ACTG

Number of Pages : 6 Total Marks: 100

Number of Questions: 6 Time Allowed: 3 Hrs

Answer all questions Working notes should form part of the answer.

Wherever necessary, suitable assumptions may be made by the candidates.

1. The balance sheets of A Ltd and B Ltd as on 31st March, 2009 were as follows.

(Rs. in ’000s)

Liabilities A Ltd Rs

B Ltd Rs

Assets A Ltd Rs

B Ltd Rs

Share capital: Goodwill 70050,000 preference shares of Rs 100 each

5,000

Patents Land and Buildings

2,000 6,000

15,00,000 Equity shares of Rs 10 each

15,000

Plant and Machinery Motor vehicles

15,500 400

4,00,000 Equity shares of Rs 10 each

4,000

Furniture Investments

1,150

250

Stocks 3,500 2,390 Debtors 800 620General reserve 8,000 Cash at Bank 450 170Profit and Loss Account

900 320

Creditors 500 210 29,400 4,530 29,400 4,530

A new company C Ltd was formed to acquire the assets and liabilities of A Ltd and B Ltd. The terms of acquisition of business were as under:

1) C Ltd to have an authorized capital of Rs3,50,00,000 divided into 50,000 13% preference shares of Rs 100 each and 30,00,000 equity shares of Rs 10 each.

2) Business of A Ltd valued at Rs3,00,000 settlement being Rs 60,000 cash and balance by issue of fully paid equity shares at Rs12.

3) Business of B Ltd valued at Rs48,00,000 to be satisfied by issue of fully paid equity shares at Rs12.

4) Preference shares of A Ltd were redeemed. 5) C Ltd has made public issue of 30,000 preference shares at par and 3,00,000 equity shares at

Rs12. The issue of under written at the commission of 3% and was fully subscribed all obligations were met.

6) D, who mooted the scheme was allotted 40,000 equity shares (fully paid) at Rs 12 in consideration of his services.

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Make shares of books A Ltd and B Ltd (to close their books of accounts) and C Ltd. And prepare the balance sheet of C Ltd.

(20 Marks)

2.(a) X, Y and Z were partner sharing profits in the ratio 3 : 2 : 1. On 31 st March 2009, their Balance Sheet

stood as under.

Liabilities Amount(Rs.) Assets Amount (Rs.) Capitals : Cash at bank 70,000 X : 75,000 Investments 50,000 Y : 70,000 Patents 15,000 Z : 50,000 1,95,000 Stock 25,000 Creditors 72,000 Debtors 20,000 General Reserve 24,000 Buildings 75,000 Machinery 36,000 ________ ________ 2, 91,000 2, 91,000 X died on 31st May 2008. It was agreed that : (a) Goodwill was valued at 3 years’ purchases of the average profits of the last five years, which were,

2003 : Rs. 40,000; 2004 : Rs. 40,000; 2005 : Rs. 30,000; 2006 : Rs. 40,000 and 2007 : Rs. 50,000. (b) Machinery was valued at Rs. 70,000, Patents at Rs. 20,000 and Buildings at Rs. 66,000. (c) For the purpose of calculating X’s share of profits till the date of death, it was agreed that the same be

calculated based on the average profits for the last 2 years. (d) The executor of the deceased partner is to the paid the entire amount due by means of a cheque. Prepare X’s Capital Account to be rendered to his executors and also a journal entry for the settlement of the amount due to the executor.

(8 Marks) 2(b). A ‘loss of profit’ policy was taken for Rs. 80,000. Fire occurred on 15th March, 2009.Indemnity period

was for three months. Net profit for 2008 year ending on 31st December was Rs. 56,000 and standing charges (all insured) amounted to Rs. 49,600. Determine insurance claim from the following details available from quarterly sales tax returns: Sales 2006 (Rs.) 2007 (Rs.) 2008(Rs.) 2009(Rs.) From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000 From 1st April to 30th June 80,000 90,000 1,00,000 40,000 From 1st July to 30th September 1,00,000 1,10,000 1,20,000 1,00,000 From 1st October to 31st December 1,36,000 1,50,000 1,66,000 1,60,000 Sales from 16.3.2008 to 31.3.2008 were Rs. 28,000. Sales from 16.3.2009 to 31.3.2009 were Rs. Nil.

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Sales from 16.6.2008 to 30.6.08 were Rs. 24,000. and sales from 16.2.2009 to 30.6.2009 were Rs. 6,000. (8 Marks)

3(a).The following are the balance sheets of a public company as on 31st December,2007 and 2008

BALANCE SHEETS as at 31st December

Liabilities 2007 RS

2008 RS

Assets 2007 RS

2008 RS

Equity share capital (paid up)

2,40,000 3,00,000 Fixed Assets 2,46,000 2,40,000

Profit & Loss A/C 18,000 19,200 Less: Accumulated 15% Debentures 72,000 66,000 Depreciation (-)66,000 (-)90,000Creditors 36,000 42,000 Provision for Taxation 58,000 65,200 1,80,000 1,50,000Proposed dividend 30,000 34,800 Sundry debtors 1,20,000 1,44,000

Outstanding liabilities Stock 60,000 70,000For compensation 75,000 40,800 Investment (short term) 1,20,000 1,40,000

Bills payable 42,000 21,000 Preliminary Expenses 3,800 3,000 Goodwill 40,000 30,000 Bank 47,200 52,000 5,71,000 5,89,000 5,71,000 5,89,000

Additional information:

1)Provision for taxation Rs38,000 was made during the year 2009.

2)Interim dividend of Rs20,000 was paid during the year.

3)A part of the Fixed Assets was sold for Rs8,000 during the year 2009. It had costed Rs21,000 depreciation of Rs16,000 has been provided on it.

4)Debentures for Rs6,000 were redeemed during 2008 at a premium of 10%.

Prepare a cash-flow statement (8 Marks)

3 b)Dr.Iodine commenced practice as an eye specialist, investing Rs.50,000 in equipment on 1st April,2008. The Receipts and Payments Account for the year was as follows:

RS RSTo Fees 1,60,000 By rent 36,000To Miscellaneous receipts 200 By salaries to assistants 45,000To Equipment sold 4,000 By journals 2,000 By library books 6,000 By equipment purchased 8,000 By drawing 24,000

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By Balance: By Bank 43,000 In Hand 200 1,64,200 1,64,200

Rs.3,000 of the fees was still outstanding. Equipment was sold as well as purchased on 1st January,2009,the cost of the equipment sold being Rs 6000. Prepare the Income and Expenditure Account and the Balance Sheet relating to 2008-09. (8 Marks)

4.a) Miss Jayanthi keeps her books on Single Entry System. From the following, prepare trading and profit and loss account for the year ended 31.3.2009 together with the Balance Sheet as on that date.

Cash book analysis shows the following:

Liabilities Rs Assets RsInterest charges 200 Balance at bank as on 31.3.2009 4,850Personal withdrawals 4,000 Cash in hand as on 31.3.2009 150Staff salaries 17,000 Received from debtors 50,000Other business expenses 15,800 Payment to creditors 30,000 Cash sales 30,000

Further details available are:

As on 1.4.2008 Rs

As on 1.4.2009 Rs

Stock on hand 18,000 20.440 Creditors 16,000 11,000 Debtors 44,000 60,000 Furniture 2,000 2,000 Office premises 30,000 30,000

Provide 5 percent interest on Jayanthi’s capital balance as on 1.4.2008. Provide Rs3,000 for doubtful debts, 5 percent depreciation on all fixed assets. 5 percent group incentive commission to staff has to be provided for on net profit after meeting all expenses and the commission. (8 Marks)

4(b) Meena Metals Ltd. sells goods on hire purchase system at cost plus 60% and provides you the following particulars for the year ended 31st December 2008.

2008 RsJan.1 Goods sold on hire purchase at hire purchase price 24,000Dec.31 Instalments not due and unpaid

Instalments due and unpaid 54,000

3,000

Further Information:

Goods sold on hire purchase system at hire purchase price

Rs 1,20,000

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Cash received from customers on hire purchase price 84,000Goods repossessed on default (instalments due Rs.3000)valued at

600

You are required to prepare Hire Purchase Trading Account at cost price.

(8 Marks)

5. Answer any eight

(i) Ashok and Bhushan started business on 1st July, 2008, without any partnership deed. They introduced capital of Rs.40,000 and Rs.70,000 respectively. On 1st October, 2008, Bhushan advanced Rs.30,000 as loan to the firm. The profit & loss account for the year ending 31st March, 2009, discloses a profit of Rs.24,900, but the partners cannot be agree upon the question of interest and profit sharing ratio. You are requested to distribute the profit between them as per the partnership Act, 1932.

