his directives. These include
pay rises, promotion and recognition.
ii. Coercive power is based on fear and the subordinates understanding that the leader has
the ability to punish or create undesirable outcomes for those who do not obey his
instructions.
iii. Legitimate power is based on the subordinates perception that the leader has a right to
exercise influence over him as a result of the role or the position the leader occupies in
the organisation or group. For example a manager has the right to exercise influence over
those under him according to the structure of the organisation.
iv. Referent power is based on the subordinates identification with the leader. The leader
exercises influence because subordinates perceive him to be attractive, possess some
personal characteristics, reputation or what is referred to as charisma.
v. Expert power is based on the subordinates perception of the leader as somebody who is
competent and who has some special knowledge or expertise in a given field.

SOLUTION 6
(a) Planning is one of the key activities of management. It is the process of setting the goals of an
organisation and developing strategies by deciding on the activities required to achieve the desire
goals.
(b) 1. A reason why a manager would not plan is that he or she may not be certain of what
objectives have been set. Objectives act as a guide to what activities are to be undertaken.
Where there are no clearly defined objectives there will be no need or point in planning.
2. Some managers do not plan as they do not see the need to plan. Such managers have an
attitude of letting events take its natural course. Some also believe that planning is a waste
of time.
3. Planning implies projecting activities into the future. This therefore involves risks. Some
managers are unwilling to take risks, a reason being that in the event of a miscalculation the
business or organisation would have to deal with some losses.
4. A key ingredient for planning is the availability of relevant information. During planning
such information is needed for analyzing and interpretation of facts. Where these facts do
not exist or the information is inadequate planning becomes very difficult.

5. Another reason why managers do not plan is that some of them are of the view that their
experience is not enough, therefore there is no need to plan. As their strategies have worked
for them, they are of the view that their experiences could help them through any difficulties
that may come up in future.
(c) i. A way to improve decision-making is to enhance the flow of information in an
organisation. Good decision-making requires an analysis of information to come out with
issues or facts before a solution is made.
ii. Another way to improve decision-making is to encourage employees to participate in these
processes. By their participation employees are able to understand the issues at stake and are
in a better position to propose solutions to issues.
iii. Another method to improve decision making is for the manager to create working conditions
and environment that encourage staff to come up with creative solutions and innovations.
Such an environment should reward creativity.
iv. In order to improve decision making, employees should be equipped with techniques for
effective decision making. One of such techniques is brain-storming. This is a method used
during meetings to solicit the opinions of participants on specific issues.
v. A manager can improve decision making by ensuring that procedures are made simple and
flexible. Where procedures are very complex and rigid, it makes it difficult for staff to use
their initiatives during decision making. This impacts negatively on organisational
performance.


SOLUTION 7
1. A control technique used in an organisation is the organisational structure. The structure spells
out how employees relate to each other. It also spells out the chain of command. Instructions and
communication flows downwards along the chain of command and accountability also flows
upwards the chain.
2. An example of financial control tool used in an organisation is the balance sheet. Financial
controls provide the bases for good management of the finances of the organisation. Financial
controls also enable an organisation to establish guidelines and policies for business success and
growth.
3. Administrative controls are made up of various policies and requirements that are put in place to
ensure that there is economic efficiency in the organisation. An example of such control is the
provision of basic training to enable staff conduct their duties safely. It also requires that prior
approval is sought before certain activities are undertaken.
4. Marketing controls are the processes that are put in place to monitor the proposed marketing
activities and make adjustments when there are deviations in order to achieve marketing goals.
An example of marketing control tool is market research. This is made up of gathering and
analyzing data to determine if the products or services being produced are meeting the needs of
clients. If clients are not satisfied the organisation would look for ways to improve the product or
service.
5. Human resource control used in organisation is performance appraisal. This is a method used to
evaluate the employees performance within a period. During this process, information is
obtained, and analyzed to determine the value of the employee to the organisation. It is a control
tool in that the results from the appraisal are compared with standards of performance and where
there are any deviations, corrective action is taken.

