Revision Test Paper (RTP), December 2024 CAP II – Group II

CHARTERED ACCOUNTANCY PROFESSIONAL II

(CAP-II)

Revision Test Paper

Group II

December 2024

The Institute of Chartered Accountants of Nepal

The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested answers as guide. Due care
has been taken to prepare the revision test paper. In case students need any clarification, creative
feedback, or suggestions for the further improvement of the material, or any error or omission on the
material, they may report to the email of the Institute.
Revision Test Paper (RTP), December 2024 CAP II – Group II

Contents
Paper 4 - Financial Management................................................................................................. 3
Paper 5 - Cost and Management Accounting ........................................................................... 51
Paper 6 - Business Communication & Marketing ................................................................... 82
Paper 7 - Income Tax and VAT ............................................................................................... 112

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Paper 4 - Financial Management
Revision Test Paper (RTP), December 2024 CAP II – Group II

Section-1: Questions:

CHAPTER: Introduction and Fundamental Concept of Financial Management:

Question No 1:
Elaborate the relationship between Financial Management and Financial Accounting.

CHAPTER: Time Value of Money:

Question No 2:
Kathmandu Bank Limited (KBL) is planning to procure sophisticated cash counting machine cum
fake note detector in order to make cash handling more effective and efficient. The quotations for
the machine received from the authorized distributors reveal two options:
Option 1: Purchase it by making a down payment of Rs 2.75 lakhs and Rs 61,500 p.a. at the end
of each year for six years.
Option 2: Purchase it by paying a total of Rs 8,40,000 divided in six annual installments, in the
ratio of 1: 2: 3: 4: 5: 6 respectively, beginning at the end of 1st year.
Which option will you suggest to the Bank assuming the rate of return is 12 percent p.a.
compounded annually?

Question No 3:
Distinguish between Annuity and Perpetuity

CHAPTER: Strategic Finance and Policy:

Question No 4:
Filip Limited is a fast-growing company which is looking to expand its total assets by 50% by the
end of the year 2081. The company has the following capital structure, which is considered to be
an optimal structure for the foreseeable future.

Particulars Amount (Rs in Million)

8% Debenture 400,000
9% Preference Shares 100,000
Equity Shares 500,000
Total 10,00,000

Other information:
a) Filip Limited has no short-term debt in its capital structure, but the retained earnings for
current year are estimated to be NPR. 50,000 million (without depreciation).
b) New debenture will cost 9% coupon rate and can be sold at par.
c) Preference shares will have a 10% rate and can be sold at 2% discount.
d) The equity shares of Filip which is currently selling at NPR. 100 can be sold at NPR. 95,
net of all costs to the company.
e) The shareholders’ required rate of return is expected to be 12%, which consists of dividend
yield of 4% and an expected growth rate of 8%.

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Revision Test Paper (RTP), December 2024 CAP II – Group II

f) The corporate tax rate is 30%.

Required:
a) Calculate the capital budget that must be financed by equity shares to maintain optimal
capital structure.
b) Calculate the cost of each component of common equity assuming average shareholder’s
marginal tax rate is 30% and brokerage fees are 2%.
c) Calculate the cost of new debt and the cost of new preference shares
d) Calculate the weighted average marginal cost of capital using marginal weights.

Question No 5:
From the following information, you are required to prepare Income Statement and Balance Sheet
of XYZ Ltd.

Price-Earnings (PE) Ratio 3 times

Market Price per equity share Rs. 180
Number of equity shares of Rs. 100 10,000
Number of 12% Preference shares of Rs. 100 each 10,000
Degree of Financial Leverage (DFL) 2:1
Degree of Operating Leverage (DOL) 2:1
Income tax rate 40%
Variable cost as a percentage of sales revenue 60%
Rate of interest on debt 10% p.a.

Question No 6:
Kathmandu Furnishing Ltd., operating in Putalisadak, is planning to expand its assets by 50%. It
is considering the following three alternative financial plans. All financing for this expansion will
come from external sources. The expansion will generate additional sales of Rs. 9 million with a
return of 20% on sales before interest and taxes.
The finance department of the company has submitted the following plan for the consideration of
the Board of Directors.
Plan 1: Issue of 12.5% debentures.
Plan 2: Issue of 12.5% debentures for half the required amount and balance in equity shares to be
issued at 20% premium.
Plan 3: Issue equity shares at 20% premium.
The Balance Sheet and Income Statement of the company as on 31st Ashadh 2081 is as given
below:

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Revision Test Paper (RTP), December 2024 CAP II – Group II

Balance Sheet of the Company as on 31st Ashadh 2081

Liabilities Amount (Rs) Assets Amount (Rs)

Equity Capital (Rs. 100 per 120,00,000 Total Assets 360,00,000
share)
10% Debentures 90,00,000
Retained Earnings 60,00,000
Current Liabilities 90,00,000
360,00,000 360,00,000

Income Statement for the year ending on 31st Ashadh 2081

Particulars Amount (Rs)

Sales 5,70,00,000
Operating Costs 4,80,00,000
Earnings before Interest and Taxes (EBIT) 90,00,000
Interest 9,00,000
Earnings before Tax (EBT) 81,00,000
Taxes 28,35,000
Earnings after Tax (EAT) 52,65,000
Earnings per Share (EPS) 43.875

Based on the above data and information, you are required to calculate:
a) Indifference points between:
(i) Plan-1 and Plan-2,
(ii) Plan-1 and Plan-3, and
(iii) Plan-2 and Plan-3.
b) Expected market price of the shares in each of the situations on the assumption that the
price-earnings ratio is expected to remain unchanged at 12 if Plan-3 is adopted, but is likely
to drop to 9 if Plan-1 or Plan-2 is used to finance the expansion.

CHAPTER: Analysis of Financial Statements:

Question No 7:
Ganesh Traders Limited is a manufacturer of automobile components, which commenced business
on 01-04-2023 with a paid-up capital of Rs 50,00,000. On the same date, it also obtained a specific
term loan at 20% interest from a financial institution worth 100% of the cost of a special machine.
The loan is to be repaid over five years in equal annual installments excluding interest, the first
installment being due on 31-03-2024.
For the first year ended 31st March 2024 the company's final accounts were prepared and stored
in a personal computer. The company had retained and transferred to reserve a sum of Rs 20 Lakhs
after making provision for taxes (tax rate 40%) and proposing a dividend of 20%. The company

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had invested the entire amount of Rs 20 Lakhs on 31st March 2024 in long term Securities. It had
also paid the first installment of the loan.
Unfortunately, due to a computer virus, the data has been lost. However, the chief accountant is
able to provide the following information:

Creditors Payment Period (based on closing creditors) 1 Month

Debtors Turnover Ratio (based on closing debtors) 6 Times
Gross Profit Ratio 33.3333%
Debt Service Coverage Ratio 2.5 Times
Interest Coverage Ratio 6 Times
Stock Turnover Ratio (based on closing stock) 5 Times
Current Ratio 2 Times
Selling and Administrative Expenses Rs 30,00,000

You are required to prepare the Profit or Loss Account and Balance Sheet of Ganesh Traders
Limited for the year ended 31st March 2024. Workings should form part of your answer.

Question No 8:
Explain briefly the limitations of financial ratios.

CHAPTER: Capital Investment Decision:

Question No-9:
Abacus Ltd. is a computer and software supplier company. It also conducts training programs
particularly for school and college students.
Innovative Academy, which is a leading higher secondary school wishes to add computer activities
but is faced with serious financial constraints. It has approached Abacus Ltd. with a proposal to
extend the computer literacy to its students (presently of three classes per month). The main
elements of the proposal are listed below:
a) Space for the computer laboratory will be provided by the Academy.
b) There will be three sections in each class with an average size of 50 students.
c) One extra class will be added for year two and one additional class for year 3 over year two
and remains same for year four and five.
d) Electricity bill will be paid and computer diskette, ribbon and computer papers will be
supplied by the Academy.
e) Rs. 200 per student per month for five years will be paid to Abacus.

At the end of the project after five years, all the printers and computers will be sold to the Academy
at 10 percent of their original cost.

The managing director of Abacus desires the finance manager to spell out the operating parameters
based on which a rigorous financial analysis should be carried out before accepting the proposal.

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Based on extensive discussion, he has identified the under mentioned parameters:

a) Investment cost: In order to cater to the requirements of the Academy, 15 computers and 2
printers will have to be acquired in the first year at a cost of Rs. 50,000 and Rs. 25,000 per
computer and per printer respectively. In addition, the cost of cables and connectors would
amount to Rs. 2,000 per computer, which would be borne by the Academy itself.

b) Operating cost: Two instructors and one supervisor, and one additional instructor would have
to be hired in the first and second year respectively, at a monthly salary of Rs. 15,000 for each
instructor and Rs. 10,000 for each supervisor. In the third year, there would be an increase in
the salary of 10 percent for instructors as well as supervisor. The other associated costs would
be: (1) Spare parts – Rs. 3,000 per computer per annum, (2) Transportation – Rs. 25,000 per
annum and (3) Insurance – 1 percent of the investment cost. The cost of spare parts and
transportation is anticipated to increase by 20 percent in the third year.
From the foregoing information and assuming 30 percent tax rate, WDV method of depreciation
at 25 percent, and 15 percent required rate of return, should the proposal under consideration be
accepted on the basis of financial viability? Abacus Ltd. has other assets in the block of 25 percent
depreciation.

Question No-10:
CDR Limited which deals in mines is considering the following investment proposals for mining:

Project Cash Flows

Year 0 Year 1 Year 2 Year 3
A -150,000 +30,000 +60,000 +180,000
B -150,000 +150,000 +45,000 +45,000

Assuming discount rate of 10%, required:

a) Rank the project according to each of the following methods:
(i) Internal Rate of Return (IRR)
(ii) Net Present Value (NPV)
b) Assuming the projects are independent, which one should be accepted?
c) Why is there a conflict in the project choice by using NPV and IRR criterion?
d) Which project should be selected if they are mutually exclusive?
e) How can the conflict between NPV and IRR can be resolved? Assume re-investment rate
@15% p.a.

Question No-11:
A hospital is planning to introduce new diagnostic center with a projected life of an eight years.
The initial diagnostic machine will cost Rs 1,80,00,000 and additional diagnostic machine costing
Rs 70,00,000 will be needed at the end of first years. At the end of projected life of the machine,
the original machine can be salvaged at Rs 30,00,000 and the additional machine at Rs 20,00,000.

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The hospital has a policy to depreciate the machines using straight line method to zero book value
over its life. It also requires an initial investment in net working capital worth Rs. 37,50,000 which,
it is assumed, is fully recoverable at the end of year 8. The project is to be set up in remote area of
Nepal. It qualifies for one time (at straight) tax free subsidy from the Government of Nepal worth
Rs 55,00,000.

The diagnostic center will be operated in a premises which is already owned by the hospital. The
hospital built the premises some years ago at Rs 1,50,00,000. The book value of the premises is
currently zero. Today, the premise has a resale value of Rs 3,50,00,000 which should remain fairly
stable over the next 8 years. The premise is currently being rented to another company under a
lease agreement, which has 8 years to run and provides annual rental of Rs 50,00,000. Under the
lease agreement, if the lessor wishes to cancel the lease, it can do so by paying the lease
compensation equal to one year's rental payment. This amount is not deductible for income tax
purpose.

The estimated annual fixed operating cash cost of machine is Rs 70,00,000 and its variable cost
ratio on revenue is 40%. The annual revenue from diagnostic work depends on number of patients
treated each year. The hospital works in two shifts and revenue from diagnostic work differs as per
the timing of treatment. The details are:

Year 1 to 3 4 to 6 7 8
No. of patients - day shift 1,600 2,400 3,200 5,400
No. of patients - night shift 1,000 1,600 2,500 3,600
Revenue per patients - day shift (Rs) 5,000 5,500 6,000 7,200
Revenue per patients - Night shift (Rs) 7,500 8,250 9,000 10,800

A special night shift allowance to employees, which is not covered on variable cost above, shall
also be required for each year from year 4 onwards. The estimated allowance for year 4 would be
Rs 3,50,000 and it will increase as per the increase in number of patients at night shifts as compared
to year 4 in succeeding years. The hospital, in addition, will have to spend Rs 5,00,000 in year 1
towards market research.
You are required to calculate Net Present Value of the project. Is it profitable to operate the
diagnostic center? Assume corporate income tax will be charged @ 30% of taxable income. If
there is loss in any year, it will be allowed to be set off against profit of coming years for taxation
purpose.
The cost of capital applicable to the hospital is 10% and PV Factors at 10% are given below:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467

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CHAPTER: Working Capital Management and Financial Forecasting

Question No-12:
A manufacturing company sells goods at a uniform gross profit of 25% on sales. The company is
following a practice to include deprecation as part of the cost of production on a consistent basis.
You have also been provided with the following details in respect of the costs/expenses of the
company for the 12-month period ending 31st March, current year:

Particulars Amount (Rs)

Annual sales Rs. 81,00,000
Materials consumed. Rs. 20,25,000
Total wages Rs. 16,20,000
Manufacturing expenses outstanding at the end of the year (cash
Rs. 1,80,000
expenses are paid one month in arrear):
Total administrative expenses (Paid as above): Rs. 5,40,000
Sales promotion expenses (Paid quarterly in advance): Rs. 2,70,000

On the basis of the above information, you are required to determine the working capital needs of
the company on a cash cost basis on the following assumptions:
f) A safety margin of 20% is to be maintained.
g) Average level of cash and bank balances are to be held to the extent of 48% of current
liabilities.
h) There will be work-in-progress for half month’s requirements requiring full materials but 50
percent of conversion costs.
i) Debtors are allowed an average credit period of 3 months to settle their dues.
j) The suppliers allow credit for three months to the company.
k) There is a system of payment of wages twice a month. The second wage payment of a
month takes place on the last day of the month.
l) Tax is to be ignored.
m) Finished goods are to be valued at manufacturing costs excluding administrative costs.
n) Production is carried on evenly throughout the year, and wages and overheads accrue
accordingly.
o) Stocks of raw materials and finished goods are kept at one month's requirement.

Question No-13:
Progressive Company Ltd. is considering working capital investment and financial policies for the
next year. Estimated fixed assets and current liabilities for the next year are Rs 780 Lakhs and 702
Lakhs respectively. Expected sales revenue and operating profit (EBIT) depends on investments
in current assets, especially on inventories and receivables. The chief financial officer of the
company is examining the following alternative working capital policies:

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Working Capital Investment in Expected sales Operating Profit

Investment policy current assets revenue (EBIT)
Conservative 1,350 Lakhs 3,690 Lakhs 369 Lakhs
Moderate 1,170 Lakhs 3,450 Lakhs 345 Lakhs
Aggressive 780 Lakhs 3,000 Lakhs 300 Lakhs

After evaluating the working capital investment policy, the chief financial officer has advised the
adoption of the moderate working capital investment policy. The company is now examining the
use of long term and short-term borrowings for financing its assets. The company will use Rs 750
lakhs of equity funds. The corporate tax rate is 35%. The company is considering the following
debt alternatives.

Financing policy Short term debt Long term debt

Conservative 162 Lakhs 336 Lakhs
Matching 300 Lakhs 198 Lakhs
Aggressive 450 Lakhs 48 Lakhs
Interest rate (average) 12% 16%

You are required to calculate the following:

(1) Working capital investment for each policy:
(a) Net working capital position
(b) Rate of Return on Total Assets
(c) Current ratio
(2) Financing for each policy:
(a) Net working capital position
(b) Rate of return on shareholders' equity
(c) Current ratio

Question No-14:
Nishan Traders Ltd. provides you the following information in respect of its present debtor’s policy
and proposed debtors policies as follows:

Particulars Present Proposed Proposed

Policy Policy-I Policy-II
Average Collection Period 90 days 45 days 135 days
Credit Sales Rs 25 Lakh Rs 15 Lakh Rs 75 Lakh
Collection costs 1.2% of sales 0.6% of sales 1.8% of sales
Credit administration costs Rs 75,000 Rs 15,000 Rs 95,000
Pre-tax Required Rate of Return 20% 20% 20%
Bad Debts 5% 2.5% 10%
Selling Price per Unit Rs 500 Rs 500 Rs 500

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Variable Cost per unit (% of sales) 85% 85% 85%

Average cost per unit Rs 450 ? ?

Required:
a) Suggest which policy is the best (assume 360 days in a year)
b) Suggest which policy is the best if corporate tax rate is 40% p.a.

CHAPTER: Distribution Policy

Question No-15:
Trishakti Ltd. has a capital of Rs 10 lakhs in equity shares of Rs. 100 each. The shares are currently
quoted at par. The capitalization rate for the risk class to which the company belongs is 10%. The
firm is contemplating the declaration of a dividend of Rs. 5 per share at the end of the current
financial year.
(i) Based on M-M Approach, calculate the market price of the share of the company, when
a) The dividend is declared, and
b) The dividend is not declared
(ii) How many new shares are to be issued by the company, if the company desires to fund an
investment budget of Rs 2,00,000 by the end of the year assuming net income for the year
will be Rs 1,00,000?
(iii) Show how under M-M Hypothesis, the payment of dividend does not affect the value of the
firm.

CHAPTER: Valuation of Securities:

Question No-16:
Alpha Ltd. is planning to issue 10% Debentures to raise funds for financing the projects selected
to be invested in. It requires Rs. 285 Lakh in net and the Debentures would be paid off in 6 years
on equal annual installments payable at the end of each year along with interest. The cost for
arranging and raising the fund would amount to 5% of face value of the Debentures. It is subject
to income tax rate of 30% and floatation cost will not be available for tax deduction.
You are required to suggest rate of return on investment as is sufficient to pay off the interest and
principal due for payment every year net of taxes.

Question No-17:
Suppose, A Ltd. issued Rs. 1,000 face-value bond with a 10 percent coupon rate, and 10 years
remaining until maturity. Interest payments are made semiannually.
a) If after two years, the market Price is Rs 1,100, state whether the yield to maturity is above or
below the coupon rate. Why?
b) What is the implied market-determined semiannual discount rate on this bond?
c) Using your answer to Part (b), what is the bond’s
(i) Nominal annual yield to maturity?
(ii) Effective annual yield to maturity?
d) If after two years, the YTM is 12%, at what price would the bonds sell?

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e) Suppose that the conditions in part (d) existed and that the YTM remained at 12 percent for the
next 8 years. What would happen to the price of the A Ltd.’s bonds over time?

Question 18:
You are appointed to make valuation of a company based on free cash flows provided by the firm
as follows:

Year 1 2 3
Free cash flow (Rs. in millions) 50 100 150

The free cash flows are expected to grow at a constant 10% rate after 3 years. You are informed
that the overall cost of capital of the firm is 15%.

After the valuation is made, it was found that the overall cost of capital of 15% is not correct as it
was calculated using book value weights of debt and equity. In fact, the overall cost of capital
should have been calculated using market value weights. The market value of equity is thrice its
book value, whereas the market value of its debt is nine-tenth of its book value. The cost of equity
is calculated based on dividend discount model assuming expected divided of Rs 20 at the end of
first year with constant growth rate of 10% forever. The current market price of equity shares is
Rs 200. The post-tax cost of debt of the firm is 10 percent.
Required:
a) What is the terminal or horizon value of free cash flows after 3rd year?
b) What is the value of the company today as per the existing overall cost of capital?
c) What is the correct value of the company with revised overall cost of capital?

CHAPTER: Risk and Return:

Question No-19:
An investor has decided to invest Rs 1,00,000 in the shares of two companies, namely, Parts Ltd.
and Equipment Ltd. The projections of returns from the shares of the two companies along with
their probabilities are as follows:

Probability Parts Ltd. (%) Equipment Ltd. (%)

0.20 12 16
0.25 14 10
0.25 10 18
0.30 18 20

He has decided to consider only 5 portfolios of Parts Ltd. and Equipment Ltd. as follows:
(i) All funds invested in Parts Ltd.
(ii) 50% of funds in each of Parts Ltd. and Equipment Ltd.
(iii)75% funds in Parts Ltd. and 25% in Equipment Ltd.
(iv)25% funds in Parts Ltd. and 75% in Equipment Ltd.

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(v) All funds invested in Equipment Ltd.

Required:
a) Expected return of individual companies.
b) Risk of individual companies.
c) The covariance of returns from the two companies.
d) Correlation coefficient between the returns of the two companies.
e) Expected return under different portfolios given above.
f) Risk factor associated with these portfolios.
g) Which portfolio is best for him from the point of risk? and
h) Which portfolio is best for him from the point of return?

CHAPTER: Overview of Capital Markets:

Question No-20:
Mr. Yaris has invested in three mutual funds (MF) as per the following details:
Particulars MF ‘X’ MF ‘Y’ MF ‘Z’
Amount of Investment (Rs) 200,000 400,000 200,000
Net Asset Value (NAV) at the time of purchase (Rs) 10.30 10.10 10.00
Dividend Received up to 31.03.2024 (Rs) 6,000 0 5,000
NAV as on 31.03.2024 (Rs) 10.25 10.00 10.20
Effective Yield p.a. as on 31.03.2024 (%) 9.66 -11.66 24.14
Assume 365 days in a year
Mr. Yaris has misplaced the documents of his investment and wants help from you in finding the
date of his original investment after computing the following:
a) Number of units in each scheme.
b) Total NAV
c) Total yield, and
d) Number of days investment held.

CHAPTER: Short Notes from Overall Syllabus:

Question No-21:
Write short Notes on:
a) Functions of Stock Exchange
b) Use of Weighted MCC for Decision Making
c) Methods of Venture Capital Financing
d) Leveraged lease

Question No-22:
Distinguish Between:
a) Leveraged Buyout and Management Buyout
b) Bank Overdraft and Clean Overdraft
c) Promised yield and Realized yield
d) Operating leverage and financial leverage.

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CHAPTER: Introduction and Fundamental Concept of Financial Management:

Question No 1:
Answer:

Financial Management and Financial Accounting:

Financial management and financial accounting are closely related as reports generated by
financial accounting (Financial Statements) are necessary inputs for making financial decisions.
However, they differ in the treatment of funds and also in regards to decision making.

1) Treatment of funds:
In accounting, the measurement of funds is based on the accrual principle. The accrual-based
accounting data does not completely reflect the financial conditions of the organization. An
organization which has earned profit (sales less expenses) may said to be profitable in the
accounting sense but it may not be able to meet its current obligations due to shortage of
liquidity as a result of say, uncollectible receivables. Such an organization will not survive
regardless of its levels of profits. Whereas, the treatment of funds in financial management is
based on cash flows. This is so because the finance manager is concerned with maintaining
solvency of the organization by providing the cash flows necessary to satisfy its obligations
and acquiring and financing the assets needed to achieve the goals of the organization. Thus,
cash flow-based returns help financial managers to avoid insolvency and achieve desired
financial goals.

2) Decision making:
The purpose of accounting is to collect and present financial data of the past, present and future
operations of the organization. The financial manager uses these data for financial decision
making. It is not that the financial managers cannot collect data or accountants cannot make
decisions, but the chief focus of an accountant is to collect data and present the data while the
financial manager’s primary responsibility relates to financial planning, controlling and
decision making. Thus, in a way it can be stated that financial management begins where
accounting ends.

CHAPTER: Time Value of Money:

Question No 2:
Answer:
The decision to purchase machine is based on comparison of Present Value of costs under both the
options as follows:
Option 1:
PV of costs = Down Payment + PV of annual installments
= 2,75,000 + Cash Flow x PVIFA 12%, 6 years

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= 2,75,000 + 61,500 x 4.1114

= Rs 5,27,851.10

Option 2:
PV of costs:
Total payment in six installments
Ratio of Installments 1: 2: 3: 4: 5: 6
Sum of Ratios = 21
Hence, 1st Installments = 840,000/21 = Rs 40,000
Statement of Present Value of Installments:
Year Cash flows PVF @ 12% Present Values (Rs)
1 40,000 0.8929 35,716
2 80,000 0.7972 63,776
3 1,20,000 0.7118 85,416
4 1,60,000 0.6355 1,01,680
5 2,00,000 0.5674 1,13,480
6 2,40,000 0.5066 1,21,584
Total Rs 8,40,000 5,21,652

Decision:
The Present Value of cost under option-2 is less than the Present Value of costs under option-1, by
Rs 6,199.10. Thus, it is recommended to choose the 2nd option.

Question No 3:
Answer:
S. No Annuity Perpetuity
1 An annuity is a stream of regular Perpetuity is a stream of cash flows or type
periodic cash flows for a specified of annuity that continues forever, i.e.,
period of time. Cash flows to satisfy perpetually. Thus, Perpetuity is a constant
annuity must satisfy the following stream of identical cash flows with no end.
conditions: The perpetuity cash flows should satisfy the
A) The periodic cash flows must following:
be equal in amount. A) The periodic cash flows must be equal
B) The time interval between the in amount.
cash flows must be equal B) The time interval between the cash
C) The cash flows should run for flows must be equal
a finite period. C) The cash flows should run for an
infinite period.

