ICAP Question Bank P Cost and management accounting Second edition published by Emile Woolf Limited Bracknell Enterprise & Innovation Hub Ocean House, 12th Floor, The Ring Bracknell, Berkshire, RG12 1AX United Kingdom Email: info@ewiglobal.com www.emilewoolf.com © Emile Woolf International, January 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf Publishing Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer Notice Emile Woolf International has made every effort to ensure that at the time of writing the contents of this study text are accurate, but neither Emile Woolf International nor its directors or employees shall be under any liability whatsoever for any inaccurate or misleading information this work could contain © Emile Woolf International ii The Institute of Chartered Accountants of Pakistan Certificate in Accounting and Finance Cost and management accounting C Contents Page Question and Answers Index v Questions Section A Objective test and long-form questions Objective test and long-form answers 83 Answers Section B © Emile Woolf International iii The Institute of Chartered Accountants of Pakistan Cost and management accounting © Emile Woolf International iv The Institute of Chartered Accountants of Pakistan I Certificate in Accounting and Finance Cost and management accounting Index to Objective test and long-form questions and answers Question page Answer page Chapter - Inventory valuation 1.1 Steel Rods 83 1.2 XYZ Limited 84 1.3 Mehanti Limited 85 Chapter - Inventory management 2.1 Stock items 6786 and 6787 87 2.2 Inventory control 87 2.3 Alpha Motors (Pvt) Ltd 88 2.4 ABC 88 2.5 Karachi Limited 89 2.6 Moder Distributors Limited 90 2.7 Robin Limited 90 2.8 Ore Limited 91 2.9 Explain 92 93 Chapter - Accounting for overheads 3.1 © Emile Woolf International Overhead cost per unit v The Institute of Chartered Accountants of Pakistan Cost and management accounting Question page Answer page 3.2 Apportionment 93 3.3 Service departments 10 94 3.4 Zia Textile Mills 11 95 3.5 Ternary Engineering Limited 12 96 3.6 Production and service 13 97 3.7 RT Limited 13 98 3.8 Ahsan Enterprises 14 99 3.9 Amber Limited 15 100 3.10 Sparrow (Pvt) Limited 16 101 Chapter - Marginal costing and absorption costing 4.1 Differences 17 102 4.2 Marginal and absorption 17 102 4.3 Zulfiqar Limited 18 104 4.4 ATF Limited 19 106 4.5 Mazahir (Pakistan) Limited 19 107 4.6 Silver Limited 20 108 Chapter - Cost flow in production 5.1 Cost ledger 21 109 5.2 Kaat Limited 21 111 5.3 Mirza Limited 23 112 5.4 Quality Limited 24 113 5.5 Sapphire Limited 25 115 Chapter - Job, batch and service costing 6.1 Job 6789 26 118 6.2 Ahmer and company 26 118 Chapter - Process costing 7.1 Process costing: The basic rules 27 120 7.2 Process and process 27 122 © Emile Woolf International vi The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page 7.3 Equivalent units 28 123 7.4 Yahya Limited 29 124 7.5 Two processes 30 125 7.6 Smart Processing Limited 30 127 7.7 Hornbill Limited 31 129 7.8 Fowl Limited 32 130 7.9 Joint process 33 131 7.10 Binary Ltd 33 132 7.11 Platinum limited 34 133 Chapter - Budgeting 8.1 Budgeted profit and loss account 35 134 8.2 Budgeted profit and loss account 35 136 8.3 Budgeted profit and loss account 37 137 8.4 Cash requirements 37 138 8.5 Budgeted profit 38 139 8.6 Profit forecast statement 40 141 8.7 Cash budget 41 143 8.8 Regression method 42 146 8.9 Production cost budget 42 146 8.10 Cash budget 43 147 Chapter - Standard costing 9.1 Standard cost – ICA 44 148 9.2 Standard cost - Idle time 44 148 Chapter 10 - Variance analysis 10.1 Reconcile 45 149 10.2 Simple variances 45 150 10.3 Overhead variances 46 152 10.4 Manufacturing cost variance 46 152 © Emile Woolf International vii The Institute of Chartered Accountants of Pakistan Cost and management accounting Question page Answer page 10.5 Variances and operating statements 47 157 10.6 Volume and expenditure variances 48 158 10.7 Lettuce 49 159 10.8 Moongazer 49 162 10.9 BRK 50 165 10.10 Carat 51 166 10.11 Hexa Limited 52 170 10.12 Excellent Limited 53 171 10.13 Watool Limited 