362 End Term FRA SecD
362 End Term FRA SecD
362 End Term FRA SecD
Q1. Tension Begins Manufacturing Company was organized five years ago and manufactures toys.
Its most recent three years’ balance sheets and income statements are reproduced below:
A reconciliation of retained earnings for years ended June 30, Year 4, and Year 5, follows:
Additional Information:
Required:
a. Compute the following measures for both Years 4 and 5: [20 marks]
b. Based on your analysis in (a) prepare a half-page report yielding a recommendation on whether to
grant a loan to Tension Escalates Manufacturing. Support your recommendation with relevant
analysis. [5 marks]
Q2. Pain Ltd was formed on December 18, 2019, via the merger of Agony International and Tension,
Inc. The company owns the rights to franchises and brands including Fake, Forged, Phony, Sham,
Replica and Bogus.
The consolidated entity got off to a bad start when it was revealed that Agony International executives
had been committing “widespread and systemic” accounting fraud with intent to deceive investors.
When the company announced that it had discovered “potential accounting irregularities” the stock
dropped from INR 360 to INR 190 per share. Eventually the stock would fall to as low as INR 60 per
share as the company struggled to convince investors about management’s integrity.
According to the company’s own investigation, Agony International executives had inflated earnings
by over INR 650 million over a three-year period using several tactics, including: (1) failing to timely
record returned credit card purchases and membership cancellations, (2) improperly capitalizing and
amortizing expenses related to attracting new members, and (3) recording fictitious sales.
Required (not more than half a page in legible writing, additional pages will simply be unread):
a) For each of three fraudulent tactics employed by Agony International, identify an analysis
technique that could have identified the accounting improprieties.
b) Both the investors and the management of Tension Inc. had relied on audited financial
statements in making decisions regarding Agony International. What do you believe was the
external auditor’s culpability in not detecting these fraudulent practices?
[10 marks]
Q3. Agony begins Ltd created its financial statements pertaining to year ended 31st March 2020
and Balance sheet as on 31st March 2020, it is given as under:
While creating the financial statements, the concerned company did not write off bad debts to the
tune of INR 4 crores, did not provide for outstanding salary expenses amounting up to INR 10 crores
and understated their inventories (as on 31st March 2011) by INR 5 crores.
You are required to compute current ratio and long-term debt to equity ratio of the company so that
the above noted errors/ omissions are rectified in the company financials. (Clearly state the working,
without which marks will not be given) [20 marks]
Q4. After saving lots of money for her dream venture, Divya finally opened her art venture.
However, since she never paid attention in her accounting classes, she is clueless on how to assess
the efficiency of her new art venture. Help her in analyzing how her venture has performed in both
the years:
Fill the table with the below numbers, show the workings and then calculate the ratios asked from
a to e.
Eg. If your Father’s birth year is 1963, cash sales will be 1963*10000 = INR 19,630,000
a. What has been the net profit margin in year 1 and year 2
b. What has been the investment turnover in year 1 and year 2
c. What has been the return on investments for both the years, comment on the performance
d. Has she been effective in managing cash in both the years?
e. What are the accounts receivable days for both the years? What can you comment on the
credit policy of the venture based on the available information?
[20 marks]
Q5. Tension Escalates Pvt Ltd (a manufacturing company) commenced all their business activities
from 1st April 2019 and during the year ended 31st March 2020 the company recorded sales of INR
155 lakhs, EBDIT of INR 41 lakhs, EBIT of INR 27 lakhs, PBT of INR 17 lakhs and PAT of INR 13 lakhs.
The balance sheet of the company as on 31st March 2020 is given as under. (Remember these are
first year of operations as the company started on 1st April 2019).
Based on this information answer the below questions. What will be the amount asked as reported
by the company during the year ended 31st March 2020:
Part A: M/s Roast Ltd wishes to manipulate their financials in such a manner so as to show a higher
“Profit before tax (PBT)” and higher “Net Assets” figure in their financials. However, the said company
is not inclined to tamper with the “Gross Profit” or “Net book value of fixed assets” figure in any
manner whatsoever. You are required to suggest a “creative accounting” measure that might meet
the desired objective.
Part B: A profitable company (currently encountering severe cash crunch, but with brilliant future
prospects) wishes to raise money from the market in such a manner so as to ensure that the returns
attributable to such new finance may be provided for in the company books during the current
operating year, but may actually be paid years later. Based on such information you are required to
state – what action the company is contemplating while raising money from the market.
[10 marks]