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2 Future Value of Annuity can be Perpetuity is a type of annuity which is

computed using Compounding never-ending. Future value of perpetuity
Techniques. cannot be calculated.
3 Examples Examples
a) Recurring Deposit installments a) Dividend on Irredeemable Preference
paid to bank. Share Capital.
b) Life insurance premium per b) Interest on Irredeemable Debt/Bonds.
annum

CHAPTER: Strategic Finance and Policy:

Question No 4:
Answer:
a) Computation of additional capital requirement due to expansion:

Particulars Amount (Rs in Million)

Present level of assets 10,00,000
Desired level of assets at the end of 2081 50% expansion on above
= 10,00,000 + 0.5 x 10,00,000
= 15,00,000
Additional capital required: 500,000

b) Proportion of capital structure:

Sources Amount (Rs in Million) Proportion

Debt 4,00,000 40%

Preference share 1,00,000 10%

Equity shares 5,00,000 50%

Total 10,00,000 100%

Capital budget to be financed by equity shares to maintain the optimal capital structure:
In order to maintain the equity at 50% level, NPR. 2,50,000 million of additional capital
requirement (50% of 500,000 million) should be financed by equity. Internal equity available
(estimated retained earnings) is NPR. 50,000 million only (No information of depreciation is
provided, hence depreciation is assumed to be zero).
Therefore, required capital to be raised through issue of common equity is NPR. 2,00,000
million (i.e., 2,50,000 million – 50,000 million)

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Cost of each component of common equity:

(i) Dividend Yield = 4%
(ii) Market Price = Rs 100
(iii) Hence D1 = Rs 4
(iv) Net Proceeds (NP) = Rs 95
(v) Cost of Equity (Ke) = [D1/NP] + growth rate = 4/95 + 8% = 12.21%
(vi) Cost of Retained Earnings (Kre) = Ke x (1- t) (1- b) = 12.21 x (1-0.3) (1-0.02) = 8.38%

c) Cost of new debt and cost of new preference shares:

Cost of new debt (Kd) = Interest rate (1- tax rate) = 9% x (1-0.3) = 6.30%
Cost of new preference shares (Kp): Pref. dividend / NP = 10/98 = 10.20%

d) Computation of marginal cost of capital (MCC):

Source of capital Additional fund Proportion Cost of Marginal cost

(Rs in million) capital (%) of capital (%)

New debt 200,000 40% 6.30% 2.52%

New Preference 50,000 10% 10.20% 1.02%

shares
Equity 200,000 40% 12.21% 4.88%

Retained earning 50,000 10% 8.38% 0.84

Total 500,000 100% 9.26%

Question No-5
Answer:
Income Statement of XYZ Ltd

Particulars Amount (Rs)

Sales 1,00,00,000
Less: Variable costs 60,00,000
Contribution 40,00,000
Less: Fixed Operating costs 20,00,000
Earnings Before Interest and Tax (EBIT) 20,00,000
Less: Interest 8,00,000
Earnings Before Tax (EBT) 12,00,000
Less: Tax @ 40% 4,80,000
Earnings After Tax (EAT) 7,20,000

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Less: Preference Dividend 1,20,000

Earnings Available to Equity Shareholders 6,00,000
Divide: No. of Equity Shares 10,000
Earnings Per Share (EPS) 60

Balance Sheet of XYZ Ltd

Liabilities Amount (Rs) Assets Amount (Rs)

10,000 Equity Shares of 10,00,000 Total Assets 1,06,00,000
Rs 100 each
10,000 Preference Shares 10,00,000
of Rs 100 each
Reserve & Surplus 6,00,000
10% Debt 80,00,000
Total 1,06,00,000 1,06,00,000

Working Notes:

1) Earnings Per Share = Market Price Per Share/PE Ratio = 180/3 = Rs 60

2) Earnings to Equity Shareholders (EAE) = EPS x No. of equity shares
= 60 x 10,000 = Rs 6,00,000
3) Preference dividend = 10,000 x 100 x 12% = Rs 1,20,000
4) Earnings After Tax (EAT) = EAE + Preference dividend = 6,00,000 + 1,20,000
= Rs 7,20,000
5) Earnings Before Tax (EBT) = EAT/ (1-tax rate) = 7,20,000/0.6 = Rs 12,00,000
6) Amount of Tax = EBT x Tax Rate = 12,00,000 x 40% = Rs 4,80,000
7) EBT for Preference Dividend= Pref. Dividend/ (1-tax rate) = 1,20,000/0.6 = 2,00,000
8) Degree of Financial Leverage (DFL) = EBIT/ (EBT – EBT for Pref. dividend)
Or, 2 = EBIT/ (12,00,000 – 2,00,000)
Hence, EBIT = 20,00,000
9) Interest = EBIT – EBT = 20,00,000 –12,00,000 = Rs 8,00,000
10) Degree of Operating Leverage (DOL) = Contribution/ EBIT
Or, 2 = Contribution/20,00,000
Hence, Contribution= 40,00,000
11) Operating Fixed Cost = Contribution- EBIT = 40,00,000 – 20,00,000 = Rs 20,00,000
12) Contribution= Sales – Variable costs
Or, 40,00,000 = Sales – 0.6 Sales
Hence, Sales = 40,00,000/0.4 = 1,00,00,000
13) Variable Costs = Sales – Contribution = 1,00,00,000 – 40,00,000 = Rs 60,00,000
14) Amount of Debt = Interest/ Interest rate = 8,00,000/0.1 = 80,00,000

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Question No-6
Answer:
Basic Computations:
1) Additional fund required= 3,60,00,000 x 50% = 1,80,00,000
2) Number of Equity Share to be issued under Plan 3 = Rs. 1,80,00,000/Rs. 120 = 1,50,000
3) Number of Equity Share to be issued under Plan 2 = Rs. 90,00,000/Rs. 120 = 75,000
4) 12.5% Debentures to be issued under Plan 1 = Rs. 1,80,00,000.
5) 12.5% Debentures to be issued under Plan 2 = 50% of Rs. 1,80,00,000 = Rs. 90,00,000
6) New EBIT after expansion = 90,00,000 + 90,00,000 x 20% = 1,08,00,000
7) Total Interest under Plan-1= 9,00,000 + 1,80,00,000 x 12.5% = 31,50,000
8) Total Interest under Plan-2= 9,00,000 + 90,00,000 x 12.5% = 20,25,000
9) Total Interest under Plan-1= 9,00,000 + 0 = 9,00,000
10) Tax rate = Tax amount/EBT =28,35,000/81,00,000 = 35%

a) Computation of Indifference Points among different Finance Plans:

(i) Between Plans 1 and 2:
EPS Plan-1 = EPS Plan-2
[(X – Interest) (1 – t)] / N1 = [(X – Interest) (1 – t)] / N2
Where,
X = EBIT at the indifferent point
N1 = Number of equity shares under Plan 1.
N2 = Number of equity shares under Plan 2
t = Corporate income tax rate
Substituting the values, we get:

[(X – 31,50, 000) 0.65] = [(X –20,25, 000) 0.65]

1,20,000 1,95,000
Or, 13 (X – 31,50,000) = 8 (X – 20,25,000)
Or, 13 X – 4,09,50,000 = 8 X – 1,62,00,000
Or, 5 X = 2,47,00,000,
Therefore X = Rs. 49,50,000

(ii) Between Plans 1 and 3:

EPS Plan-1 = EPS Plan-3

[(X – 31,50, 000) 0.65] = [(X – 9,00,000) 0.65]

1,20,000 2,70,000

Or, 9 (X – 31,50,000) = 4 (X – 9,00,000)

Or, 9X – 2,83,50,000 = 4X – 36,00,000
Or, 5X = 2,47,50,000
Therefore X = Rs. 49,50,000

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(iii) Between Plan 2 and 3:

EPS Plan-1 = EPS Plan-3

[(X –20,25, 000) 0.65] = [(X – 9,00,000) 0.65]

1,95,000 2,70,000

Or, 18 (X –20,25, 000) = 13 (X – 9,00,000)

Or, 18 X – 3,64,50,000 = 13 X – 1,17,00,000
Or, 5X = 2,47,50,000
Therefore X = Rs. 49,50,000

b) Determination of Market Price per Share under Various Alternative Plans:

Particulars Plan I (Rs) Plan II (Rs) Plan III (Rs)

EBIT 1,08,00,000 1,08,00,000 1,08,00,000
Less: Interest 31,50,000 20,25,000 9,00,000
EBT 76,50,000 87,75,000 99,00,000
Less: Tax 26,77,500 30,71,250 34,65,000
EAT 49,72,500 57,03,750 64,35,000
Less: Pref. Dividend - - -
Earnings for equity 49,72,500 57,03,750 64,35,000
No of equity shares 1,20,000 1,95,000 2,70,000
EPS 41.44 29.25 23.83
PE Ratio 9 9 12
MPS 372.96 263.25 285.96

CHAPTER: Analysis of Financial Statements:

Question No-7
Answer:
Balance Sheet of Ganesh Traders Limited as on 31st March, 2024

Capital and Liabilities Amount Assets Amount (Rs)

(Rs)
Share capital 50,00,000 Fixed Assets (50L – 10L) 40,00,000
General Reserve 20,00,000 Investment 20,00,000

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20% Loan 40,00,000 Cash and Bank 10,00,000

Proposed Dividend 10,00,000 Debtors 50,00,000
Provision for tax 20,00,000 Stock 40,00,000
Creditors 20,00,000
Total 1,60,00,000 Total 1,60,00,000

Trading and P/L Account of Ganesh Traders Ltd for the year ending 31st March, 2024

Particulars Rs Particulars Rs
To opening Stock - By Sales 3,00,00,000
To Purchases 2,40,00,000 By Closing Stock 40,00,000
To Gross Profit 1,00,00,000
3,40,00,000 3,40,00,000
To Depreciation 10,00,000 By Gross Profit b/d 100,00,000
To Interest 10,00,000
To S/D expenses 30,00,000
To Provision for Tax 20,00,000
To Net Profit after Tax 30,00,000
1,00,00,000 1,00,00,000
To Proposed Dividend 10,00,000 By Net Profit 30,00,000
To Reserve 20,00,000
30,00,000 30,00,000

Working Notes:
1) Proposed Dividend = Share Capital x dividend rate
= 50,00,000 x 20% = 10,00,000
2) Reserve and Surplus = 20,00,000
3) Net Profit = Proposed Dividend + Transferred to Reserve = 30,00,000
4) Profit Before Tax = Profit After Tax / (1-tax rate) = 30,00,000/ (1-0.4) = 50,00,000
5) Provision for tax = 50,00,000 x 40% = 20,00,000
6) Interest Coverage ratio = 6 Times
Or, 6 = PBIT/ Interest
Or, 6 = (PBT + Interest)/Interest
Or, 6 Interest –Interest = 50,00,000.
Hence, Interest = 10,00,000
7) Amount of loan taken (opening) = 10,00,000/0.2 = 50,00,000
8) Closing Loan= Opening Loan – Installment = 50,00,000 – 10,00,000 = 40,00,000
9) Hence, cost of special machine is also 50,00,000 (equal to amount of loan)
10) Debt service coverage ratio = (PAT + Interest + Depreciation)/ (Interest + installment)
Or, 2.5 = (30,00,000 +10,00,000 + Depreciation)/ (10,00,000 + 10,00,000)
Or, 50,00,000 = 40,00,000 + Depreciation
Hence, Depreciation = 10,00,000.

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11) Gross Profit = Profit Before Tax + Interest + Depreciation + Selling & administration expenses
= 50,00,000 + 10,00,000 +10,00,000 + 30,00,000 = 1,00,00,000
12) GP Ratio is 33.3333%. Hence, Sales = 1,00,00,000/0.33333 = 3,00,00,000
13) COGS = Sales – Gross Profit = 3,00,00,000 – 1,00,00,000 = 2,00,00,000
14) Closing stock = COGS/ Stock Turnover Ratio = 2,00,00,000/5 = 40,00,000
15) Purchase = COGS + Closing Stock – Opening Stock
= 2,00,00,000 + 40,00,000 – 0 = 240,00,000
16) Debtors Turnover Ratio= Sales/Debtors
Or, 6 = 3,00,00,000/Debtors
Hence, Debtors = 50,00,000
17) Creditors Payment Period = 1 month
Or, Creditors = Purchases/12 = 2,40,00,000 /12 = 20,00,000
18) Total Current Liabilities = Creditors + Provision for Tax + Proposed Dividend
= 20,00,000 + 20,00,000 + 10,00,000 = 50,00,000
19) Current Assets = Current Liabilities x 2
= 50,00,000 x 2 = 1,00,00,000
20) Cash = Current Assets – Stock – Debtors
= 1,00,00,000 – 40,00,000 – 50,00,000 = 10,00,000

Question No- 8
Answer:
The limitations of financial ratios are listed below:

a) Difficult to generalize ratios as good or bad

The concept of ideal ratio is vague and there is no uniformity as to what an ideal ratio is. It is
very difficult to generalize whether a particular ratio is good or bad. For example, a low current
ratio may be said "bad" from the point of view of low liquidity, but a high current ratio may
not be "good" as this may result from inefficient working capital management.
b) Financial ratios are not independent
The Financial Ratio's cannot be considered in isolation. They are inter-related but not
independent. Thus, decision taken on the basis of one ratio may not be correct.
c) Misleading
An analyst frequently compares the financial ratios of different companies in order to see how
they match up against each other. However, each company may aggregate financial
information differently. Therefore, the results of their ratios are not really comparable. This
can lead an analyst to draw incorrect conclusions about the results of a company in comparison
to its competitors.
d) Impact of Seasonal Factor
Seasonal factor brings boom or recession. Ratios may indicate different results during different
periods.
e) Impact of Inflation
Under the impact of inflation, the ratios might not present a true picture.

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f) Product line diversification

Due to product line diversification, the overall position of the firm may differ from position of
individual product line.
g) Operational information.
Financial analysis only reviews a company's financial information, not its operational
information. So, you cannot see a variety of key indicators of future performance, such as the
size of the order backlog, or changes in warranty claims. Thus, financial analysis only presents
part of the total picture.
h) Thin line of difference between good and bad ratio.
The line of difference between good and bad ratio is so thin that they are hardly separable.

CHAPTER: Capital Investment Decision:

Question No-9:
Answer:
1) Computation of Initial Cash Outflow:
Particulars Workings Amount (Rs)

Cost of computers 50,000 × 15 7,50,000

Cost of printers 25,000 × 2 50,000

Total 8,00,000

Note: the cost of cables and connectors are irrelevant as they are borne by Academy itself

2) Computation of Annual CFAT and NPV:

Year 1 2 3 4 5
Gross revenue (W.N) 10,80,000 14,40,000 18,00,000 18,00,000 18,00,000

Operating costs:

Salary to instructor 3,60,000 5,40,000 5,94,000 5,94,000 5,94,000

Salary to supervisor 1,20,000 1,20,000 1,32,000 1,32,000 1,32,000

Spare parts 45,000 45,000 54,000 54,000 54,000

Transportation 25,000 25,000 30,000 30,000 30,000

Insurance 8,000 8,000 8,000 8,000 8,000

Depreciation 2,00,000 1,50,000 1,12,500 84,375 43,281

Total costs 7,58,000 8,88,000 9,30,500 9,02,375 8,61,281

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Earnings before 9,38,719

3,22,000 5,52,000 8,69,500 8,97,625
taxes
Less: Taxes @ 30% 96,600 1,65,600 2,60,850 2,69,288 2,81,616

Earnings after taxes 2,25,400 3,86,400 6,08,650 6,28,337 6,57,103

Add: Depreciation 2,00,000 1,50,000 1,12,500 84,375 43,281

Cash flow after taxes 4,25,400 5,36,400 7,21,150 7,12,712 7,00,384

Add: Salvage value 80,000

PV factor at 15% 0.870 0.756 0.658 0.572 0.497

Present value 3,70,098 4,05,518 4,74,517 4,07,671 3,87,851

Total Present Values of CFAT 20,45,655

Less: Initial Cash Outflows 8,00,000

Net Present Value (NPV) 12,45,655

3) Recommendation:
Since the NPV is positive; Innovative Academy's offer is viable and should be accepted by
Abacus.

4) Working Notes:
(i) Revenue receipt from Innovative Academy:
= No. of classes × No. of sections × No. students × Fee per student × 12
Year Workings Amount (Rs)

1 3 × 3 × 50 × Rs. 200 × 12 Rs. 10,80,000

2 4 × 3 × 50 × Rs. 200 × 12 Rs. 14,40,000

3 to 5 5 × 3 × 50 × Rs. 200 × 12 Rs. 18,00,000

(ii) Salary of instructor:

Year Workings Amount (Rs)

1 2 × Rs. 15,000 × 12 Rs. 3,60,000

2 3 × Rs. 15,000 × 12 Rs. 5,40,000

3 to 5 Rs. 5,40,000 × 1.1 Rs. 5,94,000

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(iii) Insurance: 1% of Rs. 8,00,000 = Rs. 8,000

(iv) Depreciation:

Year Workings Amount (Rs)

1 Rs. 8,00,000 x 25% Rs. 20,00,000

2 Rs. 6,00,000 x 25% Rs. 1,50,000

3 Rs. 4,50,000 x 25% Rs. 1,12,500

4 Rs 3,37,500 x 25% Rs. 84,375

5 Rs (253.125 – 80,000) x 25% Rs. 43,281

Question No-10:
Answer:
a) Ranking of Project:
1) Computation of NPV: NPV = PVCI – PVCO

Year Cash Flows of Cash Flows PVF @ PV of PV of

Project A of Project B 10% Project A Project B
0 (150,000) (150,000) 1 (150,000) (150,000)
1 30,000 150,000 0.9091 27,273 136,365
2 60,000 45,000 0.8264 49,584 37,188
3 180,000 45,000 0.7513 135,234 33,809
NPV Rs 62,019 Rs 57,362

2) Computation of IRR:
Project A:
Year Cash Flows PVF @ 25% PVF @ PV @ PV of
of Project A 30% 25% Project B
0 (150,000) 1 1 (150,000) (150,000)
1 30,000 0.8000 0.7692 24,000 23,076
2 60,000 0.6400 0.5917 38,400 35,502
3 180,000 0.5120 0.4552 92,160 81,936
NPV Rs 4,560 Rs (9,486)
IRR 25% + [4,560/ (4,560+9486)] x 5% = 26.62%

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Project B:

Year Cash Flows PVF @ PVF @ 40% PV @ PV of

of Project A 35%% 25% Project B
0 (150,000) 1 1 (150,000) (150,000)
1 150,000 0.7407 0.7143 111,105 107,145
2 45,000 0.5487 0.5102 24,692 22,959
3 45,000 0.4064 0.3644 18,288 16,398
NPV Rs 4,085 Rs (3,498)
IRR 35% + [4,085/ (4,085+3,498)] x 5% = 37.69%

3) Ranking of Project:

Project A B
NPV Rs 62,019 Rs 57,362
Ranking I II
IRR 26.62% 37.69%
Ranking II I

b) Selection of Project if they are independent:

The NPV of both the projects are positive and also IRR of both the projects are more than cost
of capital, hence both projects are eligible for selection.

c) Conflict in the project choice by using NPV and IRR:

1) While choosing mutually exclusive projects, the NPV and IRR may provide conflicting
results due to the following reasons:
(i) Different life of the project
(ii) Different size of the investment
(iii) Different pattern of cash inflows over the life of project.
(iv) Different assumptions with respect to re-investment rate on cash flows from the project.
2) In the above case, project life, size and cost of capital are same for both the projects but
NPV and IRR gives different decision because of the following reasons.
(i) Different pattern of cash inflow over the life. Project A has lower inflow during initial
period whereas Project B has better inflow during initial years. A project which has
better initial inflows will provide better IRR. Hence, Project B has higher IRR
(ii) Difference in total CFAT over the life of project. Project “A” has total inflow of Rs
270,000 whereas “B”’s total inflow is only Rs 240,000. Hence, project “A” shows
better NPV.
(iii)Assumptions used in calculation of NPV and IRR. The calculation of NPV assumes
that the inflows from project can be re-invested at cost of capital as it discounts future
cash flows at COC rate, whereas calculation of IRR assumes that inflows from project
can be re-invested at IRR.

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d) Project choice if they are mutually exclusive:

When there is conflict in ranking, the project which shows better NPV is selected because NPV
provides absolute figure of net surplus for the firm. The amount of addition in wealth in
absolute figure is more superior as compared to percentage return provided by IRR.

e) Resolution of conflict between NPV and IRR:

The conflict between NPV and IRR can be resolved by computing Modified Net Present Value
(MNPV) and Modified Internal Rate of Return (MIRR).
Computation of Modified NPV and Modified IRR:

(i) For Project A:

Terminal Value @ 15% = 180,000 + 60,000 x 1.15 + 30,000 x (1.15)2 = Rs 288,675
PV at Cost of Capital = 288,000 ÷ (1.1)3 = Rs 216,379
Modified NPV = 216,379 – 150,000 = Rs 66,379
Modified IRR:
Terminal Value at re-investment rate = Rs 288,675
Initial Investment = Rs 150,000
The rate which makes PV of Rs 288,675 equal to Rs 150,000 is MIRR
Now,
Rs 288,675 x PVIF 3 years, IRR = 150,000
The PV Factor = 0.5196 is located between 24% and 25% in PVIF table in 3 years
Hence, MIRR = 24% + [(0.5245- 0.5196) / (0.5245 – 0.5120)] x 1% = 24.39%

(ii) For Project B:

Terminal Value @ 15% = 45,000 + 45,000 x 1.15 + 150,000 x (1.15)2 = Rs 261,263
PV at Cost of Capital = 261,263 ÷ (1.1)3 = Rs 1,96,291
Modified NPV = Rs 1,96,291– 150,000 = Rs 46,291
Modified IRR:
Terminal Value at re-investment rate = Rs 261,263
Initial Investment = Rs 150,000
The rate which makes PV of Rs 261,263 equal to Rs 150,000 is MIRR
Now,
Rs 261,263 x PVIF 3 years, IRR = 150,000
The PV Factor = 0.5741 is located between 20% and 21% in PVIF table in 3 years
Hence, MIRR = 20% + [(0.5787- 0.5741) / (0.5787 – 0.5645)] x 1% = 20.32%

(iii) Ranking on the basis of MNPV and MIRR):

Project A B
Modified NPV Rs 66,379 Rs 46,291
Ranking I II
IRR 24.39% 20.32%

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Ranking I II
Decision: The conflict is resolved and consistent result is achieved through
Modified NPV and Modified IRR.

Question No-11:
Answer:
1) Computation of Initial Investment:

Particulars Amount (Rs)

Initial diagnostic machine 1,80,00,000
PV of additional diagnostic machine (70,00,000 x 0.909) 63,63,000
Add: Initial Working capital Requirement 37,50,000
Add: Compensation for cancellation of lease 50,00,000
Less: Tax free subsidy from GON (55,00,000)
PV of Cash Outflow (PVCO) 276,13,000
Note: The resale value of premises is irrelevant information as the premises was already
rented to another company and its sale value is not affected due to project
implementation. The relevant cash flow for the project is the cancellation effect of lease
due to project. The compensation for the cancellation of lease and loss of opportunity
will be considered for the evaluation of project.

2) Computation of annual Cash Flow After Tax (CFAT):

Particulars Year-1 Year-2 to Year-4 to Year-7 Year-8

Year-3 Year 6
Revenue from 1,55,00,000 1,55,00,000 2,64,00,000 4,17,00,000 7,77,60,000
operation
(Working Note-1)
Less: Variable 62,00,000 62,00,000 1,05,60,000 1,66,80,000 3,11,04,000
costs @ 40% of
revenue
Less: Fixed 70,00,000 70,00,000 70,00,000 70,00,000 70,00,000
operating costs
Less: Market 5,00,000 - - - -
Research cost
Less: Special - - 3,50,000 5,46,875 7,87,500
night shift
allowance
(Working Note-2)

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Rent foregone 50,00,000 50,00,000 50,00,000 50,00,000 50,00,000

Profit Before (32,00,000) (27,00,000) 34,90,000 1,24,73,125 3,38,68,500
Depreciation &
Tax
Less: (22,50,000) (32,50,000) (32,50,000) (32,50,000) (32,50,000)
Depreciation
(Working Note-3)
Profit Before Tax (54,50,000) (59,50,000) 2,40,000 92,23,125 3,06,18,500
Less: Tax @ 30% - - - - (69,63,488)
(Working Note-4)
Profit After Tax (54,50,000) (59,50,000) 2,40,000 92,23,125 2,36,55,012
Add: 22,50,000 32,50,000 32,50,000 32,50,000 32,50,000
Depreciation
Operational cash (32,00,000) (27,00,000) 34,90,000 1,24,73,125 2,69,05,012
inflows
Add: Recovery of - - - - 37,50,000
Working Capital
Add: Net Salvage - - - - 35,00,000
Value of original
machine (W.N-5)
Final CFAT (32,00,000) (27,00,000) 34,90,000 1,24,73,125 3,41,55,012

3) Computation of NPV:
Year Final CFAT PVF@ 10% PV of Cash Inflows
1 (32,00,000) 0.909 (29,08,800)
2 (27,00,000) 0.826 (22,30,200)
3 (27,00,000) 0.751 (20,27,700)
4 34,90,000 0.683 23,83,670
5 34,90,000 0.621 21,67,290
6 34,90,000 0.564 19,68,360
7 1,24,73,125 0.513 63,98,713
8 3,41,55,012 0.467 1,59,50,391
Present Value of Cash Inflows 2,46,10,524
Less: PV of Cash Outflows 2,76,13,000
NPV (30,02,476)

4) Decision:
The NPV of Project is negative by Rs 30,02,476. It is recommended not to introduce new
diagnostic center.

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Working Note:
1) Calculation of Annual Revenue from operation:

Year 1 to 3 4 to 6 7 8
No. of patients - Day shift (a) 1,600 2,400 3,200 5,400
No. of patients - Night shift (b) 1,000 1,600 2,500 3,600
Revenue per patients - Day 5,000 5,500 6,000 7,200
shift (Rs) (c)
Revenue per patients - Night 7,500 8,250 9,000 10,800
shift (Rs) (d)
Total Revenue Day shift (a x c) 80,00,000 132,00,000 192,00,000 388,80,000
Total Revenue Night shift (b x 75,00,000 132,00,000 225,00,000 388,80,000
d)
Total Annual Revenue 155,00,000 264,00,000 417,00,000 77760,000

2) Calculation of Night shift allowance:

Year-4 to 6 = Rs 350,000
Year-7 = Rs 350,000 x 2500/1600 = Rs 546,875
Year-8 = Rs 350,000 x 3600/1600 = Rs 787,500

3) Calculation of Depreciation:
For original diagnostic machine from year 1 to 8 = 180,00,000/8 = 22,50,000
For original diagnostic machine from year 2 to 8 = 70,00,000/7 = 10,00,000

4) Calculation of amount of tax:

Year Profit Before Carry Forward Taxable Tax @ 30%
Tax of loss Income
1 (54,50,000) (54,50,000) (54,50,000) -
2 (59,50,000) (1,14,00,000) (1,14,00,000) -
3 (59,50,000) (1,73,50,000) (1,73,50,000) -
4 240,000 (1,71,10,000) (1,71,10,000) -
5 240,000 (1,68,70,000) (1,68,70,000) -
6 240,000 (1,66,30,000) (1,66,30,000) -
7 92,23,125 (74,06,875) (74,06,875) -
8 3,06,18,500 - 2,32,11,625 69,63,488

5) Calculation of Net Salvage Value (NSV):

NSV = Sale Value x (1-tax rate)
For Original Machine = 30,00,000 x (1-0.30) = 21,00,000
For Additional Machine = 20,00,000 x (1-0.30) = 14,00,000
Total Net Salvage Value = 35,00,000

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CHAPTER: Working Capital Management and Financial Forecasting

Question No-12:
Answer:
Statement showing Working Capital needs of company on cash cost basis:

Particulars Amount (Rs)

Current Assets (A)
Raw Materials (20,25,000/12) 1,68,750
Work in progress (Working Note-2) 1,63,125
Finished Goods (58,05,000/12) 4,83,750
Debtors (66,15,000 X 3/12) 16,53,750
Sales Promotion Expenses (270,000 X 3/12) 67,500
Cash in Hand (798,750 X 0.48) 3,83,400
Total Current Assets: 29,20,275
Current Liabilities
Creditors (20,25,000 X 3/12) 5,06,250
Manufacturing Expenses 1,80,000
Administrative Expenses (540,000/12) 45,000
Wages (16,20,000 X 1/24) 67,500
Total Current Liabilities: 7,98,750
Net Working Capital: (A – B) 21,21,525
Add: Safety Margin: (21,21,525 X 0.20) 4,24,305
Working Capital Required on Cash Cost basis: 25,45,830

Working Note-1:
Computation of cash cost of sales:

Particulars Amount (Rs)

Sales 81,00,000
Less: Gross Profit Margin: (8,100,000 X 0.25) 20,25,000
Total Manufacturing Costs: 60,75,000
Less: Cost of materials consumed: 20,25,000
Less: Wages 1,620,000 36,45,000
Manufacturing Expenses other than material and wages 24,30,000
Cash Manufacturing Expenses (NRs. 180,000 X 12) 21,60,000
Depreciation (24,30,000 – 21,60,000) 2,70,000
Cash Manufacturing Cost (60,75,000– 270,000) 58,05,000
Add: Administrative expenses 5,40,000
Add: Sales promotion expenses 2,70,000
Cash Cost of Sales (58,05,000+ 5,40,000+2,70,000) 66,15,000

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Working Note-2: Work in Progress:

Raw Materials 20,25,000 x 0.5/12 x 100% 84,375

Wages 16,20,000 x 0.5/12 x 50% 33,750
Cash Manufacturing Expenses 21,60,000 x 0.5/12 x 50% 45,000
WIP on cash cost basis 163,125

Question No-13:
Answer:
1) Working capital investment policy:

A) Statement of Net Working Capital Position

Conservative (Rs) Moderate (Rs) Aggressive (Rs)

Current Assets 1,350 Lakhs 1,170 Lakhs 780 Lakhs
Less: Current Liabilities 702 Lakhs 702 Lakhs 702 Lakhs
Net Working Capital 648 Lakhs 468 Lakhs 78 Lakhs
B) Rate of Return on Total Assets = EBIT/Total Assets

Fixed Assets 780 Lakhs 780 Lakhs 780 Lakhs

Current Assets 1,350 Lakhs 1,170 Lakhs 780 Lakhs
Total Assets 2,130 Lakhs 1,950 Lakhs 1,560 Lakhs
EBIT 369 Lakhs 345 Lakhs 300 Lakhs
ROA= (EBIT/Total Assets) 17.32% 17.69% 19.23%
C) Current Ratio = Current Assets/Current Liabilities

1,350/702 1,170/702 780/702

= 1.92:1 = 1.67:1 = 1.11:1

2) Working Capital Financing Policy:

The moderate working capital investment policy has already been selected, for each financing
policy, data relating to moderate working capital investment policy is used.

