· Web viewBoth Peters & Waterman and Deal & Kennedy argued that cultural strength is a powerful factor in shaping the behavior and success of organisations. A ‘strong’ culture

EXCEL PROFESSIONAL INSTITUTE

WEEKLY ASSIGNMENT

WEEK 10

ASSIGMENT SET 8

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

No Assignments for AAA this week

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1.4 QUANTITATIVE TOOLS IN BUSINESS

(a) State the relationships between the mean, median and mode in a Non-Symmetric Distribution. (5 Marks)

(b) A large departmental store, BOBO, has analyzed the monthly amount spent by its credit card customers and found that it is normally distributed with a mean of GHC 100 and a standard deviation of GHC 15.

Required: Determine, the percentage of people who will spend: (i) Over GHC 130. (2 Marks)

(ii) Over GHC 120. (2 Marks)

(iii) Below GHC 70. (2 Marks)

(iv) Between GHC 100 and GHC 130. (2 Marks) (v) Between GHC 115 and GHC 130. (2 Marks)

Calculate, the minimum amount spent of: (vi) The top 10%. (2.5 Marks)

(vii) The top 3% of customers. (2.5 Marks)

(Total = 20 Marks)

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1.2 BUSINESS AND CORPORATE LAW

1. Explain corporate veil and discuss five instances under which the veil may be lifted.

2. Explain the Ghanaian laws position of pre-incorporation contracts

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1.3 BUSINESS MANAGEMENT AND INFORMATION SYSTEMS

Question 1

Both Peters & Waterman and Deal & Kennedy argued that cultural strength is a powerful factor in shaping the behavior and success of organisations. A ‘strong’ culture is one in which key values are widely shared and intensely held by employees.

Required:

i) State FIVE advantages that a strong culture will bring to an organisation. (5 marks)

ii) State FIVE disadvantages that can exist in an organisation due to the practice of a strong culture. (5 marks)

(Total: 10 marks)

Question 2

Your organization has outsourced most of its functions to adjust to modern trends in organizational management. Identify FIVE benefits that may accrue to your organization from this arrangement. (10 marks)

b) Grassroots Limited is operating as a medium-sized company in Accra but has now decided to expand to all the regional capitals, and has therefore decided to decentralize its operations. State FIVE reasons for the decision to decentralize its operations. (10 marks)

(Total: 20 marks)

Question 3

a) One of the common threads many successful firms share is that they have a workable mission statement. Explain FIVE reasons a mission statement may contribute to a firm’s success. (10 marks)

b) You have recently been appointed to manage a project which is failing because the previous manager did not outline any clear objectives for the project. Identify FIVE characteristics of project objectives. (10 marks)

(Total: 20 marks)

Question 4

a) Distinguish between formal and informal organizations. (5 marks)

b) One of your colleagues is reluctant in joining a formal group that has been established in your company. Explain FIVE benefits that may accrue to him/her if he/she joins the group. (15 marks)

(Total: 20 marks)

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2.1 FINANCIAL REPORTING

QUESTION 1 SELA GROUP

On 1 July 2015, Sela Co acquired 60% of Seyram Co’s equity shares by means of a share exchange of one new share in Sela Co for every two acquired shares in Seyram Co. In addition, Sela Co will pay a further GHC0·54 per acquired share on 30th June 2016.Sela Co has not recorded any of the purchase consideration and its cost of capital is 8% per annum. The market value of Sela Co’s shares at 1 July 2015 was GHC3·00 each. The summarised statements of financial position of the two companies as at 31st December 2015 are:

Sela Seyram

GHC'000 GHC'000

Assets

Non-current assetsProperty, plant and equipment (note (i)) 25,400 13,500Financial asset: equity investments (note (iv)) 5,500 2,000

30,900 15,500

Current assetsInventory (note (iii) 12,700 5,300Other current assets 9,700 4,000

22,400 9,300

Total assets 53,300 24,800

Equity and liabilities

EquityEquity shares of GHC1 each 20,000 9,000

Retained earnings:Brought forward at 1 January 2015 12,200 8,600Profit/(loss) for the year ended 31st December 2015 5,000 -3,000

