Question No.01

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Question no.01

(a) Define what is mean by Treasury Stock?

Ans: Treasury Stock:

Every company has an authorized amount ofstock it can issue legally. Of this amount, the total number ofshares owned by investors, including the company's officers andinsiders (the owners of restricted stock), is known as the sharesoutstanding. The number available only to the public to buy andsell is known as the float.

Treasury stocks are shares that were once a part of thefloat and shares outstanding but were subsequently repurchasedby the company and decommissioned. These stocks do not havevoting rights and do not pay any distributions. A company candecide to hold onto treasury stocks indefinitely, reissue them tothe public, or even cancel them.

Stock repurchases are often used as a tax-efficient method to putcash into shareholders' hands, rather than pay dividends.Sometimes, companies do this when they feel that their stock isundervalued on the open market. Other times, companies do thisto provide a "bonus" to incentive compensation plans foremployees. Rather than receive cash, recipients receive an assetthat might appreciate faster than cash saved in a bank account.Another motive for stock repurchase is to protect the companyagainst a takeover threat.

(b) Define meaning and purpose of stock split?

A stock split occurs when a company releasesadditional stock in a structured manner without decreasingshareholder equity. A stock split is a decision by thecompany's board of directors to increase the number of sharesthat are outstanding by issuing more shares to currentshareholders.

For example, in a 2 for 1 stock split, an investor who owns 100shares of a stock valued at $100 per share before the stock splitwill own 200 shares valued at $50 per share after the split. After

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the stock split the investor owns twice as many shares, with eachshare worth exactly half as much as before the stock split.

While a 2 for 1 stock split is probably the most commonform ofstock split it is not the only form. 3 for 1 stock splits andother ratios of stock splits are also possible. In the majority ofcases the purpose of a stock split is to reduce the share price of astock in order to make the stock more affordable to a wider poolof investors.

Purposes of Split stock

The purpose of the stock split is to provide greater liquidity of thecompanys

common shares, increase the number of individual investors andimprove return for shareholders through lowering the per shareinvestment amount.

(c) Define Capital Stock and different type of Capital

Stock?

Capital Stock:

The stockor capital stockof a business entityrepresents the original capital paid or invested into the business

by its founders. The number ofshares authorized for issuance by

a company'scharter, including both common stock and preferred

stock

It serves as a security for the creditors of a business since itcannot be withdrawn to the detriment of the creditors. Stock is

distinct from the property and the assets of a business which mayfluctuate in quantity and value.

The number of shares authorized for issuance by a company's

charter, including both common stock and preferred stock

Types of Stock

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With so many options, how do I decide which

stocks are right for me? Topics include common and preferred

stock, stock classes, market cap, penny stocks, sector stocks,

cyclical stocks, defensive stocks, and tracking stocks.

Common stock

Common stock is a form of corporate equity ownership, a type of

security. It is called "common" to distinguish it from preferred

stock. In the event of bankruptcy, common stock investors

receive their funds after preferred stock holders, bondholders,

creditors, etc. On the other hand, common shares on average

perform better than preferred shares or bonds over time.

Common stock is usually voting shares, though not always.

Holders of common stock are able to influence the corporation

through votes on establishing corporate objectives and policy,

stock splits, and electing the company's board of directors. Some

holders of common stock also receive preemptive rights, which

enable them to retain their proportional ownership in a company

should it issue another stock offering. Additional benefits from

common stock include earning dividends and capital appreciation.

Preferred stock

Preferred stock, also called preferred shares, preference shares,

or simply preferred, is a special equity security that resembles

properties of both equity and a debt instrument and generally

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considered a hybrid instrument. Preferred are senior (i.e. higher

ranking) to common stock, but are subordinate to bonds.

Preferred stock usually carries no voting rights, but may carry

priority over common stock in the payment of dividends and upon

liquidation. Preferred stock may carry a dividend that is paid out

prior to any dividends being paid to common stock holders.

Preferred stock may have a convertibility feature into common

stock. Terms of the preferred stock are stated in a "Certificate of

Designation".

Similar to bonds, preferred stocks are rated by the major credit

rating companies. The rating for preferred is generally lower since

preferred dividends do not carry the same guarantees as interest

payments from bonds and they are junior to all creditors.

Types of preferred stock

Additional types of preferred stock include:

Prior Preferred Stock Many companies have different

issues of preferred stock outstanding at the same time and one of

them is usually designated to be the one with the highest priority.

If the company has only enough money to meet the dividend

schedule on one of the preferred issues, it makes the dividend

payments on the prior preferred. Therefore, prior preferred have

less credit risk than the other preferred stocks but it usually offers

a lower yield than the others.

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Preference Preferred Stock Ranked behind the company's

prior preferred stock (on a seniority basis), are the company's

preference preferred issues. These issues receive preference over

all other classes of the company's preferred except for the prior

preferred. If the company issues more than one issue of

preference preferred, then the various issues are ranked by their

relative seniority. One issue is designated first preference, the

next senior issue is the second and so on.

Convertible Preferred Stock These are preferred issues

that the holders can exchange for a predetermined number of the

company's common stock. This exchange can occur at any time

the investor chooses regardless of the current market price of the

common stock. It is a one way deal so one cannot convert the

common stock back to preferred stock.

Cumulative preferred stock If the dividend is not paid, it

will accumulate for future payment.

Exchangeable preferred stock This type of preferred stock

carries the option to be exchanged for some other security upon

certain conditions.

Participating Preferred Stock These preferred issues offer

the holders the opportunity to receive extra dividends if the

company achieves some predetermined financial goals. The

investors who purchased these stocks receive their regular

dividend regardless of how well or how poorly the company

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performs, assuming the company does well enough to make the

annual dividend payments. If the company achieves

predetermined sales, earnings or profitability goals, the investors

receive an additional dividend.

Perpetual preferred stock This type of preferred stock has

no fixed date on which invested capital will be returned to the

shareholder, although there will always be redemption privileges

held by the corporation. Most preferred stock is issued without a

set redemption date.

Putable preferred stock These issues have a "put"

privilege whereby the holder may, upon certain conditions, force

the issuer to redeem shares.

