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EXCEL PROFESSIONAL INSTITUTE

WEEKLY ASSIGNMENT

WEEK 3

PRINT, WORK AND SUBMIT YOUR ASSIGNMENT AT NEXT LECTURE(Ignore assignment for courses you have not registered)

1.3 BUSINESS AND CORPORATE LAW


ASSIGNMENT 3ATTEMPT ALL QUESTIONS

Q1.

Distinguish between conditions and warranties in contract law. 6 marks

Q2.

State and explain the remedies available to a contracting party who has suffered a breach of contract.

6 marks

Q3.

Define an agent and outline the different ways in which an agency relationship can be created.

8 marks

Total 20 marks

2.1 FINANCIAL REPORTING


ATTEMPT ALL QUESTIONSQUESTION 1

(a) The objective of IAS 36 Impairment of assets is to prescribe the procedures that an entity applies to ensure that its assets are not impaired.

Required:Explain what is meant by an impairment review. Your answer should include reference to assets that may form a cash generating unit.Note: you are NOT required to describe the indicators of impairment or how impairment losses are allocated against assets. (4 marks)

(b) (i) Elik acquired an item of plant at a cost of ghc800,000 on 1 April 2010 that is used to produce and package pharmaceutical pills. The plant had an estimated residual value of GHC50,000 and an estimated life of five years, neither of which has changed. Elik uses straight-line depreciation. On 31 March 2012,Elik was informed by a major customer (who buys products produced by the plant) that it would no longer be placing orders with Elik. Even before this information was known, Elik had been having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the next three years will be: GHC’000Year ended: 31 March 2013 220 31 March 2014 180 31 March 2015 170On 31 March 2015, the plant is still expected to be sold for its estimated realisable value.Elik has confirmed that there is no market in which to sell the plant at 31 March 2012.Elik’s cost of capital is 10% and the following values should be used: value of GHC1 at: GHCEnd of year 1 0·91End of year 2 0·83End of year 3 0·75

(ii) Elik owned a 100% subsidiary, Etor that is treated as a cash generating unit. On 31 March 2012, there was an industrial accident (a gas explosion) that caused damage to some of Etor’s’s plant. The assets of Etor immediately before the accident were:

GHC’000Goodwill 1,800Patent 1,200Factory building 4,000Plant 3,500Receivables and cash 1,500 ––––––– 12,000 –––––––As a result of the accident, the recoverable amount of Etor is GHC6·7 millionThe explosion destroyed (to the point of no further use) an item of plant that had a carrying amount ofGHC500,000.


Etor has an open offer from a competitor of GHC1 million for its patent. The receivables and cash are already stated at their fair values less costs to sell (net realisable values).

Required:Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 2012 after applying any impairment losses.Calculations should be to the nearest GHC1,000.


MANAGEMENT ACCOUNTINGASSIGNMENT 3

Q1

Material X is a key raw material of Foster Bread Ltd. The store keeper is interested in knowing the units they have placed on order because the supporting documents have been destroyed by fire. She is able to provide that immediately before the fire: materials in inventory were 1,250; materials requested by factory but yet to be supplied issued were 375 whilst inventory balance was 3,255. What is the amount of material X that Foster Bread Ltd has ordered from its suppliers? (2marks)

Q2

Dim Ltd., a manufacturer of groundnut paste, wishes to know whether it is advisable to stick to its economic orders or accept a special order from a foreign supplier for the supply of groundnuts. The following information has been provided:

Purchase price per bag of groundnut GH¢360

Holding cost per annum is 10% of the cost of a bag of ground nut

Ordering cost per annum GH¢7.7

Annual Demand of groundnut paste 6,000bags

Normal usage per month 520bags

Minimum Usage per month 500bags

Maximum usage 700bags

Required:

i) The foreign supplier promises a reduction in the price of a bag of groundnut by 8% if MM Company is willing to order 3000units each time it wants to order. Advise MM. . (10marks)

ii) What is the difference between a bin card and a store ledger card? (3marks)


Question 3

Prim Ltd manufacturing company is considering introducing a high day rate incentive scheme. An experiment with one of its average workers showed that an employee is likely to produce 1,500units in a 40hour week if she was paid GH¢25 per hour but 1800units if she was paid GH¢31.25 per hour.