37,200 14,600Liabilities: Payables 16,100 10,200

53,300 24,800

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The following information is relevant:i. At the date of acquisition, Sela Co conducted a fair value exercise on Seyram Co’s

net assets which were equal to their carrying amounts (including Seyram Co’s financial asset equity investments) with the exception of an item of plant which had a fair value of GHC2·5 million below its carrying amount. The plant had a remaining useful life of 30 months at 1 July 2015.The directors of Sela Co are of the opinion that an unrecorded deferred tax asset of GHC1·2 million at 1 July 2015, relating to Seyram Co’s losses, can be relieved in the near future as a result of the acquisition. At 31 December 2015, the directors’ opinion has not changed, nor has the value of the deferred tax asset.

ii. Sela Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, a share price for Seyram Co of GHC1·50 each is representative of the fair value of the shares held by the non-controlling interest.

iii. At 31st December 2015, Seyram Co held goods in inventory which had been supplied by Sela Co at a mark-up on cost of 35%. These goods had cost Seyram Co GHC2·43 million.

iv. The financial asset equity investments of Sela Co and Seyram Co are carried at their fair values at 1 January 2015. At 31st December 2015, these had fair values of GHC6·1 million and GHC1·8 million respectively, with the change in Seyram Co’s investments all occurring since the acquisition on 1 July 2015.

v. There is no impairment to goodwill at 31st December 2015.Required:

a. Prepare the consolidated statement of financial position as at 31 December 2015 (16marks)

b. IAS 28 prescribes the use of the equity method in accounting for investment in associate. Explain how IAS 28 gives meaning to equity accounting in the consolidated financial statement [4 marks]

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QUESTION 2: EXCELExcel Co is a manufacturer of domestic appliances. Its chairman is pleased with the results for the year ended 31 December 2015 as they show a continuing improvement over recent past performance. However, the finance director says that a better assessment of the company’s performance would be made by a comparison to other companies in the same sector. The finance director has obtained some ratios for Excel Co’s business sector, based on a year end of 31 December 2015, which are:Return on capital employed (ROCE) 18·5%Net asset turnover 1·8 timesGross profit margin 21%Operating profit margin 10·3%Current ratio 1·6:1Gearing (debt/equity) 36%

The summarised financial statements of Excel Co are:Statement of Profit and Loss for the year ended Dec 31, 2015

GHC’000

Revenue 62,500

Cost of sales (51,800)

Gross profit 10,700

Operating costs (5,800)

Finance costs (1,800)

Profit before tax 3,100

Income tax expense (1,000)

Profit for the year 2,100

Statement of financial position as at 31 December 2015

GHC’000 GHC’000

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Assets

Non-current assets

Property 8,100

Owned plant 12,600

Leased plant 12,20032,900

Current assets 16,400

Total assets 49,300

Equity and liabilities

Equity

Equity shares of GHC1 each 9,000

Property revaluation surplus 4,000

Retained earnings 10,60023,600

Non-current liabilities

10% loan notes 10,000Finance lease obligations 6,400 16,400

Current liabilities

Finance lease obligations 2,100Other current liabilities 7,200 9,300

Total equity and liabilities 49,300 Required:

a. Prepare for Excel Co the equivalent ratios to those of its sector. (6 marks)b. Present a vertical common size Statement of profit and loss for Excel for the year ended

31 December 2015 4 marks c. Analyse the financial performance and position of Excel Co for the year to 31 December

2015 in comparison to the sector averages. 10 marks

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2.2 MANAGEMENT ACCOUNTINGEl-classico Ltd manufactures and sells a small range of kitchen equipment. Specifically the product range contains a dishwasher (DW), a washing machine (WM) and a tumble dryer (TD). The TD is of a rather old design and has for some time generated negative contribution. It is widely expected that in one year’s time the market for this design of TD will cease, as people switch to a washing machine that can also dry clothes after the washing cycle has completed.El-classico Ltd is trying to decide whether or not to cease the production of TD now or in 12 months’ time when the new combined washing machine/drier will be ready. To help with this decision the following information has been provided:1. The normal selling prices, annual sales volumes and total variable costs for the three

products are as follows:DW WM TD

Selling price GHC200 GHC350 GHC80Material cost per unit GHC70 GHC100 GHC50Labour cost per unit GHC50 GHC80 GHC40Contribution per unit GHC80 GHC170 -GHC10Annual sales 5,000 units 6,000 units 1,200 units

2. It is thought that some of the customers that buy a TD also buy a DW and a WM. It is estimated that 5% of the sales of WM and DW will be lost if the TD ceases to be produced.

