Series: DEC 2022

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FR – Dec 2022 – L2 – Q3 – IAS 7 Statement of Cash Flows

Prepare Dompa Ltd.'s statement of cash flows for the year ended 31 December 2021, using the indirect method based on the IAS 7 framework.

Dompa Ltd prepares its financial statements in accordance with IFRSs. Below are the statement of profit or loss for the year ended 31 December 2021 and the statement of financial position as at that date, and the comparative statement of financial position as at 31 December 2020.

Statement of Profit or Loss for the year ended 31 December 2021

Description GH¢’000
Revenue 1,656,000
Cost of sales (745,200)
Gross profit 910,800
Other income 15,000
Admin expenses (409,860)
Distribution costs (136,620)
Profit before interest & tax 379,320
Finance cost (3,232)
Profit before tax 376,088
Tax expense (9,462)
Profit for the year 366,626

Statement of Financial Position as at 31 December

Description 2021 (GH¢’000) 2020 (GH¢’000)
Non-current assets:
Property, Plant & Equipment 33,210 23,260
Investment Property 28,500 28,000
Intangible Assets 124 155
Total Non-Current Assets 61,834 51,415
Current assets:
Inventory 15,700 5,680
Trade Receivables 82,800 10,765
Cash 16,712 152
Bank 304,437 5,950
Total Current Assets 419,649 22,547
Total Assets 481,483 73,962
Equity & Liabilities:
Equity:
Share capital 30,000 25,000
Retained earnings 373,526 11,300
Revaluation surplus 862 1,262
Total Equity 404,388 37,562
Non-current liabilities:
15% bond redeemable in 2024 20,432 20,200
Deferred tax 3,762 2,300
Current liabilities:
Trade & other payables 46,401 7,600
Current tax 6,500 6,300
Total Equity & Liabilities 481,483 73,962

Additional Information:

i) Depreciation expense on tangible non-current assets recognised for the year is GH¢8,804,000.
ii) An impairment review has been undertaken on one of the machines of the company that has a carrying value of GH¢1,500,000, but an estimated recoverable amount at the impairment review date was GH¢745,000.
iii) One of the company’s vehicles was involved in an accident in the year and was written off with a carrying value of GH¢562,000.
iv) The company sold a machine for GH¢850,000 with a carrying value of GH¢689,000.
v) The company also issued a 15% bond in January 2020 at a par value of GH¢20,000 with a tenure of 5 years.
vi) The company realized GH¢400,000 in revaluation surplus through excess depreciation charges.

Required:
Using IAS 7: Statement of Cash Flows, prepare the statement of cash flow for Dompa Ltd for the year ended 31 December 2021.

 

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FR – Dec 2022 – L2 – Q4 – Financial Analysis & Ratios

Analyze and compare Madina Ltd.’s performance using key financial ratios for the years 2020 and 2021, including comparisons with industry standards.

Madina Ltd is engaged in the processing of palm fruits to produce palm oil and palm kernel oil. The financial statements of the company for the years ended 31st December 2020 and 2021 are as follows:

Statement of Profit or Loss for the year ended

Description 2021 (GH¢’000) 2020 (GH¢’000)
Revenue 123,817 95,620
Cost of sales (84,940) (76,240)
Net gains from changes in fair value of biological assets 84 754
Gross profit 38,961 20,134
Administrative expenses (11,727) (8,494)
Other income 1,267 927
Operating profit 28,501 12,567
Finance income 888 508
Profit before income tax 29,389 13,075
Income tax expense (4,692) (3,422)
Profit for the year 24,697 9,653

Statement of Financial Position as at:

Description 2021 (GH¢’000) 2020 (GH¢’000)
Non-current assets
Property, Plant & Equipment 57,909 49,471
Financial assets 5,221 5,137
Current assets
Inventories 8,490 9,370
Trade Receivables 24,663 18,304
Cash and cash equivalents 22,832 10,618
Total Assets 119,115 92,900

The following ratios have been gathered from the food and processing industry for the year ended 31 December 2021:

  • Return on Equity (%) 23.52
  • Gross Profit Margin (%) 29.57
  • Net Profit Margin (%) 22.16
  • Current Ratio (times) 2.5
  • Acid Test Ratio (times) 1.8
  • Inventory Turnover (days) 20
  • Trade Receivables Collection (days) 68
  • Trade Payables Settlement (days) 32

Required:
Write a report to the Board of Directors of Madina Ltd, assessing the company’s performance for the year ended 31 December 2021 in relation to the industry and the comparative year.

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FR – Dec 2022 – L2 – Q5a – Intangible Assets Treatment for Employee Training

Analyze the treatment of employee training costs as an intangible asset under IAS 38.

Damba Ltd spent GH¢400,000 on training courses for its employees, which has resulted in increased efficiency and cost savings. The Assistant Accountant has recognized the training costs as an intangible asset and charged six months’ amortization based on the average time within which the training courses were completed.