Monthly income preferred stock A combination of

preferred stock and subordinated debt.

Non-cumulative preferred stock Dividend for this type of

preferred stock will not accumulate if it is unpaid. Very common in

Troops and bank preferred stock, since under BIS rules, preferred

stock must be non-cumulative if it is to be included in Tier capital

Question no.02

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Explain the following terms in detail?

Answer

(i)Financial Accounting:

Financial accountancy (or financial accounting) is the field ofaccountancy concerned with the preparation of financialstatements for decision makers, such as stockholders, suppliers,banks, employees, government agencies, owners, and otherstakeholders. It is the information developed in conformity with

Generally Accepted Accounting Principles (GAAP). It involves therecording and summarization of business transactions and events.

Financial accountancy is used to prepare accounting informationfor people outside the organization or not involved in the day-to-day running of the company. Management accounting providesaccounting information to help managers make decisions tomanage the business.Financial accounting relates to thepreparation of financial statements for external users such ascreditors, investors, and suppliers. The financial statements

include the balance sheet, income statement, and statement ofchanges in financial position.

(ii) Managerial Accounting:

According to the Chartered Institute of Management Accountants(CIMA), Management Accounting is "the process of identification,measurement, accumulation, analysis, preparation, interpretationand communication of information used by management to plan,evaluate and control within an entity and to assure appropriate

use of and accountability for its resources. Managementaccounting also comprises the preparation of financial reports fornon-management groups such as shareholders, creditors,regulatory agencies and tax authorities" (CIMA Official

Terminology).

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Managerial accounting is concerned with providing information to

managers- that is, to those who are inside an organization and

who direct and control its operations. Managerial accounting can

be contrasted with financial accounting, which is concerned with

providing information to stockholders, creditors and others who

are outside an organization (Garrison and Noreen, 1999).

Managerial accounting information includes:

Information on the costs of an organizations products

and services.

For Example, managers can use product costs to guide the

setting of selling prices. In addition, these product costs are

used for inventory valuation and income determination.

Budgets.

A budget is a quantities expression of a plan.

Performance reports:

These reports often consist of comparisons of budgets with actual

results. The deviations of actual results from budget are called

variances.

Other information which assist managers in their

planning and control activities.

Examples are information on revenues of an organizations

products and services, sales back logs, unit quantities and

demands on capacity resources.

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(iii) Financial Reporting.

Recording and presentation of financial statements, such as the

Annual Statement by the insurance company. Financial reporting

statements are used by the State Insurance Commissioner in

regulating the adequacy of company reserves for benefit

liabilities, assets availability, and worth. Financial reporting is

largely an effort to assess financial performance of an entity.

Presenting financial data of a company's position, operating

performance, and funds flow for an accounting period. Financial

statements along with related information may be contained in

various forms for external party use such as in the annual report,

SEC Form 10-K, and prospectus.

(iv) Matching Concept

The matching concept is an accounting principle that requires the

identification and recording of expenses associated with revenue

earned and recognized during the same accounting period.

Accordingly, under the matching concept the expenses of a

particular accounting period are the costs of the assets used to

earn the revenue that is recognized in that period. It follows,

therefore, that when expenses in a period are matched with the

revenues generated for the same period, the result is the net

income or loss for that period.

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A significant relationship exists between revenue and expenses.

Expenses are incurred for the for the purpose of producing

revenue. In measuring net income for a period, revenue should be

offset by all the expenses incurred in producing that revenue. This

concept of offsetting expenses against revenue on the basis of

"causes and effect" is called the Matching Concept.

The term 'matching' means appropriate association of related

revenues and expenses. In matching expenses against revenue

the question when the payment was made or received is

'irrelevant'. For example if a salesman is paid commission in

January, 2001, for sale made by him in December, 2000.

According to this concept commission expense should be offset

against sales of December 2000 because this expense is incurred

for producing revenue in December 2000. On account of this

concept, adjustments are made for all outstanding expenses,

accrued revenues, prepaid expenses and unearned revenues, etc,

while preparing the final accounts at the end of the accounting

period

A process in which expenses are recognized in the income

statement on the basis of a direct association between the costs

incurred and the earning of specific items of income.

This process involves the simultaneous or combined

recognition of revenues and expenses that result directly and

jointly from the same transactions or other events.

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This principle dictates that when it is reasonable to do so,

expenses should be matched with revenues. When expenses are

matched with revenues, they are not recognized until the

associated revenue is also recognized.

This principle allows greater evaluation of actual profitability

and performance (shows how much was spent to earn revenue).

Wages paid to manufacturing laborers are not recognized as

expenses until the actual products are sold. When the products

are sold, the expenses are recognized as cost of goods sold.

Product costs are costs which add value to inventory. These

costs are capitalized (added) to inventory, and later expensed as

cost of goods sold.

Only if no connection with revenue can be established, cost can

be charged as expenses to the current period (e.g. office salaries

and other administrative expenses). These are period costs which

are costs which are expensed immediately.

Depreciation is another example of the matching principle: The

cost of purchasing a fixed asset is spread over the period in which

it is expected to generate revenue.

ILLUSTRATION NO.1

On March 14, the company received inventory of $10,000.

On April 13, the vendor is paid in full.

On May 11, the company sold the inventory for $20,000

Question: When should the inventory become an expense?

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Answer: In the month of May as the inventory was sold. We have

the income of $20,000 which we need to match it with the cost of

$10,000

ILLUSTRATION NO.2

Company A bought a machinery for $36,000. It expects the

machinery to be able to generate incomes for a period of three

(3) years. The company uses the straight line method for

depreciating the machinery.

Question: What should be the annual or monthly depreciation to

be expensed off to match the generation of income?.

Answer: The company should expensed off $36,000/3 years

=$12,000 per annum or $1,000 per month so as to match against

the income.

(v) Accrual Concept

The effects of transactions and other events are recognized when

they occur (and not as cash or its equivalent is received or paid)

and they are recorded in the accounting records and reported in

the financial statements of the periods to which they relate.

ILLUSTRATION NO.1Company A has received cash of $40,000 from his customers.