CORPORATE STRATEGY AND GOVERNANCE
QUESTION 1
Read the following carefully and answer the questions which follow:
RAABOAD LTD
Raaboad Ltd was established 30 years ago in Accra, Ghana. Its founder was a retired Marketing Manager
of a leading distribution company who decided to use his expertise to build a company that would
manufacture and distribute concrete products for the construction industry.
The company became a leader in the supply of roofing tiles and pavement blocks. Ten years ago,
Raaboad Ltd, added the production of concrete slabs and kerbs to its business portfolio. The company
has been successful in its operations because it relies on competent and dedicated workforce.
The company has a head office and ten distribution depots across the country. It has a total workforce of
300. The company provides haulage services to its customers who buy in bulk. However, in recent times
the management of the company has had difficulties controlling the haulage aspect of the business and is
contemplating to outsource the service.
Competition in the industry is becoming more intense as new entrants both foreign and local are coming
in with competitive prices and modern technology. The company has to act fast in order to reposition
itself as a leader in the industry.
The Managing Director and his team have decided to prepare a plan for the next five years to address the
challenges facing the company. At a meeting to discuss the first draft plan, the following estimates were
made:
(a) Sales in the current year (2013) should reach GHC10,000,000 and forecasts for the next five years
are GHC10,600,000; GHC11,400,000; GHC12,400,000; GHC13,600,000 and GHC15,000,000.
(b) The ratio of net profit after tax to sales is 10%, and this is expected to continue throughout the
planning period.
(c) Total assets less current liabilities will remain around 125% of sales.
It was also suggested that
(i) If profits rise, dividends should rise by at least the same percentage
(ii) An earnings retention rate of 50% should be maintained.
(iii) The ratio of long term borrowing to long term funds (debt plus equity) is limited by the
market to 30%, which happens also to be the current gearing level of the company.
The proposals have been referred to a team of which you are part to prepare the financial plan for the
consideration of management.
Required:
(a) (i) Draft a financial plan for the period 2013 2018 for Raaboad Ltd. (12 Marks)
(ii) Comment on the plan and make recommendations for attention. (6 marks)
(b) Advance three (3) reasons why Raaboad Ltd should outsource the haulage service.
(6 marks)

(c) Recommend four (4) strategies the company can use to ensure its survival in the industry.
(6 marks)

SECTION B:
Answer any two (2) questions from this section
QUESTION 2
Hammond Brothers, a road haulage company, is likely to be seeking a stock exchange listing in a few
years time. In preparation for this, the directors are seeking to understand certain key recommendations
of the international corporate governance codes, since they realise that they will have to strengthen their
corporate governance arrangements. In particular the directors require information about what the
governance reports have achieved in:
(i) Defining the role of non-executive directors
(ii) Improving disclosure in financial accounts
(iii) Strengthening the role of the auditor
(iv) Protecting shareholder interests
Previously also, the directors have received the majority of their income from the company in the form of
salary and have decided salary levels amongst themselves. They realise that they will have to establish a
remuneration committee but are unsure of its role and what it will need to function effectively. The
directors also have worked together well, if informally; there is a lack of formal reporting and control
systems both at the board and lower levels of management. There is also currently no internal audit
department.
The directors are also considering whether it will be worthwhile to employ a consultant to advise on how
the company should be controlled, focusing on the controls with which the board will be most valid.
Required:
(a) Explain the purpose and role of the remuneration committee, and analyse the information
requirements the committee will have in order to be able to function effectively. (8 marks
(b) Explain what is meant by organisation and management controls and recommend the main
organisation and management controls that Hammond Brothers should operate. (7

QUESTION 3
(a) Explain the concept of business ethics (3 marks)
(b) Monibo Ltd, is a multinational energy group, recently listed on the Stock Exchange, Mr. David
Spio, the current Chief Executive has also been appointed as chairman of the Board. He is keen on
imposing his views on the group and has made it clear that he is prepared to work with those who
remain loyal to his cause. His shares in the company were also purchased with company funds.
Required:
Outline any governance and related issues arising from Davids appointment. (5 marks)
(c) A Corporate Governance Code is an important requirement for listed companies. Some argue that
such a Code should be mandatory for all companies.