54 174 10.14 ABC Limited 55 176 10.15 Standard cost sheet 55 178 Chapter 11 - Target costing 11.1 Scriba company 56 180 11.2 Target 56 81 Chapter 12 - Relevant costs 12.1 Jimco 58 183 12.2 Materials and relevant costs 58 183 12.3 Printing leaflets 59 184 12.4 JD 59 185 12.5 Product B22 60 186 12.6 Fazal Industries Limited 62 187 12.7 Describe terms 63 188 12.8 Topaz Limited 63 188 12.9 Tychy Limited 64 189 Chapter 13 - Cost-Volume-Profit (CVP) analysis 13.1 Octa Electronics 65 190 13.2 Soft drink company 65 191 13.3 Solvent Limited 66 192 © Emile Woolf International viii The Institute of Chartered Accountants of Pakistan Index to questions and answers Question page Answer page Chapter 14 - Decision making techniques 14.1 Limiting factors 67 193 14.2 Shortages 68 194 14.3 Make or buy 69 196 14.4 Condaco 70 198 14.5 Decimal world Limited 70 199 14.6 Three products 71 200 14.7 Areesh Limited 71 201 14.8 Jaseem Limited 72 202 14.9 Bauxite Limited 73 202 14.10 Artery Limited 73 203 Chapter 15 - Introduction to financial instruments 15.1 Sources of finance 75 205 15.2 Direct and indirect investment 75 207 15.3 FI definitions 75 208 15.4 FI definitions 75 209 Chapter 16 - Time value of money 16.1 DCF and relevant costs 76 210 16.2 Annuities and perpetuities 77 210 16.3 Investment appraisal and inflation 77 211 16.4 DCF exercises 78 212 16.5 Conto Company 78 213 16.6 Baypack Company 79 214 16.7 Larkana Fabrication Limited 79 214 16.8 Badger 80 216 Chapter 17 – Sustainability reporting 17.1 Benefits of sustainability reporting 82 217 17.2 IFAC sustainability framework 2.0 82 218 17.3 Key considerations for professional accountants 82 218 © Emile Woolf International ix The Institute of Chartered Accountants of Pakistan Cost and management accounting © Emile Woolf International x The Institute of Chartered Accountants of Pakistan Cost and management accounting Government order Alpha Beta Gamma Zeta 200 300 400 Market demand Units 900 3,000 5,000 600 Total 1,100 3,300 5,400 600 All figures in kg: Resource Direct material-A Direct material-B Available 22,000 34,000 Requirement 18,400 35,200 Alpha 2,200 2,200 Beta 9,900 Gamma 16,200 21,600 Zeta 1,500 It can be seen from the above that the scarcity of material-B is a binding constraint and therefore the contributions of each product and the component per kg of material-B must be compared Alpha Contribution Contribution /kg of material-B 17.9 8.95 Rank Beta Gamma Rupees 36.8 42.3 12.27 10.58 Zeta 14.0 5.60 AL should manufacture 120 units of Zeta and continue to purchase 480 units from the market © Emile Woolf International 204 The Institute of Chartered Accountants of Pakistan Answers CHAPTER 15 – INTRODUCTION TO FINANCIAL INSTRUMENTS 15.1 SOURCES OF FINANCE (a) Equity (shares) Features Finance raised through sale of shares to existing or new investors (existing investors often have a right to invest first – pre-emption rights) Providers of equity are the ultimate owner of the company They exercise ultimate control through their voting rights Issue costs can be high Cost of equity is higher than other forms of finance – they carry the risk, and therefore command the highest of returns as compensation New issues to new investors will dilute control of existing owners When appropriate Used to provide long-term finance May be used in preference to debt finance if company is already highly geared Private companies may not be allowed to offer shares for sale to the public at large (e.g in the UK) (b) Leases Features Two types: operating leases – off balance sheet finance leases – on balance sheet Legal ownership of the asset remains with the lessor Lessee has the right of use of the asset in return for a series of rental payments Tax deductibility of rental payments depends on the tax regime but typically they are tax deductible in one way or another Finance leases are capitalised and affect key ratios (ROCE, gearing) When appropriate Operating leases For the acquisition of smaller assets but also for very expensive assets Common in the airline industry Finance leases – Can be used for very big