Suggested Answer CAP III Dec 2017

CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II
SUGGESTED ANSWER
December 2017
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The Institute of Chartered Accountants of Nepal
.
Advanced Financial Reporting
Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed

Pages - 17
Time Allowed - 3 Hours Marks
Attempt all questions. Working notes should form part of the answers.
1. The major business of Kathmandu Ltd. is in the children‘s food industry. It

makes baby food and drink. On Shrawan 01, 2073, the company began
negotiation with the owners of Lalitpur Ltd. (which makes sweets) to acquire
100 percent of the issued capital of Lalitpur Ltd. After months of discussion,
an agreement was reached on Poush end 2073. In accordance with the
agreement, legal ownership of Lalitpur Ltd. passes to Kathmandu Ltd. on
Magh end 2073. However, from Magh 01, 2073, Kathmandu Ltd. shall have
the power to remove and appoint all the directors of Lalitpur Ltd. On Magh
15, 2073, Kathmandu Ltd. appointed new directors to replace the majority of
existing directors of Lalitpur Ltd.
The carrying amount and fair value of the assets and liabilities, recognized in
Lalitpur Ltd.‘s statement of financial position as on the date of acquisition,
were as follows:
Particulars Carrying Amount (Rs.) Fair Value (Rs.)
Plant and Equipment 10,000,000 13,000,000
Land 15,000,000 20,000,000
Motor Vehicles 3,000,000 3,200,000
Inventory 2,000,000 2,800,000
Accounts Receivable 1,500,000 1,300,000
Total Assets 31,500,000 40,300,000
Accounts Payable 7,000,000 7,000,000
Bank Loan 12,000,000 11,500,000
Provision (short term) 2,500,000 2,700,000
Total Liabilities 21,500,000 21,200,000
At the date of acquisition, Lalitpur Ltd. had unrecorded recipes for sweet
making. The fair value of the recipes at the date of acquisition was Rs.
8,000,000. On that date, Lalitpur Ltd. was being sued for damages related to a
claim by a parent of a child that possibly could have had food poisoning from
consuming the sweet made by the company. If Lalitpur Ltd. loses the court
case, it is expected that damages of Rs. 10,000,000 will be awarded to the
plaintiff. Lawyers estimated that the chance of losing the case is remote.
Kathmandu Ltd. estimated that the fair value of the potential liability is Rs.
1,000,000.
Details of the consideration, Kathmandu Ltd. agreed to provide in exchange
for the issued capital of Lalitpur Ltd., are as below:
(a) 100,000 shares in Kathmandu Ltd., the fair value of which at the date of
acquisition is Rs. 140 per share;
(b) Cash of Rs. 10,000,000; half to be paid at the date of acquisition and half to
be paid one year later;
(c) A further payment of Rs. 5,000,000 after two years, if Lalitpur Ltd.‘s profit
before interest and tax (EBIT) for the first year following the acquisition
exceeds Rs. 25,000,000, or a further payment of Rs. 7,000,000 after two
years if Lalitpur Ltd.‘s EBIT for the first year following the acquisition
exceeds Rs. 40,000,000. Kathmandu Ltd. believes that it was probable that
EBIT will be higher than Rs. 25,000,000 but lower than Rs. 40,000,000;
and
(d) Supply of a patent that had a fair value of Rs. 5,000,000 at the date of
acquisition.
Directly attributable cost paid by Kathmandu Ltd. in relation to acquisition
(including the cost of issue of shares of Rs. 200,000) amounted to Rs. 600,000.
The incremental borrowing rate of Kathmandu Ltd. is 10 percent per annum.
Required:
a) Ignoring the tax effect, determine: (3+4+6+2=15)
i) The date of acquisition.
ii) The fair value of net identifiable assets acquired by Kathmandu Ltd. at
the date of acquisition.
iii) The cost of the business combination.
iv) The amount, if any, of goodwill to be recognized as a result of business
combination.
b) Recalculate the amount, if any, of goodwill to be recognized as a result of
the business combination using the following assumptions: 5
i) The applicable income tax rate is 20 percent;
ii) The tax base of assets and liabilities recognized by Lalitpur Ltd. in its
individual accounting record is equal to their respective carrying
amounts; and
iii) The amortization of goodwill is not tax deductible.
Answers:
(a)
i) Date of Acquisition
The date of acquisition is the date on which the acquirer effectively obtains the control
of acquiree. Para 8 of NFRS 3 on ‗Business Combination‘ states that the acquirer shall
identify the acquisition date which is the date on which it obtains control of the
acquiree.
In the given case, although Kathmandu Ltd. did not appoint new director until Magh
15, 2073 and transfer of legal ownership did not occur until Magh end 2073, it had
acquired the power to appoint all the directors of Lalitpur Ltd. on Magh 01, 2073. All
other facts and circumstances needs to be considered. In the absence of further facts or
circumstances that might indicate otherwise, the date of acquisition is Magh 01, 2073.
ii) Fair Value of Net Identifiable Assets Acquired
Particulars Amount (Rs.)
Intangible Assets (recipes) 8,000,000
Plant & Equipment 13,000,000
Land 20,000,000
Motor Vehicles 3,200,000
Inventories 2,800,000
Accounts Receivables 1,300,000
Accounts Payable (7,000,000)
Bank Loan (11,500,000)
Provisions (short term) (2,700,000)
Contingent Liabilities (1,000,000)
Net Identifiable Assets acquired 26,100,000
iii) Cost of Business Combination
Share based payment - 100,000 shares @ Rs. 140 per share 14,000,000
Cash paid on the date of acquisition (Rs. 10,000,000/2) 5,000,000
Present value of deferred cash payment (Rs 5,000,000/1.1) 4,545,455
2
Contingent consideration (EBIT targets) (Rs. 5,000,000/(1.1) ) 4,132,231
Supply of patent 5,000,000
Directly attributable cost (excluding share issue cost)( Para 53, NFRS) NA
Total cost of business combination 326,77,686
iv) Calculation of value of Goodwill
The value of goodwill is the excess of cost of business combination over the fair value
of net identifiable assets acquired as calculated below:
Amount (Rs.)
Cost of business combination 326,77,686
Less: value of net identifiable assets acquired (26,100,000)
Goodwill 6,577,686
b) Calculation of Goodwill on given assumptions.
After taking account of income tax effects, the fair value of the net identifiable assets
acquired by Kathmandu Ltd. will be as follows:
Amount (Rs.)
Net fair value of assets without tax effect as calculated above 26,100,000
Deferred tax liability (Working Note 1) (2,220,000)
Net identifiable assets acquired 23,880,000
Cost of business combination 326,77,686
Less: Net identifiable assets acquired (23,880,000)
Value of goodwill acquired 8,797,686
Working Note 1: Calculation of Deferred tax Assets/Liabilities on business combination
Particulars Lalitpur Ltd. Group acquisition Difference Deferred
carrying carrying amount (Rs.) tax @ 20%
amount (Rs.) (fair value) (Rs.) (Rs.)
Intangible assets - 8,000,000 8,000,000 (1,600,000)
(Recipes)
Plant and Equipment 10,000,000 13,000,000 3,000,000 (600,000)
Land 15,000,000 20,000,000 5,000,000 NO
Motor Vehicles 3,000,000 3,200,000 200,000 (40,000)
Inventory 2,000,000 2,800,000 800,000 (160,000)
Account Receivables 1,500,000 1,300,000 (200,000) 40,000
Account Payables (7,000,000) (7,000,000) - -

Bank Loan (12,000,000) (11,500,000) (500,000) (100,000)
Provision (short term) (2,500,000) (2,700,000) 200,000 40,000
Contingent Liability - (1,000,000) 1,000,000 200,000
Total 10,000,000 26,100,000 (2,220,000)
2.
a) The finance officer of Multi Ltd. has drawn following trial balance for the year
ended 31/3/2074:
Dr.( Rs.
Particulars '000) Cr. (Rs. '000)
Equity share capital of Rs. 100 each 20,000
Share premium 2,000
Retained earnings 1,120
Land and buildings – at cost 95,015
Plant– at cost 34,500
Accumulated depreciation at 1/4 2073:
Building 10,000
Plant 74,500
Inventory at 31/3/2074 32,700
Trade receivables 12,200
Bank 7,700
Deferred tax 6,200
Trade payables 15,100
Revenue 650,000
Cost of Sales 511,500
Distribution cost 20,460
Administrative expenses 15,345
Dividends paid 50,000
Bank interest 700
Income tax 1,200
Total 780,120 780,120
The officer discloses additional information with trial as follows:
(i) Revenue includes sale of Rs. 10,000,000 of finished goods made to Subin
Traders on Paush end 2073 in cash. The cost of the goods at the date of
sale was Rs. 7,000,000 and Multi Ltd. has an option to repurchase these
goods at any time within three years of the sale at a price sold by it plus
accrued interest from the date of sale at 10% per annum. At the year end,
the option had not been exercised, but it is highly likely that it will be
before the date it lapses.
(ii) On Magh 1, 2073, Multi Ltd terminated the production of one of its
product line, and on this date one of the plant used to manufacture the
terminated product line was advertised for sale for price of Rs. 4.2 million
which is considered realistic. It is included in the trial balance at a cost of
Rs. 9 million with accumulated depreciation of Rs. 5 million.
(iii) On Shrawan 1, 2073, the directors of Multi decided that the financial
statements would show an improved position if the land and buildings
were revalued to market value. At that date, an independent valuer valued
the land with cost of Rs. 30 million at Rs. 52 million and the building was
revalued at Rs. 40 million and these valuations were accepted by the
directors. The remaining life of the buildings at that date was estimated as
16 years. Multi Ltd. does not make a transfer to retained earnings for
excess depreciation.
(iv) Plant is depreciated at 20% per annum using the reducing balance method
and time apportioned as appropriate. All depreciation is charged to cost of
sales, but none has yet been charged on any non-current asset for the year
ended 31st Ashadh 2074.
(v) Income tax in trial balance relates to payment of tax in due course of self-
assessment of previous year and provisioned amount exceeds the assessed
amount. Multi Ltd. estimates that an income tax provision of Rs. 25
million is required for the year ended 31st Ashadh 2074. At that date, the
deferred tax liability is estimated as Rs. 7 million.
(vi) During the year, the company issued shares of Rs. 10 milion at par value,
issue cost being Rs. 0.5 million.
Required: 10
Prepare Income Statement as per NFRS.
b) P Ltd. and its subsidiary M Ltd. get their supply of some essential raw
materials from D Ltd. To coordinate their production on a more profitable
basis, P Ltd. and D Ltd. agree between themselves each to acquire a quarter of
shares in other‘s authorised capital by means of exchange of shares. The terms
are as follows:
(i) P Ltd.‘s shares are quoted in the stock exchange at Rs. 10. The value to be
taken for this purpose was either the quoted price or on the basis of
balance sheet valuation, whichever is higher.
(ii) D Ltd.‘s shares which are not quoted in stock exchange are to be
considered on the yield basis or Balance Sheet basis, whichever is higher.
(iii)The future profits of D Ltd. are estimated at Rs. 420,000, subject to one-
third to be retained for the development purposes. The shares of the
similar company yield 8%.
(iv) Freehold properties of D Ltd. are to be valued at Rs. 1,720,000.
(v) No cash is to pass, and the balance due on settlement is to be treated as
loan between the two companies.
The summarized Balance Sheets of the companies at the relevant date stood as
follows:
P Ltd. (Rs. M Ltd. (Rs. D Ltd. (Rs.
Particulars '000) '000) '000)
Equity and Liabilities
Share Capital
Authorized Equity Share Capital 4,800 2,000 4,000
Issued & Paid up Equity Share Capital
of Rs. 10 each 3,200 2,000 3,000
Reserve & Surplus:
Security Premium 320
Profit & Loss 880 840 800
Non-Current Liabilities:
7% Debentures 1,200
Current Liabilities:
Current Liabilities 1,120 720 840
Proposed Dividend 400 200
7,120 3,760 4,640
Assets
Non-current Assets:
Freehold properties 2,640 1,160 1,320
Pland & Machinery 1,800 1,640 1,760
Investments:
160,000 Shares in M Ltd. 1,840
Current Assets:
Current Assets 840 960 1,560
7,120 3,760 4,640
Required:
Compute the value of the shares according to the terms of the agreement and
present the final settlement showing all the necessary workings. 10
Answers:
a) Income statement of Multi Ltd. For the Year ended 31/3/2074
Particulars Amount (Rs. '000)
Revenue 640,000 WN 1
Cost of Sales (498,600) WN 2
Gross Profit 141,400
Distribution Cost (20,460)
Administrative expenses (15,345)
Finance Cost (1,200) WN3
Profit Before Tax 104,395
Income Tax Expenses (24,600) WN 4
Profit for the year 79,795
Other Comprehensive income(Gain on revaluation) 6,985 WN 2(a)
Total Comprehensive income 86,780
WN 1: The revenue includes amount of Rs. 10 million which in substance is not
sales as it is likely that the option to repurchase is exercised. The amount so
received is considered as loans. Such amount at cost is included in inventory based
on substance over firm. Hence, revenue from sales is Rs. (650-10) million
WN 2: Cost of Sales (Rs.‗000)

Given 511,500
Sales in substance loan (7,000) WN 1
Depreciation of Plant (8,400) WN(b)
Depreciation of building 2,500 WN(a)
Revised Cost of Sales 498,600
WN (a) Depreciation – Building (Rs. ‗000)

Carrying Amount of land & Building 1/4/2073 85,015 (95,015 – 10,000)
Revalued amount 92,000 (52,000 + 40,000)
Gain on Revaluation 6,985
Depn. on Building for the year (SLM) 2,500 (40,000/16yrs)
Carrying Amount of land & Building 31/3/2074 89,500 (92,000 – 2,500)
WN (b)- Depn on Plant (Rs.‘000)

Opening carrying Amount (40,000) (34,500 – 74,500)
Plant-DCO (4,000) (9,000 – 5,000)
Remaining (44,000)
Depn @ 20% 8,800
Carrying Amount- Closing (35,200)
Depn of Plant DCO

Cost of DCO 9,000
Acc. Depn. of DCO (5,000)
Opening Carrying Amount 4,000
Depn. (6 Months) @ 20% (400)
Carrying amount at end of year- DCO (3,600)
Total Depreciation on Plant = (8,800) + 400 = (8,400)
WN 3: Finance Cost
As per trial 700
on loan- substance( 10% of Rs. 10m/2) 500
1,200
WN 4: Income tax expenses
Amount of current tax includes income tax and deferred tax (Rs.‘000)
DTL- Opening 6,200
DTL- Closing 7,000
Deferred Tax Expenses 800
Add: Current Income tax 25,000
Less: Prior year excess tax (1,200)
Tax Expenses 24,600
Alternatively, prior year tax may be adjusted in retained earnings.
Note: There is error in questions regarding the Plant cost and Accumulated depreciation on
Plant so any assumptions of calculations of depreciation on plant and machinery will get marks
if other calculations are correct.
b) Statement showing value of a share on Balance Sheet basis:
P Ltd. M Ltd. D Ltd.
Particulars (Rs.‘000) (Rs.‘000) (Rs.‘000)
A. Total Assets at current values:
Freehold properties 2,640 1,160 1,720
Plant & Machinery 1,800 1,640 1,760
Investment in M Ltd. 160,000*14.20 (M Ltd
Intrinsic Value) 2,272
Current Assets 840 960 1,560
7,552 3,760 5,040
B. Outside liabilities:
7% Debenture 1,200
Current Liabilities 1,120 720 840
Proposed Dividend 400 200
2,720 920 840
C. Net Assets (A - B) 4,832 2,840 4,200
D. No. of Shares( in thousands) 320 200 300
Balance Sheet Value per share(Rs.) 15.10 14.20 14.00
Valuation of D Ltd.'s shares on yield basis
Estimated annual Profits (Rs. '000) 420
Less: 1/3 retained for development purposes (Rs. '000) (140)
Distributable Profits (Rs. '000) 280
Dividend Yield (Distributable profit/paid up capital) X
100 9.33%
[(Rs. 280,000 / 3,000,000) X 100]
Normal Rate of Yield 8.00%
Value per share on yield basis = [Dividend Yield /Normal Rate X Paid up value] =
9.33% / 8% X 10 = Rs. 11.67. Note: If students uses earning yield basis for share
valuations then will get full marks.
Value taken as per agreement for exchange of shares between P Ltd. and D Ltd.
P Ltd:-
Rs. 15.10 per share, being the amount of Balance Sheet value, higher than the quoted
value of Rs. 10 per share.
D Ltd.:
Rs. 14 per share, being the amount of Balance Sheet value, higher than the yield value
of Rs. 11.67 per share.
Statement of Settlement
Rs.
Shares issued by P Ltd. to D Ltd. - 120,000 shares @ Rs. 15.10 per share 1,812,000
Shares issued by D Ltd. to P Ltd. - 100,000 shares @ Rs. 14.00 per share (1,400,000)
Loan by P Ltd. to D Ltd. 412,000
Note:- In the absence of the information, shares of M Ltd. has been valued on net asset
basis for the purpose of valuation of investment of P Ltd. Alternatively, the investment of
P Ltd. in the shares of M Ltd. may be valued on cost basis i.e. at Rs. 1,840,000. In such a
case, the Balance Sheet value of P Ltd. will be Rs. 13.75 per share and exchange of shares
for settlement and amount of loan will be as follows:
Statement of Settlement
Rs.
Shares issued by P Ltd. to D Ltd. - 120,000 shares @ Rs. 13.75 per share 1,650,000
Shares issued by D Ltd. to P Ltd. - 100,000 shares @ Rs. 14.00 per share (1,400,000)
Loan by P Ltd. to D Ltd. 250,000
3.
a) NSW Bank Ltd., a commercial bank, grants 2% loan to its employees of Rs.
2,000,000 at the beginning of FY 2073/74 as per its employee benefit policy.
The publication by Nepal Rastra Bank shows benchmark interest rate of 8%
on loans. As per the policy, the loan is to be repaid over a period of 5 years
and employees are entitled to loan based on past service with the bank. The
repayment terms further provides that the principal amount of loan is to
repaid on equal installment at end of each year and simple interest is accrued
each year. The interest so accrued is to be repaid on two equal annual
installments i.e. from year following the year of completion of payment of
principal portion of loan.
Required: (5+5=10)
i) Give accounting treatment of loan provided by NSW Bank Ltd. for FY
2073/74, in line with NFRS with explanation.
ii) Show the treatment of the above transaction in FY 2073/74 and suggest
presentation in NFRS based financial statements.
Use Discounting Factor as follows, if required:
Interest Rate/year 0 1 2 3 4 5
8% 1 0.9259 0.8573 0.7938 0.7350 0.6806
2% 1 0.9804 0.9612 0.9423 0.9238 0.9057
b) A firm of contractors obtained a contract for construction of bridge across
river Kamala. The following details are available in the records kept for
the year ended 31 st Ashadh, 2074:
(Rs. in million)
Total contract price 1,000
Work certified 500
Work not certified 105
Estimated further cost to completion 495
Progress payment received 400
Progress payment to be received 140
Required:
Advise and assist the firm in the presentation of their accounts, keeping in
view the requirements of NAS 11. 10
Answers:
a)
i) The Loan is initially recognized at fair value. The fair value at the initial
recognition is the PV of future cash flows discounted at bench mark interest rate.
The accounting treatment for FY 2073/74 is as follows:
Particulars Dr. (Rs.) Cr. (Rs.)

Loan to Employees Dr.(WN 1) 1,669,862
Fair Value Loss Dr. (WN 1) 330,138
To Bank 2,000,000
Employee Benefit Expenses Dr. 330,138

To Fair Value Loss 330,138
Note: Combined Entry will also get full marks. .
ii) The interest on amortized cost is shown as financial charges (income) in
income statement and amortized cost is shown in balance sheet as assets.
Particulars Dr. (Rs.) Cr. (Rs.)
Loan to Employees Dr. (WN 2) 133,589
To Interest Accrued (WN 2) 133,589
Bank A/c Dr. 400,000

To Loan to employees Cr. 400,000
Statement of Income 2073/74:

Financial Charges Rs. 133,589
Balance Sheet:
Assets:
Loan to Employees Rs. 1,403,451
Working Note: 16,69,862+1,33,589-400,000)
Working Note 1
Cash flows from Loan
Simple
Cash Outstanding DF@
Year Interest(Rs. DCF(Rs.)
Flow(Rs.) Principal(Rs.) 8%
)
Principal
1/4/2073 (2,000,000) 2,000,000 1
31/3/2074 P 400,000 1,600,000 40,000 0.9259 370,360
31/3/2075 P 400,000 1,200,000 32,000 0.8573 342,920
31/3/2076 P 400,000 800,000 24,000 0.7938 317,520
31/3/2077 P 400,000 400,000 16,000 0.7350 294,000
31/3/2078 P 400,000 - 8,000 0.6806 272,240
Total - 120,000
31/3/2079 I 60,000 0.6302 37,812
31/3/2080 I 60,000 0.5835 35,010
Fair Value of the Loan 1,669,862
Loan Amount (2,000,000)
Fair Value
Loss 330,138
Working Note 2
Calculation of Ammortised Cost
Int on
Cash Ammortise
ammortised Int Pmt Pri Pmt
Year Flow d Cost
amt@8%(Rs (Rs.) (Rs.)
(Rs.) (Rs.)
.)
1/4/2073 1,669,862
31/3/2074 400,000 133,589 133,589 266,411 1,403,451
31/3/2075 400,000 112,276 112,276 287,724 1,115,727
31/3/2076 400,000 89,258 89,258 310,742 804,985
31/3/2077 400,000 64,399 64,399 335,601 469,384
31/3/2078 400,000 37,551 37,551 362,449 106,935
31/3/2079 60,000 8,555 8,555 51,445 55,490
31/3/2080 60,000 4,439 4,439 55,561 0
b)
(a) Amount of foreseeable loss (Rs in million)
Total cost of construction (500 + 105 + 495) 1,100
Less: Total contract price 1,000
Total foreseeable loss to be recognized as expense 100
According to para 36 of NAS 11, when it is probable that total contract costs
will exceed total contract revenue, the expected loss should be recognized as
an expense immediately.
(b) Contract work-in-progress i.e. cost incurred to date are (Rs million)
Work certified 500
Work not certified 105
605
This is 55% (605/1,100  100) of total costs of construction.
(c) Proportion of total contract value recognized as revenue as per para 22 of NAS 11.
55% of Rs. 1,000 million = Rs. 550 million
(d) Amount due from/to customers = Contract costs + Recognized profits
– Recognized losses – (Progress payments
received + Progress payments to be received)
= [605 + Nil – 100 – (400 + 140)]
= [605 – 100 – 540]
Amount due to customers = Rs. 35 million
The amount of Rs. 35 million will be shown in the balance sheet as liability.
(e) The relevant disclosures under NAS 11 are given below:
Rs. million
Contract revenue 550
Contract expenses 605
Recognized profits less recognized losses (100)
Progress billings (400 + 140) 540
Retentions (billed but not received from contractee) 140
Gross amount due to customers 35
4. Write short notes on the following: (5×3=15)

a) Barriers to global harmonization of financial reporting standards
b) The concept of fund theory and fund based accounting
c) Banking liquidity risk and its warning indicators
d) Environmental accounting
e) Possible objections to segmental reporting
Answers:
a) It is widely argued that global harmonization of financial reporting standards will
bring about uniformity in financial reporting and ensure consistency and
comparability in published financial information by enterprises. However there are
some barriers to global harmonization. These are as follows:

Different purposes of financial reporting

Different legal system

Different user groups

Needs of developing countries

Nationalism demonstrated in the unwillingness to accept another country‘s
standards
 Cultural differences resulting in different objectives for accounting systems
 Unique circumstances
 The lack of strong accountancy bodies
b) Although, the profit motive is the driving force for any business entity, there are
certain organizations which are run without profit motive. Such organizations
may be governmental institutions or any non-profit institutions like colleges,
universities, charitable hospitals etc. The accounting for these not-for profit
entities is primarily based on the fund theory. The fund theory is based on the
equation  Assets = Restrictions on assets. Assets represent prospective services
to the fund and liabilities represent restrictions against the assets of the fund. For
example, in case of a university, the most commonly used specific funds are
endowment funds, development funds etc. Each of these funds has its specific
assets restricted for particular purposes. Under the fund theory, the balance sheet
is considered an 'inventory statement' of assets and those restrictions applicable
to the assets. Revenues represent an increase in assets into the fund that are
completely free of equity restrictions other than the final restriction imposed by
the residual equity. The residual equity represents a final restriction on the assets
and establishes the equality of assets and equities. Expenses represent the release
of services for designated purposes specified in the objective of the fund. Thus,
the fund theory calls for fund based accounting rather than entity based
accounting.
A fund may be defined as an accounting entity "with a self balancing set of
accounts regarding cash and/or other resources together with all related
liabilities and residual equities or balances, and changes therein, which are
segregated for the purpose of carrying specific activities or attaining certain
objectives in accordance with special regulations, restrictions or limitations".
Thus, every fund is aimed at fulfilling some purpose and the services embodied
in the assets are the primary means to achieve that purpose. Fund based
accounting essentially involves preparation of financial statements fund wise and
consolidation of those statements to represent the financial results/position of the
organization as a whole.
c) Liquidity is the ability of an institution to transform its assets into cash or its
equivalent in a timely manner at a reasonable price to meet its commitments as they
fall due. Liquidity risk is considered a major risk for banks. It arises when the
cushion provided by the liquid assets are not sufficient enough to meet its
obligation. Liquidity risk can best be described as the risk of a funding crisis. Given
below are some early warning indicators that have potential to ignite liquidity
problem for a bank.
• A negative trend or significantly increased risk in any area or product line.
• Concentrations in either assets or liabilities.
• Deterioration in quality of credit portfolio.
• A decline in earnings performance or projections.
• Rapid asset growth funded by volatile large deposit.
• A large size of off-balance sheet exposure.
• Deteriorating third party evaluation (negative rating) about the bank and negative
publicity.
• Unwarranted competitive pricing that potentially stresses the banks.
d) The term ‗environment‘ includes everything in all its manifest forms, on the earth,
beneath the earth and above the earth. A business enterprise takes support of social
and ecological system in order to maximize wealth. Economic activity, social
welfare and a diverse environment, all are linked and ultimately depend on each
other. The functioning of an enterprise may have some favourable and some adverse
effects on the environment. Hence, it is felt that there is a need for maintaining
accounts of the effects of activities of business entity on the environment.
Environmental accounting can be defined as a system (methodology) for measuring
environmental performance and communicating the results of these measurements
to users. It helps in presenting the utilization of natural resources by an enterprise,
the costs incurred to use them and the income earned therefrom in a transparent
manner. Environmental accounting, entirely a new concept, is a faithful attempt to
identify the resources exhausted and the costs rendered reciprocally to the enterprise
by a business corporation. Thus environmental accounting stands for recording and
documenting environmental performance to facilitate effectiveness of
environmental management system with reference to compliance, safety and quality
control. It provides a data base for taking corrective steps and future action for
developing organisation‘s environmental strategy and for identifying
environmentally based opportunities for gaining an edge over one‘s competitors. If
proper environmental accounting system is established, the enterprise will be able to
anticipate environmental damage and therefore can prevent it from happening.
Of course environmental accounting is still in an early stage of evolution and it is
being groomed under the voluntary leadership of a variety of enterprises around the
world.
e) The possible objections to segmental reporting can be enumerated as below:
(i) It is generally felt that segmental revenues and expenses are not distinguishable
objectively in many cases. Revenues of a weak product line may be derived only
because of the existence of a strong product line. Also many joint costs are only
separable arbitrarily.
(ii)Much of segmental results depend on the inter-departmental transfer pricings
which are not always logically established.
(iii)Various segments of an enterprise may use common resources which makes it
difficult to arrive at a segment wise performance ratio.
(iv)Since the users are in no position to know the proper base for cost allocation, the
segment results would be less than meaningful.
(v)The last objection consists of the competitive implications to the firm. Some
academics contend that company secrets will be disclosed while others referred to
the competitive hardship suffered by some firms if segmented data is required.
Suppose that Company X, a small company, has a segment identical to one in
Company Y, a huge conglomerate. Company X would have to disclose the segment
while Company Y would not because the segment is not considered material to Y's
operations.
5.
a) Tradeon Ltd. provides you the following balance sheet as on 31/3/2074 and
additional information:
( Rs. in ‗000)
Liabilities Amount Assets Amount
Equity share capital of Rs.
10 each 1,507.50 Gross fixed assets 1,500.00
Accumulated
Retained earnings 500.00 depreciation (500.00)
12% Term loan from bank 500.00 Non-trade investment 300.00
Trade creditors 210.00 Trade investment 90.00
Overseas trade
debtors (1FCY= Rs.
Provision for tax 10.00 30) 820.00
Proposed dividend 140.00 Inventories 350.00
Cash & Bank 307.50
2,867.50 2,867.50
Additional Information:
i) Dividend is proposed during the current period.
ii) The closing exchange rate was 1 FCY= Rs. 35.
iii) Non-trade investment was written down by 4% owing to temporary
reduction in value of investment.
iv) The industry average rate of return on current cost of capital employed is
12% on long term debt and 15% on equity.
v) The prevailing tax rate is 30% which is expected to decline by 5% in
future.
vi) Retained earnings at the beginning of year was Rs. 150,000.
Required: 8
Determine the value of its goodwill under equity and long term fund
approach and show leverage effect.
b) Describe the processes of formulation of capital budget of Government of Nepal. 7
Answers:
a) (Rs.‘000)
Future Maintainable Profit
Increase in reserves (500 – 150) 350.00
Add: Proposed dividend 140.00
Profit After Tax 490.00
Add: Income Tax @ 30% (490×30/70) 210.00
Profit Before Tax 700.00
Add/Less:
Debtors Adjustment WN 1 136.65
Adjustment in non trade investment WN 2 12.50
Adjusted Profit Before Tax 849.15
Tax @ 25% (212.29)
PAT under equity approach 636.86
Add: Tax adjusted interest on term
loans[(12%×500) – (25%×12%×500] 45.00
PAT under long term fund approach 681.86
Capital Employed
Assets as per BS 2,867.50
Less: Non trade Investment (300.00)
Add: Increase in Debtors 136.65
Less: Liabilities
12% Term Loan From Bank (500.00)
Trade Creditors (210.00)
Provision for Tax ( 10.00)
Capital Employed under equity approach 1,984.15
Add: Long Term Loan 500.00
Capital Employed under long term fund approach 2,484.15
Rs.‘000
Valuation of Goodwill- Equity approach
Capitalised value of FMP @ 15%
(636.86/0.15) 4,245.73
Capital employed under equity approach (1,984.15)
Good Will under equity approach (A) 2,261.58
Valuation of Goodwill- Long term fund approach Rs.‘000