(ii) Arun and Barun are partners in the ratio of 3:2. They admit Chaman for 1/4th share. In future the ratio between Arun and Barun would be 1:1. Calculate new profit sharing ratio and sacrificing ratio.

(iii) The company deals in three products, A, B and C, which are neither similar nor interchangeable. At the time of closing of its account for the year 2008-09. The Historical Cost and Net Realizable Value of the items of closing stock are determined as follows:

Items Historical Cost (Rs. in lakhs) Net Realisable Value (Rs. in lakhs) A 40 28 B 32 32 C 16 24 What will be the value of Closing Stock?

(iv) Mr.Long sells goods to Mr.Short as follows: Jan., 2, Rs.1,000; Feb 16,Rs.700; March 22 Rs.840.Mr. Short sells to Mr. Long as follows:

Jan 21 Rs.500; March 8 Rs.944; April 15 Rs.340.They agree to settle the amount on the average due date method. Terms are Mr. Long’s bills at 2 months and Mr. Short’s bills at one month. Find out the due date and the amount to be paid.

(v) Name four areas in which different accounting policies may be adopted.

(vi) How are self constructed fixed assets valued? (vii) When can sale be rcognised in the case of transaction of sale of goods?

(viii) Advantages of self balancing ledgers. (ix) Name the Fundamental Accounting Assumptions. (x) What are cash and cash equivalents. (8 x 2=16 Marks)

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6. Answer Any four (i) Heera Ltd. has two divisions. It provides depreciation for both divisions on straight line basis as per rates

prescribed by Schedule XIV to the Companies Act. While finalizing the accounts for the year ended 31-3-2007, it however wants to change the method to Written Down Value method for one of its divisions since in the opinion of the management the assets of the said division suffer faster wear and tear. Please advise the company on the above and also whether the change should be prospective or retrospective.

(ii) Advantages of prepackages software. (iii) Write a short note on “Pre incorporation profits” (iv) Valuation of investments for the purpose of balance sheet.

(v) Sakthi Finance and Investments Ltd, held Rs26,000,8% Debentures of ACC Ltd. On July 1,2008 which appeared in the books at Rs25,090. Interest is payable on July 31 and January 31. On October 1,2008, a further Rs13,000 Debentures in ACC Ltd , were purchased at Rs 98cum-interest and on January 1,2009,Rs.20,800,a further Rs.7,800 debentures were purchased atRs.97 ex -interest. Prepare investment account for the period ending on June 30, 2009.

(4 x 4=16 Marks)

PRIME ACADEMY 29TH SESSION MODEL EXAM

IPCC - ADVANCED ACCOUNTING SUGGESTED ANSWERS

1. Realization Account

Dr.

Cr.

Rs. Rs.

To Machinery 1,20,000 By Creditors 70,000

To Land 1,74,000 By AB (P) Ltd. – Purchase consideration (Refer Working Note )

6,00,000

To Motor Cycles 30,000 By A’s Capital A/c 3,000

To Furniture & Fittings 11,000 By B’s Capital A/c 6,000

To Stock 2,35,000 By C’s Capital A/c (2,000 + 40,000) 42,000

To Debtors 43,000 By Cash A/c (Sale of Motor Cycle) 13,000

To Cash (payment to creditors) 70,000

To Profit transferred to A’s Capital A/c B’s Capital A/c C’s Capital A/c

8,500

17,000 25,500

7,34,000 7,34,000

Partners’ Capital Accounts Dr Cr.

A B C A B C

Rs. Rs. Rs. Rs. Rs. Rs.

To Current A/c - - 1,00,000 By Balance b/d 1,00,000 2,00,000 3,00,000

To Realisation A/c (Assets taken over)

3,000 6,000 42,000 By Current A/c 39,420 60,580 -

To Equity shares in AB (P) Ltd.

3,00,000 3,00,000 - By A’s Loan A/c 30,000 - -

To Cash A/c - - 1,83,500 By Realization A/c (Profit)

8,500 17,000 25,500

By Cash A/c 1,25,080 28,420

3,03,000 3,06,000 3,25,500 3,03,000 3,06,000 3,25,500

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Cash Account Dr. Cr.

Rs. Rs.

To Balance b/d 87,000 By Realisation A/c 70,000

To Realisation A/c 13,000 By C’s Capital A/c 1,83,500

To A’s Capital A/c 1,25,080

To B’s Capital A/c 28,420

2,53,500 2,53,500

Balance Sheet of AB (P) Ltd.

Liabilities Rs. Assets Rs.

Authorised Share Capital: Fixed Assets:

12,000 Equity Shares of Rs.100 each

12,00,000

Goodwill Land

88,000 1,74,000

Issued, Subscribed & Paid up: 6,000 equity shares of Rs.100 each fully paid up (shares were issued for consideration otherwise than for cash)

6,00,000

Machinery Furniture & Fittings Current Assets: Stock

1,25,000 13,000

2,00,000

6,00,000 6,00,000

Working Note:

Calculation of Purchase Consideration

Assets taken over by AB (P) Ltd. Rs.

Machinery 1,25,000

Furniture & Fittings 13,000

Land 1,74,000

Stock 2,00,000

Goodwill 88,000

Purchase Consideration 6,00,000

Purchase consideration is discharged by the issue of equal number of equity shares of Rs.100 each (3,000 shares) at par to A & B.

ME 29/PRIME/IPCC 2

2.(a)

The amount of rebate on bills discounted as on 31st March, 2009 the period which has not been expired upto that day will be calculated as follows:

Rs

Discount on Rs.2,80,000 for 62 days @ 10% 4,756

Discount on Rs.8,72,000 for 69 days @ 10% 16,484

Discount on Rs.5,64,000 for 82 days @ 10% 12,671

Discount on Rs.8,12,000 for 92 days @ 10% 20,467

Discount on Rs.6,00,000 for 96 days @ 10% 15,781

Total 70,159

The amount of discount to be credited to the profit and loss account will be:

Rs.

Transfer from rebate on bills discounted as on 31.03.2008 68,259

Add: Discount received during the year 1,70,156

2,38,415

Less: Rebate on bills discounted as on 31.03.2009 (as above) 70,159

1,68,256 Journal Entries

Rs. Rs.

Rebate on bills discounted A/c Dr. 68,259

To Discount on bills A/c 68,259

(Transfer of unexpired discount on 31.03.2008)

Discount on bills A/c Dr. 70,159

To Rebate on bills discounted 70,159

(Unexpired discount on 31.03.2009 taken into account)

Discount on Bills A/c Dr. 1,68,256

To P & L A/c 1,68,256

(Discount earned in the year, transferred to P&L A/c)

ME 29/PRIME/IPCC 3

2 (b) Departmental trading and profit and loss account for year ended 31-3-2009

Particulars Dept.X

Rs

Dept.Y

Rs

Particulars Dept.X

Rs

Dept.Y

Rs

To Opening stock

8,000 6,400 By Sales 1,60,000 2,40,000

To purchases 1,04,000 1,45,600 By Closing Stock 16,000 32,000

To Gross profit 64,000 1,20,000

1,76,000 2,72,000 1,76,000 2,72,000

To Selling expenses(2:3)

12,800 19,200 To Gross profit 64,000 1,20,000

To Net profit 51,200 1,00,800

64,000 1,20,000 64,000 1,20,000

General Profit and Loss account

To Closing Stock Reserve

Rs Rs By Net profit Rs Rs

Dept X 1,600 Dept X 51,200

Dept Y 1,920 3,520 Dept.Y 1,00,800 1,52,000

By Opening stock Reserve

To Net profit 1,50,240 Dept X 800

DeptY 960 1760

1,53,760 1,53,760

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3. (a). Debenture Redemption Fund Investment Account

1989 RS 1989 RS Oct. 1 To Balance b/d 9,37,000 Oct. 1 By own

Debentures Investment A/C

1,98,000

Dec. 31

To Debenture Redemption Fund A/C (Profit on sale)

73,900 Dec. 31

By Bank 8,12,900

10,10,900 10,10,900

Debenture Redemption Fund (own Debentures) Investment Account 1989 RS 1989 RS Oct. 1 To D. R Fund

Investment A/C 1,98,000 Dec. 31 By 9% Debentures on A/C 2,00,000

Dec. 31 To Debenture Redemption Fund A/C (Profit on cancelation)