assets (e.g oil field servicing vessels) (c) Venture capital Features The term ‘venture capital’ is normally used to mean capital provided to a private company by specialist investment institutions, sometimes with support from banks in the form of loans © Emile Woolf International 205 The Institute of Chartered Accountants of Pakistan Cost and management accounting The company must demonstrate to the venture capitalist organisation that it has a clear strategy and a convincing business plan A venture capital organisation will only invest if there is a clear ‘exit route’ (e.g a listing on an exchange) Investment is typically for 3-7 years When appropriate An important source of finance for management buy-outs Can provide finance to take young private companies to the next level May provide cash for start-ups but this is less likely (d) Business angels Features Business angels are wealthy individuals who invest directly in small businesses, usually by purchasing new equity shares, but not get involved in the management of the company Business angels are not that common There is too little business angel finance available to meet the potential demand for equity capital from small companies When appropriate A way for small companies to raise equity finance (e) Private equity funds Features Private equity is equity in operating companies that are not publicly traded on a stock exchange Private equity as a source of finance includes venture capital and private equity funds A private equity fund looks to take a reasonably large stake in mature businesses In a typical leveraged buyout transaction, the private equity firm buys majority control of an existing or mature company and tries to enhance value by eliminating inefficiencies or driving growth Their view is to realise the investment, possibly by breaking the business into smaller parts When appropriate If used as a source of funding a private equity fund will take a large stake (30% is typical) and appoint directors It is a method for a private company to raise equity finance where it is not allowed to so from the market © Emile Woolf International 206 The Institute of Chartered Accountants of Pakistan Answers 15.2 DIRECT AND INDIRECT INVESTMENT (a) Direct and indirect investment Direct investment describes when an investor owns all or part of an asset With indirect investment, the investor gains exposure to the risks and rewards of an underlying asset without actually owning it through vehicles such as securities, funds, derivatives and private equity Taking property as an example, a direct investor might own a building then make a profit from the capital appreciation when they sell the building The indirect investor might invest in an investment fund whose return is then based on the average movement in property values The indirect investor will make a profit as property values grow without actually owning the building (b) Liquidity and holding period Liquidity Liquidity of direct investments tends to be lower due to the size (larger) and uniqueness of the investment Indirect holdings might be more liquid than direct investments as investment funds are often open-ended with investors entering and leaving the investment vehicle frequently in an open market Holding period The holding period might typically be longer-term for direct investors and may even be permanent, for example when a company owns a factory in a foreign territory The holding period might be lower and more medium-term for an indirect investment for example investing in a real estate investment fund until a price target has been met (c) Investment and speculation Investment and speculation are similar in that they both involve an investor risking capital in the expectation of making a profit However, the following differences might be observed: Investment is normally long-term following a period of careful research Speculation is typically more short- to medium-term and may be driven by intuition, rumour, charts plus a limited amount of research Investors tend to be risk neutral with an expectation of moderate