A) Statement of Net Working Capital Position

Conservative Matching Aggressive

Current Assets 1,170 Lakhs 1,170 Lakhs 1,170 Lakhs
Less: Current Liabilities
As per WC policy 702 Lakhs 702 Lakhs 702 Lakhs
Short term debt 162 Lakhs 300 Lakhs 450 Lakhs

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Total Current Liabilities 864 Lakhs 1,002 Lakhs 1,152 Lakhs

Net Working Capital 306 Lakhs 168 Lakhs 18 Lakhs
B) Return on Equity = EAE/Equity share capital:

EBIT (Moderate) 345 Lakhs 345 Lakhs 345 Lakhs

Less: Interest (short +
long) Working Note-1 73.20 Lakhs 67.68 Lakhs 61.68 Lakhs
EBT 271.80 Lakhs 277.32 Lakhs 283.32 Lakhs
Less: Tax @ 35% 95.13 Lakhs 97.06 Lakhs 99.16 Lakhs
EAT 176.67 Lakhs 180.26 Lakhs 184.16 Lakhs
Equity share capital 750 Lakhs 750 Lakhs 750 Lakhs
ROE 23.56% 24.03% 24.55%
C) Current Ratio = Current Assets/Current Liabilities

1,170/864 = 1,170/1,002 = 1,170/1,152 =

1.35:1 1.17:1 1.02:1

Working Note: computation of Interest:

Rs. In Lakhs
Working Capital Policies Conservative Matching Aggressive
Long Term Loan 336 198 48
Interest @ 16% (a) 53.76 31.68 7.68
Short Term Loan 162 300 450
Interest @ 12% (b) 19.44 36 54
Total Interest (a + b) 73.20 67.68 61.68

Question No-14:
Answer:
a) Statement showing evaluation of credit policy (if there is not tax):

Particulars Proposed Proposed

Present Policy
Policy-I (Rs Policy-II (Rs
(Rs in lakhs)
in lakhs) in lakhs)
Credit Sales (a) 25.00 15.00 75.00
Less: cost of sales:
Variable costs @ 85% (b) 21.25 12.75 63.75
Fixed costs (W.N-1) (c) 1.25 1.25 1.25
Collection costs (d) 0.30 0.09 1.35
Credit administration costs (e) 0.75 0.15 0.95

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Bad Debts (f) 1.25 0.375 7.50

Expected Profit (a-b-c-d-e-f) 0.20 0.385 0.20
Less: opportunity cost of
1.125 0.35 4.875
investment in receivables (W.N-2)
Net benefit per annum (0.925) 0.035 (4.675)

Recommendation:
The proposed policy-1 should be adopted since the net benefits under this policy is Rs 3,500 but
other policies incur losses.

Working Note-1:
Computation of fixed costs:
Fixed costs = (Average cost per unit – variable cost per unit) x No. of units sold
= [450- (85% of 500) x (25,00,000/500)
= Rs 1,25,000
Working Note-2:
Computation of opportunity cost:
Opportunity cost = Average receivables (at cost) x Required return p.a.
Where, Average Receivables = Cost of Sales x Average collection period /360
(i) For Existing Policy:
Average Receivables
= 22,50,000 x 90/360 = 5,62,500
Opportunity cost = 5,62,500 x 20% = 1,12,500
(ii) For Proposed Policy-I:
Average Receivables
= 14,00,000 x 45/360 = 1,75,000
Opportunity cost = 1,75,000 x 20% = 35,000
(iii)For Proposed Policy-II:
Average Receivables
= 65,00,000 x 135/360 = 24,37,500
Opportunity cost = 24,37,500 x 20% = 4,87,500

b) Statement showing evaluation of credit policy (if there is tax rate of 40% p.a.):

Particulars Present Policy Proposed Proposed

(Rs in lakhs) Policy-I (Rs Policy-II (Rs
in lakhs) in lakhs)
Credit Sales (a) 25.00 15.00 75.00
Less: cost of sales:
Variable costs @ 85% (b) 21.25 12.75 63.75
Fixed costs (W.N-1) (c) 1.25 1.25 1.25
Collection costs (d) 0.30 0.09 1.35

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Credit administration costs (e) 0.75 0.15 0.95

Bad Debts (f) 1.25 0.375 7.50
Expected Profit before tax (a-b-c-d- 0.20 0.385 0.20
e-f)
Less: tax @ 40% 0.08 0.154 0.08
Expected Profit after tax 0.12 0.231 0.12
Less: opportunity cost of 0.675 0.21 2.925
investment in receivables (W.N-3)
Net benefit per annum (0.555) 0.021 (2.805)

Recommendation:
The proposed policy-1 should be adopted even if there is taxation of 40% p.a. since the net
benefits after tax under this policy is Rs 2,100 but other policies incur losses.

Working Note-3:
Required return after tax = Pre-tax return x (1-tax rate) = 20% x 0.6 = 12%
Computation of opportunity cost:
Opportunity cost = Average receivables (at cost) x Required return p.a.
Where, Average Receivables = Cost of Sales x Average collection period /360
(i) For Existing Policy:
Average Receivables
= 22,50,000 x 90/360 = 5,62,500
Opportunity cost = 5,62,500 x 12% = 67,500
(ii) For Proposed Policy-I:
Average Receivables
= 14,00,000 x 45/360 = 1,75,000
Opportunity cost = 1,75,000 x 12% = 21,000
(iii)For Proposed Policy-II:
Average Receivables
= 65,00,000 x 135/360 = 24.37,500
Opportunity cost = 24,37,500 x 12% = 2,92,500

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CHAPTER: Distribution Policy

Question No-15:
Answer:
Case-1: If dividend is declared:

Step -1: Computation of Price at the end of year 1 (P1)

[D1 + P1]
P0 =
(1+ ke)

OR, P1 = P0 x (1+ ke) – D1 = 100 x 1.1 – 5 = Rs 105

Step -2: Computation of retained earnings available for investment purpose:

Number of existing shares = Share capital/ face value per share = 10,00,000/100 = 10,000
Retained Earnings = Total Earnings – Dividend Paid
= 1,00,000 – 10,000 x 5
= Rs 50,000

Step -3: Computation of amount required from fresh issue of shares:

Amount of Fresh issue = Total requirement – retained earnings available
= 2,00,000 – 50,000 = Rs 1,50,000

Step-4: Computation of number of new shares (N1):

= Amount of Fresh issue /P1 = 1,50,000/105

Step -5: Value of Firm (V) = [P1(N + N1) + E1 – I1]/ (1 + Ke)

= [105 (10,000 + 1,50,000/105) + 1,00,000 – 2,00,000]/1.1 = Rs 10,00,000

Case-2: If dividend is not declared:

Step -1: Computation of Price at the end of year 1 (P1)

[D1 + P1]
P0 =
(1+ ke)

OR, P1 = P0 x (1+ ke) – D1 = 100 x 1.1 – 0 = Rs 110

Step -2: Computation of retained earnings available for investment purpose:

Retained Earnings = Total Earnings – Dividend Paid
= 1,00,000 – 10,000 x 0 = Rs 1,00,000

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Step -3: Computation of amount required from fresh issue of shares:

Amount of Fresh issue = Total requirement – retained earnings available
= 2,00,000 – 1,00,000 = Rs 1,00,000

Step-4: Computation of number of new shares (N1):

= Amount of Fresh issue /P1 = 1,00,000/110

Step -5: Value of Firm (V) = [P1(N + N1) + E1 – I1]/ (1 + Ke)

= [110 (10,000 + 1,00,000/110) + 1,00,000 – 2,00,000]/1.1 = Rs 10,00,000

Decision:
The value of firm remains same, i.e., Rs 10,00,000 whether the company pays dividends at year
end or not. Therefore, under M-M Hypothesis, the payment of dividend does not affect the value
of the firm.

CHAPTER: Valuation of Securities:

Question No-16:
Answer:
Net Proceeds from issue of 10% Debentures = Rs 2,85,00,000
Rate of net receipt from Debentures after 5% floatation cost = 95%
So, the face value of 10% Debentures to be issued = Rs 3,00,00,000
Calculation of annual cash flow needed for Debentures settlement

Year Principal Principal Interest @ Net interest Annual cash

OS Installment 10% cost after tax flow (A+B)
(A) @ 30% (B)
1 3,00,00,000 50,00,000 30,00,000 21,00,000 71,00,000
2 2,50,00,000 50,00,000 25,00,000 17,50,000 67,50,000
3 2,00,00,000 50,00,000 20,00,000 14,00,000 64,00,000
4 1,50,00,000 50,00,000 15,00,000 10,50,000 60,50,000
5 1,00,00,000 50,00,000 10,00,000 7,00,000 57,00,000
6 50,00,000 50,00,000 5,00,000 3,50,000 53,50,000
Total 3,00,00,000 3,73,50,000

So, average annual cash needed = 3,73,50,000/ 6 = 62,25,000

And present value annuity factor equivalent for 6 years to recover Rs. 285,00,000 would be
= 2,85,00,000 / 62,25,000= 4.5783

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Looking into PFIFA table for 6 years the factor is lies between 8% and 9%.
So, for calculating IRR by interpolation, the present value calculation is

Year Annual cash PVF @ 8% PV @ 8% PVF @ 9% PV @ 9%

flows
1 71,00,000 0.9259 65,73,890 0.9174 65,13,540
2 67,50,000 0.8573 57,86775 0.8417 56,81,475
3 64,00,000 0.7938 50,80,320 0.7722 49,42,080
4 60,50,000 0.7350 44,46,750 0.7084 42,85,820
5 57,00,000 0.6806 38,79,420 0.6499 37,04,430
6 53,50,000 0.6302 33,71,570 0.5963 31,90,205
Total 3,73,50,000 2,91,38,725 2,83,17,550
Now, by interpolation the rate of return needed is
= 8% + (2,91,38,725 – 2,85,00,000)/ (2,91,38,725 – 2,83,17,550)
= 8% + 6,38,725 / 8,21,175
= 8% + 0.78 = 8.78%
Therefore, Alpha Ltd. needs to earn at least 8.78% per annum continuously from the investment
of net proceeds of Rs. 285 Lakhs received from the 10% Debenture issued in order to smoothly
cover the interest and principal payment needs.
Question No-17:
Answer:
a) The YTM is lower than the coupon rate of 10 percent because the bond sells at premium as
compared to its face value. In other words, the face value of bond is Rs 1,000 with coupon rate
of 10% and if the market price is higher than the face value, YTM must be lower than the
Coupon rate because lower the discount rate, higher the present value and vice-versa.

b) Discount Rate (YTM) can be calculated using the following approximation formula:
Step-1:
Int + (RV – MP)/N 50 + (1000 – 1100)/16
YTM (Appx.) = =
(RV – MP)/N (1000 + 1100)/2

= 4.17%
Where,
RV = Redemption Value
MP = Market Price
N = Number of periods

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Step-2:
PV at 4% = 50 x PVAF (4%, 16 periods) + RV x PVIF (4%, 16th period)
= 50 x11.6523 + 1000 x 0.5339
= Rs 1,116.52
PV at 5% = 50 x PVAF (5%, 16 periods) + RV x PVIF (5%, 16th period)
= 50 x10.8378 + 1000 x 0.4581
= Rs 1,000

Step-3: Semi Annual YTM = 4% + (1,116.52 – 1,100)/ (1,116.52 – 1,000) = 4.14%

c) (i) Nominal annual YTM = (2 × semiannual YTM) = 2 ×4.14 % = 8.28 %

(i) Effective annual YTM = (1 +semiannual YTM)2 −1 = (1 +0.0414)2 −1 = 8.45%

d) Market price of bond after two years, if YTM is 12% (Semi-annual bond)
PV at 6% = 50 x PVAF (6%, 16 periods) + RV x PVIF (6%, 16th period)
= 50 x10.1059 + 1000 x 0.3936
= Rs 898.90
e) If the YTM remain constant at 12% for the 8 years, value of the bond would increase gradually
from Rs. 898.90 to Rs. 1,000 at maturity date.
Question No-18:
Answer:
a) Terminal or horizon value of free cash flow after 3rd year:
The cash flow will grow at a constant rate of 10% after 3rd year, PV future cash flows at the
end of 3rd year can be computed by using growing perpetuity formula as follows:
PV = 3rd year cash flow X (1+ 0.10)/ (0.15 - 0.10)
= 150 X 1.10/0.05 = Rs 3,300 million.

b) Value of firm today (V):

Year Cash Flows (Rs in PVF @ 15% Present Value (Rs in
Million) Million)
1 50 0.870 43.50
2 100 0.756 75.60
3 3,450 0.658 2,270.10
Value of firm today (V): 2,389.20
million

c) Correct value of the company with revised overall cost of capital:

(i) Cost of equity (Ke) = [D1/ P0] + g = [20/200] + 10% = 20%
(ii) Cost of debt (Kd) = 10%

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(iii) Calculation of book value weight in existing situation:

Let X be the weight of debt,
Therefore, 15% = 10% X + 20 % (1-X)
Or, 0.15 = 0.1X + 0.2 – 0.2X
Or, 0.1x = 0.05
Hence, X=0.50, so book value weight of debt was 50% and of equity was 50%

(iv) Now, calculation of cost of capital on the basis of market value:

Correct weight of equity = 3x 50 = 150 (thrice of book value of equity) and
Correct weight of debt = 50 x 9/10 = 45 (nine-tenth of book value of debt)
Overall cost of capital (Ko) = 20% (150/195) + 10% (45/195) = 17.69%
(v) Terminal or horizon value of free cash flow after 3rd year:
= 150 X 1.10/0.0769 = Rs 2,145.64 million.
(vi) Correct value of firm today (V)

Year Cash Flows (Rs in PVF @ 17.69% Present Value (Rs in

Million) Million)
1 50 0.850 42.50

2 100 0.722 72.20

3 2,295.64 0.613 1,407.23

Value of firm today (V): 1,521.93

million

CHAPTER: Risk and Return:

Question No-19:
Answer:
a) Computation of Expected Return of individual security = Sum of (Return x Probability)
For Security Parts Ltd = 12 x 0.2 + 14 x 0.25 + 10 x 0.25 + 18 x 0.3 =13.80 %
For Security Equipment Ltd = 16 x 0.2 + 10 x 0.25 + 18 x 0.25 + 20 x 0.3 = 16.20 %

b) Risk (Standard Deviation of Security) = Sum of (Return – Mean Return)2 x Prob.

For Security Parts Ltd.:

Probability Return (b) Mean Return (c) (Return - Mean [b-c]2 x a

(a) Return) [b-c]
0.20 12 13.80 -1.8 0.648
0.25 14 13.80 0.2 0.010

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0.25 10 13.80 -3.8 3.610

0.30 18 13.80 4.2 5.292
Sum of (Return – Mean Return)2 x Probability 9.56
Risk (Standard Deviation of Security) 3.09%

For Security Equipment Ltd.

Probability (a) Return Mean Return (c) (Return - Mean [b-c]2 x a
(b) Return) [b-c]
0.20 16 16.20 -0.2 0.008
0.25 10 16.20 -6.2 9.610
0.25 18 16.20 1.8 0.810
0.30 20 16.20 3.8 4.332
Sum of (Return – Mean Return)2 x Probability 14.76
Risk (Standard Deviation of Security) 3.84%

c) Computation of Covariance between returns of two securities:

COV (Parts, Equipment) =
Sum of [(Return Parts – Mean Return Parts) x (Return Equipment – Mean Return Equipment)]
x Probability
(Return - Mean Return) of (Return - Mean Return) Probability (c) axbxc
Parts Ltd. (a) of Equipment Ltd. (b)
-1.8 -0.2 0.20 0.072
0.2 -6.2 0.25 -0.31
-3.8 1.8 0.25 -1.71
4.2 3.8 0.30 4.788
COV (Parts, Equipment) 2.84

d) Correlation coefficient between the returns of the two stocks

= COV (Parts, Equipment) / (σ Parts x σ Equipment)
= 2.84 / (3.09 x 3.84) = 0.24

e) Expected Return under different portfolio

Portfolio Return = Return Parts Expected

x Weight Parts + Return
Return Equipment x
Weight Equipment
All funds invested in Parts 13.80 %x 1 + 16.20 %x 0 13.80
%

50% of funds in each of Parts & 13.80 %x 0.50 + 16.20 %x 0.50 15.00%
Equipment

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75% funds in Parts and 25% in 13.80 %x 0.75 + 16.20 %x 0.25 14.40%
Equipment
25% funds in Parts and 75% in 13.80 %x 0.25 + 16.20 %x 0.75 15.60%
Equipment
All funds invested in Equipment 13.80 %x 0 + 16.20 %x 1 16.20
%

f) Risk Factor associated under different portfolio:

S. D. of Portfolio (σP) = (W1σ1)2 + (W2σ2)2 + 2W1σ1W2σ2r1,2

(i) All funds invested in Parts:

Portfolio risk will be equal to Risk of individual security Parts. Therefore Risk = 3.09%

(ii) 50% of funds in each of Parts & Equipment:

Variance:
(3.09% x 0.50)2 + (3.84% x 0.50)2 + 2 (3.09% x 0.50) (3.84% x 0.50) 0.24 = 7.50
Standard Deviation = 2.74%

(iii)75% funds in Parts and 25% in Equipment

Variance:
(3.09% x 0.75)2 + (3.84% x 0.25)2 + 2 (3.09% x 0.75) (3.84% x 0.25) 0.24 = 7.36%
Standard Deviation = 2.71%

(iv) 25% funds in Parts and 75% in Equipment:

Variance:
(3.09% x 0.25)2 + (3.84% x 0.75)2 + 2 (3.09% x 0.25) (3.84% x 0.75) 0.24 = 9.96%
Standard Deviation = 3.16%

(v) All funds invested in Equipment

Portfolio risk will be equal to Risk of individual security Q. Therefore Risk = 3.84%

g) Best portfolio from the point of Risk:

Portfolio of investment of 75% in Parts and 25% in Equipment is best for him from the point
of risk as this portfolio has lowest risk of 2.71%

h) Best portfolio from the point of Return:

Portfolio of investment of 100% in Equipment is best for him from the point of return as this
portfolio has highest return of 16.20%

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CHAPTER: Overview of Capital Markets:

Question No-20:
Answer:
1) Number of units in each scheme:

Particulars MF ‘X’ MF ‘Y’ MF ‘Z’

A) Amount of Investment (Rs) 2,00,000 4,00,000 2,00,000

B) B) NAV at the time of 10.30 10.10 10.00

purchase (Rs)
C) Number of units purchased 19,417.48 39,603.96 20,000
(A/B)

2) Total NAV as on 31.03.2024:

Particulars MF ‘X’ MF ‘Y’ MF ‘Z’

A) Number of units 19,417.48 39,603.96 20,000.00

B) NAV as on 10.25 10.00 10.20

31.03.2024 (Rs)
C) NAV as on 1,99,029.17 3,96,039.60 2,04,000.00
31.03.2024
D) Total NAV as on Rs 7,99,068.77
31.03.2024

3) Total Yield:

Particulars MF ‘X’ MF ‘Y’ MF ‘Z’

A) NAV as on 1,99,029.17 3,96,039.60 2,04,000.00

31.03.2024
B) Amount of 2,00,000 4,00,000 2,00,000
Investment (Rs)
C) Capital gain (Rs) -970.83 -3,960.40 4,000.00

D) Dividend received 6,000.00 0.00 5,000.00

(Rs)
E) Combined return 5,029.17 -3,960.40 9,000.00

F) Yield (%) = E/B 2.5146% -0.9901% 4.5000%

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G) Total return Rs 10,068.77

H) Total Yield (%) 10,068.77 / 8,00,000 = 1.2586%

4) Number of days investment held:

Particulars MF ‘X’ MF ‘Y’ MF ‘Z’

A) Effective yield p.a. as on 9.66 -11.66 24.14

31.03.2024 (%)
B) Yield (%) as above 2.5146% - 4.5000%
0.9901%
C) Period in a year 365 365 365

D) Period of holding [C/A] x B 95 days 31 days 68 days

CHAPTER: Short Notes from Overall Syllabus:

Question No-21:
Answer:

a) Functions of Stock Exchange are as follows:

1) Liquidity and marketability of securities- Investors can sell their securities whenever
they require liquidity.
2) Fair price determination-The exchange assures that no investor will have an
excessive advantage over other market participants
3) Source for long term funds-The Stock Exchange provides companies with the facility
to raise capital for expansion through selling shares to the investing public.
4) Helps in Capital formation- Accumulation of saving and its utilization into
productive use creates helps in capital formation.
5) Creating investment opportunity for small investors- Provides a market for the
trading of securities to individuals seeking to invest their saving or excess funds
through the purchase of securities.
6) Transparency- Investor makes informed and intelligent decision about the particular
stock based on information. Listed companies must disclose information in timely,
complete and accurate manner to the Exchange and the public on a regular basis.

b) Use of Weighted MCC for Decision Making

The Weighted MCC should be used in conjunction with the firm's available investment
opportunities in order to choose investments to be implemented. As long as a project's
internal rate of return is greater than the weighted marginal cost of new financing to be
used to finance the project, the project would be accepted. As a firm increases the amount
of money available for investment, in capital projects, the return on the projects will

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decrease since generally the first project accepted would have the highest return, next
project selected would have second highest return, and so on. On other words, the return
on investment will decrease as the firm accepts additional projects. At the same time, as
more projects are accepted, the weighted marginal cost of capital will increase since
greater amounts of new financing will be required. The firm would therefore accept
projects up to the point where the marginal return on its investment just equals its
weighted marginal cost of capital, since beyond that point, its investment return will be
less than its capital cost.

c) Methods of Venture Capital Financing:

Venture Capital Financing refers to financing of new highly risky ventures, promoted by
qualified entrepreneurs, who lack experience and funds to give shape to their ideas. Under
venture capital financing, venture capitalist make investment to purchase equity or debt
securities from inexperienced entrepreneurs who undertake highly risky ventures with a
potential of success.
Some common methods of venture capital financing are as follows.
1) Equity financing
2) Conditional loan i.e., repayment in the form of royalty at a certain percentage.
3) Combination of conventional and conditional loan i.e., interest on conventional loan
and repayment of conditional loan by way of royalty.
4) Participating debentures in three phases as follows:
a) Initial phase – no interest
b) Next stage – lower rate of interest
c) Final stage – at higher rate of interest

d) Leveraged lease:
Sometimes, a special form of leasing is used in financing assets requiring large capital
outlays. It is known as 'leveraged lease'. In contrast to the two parties involved in other
forms of leasing, there are three parties involved in leveraged lease: (1) the lessee; (2) the
lessor or equity participant; and (3) the lender.
From the standpoint of the lessee, there is no difference between the leveraged lease and
any other types of leases. The lessee contracts to make periodic payment over the basic
lease period and, in return, is entitled to the use of the asset over the over that period of
time. The role of the lessor, however, is changed. The lessor acquires the asset in keeping
with the terms of the lease arrangement and finances the acquisition in part by an equity
investment of, say, 20 percent (hence the name equity participant). The remaining 80
percent is provided by long term lender or lenders. The loan is usually secured by a
mortgage on the asset, as well as by the assignment of the lease and lease payments. The
lessor is the borrower.
As owner of the asset, the lessor is entitled to deduct all depreciation charges associated
with the asset. The cash flow pattern for the lessor typically involves (1) a cash outflow
at the time the asset is acquired, which represents its equity participation, (2) a period of

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cash inflows represented by lease payments and tax benefits, less payments on the debt
and (3) a period of net cash outflows during which, because of declining tax benefits, the
sum of lease payments and tax benefit falls below the debt payment due. If there is any
residual value at the end of the lease period, this of course represents a cash inflow to the
lessor. From the standpoint of the lessor, the reversal of signs of the cash flows from
negative to positive to negative gives rise to the possibility of multiple internal rates of
returns.

Question No-22:
Answer:
a) Leveraged Buyout and Management Buyout:

Leveraged buy-out (LBO) is primarily a debt financed purchase of all the stock or assets of
a company, subsidiary, or division by an investor group. LBO thus represents an ownership
transfer financed primarily with debt capital. The debt in LBO is secured by the assets of the
firm involved.
LBOs are mostly capital-intensive businesses. Sometimes, LBO involves an entire company.
However, most LBOs involve purchase of a division or some sub-unit of a company.
Desirable LBO candidates must possess certain common characteristics. The firm in question
should enjoy a host of opportunities without having a need to make investment in capital
expenditure in foreseeable future. It could be that the firm has recently made heavy investment
in capital expenditures and, as a result, the plant is quite modern. On the contrary, the
companies with the requirements of high research and development costs such as drug and
pharmaceutical companies, are not good candidates for LBOs.

Management buyout (MBO) is a leveraged buyout in which pre-buyout management ends

up taking up with a substantial equity in a particular division of the firm subjected to MBO.
The MBO takes place after the company decides that the division no longer fits in its long-
term objectives.
There are some features which distinguishes LBO from MBO. While LBO is a cash purchase,
MBO is an equity purchase. The business unit in question becomes a privately held company
following an MBO.

b) Bank Overdraft and Clean Overdraft:

Bank Overdraft:
Bank overdraft refers to an arrangement whereby the bank allows the customers to overdraw
from the current deposit account within a specified limit. The overdraft facility is granted
against the securities of assets or personal security as in case of cash credit. Interest is charged
only on the amount actually withdrawn (i.e., debit balance) for the actual period of use (i.e.,
for the period the debit balance in current deposit account remains outstanding). The cost of
raising finance by this method is the interest charged by the bank.

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Clean Overdraft:
Bank may entertain clean advances for those customers, who are financially sound, and
reputed for their integrity. The banks in this case rely upon the personal security of the
borrower. Banks are responsible for ensuring customer’s credit worthiness before providing
them with clean overdraft as there is no assets securing the amount of advance. The banks
normally take guarantee from the persons whom they believe to be credit worthy.

c) Promised yield and Realized yield:

Promised Yield indicates the total rate of return earned on bond if it is held to maturity. It is
also known as Yield-to-Maturity. This is the rate of return anticipated on a bond if held until
the end of its lifetime. YTM is considered a long-term bond yield expressed as an annual rate.
The YTM calculation takes into account the bond’s current market price, par value, coupon
interest rate and time to maturity. It is also assumed that all coupon payments are reinvested
at the same rate as the bond’s current yield. YTM is a complex but accurate calculation of a
bond’s return that helps investors to compare bonds with different maturities and coupons.

Realized Yield is the actual amount of return earned on a security investment over a period
of time. This period of time is typically the holding period which may differ from the expected
yield at maturity. The realized yield also includes the returns that have been earned from
reinvested interest, dividends and other cash distributions.
The realized yield tends to differ from the yield at maturity in scenarios where the holding
period is less the maturity date. In other words, the security is settled or sold prior to the
maturity date given at the time of purchase. For example, suppose an investor purchases a 10-
year bond for Rs. 1,000 that issues a 5% annual coupon. Furthermore, if the investor sells the
bond for Rs. 1,000 at the end of the first year (and after receiving the first coupon payment),
his realized yield would only include the Rs. 50 coupon payment.

d) Operating leverage and financial leverage:

Operating leverage:
Operating leverage occurs when there is fixed operating cost associated with the production
of goods and rendering of services. Fixed operating costs are incurred with an assumption
that sales volume will produce revenues sufficient enough to cover all fixed and variable
operating costs. Fixed operating costs do not vary with the change in the volume. On the
other hand, variable operating costs vary directly with the level of output. Therefore, if
volume is to change, it is the effect of fixed operating costs which causes the profit of a firm
to change. The effect of presence of fixed operating costs (or operating leverage) is that a
change in the volume of sales will bring about more than proportional change in operating
profit (or loss) of the company.

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Financial leverage:
Financing leverage occurs due to the use of fixed financing costs by the firm. It is employed
with a view to increase the return to ordinary shareholders. Favorable leverage occurs when
the firm uses the funds obtained at a fixed cost to earn more than the fixed cost of financing
paid for it. If any profit is left after paying the fixed financing costs, it belongs to the ordinary
shareholders. There is no choice for the management on the operating fixed costs. For
example, a heavy industry requires huge investment resulting in a large operating cost in the
form of depreciation. This cannot be avoided. On the other hand, financial leverage is always
a choice item. Firms need not have financing through long-term debt or preference share.
They have the option to finance their operations and capital expenditures from internal
sources and through the issue of equity shares.

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Section-3: Exam Tips:

Tip-1:

Carefully read and follow the instructions provided in the question paper and decide the priority
of questions for providing your answers. Ensure that your responses meet the specific requirements
of each question.

Tip-2:

First, attempt the questions in which you feel the most confident. Divide your time based on the
marks allocated the questions. If a question carries more marks, spend more time on it
proportionally, but don't get stuck on a single question for too long.