Capitalised value of FMP @ 12%
(681.86/0.12) 5,682.17
Capital employed under long term fund approach (2,484.15)
Goodwill under long term fund approach(B)( 3,198.02
Leverage effect on goodwill

adverse(Rs.‘000) (A-B) 936.44
WN1: Debtors Adjustment

In FCY (820/30) 27.33
Exchange Rate Used 30.00
Exchange Rate 35.00
Diff in rate used 5.00
Gain on revluation of debtors(Rs.‘000) 136.65
WN 2: Non trade
investment adjustment Rs.‘000
Non trade investment after loss 300.00
NTI before loss 312.50
Loss Booked 12.50
b) The capital budget formulation has four essential steps: budget forecasting, budget
ceiling setting, budget planning, and budget approval.
a. Forecasting
Forecasting is the first step in the budget making process where various macro-
economic projections are made, sources of revenues and tentative areas of
expenditure are identified and based on these economic targets are set. The Resource
Committee of the National Planning Commission (NPC) leads the forecasting
process and produces fiscal aggregates. The committee prepares the forecast on the
basis of information and feedback collected from different agencies viz. Ministry of
Finance (MoF), Nepal Rastra Bank etc.
Although these forecasts may not seem to have a direct linkage with the budget, they
do affect the budget to a huge extent. The forecasting is the basis of the annual
budget. Economic growth is targeted based on these estimates. Forecasting is a
crucial step in budget formulation as its accuracy determines whether the budget will
be balanced, in surplus or in deficit. Forecasting is the first step that paves the path
for other budget formulation activities. It is essential for the forecast to be
comprehensive as it determines the nature and shape of the budget, and the indicators
that define the forecast also define the economic objectives of the nation.
b. Ceiling Setting
Once a tentative forecast of the budget is prepared, it is presented to the budget
committee comprising of members from the NPC and the MoF. The committee
conducts extensive discussions regarding ceiling setting; an exercise that sets the
limits on budget expenditure. A final shape to the budget is given at this stage. NPC
also takes this opportunity to assess the budget utilisation and the progress of large-
scale projects, which finally defines the scale of the capital budget. It is essential to
set a ceiling on expenditures considering the limited resources. In the absence of
such a ceiling, the request forwarded by the subordinate ministries may not be in line
with the annual budget ceiling. This means that a considerable amount of time would
have to be devoted to reconciling the ministry specific budget expenditures with the
national level ceiling. Therefore, ceiling setting plays a vital role in limiting the size
of the budget based on sectors and availability of resources.
c. Budget Planning
After the determination of annual budget ceilings, the NPC requests the line
ministries to submit their capital budget estimates in accordance to the guidelines and
sectoral budget ceilings. Along with the NPC, the MoF issues detailed guidelines to
the line ministries that require the budgets to be submitted in the prescribed format
and within the stipulated time.
NPC informs each of the districts of the budget ceilings that need to be adhered to
and the MoF dispatches the budget circulars through the line ministries and the
various departments and divisions at the district level. Once a District Development
Committee (DDC) receives these requests and guidelines, it begins its budget
planning based on different sectors while the relevant line ministry sends guidelines
to each of the departments and divisions within the district-level offices. As
departments are not given a sectorial budget ceiling, they generally do not take
expenditure limitations into account; instead they look at project-specific targets as a
guide for the budget.
At the local level, a meeting of the village council is called for discussing plans and
programmes to be incorporated into the annual budget. Interest groups such as
consumer committees, NGOs, political leaders and citizens are included in these
discussions. Their plans are then forwarded to the Village Development Committee
(VDC) / municipality where it gets accumulated. Once the VDC scrutinizes and
gives a green signal to the plan it moves up to the District Council which re-
examines the budget and forwards it to the DDC. On the other hand, the district level
development offices also forward their plans and budgets for the upcoming year to
the DDC under the supervision of the relevant ministry.
Once finalised, these plans are forwarded to the line ministry and then to the NPC. A
tripartite discussion between the NPC, MoF and line ministry is held before
finalizing the budget limits for the ensuing year. Upon receiving the budget requests,
the NPC and the MoF compare various frameworks of the sectoral and national
objectives. There is room for revision of the plans to achieve various programme
targets for the upcoming fiscal year. The sectoral budgets are assessed in line with
the budget ceilings.
The budget formulation process displays both a bottom up and a top to bottom
approach. This two way process is essential in creating a synergy between the
national level plans and the local level needs. The actors in the central level authority
are well versed with policies, plans, and guidelines while the local level actors are
acquainted with the local needs, local capacity, and available resources in a particular
area. It is when these two approaches coincide, that a fruitful expenditure plan of the
budget can be obtained. This would ensure a budget that fulfils the demands of both
the state and the locals.
d. Budget Approval
The final step in budget process is budget approval. Before the budget is presented in
the parliament, the parliamentarians are presented with a draft budget document for
their perusal. They discuss the overall budget whilst looking at sector-wise specifics.
For instance, the Minstry of Health and Population has the opportunity to discuss and
review the budget allotted for health programs. The comments and queries that arise
during the ministry-specific discussions are discussed in detail until the relevant
ministry and parliamentarians are satisfied with the clarifications provided to their
queries. The budget is presented by the government only after the ministry level
budget discussion ends. If the majority agrees with the budget then it is approved and
is put into implementation.
6.
a) A company has a single substantial asset, the RAJ, which it uses to
manufacture Space Shuttle. The carrying value of the RAJ after four years
of its use is Rs. 10,000 million (Cost Rs. 14,000 million, accumulated
depreciation on a straight line basis of Rs. 4,000 million). There is no
expected residual value. Due to a break-through in technology in the
manufacturing of Space Shuttle, the company now expects the machine to
produce 30% less in revenue terms than expected over the rest of its
estimated useful life of 10 years. Net future cash flows for the next five
years, based on management's best estimate, after taking the 30% cut into
account, are:
Year 1 2 3 4 5
Future cash flows (Rs.
in million) 1,200 1,320 1,420 1,510 1,580
The expected growth rates for the following years are:

Year 6 7 8 9 10
Future cash flows 2% -1% -7% -16% -30%
If the machine was sold now, it would realize Rs. 6,400 million, net of
selling costs. The discount rate to be applied to the future cash flows is
10%.
Required:
Calculate any impairment loss and state the new carrying value of the RAJ. 5
b) An equipment is leased for 3 years and its useful life is 5 years. Both the
cost and the fair value of the equipment are Rs. 6,000,000. The amount
will be paid in 3 installments, and at the termination of the lease, lessor
will get back the equipment. The unguaranteed residual value at the end of
3 years is Rs. 800,000. The internal rate of return (IRR) of the investment
is 10%. The present value of annuity factor of Re. 1 due at the end of 3rd
year at 10% IRR is 2.4868. The present value of Re. 1 due at the end of
3rd year at 10% rate of interest is 0.7513.
Required: 5
i) State with reason whether the lease constitutes finance lease.
ii) Calculate unearned finance income.
Answers:
a) The net selling price of the machine is below its carrying value, so it is definitely
impaired. It is now necessary to find the value in use in order to determine what the
impairment loss is.
Long-term Future cash PV factor at
year Discounted future cash flows
growth rate flows 10%
(Rs. in million) (Rs. in million)
1 1,200 0.9090 1,091
2 1,320 0.8264 1,091
3 1,420 0.7513 1,067
4 1,510 0.6830 1,031
5 1,580 0.6209 981
6 2% 1,612 0.5645 910
7 -1% 1,595 0.5132 819
8 -7% 1,483 0.4665 692
9 -16% 1,246 0.4241 528
10 -30% 872 0.3855 336
Total 8,546
The impairment loss is calculated by comparing the carrying value (Rs. 10,000
million) with the higher of value in use (Rs. 8,546 million) and net selling price
(Rs.6,400 million). The impairment loss is therefore
Rs. 10,000 million – Rs. 8,546 million = Rs. 1,454 million.
The new carrying value of the RAJ is Rs. 8,546 million.
b)
(i) Present value of residual value = Rs. 800,000 × 0.7513 = Rs. 601,040
Present value of lease payments = Rs. 6,000,000 – Rs. 601,040 = Rs. 5,398,960
The present value of lease payments being 89.98% [5,398,960 / 6,000,000 X 100]
of the fair value, i.e. being a substantial portion thereof, the lease constitutes a finance lease.
(ii) Calculation of unearned finance income
Rs.
Gross investment in the lease [(Rs. 2,171,047* × 3) + Rs. 800,000] 7,313,141
Less: Cost of the equipment 6,000,000
Unearned finance income 1,313,141
Note: - In the above solution, annual lease payment has been determined on the
basis that the present value of lease payments plus residual value is equal to the
fair value (cost) of the asset.
*Annual lease payments = Rs 5,398,960 / 2.4868 = Rs. 2,171,047 (approx.)
Advanced Financial Management
Maximum Marks – 100
Total No. of Questions - 6 Total No. of Printed Pages – 4
Time Allowed - 3 Hours
Marks
Attempt all questions.
Working notes should form part of the answers. Make assumptions wherever necessary.
1.
a) The "Green Municipality" with mass population is planning to construct a
flyover that will replace the intersection of two busy highways X and Y.
Average traffic per day is 10,000 vehicles on highway X and 8,000 vehicles
on highway Y. 70% of the vehicles are private and rest are commercial
vehicles. The flow of traffic across and between aforesaid highways is
controlled by traffic lights. Due to heavy flow, 50% of traffic on each of the
highways is delayed. Average loss of time due to delay is 1.3 minute in
highway X and 1.2 minute in highway Y. The cost of time delayed is
estimated to be Rs. 80 per hour for commercial vehicle and Rs. 30 for private
vehicle.
The cost of stop and start is estimated to be Rs. 1.20 for commercial vehicle
and Rs. 0.80 for private vehicle. The cost of operating the traffic lights is Rs.
80,000 a year. One policeman is required to be posted for 3 hours a day at the
crossing which costs Rs. 150 per hour.
Due to failure to obey traffic signals, eight fatal accidents and sixty non-fatal
accidents occurred in last four years. On an average, insurance settlements per
fatal and non-fatal accidents are Rs. 500,000 and Rs. 15,000 respectively.
To eliminate the delay of traffic and accidents caused due to traffic light
violators, the flyover has been designed. It will add a quarter of kilometre to
the distance of 20% of the total traffic. No posting of policeman will be
required at the flyover. The flyover will require investment of Rs. 30 million.
Extra maintenance cost would be Rs. 70,000 a year.
The incremental operating cost for commercial vehicle will be Rs. 5 per
kilometre and Rs. 2 for private vehicle. Expected economic life of the flyover
is 30 years having no salvage value. The cost of capital for the project is 8%.
Corresponding capital recovery rate is 0.0888 and for your calculation take
365 days in a year.
You are required to compute: (5.5+2.5+2=10)
i) Total net benefits to the users;
ii) Annual cost to the Green Municipality, and
iii) Cost benefit ratio
b) Rex Ltd.'s expected net operating income is Rs. 400 million. As an unlevered
company, its value is Rs. 2,000 million. The tax rate applicable for the
company is 25%. The company intends to finance its new expansion project
with 10% debt. This will make the company levered one and the ratio of debt
to equity will be 1. To study the financial feasibility of the expansion project,
the financial controller of the company wants to estimate the cost of equity
and weighted average cost of capital (WACC). You are asked by the finance
controller to help him in deriving the required figure using MM propositions.
Required: (4+4+2=10)
i) Calculate the after tax cost of equity capital for both the levered and
unlevered company.
ii) Calculate the after tax WACC for each status of the company.
iii) Why is the cost of equity capital higher for the levered company, but the
weighted average cost of capital lower?
Answer: 1(a)
(i) Total net benefit to the users
(Amount in Rs)
Particulars Amount
(a) Annual savings in cost of delays:
Highway X (10,000 × 365 × 0.50 × 1.3/60) × (0.70 × 30 + 0.30 × 80) 1,779,375
Highway Y (8,000 × 365 × 0.50 × 1.2/60) × (0.70 × 30 + 0.30 × 80) 1,314,000
3,093,375
(b) Annual savings in cost of stops and starts:
Highway X (10,000 × 365 × 0.50) × (0.70 × 0.80 + 0.30 × 1.20) 1,679,000
Highway Y (8,000 × 365 × 0.50) × (0.70 × 0.80 + 0.30 × 1.20) 1,343,200
3,022,200
(c) Annual saving in accident claims:
(8 / 4 × 500,000) + (60 / 4 × 15,000) 1,225,000
Total benefits [A] = (a) + (b) + (c) 7,340,575
Less: Incremental cost due to added distance:
Highway X (10,000 × 365 × 0.20 × 0.25) × (0.70 × 2 + 0.30 × 5) 529,250
Highway Y (8,000 × 365 × 0.20 × 0.25) × (0.70 × 2 + 0.30 × 5) 423,400
Total incremental cost [B] 952,650
Net benefit to users [C] = [A] – [B] 6,387,925
(ii) Annual cost to Green municipality

(Amount in Rs)
Particulars Amount
Annual maintenance cast 70,000
Investment cost (Rs 30,000,000 × 0.0888) 2,664,000
Total cost [A] 2,734,000
Savings in cost of operating traffic light 80,000
Savings in cost of policeman (365 × 3 × 150) 164,250
Total savings [B] 244,250
Net annual cost [C] = [A] – [B] 2,489,748
(iii) Cost benefit ratio
PV of benefits
Cost benefit ratio 
PV of cos t
1
6,387,925
 0.0888
1
2,489,750
0.0888
71,936,092
 = 2.57
28,037,725
Answer: 1(b)
i) (a) Calculation of the after tax cost of equity capital for unlevered company:
Given,
Net operating income (NOI) = Rs. 400 million
Tax rate (T) = 25% = 0.25
Value of unlevered company (Vu) = Rs. 2,000 million
Now,
Cost of equity capital (ku) = NOI (1 – T)/ Vu
= 400 (1 – 0.25)/ 2,000
= 0.15
= 15%
(b) Calculation of the after tax cost of equity capital for levered company:
Given and we know,
Cost of equity capital for unlevered company (ku) = 15% = 0.15
Cost of debt (kd) = 10% = 0.10
Tax rate (T) = 25% = 0.25
Debt to equity ratio (D/E) = 1
Now,
Cost of equity capital (kl) = ku + (ku – kd)×(1 – T)×D/E
= 0.15 + (0.15 – 0.10)×(1 – 0.25)×1
= 0.15 + 0.0375
= 0.1875
= 18.75%
ii)(a) Calculation of the after tax weighted average cost of capital for unlevered
company:
Given,
Net operating income (NOI) = Rs. 400 million
Tax rate (T) = 25% = 0.25
Value of unlevered company (Vu) = Rs. 2,000 million
Now,
WACC = NOI (1 – T)/ Vu
= 400 (1 – 0.25)/ 2,000
= 0.15
= 15%
(b) Calculation of the after tax weighted average cost of capital for levered company:
Given and we know,
Cost of equity capital for levered company (kl) = 18.75% = 0.1875
Cost of debt (kd) = 10% = 0.10
Tax rate (T) = 25% = 0.25
Debt to equity ratio (D/E) = 1
Now,
WACC = kd(1 – T) × D/Vl + kl ×E/Vl
= 0.10 (1 – 0.25) ×1/2 + 0.1875 × 1/2
= 0.0375 + 0.09375
= 0.13125
= 13.125%
iii) The cost of equity capital is higher for the levered company because of
increasing financial leverage. The financial leverage causes the residual claims
of shareholders to become more variable.
And, the weighted average cost of capital for the levered company is lower
because of the usage of debt and preferred stock in capital structure which are
cheaper than common stock.
2.
a) Abhinav own a portfolio with the following characteristics:
Security A Security B Risk Free Security
Factory 1 Sensitivity 0.80 1.50 0
Factor 2 Sensitivity 0.60 1.20 0
Expected Return 15% 20% 10%
(Assume that the security returns are generated by a two factor model.)
i) If Abhinav has Rs. 3,000,000 to invest and sells short Rs. 1,500,000 of
security B and purchases Rs. 4,500,000 of security A, what is the
sensitivity of Abhinav‘s portfolio to the two factors?
ii) If Abhinav borrows Rs. 3,000,000 at the risk free rate and invests the
amount he borrows along with the original amount of Rs. 3,000,000 in
security A and B in the same proportion as described in part (i) above,
what is the sensitivity of the portfolio to the two factors?
iii) What is the expected risk premium of factor 2?
b) There are two bonds, one with 5 years to maturity and the other with 20 years
to maturity. Both the bonds have a face value of Rs. 1,000 and coupon rate of
8% (with annual interest payments) and both are selling at par.
Assuming that the yields of both the bonds fall to 6%, you are required to
answer the following questions giving adequate workings/computations in
support of your answer: (3+6=9)
(i) Whether the price of bond will increase or decrease?
(ii) What percentage of this increase/decrease comes from a change in the
present value of bond's principal amount and what percentage of this
increase/decrease comes from a change in the present value of bond's
interest payments?
Answer: 2(a)
When capital assets pricing model is used, we have:
Expected Return = Rf + Beta security x (Risk Premium)
This is the case of single factor. When more than one factor are involved, we get the
expected return as follows:
Rf + Beta1 (RP1) + Beta2 (RP2)
Rf + Betai λ1 + B \ (RP1) + Beta2 λ2
Overall Beta = Sum of (Beta x weight)
(i) Sensitivity of Abhinav’s portfolio to the two factors when Abhinav invests Rs.
3,000,000 in security A through own fund and proceeds of short sell of Rs.
1,500,000 of security B:
Own Fund of Abhinav: Rs. 3,000,000
Investment in security A = 4,500,000
Investment in security B = –1,500,000 (Short Sale)
3,000,000
Weight A = 4,500,000 = 1.5 and Weight B = - 1,500,000 = - 0.5
3,000,000 3,000,000
Factor Sensitivity = Beta of given factor
Overall portfolio Beta (for factor 1)
= WA x Beta A + WB x Beta B = Sum of (weight x Beta Security) = 1.50 x 0.80 + (– 0.50) x
1.50 = 1.20 – 0.75 = 0.45
= 1.50 x 0.60 + (– 0.50) x 1.20 = 0.90 – 0.60 = 0.30
(ii) Sensitivity of Abhinav’s portfolio to the two factors if Abhinav borrows
Rs. 3,000,000 at the risk free rate and invests the borrowing and own fund in
security A and B in the same proportion as described in part (i):
There is short sale of B and the risk free loan is also raised. Therefore,
Own fund of Abhinav: Rs. 3,000,000
Risk free loan: . 3,000,000
Total fund: Rs. 6,000,000
Since investment proportion as stated in part (i) should be maintained, the weight (WA) and
(WB) will be 1.50 and (-) 0.50 respectively. Therefore,
Investment in A = 6,000,000 x 1.5 = Rs. 9,000,000
Short sell of B = 6,000,000 x – 0.5 = (-) Rs. 3,000,000
Rs. 6,000,000
When risk free loan is used, the proportion of investment to own fund:
WA = 9,000,000 = 3, WB = – 3,000,000 = – 1, and Wrf assets = – 3,000,000 = –1
3,000,000 3,000,000 3,000,000
We know that the sum of weight = 1. That is, WA + WA + Wrfassets =1.
Overall sensitivity (Beta) for factor 1 = (3 x 0.80) + (– 1 x 1.50) + (-1 x 0)
= 2.40 – 1.50 +0 = 0.90
= 3 x 0.60 + (– 1 x 1.20) + (– 1 x 0) = 1.80 – 1.20 = 0.60
(iii) Expected Risk Premium of factor 2:

Expected Risk Return = Rf + Beta1 Risk from 1 + Beta2 Risk from 2
= λ0+ B1 λ1 + B2 λ2
Now, for security A, 15 = 10 + (0.80 x RP1) + (0.60 RP2) … … … (i)
for security B, 20 = 10 + (1.5 x RP1) + (1.20 RP2) … … … (ii)
Multiply (i) by 2 and then subtracting (ii) from the resultant, we will obtain the following:
30 = 20 + 1.60 RP1 + 1.20 RP2
20 = 10 + 1.50 RP1 + 1.20 RP2
10 = 10 + 0.10 RP1 + 0
Or, 0.10 RP1 = 10 – 10 = 0
Thus, RP1 = 0 which means that there is no risk premium for factor 1. Hence there is risk
premium in factor 2 only.
Substituting the value of RP1 in equation (i), we have:
15 = 10 + 0.80 (0) + 0.60 RP2,
Or, 0.60 RP2 = 15 – 10 = 5
Or RP2 = 5 /0.6 = 8.33%
Therefore, risk premium (λ2)`= 8.33%
Answer: 2(b)
When the yield of the bond falls, the price will always increase. The following
computations are done to support the statement made.
(i) When the yield fall to 6%
Price of 5 year bond will be:
Rs.80 (PVIFA 6%, 5 years) + Rs. 1,000 (PVIF 6%, 5 years)
= Rs. 80 (4.212) + Rs. 1,000 (0.747)
= Rs. 336.96 + Rs. 747 = Rs. 1,083.96
Therefore, increase in 5 years bond price = Rs. 1,083.96 – Rs. 1,000 = Rs. 83.96
Similarly, current price of 20 year bond will be:
Rs.80 (PVIFA 6%, 20 years) + Rs. 1,000 (PVIF 6%, 20 years)
= Rs. 80 (11.47) + Rs. 1,000 (0.312)
= Rs. 917.60 + Rs. 312 = Rs. 1,229.60
Therefore the increase in 20 years bond price = Rs. 1,229.60 – Rs. 1,000 = Rs. 229.60
(ii) (a) Price Increase due to Change in Present Value of Principal:
5 Year Bond:
Rs. 1,000 (PVIF 6%, 5 years) – Rs.. 1,000 (PVIF 8%, 5 years)
= Rs. 1,000 (0.747) – Rs. 1,000 (0.681) = Rs. 747 – Rs. 681 = Rs. 66.
Thus, percentage change in price due to change in PV of principal = Rs. 66/Rs. 83.96
x 100 = 78.61%
20 Year Bond:
Rs. 1,000 (PVIF 6%, 20 years) – Rs.. 1,000 (PVIF 8%, 20 years)
= Rs. 1,000 (0.312) – Rs. 1,000 (0.215) = Rs. 312 – Rs. 215 = Rs. 97
Thus, percentage change in price due to change in PV of principal = Rs. 97/Rs.
229.60 x 100 = 42.25%
(iii)(a) Price Increase due to Change in Present Value of Principal:
5 Year Bond:
Rs. 80 (PVIFA 6%, 5 years) – Rs.. 80 (PVIFA 8%, 5 years)
= Rs. 80 (4.212) – Rs. 80 (3.993) = Rs. 336.96 – Rs. 319.44 = Rs. 17.52
% Change in price = Rs. 17.52 /83.96 x 100 = 20.87%
20 Year Bond:
Rs. 80 (PVIFA 6%, 20 years) – Rs. 80 (PVIFA 8%, 20 years)
= Rs. 80 (11.470) – Rs. 80 (9.818) = Rs. 917.60 – Rs. 785.44 = Rs. 132.16
% Change in price = Rs. 132.16 /229.60 x 100 = 57.56%
Thus, in the case of 5 year bond, price increase due to change in present value of
bond's principal amount and present value of bond's interest payments is
approximately 79% and 21% respectively.
Similarly, in the case of 20 year bond, price increase due to the respective changes is
approximately 42% and 58% respectively.
Note: A slight error in the computation has occurred due to the factors of PVIFA and
PVIV taken at 3 decimal places instead of 4 decimal places or more.
3.
a) Ntell Ltd. (a listed company) is considering to acquire Nbell Ltd., an unlisted
company, which has three departments. Department A manufactures
machineries for industrial companies, Department B produces electrical goods
for the retail market and Department C operates in the construction industry.
Upon acquisition, Department A will become part of Ntell as it contains new
technology which Ntell is seeking, Department B will be spun off into a new
company called Nwell Ltd. and Department C will be sold.
Given below are the extracts of financial information for the two companies
for the year ended on 31 Ashadh 2074.
Amount in million NPR
Particulars: Ntell. Nbell.
Sales Revenue 790.2 124.6
Earnings before Depreciation, Interest and Taxes
(EBDIT) 244.4 37.4
Interest 13.8 4.3
Depreciation 72.4 10.1
Pre-tax Profit 158.2 23.0
Amount in million NPR
Particulars: Ntell. Nbell.
Non-Current Assets 723.9 98.2
Currrent Assets 142.6 46.5
7% Unsecured Bond - 40.0
Other non-current and current liabilities 212.4 20.2
Share Capital (Rs 100/share) 190.0 20.0
Reserves 464.1 64.5
Share of Profit and assets of Nbell.‘s three departments:
Department A Department B Department C
Current & noncurrent assets 40% 40% 20%
EBDIT and Pre-tax Profit 50% 40% 10%
Other information:
 It is estimated that for Department C, the realizable value of its non-
current assets is 100% of their book value, but its current assets realizable
value is only 90% of their book value. The costs related to closing
Department C are estimated to be Rs. 3 million.
 The funds raised from the disposal of Department C will be used to pay off
Nbell‘s other non-current and current liabilities.
 The 7% unsecured bond will be taken over by Nwell. It can be assumed
that the current market value of the bond is equal to its book value.
 At present, around 10% of Department B‘s EBDIT comes from sale made
to Department C.
 Nwell‘s cost of capital is estimated to be 10%. It is estimated that in the
first year of operation Nwell‘s free cash flows to firm will grow by 20%,
and then by 5.2% annually thereafter.
 The tax rate applicable to all companies is 20%, and Nwell can claim 10%
tax allowable depreciation on its non-current assets. It can be assumed that
the amount of tax allowable depreciation is the same as the investment
needed to maintain Nwell‘s operations.
 Ntell‘s current share price is Rs. 600 per share and it is estimated that
Nbell‘s PE ratio is 25% higher than Ntell‘s PE ratio. After the acquisition,
when the Department A becomes part of Ntell, it is estimated that Ntell‘s
PE ratio will increase by 15%.
 It is estimated that the combined company‘s annual after-tax earnings will
increase by Rs. 7 million due to the synergy benefits resulting from
combining Ntell and Department A.
You are required to estimate the maximum premium Ntell could pay to
acquire Nbell showing all relevant calculations and explaining the approach
taken and any assumption made. 13
b) ABC Ltd. sold its shares to general public in the financial year 2072/73. The
company's budgeted income statement for the next four years are as follows:
Rs. in '000
Particulars Year 1 Year 2 Year 3 Year 4
Sales 56,000 62,720 70,250 70,250
Less: Cost of goods sold 22,400 25,088 28,100 28,100
Gross profit 33,600 37,632 42,150 42,150
Less: Operating expenses 16,800 18,816 21,075 21,075
Less: Depreciation 4,000 4,240 4,510 4,810
Operating income 12,800 14,576 16,565 16,265
Less: Interest expenses 1,000 1,400 1,568 1,756
Earnings before tax 11,800 13,176 14,997 14,509
Less: Taxes @ 30% 3,540 3,953 4,499 4,353
Net income 8,260 9,223 10,498 10,156
Following further information are provided:

Rs. in '000
Increase in net working capital 600 672 753 0
Increase in capital expenditure 6,400 6,928 7,520 4,810
ABC Ltd. estimated that its free cash flows would form a level perpetuity
beginning in year 4. Furthermore, the company's investment banker conducted
a study of the company's cost of capital and estimated the weighted average
cost of capital (WACC) to be 15%.
Required: (3+2.5+1.5=7)
i) Calculate the free cash flow of the company.
ii) Determine the value of the company using free cash flow model.
iii) If the company has Rs. 10 million in interest-bearing liabilities and 2
million equity shares outstanding, what will be the value of equity and
value per share of the company?
Answer: 3(a)
The maximum premium payable is equal to the maximum additional benefits created
from the acquisition of Nbell., with no increase in value for the shareholders of Ntell.
It should be noted that the shareholders of Ntell would probably not approve of the
acquisition if they do not gain from it, but certainly they would not approve a bid in
excess of this.
The additional benefits can be estimated as the sum of:
- Cash gained (or lost) from selling the assets of Department C, and spinning off
Department B and integrating Department A,
- Less the sum of the values of Ntell and Nbell as separate companies.
Estimation of Cash gained from selling the assets of Department C:
Non Current assets of Department C = 98.2 m x 20% = Rs. 19.64 m
Current Assets of Department C = 46.5 m x 0.9 x 20% = Rs. 8.37 m
Liabilities and closure cost = 20.2 +3 = Rs. 23.2 m
Total cash gained from selling the assets of Department C = 19.64 + 8.37 – 23.2 = Rs. 4.81 m
Value created from spinning off Department B into Nwell
Free cash flow of Nwell million NPR
Current Share of EBDIT (0.4 x 37.4 m) 14.96
Less: EBDIT attributable to Department C (14.96 x 10%) (1.50)
Less: Tax allowable depreciation (98.2 x 0.4 x 0.10) (3.93)
Profit Before Tax 9.53
Tax (20% (1.91)
Free Cash Flows 7.62
Value of Nwell
Present value of 7.62 m free cash flow for first year (at 20 % growth rate discounted
at 10%) = 7.62 x 1.2 x 0.909 = Rs. 8.31 m
Present value of cash flows from year 2 onwards:
(7.62 x 1.2 x 1.052) / (0.1 – 0.052) x 0.909 = Rs. 182.11 m
Bond taken over by Nwell = Rs. 40 m
Hence, Value of Nwell = Rs. 8.31 + Rs. 182.11 - Rs. 40 = Rs. 150.42 m
Current values of Ntell and Nbell before acquisition

Ntell’s current value = Rs. 600 x 1.9 m = Rs. 1,140 m
Ntell‘s Profit after Tax = 158.2 m x 0.8 = Rs. 126.56 m
Ntell ‗s PE ratio before acquisition = 1140.0 / 126.56 = 9.01 say 9
Nbell.‘s PE ratio before acquisition = 9 x 1.25 = 11.25
Nbell‘s Profit After Tax = 23 m x 0.8 = Rs. 18.4 m
Nbell’s Current Value = 11.25 x 18.4 m = Rs. 207.0 m
Ntell‘s PE Ratio after acquisition = 9 x 1.15 = 10.35
Value created from Combined Company
Post-acquisition 50% of Nbell‘s earnings will remain after the disposal of Department
C and the spin–off of Department B. So earnings will be:
Rs. 126.56 m + (0.5 x Rs. 18.4 m) + Rs. 7 m synergy = Rs. 142.76 m
So the combined company should be worth the P/E of 10.35 x 142.76 = Rs. 1477.57 m
Maximum Premium
Value of combined company 1,477.57 million
Value of Nwell 150.42 million
Value for disposal of C 4.81 million
Less : Current value (1140 m + 207 m ) (1347 million)
285.80 million
Answer: 3(b)
(i) Calculation of the free cash flow:
Rs. in '000
and
beyond
Operating income 12,800 14,576 16,565 16,265
Less: Tax payments @30% (3,840) (4,373) (4,970) (4,880)
NOPAT 8,960 10,203 11,595 11,385
Add: Depreciation 4,000 4,240 4,510 4,810
Less: Increase in net working capital (600) (672) (753) 0
Less: Increase in capital expenditure (6,400) (6,928) (7,520) (4,810)
Free cash flow 5,960 6,843 7,832 11,385
(ii) Value of the company using FCF model

Rs. In ‗000
and
beyond
Free cash flow 5,960 6,843 7,832 11,385
Terminal cash flow (FCF4th yr/ WACC) 75,900
Total FCF 5,960 6,843 7,832 87,285
PVIF @15% 0.8696 0.7562 0.6576 0.5718
PV of FCF 5,183 5,175 5,150 49,910
Value of the company (Vc)=(ƩPV of FCF) 65,418
(iii) Calculation of value of equity and value per share