Assume that production overhead is added to cost at the rate of GH¢25 per direct labour hour.

Required:

i) Determine the cost per unit of output on both the low day rate scheme and high day rate scheme. (3marks)

ii) Is it advisable to introduce the high day rate scheme? (2marks)

(Total: 20 marks)


2.3 AUDIT AND ASSURANCE

ASSIGNMENT 3

Q1.You are a manager in the audit firm of SSD & ASSOCIATES; and this is your first time you have worked

on one of the firm’s established clients, GACEN Co. The main activity of GACEN Co is providing

investment advice to individuals regarding saving for retirement, purchase of shares and securities and

investing in tax efficient savings schemes. GACEN is regulated by the relevant financial services

authority.

You have been asked to start the audit planning for GACEN Co, by Mr. Gyasi, a partner in SSD &

ASSOCIATES. Mr. Gyasi has been the engagement partner for GACEN Co, for the past nine years and

so has excellent knowledge of the client. Mr. Gyasi has informed you that he would like his daughter

Elsie to be part of the audit team this year; Elsie is currently studying for her first set of knowledge level

papers for her ICAG qualification. Mr. Gyasi also informs you that Mr. Fordson, the audit senior,

received investment advice from GACEN Co during the year and intends to do the same next year.

In an initial meeting with the finance director of GACEN Co, you learnt that the audit team will not be

entertained on GACEN Co.’s yacht this year as this could appear to be an attempt to influence the opinion

of the audit. Instead, he has arranged a balloon flight costing less than one-tenth of the expenses of using

the yacht and hopes this will be acceptable. The director also states that the fee for taxation services this

year should be based on a percentage of tax saved and trust that your firm will accept a fixed fee for

representing GACEN Co in a dispute regarding the amount of sales tax payable to the taxation authorities.

Required: Explain the ethical threats which may affect the auditor of GACEN Co and make

recommendation on how these threats can be mitigated.

Q2.

Outline the benefits of establishing an Internal Audit Department in an organisation.


2.4 FINANCIAL MANAGEMENT

ASSIGNMENT 3

Vesuvius is a rapidly-growing company. Its summarized financial statements for the current financial year (just ended) and the previous year are as follows.

Summarised Income statementsCurrent year Previous yearGHS000 GHS000

Revenue 4,000 3,000Cost of sales 2,400 1,500

–––––––– –––––––Gross profit 1,600 1,500Operating expenses 1,550 1,250

–––––––– –––––––Net profit 50 250

–––––––– –––––––

Summarised statements of financial positionCurrent year Previous year

GHS000 GHS 000 GHS000 GHS 000

Non-current assets 2,000 1,800

Current assetsInventory 600 300Trade receivables 650 330Cash 0 20

1,250 650Total assets 3,250 2,450

Equity and liabilitiesShare capital 1,800

1,800Retained earnings 500 450

2,300 2,250

Current liabilities Trade payables 450 200Bank overdraft 500 0

950 2003,250 2,450

Required


(i) Identify the indicators of overtrading in Vesuvius’ financial statements(ii) Discuss ways to remedy overtrading.

Total 20 marks2.5. PUBLIC SECTOR ACCOUNTING

ASSIGMNENT 3Question one

a. Explain any THREE types of relationships between Government policy and the annual

budget

b. Explain FOUR reasons why the budget is regarded as a management tool for public

accountability

Question Two

a. In Central Government Budgeting, Revenue projections are important. State five (5)

factors to be considered in Government Revenue projections. 5 marks

b. On receipt of estimate from the department, the Minister of Finance shall cause to be

conducted a Budget hearing to review strategic plans and estimate of the departments

concern.

