Series: MAY 2019

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  • 15 Marks

CSME – May 2019 – L2 – Q7 – Corporate Culture and Strategy

Advise management trainees on the role of culture in organizations and analyze stakeholder theory with underpinning considerations.

a) In an attempt to establish the link between culture and ethics as well as between culture and social responsibility, advise a set of management trainees on:
i. The role of culture in an organization or company. (2 Marks)
ii. Outline any FOUR of the SIX inter-related elements of culture suggested by Johnson and Scholes in their idea of the cultural context of ethics. (8 Marks)

b) Since business entities operate within society, the professional accountant is required to know the theories on the responsibilities of a business entity towards the society in which it operates.
Analyse the stakeholder theory of corporate governance and advise on any TWO considerations underpinning this theory. (5 Marks)

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  • 15 Marks

CSME – May 2019 – L2 – Q6 – Corporate Governance

Advise on the importance of transparency and disclosure in corporate governance and explain the principles for a new board member.

The need for transparency and disclosure in financial markets is recognised in codes and statements of principles of corporate governance.

a) Advise the Board of a company on the importance of ‘Transparency and Disclosure’ in corporate governance. (5 Marks)

b) Present the principles of disclosure and communication of information in Corporate Governance in a lucid manner that will be comprehensible to a new Board member. (10 Marks)

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  • 15 Marks

CSME – May 2019 – L2 – Q5 – Corporate Strategy Formulation

Explain diversification strategy and advise Shacks Limited on factors favoring concentric diversification.

Shacks Limited is a company involved in the production of radio cassettes and photographic films. In the past two decades, the company had the greatest share of the market for these products. However, technological advancements resulting in the development of DVDs and digital photographs have greatly eroded the competitiveness of the company. To reposition Shacks Limited and make it more competitive, the management is considering concentric diversification as the strategy to pursue.

(a) Explain the term ‘diversification strategy’. (5 Marks)

(b) From the given scenario, advise the management of Shacks Limited on the key factors that indicate preference for concentric diversification strategy. (10 Marks)

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  • 20 Marks

CSME – May 2019 – L2 – Q4 – Ethics in Business

Advise on the nature of a corporate code of ethics, reasons for developing it, and provisions for employees and customers.

Drewal and Taiwo jointly established a plastic company after a long period of economic recession. The Board of Directors is in the process of drawing out the corporate code of ethics for the company. Advise it on:
a) The nature of a corporate code of ethics. (2 Marks)
b) THREE basic reasons for developing a company’s code of ethics. (6 Marks)
c) Any FIVE general provisions that a corporate code of ethics should specify. (5 Marks)
d) FOUR provisions or statements the corporate code of ethics should have in respect of employees and any THREE in respect of customers. (7 Marks)

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  • 15 Marks

CSME – May 2019 – L2 – Q3b – Corporate Social Responsibility (CSR)

Draft CSR implementation steps and highlight the importance of sustainable development to society.

i) Draft a recommendation on the steps to be taken by a company in the implementation of a Corporate Social Responsibility (CSR) policy. (12 Marks)
ii) Present ‘Sustainable Development’ in a way that highlights its importance to society. (3 Marks)

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  • 5 Marks

CSME – May 2019 – L2 – Q3a – Risk Management and Corporate Strategy

Distinguish five types of risk that a Risk Manager is expected to oversee.

Distinguish FIVE (5) types of risk that a Risk Manager is expected to oversee.

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  • 20 Marks

CSME – May 2019 – L2 – Q2 – Risk Management and Corporate Strategy

Discuss the elements of a risk management system, Board committee functions in risk management, and six categories of business risks from the Turnbull Report.

The Code of Corporate Governance in Nigeria states that “the Board of Directors may establish a Risk Management Committee to review the adequacy and effectiveness of risk management and controls at least annually and the Board has responsibility to report on the effectiveness of the controls to shareholders.”

a) In line with the requirements above, discuss the elements of a risk management system. (8 Marks)

b)
(i) Advise an executive director on the functions of the Board Committee in relation to enterprise risk management. (6 Marks)
(ii) Extract from the Turnbull Report, the six (6) categories of risk common to business. (6 Marks)

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  • 30 Marks

CSME – May 2019 – L2 – Q1 – Environmental Analysis

Prepare a business environment and competitive analysis for UBC Plc's intended investment in GSM phone manufacturing using SWOT, PESTEL, Porter’s Five Forces, and Kant’s categorical imperative.

a. You have just been contracted by UBC Plc to prepare a business plan on the company’s intended investment in the manufacture of GSM phones in the country. The following is a summary of the brief given to you and your own research:

  • UBC Plc is a multinational conglomerate involved in the manufacture and distribution of computer hardware accessories, networking hardware and allied products. With experience spanning four decades in the industry, the company’s products enjoy a lion’s share of the market. As part of its diversification strategy aimed at sustaining its competitive advantage, the company intends to start the production of GSM phones, targeting the mass market in the country.
  • The company plans to control at least 40% of the low-end GSM phone market in the country in the next five years.
  • UBC Plc possesses the requisite human resources and physical facilities necessary for the successful takeoff and growth of the new venture. The company also intends to leverage its extensive distribution network for its IT products covering major cities within the West African sub-region to distribute its new GSM phones.
  • The company also has modern equipment which can easily be converted into the production of GSM phones at little cost without significantly affecting the current production levels of other products. When this is done, the equipment will be able to produce more than 5 million GSM phones per annum.
  • While the company intends to expand its production capacity radically within the first few years of manufacturing GSM phones, it is still struggling to cope with the country’s incessant electric power failure which has made the company rely almost exclusively on the use of generators to power its equipment. This constitutes the bulk of its overhead costs.
  • The firm has signed a Memorandum of Understanding with a group of reputable firms abroad, which guarantees a steady supply of all required components and inputs.
  • The current value of the annual GSM phone demand in the country is estimated at N520 billion. Estimated demand growth rate is put at 5%. There is currently no local producer, as all of the GSM phones in the market are imported. However, there is currently a large number of local firms that act as distributors to foreign producers.
  • Except for regulations aimed at ensuring that only high-quality products are manufactured, there are currently no legal restrictions on local production of GSM phones. Furthermore, to encourage manufacturing, the government offers tax holidays to all manufacturers in the first five years of operation.
  • The estimated cost per unit of GSM phones designed for the mass market in the country is put at N8,000 while the current average price stands at N10,000.

Required:
a.
(i) A business environment analysis using SWOT and PESTEL analyses. (10 Marks)
(ii) A competitive analysis using the Porter’s Five Forces Model. (15 Marks)

b. Advise on Kant’s categorical imperative. (5 Marks)

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  • 15 Marks

PSAF – MAY 2019 – L2 – Q7 – Performance Measurement in the Public Sector

Compare NPV and IRR methods, state decision rules, and apply NPV to evaluate two investment projects for selection.

a. Distinguish between net present value (NPV) and internal rate of return (IRR) and state the decision rule under both criteria. (8 Marks)

b. Two projects A and B have initial capital investment of N900,000 each. The cash inflows of the two projects are as follows:

Required:
i. As a financial analyst, calculate the net present value (NPV) of the two projects given a cost of capital of 12%. (6 Marks)
ii. Based on the results obtained in (i), which of the projects should be chosen? (1 Mark)

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  • 15 Marks

PSAF – MAY 2019 – L2 – Q5 – Performance Measurement in the Public Sector

Explain cost-benefit analysis, its evaluation methods, and justify its preference as a public project appraisal technique.

The cost-benefit analysis (CBA) has been described as the most popular technique for investment project appraisal in the public sector, especially in the developing world.

Required:

a. Describe the term cost-benefit analysis (CBA). (5 Marks)

b. Identify and explain the two methods usually adopted in the evaluation of projects under CBA. (4 Marks)

c. Justify the preference for CBA as a public project appraisal technique. (6 Marks)

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  • 8 Marks

FR – May 2019 – L2 – Q7a – Property, Plant, and Equipment (IAS 16)

Discussion of the recognition criteria for internally developed intangible assets under IAS 38 and how to account for them.

Soft Solutions Limited is a Nigerian company that specializes in the development of software applications. The company has been in operation for over 16 years and has invested considerable amounts of money internally in developing accounting and banking software. The treatment of these assets is prescribed by IAS 38 – Intangible Assets.

Required:
a. As a partly qualified accountant working in the accounts department of Soft Solutions Limited, the financial controller of the company asked you for a memo which addresses the following:
i. Whether internally developed intangible assets should be recognized and, if so, how should they be recorded initially and subsequently accounted for. (5 Marks)
ii. The criteria for revaluation of intangible assets? (3 Marks)

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  • 7 Marks

FR – May 2019 – L2 – Q6b – Accounting for Government Grants (IAS 20)

Calculation of the amount to be capitalized for qualifying capital work-in-progress under IAS 23.

Jacko Company Limited has three major sources of borrowings stated below as at 1 January 2018.

Types Average Loan in the Year (N’000) Interest Expense Incurred in the Year (N’000) Income Earned from Temporary Investment of the Amount Borrowed (N’000)
7 years loan notes 128,000 20,000 12,480
10 years loan notes 160,000 14,400 —
Bank overdraft 80,000 14,400 —

The 7 years loan notes have been specifically raised to fund the building of a qualifying asset.