returns in exchange for taking moderate risk Speculators are more risk seekers who expect higher returns in exchange for taking higher risk Investment often involves putting money into an asset that isn’t readily marketable in the short-term but has an expectation of yielding a series of returns over the life of the investment The investment return would normally arise from both capital appreciation and yield (interest, dividends and coupons) On the other hand, speculators often invest in more marketable assets as they not plan to own them for too long Speculation returns would typically arise purely from capital (price) appreciation rather than yield Investment normally includes an expectation of a certain price movement or income stream whereas speculators will normally expect some kind of change without necessarily knowing what © Emile Woolf International 207 The Institute of Chartered Accountants of Pakistan Cost and management accounting 15.3 FI DEFINITIONS (a) Bonds A bond is debt capital issued by a company, local authority or government (called the issuer) An investor lends the organisation money (face/par/nominal value – i.e the loan principal) for a set period in return for receiving a fixed interest rate (called the coupon rate) The loan principal is then repaid at the pre-set maturity date which can be any period from day to infinity (in practice they tend to be 10 to 20 years) The stability of the issuer is the bond holder’s main assurance for getting repaid which is also reflected in the coupon rate Bonds issued by the Government (called Gilts) are considered the lowest risk and attract the lowest coupon rate, whereas corporate bonds are riskier and therefore require the issuer to pay a higher coupon rate Bonds are often traded on the money markets The terms bond, debenture and loan stock are often used interchangeably for describing the same instrument In some systems there may be a technical or legal differentiation based on whether the instrument is secured or not and also its ranking on liquidation The US uses the term bond but not debenture whereas in the UK the term bond is used to describe both loan notes and debentures Notes are typically short-term in duration with debentures long term Most debentures would then be secured on assets in such a way that lenders rank above unsecured creditors in a liquidation (b) (c) Caps, collars and floors A cap is a ceiling agreed to an interest rate A floor is a lower limit set for an interest rate A collar combines both caps and floors thus maintaining the interest rate within a particular range Options An option gives the owner the right, but not the obligation to trade ‘something’ The ‘something’ might be shares, a foreign currency or a commodity There are two types of options: Exchange traded options – these are standardised and traded in an open market Over the counter (OTC) options – these are bespoke and the terms are agreed specifically between the two counterparties Options have both an intrinsic value and a time value The holder of an option has two choices: Exercise the right to buy (a call option) or sell (a put option) at the predetermined price (the exercise price) Not exercising this right – i.e allowing the option to lapse © Emile Woolf International 208 The Institute of Chartered Accountants of Pakistan Answers 15.4 FI DEFINITIONS (a) Interest rate swaps An interest rate swap is an agreement between two parties to exchange interest rate payments The objective might be to: Switch from paying one type of interest to another Raise less expensive loans Securing better deposit rates In essence, party A agrees to pay the interest on party B’s loan, whilst party B agrees to pay the interest on party A’s loan (b) Forwards A forward contract is a binding agreement to exchange a set amount of goods at a set future date at a price agreed today Forward contracts are used by business to set the price of a commodity well in advance of the payment being made This brings stability to the company who can budget with certainty the payment they will need to raise