Required:
Discuss the benefits of having a Corporate Governance Code to shareholders and other interested users of
financial statements. (7 marks)
QUESTION 4
(a) The management of a company is often different from its owners. Explain the principle that
underlies this separation and the challenges that often arise from this relationship.(6m)
(b) What is the role of an audit committee in corporate governance? (9 marks)

SECTION C:
Answer any two (2) questions from this section
QUESTION 5
(a) Globalisation is now a popular concept in business. Explain globalisation and discuss four (4)
benefits of globalisation to a Ghanaian manufacturing company. (12 marks)
(b) Over the years, numerous internationally oriented strategies have been formulated and successfully
followed by many different companies. Explain four (4) such strategies.(8m)

QUESTION 6
(a) Corporate strategy is primarily about the choice of direction for a firm as a whole and the
management of its business or product portfolio. In choosing corporate strategies, most
organisations have a wide variety of options. One such option is harvesting or defensive strategies.
Required:
Explain four (4) types of harvesting strategies an organisation can use. (10 marks)
(b) The recently-appointed Chief Executive Officer (CEO) of the FSC Company intends on making the
organisation more competitive. He has made it clear that he considers current operational
performance to be below acceptable level. He recently stated, Costs are too high and productivity
is too low.
Demand for cocoa, the companys main product, is growing particularly in export markets such as
countries in the Pacific and the CEO believes FSC should capitalise on this. To do this he believes
some changes to working conditions at the company will be required. A reduction of import duty
in some proposed export markets would also be required for profitable trading.
The trade union that represents the workers of FSC Company is well-organised and has promised
the workers that it will defend their wage levels and working conditions.
Required:
(i) List the forces for change and causes of resistance in the FSC Company. Classify these according
to whether they can be considered as deriving from internal or external sources. (5 marks)
(ii) Recommend how the newly-appointed Chief Executive Officer might go about managing the
process of change. (5 marks)

QUESTION 7
(a) A company that does not address the issue of quality of its products will be left behind by its
competitors. What is the meaning of quality? (2 marks)
Apple Pie Ltd employs a total quality management program and manufactures 12 different types of pie
from chicken and leek to vegetarian. The directors of Apple Pie are proud of their products, and always
attempt to maintain a high quality of inputs at a reasonable price.
Each pie has four main elements:
Aluminium foil case
Pastry shell made mainly from flour and water
Meat and/or vegetable filling
Thin plastic wrapping
The products are obtained as follows:
The aluminium is obtained from a single supplier of metal related products. There are few
suppliers in the industry resulting from fall in demand for aluminium related products following
increased use of plastics.
The flour for the pastry shell is sourced from flour millers in four different countries one source
of supply is not feasible because harvests occur at different times and Apple Pie cannot store
sufficient flour from one harvest for a years production.
Obtaining meat and vegetables is difficult due to the large number of suppliers located in many
different countries. Recently, Apple Pie obtained significant cost savings by delegating souring of
these items to a specialist third party.
Plastic wrapping is obtained either directly from the manufacturer or via an internet site
specialising in selling surplus wrapping from government and other sources.
Required:
(b) Explain the main characteristics of a Total Quality Management (TQM) programme.(8
(c) Identify the sourcing strategies adopted by Apple Pie and evaluate the effectiveness of those
strategies for maintaining a constant and high quality supply of inputs. Your answer should also
include recommendations for changes you consider necessary.(10


CORPORATE STRATEGY AND GOVERNANCE - SOLUTIONS
SOLUTION 1
(a) i. RAABOAD LTD
FINANCIAL PLAN
Current
Year 2013
GHCm
Year
2014
GHCm
Year
2015
GHCm
Year
2016
GHCm
Year
2017
GHCm
Year
2018
GHCm

Sales
Net profit after tax
Dividends (50% of profit
after tax)
Total assets less current
Liabilities (125% of
sales)
Equity (increased by
retained earnings)
10.00
1.00

0.50


12.50
10.60
1.06

0.53


13.25
11.40
1.14

0.57


14.25
12.40
1.24

0.62


15.50
13.60
1.36

0.68


17.00
15.00
1.50

0.75


18.75
Maximum debt (30% of
long-term fund)
Funds available

Shortfalls in funds, given
maximum gearing of 30%
and no new issue of
shares = funds available
minus total assets less
current liabilities

