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a) The Inventory valuation method used in this question is as per AS 2 issued by the ICAI. The
inventory is valued at Cost or Net Realisable Value whichever is lower. The Opening Stock,
Purchases and Closing Stocks come in handy to calculate the amount of material used in production
for the current year. They are also used in calculating the inventory turnover ratio which tells the
rate at which the company is able to turn the inventory into finished goods. The higher the ratio,
the better it is for the company.
b) As per AS 2, if the items have become obsolete and you do not expect to sell them at the given cost,
it is advised and mandated to measure them at their net realisable value. It does not make sense to
keep valuing such items at their cost because the business knows that it cannot recover the same if
and when these items are sold.
c) Yes, the company will have ‘Change in stocks’ item in its cash flow statement under the header of
change in working capital under Cash flow from Operating Activities. An increase in the inventories
means a reduction/decrease in Cash flow from Operating Activities. An increase in inventories
means that a company has invested in more current assets which involves utilisation of cash and
hence a decrease in Cash flow from Operating Activities.

Ashok Leyland Case

a) The company has reduced the face value of its shares from Rs. 10 in 2014 to Rs. 1 in 2005. This is
commonly called as Stock Split. This does not have any effect on the total shareholders’ capital in
the company. The number shares get multiplied in the ratio of the stock split. In this case, the
number of shares will get *10 because the Face value of each share has become 1/10. It does not
involve bringing in new capital only the existing capital is restructured.
b) There has not been any change in the share capital of the company. The shareholders’ fund has just
been restructured.
c) Global depository receipts are the securities that are used by investors from the developed
countries to invest in companies of the developing or the underdeveloped countries. Typically, a
bank purchases shares of the company and issue depository receipts to the foreign investor. The
shares issues as GDRs are similar to what are normally issued, it is just that these are held by a
foreign investor.
d) The company has debentures to the tune of Rs. 1663.33 million. The company has maintained its
debt to equity ratio at 1.4:1 which is not too high and is well below the ideal debt-equity ratio of
e) The debentures to be redeemed in each year:
2004: 2020-1663.33= 356.67
2005: 50+83.33+33.33+16.67+6.67+83.33 = 273.33
2006: 83.33+33.33+16.67+166.67+6.67+16.67+250 = 573.34
2007: 133.33+16.67+50= 200
2008: 166.67+166.67= 333.33
2009: 166.67
2010: 166.67