Given,
Value of interest-bearing liabilities (Vd) = Rs. 10,000,000
No. of equity shares outstanding = 2,000,000
Now,
Value of equity (Ve) = Vc - Vd = Rs. 65,418,000 – Rs. 10,000,000= Rs. 55,418,000
Value per share = Ve / No. of Shares = Rs. 55,418,000/ 2,000,000 = Rs. 27.71
4. Answer the following questions: (5×3=15)
a) Write a note on 'pooled investment vehicles'.
b) Briefly describe 'arbitrageurs' as one of the important financial intermediaries
and services they provide.
c) What is commercial meaning of synergy and how it used as a tool when
deciding merger and acquisitions?
d) What do you mean by ‗IPO roll up‘? Explain.
e) Explain the terms, 'callable‘ common shares and 'putable‘ common shares.
Answer 4(a): Pooled investment Vehicles
Pooled investment vehicles include mutual funds, depositories and hedge funds. This
term refers to structures that combine the funds of many investors in a portfolio of
investments. The investor's ownership interests in such vehicles are referred to as
shares, units, depository receipts or limited partnership interests.
Mutual funds are pooled investment vehicles in which investors can purchase units
either from the fund itself (open-end funds) or in the secondary market (close-end
funds).
Exchange-traded funds (ETFs) and exchange-traded notes are traded like close-end
funds but have special provisions of conversion into individual portfolio securities or
exchange of portfolio shares for ETF shares. These features help to keep the market
prices close to the value of their proportional interest in the overall portfolio.
Hedge funds are organized as limited partnerships with investors as the limited
partners and the fund manager as the general partner. Hedge funds utilize various
strategies and purchase is usually restricted to investor4s having substantial wealth and
investment knowledge.
Answer 4(b): Arbitrageurs and Services provided by them

Arbitrage refers to buying an asset in one market and reselling it in another at a higher
price. The arbitrageur is the one who is involved in doing such transactions. The
arbitrageurs thus provide liquidity to participants in the market where the asset is
purchased and transferring the asset to the market where it is sold.
In market where there is good flow of information, pure arbitrage does not become
possible because traders will favour the markets with the best prices. Whenever there
are opportunities, arbitrageurs try to exploit pricing differences for similar instruments.
For instance, a dealer who sells a call option will often also buy the stock because the
call and stock price are highly correlated. Similarly, the arbitrageurs will always try to
exploit discrepancies in the pricing of the call and stock.
Answer 4(c):
Synergy may be defined as follows:
V (AB) > V (A) + V (B)
In other words the combined value of two firms or companies shall be more than their
individual value. Synergy is the increase in performance of combined firm over what
the two firms are already expected or required to accomplish as individual firms. This
may be the result of complementary services, economics of scale or both.
A good example of complimentary activities can be that one company may have a
good networking of branches and the other company may have efficient production
system. Thus the merged companies will be more efficient than individual companies.
On similar lines, economics of large scale is also one of the reasons for synergy
benefits. The main reason is that, the large scale production results in lower average
cost of production e.g. reduction in overhead costs on account of sharing of central
services such as accounting and finance, office activities, top level management, legal,
sales promotion and advertisement etc.
Answer 4(d):
IPO is a company‘s first offering of common stock to the general public. Roll up
means the combining of multiple small companies in the same industry to create one
larger company. So IPO roll up is an initial public offering of independent companies
in the same industry that merge into a single company concurrent with the stock
offering. The funds from the IPO are used to finance the acquisition of the combining
companies.
Thus in an IPO roll up, privately owned companies in the same line of business
simultaneously merge into a new company. At the time of merger, the company
undertakes an IPO. The idea behind a roll-up is to rapidly build a larger, more valuable
company through multiple acquisitions of small to medium sized firms.
Answer 4(e): 'Callable‘ common shares' and 'Putable‘ common shares
Callable common shares give the company the right to repurchase the stock at a pre-
specified call price. Investors receive a fixed amount when the company calls the
stock.
The call feature benefits the company because the company can call the shares when
the stock's market price is greater than the call price. The shares so called can be
reissued later at a higher price. Thus, calling the shares which is similar to the
repurchase of shares allows the company to reduce its dividend payments without
changing its per-share dividend.
On the other hand, putable common shares give the shareholders the right to sell the
sahres back to the firm at a specified price. A put option on the shares benefits the
shareholder because it effectively places a floor under the share value. Shareholders
pay for the put option because other things being equal, putable shares are sold for
higher prices than non-putable shares and rise more capital for the company when they
are issued.
5.
a) SM Ltd. is a fast moving consumer goods (FMCG) manufacturing
company of Nepal. It also has operations abroad. The financial analyst of
SM Ltd. is considering whether to undertake a 1-year project in
Bangladesh. The project's expected cash flows consisted of an initial
investment of Bangladeshi Taka (BDT) 10 million and a cash inflow the
following year of BDT 12 million. SM Ltd. estimates that its risk-
adjusted cost of capital is 14%. Currently, 1 BDT will buy 1.25 Nepali
Rupees (NPR). In addition, 1-year risk-free securities in Bangladesh are
yielding 7.25%, while similar securities in Nepal are yielding 4.5%.
Required: (2+3+3=8)
i) What is the expected forward exchange rate 1 year from now?
ii) If SM Ltd. undertakes the project, what are the net present value and the
rate of return of the project for it?
iii) If this project were instead undertaken by a similar Bangladesh-based
company with the same risk-adjusted cost of capital, what would be the
net present value and the rate of return generated by this project?
b) An American firm is under obligation to pay interests of CAN $ 1,010,000
and CAN $ 705,000 on 31st July and 30th September respectively. The firm is
risk averse and its policy is to hedge the risks involved in all foreign currency
transactions. The Finance Manager of the firm is thinking of hedging the risk
considering two methods i.e. fixed forward or option contracts.
It is now June 30. Following quotations regarding rates of exchange of US $

per CAN $ were obtained from the firm‘s bank:
Spot 1 Month Forward 3 Months Forward
0.9284 – 0.9288 0.9301 0.9356
Price for a CAN $ /US $ option on a U.S. stock exchange (cents per CAN $,
payable on purchase of the option, contract size CAN $ 50,000) are as
follows:
Strike Price Calls Puts
(US $/CAN $) July Sept. July Sept.
0.93 1.56 2.56 0.88 1.75
0.94 1.02 NA NA NA
0.95 0.65 1.64 1.92 2.34
According to the suggestion of finance manager if options are to be used, one
month option should be bought at a strike price of 94 cents and three month
option at a strike price of 95 cents and for the remainder uncovered by the
options, the firm would bear the risk itself. For this, it would use forward rate
as the best estimate of spot. Transaction costs are ignored.
Required: 7
Recommend, which of the above two methods would be appropriate for the
American firm to hedge its foreign exchange risk on the two interest
payments.
Answer: 5(a)
Given,
Cash outflow of Bangladesh project at t0 = BDT 10 million
Cash inflow of the project at t1 = BDT 12 million
Risk-adjusted cost of capital = 14%
Spot exchange rate (NPR/ BDT) = 1.25
Risk-free rate of return in Nepal (Rfh) = 4.5%
Risk-free rate of return in Bangladesh (Rff) = 7.25%
i) Calculation of the expected forward exchange rate 1 year from now

Expected 1-year forward exchange rate = Spot exchange rate × [(1+ Rfh)/ (1+ Rff)]1
= 1.25 × [(1+ 0.045)/ (1+ 0.0725)]1
= 1.25 × 0.9744 = 1.218
ii) Calculation of NPV and the rate of return, if SM Ltd. undertakes the project
Particulars Year 0 Year 1
Cash flows of Bangladesh project (BDT) (10,000,000) 12,000,000
Expected exchange rate 1.25 1.218
Cash flows in NPR (12,500,000) 14,616,000
PVIF @ 14% project cost of capital 1 0.877
PV in NPR (12,500,000) 12,818,232
NPV of the project in NPR 318,232
Rate of Return = (14,616,000 – 12,500,000)/ 12,500,000 = 16.93%
iii) Calculation of NPV and the rate of return, if Bangladesh based company undertakes the
project
Particulars Year 0 Year 1
Cash flows of the project (BDT) (10,000,000) 12,000,000
PVIF @ 14% project cost of capital 1 0.877
PV in BDT (10,000,000) 10,524,000
NPV of the project in BDT 524,000
Rate of Return = (12,000,000 – 10,000,000)/ 10,000,000 = 20%
Answer: 5(b)
Forward Market Cover
Hedge the risk by buying CAN $ in 1 and 3 months‘ time will be:
July - 1010000 × 0.9301 = US$ 939401
Sept. - 705000 × 0.9356 = US$ 659598
Option Contracts
July Payment = 1010000/50,000 = 20.20
Sept. Payment = 705000/50,000 = 14.10
The company would like to take out 20 contracts for July and 14 contracts for September
respectively. Therefore costs, if the option were exercised, will be:-
July Sept
CAN$ US$ CAN$ US$
Covered by contracts 1000000 940000 700000 665000
Balance bought at spot rate 10000 9301 5000 4678
Option Costs:
CAN $ 50000 × 20 × 0.0102 10200 ---
CAN $ 50000 × 14 × 0.01064 --- 11480
Total Cost in US $ of using Option 959501 681158
Contract
Decision
As the firm is stated as risk averse and the money due to be paid is certain, a fixed forward contract,
being the cheapest alternative in both the cases, would be recommended.
6.
a) A secondary security market is composed of the following three securities:
Security Closing Prices (Rs.) Shares outstanding (Nos.)
Date 1 Date 2
X 225 250 2,500
Y 350 300 3,500
Z 360 400 4,000
The index divisor is 3.
Required: (1+1+3=5)
i) Calculate the price-weighted index's value on date 1 and date 2.
ii) Calculate the value-weighted index on date 2 assuming the value-weighted
index of date 1 to be 320.
iii) If security Z splits 4 for 1 at the end of date 1 and the price is adjusted
accordingly, what will be the value of price-weighted index on date 2?
b) Define financial system and explain its components. 5
Answer6(a):
Calculation table:
Security Shares Price (Rs.) Market Value (Rs.)
outstanding Date 1 Date 2 Date 1 Date 2
X 2,500 225 250 562,500 625,000
Y 3,500 350 300 1,225,000 1,050,000
Z 4,000 360 400 1,440,000 1,600,000
Total 935 950 3,227,500 3,275,000
i) Calculation of the price-weighted index's value

Index on date 1 (I1) = Total Price/ Divisor (d) = 935/ 3 = 311.67
Index on date 2 (I2) = Total Price/ Divisor (d) = 950/ 3 = 316.67
ii) Value-weighted index on date 2 (I2) = (MV on date 2/ MV on date 1) × Index on date 1
= (3,275,000/ 3,227,500) × 320 = 324.71
iii) Price-weighted index on date 2, after Security Y undergoes 4 for 1 split
Adjusted price of Y after split on date 1= Rs. 360/ 4 = Rs. 90
Adjusted price of Y after split on date 2= Rs. 400/ 4 = Rs. 100
Revised divisor (d) = Total Price after split on date 1/ Index on date 1 (I1)
= (935-360+90)/ 311.67 = 665/ 311.67 = 2.13
Index on date 2 (I2) after split of Security Y
= Total adjusted price after split on date 2/ Revised divisor (d)
= (950-400+100)/ 2.13 = 305.16
Answer 6(b):
Financial system is an institutional framework existing in a country to enable financial
transaction. It is a set of arrangement consisting of lending and borrowing of funds by
non-financial economic units and intermediation of this function by financial
intermediaries in order to facilitate the transfer of funds, to create additional money
when required and to create market in debt and equity instrument and their derivatives
so that the price and allocation of funds are determined efficiently.
Financial system helps in formation of capital and meeting the needs of the short term
and long term capital of the households, corporate houses, government and foreigners.
Its responsibility is to mobilize the savings in the form of money and invest them in
the productive manner.
Thus we can find the following six essential components in the financial system:
1. Lenders and borrowers; i.e. the non-financial economic units that undertake the
lending and borrowing process.
2. The financial intermediaries that intermediate the lending and borrowing process.
3. The financial instruments that are created to satisfy the needs of the participants in
lending and borrowing process.
4. The creation of money when required.
5. The financial market, i.e. the institutional arrangements that exist for the issue and
trading of the financial instruments.
6. The price discovery; i.e. the determination of the price of equity and debt.
There are some allied participants in the system without which the system will not
work efficiently. They are: i) brokers and dealers, ii) portfolio managers, iii) financial
exchanges that facilitate the transactions and settlement, iv) credit rating agencies, and
v) the regulators that regulate and supervise all players in the financial system.
Advanced Audit and Assurance
Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages -11

Marks
1. Comment and give your views with reasons on each of the following cases,
giving consideration to respective Standards, Laws and Code of Ethics: (2×10=20)
a) Manoj, a member of the board of Swift Tyres Limited (STL), has
emphasized the following at a recent board meeting:
―Risk is the main cause of uncertainty in any organization. Thus, we need
to increase our focus on identifying risks and managing them before they
affect the business‖.
The board of directors was in agreement with Manoj. The board
concluded that there should be a formal process of identifying and
responding to the risks faced by the company.
Further, the directors agreed to implement necessary measures to address
the prevailing internal control weaknesses identified by the internal
auditor of the company.
i) Identify the ways of responding to risks faced by a business organization.
ii) Explain the responsibilities of the following persons for internal
controls of the company:
a. the board of directors and
b. the internal auditor
b) XYZ Ltd. has paid up capital of Rs. 20 million. 30% of the company‘s
share is owned by Government of Nepal. The directors of the company
are in dilemma regarding the formation of audit committee in its
organization. Chief Executive Officer desires his son to be the member of
the committee as he is a Chartered Accountant by profession and has
experience in the accounting field. As an expert, provide your opinion to
the company regarding whether audit committee is actually required or
not and also highlighting the qualification criteria to be its member along
with the functions to be performed by the committee.
Answer:
a)
i) A business organization may identify various ways to respond to the risks faced by
it. Following are the most common ways to respond risks:
o Risk avoidance – this removes the possibility of a negative risk outcome. All risks
cannot be avoided. To avoid risks, the management may refrain from making risk
decisions on new investments, developing new products etc.
o Risk acceptance- Accepting the existing amount of risks, without the need for further
measures to treat the risk. For instance, after considering the benefits/rewards the
management may accept certain risks, e.g. in the economy there is an increase in the
interest rate. However, in the long term there is an expectation of a reduction in the
interest rate. Therefore management may borrow at a variable rate.
o Risk transfer – Transferring the risk to someone else. Insurance is a very common
measure taken by many business organizations to transfer risk. (insurance on fire,
disaster etc.)
o Risk reduction – Management may decide to reduce the risk if it is too high and
unacceptable. The methods of reducing risk depend on the nature of the risk. For
instance diversification of operations, business contingency planning are few ways of
reducing risks.
ii)
a. Responsibility of Board of directors for internal controls (3 marks)
The board of directors of the company is the governing body. The directors have final
responsibility for the effectiveness of the internal controls of the company. This means
the board of directors are ultimately responsible to the shareholders of the company.
The board of directors of STL has a responsibility to ensure that the company has an
effective control system in order to comply with applicable regulatory requirements,
preparation and presentation of Financial Statements and safeguard the investments and
the assets of STL. In discharging its responsibility the board may get the assistance of the
internal auditor to ensure that the controls are operating effectively.
b. Responsibility of Internal auditor for Internal controls (3 marks)

Theinternal auditor provides management with assurance and consulting services
regarding effectiveness of internal control system, risk management and governance
process to improve the business operations and to add value to the business. Internal
auditor providesinformation and recommendations about internal controls. He/she does
not have direct responsibility for internal controls of STL.
Internal auditors evaluate control systems and report to the board of directors of STL (as
per information provided in scenario) on findings and recommendations. These testing
and the areas of testing are determined as per the agreed internal audit charter of the
company.
b) Requirement of Audit Committee

Section 164 of Chapter 18 of Company Act 2063 mentions about the formation of Audit
Committee. As per the section, a listed company with paid up capital of thirty million
rupees or more or a company which is fully or partly owned by the Government of Nepal
shall form an audit committee under the Chairpersonship of a director who is not
involved in the day-to –day operations of the company and consisting of a least three
members. Though Paid up capital of XYZ company is only Rs. 20 million, its 30% of the
share is owned by the Government of Nepal which means there is partial ownership of
government. So the company is required to form an Audit Committee as per Company
Act.
Qualification criteria: Any person who is a close relative of the chief executive of a
company shall not be eligible to be a member of the audit committee. At least one
member of the audit committee shall be an experienced person having obtained
professional certificate on accounting or a person having gained experience in accounting
and financial field after having obtained at least bachelor‗s degree in accounts, commerce,
management, finance or economics. The son of the CEO cannot be appointed as member
of the Audit Committee as he is a close relative of the CEO.
Functions, duties and powers of audit committee:

The functions, duties and powers of the audit committee are as follows:
(a) To review the accounts and financial statements of the company and ascertain the
truth of the facts mentioned in such statements;
(b) To review the internal financial control system and the risk management system of
the company;
(c) To supervise and review the internal auditing activity of the company;
(d) To recommend the names of potential auditors for the appointment of the auditor of
the company, fix the remuneration and terms and conditions of appointment of the
auditor and present the same in the general meeting for the ratification thereof;
(e) To review and supervise as to whether the auditor of the company has observed such
conduct, standards and directives determined by the competent body pursuant to the
prevailing law as required to be observed in the course of doing auditing work;
(f) Based on the conduct, standard and directives determined by the competent body
pursuant to the prevailing law, to formulate the polices required to be observed by
the company in respect of the appointment and selection of the auditor;
(g) To prepare the accounts related policy of the company and enforce, or cause to be
enforced, the same;
(h) Where any regulatory body has provided for the long form audit report to be set out
in the audit report of the company, to comply with the terms required to prepare such
report;
(i) To perform such other terms as prescribed by the board of directors in respect of the
accounts, financial management and audit of the company.
2. Answer the following:

a) Oswal & Associates, a Chartered Accountant firm issued audit report of
a Bank without any qualification where, the Bank while accepting the
nonbanking assets, 10
i) Did not charge the difference amount to the Income Statement as loss
even though the market value of the collateral was found lower than
the principal amount, and
ii) Charged the difference amount to the Income Statement as income
where the market value of the collateral was found higher than the
total of loan and interest amount, though the assets were not actually
sold.
b) ABC Ltd. supplies stationery materials to Government Office across the
country. The company has 15 warehouses at different locations
throughout the Nepal of which 8 warehouses at the borders. The major
stocks are generally supplied from the borders. ABC Ltd. appointed M/s
Ram & Associates to conduct its audit for the financial year 2072/73. Mr.
Ram, partner of Ram & Associates, attended all the physical inventory
counting conducted throughout Nepal but could not attend the same at
borders due to some unavoidable reason.
You are required to advice M/s Ram & Associates: 10
i) How sufficient appropriate audit evidence regarding the existence and
condition of inventory may be obtained?
ii) How an auditor is supposed to deal when attendance at physical
inventory counting is impracticable?
Answer:
a) The Auditor of the Bank is required to ensure whether his/her client has accounted for
and presented financial statements as required by the regulators. In the given case the
bank (auditee) is required to comply with Directives issued by the Nepal Rastra Bank
regarding Non Banking Asset. As per NRB Directives on major accounting policies, it
prescribes accounting policies for Non-banking Assets which requires to account for
non-banking assets at lower of all dues (Principal, interest and others) or prevailing
market price of collateral as valued by approved Valuator as per latest NRB Circular .
While booking NBA, in case where prevailing market price/value of the collateral is
lower than the amount due from borrower, the difference should be charges as loss in
the Income Statement of the same year with corresponding effect with loan account &
AIR. Accordingly loan loss provision made earlier should be should be written back
and 100% provision in NBA should be made. Further if in case where prevailing
market price/value of the collateral is higher than the amount due from borrower, the
difference would be represented by AIR & should be transferred to NBA provision
until the NBA is actually sold instead of booking as income.
In the given first case the bank has not followed the NRB guidelines in accounting of
Non-banking assets. In the second case the booking of AIR as income is not allowed
until sale of NBA will not been made. The AIR amount should be transferred to the
provision of NBA instead of booking as income. In the both cases the bank has not
complied with NRB Directives. The Auditor has a responsibility to ensure whether
client has complied with all applicable laws, regulation and guidelines. However, the
auditor has not qualified this non-compliance in his audit report and accordingly report
should issued.
The auditor was found compromising the provisions of Section 34(9) of the Nepal
Chartered Accountants Act 2053 which requires that members holding Certificate of
Practice to discharge their duties with due care in the course of their profession and
shall draw attention of all concerned to all material facts which are or have taken place
contrary to the prevailing law and do not comply with generally accepted principles of
auditing.
The auditor was also found compromising the provisions of Section 130 of the Code of
Ethics which requires members to act diligently in accordance with applicable
technical and professional standards.
b)
i) Special consideration with regards to inventory: As per NSA 501 ―Audit Evidence
Specific consideration for selected items‖, is applicable in the case given. When
inventory is material to the financial statements, the auditor shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by;
a. Attendance at physical inventory counting, unless impracticable, to:
i. Evaluate management‘s instruction and procedure for recording and controlling
the results of the entity‘s physical inventory counting;
ii. Observe the performance of management‘s count procedure;
iii. Inspect the inventory; and
iv. Perform test count;
b. Performing audit procedures over the entity‘s final inventory records to
determine whether they accurately reflect actual inventory count results.
ii) Attendance at physical inventory counting not practicable: In some cases, attendance at
physical inventory counting may be impracticable. This may be due to factors such as
the nature and location of the inventory, for example where inventory is held in a
location that may pose threats to the safety of the auditor. The matter of general
inconvenience to the auditor, however, is not sufficient to support a decision by the
auditor that attendance is impracticable. Further, as explained in NSA 200 ―Overall
objectives of the independent Auditor and the conduct of an audit in accordance with
Nepal Standards on Auditing,‖ the matter of difficulty, time, or cost involved is not in
itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than persuasive.
Further, where attendance is impracticable, alternative audit procedures, for example,

inspection of documentation of the subsequent sale of specific inventory items
acquired or purchased prior to the physical inventory counting, may provide sufficient
appropriate audit evidence about the existence and condition of inventory.
In some cases, though, it may not be possible to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by performing alternative
audit procedure. In such cases, NSA 705 on ―modification to the opinion in the
Independent Auditor‘s Report‖,requires the auditor to modify the opinion in the
auditor‘s report as a result of the scope limitation.
3. Comment and give your views with reasons on each of the following cases.
a) What do you mean by assertions? The statement of financial position of
a company as at 31 Ashadh 2074 presents Plant and Machinery under
non-current asset at carrying amount of Rs. 200 million. As an auditor
of the company what assertions do you draw from above information? 8
b) A company wants to amend its accounts after the completion of the
audit and adoption of the Accounts by the Board, but before circulation
to the shareholders. It requires its statutory auditor to report on the
amended accounts. State the steps the statutory auditor should adopt in
such a situation. 7
Answer:
a) Assertions: Assertions are the implicit or explicit claims and representations made by
the management responsible for the preparation and presentation of the financial
statements regarding the appropriateness of the various elements of the financial
statements and disclosures. Assertions are also known as management assertions and
financial statements assertions. The auditor evaluates the assertions made by the
management during the audit.
As an auditor of the company, I can draw the following assertions from the balance of
Plant and Machinery presented at Rs 200 million in the statement of financial position
as at 31 Ashad 2074:
i) Existence: The Plant and Machinery recognized in the statement of financial

position exist as at 31 Ashadh 2074
ii) Completeness: All plant and machinery controlled by the company are included
within the carrying amount of Rs 200 million.
iii) Rights: The Company owns and controls the plant and machinery.
iv) Valuation: The plant and machinery are valued accurately in accordance with the
measurement basis.
b) As per NSA 560(Subsequent event): Management can revise its accounts after adoption
on which report has been issued by the Auditors, but before circulation to the
shareholders. In the instant case, the statutory auditor should ascertain whether the
original audit report along with audited accounts has been circulated to the share-
holders. If not, he can issue a revised report on the amended Financial Statement
subject to following:
(i) Revised accounts must be re-approved by the Board of Directors of the company.
(ii) Ask the company to return all the original copies of the earlier audit report along
with the audited accounts.
(iii) The fact of revision of Financial Statement with reasons should be incorporated in
the Directors‘ Report. If it is neither included nor found adequately disclosed in
the Director‘s Report, auditor should include the fact with figures and reasons in
his revised audit report to the shareholders.
(iv) Mention specifically that it is a revised audit report.

a) What are the professional behaviors imposed by the ‗Code of Ethics‘ for
Professional Accountants in employment issued by the Institute of
Chartered Accountants of Nepal (ICAN)? 8
b) Describe the principle of the equitable treatment of shareholders as per
corporate governance model of Organization for Economic Co-
operation and Development. 7
Answer:
a) Part C of the Code of Ethics issued by ICAN is specifically applicable to the
Professional Accountant in employment. Employed professional accountants owe a
duty of loyalty to their employer as well as to their profession and there may be times
when the two are in conflict. An employee‘s normal priority should be to support his or
her organization‘s legitimate and ethical objectives and the rules and procedures drawn
up in support of them. However, an employee cannot be required to:
(a) Break the law

(b) Breach the rules and standards of their profession
(c) Lie to or mislead ( including misleading by keeping silent) those acting as
auditor‘s to the employer; or
(d) Put their name to or otherwise be associated with a statement which materially
misrepresents the fact
The professional accountant should comply with 5 fundamental principles of code of

conduct and be alert all the time with threats which may come in his day to day work.
Differences in view about the correct judgment on accounting or ethical matters should
normally be raised and resolved within the employee‘s organization, initially with the
employee‘s immediate superior and possibly thereafter. Where disagreement about a
significant ethical issue remains.With higher levels of management or non executive
directors.
If employed accountant cannot resolve any material issue involving a conflict between
their employer‘s and their professional requirements they may, after exhausting all other
relevant possibilities, have no other recourse but to resignation. Employees should state
their reasons for doing so to the employer but their duty of confidentiality normally
precludes them from communicating the issue to others unless legally or professionally
required to do so.
b) The equitable treatment of shareholders: The corporate governance framework

should ensure the equitable treatment of
A. All shareholders of the same series of a class should be treated equally.

i. Within any series of a class, all shares should carry the same rights. All
investors should be able to obtain information about the rights attached to all
series and class of shares before they purchase. Any changes in the voting rights
should be subject to approval by those classes of shares which are negatively
affected.
ii. Minority shareholders should be protected from abusive action by, or in the
interest of, controlling shareholders acting either directly or indirectly, and
should have effective means of redress.
iii. Votes should be cast by custodians or nominees in a manner agreed upon with
the beneficial owner of the shares.
iv. Impediments to cross border voting should be eliminated.
v. Processes and procedures for general shareholder meetings should allow for
equitable treatment of all shareholders. Company procedures should not make it
unduly difficult or expensive to cast votes.
B. Insider trading and abusive self-dealing should be prohibited.
C. Members of the board and key executives should be required to disclose to the board
whether they, directly or indirectly or on behalf of third parties, have a material interest in
any transaction or matter directly affecting the corporation.

a) M Limited is going to acquire S Limited. The purchase consideration
has been decided at Rs. 4000 million.M Limited is worried about
hidden liabilities or overvalued assets of S Limited and approached you
to examine the same. List out important account balances or
transactions items which you would like to investigate in the Due
Diligence exercise. 8
b) Khiladi Ltd. transformed its accounting processes from manual to
customized accounting software. Therein, all the transactions are
recorded processed and the final accounts generated from the system.
The management tells you that in view of the voluminous nature of
transactions, there is no need to take printouts and that audit can be
conducted on the computer itself. The management further assures you
that any 'query based reports' as required can be generated and printed.
As a statutory auditor of the company, enumerate the procedures you
would adopt to conduct the audit in such environment. 7
Answer:
a) Due diligence is an all pervasive exercise to review all important aspects like financial,
legal, commercial, etc. before taking any final decision in the matter. As far as any
hidden liabilities or overvalued assets are concerned, this shall form part of such a
review of Financial Statements. Normally, cases of hidden liabilities and overvalued
assets are not apparent from books of accounts and financial statements. Review of
financial statements does not involve examination from the view point of extraordinary
items, analysis of significant deviations, etc. However, in order to investigate hidden
liabilities or over-valued assets the auditor should pay his attention to the following
areas:
Important transactions/ items which need to be investigated in the due diligence

exercise are Items of Hidden Liabilities:
The company may not show any show cause notices which have not matured into
demands, as contingent liabilities. These may be material and important.
The company may have given ―Letters of Comfort to banks and Financial Institutions.
Since these are not ―guarantees, these may not be disclosed in the Balance sheet of the
target company.
The Company may have sold some subsidiaries/businesses and may have agreed
to take over and indemnify all liabilities and contingent liabilities of the same prior to
the date of transfer. These may not be reflected in the books of accounts of the company.
Product and other liability claims; warranty liabilities; product returns/discounts;
liquidated damages for late deliveries etc. and all litigation.
Tax liabilities under direct and indirect taxes. Pending tax assessments.
Pending assessments by tax authorities of income tax/or customs duty where such
assessment may impose more tax liabilities.
Agreement to buy back shares sold at a stated price.
Future lease
liabilities.
Environmental problems/claims/third party claims.
Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.
Huge labour claims under negotiation when the labour wage agreement has already
expired
Items of Over-Valued Assets:
Uncollected/uncollectable receivables.
Obsolete, slow non-moving inventories or inventories valued above NRV; huge
inventories of packing materials etc. with name of company. Underused or obsolete
Plant and Machinery and their spares; asset values which have been impaired due
to sudden fall in market value etc. Assets carried at much more than current market value
due to capitalization of expenditure/foreignexchange fluctuation, or capitalization of
expenditure mainly in the nature of revenue.
Litigated assets and property.
Investments carried at cost though realizable value is much lower. Investments carrying
a very low rate of income / return.
Infructuous project expenditure/deferred revenue expenditure etc.
Group Company balances under reconciliation etc.
Intangibles of no value
b) A key feature of the accounting software package used by the company definitely involves the absence o
transactions in view of the voluminous nature since it may involve extensive costs.
From the auditor's point of view, it must also be conceded that the exception reports in
the form of 'query-based reports' which isolate the above data will provide the
very material information that the auditor requires for most of the verification work.
The only problem which it raises, and it is a serious one, is that the auditor cannot
simply assume that the programmes which produce the exception reports are reliable in
respect of the following factors:
o operating accurately;
o printing out all the exceptions which exist; and
o bound by programmed control parameters which meet the company's genuine
internal control requirements.
In view of the above, the auditor is required to test the processes which purport to
embody the controls, and produce the output such as it is. These tests, which invariably
involve the use by the auditor of the computer itself, are known as tests through the
computer. In that approach, the auditor starts by proving the accuracy of the input data,
and then thoroughly examines (by applying tests) the processing procedures with a view
to establishing the following that:
i) all input is actually entered into the computer.