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3. All the direct labour force currently working on the TD will be made redundant immediately if TD is ceased now. This would cost GHC6,000 in redundancy payments. If El-classico waited for 12 months the existing labour force would be retained and retrained at a cost of GHC3,500 to enable them to produce the new washing/drying product. Recruitment and training costs of labour in 12 months’ time would be GHC1,200 in the event that redundancy takes place now.

4. El-classico operates a just in time (JIT) policy and so all material cost would be saved on the TD for 12 months if TD production ceased now. Equally, the material costs relating to the lost sales on the WM and the DW would also be saved.

5. The space in the factory currently used for the TD will be sublet for 12 months on a short-term lease contract if production of TD stops now. The income from that contract will be GHC12,000.

6. The supervisor (currently classed as an overhead) supervises the production of all three products spending approximately 20% of his time on the TD production. He would continue to be fully employed if the TD ceases to be produced now.

Required:(a) Calculate whether or not it is worthwhile ceasing to produce the TD now rather than

waiting 12 months (ignore time value of money).16 marks(b) Explain two pricing strategies that could be used to improve the financial position of the

business in the next 12 months assuming that the TD continues to be made in that period(4 marks)

20 marks2.3 AUDIT AND ASSURANCE

QUESTION 1Describe TWO substantive procedures the external auditor of a hospital should adopt to verify EACH of the following assertion in relation to an entity’s property, plant and equipment:i) Valuationii) Completeness; andiii) Rights and obligations.(Note: Assume that the hospital adopts International Financial Reporting Standards). (6marks)

QUESTION 2IntelCo provides scientific services to a wide range of clients. Typical assignments range from testing food for illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.The annual audit is nearly complete. As audit senior you have reported to the engagement partner that IntelCo is having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases by customers who bought drugs from the Company part way through the year. There have been adverse publicity for IntelCo, and a number of clients have withdrawn their contracts. A senior employee then left IntelCo, stating lack of investment in new pharmaceutical products and facilities was increasing the risk of incorrect information being provided by the company.

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A cash flow forecast prepared internally shows IntelCo requiring significant additional cash within the next 12 months to maintain even the current level of services. Pharma’s auditors have been asked to provide a negative assurance report on this forecast.Required:Explain the audit procedures that may be carried out to determine whether or not IntelCo has the ability to continue as a going concern entity.

QUESTION 3b) At a meeting to discuss the draft accounts with senior management of Good Old Days Ltd, the external auditors, Gelian Chartered Accountants asked management to confirm the amount of contingent liability of GH¢100million in respect of pending legal suit against the company. The CEO quizzed the chief Accountant to explain how the amount of GH¢100million was arrived at.Required:i) Describe briefly what a contingent liability is giving example where appropriate. (2 marks)ii) Explain in detail the audit procedures for the verification of contingent liability (5 marks)

QUESTION 4ISA 510 Initial audit engagement provide guidance to auditors on the audit of opening balances when conducting an initial audit engagement. Explain the audit objective and the audit procedures in relation to opening balances. (10 marks)

2.4 FINANCIAL MANAGEMENT

PTC Co wishes to calculate its current cost of capital for use as a discount rate in investment appraisal. The following information relates to PTC Co:

Financial position statement extracts as at 31st December, 2012

GHS ‘000 GHS ‘000

Equity:

Ordinary shares (nominal value 50 pesewas) 4,000

Reserves 18,000 22,000

Long-term liabilities:

4% preference shares (nominal value GHS 1) 3,000

7% bonds after six years 3,000

Long-term bank loan 1,000 7,000

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29,000

The ordinary shares of PTC Co have an ex div market value of GHS 4.70 per share and an ordinary dividend of 36.3 pesewas per share has just been paid. Historic dividend payments have been as follows:

Year 2008 2009 2010 2011

Dividends per share (pesewas) 30.9 32.2 33.6 35.0

The preference shares of PTC Co are not redeemable and have an ex div market value of 40 pesewas per share. The 7% bonds are redeemable at a 5% premium to their nominal value of GHS 100 per bond and have an ex interest market value of GHS 104.50 per bond. The bank loan has a variable interest rate that has averaged 4% per year in recent years.

PTC Co pays profit after tax at an annual rate of 30% per year.

Required:

(a) Calculate the market value weighted average cost of capital of PTC Co. (12 marks)(b) Discuss how the capital asset pricing model can be used to calculate a project-specific

cost of equity for PTC Co, referring in your discussion to the key concepts of systematic risk, business risk and financial risk. (8 marks)

2.6 CORPORAT STRATEGY, ETHICS AND GOVERNANCEQUESTION 1a) At K2 Limited, strategy evaluation is a key aspect of the strategic management process. It allows its management to assess the efficiency and effectiveness of the chosen strategies before their implementation.

Required: Discuss the following criteria for evaluating corporate strategic options. i) Suitability ii) Acceptability iii) Feasibility (12 marks)

QUESTION 2You are the Chief Operations Officer and a member of the board of directors of a reputable firm that has operations in all ten regions of Ghana. The board is currently deliberating on a strategy to decentralize the administrative function in order to promote flexibility in administration across

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all the operational areas of the company. You feel strongly that this move will be detrimental to the prospects of the company and has therefore spoken against it. The Chairman of the board has, therefore, asked you to submit a short memo to argue out your position.Required:In a memo to the Chairman of the board, explain THREE reasons why you believe your company should maintain the current centralised administrative department. (6 marks)

b) One of the important tasks in the formulation of corporate strategy is stakeholders’ analysis.Required:Explain the term stakeholders and identify TWO groupings of stakeholders.(4 marks)

QUESTION 3

Johnson recently qualified as a professional accountant and received promotion in your company. One of your key responsibilities is to prepare management accounts to facilitate management decision making. You require important sales information from the sales department to incorporate into the final figures. Unfortunately, due to staff sickness and other inefficiencies, the sales report for the month has been delayed. Thus, you will not receive the information until few hours before the accounts are due for presentation to the Finance Director.

In a related situation, while on lunch break, you overhead the marketing manager asking another employee in the finance department to advise her on some investment decisions she has to make. She has recently inherited a considerable sum of money and would like your colleague to calculate her inheritance tax as well as capital gains tax liabilities.

Required:

Identify the fundamental ethical principle(s) that could be in breach and justify why they may constitute a breach. (10 marks)

QUESTION 4

Bright Buke completed first degree in pharmacy programme abroad and returned to her native country Ghana with the hope of starting a pharmaceutical company. Ghana has been experiencing high graduate unemployment and Susie was very determined not to join the teaming unemployed youth in the country. Susie put together an excellent business plan and approached four other childhood friends who have also completed university to start the company for manufacturing of basic and essential drugs locally. After many months of hard work the company finally commenced operations two years ago.

Bright Buke plays a dual role of the chief executive officer (CEO) and chairman of the Board of Directors and the four other friends are all executive directors of the company. The board of the company is currently composed of five executive directors and two non-executive directors. The

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two non-executive directors are close friends of the executive directors without relevant work experience since they remained unemployed 3 years after completing university. There have been several board meetings held without the non-executive directors. This situation is largely due to believe by the executive directors that non-executive directors are really not needed since they do not play any important role on the board. Susie and other executive directors participated in a seminar on corporate governance where the facilitator made the following statements on best practices of corporate governance:

“The roles of board chairman and chief executive officer should be held by two different individuals”

“The board chairman performs critical functions to ensure that the board functions effectively”

“The board should be composed of at least one-third of non-executive directors”

After the seminar the executive directors disagreed with some of the facilitator’s assertions. They claimed the statements are idealistic and not pragmatic. Bright Buke has approached you as corporate governance expert to help provide clarity to the statements by the facilitator.