Required

Outline five (5) principles that the Ministry of Finance apply during the budget

hearing 5 marks

c. An important tool available to the Government for economic management is fiscal

policy

You are required to:

i. Explain the meaning of fiscal policy and state the instruments use to achieve

the objective of the policy5 marks

ii. Discuss the economic objectives that fiscal policy can be used to achieve

5 marks


2.6 CORPORATE STRATEGY, ETHICS AND GOVERNANCE

ASSIGNMENT 3

Merkland Sportswear (MS) is the market leader in sportswear in Ceeland, selling a variety of sportswear products under its own well-known brand. It is primarily a product development and marketing business as it contracts out all of its manufacturing to third parties around the world and it mostly sells its products through third-party retailers. It has only one store which is located in the capital city of Ceeland. The purpose of this store is to act as a centre for its marketing activities and to be a tangible representation of the MS brand. However, the main marketing activity forMS is the recruitment and promotion of star sports men and women as MS brand ambassadors. MS tries to have the most well-known sports star in each of the 10 most popular sports in Ceeland as an ambassador.You are a Strategic Management advisor to MS, brought into the company by the chief executive officer (CEO) to help the board with a number of issues. The mission statement of the business is designed to be broadly appealing. It is ‘to inspire Ceelanders to compete’. From a business perspective, the aims are more focused, MS aims to grow as a business and to maximise shareholder wealth. The CEO further clarified the broad strategy to achieve these aims saying, ‘We want to inspire competition not just in our customers but also within the company, to seek our greatest competitive advantage. We will achieve this by creating innovative products which provide reduced risk of injury and enhanced sporting performance supported by the best marketing operation in Ceeland.’ In order to assist in providing more detailed strategies to achieve these aims, the board has instituted a review of the competitive position of MS by commissioning a SWOT analysis (Appendix 1).The CEO has asked that your first task be a review of the SWOT analysis.Also, you are given details on a recent new development in the market. Nush Sportswear, one of the major competitors of MS, has recently suffered a scandal which has been widely reported. An investigative reporter discovered that one of the suppliers who manufactured sports shoes for Nush had been using child labour. The country in which the manufacturer worked had rules prohibiting child labour, but enforcement was very weak. This story has been widely covered in the media and has led to consumer boycotts and a review by the Ceeland business regulator into Nush’s sourcing policies. It has been discovered that this is common practice in the sports footwear business where manufacturing is outsourced to such countries. MS’ shareholders have reacted with alarm to the potential damage that this could do to MS’ brand. They have asked the


board to consider changing their policy of outsourcing footwear manufacture. The board is considering two alternative responses:

1. Review and ensure that all outsourced footwear manufacture complies with appropriate employment terms and conditions (where necessary manufacturing would move to third-party companies in countries with appropriate regulation and enforcement); or2. Create a manufacturing operation for MS in order to have full control of operations.

Finally, the consultant who did the SWOT analysis has mentioned to the board that if they are thinking of reviewing their existing strategies, then they should consider using the value chain to secure competitive advantage. The CEO thinks that you should assess the implications of using the value chain for the performance management of MS. (An outline of the value chain is given in Appendix 2.)

Required:Write a report to the board of MS to:(i) Assess the SWOT analysis in Appendix 1, make suggestions for improvements at MS. (ii) Explain the implications of using the value chain for performance management at MS. (20 marks)

Appendix 1SWOT (completed before the Nush scandal was reported)

S:– High market share– Excellent brand awareness– Strong revenue growth (compared toindustry average of 11%)– Supply chain management

W:– Loss of a key brand ambassador (who wasinjured when he tripped over the laces ofhis MS boots)– Weak IT expertise

O:– New products in the market for new sports(such as those being introduced at eachWorld Championships)

T:– Growth of social media as main marketingChannel

Appendix 2The Value Chain


2. Management by objectives (MBO) is a process of defining objectives within an organisation so that management and employees agree to the objectives and understand what they need to do in the organisation in order to achieve them. The essence of MBO is participative goal setting. In order for MBO to work effectively in an organisation, objectives agreed on must possess certain inherent characteristics. Required: Identify and explain THREE of these inherent characteristics and how they facilitate Management by objectives (MBO). (6 marks)

3. A new entrant into an industry will bring extra capacity and more competition and so could, in turn drive down profits. The strength of the threat posed by new entrants is likely to vary from one industry to another and depends on the strength of the barriers to entry and the likely response of existing competitors to the new entrant. Required: Identify and explain FIVE determinants of barriers to entry to new entrants into an industry.