However, the company actually has done all work satisfactorily

and the customers have acknowledged the work done which the

company can billed for another $20,000. Furthermore, the

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expenses for the $20,000 work-done have been taken up into the

books of account.

Question: Should the company just close their accounting book

by presently its income as $40,000 for the cash received or

should it be $40,000+$20,000 =$60,000

Answer: Based on this concept, the company has actually

completed all work done, also, the work done have being

acknowledged by the customers, hence income of $60,000 should

be taken up and not just the cash received.

Question no.03

(a) What is meant by following Accountancy professional

institutions?

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Answer :

1) ICAEW Institute of Chartered Accountants of England

and Wales

2) ACCA Association of Chartered Certified Accountants

3) CPA Certified Public Accountant

4) ICMA Institute of Cost & Management Accountants

5) CIMA Chartered Institute of Management

Accountants

6) CAT Certified Accounting Technician

7) AAT Association of Accounting Technicians

8) ICAP Institute of Chartered Accountants of Pakistan

9) CFA Chartered Financial Analyst

10) CIA Certified Internal Auditor

(a) How to become the member of these institutions.

Explain in detail?

1) ICAEW :

The Institute of Chartered Accountants in England & Wales(ICAEW) was established by a Royal Charter in 1880.

MEMBERSHIP

As a world leader of the accountancy and finance profession,they offer a number of routes to membership for both trainee andqualified accountants, as well as access to specialist technical andbusiness groups.

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Routes to membership

The ICAEW has reciprocal membership arrangements with the

following professional accountancy bodies. Members of thesebodies can apply for ICAEW membership under certain conditionsand provided they meet the eligibility criteria.

Pathways to Membership

Qualified members of ACCA, CIMA, CIPFA, MICPA, CPA Australia orAICPA with a minimum of five years' full membership and post-qualification experience in an accounting and/or businessenvironment may apply to join the ICAEW through the Pathwaysto Membership programme.

2)_ ACCA.

The Association of Chartered Certified Accountants (ACCA) is aBritish accountancy body which offers the CharteredCertified Accountant (Designator letters ACCA or FCCA)qualification worldwide.

Membership

Two A-Levels and three GCSEs or equivalent in five separate

subjects, including English or Mathematics

OR

Mature student entry route:

Normally over age 21

No academic qualifications required

Must pass the equivalent of Papers F2 (Management

Accounting) and F3 (Financial Accounting) within two years

before further progression to the ACCA exams is permitted.

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Holders of recognised degrees from universities and colleges, andholders of national professional qualifications MAYbe eligible for

exemption from some or all of the nine papers fromFundamentals level: Skills and knowledge Modules.

There are no exemptions from Professional Level.

ACCA can only award exemption on the basis of qualificationsawarded by recognised institutions (i.e. those which arerecognised by the local Ministry of Education as public sectorinstitutions, or the equivalent status under their regulations).

If you hold a degree or professional qualification you will need tosubmit copies (and translations) of your degree certificates andcourse transcripts to obtain any exemptions available.Applications for assessment of existing qualifications to claimexemptions must be directed to the ACCA Glasgow office inScotland.

Actual exemption will be confirmed at the time of a student'sinitial registration with ACCA. That is, when you receive the ACCAStudent Pack.

Students are required to pay an exemption fee for each paperawarded. Exemption fees are the same as examination fees.

You must send official proof of any relevant qualifications whichare held, or are currently being studied for, with your registrationform, in order for us to assess your eligibility and confirm yourentitlement for exemptions.

In Latvia usually most students with University Degree inEconomics get exemption from Paper F2 and F3. The StockholmSchool of Economics students may get additionally moreexemptions. Please note that exemption often varies from studentto student, based on their qualifications.

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The Association of Authorized Public Accountants (AAPA), one of

the British professional bodies for public accountants, has been a

subsidiary of ACCA since 1996.

3)_ CPA:

Certified Public Accountant (CPA) is the statutory title ofqualified accountants in the United States who have passedthe Uniform Certified Public Accountant Examination and

have met additional state education and experiencerequirements for certification as a CPA. Individuals who havepassed the Exam but have not either accomplished therequired on-the-job experience or have previously met it butin the meantime have lapsed their continuing professionaleducation are, in many states, permitted the designation"CPA Inactive" or an equivalent phrase.[1] In most U.S. states,only CPAs who are licensed are able to provide to the publicattestation (including auditing) opinions on financialstatements. The exceptions to this rule are Arizona, Kansas,North Carolina and Ohio where, although the "CPA"designation is restricted, the practice of auditing is not.

Many states have a lower tier of accountant qualification(below that of CPA), usually entitled "Public Accountant"(with designatory letters "PA"). However the majority ofstates have closed the designation "Public Accountant" tonew entrants, with only about 10 states continuing to offerthe designation. Many PAs belong to the National Society of(Public) Accountants.

Many states prohibit the use of the designations "CertifiedPublic Accountant" or "Public Accountant" (or theabbreviations "CPA" or "PA") by a person who is not certifiedas a CPA or PA in that state.[2] As a result, in manycircumstances, an out-of-state CPA is restricted from using

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the CPA designation or designatory letters until a license orcertificate from that state is obtained.

Many other countries also use the title CPA to designate localpublic accountants. The equivalent in formerly Britishcountries is the chartered accountant.

4)_ ICMA:

The Institute of Cost & Management Accountants of Pakistan was

established in 1951 and was granted statutory status under the

Cost and Management Accountants Act, 1966 for the regulation of

the profession of Cost and Management Accounting. ICMAP is the

sole provider of cost and management accounting education,

training and professional certification in Pakistan.

MEMBERSHIP OF THE INSTITUTE

A person, on his/her name being entered in the Register, as an

associate and, so long as his/her name remains so entered, shallbe entitled to use the letters [ACMA] after his/her name toindicate that he/she is an associate of the Institute.

The person, on his name being entered in the Register as a fellowof the Institute and such person, so long as his/her name remainsso entered, shall be entitled to use the letters [FCMA] afterhis/her name to indicate that he/she is a fellow of the Institute.

A person who has been an associate for a continuous period ofnot less than five years and who possesses such qualifications asthe Council prescribes may apply to the Council for admission asfellow; and if the Council grants his/her application, his/her nameshall be entered in the Register as a fellow.

