Suggested Solutions to Comprehensive Test in Financial Accounting for Management by Ramachandran

& Kakani; Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited,
2011"

APPENDIX D
Comprehensive Test: VIP Chaddi 1 Pe Vaddi 2 Offer
SECTION I
On a 1 to 5 scale you have to rate MIL using its Statement of Cash Flows. Where a rating of 1 would indicate
Likely to Declare Bankruptcy (lot of problems noted) and a rating of 5 would indicate Outstanding cash flow
(few problems). The rating you would give would be:
Scale
Maxwell Industries

2
No Negative

Overall Assessment (in less than 50 words):

Poor capex with poor CFO. FY2005 was a struggle. FY2004 was pathetic. Grave concerns; drastic actions needed;
cash flows from operations are going down, capex is low (compared to depreciation). Major build up in receivables.
Appears to be heading towards insolvency (or financial restructuring or sell off). Consolation is that lenders are still
willing to lend and the company has still some fixed assets for sale. (Rating: 1)

SECTION II
1. Accounts Receivable has been a source in the last two years
No
2. Inventories has been a use in the last two years
No
3. Accounts Payables has been a source in the last two years
Yes
4. In FY2005, the cash flow from operations covered both the capital expenditures and the firms dividend
payments, if any?
No
5. In FY2004, the firm invested the excess cash from operations in interest payments and/or repayment of
borrowings?
Not Applicable
6. In FY2004, (other than cash flow from operations) there were no other sources of cash the firm used to pay for the
capital expenditures and/or dividends?
No
7. In FY2005, the cash flow from operations covered both the capital expenditures and the firms dividend
payments, if any?
No
8. In FY2005, the firm invested the excess cash from operations in interest payments and/or repayment of
borrowings?
Not Applicable
9. In FY2004, the firm invested the excess cash from operations in interest payments and/or repayment of
borrowings?
Not Applicable
10. In FY2005, (other than cash flow from operations) there were no other sources of cash the firm used to pay for
the capital expenditures and/or dividends?
No
11. In FY2005, compared to FY2004 we can say that the cost of goods sold increased but its operations and other
expenses decreased
No
12. In FY2004, the company used its unsecured borrowings to repay its secured borrowings No
13. In both the years, the cash cover for daily expense is less than 2 days
No
14. In both the years, the quick asset for daily expense is less than 4 months
No
15. In FY2004, the current assets cover for daily expense has increased
Cant Say
16. As a manager inside the company, one should be happy with the companies average collection period figures
(compared to the past)
No
17. As a regular customer, one should be happy with the companies average collection period figures (compared to
the past)
Yes
1
2

Innerwear
Big

Suggested Solutions to Comprehensive Test in Financial Accounting for Management by Ramachandran

& Kakani; Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited,
2011"
18. As a regular supplier, one should be happy with the companies average payables period figures (compared to the
past)
Yes
19. One Rupee invested in the operating cycle of the company would typically take more than 220 days in FY2004
Yes
20. One Rupee invested in the operating cycle of the company would typically take less than 180 days in FY2005
No
21. The companys annual report for FY2005 would have been quite depressing to its long-term lenders
Yes
22. In FY2005, the Net Gain from borrowed funds for the company is more than Rs 37 Lakhs
No
23. In FY2004, the Net Loss from borrowed funds for the company is more than Rs 37 Lakhs
No
24. For both the years, Gearing for this company would have been negative
Yes
25. In FY2005, the companys Equity Multiplier has decreased (compared to FY2004)
No
26. In both the years, the companys book value per share has been above Rs 60
Yes
27. In FY2005, most of the ratios related to efficiency of use of assets have given a bad signal (compared to
FY2004)
No
28. In FY2005, the Return on Investment ratio operating profit to operating assets has given a bad signal
(compared to FY2004)
Yes
29. In FY2005, most of the Margin on Sales ratios have improved (compared to FY2004)
No
30. In FY2005, shareholders would have been pleased with the companys performance (compared to FY2004)
No
31. After your overall assessment of MIL. You would agree with
a) Finance-majors
b) Marketing-Majors;
c) Both (a) and (b)
d) None of the above
32. If you were the CEO of MILs competitor (say, Rupa & Co.), you would be pleased with the FY2005 annual
report of MIL
Yes
33. The deferred tax liability is due to the company providing low depreciation on books (compared to rates allowed
by tax authorities)
Cant Say
34. No board of directors resigned during FY2005
Yes
35. Three board of directors were seeking re-appointment in the AGM
Yes
36. The dividend for the year FY2005 was paid on 31-August-2005
Cant Say
37. The companys inventory valuation was based on the principle of First In First Out
Cant Say
38. The companys depreciation policy was based on written down value basis
No
39. The company had large number of related party transactions
Yes
SECTION III
If you were given complete powers to remake this annual report (including remaking its financial statements, if
needed) what all things you would change or do (to ensure transparency, better governance, and also better
compliance with rules/regulations):
Please give your answer point-wise (in the space provided):
For example, the company should have provided the detailed share price trading information on the relevant stock
exchange (say, monthly high-low and volume of shares traded).
OR,
Detailed reasons for not providing the share-price trading data.