2,000

2,00,000 2,00,000

3 (b) Fire Revenue Account for the year ended March 31, 1989

RS RS RS RS To Claims: Paid

2,40,000 By Provision against unexpired risk in the beginning of the year

2,60,000 Add Claims unpaid at the end of the year

35,000

By Premiums 6,00,000

2,75,000 Less Reinsurance Premiums

60,000 5,40,000

Less Claims unpaid at the

beginning of the year

20,000 2,55,000

To commission 1,00,000 To Expenses of

Management 1,50,000

To Provision against

unexpired risk, 50% of net premium

2,70,000

To Profit transferred to profit and loss

account

25,000

8,00,000 8,00,000

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4 (a) Intrinsic value of shares A Ltd

Rs B Ltd Rs

Fixed assets 7,90,000 16,00,000 Investment 1,70,000 Current assets 6,90,000 16,80,000

16,50,000 32,80,000

Rs. Rs. Rs. Rs. Less: Liabilities Secured Loans 4,00,000

Un - Secured Loans 2,20,000 Creditors 4,20,000 4,60,000

Provision for tax 1,10,000 5,20,000 Proposed dividend 7,50,000 1,00,000 14,80,000

Total Intrinsic Values

9,00,000 18,00,000

Value of one share Rs 9,00,000/Rs 5,000 = Rs 180 Rs 18,00,000/Rs 80,000 = Rs 22.50 Books of A Ltd Realization Account

Dr Rs Cr. Rs

To Goodwill 20,000 By Un - Secured Loans

2,20,000

To other fixed account

8,30,000 By Creditors 4,20,000

To Investments 1,70,000 By Provision for tax

1,10,000

To Current Assets

6,90,000 By B Ltd (consideration)

9,00,000

By Sundry share holders

Account-Loss

60,000

17,10,000 17,10,000 B Ltd Journal Entry

Dr RS Cr. Rs

To Realisation Account

9,00,000 By shares in B Ltd 9,00,000

Shares in B Ltd

Dr RS Cr. Rs

To B Ltd 9,00,000 By Sundry share holders Account

9,00,000

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Sundry Share Holders Account Dr RS Cr.

Rs To Realisation

Account – Loss 60,000 By share capital

Account 5,00,000

To shares in B Ltd 9,00,000 By Capital Reserve 1,00,000 By General Reserve 3,60,000 9,60,000 9,60,000

Books of B Ltd - Journal

Dr. Rs Cr. Rs Business Purchase Account Dr

To Liquidator of A Ltd Amount payable to Liquidator of A

Ltd for the Business Purchased

9,00,000 9,00,000

Fixed assets Dr Investment Dr Current assets Dr To Un- Secured Loans

To Creditors To Provision for tax

To Business Purchase Account Incorporation of assets and liabilities taken from a Ltd

7,90,000 1,70,000 6,90,000

2,20,000 4,20,000 1,10,000 9,00,000

Liquidator of A Ltd Dr To share capital Account

To share Premium Account Allotment of 40,000 shares of Rs 10 each at a premium of Rs 12.50

per share in discharge of consideration

9,00,000 4,00,000 5,00,000

4(b)

Electric Supply Ltd. Journal Entries

Dr. Cr.

Rs. Rs.

New Main Account Dr. 20,95,000

Replacement Account Dr. 19,05,000

To Bank Account 40,00,000

(Being current cost of replacement charged to re-

placement account and the balance amount capi-

talised)

New Main Account Dr. 2,00,000

To Replacement Account 2,00,000

(Being the value of motors salvaged from old main

used in the reconstruction of main)

Bank Account Dr. 70,000

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To Replacement Account 70,000

(Being the amount realised from sale of old materials

credited to replacement account)

Revenue Account Dr. 16,35,000

To Replacement Account 16,35,000

(Being the net current cost of replacement

transferred to revenue account)

Working Notes:

1.Current cost of replacement:

Cost of Increase in cost Current

existing main Rate Amount cost

Rs. Rs. Rs.

Materials (3/5 × Rs. 15 lacs) 9,00,000 25% 2,25,000 11,25,000

Labour (2/5 × Rs. 15 lacs) 6,00,000 30% 1,80,000 7,80,000

Estimated current cost for replacement

of present main (amount to be charged

to replacement account) 19,05,000

2. Additional cost of reconstruction of main (to be capitalised)

Cash cost of re-building new main 40,00,000

Less: Estimated current cost for replacement of existing old main 19,05,000

Additional cost in new main to be capitalised (excluding old motors used 20,95,000

3. Replacement Account Dr. Cr. To Bank A/c 19,05,000 By New Main A/c 2,00,000 By Bank A/c 70,000 By Replacement A/c Balancing figure 16,35,000

19,05,000 19,05,000

5 (i) When income or expenses arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods, the said incomes or expenses have to be classified as prior period items. The errors may occur as a result of mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts or oversight.

(ii) An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based,or as a result of new information ,more experience,or subsequent deveolpments.

(iii) Sale and leaseback transactions: As per AS 19 on ‘Leases’, a sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the asset back to the vendor. The lease payments and the sale price are usually interdependent, as they are negotiated as a package. The accounting treatment of a sale and lease back transaction depends upon the type of lease involved.

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If a sale and leaseback transaction results in a finance lease, any excess or deficiency of sale proceeds over the carrying amount should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset.

If sale and leaseback transaction results in a operating lease, and it is clear that the transaction is established at fair value, any profit or loss should be recognised immediately. If the sale price is below fair value any profit or loss should be recognised immediately except that, if the loss is compensated by future lease payments at below market price, it should be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair value should be deferred and amortised over the period for which the asset is expected to be used.

(iv) Firm underwriting signifies a definite undertaking to take up a specified number of shares irrespective of the number of shares subscribed for by the public.

In the books of the head office

(v) Branch a/c Dr. 8,00,000

To Purchases a/c 8,00,000

(Being rectification of wrong debit to purchases account for goods purchased by branch.)

(vI) No entry.

(vii) Branch A/c Dr. 10,000

To Branch Machinery A/c 10,000.

(viii) Tiruchy Branch a/c Dr. 5,00,000

To chennai Branch a/c 5,00,000

(ix) Invoice price is 100,cost price is 80,then selling price is 160.

When selling price is 20,000 then stock reserve would be (20,000*20)/160=Rs.2500.

(x) In “Piecemeal Distribution of Cash”, cash is utilized for settlement as and when it is available for distribution. The accounts are settled in the following order:

(i) Secured Liabilities: Secured liabilities are paid out of the cash realized by sale of mortgaged asset. Portion of liability not covered by the amount realised is treated as unsecured liability. However, if assets other than the mortgaged asset are realized first, then secured liabilities are treated at par with unsecured liabilities till the realization of mortgaged asset.

(ii) Unsecured Liabilities: After settling secured liabilities, unsecured liabilities are settled. If the amount

available is not sufficient to clear all unsecured liabilities, it is distributed rateably among all unsecured liabilities.

(iii) Partners’ Loan: After settling outside liabilities, partners’ loan are settled rateably. (iv) Settlement of capital accounts of partners: The balance of capital accounts on the date of dissolution

after adjustment for drawings, accumulated losses, reserves, accumulated profits etc. are settled by following anyone of the two methods given below:-

a. Proportionate Capital Method.

b. Maximum Loss Method.

ME 29/PRIME/IPCC 9

6. (i)

Year Particulars Dr

Rs

Cr

Rs

1st year Fixed Assets A/c Dr 50,00,000

To Bank A/c 50,00,000

(being fixed asset purchased)

Bank A/c Dr 10,00,000

To Fixed Assets A/c 10,00,000

(Being Grant received from government)

Depreciation A/c Dr. 7,00,000

To Fixed Assets A/c 7,00,000

(Being depreciation charged on SLM basis)

Profit & Loss A/c Dr. 7,00,000

To Depreciation A/c 7,00,000

(Being Depreciation transferred to P&L A/c)

2Nd year Depreciation A/c Dr. 7,00,000

To Fixed Assets A/c 7,00,000

(Being depreciation charged on SLM basis)

Profit & Loss A/c Dr. 7,00,000

To Depreciation A/c 7,00,000

Being Depreciation transferred to P&L A/c

(ii) An event after the balance sheet may require adjustment of reported values of assets, liability,expenses,income and equity for the accounting period, if the asset is such as to provide further evidence of conditions that existed at the balance sheet date. Such events are adjusting events. Exception to the rule: events occurring after the balance sheet shall be an adjusting event even if it does not reflect any condition existing on the balance sheet date, if the event is such as to indicate that the fundamental accounting assumption of going concern is no longer appropriate. Example a fire occurring after the balance sheet date but before approval of financial statements.

(iii) The accounting treatment of a contingent loss is determined by the expected outcome of the contingency .If it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements. The estimation of the amount of contingent loss to be provided for should be based on the estimates and judgements of the management. If there is conflicting or insufficient evidence for estimating the amount of a contingent loss ,then disclosure is made of the existence and nature of the contingency.