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The decision of the Council on an application for membershipshall be final.

The following persons shall be entitled to have to their namesentered in the Register, namely:-

1. Any person who has passed such examination andcompleted such training as may be prescribed formembership of the Institute.

2. Any person who has passed such other examination andcompleted such other training outside Pakistan as it isrecognized by the Federal Government, or by the Councilwith the approval of the Federal Government, as beingequivalent to the examination and training prescribed formembership of the Institute and, in case he/she is notpermanently residing in Pakistan, fulfils such otherconditions as the Federal Government, or the Council withthe approval of the Federal Government, as the case maybe, may deem fit to impose

5)_ CIMA:

CIMA: - Chartered Institute of Management Accountants

The Chartered Institute of Management Accountants (CIMA) is a

UK based professional body offering training and qualification in

management accountancy and related subjects, focused on

accounting for business; together with ongoing support for

members.

Become a member

We can apply for CIMA membership when we have completed theCIMA professional qualification. we also need to demonstratethree years of relevant practical experience.

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Once our membership application has been approved and wehavebeen notified of this, we can use the letters ACMA after our name

to signify that we are an Associate Chartered ManagementAccountant.

6)_ CAT:

The Certified Accounting Technician:-Qualification is offered by

the Association of Chartered Certified Accountants (ACCA). Upon

completion of the exams and required practical work experience

the CAT graduate will be able to apply to use the letters CAT after

his or her name. In addition, they will have the opportunity to join

the CAT alumni.

Although CAT can be obtained as a stand-alone qualification, it is

often the case that individuals study for CAT as an introduction

qualification in accountancy prior to training to become a

Chartered Certified Accountant through the ACCA Professional

Scheme. It usually takes one and a half years to complete the

nine CAT exams.

7)_ AAT:

The Association of Accounting Technicians, or AAT, is an

accountancy organization with over 108,000 members worldwide.

The AAT is a technician level qualification which entitles those

who have completed the exams and obtained relevant supervised

work experience to call themselves associate accounting

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technicians. The AAT is based in London but there are branches

all over the UK and the rest of the world.

Membership:

There are three categories ofAAT membership:

Full (MAAT)

Fellow (FMAAT)

Member in practice (MIP)

Each category depends on

how long a member has worked in accountancy. the status the member has achieved.

whether the member is running their own business.

All AAT members commit to continuing their professionaldevelopment (CPD) with the support of the AAT. This ensuresthat their skills are kept up-to-date.

Several AAT members have set up their own practices andbecome self-employed

8)_ ICAP:

The Institute of Chartered Accountants of Pakistan(ICAP) is a professional body of Chartered Accountants inPakistan, and represents accountants employed in publicpractice, business and industry, and the public and privatesectors.

ICAP is a member of the International Federation ofAccountants (IFAC), International AccountingStandards Board (IASB), Confederation of Asian &Pacific Accountants (CAPA), International InnovationNetwork (IIN) and South Asian Federation ofAccountants (SAFA).

How to become a member?

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Those who have completed the prescribed training and havepassed all the prescribed examinations of the Institute will be

eligible for Associate Membership of the Institute. Pleaseensure the following is taken care of:

1. The application should be in prescribed Form "A" (Guidelinesfor Form A)

2. Please read carefully the Guidelines Regarding Completing

3. Prescribed Application Form "A" for ICAP Membership beforecompleting the application form

4. Please insert full names (S. No. 1 & 2 of the Form A) as

entered in ICAP records as a trainee student/examinee5. If training received in more than two firms (S. No. 9 of the

Form A), particulars may be mentioned in the blank space oflast page

6. Photocopy of documents attested by a member of ICAPmentioning full name and his Membership Number

7. For proof of age please enclose Matriculation/SSC Certificate(NIC or relevant page of passport for applicants whopassed O & A levels examinations)

8. In S. No. 7 give details of your qualifications and enclosecertificates issued by Board / University / Institute; if notalready submitted

9. In S. No. 8 give details of result communication letters /examination certificates/ exemption certificate (if applicable)

10.Give Particulars of Training in (S.No. 9)

11.Enclose period completion certificate issued by the Principal.Students of recognized accounting bodies may furnish

Summary Record of Experience and necessarycertificate/documents covering information on completion ofprescribed training.

Those who qualified from other recognized AccountingBodies:

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http://www.icap.org.pk/Downloads/FormA.pdfhttp://www.icap.org.pk/userfiles/file/GUIDE%20LINES%20FOR%20FORM.dochttp://www.icap.org.pk/userfiles/file/GUIDE%20LINES%20FOR%20FORM.dochttp://www.icap.org.pk/Downloads/FormA.pdfhttp://www.icap.org.pk/userfiles/file/GUIDE%20LINES%20FOR%20FORM.dochttp://www.icap.org.pk/userfiles/file/GUIDE%20LINES%20FOR%20FORM.doc


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A person who is a member from Institute of CharteredAccountants in Australia, Canada, England & Wales, Ireland,

Scotland may apply for membership.9)_ CFA (Chartered Financial Analyst):

CFA (Chartered Financial Analyst) is an international

professional designation offered by the CFA Institute

(formerly known as AIMR) to financial analysts who complete

a series of three examinations.

Membership at CFA InstituteMembership is available to all investment professionals who meetthe requirements.

Membership Types and Requirements

Affiliate Membership

Affiliate members receive the same benefits as regular members,but do not have voting rights. To qualify for affiliate membership,you must:

1. Agree to adhere to and sign the Member's Agreement andProfessional Conduct Statement

2. Fulfill society requirements, which vary by society (find asociety). All societies require two sponsor statements as partof each application; these are submitted online by yoursponsors. Once you're approved for affiliate membership bya society, you will be prompted to activate yourmembership. You may activate your membership at that

time or wait until you qualify and are approved for regularmembership to activate your membership.

Note: Affiliate membership does not qualify you to receive the CFAcharter. Candidates are often first approved as affiliate membersand then apply for an upgrade to regular membership after theyhave accrued the required work experience.