ii) neither the computer nor the operators can cause undetected irregularities in the
final reports.
iii) the programmes appear, on the evidence of rejection and exception routines, to be
functioning correctly.
iv) all operator intervention during processing is logged and scrutinized by the
supervisors.
The auditor in such circumstances will have to first evaluate the existing controls. For
the
same, he has to do the following:
i) Evaluate the internal control system especially the controls and checks existing for
recording the transactions, i.e., he has to verify at what level transactions can be
entered into the system and what checks are available to prevent any unauthorized
data entry and for rectifying errors/omissions in the transactions entered.
ii) Evaluate at what level there is authority given for modification of transactions
already entered. Is there any authority given only to a senior employee to carry out
modifications? Or is it that once transactions are entered and validated no further
modifications are possible there to.
iii) Whether there is a provision in the software for carrying out an online audit of
transactions, i.e. whether there a separate module in the package, where a separate
password given to the auditor and once he has seen and approved a particular
transaction/set of transactions, the same would be locked and no modifications would
be possible by anyone (including the senior most employee) in the company.
iv) Whether there are proper procedures for backup of data on a regular basis and
whether the said procedures are being strictly followed.
v) In case of any loss of data whether there is a clear defined recovery procedure to
minimize the loss of data due to power failures or any human errors.
vi) The auditor may introduce some dummy data into the system and see the results
obtained.
After the auditor has evaluated the above procedures, he has to prepare an audit plan
depending on the results obtained from his earlier evaluation. Since the transactions are
not being printed, the plan can contain procedures wherein data is verified directly on the
computer from the vouchers/invoices, etc. The audit plan will also require a lot of
analytical procedures to be performed. Depending on the importance of various expense
heads and other important account heads, the auditor will also obtain various reports
from the system depending on various queries that he would have to identify. Some
illustrative reports can be:
i) To check whether proper classification is done for revenue/capital - a report can be

obtained of all purchases (not being raw materials or other routine purchases)
exceeding specified amount.
ii) To check whether all outward bills are accounted for a report containing a month wise
co-relation between goods dispatched and freight amount paid. The same can be
further co-related with the freight rates obtained from the bills.
Once the auditor has performed the above procedures, he would be able to form an
opinion whether reliance can be placed on the accounting systems and the data recorded.
If the auditor finds that reliance cannot be placed on the systems he can inform the
management about the fact and also that the transactions will need to printed to allow
him to conduct the audit. The finalization procedures to be followed even under this
system would remain more or less similar to other accounting systems.

a) Internal Control
b) Related Party
c) Ratio Analysis
d) Going Concern
e) Internal Check System
Answer:
a) Internal Control: Internal Control is the process designed, implemented and
maintained by those charged with governance, management and other personnel to
provide reasonable assurance about the achievement of an entity‘s objectives with
regard to reliability of financial reporting, effectiveness and efficiency of operations,
and compliance with applicable laws and regulations. The term ―controls‖ refers to any
aspects of one or more of the components of internal control. It focuses on designing
control measures and applying them in real work situations.
b) Related Party
A party is related to an entity if:
a. directly, or indirectly through one or more intermediaries, the party:
i. controls, is controlled by, or is under common control with, the entity;
ii. has an interest in the entity that gives it significant influence over the entity; or
iii. has joint control over the entity;
b. the party is an associate of the entity;
c. the party is a joint venture in which the entity is a venturer
d. the party is a member of the key management personnel of the entity or itsparent;
e. the party is a close member of the family of any individual referred to in (a) or (d);
f. the party is an entity that is controlled, jointly controlled or significantly influenced
by, or for which significant voting power in such entity resides with, directly or
indirectly, any individual referred to in (d) or (e); or
g. the party is a post-employment benefit plan for the benefit of employees of the entity,
or of any entity that is a related party of the entity.
c) Ratio Analysis: It is a type of analytical procedure. Ratios are expressed as a

relationship of one financial/non-financial data with another financial/no
year or budget or industrial average. Any material differences in the ratios must be
explained.
d) Going Concern: The going concern assumption is a underlying assumption in the preparation of finan
seeking protection from creditors pursuant to laws or regulations. Accordingly, assets
and liabilities are recorded on the basis that the entity will be able to realize its assets
and discharge its liabilities in the normal course of business. The auditor is required to
verify management‘s assumption of going concern and conclude accordingly.
e) Internal check system

Internal check system implies organization of the overall system of book keeping and
arrangement of staff duties in such a way that no one person can carry through a
transaction and record every aspect thereof. It is a part of overall control system and
operates basically as a built-in-device as far as organization and job allocation
aspects of the controls are concerned. The system provides existence of checks on
the day to day transactions which operates continuously as part of the routine system
whereby the work of each person is either proved independently or is made
complimentary to the work of another.
Corporate Laws
Corporate Laws
Suggested
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 15
Marks

1. Answer the following questions:
a) Mr. Ang Dami Sherpa, the Managing director of Khangsar Trekking Limited, is
interested to know whether Khangsar Trekking Limited can buy back its own
shares or not? If yes, what are the procedures mentioned in the companies Act,
2063? 10
b) Axis Life Insurance Company Ltd. of India wants to establish its subsidiary in
Nepal. List the various documents to be provided to various authorities in Nepal
and permission to be obtained from the various authorities in Nepal. 10
Answer:
(a) Generally no company can buy back its own shares. However, there are
exceptions in section 61(2) of the companies Act that allows company to buy
back its own shares. Section 61 states that no company shall purchase its own
shares (buy-back) or lend money against security of its own shares. Exception to
this provision is mentioned in subsequent sub-section which reads as
notwithstanding anything contained in Sub-section (1), in the following
circumstances, a company may buy back its shares out of its free reserves
available for being distributed as dividends, by giving information to the
Company Registar Office.:
(a) Where the shares issued by the company are fully paid up;
(b)Where the shares issued by the public company have been listed in the Securities
Board;
(c) Where the buy-back of shares is authorized by the articles of association of the
concerned company;
(d) Where a special resolution has been adopted at the general meeting of the concerned
company authorizing the buyback;
(e) Where the ratio of the debt owed by the company is not more than twice the capital
and general reserve fund after buy-back of shares; Explanation: For the purposes of
this clause, “debt” means all amounts of secured or unsecured debts borrowed by the
company.
(f) Where the value of shares to be bought back by a company is not more than twenty
percent of the total paid up capital and general reserve fund of that company;
(g) Where the buy-back of shares is not in contravention of the directives issued by the
Office in this respect.
So far as the procedure to buy back its own share is concerned, sub-section (3) of this
section mentions that a special resolution to be presented at the general meeting
pursuant to Clause (d) of Sub-section (2) above shall state the following matters:
(a) The reason and necessity for the buy-back of shares;
(b) A statement of the evaluation of possible impacts on the financial situation of the
concerned as a result of the buyback of shares,
(c) The class and number of shares intended to be bought back;
(d) The maximum or minimum amount required to buy back shares as referred to in Clause
(c) and financial source of such amount;
(e) The time limit for the buy-back of shares;
(f) The mode of the buy-back of shares;
(g) Such other necessary matters as specified by the Office and as required to be disclosed
under the prevailing law, in respect of the buy-back of shares.
As per Sub Section 4, of the above Section once the special resolution as referred to in
Sub-section (3) is adopted by the general meeting, the concerned company may
purchasing from the stock exchange or purchasing from the concerned employee of the
company the shares allotted to him/her and purchasing from the existing shareholders on
a proportionate basis buy back its shares within a period of twelve months of the
adoption of that resolution
As per Sub Section 5, after it bought back its own share the company should notify the
Office the number of shares bought back, amount paid for the same and other necessary
details within thirty days of the date of such buy-back.
As per Sub Section 7, where a company buys back its shares pursuant to Sub-section (4), it
shall cancel the shares so bought back within one hundreds twenty days of the date of
such buy-back.
As per Sub Section 8, once a company buys back any class of shares pursuant to this
Section, the company shall not re-issue the shares of that class, except for the issue of
bonus shares or payment of its liability, prior to the expiration of two years after such
buy-back.
As per Sub Section 9, notwithstanding anything contained elsewhere in this Section, no

public company shall buy back its shares in a manner that such minimum number of
shareholders or minimum paid–up capital as required to be maintained by that company
becomes less or lower.
In this way, company Khansar Trekking may buy back its own share while fulfilling the
conditions and procedures mentioned in section 61 of the companies Act, 2063.
(b) (i) Application to the insurance Board for obtaining permission;
(1) Any national or foreign corporate body desirous to operate an Insurance

Business shall submit an application to the office of the Board in the prescribed
format in Schedule 1 along with the Insurer registration fees of fifty thousand
Rupees for the registration of his name as an Insurer along with the following
documents for the registration of its name as an Insurer:
(a) Memorandum and articles of association of the corporate body,

(b) Insurance Business to be operated and its policies and terms and conditions,
(c) If life Insurance Business to be operated, documents displaying calculations of
the premiums to be received in operating such business and liability,
(d) The documents regarding the methods of utilizing the amounts to be received
from the Insurance, and
(e) Other necessary documents as prescribed by the Board,
(2) The Board shall make necessary investigation upon the application received
pursuant to Sub-section (2) above and shall make an inquiry with the applicant,
if necessary, and shall register the name of such applicant in the prescribed
register-book by mentioning the types of the Insurance Business to be operated
by the applicant and shall provide the registration certificate of Insurer to the
applicant in the form as prescribed. In case there is any reasonable ground for
not registering the name, the Board shall inform the concerned applicant
accordingly.
(3) Notwithstanding anything contained elsewhere in this Section, in the case of the
Life Insurance, the Board shall, with the approval of the Nepal Government,
issue a certificate to operate the Business, based on the fulfillment of the criteria
which it has fixed, from time to time, in respect of the operation of the Insurance
Business.
Secondly after completing requirements of the Insurance Act, 2049 the applicant
Axis Life Insurance Co. Ltd, as a foreign investor intending to establish its
subsidiary in Nepal has to file an application for approval of foreign investment
under Section 3 of Foreign Investment and Transfer of Technology Act,
(FITTA), 2049 .
The following documents are required for approval under this Act with the
Department of Industry:
1. Application in the prescribed form to the Department of Industry along with
2. Copy of permission granted by the Insurance Board
3. Draft Memorandum and Articles of Association of the proposed company
4. Certificate of incorporation, including Memorandum of Association and Articles
of Association, of the applicant foreign company
5. Company profile of the foreign investor
6. Financial Credibility Certificate (FCC) of the Foreign Investor provided by the
domiciled country bank
7. Authority letter from the concerned company to carry out any necessary work on
their behalf, if applicable.
8. Resolution of the Board of Directors of Axis Insurance Company to open a
subsidiary and invest in Nepal duly certified by Notary public.
Thirdly, as per Section 4 of the Companies Act, 2063, the applicant Axis life
Insurance Company Ltd. Has to submit the following documents for registration
of subsidiary company with the office of the Registrar of Companies:
 Online name and approval of the proposed company's name
 Memorandum of association of proposed company duly signed by the authorized
person
 Articles of association of proposed company duly signed by the authorized
person
 Copy of the agreement such as Joint Venture Agreement or Memorandum of
Understanding (if any)
 Approval/permission of the Insurance Board
 Incorporation decision of its board of directors and other major documents of the
promoter company
 Approval from the Department of Industry for foreign investment to the foreign
company under the Foreign Investment and Technology Transfer Act, 2049.
In addition
 Powers of Attorney in the prescribed format are required if promoters want to
send a representative rather than appear in the Office of the Companies Registrar
themselves.

a) The creditors of BCZ Limited have applied to the Court for the insolvency
proceeding of the company. However in making hearing on an application made
to the Court, it appeared that there exist some situations in the company which
may prejudice the interests of the creditors, and the Court has issued interim
order in these circumstances. 7
i) What are these circumstances so that the Court deemed necessary to issue
interim orders?
ii) While issuing the interim orders, the Court may issue order restraining from
doing some activities. What are these activities?
b) Newly appointed directors of Chandragiri Development Bank have submitted their

disclosure to the bank following the Section 92 of the Companies Act, 2063. However
the bank management denied taking these disclosures saying that directors of bank
should follow the provisions of Bank and Financial Institutions Act (BAFIA), 2073 in this
case. What are the differences between these two disclosures mentioned in
Companies Act, 2063 and BAFIA, 2073? Explain. 7
c) Necha Salyan Hydro Electricity Company (P) Limited of Solu, Dungeswor Petrochemical
Exploration Company of Dailekh and Lomangthan Resort (invested Rs. 50.1 million) at
Mustang (all three are newly incorporated) applied to One Window Committee to get
the facilities as mentioned in the various provisions of the Act. Explain referring the
provisions of Industrial Enterprises Act, 2073. 6
Answer:
(a)
i. Section 11 of the Insolvency Act, 2063 has explained the various situations under which the
Court issues interim orders. These are as follows:
 The assets of the company have been sold and disposed of wrongfully or there exists a
possibility of such sale and disposal;
 The management of the company has not been carried out properly;
 Any legal action is going to be instituted or such action is going to be enforced or there
exists a possibility of such enforcement in such a manner as to prejudice the assets of the
company;
ii. In the following situations, the court may issue order restraining from doing any or all of
the following acts is;
 Transferring, selling and disposing of , or otherwise mortgaging or pledging, any assets of
the company,, other than that business of the company which it has been carrying on in
the ordinary course of business;
 Transferring the shares of the company in any manner or altering the status of the
shareholders of the company in any manner;
 Withholding or foreclosing any assets of the company by any person; or
 Instituting any legal action or keeping on such action or taking any action or foreclosing by
any creditor or person against the assets of the company or any assets owned or possessed
or foreclosed by the company.
Where an order is issued by the Court pursuant to sub section 2 above, information
thereof shall be given to the concerned company, company registrar and Insolvency
Administration office, and where the court thinks fit it may also issue order requiring to
publish such information in daily paper of national circulation in a manner that the
general public can get such information.
The court may if it considers necessary issue order to appoint any appropriate person as
the interim administration of the company for the interim management of the company
during the currency of the interim order.
The function, duties and powers of the interim administrator appointed pursuant to sub-
section 4 above shall be as prescribed by the court at the time of such appointment. (.5)
Where the court issues order for inquiry into insolvency proceedings or dismisses the
application, the interim order issued pursuant to this section shall ipsofacto be
ineffective.
(b) As per the section 92 of the Companies Act, 2063 vide its First Amendment
disclosure of a director is as follows:
A director shall, no later than fifteen days after assuming the office of director,
disclose in writing to the company the following matters:
 If he/she or his/her close relative has direct involvement or any kind of personal interest in
any kind of sale and purchase or other kind of contract related with the transactions of the
company.
 If he/she has any kind of interest in the appointment of the managing director, company
secretary, officer of the company
 If he/she is a director of any other company
 If he/she has made any dealing in the share or debentures of the company or of its holding
or subsidiary company, about matters of such dealing.
In making such disclosure, a copy of the written agreement, if any, concluded

between the company and the director or his/she close relative shall be submitted,
and failing such agreement, substantial and necessary matters concerning the
transaction or interest or involvement shall be set out.
The company shall submit to the Company Registrar's Office (Office) the
information as referred to within seven days of the receipt of such information and
upon receipt of information, the office shall record the same in separate register
maintained for this purpose.
If any director has an interest directly or indirectly linked to any kind of contract,
lease, transaction or agreement entered or to be entered with the concerned company
or its subsidiary company or comes to his /her knowledge that such interest will be
so linked, that director shall disclose that matter to the company promptly, setting
out the extent and kind of such interest.
If any director gives written information to the company that he be considered to

have his personal interest in a transaction with any certain person, that director shall
be deemed to have disclosed his/her personal interest in any transaction or contract
to be done or made with such person.
BAFIA 2073 has provided two sections regarding the disclosures of directors of any
banks or financial institutions as follows which more expanded than the disclosures
as mentioned in the section 92 of the company act.
Section 24 of BAFIA has provided to make complete records of the directors as

follows:
 Name and address along with the education qualification. Also the profession and
experience if any.
 Working as a director, executive officer or employee of any organization with his/her
responsibility
 Description of the member of the family and if he or she has any kind of interest in the
bank or shares in any organization
 Description of the shares or debentures of director or his/her family in the bank or in the
subsidiary companies.
 If any member of his or her family is working as an officer of the bank or financial
institution, details thereof;
 If he or she of any of his or her family members has entered into or going to enter into any
kind of contract with the concerned bank or financial institutions, details thereof;
 If he or she has any kind of interest in the appointment of the chef executive, company
secretary and auditor, details thereof;
 A authorized letter provided to Nepal Rastra Bank regarding the power of investigation of
the director of the bank.
 Self-declaration by the director is being qualified to become director
Section 25 of BAFIA has provided more procedures regarding the disclosures and
records of the particulars of directors as obtained by Section 24 of the same Act.
Every directors within seven days after their appointment as a director should submit
their particulars pursuant to section 24 to the financial institution.
The bank or financial institution should maintained separate records of each

directors in the bank.
Hence the disclosure as mentioned in the section 92 of the company act is not
fulfilled the total requirement of the disclosures of the director as appointed by the
bank. The contention of the bank management is correct considering the provisions
of BAFIA 2073.
(c)Section 22 of Industrial Enterprises Act, 2073 has provided various facilities to

different categories of industries. Here we will discuss three types of industries
established in the different parts of the country as follow:
Necha Salyan Hydroelectricity Company is a newly established industry in Solu

district. As per sub section (1)(nya) this company will be benefited hundred
percentage income tax exemption for the first ten years of the production and fifty
percent tax exemption for the next five years. However the industry should produce,
distribute the electricity for commercial purpose within Chaitra 2080 BS.
The sub section has provided these facilities to the alternative energy production
companies whether it may be a solar, windmill or any energy production from fossil.
Industries which were already established shall be benefited considering the status
of the company at the time of coming these facilities into existence in the act.
Dungeshor Petrochemical Exploration Company was established in Dailekh to

explore the petrochemical product in Nepal. This industry will be benefited under
sub section (1)(cha) as follows:
 The company will be benefited hundred percentage income tax exemption first seven
years of the production and fifty percent tax exemption for the next three years. However
the industry should start their commercial production within Chaitra 2075 BS.
 The company will produce petroleum and natural gas or fuel exploration for further
processing.
Lomanthan Resort has fulfilled the condition of the investment minimum limit as it
has invested more than Rupees fifty million is eligible to get the facilities as
mentioned in sub section (1)(chha). The resort will be benefited hundred percentage
income tax exemption first five years of the production and fifty percent tax
exemption for the next three years after starting their commercial service.

a) What are the procedures of making claims relating to group disputes under Labour Act,
2048? 7
b) Companies Act, 2063 with first amendment 2074 has added special provision for de-
registration of the defunct and defaulting companies. Describe these special provisions
referring the act. 7
c) Discuss the legal provisions for the audit of corporate bodies fully owned by
government of Nepal. 6
Answer:
(a) Section 74 of Labour Act, 2048 has explained the variou procedures of making
claims relating to group disputes as follows:
(i) Workers or employees of an establishment shall explicitly mention their

demands or claims relating to their collective rights, interests, and benefits, as well
as their representatives, in writing, have the document signed by at least 51 percent
of their total strength and present the same before the general manager.
(2) on receipt of claims relating to disputes under sub-section 1, the general manager
shall reach an agreement by settling the problem through bilateral talks with the
representatives as mentioned in the same sub section within a period of 21 days.
(3) in case the problem is not settled in the manner mentioned in sub section 2, it
shall be settled within a period of 15 days through bilateral talks in the presence of
the labour office.
(4) in case the problem is not settled even though the talks were held under sub
section 3, the matter shall be forwarded to an arbitrator to be appointed through the
mutual consent of both the general manager and the workers or employees. In case
no such arbitrator can be appointed, the dispute may be presented before the
tripartite committee formed with the consent of both parties by Nepal Government
with an equal number of representatives of workers or employees, the general
manager and Nepal Government.
(5) the arbitrator appointed or the committee formed under sub section 4 shall take a
decision on the matter within a period of 15 days.
(6) any parties dissatisfied with the decision taken under sub section 5 may file an
appeal with Nepal Government within 35 days from the date of receipt of notice of
the decision.
(7) if the arbitrator or committee did not make decision within the period under sub
section 5, or in case the appeal was filed before Nepal Government under sub
section 6, if Nepal Government did not make decision within the period of 60 days
from the date of appeal filed, the worker or employee may call for strike by
complying with procedure o section 76.
(b) (i) the amendment have made a special provisions relating to deregistration of the
defunct or defaulting companies. Pursuant to section 136 of the Companies Act, de-
registration of the defunct companies or defaulting companies are subject to the
fulfillment of all the pending compliances and clearance of all the fines dues by the
liable officers. The amount of fine as prescribed under section 81 of the Companies
Act can be huge for the some of the companies which have remained defunct for
several years.
(ii)The amendment has provided a grace period of two year from the date of
commencement of the amendment to the defunct or defaulting companies to apply to
OCR for the deregistration which have not fulfilled any of the following conditions
as of the date of commencement of the amendment, (a) commence business, (b)
submission of details pursuant to section 80, or (c) payment of fine under section81.
A decision from the general meeting of such company is required to initiate the
process.
(iii)The amendment has further prescribed the applicable government fees for such
deregistration is (a) payment of fine under section 81, or(b) payment of zero point
five percent of the paid up capital of the company, whichever is less. For such
deregistration, the defaulting companies will also need to submit the annual returns
and other documents as provided under section 80.
(c) Section 6 Audit Act, 2048 with first amendment 2073 has explained on the audit of
corporate bodies wholly owned by Government of Nepal. Auditor General shall be
audited these bodies as per the act.
Sub-section (2) states that if the Auditor General is constrained by time and
resources to audit the corporate bodies wholly owned by Government of Nepal
pursuant to Sub-section (1) he/she may appoint license holder auditors under the
prevailing laws an assistant. While appointing auditor as such, he/she shall give
priority to the Nepali citizen. The auditor so appointed pursuant to Sub-section (2)
shall act under the direction, supervision and control of the Auditor General.
The powers, functions, duties and responsibilities of the auditors appointed pursuant
to Sub-section (2) and the procedures to be followed by them in course audit and
provisions relating to their report shall be as prescribed by the Auditor General.
Further, Sub-section (5) provides the provision about the remuneration to be paid by
the concerned organization to the auditors appointed pursuant to Sub-section (2). It
shall be fixed by the Auditor General keeping in view the volume of financial
transactions, status of accounts, number of branches and sub-branches, work load
and work progress of the concerned organization.

a) Board of directors of XYZ Limited has decided to distribute Rs. 50 cash
dividend and 5 bonus shares per existing equity share to the shareholders in
fiscal year 2073/74. Explain the provisions of section 179 and 182 of Companies
Act, 2063 and comments on the validity of the decision of the board in the above
matters. 8
b) Enumerate the circumstances under which the Securities Board of Nepal may
revoke a license obtained by any stock exchange or securities business person to
operate securities business issued under the Securities Act, 2063. 7
Answer:
(a) Section 179 of Company Act, 2063 has explained the issue of bonus shares to the
shareholders. A company may by adopting a special resolution in the general meeting
issue bonus shares to its shareholders out of the amount available for the distribution
as dividend.
Where a company is to issue bonus shares pursuant to sub section 1, the company
shall give information thereof to the Office before issuing such shares.
Section 182 of the act has explained the distribution of dividend by the company. The
divided shall be distributed to the shareholders within forty five days of the decision
made to provide dividend. The company is not bound to distribute the dividend within
this time if any law prohibits the distribution of dividend, if the right to receive
dividend is subject to any dispute or if in a circumstance beyond control of the
company or for any reason, dividend cannot be distributed within the said time limit.
A company fully or partly owned by the Government of Nepal may distribute dividend
only after obtaining prior approval of the Government of Nepal; and the Government
of Nepal may give necessary directive on the matter of dividend to the distributed by
such company.
In the event of failure to distribute a dividend within the time limit as referred to in
sub-section 1, the dividend shall be distributed together with the interest thereon at
such rate as may be prescribed.
The person whose name is maintained in the shareholder register at the time of
declaration of a dividend or his legal heir shall be entitled to such dividend.
A company shall not pay or distribute a dividend in any other manner except out of the
amount of profits set aside for the distribution of dividend.
Before declaring the dividend, the company should provide all expenses including
depreciation, all allocable funds as per the requirement of the concerned act.
Subject to the various provisions contained in this section, the board of directors of
any company may, in the following circumstance distribute interim dividend out of the
profit for the previous financial year if the article of association contain a provision on
the distribution of interim dividend and the annual financial statement for the financial
year out of the profits of which year interim dividend is to be distributed has already
been certified by the auditor and approved by the board of directors.
No company shall pay or distribute any amount in cash or kind, chargeable on its
funds, to its shareholders, except a dividend approved by the general meeting.
Considering the above provisions, the act of board in XYZ Limited Company is not valid
as directors cannot decided bonus shares. However board of directors may distribute
interim dividend to the shareholders which should be taken post approval in the
annual general meeting of the shareholders. In a given case the board has distributed
bonus shares and cash dividend to the shareholders. This is not valid.
(b) Section 89 of the Securities Act, 2063 has mentioned the circumstances where a
license issued by the Board can be revoked. These are as follows:
i) If one stops operating the stock exchange or securities business,

ii) If one operate the stock exchange or securities business in contrary to the
interest of investors,
iii) If one violates the terms set forth in the license,
iv) If one violates this Act or the Rules and Bye -laws framed under this Act,
v) If one fails to observe any order or direction issued by the Board,
vi) If one becomes insolvent being unable to repay credit to creditors,
vii) If the company or body having obtained a license to operate the stock
exchange or securities business is wound up,
viii) If the stock exchange or securities business person having obtained a
license to operate the stock exchange or securities business makes an
application for the revocation of a license,
ix) If the securities business person who has removed an agent appointed by
it does not appoint another agent in lieu of such an agent,
x) If one fails to submit such financial and transaction related statements as
required to be submitted to the Board,
xi) If one fails to pay such fees as required to be paid pursuant to Section 50
to the Board within the time limit specified by that a section.
Under Section 89(2), no revocation of a license made pursuant to sub- section (1) shall have
any effect on any liabilities arising from any activities done by such a stock exchange or
securities business person prior to the cancellation of license.
5. Answer the following questions: (3×5=15)

a) What is money laundering? Explain the stages involved in money laundering.
b) An appellate court published seven days' notice for supplying the special Nepali brand
paper made files to the court within one and half month, for which sealed quotation
be submitted before the court. Accordingly, quotations were submitted within the
dead line. The court opened the quotations and made the decision, but one of the
applicants was not satisfied with the decision.
i) What is the remedy available to the dissatisfied applicant?
ii) On what grounds petition may be filed?
iii) On what situation such decision may be suspended?
c) Ms Sheela, a Chartered accountant licensed by ICAN has been appointed as an
auditor of XYZ Trading Ltd. for the fiscal year of 2071/72. It has been revealed
that she was appointed by the general meeting of the fiscal year of 2070/71 on
the basis of recommendation of her maternal uncle's son who has been working
in the company as general manager since last several years. Later, the
appointment was questioned as the close relatives of an employee cannot be
appointed as auditor in the company. Discuss referring to Companies Act, 2063
the validity of her appointment with disqualification of the auditor along with its
consequences.
Answer:
(a) Money laundering is the process of taking dirty funds and converting it into clean
funds. Dirty funds are criminally derived proceeds which are then converted into other
assets so that they can be reintroduced into legitimate commerce in order to conceal
their true origin or ownership clean funds.
There are there stages in money laundering:
Placement
The first stage of money laundering is when the individual participating in
criminal activity places cash proceeds into the financial system. This is done so
that they can get rid of the cash that is derived from criminal sources. It can be
unsafe for people to hold onto a large amount of cash at one time, so they may
try to dump the cash somewhere that provides greater security. This stage
corresponds to the greatest degree of vulnerability for the criminal. Financial
officials are on the lookout for suspicious transactions that are cash based.
The criminal may try to bypass threshold reporting regulations, such as those
that require bank officials to report any transactions over a certain amount to
Nepal Rastra Bank. This is often done by exchanging illegal funds in smaller
and less conspicuous amounts. The funds may be exchanged for other liquid
forms of cash, such as traveler cheques, bank draft or savings account.
Layering
The next stage of money laundering attempts to separate the money from its
original, illegal source. This part of process is often complicated. By moving the
money quickly and to different areas, the money may be transformed so that it is
not detected through audits. During this stage, the money may be transferred
between multiple countries. The money may take the form of various
investments and move faster than regulator can in response.
Integration
This the final stage of the money laundering process. This involves the process
to get the funds back to the criminal from what seems to be reputable source.
After placing and layering the cash into the financial system, the funds become
integrated. In this manner, the criminal can receive funds from their original
illegal source in methods that do not draw attention to the situation. This may
include receiving money from a business purchased by the funds, such as a
restaurant, department store, car wash or laundry business. This business may
carefully follow all other regulations in order to avoid detection, such as
carefully paying all employee and business taxes and filing tax returns on a
timely basis.
(b) (i) a bidder or proponent may file an application before the chief of the concerned
public entity for review against any error or decision made by the public entity stating
the cause for the damages the bidder will suffer or is likely to suffer from the error
breach of the duty, imposed on the public entity in carrying out the procurement
proceedings or making decision.
The application to be filed pursuant to sub-section 1 shall be limited with respect to

the proceedings prior to entry into force of the procurement contract.
The application shall have to be filed within the period specified, if any, in this act for
making application and, if not so specified, within seven days from the date of the
bidder or proponent having become aware of that the public entity has made an error
or has dishonored the duty relating the procurement proceedings.
(ii) The petition may be filed on the ground that there were irregularities while making
the decision. Accordingly, if the breach of duty is seen, and irregularities were made
which resulted for his loss are to be established. The application shall have to state
clearly the commission or omission of any act by the public entity that led error or
breach of duty and the provision of this act or regulations or guidelines made
thereunder that have been contravened by such decision.
(iii) Section 47 of the Public Procurement Act, 2063 with amendment makes the
provision that if the decision was made due to irregularities, breach of duty was seen
and activities found against law, the decision should be suspended the procurement
proceedings and make a decision with reason in writing within five days of receipt of
such application. The decision as above shall also state how the procurement
proceedings shall further proceed on.
If the application is in respect of the procurement proceedings of an amount below the

prescribed one, no application can be submitted before the review committee for
review against the decision made by the chief of the public entity pursuant to this sub
section.
(c) Under Section 111 of the companies Act, 2063, the auditor of a company shall be
appointed, from amongst the auditor licensed to carry out audit under the prevailing
law, by the general meeting, in the case of a public company. The auditor shall hold
office until the next annual general meeting.
Section 112 specifies the disqualifications of auditor as follows: 1) none of the

following persons or the firms or companies in which such persons are partners
shall be qualified for appointment as auditor and shall, despite appointment as
auditor, continue to hold office:
i) A director, advisor appointed with entitlement to regular remuneration or cash
benefit, a person or employee or worker involved in the management of the
company or a partner of any of them or employee of any of such partners or a
close relatives of a director or partner, out of them, or / and employee of such
relative;
ii) A debtor who has borrowed moneys from the company in any manner, or a person
who has failed to pay any dues payable to the company within the time limit and is
in such arrears or close relative of such person;
iii) A person who has been sentenced to punishment for an offense pertaining to
audit and a period of three years has not elapsed thereafter ;
iv) A person who has been declared insolvent;
v) A substantial shareholder of the company or a shareholder holding one percent or
more of the paid up capital of the company or his/her close relative;
vi) A person who has been sentenced to punishment for an offense or corruption ,
fraud or a criminal offense involving moral turpitude and a period of five years has
not elapsed thereafter;
vii) An auditor or his partner or ex- partner or employee or ex- employee who has
already served as auditor for more than three consecutive terms
viii) In the case of a public company, any person who works, whether full time or part
time, for any governmental body or anybody owned fully or partly by the
government of Nepal or any other company or a partner of such person or a
person who is working as an employee of such partner or a person who is
authorized to sign any documents or reports to be prepared by the management
of the company;
ix) A company or corporate body with limited liability;
x) A person having interest in any transaction with the company or his/her close
relative or a director, officer or substantial shareholder of another company
having any interest in any transaction with the company.
Section 2(z9) defines the term close relative which means a partition shareholder in
joint family or husband, wife, father, mother, mother in law, father in-law, elder
brother, younger brother, elder sister, younger sister, sister in -law , elder or younger
brother's wife, brother in –law, sister in –law, husband of elder sister, uncle, aunt,
maternal uncle, maternal aunt, son, daughter, daughter in –law, grandson,
granddaughter, granddaughter-in law or son in law.
On the basis of above legal provision maternal uncle's son does not contain under the
definition of close relative, therefore, Miss Sita is not disqualified to be appointed as
director of XYZ Trading Ltd.
Consequences
Section 112 further states that the auditor shall, prior to his/her appointment, give
information in writing to the company that he/she is not disqualified. Where any
auditor becomes disqualified to audit the accounts of a company or there arises a
situation where he/she becomes disqualified for appointment or can no longer
continue to act as an auditor of the company, he/she shall immediately stop
performing audit which is required to be performed or is being performed by auditor
who has been appointed in contravention of this section shall be invalid. Under
Section 160(K) an auditor who knowingly carries out auditing of the concerned
company even after that he/she is not qualified to carry out auditing of any company;
shall be punished with a fine from twenty thousand to fifty thousand rupees or with
imprisonment for a term not exceeding two years or with both punishment.