Tip-3:

Avoid double writing, especially on numerical figures.

Tip-4:

Complete the answer for each question and part of the questions consecutively. Never provide
answer in two different places for the same question.

Tip-5:

Provide working notes, as they are a part of the answer. In many cases, certain marks are allocated
for working notes.

Tip-6:

Never use abbreviations or SMS languages except for the ones which are allowed in the subject.

Tip-7:

Start each question at a fresh page.

Tip-8:

In Financial Management, decisions must be provided after calculating the answers. Decisions also
carry some marks.

Tip-9:

If you feel that your answer is wrong, do not cancel it unless you solve it the second time, because,
some part of that answer may be correct and it will provide you some marks.

Tip-10:

If time permits, review your answers before submitting the paper. Check for any errors, missing
points, or areas where you could provide more clarity.

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Paper 5 - Cost and Management

Accounting

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Section 1: Questions
Chapter: Costs Concepts and Costing Methods
Question No.1 (a) Explain:
(i) Discretionary Cost Centre
(ii) Controllable and un-controllable variances:
(iii) Purpose of Time keeping:
(iv) Features of Unit Costing.
(v) Product cost and period cost

Material Control

Question No. 2 (a) Elaborate the treatment of shortages identified in stock taking.

Question No. 2 (b) Given: Purchase of Materials Rs. 6,00,000 (inclusive of Trade Discount Rs.
8,000); Import Duty paid Rs. 45,000; Freight inward Rs. 62,000; Rebates allowed Rs. 10,000;
Cash discount Rs. 3,000; VAT credit Rs. 7,000; Abnormal Loss of Materials Rs. 14,000; Price
variation due to computation of cost under standard rates Rs. 2,500.

Compute the landed cost of material.

Question No. 2 (c) After inviting tenders Birat Company Pvt. Ltd. received two quotations as
follows:
Supplier X – Rs. 2.2 per Unit
Supplier Y – Rs. 2.10 per Unit plus Rs. 4,000 fixed charges irrespective of units ordered.
i. Calculate the order quantity for which the purchase price per unit will be the same.
ii. Considering all factors regarding production requirements and availability of finance, the
purchase officer wants to place an order for 30,000 units. Which supplier should he select?
Question No. 2 (d) Raw materials 'X' costing Rs. 200 per kilogram and 'Y' costing Rs. 120 per
kilogram are mixed in equal proportion for making product 'A'. The loss of materials in processing
works out to 25% of the output. The production expenses are allocated at 50% of direct material
cost.
1
The end product is priced with a margin of 33 % over the total cost. Material Y is not easily
3

available and substitute raw material 'Z' has been found for 'Y' costing Rs. 100 per kilogram. It is
required to keep the proportion of this substitute material in the mixture as low as possible and at

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the same time maintain the selling price of the end product at the existing level and ensure the
same quantum of profit as at present.

You are required to compute what should be the ratio of mix of the raw materials X and Z.

Question No. 2 (e) Following details are related to a manufacturing concern:

Re-order Level 280,000 units
Economic Order Quality 90,000 units
Minimum Stock Level 160,000 units
Maximum Stock Level 300,000 units
Average Lead Time 6 days
Difference between minimum lead time and Maximum lead time 4 days
Calculate:
(i) Maximum consumption per day
(ii) Minimum consumption per day

Chapter: Labour Control

Question No.3 (a) The finishing shop of a company employs 60 direct workers. Each worker is
paid Rs. 400 as wages per week of 40 hours. When necessary, overtime is worked upto a maximum
of 15 hours per week per worker at time rate plus one-half as premium. The current output on an
average is 6 units per man hour which may be regarded as standard output. If bonus scheme is
introduced, it is expected that the output will increase to 8 units per man hour. The workers will,
if necessary, continue to work Overtime up to the specified limit although no premium on
incentives will be paid.

The company is considering introduction of either Halsey Scheme or Rowan Scheme of Wage
Incentive system. The budgeted weekly output is 19,200 units. The selling price is Rs. 11 per unit
and the direct Material Cost is Rs. 8 per unit. The variable overheads amount to Rs. 0.50 per direct
labour hour and the fixed overhead is Rs. 10,000 per week.

Prepare a Statement to show the effect on the Company’s weekly Profit of the proposal to introduce
(a) Halsey Scheme, and (b) Rowan Scheme.

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Chapter: Overhead Control

Question No.4 (a) Consider the following data pertaining to the production of a company for a
particular month:

Opening stock of raw material Rs.11,570

Closing stock of raw material Rs. 10,380
Purchase of raw material during the month Rs.1,28,450
Total manufacturing cost charged to product Rs.3,39,165
Factory overheads are applied at the rate of 45% of direct labour cost.
Calculate the amount of factory overheads applied to production.

Question No.4 (b) Calculate machine hour rate from the following data:

Total machine hours worked p.a. 4,400

Setting up time 400 hours.
Expenses for the machine p.a.
Rent Rs. 12,000; Lighting Rs. 1,200 : Repairs Rs. 2,400 ; Supervision Rs. 4,800. Two attendants
looking after 4 Machines were paid Rs. 120 per month each.
Power consumed by the machine 10 units per hour @ Rs. 40 per 100 units.
Cost of the Machine Rs. 34,400.
Scrap value Rs. 2,400.
Life period 16,000 hours.
Sundry supplies for the machine shop are Rs. 480 p.m. There are four identical machines in the
machine shop. Supervisor is expected to devote his time equally for all the machines.
Chapter: Marginal Costing

Question No.5 (a)Explain relevant cost and relevant revenue

Question No.5 (b)Define sunk cost with example

Question No.5 (c)The following figures are related to BMC Limited for the year ending Ashadh,
2081:

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Sales - 24,000 units @ Rs. 300 per unit;

P/V Ratio 25% and Break-even Point 50% of sales.

You are required to calculate:

(i) Fixed cost for the year

(ii) Profit earned for the year

(iii) Units to be sold to earn a target net profit of Rs. 18,00,000 for a year.

(iv) Number of units to be sold to earn a net income of 25% on cost.

(v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

Chapter: Standard costing

Question No.6 (a) Explain material mix and yield variances.
Question No.6 (b) The Mitho company has established the following standard mix for producing
nine litres of product A:
(Rs.)

five litres of material X at Rs.7 per litre 35

three litres of material Y at Rs.5 per litre 15

two litres of material Z at Rs.2 per litre 4

Rs.54

A standard loss of 10 per cent of input is expected to occur. Actual input was:

(Rs.)
53,000 litres of material X at Rs.7 per litre 371,000
28,000 litres of material Y at Rs.5.30 per litre 148,400
19,000 litres of material Z at Rs.2.20 per litre 41,800
Total Rs.561 200
Actual output for the period was 92,700 litres of product A
Required: Calculate material usage variances.

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Chapter: Cost Accounting System

Question No.7 (a)A purchase of 19,000 kg of raw material A at Rs.11 per kg and 10,100 kg of
raw material B at Rs.14 per kg was made. This gives a total purchase cost of Rs.209 000 for A and
Rs.141,400 for B. The standard prices were Rs.10 per kg for A and Rs. 15 per kg for B. Mention
the accounting entries for materials (if inventory is valued at standard cost).
Chapter: Operating Costing

Question No.8 (a)Metro Hospital has decided to establish a Critical Care Unit in a metro city with
an investment of Rs. 85 lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and
10 more beds, if required, can be added through hire.
Other information for a year are as under:
Building Rent 2,25,000 per month
Manager’s Salary 50,000 per month to each one
(Number of Managers – 03)
Nurses’ Salary 18,000 per month to each Nurse
(Number of Nurses – 24)
Ward boy’s Salary 9,000 per month per person
(Number of ward boys -24)
Doctor’s Payment 5,50,000 per month
(Paid on the basis number of patients attended
and time spent by them)
Food and laundry services (Variable) 39,53,000 per year
Medicines to patients (variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year
Depreciation on equipment’s 15% per annum on original cost
It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were
occupied and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of Rs. 950 per bed to accommodate the flow of patients.
Find out:
i. Contribution per patient day, if hospital charges on an averages Rs. 2,500 per day from each
patient.
ii. Break even point per patient day (Make calculation on annual basis)

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Chapter: Process Costing

Question No.9 (a) A product passes through three processes – A, B and C. 10,000 units at a cost
of Rs. 1.10 per unit were issued to Process A. The other direct expenses were as follows:
Process A Process B Process C

Sundry materials 1,500 1,500 1,500

Direct labour 4,500 8,000 6,500
Other Direct expenses 1,000 1,000 1,503
(a) The scrap of Process A was 5% & in Process B 4% on input.
(b) The scrap of Process A was sold at Rs. 0.25 per unit & that of Process B at Rs. 0.50 per unit
and that of Process C at Rs. 1.00 per unit.
(c) The overhead charges were 160% of direct labour.
(d) The final products were sold at 10 per unit fetching a profit of 20% on sales.
Prepare three process accounts and find out the number of units of scrap in Process C.
Chapter: Job Costing

Question No.10 (a) The cost structure of an article, the selling price of which is Rs. 45,000 is as
follows:
Direct Materials 50%
Direct Labour 20%
Overheads 30%
An increase of 15% in the case of materials and of 25% in the cost of labour is anticipated. These
increased costs in relation to the present selling price would cause a 25% decrease in the amount
of profit per article.
You are required
(i) To prepare a statement of profit per article and profit percentage at present, and
(ii) The revised selling price to produce the same percentage of profit to sales as before
Chapter: Budgetary Control

Question No.11 (a) Distinguish between feedback and feed-forward controls.

Question No.11 (b) Describe zero-based budgeting (ZBB).

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Chapter: Contract Costing

Question No.12 (a)The Superfast Builder Ltd., engaged in contract works, who prepares its
account on 31st December each year has the following Trial Balance for the year end 31st December
2023.
Dr. Cr.
Share Capital shares for Rs. 10 each 38,000
Profit and Loss Account as on 1st Jan, 2023 2, 500
Provision for depreciation on plant and tools 6, 300
Contractee’s account, contract no. 202 128, 000
Creditors 8, 020
Land and Building (at cost) 8, 220
Plant and Tool (at cost) 5, 200
Bank Balance 6, 400
Contract No. 202 :
Material issued 50, 000
Direct Labour 93,000
Expenses 4, 000
Plant and tools at site at cost 16, 000
182, 820 182, 820
Contract no 202 with a contract price of Rs. 240,000 began on 1st Jan. 2023 and Contractee pays
80% of the work completed and certified. The cost of work done since certification is estimated to
be Rs. 1,600.
After the trial balance was extracted on 31st Dec 2023, plant costing Rs. 3,200 was returned to the
stores and materials at site on that date were valued at Rs. 3,000.
Provision is to be made for substandard cost amounting to Rs. 600 incurred on Contract on 202
and for depreciation of all plant and tools @ 12.5% on cost.
Prepare contract no. 202 account showing the computation of profit, if any, for which credit may
be taken in 2023 and prepare the Balance sheet of the construction company on 31st Dec 2023.

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Chapter: Uniform Costing and Inter-firm Comparison

Question No.12 (a) What are the limitations of Uniform costing?

Section 2: Answers
Chapter: Costs concepts and costing methods
Question No. 1
a (i)Answer
The discretionary cost centre is a centre whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined. It is an organizational segment in which a manager is held
responsible for controllable costs when there is not a well-defined relationship between the center's
costs and its services or products. The cost of input is compared with allocated budget for the
activity. Example of discretionary cost centers are Research & Development department,
Advertisement department where output of these department cannot be measured with certainty
and correlated with cost incurred on inputs.
a (ii) Answer
Variances are broadly of two types, namely, controllable and uncontrollable. Controllable
variances are those which can be controlled by the departmental heads whereas uncontrollable
variances are those which are beyond their control. Responsibility centres are answerable for all
adverse variances which are controllable and are appreciated for favourable variances.
Controllability is a subjective matter and varies from situation to situation. If the uncontrollable
variances are of significant nature and are persistent, the standard may need revision.
a (iii) Answer:

Time-keeping will serve the following purposes:

1. Preparation of Pay Rolls in case of time-paid workers.

2. Meeting the statutory requirements.

3. Ensuring discipline in attendance.

4. Recording of each worker’s time ‘in’ and ‘out’ of the factory making distinction between
normal time, overtime, late attendance, early leaving.

5. For overhead distribution when overheads are absorbed on the basis of labour hours.

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a (iv) Answer:
1. It is used where output can be measured in convenient physical unit
2. It is followed in concerns engaged in the production of a single product
3. It is followed in industries where manufacturing process is continuous
4. It is followed where all units of production are identical
a (v) Answer: Product costs are those costs that are identified with goods purchased or produced
for resale. It comprises of direct materials, direct labour and manufacturing overheads in case of
manufacturing concerns. In a manufacturing organization, they are costs that are attached to the
product and that are included in the inventory valuation for finished goods or for partly completed
goods (work in progress), until they are sold; they are then recorded as expenses and matched
against sales for calculating profit.

Period costs are those costs that are not specifically related to manufacturing or purchasing a
product or providing a service that generates revenues. Therefore, they are not included in the
inventory valuation and as a result are treated as expenses in the period in which they are incurred.
Hence no attempt is made to attach period costs to products for inventory valuation purposes. All
non-manufacturing costs such as general and administrative expenses, selling and distribution
expenses are recognized as period costs.
Material Control

Question No. 2 (a)

Answer

At the time of stock taking generally discrepancies are found between physical stock shown in the
bin card and stores ledger. The discrepancies are in the form of shortages or losses. The causes for
these discrepancies may be classified as unavoidable and avoidable.

Losses arising from unavoidable causes should be taken care of by setting up a standard percentage
of loss based on study of the past data. The issue prices may be inflated to cover the standard loss
percentage. Alternatively, issues may be made at the purchase price but the cost of the loss or
shortage may be treated as overheads.

Actual loss should be compared with the standard and excess losses should be analysed to see
whether they are due to normal or abnormal reasons. If they are attributable to normal causes, an

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additional charge to overheads should be made on the basis of the value of material consumed. If
they arise from abnormal causes, they should be charged to the Costing Profit and Loss Account.

Avoidable losses are generally treated as abnormal losses. These losses should be debited to the
Costing Profit and Loss Account.

Losses or surpluses arising from errors in documentation, posting etc. should be corrected through
adjustment entries.

Question No. 2 (b)

Answer.
Computation of Landed Cost of Material
Particulars Amount (Rs.)
Purchase price of Material (Standard Cost) 6,00,000
Add: Import Duties of purchasing the material 45,000
Add: Freight Inward during the procurement of material 62,000
Add: Price Variation due to computation of cost under standard rates 2,500
Total 709,500
Less: Trade Discount (8,000)
Less: Abnormal Loss of materials (14,000)
Less: Rebates (10,000)
Value of Receipt of Material 6,77,500
Note:
(i) Normal loss is not deducted
(ii) Price variation is allowable inclusion as the cost was maintained on standard cost
(iii) Standard Purchase price does not include refundable taxes (such as VAT), hence, the
information of VAT Credit is irrelevant.
(iv) Cash discounts are provided against settlements of transactions rather than purchases, hence,
does not affect the landed cost.
Question No. 2 (c)
Answer
(i) Supplier A= Rs. 2.20 per unit
Supplier B= Rs. 2.10 per unit + Rs 4,000/- fixed charges

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Hence, Difference in Variable Costs Rs. 0.10 per unit

In order to cover the fixed charges of Supplier of B, the order quantity should be 40,000 units (i.e.
4,000/0.10)
At the quantity of 40,000 units the purchase price per unit will be the same in both the cases as
detailed below:
A = Rs. 2.20×40,000 = Rs. 88,000
B = Rs. 2.10×40,000 = Rs. 84,000 + 4,000 = Rs. 88,000
ii. As seen from the above, at the quantity of 40,000 units, purchase cost will be the same in both
cases. If it is for less than 40,000 units Supplier A (with lower variable costs) should be selected.
For an order of 30,000 units:
A = 30,000 × 2.20 = Rs. 66,000
B = (30,000 × 2.10) + Rs. 4,000 = Rs. 67,000
Hence, A should be selected in order to place an order for 30,000 units.
Note: If the order is for more than 40,000 units, Supplier B should be selected, as the fixed charges
of Rs. 4,000 are irrespective of the units ordered.
Question No. 2 (d)

Answer

i. Output quantity of Product A (assumed) 1.00

Process loss: 25% of output 0.25
Input of raw material X and Y (1:1) 1.25
X and Y are mixed in equal proportion for making product A, therefore 0.625 kg (1.25*1/2) of X
and 0.625 kg. of Y will be mixed to produce one kg of product A.

ii. Statement of Cost and Profit for producing one kg. of A:

Rs.
Raw material X (0.625 x Rs.200) 125
Raw material Y (0.625 x Rs. 120) 75
Material cost 200
Add Production Exp. At 50% of material cost 100
Total cost 300
Add Profit at 33.33% over total cost 100
Selling price 400

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iii. Ratio of mix of raw material X and Z:

Minimum quantity of Z is to be mixed so as to maintain the same selling price and same amount
of profit. For this purpose, total material cost in one kg of product A should be the same i.e.
Rs. 200 only. Given cost of Z is Rs. 100 per kg. Suppose quantity of Z raw material is Z.

Z x Rs. 100 + (1.25 – Z)kg x Rs. 200 = Rs. 200

100Z + 250– 200Z = 200
– 100Z =200 – 250
Z = 0.5
X will be 1.25 -0.5 kg i.e. 0.75 kg
Ratio will be 3:2 between X and Z (i.e. 0.75 kg and 0.5 kg). It can be proved as below:

Statement of Cost

Rs.
Raw material X 0.75 kg at Rs. 200 150
Raw material Z 0.50 kg at Rs. 100 50
Total material cost 200
Production expenses: 50% of Material cost 100
Total cost 300
Profit: 33.33% of total cost 100

Selling price 400

Question No. 2 (e)

Answer:
Difference between Minimum lead time Maximum lead time = 4 days
Max. lead time – Min. lead time = 4 days

Or, Max. lead time = Min. lead time + 4 days. ........................................... (i)
Average lead time is given as 6 days
i.e.
Max. lead time + Min. lead time = 6 days. .................................................... (ii)
2

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Putting the value of (i) in (ii),

Max. lead time + Min. lead time = 6 days
2
Or, Min. lead time + 4 days + Min. lead time = 12 days
Or, 2 Min. lead time = 8 days
Or, Minimum lead time = 4 days

Putting this Minimum lead time value in (i), we get

Maximum lead time = 4 days + 4 days = 8 days

(i) Maximum consumption per day:

Re-order level = Max. Re-order period × Maximum Consumption per day
2,80,000 units = 8 days × Maximum Consumption per day

Or, Maximum Consumption per day = 2,80,000 units

8 days

= 35,000 units

(ii) Minimum Consumption per day:

Maximum Stock Level = Re-order level + Re-order Quantity – (Min. lead time × Min.
Consumption per day)

Or, 3,00,000 units = 2,80,000 units + 90,000 units – (4 days × Min. Consumption per day)

Or, 4 days × Min. Consumption per day =3,70,000 units – 300,000 units

Or, Minimum Consumption per day = 70,000 units

4 days
= 17,500 units

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Labour control

Question No.3 (a)

Answer.

Working notes:
1. Total available man hours per week 2,400
(60 workers × 40 hours)
2. Total standard hours required to produce 19,200 units 3,200
(19,200 units/6 units per man hour)
3. Total man hours required after the 2,400
introduction of bonus scheme to produce 19,200 units
(19,200 units / 8 units per man hour)
4. Time saved in hours 800
(3,200 hours – 2,400 hours)

5. Wage rate per hour (Rs) 10

(Rs. 400/40 hours)

6. Bonus:
(a) Halsey Scheme
½ × Time saved × Wage rate per hour
½ x 800 hours x Rs. 10
= Rs. 4,000
(b) Rowan Scheme
= Time saved / Time allowed × Time taken × Wage rate per hour
= 800 hours/ 3,200 hours × 2,400 hours × Rs. 10
= Rs. 6,000

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Statement showing the effect on the Company’s Weekly present profit by the introduction of
Halsey & Rowan schemes
Present Halsey Rowan
Sales revenue: (A) 2,11,200 2,11,200 2,11,200
(19,200 units × Rs. 11)
Total Costs: (B)
Direct material cost 1,53,600 1,53,600 1,53,600
(19,200 units × Rs. 8)
Direct wages
(Refer to working notes 2 & 3)
- (3,200 hrs × Rs.10) 32,000
- (2,400 hrs × Rs. 10) 24,000 24,000
Overtime premium 4,000 - -
(800 hrs.× Rs. 5)
Bonus - 4,000 6,000
(Refer to working notes 6 (a) & (b))
Variable overheads
- (3,200 hrs. × 0.50) 1,600
- (2,400 hrs. × 0.50) 1,200 1,200
Fixed overheads 10,000 10,000 10,000
Total costs: (B) 2,01,200 1,92,800 1,94,800
Profit: {(A)- (B)} 10,000 18,400 16,400

Overhead Control

Question No.4 (a)

Answer.
Raw material used = Op. Stock + Purchases – Cl. Stock
= Rs. 11,570 + Rs. 1,28,450 – Rs. 10,380 = Rs. 1,29,640
Manufacturing cost = Raw material used + Direct labour + Factory overhead
Rs. 3,39,165 = Rs. 1,29,640 + Direct labour + 45% of Direct labour

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1.45 Direct labour = Rs. 2,09,525

Direct labour = Rs. 1,44,500
The amount of factory overhead = 45% of Rs. 1,44,500 = Rs. 65,025.
Question No.4 (b)

Answer:
Computation of Machine hour rate
P.a. per hour
Rs. Rs.
Standing charges
Rent 12,000
Light 1,200
Supervision 4 identical machines equal
time (1/4th × 4800) 1,200
Attendants salary
[2 Attendants × 120 p.m. × 12 months
= 2880 for four machines
For 1 machine 2880 ÷ 4] 720
Sundry supplies for the shop
[480 p.m. × 12 months = 5,760
for four machines
For one machine 5760 ÷4] 1,440
Total 16,560
Hourly rate 16,560 ÷ 4000 4.14
Running charges:
Depreciation = 34,400 – 2,400
16,000 hours (life time) 2.00
Repairs 2,400 ÷ 4,000 0.6
Power 10×(40/100) 4
Machine hour rate 10.74
Effective working Hours p.a. = 4,400 hours p.a. – 400 hours set up time = 4,000 hours

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Marginal Costing

Question No.5 (a)

Answer:

Relevant costs and revenues are those future costs and revenues that will be changed by a decision,
whereas irrelevant costs and revenues are those that will not be affected by the decision. For
example, if you are faced with a choice of making a journey using your own car or by public
transport, the car tax and insurance costs are irrelevant, since they will remain the same whether
or not you use your car for this journey. However, fuel costs for the car will differ depending on
which alternative is chosen and this cost will be relevant for decision-making.

Question No.5 (b)

Answer:

These costs are the cost of resources already acquired where the total will be unaffected by the
choice between various alternatives. They are costs that have been created by a decision made in
the past and that cannot be changed by any decision that will be made now or in the future.

The expenditure of Rs. 5,000 on materials that were purchased but were not used in production is
an example of a sunk cost. Similarly, the written down values of assets previously purchased are
sunk costs. For example, if equipment was purchased four years ago for Rs. 150 000 with an
expected life of five years and nil scrap value, then the written down value will be Rs.30 ,000 if
straight line depreciation is used. This written down value will have to be written off, no matter
what possible alternative future action might be chosen. If the equipment was scrapped, the Rs
30,000 would be written off; if the equipment was used for productive purposes, the 30,000 would
still have to be written off. This cost cannot be changed by any future decision and is therefore
classified as a sunk cost.

Question No.5 (c)

Answer:

Break- even point (in units) is 50% of sales i.e. 12,000 units.

Hence, Break- even point (in sales value) is 12,000 units x Rs. 300 = Rs. 36,00,000

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(i) We know that Break even sales = Fixed Cost

P/V ratio
Or, Rs. 36,00,000 = Fixed Cost
25%

Or, Fixed Cost = Rs. 36,00,000 x 25%

= Rs. 9,00,000

So Fixed Cost for the year is Rs. 9,00,000

(ii) Contribution for the year = (24,000 units × Rs. 300) × 25%

= Rs. 18,00,000

Profit for the year = Contribution – Fixed Cost

= Rs. 18,00,000 - Rs. 9,00,000

= Rs. 9,00,000

(iii) Target net profit is Rs.18,00,000

Hence, Target contribution = Target Profit + Fixed Cost

= Rs.18,00,000 + Rs. 9,00,000

= Rs. 27,00,000

Contribution per unit = 25% of Rs. 300 = Rs. 75 per unit

No. of units = Rs.27,00,000

Rs.75 per unit
= 36,000 unit
So, 36,000 units to be sold to earn a target net profit of Rs. 18,00,000 for a year.
(iv) Net desired total Sales (Number of unit × Selling price) be x then desired profit is 25% on
Cost or 20% on Sales i.e. 0.2 x
Desired Sales = Fixed Cost + Desire Profit
P/V ratio

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x = 9,00,000 + 0.2 x
25%
or, 0.25 x = 9,00,000 + 0.2 x
or, 0.05 x = 9,00,000
or, x = Rs. 1,80,00,000
No. of units to be sold = Rs.1,80,00,000
300
= 60,000 units

(v) If Break- even point is to be brought down by 4,000 units then Break-even point will be
12,000 units – 4,000 units = 8,000 units
Let Selling price be Rs. x and fixed cost and variable cost per unit remain unchanged i.e. Rs.
9,00,000 and Rs. 225 respectively.
Break even point: Sales revenue = Total cost
8,000 x = 8,000 × Rs. 225 + Rs. 9,00,000
Or, 8,000 x = Rs. 18,00,000 + Rs. 9,00,000
Or, x = Rs.27,00,000
8,000
= Rs.337.5
∴ Selling Price should be Rs. 337.5
Hence, selling price per unit shall be Rs. 337.5 if Break-even point is to be brought down by 4,000
units.
Standard costing

Question No.6 (a)

Answer:

In some production processes it is possible to vary the mix of materials used to make the final
product. Any deviations from the standard mix will lead to a materials mix variance. A favourable
mix variance will occur when cheaper materials are substituted for more expensive ones. This may
not always be in the company’s best interest, since product quality may suffer or output may be
reduced, leading to an adverse yield variance.

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Question No.6 (b)

Standard quantity for actual production at standard prices

Actual production of 92,700 litres requires an input of 103,000 litres (92,700 × 10/9), consisting
of:

(Rs)

51,500 litres of X (103, 000 × 5/10) at Rs.7 per litre 360 500

30,900 litres of Y (103, 000 × 3/10) at Rs.5 per litre 154 500

20,600 litres of Z (103, 000 × 2/10) at Rs.2 per litre 41, 200

556 200 (i)

Actual quantity at standard prices (Rs.)

53,000 litres of X at Rs.7 per litre 371,000

28,000 litres of Y at Rs.5 per litre 140,000

19,000 litres of Z at Rs.2 per litre 38,000

549,000 (ii)

Material usage variance (i) − (ii) Rs.7,200 (F)

Cost Accounting System

Question No.7 (a)

Answer:
Material A
Dr Stores ledger control account (AQ ×SP) 190,000
Dr Material price variance account 19,000
Cr Creditors control account (AQ × AP) 209,000
Material B
Dr Stores ledger control account (AQ × SP) 151,500
Cr Material price variance account 10,100

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Cr Creditors control account (AQ × AP) 141,400

Operating Costing

Question No.8 (a)

Answer:
(i) Calculation of Contribution Per Patient day
Total Contribution = Rs. 2,34,34,500
Total Patient days = 14,600
Contribution per Patient day = Rs. 2 34, 34,500/ 14,600
= Rs. 1,605.103
(ii) Break even point
Break even point = Fixed Cost / Contribution per patient day
= Rs. 1,63,51,000/ Rs. 1,605.103
= 10,187 patient days

Working Notes:
1. Calculation of number of patient days:
50 Beds × 200 days = 10,000
30 Beds × 105 days =3,150
20 Beds × 60 days = 1,200
Extra bed = 250
Total =14,600
Statement of Profitability
Particulars (Rs.) (Rs.)