Required:

a) Discuss THREE justifications why the roles of the board chairman and chief executive officer should not be held by Bright Buke. (9 marks)

b) Explain THREE roles of non-executive directors on the board. (6 marks)

c) Identify FOUR roles expected of Bright Buke as the board chairman. (5 marks)

(Total: 20 marks

3.1 CORPORATE REPORTINGQUESTION 1: CLASS LTD

a. Class Ltd entered into a construction contract on 1 January 2015 which is expected to last 24 months. The agreed price for the contract is GHC5 million. At 31st December 2015, the costs incurred on the contract were GHC1·6 million and the estimated remaining costs to complete were GHC2·4 million. On 20 December 2015, Class Ltd received a payment from the customer of GHC1·8 million which was equal to the full amount of the progress billings. Class Ltd calculates the stage of completion of its construction contracts on the basis of progress billings to the contract price.

Required: What is the revenue to be included in statement of profit and loss for the year ended 31st December 2015 and how much should be shown as contract asset in the statement of financial position as at the year end 2015 [6marks]

b. The issue share capital of Class Ltd at 31st December 2013 was GH¢10 million. Its shares are denominated at 25 pesewas each. Class Ltd’s earnings attributable to its

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ordinary shareholders for the year ended 31st December 2013 were also GH¢10 million, given an earnings per share of 25 pesewas.Year ended 31st December 2014On 1st January 2014 Class Ltd issued eight million ordinary shares at full market price. On 1st July 2014 a bonus issue of one new ordinary share for every four ordinary shares held was made. Earnings attributable to ordinary shareholders for the year ended 31st December 2014 were GH¢13.8 million.Year ended 31st December 2015On 1st July 2015 Class Ltd made a rights issue of shares of two new ordinary shares at a price of GH¢1.00 each for every five ordinary shares held. The offer was fully subscribed. The market price of Class Ltd’s ordinary shares immediately prior to the offer was GH¢2.40 each. Earnings attributable to shareholders for the year ended 31st December 2015 were GH¢19.5 million.

Required:Calculate Class Ltd’s earnings per share for the years ended 31st December 2014 and 2015 including comparative figures. 8 marks

c. IAS 38-Intangible asset provides criteria for capitalizing development cost. Explain 5 of these criteria 5 marks

3.3 ADVANCED FINANCIAL MANAGEMENTQuestion 1Neptune is a listed company in the telecommunications business. You are a senior financial management advisor employed by the company to review its capital investment appraisal procedures and to provide advice on the acceptability of a significant new capital project – the Galileo.The project is a domestic project entailing immediate capital expenditure of GHC800 million at 1 July 2008 and with projected revenues over five years as follows:

30 June 30 June 30 June 30 June 30 JuneYear ended 2009 2010 2011 2012 2013Revenue (GHC million) 680 900 900 750 320

Direct costs are 60% of revenues and indirect, activity based costs are GHC140 million for the first year of operations, growing at 5% per annum over the life of the project. In the first two years of operations, acceptance of this project will mean that other work making a net

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contribution before indirect costs of GHC150 million for each of the first two years will not be able to proceed. The capital expenditure of GHC800 million is to be paid immediately and the equipment will have a residual value after five years’ operation of GHC40 million. The company depreciates plant and equipment on a straight-line basis and, in this case, the annual charge will be allocated to the project as a further indirect charge.Preconstruction design and contracting costs incurred over the previous three years total GHC50 million and will be charged to the project in the first year of operation.The company pays tax at 30% on its taxable profits and can claim a 50% first year allowance on qualifying capital expenditure followed by writing down allowance of 40% applied on a reducing balance basis. Given the timing of the company’s tax payments, tax credits and charges will be paid or received twelve months after they arise. The company has sufficient other profits to absorb any capital allowances derived from this project.The company currently has GHC7,500 million of equity and GHC2,500 million of debt in issue quoted at current market values. The current cost of its debt finance is $LIBOR plus 180 basis points. $LIBOR is currently 5·40%, which is 40 basis points above the one month Treasury bill rate. The equity risk premium is 3·5% and the company’s beta is 1·40. The company wishes to raise the additional finance for this project by a new bond issue. Its advisors do not believe that this will alter the company’s bond rating. The new issue will incur transaction costs of 2% of the issue value at the date of issue.