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Regular Membership

To qualify as a regular memberof CFA Institute and a local society,you must:

1. Hold a bachelor's degree from an accredited institution orhave equivalent education or work experience

2. Pass Level I of the CFA exam or pass the self-administeredStandards of Practice Examination

3. Have 48 months ofacceptable professional work experiencein the investment decision-making process

4. Fulfill society requirements, which vary by society (find asociety). Unless you are upgrading from affiliatemembership, all societies require two sponsor statements aspart of each application; these are submitted online by yoursponsors

5. Agree to adhere to and sign the Member's Agreement, aProfessional Conduct Statement, and any additionaldocumentation requested by CFA Institute

If you are an affiliate member and meet the requirements statedabove, you must update the appropriate information in youraccount and submit an Upgrade Membership application.

In the event of a discrepancy, CFA Institute makes the finaldetermination for regular membership status.

10)_CERTIFIED INTERNAL AUDITOR :MEMBERSHIP Eligibility Requirements

EducationCertified Internal Auditor (CIA) candidates must hold a bachelor'sdegree or its equivalent from an accredited college-levelinstitution. Work experience will not substitute for an appropriatedegree. A copy of the candidate's diploma, transcripts, or otherwritten proof of completion of a degree program must accompanythe candidate's application.

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The IIA will accept student candidates into the CIA program whoare:

(1) Enrolled as a senior in an undergraduate program or as agraduate student

(2) Full-time students as defined by the institution in which thestudent is enrolled (a minimum of 12 semester hours or itsequivalent is required for undergraduate students and ninesemester hours for graduate students)

(3) Register for and take the CIA exam while enrolled in school.

(In certain countries where higher educational degrees differs

based upon cultural or societal factors, The IIA may acceptinternationally recognized professional designations as equivalentto a bachelor's degree. Additionally, in certain circumstanceseducational performance may be considered when a nondegreecandidate has completed more than 90 percent of the academicrequirements needed for a degree (in the United States,approximately 120 semester hours or 180 quarter hours ofdegree credits at an accredited college-level institution).Candidates who do not possess a bachelor's degree and whomeet these circumstances should submit their educational and/or

professional information with their registration forms requestingreview and approval. The information submitted should besufficiently detailed to determine equivalency.)

Character ReferenceCIA candidates must exhibit high moral and professionalcharacter and submit a character reference form completed by aCIA, their supervisor, manager, or educator with their registration.

Professional ExperienceCIA candidates must complete 24 months of internal auditingexperience or its equivalent. Equivalent experience meansexperience in audit/assessment disciplines, including externalauditing, quality assurance, compliance, and internal control. Amaster's degree or work experience in related businessprofessions (such as accounting, law, or finance) can besubstituted for one year of experience. Candidates may sit for the

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CIA exam prior to satisfying the professional experiencerequirement, but they will not be certified until the experience

requirement has been met.

Question no.04

(i) Define the role and importance of accounting standards

in the preparation of financial statements.

Answer :

Definition of Accounting Standards

A set of international accounting and reporting standardsthat help to harmonize company financial information, improve

the transparency of accounting, and ensure that investors receive

more accurate and consistent reports.

Statements of International Accounting Standards issued by the

Board of the International Accounting Standards Committee

(IASC) between 1973 and 2001 are designated InternationalAccounting Standards. The International Accounting Standards

Board (IASB) announced in April 2001 that its accounting

standards would be designated International Financial Reporting

Standards (IFRS). Also in April 2001, the IASB announced that it

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would adopt all of the International Accounting Standards issued

by the IASC.

Role and Importance of Accounting Standards in the

preparation of financial statements

Financial statements are mainly prepared for the internal and

external users. Internal users are the management persons,

administration etc and external users are vendors, shareholders,

government etc. Both users have to make decisions based on

financial statement. There are various methods to prepare the

statements. If all the companies follow different methods, then for

external users it is difficult to rely upon their information because

the information presented vary from company to company. The

accounting standards have restricted the organizations to follow

some restrict rules every year to make financial statements and

that makes easy to compare their results with past results as well

as with results of other companies.

Comparable, transparent, and reliable financial information is

fundamental for the smooth functioning of capital markets. In the

global arena, the need for comparable standards of financial

reporting has become paramount because of the dramatic growth

in the number, reach, and size of multinational corporations,

foreign direct investments, cross-border purchases and sales of

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securities, as well as the number of foreign securities listings on

the stock exchanges. However, because of the social, economic,

legal, and cultural differences among countries, the accounting

standards and practices in different countries vary widely. The

credibility of financial reports becomes questionable if similar

transactions are accounted for differently in different countries.

(ii) What do you understand by IFRS, how does IFRS

different from ICAP accounting standards.

IFRs are the intenational accounting standards follow worldwide

whereas ICAP standards are followed localy in Pakistan only.

IFRS(International Financial Reporting Standards)

International Financial Reporting Standards (IFRS) are Standards,

Interpretations and the Framework adopted by the International

Accounting Standards Board (IASB). Many of the standardsforming part of IFRS are known by the older name of International

Accounting Standards (IAS).

International Financial Reporting Standards comprise :

International Financial Reporting Standards (IFRS) - standards

issued after 2001

International Accounting Standards (IAS) - standards issued

before 2001

Interpretations originated from the International Financial

Reporting Interpretations Committee (IFRIC) - issued after 2001

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Standing Interpretations Committee (SIC) - issued before 2001

IFRS AND ICAP (Institute of Chartered Accountants ofPakistan)

IFRS are the international reporting standards that are adopted

almost by all the countries with some changes. ICAP In Pakistan

determines which of the IFRS are to be followed by Pakistans

organization and which are not. The standards, which are

approved by ICAP and SECP, are compulsory to follow by allorganizations in Pakistan.

Requirements Relating to IFRS under Pakistan Law

Compliance with Requirements relating to IFRS specified in

the Company Law.

Companies are required to comply with IASs / IFRSs under

section 234 of the Companies Ordinance, 1984 that are

notified by Securities & Exchange Commission (SECP)

SECP notifies the accounting standards based on the

recommendations of The Institute of Chartered Accountants

of Pakistan (ICAP)

In the event of difference between IAS/IFRS, with Company

law or SECP notifications, the law / notifications prevail.

inception.