Forwards are particularly suitable in commodity markets such as gold, agriculture and oil where prices can be highly volatile Forward contracts are tailor-made between the two parties and therefore difficult to cancel (as both sides need to agree) A slightly more flexible approach would be to use futures (c) Futures Futures share similar characteristics to Forward contracts i.e.: Prices are set in advance Futures hedges provide a fixed price Futures are available on commodities, shares, currencies and interest rates However, futures are standardised contracts that are traded on an open futures market (unlike forward contracts which are unique to the two counterparties) © Emile Woolf International 209 The Institute of Chartered Accountants of Pakistan Cost and management accounting CHAPTER 16 - TIME VALUE OF MONEY 16.1 DCF AND RELEVANT COSTS Year Rs.000 Rs.000 Rs.000 Rs.00 Rs.000 Rs.000 Sales 7,400 8,300 9,800 5,800 Wages (550) (580) (620) (520) Materials (340) (360) (410) (370) Licence fee (300) (300) (300) (300) (300) Overheads (100) (100) (100) (100) Equipment (5,200) (5,200) 2,000 Specialised equipment (150) Working capital (650) 650 (5,500) (6,150) 5,960 6,960 8,370 7,460 Discount factor at 10% Present value 1.000 0.909 0.826 0.751 0.683 0.621 (5,500) (5,590) 4,923 5,227 5,717 4,633 NPV = + Rs.9,409,000 The project has a positive NPV The project should be undertaken because it will increase the value of the company and the wealth of its shareholders 16.2 ANNUITIES AND PERPETUITIES (a) Present value of net cash flows of Rs.75,000 in Years – = $75,000 0.088 1 1.088 = Rs.852,273 (1 – 0.603) = Rs.338,352 Year 1–6 NPV Cash flow Rs (325,000) 75,000 per year Discount factor (8.8%) 1.000 PV Rs (325,000) 338,352 13,352 The project has a positive NPV and should be undertaken (b) The annuity PV formula can be used to calculate the ‘present value’ as at the end of Year for annual cash flows from Year onwards End-of-Year ‘present value’ of net cash flows of Rs.75,000 in Years – = $75,000 1 0.088 1.088 = Rs.852,273 (1 – 0.656) = Rs.293,182 © Emile Woolf International 210 The Institute of Chartered Accountants of Pakistan Answers Year Cash flow Discount factor (8.8%) Rs (325,000) 50,000 293,182 2–6 NPV PV Rs (325,000) 45,956 269,469 (9,575) 1.000 1/1.088 1/1.088 The project has a negative NPV and should not be undertaken (c) Year Cash flow onwards in perpetuity NPV PV Discount factor (8.8%) Rs (325,000) 50,000 Rs (325,000) 568,182 243,182 1.000 1/0.088 The project has a positive NPV and should be undertaken 16.3 INVESTMENT APPRAISAL AND INFLATION (a) Contribution each year = Rs.(15 – 3.75 – 2.50) × 10,000 = Minus: Production overheads = Contribution = Capital cost Year 1-5 NPV Contribution Rs (205,000) Rs 50,000 Rs.87,500 Rs.37,500 Rs.50,000 Net cash flow DCF factor at 10% Present value Rs (205,000) 50,000 1.000 3.791 Rs (205,000) 189,500 (15,500) Ignoring inflation, the project is not worthwhile (b) Workings Year At current prices © Emile Woolf International Sales: Inflation at 7% Materials: Inflation at 5% Rs 150,000 Rs (37,500) Rs (25,000) Rs (37,500) Rs 160,500 171,735 183,756 196,619 210,382 (39,375) (41,344) (43,411) (45,582) (47,861) (26,500) (28,090) (29,775) (31,562) (33,456) (38,250) (39,015) (39,795) (40,591) (41,403) 56,375 63,286 70,775 78,884 87,662 211 Labour: Inflation at 6% Overheads: Inflation at 2% Net cash flow The Institute of Chartered Accountants of Pakistan Cost and management accounting Year NPV Capital cost Contribution Rs (205,000) Rs 56,375 63,286 70,775 78,884 87,662 Net cash flow DCF factor at 10% Present value Rs (205,000) 56,375 63,286 70,775 78,884 87,662 1.000 0.909 0.826 0.751 0.683 0.621 Rs (205,000) 51,245 52,274 53,152 53,878 54,438 59,987 Allowing for inflation in the cash flows, the NPV of the project is about + Rs.60,000 The effect of inflation, particularly because selling prices are expected to rise at a faster rate than costs, is to turn a negative NPV into a positive NPV It would be a risky decision to invest in a project, when the project relies for its positive NPV on estimates of future