a) Where shall the arbitrator locate his/her office as per the provision of the act? 4
b) Explain in details the unauthorized withdrawals or payments under Banking
Offence and Punishment Act, 2064. 3
c) Bank and financial institutions can remit convertible foreign exchange directly for
their certain payments under Foreign Exchange (Regulation) Act, 2019 without the
approval from Nepal Rastra Bank. What are these payments?
3
Answer:
(a) Section 12 of the Arbitration Act, 2055 has authorized to location of the arbitrator at
the following place:
 At the place as specified in the agreement, if any.
 If the agreement does not specify the location of the arbitrators office, at the place
selected by the concerned parties.
 In case the concerned parties do not select such place within 15 days from the date of
appointment of the arbitrator, or in case the concerned parties fail to reach an
agreement in that connection, at the place specified by the arbitrator in the light of all
the relevant circumstances
 The arbitrators may except when any other arrangement has been made by the
concerned parties, designate through mutual consultations the location of their office
at any other appropriate place which is convenient for them to record the statements
of witnesses, obtain the opinion of experts, and inspect any document, object or
place.
(b) Section 5 of Banking Offense and Punishment Act, 2064 has provided the various
provisions for the unauthorized withdrawals or payments as follows:
When withdrawing or making payment from an account maintained with a bank or

financial institution, no one shall;
 Withdraw money, in an unauthorized manner, from other person's account,
 Withdraw money by stealing a cheque held by other person or by obtaining the same
in any other manner,
 Transfer fund in an unauthorized manner, from customer's account or make
unauthorized payment therefrom,
 Obtain or make cash payment by getting any sort of fake or other person's bills of
exchange, cheque, draft or other similar instruments in an unauthorized manner.
(c) Bank and financial institutions can remit the following payments directly to the
concerned parties without the permission from the Nepal Rastra Bank,
however these activities must be related with the banks and financial
institutions themselves:
1. Payment made for the procurement of books and newspapers for their own
purpose.
2. Annual membership fee where the bank or financial institution is associated with
the organization.
3. Payment of training or participation fee to the organization who organized these
activities and where there is the participation from the bank or financial
institutions.
4. Payment of international communication fee including SWIFT fee for their own
purpose.
5. Payment of service charges to obtain Business Creditability Information
internationally.
6. While making the payment bank and financial institution should kept all invoices
and supports documents for their reference to ensure the payment is genuine.
Management Information and Control System
Maximum Marks - 100

Marks
1. ABC Company Ltd. is developing the information system to track the record of
sales of various types of electronics items that they manufacture. Their products
are being sold in almost all countries of Asia. Answer the following questions
assuming that your team is assigned for the system development:
a) Which approach of the system development will you adopt? 10
b) How will you integrate the Sales Information System with the Sales Force
Automation System? 10
Answer:
a) The system analysis and design is all about clearly identifying the functional needs of
client and identifying the means to achieve those requirements. However, people cannot
reveal all their functional needs at once. The iterative process helps them to identify their
needs properly once they see the product. Therefore the spiral model of the system
development will be adopted here. It will help ABC company to identify their needs
seeing the prototype in various stages of iteration. Spiral Model of System Development is
a continuous process of development, which is combination of elements of both design
and prototyping-in-stages, in an effort to combine advantages of top-down and bottom-up
concepts.
Four main stages of Spiral Model of system development are:
1. Determine objective, alternatives and constraints
2. Evaluate alternatives, identify and resolve risks
3. Develop and verify next level
4. Plan for next phase
This model of development combines the features of the prototyping model and the
waterfall model. This involves the continuous process of system development. As it
combines the prototype and waterfall model most of the activity would be covered.
Here the stages of determining actual objectives of system: which is used to know the
requirements that might be Business Requirement Specifications (BRS) and System
Requirement Specifications (SRS). The requirements are listed taking feedbacks from
the executives, sales manager and sales agent of the ABC Company Ltd. Based upon
the SRS and BRS the alternatives designs will be proposed. The development team
will be in constant touch with the above stakeholders of the ABC Company Ltd.
The second stage will be the evaluation of alternatives, risk analysis, resolving risk
and identifying the best alternative. Risks are possible conditions and events that
prevent development team from achieving its goals. The primary task for the
development team is to enumerate all the possible risks and prioritize them according
to importance. The next step is to determine the potential strategies that can help to
overcome the risks. Evaluation of these parameters can cause changes at the next
steps.
Third stage will be the development of the first prototype. This is the stage where
planned product is developed along with further testing. During the first spiral, the
overall requirements are not so clear, so-called Proof Of Concept (POC) is created to
get the customer‘s feedback. In subsequent spiral, the final product will be developed
accordingly.
And the fourth stage is the phase of evaluation of the output of the existing spiral. This
phase allows evaluating the output of the online system to date before the project
continues to the next spiral.
Determine objective, Evaluate Alternatives,

Alternatives and Constraints Identify and Resolve
Risks
P1 P2 P3
Plan for next phase Develop and Verify next

level
Note: P1: Prototype 1, P2: Prototype 2, Prototype 3

Figure: Spiral Model
b) Sales information system is normally used in marketing and sales management system. This
system starts from the points of sale of a product and finish after sending the invoice to the
customer. Sales information system is all about the record keeping of the products and
services sold to the customer. It contains the information related with the product sold,
geographical areas, period, and types of customer etc. Thus for the ABC Company, the sales
information system will provide customer data according to their needs. These data can
further be used to generate analytical information. e.g. trend and patterns of the sales
according to geography, demography, period etc. Moreover, behavioral analysis of the
customer can also be made based upon the history of the purchase by the customer.
A Sales Force Automation System (SFA), typically a part of ABC company‘s Customer
Relationship Management system, is a system that automatically records all the stages in a
sales process. SFA includes a contact management system which tracks all contact that has
been made with a given customer, the purpose of the contact, and any follow up that might be
required. This ensures that sales efforts are not duplicated, reducing the risk of irritating
customers. SFA also includes a sales lead tracking system, which lists potential customers
through paid phone lists, or customers of related products. Other elements of an SFA system
can include sales forecasting, order management and product knowledge. More developed
SFA systems have features where customers can actually model the product to meet their
required needs through online product building systems.
Thus, the output of the sales information system will be the input data for the sales force
automation. The analytical information of the customer and their behavior will be highly
useful to concentrate on the probable sales and resulting the increment of the revenue.
Moreover, based on the sales information, the potential customer identification can be done,
which will be the good information for the push sale.
2. Suppose that a retail store wants to build an e-commerce website to sell its
products online and you are given the responsibility to develop this website. Based
on this scenario, answer the following questions:
a) How do you find the requirements to develop this website? Discuss any one
requirements finding technique in detail. (2+5=7)
b) Why do we need online payment systems? Discuss any three payment systems
that are suitable for this website. (2.5+4.5=7)
c) Discuss high availability planning to continue the operations of this website. 6
Answer:
a) To develop a website, we first must be able to correctly identify, analyze, and understand
what the users‘ requirements are or what the user wants the system to do. To know users‘
requirements, we use information gathering techniques. Information gathering techniques
are also called requirements discovery techniques or fact finding techniques or data
collection techniques. Information gathering includes those techniques to be used by
system analysts to identify or extract system problems and solution requirements from the
user community. Systems analysts need an organized method for information gathering.
Interview is one of the most important information gathering techniques used in
information system development.
The personal interview is generally recognized as the most often used fact-finding
technique. Interviews are the fact-finding techniques whereby the systems analysts collect
information from individuals through face-to-face interaction.
There are two roles assumed in an interview. The systems analyst is the interviewer,
responsible for organizing and conducting the interview. The system user or system owner
is the interviewee, who is asked to respond to a series of questions.
There are two types of interviews: unstructured and structured. Unstructured interviews
are conducted with only a general goal or subject in mind and with few, if any, specific
questions. Structured interviews on the other hand are conducted with a set of specific
questions to ask the interviewee.
There are two types of questions in interview: open-ended and closed-ended. Open-
ended questions allow the interviewee to respond in any way that seems appropriate. But,
closed-ended questions restrict answers to either specific choices or short, direct
responses.
b) First Part: The emergence of e-commerce has created new financial needs that in some
cases cannot be effectively fulfilled by traditional payment systems. E-commerce payment
systems make it easy and smooth for customers to pay while buying online. Offering
online payments does not need to be a worry or expensive: numerous payment service
providers now offer comprehensive, cost-effective and easy-to-implement outsourced
solutions to get your business accepting online payments quickly. E-commerce technology
offers a number of possibilities for creating new payment systems that substitute for
existing systems, as well as for creating enhancements to existing systems.
Second Part: The most common online payment systems are online credit card payment,
digital wallet and digital cash.
 Online credit card payment: It is the dominant form of online payment system. This
payment system is processed in much the same way that in-store purchases are, with the
major differences being that online merchants never see the actual credit card being used,
no card impression is taken, and no signature is available. These types of purchases are
also called CNP (Cardholder Not Present) transactions. These payments most closely
resemble MOTO (Mail Order-Telephone Order) transactions. There are five parties
involved in an online credit card purchase: consumer, merchant, clearing house, merchant
bank (sometimes also called the ―acquiring bank‖), and the consumer‘s card issuing bank.
In order to accept payments, online merchants must have a merchant account established
with a bank or financial institution. A merchant account is simply a bank account that
allows companies to process credit card payments and receive funds from those
transactions.
 Digital Wallets: Digital wallets (sometimes called e-wallets) are small electronic packages
that automatically supply information such as credit card numbers and shipping addresses
for use in conducting e-commerce transactions. They provide a means by which customers
may order products and services online without ever entering sensitive information and
submitting it via e-mail or the World Wide Web, where it is vulnerable to theft by hackers
and other cyber-criminals. They allow consumers to make online purchases easily and
securely. Traditionally, digital wallets were stored on the desktops of personal computers;
new digital wallets are compatible with wireless and other mobile devices, and are more
often stored on a central server owned by a digital wallet vendor or Internet Service
Provider (ISP). Digital wallet vendors maintain relationships with online merchants.
 Digital Cash: Digital cash (e-cash) is an alternate payment system developed for e-
commerce in which unique, authenticated tokens representing cash value are transmitted
from consumers to merchants. Banks issue digital tokens (unique encrypted numbers) for
various dimensions of cash, and consumers can spend these at merchants‘ site. Merchants
in turn deposit these electronic tokens in banks some examples are DigiCash, First Virtual,
and Millicent.
c) Firms using online transaction processing (transactions entered online are immediately
processed by the computer) have traditionally used fault-tolerant computer systems to
ensure 100 percent availability. Fault-tolerant computer systems contain redundant
hardware, software, and power supply components that create an environment that
provides continuous, uninterrupted services. These systems completely eliminate the need
of recovery from crash.
High-availability computing includes tools and technologies, including backup hardware
resources, to enable a system to recover quickly from crash. High-availability computing
requires an assortment of tools and technologies to ensure maximum performance of
computer systems and networks, including redundant servers, mirroring, load balancing,
clustering, storage area networks, and a good disaster recovery plan.
Disaster recovery plan is the plan for the restoration of computing and communication
services after they have been disrupted by an event such as an earthquake, flood, or
terrorist attack. Load balancing distributes large number of requests for access among
multiple servers so that no single device is overwhelmed. Mirroring uses a backup server
that duplicates all the processes and transactions of the primary server. If primary server
fails, the backup server can immediately take its place without any interruption in service.
Clustering links two computers together so that the second computer can act as backup to
primary computer. If the primary computer fails, the second computer picks up its
processing without any pause in the system.
Many companies lack the resources to provide a high-availability computing environment
on their own. In this case, management service providers (MSPs) provide network,
systems, storage, and security management for subscribing clients.
3.
a) What do you mean by Expert System? Explain it with applications and its
benefits. (2+3+3=8)
b) Why is IT strategy planning important in modern organization? Explain. 7
Answer:
a) Using an expert system involves an interactive computer-based session in which the
solution to a problem is explored, with the expert system acting as a consultant to an end
user. The expert system asks questions of the user, searches its knowledge base for facts
and rules or other knowledge, explains its reasoning process when asked, and gives expert
advice to the user in the subject area being explored.
Expert systems are being used for many different types of applications, and the variety of
applications is expected to continue to increase. It should be realized, however, that expert
systems typically accomplish one or more generic uses. Expert systems are being used in
many different fields, including medicine, engineering, the physical sciences, and
business. Expert systems now help diagnose illnesses, search for minerals, analyze
compounds, recommend repairs, and do financial planning. So from a strategic businesses
and point, expert systems can be and are being used to improve every step of the product
cycle of a business, from finding customers to shipping products to providing customer
service.
Benefits of Expert Systems

An expert system captures the expertise of an expert or group of experts in a computer-
based information system. Thus, it can outperform a single human expert in many
problem situations. That's because an expert system is faster and more consistent, can
have the knowledge of several experts, and does not get tired or distracted by overwork or
stress. Expert systems also help preserve and reproduce the knowledge of experts. They
allow a company to preserve the expertise of an expert before she leaves the organization.
This expertise can then be shared by reproducing the software and knowledge base of the
expert system.
b) A plan is a predetermined course of action to be taken in the future. It is a document containing the
details of how the action will be executed, and it is made against a time scale. The goats and the
objectives that a plan is supposed to achieve are the pre-requisites of plan. The setting of the goals
and the objectives is the primary task of the Management without which planning cannot begin.
Planning involves a chain of decisions, one dependent on the other, since it deals with a long term
period. A successful implementation of a plan means the execution of these decisions in a right
manner one after another.
Planning, in terms of future, can be long-range or short-range. Long-range planning is for a period
of five years or more, while short-range planning is for one year at the most. The long-range
planning is more concerned about the business as a whole, and deals with subjects like the growth
and the rate of growth, the direction of business, establishing some position in the business world
by way of a corporate image, a business share and so on. On the other hand, short-range planning
is more concerned with the attainment of the business results of the year. It could also be in terms
of action by certain business tasks, such as launching of a new product, starting a manufacturing
facility, completing the project, achieving intermediate milestones on the way to the attainment of
goals. The goals relate to long-term planning and the objectives relate to the short-term planning.
There is a hierarchy of objectives which together take the company to the attainment of goals. The
plans, therefore, relate to the objectives when they are short-range and to goals when they are the
long-range.
Long-range planning deals with resource selection, its acquisition and allocation. It deals with the
technology and not with the methods or the procedures. It talks about the strategy of achieving the
goals. The right strategy improves the chances of success tremendously. At the same time, a
wrong strategy means a failure in achieving the goals.
Corporate business planning deals with the corporate business goals and objectives. The business
may be a manufacturing or a service; it may deal with the industry or trade; may operate in a
public or a private sector; may be national or international business. Corporate business planning
is a necessity in all cases. Though the corporate business planning deals with a company, its
universe is beyond the company. The corporate business plan considers the world trends in the
business, the industry, the technology, the international markets, the national priorities, the
competitors, the business plans, the corporate strengths and the weaknesses for preparing a
corporate plan. Planning, therefore, is a complex exercise of steering the company through the
complexities, the difficulties, the inhibitions and the uncertainties towards the attainment of goals
and objectives.
4.
a) Define digital signature and digital certificate. What are the differences
between them? (2.5+2.5+3=8)
b) What do you understand by server virtualization? How can a growing business
organization benefit by using virtualization in its computerized information
system? (2+5=7)
Answer:
a) A digital signature is a method that can be used to verify the authenticity of a digital
document. Typically, a digital signature system uses three algorithms. To generate a
public key/ private key pair, it uses a key generation algorithm. It also uses a signing
algorithm, which generates a signature when given a private key and a message.
Furthermore, it uses a signature verifying algorithm to verify a given message, a signature
and the public key. So in this system, signature generated using the message and the
private key combined with the public key, is used to verify whether that the message is
authentic. Furthermore, it is impossible to generate the signature without having the
private key due to the computational complexity. Digital signatures are mainly applied for
the verification of authenticity, integrity and non-repudiation.
A digital certificate is a certificate issued by a CA (Certificate Authority) to verify the
identity of the certificate holder. It actually uses a digital signature to attach a public key
with a particular individual or an entity. Typically, a digital certificate contains the
following information: a serial number that is used to uniquely identify a certificate, the
individual or the entity identified by the certificate and the algorithm that is used to create
the signature. Furthermore, it contains the CA that verifies the information in the
certificate, date that the certificate is valid from and the date that the certificate expires. It
also contains the public key and the thumbprint (to make sure that the certificate itself is
not modified). Digital certificates are widely used on websites based on HTTPS (such as
E-commerce sites) to make the users feel safe in interacting with the website.
A digital signature is a mechanism that is used to verify that a particular digital document
or a message is authentic (i.e. it is used to verify that the information is not tampered)
whereas digital certificates are typically used in websites to increase their trustworthiness
to its users. When digital certificates are used, the assurance is mainly dependent on the
assurance provided by the CA. But it is possible that the content of such a certified site
could be tampered by a hacker. With digital signatures, the receiver can verify that the
information is not modified.
b) Server virtualization is a process of masking the physical computing resources of a server

or computing device. It can subdivide a single set of machine into multiple logical units
that can operate independently in terms of operating system, applications, network identity
and services. Virtualization technique can also enable combination of more than one set of
computing resources to form a large logical entity which can be allocated in different sizes
and slices to different users, applications or services.
To enable such management and scalable allocation of computing resources, virtualization
uses a middle layer virtualization enabler or software that sits between the hardware and
the operating systems. It also allows a single hardware entity to host multiple operating
systems or logical computing devices.
The major benefits of virtualization for a business organization are:
 Efficient utilization of resources.

 Better management as a single virtual environment and set of physical resources can
be used to create and manage multiple logical entities.
 Economical for a growing organization as it can start multiple services on a single
physical entity.
 As the organization grows, the virtualization based system allows addition of
resources such as CPU, memory, storage or even additional server machines later on
without disrupting the existing operating system or applications and services.
 It enables management of multiple instances through a single management console. As
a result, a growing enterprise can manage the IT system using minimum number of
dedicated human resource.
 For a business organization, it is always easier to manage a small number of devices
compared to a large number of computers with each running on a different machine
with different operating system and physical set of resources. It is efficient for
manpower allocation as well as getting external support from vendors or service
providers.
5.
a) Assume you are the information system auditor of a large trading house. How
would you ensure the system security and transaction security? (4+4=8)
b) What are the essential parameters to be considered while designing the output
of an information system? 7
Answer:
a) As the system auditor, I shall verify and carry out the following to ensure system
security:
i. Platform security in terms of hardware robustness and up-to-date software.
ii. Proper and timely patching, updating, bug-fixing of the software.
iii. Well-defined access policies and roles for both end-users and administrators.
iv. Clear security guidelines for end users and system administrators.
v. Mechanism to ensure high availability for both system and network.
Similarly, to ensure the transaction security, I shall verify and carry out the following
activities:
i. Recommend and enforce secure transaction modes such as those using encryption.
ii. By enforcing proper filtering and analytical arrangements to ensure that the data
being transacted are safe.
iii. Enacting security alert and alarm mechanism for both the system administrators
and end users in case of any breach or malpractice.
iv. Making sure that the system has necessary log record of each and every transaction
happening in the system. This log is of high importance in case of any fraud or loss
of data.
b) The essential parameters to be considered while designing the output of a

system are as follows:
 Content
 Timeliness
 Format
 Media
 Form
 Volume
Content:
It refers to the actual information to be given to the user of the system. The content should
be according to the hierarchical user of management. The content should be very precise
and free of unessential information.
Timeliness:
Information arrived after the required time has no use. So time is very essential factor of
output. It is related with the time/interval at which the required information to be
dissipated to the user.
Format:
It is the arrangement of information on the report. The tabular or graphical is some
example of presenting information to the user.
Media:
It refers to the actual physical accessories at which the output information is presented.
For the output design the media are the monitor, printed documents, tapes.
Form:
Form in output design is related with way the information is presented. Sometime people
may confuse with the format. Format may be the voice, video or text by which the
information is dissipated.
Volume:
6. Write short notes on: (53=15)

a) Customer Relationship Management
b) Fuzzy logic
c) Object-oriented development
d) Computer frauds
e) Social media
Answer:
a) Customer Relationship Management
Customer Relationship Management (CRM) systems help firms in managing their
relationships with their customers. CRM systems provide information to coordinate all
of the business processes that deal with customers in sales, marketing, and service to
optimize revenue, customer satisfaction, and customer retention. CRM systems
provide information to help firms identify, attract, and retain the most profitable
customers; provide better service to existing customers; and increase sales. CRM
systems consolidate and integrate customer information from multiple communication
channels – telephone, e-mail, wireless devices, retail outlets, or the Web. Detailed and
accurate knowledge of customers and their preferences helps firms increase the
effectiveness of their marketing campaigns and provide higher-quality customer
service and support.
b) Fuzzy logic
Fuzzy logic is a form of many-valued logic in which the truth values of variables may
be any real number between 0 and 1. It is employed to handle the concept of partial
truth, where the truth value may range between completely true and completely false.
By contrast, in Boolean logic, the truth values of variables may only be the integer
values 0 or 1. Furthermore, when linguistic variables are used, these degrees may be
managed by specific (membership) functions. Fuzzy logic has been applied to many
fields, from control theory to artificial intelligence.
Fuzzy logic has two different meanings. In a narrow sense, fuzzy logic is a logical
system, which is an extension of multi-valued logic. However, in a wider sense fuzzy
logic is almost synonymous with the theory of fuzzy sets, a theory which relates to
classes of objects with unsharp boundaries in which membership is a matter of degree.
Some general observations about fuzzy logic are:
 Fuzzy logic is conceptually easy to understand – The mathematical concepts
behind fuzzy reasoning are very simple. Fuzzy logic is a more intuitive approach
without the far-reaching complexity.
 Fuzzy logic is flexible – With any given system, it is easy to layer on more
functionality without starting again from scratch.
 Fuzzy logic is tolerant of imprecise data – Everything is imprecise if you look
closely enough, but more than that, most things are imprecise even on careful
inspection. Fuzzy reasoning builds this understanding into the process rather than
tacking it onto the end.
 Fuzzy logic can model nonlinear functions of arbitrary complexity – a Fuzzy
system can be created to match any set of input-output data. This process is made
particularly easy by adaptive techniques like Adaptive Neuro-Fuzzy Inference
Systems (ANFIS), which are available in Fuzzy Logic Toolbox software.
 Fuzzy logic can be built on top of the experience of experts – In direct contrast to
neural networks, which take training data and generate opaque, impenetrable
models, fuzzy logic lets user rely on the experience of people who already
understand the system.
 Fuzzy logic can be blended with conventional control techniques – Fuzzy systems
don't necessarily replace conventional control methods. In many cases fuzzy
systems augment them and simplify their implementation.
 Fuzzy logic is based on natural language – The basis for fuzzy logic is the basis for
human communication. This observation underpins many of the other statements
about fuzzy logic. Because fuzzy logic is built on the structures of qualitative
description used in everyday language, fuzzy logic is easy to use.
c) Object-oriented development
Object-oriented development follows system development approach that uses the
object as the basic unit of systems analysis and design. An object is the combination of
data and the actions or processes that can be performed on the data into a single object.
In this approach, the system is modeled as a collection of objects and the relationships
between them.
Object-oriented modeling is based on the concepts of class and inheritance. Objects
belonging to a certain class have the features of that class. Classes of objects in turn
can inherit all the structure and behaviors of a more general class and then add
variables and behaviors unique to each object. New classes of objects are created by
choosing an existing class and specifying how the new class differs from the existing
class, instead of starting from scratch each time.
The phases of object-oriented development are similar to those of conventional
systems development, consisting of analysis, design, and implementation. However,
object-oriented development is more iterative and incremental than traditional
structured development.
During analysis, systems builders document the functional requirements of the system,
specifying its most important properties and what the proposed system must do;
Interactions between the system and its users are analyzed to identify objects, which
include both data and processes.
The object-oriented design phase describes how the objects will behave and how they
will interact with one other; Similar objects are grouped together to form a class, and
classes are grouped into hierarchies in which a subclass inherits the attributes and
methods from its superclass.
The information system is implemented by translating the design into program code,
reusing classes that are already available in a library and adding new ones;
Implementation may also involve the creation of an object-oriented database. The
resulting system must be thoroughly tested and evaluated.
Because objects are reusable, object-oriented development could potentially reduce the
time and cost of writing software because organizations can reuse software objects that
have already been created as building blocks for other applications.
d) Computer frauds
Computer fraud is defined as any act using computers, the Internet, Internet devices,
and Internet services to defraud people, companies, or government agencies of money,
revenue, or Internet access. There are many methods used to perform these illegal
activities. Phishing, social engineering, viruses, and DDoS (Distributed Denial of
Service) attacks are fairly well known tactics used to disrupt service or gain access to
another's funds, but this list is not inclusive.
Some examples of computer fraud are:
 Theft of data
 Inappropriate use of data
 Destruction from viruses and similar attacks
 Damage to computer resources
e) Social media
Social media is the platform that facilitates interaction among people in virtual
communities where they can share information and ideas. People access these virtual
communities via platforms, apps, and websites that facilitate user interaction.
Examples include Twitter, Facebook, and LinkedIn.
The sharing and advancement of personal information over a virtual platform allows
people to remain in contact, even if they are not physically close to each other. The
spread and advancement of mobile technology has allowed people to stay regularly
connected to their social networks. By embracing social media, many companies have
been able to connect with their customers and the market on a more personal basis,
increasing the rate of growth of B2C (Business to Consumer). This can be done in the
form of special coupons, promotional videos, etc. Social media has also facilitated the
growth of C2C (Consumer-to-Consumer) e-commerce. Laws and customs regarding
privacy and ownership of material posted on social media websites are developing.
Advanced Taxation
Maximum Marks - 100
Marks
Attempt all questions. Working notes should form part of the answer.
1. Texture Cement Limited is a company engaged in manufacturing and sale of premium grade
cement and it provides employment opportunity to 1,300 people. The company is listed in
Nepal Stock Exchange and it has domestic as well as export sales. Also, the company has 50
foreign employees out of total employment. Following is the provisional Income Statement
of the company for the year ended Ashadh 31, 2074.
Particulars Amount in NPR
Income:
Export Sales 6,000,000
Domestic Sales 4,000,000
Dividend Received (Net of Tax) 150,000
Rent Income (Related with Business) 50,000
Total Income 10,200,000
Expenditure:
Cost of Materials Consumed 3,000,000
Manufacturing Expenses 500,000
Employee Cost 1,000,000
Selling and Administrative Expenses 1,500,000
Interest and Bank Charges 500,000
Exchange Loss 250,000
Loss on Sale of Assets 300,000
Total Expenditure 7,050,000
Operating Profit 3,150,000
Less: Provision for Bonus 300,000
Profit Before Tax 2,850,000
Additional information:
a) Cost of material consumed
For export sales : NPR 1,800,000
For local sales : NPR 1,200,000
b) Exchange loss includes NPR 100,000 against revaluation of creditors at the year-end.
c) Selling and Administrative Expenses include NPR 700,000 donation given to Prime
Minister Disaster Relief Fund and NPR 300,000 given for construction of school.
d) Out of total provision for bonus, NPR 200,000 was distributed to the employees till the
time of filing of income tax return. It has been decided by the management not to pay
the undistributed portion.
e) You are given following information with regards to some expenses.
i) NPR 50,000 included in employee cost as staff welfare is personal expenses