Status of Adoption / implementation of IFRS by ICAP

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All IASs/ IFRSs that have become applicable stand notified

except IFRS 1, 4.

Strategy for adoption / implementation of these two IFRS are

as follows:

IFRS 1 will be adopted once all other IAS/IFRS have notified

& implemented, as it requires unreserved compliance.

IFRS 4 A Committee of Insurance experts of ICAP is actively

deliberating on the adoption of this standard.

Following IFRS / IASs have been approved by the Council and

recommended their notification, but approval & notification

by SECP is in process:

IAS 29 - Financial Reporting in Hyper- Inflationary

Economies

IFRS 7 - Financial Instruments : Disclosures

IFRS 8 - Operating Segments

All IFRS except the following stand notified & are part of the

law:

IAS-29

IFRS-1

IFRS-4

IFRS-7

IFRS-9

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(iii) Write name of five accounting Standards?

1)International Financial ReportingStandards(IFRS)

2)Financial Accounting Standards(FAS)by FASB

3) Generally Accepted Accounting Principles(GAAP)

(UK)

4) Indian Accounting Standards(IAS)

5) Statements of Standard Accounting Practice (SSAPs)issued by ICAEW

Q uestion no.05

(1) What is creating accounting? What are the modes

of creative accounting? What are

the factors giving rise to creative accounting?

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Answer :

CREATIVEACCOUNTING:

Definition:

The use of aggressive and/or questionable accounting techniques inorder to produce a desired result, generally high earnings per share.Creative accounting may include selling assets with a low cost basis,shipping unusually large quantities of product near the end of theyear, and failure to write down inventories that have declined invalue.

The practice of recognizing revenue in a way that makes acompany look better than it is while still conforming to the GAAP.Creative accounting seeks to inflate stock prices, for example, byselling assets at the end of a year to create a profit that offsets aloss. One could argue that creative accounting hides a company'strue financial state, but, unlike aggressive accounting, creativeaccounting is generally legal. It is also called financial engineering

Creative accounting, also called aggressive accounting, is themanipulation of financial numbers, usually within the letter of thelaw and accounting standards but very much against their spiritand certainly not providing the true and fair view of a companythat accounts are supposed to.

A typical aim of creative accounting will be to inflate profitfigures. Some companies may also reduce reported profits ingood years to smooth results. Assets and liabilities may also bemanipulated, either to remain within limits such as debt

covenants, or to hide problems. Typical creative accounting tricks include off balance sheetfinancing, over-optimistic revenue recognition and the use ofexaggerated non-recurring items.

The term window dressing has similar meaning when applied toaccounts, but is a broader term that can be applied to other

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areas. In the US it is often used to describe the manipulation ofinvestment portfolio performance numbers. In the context of

accounts, window dressing is more likely than creativeaccounting to imply illegal or fraudulent practices, but it need todo so.

The techniques of creative accounting change over time. Asaccounting standards change, the techniques that will workchange. Many changes in accounting standards are meant toblock particular ways of manipulating accounts, which meansthose intent on creative accounting need to find new ways ofdoing things. At the same time, other, well intentioned, changes

in accounting standards open up new opportunities for creativeaccounting (the use of fair value is a good example of this).

Many (but not all) creative accounting techniques change themain numbers shown in the financial statements, but makethemselves evident elsewhere, most often in the notes to theaccounts. The market has been surprised before by bad newshidden in the notes, so a diligent approach can give you an edge.

MODES OF CREATIVE ACCOUNTING:

The techniques of creative accounting change over time. As

accounting standards change, the techniques that will workchange. Many changes in accounting standards are meant toblock particular ways of manipulating accounts, which meansthose intent on creative accounting need to find new ways ofdoing things. At the same time, other, well intentioned, changesin accounting standards open up new opportunities for creativeaccounting (the use of fair value is a good example of this).

Many (but not all) creative accounting techniques change themain numbers shown in the financial statements, but make

themselves evident elsewhere, most often in the notes to theaccounts. The market has been surprised before by bad newshidden in the notes, so a diligent approach can give you an edge.

Earnings management usually involves

1. the artificial increase (or decrease) of

revenues,

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profits,

or earnings per share figures through aggressive

accounting tactics. Aggressive earnings management is aform of fraud and differs from reporting error.

The main forms of creative accounting are as follows:

Unsuitable revenue recognition

Inappropriate accruals and estimates of liabilities

Excessive provisions and generous reserve accounting

Intentional minor breaches of financial reportingrequirements that aggregate to a material breach.

FACTORS GIVING RISE TO CREATIVE ACCOUNTING:

1.Management wishing to show earnings at a certain level orfollowing a certain pattern seek loopholes in financialreporting standards that allow them to

1. adjust the numbers as far as is practicable to achieve their

desired aim2. or to satisfy projections by financial analysts. These

adjustments amount to fraudulent financial reporting whenthey fall 'outside the bounds of acceptable accountingpractice'.

Drivers for such behaviour include market expectations, personalrealisation of a bonus, and maintenance of position within amarket sector. In most cases conformance to acceptableaccounting practices is a matter of personal integrity. Aggressive

earnings management becomes more probable when a companyis affected by a downturn in business.

(2) What is Social Accounting? Why social accounting

excised? What are the major forms of social accounting?

Social Accounting

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Social accounting is the process of communicating the social and

environmental effects of organizations' economic actions to

particular interest groups within society and to society at large.

Social accounting is commonly used in the context of business, or

corporate social responsibility (CSR), although any organization,

including NGOs, charities, and government agencies may engage

in social accounting.

Social accounting emphasizes the notion of corporateaccountability D. Crowther defines social accounting in this sense

as "an approach to reporting a firms activities which stresses the

need for the identification of socially relevant behavior, the

determination of those to whom the company is accountable for

its social performance and the development of appropriate

measures and reporting techniques."

Social accounting is a method by which a business seeks to place

a value on the impact on society of its operations. This might

include the following impacts on the environment: waste; the

effect on society of the packaging it produces; and how much fuel

it uses in its company cars. It can also include the effect on the

local community who might have to live in the shadow of its

premises, and how it engages with the community, its customers

and workforce.