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(iv) Computation of weighted Average:

(1,800*5/12)+(2,400*5/12)+(2,100*2/12)=2,100 shares

(v) A financial asset is any asset that is

(a) Cash

(b) a contractual right to receive cash or any other financial asset from another enterprises:

(c) a contractual right to exchange financial instruments with another enterprises under conditions that are potentially favourable: or

(d) ownership interest in another enterprise.

AGAE Number of Pages : 2 Total Marks: 100 Number of Questions: 8 Time Allowed: 3 Hrs

Answer all the questions

1 State with reasons (in short) whether the following statements are true or false: (Answer any ten)

1) The first auditors of a public limited company appointed by the board of directors hold office till the conclusion of its statutory meeting.

2) If an auditor lacks independence, he may issue an adverse report. 3) Auditor’s lien on his client’s books and record is not unconditional. 4) An adverse report is one where an auditor gives an opinion subject to certain reservation 5) Test checks refer to the out of routine checks that are carried out in the normal course of

audit. 6) If the auditor believes that the concern will not continue as going concern, he should

issue disclaimer of opinion. 7) CARO, 2004 does not apply to a foreign company. 8) As per AAS-2, one of the objectives of the audit is to detect fraud. 9) One of the techniques used for gathering evidence is substantial review. 10) Where the accounts of the company do not present a “true and fair” view, the auditor

should express disclaimer of opinion. 11) Surplus on the re-issue of forfeited shares standing to the credit of share forfeited

account can be distributed as dividend. 12) Government companies are also to be considered for the ceiling on number of audits.

(10X2=20 Marks)

2 As an auditor comment on the following situations: (a) As an auditor of PQR Ltd. you have asked your audit assistant to draw the audit .The assistant

drew up the audit program without going through the monthly report of the Internal Auditor on the plea that he is a Chartered Accountant and have found no serious irregularities and internal control system is running perfectly.

(b) Mr. T. a Chartered Accountant, was first time appointed the Auditor of XYZ Ltd. Mr. T. carried

the audit procedure for verifying the opening balances only, but not the previous year’s accounting policies as it is not needed.

(c) M/s Health Zone, a partnership firm, running a nursing home have decided to discontinue You as an auditor for the next year and requests you to handover all the relevant working Papers of the previous year

(8+6+6=20Marks)

3 (a) Evaluating Inherent Risk- explain how you do this? (b) State the circumstances where the auditing through the computer must be used.

(2 x 5 = 10 Marks)

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4 a) What is meant by external confirmation? Mention four situations where external Confirmation

may be useful for auditors.

b) Concept of materiality. (6+4= 10 Marks)

5 Define internal control system. What are the various steps involved in the verification of the system of internal control?

(10 Marks)

6 a) Explain the procedures to be adopted with regard to reappointment of auditor b) Briefly explain the basic elements of Audit Report.

(6+4=10 Marks)

7 How will you vouch and/or verify the following?

a. Research and Development expenses

b. Foreign travel expenses OR

c. Sale proceeds of Scrap Material. (5+5=10 Marks)

8 Write Short Notes on the following: Any two

a) Revenue Expenditure b) Examination in depth c) Permanent audit file

(2 x 5=10 Marks)

PRIME ACADEMY 29TH SESSION MODEL EXAM

IPCC- AUDITING AND ASSURANCE SUGGESTED ANSWERS

1 1) True: Section 224(5) has laid down the tenure of first auditors until the conclusion of the first annual

general meeting. The first general meeting of a public limited company is referred to as statutory meeting as per the provisions of section 165(1).

2) False: An auditor who lacks independence must issue a disclaimer of opinion audit report. 3) True: The auditor can exercise his lien on client’s books and records subject to the following

conditions:

(a) Document retained must belong to the client who owes the money.

(b) Such documents must have come into auditor’s possession with the client’s authority.

(c) Some work must have been done and fees for work performed must be outstanding.

4) False: An adverse report is given when the auditor concludes that based on his examination he does

not agree with the affirmation made in the financial statements 5) False: Test checks refers to an audit procedure wherein only a part is checked to form 6) False: As per AAS-16, if the auditor believes that going concern assumption is inappropriate and the

entity will not be able to continue its operation in future, he should express an adverse opinion. 7) False: CARO’ 2004 applies to all companies including foreign companies except Banking, Insurance,

Sec.25 Companies and Private Ltd. Companies subject to certain conditions. 8) False: As per AAS-2, objective of an audit is to express an opinion on financial statements to help the

users of the financial statements to determine the true and fair view. 9) False: One of the techniques used for obtaining evidence is analytical review procedure which

consists of studying significant ratios and trends. (AAS 5 “Audit Evidence”) 10) False: An adverse opinion is appropriate where the reservations or the objections are so substantial

that he feels that the accounts do not give a true and fair view. In this situation the auditor should give an adverse or negative opinion only.

11) True: The surplus on reissue of forfeited shares is credited to capital reserve account being a capital

profit. Capital profit realized in cash, authorized by the articles and remains surplus after revaluation of all assets and liabilities can be distributed as dividend.(Lubok Vs The British Bank of South America)

12) True: In calculating the audit units only audit of corporations which are not companies and foreign

companies are not included. Thus Government companies will be considered for ceiling on number of audits.(Section 224(1B) of the Companies Act, 1956)

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(a) The contention of the audit assistant is not valid and contrary to the view and guidelines given in

AAS-1.As per AAS-1, the basic principles governing an audit are Integrity, objectivity and independence. Objectivity implies that auditor’s opinion should be based on facts and evidences collected through audit procedure. Skill and competence also requires an auditor to exercise due professional care in performing the audit. The AAS also requires auditor to rely on internal control only after studying and evaluating them. In the instant case all those basic principles have not been followed by the auditor. Reliance based on position of the person and blindly accepting the soundness of the internal control violates the basic principles. Only by evaluation the auditor will know whether the internal audit and related internal control is effective or not.

(b) Contention of Mr. T, the auditor, is not correct and contrary to the AAS-22 on “Initial Engagement – opening balance”. As per the said AAS it is the duty of the auditor, auditing the financial statements first time, to verify and obtain appropriate audit evidence that: (a) The closing balances of the preceding period are correctly brought forward to the Current

period. (b) Whether any misstatement in opening balances is materially affecting the financial

Statements of the current period and

(c) Accounting policies followed in the preceding period are also being followed in current period. Hence, in view of the above guidelines of AAS-22 Mr. T should verify the accounting policies also to ensure its continuity.

(c) As per AAS-3 on “Documentation” the working papers are the property of the auditor and the

auditor has right to retain them. He may at his discretion can make available working papers to his client. The auditor should retain them long enough to meet the needs of his practice and legal or professional requirement. Working papers are the important records of the auditor. They serve as evidence of the auditor’s exercise of due care and conclusion reached regarding significant matters. The client does not have a right to access the working papers and it is up to the discretion of the auditor to make them available or not to others including the client. Hence in the instant case, management of M/s Health Zone can’t insist upon the auditor to handover the working papers of the previous year.

3 (a) Evaluating Inherent Risk: To assess inherent risk, the auditor would use professional judgment

to evaluate numerous factors, having regard to his experience of the entity from previous audit engagements of the entity, any controls established by management to compensate for a high level of inherent risk, and his knowledge of any significant changes which might have taken place since his last assessment. Examples of are such factors are: At the Level of Financial Statements: Management’s experience and knowledge and changes in management during the period, for example, the inexperience of management may affect the preparation of the financial statements

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of the entity. Unusual pressures on management, for example, circumstances that might predispose management to misstate the financial statements, such as the industry experiencing a large number of business failures or an entity that lacks sufficient capital to continue operations. The nature of the entity’s business, for example, the potential for technological obsolescence of its products and services, the complexity of its capital structure, the significance of related parties and the number of locations and geographical spread of its production facilities. Factors affecting the industry in which the entity operates, for example, economic and competitive conditions as indicated by financial trends and ratios, and changes in technology, consumer demand and accounting practices common to the industry.

At the level of Account Balance and Class of Transactions: Quality of the accounting system. Financial statements are likely to be susceptible to misstatement, for example, accounts which required adjustment in the prior period or which involve a high degree of estimation. The complexity of underlying transactions and other events which might require using the work of an expert. The degree of judgment involved in determining account balances. Susceptibility of assets to loss or misappropriation, for example, assets which are highly desirable and movable such as cash. The completion of unusual and complex transactions, particularly at or near period end. Transactions not subjected to ordinary processing.