Required:
Comment on the Assistant Accountant’s treatment of the aforementioned transaction in Damba Ltd’s financial statements for the year ended March 31, 2022, and advise on how it should be handled under International Financial Reporting Standards.

 

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FR – Dec 2022 – L2 – Q5b – Definition of Liability and Provisions

This question asks candidates to define liabilities and describe circumstances under which provisions should be recognized.

The definition of a liability forms an important element of the International Accounting
Standards Board’s Framework for the Preparation and Presentation of Financial Statements
which, in turn, forms the basis for IAS 37: Provisions, Contingent Liabilities and Contingent
Assets.

Required

Define liability and describe the circumstances under which provisions should be recognized.

 

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FR – Dec 2022 – L2 – Q5c – Calculation of EPS for the Year Ended December 31, 2021

This question requires the calculation of EPS for the year 2021, and restating the EPS for the year 2020 using a rights issue adjustment.

On January 1, 2021, Bayor Ltd had 10 million ordinary shares in issue. On 31 March 2021, the company issued at full market price, 2 million ordinary shares. On 31 August 2021, the company made a rights issue of 1 for 5 at GH¢3. The fair value of the shares on the last day before the rights issue was GH¢3.80. Profit for the current period is GH¢3.5 million. The reported Earnings Per Share (EPS) for the year ended December 31, 2020 was 0.33p.

Required: Calculate the EPS for the year ended December 31, 2021, and the restated EPS for the year ended December 31, 2020.

 

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FR – Dec 2022 – L2 – Q5d – Distinction Between Joint Venture and Joint Operation

This question asks candidates to explain the distinction between joint ventures and joint operations under IFRS 11.

An investor entity can enter into a contractual arrangement with another entity in which unanimous consent of both parties is required in order to take decisions relating to operating and financial policies of the investee. Such an arrangement could either be a joint venture or a joint operation.

Required:
Explain the distinction between joint venture and joint operation under IFRS 11: Joint Arrangements.

 

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SCS – Dec 2022 – L3 – Q8b – Controlling risk

Explanation of ways to embed risk awareness within an organisation.

The risks that TCWL automated systems could be exposed to can be controlled and managed through embedding risk awareness in the culture of the organisation. Creating a culture of risk awareness is the responsibility of the board of directors and senior management of TCWL.

Required:
Explain FOUR (4) ways by which the Board can create and embed risk awareness in the culture of TCWL to ensure that systems risks are controlled effectively. (5 marks)

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SCS – Dec 2022 – L3 – Q8a – Controlling risk

Explanation of risks faced by automated systems and ways to embed risk awareness within an organisation.

TCWL production processes and operations are highly automated, and this may expose the company to major risks with high potential of negative consequences for the business.

Required:
Explain FOUR (4) major risks that TCWL automated systems could suffer. (5 marks)

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SCS – Dec 2022 – L3 – Q7 – Strategy, stakeholders, and mission

Explanation of required corporate disclosures and measures to maximise shareholder engagement in a listed company.

The Ghana Code of Best Practices for Corporate Governance specifies a number of disclosures that should be included in an annual report of a listed company, in addition to those required by law or other regulations. The new CEO has presented a paper to the Board recommending that the company should go public to raise some equity capital to partially finance its expansion plans. The listing of the company would result in an increased number of shareholders.

Required:

a) Explain to the Board SIX (6) statements that must be disclosed in the annual report of TCWL after listing on the Ghana Stock Exchange. (6 marks)
b) The Code of Best Practices recommends measures that aim at maximising attendance and involvement by shareholders in the company. Briefly discuss FOUR (4) of those measures. (4 marks)

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SCS – Dec 2022 – L3 – Q6b – Ethics and social responsibility

Analysis of child labour using deontological and teleological ethical theories.

The Board chairman and the CEO have disagreed on whether the use of child labour by the distributors and continuous supply of the company’s products to the affected distributors is ethically wrong. The two have approached you as an expert in ethics to determine which of the positions is correct.

Required:

Using the two main theories of ethics, deontological theory and teleological theory, determine whether child labour is ethically wrong. (10 marks)

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BCL – Dec2022 – Q2b – Sale of goods/hire purchase

Identify and explain issues in a contract of sale of goods involving government property.

As part of efforts in catering for Ghanaians who were displaced by the Russian war on Ukraine, the Government of Ghana erected tents in Poland. These tents are no longer in use because all Ghanaians were evacuated back to Ghana. As a result, the Government set up a disposal board to sell these tents. The board agreed to sell the tents to Dominika who left an amount of GH¢10,000,000 as a security deposit for her purchases. According to the written agreement between the disposal board and Dominika, the price for the tents and the dates on which payment was to be made were to be agreed between the parties as and when the tents became available. In July 2022, a new disposal board took over and refused to sell the tents to Dominika. They stated that they no longer considered themselves bound by the contract.