Social accounting is also known as

social and environmental accounting,

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Accounting MBA 1-A

corporate social reporting,

corporate social responsibility reporting,

non-financial reporting

or sustainability accounting)

Social accounting is often used as an umbrella term to describe a

broad field of research and practice. The use of more narrow

terms to express a specific interest is thus not uncommon.

Environmental accounting may e.g. specifically refer to the

research or practice of accounting for an organizations impact on

the natural environment Sustainability accounting is often used to

express the measuring and the quantitative analysis of social and

economic sustainability

It points to the fact that companies influence their external

environment (both positively and negatively) through their

actions and should therefore account for these effects as part of

their standard accounting practices. Social accounting is in this

sense closely related to the economic concept of externality

Social accounting offers an alternative account of significant

economic entities. It has the "potential to expose the tension

between pursuing economic profit and the pursuit of social and

environmental objectives"

The purpose of social accounting can be approached from two

different angles, namely for management control purposes or

accountability purposes.

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Accounting MBA 1-A

Social accounting for accountability purposes is designed to

support and facilitate the pursuit of society's objectives. These

objectives can be manifold but can typically be described in terms

of social and environmental desirability and sustainability

BENEFITS OF SOCIAL ACCOUNTING OR WHY SOCIAL

ACCOUNTING EXISTS:

Social accounting for accountability purposes is designed to

support and facilitate the pursuit of society's objectives. These

objectives can be manifold but can typically be described in terms

of social and environmental desirability and sustainability

Organizations are seen to benefit from implementing social

accounting practices in a number of ways, e.g.

Increased information for decision-making;

More accurate product or service costing;

Enhanced image management and Public Relations;

Identification of social responsibilities;

Identification of market development opportunities;

Maintaining legitimacy.

FORMS OF SOCIAL ACCOUNTIG:

Companies and other organizations (such as NGOs) may publish

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1. Annual corporate responsibility reports, in print or online.

2. The reporting format can also include summary or overviewdocuments for certain stakeholders,

3. a corporate responsibility or sustainability section on its

corporate website,

4. or integrate social accounting into its annual report and

accounts.

Companies may seek to adopt a social accounting format that is

audience specific and appropriate. For example, H&M, asks

stakeholders how they would like to receive reports on its

website; Vodafone publishes separate reports for 11 of its

operating companies as well as publishing an internal report in

2005; Weyerhaeuser produced a tabloid-size, four-page mini-

report in addition to its full sustainability report.

(3) What is forensic accounting? Who need forensic

accounting? What required to become a forensic

accountant?

Forensic accounting is the specialty practice area of

accountancy that describes engagements that result from actual

or anticipated disputes or litigation. "Forensic" means "suitablefor use in a court of law", and it is to that standard and potential

outcome that forensic accountants generally have to work.

Forensic accountants, also referred to as forensic auditors or

investigative auditors, often have to give expert evidence at the

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eventual trial. All of the larger accounting firms, as well as many

medium-sized and boutique firms, have specialist forensic

accounting departments. Within these groups, there may be

further sub-specializations: some forensic accountants may, for

example, just specialize in

1. insurance claims,

2. personal injury claims,

3. fraud construction,

4. or royalty audits

NEED OF FORENSIC ACCOUNTING:

Forensic accounting is needed in Engagements relating to civil

disputes which may fall into several categories:

1. calculating and quantifying losses and economic damages,

whether suffered through tort or breach of contract

disagreements relating to company acquisitionsperhaps

earn outs or breaches of warranties;

2. and business valuation.

3. Forensic accountants often assist in professional negligence

claims where they are assessing and commenting on the

work of other professionals.

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4. Forensic Accountants are also engaged in marital and family

law matters for the purpose of analyzing lifestyle for spousal

support purposes, determining income available for child

support and equitable distribution.

Engagements relating to criminal matters typically arise in the

aftermath of fraud. They frequently involve the assessment of

accounting systems and accounts presentationin essence

assessing if the numbers reflect reality.

Forensic accountants utilize an understanding of business

information and financial reporting systems , accounting and

auditing standards and procedures, evidence gathering and

investigative techniques, and litigation processes and procedures

to perform their work. Forensic accountants are also increasingly

playing more proactive risk reduction roles by designing and

performing extended procedures as part of the statutory audit,

acting as advisers to audit committees, fraud deterrence

engagements, and assisting in investment analyst research.

In addition to gathering, investigating and then analyzing financial

evidence to recover assets through court litigation, some forensic

accountants are actually involved in the mediation process to

negotiate settlements and resolve disputes. Whether assisting in

legal proceedings by testifying as an expert witness, hearing

testimony of an opposing witness and then assisting with cross-

examination, calculating economic loss from breach of contract,

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or looking for hidden assets in a divorce case, the forensic

accountant is an investigation specialist who helps to fight white-

collar crime.

REQUIREMENTS FOR BEING A FORENSIC ACCOUNTANT:

Most forensic accountants are CPAs within large firms, but the

expansion of global marketing has created a continuously growing

need for individuals who specialize in Forensic Accounting In order

to have a successful career as a Forensic Accountant, you need tobe familiar with legal concepts and procedures. The degree in

forensic accounting is a post graduate degree. You must have a

bachelors degree in accounting, and a CPA certification is

actually preferred as well

Education and training. Most accountant and auditor positionsrequire at least a bachelor's degree in accounting or a related

field. Beginning accounting and auditing positions in the Federal

Government, for example, usually require 4 years of college

(including 24 semester hours in accounting or auditing) or an

equivalent combination of education and experience. Some

employers prefer applicants with a master's degree in accounting,

or with a master's degree in business administration with a

concentration in accounting.

Any accountant filing a report with the Securities and Exchange

Commission (SEC) is required by law to be a Certified Public

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Accountant (CPA). This may include senior level accountants

working for or on behalf of public companies that are registered

with the SEC. CPAs are licensed by their State Board of

Accountancy. Any accountant who passes a national exam and

meets the other requirements of the State where they practice

can become a CPA. The vast majority of States require CPA

candidates to be college graduates, but a few States will

substitute a number of years of public accounting experience for

a college degree.