(b) Auditing Through the Computer : There are several circumstances where auditing through the

Computer must be used: (i) The application system processes large volumes of input and produces large volumes of

output that makes extensive direct examination of the validity of input and output difficult. (ii) Significant parts of the internal control system are embodied in the computer system. (iii) The logic of the system is complex and there are portions that facilitate use of the system or

efficient processing. (iv) Because of cost-benefit considerations, there are substantial gaps in the visible audit trail.

4 a) External Confirmation: The purpose of Auditing and Assurance Standard 30 is to establish

standards on the auditor’s use of external confirmations as a means of obtaining audit evidence.External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item affecting assertions made by management in the financial statements. The auditor should employ external confirmation procedure in consultation with management.

AAS 5 “Audit Evidence” states that in general, audit evidence from external sources is more

reliable than audit evidence generated internally. Audit evidence in the form of written responses to confirmation requests received directly by the auditor from third parties who are not related to the entity being audited, when considered individually or cumulatively with audit evidence from other procedures, may assist in reducing audit risk for the related financial statement assertions to an acceptably low level.

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Following are the examples of situations where external confirmation may be useful. (i) Bank balance & other information from bankers

(ii) Account receivable balances

(iii) Stock held by third parties

(iv) Property Title Deed held by third parties

(v) Investments purchased but delivery not taken

(vi) Loan from lenders

(vii) Account payable balances

(viii) Long outstanding share application money

b) The concept of materiality is fundamental to the process of accounting. It covers all the stages

from the recording to classification and presentation. It is, therefore, an important and relevant consideration for an auditor who has constantly to judge whether a particular item or transaction is material or not. AAS-13 on Audit Materiality lays down standard on the concept of materiality and its relationship with audit risk. The auditor would be required to assess materiality right from the stage of planning the audit till the final stage of reaching at his opinion. An auditor requires more reliable evidence in support of material items. He also has to ensure that such items are properly and distinctly disclosed in the financial statements.

“Accounting Standard 1 defines, material items as relatively important and relevant items, i.e.

“items the knowledge of which would influence the decisions of the users of the financial statements”. Whether or not the knowledge of an item would influence the decisions of the users of the financial statements is dependent on the particular facts and circumstances of each case. It is not possible to lay down precisely either in terms of specific account or in terms of amounts the items which could be considered as material in all circumstances. Materiality is a relative term and what may be material in one circumstance may not be material in another. Therefore, the decision to judge the materiality of the item whether in the aggregation of items, presentation or classification of items shall depend upon the judgment of prepares of the account on the circumstances of the particular case. In many cases percentage comparison may be useful in indicating the materiality of an item.

Materiality of an item can be judged : (a) from the impact that the item has on the profit or loss or on the balance sheet, or on the total

of the category of items to which it pertains, and (b) on its comparison with the corresponding figure of the previous year. In many

circumstances even small amount may be considered material.

5

Internal Control System means all the policies and procedures (internal controls) adopted by the management of an entity to assist in achieving management's objective of ensuring, as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The internal audit function constitutes a separate component of internal control with the objective of determining whether other internal controls are well designed and properly operated.

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Steps involved in the verification of the system of Internal Control :

(a) Study the system according to which accounting routines are being carried out to ensure that these do not leave any receipt of cash, material or any other asset remaining unaccounted for, permit any payment of money being made without relevant goods or services having been received or tendered or any property being given away without its price having been received or being accounted for.

(b) Examine the financial power vested in different persons and the conditions under which

they can exercise them.

(c) Confirm whether the supervision over various managerial and accounting functions, exercised by different members of the staff to whom these duties have been assigned, is adequate.

(d) Ascertain whether any mechanical aids are being employed to ensure proper accounting of

receipts and prevention of pilferage of cash, stamps, etc.

(e) Observe the working of the accounting system and routine and determine, by application of procedural tests, whether checks and counter-checks envisaged by the system of internal control are being properly applied.

(f) Confirm that there is a system according to which the physical existence of different forms

of assets is being periodically reconciled with their balances in the books of account or stores records and discrepancies noticed are reported and adjusted; also that balance of customers, creditors, bankers and persons with whom securities are deposited are reconciled periodically. Further, that persons who are in custody of valuable assets, have furnished bonds of adequate value which would protect the company in the event of any misappropriation or misapplication thereof by such persons.

(g) Ascertain that the system of internal control is reviewed periodically and, where necessary,

a change in procedures made to plug in any loopholes which might have been observed on such a review. Also, that policy decisions which are taken from time to time are translated into actual practice.

It should be noted that, unless the system of internal control is comprehensive it may fail to provide the protection expected of it. For example, if printed receipts with counterfoils are issued in respect of amounts collected, but there is no check against cash being collected by unauthorized persons, there will be no certainty that all amounts collected have been accounted for.

6

a) The Companies Act, 1956 stipulates the office of auditor in a company as a continuing one; therefore, it has laid down that an auditor shall hold office from the conclusion of the annual general meeting in which he is appointed till the conclusion of the next annual general meeting. Excepting cases of appointment of the first auditor, appointment or filling of casual vacancies in the office of the auditor, companies are required to appoint an auditor or auditors in the annual general meeting as a routine feature. A specific resolution is required to re-appoint the auditors. The retiring auditor cannot be deemed to be re-appointed automatically at the annual general meeting. Till a formal resolution is passed, a retiring auditor cannot be said to have been re-appointed as contemplated by the section. It is not correct to say that in the absence of a resolution to the effect that the retiring auditors shall not be re-appointed, the retiring auditors shall stand re-appointed as auditors of the company. This appointment is subject to the following conditions :

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(i) The auditor proposed to be appointed or re-appointed must possess the qualification prescribed

under Section 226. (ii) The proposed auditor does not suffer from the disqualifications enumerated in sub- Sections (3)

and (4) of Section 226. (iii) In the case of proposed re-appointment of the retiring auditor, it should be ensured that:

(a) He has not given to the company notice in writing of his unwillingness to be reappointed; (b) No resolution has been passed at the annual general meeting appointing some body else

instead of the retiring auditor or providing expressly that the retiring auditor shall not be re-appointed;

(c) no notice of the intended resolution to appoint some other person or persons in place of the

retiring auditor was received by the company that could not be proceeded with due to death, incapacity or disqualification of the other person or persons [Section 224(2)].

(iv) A written certificate has been obtained from the proposed auditor to the effect that the

appointment or re-appointment, if made, will be in accordance within the limits specified in sub-section (1B) of Section 224.

b) The Basic Elements of the Auditor’s Report The auditor’s report includes the following basic elements, ordinarily, in the following layout:

(a) Title; (b) Addressee; (c) Opening or introductory paragraph

(i) Identification of the financial statements audited; (ii)A statement of the responsibility of the entity’s management and the responsibility of

the auditor; (d) Scope paragraph (describing the nature of an audit)

(i)a reference to the auditing standards generally accepted in India; (ii)a description of the work performed by the auditor;

(e) Opinion paragraph containing (i) a reference to the financial reporting framework used to prepare the financial

statements; and (ii)an expression of opinion on the financial statements;

(f) Date of the report; (g) Place of signature; and (h) Auditor’s signature.

A measure of uniformity in the form and content of the auditor’s report is desirable because it

helps to promote the reader’s understanding of the auditor’s report and to identify unusual circumstances when they occur.

A statute governing the entity or a regulator may require the auditor to include certain matters

in the audit report or prescribe the form in which the auditor should issue his report. In such a case, the auditor should incorporate in his audit report, the matters specified by the statute or regulator and/or report in the form prescribed by them

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7 (a) Research and Development Expenses

(i) Ascertain the nature of research and development work at the outset and enquire whether

separate Research and Development Department exists. (ii) See allocation of expenses under revenue and deferred revenue. Ensure that expenses which

are routine development expenses are charged to Profit and Loss Account. (iii) Check whether the concerned research activity is authorized by the Board and has relevance

to the objectives of the company. (iv) Examine that generally research expenses for developing products or for inventing a new

product are treated as deferred revenue expenditure to be written off over a period of three to five years, if successful. In case it is established that the research effort is not going to succeed, the entire expenses incurred should be written off to the profit and loss account.

(v) Ensure that if any machinery and equipment have been bought specially for the purpose of

research activity, the cost thereof, less the residual value should be appropriately debited to the Research and Development Account over the years of research.

(b) Foreign Travel Expenses

(i) Examine T.A. bills submitted by the employees stating the details of tour, details of expenses, etc.

(ii) Verify that the tour programme was properly authorized by the competent authority. (iii) Check the T.A. bills along with accompanying supporting documents such as air tickets,

travel agents bill, hotel bills with reference to the internal rules for entitlement of the employees and also make sure that the bills are properly passed.

(iv) See that the tour report accompanies the T.A. bill. The tour report will show the purpose of

the tour. Satisfy that the purpose of the tour as shown by the tour report conforms with the authorization for the tour.

