Institute of Actuaries of India 2008 CT-2 Finance and Financial Reporting - Question Paper

value of the expansion is negative, whether the feasibility study is conducted or not.

i). discuss why the probability tree suggests that the firm should conduct the
feasibility study, even though the expansion is likely to be success. [2]

ii). discuss when it might be improper to use a probability tree in the valuation of
a capital investment project. [2]

iii).Explain why the other director's simulation exercise may be more reliable than
the probability tree. [2]

iv).Describe the prerequisites of a "Successful" simulation of a capital investment
project. [2]

v). It has been suggested that managers often use capital investment appraisal
techniques in order to justify decisions that they have already taken. State, with
reasons, whether or not you agree with this suggestion. [2]


Q. 15) a) describe the subsequent ratios and discuss the main limitations of these ratios: -
i). Income Cover
ii).Asset Cover
b) The subsequent ratios have been computed from financial statements of 2
companies of similar size and identical industry:-
Y LTD S LTD
Gross Profit Ratio 40% 20%
Net Profit Ratio 32% 16%
Return on capital employed 10% 14%

discuss which of the 2 companies is more profitable and why?
(1.25)
(0.75)
(3)
[5]

Q. 16) a) Name four users of financial statements and discuss with reasons there interest
in financial Statements?
b) Topspin Ltd is in the process of preparing its balance sheet for 31
st
December
2002. So far, the items (valued at 31st December 2002 unless otherwise stated) are:
(4)
Rs'000
Non-current assets at cost 672
Accumulated Depreciation (as on 31st December 2001) 175
Current Assets 290
Long- term loans 125
Share Capital 225
Share premium 75
Revaluation reserve 155
Retained earnings (as on 31st December 2001) 180
For the year to 31st December 2002:
• The depreciation figure in the income statement is Rs 12,000
• The profit after tax is Rs 30,000
• The directors distributed half of the company's earnings to its shareholders s in
the form of a dividend.
The company's accountants take the view that the company's non-current assets
should be revalued at Rs 7, 25,000.
Prepare the balance sheet of Topspin Ltd at 31st December 2002 taking into
account the revaluation of the non – current assets.
(2)
[6]

Q. 17) A company has experienced volatile earnings in the last five years. The underlying
business is unpredictable and risky and involves a high proportion of overseas
earnings. List the steps the management can take to decrease the volatility in reported
earnings for equity share holders.
[4]

Q. 18) a) elaborate subsidiaries and associates companies? [2]
b) discuss the subsequent statements: -
i. Balance sheet always "balance" why? [3]

ii. Going concern assumption may simplify the preparation of financial
statements, how? [3]

c) The balance sheets as on 31–03 –2006 and 31-03-2005 of Gupta textiles limited are provided below:-


Rs in Lakhs
31-03-2006 31-03-2005
Fixed Assets at Cost 750 700
Less depreciation (400) (350) 350 350
Investments 250 300
Stock 162 255
Trade debtors 215 250
With Bankers 175 130
Total Assets 1,152 1,285

Share Capital 150 150
Reserves 237 115
12% Secured Debentures 2010 350 300
Trade Creditors 140 243
Provision for taxation 140 249
Provision for dividend 135 228
Total liabilities 1,152 1,285

During the financial year 2005-2006, the subsequent transactions took place: -
• Sales 1,000
• Raw material and wages at factory 412
• Office expenses and wages at office 155
• Net return on long term investments 8%
• Tax charge on 2005-2006 profits 111
• Purchase of machinery on 31-3-2006 50
• problem of further Debentures on 2-4-2005 50
Prepare the Profit & Loss Account and Cash flow statements for the financial year 2005-2006. [12]

Earning:   Approval pending.