of directors.
ii) Manufacturing expenses include NPR 30,000 for electricity bill of previous
year.
iii) Selling and Administrative Expenses include NPR 10,000 for business
promotion which is not related to business.
f) Income Tax Authority made the reassessment for the Income Year 2072/73 and
reassessed the tax payable amounting to NPR 900,000. Out of this amount the
Company accepted to pay NPR 300,000 and decided to go for appeal for NPR 600,000.
The disputed amount includes NPR 300,000 penalty.
g) The management of Company is very strong and legal team is suggesting that the
reassessed amount is challengeable as it has valid legal ground to defend. If needed,
the company is willing to resort to higher judicial authority to challenge the reassessed
figure.
Based on the above information, 20
i) Compute taxable income and tax liability of the company segregating income from
domestic sale and export sale. Apportion common cost on the basis of cost of material
consumed.
ii) With respect to reassessment order issued by Tax Authority pertaining to Income Year
2072/73, the Company seeks your advice on the recourses that can be taken.
Answers:
As per section 11 of Income Tax Act, 2058 below are the exemptions available to Texture
Cement Limited being a Special Industry –
i. The Company employs more than 1,200 Nepali employees whole year. So, it is entitled for
20% tax rebate as per section 11(3)(Ka) for employing 1,200 or more Nepali Employees
ii. The Company has export sales. So, 25% tax rebate for export Income only as per section
11(3)(3anga).
iii. The Company is a listed production based Company. Hence, it is entitled to 10% rebate as per
section 11(3)(3chha).
Selection of Tax Exemption
As per section 11(5), if more than one tax exemption is available for the same income, then only
one tax exemption should be availed as per choice of the Taxpayer.
Hence, the Company should choose one of the exemptions mentioned below:
Exemption Rebate on Export Rebate on Domestic Income
Income
20% tax rebate as per section 11(3)(Ka) for 20% 20%
employing 1,200 or more Nepali Employees
25% tax rebate for export Income only as 25% 0%
per section 11(3)(3anga)
10% rebate as per section 11(3)(3chha) for 10% 10%
being a listed production based Company
Selection of Exemption (highest rebate 25% tax rebate for 20% tax rebate as per
exemption for particular Income) export Income section 11(3)(Ka) for
only as per section employing 1,200 or more
11(3)(3anga) Nepali Employees
Computation of Taxable Income and Tax Liability of Texture Cement Limited for the year ended
Ashadh 31, 2074
Particulars Export Domestic Total(Rs.) Remarks
Income(Rs.) Income(Rs.)
Income From Business
Export Sales 60,00,000 - 60,00,000
Domestic Sales - 40,00,000 40,00,000
Dividend - - - Final Withholding
Tax
Rent Income - 50,000 50,000
Total Income 60,00,000 40,50,000 1,00,50,000
Allowable Expenses:
Cost of Material Consumed 18,00,000 12,00,000 30,00,000 Working Note 1
Manufacturing Expenses 2,82,000 1,88,000 4,70,000 Working Note 2
Employee Cost 5,70,000 3,80,000 9,50,000 Working Note 3
Selling and Administrative 7,14,000 4,76,000 11,90,000 Working Note 4
Expenses
Interest and Bank Charges 3,00,000 2,00,000 5,00,000
Exchange Loss 90,000 60,000 1,50,000 Working Note 5
Loss on Sale of Assets - - - Working Note 6
Provision for Bonus 1,20,000 80,000 2,00,000 Working Note 7
Total Allowable Expenses 38,76,000 25,84,000 64,60,000
Net taxable Income 21,24,000 14,66,000 35,90,000
Income Tax @ 20% being 424,800 293,200 718,000
Special Industry
25% tax rebate for export 106,200 - 106,200
Income only as per section
11(3)(3anga)
20% tax rebate for Domestic - 58,640 58,640
Income as per section
11(3)(Ka) for employing more
than 1,200 Nepali Employees
Net Tax Liability 318,600 234,560 5,53,160
Working Notes
1. Common Costs Allocation ratio for Export and Local Income
Cost of Material Consumed for Export Sales 18,00,000 (60% of Total Cost)
Cost of Material Consumed for Local Sales 12,00,000 (40% of Total Cost)
Total 30,00,000
2. Manufacturing Expenses
Particulars Amount
Manufacturing Expenses as per Income Statement 5,00,000
Less : Prior Period Electricity Expenses not allowed 30,000
Net Allowable Manufacturing Expenses 4,70,000
Manufacturing Expenses for Export Income – 60% of Total Expenses 2,82,000
Manufacturing Expenses for Domestic Income – 40% of Total Expenses 1,88,000
3. Employee Cost
Particulars Amount
Employee Cost as per Income Statement 10,00,000
Less : Personal expenses of directors not allowed 50,000
Net Allowable Employee Cost 9,50,000
Employee Cost for Export Income – 60% of Total Expenses 5,70,000
Employee Cost for Domestic Income – 40% of Total Expenses 3,80,000
4. Selling and Administrative Expenses
Particulars Amount
Selling and Administrative Expenses as per Income Statement 15,00,000
Less : Donation given to School not allowed 300,000
Less : Business promotion Expenses not related to business 10,000
Net Allowable Selling and Administrative Expenses 11,90,000
Selling and Administrative Expenses for Export Income – 60% of Total 7,14,000
Expenses
Selling and Administrative Expenses for Domestic Income – 40% of 4,76,000
Total Expenses
Donation given to Prime Minister Disaster Relief Fund is
allowable.[Sec 12 (Kha)]
5. Exchange Loss
Particulars Amount
Exchange Loss as per Income Statement 2,50,000
Less : Exchange Loss on revaluation of creditors(unrealized, not all) 1,00,000
Net Allowable Exchange Loss 1,50,000
Exchange Loss for Export Income – 60% of Total Expenses 90,000
Exchange Loss for Domestic Income – 40% of Total Expenses 60,000
6. Loss on sale of Assets
As per Income Tax 2058, the realized value of sold assets shall be adjusted in the
depreciation base amount of respective group of assets Schedule 2 Section 2(3)]. It is
assumed that the total realized value has been adjusted accordingly and hence loss on
sale of assets has not been claimed as expenses.
7. Provision for Bonus
Particulars Amount
Provision for Bonus as per Income Statement 3,00,000
Less : Undistributed Bonus 1,00,000
Net Allowable Bonus 2,00,000
Bonus for Export Income – 60% of Total Expenses 1,20,000
Bonus for Domestic Income – 40% of Total Expenses 80,000
ii.
The Company has the following recourses.
- If the Company is not satisfied with the reassessment made by Tax Authority it can apply for
administrative appeal to Director General (DG) of Inland Revenue Department (IRD) within thirty
days from the receipt of reassessment order.
- If, the Company has valid reasons for not submitting its appeal within 30 days, it can apply within
seven days of the expiry date of 30 days for extension and IRD can extend further 30 days period.
- The Company has to pay the undisputed amount and make the payment as deposit of one third of
disputed amount (including penalty) before making appeal to DG. In this case, the company has to
pay NPR 200,000 (1/3rd of NPR 600,000).
- The Company has further recourse that if the notice of decision is not made by DG within 60 days
from the date of application it shall be deemed that the application is not accepted, and it can apply
to Revenue Tribunal as per Revenue Tribunal Act, 2031 notifying the DG of IRD. A copy of application
filed to Revenue Tribunal shall have to be gives to DG within fifteen days. Further, if the taxpayer is
not satisfied with the decision of DG it can apply to Revenue Tribunal as per Revenue Tribunal Act.
- As per Section 9 of Revenue Tribunal Act, fifty percent of tax payable i.e. fifty percent of NPR
300,000 = NPR 150,000 and hundred percent of penalty i.e. NPR 300,000 has to be paid as deposit
before making application to Revenue Tribunal.
2.
a) SAPROS Nepal is registered with Kathmandu District Office and has taken approval from
Inland Revenue Department as tax exempt entity. The entity has earned following
income for the income year 2073/74: 7
Amount NRs.
a. Interest on deposit received from Rastriya Banijaya 250,000
Bank Ltd.
b. Membership fee received from members 150,000
c. Amount received from the canteen operated in 320,000
Kathmandu
d. Motor Bike received from Mr. Ram Shrestha as a gift. (Market value of
Motor Bike is
NPR 25,000)
e. Rent received from let out ground floor 360,000

f. Amount received from sale of old newspapers 45,000
g. Grant received from GON 800,000
h. Interest received from other than bank 250,000
Calculate the total tax liability of SAPROS Nepal for the income year 2073/74 and
describe which income is exempt from income tax as per Income Tax Act 2058.
b) Nepal Tech Ltd. is established as a wholly owned subsidiary of India Tech Ltd. which is
50% subsidiary of UK Tech Ltd. The following particulars are furnished for your
information:
Nepal Tech Ltd. had a turnover of Rs.50 million, which included Rs.20 million
from India Tech Ltd., Rs.20 million from UK Tech Ltd. and Rs.10 million from
other third parties. Nepal Tech Ltd. was charging Rs.1,000 per hour to India Tech
Ltd. and at an equivalent of Rs.2000 per hour to UK Tech Ltd. It was charging
third parties at the rate of Rs.1,500 per hour.
Nepal Tech Ltd.'s summarized Balance Sheet as at 31.3.2074 is as follows:
Million Million Rs.
Rs.
Share Capital 1.00 Assets after Depreciation 2.00
Loan from UK Tech Ltd. 20.00 Work in progress 20.00
Profit & Loss A/c 5.00 Bank 4.00
26.00 26.00
Profit & Loss Account and Balance Sheet items shown above is after deduction of office
expenses, depreciation amounting to Rs. 0.30 million and interest on loan amounting to
Rs. 4 million.
Determine the taxable income of Nepal Tech Ltd. according to the provisions of Income
Tax Act, 2058.7
c) Cream Pvt. Ltd. declared staff bonus of NPR 1,000,000 out of its profit of Income Year
2072/73 as per Bonus Act, 2030. The declared amount of bonus is charged to profit and
loss account of the company and the same is claimed as deduction of expenses as per
Income Tax Act, 2058. Such declared amount of bonus has been distributed to the staff
in the Income Year 2073/74 as per Bonus Act, 2030. After distribution of bonus as per
Bonus Act, 2030, the amount remained undistributed to staff was NPR 300,000. Now,
Tax Officer made the rapid assessment of Income Year 2073/74 and demanded to
include the undistributed portion of NPR 300,000 in the income of Income Year
2073/74. Based on facts available, answer the followings quoting the relevant
provisions and circulars, if any.
i) Whether the inclusion of NPR 300,000 in income of Income Year 2073/74 by Tax
Officer is correct?
ii) What will be your answer if the company is public institution wherein the pre-
approval of Nepal Government for distribution of bonus is required as per statute
and the approval provided was in Ashadh 31, 2073?
iii) If, out of NPR 300,000, NPR 90,000 has been deposited in National Level Welfare
Fund, what will be your answer? 6
Answer: 2(a)
Amount derived by a tax-exempt organization in the form of:
 Donation
 Gift, and/ or
 A contribution that is related directly to the objective of the organization with or without
consideration is exempt from income tax.
Contribution that relates directly to the objectives has not been defined and clarified
anywhere in the Act. But as per generally accepted interpretation, this contribution may
include:
 Membership fee
 Advertisement charge for the publication of a souvenir being published by the
organization.
 Fee for participation in a program run by the organization.
 Entrance fee for any program run by the organization.
The income derived by a tax-exempt organization other than a gift, donation or contribution is
taxable in hand of the organization. Such taxable income may include:
 Interest or dividend from investment
 Profit from sale of investment
 Profit from any business activity conducted by the organization
 Profit from sale of assets.
\
If the tax-exempt organization provides any benefit, which is neither according to the
objective of the organization nor given in consideration of assets provided to the
organization, to a person, the benefit or tax exemption is not available to the organization.
Computation of Total Tax Liability of SAPROS Nepal for the income year 2073/74.
S.N. Particulars Amount (NRs.)
Income from Business:
1 Membership fee received from members (Note 2) -
2 Amount received from the canteen operated in Kathmandu 320,000
3 Gift received from Mr. Shrestha (Note 3) -
4 Rent received from let out ground floor 360,000
5 Amount received from sale of old newspaper 45,000
6 Donation received from GON. (Note 3) -
A Assessable income from Business 725,000
Income from Investment:
1 Interest on deposit received from Rastriya Banijaya Bank Ltd. -
(Note 1)
2 Interest received from other than bank 250,000
B Assessable Income from Investment 250,000
Total Assessable Income (A+B) 975,000

Tax Liability 25% 243,750
Notes
1. Interest received on deposit from bank is final withholding amount as per Section 92 of Income
Tax Act, 2058. Hence not required to include in the total taxable income.
2. Contribution directly related to the functions of an exempt entity with or without expecting any
returns received by the tax exempt entity shall be exempted from tax according to Section 10
(Chha) of Income Tax Act, 2058.
3. Donation & Gift received by tax exempt entity is exempt for taxation purpose[Sec 10(Chha)].
Answer: 2(b)
Rs. in millions
Profit as per Profit & Loss Account 5
When third party is being charged at Rs.1,500/- per hr. India
Tech has been charged at Rs.1,000/- per hr. only. India Tech
is an associated company. Taking from the market rate, services
to India also has to be charged at Rs.1,500/- only i.e. at a rate
of 50% more. So the Income from India Tech under invoiced
= 500 x 20 million = 10
1000 15
Since interest is paid to UK Tech Ltd., which is also an associated company. (50%
owner of Indian Tech Ltd., which is 100% owner of Nepal Tech Ltd.) Sec. 14(2) will be
applicable.
Add the interest paid 4
Adjusted taxable income 19
50% of the adjusted taxable income is 9.5 million.
Since interest paid is less than 50% of the adjusted taxable income, no disallowance under
interest is applicable. Taxable income will Rs.15 million.
Under Sec.33.and 34, if any person tries to reduce the taxable income by dividing with
another person, then in order not to allow reduction of tax liability, the tax officer can
recharacterise the amount according to market rate.
Answer: 2(c)
Inland Revenue Department (IRD) has issued the public circular on 2061.03.14 on allowance of
bonus expenses for the purpose of Income Tax. As per circular, the provision of bonus expense,
which is as per Bonus Act, 2030, is allowed as deductible expenses subject to provisions of Section
13 and 14 of Income Tax Act, 2058.
Further, IRD clarified the allowance of bonus expenses for tax purpose vide public circular dated
2072.11.28. According to that circular,
 if the amount of bonus is taken as deductible expense for the purpose of Income Tax in any Income Year
and such amount of bonus is not distributed, or
 the excess amount set aside as bonus expense & taken as deductible expense over the amount specified
as per Bonus Act or
 is not required to be distributed
Then the followings shall have to be done;

1. The amount of provision of bonus as per Bonus Act, 2030 shall have to be provided for after deducting
such expenses from net profit not exceeding 10% of net profit and the amount to such extent is allowed
to be taken as deductible expense for Income Tax purpose.
2. The amount taken as deductible expense for a particular Income Year shall have to be distributed
immediately in succeeding Income Year. But, for those specified public institution wherein pre-approval
of Nepal Government for distribution of bonus is required, the bonus amount shall have to be distributed
in the year in which the approval for bonus distribution is provided.
3. If, out of bonus amount set aside and taken as deductible expense, the amount in full or partial, could not
be distributed within the time limit as mentioned per clause (1) and (2) above, such undistributed amount
shall be included in the income of immediately succeeding Income Year in which bonus amount is taken
as deductible expense. But, out of undistributed bonus amount, the amount to the extent deposited into
National Level Welfare Fund is not required to be included in the income.
Accordingly,
i. As per public circular above mentioned, the inclusion of NPR 300,000 which remained undistributed, as
income for the Income Year 2073/74 by Tax Officer is correct.
ii. If the company is public institution wherein pre-approval of Nepal Government for distribution of bonus
is required, the bonus amount shall have to be distributed in the year in which the approval for bonus
distribution is provided. The pre-approval for distribution was on Ashad 31, 2073 i.e. in Income Year
2072/73 and hence it has to be distributed in the Income Year 2072/73 itself. If it remained undistributed,
it shall have to be included in the Income Year 2073/74 i.e. NPR 300,000 is to be included in the income of
Income Year 2073/74.
iii. The undistributed amount to the extent deposited into National Level Welfare Fund is not required to be
included in income as per circular. Hence, NPR (300,000-90,000) = NPR 210,000 only shall be included in
the income of Income Year 2073/74.
3.
a) Company Q is a company incorporated in Nepal but wholly owned by a company P
registered in British Virgin Island (BVI). Company P is wholly owned subsidiary of
company R registered in Australia. All the directors live in Australia and the board
meetings are also held in Australia. Decide the residential status of company Q in Nepal
mentioning the relevant provisions of Income Tax Act, 2058.
If company Q is not incorporated in Nepal but in USA and is having permanent
establishment in Nepal, what will be its status under Income Tax Act, 2058? 5
b) Are all interest expenses paid to financial institutions are allowed for deduction as per
Income Tax Act, 2058? Can the company claim interest for funds borrowed from an
individual? What is the documentation required to claim interest expenses as per
Income Tax Act, 2058? 5
Answer: 3(a)
According to section 2[kang (4)(ka)] of Income Tax Act, 2058, a company, if it is incorporated in
Nepal, is a resident company for Nepal. The company's residential status is never affected by the
residential status of the holding company and also the residential status of the directors. So, the
company Q is a resident for Nepal.
Even if Company Q is not incorporated in Nepal but having permanent establishment in Nepal, it
will not be treated as non-resident for Nepal. According to section 2(kang)(8), a permanent
establishment in Nepal of non-resident is always treated as a resident of Nepal.
Answer: 3(b)
The following Interest expenses incurred in connection with the activities of generating income
from business can be deductible under Sec 14 (1).
Interest in relation to loan used up in the year or used in purchasing an asset used in the same
year, or interest in relation to debt obligation emerged in some other circumstances. It is not
necessary that loan should be availed from banks and other financial institutions, it can also be
borrowed from an individual. The important factor to be considered for deducting its interest
under Sec14 (1)is the application of the loan which may either be used in purchasing fixed assets
or in other activities of the normal course of business.
Therefore, we can claim interest for funds borrowed from an individual if above conditions are
met.
Documents required for claiming interest on funds borrowed from an individual.
 Loan deed
 Documents disclosing personal information of the individual
 Documents evidencing inflow of loan to the entity (For example: credit in entity’s Bank account)
 Documents evidencing payment of interest to the individual
 Interest paid to individuals would be subject to TDS @ 15% as per Sec. 88 of the Act. The amount is
not final withholding for the tax payer and legally the recipient is required to submit income tax
return.
 The interest paid preferably is on arm’s length basis. For e.g. if excessive interest has been paid to an
associated person, this may raise further questions.
 In case loan is taken from an individual who is subject to Sec. 14(2) of the Act, additional limits apply.
Individual covered by Sec. 14(2) means non-resident person or person earning exempt income who
individually or collectively owns more than 25% shares in a company and also provides loan to the
company.
Tax Office would be particularly concerned if diversion of funds has taken place. This could
be where loans have been taken from a bank, when there is significant non-interest advance
provided to directors.
4.
a) Drone Plastics has the following transactions. Calculate the amount of VAT payable or
receivable for the month of Jestha 2074. 10
Particular Amount(Rs.)
Purchase of Raw Material 650,000
Purchase of Packing Material 100,000
Purchase of Fuel For Generator 23,000
Purchase of Fuel For Vehicle 15,000
Dealer Meet at Annapurna 100,000
Purchase of Ford Figo 2,300,000
Purchase of Maruti Omni for Cargo 3,000,000
Purchase of Excavator (Earth Moving Equipment) 6,000,000
Sale of Finished Goods 1,500,000
Opening VAT Receivable 120,000
Raw Material purchased includes an item amounting to Rs. 35,000
purchased in the month of Baisakh 2073, which could be accounted 35,000
for in this month as the misplaced invoice was found
Opening VAT Receivable is same since Poush, 2073
All of the above items are exclusive of VAT
b)
i) Casterly Rock Pvt. Ltd. is a Television Assembling Unit in Nepal which imports
Television Receivers under HS Code: 8529.90.10 which is the major raw materials
for Television Manufacturing. Excise Duty on the same is levied @ 10% at the time
of imports as well as is charged @ 10% at the time of Sales of Final Product.
Whereas on the other hand Custom Duty for the same is NIL i.e. no duty is imposed
on import of items falling under HS Code: 8529.90.10. During 2074/75 Casterly
Rock imported around 10,000 Units of Television Receivers @ of Yuan 750 CIF
Birgunj Custom Point each (1 Yuan = 15 NPR). Further assembled the same and sold
around 7,500 Units of Television @ NPR.15,000 each. With Due respect to the
provision of Excise & Custom Act suggest about the following:
a. What will be the cost per unit of Television Assembling Unit so imported?
b. Will Casterly Rock be allowed to Claim Credit of the Excise Paid on Import of
Raw Material? If Yes, Why?
c. Will your answer in b above be same if the item was imported in the first 6
months i.e. Shrawan to Poush of FY: 2073/74 instead of 2074/75?
ii) Bajaj construction Co. Ltd. had imported 15,000 Kg cements and construction
materials from Lucknow, India and imported 2,000 Kg spare parts from Singapore
by Air. Both the goods were arrived on Magh 1, 2073 in Nepalgunj Custom Office
and Tribhuvan International Airport. But due to strike in the company and shortage
of funds, the company had taken delivery of the goods only after 90 days from
Nepalgunj Custom Office and TIA Custom Office. Calculate demurrage charges in
the above cases as per Custom Act.
Answer: 4(a)
Notes:
 Since the opening VAT receivable is same for six months, Drone Plastics should file an application as per
annex 14 for refund of amount in cash. [Sec. 24(3)] of VAT Act, 2052
 Purchase of Fuel for Vehicle is not allowable for credit.[Sec 41(1) of VAT Rule, 2053]
 If the student assumed disel, then it is allowable.
 Dealer Meet at Annapurna is not allowable for credit. .[Sec 41(1) of VAT Rule, 2053]
 Excavator is a VAT Exempted Item so no credit available.
Computation of VAT payable/receivable for the month of Jestha 2074
Particulars Amount(Rs.) Amount(Rs.) VAT (Rs.) Remarks

VAT Collected:
Sale of Finished Goods 1,500,000 195,000
VAT Collected On Sales 195,000
VAT Paid:
Purchase of Raw Material 615,000 79,950
Raw Material Purchase 650,000
(-) Time Barred Item (35,000) 1 Year Lapse
Purchase of Packing Material 100,000 13,000
Purchase of Fuel For Generator 23,000 2,990
Purchase of Ford Figo 2,300,000 119,600 40% Allowed
Delivery Van
Purchase of Maruti Omni for Cargo 3,000,000 390,000
100% Allowed
VAT Paid On Purchases 605,540
VAT Receivable:
Opening VAT Receivable 120,000
VAT Paid On Purchases 605,540
Less:
VAT Collected On Sales (195,000)
Total 530,540
Answer: 4(b)(i)
a) Cost per unit of Television Assembling Units so imported shall be Rs.12,375 as follows:
Particulars Units Yuan/Unit Rate Amount

Cost Price of Television Receiver 10,000 750 15 112,500,000
Custom Duty at Custom Point -
Excise Duty at Custom Point 10% 11,250,000
Total Cost of Purchase 10,000 123,750,000
Cost Per Unit of Purchase 12,375
b) Casterly Rock Pvt. Ltd. will not be allowed to Claim Credit of Excise amounting Rs.11,250,000 so paid at
the time of import even though it is the Major Raw Material for Television manufacturing. Reason for
the same is amendment in Sec: 3(Ka)(5) of the Excise Act, 2058 by Finance Bill: 2074/75 which restricts
an entity from claiming credit of excise so paid at the time of import on items on which no custom is
levied i.e. which are custom exempted. In our scenario also Custom is NIL on the item being imported.
So, Excise paid at the time of import needs to be accounted as an expenses instead of claiming the same
as a credit on purchase.
c) No, my answer will differ if the item was imported in first six months i.e. Shrawan to Poush of FY:
2073/74 instead of 2074/75. In this the scenario would have been different and the entity would have
been allowed to claim credit of the excise so paid at the time of import based on the provision so laid
down by Sec: 3(Ka)(3) of Excise Act, 2058. As the above stated amendment by Finance Bill: 2074/75 is
applicable from Jestha 15, 2074 onwards.
Answer: 4(b)(ii)
The warehouse facility is provided free of cost for 7 days of delivery of the goods to the warehouse. Customs
warehouse are mostly owned by government of Nepal. But as per Rule 11, a person with prior permission of
Government of Nepal can establish a custom warehouse. These warehouses are called Non –government
warehouse.
The importer should pay demurrage charges if he fails to take delivery of goods stored at the customs
warehouse within the prescribed time limit. When goods are delivered to custom warehouse for custom
clearance, 7 days’ time is allowed for storing at the warehouse without payment of any charge. But in case
the person fails to take delivery of the goods after custom clearance within the prescribed days, it has to pay
demurrage as per the prescribed rate. It may call rent of warehouse for storing goods. No demurrage shall
be charged in the case of those goods which could not be cleared by the Customs Officer because of
confusion about the valuation, classification of goods or for other reason. Notwithstanding anything
contained in Section 72 subsection (1), if there is a reasonable ground for remitting demurrage chargeable of
any goods because of the occurrence of any special circumstance or condition, the prescribed authority may
make full or partial remission, as prescribed.
Demurrage charge rate as per Rule 50, Annex -9 is as follows:
Days Rate NRs. Amount
NRs.
Up to 7 days = 7 days No charge -
8 days to 30 days = 23 days NRs 0.40 per kg per day 138,000
Total days = 90 days Total demurrage charges to be paid to 768,000

Nepalgunj Custom Office (A)
2
Up to 7 days = 7 days No charge -
31 days to 60 days = 30 days NRs 1 per kg per day 60,000
Total days = 90 days Total demurrage charges to be paid to TIA 171,600

Custom Office (B)
Grand Total (A+B) 939,600
5.
a) Polyvinyl Pvt. Ltd. has the following transactions during the month of Shrawan, 2074
 Import of plastic raw materials 100 ton: NPR 1,000,000
 Clearing expenses at Custom Point: NPR 40,000
 Other handling expenses at Custom point: NPR 20,000
 Factory wages: NPR 150,000
 Other production cost: NPR 100,000
 Stock of plastic raw materials at the end of Shrawan 2074: 8 ton
 Stock of finished products at the end of Shrawan 2074: 8 ton
The company purchased 1 Mini Truck and 1 Van (for passengers) for NPR
2,260,000 and NPR 1,356,000 respectively. General Service Fee incurred was
NPR 339,000. Cost of these vehicles and service are inclusive of VAT.
There is no production loss, i.e. input output ratio of finished product is 1:1.
Custom duty paid @ 30% of landed cost is not included in above data. The
company‘s directors have formed a partnership firm of distributors. The company
has appointed the firm as sole distributor of the company‘s products. The
company sales its product to the distributor @ NPR 24.80 per kg plus excise duty
and applicable VAT. The distributor firm sells the product @ NPR 50 per kg.
Normal commission to distributors/wholesaler for same product paid by other
manufacturers is NPR 7.50 per kg. Transportation expenses incurred by other
manufacturers for distribution of the same product are about NPR 7.50 per kg.
The rate of excise duty on the product is 5% of the value.
i) Calculate the amount of VAT receivable/payable for the month of Shrawan, 2074. 6
ii) Assume that VAT payable for the month of Bhadra, 2074 is NPR 598,350. The
company filed VAT return and paid such amount on Kartik 25, 2074. Calculate the
amount of additional fee under Section 19, interest under Section 26, fine under
Section 29 and total liability of the company. For the purpose of calculation assume
30 days in a month, 365 days in a year. 6
b) BB Engineering is engaged in the business of selling inverters. As part of inverter sale,
within one year of warranty period from the date of sale, it provides free servicing up
to five times. For such servicing function, BB Engineering has appointed 100 authorized
service centers throughout the country. The service centers charge NPR 3,000 per
Inverter from BB Engineering, which is charged on monthly basis. Since it is a part of
services under warranty period, the service centers are in confusion whether the
service fee is taxable as per VAT Act. Advise mentioning the relevant provisions of the
Value Added Tax Act. 4
c) XYZ Ltd. dealing excisable goods and services under physically controlled system. As per
the books of account of the company, there is excise payable of NRs. 1,500,000 of
which Rs. 500,000 is related to sales of 1 Baisakh 2074, Rs. 700,000 is related to sale of
25 Baisakh 2074 and the balance amount is related to sale of 10 Jestha 2074. The
company has not paid the excise amount till 31 Asadh 2074. In this case, briefly
mention the duty payment system and calculate late fee if excise payable amount is
paid on 31 Asadh 2074. 4
Answer: 5(a)
i)
Calculation of VAT Receivable/Payable for the month of Shrawan, 2074
Particulars NPR NPR
Cost of Raw Materials 1,000,000
Clearing Expenses at Custom point 40,000
Other handling expenses at Custom point 20,000
Landed Cost 1,060,000
Customs Duty @ 30% 318,000
Sub-total 1,378,000
VAT paid @ 13% 179,140
Cost of Raw Materials Consumed (1378,000*92/100) 1,267,760
Factory Wages 150,000
Other Production Cost 100,000
Factory Cost 1,517,760
Factory Costs per kg (1,517,760/92000) 16.50
Margin per kg [24.80-16.50)/16.50=50%)] 8.25

Factory Price to whole seller 24.80
Excise Duty @ 5% 1.24
Sub-total 26.04
VAT per kg @ 13% 3.39
Total VAT collected [84,000*3.39] 284,760
Less: VAT paid:
at Custom 179,140
while purchasing Mini Truck(Full credit) 260,000
while purchasing Van(40% credit) 62,400
for Service 39,000
Total VAT to be claimed 5,40,540
VAT credit to be claimed (Receivable) (2,55,780)
ii)
Calculation of additional fee, interest, fine and total liability
Calculation of additional fee U/S 19
Period of delay is from Ashwin 25 to Kartik 25 = 30 days
VAT amount (NPR) 598,350

No. of days for additional fee calculation 30 days
Additional Fee rate per annum 10%
Amount of Additional Fee = NPR 598,350×10%×30/365 4,918

Calculation of interest U/S 26
VAT amount (NPR) 598,350

No. of days for additional fee calculation 2 months
Interes rate per annum 15%
Amount of Interest = NPR 598,350×15%×2/12 14,959

Calculation of Fine under Section 29(1)(ja)
As per Section 29(1)(ja), if there is failure to submit tax return as per Section 18, 0.05% per day of
tax payable or NPR 1,000 per tax period whichever is higher shall have to be paid as fine.
Accordingly, NPR 598,350×0.05%×30/365=NPR 24.59 or NPR 1,000×2=2,000 whichever is higher
i.e. NPR 2,000 shall have to be paid by the company as Fine.
Calculation of Total Liability NPR
VAT 598,350
Additional Fee u/s 19
4918
Interest u/s 26 14,959
Fine u/s 29 2,000
Total 620,227
Answer: 5(b)
As per Section 5(1), of VAT Act, except otherwise provided for in the act, value added tax shall be
imposed on supply of goods or services.
As per Section 2(Chha) "Supply" means sale, exchange and transfer of goods or services or an act of
granting permission thereto or entering into a contract thereto for a consideration.
As per Section 2(ja) "Consideration" means anything to be received as value for the supply of goods
or services.
As per Section 2(cha) "Service" means anything other than goods.
Authorized service centers are treated as agents of BB Engineering. The service provided by them to
the customers is on behalf of the principal-BB Engineering. There is supply of services for
consideration. Hence, the fee charged by service centers to BB Engineering is service fee taxable as
per Value Added Tax Act, 2052.
Answer: 5(c)
The time frame prescribed for payment of Excise Duty as per section 4 (kha) (1) of Excise Act are:
a) Section 4 kha(1)(ka) for goods & service under Physically Controlled System- At the time of
removal of goods from the warehouse.
b) Section 4 kha(1)(kha) for goods & service under Self-Removal System - Within 25 days of the
following month in which goods have been invoiced.
c) Section 4 kha(1)(Ga) for goods & service to be imported - At the time of clearing goods from
custom point in Nepal.
d) Section 4 kha(1)(Gha) for import of service – As specified by the department.
 If Excise duty is not paid within due time, late fee of 0.05% per day shall be paid.
The company has excise payable of NRs. 1,500,000 that is related to 1 Baisakh, 25 Baisakh and
10 Jestha 2074. So late fee shall be as follows till 31 Asadh 2074.
Month Amount Time period Per day late No. of delay Late fee
Payable for deposit fee days till 31 NRs.
(0.05%)NRs. Asadh 2074
1 Baisakh 2074 500,000 31 Asadh 250 92 23,000
2074
25 Baisakh 2074 700,000 31 Asadh 350 68 23,800
2074
10 Jestha 2074 300,000 31 Asadh 150 52 7,800
2074
Total 1,500,000 54,600
6.
a) Mr. Hari is professor of Pokhara University and was a resident of Nepal during income
year 2072/073. On Ashwin 1, 2073, he went to Beijing under an assignment for carrying
out specific research work in Shangai University. For his outstanding work, Shangai
University paid remuneration of Chinese Yuan 200,000 for the period Ashwin 1, 2073 to
Ashadh 31, 2074. Discuss the tax liability of Mr. Hari giving consideration to the
agreement between Nepal and China for avoidance of double taxation and prevention
of fiscal evasion with respect to taxes on income. You need not to calculate the tax
payable. (Assume exchange rate of One Yuan=NRs.16). 5
b) Mr. Banwarilal, an Indian tourist, visited Nepal in the year 2016. He purchased taxable
goods of NPR 16,000 from Pokhara and decided to take the purchased goods along with
him while going back to India via Sunauli boarder by his own vehicle. He seeks your
advice on refund of VAT paid by him on purchase of such goods. What would be your
answer if he had purchased the taxable goods worth NPR 26,000 instead of NPR
16,000? 5
Answer: 6(a)
According to Article 20 of the agreement between Nepal and China for avoidance of double taxation
and prevention of fiscal evasion with respect to taxes on income, a professor or teacher who is or was
a resident of one of the contracting states immediately before visiting the other contracting state for
the purpose of teaching or engaging in research, or both, at a university, college, school or other
approved institution in that other contracting state shall be exempt from tax in that other state on any
remuneration for such teaching or research for period not exceeding two years from the date of his
arrival in that other state. This provision applies to Mr. Hari because he was resident in Nepal during
FY 2072/073 and his stay in China has not exceeded two years. Therefore, remuneration of Chinese
Yuan 200,000 received by Mr. Hari during income year 2073/74 is exempt from tax in China.
However, the income is taxable in Nepal, as he has been in Nepal for a continuous period of 183
days before departure to Beijing.
Answer: 6(b)
Under Section 25ka of Value Added Tax (VAT) Act, 2052, a foreign tourist who has paid VAT on
purchase can claim for refund of such VAT amount. However, for such refund, following conditions
must have been fulfilled –
(i) He must have purchased taxable goods of more than NPR 25,000.
(ii) He must be returning via air transportation mode. Refund facility is not available for foreign
tourist returning by road.
(iii) The purchased goods must have been taken out of country by the foreign tourist himself.
As the amount of goods purchased is less than NPR 25,000 and Mr. Banwarilal is travelling back by
road through Sounali boarder, he cannot claim the refund of VAT.
In the second instance, though the amount of purchased goods is NPR 26,000 (in excess of NPR
25,000) Mr. Banwarilal is travelling back through road transportation mode; he cannot claim the
refund of VAT.
It is to be noted that service charge at the rate of 3% of the amount to be refunded shall be deducted
by the department at the time of refund.
Advanced Cost & Management Accounting
Maximum Marks - 100
Marks
Attempt all questions. Working notes should form part of the answer.
Make assumptions whenever necessary.
1. A company produces four products, P1, P2, P3 and P4 which are marketed in
cartons. Of the total of 20 machines installed, 8 are suitable for manufacturing all
the four products and the remaining 12 machines are not suitable for the
manufacture of product P1 and P4.
Each machine is in production for 300 days a year and each is used on a given product
in terms of full days and not in fraction of days. The company, however, has no
problem in obtaining adequate supplies of labour and raw materials.
As per the marketing policy of the company, all four products are to be sold and the
minimum annual production shall be 3,000 cartons for each product. Fixed costs
budgeted amount to Rs. 5 million. The data related to production cost and price is as
shown below:
Particulars P1 P2 P3 P4
Production/day/machine (Cartons) 14 4 3 6
Selling price /Carton Rs. 810 Rs. 790 Rs. 845 Rs. 1,290
Cost : Process I
Direct Material /Day /Machine 140 52 45 84
Direct Labour / Day /Machine 224 148 90 132
Process II
Direct Material /Carton 30 30 30 30
Direct Labour /Carton 240 216 300 360
Variable Overheads /Carton 390 390 300 720
With a view to meeting the increasing demand for products P1 and P4, the company is
contemplating to convert such number of machines as may be necessary out of the 12
machines which at present are unsuitable to produce products P1 and P4 into all-
purpose machines. The cost of conversion of these machines is Rs. 210,000 per
machine. The expenditure is to be amortised over a period of three years. The company
expects 12.5% return on this expenditure.
Market research has indicated that the company’s sales of products P1 and P4 can be
increased to 37,500 cartons and 5,400 cartons respectively. Similarly, the sales of
product P3 can be increased up to three times the minimum annual production level if
needed.
Required: (10+3+7=20)
a) Calculate the optimum profit of the company if the existing machines were worked
on most profitable basis before conversion.
b) Recommend the maximum number of machines to be converted into all-purpose
machines giving supporting calculations.
c) Calculate for the first year the optimum profit of the company after conversion of
the required number of machines into all-purpose machines.
Solution to Question 1:
Contribution per Carton and per Machine Day
Products → P1 P2 P3 P4
Cartons /Day /Machine 14 4 3 6