(v) Check Reserve Bank of India’s permission, if necessary, for withdrawing the foreign

exchange. For a company the amount of foreign exchange spent is to be disclosed separately in the accounts as per requirement of Part I of Schedule VI to the Companies Act, 1956

. (c) Sale Proceeds of Scrap Material

(i) Review the internal control on scrap materials, as regards its generation, storage and disposal

and see whether it was properly followed at every stage. (ii) Ascertain whether the organization is maintaining reasonable records for the sale and disposal

of scrap materials. (iii) Review the production and cost records for determination of the extent of scrap materials that

may arise in a given period.

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(iv) Compare the income from the sale of scrap materials with the corresponding figures of the

preceding three years. (v) Check the rates at which different types of scrap materials have been sold and compare the

same with the rates that prevailed in the preceding year. (vi) See that scrap materials sold have been billed and check the calculations on the invoices. (vii) Ensure that there exists a proper procedure to identify the scrap material and good quality

material is not mixed up with it. (viii) Make an overall assessment of the value of the realization from the sale of scrap materials

as to its reasonableness.

8 a) Revenue Expenditure: An expenditure, the benefits of which is immediately say within one year

expended or exhausted in the process of earning revenue., eg., on purchase of goods for sale, on their movement from one place to another, on maintaining assets, on keeping a business organization going, etc. is a revenue expenditure. Examples of revenue expenditure are:

(i) Cost of raw material and stores consumed in the process of manufacture.

(ii) Salaries and wages of employees engaged directly or in-directly in production.

(iii) Repairs and renewals of fixed assets.

(iv) Advertisements

(v) Postage

(vi) Printing and Stationery

(vii) Rent, rates and taxes

(viii) Insurance

(ix) Interest on borrowings, etc.

b) Examination in depth: It implies examination of a few selected transactions from the beginning

to the end through the entire flow of the transaction, i.e., from initiation to the completion of the transaction by receipt of payment of cash and delivery or receipt of the goods. This examination consists of studying the recording of transactions at the various stages through which they have passed. At each stage, relevant records and authorities are examined; it is also judged whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. For example, if payment to a creditor is to be verified “in depth”, it would be necessary to examine the following documents: (a) The invoice and statement of account received from the supplier. (b) The entry in the stock record showing that the goods were received. (c) The Goods Received Note and Inspection Certificate showing that the goods on receipt were

verified and inspected.

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(d) The copy of the original order and authority showing that the goods in fact were ordered by an authority which was competent to do so.

It is to be emphasized that, so far as the management is concerned, the internal control should have willing acceptance at the hands of the employees and there should exist proper mechanism for such motivation.

(C) Permanent Audit File: In the case of recurring audits, some working paper files may be classified as permanent audit files. Normally, auditor may consider classifying such papers as permanent which are required in case of recurring audit assignments This file contains paper of continuing importance to succeeding audits. A permanent audit file normally includes:

Information concerning the legal and organizational structure of the entity. In the case of a

company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions. Extracts or copies of important legal documents, agreements and minutes relevant to the audit. A record of the study and the evaluation of the internal controls related to the accounting system. This might be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof. Copies of audited financial statements for previous years. Analysis of significant ratios and trends. Copies of management letters issued by the auditor, if any. Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor. Notes regarding significant accounting policies. Significant audit observations of earlier years.

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INSM Number of Pages : 3 Total Marks: 100 Number of Questions: 10 Time Allowed: 3 Hrs

SECTION- A

Answer all questions

. 1 (a) Describe briefly the following terms:

i. Touch Screen ii. Switch

iii. Data Centre iv. Server v. Repeaters.

(b) Explain each of the following:

i. Subroutine ii. Mesh Topology

iii. Multiplexer iv. Modem v. Transaction Log (2 X 5 = 10 Marks)

2 Differentiate between the following:

a) CD-R and CD-RW b) B2B and B2C (2 X 5= 10 Marks)

3 Answer any two:

a) What do you mean by object-oriented programming? Explain its advantages b) Discuss various Data transmission modes. c) Describe DDL and DML.

(2 X 5 = 10 Marks) 4 a) What do you mean by a port? Describe the various types of ports b) What is ISDN? Write its advantages in brief

(2 x 5 = 10 Marks)

5 Draw the flowchart for finding the amount of an annuity of Rs. A in N years. Rate of interest is r%. This amount is given by the following series: A + AR + AR2 + ...ARN-1. Where R = (1 + r)

(10 Marks)

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SECTION- B

Answer all questions

6 State with reasons which of the following statements are correct /incorrect (Any three)

a. B” in BCG Matrix stands for balance. b. Concentric diversification amounts to unrelated diversification. c. Vertical diversification integrates firms forward or backward in the product chain d. Skimming means keeping price very low. (3 × 2 = 6 Marks)

7 Briefly answer any two of the following questions in 2-3 sentences each

a. What is six sigma? b. Define Benchmarking. c. Define Demarketing.

(2 × 2 = 4 Marks)

8 a) What is meant by Functional strategies? In term of level where will you put them? b) Describe in detail the SWOT analysis. What is its significance in organizations?

(2 x 5 = 10 Marks)

9 a) Define corporate culture. Also elucidate the statement “Culture is a strength that can also be a weakness”.

b) Explain in detail the term corporate strategy with its characteristics.

(2 x 5 = 10 Marks)

10 Read the following case and answer the questions at the end:

Dr. Sharadha inherited her father’s Dey’s Lab in Delhi in2000. Till 2007, she owned 4 labs in the National Capital Region (NCR). Her ambition was to turn it into a National chain. The number increased to 7 in 2008 across the country, including the acquisition of Platinum lab in Mumbai. The number is likely to go to 50 within 2-3 years from 21 at present. Infusion of Rs. 28 crores for a 26% stake by Pharma Capital has its growth strategy. The lab with a revenue of Rs. 75 crores is among top three Pathological labs in India with Atlantic (Rs. 77 crores) and Pacific (Rs. 55 crores). Yet its market share is only 2% of Rs. 3,500 crores market. The top 3 firms command only 6% as against 40-45% by their counterparts in the USA. There are about 20,000 to 1,00,000 stand alone labs engaged in routine pathological business in India, with no system of mandatory licensing and registration. That is why Dr. Sharadha has not gone for acquisition or joint ventures. She does not find many existing laboratories meeting quality standards. Her six labs have been accredited nationally whereon many large hospitals have not thought of accreditation; The College of American pathologists accreditation of Dey’s lab would help it to reach clients outside India.

3 ME29 / PRIME / IPCC

In Dey’s Lab, the bio-chemistry and blood testing equipments are sanitized every day. The bar coding and automated registration of patients do not allow any identity mix-ups. Even routine tests are conducted with highly sophisticated systems. Technical expertise enables them to carry out 1650 variety of tests. Same day reports are available for samples reaching by 3 p.m. and by 7 a.m. next day for samples from 500 collection centers located across the country. Their technicians work round the clock, unlike competitors. Home services for Collection and reporting is also available. There is a huge unutilized capacity. Now it is trying to top other segments. 20% of its total business comes through its main laboratory which acts as a reference lab for many leading hospitals. New mega labs are being built to encash preclinical and multi-centre clinical trials within India and provide postgraduate training to the pathologists. Questions:

(i) What do you understand by the term Vision? What is the difference between ‘Vision’ and ‘Mission’? What vision Dr. Sharadha had at the time of inheritance of Dey’s Lab? Has it been achieved?

(2 + 2 + 2 + 2 = 8 Marks)

(ii) For growth what business strategy has been adopted by Dr. Sharadha? (2 Marks)

(iii) What is the marketing strategy of Dr. Sharadha to overtake its competitors? (6 Marks)

(iv) In your opinion what could be the biggest weakness in Dr. Sharadha‘s business strategy?

(4 Marks)

PRIME ACADEMY 29TH SESSION MODEL EXAM

IPCC - Information Technology & Strategic Management

Section A – Information Technology 1

(a) i. Touch Screen: It is used in information providing systems. It consists of a screen which is lined

with light emitting devices on its vertical sides and photo-detectors are placed on the horizontal sides. When the user’s finger approaches the screen, the light beam is broken and is detected by the photo detectors. It is more effect than the mouse.

ii. Switch: It is hardware device used to direct messages across a network. Switches create

temporary point to point links between two nodes on a network and send all data along that link.

iii. Data Centre: It is a centralized depository for the storage, management and discrimination of

data and information. It can be defined as highly secure, fault resistant facilities, hosting customer equipment that connects to telecommunications networks.

iv. Server: A server is a computer system that provides services to other computing systems – called

clients – over a network. Server operates continuously on a network and waits for service request from other computers on the network. It provides better access control and can reduce costs by reducing duplication of hardware/software.

v. Repeaters: Repeaters are devices that solve the snag of signal degradation which results as data is transmitted along the cables. It boosts or amplifies the signals before passing it through to the next section of cable.