During the year to 31 December 2018, Jacko Company Limited spent N144 million on the building and the fair value of the building is N147 million as at 31 December 2018.

The company also incurred the following expenditure on a qualifying project funded from the other borrowings for the year ended 31 December 2018.

Date Incurred Amount (N’000)
31 March 2018 16,000
31 July 2018 19,200
31 October 2018 12,600

Required:
Calculate the amount to be capitalized in respect of the qualifying capital work-in-progress for the year ended 31 December 2018.

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  • 8 Marks

FR – May 2019 – L2 – Q6a – Accounting for Government Grants (IAS 20)

Discussion of the conditions for capitalizing borrowing costs under IAS 23 and guidelines on commencement, suspension, and cessation of capitalization.

A company might incur significant interest cost if it has to raise a loan to finance the purchase or construction of an asset. IAS 23 on borrowing costs defines borrowing costs and sets out guidance on the circumstances under which such interest is to be capitalized as part of the cost of qualifying assets.

Required:
Discuss the conditions that must be met in order to capitalize borrowing costs under IAS 23, setting out when capitalization of the borrowing costs should commence, be suspended, or cease.

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  • 15 Marks

FR – May 2019 – L2 – Q5 – Related Party Transactions (IAS 24)

Analysis of related party transactions and disclosure requirements as per IAS 24 for Grandkano Nig. Plc.

Grandkano Nig. Plc. is a company listed on the Nigerian Stock Exchange (NSE) and located in the northwestern part of the country. The company has been paying yearly penalties to NSE in respect of non-disclosure of related party transactions in its published financial statements. The company has therefore approached a partner in your firm to assist in this regard in order to avoid payment of these yearly penalties. The partner in your firm has requested for a list of all transactions with parties connected with the company and the directors of the company provided the following summary:

(i) A factory building had been sold to the brother of Alhaji Nagode, the Managing Director of Grandkano Nig. Plc. for N300 million (net of selling cost of N5 million). The market value of the property (factory building) was N322.5 million. The carrying amount of the factory building was N375 million and its value in use was N270 million.

(ii) Every month Grandkano Nig. Plc. sells N750,000 worth of goods to Malam Bayero, the finance director. The finance director has set up a small retail business for his son (Dongoyaro), and the goods are sold at cost price to him. The annual turnover of Grandkano Nig. Plc. is N4.5 billion. Also, Malam Bayero has purchased his official company’s car from the company for N675,000 (market value N1.2 million). Malam Bayero earns a salary of N7.5 million per annum, and he is a very wealthy man.

Required:
a. Reasons why it is important to disclose related party transactions. (5 Marks)

b. The nature of any disclosures required in transactions (i) and (ii) above under IAS 24 related party disclosures. (10 Marks)

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  • 8 Marks

FR – May 2019 – L2 – Q4c – Property, Plant, and Equipment (IAS 16)

Preparation of extracts of the statement of profit or loss and statement of financial position for Chidinma Ventures Plc, accounting for leasehold property revaluation.

Chidinma Ventures Plc. acquired a 12-year lease on a property on 1 October, 2016 at a cost of N132 million. The company’s policy is to revalue its properties to their market value at the end of each year.

Accumulated amortization is eliminated, and the property is restated to the revalued amount. Annual amortization is calculated on the carrying values at the beginning of the year. The market values of the property on 30 September 2017 and 2018 were N127.05 million and N96.25 million, respectively. The existing balance on the revaluation surplus at 1 October, 2016 was N27.5 million. This is related to some non-depreciable land whose value had not changed significantly since 1 October 2016.

Required:
Prepare extracts of the statement of profit or loss and statement of financial position for the year ended 30 September 2017 and 2018 in respect of the leasehold property.

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  • 5 Marks

FR – May 2019 – L2 – Q4b – Property, Plant, and Equipment (IAS 16)

Explanation of revaluation of non-current assets and accounting treatment of revaluation surplus/deficit and gains/losses on disposal.

You are a senior accounting officer in Chidinma Ventures Plc. The chief accountant of the company has requested you to explain to some newly recruited trainee accountants, the requirements of IAS 16 as regards the revaluation of non-current assets and accounting treatment of surpluses and deficits on revaluation as well as gains and losses on disposal of assets.

Required:
Explain the transactions as required by the chief accountant.

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  • 7 Marks

FR – May 2019 – L2 – Q4a – Property, Plant, and Equipment (IAS 16)

Explanation of how initial costs of PPE should be measured and when subsequent expenditure should be capitalized under IAS 16.

The objectives of IAS 16 are to prescribe the accounting treatment of property, plant, and equipment (PPE).