Required:
Identify FOUR (4) issues in the contract of sale of goods in the above scenario. (8 marks)

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BCL – Dec2022 – Q2a – Tort, Agency

Discuss the legal implications of a negligent misstatement and the effects of an agent acting without authority.

A firm of chartered accountants prepared the financial statements of Highskies Ltd knowing that the company was going to use the report to persuade Dr. Kwesi Antwi, a prospective investor, to invest money in Highskies Ltd. Relying on the accounts, Dr. Kwesi Antwi invested two million Ghana Cedis (GH¢2,000,000) in the company. However, a year later, the company collapsed. Dr. Kwesi Antwi, therefore, decided to take legal action against the firm of chartered accountants.

Required:
i) Advise whether Dr. Kwesi Antwi’s legal action in court will be successful. (3 marks)
ii) State THREE (3) effects of an agent acting without authority. (6 marks)
iii) Explain the phrase “term of Contract.” (3 marks)

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BCL – Dec2022 – Q1b – Company directors and other officers

Analyze the conduct of a director and her friend in the context of insider dealing with shares of a company.

Adjo is a director of Boxo Company Ltd. She has insider information that the profits of the company when announced in ten (10) days’ time, could lead to a rise in the share value of the company. She, therefore, bought shares in the company herself and also advised her friend, Michael, to buy shares in Boxo Company Ltd, but did not tell him why.

Required:
In the context of the facts stated in the question, explain the conduct of Adjo and Michael with regard to the shares of Boxo Company Ltd. (10 marks)

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BCL – Dec2022 – Q1a – Sources of Law

Address the doctrines of equity, equitable remedies, and statutory interpretation in a contractual dispute.

Question:
Paa Nii who resides in the UK sent an amount equivalent to GH¢1,500,000 to his nephew, Dennis, as part payment for the purchase of a house at Trassacco Springs. Paa Nii further sent regular installments to Dennis’ personal account to be given to the vendors. Paa Nii confirmed that Dennis failed to transfer the monies paid to him to the vendors. Paa Nii out of anger organised for Dennis’ vehicle to be burnt to ashes. Paa Nii, proceeded to sue to void the agreement and recover the amount paid.

i) List FOUR (4) doctrines of equity. (4 marks)
ii) In relation to the scenario above, is there any equitable remedy Paa Nii can rely on? (3 marks)
iii) Identify THREE (3) basic presumptions for statutory interpretation. (3 marks)

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FM – DEC 2023 – L2 – Q5 – Cost of capital | Foreign exchange risk and currency risk management

Calculation of the effective cost of various financing options and explanation of internal strategies to manage foreign currency risk.

a) Markwei Pharmaceuticals Ltd plans to import active ingredients to produce vitamin syrup. The company’s managers are considering three financing options for the cedi equivalent of an invoice value of GH¢2.5 million. The options are detailed below:

Option 1: Use supplier’s credit. The credit term is 1.5/10 net 45.

Option 2: Issue a commercial paper to raise the money from the Ghanaian money market. The commercial paper will pay interest at the rate of 18% per annum. Issue costs totaling GH¢15,000 will be incurred.

Option 3: Obtain a 3-month bank loan. The interest rate on the loan is 22% per annum. Loan arrangement and processing fees are expected to be GH¢5,000.

Required:
i) Compute the effective annual cost of each financing option and recommend the most cost-effective option. (10 marks)
ii) Explain TWO (2) advantages of financing the invoice through the issue of a commercial paper instead of a bank loan. (5 marks)

b) Abongo Shoes Ltd (Abongo) imports leather from Italy. Abongo’s demand for euros to settle its import bills exposes its cash flow to foreign exchange risk. Abongo’s Management is looking for internal strategies they can deploy to hedge the company’s currency risk exposure as external hedging strategies might be too expensive for the company.

Required:
Explain TWO (2) internal strategies for managing foreign currency risk exposures that Abongo’s Management can use. (5 marks)

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FM – DEC 2023 – L2 – Q4 – Capital rationing | Introduction to Investment Appraisal | Sources of finance: debt

Explanation of capital rationing concepts, NPV and profitability index calculations, and factors influencing debt finance decisions.

a) In periods of difficult global financial environment, raising of capital is a challenge necessitating the need for prudent and best use of scarce capital for projects.

