Professional Documents
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Inventories do not include machinery spares which can be used only in connection
with an item of fixed asset and whose use is expected to be irregular; such
machinery spares are accounted for in accordance with Accounting Standard (AS)
10, Accounting for Fixed Assets.
Normal Capacity.
No.
4. During stock audit you found that few units of stock placed separately. On further
enquiry it is found that they were already sold but customer is yet to take delivery.
Will revenue on these be recognized?
Yes, provided reasonable assurance is given by the customer that he will take the
delivery in the near future.
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Revenue should be recognized notwithstanding that physical delivery has not been
completed so long as there is every expectation that delivery will be made. However,
the item must be on hand, identified and ready for delivery to the buyer at the time
the sale is recognized rather than there being simply an intention to acquire or
manufacture the goods in time for delivery.
5. Goods delivered for Installation and Inspection. What does AS9 say about them?
Revenue should normally not be recognized until the customer accepts delivery and
installation and inspection are complete. In some cases, however, the installation
process may be so simple in nature that it may be appropriate to recognize the sale
notwithstanding that installation is not yet completed (e.g. installation of a factory-
tested television receiver normally only requires unpacking and connecting of power
and antennae)
6. Intermediary revenue is earned by investing the unutilized loan amount borrowed for
installing a machine as the payments are made in different schedules. What does
AS16 say on this?
It has to be reduced from borrowing cost and only net amount can be capitalized. To
the extent that funds are borrowed specifically for the purposeof obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation on that
asset should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those borrowings.
7. An asset is ready for use but has not been put to actual use. Can the borrowing cost
for the intermediary period be capitalized?
No. Borrowing Cost can be capitalized only till the period qualifying asset is ready for
intended use. Even if it not actually used though it is ready for used, borrowing cost
cannot be capitalized.
Timing differences are the differences between taxable income and accounting
income for a period that originate in one period and are capable of reversal in one or
more subsequent periods.
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Example – Depreciation as it would be different.
9. What would be impact of difference in rates of depreciation between Company act
and Income tax act?
Either DTA or DTL will be created and disclosed appropriately in the Financial
Statements
Section -2:Costing
Marginal cost is the change in the total cost due to production of one additional
quantity. It is the cost of producing one additional unit.
An unconventional form of costing method. Accounting (Cost) is delayed here till the
finshed product is brought into books and then the cost for raw materials and other
items are calculated backwards (flushed backwards) for each unit of inventory
produced.
12. What is the difference between ‘Cost Control’ and ‘Cost Reduction’?
Cost Control is more from managing the costs point of view and it if generally for a
short duration. Example – Project Cycle etc.
Cost Reduction aims more for a permanent reduction in the cost. Example –
Alternative Supplier, Different mode of transportation etc could be considered as
valid example especially if these decisions are taken as part of BPR.
Budgets are prepared and compiled as if it is done for the first time and not taking
past data as reference.
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Section -3:Contribution and Fixed Costs - Case Study/Practical
14. You have taken charge as a new CFO for a loss making unit. Management is
considering closing down this Loss Making Unit and investing the proceeds in some
new opportunities in the market. Analysis shows fixed cost are not fully recovered.
You need to prepare a final revival plan before the Management before it finally
decides to close down the unit. Highlight the important factors your revival plan will
have enumerating the reasons as well:
Positive Factor : Contribution is there but not sufficient to recover fixed costs.(Fixed
costs are not fully recovered)
Revival Plan:
Cost Control and Cost reduction measures etc to reduce fixed costs
16. We have two projects and analysis shows that Project A has Highest NPV and
Project B has Highest IRR. However there are funds restriction and only one Project
can be executed at a time. In this context which project will you choose and why?
(Assume all other variables are equal).
Project A (Project with Highest NPV will be selected instead of the Project with
highest IRR)
Reasons:
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Reinvestment assumption is the main factor -> IRR assumes reinvestment at IRR
itself where as NPV assumes the reinvestment opportunities at required rate (Cost of
Capital)
IRR uses an arbitrary rate where as NPV uses more structured rate as it is based on
the Cost of Capital.
17. An enterprise is exploring the opportunity of investing in the below two projects.
However due to technical considerations only one project can be undertaken in a
given timeframe. Given this limitation the enterprise would be interested in selecting
a particular project which could increase the overall profitability of the enterprise.
Given are some of the facts about these two projects:
Amount Borrowed @ 10% for Investment - 100000
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18. A research agency has been hired by your organization to study the potential of a
new FMCG product and the research outcome is fantastic and shows that since
already you are the leader in that segment, this product will be received well by the
consumers. The outcome is as follows:
The research agency has submitted its bill for 3 Lacs on a 30 days credit period along with
the above outcome and the project can be commenced as early as within next 10 days.
What will be your recommendation to your CFO?
Project can be undertaken as it will have a positive net cash flow.
Irrelevant Costs:
Research Agency Bill – 3 Lacs – Sunk Cost. Since it is already incurred and doesn’t have
any impact on the decision.
Particulars Amounts
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19. An enterprise is evaluating a decision whether to manufacture an important
intermediary raw material or to buy the same from market. Further details are:
Whether the enterprise should manufacture this raw material or buy it from outside? What
are the other factors apart from cost needs to be considered in evaluating such decisions?
It is better to manufacture the Raw Material. Fixed Cost of Rs.2/Unit which will be allocated
will be irrelevant cost for the decision as it already incurred and only allocated if new product
is produced.
Capacity Constraints
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Section-6: Generic Questions
20. A going concern XXX is required to be closed down for some reasons, not
necessarily bankruptcy. It has following types of outstanding liabilities to be settled:
a. Equity capital
b. Debentures
c. Term loan from ICICI
d. Unpaid employee salaries and wages
e. Preference capital
f. Outstanding Tax liabilities
4. Debentures
5. Preference capital
6. Equity capital
***
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