inflation rates 16.4 DCF EXERCISES (a) Annuity factor at 8%, years – 5.747 Annuity factor at 8%, years – 3.312 Annuity factor at 8%, years – 2.435 Annuity factor at 8%, years – 10 6.710 Annuity factor at 8%, years – 5.747 Annuity factor at 8%, years – 10 0.963 The Year 10 value of a perpetuity of Rs.100,000 each year in perpetuity from Year 11 onwards: = Rs.100,000 ×1/0.08 = Rs.1,250,000 Years 1–4 5–8 – 10 10 NPV © Emile Woolf International Annual cash flow Discount factor at 8% Rs (3,000,000) 500,000 400,000 300,000 1,250,000 1.000 3.312 2.435 0.963 0.463 212 PV Rs (3,000,000) 1,656,000 974,000 288,900 578,750 497,650 The Institute of Chartered Accountants of Pakistan Answers (b) (i) Ignoring inflation Year (ii) Annual cash flow Discount factor at 12% Rs (900,000) 400,000 400,000 250,000 300,000 1.000 0.893 0.797 0.712 0.636 PV Rs (900,000) 357,200 318,800 178,000 190,800 144,800 Allowing for inflation Year Equipment Revenue Running costs Rs (900,000) Rs Rs Rs 824,000 (420,000) 848,720 (441,000) 655,636 (405,169) Rs 243,101 450,204 (364,652) 404,000 407,720 250,467 328,653 0.893 0.797 0.711 0.636 360,772 324,953 178,082 209,023 Net cash flow Discount factor at 12% (900,000) Present value (900,000) 1.000 NPV = + 172,830 16.5 CONTO COMPANY (a) NPV calculation PV Rs 1,050,800 (532,480) 518,320 (440,000) 78,320 PV of sales (W1) PV of variable costs (W1) PV of contribution Cost of machine NPV of project The project has a positive NPV and should be accepted Workings W1 Sales and variable costs Year DCF factor 9% 0.917 0.842 0.772 0.708 © Emile Woolf International Sales Actual PV Rs Rs 240,000 220,080 360,000 303,120 500,000 386,000 200,000 141,600 1,050,800 213 Variable costs Actual PV Rs Rs 120,000 110,040 180,000 151,560 250,000 193,000 110,000 77,880 532,480 The Institute of Chartered Accountants of Pakistan Cost and management accounting 16.6 BAYPACK COMPANY (a) Workings NPV calculation Year Initial investment Rs 000 Rs 000 Rs 000 Rs 000 1,433 (1,248) 2,298 (1,298) 3,439 (1,350) 2,497 (1,404) 1,117 2,089 1,093 (2,000) Total contribution (W) Fixed costs Taxable cash flow 185 Tax (30%) (56) (335) 129 782 1,462 765 0.909 0.826 0.751 0.683 Discount factor, 10% Present values (2,000) 117 (627) 646 (328) 1,098 522 NPV = Rs 383,000 Workings Contribution Year 16.7 Rs Rs Rs Rs Average sales price 73.55 76.03 76.68 81.86 Average variable cost 51.50 53.05 49.17 50.65 22.05 22.98 27.51 31.21 Sales units 65,000 100,000 125,000 80,000 Total contribution 1,433 2,298 3,439 2,497 LARKANA FABRICATION LIMITED (a) Contribution Strategy Year 100,000 105,000 110,250 115,762 121,551 Selling price (unit) 8.00 8.00 8.00 8.00 8.00 Variable cost (unit) 3·00 3.00 2.95 2.95 2.90 Contribution (unit) 5.00 5.00 5.05 5.05 5.10 Inflated contribution 5.15 5.30 5.52 5.68 5.91 Total contribution (Rs.) 10% discount factors 515,000 0.909 556,500 0.826 608,580 0.751 657,528 0.683 718,366 0.621 PV of contribution (Rs.) 468,135 459,669 457,044 449,092 446,105 Demand (units) Total PV of Strategy contributions = Rs.2,280,045 © Emile Woolf International 214 The Institute of Chartered Accountants of Pakistan Answers Strategy Year 110,000 126,500 145,475 167,296 192,391 Selling price (unit) 7.00 7.00 7.00 7.00 7.00 Variable cost (unit) 2.95 2.90 2.80 2.70 2.55 Contribution (unit) 4.05 4.10 4.20 4.30 4.45 Inflated contribution 4.17 4.35 4.59 4.84 5.16 458,700 550,275 667,730 809,713 992,738 0.909 0.826 0.751 0.683 0.621 416,958 454,527 501,465 553,034 616,490 Demand (units) Total contribution (Rs.) 10% discount factors PV of contribution (Rs.) Total PV of strategy contributions = Rs.2,542,474 Strategy is preferred as it has the higher present value of contributions (b) Evaluating the investment in the new machine using internal rate of return: Year Total contribution Fixed costs Profit 10% discount factors Present value 20% discount factors Present value of profits Rs Rs Rs Rs Rs 458,700 550,275 667,730 809,713 992,738 (128,684) (133,832) (114,400) (118,976) (123,735) 344,300 431,299 543,995 681,029 858,906 0.909 0.826 0.751 0.683 0.621 312,969 356,253 408,540 465,143 