8.75

3.75
12.50


0_

9.28

3.98
13.26


0.01

9.85

4.22
14.07


(0.18)

10.57

4.49
14.96


(0.54)

11.15

4.78
15.93


(1.07)

11.90

5.10
17.00


(1.75)
These figures show that the financial objectives of the company are not compatible with
each other, and adjustment will have to be made.
ii. 1. Given the assumptions about sales, profits, dividends and net assets required, there
will be an increasing shortfall of funds from year 2 onwards, unless new shares are issued or
the gearing level rises above 30%.
2. In years 2 and 3, the shortfall can be eliminated by retaining a greater percentage of profits,
but this may have a serious adverse effect on the share price. In the year 4 and year 5, the
shortfall in funds cannot be removed even if dividend payment are reduced to nothing.
3. Asset turnover appears to be low. The situation would be eased if investments were able to
generate a higher volume of sales, so that fewer fixed assets and less working capital would
be required to support the projected level of sales.
4. If asset turnover cannot be improved, it may be possible to increase the profit to sales ratio by
reducing costs or increasing selling prices.
5. If a new issue of shares is proposed to make up the shortfall in funds, the amount of funds
required must be considered very carefully. Total dividends would have to be increased in
order to pay dividends on the new shares.
The company seems unable to offer prospects of suitable dividend payments, and so raising
new equity might be difficult.
6. It is conceivable that extra funds could be raised by issuing new debt capital, so that the level
of gearing would be over 30%. It is uncertain whether investors would be prepared to lend
money so as to increase gearing. If more funds were borrowed, profits after interest and tax
would fall so that the share price might also be reduced.
(b) Reasons for outsourcing
(i) Saves cost as the organisation stops payment of certain staff costs.
(ii) More efficient and quality work is done by a specialised firm.
(iii) Enables organisation to concentrate on its core business.
(c) The organisation may pursue the following strategies:
(i) Marketing Penetration
This strategy seeks to increase market share for present/existing products or services in
present markets. Raaboad Ltd can do this by increasing marketing efforts e.g. advertising
sales promotion, publicity, etc.
(ii) Market Development
This involves introducing present products or services into new geographic areas. The
company should explore new market segments in the country or go into exports.
(iii) Product Development
This is a strategy that seeks to increase sales by improving or modifying present products
or services for existing customer groups. Raaboad Ltd should improve on the quality of
its products or introduce new innovation. This will enable it to remain competitive.
(iv) Diversification
In this strategy, new products are produced for new markets. Raaboad Limited can
therefore produce other concrete products or entirely different products for new
customers segments
SOLUTION 2
(a) Purpose and Role of Remuneration Committee
The purpose of the remuneration committee is to provide a mechanism for determining the
remuneration packages of executive directors. The scope of the review should include not only
salaries and bonuses, but also share options, pension rights and compensation for loss of office.
The committees remit may also include issues such as director appointments and succession
planning, as these are connected with remuneration levels.
Constitution of Remuneration Committee
Most Codes recommend that the remuneration committee should consist entirely of non-
executive directors with no personal financial interest other than as shareholders in the matters to
be decided. In addition, there should be no conflict of interests arising from remuneration
committee members and executive directors holding directorships in common in other companies.
Within Hammond, there is a requirement to first, appoint Non Executive Directors (NEDs) and
then ensure that the remuneration committee is comprised of these individuals. The current
system of the directors deciding on their own salary is clearly inappropriate; there is no
independent check on whether the salary levels are appropriate for the level of experience of the
directors or their salary compared to other similar companies.
Functioning of Remuneration Committee
Most Corporate Governance Code states that remuneration should be set having regard to market
forces, and the package required to attract, retain and motivate the desired caliber of directors.
The committee should pay particular attention to the setting of performance-related elements of
remuneration. Within Hammond, the vast majority of remuneration is based on salary; there is
little element of performance-related pay. Governance guidelines indicate that remuneration
should be balanced between basic salary and bonuses. Obviously, Hammonds remuneration
committee needs to increase the bonus element of remuneration to focus directors more onto
improving the performance of the company. Conditions for receipt of performance related
remuneration however should be designed to pro mote the long-term success of the company.
Consideration should also be given to the possibility of reclaiming variable components in
exceptional circumstances of misstatement or misconduct.
Reporting of Remuneration Committee
In addition a report from the committee should form part of the annual accounts. The report
should set out company policy on remuneration and give details of the packages for individual
directors. The chairman of the committee should be available to answer question at the annual
general meeting, and the committee should consider whether shareholders approval is required of
the companys remuneration policy. The remuneration committee will then ensure that disclosure
is correct.
Information Requirements
In order to assess executive directors pay on a reasonable basis, the following information will
be required
(i) Remuneration packages given to similar organisations
The problem with using this data is that it may lead to upward pressure on remuneration,
as the remuneration committee may feel forced to pay what is paid elsewhere to avoid
losing directors to competitors.
