The Institute of Certified General Accountants of Bangladesh

Formation Level 2
F7 – Business Finance

December 2018
Marks- 100
Time: 2 Hours 30 Minutes

Answer to all Questions.

Question-1: (Total = 20 marks)

(a) Why do business and managers need financial information? (05 marks)
(b) Describe the qualities of good financial information. (05 marks)
(c) What measures should be taken to ensure the security of information? (05 marks)
(d) What is the difference between data and information? (05 marks)

Question-2: (Total = 14 marks)

(a) Define internal control. (02 marks)

(b) Write the effective internal control According to COSO framework. (03 marks)
(c) Discuss qualitative characteristics of financial statements according to IFRS Framework.
(06 marks)
(d) Limitations of financial information in meeting users' needs. (03 marks)

Question-3: (Total = 20 marks)

The financial statements of XYZ Company for the year ended June 30, 2017 are as follow:
XYZ Company - Income Statement, For the Year Ended June 30, 2017
Taka Taka
Sales revenue 160,000
Less: Cost of goods sold 106,000
Gross profit 54,000
Less: Operating expenses
Selling expense 16,000
General and administrative expenses 10,000
Lease expense 1,000
Depreciation expense 10,000
Total operating expense 37,000
Operating profit 17,000
Less: Interest expense 6,100
Net profit before tax 10,900
Less: Tax 4,360
Net profit after tax 6,540

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 XYZ Company - Balance Sheet June 30, 2017

Assets Taka Taka

Cash 500
Marketable securities 1,000
Accounts receivable 25,000
Inventories 45,500
Total current assets 72,000

Land 26,000
Buildings and equipment 90,000
Less: Accumulated depreciation (38,000)
Net fixed assets 78,000
Total assets 150,000

Liabilities and Stockholders’ Equity

Accounts payable 22,000
Notes payable 47,000
Total current liabilities 69,000

Long-term debt 22,950

Common stock 31,500
Retained earnings 26,550
Total Equity 81,000
Total liabilities and stockholders’ equity 150,000

The firm’s 3,000 outstanding shares of common stock closed at a price of Tk. 25 per share as at 31-
12-2016.Credit sales Tk. 120,000.

Required:
a. Use the preceding financial statements to complete the following table. Assume the industry
averages given in the table are applicable for both 2016 and 2017. (08 marks)

Ratio Industry average Actual 2016 Actual 2017

Current ratio 1.80 1.84 ______
Quick ratio 0.70 0.78 ______
Inventory turnover 2.50 2.59 ______
Average collection period 37.5 days 36.5 days ______
Debt ratio 65% 67% ______
Gross profit margin 38% 40% ______
Net profit margin 3.5% 3.6% ______
Return on total assets 4.0% 4.0% ______

Based on a 365-day year and on end-of-year figures.

Required:
b. Analyze XYZ Company’s financial condition on above mentioned ratios. (12 marks)

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Question-4: (Total = 12 marks)

The following data are obtained from the records of a Manufacturing Company.

Taka Taka
Sales 4,000 units@ Tk. 25 each 1,00,000
Materials consumed 40,000
Variable overheads 10,000
Labour 20,000
Fixed overheads 18,000
88,000
Net profit 12,000

Required:
Calculate :
i. The number of unite by selling which the company will neither loss nor gain anything. (03 marks)
ii. The sales needed to earn a profit of 20% on sales. (03 marks)
iii. The extra units which should be sold to obtain the present profit if it is proposed to reduce the
selling price by 20%. (03 marks)
iv. The selling price to be fixed to bring down its break-even point to 500 units under present
condition. (03 marks)

Question-5: (Total = 14 marks)

(a) What is price elasticity of Demand? (03 marks)

(b) The price of a commodity is Tk.1.20 per unit and annual demand is 800,000 units. Market
research indicates that an increase in price of 10 paisa per unit will result in a fall in annual
demand of 70,000 units. Calculate the elasticity of demand when the price is Tk.1.20 per unit.
(08 marks)
(c) Write the effects when demand inelasticity of a product is above zero? (03 marks)

Question-6: (Total = 20 marks)

All techniques, conflicting rankings Unique Roofing Materials Ltd., is considering two mutually
exclusive projects, each with an initial investment of $150,000. The company’s board of directors has
set a maximum 4-year payback requirement and has set its cost of capital at 9%. The cash inflows
associated with the two projects are shown in the following table.
Cash inflows (CFt)
Year Project A Project B
1 $45,000 $75,000
2 45,000 60,000
3 45,000 30,000
4 45,000 30,000
5 45,000 30,000
6 45,000 30,000

a. Calculate the payback period for each project. (05 marks)

b. Calculate the NPV of each project (05 marks)
c. Derive the IRR of each project. (07 marks)
d. Rank the projects by each of the techniques used. Make and justify a recommendation.
(03 marks)

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