533,381 0.833 0.694 0.579 0.482 0.402 286,802 299,322 314,973 328,256 345,280 Including the cost of the initial investment to give the present values at two discount rates: 10% 20% discount rate discount rate Rs Rs 2,076,285 1,574,633 Initial investment (1,600,000) (1,600,000) Net present value 476,285 (25,367) Sum of present values of profits IRR = 10% + [476,285/(476,285+ 25,367)] × (20 – 10)% = 19.5% Since the internal rate of return is greater than the company’s cost of capital of 10%, the investment is financially acceptable © Emile Woolf International 215 The Institute of Chartered Accountants of Pakistan Cost and management accounting 16.8 BADGER (a) Cash Flows Machine Existing machine 01/01/13 Rs m (180) 31/12/13 Rs m 31/12/14 Rs m 31/12/15 Rs m 31/12/16 Rs m 25 (1) 79 (32) 103 (48) 175 (57) 179 (73) (6) (13) (9) (10) (8) (9) (8) (10) (3) (3) (6) (3) (3) (3) (1) (179) 1.000 25 25 0.909 27 27 0.826 98 98 0.751 109 109 0.683 (179) 23 22 74 74 Operating flows Sales W1 Purchases W2 Payments to subcontractors Fixed overhead Labour costs: Promotion Redundancy Material X Y Net operating flows Discount factor (10% NPV 14 WORKINGS (1) Sales 2012 Rs m 2013 Rs m 2014 Rs m 2015 Rs m 2016 Rs m 1,100 1,122 1,144 1,167 1,191 0.07 0.09 0.15 0.15 79 103 175 179 Opening payables Add purchases Less closing payables 2013 40 (8) 2014 50 (10) 2015 10 58 (11) 2016 11 62 - Cash for purchases 32 Market size Market share Sales (2) Purchases © Emile Woolf International 216 48 57 73 The Institute of Chartered Accountants of Pakistan Answers CHAPTER 17 – SUSTAINABILITY REPORTING 17.1 BENEFITS OF SUSTAINABILITY REPORTING According to GRI an effective sustainability reporting cycle should benefit all reporting organizations Internal benefits for companies and organizations can include: Increased understanding of risks and opportunities Emphasizing the link between financial and non-financial performance Influencing long term management strategy and policy, and business plans Streamlining processes, reducing costs and improving efficiency Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance standards, and voluntary initiatives Avoiding being implicated in publicized environmental, social and governance failures Comparing performance internally, and between organizations and sectors External benefits of sustainability reporting can include: Mitigating – or reversing – negative environmental, social and governance impacts Improving reputation and brand loyalty Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets Demonstrating how the organization influences, and is influenced by, expectations about sustainable development A focus on sustainability helps organizations manage their social and environmental impacts and improve operating efficiency and natural resource stewardship, and it remains a vital component of shareholder, employee, and stakeholder relations Firms continuously seek new ways to improve performance, protect reputational assets, and win shareholder and stakeholder trust Sustainability disclosure can serve as a differentiator in competitive industries and foster investor confidence, trust and employee loyalty Analysts often consider a company’s sustainability disclosures in their assessment of management quality and efficiency, and reporting may provide firms better access to capital Sustainability reporting requires companies to gather information about processes and impacts that they may not have measured before This new data, in addition to creating greater transparency about firm performance, can provide firms with knowledge necessary to reduce their use of natural resources, increase efficiency and improve their operational performance Besides, sustainability reporting can prepare organizations to avoid or mitigate environmental and social risks that might have material financial impacts on their business while delivering better business, social, environmental and financial value For reporting to be as useful as possible for managers, executives, analysts, shareholders and stakeholders, a unified standard that allows reports