(b)

i. Subroutine: A subroutine is a subset of instructions that are called or executed from a main

program or finds applications in several programs. It is economical to write it once. Subroutines may be incorporated in the main program from a library of subroutines.

ii. Mesh Topology: A random connection of nodes using communication links is known as

mesh topology. A mesh network may be fully connected or connected with only partial links. In fully interconnected topology, each node is connected by a dedicated point to point link to every node

iii. Multiplexer: Multiplexer enables several devices to share one communication line.

It scans each device to collect and transmit data on a single line to the CPU, and also communicates transmission from the CPU to the appropriate terminal linked to the multiplexer. The devices are polled and periodically asked whether there is any data to transmit.

iv. Modem: Modem stands for Modulator/Demodulator. It is a device that converts a digital

computer signal into an analog telephone signal (i.e. it modulates the signal) and converts an analog telephone signal into a digital computer signal (i.e. it demodulates the signal) in a data communication system.

v. Transaction log: A transaction log is a file that records database modifications such as inserts,

updates, deletes, commits, rollbacks, and database schema changes. The database engine uses a

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2 a) CD-R stands for compact disc, recordable. It can be written only once, though it can be read as many times as required. In a CD-R, an extra organic polymer dye layer lies between the polycarbonate and metal layers, which serve as a recording medium. A pre grooved spiral track guides the laser for recording data, which is encoded from the inside to the outside of a CD in a continuous spiral. CD-RW stands for compact disc, rewritable. This allows for repeated recordings on a disc. It can be rewritten a number of times. It is relatively more expensive than the CD-R. It uses an alloy that can change to and fro from a crystalline form when exposed to a particular light. The technology of this process is called phase changing. The patterns, however, are less distinct than that of CD-R.

b) B2B stands for business-to-business, the exchange of services, information and/or products from one business to another, as opposed to between a business and a consumer. Business-to-business electronic commerce (B2B) typically takes the form of automated processes between trading partners and is performed in much higher volumes than business-to-consumer (B2C) applications. It can also encompass marketing activities between businesses, and not just the final transactions that result from marketing. It is also used to identify sales transactions between Businesses. B2C stands for business-to-consumer, the exchange of services, information and/or products from a business to a consumer, as opposed to between one business and another. Business-to-consumer electronic commerce (B2C) is a form of electronic commerce in which products or services are sold from a firm to a consumer. It minimizes internal costs created by inefficient and ineffective supply chains and creates reduced end prices for the customers. Two Classifications of B2C Ecommerce are –

1. Direct Sellers: Companies that provide products or services directly to customers are

called direct sellers. There are two types of direct sellers: retailers and Manufacturers. 2. Online Intermediaries: Online intermediaries are companies that facilitate transactions

between buyers and sellers and receive a percentage. There are two types of online intermediaries: brokers and intermediaries.

3

(a)Object oriented programming: With traditional programming approaches, developing a new program means writing entirely new codes which may take years to complete, yet not meeting the desired quality standards. The solution of this problem is a new way of developing programs using an object-oriented language. An object is a predefined set of program codes that, after having been written and tested, will always behave the same way so that it can be used for other applications. All programs consist of specific tasks such as saving or retrieving data and calculation. In object oriented programming, an object is written for each specific task and saved in the library so that anyone can use it. In OOP, objects are selected by pointing to a representative icon; small amount of code necessary for finishing the program is written and then linking these objects together creates a new program. OOP offers the following advantages: Ease of use;

Allows graphical user interface;

Faster development of programs;

Programs produced are more reliable; and

When an object is updated, all programs using that object are updated automatically.

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However, initial cost of development using OOPs and time consumed is very large. Large

programs produced by OOPs are slower and use more memory and other computer resources.

(b) There are three Data transmission modes:

(i) Simplex: A simplex communication mode permits data to flow in only one direction. A terminal connected to such a line is either a send-only or a receive only device. Simplex mode is seldom used because a return path is generally needed to send acknowledgements, control or error signals. (ii) Half duplex: In this mode, data can be transmitted back and forth between two stations, but data can only go in one of the two directions at any given point of time. (iii) Full duplex: A full duplex connection can simultaneously transmit and receive data between two stations. It is most commonly used communication mode. A full duplex line is faster, since it avoids the delay that occurs in a half-duplex mode each time the direction of transmission is changed.

(C ) Data Definition Language (DDL): It defines the conceptual schema providing a link between the

logical and physical structures of the database. The logical structure of a database is a schema. A subschema is the way a specific application views the data from the database.

Following are the functions of Data Definition Language (DDL): They define the physical characteristics of each record, field in the record, field’s type and length,

field’s logical name and also specify relationships among the records.

1) They describe the schema and subschema.

2) They indicate the keys of the record.

3) They provide means for associating related records or fields.

4) They provide for data security measures.

5) They provide for logical and physical data independence.

Data Manipulation Language (DML): DML is a Database Language used by data base users to retrieve, insert, delete and update data in a database. Following are the functions of Data Manipulation Language (DML):

a. They provide the data manipulation techniques like deletion, modification, insertion,

replacement, retrieval, sorting and display of data or records.

b. They facilitate use of relationships between the records.

c. They enable the user and application program to be independent of the physical data structures

and database structures maintenance by allowing to process data on a logical and symbolic

basis rather than on a physical location basis.

d. They provide for independence of programming languages by supporting several high-level

procedural languages like COBOL, PL/1 and C++.

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(a) Ports and connectors are components of the motherboard that let the user connect external devices like

printers, keyboards or scanners and let them interface with the PC. The physical interfaces for the ports and connectors are located on the outside—typically at the back of the PC, but they are directly or indirectly (using a connector card) connected to the motherboard. There are various types of ports or connectors, each providing different data transfer speeds to connect various external peripherals. 1. Parallel ports: Parallel ports are used to connect external input/output devices like scanners or printers. Parallel ports facilitate the parallel transmission of data, usually one byte (8 bits) at a time. Parallel ports use 25 pin RS-232C. 2. Com/Serial ports: They are used for connecting communication devices like modems or other serial devices like mice. There are two varieties of Com ports—the 9-pin ports and 25-pin ports. Serial Ports facilitate the serial transmission of data, i.e. one bit at a time.

3. IDE drive connector: IDE devices like CD-ROM drives or hard disk drives are connected to the motherboard through the IDE connector. 4. Floppy drive connector: The floppy drive connectors are used for connecting the floppy drive to the motherboard, to facilitate data exchange. 5. USB connectors: USB stands for Universal Serial Bus. These ports provide the user with higher data transfer speeds for different USB devices like keyboards, mice, scanners or digital cameras. 6. PS/2 Connectors: PS/2 stands for Personal System/2. PS/2 connectors are used to connect PS/2 based input devices like PS/2 keyboards or mice.

(b) Integrated Services Digital Network (ISDN) is a system of digital phone connections to allow simultaneous voice and data transmission across the world. Such voice and data are carried by bearer channels (B channels) having a bandwidth of 64 kilobits per second. A data channel can carry signals at 16kbps or 64kbps, depending on the nature of service provided. There are two types of ISDN service – Basic Rate Interface (BRI) and Primary Rate Interface (PRI). BRI consists of two 64 kbps B channels and one 16kbps D channel for a total of 144kbps and is suitable for individual users. PRI consists of twenty three B channels and one 64kbps D channel for a total of 1536kbps and is suitable for users with higher capacity requirements. Advantages of ISDN are: (i) It allows multiple digital channels to be operated simultaneously through the same regular phone cable meant for analog signals. The digital scheme permits a much higher data transfer rate than analog lines. The amount of time it takes for a communication to start up or the latency time period is about half of that of an analog line. (ii) With ISDN it is possible to combine many different digital data sources and have the information routed to the proper destination. In a digital line it is easier to keep noise and interference out even after combining these signals. (iii) The phone company sends a ring voltage signal to ring the bell which is an In Band signal. However ISDN sends a digital packet on a separate channel which is an Out Band signal without disturbing the established connections, without taking any bandwidth from data channels and setting up the call much faster. Then the ISDN phone equipment makes intelligent decisions on how to direct the call.