Income for the year (A) 3,65,00,000

(Rs. 2,500 per patient per day × 14,600 Patient days)

Less: Variable Costs

Doctors Fees (Rs. 5,50,000 × 12) 66,00,000

Food to patients ( Variable) and Laundry Services 39,53,000

Medicines to patients (Variable ) 22,75,000

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Bed Hire Charges ( Rs. 950 × 250) 2,37,500

Total Variable Costs B) 1,30,65,500

Contribution (C)=(A) -(B) 2,34,34,500

Less: Fixed Costs

Building Rent (Rs. 2,25,000 × 12) 27,00,000

Manager’s Salary (Rs. 50,000 × 3 × 12) 18,00,000

Nurses’ Salary (Rs. 18,000 × 24 × 12) 51,84,000

Ward boy’s Salary (Rs. 9,000 × 24 × 12) 25,92,000

Administrative Overheads 28,00,000

Depreciation on equipment 12,75,000

(Rs. 85, 00,000 × 15%)

Total fixed Costs (D) 1,63,51,000

Profit (C) - (D) 70,83,500

Process Costing

Question No.9 (a)

Answer:
Process A A/c
Particulars Units Rs. Particulars Units Rs.

To Material 10,000 11,000 By Normal Loss 500 125

(10,000*5% units
@ Rs. 0.25)

To Sundry materials 1,500 By Process B A/c 9,500 25,075

- (b/f)

To Direct labour 4,500

To Direct expenses 1,000

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To Overheads 7,200
(160% of Direct
Labour)

10,000 25,200 10,000 25,200

Process B A/c
Particulars Units Rs. Particulars Units Rs.

To Process A A/c 9,500 25,075 By Normal 380 190

Loss(9,500*4%
units @ Rs. 0.5)

To Sundry materials 1,500 By Process C A/c 9,120 48,185

-

To Direct labour 8,000

To Direct expenses 1,000

To Overheads 12,800

9,500 48,375 9,500 48,375

Process C A/c
Particulars Units Rs. Particulars Units Rs.

To Process B A/c 9,120 48,185 By Normal Loss X X

To Sundry materials 1,500 By Finished Stock (9,120- (68,088 – X)

- A/c X)

To Direct labour 6,500

To Direct expenses 1,503

To Overheads 10,400

9,120 68,088 9,120 68,088

Normal Loss % in Process C was not given so let it be ‘X’. Its sale price is 1 so sale value will be
‘X’. The final products were sold at 10 per unit fetching a profit of 20% on sales.

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Cost + Profit = Sale

80% + 20% = 100%
Cost per unit = 10/0.8 = 8
Value of finished stock = (9,120 – X) × 8 = (68,088 – X)
72,960 – 8x = 68,088 – X
4,872 = 7X
Normal Loss (X)= 696
Now Process C A/c will appear as follows:
Particulars Units Rs. Particulars Units Rs.

To Process B A/c 9,120 48,185 By Normal Loss 696 696

To Sundry materials 1,500 By Finished Stock 8,424 67,392

- A/c

To Direct labour 6,500

To Direct expenses 1,503

To Overheads 10,400

9,120 68,088 9,120 68,088

Job Costing

Question No.10 (a)

Answer.
Working Notes:
1. Let ‘x’ be the total cost and ‘y’ be the profit for an article whose selling price is Rs. 45,000
Hence x + y =Rs. 45,000 ..................... (A)
2. Statement Showing Present and anticipated cost per article:
Item Present Cost (Rs.) Increase (Rs.) Anticipated cost (Rs.)
Direct Material Cost 0.5x 0.075x 0.575x
Direct Labour 0.2x 0.05x 0.25x
Overheads 0.3x -- 0.3x

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x 0.125x 1.125x
3. The increase in the cost of direct material and direct labour has reduced the profit by 25 per
cent (as selling price remained unchanged). The increase in cost and reduction in profit can be
represented by the following relation:
1.125x + 0.75y = Rs. 45,000… ............................. (B)

On solving relations (A) and (B) as obtained under working notes 1 and 3 above we get :
x = Rs. 30,000
y = Rs. 15,000

(i) Present Statement of Profit Per Article

Rs. Rs.
Direct Material Cost 0.5x 15,000
Direct Labour Cost 0.2x 6,000
Overheads 0.3x 9,000
Total Cost 30,000
Profit 15,000
Selling Price 45,000
Note:
Profit as a percentage of Cost Price = (Rs. 15,000/Rs. 30,000) x 100
= 50%
Profit as a percentage of Selling Price = (Rs. 15,000/Rs. 45,000) x 100
= 33-1/3%
(ii) Statement of Revised Selling Price
Rs. Rs.
Direct Material Cost 0.575x 17,250
Direct Labour Cost 0.25x 7,500
Overheads 0.3x 9,000
Total Anticipated Cost 33,750
Profit (33-1/3% of selling price i.e. 50% of Cost Price) 16,875
Revised Selling Price 50,625

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Budgetary Control

Question No.11 (a)

Answer:

Feedback control involves monitoring outputs achieved against desired outputs and taking
whatever corrective action is necessary if a deviation exists. In feed-forward control, instead of
actual outputs being compared against desired outputs, predictions are made of what outputs are
expected to be at some future time. If these expectations differ from what is desired, control actions
are taken that will minimize these differences.

Question No.11 (b)

Answer:

ZBB is a method of budgeting that is mainly used in non-profit organizations but it can also be
applied to discretionary costs and support activities in profit organizations. It seeks to overcome
the deficiencies of incremental budgeting. ZBB works from the premise that projected expenditure
for existing programmes should start from base zero, with each year’s budgets being compiled as
if the programmes were being launched for the first time.

Zero Base Budget is mainly prepared by taking the following steps.

(i) Identification of decision units
(ii) Preparation of decision packages.
(iii) Ranking of decision packages using cost benefit analysis.
(iv) Allotment of available funds according to the priority determined by ranking each decision
package is a self-contained module explaining the need for a certain activity, its costs, its benefits
consequences, if the packages are not accepted etc. The ranking of package based on cost benefit
analysis by the different levels of management starting from the bottom to upward management
ensures allotment of funds to relatively more important and essential activities.

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Contract Costing

Question No.12 (a)

Answer
Contract no. 202 account for the year ended 2023
To material issued 50,000 By plant returned 3,200
To direct labour 93,000 Less: Dep. @ 12.5% 400 2,800
To expenses 4,000 By material at site 3,000
To plant and tools 16,000 By plant at site(WN-1) 11,200
To substandard costs 600 By work in progress
To Notional Profit 15,000 Work certified (WN-3) 160,000
Work uncertified 1,600
178,600 178,600

To P & L A/c(WN-2) 8,000 By Notional Profit 15,000

To work in progress 7,000
Reserve 15, 000 15, 000

Balance sheet as on year ended 2023

Share capital 38,000 Land and Building 8,220
Creditors 8,020 Plant and tools
Profit and loss A\c 2,500 At cost (5,200+3,200) 8,400
Add: profit on the 8,000 At site 12,800
contract
Less: Depreciation (WN-4) 650 9,850
Provision for 600 21,200
substandard costs Less : provision
for dep. 8,950 12,250
Work in progress 154,600
Less : Contractee’s
A/c 26,600

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Material at site 128,000 3,000

Bank Balance 6,400
56, 470 56,470
Working Notes :
1. Plant A/c
Plant sent to site 16,000
Less: Returned to store 3,200
12,800
Less : Dep @ 12.5% 1,600
11,200
2. Profit to be transferred from contract account:
Notional profit ×2/3 ×cash received/ work certified
= 15, 000 ×2/3 × 128, 000/160,000
= 8,000
3. Amounts of work certified = 128, 000 × 100 = 160,000
80
Add: uncertified works 1,600
161,600
Less : Reserve 7,000
Work in progress 154,600

4. Depreciation provision 6, 300

Add: Dep. on plant returned to store 400
Add: Dep. on plant on site 1, 600
Other plants (5,200*12.5%) 650
Total 8, 950

Uniform costing and Inter firm comparison

Question No.12 (a)

Answer: The limitation of uniform costing includes:
1. Difference in Size of the Firm and the Organization Structure

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2. Sometimes it is not possible to adopt uniform standards, methods and procedures of costing in
different firms due to differing circumstances in which they operate. Hence, the adoption of
uniform costing becomes difficult in such firms.

3. Disclosure of cost information and other data is an essential requirement of a uniform costing
system. Many firms do not wish to share such information with their competitors in the same
industry.

4. Small firms in an industry believe that uniform costing system is only meant for big and medium
size firms, because they cannot afford it.

5. It induces monopolistic trend in the business, due to which prices may be increased artificially
and supplies withheld.

6. Difference in Geographical Situation

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Section 3: Exam tips:

Tip 1: Exam Revisions should include mandatory solving of problems and practicing with
previous years question papers.

Tip 2: Familiarize yourself with the entire syllabus and exam pattern. A good strategy to follow is
“Divide and revise”. Divide your subjects into smaller topics and then do your revisions. This will
help you to study without a burden and can make you feel less tense.

Tip 3: For better conceptual clarity, one must first read the theory part and then solve the practical
questions. It would help one to deal with any new type of questions, apart from the ones already
practised.

Tip 4: No matter how much knowledge you have, how much material studied if you can’t manage
time then it’s a total waste. You should never procrastinate and postpone your study/revision
sessions as doing so will only increase your burden and makes everything hectic at the end of the
day.

Tip 5: Attempt easier questions first quickly to save your time for the long and difficult question.
Theory portion should be done first which carries around 22 – 25 marks and save the time for
numerical questions.

Tip 6: Make sure to be both mentally and physically strenuous. Stay positive and be calm and
peaceful. This will boost your confidence and help you score well.

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Paper 6 - Business Communication

& Marketing

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Business Communication

Section 1: Questions:

Chapter 1: Communicating at work

Question No. 1

Listening is one of the most important aspects of effective communication. What are the aspects
of effective listening and how can one enhance the effective listening while communicating at
work?

Question No. 2

Explain “Frame of Reference” and “Distractions” in the context of barriers to communication.

What are the ways of overcoming communication barriers?
Question No. 3

Explain in brief the following:

a) Factors influencing business ethics

b) Improving Communication Skills for Achieving Organizational Goal
Chapter 2: Working in groups

Question No. 4

Working in a group can help you create more effective solutions to problems. Explain how the
group goals are set and what are the roles of individuals in a group to achieve the goals.
Question No. 5

Do you agree that minuting is one of the important method of official written communication?
Explain your reasons. What are the things to be considered while preparing the meeting minutes?

Chapter 3: Communicating across culture

Question No. 6

Why it is important to move beyond stereotypes while communicating across culture? What are
the effective ways of removing barriers to communication in this context?

Question No. 7

Write short note on Use of Graphics in Non-Verbal Communication

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Chapter 4: Employees communication

Question No. 8

Your friend is preparing for a job interview for a position in a commercial bank. Suggest her the
important points to be considered while interviewing for employment.
Question No. 9

What is a cover letter?

Chapter 5: Analysing information and writing reports and proposal

Question No. 10

Write short notes on:

a. Executive Summary
b. Business Proposals

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Section 2: Answers:

Answer to Question No. 1:

Listening is one of the most important aspects of effective communication. Successful listening
means not just understanding the words or the information being communicated, but also
understanding how the speaker feels about what they’re communicating.

Effective listening can:

Make the speaker feel heard and understood, which can help build a stronger, deeper
connection between you.

Create an environment where everyone feels safe to express ideas, opinions, and feelings, or
plan and problem solve in creative ways.

Save time by helping clarify information, avoid conflicts and misunderstandings.

Relieve negative emotions. When emotions are running high, if the speaker feels that he or she
has been truly heard, it can help to calm them down, relieve negative feelings, and allow for real
understanding or problem solving to begin.

Tips for effective listening

Focus fully on the speaker, his or her body language, and other nonverbal cues. If you’re
daydreaming, checking text messages, or doodling, you’re almost certain to miss nonverbal cues
in the conversation. If you find it hard to concentrate on some speakers, try repeating their words
over in your head—it’ll reinforce their message and help you stay focused.

Avoid interrupting or trying to redirect the conversation to your concerns, by saying something
like, “If you think that’s bad, let me tell you what happened to me.” Listening is not the same as
waiting for your turn to talk. You can’t concentrate on what someone’s saying if you’re forming
what you’re going to say next. Often, the speaker can read your facial expressions and know that
your mind’s elsewhere.

Avoid seeming judgmental. In order to communicate effectively with someone, you don’t have
to like them or agree with their ideas, values, or opinions. However, you do need to set aside your
judgment and withhold blame and criticism in order to fully understand a person. The most difficult
communication, when successfully executed, can lead to the most unlikely and profound
connection with someone.

Show your interest in what’s being said. Nod occasionally, smile at the person, and make sure
your posture is open and inviting. Encourage the speaker to continue with small verbal comments
like “yes” or “uh huh.”

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Answer to Question No. 2:

Frame of Reference
Another barrier to clear communication is your frame of reference. Everything you see and feel in
the world is translated through your individual frame of reference. Your unique frame is formed
by a combination of your experiences, education, culture, expectations, personality, and other
elements. As a result, you bring your own biases and expectations to any communication situation.
Because your frame of reference is different from everyone else’s, you will never see things exactly
as others do. American managers eager to reach an agreement with a Chinese parts supplier, for
example, were disappointed with the slow negotiations process. The Chinese managers, on the
other hand, were pleased that so much time had been taken to build personal relationships with the
American managers. Wise business communicators strive to prevent miscommunication by being
alert to both their own frames of reference and those of others.

Distractions. Other barriers include emotional interference, physical distractions, and digital
interruptions. Shaping an intelligent message is difficult when one is feeling joy, fear, resentment,
hostility, sadness, or some other strong emotion. To reduce the influence of emotions on
communication, both senders and receivers should focus on the content of the message and try to
remain objective. Physical distractions such as faulty acoustics, noisy surroundings, or a poor cell
phone connection can disrupt oral communication. Similarly, sloppy appearance, poor printing,
careless formatting, and typographical or spelling errors can disrupt written messages. What’s
more, technology doesn’t seem to be helping. Knowledge workers are increasingly distracted by
multitasking, digital and information overload, conflicting demands, and being constantly
available digitally. Clear communication requires focusing on what is important and shutting out
interruptions.
Ways of Overcoming Communication Barriers

Interpersonal barriers are not such that defy solutions. Some of the suggestions for overcoming
communication barriers are:
i) Using familiar words and terms: Start with the familiar words to introduce a
new idea. As inception of a new idea causes resistance, the safest way to
discuss and accept any new information is to begin with what is known. Start
from what it is to what it could be
ii) Understanding traits of cross-cultural communication traits
iii) Understanding perceptions and conceptions of others
iv) Using listener-oriented viewpoints
v) Avoidance of grapevine and rumor mills
vi Avoidance of ambiguous words, jargons, slangs and semantic words
Language Use: Choice of appropriate words for effective communication. Short words and
sweet and meaningful sentences take the listeners to a world of good understanding.

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Answer to Question No. 3:

Factors Influencing Business Ethics/Sources of Ethics

(a) The legal system: Laws are generally passed when people have low ethical standards and they
avoid social responsibilities. For example, in many families, sons do not take care of their
parents in their old age. As a result, the government of Maharastra was at one time proposing
a law to bind sons to look after their aged parents.
(b) Government rules and regulation: Government regulations regarding industrial working
condition, product safety, etc. are backed by the legal system. From these, business houses can
derive their own ethical standards and practices.
(c) Codes of conduct of companies: Many companies have their systematic ethical code of
conduct. The manager’s and employee’s conduct has to be according to it.
(d) Society’s expectation: Looking at the power and financial well-being of companies, society
expects companies to take up social causes. For example, it is forcefully being proposed that
private companies should reserve a certain percentage of jobs for backward classes.
(e) Religious Morality: Most people are sometime or other God-fearing and tend to conform to
religious doctrines in their moral life. For example, religion says, “Do not steal.’’ This may
prevent an employee from pilfering office property for personal use. The golden rule of
conduct is “Do unto others as you would have them do unto you.’’
(f) Genetic inheritance: The qualities of goodness are in the genes. Some people are born saints
and some are born rouges. This directly affects the ethical conduct and behavior.
Improving Communication Skills for Achieving Organizational Goal
It has been argued that communication effectiveness is the backbone of organizational
effectiveness. It is the concern of every organization to strengthen its communication skills to
the best possible extent. Some of the simple ways of improving communication skills are as
follows:
(a) Understand the purpose of your communication,
(b) See if your purpose has been achieved or not,
(c) The purpose, if not achieved, know the flaws in our communication system, process and
personal ways of communicating things,
(d) Remove barriers (physical and metal) impacting your communication,
(e) Make effective use of the available communication tools & materials best suited to the
situation,
(f) Identify various factors impacting effective communication in your organization,
(g) Discuss your communication problems among your office staff members and work out
solutions to the problems collectively,
(h) Always try to understand the people you communicate with
(i) Communicate the right message to the concerned authorities with appropriate suggestions

Answer to Question No. 4:

Determining Group Goals

Every group is formed by setting certain goals. This starts with an initiative usually taken by a
team of two or more persons- intellectuals, professionals, experts, technical-minded people and
the like, who gather with a thought of initiating some entrepreneurial or enterprising work or with

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a thought of achieving some common goals In business communication context, such a gathering
of elites interact on what to do, how to do and where to do. Interactions and discussions consume
a considerable amount of time. The relationship and interactions between members of a group is
known as “Group Discussion”. Interaction among members is the core group of Group Dynamics.
Interactions involve creative thinking on doing certain things creatively. At the goal setting stage,
members, based on the ideas they have in mind, shower a number of group goals, which are filtered
into tangible, workable and achievable sets of actions to be undertaken.
Mere flow of ideas in the interaction would not determine group goals. A strong personality from
among the group members, considerate and insightful enough to perceive and preview the future
working of the group, intervenes in deciding group goals. Some confuse goals with objectives.
Setting of group goals is the most important function, next to the formation of the group. Setting
objectives is the third important function. Some groups have general as well as specific objectives
to follow. Plans and programs to be followed as per group goals occupy the fourth place in the role
of functions.
Individual Roles in Group:
Individuals as group members are the crew members of a team for piloting the group work. To this
end, they should acquire the following qualities and bear responsibilities towards achieving group
goals. The following are some of the major individual roles of group members.
a. Complying with group principles, strategies and limitations,
b. Working in a group spirit,
c. Avoidance of stereotyped perceptions & thoughts,
d. Avoidance of biased and skeptic attitudes towards fellow-members and group
performance,
e. Active participation in group programs.
f. Generate a sense of liberal and generous attitude.
g. Abide by the principles of corporate culture.
h. Keep group interests above individual interests.
i. Be able to address and manage a conflict which helps to retain group structure for a long
time.
Answer to Question No. 5:

Minuting. It is the most important activity of conducting meetings. Unless decisions taken in the
meeting are minuted, the meeting will not bear any meaning at all. The last important activity
after agenda setting, notification and meeting conducting is intuiting. Things written in the minutes
will be a record of organizational achievements.
Minuting is noting down of the resolutions adopted in the meeting. Decisions taken in the meeting
are noted down in the Minute-book and duly signed by the Chairperson and all the members.
Minute is the legal and authentic record of any meeting. It is, in other words, documents recoded
during the procedures of the meeting. The minutes are clearly written and documented for future
reference. Minute-writing includes: (i) preliminary data, (ii) the body (discussion, decision taken),
(iii) Getting signature for ensuring authenticity of matters discussed and decision contents.

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A well-documented minute is preserved as a valuable testimony of organizational achievements.

Minutes serve as a reference as well as guidelines for determining future course of organizational
development.
Usually, minute-writing is done by member-secretary of the executive board or the person
appointed by the Chairperson.
Following are the crucial areas to be considered while preparing meeting minutes:
Prepare for the meeting: Collaborate with the meeting leader to ensure the agenda is well-
planned and productive. Try obtaining a copy of the meeting agenda to help develop an outline
and structure your minutes. The outline should leave ample space to write a brief explanation for
each action or motion and the time each action was taken.
Review the meeting agenda: Organize your notes by writing the agenda item each minute
corresponds to. This makes it clear what each minute is about and eliminates the guesswork.
Agendas also provide key details that need to be included in minutes, such as names of meeting
attendees and guest speakers.
Mark attendance: As meeting participants walk in, you can cross them off of your attendee list
if you're familiar with them. If you're not, you can either pass around a sign-in sheet or begin the
meeting with quick introductions. This makes it easier to identify people who could not attend the
meeting.
Focus on the most critical aspects of the meeting: Concentrating on minutiae will lead you to
miss the larger context. Instead, convey objectively what attendees discussed and the outcomes of
those discussions, including how board members voted on various resolutions.
Ask for clarification: Speak up if you need clarity on outcomes, particularly if a clear decision
wasn't made or if the next steps weren't obvious. Remember: record notes for each decision or
action as it occurs.
Immediately write the final version: A common misconception is that what you record during
the meeting is final. The reality is that you can take time after the meeting adjourns to finalize your
notes. Review your notes to ensure they’re genuinely effective meeting minutes, and if needed,
add notes for clarity or ask the meeting leader to explain specific details further. Ensure that each
action taken by the board has a brief explanation and a rationale for the decision.
Organize supplemental materials: If other documents were included in the meeting, make a note
of where they can be found or attach them as an appendix, but don't summarize them.
Distribute the minutes: Securely send the meeting minutes to the board for review before
finalizing. The minutes can be distributed via email using a password-protected PDF or a
collaborative board portal, which is the most efficient and secure option. You should also store a
hard copy for future reference.
Store the minutes: Be sure to back them up to an external hard drive as an extra precaution unless
you're using a service that includes good co-location and disaster recovery services. Many minutes
contain sensitive information, so it's critical to store them in a secure location that is password-
protected and only accessible to approved meeting members.
Answer to Question No. 6:

It is an evident aspect that communicating across cultures is associated with problems and barriers
to communication. The first big problem getting in mind is the language itself; because two
communication partners must own one language which both of them are able to speak. But it’s not
possible that everywhere we get our comfortable language. Aside from this, persons from different

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countries have also a different cultural background. So they have different values, beliefs and
ideologies. Those differences can cause misunderstandings and lead to stereotypes.
Stereotyping – The most significant barrier to effective cross-cultural communication is the
tendency to categorise and make assumptions about others based on identified characteristics such
as gender, race, ethnicity, age, religion, nationality socio-economic status examples as job
interviews, teachers, store owners… More subtle examples include shying away from people who
are culturally different or assuming people will behave a certain way based on their race gender,
place of origin or position within an organisation. We stereotype because of our tendency to
categorise everything and everyone around us, so we can interact with the world more efficiently.
Following unconscious human actions may lead to the creation of stereotypes:
A. Formation of “US” and “THEM” Groups
The step in the development of stereotypes is the categorisation of people in to two groups: “us”
(in-group) and “them” (out-group). This happens all the time, and we often don’t realise it. The
groups are formed along a wide variety of diversity dimensions such as race/ethnicity, gender, age,
nationality, religion, geographic location, family status, socioeconomic status, sexual orientation
and physical characteristics.
B. Preference for the In-group
The second step consists of the natural tendency to prefer the group of which one is a member (in-
group). It makes sense that we would come to prefer the group that we are constantly a part of.
These bonds are usually drawn based on geography and the community.
C. Illusion of Out-group Homogeneity
The third step is where actual stereotyping takes place. Simply stated, we tend to perceive members
of out-group to be more like one another than members of our in-group. This is probably because
we have the opportunity to directly experience the diversity within the in-group while we have
limited experience interacting with members of the out-group.
In order to effectively overcome all the barriers which lead to failure in cross cultural
communication, the following factors should be critically considered:
Observation: It is always best to observe the behaviors of the group and follow their lead. This
observation may help in understanding the two; High- and Low-Context Cultures: Communication
in high-context cultures depends heavily on the context, or nonverbal aspects of communication;
low-context cultures depend more on verbally expressed communication. A highly literate, well-
read culture is considered a low-context culture, as it relies heavily on information communicated
explicitly by words. Thus it can reduce the possibility of miscommunication.
Interpreters: Get to know the interpreter in advance. Your phrasing, accent, pace, and idioms are
important to a good interpreter. Review technical terms in advance, because the good interpretation
will result into positive feedback from the receiver. Ensure a shared understanding of terms in
particular and your message in general before you speak. Speak slowly and clearly. Try to phrase
your thoughts into single ideas of two sentences; work this out with the interpreter in advance. Be
careful with numbers. Write out important numbers to ensure understanding.
Nonverbal Communication: In low-context cultures, such as in academic communities,
communication is mostly verbal and written. Very little information in this culture is
communicated nonverbally. In high-context cultures, much of the communication process occurs
nonverbally and nonverbal communication involves body language and signs, which may be
different in different cultures. Body language, status, tonality, relationships, the use of silence, and

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other factors communicate meaning. Many cultures determine the seriousness of your message by
your actions and emotions during your delivery. There still more about body gestures.
Verbal Communication: Avoid use of technical phrases, jargon (words that are commonly
understood), and acronyms (it is not much serious if the acronyms are broadly used or commonly
known for example, UN is mostly understood as the United Nations). The belief should be left at
the time of communication that what u know necessarily may not be understand in the same way
as u can. So explain the meaning of technical language and acronyms throughout your conversation
or presentation. Pause between sentences and ask some questions to ensure listeners understand
you. The questions may include, ‘Do you have any questions so far’? Do not wait until the end of
your presentation. Do not be afraid to use facial expressions, body language and other signs of
emotion to enhance your message.
Emotional Responses: Emotional responses will vary among different cultures. As many times
expression can reveal those feeling which words cannot. While some cultures will not react
emotionally to your messages, others will. Do not become concerned whether there are emotional
outbursts during your conversation. Be prepared to compassionately acknowledge the emotional
impact that your message may have on your listeners.
Answer to Question No. 7:

Graphics are visual presentations on some surface, such as a wall, canvas, computer screen, paper,
or stone to brand, inform, illustrate, or entertain. Examples are photographs, drawings, line art,
graphs, diagrams, typography, numbers, symbols, geometric designs, maps, engineering drawings,
or other images. Graphics often combine text, illustration, and color. Graphic design may consist
of the deliberate selection, creation, or arrangement of typography alone, as in a brochure, flier,
poster, web site, or book without any other element.
Widespread Use of Graphics In the present-day world of visual presentation, graphics plays a
significant role. Impressive visual advertisements of products and information about happenings
and events are unthinkable without use of some kind of graphics. We cannot escape viewing the
work of graphic designers in posture advertisement in the street and various product graphics,
information graphics; media print graphics and animated graphics moving across the screen.
Things we see all around us project the magical values of graphics.
Objectives of using audio-visual aids in business communication are:
a. to make people look, read and understand.
b. to concretize the verbal message that is culturally suited, highly restive and readable to the
target mass
c. to support graphic assignment of verbal information by using quantitative or numerical
information, explanation and description,
d. to simplify the change of the complicated description into different flow charts, diagram so
that reader can easily understand the complicated description
e. to emphasize the important points by illustrating them with line-bar, pie charts and important
points
f. to enhance technical capability and efficiency on the part of source.
g. to summarize briefly all the information by making table or chart.
h. to attract and impress the audience in different colors, pictures in the material use of images
i. to use graphics to support and strengthen AIDA strategy

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Answer to Question No. 8:

Interviewing for Employment

Interview Facing: Employment interview is crucial for both the interviewer and the interviewee.
Facing an interview and satisfying the interviewer is an art, skill and a presence of mind of the
interviewee. Getting a job in these days of cut-throat competition has become much more
challenging than even before. A job-hunting prospective candidate should first be qualified and
competent and has to keep himself at a competitive edge to get a good job. The purpose of writing
effective resume and letter of application in a bid to get the job is to be short-listed for an interview.
To draw an analogy, writing a resume and a letter of application is just like you're knocking at the
door for someone to open it for you. The entry into the room will be followed by an interview.
Your winning a job depends upon how you can impress the interviewer/s. Only an effective
interview will help you win the job. Your prompt response to the questions asked will be a plus
point in impressing the interviewer/s.
• Stages of Interview Most interviews are conducted in three stages:
a. the warming-up stage (getting into the interview situation with a good appearance),
b. the question answer, the largest stage in which you will be preoccupied with prompt answers
asked by the interviewers), and
c. the summing-up stage, in which the interviewers frame some idea about who should be selected.