Minimum Sales 3,000 3,000 3,000 3,000
No. of days required for minimum sales 215 750 1,000 500
Sales /Carton (Rs.) 810 790 845 1,290
Process 1: Direct Materials 10 13 15 14
Direct Wages 16 37 30 22
Process 2: Direct Materials 30 30 30 30
Direct Wages 240 216 300 360
Variable Overhead 390 390 300 720
686 686 675 1,146
Contribution / Carton 124 104 170 144
Contribution /Machine Day 1,736 416 510 864
Optimum Mix before Conversion
The number of all-purpose machines is 8. Thus, machines hours available (300 x 8) =
2,400 days.
Since contribution /machine day is higher for product P1 (Rs. 1,736), the company should
produce minimum quantity of P4 and utilize the remaining days to produce maximum units of
product P1.
Thus, to produce minimum units of P4, number of days required = 500. The remaining days
available to produce product P1 (2,400 – 500) = 1,900. Number of cartons of P1 that will be
produced in the available days (1,900 x 14) = 26,600
Similarly, days available for other machines = 12 x 300 = 3,600
Since contribution /machine day is higher for product P3 (Rs. 510) as compared to P2.
(Rs. 416), the company should produce minimum quantity of P2 and utilize the remaining
days to produce maximum units of product P3.
Thus, to produce minimum units of P2, the number of days required = 750. The remaining
days available for the production of P3 (3,600 – 750) = 2,850. Number of cartons of P2 that
will be produced in the available days (2,850 x 3) = 8,550.
(a) Optimum Profit before Conversion
P1 P2 P3 P4
Products →
Number of Cartons 26,600 3,000 8,550 3,000
Contribution /Carton (Rs.) 124 104 170 144
Total Contribution (Rs.) 3,298,400 312,000 1,453,500 432,000
Total Contribution of all the products (Rs.) 5,495,900
Fixed Costs (Rs.) (-) 5,000,000
Profit (Rs.) 495,900
(b) Maximum Number of Machines to be Converted
After conversion of machines to all-purpose machines, production of P1 can go up to 37,500 cartons
and production of P4 can be increased to 5.400 cartons. Thus,
P1 P4
Total cartons after conversion 37,500 5,400
Less: Existing optimum production before conversion 26,600 3.000
Additional units to be produced after conversion: 10,900 2,400

Number of cartons per day 14 6
Number of days required 779 400
The total number of days required (779 + 400) = 1,179, say, 1,200 days. The number of machines to
be converted (1,179 /300) 3.93, say, 4 machines since the machines to be converted cannot be in
fraction.
(c) Optimum Profit in the First Year after Conversion
Optimum product mix after conversion:
Product Optimum Mix after Number Machine Days Remarks
Conversion (Cartons) of Days Required
P1 37,500 14 2,679
P2 3,000 4 750
P3 5,013 3 1,671 Machine days derived
as balancing figure
P4 5,400 6 900
Maximum Hours Available (20 x 300) 6,000
Optimum Profit based on above Product Mix

P1 P2 P3 P4
Products →
Number of Cartons 37,500 3,000 5,013 5,400
Contribution /Carton (Rs.) 124 104 170 144
Total Contribution (Rs.) 4,650,000 312,000 852,210 777,600
Total Contribution of all the products (Rs.) 6,591,810
Fixed Costs (Rs.) (-) 5,000,000
Profit (Rs.) 1,591,810
Amortisation of conversion cost of 4 machines (210,000 x 4) / 3 280,000
1,311,810
Earlier Profit before Conversion of Machines 495,000
Extra Profit after conversion of machines 815,910
Less: Minimum Profit @ 12.5% on Expected Investment of (105,000)
Rs. 840,000.
Extra Margin of Profit Available due to Conversion 710,910
2.
a) Bhairahawa Premier League (BPL) is played in the Siddhartha Stadium (owned and
managed by the Siddharthanagar Municipality), which has a capacity of 15,000
seats (5,000 lower-tier seats and 10,000 upper-tier seats). The Siddhartha Stadium
charges BPL a per-ticket charge for use of its facility. All tickets are sold by the
Reservation Network, which charges BPL a reservation fee per ticket. BPL's
budgeted contribution margin for each type of ticket in 2017 is computed as
follows:
Particulars Lower-tier ticket (Rs.) Upper-tier ticket (Rs.)

Selling Price/ ticket 350 175
Stadium Fee/ ticket 100 70
Reservation Network Fee/ ticket 50 40
Contribution Margin/ ticket 200 65
The budgeted and actual average attendance figures for game in 2017 season
are as follows:
Particulars Budgeted Actual
Lower-tier ticket sold 4,000 3,300
Upper-tier ticket sold 6,000 7,700
Total 10,000 11,000
There was no difference between the budgeted and actual contribution margin
for lower-tier or upper-tier seats.
The manager of BPL was delighted that actual attendance was 10% above
budgeted attendance, especially given the depressed state of the local
economy.
i) Compute the sales-volume variance for each type of ticket and in total
for BPL in 2017. (Calculate all variances in terms of contribution
margins.)
ii) Compute the sales-quantity and sales-mix variances for each type of
ticket and in total in 2017.
iii) Reconcile the sales-volume variance and comment on the results.
b) Royal Suites operates a business hotel with 100 suites in Kathmandu. During
November, a 30-day month, Royal Suites experienced a 90% occupancy rate from
Sunday evening through Wednesday evening (weeknights), with business travelers
making up virtually all of its guests. On Thursday through Saturday evenings
(weekend nights), however, occupancy dwindled to 20%. Guests on these nights
were all leisure travelers. (There were 18 weeknights and 12 weekend nights in
November.) The hotel charges Rs. 6,800 per night for a suite. Prashiddha has
recently been hired to manage the hotel, and is trying to devise a way to increase
the hotel's profitability. The following information relates to the hotel's costs:
Particulars Fixed Costs (Rs.) Variable Costs (Rs.)

Depreciation 2,000,000/ month
Administrative costs 3,500,000/ month
Housekeeping and supplies 1,200,000/ month 2500/ room night
Breakfast 500,000/ month 500/ breakfast served
The hotel offers free breakfast to guests. In November, there were an average
of 1.0 breakfasts served per room night on weeknights and 2.5 breakfasts
served per room night on weekend nights.
Required: (3.5+3.5+1.5+1.5=10)
i) Calculate the average cost per guest night for November. What was Royal
Suites' operating income or loss for the month?
ii) Prashiddha estimates that if the hotel increases the nightly rates to Rs.
8,000, weeknight occupancy will only decline to 85%. He also estimates
that if the hotel reduces the nightly rate on weekend nights to Rs. 5,000,
occupancy on those nights will increase to 50%. Would this be a good
move for the hotel? Show your calculations.
iii) Why would the Rs. 3,000 price difference per night be tolerated by the
weeknight guests?
iv) A travel agency has approached the hotel with a proposal to offer last-
minute deals on empty rooms on both weeknights and weekend nights.
Assuming that there will be an average of two breakfasts served per night
per room, what is the minimum price that the hotel could accept on the
last-minute rooms?
Solution to Question 2(a):
i) Sales-volume variance = (Actual sales units – Budgeted sales units) × Budgeted

contribution margin per ticket
Lower-tier tickets = (3,300 – 4,000) × Rs. 200 = Rs. 140,000 U
Upper-tier tickets = (7,700 – 6,000) × Rs. 65 = Rs. 110,500 F
Total tickets = Rs. 29,500 U
ii) Computation of the sales-quantity and sales-mix variances for each type of ticket and
in total in 2017
The sales-quantity variances can be computed as:
Sales-quantity variance = (Actual units of all tickets sold – Budgeted units of all
tickets sold) × Budgeted sales-mix percentage × Budgeted
contribution margin per ticket
Lower-tier tickets = (11,000 – 10,000) × 0.40 × Rs. 200 = Rs. 80,000 F
Upper-tier tickets = (11,000 – 10,000) × 0.60 × Rs. 65 = Rs. 39,000 F
Total tickets = Rs. 119,000 F
The sales-mix variances can be computed as:

Sales-mix variance = Actual units of all tickets sold × (Actual sales-mix percentage
– Budgeted sales-mix percentage) × Budgeted contribution
margin per ticket
Lower-tier tickets = 11,000 × (0.30 – 0.40) × Rs. 200 = Rs. 220,000 U
Upper-tier tickets = 11,000 × (0.70 – 0.60) × Rs. 65 = Rs. 71,500 F
Total tickets = Rs. 148,500 U
Working Note:
Calculation of sales-mix percentage
Budgeted:
Lower-tier tickets = 4,000/ 10,000 = 0.40
Upper-tier tickets = 6,000/ 10,000 = 0.60
Actual:
Lower-tier tickets = 3,300/ 11,000 = 0.30
Upper-tier tickets = 7,700/ 11,000 = 0.70
iii) Reconciliation and comments:

Sales-volume variance = Sales-quantity variance + Sales-mix variance
Rs. 29,500 U = Rs. 119,000 F + Rs. 148,500 U
Rs. 29,500 U = Rs. 29,500 U
BPL increased average attendance by 10%. However, there was a sizable shift from
lower-tier seats (budgeted contribution margin of Rs. 200 per seat) to the upper-tier
seats (budgeted contribution margin of Rs. 110 per seat). The net result of the shift
was that the actual contribution margin decreased by Rs. 29,500 of the budgeted
contribution margin.
Solution to Question 2(b):

i) Calculation of the average cost per guest night and operating income or loss for November
Guest nights on weeknights = 18 weeknights × 100 rooms × 90% = 1,620
Guest nights on weekend nights = 12 weekend nights × 100 rooms × 20% = 240
Total guest nights in November = 1,620 + 240 = 1,860
Breakfasts served:
1,620 weeknight guest nights ×1.0 = 1,620
240 weekend guest nights × 2.5 = 600
Total breakfasts served in November = 1,620 + 600 = 2,220
Total costs for November: Rs. Rs.

Depreciation 2,000,000
Administrative costs 3,500,000
Fixed housekeeping and supplies 1,200,000
Variable housekeeping and supplies (1,860 × Rs. 2,500) 4,650,000
Fixed breakfast costs 500,000
Variable breakfast costs (2,220 × Rs. 500) 1,110,000
Total costs 12,960,000
Cost per guest night (Rs. 12,960,000 ÷ 1,860) 6,968
Revenue for November (Rs. 6,800 × 1,860) 12,648,000
Operating income/(loss) (312,000)
ii) Evaluation of discriminating rates

New Guest nights on weeknights = 18 weeknights × 100 rooms × 85% = 1,530
New Guest nights on weekend nights = 12 weekend nights × 100 rooms × 50% = 600
Total new guest nights = 1,530 + 600 = 2,130
Breakfasts served:
1,530 weeknight guest nights ×1.0 = 1,530
600 weekend guest nights × 2.5 = 1,500
Total breakfasts served = 1,530 + 1,500 = 3,030
Total costs: Rs. Rs.

Depreciation 2,000,000
Administrative costs 3,500,000
Fixed housekeeping and supplies 1,200,000
Variable housekeeping and supplies (2,130 × Rs. 2,500) 5,325,000
Fixed breakfast costs 500,000
Variable breakfast costs (3,030 × Rs. 500) 1,515,000
Total costs 14,040,000
Cost per guest night (Rs. 14,040,000 ÷ 2,130) 6,592
Revenue [(Rs. 8,000 × 1,530) + (Rs. 5,000 × 600)] 15,240,000
Operating income/(loss) 1,200,000
Decision:
Yes, the strategy to apply discriminating rates as estimated by Prashiddha would be a
good move because it would increase operating income by Rs. 1,512,000 generating
a net operating income of Rs. 1,200,000.
iii) The weeknight guests are business travelers who have to stay at the hotel on
weeknights to conduct business for their organizations. They are probably not paying
personally for their hotel stays, and they are more interested in the hotel's location in
the nearby business area than the price of the stay, as long as it is reasonable. The
demand of business travelers is inelastic.
In contrast, the weekend guests are families who are staying at the hotel for pleasure
and are paying for the hotel from their personal incomes. They are willing to
consider other hotel options or even not travel at all if the price is high and
unaffordable. The demand of pleasure travelers is elastic. Because of the differences
in preferences of the weeknight and weekend guests, Royal Suites can price
discriminate between these guests by charging Rs. 3,000 more on weeknights than on
weekends and still have weeknight travelers stay at the hotel.
iv) Calculation of minimum price for last-minute rooms
The minimum price should cover at least the variable cost of the last-minute room.
Therefore, Royal Suites would need to charge a minimum of Rs. 3,500 per night for
the last-minute rooms [i.e.; an amount equal to the variable cost per room which is
(Rs. 2,500 per room night + Rs. 500 × 2 breakfasts)]. Any price above Rs. 3,500
would increase the hotel's operating income.
3.
a) A subsidiary company of an automobile company manufactures gears. The
company manufactures two types of gears – X and Y. Both the gears are processed
on three machines, namely, hobbling machine, shaping machine and grinding
machine. The time required by each gear and total time available per week on each
machine is as given below:
Gear X Gear Y
Machine Available Hours
(Hours) (Hours)
Hobbling Machine 3 3 36
Shaping Machine 5 2 60
Grinding Machine 2 6 60
Other Data:
Selling Price (Rs.) 820 960
Variable Cost (Rs.) 780 980
The initial simplex table is as given below:

Cj→
40 60 0 0 0
Quantity↓
Cj Variable X1 X2 X3 X4 X5
0 X3 36 3 3 1 0 0
0 X4 60 5 2 0 1 0
0 X5 60 2 6 0 0 1
You are required to determine the optimum production plan and the maximum
contribution for the next week by simplex method. 10
b) Electrolux Ltd. has developed a new fire-alarm system. The firm has been asked to
quote for a prospective contract. The customer requires separate price quotations
for each of the following possible orders:
Order Number of fire-alarm systems
First 100
Second 60
Third 40
The firm has estimated the following cost per unit for the first order:
Direct Materials Rs. 1,500
Direct Labour:
Department A (Highly automatic) 20 hours at Rs. 100 per hour
Department B (Skilled labour) 30 hours at Rs. 150 per hour
Variable overheads absorbed 20% of direct labour
Fixed overheads absorbed:
Department A Rs. 40 per hour
Department B Rs. 30 per hour
Required: 10
Determine a price per unit for each of the three orders assuming the firm has
a policy to charge 20% profit on selling price and allows for an 80% learning
curve.
X 1.0 1.3
1.4 1.5 1.6 1.7 1.8 1.9 2.0
Y (100%) 100.0 91.7 89.5 87.6 86.1 84.4 83.0 81.5 80.0
In the table, X represents the cumulative total volume produced to date

expressed as a multiple of the initial order whereas Y is the learning curve
factor, for a given X, expressed as a percentage of the cost of initial order.
Solution to Question 3 (a):
Table 1
Cj→
40 60 0 0 0 Ratio
Quantity↓
0 X3 36 3 3 1 0 0 12
0 X4 60 5 2 0 1 0 30
0 X5 60 2 6 0 0 1 10 ←
Zj 0 0 0 0 0 0
Zj - Cj - 40 - 60 ↑ 0 0 0
Working Notes for Table 2:

Row X5 is the departing variable and X2 is the entering variable. Values for X2 row is
derived by dividing each element in the row by the element in the intersectional element of
departing row and entering column.
Values of X3 and X4 for table 2 are derived by performing following calculations:
Values of X3 Intersectional element of Corresponding element in X3 row for
from table 1 of X3 row from table 1 replacing row X5 in table 1 table 2
36 – 3 x 10 6
3 – 3 x 1/3 2
3 – 3 x 1 0
1 – 3 x 0 1
0 – 3 x 0 0
0 – 3 x 1/6 -1/2
from table 1 of X4 row from Rtable 1 replacing row X5 in table 1 table 2
60 – 2 x 10 40
5 – 2 x 1/3 13/3
2 – 2 x 1 0
0 – 2 x 0 0
1 – 2 x 0 1
0 – 2 x 1/6 -1/3
Table 2
Cj→
40 60 0 0 0 Ratio
Quantity↓
0 X3 6 2 0 1 0 -1/2 3 ←
0 X4 40 13 /3 0 0 1 -1/3 120/13
60 X2 10 1/3 1 0 0 1/6 30
Zj 600 20 60 0 0 10
Zj - Cj - 20↑ -0 0 0 10
Working Notes for Table 3:

Row X3 is the departing variable and X1 is the entering variable. Values for X1 row is
derived by dividing each element in the X3 row by the element in the intersectional element
of departing row and entering column.
Values of X2 and X4 for table 3 are derived by performing following calculations:
10 – 1/3 x 3 9
1/3 – 1/3 x 1 0
1 – 1/3 x 0 1
0 – 1/3 x 1/2 -1/6
0 – 1/3 x 0 0
1/6 – 1/3 x -1/4 1/4

40 – 13/3 x 3 27
13/3 – 13/3 x 1 0
0 – 13/3 x 0 0
0 – 13/3 x 1/2 -13/6
1 – 13/3 x 0 1
-1/3 – 13/3 x -1/4 3/4
Table 3
Cj→
40 60 0 0 0
Quantity↓
40 X1 3 1 0 ½ 0 -1/4
0 X4 27 0 0 -13/6 1 3/4
60 X2 9 0 1 -1/6 0 ¼
Zj 660 40 60 10 0 5
Zj - Cj 0 0 10 0 5
Since all Zj - Cj are positive or zero, this is the optimum solution with X1 = 40 and X2 = 60
and optimum Z = 660.
Solution to Question 3 (b):

(i) Price per unit for First 100 Units:
Direct materials 1,500
Direct labour:
Department A: 20 hours @ Rs. 100 2,000
Department B: 30 hours @ Rs. 150 4,500 6,500
Variable overhead 20% of Rs. 6,500 1,300
Fixed overhead:
Department A: 20 hours @ Rs. 40 800
Department B: 30 hours @ Rs. 30 900 1,700
Total cost 11,000
Profit (25%* on Rs. 11,000) 2,750
Selling price per unit 13,750
* If the selling price be Rs. 100, profit to be charged will be Rs. 20 and total cost will
become Rs. 80. Thus, profit that will be charged on cost will become 20/80 or 25% of the
total cost.
(ii) Price /Unit for Second Order of 60 Units:

Learning curve will be applicable in Department B only since Department A is highly
automatic.
Cumulative output becomes 100 units + 60 units = 160 units which is 1.6 times for
which learning curve is 86.1% from the table.
Therefore, total hours for 160 units = 160 x 30 x 0.861 = 4,132.80 hours
Now, hours for 60 units = Hours for 160 units – Hours for 100 units
= 4,132.80 hours – 100 x 30 hours = 4,132.80 hours – 3,000 hours = 1,132.80 hours
Therefore, hours per unit = 1,132.80 /60 = 18.88
Calculation of Selling Price per unit:
Direct materials 1,500.00
Direct labour:
Department A: 20 hours @ Rs. 100 2,000.00
Department B: 18.88 hours @ Rs. 150 2,832.00 4,832.00
Variable overhead 20% of Rs. 4,832 966.40
Fixed overhead:
Department A: 20 hours @ Rs. 40 800.00
Department B: 18.88 hours @ Rs. 30 566.40 1,366.40
Total cost 8,664.80
Profit (25% on Rs. 11,000) 2,166.20
Selling price per unit 10,831
(iii) Price /Unit for Third Order of 40 Units:

Cumulative output becomes 100 units + 60 units + 40 unit= 200 units which is 2 times
for which learning curve is 80% from the table.
Therefore, total hours for 200 units = 200 x 30 x 0.80 = 4,800 hours
Now, hours for 40 units = Hours for 200 units – Hours for 160 units
= 4,800 hours – 4,132.80 hours = 667.20 hours
Therefore, hours per unit = 667.20 /40 = 16.68
Calculation of Selling Price per unit:
Direct materials 1,500.00
Direct labour:
Department A: 20 hours @ Rs. 100 2,000.00
Department B: 16.68 hours @ Rs. 150 2,502.00 4,502.00
Variable overhead 20% of Rs. 4,502 900.40
Fixed overhead: 800.00
Department A: 20 hours @ Rs. 40 500.40
Department B: 16.68 hours @ Rs. 30 1,300.40
Total cost 8,202.80
Profit (25% on Rs. 11,000) 2,050.70
Selling price per unit 10,253.50
4.
a) Peach, Inc., has identified the following overhead costs and cost drivers for next
year:
Expected
Actual
Overhead Item Expected Cost Cost Driver
Transactions
Setup costs Rs. 90,000 Number of setups 400
Ordering costs 50,000 Number of orders 4,000
Maintenance costs 150,000 Machine hours 25,000
Power 30,000 Kilowatt hours 75,000
The following are two of the jobs completed during the year:
Job 700 Job 701
Direct materials .............................. Rs. 1,200 Rs. 600
Direct labor .................................... Rs. 900 Rs. 400
Units completed ............................. 250 100
Direct labor hours .......................... 40 20
Number of setups ........................... 2 1
Number of orders ........................... 10 4
Machine hours ................................ 50 40
Kilowatt hours ................................ 60 25
The company‘s practical activity is 5,000 direct labor hours.
Required: (3+3+2=8)
i) Determine the unit cost for each job using direct labor hours to apply overhead.
Round answers to two decimal places.
ii) Determine the unit cost for each job using the four activity drivers. Round
answer to two decimal places
iii) Which method produces the more accurate assignment? Why?
b) A city health clinic provides health and other related services to the local residents
who are covered under insurance plan. The health clinic receives payment from the
insurance company each time any patient attends the clinic for consultation at the
following rates:
Consultation Requiring Payment from Insurance (Rs.)
No treatment 50
Minor treatment 300
Major treatment 900
In addition, the adult patients will have to make co-payment which is
equivalent to the amount of payment for the respective category of treatment
made by the insurance company. The children and senior citizens are not,
however, required to make any such payment.
The health clinic will remain open for 6 days in a week for 52 weeks in a
year. Each physician treated 20 patients per day although the maximum
number of patients that could have been treated by a physician on any
working day is 24 patients.
The health clinic receives a fixed income of Rs. 400,000 per annum for their
contribution in promoting health products from the manufacturers. The
annual expenditure of the health centre is estimated as under:
Materials and consumable (100% variable) Rs. 3,550,000
Staff salaries per annum per employee (fixed):
Physician Rs. 900,000
Assistants Rs. 300,000
Administrative staff Rs. 180,000
Establishment and other operating costs (fixed) Rs. 2,100,000
The non-financial information relating to the health clinic is as given below:
(a) Staff:
Number of physicians employed 6
Assistants 7
Administrative staff 2
(b) Patient Mix:
Adults 50%
Children 30%
Senior Citizens 20%
(c) Mix of Patient Appointment:
Consultation requiring no treatment 60%
Minor treatment 25%
Senior Citizens 15%
Required: (4+1+2=7)
i) Calculate the average contribution per patient;
ii) Calculate the number of break-even patients; and
iii) Calculate the percentage of maximum capacity required to be utilized next year
in order to break even.
(Assume that patient mix and mix of patient appointments will remain the
same in the next year as well.)
Solution to Q.No.4 a.
1. Total overhead costs = Rs.90,000 + Rs.50,000 + Rs.150,000 + Rs.30,000

= Rs.320,000
Plantwide overhead rate = Rs.320,000/5,000
= Rs.64 per direct labor hour
Job 700 Job 701
Direct materials ................................ Rs.1,200 Rs. 600
Direct labor ...................................... 900 400
Overhead assigned:
(Rs.64 × 40 direct labor hours) .... 2,560
(Rs.64 × 20 direct labor hours) .... 1,280
Total cost .......................................... Rs.4,660 Rs.2,280
Cost per unit:
(Rs.4,660/250 units) ..................... Rs.18.64
(Rs.2,280/100 units) ..................... Rs.22.80
2. Activity-based overhead rates:
Setup costs: Rs.90,000/400 setups = Rs.225 per setup
Ordering costs: Rs.50,000/4,000 orders = Rs.12.50 per order
Maintenance costs: Rs.150,000/25,000 machine hours = Rs.6 per machine hour
Power: Rs.30,000/75,000 kilowatt hours = Rs.0.40 per kilowatt hour
Job 700 Job 701

Direct materials ................................ Rs.1,200 Rs. 600
Direct labor ...................................... 900 400
Overhead applied:
(Rs.225 × 2 setups) ...................... 450
(Rs.12.50 × 10 orders) ................. 125
(Rs.6.00 × 50 machine hours) ...... 300
(Rs.0.40 × 60 kilowatt hours) ...... 24
(Rs.225 × 1 setup) ........................ 225
(Rs.12.50 × 4 orders) ................... 50
(Rs.6.00 × 40 machine hours) ...... 240
(Rs.0.40 × 25 kilowatt hours) ...... 10
Total cost .......................................... Rs.2,999 Rs.1,525
Cost per unit:
(Rs.2,999/250 units) ..................... Rs.12.00
(Rs.1,525/100 units) ..................... Rs.15.25
3. Activity-based costing produces the more accurate cost assignment because it uses
multiple drivers that are related to overhead consumption. A product or job‘s
consumption of overhead does not always increase in proportion to a single volume-
based cost driver, such as direct labor hours.
Setup costs are related to the number of setups, ordering costs are related to the number
of orders, maintenance costs are related to the number of machine hours, and power costs
are related to the number of kilowatt hours.
Solution to Q.No.4 b.
Working Notes:
1. Total Number of Patients Attended:
Number of patients attended per day by a physician 20
Number of physicians employed 6
Number of days in a week 6
Number of weeks in a year 52
Total Number of patients attended = 20 x 6 x 6 x 52 = 37,440

2. Patients Mix:
Adults (50%) 37,440 x 50/100 18,720
Children (30%) 37,440 x 30/100 11,232
Senior Citizens (20%) 37,440 x 20/100 7,488
37,440
3. Patients Appointments:
No treatment required (50%) 37,440 x 60/100 22,464
Minor treatment (25%) 37,440 x 25/100 9,360
Major treatment (15%) 37,440 x 15/100 5,616
37,440
4. Income from Insurance Companies:

Number of Patients Rate (Rs.) Total Income (Rs.)
(1) (2) ( 1 x 2)
No treatment patients 22,464 50 1,123,200
Minor treatment patients 9,360 300 2,808,000
Major treatment patients 5,616 900 5,054,400
Total: 37,440 8,985,600
5. Co-payment from Adult Patients:

No. of Patients Rate (Rs.) Total Income (Rs.)
(1) (2) ( 1 x 2)
No treatment patients (60%) 11,232 50 561,600
Minor treatment (25%) 4,680 300 1,404,000
Major treatment (15%) 2,808 900 2,527,200
Total 18,720 4,492,800
6. Fixed Expenses:
Physicians’ salary (6 x 900,000) Rs. 5,400,000
Assistants’ salary (7 x 300,000) Rs. 2,100,000
Administrative staffs’ salary (2 x 180,000) Rs. 360,000
Establishment and other operating costs Rs. 2,100,000
Total Expenditure: Rs. 9,960,000
Computation of the Percentage of

Maximum Capacity Utilization Next Year in order to Break-even
(i) Contribution Analysis:

Rs.
Total Fees from Insurance Companies and Adult Patients 13,478,400
(Rs. 8,985,600 + Rs. 4,492,800) (Working Note 4 and 5)
Less: Variable costs 3,550,000
Contribution 9,928,400
Average contribution per patient (9,928,400/37,440) 265.18162
(ii) Break-even Patients:

Rs.
Fixed Costs 9,960,000
Less: Fixed Income (400,000)
Net Fixed Costs 9,560,000
Break-even Patients = Net Fixed Costs 9,560,000 36,050.98=36,051
Contribution per patient 265.18
(iii) Percentage of Maximum Capacity Required to be Utilized in order to Break-even:
Present Utilization = 20 patients x 100 = 83.33333% which is
24 patients
37,440 patients in number.
100% Patient Capacity 37,440 /0.83333 = 44,928 patients.
Percentage of maximum capacity required to be utilized in order to Break-even
= Break-even patients x 100 = 36,051 x 100 = 80.24%
100% patient capacity 44,928
5. Write short notes: (5×3=15)

a) Business functions in value chain analysis
b) Broad averaging and its consequences on costs
c) Master budget and Rolling budget
d) Four key perspectives in the balanced scorecard
e) Learning curve and its application
Solution to Q.No.5
a) Business functions in value chain analysis