(ii) Market levels of remuneration
This will particularly apply for certain industries, and certain knowledge and skills. More
generally the committee will need an awareness of what is considered a minimum
competitive salary.
(iii) Individual performance
The committees knowledge and experience of the company will be useful here.
(iv) Organisation performance
This may include information about the performance of the operations which the director
controls, or more general company performance information such as earnings per share
or share price.
(b) Main Concerns of Board
The boards principal concern is with controls that can be classified as organisation or
management.
Organisation Controls
Organisation controls are designed to ensure everyone is aware of their responsibilities, and
provide a framework within which lower level controls can operate. Key organisation controls
include the following:
(i) Structure
The board should establish an appropriate structure for the organisation and delegate
appropriate levels of authority to different grades.
(ii) Internal Accounting System
The board should ensure that the system is providing accurate and relevant information
on a regular basis. Good quality information will enable the board to assess whether
targets are being met or losses are possible.
(iii) Communication
Communication of organisation policies and values through manuals and other guidance
to staff is essential. It is not clear from the scenario whether Hammond actually have any
of these controls in place; however, from the relatively informal basis in which the
company has been run, it is unlikely that detailed controls have been implemented
Management Controls
Management controls are designed to ensure that the business can be effectively monitored. Key
management controls include the following:
(i) Monitoring of business risks on a regular basis
This should include assessment of the potential financial impact of contingencies.
(ii) Monitoring of financial information
Management should also be alert for significant variations in results between branches or
divisions or significant changes in results.
(iii) Use of audit committee
The committee should actively liaise with external and internal auditors, and report on
any deficiencies discovered. The committee should also regularly review the overall
structure of internal control, and investigate any serious deficiencies found.
Use of internal audit
(iv) Internal audit should be used as an independent check on the operation of detailed
controls in the operating department. Internal audits work can be biased as appropriate
toward areas of the business where there is a risk of significant loss should controls fail.
As there is no internal audit department at present, the board will need to establish one
and define its remit.
The overall lack of controls is concerning, given the objective to obtain a listing. The
directors will need to implement the recommendations of the Corporate Governance
Code to ensure that a listing can be obtained.
SOLUTION 3
(a) Business ethics examines the ethical or moral principles that come up in a business environment.
It spells out the code of behaviours that business follows or adheres to in its dealings with both
internal and external stakeholders. Business ethics can refer to as low as how a business deals
with a single customer. Whether a business survives or not depends on its moral principles or
ethics.
(b) Davids Appointment
As a listed company, Monibo Ltd should be applying the principles of good corporate governance
set out in the Corporate Governance Code.
In particular, be fulfilling the roles of both chairman and chief executive, Davis Spios
appointment does not satisfy one of the codes provisions which states that the same individual
should not be chairman and chief executive.
The auditors must investigate the reasoning behind Davids appointment in the dual role. This
might be a temporary measure to fill two vacancies. On the other hand, if permanent it may give
David a disproportionate amount of authority to run and dominate the Board. Auditors must be
on their guard against potentially over-dominant management.
This concern might be increased with Davids shares being purchased through the company. It
is unclear whether Davids purchase was funded through a directors loan or not and there is the
intention to repay.
Benefits of Corporate Governance Code
(c ) i. A benefit of corporate governance is that it provides sound norms that encourage them to
be responsive to issues in their operating environment. It therefore provides the financers of the
company a guarantee that they would get a fair return on their investments.
ii. Corporate governance also spells out the pillars for good governance in the company. The
growth of corporate governance has therefore promoted the establishment of standards for
transparency, accountability, probity and integrity in all aspects of the organisational life.
iii. The existence of corporate governance has provided a level ground on which various
organisations have to conduct their businesses. The standards set by corporate governance
become the yardstick against which the activities of businesses are judged. It therefore gives
companies guidelines for the formulation of their policies.
iv. Another advantage or benefit of corporate governance is that it helps it to put in place measures to
deal with corruption in the company. Corruption is a key issue in corporate governance as it
existence increase the cost of production leading to negative impact on its profitability.
v. Stakeholders are partners of a business. They have expectations that need to be met. Corporate
governance ensures that and upholds that their interest and expectations are met. If these
expectations are not met it affects the organisations negatively. For example when expectations
of employees are not met they put up negative behaviours that affect the organisations negatively.
vi. Corporate governance is the manner in which the way a corporation is governed. This covers a
broad scope of activities which ensures that companies grow. A good corporate governance
practice does this by paving the way to attract investors. The presence of corporate governance
standards is potential partners will have more confidence in investing in a company