Some forensic accountants are also

1. Certified Forensic Accounting Professionals,

2. Certified Fraud Examiners,

3. Certified Public Accountants,

4. or Chartered Accountants

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Q.6 (a) Define the following

1. Authorize Share capital

It is the amount of capital with which the company is

registered. This capital is mentioned in the memorandum of

association. A mention is also made of the number of sharesinto which this total capital is divided and of the par value of

shares. In late years if the company want to either increase

or decrease this capital, certain legal requirements must be

met. This capital is also known as nominal capital or

registered capital.

2. Issued Shared capital

Shares offered to the general public for contribution are

known as shares issued. The total par value of such shares is

called issued capital. To begin with a company seldom offers

all of its shares for subscription. Therefore, the amount of

issued capital is generally less than the authorized capital. If

a company has a authorize capital of Rs. 10,00,000 divided

into 10,000 shares of Rs, 100 each, it may decide to offer

5000 shares to the general public. In this case the issued

capital is said to be Rs. 5, 00,000 divided into 5000 shares of

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RS.100 each. The remainder, that is, the difference between

the authorize and issued capital is known as un issued

capital.

3. Called-up Capital

A company may require the payment of par value either in

instalments or in lump sum. This amount is known as called

up capital. For example for each of 4500 shares taken up by

the public the company may require a payment of Rs. 70 per

share,(the remainder Rs.30 per share to be paid per share

when asked by the company).In this case called up capital of

the company is Rs. 3,15,000(4500 * RS. 70 per share called

up).The difference between subscribed capital and called-up

capital is known as un-called capital.

4. Paid-Up capital

The total amount received by the company out of the total

called-up capital is know as paid-up capital. Assuming that of

Rs. 3, 15, 000, called-up capital the company received Rs.

300,000 ,the paid-up capital is the amount Rs. 300,000. The

remainder of Rs. 15,000 is known as calls unpaid or calls in

arrears.

(b) Advantages and limitation of ratio analysis

1. advantages of ratio analysis

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Ratio as a tool of financial analysis provides symptoms with the

help of which any analyst is in a position to diagnose the financial

health of a unit. Different groups are interested in the affairs of

any business entity, therefore significance of ratio analysis for

various groups is different and may be discuss as follow

1. Usefulness to the management

1)Decision making

Mass of information contained in the financial

statements may be unintelligible or confusing. Ratios

help in highlighting the areas deserving attention and

corrective action, thus facilitating decision making.

2)Financial forecasting and planning

Planning and forecasting can be done only by knowing

the past and the present. Ratios help the management

in understanding the past and present of a unit. These

also provide useful idea about the existing strength or

weakness of the unit. This knowledge is vital for the

management to plan and forecast the future of the unit.

3)Communication

Ratios have the capability of communicating the

desired information to the relevant persons in a mannereasily understood by them to enable them to takes

stock of the existing situation.

4)Control and coordination is more effective

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Ratio analysis is likely to result in the coordination from

all quarters of management as those who required

attention. Due to results of ration analysis, results can

be compared with standards. Variance to be computed

an analysed by reasons and individuals. So it is great

help in administering an effective system of control.

1. Usefulness to the Owners/Shareholders

Existing as well as prospective owners or shareholders are

fundamentally interested in the (a) long term solvency (b)

profitability of the unit .Ratio analysis can help them by

analyzing and interpreting both aspects of their unit.

2. Usefulness to the Creditors

Creditors both short term and long term can analyze the

liquidity and capacity of the unit to repay periodical interest

and repayment of loans on schedules. Ratio analysis

provides ,both type of creditors ,answers to their questions

3. Usefulness to Employees

Employees are interested in fair wages. Ration analysis

provides them adequate information regarding efficiencyand profitability of the unit .This knowledge help them

bargain with the management regarding their demands for

improved wages, bonuses etc

4. Usefulness to the Government

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Govt. is interested in the financial information of the units

both at micro as well as macro level .Individual unit

information regarding production, sales, profit is required for

excise duty, sales tax and income tax purpose. Group

information for the industry is required for formulating nation

policies and planning .In the absence of dependable

information, Govt. plans and policies may not achieve

desired results.

Limitations of ratio analysis

Ratio analysis is widely used and useful techniques to

evaluate the financial position and performance of any

business unit but it suffers from a number of limitations.

These limitations must be kept in mind by the analyst while

using this technique.

1)Reliability is linked with accounting data

Ratios are calculated on the basis of accounting information.

Accounting system has certain built in limitations like

historical cast, going concern value ,stable monetary value

etc. So limitations of accounting data effect the quality of

ratios also. After, all ratios can not be more reliable then the

reliability of data itself.2)Qualitative factors are ignored

Ratio analysis is only quantitative analysis. Sometimes

qualitative factors may be more important. For example ,

management may be justified in making huge purchase of

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raw material in anticipation of large demand of its product

for coming period. But ratios are not capable of considering

qualitative factors.

3)Isolated ratios is meaningless

Ratios assume significance only when studied in proper

context and if compared with norms or over a period. Ratio

in itself does not convey any sense.

4)Ratio analysis is historical

Ratios are based on the facts contain in the financial

statements. These statements contain past records. Past

may be less important for the management then present

and future.

5)Different accounting practice Render Ratios

incomparable

Accounting permits alternative treatment of many items like

depreciation, valuation of stock differed expenses etc. Ratios

based on statements prepared by following different

practices are not comparable.

6)Price level changes affect the utility of Ratio analysis

Comparison of ratios over a period of time relating to the

same unit may be misleading. For example sales may bestatic in quantity but higher in rupee value due to inflation.

7)Incompetence of Bias of analyst

Much depend upon the skills, integrity and competence of

the analyst to use ratios judiciously.

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8)Lack of adequate standards

There are no well accepted standards or rule of thumb for all

ratios which might be accepted as norms for comparison. It

renders interpretation of ratios difficult and to some extent

arbitrary.

9)Window dressing

Financial statements can easily be window dressed to depict

better than real picture of the enterprise. Moreover the

analyst depending only upon the published information will

not be in a position to get inside information.

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Question No.01