Interview Considerations for the Interviewee: The following are some of the job interview
considerations. They mention what an average interviewee needs to do at the time of attending an
interviewee.
Appearing with a good appearance: This means presenting yourself with a good image to give an
impression to the interviewers.
Dress- up for impression: Some countries and cultures place emphasis on dress and personal
grooming, contrary to the culture of expectations of personal appearance. This does not mean
wearing highly fashionable and stylish clothes. The point of argument is that the interviewing
board expects an interviewee to dress tidy and look neat and clean. Remember that no one will
like to see you in a shabbily dressed shape.
Punctuality: Better, for many reasons, to arrive at the interview some twenty to thirty minutes
before the appointed time. Knowingly or unknowingly, your time may be consumed in parking
your vehicle, or in hair brushing or in straightening your neck tie. It is therefore, necessary to
consider the time factor.
Avoiding chewing gum or paan (beetle leaf), smoking, and drinking coffee, because they make
your gum sticky. The chewing gum could distort one’s speech; smoking could be rude, and drinks-
tea or coffee might make your mouth sticky affecting your articulation.
Being mindful of the body language: Be straight, look responsive, and be concerned with the
interviewer. Look at the interviewer’s eyes expecting his gesture to make you sit down, or do
something else.
Moving with self-confidence: Self-confidence is the interviewee’s strength, which should be
maintained throughout the interview. This helps the interviewee keep himself self-possessed, not
being nervous and not monopolizing the interview once one question has been answered
satisfactorily.

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Coming well-prepared with necessary documents: Bring necessary testimonials, letters of

achievements, and letters of recommendations and if any.
Controlling over speaking: Speak slowly and politely, not arrogantly. Have self control; do not
speak over-confidently.
Watching the body language: Sitting straight, looking at the interviewer, being alert and responsive
is necessary.
Following are the basic values to be considered by candidate in prior to attending the interview.
a) Punctuality and time management
b) Formality and politeness
c) Dress code and get up
d) Appropriate use of body language
- Eye contact
- Facial complexion
- Movement of body
- Sitting position
- Presence of mind
e) Paralinguistic skills
- Clarity of sound
- Volume variation
- Maintain speaking speed
- Economize the use of non-fluencies
- Maintain the pause(sound)interval

Answer to Question No. 9:

A cover letter is a formal one-page document accompanying a job application that introduces
yourself to a potential employer, highlights your relevant qualifications and experiences, explains
why you are interested in the position and the company and aims to persuade the employer to invite
you for an interview. It serves as a personalized introduction, complementing your resume by
providing context and showcasing your motivation and suitability for the role.

A cover letter accompanies your CV as part of most job applications. It provides the hiring
manager with further detail on how your skill set aligns with the role, what you can bring to the
team and why you want the position. Cover letters also allow the recruiter and hiring manager to
develop a better understanding of your suitability for a position.

Your cover letter will often make the first impression in the mind of a hiring manager, making it
an essential part of your application. In addition to this, employers tend to favor CVs that are
accompanied by a cover letter and will often specifically request one as a mandatory requirement
to apply for their vacancies. Within the cover letter, you should align your qualifications, relevant
skills and previous experience clearly to the job description to emphasize that you have done your
research into the role and are keen to join the team.

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A cover letter should accomplish the following:

• Introduce yourself to the hiring managers.

• Provide details about your qualifications.
• Tell employers why you want to work for them.
• Highlight your transferable skills, achievements, and versatility
• Illustrate why you’re the best match for the job.
• Explain circumstances like job hopping or gaps in employment.
• End by politely expressing interest in further dialogue

Answer to Question No. 10:

Executive Summary

An executive summary is the first section of a business plan or proposal that provides a brief
overview of the document and contains its main points. In other words, it is a condensed version
of a complete business plan or proposal. It is primarily used in the business world, but its
application in academia is also possible.

Generally, an executive summary is relatively short, with an average length of one to four pages.
It should be written in short paragraphs, using clear and concise language appropriate for the target
audience. One should know well the target audience of the document to convey the message as
clearly as possible. In addition, the summary must have a similar structure and flow as the main
document.

The executive summary must not be confused with an abstract of the document. The abstract is a
complementary overview of a larger document that does not provide much value to the reader by
itself. On the other hand, the executive summary is a shorter version of the main document and
can be read separately because it provides all the key points of the document.

Despite the fact that the components of the executive summary may vary depending on the
specifics of the main document, some major parts are still presented in the majority of the
summaries. The key components typically include:

• Overview of a company/business
• Identification of a main problem or proposition
• Analysis of a problem or proposition, with supporting facts, data, and figures
• Possible solutions and their justifications
• Clearly defined conclusions

The primary goals of the executive summary are to provide a condensed version of the main
document, such as a business plan, and to grab the attention of the reader(s). Since the readers of
the business plans and reports (investors, lenders, and executives) generally do not have time to
read all the lengthy documents they receive, a well-written summary can help you to grab their
attention and subsequently achieve your business goals.

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As the executive summary is the initial representation of the complete document, it should cover
the main parts of a plan or proposal and indicate the points that are elaborated on in the final
document.

Business Proposal:
A proposal is an exploration of innovative ideas, concepts as well as techniques for the successful
operation of business. At the mean time it Is a persuasive offer to supply services or products to
the needy customers, clients and last of all the entire corporate fraternity. In this regard a proposal
is formal networking of business to ensure mutual benefits and financial prosperity.
A business proposal is a document you send to potential customers to persuade them to do business
with you. Business proposals are a common and effective way to win business. Research your
potential customer before writing a business proposal; customize your proposal to address their
needs. Your tone should appeal to your potential customer while aligning with your brand’s
personality. In general, you should strive to be clear and courteous. Your proposal should be long
enough to convey why your potential customer should do business with you, but it should not be
unnecessarily long or contain irrelevant details.

Problem Statement
Show your potential customer that you understand the problem they are facing. You should know
all about the problem from your extensive research. Use facts and emotional appeals to craft a
persuasive argument that their problem needs to be solved. Be detailed, but only include directly
relevant information.

Proposed Solution
This will likely be the longest part of your business proposal. You want to convince your potential
customer that you have the best solution to their problem. Describe your solution, how it will
benefit your potential customer, and how you will implement it. Address any concerns your
potential customer may have. Explain the details of your proposed solution clearly and accurately.
Do not shy away from including technical information, as your target audience now includes
technical evaluators and specialists who do not require the simplified language you used in your
executive summary.

Qualifications
You must convince your potential customer that you are able to solve their problem. Establish the
credentials of your company. Inform your potential customer about your relevant expertise and
accomplishments. Consider using testimonials from previous customers and case studies
demonstrating your success.

Timeline
Include a timeline so that your potential customer knows how long it will take you to implement
your proposed solution. Be as specific and realistic as possible. Consider using graphics to display
your timeline.

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Pricing
Include a realistic and detailed breakdown of costs. Make sure that your pricing structure is clear,
so your potential customer knows what they are paying for. Use tables and graphs to display your
pricing data. Consider including an analysis that shows the return on investment your potential
customer can expect.

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Marketing

Section 1: Questions

Chapter 1: Meaning of marketing and marketing mix

Question No. 1

Explain 4Ps of marketing.

Chapter 2: Evolution of marketing concepts

Question No. 2

Discuss the limits and opportunities of social marketing.

Chapter 3: Environmental concepts of marketing

Question No. 3

What are economic policies and why do they matter for marketing strategies?

Chapter 4: Marketing segmentation and targeting

Question No. 4

You are going to segment the market for your newly introduced noodles named “Mitho” in Nepal.
What demographic variables do you consider? and why?

Chapter 5: Marketing information systems

Question No. 5
Discuss in detail about 'Marketing Intelligence'
Chapter 6: Buyer behaviour analysis
Question No. 6
Differences between Consumer and Organizational Buying

Chapter 7: Product decision

Question No. 7
What are the Marketing Considerations for industrial products?
Chapter 8: Price decision
Question No. 8
How can businesses benefit from Psychological Pricing Strategy? What are the possible
disadvantages of this strategy?
Chapter 9: Place decision
Question No. 9
Explain the importance of transportation & logistics in product distribution.

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Chapter 10: Promotion decision

Question No. 10
What do you understand about Push and Pull Promotion strategies in marketing?

Chapter 11: Emerging concepts in marketing

Question No. 11
How do you see influencer marketing as emerging concept in marketing?

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Section 2: Answers:

Answer to Question No. 1:

The 4Ps of marketing can be summed up as putting the right product in the right place at
the right time and at a fair price.

1. Product (or Service)

The first of the 4Ps refers to the product (or service), which is at the heart of the marketing strategy.
From a modern marketing point of view, it is preferable to define the product based on the needs
and motivations of the client and the benefits the product brings them, rather than its characteristics
or features.
Within this P, you should define the products your brand has to offer, what their life cycles are
and how they can be differentiated from the competition’s products. The image, the branding,
the packaging, and the post-sale services also come into play here.
Questions to Ask About a Product or Service
• What do the consumers of my product/service want?
• What are the benefits it offers?
• What needs does it satisfy?
• Are there other ways to satisfy the same needs? If so, what advantages and
disadvantages does mine have in comparison?
• What are the characteristics of the product/service? Is there anything missing that
could make it better? Am I including anything that is costly but does not add enough
value?
• How and where is my product going to be used? Are there different usage scenarios?
• What does it look like? Are there different sizes, colors, etc.?
• How does it complement other products or services, either from my company or
others?
• What must the consumer’s experience be like when using it?
• What is it called?
• What differentiates it from the competition?
2. Place
The second of the 4Ps is all about defining and managing the channels through which a
product reaches consumers. The strategic sales points can range from e-commerce to a
regional store, to a chain with physical stores in several countries.
The goal of the distribution strategy is to both make it easy for consumers to access to the
product optimize the sales process by providing a smooth shopping experience. To do this, it's
important to consider decisions relating to storage, inventory management, transportation, sales
point locations, online and offline requests, etc.

Questions About Sales and Distribution

• Where do clients get my product/service? Specialized stores? supermarkets? online?
• How can I access the appropriate distribution channels?
• Do I need a sales force? Should I be attending events in my industry? Should I send
samples to companies? Should I contact with online retailers? Should I launch my
own online store?
• What is my competition doing and how can I learn from them or differentiate myself
from them?

3. Price
The third of the 4Ps refers to the final price of your product or service. This is one of the most
complex marketing decisions, as a series of factors are at play.

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• The product’s manufacturing costs

• The commercial revenue you expect to receive
• The company’s economic goals
• The demand for your product or service
• Your competitor’s prices
• The consumers’ purchasing power
• Trends and preferences
• The positioning of the product. It can be beneficial to increase the price to give the
impression of better quality
When it comes time to choose the price, you should keep things such as payment methods,
discounts, and loyalty programs in mind.

Questions About the Price

• What is the manufacturing cost of my product/service?
• What profit margin do I need?
• What value does my product/service hold for the consumer?
• What are the average prices of products/services similar to mine?
• How sensitive is my client to pricing? Is it possible that a small decrease in price
might attract many more clients or that a small increase would go unnoticed?
• Can I offer discounts and promotions in certain seasons or to certain types of clients?

4. Promotion
Promotion refers to all the actions taken to communicate the benefits of your products and
services in order to increase sales. This includes everything from advertising and public
relations to social ads and direct marketing.
As traditional as your product or service may be, you need to keep up with trends and with the
latest marketing technologies. In today’s day and age, digital marketing has a huge influence,
so make the most of it.

Questions About Promotion

• How can I make my message reach the right audience?
• Which of the following are more appropriate for me: banners ads, search engine
marketing, social ads, radio, press, TV, billboards, direct marketing, email
marketing, etc.
• When is the best time to promote? Does my product or service depend on seasons?
• What are my competitors doing and how should that influence my decisions?
• What KPIs am I going to use to measure the results of my promotional efforts?

Answer to Question No. 2:

Social marketing is an approach used to develop activities aimed at changing or maintaining

people’s behaviour for the benefit of individuals and society as a whole.

Social marketing seeks to develop and integrate marketing concepts with other approaches to
influence behaviour that benefit individuals and communities for the greater social good. Social
Marketing practice is guided by ethical principles. It seeks to integrate research, best practice,
theory, audience and partnership insight, to inform the delivery of competition sensitive and
segmented social change programmes that are effective, efficient, equitable and sustainable.
Social marketing programmes do not just try to enhance awareness or change attitudes, but instead
work to motivate and empower people to change their behaviour. Social marketing is used at micro

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(individuals), meso (communities, organizations) and macro (policy) levels. In that way, social
marketing distinguishes between having initial impact and towards lasting, and sustainable
impact.

The limits and opportunities of social marketing

Social marketing offers a unique system for understanding who people are, what they desire and
then creating products, services, messages and strategies to meet their desires, whilst at the same
time meeting the needs of society. Through the social marketing process and key principles, social
leverage points and tipping points can be identified - the points where people and communities
believe that there are enough benefits to outweigh the barriers, or that the benefits matter more than
the barriers (exchange).
However, several problems can arise when trying to transfer marketing approaches used to sell
toothpaste to promote concepts such as gender equality, family planning, early childhood
development, and nutrition. It is not always possible simply to apply commercial techniques for
market analysis and segmentation or product, price, channel, and communication strategy and
implementation to social programmes. The social issues for which social marketing is used are
often extremely complex, making it difficult for social marketers to isolate factors that affect an
individual's behaviour and as a result, the determinants of the social consumer's behaviour are more
difficult to identify. Attitudinal and behavioural data used to identify target segments are assumed
to be less accurate when the issue pertains to a social issue. For example, it may be difficult to
identify "users" and "non-users” and self-reported measures may be misleading when measuring
attitudes and behaviours pertaining to social issues due to people giving answers that they believe
are socially acceptable.

Answer to Question No. 3:

Economic policies are the actions and decisions taken by governments and central banks to
influence the performance and behavior of the economy. They can affect various aspects of the
market, such as the level of demand, the availability of supply, the cost of production, the
distribution of income, and the degree of competition. Marketing strategies are the plans and
actions that businesses adopt to reach their target customers, satisfy their needs, and achieve their
objectives. Economic policies can have a significant impact on marketing strategies, as they can
create opportunities or challenges for businesses in different ways. Some of the ways
that economic policies can affect marketing strategies are:

- 1. Fiscal policy: This refers to the government's use of taxation and spending to influence the
level of aggregate demand and economic activity. Fiscal policy can affect marketing strategies by
changing the disposable income of consumers, the public expenditure on goods and services, and
the budget deficit or surplus of the government. For example, an expansionary fiscal policy that
lowers taxes and increases spending can boost consumer demand and create more opportunities
for businesses to sell their products. However, it can also lead to higher inflation and interest rates,
which can increase the cost of production and borrowing for businesses. A contractionary fiscal
policy that raises taxes and reduces spending can have the opposite effects.
- 2. Monetary policy: This refers to the central bank's use of interest rates and money supply to
influence the level of inflation and economic activity. Monetary policy can affect marketing
strategies by changing the cost and availability of credit, the exchange rate of the currency, and the
expectations of consumers and businesses. For example, an expansionary monetary policy that
lowers interest rates and increases money supply can stimulate economic growth and lower
unemployment, which can increase consumer confidence and spending. However, it can also
weaken the currency and make imports more expensive, which can affect the competitiveness and

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profitability of businesses. A contractionary monetary policy that raises interest rates and reduces
money supply can have the opposite effects.

- 3. Trade policy: This refers to the government's use of tariffs, quotas, subsidies, and other
measures to regulate the flow of goods and services across borders. Trade policy can affect
marketing strategies by changing the level of competition, the availability of resources, and the
access to foreign markets. For example, a protectionist trade policy that imposes high tariffs and
quotas on imports can protect domestic industries from foreign competition and create more
demand for local products. However, it can also increase the cost of inputs and reduce the quality
and variety of products available to consumers. A free trade policy that eliminates or reduces
barriers to trade can have the opposite effects.

Answer to Question No. 4:

Segmentation variables are characteristics of customers used for dividing a total market into
segments. Selecting appropriate variable is an important decision for marketing segmentation.
Consumer markets consist of ultimate consumers. They buy products for personal or household
use.
Segmentation variables for consumer markets can be Geographic, Demographic, Psychographic
and Behavioral

Demographic Variables
Demography is concerned with human population and its distribution. Demographic variables are
very popular for market segmentation. They are easy to measure. They consist of:

a) Age: Product needs differ according to age groups. The market is segmented into young,
teenage, middle age, and old age. The noodles market generally cater to the young and teenage
markets, however, have the potential to be marketed across all age groups as fast-food option.

b) Gender: Market segmentation can be done by gender of customers-male or female. Market

demand and buying behavior differ according to gender. Traditionally, markets for clothes,
cosmetics, magazines and shoes have been segmented on the basis of gender. Noodles market
may not need segmentation in terms of gender in general.

c) Family size: Segmentation can be done by the size of the family. It affects the usage and
packaging of the product. In past, Nepal used to have a joint family system with the average
family size of 6. However, in recent times, the family size has considerably reduced due to
migration and other factors.

d) Family life cycle: Family life cycle affects spending patterns. The following six stages can be
used for market segmentation:
Young bachelor living alone
Young couple with no children
Young couple with children under 6 years (Full Nest-1)
Young couple with children over 6 years (Full Nest-2)
Middle aged couple with children over 6 years (Full Nest-3)
Older single living alone (Empty Nest)

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e) Education: Education can be used for segmentation. Education levels for segmentation can
be: illiterate, primary, secondary, graduate, post graduate. Books and magazines are segmented
on this basis.
f) Occupation: Buying patterns differ with occupation. The income of a professor and a taxi
driver can be the same but their spending patterns vary. The market can be segmented into
unemployed, students, service holders, professionals, self employed, farmers, home makers,
retired, etc. The market for product is directly related to occupation.
g) Income: Income provides purchasing power and determines the level of spending. Working
wives add to family income levels. The market can be divided into: high income, middle
income and low income.
h) Social Class: It is the rank within a society determined by its members. It reflects income,
education, occupation and area of residence. It influences product choice. Market can be
divided into: upper class, middle class, lower class. Members of a class share similar values,
interests and behaviors.
i) Ethnicity: Caste, race, nationalities and ethnic groups can be used for market segmentation.
They affect product usage. Nepal has about 60 ethnic groups ("Janajati").
j) Religion: Religion affects product usage. Major religions such as Christianity, Hinduism,
Buddhism, Islam can be used for segmentation purposes.
Answer to Question No. 5:

Marketing intelligence is the external data collected by a company about a specific market which
it wishes to enter, to make decisions. It is the first set of data which the company analyses before
making any investment decision. Marketing intelligence is usually the first data set analysed by a
company about a specific market. It could be related to population age in that area, infrastructure
facilities, spending habits of consumers, state or government regulations etc. Marketing
intelligence is all about gathering information on various data sets, analysing the information,
breaking down the data into small subsets and the distribution of information to the relevant
department of the company.

Common sources for market intelligence data include:

• Third-party industry research
• Company reports
• Meeting and event transcripts
• Expert calls
• News and press releases

There are four main corner stones of marketing intelligence. The first one is competitor
intelligence, the others are product intelligence, market understanding and customer understanding.
Competitor intelligence is a legal method of obtaining information about products in a competitor’s
portfolio. It is about analyzing strengths and weaknesses of the competitor.
The basic goal of competitive intelligence is to make better business decisions. Product Intelligence
is related to gathering information about your own product. The focus around product intelligence
is on gathering information about the quality and performance of the product. This is usually an
automated process. With the help of this knowledge, the company tries and makes the user
experience better or makes changes in the product itself to make it safer or add new features.
Market Understanding is a concept wherein the company tries to understand the performance of
the product in which it is already operating as well as looks at other markets where it wants to
launch its product thoroughly.

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Answer to Question No. 6:

In today’s dynamic market, understanding buyer behavior is pivotal for the success of any business,
whether catering to individual consumers or organizational buyers. The insights offer valuable
perspectives on how entrepreneurs and small businesses can navigate these different buying
processes effectively.

Differences between Consumer and Organizational Buying

1. Number of Buyers: Consumer markets typically have a vast number of potential buyers,
whereas organizational markets consist of fewer buyers, often large companies or entities. This
difference necessitates a tailored approach where maintaining long-term relationships is crucial
for organizational buyers, given the significant impact each buyer can have on the business.

2. Relationship Dynamics: Organizational buyers often seek close, long-term relationships with
suppliers. This contrasts with consumer markets, where brand switching is common, and the
buyer-seller relationship is generally less personal. For entrepreneurs, emphasizing relationship
management with key accounts can lead to more stable and sustained business growth.

3. Decision-Making Process: While consumer buying decisions can be influenced by emotions

and brand loyalty, organizational buying is more rational and based on economic criteria.
Organizational buyers need to justify their purchases, often through detailed cost-benefit
analyses and life-cycle costing. Therefore, businesses targeting organizations must present
clear, quantifiable benefits of their products or services.

4. Specific Requirements and Customization: Organizational buyers often have specific

requirements that products must meet. This contrasts with consumer markets, where products
are generally standardized. Small businesses serving organizational markets should be prepared
to customize their offerings to meet specific client needs, which can also justify higher prices
and foster loyalty.

5. Complexity and Risk: The complexity of organizational buying often involves multiple
decision-makers and a higher perceived risk due to the scale and impact of purchases.
Understanding the roles within the Decision-Making Unit (DMU) and addressing each
member’s criteria and concerns is vital for successfully closing sales in these markets.

Answer to Question No. 7:

Industrial Product:
They are bought for business use or to make other products. The examples are raw materials,
capital items, supplies and services.

a) Materials and Parts

They are goods that become part of the final product. They are bought for further processing or for
business use. They consists of materials and parts. They can be natural or agricultural. Their
distinctive features are:
i) Raw materials consist of natural products and farm products. They change their form to become
final product.
ii) Parts enter finished products without change (component parts like nut and bolt).

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Marketing Considerations for Raw Materials and Parts

i) Long term contracts are important.
ii) Generally no brand preference. Quality is important.
iii) Price competition is high due to many suppliers.
iv) Direct or selective channels are used due to the importance of timely delivery, reliability and
cost savings.
v) Promotion is generally little.
vi) Post-sale services are not important.

b) Capital Items
They are long lasting goods that facilitate production of the finished product. They consist of
installations and accessory equipment. Their distinctive features are:
i) Installations consist of building, machinery and equipment. They are non movable, expensive
and long-lived. They affect the scale of operations. They remain fixed in one place.
ii) Accessory equipment consist of movable equipment, tools and office equipment. They help in
the production process. They have a shorter life span.

Marketing Considerations for Capital Items

i) Negotiation periods are generally long for purchase purpose.
ii) Reputation of the supplier is very important due to brand preference.
iii) Price competition is not very important.
iv) Bought directly from the producer. Short channel used for accessory equipment.
v) Promotion is generally sales force based. Advertising is important for accessory equipment.
vi) Post sale services for repair and maintenance are important. Warranty is important in
accessory equipment.

c) Supplies and Services

They are goods and services that facilitate developing and managing the finished product. They
consist of operating supplies and services. Their distinctive features are:
Operating supplies are consumable industrial goods. They are low cost, shortlived and frequently
purchased. Examples are fuel and stationery. They are the convenience goods of industries.
ii) Business services are support services and consist of repair and maintenance and advisory
services (consulting, legal).

Marketing Considerations for Supplies & Business Services

i) Standardization is very important. Contracts are entered for services.
ii) Branding and packaging is less important.
iii) Price competition is important.
iv) Distribution channels are long.
v) Advertising is important.
vi) After-sale services are not important.

Answer to Question No. 8:

Psychological pricing is a pricing strategy approach to setting prices that aims to influence
consumer perception and behavior. Psychological pricing functions by tapping into customers'
emotional responses and cognitive biases, creating an illusion of enhanced value or affordability.
There are also psychological pricing strategies that are designed to encourage customers to purchase more
products or pay higher prices.
Psychological pricing strategies encourage emotional buying. The customers perceive the price
favourably. The pricing strategies can be:

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a) Prestige pricing strategy: Prices aim to provide prestige to the product. They are set at an
artificially high level. Perfumes, jewelry, watches are suitable for such pricing strategy.

b) Odd-even pricing strategy: Odd number pricing enhances economy image of the product, for
example Rs. 199. Even number pricing enhances quality image of the product, for example Rs.
200.

c) Psychological discounting strategy: This strategy uses deceptive discount tactics. For
example,
Original Price Rs. 5,000
Reduced To Rs. 2,500
In reality the price of the product is Rs. 2,500
Some retailers put the "SALE" sign offering discount throughout the year. In reality there is no
discount.

d) Customary pricing strategy: Pricing is based on tradition. For example, land tillers pay 50%
of production to absentee landlord in Nepal.

e) Promotional Pricing Strategy:

i) One or two well known brands are sold at low price to attract customers.
ii) Special prices are set for special events, for example during exhibitions in Nepal.
iii) Cash rebates are provided to promote products.
iv) Warranties and services are focused to attract customers. Competitors rapidly copy such
strategies. Such strategies are short-lived.

Advantages of Psychological Pricing

The pricing strategy offers several advantages, making it a popular choice in various industries:

1. Simplifies Decision-Making

This strategy often simplifies the decision-making process for customers. By presenting prices in
a way that seems more affordable or represents a better deal, it can make the purchasing decision
easier and quicker, leading to increased customer satisfaction.

2. Attracts More Attention

Psychological tactics, such as charm pricing or odd-even pricing, can grab the attention of
customers more effectively. These unique pricing formats stand out among standard pricing
models, often leading to increased curiosity and interest in the product.

3. Increases Overall Sales

By appealing directly to the consumer's psychological perceptions of value and cost, psychological
tactics can significantly boost sales volume. It encourages customers to perceive they are getting a
good deal, thereby motivating more purchases.

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4. Puts Items into Categories

This pricing method can help in categorizing products based on perceived value. It aids customers
in quickly identifying which products are premium, budget-friendly, or offer the best value for
money, streamlining their shopping experience.

5. Helps You Compete

In competitive markets, psychological strategy allows businesses to stand out without necessarily
having to engage in price wars. By focusing on the perceived value rather than just the price,
companies can remain competitive and retain their profit margins.
Disadvantages of Psychological Pricing

Despite its benefits, psychological pricing also has its drawbacks:

1. Relies on Demand

The success of psychological pricing heavily depends on the existing demand and market
conditions. In some scenarios, especially where customers are price-conscious or well-informed,
this strategy may not be as effective.

2. Risks Loss of Trust

If customers feel that they have been manipulated through pricing strategies, it could lead to a loss
of trust. This is especially true if they perceive the pricing as deceptive rather than as providing
value.

3. Sets Unsustainable Expectations

Regular use of psychological strategy, particularly in the form of constant discounts or deals, can
create an expectation among customers for always-low prices, which might not be sustainable for
the business in the long run.

4. Loses Effectiveness in Global Markets

Cultural differences can affect how psychological pricing is perceived. What works in one region
may not have the same effect in another, making this strategy less effective in global markets.

5. Yields Inconsistent Results

Psychological pricing strategy might not yield consistent results across different product categories
or consumer segments. What works for one product or target market might not be effective for
another, requiring constant testing and adaptation of strategies.

Answer to Question No. 9:

Once a product has been developed and a pricing strategy has been chosen, the business must
consider where it should place the product and how to get it there via placement and distribution.
Transportation is indispensible function of marketing. Transportation provides the physical means
of carrying goods and persons from one place to another. In other words, it is concerned with
carrying the goods from the places of production to the places of their consumption.