SOLUTION 4
(a) The agency theory is the principle which recognises the separation of management of a company
from its shareholders. The shareholders who are the principals provide the company with risk
capital, but they delegate control over that capital to the management.
The challenges associated with the agency relationship are referred to as the agency problem or
agency costs. It occurs when management does not act in the best interest of shareholders.
(b) Role of Audit Committee
(i) Reviews the scope and outcome of an audit and ensures that the objectivity of the auditors
is maintained. These include review of the audit fees.
(ii) Provide a useful bridge between both internal and external auditors and the board.
(iii) The review arrangement for whistle blowers who wish confidentially to raise concerns
about possible improper practices in the company.
(iv) Where there is no risk management committee, the audit committee should assess the
system in place to identify and manage financial and non-financial risks in the company.
SOLUTION 5
(a) Globalisation refers to the growth of trade and investment accompanied by the growth and
increase in international businesses, and the integration of economies around the world. The
globalisation of business was led to the spread of various brands and services throughout the
world.
i. A benefit of globalisation is that it can bring about lower cost of production. due to competitive
advantages that some producers have they are able to come up with effective and efficient means
of production. By means of globalisation another company can input this new technology and
use.
ii. Another benefit of globalisation is that it opens up new market that local companies can take
advantage off. This is important in situations where companies are able to produce more than its
local market can consume. By operating in other markets such companies are able to achieve
economies of scale.
iii. Globalisation creates employment for the local economy of companies that are able to expand
production and export. The increase in employment has spillover effects as increase taxes for the
local economy and an increase in demand for both local and international products.
iv. Globalisation also has advantage of providing a means for investors. Investors are always
looking for opportunities to invest. Globalisation therefore provides a means for diversifying
investment. Diversification involves buying several different investments alternatives in order to
spread the risk of investing. By this they reduce the chance of losing everything they have
invested.
v. The tread of globalisation has resulted in the integration of various natural economies with a rest
of the world creating a global economy that hinged on free markets, trade and information. To
survive in such economies business are required to be competitive. Competition among
businesses therefore leads to specialisation, better quality of products at competitive prices.
(b) Four popular strategies that companies use are:
(1) Direct investment
(2) License agreement
(3) Joint ventures
(4) Importing/Exporting
Direct Investment
This is the use of the companys assets to secure additional operating assets. For example,
companies need assets as machines, equipment etc to operate. When these are purchased they are
classified as direct investment. From international perspective, a direct investment involves the
purchase of existing or new assets in one company by another company in another country.
License Agreement
This is a right given to one company by another company to use its brand name or product
specification among others in the sale of goods or services. The company that has obtained the
right earns profits on the goods or product being sold while the owner of the brand obtains license
fees. At the international level, the owner and the buyer of the license are found on different
markets in different in different countries.
Joint Ventures
Another strategy used by companies is joint venture. This occurs when two companies form a
partnership with the aim of pursuing a common mutually desirable business venture. At times a
company in one country also pulls resources with another company or companies in a foreign
country to produce, store, transport and market products and share the profits or losses.
Importing/Exporting
A common feature of modern trading or business is dealing with overseas customers and
suppliers by transporting of both physical products and delivery of service as consultancy or legal
across national boundaries. Thus a company can either send or sell goods to its oversea
customer that is exporting or any such products or services from its suppliers oversea that is
importing. By these strategies local companies are able to enter foreign markets
SOLUTION 6
(a) Meaning of Harvesting Strategy
It is a deliberate decision to cut down expenditure of all kinds on a particular product. It is also
known as asset reduction strategy, a means by which organisation sets to limit or decrease its
investment in a business by extracting as much cash out of its operation as possible. When using
this strategy all marketing expenditure is gradually eliminated and the product is allowed to sell
on its goodwill until sales revenue fall below a cut-off point.
Types of harvesting Strategies
i. Turnaround is an example of harvesting strategy. This strategy is used when there is the need for
a major effort to correct decline in sales and profits. This strategy is used to reverse the negative
state of a business and put the business back on track to profitability. This is done by cutting cost
or operating efficiently.
ii. Divestiture is another example of a defensive strategy. This involves selling off part of the