Suggested Changes
1.

Inventory symbol for FY2005 was wrong in the statement of cash flow (it was actually a source)

2.

Long-term investments seem to have suffered a permanent decrease in their value (especially market value of
Rs 0.01 per share for one company and Rs 0.45 for another company see, schedule 6). The company should
have provided for the impairment of these assets through its profit & loss account

Suggested Solutions to Comprehensive Test in Financial Accounting for Management by Ramachandran

& Kakani; Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited,
2011"
3.

Inclusion of the inventory flow method assumed (i.e., FIFO or Weighted Average OR LIFO) should have been
clearly specified in its notes to accounts (as part of disclosure of significant accounting policies)

4.

Specifics of Deferred Tax Liabilities are not provided (and the notes to accounts seems to be concealing that
revealing)

5.

Provide clear reasons for the deferred amortization expenditure in its notes to accounts (as this move is unlike
its past practice of expensing its advertising expenditure). The amount being deferred is also quite high
(compared to the firms profits). For example, the names of the product/brand launch being deferred to a five
year period.

6.

Greater the high amount of related party transactions details of transactions with related parties (especially
the terms and conditions of items such as royalty payments should be provided)

7.

A summary of 10-year important financial numbers (including a few ratios) to give a hint of the overall trend.

8.

Provide clear details of its long-term loans including the current portion of its long-term loans. It should
especially provide the repayment terms of the medium term loan (and the conditionality agreed upon).

9.

Group-wise depreciation schedule ought to be provided especially life of the asset (i.e., depending on the type
of fixed asset)

10. Mention of the Corporate Environment Management i.e., sustainability of the environment due to the
companies business activities and measures taken by the management.
11. The companies accounts receivable constitute more than 40% of its asset structure with a high average
collection period. Still the company has made no provisions for collection losses. Provide reasons thereof.
12. Terms of unsecured loans from the directors
13. Clearly mention the reasons for the one-time prior period tax adjustment [of Rs 32.10 Lakhs in FY 2005 and
(Rs 150+ lakhs) for FY 2004] for earlier years. This is especially important considering the large amount
involved (compared to profits).
14. Auditors report (with managements response) should be provided in complete detail for non-inclusion or
ignoring the above
15. One can also pick up each accounting standard and argue out relevant points that have been missed (such as AS
on investments)

SECTION IV
1.

If it is known that the loss on sale (or discard) of asset mentioned in schedule 17 is related to only one item
i.e., disposal of plant and machinery then the journal entry/entries for the sale of the asset would have been

Cash and Bank Balance A/c (debit)

Rs 18.63 Lakhs

Accumulated Depreciation, Plant and Machinery A/c (debit)

Rs 3.71 Lakhs

Loss on Sale /Discard of Assets A/c (debit)

Rs 5.38 Lakhs

Gross, Plant and Machinery A/c (credit)

Rs 27.72 Lakhs

Narration: Being sale of a partly used plant and machinery for Rs 18.63 lakhs (balance being written off as
loss on sale of asset)

2.

What would have been the journal entry when the company issued bonus shares (in one of the past periods)

Share Premium A/c (debit)

Rs 25.30 Lakhs

Suggested Solutions to Comprehensive Test in Financial Accounting for Management by Ramachandran

& Kakani; Authored by Ram Kumar Kakani, Copyright with Tata McGraw Hill Education Private Limited,
2011"
Equity Shares A/c (credit)

Rs 25.30 Lakhs

Narration: Being share premium capitalized for bonus issue of equity shares to existing shareholders