Value chain is the sequence of business functions in which customer usefulness is added
to products. Value chain analysis is essential to companies satisfying their customers and
keeping them satisfied (and loyal) over time. There are following six primary business
functions in value chain analysis:
i) Research and development (R&D) — Generating and experimenting with ideas
related to new products, services, or processes.
ii) Design of products and processes — Detailed planning, engineering, and testing of
products and processes.
iii) Production — Procuring, transporting and storing (also called inbound logistics),
coordinating, and assembling (also called operations) resources to produce a product
or deliver a service.
iv) Marketing (including sales) — Promoting and selling products or services to
customers or prospective customers.
v) Distribution— Processing orders and shipping products or services to customers
(also called outbound logistics).
vi) Customer service — Providing after-sales service to customers.
b) Broad averaging and its consequences on costs

Broad averaging (or peanut-butter costing) describes a costing approach that uses broad
averages for assigning (or spreading, as in spreading peanut butter) the cost of resources
uniformly to cost objects when the individual products or services, in fact, use those
resources in non-uniform ways.
Broad averaging, by ignoring the variation in the consumption of resources by different
cost objects, can lead to inaccurate and misleading cost data, which in turn can
negatively impact the marketing and operating decisions made based on that
information.
c) Master budget and Rolling budget

The master budget expresses management's operating and financial plans for a specified
period (usually a fiscal year) and includes a set of budgeted financial statements. It is the
initial plan of what the company intends to accomplish in the period.
A rolling budget, also called a continuous budget, is a budget or plan that is always
available for a specified future period, by continually adding a period (month, quarter, or
year) to the period that just ended.
d) Four key perspectives in the balanced scorecard

The four key perspectives in the balanced scorecard are:
i) Financial perspective - this perspective evaluates the profitability of the strategy and
the creation of shareholder value.
ii) Customer perspective - this perspective identifies the targeted customer and market
segments and measures the company‘s success in these segments.
iii) Internal business process perspective - this perspective focuses on internal operations
that further both the customer perspective by creating value for customers and the
financial perspective by increasing shareholder value.
iv) Learning and growth perspective - this perspective identifies the capabilities the
organization must excel at to achieve superior internal processes that create value for
customers and shareholders.
e) Learning curve and its application
Human performance of activities typically shows improvement when the activities are
done on a repetitive basis; i.e., the time required to perform a task decreases with
increasing repetitions. Learning curve summarizes this phenomenon. The degree of
improvement and the number of tasks needed to realize the major portion of the
improvement is a function of the task being done. If the task is short and somewhat
routine, only a modest amount of improvement is likely to occur, and it generally occurs
during the first few repetitions. If the task is fairly complex and has a longer duration,
improvements occur over a longer interval. Therefore, the learning factors have more
relevance for complex repetitive activities.
Learning curve theory has found useful applications in the areas of manpower planning
and scheduling, negotiated purchasing, pricing new products, budgeting, purchasing and
inventory planning.
6.
a) A manufacturing company produces 4 products using 3 different machines. The
machine capacity is limited to 3,000 hours for each machine. The following
information is available for the first month of fiscal year.
Product A B C D
Contribution (Sales – direct materials) (Rs.) 1,500 1,200 1,000 500
Machine Hours Required /Unit
Machine 1 10 6 2 1
Machine 2 10 9 3 1.5
Machine 3 10 3 1 0.5
Estimated Demand (units) 200 200 200 200
Required: Identify the bottleneck activity and allocate the machine time. 5
b) Indicate the various dimension of cost audit. 5
Solution to Question 6 (a):

Time required for products Total Time Machine
Machine Time Available Utilization
A B C D
1 2,000 1,200 400 200 3,800 3,000 126.67
2 2,000 1,800 600 300 4,700 3,000 156.67
3 2,000 600 200 100 2,900 3,000 96.67
Allocation of Resources
Machine Spare
Particulars A B C D Utilization Capacity
1. Contribution per 1,500 1,200 1,000 500
unit (Rs.)
2. Time Required in 10 9 3 1.5
Machine 2
3. Contribution per 150 133.33 333.33 333.33

hour in Machine
2 (Rs.) [1 /2]
4. Rank as per
3rd 4th 2nd 1st
contribution /
machine hour
5. Allocation of 200 x 100 200 x 3 200 x 3,000

Machine 2 time 10 (Balancing = 600 1.5 =
= 2,000 Figure) 300
6. Production
200 11.11 200 200
Quantity [5 /2]
7. Production
Quantity
2,000 66.66 400 200 2,666.66 333.34
Allocation
Machine 1 time
[(6) x 10; 6; 2; 1]
8. Allocation of
Machine 3 time
2,000 33.33 200 100 2,333.33 666.67
[(6) x 10; 3; 1;
0.5]
Solution to Q.No.6.b
The cost audit may have various dimensions as explained below:

i) Cost audit as an aid to management. The aim is to see that all information placed before
management is relevant, reliable and prompt so that management can discharge its duties
well.
ii) Cost audit on behalf of a customer. Often contracts are placed on 'cost plus' basis. The
customer, in such a case, usually gets cost accounts of the product concerned audited to
establish correct cost and therefore price.
iii) Cost audit on behalf of Government. Sometimes the Government is approached with
request for financial help or protection. In such a case, the Government may choose to
get cost accounts of the applicants audited before taking the decision on request.
iv) Cost audit under statue. The aim of cost audit under statue seems to be that the
Government wishes to know, as an instrument of control, the costs of various goods.
v) Cost audit on behalf of the Trade Association. Sometimes trade associations seek to
maintain prices at a certain level. For this purpose, the accuracy of costing information
submitted by various concerns has to be audited.
Strategic Management & Decision Making Analysis
Maximum Marks - 100

Marks
2. Read the following and answer the questions accordingly:
Miss Ruby Pandey was the first beautician of Nepal. People from cold Himalayan
region to hot Tarai region began to come in her beauty parlor situated in
Kathmandu to learn beauty tips. They began to share the traditional methods of
hair wash and available herbs used to make skin soft. After a year they formed a
small group with motivation of Miss Pandey and dedicated their time in
sharpening their knowledge of using Nepalese herbs for beauty purpose. Ruby
Pandey registered Shringar Company and started production employing same
group of people. It got success in marketing of its product and the business has
been expanded.
Shringar Company‘s success had been based on extremely high levels of
employee‘s productivity. The company attributes its productivity to a strong
organizational culture of respect for the ability of the individual. Its focus was on
recruitment of highly skilled manpower. It had satisfied workers with different
incentive schemes. After ten years of its establishment the company merged with
Nepal Saundarya Sadhan Limited.
For few years the company earned a quite satisfactory level of profit. But then
after its market share and profit went on declining. Since the days of attraction to
Nepalese people for foreign job, the company faced the problem of retaining its
skilled workers. Most of them left the company as they got opportunities to go
abroad. Newly hired workers were not perfect to the job. They had little
knowledge about operation of the machine and perfect timing of mixing the herbs.
The training and development part of the employees remain ignored. The
company could not correctly motivate employees for better performance. The
managers focus all their time on today. They never paid attention towards success
for tomorrow. They did not believe that the business managers should be aware of
the need for strategic management. The company replaces the old machines by
new machines, which needs skilled manpower to handle. But they paid less
attention towards the factor of lacking skilled manpower in the labour market.
With long process of selection and recruitment the company hired the people but
they left the job within one year. The managers of Nepal Saundarya Sadhan
Limited have not gone through a thorough grasp of the external environment and
internal reality. The company lacks strategic planning and strategic management.
a) Explain the problem of Nepal Saundarya Sadhan Limited from managerial

point of view. 10
b) Do you think the managers of above company know the value of
environmental analysis? 10
Answer:
a) Shringar Company started at the time when people are interested to share their knowledge among
a group. Miss Ruby took the initiation in production and distribution of beauty product and it
should be noted that she is a beautician. Her depth knowledge and public relation works well for
qualitative product and wider distribution. The history of success of the company looks to be
rooted on family type environment. But now the whole scene is changed. It became Nepal
Saundarya Sadhan after merger. Immediately after few years of merger the profit has been slow
down. Its market share declined. In fact the likely problems should be viewed from managerial
point of view to manage successfully.
The main problem of Nepal Saundarya Sadhan Limited is that its managers have no knowledge
of management science and philosophies developed recently. They never tried to follow the new
principles of management. They did not believe that the business managers should be aware of
strategic management. The concept of strategy has entered in the field of management recently
and the business managers began to adopt the strategic management. The strategic management
is a future-oriented proactive management system but the managers of Nepal Saundarya Sadhan
Limited focus all their time on today. Managers should see the value of trying to anticipate the
future and to prepare for it. The company should prepare systems, procedures, budget and long
term plan. Here the company lacks strategic plan and strategic management. This is the problem.
The managers of above Company have not yet thought about the new strategies as per the change
in environment. Today‘s global relationship and flow of human resources from one country to
another is a great challenge to this company. But the company did not accept any effect upon its
operation style. The company is so rigid that it is purchasing same complicated machines though
their workers do not have knowledge of its operation. The management lacks the component of
training and development of human resources. The management did not pay any attention
towards motivation. There is defect in human resource management that it could not retain the
employees for more than a year.
The threat to the company is the declining rate of profit and market share. The problem is the
management team who did not care the changed situation. They have not gone through a
thorough grasp of the external environment and internal reality. The whole scenario has been
changed but the managers have not changed their management style.
b) The managers of Nepal Saundarya Sadhan Limited are not interested in environmental analysis.
Its market share and profit is declining. It does not seem to be aware of change in external
environment and industry environment. They are unaware about technology and machines. They
install the machines which are difficult to operate. The taste and choice of customer in product of
beauty is so fast changing that unless the strategic planning has done in proper way, one cannot
be in position to survive. Traditional type of connection cannot grasp the market share for its
product in to-day‘s global age.
In the process of environmental analysis, management monitors the environmental factors that
determine the opportunities and threats to own organization. The managers of above Company
have neither gone through thorough external environment nor internal reality factors. Internal
factors like organizational policies, resources, structure and culture determine the relative
strengths and weaknesses of the organization. Strengths are the positive internal characteristics
that can be exploited to achieve goals. Weaknesses are internal characteristics that restrict its
performance. At initial phase when it started in the name of Shringar Company, it had strength of
employees‘ group work and high level of employee‘s productivity. But now the problem is
getting required level skilled manpower. They lack basic knowledge of herb mixing perfect time,
which directly affect the quality of the beauty product. In above case discussion, managers are
silent in its weakness. Their attention is not towards the uniqueness of own product.
In its context the political, economical, social, technical and global elements of environment have
been changed dramatically. Multiparty system has been established in the country that followed
different industrial and economic policies. Buyers‘ bargaining power has been strengthened.
Labor union formed in the organizations. The number of suppliers and competitors has been
increased. Economic reality and global opportunity made Nepalese people go abroad for job.
Expectation level and behavior pattern of employees are changed as per change in society and
social norms. A business has to interact with society made up of beliefs, values and even class
structure. It looks that above company ignored all social surroundings. Factors in technology
impact business but even the technology has not been given priority here. The managers should
diagnose the environment and identify opportunities and threats affecting their business.
Environmental analysis and organizational appraisal lead to the generation of strategic
alternatives.
The strategy might not be always expansion; it can be stability or some time retrenchment. It has
to develop its core competences. But it seems that the company has never gone through these
processes. There is a direct cause- effect relationship between the environmental change and the
strategy adapted. The managers in above case did not analyze the environment as it is ignoring
the strategic management.
3.
a) Describe the elements of strategic management. 10
b) Explain differentiation as a business strategy. What are the conditions of its
suitability? (3+7=10)
Answer:
a) Strategic management is a stream of decisions and actions which leads to the development of
corporative strategies to help achieve corporate objectives. Strategic management is a philosophy
of managing the organization that is externally oriented and links strategic planning to
operational decision making. It is concerned with strategic decisions and actions of top
management.
Strategic management broadly includes the formulation, implementation and control of strategy.
The elements of strategic management can be mentioned as:
1. Situational analysis
2. Strategy formulation
3. Strategic implementation
4. Strategic control
1. Situational analysis
Situational analysis is an important component of strategic management. Situational analysis
consists of evaluating the organization's mission, vision, values and objectives, analysing the
internal strengths and weakness of the organization; and investigating the external environment
to determine key external forces. An organization's strategy must take advantage of opportunities
in the environment avoid external threats. Capitalize on internal strengths, and reduce the
organization's weaknesses. Therefore, before a strategy can be developed, managers must have a
clear sense of what the organization should do, what it can do, and what it wants to do.
Strategic
Implementation
Strategic Strategy
Control Formulation
Situational
Analysis
Figure: Elements of Strategic Management
2. Strategy Formulation
Strategy formulation is another component of strategic management process. Based on the results
of the situational analysis, organizational goals must be established, strategic alternatives
generated. Strategic alternatives can be developed at different levels of the organization, i.e.
corporate level, business level, and functional level. All identified alternatives are evaluated based
on suitability, acceptability and feasibility criteria. After proper evaluation of available strategic
options, the best option is chosen. This entire process is referred to as strategy formulation.
3. Strategic Implementation
Another more critical element of strategic management is strategic implementation. Strategic
implementation is the process of translating the strategy into specific actions and programs.
Therefore, in the implementation phase, managers and employees are mobilized to translate
formulated strategies into action. Operational strategies, both functional and organization-wide
strategies are developed that will accomplish the broder Organizational strategies. It is in the
implementation stage that managing human, financial, informational, and physical resources
becomes most important. During this stage, the strategy is accomplished.
4. Strategic Control
The ultimate component of strategic management is strategic control. The basic objective is to
assess whether the strategy and supporting implementation are still appropriate, which is
accomplished by practically evaluating the effectiveness of the strategy and its implementation
and making any necessary modification.
The fundamental activities of the control phase of strategic management include:
 Reviewing the target goals of the organization
 Measuring the performance of the organization.
 Comparing the target goals with the actual performance
 Taking corrective action if necessary.
b) The differentiation strategy is an action produce goods or services (at an acceptable cost) that
customers perceive as being different in ways that are important to them. Under this strategy, an
organization tries to offer the products which are distinct in the perception of customers. The
differentiation may be based on product parameters, services back up, promotion and image.
The following are some of the conditions of success of differentiation strategy.
1. Many ways of differentiation: If there are many ways of differentiating products, this
strategy is likely to succeed. For example; mobile phones, car.
2. Diversification in product use: If the product can be used for different purposes,
differentiation strategy is effective. For example, mobile phone may be used as phone,
camera, and music player.
3. Few rivals: If there are few rivals in the industry, customer loyalty may be high and
differentiation strategy may be successful.
4. Dynamic technological environment: If the technological environment is dynamic,
differentiation strategy may be more effective.
5. Quality sensitive buyer: If the customers are quality sensitive not price, they are ready to
pay premium price as a result of which differentiation strategy would be successful.
6. Extensive research: Differentiation strategy is effective if a business is involved extensively
in research for developing new features on products.
4.
a) Define project. Why is effective project management essential? (2+8=10)
b) Discuss the requirements of project negotiation with principles of negotiation. 10
Answer:
a)
Definition of Project
A project is a temporary activity to achieve specific objectives. It is undertaken to create a unique
product or service. Project has definite starting and ending points. Project operates within the
constraint of time cost and quality performance.
Harold Kerzner has defined project as any series of activities and tasks that:
 Have a specific objectives to be completed within certain specifications
 Have defined start and end dates.
 Have funding limits.
 Consume Resources.
Why Project Management?

Project management is concerned with the planning, organizing, directing and controlling of
organization resources to complete specific goals and objectives. In other words, it is the task of
getting the project activities done on time, within budget and according to specifications by project
team in a dynamic environment.
Project management is a new way of thinking about management. It consists of knowledge, tools and
techniques to achieve specific project objectives through effective utilization of resources.
Effective Project management is very essential because of the following reasons:
a. Goal Attainment: Every project has specific goals and objectives. A project without goals is
unthinkable. However, specified goals can only be achieved through effective project
management. Project management helps in improving the overall organizational performance
through effective achievement of project objectives within the constraints of time, cost and
quality.
b. Proper Utilization of Resources: All projects require different types of resources. Effective
project management acquires and mobilizes needed physical, financial, human and information
resources. Resources are prioritized in a disciplined and practical way.
c. Change Management: Project management is also important to introduce new tools, techniques,
methods, equipment, processes, and functions for achieving desired results. It serves as an
instrument for adopting and managing change. It removes all functional barriers which reduce
resistance to change
d. Better Coordination: Better coordination can be established through effective project
management. The project manager is fully responsible for project results. This promotes
coordination across functional lines. The project manager makes decisions when required.
Misunderstanding and conflicts can be managed quickly.
e. Team Management: A project consists of multi-disciplinary diverse team formed from various
functional departments. Project management promotes teamwork for better results. It attempts to
maintain trust, respect and understanding among team members.
f. Organizational Re-engineering: Project management is based on temporary organization
structure. Project organization structure can be pure project structure or maturity structure. These
structures are flexible in nature which facilitates organizational re-engineering.
g. Customer satisfaction: Project management is customer oriented. It is always committed to
fulfill the needs of the customers who are the ultimate users of the projects results.
b) The negotiation is a process that a the project manager needs to know. The main requirements of
project negotiation indicate towards the probability of few conflicts arise and in situation of
conflict too the conflicting parties seek the solutions for both. The most important requirement is
honesty between parties in project.
The key to understand the nature of negotiation as it applies to project management is the
realization that few of the conflicts arising in projects have to do with whether or not a task will
be undertaken or a deliverable produced. Instead, they have to do with the precise design of the
deliverable and/ or how who will achieve the design, when, and at what cost. The implication is
clear that the work of the project will be done. If conflicts between any of the parties to the
project escalate to the point where negotiations break down and work comes to a halt, everyone
loses.
A second requirement for the conflict resolution or conflict reduction methods used by project
management is that they allow and foster honesty between the negotiators. Any behavior that
breeds mistrust will make future negotiations extremely difficult, perhaps impossible.
In fact the conflicting parties at interest to a project are not enemies or competitors, but rather
allies as members of an alliance with strong common interests. It is a requirement of all
conflicting parties to seek solutions to the conflict that not only satisfy their own individual
needs, but also satisfy the needs of other parties to the conflict as well as the needs of the parent
organization. In the language of negotiation, this is called a ―win-win‖ solution. Negotiating to a
win-win solution is the key to conflict resolution in project management. R.Fisher has developed
a negotiation technique that tends to maintain the above-discussed requirements. These are the
principles of negotiation.
1. Separate the people from the problem. Conflicting parties tend to attack one another rather
than the problem because their emotion and objective fact get confused. They might be highly
emotional. To minimize the likelihood that the conflict will become strictly interpersonal, the
substantive problem should be carefully defined.
2. Focus on interests, not positions. Otherwise each party develops a high level of ego
involvement in his or her position and the negotiation never focuses on the real interests and
concerns of the conflicting parties. When negotiation focuses on interests, the negotiator must
determine the underlying concern of the other party.
3. Before trying to reach agreement, invent options for mutual gain. Some efforts should be
devoted in finding a wide variety of possible solutions that advance the mutual interests of the
conflicting parties. Success at finding options that produce mutual gain positively reinforce
win-win negotiations.
4. Insist on using objective criteria. Rather than bargaining on positions, attention should be
given to find standards like market value or company policy that can be used to determine the
quality of an outcome. Doing this tends to make the negotiation less a contest of wills.
5.
a) ―Strategy implementation is all about ensuring a fit between strategy and
structure, resource, leadership, policies, etc.‖ Elaborate this statement. 7
b) Describe the methods of strategy development. 8
Answer:
a) Implementation of strategy is the process through which a chosen strategy is put into action. Good
strategy with poor implementation or poor strategy with good implementation is likely to lead to
problems. Mere choice of even the soundest strategy will not precipitate into organizational
activities and accomplishment of its objectives. Strategy formulation requires primarily conceptual
& analytical skills, Strategy implementation requires administrative skills. Strategy is the
independent variables and organization structure, leadership, functional strategies, resources, etc.
are the dependent variables. So, the dependent variables have to be changed and adapted as per
strategy. More specifically.
i) Strategy- organization structure fit
-Appropriate organization structure should be created so that the chosen strategy can be
readily implemented and strategic goals can be accomplished.
-Do not assume that every strategy change requires organizational restructuring, as
sometimes the existing organization structure might be appropriate for the new strategy.
ii) Strategy-resource fit
-To implement the selected strategy, the necessary human resources, financial resources,
infrastructure based resources, informational resources, etc. must be acquired.
-Decisions and actions have to be taken regarding requirement of the quality and quantity of
each type of resources necessary for implementing the chosen strategy and determining from
where they will be accumulated.
-Once required resources are collected they have to be allocated/reallocated to different
SBUs/departments etc. in line with the chosen strategy.
iii) Strategy-Leadership fit
-Appropriate leadership should be present in the organization that will ensure successful
implementation of the chosen strategy.
-Either the existing executives may change their leadership style to suit to the chosen strategy
or they can be trained to do so. If both is not possible, the existing leaders should be replaced
by capable leaders from within or outside the organization who can successfully implement
the strategy.
iv) Strategy-SIS fit
-As per the selected strategy, appropriate strategic information system (SIS) should be
developed that will monitor strategy implementation process and collect, classify, process,
store, and disseminate accurate, complete, and timely information/feedback on its progress on
a continual basis.
v) Strategy-management system fit
-General management is the foundation over which the building of strategic management
shall be created. Strategic management is not the alternative to general management. In other
words, general management is the prerequisite to strategic management.
-For example, 70% of joint ventures during the 80s failed to meet their objectives due to
failure on management’s part to set up a sound general management system to implement the
strategy.
vi) Strategy-functional plans, policies, and strategies fit
-It is necessary to develop appropriate functional plans, policies, and strategies (in line with
the selected corporate/SBU strategy) in order to realize the objectives of the strategy chosen.
-Implementing the functional plans, policies, and strategies is a must; otherwise they remain
only on papers and cannot contribute to the success of the strategy.
-For this, functional managers should be motivated to carry out the implementation of the
revised functional policies.
vii) Strategy- and change management
-As per the requirement of the selected strategy, managing strategic change in less painfully and
with great enthusiasm is a must.
b) Managers must develop different strategies by adopting appropriate methods. Following are the
main methods of strategy development:
a. Internal development: Internal development is a well-known method of strategy development.
The strategies are developed by building up an organizations are resources and capabilities.
Internal development is a slow, but less risky method of strategy development. Therefore, it is
also known as ―Organic development‖.
Internal development method can be adopted in the following ways:
 Developing new products.
 Developing new markets.
 Building competence through learning
 Spreading costs to new activities.
b. Mergers and Acquisitions
Mergers and acquisitions are popular method of strategy development. They involve permanent
ownership ties. Merger is the combination of two or more organizations into one. Mergers can be
of many types such as horizontal merger, vertical merger, concentric merger and conglomerate
merger.
Acquisition is another form of ownership ties. When one company buys another, the purchase is
called and acquisition. The purchase can be achieved either by acquiring the seller‘s stock or by
purchasing its assets and business. The acquired organization generally keeps its separate identity
as a subsidiary.
c. Joint Development and Strategic Alliances
Joint development is a method of strategy development where two or more organizations share
resources and activities to develop a strategy. This is a cooperative approach to strategy
development. Cooperative strategies involve working with other firms to gain competitive
advantage within an industry. Cooperation with other firms, no doubt, can provide access to
finance, materials, technology, skills and markets.
Strategic alliance is the best example of joint development. It is a cooperative strategy in which
two or more firms combine some of their resources and capabilities to gain competitive
advantage.
a) Strategic vision
b) Project planning
c) Value chain analysis
d) Portfolio analysis
e) Resource planning
Answer:
a) Vision is the picture of desired future state of an organization. It is a nicely worded one sentence
statement. It specifies the direction that a company intends to follow in developing and
strengthening its business. A strategic vision communicates management‘s aspiration to
stakeholders. It should be specific and distinctive to a particular organization. It provides
managers with a reference point in making strategic decisions and preparing the company for the
future.
b) Project planning is an important phase of project life cycle process. It is concerned with the
development of project for investment. Project planning is deciding in advance about what
activities those are needed to be done, how the activities will be done, when the activities are to
be done and who will do the activities. It is the process of setting goals and choosing the action to
achieve specific goals and objectives of the project.
Project planning is an integral part of project management. It is an interdisciplinary activity
involving specialized in different fields. It involves both the assessment of future opportunities
and challenges of an organization and developing strategies to achieve the predetermined goals.
Project planning is defined as the function of selecting the enterprise objectives and establishing
the policies, procedures and programs necessary for achieving them. It is the description of the
technical contents of the project. It involves detailed design, estimates, scheduling, budgeting and
allocation of human and non-human resources. Therefore, project planning is a continuous
process of taking original decision with a view to achieve specific goals in future using standard
norms and methodologies.
c) Value chain analysis attempts to understand how a business creates customer value by examining
the contribution of different activities within the business to that value. It is important because
the firm can earn return only if it creates greater value than the costs incurred to create that value.
The value chain shows how a product moves from the raw-material stage to the final customer.
The activities in a value chain analysis are divided into primary and secondary activities.
d) Portfolio is a range of investments held by an organization. Modern organizations are multi-

business enterprises. Portfolio analysis helps multi-business managers to choose what business to
have in a portfolio. Management uses it to identify and evaluate various businesses that make up
the organization. All business units are viewed as investments that provide returns. The objective
is to achieve the highest overall return on its investment.
Portfolio analysis is a set of tools that help top management in making strategic decisions with
regard to various businesses in its portfolio. A number of techniques like BCG Matrix, GE‘s
business screen and Hofer‘s Matrix have been developed. It is used for competitive analysis and
strategic planning in multi-business companies. It enables an organization to revise the portfolio
by closing down the unprofitable business units.
e) Resource planning includes the allocation of resources in different businesses and units. For a
successful implementation of strategy, managers should determine the resource needs in term of
technology, information, fund and people. After acquisition of necessary resources, they should
be allocated to various organizational units and departments. The managers are required to
review the budget proposals and ensure the resource flow the units or departments which are
critical from strategy implementation point of view.
7.
a) Enlist any five points to show the importance of strategic management in the
least developed country like Nepal. 5
b) What are the areas of internal analysis? Explain briefly. 5
Answer:
a) Nepalese organizations should develop long-term vision and strategies in every sector to
withstand the challenges posed by globalization. The following are some of the points to show
the importance of strategic management in Nepal.
1. Exploitation of opportunities: Resources like people, capital, technology and information
can be fully and effectively utilized through proper strategic management. There are ample of
opportunities in Nepal in terms of water resources, agriculture, tourism and human resource
for the Nepalese organizations to explore.
2. Strategic fit: Strategic management helps to identify the opportunities prevalent in the
external environment by matching them with the most important resources of Nepal like
people, water, and natural beauty. It alerts Nepalese organizations to adjust with the changing
environmental forces.
3. Face competition: Due to globalization and liberalization, competition is rapidly increasing
in every sector of Nepalese business. Nepalese organizations can face the competition in such
a competitive world market only through the effective strategic management.
4. Role management: Strategic management helps better understanding of the authorities,
responsibilities and accountabilities of individuals and groups. Such understanding reduces
the gap and overlap of activities. Nepalese organizations may foster role clarity through
effective strategic management. It further enhances the social responsibility of business.
5. Research and development: Strategic management focuses on the research and
development, which are very essential for growth and diversification of an organization. They
result in innovations which are cornerstones for business success. Research and development
are vital for the development of trade and business in Nepal.
b) Internal analysis is done to identify strengths and weaknesses of each functional areas. The major
areas of internal analysis are as follows:
a. Production/Operations: This area is related to those activities that transform inputs into
finished goods and services. Production and operation factors include production planning,
capacity utilization, plant location and layout, inventory management, maintenance system,
total quality control etc.
b. Marketing: Marketing attempts to satisfy the needs of target customers to achieve
objectives. Its strengths and weaknesses are analyzed in terms of marketing mix, new product
development, market share, distribution system, pricing policy, promotion strategy, etc.
c. Financial Resources: Finance is concerned with acquisition, allocation and utilization of
financial resources. Its strengths and weaknesses are analyzed in terms of availability of
sources of funds. Financial planning, financial control system, capital structure, dividend
policy, budgeting system etc.
d. Human Resources: Human Resources are strategic resources for achieving competitive
advantage to a firm. The types and nature of required human resources and their skills,
knowledge and competencies are analyzed. Effectiveness of human resources management,
training and development practices, working conditions, motivation, labour relations, etc. are
also analyzed.
e. Research and Development: Research and development is another important area of
internal analysis. It is the key to innovation and inventions. Its strengths and weaknesses are
analyzed in terms of R& D budget pace of technological change availability of R&D
competencies, availability of research facilities and well-equipped labs etc.
-End-

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CHARTERED ACCOUNTANCY PROFESSIONAL CAP-II

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Total No. of Questions - 6 Total No. of Printed

Time Allowed - 3 Hours Marks

1. The major business of Kathmandu Ltd. is in the children‘s food industry. It

Account Payables (7,000,000) (7,000,000) - -

WN 2: Cost of Sales (Rs.‗000)

WN (a) Depreciation – Building (Rs. ‗000)

WN (b)- Depn on Plant (Rs.‘000)

Depn of Plant DCO

Particulars Dr. (Rs.) Cr. (Rs.)

Employee Benefit Expenses Dr. 330,138

Bank A/c Dr. 400,000

Statement of Income 2073/74:

4. Write short notes on the following: (5×3=15)

Valuation of Goodwill- Long term fund approach Rs.‘000

Leverage effect on goodwill

WN1: Debtors Adjustment

The expected growth rates for the following years are:

(ii) Annual cost to Green municipality

(iii) Expected Risk Premium of factor 2:

Following further information are provided:

Current values of Ntell and Nbell before acquisition

(ii) Value of the company using FCF model

(iii) Calculation of value of equity and value per share

Answer 4(b): Arbitrageurs and Services provided by them

It is now June 30. Following quotations regarding rates of exchange of US $

i) Calculation of the expected forward exchange rate 1 year from now

Rate of Return = (14,616,000 – 12,500,000)/ 12,500,000 = 16.93%

i) Calculation of the price-weighted index's value

Total No. of Questions - 6 Total No. of Printed Pages -11

b. Responsibility of Internal auditor for Internal controls (3 marks)

b) Requirement of Audit Committee

Functions, duties and powers of audit committee:

2. Answer the following:

Further, where attendance is impracticable, alternative audit procedures, for example,

i) Existence: The Plant and Machinery recognized in the statement of financial

4. Answer the following:

(a) Break the law

The professional accountant should comply with 5 fundamental principles of code of

b) The equitable treatment of shareholders: The corporate governance framework

A. All shareholders of the same series of a class should be treated equally.

5. Answer the following:

Important transactions/ items which need to be investigated in the due diligence

i) all input is actually entered into the computer.

i) To check whether proper classification is done for revenue/capital - a report can be

6. Write short notes on the following: (5×3=15)

c) Ratio Analysis: It is a type of analytical procedure. Ratios are expressed as a

e) Internal check system

Attempt all questions.

As per Sub Section 9, notwithstanding anything contained elsewhere in this Section, no

(b) (i) Application to the insurance Board for obtaining permission;

(1) Any national or foreign corporate body desirous to operate an Insurance

(a) Memorandum and articles of association of the corporate body,

2. Answer the following questions:

b) Newly appointed directors of Chandragiri Development Bank have submitted their

In making such disclosure, a copy of the written agreement, if any, concluded

If any director gives written information to the company that he be considered to

Section 24 of BAFIA has provided to make complete records of the directors as

The bank or financial institution should maintained separate records of each

(c)Section 22 of Industrial Enterprises Act, 2073 has provided various facilities to

Necha Salyan Hydroelectricity Company is a newly established industry in Solu

Dungeshor Petrochemical Exploration Company was established in Dailekh to