(10 marks)


3.1 CORPORATE REPORTING

ASSIGNMENT 3Rader Ltd is constructing a warehouse that will take about 18 months to complete. It began construction on 1st January 2014. The following payments were made during 2014:

GH¢’000 31st January 200 31st March 450 30th June 100 31st October 200 30th November 250

The first payment on 31st January was funded from the entity’s pool of debt. However, the entity succeeded in raising a medium-term loan for an amount of GH¢800,000 on 31st March, 2014, with simple interest of 9 percent per annum, calculated and payable monthly in arrears. These funds were specifically used for this construction. Excess funds were temporarily invested at 6 percent per annum monthly in arrears and payable in cash. The pool of debt was again used to an amount of GH¢200,000 for the payment on 30th November, which could not be funded from the medium-term loan. The construction project was temporarily halted for 3 weeks in May when substantial technical and administrative work was carried out. Rader Ltd adopted the accounting policy of capitalizing borrowing costs. The following amounts of debt were outstanding at the balance sheet date, 31st December 2014: GH¢’000 Medium-term loan (see description above) 800 Bank overdraft (The weighted average amount outstanding during the year was GH¢750,000 and total interest charged by the bank amounted to GH¢33,800 for the year 1,200

A 10%, 7-year note dated 31st October 2018 with simple interest payable annually at 31st December 9,000

Required: Calculate the borrowing costs to be capitalized (10 marks)

b) Analyze the circumstances under which impairment losses arise and demonstrate the circumstances that may indicate that a company’s assets may have become impaired as per the provisions of IAS 36 – Impairment of Assets. (5 marks)

c) Explain modalities for recognizing and disclosure of operating segments in line with IFRS 8 5 marks


3.2 ADVANCED AUDIT AND ASSURANCEASSIGNMENT 3

Big Build Construction LtdBig Build is a listed construction company with annual revenue of GHS350m. Big Build’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008 of GHS40m.Big Build’s audit firm are conducting an audit. This is the first audit of Big Build that this audit firm have conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:(a) Inventory valuationInventories include GHS7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s Highways Agency, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review and on being offered a special purchase of this material, Big Build speculated on a favourable outcome of this review and purchase the material. In February 2009, shortly before the financial statements were approved by the directors, the Highways Agency reported that it would not, currently, accept the use of this material. If used on non-Highways Agency contracts the material’s net realisable value would not exceed GHS2m.The finance director maintains that the issue of the Highways Agency report was a non-adjusting event after the reporting period. The write down of the inventory should, therefore, be reflected in the next period’s financial statements.(b) DepreciationDuring the year ended December 31, 2005 the company purchased two computer controlled earth movers at a cost of GHS2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer controlled earth movers and replacing them with the latest model at a cost of GHS6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology


cannot be foreseen and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.


(c) Contingent liabilityThe company is being sued for GHS50m by the Highways Agency for defective work on a recently completed road. The company maintains that it met the Highways Agency’s specification and it is the Agency’s engineers who are at fault in drawing up the specification. Big Build maintains that it has no case to answer, that the possibility of loss is remote and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the Highways Agency. If the company were to lose the case its future going concern would be threatened. No disclosure has been made in the financial statements.