existing business. It is used when turnaround strategy fail to achieve its aim. When the situation
in a business has taken a down turn it may be important to sell off some part of its operations to
raise funds to be injected into the existing business to put it on firm footing.
iii. Filling for bankruptcy is another example of a defensive strategy. When a business fill for
bankruptcy to protect itself from creditors and from the enforcement of legally building contracts
that are yet to be enforced. When this is done the business is able to buy time to organise itself
and avoid insolvency.
iv. Liquidation is another example of defensive strategy. It involves process of either selling or
dissolving the entire business. Such a decision may be made either by choice or force.
Liquidation is not a popular strategy as it serves as a mark of failure on the part of management.
It is the best strategy to use to minimizing shareholders losses. Liquidation of assets is usually a
last resort measure and generally is forced by the financial backers of the business.
v. The pruning strategy involves the reduction in the number of products served or produced by the
business. It occurs when management comes to the conclusion that some segments of its markets
are too small or costly to retain or continue to serve.
(b) (i) Forces for change - internal
Forceful new CEO
Poor operational performance
High costs
Low productivity
Forces for change - external
High export demand
Low domestic demand for cocoa
Customer complaints
Forces resisting change internal
Long-serving managers complacency
The trade unions attitude
Force resisting change - external
High import duties in some export markets
Recommendation for managing change
(ii) Lewin suggests that after the forces for and against change have been established, effort
should be put not only into breaking down those opposing it (which is a natural management
response), but also into building up the influence of those supporting it.
This process is the first or unfreeze phase of the Lewin/Schein change model. The CEO will
have to set up both a programme of education and support for the complacent managers and enter
into forceful negotiations with the trade union. The basic aim is to frighten both parties with
evidence of looming disaster. This is clear enough from the companys competitive situation.
The second phase of the Lewin/Schein change model requires action to change behaviour, laying
down new patterns and reinforcing them. Residual resistance should be confronted with free
circulation of information about plans for the future and why they are required. Individuals must
be helped to change their attitudes and behaviours. An extensive programme of organizational
development is probably required for the FSC Company. There should be proper application of
positive and negative reinforcement in the shape of rewards and sanctions.
The final phase of the model is refreeze. This prevents the staff from slipping back into their
old ways and attitudes by a combination of exhortation, reward for good performance and
sanctions against the backsliders.
External forces are less susceptible to this treatment than internal ones. In the case of th FSC
Company, representations could be made to government about both the exchange rate and the
unfair competition, perhaps through a trade association or other umbrella body. However, it is
necessary to recognize that even if action is forthcoming, it is unlikely to be prompt
SOLUTION 7
(a) Meaning of Quality
ISO 8402 (1986) defines quality as the totality of features and characteristics of a product or
service that bears its ability to satisfy stated or implied needs. In business operations it consists of
a measure of excellence or a state of being free from defects, and deficiencies. This is brought
about by the strict adherence to measureable and verifiable standards with the aim of satisfying
the customer needs.
(b) In a nutshell, total Quality Management (TQM) is a management philosophy, aimed at
continuous improvement in all areas of operation.
A TQM initiative aims to achieve continuous improvement in quality, productivity and
effectiveness. It does this by establishing management responsibility for processes as well as
output.
Principles of TQM
(i) Prevention
Organisation should take measures that prevent poor quality occurring.
(ii) Right first time
A culture should be developed that encourages workers to get their work right first time.
This will save costly reworking.
(iii) Eliminate waste
The organisation should seek the most efficient and effective use of all its resources.
(iv) Continuous improvement
The Kaizan philosophy should be adopted. Organisations should seek to improve their
processes continually.
(v) Everybodys concern
Everyone in the organisation is responsible for improving processes and systems under
their control.
(vi) Participation
All workers should be encouraged to share their view and the organisation should value
them.
(vii) Teamwork and empowerment
Workers across departments should form team bonds so that eventually the organisation
becomes one. Quality circles are useful in this regard. Workers should be empowered to
made decision as they are in the best position to decide how their work is done.
(c) Aluminium foil is obtained from a single supplier a sourcing strategy termed single sourcing.
The advantages of this strategy include:
Easy to develop and maintain a relationship with a single supplier which is especially
beneficial when the purchasing company relies on that supplier
A supplier quality assurance program can be implemented easily to help guarantee the
quality of products again mainly because there is only one supplier.