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(iv) Usually the telephone company provides the BRI customers with a U interface which is nothing but a single pair of twisted wire from the phone switch. It can transmit full duplex data and therefore only a single device can be connected with a U interface, which is known as Network Termination 1. 5

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Section B – Strategic Management 6

a. Incorrect: The acronym BCG stands for Boston Consulting Group, an organization that developed a matrix to portray an organizational corporate portfolio of investment. This matrix depicts growth of business and the business share enjoyed by an organization. The matrix is also known for its cow and dog metaphors and is popularly used for resource allocation in a diversified company.

b. Incorrect: Concentric diversification amounts to related diversification. Concentric diversification takes place when the products or services added are in different industry but are similar to the existing product or service line with respect to technology or production or marketing channels or customers.

c. Correct: In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business of the firm. It moves forward or backward in the chain and enters specific product with the intention of making them part of new businesses for the firm.

d. Incorrect: In skimming, prices of a new product are kept at a very high level. The idea is to take advantage of the initial interest that a new product generates amongst the buyers who are relatively price insensitive.

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a. Six Sigma is a highly disciplined process that helps in developing and delivering near-perfect products and services. It strives to meet and improve organizational outputs in terms of quality, cost, scheduling, manpower, new products and so on. It works continuously towards revising the current standards and establishing higher ones. It means taking systemic and integrated efforts toward improving quality and reducing cost.

b. Benchmarking is an approach of setting goals and measuring productivity based on best industry

practices. It developed out of need to have information against which performances can be measured. It is a process of continuous improvement in search for competitive advantage. It measures a company’s products, services and practices against those of its competitors or other acknowledged leaders in their field.

c. Demarketing is a marketing strategy to reduce demand temporarily or permanently the aim is not

to destroy demand, but only to reduce or shift it. This happens when the demand is too much to handle. For example, buses are overloaded in the morning and evening, roads are busy for most of times, zoological parks are overcrowded on Saturdays, Sundays and holidays. Here demarketing can be applied to regulate demand.

8 a) Once higher level corporate and business strategies are developed, management Need to formulate

and implement strategies for each functional area. For effective implementation, strategists have to provide direction to functional managers regarding the plans and policies to be adopted. In fact, the effectiveness of strategic management depends critically on the manner in which strategies are implemented. Strategy of one functional area can not be looked at in isolation, because it is the extent to which all the functional tasks are interwoven that determines the effectiveness of the major strategy. Functional area strategy such as marketing, financial, production and Human Resource are based on the functional capabilities of an organization. For each functional area, first the major sub areas are identified and then for each of these sub functional areas, contents of functional strategies, important factors, and their importance in the process of strategy implementation is identified.

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In terms of the levels of strategy formulation, functional strategies operate below the SBU or business-level strategies. Within functional strategies there might be several sub-functional areas. Functional strategies are made within the higher level strategies and guidelines therein that are set at higher levels of an organization. Functional managers need guidance from the business strategy in order to make decisions. Operational plans tell the functional managers what has to be done while policies state how the plans are to be implemented. Major strategies need to be translated to lower levels to give holistic strategic direction to an organization. Functional strategies provide details to business strategy & govern as to how key activities of the business will be managed. Functional strategies play two important roles. Firstly, they provide support to the overall business strategy. Secondly, they spell out as to how functional managers will work so as to ensure better performance in their respective functional areas.

b) SWOT analysis; its significance in organizations An organization need to work within a complex and often hostile environment. They need to generate a series of strategic alternatives, or choices of future strategies to pursue, given the company's internal strengths and weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses, opportunities, and threats is normally referred to as a SWOT analysis.

Strength Weakness Opportunity Threat

Strategies will help in creating a firm-specific business model that will best align, fit, or match a company's resources and capabilities to the demands of the environment in which it operates.

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(a) Corporate culture: The phenomenon which often distinguishes good organizations from bad ones could be summed up as ‘corporate culture’. Corporate culture refers to a company’s values, beliefs, business principles, traditions, and ways of operating and internal work environment. Every corporation has a culture that exerts powerful influences on the behavior of managers. Culture affects not only the way managers behave within an organization but also the decisions they make about the organization’s relationships with its environment and its strategy. “Culture is a strength that can also be a weakness”. This statement can be explained by splitting it in to two parts. Culture as strength: As strength, culture can facilitate communication, decision making & control and create cooperation & commitment. An organization’s culture could be strong and cohesive when it conducts its business according to a clear and explicit set of principles and values, which the management devotes considerable time to communicating to employees and which values are shared widely across the organization. Culture as a weakness: As a weakness, culture may obstruct the smooth implementation of strategy by creating resistance to change. An organization’s culture could be characterized as weak when many subcultures exist, few values and behavioral norms are shared and traditions are rare. In such organizations, employees do not have a sense of commitment, loyalty and sense of identity.

(b) The term strategy is associated with unified design and action for achieving major goals, gaining

command over the situation with a long-range perspective and securing a critically advantageous position. Strategies are formulated at the corporate, divisional and functional level. Corporate strategies are formulated by the top managers. They include the determination of the business lines, expansion and growth, vertical and horizontal integration, diversification, takeovers and mergers, new investment and divestment areas, R & D projects, and so on. These corporate wide strategies need to be operationalized by divisional and functional strategies regarding product lines,

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production volumes, quality ranges, prices, product promotion, market penetration, purchasing sources, personnel development and like.

It is generally meant to cope with a competitive and complex setting.

It flows out of the goals and objectives of the enterprise and is meant to translate them

into realities.

It is concerned with perceiving opportunities and threats and seizing initiatives to cope

with them. It is also concerned with deployment of limited organizational resources in the

best possible manner.

It gives importance to combination, sequence, timing, direction and depth of various

moves and action initiatives taken by managers to handle environmental uncertainties and

complexities.

It provides unified criteria for managers in function of decision making.

In general, a corporate strategy has the following characteristics:

It is generally long-range in nature, though it is valid for short-range situations also and has short-

range implications.

It is action oriented and is more specific than objectives.

It is multi-pronged and integrated.

It is flexible and dynamic.

It is formulated at the top management level, though middle and lower level managers are

associated in their formulation and in designing sub-strategies

10 (i) A Strategic vision is a road map of a company’s future – providing specifics about technology and customer focus, the geographic and product markets to be pursued, the capabilities it plans to develop, and the kind of company that management is trying to create. A strategic vision thus points an organization in a particular direction, charts a strategic path for it to follow in preparing for the future, and moulds organizational identity. A company’s Mission statement is typically focused on its present business scope – “who we are and what we do”. Mission statements broadly describe an organization’s present capabilities, customer focus, activities, and business makeup. Mission is also an expression of the vision of the corporation. To make the vision come alive and become relevant, it needs to be spelt out. It is through the mission that the firm spells out its vision. Dr.Sharadha’s vision at the initial stage was to turn his one pathological laboratory firm into a national chain of pathological laboratories. She is in the process of achieving the vision as a number of Labs have been opened and others are in pipeline. However, at the same time the market share is low when compared with the external benchmark from US market.

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(ii) To a large extent Dr .Sharadha’s Lab has opted the business strategy of internal growth rather than going in for acquisitions or joint ventures. The reason for such a strategy is that Dr.Sharadha does not find many existing laboratories meeting the quality standards. To fund its growth and raise funds it has also given a 26% stake to Pharma Capital. (iii) Dr.Sharadha’s marketing strategy is superior to its competitors. Over a period of time it is able to evolve itself as reference lab for many leading hospitals. This is a testimony of the level of confidence it enjoys among the medical professionals. It provides a high level of customer services because of the following:

Product mix: It possesses technical expertise to conduct 1650 variety of tests. Quality: The laboratories use modern methods to conduct tests. Even routine tests are conducted

with highly sophisticated procedures. Technology such as bar coding and automated registration of patients is also used. Thus there are no mistakes in the identity of samples. There is also daily sanitization and validation of lab equipments.

Speed: Laboratories are working round-the-clock. Further, using modern systems the company is

able to deliver test results faster. Convenience: There are 500 collection centre for the laboratory, thereby the reach is more.

Additionally, system of collection of samples from home also provides convenience to the patients and others.

(iv) A weakness is an inherent limitation or constraint of the organization which creates strategic disadvantage to it. In the case it is given that Dr Sharadha has not gone for mergers and acquisition as he does not find many prospective laboratories meeting the quality standards. Thus its biggest weakness is its inability to capitalize the opportunities through mergers and acquisitions. Acquisitions and partnerships can help in leveraging the existing goodwill. Many of these labs must be enjoying a lot of goodwill in their region. In fact, a business in the medical field such as a pathological laboratory, trust and faith are important. On account of its size and available resources Dey’s Lab could have easily acquired some of these labs and built upon their names. With resources it should be feasible to modernize them to make them compatible with the business ideology and quality systems of the Dey’s Lab. However, it appears that the company lacked capability to modernize an Existing laboratory. .