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Transportation creates place utility and regularises supply from one place to another.
Transportation greatly facilitates the performance of marketing functions like buying, assembling,
selling, storage and warehousing etc. The entire economy and its development is dependent on a
well- knit system of transportation.
Logistics and transportation are important because they ensure that products are delivered to
customers on time and in good condition. They also play a vital role in reducing the overall cost of
goods and services. In addition, transportation and logistics can help businesses to expand their
operations by opening up new markets and increasing their customer base.
Below are some of the reasons why logistics and transportation are important:
Coordinated logistics can help business grow
A coordinated logistics system can help the business expand by opening up new markets and
increasing the customer base. This is because a coordinated logistics system enables the business
to ship products to multiple destinations quickly and efficiently.
Consumers are more likely to purchase products from businesses that offer efficient logistics. This
is because they know that their orders will be delivered on time and in good condition. Therefore,
if the business want to attract more customers, it is important to have a well-organized logistics
system in place.
Reliable logistics can increase the business value
Another reason why logistics is important is that they can help to increase the business value. This
is because consumers are willing to pay more for products delivered quickly and in good condition.
Therefore, if the business can offer a reliable logistics service, the business will be able to charge
a premium for the products.
A high business value can also lead to more business partners and investors being interested in the
company. This is because they know that the business are a reliable and efficient business that can
be trusted to deliver on its promises.
Reduce cost and improve efficiency
Logistics and transportation can also help businesses to reduce their overall costs. This is because
a well-organized logistics system enables businesses to ship products more efficiently and avoid
delays. In addition, logistics and transportation can help businesses to improve their overall
efficiency by reducing the need for manual labor.
For example, if the business are shipping products to multiple destinations, the business will need
to hire additional staff to pack and load the products onto the vehicles. However, if the business
have a logistics system, the business can use automation to pack and load the products, reducing
the labor costs.
Gain an advantage over the competition
Another benefit of having a logistics system in place is that it can give the business a competitive
advantage over the rivals. Offering better logistics can help the business to attract more customers
and business partners. In addition, it can also help the business to win more tenders and contracts.
Having a good reputation for delivering products quickly and efficiently can help the business to
win more customers. This is because potential customers will see the business as a reliable and
trustworthy company that they can rely on.

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Answer to Question No. 10:

Push strategy:
A push strategy is a marketing approach that involves directly pushing a product or service through
various promotional activities to intermediaries such as wholesalers, distributors, and retailers to
persuade them to stock and promote the product to end consumers.
A push strategy aims to make the product readily available to consumers through intermediaries,
even if they may not have an immediate need or desire for it. This approach is often used for fast-
moving consumer goods or products with a short shelf life.

The promotion program is directed at middlemen. The product is "pushed" through the channel.
The channel members are persuaded to order, carry and promote product. The manufacturer
promotes to wholesaler, the wholesaler promotes to retailer, the retailer promotes to customer. The
product is pushed through the channel by manufacturer. Personal selling and trade promotion tools
are emphasized in push strategy. This strategy is useful where brand loyalty is low and market
share is to be protected.

Pull strategy:
A pull strategy is a marketing approach that involves creating demand for a product or service
among consumers in order to pull the product through intermediaries such as wholesalers,
distributors, and retailers. The goal of a pull strategy is to generate consumer interest and demand
for a product, ultimately leading to retailers and distributors stocking and promoting it.
A pull strategy typically relies on advertising, public relations, social media, and other forms of
communication to create brand awareness and stimulate demand for the product or service. By
creating a strong demand pull from consumers, companies can encourage retailers and distributors
to stock and promote their products, thereby increasing sales and revenue.
The promotion program is directed at customers. The customers are persuaded to ask the product
from the retailers, the retailers ask the product from the wholesalers and the wholesalers order the
product from the manufacturers. The product is "pulled" through the channel by consumers.
Aggressive advertising and sales promotion are emphasized in pull strategy. This strategy is useful
where brand loyalty is high.

Answer to Question No. 11:

Influencer marketing (also known as influence marketing) is a form of social media marketing
involving endorsements and product placement from influencers, people and organizations who
have a purported expert level of knowledge or social influence in their field. Influencers are
someone (or something) with the power to affect the buying habits or quantifiable actions of others
by uploading some form of original—often sponsored—content to social media platforms like
Instagram, YouTube, Snapchat, TikTok or other online channels. Influencer marketing is when a
brand enrolls influencers who have an established credibility and audience on social media
platforms to discuss or mention the brand in a social media post. Influencer content may be framed
as testimonial advertising.

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Influencer marketing is a social media marketing approach that uses endorsements and product
mentions from influencers. These individuals have a dedicated social following and are viewed as
experts within their niche.

Influencer marketing works because of the high trust social influencers have built with their
following over time. Recommendations from these influencers serve as a form of social proof to
your brand’s potential customers.

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Section 3: Exam tips to students:

Tip 1: Students should have clarity on the concepts.

Tip 2: Students should practice case studies of the relevant topics.

Tip 3: Students should practice past examination questions.

Tip 4: Students should appear mock exam sets.

Tip 5: Students should use communication and marketing techniques in their day-to-day life.

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Paper 7 - Income Tax and VAT

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Questions:

Chapter: 1 Basic Concepts

Question No. 1:

Write short Notes on following:

a) Interest

b) Trustee

c) Tax

d) Non – Resident U/s 70

Question No. 2:

Mr. Dipen Agrawal has incurred the following approved medical expenses during these years:

2077-78 Rs. 20,000

2078-79 Rs. 12,000

2079-80 Rs. 10,000

Calculate the tax credit available each year as per Income Tax Regulations applicable from
Shrawan 2081 if the tax liability before medical tax credit for each year is:

2077-78 Rs. 5,000

2078-79 Rs. 300

2079-80 Rs. 200

Chapter 2: Computation of Taxable Income

Question No. 3:

Chiso and Pure Pani Pvt. Ltd is manufacturer of mineral waters and juices and it has two division
manufacturing division and trading division. Its factory site is located at Shishuwa, Pokhara.
Statement of Income during financial year 2081/082 is as under:

Particulars Note Manufacturing Trading

Sales 13 350,000,000 40,000,000
Less: Cost of goods Sold 14 184,000,000 18,000,000
Gross Profit 166,000,000 22,000,000
Miscellaneous Income 15 2,500,000 -
Repair and maintenance 16 - -
Selling Expenses 17 - -
Administrative expenses 18 15,500,000 3,000,000
Operating Profit 153,000,000 19,000,000
Interest Expenses 19 3,000,000 -

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Depreciation Expenses 4 4,000,000 7,500,000

Profit Before Staffs Bonus 146,000,000 11,500,000
Provision for Staffs Bonus 13,272,727 1,045,455
Profit Before Tax 12 132,727,273 10,454,545
Provision for Income Tax 33,181,818 2,613,636
Net Profit for the period 12 99,545,455 7,840,909

Notes to Annual Financial Statements:

Particulars Manufacturing Trading

Note 13 – Sales
Sales Local 300,000,000 30,000,000
Export sales 50,000,000 10,000,000
Total Sales 350,000,000 40,000,000

Note 14 - COGS
Opening Stocks 9,000,000 3,000,000
Raw Materials Purchased 40,000,000 30,000,000
Production Expenses 150,000,000 -
Raw materials Returns - -
Closing Stock (15,000,000) (15,000,000)
Total 184,000,000 18,000,000

Note – 15 Miscellaneous Income

VAT Refund 2,500,000 -
Total 2,500,000 -

Note- 18 Administrative expenses

Salary Allowances 12,000,000 3,000,000
Legal Fees & Expenses 500,000 -
Cash Discount 2,500,000 -
Bank commission 500,000 -
Total 15,500,000 3,000,000

Additional Information:
a) The company has provided provision for tax @ 25% of profit in both divisions.

b) Provision for staff bonus is provided in the financial statements @ 10% as required by IRD
Circular.

c) Company borrowed loan from Ghatal Bank Ltd. but the company has well managed cash
flows. CEO Mrs. Ekira has used this loan for his personal purpose.

d) Expert sales are related to Sales in Germany and USA.

e) Vat refund is related to sales of Jestha 2082.

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f) The company has accepted the sale in under invoicing as assessed by IRO i.e. under invoiced
Trading sales NPR. 500,000 and manufacturing sales NPR. 5,000,000, as on 15.03.2082.
However, the assessment order is given in 04.04.2082 by IRO.

g) Closing Stocks of Manufacturing division includes:

Particulars Details Amount (Rs)
Raw Materials 40,00,000
Finished Goods
Raw Materials 25,00,000
Production Expenses 10,00,000
Repair Factory Building 60,00,000
Depreciation 10,00,000
Interest 5,00,000 1,10,00,000
Total 1,50,00,000

h) Repair and maintenance Factory building is related to Factory building repair which was
destroyed during earthquake of 2072 BS in Nepal. Depreciation base for Block A is NPR
50,000,000.

i) All salary allowance and NPR. 67,000,000 out of production expenses is payment to workers
and staff of the company as wages & salary. The status of the worker and staff in manufacturing
division for the year is as follows:

Particulars Nepali
Men 220
Women 160
Total 380

j) The Company consumed 55% of Local raw materials for its production.

k) The paid up capital of the company in 2080/081 is NPR. 15,000,000 and this year additional
capital is NPR. 30,000,000.

l) Depreciation for manufacturing unit is as per Income Tax Act, 2058 whereas depreciation in
trading unit includes NPR. 125,000 cost of fiscal printer acquired on 31.03.2082 for issuing
bills. Depreciation base for Block D is NPR. 50,000,000 before deducting depreciation.

m) Land has been revalued from NPR. 500 lakhs (cost) to NPR. 750 lakhs in 2082.03.14 and
sold for NPR. 850 lakhs on 2082.3.27. Market Price was NPR. 650 lakhs as per records of Land
Revenue Office at the time of implementation of Income Tax Act 2058. This sales transaction
has not been recorded in the books of accounts of the company.

n) Bank Commission includes NPR. 75,000 levied on disposal of liability of the company.

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o) Company has not paid any installment tax.

p) IRO did assessment as per section 101 and included NPR. 200 lakhs in taxable income (i.e.,
Selling Price of Land is deducted from the market price of land).

q) As per assessment of IRO again include NPR. 300 lakhs as increased in capital during the
year in taxable income of the company as source of income of company’s shareholder could not
be produced.

Required: Calculate Tax Liability of IY 2081/82

Question No. 4:

On the last day of financial year 2069/070, Mr. Delta retired from state-owned ABC Development
Bank, after 25 years of service. From financial year 2073/074, Mr. Delta started obtaining pension
income of NPR. 75,000 per month, with Dashain allowance equal to one month’s pension income.
His son and daughter, Mr. Gama and Mrs. Sigma, are staying in the United Kingdom and the
United State of America respectively. He has got permanent residence in USA and did not turn up
to Nepal after that. His pension amount is regularly being deposited in his designated bank account
in Nepal. Mr. Delta’s wife, Ms. Alfa, on behalf of his husband has been depositing NPR. 7,000 per
month in a retirement fund managed by the non-resident company. He had paid life insurance
premium amount equivalent to NPR. 50,000 to an insurance company in USA. He had spent an
amount equivalent to NPR. 100,000 for his medical expenses during that year in UK. Calculate his
income tax liability with considering finance act 2081 and provision of Income Tax Act 2058.

Question No. 5:

The financial information of Nattu-Baga Joint Venture is registered with the Inland Revenue Office
for repair of Dashrath Stadium on [Link].2075. Received payments for upto 2nd running bill
each of Rs. 175,00,000. The last running bill is for Rs. 225,00,000 on 4th Shrawan 2076, for which
the JV has issued tax invoice on [Link].2076. The cost incurred by JV are given below:

Particulars Amount (Rs)

Construction Materials Purchase 24,560,000
Inventory of construction on Ashad end 2076 975,000
Consultancy cost paid to designer 1,275,000
Labor Cost 9,580,000
Legal and registration 150,000
Tax paid 680,000
Financial Consultancy 250,000

Calculate the tax liability of company for FY 2075.76

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Question No. 6:

The income details of Mrs. Pabitra Rai is given below

Consultancy service fee from Hotel Jeal Star Rs. 950,000; the hotel has deducted 15% tax on the
same and deposited with Inland Revenue Office

Retaining fee of Rs. 45,000 per month from Nepal Water Resource Company for financial
consultancy; 15% tax deducted by the company.

She is working as lead consultant with Nepal Consultancy Pvt. Ltd., with following benefits:

Salary per month 220,000Contribution to Social Security Fund as per Social Security Act/Rule.
One month festival allowance. He has received Rs. Rs. 55,000 per month from tenant of his
house located at Anamnagar. The per month tax of 10% is deducted by tenant and paid to ward
office. Further, she received dividend of Rs. 500,000 from different listed companies during
the year in his bank account. The amount is net of tax.

Suggest whether Mrs. Pabitra needs to file income tax return and calculate the tax applicable for
FY with latest provisions of Income Tax Act 2058.

Question No.7:

Mr. Chalu Pande, a government employee, is suspended by the Commission for Investigation of
Abuse of Authority (CIAA) in financial year 2070/071 but in the financial year 2072/073 Supreme
Court has cancelled the Suspension by CIAA. She received three financial year salary and benefits
after cancellation of CIAA suspension in 2070/071 NPR. 750,000, financial year 2071/072 NPR.
890,000 and financial year 2072/073 is NPR. 1000,000. The account of the office has calculated
the tax liability by considering total sum of three financial year in in the year 2072/073 and
deposited the tax liability according to the financial year 2072/073. State your view in this regard,
imposition of tax in the income of Mr. Chalu Pandey?

Question No. 8:

Mr. Gaurab joins a company on 1st Falgun 2063 with the salary scale of Rs 20,000-500-23,000-
1,000 EB -35,000. Calculate his salary for the Income year 2069-070, 2070-71 and 2071-72.
Assume he is entitled to one-month Dashain allowance.

Chapter 3: Disposal of Assets and Liability

Question No. 9:

Find out whether Section 57 is applicable or not in the following cases of C Ltd.:

Cases Case - 1 Case - 2 Case - 3 Case – 4 Case - 5

Old Mr A: 100% Mr A: 100% Mr A: 100% Mr A: 100% A Ltd. holds B
Shareholding (1000 Units) (Rs. 1 Crore) Ltd., which holds
pattern

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C Ltd. located in
Nepal.
New Mr A : 40% Mr A : 40% Mr A added Mr A : 35% A Ltd. sold all its
Shareholding Mr B : 60% (1000 Units) Rs. 60 Lakhs ABC [Link]. : 60% shares to D Ltd.
Pattern Mr B : 60% Capital (Mr A holds 24% in
(1500 Units) ABC [Link].)

Chapter 4: Withholding of Taxes and Advance Taxes

Question No. 10:

Complete the following table as per the provision of Section 88 of Income Tax Act, 2058.

Adjustable
Paid By Paid To Nature of Payment TDS %
or Final
Mr. Anna
Consultancy Fee
ABC Bank Ltd. (a Chartered
(VAT Registered)
Accountant)

ABC Bank Ltd ABC Suppliers Purchase of goods

Construction Service
ABC Bank Ltd ABC Pvt. Ltd
[PAN Bill]
Supervision Service
ABC Bank Ltd ABC Pvt. Ltd.
[PAN Bill]
Construction &
ABC Bank Ltd ABC Pvt. Ltd Supervision [PAN
Bill]
Nursing Home Dr. Narayan
Doctors Consultancy
Pvt. Ltd. Gautam
Mr. Anna
Postal Saving
(a Chartered Interest (Rs. 40,000)
Bank,Kathmandu
Accountant)
ABC Water and
Sanitation
Pokhara Consumer Contract Payment of
Metropolitan City Group (Tax Rs 70,00,000
Exemption Not
obtained)
Donation to rescue
KBC M Nepal (Tax trafficked girls Rs
Supermarket Pvt. Exempt 1,00,000 (if saved
Ltd. Organization) then shall be
refunded)
Donation to rescue
KBC M Nepal (Tax
trafficked girls Rs
Supermarket Pvt. Exempt
1,00,000 (with no
Ltd. Organization)
condition)

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KBC M Nepal (Tax Donation for

Supermarket Pvt. Exempt afforestation Rs
Ltd. Organization) 1,00,000
M Nepal (Tax
Interest on deposit
ABC Bank Ltd Exempt
Rs 1,00,000
Organization)

Question No. 11:

MB Bank Nepal Limited, a joint venture bank operating in Nepal since its establishment, declared
dividend at the rate of 15% of paid-up capital. Mr. Thomas, German citizen, is the owner of 15 %
of the paid-up capital of the bank. Accordingly, the bank has to pay NPR. 70,000,000 to Mr.
Thomas as dividend. Mr. Thomas visited Nepal just for collecting his dividend and returned to
Germany after completing all the formalities including legal, if any. Discuss the tax implication of
above transaction and determine the amount of tax to be deducted by MB Bank Nepal Limited at
the time of payment to Mr. Thomas. Advice to Mr. Thomas as a personal tax advisor.

Question No. 12:

Mrs. Mehek, a housewife received payment in foreign currency equivalent to Rs. 100,000 in her
bank account in Baishakh 2079 from YouTube for uploading a dance video in her personal
YouTube Channel. Does this payment attract withholding tax? What is the tax rate applicable in
such type of income? Does she need to file income tax return for FY 2078/79 if she has only this
income in that income year?

Question No. 13:

Sanskriti Bachau Yojana, an NGO has contracted with a consultant, Mr. Prajjwal Bastola residing
in Kathmandu to operate training in Nepalgunj in a condition to reimburse the expenses on
submission of actual bills/invoices except for remuneration and daily allowances.

Particulars Amount (Rs.)

Remuneration per day Rs 5000 for 2 days 10,000
Air fare Ktm – Nepalgunj Rs 9,000
Local Conveyance 1,000
TADA 2,000
Food Expenses (Maximum of Rs 500/Day) 1,000
Stationery (Maximum of Rs 50 per person) 2,000
Day Lunch to participant (Maximum of Rs 300 per person) 30,000
Hall Rent 5,000
Total 60,000
Required: Comment on withholding requirements.

Chapter 5: International Taxation

Question No. 14:

Jawaaf Education is a multinational company specialised in engineering, consultancy, information

technologies and institutional, economic and social development, clearly oriented towards service

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to the client, carrying out the most complex projects in the fields of Transport, Water and the
Environment, Building, Energy and Industry; applying technological knowledge, creativity,
innovation and the latest technologies to progress towards sustainable development of society, to
the benefit of people's welfare. This company is registered in Spain. It got the contract to construct
a water project in the year 2073 Shrawan 10, Mahakali Revier Kanchanpur. In 2073 Bhadra 25, it
completed its project within 45 days and is closing down its operation in Nepal.

Following are the transactions for the financial year 2073/74.

Particulars Amount (Rs)

Sale of Land in Kanchanpur (purchase price 56 75 crores
crores)
Compensation received for the loss of 7 crores
equipment (insurer is from England)
Sale of equipments related to project (opening 10 crores
WDV 7 crores)
Settlement of loans taken for the project in 25 Million US $(1 US$ =105)
Nepal from Royal Bank of Scotland RBS(loan
was taken at US $ 1 = Rs. 99)
Royalty received by the company for the trade 5 Million US $
mark used by(1US$= 109) England company
Royalty received by the company for the trade 1 Million US $
mark used by(1US$= 109) Scotland company

You are required to calculate the Assessable Income in Nepal.

Question No. 15:

Explain on the taxability and the implication thereon, of the following transactions as per the
Income Tax Act, 2058. A Sichuan airline registered in China, having contact office in Nepal and
is operating its airlines business. During Income Year 20X-68/X-69, it has sold the tickets in Nepal
as follows:

i. Sale of tickets from the passengers departing from Nepal - Rs. 50 crores.

ii. Sale of tickets in Nepal, for the passengers departing from country other than Nepal – Rs. 10
crores

Chapter 6: Distribution by Entities

Question No. 16:

Nursing Home Pvt. Ltd has below-presented balance sheet before the distribution. AGM of the
company declared full amount of distributable profit as dividend.

Particulars Carrying Amount Tax Base Market Value

Paid Up Capital 10,00,000 10,00,000
Retained Earnings 10,00,000 9,50,000

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Business Liability 10,00,000 10,00,000 9,75,000

Total 30,00,000 29,50,000 9,75,000
Trading Stock 10,00,000 10,00,000 12,00,000
Depreciable Assets 10,00,000 9,00,000 11,00,000
Business Assets 10,00,000 10,50,000 9,50,000
Total 30,00,000 29,50,000 32,50,000

Required:

a. What is the distributable profit for the company as per section 53(4).

b. Allocate distribution of profit and repayment of capital if company declared full retained
earnings as per statement of financial position as dividend.

c. Calculate the amount to be included in income from business of entity, if any, as per section 56
(3)

Chapter 7: Tax Return and Recovery

Question No. 17:

Inland Revenue Department has assessed the tax of Edupath Academy Pvt. Ltd. for the Income
Year 2078/79 of Rs. 2,50,00,000. The management of the Company is unable to pay the assessed
tax and asks for your opinion regarding various actions that Inland Revenue Department can take
against them for recovery of the tax amount. Further, management of the company is also seeking
your opinion regarding the provision to pay such tax on installment basis.

Chapter 15: Value Added Tax

Question No. 18:

On 1st Falgun 2075, Ms. Inda and Mr. Sudhir, the Tax Officers of Tax Office Baneshwor area,
visited the office of Big 4 & Company which is registered in Baneshwor Tax Office area,
demanded VAT and other accounts and records of the financial years starting from 2066- 67 but
the company is unable to produce the accounts and records for the years 2066-67 to 2070-71 as
these records are destroyed by it. Generally Big 4 & Company destroys its VAT records and books
of account and records on expiry of 4 years. Both the tax officers decided to impose fine under
section 29 of VAT Act 2052, NPR. 10,000 per year for the 5 years for not producing the accounts
and records supposing that the firm had not maintained the books of accounts and the records. You
are the tax consultant of the Big 4 & Company, the company wants to apply for administrative
review against the order and seeks your advice

Question No. 19:

Gadimai Pvt. Ltd. is a manufacturing company. The company imports the raw materials and
processes it in Nepal and sells the finished goods both locally and abroad. The company follows
cost plus margin pricing model. The company has imported raw materials during various months
as per the following:

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Manufacturing
Raw Material Cost of Raw
Month and other Profit (Rs)
(Units) Material (Rs)
overheads (Rs)
2079 Baisakh 10,000 20,000 2,000 2,000
2079 Jestha 11,000 22,000 2,000 2,000
2079 Ashad 9,000 18,000 500 500

Due to intense competition in market, the company used cost cutting measures to bring down the
overheads and also cut the profit margin to stay competitive in the market.

Month Local Sales (Units) Export Sales (Units) Total (Units)

2078 Baisakh – Chaitra 4200 4800 9000
2078 Baisakh 600 100 700
2078 Jestha 150 550 700
2078 Ashad 300 - 300
2079 Baisakh - 900 900
2079 Jestha 300 300 600
2079 Ashad 400 500 900
Required:

Determine whether the company can claim bank guarantee facility or not and if yes, calculate the
amount of bank guarantee.

Question No. 20:

Sodhi Electric Company sold its products on a scheme of “buy two, get one free” of laptop
computers. The company issues VAT bill on the value of laptop computers on every sale of three
laptop computers and collects the VAT accordingly. During the tax period, the company sold
computers having taxable value of Rs 50,00,000. However, tax officer claimed that the company
has sold three laptop computers on every sale. So, VAT should be collected on taxable value of
three laptop computers on each sale by the company. The Tax office is on the contention that the
company has done under invoicing of the goods and wants to levy fine according to section 29 for
under invoicing. Decide with brief note whether the opinion of VAT officer is correct.

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Section 2: Answers:

Answer to Question No. 1:

a) Interest

As per Section 2, Interest means:

i. Payment under debt obligation other than principal

ii. Discount, swap or premium under debt obligation or other benefits.
iii. Payment treated as interest u/s 32 of the Act from the amount received from the person
obtaining assets under annuity, installment sale or using asset under finance lease
arrangement.
b) Trustee

As per Section 2, trustee means an individual, trust or other corporate body who individually or
jointly with other individual, trust or corporate body holds a property in trust and the term also
includes:
a) The operator or administrator of the assets of a deceased.
b) A liquidator, recipient or trustee
c) Any person who protects, direct, controls or manages the assets of an incapacitated person
in personal or official capacity.
d) Any person who manages the assets under a private enterprise or similar other enterprise
and
e) Any other person in a position similar to the person as referred in clause a, b, c and d.
c) Tax

As per Section 2, "Tax" means the tax chargeable under this Act, and this term includes the
following payments:

(1) The expenditures referred to in clause (a) of sub-section (8) of Section 104 as incurred by
the Department for any claim in respect of, and auction sale of, the property in which the
tax is due and outstanding,

(2) The amount payable by the person withholding advance tax or the person subject to tax
withholding under Section 90 or the amount payable by the person making payment in
installment under Section 94 or the amount payable by the person withholding advance tax
under Section 95A. or the amount payable after the tax assessment under Sections 99, 100
and 101,

(3) The amount payable to the Department in respect of tax liability of the third party under
sub-section (2) of Section 107, sub-section (3) or (4) of Section 108, subsection (1) of
Section 109, sub-section (1) of Section 110,

(4) The amount referred to in Chapter-22 payable for a fee and interest, and

(5) The amount of fine referred to in Section 129 required to be paid as per the order of the
Department.

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d) Non-Resident U/s 70

For purposes of Section 70, "non-resident person" means a resident entity within the group of
associated entities with head offices outside Nepal.

Scope of Services: This section primarily focuses on non-resident persons providing services
such as water traveling/rafting, air transport, or telecommunications services in Nepal.
Taxable Income: The taxable income of such non-resident persons generally consists of the
amounts derived from the provision of these services within Nepal.
Tax Rate: The tax rate applicable to the income of these non-resident persons is specified in Sub-
section (7) of Section 2 of Schedule-1 of the Income Tax Act.

Answer to Question No. 2:

Particulars/Income Year 2077/078 2078/079 2079/080

a. Maximum Limit 1,500 1,500 1,500
b. 15% of Approved Medical 3,000 3,300 4,500
Expenses + Opening Carried
forward (e)
c. Tax Liability before Medical 5,000 300 200
Tax Credit (MTC)
d. Allowed MTC u/s 51 1,500 300 200
[Lower of a or b or c]
e. Carried forward MTC [b – d] 1,500 3,000 4,300

Answer to Question No. 3:

Computation of Balance Taxable Income of

M/s Chiso and Pure Pani Pvt. Ltd. for the IY 2081/082
Sec Manufacturing Trading
Particulars Note Gain on Land
Ref Division Division
Inclusions:
Sales 7(2) 1 355,000,000 40,500,000 -
Vat Refund 6 - - -
Gain on Sale of Land 9(2) 4 - - 20,000,000
Total Inclusions 355,000,000 40,500,000 20,000,000

Deduction:
General Deductions 13 11 28,772,727 4,045,455 -
Interest Expenses 14(1) 10 - - -
Cost of goods sold 15 2 192,500,000 18,000,000 -
Repair and Improvement 16 7 45,00,000 -
Depreciation 19 8 50,00,000 75,00,000 -
Total Deductions 221,272,727 22,045,455 -

Balance Taxable Income 133,727,273 18,454,545 20,000,000

Tax Liability 12 19,256,727 4,382,954 5,000,000

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Working Notes and Assumptions Taken

WN -1: Calculation of Sales

Particulars Manufacturing Trading

Sales – Local 300,000,000 30,000,000

Add: Under invoiced Sales 50,00,000 5,00,000

Sales – Export 50,000,000 10,000,000

Total 355,000,000 40,500,000

WN -2: Calculation of COGS

Particulars Manufacturing Trading

Opening Stock 9,000,000 3,000,000

Add: Raw Material 40,000,000 30,000,000

Add: Production Expenses (WN -5) 150,000,000 -

Less: Closing Stock (6,500,000) (15,000,000)

Total 192,500,000 18,000,000

WN -3: Calculation of Closing Stock

Particulars Manufacturing Trading

Given 15,000,000 15,000,000

Less: Repair and Maintenance u/s 15(8) (1,000,000) -

included in production exp.

Less: Repair and Maintenance u/s 15(8) (6,000,000) -

related to building

Less: Depreciation expenses u/s 19 (6,500,000) (15,000,000)

separately claimed

Less: interest expenses u/s 14 separately (500,000)

claimed

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Total 6,500,000 15,000,000

Note: As per Section 15(8), Repair and Maintenance, depreciation shall not be included in
Valuation of Closing stock and again as per the circular of department dated 2066.02.27, interest
shall not be included in calculation of closing stock.

WN -4: Gain on Sale of Land

As per Section 40(5) (ka) of Income Tax Act 2058, the market price as on date of transaction shall
be taken as cost of the property. Hence, though actual cost is NPR. 850 lakh it is taken as NPR 650
lakh, and gain on sale NPR. 200(850-650) lakh assessed by IRO is correct. Further, such land is
assumed to be non - business related and is recorded in separate column. No business rebates as
per section 11 is provided to such gain.