Required:
Explain how initial costs of property, plant, and equipment (PPE) should be measured and state the circumstances in which subsequent expenditure on non-current assets should be capitalized.

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Statement of Cash Flows (IAS 7)

Calculation of cash operating cycle and comparative ratios for Kobape Limited, and analysis of company performance through a report.

Shown below are the financial statements of Kobape Limited for its most recent two years.

Extract from the statement of profit or loss for the year ended 30 April:

2019 (N’000) 2018 (N’000)
Revenue 224,000 195,000
Cost of sales (169,200) (136,500)
Gross profit 54,800 58,500
Administrative costs (32,700) (38,040)
Distribution costs (10,900) (12,680)
Finance cost (1,900) (1,380)
Profit before tax 9,300 6,400

Statement of financial position as at 30 April:

Assets (N’000) 2019 2018
Non-current assets 37,000 28,600
Current assets:
– Inventory 12,800 9,800
– Trade receivables 24,600 21,600
– Cash balance 1,600 2,400
Total assets 76,000 62,400

Equity and liabilities:

2019 2018
Ordinary share capital 16,000 16,000
Retained earnings 26,200 18,600
Non-current liabilities:
– 10% loan notes 16,000 12,000
Current liabilities:
– Bank overdraft 2,200 1,600
– Trade payables 15,000 13,800
– Taxation 600 400
Total equity and liabilities 76,000 62,400

The following are the ratios calculated for Kobape Limited based on the financial statements of the previous year and also the latest industry average ratios:

Ratio Kobape Ltd (30 April 2018) Industry Average
Net profit margin 3.99% 4.73%
ROCE (Capital employed = equity + loan notes) 16.69% 18.50%
Asset turnover 4.19 times 3.91 times
Current ratio 2.14:1 1.90:1
Quick ratio 1.52:1 1.27:1
Gross profit margin 30.0% 35.23%
Account receivables collection period 40 days 52 days
Account payables payment period 37 days 49 days
Inventory turnover (times) 13.9 times 18.3 times
Gearing ratio 25.75% 32.71%

Required:
a. Calculate the cash operating cycle of Kobape Limited for the year ended 30 April, 2018 and 2019. (5 Marks)

b. Calculate the comparative ratio(s) (to two decimal places where appropriate) for Kobape Limited for the year ended 30 April, 2019. (5 Marks)

c. Draft a report addressed to the board of directors of Kobape Limited, analyzing the performance of the company for the year 2019 based on the result of the previous year and the industry average. (10 Marks)

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  • 2 Marks

FR – May 2019 – L2 – Q2c – Statement of Cash Flows (IAS 7)

Discuss the advantages of the direct method of preparing a statement of cash flows over the indirect method.

Discuss the advantages of the direct method of preparing a statement of cash flows over the indirect method.

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  • 16 Marks

FR – May 2019 – L2 – Q2a and Q2b – Presentation of Financial Statements (IAS 1)

Prepare the statement of cash flows for Babafrayo Nig. Ltd. using the indirect method and calculate the net cash flow from operating activities using the direct method.

Babafrayo Nig. Ltd. is a company located in Lagos and is engaged in the hotel and tourism business. The financial statements of the company are as follows:

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 December 2018:

Description ₦’000
Revenue 994,500
Cost of sales (884,000)
Gross profit 110,500
Admin expenses (21,250)
Distribution cost (44,200)
Finance costs (4,250)
Profit before taxation 40,800
Income tax expense (5,100)
Profit for the year 35,700
Other comprehensive income
Gains on property revaluation 17,000
Total comprehensive income 52,700

Statement of Financial Position as at 31 December 2018:

Description 2018 N’000 2017 N’000
Non-current assets:
Property, plant & equipment 242,250 174,250
Total non-current assets 242,250 174,250
Current assets:
Inventories 49,300 51,000
Trade receivables 35,700 25,500
Cash and cash equivalent 2,550 4,250
Total current assets 87,550 80,750
Total assets 329,800 255,000

Additional information:

(i) Property, plant, and equipment with a carrying value of ₦23,800,000 was sold during the year ended 31 December 2018 for ₦24,650,000. The asset had originally cost ₦38,250,000.
(ii) Depreciation on property, plant, and equipment for the year 2018 amounted to ₦34,000,000.
(iii) Dividend paid during the year 2018 amounted to ₦4,250,000 and is reported in the statement of changes in equity for the year.

(a) Prepare the statement of cash flows for the year ended 31 December 2018 in accordance with IAS 7 using the indirect method.
(12 Marks)

(b) Prepare net cash flows from operating activities only using the direct method.
(6 Marks)

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