to be quickly assessed, fairly judged and simply compared is a critical asset © Emile Woolf International 217 The Institute of Chartered Accountants of Pakistan Cost and management accounting 17.2 IFAC SUSTAINABILITY FRAMEWORK 2.0 Establishing the Role of Professional Accountants and the Finance Function The Framework will provide professional accountants with an opportunity to consider themselves as knowledgeable change agents Professional accountants are well positioned to help organizations interpret sustainability issues in a relevant way for their organizations, and to integrate those issues into the way they business Although developing a sustainable organization is a multi-disciplinary responsibility, the finance function needs to be clear on its role in providing and supporting sustainability leadership for several reasons: The finance function is well placed to influence behavior and outcomes through incorporating sustainability considerations into strategies and plans, business cases, capital expenditure decisions, and into performance management and costing systems Integrated sustainability management involves managing opportunity and risk, measuring and managing performance, and providing insight and analysis to support decision making This plays to the strengths of professional accountants working in finance functions and offers opportunities to provide higher value business partnering Improving the quality of stakeholder communications and the reporting of sustainability information and how it connects to an organization’s strategy and operations requires the same rigor as the process of financial reporting Materiality, relevance, comparability, accuracy, and completeness continue to be essential qualitative characteristics of information Professional accountants understand the need for, and how to implement quality data and robust systems to capture, maintain, and report performance They also have the project management skills needed to put such systems in place, applying appropriate processes and controls To rise to the challenge, professional accountants, on an individual level, will need to understand how sustainability does or might affect their role, and to identify and utilize the continuing professional development resources available from their own professional body, IFAC, and other sources Continuing education will help accountants learn more about the applied aspects of sustainability and determine approaches to organizational improvement and transformation Accountants working in audit and advisory roles, particularly in SMEs, can consider how they could embrace sustainability issues (using the Framework as a starting point) to add value to their client service/advisory role Importantly, when acting in a public interest-related reporting or advisory capacity, it might be necessary to consider whether sustainability issues have been properly addressed and disclosed 17.3 KEY CONSIDERATIONS FOR PROFESSIONAL ACCOUNTANTS Create awareness of how the finance function can get involved in establishing a business case Ensure clarity on uses of the business case Focus the business case on linking sustainability to strategy and the impacts of organizational activity on society and the environment A business case evolves as the business environment changes Identifying significant, material, and relevant environmental and social issues © Emile Woolf International 218 The Institute of Chartered Accountants of Pakistan ... Certificate in Accounting and Finance Cost and management accounting C Contents Page Question and Answers Index v Questions Section A Objective test and long-form questions Objective test and long-form... Pakistan Cost and management accounting © Emile Woolf International iv The Institute of Chartered Accountants of Pakistan I Certificate in Accounting and Finance Cost and management accounting. .. Pakistan Cost and management accounting © Emile Woolf International x The Institute of Chartered Accountants of Pakistan SECTION Certificate in Accounting and Finance Cost and management accounting