Economies of scale may be obtained from volume discounts.
However, the disadvantages of this strategy are:
Apple Pie is dependent on the supplier providing significant supply power. Issues such
as quality assurance may not be addressed quickly because the supplier is aware that there
are few alternative sources of supply.
Apple Pie is vulnerable to any disruption in supply.
Given that there are few suppliers in the industry this strategy may be appropriate. However,
there is no guarantee that the current supplier will not go out of business so the directors of Apple
Pie could look for alternative sources of supply to guard against this risk.
The pastry shell flour is obtained a number of suppliers a strategy known as multi-sourcing.
The advantages of this strategy include:
Ability to switch suppliers should one fail to provide the flour. Having suppliers in
different countries is potentially helpful in this respect as poor harvests in one country may
not be reflected in another.
Competition may help to decrease price.

Disadvantages include:
It may be difficult to implement a quality assurance program due to time needed to
establish it with different suppliers.
Suppliers may display less commitment to Apple Pie depending on the amount of flour
purchased making supply more difficult to guarantee.
Apple Pie appears to have covered the risk of supply well by having multiple sources of supply.
The issue of quality remains and Apple Pie could implement some quality standards that suppliers
must adhere to in order to keep on supplying flour.
A third party is given the responsibility for obtaining meat and vegetables this is termed
delegated sourcing. Advantages of this method include:
Provides more time for Apple Pie to concentrate on pie manufacturing rather than obtaining
inputs. Internal quality control may therefore be improved.
The third party is responsible for quality control checks on input again freeing up more
time in Apple Pie. Where quality control issues arise, Apple Pie can again ask the third
party to resolve these than spending time itself.
Supply may be easier to guarantee and the specialist company will have contacts with many
companies.
Disadvantages include:
Quality control may be more difficult to maintain if the third party does not see this as a
priority.
There will be some loss of confidentiality regarding the products that apple Pie uses,
although if there are no special ingredients then this may not be an issue.

Given the diverse sources of supply, Apple Pie are probably correct using this strategy.
The plastic film is obtained from two different sources utilising two different supply systems.
This is termed parallel sourcing. The advantages of this method include:
Supply failure from one source will not necessarily halt pie production because the
alternative source o supply should be available.
There may be some price competition between suppliers.
Disadvantages include:
Apple Pie must take time to administer and control two different systems.
Quality may be difficult to maintain, and as with multiple sourcing, it will take time to
establish supplier quality assurance programmes. Given that some stock is surplus to
requirements from other sources, quality control programmes may not be possible anyway.

The weakness in the supply strategy appears to be obtaining film from the Internet site in that
quality control is difficult to monitor. Changing to single sourcing with a supplier quality
assurance programme would be an alternative strategy to remove this risk.