Required:
i) Explain the term capital rationing. (2 marks)
ii) Distinguish between soft capital rationing and hard capital rationing giving an example each. (3 marks)

b) Akonta Ghana Ltd has excess funds of GH¢200 million and is looking for attractive investment opportunities that will yield a return of 15% per annum or better to deploy the funds. An extract from a Feasibility report submitted by a team of investment and project experts is as follows:

Project Initial Investment Required (GH¢) Constant Annual Cash Inflow (GH¢) Project Life (Years)
A 80,000,000 36,000,000 4
B 40,000,000 23,000,000 3
C 78,000,000 30,000,000 5
D 40,000,000 20,000,000 4
E 40,000,000 22,000,000 3

The cash flows per project are constant for the life span of each project and each project is divisible for the purpose of capital allocation.

Required:
i) Calculate the Net Present Values (NPVs) of each project. (7 marks)
ii) Rank the projects using Profitability Index and allocate the GH¢200 million among the projects. (3 marks)

c) There are many sources of debt finance available to a company which has viable and profitable investment opportunities to utilise the funds. It is, however, very important for the Finance Manager to do a thorough work before deciding the type and source of debt finance to tap into.

Required:
Explain THREE (3) factors a Finance Manager should consider when deciding the type of debt finance to raise. (5 marks)

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FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

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FM – DEC 2023 – L2 – Q2 – Business valuations | Mergers and acquisitions

Business valuation techniques applied to a 70% acquisition using P/E ratio, balance sheet valuation, and discounted cash flow.

a) Panpana Ltd is in advanced negotiation with shareholders of Zanu Ltd to acquire 70% shares in that company. The following financial information is provided for Zanu Ltd:

  • Number of ordinary shares = 20 million
  • Net assets per share = GH¢8
  • Earning per share = GH¢15
  • Price Earnings ratio (P/E) = 10

The Finance Director who performed a due diligence review recommended the following:

  1. Fixed assets included in the net assets were overstated by GH¢6 million
  2. A key customer who owes GH¢4 million has gone bankrupt and debt considered irrecoverable
  3. A provision of GH¢10 million is made for a tax liability
  4. Panpana Ltd cost of capital is 16% and risk premium of 4% is added in the valuation of Zanu Ltd to take care of additional operational risk.
  5. The Finance manager provided a statement showing projected cash inflows for the next 5 years as follows:
Year Cash flow (GH¢ million)
1 125
2 60
3 150
4 200
5 110

Required:
Advise shareholders of Panpana Ltd on how much to pay for 70% of the shares of Zanu Ltd using the following valuation methods:
i) Price Earning (P/E) ratio. (4 marks)
ii) Balance sheet valuation basis. (5 marks)
iii) Cash flow valuation. (5 marks)

b) Explain THREE (3) reasons business valuation is undertaken in the corporate environment. (6 marks)

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FM – DEC 2023 – L2 – Q1 – Introduction to Financial Management

Explanation of profit maximization vs. wealth maximization, disadvantages and advantages as performance measures, calculation related to rights issue.

a) Shareholders generally look forward to acceleration of the growth rate of their business. They therefore, prefer management report on wealth maximization to profit maximization.
Required:
i) In the light of this, explain the following:

  • Profit maximization. (2 marks)
  • Wealth maximization. (2 marks)

b) Explain to a shareholder THREE (3) inherent disadvantages of using profit as a performance measure and TWO (2) advantages of using wealth maximization as a performance measure. (8 marks)

c) Sobolo Ghana Ltd has taken a strategic decision to expand its scope of operations to enhance revenue growth. A new venture has been identified and requires funding to execute. Management in the light of the above has agreed to raise funding through a rights issue. The rights issue will be done at GH¢6 per share and existing shareholders will receive 2 rights for each 3 shares currently held. The company has 600,000 shares outstanding and they are currently trading at GH¢8 per share.
Required:
i) Calculate the number of new shares to be issued. (3 marks)
ii) Calculate the amount of money raised from the rights issue and the total value of the company after the rights issue. (5 marks)

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IMAC – DEC 2022 – L1 – Q5 – Cost Segregation and Estimation | Cost-Volume-Profit (CVP) Analysis

Estimation of fixed and variable costs using linear regression and discussion of assumptions underlying Cost-Volume-Profit (CVP) analysis.

a) Total production costs each week in a production department have been measured for the past five weeks, as follows:

Week Units Produced Total Cost (GH¢000)
1 5 20
2 9 27
3 4 17
4 5 19
5 6 23

Required:
i) Use linear regression analysis to obtain an estimate of fixed costs per week and the variable cost of production per unit (see formula table). (8 marks)
ii) Use your results to estimate total costs in a week when 8 units are produced. (3 marks)
iii) Explain why the regression analysis method of separating cost is considered more accurate than the high-low method. (4 marks)

b) The cost-volume-profit (CVP) analysis, also commonly known as breakeven analysis, looks to determine the breakeven point for different sales volumes and cost structures, which can be useful for managers making short-term business decisions. For CVP analysis to be effective, several assumptions are usually made.

Required:
State FOUR (4) assumptions underlying cost-volume-profit (CVP) analysis. (5 marks)

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