Required:For each of the following three issues, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.

a) Inventory valuation (6 marks)

b) Depreciation (7 marks)

c) Contingent liability (7 marks)


3.3 ADVANCED FINANCIAL MANAGEMENT

ASSIGNMENT 3

Excel Plc., a manufacturing company located in the Western part of the country, designs and manufactures Personal Stress-Monitoring Device (PSMD). The device is designed for checking individuals‟ stress levels. A typical device has a commercial life of three years. As a result of wide advertisement campaign, the company recorded high sales for the first two years while the sales figure for the third year went down substantially due to low demand for the product. The marketing department of the company was assigned the responsibility of finding out the reason for the low demand. The department discovered that the consumers complained of the low quality of the product which makes it much less durable. With this information, the company decided to submit 200 samples of the devices to the Quality and Assurance department of the company for analysis. Out of the 200 devices submitted, 50 enjoyed an above average demand, 120 enjoyed average demand and the remaining 30 enjoyed below average demand. This demand pattern is applicable in all the company’s products. Recently, the company developed a new device known as “SIMPLE”. The following projections were made in respect of the product “SIMPLE”:

Sales revenue Year 1 GHCm Year 2 GHCm Year 3 GHCmIf demand is above average 240 500 160If demand is average 140 340 80If demand is below average 50 180 50

Variable costs will amount to 30% of sales. Sales revenue and variable cost will be received and paid respectively on the last day of the year in which they arise. If “SIMPLE” is produced, a special machine will have to be purchased at the beginning of Year 1 at a cost of GHC190 million, payable at the time of purchase. The machine will have a scrap value of ghc10 million at the end of the product‟s life. The amount is receivable one year after the last year in which production takes place. If purchased, the machine will be installed in an unused part of one of Excel Plc.’s factories. The company has been trying to let this unused factory space at a rent of ghc16 million per annum. Although, there seems to be no chance of letting the space in year 1, there is a 60% chance of letting it for two years at the beginning of year 2 and a 50% chance of letting it for one year at the beginning of year 3 provided it has not been let at the beginning of year 2. All rental income will be received annually in advance. Fixed costs, which include depreciation of the special machine on a straight-line basis, are expected to amount to ghc70 million per annum. These costs which are all specific to the production of “SIMPLE” and with the exception of depreciation will be paid on the last day of the year in which they arise.


Advertising expenses will be paid on the first day of each year and will amount to ghc30 million at the start of year 1, ghc20 million at the start of year 2 and ghc10 million at the start of year 3. Excel Plc. has a cost of capital of 20%.

You are required to:

1. Analyse and evaluate the production of “SIMPLE” based on Expected Present Value. (Show all relevant calculations).

2. Compute the sensitivity of the NPV to each of the underlisted variables :

(a) fixed cost (b) advertising expense (c) cost of capital


3.4 TAXATION AND FISCAL POLICY

ASSIGNMENT 3

Question OneAn overseas based corporate headquarters of an organization invoices the local (Ghana) subsidiary with head office administrative charges in a given financial year. Required: Outline the practical tax implications of this transaction 10 Marks

Question TwoNhyira Company Ltd, a self-assessed tax payer with the Large Taxpayer Office (LTO) of the Ghana

Revenue Authority estimated its chargeable income for the assessment year 2016 to be GH¢80,000,000.

The company commissioned a new plant in April 2016 and realized that its production capacity has

improved significantly and hence revised its estimated chargeable income to GH¢120,000,000 in May

2016.

In November the same year after the third quarter interim accounts, the Directors were advised by the

Auditors to adjust their chargeable income to avoid an imposition of a penalty by the LTO. This was

adhered to and subsequently revised the estimate further to GH¢150,000,000.

The company submitted its 2016 annual returns on due date of 30th June 2017 and posted actual

chargeable income of GH¢250,000,000.

Required:

(a) Compute the installment payment for the four (4) quarters in the assessment year 2017. (12 marks)

(b) Compute any penalty payable by the company. (4 marks)

(c) Determine the outstanding tax payable by the company assuming all the installment payments were

made on due date. (4 marks)

(Total: 20 marks)

Please note the following:

(i) The company’s basis period is 1st January to 31st December.

(ii) The corporate tax rate is 25%

Total 20 marks

Documents

Web view2.4 FINANCIAL MANAGEMENT. ... manufacturing to third parties around the world and it mostly sells ... of the Highways Agency report was a non-adjusting