Required:(a) Estimate the adjusted present value of the project resulting from the new investment and from the refinancing proposal and justify the use of this technique. (14 marks)

(b) Estimate the modified internal rate of return generated by the project cash flows, excluding the effects of refinancing. (6 marks) Question 2. Your company, which is in the airline business, is considering raising new capital of GHC400 million in the bond market for the acquisition of new aircraft. The debt would have a term to maturity of four years. The market capitalization of the company’s equity is GHC1·2 billion and it has a 25% market gearing ratio (market value of debt to total market value of the company). This new issue would be ranked for payment, in the event of default, equally with the company’s other long-term debt and the latest credit risk assessment places the company at AA. Interest would be paid to holders annually. The company’s current debt carries an average coupon of 4% and has three years to maturity. The company’s effective rate of tax is 30%.The current yield curve suggests that, at three years, government treasuries yield 3·5% and at four years they yield 5·1%. The current credit risk spread is estimated to be 50 basis points at AA. If the issue proceeds, the company’s investment bankers suggest that a 90 basis point spread will need to be offered to guarantee take up by its institutional clients.

Required:

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(a) Advise on the coupon rate that should be applied to the new debt issue to ensure that it is fully subscribed. (4 marks)

(b) Estimate the current and revised market valuation of the company’s debt and the increase in the company’s effective cost of debt capital. (8 marks)

(c) Discuss the relative advantages and disadvantages of this mode of capital financing in the context of the company’s financial objectives. (8 marks)(20 marks)

3.4 TAXATION AND FISCAL POLICY

Ibrahim stayed in the UK for over 25 years where he was a professional boxer. He decided to settle back home in Ghana when he turned 50. He returned to Ghana in November 2013 with his total savings of £5,000. He also brought a slightly used Toyota Prado valued at GHS 85,000 and decided to set up his own business which he began on 1/1/2014.

He changed his £5,000 at the rate of GHS 4.7 for £1, raising GHS 23,500 which he used as his working capital. He has an estate house at Patase Estate which he purchased in 1983 before leaving for the UK. He used his garage as a factory where he installed machines for purifying water. The machine cost him GHS 7,500 which he paid from his money from abroad and deposited the remaining GHS 16,000 in his AMALBANK account.

Many “Pure Water” retailers registered with him hence his business was very successful. In January 2015, the domestic Tax Revenue Division of the Ghana Revenue Authority’s office at Adum, Kumasi invited him for discussion on his tax affairs since he had so far not paid any tax on his income.

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The following facts emerged during the discussions:

1. He purchased a Delivery Van costing GHS 8,500 during the 2014 year of assessment.2. He had also acquired two new machines costing GHS 10,000 during the year under

review. 3. He had extended his garage/factory at a cost of GHS 6,000.

By the end of the 2014 year of assessment some customers owed him GHS 15,000 whereas he owed an amount of GHS 3,000 in respect of water and electricity. He caused to be transferred from UK an amount equivalent to GHS 14,000 being winnings on football pools he staked before leaving the UK, which amount was transferred into his bank account with AMAL BANK.

His wife and his children are still living in the UK, making him stay in Ghana alone, since the children are all working in the UK.

His private living expenses for 2014 were as follows:

GHS Rent/Rates 8,000 Food 24,000 Medical Bills 2,200Social Activities 2,500 Clothing 4,500

41,200

Required: Using the ‘Net Worth Method’, you are to determine his Chargeable Income for the year 2014. Explain your computations where necessary. 20 marks

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Documents

· Web viewBoth Peters & Waterman and Deal & Kennedy argued that cultural strength is a powerful factor in shaping the behavior and success of organisations. A ‘strong’ culture