WN -5: Production Expenses

Calculation of Production expenses NPR. 150,000,000 is allowed; no adjustment required.

Production expenses include in closing stock. Repair and maintenance is separately claimed u/s 16
and this is not part of closing stock.

WN -6: VAT Refund

Vat Refund shall not be included in income, it shall be adjusted with VAT receivables, again VAT
claimed u/s 17 of Value Added Tax Act 2052 means offset of Vat, not refund hence it is error in
accounting. It should not be included in calculation of taxable income.

WN -7: Repair and Improvement expenses u/s 16

Particulars Block A Block D

Actual Repair 60,00,000 10,00,000

7% of depreciation base 35,00,000 35,00,000

Allowed Repair 35,00,000 10,00,000

Total Allowed Repair = Rs 45,00,000

Note: It shall be included in manufacturing business as factory building and machineries are used
by manufacturing business only.

WN -8: Depreciation U/s 19

Particulars Manufacturing Trading

As per income statement 4,000,000 7,500,000
Add: Depreciation added in 10,00,000 -
closing stock
Total Allowed depreciation 50,00,000 75,00,000

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WN -9: Bank Commission

The question states that bank commission is paid for discharging liability. Bank charges paid for
discharging liability is an allowable expense.

WN -10: Interest Expenses

Interest expenses NPR, 3000,000 and addition to closing stock NPR. 500,000 is not allowed u/s
section 14 as deduction, it is used by CEO for personal purpose not for business.

WN -11: General Deductions

Particulars Manufacturing Trading

Salary Allowances 12,000,000 3,000,000
Legal Fees & Expenses 500,000 -
Cash Discount 2,500,000 -
Bank commission 500,000 -
Bonus expenses 13,272,727 1,045,455
Total 28,772,727 4,045,455

WN-12: Calculation of Effective Tax Rate

Manufacturing Trading
Gain on Sale
Particulars Local Local
Export Sales Export Sales of Land
Sales Sales
Normal Rate 25% 25% 25% 25% 25%
Less: Special Industry (5%) (5%) - -
Rebate
Reduced Rate 20% 20% 25% 25% 25%
Option 1: Effective Rate 20% 20% *80% = 25% 25% * 80% =
after (Export Rebate 16% 20%
@20%)
Option 2: Effective rate 20% * 20% * 80% * 25% 25% 25%
of special industry after 80% * 90% = 14.4%
(rebate due to 90% =
employment >300 14.4%
Nepali citizen with more
than 33.33% of women)
Most Beneficial 14.4% 14.4% 25% 20% 25%
Effective Rate

Calculation of Tax Liability

Manufacture Trading – Trading – Gain on Sale

Particulars
Business Local Sales Export Sales of Land
Balance Taxable 133,727,273 13,840,908 4,613,636 20,000,000
Income

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Effective Rate 14.4% 25% 20% 25%

Tax Liability 19,256,727 3,460,227 922,727 5,000,000

Assumptions and Disclaimer Note:

1) As the effective rate of manufacturing local sales business and export sales business are same
i.e.14.4% (WN – 12). So, no separate calculation is done for local and export sales under
manufacturing business. Instead, calculation is done separately for manufacturing and trading
business due to separate effective tax rates as calculated in (WN- 12)

2) As cost of goods sold for local sales and export sales under trading business are not separately
provided in the question, while calculating the tax liability, balance taxable income of trading
business is divided in the ratio of sales. Sales ratio before and after under invoicing among local
and export sales will be same as such under invoiced figure will also be divided in the ratio of
given local and export sales i.e. 75% and 25% for export sales and local sales respectively.

3) Land is assumed to be not related to manufacturing or trading business. Hence, recorded in

separate column. Alternatively, students may consider such land related to the business.

Answer to Question No. 4:

Particulars Sec. Ref. Amount (Rs)

Pension Income 8(2) 900,000

Dashain Allowance 8(2) 75,000

Total Assessable Income/ 9,75,000

Balance Taxable Income

1. Assessable income is NPR. 975,000. Basic exemption will not be applicable to Non-resident
person. As per Schedule 1 Sec. 1(8) of Income Tax Act 2058, non-resident tax rate applicable is
25%.

2. Total Tax amount to be paid is NPR. 243,750. Medical Tax credit is also not applicable to the
non-resident Person. Since he is a non-resident person and will not be allowed to reduce medical
tax expenses as incurred by him in UK. The employer state owned ABC Development Bank has
to deduct Tax NPR. 243,750 from his pension amount

3. Retirement Contribution deduction is available only if the retirement contribution is made

available to the resident Approved Retirement Fund. His wife has contributed amount of NPR.
7,000 per month to the retirement fund managed by the non-resident. Therefore, this reduction is
not available.

4. Donation amount can be available to deduct from the taxable income if the donation amount is
given to the tax exempted entity approved by the department. However, he has to file the return if
the donation is claimed as expenses.

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5. Insurance Premium of NPR. 50,000 paid to the insurance company in USA shall not be allowed
to reduce from his taxable income. To get reduction under this provision, he should be resident of
Nepal. As per given information above, he has not return to Nepal since last 4 years. Therefore, he
is non-resident to Nepal as per the provision of Income Tax Act, 2058.

Answer to Question No. 5:

As the construction period is less than 12 months, definition of long term contract doesn’t met as
per section 26. Hence, Taxable income shall be calculated by including revenue as per accrual
basis in inclusions and by deducting normal business deductions.

The Joint Venture is entity (company) as per Section 2 and the tax rate for entity is 25% as per
Schedule 1 Sec. 2(1). The last running bill issued on 25th of Ashad is to be recognized as revenue
for FY 2075.76; the receipt against bill on Shrawan does not affect the revenue recognition. The
inventory of construction materials at Ashad end needs to be deducted for calculating the cost of
materials consumed. The tax paid not deductible expense.

Particulars Amount (Rs)

Inclusions:
Construction Service 57,500,000
Total Revenue 57,500,000
Deductions:
Construction Materials Purchase 24,560,000
Less : Inventory of construction on Ashad end 2076 (975,000.00)
Consultancy cost paid to designer 1,275,000
Labor Cost 9,580,000
Legal and registration 150,000
Tax paid -
Financial Consultancy 250,000
Total Cost 34,840,000
Taxable Income 22,660,000
Tax Rate 25%
Tax 5,665,000

Answer to Question No. 6:

As per Section 97 of Income Tax Act 2058, if the person has income more than Rs. 40 lakhs during
any income year, the tax return for the year should be filed. Since Mrs. Pabitra has annual income
more than Rs. 40 lakhs, she needs to mandatorily file income tax return. The tax calculation of
Mrs. Pabitra is given below:

Sec. Amount
Particulars Note Income
Ref. (Rs.)
Consultancy Fee 7(2) 950,000 950,000
Retaining Fee 7(2) 540,000 540,000

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Salary 8(2) 2,640,000 220,000 x 12 2,640,000

Contribution to 8(2) 818,400 2,640,000 x 20% 818,400
Social Security
Fund by employer
(as per Social
Security Act/Rule)
(20% of basic
salary)
Festival Allowance 8(2) 220,000 220,000
Rental Income 2 - The Income is not included in tax 660,000
calculation, and tax paid on ward
office is not claimed as advance
tax as such house rent does not fall
under the definition of rent as per
Section 2.
Dividend 9(3) - The Income is not included in tax 526,315.79
calculation, and tax deducted on
dividend is not claimed as advance
tax as such dividend is final
withholding payment u/s 54 and
92.
Total Assessable 6 5,168,400 6,354,715.79
Income
Less: Contribution 63 (500,000) Lower of:
in approved a) Rs 500,000
retirement fund b) 1/3 * 5,168,400
c) Actual (31% x 2,640,000)
Taxable Income/ 5 5,854,715.79
Balance Taxable
Income

Computation of Tax Liability [Single Assumed]

Particulars Rate Tax

1st 5 Lakhs 0% -
Next 2 Lakhs 10% 20,000
Next 3 Lakhs 20% 60,000
Next 10 Lakhs 30% 3,00,000
Next 30 Lakhs 36% 10,80,000
Balance 854,715.79 39% 333,339
Total Tax 1,793,339
Less: Advance Tax u/s 93 WN-1 (223,500)
Net tax to be paid 1,569,839

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Working Note:

WN-1 : Calculation of Advance Tax

Particulars Amount (Rs)

TDS deducted by Hotel Jeal Star [950000 * 15%] 142,500

TDS deducted by Nepal Water Resource Company 81,000

[45000*12*15%]

Advance Tax U/s 93 223500

Answer to Question No. 7:

As per Section 22(2) of Income Tax Act, 2058, employment income received by a person as a
lumpsum amount in respect of previous years after settlement of cases by court shall be accounted
by following accrual basis of accounting. Further, Supreme Court Decision on Badri Kumar
Pyakhrel Vs Civil Aviation Authority of Nepal has also decided the same.

In the given case, Mr. Chalu Pandey, a government employee, is suspended by Commission for
Investigation of Abuse of Authority (CIAA) in financial year 2070/071 and supreme court has
cancelled the Suspension by CIAA financial year on 2072/073. So, the income of each year shall
be recorded on accrual basis i.e., 2070/071 NPR. 750,000, financial year 2071/072 NPR. 890,000
and financial year 2072/073 is NPR. 1000,000 and will be taxed on rates prevailing on respective
income years.

Answer to Question No. 8:

Grade is provided after a year of joined date as per Labor Act.

Salary for required income year are as follows:

For Income Year 2069/070:

2069 Shrawan 1 to 2069 Magh End = 22500 x 7 = Rs 1,57,500

2069 Falgun 1 to 2070 Ashad End = 23000 x 5 = Rs 1,15,000

Dashain Allowance = Rs 22500

Total Income for the Income Year = Rs 2,95,000

For Income Year 2070/071:

2070 Shrawan 1 to 2070 Magh End = 23000 x 7 = Rs 1,61,000

2070 Falgun 1 to 2071 Ashad End = 24000 x 5 = Rs 1,20,000

Dashain Allowance = 23000

Total Income for the Income Year = Rs 3,04,000

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For Income Year 2071/072:

2071 Shrawan 1 to 2071 Magh End = 24000 x 7 = Rs 1,68,000

2071 Falgun 1 to 2072 Ashad End = 25000 x 5 = Rs 1,25,000

Dashain Allowance = Rs 24000

Total Income for the Income Year = Rs 3,17,000

Working Notes:

For Income Year 2063/064:

2063 Falgun 1 to 2064 Ashad Salary = 20,000 x 5 = Rs 1,00,000

Total Income for the year = Rs 1,00,000

For Income Year 2064/065:

2064 Shrawan 1 to 2064 Magh end = 20,000 x 7 = Rs 1,40,000

2065 Falgun 1 to 2065 Ashad end = 20500 x 5 = 1,02,500

Dashain Allowance = Rs 20,000

Total Income for the Year = 2,62,500

For Income year 2065/066:

2065 Shrawan 1 to 2065 Magh End = 20500 x 7 = Rs 1,43,500

2065 Falgun 1 to 2066 Ashad end = 21000 x 5 = Rs 1,05,000

Dashain Allowance = Rs 20500

Total Income for the Year = Rs 2,69,000

For Income Year 2066/067:

2066 Shrawan 1 to 2066 Magh End = 21000 x 7 = Rs 1,47,000

2066 Falgun 1 to 2067 Ashad End = 21500 x 5 = Rs 1,07,500

Dashain Allowance = Rs 21000

Total Income for the Year = Rs 2,75,500

For Income Year 2067/068:

2067 Shrawan 1 to 2067 Magh End = 21500 x 7 = Rs 1,50,500

2067 Falgun 1 to 2068 Ashad End = 22000 x 5 = Rs 1,10,000

Dashain Allowance = Rs 21,500

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Total Income for the Year = Rs 2,82,000

For Income Year 2068/069

2068 Shrawan 1 to 2068 Magh End = 22000 x 7 = Rs 1,54,000

2068 Falgun 1 to 2069 Ashad End = 22500 x 5 = Rs 1,12,500

Dashain Allowance = Rs 22000

Total Income for the Year = 2,88,500

Answer to Question No. 9:

Cases Case - 1 Case - 2 Case - 3 Case – 4 Case - 5

Old Mr A: 100% Mr A: 100% Mr A: 100% Mr A: 100% A Ltd. holds B

Shareholding Ltd., which holds
pattern (1000 Units) (Rs 1 Crore)
C Ltd. located in
Nepal.

New Mr A : 40% Mr A : 40% Mr A added Mr A : 35% A Ltd. sold all its

Shareholding Rs 60 Lakhs shares to D ltd.
Pattern Mr B : 60% (1000 Units) Capital ABC [Link]. :
60% (Mr A
Mr B : 60% holds 24% in
ABC [Link].)
(1500 Units)

Section 57 Yes No No Yes Yes

Applicable or
not

Reason Change of Change due to No change in Change of Ultimate

50% or more introduction of shareholding 65%. Indirect ownership
shareholding new % ownership of A changes. Direct
shareholder in ABC Ltd
and indirect
keeping cannot be
existing shares counted as per underlying
constant supreme ownership shall be
court’s checked as per
decision section 2 and also
supported by
supreme court’s
decision

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Answer to Question no. 10:

Adjustable
Paid By Paid To Nature of Payment TDS %
or Final
Mr. Anna
Consultancy Fee
ABC Bank Ltd. (a Chartered 1.5% u/s 88 Adjustable
(Vat Registered)
Accountant)
1.5% if total
payment in
ABC Bank Ltd ABC Suppliers Purchase of goods moving 11 days Adjustable
exceeds Rs
50,000 u/s 89
Construction Service
ABC Bank Ltd ABC Pvt. Ltd 1.5% U/s 89 Adjustable
[PAN Bill]
Supervision Service
ABC Bank Ltd ABC Pvt. Ltd. 15% U/s 88 Adjustable
[PAN Bill]
Construction &
ABC Bank Ltd ABC Pvt. Ltd Supervision [PAN 1.5% U/s 89 Adjustable
Bill]
Nursing Home Dr. Narayan
Doctors Consultancy 15% u/s 88 Adjustable
Pvt. Ltd. Gautam
6% TDS on
excess Rs.
15,000 u/s 88
(Considering
marginal relief)
Postal Saving Mr. Anna
Or
Bank, (a Chartered Interest (Rs 40,000) Final
6% TDS on
Kathmandu Accountant)
entire Rs.
40,000 u/s 88
(without
considering
marginal relief)
ABC Water and
Sanitation
Pokhara Consumer Contract Payment of
1.5% U/s 89 Adjustable
Metropolitan City Group (Tax Rs 70,00,000
Exemption Not
obtained)
Donation to rescue
KBC M Nepal (Tax trafficked girls Rs
No TDS
Supermarket Pvt. Exempt 1,00,000 (if saved N/A
Applicable
Ltd. Organization) then shall be
refunded)
Donation to rescue
KBC M Nepal (Tax
trafficked girls Rs No TDS as tax
Supermarket Pvt. Exempt N/A
1,00,000 (with no exempt u/s 10
Ltd. Organization)
condition)

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KBC M Nepal (Tax Donation for

No TDS
Supermarket Pvt. Exempt afforestation Rs N/A
Applicable
Ltd. Organization) 1,00,000
M Nepal (Tax
Interest on deposit
ABC Bank Ltd Exempt 15.00% Final
Rs 1,00,000
Organization)

Answer to Question no. 11:

As per Section 88 (2) (Ka) of Income Tax Act, 2058, tax should be deducted at source at the time
of payment of dividend by a resident person. As per this section, Tax Deducted at source on
dividend payment shall be 5% for resident as well as for non-resident. In this case, dividend has to
be paid to Mr. Thomas, who is a non-resident. Therefore, MB Bank Nepal Limited has to deduct
tax at the rate of 5% of the dividend amount of NPR. 70,000,000. Thus, the TDS amount comes
to NPR. 3,500,000. Such TDS shall be final as per section 54 and section 92 of Income tax act,
2058.

Answer to Question no. 12:

As per the Sub-section (6Gha) of Section 95Ka of Income Tax Act 2058, in case of any individual
resident not involved in the operation of business receiving payment in foreign currency for
uploading audio- visual material in social network, the concerned bank, financial institution, or
money transfer institution shall collect advance tax at the rate of five percent of the amount received
at the time of payment of such amount.

As per the Subsection (1)(Ga1) of Section 97, individual resident person having income as
mentioned in sub- section (6Gha) of section 95Ka only for an income year need not file income
tax return for that income year.

As per the provision of Schedule 1 (4ka), the tax shall be levied at the rate of five percent in the
income of individual resident person not involved in operation of business received according to
the sub-section (6Gha) of section 95Ka.

In the given case, Mrs. Mehek is a housewife, hence assumed as a resident natural person not
involved in operation of business, and the concerned bank shall collect and deposit advance tax at
the rate of five percent of the amount received. The tax rate on this kind income is five percent.
Since she has no other income, she does not need to file income tax return for the IY 2078/79.

Answer to Question no. 13:

The contract of payment made on the basis of actual invoices as stated above shall not be
considered as contract as per the clarification in section 89 of the act. Hence, Section 89 is not
attracted on such payment. Out of the amount received consultant fee of Rs 10,000 is subject to
15% tax deduction as per section 88 of the act. Further, payment of TADA is reimbursement of
business expenses though invoice not presented and are separately provided instead on lump sum
amount. Further, other payments made to the consultant like local conveyance, food expenses,
stationery, participants lunch and hall rent serve as business purpose expenses rather than for his
individual benefit of consultant for which consultant has taken authority to present the invoices of
the expenses made on the behalf of the company.

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So, no tax deduction at source is required on such payment but while reimbursing or settling the
expenses, the other contracting party shall have to confirm that the payment eligible for TDS is
done or not while making the payment from TADA, local conveyance and during the payment of
hall rent, participants lunch, stationery. If tax is withheld then, it shall be instructed to submit tax
invoice deposited to inland revenue office and if no tax is withheld then to instruct to withhold
such tax and deposit to IRO.

However, if the consultant contracted to operate training for Rs 60,000 in total without presenting
any invoices and such payment is done in lump sum, then full payment amount is tax deductible at
source.

Answer to Question no. 14

Here Jawaaf Education have worked for 45 days in total (i.e. less than 90 days), hence it does not
attract the definition of permanent establishment. As such company is not registered in Nepal and
also do not have effective management in Nepal, such company is non-resident for the income year
and Nepal sourced income will only be taxed.

Calculation of Assessable Income of Jawaaf Education for FY 2073/74

Particulars Working Amount in Note

Note “Crores”
Gain on Sale of WN-1 19 As land is situated in Nepal, it is Nepal
Land sourced.
Compensation from 7 Compensation received from foreign
insurer insurer for the assets used in Nepal is
taxable in Nepal as per Section 67 (3)(ga).
Gain on Sale of 3 Profit on dissolution of pool of assets is
equipment taxable in Nepal as per section 67(3) of
Income tax act 2068
Loss on Settlement WN-2 (15) Loss on settlement of loan due to change in
of Loan exchange rate is allowable for deduction as
per Section 67 (3) (ka)
Royalty received by - Royalty received by the company for
the company for the trademark used in England is not taxed in
trade mark used Nepal as per section 67(7)
by(1US$= 109)
England company
Royalty received by - Royalty received by the company for
the company for the trademark used in Scotland is not taxed in
trade mark used Nepal as per section 67(7)
by(1US$= 109)
Scotland company
Total Assessable 14
Income
Working Notes:

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WN-1: Calculation of Gain on Sale of Land

Particulars Amount (“In Crores”)

Incomings of Land U/s 39 75

Less: Outgoings of Land U/s 38 (56)

Gain on sale of Land 19

WN-2: Calculation of Loss on settlement of Loan

Particulars Amount (“In Crores”)

Incomings of Loan U/s 39 [2.5 Crore * 99] 247.5

Less: Outgoings of Loan U/s 38 [2.5 Crore * (262.5)

105]

Loss on disposal of loan 15

(set off with Gain on Sale of Land u/s 36)

Answer to Question no. 15

As per Sec. 70 of Income Tax Act, 2058, the taxable income of non-resident air transport operator,
water transport operator or chartered service provider for a particular Income Year shall be the
amount received for following activities, except as a result of transshipment:

a) Amount received as a result of transport of passengers who embark from Nepal.

b) Amount received for the transportation of mail, livestock or other tangible assets that
embark from Nepal.
The expenses in relation to the generation of income from air transport operation, water transport
operation or chartered service from Nepal with destination outside Nepal is not deductible.

i. The amount is taxable, and the tax rate is 5%.

ii. Principally, the amount is not taxable. However, proviso to Sec. 2 (7) of Schedule 1 of the
Act requires payment of tax @ 2%
Answer to Question no. 16

a. Distributable amount as per Sec. 53(4) is Rs. 1,275,000 (32,50,000-9,75,000-1,000,000) i.e.

[Market value of assets less market value of liabilities less capital contribution].

b. Amount of declared dividend is Rs. 10,00,000. So, full amount is distribution of profit u/s 53
attracting TDS u/s 54 and 88 @ 5%.

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c. Rs. 950,000 is distribution from tax-paid retained earnings (tax base of RE) and remaining is
distributable amount in which corporate tax has not been paid. In the given case, actual distribution
is Rs. 1,000,000, and Rs. 50,000 (1,000,000-950,000) is includible in inclusion for income from
business under Sec. 56(3), so called distribution-without-profit.

Answer to Question no. 17:

Income Tax Act, 2058 has mentioned various provisions related to collection of taxes due to pay
the Government. Some of the actions that Income Tax Department can take against Edupath Pvt.
Ltd. is as below:

a) Lien over property of the taxpayer u/s 104: Section 104 of the Income Tax Act, 2058 provides
that Government of Nepal will have lien over the property of the person who has not paid tax
within the stipulated time to pay tax. To claim lien on such property, IRD should issue the notice
mentioning the following details to the Tax defaulter.

i. Details of the claimed assets,

ii. Claimed amount,
iii. Tax related with such assets, and
iv. Other matters, if any.
b) Auction of property of the taxpayer u/s 105: Section 105 of the Income Tax Act, 2058 provides
that Government of Nepal can auction the lien property of taxpayer who has not paid tax. IRD
should issue the notice of auction of assets to the Tax defaulter. The notice as per Section 105 can
also be issued with the notice as per Section 104.

c) Travel ban to foreign countries u/s 106: Section 106 of the Income Tax Act, 2058 provides that
IRD, giving the information to the respective authorities, can impose travel ban on the taxpayer
who has not paid tax to restrict him/her from leaving the country.

d) Recovery from receiver (like liquidator) u/s 108: Section 108 of the Income Tax Act, 2058
provides that Government of Nepal can recover tax amount from the Receiver (like: liquidator) of
the Person.

e) Recovery from a person who has to pay to the Taxpayer u/s 109: Section 109 of the Income Tax
Act, 2058 provides that Government of Nepal can recover tax amount from a person who is liable
to pay to taxpayer who has not paid tax.

f) Recovery of tax from the agent of non-resident person u/s 110: Section 110 of the Income Tax
Act, 2058 provides that the Government of Nepal can recover the amount of tax from the agent of
non-resident person, if a non-resident person in arrear of tax does not pay tax within the due date.

Section 110A of the Income Tax Act, 2058 provides the facility of paying tax amount on instalment
basis. However, to avail the facility of paying tax on instalment basis, the taxpayer has to make an
application prior to the institution of the case pursuant to Section 111. In that case, tax officer can
allow payment of tax on instalment, giving a reasonable time-limit

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Answer to Question no. 18:

As per Section 16 (4) of VAT Act, 2052, a registered person has to keep accounts and records that
is required to be maintained by the VAT regulation upto the period specified by the VAT Rules.
As per rule 23 (7) of VAT Rule 2053 has prescribed 6 years for keeping the records safely by any
taxpayers. In the given case, the tax officer has visited the firm on 1st Falgun, 2075, therefore, the
firm is required to produce before the tax officer the records and accounts relating to the period
starting from Shrawan 01, 2069. In this situation, the tax officer is not valid to charge fine under
Section 29 for the period before Shrawan 01, 2069 i.e., for the year 2066-067, 2067-68 and 2068-
69. But he charged rightly for the accounts and records not produced for the period starting from
Shrawan 2071. Thus, as a tax consultant, I suggest that the firm should apply for Administrative
Review for the fine charged for the year 2066-067, 2067-68 and 2068-69 accepting to pay the fine
for the years 2069-70 and 2070-71.

Answer to Question no. 19:

As per section 8Ka of the VAT Act 2052, Bank guarantee (BG) facility is provided on import of
raw material only and that is available for the quantity of raw materials required for the export of
the finished goods provided it meets the following conditions:

a) The facility is available to those industries who have exported more than 40% of its total
sales of its product during last 12 months
b) The industry has to export the goods for the price with at least 10% value addition above
the consumed value of raw materials.
c) The amount of the BG shall be equal to the VAT payable on the customs.
Value
% of Cost of
Month Last 12 addition % Value
Export Sales Total Sales Export RM
(Import) Months (Overhead Addition
Sales (Rs)
+ Profit)

2079 Baisakh 4,800 9,000 53.33% 2,000 20,000 20%

Baisakh 2078 –
+2,000
Chaitra
2078 = 4,000

2079 Jestha 4,800 - 100 + 9,000-700 + 60.86% 2,000+ 22,000 18.18%

Jestha 2078 – 900 900 2,000
Baisakh
2079 = 5,600 = 9200 = 4,000

2079 Ashad 4,800 – 100 – 9,000 – 700 - 58.79% 500 + 500 18,000 5.55%
Ashad 2078 – 550 + 900 + 700 + 900 + = Rs. 1,000
Jestha 300 600 = 9,100
2079
= 5,350

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In Baisakh and Jestha 2079, value addition is more than 10% and export of preceding 12 month is
40%, hence bank guarantee facility is available. Hence, bank guarantee required for import on
Baisakh is 13% of Rs 20,000 i.e., Rs 2,600 and for Jestha is 13% of 22,000 i.e. Rs. 2,860.

However, in Ashad, 2079, value addition is less than 10% even though export of preceding 12
months is more than 40%, hence bank guarantee facility is not available.

Answer to Question no. 20:

According to Value Added Tax Act, 2052, taxable value of goods or service is defined in section
12 as amount received from the buyer as consideration. The VAT Directives 2069 has clarified
that the quantity discount can be allowed by the supplier which will not be the part of the taxable
value. Likewise, Rule 24 of VAT Rule 2053 allows the registered person to distribute goods
without any consideration on the promotional scheme.

In the given case, the company has received the amount of only two laptop computers by giving
quantity discount. This is not a case of under – invoicing and therefore, the contention of the tax
officer that the company has sold goods by under invoicing is not correct.

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Section 3: Exam Tips to Students:

Tip 1:

In the context of income tax and VAT, while solving short note and case study, student shall give
attention whether there is all or any of the conditions that have to be fulfilled for the given cases.
It makes a huge difference and sometimes changes the conclusion. [For reference: for a natural
person to be resident any of the three conditions shall be satisfied]

Tip 2:

Focus shall be given while revising the conditions with numerical figure either it’s “less than” or
“equal to & less than”. [For reference: In case of Turnover Based Taxation, Turnover shall be
less than or equal to one crore]

Tip 3:

In case of confusion in any provision or multiple interpretation in same provision in different study
material, immediately go through the bare act from Nepal Law Commission or Website of Inland
Revenue Department, except when Income Tax Directive has to be followed for exam purpose.

Tip 4:

In case if the question is not clear and you are not sure about the application of the provision, write
the disclaimer note along with the assumptions and reason to adopt such assumption. If alternative
solution is possible, leave a footnote mentioning the alternative solution.

Tip 5:

Focus on completion of the paper by allocating the time on the basis of marks. Follow the minimum
requirement for the papers as provided in the guidelines. Do not waste your time on designing and
making arts on your paper. Note it, time management is the major art to revise and crack the paper.

Tip 6:

Always read the requirement of the question. The portion asked in requirement shall be in the face
of the answer and other calculations required shall be the part of working paper. As working paper
forms the part of your answers and also carry separate marks, it shall be performed properly as if
it is also the main solution.

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